Coro’s Blog: On Purpose

Structuring CEO pay to drive corporate sustainability behaviour

Published on June 19, 2012

carrotI like to hear, “We do it because it’s the right thing to do.”

But often it takes a carrot to encourage the desired behaviour.

Let’s face it, for most people a little incentive can reinforce the importance of “doing the right thing”. And it’s no different for corporate leaders.

However, determining the right sustainability metrics for executive pay packages is easier said than done.

I conduct CSR / Sustainability Governance Gap Assessments for boards of directors, using the CSR Governance Guidelines I co-authored with Canadian Business for Social Responsibility (CBSR). One of the 38 criteria is: “Management compensation is linked to performance on CSR goals and targets”. In my experience few boards include CSR in executive compensation or they struggle to find the best metrics to incentivize the outcomes they seek.

The World Economic Forum’s Global Agenda Council on the Role of Business supports the trend to compensate CEOs for non-financial performance. They recommend that executives be compensated “in ways that reward long-term value creation and broader value impact.”

And the UN Global Compact includes executive sustainability compensation in its “Blueprint for Corporate Sustainability Leadership“. They require signatories to make sustainability criteria part of goals and incentive schemes for CEO and executive management teams. Over 50 companies have endorsed this program. (The sole Canadian signatory is Teck – in 2010, 20 per cent of its CEO’s bonus was paid on the basis of achievement of company-wide safety and environmental measures including safety targets and ISO 14001 certifications.)

In a article, Why it’s time to link compensation with sustainability, Ceres vice-president corporate program, Andrea Moffat, reports that one of the best performers in this area is Intel. Since 2008, Intel has linked executive compensation to the company’s achievement of goals in product energy efficiency, GHG and energy use reductions and improvements in environmental leadership reputation.

However, another study showed that only about 10 per cent of the S&P 100 factor environmental issues into their incentive compensation plans, either as strategic objectives or quantifiable goals.

Clearly, we need to increase that number.

Here are some good examples of sustainability compensation in practice. At Dean Foods the CEO is measured for cultivating a culture of ethical behaviour and social responsibility. At Xcel Energy, one-third of the CEO’s annual bonus is tied to environmental performance, as measured by renewable energy, emission reduction, energy efficiency and clean technology. And Xcel’s position as a leader in environmental conservation is included in the company’s long term performance plan. Alcoa includes its environmental sustainability goals and progress in its executive annual bonus plan. There, 80 per cent of the bonus is tied to traditional financial metrics and 20 per cent is reserved for non-financial goals including safety, diversity, and environmental health. The latter with a weighting of five per cent, is focused on reducing GHG emissions by 400,000 tons in 2010.

Dutch-based DSM, a life- and material-sciences company, has a very comprehensive sustainability incentive scheme, according to their integrated 2010 annual report. There, 20 per cent of the short-term incentive is linked to non-financial targets including percentage of green products which moved from feasibility to development; percentage of successful product launches that met the company’s green criteria; energy efficiency improvements measured by the amount of energy used per unit of product; and employee engagement benchmarked to the high performance norm for their industry. As well, 50 per cent of executives’ long-term incentive plan is based on achieving GHG reduction targets.

In Canada, Corporate Knights found that in 2010, 35 per cent of the TSX60 linked executive compensation to sustainability performance with mining/materials and financial sector companies leading the way. Compared to the S&P 100, at 10 per cent (noted above) Canadian companies seem to be ahead of the pack on these factors.

To find the true corporate sustainability leaders one needs to look beyond the CSR report to the proxy circular. Even boards that acknowledge the need for sustainability-based compensation are challenged to find the best metrics to drive CEO sustainability performance.

I welcome your insights. Please send me your thoughts on executive sustainability compensation and the top metrics to drive corporate sustainability performance via the people at the controls – the executive team.

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