Holding Executives Accountable: Tying Financial Metrics to Sustainability Outcomes

While few executives overall tie their compensation to sustainability outcomes and goals, those who do are more likely to view sustainability as a value creation opportunity.

Companies are increasingly responsible for identifying, executing, and communicating sustainability related goals. From 2021 to 2022, there has been an increase from 10% to 17% of executives who stated their compensation is in part tied to their impact on ESG (environmental, social, and governance) goals and metrics. While this is a 70% increase overall and a step in the right direction, there is still much more progress needed to be made in integrating accountability for sustainability goals.

One aspect of successful integration and execution of sustainability strategy is setting clear and actionable metrics to hold executives accountable for their success. This can be achieved several ways, including tying compensation, bonuses, and performance appraisal criteria for C-suite leaders to sustainability metric accomplishment.

In this three-article series ‘Commitment to Sustainability’, we delve into research from the Russell Reynolds Associates’ 2021-2022 Global Leadership Monitor and 2021 Divides and Dividends to help organizations in different geographic regions and industries build and maintain effective sustainability strategies for the future.

Ultimately, executives need to fully grasp three key areas when setting sustainability goals and metrics. Read on below to learn about holding executives accountable by tying financial metrics to sustainability outcomes, or navigate to our other articles in the series:

1. How CEO commitment affects sustainability integration

2. Framing sustainability through a value creation lens

3. Holding executives accountable: tying financial metrics to sustainability outcomes

Compensation by sustainability driver

Leaders whose compensation is tied to sustainability goals selected value creation as their primary sustainability driver 45% of the time; higher than the global total of 30% and those without compensation tied to sustainability goals (28%).

My compensation is in part tied to my impact on ESG goals
By Sustainability Driver

Global view: Commitment through accountability—tying sustainability to leaders’ compensation

CEO commitment and strategy are key pieces of the puzzle when it comes to embedding sustainability across the business. And tying executive compensation to sustainability goals is another way for organizations to showcase their commitment. Although only 17% of executives globally said their compensation is in part tied to their impact on ESG goals or metrics in 2022, this is a 70% increase over 2021, which speaks to the increasing pressure organizations are under to set and stick to clear metrics on sustainability goals.

Compensation tied to diversity, equity, and inclusion also rose by 21% from 2021 to 2022, indicating a heightening prioritization of diversity and sustainability in organizations, though more progress is needed in both areas.

Which of the following statements apply to you?

Regional view: UK China/Hong Kong are most likely to tie compensation to sustainability outcomes

Executives in the United Kingdom, China/Hong Kong, Australia and Germany are more likely to tie compensation to sustainability outcomes, and these numbers have risen sharply since 2021: 4x in China/Hong Kong, 3x in the United Kingdom, and 2x in Germany, all much more than the global rise of 70% from 2021 to 2022. Executives in the United States are the least likely to have their compensation tied to sustainability goals at just 13%.

Compensation tied to sustainability outcomes is low among all levels of executives, although slightly more common among C-level executives than the CEO or next-generation leaders. This indicates that not one person owns sustainability, but it should be the responsibility of the board of directors, CEO, C-suite, and head of sustainability collaboratively to thrive.

My compensation is in part tied to my impact on ESG goals
By Country

Industry view: Industrial companies are most likely to tie compensation to sustainability outcomes

Relatively few executives have their compensation tied to sustainability goals across industries. However, industrial companies are the standout, where 38% of executives say this is the case—almost twice what is reported in other industries. This metric has risen from 2021 to 2022 for every region, industry, and role level except in the professional services industry and for CEOs. It rose in the financial services (3x YOY) and healthcare (2.5x) industries the most.

The consumer industry ranks the second highest in terms of CEO commitment to sustainability, but only 19% of leaders have compensation tied to ESG goals, indicating a need to create actionable metrics to hold executives accountable to publicly expressed commitments.

My compensation is in part tied to my impact on ESG goals
By Industry

Turning these insights into action

Authors

Beth Hawley is a member of Russell Reynolds Associates’ Center for Leadership Insight. She is based in Chicago.
Tom Handcock leads Russell Reynolds Associates’ Center for Leadership Insight. He is based in London.
Gabrielle Lieberman is a member of Russell Reynolds Associates’ Center for Leadership Insight. She is based in Chicago.

Acknowledgments

Francesco Menonna is a member of Russell Reynolds Associates’ industrial/natural resources team. He is based in New York.