Building ESG Metrics Into Managerial Incentives To Improve Performance
- Media Manager
- Dec 14, 2023
- 2 min read
Forbes
Written By: Contributor
Published: December 14th, 2023
How can ESG (environmental, social, and governance) metrics be built into managerial incentives to improve organizational performance? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Dylan Blu Minor Professor at Columbia University, on Quora:
Surprisingly, roughly half of all large US companies now include ESG (Environmental, Social, and Governance) performance in calculating its top managers’ compensation. In my research, I have found that this is a trend that has been increasing consistently over the past 15 years, both in the US and abroad.
You might ask why has compensating based on ESG performance become so ubiquitous, especially in the US where this is a controversial topic? The primary reason is that the data show building ESG into overall incentives can help not only improve ESG performance but also overall firm performance to a greater extent than if it is not included. At its core ESG is a new lens that can be used to discover new opportunities, create innovations, and avoid risks often not recognized without such a lens.
For example, most top managers if asked what their most valuable asset is for creating and delivering value, they will quickly respond “their people.” The S in ESG stands for social, and one of the most important components of this category is a company’s people. Which company is more likely to be successful: the one that treats their staff superbly or instead treats them like capital? The advancement of ESG has created myriad metrics to capture how well a company treats its employees. For example, a simple ESG metric for S is a company’s worker turnover, as it provides a hard measure of employee satisfaction. For a more sophisticated example, consider the online site Glassdoor that receives reviews from company employees. These reviews can be scraped and converted to quantitative metrics to measure worker sentiment at a company and if its changing for the better or worse. These types of ESG measures not only help us understand how well a company is at S, but it also provides new ways to better forecast how successful a company will be financially.
