Here’s an excerpt from this 17-page report from Glass Lewis previewing trends for this proxy season:
“Upward Discretion
Towards the end of the 2025 calendar year, there was a slight uptick in the number of companies exercising upward discretion, mainly under their short-term incentive plans. This largely stemmed from the unanticipated impact of tariffs. There are a couple of methods that companies have in their arsenal when trying to determine the best approach in addressing such material, unanticipated disruptions.
First, some companies may adjust performance goals or outcomes to mitigate any undue impact tariffs had on financial outcomes for the year in review. Generally, this is achieved by amending targets after original goals had been set, or adjusting outcomes to account for unanticipated impacts on financials.
Second, some companies may opt to increase payouts to a level that is more reflective of the board’s assessment of executive performance despite what the financials may indicate.
The last option is to reduce performance periods (and thus, goals, proportionally) to ignore the portion of the year in which tariffs started impacting financials.
It is almost certain that exercises of upward discretion will increase in frequency. Thus far, companies that have done so have provided meaningful rationale and safeguards to their actions. Often this includes outlining what options were discussed and why one was picked above the rest, providing relevant and unique context to the situation, and limiting how much these exercises can impact the final payout (capping payouts at 100% of target, most often). Increased scrutiny will occur when pay outcomes are not explained, or appear disconnected from the shareholder experience over the same time frame.
ESG Metrics
After relative stability in the use of ESG metric usage in incentive plans over the last few years, the 2025 year saw an anticipated decline. In the S&P 500, 72% of companies used some form of ESG consideration under an incentive plan in 2024. This figure dropped to 68% in 2025. While that year-to-year decline was relatively small, this figure is anticipated to be larger in the 2026 season.
Ad hoc adjustments in 2025 due to the U.S. political climate and ESG backlash, particularly as it related to DE&I, were relatively muted on the whole. Substantial decreases were largely seen in connection with the use of diversity metrics. Of the S&P 500 companies that used any ESG metric in 2024, 73% used a diversity metric. This dropped to approximately 30% in 2025. This figure is likely to continue to fall, with similar decreases in overall ESG metric usage as well. An example of this is Starbucks, who disclosed that fiscal year 2023 and fiscal year 2024 PSUs were amended to assume a multiplier of 0.9x for its representation, talent and sustainability modifiers, which is below threshold performance, so that payouts for these previously granted PSUs would reflect operational, financial and stock price performance only.
Similar to sentiments last year though, the impact of this regression will likely not be as material for safety metrics. Companies that opt to keep their ESG metrics may provide additional rationale and implement more quantitative measures, ensuring that shareholders are clear on the materiality of such considerations.”
