The Advisors' Blog

– Liz Dunshee

I blogged a couple months ago that Starbucks would be tying executive pay to diversity targets. Around the same time, Medtronic released its 2020 Integrated Performance Report and announced progress on several E&S issues – including pay equity – and said that it would be linking compensation & advancement opportunities to diversity, equity & inclusion goals. See this Willis Towers Watson memo for more data on D&I commitments and a prediction that more companies will link diversity achievement to executive pay in the coming year.

As more companies move in this direction, this Hunton Andrews Kurth blog offers a few points to consider so that the program can both motivate executives and avoid awkward proxy disclosure. Here’s an excerpt:

To that end, consider having the D&I metric designed to act only as a downward pay modifier to a financial performance metric (similar to how absolute shareholder return can downward modify the pay outcome of an otherwise successful relative total shareholder return formula). That way:

– The status quo of financially incentivizing the executives towards the success of the D&I initiative is maintained.

– Positive proxy disclosure results if both the financial target and the D&I target are satisfied.

– Positive enforcement disclosure results if the financial target is satisfied but the D&I target is not satisfied (i.e., this outcome is not good from the perspective of the D&I initiative or from the executive’s compensation expectations, but from a proxy disclosure perspective the CD&A would disclose that failure of the D&I initiative resulted in a downward adjustment to the pay formula).

– Semi-positive disclosure results if the financial target is not satisfied but the D&I target is satisfied (i.e., this outcome is not good for long-term shareholders, but is good from a social policy perspective), though the answer is that the performance-based pay formula resulted in a $0.00 payout.

– But more importantly, negative proxy disclosure can be softened if both the financial target and the D&I target are not satisfied because, depending on design, only the missed financial target needs to be disclosed. To this point, if the sole purpose of the D&I metric was to act as a negative modifier to a financial metric (i.e., the D&I metric can only downward adjust a payout and in no circumstances act to upward adjust a payout), then awkward disclosure of the missed D&I target might be avoided.