French companies lead Europe on incorporating ESG metrics in CEO pay plans

Aug 24, 2021
ESG metrics in executive pay more common in short-term incentive plans, finds Diligent

The number of European companies incorporating ESG metrics into executive compensation plans has increased significantly from 4 percent in 2008 to an expected 39 percent in 2021, according to a new report from Diligent.

France leads Europe with the highest number of companies (an expected 71 percent) incorporating ESG metrics into executive pay plans this year. Additionally, the UK has had a noteworthy rise in ESG metrics in executive compensation plans for CEOs from 8 percent in 2008 to a predicted 54 percent in 2021.

The country with the lowest number of companies is Norway, where the proportion of companies following this best practice has dropped from 24 percent in 2008 to an expected 5 percent in 2021.

The energy (66 percent) and utilities (61 percent) sectors are expected to have the highest percentage of companies with ESG key performance indicators in pay for CEOs. The healthcare sector will have the lowest, with only 25 percent.

‘Historically, the energy and utilities sectors have been incorporating ESG and health and safety measures into executive pay due to higher environmental impacts on company operations and stronger pressure from stakeholders,’ notes a Willis Towers Watson report quoted by Diligent.

ESG metrics in executive compensation are more common in short-term incentive (STI) annual bonuses than in long-term incentives (LTIs), according to Diligent’s study of 1,914 companies.

The percentage of European companies linking STIs to ESG metrics is expected to rise from 50 percent last year to 62 percent this year. Similarly, the number of European companies linking LTIs to ESG metrics is expected to grow from 26 percent to 36 percent.

While examining CEO pay, the report highlights that cash plans are more likely (64 percent) to have ESG metrics than shares (42 percent) and options (15 percent).

Governance metrics trail behind environmental and social in Europe

Companies in Europe are more likely to incorporate environmental and social metrics than governance in executive compensation plans.

In 2020, 21 percent of companies incorporated environmental metrics and 24 percent incorporated social, compared with governance metrics, which were incorporated by only 6 percent of companies. The report expects both environmental and social metrics to jump to 28 percent and governance metrics to increase to 11 percent in 2021.

The Netherlands is expected to have the highest percentage of companies (58 percent) incorporating environmental key performance indicators in executive compensation in 2021.

France also leads with the highest percentage of companies (64 percent) incorporating social metrics in CEO executive pay plans and structure. In Italy, companies have the highest rate for incorporating governance metrics, at 18 percent of companies.

In 2021, Diligent expects no companies in Norway, Portugal, Denmark or Sweden to incorporate governance key performance indicators in CEO pay packages.

The energy sector leads this year with the highest representation of companies (53 percent) incorporating environmental metrics in executive pay plans. The communication services sector leads both social (52 percent) and governance (20 percent) metrics.

The healthcare sector has the lowest volume of companies incorporating environmental (16 percent) and social (12 percent) metrics into executive pay. The lowest sector for incorporating governance is utilities, at 0 percent.

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