Behavioral Insights fostering ‘Pay for Sustainability’ Remuneration Schemes
Behavioral Insights fostering ‘Pay for Sustainability’ Remuneration Schemes

Author(s): Julia M. Puaschunder
Subject(s): Energy and Environmental Studies, Business Ethics, Green Transformation
Published by: Scientia Moralitas Research Institute
Keywords: Corporate Social Responsibility; Behavioral Economics; Behavioral Insights; Organizational Behavior; Pay for Sustainability; Sustainable finance;
Summary/Abstract: In the aftermath of the 2008/09 World Financial Recession as well as after the COVID-19 external economic shock fallout, the stakeholder interest in integrating social considerations in corporate and finance market endeavors has risen steadily. The looming climate change crisis has exacerbated the call for sustainability in economics, finance and professional governance and leadership. In the USA and Europe, Green New Deals are governmental projects to imbue sustainability practices in corporate and financial sector activities. In the area of capital market supervision in the USA, the Securities and Exchange Commission (SEC) has proposed mandatory disclosures regarding climate change risks in the wake of attention to Environmental, Social and Governance (ESG). In Europe, the European Sustainable Finance Taxonomy classifies industry’s CO2 emission levels in order to use transparency to curb environmentally-harmful activities for the sake of sustainability. Financial Social Responsibility continues to grow in qualitative and quantitative terms, foremost in Socially Responsible Investment (SRI). The corporate sector has responded to all these sustainability trends with the concept of ‘Pay for Sustainability’ as an executive compensation form that either lowers variable pay if sustainability is not implemented or provides executive bonuses for pro-active sustainability integration into corporate activities. This paper addresses contributions of behavioral economics for improving the acceptance and efficiency of ‘Pay for Sustainability’ remuneration schemes in three features: (1) Socio-psychological aspects of remuneration that heighten social status and social belonging imbuing meaning and purpose to work; (2) Temporal bundling strategies that help decision makers envision now and the future at the same time, which helps aligning short-term with long-term goals of corporations; (3) Prospect Theory’s insights that losses emotionally loom larger than gains, which provides valuable communication nudges for outlining the intangible emotional value of sustainability care. Overall, this article discusses the current state of ‘Pay for Sustainability’ remuneration and highlights positive affirmation and communication nudges to work with social status-enhancing behavioral communication features that boost the positive acceptance of and reaction to ‘Pay for Sustainability.’

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