Pay Governance, the firm co-founded by Ira Kay, published a piece this year on how tariffs have scrambled incentive plans for 2025 and 2026 — and what compensation committees are doing about it. The core problem the firm describes is timing: most companies set their incentive targets before this round of tariffs landed, and before anyone knew whether refunds might follow, so a lot of plans are now measuring people against goals that no longer reflect the world the business is operating in. The firm reports that a large share of plan sponsors are responding by delaying when they finalize goals, widening the spread between threshold and maximum, leaning harder on relative metrics, and — when a result still lands somewhere the formula didn’t anticipate — reaching for after-the-fact committee discretion to land on an outcome that’s fair to both management and shareholders. You can read the firm’s analysis here.

Here’s what we think this means for HR and Total Rewards leaders designing variable comp programs. The boardroom playbook Pay Governance describes is genuinely sound — for the boardroom. When a tariff blows a hole in a goal that a handful of senior executives were measured against, a compensation committee can look at the year, exercise judgment, disclose what it did and why, and move on. That’s a defensible way to run an executive plan, and the firm is right that it’s often the honest answer to a year nobody could have forecast. But the further down the org chart you take that same playbook, the worse it works. Discretion that reads as thoughtful stewardship at the top reads as “the number never really mattered” on the floor. The mechanics that protect an executive plan from an outside shock are not the mechanics that protect an employee bonus plan — and confusing the two is how a well-meaning rescue turns into a trust problem across a few thousand people at once.

So before you import the tariff-year toolkit into your broad-based bonus program, here are the principles we’d hold onto.

1. The discretion that saves an executive plan can quietly break an employee one.

At the top of the house, after-the-fact discretion has a built-in audience that understands it: a board, a proxy statement, investors who read the rationale. The executive being paid was usually in the room for the conversation about why the goal moved. None of that is true for the person running a line, closing tickets, or hitting a sales number. When you rescue a blown employee bonus with end-of-year judgment, the employee doesn’t see stewardship — they see that the target they organized their year around was negotiable all along. In our experience, the first time people learn a bonus goal can be quietly adjusted after the fact, they stop treating next year’s goal as real. You can only spend that credibility once.

2. Build a goal that survives a shock instead of one you have to repair after it.

Pay Governance’s plan sponsors are widening performance ranges and delaying goal-setting because the goals they’d otherwise set are too fragile to survive the year. That instinct is right, and it’s worth stealing — but use it on the front end. For an employee plan, the equivalent of “widening the range” isn’t loosening the payout curve at year’s end; it’s choosing metrics at the start that a tariff can’t single-handedly detonate. A goal built largely on a macro input the employee can’t touch — input costs, commodity swings, a tariff line nobody on the team controls — is a goal you will be tempted to override the moment that input moves. A goal built on something the employee actually drives needs far less rescuing, because the thing it measures is still inside their reach no matter what the trade headlines do.

3. “No payout” demotivates harder one layer down — so don’t let a fragile goal create that outcome.

The firm flags a real risk: if a plan consistently pays nothing, people get demotivated. That’s true everywhere, but the consequences are sharpest for employees, not executives. A senior leader with equity, a long-term plan, and a wealth position can absorb a zero-bonus year as one line in a bigger picture. For an employee, the annual bonus may be the whole variable story, and a goose egg driven by something they couldn’t influence doesn’t read as a tough year — it reads as a broken promise. The answer isn’t to soften the plan into a participation trophy. It’s to make sure the path to a payout runs through work the employee can actually do, so that a zero, when it happens, is information about performance and not about a tariff.

4. Widen the range before the year, not the discretion after it.

There’s a clean version of flexibility and a messy one. The clean version is structural and visible: a wider threshold-to-maximum spread, a relative metric, a goal range instead of a single point — all decided and communicated up front, so the employee knows the plan was built to flex. The messy version is discretionary and invisible: a plan presented as a formula that quietly bends at the end to land where leadership needs it. Pay Governance’s sponsors are doing both, and at the executive level the messy version survives because it gets disclosed. An employee plan has no disclosure mechanism — the only “proxy statement” your workforce reads is the size of the check and the explanation that comes with it. Put the flexibility in the design where people can see it, and you almost never need the discretion no one can see.

5. Decide what’s formula and what’s judgment — and say so before the tariff hits.

There is nothing wrong with judgment in a bonus plan; a strange year sometimes demands it. What erodes trust is judgment that masquerades as a formula. If part of your plan is going to be discretionary in a volatile year, the time to tell people is at the start: “this portion is a formula on these two measures; this portion is your manager’s assessment, and in an unusual year leadership may adjust it — here’s the standard we’ll use.” People will accept a judgment call they were warned about. They rarely forgive discovering that the formula they were promised was never really one. The tariff didn’t create that exposure — it just revealed which plans had quietly left the door open.

Pay Governance is right that an outside shock like a tariff forces a hard look at whether your goals still mean anything, and right that compensation committees will lean on discretion to get to a fair answer at the top. We’d just be clear-eyed about where that answer travels and where it doesn’t. A shock is a stress test, and the executive plan and the employee plan fail differently under it: one can be repaired with judgment and disclosure, the other can only be protected by design. If your bonus program only holds together in a calm year — if it needs a rescue every time the outside world moves — that’s not a tariff problem. It’s a design problem the tariff happened to expose.

If you’re looking for tools to simplify how you manage and administer bonuses — and to build plans that hold up when the year doesn’t go to plan — let’s talk.