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More and more companies are using DE&I as a measure of executive compensation

Diversity, equity and inclusion (DE&I) goals are featured in a growing number of executive compensation programs. But these programs are usually annual bonuses rather than long-term incentives, which reduces their impact.

“In the 12-month period to September 30, 2018, 51 S&P 500 companies included a diversity metric in their compensation program,” according to Glass Lewis, a governance solutions company, in its
Racial and ethnic diversity in the conference room report. “In the 12-month period to February 1, 2021, that number had almost doubled to 99 companies.”

Aalap Shah, Managing Director of Pearl Meyer, a compensation consulting firm in New York City, said, “There has been a significant increase in incentive plans related to diversity and incentive targets. Big business is leading the way.

But he noted that “the actual impact on compensation is not that large” because most incentives are annual programs rather than long-term incentives, such as stock options.

“A measure like diversity belongs more to long-term programs than short-term incentives,” Shah said. If included in long-term incentives, concentrated DE&I efforts could be phased in over three, five, or even 10 years, rather than “all-in-one” quick fixes that might not last.

Large companies associate executive compensation with DE&I

Starbucks and McDonald’s are two of the few companies to create long-term incentive programs around DE&I. In October 2020, Starbucks announced that it would for the first time link executive compensation to success in meeting the company’s environmental, social and governance (ESG) goals.

“The changes to the annual bonus plan have created a more direct link between executive compensation and the goal of creating a more inclusive and diverse business,” Starbucks noted. The company “was increasing the individual performance factor from 30 to 50 percent of the overall payout calculation, with the goal of holding individual senior leaders accountable for fostering inclusion and sustainability.”

Starbucks is one of the few companies to create a long-term incentive program for the United States-based management team. Executives are collectively responsible for the three-year representation goals focused on increasing the representation of Blacks, Indigenous people and Latinos in leadership positions in the corporate sector. If the goals are met or exceeded, the payout increases by 10%. There will be an automatic 5% payout reduction if growth is 0-5%, and a 10% payout reduction if growth is negative.

McDonald’s aims to increase the number of women in leadership positions (senior managers and above) from 37% to 45% globally by the end of 2025, with the goal of achieving gender parity by the end of 2025 the end of 2030. The company is also setting targets for increasing the representation of historically under-represented groups in leadership positions (senior and senior manager in the United States) from 29% to 35% by the end. from 2025.

For the company’s target incentive program, executives will be assessed on measures related to upholding core company values, improving diversity representation for women and under-represented groups. and creating a strong culture of inclusion among employees. The 2021 short-term incentive program metrics will be operating income growth (42.5%), system-wide sales growth (42.5%), and human capital metrics (15 %).

Advantage of linking remuneration to DE&I

“Based on empirical evidence, we predict that in the long run, diversity and inclusion will lead to better financial performance and better returns on investment, thus justifying the higher CEO compensation,” said Simiso Nzima , Head of Corporate Governance for California Public Employees Retirement. System in Sacramento, California. “It’s about paying for performance and long-term returns on investment. “

He added, “So it is important to include measures of diversity, equity and inclusion as part of the performance appraisal at all levels of leadership of a company, because we know that what is measured is managed.

“Increasingly, we are finding that consumer behaviors are shaped by companies’ public ESG engagement, and ESG-focused companies are also better equipped to highlight their purpose, which gives them an advantage for attract and retain the talent of the next generation, ”said Kenneth Kuk, Senior Director. , executive compensation at Willis Towers Watson in Washington, DC

“Keep in mind that DE&I is not just an HR priority. It is a priority for the board of directors, and by extension it is a leadership mandate,” he said.

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Most companies do not yet link compensation to DE&I

As more companies associate executive pay with DE&I, the practice is “still relatively rare,” according to Glass Lewis.

“Most companies agree that diversity is important to their long-term success, but find it difficult to include it in incentive plans,” Glass Lewis said in his report. The company attributes the reluctance to join the trend to several factors:

  • Some companies have struggled to measure performance and briefly disclose results with data that in some cases is considered sensitive.
  • Others do not include DE&I in their incentive plans because it is something that should always be considered by all executives, and not something to be specifically incentivized.
  • Several organizations cited the stigma associated with using a quota as a reason for avoiding quantifiable measures.

As for those who fear reverse discrimination claims, Shah dismissed the concern, saying companies “will not overly correct diversity.”

He said: “There is a wave of interest in companies being more responsible for diversity. Now institutional shareholders are moving the needle. “