EXECUTIVE PAY
How should you handle exchange rates when determining long-term incentives?
New research by Kepler Associates, a firm of reward consultants, has called into question the way some companies with international rivals use total shareholder return to calculate executive rewards.
Total shareholder return (TSR) is currently the most common performance measure for long-term incentive plans. Although most plans compare a company's TSR performance to that of a peer group of UK companies, these comparators are increasingly likely to include overseas competitors listed in foreign currencies.
Approaches to handling exchange rates
Kepler's research reveals that for peer groups containing overseas competitors, two different approaches to handling exchange rates for the calculation of TSR have emerged:
The first approach measures TSR in domestic currency — in other words, the currency in which each peer has its primary listing.
The other approach measures TSR in a common currency.
This choice can have a significant impact on relative TSR rankings and hence on pay-outs for long-term incentive plans.
Decision tree
Kepler Associates has developed what it calls a decision tree to guide companies on whether to calculate TSR for their international peers in domestic or common currency.
The factors which should drive your company's choice include:
actual overseas listing currencies
geographic mix of peers' operations
long term interest rate differentials.
Want to know more?
Kepler Associates is a measurement and reward consultancy which helps companies to more closely align the interests of shareholders and employees .
If you would like more information, contact Kepler at www.kepler-associates.com