Linking pay to sustainability

Here's an interesting turn. The FT recently reported that

"DSM and TNT, the Dutch life sciences group and postal operator respectively, this week join a multiplying band of companies – predominantly from the Netherlands – that link part of the bonuses senior managers receive to sustainability, an all-encompassing term that refers not only to the environment but to issues such as employee satisfaction and safety."

As they rightly point out

"The decision raises questions such as how to measure sustainability as distinct from something more tangible such as a rise or fall in a share price, and whether it makes sense to do it."

This is a particularly thorny issue since 'sustainability' is an ill-defined term. For example, if you take the reasonably well-accepted definition of the Brundtland Declaration "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs" and try to apply this to executive pay seems you would be entering a minefield.

Nevertheless, I find the idea of linking pay to sustainability appealing. At least even thinking about making the link draws a little away from a focus on immediate quarterly financial results, and plants the seeds for longer term thinking.

One way companies aremaking this linkage is to use the Dow Jones sustainability index adjusting management pay to the company's ranking on this list.

Walmart is taking a related tack with its suppliers. An article in the Washington Post, February 28 2010, comments on Lutex, a Walmart supplier in China.

"We heard that in the future, to become a Wal-Mart supplier, you have to be an environmentally friendly company," Fung said. "So we switched some of our products and the way we produced them."
Lutex has been paying attention to more efficient light bulbs, better ventilation and less packaging. It switched from Styrofoam to recycled paper and saved enough Styrofoam to cover four football fields. And Lutex, which has been here since 1991, says it treats four tons of wastewater that it used to dump into the municipal sewage line. That water was supposed to be treated by the city, but like three-quarters or more of China's wastewater, it almost certainly wasn't.

"They are the rule setters," said Ma Jun, director of the Institute of Public and Environmental Affairs, a Beijing-based group. "Before Wal-Mart only cared about price and quality, so that encouraged companies to race to the bottom on environmental standards. They could lose contracts because competition was so fierce on price."

Applying sensible pressure to encourage sustainability seems a reasonable way forward. It addresses what one Aileen Ionescu-Somers and Ulrich Steger in their book "The Business Logic for Sustainability: a Food and Beverage Industry Perspective call "The 'Smart Zone' – the business area in which companies create additional economic value by improving environmental and social performance beyond that required by legislation". However, as they point out it "is thus dependent on whether managers see a business reason for action and whether they are able to build, communicate and implement that business case. Manager's perception of business logic for sustainability is fundamental to the development of a business case for sustainability and also to its successful roll out within companies."

For individuals or suppliers a compelling business reason for action could well be the thought of as a performance bonus or the continuation of a contract. But the monetary award alone is unlikely to be to get to a sustainability mindset. The authors of a report "A new mindset for corporate sustainability" offer a ten-point prescription that will take companies beyond shareholder value, as a success indicator enabling them to add value by including social and environmental impacts, as well:

1. Make innovating for sustainability a part of your company's vision
2. Formulate a strategy with sustainability at its heart
3. Embed sustainability in every part of your business
4. Walk the talk: emphasise actions, not words
5. Set up a body at board level with the power to make sustainability matter
6. Set firm rules
7. Bring your stakeholders on board
8. Use people power
9. Join the networks
10. Think beyond reporting: align all business systems with the company's vision of sustainability

These points are not staggeringly new (or new at all) but the point about alignment is one that touches on the holistic design of the organization. Indeed if the company only managed point 10 – the other 9 items should fall into line behind it.