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David Fitt of Pay Governance LLC, Leading Minds of Compensation



I want to hear your thoughts on how a compensation committee can use executive pay to address obviously ESG is a wide topic you may pick ESG may pick just s but how can the the committee and executive pay address at least some of those issues yeah I mean it's interesting right we're I think we're clearly in a call it new environment the influence the influence of social media politics the the priorities of of the Millennials you know and they're all engaged around a broad basket of things that can fall into this environmental social governance issues you know whether you're talking about climate change or diversity inclusion gender racial equity etcetera you know all of these things are tied up in in social movements that that we haven't really experienced recently if you will it's manifest itself in as I said social movements we now have state laws that are addressing it shareholder proposals it hasn't to date been a sea change but it also has not even remotely gone away the sort of the the grass roots continue continue to kind of bubble up and it's all around an expectation of how companies how companies should act how they should behave you've got some of the largest institutional investors in the world right now the black rocks Vanguard State streets etc becoming increasingly vocal around sustainability issues they're they're calling for companies to be good corporate citizens in ways that go well beyond just profitability and share price growth because the institutional investors are getting involved you also now have the the proxy advisors getting involved you have ISS and glass louis with their points of view i heard a number the other day i don't have any basis for it so forgive me for passing along potentially information but that there are something like 300 or more different organizations out there that are reviewing and giving ratings on ESG measures 300 different organizations now that seems to me like it's a recipe for not being able to satisfy anyone and you know there's going to be every you know each one's gonna have a different take on it so it's possible that the ISS is in glass losses of the world that their influence will will bring call it some degree of continuity of focus to the issue those folks tend to you know have some unintended consequences in many of the things that they do so you know some of that remains to be seen and and not with some notwithstanding becoming a bit more mainstream a lot of this isn't new and some ESG measures are things like safety I mean if you're Dupont in the 1800s making gunpowder safety was a pretty key metric for you and it has actually been in there incentive plans probably since you know 1802 or something like that so there are there are aspects of it that are key to some industries and some companies simply because of what they do how they do it etcetera and that's where I think we tend to see right now we tend to see the most uptake in the use of of ES and G measures within incentive plans manufacturing companies energy companies materials etc they they tend to have you know safety carbon footprint that that kind of stuff coca-cola has has a clean water measure in in their incentive plans because clean water is so critical to to their strategy and their image as part of part of a drinks company but you also have hospital systems now that have patient care and quality being an influence on on their performance there has been I think a decent amount of reluctance perhaps largely on the part of executive teams to to incorporate these measures independently from financial metrics and part of that is that is a belief that well it'll get swept up in the financial aspect or results of the company if we're not doing a good job and we have a scandal or we're treating our employees poorly that will become known and it will influence the financial results so isn't it in there and – there have been you know a number of studies done on this that have been I'll say at least inconclusive some have said there definitely is a direct link between performance on ES and G measures and others that have said there's absolutely no link between performance on ESG and and your share price so but but those studies haven't stopped they're continuing on both sides and so that's kind of the reason why I think bottom line this issue is not going away the social movement is is pretty clear and if we look back across the pond there there you know they're ahead of us in many of these these aspects so I think this is this is clearly going to clearly going to continue and to the the answer to the the question that was was posed early about the use of non-financial metrics there's room in our incentive plans to include whether it's specifically any S&G measure or some other non-financial but strategically important measure in our incentives sometimes they're difficult to to measure and articulate and all that really means is that if they're key to our strategy we shouldn't be afraid of the use of judgement we shouldn't be afraid of the use of discretion if it's strategically important it should be in there we do the best we can to explain ahead of time what the measurements scale is and what does success look like etc so that it's not a complete free-for-all at the end of the year but I think I think the combination of the grassroots push the now investors being involved and opining on these things that we easily can incorporate them if it's important to your company you

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