Pay for What?

Imagine setting executive compensation financial targets today, on April 3rd, 2025. Tariffs just reshuffled the entire global supply chain. Manufacturing economics are in flux. Every CFO in America is recalculating their cost structures. And you're supposed to know what "good performance" looks like for the next three years?

Good luck with that.

The Performance Mirage

The sacred "pay for performance" mantra that underpins executive compensation can generally work in stable times. But we aren't in stable times.

The traditional metrics are suddenly suspect. Revenue growth? Sure, but at what margin after absorbing new tariffs? Market share? Against competitors facing entirely different supply chain exposures? Stock price? When the market doesn't know how to price in these structural changes? What about the beneficiaries of other companies’ pain? Does that count as success?

When Adjustments Get Messy

In normal times, boards make reasonable adjustments to performance metrics in a few predictable scenarios:

• External shocks (the traditional "Act of God" category): A pandemic closes all stores, a hurricane wipes out facilities, a geopolitical crisis disrupts supplies
• Strategic investments: The company deliberately sacrifices short-term profits for long-term positioning through major technology investments or market development
• Accounting anomalies: One-time charges that distort underlying business performance
• Acquisition integration: Temporary disruption from combining operations that shouldn't penalize leadership

But today's challenge isn't about making discrete adjustments to otherwise reliable metrics. It's about questioning whether our entire performance measurement framework makes sense when the economic landscape is being redrawn.

Real Options for Real Boards

So what's a board to actually do? Here are five approaches that go beyond business as usual:

1. Brutal Simplification

Throw out the scorecards and the weighted metrics. Pick the one or two things that matter most right now that you can measure. Maybe it's maintaining gross margin in the face of rising input costs. Maybe it's domestic manufacturing ramp-up speed. Whatever it is, make it crystal clear and put serious money behind it.

Why it works: In chaos, focus wins. Leaders know exactly what matters.

Why it doesn’t: Focus is powerful—but risky, and you could lock onto the wrong target, oversteer, or incentivize behavior that solves one problem while quietly creating three more.

2. The Five to Seven-Year Bet

Cancel next year's standard equity grant cycle. Instead, make a single, multi-year grant that vests based on where the company stands in 2030 or 2032. No annual refreshes, no short-term metrics. Just one big bet on long-term value creation.

Why it works: It aligns everyone with the timeframe needed to navigate structural economic change and frees executives from quarterly optimization games.

Why it doesn't: Not every executive wants to wait that long to get paid—or stay that long. You'll need clear exit ramps and fairness mechanisms for those who leave early without undermining the long-term nature of the plan.

3. The Horse Race Design

If you can't tell what "good" looks like in absolute terms, measure relative position. Rank your company against a carefully selected peer set or the broad economy, “the market,” and pay only for outperformance. This isn't just about stock price—it can include market share gains, margin protection, or other competitive metrics. You could even combine absolute and relative performance: “We did well, and we won.” This is a viable option for many companies and won’t be offensive to the traditional compensation frameworks and orthodoxy like the first two would be.

Why it works: In a storm, you can't control the waves but can reward the captain who navigates better than others.

Why it doesn't: Relative metrics sound simple, but they rarely are. rTSR can be gamed by timing, and most “relative” measures aren’t tracked consistently or cleanly enough to withstand scrutiny.

4. The Conscious Placeholder

Admit you don't have the answers yet. Implement a one-year fully discretionary program with transparent guardrails. Tell executives, "We don't know exactly what success looks like, but we'll recognize it when we see it." Then, document your reasoning meticulously. Apply that discretion in the bonus and give everyone a modest RSU grant so you are out of the goal-setting business.

Why it works: It's honest. And sometimes honesty is the only credible position.

Why it doesn't: Kicking the can only works if the road gets smoother. Next year might bring even more uncertainty—and you could be stuck having the same conversation all over again.

5. Business as Usual (with Consequences)

Keep your existing program, but face the music: you'll either end up with astronomical payouts for executives who got lucky or devastating attrition because good leaders were penalized for factors beyond their control. Or either (i) your goals will be so wide they don’t really mean that much, (ii) a very complex adjustment process at the end of the year.

Why it works: It doesn’t always—at least not perfectly—but it’s the path of least resistance for governance-constrained boards. It keeps leaders focused on running the business instead of redesigning compensation and requires trust between the board and management to navigate adjustments in good faith.

Why it doesn't: Fixed targets limit agility. In uncertain times, they can box executives into playing it safe—and spark distracting debates about adjustments in environments with low trust between the Board and Management.

Beyond Compensation Theater

Stock price remains the ultimate scorecard—eventually. It can be rigged, it can be risky, and it doesn’t always tell the full truth. But, over sufficient time, it should capture every dimension of business health, from customer loyalty to employee engagement. However, in periods of structural economic change, the gap between company actions and market verdict widens considerably.

The awkward truth about executive compensation is that many companies have been trapped in a ritualistic annual exercise—setting reasonable targets, making predictable adjustments, and managing the process while dutifully checking governance boxes along the way. But today, those same governance checkboxes might push companies toward outcomes that fundamentally contradict logical behavior in an environment that has suddenly become completely illogical— where many companies have lost their sense of control entirely in the last 24 hours.

Perhaps today's economic dislocation offers something genuinely valuable: permission to break free from compensation orthodoxy, to embrace crude but honest measures like long-term stock price, and to create the freedom to pivot and remain agile as the landscape continues to shift.

The question isn't just how to pay executives fairly during upheaval—it's whether this moment is a call to action for Boards to build something entirely new around compensation, something that acknowledges the reality of our uncertain times rather than pretending we can predict what's coming next.

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