February 5, 2021 Executive Compensation Executive & Director Pay Design Articles

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Executive & Director Pay Design

How do you design a relative TSR Plan? A "First Question"

By taking the time to lay out your objectives and see how others in the industry do TSR plans well, you’ll be on your way to having a good TSR Plan. Here are some more tips to get you going:

Concept

Long-term incentive plan that measures and pays out in whole, or in part, based on a company’s shareholder returns relative to a comparator group over a specified time period

Objectives

  • Increase shareholder alignment
  • Reduce difficulty in long-term goal setting
  • Mitigate macroeconomic volatility through the use of a relative metric

Challenges

  • Limited line of sight for most participants, particularly lower in the organization
  • Payouts can be driven by macro-environment rather than management accomplishments/contributions
  • May not align with absolute results
  • Consistent outperformance on shareholder returns is difficult to achieve
  • May be difficult to select the right comparator group
  • Small differences in performance can result in large differences in payouts depending on the payout curve and clustering of outcomes
  • Requires determination of appropriate payout curve and spread
  • May not be motivating to executives

Initial Checklist

  1. Confirm relative TSR makes sense to use in the business context
  2. Determine whether relative TSR should be the sole metric or used in combination with other metrics
  3. Consider different peer groups or indices the company could be measured against
  4. Model the company’s historical performance relative to the different groups to determine which one is best correlated
  5. Select a general approach/methodology (e.g., modifier, percentile rank, or difference from index?) based on the data distribution and the approach that will drive the most meaningful outcome with the fewest unintended consequences; build the payout curve
  6. Assess how accounting can impact outcomes
  7. Ensure payouts are not overly sensitive to grant timing
  8. Analyze impact on share reserves, shareholder outcomes, and disclosure

Need some more help?

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