August 5, 2019


As Investors Suggested Tying Executive Compensation to Progress in ESG / Sustainability - Can This Be Factored Into Today's Corporate Pay Programs?

For several decades now, investors have increasingly focused on issues involving executive compensation.  Remember Graef S. Crystal?  Back in 1992 the former compensation consultant to the largest corporations became an activist focused on “excess” pay arrangements for U.S. corporate CEOs (his book was “In Search of Excess – the Overcompensation of American Executives”).

Every company faces the same questions, he explained:  in terms of compensation of the senior management team, how much and how?  He explored the various approaches of the day and set the foundation for conversation about CEO comp over the ensuing years.  

Much progress has been made in linking pay to performance over the years since Crystal’s (and others’) call for reform of the compensation packages of publicly-traded companies.  Institutional shareholder activism has been a factor.

And as we have seen with the passage of new laws and operating rules of the road – for example in Dodd-Frank legislation in 2010 – the Congress attempts to address the issue (the annual public report on the ratio of CEO pay to the median worker in U.S. public companies came about this way).  The corporate proxy statement today greatly illuminates to the board thinking in the structuring of basic compensation plus incentives.

More recently, there are calls from some institutional investors to have executive compensation tied to performance related to ESG / sustainability. Authors Seymour Burchman and Blair Jones writing in The Harvard Business Review see “…the final link in the chain of improving corporate accountability for sustainability is to tie improvements to pay”.  That gets to Graef Crystal’s how much and how?

These are real challenges for boards in considering the how --- the number of possible sustainability improvement goals grows by the day.  The long-term efforts to realize payback from most ESG initiatives don’t easily fit into the usual annual or three-year incentive timeframes.  And then because incentives are typically tied to financial results…revenues, profit, returns…how do you weight the non-financial aspects?

The authors (both experienced compensation advisors) set out five steps to designing sustainability incentives to address these challenges and more to enable boards and management teams to create incentives that respond to internal and external stakeholder priorities.

Briefly, these are: (1) reexamine the context – what are your measurements?; (2) clarify the organizational scope – where to apply the incentives; (3) quantify the duration (time horizon); (4) consider the ends and the means – what are the goals?; (5) and then structure the incentives.  The authors spell out the specifics of each of the five steps.

The public discussion that Graef Crystal helped to start on the subject of senior management compensation a quarter-century ago continues today with varying expectations of investors about how much and how, but with far greater transparency on the part of companies about their plans. We are now seeing companies acknowledging the importance of factoring progress in sustainability efforts into the pay packages. 

We think corporate boards and managements, and investors in the enterprise, will find the Top Story of importance in the context of the growing expectation that executive compensation will somehow reflect the continuing embrace of sustainability (or “ESG”) by public companies of all sizes in the U.S.A. – and by a growing number of mainstream asset owners and their managers.

This Week's Top Story

5 Steps for Tying Executive Compensation to Sustainability
(Source: Harvard Business Review) - The final link in the chain of improving corporate accountability for sustainability is to tie improvements to pay. In our last article, we explained that companies should use incentives to motivate executives to tap big...

In Focus: Sustainability Standards Setters & Policy Makers

Reporting drives corporate change to achieve SDGs  
(Source: Global Reporting Initiative -GRI) - Amsterdam – An ambitious project has been launched to explore how the private sector can actively contribute to the Sustainable Development Goals (SDGs) – and what the role of reporting and partnerships is to support this process.

Auto emissions deal between four major automakers and California opens door for others to follow suit (Source: Ceres) - California’s new agreement with four major automakers that acknowledges the state’s authority to set vehicle fuel economy and emissions standards…

United Nations announces 2019 Climate Action Summit ‘Clean Air Initiative’, Calls On Governments At All Levels To Join
(Source: United Nations) - Ahead of the upcoming 2019 Climate Action Summit, the United Nations, the World Health Organization (WHO), the United Nations Environment Programme (UN Environment) and Climate and Clean Air Coalition announced today the “Clean Air Initiative”, calling on governments at all levels to join the Initiative.

New International Standard for water efficiency just published
(Source: ISO) While some parts of the world are ‘flush’ with freshwater, others face serious drought. What’s more, only a fraction of the world’s freshwater is available for us to use and drink, as the rest is in the sea or frozen in glaciers1). As the world’s population continues to put pressure on this limited supply,...

ESG/Sustainable & Responsible Investment

Sustainable Funds at Midyear
(Source: MorningStar)
-Sustainable funds experienced record flows in the first half of 2019 alongside generally strong relative performance. Conventional funds continued to add environmental, social, and governance criteria to their investment process....

Corporate Sustainability - ESG

200 CEOs Call on New EU Leaders for Sustainable Europe by 2030
(Source: Sustainable Brands

“It’s Been A Huge Shift”: How Sustainability Is Revolutionizing The Tech World
(Source: Vanity Fair)

E-commerce’s sustainability problem isn’t just the packaging
(Source: GreenBiz)

Report Cites U.K. Automotive Sustainability, Productivity Gains
(Source: Wards Auto


Sponsored Message

Global Sustainability: Continuing Forward Momentum!

Climate change report: Few places will be unaffected by extreme heat conditions by midcentury
(Source: Northern Kentucky Tribune

Consumers and Sustainability - Quo Vadis?

Consumer engagement in sustainability is ‘low’: Can an accessible story buck the trend?
(Source: FoodNavigator) - New research from Lumina Intelligence concludes that consumer engagement with sustainability claims is currently ‘low’. But mission-based brands supporting a clear cause could point the way to reversing this trend .


G&A Institute Sustainability Update
Informative, insightful, thought provoking
Governance & Accountability Institute's blog focusing on the sustainable world evolving daily before our eyes. Read it, absorb it, question it and challenge.

Plastic Bottles, Past Present and Future – Are They a Factor in Your Organization’s Operations? Some Remedies to Consider…

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