What Boards Should Ask Management About Compensation and ESG
Our Privacy Policy has been updated! The Conference Board uses cookies to improve our website, enhance your experience, and deliver relevant messages and offers about our products. Detailed information on the use of cookies on this site is provided in our cookie policy. For more information on how The Conference Board collects and uses personal data, please visit our privacy policy. By continuing to use this Site or by clicking "OK", you acknowledge our privacy policy and consent to the use of cookies.  Our Privacy Policy has been updated! Detailed information on the use of cookies on this site is provided in our cookie policy and our privacy policy. 
TCB Tourch
Loading...
  • logoImage
  •  
    • US
    • EUROPE
    • ASIA
  • 2

    Close
    • Insights
        • Insights
        • Explore by Center
          • Explore by Center
          • CED
            Committee for Economic Development

          • Economy, Strategy & Finance

          • Governance & Sustainability

          • Human Capital

          • Marketing & Communications

        • Explore by Content Type
          • Explore by Content Type
          • Reports

          • Upcoming Webcasts

          • On Demand Webcasts

          • Podcasts

          • Charts & Infographics

        • Trending Topics
          • Trending Topics
          • Artificial Intelligence (AI)

          • Navigating Washington

          • Geopolitics

          • US Economic Forecast

          • Sustainability

          • Future of Work

    • Events
        • Events
        • Upcoming Events
          • Upcoming Events
          • People First: Strategic Transformation

          • People First: Opportunity and Access

          • CHRO Summit: Navigating through a Tsunami of Change

          • Future: People Asia

          • Executive Compensation in a Disruptive World

          • CED Distinguished Leadership Awards Celebration

          • Explore all Upcoming Events

        • Member-Exclusive Programs
          • Member-Exclusive Programs
          • Center Briefings

          • Experts Live

          • Roundtables

          • Working Groups

          • Expert Briefings

    • Data
        • Data
        • Consumer Confidence Index

        • Data Central

        • TCB Benchmarking

        • Employment Trends Index

        • Global Economic Outlook

        • Leading Economic Indicators

        • Help Wanted OnLine

        • Labor Markets

        • Measure of CEO Confidence

        • Human Capital Benchmarking &
          Data Analytics

        • CMO+CCO Meter Dashboard

    • Centers
        • Centers
        • Our Centers
          • Our Centers
          • Committee for Economic Development

          • Economy, Strategy & Finance

          • Governance & Sustainability

          • Human Capital

          • Marketing & Communications

        • Center Membership
          • Center Membership
          • What Is a Center?

          • Benefits of Center Membership

          • Join a Center

    • Councils
        • Councils
        • Find a Council
          • Find a Council
          • Economy, Strategy & Finance

          • Governance & Sustainability

          • Human Capital

          • Marketing & Communications

        • Council Membership
          • Council Membership
          • What is a Council?

          • Benefits of Council Membership

          • Apply to a Council

    • Membership
        • Membership
        • Why Become a Member?
          • Why Become a Member?
          • Benefits of Membership

          • Check if Your Organization is a Member

          • Speak to a Membership Associate

        • Types of Membership
          • Types of Membership
          • Council

          • Committee for Economic Development

          • Economy, Strategy & Finance

          • Governance & Sustainability

          • Human Capital

          • Marketing & Communications

          • Insights

        • Already a Member?
          • Already a Member?
          • Sign In to myTCB®

          • Executive Communities

          • Member-Exclusive Programs

    • About Us
        • About Us
        • Who We Are
          • Who We Are
          • About Us

          • In the News

          • Press Releases

          • Our History

          • Support Our Work

          • Locations

          • Contact Us

        • Our Community
          • Our Community
          • Our Leadership

          • Our Experts

          • Trustees

          • Voting Members

          • Global Counsellors

          • Careers

          • This Week @ TCB

    • Careers
    • This Week @ TCB
    • Sign In to myTCB®
      • US
      • EUROPE
      • ASIA
    • Insights
      • Insights
      • Explore by Center
        • Explore by Center
        • CED
          Committee for Economic Development

        • Economy, Strategy & Finance

        • Governance & Sustainability

        • Human Capital

        • Marketing & Communications

      • Explore by Content Type
        • Explore by Content Type
        • Reports

        • Upcoming Webcasts

        • On Demand Webcasts

        • Podcasts

        • Charts & Infographics

      • Trending Topics
        • Trending Topics
        • Artificial Intelligence (AI)

        • Navigating Washington

        • Geopolitics

        • US Economic Forecast

        • Sustainability

        • Future of Work

    • Events
      • Events
      • Upcoming Events
        • Upcoming Events
        • People First: Strategic Transformation

        • People First: Opportunity and Access

        • CHRO Summit: Navigating through a Tsunami of Change

        • Future: People Asia

        • Executive Compensation in a Disruptive World

        • CED Distinguished Leadership Awards Celebration

        • Explore all Upcoming Events

      • Member-Exclusive Programs
        • Member-Exclusive Programs
        • Center Briefings

        • Experts Live

        • Roundtables

        • Working Groups

        • Expert Briefings

    • Data
      • Data
      • Consumer Confidence Index

      • Data Central

      • TCB Benchmarking

      • Employment Trends Index

      • Global Economic Outlook

      • Leading Economic Indicators

      • Help Wanted OnLine

      • Labor Markets

      • Measure of CEO Confidence

      • Human Capital Benchmarking & Data Analytics

      • CMO+CCO Meter Dashboard

    • Centers
      • Centers
      • Our Centers
        • Our Centers
        • Committee for Economic Development

        • Economy, Strategy & Finance

        • Governance & Sustainability

        • Human Capital

        • Marketing & Communications

      • Center Membership
        • Center Membership
        • What is a Center?

        • Benefits of Center Membership

        • Join a Center

    • Councils
      • Councils
      • Find a Council
        • Find a Council
        • Economy, Strategy & Finance

        • Governance & Sustainability

        • Human Capital

        • Marketing & Communications

      • Council Membership
        • Council Membership
        • What is a Council?

        • Benefits of Council Membership

        • Apply to a Council

    • Membership
      • Membership
      • Why Become a Member?
        • Why Become a Member?
        • Benefits of Membership

        • Check if Your Organization is a Member

        • Speak to a Membership Associate

      • Types of Membership
        • Types of Membership
        • Council

        • Committee for Economic Development

        • Economy, Strategy & Finance

        • Governance & Sustainability

        • Human Capital

        • Marketing & Communications

        • Insights

      • Already a Member?
        • Already a Member?
        • Sign In to myTCB®

        • Executive Communities

        • Member-Exclusive Programs

    • About Us
      • About Us
      • Who We Are
        • Who We Are
        • About Us

        • In the News

        • Press Releases

        • This Week @ TCB

        • Our History

        • Support Our Work

        • Locations

        • Contact Us

      • Our Community
        • Our Community
        • Our Leadership

        • Our Experts

        • Trustees

        • Voting Members

        • Global Counsellors

        • Careers

        • This Week @ TCB

    • Careers
    • Sign In to myTCB®
    • Download TCB Insights App
  • Insights
    Insights

    Our research and analysis have helped the world's leading companies navigate challenges and seize opportunities for over 100 years.

    Explore All Research

    Economic Indicators

    • Explore by Center
    • CED
      Committee for Economic Development
    • Economy, Strategy & Finance
    • Governance & Sustainability
    • Human Capital
    • Marketing & Communications
    • Explore by Content Type
    • Reports
    • Upcoming Webcasts
    • On Demand Webcasts
    • Podcasts
    • Charts & Infographics
    • Trending Topics
    • Artificial Intelligence (AI)
    • Navigating Washington
    • Geopolitics
    • US Economic Forecast
    • Sustainability
    • Future of Work
  • Events
    Events

    Our in-person and virtual events offer unmatched opportunities for professional development, featuring top experts and practitioners.

    See Everything Happening This Week

    Sponsor a Program

    • Upcoming Events
    • People First: Strategic Transformation

      May 15 - 16, 2025

      People First: Opportunity and Access

      June 12 - 13, 2025

      CHRO Summit: Navigating through a Tsunami of Change

      June 24, 2025

    •  
    • Future: People Asia

      September 04 - 05, 2025

      Executive Compensation in a Disruptive World

      September 16 - 17, 2025

      CED Distinguished Leadership Awards Celebration

      October 08, 2025

    • Member-Exclusive Programs
    • Center Briefings
    • Experts Live
    • Roundtables
    • Working Groups
    • Expert Briefings
    • Explore by Type
    • Events
    • Webcasts
    • Podcasts
    • Member-Exclusive Programs
    • Center Briefings
    • Experts Live
    • Roundtables
    • Working Groups
    • Expert Briefings
  • Data
    Corporate Disclosure Data

    TCB Benchmarking

    Real-time data & analytical tools to benchmark your governance, compensation, environmental, human capital management (HCM) and social practices against US public companies.

    Economic Data

    All Data

    See current direction and trends across key indicators

    Consumer Confidence Index

    US consumers' thoughts on the economy, jobs, finances and more

    Data Central

    One-stop, member-exclusive portal for the entire suite of indicators

    Labor Markets

    Covering all aspects of labor markets, from monthly development to long-term trends

    Measure of CEO Confidence

    Examines the health of the US economy from the perspective of CEOs

     

    Recession & Growth Trackers

    See the current and future state of 16 economies.

    Global Economic Outlook

    Track the latest short-, medium-, and long-term growth outlooks for 77 economies

    Leading Economic Indicators

    Track the state of the business cycle for 12 global economies across Asia and Europe

    Help Wanted OnLine

    Track the status of job markets across the US through online job listings

    Other Featured Data

    Human Capital Analytics Tools

    Tools to understand human capital management and corporate performance

    CMO+CCO Meter Dashboard

    Tracks the impact, resources, and satisfaction of CMOs and CCOs

  • Centers
    Centers

    Centers offer access to world-class experts, research, events, and senior executive communities.

    Our Centers
    • Committee for Economic Development
    • Economy, Strategy & Finance
    • Governance & Sustainability
    • Human Capital
    • Marketing & Communications
    Center Membership
    • What Is a Center?
    • Benefits of Center Membership
    • Join a Center
  • Councils
    Councils

    Councils are invitation-only, peer-led communities of senior executives that come together to exchange knowledge, accelerate career development, and advance their function.

    Find a Council
    • Economy, Strategy & Finance
    • Governance & Sustainability
    • Human Capital
    • Marketing & Communications
    Council Membership
    • What Is a Council?
    • Benefits of Council Membership
    • Apply to a Council
  • Membership
    Membership

    Membership in The Conference Board arms your team with an arsenal of knowledge, networks, and expertise that's unmatched in scope and depth.

    • Why Become a Member?
    • Benefits of Membership
    • Check if Your Organization is a Member
    • Speak to a Membership Associate
    • Types of Membership
    • Council
    • Committee for Economic Development
    • Economy, Strategy & Finance
    • Governance & Sustainability
    • Human Capital
    • Marketing & Communications
    • Insights
    • Already a Member?
    • Sign in to myTCB®
    • Executive Communities
    • Member-Exclusive Programs
  • About Us
    About Us

    The Conference Board is the global, nonprofit think tank and business membership organization that delivers Trusted Insights for What's Ahead®. For over 100 years, our cutting-edge research, data, events and executive networks have helped the world's leading companies understand the present and shape the future.

    Learn more about Membership

    • Who We Are
    • About Us
    • In the News
    • Press Releases
    • Our History
    • Support Our Work
    • Locations
    • Contact Us
    • Our Community
    • Our Leadership
    • Our Experts
    • Trustees
    • Voting Members
    • Careers
    • This Week @ TCB
Check if You're a Member
Create Account
Forgot Your Password?

Members of The Conference Board get exclusive access to the full range of products and services that deliver Trusted Insights for What's Ahead ® including webcasts, publications, data and analysis, plus discounts to conferences and events.

What Boards Should Ask Management About Compensation and ESG

30 January 2023 / Report

Download Report
  • Email
  • Linkedin
  • Facebook
  • Twitter
  • Copy Link

The board should understand the company’s broader ESG goals to ensure the right approach is taken in linking pay to ESG performance.

Corporate boards in the United States are increasingly considering ESG performance measures in incentive plans. However, there are important questions to ask about the benefits of incorporating ESG measures into compensation, the risks of doing so, and the challenges of communicating with investors, affected employees and others about what the company is doing and why. Those questions are even more urgent today, as companies face skepticism about whether ESG can drive financial performance.

Companies can successfully link compensation to ESG, but it requires a rigorous and methodical approach tailored to the company’s particular circumstances and strategy. Here are five questions directors should ask management, what they should look for in each answer and potential red flags in those answers.

What Are We Trying to Achieve by Linking Executive Compensation to ESG Performance?

The majority (77 percent as of 2021) of S&P 500 companies are now tying executive compensation to some form of ESG performance. They’re most commonly tying executive compensation to human capital management goals—64 percent of the S&P 500 do so—and least frequently (25 percent) to environmental performance goals.

There are a number of reasons why companies tie executive compensation to ESG. A recent roundtable by The Conference Board in collaboration with Semler Brossy sheds some light. Corporate participants cited the top reasons as signaling ESG as a priority, followed by responding to investor expectations and achieving ESG commitments the firm has made. Top reasons for not doing so include the challenge of defining specific goals, followed by concerns about measuring and reporting performance and skepticism about their effectiveness.

What to look for in management’s answer

Above all, management should be able to explain what ESG or broader business goals it is trying to achieve and why including ESG measures in compensation is necessary (or at least helpful) in doing so—especially since most companies say that including ESG measures in executive compensation is not vitally important to their overall ESG efforts. Management should be able to put linking compensation to ESG in a broader context of what the company is doing to advance its ESG agenda (e.g., incorporating ESG into business plans, talent development and promotions) and explain why the benefits of tying executive compensation to ESG performance outweigh the costs.

Red flags in management’s response

Boards ought to be wary if the goals that management wants to tie executive compensation to are not the firm’s core ESG goals (e.g., if the proposed goals aren’t aligned with the business strategy and do not reflect the company’s key ESG risks and opportunities).

Boards should also have doubts if management tells them that incorporating ESG measures into executive compensation is an important way to signal that ESG is a priority, or that it’s what investors want. Despite what companies might think, investors do not uniformly support incorporating ESG measures into executive compensation. In fact, some large institutional investors have been agnostic about ESG-based pay, especially if there is not a strong business case to link compensation to ESG goals.

Whose Compensation Would Be Affected?

Increasingly, C-suite executives other than the CEO are being compensated based on ESG performance. Some companies go beyond the C-suite to include the next tiers of management and even all employees. This can make sense when achieving ESG goals requires the collective effort of the broader management and general employee base.

What to look for in management’s answer

In deciding whose compensation should be linked to ESG goals, management will want to consider the link between the goal and the business strategy as well as the scope of responsibility for implementing the goal within the organization. It will likely take some time to appropriately incorporate ESG incentives into a compensation plan for the broader employee base.

Management should also caution boards that there are potential unintended consequences in applying ESG measures to the broader employee base—for example, the risk of different parts of the organization competing with each other for resources to achieve the same goals. Therefore, management should assign responsibility for implementation to specific teams and individuals, clarify how employees can influence ESG performance and facilitate interdepartmental collaboration.

Red flags in management’s response

Modifying everyone’s compensation by using a brand-new measure can catch employees off guard. In particular, setting up a situation in which employees’ pay might be cut (even by just a few percentage points) based on metrics that are unfamiliar or beyond their control can be extremely demotivating. That’s a recipe for disaster for a company in a market in which attracting and retaining talented employees is so essential. For a performance measure to be effective, everyone should understand the goal, its connection to the business and their own role in achieving it.

If We Add ESG Measures to Our Executive Compensation Programs, How Should We Do It?

While most S&P 500 companies are linking executive compensation to ESG priorities, there isn’t a one-size-fits-all approach for doing so. Looking at what others have done is an important part of due diligence, but there is no off-the-shelf solution.

It is most common for companies to put ESG performance measures in their executives’ annual incentive plans. Ninety-seven percent of S&P 500 companies incorporating ESG performance metrics in incentive compensation put them in the annual bonus plan. Only 12 percent of companies put them in long-term incentive compensation, but this percentage may grow over time. The type of performance measure varies, and some companies use multiple approaches simultaneously: 

  • 49% of S&P 500 companies consider ESG as part of an executive’s individual performance.
  • 48% include it in business strategy scorecards.
  • 24% use stand-alone ESG metrics.
  • 6% use ESG performance to modify a financial or overall bonus rating.

What to look for in management’s answer

If a company decides to proceed with linking executive compensation to ESG goals, boards will want to ensure management considers:

  • Whether the ESG goal is appropriate for the annual or long-term incentive plan.
  • Whether to make performance measures absolute or relative to the market, and quantitative or qualitative.
  • Whether the type of metric reflects the firm’s corporate culture (some employees respond better to qualitative vs. quantitative metrics).
  • How various stakeholder groups will likely react.
  • How to reevaluate goals periodically to ensure that the ESG measures are still relevant and effective.

Red flags in management’s response

It is understandable that companies might want to ease into the practice of incorporating ESG performance in compensation by starting off with purely qualitative measures. But if the goals are vague, are purely qualitative or rely too heavily on committee discretion, it may signal that the company is moving to incorporate ESG performance before it is ready. To pass muster with investors, and to give executives and employees something to aim at, goals should be measurable, reportable and accountable.

How Are We Measuring the Impact of Including ESG Performance Goals in Compensation?

Measuring the full impact of including ESG performance goals in compensation is often more challenging than measuring the impact of traditional operating or financial metrics. Sometimes, measurement is relatively straightforward when it relates to the company’s operations or workforce (e.g., changes in greenhouse gas emissions, waste, water usage, employee turnover or injuries). Often, however, the expected impact goes beyond the four walls of a company and relates to its relationship and reputation with different stakeholders or to its ability to effectuate broader change in the marketplace.

What to look for in management’s answer

As a prerequisite to measuring impact, management needs to clearly articulate what the company is striving to achieve by including ESG measures in compensation programs. Is it to improve the firm’s ESG performance, to enhance its operating and financial performance, to signal to its stakeholders that ESG or a specific ESG metric is a priority, to have a meaningful impact on society and the natural environment, or some combination of factors? 

Red flags in management’s response

The failure to define what a company is trying to achieve, and how it fits into a company’s overall business and sustainability strategy, should raise eyebrows.

How Do We Communicate Our ESG Performance Goals Internally and Externally?

Adopting ESG measures in compensation provides a catalyst and vehicle for communicating with internal and external stakeholders. However, to be effective, management will need to ensure that communication about ESG performance goals is clear and consistent in substance and tailored to meet the needs of different audiences.

What to look for in management’s answer

Management needs to ensure there is not only a plan to tell people what the company is doing to incorporate ESG into compensation, but also a process for promoting the idea with those affected and interested. A comprehensive communications plan will address factors like:

  • How including ESG in compensation advances the company’s strategy and supplements its existing efforts.
  • How the company will respond to skepticism from investors, employees, the media and others.
  • How the goals are both ambitious enough (so investors do not see them as a way of delivering guaranteed compensation) and achievable (so affected employees are motivated to attain them).

Red flags in management’s response

Especially in this era of ESG backlash, boards should be wary if management isn’t prepared to deal with skepticism (internal or external), and if they are overly optimistic about stakeholders’ reactions to these goals.

If boards are comfortable with management’s answers to these five questions, they can proceed with some confidence. Even so, directors may want to pause for a moment and consider other ways of advancing ESG goals—and driving meaningful change—rather than adding ESG measures to compensation. If management does proceed, directors should continue to ask these questions annually to assess whether executive compensation to ESG factors remains a good idea as the company’s strategy, goals and position in the marketplace continue to evolve.

This essay was first published in Directors & Boards.

The board should understand the company’s broader ESG goals to ensure the right approach is taken in linking pay to ESG performance.

Corporate boards in the United States are increasingly considering ESG performance measures in incentive plans. However, there are important questions to ask about the benefits of incorporating ESG measures into compensation, the risks of doing so, and the challenges of communicating with investors, affected employees and others about what the company is doing and why. Those questions are even more urgent today, as companies face skepticism about whether ESG can drive financial performance.

Companies can successfully link compensation to ESG, but it requires a rigorous and methodical approach tailored to the company’s particular circumstances and strategy. Here are five questions directors should ask management, what they should look for in each answer and potential red flags in those answers.

What Are We Trying to Achieve by Linking Executive Compensation to ESG Performance?

The majority (77 percent as of 2021) of S&P 500 companies are now tying executive compensation to some form of ESG performance. They’re most commonly tying executive compensation to human capital management goals—64 percent of the S&P 500 do so—and least frequently (25 percent) to environmental performance goals.

There are a number of reasons why companies tie executive compensation to ESG. A recent roundtable by The Conference Board in collaboration with Semler Brossy sheds some light. Corporate participants cited the top reasons as signaling ESG as a priority, followed by responding to investor expectations and achieving ESG commitments the firm has made. Top reasons for not doing so include the challenge of defining specific goals, followed by concerns about measuring and reporting performance and skepticism about their effectiveness.

What to look for in management’s answer

Above all, management should be able to explain what ESG or broader business goals it is trying to achieve and why including ESG measures in compensation is necessary (or at least helpful) in doing so—especially since most companies say that including ESG measures in executive compensation is not vitally important to their overall ESG efforts. Management should be able to put linking compensation to ESG in a broader context of what the company is doing to advance its ESG agenda (e.g., incorporating ESG into business plans, talent development and promotions) and explain why the benefits of tying executive compensation to ESG performance outweigh the costs.

Red flags in management’s response

Boards ought to be wary if the goals that management wants to tie executive compensation to are not the firm’s core ESG goals (e.g., if the proposed goals aren’t aligned with the business strategy and do not reflect the company’s key ESG risks and opportunities).

Boards should also have doubts if management tells them that incorporating ESG measures into executive compensation is an important way to signal that ESG is a priority, or that it’s what investors want. Despite what companies might think, investors do not uniformly support incorporating ESG measures into executive compensation. In fact, some large institutional investors have been agnostic about ESG-based pay, especially if there is not a strong business case to link compensation to ESG goals.

Whose Compensation Would Be Affected?

Increasingly, C-suite executives other than the CEO are being compensated based on ESG performance. Some companies go beyond the C-suite to include the next tiers of management and even all employees. This can make sense when achieving ESG goals requires the collective effort of the broader management and general employee base.

What to look for in management’s answer

In deciding whose compensation should be linked to ESG goals, management will want to consider the link between the goal and the business strategy as well as the scope of responsibility for implementing the goal within the organization. It will likely take some time to appropriately incorporate ESG incentives into a compensation plan for the broader employee base.

Management should also caution boards that there are potential unintended consequences in applying ESG measures to the broader employee base—for example, the risk of different parts of the organization competing with each other for resources to achieve the same goals. Therefore, management should assign responsibility for implementation to specific teams and individuals, clarify how employees can influence ESG performance and facilitate interdepartmental collaboration.

Red flags in management’s response

Modifying everyone’s compensation by using a brand-new measure can catch employees off guard. In particular, setting up a situation in which employees’ pay might be cut (even by just a few percentage points) based on metrics that are unfamiliar or beyond their control can be extremely demotivating. That’s a recipe for disaster for a company in a market in which attracting and retaining talented employees is so essential. For a performance measure to be effective, everyone should understand the goal, its connection to the business and their own role in achieving it.

If We Add ESG Measures to Our Executive Compensation Programs, How Should We Do It?

While most S&P 500 companies are linking executive compensation to ESG priorities, there isn’t a one-size-fits-all approach for doing so. Looking at what others have done is an important part of due diligence, but there is no off-the-shelf solution.

It is most common for companies to put ESG performance measures in their executives’ annual incentive plans. Ninety-seven percent of S&P 500 companies incorporating ESG performance metrics in incentive compensation put them in the annual bonus plan. Only 12 percent of companies put them in long-term incentive compensation, but this percentage may grow over time. The type of performance measure varies, and some companies use multiple approaches simultaneously: 

  • 49% of S&P 500 companies consider ESG as part of an executive’s individual performance.
  • 48% include it in business strategy scorecards.
  • 24% use stand-alone ESG metrics.
  • 6% use ESG performance to modify a financial or overall bonus rating.

What to look for in management’s answer

If a company decides to proceed with linking executive compensation to ESG goals, boards will want to ensure management considers:

  • Whether the ESG goal is appropriate for the annual or long-term incentive plan.
  • Whether to make performance measures absolute or relative to the market, and quantitative or qualitative.
  • Whether the type of metric reflects the firm’s corporate culture (some employees respond better to qualitative vs. quantitative metrics).
  • How various stakeholder groups will likely react.
  • How to reevaluate goals periodically to ensure that the ESG measures are still relevant and effective.

Red flags in management’s response

It is understandable that companies might want to ease into the practice of incorporating ESG performance in compensation by starting off with purely qualitative measures. But if the goals are vague, are purely qualitative or rely too heavily on committee discretion, it may signal that the company is moving to incorporate ESG performance before it is ready. To pass muster with investors, and to give executives and employees something to aim at, goals should be measurable, reportable and accountable.

How Are We Measuring the Impact of Including ESG Performance Goals in Compensation?

Measuring the full impact of including ESG performance goals in compensation is often more challenging than measuring the impact of traditional operating or financial metrics. Sometimes, measurement is relatively straightforward when it relates to the company’s operations or workforce (e.g., changes in greenhouse gas emissions, waste, water usage, employee turnover or injuries). Often, however, the expected impact goes beyond the four walls of a company and relates to its relationship and reputation with different stakeholders or to its ability to effectuate broader change in the marketplace.

What to look for in management’s answer

As a prerequisite to measuring impact, management needs to clearly articulate what the company is striving to achieve by including ESG measures in compensation programs. Is it to improve the firm’s ESG performance, to enhance its operating and financial performance, to signal to its stakeholders that ESG or a specific ESG metric is a priority, to have a meaningful impact on society and the natural environment, or some combination of factors? 

Red flags in management’s response

The failure to define what a company is trying to achieve, and how it fits into a company’s overall business and sustainability strategy, should raise eyebrows.

How Do We Communicate Our ESG Performance Goals Internally and Externally?

Adopting ESG measures in compensation provides a catalyst and vehicle for communicating with internal and external stakeholders. However, to be effective, management will need to ensure that communication about ESG performance goals is clear and consistent in substance and tailored to meet the needs of different audiences.

What to look for in management’s answer

Management needs to ensure there is not only a plan to tell people what the company is doing to incorporate ESG into compensation, but also a process for promoting the idea with those affected and interested. A comprehensive communications plan will address factors like:

  • How including ESG in compensation advances the company’s strategy and supplements its existing efforts.
  • How the company will respond to skepticism from investors, employees, the media and others.
  • How the goals are both ambitious enough (so investors do not see them as a way of delivering guaranteed compensation) and achievable (so affected employees are motivated to attain them).

Red flags in management’s response

Especially in this era of ESG backlash, boards should be wary if management isn’t prepared to deal with skepticism (internal or external), and if they are overly optimistic about stakeholders’ reactions to these goals.

If boards are comfortable with management’s answers to these five questions, they can proceed with some confidence. Even so, directors may want to pause for a moment and consider other ways of advancing ESG goals—and driving meaningful change—rather than adding ESG measures to compensation. If management does proceed, directors should continue to ask these questions annually to assess whether executive compensation to ESG factors remains a good idea as the company’s strategy, goals and position in the marketplace continue to evolve.

This essay was first published in Directors & Boards.

Authors

Paul Washington

Paul Washington Paul Washington

President and CEO
Society for Corporate Governance

Read Bio

Merel Spierings

Merel Spierings Merel Spierings

Former Senior Researcher, Governance & Sustainabil…
The Conference Board

Read Bio

Great News!

You already have an account with The Conference Board.

Please try to login in with your email or click here if you have forgotten your password.

Other Related Resources

Podcasts

CHROs in the Boardroom: What’s Trending, What’s Next?

CHROs in the Boardroom: What’s Trending, What’s Next?

May 05, 2025

Article

Biodegradable Packaging 2.0: Innovations Provide Business with Better Options

Biodegradable Packaging 2.0: Innovations Provide Business with Better Options

May 05, 2025

Quick Take

Are CHROs Ready to Fully Engage with the Board as Enterprise Leaders?

Are CHROs Ready to Fully Engage with the Board as Enterprise Leaders?

April 29, 2025

Database

Recession & Growth Trackers

Recession & Growth Trackers

April 28, 2025

Podcasts

S2E3 - Is Your Eco Story a Hidden Threat?

S2E3 - Is Your Eco Story a Hidden Threat?

April 25, 2025

Report

Biodiversity and Deregulation: Navigating a Fragmented Regulatory Landscape

Biodiversity and Deregulation: Navigating a Fragmented Regulatory Landscape

April 21, 2025

Podcasts

e.l.f. Beauty CEO: Purpose and Growth Go Hand in Hand

e.l.f. Beauty CEO: Purpose and Growth Go Hand in Hand

April 21, 2025

Podcasts

Why Yum! Brands Focuses on Food, People, and Planet

Why Yum! Brands Focuses on Food, People, and Planet

April 14, 2025

Report

The Evolving Landscape of DEI Shareholder Proposals

The Evolving Landscape of DEI Shareholder Proposals

April 14, 2025

Report

How the EU Green Deal Will Impact China’s Business

How the EU Green Deal Will Impact China’s Business

April 14, 2025

Podcasts

S6E15 - Reduce, Reuse, Recap: Season 6 in Review

S6E15 - Reduce, Reuse, Recap: Season 6 in Review

April 11, 2025

Podcasts

Are Trade Deficits Bad for the US? It’s Complicated

Are Trade Deficits Bad for the US? It’s Complicated

April 10, 2025

Report

The Evolving Role of the CHRO in the Boardroom

The Evolving Role of the CHRO in the Boardroom

April 08, 2025

Podcasts

How Prudential Turns Purpose into Practice

How Prudential Turns Purpose into Practice

April 07, 2025

Podcasts

What Should Corporate Philanthropy Look Like in 2025?

What Should Corporate Philanthropy Look Like in 2025?

March 31, 2025

Article

The EPA’s Deregulatory Agenda: Implications for Corporate Sustainability

The EPA’s Deregulatory Agenda: Implications for Corporate Sustainability

March 27, 2025

Podcasts

Proxy Season Is Busier Than Ever. How Can Companies Prepare?

Proxy Season Is Busier Than Ever. How Can Companies Prepare?

March 26, 2025

Podcasts

S6E14 - How ISO Standards Can Help on the Road to Net Zero

S6E14 - How ISO Standards Can Help on the Road to Net Zero

March 25, 2025

Report

Regulatory Shifts in ESG: What Comes Next for US Companies?

Regulatory Shifts in ESG: What Comes Next for US Companies?

March 20, 2025

Report

EU Omnibus to Ease Reporting Requirements but not Sustainability Commitment

EU Omnibus to Ease Reporting Requirements but not Sustainability Commitment

March 20, 2025

Podcasts

How Webster Bank Serves Community and Shareholders Alike

How Webster Bank Serves Community and Shareholders Alike

March 17, 2025

Podcasts

CHROs in the Boardroom: What’s Trending, What’s Next?

CHROs in the Boardroom: What’s Trending, What’s Next?

May 05, 2025

Article

Biodegradable Packaging 2.0: Innovations Provide Business with Better Options

Biodegradable Packaging 2.0: Innovations Provide Business with Better Options

May 05, 2025

Quick Take

Are CHROs Ready to Fully Engage with the Board as Enterprise Leaders?

Are CHROs Ready to Fully Engage with the Board as Enterprise Leaders?

April 29, 2025

Conference

2025 Corporate Responsibility Summit

2025 Corporate Responsibility Summit

April 24, 2025

On Demand Webcasts

Developments in Executive Compensation in 2025

Developments in Executive Compensation in 2025

April 22, 2025

On Demand Webcasts

Shareholder Activism: Expectations for 2025

Shareholder Activism: Expectations for 2025

February 27, 2025

On Demand Webcasts

2025 Proxy Season Preview

2025 Proxy Season Preview

February 12, 2025

Councils

Data Protection and Privacy Leaders Council

Data Protection and Privacy Leaders Council

Councils

Global Business Conduct Council

Global Business Conduct Council

Councils

Global Investor Relations Executives Council

Global Investor Relations Executives Council

Councils

Environment Strategy Council

Environment Strategy Council

Councils

Legal Council

Legal Council

Councils

Health and Safety Council

Health and Safety Council

Councils

Chief Legal Officers Council

Chief Legal Officers Council

Councils

Enterprise Resilience and Crisis Leadership Council

Enterprise Resilience and Crisis Leadership Council

Councils

Global Investor Relations Council

Global Investor Relations Council

Councils

Strategic Intellectual Property Leaders Council

Strategic Intellectual Property Leaders Council

Councils

Strategic Risk Management Council

Strategic Risk Management Council

Councils

Responsible Sourcing Council

Responsible Sourcing Council

Councils

Government Relations Executives Council

Government Relations Executives Council

Councils

Chief Audit Executives Council

Chief Audit Executives Council

Councils

Chief Privacy Officers Council

Chief Privacy Officers Council

Councils

CEO Council

CEO Council

Councils

Chief Security Officers Council

Chief Security Officers Council

Conference


2025 Corporate Responsibility Summit

2025 Corporate Responsibility Summit

April 24, 2025

On Demand Webcasts


Developments in Executive Compensation in 2025

Developments in Executive Compensation in 2025

April 22, 2025

On Demand Webcasts


Shareholder Activism: Expectations for 2025

Shareholder Activism: Expectations for 2025

February 27, 2025

Conference Board Sample Web Chat
chatbot-Icon TCB Logo
chatbot-Icon
Navigating Washington - Sign up to receive the latest business insights related to executive orders, new laws, and changing regulations.
ABOUT US
  • Who We Are
  • Annual Report
  • Our History
  • Our Experts
  • Our Leadership
  • In the News
  • Press Releases
MEMBERSHIP
  • Become a Member
  • Sign In to myTCB®
  • Access Experts
  • Member-Only Events
  • Data & Benchmarking
  • Manage Account
EXPLORE
  • Centers
  • Councils
  • Latest Research
  • Events
  • Webcasts
  • Podcasts
  • This Week @ TCB
CONTACT US
  • Americas
    +1 212 759 0900
    customer.service@tcb.org
  • Europe/Africa/Middle East
    +32 2 675 5405
    brussels@tcb.org
  • Asia
    Hong Kong | +852 2804 1000
    Singapore | +65 8298 3403
    service.ap@tcb.org
CAREERS
  • See Open Positions
Terms Of Use | Privacy Policy | Event Code of Conduct | Trademarks
© 2025 The Conference Board Inc. All rights reserved. The Conference Board and torch logo are registered trademarks of The Conference Board.
The use of all The Conference Board data and materials is subject to the Terms of Use. Reprint requests are reviewed individually and may be subject to additional fees.The Conference Board reserves the right to deny any request.
Terms of Use | Privacy Policy | Event Code of Conduct | Trademarks
© 2025 The Conference Board Inc. All rights reserved. The Conference Board and torch logo are registered trademarks of The Conference Board.
The use of all data from The Conference Board data and materials is subject to the Terms of Use. Reprint requests are reviewed individually and may be subject to additional fees.The Conference Board reserves the right to deny any request.

Thank you for signing up. You will now receive CEO Insights for What's Ahead every Wednesday morning. You can unsubscribe at any time or manage your preferences to receive more content from The Conference Board.

Announcing The Conference Board AI Virtual Conference Series

Explore the Impact of AI on Your Business

Members receive complimentary registration - Learn more >>