How Incentive Plans Can Support Environmental, Social, and Governance Initiatives: A Mercer Survey

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With growing expectations for companies to operate in an environmentally and socially conscious way, environmental, social, and governance (ESG) incentive plan metrics are increasingly being considered as effective ways to reinforce positive actions now and in the future of work. In May 2019, Mercer conducted a survey to capture ESG metrics companies use in incentive plans, including goals linked to environmental factors, employee engagement and company culture, and diversity and inclusion.

A total of 135 public, private, and not-for-profit companies from Canada and the United States participated in the survey. Over half (51%) of respondents either currently use ESG metrics in their incentive plans (30%) or are considering doing so (21%). Is your company using ESG metrics in your incentive plans?

ESG metrics: small but mighty. Among respondents using ESG metrics, the metrics typically comprise 5% or less of all incentive plan metrics, but ESG metrics usually apply to all incentive plan participants, not just senior executives. Despite their small relative weight in determining payouts, incentive plans that utilize ESG metrics can be designed to reinforce desired behavior across a company’s workforce.

Given that companies track numerous metrics in running their businesses but typically include only a handful in their incentive plans, the inclusion of ESG metrics is significant regardless of the relatively low weightings. ESG incentive plan metrics by themselves will likely not create lasting change for your company. However, they are a great mechanism to signal what is important to your company and foster a culture that encourages your employees to operate in an environmentally and socially conscious way.

Mining & Metals and Energy sectors lead the pack. The prevalence of ESG metrics varies widely by industry. These metrics are most commonly used by Mining & Metals companies (82% of respondents in that sector) and the Energy sector (52%). Technology sector respondents are least likely to use, or consider using, ESG metrics.

Metrics vary by industry. Companies in the Mining & Metals and Energy sectors are far more likely to use an Environmental metric (96%). Employee Engagement / Culture is the most prevalent metric for all other sectors (76%), followed by Diversity & Inclusion (35%).

The high usage of environmental metrics among respondents in the Mining & Metals and Energy sectors is not surprising because their dynamic business models are heavily reliant on the use of natural resources while protecting the environment. But, we expect more companies will evaluate ESG performance frameworks as investors, customers, and other stakeholders focus more on sustainability.

Companies and their human capital operate under a backdrop of growing fears of climate change, uncertainties in the future of work and concerns around female and minority representation. The use of ESG metrics linking environmental factors, employee engagement, company culture, and diversity and inclusion can help reinforce your efforts to make positive changes in your company.

Download the report to discover our full findings and learn more about ESG as a metric in incentive plans.

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