As the conversation evolves around tying diversity and inclusion metrics to executive pay, one criticism of the practice has been that equity, diversity and inclusion should be intrinsic to good company governance, embedded in the culture, and a basic expectation of leadership – in other words, not something that should require additional incentive in the form of compensation.
As companies struggle with increasing expectations from investors, employees, customers and other stakeholders around transparency of diversity progress and goals, the question of whether to tie D&I metrics to pay has engendered considerable debate. Those in favor believe that “what gets measured gets done,” while others have warned that quantifying basic cultural expectations into incentive plan goals could have the opposite of the intended effect.
A new Pay Governance paper describes an interesting alternative: the use of a scorecard that carries only negative compensation potential (in other words, only the stick, not the carrot). Using the real-life example of a client company, the article explains that although the company had a long-term and effective commitment to diversity and tracked progress internally, the Compensation Committee was concerned about the lack of a D&I factor in the incentive plan.
However, instead of adding a standalone metric, the company decided to build a modifier using a scorecard of various D&I and human capital factors. An illustration (sample only) of such a scorecard included items such as engagement scores for diverse employees, increasing the percentage of diverse hires and promotions, improving diverse representation at management and board levels, and a succession plan for senior leaders that included diverse candidates for every role. A score of less than 50 points would result in a 5 percentage point reduction while less than 40 points would lead to a 10 percentage point reduction in the annual incentive plan – with no commensurate upside potential.
The article referred to this as a “culturally congruent” approach, meaning that it avoids offering bonuses for supporting the company’s stated cultural imperatives, but does hold leadership accountable when that culture is not maintained. It is an interesting suggestion and relieves the concern expressed by some that “upside leverage on EESG and DEI cultural imperatives is inconsistent with core values.” As companies continue to experiment with which strategies lead to improved outcomes for them, we will likely see approaches across the spectrum, including the scorecard approach.