Social and environmental goal is new criterion for remunerating executives

Linking a company’s financial performance to executive bonuses is common practice in the market. But if the ESG (environmental, social and governance) principles have gained importance, why not consider sustainable performance in this calculation?

To show that the commitment to the agenda goes beyond marketing, Brazilian companies have started to link the variable remuneration of their leaders to social and environmental indicators.

One of the examples is GPA, which owns brands such as Extra and Pão de Açúcar. In 2021, carbon footprint reduction was included in the bonus system for all executives.

The group is committed to cutting its emissions by 30% by 2025. If there is no progress from one year to the next, the penalty will be in the pocket.

“It works like any other goal. If we achieve it, we have recognition”, explains Mirella Gomiero, executive director of HR, sustainability and technology at GPA.

Since 2016, the company has had a sustainability indicator that influences the variable remuneration of its 1400 managers. As of this year, decarbonization will be part of the index, which already included a commitment to diversity: reaching 2025 with 38% of top leadership positions held by women.

According to Gomiero, performance in these two items is evaluated like the other collective goals of GPA.

“It is in the same importance as Ebitda [indicador que mede geração de caixa], marketshare, customer satisfaction… ESG is part of the business agenda”, he says.

The Gerdau steelmaker also linked carbon emissions and the presence of women in leadership to the bonus.

Annually, executives receive shares in the company, but which can only be used after three years (a contract known as “vesting”). A part of this benefit (40%) is conditional on remaining in the company, and another 40% refers to financial performance.

Since April 2021, the remaining 20% ​​is calculated based on the performance in the two socio-environmental indicators.

“I show the importance of these themes when I put them in compensation. The systems that the company develops have to reinforce the culture it wants to create”, says Caroline Carpenedo, global director of people and social responsibility at Gerdau.

The company’s goal is to reach 2025 with 30% of female leaders — a number that currently stands at 22%. Regarding the reduction of emissions, there are still no public commitments, but, according to the director, the announcement will be made soon.

“We are always thinking about how the human resources area can manage its processes in order to leverage the results that the company expects”, he says. “Compensation is an important system, whether or not it directs behavior,” he adds.

Since 2019, Vivo has also reserved 20% of its executives’ bonuses for topics such as sustainability, diversity, reputation and customer experience.

Since then, the company has noticed a greater involvement of employees, as stated by Renato Gasparetto, vice president of institutional relations and sustainability at Vivo.

“Before, we used to make a little more effort to seek engagement. Today, it’s the opposite, my area receives ideas from other sectors on how to be more sustainable”, says the executive.

This, in fact, was one of the reasons that led Vivo to increase the weight of the environmental component in the bonus: from 1% to 5% in 2021.

“We realized that the more audacious goals we had, the more we could collaborate with the business, with the engagement of people within the teams and with the planet”, says Gasparetto.

The company already offsets all its direct emissions, which makes it carbon neutral. But for 2021, the goal linked to variable remuneration is not to emit more than 81.2 thousand tons of CO2 in its operations in Brazil.

Bonuses tied to ESG goals are still the exception

A survey by the FSB Institute showed that only 16% of Brazilian companies make the variable remuneration of their executives conditional on good performance in socio-environmental matters.

Considering the companies that direct their goals based on the SDGs (UN Sustainable Development Goals) —one of the main sustainability benchmarks— the proportion is even lower: only 3%.

The survey was conducted by telephone, between August 3 and September 8, 2021, with representatives from 400 large and medium-sized companies.

For Danilo Maeda, director of Beon, a sustainability consultancy that participated in the study, the result is not disappointing, as it is a sophisticated management mechanism.

“The Brazilian corporate world is gaining maturity on the subject,” he says. “I’m not gilding the pill to say the number isn’t low, because it is. But we’ve seen the market move to adhere to these good practices,” he adds.

According to him, linking executive bonuses to social and environmental goals is an important indicator of how genuine the commitment to the ESG agenda is.

“It signals to the market that the organization has already matured in the integration of the core business [essência do negócio] and sustainability.”

Maeda also says that this type of policy helps to accelerate the sustainable transformation of companies, as it directs more efforts in this direction. No wonder, he argues, that these companies are the most mature on the ESG agenda, as the survey points out.

“The 3% that have goals [vinculadas à remuneração] coincide with the 2% of companies that we find in the most advanced stage of sustainability management. It’s basically the same group,” he says.

Despite defending the inclusion of environmental and social components in the bonus, Maeda admits that there are challenges.

Unlike the conventional system —which includes indicators on sales, employee turnover and ​work safety—, sustainable goals are more transversal. Knowing who to charge results with can be more difficult.

Another challenge is defining the percentage of compensation tied to these components.

“If only 5% of the bonus is linked to social and environmental performance, the tendency is to create a system where people prioritize other deliveries first.”

This is also what worries Carlo Pereira, executive director of Rede Brasil do Compacto Global. According to him, it is still rare for a company to reserve more than 15% of variable remuneration for sustainability. “It has to be proportional to the importance the company gives to the topic”, he says.

However, the director believes that this could change soon, as there is increasing talk of the transition from shareholder capitalism —focused on shareholders— to the stakeholder model, which seeks to benefit all parties involved: from investors to the planet.

“Today it seems absurd to talk about 50% [de bônus vinculado à sustentabilidade], but in a few years we’re going to get something close to that.”

In his view, it is necessary to reconsider the high bonuses paid to executives, which reach over US$ 100 million (R$ 568 million).

“It doesn’t have the slightest reason to be,” he says. “You create distortions that are negative for the environment, for the community, for employees. The shareholders will gain in the short term, but in the medium term the company starts to fall in quality indicators”, he adds.