September 3, 2020
D&I Metrics in Incentive Programs: Usually Discretionary
– Lynn Jokela
Earlier this summer, I blogged about a Semler Brossy Report that found 62% of Fortune 200 companies incorporate ESG measures in executive compensation programs – here’s a NYT article discussing what some companies have done. More recently, Semler Brossy issued a follow-up report on ESG and incentive programs and Liz blogged about how it shows many of those ESG metrics relate to shorter term, operational metrics. The report also gives some interesting info on D&I metrics.
“People” metrics have frequently been included in incentive program design, but in contrast to explicitly measured ESG metrics on topics like customer satisfaction and climate change, the report says that over half of companies with a diversity & inclusion metric include it on a discretionary basis. Here’s more:
Of companies with ESG measures, 38% use a D&I metric (or 23% of all companies in the sample). However, well over half of companies with D&I include it on a discretionary basis. Despite seeming prevalence, only 10% of all companies in the overall sample include a D&I metric with a formal weighting in executive incentives.
This trend speaks to many Boards’ traditional hesitation to set and disclose formal targets around D&I initiatives, likely due both to general discomfort around setting “quotas” and optics as well as risks associated with disclosing performance that may be subject to external criticism. In addition, many companies recognize that “hard” metrics of representation in an employee population do not capture the cultural aspect of a truly inclusive organization – measuring “Diversity” results without assessing “Inclusion” is an incomplete answer. A more balanced assessment may require discretion and judgement.
As much as there’s hesitation to disclose formal D&I targets, there may be increased demand for companies to do so. Debate about the proper way to incentivize progress on diversity & inclusion efforts will likely continue and as the report notes, existing examples of how companies have integrated social metrics into incentive plans will prove helpful for other companies as they step forward. The same will also likely be true for other sustainability metrics.
We’ll be addressing ESG & use of other non-financial metrics in incentive plans, along with related issues, at our “Proxy Disclosure & Executive Pay Conferences” – coming up virtually September 21st – 23rd. Register today to get the latest essential & practical guidance, direct from the experts. Here are the agendas – 15 panels over 3 days, plus interactive roundtables to discuss pressing topics.