How to Design STI Plans in Evolving Business Cycles

Today's companies increasingly look to short-term incentive plans to motivate key talent through changing market conditions that ensure an appropriate relationship between performance and payout achievements.

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Author: Ian Keas

Short-term incentive (STI) plans remain one of the most influential executive compensation tools companies use to drive annual performance and reinforce strategic priorities. Yet today's environment — marked by economic uncertainty, shifting talent expectations and heightened scrutiny of executive pay — has pushed organizations to re‑evaluate not only what they reward, but how they design and calibrate their STI programs.

This re-evaluation has manifested in market trends that show a clear move towards more tailored structures that are taking the place of "market standard" practices of old. Instead of simply doing what other competitors do, companies are now designing nuanced programs that evolve alongside their strategic drivers, balancing both micro and macro conditions. The result: more diversified and objectively calibrated scorecards that reinforce payout integrity and alignment with business results.

And it's not just the metrics that are changing. Shareholders, by way of their portfolio company boards of directors and compensation committees, are placing greater emphasis on performance metric rigor, factoring in economic volatility and forecasting challenges that have become more the norm than the exception in recent years.

These trends, along with the reality that executives are shifting roles more often relative to longer-term trends, highlight a key governance reality that all companies should be aware of: Regardless of the economic cycle your business is in, ensure alignment of STI plan designs or run the risk of falling behind in competing in today's labor market for key executive talent.

A structured approach to STI plan design

A thoughtful approach to designing or refining an STI plan is generally delivered in two phases.

Phase 1 begins with structured interviews of select members of management teams and board members. These conversations explore compensation philosophy, company culture expectations, strategic planning and performance priorities. Such discussions generate insights that help identify opportunities, risks and structural pressure points to shape an STI plan's architecture.

Phase 2 includes performing competitive peer benchmarking. Evaluating how similar organizations reward executives and key employees ensures:

Awareness of current market practices
Understanding trends in pay for performance‑performance relationships
Insights on financial sharing ratios (STI plan funding versus overall financial metrics like revenue, earnings, etc.)
Insights on award opportunity leverage

The goal is to design STI plans that direct efforts, align with strategic goals and avoid the pitfalls that can turn incentives into disincentives.

Four market forces shaping STI plans in 2026

1. Standardized use of multi‑metric scorecards

Organizations are broadening the performance metrics used in STI plans. For example, organizations are blending traditional financial drivers with metrics that measure:

Operational execution
Customer and/or employee experience
Strategic plan implementation
Individual contribution

These trends reflect a larger shift toward objective, measurable key performance indicators (KPIs) that reduce ambiguity and increase payout clarity.

2. STI goal-setting

In our consulting experience, we see that, as metric rigor becomes a central point of focus, high-performing companies are:

Strategically calibrating targets each year given economic conditions
Adjusting performance ranges to reflect confidence in financial forecasts
Providing space for boards/compensation committees to apply proper business judgment through the use of discretion

Such practices ensure that payouts align with actual performance — not macro-environmental luck.

3. A more measured use of discretion

The most effective boards don't shy away from the use of discretion. While market practices trend towards widening performance ranges and other practices to essentially build in "breathing room" in structural plan designs to counteract market volatility, our consulting experience suggests rationalized and targeted discretionary adjustments may be required to successfully navigate turbulent market conditions. Appropriate business rationale can't be stressed enough in such situations, as shareholders and corporate governance practitioners have sharpened their perspectives and evaluations of such applications despite their importance.

4. Increased emphasis on operational and other strategic metrics

Companies are expanding the metrics they use in STI plans to include operational and strategic metrics as meaningful parts of the payout formula. This trend stems from the difficulty for some industries to forecast financial performance over time, along with the realities that generating shareholder value doesn't come from execution against financial metrics only. Examples may include customer retention benchmarks, safety standards, employee engagement, AI strategy implementation, strategic plan execution or individual/departmental drivers.

Building sustainable, high-impact STI plans

A well-designed STI plan should reinforce behaviors that drive annual operating plan execution while supporting the creation of long-term value. Strong programs incorporate:

Clear, measurable and reliable metrics
Thoughtfully calibrated performance hurdles
Transparent communication
Adaptability to variable economic conditions

Recent studies emphasize the most effective STI plans rely on objective, well-defined multi‑metric structures that allow executives to connect performance outcomes to fair and predictable payout opportunities. Companies that commit to disciplined design create incentive systems that motivate — even in uncertain conditions.

Gallagher can help

STI plans are a critical tool for driving execution and reinforcing company strategy. Designing an STI plan that performs reliably amid uncertainty requires balancing rigor, flexibility and strategic alignment — backed by a solid understanding of market practice and organizational capability.

Gallagher combines boardroom experience with research-driven data and insights to help organizations develop STI plans that motivate performance, withstand volatility and deliver measurable value. Learn more about executive compensation.