UPS: Link Executive Pay to Sustainability

Ask the Board Compensation Committee to integrate sustainability metrics into company executive compensation incentive plans.

Effectively managing for sustainability offers positive opportunities for companies and should be a key metric by which executives are judged. Sustainability is defined as how environmental and social considerations, and related financial impacts, are integrated into corporate strategy over the long term.

Numerous studies suggest companies that integrate environmental, social and governance (ESG) factors into their business strategy reduce reputational, legal and regulatory risks and improve long-term performance. A large and diverse group of companies has integrated sustainability metrics into executive pay incentive plans, among them Alcoa, Unilever, PepsiCo, Walmart, and Danone. The 2016 Glass Lewis report In-Depth: Linking Compensation to Sustainability finds a “mounting body of research showing that firms that operate in a more responsible manner may perform better financially…. Moreover, these companies were also more likely to tie top executive incentives to sustainability metrics.” A 2015 Harvard Business School study of S&P 500 executives’ pay packages found a positive relationship between the presence of explicit incentive compensation for corporate social responsibility (CSR) and firms’ social performance (Hong, et al, 2015). A 2012 guidance issued by the United Nations Principles for Responsible Investment and the UN Global Compact found “the inclusion of appropriate Environmental, Social and Governance (ESG) issues within executive management goals and incentive schemes can be an important factor in the creation and protection of long-term shareholder value.” According to the largest study of CEOs on sustainability to date (“CEO Study on Sustainability 2013,” UN Global Compact and Accenture):

  • 76 percent believe embedding sustainability into the core business will drive revenue growth and new opportunities.
  • 86 percent believe sustainability should be integrated into compensation discussions, and 67 percent report they already do.