Executive Compensation Tied to ESG Performance
- 24 percent (146 companies) link executive compensation to sustainability performance
- The 3 percent (19 companies) in Tier 1 link executive compensation to voluntary sustainability performance metrics, such as GHG emissions.
Corporations have long incentivized executive performance by tying compensation to financial metrics. The growing business case for sustainability strengthens the argument for linking executive compensation to sustainability performance. By tying executive compensation to sustainability metrics—to greenhouse gas (GHG) reduction targets and energy efficiency goals, for example—companies can boost both financial and sustainability performance.
In 2012, only 15 percent of the companies evaluated linked executive compensation to some sustainability metrics. Today 24 percent (146 companies) do so—but with varying degrees of transparency. The seven percent (40 companies) in Tiers 1 and 2 make explicit links between compensation practices and publicly disclosed sustainability targets. Only the 3 percent (19 companies) performing in Tier 1 are linking executive compensation to sustainability performance targets that go beyond goals driven by required compliance with laws and regulations. Among the standouts: at Materials company Alcoa 20 percent of executive cash compensation is tied to safety, environmental stewardship, including voluntary GHG reductions, energy efficiency and diversity goals.
Leading companies in the highly regulated Utilities sector have a longer history of linking improved environmental and social performance—specifically compliance-driven targets—to executive compensation. The sector has also shown improvement since 2012, with more than 40 percent (15 of 35 companies) performing in Tiers 1 and 2.
Top performing companies in this sector are also being innovative. For example:
- Exelon jumped from Tier 4 to Tier 1 with an innovative “long-term performance share award” that rewards executives for meeting non-financial performance goals, including safety targets, GHG emissions reduction targets and goals engaging stakeholders to help shape the company’s public policy positions.
- Xcel Energy ties executive compensation to specific performance measures, including environmental leadership. Most notably, Xcel links compensation to goals achieved in “demand-side management,” which are reductions in energy consumption by its customers.