Compensation Advisory Partners (CAP) reviewed annual and long-term incentive program design practices across 52 companies in the Technology industry. These companies were split into three groups by revenue size: $500 million to $2 billion (“Small”), $2 billion to $5 billion (“Medium”), and over $5 billion (“Large”) in revenue.

Incentive plans play a crucial role in motivating and rewarding executives for achieving short- and long-term financial and strategic objectives. This research is intended to cover key trends in annual incentive and long-term incentive program design for the technology industry.

Key Findings

Annual Incentive Plans

• Revenue and profitability are the most common metrics
• Complexity of plans (i.e., number of metrics and use of non-financial measures, etc.) increases as company size increases

Long-Term Incentive Plans

• Use of performance plans is nearly universal among CAP’s sample
• TSR is the most prevalent metric among larger companies; smaller companies focus on growth measures such as ARR balanced with profit-based metrics
• Emphasis on performance-based equity grows as companies get further from IPO and grow in size

Annual Incentive Program

Performance Metrics

As technology companies grow, their annual incentive (AI) plans become more complex, incorporating a greater number of metrics. While most companies in the sample use two to three metrics, larger firms are more likely to include non-financial measures, and smaller companies tend to focus solely on financial metrics.

Metric Prevalence

Revenue is the most prevalent metric in AI programs across the companies studied, demonstrating its importance as a key performance indicator in the industry. Profitability metrics are the second most common and indicate another strategic priority.

Among smaller companies, ARR and Bookings are widely used; almost half of companies in the small and medium sample use these measures. Companies typically use metrics that are easy to measure (or set goals for) and reinforce strategic priorities. Smaller companies tend to focus on growth, as evidenced by the use of ARR and Bookings, while larger companies are more focused on sustained performance.

Individual performance also factors into AI programs at many companies in the sample, and it is generally applied as a modifier or discretionary adjustment rather than a weighted funding component. Notably, out of the total sample, only two companies incorporate individual performance as a formal weighted metric.

The inclusion of strategic and ESG goals in AI programs shows a clear upward trend with company size, however, overall use of these non-financial metrics is still a minority practice. Practice is mixed across the sample for how companies incorporate strategic and ESG goals into their plans, as either an award component (which may be a basket of metrics) or as a multiplicative modifier.

Larger companies tend to prioritize ESG metrics such as diversity, equity, and inclusion (DE&I) and environmental or sustainability issues. Smaller companies focus more on strategic measures such as product development and innovation to prioritize the growth of their company. Other strategic priorities used as non-financial measures include employee engagement and talent development goals, which are prevalent across all revenue groups. These trends highlight the increasing importance of aligning executive actions and incentive reward programs with company values and long-term sustainability objectives.

Long-term Incentive Program

Long-term Incentive Mix

Long-term performance plans are highly prevalent among all company size groups. Time-based restricted stock unit (RSU) plans are used for the other NEOs at all of the small companies and most of the medium and large companies. For CEOs, however, RSUs are not as ubiquitous at the larger companies (58% of companies). Stock options are granted to 33% of CEOs in the large company sample, compared to 16% in the medium company sample and 0% in the small company sample; similar prevalence applies to the other NEOs in each sample.

The large company group grants a greater proportion of executives’ long-term incentive program in long-term performance plans and stock options than the small and medium company groups. Performance plans being used less frequently at the smaller companies indicates the difficulty in long-term goal setting for these organizations. When they are used, they account for a smaller portion of the overall LTI program.

Performance Metrics

The number of metrics used in long-term performance plans by tech companies varies, showing no clear trend as it relates to company size. However, across all size groups, the most common approach is to use two metrics (43% of companies in the total sample).

Metric Prevalence

Long-term incentive metrics used vary significantly by company size, reflecting different company objectives across the revenue groups. Relative TSR is most prevalent among large and medium companies, used by 100% and 64%, respectively, compared to 39% of small companies. Tech companies across all revenue groups rely on established market indices to benchmark their TSR performance and use of a custom peer group is rare. Smaller tech firms also experience greater stock price fluctuations (sometimes out of management’s control), making TSR a less reliable metric of overall company performance.

Revenue is a widely used financial metric after TSR (56% of small companies, 50% of large, and 43% of medium). Smaller companies more frequently use ARR (44% of companies) and EBITDA / Operating Income Margin, used by 28%, highlighting a focus on company growth. Given the stock price volatility in smaller firms, they are more likely to rely on alternative financial measures instead of TSR. Margin-based metrics are particularly common because it is easier to set goals over a longer performance period.

Performance periods for small companies are typically shorter, often spanning one year (with additional vesting) or spanning three years with annual goal-setting for three discrete one-year measurements. This is partly because smaller firms face greater uncertainty in forecasting long-term performance, making it more challenging to set reliable multi-year goals. Larger companies use longer performance periods (typically three years), aligning executives with long-term company performance and sustainability.

Concluding Thoughts

While incentive design practices vary across companies, organizations of all sizes in the technology industry focus on growth and profitability. Incentive plan design supports these financial priorities while also tying in other strategic priorities through use of individual performance, non-financial measures and time-based equity vehicles. Incentive plan design evolves as a company grows, more aligned in structure with broader industry trends. Technology companies face unique challenges in keeping up with ever-changing market dynamics, so we expect incentive plan design to continue to adjust over time to keep up with macro-economic trends that impact these organizations.

Alex Barrionuevo, Gray Broaddus, and Cedrick Jean-Louis provided research assistance for this report.