Amid indications from the SEC that climate disclosure rules are on the horizon see story above), some stakeholders are already calling for linking CEO pay to decarbonization or cutting emissions. Friso Van der Oord, NACD’s SVP of Content, lays out the case in a recent
CNN opinion piece.
Reiterating that “what gets measured, gets managed”, Mr. Van der Oord believes that the most effective way to get companies to rapidly decarbonize is to link pay to decarbonization metrics. While the idea is not new, the author highlights several interesting points:
- Prioritizing a new CEO skill set: Van der Oord notes that widescale adoption of decarbonization metrics would make transitioning to net zero a core competency for current and incoming CEOs while sidelining those that ignore the risks.
- Access to capital: According to an MSCI study, share prices were initially slow to respond to decarbonization, but outperformance has accelerated over the last two years.
- Define specific milestones: Van der Oord recommends that boards tie additional incentive payouts to a variety of metrics and milestones such as:
- Inclusion on a climate index (such as MSCI indices)
- Low-carbon transition milestones such as phasing out fossil-fuel powered vehicles for electric vehicles in a company fleet or reductions in GHG
- Implementing a reporting regime for strategic, operational, financial and other metrics tied to climate
Given the relative newness of linking pay to climate performance, the author believes they offer boards the chance to reward executives for “doing good” and penalize CEOs for underperformance on climate.
Many of the ideas in the op-ed feel “of the moment,” but they lack consideration of several economic factors. Would shareholders accept higher costs but lower carbon results? How much of the incentive should be tied to climate performance? Too low and it looks more like marketing than an honest effort, but too high and shareholders may express concerns about losing focus on financial performance. As the regulatory environment shifts, lower carbon options may align with reduced costs, but that transition is only beginning and the time horizon is likely longer than standard compensation plans.
