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The Greening of Executive Pay

The Greening of Executive Pay

David Wentworth | i4cp

August 25, 2010

There’s a new metric in town when it comes to determining executive pay – at some companies at least. Now, in addition to earnings per share and stock prices, some executives are earning incentive pay based on a series of sustainability measures.

The trend is a bit more common in Europe than it is in the U.S., with the Dutch leading the way. Chemical company Akzo Nobel, life sciences group DSM and mail operator TNT all have at least a small portion of executive pay tied to environmental improvements. According to Monique Pennings, who is part of the Corporate Responsibility and Sustainable Development group at financial giant ING, corporate responsibility and sustainable business practices are part of their core business. Now, many firms say this, but ING seems to be put their money where their mouth is, so to speak. Sustainability is being integrated into the personal accountability and performance objectives of senior management. Pennings says that performance objectives will be increasingly tied to non-financial drivers.

How much will pay be tied to these drivers? For 2010, at least 40% of the total variable compensation for members of the executive board will be based on non-financial performance indicators. Some of those indicators include diversity in the workforce, employee engagement, development of sustainable products and community investment. Pennings says that ING has a “long-term aspiration to belong to the sector leaders in the Dow Jones Sustainability Index.”

In the U.S., Minnesota-based utility Xcel Energy has also integrated various sustainability indicators into executives’ annual objectives. About 25% of executives’ incentives are based on non-financial metrics, including decreases in emissions and safety performance.

When a company puts its executives on the hook for sustainability initiatives, it indicates that there is more at work than a simple green marketing ploy. It says that executives in these organizations are serious about these issues and are willing to bet at least some of their pay on them.

Does tying executive compensation to sustainability and social responsibility goals lead to better overall organizational performance or is it taking executive eyes off the ball? Does your organization have goals relating to sustainability and social responsibility that are tied to executive compensation?

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