Consultants Weigh In on the Future of Diversity Metrics in Incentive Design

Agenda interviewed a number of executive compensation consultants on the challenges employers may face with continuing their practice of tying DEI metrics to incentive plans in the wake of the Supreme Court’s ruling on college admissions.  Experts agree that companies should closely examine their diversity programs and hiring practices  to assess the risks, and evaluate if changes should be made to avoid inference of discrimination in light of the increased political environment.

The practice of including DEI metrics in compensation plans is common – prevalent in 55% of S&P 500 companies according to Semler Brossy. Most often these metrics are discretionary and more qualitative. However, companies have slowly shifted to using weighted diversity metrics where an explicit target needs to be met to achieve a payout. Investors have pushed for more transparency in metrics and rigor in goals, but companies using such metrics may now find themselves caught in the middle of the ESG debate and increased scrutiny of DEI practices. A Semler Brossy consultant stated, “Right now, given the uncertainty of the legal and political environment, you wouldn’t add that [weighted metric] today if you didn’t already have it,” noting that while diversity programs will continue to move forward, companies will likely “pause on how explicit and quantitative and how discretely measured these things are.”

Employers should keep in mind that DEI programs are legal as long as they are developed to align with Title VII. Efforts to increase workforce diversity and linking executive compensation metrics to these acceptable practices also remain lawful, provided actual employment decisions are not in any way influenced by race, ethnicity, or gender (or other protected characteristics). A Covington & Burling representative indicated that, “There are dozens of ways to increase representation that do not involve specific hiring decisions and are entirely lawful, such as expanding the sourcing of entry- level applicants to a broader swath of colleges and universities.”  

A Fordham Law professor suggests this may be the time for companies to get creative about how pay design is structured. While some may go back to making ESG achievements based on discretionary measures, it is also opportunity to “think about different ways to include compensation in targets and still keep their integrity.”