In a recent interview with Listed Magazine, Paul Gryglewicz, Senior Partner, Global Governance Advisors, expressed his views relating to the growing support for basing a greater share of executive pay on meeting “non-financial” metrics that reflect corporate reputation, social integrity and sustainability.
He shared that making non-financial metrics measurable and quantifiable is not an insurmountable challenge. Boards could create a scorecard based on five to six performance metrics—a mix of financial and non-financial—and determine how much weight to assign to each performance indicator. For example, an auto company could tie 70% of a CEO’s bonus to making a certain number of cars and the other 30% to slashing greenhouse gas emissions by 15%.
Paul doesn’t see a near future where most or all of an executive’s bonus will be tied to long-term metrics. “Markets haven’t responded well to that and there’s no precedent for it,” he says.
And that’s the reality of sustainability goals. Even if an executive hits those targets, the benefits may not immediately trickle down to shareholders and can result in some tension. This happened in April when TransAlta Corp. (TSX:TA) shareholders rejected a $5-million bonus handout to senior executives despite the fact that they successfully partnered with the Alberta government to phase out their coal-fired plants and move towards cleaner energy. ISS argued that compensation levels were at odds with stock performance and meant drastic cuts to dividends. “Some plans don’t show financial results for shareholders right away,” says Paul. “But what if they’re laughing by 2030, making more money and their children are living in a better environment? Should the CEO then not get rewarded?”