Diversity and inclusion metrics absent from executive remuneration: How worried should we be?

SINGAPORE companies are way behind the curve when it comes to incorporating diversity, equity and inclusion (DEI) metrics into executive remuneration, a study has found.

Global advisory WTW says that none of the companies in its Singapore sample had such metrics, whereas two-fifths have done so globally.

On the face of it, the finding is disturbing. Despite much talk about a greater recognition of diversity, in particular gender diversity, in the workplace, it would appear that Singapore companies aren’t incorporating such concerns into their incentives.

But does a company’s inclusion of such metrics in its incentive plans necessarily mean it is taking such issues more seriously? Would such an inclusion make a positive difference?

Whither diversity & inclusion?

WTW’s study, published in late March, looked at how publicly listed companies in major markets incorporated ESG (environmental, social and governance) metrics into their executive incentive plans.

Its global sample comprised 1,081 publicly listed companies – from the United States, Canada, Europe, the United Kingdom, and the Asia-Pacific – that disclosed information about the use of ESG metrics in their incentive plans. Of these, 188 were from the Asia-Pacific, and 20 were from Singapore.

The most prevalent metrics were social (67 per cent globally, 47 per cent in the Asia-Pacific), followed by governance metrics (42 per cent and 31 per cent), and then environmental metrics (38 per cent and 28 per cent).

Of the social metrics used, those relating to people and human resource (HR) matters were the most common (48 per cent globally, 36 per cent in the Asia-Pacific), followed by DEI (40 per cent and 17 per cent), and health and safety (26 per cent and 17 per cent).

Within its Singapore sample, no companies disclosed DEI metrics in their incentive plans. In comparison, 44 per cent of companies in Australia and 13 per cent in Japan had DEI metrics. These two countries, together with Singapore, had been identified by WTW as having high levels of disclosure, comparable with other major regions.

Is this worrying?

There are some nuances to this story. First, WTW told The Business Times that some Singapore companies have DEI and gender-representation goals as part of their annual balanced scorecards that determine short-term incentive payments.

“However, Singapore companies don’t always disclose the KPIs (key performance indicators) within their annual balanced scorecards. So, while we are aware of companies that target DEI goals, they do not disclose them as explicit and stand-alone measures linked to executive incentives,” said Shai Ganu, managing director and global practice leader for executive compensation and board advisory at WTW.

Next, having a DEI metric in its incentive plans does not mean a company is giving such issues the right focus or effecting the right results. How a company sets up the metric and incorporates that into its remuneration plans is as important as whether they have one or not.

I would argue that it is imperative for organisations to have insight into the makeup of their workforce, and the equity of their HR practices – for example, to determine whether their practices result in a level of pay equity or gender equity.

Factoring DEI metrics into incentive plans can signal that a company is making sure such outcomes are measured and can hold up to scrutiny. But, these are effective only if such values are also integrated into its corporate culture, and if the right metrics are used.

The report Integrating ESG Factors Into Executive Remuneration by Professor Mak Yuen Teen of the National University of Singapore Business School, published last year, noted that investors and regulators are increasingly expecting companies to link ESG factors to remuneration. But it also noted concerns about their subjectivity and possible abuse.

Companies may choose ESG factors that are easily measurable, but not capture the most important ESG issues for them. ESG metrics may also be used to boost executive pay or shield executives from poor performance.

As an example, the report cited Marathon Petroleum in the US. It awarded its chief executive officer a US$272,000 bonus for exceeding environmental goals in the same year that the company spilled 1,400 barrels of fuel in an Indiana creek – its worst oil spill in years. The performance of Marathon’s top executives was assessed on the number of significant oil spills in a year, and not the total volume.

While this example relates to an environmental metric rather than a social one, the same concerns apply.

The presence of a DEI metric is, therefore, as important as how the company came about it. There should be a robust and comprehensive assessment of the DEI factors that are important to it, and how to input these into its incentive plans so that they impel and reward the desired behaviour and outcomes. These should be disclosed, so stakeholders can be cognisant of the company’s approach.

There is a host of decisions to make. As mentioned in Mak’s study, these include, but are not limited to the use of quantitative versus qualitative measures; stand-alone metrics versus an overall scorecard; weightage; and short-term versus long-term incentives.

It is definitely concerning that Singapore companies are behind the curve, and the market should ask why this is so. But, it is equally crucial that companies and stakeholders alike understand how these metrics work.

It is not enough that companies consider incorporating them into executive incentive plans. They must also determine which metrics would be the most relevant, the most important and the most effective in their various circumstances.