First, identify your company’s purpose. Then, set long-term goals against your purpose. Finally, define targets, metrics and KPIs to get you there; and embed these in annual and long-term incentive plans.
“You get what you pay for.”
This axiom has guided my views on executive compensation since my time on the Vancity Credit Union board in Vancouver, BC, in the 1990s. Back then, the board of directors of the world’s largest community-based credit union was struggling to motivate its executives to deliver on its social mission. Then a breakthrough moment occurred: We discovered that all our compensation incentives were directed solely at financial performance, with no incentive focusing on the social numbers. Once we figured this out, we swiftly incorporated social impact into the CEO’s long-term incentive plan. That accelerated the financial institution’s pivot to becoming a global leader in social impact banking – a position it has held since.
Fifteen years later, and long-retired from the Vancity board, I was commissioned to study the social and environmental components of the S&P/TSX-60, Canada’s stock market index of 60 large companies listed on the Toronto Stock Exchange. The results at the time were very discouraging: While over half of the companies mentioned considering sustainability factors in their executive compensation decisions (57 percent), only 40 percent showed use of pre-established sustainability metrics, targets and/or weightings for incentive pay within their annual incentive plans (and, by the way — most of those were for injuries, deaths, spills and leaks).
Fast-forward to 2020, and the study conducted by Willis Towers Watson’s Global Executive Compensation Analysis Team on S&P 500 Highlights — ESG Incentive Metrics. It found that 50 percent include ESG (environmental, social and governance) metrics in annual incentive programs, up from the 40 percent in my 2013 study. It also found that four percent include ESG metrics in long-term incentive programs, up from zero percent in my research (note that this summer, Hugessen Consulting published a similar review of the TSX60, which replicated my 2013 study; and found that now 60 percent of Canadian issuers have weighted ESG performance metrics in their incentive plans, with only 3 companies including ESG metrics in their long-term incentive plans).
So, while we are definitely seeing progress, it’s not enough — if the fallout from the global pandemic is any indication. Boards and their compensation teams and advisors are falling hopelessly short of their stakeholder and shareholder expectations.
All this while the bar is moving even higher, as revealed by this compelling Harvard Business Review article by Seymour Burchman — a managing director with Semler Brossy Consulting Group, an executive compensation firm based in California.
As Burchman says, “Let the mission guide you.” He argues, and I agree, that if you design your incentive plans around your mission (I now call it purpose), attaching targets and incentive payouts to achievement of your mission/purpose, you would allow for “long-term transformation; agile course corrections; and the building, operation and constant reshaping of stakeholder-rich ecosystems.”
With 10 years’ experience directing and advising purpose-driven companies, most recently with the Social Purpose Institute, I am equally unequivocal on this matter. First, find your core purpose — the societal reason your company exists. Then, set long-term goals against your purpose. Finally, define the targets, metrics and KPIs (key performance indicators) to get you there; and embed these in annual and long-term incentive plans.
It is good to see compensation advisors get up to speed on this issue. I expect more boards and compensation committees will become adept at defining and realizing a purpose business model through compensation schemes in the years ahead. Society awaits.