Andrew Manktellow of Legal & General talks incentives and ESG targets
Climate and environmental targets often relate to major projects that will take longer than the standard three-year performance cycle of a long-term incentive to achieve, so they don’t always neatly fit into these types of reward.
Speaking at REBA’s recent webinar – How executive remuneration is adapting in the face of ESG targets: The impact of sustainability, the pandemic and new regulation – Andrew Manktellow, head of executive compensation at Legal & General (L&G), said that climate and environmental measures had been a recent addition to the company’s environmental, soical and governance (ESG) performance measures.
“One thing there is consensus on,” Manktellow said, “is that these need to be clearly measurable targets: clearly verifiable and externally validated. You also need to be careful about putting in targets that are appropriate, rather than just the ones that are easily measured.”
L&G is perhaps considered a bit of an outlier in terms of the guidance that it has given to investee companies, as far as wanting to see a specific amount of long-term incentive plans (LTIPs). Said Manktellow: “20% of our LTIPs are linked to ESG measures, but this is only really appropriate if you have a clear goal in those areas and can specify if it is environmental or social, and that there is clear progress that can be monitored over a performance cycle.”
Short-term plans to achieve long-term goals
As a recent addition to L&G’s strategy, the inclusion of climate targets has mainly revolved around setting science-based goals, which at the moment are all more short-term and project-based. These smaller targets lay the groundwork to help achieve long-term goals, such as a reduction in carbon emissions, which fits more naturally with long-term incentives.
Peter McDonald, statutory reporting lead at NatWest Group, agreed. “Speaking about climate specifically, in the short-term, it’s the work you need to do to get you to a place to set science-based targets. These sectoral science-based targets then create clear flightpaths to long-term targets for the next 30, 40, arguably 50 years,” he said.
Everything in moderation
Manktellow wrapped up by explaining how ESG targets have traditionally been linked to the annual cash bonus part of the incentive package and how they can act as a moderator.
“Can we say that we are comfortable that we are doing all the things that we said we were going to try to do?” he asks. “Are we on a good flightpath to achieve this target? And if we’re falling behind, then perhaps it will start to impact on the long-term incentive, and the share-based side of that.
“This will create some challenges where there’s a clear disconnect between performance and outlook, and shareholder experience and bonuses. I think that’s where there’s going to be some difficult conversations.”