Can tying executive compensation to sustainability drive more impactful change? (full report)

The great motivator dangling carrots to motivated staffAligning incentives – this is why executive compensation is linked to financial performance. Corporate America wants to promote financial performance, so it compensates its executives directly for it. With the increasing risk that natural resource scarcity and climate change poses to businesses, what about aligning compensation to sustainability performance?

A  2012 Glass Lewis report states that 42 percent of publicly traded companies interviewed across 11 major markets across the world disclosed a link between compensation and sustainability. Last year Ceres found that only about 10 percent of S&P 100 companies have reportedly incorporated sustainability into their bonus structures.

These statistics point not only to an emerging trend, but also to the varying degrees of transparency and rigor with which corporations are linking executive compensation to sustainability goals and results.

On one end of the spectrum, some companies mention a sustainability-compensation link in their CSR reports, yet do not provide further details.  On the other end, there are companies that clearly articulate the connection. Alcoa, for example, in 2010 started tying 5 percent of executives’ annual bonus to the company’s CO2 emissions reduction goals. Intel is another example—since 2008 it has tied 3 percent of all its employees’ annual bonuses to specific company-wide sustainability goals (in 2012 the focus being energy efficiency in the company’s operations and products).

On the exemplary side, Xcel Energy ties one-third of its’ CEO’s annual bonus to renewable energy, emission reduction, energy efficiency and clean technology goals.

What is driving those companies that are aggressively linking executive compensation to sustainability?

A 2012 Conference Board report notes two factors:

  1. Financial benefits: Given the inchoate nature of the field, there is little data yet to show the correlation between this practice and better long-term financial profitability. But, EDF (in its 20+ years of corporate partnerships) has numerous case studies of how environmental innovation can save companies millions of dollars and be a critical component of long term value creation. In our Green Returns work alone, we have seen companies’ focus on sustainability lead to $650 million in financial benefits while avoiding 1 million metric tons of GHG emissions, 3.4 million tons of waste, and 13.2 million cubic meters of water use across 38 portfolio companies.
  2. Reputation and culture benefits: Linking compensation to sustainability is a powerful marker of a company’s environmental leadership. The Conference Board found that such leading companies were more likely to link their compensation than others.  Additionally, this practice can serve as a powerful tool to increase accountability and promote action around environmental goals, a sentiment echoed by Intel’s in its 2012 CSR report — as well as by Tom King, president of National Grid U.S., who notes that “linking executive pay and climate change deliverables has increased accountability and positively impacted our culture. Employees across the company are increasingly incentivized to put sustainability at the heart of the way we do business.”

If you want to learn more about linking executive compensation to sustainability, the Conference Board report is a good place to start. As everything from water scarcity to carbon constraints start impinging on your company’s growth, now is a good time to think about implementing such a powerful tool to position your company for success in this new environment (pun intended).

This article was originally published on the EDF+Business website
Namrita Kapur
is Director of Strategy for Environmental Defense Fund’s business-facing program, working to drive positive environmental change through corporate value chains.