The Advisors' Blog

– Lynn Jokela

One size doesn’t fit all when it comes to incentive metrics – selected metrics vary across companies and they need to due to specific business strategies, peer practice, investor feedback, etc.

This recent article in Ethical Boardroom discusses how TSR correlation analysis can provide another tool in the shed to help compensation committees and management understand how incentive metrics track with TSR – in other words, “how one variable (i.e. TSR) is affected by changes in a second variable (i.e. financial performance metric) over time.”

As compensation committees work with their comp consultants, they consider a multitude of factors when selecting incentive metrics.  And many factors will impact TSR, for example, company-specific performance as well as macro-economic factors.  The article walks through a sample TSR correlation analysis – explaining the inputs and how to interpret the analysis. So, if you have an eye for stats, this method can help identify metrics that:

– Have historically had the strongest correlation with value creation

– Are the most volatile

– Are reasonable relative to key value drivers and metrics used by companies in similar businesses