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Rise in CEOs linking pay to engagement and diversity targets

Environmental, social and governance (ESG) issues are high on the C-suite agenda, and CEOs are increasingly tying their pay to values like engagement and diversity.

PwC's global survey of CEOs, released yesterday (16 January), showed broad economic optimism and a growing push towards considering good governance as a key part of business.

More than three quarters (77%) of CEOs said they expected global economic growth to improve in the year ahead, an increase from 76% last year, and the highest figure since 2012.

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The two most important metrics for company strategy are now ranked as customer satisfaction and employee engagement.

Six in 10 (62%) CEOs said employee engagement levels were written into their long-term corporate strategies, compared with 71% for customer satisfaction, and 54% for automation and digitisation goals.

These goals have also been linked to CEO reward levels, with over a third (36%) of CEOs having their reward packages tied to employee engagement metrics

Tying CEO reward to specific goals has also started to become more common for matters such as gender and racial diversity.

Philippa O’Connor, national leader of reward and employment practice at PwC UK, told HR magazine: “For many investors, and companies, it is precisely because these goals are believed to be in the long-term financial interest of companies that it is important to link them to reward. 

“Linking progress to CEO pay helps to create accountability and responsibility for making these improvements a reality, and often entails setting out a clear plan with targets that others can follow.”

She added: “It means that executives – who may not personally be employed by the company in years and decades to come – are given a clear incentive to address these issues today even if they do not result in an increase to short-term profits. 

“By linking them to CEO reward, it also ensures that progress is regularly assessed at board level, as part of the annual cycle of the remuneration committee.”

So far, only 13% of CEOs have greenhouse gas emission targets in their annual bonus or long-term incentive plans, with fewer still tied to gender representation (11%) and racial and ethnic diversity (8%). 

According to the report this practice seems likely to become more common.

Michael Ryan, CEO of Dalmore Capital, a London investment company, said: “The purpose of a business used to be to generate profits for its shareholders, almost full stop. And if you dared suggest objectives that were not consistent with dividends and profits, you’d be shouted down.

“But the world has changed. The general view now is that CEOs are accountable to the public.”

New to the survey this year was an aggregate score of how trusted companies are by their customers. 

Though careful not to say one caused the other, the report found that the companies that had made net-zero commitments, or had tied their CEO compensation to non-financial factors, such as employee engagement or racial equality, tended to be more highly trusted.

The most highly trusted companies, it found, were 40% more likely to have gender diversity targets in their chief executive compensation plans.

O’Connor told HR magazine that ESG factors are key in the fight for talent.

“When it comes to talent, more and more people want to work in a company that exemplifies ethical, sustainable and inclusive behaviour.

“For many, these are the signs of a positive workplace."

The majority (74%) of UK CEOs said they plan to increase headcount this year so they will be competing for talent.

O'Connor added: "The survey also found that CEOs are aware of the weight that their ESG work holds when it comes to competing for talent, with 65% of UK CEOs saying that attracting and retaining employees is an extremely or very influential factor behind their carbon neutral or net zero commitments.”

PwC's 2022 CEO survey is based on a poll of 4,446 CEOs from 89 countries and territories.