The case for greening executive bonus packages

When it's time for salary reviews at Minnesota-based utility Xcel Energy, earnings per share are not the only metric that matters.

In its 2009 corporate proxy statement, Xcel explains how a range of sustainability indicators fit into annual incentive objectives for all executives so that it can weigh greenhouse gas reductions and safety performance alongside earnings per share when deciding how to divide up bonuses.

Company spokeswoman Patti Nystuen recently told sustainable investment lobby group Ceres that the bonus policy underlined the company's commitment to environmental issues. "Xcel believes strongly in providing long-term incentive opportunities that deliver awards on the achievement of specific performance goals linked to the success of the company and its long-term strategy in the core utility business," she said. "These include financial and environmental goals."

Seventy-five per cent of Xcel's award incentives are still based on earnings per share growth, but the remaining quarter are based on other metrics, including aspects of the company's environmental strategy, such as decreases in emissions.

"In 2007, payouts of annual incentive awards for the NEOs (named executive officers) and all executive officers, including those reporting to the chief executive, were determined entirely by attainment of corporate goals, which included targeted earnings per share, an environmental metric related to carbon dioxide emissions, and safety," Nystuen explained.

Across the Pond

Xcel is one of a small but growing group of companies, increasingly aware of the power that executive pay policies can exert on environmental behaviour.

In Europe, the Netherlands seems to be ahead of other nations in tying remuneration to environmental objectives. For example, Dutch banking and insurance giant ING said recently that social, ethical and environmental objectives are to form a component part of its top management executive pay structure.

"ING has formulated corporate responsibility ambitions and priorities, combined with a long-term plan and concrete targets," the company says in its 2009 corporate responsibility report. "These targets are also part of the performance objectives of our Executive and Management Boards."

At least three other Dutch firms – chemical company Akzo Nobel, life sciences group DSM, and mail operator TNT – have similarly tied executive compensation to environmental improvement and other objectives, including employee and customer satisfaction.

And in one case, the linkage of pay to sustainability has been introduced to justify potentially controversial management decisions. The oil giant Royal Dutch Shell, in a disclosure regarding its development of Canadian oil sands resources, makes the point that the company is "actively managing environmental and social impacts", specifically noting that "performance on sustainable development is a key feature of management targets and remuneration".

On the Boardroom Agenda?

These initiatives come in the wake of two reports from organisations, based on opposite sides of the Atlantic, that have outlined how the integration of environmental objectives into executive pay structures represents one of the best ways for businesses to marry the twin objectives of sustainability and profitability.

The first, published last month by Ceres, the Boston-based coalition of institutional investors and environmental organisations, explains how an increased focus on corporate governance following the financial crisis of the past few years has now forced environmental sustainability onto boardroom agendas.