Performance Shares Still King, Says Survey

34% of companies with a TSR metric now structure it as a modifier, according to the most recent Clearbridge 200 survey examining LTI practices for the top 200 companies.

Why it matters? The report highlights interesting trends in LTI plan design including LTI vehicles, performance-vested design and TSR goal setting.

LTI Vehicles

• Number of vehicles.
  
  
  1. While two vehicles have been the most common for large-cap companies since 2020, mid-caps have now followed suit, moving from 54% to 73% over the three-year period.
     
     
  2. Large-caps are now more likely to use 3 vehicles than mid-caps, with prevalence rising from 27% to 30% whereas the prevalence among mid-caps dropped sharply from 23% to 13%.
     
     
• Vehicle type.
  
  
  1. PSUs are “king.” Prevalence of performance shares increased for both mid and large-cap with large-cap growing from 86% to 92% since 2020.

Performance-vested LTI Design

• Number of performance measures.
  
  1. Two measures are the most common for mid-caps (52%) but large-cap companies tend to use more than two measures. The usage of 3 measures increased from 27% to 33% and the use of 4+ measures remained steady at 10%.

• Types of performance measures.
  
  
  1. TSR tops. 72% of large-cap use a stock price/TSR as metric, an increase from 65% in 2020. The overwhelming majority use TSR.
     
     
  2. 69% of large-cap companies use both absolute and relative measurements (compared to 56% in 2020). Half of mid-cap companies use both measurements.

• 3-year Measurement Approach
  
  1. The cumulative approach to measuring performance over the 3-year period is by far the most common (78%). A trend of using more than one measurement approach for different performance measures has become more common.

Relative TSR Goal setting

• TSR Modifiers.
   
  1. 34% of companies that use stock price/TSR as a performance measure use some type of TSR modifier, the most common being a relative modifier.
     
     
  2. The most common modifier adjustment is +/ - 25%.