Tariff Turbulence for Incentive Plans

If navigating your executive incentive plans right now feels eerily like dusting off the 2020 pandemic playbook, you’re not alone. With tariffs as the most recent disruptor, Compensation Committees are once again tightening their seatbelts for turbulence — economic, strategic, and optical. A recent Cooley article dives deep into how boards can remain fair, strategic and defensible.

In-Flight Adjustments: Use Discretion Wisely.

• Many companies took the opportunity earlier in the year to bake flexibility into their metrics. But where there’s little wiggle room, boards must use thoughtful, documented judgment calls.

New Programs Require Foresight, Not Hindsight.

• For plans still in the design phase, this is the time to plan and act — not react. Stakeholders expect that boards consider how tariffs could reshape business fundamentals and, in turn, pay. Questions to ask:
  
  
  • How might tariff-induced costs impact performance targets?
    
    
  • What adjustments might be perceived as fair vs. opportunistic?
    
    
  • Do current design features account for macro-level shocks?

As circumstances unfold, decision makers need to understand how it may change their current thinking and program planning.

Considerations to Navigate the Tariff Terrain:

• Assess the Level of Flexibility: Consult with Finance before adding more, to avoid accounting landmines.
  
  
• Smooth Volatility: Use trailing average stock prices for grant valuations to minimize market swings — and clearly disclose this practice in the proxy.
  
  
• Mind the Share Pool: A lower stock price can deplete share reserves faster. Scrutinize award limits in equity plans and your ESPP to avoid unintentional dilution.
  
  
• Preserve Cash, Cautiously: Settling incentives in equity can help save cash, but may open a Pandora’s box of accounting and disclosure implications.
  
  
  • Take a look at your net settlement practices for exercise price payment and consider limiting them to Section 16 officers.
    
    
• Shifting Away from Options: Consider moving option awards to full value grant awards to offset the underwater options from prior grants and keep retention power.

The Bottom Line: The tariff outlook may be foggy, but leading with clarity will bring program resiliency. Embrace discretion thoughtfully, design with flexibility and communicate clearly.