Tariffs 2.0 & Incentive Planning: Less About the Math, More about Judgement
Here we go again... Another year and another round of uncertainty—and another test of whether incentive plans are truly designed to reward performance or whose results are tainted by external events that only a crystal ball may have predicted. Getting goals “right” is a multi-faceted balance of prediction based on the past, expectations of the current year’s budget and performance, and a sprinkling of the “unknown.”
The key question is not whether 2026 will be volatile. It is. The question is whether your incentive plans are designed to expect the unexpected. We know the labor market has tightened: peak baby boomers are retiring by 2030, labor market entrants are slowing, and many early workforce exits occurred due to COVID. So how can you adjust your incentive plans to be realistic?
The Growing Tension in Goal Setting
Some companies are still finalizing 2026 goals, while others are already wrestling with payout decisions for 2025. In both cases, the same questions exist:
- Were the 2025 goals set on assumptions that no longer hold true? Will the same occur in 2026?
- Did participants have control or “line of sight” over the outcomes being measured? Will participants have more control in 2026?
- And - perhaps most importantly, how will incentive payouts or lack of payouts be received by employees, and will employees react? Will they be engaged to achieve the new year’s plans?
These questions impact key decisions and reflect fiduciary responsibility, management credibility with employees, and participant trust in the incentive plan and process.
At The Overture Group, we have clients who attempted to hedge uncertainty by creating dual-track plans—one set of goals based on internal performance expectations and another adjusted for potential macroeconomic disruption. While well-intentioned, this approach has produced mixed results. In hindsight, some companies now find themselves managing complexity without achieving greater clarity or fairness.
The Board Discretion “Lever”
As uncertainty persists, decision-makers face the challenge of offering incentives to attract, motivate, and retain key talent while meeting stakeholder requirements. The Overture Group recommends including the Unintended Consequences clause when designing incentive plans.
This allows the board to exercise discretion when, and if, it is deemed fair to both the organization and the participants. We see this clause used by family-held and closely held organizations (not PE), where long-term sustainability outweighs strict formulaic outcomes and shorter-term focus.
The Rise of the “Unintended Consequences” Clause
The Unintended Consequences provision gives boards or compensation committees the explicit ability to adjust outcomes when external forces—such as tariffs, regulatory shifts, or abrupt and unpredictable market changes materially distort performance results.
In practice, this clause serves as a structured form of discretion. Rather than making a completely subjective decision after the fact, organizations establish guardrails in advance. The guardrails are documented in the Administrative Guidelines, delegating authority to the board or another decision-maker to modify the incentive payout. Included in the documentation are examples of when such an event may justify using the clause.
Just because the Unintended Consequences clause is included in an incentive plan does not mean that it has to be used. Its purpose is to provide an option for fairness in the most unusual of situations.
Used thoughtfully, discretion can:
- Reinforce cultural values
- Correct for external events outside of management’s control
- Motivate participants to stay in the game when the year’s results may otherwise look bleak
Used impulsively, discretion can:
- Undermine the credibility of incentive plans
- Increase perceptions of subjectivity and mistrust of management
- Dissatisfy shareholders and owners
The difference lies in rational decision-making, shareholder alignment, and participant communication.
The Balancing Act: Expectations and Perceptions
The challenge, of course, is balance. Employees want to know what success looks like and how it will be rewarded. For companies that regularly pay out incentives every year, some employees are planning how to spend the award before it is even earned. Incentive compensation has become an important part of the total compensation package and employees have other employment opportunities if they lose faith in the current plan.
For companies that minimally pay out incentives, they have other problems as the incentive plan is not designed to drive results. These companies need to review and redesign their plan to drive behaviors toward business goal achievement, earn a meaningful return on investment in the plan, and reduce the risk of turnover.
At the same time, boards need to carefully weigh the advantages and disadvantages of providing a discretionary payout. Doing so once may set future expectations as an ongoing practice versus a one-time exercise. Providing small payouts may be perceived as minimal, a joke, or even insulting to some employees. However, providing larger, meaningful payouts is just not affordable.
The right answer at times like these is not easy. Using discretion to provide an incentive plan payout is a decision to be made only after careful consideration and should not be made lightly.
Organizations most effectively navigating the discretion decision process are those that:
- Document in advance when discretion may be used in the plan document and administrative guidelines
- Align decision-making with company values and principles
- Consider the motivational and retention value of the incentive plan
- Think through the culture, level of paternalism, employee expectations, and potential reactions in both scenarios. Then plan communications to mitigate potential negative reactions.
- Examine the incentive plan payout frequency and levels – not all incentive plans payout every year, and that is OK! A rule of thumb is that, on average, incentive plans pay at target 50-60% of the time. Your industry or location may have payout trends that differ from the overall average.
- If discretion is used, be fair and equitable in the distribution of awards
- Revisit plan design every few years to reflect the current state of the business. Do not “set it and forget it.” Some companies use external compensation consultants because they have failed to keep pace with business shifts, and the plan has become obsolete and no longer delivers a positive return on investment.
- Consider that incentive plans and compensation program design are more of an art than a science. If compensation were a color, it would be gray, with ambiguity requiring a unique approach at each organization.
Looking Ahead
As 2026 unfolds, many organizations will once again be forced to reconcile carefully crafted incentive plans with an unpredictable operating environment. The companies that fare best will be those that view incentive design not as a mechanical exercise, but as a strategic tool that evolves as the business grows.
The Overture Group is proud to have been a resource for IMA members for the past 15 years. Please contact us if we can answer any questions or guide you through an evaluation of your company’s incentive plans.
Now is the time to revisit plan design, clarify governance, and ensure that your company’s incentive programs reflect both performance and purpose. Doing so will not eliminate uncertainty, but it will help mitigate the very thing incentive plans are meant to prevent: Unintended Consequences.
