OAKLAND, CA — Offering financial incentives to achieve certain goals has long been a standard business practice, but applying the concept to sustainability performance is relatively new.

The Carbon Disclosures Project's 2008 report on the S&P 500 found that 29 percent of the companies that responded to the CDP survey had begun building environmental responsibility and climate awareness into executive incentives.

While the idea appeals to stakeholders, it presents several challenges to businesses.

"Companies are struggling with how to do this effectively to meet the needs of their stakeholders," said Jennifer Coulson, manager of corporate engagement for NEI Investments. Coulson moderated a panel discussion this week on linking executive compensation to corporate environmental, social and governance performance at the annual Ceres Conference, which was held in Oakland.

The discussion included Robert McCormick, chief policy officer for Glass Lewis, a prominent independent proxy advisory service that compiled a report on executive compensation and sustainability in 2010 called "Greening the Green."

"Any compensation metric is only as good as how it is used," said McCormick. The Glass Lewis studied compensation plans at publicly traded companies in the United States, United Kingdom, Australia, France, Germany and the Netherlands and found a lot of room for improvement.

The Glass Lewis review of long- and short-term compensation plans, as described by companies in standard regulatory findings, also determined that 29 percent of the firms disclosed a link between compensation and sustainability. Then the company went a step further in analyzing the disclosures by assessing the quality of those links.

Glass Lewis deemed 40 percent of the links as being "weak," meaning there was no specific percentage of compensation tagged to sustainability, although the compensation committee asserted that metrics related to sustainability are considered in determining executive compensation. Twenty-nine percent fell into the "medium" category, which covered firms that bundle sustainability metrics with others and disclose what percentage that group of metrics has in compensation calculations. Just under a third of the links, 31 percent, were considered "strong" for disclosing the percentage of the executive compensation that is linked to sustainability.