Although a number of large U.S. companies decided to back away from their public commitments to diversity, equity and inclusion (DEI) initiatives in 2024, and others have recently been pressured to disregard environmental, social and governance (ESG) concerns, the majority of S&P 500 companies are still incorporating ESG and DEI metrics into their executive compensation plans. Since corporate board members approve all executive pay plans, it will be interesting to see if boards are willing to use financial incentives to keep the spirit of ESG and DEI initiatives alive over the long term without imposing quotas.
Recently, McDonald’s joined a growing list of major companies that have decided to end their DEI initiatives. Also, JPMorgan Chase was the latest company to leave the Net Zero Banking Group, a United Nations-backed coalition which is committed to reducing greenhouse gas emissions at their companies to zero by 2050. Anti-ESG and anti-DEI advocates have played a major role pressuring many companies into making those moves.
Despite the trending backlash against ESG and DEI, new research from advisory firm WTW found that in 2024 77 percent of S&P 500 companies reported that they incorporated at least one ESG metric in their executive incentive plans. (According to the research, 75 percent of S&P 500 companies used ESG metrics in their short-term incentive plans and 9 percent in their long-term incentive plans.) Additionally, WTW found that 57 percent of S&P 500 companies were using DEI metrics in their executive pay plans. (However, 29 companies eliminated ESG metrics from their pay plans and another six companies planned to remove DEI metrics from their pay plans.)
By offering financial incentives, companies may have found a way to provide an avenue for company executives to forward DEI and ESG initiatives without imposing mandates or quotas.
In a press release, WTW senior director, Work and Rewards, Kenneth Kuk, stated, “While prevalence of DEI measures may continue to decrease amid pushback on corporate DEI initiatives, the remaining ones will better withstand scrutiny because these companies made a compelling case for why DEI helps drive business results and preserve long-term sustainable value for stakeholders. We would caution against only discussing human capital and DEI within the narrow context of ESG metrics in executive incentive plans given their broader business impact.”
Companies like Costco, that are fighting to keep their DEI initiatives in place under threat of boycott or legal action by conservative groups, might consider implementing financial incentives in their pay plans that encourage executives with decision-making power to be more open to looking at diverse candidates in hiring practices as well as finding more innovative was to limit their company’s carbon emissions. As always, companies should make sure DEI and ESG-related financial incentives are tied to business growth. Boards might want to seek advice from outside compensation consultants. Boards might also review compensation plans of other companies that have such incentives.
Of course, the use of pay plan incentives won’t affect how companies address board diversity, but it may help those organizations that hold diversity as a core value build greater trust with shareholders, employees and customers. Corporate boards may find that strengthening those relationships will be extremely important as the coming year is expected to hold quite a bit of economic uncertainty.
