Are DEI Metrics in Executive Incentive Plans Gone for Good?

Many U.S. companies have announced they are discontinuing or reframing policies, programs and goals that promote diversity, equity and inclusion (DEI) toward employees, vendors and external partners. This is primarily the result of recent White House executive orders (EOs) that seek to end DEI policies and programs within the federal government and require federal contractors to certify they are not operating “unlawful” DEI programs. The orders and ancillary memorandums also have direct and tangential ramifications for private employers.

Legal battles will likely continue, as federal judges in recent weeks blocked and then unblocked enforcement of the EOs.

While the EOs have accelerated market movement in this space, it is important to acknowledge that some companies had already started reviewing and discontinuing aspects of their DEI programs in the summer of 2023, before the Presidential election.

At that time, the U.S. Supreme Court had struck down race-based affirmative action programs in the case Students for Fair Admissions, Inc. v. Harvard College (SFFA v. Harvard). Meanwhile, at the time this article is being written, a few notable companies have reaffirmed their commitment to DEI, arguing that it is material to their business and talent strategies. These companies also have gained the support of their shareholders when they put their DEI programs to a vote.

(Editor’s note: WorldatWork recently switched its usage of the terms “diversity, equity and inclusion” and “diversity, equity, inclusion and belonging” to “equitable and diverse workplaces.” While these terms and related strategies remain core to the association’s mission, they have become polarizing in some audiences and organizations where our members work. This polarization can detract from our broader goal: fostering workplace equity.)

Implications to DEI Policies and Programs

Well-designed DEI programs and policies are meant to promote a culture of inclusion and belonging so that all employees may thrive in advancing the company’s business strategy, fostering innovation, deepening competitive advantage and enhancing corporate performance. Well-implemented DEI programs and policies focus on fair and “barrier-free” talent practices regardless of background. These programs also establish a clear link to how a business creates sustainable value to its stakeholders.

In the current environment, it is a matter of practicality that most U.S. companies have sought to review — and mitigate risk from — their DEI programs and policies. Certain practices, such as the explicit measurement of representation goals in workforce or in leadership, likely will be subject to heightened prosecutorial risks. In general, DEI programs, policies and goals will be subject to greater scrutiny regardless of whether they are “illegal” or “discriminatory” in nature. However, this presents a dilemma for global companies, as these DEI sensitivities have not extended to other regions such as Europe. In fact, some large global companies have explicitly indicated a bifurcation in their approach to DEI — a reframing or de-emphasis in the U.S. while staying the course in Europe and other markets.

DEI Metrics in Executive Incentives

According to WTW research, DEI metrics are some of the most common executive incentive metrics among S&P 500 companies (57% of S&P 500 companies, based on proxy filings up to August 2024). Prevalence slightly declined (down 1% vs. the same time last year) after the SFFA v. Harvard decision (Figure 1 and Table 1). Also, six additional companies prospectively disclosed the removal of DEI metrics in the following year.

While it is still early to make trend conclusions from the 2025 proxy season, DEI metric prevalence likely will drop from 2024 levels as more companies consider removing or reframing their DEI approach (and measurement). While investors, in principle, prefer quantitative and results-based metrics, explicit quantitative representation goals likely will be removed from executive incentive plans due to increased legal risk.

Companies that decide to reframe DEI priorities have generally started dropping the “D” and “E” from their program language and objectives. Instead, they are pivoting to inclusiveness for all, sense of belonging, and underscoring the importance of a healthy and distinct culture and value set.

We will likely see a greater focus on inclusive culture, employee engagement and a more qualitative-assessment approach to measure progress. Companies with a European presence should be mindful of regional regulatory requirements. Consider, for example, the pay gap/equity requirements reflected in the European Union Pay Transparency Directive, similar regulations in other markets and emerging broader DEI-related regulations around the world.

What Should Companies Do?

The bottom line is that companies should evaluate the risks between (1) backlash from their stakeholders (e.g., customers, employees, non-U.S. parties) by reframing or backtracking on DEI and (2) the reputational and litigation risks from continuing their DEI programs. It is a delicate balance that will look different for companies across industries and with different target customer segment(s). Additionally, those that fail to make a strong case for how DEI policies and programs advance their business strategy and drive sustainable value creation likely will be exposed to the greatest risks.

Employers should understand not every DEI metric has the same level of risk depending on how it is measured. While higher risks are associated with quantitative representation goals, investors may push back on qualitative, judgment-based DEI metrics that may be perceived negatively due to the lack of objective measurement criteria, especially when payout is higher than what financial results would otherwise provide (Figure 2).

In closing, here are a few principles that may help you see through the noise and sensitivities:

1. Treat DEI like any business priority. Evaluate business impact, legality and reputational risk of DEI programs/metrics consistent with other business risk factors.
2. Be specific in measurement. Consider other impactful ways (see Figure 2) to measure DEI progress linked to business performance beyond leadership and workforce representation.
3. Bolster the supporting infrastructure. Review recruiting and talent practices (e.g., performance management, career decisions, talent development) to ensure robust governance and documentation.
4. Affirm the global context. Be mindful about reactions and regulatory ramifications in other markets when reacting to sensitivities in the U.S.
5. Provide clear and thoughtful messaging to stakeholders. Communicate DEI in terms of company values and business case; address nuances by tailoring messaging to each stakeholder group.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Equitable and Diverse Workplaces
• Executive Compensation
• Organizational Performance