Back in 2021, fast-food giant McDonald’s announced a plan to tie 15% of executives’ annual incentive bonuses to meeting DEI—diversity, equity, and inclusion—goals, such as increasing the percentage of women and underrepresented groups in senior leadership roles. The company also set a four-year goal to have 35% of leadership roles in the U.S. filled by people from underrepresented groups. At the end of 2023, representation reached 33%, a 5% increase from 2022.
Now, McDonald’s is pursuing a different course. On January 6, the leadership team announced the company is retiring some of its DEI initiatives, such as “aspirational representation goals" and supplier diversity targets. But McDonald’s annual incentive plan continues to hold the CEO and senior executive officers accountable for efforts that drive employee engagement and values, including inclusion.
"McDonald’s commitment to inclusion and the communities we serve is steadfast," a McDonald's spokesperson told Fortune. "The critical work of expanding access to opportunity continues because our business thrives when we are shaped by the communities in which we operate.”
McDonald’s is hardly alone in reframing its approach to DEI. On February 5, famously progressive Google said it was purging diversity hiring targets. The companies join a growing list of others—including giant brands like Amazon, Meta, and Target—that are eliminating or rethinking DEI policies crafted in a very different political climate five years ago.
This retreat from DEI has also extended to executive pay incentives for senior leaders. As the chart below shows, the trend grew steadily from 2021 but has since tapered off sharply:
View this interactive chart on Fortune.com
This shift comes amid a political and social media backlash to DEI, but has also come in response to recent court rulings that have found certain diversity-related practices to be illegal. However, some of the discourse about DEI has been oversimplified. Talent goals for CEOs and senior execs, generally, were never a matter of just recruiting a certain number of employees from underrepresented groups in exchange for a pay boost. Senior leaders were incentivized to focus on recruiting with diversity in mind and creating a more inclusive culture that could sustain amid future demographic shifts.
Despite all of this, however, corporate boards are not turning away from DEI altogether. In the case of executive compensation, many of the broader goals are still there—they are just being packaged a little differently, and wrapped into strategic pillars related to human capital—including talent and creating an inclusive corporate culture.
Bonuses related to diversity strategy
The brutal murder of George Floyd in 2020 set off a racial reckoning in the U.S. That led to calls to address historical injustices, including in the workplace, leading many companies to reassess their approach to DEI. Many observers felt that business leaders had long been paying lip service to inclusion, but had only modest improvements to show for it.
In response, firms began using money as a motivator for change. According to ESGAUGE data, some of the largest companies—like Apple, Allstate, and PepsiCo—wove diversity and inclusion metrics into their compensation plans for senior leaders in various ways. The plans called for rewarding executives either through annual cash bonuses or long-term incentive plans.
In order to assess progress, some pay packages added DEI among the factors to be considered when evaluating various qualitative aspects of performance. Others set explicit targets to measure progress in fields like hiring.
According to ESGAUGE, the number of S&P 500 companies with DEI-related metrics woven into compensation plans surged from 170 companies 2021 to 251 in 2022 among all senior executives. For just S&P 500 CEOs, the prevalence of DEI metrics in comp plans rose from 149 to 224 during the same period.
In practice, this often entailed companies introducing DEI into short-term incentives (STIs), which are annual cash bonuses. “STIs are better in reinforcing immediate behavior change, initial momentum, and faster adoption of DEI objectives,” according to Tom McMullen, senior client partner at Korn Ferry.
STIs also allow companies more flexibility in focusing on certain aspects of DEI year over year. For example, in year one, executives might be incentivized to establish the foundation of a program and then, in year two, to design and popularize the program.
In 2024, 47% of S&P 500 organizations had a DEI metric in their short-term incentive program, and 4% had a DEI metric in their long-term incentive [LTI] program, according to McMullen.
Are there financial repercussions if an executive fails to meet a target? “If the organization is slightly below its DEI goal, there may still be an incentive payment,” McMullen explained. “If an organization substantially misses its DEI goal, the incentive payment for that portion of the goal may be zeroed out. It depends on the nature of the plan design.”
For instance, Apple in 2020 introduced a 10% ESG modifier in its annual bonus program. The modifier allowed the board’s compensation committee to adjust awards upward or downward by up to 10%—or not make any adjustments. After the committee applied a 7.5% modifier in 2023, it did not apply it in 2024 since bonuses were already at their capped level, even though the company noted it had made significant progress on its efforts.
A tipping point
The practice of including diversity-related goals into senior executives' comp plans hit a high-water mark in 2023 and then began to decline. The pivot appears tied to fallout from a Supreme Court ruling from that year, which declared affirmative action practices in higher education to be unconstitutional.
Although the Supreme Court’s decision did not directly address corporate diversity programs, some companies nonetheless began to identify such activity as a potential source of legal exposure. Meanwhile, executives surveyed by The Conference Board reported it negatively impacted their efforts on DEI.
In addition to the Court’s ruling, President Trump’s recent executive order targeting DEI and a broader conservative backlash are also factors. For example, Attorney General Pam Bondi issued a memo the day she was sworn in directing employees to end “illegal DEI” and “accessibility” discrimination. Meanwhile, social media influencers such as Robby Starbuck and conservative shareholders have also sought to pressure companies by putting their DEI efforts into the spotlight.
Despite all this, the data firm ESGAUGE told Fortune that many firms are still incorporating DEI metrics into their executive compensation plans although not as frequently as before. As the chart below shows, nearly half of companies still included such incentives for CEOs and CFOs in 2024:
View this interactive chart on Fortune.com
These numbers, however, may not reflect the tidal wave of anti-DEI sentiment that has coincided with the election of President Trump and his recent Executive Orders.
Meanwhile, an activist group called the National Legal and Policy Center (NLPC) has been pressuring companies to remove DEI incentives. As the Wall Street Journal reported, the group has put forward proposals aimed at asking boards to consider removing incentives from DEI initiatives for high profile figures like Goldman Sachs CEO David Solomon and JPMorgan Chase CEO Jamie Dimon—arguing the provisions open the banks to discrimination lawsuits and harm shareholders. JPM sought approval from regulators to omit the proposal from its proxy for a shareholder vote.
A spokeswoman for Goldman Sachs told Fortune in an email: “We strongly believe that organizations benefit from diverse perspectives, and Goldman Sachs is committed to operating our programs and policies in compliance with the law.”
When asked about the pushback from anti-DEI activists, Dimon said in a recent interview with CNBC: “Bring them on.”
Other companies like Costco, Apple, and e.lf. Beauty are publicly standing by their DEI programs.
The repackaging of DEI
On a broader level, research suggests companies are responding to the new political and legal climate by tethering any DEI goals to long-term business strategy so as to avoid being blasted as “woke.” In practice, this often means refashioning language and specific incentives while seeking to maintain diversity and inclusion as a desirable goal.
A recent report from The Conference Board revealed more than 60% of corporate executives view the current landscape for DEI as challenging, but only 10% of those surveyed report their companies are reducing their DEI resources over the next three years. Meanwhile, more than half have refashioned their DEI terminology, adjusting language to broader concepts like fostering “inclusion,” “belonging,” and “engagement,” which are less prone to legal challenge, according to the report.
Others are also repackaging DEI-related goals tied to CEO or senior executives’ compensation into broader strategic scorecards. This typically entails wrapping DEI into business development or a related corporate-strategy pillar to hold the entire enterprise financially accountable for incremental progress on social goals—and make their plans defensible should they come under threat.
“There’s been a lot of press coverage about companies pulling back from DEI commitments under pressure from activists or due to legal risk,” said Andrew Jones, senior researcher in business organization The Conference Board’s ESG center. “In practice, it’s more nuanced and it’s more a recalibration and a rebranding of DEI rather than dropping those commitments outright.”
Others, though, express a more skeptical view of companies’ evolving views on DEI. Lori Patton Davis, a professor at UCLA's School of Education and Information Studies, suggests firms’ recent retreat from pre-existing DEI initiatives aren’t necessarily due to fear of legal or social reprisal.
“For most, if not all companies, addressing their bottom line is the most salient priority,” said Davis. “[They] have decided the DEI initiatives they had were irrelevant to their bottom line and not central to their values.”
She added that many of companies’ original commitments came about as part of a “bandwagon approach” that arose in summer 2020 following the death of Floyd.
One compensation expert, though, argues the response of corporate America to the wave of anti-DEI sentiment has been more nuanced. Dan Laddin, a partner at Compensation Advisory Partners who works with comp committees, says many companies are standing by the spirit of their earlier commitments—all while seeking to sidestep social influencers, negative media attention, and potentially shareholder lawsuits.
The bottom line, in Laddin’s view, is that DEI is getting a low-key rebrand in order to de-risk compensation plans against litigation, while trying to stay aligned with values they expressed to stakeholders and employees.
“You have a lot of voices out there pushing against this, but you have a lot of voices pushing very hard for it, too,” said Laddin.
