Executive pay plans in Europe increasingly linked to ESG goals

European executive incentive programmes are increasingly being linked to environmental, social and governance (ESG) metrics.

A global study by WTW showed that companies in the region are now setting more robust targets aligned with their business goals.

The advisory, broking and solutions company also found that the inclusion carbon/greenhouse gas (GHG) emissions reduction metrics are still high, with some including scope 3 emissions – those that are not produced by the organisation itself that it is indirectly responsible for.

This year’s data indicated that nearly all (94%) of the firms surveyed in Europe included one or more ESG metrics in their executive pay programmes, with 88% incorporating them in short-term incentives (STI). The figure stood at 64% in long-term incentive (LTI) schemes, representing a 7 percent point increase from 2023.

Globally, more than four in 10 (81%) of businesses included at least one ESG measure, which suggested a moderate rise from last year. More than three in four (77%) use ESG metrics in their STI schemes, while nearly three in 10 (29%) use them in their LTI plans.

In Europe, the social aspect of ESG is still the most prevalent (89%), closely followed by environmental (85%). Overall, the most common ESG metric was human capital, used by 85% in Europe and 76% worldwide.

Nearly four in 10 (37%) of firms that included a carbon/GHG measure in their incentive schemes incorporate scope 3 emissions.

Hannah Summers, director of stewardship and sustainability, executive compensation and board advisory, at WTW, said: “Despite challenges with scope 3 emissions data, target setting and influence, it’s encouraging to see companies incorporating scope 3 into their carbon/GHG emissions reduction incentive metrics to drive necessary focus on what is invariably the most material contribution to global emissions companies make.”

She believes market pressures are forcing companies to express the ESG aspects that matter most to their businesses.

“This can be a helpful exercise when it comes to selecting ESG metrics for incentive plans that are material to business strategy and long-term value creation, as well as being able to robustly define and set targets against them,” Summers said.

WTW’s research, which also included 500 US firms, 60 companies in Canada and 193 in the Asia Pacific region, showed minor change in the use of ESG metrics within executive pay programmes in North America and Asia Pacific, cited by 77% and 74% respectively.

In North America, STI remains a key focus for ESG use, noted by 75%, while only 10% consider use the metrics for LTI. In the Asia Pacific region, the ESG metrics in LTI plans are being used slightly more, by 30%.

Summers added: “With the use of ESG measures in executive pay plans plateauing, we expect investors and boards to focus on ESG metrics most material to the business and the quality of these metrics, ensuring that they are transparent, objective, measurable, and underpinned by a robust approach to target setting.”

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