More than three-quarters of companies worldwide link sustainability targets to executive pay, according to a new report from KPMG International.

KPMG’s study, Incentivizing Long-term Value Creation: Linking sustainability metrics to board members’ pay, found that 78% of businesses now link senior execs compensation to sustainability performance, with the most common targets relating to climate change and internal workforces, often focusing on female leadership and injury rates.

The report, based on data from 375 publicly listed companies from fifteen countries – including Australia, China, the EU, UK and US – revealed that 88% align their ESG targets with business-critical topics, indicating that market forces remain the primary driver of sustainability ambitions.

While more companies linked sustainability to short-term targets (40%) compared to both short-term and long-term incentives (37%), KPMG said that investors generally expect to see a balance between both short-term and long-term targets to measure board performance.

While ESG topics related to climate change (26%) and to a company’s workforce (23%) were by far the most popular in deciding executive pay, firms also reported considering business conduct (12%), use of resources and circular economy (9%), and impact on biodiversity and ecosystems (4%).

The analysis also highlighted a significant regional difference in the adoption of sustainability-linked pay, with companies in the EU more likely to use such measures in executive pay decisions.

KPMG said that all of the French companies included in its analysis, as well as all but one from Germany and at least 80% of those in Austria, Australia, Italy, the Netherlands and Spain, consider sustainability in boardroom pay.

Even in the US, the lowest placed country, 11 of the top 25 listed companies used some ESG metric in determining executive-level pay, as well as thirteen of those in China.

Despite strong alignment of sustainability topics by both Japan and the UK, on average countries outside the EU are less aligned than those within it. An average of 7.5 companies in non-EU countries fully align material sustainability topics and boardroom pay measures, compared with 8.7 companies in EU member states. 

“Despite ongoing economic and geopolitical uncertainty, the findings make clear that linking executive compensation to sustainability performance is becoming increasingly widespread within the world’s largest companies,” said Nadine-Lan Hönighaus, global ESG governance lead at KPMG International.

Recommended reading

• FinTech Scotland Launches ESG Innovation Challenge
• Boards Increasingly Aware of Risks Posed by Ignoring ESG
• ESG A Top Priority for Cloud Migration Projects

“While there are some notable regional differences, there is a consistent global trend, that reflects the crucial role senior executives play in steering a company towards long-term value creation.

“For business leaders, transparency in linking sustainability performance to executive pay is key. The starting point should be a small number of performance indicators that are measurable, meaningful, and decisive in steering and improving a company’s sustainability performance.”

KPMG’s report follows the latest polling from YouGov, which found that some UK businesses are struggling to keep up with the UK Government’s changing ESG regulations, with smaller firms beginning to feel left behind.

Added to that, studies have recently shown that the majority of UK and EU businesses are worried their current compliance approach won’t meet requirements for upcoming ESG legislation, such as the Corporate Sustainability Reporting Directive (CSRD), coming into effect later this year.