Corporate Governance

Shearman & Sterling LLP 24 | ESG Slowly Finding its Way into Incentive Compensation Plans ACTION ITEMS FOR INCORPORATING ESG METRICS INTO INCENTIVE PROGRAMS The following is a list of action items for companies looking to consider incorporating ESG metrics into their incentive compensation programs: Identify the Appropriate Metrics Consider what ESG metrics are appropriate for the company, what ESG metrics reflect the company's tie to long-term growth and what ESG metrics address risk management considerations. Companies should also consider whether the metrics will incorporate third-party measures, like those of Sustainability Accounting Standards Board, or internally generated targets or goals. 2 2020 SURVEY — COVID-19 & ANNUAL INCENTIVE COMPENSATION Under the federal securities laws, public companies are not required to disclose the details of their 2020 annual incentive compensation until they file their next annual proxy statement. For most companies, this means that disclosure is not required until Spring 2021. Even if not required, companies may elect to disclose COVID- 19-related adjustments they are making to incentive compensation programs. Further, Institutional Shareholder Services has posited that any COVID-19-related changes to incentive compensation should be disclosed through Form 8-K filings. Companies have announced that they will reduce annual incentive payouts for executive officers; adjust executive payouts to align with payouts to the general employee population; and lower minimum performance thresholds or otherwise revise performance and payout ranges. Others have offered one-time equity awards to executives in lieu of annual incentive opportunities or divided the year into multiple segments, with different performance objectives applying to the different parts. We expect that at many companies, discussions regarding 2020 annual incentive compensation are ongoing. We also expect that approaches to incentive compensation will continue to evolve as the impact of COVID-19 unfolds. The approach to modifications in annual plans versus long-term plans may be of particular interest to watch, and ISS and investors are likely to view adjustments in short- and long-term plans differently, with more flexibility for 2020 plans. Set Goals, but Allow for Discretion With a lack of historical context by which to measure ESG progress, consider providing the compensation committee with discretion to determine how executives have performed with respect to the company's ESG goals. Also, determine whether goals should be annual or long-term. As shown in the Survey data, most ESG metrics are tied to annual incentive plans, reflecting the long-held belief that long-term goals should relate to the achievement of financial and shareholder return metrics. 4 Ensure a Line of Sight between Executive Actions and Performance Incentive compensation metrics have little value if executives cannot control the desired outcome. For example, while improved safety may be an important goal, it is likely that the CFO has little direct ability to effect change in this regard. 3 Effectively Track/Report On ESG Metrics and Controls Unlike financial metrics, ESG performance cannot be assessed through numbers on a spreadsheet usually and instead requires a subjective analysis. Therefore, ensure a reporting infrastructure is in place to track ESG metrics and controls, so that ESG performance can be meaningfully assessed on executive scorecards. In addition, determine whether the company will report on ESG performance outside of annual proxy filings. 5 Engage with Shareholders As part of a company's regular shareholder engagement processes, companies should discuss the inclusion of ESG metrics in their incentive compensation programs. Companies should highlight the long-term value and sustainability that these metrics promote. 1

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