Ethical Performance
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Sweetening the deal for sustainability?

August 2015

More and more companies are linking staff pay and bonuses to sustainability performance. Is it a fad, or a genuine tool to drive employee engagement at scale? And is it having the desired impact? Tom Idle reports

A multitude of studies point to the fact that there is little correlation between how much people earn and how happy they are. New research by the recruitment business Michael Page reveals that hairdressers might well earn ten times less than most chief executives, but they are just as happy with life. Fitness instructors take home an average of £10,378 a year. But they are happier than lawyers who earn more than £75,000. In fact, the happiest workers in the UK are vicars, who earn less than the national average of £26,500.

Despite this continued reinforcement of the fact, it is human nature to react to our pay slips at the end of each month. And while not everyone is in support of the bonus culture that is still prevalent in most Western economies, most of us like to be recognised, and would appreciate being financially rewarded, for doing a good job. Money might not bring happiness, but it certainly offers stability, choice and freedom.

Of course, traditional pay and bonus structures have been linked to economic growth; ‘Make more sales, hit your targets and generate more profit for the business, and you will be rewarded for your efforts’. It is an approach that works and has done for hundreds of years - especially when base pay is kept low in a bid to incentivise bonus-chasing, and the economic growth that comes with it.

But could a similar executive compensation mechanism work in helping companies to meet their sustainability goals? Those that work in corporate responsibility and sustainability (CRS) are satisfied with their jobs. The latest Salary Survey, carried out by CRS recruitment specialists Acre, shows that more than 50% of professionals are ‘satisfied’ with their jobs and around 28% are ‘very satisfied’. More than 90% of them say they would recommend a career in the sector.

So, is it possible to financially incentivise people that are inherently happy in their work? After all, people go into this profession for the love of it, rather than the money, don’t they?

Well, a number of companies are experimenting with compensation structures to engage the staff that will ultimately help them to meet internal operational efficiency goals, such as saving energy, waste and water. Employee engagement is one of the biggest challenges for companies right now, according to the sustainability professionals that responded to a recent survey by 2degrees.

A study by Ceres, the US-based advocacy non-profit, reveals that 24% of large companies in North America are now incorporating sustainability performance into executive compensation packages - up from 15% in 2012.

While most of these payments are linked to compliance-based performance - such as keeping a check on health and safety issues or pollution incidents that might lead to legal challenges and financial penalties - some are going beyond rewarding people for merely helping companies stay within the law. Around 3% of companies are today linking executive pay to things like improving workforce diversity, reducing water risks in the supply chain or reducing greenhouse gas (GHG) emissions.

The aluminium business Alcoa, for example, allocates 20% of executive bonuses to environmental stewardship, including voluntary GHG emissions reductions, energy efficiency and improved diversity.

The Colorado-based utility, Xcel Energy ties executive compensation to specific performance measures, such as the amount of energy it helps its customers save.

At the City accountancy practice, Grant Thornton, the newly-appointed CEO Sacha Romanovitch has brought in a John Lewis-style profit share scheme, designed to boost salaries across the business by 25% and bring back “trust and integrity” to the company. The 47-year-old is capping her own salary, limiting it to a maximum of 20 times the average salary in her firm - a fraction of the 149 times average ratio across FTSE 100 businesses.

Meanwhile, Unilever’s CEO Paul Polman famously received a significant bonus in 2014 for meeting sustainability targets. And the likes of Marks & Spencer, Royal DSM and British Land have also started to integrate sustainability-related pay into their executive KPIs.
But are these approaches having the desired effect in driving sustainability improvements and creating companies that are fit for the future? Is the CSR profession upping its game, motivated by the promise of extra cash?

According to Lydia Langford, a manager at Acre, “a number of companies I have spoken to have seen a significant improvement in sustainability performance when related to exec bonus payments. It sends out a strong message to the business when initiatives are driven from the senior management.

“For non-sustainability individuals, who may be more interested in commercial streamlining, if embracing sustainable efficiencies impacts their total remuneration directly, then they are likely to embrace it and percolate it down to their teams.”

The computer-chip giant Intel started linking environmental performance to every employee’s compensation back in 2008. It worked. By 2012, the company’s GHG emissions had dropped by 35% on an absolute basis, and by 28% on a per-chip production basis - all against a backdrop of continued business growth.

In 2013, Intel ran an internal competition for staff designed to get them to come up with new innovations that the company might be able to use itself or put out into the market. By offering a bonus for every member of the team that had the best concept, the company managed to generate a host of new ideas. The winning project, from a team in its New Mexico office, found a way to reconfigure energy flows and reduce CO2 emissions by 27,000 tonnes a year from one of its central utilities buildings.

And it is in motivating people to develop innovations that will help companies prepare for a new, future sustainable economy that financial-reward mechanisms might be most useful. That’s certainly the view of Andy James, co-founder of Six Degree People. He spends his time helping companies find their next business leaders and creating advisory boards that will help them develop more innovative strategies. Rather than linking executive pay to being less bad (e.g. improving environmental efficiencies), James says more and more companies are looking into how they can motivate people (by extra cash, or otherwise) to develop “products and services the world needs more of” - something he says will come about by “encouraging co-creation and ideas hubs - taking away the hierarchy to create a more empowered innovation culture at all levels of a business”.

Ramon Arratia, sustainability director at the carpet-tile manufacturer, Interface, agrees. He says there is a danger that companies will end up linking compensation to “naive sustainability targets, rather than strong goals linked to business success”. “Just think about how you would link sustainability and executive pay at a traditional oil and gas business, for example,” he asks.

For Langford, keeping sustainability performance separate from commercial success could discourage an organisation from truly embedding more future-proof practices into business as usual. “Organisations need to embrace the true value and commercial benefit of sustainability across the business, so it becomes wholly integrated to all business activities and the true ROI can be established,” she says. “However, until that happens, it can be a useful way to kick start executives in to embracing sustainability into their business unit.”

Whether or not people will be motivated to embed sustainability into business quicker, faster and more effectively because big bonuses are on the table, “it’s too early to say,” adds James. But it seems that sustainability-related performance bonuses are here to stay, however they might manifest in the future, as sustainability becomes more commercially-integrated and mainstream across the business world. 

Global | embedding values

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