In the end, money may be the only way to move the diversity needle. After watching most firms fail in their efforts to add more leaders of color, the world’s largest fast-food chain has decided to tie executive pay to the challenge.
In one of the first moves of its kind, McDonald’s said it is tying 15% of executives’ bonuses to meeting targets including diversity and inclusion. The company has discussed such an effort in the past year, but this put “some teeth and transparency behind it,” says Sheila O’Grady, a Korn Ferry senior client partner and head of the firm’s Restaurant practice. (Wells Fargo, which announced a similar pay plan last summer, may have been the first to act.)
It wasn’t that long ago that all executive pay was tied to sales, profits, or other strictly financial metrics. Tying 15% of an executive’s bonus to the performance of any nonfinancial metric is uncommon, says Don Lowman, a Korn Ferry senior client partner and global leader for the firm’s Total Rewards practice. About one out of every five public firms have started to indicate that they are tying some amount of executive pay to environmental, social, or governance metrics. “It’s a coming trend, and McDonald’s, because of its name recognition, will bring this more attention,” Lowman says.
But while most are lauding the move, experts say it will be difficult to determine how to make these plans effective. Should the company give executives one year or five to increase the number of leaders from underrepresented groups, for example? Overall targets must also be realistic and aggressive at the same time, which can be another challenge. For its part, McDonald’s aims to have 35% of its US senior management from underrepresented groups by 2025, up from 29% currently. Another goal is for senior roles worldwide to be 45% women by the same year and 50% by 2030, compared with 37% now.
Giving itself multiple years to reach its diversity goals can reduce the idea that the company is imposing a quota system, experts say. It also provides the company with more options for hitting the goal, such as developing existing high-potential talent. Indeed, many experts believe that few companies can sustainably solve a chronic lack of diversity solely through hiring a bunch of people from underrepresented groups. “If you don’t nurture now, you won’t get the leaders later,” says Andrés Tapia, Korn Ferry’s global diversity and inclusion strategist. The additional years also can allow McDonald’s, or any firm that tries a similar plan, to review its own internal succession plans, allowing it to map out what roles might be open over the next few years and begin identifying people of color inside the organization who could potentially fill them.
Though corporate executive teams have been saying for years that diversity and inclusion were priorities, people of color in executive positions are still few and far between at large US companies. Almost 90% of the Fortune 500 are run by White men. Only 1% of the large-firm CEOs are Black, less than 3% are of Asian descent, and less than 4% are Latinx. According to its own data, McDonald’s actually has a higher percentage of people of color and women in leadership positions than most Fortune 500 firms.
The transparency behind the company’s diversity move is in itself helpful and unusual, diversity proponents say. Stakeholders have been pressuring organizations large and small to release demographic data on their workforces along with plans on how they will make their firms more diverse and inclusive. Some countries have mandates on the minimum number of women on boards. George Floyd’s killing last spring and the resulting protests spurred many firms to make commitments to become more diverse and inclusive.