Pay For Climate Performance

Climate change cost the U.S. over $90 billion in 2023.¹ Last year was the hottest year in recorded history and had a record physical impact. Swiss Re warns that rising temperatures are likely to reduce global wealth significantly by 2050 as crop yields fall, disease spreads, and rising seas consume coastal cities, among a host of other harms.²

Linking greenhouse gas emission reduction targets to executive compensation is one important lever by which CEOs can be incentivized to achieve timely and systematic progress on climate. This second edition of the Pay for Climate Performance report analyzes how effectively 100 of the largest U.S. companies by market capitalization, across 11 sectors of the economy, are currently linking GHG emissions reduction incentives to CEO remuneration. These 100 companies collectively represent a market capitalization of $28 trillion.³ Building upon the 2022 Pay for Climate Performance report’s analysis of 47 U.S. companies, this edition enables year-over-year comparisons and provides broader coverage across industries.

This report also provides a succinct overview of best practices and investor expectations, evaluates the 100 companies on how they incorporate climate metrics into CEO compensation, and considers the associated investor challenges in assessing climate-related CEO compensation incentives.

For CEOs to be motivated to achieve company-wide, science-aligned climate goals, rewards for climate-related achievements must be measurable, clear, and significant.

Too often, where climate-related linkages exist, they

• are predominantly qualitative, leaving significant and unwarranted discretion to compensation committees; or

• are non-transparent or overly complex quantitative climate metrics, which are difficult to understand and monitor; or

• include insignificant metrics not captured in the long-term incentive plan (LTIP), which is the substantial part of CEO pay.

The 100 companies assessed in this report were also evaluated in As You Sow’s 2023 Road to Zero Emissions report.⁴ Together, these reports provide insight into the effectiveness of linking CEO pay to climate metrics as a means of holding companies accountable for their emissions reduction performance, particularly achieving Paris aligned goals by 2050 or sooner. Generally, for the 100 companies assessed, despite increased linkage of CEO pay to climate metrics, the data indicate there is insufficient correlation between current pay practices and alignment of GHG company emissions with a 1.5°C pathway.

Establishing well-defined and measurable GHG reduction targets linked to well-designed CEO incentive structures is crucial to driving meaningful progress toward net zero emissions. Significant elements of such a pay package include

• linking compensation to 1.5°C climate targets with short-, medium-, and long-term goals;

• using quantitative rather than qualitative climate metrics that have a focus on effectiveness and little room for pay discretion;

• ensuring that linked climate metrics are transparent and easy to understand and monitor; and

• ensuring that compensation for achieving linked climate goals is significant.

Tracking progress over time is important to driving action. This report will continue to analyze companies for effective climate/compensation linkages and track which elements are best suited to driving company progress on climate. As it stands today, we are seeing too little progress in achieving Paris-aligned GHG emissions reductions even where executive compensation is linked to climate targets.

Similar to the 2022 Pay for Climate Performance report⁵ results, nearly 90% of the U.S. companies assessed this year received an overall grade of “D+” or lower (see Figures 1 and 2). The findings further reveal that over a third of companies do not have a climate incentive tied to their CEO compensation package. Of the 66 companies that do include a climate metric in their CEO compensation, only 30% have a measurable climate incentive. Even fewer had transparent and specific payouts likely to incentivize action. To ensure that climate-related pay linkages, where they exist, do more than enrich well-paid CEOs, investors should scrutinize compensation design and the rigor of climate metrics to ensure companies are effectively motivating CEOs to prioritize climate action and ensure long term financial sustainability.

KEY FINDINGS

• Over a third of companies do not have a climate-related incentive tied to their CEO compensation package. Of the 66 companies that do include a climate metric in their CEO compensation, only 20 companies had a measurable climate incentive, which is key to driving outcomes.

• Of the companies assessed, 88% received an overall grade of “D+” or lower. These companies either failed to link CEO compensation to climate metrics altogether or linked non-quantitative climate metrics with non-quantitative and/or non-significant pay criteria. This finding was similar to the 2022 scorecard findings, where 89% of companies (42 out of 47) earned a “D+” or lower.

• None of the assessed companies received an overall “A” grade. An “A” grade requires linking CEO compensation to an enterprise-wide, science-based, 1.5°C-aligned GHG emissions reduction target covering Scopes 1, 2, and 3. The GHG reduction target must also be measurable and within the LTIP at a significant level. Interestingly, Trane Technologies is the only company that ties 1.5°C-aligned emissions reduction targets to its annual compensation plan; however, its targets are not tied to a pre-defined level of CEO compensation in the LTIP, so the company earned a “C-” grade.

• Dow received a “B,” the highest overall score awarded. Dow received a “B” for linking CEO compensation to emissions reduction performance in its CEO’s LTIP and having a significant amount of pay related to achievement of its GHG emissions reduction goals.

• Eight companies improved their overall scores due to the addition of new climate-related metrics. In 2023, Dow increased its score from a “D-” to a “B” by adding a quantitative emissions reduction metric to its CEO compensation package. PPL, Boeing, Lyondell Basell, and Duke all added new quantitative climate metrics. Finally, Caterpillar and Lockheed added new, non-quantitative, climate-related metrics.

• Climate metrics are more commonly included in CEOs’ annual incentive plans (AIP) than in long term incentive plans (LTIPs). This likely results in limited incentivization since the annual bonus is generally a small portion of total compensation. Half of the companies assessed have at least one climate related metric in their AIP, and 16 companies have one in their LTIP.

• Among the 16 companies with climate-related incentives tied to the CEO’s LTIP, only 10 included a measurable and significant bonus.⁷ LTIP linkage is credited only for climate-related metrics with a designated percentage of the CEO’s performance shares within the LTIP. Xcel stood out with the highest weighting of 30%, demonstrating a strong commitment to attaining its company-wide, climate related goals. Additionally, three companies (PPL, Dow, and Valero) assigned a weight greater than 10% to climate metrics for awards granted under the LTIP, while five companies (Ameren, Southern, American Electric Power, Dominion, and EQT) gave a 10% bonus weight.  

• CA100+ companies are adding climate metrics to CEO compensation at higher rates and of better quality than non CA100+ companies. Among the 48 CA100+ companies on the scorecard, 37 had a climate metric tied to CEO compensation, and 16 were measurable.

• Climate incentives were not credited where offsets are or can be used to achieve linked targets. EQT and Excel both had measurable emissions reduction targets linked to the CEO’s LTIP but did not earn credit for them. The scorecard methodology does not award credit for targets that use, or allow the use of, offsets to meet emissions reduction targets. This principle is based on leading practices, such as the Science-Based Targets initiative (SBTi) that requires long-term decarbonization of 90 to 95% of a company’s emissions across all Scopes before 2050.⁸

• The technology, consumer goods, and real estate sectors have higher net zero performance but lower overall scores in the Pay for Climate Performance scorecard. This suggests that other mechanisms are driving climate performance in these sectors, such as the consumer facing nature of these companies, the risk of non-action to brand image, and the fact that climate emissions are generally not an integral part of their business model, may be driving such performance.

Endnotes

1. NOAA National Centers for Environmental Information. “2023: A historic year of U.S. billion-dollar weather and climate disasters,” https://www.climate.gov/news-features/blogs/beyond-data/2023-historic-year-us-billion-dollar-weather-and-climate-disasters.

2. Munich Re, “Record Thunderstorm Losses and Deadly Earthquakes: The Natural Disasters of 2023,” https://www.munichre.com/en/company/mediarelations/media-information-and-corporate-news/media-information/2024/natural-disasterfigures-2023.html.

3. Refinitiv, as of 4/1/2024.

4. David Shugar, Olivia Aldinger, and Danielle Fugere, Road to Zero Emissions: 100 Companies Ranked on Net Zero Progress 2023, https://static1.squarespace.com/static/59a706d4f5e2319b70240ef9/t/654173fbfb360c7445aa3d0c/1698788352229/AsYouSow2023_RoadToZero_v 5_FIN_20231031.pdf. This net zero report reviews companies’ climate transition progress by monitoring the transparency of climate-related disclosures, emissions reduction targets, and emissions reduction performance.

5. https://www.asyousow.org/report-page/2022-pay-for-climate-performance

6. Please see Annex D for additional information on rescored companies from 2022.

7. For the purposes of this scorecard, significant bonus is defined as at or above 5% of the total performance shares within the CEO’s LTIP.

8. Tom Dowdall, “Science-Based Net-Zero Targets: Less Net, More Zero,” Science Based Targets (blog), October 7, 2021, https://sciencebasedtargets.org/blog/science-based-net-zero-targets-less-net-more-zero#NetZero%20=%20Offsets%20Instead%20of%20Reducing%20Emissions.

Press Release
Webinar & Slides
Data Visualization