A recent report by As You Sow has explored the relationship between executive pay and climate action through ESG activities (Environmental, Social and Governance). Here the organisation suggests that linking greenhouse gas emissions (GHG) targets to compensation is one important means by which CEOs can be incentivised to achieve timely and systematic progress on climate. As You Sow argue that their report is a first step in assessing how effectively companies are currently linking emissions reduction incentives to CEO pay.
The study examined all 47 US companies targeted by the Climate Action 100+ global investor initiative, which seeks to reduce industrial greenhouse gas emissions. Companies were assessed on three indicators:
As You Sow’s study revealed that 47 out of 47 US companies assessed either have “no linkage between CEO pay and climate metrics or do not adequately tie CEO pay to climate performance metrics at the level of incentivisation required to achieve alignment with global 1.5° C emissions reduction goals.”[ii]
Scoring companies on their performance, they were then allocated a grade from A to F to show progress.
Source: As You Sow
No company achieved an ‘A’, and just one- Xcel Energy, received a ‘B’ grade. Only four other companies tied their executive pay to climate metrics, though they were not as strict about reducing emissions, As You Sow found. Some companies may only be trying to look good to investors with vague wording in securities filings about making progress toward cutting emissions; study authors said: "We have concerns [that] the way in which it's being done isn't going to reduce emissions," Melissa Walton, an As You Sow research associate told Reuters[iii].
Further key findings included[iv]:
Interestingly, the study noted that the proportion of companies integrating ESG goals in compensation is rising rapidly, at the same time that we are seeing investors push for climate progress. In 2021, 52% of S&P 500 companies reported including ESG metrics in compensation, while 69% of companies stated that these would be included in their 2022 compensation packages. Even though this indicates some progress, As You Sow argues that such generalised linkages are generally insufficient to drive climate progress. They suggest that as more companies begin to link GHG emissions reduction to compensation, it is important that it be done in the most transparent and impactful way.
The study found that a key challenge lay in differentiating between effective CEO pay links and negligible or performative inclusions. This was due to a lack of transparent disclosure in company proxy statements. They also discovered that climate metrics are more commonly included in the annual bonus rather than long-term incentive structures, likely resulting in limited incentivisation since the annual bonus is generally a smaller portion of total compensation.
As You Sow subsequently suggested that companies can improve transparency by linking quantitative climate metrics to a measurable amount of pay, allowing investors to better assess emissions reduction impact and amount of incentivisation.
As You Sow’s senior manager for wage justice and executive pay, Rosanna Landis Weaver, was quoted by Edie.net as saying: “Many executive compensation plans are complicated and confusing. It takes a thorough understanding of both executive compensation and climate change to evaluate these pay metrics. This report is intended to help investors understand best practices in incentivising the attainment of strong climate goals.”[v]
[i] Pay For Climate Performance — As You Sow
[ii] Ibid
[iii] Climate pay links for CEOs do little to cut emissions, study finds | Reuters
[iv] Pay For Climate Performance — As You Sow
[v] Most US-based corporates not linking executive pay to climate action, analysis finds - edie
Lauren has extensive experience as an analyst and market researcher in the digital technology and travel sectors. She has a background in researching and forecasting emerging technologies, with a particular passion for the Videogames and eSports industries. She joined the Critical Information Group as Head of Reports and Market Research at GRC World Forums, and leads the content and data research team at the Zero Carbon Academy. “What drew me to the academy is the opportunity to add content and commentary around sustainability across a wealth of industries and sectors.”
