Sustainability achievements are now routinely recognised along with traditional key performance indicators (KPIs) within the corporate sector in response to increasing pressure to do well by doing good. Certainly part of this is done to improve business reputations and meet legal compliances. However, there is a growing body of academic research showing that sustainability has a huge impact on shareholder value and the bottom line. It is these returns, both financial and reputational, that are introducing a new set of criteria when determining executive pay packets, all linked to ESG data.
Across global industries, shareholders have begun to introduce financial incentives into long-term incentive packages for upper-level executives to help drive their ESG agendas harder. It’s easy to see why. Beyond the aforementioned monetary gains for organisations, including ESG-related metrics into executive remuneration is a tangible way to inspire greater ESG efforts from the top. These metrics also gauge the degree to which those at the helm are invested and interested in mobilising ESG initiatives – the importance of which cannot be underemphasized, as how teams follow through on ESG deliverables can be shaped by the behaviours those who lead them. In this regard, ESG-structured pay packages encourage executives to not allow ESG fall to by the wayside – and also showcase the efficacy of corporate leadership to meet KPIs.
According to a poll of 600 institutions and asset managers in six countries conducted by PR firm Edelman, two-thirds of investors would like to see executive compensation linked to performance. This message appears to be getting through. Several blue-chip companies and 45% of FTSE 100 companies have already included ESG targets into either their annual bonuses, long-term incentive plans or both.
Five Major Companies Linking Executive Pay to ESG Performance
In January 2021, Apple confirmed plans to modify executive bonuses depending on how much progress the business makes towards key environmental and social targets.
Multinational oil and gas company BP, which bases annual executive bonuses in part on environmental preservation and sustainability targets, increased the weight of this target from 10% to 20% in 2020.
The burger giant factored diversity goals into its executive bonuses, aiming to increase the number of women at the senior director level by 8 percentage points from 2020, and the number of executives in the U.S. from historically underrepresented groups by 6 percentage points.
In 2020, food company Danone linked 20% of its executives’ annual variable compensation to ESG targets.
Siemens pays 20% of its executives’ stock awards based on a set of ESG KPIs, including CO2 emissions.
The choice and calibration of ESG-pay measures require boards to rely on inputs from operational and sustainability teams. This requires insights and data, captured and interpreted accurately to produce engaging ESG reports that point to truthful ESG priorities and progresses.
While many companies are squaring up to figure this out, others are embracing ESGCloud. The ESGCloud reporting software simplifies, manages and standardises the collection of data based on material content and consolidates reports into one accessible hub. This offers a single source of truth in ESG frameworks, resulting in high-quality data that CEOs, CFOs and other senior-level executives can utilise to inform strategic thinking, track the progress of ESG efforts and realign strategies to meet objectives should report findings prove unsatisfactory. If used well, these insights can ensure that ESG-related endeavours, and bonuses are not adversely affected.
In using ESG metrics to link executive pay to performance, companies are holding their leaders accountable and demonstrating the seriousness of their sustainability commitments. As ESG continues to impact the nature of business, one can expect to see many more companies integrating ESG metrics into their executive pay packages.