Evolving ESG metrics 
and employee 
compensation: 
The way forward
Board Leadership Center (India)
January 2023
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The evolving environmental, social, and governance 
(ESG) landscape has been stimulated by recent 	
technological disruptions, unprecedented health crisis, 
mounting social disparities, and global climate crisis. 
Today, every organisation has embraced an ESG agenda 
to ensure responsible business practices throughout 
their value chain. The current approach looks far beyond 
the traditional ESG criteria and adopts financial metrics 
to bring sustainability as a critical evaluation parameter 
for employee remuneration. As forward-looking 	
organisations delve deeper into ESG goal setting, they 
recognise employees are at the fulcrum of progressing 
action. In lieu of the same, incentivising employees 
through integrating ESG into the payroll can potentially 
accelerate the company’s overall ESG agenda. Incentive 
plans which reflect the synthesis of ESG goals into 
them, harness the ability to align employee behaviour, 
actions and efforts towards the attainment of the 
company’s ESG objectives.	
	
	
	
	
	
	
	
	
	
Previously, the ESG Council of KPMG in India’s Board 
Leadership Center (BLC) has shared perspectives on 
incentivising ESG linked performance. It highlighted how 
ESG metrics are rapidly making their way into corporate 
boardrooms and becoming a prominent component of 
incentivising C-Suite. This document furthers the 
discussion on ESG linked remuneration and delves deep 
into the ecosystem required for integrating ESG factors 
into the employee pay structure.
Socially responsible organisations are moving beyond 
just making assurances and claims about their ESG 
commitments to connecting the dots between the 
organisations‘ ESG vision and empowering employees as 
enablers for achieving ESG targets.
Embracing ESG practises that prioritise social and 
environmental concerns drives employee loyalty that 
enhances productivity and fosters workplace success.
Our experience suggests that it is important for organisations to involve employees for driving the culture through incentivisation and also 
making them accountable for the determined objectives. There is enough empirical evidence and some companies in 2021,handed over payouts 
around 100% of target. In 2021, we know several examples where the ESG metric rating at 100% reduced the very strong interim weighted 
payout from their financial results. 	
	
	
	
	
	
	
	
	
	
	
Source: The perils and promise of ESG based compensation- a response to Bebchuk and Tallarita | Harvard Law School Forum on Corporate 
Governance | 27 April 2022
© 2023 KPMG Assurance and Consulting Services LLP, an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
Relevance of ESG linked remuneration 	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
94%
of investors want an 
ESG metric in their 
incentive plans.
86%
86%
of directors across 
the companies 
support the usage 
of non-ﬁnancial 
goals.
of S&P 500  
 
companies  
integrated ESG 
metrics in their 
incentive plans in 
2020. 
of employees want 
to work with the 
companies with 
same ESG values 
that employees 
have.
of large companies 
have already added 
an ESG metric.
60%
57%
Decoding the maze of ESG incorporation into pay	 	
	
	
	
	
	
	
	
	
Incorporating ESG metrics into incentive plans requires 
carefully designing and calibrating achievable and 	
palatable goals. In 2021, ESG-linked pay appeared as an 
emerging trend with companies deploying social and 
environmental metrics into their employee remuneration 
plans. As companies enter the unchartered waters of 
ESG linked employee remuneration, a robust action plan 
is required. The steps below aim to accelerate the 	
effective integration of ESG through fostering an ESG 
culture, alignment with the company vision, stakeholder 
inclusivity and appropriate metric identification.	 	
	
	
	
	
	
2021
63%
Environmental
87%
Social
47%
Governance
	
	
	
	
	
	
	
	
Source: Inclusion of ESG metrics in incentive plans evolution or 
revolution | 30 March 2021	
	
	
	
	
	
	
	
	
	
	
	
STEP 1: 
Nurturing an ESG-centric culture
The Board and its committees are the custodian of 
shaping the sustainability culture and hence it is the 
responsibility of the Board to cascade an ESG mindset 
across the organisation. In lieu of the same, Board’s 
Nomination and Remuneration Committee (NRC) will 
have to realign incentives to reflect the shifting focus.  
The critical role of the Board includes setting the tone at 
the top, agreeing on a common language, creating a 
sense of purpose, and communicating their direction, 
goals, vision, and strategies with regard to ESG issues to 
key stakeholders through various communications 
channels. For nurturing a strong culture, ESG mindset 
must be cascaded throughout the company by building 
capabilities and awareness. 	
	
	
	
	
	
	
	
	
	
	
	
	
STEP 2: Aligning with vision, mission
and business strategy		
	
	
	
	
	
	
	
	
	
	
	
	
Using company’s purpose, vision, and strategy, the ESG 
linked pay structure can be weaved in the existing remu­
neration processes. The pay structures implemented by 
the compensation committee must be modified to be 
inclusive of ESG performance as well as the latest 
prevailing approaches in the ESG compensation land­
scape. The NRC will further be responsible for bringing 
structural changes and defining key responsibilities.  	
	
	
	
	
	
	
	
	
	
STEP 3: Engaging with stakeholders	
	
	
	
	
	
	
	
	
	
	
Companies must be cognisant of the varying perspective 
of their stakeholders to gauge whether they are on the 
right path. They must engage in thoughtful and cautious 
dialogue with internal and external stakeholders. Inter­
nally, the appropriate set of employees must be identified 
in order to garner their perspective on the identified goals 
and existing metrics. Their opinions are translated to the 
Board‘s NRC which further designs appropriate mecha­
nisms and incentive plans in line with the employees‘ 
expectations of the ESG metrics. Companies can narrow 
down on the most important ESG metrics by conducting 
periodic ESG materiality assessments and augmenting 
with stakeholder engagement initiatives.		
	
	
	
	
	
	
	
	
	
	
STEP 4: Identify the appropriate metrics
ESG metrics must be identified and tracked by the NRC 
to construct reward benchmarks and reinforce the 
company‘s ESG strategy and culture. Employee compen­
sation based on ESG metrics has a simple rationale: pay 
should be correlated with the efficiency that improves a 
business‘s ability to create value for its stakeholders. 
However, for employee compensation plans to succeed, 
they must have precise targets supported by KPIs that 
align with the corporate strategy. When a company 
chooses to incentivise employee pay with non-financial 
ESG metrics, the metrics should be measurable and 
transparently communicated. It should be appropriately 
structured into the pay component either as short-term, 
long-term incentives or both, depending on the 	 	
company’s goal and the sector it will be implemented in.
Bringing ESG remuneration into action
The key ESG focus areas for an organisation are identified 
in line with the company’s larger vision and stakeholder 
expectations through a structured materiality process. 
NRC will play a critical role in reinforcing accountability of 
the key ESG focus areas by devising specific targets with 
support from relevant functions. It is important the KRAs 
must be aligned with the company’s ESG objectives and 
the individual employee roles. This approach will ensure 
horizontal as well as vertical integration of ESG based pay.
Across its current charter of responsibilities, the NRC can 
implement relevant metrics through the identified KRAs 
that align the departments’ efforts to achieve ESG 
objectives. Clearly defined metrics can be further given 
weightage to formulate the compensation structure of the 
entire workforce in action. These performance metrics 
can be linked to the remuneration and rewards platform 
using the tools mentioned in KPMG in India‘s previous 
PoV, “Incentivising ESG linked performance.”

Leverage stakeholder engagement to identify key material topics in line with key critical goals and targets 
Engage with stakeholders for their buy-ins on ESG linked remuneration  
Adjust the existing mission and vision to be inclusive of ESG  
Functional 
department
Research and Development 
Illustrative 
metrics
Role in ESG
Water
Human rights 
Research and 
Development 
Operations
Packaging 
• Design 
products with 
an eco- 
conscious lens 
• Modify 
product 
requirements 
for lesser 
water quantity.
• Modify process 
requirements 
to practice 
reduce, reuse 
and recycle 
• Drive Zero 
Liquid 
Discharge
(ZLD) facilities. 
• Develop           
sustainable 
procurement 
policies 
• Supplier
screening to 
drive the 
sustainability 
agenda across 
the value chain
• Optimising 
utilisation of 
resources
during product
development 
• Drive 
responsible 
consumption
by developing 
products that 
reduce post 
consumption 
footprint. 
• Ensure 
sustainable 
logistics to 
collect, 
segregate and 
recycle plastic 
packaging 
waste.
• Develop policies 
which ensure 
equal 
remuneration, 
and address child 
labour as well as 
forced labour 
• Conduct regular 
training on 
human rights 
• Enhance diversity 
and inclusion 
through policies 
and initiatives. 
Human 
Resource
Procurement
Engineering
Logistics
The material issues should be made relevant to 
speciﬁc departments/functions who can take the 
overall responsibility of its implementation. It is 
important to identify and task the roles and  
responsibilities of each functional department that are 
critical in improving the performance of the material 
topic.
The NRC further plays a role in conducting awareness 
sessions and assigning weightages to the KRA’s for 
respective departments across the organisation to 
drive the pay program effectively. 
Once the departments are identiﬁed, discussion with 
the functional heads will help in identifying the 
relevant KRAs (target) to be set on Y-O-Y basis in 
order to achieve the ESG objectives. The KRAs can be 
further enhanced and deﬁned in a strategic manner 
based on its alignment with the department speciﬁc 
priorities. These quantiﬁable objectives should be 
discussed with employees and mapped to their skills 
and goal sheets in order to achieve maximum 
participation and transparency. 
• Achieve 5% of the target to 
become water secure
• The company recycles > 20% 
water (plant owned locations).
• Increase women 
diversity by 30%
• Enhance the 
number of
trainings 
conducted by 
5%. 
• Achieve 15% of recycled content within the 
company's plastic packaging
• Reduce the packaging-to-product weight 
ratio by 2%.
Customer 
safety
• Maintain product 
safety and quality 
standards by 
ensuring
adherence to 
governmental 
guidelines and 
regulations
• Effective A/B and 
pilot testing of 
products before 
making them 
available to the 
general public.
Operations 
and Customer 
Relations
• Ensure zero 
incidents
regarding 
cybersecurity
breaches.   
NRC to determine the appropriate quantum of weightage for each of the determined metrics  
The framework below illustrates the steps for assimilating and expanding ESG metrics across functional levels of an organisation and tailoring the ESG journey for every single employee. The relevant role of the functional departments in 
implementing ESG and the specific metrics set for them are disclosed in in the framework below which are illustrative in nature.
© 2023 KPMG Assurance and Consulting Services LLP, an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Proceeding with prudence
As organisations navigate through the growing momentum around ESG compensation, they may stumble across certain challenges for seemless implementation of ESG linked pay. Linking ESG measures and employee remuneration can be a 
robust mechanism and requires puissant measures to promote and implement change. To create an effective incentive design, companies should have trust in their metrics before integrating ESG goals into pay. 
On the flip side of the coin, ESG linked pay program presents a myraid of benefits which can be availed for augmenting sustainable value creation. For companies that can endeavour a pre-emptive journey through the high tide of ESG remune­
ration will sail faster and for the rest, it will be a rough tide. 
Incentivise management teams 
to integrate material ESG goals 
into corporate agendas
Help lessen scrutiny from 
investors, regulators, and 
other stakeholders 
Increase corporate value by putting 
less emphasis on short-term 
performance targets and more on 
long-term sustainability objectives
Better accountability on 
sustainability-related performance 
across management 
Provides employees with 
a sense of purpose which 
correlates with higher job 
satisfaction and 
productivity 
We would like to extend our gratitude towards the ESG and NRC council members for their valuable time, insights and perspectives that have contributed towards the development of this document.	
	
	
	
ESG Council Members: Mr. Mukund Rajan, Mr. Santhosh Jayaram, Mr. Shailesh Haribhakti	; NRC Council Members: Ms. Neelam Dhawan, Ms. Sangeeta Talwar, Mr. Vimal Bhandari
KPMG in India contacts:
Ritesh Tiwari
Partner,
Board Leadership Center
E: riteshtiwari@kpmg.com
Prathmesh Raichura
Partner,
ESG
E: prathmesh@kpmg.com
Sunit Sinha
Partner and Head, 
People, Performance and Culture
E: sunitsinha@kpmg.com
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is 
received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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