Diversity and Compensation

CGI Glass Lewis has stated that more companies are introducing diversity measures into incentives and has provided guidance in a blog post on how it assesses such measures, and its preferences around disclosure.

The Glass Lewis emphasis is consistent with many other external stakeholders driven primarily by heightened investor concerns with racial and ethnic diversity. With key investors, such as State Street (see HERE) now stating that they will vote against directors unless they meet diversity expectations, the prevalence of such measures will only increase.

CGI Glass Lewis noted that short-term incentive (STI) prevalence was rising and that some companies were even introducing measures into their long-term incentive (LTI). Guerdon Associates’ research into 2019 disclosures showed that 58% of top global companies had a diversity or people and culture measure. Of these, 88% were within their STI only, 4% in their LTI only and 8% in both their STI and LTI. See HERE for a breakdown of ESG measures in the global sample.

While CGI Glass Lewis sees ESG measures as important, it also recognises the difficulty of measuring diversity performance. It noted normally diversity is measured as either a subjective consideration or as a portion of a discretionary component. In both cases, performance is generally rated at or above target. Where a goal or benchmark is set, it will generally be organisation specific.

Given how hard it can be to develop quantitative measures, CGI Glass Lewis views discretionary adjustments in these areas “with less scepticism” than it would for financial or operational performance.

The choice lies with the board to choose a discretionary or target based approach, the proxy adviser states.

“Whether companies choose to assess diversity performance on a discretionary basis or as part of a formal metric, our focus is on the level of disclosure provided, and alignment with outcomes. A soft goal reviewed by a judicious board can give better outcomes than a poorly structured weighted metric. It is the board’s responsibility to make sure that either structure works.”

The most important thing from an investor point of view is that the goals are challenging and do not represent “de facto guaranteed payouts”.

Disclosure will be key where there are no specific targets. CGI Glass Lewis will be looking for “non-boilerplate explanatory disclosure that provides context as to the performance assessment and ultimate award outcome”.

To view the original CGI Glass Lewis blog post, see HERE.

© Guerdon Associates 2024
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