It looks like ESG is taking another interesting turn in the corporate world. Topics like ESG reporting are already standard, and governments worldwide are working hard on ESG reporting rules. Companies have recognized how important it is for their businesses to wear a shiny green badge, so international companies are competing in how to best demonstrate their green agendas. There is, however, a new initiative that gives rise to the development of “green management”. Companies are increasingly linking the compensation packages of their executives to their performance on ESG principles. In short, large multinationals are now including ESG criteria in their employee bonus schemes, most notably their management.
It all began with a statement by Mastercard’s CEO Michael Miebach announcing that ESG goals will be included in the calculation of bonuses for all employees. Mastercard’s initiative spurred a trend among companies across a wide range of industries to link compensation to ESG progress.
Several other big companies revealed the introduction of ESG-linked bonuses. For example, Apple announced that it will introduce an ESG modifier to its executive bonus payouts, Deutsche Bank announced that it plans to link top-level executive and management compensation to ESG and sustainable finance criteria, BP executives’ annual bonus was already based on a performance scorecard which includes environmental targets.
Another example of big companies including the ESG goal factor into their compensation schemes is the pizza giant Papa John’s. Papa John’s President and CEO, Rob Lynch stated:
“As Papa Johns continues to grow, we remain focused on priorities that set us up for long-term success and create a positive impact on the world around us, we are proud to be among the few companies in our industry linking incentive compensation with achieving ESG initiatives. Taking this step emphasizes the importance we have placed on corporate responsibility.’’
From this statement and recent initiatives taken by these companies, it is evident how quickly the importance of adherence to ESG principles is growing and that more companies are likely to follow suit with similar policies.
Although linking ESG to compensation may help deliver results as a method of motivation, the potential risks of such moves should also be carefully considered. For instance, focusing on a narrow aspect of ESG can distract a company from achieving broader objectives. Companies must also understand well the purpose and practicality of their ESG metrics before linking those goals to executive incentives.
All in all, it is great to see such a variety of initiatives to include ESG considerations into management processes, but businesses should also be mindful of all the risks and tradeoffs that this could entail and strive to find a sustainable balance between the two.
Authors: Milica Novaković, Jasmina Glavšić, Nemanja Sladaković
