Executive compensation in 2025: Key trends, challenges and takeaways
As we look forward to 2025, compensation committees are faced with a unique set of considerations that will significantly impact their decision-making processes in the year ahead.
To help make sense of it all, we called on the expert insights of Jon Szabo, Partner at Meridian Compensation Partners (a recent guest on Inside Today’s Boardrooms), who helped us unpack some of the key areas that compensation committees must be aware of as they navigate the key governance issue of executive pay.
Supplemental discretionary clawback policies
One trend that has gained significant traction over the past year is the implementation of supplemental discretionary clawback policies. In response to the need for accountability and deterrence of potential misconduct, companies are increasingly adopting these policies to enable the recovery of compensation in specific instances.
This trend is expected to continue, with smaller companies expected to follow the lead of larger corporations in adopting such measures. By embracing supplemental discretionary clawback policies, organizations can strengthen their ability to mitigate risks and protect shareholder interests.
Navigating uncertainty in performance goal setting
In the midst of today’s economic uncertainty, compensation committees are tasked with setting performance goals and incentive plans for 2025. To help navigate this challenge, carefully consider threshold and maximum performance ranges, particularly in times of uncertainty.
Additionally, be prepared to adjust incentive plan performance goals throughout the year. Establishing guiding principles for evaluating potential adjustments is critical to ensure they are in the best interests of shareholders and the company.
Reevaluating compensation committee charters
In recent years, some compensation committees have taken on human capital management responsibilities. Now, organizations are reevaluating the effectiveness of these responsibilities.
This reassessment includes evaluating whether certain responsibilities, such as succession planning and CEO performance evaluations, should remain with the compensation committee or be moved to other board committees. By conducting a thorough evaluation, organizations can ensure that their compensation committees are structured optimally to fulfill their essential roles.
Growing focus on below C-Suite pay and compensation equity
Compensation committees are showing a heightened interest in comprehending the impact of incentive designs across the organizational hierarchy, from top executives to the workforce's base.
This emphasis on equity in compensation and pay below the C-suite is a testament to the commitment to fairness, transparency, and alignment. The goal is to mitigate substantial disparities in pay growth between executives and the workforce, fostering a culture of equity across all organizational tiers.
Scrutinizing retirement provisions for fairness and alignment
Proxy advisors are now focusing their scrutiny on exit pay for voluntary terminations and equity treatment for retirement. This increased attention poses a challenge for companies as they strive to structure compensation and equity in a manner that attracts late-career talent while ensuring fairness and alignment with employee contributions.
Organizations must carefully navigate this complex landscape to ensure compliance with evolving standards and maintain a competitive position in the talent market.
Four key considerations for compensation committees in 2025
In light of the emerging trends and challenges in executive compensation for 2025, here are our key recommendations for compensation committees ahead of the new year.
Ready to elevate your board's impact?
Strong governance encompasses much more than executive compensation. While aligning executive pay with performance is vital, it’s just one piece of the puzzle. A high-performing board is critical for providing strategic oversight, fostering accountability, and driving leadership excellence.
Read our '10 steps for building a better board' to unlock the full potential of your board members, committees, and CEO.
