Companies are increasing linking executive pay to carbon-reduction goals but are not meeting investor expectations, according to research released Monday by PwC UK and London Business School's Leadership Institute.
The study, Paying for net zero, looked at the largest European companies in the STOXX Europe 50 because Europe has the most developed practice of linking executive pay to ESG practices.
It found that 78% include some measure of carbon targets in executive pay in 2022. Companies paid executives well for having carbon targets, averaging 86% of the maximum pay available, and more than half of them paying 100%.
Yet only 14% of those companies meet investor expectations that climate pay metrics should be significant, measurable and transparent, the report said.
"If it's not done well, there's a risk that the practice just results in more pay not more climate action. Current levels of pay-out don't seem consistent with the slow progress we're making on climate change," Tom Gosling, executive fellow at LBS's Leadership Institute, said in the report's foreword.
The report found a "wide spectrum of approaches" to measuring carbon progress in the context of pay, ranging from a single item on a list of ESG goals, to a separate component on the incentive plan that is directly tied to the company's strategy for addressing climate change.
The most common problems were a failure to disclose targets transparently and the lack of a clearly explained link to the trajectory of long-term net-zero goals.
Some "easy opportunities to improve" include creating a demonstrable, disclosed link between pay targets and announced carbon targets. That link "often exists but is rarely drawn out in a way that enables investors to compare the consistency of pay goals with stated medium to long-term commitments," the report said.
Investor engagement made a difference, the report found. Bigger carbon emitters were more likely to have carbon measures in executive pay and more likely to score well against investor expectations.
More of the companies engaging with the investor climate group Climate Action 100+ have carbon targets in pay, 71%, compared to 50% without them.
And carbon targets for companies engaged with Climate Action 100+ were weighted more in the bonus. "This suggests that investor engagement on climate is also influencing how companies design their pay plans," the report said.