Many directors find themselves in “operational scope” due to the ambiguous effects of tariffs on compensation programs. On the one hand, the impact of tariffs is closely aligned with changes in tax laws (e.g., unpredictable, out of management control, and frequently adjusted). On the other hand, shareholders expect management to have stronger control over the impact of tariffs as it could have a meaningful long-term impact on the business (similar to changes in the Covid-19 macroeconomics).
Due to the inherent uncertainty of proposals or potential tariffs and the speed at which they may be implemented (as seen in recent intergovernmental and intergovernmental and withdrawals), it is more important than ever for the Commission and Compensation Committee to consider a practical framework to address possible tariffs before they are announced. This helps them to best serve both managers and shareholders.
Two lenses for understanding the impact of tariff incentives
Tariffs can have a significant impact on long-term business plans and goal setting, and can affect incentive planning through two different lenses.
- Adjusts incentives during flight
Generally, shareholders and investors believe that tariffs will have an operational impact that companies will be expected to work. Program changes will be scrutinized, particularly in the annual and annual programs, particularly in the long term programs. Therefore, there is an expectation that executives should have foresight in the course hedge or shift the course as needed in certain cases, so adjustments made to incentives in flight generally attract stronger shareholder criticism. - New Incentive Award Goals Setting
It's easier to look forward to it and justify taking tariffs into consideration when setting goals. You can use the long horizon to avoid the appearance of knee changes. Still, shareholders may be wary of insulating executives from lower payments if they cannot accurately measure the direct and indirect business impacts from tariffs. When adjusting your goals to explain Tarif, it is helpful to have the right indicators that ensure that changes will respond to the impact of tariffs, instead of making up for a lack of visionary.There are subtle considerations on a per-company or industry basis, which do not lend to a one-size-fits-all approach, and shareholders look critically to adjustments. For example, if tariffs force an organization to rapidly change their short-term plans, adjusting incentives during flight to ensure that everyone is in line with their new priorities may be justified. Similarly, companies may determine that they can meet their long-term goals through organizational changes without adjusting their incentive plans.
Take action in the face of uncertainty.
Given the level of uncertainty regarding potential tariffs and their impact, it is difficult to identify specific steps to address them. However, in any scenario there are proactive, short-term actions that the board can set up for success.
- Discuss scenarios that may require incentive adjustments. Whatever happens in the future, the committee can build consensus on how to plan future actions when tariffs are imposed and outlined, and can outline scenarios where tariffs are likely to require changes to incentive plans.
- Potential size adjustments. Following framework alignment, we estimate the cost of changes based on the various tariff scenarios mentioned above and the consequences.
- Build flexibility in your existing planning language. This ensures that appropriate discretion/action will be taken if adjustments are deemed necessary.
- Dive deep into existing incentive plans. Be aware of how incentive planning is more durable. This could be focusing on relative metrics, expanding thresholds and maximum target ranges, or adding additional operational modifiers that allow for subjective year-end assessments (Note: This list is not exhaustive).
In most cases, there is too much uncertainty to build protection on today's goals. However, it is important that the board sizes potential business impacts in both the worst and best case scenarios and give an idea of what situations could guarantee adjustments.
Future Plans: A Proactive Framework
The Committee recommends that it be implemented/accepted to the following framework when assessing whether potential adjustments to the planning in flight should be made and what the correct course of action is.
In most cases, shareholders will react negatively to adjustments made to incentives in the flight, and in any case, the board can consider making a choice do not have By adjusting anything, lessons from the goal setting process can be incorporated into future grants.
One size does not fit all: 3 case studies
The following virtual scenario illustrates how the above framework can be implemented to best respond to customs duties.
In each sample case, the estimated size of the impact and the design of existing programs were key considerations for determining whether the board considered repair tactics. The fiduciary duties of directors require the use of selective and appropriate judgments when considering adjustments or actions regarding executive compensation, even when financial performance is incredible.
Conclusions for navigating tariffs
While the general expectation for most companies is to adjust operations rather than accounting, the board is expected to carry out the right thinking when considering changing incentives and setting goals during flight, especially in long-term planning. The above framework thinking may change as policy situations evolve, and compensation approaches may be consistently reassessed with the above principles. In any case, appropriate disclosure is important when communicating the rationale for future changes to stakeholders.
