While shareholders across different business sectors necessarily have diverse concerns, executive compensation is a topic that remains at the top of nearly all shareholders’ lists of corporate governance priorities. Largely beginning with the implementation of “say-on-pay” votes under The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), companies have increased communications with shareholders and have begun more recently to proactively respond to shareholder concerns. A significant sea change in both evaluation and disclosure emerged over the last five years with respect to pay for performance. Not only did the Dodd-Frank Act address pay for performance clearly as a result of the financial crisis, but shareholders and their advisers have persistently pushed for it. And companies and their boards of directors have listened and continue to listen. By directly linking pay and performance, the connection between the interests of executives and shareholders is stronger than ever. A significant question, however, remains—how best to measure performance. This question is complicated and constantly evolving.
Currently, total shareholder return (TSR) is the gold standard in goal setting for performance-based compensation. If the goal of performance-based compensation is to align the interests of executives with those of shareholders, TSR does seem to offer a convenient bridge between the two shores. However, companies are finding that TSR should not be the end of the road or the only road. It can be argued that TSR often does not capture the full picture when it comes to investor interests, particularly in industries where environmental, social and governance (ESG) issues are becoming increasingly prominent priorities for investors.
