How to Pay a Bonus for Something You Can't Measure
Carlyle found an innovative way to reward employees for “going above and beyond” in fostering diversity and inclusion. More companies need to follow suit.
Setting the right incentives.
Photographer: Michael Nagle/BloombergMost 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 judgement given their track record of excessive generosity.
Environmental, social and governance metrics already inform executive pay plans. That’s partly because businesses are under pressure to acknowledge their wider responsibilities — think of the U.S. Business Roundtable’s revised definition of corporate purpose, or BlackRock Inc. Chairman Larry Fink’s preoccupation with the same theme in his annual letters to corporate bosses. At the same time, there’s evidence that firms with higher ESG scores perform better as they benefit from a lower cost of capital.