Shell 'A' (NYSE:RDSA)
Historical Stock Chart
3 Months : From Jun 2019 to Sep 2019
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.
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.
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 email@example.com.
(END) Dow Jones Newswires
June 24, 2019 08:50 ET (12:50 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.