Linking Executive Compensation to Climate Performance

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.