Bloomberg BNA, Report on Salary Surveys™

Study Finds TSR Doesn’t Drive Company Performance

The use of total shareholder return (TSR) as a metric in long-term incentive plans has not been effective in improving company performance, according to an analysis by Pearl Meyer and Cornell University’s ILR School’s Institute for Compensation Studies.

Pearl Meyer and Cornell studied S&P 500 companies’ use of TSR in LTI plans over a 10-year period and whether it had an impact on the firms’ performance. The research found that there appeared to be an unclear link between TSR and business results.

“The assumption about TSR is that linking stock performance to executive compensation would lead to improved performance because, in part, it would align incentive awards with shareholder interests,” saidDavid Swinford, President and CEO of Pearl Meyer.

Instead, the Pearl Meyer and Cornell research found little to suggest that including TSR in a LTI plan led to improved financial performance.

Institutional Shareholder Service and other proxy firms use TSR because it’s something that the shareholder can use to compare firms, Swinford said. TSR would seem to be a good metric to use over the long term. “Everyone agrees the purpose of the business is to make profit for the owners,” Swinfordsaid.

There is nothing that could easily replace TSR, according to Swinford. “There isn’t a single good measure or pair of measures that would be a good metric for all companies. There are different drivers of value creation,” Swinford said.

Using a metric other than TSR would require some communication skills of a company, according toSwinford. If an organization decides to use another measure other than TSR, then it should have good reason to do so, he said. “It’s incumbent on every company to explain to shareholders why they are pursuing the strategy they pursue,” he said.

“Every investor wants to know what the long term strategy is and how to get there,” Swinford said.