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Article | Executive Pay Memo North America

Reassess DEI metrics in executive incentive plans in light of affirmative action ruling

By Kenneth Kuk , Rachael McCann Jones and Michael Siu | December 21, 2023

Recent legal battles over affirmative action may mean a higher risk of litigation on the grounds of “reverse discrimination.” 
ESG and Sustainability|Executive Compensation

For companies that either have or are considering incorporating diversity, equity and inclusion (DEI) in their incentive plans — especially those with defined representation goals for under-represented groups — recent legal battles over affirmative action may mean a higher risk of litigation on the grounds of “reverse discrimination.”

There are important implications for most large employers in the U.S., and they should prompt a review of DEI goals and strategies. DEI metrics, after all, are among the most prevalent ESG metrics in executive incentive plans. According to WTW research, 58% of S&P 500 companies have at least one metric or consider factors related to DEI in their executive incentive plans, such as workforce and leadership representation and closing pay gaps.

The ruling and a warning flag

On June 29, 2023, the U.S. Supreme Court issued its ruling for Students for Fair Admissions, Inc. (SFFA) v. President and Fellows of Harvard College (Harvard) and Students for Fair Admissions, Inc. v. University of North Carolina (UNC), which overturned the affirmative action decision in Grutter v. Bollinger.

Shortly following the ruling, attorneys general of 13 states issued a warning to Fortune 100 companies challenging the legality of any “race-based employment preferences and diversity policies.” It was immediately met with a rebuttal from 20 other state attorneys general. Meanwhile, the U.S. Equal Employment Opportunity Commission issued a statement reaffirming the ruling does not address DEI programs used by employers. Further legal battles on workplace discrimination are expected from cases such as Muldrow v. City of St. Louis.

For employers, the context of reverse discrimination means an allegation that a company prioritizes demographic traits over qualifications in favor of historically disadvantaged demographic groups such as women and racial minorities, in pay, career or recruiting decisions. The implication is that DEI metrics lead management to make these decisions based on representation rather than selecting the most fitting candidate.

Key DEI practices to review now

As companies assess how to respond to these legal developments, it’s a good time to revisit best practices in setting DEI metrics and goals in incentive plans with these five strategies:

  1. Make the business case. Companies that have or are considering DEI metrics in their incentive plans should make a clear business case for how DEI initiatives align with their overall business strategy, and how a more diverse workforce and a more equitable and inclusive culture will create value for stakeholders. Use of DEI (or any ESG) metrics should be informed by the materiality of the metric to the business. Companies that clearly and proactively establish the return on investment in DEI will be better positioned to withstand any legal risks than those with a more passive approach.
  2. Provide clear and consistent messaging to stakeholders. The approach to DEI metrics should align with the company’s overall philosophy to DEI. Misalignment often leads to confusion and dilutes the business case. For companies with strong public-facing DEI profiles and DEI metrics in their executive incentive plans, backtracking on DEI metrics will present very poor optics and reputational risks. In some ways, the legal battles may present an opportunity for these companies to refine their DEI narrative, doubling down on commitment and reinforcing its purpose and values as an organization.
  3. Be specific in measurement. There are many ways DEI progress can be measured. While leadership and workforce representation goals may be a common approach, they also arguably present the highest reputational and litigation risk, especially if the company does not have strong documentation on career and pay decisions. Some other impactful ways to measure DEI progress include engagement score gaps for under-represented groups or participation in DEI enablement programs such as employee resource groups. In addition, companies should evaluate the pros and cons of using quantitative vs. qualitative measurement, especially in countries where demographic information is often self-reported and can be inaccurate. Companies that choose to assess DEI performance qualitatively should take note that investors strongly prefer quantitative and outcome-based metrics over activities-based and qualitative metrics.
  4. Bolster the supporting infrastructure. It is important to acknowledge that litigation risks with DEI programs have existed since before the SFFA decision, and many other corporate programs and policies are exposed to similar litigation risks. It is unrealistic to expect elimination of all risks associated with DEI programs, and companies should know that the benefits of DEI programs far outweigh the potential risks. A more reasonable approach is to proactively assess, quantify, and manage these risks. Companies should review practices in recruiting, career development, training and development, managerial enablement and performance management to ensure robust governance and documentation for how decisions are made and communicated.
  5. Affirm the global context. For U.S. companies with global operations and/or a global investor profile, it is important to keep in mind that the ramification of the SFFA decision is insulated to the U.S. only. Investors around the world have reaffirmed their point of view that investments in sustainability and DEI create long-term sustainable value. DEI commitment and programs continue to be a differentiator for employers in talent attraction and retention, especially for millennials and Gen Z.

As you evaluate the implication of the SFFA decision to the business, we urge companies to thoroughly evaluate their DEI initiatives against their long-term business strategy. Use this opportunity to take a hard look at the DEI objectives, programs, processes, decisions and communication that drive sustainable value.

A version of this article appeared in Workspan on December 14, 2023. All rights reserved, reprinted with permission.


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