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The Exec Comp Landscape Is Changing

The list is growing.  

Uber. Wells Fargo. Starbucks. PepsiCo.

These are a handful of the high-profile companies whose CEOs have publicly announced their intention to tie executive compensation to the organization’s advancement toward diversity, equity and inclusion (DEI) goals.  

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These companies are not alone, of course. Working Mother Media’s Top Companies for Executive Women 2020+ list, for example, finds 49% of the top 75 companies reporting that progress against their organization’s DEI objectives factor into decisions regarding managers’ compensation. 

Others are linking executive pay to the company’s environmental, social and corporate governance (ESG) criteria, which articulate the organization’s commitment to sustainability and conscious capitalism, so to speak.

Apple, for instance, said in its most recent proxy filing that, starting in 2021, the multinational tech giant would “modify executive cash bonuses based on whether the executives act within the company’s social and environmental values,” Reuters reported.

Announcements like Apple’s underscore the increasing importance companies are putting on DEI and ESG efforts in determining executive compensation. And there’s data to suggest more organizations will take similar steps in the near future.

Consider a recent Willis Towers Watson survey that found organizations planning to make ESG measures a more significant part of their executive incentive plans. In a survey of 168 organizations representing 2.2 million workers, 78% said their companies plan to change how they use ESG benchmarks with respect to their executive incentive plans over the next three years.

In addition, 41% said their organizations plan to introduce ESG measures into their long-term incentive plans in that same timeframe, with 37% planning to incorporate ESG standards into their annual incentive plans. Roughly one-third of respondents said their company intends to raise the prominence of environmental and social measures in their incentive plans.

“As companies seek to strengthen their commitment to ESG, they are linking executive compensation to their ESG goals,” said Sue Holloway, CCP, CECP, director of executive compensation strategy at WorldatWork.

As ESG priorities continue to evolve and increase in importance, “we can expect more companies to tie related performance metrics to executive incentives,” Holloway said.

“Raising the commitment and prominence of ESG measures in incentive pay also signals a company’s interest in the needs of other key stakeholders beyond shareholders — society, employees, customers, suppliers, for example.”

Brad Hill, a principal at Chicago-based compensation and pay-for-performance consulting firm Clearwater Human Capital, agrees that this compensation trend is likely to continue.  

“I absolutely see more companies tying executive compensation to the company’s diversity, environmental and social goals,” Hill said. “And I think I would put them in that order.”

Diversity is the most urgent of the three “because it is the one with the most proven return on investment. It is not just a ‘nice to have.’ A diverse workforce has proven to be more innovative and productive,” said Hill, noting that research has shown the connection between racially and ethnically diverse workforces and increased organizational performance.

(A 2019 McKinsey analysis, for example, found that companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile.)

“Environmental and social needs have a lower ROI,” he continued, “but they contribute to a superior recruiting platform for prospective employees in their 20s and 30s, and they help create a greater sense of purpose among employees.”

By design, incentive compensation plans are intended to include and highlight goals that are considered a priority, said Scott Hamilton, global managing director of human resources and compensation consulting at Gallagher.

“[Incentive compensation plans are also] often linked to both a company’s short-term and longer-term strategic needs,” he said. “And, as many board members, executive teams and institutional investors look for faster and more visible progress in these important stakeholder areas, we anticipate more incentive plan goal design discussions to reflect desired movement in those areas.”

About the Author

Mark McGraw Bio Image

Mark McGraw is managing editor of Workspan.


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