EHS Management

Incentivizing Safety: How Companies are Linking CEO Bonuses to EHS Goals

At 9:47 pm on April 20, 2010, an explosion rocked the oil well drilling platform Deepwater Horizon just 41 miles off the coast of Louisiana in the Gulf of Mexico. The explosion left 11 men dead, 17 workers injured, the rig destroyed and sunk, and 3.19 million barrels of oil spilled into the Gulf. The owner of the well, BP p.l.c., set aside almost $54 billion to cover costs from the spill. The company’s top executive was given no bonus that year. Since the explosion, more than 90% of companies in the energy and utilities sector have linked executive compensation to environment, health, and safety (EHS) performance metrics.

Other industries, perhaps lacking the motivation of a Deepwater Horizon-scale disaster, have shown less alacrity in linking pay to safety and environmental performance. But there’s definitely an increasing trend. Here’s how companies are starting to link executive compensation to EHS goals.

Measuring EHS Performance

A study published in 2014 by GMI Ratings looked at what it called “sustainability metrics”—mostly measures of environmental, safety and health performance, although some had to do with customer satisfaction, reputation, and other factors affecting a company’s long-term survival—to determine exactly what metrics companies listed in the S&P 500 Index are connecting to executive pay, and how they’re doing it.

It’s About the Bonuses

Companies tend to link CEO compensation to corporate objectives in the form of bonuses and incentives; a certain percentage of the executive’s bonus will be linked to whether the company achieves certain goals. Traditionally, these bonuses have been linked to factors like profitability and revenue growth. But as companies see the effect of product liability costs, environmental cleanup costs, and worker safety on their reputations, profitability, and ultimate corporate survival, more companies are including an EHS component in their executive compensation structure.

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Factors, Metrics, and Targets

As of 2013, just over half of S&P 500 companies included at least one “sustainability” factor in compensation decisions—but the specificity of the factors used varied widely. Only 16% of the companies reported specific performance metrics that were used in calculating executive bonuses, and only one in ten reported specific sustainability performance targets. So, while EHS metrics are increasingly “factored in” to executive compensation, there doesn’t seem to be a lot of consensus on which specific metrics are the most motivating.

Some metrics that companies reported using included:

  • Worker safety. Worker safety was the most commonly cited factor connected to executive compensation. The total recordable incident rate was the most frequently named metric. OSHA reportable incidents and other measures of workplace safety incidents were also used.

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  • Environmental spills and accidents. The thing being measured depended on the industry. Some companies measure volumes of oil or chemicals released to the environment; others, the number of category 3 or category 4 environmental incidents or the number of regulatory violations.
  • Routine operational impacts. Not many companies reported using greenhouse gas emissions, water usage, or other routine operational impacts on the environment in their compensation calculations. For the most part, companies seemed to focus on avoidance of errors rather than proactive enhancements of operational performance.

Tomorrow we’ll look at whether these incentives appear to be effective in focusing executive efforts on EHS risk management.

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