February 16, 2022
TSR Gains Traction as a Modifier
Total shareholder return is one of the most prevalent metrics in long-term incentive plans. Now, a newer way of incorporating TSR is starting to gain traction. This blog from MyLogIQ gives details on an emerging practice that Lynn identified back in 2020. Here’s an excerpt:
Rather than weighting TSR to determine a payout on a portion of an award, e.g. linking 33.3% of total potential shares to TSR performance, TSR performance instead determines a final adjustment to the value of the award, e.g. -25% for poorer results and +25% for superior ones. Utilizing the CompanyIQ® platform, MyLogIQ found that the proportion of R3000 companies that used a TSR modifier grew by two percentage points per year from 2018, when 8% leveraged a TSR modifier, to 2020 when that figure was 12%.
TSR performance is typically measured relative to a performance peer group, which can be a designated custom group of performance peers selected by the board or a stock index such as the S&P 500. For example, a board can target 50th percentile (pctl) TSR performance within a group rather than an absolute TSR goal. In 2018, 72% of R3000 TSR modifier metrics were relative. In 2020, 80% of metrics were rTSR.
The blog says that the modifier is typically a 25% or 20% adjustment – which can be positive or negative based on achievement of threshold, target (typically no adjustment) or maximum performance hurdles. However, one downside of this approach still being somewhat new & unique is that some equity award software may not fully accommodate it. That means that tracking awards and expense calculations could get complicated.
– Liz Dunshee