Executive pay at top European companies is linked to carbon targets

According to research carried out by PwC UK and the London Business School, the majority (78 percent) of the 50 largest companies in Europe have implemented carbon targets in the process of determining executive compensation.

The European offices of Adidas, Airbus, BMW, and L’Oréal are included in its annual review of executive pay at STOXX 50 companies.

Although the independent authority Science-Based-Targets (SBTi) approved the majority (68 percent) of carbon reduction targets, many companies that linked executive pay to carbon reduction lacked specific goals.

While 67% of the top 50 had a broader, less specific link to environmental performance, just 11% of executive pay plans were linked to long-term specific carbon targets.

PwC’s workforce environmental, social, and governance (ESG) leader, Philippa O’Connor, stated that as the company get serious about ESG criteria, the company had seen an explosion in investor interest in linking executive reward to climate targets.

She told HR magazine: “The UK is a market leader in adopting ESG measures in executive pay, and the robust reporting requirements here mean that executive pay plans are generally disclosed well.”

She added, however, that tying executive pay to ESG goals is not a cure-all.

O’Connor said: “It is important that ESG and carbon measures in executive pay is not seen as the sole litmus test of an organization’s ESG credentials.

“If a company decides to include a carbon measure in pay they should make sure they do it well, so that pay targets have a meaningful impact on incentivizing the right behaviors to help companies meet their climate goals.

“In particular, carbon measures in pay should be significant, measurable, transparent, and linked to long-term carbon goals.”

According to an interview that he gave to HR magazine, Luke Hildyard, executive director of the think tank The High Pay Centre, was skeptical regarding the extent to which pay plans had any effect on the behavior of CEOs.

He said: “For ambitious, highly skilled individuals, money is not the only motivating factor. Lots of people take on similarly demanding jobs in public service, the voluntary sector, or elsewhere for much lower levels of pay.”

He added that the use of these goals was more interesting because it reflected the priorities of the company.

He added: “Putting a link to a particular objective in the CEO’s pay plan makes a statement to investors and other stakeholders that that objective is important, so if more companies are linking to green targets that is a sign that business is taking environmental issues more seriously or at least wants to be seen to be taking them more seriously.”

Perry Timms, HR Most Influential Thinker and founder of HR consultancy PTHR, stated that he was encouraged by the news that CEOs were focusing on ESG goals.

He stated the following to HR magazine: “If we know it’s true and not ‘greenwashing’, I’m all for it.”

He added that HR should be on the lookout for ways to avoid these public displays of action becoming merely publicity stunts.

“I see HR’s role as a steward and ‘conscience coach’,” he said, “to keep [action taken] virtuous and impactful.

“It should be clear to all through transparent reporting that a CEO is incentivized and compensated – even partly – by how much environmental regeneration, or even offset, is being done.

“I believe this would ultimately bring brand loyalty for both customers and investors, and from prospective and existing colleagues, so it also has a positive financial impact.”