More Minnesota companies tying environmental, social goals to executive pay

Xcel Energy's record on employee and public safety last year helped CEO Ben Fowke earn an annual cash-incentive bonus of $2.9 million.

The bonus, along with his $1.25 million salary and $22 million in restricted stock, contributed to Fowke ranking third on the Star Tribune's annual executive-compensation list for Minnesota public companies with total pay of $26.2 million.

As more investors and companies are placing greater emphasis on environmental, social and governance factors, referred to as ESG, the philosophy is starting to work its way into more discussions on how companies can achieve those goals and if they should be used in executive pay formulas.

"What we are seeing and hearing both from proposals from 2018 and early indications looking forward to 2019 is the increase in the use of three very important letters: E … S … G," Brian Blackwood, a managing director with Willis Towers Watson, said of this year's proxy season.

Blackwood said many of those additional shareholder proposals have included mandates for board diversity, pay equity and workforce diversity. In addition, boards and their compensation committees are considering ESG principals in compensation-plan design as it relates to business risks and talent management.

"We are most definitely seeing a rise in these topics finding their way to either compensation committee and or board of director agendas," Blackwood said.

Fowke's annual bonus is based on five factors: employee safety, public safety (based on gas emergency response), electric-system reliability, customer satisfaction and operations and maintenance growth.

Since 2004, Minneapolis-based Xcel has included environmental goals as part of its executive compensation plan, and it's had employee and public safety goals for more than 20 years.

Its results-based metrics are aimed to help the company achieve its long-term goals of reducing carbon emissions 80% by 2030 and achieving 100% carbon-free electricity by 2050.

"Xcel Energy's executive compensation is market competitive, provides vested interest in the company's long-term success by awarding equity grants and is strongly tied to achieving superior business results," the company said in a statement.

In a typical proxy statement, an annual filing with the Securities and Exchange Commission, shareholders vote on proposals to elect directors, confirm the company auditor, take a nonbinding vote on the company's executive compensation package, and vote on other shareholder proposals that have made it to the proxy statement.

Xcel has long included some ESG metrics in its executive-compensation plan and has had employee, safety and environmental efficiency targets as part of its annual incentive plan.

"A lot of people are talking about how important ESG is this year, but of course compensation has been important for a really long time, and it's a core part of the 'G' in ESG," said Peter Kimball, head of adviser services at ISS Corporate Solutions. "Corporate governance, and how you pay your people and how you structure your board, what rights you give shareholders. Those are topics that have been evergreen in proxy season for a very long time."

One reason ESG is important is because investors are increasingly using those screens as a way to pick stocks, citing evidence that companies who score best in those categories tend to outperform their industry peers.

The largest shareholders at the largest companies tend to be a small number of institutional shareholders, and those shareholders are paying more attention to ESG scores.

"There is a real shift in the way many large institutional investors are looking at compensation because their teams are growing in size and expertise all the time." Kimball said. "They are moving beyond the compensation problems that were at the forefront of their examinations several years ago. They are looking in a more granular way at the reasonableness of a company's incentive programs and other elements of pay."

There has been an uptick in the number of shareholder proposals that directly link environmental and social concerns with executive compensation, according to ISS Corporate Solutions. In 2015, there were just 11 such proposals, in 2018 there were 21 and with five months remaining in 2019, albeit past the bulk of the proxy season, there are 19 such proposals.

Not all shareholder proposals on ESG topics make it to the proxy statement. Some would say that's not always the goal.

Not every ESG topic needs to be tied to executive compensation, either, but companies will perhaps decide on one or two measures that relate most directly to their company.

"You can't forget that there are financial and other operational metrics that are and always will be central to the company's well-being, so you have to incentivize around financial measures," Kimball said.

As You Sow is a shareholder advocacy group that promotes environmental and social corporate responsibility. The nonprofit makes a number of shareholder proposals each year and tracks their progress. It has made environmental or social shareholder proposals at several Minnesota companies in the past several years, such as Xcel (2017); Target (2017); Hormel Foods (2017, 2016); General Mills (2019, 2018); and a proposal at Fastenal this year for better reporting on workplace diversity that made it to the proxy and gathered 41% support.

Advocacy groups use the proposals to promote sustainable changes at companies.

"The point of these engagements 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, that's all for the good."

Even though most of the proposals were withdrawn, the group kick-started conversations within companies that have led to better disclosure and may have even more direct impact on compensation design and metrics.

"The focus on ESG right now is really driving compensation committees to reconsider their roles in business risk and talent management," said Willis Towers Watson's Blackwood.

Patrick Kennedy • 612-673-7926