The big debate in executive pay circles at the moment is whether linking KPIs to sustainability targets will help to solve the climate crisis. Two theories advanced some years ago by prominent organisation theorists help to explain why this is happening—and why it won’t work.

In the wonderfully titled article The Iron Cage Revisited (a glancing reference to Max Weber’s ideas about bureaucracy and rationality), Professors Paul DiMaggio and Walter Powell of Yale University describe how three kinds of “isomorphism” (which means something like “imitation” or “replication”) explains how social institutions are created. Coercive isomorphism occurs because of political influence and the need for legitimacy. Mimetic isomorphism (or, if you prefer, simply “copying”) is a standard response to uncertainty—”if you’re not sure what to do, follow the crowd”. Normative isomorphism occurs when people and organisations desperately try to “do the right thing”.

We have seen isomorphism many times before in the field of executive pay. In the early 1990s Reuters and BT adopted the first UK LTIPs. Other companies soon copied them. Institutional investors, unhappy that LTIPs might lead to excessive awards, insisted on attaching challenging performance conditions, which became part of the UK corporate governance code following the publication of the Greenbury report. Remcos experimented with diverse KPIs. These were typically profit-related, but sometimes were linked to sales growth, customer satisfaction, or employment metrics.

A consensus emerged that this was all too difficult, and “Relative TSR” (total shareholder return calculated in comparison with a basket of comparable companies) became the KPI of preference. But focusing on Relative TSR encouraged short-term behaviour and corporate game playing, and it fared particularly badly during the global financial crisis. Eventually it became apparent that LTIPs were not a universal panacea to all problems relating to strategic alignment and executive pay.

Sustainability KPIs and complex systems

So what about the current focus on KPIs and climate change? The natural environment is of course an extraordinarily complex system. So is the economy, of which corporations, executives, and their pay, are all important components. Professor Jay R. Galbraith of the University of Southern California explains how cybernetics, the general theory of control systems, provides a theoretical basis for thinking about complex systems.

A guiding principle in cybernetics is the “law of requisite variety”, which holds that the internal complexity of a system must match the external complexity which it confronts: an entity which finds itself in an environment where it has N different opportunities and threats requires at least N different measures and responses if it is to remain in control of its destiny.

The law of requisite variety means that a company needs measures and responses to each of the strategic opportunities and threats which it faces. If its executive pay strategy is to be effectively aligned with its business strategy, then a KPI is required to deal with every possible opportunity or threat. Pay systems which attempt to do this rapidly acquire what the philosopher Joseph Heath has described as “baroque complexity”.

So what should companies do about climate change? A much more fruitful line of enquiry, I would suggest, is to think more radically about the question of corporate purpose. The critical importance of this has been recognised by the US Business Roundtable as well as the World Economic Forum, and the British Academy has been grappling with the meaning of corporate purpose for a number of years.

Only by broadening the definition of corporate purpose to include social as well as financial objectives, including targets relating to sustainability, can business be expected to become part of the solution to the problem of climate change.

Alexander Pepper is professor of management practice at the London School of Economics and Political Science.