More companies adding diversity measures to executive compensation formulas

The inclusion of diversity, equity and inclusion (DEI) metrics as compensation incentives is quickly becoming one of the biggest trends in executive compensation pay plans.

Nearly 46% of companies in the S&P 500 used DEI metrics in pay plans last year, up from 30% a year ago, according to a recent report from executive compensation firm Semler Brossy Consulting Group.

What's more difficult is figuring out the parameters of the metrics.

"There's a really wide range of how companies use DE&I in incentive design," said Margaret Hylas, a Semler Brossy principal. "And it's very difficult to tell from the public disclosures exactly how much rigor is in the ones that are not fully and discretely disclosed. But the trend is very clear and very prominent."

"DE&I metrics have been at the top of the list of a lot of nonfinancial metrics that have increased in prevalence in the last few years," she said.

The metrics fall into a broader category of environmental, social and governance metrics that increasingly been have added to compensation formulas in the past several years.

The moves come as investors are demanding more and better information on diversity in the boardroom and the companies as a whole. Also, regulatory and investor pressure is increasing for companies to disclose the diversity of their board.

About 10 states have or are considering implementing board representation mandates for public companies headquartered in their states.

The Nasdaq stock exchange also recently instituted new rules requiring that member companies publicly disclose board level diversity data in a standardized matrix. In addition, if companies do not have at least two diverse directors, they must explain why under the Nasdaq rules.

Hylas advises companies to think thoroughly and carefully about how to use DEI metrics in pay plans. Companies need to focus on the equity and inclusion aspects of the initiatives and not just on easy-to-measure numbers.

True diversity in companies leads to better financial results, several studies have found.

Measurement and disclosure can lead to change. For the past 14 years, St. Catherine University in St. Paul has produced the Minnesota Census of Women in Corporate Leadership. The report measures women's representation on boards and in senior management positions at Minnesota-based public companies.

Diane Fittipaldi, program director of St. Catherine's MBA program and one of the authors of the census, said there are a lot more eyes on measuring diversity on the board side than on the senior leadership side.

In 2021, women made some of the biggest gains in board seats: They now hold 26.7% of the seats among Minnesota's 79 largest companies. Women of color, though, still remain significantly underrepresented, Fittipaldi said.

To diversify, several companies added board seats.

"Boards have increased in size largely to make room for additional members that are diverse, either women, people of color or women of color," Fittipaldi said.

Nationally, women hold 25% of executive officer positions, according to a Korn Ferry report.

But at Minnesota's public companies, they hold only 22.6% of the executive positions.

Slower growth among women and people of color in executive leadership eventually could play a role in slowing the progress of board representation — not to mention the number of women in the C-suites.

Women in executive leadership serve not only as the pipeline for C-suites but also for board positions at other companies.

"Getting into this executive leadership team, at any capacity, whether it's C-suite or not, that also is a pipeline for future CEOs," Fittipaldi added.