Incorporating ESG performance in executive remuneration
A practical guide
An effective Environmental, Social and Governance (ESG) strategy has rapidly gone from being a ‘nice-to-have’ to a necessity. Companies, investors and wider stakeholders increasingly recognise the ESG strategy will intrinsically be linked to future business resilience, and can positively impact many areas, from attracting talent and engaging employees to improving financial performance.
The actions of business executives are seen as critical in driving the ESG strategy. Although there are mixed views around the effectiveness of incorporating ESG metrics in executive remuneration, it can be a powerful tool for driving leadership behaviors if structured in the right way and linked to transparent and quantifiable performance metrics.
A Remuneration Committee responsibility
As with financial metrics, Remuneration Committees should ensure that they have enough flexibility to safeguard against rewards for failure and seek external assurance around target-setting and performance out-turns. Where boards are demonstrably aligned with strategy and future business performance, the inclusion of ESG performance metrics can send an important signal to executives, employees, investors, and wider stakeholders.
While more than 45% of the largest Nordic listed companies already have one or more ESG performance metrics in their executive incentive plans, we expect more companies to move toward linking incentive plans with ESG performance and, specifically, sustainability goals.
In this brochure, we provide concrete guidance on how to incorporate ESG performance in executive remuneration.