executive compensation

More Companies to Use DE&I as Executive Compensation Metric

The concept of diversity, equity, and inclusion (DE&I) is seeping into the fabric of the modern business. This set of objectives is a key to defining organizations as socially responsible. Here’s how DE&I as executive compensation is revolutionizing corporate culture.

DE&I Compared with ESG

DE&I incentive programs are built on the long-term pay incentive model that suggests a more diverse workforce will lead to a better return on investment. These metrics are associated with another emerging paradigm called ESG, which stands for a business’s Environmental, Social, and Governance concerns. ESG ratings published by S&P Global now help shape investor decisions on how they invest their money.

No universal standards have yet emerged for measuring DE&I or ESG, as competing research firms offer different data and methodologies. It’s important to note that DE&I can be classified as a subset of the “S” in ESG.

New Executive Incentives for Corporations

Even though the overall impact of DE&I on pay isn’t significant, it’s opening doors to new types of executive incentives. It is already inspiring business leaders to cultivate a more diverse workforce. These incentives are typically designed to reward business leaders for reaching short-term milestones.

On the other hand, McDonald’s and Starbucks have developed long-term incentive programs built on DE&I development. McDonald’s has set a specific 2025 goal to increase women in leadership roles from 37 to 45 percent. Starbucks announced its new executive incentive plan tied to ESG goals in October 2020 that affected annual bonuses. The company’s goal is to reward senior leaders for driving greater diversity and overall sustainability.

Metrics for Achieving Core Values

Each company must design its own DE&I as an executive compensation program. McDonald’s program measures this package based on the degree executives contribute to championing its core values, such as improving diversity to be more inclusive of women and minority groups. The more specific metrics for the company’s short-term incentive program include operating income growth and systemwide sales growth. An additional lesser-weighed metric relates to human capital.

Final Thoughts

Businesses are increasingly looking at DE&I as executive compensation. It’s a sign the business world and its investors are becoming more aware of how corporate leaders must set examples for themes of social responsibility. The concept of DE&I is still in its infancy, but it’s now on the radar of HR departments as a strategy to attract quality talent.

If you need consulting on human resources, our experienced team is here to assist you. Contact us at  McKnight Associates, Inc. for more information on how we can improve your university, college, school, or other organization.