Some CEOs Are Hearing A New Message: Act On Climate, Or We'll Cut Your Pay

Corporate America wants you to know that it takes climate change seriously. But how can you tell if businesses will follow through?

Here's one idea that's catching on: Cut the pay of corporate leaders if they don't meet their climate goals.

Though the practice is not widespread, several firms — including oil companies such as Shell, Murphy Oil and the refiner Valero — are embracing it, often under pressure from activist shareholders.

"We believe that compensation drives outcomes," says Danielle Fugere, president of As You Sow, a nonprofit that works in shareholder activism. "So when an executive team is incentivized to actually accomplish a goal, then they're more likely to do so."

Top executives at big companies don't just receive a paycheck. Much of their compensation comes in the form of bonuses or stock options pegged to certain benchmarks — for instance, the more profit the company makes, the more money the CEO might take home. (And in the U.S., it's a lot of money — more than $20 million on average.)

Many companies already tie pay to nonfinancial metrics such as customer satisfaction or a good safety record, says Jannice Koors, a senior managing director at Pearl Meyer, which advises corporate boards on executive compensation packages.

But linking executive pay to cutting carbon emissions, or to diversity, equity and inclusion efforts — both major areas of focus for investors today — is new territory.

"It's not very common — yet," Koors says. She says that mounting pressure from shareholders and the general public will likely cause that to change over time.

Still, some boards are balking. Say shareholders ask a board to tie 20% of an executive compensation package to environmental or social goals. The board might worry that would reduce the incentive to meet other business goals.

"What in the current bonus plan has suddenly become 20% less important?" Koors asks. "Have profits become 20% less important? Have revenues become 20% less important? That 20% has to come from somewhere."

(One caveat though: Many incentive packages for oil and gas executives just peg pay to reserves or production — basically, rewarding executives for how much oil they pump, even if they're losing shareholders' money.)

Meanwhile, there's skepticism from outside the boardroom, too. Some scholars and activists question whether putting 10% or 20% of an executive's bonus on the line would be enough to motivate a dramatic shift in the business model.

Dario Kenner, a visiting research fellow at the University of Sussex who has examined the voluntary climate commitments made by oil and gas companies, is skeptical, calling the entire conversation a distraction.

"The overall incentives are to maximize fossil fuel production, because they are oil and gas companies," he says.

How do activists respond to these doubts? To board members, they argue that fighting climate change will serve profits and revenue long term.

Some companies are making the same argument. After shareholder pressure, Shell agreed to link executive pay to reducing its carbon footprint in 2018. This year, the company announced it's doubling the weight it gives to climate when determining those bonuses.

A Shell spokesman told NPR that the company sees "commercial opportunity" in a society-wide shift away from carbon and that "tangible incentives" for executives to cut emissions are part of that effort.

"If we do that well, and continue to focus on reducing the carbon intensity of our own operations toward net zero, Shell should thrive, too," the spokesman said.

As for the question of whether putting bonuses on the line is enough really to tackle climate change, activist investors say it's a good starting point. As You Sow's Fugere says government action is needed to tackle climate change adequately — but that corporate changes, such as pegging pay to climate goals, can fill in the gap where policy falls short.

Her group pushed Valero to add climate criteria to its executive pay; the oil refiner agreed. It asked the same of General Motors, which has set ambitious climate goals (such as phasing out gas-powered cars completely by 2035) but stopped short of firm commitments. A proposal on the topic will be up for a nonbinding vote at the next GM shareholder meeting.

In a way, the fact that this conversation is happening at all is a sign of just how much ground activist shareholders have won after years of pushing companies to acknowledge climate change and make plans to act.

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

"To say that [environmental, social and governance] factors can replace — or at least add to — the actual financial goals is a change," Fugere says. "It's a sea change."

Pat Miguel Tomaino, director of socially responsible investing with Zevin Asset Management, has pushed Apple to add sustainability and diversity metrics to its pay package, which the company is now doing. He says he views making progress on climate goals as "simply like any other business objective."

And like any other business objective, it requires follow-through.

"When we find a company is not making progress against that goal," Tomaino says, "it's time to increase pressure on the company." [Copyright 2021 NPR]