Simply uttering the term "going green" seems to lend itself to a number of public relations advantages nowadays. So it’s not surprising that many companies – in a quest to stay relevant and please shareholders – now dedicate a greater percentage of their budgets to sustainable solutions.
One method that has been gaining ground in the business world ties environmental protection to executive pay packages. In other words, the efforts a senior manager makes to "green" business operations and meet predefined targets determines his or her rewards.
Firms are using incentives to help meet a variety of environmental goals, including lowering greenhouse gas emissions and reducing carbon footprints.
At the same time, the effectiveness of these programs is dubious. Problems with establishing targets and measuring leaders’ success in fulfilling green goals, raises questions about whether the scheme is merely a public relations tactic.
Environmentally-conscious remuneration plans need more transparent assessment guidelines, according to Per Marius Berrefjord, managing director of DNV Sustainability Centre in Beijing, a risk management and sustainability solutions provider.
"If you are a company’s CEO, and the board of governors wants to measure your sustainability performance, you wouldn’t disagree. But there have to be credible measurements," said Berrefjord.
In the US, for example, Xcel Energy’s (XEL.NYSE) compensation for executive officers is tied to greenhouse gas reductions. The company takes an extra step by publishing its sustainability targets and compensation not only in sustainability reports, but also in proxy statements. Furthermore, Xcel’s 2009 proxy statement reveals that the company did not offer annual incentive awards to top executives, as their performance in cutting emissions fell short.
While multinational corporations must iron out the kinks in their green leadership incentives, Berrefjord said such programs will take time to develop among Chinese businesses.
"China is working very hard to understand international best practices, but [domestic companies] are not going to simply copy anything…You look at what is suitable or useful in China and you Chinese-ify the practice," Berrefjord said.
Most companies opting for such incentive schemes in China are international firms. In 2008, for example, Intel (INTC.NASDAQ, 4335.HK, INCO.Euronext) expanded its green incentives program – previously just for top executives – and applied it to all global employees. As such, the company not only uses environmental metrics to evaluate senior managers’ yearly bonuses, it also measures all employees on a similar scale to determine annual incentives.
"We want to make sure everybody in the company is taking sustainability seriously," said Ge Jun, managing director of Intel China. "It’s an effective way to drive awareness at all levels. Now, people are very self-disciplined. They turn off the lights automatically when they leave a room, and in those small things you can see that the program is making a difference."
But the most important factor in the success of green employee incentives is whether companies see environmental protection as crucial to their survival.
"If you build sustainability simply as window dressing it helps for a moment, but not for the long term," Ge said. "In order for Intel to grow in China we have to take environmental challenges as our own responsibility."
Johnny Kwan, board chairman of BASF (BAS.FWB) Greater China, believes that the biggest challenge that green leadership incentives face in the country is a lack of government encouragement. China has implemented policies for emissions reductions and new energy development, but it could make an even bigger impact in the upcoming 12th Five-Year Plan. Kwan said China should require domestic businesses to prioritize sustainability in their corporate strategies.
"Sustainability and business performance are not separated from each other," Kwan said. "An integrated approach is much more efficient than, for example, increasing businesses first and doing sustainability afterwards, which is expected to be much more expensive for an economy in the end."
Meanwhile, pressure on Chinese companies to compete at an international level will be a major impetus for changing business practices in the future, according to Brian Ho, China director of CSR Asia, a provider of research and consultancy services on sustainable business practices.
As more Chinese companies seek to enter the global market, they will face higher expectations from foreign investors and stakeholders regarding sustainable practices. "If they don’t learn to take more green initiatives, they will lose their market competitiveness," Ho said.
To make a real difference, firms will need to implement environmentally-conscious policies – like green leadership incentives – at every level of an organization.
"Companies still think, ‘As long as I donate enough money to some charity or big NGO every year, I’m taking care of CSR and sustainability,’ " Ho said. "They don’t have a management system or dedicated person to coordinate internal CSR.
"It will still take some time to buy into such a concept that sustainability initiatives should become a core part of a business."