A new chapter begins
Adjusting long-term incentive plans in an uncertain market
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The 2025 economic outlook remains uncertain due to geopolitical tensions, ongoing supply chain disruptions, technological shifts and evolving regulatory environments. Market volatility and unpredictable global policy changes further complicate the landscape. Consumers are still cautious, and businesses are trying to adapt to these complex, dynamic conditions.
Establishing robust three- to four-year business targets is increasingly difficult in this environment, and many organizations are reevaluating their long-term incentive (LTI) structures. Essentially, LTIs are designed to retain employees and motivate them to achieve key business objectives that align with shareholder interests. But if targets become impossible to reach due to shifts in the economic landscape, these plans lose their effectiveness.
Here are several approaches organizations can consider in addressing this challenge:
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Transition from time-vested to milestone-based LTI
Shift from LTIs that vest based on performance against three- to four-year targets to those that vest upon achieving specific business milestones.
For example, Mercer recently developed an LTI structure with three key vesting milestones for an attractions operator. The first milestone is the completion of construction for a new attraction. The second will be met when the attraction reaches five million visitors. And the third is reached when the attraction attains an annual profit of US$20 million. If any milestones are delayed due to economic factors, payouts aren’t forfeited but simply deferred, thereby maintaining employee motivation.
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Implement a value-sharing LTI
Implement an LTI that pays out a percentage of total shareholder return generated above a predefined baseline over three to four years. Upon cliff-vesting at the end of the period, a new grant is issued to employees, and the baseline is calibrated.
We developed one such LTI for an insurance-sector client seeking to avoid highly subjective long-term target setting. This design’s core message to executives was simple: Maximize growth in any economic context, and your rewards will scale accordingly.
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Adjust pay mix temporarily to emphasize short-term incentives
Reallocate a portion of compensation from LTI to short-term incentive (STI), reducing the proportion of total compensation linked to long-term targets.
A private equity client focused on purposeful investing adopted this approach, taking the opportunity to emphasize “process” KPIs and “mission impact” metrics (for example, number of lives touched) through STI. This strategy also lessened the impact of “trapped carry” resulting from delayed investment exits.
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Incorporate a catch-up mechanism into performance share plans
Enhance traditional performance share plans with a catch-up feature that grants employees an additional year to earn back shares that didn’t vest due to macroeconomic conditions.
For a professional services client with a rolling-performance share plan, the board retains discretion to allocate half of the unvested shares to the following year’s performance targets or extend the vesting period by one year with new objectives.