Integrating Diversity, Equity, and Inclusion (DEI) and Environmental, Social, and Governance (ESG) metrics into executive compensation

Many companies are integrating Diversity, Equity, and Inclusion (DEI) and Environmental, Social, and Governance (ESG) metrics into executive compensation plans, though approaches vary across industries and regions.​

• ESG Metrics: As of 2024, over 75% of S&P 500 companies incorporated at least one ESG metric into their executive incentive plans, maintaining the same rate as the previous year. ​Harvard Law Corporate Governance Forum

• DEI Metrics: More than 50% of U.S. companies used DEI metrics in developing executive pay plans in 2024, despite facing activist pressure against such programs. ​Financial Times+2HR Brew+2WTW

Weighting and Structure of DEI and ESG Metrics

• Weighting: Companies often assign a specific percentage of incentive payouts to DEI and ESG goals. For instance, Uber Technologies included ESG goals weighted at 20% in their performance-based long-term incentive program, with DEI and safety goals each accounting for 10%. ​

• Short-Term vs. Long-Term Incentives: ESG metrics are more commonly included in short-term incentive (STI) plans than in long-term incentive (LTI) plans. In 2024, 75% of U.S. companies used ESG measures in their STI plans, while only 9% included them in LTI plans. ​

Evolving Practices and Challenges

• Investor Scrutiny: There is growing concern among investors that ESG goals may be set too low, leading to higher payout rates for ESG metrics compared to financial goals. In 2024, ESG incentives were paid out at an average of 122% of target, compared to 114% for financial incentives. ​HR Brew

• Regulatory and Political Factors: The inclusion of DEI metrics in executive compensation has come under increased scrutiny following legal and political developments. For example, the U.S. Supreme Court's 2023 decision on affirmative action has led some companies to reconsider or adjust their DEI-related goals to mitigate legal risks. ​Harvard Law Corporate Governance Forum

Industry Examples

• Chevron: Allocated 10% of its annual incentive plan to "energy transition" goals, focusing on reducing carbon intensity and investing in low-carbon technologies. ​ESG Reporting Hub

• Chipotle Mexican Grill: Included ESG components such as maintaining racial and gender pay equity and publishing Scope 3 emissions reports in their executive compensation plans. ​ESG Reporting Hub

• Intel: Incorporated environmental sustainability and diversity and inclusion metrics, accounting for up to 7% of its annual cash bonus plan. ​ESG Reporting Hub

In summary, while the integration of DEI and ESG metrics into executive compensation plans is prevalent, companies are continuously refining these practices to address investor concerns, legal considerations, and evolving societal expectations.