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ESG Goals For Top Management Remuneration

June 2022
Christian Ehl
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All of the scientific data from the past 40 years tells us that the age of mass consumption and mass waste production has to end. We as a global society have to find another form of wealth and value generation that doesn’t negatively impact the climate, ecosystems, biodiversity, and our social balance. Every company around the world must take responsibility for its own contribution to the problem and realize that, conversely, they are responsible for making a change.

In the corporate world, one such step can be to start including ESG goals in top management remuneration. There are some companies that already started working on this a few years ago, but most still have a high link to pure business KPIs like EBIT. However, new players are entering existing markets with new business models and solutions such as hydrogen and renewable energy companies. ESG regulations and capital market demands are significantly increasing, and consumer awareness is rising. Companies are well advised to take a critical view on their future performance if no higher ESG compliance is achieved. ESG goals support the mitigation of future business risk and ensure future performance.

When implementing ESG goals in top management remuneration, it is current practice to have them as a separate pay component that reduces the overall share of other bonus components. ESG goals can be a part of annual bonuses as well as of long-term incentive plans (LTIP), depending on the concrete goals and strategy of the company.

A recent PWC article on linking executive pay to ESG goals1 points out that pay has to follow strategy and that it does not drive strategy. Therefore, a primary point for each organization starting to work on ESG is to create a respective strategy, one that doesn’t focus solely on the company’s own impact (such as its CO2 emissions) but rather takes a critical look at the company’s business model. The challenging lead question could be, “What does a successful strategy and business model look like when we put the focus on ESG compliance?”

Formulating a strategy should be the first goal for top management and should be strongly linked to bonus achievement. For some organizations, this could be a good goal to start with. Bonus amounts should be in line with the relevance, ambition, creativity, and of course realizability of the strategy. Creating a strategy should be linked to an LTIP while other measures are to be linked to annual bonuses or short-term incentives (STI).

Currently, an often used and measurable goal is the reduction of the company’s own carbon emissions by X tons by a specific date or to become climate-neutral by a certain year. Some organizations have set goals for cost reductions achieved by ESG measures. We discuss a good example of this in practice in our article titled “Taking The Lead On Sustainability In The Corporate World.”

With an overall strategy set, ESG goals can be cascaded down to the more operative levels in order to bring the strategy to life. By using a modern leadership approach, top management can rely on the brightness, creativity, and problem-solving skills of their teams. Scorecards can then help to keep track of benchmarks and targets.

In the end, it is about having transformation managers on board with an open, creative, and solution-orientated approach, strong change management, and leadership skills.

Our search assignments and diverse talks with Sustainability Managers have given us a profound overview of their tasks, reporting lines, personalities, backgrounds, and achievements. We would be honored to also support your considerations on sustainability recruitments.

About the Author:

Christian Ehl is a Partner at the Düsseldorf office of Stanton Chase and acts as Regional Practice Leader ESG EMEA.

1  Executive Pay and ESG Performance: PwCExecutive Pay and ESG Performance: PwC

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