Executive Remuneration: fat cats v's the future

If Britain’s Liberal Democrats had their way, they would limit bankers’ bonuses to £2,500 per year. It doesn’t look like they will, however. UK banks are readying themselves for a predicted £7 billion bonus season. As the bank tills ping back open, the Conservative-dominated Coalition stands accused of a climbdown on a promise to curb “unacceptable bonuses”.

No one likes fat cats. Much of that, let’s be honest, derives from envy. Not always, though. Sometimes the public’s dislike is justified. Why should BP’s Tony Hayward walk away with a £1.045 million handshake after overseeing one of the worst environmental disaster in US history (not to mention leaving an £11 billion hole in investors’ pockets)? Pay should be commensurate with performance. When bankers so spectacularly failed during the recent financial meltdown, their pay packets should be adjusted accordingly.

Away from the contentious issue of bankers’ bonuses, however, giving your top dogs an annual ‘extra’ has a well-attested business rationale. It’s there in industrial and organisational psychology 101. In sum, bonuses are supposed to motivate those managing certain assets to work those assets harder and more profitably. Hence a large chunk of executive pay comes in the form of share rewards. Perform well and the share price goes up. And then everyone wins, both the managers (executives) and owners (shareholders) of those assets.  

Corporate Responsibility advocates are not blind to the appeal of such thinking. They want companies to improve their non-financial performance. They know general business case arguments can get them so far. Those that live in the real world of business and not in do-gooderville know they can get a whole lot further if they can link their agenda to executive pay. A CEO will nod benignly and make vague commitments on responsible business if he has nothing at stake personally. He’ll be sure to pick up the phone and make it happen, meanwhile, if he knows his bonus is one the line.

The move from theory to practice is taking time. Precious few companies have integrated corporate responsibility into senior management pay. Among Europe’s 300 largest companies, the percentage is under a third (28%), a study by specialist analysts EIRIS finds. Those that have, have done so in a way that could be best described as “opaque”, according to Ethical Corporation writer Stephen Gardener.

The reasons are easy to identify, but tricky to fix. First, there’s the deep-seated issue of corporate culture. Remuneration policies lack transparency, full stop. Companies start making noises about confidentiality and commercial sensitivity as soon as the light shines too brightly on their pay schemes. More importantly for corporate responsibility, the metrics for identifying the drivers of value with respect to non-financial factors are not there yet. Even in measurable areas, such as accident rates or greenhouse gas emissions, establishing a direct causal link between the top dog and the target is not straightforward. To do so requires very strict vertical integration.

That’s not to say companies aren’t trying. Gardener highlights the example of Dutch paint and chemicals firm AkzoNobel. Half of the share allocations that the company’s directors receive is dependent on the company’s average positioning over a three-year period in the Dow Jones Sustainability Index. It’s not just the board that is impacted. AkzoNobel’s top 600 managers are similarly incentivised. In the same vein, shareholders at banking giant ING recently approved a remuneration plan that links 40% of the variable element of directors’ pay to sustainability targets. Again a sizeable number (this time, 200) of senior managers are directly affected.

It’s notable that both cases derive from the Netherlands (Dutch life sciences group DSM and mail operator TNT are other examples). Dutch law makes executive remuneration packages subject to a binding shareholder vote. Shareholders in countries such as the UK, France and Germany also vote on executive pay, but only in an “advisory” capacity.

There are some important lessons here. First, when it comes to remuneration, it’s investors (as asset owners) that hold the clout. They need to be convinced that sustainability impinges on their long-term interests. The arguments are there. They just need to be made more clearly and more urgently.

Second, investors need to act. If more countries adopted the Dutch voting norms that would certainly help them do so. Whatever the case, it can’t be left to company boards alone. However well intentioned they might be, the language will inevitably be general and the targets vague. Clear deliverables with direct lines of responsibility is what’s required if sustainability is ever to be seriously factored into executive pay.

Hopefully come bonus season we then can begin to talk about the future and not just fat cats.

The Netherlands and CSR: Moths or Behemoths?

For a small country, the Netherlands has more than its fair share of big companies. Aegon, AkzoNobel, Heineken, ING, Philips Electronics, Royal Dutch Shell, TNT, Unilever – the list rolls on. Many will be familiar to those that follow sustainability indices. There are a dozen Dutch multinationals in the benchmark Dow Jones Sustainability Index.

But does big necessarily mean beautiful? That’s the question behind Ethical Corporation’s recent Country Briefing. The answer all depends, author Stephen Gardner concludes, on who’s doing the beholding.

If it’s a box-ticker, then ‘yes’. More than six in ten (63%) of major Dutch companies produce an annual sustainability report – a figure far in advance of European counterparts such as Germany, Italy and Spain.

Internationalists are also likely to answer positively. From the days of the Dutch East India company, the Netherlands’ sights have been firmly set overseas. It’s a perspective to which its modern multinationals have remained true. As with its government, private companies rank international development highly. And not just in cash terms. Programmes such as the Sustainable Trade Initiative are making strides in spreading efficient, ethical standards away from home. Their supply chain record is no less impressive. The vigilance of Dutch campaign groups and investors has a lot to do with that.

For others, big means bad. Not all Dutch companies are whiter than white. Global bank ING, for instance, has recently come under scrutiny for its holdings in controversial companies”, such as cluster bomb and landmine component makers.

But for most, big simply means cumbersome. Dutch companies have a reputation for following, not leading. Most are a century-plus old. That slows the dynamo somewhat. As Gardner puts it: “Though Dutch companies are among the best, they are generally not the very best, or they are the best only in certain areas.” Shell stands as a case in point. It recently slipped from the Dow Jones Sustainability Index, the first time since the ranking’s inception over a decade ago. The reason has yet to be published. Problems in the Niger Delta could be to blame. But more likely, the company just stood still and let others go past it.

Yet the Netherlands is not without its ethical innovators. It’s just a case of where to look. The real action is happening at the other end of the telescope, among the moths not the behemoths. The Dutch know these small, nimble players as “double goal” firms. Triodos Bank, the ethical finance pioneer, is perhaps best known. Its fames for using its $3 billion balance sheet to finance those “working to make the world a better place.” Others - like union-founded bank ASN, local brewer Gulpener and pro-organic fashion label G-Star Raw - are less well known. (The Briefing includes a case study of carpet manufacturer Desso’s cradle-to-cradle production approach should anyone need convincing).

Of course, there’s always a danger that the Netherlands’ ethical minnows might sink rather than swim. In an age of austerity, government incentives are few and far between. That said, the Dutch government does now apply sustainable purchasing criteria to all public contracts.

But government support is confined mostly to the realm of the rhetorical. “Inspiring, innovating and integrating” runs the current mantra from the Staten-Generaal (the Dutch Parliament). If you’re on the look-out for examples, it’d be as well to think small as it would big.