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More Businesses Tie Executive Compensation to Environmental Metrics

A growing number of businesses across several sectors are starting to tie salary compensation with their environmental performance as they realize the power that executive pay policies have on environmental performance, reports BusinessGreen.

As an example, Minnesota-based utility Xcel Energy uses a range of sustainability indicators, including greenhouse gas reductions and safety performance, along with earnings per share to determine how to divide up bonuses, reports BusinessGreen. Although 75 percent of Xcel’s award incentives are still based on earnings per share growth, the remaining 25 percent are based on other metrics including the company’s environmental performance.

Similarly, utility company National Grid announced last year that it would base an executive’s compensation, in part, on their performance against targets for reducing carbon emissions.

The same trend is occurring in Europe, particularly in the Netherlands. For example, Dutch banking and insurance giant ING recently said that social, ethical and environmental objectives will part of its top management executive pay structure, says BusinessGreen.

The article cites three other Dutch firms — chemical company Akzo Nobel, life sciences group DSM, and mail operator TNT — that have tied executive compensation to environmental improvement and other company goals.

Two recent reports — released by Ceres and the European Sustainable Investment Forum (Eurosif)– show how the integration of environmental goals with executive pay is one of the best ways for businesses to combine their sustainability and profitability objectives, says BusinessGreen.

Compensation and incentives for top executives and other employees to drive sustainability into their businesses is one of 20 key expectations for companies recommended by Ceres’ report, “The 21st Century Corporation: The Ceres Roadmap for Sustainability.”

The third “Remuneration Theme Report” from the European Sustainable Investment Forum (Eurosif) indicates that most European companies don’t link executive pay to environmental, social, and governance (ESG) performance, revealing that 29 percent of FTSE Eurofirst300-listed companies have some commitment to linking remuneration to ESG performance.

However, implementing an executive compensation policy tied to carbon reduction or other environmental metrics is a challenge for some companies. As examples cited in the article, some companies with environmental pay policies don’t reward environmental strategies any more than those without these policies, while others face challenges in trying to link compensation packages to policies and practices that may not impact their businesses for years.

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