Whether it be to improve an employer brand or align financial with non-financial priorities, there is a growing trend towards including CSR criteria in pay packages and it is one that underlines major disparities between different businesses and sectors.

A (highly) variable component

Listed firms have made a real effort to become more transparent in recent years, including when it comes to compensation. Where CSR criteria are concerned, the key question has switched from: “should we consider them or not?” to “what portion should we allocate to them?”. Some 100% of CAC 40 firms now include CSR metrics in their executive pay packages. In what is undoubtedly an underlying trend, these non-financial components now account for between 10% and 30% of the annual bonuses awarded by firms in France’s stock market index¹ (with an average of 24%). Groups like Veolia (where such aspects account for 50% of long-term variable compensation) and L’Oréal (where carbon neutrality is a prerequisite for payment) have proved exemplary, especially as regards the types of criteria they use. And yet few firms are actually increasing this portion. The emphasis instead is on ensuring strict application of the formulae used and on selecting criteria that correspond to the firm’s core issues. In the meantime, various specialist consultancies are carrying out awareness and training campaigns for executives in order to instil a shared understanding of the CSR issues that are material to their respective firms.

The eternal tragedy of horizons

It is clear that a firm seeking to reconcile non-financial performance with overall performance while instilling a CSR culture cannot overlook the “compensation” aspect, be it short-term or long-term compensation; failure to consider this aspect risks limiting the scope of its CSR approach. As cynical as it may seem, influencing the executives of portfolio companies by indexing their variable compensation to non-financial criteria is among the conditions for corporate engagement on environmental and societal matters. And given the lack of understanding surrounding pay packages that can run into the millions of euros, reforms to impose stricter ESG criteria can in some cases lead to better alignment between the interests of executives and employees. However, there is some contention within compensation committees regarding the types of targets set and the time-horizons over which they should be measured, indicating that there is a lack of maturity surrounding the matter. The CSRD (Europe’s Corporate Sustainability Reporting Directive) was designed to standardise practices and improve transparency. The main problem is that a company’s various environmental and societal impacts tend to materialise over long-term horizons. Certain long-term targets lack predictability, whereas the chances of achieving annual milestones are easier to gauge.

From Say on Pay to Say on ESG: heading towards strategic alignment?

For the record, the Afep-Medef Code recommends including one or more CSR-based criteria when determining executive pay packages, with at least one criterion relating to the firm’s climate targets and a preference for quantifiable criteria. There is no single approach, but some metrics are referred to more frequently because they are measurable: Scope 1 and 2 greenhouse gas emissions, equal pay for men and women, diversity and inclusion, in-house training on sustainable development, etc. But it can be difficult to avoid a certain lack of objectivity given the way in which data are collected and analysed in some cases. For instance, the CEO of TotalEnergies received his entire variable compensation package in 2022 thanks to a reduction in carbon emissions (excluding Scope 3), execution of a CSR strategy and a number of purely qualitative indicators.

According to the Proxinvest consultancy when questioned in October 2024, the number of ESG-based compensation criteria has increased 3-fold in the space of 4 years to over 200 different ESG criteria now applied within CAC 40 companies. Indicators must be “quantifiable, auditable and relevant” and there should be no scope for greenwashing, at the risk of undermining one’s credibility. Shareholders who vote on such compensation packages each year are by no means unanimous when it comes to indicators that are external to a company, such as ESG rating targets (along the lines of MSCI ratings). These indicators tend to be replaced by metrics over which executives and employees have some leeway.

A need to broaden the scope

Norm-based frameworks so far remain focused on executive corporate officers, but a company might be able to instil a CSR culture more easily if employees were also included in a selective and pertinent manner.

It is not always simple to put strategy into action, whether by including CSR-based targets in annual compensation packages or by promoting them on a voluntary basis. When adherence to corporate values is lacking and a firm has no local ambassadors promoting these values, it can then be difficult for such initiatives to take root on a day-to-day basis; this can create a disconnect between the firm’s strategy, its staff’s understanding of the strategy and action taken on the ground. Staff members can often be rallied together if there is a dynamic network of CSR ambassadors in place.

And although large groups have taken the lead in this arena, it seems that ISEs and SMEs need to move forward in smaller steps. Specifically, examples of best practices can include allocating carbon budgets to different departments depending on their business lines and projects, or offering employees the chance to choose from a catalogue of collective targets based on the firm’s strategic pillars. Last of all, including CSR criteria in discretionary and statutory profit-sharing agreements can send a positive signal to a firm’s employees and the market. A general trend seems to have taken shape in recent years, including in the private equity sphere, with mechanisms such as the management package² and carried interest³.

The proprietary system for assigning company ESG ratings used here at Mandarine Gestion values CSR performance criteria highly as we believe they send out a positive signal to investors. This is also a question that arises frequently in our discussions with companies of all sizes as we encourage them to set guidelines on the matter.

To conclude, there is still a long way to go before non-financial aspects are considered on a par with financial aspects in the field of executive pay. Questions could be raised about the relevance of certain ESG criteria, to the extent that the non-financial criteria applied could be accused of compensating for poor financial performance when awarding executive pay packages. Similarly, investors need to examine the market for sustainability-linked bonds⁴ closely to gauge the quality of the criteria selected, as sustainability-linked compensation⁵ still ought to be taken with a good pinch of salt.

¹Source: PWC study “Corporate Social Responsibility criteria and compensation: strategic alignment?”, January 2024.

²A management package consists of sustainability metrics to be met by a fund’s holdings.

³Carried interest is a practice that consists in awarding compensation to investment teams depending on the degree to which targets are met. This compensation consists of the portion of capital gains realised by a fund over and above a predetermined yield threshold.

Sustainability-linked bonds are bonds whose interest rates vary depending on the attainment of social or environmental performance targets (decarbonisation, waste management and sustainable use of water resources, health and safety, gender equality, staff training, etc.).

⁵Sustainability-linked compensation: a mechanism that links compensation to sustainable development

Executive pay and ESG-based criteria: a toolbox that is still lacking?

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