A number of recent stories covered the move by Royal Dutch Shell to incorporate carbon emissions into the performance goals for its executives incentives. For example, see this story by CNN, Shell is tying executive pay to carbon emissions. Here’s why it could create real impact.
Some may believe this is an appropriate action by one of the big oil companies. Other may dispute whether any such action is needed at all. But, assuming that society as a whole has focused on environmental issues to the extent that boardrooms have begun to take notice, Royal Dutch Shell may be the first in a new wave of companies adopting environmentally-focused performance goals for their executives’ incentives. The number of companies this could impact is staggering–everything from the typical companies thought of when considering environmental impact (oil companies, manufacturers, and utilities) to the less thought of, but sometimes having even more of an impact on some aspects of the environment. For example, just recall the recent focus on the types of straws folks use after it was disclosed that plastic straws lead to an overall increase in plastic pollution that endangers wildlife and the environment. Many companies immediately sought out more environmentally-friendly alternatives and suddenly paper straws are all the rage (and the one company in the U.S. that manufactures them is having a hard time keeping up with demand).
We have seen this focus on bags in the retail environment too as plastic bags have given way to reusable shopping bags or the return of paper bags for shopping needs. My point is that these matters likely will continue to surface and with a frequency unseen in history as social media makes it easier for consumers and individual citizens to gain focus on things that the wider community may want to consider. So, will fast food chains be integrating carbon emissions into their incentives? Probably not that soon. But, for large restaurant chains that have large, wide-spread distribution networks I could see them focus incentives on finding the most cost effective solution that balances environmental impact. Perhaps that means that their delivery fleets get powered by alternative fuel sources. There could be more action in this area as social awareness of environmental issues grows. It may seem far-fetched today that business leaders would be rewarded based on both how a company performs financially, as well as how the company manages its environmental (and social) impacts.
However, I think in the not too distant future this will be part of incentive designs, especially at companies that take a more holistic approacg to their businesses and how they define success.
So when more companies start adopting Environmental (and Social) goals into their incentive plans, they will need to take care that they do not create any perverse incentives that could cause problems later. Adopting such goals should be done carefully and discussed and reviewed from all sides. The goals should be tested–preferably by a number of folks who enjoy finding the loopholes in things to best identify where the goals may present weaknesses. Those should be shorn up through the use of countervailing goals and/or careful monitoring. If done properly, these such environmental (and social) goals could help propel companies to greater financial returns, especially if the goals lead to behaviors that are recognized by society as appropriate.