US companies add environmental and social goals to executive bonuses

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Kevin Johnson, chief executive of Starbucks, has earned a share of his 2021 bonus by reducing plastic straws and methane emissions – an example of the trend of corporate America adding environmental and social goals to bonus packages.

Starbucks has joined Apple and Disney in adding new environmental and labor goals to 2021 pay, according to analysis by Sentieo, a data provider. Shareholders will be able to vote on these provisions in March when the companies hold annual meetings.

Corporate social responsibility pay jumped above 20% at Russell 3000 companies, from 7% in 2018, according to Institutional Shareholder Services ESG, the proxy adviser’s responsible investment arm. Wage provisions related to workplace diversity reached 11% in 2021, up from 2.5% in 2018, the proxy adviser said.

In 2021, Starbucks failed to win investor support for its leadership bonuses for the previous year, in part because of a $50 million retention bonus offered to Johnson. As a result, the coffee chain revamped its bonus packages and added new environmental and human rights criteria.

For Johnson, 10% of his annual bonus was tied to environmental provisions, including efforts to “eliminate plastic straws” and “reduce methane at the farm level”, among others. Starbucks said it rolled out natural, biodegradable straws in September 2021 and a sustainable dairy initiative is starting this year.

Another 10% of pay was tied to retaining minority workers and other workplace goals, Starbucks said.

Johnson hit all of his annual bonus goals, and his total salary in 2021 rose to $20.4 million, from $14.7 million in 2020 and $19.2 million in 2019.

As bonuses linked to environmental, social and governance (ESG) issues increase, shareholders are skeptical. Investors grew frustrated with big bonuses awarded with little accountability. A record number of S&P 500 companies failed to win investor support for bonuses in 2021.

ESG compensation provisions tend to be vague, and asset managers have expressed concern that if ESG compensation replaces bonus targets linked to share price performance, executives could isolate bonus during a turbulent stock market this year.

“There is definitely a concern that you are looking at [stock] market valuation and you look at compensation packages and they can anticipate where we are in the cycle,” said John Hoeppner, head of US management at Legal & General Investment Management America. “It’s absolutely a concern of all long-term investors.”

ESG compensation metrics “are either incredibly broad and high-level and almost always – at least in the US – short-term [pay] said Caitlin McSherry, Vice President and Director of Investment Stewardship at Neuberger Berman.

“It’s fair to be skeptical about what’s really at risk in performance-based compensation, especially when it comes to the more qualitative elements introduced,” such as ESG, she said.

In 2021, Apple incorporated an ESG provision into executive annual cash bonuses that can increase pay by 10% based on “Apple values ​​and other key community initiatives,” according to ISS. But because company executives met bonus targets for sales and revenue, the ESG element was not added to the bonus, the company said.

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ISS recommended that Apple shareholders vote against the pay of chief executive Tim Cook and other tech group executives earlier this month.

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

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

Companies should move toward quantifiable ESG compensation metrics, such as the specifics adopted by Starbucks, said Robin Ferracone, founder of Farient Advisors, a compensation consultancy. Companies should be “afraid of backfire” if they pay bonuses derived from imprecise ESG metrics, she said.

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

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