Leveraging Executive Bonuses to Enforce Corporate Responsibility

Bonuses have been the subject of much debate, rebuke, and regulation in recent days. Wall Street executives have had to answer biting questions from senate committees and the media has done its share by writing editorials and publishing many accounts of the outrage. However, what happens when these bonuses start linking to a different set of key performance indicators (KPIs) than just monetary gains and shareholder dividends?

Minnesota-based Xcel Energy, a utilities company, recently divulged that it had started including a sustainability quotient in its salary reviews and bonus allocation. While 75% of the incentives continue to be awarded based on earnings per share growth, the Guardian reported that the remaining 25% include other non-monetary metrics including environmental footprint and decreases in carbon emissions. Florian Kaefer, a reporter who focuses on CSR and often co-blogs with me on U.K.-based website SustainabilityForum.com, discussed this recent announcement with a mix of skepticism and hope. Here's what he wrote:

"Executive remuneration according to environmental performance is a promising idea, but one that has to be backed by the shareholders (which are usually more concerned about monetary profits) and a shift in cultural values. Still, the corporate world (and multinational giants at its forefront) will have to find ways to re-establish consumers' and citizen's trust in their operations. An urgent call, as despite numerous announcements and pledges to behave more ethically, most banks and large corporations are back to paying bonuses as if nothing has happened in the last two years. The time has come to walk the talk and to live up to all those messages in glossy papers and reports." (Emphasis added)

Of course, Xcel is not the first company to begin accepting responsibility for their carbon footprint by tying it to management compensation. Recently, Netherlands-based banking firm ING announced that social, environmental and ethical components would form a part of its top management executive pay structure. Another European company to step up in recent months has been Akzo Nobel.

In February, Royal Dutch Shell announced that it was freezing executive pa y for its top executives (CEO and CFO) and going forward would include sustainable development as a significant part of their performance-based bonuses. However, in the oil giant's case, this wasn’t a proactive measure. The move came after their annual shareholder meeting late last year, where 60% of their shareholders voted against the company's pay plan.

Now for a reality check: All the companies I just finished citing are based in Europe. This gradual acceptance of a growing demand for accountability and their responsibility toward the environment, community and employees, (People, Planet, Profit) has been making headway across Europe for years now, leaving corporate America on the sidelines.

As the Guardian points out, "Debates over corporate governance and accountability in the wake of the recent global financial crisis have already highlighted the crucial role executive pay policy has as a means of influencing business behavior." Connecting the dots between a rising corporate consciousness among the rank and file, a socially and sustainably responsible graduating class of leaders, and growing concern from strategic stakeholders will be a good start.