Final answer:
Sustainable pay links executive compensation to environmental, social, and governance (ESG) performance targets, aligning executive interests with the long-term sustainability of a company, its social impact, and environmental responsibility.
Step-by-step explanation:
Sustainable pay links executive compensation to environmental, social, and governance (ESG) performance targets. This means that executive rewards are not solely based on short-term financial performance, but also on the long-term sustainability of the company. Sustainability in this context includes a wide range of factors such as how the company impacts the environment, how it treats its employees, and the governance practices that guide its operations and strategies.
Using ESG metrics for executive compensation aligns the interests of the executives with the long-term health of the company, the society, and the environment. This approach is a reflection of stakeholder theory, which argues that a company should take into account the interests of all its stakeholders, not just shareholders. It goes beyond traditional measures like market share or customer satisfaction and embraces a broader vision of success.
Examples of ESG performance targets could include reducing carbon emissions, ensuring safe labor practices, or implementing governance reforms. By tying executive compensation to these outcomes, companies aim to encourage sustainable business practices that can lead to both short and long-term benefits.