The Advisors' Blog

The popularity of relative TSR as a long-term incentive plans metric makes a lot of sense given how challenging it can be to set multi-year goals for absolute metrics. I have always thought of rTSR plans as pretty much identical company to company — with the exception of the rTSR comparison group. But this HLS blog from the Equilar team says it’s actually not so “plain vanilla” and discusses the variables to consider when using it as a metric. Those include:

– The length of time to measure

– The comparator group

– Whether to factor in stock price averaging

– The weighting or modifier effect on the overall payouts

– Whether to implement additional contingencies (e.g., absolute floors or caps)

– The payout scale (most commonly threshold payout of 50%, maximum payout of 200% and threshold/target/maximum goals of the 25th/50th/75th percentiles)

All these factors have an impact on the Monte Carlo valuation that determines the accounting expense the company recognizes on the awards. And they may have an impact on company performance. Looking at a sample of 1,049 CEO awards between 2020 and 2024 by Russell 3000 companies, the companies with more rigorous rTSR plan design outperformed the other companies in the sample (but the blog says a larger study is needed to determine whether there’s really a correlation).

– Meredith Ervine