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Greening Executive Bonuses

By Jason Margolis
PRI's The World
Mindy Lubber talks with Jason Margolis of PRI's The World about tying executive's compensation to a company's sustainability goals.

Click to hear the interview.

Hugh Welsh heads the North American operation of the Dutch life sciences company DSM. The company makes everything from plastics, to biomedical devices, to nutritional supplements. And like most corporate executives these days, Welsh get a bonus for meeting certain performance goals.

But some of those goals wouldn’t show up in most corporate reports, for instance, progress toward the company’s goal of lowering greenhouse gas emissions by 25 percent within a decade.

“So each year, there would be a target set for that annualized greenhouse gas emission reduction and that must be met or I don’t get that portion of my bonus,” said Welsh.

In fact, for the past two years, a third of Welsh’s bonus has depended on meeting greenhouse gas targets, as well as targets for using less water and energy. The company has taken on projects ranging from installing solar farms on its properties to returning to natural landscaping to cut back on water and fertilizer usage.

Using less energy and water saves the company money right now. And Welsh said they’re also concerned about the growing number of severe weather events linked to climate change, such as last year’s major US drought and hurricane Sandy.

“Those have adverse impacts on our businesses and would have more severe adverse impacts on our businesses down the road. So whatever we can do to mitigate that, we see as good business,” said Welsh.

And, by extension, Welsh said the company sees it as good for the environment as well.

“Let’s be clear, when people get compensated for something, they make sure it gets done well,” said Mindy Lubber, the CEO of Ceres, a Boston-based nonprofit that helps companies deal with sustainability issues.

“If we want to truly integrate sustainability into companies, not as an after-thought, not as a small niche program, but as a core part of what that company needs to be doing, several things need to happen. They need to set goals around sustainability, and, like they do with other important things, they need to tie those goals to compensation.”

But linking compensation to environmental measures still isn’t all that common, perhaps in part because companies have to spend more money upfront to save money and protect the environment in the long-run. CERES polled 600 multinationals and found only 7 percent doing it.

Lubber said European companies, like DSM, are leading the way.

“We know that sustainability is an ethic in Europe, is embedded in people’s lives from the time they are born. Not so much in the United States I’m embarrassed to say. And it’s the same with companies.”

European companies also have to deal with more environmental regulations. And that pushes them to innovate, said Paul Simpson, the CEO of CDP, a London-based global not-for-profit organization that helps companies and cities measure the financial impacts of environmental policies.

Simpson also likes the idea of tying bonuses to environmental goals. But he said to truly be effective, the tactic has to be integrated across an entire company.

“Historically, you might have had big businesses with 100,000 employees having two people work on (the) environment, right? That’s not going to get you very far. If you want to really embed this in your business, you’ve got to get some or all of your staff to take it seriously, and therefore providing these incentives makes complete sense. If you can change your staff, you can realize the benefits of sustainability far quicker in the business.”

And Simpson said there’s increasing evidence that companies that are leading on measures of sustainability are also doing well financially.

“The financial community is very interested: Is that because it’s a proxy for good management? So a well-managed company will be delivering better returns and of course addressing sustainability. Or are there also fundamental factors, like the company is more energy efficient? Or it’s got a better innovation process and better product portfolio to attract more clients?”

Whatever the reason for the success of these companies, Welsh, and Mindy Lubber, said the trend of tying bonuses to environmental measures is slowly catching on, particularly with multinationals. But resistance among many executives may be hard to shake. After all, as Hugh Welsh with DSM knows all too well: You need to perform to get paid.

“(Last year) we met other metrics with respect to water usage and energy usage, but our greenhouse gas emission metric was not met, so that portion of my bonus I did not get,” Welsh said. “That’s the way it goes, but I guess we’ll redouble our efforts to get there this year.”

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