This article originally appeared on Robin A. Ferracone’s “Executive Pay Watch” blog on Forbes.com.
In the spirit of Earth Day last Friday, I did some reading on what companies are doing these days to improve environmental sustainability, curious to see whether such programs are finding their way into incentive plans, and whether they are providing tangible results. So, I asked myself the following questions:
- To what extent are companies incorporating sustainability measures into their incentive plans?
- To what extent are such measures quantifiable and challenging vs. a walk in the park (so to speak)? Are there good examples of what companies are doing in this regard?
- Is sustainability accretive to the value of businesses that have sustainability measures and rewards? In other words, we know that sustainability is good for saving our planet, but is it good for shareholder value?.
Well, I didn’t have far to go to find companies that are incorporating some sort of sustainability agenda into their incentive plans. According to Farient Advisors, approximately 10 percent of the S&P 100 are currently factoring environmental issues into their incentive compensation plans, either as strategic objectives or quantifiable goals. These companies are employing a broad portfolio of sustainability goals, including the reduction of greenhouse gas emissions, waste management, water conservation, and being a sustainability leader, as indicated by being included in the Dow Jones Sustainability Index, for example. (For those of you not familiar with the Dow Jones Sustainability Index, it uses “a defined set of criteria to assess the opportunities and risks deriving from economic, environmental, and social developments.”)
To better illustrate the point, I found a number of real life examples on how companies can incorporate sustainability into their incentive plans, three of which are shown below:
Dean Foods: Dean Foods expressly charges board members with governing sustainability. The Audit Committee oversees corporate social responsibility policies, including those covering sustainability, ethics, compliance, and reputation, while the Compensation Committee evaluates executive officers on the basis of these factors, weighted 40 percent. The CEO is measured on the basis of instilling a culture of ethical behavior and social responsibility. The Chief Supply Chain Officer is measured on the basis of saving water, improving energy efficiency, and reducing waste output in the supply chain. With the aid of such goals, Dean Foods has cut water use by 5.6 percent over the last year, and has reduced greenhouse gas emissions by 6 percent over the last three years.
Xcel Energy: As an energy and utility holding company, Xcel has a significant stake in environmental preservation and marks its commitment to sustainability at the highest level by applying specific quantitative metrics to incentive awards. In fact, one-third of the CEO’s annual bonus is tied to environmental performance, as measured by renewable energy, emission reduction, energy efficiency, and clean technology.
Environmental sustainability is also taken into account in long-term incentive awards, as 25 percent of restricted stock units granted have a performance-based vesting schedule related to Xcel’s position as a leader in environmental conservation.
Alcoa Inc: Since 1993, Alcoa has published its long-term environmental sustainability goals and progress. Last year, Alcoa took a step forward in its level of commitment by including such goals in its executive annual bonus plan. With 80 percent of the bonus plan tied to traditional financial metrics, 20 percent is reserved for non-financial goals including safety, diversity, and environmental health, as indicated by reducing CO2 emissions by 400,000 tons in 2010 (weighted 5 percent).
Many of the companies that incorporate sustainability objectives into their incentive plans report on how these objectives are helping them create value for investors through things like reducing costs, attracting and retaining customers, spurring innovation in the design of new and improved products, enhancing reputational value, and providing a more inspiring place for people to work.
Many investors now make their investment decisions on the basis of corporate social policies, including sustainability. In addition, others cast their shareholder votes in accordance with shareholder resolutions that support sustainability. For example, TIAA-CREF, the largest of the institutional investors with over $450 billion in funds under management, states that their policy for Global Climate Change is to “generally support reasonable shareholder resolutions seeking disclosure of greenhouse gas emissions, the impact of climate change on a company’s business activities and products and strategies designed to reduce the company’s long-term impact on the global climate.”
To be sure, the trend toward a focus on sustainability is not a short-term fad or fix. Corporate social objectives are big ideas that take time. Diversity, for example, has been a corporate social objective for the last 30 years, and we’re still working on it. Similarly, sustainability will attract increasing attention over the next several decades. If your company has not yet addressed the sustainability issue, it might be a good time to start. After all, it seems as though what’s good for the planet is good for business.
Robin A. Ferracone is the Executive Chair of Farient Advisors LLC, an independent executive compensation and performance advisory firm that helps clients make performance-enhancing, defensible decisions that are in the best interests of their shareholders. Robin Ferracone is the author of a recently published book entitled Fair Pay, Fair Play: Aligning Executive Performance and Pay, which explores how companies can achieve better performance and pay alignment. Robin can be contacted at firstname.lastname@example.org.