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Top European companies tie executive pay to carbon targets

The majority (78%) of the 50 largest companies in Europe have adopted carbon targets in their calculation of executive pay, according to research by PwC UK and the London Business School.

Its annual review of executive pay at STOXX 50 companies includes the European offices of Adidas, Airbus, BMW and L'Oréal.

Despite the majority (68%) having carbon reduction targets approved by the independent authority Science-Based-Targets (SBTi), many of the companies that linked executive pay to carbon reduction lacked precise goals.

Just 11% of the top 50 had executive pay plans linked to long-term specific carbon targets, compared to 67% that had a broader, less specific link to environmental performance.

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Philippa O’Connor, workforce environmental, social, and governance (ESG) leader at PwC, said the company had seen an explosion in investor interest in linking executive reward to climate targets, as businesses get serious about ESG criteria.

She told HR magazine: “The UK is a market leader in adopting ESG measures in executive pay, and the robust reporting requirements here mean that executive pay plans are generally disclosed well.”

However tying executive pay to ESG goals is not a cure-all, she added.

O’Connor said: “It is important that ESG and carbon measures in executive pay is not seen as the sole litmus test of an organisation’s ESG credentials

“If a company decides to include a carbon measure in pay they should make sure they do it well, so that pay targets have a meaningful impact on incentivising the right behaviours to help companies meet their climate goals. 

“In particular, carbon measures in pay should be significant, measurable, transparent and linked to long-term carbon goals.” 

Luke Hildyard, executive director at think tank The High Pay Centre, told HR magazine he was sceptical of how effective pay plans were in influencing CEOs’ behaviour.

He said: “For ambitious, highly skilled individuals, money is not the only motivating factor. Lots of people take on similarly demanding jobs in public service, the voluntary sector or elsewhere for much lower levels of pay.”

The use of these targets, he added, was more interesting for its reflection of corporate priorities.

He added: “Putting a link to a particular objective in the CEO's pay plan makes a statement to investors and other stakeholders that that objective is important, so if more companies are linking to green targets that is a sign that business is taking environmental issues more seriously or at least wants to be seen to be taking them more seriously.”

Founder of HR consultancy PTHR and HR Most Influential Thinker Perry Timms, said that he was encouraged by the news that CEOs’ attentions were being directed towards ESG goals.

Speaking to HR magazine, he said: “If we know it's true and not ‘greenwashing’, I'm all for it.”

HR should be on its guard that these public shows of action do not become simple PR stunts, he added.

“I see HR’s role as a steward and ‘conscience coach’,” he said, “to keep [action taken] virtuous and impactful.

“It should be clear to all through transparent reporting that a CEO is incentivised and compensated – even partly – by how much environmental regeneration, or even offsetting, is being done.

“I believe this would ultimately bring brand loyalty for both customers and investors, and from prospective and existing colleagues, so it also has a positive financial impact.”