The report examines the growing significance of incorporating Environmental, Social, and Governance (ESG) metrics into executive remuneration policies across Europe. It highlights how these factors are increasingly embedded in corporate governance frameworks, particularly within the top 300 companies listed on the FTSE EuroFirst300 Index. The report also explores whether these incentives are effective in driving sustainable corporate practices.

Executive remuneration in context

Executive remuneration has long been a focal point of corporate governance, intended to align managerial and shareholder interests. Historically, executive pay has evolved from fixed salaries and bonuses to performance-based pay, reflecting broader trends in corporate theory such as shareholder value maximisation. However, recent trends have shifted towards a long-term value approach, incorporating ESG metrics to reflect broader stakeholder interests. Between the 1970s and 2000s, executive pay in Europe grew significantly, with performance-based incentives like stock options becoming prominent.

Quantitative and structural evolutions

From a quantitative perspective, executive pay has increased dramatically. CEO-to-worker pay ratios rose from 20 times in the 1970s to 376 times by 2000. More recent trends show a decline in the use of stock options in favour of restricted stock grants linked to long-term performance measures. The structure of executive compensation has also changed, with a mix of fixed pay, long-term incentive plans, and bonuses tied to ESG performance.

Corporate scandals and the increased debate on executive compensation

The report details the impact of corporate scandals like Enron and WorldCom on the debate around executive pay. These scandals demonstrated how performance-based incentives could lead to excessive risk-taking, misaligned managerial interests, and, ultimately, corporate failure. In response, governments introduced regulations such as ‘say on pay’, which aimed to increase shareholder oversight of executive remuneration. This shift, particularly in the UK and EU, sought to strengthen the role of shareholders in determining compensation policies.

From the financial crisis of 2008 to the present

The 2008 financial crisis further accelerated the need to reform executive pay, particularly in financial institutions. There was a push for more long-term incentive structures to mitigate excessive risk-taking and align remuneration with long-term business sustainability. The report suggests that recent regulatory measures, such as the EU’s Shareholder Rights Directive II, have helped embed ESG factors into executive pay packages. In the UK, regulatory bodies like the Financial Conduct Authority now emphasise the importance of aligning remuneration with sustainability goals.

Data on executive compensation and ESG

The report provides a detailed analysis of the extent to which ESG metrics are included in executive compensation packages across Europe. Out of the 300 companies studied, 61.6% incorporate ESG factors into their remuneration structures. The majority of these companies focus on non-financial performance measures, particularly around environmental sustainability and social responsibility. In terms of financial impact, ESG targets account for more than 20% of total executive compensation in nearly a third of companies surveyed.

Targets and metrics

Most companies use specific metrics to address stakeholder concerns, such as diversity and inclusion for employees, carbon reduction for the environment, and customer satisfaction. For instance, 91 companies tie short-term incentives to ESG performance, while 25% link both long- and short-term incentives to ESG. The report highlights a lack of consistency across industries, with companies using varying approaches to integrate ESG metrics.

Although ESG performance is mainly tied to short-term incentives like annual bonuses, some companies have begun to link long-term incentives to sustainability goals. ESG metrics influence more than 15% of total executive pay in most cases, reflecting the growing importance of sustainability in corporate governance.

Conclusion

The report concludes by questioning the overall effectiveness of linking executive remuneration to ESG performance. It highlights the need for clearer, more consistent metrics and greater transparency in how these targets are set and measured. It also calls for a stronger focus on long-term incentives and a more significant cultural shift within corporations to ensure genuine commitment to sustainable business practices.