NEW YORK–(BUSINESS WIRE)–While relative total shareholder returns (TSR) continues to be a widely used metric when assessing company performance, new research by executive compensation consulting firm Pay Governance (paygovernance.com) suggests it is imperfect as an independent measure.
As a compensation committee must communicate its company’s performance to shareholders and pay executives, comparing the company’s TSR to that of its competitors is an attractive benchmark to use, considering multi-year goal-setting challenges and external pressures from proxy advisory firms.
However, Pay Governance has found that this does not tell the full story.
“Relative TSR is an output without a specific connection to the financial and operational measures in the company’s business plan,” said Pay Governance Consultant Julia Kennedy. “This minimizes the incentive impact, resulting in a game of chance with reversion to the mean.”
Relative TSR is the most common metric cited when companies implement relative performance goals, but compensation committees should consider its limitations, and implications, before determining its role, Kennedy said.
“We find that many companies that are now adopting relative TSR are implementing it as a performance modifier in their long-term plans in lieu of using it as a free-standing metric,” said John R. Sinkular, Pay Governance Partner. “As a performance modifier, relative TSR can overcome many of the shortcomings of it being used as an independent metric.”
Pay Governance continues to monitor corporate board, corporate management and institutional investor community opinions on the value of relative benchmarking. Its consulting practice advises public company compensation committees both on setting pay opportunity values based on competitive market data, as well as assessing after-the-fact pay-for-performance using realizable pay and other appropriate methodologies.
Pay Governance LLC is an independent consulting firm focused on delivering advisory services to compensation committees. The consultancy also advises the management of companies in situations in which the firm does not serve as the independent committee advisor. Pay Governance has locations throughout the United States in New York, Boston, Detroit, Philadelphia, Pittsburgh, Chicago, St. Louis, Dallas, Cleveland, Charlotte, St. Petersburg, San Francisco and Los Angeles. The firm also has strategic affiliate relationships with Pay Governance Japan and Pay Governance Korea. For more information, visit www.paygovernance.com.