Posted: December 14, 2021
In the United States, the average CEO earns about $20 million per year. Usually, only a small percentage of this is in the form of an actual salary. The rest is attached either in the form of stock options or bonuses. By structuring the compensation this way, CEOs have an incentive to increase the company’s stock price and satisfy investors. Meeting certain business metrics can also unlock hefty increases in terms of executive compensation. These metrics are usually tied to the company’s performance and can be things like improved sales, increased market share, or a successful launch of a new product. However, lately, companies are starting to tie these bonuses to targets relating to climate change. More specifically, reducing the company's carbon footprint and adhering to sustainable business practices. Let’s take a look at whether linking climate targets to executive pay will truly amount to real change. Linking pay to performance The ideology behind compensation on any level is simple. Pay people to do tasks that need to be done. The more that these people are paid, the more incentive they will have to get the job done. In general, this model has worked fairly well in corporate America. In line with their hefty compensation plans, CEOs and top management are usually some of the hardest working people in the room. According to a study by Harvard Business Review, the average CEO works almost ten hours per day. The relentless work ethic of CEOs has helped turn the United States into a global powerhouse. So, if boards want CEOs to focus on their company reaching certain climate goals, the straightforward answer is to pay them to do just that. However, there is one missing ingredient. Accountability is key For the most part, business metrics are very easy to define and measure. A simple equation will help you determine whether a company has increased sales by 10% from the previous year. Unfortunately, when it comes to climate goals, most metrics are tough to define. For a company like Apple, it’s nearly impossible to measure how much carbon dioxide it produces each year. It’s even harder to measure whether Apple has reduced its carbon output year over year. The key to making sure that companies actually follow through with their climate goals will be accountability. As best as possible, companies need to set measurable goals that CEOs will either meet or not meet. If the CEO falls short, the Board should not be shy about withholding pay (just like they would for failing to meet a sales metric). A few companies are already starting to do this. For example, Shell is just one company that is linking CEO pay to meeting metrics for reducing its carbon footprint. A few of the other companies that have taken this step are American Electric Power, Chevron, Duke Energy, Lockheed Martin, and Raytheon. If these executives are successfully held accountable for meeting these goals then it should truly amount to tangible change. However, only time will tell if these compensation packages end up really making a difference. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at firstname.lastname@example.org or by phone at 415-618-6060.