AzkoNobel (a Netherlands-based paint and chemical company) has recently decided to give its executives bonuses based on their sustainability performance.  AzkoNobel is the first company to try this publicly and several Dutch multi-national companies—including chemical manufacturer DSM, postal company TNT and energy goliath Shell—are already announcing similar policies.

Because of this new policy, the 600 top managers at AkzoNobel will now be concerned with how much they’ve done to reduce greenhouse gas emissions, waste and energy inefficiencies, fresh water consumption and workplace injuries.  This system of compensation will push managers to engage employees and to develop more environmentally-friendly products that can be sold at a premium. 

While 50 percent of Azko’s executive bonus is based on sustainability goals, the other 50 percent is still based on traditional financial goals.  Performance is rated according to how the company is ranked on the Dow Jones Sustainability Index, which has 90 social and environmental criteria.  Over the last few years, AzkoNobel has ranked within the top three chemical companies of this list.

AkzoNobel has reported that managers will get 100 percent of their conditionally granted stock options for third place in this ranking, but if they reach second or first, bonuses could rise as much as 125 to 150 percent.  If they do not meet financial goals, then managers have the opportunity to be compensated for that part of the bonus by meeting the sustainability target over a three-year period.

In their 2009 annual report, AkzoNobel lays out the relevant objectives, metrics and targets that they will be using to “invent, manage and improve” their environmental, economic/governance and social performance.  They have used the GRI reporting guidelines to set and manage measurable and ambitious goals for the company, and they report on progress towards 2015 targets on their report website as well.

This policy makes strategic business sense for AzkoNobel, as it does for other companies following suit.  By focusing on environmental, social and economic targets, these companies will gain the competitive advantage through stakeholder and shareholder buy-in, improved operational efficiency, decreased risk and a higher premium for innovative and eco-friendly products.