By Tatyana Shumsky
When Floris Fooij proposed a $1.7 million upgrade for the
vitamin plant he oversees in New Jersey a few months ago, he did
something he wouldn't have done in the past: He mapped out for the
finance team how the upgrade would affect the firm's greenhouse-gas
emissions.
His employer, the Dutch life-sciences and specialty-materials
maker Koninklijke DSM NV, in recent years had tied the bonuses of
operational managers such as Mr. Fooij to corporate
energy-efficiency and emissions-reduction targets.
That meant that in addition to presenting the business case for
the upgrade -- it would pay for itself in a few years, according to
Mr. Fooij -- he also had to demonstrate that it wouldn't increase
the company's emissions, or risk not getting his full bonus.
"It pushes us to think differently," says 49-year-old Mr. Fooij,
who has been with the company for about 25 years. "The overall
focus of the organization has changed."
Mr. Fooij is eligible for a bonus paid in stock that vests over
three years, as long as the company meets certain performance goals
that are measured on a three-year rolling average. Half of those
goals are linked to sustainability and governance factors.
Everyday decisions
DSM is part of a small but growing group of companies, including
candy maker Mars Inc. and energy giant Royal Dutch Shell PLC, that
have started linking a portion of executive pay to corporate
environmental, social and governance goals, deploying a tactic they
say helps align management's mind-set with the company's ESG
strategy.
The idea, proponents say, is to give managers a personal
incentive to incorporate such considerations into everyday business
decisions. If everyone from the chief executive to the plant
manager factors things like carbon emissions into
capital-expenditure decisions, rank-and-file employees also will be
more likely to make choices that help the company reach its goals
more quickly -- or so the thinking goes.
"Making people like me, and many other people in the
organization, have a stake in making progress in this area, as well
as other areas, is a very natural thing," says Claus Aagaard, the
chief financial officer of McLean, Va.,-based Mars, which is aiming
to cut carbon emissions from its direct operations to zero by
2040.
When tying a portion of executive compensation to sustainability
goals, that portion must be meaningful enough to incentivize
change, says Jenny Davis-Peccoud, global leader of Bain & Co.'s
sustainability and corporate-responsibility practice. And finance
chiefs, in particular, need to support ESG-linked compensation
plans by creating processes that allow managers to incorporate
sustainability into what they do every day, she says.
"If people don't have the process to bring sustainability into
their everyday decisions, the link to sustainability and the [pay]
incentive isn't going to be enough to get the change that you want
to see," says Ms. Davis-Peccoud.
To ensure its managers have a clear path to meeting
sustainability goals -- and their compensation targets -- Mars has
made it easier for them to get approval for capital projects that
reduce energy and water consumption, says Mr. Aagaard. The
profitability threshold for such projects is 25% lower than it is
for other productivity investments, he says, while the time horizon
in which they need to become profitable is longer.
"We believe we [have] made meaningful progress already," Mr.
Aagard says. Some 53% of the electricity Mars purchases world-wide
now comes from renewable sources, the company says, while in 10
countries, including the U.S. and the U.K., that figure is
100%.
Overall, however, success has been elusive for most corporate
ESG programs, even as these topics have vaulted in importance for
both companies and their investors. In a 2018 survey of 297 global
companies by Bain, 47% said they had failed to meet even half of
their sustainability targets, while only 4% reported achieving or
exceeding their goals.
Some big investors worry that ESG-linked compensation programs,
unless structured correctly, might not lead to thoughtful action on
sustainability.
"Executive remuneration should incentivize the right behavior
from management and the right business strategy from the company,"
says Leon Kamhi, head of responsibility at asset manager Hermes
Investment Management. For an oil producer, that might mean a focus
on carbon dioxide and safety, while for a bank it could mean a
focus on culture and conduct. "We just don't want environmental and
sustainability factors to be used to greenwash remuneration," he
says.
Powerful signal
Many say that ESG-linked pay plans can signal to potential hires
that the company isn't just talking the talk -- it also is walking
the walk when it comes to sustainability. At the same time, such
plans might scare some job candidates, who could fear they won't be
able to meet the ESG targets. Geraldine Matchett, DSM's finance
chief, says that was on her mind when she was weighing whether to
take the CFO job in 2013.
"My first CFO thought was, 'Oh, that may be a lot of things to
try to achieve at the same time,' " Ms. Matchett says. Still, she
says, it was "a powerful signal that this is going to be how
everyone from the very top of the organization all the way down"
was going to be judged at the company.
DSM established the ESG-linked compensation policy for its
managing board in 2010 and expanded it beyond the C-suite in 2013,
tying ESG goals to the bonuses of operational managers such as Mr.
Fooij.
Since then, the company appears to have made inroads on a number
of its sustainability goals. In 2018, 41% of the electricity the
company purchased came from renewable sources, up from 21% in 2017,
while greenhouse-gas emissions totaled 1.2 million tons of
carbon-dioxide equivalent, down from 1.5 million tons a year
earlier, according to the annual report.
"Our greenhouse gas road-mapping and the associated projects are
really at the forefront of what we do day in day out," now, says
Mr. Fooij.
The Belvidere, N.J., site Mr. Fooij oversees is one of the top
10 contributors to DSM's greenhouse-gas emissions and energy use,
so any sustainability improvements made at the site tend to show up
in the company's metrics, and his bonus, that year or the next, he
says.
"We have been successful in achieving our [long-term incentive]
targets linked to sustainability in recent years, [so] in that
sense it has been very positive," says Mr. Fooij.
His request for the plant upgrade was ultimately approved.
Ms. Shumsky is an editor for The Wall Street Journal in New
York. Email her at tatyana.shumsky@wsj.com.
(END) Dow Jones Newswires
June 24, 2019 08:50 ET (12:50 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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