Boohoo’s ESG-linked executive compensation evolution could be the latest in a bigger shift in the fashion industry
Boohoo Group is the latest publicly traded company to link executive compensation agreements to specific environmental, social and corporate governance (“ESG”) objectives to demonstrate its commitment to sustainability and societal impact of its operations. Following numerous reports of unethical practices in – and a subsequent investigation into – its supply chain last year, the Manchester, UK-based fashion retailer tied 15% annual bonuses from its leaders to its “Agenda for Change”, the initiative it launched in 2020 to promote ethical and sustainable work practices in its supply and logistics network.
Following reports that it was considering linking executive compensation to ESG objectives, Boohoo confirmed in May that it would adopt the recommendation of Parliament’s environmental audit committee that bonuses should be linked to ESG improvements. set out in its supply chain-centric Agenda for Change program, stating in a statement last month: “While we ultimately believe that resolving fully (or otherwise) these (chain supply) will be reflected in long-term share price performance (and therefore impact the value of rewards), we also agreed with participants to add a new extra-financial performance condition.
The association between Boohoo’s ESG goals and executive bonuses has been capped at 15%, but the growing company’s compensation committee will have the power to reduce the entire executive bonus if ESG progresses. are particularly weak. Specifically, “in the event that the committee determines that the Agenda for Change program has not been successfully implemented in its entirety, we will have the opportunity to reduce the level of vesting of awards regardless of growth. of the share price achieved during the performance period, ”Boohoo said in his report.
The executive compensation plan will be voted on at this month’s general meeting, with the new bonus terms likely a welcome change for investors and shareholders. More than that, the new approach and accompanying incentives will likely be crucial to the continued success of 15-year-old Boohoo, as the company continues to grapple with the fallout from reports of unethical practices in its chain. of supply, which led to nearly a billion pounds being wiped out of its stock value in the course of a single week.
If retailers are keen to demonstrate and underline their commitment to ESG, then the way forward would be to follow suit. While 45% of FTSE 100 companies have either an ESG target in their annual bonus or a long-term incentive, or both, an analysis of compensation reports from UK-based retailers shows that few companies include ESG objectives in the remuneration of their directors.
Among the potential outliers? Burberry said it plans to incorporate non-financial performance measures – including the achievement of ESG targets for the group’s senior executives – into its compensation structure. At the same time, after revealing that senior executives chose to forgo their bonuses for fiscal 2020, Disney’s compensation committee said in a letter to shareholders in January that the global entertainment company and retailer would highlight ESG measures in its 2021 annual bonuses by giving diversity and inclusion the highest weighting among non-financial measures.
Retailers considering linking ESG metrics to executive compensation will primarily need to select the most important issues; this should be done before even considering whether to use entry measures that focus on a company taking action (e.g. towards environmental initiatives, development of low carbon technologies) or output that represent an easily identifiable outcome (eg reduction in carbon emissions). Clearly, while output metrics are preferred by investors, the value of input metrics should also be seen as part of the overall strategy. In addition, the ESG measures that a company decides to use must be transparent and easy to understand.
In light of increasing pressure from investors, shareholders and consumers in the ESG space, Boohoo’s announcement could be the start of a shift for retailers from traditional financial performance metrics to ones that demonstrate l ‘a company’s commitment to ethical and sustainable values through executive compensation. .
Saba Palizi is Senior Counsel at Macfarlanes, where she specializes in employee benefits and is a member of the firm’s Compensation practice.