.png)
On July 17th, 2024, industry leaders and directors convened at the Asia School of Business for the "Director's Masterclass Series 2024: Latest Developments in Climate: Aligned Executive Compensation." This Masterclass, in collaboration with FIDE FORUM, delved into the critical role of aligned executive compensation in advancing the climate agenda and promoting environmental sustainability within organizations.
Dr. Gary Theseira, Director of Climate Governance Malaysia, began the session with a warm welcome and an introduction to the Masterclass. Mr. Tay Kay Luan, CEO of FIDE FORUM, followed by highlighting the importance of holding board members accountable for implementing climate mitigation efforts aligned with ESG metrics. Given the pressing nature of climate change, he urged attendees to integrate insights from this Masterclass into their strategies to incentivize sustainability efforts, especially since climate action in Malaysia remains predominantly driven by the private sector.
Shai Ganu, Managing Director and Global Leader at WTW, then outlined the session's agenda, featuring discussions on the global status of ESG metrics and successful case studies of well-crafted compensation plans that incentivize climate actions. Drawing on his extensive experience as a director and board advisor, Shai emphasized that executive compensation should be performance-linked to effectively promote sustainability within organizations.
Highlighting a global trend, Shai noted the increasing alignment of executive compensation with ESG metrics and associated incentive plans. He stressed that environmental sustainability (E) should be prioritized within companies' operations among ESG metrics and advocated for board members to attain climate literacy through relevant upskilling programs. He anticipated that more companies would establish dedicated committees focused on sustainability, risk management, finance, and human capital to drive sustainability initiatives further.
Shai underscored the pivotal role of board members as stewards of financial, intellectual, social, numan, and natural capital assets, emphasizing their duty to safeguard and enhance the future value of organizations by aligning incentives to promote sustainability-focused behavior change. He introduced WTW’s 5P Global Stewardship Model—encompassing Purpose, People, Planet, Protection, and Performance—explaining the necessity of aligning decisions, incentive structures, and performance metrics with the organization’s purpose to achieve long-term, tangible commercial success. Moreover, he stressed that a strategy-driven operational structure is essential for companies aiming to effect long-term changes, particularly as global industries increasingly embrace decarbonization initiatives.
Shai highlighted WTW’s 2023 research of circa 1200 global companies that 81% had incorporated ESG measures in their incentive plans. However, noting that only a few companies currently link Climate and Environmental metrics with long-term incentives, he urged participants to incorporate long-term sustainability ambitions to ensure sustained commitment. He recommended that effective incentive arrangements should reward both the annual efforts and milestones through the short-term incentives, as well as longer-term outcomes through the long-term incentive plan.
In his presentation of the executive compensation guidebook for climate transition, Shai stressed the necessity of aligning ESG priorities with business strategies as a crucial first step. He highlighted the importance of increased transparency and disclosure, as well as the need for continuous improvement throughout the sustainability transition journey. These measures, he explained, are essential for fostering a culture of sustainability and ensuring that organizations remain committed to their environmental goals.
Using practical examples, Shai introduced a design spectrum for aligning executive compensation by balancing the effort and outcomes of various sustainability transition actions. Drawing on the psychology of pay, he advocated for an incentive structure that adjusts compensation downward for unmet sustainability goals, rather than solely rewarding positive efforts. He also recommended standalone incentive plans to reward management for achieving long-term and stretched Climate aspirations. Challenging conventional norms, he proposed an alternate paragon for long-term incentives, whereby performance achievement is constant (eg 30% carbon emissions reduction) and time served as the variable the determined incentive achievement. The intent is to impress upon companies the sense of urgency in achieve Climate action goals; and the sinner they achieve said targets, the higher their incentive outcomes.
He also briefly shared WTW’s perspective on the crucial role of aligning incentives and Climate action within financial services companies;, which are vital stewards for economy-wide transitions. He reiterated that the core of aligned compensation rests on the principle of fairness to ensure personnel satisfaction. Shai concluded that well-designed incentive structures are essential for accelerating sustainable transitions, which are crucial in addressing current global environmental challenges. Participants gained valuable insights into designing compensation structures that incorporate ESG metrics and fine-tuning incentive schemes to enhance sustainability efforts within their organizations.
Click here for the recordings and slides
Comments