Linking executive bonuses to sustainability; the logical next step
February 24, 2010
It doesn’t happen very often that a Dutch company makes it to the front page of the Financial Times with the subject of sustainable development. Yet today, the newspaper focuses on DSM’s decision to link a significant part of the executive bonuses to sustainability indicators. In a news analysis reference is being made to similar steps by Akzo Nobel, TNT and Royal Shell. The differences of the various arrangements are being discussed. And of course some objections are reflected. Jan Maarten Slagter of the VEB (retail shareholders’ association) is quoted saying: “you lose sight of the fact that all these things tend lead to shareholder value itself.”
He is worried that using various indicators will always lead to some kind of variable pay, whereas the single indicator of shareholder value is more conclusive.
I believe he is defending an old-fashioned position. Over recent years many executives have given a very poor example of how they deal with long term shareholder value and their pay check. A focus on their own personal gains has often resulted in a short term focus. The theoretical model Slagter is promoting, has delivered poorly in practice. Sustainability subjects do not tend to land on an executive’s agenda just by itself, nor as a long term focus can be expected to be robust. Helping business leaders to avoid a short-termism and encouraging them to include the risks and opportunities of sustainable entrepreneurship on their radar screen is needed. The inclusion of sustainability in the Dutch corporate governance code was a wise and effective measure of government. Linking sustainability to executive remuneration is a logical step of companies themselves. It will be a matter of time before Slagter and the likes will acknowledge that such steps will not only help to improve shareholder value, but that the stronger social antenna of the corporation will also add to the non-financial benefits both the company itself, as well as society can cash in. The drive to link pay to sustainability is likely to accelerate.
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