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)

CAP reviewed chief executive officer (CEO) pay levels among 50 companies with fiscal years ending between August and October 2025 (defined as the Early Filers). 2025 financial performance was generally flat to up, which resulted in median bonus payouts of around target. Total compensation for the CEO was up +8% due to an increase in the grant date value of long-term incentives (LTI). This report covers 2025 financial performance, CEO actual pay levels and annual incentive payouts for the Early Filers.

Key Findings

Performance: 2025 median financial performance – as measured by revenue, earnings before interest and taxes (EBIT), and earnings per share (EPS) – was generally flat to up. In 2025, median revenue grew slightly (+2.9%), EBIT grew modestly (+7.3%) and EPS was down slightly (-1.6%). One-year total shareholder return (TSR) was up modestly (+5.3%) and generally aligned with overall financial performance.

CEO Pay: Median CEO total direct compensation increased +8% year over year, driven by a +9% increase in the grant-date value of long-term incentives (LTI). Annual incentive payout was up +4% generally due to increases in the target opportunity.

Annual Incentive Payout: For the third year in a row, the median bonus payout for CEOs was around target (i.e., 98% of target). While median and 75th percentile payouts were consistent with the prior two years, we saw a modest rise in the 25th percentile payout due, in part, to fewer companies having a payout below 50% of target than in prior years. About 25% of companies increased the CEO’s bonus payout above the corporate funded amount through either individual performance or positive committee discretion.

2025 Performance

Financial performance was flat to up for the Early Filers. Median revenue was up +2.9%, EBIT was up +7.3% and EPS was slightly down -1.6%. Median S&P 500 performance for the metrics reviewed was up modestly over the same period.

Median TSR performance was up moderately for Early Filers and generally aligned with 1-year financial performance. At median, TSR was up +5.3% year over year; the S&P 500 had similar median TSR performance over the same period (+5.4%). We measure TSR through a company’s fiscal year end for the Early Filers and through September 30th for the S&P 500. The index returns for calendar year 2025 were around 17%, influenced by the larger technology companies that saw Q4 stock price performance increase with the AI boom.

2025 CEO Actual Total Direct Compensation

CEO pay increased in 2025. Median CEO total direct compensation – base salary plus actual bonus payout plus grant-date value of LTI – was up +8%. This increase was largely delivered in the form of LTI which was up +9% year over year. LTI awards are generally approved in the first quarter (i.e., September 2024 – January 2025 for Early Filers), and increases in award value are typically to recognize strong company and/or individual performance from the prior year. Long-term incentive pay eventually realized by CEOs may be higher or lower than the target amounts.

Median salary was up 2.3% in 2025 (slightly behind merit budget increases for 2025). Annual incentive payout was up +4% year over year. This increase in the annual incentive payout was generally due to increases in the target bonus opportunity.

Annual Incentive Plan Payout

For a third year in a row, the median annual incentive payout was around target (98% in 2025). Median and 75th percentile payouts as a percentage of target were generally flat when compared to 2023 and 2024. However, in 2025, we saw a modest increase in the 25th percentile bonus payout (87% of target in 2025 vs. 77% of target in 2024 and 76% in 2023).

Approximately 50% of the companies in our sample achieved annual incentive payouts at or above target (median payout for these companies was 139% of target). These organizations demonstrated robust performance, including a notable increase in revenue and double-digit growth in EBIT, EPS, and TSR.

In contrast, companies with below target payouts experienced flat or declining financial results. The median payout for this group was 87% of target.(1) 1-year financial performance and TSR is as of each company’s fiscal year end.

Nearly 80% of the companies studied provided a bonus payout that was between 50 – 150% of target. We saw more companies providing a payout just below target as well as fewer companies having a payout below 50% of target which resulted in a higher 25th percentile payout (87% of target) among the Early Filers.

Most companies provided a payout to the CEO that was +/-5 percentage points from the corporate funding factor (i.e., the percentage at which the annual incentive funds based on company performance). If a company wanted to adjust an executive’s payout, as approximately 30% of the Early Filers did, there are a couple of ways in which it could be accomplished – through individual performance or discretionary adjustment. 30% of the Early Filers use individual performance as a component of the annual incentive payout for the CEO. Companies use individual performance to align the incentive payout with an executive’s contribution to the company and the results can raise or lower an executive’s payout relative to corporate performance. Alternatively, companies may make discretionary adjustments to recognize overall company performance (more broadly than incentive plan or financial metrics), particularly if an individual component is not part of the annual incentive plan design.

In 2025, about a quarter of companies increased the CEO’s payout above the corporate funding factor. The average increase ranged from 8 – 50 percentage points above the funding factor. Most of these increases were provided through an individual performance component although some companies did so through a discretionary adjustment. When a company provides a positive discretionary adjustment, it typically does not raise a below target payout to above target. Only one company reduced the CEO’s payout in 2025.

Looking Ahead

2025 was a year of uncertainty, largely defined by tariffs which impacted both financial performance and stock price performance. For the Early Filers, tariffs were enacted after their Q1 began which means that annual incentive goals were established and set before tariffs were implemented. Despite the challenges, median annual incentive payout for companies was around median. CEO total compensation was up year over year driven by increases in LTI awards given strong TSR performance in the prior year.

There is continued uncertainty for 2026 because of tariffs and its impact on the global supply chain. We anticipate that goal setting will continue to be a challenge for companies, particularly given the recent Supreme Court ruling on tariffs. When there is economic uncertainty, companies typically take two approaches for incentives: either through goal setting at the beginning or determining final payout at the end of the performance period. During the goal setting process, companies will try to address it by widening the performance leverage curve, flattening the payout range around target or setting more conservative growth goals. At the time of payout, other companies may deal with uncertainty by adjusting the final results to exclude the impact of tariffs or use Compensation Committee discretion to adjust the final payout. At the time of writing, the war in Iran recently began and is adding uncertainty to the economy. Most companies (including fiscal year companies) have set their budgets and incentive plan goals for 2026. The impact of the war is yet to be seen and may not affect all companies. Depending on the length of the war, we would expect that companies that are greatly impacted would be more likely to make adjustments while others may take a wait and see approach.

Given the moderate increase in TSR performance in 2025, we would expect to see modest increases in LTI award values for 2026 to align with stock price performance. In the broader market, we may see larger increases in LTI for 2026, particularly at AI or technology companies, given the significant stock price appreciation towards the end of 2025.

Early Filer's Company Sample

CAP’s study reflects 50 companies with fiscal years ending between August and October 2025. Industry sectors reviewed include: Communication Services, Consumer Discretionary, Consumer Staples, Financials, Health Care, Industrials, Information Technology and Materials. Revenues for these companies ranged from $1.1 billion – $416 billion (median revenues of $11.5 billion); median fiscal-year-end market capitalization was $16.2 billion.

Grace Tan and Bhavika Podduturi provided research assistance for this report.

For the next installment of our technology industry research, Compensation Advisory Partners (CAP) reviewed long-term incentive relative total shareholder return (“rTSR”) metric design practices across 52 companies in the Technology industry as well as general industry (the Nasdaq 100 index for purposes of this research). The technology companies are split into three groups by revenue size: $500 million to $2 billion (“Small”), $2 billion to $5 billion (“Medium”), and over $5 billion (“Large”).

This report reviews key design practices and considerations of using relative TSR in long-term incentive plans. Relative TSR is a widely used metric in long-term incentive plans as it aligns executives to the shareholder experience and avoids the challenges of setting internal performance targets. In our review, we found that 46% of the technology companies use rTSR while 52% in the broader sample of Nasdaq 100 companies use the metric in their long-term incentive plan. CAP’s design considerations are intended to inform of best practices in technology companies around use of rTSR in long-term incentive programs.

Design Consideration: rTSR as Metric or Modifier

Twenty-four of the 52 technology companies in our study use rTSR in their long-term incentive plans (i.e. 46%). Of those, 17 companies (71%) use it as a weighted performance metric, and 7 companies (29%) use it as a payout modifier. Larger companies overall are more likely to use rTSR as a modifier, while medium and smaller companies in the technology sample more commonly use rTSR as a weighted metric.

Companies most often balance the use of rTSR with other financial metrics, depending on company strategy and long-term priorities. Pairing rTSR with financial metrics can mitigate the impact of volatile markets, provide more balance and reward executives for meeting operational goals. When rTSR is used in the performance plan as a weighted metric along with other metrics, the average weighting is 50% of the award. A quarter of the technology companies using rTSR as a weighted metric use it as the sole metric in the performance plan. Using rTSR as a weighted metric creates greater alignment between executive pay and shareholder outcomes.

Award modifiers (versus weighted measures) can add complexity yet are effective at promoting alignment between executives and shareholders while still prioritizing operational performance as the rTSR impact is smaller. A criticism of rTSR is that it is an outcome measure, versus one that drives performance, but market and operational performance may not always be aligned so using it as a modifier can help provide balance. At median of both the technology company sample and Nasdaq 100 companies, the modifier can adjust payouts by ±25%.

Design Consideration: TSR Comparator Groups

The choice of a comparator group sets the context for how rTSR performance will be evaluated. There are four typical options as discussed below.

Among the 24 technology companies using rTSR, 75% use a general industry index, 21% use a technology-specific index, and 4% use a custom performance peer group. Common indices used in the technology sample include the Russell 3000, S&P 500, Nasdaq Composite and Nasdaq 100. In comparison, of the 52 companies in the Nasdaq 100 using rTSR in their long-term performance plans, 52% use a general index, 17% use an industry index, 19% use a custom performance peer group, and 12% use their compensation benchmarking peer group. More technology companies may use a general industry index given that: (1) industry indices may include companies that are largely different (i.e., hardware versus software), and (2) for smaller companies, there may be limited choices of industry indices that are reflective of similar stage companies.

Regardless of the comparator group selected, the comparators/constituents are locked at the start of the performance period. As a result, an approach should be determined in advance to address companies that are acquired, go bankrupt, or are otherwise unable to be included for the full performance period. These provisions should be defined up front in the award agreement to avoid any uncertainty.

Design Consideration: Performance Goals and Payout Scales

Another key design feature includes performance goals and corresponding payout leverage. Among technology companies using rTSR, at median, the payout scale ranges from 50% of target at threshold to 200% of target at maximum, with target performance goals most commonly set at median performance (50th percentile) relative to comparator companies. About a third of the technology companies using rTSR target above-median performance for a target payout, which is a fairly progressive design feature. Proxy advisory firms have criticized median performance that results in a target (or, 100%) payout, despite this being most common practice in both our technology sample and the broader market. Many companies remain comfortable with this approach given that there are items outside of an executive’s control impacting stock price and returns.

The structure at technology companies is generally aligned with the broader market. The Nasdaq 100, at median, sets payout curve ranges from 30% of target at threshold to 200% at maximum, with similar prevalence of target goals set at and above median performance.

Most companies set goals that target a relative percentile positioning within the comparator group. A less common approach (2 of the 24 technology companies) is to compare company returns to total index returns. This approach can lead to unexpected outcomes given that most indices are weighted by market capitalization and index performance can be driven by a select group of companies. It can also be difficult to determine the number of percentage points of outperformance (or underperformance) that results in maximum (or threshold) payout.

Performance goal ranges are generally consistent across small, medium, and large revenue groups, though larger companies more commonly set target performance goals above the 50th percentile. It is common for maximum performance goals to be set above the 75th percentile in the technology industry. In the technology sample, 67% of companies set maximum performance goals above the 75th percentile, and 33% set max goals at the 75th percentile, compared to 50% of Nasdaq 100 companies that set maximum performance goals above the 75th percentile and 50% that that set max goals at the 75th percentile. Threshold performance is typically set at the 25th percentile.

All 24 technology companies measure rTSR performance over at least three years, with 75% using a three-year cumulative period. Many companies, mix and match the length of the performance period used for rTSR and accompanying financial performance metrics, and often use a shorter performance period (i.e., less than three years) for financial measures. Of the 18 technology companies pairing rTSR with financial metrics, 28% measure financial performance over the same three-year period; 44% of companies use three one-year periods. The remaining 28% use a one-year period in conjunction with a three-year rTSR performance period.

The use of mixed performance periods reflects the challenging nature of financial goal setting in a high-growth and/or volatile macroeconomic environment. While relative performance measures like rTSR should account for external risk factors affecting the industry or broader market, long-term absolute financial results can be impacted by factors not predicted at the time of goal-setting which are beyond executives’ control.

Additional Considerations

TSR Calculation Methodology

When setting performance goals, it is important to clearly define the methodology for calculating TSR. It has become exceedingly common to use an average stock price for both the beginning and end of the performance period versus using spot prices. The most common averaging period among technology companies in the sample is 30 trading days (preceding the beginning and end dates of the performance period). Average prices can reduce irregular outcomes caused by stock price volatility on one specific date for both the company and the comparator companies.

When implementing or making changes to rTSR in the plan, historical back testing can also be helpful. This can help with selection of comparator companies as well as determining the appropriate trailing period for calculating TSR. It is important to ensure that outcomes are varied over time and that design features are not always advantageous (or disadvantageous) based on program choices.

Accounting Treatment and Number of Shares Granted

Given the accounting rules for market-based performance awards, grant date fair values for awards with an rTSR component may not align with intended target value. Market-based awards require a Monte Carlo valuation to determine fair value so the reported value of rTSR awards in the Summary Compensation Table and Grants of Plan Based Awards Table will be different (oftentimes higher) than a time-based award or performance-based award without market conditions. This can have communication implications when reported values of equity awards are misaligned from the intended target value. This happens when the spot price (or trailing average trading price) is used to determine the number of shares at grant.

When companies determine the number of shares using the Monte Carlo valuation, executives may view this as punitive since they typically receive less shares than if a spot price (or average price) is used. Monte Carlo valuations often result in a premium price compared to the spot price on date of grant. Using the Monte Carlo Value to determine the number of shares is generally less common, particularly if there are financial metrics included in the long-term incentive plan.

Award Caps

An additional feature included in performance plans using rTSR, is an award cap. Award caps are used to prevent above-target payouts if absolute TSR is negative, (e.g., payout is capped at 100% if absolute stock price decreases during the period). This prevents outsized payouts when shareholders are experiencing negative returns, even if the company overall is performing better than the comparator group. For companies using rTSR, 38% of the technology sample and 50% of the Nasdaq 100 companies cap payouts at target for absolute stock price decline. This feature is viewed as a good governance practice and is well received by shareholders and proxy advisory firms.

Conclusion

Relative TSR is generally considered to be a clear and easy to understand metric in long-term incentive plans. It is a simple way to provide balance and include both relative and absolute performance considerations. While often used at larger established companies, our study shows that technology companies, even with a smaller market cap, use rTSR given the challenges of setting long-term financial performance goals. Used effectively, relative TSR can enhance program design, particularly when balanced with other performance metrics and/or long-term incentive vehicles.

Relative Total Shareholder Return (rTSR) continues to dominate the long-term incentive landscape for S&P 500 CEOs, appearing in 58% of performance share unit (PSU) awards. Its appeal lies in its perceived objectivity since it does not rely on financial targets established internally, its ability to create a clear link between shareholder experience and executive payouts, and the ease of communication to investors and proxy advisory firms.

Yet rTSR’s simplicity can be deceptive. While it measures stock price appreciation plus dividends relative to a benchmark, results can be heavily influenced by broader market forces, interest rate shifts, or sector cycles. As a result, companies face two fundamental questions when choosing to implement rTSR into their long-term incentive plans: (1) What design choices will best reflect the company’s performance philosophy? And (2) How much weight should rTSR carry in the plan?

Implementation: Weighted Metric vs. Modifier

The first decision is whether to use rTSR as a primary weighted metric or as a modifier to other financial results.

Most companies give rTSR a prominent role, with 68% using it as a weighted metric, meaning it directly determines a portion of the PSU payout. While 50% is the most common weighting (38% of companies), practices diverge sharply on either side. About one-third lean heavily on rTSR, with 22% weighting it at the full 100%. At the other end, 29% set it below 50% — and only a small minority, 13%, drop below 33%, most often at 25%.

When rTSR is a weighted metric, nearly nine in ten companies measure performance as a percentile rank within their comparator group. The median payout scale begins at the 25th percentile for threshold, reaches the 50th percentile for target, and tops out at the 80th percentile for maximum payout. While the traditional 25th / 50th / 75th percentile performance goal scale remains the single most common approach (31%), it is no longer majority practice, as more rigorous maximum goals have become increasingly common.

For a smaller percentage of companies (7%), rTSR goals are expressed as the percentage difference from an index’s performance rather than as a percentile rank. This approach is straightforward to track and avoids certain complexities (such as adjusting for M&A), but it can lead to irregular outcomes. In index-heavy benchmarks, large constituents can have an outsized influence, for example, the “Magnificent Seven” stocks (Apple, Microsoft, NVIDIA, Alphabet, Amazon, Meta, and Tesla) currently make up over one-third of the S&P 500’s market capitalization.

The modifier approach plays a different role, with 32% of companies applying rTSR as a modifier to results from other metrics. Multiplicative adjustments are the norm (76%), with most designs using symmetric ranges such as ±20% or ±25%, often corresponding with top- or bottom-quartile performance. A smaller group opt for additive adjustments (22%), and a few employ asymmetric ranges that penalize underperformance more than they reward outperformance. Two companies, Chipotle and American Express, apply their rTSR modifiers purely as caps. For Chipotle, the award payout is capped at target if rTSR performance is in the bottom quartile compared to other S&P 500 constituents. American Express has a similar payout cap at 100% of target; however, this applies in all instances where rTSR performance falls below the 67th percentile of a custom peer group, which creates a much higher penalty.

The choice between a weighted metric and a modifier reflects a company’s philosophy on pay-performance alignment. Weighted metrics make rTSR a central driver of payouts, appealing to investors who value direct market alignment. Modifiers keep rTSR in a secondary role, reinforcing other financial or strategic goals without overshadowing them. However, the downside to using rTSR as a modifier is that if results fall short due to the inability to plan with precision, there may well be no payout to modify. Companies choosing to have rTSR as the sole performance measure (22%) may have difficulty setting multi-year goals for financial metrics, and the use of rTSR alleviates this concern by serving as an objective assessment of long-term results.

Comparator Groups

Once rTSR’s role is set, the next question is: Who should we measure against?

Most companies compare their rTSR to the performance of the constituent companies in an index. In the sample reviewed, 61% compare performance against a single index, 37% against a custom peer group, and 2% against both. Among those comparing against an index, approximately half (51%) choose a general industry index like the S&P 500 or Nasdaq 100, while 48% select an industry-specific benchmark. Unsurprisingly, the S&P 500 itself is the single most common comparator index, used by 44% of all companies.

Nearly all companies (96%) measure against just one comparator set. Only a handful compare against multiple groups of companies, 4% use two indices, and only one compares against three. When companies do choose to compare against multiple indices, it is common to use both a general industry group and an industry-specific group, which may lead to different outcomes based on macroeconomic conditions.

The trade-off is clear: indices are transparent and objective but may be less relevant for companies in niche sectors, while custom peer groups can provide a sharper performance comparison and the ability to control the sample size but require more judgment and justification in their selection.

CAP cautions companies using sector indexes to carefully consider the constituents included, as they may be reclassified over time. For example, due to changes in GICS codes during 2023, “Data Processing & Outsourced Services” (e.g., Broadridge Financial) and “Human Resources and Employment Services” (e.g., Paycom Software) are now grouped in the S&P 500 Industrials sub-industry index alongside traditional industrial companies such as Boeing and Deere. This blending of fundamentally different business models can distort performance comparisons within the index, meaning rTSR results may reflect shifts in sector makeup rather than true differences in company performance.

Absolute TSR Caps

One-third of companies build in a safeguard for down markets: an absolute TSR cap that limits payouts when shareholder returns are negative, no matter how strong relative performance is.

The prevailing approach, used by 95% of companies with a cap, is to limit payouts to 100% of target. Outliers to this practice include capping at 125% or 150%, zeroing out payouts entirely, or reducing them by a fixed percentage (e.g., -20%). It is important to note that these caps most often apply only to the rTSR portion of awards, rather than the entire award, although some companies do apply the cap to the full payout.

These provisions resonate with investors because they prevent windfall payouts in down markets and help manage share usage when stock prices are depressed.

Performance Periods

Three-year performance periods are nearly universal in rTSR plans (99.3% of companies). Just one company each uses a two-year or a four-year performance period.

While most measure rTSR cumulatively over the full period, a small subset (3%) calculates rTSR for each interim period and then average the results, a design most often seen when rTSR is the only metric used for PSU payouts. This approach smooths the impact of performance spikes or dips in any single year and reduces reliance on a single measurement window.

Stock Price Measurement Methodology

While rTSR is ultimately a measure of return, how companies measure the starting and ending stock prices varies.

Averaging is by far the dominant approach. 90% of companies smooth volatility by averaging stock prices at the beginning and end of the period, compared to just 10% that use a simple point-to-point calculation.

Companies describe these averaging windows in either trading days or calendar days, with disclosures split roughly evenly (53% vs. 47%). Standardizing them so that 30 calendar days is roughly equivalent to 20 trading days reveals a strong clustering around one month: half of companies use a one-month average. Another 22% use periods between one and three months, most often 45 days (~30 trading days) or 60 days (~40 trading days). About 12% use a three-month period (90 days), while 12% use less than one month, most commonly 20 days (~9% of all companies). Longer averaging windows are rare, with only 4% exceeding three months, including one notable outlier, Ball Corporation, which averages a full year at both the front and back ends of the performance period.

These kinds of design decisions, whether on averaging periods, comparator groups, or rTSR’s role in the PSU design, highlight that even within a framework of well-established norms, companies regularly make adjustments to fit their own circumstances.

Conclusion and Takeaways

Relative TSR design follows well-established patterns, but most programs include elements of customization that stray from the norms. In CAP’s view, the two most critical levers are:

1. Implementation method: weighted metric or modifier, and magnitude
2. Comparator group selection: relevant, competitive, and statistically sound

Understanding prevailing market norms is essential for benchmarking and credibility, but awareness of less common, more unique designs is equally valuable. These “fringe” approaches can be just as effective, and sometimes better, in aligning pay with performance when they are thoughtfully matched to a company’s specific goals and circumstances.

Amidst increasing pressure from Institutional Shareholder Services (ISS) to disclose forward-looking long-term incentive goals, CAP finds that most companies do not disclose forward-looking financial goals.

In 2025, Institutional Shareholder Services (ISS) issued policy updates that include greater scrutiny of companies that do not disclose forward-looking long-term incentive (LTI) goals, especially in the case of quantitative pay-performance misalignment. When pay-performance misalignment exists, as measured under ISS’ quantitative model, disclosure of goals at the end of the performance period is also less likely to mitigate ISS’ reluctance to support a Say on Pay proposal. Given this policy development, companies who expect challenges with Say on Pay may consider disclosing forward-looking goals to earn additional credit from proxy advisors and shareholders, but clear trade-offs exist.

CAP analyzed the 100 largest U.S. publicly traded companies by revenue to evaluate current practices on disclosing forward-looking goals for performance-based long-term incentive plans. Here is what we found:

94% of the 100 largest companies award long-term performance-based equity awards to Named Executive Officers. Of those companies, 87% include absolute financial performance metrics — i.e., revenue targets, profit targets, or return metrics — and 80% include relative performance metrics in their long-term incentive plans. Relative performance metrics typically involve Total Shareholder Return performance relative to an industry or market index (rTSR), but a few companies use relative financial metrics.

Most companies do not disclose forward-looking financial targets that cover future years. Companies often determine that disclosure of forward-looking business plan targets exposes the company to competitive harm. Disclosing forward-looking goals can also put companies in a precarious position when there is a disconnect between internal budget scenarios built on non-GAAP metrics and accounting scenarios that are reported externally under GAAP.

Under SEC rules, companies that omit actual forward-looking goals from the Compensation Discussion & Analysis established at the beginning of the performance period must provide a statement on the perceived degree of difficulty of the pre-established goals, and there is pressure to make this disclosure more robust. Many companies disclose the financial goals and actual performance relative to those goals only after the performance period has ended, but there is increasing scrutiny of this practice from proxy advisors that view it as insufficient. This creates the trade-off between offering disclosure designed to support Say on Pay and assessing the possibility of causing competitive harm.

Our research finds that only 30% of companies with absolute performance metrics in the long-term incentive plan disclose forward-looking goals. In analyzing whether the type of absolute metric affected the prevalence of disclosure, we found that disclosure of goals was evenly split between companies with return metrics (e.g., return on equity, return on invested capital) and numerical metrics (e.g. absolute revenue or operating margin).

Companies are far more likely to disclose performance targets and associated payouts for relative metrics. We find that 68% of companies with relative performance metrics in their LTI plan disclose forward-looking relative performance targets. For example, a company with an rTSR metric may disclose up front that 50th percentile performance relative to its peer group would result in target funding, 25th percentile performance results in threshold funding and 90th percentile performance results in maximum funding. These targets often stay consistent over time and are generally not viewed as sensitive business information.

Disclosure of forward-looking LTI goals varies somewhat by industry. Specifically, financial services companies are much more likely to disclose absolute financial goals than the overall sample. These companies are also more likely to use return metrics as absolute metrics, which may have relatively consistent goals over time and are typically viewed as less sensitive business information compared to metrics such as revenue or profitability. Conversely, energy and health care companies are lagging in disclosing even relative performance goals.

Overall, even among the largest companies, forward-looking financial goal disclosure clearly remains a minority practice, even though disclosure of relative metrics with non-sensitive performance-payout matrices has become common. Although forward-looking financial goal disclosure may increase over time, it is likely to do so in selective scenarios such as when companies anticipate lower Say on Pay support.

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.

On January 30th, 2024, the Delaware Court of Chancery determined that the compensation package awarded in 2018 to the CEO of Tesla, Elon Musk, was not “fair” to shareholders and that Tesla’s compensation committee had breached its fiduciary duties in granting it. This article will discuss the main aspects of the award that were factors in the Court’s verdict, which includes the grant size, the compensation-setting process, and the disclosure of the grant.

The Grant

On March 21, 2018, Tesla published an 8-K announcing the approval of a CEO Performance Award that would compose the entirety of Musk’s compensation. The performance-based award was record-breaking in its size, granting roughly 20.3 million stock options with a grant date value of $2.3 billion. It would vest in twelve tranches as financial milestones were met – the first milestone required reaching $100 billion in market capitalization, and each milestone thereafter required an additional $50 billion increase in market cap for the options to vest. In addition, there were operational milestones related to total revenue and adjusted EBITDA. Each tranche would effectively award 1% of total outstanding shares as of January 21st, 2018, to Musk, on top of his existing ownership stake of 21.9% of Tesla.

The Board and CEO presented the award’s milestones as extremely challenging, as full vesting of the grant would require Tesla to increase its market cap by $600 billion from its current market cap of $56 billion. However, the potential payout was similarly unprecedented, with a grant date fair value of $2.3 billion and a potential value of $55.8 billion. Although other companies have also awarded large, high-profile equity awards to their executives since Tesla’s 2018 award, the value of those awards are still eclipsed by Musk’s 2018 grant date fair value, as illustrated by the chart shown below.

Ultimately, primary aspects of the award that were scrutinized in the Court’s verdict of the grant were the grant size, the compensation-setting process, and the disclosure of the award.

1. Grant Size

The Court questioned whether the size of the grant was reasonably necessary for Tesla to achieve its goals of retaining and growing under Musk.

• In its opinion, the Court points to Musk’s ownership of 21.9% of Tesla at grant as evidence that Musk was already significantly incentivized to drive Tesla’s performance. Testimonials also suggested that Musk had no immediate plans for leaving the Company, further putting the rationale for the grant in question.
• Additionally, the Court highlighted the grant’s more lenient leadership requirement as potentially problematic practice, especially given that the grant was intended to induce retention: the grant conditioned vesting on Musk remaining either CEO or Executive Chairman and Chief Product Officer, a more relaxed requirement compared to Musk’s prior equity grant which required him to remain CEO.
• The Court also flagged the meeting notes of the Compensation Committee, noting that the lack of discussion on whether the proposed grant was necessary and appropriate was indicative of a flawed compensation-setting process.
• Finally, the large discrepancy between Tesla’s award and pay levels among peer companies was scrutinized, and the Court criticized the lack of a benchmarking study.

2. Process

The process undertaken by the Compensation Committee while formulating the grant was another significant point of scrutiny. First, many of the “independent” directors were revealed to have either a longstanding personal relationship with Elon Musk or an outsized financial stake in their role as a director at Tesla.

• Two directors out of the four Compensation Committee members had close personal and professional relationships with the Musk family, including the Chair of the Compensation Committee.
• The other two directors were found to have a significant portion of their wealth tied to their compensation as a Tesla director, which would sum to several million dollars. Such outsized director compensation was judged as atypical by the Court, and added to the question of whether the Committee members could truly be considered independent decision-makers.

The Court also found Musk’s involvement in the compensation-setting process to be inappropriate, as he was given latitude to suggest his own compensation package and made requests to accelerate or pause the work at several points during the 9 months when the grant was under discussion.

• For instance, when the initial schedule planned for the grant to be approved within two months, the Compensation Committee’s independent advisors asked for an extension but were denied. However, when Musk asked to pause the process from July to November 2017, the compensation process stopped entirely.
• The Board also found that Musk proposed new terms prior to six out of the ten Board or Compensation Committee meetings when the grant was discussed.

The Court criticized the disjointed and abbreviated nature of the Committee’s work, as most of the work occurred during only a few weeks within the 9-month span and with little time to research and evaluate new changes proposed by Musk.

In addition, the Court judged that the process was cooperative rather than adversarial, as Musk could set the timeline and only his proposals were considered and researched by the Board, with few challenges or alternatives presented. The Court noted that besides their personal relationships to Musk, another factor impeding the Board’s ability to conduct arm’s-length negotiation was Musk’s halo as a “superstar CEO”, which resulted in the Board rarely restraining Musk’s discretionary actions, including his demands to adjust the compensation terms.

3. Disclosure

Finally, the disclosure in Tesla’s February 2018 proxy statement was judged to be inadequate or misleading in affirming that the grant was reasonable and justified. The February proxy presented the terms of the 2018 grant and notified stockholders of a vote to approve the award in March. However:

• The proxy described all members of the Compensation Committee as “independent”, omitting the financial or personal relationships that multiple board members had with Musk. Furthermore, the definitive proxy removed a section in earlier drafts that mentioned how Musk established the key terms of the grant during conversations with the Chair of the Compensation Committee. The omission creates the misleading impression that the grant was developed independently by the Board when it was mainly designed by Musk.
• Although Tesla framed the milestones as aggressive, Tesla had internal data at the time of grant that showed that the first few milestones would vest given the Company’s trajectory: three-year projections in December 2017 showed that Tesla would achieve seven operational milestones by 2019, and eleven by 2020. The proxy did not disclose this context when explaining the grant, although it cited “internal growth plans” as one of the factors the Board considered when setting milestones.

Where Things Stand Today

After the trial, Tesla included a shareholder proposal to re-ratify the 2018 grant in its 2024 proxy statement. 73% of Tesla’s shareholders approved the proposal, similar to the level of voting support achieved in 2018. The disclosure provided in 2024 was extensive, including full details of the grant and the Delaware Court’s opinion. Meanwhile, Tesla also intends to exit Delaware and reincorporate in Texas, in search of a friendlier business climate.

Other Examples of “Moonshot” Awards

To provide context on the size of Tesla’s CEO grant, here is an exhibit that details other mega grants that have received scrutiny and increased public attention.

Notes

1. Identical grants were made to Lawrence Ellison, Chairman and CTO, and Thomas Kurian, co-CEO.
2. Identical grant was made to Catherine Spear, Co-CEO.
3. Slack became a private company upon its acquistion in July 2021.

Conclusion

Mega-grant awards are infrequent but not entirely uncommon among publicly traded companies, and several more have been granted over the last few years. However, the rescission of Tesla’s 2018 mega-grant to their CEO illustrates a few considerations for boards considering similar grants, as well as some best practices for the compensation-setting process in general:

• Consider the goal that the compensation package is intended to achieve, such as retention, and whether the compensation size, vehicle, and structure is necessary and appropriate for driving the goal.
• Support the compensation size with benchmarking of compensation provided by reasonable peer companies.
• Ensure an accurate assessment of independence among the Board of Directors. Besides preexisting interpersonal relationships, the nature of negotiations during the compensation planning process also impacts director independence.
• Ensure accurate disclosure of the compensation-setting process and of the nature of grant vesting requirements.
• The more atypical or outsized an award, the more critical that benchmarking and adequate justification become.