FW Cook Top 250 Report Shows Increased Use of TSR as Modifier, Focus on Relative Goals

The market volatility of the previous two years has produced some changes in long-term incentive grant practices, according to the 49th annual FW Cook top 250 report. The report reflects moderate increases in the use of stock options, a slight increase in the use of performance periods longer than three years, and notable increases in the use of relative metrics. 

The report examines the long-term incentive structures and practices of the 250 largest companies in the S&P 500 Index. It helpfully includes data for 2021 as well as short- and long-term trends. 

• 92% of surveyed companies grant performance awards, 65% grant restricted stock, 54% grant options.
  
  
• The typical long-term incentive mix is 58% performance-based, 22% restricted stock, and 20% options.
  
  
• TSR remains the most common performance metric, used in 69% of performance plans.
   
  • Profit is used by 53% of plans, followed by capital efficiency metrics at 38%.
    
    
  • Revenue is an increasingly common metric – increasing from 20% to 25% over the last five years.
    
    
• 3-year performance plans represent the vast majority of plans – 86%.
  
  
  • However, this is a slight decline from 89% two years ago due to an increase in four-year plans from 1% to 3%.
    
    
• If a plan uses absolute metrics, the payout curve is tighter for top-line metrics such as revenue (95% for threshold – 104% for maximum) versus bottom-line metrics such as net income (91% – 107%).
  
  
  • Relative metrics showed the same median spread (50% for threshold – 150% for maximum).
    
    
  • 70% of relative metrics are targeted at the 50th percentile for target payout, while 29% set target payouts between 51st and 60th percentile, likely due to ISS pressure to target above the median.
    
    
• Several metrics previously measured almost exclusively on an absolute basis are increasingly being used on a relative basis due to extreme uncertainty and market volatility:
  
  
  • 5% of companies now use cash flow as a relative metric (zero in 2019) and 16% use revenue on a relative basis (versus 12% in 2019).

As the report points out, some of these trends may be temporary while others may be here to stay, especially given the impacts of record-breaking inflation and continued market uncertainty.