From three year optics to a five year executive compensation lens
Proxy advisers have quietly turned executive compensation 5 year performance from a niche metric into the new default lens. Since the 2022–2023 proxy seasons, ISS and Glass Lewis have both updated their benchmark voting policies and pay-for-performance methodologies to emphasise multi year analysis, and they now assess compensation and executive pay outcomes over a full five year period for many large issuers. This means a growing number of companies will see their long term incentive plan designs stress tested in ways they were never built to handle. For any company that still relies on three year time based equity awards as the core of its plan, the next fiscal year proxy season will feel very different.
The grant structures most exposed are those where performance and equity are only loosely connected and where stock options or restricted stock units vest purely with time. Under a five year horizon, pay performance alignment will be judged on the total number of shares, the realised option awards value, the strike price versus performance of the stock, and the full term of vesting, not just the initial three year window. Summary compensation and the compensation table will now be read alongside a de facto five year discussion analysis of executive compensation versus performance, even if the company never intended to present it that way.
Boards that leaned heavily on short term incentive plan metrics and modest long term equity incentive grants will see more volatility in the pay versus performance narrative. Glass Lewis has moved to a 0–100 scorecard that aggregates six weighted tests in its pay-for-performance model, so a weak long term record can drag down otherwise strong short term results for named executive officers. Under ISS policy, a Say on Pay outcome below roughly 70 % support has for several years been treated as a warning threshold that can trigger deeper scrutiny in subsequent proxy seasons, but there is now more flexibility when the proxy statement shows a credible engagement plan and detailed disclosure of how executive officers and investors were consulted.
ISS has signalled this shift in its annual benchmark policy updates and pay-for-performance technical documents, which explain how five year total shareholder return and relative performance now feed into quantitative concern levels. Glass Lewis has likewise described its methodology changes in its 2023 and 2024 proxy guidelines and pay-for-performance model overview, where it highlights the move away from a simple letter grade toward a more granular numerical score that captures multi year outcomes.
Why three year TSR is now a defensive minimum, not a full answer
Relative total shareholder return over three years used to be the gold standard metric for performance based awards. Under the new executive compensation 5 year performance lens, three year TSR is now just a defensive minimum, because investors and proxy advisers will extend their own versus performance tests across a longer horizon even if the incentive plan does not. Companies that rely solely on three year TSR based awards will struggle to explain why executive pay remains high when five year stock charts tell a different story.
For the next grant cycle, compensation committees should map every existing equity incentive plan to a five year pay performance storyboard. That storyboard needs to show, year by year, how base salary, short term cash incentives, long term equity, and any option awards or stock options will look in the summary compensation table if the stock price underperforms peers. A simple internal table that tracks each named executive officer, the number of shares granted, the term of vesting, the strike price of each option, and the realised value under different performance scenarios will help the board see where the current plan will fail external tests.
One practical way to stress test a grant is to model a single award across five years using a standardised template. For example, assume a named executive officer receives 100,000 performance share units with a three year performance period and an additional two year holding requirement. If the stock price is 50 at grant and ends at 40, 50, or 70 after five years, the realised value ranges from 4.0 million to 7.0 million, even before dividend equivalents. A simple scenario table that shows these outcomes alongside three year relative TSR and five year total shareholder return helps directors see how the same award can look acceptable in the compensation table yet misaligned in a pay versus performance chart.
The illustrative table below summarises how a single grant can pass a three year test but raise concerns under a five year review:
| Scenario | Stock price at year 3 | Stock price at year 5 | 3 year relative TSR | 5 year total shareholder return | Realised value of 100,000 PSUs |
|---|---|---|---|---|---|
| Underperformance | 45 | 40 | Below median | Negative | 4.0 million |
| Flat performance | 50 | 50 | At median | Neutral | 5.0 million |
| Outperformance | 60 | 70 | Above median | Strong positive | 7.0 million |
Retention risk is the main argument against longer vesting, yet the data rarely supports the fear when design is thoughtful. Companies like Microsoft and Adobe have shifted more of their executive compensation into longer term equity, often with four or five year vesting, while still maintaining strong executive retention and clear pay versus performance alignment. For CHROs who need to educate directors on how variable compensation works in practice, a detailed explainer such as this guide to understanding variable compensation programs can help frame the trade offs between short term and long term incentives without resorting to consultant jargon.
Board conversations, documentation, and the new five year narrative
The hardest work now sits in the boardroom, where CHROs must explain why the current executive compensation 5 year performance story will not pass under the new policies. The conversation should start with a clear compensation table that reconciles base salary, short term bonuses, long term equity incentive awards, and any special stock options or option awards with realised outcomes over five years, not just grant date values. When directors see the full number of shares, the effective strike price, and the stock performance across that term, they usually accept that the plan will need to change.
Documentation is the second pressure point, because ISS and Glass Lewis both expect a robust discussion analysis in the proxy when Say on Pay support drops. Meaningful engagement means the company will disclose which investors were contacted, what feedback they gave on executive pay, how the incentive plan and equity based awards were adjusted, and how culture and performance expectations were reinforced across executive officers. A strong narrative on how feedback shapes performance and pay can also connect the executive officer experience to broader workforce compensation, including how year to date earnings are explained to employees in pay slips and how total rewards are communicated.
The gap between ISS and Glass Lewis scoring will matter most for companies already on the edge of investor patience. Glass Lewis may penalise designs that lean too heavily on time based awards, even when stock price performance has been acceptable, while ISS may focus more on outlier pay levels and weak responsiveness to prior votes. For CHROs, the practical takeaway is simple : redesign the plan now for a genuine five year horizon, or wait for the market to rewrite your executive pay story for you — not another merit matrix, but an actual retention lever.
Key statistics on executive compensation and multi year performance
- ISS and Glass Lewis now apply a five year pay for performance lens in their core quantitative tests for many large companies, extending beyond the traditional three year window.
- Glass Lewis has replaced its prior A–F letter grade with a 0–100 numerical scorecard that aggregates six weighted pay versus performance tests for executive officers.
- Five year time based equity is explicitly treated as a positive signal by major proxy advisers when combined with robust performance based awards.
- ISS provides more flexibility for companies that receive less than 70 % Say on Pay support when the proxy includes detailed engagement disclosure and clear plan changes.
Questions people also ask about five year executive compensation performance
How does a five year horizon change executive compensation design ?
A five year horizon pushes companies to rebalance from short term cash and three year restricted stock units toward longer term equity incentive awards that vest over four or five years. It also forces boards to test executive pay outcomes under multiple stock price and performance scenarios across the full period. Designs that looked reasonable over three years can appear misaligned when investors examine five year total shareholder return and realised pay together.
Why is three year relative TSR no longer enough for incentive plans ?
Three year relative TSR remains a useful metric, but it captures only part of the performance cycle for many industries with longer investment horizons. Proxy advisers now compare executive compensation versus performance over five years, so a plan that stops at three years can leave two years of untested outcomes. Investors increasingly expect a mix of TSR, operating metrics, and strategic milestones that together support sustainable value creation over the full period.
What should boards disclose about pay for performance alignment ?
Boards should provide a clear narrative that links each element of compensation to specific performance goals and time frames. That means explaining how base salary, annual bonuses, long term equity, and any special option awards or stock options are calibrated to company results over both the short term and the long term. Detailed tables, scenario analysis, and explanations of any one time awards help investors understand why executive officers are paid what they are paid.
How can companies extend vesting without losing executive talent ?
Companies can pair longer vesting schedules with more transparent performance conditions and competitive target values to maintain executive retention. When executives see that equity awards and stock options have meaningful upside for strong five year performance, they are less likely to resist longer terms. Clear communication about the rationale, supported by market data and peer practices, also reduces anxiety about perceived pay cuts.
What role does engagement play after a weak Say on Pay vote ?
After a weak Say on Pay vote, investors expect boards to engage directly with major shareholders and then report back in the next proxy statement. Effective engagement includes listening to concerns about pay levels, incentive metrics, and disclosure, and then adjusting the plan where appropriate. Proxy advisers look for evidence that the company has responded with concrete changes, not just explanations, before they relax any negative voting recommendations.
