The Advisors' Blog

Liz previously blogged about the growing number of companies incorporating ESG metrics – and how ESG in executive compensation is likely here to stay. But ESG can mean a lot of things, and it’s difficult to know sometimes which “ESG” topic is being utilized in executive compensation. While metrics can (and should) vary by industry, one topic that seems to be employed across almost all sectors is DEI, according to an analysis last summer.

To get more granular, Teneo did a deep dive on how companies are specifically incorporating diversity, equity & inclusion metrics into executive compensation. Teneo looked at the largest 100 companies in the Fortune 500, as well as those that “publicized DEI compensation ties or that were otherwise publicly committed to improving DEI performance,” with all but one company in the US. Here are some of the highlights:

– Strong DEI incentive metrics align with the company’s long-term strategy. The most common metric is diverse representation among leadership.

– A Teneo study of S&P 500 companies found that over half of 2021 Sustainability Reports included at least one demographic target, with 42% of companies including both gender and racial/ethnicity goals. By setting goals, companies are treating DEI like any other business priority, ensuring accountability and tracking progress.

– Communicating exactly how much pay is at risk based on DEI performance creates accountability. The most common weighting for DEI metrics in the STI and LTI is 10%. Quantifying the impact on pay is considered more transparent from a shareholder perspective, and the pay affected is viewed as more strongly performance based.

– The most common weighting was 10% of the incentive payout for those that quantified the impact. However, the range of disclosed weightings varied from less than 5% of the bonus to determining 100% of the PSUs earned. There is no universally ideal weighting system, but investors and proxy advisors have questioned whether weighting DEI and other ESG-related metrics below a certain level is effective at holding executives accountable for performance.

– While most companies embedded diversity considerations in their annual incentive, 17% of companies in the study incorporated DEI metrics in long-term incentive (LTI) design, an emerging best practice.

– Emily Sacks-Wilner