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A growing number of top-tier US companies are using environmental and social factors to set bonuses for top executives, but investors fear these metrics are being manipulated to inflate payouts.
According to data from The Conference Board and Esgauge, an ESG data analytics firm, three-quarters of S&P 500 companies have disclosed that environmental, social and governance metrics contribute to executive compensation. In 2021 it was two thirds of the companies.
Among them are American Express, Dow and Southwest Airlines.
According to Semler Brossy, a consulting firm, more than half of all S&P 500 companies have diversity and inclusion components in their executive compensation. Almost half of these companies included environmental metrics as part of their bonuses, up from a quarter of companies in 2020.
According to ISS ESG, a division of Institutional Shareholder Services, since 2015, more than 13,000 global companies have seen pay factors related to profitability and business aspects decline while environmental and social pay factors have increased.
Now, some of these determinants of executive compensation at wealth managers are coming under fire.
“We’re skeptical about using ESG metrics in compensation,” said Ben Colton, head of stewardship at State Street Global Advisors, which manages $3.79 trillion. “Often they are very subjective, fluffy and easy to trick.”
At Southwest, CEO Robert Jordan’s salaries rose 76 percent last year to $5.3 million, even as the airline angered passengers by canceling more than 16,700 flights during the holiday season.
Southwest said in a regulatory filing earlier this year that the December layoffs had negatively impacted executive bonuses, but added, “In terms of ESG initiatives, including DEI and sustainability, the [board] found that the company’s performance exceeded target expectations.” DEI stands for Diversity, Equity and Inclusion.
Southwest’s salary plans have drawn criticism from Strive Asset Management, a conservative-leaning firm that has criticized ESG investment principles.
Strive was co-founded by Vivek Ramaswamy, who is now running as a Republican in the 2024 US presidential primary. A letter to Southwest this week said, “There’s no easier way to reduce the company’s carbon footprint than by grounding thousands of flights.”
Southwest did not respond to requests for comment.
Other asset managers help companies incorporate ESG metrics into compensation. UK-based Legal & General Investment Management has said it aims to tie net-zero carbon emissions to long-term executive pay by 2025.
“Our position is that ’employee engagement’ is a weak sub-metric within ESG that some people are using that we think is of concern,” said John Hoeppner, LGIM’s chief of US administration. “Frankly, we’ve never seen a company perform below the median for employee engagement. Those things can be played.”
About 190 executives at S&P 500 companies have an employee engagement pay metric, Esgauge data shows.
Unlike financial metrics, which are tied to earnings or stock price performance, it’s almost impossible for outsiders to tell whether ESG pay metrics are worthwhile, “or whether they’re just lining CEOs’ pockets with non-performance pay,” say two Harvard researchers in a January 2023 study.
ESG in pay “allows executives to receive additional compensation when the equity reward isn’t worth it,” Lucian Bebchuk, director of the corporate governance program at Harvard Law School and co-author of the study, said in an interview. “But they’re happy to receive additional compensation, even if the equity reward is worth it.”
Credit card company American Express paid 15 percent of annual awards to leaders for diversity, talent and cultural achievements. However, it is unclear how these successes are achieved, the Harvard professors said in their study. “It’s unclear if there was a quantitative target or if an increase (even by one woman) would be enough.”
Chief Executive Stephen Squeri received the company’s maximum annual bonus allowed for 2022: $10.3 million, up from $8 million in 2021. Squeri’s total salary in 2022 nearly doubled to $48 million compared to what he was paid in 2021, even as a total shareholder in the company. Returns declined last year.
American Express declined to comment.
At chemical company Dow, ESG metrics for executive compensation include a Customer Experience Index, which measures the sentiment of potential customers, and workforce diversity. The diversity factor “does not reveal the relevant starting points at the beginning of the year,” according to the Harvard professors in their paper.
ESG metrics comprised 20 percent of annual executive bonuses at Dow. CEO Jim Fitterling received a $3.5 million annual bonus for 2022, up from $5 million in 2021.
In a statement, Dow said its executive compensation program “is in line with market practice” and that in 2020 it added “quantifiable ESG metrics.” The company said that its 2022 sustainability report “provides the latest quantitative and qualitative information supporting performance relative to our company’s goals”.
Real estate company CBRE announced that CEO Robert Sulentic fell short of a financial goal last year, which made up half of his annual bonus.
But he surpassed five strategic goals, including increasing “employee engagement” and improving diversity, CBRE said. Excluding a one-time stock award, Sulentic’s salary increased by a third to $18.4 million. The company announced that its total return to shareholders has declined over the past year.
CBRE did not respond to requests for comment.