USA October 8,
Incentive compensation has long been a board’s primary tool to ensure that the interests of management are aligned with the interests of a company’s shareholders. To that end, the ongoing challenge facing compensation committees is choosing metrics that motivate management to optimize shareholder value without incentivizing behaviors that focus on short-term stock price appreciation that can threaten the company’s long-term interests. As a result, traditional incentive compensation metrics measure performance through quantitative shareholder return and financial and operational metrics that reward longer-term performance. Although the traditional metrics still dominate, a number of forces have recently resulted in the incorporation of more qualitative ESG factors. This article discusses the forces encouraging companies to adopt ESG metrics and analyzes how companies are incorporating ESG metrics into their incentive compensation programs.