Companies include environmental and social targets in executive bonuses

Starbucks has joined Apple and Disney in tying ESG agenda commitments to 2021 compensation, according to analysis by data provider Sentieo.

The payment linked to social responsibility grew by more than 20% in the companies that make up the Russell 3000 index (which gathers the largest North American companies), according to the Institutional Shareholder Services ESG, from the consultancy ISS.

In 2021, Starbucks failed to get investor support for the previous year’s executive bonuses, in part because of a $50 million extra payout offered to company president Kevin Johnson. As a result, the coffee chain overhauled its compensation packages and added new environmental and human rights criteria.

In Johnson’s case, 10% of his annual bonus was tied to environmental issues, including efforts to “eliminate plastic straws” and “farm-level methane reduction”, among other things.
Another 10% of the pay was tied to minority employee retention and workplace goals, Starbucks said.

But as bonuses linked to ESG issues increase, so does shareholder distrust. Investors were frustrated by large bonuses awarded with little accountability.

Asset managers have expressed concern that if ESG pay replaces targets tied to stock performance, executives could protect their bonuses in turbulent times.

ESG metrics for compensation “are incredibly broad and high-profile, and almost always — at least in the US — make it into the program [de remuneração] short term,” says Caitlin McSherry, vice president and director of investment management at Neuberger Berman.

“But it’s fair to be skeptical about what’s really at risk in performance-based pay, particularly in relation to the more qualitative elements that are being brought in,” he says.

According to the ISS, Apple in 2021 incorporated an ESG provision into annual cash bonuses for executives, which can increase salaries by 10%. However, as company executives met targets for sales and revenue, this ESG element was not added to the bonus, the company said.

The ISS recommended that Apple shareholders vote against paying its chief executive, Tim Cook, and other Apple executives earlier this month.

Meanwhile, Disney has incorporated diversity and inclusion goals, making these criteria the most weighted non-financial metric in the 2021 bonus plan.

Apple declined to comment beyond its regulatory filings. Starbucks and Disney did not respond to requests for comment.

Robin Ferracone, founder of compensation consultancy Farient Advisors, says companies should adopt quantifiable ESG pay metrics such as those applied by Starbucks.

According to her, companies need to be “afraid of backfire” if they pay bonuses derived from inaccurate metrics.

“If a measure [ESG] if it’s not bearable, you could get in trouble with the Securities and Exchange Commission,” he says. “With more quantification, it will be increasingly difficult to falsify the results.”

Translated by Luiz Roberto M. Gonçalves