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Linking ESG targets to executive pay

October 5, 2021
Linking ESG targets to executive pay

ESG considerations are now a central strategic pillar for a lot of companies, while COVID-19 has intensified investor, consumer and public scrutiny of businesses’ ESG performance. Two-thirds of institutional investors demand executive compensation linked to ESG performance and such metrics are important in both annual and long-term executive incentive plans. On the other hand, 45% of FTSE 100 companies have already adopted an ESG measure in either their annual bonus targets or long-term incentive plans.


For example, the world-leading food company Danone has linked 20% of its executives’ annual variable compensation to its social, societal, and environmental targets. BP executives’ annual bonus is also based on a performance scorecard, which includes an environmental target. Moreover, Apple recently announced that it will add a ‘bonus modifier’ to its 2021 annual cash incentive programme, increasing or decreasing executive bonuses by up to 10% depending on progress toward its ESG targets.


Investors and stakeholders’ pressure is the main driver for the increased focus on linking executive compensation to ESG. The U.S. Securities and Exchange Commission is determined to establish new comprehensive ESG regulatory frameworks that are able to support investors’ decisions. Listed companies already feel the urge to respond to the upcoming frameworks and legislations, striving to improve their ratings. On the other hand, European Union has been escalating the transition to a net-zero economy with new non-financial disclosures, aiming to become the leader in sustainable finance and investments.


Of course, ESG remuneration is not as easy as it seems. Keeping track of progress towards ESG targets and aligning them to individual KPIs and scorecards can become complex and unmanageable sometimes. It is also critical to determine which timeframe is most effective for the employees’ bonus plan, as ESG targets vary from annual to long-term.


Restructuring remuneration can be an effective tool to drive strong ESG performance. Would you like to be part of the new sustainable corporate world?


CSE is the most qualified training provider in the field of ESG and sustainability. CSE’s Certified Sustainability ESG Practitioner Program on November 4-5 & 8, Advanced Edition can lead the way towards a successful ESG strategy, providing you coaching and practical tools.

For more information on registration, Early Bird and Group Discounts, contact [email protected]

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