Executives at many companies appear to function with easy carbon reduction targets linked to their remuneration, according to a new study.
The study, from London Business School and PwC, says payouts disclosed by 50 of the largest European companies averaged 86%, with more than half paying out the full 100%.
A study report says: “This is surprisingly high given the common understanding that we’re making inadequate progress on reducing carbon emissions, which raises the questions on whether the carbon targets in pay are working.”
Published this week, the new research attempts to understand whether carbon-linked pay deals are delivering on investor expectations.
Reporting by the 50 companies was examined for whether the pay arrangements targeted at tackling climate change met four criteria of being “significant, measurable, transparent and demonstrably linked to long-term carbon reduction goals”.
The report found that most companies were falling short of investors’ expectations.
The study could find only one company that met the four signposts.
According to Tom Gosling, an executive fellow at London Business School, poor climate target setting would fail to achieve stated aims, with a “risk that the practice just results in more pay, not more climate action”.
He adds: “Current levels of payout don’t seem consistent with the slow progress we’re making on climate change.”
Gosling believes there are quick wins to be had for companies by improving transparency of targets and explaining the link between them and net-zero commitment.
The study found roughly a third of companies were not transparent about targets. The position is worse for companies not targeted by the investor-led campaign, Climate Action 100+ (CA100+), where 39% fail to be transparent, compared with 30% of those subject to CA100+ engagement.
Somewhere between one fifth and a quarter of companies fail to disclose a link between carbon goals and long-term company plans.
The report offers much to consider for boards using pay to incentivise substantive action on climate. But it has further warnings.
Climate transition plans are becoming increasingly popular, with many companies publishing their documents and some offering them up for shareholder votes. But the report warns that investors may soon expect “tight coherence between the objectives set out in those plans” and executive pay targets.
Likewise, investors will increasingly want to see climate goals and achievements subjected to “appropriate internal and external independent verification”.
Investors will also want to see pay plans line up with “more sophisticated” decarbonisation benchmarks as these benchmarks evolve.
Boards should also expect investors to want to see other ESG aims—on biodiversity and land usage, for example—to be integrated into climate plans and pay schemes.
Investors have called for a strong link between ESG and executive pay in the past. This survey suggests that the idea remains solid, while delivery is lacking.