19 Aug Tie Executive Compensation to Sustainability, Harvard Business Review
Seymour Burchman and Barry Sullivan draw parallels between sustainability metrics and quality metrics introduced by manufacturers in the 1980’s in executive compensation incentives in a recent article in Harvard Business Review. The quality metrics where shown to focus executive attention and ensure quality initiatives actually got carried out. Over the next decade, quality levels improved substantially. The authors argue this should now be replicated with sustainability metrics. As highlighted by the authors, most compensation plans have fewer than six metrics. Having any more than that risks diluting executive focus. So for a compensation committee to justify a new metric, it needs to have a strong business case:
- A strong commitment to sustainability can boost a company’s reputation with customers and employees.
- It can generate political capital with government regulators, who may then grant the company greater freedom of movement.
- The company can also create profitable new products and services to address the urgent global needs such as those associated with scarce water supplies, hunger, and greenhouse gas emissions.
- Finally, some sustainability investments can pay for themselves through reduced energy consumption and waste over the long term.
As addressed by the authors, BlackRock, recently said, “Environmental, social, and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects.” That phrase — “relevant to a company’s business” — is a key condition according to the authors. Rather than aiming at all 17 of the United Nations’ Sustainable Development Goals, for example, companies will likely tailor their sustainability efforts to their commercial priorities. Moreover, not every company should expect to add sustainability to its core compensation metrics, at least not right away according to the authors. Without well-defined metrics tied to concrete plans, sustainability becomes a vague goal that’s easy for executives to game. Linking sustainability to executive compensation is not for every company, as of now, but for those that are ready for the concrete commitment, it can pay off in long-term market leadership.