Tougher CEO pay hits needed to tackle climate change, says report

October 15, 2022

Corporate giants need to have tougher pay penalties for their CEOs to meet greenhouse gas (GHG) emissions targets, according to a new report.

Environment and social responsibility champions As You Sow have analysed the 2021 CEO compensation packages of the 47 American companies included in the Climate Action 100+ (CA100+) Initiative.

The investor-led initiative, which has $68 trillion in assets under management, works to ensure the world’s largest corporate GHG emitters take action to reduce emissions.

The CA100+ companies are responsible for 80% of corporate emissions and so getting them all to play ball is crucial to effecting meaningful change.

The firms were assessed on the following three indicators:

• inclusion of a climate metric in their 2021 CEO pay package, with higher grades for incentives tied to emissions reductions and alignment with 1.5° C goals
• inclusion of measurable climate metric and measurable pay
• inclusion of climate metric in the long-term incentive plan

The As You Sow report found that 47 companies either have no linkage between CEO pay and climate metrics, or do not have it at the level needed to achieve alignment with global emissions targets.

Specifically, the study found that 25 have not explicitly linked any climate-related action to CEO pay, while 15 have some type of climate-related incentive tied to compensation.

Furthermore, six have linked a quantitative climate incentive to CEO compensation, and only one has a GHG emissions reduction metric tied to compensation.

The report explains: “The amount of pay tied to most climate metrics was negligible relative to overall compensation package size - and thus generally inadequate to incentivise behaviour.

“The climate metric was often only one of many metrics used in determining annual bonus, which is typically dwarfed by equity awards.”

The number of firms integrating ESG goals into pay structures is rising rapidly as investors push for progress on tackling climate change.

Last year over half of S&P 500 companies had ESG metrics in compensation packages, while 69% reported they were to be included in 2022.

As You Sow says that indicates “some progress” but that the “generalised linkages” currently in place are largely insufficient to drive progress.

The non-profit foundation believes it is the right incentive lever to pull but that it is important it is done “in the most transparent and impactful way.”