Boohoo plc has become the latest listed company to tie its executive remuneration arrangements to specific ESG targets. The company has linked 15% of the annual bonus paid to executives to its “Agenda for Change” initiative designed to promote ethical and sustainable working practices.
The adoption is crucial for Boohoo’s continued success. Only last year, stories of unethical practices in their supply chain led to nearly a billion pounds being wiped from its share value over the course of a single week. In order to demonstrate its commitment to ESG, the company has tied its annual bonus to the new agenda. Boohoo has stated that while a direct link to the targets has only been made to 15% of bonuses, its remuneration committee will have the power to scale back executives’ entire bonus if ESG progress is particularly weak. The remuneration report will be voted on at this month’s general meeting, but this is likely to be a welcome change for investors and shareholders alike.
If retailers are keen to demonstrate and emphasise their commitment to ESG, then the way forward would be to follow suit. While 45% of FTSE 100 companies have an ESG target in their annual bonus, long term incentive or both, an analysis of UK retailers’ remuneration reports shows few companies incorporating ESG targets into their executive pay.
Luxury brand, Burberry plc however has stated that it is considering incorporating non-financial performance metrics, including the achievement of ESG targets for senior leaders across the group, while global entertainment company and retailer Walt Disney has disclosed that the 2021 annual bonus will further highlight ESG metrics, by emphasising diversity and inclusion by having the highest weighting among non-financial metrics.
Retailers considering linking ESG metrics to executive remuneration will firstly need to select the most material issues, before considering whether to use input measures which focus on a company taking action (e.g. towards environmental initiatives, developing low carbon technologies) or output measures which represent an easily identifiable outcome (e.g. reducing carbon emissions). It is clear that while output measures are preferred by investors, the value of input measures should also be considered as part of the overall strategy. The ESG metrics that a company decides to use should be transparent and easy to understand.
The news of Boohoo plc may be the beginning of a shift for retailers away from traditional financial performance metrics towards those which demonstrate a company’s commitment to ethical and sustainability values through executive pay.