“The merits of linking executive compensation and climate objectives are well established,” according to a surprisingly assertive
report by Willis Towers Watson and the World Economic Forum on embedding climate transition objectives in pay. The paper, titled the “Executive Compensation Guidebook for Climate Transition,” notes that tying emissions reduction and renewable energy adoption to pay is increasingly prevalent in Europe. 28% of large European companies (versus 19% of the S&P 500) link climate and broader environmental metrics to executive pay, and not just in oil and gas or utilities – 26% of IT firms in Europe, for example, have this practice.
The guidebook recommends that companies incorporate climate priorities into the enterprise risk and opportunities framework, articulate a clear net zero vision by 2050 with short and long-term milestones, and develop the incentive plan structure based on this framework, evolving as needed.
Acknowledging that climate metrics in pay are not for everyone, and that in fact they may be perceived as “greenwashing,” the guide suggests alternative mechanisms for prioritizing climate goals such as strengthening the link between executive wealth and very long-term company performance to align executives with the overall sustainability of the company. It should be added here that similar arguments apply to other ESG metrics such as diversity; if the metric lacks sufficient alignment with business strategy, or if the incentive plan becomes so cluttered with various metrics that it ceases to drive behavior, the end result will not be successful. Companies are faced with the challenge of balancing the views of multiple stakeholders while ensuring that compensation decisions are made in the best interests of the company and its shareholders.
