The Impressive Rise of Climate Goals in Executive Compensation

Commitment to goals matters. A case study on Mastercard’s stakeholder incentives shows the extension of an environmental, social, and governance (ESG) modifier to all employee bonus plans globally—i.e., not just for executives. The expansion in 2022 was intended to encourage everyone to work together toward a common set of goals. In 2023, Mastercard continued using its Corporate ESG Modifier to focus on reducing its own emissions (Scope 1 and Scope 2) and those of its supply chain. It encouraged these companies to disclose their emissions through the Carbon Disclosure Project and adopt near-term science-based carbon reduction or net zero goals.

Mastercard is among the companies spotlighted in 2024 Global Trends in Stakeholder Incentives: What’s Next? and racing to reduce greenhouse gas (GHG) emissions.

The seventh annual global research was conducted by the Global Governance and Executive Compensation (GECN) Group, where Farient Advisors is a founding partner. For the last four years, the GECN Group research has explicitly focused on using ESG incentives by analyzing the public disclosures of some 500-plus companies listed on exchanges in nine countries.

The trendlines are encouraging for anyone concerned about climate change—and corporate performance. The use of environmental measures in incentives has increased to 61% globally, with significant increases across the various regions. For example, in the U.S., 52% of large-cap companies now use environmental incentive measures, up significantly from 34% in 2022 and 8% in 2021.

While a majority of companies use these measures in executive incentives, there are certain examples like that of Mastercard where environmental and ESG goals are being applied to a broader swath of employees. This can be a challenge, especially if employees do not see how their individual actions can contribute to lofty goals like reducing emissions. To address such challenges, some companies encourage business unit leads and managers to develop individual, team, or project-based goals that contribute to the overarching corporate ESG goal, thus providing some line-of-sight for employees.

Regardless of implementation, communication from the top and throughout the organization is key so that all employees understand the company’s strategic vision, which may be tied to sustainability objectives, and how their individual roles and responsibilities can affect outcomes.

 

 

GHG emissions are the most common environmental measure, increasing by 33 percentage points over last year. This considerable jump coincides with increases in companies setting emissions reduction targets and disclosing them publicly. In fact, 63% of S&P 500 and STOXX Europe 600 companies have publicly disclosed Scope 1 and 2 emissions reduction goals for 2030. Other environmental measures are generally increasing in prevalence but remain a minority practice.

 

 

Other key research findings include:

• Prevalence: A growing number of corporations across various industries are incorporating climate-related metrics into executive compensation plans. This trend is particularly noticeable in sectors with significant environmental impacts, such as energy, utilities, and manufacturing.
• Types of metrics: Common climate-related metrics include GHG emissions reductions, energy efficiency improvements, and the achievement of specific sustainability targets. Some companies also consider broader ESG metrics such as employee safety and DEI.
• Integration methodologies: Companies typically integrate these metrics into short-term incentive (STI) plans, and they are increasingly incorporating them into long-term incentive (LTI) plans.
• Drivers: The integration of climate metrics is driven by increasing regulatory pressures, stakeholder demands, and the recognition that sustainable practices can enhance long-term corporate value. Some investors are pushing for greater transparency and accountability regarding environmental performance regardless of the political backlash against ESG initiatives.
• Challenges: Despite the increase, there are challenges to effective implementation, particularly in terms of climate metrics. These include difficulty setting appropriate and measurable targets, ensuring the data’s accuracy and reliability, and balancing environmental goals with financial performance.
• Impact: Early evidence suggests tying executive compensation to climate metrics can improve corporate environmental performance. Companies that adopt these practices tend to achieve better outcomes in terms of emissions reductions and overall sustainability efforts.

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