Apple senior executives are measured on key financial goals when it comes to being awarded among the market’s most lucrative pay packages, such as sales, earnings, and valuation growth. Now, for the first time, executives at the stock market’s largest company are also going to have a portion of their millions in cash bonus pay linked directly to factors reflecting a fast-changing world of capitalism: environmental, social, and governance (ESG) metrics.
In 2021, Apple is adding an ESG “bonus modifier” to its cash incentive program which can swing the total bonus payout by 10%—executing on ESG goals can increase the bonus by 10%, while failing to hit ESG targets could cost Apple’s top brass a bonus reduction of the same amount.
After a 2020 that included civil unrest in the US, the Black Lives Matter movement, and a pandemic that showed the financial fragility and health risks across many communities and workers, there is more pressure on companies to focus on ESG themes, such as diversity, equity, and inclusion, and labor policy. “For better or worse, this year the world is a lot different than it was last proxy season,” said Jannice Koors, senior managing director and Western region president at Pearl Meyer, an executive compensation consultant. “Diversity, equity, and inclusion is taking up a lot more bandwidth in boardrooms.”
In recent years among the Russell 1000 universe of companies, about 20% have linked executive pay to ESG goals. That is consistent with other surveys showing between 10% and 20% of companies have some executive pay tied to ESG key performance indicators. Most are of the magnitude of the new Apple 10% swing factor in bonus pay, according to a Pearl Meyer survey from last summer. Roughly 25% of the firms that said they have an ESG pay component indicated it was less than 5%; 67% indicated it was 5% to 10%.
Using a modifier takes the pressure off in the goal-setting process and reflects the imprecision that still exists in ESG. “Companies can’t just dive into the deep end of the pool right off the bat,” Koors said (her firm does not work with Apple specifically). “The question for them is, ’How do we start to introduce these measures in a way where we don’t end up regretting it?’ You don’t necessarily want to be the first one out. You can tell the pioneers by the ones that have arrows in their backs. But lots want to be a fast follower.”
Pearl Meyer expects more companies will be adopting ESG metrics in incentive plans – in its summer survey the number of companies that said they were looking at adding an ESG pay metric this year (9%) more than doubled over those that said they already had one (6%). “Given the data we’ve seen, this is still the early adopter phase,” Koors said.
Which ESG metrics, and how many to incorporate, remains a challenging question. “That everything is important should be signaled, but on the flip side, if everything is important then nothing is important,” Koors said.
In the Equilar 500, roughly 20% of the companies tie compensation to some kind of diversity metric. There are quantitative measurements for gender pay gap or ethnic pay gap analysis, but there is no “monolithic approach,” says Koors.
The issues should not deter companies from thinking about senior executive incentive plans, though, because they drive behavior and performance throughout an organization. “You need everyone in the boat all rowing in the same direction and the more companies that make a plan like this, it can cascade down through the entire management.”
“If the company proves that the goals they set were rigorous such that the 10% modifier plus or minus doesn’t always end up being positive, if we see examples where they set goals and they were not layups and money was taken away, then give them credit for it,” Koors said.