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More than three-quarters (77%) of US companies in the S&P 500 tied executive incentive plans to at least one environmental, social, and governance (ESG) metric in 2024, matching the 2023 rate, according to a new study by WTW. However, the payout rate for hitting ESG metrics is about 10% higher than it is for reaching financial goals, leading some investors to worry that ESG aims are being set too low, the report said.
ESG incentives were paid out at an average of 122% of target compared to financial incentives that were paid out at 114% of target, the report said.
Kenneth Kuk, senior director of work and rewards at WTW, said there’s no evidence that the goals are only being met because they aren’t challenging.
“We couldn’t say why there is this difference. Is it because companies are setting soft goals, and they’re just doing that because then they can pay themselves more, or is it because they are doing quite well…on those non-financial metrics?” Kuk said.
Kuk added that it is the board’s responsibility to ensure that targets are “difficult enough and not set up as a slam dunk.”
The most popular ESG metric among US companies is the social category, with 74% of organizations using the segment, which includes diversity, equity, and inclusion. Governance and environmental issues are tied at 45 and 44%, respectively.
DE&I programs have been under attack since 2023, when the Supreme Court struck down the use of affirmative action in college and university admissions. Still, DE&I metrics remain a part of long-term incentive plans at 54% of companies. Some 29 companies stopped using DE&I metrics to determine incentive pay in 2024, but 26 companies began using them.
“You are starting to see the tide shifting a bit,” Kuk said. He said the number of companies using DE&I metrics may drop slightly again next year, though he doesn’t fear a worrisome trend emerging. He noted that over 50% of companies still have DE&I metrics.
“I think that the more important point here is that companies still deliberately make the choice to keep those metrics,” Kuk said, adding that companies have realized there is a link between investing in DE&I and business value creation.