Improving diversity in corporations starts with establishing the right incentives at the top
Most people agree that executive pay should reflect their firm’s progress on diversity. That’s easier to say than to do. Measuring financial performance objectively is pretty straightforward, and scoring climate credentials isn’t the headache it once was. But rewarding inclusion will necessarily be subjective. It’s unclear investors are ready to trust corporate boards to exercise such judgment given their track record of excessive generosity.
Policymakers are pushing on this front too. The Bank of England and the UK Financial Conduct Authority are consulting on whether to issue guidance about tying finance-sector pay to diversity and inclusion metrics. The BoE has already said it will do this for its own executive directors while a recent study by London Business School and PwC found that around 7% of the annual bonus in executive pay for FTSE-100 financial firms is tied to diversity goals.
“The challenge is you want more discretion,” says Phillippa O’Connor, head of PwC’s UK reward and employment team. “But that means shareholders need to trust the remuneration committee to exercise this appropriately.”
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