Latest trend in executive compensation: To include diversity and inclusion or not?

By Amanda Dernovshek
Foster Swift

Companies are increasingly tying executive compensation to diversity and inclusion (D&I) initiatives in an effort to increase female and minority representation among the workforce and management. Despite progress in recent years, an overwhelming majority of executives in the United States remain Caucasian males. Many companies have previously adopted diversity measures at the directorship-level; however a lack of diversity remains at the management level and among the rank and file employees.

Large companies, including Nike, Facebook, and Uber, are linking executive bonuses to certain D&I benchmarks in an effort to match their company’s management and work force demographics to that of the communities in which they operate. For instance, if 30% of the qualified applicant pool is female, the company may choose to set an aspirational goal of having 30% of management positions and 30% of new hires be female.

Executive Compensation and Measuring D & I

Executive cash bonuses are generally based on a variety of performance measures. Those measures often have three components: (1) absolute financial performance, (2) relative financial performance, and (3) operational performance. Absolute financial performance measures year-over-year changes in financials such as EBITDA, net income, and gross income. Relative financial performance compares the company's financials to other companies in its peer group. Finally, operational performance includes specific operational goals set by the compensation committee. Operational goals include customer and employee satisfaction, productivity, and, lately, D&I measures.

Companies typically grade executives and managers on a D&I scorecard that includes quantitative and qualitative measures. Quantitative measures may include an aspirational goal, but should avoid hard quotas when tied to D&I. Companies may also measure yearly improvements in hiring, training, and promoting women and minorities where underrepresented. The measurements should be tied to a written plan aimed at attaining a workforce whose composition reflects the demographics of the qualified applicants in the company’s geographic area.

Qualitative goals measure factors that demonstrate the program’s success. Some companies have begun scoring executives and managers on their involvement in mentoring and sponsoring female and minority employees. Other common measures include participation in female and minority recruiting events, promoting diversity-based programs, and participation in programs designed to help increase awareness and improve cross-cultural communication.

An executive compensation plan that includes D&I measures should be carefully structured to avoid any legal pitfalls. Many states prohibit employment discrimination on the basis of race, color, gender, and national origin. A program that intentionally prefers female and minority candidates and employees may create legal liability for the company. However, a properly designed D&I program can minimize potential legal issues and help the company to obtain its D&I goals.           

Conclusion

Tying executive cash bonuses to D&I initiatives is one approach for companies to address the longstanding underrepresentation of women and minorities in the workplace. Such programs, if carefully crafted, can avoid exposing the company to legal liability while encouraging management to increase diversity.
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Amanda Dernovshek is a member of Foster Swift’s Business and Tax group. Her practice focuses on issues related to federal taxation, employee benefits, and business planning. She also assists the mergers and acquisitions team.