Despite global challenges from many quarters around environmental, social and governance (ESG) policies and initiatives, European companies remain committed to driving outcomes against ESG goals through executive incentives.
Companies are refining their approach by establishing quality ESG metrics aligned with stewardship of shareholder value, especially with a focus on environmental resilience and human capital metrics, according to a new global study by WTW, a global advisory, broking and solutions company.
When looking at the top 300 companies in major European stock indices, 94% of companies incorporated at least one ESG metric in their executive incentive plan, which is stable from last year.
Eighty six per cent of European companies reported using ESG measures in their short-term incentive (STI) plans while 70% reported using ESG measures in their long-term incentive (LTI) plans.
Carbon emissions reduction metrics are by far the most prevalent ESG metric across Europe (70%), with the study reporting a six-percentage-point increase in the last year in the use of environmental metrics in European LTI plans.
Human capital metrics are also common across incentive plans, reported in 81% of plans in Europe, with metrics linked to diversity, equity, and inclusion (DEI) within management accounting for 44% and others linked to employee engagement accounting for 31%.
Despite a notable decline this year in the prevalence of metrics related to DEI in the US, in light of recent court rulings and executive orders, prevalence of DEI-related metrics has only slightly dropped across Europe (-3pp).
The impact of these developments in the US is more muted across Europe, countered by regulatory pressure and reporting frameworks such as the EU’s Corporate Sustainability Reporting Directive and Pay Transparency Directive encouraging sustainability progress and transparency.
While 56% of companies in Europe continued to use at least one DEI metric in their executive incentive plans, forward-looking reports indicate that 9% of companies that used a DEI metric in 2024-2025 fiscal year plan to remove it.
This trend is expected to grow as most companies do not disclose forward-looking changes to their incentive programmes.
Human capital metrics remain a top business priority, with boards looking to focus on identifying and measuring the specific metrics which align most to business value.
“The broad use of people metrics is consistent with the focus of boards as they continue to prioritise their role in the oversight and governance of human capital risks, investments and opportunities.” said Hannah Summers, board advisory director at WTW. “They are concentrating on developments in labour markets, skill shortages, employee retention, and labour costs, all of which they view as critical to company strategy and competitive advantage amidst geopolitical shifts and technology-driven business transformation.”
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