April 27, 2017
TSR Use Flattens: What’s Taking Its Place?
– Liz Dunshee
According to a recent Equilar report, relative total shareholder return remains the most popular pay-for-performance metric – used by 57% of the S&P 500. But its use has leveled off amid recognition that executives can only control factors that influence TSR – not the final outcome.
How are companies implementing this shift away from TSR? Return on capital & earnings per share are gaining popularity – along with other metrics that drive TSR. Here’s a blurb from Equilar’s summary:
As a result, other popular metrics like ROC and EPS saw a resurgence in 2015. Only ROC consistently increased every year in the Equilar study, rising from 26.1% in 2011 to 30.6% in 2015 for CEOs. While EPS declined each year between 2011 and 2014, use of this metric in 2015 increased from 27.3% of companies to 29.2% in 2015, though still below its high in 2011 of 34.6%.
And for more detail, here’s an excerpt from Equilar’s specific analysis of 10 of the companies:
Most commonly, companies simply reduced how TSR was weighted, and half of the companies in the study employed this strategy. Companies redesigned these awards so that they were no longer contingent on one factor, instead using multiple measures to drive executive performance.
Interestingly, each company split its weighting in half, with one company reducing its impact on the award’s payout from 50% to 25% and four companies reducing it from 100% to 50%. These four companies balanced the use of TSR as a performance metric by incorporating at least one additional metric that affected the awards’ payouts.
While five companies balanced the use of TSR by introducing other metrics, four out of the 10 changed how TSR affected award payout by transforming it from a weighted metric to a modifier. Weighted metrics determine the initial award payout, while modifiers provide a final adjustment.
Three companies instituted a standard multiplier, which can adjust the final payout up or down. In the study, the smallest multiplier could adjust payout down by 90% and up by 110%, whereas the largest could adjust payout down by 75% and up by 125%. Pfizer had a unique modifier among the set of companies—while unlikely, the modifier has the power to reduce the award level to zero or boost it to the maximum in cases of extreme TSR performance.
Finally, one company completely removed TSR from their award design, shifting from a 100% TSR focus to a 100% EBITDA focus.