March 12, 2024
Improvements in Relative TSR Design at Technology Companies
This Compensia Thoughtful Pay Alert discusses trends and key practices among companies in the technology industry that award executives PSUs with a relative TSR metric. The use of relative TSR remains popular (approximately 64% of the covered technology companies granted PSUs with a relative TSR metric), with some companies (particularly in the software space) making some improvements in program design to strengthen pay and performance alignment.
Where both relative TSR and financial metrics are weighted components of the plan formula (85% of the companies including both types of metrics), TSR accounts for, on average, 45% of the payout.
The other 15% of companies use relative TSR results as a modifier to adjust payouts determined using financial or absolute stock price metrics, generally +/- 25 percentage points. No company eliminated a relative TSR metric for the current year, while 10 companies introduced relative TSR PSUs for the first time.
The alert highlights these design improvements:
– Bar raised on performance levels required for target and maximum payouts (i.e., above 50th percentile at target and above 75th percentile at max)
– Payout caps added for negative absolute TSR (nearly 50% of companies)
– Adjustment in measurement approaches
On measurement approaches, the alert says percentile rank remains the most common (at 70%), but “more companies are questioning the impact of using a percentile rank approach on the plan outcomes” since select indices are “becoming increasingly weighted toward a small group of highly-valued companies (i.e., top 10 constituents represent 30% of the S&P 500; Apple, Microsoft, Amazon, NVIDIA, Alphabet and Meta represent 40% of the NASDAQ).” This is causing an uptick in companies considering or implementing a Percentage Points vs. Index approach (25%) or Points vs. Median approach (5%). The alert reviews the advantages and disadvantages of each approach.
– Meredith Ervine