Can linking executive compensation to sustainability performance lead to a sustainable business model? Evidence of implementation from enterprises around the world

• Date: 01 November 2018
• Published date: 01 November 2018
• DOI: http://doi.org/10.1002/jsc.2240

RESEARCH ARTICLE

Can linking executive compensation to sustainability

performance lead to a sustainable business model? Evidence of

implementation from enterprises around the world

*

Nirjhar Nigam | Cristiane Benetti | Sondes Mbarek

ICN Business School, Metz, France

Correspondence

Nirjhar Nigam, ICN Business School, 3 Place

Edouard Branly, 57070 Metz, France.

Email: nirjhar.nigam@icn-groupe.fr

Abstract

Making top executives accountable for their companies' sustainability performance demon-

strates the seriousness of those companies' efforts to combat adverse environmental impacts

caused by business practices and become sustainable corporate citizens. Corporations' sustain-

ability goals should be reflected in top executives' remuneration and not merely in reports. Link-

ing executive compensation with a company's sustainability goals may result in a better model

for sustainable corporate health. Decision makers (CEO, CFO) that fail to support the mission of

sustainability are unlikely to frame optimum policies for their companies.

1|INTRODUCTION

According to neoclassical economics and corporate financial theories

(Berle & Means, 1932), the primary objective of a corporation is to

maximize shareholder wealth. Shareholders provide the financial capi-

tal necessary to support the investment, financing, and operational

activities of corporations and are also the residual claimants in the

event of default (Jensen & Meckling, 1976; Zingales, 2000). Given this

emphasis on finances, corporations in most countries link top execu-

tives' compensation packages to financial performance. These incen-

tives policies encourage reckless risk-taking by top executives (CEOs);

when the risks actualize, corporations are left with meager resources

to absorb the failure, which puts the global financial system in jeop-

ardy. As a result, these polices have been severely criticized; they are

even thought to have been one of the factors that triggered the finan-

cial crisis and the resulting recession (Lorsch & Khurana, 2010). The

global financial crisis of 2008–2009 illuminated the shortcomings of

executive compensation policies and shifted the focus from share-

holder value to stakeholder value. Focusing only on short term objec-

tives and pursuing maximization of shareholder value has proven

detrimental not only to the world economy but also to other stake-

holders (e.g., the environment, society, and consumers) (Guerrera,

2009; Hahn, Kolk, & Winn, 2010; Jensen, 2001; Lenssen, Bevan, &

Fontrodona, 2010; Paine, 2002).

Moreover, as the world faces severe sustainability challenges, the

threat of resource depletion (such as scarcity of food, raw materials,

and important resources [oil and energy]), and the impact of a growing

population on climate change and the environment, the business com-

munity is facing pressure to incorporate sustainability issues in its

long-term objectives. Corporations are expected to integrate sustain-

ability principles into the way they conduct their business. As a result,

a rising number of enterprises are now disclosing nonfinancial aspects

of their performance, such as social and environmental responsibility

efforts, in addition to their traditional accounting and financial reports.

According to Gray and Cannella (1997), such nonfinancial disclosure

practices can be defined as “the process of communicating the social

and environmental effects of organizations (particularly companies)

beyond the traditional role of providing a financial account to the

owners of capital, especially shareholders. Such an extension builds

upon the assumption that companies do have wider responsibilities

than simply ‘to make money for their shareholders’”.

Given the importance of nonfinancial disclosures, many organiza-

tions have begun to address sustainability issues more seriously by

linking compensation with environmental performance. For example,

in 2008, Intel took an unconventional step to encourage sustainability

within its organization by linking employees' compensation to the

company's environmental performance. According to Michael Jacob-

son who was then the director of Corporate Social Responsibility, this

step was taken to encourage employees to care about the company's

sustainability because everyone cares about their pay. By 2012, this

change has led to some amazing results; Intel's greenhouse gas emis-

sions had declined by 35% on an absolute basis and 28% on per chip

basis, and its energy consumption had decreased while operations

*JEL classification codes: G30, G34, M12, M14, Q01, P27, F64.

Received: 27 September 2017 Revised: 31 January 2018 Accepted: 7 October 2018

DOI: 10.1002/jsc.2240

Strategic Change. 2018;27:571–585. wileyonlinelibrary.com/journal/jsc © 2018 John Wiley & Sons, Ltd. 571