Total shareholder return is one of the most prevalent metrics in long-term incentive plans. Now, a newer way of incorporating TSR is starting to gain traction. A blog from MyLogIQ gives details on an emerging practice that Lynn identified back in 2020. Here’s an excerpt:
Rather than weighting TSR to determine a payout on a portion of an award, e.g. linking 33.3% of total potential shares to TSR performance, TSR performance instead determines a final adjustment to the value of the award, e.g. -25% for poorer results and +25% for superior ones. Utilizing the CompanyIQ® platform, MyLogIQ found that the proportion of R3000 companies that used a TSR modifier grew by two percentage points per year from 2018, when 8% leveraged a TSR modifier, to 2020 when that figure was 12%.
TSR performance is typically measured relative to a performance peer group, which can be a designated custom group of performance peers selected by the board or a stock index such as the S&P 500. For example, a board can target 50th percentile (pctl) TSR performance within a group rather than an absolute TSR goal. In 2018, 72% of R3000 TSR modifier metrics were relative. In 2020, 80% of metrics were rTSR.
The blog says that the modifier is typically a 25% or 20% adjustment — which can be positive or negative based on achievement of threshold, target (typically no adjustment) or maximum performance hurdles. However, one downside of this approach still being somewhat new and unique is that some equity award software may not fully accommodate it. That means that tracking awards and expense calculations could get complicated.
-Liz Dunshee, CompensationStandards.com February 16, 2022
