Reward: Incentivising the ESG agenda

Attention on the climate crisis has been gaining momentum in recent years, and there is a growing need for sustainable practices globally. There is an expectation that organisations need to not only take responsibility over their actions but also to recognise that they can be a force for good.  This increasing pressure on businesses is not just coming from global leaders, but from a wide variety of their stakeholders – investors, employees and consumers.

Selena Farooqi, Associate Partner leading International Reward Search at Eton Bridge Partners, sat down with Natura &Co’s outgoing Group Vice President of Total Reward, Bola Ogun. Here, they explore the ability organisations have to impact ESG and the sustainability agenda through reward and pay initiatives.

Natura &Co are a purpose driven group of companies, including brands such as The Body Shop, TBS, Aesop, Avon, and Natura. Historically they have proven how their individual businesses can collectively and successfully bring sustainability into reward programmes to better meet ESG targets, and their responsibility to the planet.

ESG is an acronym standing for environment, social, and governance, where environment denotes reduction of carbon and other greenhouse emissions, or generally protecting the environment. Social criteria looks into how entities manage the relationship between and among stakeholders, while governance means practising fairness and transparency in the management, as well as actively disclosing information, to the relevant stakeholders. Sustainability, in this instance, is based on the selection of projects or programs that have a positive impact on social and environmental aspects where an entity is ready to sacrifice profits for a clean environment.

Internal and external talent demand more sustainable practices

During our conversation with Bola, we asked whether he felt that organisations have more accountability now as far as sustainability is concerned.

“The demand to address the climate crisis, embrace circularity, and promote policies that defend human rights and are human ‘kind’, previously came from only two core sets of stakeholders. The first being consumers, who look at the credentials of who they will buy from – especially amongst younger generations. The second being climate activists who have always been keen to shine a light on companies that are exploiting the planet or its people.

“Now, institutional investors are not only pressuring organisations to meet ESG targets, but they are also questioning the viability of companies – will they be able to navigate the world’s growing demand for sustainable processes and products moving forward?

People are increasingly considering the sustainability of the companies they work for, and it is forming a large part of their decision-making process when choosing which organisation to work for.”

“Business can be a force for good”

Bola feels that we should be optimistic about businesses being able to be a force for good when it comes to addressing the climate emergency and developing nature-positive regenerative solutions.

“Businesses are doing more than simply looking for ways to create short term value for shareholders. Business can and do help us to really drive change and address the climate emergency – this is called sustainable capitalism” he said.

“Internally we focus on ‘people, planet, profit.’ For Natura &Co. the planet aspect comes instinctively because it’s at the core of our Natura business’ heritage. The Body Shop are activists raising awareness about animal welfare, as well as LGBT rights and other causes right from its beginning. These are fundamental values across all of our businesses.”

But while society has largely moved on from considering sustainability as a problem that needs only to be addressed by a handful of “eco-friendly” companies, there does remain some stubborn pushback.

“Everyone knows the disastrous impact of global warming, so I don’t think it’s a case of trying to get businesses to do something that they’re reluctant to do. But some businesses have still got it in the “too difficult box,” and some have got it in the “it’s not directly relevant to how we pay executives” box. This must change.”

By companies taking the steps needed to understand, assess, and mitigate climate-related risks linked to them, and the larger economy, and putting targets in place, they can help their people understand the relevance.

“Targets in ESG can and should be quantifiable and directly relevant to your business, rather than having soft targets which are open to interpretation. For manufacturing, this might be in plants that are powered by burning fossil fuels and how much CO2 the production and supply chain process produces, or for IT companies the fact that data centres are using X amount of energy. There must be measures which are specific to your sector or your business.”

“What gets paid gets done”

Using reward as a tool for driving change is just one factor that reward leaders might consider when devising programmes.

“We say in reward “what gets paid gets done” and having specific ESG incentive targets can give additional motivation to those that maybe aren’t as aware.”

But it’s not just the engagement factor that is important.

“Leaders have a huge proportion of pay which isn’t base pay. Senior leaders will have a minimum of 30-85% of pay based on achieving specific targets. Companies must be cautious of this because people will question what they have done to earn these large bonuses.

We don’t want ESG to simply become an excuse for even higher exec pay levels. We want better Environment Social and Governance (ESG) outcomes. Executive long term incentive plans must strive for breakthroughs rather than marginal, or incremental ESG improvements.”

The future of employee benefits is green…

One area where companies can make a significant impact on the environment is through their benefits, especially their car allowances.

“We should be conscious of all aspects of compensation and how benefits can convey and reinforce company culture. For example, you must question the environmental impact of having large car parks which are potentially full of high polluting cars financed from our remuneration packages,” said Bola, “There are more specific actions we can take. We might reposition car allowances as being about ‘Green Commuting’ and ‘Hybrid working’ to reflect the way the pandemic has driven a move towards more remote working.”

“As a company we are constantly examining our carbon footprint, and electric vehicles are a fundamental part of that. We have had situations where we have offered leasing or purchase options of electric vehicles. In time, we might get to a place where companies will say to their employees that they’re not able to drive a polluting car on site. We’re not there yet, but we might get there in the future.”

Bola feels that employers have a responsibility to support their employees in leading a more sustainable life outside of work too.

“The future of work and wellbeing is about moving beyond employee experience to the overall life experience of employees. Corporate leaders need to think more progressively about their role in their employees’ lives and how they can positively impact them at work and after hours.”

Change doesn’t happen overnight

Linking sustainability with your reward agenda might seem daunting at first, but Bola encourages reward leaders to simply start by establishing and asking yourself where you are now.

“For businesses, one of the first things you have to be able to do is find that baseline. What is your starting point? So, understand the impact your processes have. For example, what plastic you are using and where you’re sourcing it from?”

“Establishing where you are in these areas helps to decide which changes you need to drive through your reward philosophy.”

After determining where they are, businesses can then decide which metrics to focus on, and set challenging and relevant targets – but this doesn’t happen overnight.

“The inclusion of a strong environmental metric with challenging targets took nine months of careful consideration, external research and consultation, as well as consideration of both the short- and long-term incentive plan design. We landed on CO2 reduction driving towards net zero.

We have had Sustainability Metrics in place for over three years now, focusing on recycling and plastics (reduce, reuse, and ensure it is compostable). Going forward the focus of our Short Term Incentive (STI) is on metrics that can be assessed on annual progress.”

How to create a sustainable reward programme:

  • Find the relevancy: Examine the issues that are core to your business and decide on what you can measure.
  • Establish your base-line position: Where is your business in helping address the climate crisis? Do you understand its CO2 emission and its use of plastics? Is the company ‘human kind’ and does it advance diversity and inclusion (gender, race, religious, sexual orientation)? Where are you when it comes to Pay Equity (living wage, locally and globally plus gender pay gaps)? All aspects need to be considered.
  • Pay for outcomes not just inputs and activities: Executive compensation plans are bonuses, so it’s important to be clear what the stretch target is vs the day job. Focus on metrics that are material and quantifiable to the business and how they can be independently measured. When it comes to People and Planet metrics, we should strive for breakthroughs rather than marginal or incremental improvements.
  • Be bold and transparent: People are demanding that businesses be more accountable. Select metrics that directly link to your business and its purpose. This is where you can drive real change.

Thank you Bola for your fascinating insights into how reward leaders can and do drive real change in devising sustainable rewards programmes! If you would like a confidential discussion with Selena, please get in touch here.