It’s Time to Link Compensation and Sustainability
Incentive-based pay isn’t new; it’s been around for centuries. Ship captains transporting prisoners from England to Australia were once rewarded not on passenger counts but on how many survived the journey. Athletes get bonuses for making all-star teams and winning championships. And so it is for CEOs and other top executives at almost every major company where pay is linked, at least in part, to performance. But what kind of performance is being rewarded? Generally, it’s financial performance. But unless companies begin to link compensation to sustainable environmental and social performance, they will continue to sacrifice long-term value creation and competitiveness for short-term, unsustainable gains.
In a world of mounting economic risk from climate change, water scarcity, poor labor conditions and other environmental and social threats, it’s time for a new set of incentives. Some major companies are already linking executive pay to sustainability performance – that is, to a company’s progress towards achieving environmental, social and governance (ESG) goals that improve long-term viability and value creation.
Tying executive compensation to such sustainability performance is one of the key company expectations contained in The 21st Century Corporation: The Ceres Roadmap for Sustainability published in 2010. Two years later, Ceres, in partnership with Sustainalytics, is releasing The Road to 2020: Corporate Progress on the Ceres Roadmap for Sustainability— its first major assessment of how 600 of the largest U.S. companies are faring against these expectations.
One of the best performers, being announced tomorrow at the Ceres conference in Boston, is Intel, a world leader in computer chip technology. Intel sets sustainability goals, measures its progress and publicly discloses its results. It’s also tying executive pay to sustainability performance. Since 2008 Intel has linked the compensation of the CEO and top executives to the company's achievement of such sustainability goals as the energy efficiency of its products, reductions in greenhouse gas (GHG) emissions and energy use, and improvements in environmental leadership reputation. Rank and file employee bonuses are also tied to these goals. According to Michael Jacobson, Intel’s Director of Corporate Responsibility, the key is to invest every employee in sustainability by tying pay to performance.
Unfortunately, Intel’s program is a rarity. Although a growing number of U.S. companies are integrating ESG factors in their governance structures – through board oversight, dedicated committees or by hiring key managers with environmental and social performance roles – relatively few are directly linking sustainability performance and compensation. Eighty-five percent of the 600 U.S. companies we evaluated do not factor any sustainability criteria into executive compensation. And among the small number of companies that are making these linkages, it’s usually only meeting health and safety and/or diversity hiring goals. These are important, but more is required to put companies on a serious path for managing the major financial and operational risks arising from climate change, resource scarcity and other sustainability challenges.
To learn more about these and other key findings from The Road to 2020, join us for an interactive workshop tomorrow afternoon at the Ceres conference where we will hear from the report authors, investors and company executives. Intel’s CSR Strategy Director Suzanne Fallender will share her perspective on the importance of integrating sustainability into business strategies.
As Jonas Kron, Vice President at Trillium Investments, put it at the Ceres conference last year, “We have to figure out how to pay the captains of these ships to be sustainable. If we give them short-term incentives, we’re going to get short-term results.” Intel is leading the way; others need to get on board.