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November 1, 2021updated 07 Jul 2022 5:48am

Boardroom pay not reflecting soaring demand for ESG skills

Sustainability expertise has become a key priority for corporate boards in Europe but the sharp rise in demand for ESG-focused top-level executives has not driven an equivalent jump in pay, say recruiters.

By Adrian Murdoch

Executive ESG pay, salaries
No green premium: Remuneration for board-level ESG-focused individuals is now starting to match that for other executives of equivalent seniority. (Photo by ImagePixel via Getty Images)
  • Boardroom salaries for senior ESG experts are rising but remain below those of top executives in other key areas, say recruiters.
  • Reasons for this may include the difficulty of measuring ESG-related performance and the fact that ESG pay is coming from a low base.
  • In this nascent space, it is hard to pinpoint or assess relevant experience or to find talent possessing it.

The themes of ESG and sustainability have shot up the priority list for companies in recent years, to the extent that they are now central to executive management and boardroom thinking.

In the UK, for instance, the bonus plans of six in ten FTSE 100 companies now have some form of ESG component, shows a new survey published on 6 October by US professional services firm Alvarez & Marsal. Moreover, the share of companies polled incorporating an ESG measure in a long-term incentive plan doubled from 15% last year to 32%.

Indeed, ESG has risen 12 percentage points over the past year to become the second most important performance metric for boardroom bonuses, after profitability (see chart below).

“ESG metrics are not just the latest fashion: they are part of the new normal in executive remuneration,” says Nicolas Stratford, managing director in Alvarez & Marsal’s executive compensation services practice in London.

This new environment has driven a shift in hiring demand and expectations, recruiters tell Capital Monitor.

“All of our work with boards has ESG at the centre of it currently,” says Alice Breeden, London-based global lead of board effectiveness at search firm Heidrick & Struggles.

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Board pay ‘levelling out’

Yet the sharp rise in sustainability-related hiring has not yet translated into an equivalent jump in senior executive remuneration for ESG talent, with a few exceptions.

It is less a case of ESG specialists demanding a premium and more one of the playing field levelling out, says Gillian Karran-Cumberlege, London-based co-founder and head of board advisory at recruiter Fidelio Partners.

“The role is becoming more important and influential,” she adds. “Therefore it’s a more senior role within the organisation, but it doesn’t automatically have a seat on the executive committee.”

Ultimately, companies are still grappling with how to set remuneration for ESG expertise. Historically such employees have been paid at the lower end of the scale because sustainability experience was a ‘nice to have’ rather than essential element of a CV, say headhunters.

Adam Gates of Odgers Connect says the take-home pay for a chief sustainability officer is a lot lower than for other board members. (Photo courtesy of Odgers Berndtson)

The typical take-home salary is a lot lower for a chief sustainability officer (CSO) than for chief executives, chief financial officers (CFOs) and chief investment officers (CIOs), says Adam Gates, principal consultant in the insurance practice at Odgers Interim and head of Odgers Connect, part of the Odgers Berndtson group.

That said, he tells Capital Monitor, “the financials are probably getting there slowly but surely, and I don’t think that they are too far out of kilter”. Neither Gates nor other recruiters would be drawn on precise figures or percentage-level pay differentials.

ESG performance hard to measure

Still, linking ESG and pay is not easy, wrote Tom Gosling, executive fellow at the London Business School’s Centre for Corporate Governance on The Harvard Law School Forum on Corporate Governance in April. “By and large investors do not yet have a consistent or rigorous view about what good ESG performance looks like – and so there is no clear guidance for companies on a good ESG performance measure.”

Companies should also bear in mind that sustainability experts may be less motivated by salary than other incentives. The central factor in such individuals wanting to move, say headhunters, is to have the biggest impact they can over the next five to ten years.

As a result, says Gates, “I don’t think you can just throw money at [ESG-related hiring]. I think there’s got to be a story that people buy into.”

ESG metrics are not just the latest fashion: they are part of the new normal in executive remuneration. Nicolas Stratford, Alvarez & Marsal

A further challenge facing boards looking to bring in someone with ESG expertise or an appropriate background is that it is hard to pinpoint exactly what that looks like. Accountancy experience will invariably dominate a CFO’s CV, but it is still too early to describe the typical career path of a sustainability expert.

Similar findings were flagged by Capital Monitor research, published last month, into how banks are filling ESG job vacancies.

Experience as a CSO for a major global company would be invaluable, but such roles are still scarce. “There are not that many [sustainability] experts on boards and management teams, which is why they’re all grappling with the same problem,” says Gates. After all, he adds, no one was talking about ESG 20 years ago.

There is a tendency to seek candidates with engineering and science backgrounds because key areas of sustainability for companies, such as reducing carbon emissions, are science-based.

That said, the skills needed to lead sustainability on the board are broader. Karran-Cumberlege stresses that the best candidates do not “fit in boxes”. They need to be able to “listen externally and be very good at joining things up internally”, she says, citing the importance of an ability to link supply chain employees with production staff and to “break down silos”.

Drivers of ESG hiring demand

Recruiters compare the ESG-driven change in the hiring landscape to how technology hit the boardroom at the turn of the century. Just as digital expertise is now required for board members – rather than being a specialist skill – now clients are thinking the same way about sustainability, says Emma Penny, London-based principal in the investment management practice at Heidrick & Struggles.

Arguably environmental know-how is the top priority in this regard. “Rather like finance is the language of the boardroom, climate change – or a degree of climate change competence – is going to become a requisite to serve on boards,” says Fidelio’s Karran-Cumberlege.

In short, sustainability has gone mainstream and is ubiquitous.

“Customers want to know what a company’s ESG agenda is, its approach to climate change, how it is investing and what it is investing in,” says Gates.

Fidelio Partners' Gillian Karran-Cumberlege thinks climate change expertise is going to become a requisite to serve on boards. (Photo courtesy of Fidelio Partners)

Similarly, institutional investors increasingly want to know about a company’s net-zero plan, says Karran-Cumberlege, who works with numerous listed companies. There is a long list of companies that have set net-zero targets, but also a lot of scepticism around such commitments, at least partly because of a lack of legal accountability for them.

But pressure is coming from company employees too. Younger staff are interrogating their employers a lot more and are “less likely to hang around in a business for ten to 15 years” if they do not get the impression that the company is taking ESG seriously, says Gates.

And boards themselves are also driving change – particularly the newer members, who have most recently made the transition from executive roles, says Karran-Cumberlege. “They probably have [had] a lot more exposure at the executive level to sustainability,” she adds.

Reflecting the demand for ESG expertise, many universities are now “very hot” on sustainability, says Penny. And numerous sustainability-related qualifications have emerged, such as the CFA Institute’s Certificate in ESG Investing in March.

Financial firms dominating ESG recruitment

This latter development in particular may reflect that fact that financial services companies have recently been leading demand for ESG know-how. “If I had to single out one sector [for having the most ESG hiring activity], it’s probably financial services,” Karran-Cumberlege says.

Energy and mining companies – under pressure as big polluters – had been ahead of the curve in retooling their boards with a sustainability focus, but financial firms are now looking to tap their talent.

For example, Jessica Uhl, CFO of Anglo-Dutch oil major Royal Dutch Shell, was nominated to the board of investment bank Goldman Sachs in March. She joined the board in July as the first and only member to come from the fossil fuel sector.

The gathering momentum behind ESG and sustainability suggests salaries for proven experts in those areas will continue to rise, especially once their performance can be more easily quantified. However, trying to arrive at a standard for ESG board member salaries is regarded as very difficult – as it is for benchmarks for sustainability in general – and is likely to remain so.

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