Ongoing volatility in US markets is expected to extend into 2026, shaping how directors sculpt compensation plans.
The ongoing trade war, uncertainty over federal interest rates, pressure from the White House against certain social metrics, changes from proxy advisors and expectations that the SEC will overhaul compensation disclosure requirements are all making it hard for compensation committees to shape executive pay programs for next year.
Amid the chaos, boards are adding flexibility to comp plans — including delaying when certain goals are finalized and adding components to plans that explicitly allow adjustments in case of regulatory changes, sources tell Agenda.
Ideally, those methods will help minimize the likelihood that directors will have to turn to the use of positive discretion, said Bill Reilly, managing director at Pearl Meyer. He noted that positive discretion at the senior executive level poses challenges for companies in that proxy advisors and investors tend not to support its use.
Pearl Meyer recently released a report—which included a survey that was conducted in August and September and included mostly publicly traded companies but also privately held ones and nonprofits—into how companies are assessing performance against 2025 plans and how they're approaching comp planning for next year.
Although many respondents said they didn't intend to exercise any discretion on 2025 plan payouts, and some weren't sure, those who do intend to use discretion intend to do so positively, as opposed to using negative discretion, said Reilly. Further, those who plan to apply discretion intend to use it more for short-term incentive plans, as opposed to long-term ones, and more so for nonexecutives than for executives, he added.
Tapping discretion was more prevalent for smaller, private companies versus larger, public ones, Reilly explained, adding that is likely the result of the heightened scrutiny that public companies face. Further, about a third of respondents said they were in a "wait-and-see" state of mind regarding the use of discretion on comp plans, he added.
Next year will likely see more market uncertainty, and it will be important for comp committees to try to allow for flexibility as best they can, said Reilly.
In fact, nearly 40% of respondents to the survey said that they've taken one or more actions to address goal-setting challenges within the current environment, said Reilly.
Some actions include delaying the finalization of goals to allow more time to garner market insight, moving to broader performance ranges and considering more relative metrics within incentive plans, said Reilly.
ESG Pullback
The report also found pullback at companies regarding stand-alone diversity, equity and inclusion and environmental, social and governance incentive plan metrics. For instance, only 22% of public companies and 13% of private firms now include stand-alone ESG metrics in incentive design.
Last year's survey showed similar trends, according to Reilly.
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