Over the past year, the challenge of aligning executive compensation with long-term strategy has grown more complex—and getting it wrong more consequential. The trends commanding attention are many and varied, agreed participants in a recent roundtable on executive pay practices held in partnership with Semler Brossy.
Thanks to attention-grabbing headlines, buzz-generating issues like AI-driven pay packages and the potential for external factors like tariffs and geopolitical disruptions to skew incentive pay scoreboards mid-cycle get raised frequently in boardrooms. However, just as pressing are deeper shifts slowly but steadily reshaping the compensation landscape, including evolving institutional investor policies on say-on-pay, increased scrutiny of performance share units and growing complexity around shareholder communication.
GETTING GOAL-SETTING RIGHT
“Some of the big concerns we’re hearing have to do with setting goals,” noted Margaret Hylas, a principal at Semler Brossy. “How do you set goals in an environment where we can’t really predict the future? With so many challenges and opportunities ahead, do multi-year goals constrain us or help us gain clarity? That’s a huge focus right now. Another one is how do we credibly evaluate pay and performance in this environment where we had tariff disruptions midway through the year? And do we have adjustment frameworks that make sense and that feel right to an executive team that are also fair to shareholders?”
Those questions resonated with participants, several of whom described scenarios where external shocks—macro volatility, sector-specific disruption or unexpected market shifts—sabotaged incentive plans designed under different assumptions. Travel technology company Sabre’s performance, for example, correlates closely with the airline and travel sector’s, notes John Scott, who serves on the boards of Belmond and Sabre, where he dealt with payout issues as chair of the compensation committee. “Obviously, that sector—and our share price—got hammered,” he says, adding that long-term performance share units are tracking toward a zero payout. “We’re looking at how to navigate potential adjustments to protect retention and ensure continued alignment.”
Weighing whether to address PSUs tracking at zero should start with a hard look at root causes, says Hylas, who notes that making midstream change to incentive payouts without a strong rationale is often a red flag for proxy advisors. “Unless it’s a credible adjustment that makes business sense, adjustments to PSUs can be pretty radioactive,” she says. “A lot of companies will look at one year of really low payouts and say, ‘We can stomach it.’”
However, if PSU underperformance is the result of a fundamental shift—such as a change in strategy or an external disruption that has rendered original targets obsolete—then, action may be warranted. “We don’t see that often, but occasionally things are dire enough that the old goals just don’t make sense anymore,” she says. “That might make the case for doing something more radical, like canceling the grants or substantially revising them.”
In cyclical industries like transportation, today’s most prevalent performance metrics sometimes exacerbate erratic outcomes, notes Mike Hogan, a director at the logistics company ArcBest. “Among proxy advisors there seems to be a preference to move toward TSR, which can feel like a double whammy for executives, who already see diminished payouts when shares they’ve earned are worth less because stock prices fell due to cyclicality,” he says. “There are a lot of cases where you could argue that return on capital employed (ROCE) is a better measure of performance.”
FIGHTING RETENTION FALLOUT
Retention concerns often spur boards to address missed incentive targets. After two consecutive years of zero payouts, Healthcare Realty felt pressed to take steps to avoid losing key executives, despite the sense that flawed metrics were a factor, notes Connie Moore, who was serving as the company’s interim CEO at the time. “From my perspective, the targets were disjointed from the business,” she says. “And I’m not sure that was a management problem—I think that was the board’s problem in setting those goals.”
Concerned about the risk of losing key leadership, Moore set up targeted retention grants for three key executives and embarked on an analysis of metrics to avoid misalignment in the future. “I’ve always said, ‘If we get it right and we’re paying you target, then over a five-year period you should expect to receive target.’ Some years will be up, some down, but multiple years of zero should be the exception.”
At the same time, reacting to every concern by layering on new grants or broad-based awards can undermine the integrity of a pay program, cautions Herman Bulls, a board member at JLL, USAA, Comfort Systems USA, Host Hotels and Fluence Energy, who says boards need to assess the true risk behind retention concerns voiced by management.
“CEOs always say, ‘We’re going to lose them,’” he explains. “I call it spreading the peanut butter, when you’re taking care of everybody because that CEO wants his or her entire team who’s there to stick around. As board members, sometimes we have to be the adults in the room looking out for all the stakeholders by asking: ‘How many people have we actually lost involuntarily?’ And, ‘Who do you really, really, really need?’ It’s our role as board members to push that. Are we going to push it too much sometimes? Perhaps.”
TROUBLES WITH TECH TALENT
As outsize salaries for AI expertise continue to make headlines, compensation committees may also need to closely monitor concerns about compensation for essential digital and technology expertise, seeking to separate the reality from the hype. “If you’re competing in that space, you have to just change your mindset and forget the comp ranges for those jobs,” says David Kimbell, a board member at Best Buy. “But let’s be clear, most of us are not. There are only a few people in the war for that type of talent.”
For companies like Sabre, which rely on tech expertise and lack the deep pockets of Big Tech, however, the challenge is real. “We don’t have the same underlying growth and attractiveness that some of our competitors for tech talent have, so therein lies a competitive disadvantage and challenge,” says Scott, whose company is in the airline travel technology distribution business. “We haven’t lost people we didn’t want to lose so far, but that could quickly change over time. And if I lose someone key today, replacing them is going to end up costing us materially more than what we have in our current talent payment pool. That weighs on us.”
Finding that level of talent is also likely to become more difficult, adds Esther Dyson, a board member at Nebius and Swvl. “The market for middle management is collapsing because entry-level hiring pipelines are weakening, and the skills that make employees valuable in later years are not being adequately developed elsewhere,” she says. “If you don’t automate, you’ll be behind, and if you do automate, you’ll need fewer people but the employment conditions will change and adjusting to that will be challenging.”
Ultimately, compensation committees will play a pivotal role in addressing such challenges by building flexible, resilient programs aligned with their companies’ strategic goals. “Boards are going to be on the front lines of these big, major questions about what the workforce is going to look like long term,” says Hylas. “Compensation can be viewed not only as a reward mechanism but also a way to keep everyone aligned, motivated and focused on driving innovation forward.”
