Overview of Recent Trends
Between 2023 and 2025, compensation committees at Russell 3000 and S&P 500 companies began moving away from broad ESG-labeled metrics, environmental measures, and human capital indicators in short-term incentive (STI) plans. This wasn't a complete abandonment of non-financial performance metrics; over half of companies in both indexes still used mixed financial and non-financial STI plans in 2025. However, the declining use of specific categories like environmental and human capital metrics, coupled with increased reliance on board discretion, suggests committees struggled to define, measure, and defend these metrics under shareholder scrutiny.
This shift was most evident in long-term incentive (LTI) plans, where non-financial metrics remained rare across nearly all sectors. Financial measures, particularly total shareholder return, profit, return, and revenue, dominated LTI design, typically accounting for 70% to 75% of the payout opportunity even in mixed STI plans.
Timeline of Changes
2023: Broad ESG labels, environmental metrics, and human capital measures were common in STI plans across both indexes.
2024: Selectivity began to emerge. Use of governance metrics, social metrics, cash flow measures, and expense controls increased, while broad ESG categories started to decline.
2025: The trend solidified. Boards increased discretion in STI plans while pulling back from environmental and human capital categories. Financial-only STI plans rose modestly. In LTI plans, non-financial metrics remained marginal outside healthcare, with most companies focusing on financial performance and market return.
Governance Failures
The core issue wasn't technical but definitional and governance-related. Compensation committees failed to establish clear, auditable links between non-financial metrics and long-term value creation. Three specific breakdowns occurred:
Metric Definition and Rigor: Boards adopted broad ESG labels without translating them into measurable, business-specific performance indicators. Without operational definitions, thresholds, and time-bound targets, metrics become discretionary modifiers rather than performance measures.
Weighting Transparency: Many companies did not disclose the relative weight assigned to financial and non-financial metrics. The absence of mandatory weighting disclosure allowed committees to avoid accountability for their reliance on non-financial measures.
Plan-Type Misalignment: Boards treated STI and LTI plans inconsistently. Non-financial metrics appeared in just over half of STI plans but were rare in LTI plans. This suggests committees viewed non-financial performance as relevant for annual assessment but not for long-term value creation, a position difficult to reconcile if those metrics genuinely capture strategic priorities or enterprise risk.
Relevant Standards
The UK Corporate Governance Code, Provision 40, requires remuneration committees to design executive pay structures that promote long-term shareholdings by executive directors and align their interests with those of shareholders and the company. Metrics must be "stretching and rigorously applied," and the committee must explain how the structure supports strategy and promotes long-term success.
Under the Apply and Explain framework, boards must either apply each provision or explain clearly why they have not. A compensation structure that assigns 30% of annual incentive pay to undefined ESG goals while excluding non-financial measures from long-term plans does not meet the rigor standard.
The Investor Stewardship Code Principle 7 requires institutional investors to hold boards accountable for the clarity and appropriateness of performance metrics. When proxy statements disclose only that "ESG factors" or "human capital measures" were considered without operational definitions, stewardship obligations require investors to challenge that opacity.
The COSO ERM Framework Component 3 (Performance) addresses how organizations define performance metrics that align with strategy and risk appetite. Non-financial metrics tied to safety, regulatory compliance, operational reliability, or workforce stability can be more rigorous indicators of enterprise risk management than financial metrics subject to non-GAAP adjustments.
Action Items for Your Organization
Audit Metric Definitions: Review your most recent proxy statement and list every performance metric disclosed. For each non-financial measure, document the operational definition, the threshold for payout, and the rationale linking that metric to long-term value or enterprise risk. If this exercise is incomplete, your committee is relying on discretion, not performance measurement.
Reconcile STI and LTI Logic: If your board uses non-financial metrics in annual incentive plans but excludes them from long-term plans, document the reasoning. Either those metrics capture strategic priorities (and belong in LTI design) or they do not (and their inclusion in STI plans requires a different explanation). The inconsistency itself is a disclosure risk.
Disclose Weighting: Move beyond listing metric categories. In your next proxy cycle, disclose the percentage of payout opportunity tied to each category, financial, operational, governance, social, environmental. Voluntary disclosure now demonstrates committee confidence and reduces the risk of shareholder proposals demanding it later.
Replace Broad ESG Labels: Use business-specific indicators. If your sector depends on regulatory approvals, measure regulatory milestones. If safety incidents create material liability, measure safety performance. If workforce turnover affects service delivery, measure retention in critical roles. Every metric should answer: what does management need to deliver this year to preserve or create long-term value?
Test Discretion Against Standards: Board discretion is not a performance metric. If your committee routinely adjusts payouts based on factors not captured in the disclosed metrics, you're signaling that the metrics themselves do not measure what matters. Discretion should be reserved for extraordinary events, not routine performance assessment. Document every use, the rationale, and the impact on payout.
The 2025 data show boards becoming more selective, not abandoning non-financial metrics entirely. That selectivity is appropriate if it reflects clearer thinking about what drives value in your business. It's a governance failure if it reflects retreat under pressure without addressing the underlying question: which measures actually tell you whether management is building long-term capability and managing enterprise risk?
