When companies create sustainability initiatives, they often set targets or benchmarks the organization hopes to meet. But by themselves, goals and benchmarks may not be enough to inspire employees to focus on sustainability initiatives. To boost their chances of success, some companies have added financial incentives to the mix.

companies leading the way to a greener future

Xcel Energy, the Minneapolis-based power company, ties a portion of its executive compensation to sustainability goals such as reducing green house gas (GHG) emissions.  And while earnings per share still account for 75 percent of the company’s incentive awards, including sustainability metrics in compensation calculations is an important corporate statement. Xcel also discloses the details in proxy statements, demonstrating that GHG reduction is a core business value, and not just a bullet point in a corporate sustainability report (CSR).

National Grid, a large electric power utility, has also integrated sustainability into the company’s compensation model. Like Xcel Energy, National Grid has linked executive pay to GHG reductions. The utility’s target reductions are unusually ambitious: a 45 percent reduction by 2020 and an 80 percent cut in GHG emissions by 2050.

Energy companies are not alone in tying compensation to sustainability. The Dutch banking and insurance company ING has declared that social, environmental, and ethical objectives form a portion of its top management’s pay structure. In their 2009 corporate responsibility report, they said:

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

Intel has made a commitment to changing its corporate pay structure. The company determines its annual companywide bonuses using benchmarks such as completion of renewable energy projects, energy efficiency, and reducing the company’s carbon footprint.

Marks & Spencer (a large British retailer) has outlined executive pay incentives as part of its Plan A program. Under that program, Marks & Spencer hopes to achieve the ambitious goal of becoming the world’s most sustainable retailer by 2015. Compensation for executives is tied to the completion of Plan A goals.

arguments against adding sustainability to the calculation

Although the companies above believe sustainability is important enough to literally pay for, not everyone is convinced. Jan Maarten Slagter, director of the Dutch shareholders’ association VEB, believes financial performance is a sufficient metric on which to base bonuses.

Slagter told the Financial Times that good companies know sustainability will help them perform better than rivals…

You can score well on three or four sustainability components and still do poorly in [building] shareholder value. You would still get some of your variable pay. We would like to see pay policies directed to [boosting] shareholder value in the long term.

Others are concerned that linking sustainability to pay would be difficult because the impact of certain policies and practices might not fully emerge for several years or even decades.

To overcome this concern, some organizations including PLATFORM and Friends of the Earth, have advocated linking pay to long-term financial and environmental performance. Under this recommendation, companies would issue bonds that are held in escrow for directors, and released after 10 to 20 years. Many companies may not want to have bonus pay that could potentially be affected by decisions that are made long after a director’s departure.

Clearly more and more companies and organizations are in the process of connecting the concepts of pay-for-performance and sustainability. Ceres, a Boston-based group of investors and non-governmental organizations pushing for corporate sustainability, wrote in its 2010 roadmap to sustainability that:

Sustainability performance results must be a core component of the evaluation of senior executive performance and compensation packages. The weighting given to sustainability performance should be disclosed in annual reports so that it is clear to shareholders and other stakeholders how executives are being rewarded.

While remuneration might not be the silver bullet that will transform a company to a completely sustainable organization, it is an important mechanism for steering the corporate culture toward that goal. We expect more companies to experiment with rewarding sustainability in the near future.

Is sustainability being rewarded at your organization?

photo credit: AMagill / Flickr

A growing number of big brands are instituting recycling programs, then highlighting those efforts in corporate sustainability reports (CSRs) and to consumers. The programs are important for the environment and for retailers. But they also are important steps toward creating a closed-loop recycling future–where new goods are produced from recycled materials, then recycled again.

The following are examples of recent recycling initiatives:

• Target plans to add recycling centers to all of its 1,740 stores. The centers will accept aluminum, glass, and plastic containers, plus plastic bags, MP3 players, cell phones, and printer ink cartridges. The retailer has faced pressure to match the sustainability efforts of competitor Wal-Mart in an ongoing battle of eco one-upsmanship.
• Electronics giant Best Buy is kicking off a new recycling goal to collect one billion pounds of electronics and appliances. The program, which began April 22 (Earth Day), invites consumers to “Recycle It On.” Best Buy officials believe the company will meet the billion-pound goal over the next few years. The program does have certain restrictions. For instance, only three items can be brought in for recycling per person, per day.
• The three largest U.S. wireless phone companies (Verizon, AT&T, and Sprint) have stepped up their recycling programs for mobile phones.
• Specialty grocer Whole Foods, which already provides customers with standard recycling bins, is expanding its program in many stores to also collect corks and #5 plastics for recycling.
• Marks & Spencer, in its updated Plan A program, unveiled a clothing recycling effort–something not commonly found beyond thrift shops and the Salvation Army.  The company plans to help its customers recycle 20 million garments.

Some of the more ardent green activists believe all products should be either biodegradable or recyclable. They want the government to impose restrictions that would prevent the production and sale of items that cannot be disposed of “properly.” Such draconian measures are unrealistic, but those environmentalists are well-intentioned. They want to see complete recycling of all goods.

We too would like to see all goods recycled in a closed-loop system. As technology and economics pave the way for more extensive recycling, we will move closer to a closed-loop reality. In the meantime, the recent surge in recycling programs could be an indication that we’re heading in that direction.

Companies with new recycling programs have an opportunity to demonstrate to consumers that retail outlets can have dual roles: as recycling collection centers as well as places to buy new goods.

Two reasons companies pursue recycling efforts are:

1. It looks good. Companies can boost their environmental credentials and strengthen their brands by highlighting recycling programs for consumers. Recycling is almost universally recognized and associated with good environmental behavior.
2. It brings people into their stores. Like coupons or loss-leaders, recycling programs can attract customers–something vital to all retailers.

Recycling programs at retail centers will increase the amount of goods that are recycled, but those programs alone will not get us to a closed-loop future. Like those ardent environmentalists, more producers of goods should focus on “end of life” (EOL) disposal strategies. We’ve done that with our ecobanner display product, and many companies are beginning to design products with recyclable materials and EOL in mind. The more ubiquitous recycling becomes, and the more companies focus on designing products for EOL, the closer we’ll move to a closed-loop future.

Which other organizations are implementing recycling programs? Share visions of recycling’s future in our comments below.

Marks & Spencer (M&S), the British retailing giant known for selling up-market foods in addition to clothing, announced last month plans to become a sustainable leader in the retail market. The company has updated its Plan A program (originally launched in 2007) to reflect this new goal.

Sir Stuart Rose, chairman of Marks & Spencer, outlined the company’s long term goal in a recent press release:

We’ve now set ourselves the ambitious target of becoming the world’s most sustainable retailer by 2015, so that we lead the way in making a positive contribution to the environment and society across everything we do and everything we sell.

M&S plans to dive deep into its supply chain to alter textile production and sourcing. The company has a stated goal of reducing energy use at these facilities by 10 percent. It plans to accomplish that in part by:

• installing energy efficient lighting
• improving insulation
• optimizing temperature controls

In its Plan A document, M&S identified ways to improve its clothing division. Those include:

• Helping customers increase the number of garments they recycle from 2 to 20 million
• Working with suppliers and factories to reduce waste within the supply chain
• Rigorously managing the raw materials and natural resources used to make products
• Paying workers in developing countries a “living-wage” (although M&S didn’t specify what constitutes a living-wage)

Better water management is another featured goal. The company hopes to be 25 percent more water efficient by 2015, and to increase in-store efficiency by 30 percent. To accomplish this, M&S has brought in partners such as the World Wildlife Foundation (WWF) to help better understand its corporate water footprint.

The WWF helped M&S identify four key areas along its supply chain where water use could be improved–cotton production, farming, food manufacturing, and dye-houses. In the case of dye-houses, the company plans to create three “eco” dye-houses, and then replicate the most efficient of those processes throughout its supply base.

Dye-houses and traditional textile manufacturers are a large part of the water waste and pollution problem. Redesigning those facilities and using the best water management practices would hopefully help change the culture of pollution in the developing world’s textile industry – and do so without sacrificing profits. After all, while these initiatives may be kinder to the environment, Plan A also needs to offer an overall improvement in profitability.

So far, it appears M&S is on the right track. The company has saved £50 million this year, and it believes bigger savings will come from further execution of Plan A.

Part of what we found compelling about the company’s Plan A program is that executives are being offered incentives to complete goals. We believe that it’s not enough to declare an environmental goal – companies must also inspire employees to get onboard. Providing rewards is a tried and true method, and one that more companies should implement alongside the incentives traditionally awarded for expanding the business or reducing costs. M&S has a long way to go before becoming the world’s greenest retailer, but Plan A might trigger the thorough supply-chain examination needed to get them there.

photo credit: Marks & Spencer