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What proxy advisory firms expect when it comes to pay-for-performance doesn't always align with what companies should be doing. For example, investors prefer to see relative total shareholder return (TSR) in long-term incentive programs. “As a result, relative TSR has soared in prevalence as a long-term incentive metric,” says Steven Van Putten, a managing director with Pearl Meyer & Partners.
According to Van Putten, TSR is “not really an incentive metric; it's more of an accountability metric, because TSR really is an outcome of the company's execution of its business strategy and how investors perceive that,” says Van Putten. “TSR is not something an executive can necessarily influence, or control, through their actions.”
Also, a well-designed executive incentive program shouldn't necessarily be built on the basis of what other companies are doing, or what proxy advisory groups prefer, says Van Putten. Rather, it should “align with, and support, a company's business and leadership strategy,” he says.