Some CEOs Hear New Message: Take Action On The Climate, Or We’ll Cut Your Pay

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Corporate America wants you to know that it takes climate change seriously. But how do you know if the companies will follow suit?

Here’s an idea that’s gaining ground: cut back on executive pay if they don’t meet their climate goals.

Although the practice is not widespread, several companies – including oil companies such as Shell, Murphy’s Oil and refiner Valero – embrace it, often under pressure from activist shareholders.

“We believe in pay drives results,” says Danielle Fugere, president of As You Sow, a non-profit organization that works in shareholder activism. “So when a leadership team is motivated to actually achieve a goal, they are more likely to do so.”

Senior executives at large corporations don’t just get a paycheck. Much of their compensation comes in the form of bonuses or stock options indexed to certain benchmarks – for example, the more the company makes, the more money the CEO can make home. (And in the United States, it’s a parcel silver – over $ 20 million on average.)

Many companies already associate compensation with non-financial metrics such as customer satisfaction or a good safety record, says Jannice Koors, senior managing director of Pearl Meyer, which advises boards on safety programs. executive compensation.

But tying executive pay to reducing carbon emissions or efforts for diversity, equity and inclusion – two major areas of focus for investors today – is new territory.

“It’s not very common – againSays Koors. She says the increasing pressure from shareholders and the general public will likely lead to a change over time.

However, some boards balk. Suppose shareholders ask a board to tie 20% of executive compensation to environmental or social goals. The board may be concerned that this will reduce the incentive to achieve other business goals.

“What about the current bonus plan has suddenly become 20% less important?” Koors asks. “Has the profit become 20% less? Has the income become 20% less important? That 20% has to come from somewhere.”

(A caveat though: many incentive programs for executives in the oil and gas industry simply set the salary to reserves or production – in essence, rewarding executives for how much oil they pump, even if they are lose shareholders’ money.)

Meanwhile, there is also skepticism from outside the conference hall. Some academics and activists wonder if stake 10% or 20% of a leader’s bonus would be enough to motivate a radical change in the business model.

Dario Kenner, visiting scholar at the University of Sussex who has examined voluntary climate pledges made by oil and gas companies, is skeptical, calling the whole conversation a distraction.

“The overall the incentives are aimed at maximizing the production of fossil fuels, because these are oil and gas companies, ”he said.

How do activists respond to these doubts? To board members, they argue that the fight against climate change will serve long-term profits and incomes.

Some companies make the same argument. After pressure from shareholders, Shell agreed to link executive compensation to reducing its carbon footprint in 2018. This year, the company announced that it is doubling the weight it places on climate when determining these bonuses.

A Shell spokesperson told NPR the company sees a “business opportunity” in a company-wide shift away from carbon and that “tangible incentives” for executives to reduce emissions are part of that effort. .

“If we do this right and continue to focus on reducing the carbon intensity of our own operations to net zero, Shell should also thrive,” the spokesperson said.

As to whether putting bonuses into play is sufficient really to tackle climate change, activist investors say it’s a good place to start. As You Sow’s Fugere says government action is needed to tackle climate change adequately – but corporate changes, such as pegging wages to climate goals, can fill the void where policy fails.

His group pushed Valero to add climatic criteria to his executive compensation; the oil refiner agreed. He asked the same of General Motors, which has set itself ambitious climate goals (such as phasing out gasoline cars by 2035), but stopped short of firm commitments. A proposal on the matter will be put to a non-binding vote at GM’s next shareholders meeting.

In a way, the fact that this conversation is taking place is a sign of how much grassroots activist shareholders have gained after years of pushing companies to recognize climate change and making plans to act.

Big business, including oil and gas companies, no longer denies climate change. It is common for them not only to disclose their carbon footprints, but also to announce plans to reduce them. And it’s only because these battles have been won that the prospect of putting executives’ money on the line is now on the table.

“Say that [environmental, social and governance] factors can replace – or at least add to – actual financial goals is a change, “says Fugere.” It’s a radical change.

Pat Miguel Tomaino, director of socially responsible investing at Zevin Asset Management, pushed Apple to add sustainability and diversity measures to its compensation program, which the company is doing now. He says he views progress on climate goals as “just like any other trade goal.”

And like any other business goal, it requires follow-up.

“When we see that a business is not progressing against this goal,” says Tomaino, “it’s time to increase the pressure on the business”.

Copyright 2021 NPR. To learn more, visit https://www.npr.org.



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