Social Governance

Bonus Packages of US Companies Now Involve Environmental and Social Targets

Published on: 21 February 2022 11:13 AM
by KnowESG

A Brief Summary

The companies in the U.S. are now integrating environmental and social targets into bonus packages. Recently, Kevin Johnson, Starbuck's chief executive, earned his 2021 bonus by slashing plastic straws and methane emissions, setting a trend among companies in the U.S to add climate-related targets to bonus packages.

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In 2021, Starbucks failed to get support from investors for its executive bonuses in the previous year, owing to a $50 million retention bonus offered to Jhonson. Consequently, the firm tweaked its bonus packages and included environmental and human-rights criteria.

10% of Johnson's annual bonus was tied to environmental activities, including eliminating plastic straws and farm-level methane reduction. Starbucks said it launched biodegradable straws in September 2021 and a sustainable dairy initiative starting this year. Retaining minority workers and other workplace goals account for another 10%, Starbucks stated.

Johnson accomplished all his annual bonus targets resulting in his total 2021 pay jumping from $14 million to $20.4 million in 2020 and $19 million in 2019.

Shareholders have become sceptical as bonuses tied to environmental, social and governance (ESG) issues increase. Investors said big bonuses awarded with little accountability made them even more frustrated. A large number of S&P 500 companies in 2021 failed to get support from investors for bonuses.

Apple in 2021 integrated an ESG provision to executives' annual cash bonuses. Meanwhile, Disney integrated diversity and inclusion targets into making these criteria the highest-weighted non-financial metric in the company's 2021 bonus plan.

Companies should move toward quantifiable ESG-pay metrics, such as the specifics Starbucks adopted, said Robin Ferracone, founder of Farient Advisors, a pay consultancy. Companies should be “afraid of the blowback” if they pay bonuses derived from imprecise ESG metrics, she said.

“If an [ESG] measure is not supportable you could get yourself in trouble with the Securities and Exchange Commission,” she said. “With more quantification, it is going to be harder and harder to fudge the outcomes.”