Executive Pay: Creating Real Alignment With Shareholders

Executive Pay: Creating Real Alignment With ShareholdersZoom inDownload PDF

Nobody really likes total shareholder return (TSR) as an incentive plan metric.

Nobody, that is, except the major shareholders of publicly traded companies. Boards feel pressured to adopt TSR as a metric because it is easy to explain to shareholders, but they don’t really embrace TSR due to the lack of transparency and understanding among executives. Shareholders, on the other hand, have strongly supported TSR as a key metric of success. This is the new reality to which board members and executives need to be sensitive when designing incentive plans.

We recently attended a Nasdaq compensation committee forum attended by board members, top HR executives and representatives from a number of institutional investors where the major topic of discussion was about the growing prevalence of TSR and relative TSR (rTSR) metrics in executive compensation. There was broad and general agreement that linking compensation to TSR does not make a very good “incentive” plan. Executives cannot control TSR directly, and it generally makes more sense to link pay to the strategic priorities of the business that executives can control, like revenue growth, innovation, margin management and returns on investments. This idea of strategic alignment has been the core principle for designing effective incentive plans for more than 30 years, and it continues to be relevant today.

Read the entire article by John Borneman, “Executive Pay: Creating Real Alignment With Shareholders,” originally published in the January 2016 issue of Workspan magazine.