In recent years, environmental, social and governance (“ESG”) factors have become increasingly important to investors and companies as the materiality of these factors to companies’ operations and bottom lines has become increasingly evident. As a result of this growing interest and concern in ESG factors, a growing number of companies are also incorporating sustainability metrics as part of their incentive programs.
During the 2017 AGM season, one of the largest Swedish insurers, Folksam, questioned nearly 50 Swedish companies as to whether they were incorporating sustainability metrics into their variable executive remuneration. Ten firms replied in the affirmative. Although the metrics these firms employed were generally not disclosed, some only included them for managers that have responsibilities directly tied to sustainability. Notably, 15 companies said they would review their compensation programs and possibly include such metrics in the future. However, most firms said that variable remuneration was driven by financial goals; that the question of sustainability was broader than executive compensation; or, simply, that such metrics were not appropriate in their remuneration structures.
Of those companies that incorporate sustainability into their variable remuneration, retail giant H&M Hennes & Mauritz AB and corporate bank SEB Group said sustainability goals are a well-integrated part of their incentive plans. At H&M, the level of variable remuneration is tied both to financial goals and sustainable development, but the company does not disclose the specific metrics and targets. Similarly, at SEB, its share deferral program is measured against both financial targets and other parameters such as compliance and corporate sustainability.
Safety and accident frequency were specific metrics cited by mining company Boliden, steel producer SSAB Svenkst Stål, and construction firm NCC, which is not surprising given that they operate in industries where accidents could potentially have fatal outcomes and/or result in significant expenses as a result of lawsuits or fines. Similar developments can be observed internationally as well. According to research by the Harvard Business Review, only 2% of firms in the S&P 500 are linking environmental metrics to executive remuneration. Around 5% of companies use a safety target – the most commonly used sustainability metric. But the numbers are growing, reflecting greater awareness among boards that incentivising employees could also help companies meet their corporate social responsibility targets.
While sustainability targets might not be appropriate as core compensation metrics for every company, the growing trend shows that many companies find a broad business case for tying sustainability to executive remuneration. And in Sweden, it will be particularly interesting to see over the 2018 AGM season if this trend will lead to any amendments in executive remuneration plans.
Jakob Nordmark is a Research Analyst covering the Northern Europe region.