Business leaders have long been saying the right things about racial and gender inclusion, with only modest improvements to show for it. But as diversity becomes an ever-greater focus of Wall Street, employees, and the public, more corporate boards are aligning executives’ pay with their platitudes.
A number of boldface-name companies are making bonuses partially contingent on measurable progress on gender and racial equity. But the shift doesn’t yet add up to a mad rush: A mere 97 of the companies in the Russell 3000 (or 3.2%) have at least one diversity goal for at least one top executive, according to Main Data Group.
Aalap Shah, a managing director at Pearl Meyer, says that as recently as 2018, when he spoke to executives and boards about diversity as a factor in compensation, he’d get quizzical looks. But since last summer, companies are listening up, lest they be seen as out of step.
Whatever metrics companies choose, they’ll be more likely to result in enduring changes if they’re tied to long-term incentive packages rather than annual bonuses. History suggests that CEOs who miss targets may not actually face a pay cut, as boards have wide discretion to change compensation based on extenuating circumstances.
It’s possible, though, that boards won’t attempt such maneuvers around diversity, since they’d risk losing the trust of their workforces, customers, and investors. Compensation experts note that companies’ actions on diversity already get plenty of public scrutiny, which in turn could fuel a virtuous cycle of adoption of concrete targets. Says Pearl Meyer’s Shah, “This is a true cultural shift.”