Andrew Gordon is a Senior Director of Research Services at Equilar, Inc. This post is based on his Equilar memorandum.
Relative TSR has been one of the most popular long-term incentive plan metrics since the accelerated adoption of performance-based equity plans in the Say on Pay era. In periods of higher volatility, companies are more likely to adopt relative metrics of any kind, but most commonly relative TSR, due to the difficulty of making accurate long-term forecasts for absolute targets. With the recent tariff announcements from the Trump administration, it’s likely that many companies will increase the weighting on relative performance and/or shorten performance periods to maintain line-of-sight for their executive team.
While relative TSR is often viewed as the plain vanilla choice of plan designs, there are still several variables to determine when selecting it as a metric. For example, a company has to decide the length of time to measure, the comparator group, whether to factor in stock price averaging, the weighting or modifier effect on the overall payouts, and whether to implement additional contingencies such as absolute TSR floors or caps to avoid misaligned payouts if the company performs poorly or well on an absolute basis. However, one of the most impactful decisions is the payout scale, i.e. the threshold, target, and maximum performance levels and their corresponding payouts. These inputs heavily factor into the Monte Carlo valuation of the award which ultimately determines the accounting expense the company will have to recognize.
