This marks the third year WTW has conducted a study on global environmental, social and governance (ESG) executive incentives for Europe and North America. For the first time, WTW has included a review of ESG executive incentives across seven markets in the Asia Pacific region. Through a review of public disclosures from more than 1,000 companies, including S&P 500, FTSE 100, TSX 60 and major European and Asia Pacific indices, this study provides insights into not only the prevalence of ESG metrics in executive incentive plans but also details such as industry trends and measurement methodology.
In Europe and North America, ESG metrics are used by more than three-quarters of companies when determining executive incentive compensation, ranging from 69% in the U.S. to about 90% in Europe and the U.K. While most companies incorporate ESG metrics into their short-term incentive (STI) plans, measurement of ESG in long-term incentive (LTI) plans has increased sharply over time, especially in Europe (46% of companies) and the U.K. (37% of companies). In the U.S. and Canada, the adoption of ESG metrics in LTI plans remains low (8% and 7%, respectively).
Social metrics are the most prominent ESG metrics across markets, particularly those related to human capital, such as talent management, succession planning, inclusion and diversity, and employee health and safety. Human capital metrics are now used by 68% of companies across Europe and North America, ranging from 63% in the U.S. to 75% in Europe and the U.K. The prevalence of environmental metrics, most notably climate transition such as carbon emission reduction, has increased sharply over the past year. Almost two-thirds of companies in Europe and the U.K. now include environmental metrics in their executive incentive schemes.
When used to determine executive incentives, ESG metrics are measured empirically as a distinctive weighted metric about half the time. The median weighting for all ESG metrics in the aggregate is typically 20%. Qualitative assessment of ESG performance remains a common practice, either as a milestone, a qualitative objective or a part of a larger performance scorecard.
A wide range of practices in the use of ESG incentive metrics remains across industries, especially in North America, where the consumer discretionary and information technology sectors fall behind the overall average. By contrast, more than 90% of energy and utilities S&P 500 companies include at least one ESG incentive metric. Industry variance is far less prominent in Europe and the U.K., where ESG metrics adoption is at least 75% for all industries.
Executive compensation disclosure in Asia Pacific is maturing and varies widely by country. In mature markets such as Australia, Japan and Singapore, use of ESG metrics in executive incentive plans is highly prevalent and comparable to Europe and North America. In other parts of the region, disclosure and use of ESG metrics are often inconsistent. Overall, we found that 63% of the largest Asia Pacific companies use ESG metrics in their executive incentive plans, and 45% of these metrics are human capital-related.
Access our complimentary report to learn more about our detailed global findings.