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  Total Shareholder Return

Introduction to Total Shareholder Return

A widely-used performance target is based on total shareholder return (TSR). The total return from a share is made up of two elements: the increase (or decrease) in share value over a period plus any dividends paid during the period.

Problems with TSR

TSR measures changes in shareholder wealth and, therefore, has obvious appeal as a basis for rewarding executive directors. It is also a quite robust measure that can accommodate different operating and financing arrangements. Nevertheless, care must be taken while using it. Particularly, the issue of risk must be considered. Higher returns may be achieved by simply taking on higher-risk projects and directors should not necessarily be remunerated for increasing returns in this way.

To assess relative performance, TSR must be compared to that of similar companies. There may, however, be difficulties in finding similar companies as a suitable basis for comparison, as with BSkyB for example. (There is also a risk that unsuitable companies will be eliberately chosen to make the company's performance seem better than it is.)

Other problems like the inability to identify the contributions of individual directors to overall company performance, the inability to identify share price changes that are beyond the directors' control, and the fact that TSR can be manipulated over the short term, all conspire to make this a less than perfect measure.

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