Recent statements and opinions made by proxy advisors, a Europe-based institutional investor, and some academics and consultants have cast the preference for using performance-based equity incentives into question. The use of these plans, such as performance share units (PSUs), has become nearly universal and is the largest form of compensation delivered to S&P 500 chief executive officers (CEOs). This practice has largely been due to previous proxy advisor requirements, and investor preferences, that PSUs or other performance-vesting equity comprise at least a majority of CEO total equity compensation.
As demonstrated in this Viewpoint, our investor opinion survey conducted this summer shows that the vast majority of shareholders strongly prefer that companies continue the majority usage of PSUs, and it does not indicate much preference for movement to long time-vesting restricted stock units (RSUs). Our survey conducted in partnership with IR Impact of more than 100 large investors revealed:
The recent criticisms of the use of PSUs have largely focused on three themes:
In response to some of these criticisms, both Institutional Shareholder Services (ISS) and Glass Lewis have included topics in their annual policy surveys asking survey participants for their opinions on the use of performance-based and time-based equity plans, including the relative emphasis preferred on both vehicles. To date, the proxy advisors appear to be mixed/ambiguous on this important topic.
The ISS 2024 policy survey indicated that a minority (31%) of investors thought ISS should revise its current approach and begin considering the use of time-based equity awards with extended vesting periods to be a positive mitigating factor when there is a pay-for-performance misalignment. A larger group of investors (43%) responded that a predominance of time-based equity awards should continue to be viewed as a negative factor in the context of the presence of pay-for-performance misalignment.[3] In contrast to these results, ISS has also stated “many investors are calling into question the presumption that performance-conditioned pay is preferable to other forms of executive pay.”[4]
The Glass Lewis 2024 policy survey more directly asked investors about their preference of LTI vehicles. Only 15% of investors agreed that they “prefer time-based equity awards over performance-based equity because the vesting conditions for performance-based equity have become too complicated and difficult to monitor.” As further evidence of investor support for PSUs, the Glass Lewis survey results indicated that 92% of investors agreed “a large portion of equity compensation should be performance-based to ensure that executive pay is aligned with performance results.”[5]
Likely influenced by the proxy advisor pay-for-performance models, 93% of S&P 500 companies use PSUs; these plans on average make up about one-third of CEO target total compensation.[6] There clearly was and has been strong shareholder support for the CEO pay model as evidenced by high average Say on Pay votes (2011-2024 average S&P 500 “for” vote of 90% and 98+% of votes passing).[7]
Recent regulations to require the Compensation Actually Paid (CAP) disclosure in the proxy also helped support the notion that CEO pay has been aligned with performance. Pay Governance research on PSU plan payouts and TSR performance confirmed that PSU payouts are aligned with shareholder outcomes. This may partially explain why shareholders have consistently and strongly supported Say on Pay since its inception. As further support against the above criticisms of PSUs, Pay Governance and a few others extensively studied the PVP/CAP 2022 regulation and found it to demonstrate very strong pay and performance alignment. If CAP is high or growing, it will be aligned with TSR and the obverse will also be true (low/decreasing CAP aligned with low TSR).[8]-[10]
Pay Governance in collaboration with IR Impact, a leading governance and investor relations intelligence firm, surveyed more than 100 institutional investors and public pension funds with aggregate assets under management (AUM) of $29 trillion. Our objective was to understand investor perspectives on the use, design, and disclosure of PSUs given recent media coverage of this important and prevalent compensation component. While the design and mix of LTI awards need to be driven by each company’s unique cultural and strategic situation, understanding investor preferences is also critical.
Our survey sample included institutions with an average AUM of $261 billion and included responses from portfolio managers, investment analysts, and governance/stewardship officers. The participants were based across North America (59%), Europe (40%), and Asia (1%).
In general, our survey respondents expressed satisfaction that executive pay is aligned with shareholder performance, much of which is explained by the large amounts of PSUs granted (see Exhibit 1). Nearly one-half (49%) of all investors indicated they were satisfied / very satisfied with the CEO pay alignment at their portfolio companies while only about one-quarter (26%) were dissatisfied or very dissatisfied. Investor sentiment was similar across regions and AUM.
Exhibit 1: Investor Sentiment Toward Executive Pay and Performance Alignment
As shown in Exhibit 2, the results of our survey largely support the preference for PSUs in contrast to time-based stock awards (RSUs) with longer vesting schedules than typical: 71% preferred PSUs that would be earned/vested over a multi-year period or PSUs in concert with a balance of time-based RSUs. A majority (51%) would rather have issuers award mostly or 100% PSUs, while a sizeable group (86%) desire that PSUs comprise at least 50% of total LTI value. Importantly, from most executives’ point of view, the upside payout of the number of PSUs (150-200% of target) is extremely compelling and motivational relative to RSUs that do not have that type of upside. Investor opinions are split on whether standard stock options with time-vesting are considered performance-based (52%) or time-based (48%).
Exhibit 2: Investor Preferences of LTI Vehicles
From a design and disclosure perspective, investor preferences from our survey generally mirror current typical practices (see Exhibit 3). Such practices include paying out at target for median (50th percentile) relative performance, using a blend of absolute and relative metrics (some of which may overlap with annual incentive metrics), and measuring PSU performance over a multi-year period of at least 3 years. In terms of PSU metrics, most (91%) investors prefer financial metric(s) linked to the issuer’s disclosed strategy or a mix of financial metrics and stock-price metrics (absolute or relative). The majority (55%) of respondents indicated it would be problematic to lower performance goals year-over-year in recessionary or disruptive environments. Lastly, and in contrast to common practices, most investors (84%) agree that issuers should forward-disclose PSU multi-year financial performance goals in their CD&As. Based on information collected from ESGAUGE, we found that of the S&P 500 companies that use 3-year financial metrics, 40% forward-disclosed their goals in 2025 proxy statements.
Exhibit 3: Investor Preferences of LTI Design and Disclosure Practices
Pay Governance reviewed the shareholder engagement efforts disclosed by nearly 200 S&P 500 companies in 2024 and 2025 proxy filings and extracted investor feedback related to LTI programs.[11] The most frequently cited areas of investor feedback on LTI programs were around design features of PSU plans (e.g., types of metrics used, length of the performance period, difficulty of the performance goals). The next most common area of investor feedback was around the mix of LTI vehicles and, more specifically, the proportion of LTI denominated in PSUs. When commenting on the use of PSUs, most investors expressed strong support for PSUs to increase the alignment of executive compensation with Company performance and, in some cases, conveyed the preference for the majority of LTI value to be delivered in PSUs.
Anecdotal criticisms of PSUs should be considered thoughtfully and not compel a change in approach. Rather, it is important to have a clear understanding of the preferences of shareholders and to ensure the LTI program supports long-term strategic priorities and aligns with the company’s executive pay and performance philosophy. Most companies can and likely will continue with the vast majority of their executive pay practices, as they have been highly motivational, aligned with stock price performance, very successful, and endorsed by the shareholders.
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Our research shows that the grant date accounting value (e.g., Black-Scholes value) is significantly lower than the future in-the-money value of most stock options. This is a unique topic of research in the executive compensation field.
Stock option accounting rules require companies to determine the fair value of stock-based compensation awards at the date of grant, which are significant and irreversible. This requires an option-pricing model, such as the Black-Scholes-Merton (Black-Scholes) model or a lattice (Binomial) model, that factors the exercise price, stock price volatility, expected term, dividend yield, and risk-free interest rate at the time of grant to estimate an economic value of the award.
However, this accounting value differs significantly from the in-the-money value of options, which is zero at the time of grant. This can be confusing to Compensation Committees, HR leaders, and recipients, as the grants are set and disclosed in the proxy’s Summary Compensation Table at their accounting value. In some cases, option awards expire without ever being in-the-money. However, in most cases, option grants are exercised after vesting at a higher stock price, which can yield greater in-the-money value than the accounting value.
This Viewpoint takes a deeper dive into this differential of accounting versus in-the-money values.
To quantify the potential differential between the accounting versus in-the-money value, we compared:
This consistent time frame was used across all option grants analyzed to ensure comparability among companies, although actual timing and stock prices chosen by the executive differ from the expected term used for our study. A sample calculation is shown below for illustrative purposes:
Our data set includes all option grants for S&P 500 index constituents as of January 1, 2010, and covers 10 years’ worth of grants (2010 to 2019)[1] that meet the following disclosure conditions: the accounting value and assumptions used in the valuation were disclosed, for a total of 2,159 data points. Table 1 summarizes the ratio of the in-the-money present value to the accounting value:
Table 1 contains robust data that shows:
When companies grant stock options, they typically utilize the accounting value to calculate a number of options that would be equivalent to a grant of a full-value award, such as a time-based restricted stock unit (RSU). For example, if the accounting value of an option was $5 versus the stock price of $20, the company would grant four options compared to one full value award. This creates more leverage in potential values, which has yielded significant value for many organizations as the S&P 500 has grown ~600%, a compound annual growth rate of ~14% over the 2010-to-2024 time period covered in the analysis. However, there is still a population of companies where such leverage has not paid off with the option being underwater and having zero value while an RSU would have kept some value.
In addition, our analysis yielded several other interesting observations:
Our analysis shows that the in-the-money present value is higher than the accounting value for the majority of option awards. It is important for Compensation Committee members, HR leaders, and award recipients to understand the difference and purpose of the two values. It also highlights the need for appropriate communications and education around various incentive vehicles, as options have a unique reward profile that our data shows have potentially significant value over longer periods of time and comes with unique financial planning flexibility. Further studies will investigate stock option values granted during down years, e.g., COVID.
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In the first half of 2025, Pay Governance partners and consulting staff have participated in more than 250 meetings with the compensation committees of corporate boards of directors. These engagements and interactions with key stakeholders in the executive pay arena provide us with a unique vantage point into the evolving landscape of executive compensation and corporate governance.
We regularly convene as a firm to exchange perspectives on the trends shaping the industry, the challenges our clients face, institutional investor perceptions, and the key issues emerging in boardroom discussions. These discussions help us gain a collective, comprehensive understanding of the current priorities and concerns of compensation committees.
This Viewpoint is intended to share our perspectives on the key developments we anticipate will be focal points for board compensation committees during the 2025-2026 meeting cycle. The section below highlights these anticipated trends, accompanied by our insights into how they may influence executive pay practices in the coming year.
The topics are not presented in any order of prominence. Each represents a significant development we expect to emerge in compensation committee discussions and priorities will likely be unique to each company.
1. Enhanced Executive Security
Following the fatal shooting of UnitedHealthcare CEO Brian Thompson in December 2024, executive security has become a heightened priority for many organizations. Discussions around executive security benefits are now more frequent in compensation committee and board meetings. These benefits typically include home security systems, personal protection security, secure transportation arrangements (i.e., drivers and personal use of company aircraft), and enhanced protection at company meetings involving leadership. Program enhancements made in 2025 will be disclosed in 2026 proxy filings.
2. Potential Impact of Tariffs on Incentive Plans
The design and execution of 2025 incentive plans have been complicated by the uncertain impact of tariffs, which can vary significantly across companies and industries depending on supply chain structures, among other things. Many boards that finalized their budgets in early Q1 have adopted a range of strategies to account for the potential impact of tariffs.
Common approaches include:
a) Planning for year-end adjustments to account for actual tariff impact
b) Incorporating a “best estimate” of tariff effects into goal-setting
c) Establishing wider performance ranges to accommodate uncertainty
d) Delaying goal-setting until more information becomes available
e) Maintaining a shadow schedule to monitor parallel performance metrics.
When tariff-related adjustments materially impact incentive plan payouts, companies should clearly articulate the rationale behind these changes and disclose any adjustments/exclusions. Companies may also expect increased scrutiny, particularly if incentive outcomes appear misaligned with the shareholder experience.
3. One Big Beautiful Bill Act – Proposed Impact on Executive Pay
The 2021 American Rescue Plan Act (ARPA) modified the definition of covered employee under Section 162(m) to include the next five highest-paid employees in addition to the original list (CEO, CFO, and next three highest-paid), effective for tax years beginning after December 31, 2026. The proposed One Big Beautiful Bill Act includes a provision to aggregate compensation paid to a specific employee across a controlled group, thus treating entities as a single employer for this purpose (which already applies for employee benefit purposes). The proposal would apply for tax years beginning after December 31, 2025.
For tax-exempt organizations, the Act also expands the definition of covered employee for purposes of applying the Section 4960 excise tax to include any current or former employee with compensation above $1 million, not just the five highest-paid employees.
4. Navigating Shifting Pressures on ESG and DEI Goals
Amid shifting political and regulatory pressures, many companies are re-evaluating their approach to and disclosure of ESG and DEI initiatives. While these goals were actively promoted under the previous administration, the current environment has prompted some organizations to soften publicly disclosed language, delay the rollout of new programs, or reframe existing initiatives under broader business strategy or talent objectives. In some cases, companies are maintaining core commitments but reducing prominence in disclosures, incentive plans, or charters to avoid drawing scrutiny. This repositioning reflects a careful effort to balance evolving external trends with internal priorities and long-term reputational considerations.
5. Balancing Pay Decisions in Challenging Sectors
In sectors experiencing prolonged downturns—such as biotech and renewable energy—compensation committees are challenged with how to reward and retain critical talent (including executives) amid multi-year stock declines that have significantly reduced realizable pay. Companies must carefully balance the tension in executing their pay programs within the broader context of turnaround efforts and evolving business strategies. A key priority is to maintain transparent and compelling shareholder communications—through proxy disclosures, shareholder letters, and active engagement—while upholding strong governance standards around executive compensation. Achieving this balance is essential in turnaround situations, where credibility and consistency are critical to maintaining investor confidence.
6. Incentive Plan Alternatives Amid Uncertainty
Companies operating in uncertain environments or challenging sectors often face significant difficulty in setting reliable incentive plan goals. When incentive awards fail to deliver payouts, particularly in situations involving uncontrollable external forces, it can undermine momentum, morale, and retention. To address this, organizations may consider adopting less traditional, more flexible approaches to incentive design.
Possible design considerations include:
a) Exercising judgement/discretion
b) Increasing the weighting of MBOs (individual and/or corporate) or incorporating other non-financial metrics
c) Widening performance ranges to better accommodate uncertainty and volatility
d) Splitting annual incentive plans (AIPs) into two six-month performance periods with aggregate payout at the end of the year
e) Structuring performance share units (PSUs) as three discrete one-year performance periods with aggregate payout at the end of three years (and combining with a three-year relative TSR modifier to preserve long-term alignment)
f) Using long-vesting restricted stock units (RSUs) or stock options to avoid the complexities of goal-setting altogether.
For any such change, clear disclosure and proactive shareholder engagement are critical to building trust and demonstrating continued alignment between incentive design, business strategy, and shareholder value.
7. Heightened Scrutiny on Goal-Setting Practices
Proxy advisors are placing increased emphasis on the alignment between incentive plan goals and company performance. Specifically, the large proxy advisors (i.e., ISS and Glass Lewis) are scrutinizing situations where annual or long-term incentive (LTI) goals are set below prior-year targets or actual outcomes. Without a strong and well-communicated rationale—such as a major strategic shift, macroeconomic disruption, or turnaround context—goal “reductions” may be viewed as misaligned with shareholder interests. Companies that make such adjustments should be prepared to clearly explain their reasoning in proxy disclosures to mitigate potential investor and proxy advisor concerns.
8. Alignment of Incentive Plan Payouts and TSR
Some stakeholders have expressed concern that incentive plan goals may lack sufficient rigor, potentially resulting in elevated payout levels. However, a recent Pay Governance study found that actual incentive payouts are generally aligned with shareholder outcomes—a dynamic that may help explain the consistently strong shareholder support for Say on Pay (SOP). By implementing a disciplined goal-setting process, companies can improve the alignment between payouts, operating performance, and shareholder experience, while also reinforcing motivation and retention. (See Viewpoint “Are Executive Incentive Plan Payouts for AIP and PSUs Aligned with Shareholder Returns?” April 23, 2025.)
9. Long-Term Incentive Vehicle Mix
As companies continue to evaluate the effectiveness of their LTI programs and alignment of metrics with strategy, the mix of vehicles utilized is coming under renewed scrutiny. Among S&P 500 CEOs, the current LTI mix is ~60% PSUs, ~25% RSUs, and ~15% stock options.
While PSUs remain the dominant vehicle, they have drawn increasing criticism from proxy advisors, particularly around the use of non-GAAP adjustments and the potential resulting misalignment between pay and performance. Proxy advisor perspectives have also started to differ on the use of PSUs and RSUs with lengthier vesting schedules (our firm’s upcoming Viewpoint on institutional investor perspectives will address some of these issues). Stock options, though often categorized as non-performance-based by proxy advisors, still appeal to many boards and investors due to their direct link to shareholder value through stock price appreciation.
As perspectives of proxy advisors and institutional investors evolve and potentially become more differentiated, it will be increasingly difficult to design LTI programs to conciliate all external stakeholders.
10. Diverging Say-on-Pay Perspectives: Institutional Investors vs. Proxy Advisors
SOP support from large institutional investors has remained consistently strong in recent years. However, recent data reveal a decline in alignment between institutional investors and proxy advisors on SOP voting outcomes. This suggests that institutional investors may be placing less reliance on proxy advisor guidance and increasingly forming independent judgments on executive compensation matters. It may also highlight an emerging shift in how executive pay practices are evaluated and signal a broader rebalancing of influence in shaping SOP results.
11. Shareholder Outreach Challenges
Recent SEC guidance has added new complexity to shareholder engagement by cautioning that certain forms of outreach, particularly those perceived as influencing control over corporate strategy, may trigger more burdensome filing requirements for investors. As a result, some institutional investors have become more hesitant to ask direct questions or engage deeply on sensitive topics such as executive compensation. In this environment, many companies continue to adopt a more proactive approach to outreach, anticipating the concerns and informational needs of major shareholders, even when those concerns are not explicitly raised.
One increasingly important communication tool is a letter from the compensation committee chair included in the proxy CD&A, which enables companies to clearly articulate pay decisions, governance principles, alignment with strategy, and responsiveness to shareholder feedback in a transparent and structured format.
12. Talent Retention and Succession Planning
These areas have become increasingly central to compensation committee charters, particularly during this period of record executive turnover. Executive transitions can be disruptive and expensive, with average CEO transition costs among S&P 500 companies exceeding $10 million. More effective succession planning supported by effective compensation decisions can help minimize these costs while also reducing the uncertainty and volatility that often accompany leadership changes.
Many committees are addressing succession planning throughout the year, rather than limiting it to annual reviews, to ensure a strong pipeline of internal candidates. One ongoing challenge is managing pay increases for internal promotions, where compensation must balance market competitiveness, internal equity, and performance justification. Similarly, many are reviewing and, in some cases, increasing the formalization of board-approved emergency succession plans.
As the 2025-2026 cycle brings heightened complexity across a range of executive compensation and governance issues, open communication and proactive planning are essential. At Pay Governance, we encourage clients to foster constructive, transparent dialogue—within compensation committees, across the full board, involving management, and with key external stakeholders, including shareholders, institutional investors, and proxy advisors. We believe that thoughtful engagement and disciplined governance foster the trust and flexibility needed to effectively navigate this dynamic environment.
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