Factoring DEI into executive compensation has the potential to transform how companies approach data tracking, public disclosure and practice implementation broadly.
Authors:
Sergio Reyes | Director, Advisory Services | LinkedIn
Let’s talk executive pay. Leaders often receive bonuses for achieving predetermined metrics, and boards commonly use this kind of incentive-based pay to promote outcomes that drive forward the organization’s goals. Traditionally, these goals are financial in nature: growth in revenue, profits, earnings per share, etc. However, the rise of corporate social responsibility as a business imperative has brought nonfinancial goals to the foreground. Accordingly, incentive-based compensation has also become a tool to promote the achievement of environmental, social and governance (ESG) metrics, with as many as 50% of U.S. companies in the S&P 500 tying executive pay to ESG outcomes.
While scholarship is still assessing the effectiveness of this strategy, many companies are moving to tie executive compensation to diversity, equity and inclusion (DEI) initiatives explicitly. And with this shift, we at Grads of Life are already anticipating some outsized benefits.
More Robust DEI Data Tracking
Since incentive-based pay is connected to specific, preset metrics, companies implementing the practice must concurrently develop their ability to measure progress on those metrics. Every publicly traded company and many private ones have sophisticated systems in place to track financial metrics. But when it comes to DEI data, even large companies often struggle to gather and analyze necessary information beyond basic representation figures. As businesses set inclusive leadership scores, retention and advancement goals for historically excluded talent, and other prerequisites for executive bonuses, their tracking and measurement of DEI data will necessarily improve.
Increased Public Disclosures
Companies are increasingly responding to the call for transparency when it comes to DEI progress. As of September 2021, 55% of companies in the Russell 1000 disclose some type of DEI data, up from 32% in January 2021. But there is still a critical mass of employers not reporting this information. Since publicly traded companies must disclose details about executive compensation, companies that tie leaders’ pay to DEI outcomes have an impetus to report on DEI progress. See, for example, Starbucks, which included in its Security and Exchange Commission reporting details on its executive compensation bonus structure, DEI metrics and achievements. This level of transparency supports internal accountability, builds public trust and fosters sector-wide progress.
Wider Adoption of DEI Practices
Companies pioneering DEI practices can become influencers in their networks, triggering a virtuous cycle. Many directors sit on more than one company’s board, resulting in a network of companies connected by shared directors (a phenomenon referred to as interlocking directorates or board interlock). There is ample scholarship showing that board interlock promotes the spread of governance practices. We have seen the power of such peer learning through our work with corporate coalitions like OneTen, Business Roundtable and Markle’s Rework America Alliance, where CEOs, CHROs and other leaders come together to share DEI best practices. And as the trend of tying executive compensation to DEI outcomes gains traction, this practice may spread across companies via interlocking boards (similar to the way accounting practices do) and other knowledge sharing mechanisms.
While incentive-based executive pay is just one tool to promote DEI progress, we believe it holds a high degree of promise. Ideally, this practice will result in more companies achieving their specifically outlined DEI goals. But even if employers do not immediately meet their stated goals, they will have demonstrated a meaningful commitment to DEI, and built important infrastructure and accountability mechanisms to advance DEI progress and shape the future of corporate citizenship.
