I was looking at the definitive proxy statement of Thermon Group Holdings, Inc., and noticed that they had doubled the number of ESG metrics in their short-term incentive plan for fiscal 2022. For several years, the company had been using multiple financial metrics (typically revenue and Adjusted EBITDA) along with a safety metric as the measures for determining the awards under the short-term incentive compensation plans for their executive officers and other employees. However, in fiscal 2022, the Compensation Committee decided to add diversity and inclusion to the mix (at page 31):
In designing the FY22 STIP, the HCMC Committee introduced a new performance metric relating to diversity and inclusion to focus our most senior leaders on driving cultural change based upon building, adhering to, and advancing our diversity goals throughout the organization. This new performance metric represented 5% of the FY22 STIP target opportunity for each participant and targeted measurable improvement across three key human capital metrics in our salaried employee population in the United States: (i) diversity in candidate recruiting; (ii) new hire voluntary turnover for diverse talent and (iii) overall diversity.
The stated purpose of the new metric was to “focus management on creating an inclusive workforce, where diverse backgrounds are represented, engaged, and empowered to inspire innovative ideas and decisions.”
Previously, the safety metric had been weighted at 10% of the overall plan metrics, but with the addition of D&I, the Committee, as disclosed, split the percentage equally (at 5%) between the two metrics. This is somewhat consistent with other annual bonus plans that I’ve seen add ESG metrics, usually comprising 10% to 15% of the total weighting the various corporate performance measures used in the plan.
The description of the plan goes on to establish threshold, target, and maximum achievement levels for the D&I metric. As explained in a table setting out the target levels for each performance metric:
For purposes of the FY22 STIP, “diversity” represents the attainment of specific diversity metrics. The diversity metric has been structured such that the Company earns the payout based upon the number of performance targets achieved across three key human capital metrics in our salaried employee population in the United States: (i) diversity of candidate recruiting, (ii) new hire voluntary turnover for diverse talent, and (iii) the overall diversity. Each metric is measured on a binary basis as to whether the Company achieved the established goal.
It looks as if the executives and other employees were sufficiently motivated by the new metric, as it met the performance targets across three human capital metrics, resulting in a 200% payout for this metric (which translated to a 10% payout under the short-term incentive plan). Combined with the percentage payouts under the other financial performance metrics (200% for revenue weighted at 30%, and 148% for Adjusted EBITDA, weighted at 60%), each of the company’s continuing Named Executive Officers earned 161.2% of his respective target Fiscal 2022 STIP opportunity based upon performance against the pre-established performance goals (even though the company’s safety record was down this year, finishing just above the threshold performance level).
I like the way the company took a formulaic approach to its use of ESG metrics (in contrast, in some plans the results are determined on a discretionary basis) and the fact that it used multiple metrics. I expect that, in the near term, we will continue to see ESG metrics appear more often in short-term, rather than long-term, incentive compensation plans, as companies continue to move cautiously in modifying their incentive plans to incent their executive officers to focus on their ESG objectives.
