Driving Sustainability: How German Companies Link Executive Bonuses to CO₂ Reduction

More and more companies in Germany are directly linking bonuses to CO₂ reduction targets. Why? Because it works. This approach not only motivates executives, but also leads to measurable reductions in CO₂ emissions. Here are the key points:

• Clear goal: Reduce CO₂ emissions and promote sustainable action.
• Success stories: Deutsche Bank (25% of CEO bonuses tied to ESG targets), Volkswagen (CO₂ reduction as a bonus criterion).
• Benefits: Enhanced reputation, greater appeal to investors, compliance with legal requirements.
• Rules: Transparency, measurable targets (e.g., SMART method), adherence to standards such as the German Corporate Governance Code (DCGK).
• Technology helps: Tools for CO₂ measurement and reporting make implementation easier, with digital platforms and AI-driven analytics now streamlining data collection and verification (McKinsey).

Companies that integrate CO₂ targets into their compensation systems are investing in the future—for the environment and for business success. According to a 2023 Deloitte survey, 59% of global CXOs say linking sustainability to compensation is a top driver for climate action.

Legal and Regulatory Framework in Germany

The introduction of CO₂-based bonus systems in German companies takes place within a demanding legal environment. Three sets of regulations play a central role: the German Corporate Governance Code (DCGK), the Corporate Sustainability Reporting Directive (CSRD), and German tax laws. These guidelines open up opportunities but also impose obligations when companies want to integrate sustainability aspects into their compensation models. The following section takes a closer look at these three frameworks and their impact on compensation structures.

DCGK and ESG Integration in Executive Compensation

The German Corporate Governance Code sets the framework for transparent and responsible compensation structures in Germany. With recent updates, the DCGK explicitly recommends considering sustainability criteria when determining variable compensation components (ECGI).

However, reality paints a mixed picture: Only 47% of surveyed companies consider ESG criteria in the compensation of managing directors and board members (Spencer Stuart). Nevertheless, almost all DAX-40 companies have integrated sustainability targets into their compensation models, reflecting a strong trend among Germany’s largest firms.

The DCGK provides clear guidelines: These include clawback provisions, a four-year waiting period for share-based compensation, and the prioritization of long-term incentives over short-term ones. Particularly important is the "comply-or-explain" rule, which obliges listed companies to disclose annually whether they comply with the Code or to explain any deviations.

Adidas offers a practical example: Here, 20% of each executive board member’s long-term incentive plan (LTIP) is tied to individually defined and measurable ESG targets. Pauline Stadler, attorney at Mayer Brown, emphasizes:

“To create a clear incentive for pursuing a comprehensive sustainability strategy, it is generally recommended that ESG targets should account for at least 10–30% of total (variable) compensation.”

CSRD Reporting Requirements

The Corporate Sustainability Reporting Directive significantly tightens the transparency requirements for executive compensation. Investors and other stakeholders increasingly expect executives to understand ESG risks and opportunities and to implement strategies to manage them. Compensation models that motivate executives to align their organizations sustainably are therefore becoming ever more important. Read more about ESG integration and CSRD reporting.

A key point of the CSRD is the audit requirement: Until 2028, limited assurance is permitted, after which a more comprehensive audit will be required. In addition to reporting obligations, tax and compliance aspects play a crucial role in designing sustainable bonus models. The CSRD’s reach is broad, affecting over 50,000 companies in the EU and requiring detailed disclosures on environmental impact, including how executive pay is linked to climate targets (PwC).

Tax and Compliance Requirements

The tax treatment of ESG-based bonuses in Germany follows the general rules for performance-based compensation. The decisive factor is the clear documentation and measurability of sustainability targets.

The SMART method has proven effective here: Specific, Measurable, Achievable, Relevant, and Time-bound. At the same time, employee co-determination rights must be observed in Germany. This structured approach not only facilitates tax recognition but also regulatory audits (Deloitte Germany).

Susanne Goniak, Senior Recruiter at Eurojob-Consulting, describes the practical challenges:

“Offering a competitive base salary while ensuring a well-balanced bonus structure can attract top talent while maintaining compliance.”

Transparency is key: Companies have flexibility in designing ESG incentives for management, but disclosure of how sustainable criteria are integrated into compensation models remains essential.

Practical recommendations include the early involvement of all stakeholders, defining clear KPIs, and translating ESG targets into concrete measures through compensation systems—not just for executives, but for the entire workforce.

How to Design CO₂-Linked Compensation Models

A well-thought-out CO₂ bonus model requires clear structures, measurable targets, and a balanced time frame. While 77% of publicly listed companies in Europe and North America have already integrated ESG metrics into their compensation systems, only 40% of them use concrete environmental metrics such as CO₂ reduction targets (WTW). The following principles provide guidance for designing such models effectively.

Selecting the Right Metrics and Targets

Choosing the right CO₂ metrics is key to a functioning bonus system. Scope 1 emissions, which relate directly to company activities, are often easier to measure and control. Scope 2 and 3 emissions from energy use and supply chains are more complex and require targeted approaches. Learn more about Scope 3 emissions and carbon credits. For example, CDP highlights that over 90% of a company’s emissions can fall under Scope 3, making robust measurement and reduction strategies essential.

Industry-specific adjustments play a central role here. For example, ThyssenKrupp, a leading German steel group, has integrated a “sustainability multiplier” into its short-term incentive systems.

Mark Vaessen, Global Head of Corporate and Sustainability Reporting at KPMG, highlights:

“Companies should select sustainability benchmarks that are truly important for the business. These benchmarks must also be properly measurable. A bonus is only justified if sustainability performance has fundamentally improved. This means that challenging but achievable targets must be set for sustainability performance.”

A combination of absolute and relative targets provides a balanced foundation. Absolute targets, such as reducing CO₂ in tons, make progress tangible. Relative targets, such as CO₂ intensity per euro of revenue, also take company growth into account. The SMART methodology helps define these goals clearly and transparently.

Balancing Short- and Long-Term Incentives

A balanced mix of short- and long-term incentives is crucial. Short-term incentives (STI) with one-year targets create momentum, while long-term incentive plans (LTI) over three to five years support deep-rooted change.

Companies like IKEA and AstraZeneca demonstrate different approaches: IKEA involves all employees and links a third of short-term incentives to sustainability targets. AstraZeneca, on the other hand, focuses on executives and weights ESG targets at 10%, especially for Scope 1 and Scope 2 emission reductions (AstraZeneca).

Experts recommend raising the share of sustainability incentives to at least 20% of variable compensation. In addition, non-financial incentives can play an important role. For example, IKEA ties failure to meet ESG targets to career obstacles, while AstraZeneca recognizes sustainability initiatives through global awards.

Building Transparency and Accountability

A successful CO₂ bonus model thrives on transparency and independent verification. High-quality data is the foundation for realistic targets and their implementation.

Jon Bernstein of Motus emphasizes:

“High-quality data is essential for developing effective strategies to set realistic targets and, above all, to implement them.”

Technologies such as fleet tracking apps and standardized EPA ratings provide a reliable data basis. Consistent CO₂ reporting (TCCR) increases credibility by publishing annual CO₂ footprint metrics and regularly updating forecasts. Breaking down net direct emissions into gross emissions and offsets adds further clarity, making it clear which progress is due to actual reductions and which to offsetting measures (US EPA).

Case Studies: German Companies as Pioneers

The following examples show how German companies are successfully implementing CO₂-linked compensation models. Both large industrial groups and medium-sized businesses are integrating new approaches to make sustainability measurable in their compensation systems.

HeidelbergCement’s CO₂ Intensity Bonus

HeidelbergCement is one of the pioneers in Germany when it comes to integrating CO₂ emission targets into the compensation of executives and employees worldwide. The company has set ambitious goals: By 2030, specific net CO₂ emissions are to be reduced to 400 kg per ton of cementitious material—a 47% reduction compared to 1990 (Heidelberg Materials).

Between 1990 and 2019, HeidelbergCement already achieved a 22% reduction. As an interim target by 2025, the company plans to reduce emissions to 525 kg CO₂ per ton—a significant improvement over the 590 kg CO₂/t in 2019.

Dr. Dominik von Achten, CEO of HeidelbergCement, emphasizes:

“We are rigorously driving forward the transformation of HeidelbergCement to become the world's most sustainable company in our sector.”

Similar strategies are being pursued in other industries, such as the automotive sector.

Examples from the Automotive Industry

The automotive industry is under significant pressure to reduce CO₂ emissions, as road transport accounts for about 20% of total greenhouse gas emissions in the EU (EEA). German manufacturers are responding with new compensation models.

Volkswagen, for example, partially links the CEO’s bonus to CO₂ reduction targets, while BMW integrates ESG performance indicators such as CO₂ reduction and sustainable production into executive compensation. These measures are having an impact: The market share of battery electric vehicles in the passenger car segment rose from 2% in 2019 to 15% in 2023 (IEA).

Luca de Meo, CEO of the Renault Group and President of the European Automobile Manufacturers Association (ACEA), warns:

“The pace of electrification is only half as fast as needed to avoid penalties.”

Similar approaches are found at Siemens, where 20% of the CEO’s compensation is tied to green energy transition targets (Siemens).

Not only large corporations but also medium-sized companies are increasingly adopting such incentive systems.

Sustainability Incentives in the Mittelstand

Germany’s medium-sized companies are also developing creative solutions to integrate CO₂ reduction into bonus systems. They receive support through government funding programs such as the Common Agricultural Policy (GAP), climate protection agreements, and carbon contracts for difference for carbon-intensive sectors (BMUV).

The steel sector is particularly important, accounting for 11% of global carbon emissions and 20–25% of industrial CO₂ emissions in the EU (IEA Steel Roadmap). According to Bain and Company, by 2030, 15–25% of European steel production could already be low-carbon—with an estimated market volume of $20–30 billion (Bain & Company).

Lavinia Bauerochse, Global Head of ESG at Deutsche Bank Corporate Bank, explains:

“The steel sector is a crucial decarbonisation enabler for multiple industries, as utilizing green steel reduces upstream Scope 3 emissions of corporates relying on steel, a factor particularly relevant for the German economy.”

These examples show that CO₂-linked compensation models are becoming increasingly important not only for large corporations but also for medium-sized businesses.

Implementation Guide for Companies

Introducing CO₂-linked compensation systems requires a well-thought-out strategy, from planning to technical implementation. Here are concrete steps companies can take to successfully establish such incentive systems.

Conducting a Materiality Analysis

The first step is to identify the relevant sustainability metrics that fit the company’s strategy. A materiality analysis helps determine the most significant environmental impacts and formulate clear targets (GRI).

First, companies should record their direct and indirect CO₂ emissions along the entire value chain. For example, BASF has tied executive incentives to the goal of climate neutrality by 2030 (BASF).

Selecting the right metrics is crucial. In addition to absolute CO₂ reduction, CO₂ intensity per unit produced can provide valuable insights to align growth and sustainability. It is important that targets are measurable, achievable, and time-bound. This foundation is essential for the success of the entire compensation system.

Involving Stakeholders

Early involvement of all stakeholders is essential for the successful integration of CO₂ targets into compensation systems. More and more employees are looking for employers who share their values on sustainability (World Economic Forum).

Employee involvement plays a central role. Companies should communicate transparently from the outset why CO₂ reduction is important and how the new compensation system works. It makes sense to tailor communication to the needs of each target group: Executives need detailed information on calculation methods, while employees are mainly interested in the impact on their daily work.

Susanne Goniak of Eurojob-Consulting emphasizes:

“Offering a competitive base salary while ensuring a well-balanced bonus structure can attract top talent while maintaining compliance.”

Regular training and workshops help deepen understanding of ESG targets. A good example is Marks & Spencer, which has established so-called sustainability champions in each of its 1,380 stores to ensure effective implementation of targets. Recognizing employees who actively support ESG initiatives can also motivate others. According to a 2021 IBM survey, 74% of employees find their work more fulfilling when they make a positive contribution to social and environmental issues.

Using Technology for Monitoring and Reporting

After involving stakeholders, technical implementation becomes crucial to ensure target achievement. Studies show that 85% of companies want to reduce their greenhouse gas emissions, but only 9% are able to accurately track their total emissions (SAP Sustainability Report).

Carbon tracking software can help companies capture emissions data, measure their CO₂ footprint, and generate reports. At the same time, it can identify potential for further reductions. Important criteria when selecting such solutions are user-friendliness, precise measurements, comprehensive reporting, and reliable monitoring functions (CDP).

Data quality is a common problem. According to a survey by SAP, only a third of executives in medium-sized companies trust the quality of their data. In addition, 86% still use spreadsheets for CO₂ tracking. Modern tools therefore offer options such as manual data entry, bulk uploads, and automated interfaces.

Life Cycle Assessment (LCA) software evaluates a product’s environmental impact throughout its entire life cycle. Emilia Moreno Ruiz, CTO of ecoinvent, explains:

“LCA brings the metrics needed to evaluate environmental impacts across the product lifecycle. Integrating that with virtual twin technology opens new possibilities to address those impacts very early on.”

New developments in LCA software are leveraging artificial intelligence and machine learning to automate data analysis and increase accuracy. Cloud-based platforms are also gaining importance, enabling flexible and scalable real-time collaboration. Learn more about LCA methodologies and standards.

The use of carbon accounting software not only improves reporting but can also enhance a company’s attractiveness to talent and investors. When selecting such systems, factors such as measurement accuracy, reporting options, data integration, user-friendliness, standards, scalability, cost, and security should be considered. These technical solutions are crucial for the sustainable implementation of CO₂-linked compensation models.

Conclusion: Advancing Sustainability Through Compensation

Linking CO₂ targets to variable compensation drives decarbonization. Already, 78% of the 375 largest publicly listed companies in 15 countries have tied executive pay to sustainability performance, and 88% of these companies align their sustainability goals with business-relevant topics (KPMG).

Germany in particular is showing a clear lead: While only 16% of US companies had introduced ESG-linked compensation systems in 2020, the share in Germany was already over half of all companies (WTW). This development shows that German companies recognized the strategic importance of such incentive systems early on.

The impact of these measures is measurable: Studies show that companies that integrate emissions-related metrics into executive compensation achieve a noticeable reduction in their CO₂ emissions (MSCI). These results confirm the trends observed in case studies. Nadine-Lan Hönighaus, Global ESG Governance Lead at KPMG International, aptly describes the global dynamic:

“Despite ongoing economic and geopolitical uncertainty, the results clearly show that linking executive compensation to sustainability performance is becoming increasingly common among the world’s largest companies. Although there are some notable regional differences, there is a consistent global trend reflecting the crucial role executives play in steering a company toward long-term value creation.”

The key to success lies in a few, clearly defined and measurable performance indicators that are specifically aimed at improving sustainability performance. This development is also supported by investors: Institutional investors prefer companies that integrate ESG criteria into executive compensation (BlackRock). Studies also show that financial incentives for management not only promote sustainability goals but also have a positive impact on company value and returns (Harvard Business Review).

Companies that succeed in combining sustainability and business success secure a long-term competitive advantage. CO₂-linked compensation models offer a strategic way to motivate executives over the long term. These companies position themselves not only as responsible employers but also lay the foundation for sustainable success in an increasingly climate-conscious business world.

FAQs

How can companies ensure that CO₂ targets in variable compensation are realistic and measurable?

How Companies Can Implement CO₂ Targets in Variable Compensation

Companies can make CO₂ targets in variable compensation tangible and actionable by setting clear, measurable metrics. These targets should be precisely formulated, realistically achievable, and directly linked to executive performance. Regular reviews are essential to assess progress and make adjustments if necessary.

A reliable monitoring system plays a central role in continuously tracking target achievement. Integrating ESG metrics into compensation models has proven to be an effective way to drive sustainable action and achieve environmental goals faster. It’s important to strike a balance: The targets should be challenging enough to inspire ambition, but also realistic to maintain motivation and ensure success. Learn more about ESG data management and reporting. For further guidance, the Science Based Targets initiative provides frameworks for setting and validating emissions reduction targets.

What challenges arise when linking CO₂ targets to variable compensation, and how can companies overcome them?

Linking CO₂ targets to variable compensation systems presents several challenges. One of the biggest hurdles is to define targets that are both measurable and achievable without compromising on ambition. It’s equally important to develop clear and transparent methods for measuring target achievement. Only then can employee trust and acceptance be secured.

There are proven strategies companies can use to overcome these challenges. These include the involvement of relevant stakeholders in the target-setting process. Targeted training programs can also help raise awareness and understanding of sustainability goals. In addition, technology plays a crucial role, especially in monitoring and reporting progress. Such measures not only increase transparency but also foster accountability and drive the implementation of CO₂ targets. For a deeper dive into best practices, see UN PRI: Aligning Executive Pay to ESG Goals.

How do CO₂-linked compensation models increase a company’s attractiveness to investors and talent?

CO₂-Linked Compensation Models: A Win for Companies and Talent

CO₂-linked compensation models offer companies the opportunity to position themselves more strongly as sustainable and future-oriented players. By tying financial incentives directly to climate targets, companies attract not only the attention of investors but also potential employees.

More and more investors value companies that integrate ESG criteria (environmental, social, and governance) into their strategies. Why? Because these factors signal long-term stability and responsibility—two qualities that are becoming increasingly important in an uncertain economic environment. According to MSCI research, companies with strong ESG performance tend to have lower costs of capital and higher valuations.

But it’s not just investors who benefit from such approaches. CO₂-linked compensation models are also a strong argument for talent. They show that a company takes climate protection seriously and actively assumes responsibility. Employees feel more connected to an employer who shares their values and takes concrete action for a sustainable future. This not only improves employee retention but also strengthens the company’s image as a modern and responsible employer. A PwC survey found that 53% of workers would consider leaving their job for an employer with stronger environmental values.

At a time when competition for skilled workers is intensifying, such models can make all the difference. They position companies as attractive employers who strive not only for business success but also for a positive contribution to society.