Report: Why top companies link executive pay to ESG metrics

More public companies across Asia Pacific are integrating ESG targets into their executive pay.

The region has seen an increase in the number of listed companies using ESG metrics as a factor when calculating compensation, data from global advisory firm WTW showed.

• 193 companies in APAC disclosed their metrics for executive pay
• 3 in 4 firms (74%) tied their compensation to ESG metrics
• Australian companies (92%) appeared to be the most committed to measuring leadership performance against ESG targets
• In Japan, 3 in 4 firms applied ESG metrics to executive pay
• Zooming into Southeast Asia: 82% of the top listed companies surveyed in Singapore and 45% in Malaysia integrated ESG into their remuneration plans.

Overall, APAC companies in the energy, materials, and financial industries had the highest prevalence of ESG-aligned pay programmes.

More leaders from these sectors are assessed against benchmarks such as their organisations’ sustainability goals, DEIB principles, and other ethical standards.

A measure of priorities

The WTW study also found that social measures were the most popular ESG metric category used globally.

In APAC, for instance, 62% of employers gauged their leadership performance against social values and practices, while 59% used diversity and inclusion measures in their incentive plans.

In contrast, however, the use of climate measures falls behind.

Only about 2 in 5 APAC companies incorporated environmental metrics into their executive pay programmes.

This shows a large disparity with ESG trends in Europe, where 85% of businesses incentivise executives for adhering to and promoting environmental practices.

Moreover, in APAC, only “30% incorporated GHG or carbon emission measures including Scope 3 emissions,” WTW noted.

Varying pay disclosure practices

A number of factors influence the variability between countries’ pay disclosure practices and ESG alignment. These factors include regulatory requirements and the expectations of institutional investors for specific markets.

“While markets such as Australia, Japan, and Singapore continue to have a high prevalence of ESG measures in executive incentives, we haven’t seen significant change over the past year,” said Shai Ganu, Managing Director and Global Practice Leader, Executive Compensation and Board Advisory, WTW.

“Going forward, geopolitical shifts may prompt a slowdown in the adoption of climate and DEI measures, particularly in North America. Nevertheless, Asian companies will do well as they continue to drive the right behaviours by ensuring alignment between ESG strategy and executive incentives.”

ESG metrics and creating long-term impact

Integrating ESG metrics into executive pay shouldn’t be a form of corporate philanthropy but risk management, said Dr. Hermann Stern, founder of Obermatt, a research firm specialising in executive compensation.

“ESG is not about ‘doing good;’ it’s about ‘doing well,’” Stern said.

“ESG doesn’t measure the level of corporate philanthropy; it measures corporate stakeholder risk management.

“Professional investors use ESG metrics to ensure that their investments prosper in the long term. It certainly makes sense to manage corporations’ future risks, and no shareholder can object to that,” the expert said.

“If there is a backlash against ESG now, it is because future risks are perceived differently.”

Alusch Amoghli, Director of Development (ENA) at Accor, shared similar views.

“Aligning compensation with ESG performance helps mitigate risks related to environmental regulations, social unrest, and governance failures. By proactively addressing these areas, companies can avoid potential fines, boycotts, and legal issues,” Amoghli, an ESG advocate, said.

“A clear example is BP, which has integrated safety and environmental metrics into executive compensation following past environmental disasters. This helps the company manage operational risks more effectively.”

With more companies incorporating ESG metrics into executive pay, the responsibility of managing risks is shared across the board.

Experts believe incentives around leadership performance shouldn’t be viewed as a reward for “doing good,” but as an investment in good leadership and a reasonable hedge against business risks.