Linking Sustainability Performance to Compensation: A Must for Success
Many companies tout sustainability as important and highlight their accomplishments on their website and in their sustainability reports. Unless it is directly linked to staff performance across the organization, however, it is usually just window dressing. Companies have used incentive programs to reward particular types of behavior for decades. Incorporating sustainability performance metrics into that picture, however, is still a novel concept.
There are a few exceptions, however. Those most often cited include Intel, Xcel Energy and Alcoa. Intel started in 2008 to link 3 percent of all its employees’ annual bonuses to environmental sustainability metrics and goals. Xcel Energy ties a third of its CEO’s annual bonus to energy and greenhouse gas emission goals and discloses its targets and compensation in its proxy statements. Alcoa includes sustainability performance in its executive bonus plan; starting in 2010, it began linking 20 percent of the plan to non-financial metrics that include carbon dioxide reduction goals.
If sustainability is to become part of business operations and be successful in the long-term, it must be evaluated and tied to compensation at the executive level as well as organization-wide. When looking at pay for sustainability performance, much of the focus has been on executive compensation. Executives and staff are then incentivized to dedicate resources, including time and money, towards set sustainability goals.
The goals that sustainability compensation is tied to should be relevant, challenging and meaningful to the organization. Today, companies that do this and are transparent about the metrics and goals they use are the exception. Most do not provide enough transparency to determine whether this tie is rigorous and significant. Very few report on the percentage of compensation and the specific sustainability metrics this is tied to.
The trend seems to point towards greater ties between sustainability and compensation, at least at the executive level. However, companies still seem unwilling to disclose the full details. A 2012 Glass Lewis report found that 42 percent of companies reviewed provided a link between executive pay and sustainability in their annual proxy filings, up from 29 percent in 2010. However, a CERES report also completed in 2012 determined that 85 percent of the 600 publicly traded companies evaluated did not factor any sustainability criteria into executive compensation. According to the CERES report, even though a growing number of U.S. companies are integrating ESG factors in their governance structures, only about 10 percent of S&P’s 100 companies have included sustainability into their bonus structures. A 2013 Conference Board survey of over 350 U.S. public companies found that about 20 — 25 percent of companies across industries embed sustainability performance in their compensation formula, but details were not provided.
As this becomes more common business practice, and more executives’ compensation is tied to sustainability goals, others in the organization will also be held accountable and reviewed based on their performance on sustainability goals. This will go a long way to permanently embedding sustainability into organizational culture.