Aligning incentives – this is why executive compensation is linked to financial performance. Corporate America wants to promote financial performance, so it compensates its executives directly for it. With the increasing risk that natural resource scarcity and climate change poses to businesses, what about aligning compensation to sustainability performance?
A 2012 Glass Lewis report states that 42 percent of publicly traded companies interviewed across 11 major markets across the world disclosed a link between compensation and sustainability. Last year Ceres found that only about 10 percent of S&P 100 companies have reportedly incorporated sustainability into their bonus structures.
These statistics point not only to an emerging trend, but also to the varying degrees of transparency and rigor with which corporations are linking executive compensation to sustainability goals and results.
On one end of the spectrum, some companies mention a sustainability-compensation link in their CSR reports, yet do not provide further details. On the other end, there are companies that clearly articulate the connection. Alcoa, for example, in 2010 started tying 5 percent of executives’ annual bonus to the company’s CO2 emissions reduction goals. Intel is another example—since 2008 it has tied 3 percent of all its employees’ annual bonuses to specific company-wide sustainability goals (in 2012 the focus being energy efficiency in the company’s operations and products).
On the exemplary side, Xcel Energy ties one-third of its’ CEO’s annual bonus to renewable energy, emission reduction, energy efficiency and clean technology goals.
What is driving those companies that are aggressively linking executive compensation to sustainability?
A 2012 Conference Board report notes two factors:
If you want to learn more about linking executive compensation to sustainability, the Conference Board report is a good place to start. As everything from water scarcity to carbon constraints start impinging on your company’s growth, now is a good time to think about implementing such a powerful tool to position your company for success in this new environment (pun intended).