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ACCA Strategic Professional · Advanced Performance Management · Financial performance measurement

The board of Calder Group links 50% of executive long-term bonuses to relative TSR against a peer group over three years. The finance director warns that this may produce unintended results. Which concern is the most valid criticism of using relative TSR as the sole long-term shareholder value measure for executives?

The key weakness is that TSR depends on share price movements, which are affected by market sentiment, sector trends and other factors outside managers' control. Rewards may therefore be paid or withheld regardless of actual managerial contribution, even though TSR itself uses market data rather than accounting profit.

  1. ATSR cannot be calculated for listed companies because dividends are unobservable
  2. BTSR is driven by share price movements, which can be affected by market-wide sentiment and factors outside managers' control, so rewards may not reflect managerial performanceCorrect
  3. CTSR ignores share price changes and only reflects dividends paid
  4. DTSR is based on accounting profit and is therefore easily manipulated by accounting policy choices

Explanation

TSR relies on market prices and dividends, so it is influenced by market sentiment, sector moves and expectations rather than just managers' actions. It is not accounting-based, and it does include price changes, so the other options are wrong.

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