Executive Compensation and Stakeholder Capitalism

When looking to incentivize behavior tied to ESG goals, time-honored principles still apply.

Addressing the needs of a range of stakeholders has long been a part of managing a company, though explicit “stakeholder capitalism” has grown in influence in recent years following Business Roundtable’s updates to “The Purpose of the Corporation” in 2019. While the broader stakeholder focus is growing, shareholder value creation is still the primary company objective, implying that financial and shareholder value metrics should remain the most prominent incentive tools for executive pay programs. With the ongoing market evolution, many companies are more actively contemplating broader stakeholders and considering direct adoption of ESG metrics in pay programs. In these cases, many enduring principles of executive compensation should be applied to ESG metrics, including considering the alignment to company strategy and values and the incentive value that a broader view of performance can provide.

A common criticism of Business Roundtable’s definition of stakeholder capitalism is that navigating varying stakeholder expectations is part of the complex decision set that company leaders have always had to manage to drive long-term shareholder value creation. This view is supported by legacy executive pay program designs. Under a fairly broad definition of ESG that includes nonfinancial metrics such as customer satisfaction and safety, 57% of S&P 500 firms had such metrics in place in 2019, before the publication of Business Roundtable’s updated statement. However, the prevalence of ESG metrics has increased over the last several years, with 65% of S&P 500 companies disclosing a metric in 2020 incentive plans and 70% disclosing a metric in 2021 incentive plans. Customer satisfaction and safety metrics continue to be prominent in industries where those metrics are relevant. The two metrics with the largest increase in prevalence were human capital metrics, primarily measured through diversity and inclusion and sustainability metrics, primarily measured through carbon footprint, as companies have become deliberate about those topics.

Already a subscriber? Sign In

About the Author(s)

Greg Arnold

Greg Arnold is a managing director of Semler Brossy.


Brant Shelor

Brant Shelor is a managing director of Semler Brossy.


Related Articles

Navigate the Boardroom

Sign up for the Directors & Boards weekly newsletter for the latest news, trends and analysis impacting public company boardrooms.