Deemed as a best practice approach and as part of an increasing trend, leading companies are linking executive pay to ESG performance, with a view to accelerate delivery of sustainability objectives and shine as responsible businesses. This makes sense as ESG has become a boardroom conversation.
To take this step there are some things that need to be in place and decisions taken around how to structure the remuneration and performance related-pay. The organisation will have first had to define what its ESG/Sustainability objectives are, ideally with clear key performance indicators (KPIs), which can be reported and verified in a similar way to established financial reporting.
With the emergence of the various ESG/Sustainability reporting frameworks, ESG KPIs are becoming ever-more common place alongside the information reporting systems, which enable data to be entered and reported, across various operational sites and business entities. Not to mention the rise of legislative requirements for ESG performance disclosures, for example with pay gap reports and carbon footprints.
Decisions can then be taken around how to integrate into remuneration. One of the simplest ways is to make ESG a percentage part of the bonus structure, which can be related to whole business ESG performance or more finessed, for example at a departmental or divisional level.
A clear advantage of a whole business ESG performance-related bonus, is that it drives greater collaboration for the delivery of ESG/Sustainability targets and sends a strong message that ESG is part of the company's overall value and to be balanced in the drive for the shorter-term financial returns.
Pay Performance Targets In addition, Tesco will also be aligning executive pay performance targets to key sustainability measures, including reducing food waste, becoming one of the first UK food retailers to do this. This means that 25% of the performance share that executive directors receive will depend on the chain’s progress on key sustainability measures – including gender and ethnicity representation, carbon reduction, and food waste reduction – in its own operations.