Canadian companies adopting long-term sustainability metrics at a slower pace than in recent years

Canadian companies are adopting sustainability metrics in long-term incentive (LTI) plans at a slower rate than in prior years, according to WTW research. The number of S&P/TSX 60 companies with a sustainability, or environmental, social and governance (ESG), performance metric in their LTI plans increased by a single company to 17% in 2024 from 15% in 2023 and 7% in 2022.

This slower pace of adoption is driven, in part, by the challenge organizations face in identifying appropriate sustainability metrics and setting longer-term, quantifiable performance targets in a way that differs meaningfully from well-established sustainability measures in annual incentive plans. Another key factor is public perception: Investor fund flow to sustainability/ESG investment funds has decreased in recent years as the public discussion about ESG has become highly polarized.

Taken together, companies should take the time to appropriately capture sustainability objectives in their LTI plans. Metrics should align directly to company strategy and support long-term value creation.

How long-term sustainability/ESG metrics are incorporated into LTI

Based on our research, we found that Canadian companies are incorporating long-term sustainability/ESG metrics in their LTI plans as follows:

• Focus on the ‘E.’ 90% of companies with ESG in their LTI plans include a climate-related performance metric, most commonly tied to reductions in greenhouse gas emissions.
• Scorecard approach. A scorecard of three to five performance metrics within performance share unit (PSU) plans is becoming more common. Practice varies on scorecard design, but it is common to formally weight each metric with performance assessed on both a qualitative and quantitative basis.
• Lighter initial weightings. 90% of organizations incorporate ESG as a weighted performance metric with an average 17% weighting within their PSU plan or a 10% weighting in the overall LTI plan offering. While this may appear low, the median LTI award is three to four times greater than a Canadian executive’s target annual incentive, resulting in significant pay-at-risk tied to sustainability.
• Modifiers. 20% of companies are using ESG performance to modify overall PSU outcomes. Modifiers, often in the +/-10% range, help link overall company and ESG performance such that progress on sustainability goals (or a lack thereof) can improve (or reduce) overall payouts otherwise tied to share price or financial performance.

While the inclusion of sustainability/ESG performance in annual incentives is a majority practice (around 80% in both Canada and the United States), North America has materially lower prevalence of ESG in LTI plans compared to Europe and Asia Pacific (Figure 1).

In our client discussions, the focus is on finding suitable metrics that directly align to company strategy and support long-term value creation. This supports a more deliberate pace of change and suggests it is unlikely that North American companies will attain European levels of prevalence in the near future.

Enabling success with long-term sustainability/ESG incentive metrics

For companies seeking to better incorporate their sustainability objectives within executive pay plans, we recommend:

Adopting metrics tailored to the strategic, long-term direction of the business

Building accountability for senior management and signaling your sustainability priorities to stakeholders

Understanding that ESG metrics cannot cover the full spectrum of sustainability issues that matter to all stakeholders

Emphasizing a quantitative approach to target setting, tracking progress relative to your sustainability objectives

To explore the implications of this study on your organization, connect with your local WTW consultant or one of the authors.

Authors

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Michael Wach

Senior Director, Work & Rewards
WTW

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Megan Yip

Lead Associate, Executive Compensation and Board Advisory

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