There was an interesting article in the Financial Times last week. It talks about rewarding sustainability targets in executive pay packages. It asks whether this will result in change. Will this improve the environment?
In brief, the article describes an increase in senior pay linking to sustainability targets. For example, a bonus linked to reducing carbon dioxide emissions. In one example, a fifth of incentive pay links to environmental targets. A quoted recent survey by Deloitte suggests that 24 per cent of organisations plan to link incentive plans for executives to climate measures in the next two years.
Aon’s survey earlier in 2021 backs up the Financial Times article. It found that 80% of HR professionals thought that their benefits offer needed change. Environmental and sustainability factors were both priorities.
However, the Financial Times article questions that changes to executive pay will lead to environmental change. It foresees a potential clash between shareholder value and environmental, social and governance (ESG) initiatives.
An earlier article in Reward Strategy echoes these concerns. It questions whether there are tangible, measurable ESG objectives. If not, then a link to pay is challenging.
Will rewarding sustainability targets work?
Years of evidence and research suggests that rewarding sustainability targets won’t work.
One body of research finds that financial incentives don’t improve performance for complex tasks. Although incentives do improve performance for simple tasks, ESG initiatives are not simple. Dan Pink’s TED talk The Puzzle of Motivation provides an entertaining summary of this research.
Many executive reward schemes are based on the premise that what gets measured gets done. However, this can misfire, with executives focusing solely on delivering those targets by whatever means possible. And those means may not be of overall benefit to the organisation. John Sutherland provides a neat overview of the challenges of executive pay in his book Ensuring General Wisdom.
Perhaps this doesn’t sound so bad in the context of ESG targets. If these are met, surely that’s good for everyone? For the business, the intention is that ESG measures encourage longer-term thinking. Resulting in a sustainable business. So are ESG targets actually another way of attempting to improve business performance rather than environmental change?