Tag Archive: total stakeholder return

Debating the Role of TSR in Executive Compensation

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Using total shareholder return (TSR) as a compensation program metric emerged as a hot topic for both panelists and attendees during the third annual Leading Minds of Compensation event last week at the Grand Hyatt in New York City. Discussing the day’s most pressing compensation issues in a panel selected  by NACD Directorship magazine Publisher Christopher Y. Clark and Editor-in-Chief Judy Warner were: Steven Hall, managing director of Steven Hall & Partners; Dayna Harris, vice president of Farient Advisors; Jeff Joyce, partner of Pay Governance; Rose Marie Orens, senior partner at Compensation Advisory Partners; Jannice Koors, managing director of Pearl Meyer & Partners; and Barry Sullivan, managing director of Semler Brossy.

Jannice Koors noted that, while not a practice used by the majority of public companies, TSR is a popular metric. “It has some benefits: it clearly is the most directly aligned metric between shareholders and executives, so it’s an easy story to tell, it rewards results, it’s easy to present to shareholders.” But, according to Koors, the pros of TSR are readily outweighed by the cons. “The purpose of an incentive plan is to incent behaviors, actions, and decision making,” she said. “You don’t have behaviors that create stock price.” Dayna Harris agreed. “TSR doesn’t focus people on things they can control,” she said. “When you go to a one-size-fits-all compensation plan, you are reducing the number of tools in the tool chest that help the board and management to improve overall company performance.”

Koors expressed another major reservation with this metric. “You’re measuring movement over that period of time—it creates some natural spikes. So what goes up must come down. What naturally happens in TSR plans—and what a lot of companies who are coming up on that third and fourth and fifth year of having a TSR plan in place are finding—is that if you’re in the top quartile at the end of your three years, you have vastly improved the likelihood that you are going to be in the bottom quartile at the end of your sixth. So what TSR really rewards is being a steady eddy in the middle of the pack.”

But, during the Q&A portion of the event, one director self-identified as an advocate for TSR as a valid and valuable metric, said it’s the purest way to align shareholders with directors. If companies were to move away from TSR, what data is available to lure away TSR’s most ardent adherents? “I’m not going to try to dispel the notion that it is purely aligned,” Koors said. “I’m just saying it’s a reward, not an incentive—and it depends on what you want your long term incentive plan to do.”

Rose Marie Orens added her thoughts about TSR, saying that there is a time and a place for this metric, particularly in the financial services industry. Though acceptable to use TSR as a portion of an award, and to use it as a reminder that driving stock prices is a priority for executives, Orens didn’t think it should be used as the main metric behind executive compensation. “I would drive either for relative performance on metrics that are important in my industry and I want to demonstrate that I am doing better,” Orens said.

Barry Sullivan directed attendees’ attention to “The Problem with Total Shareholder Return,” a study mounted by his firm in 2012 that gave Koors’ intuition and Orens’ observations a statistical bite. “What do we need to do from a growth and profitability perspective over a long period of time to drive TSR?” Sullivan asked. “When you look at the data, those companies that outgrow at a return above their weighted cost of capital drive superior total shareholder return. Focus on growth, focus on profitability, and TSR will come.”

Jeff Joyce didn’t take issue with TSR in and of itself, but rather, he found fault with its application. He observed that, because TSR is measured over a fixed period of time, a sudden lull in stock price at the end of that period undermines shareholder alignment. “While it does play a role, stock price is captured in other forms of equity,” he said. “It doesn’t have to be explicitly measured in terms of total shareholder return.”

NACD Directorship will host a “Prognosticators of Pay” event on July 17th in Seattle. Directors interested in attending this complimentary program may request an invitation online.

Look for full coverage of NACD’s Leading Minds of Compensation event in the May/June 2015 issue of NACD Directorship magazine.

Keynote: Conscious Capitalism with Rajendra Sisodia

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So much has changed, and so quickly. What will it take for businesses to truly flourish in the future? The second keynote of the 2013 NACD Board Leadership Conference was a smooth transition from NACD Chair King’s address on innovation in the boardroom with a presentation from Raj Sisodia. Conscious Capitalism Institute Co-Founder and Chairman Sisodia recently co-authored with Whole Foods Co-Founder John Mackey, Conscious Capitalism: Liberating the Heroic Spirit of Business.

Although capitalism is suffering an image crisis following the global financial crisis, Sisodia focused on its ability to advance society as a whole. He currently consults companies on shifting from a traditional method of operations to a “conscious” one. Based on research on the impact of the industrial revolution on social well-being, Sisodia believes that business is good because it creates value. His method of conscious capitalism is based on four tenets:

1.  Business can and should be done with a higher purpose, not just maximizing profits.

2.  Conscious businesses are explicitly managed for the benefit of all their stakeholders.

3.  Conscious leaders are driven primarily by service to the firm’s purpose and people, rather than by power or money.

4. These leaders create a conscious culture, which enables and empowers employees.

Other takeaways from the session:

  • Capitalism is the most effective method to alleviate poverty. If current trends continue, extreme poverty (world population living on less than $1 a day) will be virtually eliminated in the next 50 years (if free markets are allowed to spread and be the norm).
  • “Have you ever watched a movie in which the business person is a good person?” The lack of trust in capitalism is the result of the world and humanity changing significantly in the last 20 years, yet business has not adapted.
  • In the future, companies will not be able to survive by only focusing on driving shareholder wealth. Ultimately, viewing financial profit as the end result will drive you to do things that destroy value in its path. To this end, Sisodia believes directors should focus on the corporation—not just the shareholders. In doing so, value will be created for all stakeholders.
  • Conscious capitalism is not about trade offs, but they can always be found. Although businesses create wealth, they can also destroy many kinds of wealth, including financial, social, and emotional. It matters how companies make their money.”