TSR is the dominant measure used to determine vesting in long-term performance share plans in major listed companies in Singapore. It is also common in the US, the UK, Australia, and Canada. Many organizations have been quick to hail TSR as the ultimate and only measure of a company’s performance; however, it may not be the panacea for ensuring pay for results over the long term.
Effective long-term incentive plans should reflect a balance of objectives and reward both financial and shareholder results. Relying on a single metric may oversimplify the assessment of performance and potentially encourage inappropriate risk-taking. The hazards become all too apparent in markets, industries, or companies characterized by high volatility, as has been seen since mid-2008 in several markets around the world, including some here in Asia.
With little insight into the future performance of many economies, remuneration committees are looking to select and calibrate long-term internal financial targets. In Singapore, the focus seems to be on viewing TSR as a "true" measure of performance, given its strong alignment with shareholder outcomes. However, TSR incorporates actual financial performance and market expectations that could be influenced by a variety of factors. Due to this and to other disadvantages outlined below, the use of TSR in a volatile market needs to be carefully considered to avoid unintended outcomes. Furthermore, TSR may not be appropriate for all types of long-term incentive vehicles; for example, share options, which already have a built-in TSR hurdle that must be achieved before they are "in the money."
In this article, we consider how to reassess the way in which TSR is used in long-term incentive plans. The current economic environment has made target setting based on absolute measures more difficult than under steady growth environments; however, uncertainty seems to be the order of the day and companies must find ways to prosper even in these challenging times. At the same time, it is not simple for companies in Singapore to choose appropriate peers, or even indices, to compare against. Companies that want to measure management’s performance against relative TSR (r-TSR), have to look for ways to address how (or if) its shortcomings can be addressed to ensure that r-TSR remains an effective measure of results and long-term shareholder value creation.
For more information, contact Shai Ganu at +65 6398 2939.