The Advisors' Blog

ISS Corporate Solutions recently released a paper “TSR: Measuring Performance in a Tough Market” (available for download) that analyzed relative TSR metrics across the S&P 500. Below is an excerpt from the summary with key takeaways:

– As of the end of last year, 54 percent of companies in our analysis have a relative TSR performance that’s equal to or greater than the median of their performance peer group
– In the year through December 2022, 40 percent of companies maintained the same relative positioning
– Median TSR for all the groups was up as of the end of March 2023 after a general stock price recovery from the lows of 2022
– Although stock prices have generally fallen across the board as a result of the recent market turmoil, relative TSR metrics have remained resilient and have delivered on their promise of helping incentivize executives to outperform their peers in challenging and uncertain times

The full paper goes on to suggest action items when planning incentive awards using relative TSR, including carefully selecting and frequently reviewing your peer group, considering relative TSR in the context of other financial and strategic objectives to avoid duplication and this tip on how to incorporate shareholder-friendly provisions:

Companies should consider shareholder-friendly provisions in their award designs to mitigate concerns. These could include:
– Capping award payouts at Target if the absolute TSR of the company is negative over the period in question. The cap would apply even if the company outperformed its peer group.
– Increasing the target goal level to the 55th or 60th percentile of the performance peer group to reflect true outperformance for target payouts.
– Considering absolute stock price targets based on historical market performance, or get-back-to-even targets, to mitigate shareholder losses during down periods.

– Meredith Ervine