Relative TSR is a Bit Like Cough Medicine

A bedtime story for executive compensation professionals.

Little ExecComp wasn’t feeling well. Whatever ailed him had been lingering for a long time. While sometimes he felt great, other times he coughed so badly he feared he would be quarantined. His mom and dad, Mr. and Mrs. Board, had tried a long list of remedies including herbal equity baths, expensive cash showers and hot packs filled with perqs and deferred release solutions. Nothing seemed to work.

One night while watching late night TV, the Boards saw an advertisement from a guy with a loud voice and catchy accent. The announcer, a man named Dr. Actuary, PhD., claimed to have invented a wonder drug that would make hacking coughs go away. He presented happy customers; none of whom had a cough. He showed statistics, charts and results from scientific studies. Everything seemed to support his fantastical elixir.

He called his potion “RxTSR” and claimed it would cure ExecComp’s cough. In fact, it would make the growing boy the healthiest kid on the block and help him reach his ultimate potential. His testimonials made it clear that all of the coolest, best kids were taking RxTSR regularly. The Boards were excited. “We have finally found a solution to our problems”, they shouted.

Just to be sure, they called their doctor, Dr. ISS. Dr. ISS agreed that RxTSR was a wonder drug. In fact, she claimed that she prescribed it to nearly everyone. “Too much of a good thing is a great thing”, said Dr. ISS.

The Boards called Dr. Actuary and ordered a three-year supply of RxTSR. When they got it, they were surprised that it came with very few instructions. The bottle simply said, “Use as much as you think you need, whenever you think it is needed but, try not to use too much more than everyone else does.” The Boards didn't know how much or how often anyone else used, so they simply made their best guess.

At first little ExecComp seemed to be getting healthier. His cough started to fade and he seemed to be performing better. Figuring that if a little was good more would be better, the Boards gave ExecComp even more. Now he seemed a bit giddy. The solution seemed to make him feel better than good. He laughed more often and almost never coughed, but he also made some not too bright decisions. Interestingly, he seemed to start coughing whenever he wanted a bit more RxTSR.

The Boards noticed that Dr. ISS gave full support their approach. They also wanted to make ExecComp happy. So, they gave ExecComp bigger and bigger doses of RxTSR. They were surprised when ExecComp started performing worse while at the same time demanding more of the magic elixir. Even more troubling, ExecComp started showing symptoms of far worse problems! It turns out that RxTSR in small doses was helpful. RxTSR in larger doses worked almost like a hallucinogen and in very large doses RxTSR was simply poison.

While it took a few years, the Boards, Dr. ISS and Dr. Actuary, PhD finally learned that, like any wonder solution, RxTSR needed to be used in moderation and only with close oversight and constant communication regarding its effect. They also learned that many of their legacy solutions worked better when combined with RxTSR and that each one of ExecComp’s peers found a slightly different combination of solutions that worked best for them. Finally the cough went away and little ExecComp became truly healthy and was able to reach his potential. He made everyone around him prosperous and happy. And, they all lived happily ever after.

Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with corporate strategy and culture. Dan and fellow Compensation Café writers, Ann Bares and Margaret O’Hanlon will soon be releasing a new book on communicating compensation (shoot him a message for about early release.) Meet Dan in July 14 at the Boston / Connecticut NASPP All Day Conference or in July 15 in Denver for live presentations. Dan has co-authored of several books including “The Decision Makers Guide to Equity Compensation”, “If I’d Only Known That”, “GEOnomics 2011” and “Equity Alternatives.” Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Comments

[E. James (Jim) Brennan]

From the ending, one might suspect this is a fairy tale.

[Jay Schuster]

Very good, Dan. Love executive compensation stories. :)

[Jacque Vilet]

I love it! Agree with Jim.

[Dan Walter]

Jim and Jacque,

At this point it is a hopeful fairy tale. It could. however end more like the traditional Grimm fairytales. But, let's hope not!

[Dan Walter]

Jay,

Thanks for the comment. I am hoping that this spark conversations about the proper use of TSR as a metric. We will see if it has any impact.

[Dan Walter]

WHAT THE HECK IS TSR?

This has been the question from several readers. TSR = Total Shareholder Return.

What is TSR?
It is the growth or shrinkage in stock price plus any dividends paid to shareholders. For many shareholders, this is the single most important measurement of how a stock performs against both expectations and peers. It is important to remember that TSR is a result of actions, not the driver of actions.

Here's another article I wrote on the topic that explains it in more detail:

http://performensation.com/cfo-corner-beyond-tsr-total-shareholder-return/

[Windsor Lewis]

Appreciated the post this week!