Sign in / Sign up

Albert Vilario Alonso

Follow

Consultant in Corporate Social Responsibility, Sustainability, Reputation and Corporate Communicatio

just now = min read

How is sustainability integrated in

management bonuses?

Note: This article was first published in spanish and can be found here.
Leaving aside the debate about whether bonuses or annual incentives in
some industries and companies are excessive, there is another debate on
what kind of goals should weigh these bonuses.
The bad practices that caused the crisis in the past decade should have
served as a wake-up call for the objectives of sustainability and corporate
social responsibility to be implemented within the annual bonuses of
managers and executives mainly in large companies, but so far it seems that
it is an issue that still has a long road ahead and can have different
obstacles to overcome.

State of the linkage between executive bonuses and

sustainability.
There are still few reports (and there are not all recent and contemplate
especially the US market) to consider the adoption of sustainability criteria
in executive bonuses.
In his article Linking Sustainability Performance to Compensation: A
Must for Success, Anca Novacovici reveals that the trend seems to point
toward a stronger link between sustainability and compensation, at least at
the executive level. However, companies still seem unwilling to disclose full
information.
Novacovici notes that, according to the report by the consulting firm Glass
Lewis in 2012, 42% of companies surveyed linked compensation of its
executives and sustainability of the company, while in 2010 that percentage
was 29%.
However, a report by CERES in 2012 found that 85% of the 600 companies
surveyed listed on the US stock market did not take into account the
sustainability criteria in the compensation of its executives.
Although a growing number of US companies were integrating
environmental, social and governance factors into their governance
structures, only 10% of companies in the Standard & Poors 100 had
included sustainability in their bonuses structures.
Among the American companies that stand out as being among the first to
define bonuses linked to performance of the company CSR we can mention
Intel, Xcel Energy or Alcoa.
With regard to Europe, yet no reports or evidence in hand, we can say that
there has been a breakthrough for years thanks to the gradual
acceptance of the growing demand for accountability and
responsibility towards the environment, the community and employees,
leaving US companies at a considerable distance in the adoption of
sustainable bonuses.
Not in vain are often cited AkzoNobel, DSM, Shell, TNT (European and
Dutch companies specifically to be exact) as global pioneers in
contemplating sustainability incentives of its executives.
Other examples of European companies enrolled for some time on this
issue are Danone and Heineken.

Drawbacks of implementing CSR based bonuses.

It might seem at first glance that the establishment of such annual goals
based on responsible criteria for socially, economically and environmentally
has only advantages and no objection or criticism, but it is not.
In his paper entitled Sustainable bonuses: Sign of Corporate
Responsibility or Window Dressing and published in the Journal of
Business Ethics, Ans Kolk and Paolo Perego highlighted that doubts have
raised about whether the introduction of sustainable bonuses is more than
the replacement of perverse system by a different one, generally
being targets suggested by management apparently very easy to achieve.
There are suspicions that the sustainable bonuses have arisen just because
normal bonuses have become controversial and unsustainable after the
financial crisis, and therefore the sustainable bonuses simply embody a
new way to serve the interest of managers.
This is why the amount of the bonus is also something that should be
considered carefully, so it does not appear that the introduction of
sustainability criteria in the bonus is merely aimed at maintaining previous
levels of variable remuneration in a new era in which the incentives related
to the financial performance have declined due to the crisis.
Meanwhile, Pascual Berrone, in its document Pros and cons of rewarding
corporate responsibility at the top, published by the IESE Business
School, notes that one of the main benefits of seeing CSR when rewarding
executives is that this would encourage managers to make efforts
and resources towards social initiatives that would theoretically
increase the value of companies.
But according to Berrone there are some issues that call into question the
above.
The first is that it is unclear to what extent social initiatives have a
positive impact on the economic performance of companies. For
the author it is clear that socially irresponsible businesses can be punished
by the stakeholders in terms of image, reputation and legitimacy for failing
to fulfill their public responsibilities, but it is not so clear that a good social
performance make the value company is increased.
The second issue is on the assumption that all stakeholders are in favor
of responsible actions and therefore the enterprise treats them
indiscriminately while the reality dictates that, although some groups may
have general preference for the social initiatives, it is not taken into account
that the social policies of the company may conflict with the interests of
other groups or that maybe some compromise solution must be assumed.
Third, performing socially responsible actions can be an intrinsic
decision of each company employees, including executives. A decision that
is taken and is done simply by doing good without expecting economic
considerations.
There are theoretical and empirical evidence from the field of psychology
that suggest that offering a financial benefit for carrying out social actions
can cause the person to lose sense of control over their own actions,
reducing as a result his desire to spend time, money, effort, etc. in carrying
out social initiatives, thereby achieving the opposite effect to that
intended.
Finally, another aspect to mention is related to social performance
measurement, because unlike what happens with the measurement of
financial performance, social performance is yet to be fully developed and
implemented widely.

How should those responsible bonuses be?

The executive compensation in accordance with sustainability performance
is an idea with great potential, but for this to happen have some
conditions must be given:

CSR objectives in which bonuses must be based should be rigorously

measurable, relevant, challenging, transparent, aligned with
the strategy and therefore meaningful for the organization.

The adoption of these bonuses must be supported by shareholders

and by a change in cultural and business values.

Companies must have a robust compensation structure in which it is

easy to integrate sustainability metrics within human
resources systems.

Incentives should be based on growth and long-term development,

stability, positive relationships with the community and
values.

It is necessary to take into account and know how to balance the

intrinsic motivation that workers may have and the extrinsic
incentives the company offers them.

Organizations must be aware of the relationship between social

performance and economic and the contradictions or conflicting
interests that may affect stakeholders depending on the objectives
marked.

Over time, transparency and disclosure of details regarding bonuses

sustainability will be much more common and remuneration committees
and management, specialists in compensation and benefits, regulators and
investors should gradually come to form part of the debate on such
incentives.
You may also like:

The importance of managing reputational risks.

The importance of managing reputational risks.

Reputation is a value driver through the favorable behaviors that generates in
the stakeholders and affects the income
medium.com

Education for sustainability.

Education for sustainability.

I read on the website Edie.net a short summary of a study conducted by the
company SmartestEnergy to a sample of one
medium.com

Sustainability

Csr

Management

Human Resources

Corporate Responsibility

Albert Vilario Alonso

Follow

Consultant in Corporate Social Responsibility, Sustainability, Reputation and

Corporate Communication,and integration of people with disabilities.

More from Albert Vilario Alonso

Also tagged Csr

Does your
company have i
mind people with
disabilities
Albert Vilarioas
Alonso
J min read
customers?

UN Guiding
Principles show
us the way to
fairer
trade 6
Fairtrade
K min read

Also tagged Corporate

Responsibility

Three Reasons
Entrepreneurs
Have
No Moral
Vince Skolny
Obligation
to 1
= min read
Give Back to
Society

Never miss a story from Albert Vilario Alonso, when you sign up
for Medium. Learn more

SUBSCRIBE