Three Questions Worth Revisiting in Long-Term Incentive Design

Every summer, after the proxy is filed and the say-on-pay vote is in the books, compensation committees get a brief stretch of time that is genuinely theirs. The calendar isn’t pressing. The advisors aren’t running models against a deadline. It is, in our experience, the most productive window of the year for stepping back from the mechanics of the program and asking the bigger questions.

The long-term incentive (LTI) program is often where that conversation lands, and for good reason. LTI is the largest piece of executive pay, the piece most visible to shareholders, and the piece that most directly translates board intent into management behavior. It is also the piece that tends to evolve through small, defensible adjustments year over year — a metric swap here, a weighting tweak there — until the cumulative shape of the program reflects historical accommodations more than current strategy.

Three areas in particular seem worth a fresh look this year. None of them have a single right answer. All of them are places where the default assumption deserves another look.

The vehicle mix

For most large public companies, the LTI mix has settled into a familiar pattern: a majority weighting to performance share units, a meaningful slice of time-based restricted stock, and, for a shrinking minority, a residual position in stock options. The proportions vary, but the architecture is remarkably consistent across industries and market caps.

The harder question is whether that consistency reflects considered design or just inertia. PSUs became dominant in part because proxy advisors and large institutional investors signaled a preference for performance-conditioned equity, and that preference hardened into an expectation. The result is that many programs now carry a heavy PSU weighting in part because alternative designs require explanation in the proxy, not necessarily because the committee concluded performance conditioning was the most powerful motivator at that company.

That isn’t necessarily wrong. There are good reasons PSUs became the standard. But the original case for PSUs rested on three assumptions: that relevant performance metrics could be selected with confidence, that three-year goals could be set with reasonable accuracy, and that the resulting payouts would track operating performance rather than macro noise. Each of those assumptions has come under more pressure over the past several years. Committees that haven’t recently asked whether the current mix is still the best expression of their pay philosophy may find the answer has drifted from where they thought it would be.

The companion question is the role of stock options. Options have largely fallen out of favor, but the result is that very few executive programs today carry meaningful upside leverage tied purely to share price appreciation. Whether that absence is a feature or a gap depends on the company, the strategy, and the talent market.

The three-year performance period

The three-year performance period is the closest thing executive compensation has to a universal default. It appears in nearly every PSU plan, has been broadly accepted by investors and proxy advisors, and is rarely questioned in committee discussions.

It also predates a meaningful shift in how quickly company circumstances can change. A three-year goal set in early 2020 looked very different by mid-2020. A three-year goal set in early 2022 ran into an inflation environment few models had contemplated. A three-year goal set in early 2025 had to account for a tariff and trade policy backdrop that was not on most strategic plans the year before. The cumulative effect is that committees have spent a lot of recent cycles either accepting payouts that don’t reflect underlying performance or applying discretion that, however well-reasoned, is hard to defend in the proxy.

There is no obvious replacement. Shorter periods raise concerns about long-term orientation. Longer periods compound the goal-setting problem. Multiple overlapping periods add complexity. But the assumption that three years is the right answer because three years has always been the answer deserves at least one honest conversation per cycle. Some committees may conclude that holding requirements after vesting do more work than extending the performance period itself. Others may find that a different cadence — annual goal-setting within a multi-year vesting structure, for instance — better reflects how the business is actually managed. The point isn’t to land on a particular alternative. It is to make sure the current structure is a choice rather than an inheritance.

Vesting and post-vest holding

Vesting mechanics get less airtime in committee discussions than metric selection or peer benchmarking, but they may carry more behavioral weight. The transition from earned to owned to sold is where the long-term orientation of an LTI program is ultimately tested.

Cliff versus ratable vesting, post-vest holding requirements, mandatory deferral, and stock ownership guidelines all interact in ways that are easy to specify individually and harder to evaluate as a system. A program can satisfy every governance checklist and still permit an executive to effectively cash out a meaningful portion of their multi-year award within months of vesting. Whether that matches the committee’s intent — and whether shareholders would recognize the program’s holding profile from the proxy disclosure alone — is worth periodic verification.

Post-vest holding requirements, in particular, have grown more common but vary widely in their actual bite. A one-year holding period applied only to net-of-tax shares, with the underlying ownership guideline already satisfied, may have very little practical effect on executive behavior. That doesn’t mean it shouldn’t exist because signaling matters, too.

All three of the questions above share a common thread: how to get more equity into executive hands and keep it there longer, without layering on another mandatory feature. One mechanism that has largely faded from current practice but could be revisited is the management stock purchase program — an arrangement under which executives can elect to receive a portion of their bonus, or other earned compensation, in restricted stock rather than cash, typically with a premium or matching component that compensates for the lockup. MSPPs were more common a generation ago and fell out of favor as governance norms tightened around anything resembling discounted equity. The optical concerns are real and shouldn’t be minimized. But the underlying mechanism is structurally different from anything else in most compensation programs. It is voluntary and executive-funded, and it rewards the choice to hold rather than enforcing it. Mandatory holding requirements and ownership guidelines, for all their virtues, don’t do that.

None of this argues for a redesign. Most programs are working reasonably well, and the cost of change is real, in shareholder optics, in executive perception, and in advisor and committee time. The argument is narrower: the summer window is a good time to test whether the current program reflects current intent, and that the three areas above are where the gap between intent and architecture may have quietly opened.

A useful exercise for the next committee meeting is to ask, for each of the three: if we were designing this program today, with no incumbent structure to defend, would we land where we are? The answer matters less than the discussion that gets you there.