A recent study by KPMG International has highlighted a significant trend among the world’s largest companies, demonstrating a growing connection between sustainability metrics and executive compensation.
The report titled “Incentivizing long-term value creation: Linking sustainability metrics to board members’ pay” scrutinised the compensation strategies of 375 large, publicly listed companies across 15 countries.
The findings reveal that an impressive 78% of these businesses now tie executive pay to sustainability outcomes, indicating a robust integration of environmental, social, and governance (ESG) factors into corporate governance. Particularly, 88% of these firms have aligned their sustainability targets in executive remuneration with issues that are material to their respective businesses, with climate change and workforce-related targets being the most common.
The study also sheds light on regional variances in the adoption of sustainability-linked pay structures. Companies within the European Union are more inclined to adopt these measures compared to those outside the EU, highlighting a proactive approach towards sustainability beyond the EU’s stringent regulatory frameworks. The UK and Australia are notable for their strong alignment, ranking second and third respectively among the top 25 companies globally in implementing these practices.
Despite the widespread adoption, the study points out that while many companies focus on short-term sustainability targets, there is a growing expectation from investors for a balanced approach that also considers long-term objectives. This balance is crucial for driving the companies towards sustainable development and long-term value creation.
Nadine-Lan Hönighaus, Global ESG Governance Lead at KPMG International, commented on the trend, “Despite ongoing economic and geopolitical uncertainty, the findings make clear that linking executive compensation to sustainability performance is becoming increasingly widespread within the world’s largest companies. While there are some notable regional differences, there is a consistent global trend, that reflects the crucial role senior executives play in steering a company towards long-term value creation.”
She further stressed the importance of transparency and the need for companies at the beginning of this journey to consider incorporating relevant and material sustainability targets into their executive pay schemes. The emphasis is on choosing performance indicators that are measurable, meaningful, and crucial for enhancing a company’s sustainability footprint.
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