Amid heightened economic uncertainty in 2025—driven in part by newly-imposed tariffs, persistent inflation pressures, and increased capital costs—middle-market companies are being forced to reevaluate how they retain, reward, and align executive leadership.

For many privately held businesses, particularly those navigating supply chain volatility or margin compression, executive compensation is no longer business as usual. Boards, compensation committees, and leadership teams are revisiting incentive plans and employment agreements through the lens of adaptability, liquidity preservation, and long-term value creation.

At Nelson Mullins, we are working closely with clients to adjust their executive compensation strategies to reflect this new environment.  Below are six key trends and legal considerations emerging in the middle market today.

1. Shift Toward Cash Preservation and Non-Cash Incentives

With capital tighter and financing more expensive, companies are increasingly moving away from all cash bonuses that jeopardize liquidity and are turning to tools like deferred compensation, phantom equity payments tied to a liquidity event, equity, and profit-sharing arrangements that preserve short-term cash flow.

Legal Insight: Alternative incentive programs can help conserve liquidity while maintaining retention leverage—but they must be structured carefully to comply with Internal Revenue Code Section 409A and protect against valuation disputes, especially if a future exit or recapitalization is on the horizon.

2. Realignment of Performance Metrics Amid Economic Uncertainty

Many companies are reevaluating 2025 and future bonus plans due to unexpected tariff impacts, supply chain disruptions, and/or input cost volatility. Financial targets that once seemed achievable may now require modification—or the company may risk disincentivizing executive talent.

Legal Insight: When modifying financial targets, companies should ensure that any changes are well-documented, include clear communications to executives about the rationale behind the revisions, and update applicable agreements or plan documents accordingly. Transparent, mutually agreed-upon goals will help lessen the risk of misunderstandings or disputes in the future. However, arrangements should be structured in a manner to permit discretion by the company to adjust future performance metrics to reflect extraordinary or unexpected events.

3. Increased Use of Downside Protection (but with Guardrails)

Executives are negotiating for more downside protection in the face of an uncertain economy.  This includes minimum bonus guarantees, severance enhancements, or accelerated vesting of equity awards in the event of termination without cause during downturn-related restructurings.

Legal Insight: Boards, compensation committees, and leadership should evaluate each protection request in the broader context of corporate governance and cap table composition. Vesting of equity awards for numerous executives could create a chaotic cap table and reduce the available equity incentive pool. Any termination-based pay provisions should be clearly defined and limited to avoid unintended golden parachutes under Internal Revenue Code Section 280G.

4. Growing Emphasis on Multi-Year Retention Plans

Boards are looking past the current volatility and focusing on leadership continuity. Multi-year retention programs—structured as cliff-vesting cash awards or phantom “synthetic” equity grants tied to three- to five-year growth goals—are gaining traction.

Legal Insight: Be thoughtful about exit-based triggers, vesting acceleration, and funding mechanisms. Many companies are pairing retention bonuses with restrictive covenants to mitigate post-employment risk and golden parachutes payments under Internal Revenue Code Section 280G. For example, companies, consistent with state law, are including claw-backs if post-employment confidentiality, non-compete, or other restrictive covenants are violated.

5. Stronger Focus on Resilience-Based Metrics

Traditional growth metrics are giving way to measures of operational resilience—margin protection, inventory optimization, customer retention, and supply chain agility. These are increasingly being woven into executive incentive plans, particularly in manufacturing and distribution-heavy businesses impacted by trade policy.

Legal Insight: When adding operational metrics to incentive plans, define terms precisely and apply them consistently. Avoid overly subjective criteria. Inconsistent interpretation can lead to disputes or dissatisfaction when performance is reviewed. However, arrangements should be structured in a manner to permit discretion by the company to adjust future performance metrics to reflect extraordinary or unexpected events.

6. Stakeholder Scrutiny Driving Governance Improvements

Board, investors, and lenders are applying greater scrutiny to executive pay—especially as profits tighten. Boards are adopting more formal governance protocols around compensation, including clearer benchmarking and committee oversight.

Legal Insight: Even in a private company, documenting compensation philosophy, market data, and decision rationale can protect against shareholder friction and support fiduciary obligations.

What This Means for Middle-Market Leaders:

Executive compensation in 2025 must account for more than just performance—it must reflect uncertainty, resilience, and retention risk while providing companies with flexibility to structure or restructure compensation to reflect current market conditions. For many middle-market companies, this means reevaluating not just how much they pay their leadership teams, but how that pay is structured, governed, and aligned with long-term business goals.

Key Recommendations for Middle-Market Companies in 2025:

• Reassess Bonus Plans and Equity Awards in Light of Economic Conditions. Consider whether your performance metrics, payout formulas, and vesting schedules still make sense in today’s volatile market and, more importantly, will they work in the wake of unexpected changes to trade policies or laws?  If not, formal mid-year adjustments may be warranted—with legal documentation to match.
   
• Prioritize Cash Preservation Without Sacrificing Incentive Value. Look to multi-year deferred compensation, phantom equity, or milestone-based retention grants to maintain engagement while protecting immediate liquidity.
   
• Review Executive Agreements for Gaps in Protection and Flexibility. Are severance triggers clear? Is change-in-control treatment appropriately tailored? Do you have tools in place to enforce non-competes or other restrictive covenants, or claw back bonuses if needed?
   
• Formalize Your Compensation Governance. If your company doesn’t have a compensation committee—even an informal one—it may be time to establish basic review procedures, especially if you’re dealing with investor oversight or planning for a future exit transaction.
   
• Communicate Transparently with Executives. Uncertainty breeds anxiety. Clear, proactive communication around changes to compensation plans can preserve morale and reduce legal risk.
   
• Plan Compensation Strategy Alongside Business Continuity Planning. Compensation isn’t just an HR issue—it’s a strategic risk factor. Align your compensation design with your long-term business continuity, succession, and liquidity planning.

How Nelson Mullins Can Help:

Our Executive Compensation & Benefits team advises middle-market clients on designing compensation programs that are adaptable, tax-efficient, and legally sound—even in volatile economic conditions.  Whether you're responding to near-term shocks or planning for long-term liquidity needs or growth, we can help you align leadership incentives with your business goals.