The Advisors' Blog

Late last month, I shared three approaches to incorporating AI into incentive plans. This FW Cook article in Corporate Board Member also shares thoughts on that topic and predicts that:

As spending on AI leadership, infrastructure and enterprise-wide transformation efforts continue to escalate, investors may begin pressing companies to measure whether those investments are actually creating value. “As companies get clarity around the best way of quantifying returns on AI investment, it will serve as the logical bridge to incorporating related metrics into compensation programs,” says Kaplan. “At that point, the qualitative goals that we are currently seeing in bonus plans will likely morph into quantitative metrics that are more meaningfully integrated into incentive plans.”

It also points out that AI has broad implications for compensation design beyond AI metrics themselves, since, like anything uncertain that is central to corporate strategy, it’s exacerbating the already challenging process of setting multi-year goals.

As companies lean further into AI-driven strategies, the unpredictability surrounding future business models and operating results could make traditional multi-year financial goal setting more difficult, says Kaplan. “An indirect consequence of this may be a shift back toward metrics tied to share price or total shareholder return, or a re-examination of stock options as an equity vehicle, all of which are strategically agnostic and reward for shareholder value creation without relying on precise long-term forecasting.”

In 2022, Liz shared many ways companies grappled with forecasting challenges in response to COVID-19 uncertainty. At the time, she noted that these practices “were carried into the 2021 compensation year – and may linger even longer.” With tariffs, geopolitical conflicts and AI, perhaps Liz’s title, suggesting that some of these practices were “here to stay,” was prescient.

– Meredith Ervine