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Incorporating ESG criteria in compensation policies

By: Andrea Garrido, Maria José Andrade, Leire Erdociain and Elisa Palau

Juan Guerrero, manager at Willis Towers Watson and professor at Master's Degree in Personnel Management Service in Organizations, led the round table on the incorporation of ESG criteria in compensation policies. He began his discussion paper by stating that the main mission statement of variable remuneration is to guide the behavior of managers towards the strategic priorities established in the business. In this sense, variable compensation is a fundamental tool , as it allows linking executive compensation to the objectives that the company has defined as priorities.

Regarding the metrics used in incentive plans, it is increasingly common to include ESG indicators, either in short term incentive plans deadline (STI) or long term incentive plans deadline (LTI). According to data , 86% of companies use at least one ESG metric in their incentive plan. Here it is important to emphasize and keep in mind that not all metrics are quantitative, and that transparency in their definition is essential to ensure their effectiveness, so when there is not enough transparency in the metrics, they are said to be qualitative.

The inclusion of ESG objectives in executive compensation is a topic that is still controversial in some companies, as there are divergent opinions as to whether they should be part of fixed or variable compensation. For Luis Blas, director HR at Tabacalera and Ramón Ruiz, director global ESG at Cosentino, speakers who took part in the roundtable, they should be present in variable compensation, as this ensures that managers are actively involved in achieving sustainability objectives.

One of the main difficulties that the two professionals have encountered in establishing sustainability metrics is the selection of metrics, since it is important to choose those that are relevant to the company and that can be explained clearly and simply. On the other hand, it is essential to define a scorecard to measure progress towards the defined objectives.

Regarding sustainability benchmarking, it is important to keep in mind that not all companies have the same needs and priorities, as each company must define its own path towards sustainability. However, benchmarking can be a useful tool to identify best practices and learn from the experience of other companies.

Luis Blas, during the roundtable, commented that not everything fits for everyone, and for one thing is suitable according to the time of the company. The great discussion focuses on the fact that everything depends on what your moment is, and what your company is in. Today it is clear that there is no doubt that indicators are needed. On the other hand, Ramón Ruiz said that health and safety indicators are included in the annual bonuses; and in the multi-year bonus for managers they have now included one for the total accident rate and another for the carbon footprint.

They have recently incorporated in the annual bonus du, two of sustainability (one of the carbon footprint taking into account that it has a goal reduction of the same, and another of total accident rate.

During this roundtable, a series of thought-provoking questions were opened for discussion, which were as follows:

Should it go to fixed or variable? They affirmed that it should go to the variable one. Since it should be in this one mentioned, because it is understood that if a manager does not work in subject of sustainability, that person cannot be in that position, he/she does not perceive in the salary.

Why did you choose these two indicators? The conclusion to this question was that all indicators are important, but the important thing is to define the priorities, based on a scorecard. They are indicators that are easy to explain, and it is simple for the manager to carry out on a day-to-day basis. Each area has its numbers, with respect to the global and the company, and so they can follow up closely how they are doing.

In conclusion, the management of variable compensation is core topic to guide managers' behavior towards the strategic priorities defined by the company, including sustainability objectives. It is essential to define relevant and clear metrics, and to establish a scorecard to measure progress towards the defined objectives. Finally, it is important to keep in mind that each business must define its own path to sustainability, and that benchmarking can be a useful tool to identify best practices.

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