Short-Term Incentive Metrics: Increasing Metric Complexity and a Pay-for-Performance Disconnect

Key takeaway

• Increases in the number of metrics used in short-term CEO incentive plans correspond with a
  notable increase in payout levels across the S&P 1500
• Above-median payouts do not clearly correspond to above-median performance, as measured by annual TSR
• The Pandemic inspired a shift in metric utilization with a higher number of short-term incentive
  plans utilizing a greater number of incentive metrics after 2020. The level has remained elevated
  even after the impact of the Pandemic decreased
• Use of a diversified set of short-term incentive metrics raises key questions for compensation
  committees over executive retention and performance incentivization
• Use of non-financial metrics, often difficult for those outside a company to assess, has also
  increased since the Pandemic

Introduction

Metric selection and goal setting are primary considerations in the design of short-term incentive plans. Striking the balance between an adequate number of metrics to capture complex businesses, challenging goals, measurable performance and appropriate reward levels for chief executives can be difficult and can encourage the adoption of an overly diversified, or “complex,” set of performance metrics.

Adoption of too many metrics in short-term incentive plans may result in lack of focus on core financial or strategic goals and excessive rewards for achieving non-core goals, while the use of too few metrics may fail to strike an appropriate balance between priorities and lead to a relative under-compensation of executive leadership, challenging efforts to recruit and retain executives.

The question then of the “just right” number of metrics is a Goldilocks equation that involves balancing breadth, focus, and actual goals: right-sizing compensation to encourage CEO retention while aligning compensation with company performance and shareholder value.

Our research shows that increases in the number of metrics underlying short-term CEO awards tend to result in increases in payout (or “vesting”) levels above the market median. At the same time, the increased complexity did not appear to result in clearly identifiable market outperformance when measured by annual TSR, a disconnect that may invite investor scrutiny.

Metric Counts Rising

The following chart shows payout levels of short-term incentive programs in the S&P 1500, grouped by the number of metrics employed in the programs from 2018 to 2025. It demonstrates that short-term incentive programs with a greater number of metrics are associated with typically higher payout levels than those with fewer metrics, with a noticeable increase in payout levels starting with the inclusion of four metrics.

Source: ISS-Corporate Incentive Benchmarking Data as of December 31, 2025

Excess Vesting

The next chart shows the average value of above-median payouts, which could be viewed as “excess” vesting, by metric count for each year, with a breakdown of S&P 1500 sub-indices.[1]

Vesting trends vary between the component indices of the S&P 1500. » S&P 500 companies, which typically face the most outside scrutiny, see a much less pronounced association between excess vesting and metric count.  » The S&P 400 displays a more direct correlation between metric count and excess vesting than that seen at the S&P 500.  » S&P 600 data shows that for all metric counts, vesting levels were above median and the highest of all comparator groups.

Impact of the Pandemic

Pandemic disruption of payout levels

Median payout levels were lower in 2020 than in 2019 for all metric count groups, but did not fall below target despite a drop in one-year TSR. In 2021, short-term compensation exceeded pre-Pandemic levels for similar performance.

Pandemic impact on incentive plan design

Potentially driving this increase in payouts between nominally comparable performances in 2019 and 2021 is the underlying program design itself. In 2021 there was a significant increase in program complexity, with simpler programs declining a relative 8% and high complexity programs jumping a relative 17% from 2020 to 2021—a trend that has cooled recently but has not reversed. The Pandemic contributed to a sustained increase in the overall complexity of short-term programs.

Consolidating the groups into low (1-3 metrics), medium (4-5 metrics), and high (6 or more metrics) also reveals the Pandemic as an inflection point in award structure trends. Between 2018 and 2025, low complexity programs fell nearly 15%, while medium-complexity programs rose nearly 25%. High-complexity programs increased, in relative prevalence, by close to 26%. However, by 2024, the growth in complexity had leveled off, with low-complexity programs slightly recovering in prevalence and a slight consolidation towards medium-complexity programs and away from highly complex designs.

Within the growing complexity, the Pandemic also kickstarted an increase in the use of non-financial metrics, such as Staff Relations or Customer Satisfaction. Given the reliance on internally-collected data and committee assessments to measure performance and disclosure that typically offers only a high-level description of a general goal without clear explanation of objective measurement, these metrics are often difficult for those outside a company to understand and assess.

As shown in the chart above, 2021 marked an inflection point following three years of low growth in the use of non-financial metrics across the S&P 400 and 600, and relative stable growth in the S&P 500.[2] Following the Pandemic, the S&P 1500 saw a shift across all sub-indices, with changes in the S&P 500 driving the growth.

Although the growth of metric counts and the use of individual/non-financial metrics has slowed slightly from immediate post-Pandemic levels, neither trend shows signs of returning to pre-Pandemic levels. Short-term incentive program design has thus undergone a paradigm shift: more complex programs and more qualitative metrics are used to mitigate the risk of non-vesting and provide flexible opportunities to ensure vesting independent of performance. That protects executive paydays (and, ideally, executive retention) well after the macroeconomic shocks of the Pandemic have subsided.

Thus, short-term incentive design implies a riskier and more challenging business environment than before the Pandemic, even if not directly due to the lingering effects of the Pandemic. This situation is seen as justifying enhanced executive compensation in ways notably different than pre-Pandemic norms and expectations, both in terms of investor understanding of program design and achievement and the importance of a direct link between pay and performance. Declining rates of say-on-pay failures seem to affirm the investor viewpoint that business now is harder than before the Pandemic and executive compensation focused on outright compensation is more acceptable.

Metric Usage and Performance

Given the connection between increased payout levels and increased metric count, we looked to see if there has been a corresponding increase in performance. To examine performance, we analyzed S&P 1500 TSR data from 2018 to 2025, examining TSR performance of companies by metric count relative to median TSR of the respective S&P 1500 index and sub-indices.[3]

Despite the increase in payouts associated with a higher metric count, there does not appear to be a consistent relationship with an increase in TSR performance. In fact, short-term incentive programs utilizing the most metrics (six or more), while volatile, show a downward trend in TSR performance.

While one-year TSR does not tell the full story of a company’s annual performance against financial and non-financial goals, it nevertheless demonstrates a trend of increasing above-median payout levels as short-term incentive programs employ more metrics.

Committee Considerations and Shareholder Concerns

The role of retention is a major consideration for compensation committees in the design of short-term CEO grants, helping to explain the trend toward increased metric utilization and stability of STI payout levels. The following chart maps out median vesting and median TSR outcomes for the S&P 500, S&P 400, and S&P 600.

Source: ISS-Corporate Incentive Benchmarking Data as of December 31,2025[4]

From the chart above, there is a slight tendency for above median STI payout levels for each of the three indices, when median TSR is negative, outpacing median STI payout levels for companies showing positive median TSR.

There is also a slight tendency for the median payouts of short-term awards in years of negative TSR to vest slightly above those of years with more moderate TSR. Years of exceptionally high TSR also complicate the picture of the link between performance and vesting: across the S&P 500, 400, and 600 the year for each index with the highest median TSR was never the year with the highest median vesting.

TSR has limitations as a sole measure for assessing pay and performance alignment, particularly for STI programs that employ absolute financial measures. However, there could be reasonable alignment between TSR and STI payout levels. If payouts increased with falling TSR and declined or stabilized with rising TSR, then the implied goal in short-term award design appears to be retention rather than performance.

The observed trend in TSR and STI pay outcomes raises questions. During the Pandemic years, which saw an unprecedented disruption of company stock price performance, stable STI payouts helped retain executive teams. However, why does that approach continue into a period that has seen a broad rise in stock market valuations? Does the addition of short-term metrics, including individual performance measures, create adequate diversification to accomplish executive retention through stable STI payouts?

Balancing retention and performance priorities can become more difficult with increased metric diversification. While having more goals may imply that the executive team is more focused on a comprehensive mix of key business drivers, having too many goals creates the risk of reduced focus on critical, core financial measures.

A complex approach can raise shareholder concerns, including the over-use of non-financial measures, complexity of design and coherence of disclosure, and ultimately, the observable alignment of pay outcomes and stock price performance.

Conclusion

This review found a correlation between the number of metrics used in short-term CEO incentive programs and both higher payouts and, at least at a high level, decreasing performance measured by annual TSR.

While the evidence of this observation may not be sufficient to establish a direct causal relationship between metric counts and either outcome, the consistency of these trends across years and the three component indices of the S&P 1500 lends weight to concerns about increasing STI complexity from both compensation committees and investors.

At the same time, these trends are partially explainable by reflecting on the focus of incentivization: if the intent is to promote executive retention by constructing near-term awards that are realistically obtainable— and that remain so even in years of market turmoil such as during the Pandemic—the question of the relationship between payouts and performance takes on a different contour when market participants consider the role of short-term versus long-term incentive compensation.

Whether these trends extend beyond the 2026 annual meeting cycle remains uncertain. In the absence of a significant external disruption comparable to the Pandemic, prevailing market norms are likely to continue favoring more complex short-term incentive structures with reduced reliance on purely financial metrics. Although some trends, such as complexity, appear to have plateaued, emerging practices, once established, can proliferate as companies seek to remain competitive in attracting and retaining executive talent, given the central role of peer benchmarking and comparative assessments in executive compensation decisions. From this perspective, short-term incentive design can be understood less as a direct reflection of company performance and more as an expression of the board’s assessment of, and confidence in, management’s leadership.

1The calculation of average excess vesting for S&P 1500 and sub-indices is as follows:

1. For each year, determine median vesting levels for S&P 1500 and sub-indices overall and corresponding median vesting levels for each metric count group
2. Subtract median vesting level of index/sub-index from median vesting level of each metric count group for each year
3. Average across years for each metric count group (go back)

2The above chart consolidates Climate Change and Energy Use; Customer Satisfaction; Diversity; Environmental Protection; Individual; Non-Financial; Society and Human Rights; Staff Health and Safety; and Staff Relation, Engagement, and Training metrics.(go back)

3The calculation of excess TSR for the S&P 1500 and sub-indices is as follows:

1. 6+ S&P 600 For each year of the analysis period (2018-2025), determine median TSR for the S&P 1500 and sub-indices overall and corresponding median TSR levels for each metric count group
2. Subtract median TSR level of index/sub-index from median TSR level of each metric count group for each year
3. Average across years for each metric count group(go back)

4This table charts the median TSR and the median short-term award vesting for each year for each index. Although the charted points do not necessarily correspond to a single company, the above chart presents a theoretical median firm for each index in each year.(go back)