Business leaders agree ESG-aligned remuneration pledge

A new manifesto aiming to align executive pay to ESG-related criteria has been welcomed by company CEOs.

Gathering at the World Economic Forum’s (WEF) International Business Council meeting, held in Davos this week, the majority of company bosses gave their backing to an initiative to tie their remuneration to corporate social responsibility.

With stakeholder capitalism gaining traction, the push to assess and reward companies’ performance based on ESG-related criteria is gaining ground.

Pierre Habbard, general-secretary of the Trade Union Advisory Committee
to the Organisation for Economic Co-operation and Development, said he welcomed
the new manifesto. He added that his constituents viewed the widening pay gap
between bosses and workers as a “social justice issue”, which has undermined
trust in business and contributed to rising income inequality.

Habbard also warned that the current model of aligning compensation to
financial criteria can be manipulated by share buybacks, which burn a company’s
cash for the short-term purpose of keeping up the share price.

CEOs attending the International Business Council meeting deliberated on a set of metrics to help companies track performance against long-term priorities.

Maha Eltobgy, head of Shaping the Future of Investing at the WEF, said
the mood was “positive”, with a majority of the CEOs indicating they would
publish the metrics in their annual reports.

Eltobgy cited Siemens as an example of a corporation that has already
incorporated ESG-related criteria into its executive compensation package.

In addition to trade unions, investors are also expected to exert pressures on management in their attempts to limit potential liabilities relating to climate change, according to Katharina Pistor, the Edwin B. Parker Professor of Comparative Law at Columbia Law School.

Speaking in December, Klaus Schwab, founder
and executive chairman of the WEF, said executive remuneration needed to be
addressed and adjusted.

“Since the 1970s, executive pay has skyrocketed, mostly to “align”
management decision-making with shareholder interests. In the new stakeholder
paradigm, salaries should instead align with the new measure of long-term
shared value creation,” Schwab said.

In October, the Manifest Total Remuneration Survey showed CEOs of the 100 largest UK companies were paid a combined total of just over £500m in the 2018/2019 financial year.

While the average pay dropped 11% from the previous year’s figure
of £5.7m, the majority of stakeholders and a number of fund managers still
consider this pay to be unnecessarily high, the report stated.