What does good then look like?

To make sure your remuneration policy fosters real long-term growth, the metrics need to be significant, measurable, transparent, and linked to long-term business ambitions (1). For these metrics to be considered proper drivers of

performance, they need to be meaningful both on a company level and for individuals so that people remain loyal to them. Measurable metrics hold clear units or definitions and can preferably be benchmarked against other industry peers. Transparency calls for the need to understand what is being measured and how. Linking to long-term strategy means identifying what the most relevant metrics are for reaching the corporate goal. Metrics that are not well aligned with the strategy, such as not serving a real business purpose, are in fact more prone to harm the performance and credibility of a company. Nonetheless, the highest-performing companies do all have ESG metrics in place in their remuneration plans (2). In other words, there is a correlation to be found but not necessarily causality.

Prioritizing quality over quantity is crucial for ESG metrics in pay incentives to ensure a meaningful impact. The ESG component should carry significant weight within the total variable compensation package. The proportion is to be considered carefully to ensure the ESG goals are significant but not so dominant as to detract from other business priorities (based on discussions with multiple investors).

Although the number of firms including ESG metrics in their LTI plans is on the rise, the number in the Nordics is still relatively low (3). One reason behind this is the LTI plan structure, with higher use of warrants that are linked to share price development rather than operational measurements. However, the challenge in driving ESG metrics has started to become addressed by institutional investors becoming more assertive in communicating preferences and demands for ESG integration. This might then lead to international proxy voters adapting their assessments to reflect these local market expectations.

In summary, incorporating ESG metrics into compensation is becoming increasingly important for companies to conduct business effectively. ESG metrics help prevent greenwashing, give a clear message of what really matters, and empower shareholder engagement. For real impact, they need to be carefully defined, transparent, and measurable. Making the metrics present in the Boardroom is important for real attention and execution.

If you wish to get support in understanding the market practice and in designing incentive programs with ESG metrics, please reach out and let us help you.

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Emma Kuivala - Director, Incentives Plans, Finland | e-mail: emma.kuivala@allshares.com

Sanna Westerberg - Director, Incentive Plans, Sweden | e-mail: sanna.westerberg@allshares.com

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Sources:

(1) Seminar, Cevian Capital, 2023

(2) ESG Remuneration, Allshares Survey (2024)

(3) About Pay, Allshares (2024)

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