SEC Commissioner Alison Herren Lee recently availed herself of the opportunity presented by the re-opening of the comment file on the Dodd-Frank rule "requiring companies to disclose the relationship between executive compensation actually paid and the financial performance of the company" to invite comments opining on "performance metrics related to, for example, climate, diversity, and other company-specific ESG goals." In other words, SEC Commissioner Lee has used her platform at the SEC to provide public support for the notion that executive pay at regulated companies should take into account the implementation of ESG goals.
The inclusion of ESG metrics within the broader evaluation of executive performance would likely--as reflected by activist focus on this issue--prompt greater implementation of and compliance with ESG goals, as if executives' pay is linked to such performance, they are more likely to devise means of properly measuring and assessing progress towards defined ESG goals, and to devote additional resources to achieving those same ends.
Broadly speaking, this statement reflects not only the increased regulatory focus on ESG matters, especially by the SEC, but also the varied means by which this regulatory focus can be implemented--for example, not just by regulatory disclosures in public company filings (as the SEC has repeatedly stated they will promulgate), but by encouraging that executive pay be linked to performance according to ESG metrics.
Financial incentives drive how executives perform in their role as fiduciaries to companies and their shareholders. Understanding what those incentives are and whether they are actually working – that is, if and how they link to company performance – is critical for investors in evaluating a company’s compensation practices. ... The modern compensation landscape now encompasses enhanced reliance on performance metrics related to, for example, climate, diversity, and other company-specific ESG goals.[3] It would be helpful to hear from commenters on how the increased flexibility contemplated in today’s reopening release may facilitate investor analysis of the use of such metrics and targets in compensation plans, and how it may enable companies and investors to better evaluate the success of the many tailored and unique compensation plans companies employ.
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