UK CEOs given no incentive to tackle climate crisis

Fewer than one in 10 UK CEOs are offered any kind of financial incentive to make their businesses more environmentally friendly, according to new research.

Data released this week by the Vlerick Business School reveals that only 6% of the nation’s CEOs have a KPI focused on tackling the climate crisis in their contract, while only 1% have long-term incentives in this area.

The study – by Xavier Baeten, a professor in reward and sustainability and Director of the school’s Executive Remuneration Research Centre – explored the pay, habits and incentives of CEOs at 899 major European companies, including 159 of the UK’s biggest firms.

Its analysis revealed 90% of UK business heads are offered no financial incentive to focus on sustainability or environmental initiatives.

Instead, rewards are focused on income, revenue and profit, employees, customers, safety, innovation and shareholder return.

Professor Baeten said: “There is a general consensus in business, certainly among larger firms, that there is a climate crisis and that different stakeholders have to play a role in becoming part of the solution.

“They now understand how their practices are impacting the environment, and are actively looking to implement initiatives that focus on being more environmentally friendly.

“However, our research shows that for the overwhelming majority of UK firms, there is no incentive for the top CEOS to enact these environment focused initiatives and policies.”

The collated data also shows that though the majority of UK firms have included a least one non-financial KPI into their bonus plan, only 21 per cent of UK CEOs had a long-term incentive that was not related to the profit of the company or returns for shareholders.

Long-term incentives are a much more significant part of the remuneration package in the UK compared with other countries meaning that, according to the researchers, UK CEOs are much more strongly steered towards uplifting the share price compared with other countries.

Even though this is the ultimate measure of firm value in the long term, performance shares, a popular part of UK CEOs remuneration package, could very easily lead to sub-optimal behaviour.

Professor Baeten added: “Though there is a clear lack of these environmental KPIs, it would not be effective for governments to look to impose these KPIs to firms.

“It would be much more effective and beneficial if firms think about exactly how the climate crisis will affect them and then look to first develop a sustainability strategy focusing on what are for them the most important topic of this, taking into account their business.

“Then, after identifying these, firms can select the relevant KPIs to include in CEOs’ remuneration.”

The researchers also found other results about UK CEOs in comparison to their European colleagues, including UK CEOs earning significantly more than their colleagues in Belgium, Netherlands, Scandinavia and South Europe.

Despite this, 42% of UK CEOs have actually had a decrease in their packages over the past three years – with FTSE 100 firm CEOs’ median remuneration dropping to €3.9m from €4.3m in 2016.