Annual Incentive Plan Design and Trends
Summary
Equilar’s analysis of the Equilar 500 compares annual incentive plan design and outcomes for fiscal-year 2024 versus 2023 across roughly 400 formulaic CEO bonus plans. The report finds a modest shift back toward financial metrics (median financial weighting 90% in 2024 vs 85% in 2023), a decline in non-financial and market-based metrics, reduced use of discretion, and a sharp pullback in ESG/DEI metrics — especially representation targets. Overall, companies tightened targets (narrower performance ranges and higher growth goals), leading to lower payouts in 2024 for most metrics except EPS, which saw stronger results and higher payouts.
The study examines common financial metrics — revenue, operating profit, free cash flow and EPS — using a normalized subset to compare threshold, target and maximum goals, leverage, and actual results. It also reviews plan features such as individual performance components, circuit breakers, and formal discretionary ranges.
Key Points
- Financial metrics increased in prominence: median weighting rose to 90% in 2024 from 85% in 2023; market-based metrics remain rare.
- Non-financial and ESG/DEI metrics fell: ESG prevalence in formulaic plans 32.7% (2024) vs 37.5% (2023); diversity metrics with representation targets dropped sharply (6.7% to 1.2%).
- Individual performance usage slipped slightly (189 companies in 2024 vs 192 in 2023) with a move from formal weightings to modifiers (mostly multipliers).
- Payouts fell overall: median corporate score and total payout were lower in 2024 versus 2023, reflecting tougher targets and slightly weaker results for most metrics.
- EPS bucked the trend: targets tightened but results improved enough to produce higher payouts for EPS in 2024.
- Use of board discretion declined (38 companies adjusted corporate scores in 2024 vs 48 in 2023); in-flight plan changes were rare.
- Plan design features such as circuit breakers and formal allowable discretion ranges remain minority practices with little change year-over-year.
- Companies retaining DEI goals shifted away from representation quotas toward qualitative measures (training, surveys, diverse candidate slates).
Why should I read this?
Because if you work on pay, governance or advising boards, this piece saves you time — it’s the numbers-first view of where incentive design is actually moving. Short version: targets got tougher, payouts mostly fell, and ESG quotas are getting dropped fast. Read it if you want the data-backed signals rather than hot takes.
Author style
Punchy: this is a data-led briefing that matters for remuneration committees, HR leaders, compensation consultants and institutional investors. The findings give clear, actionable signals — tougher financial targets, reduced discretion and a rapid retreat from representational DEI measures — that should shape next year’s plan designs and proxy discussions.
Context and Relevance
The report reflects a post-COVID normalisation: companies narrowed performance ranges and raised growth goals after earlier years of soft targets and outsized outperformance. Political headwinds and activist pressures accelerated the pullback from quantitative ESG/DEI goals in 2024. For anyone tracking executive pay trends, investor expectations or board-level risk management, these shifts affect target setting, disclosure practices and shareholder engagement going into 2025.
Source
Source: https://corpgov.law.harvard.edu/2025/10/14/annual-incentive-plan-design-and-trends/
