Green is good

I often look at the results of a survey and find myself wondering, ‘is that good or not?’

This week’s study from PwC on executive pay and its links to ESG performance is a case in point. The fact 58 per cent of firms now link the pay of top executives to their performance against various ESG metrics seems like a welcome step forward, but then you think, ‘what on Earth are the other 42 per cent of firms thinking?’

There’s plenty of fascinating and conflicting research on the role of the remuneration and rewards schemes in driving corporate performance and change programmes.

On the one hand it is hard to see how a modern business compete in the war for talent without a generous incentive scheme and as such it stands to reason that if you want to drive environmental performance you need to reward people for delivering it. On the other, there are legitimate questions over whether bonuses really work in motivating a workforce and plenty of horror stories about how they can create perverse incentives and encourage employees to fixate on narrow performance metrics rather than big strategic goals.

It is possible to imagine how requiring corporate leaders to hit ESG goals to secure their full bonus could help drive corporate decarbonisation programmes. But equally, if schemes are badly structured or if only a small proportion of total incentives are linked to environmental performance there is still a risk ESG considerations will be sidelined.

The PwC study also shows that only around a quarter of top firms link bonuses to emissions targets, while ESG measures only account for around 16 per cent of total bonus payments and 20 per cent of long term incentive plans. Short term financial performance often remains the dominant consideration.

However, one thing is clear here: a trend is underway and there is no sign of it relenting. In 2020 only around 46 per cent of businesses surveyed linked bonuses to ESG performance, just a year later it was up to 58 per cent. With all listed firms set to soon face a mandatory requirement to publish a net zero strategy and pressure from employees, customers, and investors all ratcheting upwards, it looks like green bonuses are here to stay.

The big challenge is whether businesses can develop incentive schemes that actually deliver the decarbonisation they want to see.

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