October 10, 2023
FW Cook’s “Top 250 Report”
FW Cook has released its Annual “Top 250 Report” – which examines the long-term incentive practices & trends of the 250 largest companies in the S&P 500. This year’s report gives special focus to design trends that have emerged since the COVID-19 pandemic (i.e., pre-2020 to current). Here are the key findings:
Prevalence of total shareholder return (“TSR”) metrics has increased 7 percentage points since 2019, with most companies combining market-based metrics with at least one other financial performance metric…
• Increased use of TSR metrics is driven by pressure to better align long-term incentive payouts with shareholder outcomes, despite program participants’ limited control over external factors that influence stock price movement.
• Most companies use TSR with at least one other performance metric (85% prevalence), and the prevalence of using it as a modifier of payouts based on other metrics has grown by 50% since the start of the pandemic (38% prevalence now, up from 25% in 2019)
Non-TSR financial goal ranges have widened to account for goal-setting difficulties, while relative TSR award designs have become more rigorous…
• Wider ranges between threshold and maximum goals for non-TSR financial metrics make it more likely to earn at least some portion of the award while making an above-target earnout more challenging.
• For relative TSR, more companies are setting above-median target goals (30% prevalence now, up from 24% in 2019) and implementing caps on payouts if absolute TSR is negative (34% prevalence now, up from 26% in 2019).
Performance measurement using multiple, discrete annual goals has increased in prevalence…
• 12% of companies measure long-term incentives in annual increments, double the rate in 2019, which is most common in the Communication Services (29% prevalence), Information Technology (24%), and Health Care (19%) sectors.
• However, proxy advisors and investors often express concern that annual goals do not incentivize long-term performance and continue to prefer multi-year end-to-end measurement periods, which remain much more prevalent.
• Setting annual performance goals year-by-year (vs. all-at-once at grant) further deleverages performance risk and has increased by 30% in prevalence (46% prevalence now, up from 36% in 2019), despite being subject to more external scrutiny than upfront goal-setting.
– Liz Dunshee