As the market remains in flux following recent tariff-related announcements and broader macroeconomic headwinds, companies are navigating a new wave of uncertainty, one that poses real challenges to executive compensation strategy.
Compensation committees and HR leaders are asking, “What should we be doing?” Our guidance is simple: plan now, act later.
Decisions companies make around executive compensation should reflect discipline and foresight – not short-term reactions to market noise. By being proactive and modeling potential scenarios, companies can position themselves to make fully informed decisions as the economic picture becomes clearer.
Annual Incentive Plan ("AIP') Considerations
Most companies set 2025 AIP targets earlier this year, before the April 2nd tariff announcements. With greater clarity now around potential downside risks, from tariffs to supply chain disruptions to shifting consumer demand, it’s critical to monitor whether AIP goals remain realistic and continue to effectively motivate and reward performance.
We do not recommend immediate changes. Instead, companies should begin monitoring how external pressures are affecting financial results and performance against targets. If the macroeconomic environment persistently drives down performance, compensation committees may need to evaluate whether goal adjustments or the use of discretion may be appropriate. Any such decisions should be grounded in a clear understanding of what is and is not within management’s control, and carefully weighed against shareholder expectations and the integrity of the incentive plan.
Companies that have yet to set their AIP goals can expect continued uncertainty and can take steps in goal-setting to help mitigate the impact such as widening goal ranges, setting target as a range, and establishing pre-determined adjustments.
Equity Compensation Considerations
Retention Risk
Falling stock prices reduce the value of outstanding equity, particularly stock options, undermining their retentive and motivational power.
We recommend companies identify whether certain individuals or roles may be at risk and begin scenario planning around potential retention strategies (e.g., selective grants or adjustments to future award sizing or mix) if challenges persist.
We also note that while retention is a legitimate concern, companies should also consider that this is a market-wide impact, not company-specific.
Share Pool Management & Burn Rate
Lower stock prices mean more shares are required to deliver the same intended grant value, accelerating burn rate and putting strain on the equity reserve.
Depending on your grant timing, now may be the time to model a range of future stock price scenarios to assess the potential duration of the current share pool. This analysis can help determine if a future share request may be needed, or whether changes to long-term incentive design or granting approach (e.g., shifting mix of vehicles, adjusting performance design, refining eligibility, modifying share determination approach) could help mitigate challenges.
Even if the plan has sufficient shares on paper, using significantly more shares to deliver target values can raise red flags with investors and potentially deliver unintended windfalls to participants with a market rebound.
Long-Term Performance Goals
As with annual incentives, we do not recommend making immediate changes to in-flight long-term performance goals. However, performance should be continuously monitored. If economic conditions materially impact long-term goal achievement over the coming months, there may be a case for revisiting goals – but only after the full impact is better understood.
And if 2025 long-term performance goals have yet to be set, companies can consider mitigating approaches such as implementing shorter performance periods, wider ranges around target, relative metrics, and pre-determined adjustments.
Looking Ahead
Uncertainty is not new, but the current economic climate demands heightened vigilance. Compensation decisions made today will be scrutinized tomorrow – not just by employees, but also by shareholders and proxy advisors. By focusing on data gathering, scenario modeling, and thoughtful planning, companies can position themselves to act decisively when the time is right.
Being proactive now avoids surprises later.
