Materiality: Tying priorities to executive compensation

Organizations that proactively identify and manage their material sustainability issues are better positioned to enhance their reputations, mitigate risks and promote growth. Material issues are sustainability factors with the potential to impact a company’s value drivers, competitive position and long-term shareholder value creation. They are often dependent on a company’s industry, business model and value chain. Material issues often mentioned by companies include climate-change strategy, corporate governance, business ethics and labour practices. Managing a company’s performance concerning these critical issues requires establishing targets and metrics and integrating executive compensation with these factors.

By aligning executive compensation with specific ESG metrics, companies can foster a culture of accountability and encourage leaders to prioritize long-term sustainability alongside financial performance.

Within our ESG Scores and data, underpinned by the S&P Global Corporate Sustainability Assessment (CSA), we assess whether companies have pinpointed essential metrics associated with their most pressing issues and whether these metrics affect executive committee member compensation.

The S&P Global CSA is an annual evaluation of sustainability practices that covers about 14,000 companies worldwide. In this review, we analyze data from 12,825 public companies across 20 industries on established targets or metrics linked to material issues and executive compensation.

Figure 1 shows that, on average, 40% of companies assessed in 2024 publicly disclosed materiality metrics and their progress in achieving targets linked to material topics. In reporting on established targets or metrics linked to material issues, the utilities sector led the way at 58%, followed by the materials sector at 56%. Disclosure in the real estate, industrials and energy sectors stood at 46%. The healthcare industry had the least disclosure of materiality metrics and progress at 22%.

Some of these sectors, especially utilities, materials and energy, have a greater impact on the environment and communities due to their direct operations. This can lead stakeholders and investors to demand more transparency on how these companies are managing their biggest impacts in terms of setting and progress toward targets. Additionally, these sectors are heavily regulated in terms of emissions and pollution control, resource extraction, and land use and worker safety. Hence, they are mandated to establish processes to measure risks and impacts, and to define mitigation plans.

On average, only 10% of the assessed companies linked executive compensation to target metrics for material issues, indicating significant room for improvement. Figure 2 shows a breakdown of this data by sector. Once again, utilities companies led the way with 27%, whereas healthcare companies reported the lowest numbers. The energy sector ranked second at 18%, while in the consumer staples, financials and industrials sectors, the share of companies was between 10% and 12%.

Tying executive compensation to materiality helps to align corporate leadership with the long-term interests of stakeholders and the wider community. By integrating material factors into compensation frameworks, organizations can incentivize executives to prioritize sustainable growth and responsible decision-making. Notably, on average, only 40% of companies reported on a materiality metric or target, and just 10% of the assessed universe linked executive compensation to specific material issue targets. While progress is being made, companies have a long way to go to effectively integrate materiality issues across their operations and performance management.