More than three-quarters of top companies link pay incentives to sustainability

An analysis of the 25 largest companies by market capitalisation across 15 countries has found that 78% link executive pay to sustainability performance.

The KPMG study looked at a total of 375 publicly listed companies across Australia, Austria, Belgium, Canada, China, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, the UK and the US – many of which would have to comply with the EU’s Corporate Sustainability Reporting Directive (CSRD) under its original scope.

It shows that linking executive pay to sustainability targets is an increasingly popular strategy used by companies to improve non-financial performance. (Another KPMG report from November 2024 found that 41% of G250 firms used this mechanism.)

“For business leaders, transparency in linking sustainability performance to executive pay is key and for those companies at the start of the journey, now is the time to start thinking about incorporating sustainability targets into executive remuneration with a focus on relevant targets that are linked to material sustainability topics. The starting point should be a small number of performance indicators that are measurable, meaningful, and decisive in steering and improving a company's sustainability performance,” said Nadine-Lan Hönighaus, Global ESG Governance Lead at KPMG International.

Climate change and workforce lead KPIs

The most common targets used in incentive schemes relate to climate change and workforce targets, with 88% of the companies that link sustainability to executive pay aligning KPIs with their most material topics.

More companies appear to link sustainability to short-term targets, though investors generally expect to see a balance between both short-term and long-term targets, KPMG adds.

The study also reveals significant differences in the adoption of sustainability-linked pay incentives across regions, with companies in the EU most likely to use this governance mechanism.

Regional variations

The UK and Australia are ranked second and third in the use of sustainability pay incentives by their top 25 companies, suggesting that firms are taking a strategic approach to embedding sustainability beyond compliance requirements.

However, sustainability KPIs used by firms in countries outside the EU are generally less aligned with material topics than for those within the EU – with the exception of Japan and the UK. An average of 7.5 companies in non-EU countries fully align material sustainability topics and boardroom pay measures, compared with 8.7 companies in EU member states. 

“Despite ongoing economic and geopolitical uncertainty, the findings make clear that linking executive compensation to sustainability performance is becoming increasingly widespread within the world’s largest companies. While there are some notable regional differences, there is a consistent global trend that reflects the crucial role senior executives play in steering a company towards long-term value creation,” added Hönighaus.