Beyond Stock Price: The Role of TSR in Incentives

Relative total shareholder return continues to play a prominent role in executive incentive plans, appearing in 58% of S&P 500 performance share programs. Its appeal lies in its straightforward alignment of executive outcomes with shareholder experience and its ease of communication. However, varying the structure of the rTSR metric can produce very different outcomes.

Compensation Advisory Partners frames the conversation around two central design choices: the role rTSR plays in the plan and the comparator group selected.

Decision #1: The role of rTSR: Weighted Metric or Modifier?

Weighted metric approach: A central driver of the payout

• 68% of companies do this, and a 50% weighting is the most common. In fact, 22% rely solely on rTSR, with a 100% weighting.
• Nearly 9 in 10 companies use a percentile ranking within their comparator group. A small minority (7%) express rTSR as a percentage difference from index performance instead of a rank. While this can be a straightforward approach, it can lead to unexpected outcomes especially if large companies have an outsized influence in the index (think the “Mag Seven” companies)

Modifiers: A secondary driver that balances other financial and strategic measures

• 32% of companies use rTSR as a modifier to other metrics, and the majority (76%) of these use an adjustment, usually +/- 25% or +/- 20%. The rest (22%) have an additive adjustment while a few use ranges where underperformance is penalized more than outperformance is rewarded.

Decision #2: The Comparator Group: Index or Custom Peer Group?

Index 

• 61% of companies pick a single index (44% of companies choose the S&P 500) while 48% select an industry-specific benchmark. Indices are preferred due to perceived objectivity and transparency.

Custom Peer Group

• A notable 37% use a custom peer group which can provide a more precise comparison, particularly in niche industries, but requires careful analysis and clear explanations around the selection processes.

The Bottom Line: A well-structured rTSR framework requires clarity on the role of TSR within the plan and thoughtful selection of the comparator group. While it is helpful to understand prevailing practices, the most effective use of rTSR is one that aligns with the company’s unique strategy, industry context and shareholder expectations.