UK executive pay increasingly linked to ESG goals

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UK executive pay increasingly linked to ESG goals

Leading businesses in the UK are increasingly looking to incorporate ESG goals within their executive pay plans, suggesting pressure from investors for heightened ESG disclosure is having an impact. Applying environmental, social and governance (ESG) measures in UK pay plans has increased by 89%, according to a study by WTW. The number of businesses applying one or more ESG measures within their long-term pay plans increased from 24% to 37% in the last year. The report believes this pattern will only continue and likely accelerate in the coming years.

Sarah Reay, Climate Change Executive of ICAEW, explains that while it’s positive to see a rise in incentive plans like ESG measures, Reay believes there is a long way to go in matching these changes in long-term plans. Reay hopes to incorporate social and environmental factors into executive pay and benefits, it will increase activity on emissions reduction, reduce the gap in social inequalities and improve the health and wellbeing of people and our planet. ESG incentive plans are one way a business can work on its overall sustainability strategy, and Reay believes this could become normality in future years.

Europe is a global leader in applying ESG incentive metrics. About 90% of European businesses, including those in the UK, incorporate at least one ESG measure in their executive pay plan. The leading nations are Germany and France. In comparison, the use of ESG measures in long-term incentive plans in the US is relatively uncommon, rising from 5% to 8% in the last year.
The emergence of environmental measures has nearly doubled worldwide in the last year, increasing from 22% to 40%. There remain considerable regional disparities in applying climate and environmental metrics, but WTW believes more nations will adopt ESG-focused plans as investors and regulators increase pressure on businesses.

ESG metrics can integrate into incentive systems in various ways, such as through key performance indicators that determine a standard required performance level and modifiers, which enable modifications to the incentive payout.

Applying environmental measures greatly differs, from 25% of businesses in the US to over 60% in Europe and the UK. Energy and utility businesses experience the highest use of ESG metrics, followed by the materials sector. Despite a rise of 9% since the previous year, the IT sector remains the lowest for ESG incentive measures. Richard Belfield, board advisory leader at WTW, explains that the additional pressures from investors, advisors, employees and other stakeholders are reshaping the system. Businesses are recognising the focus on a stronger connection between executive compensation and benefits and ESG priorities, especially regarding climate change and environmental plans, inclusion, diversity and human capital governance.

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