The “S” in ESG: Tying Compensation To DEI Goals

Jackson Lewis P.C.

As companies plan and strategize about next steps regarding the  “S” of ESG, i.e., Social initiatives, we are often asked about best practices in promoting Diversity, Equity, and Inclusion (DEI)  goals in the workplace.   Companies increasingly are seeking to tie compensation to DEI goals. Doing so demonstrates the company’s commitment to DEI, and rewards positive efforts. Of course, as any prudent lawyer would say, one needs to tread carefully and understand the path chosen.  Jackson Lewis principal Michael Hatcher, who regularly counsels employers in this area, advises that companies need to be careful not to tie compensation to any specific “hire” or “promotion” decision.   Such a practice could lead to claims that the company is incentivizing unlawful race/gender-based employment decisions, despite a laudable goal.

Instead, there are a variety of ways to carefully design a lawful compensation strategy to minimize exposure to litigation.  Such programs typically take into account the “big picture” of what the company is trying to achieve, rather than tie awards to “numbers.” Accordingly, Hatcher recommends relying upon a broader array of factors when creating the appropriate compensation program. Examples include, but are not limited to:

  • Manager evaluations, where the company can develop concrete examples that would be applied across the board, such as attendance at implicit bias training or actively mentoring others across racial, gender, or other boundaries.
  • Team-approach to bonuses, where for example, a particular level of company leadership is eligible to receive the reward based upon “team performance,” not individual effort, against appropriate benchmarks.  Benchmarks are typically goals a company strives for in their DEI efforts, and they need to be carefully crafted to avoid claims of bias.

The strong support of DEI initiatives by leadership and corporate culture play an important role in developing and carrying out these programs. 

Once the appropriate incentive program is developed, careful communication, both internal and external, will be paramount to its success. Internal communications will help educate and train stakeholders on the company’s DEI’s initiatives, as well as the limitations imposed by laws such as Title VII’s prohibition against discrimination, which includes so-called “reverse discrimination” against whites and men.  External communications can help enhance the success of the company’s DEI efforts.  Training to reinforce what company management can do to lawfully promote DEI initiatives within the bounds of antidiscrimination laws should be complemented by a strong communications program.

As this remains an evolving area, it is always important to seek legal counsel before tying compensation to DEI goals.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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