Using Sustainability Metrics in Incentive Compensation Plans

The overarching goal of incentive compensation plan design is, of course, to incentivize management to focus on value creation for shareholders.  Recent developments concerning corporate “sustainability” suggest that compensation committees of public company boards of directors, as well as human resources executives, should consider the use of metrics developed to measure sustainability in incentive compensation plans.

By way of illustration, Chevron Corporation’s latest climate report, released last week, notes that it plans to set greenhouse gas emissions targets and said the goal would be added to the scorecard that determines incentive pay for executives and approximately 45,000 employees.

To be blunt, for many the term “sustainability” conjures up images of tree-hugging radicals.  That is not the sense in which the term is used for our purposes.  As noted by Oren Cass, a senior fellow at the Manhattan Institute, which bills itself in the center-right politically and has been referred to as the “fiscally conservative, culturally agnostic wing of the [Republican] party”, in his recent book The Once and Future Worker, “while sustainability is generally associated with environmentalism, the issues it raises are not only, or even primarily, ones of natural and ecological resources.  What matters is the vitality of the endowments that allow society to replicate and expand its prosperity, year after year, generation after generation.  If economic growth fails to nourish the endowments on which it relies, it is not sustainable.  Farmers want to maximize crop yields, but most know better than to do this at the expense of their soil.”

In the video presentation, Joseph Sorrentino, a Principal with the compensation consulting firm FW Cook, discusses these issues with Cleary Senior Counsel Alan Beller, a Board member of the Sustainability Accounting Standards Board (“SASB”) Foundation, and Cleary Partner Arthur Kohn.

The presentation:

• Provides background concerning the concept of “sustainability” and explains that the term, as used for these purposes, is focused on the long-term sustainability of corporate strategies rather than on social or environmental outcomes. The background portion of the presentation maps out the history, and the lay of the land today, of the alphabet soup of organizations that focus on sustainability.
• Discusses the details of quantitative and qualitative sustainability accounting metrics developed by SASB in four industries (out of the 77 for which SASB has developed metrics): pharma/biotech, professional services, media/entertainment and coal extraction.
• Addresses how sustainability metrics are being used today in incentive compensation plan design, citing examples of plan designs and companies that have incorporated sustainability metrics into their compensation plans.  This portion of the presentation also discusses the corporate governance implications of using sustainability metrics in this way, including likely shareholder and proxy advisory firm reactions.

Please click here to view the presentation.