When the topic of conversation is tariffs, few sectors are discussed more than the automotive industry — and rightly so, given the importance of this industry in the U.S.
The auto industry contributes more than $1 trillion annually to the U.S. economy, or about 5% of GDP. It supports more than 10 million jobs across the country, representing about 5% of total U.S. employment, and is the fourth-largest R&D investor among all manufacturing industries.
The impact of tariffs on large manufacturers is expected to be significant, and auto component manufacturers will feel the squeeze of cutting costs while industry demands waver. Combine tariffs, the general slowdown of the economy and changing landscape of electric vehicles vs. traditional gas vehicles, and it’s clear that the industry has never been under more pressure to manage costs and deliver meaningful results to shareholders.
This article explores the incentive design programs for 40 automobile and automobile-component companies with revenue of more than $500 million, providing insights into the early impact of tariffs on industry expectations, where the industry is now, and what might be around the corner.
Among the auto companies reviewed, operating income and cash metrics stand out, with cash-based metrics (i.e., operating cash flow or free cash flow) being much more prevalent than the S&P 1500 (Figure 1). This points to an industry focused on operational efficiency and managing expenses.
We also noted that auto companies tend to focus on fewer metrics than the S&P 1500 (Figure 2).
Despite the uncertainty and volatility in the market that started 2025, consensus analysts’ estimates for two of the three financial metrics in Table 1 post-Liberation Day were higher than pre-Liberation Day (April 2, 2025). Pre-Liberation Day expectations suggested a meager outlook going into 2025. Post-Liberation Day, however, expectations stayed about the same or slightly improved.
| Period | Percentile | Revenue growth | EBITDA growth | Operating cash-flow growth |
|---|---|---|---|---|
| Pre-Liberation Day (March 1, 2025) | 50th percentile | 0% | 3% | 6% |
| Post-Liberation Day (May 1, 2025) | 50th percentile | 1% | 1% | 7% |
| Recent expectations (Sept. 30, 2025) | 50th percentile | 1% | 1% | 1% |
Expectations for revenue and EBITDA growth have remained consistent throughout the second and third quarters of 2025. However, operating cash flow expectations declined. These single-digit growth rates don’t tend to lead to strong shareholder return, potentially affecting annual and long-term incentive (LTI) payouts in the industry.
Turning our focus to the actual year-over-year results for the first two quarters of the year, most companies are flat to down across revenue, EBITDA and cash-flow growth. However, the top quartile showed compelling growth results (Table 2).
| Percentile | Revenue growth | EBITDA growth | Operating cash-flow growth |
|---|---|---|---|
| 75th percentile | 7% | 10% | 24% |
| 50th percentile | 2% | -3% | -6% |
| 25th percentile | -4% | -15% | -24% |
It’s worth pointing out that, in the past three years, auto industry annual incentive bonus payouts have lagged the general industry (98% of target, on average, vs. 113% of target for the general industry).
Equity granting practices among auto industry companies tend to mirror the broader market, with a primary focus on performance and restricted shares. Stock options and long-term cash are less common (Figure 3).
Anecdotally, we have heard of auto companies revisiting and adjusting their mix of time-vested vs. performance-vested awards for top executives. This puts more emphasis on time-vested awards and less on performance-based awards, effectively addressing retention as well as minimizing concerns about setting long-term goals in the current uncertain environment.
Contrary to annual incentive plan metrics in the automotive industry, long-term plan metrics tend to be similar to the S&P 1500 (Figure 4).
Total shareholder return (TSR) is the most common metric, followed by return-based metrics and earnings. When measuring TSR, relative TSR is more common than absolute. Also of note: Cash-flow metrics are more prevalent in the auto industry.
Like annual incentive plans, fewer metrics (one or two) tend to be more common, whereas general industry companies are more likely to use two or three (Figure 5).
As TSR is one of the most common metrics, we thought it was useful to look at General Industry and broad Manufacturing industry comparator groups from our 2024 Long-Term Incentives Policies and Practices Report. When relative TSR is used, auto companies are most likely to measure against a custom peer group followed by an industry index. None measured against a broad index (Figure 6).
Year-to-date stock price returns have been volatile in 2025 as of the publication of this article. Liberation Day caused a lot of uncertainty in the industry and more broadly, leading to a steep decline in TSR in the first four months of the year.
Since then, automotive companies have not just rebounded; year-to-date returns now exceed the broader market and S&P Composite Industrials sector. This could signal investors’ high expectations for the industry after regulatory easement on greenhouse gas rules (Figure 7).
This turnaround is in stark contrast to historical results in the auto industry, which have tended to underperform general industry counterparts in the past five years. The auto industry posted a compound annual growth rate of -3.5% compared to 10.4% for the S&P 1500 composite.
As the end of the year approaches, final outcomes are still unclear. However, several themes are emerging:
Non-calendar year fiscal companies that set targets in late 2024 will provide an early look at any special discretionary actions compensation committees have taken so far in 2025, but it will still be a few months before that information is available.
