Author: James Reda
This article is the first in a two-part series to guide compensation committees in a rapidly evolving marketplace. For the second article, see 12 Guidelines to Help Steer Compensation Committees Through New Uncertainty.
Market volatility, competition for talent and regulatory issues are among external challenges confronting compensation committees in 2025 and beyond. Companies that proactively address such issues will ensure their compensation programs and operations remain resilient.
What does a board compensation committee do?
Now more than ever, three critical issues demand compensation committee attention:
- Competition for talent — Retaining executives who drive strategy and manage operations has become increasingly difficult amid business uncertainty. Companies must stay competitive in attracting and retaining top talent.
- Market and business volatility — Political and economic uncertainty complicates corporate strategy, talent management and performance goal setting. Committees must understand these challenges thoroughly to reshape compensation plans and ensure they align with evolving business realities.
- Regulatory, shareholder and litigation challenges — The current US administration is implementing regulatory shifts, impacting mergers and acquisitions, tax policies and employment laws. Changes to non-compete agreements, overtime rules and retirement policies could reshape compensation structures. To avoid crisis, companies must maintain strong shareholder relations — managing reputation risk, proxy advisors and institutional investors.
Retaining top talent
Organizations must retain top talent to drive new levels of performance and success. However, economic uncertainty can heighten retention risks. Proactive compensation committees will assess the unvested incentive award value that executives hold (retention value) and determine whether the value is sufficient to encourage long-term commitment.
Additionally, companies must evaluate their incentive plan payouts over recent years and compare them to targets, peer organizations and the broader industry. If incentive payouts lag behind competitors, key executives may seek opportunities elsewhere to maximize their compensation. Further, this review should extend to the private equity sector, which can offer more lucrative and tax-advantaged compensation structures, such as capital gains rather than ordinary income tax rates.
Finally, compensation committees should analyze realized pay versus performance for both the company and its peers. Understanding how different scenarios for share-price performance impact retention value can help identify potential retention risks and strengthen long-term executive engagement.
Navigating market and business volatility
Volatility can stem from market fluctuations, economic downturns, supply chain disruptions, regulatory shifts or environmental factors. Navigating these challenges requires a deep understanding of the company's operations and their impact on performance goals, executive pay and overall compensation programs. Successfully managing business volatility demands a combination of strategic planning, risk management and adaptability.
To mitigate the effects of business volatility, companies should strengthen:
- Financial resilience — Diversifying revenue streams, maintaining strong cash flow and implementing risk-hedging strategies
- Operational agility — Enhancing supply chain flexibility, optimizing operational costs and fostering a more adaptable workforce
Proactively, the compensation committee must thoroughly analyze these shifts and determine how the compensation program may need to evolve to align with changing business dynamics.
Keeping an eye on regulatory, shareholder and litigation issues
Recent regulatory actions are set to shift under the new administration, including the Federal Trade Commission's (FTC) efforts to ban non-compete agreements. Additionally, the administration may take different approaches to existing regulations and their interpretations.
While changes in government oversight create uncertainty, analysts expect the new administration to ease regulatory burdens on businesses. Predicting the exact timing, scope and impact of these changes, however, remains challenging.
If proposed regulations affect a company's compensation programs, the organization may need to make updates once the regulatory landscape becomes clarified. Meanwhile, companies should track possible regulations that could impact compensation structures — such as the FTC's proposed non-compete ban — and assess potential implications.
Observers expect mergers and acquisitions (M&A) activity to rise, particularly in oil and gas, energy and packaging and other industries undergoing consolidation. A more relaxed approach to M&A reviews could lead to increased deal-making.
M&A developments bring major implications for talent retention, especially in the face of potential transactions. Companies should evaluate whether their change-in-control protections are competitive within their industry and the broader market.
Implementing market-appropriate protections helps ensure that key executives remain neutral about potential transactions, reducing the risk of departures during critical moments. This stability allows leadership to focus on executing strategic objectives and act in the best interests of shareholders when acquisition opportunities arise.
Steps for the savvy and proactive compensation committee
First, the committee must assess whether the current compensation model is flexible enough to support the company's success over the next few years. At a minimum, compensation committees should ensure that executive pay aligns closely with company performance. Establishing a strong correlation between compensation and long-term success can represent one of the biggest challenges. At the same time, committees must avoid excessive short-term incentives that could encourage risky decision-making.
To achieve this balance, compensation committees should evaluate key elements of their incentive programs, including:
- Performance metrics: Are the short-term and long-term incentive metrics appropriate? Do they provide executives with the flexibility to drive company goals while adapting to a changing business environment?
- Performance measurement periods: Given market uncertainty, should the company consider shortening performance periods below the standard three-year period?
- Target goal setting: Given such political uncertainties as potential tariffs and policy shifts, has the company properly set goals? Should the company adjust goals in response to regulatory changes after the performance period begins?
- Goal ranges: Does expected volatility make goal achievement less predictable? If so, should the company expand the range around target goals or tighten the payout range toward a more achievable target?
- Adjusting metrics and use of discretion: How should the company account for non-recurring events in performance assessments? Should the company establish clear principles for adjusting payouts when unforeseen circumstances arise?
By proactively addressing these questions, compensation committees can create a more resilient and adaptable framework that aligns executive compensation programs with long-term business success.
Gallagher can help
Gallagher uses data, technology and trust to design and evaluate executive compensations models to fit your company's strategic goals. Our team can work with your compensation committee to proactively analyze market shifts and determine how the incentive model may need to evolve to align with changing business dynamics.
