Paying Executives is Complicated

Outpacing frontline worker wage gains, executive pay has increased dramatically over the past several decades and continues to grow as leaders are faced with managing business activities in increasingly complex and risky macroeconomic environments.

According to Pearl Meyer’s annual research report on 2026 executive pay practices, average salary increases for executive pay hover around 3.3% to 3.5% for 2026. This prediction is in line with trends we are also observing for other, non-executive roles in 2026. With tight budgets, appropriately compensating executive plans and employees may be a challenge to achieve balance this year.

Learning how to run a dynamic organization in a complex environment takes time, breadth and depth of skills, and repetition. Compensation for effective leadership skills is priced accordingly. Strong executive pay is often required to attract and retain highly skilled and experienced leaders who have the required expertise to effectively strategize and inspire employees to work toward the organization’s business goals.

Determining Executive Pay Plans is Complex

Effective executive pay plans include specific, expected outcomes of the organization’s business goals which an executive’s actual performance can be measured against. This approach enforces accountability for the executive in achieving or not achieving the identified goals. This incentivizes responsible stewardship and prudent decision-making.

Tying an executive’s compensation payments to company metrics like EBIT margin, free cash flow, target sales, revenue growth over a specific period, along with other measurements, links the success of the individual executive with the success of the company. For example, an executive who meets 100% of the revenue growth target in their first year may receive a 20% bonus of their base pay, whereas meeting 80% of the revenue growth target might result in a 5% bonus. By reaching the organization’s intended business targets, the executive(s) will theoretically then reach their own pay targets.

Executive take-home pay significantly increases with potential earnings from variable pay plans, like long-term incentive plans (LTI) with performance-based restricted stock units, and other forms of incentives and perquisites, such as deferred compensation or extra insurance coverage. Determining the appropriately motivating pay mix for any executive or leadership team depends on an organization’s financial circumstances, industry and/or regional standards, measurement period, competitive pressures, and of course, the individual’s own preferences.

Without clear metrics, organizations risk overpaying for mediocre performance or losing talented leaders to competitors who use a more transparent reward system. Incentive clawback policies may also be introduced to reinforce the expectations of strong commitment to ethical operations and decision-making.

Developing a Plan

Developing an executive pay plan requires market benchmarking, a clear compensation philosophy, a governance plan (typically managed by a board of directors or executive compensation committee), and a regulatory review by in-house counsel or other form of legal support. Balancing short-term incentives with long-term incentives and long-term goals, while maintaining compliance with evolving regulations, makes decisions about compensating executives particularly complex.

Metrics or targets used in executive compensation plans should be compliant with regulatory requirements, meaningful to the organization, and be thoughtfully decided upon. Consider what is within the executive’s span of control and what is not when determining plan metrics and associated payout targets (or penalties).

Any strong variable pay plan, whether for executive-level or frontline staff, should have clear guidance on what performance outcomes correlate to what specified compensatory rewards for whom and in what amounts under what circumstances. Our variable pay guide is an evergreen resource for Cascade members to reference when planning or designing variable pay plans.

Executive Pay Continues to Grow

Given the wide range of challenges and complex landscape employers are attempting to navigate, surprises or sudden changes in approaches in 2026 may also be in store. What else will we observe in 2026, and how is your organization approaching executive pay this year? Our Compensation Team would love to hear from you!