Incentivizing long-term value creation

Companies have made significant progress in recent years in identifying the risks and opportunities related to how sustainability is considered in a company’s strategy. However, in many instances, the realization of these opportunities or risks falls outside the normal business planning cycle. Therefore, incentivizing sustainability-minded behavior is a key element of an overall governance model that supports day-to-day decision-making.

A company’s strategic course is set by its management, yet it is these managers who must help ensure that this course is adhered to in their daily decisions. An effective way of providing them with further incentives to stay on course is to anchor the company’s sustainability targets in their remuneration, in the same way as other strategic aims.

Consequently, linking strategic priorities to the key governance setup of a company remains an aspect of utmost importance to stakeholders, particularly investors. Remuneration is one strategic pillar of a robust governance model.

For this reason, the management board pay system is a key aspect of corporate governance for a company’s shareholders. With this overview of 375 companies from 15 countries, we take stock of the integration of sustainability criteria into board members’ pay, finding that an impressive 78 percent of these companies already do so. We hope this report can serve both as an inspiration and a contribution to debates within companies and between stakeholders.

Incentivizing long-term value creation

Linking sustainability metrics to board members’ pay

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Key findings

78 percent of the companies included in this research consider sustainability in their senior executives’ pay.
Among companies that specify the sustainability targets used in their board members’ pay, 88 percent align these to ESG topics that are material to their businesses, although this varies widely by country.
ESG targets included in executive remuneration are most commonly linked to climate change and a company’s own workforce. On climate change they typically refer to reductions in greenhouse gas emissions, while those on a company’s own workforce often refer to employee engagement, the percentage of female managers and injury rates.
Of the 274 companies that measure board performance based on sustainability-related targets and that provide information on how these are included in variable remuneration, 37 percent include ESG targets in both short-term and long-term incentives, 23 percent include such targets only in long-term incentives and the remaining 40 percent use them only in short-term incentives. Use of both short-term and long-term sustainability targets is more common in EU countries.

Methodology

This report is based on data from 375 publicly listed companies, the 25 largest based on market capitalization in June 2024 from each of the following 15 countries: Australia, Austria, Belgium, Canada, China, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, the United Kingdom (UK) and United States (US). Nine are EU member states and the other six have significant numbers of companies that would have needed to comply with CSRD according to its original scope before February 2025’s Omnibus directive.

For each company, KPMG professionals examined its 2023 annual report and if required the compensation report, sustainability report and the company’s website to answer five questions:

Is the board of management’s remuneration linked to sustainability-related performance targets?
If yes, which sustainability matters and what key performance indicators are included in the remuneration policy?
How closely does the remuneration policy reflect the material sustainability matters identified by the company in its reporting?
What is the balance between incentives based on short-term sustainability performance targets (one year) vs long-term targets (more than one year)?
What is the balance in variable remuneration between financial and non-financial/sustainability performance?

KPMG carried out the research in July and August 2024. The findings are based purely on analysis of publicly available information and no information was submitted directly by companies to KPMG firms.

This report builds on ‘Time to take a broader view’, a report published in May 2024 by KPMG in the Netherlands, which asked the same questions of the 50 largest listed companies on the Amsterdam Stock Exchange and the 25 largest listed companies in Germany, Sweden and the UK. It used annual reports published during 2023, meaning many would cover the financial year before those used in this report, and covered twice as many companies from the Netherlands. However it produced similar results, with for example both sets of research finding that 88 percent of companies in the Netherlands use sustainability in working out boardroom pay.

Recommendations

Recommendations on how to integrate sustainability indicators into management board remuneration.

Derive key performance indicators from the corporate strategy

Select key sustainability indicators that are relevant and suitable to remuneration. These should be closely linked to the corporate strategy. This could be indicators that either contribute to long-term business development, reflect how managers could avoid significant risks to business success or for example also refer to aspects of particular importance to the market or industry. Indicators are supposed to help steering the company into the intended strategic direction.
Select relevant, suitable and reliable data

It is advisable to focus remuneration on a small number of suitable sustainability indicators that are truly decisive for business success. Suitable key data must be controllable and it should be possible to determine them for shorter intervals than a year. They should be part of continuous reporting for the management board in order to enable performance to be managed in the first place. However, the availability of data during the year is often a challenge, particularly in the case of sustainability indicators. It is therefore advisable to start small, with one or two key pieces of data, and at the same time, develop data availability and internal reporting to increase this.
Define the shares of the remuneration system and scope

We recommend determining the relative share of sustainability-related targets in the short-term and long-term variable remuneration components. It is relevant to determine the target group for which the targets are designed. In this report we have focused on the remuneration of the management board, but it is widespread practice that the performance indicators relevant to this board are also taken into account in an adjusted form in the remuneration of top executives.
Provide transparency and aim to ensure reliability of data

For capital markets in particular, information on financial incentives for the management board is a decisive valuation criterion for companies, as it has an influence on the opportunities and risks that board members take into account in their operational activities. For this reason, public reporting on management board remuneration is required by law for listed companies in many countries and is also recommended for smaller companies and organizations. The reliability of remuneration-related sustainability indicators is often ensured by external auditing. Due to the impact on the executive board and capital markets, remuneration-relevant key figures are often also those that are voluntarily audited with a higher level of assurance (reasonable assurance).