Want More Diversity? Some Experts Say Reward C.E.O.s for It
Only a small number of large companies have tied executive compensation to goals for hiring and promotion of workers from underrepresented groups.
When Charles E. Jones, the chief executive of a large Ohio-based utility, realized that his senior executives weren’t fully behind his push to hire and promote people of color and women, he decided to do something to get their attention.
In 2018, Mr. Jones linked 10 percent of annual bonuses for himself and other top executives at his company, FirstEnergy, to diversity goals, and increased the number to 15 percent the next year. “I’ve got experience that suggests that if you tie compensation to the things you want to have accomplished, you are much more successful at getting them accomplished,” he said.
Mr. Jones’s approach is striking because it is extremely rare in corporate America. But he and other management experts say it shouldn’t be. For decades, companies and top business schools have preached the gospel of tying pay to all manner of business goals, like stock price performance and profits.
Yet just 78 of roughly 3,000 companies said fulfilling diversity goals determined some portion of chief executives’ pay, according to an analysis of public pay disclosures by Pearl Meyer, a compensation consulting firm. Of those, only 11 revealed the share of pay affected by fulfilling diversity goals, and 21 gave some details of their diversity goals.
The issue has gained new salience in recent weeks as businesses across the United States have declared support for Black Lives Matter, pledged to hire more people of color and ditched decades-old brands like Aunt Jemima that were built on racist imagery.
Charles A. Tribbett III, a consultant who advises large corporations about hiring and compensation, said many executives and board members were discussing whether to link pay to diversity goals, a change he endorsed. “I believe the time is now for that discussion to be turned into action,” said Mr. Tribbett, a managing director at Russell Reynolds.
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Deb Lifshey, a managing director at Pearl Meyer, agreed that there was growing interest in the practice, though she said it was too early to say whether it would be sustained. “Whether or not this will have a material impact on how much compensation they’re making is hard to tell,” she said.
Only five of the Fortune 500 companies have Black chief executives, and some of the most successful American companies haven’t significantly increased the number of African-Americans in their senior ranks.
Making diversity targets part of compensation and disclosing them would not just give top executives a financial incentive to hire and promote more Black and Latino people, but also provide a public scorecard that employees and shareholders could use to determine whether companies were following through on their commitments.
FirstEnergy paid out nothing on the diversity-related part of the bonus in 2018 after the company fell short on two of three targets. Last year, it paid out the segment of the bonus for meeting two of the goals: hiring women and people from underrepresented ethnic groups for professional jobs, and including them as candidates in succession plans. But executives fell short on a measure related to how employees responded to questions about diversity in a company survey.
Mr. Jones said most people at his company did not discriminate against Black and brown people, but he believes some do. “Quite frankly, in a company like ours, which is 90 percent white, you actually have outright racism that still exists, that we have to deal with,” he said.
Even as an old-economy business like FirstEnergy has embraced a relatively progressive policy, other businesses widely considered to be liberal bastions, like Google and Facebook, have not.
In 2018, Zevin Asset Management, a Boston-based investment firm that says it takes a “socially responsible” approach, proposed that Google connect some executive pay to diversity, among other measures, but the measure was soundly defeated.
“We saw companies saying a lot about how they want to move the needle in the tech space but not disclosing a lot or setting goals,” Pat Miguel Tomaino, a director at Zevin, said. “Nothing trumps having a part of your compensation at risk on a key business initiative.”
Top tech executives are accustomed to having formal targets built into their pay. Last year, Google’s chief executive, Sundar Pichai, received a compensation package valued at $280.6 million. Just over $121 million of it came in units linked to the stock performance of Google’s parent company, Alphabet.
Founders like Mark Zuckerberg of Facebook and Sergey Brin and Larry Page of Alphabet do not receive cash bonuses or stock-based compensation. But they control so much of their companies’ voting stock that they could pretty much single-handedly approve the inclusion of diversity targets in executive compensation. Facebook, for example, valued the 2019 compensation of its chief operating officer, Sheryl K. Sandberg, at $27 million.
Facebook said it had made “bold goals to build a more diverse and inclusive workplace,” adding that leaders were evaluated on inclusion and recruitment in their performance reviews. Google declined to comment.
That said, some tech companies have linked pay and diversity.
Achieving diversity goals helps determine one-sixth of the cash bonus of Microsoft’s chief executive, Satya Nadella, a bonus that last year totaled $10.8 million. “This is an important demonstration of executive commitment to creating an inclusive workplace, and we find this helps ensure there is shared accountability to make progress,” the company said in a statement.
Uber, which in the past was criticized for a cutthroat work culture, perhaps goes further than any other company. Diversity targets are embedded in the stock compensation of its chief executive, Dara Khosrowshahi, accounting for a fourth of his performance-based stock awards. Uber valued his performance award for last year at $6.25 million. The goals include achieving growth in the percentage of workers who are from underrepresented ethnic groups at the senior analyst level and above over a three-year period that has not ended.
Bo Young Lee, Uber’s chief diversity and inclusion officer, said the policy had “really crystallized what we’re trying to achieve, and gave something for us to pivot off of, and explore other aspects of our diversity and inclusion strategy.”
But diversity-related goals may end up having less bite than advertised because they might be relatively easy to achieve, which can be hard to evaluate when companies do not disclose details about their goals. In addition, even companies that use this approach do not let it determine a sizable portion of overall pay.
Of course, there are plenty of other ways to bolster the hiring and promotion of people of color and women, experts say. Regularly disclosing in meaningful detail how the company is performing on important diversity metrics can help employees hold senior executives accountable. Mr. Tomaino, the activist investor, says Google is a leader in providing useful information in its diversity report. The report, for example, shows that Black employees are more likely to leave than the average employee.
Some companies, like JPMorgan Chase, the country’s largest bank, claimed they could do more without strict goals. Joseph Evangelisti, a JPMorgan spokesman, said the bank had increased the number of Black professionals — managing and executive directors — by more than half over the last four years.
The board and its top leaders do not “believe in using a simple, formulaic, short-term approach,” he said, “because they’re looking to our leaders to develop and implement strategies that provide long-term, sustainable outcomes to drive diversity, equity, inclusion and, ultimately, success of our diverse employees.” JPMorgan did not say what percentage of professionals were Black employees.
But activist investors say they will keep pressing for diversity targets for senior executive pay. “The issue here is that we’re in a multiethnic country where wealth is controlled by white people,” Mr. Tomaino said. “It’d make sense for companies that possess big levers to help create change.”
Mr. Tribbett, the consultant, said that even though companies might disclose and meet diversity goals, it was particularly important to look at whether this meant they were succeeding in hiring and promoting Black employees in particular.
“What we’re trying to achieve right now is an increase in African-Americans into the boardroom and into the C-suite and up the ladder of the company,” he said. “So when a C.E.O. metric is positively achieved, but within that metric the Black portion of it still has not been achieved, then I think we have failed.”