Firms that peg CEOs’ pay to ESG goals must be clear how it fits with their strategy

SHOULD a chief executive’s salary be bumped up if the company reduces its carbon emissions or improves on the gender diversity of its board? More companies are mulling this question – whether to tie their leadership’s salaries to environmental, social and governance (ESG) outcomes.

The answer isn’t just a simple yes or no, but involves a big “why” and “how”. Companies that choose to adopt “ESG-linked salaries” should focus not just on the act itself, but also examine how the practice fits into their broader strategy, and whether target fulfilment can be verified.

Poorly implemented ESG-linked pay is arguably worse than not even adopting the measure. Companies run the risk of having conflicting objectives, or even being accused of greenwashing.