- Among S&P 500 companies, less than half (43%) of those in the information technology sector link executive remuneration to ESG measures, compared with 100% of energy companies.
- Capital Monitor finds that just three out of seven ‘FANGMAN’ tech giants have ESG remuneration policies, with Microsoft the first to implement such measures in 2016.
- Data indicates that shareholder resolutions calling for ESG-linked pay is a major driver of implementation, though companies, including Amazon, have rebuffed such demands.
As a means of encouraging bosses to pay attention to ESG metrics, a number of companies now link their executives’ pay to ESG targets. In 2021, one in four US-listed companies incorporated some form of environmental or social consideration within their executive pay packages, up from 16% in 2019, according to an April 2022 study conducted by proxy advisory firm Glass Lewis, published in the Harvard Law School Forum on Corporate Governance.
Among S&P 500 companies, this figure rises to approximately 50%, compared with 39% in 2020. As such, the research finds that of the $6.96bn paid to S&P 500 CEOs in 2021, 8.65%, or almost $600m, was based on environmental and social performance.
Of course, different elements of ESG may be perceived as more or less relevant depending on the sector. For example, energy companies are the most likely to incorporate environmental targets into their CEO’s pay packages, whereas financial institutions are among the most likely to focus on diversity targets, according to Glass Lewis research.
Further data in the study shows that while 100% of energy companies in the S&P 500 tie some form of ESG metric to executive pay, companies in the information technology sector are the least likely to do so, shortly followed by ‘industrials’ and ‘consumer discretionary’.
Included among the world’s largest information technology companies are Apple, Microsoft and Nvidia, which are often referred to as FANGMAN stocks - an acronym for the group of companies including Meta (formerly Facebook), Apple, Nvidia, Alphabet (Google’s parent company), Microsoft, Amazon and Netflix. These stocks are considered the world’s most influential tech companies, although Meta, Alphabet and Netflix are technically classed as ‘communication services’ and Amazon as ‘consumer discretionary’.
Because on average, they produce less Scope 1 and 2 emissions – carbon emissions linked directly to their own businesses – than other sectors, tech companies tend to be overweight in ESG funds, according to MSCI. For example, across the 20 largest MSCI ESG equity funds in 2021, the companies with the highest average weights were Apple (5.6%) and Microsoft (5.0%). As such, tech executives appear to be less susceptible to shareholder demands for ESG-linked pay policies than other companies.
But should this be the case? Despite having relatively low Scope 1 and 2 emissions, Big Tech and social media companies such as the FANGMAN stocks have an outsized influence over social issues and geopolitics globally.
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Companies like Facebook and Google have been dogged by scandals and concerns over social issues during the past few years, including allegations of election tampering, underpaying workers, and a lack of diversity within their workforces. And as Capital Monitor has reported, shareholders are struggling to act on these concerns due to their executives ‘super-voting’ rights.
The three FANGMEN of ESG-linked pay
Of the seven FANGMAN companies, Capital Monitor finds that three – Alphabet, Microsoft and Apple - currently link some executive compensation to ESG targets.
The first to do so was Microsoft in 2016, which uses a weighted approach similar to that applied by oil majors such as Shell and TotalEnergies. Capital Monitor calculates that Microsoft apportions approximately 2.5% of its executive bonus to ESG targets, down approximately 4% last year.
According to its latest SEC filings, one-third of Microsoft’s annual cash incentive (which totalled $14.2m) is non-financial, of which 10% is tied to performance on issues relating to ‘customers & stakeholders’, reduced from 16.67% in 2020. This 10% of the total bonus is composed of four parts, one of which includes progress on ‘Environmental, Social, and Governance goals’. The goals themselves are not detailed in the filings, which contrasts with the level of detail evident in the reports of oil majors, for example.
Last year, according to its filings, Microsoft’s CEO Satya Nadella received 85% of his potential 10% ‘customer and stakeholder’ annual cash incentive, due to progress in a number of areas, including ESG targets such as accelerating the company’s ten-year carbon reduction plan, and narrowing the ‘disability divide’ through investments in technology, the workforce, and the workplace.
Apple, by contrast, doesn’t weight bonuses against targets. Rather, since 2021, the tech giant has applied an ‘ESG modifier’ to its cash incentive programme, which can either increase or decrease the final bonus by up to 10%. While this past financial year was the first in which this policy was put in place, the ESG modifier was not applied, as its executives had already maxed all the possible bonus pay they could earn, as it is capped at 200% of the total target.
Alphabet, which owns Google, rolled out its ESG compensation policy in February this year. Executives can receive a maximum of $2m as an annual cash bonus based on contributions to Google’s performance against social and environmental goals for 2022. The company has provided no further details on how executive pay will be measured against these goals.
Shareholder activism
Though nascent, such policies in the sector follow years of campaigning.
Capital Monitor’s analysis of data compiled by Ceres, a sustainable non-profit focused on capital markets, finds that close to a third of US shareholder resolutions calling for ESG-linked pay tabled at companies over the past decade are concentrated among energy companies. As such, it’s little surprise that so many of them implement such policies.
Of the 95 relevant shareholder resolutions included in this database, three took place across Alphabet, Amazon and Apple. At each company, the same proposal was submitted multiple times by a firm called Zevin Asset Management, a boutique, self-described ‘socially responsible’ investment firm with just $443m assets under management.
On each submission, Zevin Asset Management called on these tech majors to tie their executive pay to ESG metrics, as a means of forcing them to take greater action on social issues. Though the resolutions didn’t pass, they appear to have succeeded in mounting pressure on these firms, as both Apple and Alphabet eventually adopted these policies.
For example, in January 2020, Zevin Asset Management filed a resolution at Alphabet claiming that the ‘tech diversity crisis threatens worker safety, talent retention, product development, and customer service’. It warned that such ‘human capital risks’ were ‘playing out as controversies’ at the company, referencing a situation in November 2018 when more than 20,000 workers walked out of Alphabet offices in protest of its mishandling of sexual misconduct cases.
The proposal also cited concerns about the company’s inclusion, pointing out that among Alphabet's top 290 managers in 2017, just over a quarter were women and just 17 managers were ‘underrepresented people of colour.’ As with the other resolutions it filed, Zevin Asset Management argued that ‘clearly disclosed, comprehensive links among sustainability, equity, and executive compensation would enhance Alphabet's approach’ on tackling these issues.
Though the proposal still went to vote, and gathered just 12.2% of shareholder’s support, Alphabet had decided shortly beforehand to adopt an ESG-linked pay bonus structure.
Also in 2020, Zevin Asset Management shared a similar proposal at Apple, which received just 12.1% support from shareholders. Similar to what happened at Alphabet, shortly after the asset manager decided to repeat the same proposal the following year, Apple decided to implement an ESG-linked pay policy. On its website, Zevin Asset Management describes holding a series of calls and meetings with Apple in which they discussed the proposal in the months leading up to the company implementing its ESG modifier.
Amazon, however, refused: while Zevin Asset Management’s initial 2019 proposal that the company link executive compensation to ESG metrics received more than 19% of the shareholder vote — a large proportion considering CEO Jeff Bezos’s oversized share in the company — Amazon took the step of refusing the proposal on the grounds of a technicality and omitting it from the ballot the following year.
A spokesperson for Amazon pointed Capital Monitor in the direction of its 2022 proxy statement. It states incorporating what it calls discrete incentives into executive remuneration is a major source of “complexity and confusion” and believes corporate policy should be enough to incentivise executives to act in the interests of it.
Though progress on ESG-linked pay at tech companies has so far been slow, if shareholders persevere with such resolutions, they may soon have to join their counterparts in other sectors in linking executive pay to ESG targets.
Spokespeople at Facebook and Netflix did not return emails seeking comment.
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