Executive pay and ESG

There is a push for executive pay to be linked to ESG factors. But how best to do this responsibly?

Overview

The topic of ESG continues to dominate the discussions at many companies as they begin to grapple with what ESG means for their organisations and what changes they need to make, particularly when it comes to remuneration.

While the importance of ESG measures and their integration into incentive structures cannot be ignored in the business sector, many companies experience challenges in determining how they should be linked to executive remuneration and what the first steps are in their ESG journey. In determining how to include performance measures, it is important that companies not merely include ESG for the sake of compliance or silencing their stakeholders and in so doing, carry the risk of hitting the target but missing the point.

The four dimensions of ESG remuneration

The selection of ESG metrics requires companies to obtain insights from their strategic and operational leadership and reflect on their purpose, underlying values and the practicalities of incorporating ESG metrics into remuneration based on their current internal processes. PwC in collaboration with the London Business School identified four design dimensions that leaders and remuneration committees need to weigh up when deciding how to integrate ESG into remuneration structures.

There is increasing pressure for companies to incorporate ESG metrics into their incentive structures. Nevertheless, companies should ensure that the underlying motivation for including metrics is sound and that they have fully assessed the materiality of the ESG goal and the ramifications (and sometimes unintended consequences) of including ESG metrics. RemCos, leaders and other design makers should be wary of moving too quickly and in doing so falling prey to misaligned ESG metrics. Where there is an insufficient link between the ESG metrics and the company, their inclusion will have been in vain. As such, companies should have regard to the development (insofar as they do not have one) of a robust ESG strategy that considers the views of stakeholders and shareholders, is underpinned by the company’s purpose, values and business strategy, and takes into account the design dimensions set out above.