From Lottery to Well-Structured Incentive
Author: 5 November 2017 Download Full Article

Last month, we highlighted how the power inadvertently ceded to proxy advisors through the introduction of the Two Strikes Rule, had helped drive the adoption of an approach to LTI Plan design that was likely to be inconsistent with the long-term best interests of listed companies and their many stakeholders. 

We showed that the LTI design preferred by certain proxy advisors, and which is now in use in most ASX-100 companies, can encourage very different behaviours to those intended.  These LTI plans reward executives for their company’s capital market performance based on relative TSR outcomes.  But a Monte Carle Simulation shows relative TSR to be a flawed metric, operating more like a lottery than a well-structured incentive. 

In this month’s KBA Insights, we outline a practical, two-step solution through which Boards can transform their company’s LTI Plan from a lottery that produces unsatisfactory outcomes all round, into a well-structured incentive that encourages behaviours consistent with the long-term best interests of all stakeholders.

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