Mercer Canada update: Aligning to a new tariff environment 

With new tariff policies in effect as of March 4^th, organizations must reassess their compensation frameworks to maintain competitiveness while managing new financial realities.

The implementation of new tariffs on Canadian goods and the escalating tariff environment represents a significant shift in the business landscape. Canadian businesses need to thoughtfully recalibrate compensation structures and governance to navigate cross-border trade challenges. Organizations that proactively address these challenges will be better positioned to attract and retain key talent that is focused on adapting the organization to the new economic realities.

The new tariff environment necessitates enhanced governance around incentive compensation. Boards of directors should conduct comprehensive reviews on how tariff-related cost pressures and revenue reductions impact executive and employee performance, and established bonus metrics across the organization. 

Example: A company with significant import exposure may already be seeing that previously established EBITDA targets no longer represent the same level of performance achievement. The board could implement a quarterly review process to assess whether performance targets remain appropriate or require adjustment to reflect the new operating environment.

Conducting thorough risk assessments on earnings quality provides critical context for informed compensation decisions. Evaluating risks beyond the scope of incentive plan design offers a more comprehensive view of how profits are being generated.

Example: An organization might task its Chief Risk Officer with assessing whether revenue growth stems from sustainable practices or potentially risky short-term measures that could compromise long-term viability. This analysis would inform the board's evaluation of executive performance beyond pure financial metrics.

In this period of market adjustment following the tariff implementation, boards should consider exercising increased discretion in compensation determinations. A well-structured framework for applying this discretion ensures fairness and transparency.

Example: A company could establish a formal matrix for applying discretionary adjustments, considering factors such as relative industry performance, leadership during transition, and successful implementation of tariff mitigation strategies.

Organizations now operating in this new tariff landscape should consider these additional elements:

• Developing scenario-based compensation models that account for the observed initial impacts of the tariffs
• Implementing more frequent performance reviews and compensation adjustments
• Enhancing communication strategies to ensure stakeholder understanding of compensation decisions
• Creating dedicated cross-functional teams to monitor ongoing tariff impacts on business performance and compensation structures

In the weeks leading up to implementation, we've observed several trends emerging across industries:

• Companies with robust governance structures have been able to more quickly assess potential impacts on incentive metrics
• Organizations with clear discretionary frameworks are better positioned to make timely adjustments
• Communication has emerged as a critical factor in maintaining employee engagement amid uncertainty

The new tariff environment presents both challenges and opportunities for organizations to refine their compensation approaches. By implementing thoughtful governance, conducting comprehensive risk assessments, and establishing frameworks for discretionary decision-making, companies can maintain competitive compensation strategies while adapting to these new economic conditions.

With executive compensation and communication experts in six Canadian cities, Mercer Canada is available to provide tailored guidance for your organization's specific circumstances in this evolving landscape.