Avoiding Compensation Whiplash in 2025
In today’s volatile market, businesses are grappling with unprecedented challenges that are affecting businesses at nearly every level – including one of the largest company investments and expenses: compensation.
From tariffs and geopolitical risks to labor market shifts, inflation, and stock market volatility, companies are experiencing what can be termed as “compensation whiplash”—rapid and unpredictable swings in pay structures and outcomes. While 20% stock market selloffs can feel unsettling and raw, there are tried and true compensation best practices businesses can employ to navigate compensation whiplash and regain confidence in delivering the best bang for the compensation buck.
Establish a Solid Compensation Philosophy
At the heart of effective compensation management lies a clearly defined philosophy. However, fewer than 5% of companies can point to a well-documented compensation philosophy that aligns with company objectives and the external market.
A strong compensation philosophy not only anchors decision-making during uncertain times but also emphasizes a variable pay structure over fixed compensation. Variable pay can better weather economic volatility by rewarding performance based on company success rather than being tied solely to base salaries. By integrating compensation decisions with long-term business goals, businesses can navigate external shocks, like tariffs and market fluctuations, with more resilience.
Broaden Incentive Plan Targets
Given the unpredictability of market conditions and external factors like tariffs, it is crucial to adopt flexible incentive plans that consider volatility and lack of clarity. Traditional performance metrics tied to absolute financial goals may not be sufficient during volatile periods, where tariffs or global economic shifts impact profitability.
Companies could consider broadening performance ranges between threshold, target and stretch goals for both short and long-term measures. These “wider shoulders” help companies maintain pay–for–performance philosophies and mitigate the impact of unplanned negative (or positive) swings in performance that were the result of conditions outside of management’s control, reducing the impact of volatility and lack of clarity on pay outcomes.
Shorten Performance Metric Periods
Due to the lack of clarity in the current volatile market, company leaders may consider shortening annual performance periods to two 6-month periods and/or shortening long-term incentive performance to three 1–year periods. These shorter performance periods can reduce the pressure to get metric hurdles exactly right, thereby compensating for what is true performance relative to the operating environment in which those achievements were made.
Utilize Relative Performance Metrics
Whether built into short or long-term incentives, or utilized after the fact, viewing company performance through a relative lens can be a helpful barometer of true performance. Companies are increasingly utilizing relative performance measures in their short and long-term incentive plans to better identify the type of performance management teams are achieving in volatile environments. Note that even if a company is in–flight with absolute measures, they may still use after the fact relative performance to make discretionary decisions.
Balance Multiple Performance Metrics
Incentive plans should always balance focus on core drivers of the business. While operating profit and revenue are always key drivers, considering other metrics such as customer satisfaction, employee engagement, safety, etc. can help support the long-term health of the company and also help mitigate compensation volatility. When adding metrics, it is important to ensure weightings for each metric are meaningful (e.g., 20%+).
Utilize Long-term Incentives Effectively
Long-term incentive compensation has seen a considerable growth in prevalence and value opportunity over the past 10 years. Coupled with this, the weighting between performance-vesting and time-vesting elements has shifted to more retention orientation (more time-vested) below the CEO.
Given challenges with establishing reliable long-term performance hurdles and the tense battle for talent at the executive level, companies could consider either (i) more long-term compensation overall or (ii) adjusting the balance between performance and time-vested elements to enhance the value proposition of awards.
Communicate, Communicate
When market volatility is at a crescendo, confidence can be rattled. Therefore, when communicating compensation practices, performance updates or payouts, business leaders should clearly outline their decision-making process and rationale early and often.
Linking this communication back to a thoughtful compensation philosophy can reinforce with employees the intentional and even variable nature of a market–based compensation plan.
Implement a Proactive Compensation Calendar
A proactive approach to compensation is essential during periods of uncertainty. Many companies only react to end-of-year events, but a well-thought-out compensation calendar helps mitigate the need for last-minute negotiations or adjustments.
This calendar should include set dates for base salary increases, incentive plan updates, company performance snapshots, economic condition reviews, labor market assessments, and more. By anticipating these key decisions throughout the year, companies can avoid reactive decision-making with thoughtful decision making throughout the year.
Final Thoughts
Developing and managing compensation programs during periods of uncertainty—whether driven by tariffs, economic instability, or shifting labor markets—requires a strategic, thoughtful approach.
By establishing a strong compensation philosophy, implementing best practices, and communicating crisply, companies are more capable of managing the impact of external shocks. Additionally, these companies can separate themselves as standout performers while delivering the best bang for the compensation buck.
If your organization would like to partner with us, contact the team at info@zayla.com or (832) 363 – 5089.
