It’s Time to Tie Executive Compensation to Sustainability

Despite conflicting messages about climate change from U.S. government leaders, sustainability is getting more and more attention at American companies. Shareholders are ratcheting up their demands on environmental and social issues. Consumers are registering their concerns about how companies make their products. And talented Millennial employees are voting with their feet by leaving laggard companies behind. Meanwhile, new technologies are making it easier for sustainability investments to pay off in the middle to long term.

A similar phenomenon happened in the 1980s, when quality became a significant issue for manufacturers. Many of them responded by including quality metrics in their compensation incentives. These moves helped to focus executive attention and ensure that quality initiatives actually got carried out. Over the next decade, quality levels improved substantially. It’s time for companies to start doing the same thing for sustainability.

As any compensation consultant will tell you, comp plans can address only so many metrics. Most plans have fewer than six: one or two financial metrics, such as sales growth or earnings per share, and two or three nonfinancial metrics, in areas such as quality or innovation. 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.

Read the full article at the Harvard Business Review (HBR).