December 1, 2021 Executive Compensation ESG & Human Capital Management Articles

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Before You Look to Add DEI to Incentives… Check the Board Dialogue

The drumbeat to add diversity, equity and inclusion (DEI) metrics to executive incentive design is growing louder. Some companies are already far along on their efforts, and incentive design may naturally extend their strategic priorities. Others are still learning, and the rush to add DEI incentives is at risk of being a “check the box” item that satisfies external audiences without meaning or impact internally.

A DEI program needs specific goals to be meaningful

DEI incentive metrics do not unilaterally make sense for every company and are not the only lever companies can use to hold management teams accountable. How can a board member evaluate if DEI incentive metrics would be meaningful? As with any key initiative, the dialogue surrounding performance management can give clues as to what does or doesn’t make sense at a company.  

Assessing the dialogue at the board level

You can tell a lot about how seriously a company takes an issue by how directors discuss it. DEI efforts are no exception. Before going straight to incentive pay, evaluate how board members assess performance management around DEI.  

  • What information does the board receive on DEI? Is it primarily a report-out on key statistics, or does it go beyond the current state and include details on the company’s long-term strategy and goals?
  • Is the board aware of who leads the charge on the company’s DEI strategy? Can the board hear from those individuals and from diverse members of management?
  • Does the board have visibility on how key DEI statistics have progressed over time? Is the board aware of how progress compares to external and/or peer standards?
  • Are the definitions of success clear? Does the board know what the right goals should be? Is there sufficient room for board dialogue to test the rigor of goals?
  • Are the indicators of “something went wrong” clear to the board? For areas where the company misses the mark, is the board aware of the key drivers and needed course corrections?
  • Does the board discuss messaging and disclosure both internally and externally?

With the investor energy and attention on DEI, it’s worth slowing down to ensure that the board and management culture around DEI is robust and meaningful before thinking about incentives. Many boards and management teams will need to go through a learning process to see what works and what’s important for their organization. But that learning depends on a structure. The goals can change, but boards can insist on quantifiable metrics from the start for performance management. Otherwise, the conversations might go nowhere. 

Determining whether DEI has a role in incentives

Once the board has grounding in the company’s objectives and operations around DEI, it’s time to ask, “Would DEI metrics around incentive design help us achieve our goals?” The type of dialogue boards engage in can inform the answer. In some cases, the lack of board dialogue might lead to adding DEI metrics to force ­process and rigor around DEI initiatives. For other companies in the beginning stages of establishing DEI dashboards, adding metrics may not be meaningful yet. Companies need to articulate success clearly. Without a baseline understanding of DEI or key milestones and goals, management teams have a limited line of sight into how the metrics would be evaluated, and behaviors are unlikely to change materially.

On the other end of the spectrum, healthy, robust dialogue doesn’t predicate incentive metrics. Companies do not need to tie DEI to pay in order to be leaders on that front. Having management teams regularly report on DEI progress to the board, employees and external stakeholders may be sufficient to demonstrate accountability and improvement. For instance, Salesforce published its DEI goals and provided quarterly equality updates while keeping its incentive programs tied strictly to financial performance. Another lever companies can use is factoring progress on DEI initiatives into promotion decisions. Internally, holding back a promotion can send a strong signal of the importance of DEI.

Incentive metrics might come into play if a company has not made significant progress, even with strong board dialogue and oversight. For example, consider a company whose board and management team had focused on DEI, and management regularly presented dashboards with key DEI statistics — and yet the DEI needle moved very little. The company added a weighted scorecard to its incentive design that tied pay to a variety of DEI-related metrics — which got the leadership team’s attention. With higher stakes, the needle started to move. When progress stalled, the leadership team held real shared accountability. Incorporating DEI into pay changed the nature of the dialogue and created accountability for slow progress.

The dialogue around performance management isn’t the litmus test, but it’s a helpful way for boards to assess their company’s performance relative to DEI. While it’s tempting to follow the crowd, companies should establish clear objectives and success measures and evaluate whether incorporating DEI into compensation helps accomplish those objectives. 

View the full article as it was originally published.

Olivia Tay

Olivia Tay

Margaret Hylas

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