Do Any Climate-Related Incentive Comp Plans Get a Passing Grade?

As You Sow has issued an excellent; new report evaluating the 47 companies responsible for 80 percent of carbon emissions, based on the incentive compensation based on achieving environmental goals.

The companies were assessed on three indicators:

  • inclusion of a climate metric in the 2021 CEO pay package, with higher grades for incentives tied to emissions reductions and alignment with 1.5° C goals;
  • inclusion of measurable climate metric and measurable pay; and,
  • inclusion of climate metric in the long-term incentive plan.

One company got a B. Four got Cs. None got an A.

Their findings:

  • 89% of the assessed companies received D or F grades for climate-related pay incentives. 42 of the 47 assessed companies received D grades or lower for failing to include rigorous quantitative climate-related metrics with measurable payout or long-term incentive components. A summary of the climate incentive grades by company is given in Figure 1.
  • Of these 47 highest emitting U.S. companies, 25 have not explicitly linked any climate- related action to CEO pay. Fifteen have some type of climate-related incentive tied to compensation. Six companies link a quantitative climate incentive to CEO compensation. Only one of the assessed companies has a GHG emissions reduction metric tied to compensation.
  • Xcel Energy received the highest score (B). Xcel Energy received a B for linking CEO pay to emissions reduction performance in its long-term incentive plan, with a measurable amount of pay related to achievement of reduction goals.
  • None of the assessed companies received an A grade. An A grade requires linking CEO compensation to a science-based, 1.5° C aligned, emissions reduction target across Scopes 1 (direct), 2 (purchased energy, and 3 (suppliers and consumer use).
  • Lack of transparent disclosure in company proxy statements makes it challenging to differentiate between effective CEO pay links and negligible or performative inclusions. Companies can improve transparency by linking quantitative climate metrics to a measurable amount of pay, allowing investors to better assess emissions reduction impact and amount of incentivization.
  • Climate metrics are more commonly included in the annual bonus rather than long-term incentive structures, likely resulting in limited incentivization since annual bonus is generally a smaller portion of total compensation. Of the 22 companies with any type of climate-related metric, only 23% included such metric in the long-term incentive plan.
  • The amount of pay tied to most climate metrics was negligible relative to overall compensation package size and thus generally inadequate to incentivize behavior. The climate metric was often only one of many metrics used in determining annual bonus, which is typically dwarfed by equity awards.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s