FTSE 100 firms increasingly linking executive pay to ESG measures
New research from PwC has found that almost two-thirds of FTSE 100s now include some sort of environmental, social and governance (ESG) measure as part of executive incentive pay plans, up from less than half in 2020.
With the corporate AGM season now drawing to a close, PwC has analysed the executive remunerations decisions of FTSE 100 companies.
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.
The research also found that 28% of companies had linked decarbonisation and net-zero measures to executive pay.
PwC’s reward and employment leader Phillippa O’Connor said: “Looking forward to the 2022 AGM season, we expect to see much of the same restraint and scrutiny where pay outcomes do not appropriately reflect the broader stakeholder experience or ESG expectations. Shareholders have already started to share their focus areas and expectations.
“With more shareholder rebellions being recorded than in previous years, companies would do well to consider what actions they can take now to secure agreement, meet the expectations set and prepare for the new reporting regulations around their net-zero plans.”
Linking executive pay to progress against environmental and social goals has become an increasingly popular way for companies to prove they are embedding approaches to sustainability, along with integrated reporting, internal carbon pricing, natural capital accounting and empowering employees to co-design sustainability priorities.
Businesses that have already tied board members’ salaries or bonuses to these KPIs include Shell, BP, BMW and Kingfisher. More recently, companies like Apple and Boohoo have announced plans to link executive pay to sustainability targets.
Part of the reason behind this trend is to appease investor demands. Separate research this year from PwC found that two-thirds of investors believe that ESG performance measures should be included in executive pay, while 86% believe that they should be used by corporates to help drive long-term shareholder value.
Additionally, 50% of investors believe that ESG measures should still be included in pay if these measures “conflict with long-term shareholder value”. Investors believe that executive incentives should be weighted at 10-30% for ESG considerations.
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