Executives discount the value of long term incentives (LTIs) from the underlying and probable fair value. In behavioural economics this is known as “hyperbolic discounting” (see HERE). In response, and to better align executive interests with shareholder interests, some boards are considering converting LTIs to restricted share grants. These are receiving more external stakeholder support (see HERE, HERE and HERE). But what value do you place on the LTIs they will replace? There are multiple methods. One that some may consider is the extent that LTIs have vested in the past.

This article updates previous research on LTI vesting outcomes (See HERE).

Our research and analysis examined the vesting outcomes for ASX 200 LTI plans with performance periods ending between FY22 and FY23 as at the end of June 2023. We have broken down the analysis by year, Global Industry Classification Standard (GICS) Sector and the different groupings of performance measures:

• Market and non-market conditions,
• Relative total shareholder return (TSR) and absolute TSR; and
• Financial and non-financial metrics.

All vesting outcomes were taken as the final actual outcomes. This means any adjustments as a result of the board exercising its discretion are included. All vesting calculations are taken as a percentage of maximum LTI opportunities. Retesting has not been included in the analysis as it neither contributes any additional value nor is significant in terms of the final outcome. The sample consists of companies with LTI plans tested in the financial year.

The table below shows the LTI outcomes for ASX 200 CEOs in FY22 and FY23.

Table 1: FY22 and FY23 ASX 200 CEO LTI outcome as % of maximum

 

Over the 2 years, 86% of the companies with an LTI plan had a market measure (e.g. TSR) while 75% had a non-market measure (e.g. EPS growth).

Twenty-five percent of the companies in the sample had market measures only while 14% had non-market measures only.

Of the companies with a market measure, 91% had a relative TSR measure while 15% had an absolute TSR measure. The overlap shows some companies have both relative TSR and absolute TSR in the LTI. The preference for relative TSR remains prominent.

Ninety-two percent of the companies with non-market measures had at least one financial metric while 21% had at least one non-financial metric. The importance of non-financial metrics has been highlighted with CPS-511 compliant APRA regulated company annual reports being released this year, and several examples of market value loss from poor non-financial performance in recent years. One of the APRA regulation requirements is that non-financial metrics bear ‘material weight’ (see HERE).

Looking at the data, there is a slight increase in FY23 vesting outcomes compared to FY22. The analysis of vesting outcomes over these two years continues the trend found from prior analyses. The vesting outcomes appears to remain consistent over time. This can be seen in the table below.

Table 2: Comparison of ASX 200 Outcomes to Prior Analyses

 

We have broken down outcomes by GICS Sectors. The table below shows the median of the Sectors. The Consumer Discretionary, Energy and Information Technology Sector consistently performed well over the period. Consumer Staples, Healthcare and Utilities Sectors had a decrease across the period.

Table 3: FY22 and FY23 ASX 200 CEO median LTI outcome as % of maximum by sector

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