Prioritising ESG with remuneration

As investor, consumer, and stakeholder interest in environmental, social and governance (ESG) targets and performance increases, so does the number of companies that are embedding ESG ambitions into their rewards and benefits. ESG pay-links have become a key point of scrutiny, identified by some as a signifier of long-term thinking, risk-management and a commitment to sustainability.

PwC analysis following the end of the AGM season shows that almost 90% of FTSE 100 companies included either E, S or G measures in their annual bonus and/or long term incentive plan for 2022. The number of firms adopting ESG within compensation plans has rapidly increased on last year, when only 60% of Britain’s biggest businesses included ESG metrics as part of their executive incentive plans. Social measures continue to be the most common form of ESG metric at 54%, PwC said. This has been driven by initiatives around diversity and inclusion, health and safety, and employee engagement.

But Andrew Page, Executive Compensation Leader at PwC UK, warned “looking forward to the 2023 AGM season, higher pay outcomes are likely to be met with greater investor scrutiny, particularly in the context of rising inflation and pay increases across the workforce. We also expect shareholders to focus on windfall gains. As most long term incentives were granted at the onset of the pandemic, many companies will be committed to reviewing windfall gains rather than making an adjustment”.

Accountability and transparency

ESG pay-links can be a powerful tool for driving leadership behaviours if structured in the right way, and linked to transparent and quantifiable performance metrics. However the concept is met with mixed opinions due to the difficulties in translating ESG goals into targets in a holistic and reliable way, and concern that executives may be inclined to focus on only the ESG targets in the pay plan, at the expense of other important ESG issues. There is a risk that in order for metrics to be met, people may not report on incidents or talk about challenges for fear of bonuses not being paid out. 

ESG is evolving, and the committees and boards making decisions on compensation face the challenges of creating clear, meaningful targets that align with and reinforce this. Failure to track appropriate performance indicators that measure material issues will result in executive payouts despite poor ESG performance, and subsequent accusations of box-ticking and greenwashing

Measuring success

Sustainalytics eBook ‘Real ESG Accountability – Tying your company’s ESG performance to Leadership Compensation’ advises “To ensure credibility, teams or committees tasked with executing an ESG incentive program must make sure they apply the same care in measuring the KPIs as with financial metrics”. 

As more companies tie executive compensation to ESG metrics, norms, standards, and performance data will emerge. In order for successful implementation, a reliable reporting system must be incorporated to provide necessary checks on whether ESG targets linked to remuneration have been achieved.

SI Engage will help you navigate the challenges of remuneration in order to drive stakeholder value. Through engagement on our system you can push companies to explain how progress on ESG pay metrics is measured, and to disclose performance against those goals. 

When it comes to ESG transparency and accountability, regulatory and shareholder pressure will only intensify.

We can help you keep pace.

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