Introduction
The illustration of Nike illustrates absolutely how concern is altering ( Berrone, 2009 ) . Under societal and media force per unit area for transgressing human rights in its affiliates, Nike changed wholly its strategic orientation to corporate duty by bettering work conditions, C neutrality, etc. The same apply for Mac Donald ‘s who faced strong critics for its human resources policy ( referred as debris occupations ) . To turn to those jobs, the house developed a strong calling development plan and was able to incorporate in a few old ages the “ Great Place to Work ” ranking.
Literature background
2.1 The definition of environmental public presentation
Although there is a batch of treatments and researches about environmental public presentation ( green label, ecological ranking, etc. ) , there is today no understanding about the right definition of what is environmental public presentation. Sing the growing of ecological concern by all the stakeholders of a company ( stockholders, consumers, authoritiess, environmental groups through ecologic rakings, the populace in general ) , the demand for revelation has become important. The challenge for such companies is to aim their CEOs ‘ attempt on the relevant environmental public presentation standards, those valuable for the company ( internal direction and external coverage ) but besides for all the other stakeholders ( third-party environmental public presentation rating ) . A complete apprehension of the environmental public presentation ‘s constituents and its dimensions is decisive, particularly in the design of proper inducements systems. What information can we compare? How do we benchmark such public presentation among the different industries? The job of mensurating environmental public presentation comes from the variables. “ Environmental public presentation measuring requires measuring of non-financial public presentation, measuring under enormous uncertainness, and collection of multiple types of prosodies. ” ( Illinch et al. , 1998 ) . The undermentioned three theoretical accounts below explain the constituent and different classs related to environmental public presentation.
2.1.1 Henri and Journeault ‘s Model ( 2009 )
We frequently cut down environmental public presentation to one dimension, the environmental impact ( pollution, wastes, toxic leak, etc. ) . However, as fiscal public presentation, it has more than one facet. Henri J. ( 2009 ) , modelled the construct of environmental public presentation through two dimensions, consequences vs procedure and internal V external.
Figure 1
Environmental impact & A ; Corporate image
Stakeholder dealingss
Process & A ; Product betterment
Fiscal Impact
Consequences
Procedure
External
Internal
The “ consequences oriented ” dimension focal point on the terminals: the achievement of fiscal or environment results.
The “ procedure oriented ” dimension focal point on the resources and systems needed to achieve specific aims. It besides gives importance to the relation with the stakeholders sing environmental inquiries.
Internal dimension focal point on the business-oriented position of the environmental public presentation. ( Gray, R. , & A ; Bebbington 2000 )
External dimension focal point on the sustainability-oriented position of the environmental public presentation ( Gray, R. , & A ; Bebbington 2000 )
The different positions of environmental public presentation gave us four different facets when calculating the possible focal points. Achieving suited environmental public presentation, the company should unite all the four different facets.
Environmental impact & A ; corporate image: rating of the company ‘s repute and its capableness to follow with criterions, Torahs and ordinance or to transcend them.
Stakeholder dealingss: The capableness of the company to pull off good relationships with its stakeholders affected by ecological inquiries.
Fiscal Impact: This facet asses the fiscal effects ensuing from environmental processs ( waste recycling, energy economy, decline of regulative costs etc. ) .
Process & A ; Product betterments: This facet evaluates how environmental issues are linked into the operations of the company to acquire a competitory advantage ( enhanced quality, promote invention and addition of productiveness ) . The integrating of environmental standards in the compensation system is in this class
2.1.2 Xie & A ; Hayase ( 2007 ) and Illinch ( 1998 ) Model
Xie and Hayase ( 2007 ) developed an interesting construct of corporate environmental measuring. Their theoretical account is an version of theoretical account developed by Illinch et Al. in 1998. Most of the surveies on Environmental Performance Measurement ( EPM ) are focused on the development of Environmental Performance Indicators ( EPIs ) and eco-control to heighten internal direction and external coverage. Yet, most of their decisions can non be generalized. There are frequently “ instance specific ” or excessively much related to an industry. There is a dissension on what, in which manner and where to mensurate. This is why the researches on standardised EPM theoretical account are appropriate to show all dimensions, irrespective the industry, of environmental steps and the of import EPI ‘s.
The old literature ( Ilinitch et al. 1998 ) , but besides ISO 14031:1999 “ Environmental direction – Environmental Performance Evaluation – Guidelines ” , built a hierarchal categorization with all the cardinal constituents of a Corporate Environmental Performance ( CEP ) . Based on Figure 2, we distinguish two chief dimensions of CEP, the direction public presentation procedures and the operational public presentation as the consequences.
The two variables are mutualist. Indeed, “ MPIs are taking indexs of EOP because the company can state whether appropriate direction systems are in topographic point before it sees whether these systems are holding desired effects ” ( Xie, S. , Hayase, K. 2007 ) . On the other manus, Operational Performance Indicators will demo whether the environmental direction patterns have positively affected the environment or non.
Organizational System
Stakeholder dealingss
Operational countermeasures
Environmental trailing
Input signals
End products
Corporate Environmental Performance
EMP
EOP
Figure 2
A complete and effectual environmental direction system should incorporate:
An Organizational system that is environmentally oriented and organisational procedures designed to better environmental public presentation. The system should incorporate all ecologic issues within its ordinary operations. For illustration: ecological policies, environmental ends, employee coaching and sensitisation, environmental accounting, scrutinizing, etc. Therefore, environmental audit plans should be on a regular basis performed in the company. Besides the consequences of those audits should be linked with employees ‘ compensation. Accounting picks could besides hold an impact on environmental public presentations. For illustration the house could delegate the environmental disbursals straight to the activities or merchandises alternatively of administering those costs in the operating expense charges account. A dedicated section to environmental issues could be relevant. Bing proactive in planing the organisational procedures certainly improves the environmental results and consequences.
The stakeholders ‘ relationships are besides a cardinal constituent in how the company deals with environmental direction. We measure here, for case: the degree of environmental public presentations revelations, the communicating or others eco-marketing runs, etc. By unwraping information, the company reviews the indexs, improves its image or repute and that could excite its willingness to accomplish better environmental public presentation. The comptrollers have the duty of the revelation procedure. They must take descriptive and fiscal information that are pertinent and important for the users. The type of environmental informations is non standardized among the companies, and their pick could be debatable. Besides, the step and reading of stakeholder dealingss indexs are non an easy undertaking. Examples of indexs: acceptance by the company of industry or general criterions ( ISO for case ) , the measure and quality of environmental information disclosed, etc.
Operational countermeasures contained all the set of steps taken by the house to cut down environmental losingss in its day-to-day activity. Some illustrations: A systematic confirmation process of the providers ‘ environmental public presentation, countermeasures against planetary heating or ecological hazards, betterment in the process/product design, etc.
Environmental Tracking step the pattern of the company in entering its environmental consequences. “ Without tracking, mensurating and measuring its environmental consequences, the company will hold no footing for determination devising ” ( James, 1994 ) . Besides this variable is linked to the stakeholder ‘s relationships because you can non pass on Numberss you do n’t hold. The type of information disclosed should be related to the classs of stakeholders.
Most of the indexs related to Environmental Management Performance are qualitative. Therefore there is ever a job of trust with the company measuring systems.
Contrary to the old dimension, the Operational Performance Indexs are all quantitative consequences. There are less manageable even if the pick of the measurement unit can be subjective.
Input signals are the resources and energy exploited by the house. The nexus between inputs and environmental impact is simple: the wastes and pollutant emanations addition with the degree of ingestion. If the house take its energy/resources efficiency into consideration, it can certainly increase its production efficiency that impacts straight fiscal public presentation.
End products are what the company releases during its activities. For case: industrial wastes, H2O release, toxic substances, but besides all the releases into the air ( CO2, etc. ) . Those factors can be easy observed and measured.
In decision, the researches agreed on the two dimension of environmental public presentation, Results/Process and External/Internal for Henri and Journeault ( 2009 ) and EOP/EMP and Operations-Organization/Tracking-Stakeholders for Xie & A ; Hayase ( 2007 ) and Illinch ( 1998 ) . The type of compensation system is integrated in the Environmental Management Performance set within the subcategory of Organizational system for Xie & A ; Hayase ‘s Model and in the Process Improvement for Henri and Journeault ‘s Model. Consequently, we will see in the undermentioned chapters how compensation systems can impact this organisational procedure and accomplish the coveted degree of environmental public presentation.
Achieving Fiscal public presentation through Environment
There are many grounds why the board of managers would pay attending to environmental issues: their concern for environmental betterment, concern scheme based on non-performance standards ( to entree the green market for illustration ) , strong force per unit area with ordinance conformity from external stakeholder, etc. ( Cordeiro, J. , Sarkis, J. , 2008 ) . However, the challenge of binding environmental duties to the director depends on the apprehension of the benefits of sustainability schemes by the house. If the stockholders capture the advantages that represent a good environmental public presentation, so, they will hold a strong justification for the execution of environmental policies such as an eco-oriented compensation system ( Figure 3 ) . Yet, the nexus between environmental and fiscal public presentation is still non clear, and legion of surveies found positive ( Klassen & A ; McLaughlin, 1996 ; Judge & A ; Douglas,1998 ) , negative ( Cordeiro & A ; Sarkis, ( 1997 ) or undistinguished ( Watson et al. , 2004 ) relationships.
Figure 3 from compensation to Financial Performance
Compensation systems
Environmental Performance
Fiscal Performance
Wagner et Al. ( 2001 ) found several grounds to explicate the deficiency of consentaneous consequences on the relationship between economic and environmental public presentation. First, empirical surveies on the topic are frequently based on specific industries and utilize little samples. Second, the clip aggregation of the information seems to play a function in the findings. The relationships changed over the old ages with the turning involvement of the stakeholders for ecologic issues. Today, it appears to be easier for companies to unlock value of green investings than ten old ages ago. Third, there is a deficiency of homogeneousness among the environmental public presentation variable used in the different readings ( environmental ranking, Toxic Release Inventory, sum of environmental punishments, etc. ) every bit good as economic public presentation ( stock-market, fiscal statement based informations, etc. ) . Finally, surveies are frequently non precise plenty on the different degree of environmental public presentation ( i.e. , end-of-pipes solutions or bars ) and forgot to take of import moderators factors on the relationships like: house size, state, ordinances, etc.
The results of the different surveies let look three different types of relationship. Wagner et Al. ( 2001 ) called the first class the “ Traditionalist position ” . This position was the first predominant theory. It argues that prosecuting environmental scheme has ever a bad reverberation on the fiscal public presentation and particularly its fight. Eco-investments are seen as an extra-cost ( Cohen et al. , 1995 ) . Investing in better environmental production processes increases the entire production costs and the fringy costs. The consequence is illustrated by a uniformly negative nexus between fiscal and environmental public presentation: low environmental public presentation leads to high fiscal public presentations and vice-versa ( see figure 4 below ) . In this state of affairs, the optimal point for the house is represented by the minimal degree of environmental public presentation required by legal ordinances.
Economic public presentation
Environmental public presentation
Figure 4 Traditionalist position ( Wagner et al. , 2001 )
Porter ( 1991 ) and Porter & A ; Van der Linde ( 1995 ) were the first to knock the diehard position. The revisionist tendency supports the “ Porter Hypothesis ” that the costs ‘ addition associated with environmental public presentation is non systematic and can be balanced by significant benefits and efficiencies such as: entree to markets, merchandises distinction, less regulative cost, saves in stuffs and energy, etc. ( see the undermentioned subdivision for complementary information ) . In this state of affairs, the curve is uniformly positive: environmental betterments result in better fiscal public presentations with a diminishing positive fringy consequence ( see figure below ) .
Economic public presentation
Environmental public presentation
Figure X Revisionist position ( Wagner et al. , 2001 )
The last possible relationship is a mix of both, diehard and revisionist position ( Schaltegger & A ; Figge, 2000 ) . It argues that “ The benefits reaped from increased environmental public presentation addition continuously for low degrees of environmental public presentation. ( aˆ¦ ) Beyond this [ optimal ] point, the relationship is likely to be represented by a downward sloping curve ( which in a first estimate is considered to be reasonably additive ) . ” Wagner et Al. ( 2001 ) . The assorted position assumes that an limitless figure of environmental protection activities wo n’t ever increase the fiscal return of a house. The assorted relationship is illustrated below.
Figure X Mixed position ( Wagner et al. , 2001 )
Economic public presentation
Environmental public presentation
Empirical surveies on the relationship between environmental and fiscal public presentation can be classified in three classs of methodological analysis. The first class of readings includes all surveies that model the nexus by multiple arrested development analysis. Those surveies try to mensurate the impact of assorted variables ( including environmental public presentation ) on economic public presentation ( profitableness, growing, etc. ) and vice-versa on the long tally. The overall consequences of multiple arrested development surveies are mitigated, but positive relationships seem to be dominant among the researches ( Ambec & A ; Lanoie, 2007 ) . However, arrested development analyses face a way job of causality. Indeed, companies with good fiscal public presentations can hold extra resources to put in environmental issues: good economic public presentation lead to high degree of environmental public presentation. On the other manus, companies holding high environmental public presentation can salvage energy or stuffs and therefore heighten fiscal public presentation.
The 2nd group includes all surveies comparing portfolio of houses that implement pro-active or reactive environmental schemes ( Bauer et al. 2005, Cohen et al. , 1995 ) . Those surveies found besides mitigate consequences. Most of the portfolio surveies did n’t happen any support for the hidebound position or the revisionist position. The relationship is characterized by little degrees of significance explained by the minor impact of environmental public presentation on portfolio economic returns ( Bauer et al. 2005 ) .
The last set of readings evaluates the impact of good or bad ecologic events on the capital market ( Schaltegger & A ; Figge, 2000 ) . Most of those surveies found important groundss for abnormals positive ( negative ) returns when positive ( negative ) environmental intelligence were published ( i.e. Klassen & A ; McLaughlin, 1996 ) . Events surveies are the lone methodological analysis class that clearly finds important groundss on the nexus between environmental and fiscal public presentations ( stock-market return ) .
The nature of the relationship between environmental and fiscal public presentation is complex. “ The variableness of consequences based on different methodological attacks raises the inquiry of whether the variableness encountered in the above findings represents more an artifact of the methodological analysis or the research design or more the per se broad discrepancy in the relationship between environmental and economic public presentation ensuing from assorted originating factors at the house, industry and state degrees. ” ( Wagner et al.,2001 ) .
Schaltegger & A ; Synnestvedt ( 2002 ) give another account to the conflicting positions: it is non the degree of environmental public presentation that impacts fiscal public presentation, instead the manner environmental direction is implemented in the company. The execution of efficient environmental schemes depends on the managerial determination. “ The managerial challenge so includes two interconnected dimension: ( 1 ) Choosing the optimum degree of environmental public presentation which potentially consequences in the highest economic success and ( 2 ) obtaining that degree of environmental public presentation at the lowest possible costs in order to recognize the upper limit of conomic success ” ( Schaltegger & A ; Synnestvedt, 2002 ) . Therefore, economic public presentation would non be impacted by the degree of environmental public presentation ( as old relationships empirical surveies supported with traditional or revisionist position ) but by the manner the scheme is integrated in the company. This could be the chief ground why “ authoritative ” empirical surveies on the relationships failed to happen a clear reply to the relationship. Alternatively of correlating two samples ( economic with environmental public presentation ) , research workers should research the impact of different types of environmental direction on eco-performance by instance surveies attacks. Indeed, companies with the same environmental direction systems ( eco-control, compensation systems, etc. ) could hold different economic and environmental results. An efficient environmental direction system is the major moderator for fiscal public presentation and environmental public presentation ( figure 5 ) . This statement emphasizes the importance of direction tools such as compensation for the success of both, environmental and economic results.
Environmental Management Efficiency
Fiscal
Performance
Environmental Performance
Eco-efficiency
Figure 5 Management as the trigger between environmental and economic public presentation ( adapted from Schaltegger & A ; Synnestvedt, 2002 )
If causality between the environment and fiscal public presentation is non systematic and depends on the environmental direction efficiency: What are so the possible benefits of high environmental public presentation for the house? The bookmans seem to hold on one point: “ societal actions improve corporate image and repute, create intangible assets, and positively act upon long-run organisational endurance ” ( Berrone, 2009 ) . Ambec & A ; Lanoie ( 2007 ) based on the work of Lankoski ( 2006 ) reexamine the chief benefits of pro-active environmental schemes in two subjects: ( a ) addition in grosss and ( B ) cost decreases.
Entree to specific markets
Eco-efficient houses can hold entree to specific markets. First, a turning portion of consumers wages attending to eco-friendly houses. This new phenomena is called “ green consumerism ” . A house which is able to describe and market its green oriented concern will therefore better its image and enforce clients ‘ trueness. Second, it becomes more and more common that public establishments are required to esteem minimal environmental public presentation standards in taking their providers, called as Green Public Purchasing ( Kunzik, 2003 ) . This tendency seems to develop besides in private companies in taking their providers or spouses and will increase in the hereafter.
Merchandise distinction
Regulatory Cost
Keantinge and Eaton ( 2012 ) examined the relationship between US companies that linked the compensation with environmental public presentation and those who did non sing the frequence and the sum of environmental punishments. They found a strong nexus. Companies that linked environment and compensation faced less ordinance punishments and the mulcts were lower. Therefore, companies that are exposed to high regulative punishments should associate the CEO ‘s wage with non-financial public presentation, even when fiscal benefits are non apparent.
The uncertainness of the fiscal benefits is frequently the chief cause of the non-application of environmental-related compensation systems. Empirical researches found opposite consequences when measuring the fiscal results subsequent better environmental public presentation. However, they all agree that an irresponsible environmental policy is punished one twenty-four hours.
Eco-oriented Compensation systems
We review in the undermentioned chapters the theoretical and practical attacks in the execution of eco-oriented compensation. Then, we see what are the empirical consequences and the effects of environmental oriented compensation on the concern. The survey focuses its attending on top directors ‘ compensation because they are known to be a cardinal component for the execution of new organisational procedure, particularly new environmental policies ( Daily & A ; Huang, 2001 ) . CEOs have adequate capacity to impact and back up environmental schemes and their public presentation in the company ( Orlitzky & A ; Swanson 2002 ) . “ Top direction support can impact environmental direction system success by advancing employee authorization, changing organisational civilization and instituting wagess and incentive systems to impact employee behaviour, supply preparation and increase communicating throughout the organisation ” ( Cordeiro, J. , Sarkis, J. , 2008 ) . In his sample, Tonnello ( 2012 ) found that about half of the companies delegated the duty of sustainability ends accomplishment to the CEO, when the other half concerned the board of manager or one of its commissions. This consequence emphasizes the importance of the CEO and the board committedness in the environmental inquiries. Pay is a major instrument to aline CEO involvement and stakeholders ‘ outlooks and is used to concentrate managerial attempts on coveted results. Hence, an efficient compensation system is important to heighten environmental public presentation.
4.1 Introduction
Since the 70 ‘s, it has been widely accepted that directors compensation should be linked with the overall company public presentation. Therefore, performance-based inducements such as fillips or stock options have become the regulation. Whereas wagess for fiscal public presentation continue to be the base for most of the companies, a new tendency claims the debut of sustainability public presentation standards in the compensation measuring. Following the Schaltegger & A ; Synnestvedt ( 2002 ) theory, a high quality of environmental direction is the key to unite environmental and economic public presentation and compensation is one of the major managerial tools to successfully implement schemes. Tonnello ( 2012 ) in his survey shows the increasing involvement of the stockholders in sustainability inquiries. Based on all the stockholder proposals during the one-year general meetings of the SEC members companies, the portion of proposals linked to societal or environmental issues increased from 29 % in 2007 to 35 % in 2011. The per centum of ballot for such proposals besides increased significantly over the old ages. However, the study of Ceres ( 2012 ) showed that even if the eco-concern is turning, merely 39 out of 600 public houses had officially linked their CEO compensation with environmental standards, and 53 more had such compensation systems without officially describing it ( Annexe 1 ) . This spread is debatable sing the turning concern for sustainability issues and its benefits and allow a large field of surveies.
4.2 Theoretical Approach
Few academic surveies investigated the inquiry of associating compensation with environmental public presentation in a theoretical manner ( Cordeiro & A ; Sarkis, 2008 ) . Still, the deductions of the inquiry lead to some issues with the rich accounting, direction and human resources literature. The effects on the bureau theory or the incentives-based compensation theory have to be taken into history before traveling further in the execution of eco-oriented compensation systems.
4.2.1 Multi-Tasking bureau job
As the agent has the power of decision-making, the proprietor must act upon him to concentrate on steadfast long-run profitableness and non merely his ain private involvements ( fillips and wage ) . The principal can take to supervise every actions of the director in is day-to-day work, but it is practically excessively hard and really dearly-won. Incentive-based compensation helps to work out the bureau job without disbursement resources in expensive monitoring systems: by an effectual compensation system, the board is able to direct directors ‘ attempt to the desired results. However, the traditional position of the bureau theory does non wholly fit with our topic because here, the agent must confront two duties: fiscal and environmental public presentation.
Holmstrom and Milgrom ( 1991 ) worked on the bureau job when the agent must follow with two or more proprietor ‘s demands. When the fiscal and environmental public presentations are strongly linked ( no struggle ) and lead to the same results, the compensation system can be based on merely one dimension ( for case, companies where fiscal public presentation can be achieve merely through better usage of energy ) . Therefore, eco-oriented compensation is non utile and Environmental Performance Indicators ( EPIs ) are non needed: even if the compensation system focuses merely fiscal public presentations, the director will hold to accomplish environmental public presentation.
Yet, there is frequently a struggle between economic and environmental ends, particularly in the short term ( Wagner & A ; Wehrmeyer, 2002 ; Hart & A ; Ahuja, 1996 ) . Maximizing the production with inexpensive but fouling stuffs can better short term fiscal public presentation at the disbursal of the environment, when investing in advanced green engineerings can stand for negative net nowadays value because it is really hard to measure the hereafter returns and the possible extra costs. In instance of struggle between the two public presentations, the incentive-based compensation has to be adapted in effect and distinguish the two different dimensions in the public presentation measuring. The hazard originating from multi-tasking comes from the incentive for directors to concentrate their work merely on the “ easy to mensurate undertaking ” , the 1 that is straight, objectively related to honor and the most discernible: fiscal public presentation ( Dodge, 1997 ) . The inducements system must turn to this struggle by coercing the director to concentrate his attempt on both public presentations. “ The inducement system is no longer a pure motive and hazard sharing device ( as in the unidimensional instance ) , but besides serves as a tool for apportioning attempt between undertakings ” ( Lothe and Myrtveit, 2003 ) . This statement emphasizes the importance of the environmental public presentation ‘s weight in the compensation systems and the pick of relevant EPIs.
4.2.2 Academic model
Lothe et Al. ( 1999 ) and Lothe & A ; Myrtveit ( 2003 ) developed interesting compensation ‘s models for companies confronting different degrees of financial-environmental struggle.
As we saw, the integrating of environmental dimension in the organisational procedures is important to accomplish environmental public presentation ( Xie & A ; Hayase, 2007 ) . Compensation is a cardinal organisational procedure. Unfortunately, surveies showed that managerial attempt is frequently redirected from environmental to fiscal public presentation. Surveies found that even if the concerns on environmental issues are quickly turning over the twelvemonth, companies fail to implement proper compensation systems ( Tonnello, 2012 ) . The chief ground is explained by the deficiency of wagess for such public presentations. The nexus between eco-performance and compensation is often excessively low “ There will frequently be inducements for profit-maximising houses to seek short or average term fiscal wagess instead than concentrating on ethical duties towards environmental direction ” ( Welford, 1995 ) . The absence of direct relationship between wagess and environmental public presentation chiefly explains why most of the eco-policies are non translated into action.
Another beginning of jobs come from the troubles faced by the companies to observe and implement proper controls and EPIs or merely because environmental public presentation struggles with fiscal public presentation. A study of Lothe and Myrtveit ( 2003 ) on all the companies ‘ members of the Open Source Ecology Europe found that even if 80 % of them possessed a clear environmental scheme, merely 50 % of them had a pro-active scheme that exceed legal minimal demand, and “ None reported a variable wage based on environmental public presentation indexs, EPIs, non even the 1s that did hold such prosodies in topographic point. None of the companies had changed their compensation or inducement systems after presenting an environmental strategyA» . Yet, they all agreed that environmental public presentation was valuable on the long term. This fact emphasizes the deficiency of counsel and criterions in this field.
4.2.2.1 Lothe Model ( 1999 )
Lothe et Al. ( 1999 ) suggested a theoretical account to plan the compensation bundle sing the company environmental state of affairs. The state of affairs depends on whether the house faces a struggle between fiscal and environmental public presentation ( on the long or short term ) , and whether the house can supply environmental public presentation indexs or non.
The houses can non ever link environmental scheme with its fiscal public presentation. It depends on whether the company can equilibrate the cost or the investing of implementing environmental schemes with concern public presentation. Even if surveies proved in some instances that environmental public presentation leaded to fiscal consequences, it can non be generalized for all houses ( Wagner & A ; Wehrmeyer, 2002 ) , . “ A struggle does non be when the environmental schemes save on natural stuffs, cut down authorities punishments, do waste into positive gross border merchandises or increase gross revenues because green is marketable. ( … ) . A struggle does be, nevertheless, when the environmental schemes require excess investing ( in dollars or managerial attempt ) , particularly with long or unsure payback periods ( … ) . “ Lothe et Al. ( 1999 ) . Then, the challenge for conflicting companies is to implement an environmental scheme in conformity with the already bing profit-oriented one.
Besides, the compensation system must take into history the alterations in the relationship between environmental and fiscal public presentation over the clip. Indeed on the long tally, environmental public presentation can in some instances lead to fiscal public presentation even when a struggle arises in the short tally ( i.e. high initial cost but competitory advantage after several old ages ) . The opposite state of affairs, struggle on the long tally but non in short term, can besides happen ( i.e. investing in short term inexpensive solutions make the companies out-of-date for advanced ecological engineerings on the long term ) .
Figure 3 Type of companies
Relation between Environmental and Financial public presentation
Type of compensation system
Short term
Long term
Type 1
No struggle
No struggle
EPI ‘s non needed
Type 2
Conflict
No struggle
Multiplier based compensation
Type 3
No struggle
Conflict
Multiplier based compensation
Type 4
Conflict
Conflict
Multiplier based compensation
The classification of the house is important to plan a proper compensation system and guarantee director ‘s attempt on environmental schemes. “ With compensation systems that forces directors to concentrate on both profit-related activities and activities related to environmental public presentation, sustainable direction can be achieved. ” Lothe et Al. ( 1999 ) . If the inducements are severely implemented, the director will go on to concentrate his work on fiscal public presentation merely.
Analyse of figure 3
As said before, for type 1, non-conflicting houses, the bing inducements system based on concern public presentation is adequate. The director knows that bettering ecological procedures will automatically heighten fiscal public presentation. The lone challenge in this state of affairs is to equilibrate the short and long term inducements weight in the compensation bundle and pay attending to any alteration in the relationships over the clip.
For type 2 and 3 houses, the compensation system must concentrate on the conflicting period. For case, in type 2 house, the inducements system should aim environmental short term consequences as a status for fillips: if the short term environmental end is non met, the fillip is zero. This solution would coerce the director to concentrate his attempt on both undertakings, fiscal and environmental public presentation on the short tally. Lothe et Al. ( 1999 ) suggest a multiplier based on an environmental public presentation mark for the at odds period:
As there is no struggle on the long tally, the house does n’t necessitate long term environmental inducements steps. This system is besides good designed for type 4 houses. Of class the success of this compound compensation system depends on the quality of EPI ‘s.
To be efficient, compensation systems require really good public presentation steps that should reflect every bit good as possible the attempt of the directors. In our instance, the pick and design of environmental public presentation indexs will straight impact the success of the incentive-based compensation. Unlike fiscal indexs, it is more hard to capture the environmental public presentation of the director because many external factors can take to incompleteness, imperfectness and job of controllability. For case, the temperature can increase energy ingestion during the winter. The indexs taken for the step of environmental public presentation follow the same standard as fiscal index. They must be relevant, comparable, overtime, quantifiable, wholly disclosed. Firms must except prosodies that are excessively imprecise and general. They should take indexs that are related to their nucleus concern. Thus, taking merely specific indices to measure the planetary environmental public presentation is non recommended ( Dow Jones Sustainability Index, Toxic Release Index, degree of conformity with the ordinance, etc. ) . Alternatively, the company must plan indexs that are straight linked with its scheme and way. “ Associating sustainability public presentation to executive compensation must be seen as strategically of import to the full corporate endeavor, non merely parts of it. Sustainability prosodies should lend to the accomplishment of overall corporate ends ” ( Singer 2012 ) .
When EPI ‘s can non be collected or are non relevant, Holmstrom and Milgrom ( 1991 ) suggest fixed pay compensation to accomplish environmental ends and non incentive-based compensation that leads directors to concentrate on the easy measureable and rewarded undertaking ( fiscal public presentation ) . Of class fixed pay compensation system must be supported by others agencies such as: heightening motive, efficient supervising systems, good corporate civilization, etc.
The challenge of environmental orientated compensation systems comes from the demand to measure the quality of green investings. When such investings result in short-run economic return, the public presentation is easy measured. However, most of the green investings can take clip before looking in the fiscal statement, or can ne’er look. It is the instance for enterprises that cut down environmental hazards, better corporate image, etc. A compensation systems based on traditional cost accountings theory may non properly gaining control the benefits of director ‘s determinations. It is debatable because even intangible, a company ‘s improved image can last old ages. To mensurate the cost/benefits of green investing, the company must alter its accounting systems. The challenge for the company will be to divide and separate the costs related to environmental public presentation on every phase of the operational procedures. For case, by taking merely ISO 14001 certified provider, the company will pay more its stuffs. In this instance, the cost of natural stuffs should be divided into two classs: the uncertified market monetary value and the premium cost. By tracking/categorizing/reporting consistently and exactly all the direct and indirect cost related to environmental public presentation, the proprietor will hold a touchable footing to measure the director attempt. Besides, this will assist the director to expeditiously apportion resources and support him in decision-making.
4.1.2.2 Non-parametric Compensation system
Lothe and Myrtveit ( 2003 ) proposed the execution of non-parametric compensation systems to work out the multi-tasks struggle. Their attack was peculiarly relevant for companies willing to complement their already bing fiscal orientated inducements systems with an environmental one and is complementary to the old theoretical account.
The non-parametric compensation system is designed to assist companies that do n’t cognize which weight must be assigned between the two public presentations. Nor have they clear scheme to concentrate environmental end product instead than fiscal consequences. This state of affairs occurs in most of the houses. Lothe and Myrtveit ( 2003 ) suggest an attack based on benchmarking the different units, sectors, section of a group. This non-parametric benchmarking method is called Data Envelopment Analysis ( DEA ) ( Tyteca, 1997 ) . By taking the best public presentation within the different units, we can specify “ a non-parametric best pattern frontier ” ( see figure below ) . The units on the line are efficient in utilizing their resources in both public presentations, for the others, the distance from the frontier states the degree of inefficiency. The method has the advantage of non depending on a peculiar functional form/shape for the frontier and take fiscal and environmental facets together, nevertheless it does non offer a general nexus ( equation ) relating end product and input. It shows to the houses ‘ units how they could cut down their input to bring forth the same degree of end product. Or, the addition of end product they could hold achieved with the same degree of input if their resources would hold been used expeditiously. In general input reflects labour, capital, stuff, energy when end product reflects the production, gross revenues, emanation, pollution, etc. Again, the large advantage is to reflect both environmental and fiscal variables in the same axes.
The figure 4 demonstrates clearly the method. If you are C, so you should cut down your input to make the efficiency frontier ( point B ) defined by units 21 and 22 ( the mention units ) .
Figure 4: Non-parametric best pattern frontier
Figure from Lothe and Myrtveit ( 2003 ) .
This superior method can easy function for a compensation system based on fiscal and environmental public presentation. By utilizing an overall public presentation index ( including environmental and fiscal public presentations ) , any possible struggle is solved. Besides, as the public presentation is calculated on relation and non absolute step, it helps to avoid controllability jobs and others external factor that impact environmental public presentation indexs ( every bit good as fiscal indexs ) . “ All units are compared with ascertained best pattern, non some theoretical norm that is influenced by external factors. ( aˆ¦ ) This is a strong statement in favour of the DEA as footing for compensation. ” Lothe and Myrtveit ( 2003 ) .
However, the DEA methods require some safeguards. As the frontier is constructed merely on the best units ( in contrast to arrested development theoretical accounts that exclude outliers ) , merely concrete and dependable informations must be taken into history. This means that all the EPIs are non suited for the theoretical account ( quantitative and discernible informations merely, for case, degree of emanations ) . It should be no mistake or reading in the rating of those indexs because the utmost public presentation units extremely affect the frontier. To see a proper frontier and exclude false outliers, it is required to roll up a big sample of observations. The other bound concerns the impression of profitableness. This theoretical account takes fiscal and environmental input and end product but do non supply the profitableness of the units. It would n’t do sense to set a unit on the frontier when it is efficient but non profitable. The last bounds relates to the weight of the input and end product. This theoretical account does n’t allow you take the weight of an input or end product. However in existent instances, some fouling end product can be more damageable than others. “ The existent challenge utilizing DEA is to stipulate the theoretical account that is taking the right variable to include as inputs and end products. This is the critical portion in pattern ” Lothe and Myrtveit ( 2003 ) .
In decision, DEA Numberss linked with compensation provides a strong footing to incorporate an environmental dimension in a equal comparing system. It besides gives the chance to the directors of less efficient units to compare their scheme with the mentions on the frontier.
4.2.3 Practical model
Recently, an organisation backed by the United Nations, the Global Compact LEAD published a counsel on how implement an Environmental and societal oriented compensation system. Based on treatments with experts, investors and NGO, they issued a set of recommendations and instance surveies to assist companies in the design of sustainability linked compensation systems. Beside all academic researches on the topic, it is interesting in the model of this survey to see how the concern universe deals with this issue. Furthermore, it is the first bill of exchange of international criterions on the topic.
The organisation found several benefits of incorporating sustainability factors into directors pay which support the relevancy of this counsel. First, as long term economic returns are expected by the stockholders, sustainable factors fit absolutely with long-run compensation systems. Second, it signals clearly to the directors that societal and environmental issues are under their duties. Third, by analysing the relevant sustainable prosodies, the company will detect new concern and market chances.
The counsel points out several challenges when associating sustainability to directors ‘ wage. First, top direction can non trust on international criterions to place hazard and chances of this system. Second, the integrating of environmental or societal dimension in the compensation should non be another manner to pay more directors. On the contrary, it should back up existent sustainable schemes. Finally, the board should pay attending to non include easy mensurable variables instead than relevant constituent.
The counsel is divided in three parts ( United Nations Principles for Responsible Investment, 2012 ) : ( I ) how to place the appropriate Environmental, Social and Governance ( ESG ) factors, ( two ) how to associate them with director ‘s compensation, ( three ) how decently unwrap those information.
Identifying relevant sustainable prosodies
The first demand is to analyse factors that have a direct nexus with stockholders value and back up the long-run house scheme. In making so, the new indexs will assist the CEOs to pull off more expeditiously resources and investings in those sectors. Furthermore, clear indexs will assist the company to affect all employees in the procedure. Those prosodies should incorporate indexs that protect value ( as pollution degree indexs ) , and indexs that create value ( as energy efficiency indexs ) . Targeting appropriate prosodies require the audience of all stakeholders. Consequently, the company will expeditiously concentrate their attempts on what involvements the community. The features of environmental prosodies are the same as fiscal steps: clear, replicable, frontward looking, comparable, come-at-able and time-bound. Last, in the linking procedure, the compensation commission must pay attending to several points. The non-financial prosodies must be varied adequate to avoid a focal point of the director attempts on merely one environmental facet. However, excessively much steps lead to compensation dilution and is non suited. The 2nd job comes from the trouble in mensurating environmental public presentation. Choosing the right standards is non an easy undertaking. But as all non-financial public presentation, it is unfastened to use by the directors. Consequently, control and information systems must be carefully designed.
Link with directors ‘ compensation
Surveies show that most of the companies, that already link compensation with sustainable factors, include them into short-run inducements plans such as hard currency one-year fillips. However, environmental public presentation is a long-term procedure and should be integrated within the long-run inducements scheme. Second, the inducements systems should let the board to stamp down or diminish inducements when important environmental or societal ends are non attained. The 2nd demand is good illustrated by the Transocean Ltd Swiss company illustration ( Keatinge and Eaton, 2012 ) . This company was in charge of the offshore boring rig that exploded and spilled million barrels of oil in 2010 into the Gulf of Mexico. During this twelvemonth, the directors still acquire 67 % of their compensation based on safety even if the company was found guilty of non holding a proper and efficient safety system in topographic point. Furthermore, they got a 57 % entire compensation addition for the 2010 period. This event would hold been catastrophes for the repute of the house if the directors did non make up one’s mind to donate their portion of wage to the victims ‘ households. This job could be solved by presenting a rule of inter-conditionality in the compensation systems: if directors do n’t recognize their fiscal ends, they should non acquire any fillips ( or a important decline ) , the same applies for environmental ends. Finally, the execution of equal comparing is besides advised ( for illustration, the attack of Lothe & A ; Myrtveit ) .
Disclosure of Compensation Practices
The counsel recommends describing every bit much information as possible on the compensation systems in the official wage revelations. It is the lone manner to clearly explicate to the stockholders and stakeholders that the execution of the system truly adds value and is non another “ fast one ” to pay more the executives. The house should pay attending to do the public presentation variables and aims apprehensible and clear to warrant the awards paid during the twelvemonth.
In decision, a good inducement system entirely is non sufficient to accomplish the coveted degree of environmental public presentation. The committedness of all employees is needed to back up the environmental scheme by appropriate human resources plans. Such plans can include: orientation, preparation, proficient aid, advices, etc. The company must turn out to the employees that the new green orientation is non a selling construct for consumer but truly a lasting scheme.
Berrone ( 2009 ) give an interesting cheque list of rules for the practical execution of environmental related compensation.
Knowing that environmental and societal aims do non ever lead to fiscal benefits. The house must carefully measure the cost and benefits before planing its new scheme.
Classify the outlook of the stakeholders by importance and accordingly, take the key environmental standards. Then, the house must specify precise ends for the following old ages.
Define how environmental standards will be measured and design effectual EPIs.
Measurement of environmental constituents is frequently complex and partly based on qualitative standards, which make them manageable by the CEO. To turn to the jobs related to use, the company must collectively implement relevant control and describing systems.
In order to affect all employees, it is of import to regularly pass on the consequences and the aims to the full organisation.
Pay attending to public releases information. The relationship with the communities must be carefully managed. The company must avoid merely symbolic actions and concentrate on substantial actions.
4.3. Consequences
After reexamining the benefits of environmental public presentation and what research workers or experts propose for the execution of eco-oriented compensation systems, it is now interesting to concentrate on the consequences. Many empirical surveies have been conducted on the different relationships between environmental public presentation and compensation systems: the construction and its effects on the house overall public presentation, the consequences for the CEO wage, etc. Some independent analyst companies investigate the pattern in the concern universe ( Keatinge & A ; Eaton, 2012 ) .
4.3.1 Empirical consequences
4.3.1.1 Relationship between CEO Compensation and Environmental Performance
If many empirical surveies found links between compensation and fiscal results ( size, gross revenues, etc. ) , merely few explored the relationships between the top-managers compensation and the company ‘s committedness to societal and environmental public presentation. The undermentioned chapter reveals the troubles that face research workers to show through empirical observation the benefits of eco-oriented compensation on environmental public presentation.
Harmonizing to the “ stakeholder mismatching ” theory, Stanwick and Stanwick ( 2001 ) argued that “ stakeholders who would profit from a strong environmental repute ( e.g. , the community at big ) may non be stakeholders who evaluate the organisation ‘s public presentation ( e.g. , shareholders ) ” . Consequently, the compensation system designed by the board of managers may non aim environmental public presentation as a primary end. Seen as extremely unsure investing and fiscal load, green schemes may non be included in the public presentation rating. Besides, stockholders by and large prefer to establish the public presentation rating on stable variables. Sing the trouble when choosing right environmental variables ( repute, emanation, etc. ) , this facet could be omitted. Therefore, Stanwick and Stanwick ( 2001 ) expected to happen negative relationships between CEO ‘s entire compensation and environmental repute but positive nexus between compensation and fiscal public presentation. Their sample was based on the one-year repute index by the Fortune Magazine of 1990-1991.
The decision of the trial strongly supported the hypothesis. Directors ‘ compensation of houses with good environmental repute was lower. It means that directors are encouraged to non derive environmental repute. However, there are some of import restrictions on the survey. First, the period could be debatable in two ways: the short oversight of clip ( merely two old ages ) and the period of the early 90 ‘s may non reflect how companies act today. The survey took merely the repute index as environmental public presentation. However, repute is merely one dimension of such public presentation ( conformity, outcomes, etc. ) . Finally, the research workers made the strong premise that there was no nexus between environmental and fiscal public presentation. However, the advantages of green oriented schemes have been proven to carry on to fiscal consequences in many instances ( Judge & A ; Douglas, 1998 ) . They asked good inquiries, but solved them ill.
Russo & A ; Harrison ( 2005 ) tested the same relationship between environmental public presentation and eco-oriented compensation. Based on a sample of electronics workss ( indexed in the Toxic Release Inventory of 2001 ) , they analysed the emanation degrees of companies that integrate or non compensation systems with an environmental public presentation dimension. Their consequences contrasted those of Stanwick and Stanwick ( 2001 ) . They found a fringy degree of significance. Companies with eco-oriented compensation systems had little better environmental results.
The most recent survey from Cordeiro and Sarkis ( 2008 ) besides tested the relationship between environmental public presentation and the top director compensation. With their sample of 500 US houses during 1996, they tried to turn out that companies with environmental oriented compensation system had better ecologic public presentations: “ Top executive compensation will be more significantly and positively related to environmental public presentation in houses that explicitly link environmental public presentation factors to exceed executive compensation than in those that do not. ” . Their sample was based on 172 US houses ‘ informations from the 1996 IRRC Investor Responsibility Research Center. They took for the theoretical account three different environmental public presentation independent variables: 1. Emission index, 2. Spill index and 3.Compliance index ( one per arrested development ) . The premise received partial support merely. The consequences showed that there was no clear important nexus between environmental public presentation and expressed environmental inducements compensation except for the conformity index. The survey distinguished three chief justifications. First, the decision could be explained by the fact that boards of managers design environmental compensation systems chiefly to forestall personal and corporate judicial proceedings ensuing from non-compliance. The 2nd account could come from the period of the sample ( 1996 ) when environmental issues were less of import and the houses acted more reactively instead than proactively as today. Last but non least, they could hold found the cogent evidence that there is non needfully a relation between environmental public presentation and executive compensation even for the houses claiming expressed relationships between these two variables. This decision could hold several grounds. The directors could hold adequate influence on the compensation commission to take down the weight of hard and less governable variables such as environmental steps in their public presentation appraisal. Furthermore, sing the trouble and non-transparency of environmental public presentation measuring, the Chief executive officer might hold the capacity to pull off those indexs. Finnaly, it could be a effect of corporate “ greenwashing ” ( developed in chapter Thirty ) . This construct occurs when companies improve their repute by eco-marketing or others communication runs alternatively of bettering their existent impact on the environment. By claiming an expressed nexus between CEO compensation and environmental public presentation, the company gives the visual aspect of its environmental concerns without truly implementing it ( Ramus and Montiel, 2005 ) .
4.3.1.2 Relation between high Environmental Performance and CEO Total wage
The empirical survey conducted by Berrone and Gomez-Mejia ( 2009 ) presented the relationship between environmental public presentation and the CEO degree of compensation. They tried to turn out that good environmental public presentation was recognized by the company and rewarded accordingly. They tested their chief hypothesis: Environmental public presentation has a positive consequence on CEO entire wage. More in inside informations, they tested several sub-hypotheses explained below.
The first sub-hypothesis links the type of environmental scheme chosen by the director and the wages. Chief executive officer can follow two types of environmental schemes: eco-control and bar. Eco-control ( pollution control ) relies on end-of-pipe patterns. The purpose is to mensurate and handle all polluting constituents at the terminal of the company ‘s procedures with an aim of conformity. Compared to the bar, it does n’t necessitate of import investing or particular expertness. On the other manus, bar schemes are wholly integrated in the different procedures and concentrate on cut downing or extinguishing environmental issues. Those pro-active steps require of import investings in new green engineerings. “ Pollution bar attempts provide organisations with alone advantages and may even increase fabrication public presentation because they require a cardinal rethinking of merchandises and procedures that can make chances for betterments and invention ” ( Berrone and Gomez-Mejia, 2009 ) . Surveies besides found that lone bar schemes could take to competitory advantage when eco-controls were easy copied. The bar schemes offer better returns and advantages for the steadfast public presentation and should be preferred than eco-control ( Christmann, 2000 ) . Therefore, pollution bar schemes should be rewarded more than end-of-process controls.
The 2nd sub-hypothesis tested whether the being of an environmental commission had an impact on the compensation. The inducements system of a house should incorporate environmental public presentation every bit good as fiscal public presentation. The environmental compensation policy must be expressed and clear for the CEO. To better the efficiency of such compensation, surveies found that an environmental commission, within the board, was more capable in measuring the attempt of the Chief executive officer on environmental issues. “ Delegating environmental issues to a commission made up of knowing board members should cut down the information dissymmetries between chief and agent, leting for a more accurate appraisal of the executive ‘s environmental public presentation and a tighter linkage between that public presentation and entire wage. ” ( Berrone and Gomez-Mejia, 2009 ) . Therefore, the presence of a clear environmental compensation policy and an environmental commission should to the full better environmental public presentation.
Berron and Gomez-Mejia ( 2009 ) studied 469 publically traded fouling companies to turn out the old premises. They found groundss for all the hypotheses except the impact of environmental commission and policy. It could be explained by the symbolic function of those constituents. Companies use policy and commission to signal their engagement about ecology when they do n’t do the cardinal investings. External environmental audit could be more appropriate than a commission to mensurate environmental public presentation.
