On April 2, 2025, referred to as “Liberation Day,” the Trump Administration announced a universal 10% tariff on all imported goods. In addition, the Administration imposed country-specific “reciprocal tariffs” on 57 nations, bringing total tariff rates to as high as 50% for certain trading partners. Major manufacturing hubs that account for a significant share of U.S. imports, including China, Vietnam, and India, were among the most significantly impacted, with certain categories of goods from these countries subject to materially higher effective tariff rates depending on industry and product type.

Background

Tariffs are commonly used as a policy tool to protect domestic industries, encourage local production, address perceived trade imbalances, and generate government revenue. In this case, the tariffs were also intended to incentivize companies to shift supply chains and manufacturing back to the United States or to countries with more favorable trade relationships. However, such shifts are often complex, time-consuming, and costly to implement.

These tariffs effectively functioned as a tax on imported goods, increasing input costs and compressing profit margins for companies that rely on overseas manufacturing or foreign-sourced materials. For example, companies importing consumer electronics or industrial components from China faced higher input costs, while apparel and footwear companies sourcing from Vietnam experienced margin pressure due to increased duties. Similarly, manufacturers reliant on raw materials or intermediate goods from India and other affected countries saw cost structures shift unexpectedly.

In response, some companies passed these higher costs on to customers through price increases, while others absorbed the impact, resulting in reduced profitability. Tariffs also disrupted established supply chains, forcing companies to reevaluate sourcing strategies, often at higher cost and with added operational complexity.

Importantly, these developments had direct implications on executive compensation. When companies established performance goals for their executives’ annual and long-term incentive plans in early 2025 or 2023 or 2024 for 3-year long-term incentive plans, the scope and magnitude of these tariffs were not anticipated. As a result, many incentive targets, both short-term and long-term, were set based on financial expectations that did not reflect this significant macroeconomic shift, with potential implications not only for annual payouts but also for performance measurement over multi-year performance cycles.

Approach

Given the potential for tariffs to distort financial performance and complicate pay-for-performance alignment, as companies file their 2026 proxy statements, CAP reviewed disclosures related to goal setting and payout outcomes to assess whether and how tariffs affected compensation decisions. Our analysis focused on 2023-2025 long-term incentive plan and 2025 annual incentive payouts. CAP selected a sample of 22 companies, focusing on those most exposed to tariffs due to their reliance on imported goods, overseas manufacturing, and global supply chains.

To conduct this research, we selected companies based on their exposure to tariffs and reliance on global supply chains. Specifically, we focused on companies that depend heavily on imported goods, manufacture products overseas, or source key materials from countries most affected by tariffs, such as China, Vietnam, and India. We also prioritized industries where tariffs were likely to have a direct and material financial impact, including industrials, consumer goods, and manufacturing. This approach enabled us to better understand how tariff-related disruptions influenced both business performance and compensation outcomes.

Our findings are based on proxy filings available as of April 17, 2026.

Key Findings

Of the 22 companies reviewed, 11 (50 percent) did not reference tariffs impact on incentive plan metrics in their proxy statements. Of the remaining 11 companies (50 percent), 8 disclosed an impact on their annual incentive (AI) plan, while 3 disclosed impacts on both annual and long-term incentive (LTI) plan payouts. Therefore, 8 out of 22 companies (36 percent) made adjustments to annual and/or long-term incentive payouts.

Across these disclosures, a consistent narrative emerged: performance goals for both AI and LTI plans had been established prior to the implementation of tariffs. Once tariffs were introduced, companies experienced a period of volatility during ongoing negotiations between the Trump Administration and the impacted countries. As a result, many companies characterized the negative financial impact as an unforeseen, extraordinary event and applied upward adjustments to incentive plan payouts.

Among the companies that did address tariffs and impact on financial performance, larger companies (Ford, PepsiCo, Pfizer) generally did not disclose any impact on their annual or long-term incentive plans. This likely reflects the greater scale, diversification, and cost absorption capacity of larger companies, which can mitigate tariff impacts through pricing, sourcing, and operational flexibility. In contrast, smaller companies are often more directly affected by such cost pressures, making them more likely to disclose and adjust incentive plans. For Pfizer, no adjustments were likely made due to a voluntary agreement with the U.S. government to lower prescription drug prices and align them with other developed markets, which provided a three-year exemption from certain tariffs.

The impact on payouts were disclosed as adjustments to their plan payouts in percentage points. In comparing annual versus long-term incentive plan adjustments, ICU Medical was the only company to disclose a quantitative adjustment to its long-term incentive plan, applying an upward adjustment of +50% to the payout percentage. Adjustments were more common for annual incentive plans, with reported increases ranging from +6% to +43% of the actual payout. Among the seven companies that disclosed a specific adjustment, the median increase was +13%, and the average was +12% to the actual payout.

Finally, companies adjusted annual and long-term incentive plans in different ways. Of the eleven companies that made adjustments, 5 companies modified adjusted EBITDA to exclude all or a portion of the tariff expense to increase incentive plan payouts. In addition, three companies adjusted multiple performance metrics rather than a single measure. These results are illustrated in the chart below.

Based on this review, we observed that the introduction of tariffs created a meaningful disconnect between predetermined incentive targets and actual company operating performance. This dynamic raises important questions about the integrity of pay-for-performance alignment, specifically, whether executives should be rewarded or penalized for outcomes driven by external factors largely outside of management’s control. More broadly, the tariffs reflect a significant shift in U.S. trade policy away from decades of relatively free trade toward a more protectionist framework, introducing a new layer of structural uncertainty that companies must navigate.

Eight companies did not discuss tariffs in their proxy statements, despite being large organizations that we expected to be impacted, including Amazon, Archer Daniels Midland, CVS, Hasbro, Johnson & Johnson, Mattel, Merck & Co., and Wayfair.

The policy environment surrounding tariffs has also remained fluid. Subsequent legal challenges, including a Supreme Court ruling, have questioned aspects of the tariffs’ implementation, creating more uncertainty for companies as they assess both operational and financial impacts.

Rationale for Adjustments or No Adjustments

When adjustments are made, the rationale is that tariffs are external, unpredictable shocks that were not included in the original target setting process, so adjusting helps isolate true operational performance and ensures executives are evaluated and compensated based on factors within their control. Adjustments also prevent key financial metrics such as EBIT, EBITDA, Free Cash Flow, and EPS from being distorted and help maintain a consistent pay-for-performance framework.

The rationale for partial/no adjustments includes:

• Ensuring performance metrics do not fully exclude real economic impacts of tariffs on profitability
• Maintaining accountability for management’s response to tariff pressures
• Avoiding overstatement of performance by fully removing a real cost
• Preserving credibility with shareholders and consistency in reporting

Examples:

Looking Ahead

Companies are likely to continue adopting hybrid approaches to tariff treatment, with a growing emphasis on partial and rule-based adjustments rather than fully excluding or fully including tariff impacts. The evidence suggests companies will increasingly distinguish between anticipated tariffs, which are treated as normal economic costs, and unforeseen or newly imposed tariffs, which may be adjusted out using predefined mechanisms such as cutoff dates or specific cost factors. This reflects an effort to balance fairness in performance evaluation with accountability for real business outcomes, while also enhancing transparency and consistency in incentive design. As tariff volatility persists, companies are expected to formalize these practices further, embedding clearer guidelines into incentive plans to ensure that performance metrics remain both economically meaningful and aligned with shareholder value creation.

An additional emerging consideration is the potential for tariff refunds in 2026. The Supreme Court ruled that the tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unlawful, but it did not determine whether companies must be reimbursed for tariffs already paid. Many companies have filed lawsuits seeking relief and the Trump administration is expected to begin a refund process shortly. Assuming refunds are ultimately issued, they could create a one-time increase in reported profits, potentially inflating incentive payouts. As a result, companies will need to evaluate whether and how to adjust performance metrics to exclude or normalize the impact of such refunds, ensuring that executive compensation reflects underlying operating performance rather than a one-time boost.

APPENDIX

Companies Disclosing the Impact of Tariffs (n=14)

Companies That Did Not Discuss the Impact of Tariffs (n=8)