December 6, 2021
Linking Executive Pay to Climate Transition: 34-Page Guidebook
Recently, Willis Towers Watson partnered with the World Economic Forum’s Climate Governance Initiative to publish this 34-page guidebook on whether & how to use executive compensation incentives as part of strategic climate transition plans. The guidebook looks at director & investor views, case studies, and pros & cons of environmental-based incentive compensation. It also offers a “design spectrum” (pg. 16) and principles to consider when selecting metrics (pg. 17).
The guidebook recommends a 6-step cycle for using executive pay to accomplish “net zero” goals:
1. Align climate priorities with business strategy. Incorporate clear organizational climate priorities into the fabric of the company’s enterprise risk and opportunities framework.
2. Climate goals tied to the net zero vision. Articulate a clear net zero vision by 2050 (or earlier) and set short-, medium- and long-term milestones toward the vision.
3. Select the right metrics. Considering company’s net zero vision/milestones and incentive design, determine the right climate metrics.
4. Fit-for-purpose incentive design. Reference market practice and the company’s own climate objectives to finalize the incentive design mechanism and formula.
5. Tell the story with disclosures. Design and metrics selection should be disclosed clearly, aligned with business strategy and other climate and ESG disclosures.
6. Evolve and learn over time. Review effectiveness and adjust design, metric(s) and goal(s) over time.
– Liz Dunshee