Carbon bonuses could determine development of a low-carbon economy

National Grid managers to earn bonuses for hitting carbon and financial targets, an initiative which may spread throughout industry and Whitehall

James Murray
guardian.co.uk, Wednesday 8 April 2009 12.30 BST

Bonuses are wrong, right? If our journey over the economic precipice has taught us anything, it is that bonus schemes promote reckless risk taking, create perverse incentives and breed resentment. Your financial reward is your salary, the bonus is keeping your job.
Or was it the scale and structure of the turbo-charged bonuses given to incompetent bankers that created the testosterone-fuelled culture that preceded the crash? Modest bonuses paid out when tangible targets are achieved motivate employees and represent a proven mechanism for sharing the rewards of a well-executed strategy.
It is hardly news that the resolution of this debate will reshape the financial sector over the next few years, but it could also determine the pace at which a low-carbon economy develops.
Having set carbon emission reduction targets in recent years, many firms are now trying to work out how to meet them. Inevitably, they are turning to the mechanisms they deployed to ensure financial targets were met, namely bonuses. Growing numbers of companies are currently investigating the feasibility of carbon budgets and bonuses — schemes where managers are given an annual carbon budget, and then have their promotion prospects and bonuses determined by whether those emission targets are met.
Last month, National Grid became the largest firm to publicly launch a "carbon-based remuneration policy" - or, to translate from the language of the HR department, a carbon bonus scheme. The company announced that to help achieve its target of a 45% reduction in emissions by 2020 it would impose departmental carbon budgets, detailing how much carbon each division can emit. Just as executives' performance was previously gauged against achievement of a financial budget, managers at National Grid will now see their performance – and consequently their promotion prospects, salaries and bonuses – determined by their ability to hit both financial and carbon targets.
National Grid is not alone in investigating this model. Within Whitehall the annual performance reviews that determine the career prospects of senior civil servants now officially include environmental targets. Meanwhile, Mike Duke, recently appointed chief executive at Wal-Mart, used a speech earlier this year to promise those who deliver on the company's environmental targets will be rewarded - and those who don't better watch out.
"You will see that the leaders that get ahead in Wal-Mart will be the ones who demonstrate their commitment to sustainability," he told executives at the company. "You won't be able, in the future, to be viewed in the same way if you put this on the back burner."
And carbon bonuses need not be confined to senior executives. Green consultancy WSP Environmental has trialled a voluntary carbon trading scheme that sees all employees given an annual CO2 allowance of 5.5 tonnes. They then receive a bonus or have to pay a penalty of up to £100 based on the extent to which they come under or over the target. David Symons, a director at the company, admits the 5.5 tonne allowance is pretty generous, but the company will bring the cap down over time and is also investigating the introduction of formal departmental carbon budgets.
On a more prosaic level, many firms have trialled a wide variety of rewards for staff who save energy by turning their computers off, ranging from shopping vouchers to free croissants each day.
Any student of the financial crisis should be able to spot the risks inherent in these schemes. Just as bankers' bonuses encouraged people to take risks and focus on short term gains, there is a danger that offering financial rewards to cut emissions could tempt managers to rush low carbon projects. For example, an exec keen to qualify for their bonus could quickly authorise a new solar panel project, only to find later that an investment in building insulation would have delivered greater carbon savings.
Equally, the absence of universal standards for measuring carbon emissions coupled with the temptation of a carbon bonus could result in unscrupulous executives overstating their emission reductions. Carbon bonuses could soon be followed by carbon fraud.
But despite these risks, carbon budgets and bonuses are set to become a common feature of the corporate landscape. One of the benefits of bonus schemes is that they provide a clearer signal of a board's priorities than a speech at the annual general meeting ever can. The problem with the bankers' bonuses is they were structured to signal to staff that bosses were only interested in short-term gains and did not care how they were achieved.
In contrast, well-structured carbon bonuses based on a robust assessment of a firm's emission reductions would let all employees know that achieving the long-term benefits associated with reduced emissions is a priority for the business that everyone should take seriously. Used in this way, perhaps bonuses aren't so bad after all.
• James Murray is the editor of BusinessGreen.com