Tips for compensation committees and HR teams in the second half of 2025 

Most companies have already granted 2025 annual and long-term incentive awards. But it’s not too soon for compensation committees and HR teams to plan for 2026, including discussions around:

• The difficulties of setting goals when the company can’t project business conditions.
• What items and events should trigger automatic adjustments to goals or results.
• Determining the number of shares to grant when stock prices are volatile.

Goal setting. Companies struggling with goal setting for annual and long-term incentive plans may want to consider:

• Using shorter performance periods with additional service-based vesting requirements.
• Setting wider ranges for performance around target—e.g., instead of setting threshold and maximum goals at -/+10% of target, use -/+15%. This may mitigate goal setting challenges and allow for a minimum payout where threshold performance wouldn’t have been met under the 10% payout curve structure.  In some cases, it may make sense to also lower the threshold payout in tandem with lowering the threshold performance level relative to target.
• Defining “target performance” using a range around budgeted performance—e.g., 98% to 102% of budgeted performance yields target payout. This may mitigate concerns about the ability to set specific target goals in the current environment.

For long-term incentives, companies could also consider taking one or more of the following actions:

• Using relative metrics, calibrated as a percentile rank against industry peers (assuming the financial impact is likely to be similar for companies in the same industry), rather than attempting to forecast internal financial metrics, or using metrics relative to a broad index, such as the S&P 500.
• Placing more weight on relative total shareholder return (TSR) in particular, assuming company performance will inherently drive TSR results and efficient markets will appropriately calibrate industry “winners” and “losers.”
• Setting annual performance goals, with earned amounts “banked” subject to meeting service requirements through the end of the standard long-term performance period. This approach mitigates the risk that goals become unattainable shortly after grant while maintaining a long-term orientation and facilitating retention. But annual goals aren’t favored by proxy advisors and there are accounting and disclosure implications (i.e., not having a grant date until goals are set).
• Changing the mix of awards to place more weight on time-based, full-value awards.

Automatic vs. discretionary adjustments to performance goals or results. Most plans specify in advance events and items that will automatically trigger an adjustment. Companies typically take the following approach to identifying such events and items:

• Almost all automatically adjust for items classified for accounting purposes as “infrequent” or “unusual” and other items or events outside of management’s control regardless of their accounting classification (e.g., changes in accounting rules, tax law, or government regulations).
• Many automatically adjust for the impact of certain unplanned events within management’s control, such as acquisitions and divestitures, to encourage management to make decisions based on long-term expectations.
• Some automatically adjust for the impact of known events where management can’t control the impacts due to economic or regulatory uncertainty.
• Almost all build in compensation committee discretion to adjust awards under additional circumstances.

Where tariffs fall on this spectrum is tricky. Management should eventually be able to predict and manage the impact such that no adjustment would be necessary but, while the situation is fluid, some companies will provide for automatic adjustments while others will communicate that they will make discretionary adjustments at the end of the performance period. Those that provide for automatic adjustments should communicate that they will use negative discretion if the adjustments could result in a windfall for executives.

There’s no right or wrong answer. Automatic adjustments can avert misunderstandings with participants, mitigate pushback from investors and proxy advisers, and avoid adverse accounting and disclosure consequences associated with modifications (see Uncertain times: Will trade wars and market volatility upend incentive plans?). But discretionary adjustments allow for more flexibility during a time of uncertainty.

Compensation committees should preview draft proxy disclosure before pay decisions are made to better understand the optics of the decisions in the larger context of the business environment and the amounts that will have to be disclosed in the summary compensation and grants of plan-based awards tables. General statements that awards were modified or upward discretion was exercised to motivate and retain executives may not be viewed as persuasive on their own; instead, disclosures should demonstrate the retention and motivation risks and detail how the new performance conditions or awards promote business strategy. If positive discretion is exercised, disclosures could include a detailed description of management’s efforts to reduce exposure to tariffs, maintain productivity and manage the supply chain.

Companies should also proactively engage with shareholders and describe shareholder engagement efforts in their proxy statements although they may find shareholders are less forthcoming in their feedback on executive pay and corporate governance practices than in prior years. This is because new SEC staff guidance requires 5% shareholders to file more detailed disclosures as active (vs passive) investors if they exert pressure on management to implement specific changes as this may be seen as “influencing” control over the company.