- The Supreme Court decision on affirmative action doesn't directly affect businesses. But now is a good time to review executive compensation and incentives tied to DEI metrics under privilege with an employment attorney.
- Not all DEI incentives are equal. Are yours tied to short-term or long-term incentives? Are they related to hiring, retention or creating inclusive programs?
- Take a holistic approach. Don't focus only on the “D” in DEI by creating only diversity- and hiring-related goals; examine ways to increase equity and inclusion as well.
Diversity, equity and inclusion (DEI) programs are successful when they are incentivized, as seen by the significant leap in hiring people of color at S&P 100 companies in 2021.
But following the Supreme Court's June ruling against affirmative action, businesses are taking another look at their DEI programs and questioning if similar legal action may be taken against employers. One area being examined is tying DEI benchmarks to executive compensation.
Although this tie has been legally challenged in certain cases, the Supreme Court ruling itself applies only to college admissions and has not changed the law related to employment practices. That said, the current scrutiny could serve as a catalyst for companies to re-examine their DEI-related incentives, said Michael Siu, senior director, executive compensation and board advisory for WTW.
“Where DEI has been considered as part of the executive incentives either as a standalone metric or as part of the assessment of the executives’ individual achievements, boards are keen to understand that their commitments on top management and workforce representations continue to be compliant with applicable laws,” Siu said. “Companies need to be mindful that their DEI programs and talent processes do not run afoul of these laws.”
The Intricacies of Tying DEI Metrics to Executive Incentives
More companies have begun tying executive compensation to DEI metrics in recent years — in 2021, 27% of S&P 500 businesses were doing so, compared to less than half that amount before 2020.
One critique that has emerged is that some of the incentives are too short-sighted. Some experts suggest that rather than tying DEI goals to short-term incentives such as annual bonuses, they instead should align with long-term incentives, such as stock options. This would better support long-term DEI initiatives rather than quick or impulsive initiatives.
While consulting with employment attorneys to conduct a privileged review of their DEI-related compensation, businesses should examine their specific approach to incentives.
DEI-related goals are now one of the most common benchmarks used in public companies' executive incentive plans that do not center around financial metrics. Some are related to achieving a certain percentage increase of women or diverse employees. Others are tied to creating internal initiatives that boost inclusiveness. Some look at hiring, while others instead seek to improve retention.
“Employee resource groups and other DEI efforts such as having a diverse set of candidates or interview panels to promote diversity and belonging tend to have a lower risk profile,” Siu said.
He noted that using race-related quotas or specifically considering race when making hiring decisions has been, and continues to be, illegal.
After recent requirements from the U.S. Securities and Exchange Commission (SEC) that publicly traded companies disclose human capital metrics, such as diversity breakdowns, other similar rules have followed. The Nasdaq's new board diversity rule sets new standards related to having board directors who are female, LGBTQ+ or from an underrepresented minority.
“It is hoped that disclosure by peers will provide much-needed comparability,” Siu said. “This discipline, together with the need for regular reporting to the board, will have an impact on holding management accountable for delivering on their diversity goals. This is without regard to whether these goals are tied to executive pay outcomes.”
Moving Forward with a Holistic Outlook
Executive compensation is not the only way to boost DEI goals — and some suggest that companies should not depend on incentives to meet those goals.
“Many such metrics that exist today are qualitative in nature, and many companies remain committed to their DEI goals regardless of whether they incorporate such metrics within their compensation programs,” said Greg Stoeckel, managing director and consulting team leader at Pearl Meyer.
In fact, he added, “DEI needs to be about culture, not compensation. Executives play a pivotal role in culture by setting the 'tone at the top.' Effective leadership assessment, development and coaching is the best way to maintain progress and effectiveness when it comes to achieving DEI goals.”
With the current concerns of legal challenges, Siu suggests that companies focus their goals — and, when applicable, executive incentives — on the full scope of DEI rather than focusing only on diversity and hiring.
“Companies should develop a DEI strategy that gives attention to diversity, equity and inclusion equally — developing a holistic approach to ensure that diverse views are heard and valued, and employees have a sense of belonging to the organization and its purpose,” Siu said.
He urged companies to avoid “greenwashing” or “virtue signaling” by creating DEI goals or incentives with nothing to back them up. Well before tying a DEI metric to its executive incentive plan, a business should ensure it has the talent processes and infrastructure in place to remove biases and actually carry out its stated DEI goals.
The scrutiny prompted by the Supreme Court's affirmative action decision may lead to a flurry of evaluations by companies to reaffirm the legality of their DEI incentives, but in most cases it's not in their best interest to make hasty changes.
“The recent SCOTUS decision is simply another lens through which to view a company's DEI objectives and goals,” Stoeckel said. “As with any complex issue, it's important to consider multiple perspectives in order to maximize effectiveness and minimize unintended consequences.”
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