WTW: Does ESG provide the ultimate incentive plan?

The job market is competitive – and it’s not showing signs of changing anytime soon.

And according to insurance firm WTW – which generated US$9 billion in revenue in 2023 – there’s been an increase in the adoption of ESG measures in executive incentive plans across the globe.

In fact, the study, which used 1,000 global companies including S&P 500, FTSE 100, and TSX 6, found that 81% of companies include ESG metrics in their executive incentive plans last year. This demonstrates a significantly increased use of climate metrics from 2022 (75%).

Given the increasing focus on ESG governance in regulatory frameworks, and executive incentives being a tangible and powerful governance mechanism, we’re not surprised at the high and increasing prevalence levels of ESG metrics in incentive plans,” said Hannah Summers, director of climate, executive compensation and board advisory at WTW.

“In fact, we suspect that prevalence levels, across Europe at least, may have reached a plateau.”

Summers explains that focus is now shifting to the quality, robustness, and strategic materiality of metrics and targets.

What’s more, three-quarters of European companies measure ESG performance quantitatively in incentive plans, yet Summers expects an increase in scrutiny around the relevance, transparency, measurability, and degree of stretch in ESG targets.

This will only be increased as more companies disclose information to the public – which they must do to comply with ESG regulations.

How HR leaders can implement ESG incentives

Human capital metrics – such as employee engagement, employee safety, and talent management – were found to be the most prevalent ESG categories in executive incentive plans, ranging from 70%-83% across Europe and North America.

Across the globe, more businesses are introducing environmental and climate metrics to incentivize employees. In fact, 80% of European businesses now have these metrics, with stats doubling in Canada and tripling in the US over the last three years.

But what can HR leaders take away from these metrics? Summers explains: “The broader market continues to view these elements of robust stewardship as important business priorities.

“And, this includes ensuring a more sustainable future where the companies will have a clear competitive advantage, a better and more transparent relationship with customers and employees, a more productive and engaged workforce, and a more robust framework to oversee and manage emerging risks; just to name a few.

HR leaders have an important role in aligning the organization towards such a future, and in ensuring connection between these business priorities and the employee experience,” she concludes.

“An example would be connecting wellbeing, engagement, and productivity for everyone in the organization.”