There’s an old saying in a number of languages that’s handy for most of us to keep in mind. In Spanish, it’s “Tienes lo que pagas.” In Danish, it’s “Du får hvad du betaler for.” In English, we say “You get what you pay for.”
That proposition lies behind businesses’ repeated attempts to update their executive bonus plans, to find the best ways to motivate their top leaders to create real value for shareholders. Now, as forward-looking investors and activists prod more companies to embrace ESG targets, the world’s most sustainable companies are actively seeking the best ways to link leaders’ incentive pay to planetary progress and purpose.
Is it working? We posed this question to a handful of companies on the Corporate Knights Global 100 ranking that link the highest percentage of CEO incentive pay to achieving their organizations’ ESG goals. These firms said their sustainability-linked compensation plans are too new to provide definitive evidence that linking CEO pay to corporate purpose is working – but they’re confident they’re on the right track.
“It’s important to make it clear what you stand for as an organization and what priorities you want to set,” says Ida Krabek, head of global sustainability for Ørsted – the Danish power company that topped Corporate Knights’ Global 100 ranking in 2020. Founded to manage Denmark’s oil and gas assets in the North Sea, Ørsted has since become Europe’s biggest operator of offshore wind farms, producing more than 90% of its energy from renewable sources.
“Linking pay to sustainability has been part of our journey from the beginning,” says Krabek. At first, she says, Ørsted based part of senior leaders’ bonus pay on achieving employee-safety goals. As concerns about climate change grew, she says, the company added CO2 intensity targets.
In recent years, Ørsted has doubled down on incentive pay for its most senior leaders, establishing a range of sustainability-related targets. Today, purpose-based incentives amount to 30% of top executives’ variable pay – the same percentage as their bonuses for meeting purely financial goals.
Until recently, however, such bonuses applied only to top management – and Krabek admits those priorities didn’t necessarily filter through the entire organization. Starting in 2022, Ørsted expanded sustainability-related incentives to a broader portion of the management team. In 2023, the program will expand again to nearly all managers – a full 20% of the company’s workforce.
There is no “one size fits all”: managers in different areas will have to achieve personalized KPIs (key performance indicators). And while senior leaders’ compensation will always include more incentive pay than others’, Ørsted intends to raise the relative weighting of ESG metrics in all employees’ paycheques to ensure these goals become top of mind. “We want to be accountable as a team,” Krabek says.
Iberdrola, a multinational electric utility company based in Bilbao, Spain, offers next-level sustainability: ESG targets now determine 50% of the CEO’s variable pay. In 2017, Iberdrola created an executive remuneration plan that tied top managers’ bonuses to renewable energy targets and emission reductions.
In 2020, the renumeration plan was revised to include other ESG goals, such as human rights, equal pay for men and women, and driving sustainability throughout the company’s supply chain. “We are totally committed to a new world,” says executive remuneration manager Armando Ugarriza.
Today, most Iberdrola executives earn half of their bonuses by meeting four to five specific ESG targets. But Ugarriza says all employees are now part of the process, with lower-tier staff earning 15% to 20% of their incentive pay by achieving ESG goals.
Some of Europe’s oldest fashion brands are on the same journey. Paris-based Kering is a conglomerate of legendary fashion houses such as Yves Saint Laurent, Gucci, and others. Based on founder François-Henri Pinault’s belief that “luxury and sustainability are one and the same,” Kering adopted its first social and environmental code of ethics in 1996. In 2010, it began including sustainability criteria in the performance evaluations of key leaders.
Six years later, Kering introduced formal non‑financial criteria that would determine 30% of top executives’ annual variable pay.
The company’s current sustainability criteria include reducing the company’s environmental impact in line with its 2025 strategy; eliminating single-use plastics from product packaging; and leading, and helping to grow, industry-wide sustainability programs.
A parallel incentive program offers top executives shares for meeting three-year performance targets. While 80% of that bonus is weighted to cash flow and operating income, 10% is based on meeting biodiversity targets, and another 10% on increasing the proportion of women in executive roles.
Sadly, information on the impact of adopting ESG incentives is still hard to come by. In the meantime, Iberdrola’s Ugarriza believes that having employees include non-financial criteria in their investment decisions helps the company grow, by building stronger communities and partnerships. “We do things for the future,” he says. “It’s a new way of thinking.”
In any language, you get what you pay for.
