Glossary term
ESG-linked Executive Remuneration
Subject: Sustainability and ESG, Corporate Social Responsibility and Stakeholders
Also known as: ESG pay metrics, Sustainability-linked pay, ESG-linked pay
ESG-linked executive remuneration ties part of senior managers' bonuses or long-term share awards to targets on environmental, social or governance measures, such as emissions, safety or diversity.
Explanation
The pay committee chooses a small number of measures and a modest weight within the variable pay. Common metrics are emissions reduction, workplace injury rates, employee engagement, gender balance in leadership and customer outcomes. The aim is to make leaders answer for non-financial goals in the same way as for profit. Design decides the result. Targets that are easy to meet, vague or not independently checked give a bonus without a change in behaviour. Metrics must be within management's control, tied to the strategy and verified, and many firms use assurance on the data. Investors and proxy advisers review the schemes, and some disclosure rules require firms to explain them. A weak design pays out for appearances, which is why investors and proxy advisers read these schemes closely.
Example
A mining company links 15% of its annual executive bonus to two measures: a fall in serious injuries and a cut in site emissions. The remuneration committee sets thresholds in advance, and internal audit checks the data. When injuries drop but emissions miss the target, executives receive only the safety part of that share.
Not to be confused with
- Sustainability-Linked Loan (SLL)
- ESG-linked pay changes what executives are paid. A sustainability-linked loan changes the interest the company pays if it misses targets.