By far the most popular long term incentive (LTI) performance hurdle is relative total shareholder return (TSR).  Since this was first introduced to Australian boards by one of our directors in 1995 it has come to dominate LTI plans.  ASX 300 use of relative TSR exceeds FTSE 500 use, where these measures were first applied from 1992 after the UK commissioned Cadbury report on governance.  Unfortunately we have to say that now most applications of the measure have strayed far from what we would consider to be effective performance requirements.

Most relative TSR applications today are ineffective contributors to the establishment of credible and efficient LTI designs.  As a key component of the remuneration mix they fail to attract, retain or motivate.  The reason is peer group selection for comparison purposes.  The size of Australia’s economy means that industries, at best, are dominated by oligopolies.  Yet peer groups are often selected with 20, 50, 100, or even 200 companies for comparison purposes.  Senior management have next to no influence over relative TSR outcomes against a group representing such diversity of most sectors, markets, and expertise, and subject to widely varying profit cycles.   With no line of sight over outcomes the LTI is akin to a lottery ticket.  Hence, about 20% of senior management pay expense is wasted. 

We urge boards to review LTI performance measures.   Much more can be done.

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