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There's been an uptick in companies tying their executives' compensation packages with diversity goals. But experts say companies are often taking a short-term approach to the issue—a disconnect that could limit the effectiveness of the idea, given that successful diversity, equity, and inclusion (DE&I) strategies require long-term efforts.

Incentives tied to DE&I goals usually account for 10% or less of executives' annual compensation, said Aalap Shah, a managing director at executive compensation consultancy Pearl Meyer.

Assuming a company makes annual incentives 20% of its total executive compensation, DE&I goals would only have a 2% bearing on executives' overall pay.

"You're starting to talk about an infinitesimally small impact on an executive's compensation," Shah said.

That isn't to say it's not a good thing more companies are adopting DE&I goals as metrics for executive compensation, Shah said. He notes it's just not having as significant of an impact on executives' behavior as it could. One way to make DE&I have more weight would be to increase the percentage of the annual incentive package that DE&I accounts for.

"I'm not suggesting that it should be 100% or 50% even," Shah said. "But to have a meaningful percentage—20% or so—I think demonstrates some real commitment."

However, given that DE&I issues tend to be "multi-year journeys" for companies, it seems to warrant that DE&I metrics are included as metrics in companies' long-term incentive programs, Shah said.

This gives executives more of a motivation to achieve DE&I goals, and gives companies the time they need to take on complicated DE&I challenges.

Looking forward, Shah said he thinks more companies will embrace integrating DE&I goals into long-term incentive programs, but this will prompt a number of interesting questions.

"Traditionally, shareholders have been way more accepting of subjective-ish, nonfinancial metrics in an annual program," Shah said. "But, in a long-term program, there's been a bit of a rigidity in most industries to anything that is nonfinancial or nonmarket-based."

It remains to be seen whether shareholders will continue to back tying DE&I goals to incentive programs if it means executives have significantly less skin in the game regarding companies' long-term financial performance, Shah said.

At the heart of the matter will be how shareholders will think of the value of companies, Shah said. They might see value solely as market capitalization, revenue growth, and other financial metrics. Or they may hold a broader view of value that also encompasses the good companies contribute to society.

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