The Advisors' Blog

I blogged earlier this week about annual incentive plan practices. These annual reviews are always interesting and helpful for benchmarking – but it’s important to acknowledge that the data lags actual trends, since it’s based on proxy statement disclosures of prior-year practices. As we know, a lot can change in one year!

This Equilar report takes a closer look at how things changed from 2023 to 2024, which may give more of a sense of the trend line as compensation committees start considering 2026 plans. Here are a few takeaways:

– 2024 saw a slight uptick in financial metric weighting. At the median in 2024, financial metrics made up 90% of the bonus plan, up from 85% in 2023, and 2024 also saw a corresponding downtick in non-financial weighting and prevalence. Market-based metrics (e.g., stock price) continue to be rarely used. The backlash against ESG/DEI metrics is a contributing factor to this small shift.

– Compared to 2023, 2024 saw a slight decline in individual performance usage (189 vs. 192). In terms of implementing individual performance, there was movement away from formal weightings and towards modifiers, mostly multipliers. For companies that weighted the individual performance component, weightings remained largely unchanged.

– On payouts, median corporate score factors in 2024 declined six percentage points at the median vs. 2023, and declined 7.1 percentage points on a total payout basis. The “corporate score” is the percentage achievement of goals – which corresponds to the payout. The decline in payouts could be due to overachievement of goals in 2023 that led to comparatively increased metric rigor in 2024.

– The use of discretion continued to decline from 2023 to 2024 – from 48 to 38 companies – compared to the surge that happened in the COVID years. In addition, one company in 2024 made an in-flight modification to the structure of their bonus plan, down from three in 2023.

– Circuit breaker usage declined from 37 companies to 36 from 2023 to 2024. In both years, a circuit breaker was triggered by three companies.

– Plans at 17 companies included a formal range of allowable discretion on the formulaic corporate score results, typically in the range of +/- 15% to 25%. This is distinct from other discretionary elements such as individual performance or discretionary metrics. In 2023, 16 companies included this feature in their plans.

The report also looks at common metrics. As you might guess, the biggest changes on that front are with ESG. Here’s more detail:

The prevalence of ESG metrics within formulaic plans was 32.7% in 2024 vs. 37.5% in 2023. Prevalence in this case only factors in metrics with a weighting or modifier effect and excludes ESG metrics embedded in individual performance or grouped strategic metrics. Within the subset of diversity metrics, there was a more dramatic decline from 12.2% of companies in 2023 to 7.4% in 2024. Lastly, the most dramatic decline occurred in diversity metrics with representation targets, which declined from 6.7% of companies in 2023 to 1.2% in 2024.

For companies that chose to retain diversity metrics in 2024, most eliminated any goals that could be interpreted as “quotas,” instead focusing on goals like diversity training, surveys on employee satisfaction and inclusion, and having diverse candidate slates for open positions. For companies that eliminated diversity metrics, most either shifted the weighting back to financial metrics or to a more general strategic goals metric covering various qualitative aspirations.

The Equilar study covers the largest 500 U.S. public companies by revenue, and was compiled using Equilar’s “IPAC” tool.

– Liz Dunshee