One would be hard-pressed to find a major US corporation that hasn't been impacted, whether directly or indirectly, by the White House's frequently shifting tariff policy, the effects of which have already trickled into the compensation committee.
The economic uncertainty surrounding President Donald Trump's trade policy harkens back to previous market tumult—including the impact of Covid-19 and the 2008 financial recession.
"But it's different, I think, in an important way," Matt Turner, president of executive compensation at Pearl Meyer, told Agenda.
Under more normal circumstances, Turner would advise clients that, when designing incentive plans and methods of measuring performance, they should agree up front, before the start of the plan cycle, on calculation rules and a list of plan components that directors can make adjustments to later on and agree on how to carry those out, he said. In other words, he would advise boards to remove as much ambiguity from the calculation as possible so that, when the end of the year comes, directors have a narrower band of discretion to consider.
But this time around, said Turner, "that's actually, I think, the wrong way to approach the uncertainty associated with the tariffs."
He added that the political change and the whipsaw nature of Trump's tariff policy has made it very difficult for boards to say what goals they want to achieve at the outset, and it increases the odds of boards' getting it wrong. Trump's tariff approach "flips the equation" for dealing with market uncertainty in reference to executive compensation, he added.
Turner said he's advising clients to reserve the right and the ability to make comp plan adjustments at the end of the year in cases where it makes sense.
Further, directors should also make sure they have an active, ongoing conversation with the executive team throughout the year as the situation unfolds, discussing how management is dealing with any changes in the economic environment and what they're doing to mitigate the impact of tariffs, said Turner. Finally, directors should ensure that, by the end of the year, everyone has a similar mindset about what the impact of tariff policy has been and what, if anything, makes sense in terms of plan adjustments, said Turner.
Meanwhile, a number of mechanisms exist which directors can apply to mitigate tariff impacts on executive compensation if they affect the ability of boards to attract and retain talent or motivate executives effectively.
At the same time, proxy advisors are likely going to apply much tougher scrutiny to comp rejiggering at the end of 2025 than they did during the pandemic era, said Turner. Since Covid-19 was such a global event, there was some tolerance from Glass Lewis and Institutional Shareholder Services for adjustments to executive pay, said Turner.
"I think there'll still be some tolerance this year, but they're going to look very closely at it," he said.
Pay packages that reach aggressive levels through positive discretion or special awards this year will draw very negative attention from proxy advisors, said Turner. However, if a company's performance gets wiped out below threshold due to tariff impacts and the board determines that a threshold-level award is warranted, investors may stomach discretion, he said.
At the same time, companies need to be prepared to take an action that might draw negative attention from the proxy advisors "if they believe their business circumstances warrant that action," said Turner.
"The job of the board is not to get an A+ from ISS," said Turner. "The job of the board is to make sure that the executive compensation program is effective in incenting and motivating the executive team to provide the best performance possible for shareholders."