The NASPP Blog

These days you can’t talk to a compensation consultant without having a discussion around the increased usage in performance-based equity plans, especially around the growing trend of total shareholder return (TSR) as a relative long-term performance measure. Relative TSR plans are ones where a company measures the return of its own stock against the performance of other companies (typically a group of 15 to 20 pre-defined industry peers) over a period of time. How the company’s stock performs as compared to its peers is then used as the metric to determine whether vesting in the award is achieved and at what payout level.

Relative TSR plans have been used in Europe for several years, and have recently grown in popularity in the United States. In this current market, relative TSR is likely to become a predominant long-term performance measure when setting performance goals since, in a volatile market like the one we are experiencing now, it can be difficult for companies to identify absolute performance goals e.g., where vesting is dependent on the company achieving specified targets, such as a threshold stock price. And, with relative TSR as a performance metric, the award holder can often realize some value from the underlying award regardless of market/economic conditions, provided that the company outperforms its peer group.

The length of the performance period, the number of peer companies to be included in the plan and which peer companies should be included in the plan are among some of the criteria to decide when designing a relative TSR plan. It’s probably not critical to understand all aspects of the design of a relative TSR plan, however, what you should plan for is the likelihood that you will have to administer one of these plans in the near future and as a result will want to have some familiarity with how they operate. There are a number of companies who have already adopted TSR type plans–for example, see Intel, Yahoo, or Bank of New York Mellon–the details around these plans are available in their respective proxy statements. This is a good place to start your education around this topic.  In addition, we have several articles that discuss TSR as a perforamnce measure and relative TSR plans in our  Performance Plans portal, including Octane-Driven Performance – Pearl Myers & Partners, Correlating Performance Metrics and Business Value in Growth – Workspan, Plan Design Considerations with Performance Shares – Radford, and Relative TSR — A U.K. Perspective – Towers Perrin.  And, finally, be sure to check out www.RelativeTSR.com for further information on this topic.

As companies look for new ways to set performance goals in this current marketplace, it’s likely they will look to relative TSR as a performance measure; make sure you are prepared to support these plans!

-Robyn