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Executive rewards should be a catalyst for corporate action on climate

Compensation Strategy & Design|Medioambiental|Executive Compensation
Climate Risk and Resilience

By Shai Ganu | November 2, 2021

Aligning executive pay with climate goals can accelerate an important mindset shift in businesses that COP26 can reinforce.

At one time or another I suspect that most of you reading this article have come across a variation of the phrase, “What gets rewarded gets measured and, in turn, gets done.” 

In the nearly 20 years that I’ve been working in the executive compensation arena, there’s certainly been no shortage of evidence proving that rewards and incentives focus management minds on set goals. In this respect, managing through the climate transition is no different from any other business priority or objective.

Indeed, Willis Towers Watson’s 2020 ESG survey of board members and senior executives showed that climate action and executive rewards are increasingly connected. Nearly four in five respondents (78%) are planning to change how they use environment, social and governance (ESG) measures within their executive incentive plans over the next three years. They listed environmental and climate issues as their number one priority, and 41% plan to introduce ESG measures into their long-term incentive plans over the next three years, while 37% plan to introduce ESG measures into their annual incentive plans.

This almost certainly reflects a growing weight of outside influences, including one of the pillars of the Taskforce for Climate-Related Financial Disclosures framework and the World Economic Forum’s inclusion of a specific provision (Principle 6) for incentivization in its Principles for Effective Climate Governance for nonexecutive board directors.

The truth is, however, that many still have a long way to go.

For example, our analysis of 2021 disclosures within top 500 companies in the U.S. and top 350 companies in Europe shows that just 13% of top European companies and only 2% of top U.S. companies have explicit carbon emissions-reduction targets in their incentive plans.

If we take a step back to consider those points and findings, I’d classify organizations in four buckets:

  1. Naysayers – climate change deniers. Sticks rather than carrots may be needed.
  2. Sceptics – see climate change as an issue but feel that this is something for governments to deal with.
  3. Seeking answers – recognize an organizational responsibility to address climate issues but don’t know what to do.
  4. Converts – those that recognize the issues and are moving forward.

The encouraging thing is that the question I’m now most frequently asked in boardrooms is, “How do we incorporate ESG and climate measures in pay?” So mindsets appear to be shifting, and we (with encouragement – or possibly direction – from the COP26 meeting) need to be helping turn thought into action.

That’s why on November 11, we are partnering with the World Economic Forum’s Climate Governance Initiative to release the Executive Compensation Guidebook for Climate Transition. The guidebook presents our global research findings, views of nonexecutive directors, remuneration committee members, and investors, and our latest thinking on how to incorporate climate metrics across a number of key industries. We also look at best practices and pitfalls in aligning executive compensation with climate transition and climate risk mitigation.

It looks at a few incentive design alternatives, ranging from underpins, to modifiers, to short-term incentive plans, to key performance indicators within long-term incentive plans, to bonus pool funding and a stand-alone hyper-long-term incentive plan.

If you’re one of those board remuneration committee members asking that question about appropriate climate-related executive incentivization, I hope you’ll take a look – or give us a call.

Author

Managing Director, Global Leader – Executive Compensation

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