Stock prices have continued rising since our review in July 2025 of the S&P Industrials 400, which focused on the 58 companies with calendar fiscal years, also known as the mid-cap industrials. In that article, our observations found that:
Now, given the continued rise in stock prices, mid-cap industrials are posting double-digit shareholder returns. At the same time, 2025 forecasts for revenue, EBITDA and cash flow have remained steady, with an emerging sense that the tariffs will not cause the sky to fall.
In this article, we explore how long-term incentive (LTI) plan designs among mid-cap industrials contribute to the alignment of CEO pay and performance.
The alignment zone is where CEO compensation actually paid (CAP) and TSR percentiles fall within 25 percentage points of each other (e.g., TSR of 75th percentile and CAP of 60th percentile are considered aligned based on the 15-point differential). Based on that understanding:
Most mid-cap industrials show pay as being aligned with TSR. The prevalence of mid-cap industrials by pay alignment zone:
We looked at the weightings of performance awards, restricted stock/units and stock options/stock appreciation rights (SARs) among mid-cap industrials. There was no significant difference across mid-cap industrials in terms of the weighting on different LTI vehicles nor on the degree of alignment between pay and performance. Performance awards are most heavily weighted, followed by restricted stock/units, with stock options bringing up the rear (Table 1).
| Type of award | Average LTI vehicle weighting | ||
|---|---|---|---|
| Pay is materially higher than performance | Pay is aligned with performance | Pay is materially lower than performance | |
| Performance awards | 59% | 58% | 48% |
| Restricted stock/units | 37% | 33% | 33% |
| Stock options/SARs | 4% | 9% | 19% |
Most mid-cap industrials use two or three performance measures in their performance awards (Figure 1).
TSR is the most common measure, typically on a relative basis. Financial returns on capital, investments or equity are the most common financial goal, which is not surprising given the asset and capital intensity of the industrials sector. Figure 2 shows the five most common LTI metrics among mid-cap industrials.
On average, mid-cap industrials allocate 73% of their LTI awards to absolute goals and 27% to relative goals. (Note: These averages consider only weighted metrics, not the impact of modifiers.) Using both absolute and relative goals provides several benefits. Absolute goals provide clear, tangible goals, while relative goals help ensure that pay is aligned relative to performance.
All companies using TSR measure it on a relative basis (some also measure it on an absolute basis). A little more than half of mid-cap industrials use a custom peer group, while the rest are split between an industry index and a broad index.
Interestingly, the use of indices (industry or broad) is more prevalent among those with pay that is aligned with performance. In cases when pay was misaligned with performance, more than 80% of the time the TSR comparator group was a custom peer group. This may indicate that those custom peer groups are too narrowly defined or too small in sample size to provide a compelling comparison.
The use of modifiers is a minority practice (29% prevalence) among the mid-cap industrials. When used, they typically are based on relative TSR (80%) and permit a +/-20% adjustment. Modifiers are most commonly used by companies that otherwise use only absolute metrics to determine payouts.
We calculated sharing ratios of mid-cap industrials to compare five-year CEO CAP to the increase in market capitalization over the same five-year period. The calculation compares the compensation value of CEOs to the market capitalization change. In these calculations, the:
Interestingly, the sharing ratio when pay is relatively high is not too different from the ratio when pay is aligned. It’s the annual TSR result that differs. When pay is relatively low, the CAP ratio is much smaller than when pay is aligned, and the average annual TSR result is significantly higher than the other pay alignment outcomes (Table 2).
| CAP sharing ratio (5-year cumulative basis) | |||
|---|---|---|---|
| Pay is materially higher than performance | Pay is aligned with performance | Pay is materially lower than performance | |
| Average CAP sharing ratio | 0.84% | 0.88% | 0.44% |
| Average annual TSR | 3% | 15% | 24% |
Performance awards have become the dominant form of LTI among mid-cap industrials, which allocate half or more of their total LTI values to performance awards. Nearly 70% of mid-cap industrials use two or three metrics, and the top two metrics are TSR (typically on a relative basis) and financial returns (e.g., ROIC).
When we study the alignment of CEO pay and TSR performance, we see a trend that portends the additional risk of misalignment. The use of a custom peer group for measuring relative performance is more common among companies that have misaligned pay and performance. Custom peer groups may be too narrowly focused and small in sample size to adequately capture relative performance success. Meanwhile, the breadth and more robust sample of an accepted industry index tends to be used more by companies that align pay and performance.
There are several factors that could contribute to the alignment of CEO pay and performance. When assessing the effectiveness of your LTI program from the lens of pay and performance alignment, key questions to consider include:
If you haven’t assessed the alignment of CEO pay and TSR performance in your organization, you should. There’s still time to conduct this kind of analysis to inform your 2026 incentive plan design.
