How Could COVID-19 and ESG Affect Executive Compensation?

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By Gary S. Williams, CFP® & Brian McKinney, CFP®

Published in the Baltimore Business Journal on September 17, 2020

How Could COVID-19 and ESG Affect Executive Compensation?

Navigating executive compensation, including incentive packages, has always been somewhat of a labyrinth.

Long-term incentives like equity awards and stock options allow companies to control their executive compensation and ensure those at the top are rewarded well. While the types of compensation may vary depending on industry, competition and numerous other factors, the drivers of these rewards appear to be changing in reaction to the pandemic, calls to address racial inequality and other social issues.

To say that we are in unprecedented times would be an understatement. In the context of business, what has happened in the last six months as a result of the pandemic, social unrest and ensuing global social issues related to labor, the supply chain and employee safety has highlighted discrepancies between executive and average employee compensation, putting imbalances front and center.

The result? Economic consequences will cause investors to scrutinize the existing structure of executive pay and how to incentivize corporate bosses to put greater focus on environmental, social and governance (ESG) issues.


ESG investing in context

ESG is a term used to refer to investing strategies that consider a company's environmental, social and governance initiatives and how their efforts will positively impact those three factor areas. Examples include climate change (environmental), human rights (social) and executive compensation (governance).

Tying executive compensation to ESG investing targets is not a new idea, but it is certainly gaining traction due to recent events. Even prior to the pandemic and protests that ensued after the death of George Floyd on May 25, there was certainly a surge underway in the ESG direction.

In fact, financial services firm Morningstar reported a record $45.6 billion was invested into the global sustainable universe during the first quarter of 2020. Throughout 2019 and the beginning of 2020, companies were regularly being called out on Wall Street for a lack of corporate accountability. Big-name companies such as Uber, Microsoft, Intel, Johnson & Johnson and Facebook all took notice in 2019 and began tying CEO bonuses and monetary rewards to hitting diversity and inclusion targets.

It is too soon to tell if those changes will be impactful, but the initial results are promising. For example, according to Uber’s 2019 diversity and inclusion report, the percentage of women in leadership roles grew from 20.9% to 28% in the past year.


The effects of Covid-19

The ongoing pandemic has caused the deepest worldwide economic downturn since the Great Depression, which in turn has caused businesses to respond by laying off or furloughing employees. So far, generally speaking, this downsizing has been unevenly distributed and has magnified economic and social inequality.

The question investors need to ask now is whether bosses should be encouraged to think only of maximizing the company’s share price, or if the treatment and compensation of their employees should be considered in their executive pay packages? Many are doing just this. According to the Financial Times, about 50 companies offered their CEOs 50% more equity options when the markets plunged in March.


Looking ahead

Unemployment levels are at record highs and big companies are still going out of their way to pay their executives millions. Ostensibly, the way executives are incentivized and compensated will be watched and monitored more closely than ever.

But with a strengthening push by consumers into ESG investing, it certainly wouldn’t be out of the realm of possibility for investors to demand that companies develop, track and publish their company’s ESG achievements in their corporate sustainability reports.

While the outcomes are yet to be seen, the way top executives are compensated could be potentially forever changed in light of recent events.