A gap has opened up between pay and purpose in most executive suites. Here's how to close it.
experience, we have identified five questions that can serve as a helpful starting point for companies to develop sustainable compensation programs.What does the organizations aim to achieve with its compensation plan? How do these objectives link to the corporation’s purpose and strategy?
For example, reduction of greenhouse gas emissions is positive and is possibly on everyone’s agenda. But if you’re in the financial services industry, reduction of GHG emissions of your own premises will have a limited impact, whereas reduction of emissions related to your investment and/or loan portfolios would be more impactful. Such materiality is a key issue for the relation between ESG and business performance.
While organizations are paying more attention to ESG topics in compensation, the weight allocated to these metrics is often insufficient to make a difference. If an executive’s compensation is linked to a broad basket of financial and non-financial measures , the likelihood that they will have an impact on executive behavior will be small. Either the attention will be diluted and spread out over too many factors, or attention isn’t given at all as the impact on compensation is minimal.
Having decided the metrics to be used, it’s critical to quantify and calibrate target performance levels for each KPI selected – for instance, reduction of GHGs by “X” percent over “Y” years. Consider using relative targets to allow for sector comparison. Alternatively to assess the internal efficiency of for instance your GHG emissions, it is sound to make the measure dependent on the level of sales or production.
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