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Article | Executive Pay Memo North America

More companies expand I&D programs amid renewed focus on racial equality

Governance Advisory Services |Executive Compensation|Inclusion and Diversity
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By Robert Newbury | November 18, 2020

Diversity hiring goals, training, mentorship, and leadership changes are among the actions companies are taking to support inclusion and diversity.

While most companies have maintained policies and programs addressing inclusion and diversity (I&D) issues for years, a series of events — including the death of George Floyd at the hands of police officers on May 25 — raised awareness of racial disparities in the United States and prompted several companies to take renewed and heightened action to address inequality within their companies and surrounding communities.

To quantify the commitments U.S. companies made to address inequality, Willis Towers Watson’s Global Executive Compensation Analysis Team reviewed press releases issued by S&P 500 companies from June to October 2020 in response to recent racial unrest. Statements were included in the study if they identified tangible commitments by the company to address inequality; statements denouncing inequality but that did not include specific commitments were not included. The commitments summarized in the study are based on new or enhanced efforts companies have pledged since the racial unrest earlier in 2020 and may not reflect previous commitments or initiatives already in place. We identified and analyzed commitments by 74 companies that met these criteria.

Willis Towers Watson’s Global Executive Compensation Analysis Team reviewed press releases issued by S&P 500 companies from June to October 2020 in response to recent racial unrest.

Within these statements, some items emerged as common issues companies were addressing to improve their I&D internal programs and resulting impact on the employment experience for African American and Black employees, including:

  • Charitable contributions: In roughly equal proportions, companies either pledged to immediately contribute to organizations promoting equality and social justice or announced long-term investments over two to 10 years in improving community relations, education initiatives and economic opportunity, among others, for minorities. Amounts immediately pledged ranged from $250,000 to $12 million (the average was $4.6 million) and were directed at organizations such as the National Urban League and the National Association for the Advancement of Colored People. Funding for long-term equality initiatives ranged from $1.5 million to $1 billion (with an average of $207 million).
  • Minority hiring goals: New or enhanced goals for minority hiring, retention and promotion. Most goals called for increases in the rate of minority representation among the executive or broader employee ranks within the next two to five years. Goals ranged from increased black representation of 20% to a doubling of existing levels over the specified timeframe.
  • Support and benefits for minorities: Actions taken to evaluate, institute and promote programs that enhance the working experience for minority employees. Some examples of the types of programs companies indicated they will review included career development and mentorship programs, pay parity programs, cultural competences, mental health benefits and financial wellness assessments.
  • Diversity training: Efforts to strengthen the impact of diversity training programs, including shifting from optional to mandatory requirements, broadening the employee population required to complete training or expanding topics covered by training programs. Some companies indicated training will be made available in alternative or virtual formats given ongoing restrictions on in-person meetings.
  • Leadership and executive changes: On an individual executive basis, several companies indicated plans to identify or fill a chief diversity officer (CDO) position. Others with existing CDOs announced plans to elevate these individuals to roles that would directly report to the CEO or others on the executive council. On a broader basis, companies announced the formation of inclusion councils, advisory groups or task groups aimed at increasing the input and profiles of black employees and executives.
  • Paid time off: Several companies indicated they would provide employees paid time off to vote on election day or to celebrate Juneteenth
  • Governance program changes: Actions taken to strengthen and revise policies or codes of conduct to account for discriminatory and racially biased behavior. Separately, several companies indicated policies and procedures would be expanded to require more diverse candidates for open positions on the board of directors.
Figure 1: Corporate actions taken to address racial inequality (out of 74 companies reviewed)*
Figure 1: Corporate actions taken to address racial inequality (out of 74 companies reviewed)*

* Source: Willis Towers Watson’s Global Executive Compensation Analysis Team’s review of press release statements addressing diversity issues made by 74 S&P 500 companies from May to October 2020.

Linking diversity commitments to incentive programs

Historically, organizations have used I&D metrics sparingly in incentive programs, usually as part of a broader strategic qualitative assessment or individual evaluation of performance. According to WTW’s 2020 ESG Incentive Report, 17% of S&P 500 companies disclosed that I&D issues impacted incentive pay outcomes based on 2019 programs. Of this group, 19% — or 3% of all S&P 500 companies — had quantifiable goals tied to I&D efforts.

The new and enhanced diversity hiring goals outlined in the recent commitments to address racial inequality will likely lead more companies to link I&D achievement to executive pay. Companies use these incentives to emphasize the importance of improving diverse hiring and retention rates, while incentivizing management commitment to the enhancements.

As shown in Figure 1, 32 (43%) of the 74 S&P 500 companies making I&D commitments in the past several months enacted new or increased diversity hiring goals to be achieved over the next few years. Of these companies, eight companies (25%) indicated they will tie achievement of the goals to pay, performance evaluations, and/or promotion considerations going forward. Several companies indicated goals will be extended to a broader management group or in various business unit or functional areas.

The new and enhanced diversity hiring goals outlined in the recent commitments to address racial inequality will likely lead more companies to link I&D achievement to executive pay.

It seems clear that recent commitments to new diversity hiring goals will have a near-term impact on the use of I&D metrics in incentive programs in the years ahead. Incorporating thoughtful metrics and measures that are aligned with stated diversity hiring objectives will help hold executives and management teams accountable for improving diverse hiring rates, while signaling the importance of addressing racial inequality concerns to various stakeholders.

Author

Senior Director, Global Executive Compensation Analysis Team (Columbus)

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