During the first few months of 2021, a slew of hot-shot S&P 500 companies announced fresh policies tying executive pay to diversity and inclusion metrics. This included McDonald’s which, in February, revealed it will offer executives annual incentives to increase the share of women and racial minorities in leadership roles by 2025. Nike shortly followed suit, declaring in March that executive pay would also be tied to 5-year D&I goals.
These policies quickly took shape in the wake of last year’s George Floyd protests and the consequent increase in demands from customers and employees for companies to ‘put their money where their mouth is’ – rather than simply posting condolences on Twitter or hosting all-employee racial-awareness webinars. CEOs are no longer solely accountable to investors; they are accountable to society itself.
Diversity within business leadership indeed remains fairly laughable. In the US, caucasian males, who make up approximately 35 per cent of the population, held 85.8 per cent of Fortune 500 CEO positions in 2020. White women held 6.8 per cent. African-Americans held 1 per cent.
The question is not whether improved diversity would be beneficial – that much is obvious. The question is instead whether targeting executive pay is the best route forward.
Remuneration policies can be effective at ‘moving the dial’ in the short term, but solely targeting diversity quotas within leadership can lead to distorted outcomes. For example, it can lead to diverging outcomes for pockets within the minority groups themselves – as a result of what has been dubbed the ‘diversity premium’ effect.
A recent study revealed that in organisations with aggressive D&I goals, ‘high-potential’ women received a pay premium (earning more than their male counterparts), whereas women overall continued to experience a pay penalty. In other words, organisations were focusing on high-profile, high-visibility employees with ‘diversity value’ at the expense of a broader segment of their workforce. The gender pay gap was not uniformly disadvantaging women and, in fact, there was an inflection point at which the female pay penalty became a pay premium.
And so, rather than jumping straight to equality of outcome through remuneration policies, surely the more sustainable solution is to be found by focusing on improving equality of opportunity.
Working to remove systemic discrimination from the ‘entry point’ (i.e. within access to education, which remains predominantly dictated by parental wealth), would prove more effective at creating the enduring pipelines needed to organically improve diversity. Despite clearly being a more complex and expensive route (one which spans far wider than the corporate boardroom) this would facilitate social mobility on a much wider scale and allow ‘top level’ diversity quotas (along with their problematic side effects) to become unnecessary.
Don’t get me wrong, McDonald’s decision to tie executive pay to D&I quotas will definitely be a catalyst for short-term change. However, society is at risk of forgetting that such actions are only a band-aid. The real impetus should be focussed at removing barriers from the beginning – not at the end.
