Feet to the Fire: How Should Companies Tie Executive Compensation to Climate Targets?

9 Pages Posted: 19 Dec 2023

See all articles by Ida Hempel

Ida Hempel

Galvanize Climate Solutions

Seth Kirkham

Galvanize Climate Solutions

David F. Larcker

Stanford Graduate School of Business; Stanford University - Hoover Institution; European Corporate Governance Institute (ECGI)

Asad Raman

Galvanize Climate Solutions

Brian Tayan

Stanford University - Graduate School of Business

Kira Varaday

Galvanize Climate Solutions

Date Written: December 12, 2023

Abstract

In recent years, many companies have made voluntary pledges to reduce their carbon footprint. In this Closer Look, we examine how some companies institutionalize their climate commitments through executive compensation contracts. We find considerable variation in the choices they make, the structure of their programs, method of implementation, and ongoing support at the board and executive levels. Based on these learnings, we identify best practices for companies serious about demonstrating their commitment to climate objectives to shareholders.

We ask:

• Why do so few companies include climate metrics in their bonus plans?
• What are the impediments to doing so, and how can they be overcome?
• Are commitments to carbon reduction driven by industry and market pressure, or commitment of the CEO and board?
• How realistic are the assumptions that underlie corporate projections for carbon reduction?
• How can outside investors determine whether a company will meet its objectives?

Keywords: Corporate governance, CEO compensation, climate change, reporting, carbon reduction, annual bonus, key performance indicators, long-term incentive programs, board of directors

Suggested Citation

Hempel, Ida and Kirkham, Seth and Larcker, David F. and Raman, Asad and Tayan, Brian and Varaday, Kira, Feet to the Fire: How Should Companies Tie Executive Compensation to Climate Targets? (December 12, 2023). Rock Center for Corporate Governance at Stanford University Working Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4668169

Ida Hempel (Contact Author)

Galvanize Climate Solutions ( email )

Seth Kirkham

Galvanize Climate Solutions ( email )

111 Sutter Street, 10th Floor
San Francisco, CA 94104
United States

David F. Larcker

Stanford Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Stanford University - Hoover Institution ( email )

Stanford, CA 94305
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Asad Raman

Galvanize Climate Solutions ( email )

111 Sutter Street, 10th Floor
San Francisco, CA 94104
United States

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Kira Varaday

Galvanize Climate Solutions ( email )

111 Sutter Street, 10th Floor
San Francisco, CA 94104
United States

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