Walmart had a problem. While the company took many actions to green up its sustainable chain, including the use of sustainability index and scorecards, its buyers still didn’t take sustainability into account during their decision-making process.
So what did Walmart do about it? According to Andrew Winston, the company’s solution was very simple – adding sustainability performance to its buyers’ performance evaluation.
In other words, Walmart chose to join a growing number of companies that link compensation with sustainability, hoping this incentive will ensure its buyers will start looking at sustainability differently. On its face it sounds like a great idea, but it got me wondering – do incentives actually work when it comes to sustainability? And more specifically, can it be an effective tool when it comes to working with the supply chain?
The first question has no clear answer yet. On one hand, you’ve got organizations like Ceres advocating for this solution, saying that “unless companies begin to link compensation to sustainable environmental and social performance, they will continue to sacrifice long-term value creation and competitiveness for short-term, unsustainable gains.” On the other hand, as Prof. Michael Beer of Harvard Business School told Fortune, “coupling pay with certain goals too tightly can force employees to focus on specifics in lieu of the larger picture.”
Searching for empirical evidence, I found only one academic study evaluating the effectiveness of incentives in the case of carbon reduction targets. Its results suggest “that under some conditions (i.e., when employees perceive their action as pro-social behavior) the adoption of nonmonetary incentives might be more effective in reducing carbon emissions compared to monetary incentives.”
The lack of research is probably due to the fact that these incentives are a relatively new mechanism. In addition, the number of companies using them is still fairly low – according to Farient Advisors, approximately 10 percent of the S&P 100 factor environmental issues into their incentive compensation plans, either as strategic objectives or quantifiable goals. Ceres reported that, of the 600 companies it evaluated, only 15 percent factor sustainability criteria into executive compensation.
Nevertheless, the trend is very clear – a growing number of companies like Intel, Unilever, Alcoa, Campbell Soup and Xcel Energy think that tying pay to performance will help them meet their sustainability goals. While there’s still no clear evidence that they’re right, it is still very possible that monetary incentives can increase the importance executives and employees ascribe to sustainability.
It’s important to note, though, that there are many variables that can make a difference when linking progress to reward – what sustainability goals you look at, how you measure them, the right type of incentive (a bonus or an increased chance for a promotion or stock options, as Prof. Beer offers), the scope of the incentives (short-term or long-term), and their weight in the overall performance evaluation. So, the bottom line is that we’ll probably see companies continue to fine-tune their sustainability incentives in the next few years, trying to figure out the best formula to generate the optimal results.
But then again, can it also be effective when it comes to supply chain management? Here, I have my doubts. First and foremost, the question that comes to mind is what impact will it have on the relationships between the company and its suppliers.
Take for example the story Winston tells to show how the new incentive system can generate results at Walmart – using the index scorecards, Walmart’s laptop buyer identified energy use as the biggest determinant of the computer’s total lifecycle footprint and emissions. She found out that only 30 percent of the laptops sold at Walmart ship with advanced energy-saving settings in place, and set a new goal to increase the percentage of laptops sold with the advanced power settings from 30 percent to 100 percent by this Christmas.
The problem is that this is more of a top-down approach rather than a cooperative relationship based on supplier engagement – Walmart identifies the problem, decides on the solution and sets up the timeframe for its implementation. It can certainly help to ensure that the laptops sold in Walmart are more energy efficient, but it’s not clear how well it serves the long-term relationships between Walmart and its suppliers as well as the suppliers’ approach to sustainability.
It also seems to be a one-sided approach – would suppliers meeting this goal be rewarded like the buyer deciding on it? Would they receive a preferential status for their improved performance or be awarded in some way other than just not being kicked out of Walmart’s supplier list?
Finally, there’s also a risk that focusing on too-specific goals rather than on the bigger picture might not be very effective and can even cause more harm than good. For example, Apple leaned on its supplier, Foxconn, to commit to reducing the overtime hours of its employees, only to find out later that students were forced to work as “interns” to help Foxconn meet its needs.
Incentives might be an effective tool, but in the case of a supply chain, if they shift the relationship toward a top-down approach rather a cooperative one, don’t generate benefits for both sides, or miss the big picture, buyers might get higher bonuses, but it won’t help the company meet its sustainability goals.
Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and the New School, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.