Relative TSR Implementation and Risk Management

Relative total shareholder return (relative TSR) awards are one of the most complex compensation instruments invented, far outpacing stock options and restricted stock in the number of parameters governing payout. As more companies continue adopting relative TSR awards, various issues and risk areas need to be managed: (i) ensuring pay-for-performance symmetry (as captured in the proxy); (ii) managing the reactions and perceived value from recipients; and (iii) avoiding accounting surprises that are ultimately manifested in the 10K or proxy.

These issues can emerge from days before the actual grant to many years after, even when everything seems to be running smoothly. Effective risk mitigation needs to start long before the grant date. This Issue Brief provides a “playbook” for managing against these accounting, HR, and corporate governance risks in a relative TSR program. We present three pillars of risk management in a relative TSR program implementation—education, coordination, and analytics—and go into detail on practical tools that can be adopted to drive better outcomes for all involved.

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