European companies are leading the world in linking ESG measures to executive incentive plans, according to a global study by risk consultancy WTW.
Almost all main index constituent companies in Europe (93%) reported in this year’s disclosures they had incorporated at least one ESG metric in their executive incentive plans. This is up from 90% the previous year and just 75% three years ago.
Long-term incentive (LTI) plans have seen the most rapid area of growth, where the majority of European countries now include at least one ESG metric.
This trend is mainly driven by the adoption of environmental and climate metrics, the prevalence of which has risen from 21% in 2020 to 56% in 2023.
According to the study, 88% of European companies now tie their short-term incentive (STI) plans to at least one ESG measure, up from the 85% they reported last year. The ESG measures European companies are using the most in incentives plans are social metrics (87%). These include categories such as human capital and customer service.
Eight in 10 (80%) companies incorporate environmental measures that address areas such as climate change, carbon emission reduction and responsible use of natural resources. Nearly two-thirds of companies (62%) use governance measures that focus on areas including risk management and corporate social responsibility.
Industries such as IT and consumer goods, which have previously shied away from using ESG measures, are now joining in with the wider trend and have narrowed the gap with other industries, according to WTW’s research.
Richard Belfield, executive compensation and board advisory practice leader at WTW, said the figures showed companies are increasingly articulating to stakeholders “how ESG priorities are embedded in their business strategy and how they are used as a key measure of non-financial performance”.
Rest of world catching up
This WTW research study reviews public disclosures from 1,146 companies listed in nine major European indices including the FTSE 100, as well as the US S&P 500, and the TSX 60 in Canada and the largest companies across seven markets in the Asia Pacific region.
Among these, WTW looked at 500 companies in the US, 60 in Canada and 352 across seven major markets in the Asia Pacific region.
Use of ESG metrics within executive incentive plans continues to rise in the United States, increasing from 69% to 76%, and Asia Pacific, from 63% to 77%. In Canada, use of ESG metrics has stabilised, staying flat at 80%.
ESG metrics are mainly used in STI plans in the US and Canada, the study found. The prevalence in LTI plans has tripled over the past three years but from a lower base than in Europe, and so remains at about 10% for both markets.
In Canada, the significant increase in prevalence can be attributed to companies adding environmental and climate metrics to their LTI plans.
Human capital metrics remain a top priority. Between the US and Canada, more than 70% of companies now include at least one human capital metric in their executive incentive plans.