Should Executive Compensation Be Tied to Sustainability Goals?
Alan L. Johnson
There are numerous examples of companies tracking towards meaningful sustainability goals, but would aligning executive compensation to these goals make them more successful? In an article by Seymour Burchman in the Harvard Business Review entitled: "How to Tie Executive Compensation to Sustainability," Burchman discusses the path to having executive compensation tied to sustainability goals like eliminating poverty, offering affordable and clean energy, achieving gender equality, protecting ecosystems, and increasing responsible consumption and production.
The article describes the recent state of affairs with corporate shareholder:
The challenge of running a sustainable enterprise has taken center stage among shareholders. Last year, for example, Russell 3000 companies received 144 shareholder proposals requesting action on social and environmental issues. Meanwhile, in a survey of 89 institutional investors by Callan, 43% of respondents said they incorporate sustainability factors into their investment decisions — up 21 percentage points from 2013.
What is interesting is that sustainability goals continue to take precedent over many other issues, but unfortunately not all companies have the same interest in these pursuits. The good news is this may be changing.
Though not all businesses today are in a position to implement big strategic initiatives based on sustainable thinking, the opportunities to pursue them are growing fast. According to a survey by the UN and Accenture, 63% of executives believe that sustainability will cause major changes in their businesses in the next five years.
Burchman recommends that executive compensation be tied to limited outcomes:
By limiting the number of sustainability goals in its incentives, companies can wield huge power to change leaders’ behavior. An auto executive’s bonus might depend on advancing the company’s electric vehicle, connected and autonomous vehicle, or ride-sharing business. A financial services firm’s executives might be rewarded for the percentage of affordable capital that’s allocated to worthy sustainable projects, such as renewable energy or sustainable agriculture.
If executive compensation is pegged to sustainable goals, what additional success comes with it? Well, a McKinsey survey of retailers and consumer goods manufacturers found that almost half of those undertaking sustainability initiatives were pursuing new business or growth opportunities. Not only are sustainability initiatives helping to drive brand loyalty and improved social governance, but they are leading to new business value as well.
Reality Changing Observations:
Q1. How would you tie executive compensation to sustainability goals?
Q2. What sustainability goals do you care about the most?
Q3. Are there ways in which you can educate people about sustainability goals?