Executive compensation is the path to sustainability

The key to corporate social responsibility is to link executive compensation to sustainability goals. John Dyer reports from Boston.

Shareholders are increasingly calling on managers to devote more time and energy to achieving sustainability.

To satisfy them, boards of directors need to alter their approaches to executive compensation, argued Seymour Burchman, a managing director at Semler Brossy, an executive pay consultancy, in a recent issue of the Harvard Business Review.

New kinds of strategic thinking

“Boards should demand entirely new kinds of strategic thinking from management, the kind of thinking that not only makes the company more sustainable but also aids suppliers and customers in becoming so,” wrote Burchman.

Specifically, if they want executives to devote attention to sustainability, directors must identify goals that comport with their companies’ core missions while choosing to place less emphasis on targets where they can’t make an impact, he suggested.

“Directors should remain focused…on isolating a limited number of sustainability goals that deliver the most value,” Burchman wrote. “And that value should be of such scale that it will energize executives to go after it, in turn yielding the biggest reward for shareholders, other stakeholders, and society.”

Link core mission to sustainability

Companies can’t alter their models to the point where they abandon their core missions. But they can figure out their niches where they can thrive.

Coca-Cola and PepsiCo might aim to preserve water sources. Rio Tinto and Teck Resources might devote research and development to mitigating the environmental impact of mining. McDonald’s, Dunkin’ and Nestlé might improve their labour practices.

Tying a proportion of executive pay to those goals rather than solely to total sales of soda, overall revenues from commodities or controlling growth in employees’ wages would compel executives to address their companies’ biggest impacts on sustainability.

Shareholders want more emphasis on ESG goals

Burchman cites a number of surveys that suggest boards need to change if they want their competitors to remain competitive among increasingly sustainable-minded customers and stakeholders.

Shareholders in 144 companies in the Russell 3000 index, which includes the 3,000 biggest trade stocks in the United States, forwarded proposals last year calling for more emphasis on environmental, social and governance, or ESG, goals.

A Callen survey found that 43 per cent of 89 institutional investors were incorporating ESG in their portfolio moves, a 21 per cent increase from five years before. A recent McKinsey survey found that half of the retailers with sustainable initiatives were developing news business. And a United Nations-Accenture poll found that 63 per cent of executives expected sustainability to influence their businesses in the next five years.

Sustainability is a competitive edge

“If that shift ends up determining which companies thrive in the future, then it’s likely that incentive goals must apply to bold business opportunities,” wrote Burchman.

He gave an example of a heavy-equipment manufacturer that had 14 sustainability goals but only one that really made a difference given the nature of the business: recycling parts. Providing incentives to executives who grow revenues from recycled parts would clearly achieve a sustainable goal.

“By limiting the number of sustainability goals in its incentives, companies can wield huge power to change leaders’ behaviour,” he argued.

Key questions need to be asked

Directors needed to ask themselves three questions when considering how to incentivize executives, Burchman concluded.

First, they needed to identify where the company has a unique opportunity in sustainability. Second, they needed to determine if their company was competent in pursuing a sustainable goal. Third, they need to ask themselves whether pursuing that goal yield a return on investment? Striving for sustainability that yields unintended consequences that hurts the company, after all, doesn’t help anybody.

An auto executive’s bonus, Burchman wrote, might depend on the success of the company’s electric vehicle business. That’s a unique opportunity given the growing market in electric vehicles. It’s a goal that an auto company can obviously pursue. And it’s likely one that will result in sales because customers to drive want cleaner, efficient vehicles.

Lastly, in a move that would almost certainly motivate managers, wrote Burchman, boards could claw back bonuses and pay the company failed to achieve its sustainable goals.

You may also like...

Leave a Reply