Annual Incentive Plan Design and Trends

October 2, 2025

Andrew Gordon

Annual incentive plans serve a valuable function as an interim measurement of progress towards longer-term goals. Unlike performance share awards, which have a more rigid construction due to complex equity accounting rules and higher levels of shareholder scrutiny, annual bonus plans offer a greater flexibility in plan design, consideration of individual performance, and use of discretion. This report summarizes the current state of annual incentive design and trends in the Equilar 500, the 500 largest U.S. public companies by revenue.

Within its IPAC tool, Equilar features a Payouts and Weightings module that captures granular incentive plan data related to plan features, metrics and payout curves for performance-based awards granted to the CEO. For this analysis, we compared 2024 (defined as fiscal years ending between May 31, 2024 to April 30, 2025) against 2023 (defined as fiscal years ending between May 31, 2023 to April 30, 2024) for 432 Equilar 500 companies with both years of data. We further removed fully discretionary plans, leaving 404 formulaic plans for 2024 and 403 for 2023, which serve as the basis for the remainder of this report. Discretionary plans generally have no material plan features or structured metric measurement and instead rely upon a holistic measurement of performance, as determined by the board of directors.

Annual Incentive Plan Summary

Weighting Breakdown

Metric categories fall into one of three buckets: 

1) Financial (based on financial performance); 

2) Market-Based (based on stock price performance); and 

3) Non-Financial (based on operational performance)

The table below shows a slight uptick in financial metric weighting. At the median in 2024, financial metrics made up 90% of the bonus plan, up from 85% in 2023, and 2024 also saw a corresponding downtick in non-financial weighting and prevalence. Market-based metrics continue to be rarely used. The backlash against ESG/DEI metrics, to be discussed later, is a contributing factor to this small shift.

Individual Performance

Individual performance considerations give additional flexibility to the board in determining payout results, but can attract scrutiny if too misaligned with formulaic performance. Individual performance is typically embedded in formulaic plans in one of three ways: 1) as a weighted element; 2) as a modifier (multiplier or additive) with a formal threshold and maximum payout effect and 3) as an informal discretionary authority to increase or reduce the formulaic payout.

Compared to 2023, 2024 saw a slight decline in individual performance usage (189 vs. 192). In terms of implementing individual performance, there was movement away from formal weightings and towards modifiers, mostly multipliers.

Number of Companies using Individual Performance

For companies that weighted the individual performance component, weightings remained largely unchanged.

For both weightings and modifiers, payout vs. target declined slightly year over year.

Payouts

Median corporate score factors in 2024 declined six percentage points at the median vs. 2023, and declined 7.1 percentage points on a total payout basis. Corporate scores exclude individual performance considerations, but will otherwise be the same as the total payout if individual performance isn’t factored into the plan design. As will be discussed in the metrics section, this could be due to overachievement of goals in 2023 that led to comparatively increased metric rigor in 2024.

Use of Discretion

The board of directors tries to establish fair targets based on the circumstances and estimations at the time of plan implementation, but, inevitably, unpredictable events will positively or negatively impact results in a way that the board considers outside the control of the executive team. Assuming events occur that are outside the scope of the metric definitions, and even sometimes if they aren’t, the board may feel it’s best to adjust the formulaic corporate score to better reflect the efforts of the executive team. The initial COVID-19 years of 2020 and 2021 saw unprecedented use of discretion, which has since declined and continued to decline from 2023 to 2024. In addition, one company in 2024 made an in-flight modification to the structure of their bonus plan, down from three in 2023.

Other Plan Features

Some companies like to have the security of requiring a separate threshold to be achieved in order for any payout to made, regardless of achievement of any other metrics. This threshold, or “circuit breaker,” remains a small but not insignificant component of bonus plan design. Circuit breaker usage declined from 37 companies to 36 from 2023 to 2024. In both years, a circuit breaker was triggered by three companies.

One other feature employed by a minority of companies is a formal range of allowable discretion on the formulaic corporate score results, typically in the range of +/- 15% to 25%. This is distinct from other discretionary elements such as individual performance or discretionary metrics. This feature increased from 16 to 17 companies from 2023 to 2024.

Annual Incentive Plan Metrics

This section will review the four most common financial metrics used in annual incentive plans in 2024, with a comparison to 2023. In order to provide a meaningful comparison, we first calculated the number of companies using a metric in any capacity. Then, for the purposes of year-over-year calculations, we created a “normalized” subset where each metric must have the following characteristics: 

1) Measure absolute performance; 

2) Measure corporate performance; 

3) Measure the full year; and 

4) Have a weighting

This normalized subset was then converted into growth percentage goals. We did this by taking the metrics already disclosed as growth percentages and converting the metrics disclosed as dollar targets into growth percentages by calculating the growth percentages of threshold, target and maximum versus last year’s actual performance, only if the same metric was used both years.

Metric #1 - Revenue

The most commonly used financial metric was revenue at 46.3% of companies in 2024 vs 45.4% in 2023. For the tables below, the normalized metric subset contained 160 data points in 2024 vs. 158 in 2023.

These results show a narrowing of the performance goals, with both a higher threshold leverage percentage and a lower maximum leverage percentage. Companies also set more difficult growth goals in 2024 vs. 2023. In the past year, the median company set a target revenue goal that was 4.7% higher than the 2023 outcome, greater than the 2023 target of 4.1% growth. This continues the post-COVID trend that initially saw an increase in the width of performance targets due to the uncertain environment, but has since reverted closer to pre-COVID standards. The combination of more difficult goals and slightly lower results yielded lower metric payouts in 2024. 

Metric #2 – Operating Profit

The second most commonly used metric was operating profit at 26.2% of companies in 2024 vs 24.8% in 2023. For the tables below, the normalized metric subset contained 100 data points in 2024 vs. 96 in 2023.

Similar to revenue, operating profit saw a narrowing of the performance leverage range and increase in growth percentage targets. Marginally lower performance results yielded slightly lower payouts in 2024 vs. 2023.

Metric #3 – Free Cash Flow

The third most commonly used metric was free cash flow at 25% of companies in 2024 vs 24.8% in 2023. For the tables below, the normalized metric subset contained 87 data points in 2024 vs. 88 in 2023. The normalized subset excluded free cash flow conversion.

Free cash flow trends were mixed, with performance goals narrowing on average, but not as uniformly as the other metrics in this report. The 25th percentile of growth percentages all saw increased difficulty, with little change at the median, and a decrease in difficulty at the 75th percentile. This suggests that free cash flow targets overall converged in 2024 compared to 2023. Performance results showed a similar narrowing, with a slight decrease in average payout year over year.

Metric #4 – Earnings Per Share

The fourth most commonly used metric was earnings per share at 22.8% of companies in 2024 vs 23.3% in 2023. For the tables below, the normalized metric subset contained 86 data points in 2024 vs. 87 in 2023.

EPS saw the most significant narrowing of performance targets and increase in performance goal difficulty. However, the improvement in performance results exceeded the increase in goal rigor, leading to a significant increase in payouts for this metric.

ESG and DEI Metrics

ESG and its subset of diversity metrics has seen significant increases since 2020. However, that trend peaked in 2023 incentive plans and saw a rapid retraction in 2024 in a shifting political environment leading up to the reelection of President Donald Trump and the threat of conflict with the federal government and conservative activist shareholders. The prevalence of ESG metrics within formulaic plans was 32.7% in 2024 vs. 37.5% in 2023. Prevalence in this case only factors in metrics with a weighting or modifier effect and excludes ESG metrics embedded in individual performance or grouped strategic metrics. Within the subset of diversity metrics, there was a more dramatic decline from 12.2% of companies in 2023 to 7.4% in 2024. Lastly, the most dramatic decline occurred in diversity metrics with representation targets, which declined from 6.7% of companies in 2023 to 1.2% in 2024.

For companies that chose to retain diversity metrics in 2024, most eliminated any goals that could be interpreted as “quotas,” instead focusing on goals like diversity training, surveys on employee satisfaction and inclusion, and having diverse candidate slates for open positions. For companies that eliminated diversity metrics, most either shifted the weighting back to financial metrics or to a more general strategic goals metric covering various qualitative aspirations.

Conclusion

Going into 2024, there was political uncertainty with the upcoming U.S. elections, as well as multiple ongoing global conflicts. However, the elimination of most remaining COVID-19 uncertainties seemed to have the greater impact on annual incentive plans given that most financial metrics saw narrower goal setting and more difficult targets. While 2023 paled in comparison to the major outperformance of soft targets in 2021, the level of outperformance likely also had a contribution to the increased rigor of 2024 targets. Performance results improved for EPS and slightly declined for the other three top financial metrics, which in combination with higher growth targets yielded lower payouts in 2024. As 2025 enters its final stretch, uncertainties remain with global conflicts and the return of tariffs. Time will tell if companies address those concerns via their goal setting, metric definitions or use of discretion. In addition, the rapid decline of ESG, particularly DEI metrics, is expected to continue, as the remaining holdouts from 2024 capitulate to pressure; but those goals could remain in more qualitative forms such as individual performance or grouped strategic metrics.

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