European insurers paying executives more to hit new ESG targets

European insurers have nearly tripled the weight of ESG factors in the long-term incentive programmes driving executive pay over the past two years, albeit to a still-moderate 11%, and a majority of insurers have packed related targets into short-term variable pay plans as well.

Changes in executive variable pay drivers are considered modest in 2022, analysts at the Deutsche Bank brokerage said in recent research following publication of 2021 annual and ESG reports.  But the changes being tracked have clearly become “notable” on a five-year cumulative basis.

Long-term incentive metrics, chiefly for payment via deferred stock options, continue to be dominated by financial metrics and total shareholder return. That leaves some 15% weighting for non-financial metrics, chiefly ESG “which continues to become a more relevant component.” In the latest round of changes, ESG has been squeezing out cash- and capital-generation metrics.

Short-term incentive metrics, chiefly resulting in annual cash payments amongst the continental European firms, are most recently at a roughly 70-30 split between financial and non-financial metrics on average. Of the latter, some 60% of the firms in the Deutsche Bank coverage universe included “some sort of customer, employee and/or ESG-related targets.”

AXA,  Allianz and  Munich Re were called out for above-par inclusion of ESG in long-term incentive structures.

AXA remains at the forefront on account of what analysts estimate is 25-30% ESG in variable compensation. “The group has maintained its leadership on ESG as a driver of management remuneration,” analysts wrote. ESG is 30% of the long-term drivers thanks to target in Dow Jones Sustainability Index placement, carbon reduction and female executive counts. Amongst short-term bonus drivers, an estimated 25% are based on ESG targets for reduced carbon footprint of the asset book as well as employee and customer metrics. Stubbornness on auditor selection remains a stand-out negative.

Munich Re has bolstered what Deutsche considers a “straightforward” variable remuneration model with a nearly market-leading 20% weighting for “explicit ESG targets” in its long-term schemes. Deutsche Bank prefers the new model to a prior “softer” version based on loose adjustments to a broader measure.

Generali has previously fallen short of the leader board, but did take praise for “a push towards ESG measures.” Sustainability and people values have crept into the short-term incentive structure while gender equity and green/sustainable bond investments have worked their way into the long-term variable pay targets.

At  Zurich, ESG “remains notably absent” from long-term incentives and Deutsche Bank analysts are looking towards a strategy update due later this year for changes.

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