Include diversity and inclusion in compensation discussions

While diversity and inclusion are important issues to consider when recruiting new board members, they’re becoming important metrics when gauging CEO performance and determining compensation.

A study from Corporate Board Member and Compensation Advisory Partners found that 52% of directors believe diversity and inclusion metrics should be a factor in determining compensation for their top executives. However, fewer than 10% of companies currently use nonfinancial metrics in their incentive program.

The idea of using nonfinancial metrics such as diversity and inclusion in compensation discussions is gaining traction. But some organizations continue to hold the mindset that nonfinancial factors can’t be precisely measured and shouldn’t be included in compensation discussions.

“In most cases, companies weight nonfinancial metrics as a small portion of the total incentive or use a basket of nonfinancial measures as a modifier to the final payout,” Melissa Burek, partner at Compensation Advisory Partners, says in the study.

While Burek believes there will be an uptick in the use of nonfinancial metrics in the future, the main focus during compensation discussions will continue to be on profitability, growth, and returns.

But the findings come amid a growing push to emphasize diversity as a key organizational goal, especially among leadership positions.

CUNA and its member credit unions are committed to ensuring diversity and inclusion play a meaningful role in every aspect of the credit union system.

Diversity is the wide range of differences that exist among people—age, race, gender, ethnicity, and sexual orientation. Inclusion is a work environment and culture that allows everyone to participate and be valued regardless of those differences.

Gender diversity now ranks as the third most important focus in selecting new board members, according to “What Directors Think,” a study from Corporate Board Member and Grant Thornton LLP. Only industry expertise and financial experience were cited as more important traits.

A McKinsey & Co. study found that boards that are diverse and inclusive make better decisions because they better reflect and understand the membership base.

“To successfully navigate the complex issues facing companies today, leadership needs to draw on a diverse set of skills and competencies, as well as new thinking and perspectives about markets, business practices, and customers,” says Jina Etienne, director of diversity and inclusion at Grant Thornton LLP.

“It’s time we stop treating diversity as a separate thing to be managed,” she continues. “Instead, diversity is a resource and perspective that needs to be woven into all other business strategies to optimize their effectiveness.”

Seventy-eight percent of boards say they conduct director evaluations at least annually, according to “What Directors Think,” and these are opportunities for directors to assess their contributions to the governance process and identify gaps that exist in the board’s makeup.

Consider how to:

• Embrace diversity in the boardroom. This sends a clear and powerful message to employees and members about the credit union’s commitment to diversity, as well as opportunity and equality. The board, CEO, and other C-suite leaders must be committed to ensure long-term success.
• Make gender diversity a requirement for recruiting new board members. Modify existing requirements to focus on candidates having the right experiences rather than requiring prior board experience.
• Support actions that promote and address gender equality issues including equal pay, power and decision-making, personal safety, interpersonal work relationships, and community involvement.

This article initially appeared in Credit Union Director's Newsletter, which provides strategic insights for policymakers. Subscribe now to the print or PDF version.