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    When Greed Is Good

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    Despite the persistent rumours about the imminent death of ESG, the handy little acronym is proving to be as resilient as ever. Lately, the invasive species has been creeping even into that holiest of holy spaces, the executives’ wallets. For years sustainable activist investors have been zeroing in on bonus programs, pushing companies to link management incentives to environmental and social goals. And their efforts seem to be yielding results.

    Just this week, for instance, Nordics’ biggest financial player, Nordea, announced that it would introduce ESG targets as part of the company’s long-term incentive plan for senior executives. Although Nordea does not disclose the details of the program, it is understood that the achievement of goals related to sustainable financing, net-zero committed assets under management, gender balance and credit profile will affect the bonuses of Nordea’s top dogs going forward.

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    Better late than never, you might say. After all, a recent study conducted by WTW[1] found that more than three-quarters of major companies across North America and Europe already include ESG metrics in their executive incentive plans. And if you zoom in on Europe only, we are talking about a whopping 90% of big companies. Quite impressive, albeit, that these ESG metrics are often measured empirically, and a qualitative assessment of performance remains a common practice.

    So, what’s all the fuss about? Well, consider that these numbers reflect the way companies incorporate ESG metrics into their short-term incentive programs. Measurement of ESG in long-term incentive plans, like the one introduced by Nordea, is still somewhat more of a rarity. Across the Atlantic, for instance, only eight per cent of US companies and seven per cent of their Canadian brethren have adopted the practice, according tot he same WTW paper. Long-term, in Nordea’s case, means 2023-2025, just so you know.

    Nordea’s plan covers members of the group leadership team plus approximately fifty senior leaders and key employees whose efforts are deemed to have “a direct impact on Nordea’s results, profitability, customer vision and long-term growth.” Let us hope that these prominent figures are interested in the win-win proposition of increasing their annual pay as well as making a difference.

    Here is some inspiration, courtesy of Starbucks’s chief executive, Kevin Johnson. In 2021, the coffee chain revamped its bonus packages to add environmental and human-rights criteria. For Johnson, ten per cent of his annual bonus was tied to specific environmental goals such as “eliminating plastic straws” and “farm-level methane reduction”. Another ten per cent was conditioned by retaining minority workers and similar workplace goals. The results? He achieved all his annual bonus targets; voila, his total 2021 pay jumped to USD 20.4 million from USD 14.7 million in 2020. While slashing plastic straws, methane emissions, and employee turnover, that is.

    If there is one lesson to learn from Starbucks’ example above (apart from how grossly overpriced their hot beverages must be to provide for those gigantic bonuses), it is the importance of identifying ESG goals that are quite specific and relevant for the company as well as for the leader in question.

    So, watch out, Nordea! Make sure that the ESG-pay metrics you adopt are quantifiable and meaningful. And make it difficult to fudge the outcomes.

    [1] Willis Towers Watson Data Services (WTW) has been compiling data on ESG incentives in executive compensation annually for the past three years.

    Image courtesy of frugal flyer on Unsplash
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