The Advisors' Blog

– Liz Dunshee

This Aon memo looks at why companies might be moving away from TSR as a central performance metric – and suggests alternatives for three tech industries:

– E-Commerce Companies: Internet-related businesses have historically focused on top-line growth as the primary measure of success, but since growth can be rapid and unpredictable, we recommend e-commerce firms consider using measures like revenue, operating income and EBITDA. This focuses executives’ attention on key goals and reduces the importance of precise goal-setting that is typically required for bottom line or return metrics. Smaller e-commerce companies might want to focus on volume-based metrics (e.g., number of customers or transactions), revenue growth and market share as these will be key measures of success for firms not yet reporting a profit.

– Software companies: This high-growth, high-profit industry should focus on metrics that are balanced across various operating and financial measurements. Indeed, our research finds software companies are moving toward a combination of market and operating metrics — from 28% that reported using both in 2015 to 33% in 2016 (based on 2016 and 2017 proxy statements ). The most common operating metrics include revenue growth followed by operating income and earnings per share, according to the 2017 Radford Performance-Based Equity Report for Software Companies (available for $750).

– Semiconductor companies: The semiconductor industry is unique in that it is inherently more cyclical because the business is more directly related to consumer spending. As such, we find there are two common approaches companies take to designing incentive plans. The first is designing performance plans with aggressive metrics that pay out big when business is booming, while the alternative approach is more conservative, developing consistent payouts at, or slightly below, target most years. When deciding which approach is best for your organization, we recommend semiconductor companies think about what approach aligns best with their compensation philosophy, culture and what their employees value.