Compensation data from public-company proxy filings suggests a structural shift in executive pay design that has accelerated over the past 36 months. The shift, which has received limited public attention, has implications that extend well beyond CEO contracts to broader questions about organisational alignment, governance, and long-term value creation.
The observable change
Three trends are evident in proxy data from S&P 500 firms across 2023 to 2025.
First, the proportion of executive compensation tied to performance share units (PSUs) has continued to expand at the expense of stock options and time-vested restricted stock. PSUs now represent approximately 60 percent of long-term incentive value at large public companies, up from roughly 35 percent a decade earlier.
Second, the metrics underlying PSU vesting have broadened. Total shareholder return remains the most common metric, but it is increasingly paired with operating metrics — return on invested capital, organic revenue growth, free cash flow conversion — rather than used in isolation.
Third, the time horizons over which performance is measured have lengthened modestly. Three-year performance periods remain dominant, but a meaningful minority of firms have introduced four- or five-year measurement windows, particularly for the most senior roles.
What is driving the shift
Multiple factors appear to be operating simultaneously, and isolating their relative weight is difficult.
Institutional investor pressure has been a consistent influence. Major asset managers have published increasingly specific guidelines on what they consider acceptable compensation design, and proxy advisors' recommendations have grown more granular over the same period. The cumulative effect has been to constrain compensation committee discretion while pushing design toward longer-horizon, multi-metric frameworks.
Tax and accounting changes, particularly those affecting the deductibility of certain compensation structures, have made some legacy designs less attractive than they were under previous tax regimes. The shift away from stock options is partly attributable to these changes.
Internal cultural pressures have also played a role. Senior executives in some industries have increasingly preferred PSU structures over option grants, viewing the latter as inappropriate in mature businesses where leverage to share price movements is asymmetric.
Implications beyond the C-suite
The shift in executive compensation has consequences that extend several levels into the organisation.
Performance metrics chosen for executive PSUs tend to cascade downward. When operating metrics are included in CEO compensation, those metrics typically appear in operating-unit incentive plans within 12 to 24 months. The selection of metrics at the top therefore shapes incentive structures for thousands of employees.
Time horizons in long-term incentive plans also tend to cascade. Firms that have lengthened executive measurement periods are more likely to lengthen them for senior managers, with potentially substantive implications for how managers prioritise short-term versus long-term initiatives.
Capital allocation decisions, particularly around buybacks and dividends, are sensitive to which metrics drive senior compensation. Firms that have moved away from earnings-per-share-driven incentives have, on average, reduced share buyback activity relative to peers, though the relationship is correlational rather than necessarily causal.
What boards are now examining
Compensation committees that have completed structural redesigns are increasingly turning attention to questions of measurement integrity. Specifically: are the metrics chosen for executive incentives subject to manipulation? Do they reflect underlying business performance, or are they susceptible to accounting choices that obscure operating reality?
This examination is producing modest but consistent moves toward metrics with stronger anti-manipulation properties — return on invested capital adjusted for one-time items, free cash flow conversion measured over rolling multi-year windows, customer-retention or unit-economics indicators in subscription businesses.
Questions for boards in the coming cycle
Three questions appear consistently in compensation committee work this year. First, do current incentive metrics align with the firm's stated capital allocation priorities? Second, are measurement windows long enough to discourage decisions that boost short-term metrics at the cost of long-term value? Third, are pay outcomes — actual realisable compensation over recent vesting cycles — consistent with shareholder experience over the same period?
Boards that can answer all three affirmatively are unlikely to face significant compensation-related challenges in proxy season. Those that cannot are likely to find themselves engaged in more active dialogue with major investors than previously.
