Notwithstanding my preference for financial measures, relative TSR can be a reasonable default measure.
Earnings growth, followed by returns and revenue growth, has the greatest impact on TSR.
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So, what could be better than forging a direct link to TSR itself in the incentive plan?
Their average annual TSR of 17.3 percent is nearly 3 times greater than that of the MSCI Emerging Markets Index.
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Unlike TSR, good financial and strategic measures can communicate how to drive value, and therefore, can be infinitely more motivational than using value itself.
Three TSR provisions to take effect Sept. 27 should significantly reduce the numbers of late-night TV advertisements that promise a quick settlement for pennies on the dollar.
Anyone who has read my book, Fair Pay, Fair Play, can see that I am an ardent proponent of achieving alignment between executive pay and TSR.
The regulations, which extend the TSR rules to cover calls consumers make to firms in response to debt-relief ads, also will ban companies from misrepresenting what they can do.
Also, Morgan Stanley was ahead of its peers by attaching long-term performance criteria to the vesting of stock options based on ROE, TSR, and Pre-tax Profit measures over three years.
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Because while TSR does a good job of measuring performance outcomes for shareholders, it does not do a good job of signaling to plan participants how to deliver those outcomes.
With relative TSR, companies can have confidence that the plan captures something that investors care about, and that the plan is likely to produce good pay and performance alignment.
The good news is that half of the 24 industry groups use metrics that most highly correlate to value, and also use TSR as a direct measure of shareholder value.
FORBES: Think Your Annual Review was Tough? See How CEOs' Performance Is Evaluated
TSR, which dates back to the 17th century, is simply a measure of historic share-price appreciation plus dividends paid, expressed either in terms of cash or as a percentage return.
Pro-Tect Systems is now being replaced by start-up firm Tactical Safety Responses (TSR), which is based in the same area and will use some of the same staff as its Northampton-based predecessor.
Celgene, on the other hand, produced even more growth (innovation?) than was implicit in their 2005 valuation and so their return to investors over the next five years was outstanding (62% cum relative TSR).
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In a recent Compensation Committee meeting, one of the executives participating in the meeting asked whether or not I favor Total Shareholder Return (TSR) as a performance measure for performance share plans.
The Alignment Reports clearly show whether or not the CEO pay of each bank was: (1) reasonable compared to the relevant market, and (2) sensitive to company performance, as indicated by Total Shareholder Return (TSR) over time.
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In addition, relative TSR is used by vast majority (80 percent) of FTSE 250 companies in the UK for their performance share plans, due largely to the fact that their version of Say on Pay was implemented back in 2006.
The companies in these industries are either not using the metrics that are most strongly correlated to value or, when the overall correlations of financial metrics to shareholder value are poor, they are not sufficiently using TSR as a direct measure of shareholder performance.
FORBES: Think Your Annual Review was Tough? See How CEOs' Performance Is Evaluated
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