Global Firms Tie Executive Pay to Sustainability Goals

A new KPMG study of 375 large publicly traded companies in 15 nations finds a dramatic change in corporate governance: executive pay is more closely linked to sustainability performance. The report says that 78% of leading global companies now include environmental, social, and governance (ESG) objectives in board-level pay packages, a major development in corporate responsibility.

This pattern mirrors increasing business understanding that sustainability is not simply an ethical requirement but a strategic one. Through integrating ESG performance into executive compensation, companies are keeping their leaders keen on long-term sustainability issues like climate change, diversity, workplace safety, and corporate governance.

The research points out that 88% of companies linking compensation to ESG priorities focus on material sustainability concerns—those most critical to their business and stakeholders. Climate incentives tend to be focused on cutting carbon emissions, whereas social metrics might be employee participation, gender diversity in management, and work-related injury rates. These goals are meant to tie executive decision-making to wider corporate sustainability objectives, making the leadership responsible for progress in these key areas.

One of the main findings of the research is the split in the way firms design ESG-linked incentives. Among those that include sustainability in executive compensation:

• 37% combine both short- and long-term ESG goals.

• 23% concentrate on long-term incentives only.

• 40% employ only short-term objectives.

European businesses are most notable for their preference for a combined approach, combining both short- and long-term ESG incentives. The trend points to the strength of sustainable governance in the region with companies acknowledging that true environmental and social improvement is achieved through commitment over the long term.

The methodology for the report entailed thorough examination of public disclosures made by the 25 largest firms by market capitalization in all the 15 countries surveyed, including the US, UK, China, and various EU members. The study was carried out in July and August 2024 and was based on company reports like yearly sustainability and compensation reports. Interestingly, all the conclusions were based on data which was public in nature, with no company submissions directly to the study.

KPMG's results are a strong endorsement of the notion that remuneration is one of the most important pillars of corporate governance. Tight linkage between executive compensation and ESG performance is a message to investors and stakeholders of disciplined, long-term strategic thinking. The companies that integrate sustainability into compensation systems are showing them that they look at ESG not as a compliance exercise but as part of successful business.

A firm's strategic direction is set by leadership, but execution of that vision in day-to-day decision making is the obligation of management. By linking incentive compensation to performance on ESG factors, corporations are refocusing executive attention on material risks and opportunities that, absent this kind of pressure, may be below the radar for traditional business managers.

This study is based on KPMG's previous May 2024 report, where similar trends were discovered, especially in the Netherlands, where integration of ESG into executive compensation is already highly prevalent. As more businesses implement these governance structures, the global business landscape is transforming to a future with sustainability integrated into financial decision-making at the corporate level.

The wider implications of this transition lie outside the boardroom of the corporation. Investors are now more closely examining how firms embed ESG factors into their business models, and executive compensation is becoming a top indicator of corporate sustainability commitment. Connecting ESG priorities to governance arrangements is still a high priority for stakeholders, especially institutional investors who view sustainability as a long-term value driver.

KPMG is hoping that this report will help fuel discussions between firms, investors, and regulators on the part executive compensation plays in ensuring sustainable business practices. As corporate executives are now increasingly held financially accountable for sustainability results, this trend is likely to redefine how companies tackle environmental and social responsibility in the future.