Use of Diversity, Equity & Inclusion (DE&I) Metrics in the S&P 500

February 2, 2021

  • Society at large and investors are increasing pressure on organizations to ensure their talent base more closely reflects our diverse population
  • 20% of S&P500 companies are linking short-term (STI) executive compensation to diversity and/or including diversity as an executive accomplishment in their disclosures
  • When Diversity, Equity, and Inclusion (DEI) is used as an incentive measure, it is most often part of a weighted scorecard or a weighted measure up to approximately 20% of STI

 

Introduction

Investors and corporations recognize that diversity on boards and in the workforce, while important, has been slow in coming. This past year with COVID-19, civil unrest, and divisive politics, the focus on diversity, equity and inclusion (DEI) has been accelerated. Historically, organizations such as 50/50 Women on Boards (formerly 2020 Women on Boards), the Executive Leadership Council, and Latino Corporate Directors Association were founded to encourage more boards to bring qualified women and people of color into their ranks. This year’s proxy season should prove interesting, where the proverbial “rubber hits the road” as some investors have announced plans to vote against the Nominating and Governance chairperson if their companies do not disclose the gender and racial makeup of their boards.

“DEI is becoming a strategic differentiator in talent acquisition and corporate performance. However, corporations admit that they need to raise their game in this regard. To this end, our team at Farient continues to see DEI metrics introduced into more executive compensation plans.” —Eric Hoffmann, Leader, Information Services, Farient Advisors

Corporations also are expanding DEI initiatives beyond the boardroom. For example, Starbucks (SBUX) recently announced its commitment to a “Culture of Inclusion, Diversity, and Equity”, along with specific, measurable action steps to create an enduring diverse, and equitable workplace. Salesforce (CRM) has announced initiatives to increase racial diversity company-wide. Walmart (WMT) announced plans to release a diversity report twice annually while “pledg[ing] to increase career advancement opportunities for women and people of color.” Apple (AAPL) also announced a set of new projects as part of its “$100 million Racial Equity and Justice Initiative (REJI) to help dismantle systemic barriers to opportunity and to combat injustices faced by communities of color.”

Farient and its partners in the Global Governance and Executive Compensation Group (GECN Group), of which Farient is a founding partner, recently published “2021 and Beyond: Global Trends in Stakeholder Incentives.” This is the fourth in a series of Global Trends research initiatives that have looked at a range of relevant topics including Board Composition and Structure, Investor Engagement, and this year’s Stakeholder Incentives. Our global research explores stakeholder metrics in executive compensation plans at approximately 500 companies across six geographic regions, using the S&P 100 and the TSX 60 in North America.

For this week’s Farient Brief, we focus exclusively on U.S.-based companies and expand the research universe from the S&P 100 which we used in the global research, to the S&P 500. In addition, this data in this Farient Brief exclusively focuses on DEI measures.

 To Whom Much is Given, Much is Expected

In our review of S&P 500 compensation plans, we found 20% of the S&P 500 (102 companies) either include DEI metrics in their executive incentive plans or cite DEI as an “accomplishment” in their scorecard evaluation. For example, State Street Global (STT) declared in its proxy that its CEO broadened the composition of its Management Committee and its most senior strategy and policy-making team to improve diversity.

As reflected in our global research, the use of DEI metrics varies significantly by industry. For example, 10% of companies in the Consumer Discretionary industry use DEI metrics, while approximately one-third of financials and utilities use such metrics.

Percentage of Companies using DEI Metrics in Executive Pay Plans Among S&P500

Different Strokes

Not surprisingly, the majority of the companies we reviewed include DEI metrics in their short-term incentive plans. Only two companies, Prudential Insurance (PRU) and Altria (MO), link DEI goals to their long-term awards, each with a different approach:

  • Case 1: Altria’s DEI metrics are part of a larger strategic scorecard, determining 50% of the long-term incentive payout for all members of their executive team
  • Case 2: Prudential Financial calculates the increasing percentage of “diverse persons” as a modifier which could increase or decrease the final long-term incentive award of their entire executive team by up to 10%

Approximately 50% of S&P 500 companies use a weighted measure or scorecard, similar to the Altria example above, which generally includes other measures in addition to DEI. 38% of our S&P 500 data set use board discretion. Only 8 companies used the modifier approach in their STI like Prudential Financial.

Structure of DEI Awards Among Companies with DEI Metrics

The structure of Thermo Fisher Scientific’s (TMO) short-term incentive plan is a good example of the scorecard approach. TMO bundles their DEI initiatives into a scorecard element along with Customer Allegiance and other non-financial metrics. This portion of the scorecard determines 30% of the short-term payout with the other 70% tied to financial metrics.

The Drumbeat of Broader Influence

In addition to increasing DEI initiatives and outcomes in their own organizations, seven companies in our study referenced efforts to increase diversity among suppliers and partners who provide services to their organizations. Companies that have broadened their DEI initiatives beyond their own organizations include:

  • Microsoft (MSFT): As part of CEO Satya Nadella’s individual performance scorecard and defined goals, he was recognized for “working to increase diversity among Microsoft suppliers and partners”
  • Verizon (VZ): Diversity goals have been included in Verizon’s executive compensation plan for several years. This measure links 5% of short -term compensation to diversity and sustainability goals. To earn a target incentive, at least 60% of the U.S.-based workforce needs to be composed of minority and female employees and at least $5.2 billion of overall supplier spending needs to be directed toward minority- and female-owned firms
  • Southern Company (SO): The CEO and CFO were rewarded for improving the representation of minorities and women in leadership and across the organization, achieving top quartile performance on DiversityInc rankings and meeting spending targets with diverse suppliers

Large companies with recognizable brands and influence are walking the talk and leading by example. They also are encouraging downstream suppliers and partners to improve their DEI as well, often as a condition of doing business.

The Takeaways

DEI metrics in compensation plans may serve as a strong signaling device to stakeholders, but may not be the immediate answer for every company. Like all decisions around executive compensation plan design, the inclusion of DEI metrics is a balancing act between showcasing and focusing on certain strategic goals versus risking higher complexity in the pay program.

If your company is considering DEI metrics in its executive compensation program, Farient suggests that you:

  • Evaluate your company’s overall DEI position and communication strategy and assess whether linking the plan to a DEI measure will achieve the desired outcome
  • Diagnose the root causes of why diversity needs improvement to ensure that the company is attacking the right issues and establishing the right measures
  • Consider whether diversity should be targeted at the corporate, business unit, or individual level. For example, consider targeting areas where there may be a  lack of diversity in specific roles as a result of recruiting practices, geography, and/or opportunity
  • Pilot measures and goals to ensure the company can access credible data on a timely basis and establish a baseline for goal-setting
  • After a pilot program, use specific, measurable goals, if possible
  • Consult your legal advisor to ensure that DEI initiatives don’t run afoul of federal and local affirmative action laws

Corporations are on a journey toward greater inclusiveness and equity for all. Although the process is complex, there is now a palpable urgency

 

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