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Tying targets

3 March, 2023

Research by PwC Uk and the London School of Business shows that the number of companies linking ESG targets to executive pay is on the rise. The study included 50 European companies and found that 78% of these companies have now introduced carbon-related components to executive pay packages, with pay-outs averaging 86% for disclosed targets last year.  

It has become increasingly popular for companies to link executive pay to progress against environmental objectives and has become a way for companies to prove to investors that they are embedding approaches to sustainability. And there is lots that is good about this approach – it sets out a clear ambition, signals the importance of the issue and – of course – focuses minds on achieving change.  

That said, the devil is – as always – in the detail. Progress on sustainability takes many forms, and targets will typically focus on just one or two dimensions of sustainability. And even within a focused area such as climate and carbon reduction, the way the target is structured is essential – too ambitious, and it won’t be motivating, too weak, and it won’t drive change. And getting it right is hard – who is responsible and accountable for change, how will that change be evidenced, how do you align short term remuneration and bonuses to longer term sustainability goals, and – crucially – how do you ensure you’re focused on the right thing, rather than the easy thing? 

Putting sustainability on the board agenda and making it an important part of how success is measured is critical. But when you reflect on the fact that there is broad consensus that companies are failing to make adequate progress on carbon emissions reductions, the fact that pay-outs in relation to carbon targets included in the study were so high gives us pause for thought. Well-structured financial targets are part of the answer to putting sustainability higher up the agenda of leadership teams, but they aren’t the only solution. And more board members being paid more for sustainability-related activity is only a good news story if the underlying direction of travel is the right one.   

By Ashleigh Werner

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