In Europe, executive pay plans are increasingly tied to ESG goals

European executive incentives programmes are increasingly linked to environmental social and governance metrics.

WTW conducted a global study that revealed companies in the region have set more aggressive targets to align with their business goals.

The advisory, broking, and solutions company found that carbon/greenhouse gases (GHG) reduction metrics were still high. Some included scope 3 emissions, those not produced by an organisation but that it was indirectly responsible for.

The data from this year showed that almost all of the companies surveyed in Europe (94%) included ESG metrics into their executive compensation programmes. 88% incorporated them in short-term incentive (STI) schemes. This figure was 64% for long-term incentives (LTI), representing an increase of 7 percentage points from 2023.

More than four out of ten (81%) businesses worldwide included at least one ESG measurement, which suggests a modest increase from last year. Over three-quarters (77%) of businesses use ESG metrics as part of their STI plans, and nearly three-tenths (29%) do so in their LTI schemes.

In Europe, social ESG remains the most prominent aspect (89%), followed closely by environmental ESG (85%). Human capital was the most commonly used ESG metric, with 85% of Europeans and 76% of global users using it.

Nearly 4 in 10 firms (37%) that include a carbon/GHG measurement in their incentive scheme incorporate scope 3 emission.

Hannah Summers is the director of stewardship, sustainability, executive compensation, and board advisory at WTW. She said: “Despite challenges in scope 3 emission data, target setting, and influence, I find it encouraging to see companies incorporate scope 3 into their carbon/GHG reduction incentive metrics, to drive needed focus on what’s always the most important contribution companies make to global emissions.”

She believes that market pressures force companies to communicate the ESG factors that are most important to their business.

Summers stated that this exercise can be useful when selecting ESG metrics to use in incentive plans, which are important to the business strategy and value creation over time. It also helps to define and set realistic targets.

WTW’s research, which included 500 US companies, 60 Canadian firms and 193 Asia Pacific firms, revealed that there was a minor shift in the use ESG metrics in executive pay programmes across North America and Asia Pacific. 77% of respondents cited this change, and 74% cited it.

In North America, STI is still a major focus of ESG, as noted by 75%. Only 10% are considering using the metrics for LTI. In Asia Pacific, ESG metrics are used in LTI plans slightly more than 30%.

Summers said: “With ESG measures being used less in executive compensation plans, we expect boards and investors to focus more on the ESG metrics that are most important to the business, as well as the quality of those metrics. We will ensure they are transparent and objective, measurable and supported by a robust target setting approach.”

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