Companies have started to tie compensation to various ESG metrics. Earlier this month Papa John’s pizza announced it would evaluate executives’ progress toward material ESG priorities. UBS, Caterpillar, Apple and Trane have made similar moves. And in April, Mastercard announced it would extend its executive compensation model – which ties bonus pay to ESG goals – to all of its global employees.

Often the ESG priority areas are chosen based on either (or both) the company having a substantial impact in these areas or because they are considered material information by a well-known standard setting board. For example, Papa John’s identified several areas, based on its materiality assessment, such as sustainable packaging and materials management, sustainable agriculture, reducing food waste through the company’s operations and supply chain, and reducing greenhouse gas emissions.

But how is it done exactly?

In its Sustainability Report, UBS provides some interesting details on how it uses ESG targets in its compensation program. In the report, UBS said that it has revised the performance scorecards for all members of its Group Executive Board (GEB) and group CEOs, introducing explicit sustainability objectives linked to the firm’s strategic priorities, and measured through robust quantitative metrics and qualitative criteria. ESG is also reflected through an assessment of progress made against targets linked to our focus areas of Planet (Climate), People (Wealth Inequality, Health and Education) – including progress made against the company’s diversity ambitions – and Partnerships, alongside other key dimensions. And, ESG is taken into consideration when the Compensation Committee assesses not only what results were achieved but also how they were achieved.

Apple takes another approach. In its 2021 Proxy Statement Apple decided to incorporate ESG considerations into its executive compensation program by introducing a “modifier” to bonus payouts, increasing or decreasing bonuses by up to 10% based on executive performance with respect to “Apple Values” including accessibility, education, environment, inclusion & diversity, privacy, and supplier responsibility. The company’s Compensation Committee decides on the increase or decrease.

Similarly, under Trane Technologies new plan, incentive payments for senior leaders could be revised up or down by 20% through the application of an ESG factor based on several sustainability metrics including carbon neutral operations, and gender, racial and ethnic diversity. In 2019, Trane launched the Gigaton Challenge, a sustainability initiative aiming to reduce one billion metric tons of carbon emissions from its customers’ footprint by 2030. This initiative also serves as one of its sustainability metrics for executive compensation.

Lastly, Chipotle Mexican Grill links executive compensation with the company’s sustainability goals by tying 10% of officers’ total annual incentive bonus to the company’s progress toward achieving its ESG targets as mentioned in its proxy statement. The company earlier announced its use of “Real Footprint”, a sustainability tracking platform which compares average values for each of Chipotle’s 53 real ingredients to their conventional counterparts against five key metrics, including Less Carbon in the Atmosphere, Gallons of Water Saved, Improved Soil Health, Organic Land Supported, and Antibiotics Avoided. It may be only a matter of time for this tool to be tied to executive compensation as well.