Compensation for ESG: Apple and Starbucks

Forum 2: Using Compensation to Improve Environmental, Social, and Governance (Including Diversity & Inclusion) Performance: Apple and Starbucks

As with most companies, Apple measures and compensates senior executive performance primarily on the basis of meeting key financial goals. Now, for the first time, Apple will also compensate its executives based on their performance on environmental, social, and governance (ESG) metrics. Starting in 2021, according to its most recent proxy statement to shareholders (available online), Apple will include an ESG "modifier" in determining the bonus (or annual incentive) part of executive compensation. Specifically, the bonus can be up to 10 percent larger if ESG goals are fully met versus 10 percent lower for low performance in meeting ESG goals. Apple's proxy statement does not provide much further detail, except to say that ESG performance will be evaluated "based on Apple values and other key community initiatives." Apple's values are: Accessibility, Education, Environment, Inclusion and Diversity, Privacy and Security, and Supplier Responsibility.

Diversity and Inclusion is included by Apple as part of its ESG goals. Starbucks is taking steps that focus even more specifically on diversity and inclusion. It announced that it will mandate antiblas training for executives and that compensation for those at the level of senior vice president and above will depend in part on their success in increasing minority representation in the Starbucks workforce. Starbucks said its goal is to have at least 30 percent of corporate employees and at least 40 percent of its U.S. retail and manufacturing employees be people of color by 2025. It says that it currently does not meet those goals in nine of the fourteen job levels that it tracks. In 2018, two black men sitting at a table in a Philadelphia Starbucks were arrested. The company subsequently apologized and closed its U.S. corporate stores for one day to conduct antibias training. The Starbucks proxy statement provides some detail on how diversity and inclusion will play a larger role in executive compensation. In contrast to Apple, there will be a modifier not only in the bonus (annual incentive) plan, but also in the long-term incentive plan. One specific target is to increase Black, Indigenous, and LatinX representation by 5 percent or more over a three-year period.

Discussion Question

(pick and answer one of the three questions below):

1. In Chapter 01, we saw the major components of chief executive officer compensation. Apple’s ESG incentive focuses primarily on the bonus. In thinking about the (a) typical size of the bonus relative to total chief executive compensation and (b) taking into account the size of the ESQ “modifier” Apple will use (based on ESG performance), do you consider the incentive to achieve ESG goals to be too small, too large, or just about right?

2. In looking at the ESG incentive at Starbucks, is it about the same, stronger, or weaker than what Apple will use? Given Starbuck’s business strategy and its stakeholders, would it make sense for Starbucks to use the same, stronger, or weaker ESG incentives, especially in the diversity and inclusion area, compared to Apple?

3. Do you have any suggestions for either or both companies that might make their ESG incentives more effective?