By Jennifer Williams

Links between executive pay and diversity goals lost ground in large companies' most recent annual filings as American corporations retreat from DEI.

Twenty-nine members of the S&P 500 dropped diversity, equity and inclusion goals from executives' pay metrics in company statements filed during the 2024 proxy season, up from 20 in the period a year earlier, according to advisory firm WTW. The number of companies adding DEI measures to compensation calculations meanwhile fell to 26 from 81.

DEI policies are under mounting pressure from conservative activists emboldened by a 2023 Supreme Court decision striking down affirmative action in college admissions and, more recently, by the return of President Trump to the White House. Trump has quickly ordered federal agencies to end DEI programs and investigate diversity programs at employers including publicly traded corporations, while recipients of federal contracts were instructed to certify that they don't run "programs promoting DEI that violate any applicable Federal anti-discrimination laws."

Many companies may keep the DEI link to pay, but "there's the general movement of dropping those metrics," said Kenneth Kuk, a senior director at WTW. Whatever the outcome in each case, boards and management are thinking carefully, he said.

Ride-hailing pioneer Uber Technologies said it is revising its DEI incentives, which have linked a performance-based award to targets for increasing the representation of women and underrepresented people.

"We intend to make changes to our executive compensation goals, including our DEI goals, in the weeks ahead," an Uber spokeswoman said. Uber typically releases its proxies in late March.

Because proxy statements are a lagging indicator that describe compensation in the previous year, the disclosures indicate that the shift in momentum has been under way for some time.

Fifty-seven percent of the S&P 500 still linked DEI goals to executive pay in last year's proxies, according to WTW, reflecting their compensation arrangements for 2023. Although that was down only slightly from 58% a year earlier, the dip ends a two-year surge when companies added diversity measures to their compensation structures as part of their response to the 2020 police killing of George Floyd.

The new proxy season starting this spring could see more companies cut those ties. "It wouldn't surprise me when proxies start coming out to see more softening or taking these metrics out completely," said Ryan Colucci, a principal at Compensation Advisory Partners, or CAP.

Companies generally have flexibility in the level of detail they share on how top executive pay is determined. Boards typically have linked DEI metrics to short-term bonus pay, which doesn't affect a significant portion of an executive's overall compensation, advisers say. Those metrics can take the form of relatively specific targets or general companywide progress. Sometimes diversity goals are lumped in with other strategic or individual measures.

Those now backing away from linking pay with DEI are doing so in equally varied ways, including eliminating the connection entirely, softening the language and moving away from quantitative metrics.

Prudential Financial dropped financial incentives related to diversity and inclusion. The financial services company started adding diversity goals to executive compensation plans in 2018 so that certain performance-based payouts increased or decreased by as much as 10% depending on the change in representation among senior management of people of color, women, veterans and LGBTQ and disabled people. It said last year in a regulatory filing that the compensation incentive was no longer necessary because the company had significantly increased diversity since introducing the tie to pay.

Electric utility company FirstEnergy reduced the impact of DEI metrics in executive bonuses, saying it needed to offset increased weighting for operational targets.

A range of criteria that included hiring women, people with disabilities, veterans, LGBTQ workers and those from racial and ethnic minorities accounted for 10% of a business leader's 2023 cash award, described in the company's most recent proxy, down from 15% a year earlier.

"While this shift addresses the need for immediate improvements in our operational performance, your company is no less focused on our DEI culture and priorities," FirstEnergy said in its filing.

At Becton Dickinson, metrics for annual cash awards are changing. Just over a year ago, the medical technology business said certain targets, including companywide inclusion and diversity goals, could boost executives' annual awards by as much as 5%. Now, the targets are instead built into individual goals, Becton Dickinson said in December.

While some boards are changing or cutting the tie between DEI and executives' pay, the underlying desire to create more opportunities for underrepresented groups often remains, compensation advisers say. "It's not necessarily a backing away from the theme of what board members want, " said CAP's Colucci. "It's more, are we doing this in a thoughtful way and without unnecessary risk?"

"You can have someone focus on something even if it's not dollars and cents," Colucci added.

Some companies, meanwhile, are changing the wording about DEI targets for pay.

Accenture previously listed gender, racial and ethnic diversity and inclusion goals among the annual factors that influence executives' performance-based pay. That wording now includes "hiring, retaining, and promoting people who have different skills, backgrounds, perspectives and lived experiences," the professional-services company said in December.

At FactSet Research Systems, board members look at personal goals set for each top executive to determine 20% of their yearly incentive awards. Among the considerations for chief executive Philip Snow's fiscal 2023 payout was whether the financial data provider's culture values diversity. A year later, FactSet said Snow's goals included driving a culture that attracts and retains talent and represents the company's values.

Those keeping DEI compensation metrics are ensuring they can explain why it's good for the business, said WTW's Kuk.

"If you cannot make that case, that's a very delicate spot to be," Kuk said. "All of your initiatives, and the fact that you have the metrics, are built on a weak foundation, so whenever you have any external factors pushing you, everything falls apart."

Companies including Marriott International and Tyson Foods still had links between DEI and some part of business leaders' compensation as of their latest proxies.

Costco Wholesale links a portion of executives' bonus pay to social objectives including DEI metrics. The warehouse giant recently came under fire from a conservative activist group pushing the company to evaluate and publish a report on the risks posed by its diversity policies and goals. Ahead of the company's annual meeting last week, Costco directors vigorously defended the company's stance on diversity, calling it consistent with its values and integral to the business.

"Our position on these issues is not new," board chair Hamilton "Tony" James said at Thursday's meeting. "We have always been purposefully nonpolitical and a welcoming workforce has been integral to the company's culture and values since its founding." Costco shareholders overwhelmingly rejected the activist group's proposal, with more than 98% of shares voting against it, according to a regulatory filing.

-- Theo Francis contributed to this article.

Write to Jennifer Williams at jennifer.williams@wsj.com

(END) Dow Jones Newswires

January 28, 2025 05:30 ET (10:30 GMT)

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