Directors to Watch: Diversity, Equity and Inclusion in Executive Pay: Boards Are Testing the Waters

Companies are increasing their efforts to promote diversity, equity and inclusion (DEI). One visible way some companies are showing their commitment is by linking DEI progress to executive pay.
In aggregate, 28% of the S&P 500 mention incorporating DEI in executive pay considerations, but these companies have moved cautiously. Our just-released study of S&P 500 company practices (from proxies filed June 2020 through May 2021) shows that only a small portion (five companies) included full detail about what was being measured and how it tied back to pay design. Another 10 had one of the two — either a specific goal without clear detail on the design mechanics or very clear tieback to design mechanics without a clear target. 
The majority of companies mentioned DEI as a broad factor that affects incentive payouts without making the goals themselves clear in the disclosure. As an example, a company might say, “20% of the annual bonus is based on individual performance,” which includes “creating a diverse and inclusive community” among the imperatives. Boards at companies using discretion may still communicate explicit weighting or goals to their executives, but we know only what they revealed in proxies.
These statistics suggest that boards are taking the time to learn by experimenting with various approaches. As with any other new metric, a board should craft DEI metrics to reflect the company’s context and priorities and to complement existing incentive measures.
Compensation is not the only way for boards to hold executives accountable for DEI. Decisions on succession, leadership development and simply the amount of attention at meetings with management can promote change with fewer of the unintended consequences that can come from using incentive pay.
Accordingly, adopting DEI in incentive pay should never be a single decision. Boards do better with a process, beginning with elevating the issues internally and externally, clarifying goals and trying out DEI informally in pay. Only then is it appropriate to proceed to explicit weighting and goals.

Margaret Hylas is a senior consultant at Semler Brossy. She advises clients on strategic compensation issues and supports compensation and human resource committees on executive pay and governance issues.

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