A new global survey by KPMG has found that 78 percent of the world’s largest publicly listed companies now incorporate sustainability metrics into executive pay, signaling a growing alignment between corporate governance and ESG goals.
The report, Incentivizing Long-Term Value Creation, analyzed 375 companies across 15 countries and revealed that ESG-linked compensation is gaining traction as a key mechanism for encouraging sustainable decision-making in boardrooms.
Climate, Workforce Targets Dominate ESG Metrics
The most commonly used ESG topics in executive compensation were climate change and workforce-related metrics.
Climate targets primarily focused on greenhouse gas emission reductions, carbon neutrality and energy efficiency, while social indicators included employee engagement, female leadership representation and workplace safety rates.
“Companies are prioritizing areas where data and reporting frameworks already exist, with climate and workforce metrics offering measurable and comparable indicators,” KPMG’s report noted.
Other ESG themes, such as business conduct and circular economy practices, were also present but featured less prominently. Governance-related metrics, such as cybersecurity and risk management, appeared less frequently and were often unspecified.
Varying Levels of ESG Pay Adoption Across Markets
French, German, and British companies led in ESG integration, with 24 to 25 companies out of 25 in each country tying boardroom pay to sustainability targets. By contrast, the U.S. and China trailed, with only 11 and 12 companies, respectively, doing so.
Among EU members, an average of 20.2 of the top 25 companies in each country incorporated sustainability into remuneration, compared with 18.3 in non-EU countries.
Japan stood out among non-EU countries, with 16 of 25 companies fully aligning their pay with material sustainability topics, despite having a relatively lower overall ESG pay adoption rate.
Short-Term Incentives Prevail, but Integrated Models Grow
Despite investor preference for balance, only 37 percent of companies with ESG-linked pay use both short- and long-term targets. Short-term incentives dominate, used exclusively by 40 percent of companies, while 23 percent rely solely on long-term ESG metrics.
Italy and France stood out for integrating both time horizons, with 20 and 19 companies, respectively, doing so. In contrast, none of the top 25 companies in the U.S. or China combined both short- and long-term sustainability targets.
Where both timeframes were used, 11 percent to 30 percent of incentive pay was typically tied to ESG metrics.
Key Recommendations for Companies
KPMG’s report outlines a four-step roadmap for firms aiming to link executive pay to sustainability performance effectively:
- Derive KPIs from Strategy: Align indicators closely with long-term corporate strategy and material ESG risks or opportunities.
- Select Suitable Data: Use metrics that are both controllable and measurable at shorter intervals.
- Define Remuneration Scope: Clearly assign weights for ESG targets across short- and long-term components.
- Ensure Transparency: Regular reporting and external assurance help build credibility with stakeholders.
The report also emphasized starting with a few high-impact indicators and gradually expanding internal reporting capabilities.
The widespread adoption of ESG-based remuneration marks a shift in how companies manage risk and reward. “Executive pay is becoming a core pillar of corporate sustainability,” the report concluded, with increasing transparency and regulatory pressure — particularly in the EU — driving the trend forward.
As ESG priorities move from voluntary initiatives to strategic imperatives, tying sustainability to pay appears poised to become the new norm in global corporate governance.
