ESG goals increasingly linked to executive pay

Environmental, social and governance (ESG) considerations are increasingly used when making remuneration decisions at the UK's largest firms, PricewaterhouseCoopers (PwC) has uncovered.

Analysis of the executive remunerations decisions of FTSE 100 companies this year found that 60% now include ESG measures as part of their executive incentive plans.

The findings also show that 58% now link ESG measures to executive pay, an increase of nearly one third on last year, when 45% of companies had these measures.

Furthermore, 46% of firms had an ESG measure in their annual bonus for 2020, while 32% incorporated an ESG measure into the assessment of their 2021 long-term incentive plans (LTIP). The average weighting of ESG measures was 16% in the bonus, and 20% in the LTIP.

“Our research shows that 28% of FTSE 100 companies have a measure linked to decarbonisation and net zero,” said Phillippa O’Connor, reward and employment leader at PwC UK.

“Executive pay and reward offer an important lever to align senior leaders with ESG challenges and is increasingly seen as a key tool to achieving change, with two thirds of investors believing that ESG performance measures and targets should be included in executive pay.”

The research also found that 28% of CEOs received no bonus this year – as a result of not meeting targets, or the bonus being cancelled or waived – compared to 14% in 2020.

Moreover, 45% of CEOs have had their salaries frozen in 2021, compared to 52% last year.

“Looking forward to the 2022 AGM season, we expect to see much of the same restraint and scrutiny where pay outcomes do not appropriately reflect the broader stakeholder experience or ESG expectations,” O’Connor continued.

“Shareholders have already started to share their focus areas and expectations.

“With more shareholder rebellions being recorded than in previous years, companies would do well to consider what actions they can take now to secure agreement, meet the expectations set, and prepare for the new reporting regulations around their net-zero plans.”