Uncertain times: Will trade wars and market volatility upend incentive plans?  

Companies struggling with goal setting for annual and long-term plans may want to consider taking one or more of the following actions:

• Use shorter performance periods with additional service-based vesting requirements, since setting shorter-term goals is easier during times of uncertainty.
• Build in and communicate automatic and discretionary adjustments (full or partial) to performance goals:

- Most plans specify in advance events that will automatically trigger an adjustment to the extent possible. Typically, items classified for accounting purposes as “infrequent” or “unusual” are covered, as are items or events outside of management’s control regardless of their accounting classification (e.g., changes in accounting rules, tax law, or government regulations). Further, some companies 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. And finally, some companies adjust for the impact of known events where management can’t control the impacts due to economic and regulatory uncertainty.

-  While automatic adjustments can avert misunderstandings with participants, mitigate pushback from investors and proxy advisers, and avoid adverse accounting and disclosure consequences (see below), most plans also build in compensation committee discretion to adjust awards for situations that are less clearcut, such as for the impact of foreseeable events that are somewhat in management’s control.

Where tariffs fall on this spectrum is tricky. Once there is more certainty, management should be able to predict and manage the impact. But for now, some companies will provide for automatic adjustments while others will communicate that they will make discretionary adjustments at the end of the performance period.

• Provide less stringent plan leverage, such as by:

- Setting wider ranges for performance around target — e.g., +/– 5% of target performance yields target payout, which may mitigate goal setting challenges where predictions are difficult.

- Lowering or eliminating thresholds to help achieve a minimum payout so awards where threshold performance wouldn’t have been met can continue to motivate participants.

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

• Use relative metrics, calibrated as a percentile rank against industry peers, rather than attempting to forecast internal financial metrics or using metrics relative to a broad index, such as the S&P 500 (this assumes the financial impact is likely to be similar for companies in the same industry).
• Place more weight on relative TSR in particular, assuming that company performance will inherently drive TSR results and efficient markets will appropriately calibrate industry “winners” and “losers.”
• Place more weight on time-based awards, which align participant interests with those of shareholders while also promoting retention.

Most companies grant equity awards annually, so they will have multiple performance cycles in progress where goals predate the tariffs and other economic policy changes. Given the current uncertainty and the fact that it’s still early in the year, it’s likely too soon to change performance goals or make discretionary adjustments. But, near the end of the performance period (for example, early in the fourth quarter for annual incentives and for performance share grants that vest at the end of 2025), compensation committees should undertake a holistic assessment of all relevant factors to determine whether to exercise positive (or negative in the case of windfalls) discretion.

Factors that favor positive discretion or goal modification include:

• The total rewards program has minimal retentive and motivating effect. For example, the value of employees’ equity holdings has dropped significantly and there’s a reasonable likelihood there won’t be payouts for the next several years.
• Performance goals are absolute (not relative) and have become unattainable as a direct result of the economic downturn, while relative performance is strong. For example, measures that were on track to reach target or above performance fell for reasons largely outside management’s control.
• Management effectively responded to the economic downturn and tariff challenges.
• The company doesn’t typically adjust awards, modify goals or make special grants.

Factors that may argue against positive discretion or goal modification, particularly for proxy named executives, include:

• The company has undertaken layoffs.
• There’s some likelihood that performance goals could be achieved at or above threshold.
• The total rewards program still has retentive and motivating impact given there’s a strong likelihood of payouts under other outstanding incentive awards.
• The company’s performance is poor relative to the performance of its peers and the broader industry.
• The company recently adjusted incentives or made special grants.
• The incentive plans already incorporate some or all of the following provisions to mitigate goal-setting issues:

- Relative metrics to see if the company is outperforming peers that are facing similar challenges

- Strategic/qualitative metrics that allow for more discretion

- Shorter performance periods (e.g., quarterly or biannual for short-term incentives and annual for long-term incentives) with additional service-based vesting requirements

- Less stringent plan leverage, such as wider ranges for performance around threshold and target performance

- Lower or no thresholds to help achieve a minimum payout.

When making positive adjustments for awards that would otherwise have a zero payout, strong consideration should be given to capping payments at or modestly above threshold.

Compensation committees should also consider the following implications of incentive plan adjustments: