“Nothing says I love you like cash,” said my wise friend as a session on CEO compensation ended at ICD-Rotman DEP over the weekend.

Agreed.

And it also poses a challenge. Traditionally, executive compensation packages have been primarily based on financial performance metrics, such as revenue and profits.

However, transitioning to a greener and more sustainable business will likely mean a significant investment by the enterprise, which will impact the bottom line and the amount of profit that can be shared.  

We can also look at discussions happening now for COP 28 in Dubai, UAE. The primary mandate of the conference is to “deliver a successful COP 28 that drives global transformation towards a low-emission and climate-resilient world, fosters ambitious climate action and facilitates implementation, including the related support.”

Although some companies are tying a few ESG metrics to compensation, we know that there is much more work that can be done.

The question is, how do we truly incentivize our most ambitious leaders to act with urgency, transform their company, and continue to benefit financially from their efforts?

Here are 7 inspirational and brief thoughts:

1. Sustainability-linked stock options: create stock options that are linked to the company's sustainability performance. For example, the options could vest only if the company meets specific sustainability targets, such as reducing carbon emissions or increasing the use of renewable energy.

2. Socially responsible investment funds: The CEO could receive a portion of his compensation in the form of shares in this fund. This would align his compensation with the company's commitment to sustainability or issues that are important to them, while also providing an opportunity for him to benefit from the fund's performance over time.

3. Green bonds: The compensation committee could consider using green bonds to finance the company's sustainability initiatives. The CEO could then be awarded a portion of her compensation in the form of these green bonds, which would increase in value as the company meets its sustainability goals.

4. Equity-based compensation:  Stock options or restricted stock units that vest over time can reward executives for achieving specific sustainability targets, such as reducing greenhouse gas emissions or increasing the use of renewable energy. This aligns executive interests with those of shareholders and encourages executives to focus on long-term sustainability and financial performance.

5. Deferred compensation: can encourage executives to focus on long-term sustainability goals by paying out bonuses or other incentives over a longer period, such as three to five years. This encourages executives to focus on the long-term impact of sustainability initiatives, rather than short-term gains.

6. Bonuses based on sustainability metrics: Tying executive bonuses to specific sustainability metrics, such as greenhouse gas emissions reductions or energy efficiency improvements, can incentivize executives to focus on sustainability goals. This creates a direct financial incentive for executives to achieve specific sustainability targets, which can improve the company's financial and reputational performance over time.

7. Long-term incentive plans: tied to the achievement of specific sustainability and ESG goals. These plans might include cash bonuses or equity awards that vest over a longer period, such as five to seven years. This encourages executives to focus on the long-term impact of sustainability initiatives, rather than short-term gains.

The conversation of how to balance the love with the short-term cost of transitioning to a more sustainable business, is a lengthy and important one. At @7Centre, we are committed to helping companies navigate these important issues as we all build a more climate-resilient and sustainable world.