Base your compensation policy on what really matters
With the introduction of the CSRD for large companies, a new tool has been added: the Double Materiality Assessment (DMA). With this, the company identifies what is relevant to the company and its stakeholders in terms of natural and societal spheres. This assessment is not so much a reporting tool but rather a strategic instrument that provides a clear focus on the truly relevant topics. One would expect that the most impactful sustainability themes would be incorporated into the strategy and, logically, into the compensation policy. I call this the inside-out perspective. In practice, however, this connection is often not yet visible, with more often than not an outside-in perspective: we look at what is customary in the market, both in terms of salary levels and structure, and let this dictate the compensation. Even though supervisory board members claim the opposite, the fear of lagging behind the market – ‘are we paying enough?’ – almost always prevails in the end.
Reward Value is, in collaboration with the Goldschmeding Foundation, conducting research into what we call the Executive Remuneration Compass: a model in which executive remuneration is linked to the long-term value creation of the organization in terms of financial, societal, and natural capital. Our behavioral research clearly shows that the compensation structure has a major influence on directors’ behavior and that their intrinsic motivation can be positively or negatively influenced by external incentives. Even an intrinsically visionary director will unconsciously shift his or her focus to the short term if the compensation system provides that incentive. Conversely, it appears that challenging goals and relevant weighting in compensation do indeed elicit different behavior, provided they are consistently and credibly integrated into the overall compensation model. In short, compensation is an important steering instrument. You can use it as an additional lever to achieve the desired strategic goals.
Focus on non-financial goals
While companies do set a clear focus on their financial objectives, with at most two or three hard targets that influence compensation, on the non-financial side we often see a laundry list of as many as ten to fifteen mini-objectives: CO2 reduction, renewable raw materials, improving water quality, working conditions, diversity... So, while the number of societal issues has indeed increased, no clear choices are being made, and the impact on compensation is limited. It seems that companies are primarily focused on satisfying every possible stakeholder and showing the outside world that they are doing well in the area of sustainability. This results in a rather meaningless list without a clear hierarchy: which of these topics do we, as a company, truly consider important?
Our analysis of the top hundred European companies speaks volumes in this regard. We examined the so-called ultimate relevance of a performance target (a single KPI). We express this as a percentage of the executive’s total compensation (the sum of the fixed salary, bonus, and long-term incentive). On average, a single financial KPI in the short-term bonus accounts for about 6.3 percent of the executive compensation. For a non-financial KPI, this is only about 1.6 percent, roughly a quarter. On the long-term side, the financial KPI amounts to approximately seventeen percent of total executive compensation, while the non-financial KPI accounts for only about 3.8 percent. Proportionally, therefore, much more value is assigned to financial targets, and they have a much greater impact on total compensation. It pays more to keep the cash flow in order, so to speak, than to reduce CO2 emissions or raise employee satisfaction by a point.
No gathering breadcrumbs
Ultimately, as our behavioral research shows, executives pay most attention to objectives that can earn them relatively high returns. It is therefore time for supervisory board members to also focus on non-financial topics and translate the two or three most relevant topics for the organization into executive compensation. You cannot expect executives to give equal attention to ten or twenty items. By setting priorities, you not only give executives direction; by giving those material elements greater weight, you also positively influence their intrinsic motivation in the desired direction. In other words, if, as a supervisory board, you decide to include non-financial elements alongside financial ones, it only makes sense if those elements truly impact the total compensation. Gathering breadcrumbs will not work. The big pieces get picked up, and the crumbs fall to the floor.
However, when I look at current proposals from listed Dutch companies drafting new compensation policies, they still focus primarily on the amount and much less on the structure. The balance between financial goals and sustainability goals barely changes; companies continue to navigate a jungle of diverse non-financial topics. The step toward a true inside-out perspective – where the most important sustainability themes become the basis for top executive compensation – is being taken too rarely. This is also evident from the figures in our analysis of annual reports for 2023 and 2024 (before and after the introduction of the CSRD). Paradoxically, since the CSRD requirement took effect, companies have actually opted for sustainability in their remuneration policies less frequently. The share of truly relevant sustainability themes in the reports fell from twenty-five to twenty-three percent. The translation of those themes into compensation policy stalled at just six percent. Before the CSRD, this figure was still eight percent. The new legislation is therefore not yet leading to ‘greener’ bonuses. And this despite the fact that the insights now gained from the materiality assessment offer an excellent opportunity to redefine where, as an organization, you want to add value to the company and to society in both the short and long term. This assessment facilitates the choices that must be made to incorporate non-financial objectives into the compensation policy.
Risk of reputational damage
A balanced compensation policy takes into account fairness within the organization (is the pay gap between employees and management too wide?), fairness among board members (are we paying in line with market rates?), and fairness based on performance (has the long-term value growth and the intended impact on society been achieved?). Drafting such a compensation policy is the responsibility of the triad of management, supervisory board, and shareholders. The supervisory board cannot leave the determination of the compensation structure to management and external benchmarking.
The remuneration committee will need to establish a policy, in close consultation with the nomination and sustainability committees and in line with the established strategy, that focuses on long-term objectives in the interest of natural and societal stakeholders: an inside-out process in which the remuneration policy is a true reflection of the company's purpose. Shareholders must approve the compensation policy and therefore have a significant say in shaping that policy. They currently exercise this influence relatively little. The funds have become large and complex, and asset managers' focus is more on the systemic risks across the entire portfolio than on risks related to individual companies. To promote active stewardship by shareholders, it would be helpful to gain more insight into the time horizon of sustainability investments. The trend is that asset managers relatively often opt for the shorter term, while an increasing body of research shows that there is indeed a business case for those sustainable investments – even though that horizon often lies somewhat further away.
We are conducting further research into this in collaboration with the Goldschmeding Foundation. Anyone examining compensation policy must, in any case, do so with the awareness that this is a reputationally risky issue. When society views companies critically, it is often due to excessively high or too complex compensation packages, or the perceived unfairness of, for example, major pollution or reorganizations taking place, yet huge bonuses for executives. If only to mitigate this reputational risk, a new compensation policy is needed that does not primarily follow the market but rather serves as the ultimate litmus test for what the company truly stands for.
This essay was published in Management Scope 06 2026.