Across the globe, executive companies and industries are slowly but steadily recognising the potential of climate change resistance and sustainability within their organisations. In a selection of studies shared by sustainable content leader Edie, new research has shown a significant and developing link between executive pay and progressive climate targets.
In a recent collaborative study carried out in February by PwC UK and the London Business School, the researchers discovered that over 75% of major companies have now begun offering pay incentives for reaching climate targets. With all 50 European companies being taken from the STOXX index, these businesses make up some of the biggest industry names from Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, and Spain.
How are executive pay rates being linked to climate targets?
As declared in the study, climate targets are becoming a growing benchmark of success for large-scale businesses, with carbon-heavy businesses, in particular, highlighting sustainable goals as an incentive for increased pay.
As described by PwC’s workforce ESG leader Phillippa O’Connor; ‘linking shareholder objectives to specific climate-driven objectives gives leaders a clear definition of success, helps meet investor expectations, and ultimately helps achieve climate goals.’
Business executives are now being actively encouraged to prioritise decarbonisation efforts, reduce harmful emissions and seek out alternative options for non-renewable materials and energy sources - either as part of their yearly salary or as a bonus to be granted upon the goal being reached. In some organisations, executives are warned of a 15% bonus decrease if their environmental KPIs are not met.
In the UK and the US, however, studies have found a much smaller link. Only 45% of the FTSE 100 list have been reported linking their ESG (Environmental, Social and Governance) targets to executive incentives and pay. Whilst this is an improvement on the figures from 2019, which revealed only 6% of British firms had made this connection, the UK is still falling shy of its European counterpart.
Similarly in the US, a report published by shareholder organisation As You Sow found that only 46% of the largest businesses in high-carbon sectors have offered a financial incentive or compensation for reaching disclosed sustainability targets. Additionally, out of the firms that do, the links are somewhat tenuous - with only 6 displaying incentives linked to conclusive, time-bound and quantitative climate goals.
How should businesses and firms be incentivising climate targets?
For many firms and organisations, sustainability and climate change targets are a core part of their values and policies - with most modern businesses citing ethical, accessible and sustainable ESG goals as part of their company promise.
However, these goals should be more than just a vague aspiration or an open company-wide drive. Identifying the current carbon emissions and environmental status of your business and developing science-based, time-bound targets for executives to strive for allows for positive, accurate change to happen. Establish key numbers and metrics for executives to follow, which directly correlate to their financial compensation, and conduct regular check-ins to ensure progress is being made to meet them. Provide executives with the equipment and tools required to meet these goals and encourage structural processes to ensure they are used effectively.
Following in the footsteps of these businesses and linking executive pay to climate targets invites positive, actionable steps for execs to take from the top down and is just one of the many ways industry-leading businesses can help the fight against climate change.
‘Over the next 5 years, we predict more and more businesses and organisations will embed sustainability targets into their financial planning, and create more diverse incentives for company-wide change. This is a forward-thinking move with multiple benefits - to the environment and to businesses, and one we would strongly encourage all firms to consider.’
Matt Williams, CFO of Clean Energy Capital.