Back in July 2021, the UK financial services regulators published a discussion paper seeking views on how to make the industry more diverse and inclusive. It sets out potential policy options including, among others, the use of targets for representation, measures to make senior leaders directly accountable for diversity and inclusion in their firms, linking remuneration to diversity and inclusion metrics and the regulators’ approach to considering diversity and inclusion in non-financial misconduct.
Focusing on the remuneration aspect, the paper highlights how linking progress on diversity and inclusion to remuneration could be a key tool for increasing accountability in firms and incentivising progress.
“It’s a carrot rather than a stick”, comments Professor Trevor Williams, Chair of the Institute of Economic Affairs Shadow Monetary Policy Committee. “But if you’re driven solely by money, you may respond positively as a manager.
“However, I think the issue of lack of diversity and inclusion is more than just numbers,” Williams continues. “It’s about including people in decision-making and the conversation. Hence, I’m not convinced by this approach, but it may work if it is part of a whole package”.
Williams says it also depends on the weight of diversity in the package of remuneration that managers have been offered: ie, how relevant it is to other targets such as sales or staff and customer satisfaction ratings.
“If diversity and inclusion (and it should be both) don’t have a high enough weight, it won't matter enough - even if it is part of the manager’s remuneration package. Senior managers should look for more than just remuneration. It should also be about job satisfaction, reputation and legacy, of feeling they are making a difference and doing something positive.
Remuneration is no doubt part of feeling valued but is also simply part of the whole job satisfaction profile,” adds Williams.
D&I: a quadrilateral problem
Williams goes on to say that D&I is not a linear problem that can be solved by increasing the percentage of diverse workers in a company: it's also about how employees are treated and feel about the company.
He explains how diversity needs to be monitored by a closer look at staff turnover rates, career progress within the business, assessments of worker satisfaction and perception of their treatment etc.
For example, companies should be looking at the numbers of employees leaving and if the rates are high, then using exit interviews to find out why. Are they included in decision-making or feeling ignored? Otherwise, the company will not reap the benefits diversity can bring.
FRC analysis on Board Diversity and Effectiveness shows that companies that had at least one woman on the board experienced higher levels of EBITDA after three years, while McKinsey’s latest analysis reaffirms the strong business case for both gender diversity and ethnic and cultural diversity in corporate leadership.
Wall Street Journal research also outlines that diverse and inclusive cultures are providing companies with a competitive edge over their peers, with diverse teams better prepared for decision-making and avoiding complacency and sameness in thinking.
Despite this growing body of supporting evidence, in 2020, 59% of FTSE 350 companies did not meet the target set by the Parker Review of having at least one director from an ethnic minority background, showing there is still a long way to go.
“One part of it may be to get the numbers through the door, but believe me, that's not enough. It is a challenge, but it's not enough. It's got to be a great place to work because everyone then feels included in a nice environment where you’re all supported and this will breed diversity,” Williams explains.
Once the money goes, will things revert back?
Using remuneration to drive D&I does not solve the whole problem, says Partner at executive search company Odgers Berndtson, Mark Freebairn.
“I don't think it [remuneration] really achieves the behavioural change you're looking for,” says Freebairn. “I think it achieves a different outcome for as long as you're able to use money to drive that different outcome. But when the money goes, in my experience, most people revert back”.
Freebairn says using remuneration as a D&I incentive is like a manager paying off an employee to work better with a colleague in the office they dislike. It may solve the problem for the time they work together but once the money stops, the problem will probably resurface again. Whereas, if the manager sits down with the employees and works through their differences, this could have a long-lasting effect which has actually achieved behavioural change instead of ‘bribing’ it – “If money drives behaviour, then you haven't shifted behaviour, you've just bribed someone to do it”.
However, if what’s proposed is that diverse recruitment becomes part of a permanent bonus system, in the same way some workers get a chunk of their bonus for the profit they help the business generate, then Freebairn believes it could end up working. This money will force people to change behaviour and on that basis, if it's always there, it doesn't matter whether or not it's changing the behaviour on an intellectual level, or just on a primary level. It's going to end up working because it will change what people do.
All aiming towards the same goal
Focussing more on the end goal and how this would feel to be someone hired to boost a company’s diversity, Freebairn believes that if he was hired to bring a different perspective which adds value to the company, and someone's being paid twice the fee to hire him because it's so difficult to find different people, ‘Instinctively I’d feel valued for who I was by the firm in the first situation. And I think I'd also feel that the firm was forward-thinking enough to recognise the value of diversity of thought in his leadership team’.
Freebairn concluded: “Bottom line, where I would hope we can all get to you is that universally, we all recognise talent is talent. Because everyone's customer base and everyone's employee base comes from a myriad of different backgrounds, and perspectives. And the more the leadership group of an organisation can understand and reflect those opinions, aspirations and thoughts, the more that organisation is going to help and support its employee base.
“Anything that drives greater and increased diversity of thought within an organisation is inherently a good thing.”
Read ICAEW’s coverage of the discussion paper: Financial services regulators seek views on diversity and inclusion
ICAEW’s Diversity and Inclusion hub brings together timely resources on regulation and equality, along with our latest insights into diversity in the profession.
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