GECN ESG Report 2023: Most bonuses paying above their targets – download your free copy
February 24, 2023
MM&K (the UK partner firm in the GECN group) has published its 2022/23 research on how the world’s largest firms use ESG (environmental, social, governance) metrics in their executive incentive plans.
We studied how world’s top listed companies have used ESG goals to incentivise their executives. Typically, target pay-outs will be set at around 50% of the maximum, so you might assume that goals pay-out mostly around their target levels with exceptional performances being rewarded with the maximum pay-out.
However, we found across the globe that ESG goals in most short-term incentives (STI) pay above target (61%). This varies by region; in the UK it is more common at 71% paying above target, and Europe is even more so at a remarkable 85%.
ESG metrics are naturally less tied to the financial survival and success of a business than more typical measures (e.g., profit or share price) so this would naturally raise the concern that ESG metrics are used as a PR stunt and are not actually challenging and meaningful. However, a minority of ESG metrics are paying out above the other typical metrics (only 29%), which suggests that STI measures overall are not challenging enough.
This result does not come as a surprise, as the High Pay Centre reported a similar result in 2021. This could show that remuneration committees are missing chances to set more ambitious targets for their leaders. On the other hand, it may show that the meaning of ‘target’ in incentives has warped so that the maximums are now the de facto targets.
Naturally, the make-up of an incentive plan will depend on the firm’s circumstances. An STI pay-out may be determined by a range of factors, such as if there are low salaries, industrial norms, the firm’s goals (e.g., financial firms may have a larger STI element since long-term incentives are harder to plan in an unpredictable market), and investors may even encourage generous incentives so they know their executives are well-motivated.
MM&K, together with our GECN partners, publishes research annually on how ESG shapes CEO incentive pay in the world’s top companies. This is the comprehensive guide to ESG in firms of the FTSE100, S&P100, DAX30, etc.