Diversity, equity and inclusion (DEI) is a relative newcomer to the key performance metrics (KPIs) used to determine executive compensation. The seeds of that trend were planted with the introduction of environmental, social and governance (ESG) in the mid-2000s. As early as 2006, Fortune 500 companies have incorporated ESG metrics into their executive compensation models.
Accountability through Executive Compensation
Eighty percent of Fair360’s Top 50 companies have linked executive compensation to representation metrics in 2023. In 2022, 76% of the Top 50 companies made a similar commitment. This demonstrated a growing effort to encourage leadership accountability regarding workplace fairness.
This trend can be seen in recent changes to compensation models for Top 50 companies. Medtronic (No. 2 on the 2023 Top 50 Companies list) established metrics for monitoring DEI in 2015 but only began tying those metrics to executive compensation in 2022.
In 2021, Mastercard (No. 1 on the 2023 Top 50 Companies list) announced a new compensation model that linked executive pay to “three global ESG priorities: carbon neutrality, financial inclusion and gender pay parity.”
Such compensation packages can serve as incentives for leadership accountability at all levels of management. C-suite compensation, for example, is increasingly becoming tied to an organization’s ability to meet DEI goals. Among all surveyed companies, 26% of CEOs had a specific percentage of their compensation linked to diversity results in 2021. That grew to 30% in 2022 and 32% in 2023.
READ MORE: ESG: A New Era of Trust, Transparency and Reliability
Establishing Supplier Diversity Goals
Supplier diversity is a DEI focus driving executive compensation for Top 50 companies. In 2023, 42% of CEOs, 40% of CHROs (Chief Human Resources Officers) and 20% of CAOs (Chief Administration Officers) at Top 50 companies had annual compensation determined partly by meeting supplier diversity goals. These are all significant increases from the previous year.
In 2022, supplier diversity affected the compensation of 26% of CEOs, 26% of CHROs and 12% of CAOs at Top 50 companies. That, too, represented an improvement from 2021.
Incentivizing Executive Diversity Councils
Unsurprisingly, Executive Diversity Councils (EDCs) have also been affected by the growing emphasis on fairness KPIs. Eighty-two percent of the Top 50 companies tied their EDC’s compensation to DEI metrics in 2023, up 2% from 2022.
The number of companies connecting EDC compensation to DEI goals isn’t the only thing increasing. Compensation tied to DEI success is also on the rise. For the Top 50 companies in 2022, the average percentage of compensation connected to DEI goals for EDCs was 8.6%. The following year, the average grew to 10.7%.
Pushback against Executive Compensation Packages
Leadership accountability models have faced several challenges that use representation metrics to determine executive pay. Most notable are several lawsuits filed in 2022 and 2023.
The theme of many of these lawsuits is that such compensation packages create “outright racial discrimination,” according to one court filing. Another complaint is that prioritizing DEI constitutes a failure to assess “social and political issues and risk to protect shareholders,” according to another filing.
Because these threats of legal action have only come within the last year, it’s not yet clear if the pushback they represent will have a cooling effect on DEI-motivated compensation packages. The current trend shows a growing enthusiasm among U.S. companies for using such packages to hold leaders accountable to workplace fairness goals.
