More than 80% of large EU-based companies are now integrating sustainability considerations in the compensation packages for senior executives, nearly twice the rate of their U.S. counterparts, according to a new report released by professional services firm KPMG.

The report also found that U.S. companies lag their global peers on tying sustainability factors in compensation to topics that are material to their businesses, and are much more focused on short-term sustainability targets.

For the report, KPMG examined the 2023 annual reports, as well as some compensation reports, of 375 public companies, encompassing the largest 25 companies by market capitalization in 15 countries, including Australia, Austria, Belgium, Canada, China, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, the UK and the U.S.

The report found that 78% of companies overall are integrating sustainability criteria into the compensation of their senior executives. By country, France led the group with 100% of companies assessed linking pay to sustainability factors, followed closely by Germany and the UK, at 24 out of 25 companies each. On average, 81% of EU companies were found to be tying pay to sustainability, while the U.S. was the least likely of all countries to include sustainability considerations in compensation, at only 44%.

Of the companies that did tie compensation to sustainability, U.S. companies were also found to be less likely to align the sustainability targets used to topics that are material to their businesses, with 60% of companies found to be fully or partially aligning the targets with material topics, compared with more than 85% of EU companies, and 88% of global companies.

The report also examined the topics used by companies for compensation-related sustainability targets, with climate change and companies’ own workforce by far the most popular factors considered. Within these categories, specific climate-focused targets frequently used included greenhouse gas emissions reduction, emissions intensity, energy consumption, share of renewable energy, while workforce targets included employee engagement index, percentage of female managers and executives, gender and equal pay gap, and injury rates.

The study also found significant regional differences in the time horizons considered for sustainability-related compensation. According to the report, among the companies tying sustainability to pay, 37% were found to be using both short-term and long-term sustainability targets, while 40% were using only short-term targets, and 23% using long-term only. Among U.S. companies, however, nearly all (10 out of 11) were found to be using only short-term targets. Countries with the highest number of companies considering both short- and long-term targets in sustainability-related compensation included Italy, at 20 out of 23, and France, at 19 out of 25, while Germany had the greatest number of companies considering only long-term targets, at 13 out of 23.

In the report, Nadine Hönighaus, Global ESG Governance Lead at KPMG International, said:

“Companies have made significant progress in recent years in identifying the risks and opportunities related to how sustainability is considered in a company’s strategy. However, in many instances, the realization of these opportunities or risks falls outside the normal business planning cycle. Therefore, incentivizing sustainability-minded behavior is a key element of an overall governance model that supports day-to-day decision-making.”

Click here to access the report.