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November 16, 2020

Executive compensation and ESG in pandemic times

By Prasanthi Vasanthakumar, Institute of Corporate Directors
The perceived excess of executive compensation has long been a thorny issue, made pricklier by COVID-19. In the early chaos of the pandemic, many CEOs took pay cuts in a show of solidarity with laid-off employees. But is this an anomaly or a trend? Michelle Tan, a partner at Hugessen Consulting, an independent executive compensation firm, notes the evolution of executive compensation traditionally occurs at a snail’s pace, due to competitive market pressures and the sheer enormity of effort required to change compensation programs at large, complex organizations. However, there is nothing traditional about COVID-19.
“An external trigger like the pandemic can bring about bigger, seismic shifts in executive compensation across the market,” says Tan. “For example, the financial crisis of 2008 pushed many companies to implement risk mitigation and clawback policies. With COVID-19, we’re seeing a focus on environmental, social and governance (ESG) topics being woven into clients’ operations, strategy and financials. There is a strong emphasis on the social side as companies consider a much broader range of stakeholders.”
High-profile examples

Starbucks is rising to the challenge by tying executive pay to diversity targets beginning in 2021. In a year of racial unrest, the coffee giant has revealed its current workforce diversity for all American locations, mandated anti-bias training for executives and pledged to hire more people of colour by 2025. Experts applaud this move, noting that publicizing goals and publishing diversity numbers are critical for accountability.
In a similar push for collective responsibility, Goldman Sachs is making executives pay for criminal wrongdoing that took place on their watch. The Malaysian corruption scandal in which Goldman employees allegedly stole funds to go on a shopping spree has cost the firm more than $5 billion in fines and immeasurable reputational damage. Experts note this type of personal punishment for improper supervision could become an emerging trend because it appeases shareholders and deters future wrongdoing.
Canadian compensation

In Canada, nearly two-thirds of TSX 60 issuers have linked executive pay to ESG criteria, a trend that is gaining momentum. In the past seven years, this group has seen an 18 per cent increase in the adoption of sustainability-related metrics.
“ESG is already a part of incentive programs for executives in Canada,” says Tan. “Most metrics currently focus on operational health and safety, especially at extractive companies with respect to the environment and local communities they operate in. I think we’re going to see that shift across all companies to include metrics such as employee engagement, customer satisfaction and, importantly from a shareholder perspective, climate change.”
In the 2020 proxy season, Cameco and Telus included noteworthy ESG metrics in executive compensation. Cameco uses its “supportive communities” metric to measure its ability to source services from Northern Saskatchewan vendors, while Telus’s “corporate sustainability index” quantifies its commitment to the community, brand perception and progress toward reducing greenhouse gas emissions.
Tan also points to Husky Energy and TD Bank as two recent examples of companies stepping outside their industry’s comfort zones on the ESG front. In the summer, Husky Energy announced it would set diversity targets for senior leadership and link greenhouse gas emissions to compensation. Just last week, TD Bank introduced a global climate action plan that shuns oil and gas projects in the Arctic Circle and makes it the first major Canadian bank to commit to net-zero carbon dioxide emissions by 2050.
“As companies advance the integration of ESG into their operations and strategies, I expect we’re going to see more ESG metrics appear in compensation programs,” says Tan.
Did Disney get the memo?

Although not alone, Disney’s highly publicized executive compensation story is still waiting for its fairy tale ending. Pre-pandemic, the company was criticized for the size and performance metrics of its top executives’ pay packages, but COVID-19 exacerbated the issue. Last month, Senator Elizabeth Warren slammed Disney for “hanging its front-line workers out to dry” when it laid off thousands of workers while reportedly restoring executive pay.
“The social inequalities across the globe can’t be fixed by any one company or government, but that’s where the attention now lies,” says Tan. “My suggestion for boards when looking at executive pay, particularly that of the CEO, is to consider how the philosophy and approach cascade down through the organization and align with the philosophy and approach for the broader employee base.”
Will ESG go the distance?

The pandemic is pushing executive pay conversations to focus beyond financial and corporate objectives to include broader stakeholder considerations. But when life goes back to normal, will these non-financial metrics remain? And how will we balance financial goals with ESG considerations in the long run? These are important questions for boards to consider, according to Tan.
Boards should also carefully monitor the efficacy of the compensation incentives they choose to implement. Are they helping their organizations meet their stated purpose and strategic goals?