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Faculty of Economics

CWPE Cover

Ritz, R.

Climate targets, executive compensation, and corporate strategy

CWPE2098

Abstract: Since the 2015 Paris Agreement, climate change – and wider environmental, social and governance (ESG) issues – have risen to board-level on the corporate agenda. Under increasing pressure from institutional investors, companies are reformulating their strategies for a climate-constrained world. A novel aspect of the emerging corporate response is that executive compensation is being linked to climate targets. At the world’s largest energy companies, climate metrics now make up 8% of CEO’s short-term incentive plans. This paper explains the case for corporate climate action, summarizes the use to date of climate-linked management incentives, and presents a framework for understanding their benefits and design challenges.

Keywords: Balanced scorecard, corporate climate action, corporate strategy, ESG, executive compensation, management incentives

JEL Codes: L21 M12 Q54

Author links: Robert Ritz  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2098.pdf

EPRG Paper Link: 2029

Open Access Link: https://doi.org/10.17863/CAM.62311