Boards need to pause. As companies consider incentive plans to support their ESG journey, they need to evaluate whether the organization’s ESG strategy aligns with an integrated corporate strategy and whether these incentive plans enforce the behavior that the company wishes to drive.
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KPMG Elevate C-Suite Perspectives – Success in an environment filled with risk
While it may feel like incentive plans are the next step for your company’s ESG journey. Boards should pause and evaluate whether the organization’s ESG strategy aligns with and is integrated into corporate strategy, and whether the incentive plan enforces the behavior that the board wishes to drive.
Welcome to KPMG’s Elevate C-Suite Perspectives series
Issue 8 – Success in an environment filled with risk
KPMG insight on crafting ESG-related incentive plans
These days, showing real progress on environmental, social and governance (ESG) issues is becoming an essential element of doing business. CEOs and boards of directors are under intense pressure from stakeholders to effectively understand and implement a strategy surrounding ESG initiatives. And without a meaningful commitment to ESG, organizations face real risks—the ability to attract capital and customers, collaborate with other businesses, and recruit and retain top talent.
In response to all this, companies have been increasing their commitments to improving performance in ESG areas. Naturally, boards are looking to use incentives to ensure that executives pursue and are held accountable for these goals, as they have long used incentive compensation to enforce other strategic and financial objectives.
But before designing an appropriate ESG incentive program, companies must be sure they have a well-defined ESG strategy that is embedded in corporate objectives and initiatives (rather than treating it as a separate, siloed activity). Why? Because poorly-thought out incentives can backfire, causing frustration among executives, confusion among external stakeholders and hold back ESG progress in the organization.
Boards should ask if their organization is in fact far enough along the ESG journey to align ESG strategy with compensation. Has the board evaluated which ESG issues do customers, suppliers, and other internal and external stakeholders view as key to the company’s long-term strategy? Addressing such questions can help boards design ESG-related compensation programs that will work for the executives and the organization.
What you can do:
While it may feel like incentive plans are the next step for your company’s ESG journey, boards might want to pause and evaluate whether the organization’s ESG strategy aligns with and is integrated into corporate strategy, and whether the incentive plan enforces the behavior that the board wishes to drive. The KPMG Elevate solution provides expert data analysis, industry perspectives, and competitive insights to guide your most important strategic decisions and transform your operation when it comes to business reinvention.
Your next moves:
- Assess: Prioritize critical areas and set an enterprise wide ESG strategy that aligns with the broader business strategy and stakeholder expectations. Evaluate material areas and gauge the maturity of each to inform current positioning.
- Design: Strategize how ESG will be incorporated into the operating model of the company. Set specific targets and goals. Start to mitigate gaps in disclosure frameworks, processes, data and governance.
- Operationalize: Start by understanding the requirements to meet the outlined ESG commitments, then invest in the necessary capabilities (workforce, technology, infrastructure and governance).
- Measure and report: Formalize the metrics to monitor the achievements of the ESG strategy. Track return on investment and progress against plan. Also keep track of changes in relevant standards and ratings frameworks that are to occur.
For more insights and strategies, please download the KPMG report, “Implementing ESG incentives: How soon is too soon?” This is part one of a two-part series. Stay tuned for part two “Crafting effective incentive plans tied to ESG” releasing later this month.