The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu The leading online blog in the fields of corporate governance and financial regulation. Sun, 11 Oct 2026 11:30:28 +0000 en-US hourly 1 https://wordpress.org/?v=6.5.13 https://corpgov.law.harvard.edu/wp-content/uploads/2024/02/cropped-photography-4-e1706898544564-1-32x32.png Paying Well By Paying for Good – The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu 32 32 Paying Well By Paying for Good https://corpgov.law.harvard.edu/2022/06/25/paying-well-by-paying-for-good/?utm_source=rss&utm_medium=rss&utm_campaign=paying-well-by-paying-for-good https://corpgov.law.harvard.edu/2022/06/25/paying-well-by-paying-for-good/#comments Sat, 25 Jun 2022 13:36:54 +0000 https://corpgov.law.harvard.edu/?p=146939?d=20220625093654EDT Posted by Phillippa O’Connor and Tom Gosling, PricewaterhouseCoopers UK, on Saturday, June 25, 2022
Editor's Note:

Phillippa O’Connor is a Reward & Employment Leader at PwC United Kingdom, and Tom Gosling is an Executive Fellow in the Department of Finance at London Business School. This post is based on their PwC UK memorandum. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) and The Illusory Promise of Stakeholder Governance, both by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

Market practice in the FTSE 100 shows the changing nature of ESG targets in executive pay

ESG targets are increasingly prevalent in pay

  • 45% of FTSE 100 companies have an ESG target in the annual bonus, the Long-term Incentive Plan (LTIP), or both
  • 37% use ESG in annual bonus with an average weighting of 15%
  • 19% of the FTSE 100 use ESG in LTIP with an average weighting of 16%
  • The most common category of measure in the bonus is Social, including measures focusing on diversity, employee engagement, and health & safety
  • The most common category of measure in the LTIP is Environmental, typically measures focusing on decarbonisation and the energy transition

The nature of ESG targets is changing, with increased use of Environment and Social targets, particularly in LTIPs

  • ESG targets relating to long-standing social and governance metrics such as health & safety, risk, and employee engagement have appeared in bonuses for some time. 33% of FTSE 100
    companies incorporate such “Old” ESG measures, 31% in the bonus and 7% in the LTIP
  • “New” ESG targets relate to more recently emerging stakeholder concerns, particularly around
    climate change, sustainability and diversity. 28% of companies have such measures, 18% in the bonus and 15% in the LTIP

A slight majority of ESG measures are output rather than input measures, with only a minority operating as an underpin

  • 55% of ESG measures in bonus, and 50% in LTIP, are output measures with a quantifiable goal—for example scope 1 and 2 emissions reductions in tonnes against baseline numbers
  • 31% of ESG measures in bonus, and 27% in LTIP, are input measures relating to specific activities a company undertakes—such as making investments in green energy sources
  • Only 14% of ESG measures in bonus, and 22% in LTIP, operate as an underpin, despite this
    approach being popular with some shareholders

Nearly half of current ESG metrics are not linked to material ESG factors

  • Over half (55%) of ESG targets are based on ESG dimensions categorised as material to the
    company under the SASB Materiality Map®. But equally, nearly half are not
  • Of the 45% of targets not deemed material in the SASB framework, nearly half (45%) relate to employee engagement or diversity & inclusion—whether this should be deemed immaterial will be a matter of debate. Diversity metrics commonly appear in financial services incentives, following the Women in Finance Initiative

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