Most listed companies administer a Long-Term Incentive Scheme offering key management staff share rights or options that vest, subject to certain performance conditions. The performance conditions vary based on the company profile, industry, and objectives of the scheme. An appropriate selection of performance hurdles especially for market-based conditions is critical to the successful implementation of the scheme.
Additionally, as the vesting of the awards is subject to performance conditions it creates a complexity for the accounting team on how they value these awards and record the expense for financial reporting. Below are some insights from our Metrics team based on their years of experience in providing transparent and independent remuneration data services.
| What are the different valuation methodologies for market-based conditions? |
The Monte Carlo simulation approach is used to value the Awards subject to TSR performance conditions. Other typical valuation models are the Black Scholes formula and Binomial model. |
| What is the most popular type of market-based condition? |
Relative TSR, absolute TSR,EPS growth target are the most popular market conditions. We also observe CAGR of EBITDA, EPS CAGR, KPIs, ROCE, as well as Continuous Service and Group Revenue as additional performance conditions. There can be a few hurdles for a single LTI award, normally each with a percentage weight. |
| What is the Peer Group composition for the Relative Total Shareholder Return performance hurdle? |
They are usually composed of some of the popular S&P/ASX index (e.g.ASX 100) and with or without exclusions depending on the relevance of sectors in it or GICS. The peer group is also sometimes tailored to a small group of relevant companies. We have also observed TSR reports with international peer groups–either some index like FTSE 250 or mixed companies from around the world in particular sector. |
| What are the complexities of TSR calculation? |
The complexity of TSR calculation arises when a company in the peer group has been taken over (acquisition or scheme of arrangement), split, merged with another company or delisted. For such scenarios, you may decide to exclude the company from the peer group and not rank or keep them in the peer group with their TSR up to the point of suspension. Also, if there was a merger or demerger in the peer group company, some companies would prefer to have the TSR for that company calculated before and after these corporate actions. |