UK Executive Pay Increasingly Tied to ESG Goals

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by KnowESG
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According to new research, the top companies in the UK are putting ESG corporate goals into executive pay plans more and more. This shows that investors are getting what they want: more ESG transparency.

The use of environmental, social, and governance (ESG) metrics in UK executive pay plans has gone from 81% to 89%, according to WTW, a US consulting and brokerage firm.

In the UK, ESG-related goals appear in both short-term and long-term payment plans. According to the study, 85% of UK companies tied at least one ESG metric to their short-term pay packages, up from 79% the previous year.

In the last year, the proportion of companies that used at least one ESG metric in their long-term pay plan increased from 24% to 37%. The research says this trend is likely to continue, if not intensify, in the coming years.

Sarah Reay, Climate Change Executive, ICAEW, says: “While it’s encouraging to see an increase in incentive plans including ESG metrics, there is some way to go in matching the addition of measures in long-term plans with those in short-term plans. We hope that including social and environmental measures as part of executive remuneration will accelerate action on emissions reduction, close the gap on social inequalities, and improve the health and wellbeing of people and the planet.”

ESG-linked incentive plans, according to Reay, are one lever an organisation can use as part of its overall sustainability strategy. “We expect this to become the norm in the coming years,” she added.

Europe is a pioneer in the implementation of ESG incentive metrics. A sizable 90% of European companies, including those in the UK, now integrate at least one ESG metric in their executive compensation plans, an increase from 79% in the prior year. Germany (98%) and France (100%) are the most enthusiastic adopters.

In the US, on the other hand, ESG metrics are rarely used in long-term incentive plans, though the number of plans that use them is growing from 5% to 8% each year.

Year on year, the global prevalence of environmental measures nearly doubled, growing from 22% to 40%. There are still big differences in how climate and environmental measures are used in different parts of the world, but WTW thinks this will change as institutional investors and regulators increase their pressure.

ESG metrics are included in incentive systems in a variety of ways, including underpins (weighted key performance indicators that specify a minimum level of performance required) and modifiers (which allow changes to the incentive payout). Some use quantitative measures, while others rely on their own judgement.

Among the three ESG categories, social metrics are the most commonly employed in pay plans. The adoption of environmental measures varies greatly, ranging from 25% of companies in the US to nearly two-thirds of companies in Europe and the Uk.

ESG indicators are still used most by utilities and energy companies, followed by the materials industry. Despite a 9% increase from the previous year, IT has the lowest prevalence of ESG incentive metrics.

Richard Belfield, executive compensation and board advisory practice leader at WTW, said: “Pressure from institutional investors, proxy advisers, employees and other market stakeholders is reshaping the envelope. Companies are beginning to focus on a stronger link between their executive compensation plans and ESG priorities, particularly concerning climate change and environmental measures, inclusion and diversity matters, and overall human capital governance.”

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Source: ICAEW

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