Employers increase ESG measures in executive pay programmes

ESG measures pay programmesEmployers have continued to increase the role of environmental, social and governance (ESG) measures in executive pay and incentive programmes, across markets according to a global study by Willis Towers Watson (WTW).

The global advisory firm surveyed 1,146 firms listed in nine major European indices, 500 US employers, 60 in Canada and 352 across seven major markets in the Asia Pacific region. It found that across Europe, 93% of respondents reported incorporating at least one ESG metric in their executive incentive plans, up from 90% the previous year and 75% three years ago.

In Europe, the most rapid area of growth relates to long-term incentive plans (L-tips) that include at least one ESG metric. This is driven by the adoption of environmental and climate metrics, which has risen from 21% in 2020 to 56% in 2023. The majority (88%) tie their short-term incentive plans to at least one ESG measure, up from 85% last year.

The most prevalent ESG measure in incentive plans across Europe are social metrics (87%), which include human capital and customer service. Four-fifths (80%) incorporate climate change, carbon emission reduction, and natural resources use, and 62% use governance measures that focus on risk management and corporate social responsibility.

ESG metrics within executive incentive plans has risen from 69% to 76% in the US and 63% to 77% in the Asia Pacific region. In Canada, use of ESG metrics stabilised at 80%.

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ESG metrics continue to be primarily used in short-term incentive plans in the US and Canada, while the prevalence in L-tips has tripled over the past three years. In Canada, this is due to employers adding environmental and climate metrics to their L-tips, while 70% in both countries include at least one human capital metric in their executive incentive plans.

Richard Belfield, executive compensation and board advisory practice leader at WTW, said: “Employers in some industries, such as IT and consumer goods, that have previously shied away from using ESG measures are now joining in with the wider trend and have narrowed the gap with other industries. The ongoing growth we are seeing reflects the continued focus from firms across markets and countries to articulate to stakeholders how ESG priorities are embedded in their business strategy and how they are used as a key measure of non-financial performance.”