'We've introduced an annual KPI to reward colleagues for contributing to our reduction targets'
Focused on sustainability, LEGO has pledged to reduce its greenhouse gas (GHG) emissions in making and selling LEGO bricks across its factories, offices, stores, and supply chain.
Back in 2020, the company announced a science-based emissions reduction target to reduce absolute GHG emissions by 37% by 2032, against a 2019 baseline. And in August 2023, the company pledged to achieve net zero emissions by 2050.
But more recently, LEGO revealed a new initiative that breaks from the norm – while many companies connect ESG initiatives to executive compensation, LEGO is connecting it to salaried employees also.
“To keep ourselves on track, we’ve introduced an annual KPI to reward colleagues for contributing to our reduction targets.”
Everybody is playing their part, says the company.
“It’s an annual KPI that sets an emission reduction target across our factories, offices and stores, as part of our efforts to reduce the environmental impact across all areas of our business.”
Employees play a critical part in helping reach ESG targets, says LEGO.
“So, from this year, a percentage of the performance management program for salaried employees’ bonuses will be tied to annual emissions. This is all part of our commitment to playing our part in building a sustainable future, and making a positive impact on society and the planet our children will inherit.”
Proliferation of ESG-related executive compensation
Having followed this space for roughly 10 years, Coro Strandberg says the uptake in compensating executives for ESG “has proliferated” in the last three years.
“It continues even in the face of ESG backlash, mostly in the States,” says the president of Strandberg Consulting in Vancouver.
As an example, 76% of S&P 500 companies have ESG performance metrics in the incentive plans for CEOs and senior executives — up from 66% in 2021, she says, citing stats from the Harvard Law School Forum on Corporate Governance.
The most frequently used ESG performance metrics reflect a company's commitment to diversity and to net zero environmental impact, says Strandberg, citing the same research that shows diversity Inclusion measures are used by 75% of S&P 500 companies while carbon footprint and emission reduction measures are used by 38.7% of — up from 14.8%.
“That's a 20% jump; even though the increase in ESG performance metrics was 10% over these two years, the use of GHG emission reduction measures has gone up by 20%.”
Salaried employees linked to ESG KPIs
This area is becoming bigger and more frequent, with many organizations connecting compensation to sustainability or ESG-related KPI, says Bertrand Malsch, associate professor and PWC, Tom O’Neill professor of accounting at the Smith School of Business at Queen’s University in Kingston, Ont.
“And now we see that it is going down the chain,” he says, citing LEGO’s announcement.
“This is logical that if you start measuring the performance of your activities by looking at that type of KPI, then at some point, you should also apply it to your organization. So it makes sense. I'm not surprised from that perspective.”
It’s also a reasonable policy in terms of signaling the objective of the company, and trying to align behaviours with the overall goal, which is to be more sustainable, says Malsch.
“One of the major way organizations can try to align individual behaviours with organizational goals is through performance measurement, and ultimately, compensation or financial rewards.”
It’s a sensible approach since the workforce can actually influence those measures, says Sandberg, “where some other executive measures, they can't be influenceable by all folks in the firm.”
There are several ways workers can work towards sustainability, she says, such as reducing electricity at work, reduce paper usage, composting garbage, taking alternative transportation to work, carpooling, driving an EV car or cutting back on business travel
“So, this is a good [idea], to engage and mobilize all employees on emission reduction.”
And GHG emission reductions are very measurable, so they’re a good metric to use, she says, as they’re quantifiable and not qualitative.
“In that sense, it's easier to cascade down.”
Potential pitfalls in setting sustainability metrics
LEGO has said the carbon KPI will focus on tracking carbon emissions within its own operations (also known as scope 1 and 2 emissions) and one scope 3 emission category. This will include measuring emissions from production sites, hubs, offices and LEGO brand retail stores, as well as company cars and the emissions from business travel.
“From 2024, a portion of our salaried employees' bonus payments will be tied to annual emissions. Over time, we will expand it to cover scope 3 emissions, as we progress towards our goal to become a more sustainable business.”
But one potential pitfall to this approach is the notion of controllability, says Malsch, and when you measure people's performance, you want to measure people's actions over which they have control.
“If I try to tie your performance with something that you have no control over, this is not fair, to a certain extent… not everyone has the same level of control,” he says.
“At some point, it's not clear if you're rewarding performance or opportunism somehow.”
Not everyone has the same resources or the same opportunities to achieve the targets, he says.
“It's something companies have to be careful of when they tie these type of policies at a variable level, and especially when they go to scope 3… to recognize that not all your employees are starting from the same place with that type of thing. And that this should be factored somehow.”
Finding the ‘sweet spot’ of reasonable targets
Also a factor is the level of target, and not setting the bar too low or too high, according to Malsch.
“When you set targets that are too ambitious and unrealistic, then it demotivates people, and even worse, people start cheating or manipulating or do some greenwashing type of things to achieve this target.”
People make try to achieve targets by all means, he says, “potentially by manipulating data or making false claims about things, which is something that in the sustainability space is happening a lot — we know that greenwashing or other false representations or misrepresentations are not infrequent.”
On the other hand, if you set a target that is too easy to achieve, it's not really a changing force, he says, “because people will stay in their zone of comfort.
“You have to find this sweet spot where it's difficult enough so that things are changing for real, but it's not too difficult so that people can achieve them and stay motivated or not tempted to engage in unethical behaviours.”
Also important: What happens if targets are not met? That comes down to the culture that underlies these performance measures, says Malsch.
“Will the company be fine if we recognize, collectively or even individually, that we weren't able to achieve them? What are the consequences of not achieving?”
Another consideration? Some targets can take months or years to be reached, he says.
“If you have annual KPI, but actually some of the effects are happening maybe in two, three years, how do you do that, how do you tie it [in]?”
Breaking down macro reduction targets
Ideally, if a company is going to extend ESG metrics beyond executives, it should take its macro GHG emission reduction target and break it down by group, with different targets, says Sandberg.
“If they were to be rigorous, then you would see them breaking it down by division, and then you keep breaking it down,” she says.
And the bonuses could vary; for example, there might be a performance band with a low threshold that pays out 5% of the bonus, and then if you hit the high threshold, you get a bigger bonus, says Sandberg.
“Through incentives, you can create this stretch target.”
Boosting employee attraction, retention through ESG
Overall, LEGO’s decision to connect ESG metrics to employee compensation can definitely help attraction and retention, says Sandberg — particularly the younger generations.
“They’re going to want to work for companies who are trying to at least not have a bad impact on the climate, and more so who are actually working hard to decarbonize the sector, or decarbonize their supply chain, or play a role in influencing others, not just the firm to reduce its own emission, but influencing others.”
People will be incentivized to contribute, she says.
“At that entry level, you're hiring the best and the brightest and employee engagement, employee productivity, employee morale, and employee mental health — this will help with all of those, [having] GHG metrics throughout the organization.”
If you believe in these values, then LEGO will of be an attractive company, says Malsch. And if these targets are achievable, then it can also be attractive.
“It can also... backfire if, at some point, the company does not meet the target or there are stories about targets not being achieved, or some greenwashing happening,” or the financial rewards are not substantial, he says.
“It can be a really double-edged sword when you engage in these practices, and you advertise them a lot. If you don't deliver, it can also undermine the image and the reputation. So companies have to be careful about that.”
