Six Approaches to Incentive Targets Amid Economic Volatility and Uncertainty

Written by Dr. Charles G. Tharp
Senior Advisor, Research and Practice
Center on Executive Compensation

A key responsibility of compensation committees is the approval of incentive plan design, especially determining individual awards for the senior-most executives and setting performance objectives for annual and long-term incentive payouts. The process of setting performance objectives for long-term incentive awards is particularly challenging in the context of an uncertain and volatile global environment.
While some of these factors impact companies across industries, there are also factors that may be specific to a given sector that produce additional uncertainty and volatility.

These uncertainties have led many compensation committees to question their ability to set multi-year performance objectives with confidence.

In times of uncertainty, compensation committees may seek alternative design approaches to mitigate the risk of setting overly aggressive or overly conservative long-term performance targets. The prevailing practice of establishing a three-year performance period for long-term incentive grants makes goal setting especially difficult in periods of high market and economic volatility. Presented below are six alternative approaches (with corresponding pros and cons) that companies may find helpful in structuring long-term incentive arrangements in an uncertain and volatile business climate.