Design Features that Drive the Fair Value of a Relative Total Shareholder Return Award

Relative Total Shareholder Return (“Relative TSR”) awards are rapidly entering the mainstream. These innovative awards serve multiple purposes and constituencies – they create line of sight to senior executives, can span long time horizons, and are broadly accepted by governance agencies. However, unlike plain-vanilla stock options, Relative TSR awards can potentially have thousands of input assumptions, all of which interact in potentially non-intuitive ways.

This Issue Brief discusses the key design features that drive the fair value of a Relative TSR award to help human resources and accounting executives better plan and avoid surprises generated by this substantially more complex awards structure.