Can Today’s CEO Pay Reward Long-Term Thinking?
Boards want CEOs focused on the future. But in a faster-moving business world, rigid five-year plans are falling out of favor.
Key takeaways:
- Last year, fewer than 1% of S&P 500 companies offered performance awards to CEOs with time frames of five years or longer.
- Shorter, more flexible plans, and longer “moonshot” plans are on the rise.
- Performance plan changes reflect the dual mandate to transform and perform simultaneously.
When Five-Year Pay Plans Stop Making Sense
The compensation committee had narrowed its CEO search to a final candidate. The board wanted a leader capable of transforming the company, now and into the future. But as directors debated how to structure the incoming CEO’s pay package, they faced a tough question: How should they reward long-term thinking when their business strategy might need to change as soon as next year? And how do they do that with investors demanding strong results every quarter?
In a gradual but now clearly defined shift, firms appear to be rethinking how compensation can encourage long-term leadership in a faster-moving business environment. In the past, companies frequently offered CEOs ten-year stock options. But recent data from Equilar shows that firms have not only moved away from these options, but from five-year plans as well. In 2025, only 0.5% of S&P 500 companies offered performance awards to CEOs with time frames of five years or longer, continuing a pandemic-era trend. Today, three-year performance plans, which reward leaders who keep up with fast changes, are by far the most common structure for CEO incentives. “Innovation is not the future—it’s today,” says Jane Edison Stevenson, global vice chair of Korn Ferry’s Board and CEO Services practice.
The risk, of course, is that shorter incentive cycles could discourage investments—such as AI initiatives—that require years to produce meaningful growth. If executives are rewarded over shorter periods, will they focus too heavily on quick gains instead of building strength that will endure years to come?
Still, many experts argue that as the future becomes harder to predict, compensation systems must adapt. Stevenson says companies increasingly expect leaders to do two things at once: run today’s business while also reinventing it for tomorrow. “The three-year time frame pushes that fact,” Stevenson says. “You’ve got to be performing and transforming simultaneously.”
The fast pace of change in modern business is making rigid long-term compensation systems less useful than they once were.
To some degree, the fast pace of change in modern business is making rigid long-term compensation systems less useful than they once were. Instead, experts say more flexible approaches can help. Irv Becker, vice chairman of executive pay and governance at Korn Ferry, says he has helped some boards create “build as you go” CEO compensation plans. Instead of locking in a company’s entire three-year target all at once, the approach builds the long-term goal one year at a time. The company keeps a three-year horizon in mind, but the board can adjust its targets as business conditions change. Supporters say that helps companies stay focused on long-term growth without forcing boards to make difficult projections. The idea reflects a larger shift: Companies now change strategy much more often than they used to. “When that happens,” says Becker, “you have to step back and redo your compensation strategy. You don’t want to leave it in place if there’s a new business strategy.”
To be sure, some experts think fears about short-termism may be overstated. “I think this whole debate around whether plans should be three years or five years is becoming antiquated in today’s environment,” says Dennis Carey, vice chairman of board services at Korn Ferry. This is partly because the structure of CEO pay may itself be changing. Older compensation plans often focused on targets such as growth in earnings or revenue. Today, some companies are moving toward massive equity grants for CEOs—so-called “moonshot” packages—that are tied more directly to stock prices or shareholder returns over longer periods. “They’re exchanging operating metrics for these shareholder-return metrics,” Becker says. And many of these “moonshot” grants stretch six, seven, or even ten years—a much longer time frame than those built into current performance-based incentives—which encourages CEOs to focus on lasting growth.
For boards, the challenge is no longer simply deciding whether CEO incentives should last three years or five. It is figuring out how to fairly reward farsighted leadership in a business environment where technology, strategy, and market conditions can all shift much faster than they once did.
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