“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
When Upton Sinclair went undercover in Chicago’s meat packing district to depict the abhorrent conditions under which workers had spent their days at the beginning of the last century, an uproar followed leading to a frenzy of investigations at the end of which both new labor regulations and food safety laws were introduced. He once said his goal was to reach American people’s hearts but ended up reaching their stomachs.
In my almost 30 years working at the intersection of the political and business world another quote of Upton Sinclair keeps coming back: “It’s difficult to get a man understand something, when his salary depends on not understanding it.” Mr. Sinclair, consistent with his times, used ‘man’ in here, but, of course, this is equally applicable for female business leaders as well.
Due to a growing and increasingly affluent world population that doubled during my lifetime, we are consuming more resources than our planet can replenish. Even economic stand-still and slow-down with massive negative consequences for billions, only led to a small reversal of this trend. Last year’s Earth Overshoot Day, the date on which we have consumed what can be replenished in a year, was on August 22nd indicating we are currently consuming the equivalent of 1.6 planets. With less than nine years left until 2030 to accomplish the UN Sustainable Development Goals, the need for collective action to ensure a growing population can thrive within planetary boundaries is abundantly clear.
In my experience, however, sustainability initiatives don’t have a long life in a business with performance challenges. Sustainability needs to be fully integrated not only into the business strategy but also into the foundation for a company’s success. Emanuele Faber, Danone’s CEO, experienced very recently how hard it can be for business leaders to embark on this journey, when Franck Riboud, a former CEO and son of the company’s founder Antoine, criticized Mr. Faber was more worried about the health of the planet than the performance of Danone. This outburst is even more notable because Danone has agreed with its shareholders to transform into a B Corporation – a company that uses its business as a force for good and meets the highest standards of social and environmental criteria.
Decarbonization without de-industrialization, for example, depends on businesses getting quite a few things right:
- Companies need a normative goal or business ambition to reach net-zero emissions – Bayer thrives to be carbon-neutral by 2030 and supports the UN 1.5 DC Business Ambition;
- Shareholders need to endorse this ambition and support the trade-offs that result from them;
- Measurable and independently audited targets need to constitute an attainable path to net zero;
- Management needs to be rewarded in the same way for achieving those targets as they are for financial KPIs;
- Internal carbon prices need to be established to guide investment decisions on project level, wherever (and that is currently almost everywhere) the external costs of CO2 emissions are not reflected – this year, we introduced a globally applicable internal carbon price of 100 EUR/t;
- Innovation needs to be directed towards decarbonization and addressing climate risks across the value chain;
- Companies need to actively support societal forces and governments that call for climate action, whilst demanding a more welcoming environment for innovation and better understanding for unintended effects like carbon leakage.
Let’s talk about remuneration for a moment. In their recent “Socially Responsible Investment” report, Société Générale took a look at 105 large companies in Europe and found that “74% of the largest European companies tie ESG considerations to their CEO’s variable remuneration.” They report that 60% of their sample also provide details of the criteria used to assess CEO ESG performance. This shows that things are moving in the right direction as incentivization is becoming more mainstream. For this to really work however, we need to get remuneration right. It needs to be meaningful by making up for a significant portion of the overall incentive. Incentives should be impact-focused and thus quantitative and, equally important, externally audited. Under those conditions, following the prediction of Gillian Tett, U.S. editor of the Financial Times, ‘warrior accountants’ will become drivers of the green revolution.
Two simple steps to integrate sustainability into remuneration
In two simple steps, Bayer has fully integrated sustainability into its remuneration. At last year’s Annual General Meeting, our shareholders agreed in principle to allocate 20% of the remuneration to sustainability targets. Just this week, our supervisory board agreed to the first four-year sustainability KPIs, which have to be achieved for the incentives to be paid out. These are narrowly defined performance indicators, based on the strategic, ambitious ESG criteria that we have set for ourselves and do not merely apply to the executive level, but rather to the variable compensation of all Bayer managerial employees whose salaries include a long-term performance-related element. Importantly, the new remuneration scheme complements the traditional non-financial elements in short-term incentives designed to reward progress in sustainability and does not replace them.
The targets are publicly available and Bayer is committed to communicating our progress to our stakeholders consistently and irrespective of how well we are doing in achieving them. Half of our sustainability targets are directed to achieving decarbonization for us and our suppliers, the other half focusses on inclusive growth with emphasis on supporting smallholder farmers, increasing access to family planning, and to everyday health with projects like the Vitamin Angels partnership. At Bayer, we follow the logic of the UN Sustainable Development Goals and believe sustainability needs to address the social and environmental challenges in our value chain with equal emphasis. Impact in the inclusive growth space is much harder to quantify, but, after having gone through the process of trying it, we are convinced it is possible.
With this step, Bayer is one of the few industrial companies in the world to include its own sustainability goals in the long-term remuneration of its employees in a measurable way at significant scale. We hope for many others to join us on this journey. In our recently published sustainability report, Bayer looks at a 10% reduction of our carbon emissions for 2020. This is a great step towards decarbonization but needs to be seen in the context of the pandemic. The journey towards net-zero emissions will be hard and filled with complications. Business leaders need to be rewarded for achieving decarbonization in the same way they are used to for financial targets. But one more thing is needed: These leaders also need to be recognized for trade-offs they make when seeking to manage through these KPIs. In my experience, the ability to balance tensions between conflicting targets is one of the great strengths of leadership teams in successful businesses. It’s a skill worth to be fully mobilized to reduce the annual emissions of 51 billion tons of greenhouse gas emissions to zero by 2050