The Advisors' Blog

I must admit that I’ve had trouble keeping up with the status of tariffs. Yesterday, when I read this Semler Brossy article about incentive program impacts, I had to quickly check where things stood. Semler Brossy says this uncertainty — from the back and forth among governments — is all the more reason that boards and compensation committees need to develop a framework for responding to tariffs (from a compensation perspective) before they are announced.

That framework needs to address in-flight incentives — where any adjustments will attract criticism — and new awards — where it is “easier to justify taking tariffs into account in goal setting.”  Generally investors “view tariffs as having an operational impact that businesses are expected to work through” and expect companies to “adjust operations and not accounting.” And, while the level of uncertainty may be too great to address tariffs in goals today, boards still need to be doing the following in the short term:

Discuss the possible scenarios where adjusting incentives may be necessary. No matter what happens in the future, the committee can build consensus about how to plan for future actions when and if tariffs are imposed and outline likely scenarios where tariffs may require a change to incentive plans.

Size potential adjustments. Following alignment on a framework, estimate the cost of any changes and their resulting impacts under various tariff scenarios outlined above.

Build flexibility into existing plan language. This ensures appropriate discretion/actions can take place should an adjustment be deemed necessary.

Conduct a deep dive into the existing incentive plans. Keep an eye on ways incentive plans might be made more durable. This could be by adding emphasis on relative metrics, expanding threshold and maximum goal ranges, or adding an additional operational modifier that allows for subjective year-end assessment (note: this list is non-exhaustive).

The article goes on to provide a flow chart that could guide decision-making when a compensation committee considers whether adjustments to in-flight awards should be made.

– Meredith Ervine