It has become a given that ESG considerations need to be integrated into corporate strategy in order for a business to create sustainable value. Moving increasingly into focus is the question of pay and, if, or how ESG should be integrated into reward strategy for a global workforce.
The public debate often focuses on executive pay in listed companies and how CEOs can be held accountable for delivery of shareholder returns in a responsible manner that also benefits stakeholders. But for many companies, the more interesting question is how to use an all-employee reward strategy to reinforce focus on a business strategy that now more explicitly incorporates ESG factors.
Although there are some common themes for the senior executive and wider management and employee population, there are also important differences. To draw out the key themes, PwC, working with London Business School, have gathered fresh insight from investors and senior leaders about their expectations and experiences of linking pay to ESG. This includes interviews with senior HR leaders and board members in global organisations, who are responsible for making this happen.
The momentum towards integrating ESG into reward strategy seems unstoppable. In this report we outline findings and recommendations to help you do it well.
Watch PwC’s Global ESG People leader, Phillippa O’Connor, as she discusses the report findings and what these trends mean for organisations.
Duration: 1min
But senior leaders are more cautious than investors about linking pay to ESG: over one-third believe that pay should be linked to ESG only in the minority of companies facing the most material ESG issues. Perhaps this is because, they are more aware than investors of the risks and difficulties that can arise. Moreover, a strong theme coming through our interviews was that pay is, at best, just one element in how behaviour is aligned with strategy.
There is also some concern amongst HR professionals we interviewed that linking pay to ESG may be another example of a temporary pay “fad”. But undoubtedly the momentum has been strong. In large UK companies the proportion including ESG targets in pay has increased from 45% just two years ago to 86% today.
“The starting point needs to be to define what ESG really means to you as a company. We took the decision that instead of a focus on one or two discrete metrics, we can best serve our ESG agenda through targets in pay that accelerates growth in business lines that are more sustainable”
Source: PwC's Paying for good for all report 2022
Source: PwC's Paying for good for all report 2022
ESG targets in pay are viewed as stepping stones to long-term value creation. Most senior leaders (78%) and investors (86%) believe that a focus on ESG in company strategy supports enhanced shareholder value.
Including ESG targets in pay signals the importance the organisation attaches to these objectives, internally to employees and externally to the company’s stakeholders. This signalling motivation of “putting your money where your mouth is” was cited by 86% of investors as the reason they wanted to see ESG targets in pay.
Senior leaders emphasised the important role played by investors (and in turn asset owners) in shaping their ESG priorities. This is at least as true in private as listed businesses. In some cases the values of investors can cause companies to pursue ESG priorities on a broader basis than would be justified purely by shareholder value.
Senior leaders believe the most important ESG goals to include in pay are those most directly related to the business strategy and the process of creating value, particularly relating to internal areas such as employee satisfaction (56%) and health and safety (56%). Diversity goals (41%) and decarbonisation (35%) or other environmental goals (36%) are important, but less so.
Investors attach greater importance to prominent, market-wide and so-called “systemic” factors such as climate change (72%) and other environmental priorities (62%).
In the push to link pay to ESG, we cannot assume that everyone agrees on what ESG should mean in this context or how it should be adopted. This will require careful dialogue between a company and its investors.
But there’s also a concern that investors are adopting a one-size-fits-all approach to ESG based on issues that are most in the public eye – an approach that can be disconnected from individual business priorities. By contrast, the senior leaders we spoke to see it as vital to have a targeted approach focusing on telling a compelling ESG story, including why and how a specific ESG priority is linked to the company’s specific strategy.
Source: PwC's Paying for good for all report 2022
“Ensure there is alignment between the company’s purpose and how people are paid. You also need to hire people with the right mindset that aligns with your company culture”
Senior leaders do not see pay as the most important part of achieving change in their organisation. This may explain why fewer senior leaders (55%) than investors (68%) believe it is important to link ESG to pay in most companies. Instead they see the most important task to be the development of a culture where ESG considerations are integrated into decision making.
Our interviewees emphasised the importance of engagement when developing an ESG strategy so that employees felt a sense of ownership of, connection with, and ability to influence that ESG strategy. Employees need to be empowered to do the right thing to enable the strategy to come to life. Engagement of this sort is good practice when setting goals and objectives. But it is particularly important in development of ESG strategies, where engagement and retention of talent is of itself often a key objective of introducing the ESG strategy.
That sense of ownership then needs to be supported by communication to enable employees to understand how their actions contribute to the company’s success.The good news is that 81% of senior leaders believe they have a strong understanding of the ESG issues facing their company.
“Having it run through our culture and DNA is far more important than building it into incentives”
“I think the biggest enabler is company culture…that is also the most difficult one to change”
ESG targets in pay are here to stay: the momentum seems unstoppable. While the early-adopters are still finding their way, most now consider these to be a useful management tool, when seen in the context of broader cultural change. But they also give rise to risks and unintended consequences that must be managed.
We offer five main recommendations in addressing these issues:
Employees and other stakeholders need to understand how ESG goals link to the company’s strategy and priorities. Without this alignment, goals will lack credibility.
It is culture, not pay, that drives sustainable behaviour change. Pay must be seen as the enabler of culture, not the sole driver of it.
Engaging employees in setting ESG priorities increases ownership of the goals. Employees need to understand how they can influence ESG goals and must be given the tools and freedom required to do so.
Integrating ESG into pay requires, at least, close collaboration between HR and sustainability functions – and it might also require new capabilities in both. Governance oversight of target setting and measurement might need to evolve to enable appropriate input from sustainability committees into the remuneration process.
Good ESG performance can’t be an excuse for not creating value. The best organisations capture the symbiosis between ESG and financial performance, and pay arrangements need to reflect that.
In this 30 minute interview, the authors of the report, Phillippa O’Connor, Partner PwC, Tom Gosling, Executive Fellow, London Business School, Jean-Pierre Noël, former FTSE 50 HRD talk through the report findings, how these vary by territory, and what they mean for organisations.
In December 2021 PwC commissioned a global survey of 632 business leaders, investors and HR-focused leaders. The survey polled leaders in nine countries and regions and 28 industries across listed companies, family-run companies, companies backed by private equity, partnerships and owner managed companies.
Partner, Global Sustainability Tax, Legal and Workforce Leader, PwC United Kingdom
