Priority two: Accountability, with a bold approach to sustainability-linked remuneration
Defining “remuneration-grade” KPIs for sustainability objectives — which constitute a meaningful proportion of total reward and help to hold management teams accountable — is challenging. However, there is a compelling case to do so: Implementing effective variable remuneration schemes supports the delivery of outcomes and progress against sustainability objectives.
A robust approach will need to address several challenges:
- Multiyear time horizons: For survey respondents, the number one challenge is the difficulty of aligning the time horizon of annual salary and variable remuneration with sustainability goals that often have five- to 10-year targets (selected by 39% of respondents as one of their main obstacles).
- Unintended consequences: How do companies ensure that including stock options as part of sustainability-focused remuneration supports long-term value creation? If there is too much emphasis on stock, could that lead to the pursuit of short-term performance achievement to increase the share price?
There is also the question of “what matters?”. What topics do stakeholders think leaders should be assessed against? And, once materiality is assessed, it is important to determine priorities — or the weighting of incentive scheme metrics — to drive the right behaviors. Finally, companies also need to consider how metrics can be cascaded through the organization.
These complex issues do raise the risk of inertia or incrementalism. In fact, the research shows that less than half of organizations (47%) have made sustainability a significant element of remuneration today . However, the Experts are much more likely to have an advanced approach: