Well, it’s about time. Bonuses strictly related to quarterly profits may become a thing of the past as the corporate image of BP and its dubious sustainability measures have wreaked havoc on their stock price; rather, rewards based on a deeper measurement of sustainability may start to pay off.
In fact, the recently published Roadmap to Sustainability developed by Ceres, a Boston based network of institutional investors, shows that increased attention by upper level management on sustainability is forcing companies to change. It’s important to note that Ceres also directs the Investor Network on Climate Risk (INCR), a group of more than 70 leading institutional investors with collective assets of more than $7 trillion.
Numerous examples of this new bonus structure are starting to pop up. Two of Holland’s largest companies have announced plans to link cash bonuses to greener concepts. Dutch life sciences giant DSM, and postal operator TNT, have produced sustainability bonus schemes.
AzkoNobel, a Netherlands-based paint and chemical company, is the first to try this publicly as 600 of its managers will now be reviewed based on how much they have done to reduce greenhouse gas emissions, water consumption, waste and energy inefficiencies, and employee injuries. Fifty percent of Azko’s executive bonus will be based on the finances of the company, while the other 50% is now focused on various sustainability goals. This will all be scored and watched under how they eventually rank in the Dow Jones Sustainability Index.
“We are convinced that strong corporate values, including care for the interests of employees, customers and the environment, are a strong precondition for stable, long-term, above-average results for a company,” said Carola van Lamoen, pay expert at Robeco Investment Management Company.
Core factors for companies looking to implement such pay structures exist as well The recent Berrone/Mejia study which Gina-Marie Cheeseman recently covered lays out three factors that should be considered when designing new compensation schemes:
- “Informativeness,” or the extent to which the performance measure actually reflects the agent’s contribution to the principal’s welfare.
- “Risk bearing,” or the extent to which an agent may incur potential losses in pursuit of performance targets (such as lower reputation or high employment risk).
- “Controllability,” or the extent to which an agent can exert some influence over a performance criterion.
In the not so far future, CEOs may be incentivized by quarterly earnings along with reducing their carbon footprints to continue receiving such lumpy bonuses.