Just over half (52%) of directors believe diversity and inclusion metrics should be incorporated into incentive plans for the CEO and executive management team, according to a recent Corporate Board Member survey. The report surveyed 258 US public company directors on a variety of compensation, financial performance and governance questions and included analysis from Compensation Advisory Partners. Key findings included:
- Diversity and Inclusion. Although fewer than 10% of companies currently use diversity-related metrics in incentive plans, directors are highly supportive of incorporating diversity and inclusion into compensation decisions. The strong interest in D&I metrics in particular is reflective of increased interest in pay equity and representation, as well as the potential benefits of non-financial metrics (at small weights) within incentive plans.
- Adjustments to Performance Metrics. About half (50%) of directors also said they believe the board should focus on GAAP and adjusted metrics when assessing financial performance, while 39% said adjusted metrics should be the primary focus. When asked what kinds of adjustments were appropriate when assessing performance for incentive plan purposes, the most common responses were changes in accounting rules (81%), changes in tax law (74%) gains/losses on sale of business (46%) and technology breaches (37%). Interestingly, less than a third of directors considered it appropriate to adjust for currency fluctuations (27%) or restructuring costs (6%) despite their high prevalence among adjustments made by companies currently.
- Stock Buybacks. Amid increased attention by the media, politicians and investors on stock buybacks, especially for companies that use earnings per share as a metric, the survey asked directors how companies should deal with buybacks in financial performance assessments. More than a third (35%) said that the impact of share buybacks should be excluded entirely, while 26% said the impact of buybacks should be excluded to the extent buybacks differed from plan and 13% said a range or "corridor" should be applied around planned buybacks, with anything outside the range excluded. Just over a quarter (26%) felt the impact of buybacks should always be included.
- Special Awards. One-time special awards have attracted the ire of proxy advisory firms in recent years. Not surprisingly, however, almost two-thirds (64%) of directors said one-time special retention awards are important to attract and retain top talent, and 85% said those awards should be partially or entirely performance-based.
- Tax Reform. More than a third (38%) of directors said their companies have considered greater use of time-based restricted stock after the change in tax law that eliminated the deduction for performance-based compensation. About 23% said they were considering greater use of discretion in long-term plans. A recent Meridian survey found that the most common change post tax reform has been elimination of 162(m) structures in incentive plans (63%); only 14% reported considering more discretion.