Environmental Impact Targets, Sustainability Guidelines and How they Affect Executive Compensation

Posted: April 20, 2021

In today’s globalized world, many companies have grown to dominate entire industries, sell millions of products internationally, and employ hundreds of thousands of people. While these companies provide massive value to the general population, they also put tremendous strain on the environment. Due to this, there is tremendous social and consumer pressure on these companies to be mindful of the harm that they may be doing to the environment and economy. The success of these companies has been good for many facets of society, but it has also led to massive income inequality and contributed climate change through the use of fossil fuels and unsustainable business practices. To compensate for this, boards are starting to implement sustainability initiatives so that companies can continue to move forward while also limiting the negative impacts their business might be causing. One of the ways that they ensure these initiatives are met is by tying the compensation of their executives directly to meeting these goals. Why the push for ESGs and environmental initiatives? Societal problems like income inequality and climate change are not any one person or company’s problem to solve. However, these issues can be frequently linked to the activities of major corporations. The rise in executive compensation over worker pay creates income inequality and the fossil fuel consumption needed to manufacture and ship products around the world has been harming the global environment in a measurable and quantifiable way over the last 100 years. While large multinational corporations aren't solely responsible, they contribute in a larger way to these issues than the average individual or smaller company does. Shareholders and boards are putting increasing pressure on major corporations to solve these problems by creating incentive compensation plans for executives who can steer their company's policies in such a way as to limit the negative effects of corporate activities. As we saw with COVID-19, it is also in the best interests of many companies to combat major societal or environmental issues since unsustainable business practices could end up negatively impacting their businesses in the long term. Companies are starting to view things like climate change as something that has the potential to devastate their supply lines and hurt profits in both predictable and unforeseen ways. If companies can curb their environmental impacts now then it is almost certain that they will mitigate the future risk to their business by doing so. One of the main ways that companies are doing this is by setting environmental/societal impact goals and then encouraging CEOs and other top executives to meet them. Executive compensation and ESGs The traditional way that companies compensate top management is by tying their pay to increasing the company’s stock price and increasing shareholder value. However, the new trend for major corporations has been to tie executive compensation to metrics that proactively drive sustainability. Shareholders are content knowing that companies are working to offset the environmental and societal problems that they are contributing to. One example of a company that took such an initiative is Clorox. Through their “Ignite Strategy” they became one of the first firms to create a plan for cutting their greenhouse gas emissions and making more eco-friendly packing. The overall goal of the strategy is to achieve “profitable, sustainable, responsible growth”. The compensation for their CEO and CFO is directly tied to meeting this initiative. It is likely that we will see many other companies follow their lead. However, a problem with doing that is also ensuring that these ESGs will lead to long-term profitability and shareholder value. Crafting an executive compensation plan that leverages recent interest in ESGs is a fantastic way to ensure long-term sustainability for the company, the environment and the executive's pay structure. Leveraging the expertise of an Executive Compensation Consulting Firm such as Veritas is the best way to begin the process of achieving these goals. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at fglassner@veritasecc.com or by phone at 415-618-6060.