Navigating the metrics and management of impact incentives

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Guest Author

Aunnie Patton Power

This is the second article for ImpactAlpha about the Impact Linked Compensation Project, a research initiative exploring impact-linked compensation mechanisms, metrics and governance.


Fund managers’ most commonly cited obstacle to impact incentives is the complexity of measuring and managing them. The Impact Linked Compensation Project has identified guidelines and considerations for selecting metrics, setting targets and putting the appropriate governance structures in place for a range of different incentive options.

Selecting metrics

The cornerstone of impact-linked compensation is metrics selection. Choosing the appropriate metrics is a critical decision that involves navigating relevant impacts and outcomes, determining proxies for impact outcomes, and deciding on the number of metrics linked to compensation.

Relevant impacts and outcomes: The significance of linking compensation to relevant impacts cannot be overstated. This often starts with assessing the nature of impacts, where their importance is determined by the fund’s goals, objectives, and the needs of the affected stakeholders. Drawing from real-world examples, our research highlights the importance of steering clear of irrelevant metrics, emphasizing the need for precise linkages between investment allocations and impact performance.

DWM’s Displaced Communities Fund links carry to three portfolio targets: the number of refugees and internally displaced persons served by the fund, a proxy livelihood improvement in host and source communities and a metric for asset and income growth of the women being served.

Proxies: While Impact-linked compensation is ostensibly linked to impact, the majority of models reviewed did not directly link to measures of impact. Proxies, often in the form of outcomes and outputs, become practical alternatives, addressing concerns about the difficulty and cost of collecting precise impact data. There are various methods of determining proxies, including the use of composite scores and external expertise, shedding light on the diversity of approaches.

GAWA Capital’s second fund links carry based on a composite score of 25 metrics aligned with the Smart Campaign Client Protection Principles and GIIN’s IRIS+. Alive Ventures uses IMP’s Five Dimensions of Impact for its composite score, which is calculated at the exit of each portfolio company using data collected throughout the life of the investment.

Number of Metrics: Determining how many metrics to link to compensation becomes a key decision, directly related to relevant impacts and practical proxies. The majority of Impact-linked compensation models surveyed use between one and four metrics, highlighting the challenge of balancing simplicity with a comprehensive understanding of impact.

Circulate Capita’s third fund links carry to just one metric: tons of plastic pollution prevented, which is the core objective of the fund.

Setting targets

Setting targets is fundamental to impact-linked compensation and involves determining the level of ambition, the time frame, and the flexibility in adapting targets. These considerations are crucial for aligning compensation structures with the strategic goals of the fund.

Level of ambition: Setting an appropriate level of ambition for targets is emphasized as essential for achieving impact objectives. Striking a balance between ambitious and realistic targets is crucial to driving progress without demotivating stakeholders. A number of strategies employed by funds have been used to assess and validate the level of ambition, including external validations and governance structures.

Masawa fund invests in early-stage companies that may change their product and strategy as they grow. The fund and its portfolio founders co-create provisional impact targets that help the companies get to product-market fit; if there’s no product-market fit, there’s no impact. Then, at Series A, Masawa co-creates the long-term impact target to which Masawa is held to account.

Time frame: There is often a variation in time frames used to manage Impact-linked compensation targets, highlighting the direct relationship with a fund’s strategy, impacts, metrics, and portfolio-level assessment practices. Examples from different funds illustrate the diversity in approaches to setting timeframes, reflecting the dynamic nature of impact and the specificities of each fund. This is often the case when considering the different time constraints between a close ended fund in comparison to an open ended one. 

Nuveen Private Equity Impact sets targets on an individual company basis annually and measures performance based on the percentage of that impact target achieved.

Level of flexibility: Recognizing the dynamic nature of impact, funds incorporate flexibility into their Impact-linked compensation structures to adapt to changing contexts, sector advances, and lessons learned. The report highlights instances where funds build flexibility into their structures, allowing for revisions to targets throughout the fund’s lifecycle.

New Forests’ African Forestry Impact Platform established four portfolio level targets at the outset of the fund, in collaboration with its cornerstone LPs. These targets can be adjusted up or down with LP approval.

Big picture  

Investors and fund managers must consider whether and how to aggregate impact performance at the portfolio level.

Top-down vs. bottom-up: Two primary approaches for aggregating impact at the portfolio level: top-down, where metrics and targets are determined at the portfolio level, and bottom-up, where individual investment-level metrics contribute to the portfolio-level assessment. The majority of funds use a bottom-up approach, particularly in multi-sectoral funds focused on social impact, whereas top-down approaches are more commonly present with climate focused fund, with a focus on emissions mitigation.

Many European funds may have adopted the European Investment Fund’s methodology, which is a bottom-up approach that considers tailored approaches for company activities. Kilara Capital, an Australia based fund, uses a top-down approach which links compensation to the rate in tons of emissions mitigated, based on its focus on climate change mitigation.

Weighting results: Recognizing that investments vary in size and growth stages, the report discusses how funds employ weighting mechanisms to assess performance. Different bases for weighting are explored, including internal criteria and the amount invested in portfolio companies.

Opting out: While most funds link compensation to portfolio impact level performance, a few examples exist where compensation is determined on an investment-by-investment or community-level basis. The report provides case studies illustrating these deviations from the norm.

While metrics setting and measuring is a challenge for many impact fund managers and investors in considering impact-linked incentives, our research found that there are a variety of options accommodating many different objectives and goals in ways that aligns with fund managers’ structures and goals.


The Impact Linked Compensation Project is a collection of first-generation data to provide insights and offer fund managers a set of considerations for understanding impact-linked compensation within the context of their fund structures, portfolio compositions and relationships with asset owners. The report aims to contribute to the ongoing evolution of impact-linked compensation in the broader landscape of impact investments.

Aunnie Patton Power is an impact fellow at The ImPact and the lead researcher for the Impact Linked Compensation Project.