Tying Energy Efficiency to Compensation and Performance Reviews

Last year, commercial and industrial buildings used roughly 50% of the energy in the U.S. economy at a cost of over $400 billion. These buildings and operations can be made much more efficient using a variety of cost effective efficiency improvements while creating jobs and building a stronger economy. We have similar opportunities in our homes. In February 2011, President Obama, building upon the investments of the American Recovery and Reinvestment Act, announced the Better Buildings Initiative to make commercial and industrial buildings 20% more energy efficient by 2020 and accelerate private sector investment in energy efficiency.

This initiative gave birth to Better building webinar series, which profile the best practices of better challenge partners, better building alliance members and aligned organizations who are working to improve energy efficiency in building. The scenario discussed below shows the efforts of three better building challenge partner as they work to connect energy efficiency improvement in their building portfolio to employee compensation and performance review.

Many organizations offer a variety of incentives for meeting sales targets or other corporate goals

·         Recognition in annual reviews and compensation increases

·         Bonuses

·         Free vacations or other prizes such ipad

What is not so common is to recognize employees for their role in achieving energy efficiency improvements and other sustainability goals which further establish efficiency as a core business strategy. Below are success stories shared by better building members on ways their organizations tied compensation to energy efficiency improvements in their respective organizations.

According to Nicholas Stolatis, TIAA -CREF

Organization Type	Commercial Property Management
Barrier	A lack of visibility into the energy and water usage of the third-party-managed assets
Solution	Adding sustainability metrics to the existing property governance scorecard, part of a formal performance assessment of third-party property managers
Outcome	TIAA-CREF can better understand resource costs, estimate savings associated with improvement projects, and verify that projected results are achieved

Overview

TIAA-CREF’s goal was to improve asset management’s visibility into the energy and water usage of the third-party-managed assets and to ensure ongoing attention to ENERGY STAR® achievements. To address several barriers, TIAA-CREF added sustainability metrics directly related to the maintenance of their respective ENERGY STAR Portfolio Manager accounts to the existing property governance scorecard for commercial office, retail, and multifamily real estate assets. The quarterly scorecard is part of a formal performance assessment of third-party property managers.

TIAA-CREF faced the following energy reduction barriers:

Delayed or lagging data updates in Portfolio Manager – Poor data quality and inconsistent updates for energy and water meter data prevents precise analysis of progress towards sustainability goals. The scorecard serves to reinforce the importance of accurate and consistent updates to the ENERGY STAR Portfolio Manager profiles.

Limited access to energy, water and space use update data – An understanding of the individual ENERGY STAR accounts maintained by third-party property management teams can be difficult to obtain and monitor by executive and asset management in a transparent and efficient way. The scorecard system provides easy access to a property- and portfolio-level understanding of the timeliness of data updates and ENERGY STAR recognition.

Lack of ongoing attention to ENERGY STAR recognition – Since eligibility for ENERGY STAR certification is on a rolling basis for each property, property teams can lose track of when their properties are eligible. TIAA-CREF encourages the property to apply or re-apply as the case may be immediately upon that property becoming eligible. The scorecard helps to track and encourage the property management team to seek recognition by applying promptly.

Policies

Tracking energy and water usage was deemed a key organizational priority, and TIAA-CREF leadership agreed to include energy and water efficiency as part of the formal property manager annual performance review process. In addition, the results of the annual performance review process for individual property managers are aggregated for review at the account level to measure efficiency progress.

Process

TIAA-CREF developed a simple scorecard to be filled out at the property level that provides asset management with visibility into how well individual properties are tracking energy use, water use, and ENERGY STAR certification.

Given the existence of the property governance scorecard platform, it was fairly straightforward to develop the metrics to determine a score of green, yellow, or red. The creative part was establishing fair and reasonable benchmarks to evaluate their third-party property management teams on a quarterly basis. The cooperation and collaboration of the TIAA-CREF property management governance team, their sustainability consultant, and the third-party property management teams were required to ensure the initiative’s success.

The process changes that made this solution a success were:

• The addition of the sustainability metrics to the scorecard was developed and launched as a pilot in the first quarter of 2011, and is now generated on a quarterly basis to ensure that property managers update Portfolio Manager on a regular basis.
• The ratings can be aggregated and distributed internally or externally to property management firms and teams. They also comprise a portion of each property team’s formal performance assessment. Due to the competitive nature of the commercial real estate industry, measures of relative performance to peers are an effective driver for market transformation and encourage additional buy-in for the sustainability initiative.
• For the Energy and Water aspects, the evaluation is dependent upon the Current Period date, defined as the last day of the most recent month with complete data from all meters either energy or water, as reported in Portfolio Manager for both energy and water data sets. Scores are allocated as follows:

Green	The property’s current period date is within 60 days of the date of the report
Yellow	The current period date is between 61 and 90 days of the date of the report
Red	A current period date is more than 90 days from the date of the report
N/A	The property does not have any associated energy or water meter(s)

 

• For the Certification aspect, the allocation of scores related to ENERGY STAR certification eligibility is based upon the following table:

Green	Holds a current ENERGY STAR certification or appears eligible for the first time this quarter
Yellow	Eligible for a certification and was also eligible on the previous benchmarking report
Red	Properties that have been listed as eligible on the previous 2+ benchmarking reports
N/A	Properties that do not qualify for an ENERGY STAR certification or do not receive a score

• Variances must be provided on a case-by-case basis for properties that do not obtain energy and/or water utility bills on a standard monthly billing cycle in order to fairly evaluate the property management team performance. Examples of situations that require variances include:
  1. A property purchases water from a municipal utility that sends invoices on a quarterly basis.
  2. The property management team is frequently given the current utility invoices late due to a process of reporting expenses to the accounts payable office.
  3. The property management team is new to the property and ENERGY STAR Portfolio Manager, and is given a temporary variance until they are trained and on-boarded to the Global Real Estate Sustainability Initiative (GRESI).

To facilitate the scorecard program, all properties in the portfolio must be previously benchmarked in Portfolio Manager and shared to a master account.

Because the scorecard metrics were developed to fit within the already-in-place third-party performance review and property teams were already using Portfolio Manager, it took less than six months to update the scorecard and establish complete buy-in.

At TIAA-CREF, sustainability is viewed as an integral part of their standard operational excellence practices. The data required to track the sustainability metrics is part of the on-going Global Real Estate Asset Management effort, so there is only a small incremental additional effort required to collect, track, and disseminate the sustainability metrics as part of the property governance scorecard.

Measuring Success

On a quarterly basis, each property receives score in three possible areas: Energy, Water, and Certification.

·         For the Energy and Water aspects, the evaluation is dependent upon the Current Period date, defined as the last day of the most recent month with complete data from all meters either energy or water, as reported in Portfolio Manager for both energy and water data sets.

·         For the Certification aspect, the allocation of scores is related to ENERGY STAR certification eligibility.

Success of this scorecard program is ultimately measured in the percentage of properties in compliance with the corporate property rating policy. Since the inception of the scorecard, the percentage of properties maintaining an up-to-date Portfolio Manager account has risen from only 55% in compliance green rating to nearly 90% for energy metrics and 80% for water metrics in the most recent scorecard.

Walt Brockway, Alcoa case study shows

Organization Type	Primary and fabricated aluminum manufacturer
Barrier	Energy performance improvement crowded out by other business priorities
Solution	Link energy efficiency achievement to performance based compensation for Alcoa business leaders
Outcome	Alcoa businesses are increasing their focus on energy efficiency and steadily reducing energy intensity to meet long-term sustainability goals

 

Alcoa uses its leadership performance pay program to reward business leaders who successfully implement energy-saving projects. This financial incentive is designed to make energy efficiency a higher priority within Alcoa’s business units and help achieve corporate energy and sustainability goals.

In most companies, energy efficiency projects must compete for funding and management attention with projects that increase production, improve safety, address regulatory compliance, and enhance profitability. Alcoa has addressed this barrier to energy efficiency by setting long-term corporate energy goals and linking energy performance to the company’s incentive compensation structure for business executives. By providing financial rewards to business leaders who set aggressive energy reduction goals and successfully achieve those targets, Alcoa is helping ensure energy efficiency initiatives receive adequate attention from senior leaders, even as they juggle other critical business priorities.

Policies

In 2010, Alcoa began compensating its business leaders for their achievements in meeting energy efficiency targets. Alcoa’s CEO championed this linkage between energy performance and compensation to improve corporate energy performance and better integrate Alcoa’s long-term sustainability approach into all aspects of its business strategy and operations.

Alcoa provides performance-based incentive pay to reward and compensate a wide range of employees at all levels of the company—from corporate executives to business level management to production level management and production line management. At Alcoa, performance-based pay, or variable compensation, is determined by a formula based on overall company performance and a qualitative evaluation of individual performance. Company performance is based on a combination of financial and non-financial goals.

In 2010, Alcoa’s CEO classified energy efficiency, as well as other sustainability metrics, as one of the non-financial goals for use in calculating variable compensation. In 2011, up to 20% of Alcoa’s variable compensation was tied to achieving significant aspects of sustainability targets, including safety, workforce diversity, and reductions in carbon dioxide emissions due to process improvements and improved energy efficiency. These financial incentives create a clear link between employee actions and business unit results, helping Alcoa enhance its corporate energy performance and promote a culture of energy efficiency throughout the organization.

Process

Alcoa’s executive compensation plan is a key element of a broader strategy to integrate improved energy performance practices into the company’s core business strategy. The plan incentivizes business leaders to set and achieve energy reduction targets that are linked to the company’s overall energy goals.

Alcoa established a four step process to set and meet these goals:

1. Set Corporate and Business-Level Energy Targets

·         In 2011, Alcoa set the following long-term, corporate-level strategic energy reduction targets:

·         10% reduction in the energy intensity of Global Primary Products by 2020 and 15% by 2030, both by a 2005 baseline; and

·         20% reduction in the energy intensity of all other businesses Global Rolled Products and Engineered Products and Solutions by 2020 and 30% by 2030, also from a 2005 baseline.

Alcoa has three major businesses: Primary Products, Rolled Products, and Engineered Products and Services. To support the corporate level targets, each Alcoa business sets annual energy intensity reduction goals and determines how these will be measured and calculated. These annual targets are linked to the overall sustainability goals for the corporation and are typically contrasted against the previous year. Corporate-level financial leaders’ controllers review and approve these targets, which are then communicated to sub-businesses and locations. Each business and some sub-businesses appoints an energy leader—a person with direct responsibility for promoting energy reduction initiatives and meeting targets at the plant level—to coordinate efficiency efforts and ensure projects are on schedule.

2. Determine Contribution to Incentive Pay

Business units are given autonomy to determine the extent to which energy efficiency performance will contribute to incentive pay of employees within that business. For example, Alcoa Recycling may choose to make energy efficiency count towards 3% of employee incentive pay, whereas Alcoa Building and Construction Systems may make it 5%. Once set within the business, the weighting applies equally to all employees. In other words, energy efficiency performance does not make up a larger or smaller percentage of incentive pay for different employees based on the individual’s responsibilities.

3. Monitor Initiatives

Alcoa has set up an energy spend reduction team, which includes representatives from each business unit—typically the financial controller, the energy leader, and the energy services group. Other ad hoc members such as procurement staff take part when needed. Every month, the team reviews energy reduction initiatives using a common project implementation tool to assist with completion. The tool specifies the project, timing, savings and responsible person. Projects or initiatives are approved at the business level, but can be approved at the individual plant or department level if they fall below specific cost thresholds, which vary from business to business.

4. Track Progress

Energy Intensity calculations are performed each month and communicated to the energy group and leader in each business. The team reviews the data to track and ensure progress.

Tools & Resources

Alcoa’s global energy database is a valuable tool that supports energy intensity performance of each Alcoa business. It contains utility information that is entered from all business invoices when received, and therefore captures true energy consumption for every location globally. Alcoa’s open project implementation tool is used to track and monitor the status of all energy projects. Additionally, Alcoa has established a standalone energy services group, which provides expert resources to assist locations in identifying and executing energy saving opportunities. Tools provided by the energy services group include energy standard practices, energy kaizen events in-depth energy audits that search for low-cost opportunities, energy assessments, technical consultation, and reporting assistance.

Sustainability scorecards are also used to align sustainability targets with business strategy across every business and provide a dashboard to measure progress against key near-term sustainability metrics. Each business has also developed a roadmap to lay out the process steps, business decisions, and technical improvements necessary year-by-year to realize the longer-term objectives on energy efficiency and sustainability that it had committed to deliver.

Measuring Success

A rigorous computation was established to calculate energy intensity including the baseline year level. The calculation is performed by each business with approval from the business controller. At some Alcoa businesses, DOE’s Energy Performance Indicator tool EnPI 3.0 is used to help establish a normalized baseline of energy consumption and track annual progress of intensity improvements. Overall success is measured by achievement of the energy reduction target, and progress toward the target is communicated periodically to all levels of management.

Alcoa established a measurement and verification policy for its 2010 operating plan. The strategy requires that each business:

·         Determine a measure of energy intensity typically GJ per metric ton of product.

·         Report energy consumption data to a centralized database.

·         Identify where production numbers reside and if any normalization is to be applied.

·         Formulate parameters for calculating energy intensity; there are also regional differences in the calculation.

Outcomes

In 2011, Alcoa’s Global Primary Products business reduced its total energy intensity 2% against its 2005 baseline, positioning it to meet the 10% reduction goal by 2020. The Global Rolled Products business achieved an 8% decline compared to baseline, while Engineered Products and Solutions realized a 7% decrease compared to 2010.

Energy Intensity—Global Rolled Products

Gigajoules per metric ton of aluminum produced

Quantifying the precise link between Alcoa’s energy efficiency results and its incentive pay plan is challenging; however, Alcoa has noticed increased attention to energy saving projects since energy efficiency was more clearly integrated with employee compensation. For example, Alcoa’s energy services group is receiving a growing number of requests from business leaders interested in reviewing opportunities to save energy and meet their energy efficiency targets. Alcoa estimates that the number of energy cost reduction activities has increased by about 50% since 2009—the year before energy efficiency targets were explicitly linked to incentive pay. The incentive pay was not the sole factor driving this increase, but it did have an effect, according to Alcoa. Additionally, several sub-businesses have requested energy kaizens at their locations to help uncover low-cost energy saving opportunities.

While business leaders are focusing greater attention on energy projects, they are also employing different ways to achieve reductions. For the Global Primary Products business unit, management has focused on smart manufacturing—the integration of machine gathered data, analysis, and process simulation to conserve energy and optimize production outputs. In the Global Rolled Products business, a number of projects focused on improving metal pre-heating and casting to reduce energy. In many cases, the establishment of Alcoa’s Centers of Excellence COE has played a key role. These Centers are set up at each business unit and focus expertise and resources to specific areas, such as energy, casting, rolling and technology.

Bob Holesko, HEI Hotels and Resorts scenario

Organization Type	Hospitality
Barrier	Lack of centralized information on energy, other key data
Solution	Energy management tracking tool
Outcome	HEI is now able to recognize areas for improvement and realize savings

 

Overview

HEI developed an energy management tracking tool that analyzes key variables such as weather normalized utility consumption, and hotel occupancy alongside capital and operational energy efficiency initiatives. HEI named their system the Energy Looking Glass ELG Dashboard. It serves not only to track energy use and compare use across facilities, but it facilitates organizational behavior change by encouraging teamwork to meet company goals.

Policies

HEI established the following goals for the development of their energy management tool:

·         Measure and track the impacts of energy efficiency initiatives across their portfolio of hotels;

·         Compare energy usage trends to changes in hotel occupancy rates and weather;

·         Roll out and track participation of hotel energy efficiency best practices at each hotel; and,

·         Monitor main energy conservation capital project end dates.

To accomplish these goals, HEI outlined all of the data that would need to be collected and updated in the energy management tracking solution on a regular basis. Key system data needs included:

·         Monthly energy consumption and cost data by fuel type electricity, natural gas, water, steam, chilled water

·         Weather data heating and cooling degree days

·         Occupancy rates for each property

·         Property square footage

·         Property year

·         List of energy efficiency best practices to implement

·         Key energy conservation capital project end dates

HEI also identified three system specifications as essential to the functionality of the tool:

Excel Based. It was essential for the tool to be able to import and export data in Excel so that HEI could access the historical property utility data from 2006 from its centralized billing company.

Centralized System. Given HEI’s properties are located across the country, it was important to allow both local users (hotel general managers and chiefs of engineering) access to the data as well as to send this data to a centralized location where properties could be analyzed in comparison to others in the company’s portfolio.

User Friendly. A custom dashboard was created for each hotel to enable the Chief Engineer to manually enter utility meter readings, heating and cooling degree data and hotel occupancy on a daily basis. The tool calculates if the hotel is using more or less energy for that given day compared to the previous year displayed as a percentage up or down as well as the dollars saved or spent. In addition, month to date comparisons are provided, which compare the month to date data to the previous year as well. The Chief Engineer can then determine if any course of action is required and relay this information to other managers.

Process

HEI followed several key steps to plan and implement its innovative solution, including data collection, regression analysis, staff training, and an annual tool revision process.

Data Collection. In 2009, HEI began requiring the daily collection and reporting of utility meter readings so they could be compared to historic usage patterns. The following are the main data points that are input daily into a collection template to upload into the energy management tracking tool:

• Utility meter readings for electricity, natural gas, water, steam and chilled water
• Heating and cooling degree days
• Hotel occupancy rates

Once this information is entered into the tool, ELG calculates if the hotel is using more or less energy for that given day compared to the previous year, displayed as a percentage up or down as well as the dollars saved or spent. In addition, month to date comparisons are provided for the current and previous year, allowing the Chief Engineer to determine if any course of action is required and relay this information to other managers.

Regression Analysis. In order to establish hotel baselines for each property in HEI’s portfolio, a number of variables were collected and analyzed through an Excel-based regression analysis.

Variables included:

• Utility consumption data electricity, natural gas, water, steam and chilled water
• Weather data heating and cooling degree days for each hotel for the same consumption periods as the utility data to determine weather related impacts on energy consumption
• Hotel occupancy rates for the same consumption period to determine the impact of occupancy on energy consumption
• Main energy efficiency capital project completion dates including lighting retrofits and the installation of programmable thermostats in order to determine their impact on energy consumption

After all of the data was loaded into the tool, HEI analyzed how each variable was normalized in the model in order to establish daily consumption thresholds for each consumable. The data was then placed into a custom dashboard for each hotel and the hotel’s Chief Engineer was designated as the responsible party for maintaining the model for the specific property.

Of note, the regression analysis model faced resistance from some of the properties’ staff. HEI overcame this barrier by making the tool highly-visible and user-friendly, speaking of energy savings in terms of environmental impact rather than financial savings.

In addition, a “Daily News” section was added to provide property users additional energy facts and conservation best practices for consideration.

Staff Training. HEI’s employee training program included two key elements: BUZZ the Energy Bee mascot and an ELG tutorial.

HEI created BUZZ the green Energy Bee as the face of the ELG and HEI’s energy conservation efforts. In each hotel, a BUZZ Committee was created to:

• Promote enthusiasm
• Spread the BUZZ
• Coordinate quarterly activities
• Share ideas
• Encourage leadership in energy savings

HEI also created an ELG tutorial to facilitate staff training on the energy management tool. Today, all key hotel managers including GMs, Chief Engineers, Executive Housekeepers, Executive Chefs and Banquet Managers (200+) take an active role in saving energy at their hotels.

Tool Revision Process. In order to ensure that the energy management tracking tool remains relevant, HEI developed an annual revision process for the ELG.

This process includes the following steps:

• Seek recommendations from key HEI Chief Engineers on what they feel should be enhanced on the ELG
• Update staff training materials and conduct training sessions for HEI employees responsible for overseeing ELG operations general managers, chief engineers, etc.
• Update tutorial to train engineers with no dashboard experience
• Modify each hotel dashboard to account for changes in hotel square footage, corporate energy efficiency initiatives, ENERGY STAR score improvements, and hotel best practices
• Link ELG results to the on-going Chief Engineer incentive program

Tools: •           Daily Entry Page and ELG Tutorial

Outreach

HEI marketed the energy management tracking tool to hotel staff using a number of innovative approaches to both educate and engage hotel staff in this project.

The following are samples of HEI’s marketing materials:

Interactive Tool Design. The tracking tool is a user-friendly, highly visual model that displays energy savings in terms of environmental impact rather than financial savings. This method allows staff to feel positive about reducing the environmental impact of the hotel through their efforts rather than focusing on saving the company money. In addition, a “Daily News” section was added to the tool to give properties additional energy facts and conservation best practices.

Staff Incentive Program. HEI introduced a three year flat screen TV give-away program tied to specific hotel brands, regions and hotel management positions. During this period, over 40 TVs were awarded across the portfolio at a cost of nearly $40,000 while the energy savings for this same period came in at 14.5%, valued at $2.7 million.

Quarterly Incentive Programs. In addition to the TV give-away, HEI also offers quarterly recognition for staff in the form of gift cards that can be redeemed for items other than flat screen TVs.

Executive Level Recognition of Staff. HEI’s upper management also recognizes staff who are achieving success within the program through formal letters of appreciation, articles and photos featured on the HEI website as well as having photos posted on the HEI Going Green Wall of Fame located at the Corporate Office.

Tools:

    HEI’s 2011 Chief Engineer Incentive Program Overview

    HEI Staff Recognition Letter

Measuring Success

An important component of HEI’s energy management tracking tool is the ability to measure and track energy and cost savings achieved as a result of the program’s implementation. The tool calculates hotel energy consumption for a given day and displays it as a percentage up or down and dollars saved or spent. It also provides month to date comparisons throughout a given month as well as comparisons to the same date for the previous year.

HEI is able to measure the impact of energy efficiency related capital and operational programs on energy consumption and cost. During this process, it was determined that $9 million in energy projects completed between 2005-2008 delivered 2.79 return on investment ROI and saved over $3 million a year. As a result of its staff incentive program, HEI awarded over 40 flat screen TVs to staff across its portfolio of properties at a cost of nearly $40,000. The company realized an energy savings of 14.5% for this period valued at $2.7 million dollars.

The tool has strengthened and supported the commitment of HEI’s management to their broader energy program and freed up capital funds, which could be reinvested in additional energy efficiency measures and other corporate expenditures.

Tools:

• Consumption Report from ELG
• HEI Monthly Consumption Email

Outcomes

When the ELG Dashboard was developed and introduced to the field company-wide in 2009, HEI was optimistic that this energy management tracking tool would help to monitor energy conservation efforts for years to come. Energy and cost savings data collected to date across the HEI portfolio has confirmed the effectiveness of the tool. Another significant outcome of HEI’s approach has been the “Annual ELG RR&R’s.” HEI realized that for the ELG to become a “Living Document,” it would need to be “Reviewed, Revised & Refreshed” RR&R on a regular basis with input from Key Chief Engineers.

Listed below are the items completed annually to ensure the ELG’s continued success.

Annual ELG RR&R’s:

·         Update Daily News Items

·         Update social responsibility conversions

·         Review Excel model formulas and calculations

·         Load approved energy capital data

·         Update ENERGY STAR scores

·         Update Your Property data

Also in 2012, the entire report received a complete graphics refresh. A similar refresh is scheduled to occur again in 2014.