Aon’s 1st Annual Relative TSR Design Survey

Help guide companies towards best practice for creating, valuing and managing Relative TSR programs

So, you’ve decided to grant performance awards tied to Relative Total Shareholder Return (“RTSR”). Congratulations – you’ve chosen a performance metric that is viewed favorably by proxy advisory firms, creates strong shareholder alignment, is completely transparent, and allows for objective multi-year performance measurement without the difficulty of long-term goal setting.

The decision to grant RTSR awards is actually comprised of many smaller decisions: Who are my peers? How exactly should TSR be calculated? How should performance be mapped to payout percentages?Outside of plan design, you’ll also need to decide who will receive the RTSR awards, how to determine the target award size, and how to communicate the progress of the award over the performance period. What have you gotten yourself into?

The good news is that you are not alone. Hundreds and hundreds of companies grant RTSR awards, allowing us to view trends and identify where the market has converged towards best practices. The bad news is that this data is buried in proxy statements, and the disclosures themselves may be vague or incomplete. Because of this, Aon has launched its first ever Global Relative TSR Survey, aimed at capturing plan design and grant practice information on the largest and most detailed level possible. Aon’s client base of over 500 global companies will furnish the initial data set, with the survey opening externally from June 5, 2017 to July 28, 2017 at www.rTSRsurvey.com. A sneak preview of the data points collected and preliminary results of the internal survey is provided below.

Award Recipients: Most companies that issue RTSR awards grant them to only a small population. A vast majority of companies grant RTSR awards to fewer than twenty employees, mostly Section 16 officers or NEOs.

TSR Calculation: Approximately 90% of companies use some sort of averaging period at the beginning and end of the performance period for purposes of calculating TSR, providing smoothing for any daily stock price anomalies. Averaging periods typically range from one month to one quarter. Averaging periods over one quarter are exceedingly rare in the US but are more commonplace across Europe. Another decision regarding calculating TSR is how to incorporate dividends. The vast majority of companies assumed that dividends are reinvested in additional shares of the issuing entity’s stock, a practice that Aon recommends as best practice.

Plan Type – Percentile Rank vs. Outperformance: Percentile Rank plans currently make up 80% of the US market in our preliminary data.   For larger peer groups, Percentile Rank plans work great.  However, for smaller peer groups, Percentile Rank plans can create situations that see small changes in TSR create large changes in payout – a potential governance risk.  In these situations, Outperformance plans are an elegant way of mitigating risk and graduating the payout percentage.  Learn more about Percentile Rank vs. Outperformance plans at www.RelativeTSR.com.

RTSR awards are widespread, but far from homogenous. Aon wants to help you see how your company’s grant practices, plan design, and communication strategy compare to the broader marketplace and help guide companies towards best practice. For this reason and for the good of the industry, we urge issuers to participate in this 10-minute survey, in which all participants will be provided results. Keep an eye out for the results of Aon’s Global TSR Survey, coming in September 2017!

CJ Van Ostenbridge
Senior Consultant
Aon Hewitt
1650 Market Street
Philadelphia, PA 19103
415-486-7257
cj.vanostenbridge@aonhewitt.com

Sian Halcrow
Head of Reward Analytics
Aon Hewitt
122 Leadenhall Street
London EC3V 4AN
+44 (0)20 7086 9392
sian.halcrow@aonhewitt.com

Aisling Riordan
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