Board Focus: Not Punishing for Market Plunges

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If you want to faint or punch a wall when the stock market plunges—as it’s done on some days this year—you’re not alone. CEOs, with millions at stake, are having heart palpitations, too.

Although it can swing up as much as it swings down, the market this year has been in one of its greatest slumps in decades. The major indexes are down between 10% and 15%, with some $9 trillion lost in stock value. That’s a steep hit for many retirement plans, but it’s also costly to the man or woman in the corner office. Thanks to a shift in high-level compensation over the past decades, equity makes up about 70% of a typical CEO’s rewards package.

That worked well during the bull market, but fast-forward to today, and experts say that both top bosses and directors are beginning to think stock compensation isn’t all it's cracked up to be. “CEOs get concerned when they see significant downturns, especially when it’s not caused by their company’s performance,” says Irv Becker, a vice chairman in Korn Ferry’s Executive Pay and Governance practice. For directors, who may also draw equity-based compensation, “massive market swings could have boards wondering if they should rethink their compensation mix,” says Tierney Remick, vice chairman and co-leader of Korn Ferry's Global Board and CEO Services practice.

Even before the current market volatility, CEO compensation had become a touchy topic for boards, which are under pressure from mounting shareholder activism. That comes at a time of record CEO turnover, with more than 2,000 CEOs departing in 2024—a 16% increase over the year before.

But if boards decide to rejigger CEO compensation, experts say, that’s a whole new ball of wax, since CEOs are paid in two types of stocks. The majority of equity in a chief’s pay package is made up of so-called PSUs—performance stock units that are based on financial metrics tied to a company’s performance. The rest are RSUs, or restricted stock units, that aren’t tied to performance (other than stock price) but are tied to future service only, which makes them less risky. If the market continues its volatile trajectory, some boards may be open to shifting the allocation of these equity vehicles. “If volatility continues, the board’s compensation committee could start to think about moving away from PSUs and moving toward more RSUs with longer vesting periods,” Becker says.

On the other hand, instead of adjusting compensation levers, directors may fine-tune the language in a CEO’s contract to reflect situations that are out of management’s control—such as tariffs. That would allow compensation committees to adjust short-term incentives to accommodate unforeseen circumstances, while keeping the overall framework of the total rewards package.

If there’s any silver lining to stock volatility, it may be that CEO turnover could abate. “If you have a significant decline in the stock market, you might see CEOs trying to stay longer, to recoup lost value,” Becker says. 

Learn more about Korn Ferry’s Executive Pay capabilities.

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