Some CEOs Are Hearing A New Message: Act On Climate, Or We'll Cut Your Pay

Apr 20, 2021
Originally published on April 21, 2021 8:51 pm

Corporate America wants you to know that it takes climate change seriously. But how can you tell if businesses will follow through?

Here's one idea that's catching on: Cut the pay of corporate leaders if they don't meet their climate goals.

Though the practice is not widespread, several firms — including oil companies such as Shell, Murphy Oil and the refiner Valero — are embracing it, often under pressure from activist shareholders.

"We believe that compensation drives outcomes," says Danielle Fugere, president of As You Sow, a nonprofit that works in shareholder activism. "So when an executive team is incentivized to actually accomplish a goal, then they're more likely to do so."

Top executives at big companies don't just receive a paycheck. Much of their compensation comes in the form of bonuses or stock options pegged to certain benchmarks — for instance, the more profit the company makes, the more money the CEO might take home. (And in the U.S., it's a lot of money — more than $20 million on average.)

Many companies already tie pay to nonfinancial metrics such as customer satisfaction or a good safety record, says Jannice Koors, a senior managing director at Pearl Meyer, which advises corporate boards on executive compensation packages.

But linking executive pay to cutting carbon emissions, or to diversity, equity and inclusion efforts — both major areas of focus for investors today — is new territory.

"It's not very common — yet," Koors says. She says that mounting pressure from shareholders and the general public will likely cause that to change over time.

Still, some boards are balking. Say shareholders ask a board to tie 20% of an executive compensation package to environmental or social goals. The board might worry that would reduce the incentive to meet other business goals.

"What in the current bonus plan has suddenly become 20% less important?" Koors asks. "Have profits become 20% less important? Have revenues become 20% less important? That 20% has to come from somewhere."

(One caveat though: Many incentive packages for oil and gas executives just peg pay to reserves or production — basically, rewarding executives for how much oil they pump, even if they're losing shareholders' money.)

Meanwhile, there's skepticism from outside the boardroom, too. Some scholars and activists question whether putting 10% or 20% of an executive's bonus on the line would be enough to motivate a dramatic shift in the business model.

Dario Kenner, a visiting research fellow at the University of Sussex who has examined the voluntary climate commitments made by oil and gas companies, is skeptical, calling the entire conversation a distraction.

"The overall incentives are to maximize fossil fuel production, because they are oil and gas companies," he says.

How do activists respond to these doubts? To board members, they argue that fighting climate change will serve profits and revenue long term.

Some companies are making the same argument. After shareholder pressure, Shell agreed to link executive pay to reducing its carbon footprint in 2018. This year, the company announced it's doubling the weight it gives to climate when determining those bonuses.

A Shell spokesman told NPR that the company sees "commercial opportunity" in a society-wide shift away from carbon and that "tangible incentives" for executives to cut emissions are part of that effort.

"If we do that well, and continue to focus on reducing the carbon intensity of our own operations toward net zero, Shell should thrive, too," the spokesman said.

As for the question of whether putting bonuses on the line is enough really to tackle climate change, activist investors say it's a good starting point. As You Sow's Fugere says government action is needed to tackle climate change adequately — but that corporate changes, such as pegging pay to climate goals, can fill in the gap where policy falls short.

Her group pushed Valero to add climate criteria to its executive pay; the oil refiner agreed. It asked the same of General Motors, which has set ambitious climate goals (such as phasing out gas-powered cars completely by 2035) but stopped short of firm commitments. A proposal on the topic will be up for a nonbinding vote at the next GM shareholder meeting.

In a way, the fact that this conversation is happening at all is a sign of just how much ground activist shareholders have won after years of pushing companies to acknowledge climate change and make plans to act.

Big companies, including oil and gas firms, no longer deny climate change is happening. It is routine for them not only to disclose their carbon footprints but also to announce plans to reduce them. And it's only because those battles have been won that the prospect of putting executives' money on the line is now on the table.

"To say that [environmental, social and governance] factors can replace — or at least add to — the actual financial goals is a change," Fugere says. "It's a sea change."

Pat Miguel Tomaino, director of socially responsible investing with Zevin Asset Management, has pushed Apple to add sustainability and diversity metrics to its pay package, which the company is now doing. He says he views making progress on climate goals as "simply like any other business objective."

And like any other business objective, it requires follow-through.

"When we find a company is not making progress against that goal," Tomaino says, "it's time to increase pressure on the company."

Copyright 2021 NPR. To see more, visit https://www.npr.org.

ARI SHAPIRO, HOST:

A lot of companies have announced ambitious goals to fight climate change, but who's keeping an eye on those companies to see if they keep their promises? As NPR's Camila Domonoske reports, activist investors want to tell CEOs cut your emissions or we'll cut your pay.

CAMILA DOMONOSKE, BYLINE: Big companies are talking a big game on climate, whether they're tech giants...

(SOUNDBITE OF ADVERTISEMENT)

UNIDENTIFIED PERSON #1: By 2030, Apple will be 100% carbon neutral for our entire end-to-end footprint.

DOMONOSKE: ...Food companies like Nestle...

(SOUNDBITE OF ADVERTISEMENT)

UNIDENTIFIED PERSON #2: I'm committed to do what we can to protect our planet for future generations.

DOMONOSKE: ...Or even oil and gas companies.

(SOUNDBITE OF ADVERTISEMENT)

UNIDENTIFIED PERSON #3: All across BP, we are changing to support our net-zero ambition.

DOMONOSKE: Maybe you're skeptical. Maybe you remember that 20 years ago, BP pledged to go beyond petroleum and kept on pumping oil. Maybe you're wondering what happens if these promises are empty.

PAT MIGUEL TOMAINO: And oftentimes when we find a company is not making progress against that goal or we just stop as investors hearing about the goal, it's time to increase pressure on the company.

DOMONOSKE: Pat Miguel Tomaino is with Zevin Asset Management, a socially responsible investment company. And he says one way to increase pressure is to go to the board of directors with this idea.

TOMAINO: It's time now, once there's a goal in place, to tie performance on that goal to executive compensation.

DOMONOSKE: CEOs get huge incentive packages designed to reward them if they grow profits or promote worker safety or boost customer satisfaction. Companies could change those packages to peg some pay to meeting climate targets. So if executives hit their goals, they get their full, very large bonuses. If they fall short, their paychecks fall too. After shareholder pressure, companies like Apple and Shell have actually said yes to this. This is new territory.

JANNICE KOORS: It's not very common yet.

DOMONOSKE: Jannice Koors is with Pearl Meyer, a firm that advises companies on how to pay their executives. She says investors are very interested in tying compensation to things like climate goals and diversity and equity. But boards can be skeptical. Say a company decides to tie 20% of its total bonus pool to environmental or social goals.

KOORS: Have profits become 20% less important? Have revenues become 20% less important? That 20% has to come from somewhere.

DOMONOSKE: Activist investors argue that these changes do promote profit and revenues over the long term. And Koors says between investors and public pressure, she expects more companies to tie pay to climate targets. Even some U.S. oil producers like Murphy and Marathon are taking this step. The key for investors is that this is a way to hold business leaders accountable if they don't follow through. Danielle Fugere is the president of As You Sow, an activist investor group. She closely follows corporate climate targets. And for some companies...

DANIELLE FUGERE: We have some questions about their intentions to reach those goals.

DOMONOSKE: Her group successfully pushed the petroleum refiner Valero to tie corporate pay to meeting climate targets, and now they're asking the same of General Motors. It's not clear how big of a difference these executive compensation measures will make, especially for businesses whose core product is driving global warming. But the fact that this conversation is happening at all represents a remarkable shift.

FUGERE: It's a sea change.

DOMONOSKE: Activist investors spent years trying to get companies to talk about climate change, and they won that battle. So now they're telling business leaders to put their own money where their mouth is, and some big companies are agreeing.

Camila Domonoske, NPR News.

(SOUNDBITE OF GEORGE FITZGERALD'S "PASSING TRAINS") Transcript provided by NPR, Copyright NPR.