Mid-Cap Technology Company with Total Shareholder Return Awards
In response to shareholder pressures, the compensation committee of a mid-cap technology company decided to implement TSR-based performance awards. This decision, along with some very broad guidance (“Make our award similar to the ones granted by the giant, dominant company in our industry”) was handed down to the team responsible for equity award administration and accounting. The equity team had never dealt with TSR awards before, and they came to us for help since we had worked with them on option valuations in the past.
Our first step was education: Here’s what TSR awards are, here are the basics of the accounting, here’s how that differs from performance award accounting. Once they were comfortable, we moved forward with locking down their award design.
The structure they had in mind was the awards granted by the big fish in their industry. But they wanted to be sure it fit their program goals. For example, they wanted a less-leveraged award with some guaranteed payout because this award would be a substantial piece of their executives’ compensation.
We set about testing variations on the big fish’s design. These included different award slopes, payout caps, and ways of calculating relative performance. Once our client selected a structure, we performed backtesting so that they could show their compensation committee how this award’s cost and payout would have differed over the last several years from the awards actually granted.
The company’s TSR award grant went off smoothly, with no substantial pushback from the compensation committee or the participants. In subsequent years, they have maintained the same design.