Boards increasingly linking remuneration packages to environmental goals

The research found that more than 50% of the companies have now included ESG indicators that are linked to bonus schemes

New research from the Executive Compensation practice at Alvarez & Marsal examined the remuneration policies from the first 50 Directors’ Remuneration Reports published by FTSE 350 companies in 2022.

These companies, which represent almost 20% of the FTSE 350, have been revamping their remuneration policies and practices to address investor concerns around ESG criteria.

The research found that more than 50% of the companies have now included ESG indicators that are linked to bonus schemes.

Alvarez & Marsal’s Executive Compensation Services’ managing director Jeremy Orbell said: “High-profile clashes between investors and boards tend to attract the greatest attention, but most companies have been listening to shareholder guidance on key remuneration issues.

“Although most remuneration reports are reflecting investor demands, including on issues like ESG and pension provision, we will continue to see some examples of shareholder dissent as investors urge restraint in executive remuneration.”

Separately, research from PwC found that almost two-thirds of FTSE 100s now include some sort of ESG measure as part of executive incentive pay plans, up from less than half in 2020.

While the analysis notes that 45% of chief executives had their salaries frozen in 2021, which is down 7% compared to the previous year, more companies are now linking executive pay packets to ESG targets and metrics. ESG measures include decarbonisation and net-zero targets and social sustainability.

PwC found that 58% of FTSE 100 companies now link ESG measures to executive pay, which is more than a 30% increase year on year. In 2020, 45% of FTSE 100 companies had these measures in place.

In total, 46% of companies had ESG measures included in annual bonuses in 2020, while 32% included these measures in the assessments of 2021 long-term incentive plans (LTIP). The average weighting of ESG measures is 16% in the bonus and 20% in the LTIP.

It comes in the same week that fast food chain Wendy’s announced it would link its executive compensation packages to performance against its ESG targets, namely to soon-to-be announced decarbonisation targets.

The decision was announced in the company’s latest sustainability report, which also confirmed that the company would “benchmark, track and reduce” emissions, with science-based targets to be set by the end of 2023.