As investor expectations shift, regulatory pressure mounts, and business models evolve, compensation committees are moving away from short-term incentive plans that rely solely on a single financial performance measure. The "one-metric bonus," commonly tied to adjusted EBITDA or EPS, is falling out of favor as market expectations evolve.
This Comp & Benefits Brief outlines how public company boards and compensation committees are responding by adopting annual bonus structures that incorporate multiple performance factors, strategic goals, and clearly governed discretion frameworks.
Investor Pressure Is Accelerating the Shift
Proxy advisors, institutional shareholders, and governance advocates continue to criticize short-term bonus plans that depend on a single metric. Concerns include, but are not limited to:
- Use of heavily adjusted or non-GAAP metrics.
- Limited disclosure explaining the alignment between metrics and long-term strategy.
- A lack of connection between realized pay and shareholder returns.
In 2025, several Say-on-Pay vote outcomes reflected negative sentiment toward plans that failed to consider broader indicators of performance, including strategic execution, risk management, or relative shareholder return. For example, in April 2025, Institutional Shareholder Services ("ISS") recommended a vote against Bank of America's $35 million executive pay package for its CEO, noting that while the pay increase was "directionally aligned with company performance," the bank failed to provide sufficient transparency around its short-term incentive design and discretionary adjustments. ISS specifically faulted the lack of disclosures, which "inhibits a fulsome assessment of pay program rigor and the reasonableness of the specific pay determinations."
Multi-Factor Scorecards Are Becoming the Market Standard
A growing number of companies are replacing single-metric bonus formulas with scorecards that reflect both financial and non-financial performance. Common approaches include:
- Financial metrics, comprising 50-70% of the total bonus formula, are often spread across revenue, EBITDA, operating cash flow, and capital efficiency.
- Operational or strategic goals accounting for 10-30%, such as customer retention, product development milestones, or geographic expansion.
- Individual or discretionary components, typically weighted at 10-20%, based on executive-specific contributions or leadership behaviors.
This structure allows committees to reward broader business execution while maintaining discipline around financial performance.
ESG and Human Capital Metrics Are Gaining Traction
Many S&P 500 companies now include non-financial objectives in their short-term incentive plans. For example, JPMorgan Chase incorporates employee safety, talent development, and inclusion into its annual incentive scorecard, alongside traditional financial measures. A 2023 Harvard Law School report found that approximately 73% of S&P 500 companies incorporated ESG metrics into their short-term incentive plans, and the typical weighting for those metrics ranged from 5% to 15% of the annual incentive opportunity. 1 These metrics typically relate to:
- Employee safety and workplace incidents
- Talent development or retention
- Diversity, equity, and inclusion benchmarks
- Environmental sustainability targets
To avoid criticism, compensation committees are focusing on metrics that are measurable, subject to reasonable verification, and appropriately weighted. In most cases, ESG-related metrics represent no more than 15% of the total incentive opportunity, ensuring they complement rather than override financial objectives.
Discretion Is Returning with New Guardrails
Discretionary adjustments to bonus payouts have become more common, especially in response to factors outside of management's control. At the same time, committees are more deliberate in defining when and how discretion will apply. The ISS U.S. Executive Compensation Policies FAQs emphasize that companies should provide clear proxy disclosures when discretionary adjustments materially affect payouts, highlighting best practices such as quantifying modifier caps ("may increase or decrease the total bonus payout by up to 15%") and explaining the rationale behind any adjustments. 2 This approach reflects the market's expectation that discretion be exercised within defined guardrails and supported by transparent disclosure. Key features include, but are not limited to:
- Establishing specific circumstances where discretion may be used, such as regulatory approvals, unexpected litigation, or M&A transactions.
- Setting a cap on the potential increase or decrease resulting from discretion.
- Providing clear documentation and a written rationale, particularly in proxy disclosures.
These practices help ensure that discretion enhances the integrity of the plan rather than undermines it.
Design, Disclosure, and Oversight Are Critical
As companies expand the number and type of metrics used in bonus plans, the role of the compensation committee becomes more complex. Compensation committees should ensure that:
- Each metric is tied to a strategic priority and supported by a credible measurement methodology.
- Performance targets are challenging but achievable and not easily manipulated.
- The full plan structure, including any discretionary elements, is disclosed in a manner that is understandable and defensible.
Plans that rely on boilerplate disclosures or unexplained judgment are more likely to attract scrutiny from proxy advisors and investors.
Final Word
Moving away from the one-metric bonus is not simply a trend; it reflects a broader rethinking of how to align executive pay with performance. Compensation committees that embrace multi-factor design, apply sound governance, and communicate the rationale clearly will be better positioned to defend their plans and maintain investor trust.
Footnotes
1 Incentives Linked to ESG Metrics Among S&P 500 Companies
2 US-Compensation-Policies-FAQ.pdf
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
