Q&A: Organizations Taking a Measured Approach to 2026 Executive Comp

New research by executive compensation advisory firm Pearl Meyer projects many organizations will slightly pull back on their salary increases for top leaders in 2026.

The annual study also cited a restrained use of discretion in incentive payouts and a notable pullback in standalone diversity, equity and inclusion (DEI) and environmental, social and governance (ESG) incentive plan metrics. Board representatives and employees from 248 organizations, spanning ownership types and industries, responded to this year’s survey.

In an interview with Workspan Daily (WD), Bill Reilly, Pearl Meyer’s managing editor and survey author, shared further insights on expected changes in salary budgets, short- and long-term incentive plans, pay positioning, and governance practices.

Bill Reilly, Pearl Meyer’s managing editor and survey author

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WD: What are some key findings you can share from the report?

Reilly: While macroeconomic conditions remain volatile and challenging, approximately 75% of respondents expect overall financial performance results for fiscal year 2025 to be similar to or better than the prior year, evenly split between similar or better performance. Additionally, only 23% cited a negative impact from tariffs.

In addition:

• Most respondents expect to provide salary increases in 2026, with slightly lower average projected increases versus the current year, and most also expect to provide at least some payout for incentive cycles ending this year.
• Less than 15% of respondents have already revised or plan to revise incentive plan performance goals or provide supplemental awards to address macroeconomic challenges, with many taking a “wait and see” approach regarding the potential use of discretion for year-end incentive award determinations. Nearly 40% of respondents took one or more actions to address incentive plan goal-setting challenges, such as delaying the timing to finalize goals, widening performance ranges, and adding or increasing the emphasis on relative metrics.
• Most respondents are not planning significant changes to incentive plan designs for 2026 or the short-term incentive (STI) performance mix or long-term incentive (LTI) award vehicle mix. Most also have not made changes to equity grant practices in response to stock market volatility or proposed shareholder advisory group policy changes.
• Among respondents with incentive cycles ending in 2025, most (roughly half for STI and 60% for LTI) do not currently anticipate the use of discretion, with one-third taking a “wait and see” approach. Among those anticipating use of discretion, most expect to apply positive (versus negative) discretion, with lower prevalence for LTI than for STI, for executives versus non-executives, and for publicly traded and larger-sized organizations versus other respondents, as they are subject to greater external scrutiny.
• Approximately 15% of respondents have either eliminated or recharacterized standalone DEI incentive plan metrics, consistent with the broader market backlash. There also was a notable year-over-year decline in prevalence of compensation/human capital committees in terms of DEI oversight, although many compensation/human capital committees (including 60% of those that are publicly traded) cited moderate or high levels of oversight for broader human capital topics.

Most respondents plan to provide salary increases for 2026, with average projections ranging from 3.3% to 3.4%.

WD: What trends do you see with 2026 base salary increase projections and incentive payouts?

Reilly: Most respondents — approximately 80% for chief executive officers (CEOs), 90% for CEO direct reports and 98% for other employees — plan to provide salary increases for 2026, with average projections ranging from 3.3% to 3.4% across various employee categories. In comparison, actual 2025 average increases ranged from 3.3% to 3.9% across employee categories.

The year-over-year (YOY) decline in average increases aligns with the gradual reduction in inflation levels and some softening within the labor market. Median salary increase percentages for 2026 equal 3% for CEOs and broad-based employees, with a higher level (3.4%) for CEO direct reports. Results vary by industry and by ownership type, with higher salary increase projections for executives among not-for-profit respondents versus for-profit organizations.

Virtually all respondents expect at least some payout for incentive award cycles ending in 2025, and excluding “don’t know” responses, prevalence is fairly evenly split between below-target, at-target and above-target payouts. Approximately two-thirds of respondents project STI payouts to be similar to or above prior year levels and grant date LTI values for 2026 to be similar to or above 2025 levels.

As expected, incentive award payout projections generally correlate with YOY financial projections, with below-target payouts expected by 63% of respondents with YOY performance declines versus only 20% of those with increased performance.

WD: What did the research show as factors impacting organizations and executive pay?

Reilly: Economic uncertainty and inflation were the most common macroeconomic challenges cited by half or more of respondents, with roughly 30% to 40% also including either legal/regulatory developments (primarily not-for-profit organizations), tight labor markets (private for-profit companies) or stock market volatility (publicly traded companies) among the top three factors having an impact.

The least commonly cited factors (in terms of the top three biggest impacts) were shareholder advisory group policies (even among public companies), supply chain constraints and tariffs, with prevalence at or below 20% for each.

Incentive plan goal-setting remains challenging in the current environment, prompting 40% of respondents to take or consider taking various actions such as delaying the timing to finalize goals, widening performance range spreads, and adding or increasing the emphasis on relative metrics.

Additionally, while most respondents have not made changes to goals for in-process cycles or provided supplemental awards, many are taking a “wait and see” approach regarding the potential application of discretion (generally positive rather than negative) for incentive cycles ending this year. 

WD: Based on this report, what is the status of CEO turnover and succession planning?

Reilly: Within the past year, 16% of respondents experienced a CEO turnover, typically executed through a pre-existing succession plan. Most respondents also have either a strategic or emergency succession plan in place for the CEO role. Not-for-profit respondents are less likely to have formal succession plans in place versus other ownership types.

Executive succession planning oversight is handled by compensation/human capital committees at approximately two-thirds of respondents; while not specifically addressed, oversight among other respondents with pre-existing plans is presumably handled by a different committee or the full board.

Roughly half of respondents said overall executive turnover levels did not materially change over the past six to 12 months, with 32% citing lower and 16% citing higher levels. This also suggests some softening within the labor market.

About 60% of respondents believe their executive compensation programs are highly effective in achieving desired objectives.

WD: What did this report show regarding executive compensation program effectiveness?

Reilly: About 60% of respondents believe their executive compensation programs are highly effective in achieving desired objectives, citing competitive pay, alignment of pay with performance, strong retention and transparency as key program strengths. Only 6% of respondents, most of which are not publicly traded, assigned a low effectiveness rating, primarily due to a lack of or inadequate incentives, non-competitive pay, lack of alignment with performance, or programs that are too subjective in nature. 

Some program weaknesses also were cited by respondents with high effectiveness ratings, such as:

• Incentive plan goal-setting challenges;
• Insufficient market benchmarking frequency;
• Pay mix concerns (such as overly conservative base salaries); and,
• A need for greater award upside opportunity for superior performance

This shows there is always some room for improvement in terms of compensation program design to ensure pay programs remain competitive and aligned with changing strategic priorities.

WD: The report showed pullback in standalone DEI and ESG incentive plan metrics. How will this impact executive pay moving forward?

Reilly: The decline in standalone DEI metrics aligns with the broader market backlash on this topic. However, some companies continue to incorporate human capital-related metrics, often within broader strategic or individual performance components. While any type of quota-related metric will continue to be avoided, other human capital-related metrics may warrant some consideration within incentive plans, such as retention and turnover levels, employee engagement, training, compliance and safety, and/or succession planning.

Most survey respondents continue to place primary emphasis on quantitative financial and operational goals (median weighting, when provided, of 80% of the total award opportunity for senior executives), with roughly one-third to 40% also tying a portion of award opportunities (median weighting of 20% to 25%, when provided) to non-financial strategic criteria and/or individual goals, allowing for holistic assessments of performance. 

The prevalence of standalone ESG metrics (excluding DEI) is higher than standalone DEI metrics but still a minority practice. Metric prevalence and weightings vary by industry. To the extent companies are using or considering ESG-related incentive plan metrics, they should select metrics that are relevant to the business and promote long-term value creation, with goals that can be tracked internally and that are measurable.

WD: Based on the research, what are some next steps for organizations to consider?

Reilly: Companies should ensure their executive compensation programs continue to reinforce key business and human capital objectives and allow for holistic assessments of performance with sufficient flexibility to address ongoing market volatility and macroeconomic challenges.

As noted by survey respondents, there is always room for improvement in terms of compensation program design, even among companies assigning high ratings. While labor markets appear to be softening, companies and boards remain very focused on employee attraction and retention, and should ensure their compensation programs provide for fair and competitive pay opportunities that align with performance outcomes and support long-term value creation.

Scrutiny of executive pay practices continues to intensify, and companies and boards should ensure compensation designs and decisions (including any potential use of discretion) are defensible and effectively communicated, both internally and externally.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Executive Compensation
• Finance and Budgeting