Linking executive pay to ESG targets

How common is ESG-linked executive pay?

Very common among large listed companies. WTW's study of 1,070 companies across 18 markets, published in January 2026, found ESG metrics in 76% of S&P 500 incentive plans, down one point, and in 80% of companies overall; three quarters used them in annual incentives and about a third in long-term incentives. People-related metrics, such as engagement, retention and succession, were the most common, used by 71% of North American and 81% of European companies, while the share of S&P 500 companies paying on diversity metrics fell from 55% to 34% after US court rulings and policy changes. See workforce metrics.

How is ESG-linked executive pay designed?

• Metrics: a few that are material to the business and tied to strategy, such as emissions for a heavy emitter or safety for a mining company, rather than a long list.
• Measurement: the same definitions and boundaries as the sustainability report, with data that has controls and, ideally, assurance.
• Targets: set at the start of the period, with a threshold, target and maximum, consistent with published targets and transition plans.
• Weight: enough to change behaviour, but balanced with financial measures.
• Vehicle: annual bonuses suit yearly operating goals; long-term awards suit multi-year goals such as emissions pathways.
• Safeguards: limited discretion, underpins such as no payout after a fatality, and malus and clawback terms.

See ESG targets and net zero.

ESG-linked pay in practice: a chief executive's bonus scorecard

A chief executive's target bonus is US$1,000 thousand. The scorecard weights EBITDA at 50%, free cash flow at 30%, the cut in scope 1 and 2 emissions at 10% and the recordable injury rate at 10%, each paying 0% to 150% of its share depending on results.

Emissions fell faster than the target, paying 120% of that component; the injury rate improved but missed the target, paying 50%. The bonus is US$990 thousand, of which US$170 thousand, 17%, comes from ESG measures. For IFRS S2, the climate-linked part is the US$120 thousand emissions component; with salary of US$800 thousand and US$1,200 thousand of long-term incentive expense recognised in the year, 4.0% of the chief executive's remuneration recognised in the period is linked to climate-related considerations. See IFRS S2.

What must be disclosed?

• IFRS S2: how climate-related considerations are factored into executive remuneration, and the percentage of executive management remuneration recognised in the period that is linked to them; IFRS S1 also asks whether performance metrics are included in remuneration policies.
• ESRS 2: how sustainability-related performance is integrated into incentive schemes for the board and management, including whether pay depends on sustainability targets. See ESRS 2 general disclosures.
• EU remuneration policy: under the Shareholder Rights Directive II, it must explain how pay contributes to the company's strategy, long-term interests and sustainability, using financial and non-financial criteria.
• US proxy statements: the compensation discussion and analysis explains the metrics, targets and results used for incentive pay.

What are the pitfalls?

The main ones are targets that are easy to hit, metrics that are vague or judged qualitatively, measures that are not material, data that has not been checked, and a low weight that makes the link symbolic. Each can turn a pay disclosure into a greenwashing risk. The SEC's mandatory clawback rules cover pay based on financial reporting measures, so recovery of ESG-based awards usually depends on the company's own malus and clawback terms. See greenwashing risk and internal controls over sustainability data.

This guide is general information. It is not tax or legal advice for your situation.