Relative Total Shareholder Return (“TSR”) Modifier Programs Considerations and Accounting Implications

Written By: Deidre Salisbury

Companies considering a relative TSR plan or a change to a current program may want to evaluate a Relative Total Shareholder Return Modifier. 

As a company matures, it may face pressure from shareholders and other stakeholders to implement a performance program that utilizes relative total shareholder return “TSR” as a metric. A relative TSR program aligns pay with company performance, as the pay is directly dependent on the company performance against the peer group. 

However, there can be challenges in adopting a stand-alone plan, with criticism that the award holder is not directly in control of the stock price. One alternative that incorporates relative TSR but is not fully dependent on relative TSR is a “modifier” type plan. This plan has a primary metric, which is then modified up and/or down. Therefore, the award recipients have direct line of sight into an operational or financial goal first, and then modify with relative TSR to satisfy shareholders and create alignment. 

A modifier plan is typically constructed with primary metric as an internal metric (operating goal, financial goal, etc.) and modified up and/or down by relative TSR. However, other variations include the primary metric as relative TSR modified by an internal metric, or even a performance metric modified by absolute TSR performance.

From an accounting perspective, a modifier plan (with relative TSR as the modifier) will mitigate risk with fixed expense for market conditions since the expense based on the internal conditions can still be adjusted and can be adjusted to $0 if the internal metric is not met. Additionally, there can be more alignment between the actual value delivered and the compensation expense – since a relative TSR modifier provides only a modest adjustment (with the typical maximum adjustment being up or down 25%), the potential difference between actual value delivered and the compensation expense is limited. A more detailed explanation of the accounting implications is in the section below.

For employee perception and understanding, integrated plans are more complicated so award recipients may not understand them if there is not a concerted effort around education. Also, combining multiple goals might cause award recipients to emphasize one goal over another, and it may or may not be the goal that is most important to the company.  

When implementing a relative TSR modifier award, it is critical to understand the accounting implications and related updates needed throughout the performance period. It is also critical to educate award recipients so they appreciate their awards and feel empowered to impact their performance results. 

The table below shows the expense accrual process assuming a target award of 1,000 shares with a grant-date fair value of $10.00.

  • Value of grant disclosed in proxy will equal the product of i) the target number of awards, ii) the grant-date fair value, and iii) the most probable payout of the operating metric (1,000 x $10 x 100% = $10,000 in example below)
  • The relative TSR modifier payout does not affect the expense accrual, as the impact of the modifier is already reflected in the grant-date fair value
  • The relative TSR modifier payout will impact the contingently issuable shares used to determine diluted EPS

As a company matures, it may face pressure from shareholders and other stakeholders to implement a performance program that utilizes relative total shareholder return “TSR” as a metric. A relative TSR program aligns pay with company performance, as the pay is directly dependent on the company performance against the peer group.

Infinite Equity has the experience and skill-set to assist companies of all sizes with their TSR programs. Contact Us for additional information.

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