From Common Practice to Differentiated Design: Turning Stock Prices into Performance Prizes in the S&P 500
Summary
Ryan Colucci of Compensation Advisory Partners reviews how relative Total Shareholder Return (rTSR) remains the dominant long-term incentive for S&P 500 CEOs, present in 58% of PSU awards. The article explains key design choices — whether rTSR is used as a weighted metric or as a modifier — and how comparator groups, absolute TSR caps, measurement periods and stock-price averaging windows shape outcomes.
It highlights common market practices (three-year periods, percentile-based payout scales, one-month averaging windows) and notes important variations companies use to tailor pay-for-performance to their strategy and circumstances.
Key Points
- rTSR appears in 58% of PSU awards among S&P 500 CEOs, prized for perceived objectivity and easy communication to investors.
- 68% of companies treat rTSR as a weighted metric; 32% use it as a modifier to other metrics.
- 50% weighting is most common (38% of companies), but 22% use rTSR as the sole measure (100% weighting).
- When weighted, companies usually measure rTSR as a percentile versus peers; median payout scale is 25th (threshold) / 50th (target) / 80th (maximum).
- Modifiers are typically multiplicative (±20–25% common); some designs are asymmetric or act as caps (e.g., Chipotle, American Express).
- Comparator choice: 61% use a single index, 37% use a custom peer group; the S&P 500 is the most common comparator (44%).
- About one-third of companies apply absolute TSR caps to limit payouts in down markets, usually capping rTSR payouts at 100% of target.
- Three-year performance periods are nearly universal (99.3%); 90% use averaging for start/end stock prices, most commonly a one-month window.
Content summary
Colucci walks through how rTSR’s simplicity masks meaningful design trade-offs. Firms must choose whether rTSR will directly drive payouts or adjust rewards earned under other financial metrics. Each approach signals a different pay-performance philosophy: weighted metrics tie pay closely to market outcomes, while modifiers preserve emphasis on internal financial goals but still allow market-relative adjustments.
The piece details common percentile-based goalposts (25/50/80 typical), alternative approaches (index-difference targets), and stresses risks such as sector concentration in index benchmarks and GICS reclassifications that can distort comparisons. It also covers downside protections (absolute TSR caps), near-universal three-year measurement windows, and the dominant use of averaging to smooth start/end price volatility.
Context and relevance
This analysis matters for compensation committees, HR leaders, investors and advisors who benchmark executive pay and design incentives. With macro volatility, rate shifts and concentrated index constituents (e.g. the so-called Magnificent Seven) affecting market returns, how companies structure rTSR — comparator selection, weighting, caps and averaging windows — can materially change pay outcomes and investor perceptions.
Trends noted include stronger maximum goals, more frequent use of nuanced modifiers or caps to avoid windfalls in down markets, and careful selection of comparator groups to preserve credibility and relevance.
Why should I read this?
Quick take: if you’re involved in executive pay, investor relations or governance, this is a tidy briefing that saves you a lot of reading. It lays out the practical choices firms make with rTSR, the pros and cons of each design, and the common market benchmarks — so you can spot what’s standard, what’s risky, and where you might want to tweak your own plan.
