Good morning,
Earlier this month, I reported there's some indication that annual bonuses for CEOs and CFOs in 2022 weren't as robust compared to prior years. But a company’s financial performance isn’t the only indicator of whether an executive’s bonus or compensation increases. Progress in environmental, social, and governance goals is becoming a major factor.
A recent report released by the Conference Board found the vast majority of S&P 500 companies are now linking executive compensation to some form of ESG performance—an increase from 66% in 2020 to 73% in 2021. Take for instance Chipotle Mexican Grill. The fast-casual restaurant chain first announced in 2021 that up to 10% of executives’ annual incentives will be tied to their progress toward achieving company ESG goals. In 2022, Chipotle increased that to 15% and will keep the bar there this year.
"The current compensation plan ensures leaders continue to set the tone for Chipotle’s nearly 100,000 employees,” Laurie Schalow, chief corporate affairs officer at Chipotle, told me.
Chipotle’s ESG goals for 2023 that are tied to executive compensation include purchasing at least 37.5 million pounds of local produce, up from 36.4 million pounds in 2022; improving the retention of its diverse U.S.-based restaurant support center and field operations employees; and beginning composting programs in at least 23% more restaurants. Making these goals a priority and holding the leadership team accountable “intrinsically minimizes our impact while accelerating our growth,” Schalow says.
So how does Chipotle’s bonus program work? There's a "performance-driven compensation philosophy for executives," she says. “As an employee’s responsibilities and ability to affect our financial results increases, base salary becomes a smaller component of his or her total compensation,” she explains. “Our Annual Incentive Plan is our annual cash incentive program for certain bonus-eligible employees, including our executive officers, which is based on the achievement of three factors: a company performance factor, an individual performance factor, and an ESG factor.”
How did the company do with some of the 2022 targets? Chipotle met its goal of purchasing more than 57 million pounds of organic, transitional, or locally grown ingredients, according to the company. Chipotle set out to increase diversity above its 60% rate for its pipeline of candidates for promotions. It achieved a 63.6% rate. Ninety percent of all restaurant management roles were internal promotions including 100% of U.S. regional VP roles, 81% of team directors, and 74% of field leader positions, according to the company. Both hourly and salary turnover rates for employees hit a two-year low in December 2022, Schalow says.
Will tying executive compensation to ESG goals work for every organization? The Conference Board's report suggests that companies should consider using ESG operating goals for one to two years before including them in compensation. This practice would allow time to determine if those goals are truly relevant for the business.
The report cautions that companies will need to go beyond simply “following the trend.” Companies will need to explain to investors and stakeholders “why including or adjusting ESG goals in compensation programs makes business sense and will ‘move the needle’ on the firm’s performance and impact,” according to the report.
With proxy season on the horizon, executive compensation and ESG are certainly topics that will be on the docket.
Sheryl Estrada
sheryl.estrada@fortune.com
