Hacking Reward Structures For True Sustainability And Climate Protection

Sustainability is the new front-runner in trendy topics. But what requirements need to be fulfilled? How do we change structures and processes based on economic goals for years? Uncertainty abounds. No one has a silver bullet.

This creates opportunity and danger. If the focus is superficial, it’s simply about making company figures and KPI’s look good. And existing incentive practices, when transferred to sustainability, will be built on a shaky foundation. And the opportunity for a rethink lost. What new perspectives might help us?

1. What if we were to re-evaluate?

Many see sustainability primarily as a business issue. The demands of customers and employees are increasing. Maybe it’s just a matter of convincing shareholders we have minimised the risk of climate sins and social mismanagement. Senior managers can experience conflict advocating more sustainability. They are caught in the rules of making revenue.

Take executive remuneration as an example. Even a low proportion of ESG factors is considered sustainable. (E= environmentally friendly. S = social. G = well governed.) The "Working Group on Guidelines for Sustainable Executive Board Remuneration", suggests 20 per cent of sustainability targets are already enough, and is at the upper end in a European comparison. Add to this: The ESG mix is dominated by a focus on CO2 emissions.

In a study by the Futurist Institute for Sustainable Transformation (Potsdam Institute for Climate Impact Research, plus PIK and Bain & Company), climate neutrality stands out as the sustainability goal in the eyes of CEOs. This means that long-term goals like species conservation or fair labour conditions (the S in ESG) fall by the wayside.

Moreover, sustainability goals can cannibalise each other as a result of this methodology. Companies saddle the horse from the behind, or the side, of the metrics. These obscure the real purpose which is the future for generations to come.

2. What if we don’t understand sustainability as an obligation?

What sustainability/ESG means is not clearly defined, even if companies act as if it is. Despite minimum standards and legal requirements, there is much room for interpretation. Companies may use this leeway to adopt definitions they are likely to meet, or worse, already have.

In Germany, the Supply Chain Act, regarding social standards and the EU taxonomy regarding climate protection, have increased pressure on organisations in reporting, at least. Elsewhere, this development remains to be seen. In any case, shareholders and customers are paying more attention to climate targets. But this leads companies to see sustainability as an obligation.

The 17 UN Sustainable Development Goals (SDGs) or voluntary accounting tools (depending on the focus), could act as a guide to a real performance definition of sustainability that is challenging, meets more than the minimum requirements, or sends symbolic signals. It is not only inputs (resource requirements, staff and capital) and outputs (measurable results in operations) that count, but also outcomes (benefits for customers) and the impact (long-term) on society.

Such an impact requirement is a design opportunity, because it can be a driver for employees. If they see their company is serious about sustainability, including top management, the way is clear to redesign structures and processes (in say personnel or compensation issues). Sustainable performance then becomes part of the job evaluation process. Do employees have sustainability competencies, or high impact on sustainability in their work? These would be crucial criteria.

3. What if we removed money and bonuses from sustainability?

Sustainability is complex. And when complex tasks are involved, intrinsic motivation works best. But many claim "CEOs and managers are highly motivated to do something for sustainability”, but the impact does not seem rewarding enough. It can't hurt to have a few monetary incentives, can it?

Well, yes, it can. The research is very clear on this: intrinsic and extrinsic motivation cannot be added together. A so-called over-justification effect kicks in, where people focus more on the bonus or money and less on intrinsic motivation. High weight for sustainability criteria in pay management is not progress (contrary to what compensation consultancies might claim). If systems are as they are, it seems better to have no sustainability targets at all. But is that enough?

To change something, one would need to decouple compensation and goal setting. This would not necessarily mean ambitious goals need to be abandoned. Methods such as Objectives and Key Results (OKRs) are not without their difficulties too. Misguided incentives cannot be ruled out. But they follow the intrinsic principle that employees can derive concrete goals for their area of work from the corporate strategy. These are all the more ambitious the less they have to do with rewards. After all, no one wants to punish themselves for ambitious goals.

However, the persistence of individual incentives - even if they are recognised as ineffective or harmful from a motivational point of view - is strong. This is related to the acquisition function of "performance-related" pay and financial aspects. Many employees still expect individual bonuses, even though a rethink has started to emerge. Financially, the approach means that companies pay out the variable portion only at the end of a bonus period, thus increasing their cash flow.

But those who decide to do this should be aware that the incentive mechanics reflect false facts. Even worse, extrinsic incentives put a price on sustainability efforts. This does not mean it becomes more attractive for people to get such a bonus. If the necessary steps require a lot of effort, this can also lead to employees consciously accepting downtime costs. And including sustainability in remuneration creates choices and loopholes in case of failure.

4. What if we measured differently?

"We can only manage what we measure" is a common belief. When it comes to climate neutrality, for example, companies cannot get around measurements - otherwise they do not know where they stand. Nevertheless, this statement is only half the truth. Because many things that cannot be measured are important for sustainability and climate protection.

How, for example, can companies measure whether they are contributing to the protection of species or to improving the living conditions of their customers if hard figures are lacking, or measurements are so costly as to be prohibitive? Qualitative signals and concrete measures for sustainability are more meaningful here than specific KPIs.

But threshold values are often declared to be the goal. Sustainability measurements convey certainty and clarity and mutate into the end in itself. We forget that measurement units can only gauge whether or not we are on the right track. It is about decisions shaped by our beliefs. Consider the new EU taxonomy. It regards nuclear energy as sustainable because of its low emissions. However, this does not include the risks of nuclear accidents or final storage.

It’s important that the overall equation is correct. The current measurement arithmetic has blind spots. For example, the following are not usually factored into company balance sheets:

1. Resources (raw materials) that people take from nature and do not give back to it.
2. The social consequences of climate.
3. The investment needed to invent climate-friendly solutions (not only energy-saving technology, but also recycling or repair).

If nothing changes in this regard, sustainability results will be wrongly measured. Then there is "no value" in sustainability to reward managers for these results with shares and money.

"Our measuring device for determining 'less' and 'more' is not properly calibrated," says neuroscientist Maren Urner. Take time for instance. The answer to what is less or more depends on whether we think, decide and act in the short, medium or long term.

So today it might feel as if climate change is far away, because the damage to people and environment is only felt elsewhere. But tomorrow, the consequences could "arrive on our own doorstep - in the form of planetary dynamics and refugees", says Urner.

The way we look at things has implications for our units of measure. Of course, the saying "less is more" is wrong if we relate it to monetary aspects. But what about when we relate less and more to quality of life? One might argue that money is power and opens up opportunities. But happiness research shows that joy and pleasure do not increase in proportion to wealth.

5. What if we were rebels and pioneers?

Benefit programmes indicate what beliefs shape our measurement systems. This is via the choice of benefits (for example, classic company car vs. e-car or e-bike, shopping vouchers vs. CO2 compensation by planting trees) and the offer of non-monetary currencies (for example, choice of home office, flexible or regular working hours).

The time perspective also plays a role: many benefits are designed to encourage employees to spend money rather than save for a future in which demographic change will shake up pension systems. When people do reduce short-term spending, and invest in long-term development - like further education - this produces sustainable prosperity. Benefit programmes, however, usually do not (as yet) support this option.

If we are serious about sustainability, we must redesign our reward and incentive systems. Why don't companies start doing this? Because they think the world is not ready for it, or because sustainability will become more expensive, or people don’t appreciate its value.

Ultimately, new currencies in compensation can only go as far as a current thinking allows. But for those who are not held hostage to the chicken-and-egg dilemma still enjoy a unique selling point.

In the battle for talent, this factor should not be underestimated.

This is a guest post by Stefanie Hornung, a freelance journalist specialized in topics of New Work, HR, Management and Diversity. For more information on Stefanie and her work, check out her rebel page.