Business strategy, the macroeconomic environment and executive compensation practices are all evolving at an increasingly rapid rate, and compensation committees may not have all the answers right off the bat.
However, leading compensation committees can adapt to volatility and uncertainty to find the right answers, even if those answers aren’t initially clear. Committees can respond effectively to the evolving landscape by ensuring compensation practices support strategic priorities, making the most of the committee’s expanding mandate as well as staying ahead of compensation and investor trends.
Adapt compensation practices to support strategic priorities and evolving macroeconomic conditions
Compensation programs are most effective when tailored to support long-term strategic goals. When these goals change, whether in reaction to macroeconomic challenges (such as tariff-related uncertainty) or due to pivots in business strategy, forward-thinking compensation committees need to be agile and flexible enough to adapt compensation programs to fit the new status quo. Committees that succeed here:
Actively partner with management to determine strategic priorities or responses to key external changes
Committees that are more in tune with the company’s strategy or responses to external challenges are often better situated to think through how the company’s incentive programs may need to evolve.
Promote continued education of committee members
Committees that are aware of knowledge gaps in narrow (but often critical) areas, such as AI and the impacts of macroeconomic policies, can then respond through continued education. Bringing in experts to educate members on new topics can enhance their understanding of how to tailor compensation programs to strategy changes.
Assess compensation programs at the right times
Often, half the battle is recognizing the right time to step back and assess if compensation programs incentivize the right behaviors and goals. Whether in response to an obvious catalyst, like a business turnaround or a more subtle trigger like a new CEO with a slightly different vision, it is critical for committees to recognize when these conversations should occur to have the most impact. Best practice includes reviewing compensation plans and their effectiveness, at least annually, as part of the committee’s review cycle.
Ultimately, the strongest compensation programs are those rooted in the company’s unique strategy and long-term growth proposition. A focus on driving alignment between compensation and those various factors can significantly enhance the committee’s impact and effectiveness.
Make the most of the committee’s expanding mandate.
By 2024, more than half of the compensation committees in the S&P 100 had amended their charters to include oversight of several human capital management (HCM) topics, including talent planning and succession, culture and pay equity. Expanding the role of the committee to include HCM gives forward-thinking members the chance to better design pay programs to support talent strategies. Opportunities include:
Developing robust succession plans through broader exposure to talent
Committees can work with the chief human resources officer (CHRO) and business heads to identify potential candidates for succession and consider having employees below the C-suite present to the committee on relevant issues and talent strategies to broaden the committee’s awareness of the talent pool.
Leveraging compensation programs to strengthen organizational culture
Culture is often downstream of pay. Committees should consider how programs might be shaping internal dynamics. Are pay programs unwittingly promoting a “mercenary culture?” Are positive “culture carriers” being rewarded and retained? Are the company’s goals and values being reinforced by incentive programs?
Marrying pay philosophy with talent strategies
Delving into HCM issues like pay equity offers committees the chance to grow their understanding of company-wide pay practices and help determine if pay is adequately rewarding performance. Committees can work with human resources to develop a deeper understanding of global pay practices and ensure they attract and retain the talent necessary for long-term success.
In some circumstances, it may help to add members with HCM experience, such as former CHROs, to provide insights into key HCM topics. Building time into the committee calendar and meeting agendas to tackle HCM issues in depth can also help committees handle issues with appropriate time and attention. Many boards set aside time for planning, reviewing and ideating throughout the year, alongside their more traditional agenda items.
Stay ahead of compensation and investor trends
Investor expectations and best practices in compensation and corporate governance regularly evolve, but staying on top of these developments does not need to be a daunting task. Effective compensation committees:
Lean on independent compensation advisors to provide context across companies and industries
Good outside advisors are deeply intertwined with their clients’ ongoing strategy and compensation discussions. By applying strong data analytics and relevant experiences from different clients, outside advisors can help committees think through issues in real time and get ahead of the curve on issues like responding to the impacts of tariffs on incentive programs, remaining competitive in key talent areas like AI and cybersecurity as well as evolving the role of ESG and DEI goals in incentive plans.
Collaborate with legal and outside counsel
While having committee members versed in legal and regulatory changes is beneficial, effective committees allocate time in one or two annual meetings for experts to discuss the evolving landscape.
Communicate effectively with shareholders
Historically, companies have relied on both the narrative disclosure of executive compensation programs in the proxy filing and shareholder engagement with both management and the committee chair. With the SEC’s February 2025 guidance related to investors potentially losing their eligibility to report under Schedule 13G as passive investors, many committees are needing to adapt their strategies in real time to proactively adjust their engagement strategy with shareholders and enhance proxy disclosures.
While staying abreast of market and compensation trends, managing the evolving expectations of compensation committees and mitigating pivots in strategy are all important, this list is not exhaustive. As such, it is important for the committee to periodically step back and assess its processes, skills and advisors. Many of these topics can be covered as part of the committee’s annual self-assessment, and it may be helpful to encourage feedback from management and independent advisors as part of the process. Done well, committees can build in the processes necessary to evaluate if new skills, members or outside advisors would help them support long-term value creation through change and volatility.
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