Investors are keenly interested in understanding executive compensation programs, especially how these pay programs tie in with and support major elements of a company’s business strategy. Pre-set formulaic metrics, where employed, provide a clear window into the behaviors and performance that compensation committees are rewarding.
These metrics traditionally revolve around a range of financial, operational and strategic measures, with TSR improvement (both absolute and relative) either an explicit or implicit objective. Increasingly, many companies are including one or more non-financial metrics in their programs.
Examples of these non-financial metrics include:
- Diversity efforts (board, C-suite and general workforce)
- Employee engagement
- Employee health and safety, and remote work
- Supply chain resilience
- Strategic and revenue diversification efforts
It is anticipated that the impact of COVID-19 on a company’s operating and financial performance, employees, supply chains and even its business models is causing companies to focus on improving their resilience to events that once seemed abstract or remote. As a result, many likely will incorporate ESG-related objectives into executive performance metrics, and disclose this heightened focus and new set of priorities to investors.
As reported by Willis Towers Watson in its blog earlier this spring (March 27, 2020): “Just over half (51%) of S&P 500 companies use ESG metrics in their incentive plans, with 50% including it in annual incentive programs (AIPs), … only 4% use ESG metrics for long-term incentive programs (LTIP).”
As companies incorporate additional categories of incentives and metrics into their programs, they will want to disclose these to investors in hard-to-miss, easily digested formats. Typically, such metrics are disclosed, in tabular format, in the full discussions of each relevant element of pay in the body of the CD&A.
Given the increasing complexity of compensation programs and a growing desire to summarize programs “at a glance,” many companies are supplementing traditional CD&A content with half or full-page “elements of compensation” tables.
In this article are a few examples of how companies are disclosing E&S and other non-financial metrics, along with more traditional financial and operational metrics, in their proxies. These examples and many more can be found in DFIN’s “Guide to Effective Proxies.”