This post originally appeared in Forbes. It has been reprinted here with their permission.
In corporations across the globe from Intel to Xcel Energy , a new trend has emerged in binding executive compensation to progress made on corporate sustainability goals, including reductions made in energy costs and consumption. The changing legislative and financial landscape in the U.S. and elsewhere underscores the potential impact of this trend on every executive in America.
Managing executives based on performance to goals is nothing new. Management by objectives is a mainstay of most executive compensation plans to ensure pay and strategic growth are closely aligned. Most options packages include a vesting period to maximize the contribution of employees associated with organizational goals. Key performance indicators have been the benchmark system of HR departments for years. Performance-based pay is a common method of compensation.
But a new indicator of organizational performance has emerged that has potentially far-reaching implications: the achievement of sustainability goals. Sustainability has slowly moved into the realm of finance and corporate oversight as energy, carbon emissions, water, and waste have become financial assets in terms of reduced cost, risk mitigation and new lines of revenue. The Securities & Exchange Commission recently issued guidelines for corporate disclosure around sustainability because it sees this as a key risk for corporations, including the impact of climate legislation and even the physical impact of climate change.
Even shareholders are using their considerable leverage to move companies to address sustainability in their business plans. With the public outcry regarding golden parachutes provided to top executives and the subsequent financial collapse, executive compensation has become a highly visible, hot-button issue. So have corporate responsibility and environmental track records. Corporations are responding by combining the two: tying executive compensation to the success or failure of company-wide sustainability initiatives. Just as energy and carbon are being treated like any other financial asset, companies are looking toward sustainability as a new way of measuring corporate success–and the financial motivations of their executives.
U.S. corporations are reacting swiftly. Investment in environmental products and services is skyrocketing–the global market for low-carbon and environmental goods and services (LCEGS, which includes alternative fuel vehicles and waste management) was worth over $5 trillion in 2009 -and companies are starting to look at their own internal operations for incentives to green their business.
The corporate justification for aligning executive compensation and sustainability goals shouldn’t be surprising. While the American conversation on the environment has focused on climate regulation, corporations have recognized for some time that change is coming. For them it has not been a question of if this change will occur, but when. The immediate corporate response was to establish a baseline and internal metrics around sustainability, spurring the Enterprise Carbon & Energy Management software market and a $9.6 billion market in sustainability consulting. Corporate culture is now following suit.
This trend isn’t isolated to countries where there are environmental markets; it is clear and pervasive across industries around the globe. In addition to Intel and Xcel Energy, companies such as ING, National Grid, Suncor Energy and others are making executive compensation decisions based on how well the company’s business units perform in relation to its sustainability goals.
What’s new here is the notion of performance in sustainability, and it has far-reaching implications for business. To reach this level of analysis on executive compensation, companies needed to walk before they could run. Even a few years ago, there were few technologies or consultants who could accurately calculate an organization’s sustainability footprint, at least at an executive level. Today there is a wide range of solutions available to help companies manage their entire sustainability portfolio, from energy to carbon, water, and waste. What was once a major corporate effort and expense can now be done online at minimal cost, providing companies with all of the information required to make strategic decisions around sustainability.
This fundamental shift in the availability of corporate sustainability information is a double-edged sword, making data more available to not only corporate leaders but also to those who hold them accountable, including shareholders and regulators. This is the key driver for a wide range of corporate developments in sustainability, including executive compensation, and it will continue to filter down into organizations and into organizational relationships including vendors, partners, and customers.
It is no longer enough for companies to simply address their sustainability goals with mere compliance; they are now held to a much higher standard to set reduction goals and accurately report on progress, managing the performance of their organization towards these goals. Their customers, shareholders, and even regulators are starting to demand it.
Michael is the former CEO of the Global Reporting Initiative, Carbonetworks, and other sustainability organizations. He has been an advisor and CEO in sustainability for almost 20 years, and writes about technology, sustainability, and social innovation.