More than 75% of major companies linking carbon targets to executive pay

The analysis found that 78% of theses companies have now introduced some sort of carbon target in executive pay

A new joint study from PwC UK and the London Business School (LBS) analysed executive pay outcomes and links of the 50 top European blue-chip companies on the STOXX index.

The 50 companies were split into two sub-categories, the ‘Climate Action 100+’ (CA100+), which accounts for 14 of the 50 companies and the ‘non-Climate Action 100+’ (non-CA100+) which covers the remaining 36 companies.

The analysis found that 78% of these companies have now introduced some sort of carbon target in executive pay, with payouts averaging 86% for disclosed targets last year.

The analysis also found that 68% are using approved science-based targets in these payment plans. In total, 80% of CA100+ companies that have an explicit carbon measure in pay have, compared to 72% of non-CA100+ companies. However, only 10% of both sets of companies combined provide a “comprehensive link” in their pay plan that is supported by numerical targets and dates.

PwC’s workforce ESG leader Phillippa O’Connor said: “Climate change has a huge impact on the way businesses operate, with net zero targets, mitigation and adaptation measures of growing interest to investors. Recently we’ve seen an explosion of interest from investors and companies linking executive pay to ESG targets. In fact, 86% of companies have now adopted ESG measures in their executive remuneration policies, as businesses want to demonstrate they are serious about the ESG challenges.

“Climate is the area of ESG with the strongest investor consensus. It’s crucial that leaders are clear on what is important to investors and understand the role they have to play in achieving both financial and non-financial metrics. 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. Yet there are unintended consequences of linking pay to ESG metrics. ESG targets in pay are not always as simple as it seems and should not be viewed as the sole litmus test of a company’s commitments to ESG priorities. The challenge now must be to do it well, so that pay targets make a meaningful contribution to helping companies meet their climate goals.”

Growing trend

The analysis also found that the more carbon a company emits, the more likely they are to put carbon measures in executive pay. However, carbon targets are commonly just one aspect of environmental, social and governance (ESG) measures that companies are considering.

The research also shows that the number of companies linking ESG to executive pay is on the rise.

Similar research published by PwC in November 2021 found that almost two-thirds of FTSE 100s now include some sort of ESG measure as part of executive incentive pay plans, which is up from less than half in 2020.

However, the likelihood of a company tying executive pay to climate performance varies based on region.

Shareholder organisation As You Sow published an analysis of the links between executive pay and ESG at 47 of the largest listed companies in high-carbon sectors in the US last year. It found that more than half of these companies (25 of the 47) have not explicitly linked any kind of climate-related action or target to the remuneration for their chief executive. Of the firms which do make this link, only six link compensation to a quantitative (time-bound, numerical) climate goal.

In the UK, however, almost half of FTSE100 firms are now linking executive pay packages to climate aspirations.

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