Linking Executive Compensation to Climate Performance

Abstract

Governance Linking Executive Compensation to Climate Performance California Management Review 2022, Vol. 64(3) 124 –140 © The Regents of the University of California 2022 Article reuse guidelines: https://doi.org/10.1177/00081256221077470 sagepub.com/journals-permissions DOI: 10.1177/00081256221077470 journals.sagepub.com/home/cmr Robert A. Ritz1 SUMMARY Climate change has risen to board level on the corporate agenda. Under pressure from institutional investors, companies are reformulating their strategies for a low- carbon world. A novel aspect of the emerging corporate response is that executive compensation is being linked to climate performance. This article examines the different ways that climate-linked incentive pay is used at European and U.S. energy majors, and it develops a framework—aimed at companies in “hard-to-decarbonize” sectors—to understand the benefits, challenges, and key design options. It also makes recommendations on how this organizational practice might be refined over time. KEYwoRdS: balanced scorecard, corporate climate action, corporate strategy, ESG, executive compensation, management incentives w ith the 2015 Paris Agreement to limit global warming to well below +2 degrees, climate change has moved back up in the policy agenda. Governments around the world are developing policies to help achieve global climate tar- gets. At the same time, climate change—and wider environmental, social, and governance (ESG) issues—has risen to the board level on …

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