Kevin Johnson, Starbucks’s chief executive, earned a slice of his 2021 bonus by slashing plastic straws and methane emissions — an example of a trend by US companies to add environmental and social targets to bonus packages.
According to Sentieo’s analysis, Starbucks joined Apple and Disney in setting new environmental and workplace targets for 2021 wages. These provisions will be up for vote at the March annual meetings of shareholders.
Pay tied to corporate social responsibility has jumped above 20 per cent at Russell 3000 companies, up from 7 per cent in 2018, according to Institutional Shareholder Services ESG, the proxy adviser’s responsible investment arm. The proxy adviser stated that pay provisions related to workplace diversity will reach 11 percent in 2021, up from 2.5 percent in 2018.
Starbucks was unable to secure investor support in 2021 for executive bonuses. This was partly due to a $50mn retention bonus Johnson received. Starbucks revamped its bonus programs and added new human-rights and environmental criteria.
For Johnson, 10 per cent of his annual bonus was tied to environmental provisions, including efforts to “eliminate plastic straws” and “farm-level methane reduction” among other things. Starbucks claimed that natural, biodegradable straws were introduced in September 2021 and that a sustainable milk initiative has been launched this year.
Starbucks stated that another 10% of the pay was tied to retention of minority workers and other workplace goals.
Johnson met all his annual bonus goals and his total 2021 salary jumped to $20.4mn, up from $14.7mn 2020 and $19.2mn 2019.
As bonuses tied to ESG (environmental, social, and governance) issues rise, shareholders are becoming more skeptical. Investors are becoming frustrated by large bonuses that are not tied to accountability. In 2021, a record number of S&P 500 companies failed in their efforts to win investor support for bonus payments.
ESG pay provisions are often vague and asset managers expressed concern that ESG pay could replace bonus targets tied to share prices performance. This could mean that executives could be shielding bonuses from a turbulent stock exchange this year.
“There is definitely a concern that you look at [stock] market valuation and you look at pay packages and they can anticipate where we are in the cycle,” said John Hoeppner, head of US stewardship at Legal & General Investment Management America. “That is absolutely a concern of all long-term investors.”
ESG metrics in pay “are either incredibly broad and high level and almost always — at least in the US — coming into the short-term [pay] programme,” said Caitlin McSherry, a vice-president and director of investment stewardship at Neuberger Berman.
“It is fair to be sceptical of what truly is at risk in performance-based pay, particularly around the more qualitative elements being brought in,” such as ESG, she said.
Apple in 2021 incorporated an ESG provision to executives’ annual cash bonuses that can increase pay by 10 per cent based on “Apple values and other key community initiatives,” according to ISS. The company stated that the ESG component was not included in the bonus because the company’s executives met their bonus targets for income and sales.
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ISS recommended Apple shareholders vote to reject pay for chief executive Tim Cook, and other executives at this tech group, earlier in the month.
Meanwhile, Disney incorporated diversity and inclusion targets, making these criteria the highest-weighted non-financial metric in the company’s 2021 bonus plan.
Apple declined to comment beyond what was required by regulatory filings. Disney and Starbucks did not respond to requests to comment.
Robin Ferracone, founder and CEO of Farient Advisors, a consultancy that specializes in pay, stated that companies should adopt quantifiable ESG metrics. Companies should be “afraid of the blowback” if they pay bonuses derived from imprecise ESG metrics, she said.
“If an [ESG] measure is not supportable you could get yourself in trouble with the Securities and Exchange Commission,” she said. “With more quantification, it is going to be harder and harder to fudge the outcomes.”
