From Ambition to Accountability: Linking executive pay to green targets

The practice was exceedingly rare as recently as 2016 but by 2022 had become commonplace. And the data reveals there was a significant increase in companies adopting more ambitious, multi-target strategies in the period studied. Findings also break down trends by industrial sector, types of target and types of incentives. 

The research is published in a White Paper, titled “From Ambition to Accountability: Trends and challenges in linking executive compensation to environmental goals," which is a wealth of information for anyone hoping to better understand developments in corporate commitments to environmental sustainability, and sets the stage for a deeper dive in this continuing project by ISF. Download the report here.

The authors caution that work needs to be done to set and monitor targets and design compensation packages properly to ensure long-term commitment and real world impact.

“These findings are great news for anyone who feels corporations need to do much more on climate and the environment,” said ISF Research Fellow, Dr. Pierre Chaigneau, one of the authors of the report. “Now, to ensure real impact, companies need to carefully select targets and design compensation packages to prevent executives gaming the system.”

“This research has produced striking findings but there is still much more to explore as part of this continuing project,” said report co-author Dr. Paul Calluzzo. “We want to learn what factors drive some firms adopt these standards while others don’t? Which stakeholders are influential and how can they impart policy change at a firm? Is all of this leading to more sustainable, greener ways of doing business?”

The White Paper’s key findings include:

• Growing Adoption: From 2016-2022, adoption of environmental performance metrics in executive compensation surged, from being exceedingly rare to commonplace, and the rate of adoption accelerated.
• Early adopters: Companies in carbon-intensive sectors such as petroleum and natural gas, and utilities sectors emerged as early adopters of environmental goals. Among S&P 500 companies, these sectors collectively accounted for approximately 64.5% of environmental goals integrated into executive pay.
• Focus Areas: The most common environmental performance indicators relate to climate change and energy use (49%), followed by environmental protection (32%) and resource use (7%). Companies are increasingly including ambitious multi-goal strategies in the executive pay model.
• Incentive Award Types: Environmental goals are more frequently linked to short-term cash incentives. However, equity-based awards are steadily gaining traction for long-term alignment.

Despite positive momentum, several challenges persist that may hinder the effectiveness of aligning executive pay with environmental outcomes:

• Minimal Weighting and Greenwashing Concerns: Many companies assign minimal weight to environmental metrics in executive incentives, raising concerns about greenwashing and the authenticity of their commitments.
• Short-Termism: A key risk is that environmental targets are set for quick wins rather than meaningful, long-term impact. The report’s findings highlight this concern, with short-term incentives accounting for 81% of the total count of awards, compared to just 17% for Restricted Stock Units (RSUs) and 2% for long-term incentives in the period studied.
• Gaming and Transparency: Executives may modify metrics for personal gain, while opaque bonus structures and disclosure practices undermine stakeholder trust.
• Regulatory and Stakeholder Pressure: Companies often respond reactively to external demands rather than proactively catalyzing genuine environmental reforms.
• Evolving sustainability landscape: Remuneration committees encounter heightened complexity in selecting key performance indicators (KPIs) that balance climate mitigation, operational realities, and stakeholder expectations.

Amid competing imperatives – financial performance, political oversight, organizational support and public interest – companies naturally value survival over sustainability. Yet, the growing adoption of environmental metrics in executive compensation suggests that the corporate sustainability initiatives are likely to maintain positive momentum in the coming years. Over time, companies are expected to follow through on their commitment and strive to balance broader adoption with stronger alignment to environmental goals.