It’s Time to Tie Executive Compensation to Sustainability

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While U.S. government leaders may be sending mixed messages for their beliefs about climate change, sustainability is more than just a pop culture buzzword for companies across the globe.

Learning from earlier mistakes

A similar phenomenon happened in the 1980s around the issue of manufacturing quality. At that time, many businesses responded by including quality metrics in their compensation incentives, which helped focus executive attention on the issue. As a result, over the next decade, quality levels improved significantly.

Now, sustainability efforts are being driven by new technologies that help businesses pay for those investments in the middle to long term. In addition, consumers are more vocal concerning ways companies make their products; shareholders are increasing demands for businesses to respond to environmental and social issues; and a talented Millennial workforce is voting with its feet by leaving behind companies lagging in sustainability.

It’s time for companies to begin looking for ways to successfully tie executive compensation to sustainability efforts.

Benefits

  • A strong commitment to sustainability can boost a company’s reputation with customers and employees.

  • It can generate political capital with government regulators, who may then grant the company greater freedom of movement.

  • It isn’t just about limiting downside risk; the company can also create profitable new products and services to address urgent global needs such as scarce water supplies, hunger, and greenhouse gas emissions.

  • Finally, some sustainability investments can pay for themselves over the long term through reduced energy consumption and waste.

Implementation

While the business case for sustainability is broad, it’s not always easy to measure. Therefore, only a substantial minority of companies currently may have clearly articulated plans necessary to add sustainability to its core compensation metrics. If your company is not one of those, you may be wondering how you can implement more than simply vague goals toward sustainability.

The key could be to add sustainability metrics at the divisional level or as a “do no harm” clause that explicitly reduces incentive awards on the back end if a company’s reputation is substantially damaged or diminished. In such an event—for instance, an oil spill caused by inadequate precautions—boards can reduce bonuses if irresponsible actions have a negative effect on sustainability. While many companies tend to keep this option implicit, making it explicit would increase its effectiveness. Such a clause can be a useful reminder that, even in the absence of metrics, sustainability is still a significant corporate concern.   

In conclusion

As more companies recognize the importance of sustainability as a business issue, it’s also linked more frequently to executive compensation. Various studies of American, Canadian, and German firms found that executive incentives for sustainability boosted those firms’ efforts to make positive environmental and social impacts. That’s a link that also has the potential to pay off in long-term market leadership.

So, what’s it going to be - Are you reconsidering taking small steps, like re-thinking your packaging materials, or are you going all in, so to say? Let us know in the comments!

 

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