Summary List Placement
Diversity, equity, and inclusion (DEI) aren’t just buzzwords corporate leaders can throw around anymore. Increasingly, C-suite leaders find some of their compensation tied to meeting goals in these areas.
In 2017, a survey of some 10,000 business and HR leaders conducted by Deloitte found that 78% of respondents believe diversity and inclusion is a competitive business advantage. Yet, only 6% of companies surveyed actually tied compensation to diversity outcomes at the time.
That’s since changed. A 2019 Mercer study found that 51% of firms include ESG metrics (environmental, social, and governance standards, which includes DEI metrics) in their executive incentive plans or are considering doing so.
McDonald’s, for example, announced last week it would tie 15% of senior executives’ bonuses to new goals for diversifying the company’s leadership.
The company aims to increase the percentage of women at the senior director level and above from 37% to 45% globally by the end of 2025. The fast food giant also wants to boost the percentage of people from underrepresented backgrounds in those positions from 29% to 35% over the same time period.
McDonald’s joins a growing number of companies making commitments to measuring social progress.
Industry leaders are paving the way for accountability
Gregg Passin, senior partner at Mercer, said that over the last few years, there’s been an increase in companies measuring progress in diversity, equity, and inclusion.
“More companies are discussing this internally and announcing that they are adopting some DEI metric,” Passin told Insider.
The progress comes as more workers, customers, and investors demand change.
Verizon was an early adopter of this type of program. In 2014, the company began including specifics about tying compensation to diversity goals, according to a review of the company’s recent proxy statements.
And in 2015, Intel’s then-CEO Brian Krzanich pledged $300 million toward diversity efforts and said that part of the plan included tying executive compensation to hiring diversity goals. That same year, Johnson & Johnson announced a similar program.
In 2016, Microsoft said it would tie executive compensation to diversity goals after the company had its second year of employing less women than it previously had the year before, a trend the tech giant attributed to its closing of some of its Nokia factories that employed a large number of women.
Facebook added DEI goals to bi-annual performance reviews for some executives at the vice president level and higher in 2019, the company told CNBC.
Also last year, Uber said bonuses for its C-suite leaders would be tied to specific diversity targets aimed at increasing the number of women and people of color in managerial roles.
How these programs work
Incentive plans, or compensation plans that award executives based on their accomplishment of predetermined goals, are a key part of a company’s compensation program. These plans are typically split into two types: short-term, or annual, incentive plans, and long-term incentive plans, which sets up goals that measure performance over a few years.
Verizon’s compensation plan for its CEO, CFO, and three group CEOs provides a clear example of how this type of metric works. Verizon rewards executives with three key types of pay: base salary, short-term incentives, and long-term incentives.
The firm’s 2019 short-term incentive plan was rewarded based on the achievement of four categories: adjusted earnings per share (45%), free cash flow (25%), total revenue (25%), and diversity and sustainability (5%). Verizon’s long-term incentive plan was based on total shareholder return and cash flow.
Verizon is one of few firms that explicitly spells out how it measures achievement of their goals.
In order to receive the 5% of the short-term incentive award related to ESG metrics, the executives had to hit the following goals: have at least 60% of U.S.-based workforce comprised of minority and female employees; direct at least $5.2 billion of overall supplier spending to minority- and female-owned firms; reduce carbon intensity — the amount of carbon the business emits divided by the terabytes of data it transport over networks — by at least 10% compared to the prior year.
In 2019, Verizon had 59.3% of its US-based workforce comprised of minority and female employees. It also directed $5.8 billion of its overall supplier spending to minority- and female-owned firms, and saw a 12.2% reduction in carbon intensity, according to the firm’s proxy statement. Referencing the goals, these results mean they underperformed on one goal and over performed on two. Based on these results, the compensation committee is armed to make decisions on how to award the executives.
Verizon’s plan is in line with industry standards. Most companies with DEI metrics use them in their short-term incentive plans, and typically represent 5% to 10% of one’s bonus. According to a spokesperson from Verizon, the firm plans to increase their ESG metric from 5% of the short-term incentive to 10% in 2020.
According to Diversity Best Practices, a news outlet focused on DEI, Microsoft ties about 17% of annual bonuses to “culture and organization leadership goals,” which include promoting diversity.
Other companies like Intel have taken a broader approach, incentivizing non-managers to increase the firm’s diversity. In 2015, Intel sent a note out to employees saying that referral bonuses for candidates who are women, people of color, or veterans would be $4,000, double the company’s usual referral bonus, Fast Company reported.
The impact of DEI standards
Tying diversity and inclusion metrics to executive compensation is a positive trend in business, according to Stephanie Creary, assistant professor of management at The Wharton School of the University of Pennsylvania and a founding member of the Wharton IDEAS lab (Identity, Diversity, Engagement, Affect, and Social Relationships).
“Since bonus compensation is discretionary and tied to meeting business goals, I believe that diversity should be part of that equation as well to ensure accountability,” she said.
However, there is a risk.
“Inevitably, firms face backlash from those who do not understand diversity as a business goal and from those who believe that this practice might reinforce tokenism – selecting people only because of their demographic characteristics and not because of the knowledge, skills, and abilities they can also bring,” she said.
To avoid this, leaders should explain their reasoning behind adding these metrics and point to literature that shows diversity’s positive impact on returns so that executives take the measure seriously.
And tying executive compensation to DEI goals is not a one-stop solution.
“Companies need a holistic strategy, informed by data and analytics, that articulates their goals and approach on how to get from their current state to their desired state,” Passin said.
Nonetheless, it’s an important step in signaling what’s important to a company, he added.
This article was originally published in November 2020.
Originally published at https://www.businessinsider.com/companies-tying-executive-bonuses-meeting-diversity-esg-goals-2020-11 on .