Are sustainable bonuses simply an opportunity to offset loss of income at a time of disappointing financial results and fierce criticism of traditional bonuses? Ans Kolk researched how this works in practice at AkzoNobel, DSM, TNT and Shell.
Dutch multinationals lead the way when it comes to including environmental and social objectives in bonus systems for high-level executives. Some state that these sustainable bonuses are a good opportunity to offset loss of income at a time of disappointing financial results and fierce criticism of traditional bonuses. Professor Ans Kolk of the University of Amsterdam Business School (ABS) led research on sustainable bonus systems, using AkzoNobel, DSM, TNT and Shell, four global pioneers in this area, as illustrative cases. "The public wants an answer to the following question: when do you receive a bonus and how difficult is it to get one? It's not easy to find an answer to that question. Finding information takes quite some effort and often there is very little transparency. Corporations say that this is sensitive information with regard to their competitors, but this argument may also be an easy way out for them. So yes, there is a risk that these bonuses also serve to keep bonuses at a certain level”, says Kolk.
She emphasises that she has no reason to doubt the good intentions of the board of, for example, AkzoNobel. “But the practice of sustainable bonuses is still in the early stages. This is the first time research of this type is being conducted.” The research does give companies tangible directions on the design and set-up of sustainable bonus systems, as they can take the four cases as examples. “But the devil is in the details”, says Kolk. “Which aspects do you consider? Do you choose an external benchmark (AkzoNobel and Shell) or internal objectives (TNT and DSM)? Short or long-term bonuses? And what percentage of the overall bonus? Can management influence the criteria? What are the advantages and disadvantages?”
Linking bonuses to performance is always a difficult, complicated process and this is no different for sustainable bonuses. Consistency is essential to win the trust of the outside world. Still, in 2011 AkzoNobel changed its system after two years. Just as Shell did when it was struck from the Dow Jones Sustainable Index (DJSI) following oil spills in Nigeria. However, the fact the Halliburton – a company directly involved in the BP oil spill disaster in the Gulf of Mexico – remained at the top of the DJSI, discredited the index. It didn't help matters that errors were made and the DJSI had to retract rankings.
The choice of an external index creates a feeling of trust in the general public but it makes corporations vulnerable if this benchmark turns out to be unreliable. If you examine management’s influence on the criteria, then it seems logical that you only give a reward for matters where there was actual influence. On the down side, management could be tempted to select objectives that are easily met. And what percentage of the bonus should be dedicated to sustainable criteria? If it is only a small portion of the variable income (like at Shell) this doesn’t create too much suspicion regarding keeping bonus income at a certain level. On the other hand, if only 10% of the bonus is 'sustainable' this gives the impression that the company is not too serious about sustainability.
Kolk was surprised at the amount of variation found in the approach taken by various companies. She also found it interesting to see how the aspect of competition was used as a reason for justifying the lack of transparency. “It was a major undertaking to acquire insight into the details of sustainable bonus systems.” Her preliminary conclusion: “Perhaps the greatest value of the sustainable bonus is raising consciousness about the importance of stakeholder value in the form of non-financial objectives. It’s an opportunity to introduce sustainability in the boardroom and have it settle a bit more in the hearts and minds. It’s an extremely interesting subject but there is little information available and it is difficult to research. What we have found sheds an interesting light on the various ways it could be implemented. That is helpful for companies considering introducing sustainable bonuses.”