Riding the AI Infrastructure Wave: Executive Compensation and Durable Value Creation

Jake: In this season of Pearl Meyer Unscripted, we're looking at executive compensation through an industry lens. Our cohosts, Mark Rosen and Aalap Shah, are joined by several colleagues who specialize in different industries, including technology, healthcare, oil and gas, and more, to examine the aspects of compensation design that are unique to each.

In our third episode examining the technology space, we're looking at where the AI build-out intersects with energy, infrastructure, and compensation strategy.

Mark and Aalap were joined once again by managing director Malcolm Adkins, Pearl Meyer's Energy Practice Leader, who advises boards and senior management on executive compensation and governance across cyclical and changing industries. Together, they discuss how AI and data center demand are extending the technology value chain into infrastructure and energy-related businesses, what that means for scarce talent and internal equity, and how boards can calibrate pay and incentives that reward durable value creation. Let's listen in.

Aalap: Hey, Malcolm. Really glad you could join us today to have a conversation.

Malcolm: Thanks, guys. Happy to be here.

Mark: Yeah, this is great because Aalap and I have been talking a bunch about the issue we're going to talk about today, which is the AI value chain really reaching down. because we are seeing some significant increases in the value of some companies that are either exposed to data centers or some of the downstream AI applications, and it's having an impact on how we think about executive compensation for the senior execs. So really excited to hear you talk a little bit about that today.

Malcolm: Yeah, absolutely. It's been pretty fascinating to watch some of these companies that have been kind of plugging along but are now benefiting from being involved with the downstream application of the AI value chain and benefiting from higher multiples and a run-up in their stock price. It's really created some interesting dynamics around wealth creation for the executive team and a whole host of issues with goal setting and things like that.

Mark: So how are you thinking about your workforces and your executives? They're suddenly much more valuable, the grants are higher. How are you thinking about what you're going to do for the calendar of your companies in '27?

Malcolm: There's a lot of things to think about. You're always talking about peer groups and how we think about benchmarking compensation. That's all related to target pay. But the traditional metrics that we use to benchmark those executives—we're always looking at revenue. Obviously, with the run-up in the stock price, perhaps balancing that with market cap is important as well.

But really taking a hard look at peer groups for target pay. Then we also really need to think about—and this sometimes flies under the radar—realizable pay. How much have the executives benefited from the run-up in the stock price? What does that mean from a realizable pay perspective? And kind of layering on TSR performance with that. Are these things linked closely together?

Aalap: I think you're saying some really important points here, but let's unpack some of them. Like on the comparator set, is it appropriate for companies to go even outside their industry and maybe look at specific companies that are of similar size, given this run-up in the market cap and what they're trying to do?

Malcolm: So, in a perfect world, you've got a good sample size of companies that are both in your industry but also participating in this AI dynamic. But, that's going to be a small group of companies.

So, yeah, I think whether it's keeping a peer group of your traditional peers and then keeping another peer group of forward-looking, maybe AI-adjacent peers, I think that can give you a current and future look at things.

But I don't want to go too far forward-looking. We want to keep things balanced and not have knee-jerk reactions to what's currently going on purely from a comparator group perspective.

Aalap: Right. That's something I 100% agree with you on. It's something I do right now with a healthcare tech client. We look at a subset of companies that are healthcare tech, then we look at a healthcare peer group, and we also look at a tech peer group. And not necessarily, like, blend all that information together, but really look at it in detail and make some judgment calls on what is the appropriate path forward.

Malcolm: Yeah. What I've started saying is—and you're exactly right—it's not good enough that we just provide the data or some blend of these different data sets, but really we need to talk to our clients about how they apply it.

So something I've said is, we can talk about the traditional peer group and what's going on, but that doesn't mean we can't call out the two or three companies that are adjacent and what they're doing and the dynamics there, or, call out what's happening with these AI-adjacent companies. We can kind of provide good guidance on how to apply all the things that we're throwing at them.

Aalap: Yeah, this is definitely a time period where judgment and exercising sound judgment is really important. Another thing you said was about realizable pay. Let's unpack that a little bit.

Now, realizable pay I think makes good sense to be looking at, but I guess the question that I've been thinking about is, is TSR the performance metric that you should be assessing against? Or should it be a combination of multiple metrics? How are you thinking about that?

Malcolm: Yeah, so TSR is going to be the most closely linked, right? A heavy portion of your executive team's pay is provided through LTI. So naturally, TSR should be linked to realizable pay because any run-up in the stock price you're going to benefit from  a realizable pay perspective.

But no, you're exactly right. Often—and this doesn't even apply to what we're talking about today—but we've always, when we've looked at realizable pay just in general, used TSR as a starting point. I think it tells a good story. But also, we've looked at what are some of the other important successful metrics for the company, whether it's EBITDA growth, EPS growth, return metrics. You can layer those things on as well and see, from a growth perspective, how do we line up from a realizable pay perspective to our peers?

Aalap: Yeah, I think definitely worthy of exploring, as you're saying. I think the challenge is, especially if you're using different comparator sets, what are the metrics that are universal across all of them? That can be a bit problematic. So, like, having a grounding in total shareholder return, I agree with you there. Definitely.

Malcolm: But I think that the key is the reason you're doing this is because we talked about these higher multiples and the run-up in the stock price creating these wealth creation events, what is the magnitude of that? Looking at realizable pay can help you determine that.

I think it's important that you start thinking about potential retention issues and planning right now versus when you potentially hit a cliff, right? And someone's already decided that they've benefited from this windfall.

Mark: Malcolm, I can't help but be the old guy here on the call. The parallels to the internet bubble 20 years ago—or actually a little more than 20 years ago—it seems to be a good analog. In both cases, long term, there were tremendous increases in productivity. But sometimes some companies got a little bit ahead of themselves, and long term that productivity embedded itself in the companies and everybody was better for it.

How do you think about this longer term? How do you think about not just the potential stock price increase for the next year, but rather how do we make sure that we capture this value and continue to grow our companies and be more productive?

Malcolm: I think the important thing is looking through the long-term impact of what's happening. To the extent this tails off—I'll humor you for a little bit, Mark—you've got these big tranches of value that are vesting off to where your holding power eventually becomes a fraction of what it was during this boom.

I think, again, now is the time to start thinking about potential retention issues in the future should things tail off. So, talking about longer-term vesting on RSUs to potentially just tail some of that value off, maybe backloading the grants to where it vests more toward the end of the period.

And then also, like, performance-based awards. Do we start doing milestone-based or rethinking what metrics we want to put into the performance-based program to perhaps just give a longer tail to any big tranches that are vesting off?

Aalap: Yeah, because even if the run-up in the stock price doesn't last, if you anchor some to performance-based equity on financial goals, then you have this opportunity to create a leverage structure which can address the tapering off of the significant stock price run-up. Because now they're potentially earning more shares if the performance is still sound, and then you're continuing that motivational aspect of driving performance by linking to a significant performance outcome.

Malcolm: Yeah, you're absolutely right, Aalap. I think you've got to start thinking of, we're benefiting from riding this wave, but can we put things in the performance-based program that will continue to incentivize management to build off of the success that we're having right now?

Mark: I hate to keep being the naysayer here, but part of the issue—and, look, I don't want to take anything away from folks that have either benefited from or driven substantial increases in value—but doesn't the leverage in some of the programs that we put in place create some of these problems?

So, 200% payouts on a program that is relative TSR. And look, if we hit the 75th percentile, we deserve it. But shouldn't we be thinking a little bit longer term around retaining people and keeping them through the cycle? And so that longer-term vesting and potentially having less leverage in the incentive program—of course, some protection on the downside too—but should we think a little bit differently about leverage?

Malcolm: Yeah, so I would actually ask, should we be thinking the opposite? Should we make it harder to achieve the top end of the program?

First of all, you need to look at your peer group, right? Are we benefiting from a tailwind that the rest of our performance peers aren't? And so it's pretty easy for us, just riding this wave, to achieve the 75th percentile. And should we be rethinking that?

But maybe it's not good enough that we just, are at the 75th percentile. Maybe we've got to be at the top of our peer group for a 200% payout. Or, if it's a financial metric, maybe we just need to extend that out. And to your point, maybe you also protect some of the downside, but really making it more difficult to achieve that top-end payout as well.

Mark: And we do need to be very careful there because advocating higher hurdles doesn't always go over very well with management. We have to be very balanced in how we think about this and make sure it's the right answer for both management and the shareholders. So I'm not advocating squashing all of the leverage in incentive plans, just to be clear.

Malcolm: This is really hard to do in this market right now but we always say that you should have a 10% to 20% chance to achieve your maximum performance. Trying to pin that probability is easier said than done. But to the extent it's a slam dunk, maybe we do need to make it a little bit harder.

Aalap: Yeah, and I think you're touching on a very important discussion topic for committees, which is that if you're in an environment where you are riding a significant stock price valuation wave, is this the right time to have total shareholder return in your program, even if it's relative?

Because to have true sustainable performance, maybe it makes more sense to calibrate at this moment in time to more financial metrics because you're already going to have the impact of each share earned being worth significantly more. So when you do that realizable pay analysis, you may likely find that you're already at the 90th percentile or 75th percentile, something like that.

I think it brings up the question of what is the main metric that you should be using given where you are in the cycle. And just because you've been using total shareholder return before doesn't mean that you want to continue using it right now, given the macro dynamics that are happening.

Malcolm: Yeah. One of the key arguments when we talk about the pros and cons of relative TSR is it's not always in management's control. That's kind of the reason to add some financial metric.

I don't think you can get rid of TSR completely once you have it, but you can certainly supplement it with a performance metric that's within management's control. And typically we're talking about that when there's downside and we're at the downturn of a market. But it also applies to some upside that we're talking about here too.

Aalap: So, Malcolm, your insights have been really helpful. What other things are you thinking about? Besides supporting growth and driving accountability, what else do we have to be thinking about?

Malcolm: We talked about these big wealth creation events and how we need to think about retention right now. We talked about how this impacts incentive plans, but something that often can fly under the radar until it's important or it's a key issue is succession planning.

Right now is also the right time to be thinking about succession planning at the executive level, making sure that we have the next generation of leaders in place or that we're growing that bench into that next generation.

Aalap: Well, Malcolm, really appreciate you taking the time to shed some light on this topic. I'm having this conversation with multiple boards, so this is going to be really enlightening.

Mark: Yeah, thanks, Malcolm. Aalap, I think we've got another topic to discuss.

Aalap: Always do.

Mark: That's right. Thanks a lot, Malcolm.

Malcolm: All right. Thanks, guys.

Jake: Our thanks to Malcolm for giving us a deeper understanding of how companies participating in the AI infrastructure build-out can adapt their comp strategies to reward durable value creation.

In our final episode on technology, Eric Myszka will join us to discuss stock-based compensation expense, equity efficiency, and whether companies are getting the right return from their equity spend.

Until then, you can find all of our Unscripted episodes on Spotify, Apple Podcasts, pearlmeyer.com, or wherever you get your podcasts. Thanks as always for listening, and we'll meet you back here next week.