WorkLife 2.0: Director and employee incentivisation - going green?

Incentivisation is designed to attract, engage, and retain talent. It comes in many different forms and is an increasingly sensitive area in today’s highly scrutinised global corporate environment. It is therefore no surprise that ‘green incentivisation’ is at the forefront of the minds of many global employers. This is part of a series of blog posts on climate change and the workforce, looking at how employers can prepare for the climate emergency and take proactive steps to make their businesses more sustainable (see here for the latest blog post in the series). Incentivising directors and employees in a climate-friendly way is one piece of the complex puzzle. This blog post explores some of the options available to employers to both motivate individuals and fight climate change.

Across the globe, businesses are subject to greater disclosure requirements and consequently public scrutiny in relation to their remuneration arrangements, particularly those of their directors but also of the workforce more broadly. Following the growing trend in environmental, social and governance (ESG) investing, sparked by a combination of key events including the Covid-19 pandemic, the Black Lives Matter movement and recent extreme weather events, incentive plans are increasingly being designed to consider ESG metrics. This, combined with the continued growth of environmental stewardship, means that many variable remuneration arrangements are now linked to climate-driven objectives.

In the UK, according to research from Alvarez & Marsal, 61% of FTSE 100 bonus plans now have some form of ESG component. The research also found that the number of firms using an ESG measure in a long-term incentive plan increased from 15% last year to 32% in 2021. Most recently, online shopping group, THG (also known as The Hut Group) announced that it is to link its executive pay to climate targets as part of its new sustainability plan. Moving across to the EU, over summer the European Banking Authority recommended that companies should consider ESG indicators and ESG risk-related objectives and limits in the design of remuneration policies and their application. In Germany, 34% of 160 companies in Dax30, MDax und SDax have key performance indicators (KPIs) for their managing directors that relate to sustainability and ESG components, according to a research paper from BDO and Kirchhoff Consult published in September 2021. However, the research found that only 20% of ESG KPIs define concrete performance indicators and target measurements, which could be seen as a lack of authenticity and credibility in meeting companies’ ESG goals. In France, according to research from PwC, the number of CAC 40 companies integrating ESG goals into their top executives' compensation has increased from 10% to 70% (from 4 in 2006 to 29 in 2015). The issues most frequently addressed by CAC 40 companies in the compensation of executive directors are the mitigation of health and safety risks (55% of CAC 40 companies) and climate change (41%), but also ethics (32%) and skills development (32%).

A movement towards linkage between climate and reward is likely to be partly due to investor pressure. Data from Minerva Analytics, a proxy voting service, suggests that a number of the highest dissent resolutions for remuneration proposals in the UK were connected to ESG issues and questions over societal expectations on responsible business behaviour. But pressure is also likely to come from employees themselves. The Amazon Employees for Climate Justice, who lead a walkout at the company's headquarters in Seattle in 2019, are just one of many examples of employee activism in response to the climate emergency.

A fundamental problem with climate-friendly metrics is that many environmental impacts are difficult to measure and quantify. But clarity is key when determining the basis on which to pay out significant chunks of remuneration. Another challenge for employers is ensuring that climate targets closely align with the overall objectives of their business, and then deciding how much weight to give to those metrics. Employers will also need to consider how to report on their efforts, taking into account any disclosure requirements to which they are subject (for example, the Task Force on Climate-related Financial Disclosures in the UK, the EU’s Sustainable Finance Disclosure Regulation or the recently proposed Directive on Corporate Sustainability Reporting).

Of course, using climate-friendly metrics in incentive plans is not the only way. Employers are also looking to other incentives to direct the behaviour of their employees towards sustainability and lowering carbon emissions. For example, many businesses already operate cycle-to-work, car-pooling, electric vehicle and other commute-related schemes, but these may become more prevalent in the coming months and years (see here for our earlier blog post on reducing the use of company cars in Belgium). Most obviously, the Covid-19 pandemic has generally led to an increased acceptance of and support for remote working, which reduces the commute altogether.

But for those businesses seeing more individuals returning to the office, ensuring that staff canteens serve locally sourced or meat-free food and providing rewards to team members who reduce printing levels or recycle the most are also viable options. In addition, vouchers to purchase eco-friendly goods is another idea to push employees towards sustainable choices. In countries like Belgium, this is an employee benefit agreed by way of a collective agreement (see here for the agreement in French). And we can’t forget about the topic of business travel. The past 18 months have proven that meetings can be conducted virtually, but there is something to be said for meeting colleagues and clients in-person. So, in circumstances where an in-person meeting is considered essential, employers may wish to opt for ground rather than air travel to be more sustainable.

Finally, very few remuneration packages are complete without a pension and there has been a considerable push for climate-conscious investment and disclosure by pension schemes and pension trustees in the UK (please see here and here for our previous blog posts on this topic).

It is clear that climate issues are becoming increasingly central to employers’ incentivisation strategies and a pressure to continually address the climate emergency in HR policies is being felt from different angles. But ‘green incentivisation’ is good for business too – it could help to boost recruitment efforts due to an improved reputation, and might improve employee satisfaction and therefore talent retention. The challenge for employers will be tapping into it in a clear and meaningful way.