In the realm of corporate performance management and executive compensation, the concept of Total Shareholder Return (TSR) has received widespread attention and adoption as a key metric for driving sustainable growth and rewarding long-term value creation.
This increased focus has been driven by growing stakeholder demand for compensation models that incentivise not only near-term success, but also sustainable growth and value creation over the long run.
Understanding TSR
TSR encapsulates all returns realised by an investor from holding a company’s shares over a defined period. It combines:
- Share Price Appreciation (or Depreciation): The change in share prices from the beginning to the end of the period.
- Dividends Received: Total dividends paid out to shareholders during the same period, including reinvestments.
Expressed as a percentage of the initial share prices, TSR offers a comprehensive view of a company’s effectiveness in enhancing shareholder value. It serves as a crucial benchmark for evaluating performance against industry peers on listed exchanges.
Also read “The value of TSR plans and other performance-based equity compensation“
Calculating TSR
The formula for calculating TSR is as follows:
TSR=(Ending Share Price− Beginning Share Price + Dividends Received) x 100 ÷ Beginning Share Price
Where:
- Ending Share Price is the share price at the end of the measurement period.
- Beginning Share Price is the share price at the start of the measurement period.
- Dividends Received include all dividends paid to shareholders during the measurement period.
To navigate some of the other complexities in calculating TSR for performance-based incentives, read “Total Shareholder Return: A common performance metric for share incentives”
TSR compared to Share Price Return as a metric
Captures the Full Picture with Dividends:
Unlike simple share price return, TSR factors in dividends, a crucial element of total returns, particularly for those investing in high-dividend-yielding companies or investors with a keen eye on income generation. Share price return alone might miss out on this vital aspect, potentially skewing the perception of a company’s performance.
Adjustments for Capital Changes:
TSR smartly adjusts for capital changes like share splits or special dividends, ensuring comparisons across companies remain equitable and consistent, no matter their individual capital adjustment histories.
A Comprehensive View of Value Creation:
By including both dividends and share price appreciation, TSR offers a full spectrum view of how a company creates value for its shareholders. This is particularly important when comparing companies with diverse strategies for value delivery, be it through growth or income.
Levels the Playing Field:
The inclusion of dividends in TSR allows for a fairer comparison among companies with varying dividend policies. This means a company might show lower share price returns but could be delivering superior value through generous dividend payouts.
Promotes a Long-term Outlook:
TSR favours a long-term perspective by rewarding companies that consistently provide value, not just through immediate share price increases but also through sustained dividend payments.
Total Shareholder Return goes beyond mere share price changes to provide a nuanced assessment of a company’s performance and its commitment to shareholder value. For companies navigating the complexities of executive compensation and employee incentive plans, understanding and leveraging TSR can foster alignment with long-term strategic goals.
How can ShareForce help?
ShareForce’s web-based platform enables organisations to efficiently manage their employee incentive plans, including those linked to TSR performance metrics. Whether your goal is to improve executive compensation strategies or enhance shareholder engagement, ShareForce’s technology automates and simplifies the management of your employee incentive plans. This allows your rewards and finance teams to prioritise key tasks such as cost control and employee retention strategies.
You can book a demo by filling in the form below or by visiting website: www.shareforce.net/contact
