As a top executive in a global firm, Stephan Tanda makes a good living. What sets Tanda apart from peers at other firms isn’t what his pay adds up to, so much as how it’s added up. Forty percent of Tanda’s short-term incentive pay and that of his colleagues at DSM, a Dutch-headquartered life and materials science company, is tied not to profit increases or cost reductions or even total shareholder return, but rather to whether the company met environmental and other sustainability goals.
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At the Davos 2014 World Economic Forum, a gathering of more than 1600 global business leaders in Switzerland this week, one of the hot topics is ‘doing business the right way’.
Tanda’s boss, DSM CEO Feike Sijbesma, was just one of the high-powered leaders who took part in a 22 January kick-off panel on executive compensation and some radical strategies companies are trialling to align pay packets more closely to corporate social responsibility goals. Some of the other panel members included PepsiCo CEO Indra Nooyi and Pricewaterhouse chairman Dennis Nally.
More companies are including these unconventional measures in manager’s pay deals, sometimes driven by long-term business planning, sometimes in response to safety disasters like the Deepwater Horizon explosion that killed eleven petroleum workers in the Gulf of Mexico in 2010.
It seems a promising idea, but will aligning corporate behaviour with goals beyond growing the bottom line really change how managers do their job? And can it hope to have a measurable impact on society?
Outrage over high pay for bankers and other financiers connected to the financial crisis continues to leave many sceptical about the whole topic. Last November, Swiss voters rejected a national proposal to cap executive pay. In the Netherlands financial services firms continue to labour under restrictions placed on them following taxpayer bailouts starting in 2008. Yet even sceptics say more companies do seem to be taking a serious look at incorporating these measures into pay structures. “There’s been something of a revolution,” said Paul Hodgson, a frequent critic of big CEO pay packages, and partner at governance research firm BHJ Partners.
One of the hot topics for debate at Davos will be how business leaders and the private sector can support societies undergoing economic transition through more effective corporate social responsibility strategies. And part of this discussion will home in on aligning executive pay with these initiatives.
Today 269 of companies in the Standard and Poor’s 500 Index report are considering some sustainability measures related to environmental issues, safety, or worker engagement in executive pay, according GMI Ratings, a governance research firm based in the US. Among them: chip maker Intel and aluminum producer Alcoa.
But while long on good intentions, these programs often fall short of providing a detailed account of how they are measured and whether performance met targets. Less than 10% of the S&P 500 discloses the specific targets executives are charged with meeting, GMI reports. That leaves investors sceptical. “What gets measured gets managed,” said Tessie Petion, vice president of responsible investment research at Domini Social Investments, which manages $1.3 billion of investments.
Measuring impact on profit can be a particular challenge.
Intel is among the companies which disclose few particulars about their pay targets, saying those details are proprietary, but the firm has reduced greenhouse gasses 35% since 2008 and has saved the equivalent of the energy use of 126,000 US homes for one year. On an investment of more than $59 million the company has reaped electrical savings of $111 million, according to director of corporate responsibility Michael Jacobson.
At Alcoa, where sustainability measures include safety and leadership diversity as well as environmental goals, 20%of executive pay takes its cue from these metrics. Since 2008 when that policy started, productivity improvements, including better energy efficiency, have generated $6.6 billion in productivity gains, according to Kevin McKnight, chief sustainability officer. In the same period, safety incidents have fallen 30%, the number of female executives has risen 43% and the number of minority executives has grown 26%.
DSM, a manufacturer of products for the biomedical, nutritional, thermoplastics industries, among others, has transformed in recent years from a petrochemical-based company to one focused on renewable resources, initially considered using broad measures like the FTSE4Good and the Dow Jones Sustainability Index to evaluate executive performance, but decided those measures were not specific and transparent enough. To come up with metrics just as measurable as financial performance, the firm has focused the sustainability portion of short-term bonus on three measures: what percent of their new products and services offer a clear ecological benefit over mainstream solutions, how well they progressed toward their goal of increasing the company’s energy efficiency by 20% by the year 2020 and measurable employee engagement. Half of executive’s long-term incentive stock grants depend on specific reductions in greenhouse-gas emissions.
Among the recent product introductions helping to meet these goals are enzymes that improve the sustainability of beer brewing, in addition to a product which reduces the methane emissions of cows, and engineered plastics made from oil from non-edible castor beans.
“For sustainable solutions you have to have a responsible private sector,” says Tanda. “But it’s also good business. We are not philanthropists. We absolutely believe that sustainability is good for business, otherwise we wouldn’t have that in there.”