24 May 2021 / Company

More companies must link executive pay with ESG commitments

By ESG Clarity

Boohoo has accepted MPs' recommendation to link bonuses with supply chain improvements

More companies must link executive pay with ESG commitments

More companies should link executive pay to supply chain commitments, according to ESG professionals responding after the latest announcement from fast-fashion retailer Boohoo.

Last week, Boohoo accepted a recommendation from MPs that its long-term bonus scheme – announced last year and potentially paying up to £150m – be linked to improvements in its supply chain.

This comes after the fast-fashion brand was revealed last year to be paying workers at one Leicester factory as little as £3.50 an hour, causing responsible investors such as Aberdeen Standard Investors and Premier Milton to divest from the company and shining a spotlight on ESG portfolio construction.

Environmental Audit Committee chair and MP Philip Dunne welcomed the news Boohoo would be linking remuneration with supply chains and said he hoped other firms would follow suit.

“While it appears that only 15% of the bonus will be tied to ESG improvements, it is encouraging that Boohoo’s remuneration committee will have the discretion to scrap the entire bonus if these much-needed changes are not implemented.”

ESG professionals appear inclined to agree. “The pandemic has highlighted the need to have robust and flexible supply chains and linking management remuneration to the health of the supply chain is vital to protect the business model,” said Ketan Patel, manager of the EdenTree Responsible & Sustainable UK Equity Fund, and ESG Clarity editorial panellist.  

“An independent board is vital in ensuring that the interests of the shareholders are aligned with management and a symmetrical remuneration framework plays a key role in this relationship.” 

Patel added in the case of Boohoo, investors should question why only 15% of the 150m bonus is being linked to ESG and how improvements will be monitored.

“The key business risk in the case of fast fashion is the supply chain and to only place a modest link on compensation feels out of touch with the current state of the world. It could be argued that management should not need to be incentivised so generously to behave in the right manner – surely that should be business as normal for responsibly led companies and industries?”

See also: – Linking ESG to executive pay

At the moment it seems to be smaller companies starting to link executive pay with ESG principles, Downing partner Judith MacKenzie said, but she hopes more will follow suit.

“I think it will become increasingly common for senior managers/directors to have remuneration tied to deliverable KPIs that have an ESG focus. It is close to my thinking as to become a BCorp, best practice ties performance on ESG principles to remuneration – and I personally have a KPI that if not delivered will influence what I get paid in Downing, as does the CEO and head of unquoted,” she said. “It does focus the mind.”

Arvinder Tiwana, senior ESG analyst at Nordea Asset Management, added when linking executive pay to ESG commitments, milestones and timeframes must be taken into account, as well as how business critical the commitments are. For example, climate change may be more critical for oil and gas companies, and labour rights for fashion businesses.

“It is positive for ESG commitments to have both a binary and percental impact on the executive bonus. The binary element ensures a minimum progress is achieved for the executive to attain any bonus, while the percental element incentives the executive to not just reach the minimum requirement.”