Executive Pay Starts to Consider ESG Metrics

Big Idea

Environmental, Social, and Governance (ESG) metrics are creeping into the calculations for executive pay. In Europe, one-quarter of leading companies in France, Germany, and Switzerland link climate targets to compensation. Elsewhere, 80% of major companies in Australia include ESG compliance when calculating executive bonuses. Increasing stakeholder concerns prompted these new structures. Companies connect essential ESG metrics to executive compensation to better align with stakeholder values beyond financial performance. 

RepTrak Perspective

Incorporating and involving stakeholder expectations through every channel of the organization is vital. By executing ESG measures into compensation, companies can build credibility and demonstrate authenticity to external stakeholders as a strategy to achieve reputation payoffs.

Reputation Context

Why is this important?

As ESG metrics become increasingly important, stakeholders want to support companies that share similar viewpoints. When looking at brand strategies, 70% of consumers want to know how companies address environmental and social concerns. Failure to meet stakeholder expectations can have negative reputation implications. A lack of corporate authenticity has led to business outcomes such as the “Benefit of the doubt,” “Trust to do the right thing,” and “Defend company” decreasing 4% across company supporters.

What is the reputation connection?

Maintaining ESG values across company functions, including executive pay, can contribute to positive business outcomes. For the first half of 2021, each RepTrak ESG Driver Score maintained an Average score between 66 – 68. RepTrak data has shown that increasing ESG Scores are strong determinants of “Recommending to others” and “Trust to do the right thing.” As a result, companies with close ESG attention also experienced increasing Reputation Scores.

What must companies do? 

As CEOs have more recently become the public face of social and community initiatives, benchmarking CEOs’ compensation to ESG metrics is one way to motivate positive community impact – a key component of the multistakeholder environment in which companies operate. By scrutinizing executive pay, companies are increasing the scope of ESG management and holding their CEOs accountable.

Convo Starters

How can your company expand the executive compensation process to consider stakeholder experiences and sentiments?

What are your ESG metrics targeting, and how does it connect to your company’s reputation?

How can your company reinforce Citizenship and Governance Driver initiatives to strengthen ESG Scores?