How fair are fair values?

Relative TSR is the most commonly used LTI hurdle among ASX 100 companies. Of the 48 ASX 50 companies with an LTI, 37 (77%) use relative TSR as one or more of the LTI performance hurdles.


LTI grants that vest based on relative TSR (a market condition) are expensed based on the amortised accounting fair value of the instrument. This value is generally estimated for accounting purposes using a Monte Carlo simulation and must incorporate the vesting conditions. Since accounting adjustments are not permitted in relation to the forfeiture of grants assessed against a market condition, the share-based expense is fixed, regardless of the vesting outcome. It is therefore relevant to assess the extent to which the fair value used to determine the share-based expense, aligns with the actual, or realised value of the grant.


We compared the initial fair value of grants made to 23 ASX 50 CEOs with the value at the earliest vesting date. Some companies were excluded because of the tenure of the current CEO. Others were excluded because the relative TSR hurdle has not been in place for long enough for vesting to occur.


The following table summarises the fair value, realised value and hypothetical maximum value, had full vesting occurred.

Table 1: Fair value compared with vested value


Percentage Vesting

AASB Fair Value at Grant Date

Realised Value at Vesting

Realised Value as a Percentage of Max Value






25th Percentile





50th Percentile





75th Percentile






The zero realised value generally reflects rights that have failed the TSR performance test and have not vested, but also includes one instance of a vested options grant that is currently significantly underwater. While this grant will have some inherent value until it lapses, the realisable value at vesting was zero and that was the value assigned for this analysis.


The realised value as a percentage of fair value was calculated for each CEO, and the statistics above are based on these values. They have not been calculated, for example, by dividing the median realised value by the median fair value.


Based on the average statistics, which include zeros, the realised value is 5% higher than the initial grant fair values. This outcome does not include the effect of forfeiture for other reasons such as resignation. However, it confirms that across the ASX 50, the initial fair values are close to the realised value at vesting.


Grants were also assessed more broadly across KMP executives, based on the realised value as a percentage of the initial fair value per instrument, rather than a dollar value in relation to the CEO grants. This enabled us to include an additional eight companies that were excluded in the CEO grant analysis above, based on CEO tenure.


The following table breaks down the vesting outcomes for 31 ASX 50 companies with a TSR test in the 2013 disclosure period.

Table 2: Vesting profile and average realised value

Vesting Outcome

Count (%)

Average Realised Value as a Percentage of AASB Fair Value

Full Vesting 100%

7 (23%)


Partial Vesting of 75.1% to 99.9%

4 (13%)


Partial Vesting 50.1% to 75.0%

6 (19%)


Partial Vesting 0.1% to 50.0%

2 (6%)


Zero Vesting

12 (39%)



The results suggest that only grants that fail to achieve over 50% vesting have a lower realised value than fair value.


The average share price (or share price less exercise price for options) at vesting was 200% of the initial fair value of the instrument.


The results were not significantly different for the additional eight companies in the analysis.


Companies that achieved full vesting provided an average reward of almost 250% of fair (expensed) value representing a high return on investment. This should provide a significant performance and retention incentive, provided it is not perceived as a chance outcome. This underlines the importance of establishing a robust peer group, or benchmark when implementing or reviewing a relative TSR tested LTI.


Since the grants analysed above were made, companies have increasingly broadening their relative TSR benchmarks to include the following:

·         An additional group of peer companies such that the company is compared to an industry group and a general group of peers (e.g. ASX 200 financials and ASX 100)

·         A cap-weighted index instead of a discrete list of companies to overcome the problems associated with listing, delisting and the M&A activity of peer companies in some sectors

·         An additional group of global peer companies or a global index


Other recent enhancements to improve governance include:

·         The increase in threshold performance from the 50th percentile to the 51st percentile

·         The reduction in cliff vesting at the threshold from 50% (e.g. 20%)

·         The reduction in the frequency of retesting


We would encourage companies to think outside the square and consider the following:

·         Should relative returns be assessed on risk-adjusted basis?

·         If the relevant index returns are predominantly driven by a few large companies can it be custom weighted to provide a more valid benchmark?

·         What represents outperformance of an index, given that indices don’t have a 75th percentile?

© Guerdon Associates 2024
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