TSR, Executive Compensation, and Firm Performance

No evidence found of link between firm performance and inclusion of TSR in executives’ long-term incentive plans
Thursday, October 1, 2015

An analysis of S&P 500 company data over a decade reveals that embedding total shareholder return (TSR) as a performance metric into the long-term incentive plans of executives may not be the blanket solution for linking executive incentives with shareholder interests.

“Currently, almost half of the 2014 S&P 500 firms offer TSR plans to their named executive officers (NEO) - a twofold increase between 2004 and 2013,” states the research brief. While growth in the use of TSR plans is observed across all sectors, the average weight placed on TSR in the compensation plans has been falling since 2004, the starting point for the study.

“Most surprising perhaps,” states Hassan Enayati, one of the researchers on the project and lead author of the research brief, “is that the evidence from our statistical regression analysis indicates that there is either no impact of TSR plans on firm performance or weak evidence of a negative relationship.”

Despite the expanding use of such TSR plans, the academic analysis of the link between such metrics and firm performance is limited. According to Enayati, this work not only clarifies the trends associated with expanding TSR plans for executives of S&P 500 companies, but also surfaces the “need for further empirical research on the relationship between the inclusion of TSR and other metrics of firm performance in the compensation plans of top executives and the ultimate sustainable financial success for the firms they lead.” The future steps the research team is considering is examining, for example, more refined measures of TSR awards. In addition to Enayati, researchers on the broader project team include Kevin F. Hallock, Stephanie Thomas and Linda Barrington.

Funding, data and valuable insight on the structure of executive compensation were provided by Pearl Meyer, jointly agreeing with the Institute for Compensation Studies (ICS) authors on the research question of interest.

For Wall Street Journal reporting on this research, see http://blogs.wsj.com/cfo/2015/09/29/tsr-a-growing-pay-metric-may-not-be-useful-study/

For full research brief, see TSR, Executive Compensation, and Firm Performance (PDF, 198 KB) - An ICS Research Brief