Most executive pay is inefficient, with gaps for competitors delivering better economic value for the same face value

August 11, 2025

Remuneration Committee (Remco) chairs will be familiar with the dilemma of ensuring their CEO and executive team’s pay is at market and that they are not being under- or over-paid.

It is not as simple as benchmarking their fixed pay, STI and LTI on a “face value” basis. Intuitively, executives understand this, and gravitate to offers providing better economics.

Therefore, Remco chairs need to understand the true economic value of their executives’ pay compared to the economic value offered by competitors. The economic value of an executive’s remuneration opportunity could vary widely from competitors because the remuneration committee compares simply on face value. It does not consider probable realisable value. The “economic value” method calculates your executive pay against competitors considering:

  • The fair value of the payment vehicle; and
  • The probability of vesting.

We described issues associated with equity grants on a face value basis over the years (see, for example, HERE  and HERE).

This is not to say a remuneration committee should ignore the face value of executive remuneration. This is necessary because that is how investors and proxy advisers evaluate pay levels. While not a valid basis for assessment, it is better than using the accounting value or the inconsistent accounting versions of fair value that vary with the performance measure (see our 2008 article HERE).

To demonstrate the stark difference, this article shows how benchmarking without having regard for the probability of vesting and the treatment of dividends can result in significantly incorrect comparisons. We compare two equity grant packages for company A and company B:

  • Company A grants an LTI value of $1m using face value without regard for dividends. It has a relative TSR hurdle.
  • Company B grants equity with the same $1m face value. Half of the LTI is based on EPS growth and the other half is unhurdled contingent only on service.

If company B included and accrued dividend value assuming a 4% yield and a 4 year period to realisation, and company A did not, then the company A executive would have an economic value 15% less than the company B executive at grant.

Guerdon Associates’ analysis of historical hurdled LTI vesting indicates average vesting of 51% across the ASX 100 (see HERE).

EPS hurdled LTI has historically realised higher vesting than a TSR hurdle, at 58% against 57%. Note the vesting probability would vary with each company, but for now we will use the 58% for the EPS hurdle and 57% for the TSR hurdle.

So, in simple terms and without having regard for fixed remuneration and STI cash and deferral, the economic LTI value of the two packages is, prima facie:

  • Company A: $487,238
  • Company B: $790,000

The Company B executive would expect to realise 62% more from the equity grants than the Company A executive. Yet, a face value benchmark basis sees both having an equity grant value of $1m.

The message for Remco chairs is to understand the basis on which pay is being benchmarked:

  • Is it like-for-like?
  • Does it have regard for performance measures, vesting period, instrument exercise period, dividend value, and, if so, on what basis?
  • Has the realisable economic value been considered?