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NFP Compensation Insights | January 2023


Annual Incentive Payouts and TSR – Is There a Link?

It’s the start of the new year and companies are preparing their salary budgets and planning for annual incentive bonuses. Traditionally, it’s known that organizations will use TSR performance (Total Shareholder Return) as a metric for long-term incentive planning. But how does TSR come into play when it comes to annual incentives/bonuses for executives? Is there any correlation?

In this edition of Compensation Insights, NFPCC analyzed recent annual incentive/bonus payouts in relation to annual total shareholder return calculations and made an interesting discovery. Although TSR is not typically used as a metric in annual incentive planning, our analysis showed a direct correlation. In our original article, we dive into this topic and explain what the data is telling us. We hope you find this helpful as you prepare your compensation plans for the year. As always, reach out to NFPCC with any questions or for help with your incentive planning.

Should TSR Performance Be Accounted for in Annual Incentive Plans?

By Tyler Brown

It’s that time of year again as calendar year organizations begin to finalize their respective annual incentive/bonus payouts. Within this context, many board members and directors, in their totality, are wrestling with investor perspectives and pre-determined performance metrics. This convergence of thought processes has been a continued hot-button topic covering the previous five years. Within this article, NFPCC analyzed recent multiyear annual incentive/bonus payouts in relation to annual total shareholder return (“TSR”) calculations for the S&P 500.

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The Use of TSR in Executive Incentive Compensation

Given the vast changes in the market since March, corporate boards and shareholders are faced with urgent questions on how to address executive compensation during times of crisis. Many market participants believe that the primary driver of current stock market growth is the Federal Reserve’s forceful slew of interventions to blunt some of the effects of the on-going economic crisis.

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Executive Compensation and Deconstructing TSR Metric

The prevalent use of Total Shareholder Return (TSR) as a payout or vesting trigger for long-term executive compensation elements begs the question, “How is TSR derived?” To do this, let’s start by deconstructing TSR for executive compensation and review how it is calculated: TSR = ((Stock Price end – Stock Price begin) + Dividends) / Stock Price begin

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