SAN JOSE, Calif.
Aug. 9, 2012
/PRNewswire/ -- As shareholders call for closer links between executive compensation and corporate performance, companies continue to migrate toward the use of performance-based equity over traditional stock options and restricted shares. In particular, performance-based equity plans using Relative Total Shareholder Return ("Relative TSR") metrics are on the rise. Radford's new web portal, launched today at
, explores Relative TSR plans in unmatched detail and reveals a number of emerging trends. Key findings are presented below.
Relative TSR Is the Top Metric for Performance-Based Equity Compensation
According to new research published today by Radford, an Aon Hewitt Company, nearly 600 US companies have adopted Relative TSR plans since 2005, including more than 140 new plans in the last two years. Under Relative TSR plans, final award payouts are typically tied to relative stock price returns against a peer group or a stock market index. These findings make Relative TSR the most prevalent performance metric for equity compensation programs today.
Prior to the economic downturn of 2008, Relative TSR plans were considered fairly uncommon. However, they now serve as a go-to strategy for creating improved alignment between the long-term interests of executives and shareholders.
Relative TSR Plans Offer Companies Diverse Strategic Benefits
Performance-based equity incentive plans with Relative TSR metrics offer companies a wide range of important benefits, including:
- Reduced forecasting requirements for long-term performance goals, especially in an uncertain macro-economic environment.
- Increased flexibility for companies to disclose performance goals to shareholders in a clear and concise manner without the risk of releasing key business strategies.
- Reduced use of redundant performance metrics between annual cash incentive plans and long-term equity incentive plans, improving the overall risk profile of executive compensation programs.
- The ability to motivate and focus employees to perform against a defined set of competitors.
- Clearer links between final executive compensation payouts and shareholder value creation.
- A renewed focus on setting transparent goals that matter to shareholders.
"Viewed from almost any angle, Relative TSR plans are an increasingly attractive alternative for Compensation Committees looking to improve the link between pay and performance," notes
Linda E. Amuso
, President, Radford. "Relative TSR plans, while not a cure-all in every situation, are easy to communicate to employees, directly link executive compensation to shareholder returns, can be communicated to shareholders in a transparent manner, and, when designed appropriately, can reduce the administrative burden of using performance-based equity."
Relative TSR Programs Continue to Evolve
Radford's research also indicates Relative TSR programs continue to evolve as companies seek to further improve links between compensation and performance. Examples of novel design features include "outperformance" plans in which TSR is measured against benchmark performance levels for an appropriate market index, and "collared" plans in which potential payouts are capped to avoid oversized payouts when performance is exceptionally high or when absolute company performance is negative, but still above competitor companies.