Can Executive Compensation Lead to More Corporate Diversity?
BY: Isha Kumar, RBFL Student Editor
Firms often tie executive compensation to corporate social responsibility goals such as increased diversity, energy efficiency, employee wellbeing and product safety. [1] Recently, since 2020, large companies such as Nike, Starbucks and McDonald’s have begun to incentivize executives to achieve diversity hiring goals by increasing executive compensation if these goals are accomplished. [2]
In 2018, only a fifth of S&P 500 companies included a diversity metric in their compensation program, however, by May of 2021, this metric increased to a third of S&P 500 companies.[3] This was in large part due to the protests happening during the summer of 2020. The changing political climate led to prominent business leaders undertaking a pledge to fight racism, and work to recruit and promote minority employees.[4] In addition to the shifting political climate, companies may also be incentivized to tie executive compensation to diversity hiring because it is likely to increase company value. In the long-run, diversity and inclusion will lead to better financial performance and investment returns, therefore justifying the higher CEO pay.[5]
In conjunction with companies employing their own stringent standards and goals related to diversity hiring, there are also various federal and state statutes regulating company diversity. Recently, NASDAQ set out a requirement that each NASDAQ-listed company have at least two diverse board members.[6]
In the coming years, public demand for an increase in diversity hiring initiatives is expected to only increase. It is likely that many smaller companies will follow the path of these larger corporations and link compensation to diversity initiatives.
We will probably have to wait several years before we can observe the actual impacts of implementing the effects of such diversity compensation programs. Companies however should be wary that increasing diversity does not increase effectiveness in itself; simply committing to hiring more diverse employees is not enough, but it is a place to start. It is also important to be aware that only adding a certain number of diverse employees is unlikely to be representative of the amount of diversity that exists in the country. Therefore, while these efforts have the right intentions in mind, companies will have to do more for such initiatives to have meaningful effects.
Sources:
[1] O’Kelly E. McWilliams III & Jennifer Budoff, Why And How To Link ESG Metrics With Exec Compensation, Law360 (July 1, 2021, 1:32 PM), https://www-law360-com.ezproxy.bu.edu/articles/1398378/why-and-how-to-link-esg-metrics-with-exec-compensation
[2] Emily Glazer & Theo Francis, CEO Pay Increasingly Tied to Diversity Goals, Wall St. J., (June 2, 2021, 5:33 AM), https://www.wsj.com/articles/ceos-pledged-to-increase-diversity-now-boards-are-holding-them-to-it-11622626380
[3] Allen Smith, More Companies Use DE&I as Executive Compensation Metric, SHRM, (Jul. 12, 2021), https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/dei-as-executive-compensation-metric.aspx [https://perma.cc/LB99-S49X]
[4] Amelia Lucas, Chipotle will link executive compensation to environmental and diversity goals, CNBC, (Mar. 4, 2021, 12:01 AM), https://www.cnbc.com/2021/03/04/chipotle-will-link-executive-compensation-to-environmental-and-diversity-goals.html [https://perma.cc/2QUG-3ZF7]
[5] Robin J. Ely & David A. Thomas, Getting Serious About Diversity: Enough Already with the Business Case , Harv. Bus. Rev. (Nov. 2020), https://hbr.org/2020/11/getting-serious-about-diversity-enough-already-with-the-business-case[https://perma.cc/2QET-AFLQ]
[6] Public Statement, Allison Herren Lee & Caroline A. Crenshaw, Commissioner, Statement on Nasdaq’s Diversity Proposals – A Positive First Step for Investors, SEC (Aug. 6, 2021), https://www.sec.gov/news/public-statement/statement-nasdaq-diversity-080621 [https://perma.cc/72MF-BMYW]