Linking net zero targets to pay

Posted: 23rd May 2023 Julie Leo, Director of People, and Annabel Gray, Director of Sustainability

The need to achieve net zero is becoming a reality for most organisations in the UK, with many already having plans and targets in place. However, the question is how do organisations ensure that those plans and targets are accomplished?

Decarbonisation should be treated the same as every other corporate objective; it needs to be an integral part of the performance and reward framework. Including this within the performance and reward frameworks can support in communicating priorities and commitments to net zero both internally and externally.

Research undertaken by the London Business School and PwC, published in 2021 – which looked at links between Executive Pay and wider Environmental, Social and Governance (ESG) metrics – found that 45 percent of the 100 largest UK companies had introduced ESG metrics into executive compensation plans, and one-in-four UK companies had added ESG metrics to long-term incentive packages.

The research also found:

  • The most common category of measure for bonuses is the Social element of ESG and included diversity, employee engagement, and health and safety
  • The most common category of measure for a Long-Term Incentive Plan is the Environmental element of ESG, focusing on decarbonisation and the energy transition

So what does this mean for housing organisations, and what can be learned from larger UK organisations that already link pay to ESG metrics?

There are many benefits in setting employee ESG performance management targets; they act as a mechanism to encourage the behaviours required to aid the achievement of organisational-wide ESG targets. Behaviour change is fundamental to this. Furthermore, these metrics internally and externally demonstrate a robust implementation plan and commitment to the cause, helping drive continuous improvement for wider ESG targets.  This is particularly beneficial if these are tied to sustainable finance.

Linking pay to ESG is not easy and like many areas linked to pay, if not handled properly can drive the wrong behaviours.

Firstly, unlike the private sector, long-term incentive plans rarely feature as part of reward packages within the housing sector. Therefore, organisations need to ensure that there is a clear link between the longer-term ambitions of the organisation in relation to decarbonisation, and the targets set on an annual basis.

It is also important that;

  • The quality of the measures and metrics within decarbonisation plans are specific and measurable; they are going to be impossible to reward against if they are not.
  • Transparency is key. Achievement of targets needs to be demonstrable and there needs to be transparency around measuring and reporting.
  • Longer-term ambitions need to be translated into specific annual metrics and measures, just giving ‘achieving net zero by 2030’ is not specific enough. There needs to be a roadmap to this that the organisation can reward against.

To support a robust ESG centric performance management framework, there must be rationale behind the targets and transparency on the wider direction of travel and strategic ambitions.  For example, this can be achieved by setting annual organisational level carbon budgets alongside the finances, your forecasts to net zero and delineating these across the management structure to the suitable level.  Treating carbon like finance can help make the overall approach less alien.

This will be something new for most organisations in the sector, but a concept proven to drive positive outcomes.

At Altair we are passionate about supporting boards and executives to understand their impact on the environment, designing bespoke ESG or net zero strategies and robust plans for implementation to ensure the ecosystem for long-term change is created.

To discuss this article and your needs further, please contact Julie Leo, Director of People, or Annabel Gray, Director of Sustainability.

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