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How to design exec compensation to translate climate ambition into action: 3 steps for boards
For most companies, climate action has limited influence on executive decision-making. Here’s how boards can design compensation structures that motivate leaders to meet corporate climate ambitions.
Checklist: What do our current executive compensation structure and board composition look like?
- Do we have any climate-linked pay incentives in place?
- Do those compensation schemes include both annual and long-term environmental targets, or are they exclusively focused on short-term goals?
- Is leaders’ pay tied directly to the achievement of meaningful climate milestones?
- Do we have a dedicated sustainability committee at board level?
What boards can do
Here are three steps that boards can take to design incentive structures that will translate climate ambition into action:
1. Strengthen board governance around sustainability
Boards should institutionalize climate governance by establishing or empowering sustainability committees that oversee climate strategy, risk, and executive accountability. These committees should play a direct role in shaping climate-linked compensation, ensuring it is not only included but integrated into the company’s performance management mindset.
2. Design incentives that reflect strategic priorities
Executive pay should be structured to support the firm’s material climate risks, sector-specific decarbonization priorities, and climate targets. Climate-related KPIs must be carefully selected to reflect what truly drives sustainable value creation, not buried in aggregated ESG scores that dilute focus. Boards should ensure that pay structures are driving the right decisions for long-term resilience.
3. Embed climate accountability into short- and long-term pay
Boards should require the inclusion of climate-related targets in both annual bonuses and long-term incentive plans (LTIPs), and make sure those targets matter. For LTIPs, this means assigning meaningful weight (e.g., at least 15% of total compensation) and tying rewards to specific, externally verified climate outcomes. These targets must be clearly linked to the company’s long-term climate strategy, not vague ESG references.
Key takeaway
One of the most powerful levers at boards’ disposal is executive compensation. By tying leaders’ pay directly to the achievement of meaningful climate milestones, a company’s climate strategy will not just be well-designed but also effectively executed through leadership accountability.
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