Xcel Energy’s record of employee and public safety last year helped CEO Ben Fowke earn an annual cash bonus of $2.9 million.
The bonus, along with his $1.25 million salary and $22 million in restricted stock, helped Fowke rank third on the Star Tribune’s annual executive compensation list for Minnesota public companies with a total salary of $26.2 million.
As more and more investors and companies place greater importance on environmental, social and governance factors, known as ESG, the philosophy is beginning to find its way into more discussions about how companies can achieve these objectives and whether they should be used in executive compensation packages. .
“What we see and hear from both the 2018 proposals and the early indications for 2019 is the increased use of three very important letters: E…S…G,” said Brian Blackwood, Managing Director of Willis Towers Watson. of this year’s proxy season.
Blackwood said many of these additional shareholder proposals include mandates for board diversity, pay equity and workforce diversity. In addition, boards and their compensation committees consider ESG principles in the design of compensation plans with respect to business risks and talent management.
“We are most definitely seeing an increase in these topics making their way onto compensation committee and/or board agendas,” Blackwood said.
Fowke’s annual bonus is based on five factors: employee safety, public safety (based on gas emergency response), electrical system reliability, customer satisfaction, and growth in operations and maintenance.
Since 2004, Minneapolis-based Xcel has included environmental goals as part of its executive compensation plan, and it has had employee and public safety goals for more than 20 years.
Its results-based measures aim to help the company achieve its long-term goals of reducing carbon emissions by 80% by 2030 and achieving 100% carbon-free electricity by 2050.
“Xcel Energy’s executive compensation is competitive in the market, provides a vested interest in the long-term success of the company by providing equity grants, and is strongly tied to achieving superior business results,” said the company in a press release.
In a typical proxy statement, an annual filing with the Securities and Exchange Commission, shareholders vote on director election proposals, confirm the company’s auditor, take a nonbinding vote on the company’s executive compensation program company and vote on other shareholder proposals that have done so. to the power of attorney statement.
Xcel has long included certain ESG measures in its executive compensation plan and has set employee efficiency, safety and environmental targets as part of its annual incentive plan.
“A lot of people are talking about the importance of ESG this year, but of course compensation has been important for a very long time, and it’s a central part of the ‘G’ in ESG,” said Peter Kimball, Head of Consulting Services. at ISS Corporate Solutions. “Corporate governance, and how you pay your employees and how you structure your board, what rights you give shareholders. These are topics that have been lingering in proxy season for a very long time. »
One of the reasons ESG is important is that investors are increasingly using these screens to pick stocks, citing evidence that companies that score highest in these categories tend to outperform their industry peers. .
Major shareholders of larger companies tend to be a small number of institutional shareholders, and these shareholders pay more attention to ESG scores.
“There is a real shift in how many large institutional investors think about compensation as their teams continue to grow in size and expertise.” said Kimball. “They are moving beyond the compensation issues that were at the forefront of their reviews several years ago. They look in more detail at the reasonableness of a company’s incentive programs and other elements of compensation. »
According to ISS Corporate Solutions, the number of shareholder proposals directly linking environmental and social concerns to executive compensation has increased. In 2015 there were only 11 such proposals, in 2018 there were 21 and with five months remaining in 2019, despite having passed most of the proxy season, there are 19 proposals for this guy.
Not all shareholder proposals on ESG topics can be found in the proxy statement. Some would say that’s not always the goal.
Not all ESG topics need to be tied to executive compensation either, but companies may decide on one or two metrics that most directly relate to their business.
“You can’t forget that there are financial and operational metrics that are and always will be at the core of corporate well-being, so you need to encourage financial metrics,” Kimball said.
As You Sow is a shareholder advocacy group that promotes corporate environmental and social responsibility. The association makes a number of shareholder proposals each year and monitors their progress. He has made environmental or social shareholder proposals in several Minnesota companies in recent years, such as Xcel (2017); Target (2017); Hormel Foods (2017, 2016); General Mills (2019, 2018); and a proposal to Fastenal this year for better workplace diversity reporting that won by proxy and garnered 41% support.
Advocacy groups are using the proposals to promote lasting change in business.
“The purpose of these pledges is not to get a good vote on a shareholder proposal; the goal is to create change,” said Rosanna Landis Weaver, program manager at As You Sow. “If a company wants to work with the shareholder, so much the better.”
Even though most of the proposals have been withdrawn, the group has started conversations within companies that have led to better disclosure and can have an even more direct impact on compensation design and metrics.
“The current focus on ESG is really pushing compensation committees to reconsider their role in managing enterprise risk and talent,” said Blackwood of Willis Towers Watson.