The Pros & Cons of Linking Sustainability Successes with Bonuses

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The Pros & Cons of Linking Sustainability Successes with Bonuses

This is the month many of us await anxiously for our bonus. Many are thinking, "I did great in my performance review last month but the company didn't meet its targets so what's that bonus going to be?"

Let's face it. Nothing works better than money when it comes to incentivizing employees.

I'm obviously a firm believer in the power of employee engagement, and I consistently observe that employee support is a crucial part of any company becoming sustainable. But engagement is easier said than done. If sustainability is truly a priority, there have to be solid incentives.

So I did some research into the use of bonuses and other cash incentives to encourage employees to engage around sustainability.

Incentives: Pros & Cons

And shouldn't the easiest way to meet your sustainability targets be to tie them to an incentive structure? Already 10 percent of the S&P 500 have incorporated sustainability into their bonus structure. However, for these programs to work, your company must have a robust compensation structure that is able to easily integrate sustainability metrics with human resources systems.

Further, if they're not carefully aligned with corporate strategy and values, they can end up incentivizing short-term cost cutting measures. Instead, incentives have to be based on long-term growth and value. Sustainability initiatives often share goals around stability, positive community relations and long-term development.

Alcoa is one of few companies where incentives are being usefully implementation for achieving sustainability targets. I caught up with Alcoa's VP and Chief Sustainability Officer Kevin Anton to dig deeper.

Anton told me that Alcoa has been measuring safety for a long time. But the idea of tying strategic sustainability to incentives and compensation was a relatively recent idea that was initiated by a board member.

"Our board brought up the idea of creating an incentive plan for diversity, which spurred the thought of having a similar structure for sustainability. The first thought that came to my mind was measuring our 'energy intensity' -- Gigajoules per metric ton of aluminum produced -- and setting a corresponding CO2 emissions reduction target, then making that the core measurement component in evaluating incentives," he said.

Sustainable Incentives: The Decision to Measure

So work began with the energy conservation teams taking the lead on identifying processes that could become part of an organization-wide effort. In 2010 the first of several changes to Alcoa's compensation plans began. These included a new sustainability target related to energy intensity and "modifying long-term incentive awards at the executive level to include a performance condition relating to profitability."  

"In 2010, 20 percent of our variable compensation plan was tied to achieving significant aspects of our sustainability targets. Across the entire workforce, the targets focused on improvements in greenhouse gas emissions and safety," Anton explained.

Other companies have developed sustainability variables on the overall scorecards that help determine end-of-year employee bonus. For example, sustainability development counts for 20 percent of Shell Oil's overall scorecard [PDF]. The sustainability assessment for the executive committee was half safety and half Shell's rating in the Dow Jones Sustainability Indexes (DJSI).

HSBC also uses a scorecard system to measure sustainable development on an individual basis and give incentives based on this. They've succeeded in cutting waste 11.9 percent, as well as other significant improvements in resource use.

Incentivizing Innovation

For Alcoa, which has factored safety into bonuses for years, it was a natural progression to allocate some of the funds from safety to diversity. "I think it's important for businesses to self-regulate and find their own opportunities for self-improvement," added Anton.

For example, he continued, "It was often the maintenance workers at Alcoa who saw opportunities for more efficient use of machinery and were able to widely implement their ideas. Alcoa has reduced its energy use by operating their furnaces differently."

I asked Anton to explain further:

"We like to think of sustainability as how we do our jobs and not a stand-alone project," he told me. "We have a system to track and share ideas that end up leading to millions in savings. Department managers decide which projects to do, analyze the financial returns, and archive the ideas that can't be used but may have potential in the future. If a team comes up with a really good idea, it will filter down to their individual evaluation and rewards."

This emphasis on individual growth and contributory progress helps Alcoa link incentives with measurable sustainability and innovation. Also helping is the company's constant effort on long-term value creation and connecting sustainability with productivity.

Keeping sustainability close to business strategy sends the right message not only for a business' external stakeholders but its most essential assets: the employees.