The Advisors' Blog

Even though we (thankfully) put the pandemic behind us several years ago, we can’t say the same for business complexities and surprises. When it comes to compensation plans, that may be why a few pandemic-era practices have continued.

This memo from ISS Corporate says that compensation committees continue to prioritize flexibility for short-term incentives. They’re doing this by using a greater number of metrics than in pre-pandemic times, including non-financial metrics that may involve subjective measurements. Here’s an excerpt:

Although the growth of metric counts and the use of individual/non-financial metrics has slowed slightly from immediate post-Pandemic levels, neither trend shows signs of returning to pre-Pandemic levels. Short-term incentive program design has thus undergone a paradigm shift: more complex programs and more qualitative metrics are used to mitigate the risk of non-vesting and provide flexible opportunities to ensure vesting independent of performance. That protects executive paydays (and, ideally, executive retention) well after the macroeconomic shocks of the Pandemic have subsided.

Thus, short-term incentive design implies a riskier and more challenging business environment than before the Pandemic, even if not directly due to the lingering effects of the Pandemic. This situation is seen as justifying enhanced executive compensation in ways notably different than pre-Pandemic norms and expectations, both in terms of investor understanding of program design and achievement and the importance of a direct link between pay and performance. Declining rates of say-on-pay failures seem to affirm the investor viewpoint that business now is harder than before the Pandemic and executive compensation focused on outright compensation is more acceptable.

The memo says that companies with more metrics tend to have higher payouts – but those payouts may not translate neatly to higher returns for shareholders. Investors could take issue with that if the short-term incentive plan is supposed to incentivize year-over-year stock price increases. However, the memo acknowledges that this component of compensation programs may be geared more towards retention. Here’s concluding food for thought, which may be helpful in communicating about plan design:

At the same time, these trends are partially explainable by reflecting on the focus of incentivization: if the intent is to promote executive retention by constructing near-term awards that are realistically obtainable — and that remain so even in years of market turmoil such as during the Pandemic — the question of the relationship between payouts and performance takes on a different contour when market participants consider the role of short-term versus long-term incentive compensation.

Whether these trends extend beyond the 2026 annual meeting cycle remains uncertain. In the absence of a significant external disruption comparable to the Pandemic, prevailing market norms are likely to continue favoring more complex short-term incentive structures with reduced reliance on purely financial metrics. Although some trends, such as complexity, appear to have plateaued, emerging practices, once established, can proliferate as companies seek to remain competitive in attracting and retaining executive talent, given the central role of peer benchmarking and comparative assessments in executive compensation decisions. From this perspective, short-term incentive design can be understood less as a direct reflection of company performance and more as an expression of the board’s assessment of, and confidence in, management’s leadership.

– Liz Dunshee