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Directors Agree CEO Compensation Should Include Diversity, Inclusion Metrics

A new study by Corporate Board Member, a division of Chief Executive Group specializing in board education, along with Compensation Advisory Partners, an independent consulting firm specializing in executive and director compensation and related corporate governance matters, finds 52 percent of directors believe diversity and inclusion (D&I) metrics should be a factor in determining compensation decisions for their top executives. Yet fewer than 10 percent of companies currently use non-financial metrics in their incentive program, the survey of 258 public company board members found.

The findings come amid a growing push in the corporate governance community to emphasize diversity as a key goal in the nation’s companies — especially in leadership positions.

“Shareholders — especially large, institutional shareholders — have been pushing for companies to make progress on D&I initiatives,” said Melanie Nolen, research editor at Corporate Board Member, “but companies are data-driven, and measuring non-financial metrics poses a great challenge to compensation committees.”

Although the role that D&I should pay in incentive plans has recently moved to the forefront of the discussion around non-financial metrics, there remains a mindset of excluding items that cannot be precisely measured against short-term financial performance.

Still, says Melissa Burek, partner at Compensation Advisory Partners, there’s been a small increase in the number of companies incorporating non-financial metrics into their incentive plans in recent years. “In most cases, companies weight non-financial metrics as a small portion of the total incentive or use a basket of non-financial measures as a modifier to the final payout,” she said.

Burek believes we may see an uptick in the use of non-financial metrics like D&I in the near-term; yet, over the long-term, the key focus will continue to be on the fundamentals of profitability, growth and returns.

Other key findings from the report include:

  • When establishing financial objectives, profitability is the highest priority in the near term, while top-line growth takes precedence over the long term.
  • 9 out of 10 directors polled believe that Total Shareholder Return still has a critical place in long-term performance plans.
  • When setting target performance goals, 76 percent of directors viewed the company’s internal budget/strategic plan as the most important consideration.
  • More than a third (35 percent) of directors believe that companies should exclude the impact of share buybacks on comp plans.
  • 64 percent of directors surveyed believe that one-time special retention awards are important to attract and retain talent.

To download the full report, click here.

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