Here are three steps that boards can take to design incentive structures that will translate climate ambition into action:
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.
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.
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.
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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