January 16, 2025
LTI: Should You be Reconsidering Your Performance Periods?
This Aon article says that economic instability and heightened shareholder scrutiny of the use of positive discretion are putting pressure on companies when setting metrics for their LTI plans with three-year performance periods. Greater uncertainty makes it challenging to set “realistic, achievable and suitably challenging” goals.
For this reason, Aon is seeing more and more companies reconsider three-year performance periods in their LTI programs, with some of those companies opting to use a three-year averaging method for performance shares. This “hybrid” approach incorporates averages derived from three distinct one-year performance periods. The article says there are a number of potential benefits to this approach:
– Flexibility: Shorter performance periods enable boards to adjust to shifting market conditions and macroeconomic uncertainties, making goals more precise and achievable.
– Enhanced performance tracking: With realistic and timely internal and external financial data, incentive targets can be set appropriately. The averaging approach requires sustained achievement of long-term performance objectives.
The article says this approach achieves these goals while still demonstrating “to investors that the board has a long-term vision.” For example, the proxy advisors “generally favor cumulative long-term performance metrics,” but “averaging three one-year performance periods helps address their concerns about adopting shorter-term performance periods.” If you’re in this boat, consider your CD&A disclosure carefully since the article notes, “thoroughly communicating the reasoning behind the board’s long-term vision is crucial.”
– Meredith Ervine