It is significantly more common for European companies to link incentives to performance against ESG metrics as compared to US companies. As mentioned in a
recent article, approximately 33% of the largest 350 European companies include an environmental or sustainability metric in incentives, but only 14% of S&P 500 companies do so. Additionally, 11% of European companies have GHG emission reduction targets, compared with only 2% of S&P 500 companies.
- Approximately 34% of EU companies use an ESG metric or key performance indicator (KPI) in the incentive plan, up from 4% in 2008.
- The number is expected to increase to 39% in 2021.
- France has the highest percentage - 74% of French companies use an ESG KPI in the incentive plan.
- Norway has the least (<10%) and is the only market to show a decrease.
- Across the EU, 30% of companies use a social KPI and 24% use an environmental KPI.
- France has the highest use of social KPIs while Spain leads on environmental metrics (though the report notes that the Netherlands are expected to surpass Spain in 2021).
- Currently, 50% of companies in the EU have ESG metrics in the STI (annual bonus), and this is expected to grow to 62% in 2021. Meanwhile, 26% of companies also have ESG metrics in their LTI pay plan, which is also expected to grow to 36% in 2021.
- In LTI plans, it is far more common to have ESG metrics in stock settled plans (42%) than option settled plans (15%).
Not all results can be translated over to US markets given the variance in demographics. The authors note that several European markets have developed corporate governance regulations that encourage the use of sustainability and social metrics within compensation programs. That level of regulation is unlikely in the US. However, should the SEC mandate prescriptive climate change and human capital metrics, it is feasible that activist investors will begin to press companies to link pay to the disclosed metrics, either through engagement or shareholder proposals.
