Over the past year, the challenge of aligning executive compensation to long-term strategies has become more complicated and more consequently mistaken. The most popular trend is the many different agreed participants of the recent roundtable on executive pay practices held in a partnership with Semler Brossy.
Thanks to high-profile headlines, the possibility of topic-generating issues such as AI-driven pay packages, as well as external factors such as tariffs and geopolitical disruptions frequently rise in the boardroom. However, the press is slower, but steadily restructuring the compensation environment, as if it were a slower and deeper shift.
Get the goal set correctly
“Some of the big concerns we're hearing have to do with setting goals,” said Margaret Hylas, principal at Semler Brossy. “How do you set goals in an environment where you can't predict the future? Will the challenges and opportunities so far have been so many, and will multi-year goals help us to be more clear about whether they constrain us or clarify? That's a big focus for now.
These questions resonated with participants, some of which described scenarios that crossed incentive plans designed under different assumptions, where external shocks (macro volatility, sector-specific disruption, or unexpected market changes). For example, Saber's performance, a travel technology company, is closely correlated with the airlines and the travel sector, notes John Scott, who works for the Belmond and Saber board of directors, dealing with payment issues as chairman of the compensation committee. “Obviously, that sector and our stock price have been hindered by got,” he said, adding that the long-term performance share unit is tracking towards zero payouts. “We are looking at ways to navigate potential adjustments and protect retention and ensure continuous integrity.”
The weight of whether to deal with tracking PSUs at zero should start looking closely at the root cause, says Hylas. Hylas notes that making middle-class changes to incentive payments without strong basis is often a red flag for proxy advisors. “Unless it's a reliable adjustment that makes business sense, PSU adjustments can be quite radioactive,” she says. “Many companies see a very low payment for a year and say, 'We can make it into a stomach.' ”
However, if PSU's misperformance is the result of a fundamental change (such as a change in strategy or external disruption that has made the original target outdated), action may be guaranteed. “We don't see it often, but sometimes things are miserable enough that the old goals just make no sense anymore,” she says. “It might insist on doing something more radical, like canceling grants or effectively correcting them.”
In cyclical industries like Transportation, today's most common performance metrics can exacerbate unstable outcomes, notes Mike Hogan, director of Logistics Company Arcbest. “In proxy advisors, they seem to prefer moving towards TSR. This can feel like a double wammy for management. We see that the stocks they acquire have already fallen if the stocks decline because of circularity,” he says. “There are many cases where it can be argued that Return on Capital Employed (ROCE) is a better measure of performance.”
Fighting against retaining fallout
Retention concerns often spur the board and address missed incentive targets. After the second year in a row, Healthcare Realty felt forced to take steps to avoid losing key executives despite the sense that flawed metrics were the factor, says Connie Moore, who was then interim CEO of the company. “From my perspective, my targets have fallen apart from the business,” she says. “And I don't know if it's an administrative issue. I think that was the board's issue when setting these goals.”
Concerned about the risk of losing key leadership, Moore set up targeted retention grants for three key executives and set out to analyze the metrics to avoid future inconsistencies. “I always said, 'If we're going to get it right and we're paying the target for you, then we should expect to receive the target for five years.” It's been a few years, but a few downs, but a few years of zero should be the exception. ”
At the same time, responding to all concerns through stacking new grants and wide range of awards could undermine the integrity of wage programs, Herman Bulls, a board member of JLL, USAA, Comfort Systems USA, host hotels and Fullence Energy, warns that the board needs to assess the real risks behind the retention concerns spoken by managers.
“The CEO always says, 'We're going to lose them,'” he explains. “I spread it peanut butter and because when you're caring for everyone, that CEO wants to stick with him or her whole team. As board members, we must be adults looking for every stakeholder sometimes: and “Do you really, really, really need you?” It's our executives who push it.
Trouble with technical talent
As large salary for AI expertise continues to make headlines, the Compensation Committee may need to closely monitor concerns regarding compensation for essential digital and technology expertise. “If you're competing in that space, you have to change your mindset and forget about the comp range of those jobs,” says David Kimbell, executive at Best Buy. “But let's be clear, most of us aren't. There are only a few people in the war because of that type of talent.”
But for companies like Saber, who rely on technical expertise and lack a deep pocket of big technology, the challenge is real. “We don't have the same underlying growth and appeal as some of our tech talent competitors, so there are competitive disadvantages and challenges,” says Scott, who works in the airline's travel technology distribution business. “We have not lost people we don’t want to lose, but that can change quickly over time, and if we lose our keys today, replacing them costs us a lot more than what we have in our current talent payment pool.
Determining that level of talent is likely to be even more difficult, adds Nebius and SWVL executive Esther Dyson. “The entry-level employment pipeline is weakening and the market for middle management is collapsing as the skills that make employees valuable in later years are not properly developed elsewhere,” she says. “If you don't automate, you're behind. Automate requires fewer people, but the employment conditions change and it makes it difficult to adjust to that.”
Ultimately, the Compensation Committee plays a crucial role in addressing these challenges by building flexible and resilient programs tailored to the company's strategic goals. “The board is at the forefront of these big, big questions about what the workforce looks like in the long term,” says Hylas. “Rewards can be seen not only as a reward mechanism, but as a way to coordinate everyone, stay motivated and focused on driving innovation.”
