Should Employers Tie Executive Compensation to DE&I Goals?

YES: Aligning pay with business goals is a common method of ensuring results.

It is now widely accepted that achieving high levels of diversity, equity and inclusion (DE&I) can create a competitive advantage and drive individual and organizational performance. However, organizations seeking to advance in these areas face a strategic alignment challenge: how to embed DE&I priorities into the heart of a company’s business strategy. 

This requires integrating DE&I practices into all aspects of the organization, including behaviors, structures and systems. Such an onerous challenge demands disciplined execution. It is therefore not surprising that many of the organizations that have recently made bold and unprecedented commitments to advance DE&I goals, including Mercer’s estimate of 15 percent to 20 percent of the S&P 500, are aligning executive pay with DE&I performance.

Using compensation to achieve DE&I strategic alignment is particularly promising since organizations extensively use incentives for other financial and business goals. Executives understand incentives, which apparently help align their individual goals to their firm’s strategic priorities. Why reinvent the wheel? 

Moreover, linking executive pay to DE&I goals has a multiplier effect. Once strategic alignment is achieved at the senior management level, it’s easier to cascade those goals to middle managers and the entire organization. When executives have a stake in the matter, they are more likely to advocate creative ways to advance DE&I goals, such as by awarding corporate matching gifts and spot bonuses. 

Pay is perhaps the most powerful motivator of performance for most people, research shows. As companies set aggressive DE&I goals—for example, Microsoft, Salesforce and Uber recently announced plans to double Black representation in their leadership teams—motivating executives to deliver results is key. To put it simply, if diversity is a strategic imperative and good for business, then it should be compensated as such. 

The unusual challenges of managing in a post-COVID-19 era, as well as an increasing number of environmental, social, governance and business priorities, are competing for executive attention. Executives need extra motivation to pursue multiyear initiatives that produce long-term change. Long-term incentives are perfectly suited for this, especially when they are complemented with short-term incentives that reward incremental progress. While in a perfect world no executive should have to be compensated to drive DE&I efforts, the painfully slow progress over the last few decades and the urgent need for change call for such radical intervention.

Every HR intervention sends a signal about what the company values. At a time when some employers are merely paying lip service to DE&I and “woke-washing” is rife, organizations need to show that they’re serious. When companies such as Sodexo and Procter & Gamble link 10 percent of executive pay to DE&I goals, for example, they are essentially telling senior leaders to allocate that percentage of their time and energy to DE&I issues. To employees, investors and board members, these companies are communicating that building a diverse and inclusive workplace culture is a top priority and that executives will be held accountable for achieving it. 

There also is often a need to demonstrate to those outside the business—consumers, suppliers, activists, regulators and the media—that DE&I matters to the company. There is no better way to get the message across to a skeptical audience than by linking executive pay to the achievement of DE&I goals. That’s how to show stakeholders that you put your money where your mouth is. 

Ed Hasan is the CEO of Kaizen Human Capital, an organizational development and HR consultancy in the Washington, D.C., and Los Angeles metro areas. He also is an adjunct professor at Georgetown University and an instructor for SHRM. 

NO: Financial incentives undermine intrinsic motivation or interest in a task.

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