The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

January 9, 2025

Individual Performance Metrics: Discretionary Bonuses in Disguise?

Back in the 2021, there was a jump in the percentage of companies including individual performance metrics in their annual incentive plans. A number of companies added these metrics during pandemic times in order to provide some flexibility in the midst of uncertainty. A recent analysis from ISS Corporate observes that usage has remained steady ever since – with 34% of companies across the S&P 500 and Russell 3000 using them, compared to 29% in 2020. The memo looks at payouts at these companies compared to companies that do not use individual performance metrics. Here are the key findings:

– Incorporating discretionary components within a company’s Annual Incentive Program has become increasingly common, particularly in the Real Estate and Financial sectors.

– Companies that have individual performance metrics in their Annual Incentive Programs tend to deliver higher payouts and executives are more likely to achieve target than companies that do not.

– Discretionary components in a compensation program generally shift pay more towards the Annual Incentive Program for companies in the Russell 3000, while having the opposite effect for the S&P 500.

– Individual performance metrics may be used as a substitute for discretionary bonuses for S&P 500 companies, but the opposite is true for Russell 3000 companies, where companies with discretionary metrics also award larger discretionary bonuses on average.

Companies may want to prepare to talking points in response to these observations, because the memo offers this advice to investors:

The results also suggest that investors should carefully evaluate programs that lack pre-set quantifiable metrics. While IPMs add needed flexibility to a CEO’s pay package, they can also subtly lead to an increase in short-term pay. Companies with IPMs are more likely to hit their target payout, and short-term payouts may be significantly higher as well. In short, the results suggest an important role for monitoring AIPs with a heavily weighted individual performance metric and it is incumbent on companies to provide adequate disclosure.

Remember that last month, updated ISS FAQs also signaled that companies may face more scrutiny this year around performance metrics and related disclosures, especially for performance-vesting equity when pay & performance aren’t aligned under ISS’s quantitative test.

Liz Dunshee