Idea in Brief
The Problem
Total shareholder return (TSR) has become the definitive metric for assessing company performance. But it conflates performance associated with operations and strategy with that arising from cash distributions.
A Better Measure
A new measure for assessing performance, core operating shareholder return (COSR), emphasizes value created through operations and does not penalize or reward managers for their dividend and buyback decisions.
The Impact
The adoption of COSR promises to bring about an increased emphasis on operational performance, a decreased reliance on financial engineering and cash distributions, and a more credible compensation process.
Total shareholder return (TSR) has become the definitive performance metric for public companies. As executive compensation has shifted over the past two decades away from grants of stock and options that vest with time to grants that vest with performance, TSR has become a critical element of governance and compensation and, therefore, of how firms are managed. TSR is sold as a neutral, market-based measure that captures value creation and can’t be manipulated by managers using accounting maneuvers. Are those claims justified?
