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US' 47 Largest Carbon-Emitters Fail to Incentivize CEO Pay Based on Climate Performance

A new report analyzes the executive compensation packages of 47 of the US’s most carbon-emitting companies. Where climate-related compensation ties were claimed, most were negligible, non-quantitative and lacked specific, climate-related pay incentives.

Shareholder advocacy organization As You Sow (AYS) has released a report finding that, while more and more companies say they link CEO pay to climate-change-mitigation and emissions-reduction goals, such incentives generally lack meaningful metrics or sufficient compensation to incentivize climate progress.

The percentage of companies integrating ESG goals in compensation is rising rapidly as investors push for climate progress. While a positive sign, such generalized linkages and a lack of rigorous metrics are generally insufficient to drive significant climate progress. As more companies begin to link GHG emissions reduction to compensation, it is important that it be done in the most transparent and impactful way. In the past year, companies including Chipotle, Nike, Mars, Ralph Lauren, Microsoft and Danone have declared a new link between their executive compensation and various social and environmental KPIs — but how rigorous are their metrics?

As You Sow’s Pay for Climate Performance report grades 47 of the largest carbon-emitting companies in the US on their use of CEO climate-related pay incentives and the quality of such incentives, and found a notable lack of measurable incentives across these companies. A whopping 89 percent of the assessed companies received D or F grades for failing to include a quantitative or any type of climate-related incentive. Where climate-related compensation ties were claimed, most were negligible, non-quantitative and lacked specific, climate-related pay incentives.

“Climate metrics included in CEO pay can either incentivize timely progress on emissions reduction or can be another form of company greenwashing,” said lead author Melissa Walton, executive compensation and Say on Climate associate at As You Sow. “This report allows investors to understand the difference between the two. Of the companies that did link CEO pay to a climate-related metric, we generally found the metric to be formulated in such a way as to not adequately incentivize emissions-reduction performance.”

As You Sow analyzed the 2021 CEO compensation packages of the 47 US companies included in Climate Action 100+ (CA100+) — an investor-led initiative with $68 trillion in assets under management working to ensure that the world’s largest corporate GHG emitters take action to reduce emissions. The 166 CA100+ companies are responsible for 80 percent of global corporate emissions; thus, incentivization for emissions-reduction performance in these companies is particularly timely.

The companies were assessed on three indicators:

  • inclusion of a climate metric in the 2021 CEO pay package, with higher grades for incentives tied to emissions reductions and alignment with 1.5° C goals;

  • inclusion of a measurable climate metric and measurable pay; and

  • inclusion of a climate metric in the long-term incentive plan.

AYS found the 47 US companies assessed either have no linkage between CEO pay and climate metrics or do not adequately tie CEO pay to climate performance metrics at the level of incentivization required to achieve alignment with global 1.5° C emissions-reduction goals. While having a specific emissions reduction incentive is an important step for companies, not all emissions-reduction metrics are equal. Investors should pay particular attention to the interaction of compensation design and the rigor of the climate metric.

None of the assessed companies received an A grade — which requires linking CEO compensation to a 1.5° C-aligned, emissions-reduction target — across all relevant emissions sources in the long-term incentive package. Xcel Energy earned the highest score, a B, for linking CEO pay to quantitative emissions-reduction performance.

“It is not enough to develop science-based, emissions-reduction efforts and ‘net zero by 2050’ goals,” said David Shugar, Say on Climate initiative manager at As You Sow. “Companies should also properly incentivize leadership to accomplish these goals, through clear metrics based on actual emissions reductions aligned with 1.5° C.”

Investors need to pay particular attention to the amount of pay associated with climate metrics and if these metrics are included in long-term incentive plans, which often represent the majority of the pay package. To meaningfully incentivize emission reductions, climate metrics should constitute a motivating, well-defined portion of CEO pay. The report found the amount of pay tied to climate metrics was often negligible, relative to the overall pay package.

“Many executive compensation plans are complicated and confusing,” said Rosanna Landis Weaver, wage justice and executive pay program senior manager at As You Sow. “It takes a thorough understanding of both executive compensation and climate change to evaluate these pay metrics. This report is intended to help investors understand best practices in incentivizing the attainment of strong climate goals.”