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Research released today shows that the use of total shareholder return as a metric for incentive programs does not lead to improved company performance.
The study by Cornell University ILR School’s Institute for Compensation Studies, in collaboration with consultancy Pearl Meyer, found that there was not strong evidence that using TSR in a long-term incentive program had a positive influence on one-, three- or five-year TSR, return on equity or earnings per share.
David Swinford, President at Pearl Meyer, says that he is not surprised by the results that the use of TSR as an incentive metric was not associated with better performance. “[TSR] is good at aligning the executive’s total rewards with the returns of the shareholders, but it really doesn’t have value as an incentive tool,” he says.
Compensation committees do have to focus on alignment, Swinford says, “but there is so much guidance around the use of TSR… It is much harder to figure out what are the right measures to select for long-term performance and it is harder to establish the appropriate goals for the management team. So at the end of the day, many start defaulting back to what is more well known.” Swinford continues, “They know if they use TSR they will have better alignment over the long term and are going to have less external criticism.”
Swinford says that if companies have a strong sense of what it is going to take to drive future value creation and they know what levers to pull, those should be prioritized in executive comp plans.
The Cornell research was the first academic effort to address the topic of TSR as a metric.