eps insight long term incentive share plans in australia · 2019-01-24 · welcome to the second...

Corporate Markets

EPS Insight Long Term Incentive Share Plans in Australia

Equity Plan Solutions January 2019

In this edition 3

2018 LTI plan landscape 4

TSR in focus 6

SunRice in the spotlight 8

miraqle metrics 10

Need to up the take up? 12

Contents

Welcome to the second edition of EPS Insight. With executive remuneration a constant topic of conversation in corporate Australia, we will examine Long Term Incentive (LTI) share plans, focussing on the varying ways companies are constructing their LTI plans and the behaviour of employees once their awards have vested at the end of the performance period.

In this edition

This report contains insights on LTI plan trends, including the type of performance conditions and instrument, performance periods, post vesting activity and employee engagement, and covers all the LTI plans offered by Link Group equity plan clients in 2018.

Additionally, we have included a case study on SunRice’s ‘MyShare Plan’ and the successful roll out of the plan to their staff in early 2018.

Key Takeaways

We hope you find this edition informative. If you would like further information please contact your Client Relationship Manager.

67%

of Link Group clients had a three year

performance period*

80%

of Link Group clients have two or more performance

conditions attached to their LTI awards*

60%

of Link Group clients have relative Total Shareholder

Return as the key performance condition*

* within the ASX 300

Link Group EPS Insight Long Term Incentive Share Plans in Australia • 3

2018 LTI plan landscape

Type of performance conditions

60% of Link Group clients (within the ASX 300) have relative Total Shareholder Return (TSR) as the key performance condition followed by Absolute Earnings per Share (EPS). Return on Capital (ROC) and Compound Annual Growth Rate (CAGR) are becoming a popular alternative to the TSR and EPS conditions.

Type of vesting

The majority of companies still have cliff vesting, however there is an emerging trend of staggered vesting prolonging the vesting period.

Number of performance conditions

The majority of clients have two performance hurdles, with an increase to three conditions with the condition split 80/20 or 50/50.

Type of instrument

Share rights are still the equity instrument of choice, however since the July 2015 taxation changes, Option plans with exercise periods were introduced to allow further tax deferral for employees.

60%

TSR

20%

1 COND

28%

OPTIONS

78%

CLIFF VESTING

24%

EPS62%

2 COND

72%

RIGHTS

22%

STAGGERED

11%

ROC18%

3 COND

5%

CAGR

4 • Link Group EPS Insight Long Term Incentive Share Plans in Australia

Post vesting transactions

24% of Link Group clients offer deferral post vesting. The length of deferral period varies from 2 to 5 years post vesting.

On average 40% of the LTI participants have partially or completely sold their vested shares within one year. 31% of clients have implemented an additional deferral period post vesting following the 2015 taxation changes.

There is greater focus on remuneration reports and we are observing companies updating their plan rules and offer documents with appropriate clawback and malus provisions. The most common triggers for the malus and clawback provisions are gross misconduct or misstatement of results. The occurrence of clawbacks is extremely rare.

Restricted share plans

The majority of top ASX 200 companies have implemented a time-based deferral scheme for short or long-term incentives. This is driven by shareholders wanting to hold executives accountable for actions that may have an impact in two or three years. The deferral period is generally 2 to 3 years with awards vesting in tranches during the period.

Length of performance period

An increasing number of Link Group clients are moving to 4-year vesting periods. Some clients are forced by legislation, and there is also demand from shareholders driving longer performance periods.

Number of LTI participants

The number and groups of employees participating in an LTI scheme vary across the top ASX 200. The average number of participants is just under 35, with offers made to key management personnel and senior business unit managers.

Number of Participants

Company 1 11

Company 2 13

Company 3 30

Company 4 60

Company 5 6

Company 6 20

Company 7 10

Company 8 10

Company 9 150

Company 10 13

19%

2 YEARS

67%

3 YEARS

14%

4 YEARS


TSR in focus

Total Shareholder Return (TSR) remains the most common performance-based condition for LTI Plans. TSR is most commonly applied as shown below:

TSR of Group relative to TSRs of Comparators

Proportion of Performance Rights vesting

Below 51st percentile 0%

51st percentile 50%

Between 51st percentile and 75th percentile Straight line vesting between 50% and 100%

75th percentile or higher 100%

TSR during the period 1 July 2015 to 30 June 2018 – based on a one month average of accumulation index price methodology.

TSR results for the year

For Link Group clients who currently engage our miraqle metrics team for TSR calculation, the average TSR percentage was determined to be 55.35%.

We looked at each industry sector below:

Industry Sector Sector total shareholder return

Health Care 75.20%

IT 49.94%

Materials 49.20%

Consumer Discretionary 44.87%

Consumer Staples 44.13%

Industrials 40.59%

Utilities 37.65%

A-REIT 29.18%

Financials 12.09%

Energy 10.41%

Telecom -43.66%


SunRice in the spotlight

Tell us a little about SunRice

Our company was built by the Australian rice industry over many decades, and today it’s strengthened by a broad portfolio of subsidiary and complementary businesses.

We supply almost 50 countries with diverse, innovative and nutritious rice food products, and through our successful food ingredients and food service divisions, contribute to thousands of other brands and businesses the world over.

Our five-year strategy has a dual objective, to improve the prices we pay our growers, whilst increasing returns for our shareholders. This will be achieved by focusing on 5 key areas:

• Cementing a global supply chain to respond to increased demand in branded products, ensuring quality and sustainability

• Repositioning Australia as the source for premium branded rice markets

• Using our capabilities to exploit evolving global food trends, especially in health and snacking

• Being recognised for our high performance in a positive, inclusive and accountable culture

• Maintaining a strong, cash-generative and diverse portfolio.

Can you elaborate on employee involvement in the Workplace Strategy at SunRice?

Our people play an integral part in the workplace strategy.

SunRice has created cross functional teams based on the 5 year strategy. These teams are responsible and accountable for determining key aspects of the strategy, objectives and contributions to achieving our goals. This includes innovative changes, meeting business-as-usual targets, as well as step outs to achieve our long-term strategy.

In March 2018 you launched the new MyShare Plan. Tell us a little about the plan and why the decision was made to launch the plan?

In 2018 SunRice launched its MyShare Plan to 913 eligible employees. The company’s goal was to provide employees with the opportunity to become shareholders and share in any future success. Employees were able to purchase B Class shares under the SunRice Company structure, which would entitle them to any capital growth and dividends following a three-year disposal restriction period.

The anticipated result of collective effort is the potential to improve company performance and thereby increase shareholder value.

We spoke to Janice Hiskett-Jones, Head of Rewards at SunRice regarding the company and its new MyShare Plan.

SunRice 2018 SunShares PlanWork for success. Share in the success.

The information contained is general only and has been prepared without taking into account your objectives, specific personal circumstances, financial

situation or needs. You should consider obtaining your own financial advice from a licensed financial adviser. The Plan is discretionary in nature and

SunRice Group may amend, cancel, suspend or terminate the Plan at any time.

This provides you the opportunity to:• Become a B Class Shareholder* in SunRice• Benefit from potential capital growth on your share rights• Receive potential dividends on vested shares • Be part of the success that we are working on together

This offer is available exclusively to invited participants and should be kept confidential.

IMPORTANT: Refer to FAQs for implications regarding the ASX Proposal. * Refer to the Employee Share Plan for rules applicableto “Employee Holders”

The success of the SunRice Group is driven by the dedication and

commitment of our team, each and every day. In recognition of your valuable contributions, SunRice is pleased to invite you to participate in the

2018 Long Term Incentive (LTI) SunShares Plan, as part of your Total Rewards Incentive offer.

TOTALREWARDSOFFER

SunRice myShare PlanWork for success. Share in the success.

The information contained is general only and has been prepared without taking into account your objectives, specific personal circumstances, financial situation or needs. You should consider obtaining your own financial advice from a licensed financial adviser. The Plan is discretionary in nature and SunRice Group may amend, cancel, suspend or terminate the Plan at any time.

This is your opportunity to:• Become a B Class Shareholder* in SunRice • Benefit from any potential future dividends and share price growth• Be part of the success that we are working on together

IMPORTANT: Refer to FAQs for implications regarding the ASX Proposal. * Refer to the Employee Share Plan for rules applicableto “Employee Holders”

Eligible employees are:• Employed by the SunRice Group or one of our subsidaries;• Permanent (full-time or part-time) or in a fixed term contract (greater than 12 months if salary sacrificing); and an• Australian resident for tax purposes.

The success of the SunRice Group is driven by the dedication and commitment of our team, each and every day. In recognition of your valuable contributions and ongoing loyalty, SunRice is pleased to offer eligible employees the opportunity to participate in our Employee Share Scheme (ESS), called myShare Plan, which forms part of the Total Rewards Incentive offer.As we progress our five year strategy and next stage of the company’s growth, myShare Plan gives you the opportunity to share in SunRice’s continued success, along with our growers and shareholders.

TOTALREWARDSOFFER


As part of the launch you developed a communications strategy that targeted both offline and online communication channels. Can you provide a quick overview on the communications SunRice utilised before and during the offer?

SunRice, together with Sauce Communications, developed a comprehensive communications strategy that ensured we were able to reach all our employees with easy to understand material.

Communications included multiple mediums such as a teaser campaign, emails including a video message from the CEO, intranet news, face to face presentations at roadshows, text messages, team leader scripts, a website, screensavers, posters, FAQs, tax guides, brochures, invitation letters, help guides to the sign up process and the share registry. Deloitte provided support for all the technical documents, while Link Group developed and hosted the website that provided online information of the offer and a link to the registry and documents. Link also facilitated the distribution of emails and SMS, providing us with data to understand the ‘hit rate’.

The branding and visibility of the campaign meant that there was a buzz across all our offices and sites that something exciting was happening and you didn’t want to miss out!

Were you happy with the acceptance rate in the first year of offering the share plan? Do you think the additional work you placed into the communications strategy paid off?

We were thrilled with an uptake of 24%. Taking into consideration the outcome was above industry standards, despite our shares being on the NSX with low liquidity and limited rights under the SunRice Plan rules, (unlike typical ASX listed organisations), the uptake surpassed our expectations.

The effort that was put into the communications strategy definitely paid off.

What feedback have you received from employees since the launch of the plan?

The fact that we have nearly one in four employees in Australia as company shareholders, speaks volumes. Employees were delighted to be a part of the company’s future, and couldn’t wait to participate in the next round. Together with moving to the ASX in 2019, it can only be positive news.

OFFER EMAIL 1

SMS

EMAIL 2 EMAIL 3

SMS

BROCHURE

THE INFO THE RESULTS

DELIVERY

REPORTING/TRACKING

ENGAGEMENT

RE-TARGETING

THE OFFER

Offer

Offer

Reminder Last Chance

Last Chance

FAQ SHEETS

PRESENTATION

WEBSITE

VIDEO

APPLY REGISTRATION


miraqle metrics

miraqle metrics has more than a decade of experience in offering accurate, transparent and independent remuneration data services. We are trusted by Australia’s largest listed companies to deliver our suite of products and services. Our key strength is providing independent analytical advice to remuneration managers and teams.

Our services• Remuneration advisory services

• Calculation of performance conditions

• Valuation of equity awards

• Corporate action adjustment

• Advice on the link between company performance and remuneration payouts

• Consultation and other ad hoc analysis.

Calculation of Performance ConditionsLong and Short Term Incentive Awards typically only vest upon performance conditions being met – miraqle metrics can provide an independent, arm’s length, verification of performance.

miraqle metrics specialises in calculating TSR vesting outcomes, but can also calculate any other financial condition including Earnings per Share, Return on Equity, and profit growth. Analysis can also be provided on the hypothetical performance required to attain vesting outcomes.

miraqle metrics can also provide regular performance updates throughout the performance period. For Link Group equity plan clients, performance results also display on the Investor Centre.

We use a fully automated, proprietary software system which delivers efficient data management, rapid turnaround and accurate calculation of performance hurdles, together with ranking tables by index, industry sector or other defined peer groupings.


Valuation of Equity AwardsAustralian and International Accounting Standards require all employee rights and/or options to be valued for the purposes of the financial statements – miraqle metrics can provide this valuation.

Valuations are provided in a clear, easy to understand report that highlights the valuation and the assumptions made to reach the result.

Valuations are conducted using all market standard models that comply with AASB 2 and IFRS 2, including Black-Scholes formula, Binomial/Trinomial Lattice model and Monte Carlo simulation. Our proprietary software is specifically designed to handle large datasets and can run over one million simulations, ensuring the accuracy of the fair value result.

Our services include:

• Advice on the most appropriate equity award pricing model for the equity award

• Developing option pricing models, including expected option life, expected volatilities and correlations

• Modelling the potential impact of plan design features on expected equity compensation expense to help companies understand the financial impact of plan design.

VWAP (Volume Weighted Average Price)It is very common for companies to determine the number of equity awards to be granted to employees using a ‘face value’ calculation. To assist, miraqle metrics has developed a fully automated self-service Volume Weighted Average Price calculator that can provide the basis for the face value calculation.

The calculator is commonly used by ASX companies of all sizes for calculations, including face value, dividend and reinvestment plans, share conversions, option repricing and ATO share plan reporting.


LK 1349.7 02/19 ISS3

Link Group

Level 12, 680 George Street

Sydney NSW 2000, Australia

linkgroup.com

Link Administration Holdings Ltd

ABN 27 120 964 098

Call in the expertsLink Group’s marketing team are experts in employee engagement communications across share plans and superannuation. They can develop marketing strategies, internal communications, and easily understood financially literate communications.

Review your communications Develop simple, clear and concise communications to ensure employees understand what is being offered and the benefit of the plan.

Move into the digital age Companies have seen a lot of success with plan-specific websites hosting plan information. SunRice won ‘Most Effective and Innovative Communications Program’ at the Employee Ownership Australia awards for their comprehensive communications strategy which included a website and videos providing information about their new MyShare Plan.

Engage the managers Ensure managers in the company understand the plan and promote it to their staff. Manager engagement is a key determinant of involvement.

Remember the rest of the year For total engagement ensure the plan is promoted throughout the year and not just during the offer period.

For advice or assistance with any of the above – Link Group is on hand to assist with your plan communications.

Need to up the take up?

eps insight long term incentive share plans in australia · 2019-01-24 · welcome to the second...

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