Jan 07, 2022
Tying executive compensation to environmental, social and governance (ESG) targets is an increasing trend among Canadian companies and expected to continue in the new year, according to a recent story in the Canadian HR Reporter. As conversations around companies’ social responsibility gather steam among shareholders, employees, customers and suppliers, linking executive pay to their ESG performance has emerged as one strategy to encourage progress in those areas.
Sarah Dobson spoke to Kelly O’Ferrall, counsel in Osler’s Employment & Labour practice, about some of the challenges involved in these novel arrangements. One important issue is the lack of standardization in how ESG performance might actually be measured.
“It might mean to one organization customer satisfaction, and another organization might be focused on diversity,” Kelly says. “What I hope would happen is that as more and more companies start to focus on this, we’ll get more consensus on what ESG means, what’s encompassed within ESG issues.”
Even beyond that, the data collection involved in evaluating, say, diversity and equity initiatives, could lead to human rights or privacy concerns. Other goals are even more subjective and difficult to quantify.
“It's hard to base compensation arrangements on ESG measures, given the inherent difficulty in figuring out whether and to what extent the employer is achieving those metrics,” Kelly says. “You're entirely reliant on self-disclosure by the employees and employee surveys, and that could obviously take up time and resources and be difficult to reliably assess.”
The long-haul nature of some ESG targets adds another wrinkle, as these goals were often initially built into short-term incentive programs.
“You might be doing a great job in promoting a diverse workplace, but you may not see the results of that work for four years down the road. So it's a difficult thing to measure because certain of these metrics are so long term.”
If you have a subscription, you can read the full article, “ESG increasingly linked to executive comp,” on the Canadian HR Reporter website.