Matt Turner discusses which metrics beyond Total Shareholder Return (TSR) help create an aligned pay-for-performance compensation program.
Q. Thanks to Pearl Meyer’s research with Cornell University, we’re learning that TSR isn’t a driver of corporate performance when used in long-term incentive plans. What metrics do belong in the pay-for-performance equation?
A: We advise our clients to define their “centerpiece” financial performance measures. Which metrics appropriately reflect profitable growth and returns, consistent with your company’s context? Also consider other operational and strategic measures that are consistent with your business plan. When these measures are properly balanced, they reflect your company’s model of value creation. Designing your incentive programs around these benchmarks, rather than a short-term TSR goal, will be much more effective at spurring corporate performance and mapping your pay programs to the desired performance levels.
Q. It’s possible some companies may encounter external pressure if they go this direction or they may be reticent to try, believing proxy advisors or shareholders expect to see a TSR-based metric. What do you tell them?
A: TSR is an alignment metric rather than an incentive metric. For many companies, it may be appropriate to balance the two types. However, we believe the increased prevalence of TSR in incentive plans may be an overreaction to those external pressures. Programs that are set up to reflect specific financial, operational, and strategic elements that drive value for your company ensure that management has “line-of-sight” between their decisions and value creation. An understanding of the proxy advisors’ views is important, but should be secondary to ensuring an effective pay program. Don’t let the tail wag the dog!
