Simple performance metrics are always attractive.

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1 Rotman International Journal of Pension Management Volume 5 Issue 2 Fall 2012 Total Shareholder Return and Management Performance: A Performance Metric Appropriately Used, or Mostly Abused? Roland Burgman and Mark Van Clieaf Roland Burgman is founder and CEO of AssetEconomics, Inc., a value-based management advisory firm in New York (USA); an independent research fellow for Accenture s Institute for High Performance; and an adjunct professor at Mendoza College of Business, University of tre Dame, and the SKOLKOVO Moscow School of Management. Mark Van Clieaf is Managing Director of MVC Associates International, a Tampa/ Toronto/London U.K.-based consultancy focused on integrating organization effectiveness, pay for performance, leadership, and shareholder value. He is a member of WorldatWork (formerly the American Compensation Association), the Society for Human Resource Management Investor Metrics task force, and the National Association of Corporate Directors, and a past special guest lecturer in corporate governance at the Ivey Business School in London, Ontario (Canada). This article identifies the complex issues associated with the unconsidered use of total shareholder return (TSR) as a metric to represent the gains (or otherwise) in shareholder wealth and in contexts such as long-term incentive compensation and proxy voting by shareholders (including say on pay ). t all TSR is created equal. Other measures, such as economic profit (EP), return on invested capital (ROIC), and future value (FV), need to be introduced to effectively interpret the quality of TSR. There are not one but eight states of the quality of TSR, and this has implications for effectively evaluating true pay-for-performance alignment and considered say-on-pay voting by institutional investors everywhere, including under the new Dodd Frank legislation in the United States. Keywords: Incentive Compensation; Pension Fund; Proxy Voting; Say on Pay; Total Shareholder Return (TSR); Work Levels Fables should be taught as fables, myths as myths, and miracles as poetic fancies. To teach superstitions as truths is a most terrible thing. Hypatia of Alexandria Men are quick to believe what they wish were true. Julius Caesar TSR: Simple Measure, t-so-simple Interpretation Simple performance metrics are always attractive. But the fact that a performance measure is simple does not make it useful, especially if it is represented as measuring something it does not really measure and then used to justify outcomes advantageous to the measurer. This article identifies the issues associated with the unconsidered use of total shareholder return (TSR) to measure the gains (or otherwise) in returns to shareholders and its use as the basis for long-term incentive compensation and for proxy voting by shareholders (including say on pay ). The key point is that not all equal TSRs can be considered equal in terms of their performance implications. There may be situations in which TSR is positive yet there is a declining or negative return on invested capital (ROIC) and economic profit (EP), resulting in the destruction of underlying shareholder value. The reverse can also be true, such that there is negative TSR (e.g., during the most recent global financial crisis) yet the underlying business has positive and increasing ROIC and EP. TSR as a measure is not always aligned with underlying shareholder value creation. Say on pay is a significant opportunity for long-term shareholders to influence the alignment of executive incentive design at investee companies with the true underlying drivers of longterm value creation. Institutional investors, and pension funds 00 Volume 5 Issue 2 Fall 2012

2 T o t a l S h a r e h o l d e r R e t u r n a n d M a n a g e m e n t P e r f o r m a n c e : A P e r f o r m a n c e M e t r i c A p p r o p r i a t e l y U s e d, o r M o s t l y A b u s e d? in particular, need to recognize that a performance metric like TSR alone does not meet this objective. Boards, institutional shareholders, and proxy voting firms will need more robust performance measurement screening and pay-for-performance alignment testing beyond just using TSR as a metric to judge equitable CEO compensation. What is Simply put, TSR is the percentage gain or decline in total shareholder returns, measured as share price appreciation or depreciation, plus dividend reinvestment, over a defined period variously one year, three years, five years, seven years, or 10 years. Since March 2007, the Securities and Exchange Commission (SEC) in the United States has introduced the requirement for a comparative five-year TSR performance graph to be disclosed; 1 for this purpose, TSR is measured by dividing the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the registrant s share price at the end and the beginning of the measurement period; by the share price at the beginning of the measurement period. In other words, TSR is measured by assuming that dividends (where paid) are reinvested in the company on the ex-dividend date at the then prevailing share price, such that there is an accumulation of shares over a five-year period. The TSR calculation, based on the share accumulation approach, is as follows: TSR = [[Share Price at EOP Number of Shares at EOP] [Share Price at BOP Number of shares at BOP]] / [Share Price at BOP Number of Shares at BOP] where TSR is measured as a percentage and the number of shares at the BOP can be any number, but traditionally is set at 1,000 (the answer will be the same in any case, whatever BOP number is chosen). Clearly, then, TSR is a point-to-point measure that simply takes the start and end dates to establish a mathematical result. The calculation is mathematically straightforward. It measures what it measures. How it should be interpreted and used by Boards of Directors, executive management, institutional investors, and or proxy voting services is entirely another matter. Relative TSR Stock markets in general are subject to the vagaries of economic cycles, government monetary policy (expansionary or contractionary), and general market conditions, among other macro influences. Individual companies share prices are subject to expectations about future growth (specifically, future free cash flows) in the context of their chosen industry sectors and perceptions about their relative competitive position (sustainable competitive advantage) into the future. An untested but generally accepted rule of thumb is that 50% of long-term change in a share price is due to broad macroeconomic factors, 25% to industry-specific factors, and 25% to company-specific performance factors. Thus, some 75% of the influence over share price is broadly out of management s control. To separate out the effects of general and specific market conditions, and in an attempt to isolate relative performance, the concept of relative total shareholder return (RTSR) has been introduced; RTSR is now commonly used and is required by the SEC in the presentation of a so-called performance graph. RTSR positions the performance of the reporting company against that of chosen peers and/or relevant indices, measured in the same way over the same time period. t surprisingly, the effectiveness of RTSR will depend largely on the appropriateness of the peer group chosen for comparison. Companies may not always have either direct or strong peers. In addition, if a company s performance is weak in absolute terms, but simply not as poor as that of the chosen peer group, compensation payouts made to executives on the basis of RTSR remain an issue, particularly if TSR is negative. Certainly if a company outperforms its peers in a tough economic environment, it seems reasonable for its executives to be equitably rewarded. Again, however, such a reward should not imply that shareholders are better off, although the company s senior managers may well be. Choices, Choices, and the Use of RTSR When TSR or RTSR is used as a performance measure, there are several choices to be made as to the parameters introduced into the calculation that affect the interpretation of TSR and RTSR performance: Selection of the peer group Averaging period for the share price assumed at end of period (EOP) and beginning of period (BOP) Assumption (or otherwise) of dividend equivalents during performance period with incentive compensation rights (second class of stock consideration) Performance period chosen (while the SEC requires five-year TSR disclosure, over 90% of issuers have set their longest performance period for long-term executive incentive pay at three years or less, and have had shareholders approve this suboptimal accountability design) Volume 5 Issue 2 Fall

3 Rotman International Journal of Pension Management Volume 5 Issue 2 Fall 2012 In addition, if RTSR is used as a basis for incentive compensation (which is almost always the case), there are issues in compensation design around threshold, target, and minimum payouts as well as around treatment upon termination or separation. However, our principal concerns with TSR/RTSR lie in three areas, all of which suggest that Boards, institutional shareholders and proxy voting firms should proceed with caution when using TSR/RTSR as measures of shareholder wealth creation and for pay-for-performance alignment testing: 1. Interpretation of TSR/RTSR as a measure of shareholder value creation 2. Intra-period volatility 3. Misleading signaling of the quality of management performance TSR as a Measure of Shareholder Value Creation Much has been made recently of the alignment between TSR and incentive compensation. Unfortunately, there is no necessary alignment between TSR performance and longerterm shareholder interests. As we have pointed out, TSR measures a change between two periods; it does not, however, measure the change in the actual accounting or financial economic performance of a company (see Table 1). TSR will very likely be measuring a change in EP in part, but it is fundamental to understanding TSR that we remember that a share price reflects expectations about future free cash flows. So what TSR primarily measures is a shift in shareholder expectations about future cash flows, compounded (in valuecreation terms) by the actual or notional reinvestment of dividends received in terms of share accumulation when dividends are actually paid. By definition, then, TSR does not measure a change and only a change in the actual EP of the underlying business; 2 what it does measure is the change in expectations about the retention of and changes to existing economic performance. As a measure, TSR is what it is. Problems arise, however, with the interpretation that TSR measures the creation of shareholder wealth during an interval and that applying this measure as the basis for long-term incentive compensation is therefore appropriate. This thinking is flawed, as we will see, since it is possible for shareholder value to be destroyed while TSR is indicating otherwise. The current lauding of TSR just doesn t make a lot of sense, especially when we consider our next two topics intra-period TSR volatility and misleading signaling of the quality of management performance. Intra-period TSR Volatility t all TSRs are created equal. TSR as a calculation is alluring, in that it appears to provide a sensible interpretation of wealth-creating performance by management that is relevant to shareholders. This just isn t necessarily true. For one thing, the hold period for shares by shareholders will need to coincide exactly with the TSR calculation period for the interpretation to be drawn that a particular calculation reflects an increase or decrease in shareholder wealth. The tenuous nature of any conclusion drawn about shareholder wealth creation is evident when we calculate a reverse TSR, which shows the volatility, and thus the range of possible returns, that shareholders will have experienced depending on when they acquired shares within the TSR calculation period used by a company to trigger delivery of incentive compensation pay. To calculate a reverse TSR, today s share price is set as zero and a month-on-month return profile is calculated for a peer set of companies. Figure 1 shows the five-year monthly TSR profile for 6 medical-device companies from January 2007 through January As we can see, TSR performance is volatile; the returns achieved by investors are entirely dependent on when they invested. Figure 1 thus illustrates why a strict point-to-point interpretation of TSR is not a reliable indicator of wealth creation. It is not, and cannot be, representative of the average investor s realization of returns, nor can it in any way be considered as necessarily representative of the TSR calculation s intra-period returns performance. The five-year annualized return for Boston Scientific (BSX) for the period January 2007 January 2012 is 13.54%, but for an investor who acquired BSX shares in August 2010, the annualized return would be %. Similarly, an investor in Zimmer (ZMH) who picked the right time to invest (February 2009) would receive an annualized return of 25.19%. These examples show TSR for what it is: a simple point-to-point measure of differences. The investor s actual return experience is the reality that lies between the two data points that make up TSR. As a point-to-point measure, then, TSR per se does not necessarily reflect a fair and reasonable view of shareholder returns over a measurement period. TSR needs to be more precisely defined in terms of what it truly measures and what it does not measure. More importantly, given its limitations, TSR needs to be aligned and evaluated along with other financial and non-financial performance measures to ensure that a positive TSR is consistent with the creation of shareholder value and that a negative TSR is consistent with the destruction of shareholder value. 00 Volume 5 Issue 2 Fall 2012

4 T o t a l S h a r e h o l d e r R e t u r n a n d M a n a g e m e n t P e r f o r m a n c e : A P e r f o r m a n c e M e t r i c A p p r o p r i a t e l y U s e d, o r M o s t l y A b u s e d? Figure 1: Five- Year Reverse TSR for 6 Medical- Device Companies, January 2007 January % 80% 60% 75.21% 73.48% 40% 20% 35.69% 0% -20% 14.84% -40% -60% % -80% Jan-07 Jan % Jan-09 Jan-10 Jan-11 Jan-12 Boston Scientific Hospira Zimmer Stryker Medtronic Johnson & Johnson TSR and Misleading Signaling of Management Performance We argue that shareholder value creation is most coherently revealed through return measures such as ROIC or its more robust equivalent in economic profit (EP) calculated as net operating profit after tax (NOPAT) minus a capital charge and not through TSR, simply because, directionally, TSR is not necessarily consistent with what is happening in terms of period-on-period changes in ROIC and EP. For financial institutions, risk-adjusted return on risk-weighted assets (RORoRWA) would be substituted for ROIC. There are actually eight possible performance scenarios and quality states of TSR (measured over the same period/s) that need to be directionally considered and interpreted to determine their implications for shareholder value creation. These are shown in Table 1. Although EP is the most sensible measure of shareholders wealth creation, it is not used as often as it could be as a basis for long-term incentive compensation. The use of ROIC (calculated as NOPAT / Invested Capital) or ROIClike measures is more prevalent, but a ROIC not compared to the weighted cost of capital (WACC) can also be misleading (ROIC can increase while EP is decreasing, and ROIC can decrease while EP is increasing), so a more logical directional comparison will be between TSR, ΔROIC, and ΔEP. As Table 1 shows, the three performance measures align in only two of the eight cases (Cases 1 and 8). And given that TSR and RTSR measure external capital markets expectations of a company s prospective fortunes from outside, while ROIC and EP measure the company s actual performance from within, we argue that both directional and substantive alignment among these measures is fundamental in considering long-term incentive compensation design and pay delivery. Volume 5 Issue 2 Fall

5 Rotman International Journal of Pension Management Volume 5 Issue 2 Fall 2012 Table 1: Alignment of TRS, ROIC, and EP Performance Total Shareholder Change in Return on Change in Economic Case Return (TSR) Invested Capital (ROIC) Profit (EP) Why Does All This Matter? The issues we have outlined around TSR would remain more in the finance arena were it not that TSR is heavily used by proxy voting firms and institutional investors related to say on pay and effective corporate governance. In a recent update, Institutional Shareholder Services (ISS) makes the following comment: Pay-for-Performance is a key tenet in corporate governance. ISS recognizes that there are various ways to evaluate company performance. Companies may use myriad financial, operational, and/or qualitative measures when designing their incentive programs for executives. However, improvements in companies incentive metrics should ultimately translate into improvements in total shareholder returns. Therefore, total shareholder returns continue to be a key measure in our new Pay-for-Performance methodology, which emphasizes long-term alignment. Additional measures such as changes in revenue, profit, cash flow, etc., may also be considered in our qualitative assessment. (ISS 2011, 9; emphasis added) The focus on the correlation between TSR and long-term incentive executive pay, with TSR vaunted as the ultimate measure of success, illustrates the unquestioning approach to the use of TSR in determining executive pay. What is lost by focusing on the correlation between TSR and pay for performance is that when TSR becomes the basis of pay-forperformance decisions, a circularity is introduced that has nothing necessarily to do with shareholder wealth creation. Sinkular and Kay (2011), 1) note that higher TSR results in greater capital gains for shareholders, stock price appreciation for employee-owners and potential for future success. This is simply incorrect: since TSR is a measured outcome resulting from share price appreciation (and dividend reinvestment), cause and effect are the wrong way around. The driver here (the cause) is the market s views about future success; the result (effect) is a positive TSR. Unfortunately, the kind of thinking illustrated above is all too prevalent. The focus should be on whether shareholders are better off and on ensuring that key longer-term business performance metrics (financial and non-financial) and management incentive pay are aligned with longer-term shareholder interests. This goal cannot be achieved by uncritically accepting TSR as the ultimate measure of success. The fact remains, however, that there is an uncritical reliance on TSR, on the assumption that aligning TSR and CEO pay results in a positive or negative say-on-pay vote, which also aligns with shareholder value creation. Clearly, this is not necessarily the case. The question then is, What performance metric will show actual shareholder value creation performance over an interval? In our estimation, only growth in EP will do this. For growth in EP to create true shareholder value, the ROIC must be greater than the firm s WACC. And improvement in EP that is expected to be sustainable will translate into increased expectations about future EP and will thus be reflected in an increased share price and overall growth in enterprise value (holding net debt constant). Enterprise Value and Its Drivers Enterprise value (EV) can be calculated two ways. The first links directly to TSR: EV = # Shares Outstanding Share Price + Debt Cash Thus, an increase in share price increases EV and thus creates a positive TSR over the measurement period. 00 Volume 5 Issue 2 Fall 2012

6 T o t a l S h a r e h o l d e r R e t u r n a n d M a n a g e m e n t P e r f o r m a n c e : A P e r f o r m a n c e M e t r i c A p p r o p r i a t e l y U s e d, o r M o s t l y A b u s e d? The second way to calculate Enterprise Value is by using the two core components of EV, which are current value (CV) and future value (FV): EV = CV + FV CV is the sum of invested capital and the perpetuity value of current-period EP (or NOPAT / WACC). CV therefore represents the present value of EP if there is no change to current performance (i.e., if the EP earned today continues forever). FV is the difference between EV and CV and represents the present value of expected changes to CV. Improvement in EP is reflected in a company s CV, while expectations about future growth in EP are reflected in a company s FV. This coincides with what a share price represents that is, the investor s judgment about future cash flows. So management s role in managing for shareholder value should be to maximize EP growth on a sustainable basis and to communicate its strategies for achieving near-term and longer-term EP performance. Management is not responsible for the stock market s vagaries, but it should be accountable for delivering growing EP, which itself implies a sustainable and growing competitive advantage and the ability to innovate. In other words, management s responsibility is to manage to the creation of shareholder returns by delivering positive and growing EP and by communicating information that can be easily valued by investors and appropriately incorporated into the share price at any point in time. Two analytic questions then arise: 1. What management actions and strategies have given rise to an improvement in EP in the current period that is reflected in CV? 2. What contemplated management actions and strategies are anticipated will give rise to an improvement in EP in future periods that is reflected in FV? There are four ways in which EP can be improved by management and value created for shareholders: 1. Increase revenues (growth and innovation value drivers) 2. Reduce cost or increase pricing (expanding margin value drivers) 3. Reduce the invested capital (capital efficiency value drivers) 4. Reduce the WACC (financing value drivers generally including financial structuring) CV strategies are mostly about revenue increase and margin expansion, while FV strategies are about growth, innovation, and financing beyond current operations. The former tend to focus on market penetration and operational excellence strategies (e.g., Six Sigma, lean manufacturing, process innovation, extension of existing product lines, working capital management, trading terms), while the latter tend to focus on market expansion, diversification, acquisitions, and continuous innovation strategies (e.g., R&D, product and market development, introduction of new business models, mergers and acquisitions, capital restructuring). Accordingly, executive management should be held accountable for execution of strategies and tactics on one or more of the four financial outcomes relevant to growth in EP (increased revenue, expanded profit margin, reduced capital intensity, reduced WACC), which in turn drives growth in CV. Executive management should be held accountable for growth in EP, and ROIC (relative to WACC) from different sources of growth and innovation beyond the current operations, including developing business strategies and investment plans to create new products, new markets, new business models, and even new industries (e.g., clean energy). These innovation drivers and investments made to create future shareholder value should be recognized in the growth of FV and FV s contribution to the share price. It is these value-adding levels of work and a hierarchy of innovation (from procedural work through to creating new business models and new industries) that results in creating and realizing real free cash flows (and not simply creating expectations for their delivery), which in turn justifies having strategic value-adding layers ( Work Levels ) in the management structure. Today s Longer-Term Incentive Compensation Design At present, executive incentive compensation is primarily tied to growth in sales revenue, EBITDA, growth in earnings per share (EPS), and RTSR. These are mostly CV outcomes, and thus executive compensation is directionally aligned primarily with shorter-term current operations. To be precise, most of the top four measurement categories currently used in determining incentive pay for executives do not create direct accountability and alignment with the drivers of long-term shareholder value creation. If there is a relationship, it is indirect at best. Table 2 shows the results of Equilar s (2012) recent analysis of the S&P 1500 long-term incentive plans. TSR is currently being heavily promoted as a singular basis for longer-term incentive pay, primarily, we suspect, because it purports to solve the knotty problem of actually measuring shareholder value creation, based on the precise nature of the calculation. Unfortunately, TSR and RTSR do not necessarily provide insight into shareholder value creation. What TSR and RTSR, like EPS, do provide are easy optics! Volume 5 Issue 2 Fall

7 Rotman International Journal of Pension Management Volume 5 Issue 2 Fall 2012 Table 2: S&P 1500 Long-Term Incentive Plans Frequency of Use Measure by S&P 1500 (%) TSR 41 Income measures (net income, earnings growth, EPS) 33 Capital efficiency measures (ROIC, ROC) 17 Revenue measures (revenue, revenue growth) 15 Cash-flow measures (cash flow, cash-flow growth) 7 Longest performance measurement period for LTIP design: 4 years 7 3 years 59 2 years 34 Source: Equilar (2012) Where to From Here? Rewarding executive management for achieving sustainable gains in shareholder wealth is an admirable objective. It is also a formidable one for Boards to get right, and investors face significant challenges in ensuring that Boards are effectively carrying out their corporate governance duty of care relative to a changing and increasingly demanding standard of care. Our view is that a balanced set of multiple measures should be applied and directionally and logically aligned. The measures that will provide the basis for alignment with sustainable shareholder wealth gains will be reflected in a growth in future EP. Growth in FV, and its realization over time, is what justifies the 15- to 100-times differential in total direct compensation between the CEO role and front-line management, depending on the level of work and the complexity of innovation of the enterprise. These two gains together ( EP and ROIC) will improve alignment with TSR and pay for performance. A gain in TSR and RTSR should be tested against growth in ROIC and EP over a performance cycle and risk horizon of at least five years. If they are not moving in concert directionally, then a review should examine the causal basis of any TRS gain. The design of long-term incentive plans should seek to align accountability design, pay delivery, and the fortunes of senior management with those of the shareholders over time. The pivotal reference point should be growth in ROIC and EP and the alignment of various metrics with growth in EP, particularly on a sustainable basis. The tests we propose, which align to the core value drivers, are provided as a set of questions: 1. Has management created real value by delivering ROIC > WACC? 2. Has management created growth in EP over the measurement period? 3. What percentage of current NOPAT or EP was from new products, new markets, and new business models realized over the measurement period? 4. Did NOPAT per full-time equivalent (FTE) grow over the measurement period, demonstrating increased organizational effectiveness and productivity in creating value? 5. Has FV increased over the measurement period? 6. Does the enterprise appear to have the intellectual capital (relationship, structural, and human) to create and realize 3- to 10-year-plus investments in new products, new markets, and new business models that will live up to the expected growth in EP (FV) already embedded in the firm s current share-price valuation? 7. Are there other non-financial performance metrics and related strategic risks that should be considered (e.g., customer, environmental, societal, governance, and reputational) that could materially affect long-term business viability, FV, and thus long-term sustainable gains in shareholder value? The answers to these questions have quite different implications for the interpretation of TSR. There are eight possible combinations of performance outcomes, which, when considered quantitatively, will define whether the interests of shareholders have been served and whether TSR and RTSR are aligned with the concept of shareholder value creation. Figure 2 shows the eight possible performance outcomes that will condition any interpretation of TSR and RTSR. This interpretation should be measured over a rolling period of at least five years. Figure 2: Combinations of ROIC, EP, and FV informing the interpretation of TSR and RTSR Is ROIC > WACC? Has EP Has EP Has FV Has FV Has FV Has FV Volume 5 Issue 2 Fall 2012

8 T o t a l S h a r e h o l d e r R e t u r n a n d M a n a g e m e n t P e r f o r m a n c e : A P e r f o r m a n c e M e t r i c A p p r o p r i a t e l y U s e d, o r M o s t l y A b u s e d? Use of an integrated and balanced performance measurement screen (ROIC, EP, FV) to evaluate the quality of management and their true performance, together with a considered interpretation of TSR and RTSR, will provide a logical basis for the design of equitable long-term incentive plans. Only by considering TSR and RTSR along with FV, EP, and ROIC relative to WACC can Boards and institutional investors be confident that they have aligned management incentives with creation of wealth for their shareholders and, in so doing, met their obligations to their shareholders, including true pay-for-performance alignment. Institutional shareholders, and pension funds in particular, to truly fulfill their legal duty of care to pension beneficiaries, will need to go beyond the current check-the-box approach, which simply evaluates one-, three-, and five-year TSR relative to changes in one-, three-, and five-year CEO pay as a basis for say-on-pay voting under the new Dodd Frank legislation. Pension funds will need to take individual and collective action to influence Boards, regulators (SEC, OSC, etc.), and proxy voting firms to create a more robust performance measurement and pay-for-performance model and related current and future value disclosures for shareholders (including NOPAT, NOPAT / FTE, ROIC, EP, FV and FV / FTE). Endnotes 1. Regulation S-K of the Standard Instructions for Filing Forms under the Securities Act of 1933, Securities Exchange Act of 1934, and Energy Policy and Conservation Act of 1975 requires filers to Provide a line graph comparing the yearly percentage change in the registrant s cumulative total shareholder return on a class of common stock registered under section 12 of the Exchange Act (as measured by dividing the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the registrant s share price at the end and the beginning of the measurement period; by the share price at the beginning of the measurement period) with: (i) The cumulative total return of a broad equity market index assuming reinvestment of dividends, that includes companies whose equity securities are traded on the same exchange or are of comparable market capitalization; provided, however, that if the registrant is a company within the Standard & Poor s 500 Stock Index, the registrant must use that index; and (ii) The cumulative total return, assuming reinvestment of dividends, of: (A) A published industry or line-of-business index; (B) Peer issuer(s) selected in good faith. If the registrant does not select its peer issuer(s) on an industry or line-of-business basis, the registrant shall disclose the basis for its selection; or (C) Issuer(s) with similar market capitalization(s), but only if the registrant does not use a published industry or line-of-business index and does not believe it can reasonably identify a peer group. If the registrant uses this alternative, the graph shall be accompanied by a statement of the reasons for this selection. 2. This point is underscored when we consider the concept of the price/ earnings multiple. If we are managing to current earnings per share (EPS) and we have a P/E multiple of 20, then we are managing to 5% of the company s market capitalization. The question then is, What does the other 95% represent? References Equilar CEO Performance Metrics: An Analysis of the Prevalence and Types of Metrics in S&P 1500 Incentive Plans. Institutional Shareholder Services [ISS] Corporate Governance Policy Updates and Process: Executive Summary. Sinkular, J., and I. T. Kay Total Shareholder Return as a Performance Measure Design Features and Key Considerations. Pay Governance LLC. Volume 5 Issue 2 Fall