Methodology and Key Takeaways
Using the CompanyIQ platform, MyLogIQ reviewed three years of long-term incentive award metrics for Russell 3000 (R3000) companies during compensation years 2018, 2019 and 2020. Companies that filed their most recent proxies by 12/1/2021 were included in the results.
- Modifying award payouts based on total shareholder return (TSR) performance is gaining traction in the R3000 where 12% of companies used a TSR modifier in their 2020 executive compensation metric portfolio.
- Four out of five TSR modifiers were linked to TSR performance relative to a group of comparator companies, rather than on an absolute basis.
- Target performance was set at the 50th percentile for 79% of relative total shareholder return (rTSR) modifiers, but R3000 boards assigned target performance above the median for 18%.
- The most commonly assigned rTSR modifier payout adjustments were -25%, 0%, and +25% for threshold, target, and maximum performance, respectively.
TSR, a measurement of income derived from and capital appreciation of an investment, gained prominence since the introduction of Say on Pay votes as a means to link the performance of a company’s stock price with the payouts of long-term equity awards granted to top executives. Well over half of companies in the large-cap indices now utilize TSR as a metric in their long-term plans. Moreover, using TSR performance to adjust final payouts of awards previously determined by other metrics, rather than a discreet and weighted metric itself, has grown increasingly popular with 12% of R3000 companies using these TSR modifiers.
Data and Analysis
Rather than weighting TSR to determine a payout on a portion of an award, e.g. linking 33.3% of total potential shares to TSR performance, TSR performance instead determines a final adjustment to the value of the award, e.g. -25% for poorer results and +25% for superior ones. Utilizing the CompanyIQ® platform, MyLogIQ found that the proportion of R3000 companies that used a TSR modifier grew by two percentage points per year from 2018, when 8% leveraged a TSR modifier, to 2020 when that figure was 12%. (Fig 1)
Fig 1 - Russell 3000 TSR Modifiers