Comp Committees Link Incentive Pay Environmental Goals

Xcel Energy, Duke Energy and Baxter International are part of a growing number of companies beginning to link executive pay to how well the company meets its sustainability goals.  Companies are placing more emphasis on these goals, which primarily include environmental planning.

With public attention on executive pay as well as global warming more conscientious companies are taking this route.

“A lot of companies now understand you need to provide a green pasture,” says Paul Dorf, managing director of the compensation consulting firm Compensation Resources.  There’s no question more companies will begin assigning sustainability in their compensation plans, he says.

Duke Energy’s latest proxy statement mentions social goals as a factor in determining compensation for the first time.  The board assigned operational metrics for different executives’ compensation.  Ruth Shaw, president of Duke Nuclear, who was scheduled to retire at the end of April, had individual objectives based on advancing the company’s public policy, sustainability, community relations and nuclear-related efforts, the proxy says.  These objectives were the basis for Shaw’s short term incentive pay in 2006.  She was eligible to receive 190% of the amount of her short-term incentive target and was awarded 75%.

ConocoPhillip’s 2007 proxy statement says the board considers the company’s health, safety and environmental performance as a component of its annual incentive bonuses for executive.  “We seek to be a good employer, a good community member and a good steward of the environmental resources we manage.  Therefore, we incorporate metrics of health, safety and environmental performance in our performance-based pay programs,” the proxy reads.

This isn’t the first time the company has mentioned factoring social issues into its annual incentive program, but it does go into greater detail about it in tis latest proxy statement.  ConocoPhilips was also the first U.S. oil company to join the U.S. Climate Action Partnership recently, which calls for significant reductions of greenhouse gases.

As boards start linking environmental and other social factors to a component of executive pay, the details of how they do so are vague.  Establishing concrete metrics for tying sustainability to pay is a new concept, leaving comp committees with no precedent to follow, Dorf of Compensation Resources says.  Being able to attach numbers to soft issues like sustainability and the environment is a difficult task.  Dorf says his services have been retained to assist comp committees in doing this.

Seattle-based utility Puget Energy, for example, is just starting to look at sustainability goals, but has “not yet used it to any tangible goals,” writes board member Phyllis Campbell in an e-mail to Agenda.

When Xcel Energy’s CEO and chairman Dick Kelly took charge roughly two years ago, he pushed environmentally friendly policies.  On Kelly’s urging, the board began linking the chieftain’s pay to how well the company meets its sustainability goals.  Xcel is the largest supplier of wind generation in the U.S., so the company is well situated to push a greener agenda than traditional oil and coal companies.

According to Roger Hemminghaus, a director at Xcel, one third of Kelly’s annual incentive compensation is tied to “very specific” sustainability and environmental goals the board establishes every year with the CEO.  Along with the short-term incentive, 25% of Kelly’s long-term incentive compensation is connected with the company’s environmental compliance, which primarily consists of how well Xcel met its goals for restricting carbon dioxide emissions.

Jeff MacDonagh, SRI portfolio manager at Domini Social Funds, says the funds generally support linking executive pay to environmental and other social issues, but that the board should also make sure C-suite executives have their incentive compensation tied to sustainability.

There have been some shareholder proposals to explicitly make the link between a company’s performance on environmental issues and executive pay.  But generally these types of proposals have not fared well, says Scott Fenn, managing director of policy at Proxy Governance, Inc.  The movement to link pay with sustainability is mostly a voluntary effort initiated by companies that have been forward-thinking on the environment.