Should Employers Tie Executive Compensation to DE&I Goals?

It is now widely accepted that achieving high levels of diversity, equity and inclusion (DE&I) can create a competitive advantage and drive individual and organizational performance. However, organizations seeking to advance in these areas face a strategic alignment challenge: how to embed DE&I priorities into the heart of a company’s business strategy. 

This requires integrating DE&I practices into all aspects of the organization, including behaviors, structures and systems. Such an onerous challenge demands disciplined execution. It is therefore not surprising that many of the organizations that have recently made bold and unprecedented commitments to advance DE&I goals, including Mercer’s estimate of 15 percent to 20 percent of the S&P 500, are aligning executive pay with DE&I performance.

Using compensation to achieve DE&I strategic alignment is particularly promising since organizations extensively use incentives for other financial and business goals. Executives understand incentives, which apparently help align their individual goals to their firm’s strategic priorities. Why reinvent the wheel? 

Moreover, linking executive pay to DE&I goals has a multiplier effect. Once strategic alignment is achieved at the senior management level, it’s easier to cascade those goals to middle managers and the entire organization. When executives have a stake in the matter, they are more likely to advocate creative ways to advance DE&I goals, such as by awarding corporate matching gifts and spot bonuses. 

Pay is perhaps the most powerful motivator of performance for most people, research shows. As companies set aggressive DE&I goals—for example, Microsoft, Salesforce and Uber recently announced plans to double Black representation in their leadership teams—motivating executives to deliver results is key. To put it simply, if diversity is a strategic imperative and good for business, then it should be compensated as such. 

The unusual challenges of managing in a post-COVID-19 era, as well as an increasing number of environmental, social, governance and business priorities, are competing for executive attention. Executives need extra motivation to pursue multiyear initiatives that produce long-term change. Long-term incentives are perfectly suited for this, especially when they are complemented with short-term incentives that reward incremental progress. While in a perfect world no executive should have to be compensated to drive DE&I efforts, the painfully slow progress over the last few decades and the urgent need for change call for such radical intervention.

Every HR intervention sends a signal about what the company values. At a time when some employers are merely paying lip service to DE&I and “woke-washing” is rife, organizations need to show that they’re serious. When companies such as Sodexo and Procter & Gamble link 10 percent of executive pay to DE&I goals, for example, they are essentially telling senior leaders to allocate that percentage of their time and energy to DE&I issues. To employees, investors and board members, these companies are communicating that building a diverse and inclusive workplace culture is a top priority and that executives will be held accountable for achieving it. 

There also is often a need to demonstrate to those outside the business—consumers, suppliers, activists, regulators and the media—that DE&I matters to the company. There is no better way to get the message across to a skeptical audience than by linking executive pay to the achievement of DE&I goals. That’s how to show stakeholders that you put your money where your mouth is. 

Ed Hasan is the CEO of Kaizen Human Capital, an organizational development and HR consultancy in the Washington, D.C., and Los Angeles metro areas. He also is an adjunct professor at Georgetown University and an instructor for SHRM. 

Financial incentives undermine intrinsic motivation or interest in a task. 

With the business and moral case for DE&I becoming overwhelmingly compelling in recent years, it is hard to justify why executives need financial incentives to motivate them to do the right thing. For 21st century business leaders, increasing DE&I shouldn’t be an afterthought or a responsibility outsourced to HR—it must be an essential element of their jobs for which they receive a base salary.

The problem with financial incentives is that they undermine intrinsic motivation or interest in a task because people tend to think they are working for just the reward. Even if intrinsic motivation isn’t enough for executives, what about using other recognition and rewards programs that are more inclusive, such as paid time off for volunteering and peer-to-peer recognition awards? That way, all employees advancing DE&I goals can participate—not just executives. These types of programs also have more impact because they celebrate ongoing efforts and are more cost-effective. 

The optics and ethics of financial incentives also can be problematic. Senior executives, who are typically in the more powerful and privileged demographic (white men), are being paid to hire and treat historically marginalized and oppressed people fairly. Meanwhile, most of the hands-on DE&I work tends to be done by historically excluded groups and middle managers, who aren’t usually compensated for their contributions. 

Most organizations tying incentives to DE&I goals do so only in their annual plans, creating a serious mismatch between the problem and solutions, as DE&I work takes multiple years and is more suited for long-term incentive plans. This mismatch is more pronounced when organizations set DE&I stretch goals.

FirstEnergy, an Ohio-based utility, for example, tied 10 percent (and later 15 percent) of executives’ annual bonuses to three DE&I goals, including increasing diversity in the candidate pool for managerial positions and improving workplace climate. Perhaps not surprisingly, there was no payout in the first year and only a partial payout in the second, according to the company. Building a diverse and inclusive workplace takes time, and company leaders should recognize and celebrate short-term efforts as well as long-term results.

To be clear, incentives do work and can be leveraged to advance DE&I goals. But they sometimes lead to undesirable results. Volkswagen’s “Dieselgate” and Wells Fargo’s cross-selling scandal are examples of how executive incentives can lead to unethical behavior. If the benefit is worth the risk, chances are that some executives will be tempted to do wrong things, such as falsify DE&I data or make questionable trade-offs.

A recent study lends credence to such concerns. Researchers found that in organizations with aggressive DE&I goals, high-potential women who are considered critical to meeting diversity targets are given a pay premium (earning more than their male counterparts), whereas women overall continue to experience a pay penalty or inequity. The risk that organizations will focus on employees with “diversity value” at the expense of a broader segment of their workforce to achieve their goal is real and alarming. 

Another potentially counterproductive outcome of linking executive pay to DE&I goals, given the tendency to focus narrowly on diversity (representation) metrics, is that organizations would not pay sufficient attention to equity and inclusion issues. The consequence? Retaining a diverse workforce becomes a serious challenge due to inequities and a noninclusive workplace culture; overall, DE&I progress is stalled and long-term sustainable change proves elusive.  

Ifedapo Adeleye is faculty director of the Master’s in Human Resources Management program at Georgetown University in Washington, D.C. He conducts research and advises clients on inclusion issues.