Some companies are tying executive compensation to hitting DE&I goals, but is it a good idea?

Starbucks tied executive compensation to DE&I—now its SVP of HR is being sued over the policy.
article cover

Illustration: Dianna “Mick” McDougall, Source: cienpies/Getty Images

· 5 min read

From 2020 through 2021, tying executive pay to meeting diversity goals grew significantly in popularity, with companies including McDonald’s, Nike, and Starbucks tying some form of executive compensation to boosting gender and racial diversity in their workforces or in leadership positions.

Some companies, including those at the Golden Arches, opted to do so, at least in part, because some shareholders wanted it: Thomas DiNapoli, New York State comptroller, submitted one 2020 proposal that seemed to motivate McDonald’s to consider the issue. He withdrew that proposal when the company announced the compensation policy in 2021; that year, DiNapoli told Bloomberg Law the company had “taken a real step toward protecting its workforce” by doing so and that he hoped other companies would follow.

But elsewhere, other shareholders objected to the practice—and, in some cases, objected aggressively. Since 2022, at least four big-name companies have received retraction demands from a handful of right-leaning think tanks calling for an end to programs that tie executive compensation to diversity hiring. If companies don’t comply, one retraction demand warned, a lawsuit could follow.

In August of 2022, the American Civil Rights (ACR) Project made good on that threat when it sued Starbucks on behalf of a shareholder, the National Center for Public Policy Research (NCPPR), in Washington State alleging the comp policy created “racial prejudice against white job candidates.”

The suit specifically names SVP of HR, Jennifer Frisch, and its chief inclusion and diversity officer, Dennis Brockman, as defendants, alongside the company, CEO Howard Schulz, and 30+ other executives—a legal tactic that could have some HR professionals wondering about the unanticipated risks of such an executive compensation program.

The jury is (figuratively) out. Title VII of the Civil Rights Act of 1964 prohibits “employment discrimination based on race, color, religion, sex, and national origin,” which could potentially include using quotas.

In NCPPR v. Schultz et al., the plaintiffs allege that Starbucks’s executive compensation policy, which began in 2021, “appeared to violate Title VII, both by incentivizing officers to violate Title VII in hiring and promotional decisions, and by discriminating based on the race of officers’ workforces in setting officers’ compensation levels.”

“You can call it a [hiring] goal, but if you’re rewarding and punishing people based on whether or not they achieve a quota, that’s what it is,” Dan Morenoff, the executive director of the ACR Project, told HR Brew. (Starbucks representatives declined to comment on this story; Frisch and Brockman did not return requests for comment.)

Quick-to-read HR news & insights

From recruiting and retention to company culture and the latest in HR tech, HR Brew delivers up-to-date industry news and tips to help HR pros stay nimble in today’s fast-changing business environment.

Though the Starbucks case is still pending, Jen Rubin, employment attorney at Mintz, disagrees that simply tying executive comp to diversity hiring violates civil rights law. Rubin told HR Brew by email that not only are such programs lawful, she thinks they’re “a valid measure of [executive] performance,” and “among the most effective mechanisms to achieve corporate equity and inclusion goals.”

Others are not as enthusiastic about the practice. In 2021 guidance from the Joint Center for Political and Economic Studies and employment firm Wilmer Hale, authors warn, “there is an increased risk of employer liability” associated with such programs, particularly if employees can show the policy “caused a decisionmaker to impermissibly consider [protected factors]” when making employment decisions.

Rubin told us it can come down to how HR and hiring managers implement diversity hiring targets—are targets used to inform companies’ employment calculations or aspirations? She argues when companies focus on the latter, HR can get it right.

“You absolutely cannot make an individual hiring decision based upon a protected characteristic: full stop,” Rubin said. But it’s fine, Rubin said, to meet targets by broadening the scope of recruiting efforts. By the time recruiters review final applicants, she said, they will naturally have a more diverse selection to consider.

What’s next: Mike Delikat, partner at Orrick and former head of the firm’s global employment practice, told us that negative attention toward DE&I policies, including diversity hiring, is increasingly on his radar as anti-DE&I shareholder activism becomes a “trend.” He’s advising clients to proactively “kick the tires” on policies to evaluate possible risk. A full checkup, he said, includes inspecting how policies are written, applied, and the justification for why a diversity hiring policy was put in place to begin with.

“Was there a legitimate basis [for a policy] because there was very poor representation of women in the top four pay grades, for example? Were there records kept to show that?” Delikat asked. He then investigates how or whether hiring managers are trained to apply the policies.—SV

Quick-to-read HR news & insights

From recruiting and retention to company culture and the latest in HR tech, HR Brew delivers up-to-date industry news and tips to help HR pros stay nimble in today’s fast-changing business environment.