The Economic Landscape: Tariffs as a Policy Lever
Tariffs, historically, have been employed as a strategic policy tool with several objectives: protecting domestic industries by making imports more expensive, encouraging local production, rectifying perceived trade imbalances, and generating government revenue. In the context of the April 2025 "Liberation Day" tariffs, the stated intentions extended to incentivizing companies to re-evaluate and potentially relocate their supply chains and manufacturing operations back to the United States or to allied nations with more favorable trade agreements. However, the practical implementation of such supply chain shifts is notoriously complex, often requiring significant time and substantial financial investment, a reality many businesses would soon confront.
These tariffs effectively functioned as a tax on imported goods. For American companies, this translated into increased input costs and compressed profit margins, particularly for those heavily reliant on overseas manufacturing or foreign-sourced raw materials and components. For instance, the consumer electronics sector, a significant importer of goods and parts from China, faced immediate cost pressures. Similarly, the apparel and footwear industries, with substantial sourcing from Vietnam, experienced margin erosion due to the escalated duties. Manufacturers dependent on intermediate goods or raw materials from India and other affected countries also found their cost structures unexpectedly altered, necessitating swift and often costly adjustments.
In response to these new economic realities, some companies opted to pass the increased costs directly to consumers through price hikes. Others chose to absorb the financial impact, leading to a reduction in their profitability and potentially affecting shareholder returns. Beyond direct financial consequences, the tariffs acted as a significant disruptor to established global supply chains, compelling businesses to undertake complex and often expensive re-evaluation of their sourcing strategies. This recalibration introduced a new layer of operational complexity and uncertainty into the business environment.
Impact on Executive Compensation and Performance Metrics
Crucially, the magnitude and scope of these tariffs were largely unforeseen when executive compensation goals were established. Companies typically set annual and long-term incentive plan targets early in the fiscal year, or even years in advance for long-term incentives (typically three-year cycles). The disclosures reviewed for the 2023-2025 period, particularly for 2025 annual incentive payouts and 2023-2025 long-term incentive plans, revealed that these targets were based on financial expectations that did not account for the significant macroeconomic shift introduced by the tariffs. This created a potential distortion in performance measurement and, consequently, in annual and multi-year incentive payouts.
Research Methodology: Assessing Tariff Impact on Compensation
In anticipation of companies filing their 2026 proxy statements, which detail executive compensation and goal achievement, CAP (presumably a consulting or research firm specializing in executive compensation) initiated a review of disclosures pertaining to goal setting and payout outcomes. The analysis specifically focused on the 2023-2025 long-term incentive plan performance and the 2025 annual incentive payouts. CAP selected a sample of 22 companies, prioritizing those deemed most exposed to the tariff impacts due to their reliance on imported goods, significant overseas manufacturing footprints, and intricate global supply chains.
The selection criteria emphasized companies with a substantial dependence on imported goods, those manufacturing products internationally, or sourcing key materials from countries directly affected by the tariffs, such as China, Vietnam, and India. Furthermore, industries demonstrably susceptible to direct and material financial impacts from tariffs, including industrials, consumer goods, and manufacturing sectors, were prioritized. This targeted approach aimed to provide a clearer understanding of how tariff-related disruptions influenced both corporate performance and subsequent compensation decisions. The findings were compiled based on proxy filings available as of April 17, 2026.
Key Findings: Adjustments and Disclosures
The review of the 22 sampled companies revealed a split in how the tariff impacts were addressed in proxy statements. A significant portion, 11 companies (50%), did not reference the impact of tariffs on their incentive plan metrics within their proxy filings. However, of the remaining 11 companies (also 50%), a substantial majority—eight companies—disclosed an impact on their Annual Incentive (AI) plan payouts. Furthermore, three companies reported impacts on both their Annual and Long-Term Incentive (LTI) plan payouts. In total, 8 out of the 22 companies (36%) made adjustments to either their annual or long-term incentive payouts, or both, directly attributable to tariff impacts.
The disclosures consistently indicated that performance targets for both AI and LTI plans had been established prior to the implementation of the tariffs. Following the introduction of these measures, companies navigated a period of market volatility, further complicated by ongoing trade negotiations between the U.S. administration and the affected nations. As a consequence, many companies characterized the negative financial repercussions as unforeseen, extraordinary events, thereby justifying upward adjustments to incentive plan payouts.
A notable trend emerged when comparing company sizes: larger, more diversified corporations such as Ford, PepsiCo, and Pfizer generally did not disclose any adjustments to their annual or long-term incentive plans. This discrepancy is likely attributable to the greater scale, diversification, and enhanced cost-absorption capabilities of these larger entities. Their ability to mitigate tariff impacts through strategic pricing adjustments, diversified sourcing, and operational flexibility appears to have shielded their incentive metrics. In contrast, smaller companies, often more directly exposed to these cost pressures, demonstrated a greater propensity to disclose and subsequently adjust their incentive plans. For Pfizer, in particular, the absence of adjustments was likely influenced by a pre-existing voluntary agreement with the U.S. government to lower prescription drug prices, which included a three-year exemption from certain tariffs, thereby neutralizing the direct impact.
The disclosed adjustments to payouts were quantified in percentage points. ICU Medical stood out as the sole company to provide a quantitative adjustment to its long-term incentive plan, reporting a significant upward adjustment of +50% to the payout percentage. Adjustments were more prevalent in annual incentive plans, with reported increases ranging from a median of +13% to an average of +12% of the actual payout among the seven companies that provided specific quantitative data.
The methods employed by companies to adjust their incentive plans varied. Out of the eleven companies that acknowledged tariff impacts on payouts, five explicitly modified their Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) calculations to exclude all or a portion of the tariff-related expenses, thereby bolstering incentive plan payouts. Additionally, three companies adopted a strategy of adjusting multiple performance metrics rather than focusing on a single measure. These diverse approaches illustrate the complex and varied ways companies sought to navigate the financial distortions caused by the tariffs.
Analysis of Rationale: Adjustments vs. Non-Adjustments
The rationale for making adjustments to incentive plans typically centers on the argument that tariffs represent external, unpredictable shocks that were not factored into the original target-setting process. Proponents of adjustments contend that such measures help to isolate true operational performance, ensuring that executives are evaluated and compensated based on factors within their control. These adjustments are also seen as crucial for preventing key financial metrics like EBIT (Earnings Before Interest and Taxes), EBITDA, Free Cash Flow, and EPS (Earnings Per Share) from being artificially distorted, thereby maintaining the integrity of the pay-for-performance framework.
Conversely, the rationale for making partial or no adjustments often includes treating tariffs as inherent business costs that management should manage and mitigate. Companies opting for this approach generally view tariffs as a component of normal operating performance that should not be artificially excluded from performance assessments. This perspective emphasizes accountability for managing all business outcomes, including those influenced by macroeconomic and geopolitical factors.
Case Examples Illustrating Adjustment Rationales
- Ford: No adjustments were made. Ford chose not to exclude tariff costs, instead incorporating them into adjusted EBIT, thereby treating tariffs as an integral part of normal operational performance.
- RTX (formerly Raytheon Technologies): An adjustment was made. RTX explicitly stated that the impacts of tariffs should be "neutralized" for performance evaluation purposes, citing their external, unpredictable nature and their disconnect from direct operational execution.
- Westinghouse Air Brake Technologies (Wabtec): A partial adjustment was implemented. The company aimed to prevent the understatement of performance due to external tariff headwinds while still maintaining management accountability for overall business outcomes.
- Sylvamo: A partial adjustment was applied. Sylvamo added back only a portion of tariff costs, acknowledging their impact on results but treating them as real economic costs that were not fully excluded from the performance metrics.
- YETI Holdings, Inc.: Tariffs were categorized as an "unforeseen extraordinary event," leading to a recalculation of performance metrics to reflect what the company deemed true underlying performance for incentive purposes.
Future Outlook: Navigating Uncertainty and Transparency
Looking ahead, companies are likely to continue adopting hybrid approaches to the treatment of tariffs in their executive compensation plans. There is a discernible trend towards more nuanced, partial, and rule-based adjustments rather than outright exclusion or full inclusion of tariff impacts. Evidence suggests a growing emphasis on differentiating between anticipated tariffs, which are integrated into standard economic cost assessments, and unforeseen or newly imposed tariffs that may warrant adjustments through pre-defined mechanisms, such as specific cutoff dates or clearly defined cost-factor exclusions. This evolving practice reflects a delicate balance between ensuring fairness in performance evaluations and maintaining robust accountability for tangible business outcomes, while simultaneously enhancing transparency and consistency in incentive plan design.
As the policy environment surrounding tariffs remains fluid, with ongoing legal challenges and potential regulatory shifts, companies are expected to further formalize these compensation practices. Clearer guidelines are likely to be embedded within incentive plans to ensure that performance metrics remain both economically meaningful and demonstrably aligned with the creation of shareholder value.
An additional emerging consideration is the potential for tariff refunds. A landmark Supreme Court ruling questioned the legality of tariffs imposed under the International Emergency Economic Powers Act (IEEPA), but did not definitively address whether companies should be reimbursed for tariffs already paid. Numerous companies have initiated lawsuits seeking such relief, and the Trump administration has indicated an expectation to commence a refund process in the near future. Should refunds be ultimately issued, they could result in a one-time, potentially significant, increase in reported profits, which could, in turn, inflate incentive payouts. Consequently, companies will need to carefully consider whether and how to adjust performance metrics to exclude or normalize the impact of these refunds, ensuring that executive compensation continues to accurately reflect underlying operational performance rather than a one-time financial windfall.
