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Harnessing total rewards to drive ESG goals

By Kenneth Kuk and Monica Martin | September 16, 2022

Boards, shareholders, customers, the media and employees are closely monitoring organizations’ environmental, social, and governance (ESG) promises and, more importantly, deliverables.
Medioambiental|Total Rewards
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Boards, shareholders, customers, the media and employees are closely monitoring organizations’ environmental, social, and governance (ESG) promises and, more importantly, deliverables. Human capital is key to ESG success and strategic total rewards can be the spark that inspires employees to put their all into contributing to an organization’s ESG priorities. Astute leaders get it. Twenty-five percent of North American organizations have aligned their total rewards programs with their ESG goals and 47% more are thinking of doing the same in the next three years. The icing on the cake? Tangible, actionable ESG objectives advance your employee value proposition—and help you succeed in the ongoing war for talent.

Before your organization embarks on its journey to connect total rewards with ESG, it’s important to remember that organizations start from different places with different goals. Make sure your employees and business leaders are on board with your plan. Do they understand how it will impact them? Are they aware of their role and the commitment required in the coming months and years?

Here are four steps total rewards leaders can employ to encourage your entire organization to support your ESG agenda.

Step 1: Know your organization’s current ESG status

Linking ESG and total rewards begins with a deep understanding of your organization’s current ESG state. Start by answering the following questions:

  • What are your organization’s current ESG commitments and priorities? When were they made and why? How far along are you in fulfilling them? What is HR’s role?
  • What are the ESG risks to your business? Has your organization inventoried the potential ESG risks to your business? Do these risks comprehensively cover all aspects of ESG across the E, S and G categories? Have these risks been quantified to understand the potential impact on your business?
  • Do employees know about your ESG goals? Do employees understand what your organization has committed to on ESG and why? Have they bought into your ambitions? Do they feel connected to your organization’s purpose and understand the role they can play in driving change? Employee listening tools provide a better understanding of employee expectations, concerns and needs related to the organization’s ESG goals, and whether employees are receptive and will share in the vision.

Possible ESG-related risks

  • Effect of carbon emissions on human health and social inequality
  • Effect on reputation if ESG commitments not achieved (or too lax)
  • Effect of supply chain interdependency (when replacing vendors is not feasible/unsustainable)

Do your homework. Asking these questions up front will provide you with a solid footing on which to make broader connections to your total rewards strategy.

Step 2: Set your destination to optimize and align the link between ESG and total rewards

Following your assessment, connections between your total rewards strategy and ESG will become apparent and expose areas where your total rewards strategy may already be, sometimes unintentionally, contributing to or working against ESG objectives.

For example, remote and flexible work policies may align with your broader business net-zero commitments or diversity, equity and inclusion (DEI) goals (e.g., research shows that remote and flexible working arrangements can help reduce air pollution by around 8% and flexible work can improve gender equity in pay and career). Or you may already have practices in place to track whether your total rewards programs are properly considering affordability for your underrepresented employee groups (including those at lower income levels). Conversely, a requirement for employees to have a four-year college degree to participate in upskilling initiatives may create career inequity among underrepresented employee groups.

Consider ROI as you think about how to modify, enhance, or eliminate elements of a current total rewards strategy to amplify your ESG goals. Total rewards investment should be commensurate with the benefit the organization may reap from an improved ESG profile. These benefits may vary significantly depending on business factors such as industry (e.g., some are under intense pressure to produce a robust net-zero plan), business lifecycle (e.g., high-growth companies may need to prioritize other critical business and infrastructure investments), and stakeholders (e.g., some businesses have more complex stakeholder interests to balance).

We’ve found that organizations find themselves in one of the following three categories as they think about where they currently are in linking their total rewards with ESG goals, and where they want to go.

  • Compliance-driven: When ESG actions are primarily focused on satisfying compliance requirements, regulators, exchange rules and/or basic investor or consumer expectations, total rewards’ role is largely focused on mitigating ESG-related risks (such as pay equity and workplace misconduct) as well as reporting on specific people-related elements that drive business outcomes (such as DEI, wellbeing, skill development, and executive incentives).
  • Social responsibility-driven: For companies where ESG actions are based on values and company purpose and where stakeholders proactively invest in, purchase from and work at companies that share their vision, total rewards’ role tends to have ownership of the Social elements of ESG and meaningful input on Environmental and Governance issues, as well. Examples include total rewards programs that highlight a commitment to net-zero transition and sustainability, (e.g., green benefits and employee initiatives), and total rewards communications that highlight company purpose and connection to work and people.
  • Strategy-driven: For companies where ESG is integrated into company strategy to drive both purpose and profit and where there are well-defined ties between ESG and business performance, risk management and value creation, total rewards has strong linkages into all three elements of the environment, social, and governance agenda. Examples include pay-for-performance programs for both executive and employee behaviours that support ESG commitments and aligned climate priorities with program design when implementing remote and hybrid work policies. Further, total rewards leaders hold health providers, risk insurers and third-party administrators (TPA) accountable for demonstrating ESG commitments in products and delivery.

Step 3: Build the bridge

“The secret to getting ahead is getting started” - Mark Twain

Immediate priorities may include leveraging employee experience platforms to clarify and promote ESG programs and policies and to help employees understand how linking total rewards to ESG can benefit them. We recommend rebranding or re-promoting elements of your total rewards strategy that already support your organization’s ESG agenda.

Longer-term priorities may include developing a plan to ensure pay equity and wellbeing programs that consider the social determinants of health. For example, an employee’s financial resilience is often linked to race and gender. Or you may want to support your strategy on net-zero commitments by redesigning workspaces to be environment-friendly, incentivizing employees who use energy-efficient or low-emission transportation and/or subsidizing remote workers’ home energy assessment. If you’re focused on social equality, prioritize equitable total rewards like pay transparency, living wage and reskilling or upskilling programs to pave equitable career paths for underrepresented talent. While more subtle, total rewards can also better align with governance priorities, such as a greater focus on risk management, data security, ethics, and vendor relations.

In either case, the bridge you build between total rewards and ESG should be customized to your organization, taking your current ESG state into account, where you are headed, and the role total rewards can play in influencing this journey.

Step 4: Sustain your momentum

To sustain momentum, total rewards leaders should focus on three key areas:

  1. A consistent measurement strategy is critical to success. Metrics should go beyond surface-level data and focus on employee impact and outcomes related to pay, benefits, wellbeing and careers.
  2. An ongoing communication plan helps keep the entire organization aligned throughout the journey. There are various digital solutions and methods to help leaders provide employees with regular updates about ESG initiatives, what it means for them and how they can participate and share feedback. Embedding ESG and company commitments into your Employee Value Proposition also strengthens the employment brand and ensures potential new talent has visibility into total rewards sustainability alignment. Most importantly, celebrate wins with everyone in the organization.
  3. A thoughtful governance process helps sustain momentum. Listening to employees regularly validates progress and helps identify new opportunities to connect ESG and total rewards. Leaders will inevitably have to decide how and where to invest in total rewards programs, and a proper governance approach ensures ESG linkages continue to be considered in those processes. ESG risks will continue to evolve, and employers will need a mechanism to track and address these emerging risks.

Around the world, many regulators, investors and shareholders are calling for organizations to improve and sustain their ESG initiatives. You will need all hands on deck to accelerate your ESG commitments and sustain that momentum. By linking ESG to total rewards, you recognize that employees play a vital role in helping shape your ESG priorities and you can go farther with the whole organization rallying towards the same goal. Amidst continuous shifts in global markets and talent requirements, a sustained commitment to ESG objectives can give the organization a competitive edge in its human capital strategy.

Authors

Senior Director, Work and Rewards (Washington, D.C.)

Senior Director, Health, Wealth and Career (Atlanta)

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