How National Grid Ties Executive Pay to Carbon Reduction
Utility company National Grid made headlines earlier this year when it revealed it would be basing executive’s compensation, in part, on their performance against targets for reducing carbon emissions.
Joe Kwasnik, Group Head of Climate Change for National Grid, joined Environmental Leader to explain some key points about how National Grid will implement the program.
Previously Vice President of Environment for the U.S. businesses of National Grid, Kwasnik now develops corporate policy, strategy and implementation of initiatives to help the London-based company achieve a lower carbon, more energy efficient business.
At National Grid, Kwasnik explained, three units are tasked with devising budgets to reduce carbon dioxide, methane and other emissions:
- Electric distribution and generation
- Gas distribution business
- Shared services – i.e., supply chain fleet, etc.
While the company operates in the United Kingdom and the United States, each with different industry standards and government operations, National Grid does not run the operations separately. For instance, an executive tasked with reducing carbon emissions in the supply chain fleet oversees the process in both nations.
In all, the company’s four executive directors and the chief executive officer will have performance targets tied to carbon reduction goals.
Key #1 – Recognize that change is coming, and get ahead of the curve.
The fact that many governments are targeting 2050 for 80 percent greenhouse gas reductions played into National Grid’s strategy to incorporate carbon targets into executive performance, Kwasnik said. “We decided we needed to weave that into our internal budgets and operations, including executive incentives. We set the targets at a high level and then we leave it to the business units to come up with plan on how to get there.”
To judge performance most fairly, Kwasnik said, National Grid bases its goals on carbon-equivalent budgets, since more than just carbon dioxide is being measured.
Key #2 – Establish a baseline and internal metrics.
First, the company had to set a baseline measurement of its carbon footprint. Over the past five years the company used internal audits. But now it has hired an external firm, URS.
“With an emissions inventory in place, you can begin to develop proximate emissions budget, which is based on the 2008 inventory,” he said, adding that executives are tasked with bringing their 2009 budget under the 2008 budget. The carbon targets will not be included in their performance packages until 2009, a year after the goals were put in place, Kwasnik said.
Executives are expected to reduce their group’s carbon budget 1-1.5 percent each year until 2050.
By 2020, National Grid wants to achieve a 45 percent reduction in carbon emissions.
Each group is measured by three targets:
- Tonnage, which varies by business unit
- An efficiency target, which divides tonnage by the amount of electricity produced
- Establishing a planning process to establish low-carbon emissions in the future.
National Grid estimates it will emit about 11.5 million tons of carbon dioxide equivalent this fiscal year.
Key #3 – Create a culture that rewards carbon reduction.
Since 1990, the company has reduced its greenhouse gas emissions by 30 percent, so the practice is already ingrained in the company culture.
The fact that National Grid’s executives have a background in the energy business makes carbon reduction perhaps easier to embrace than it is for executives in other companies, such as those in general manufacturing.
Tom King, National Grid’s U.S. President and Executive Director of Electricity Distribution and Generation, is a leader in the company’s Clean Energy Group. “He is already up on the learning curve,” Kwasnik said.
“Nick Winser (Executive Director of Transmission) in the UK actually buys carbon offsets in his personal life. He reduced his cars and is now a one-car household. He bikes and he takes a train instead of flying, when he can,” he said. “It helps to have that kind of focus already in place.”
As a percentage of an executive’s performance targets, carbon reduction targets are given equal weighting with other targets such as safety, operational delivery, financial budgetary targets, Kwasnik said. After all is said and done, carbon targets account for 5 percent of each executive’s performance package.
Since April, each of National Grid’s major lines of business has assembled a senior team to develop business plans that meet carbon reduction targets.
- The “Driving Out Carbon” team is looking at greening the U.S. vehicle fleet.
- The “Price of Carbon” team is integrating the cost of carbon into economic decision-making.
- The “Low Carbon Design Team” is looking at ways to add technical efficiency.
Key #4 – Be ready to adjust to new policies, regulations and market information.
When and if a federal cap and trade program comes into play, National Grid will incorporate the U.S. cost of carbon into its economic decision-making, he said.
As of April 1, National Grid began evaluating carbon costs in many decisions, including acquisitions, which assets might be constructed or deployed and how they will be configured (efficiency of cables, transformers, etc.), he said.
In the UK, DEFRA, the environmental agency, established a carbon cost of a little more than 26 British Pounds per ton. “Now, this cost equivalent is factored into all decisions in the UK,” he said. “And when the U.S. market is determined, we’ll have to incorporate that too.”
To ensure its progress, National Grid will use rolling five-year carbon budgets, with the end goal of cutting emissions 80 percent by 2050.
Whether the notion of tying executive pay to carbon reduction takes off on a broader scale is yet to be seen.
Since National Grid’s executive compensation plans made headlines, the company has received a few inquiries from environmental groups, Kwasnik said, but none from other companies looking to add a similar program.
“We’re happy to share our experience so far with anyone who asks, and have been sharing our plans at various meetings and conferences,” Kwasnik said. “The key thing is that it is still early days in the process. We will have more to say this time next year and maybe more companies will be interested as the cost of carbon becomes ‘real’ once there is federal legislation in place.”
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