ii. Long term incentive
Key details of the LTI plan are shown below:
TABLE 4 - LTI PLAN
Description
LTI grants are determined annually by the Board and are aligned to the Group’s strategic financial
targets. The grants are provided in the form of EPR and are based on an assessment of market
benchmarks and performance.
Potential maximum LTI
The maximum value of EPR granted to the Group CEO and Executive team under the LTI plan is 150%
and 125% of their annual fixed remuneration, respectively.
The number of EPR granted is based on the face value of an IAG ordinary share at 30 June before the
grant date.
The EPR granted during the year will not vest and have no value unless the performance hurdles are
achieved. No dividend is paid or payable for any unvested or vested and unexercised EPR.
Performance hurdles
The LTI has two performance hurdles of ROE and TSR with 50% of each allocation subject to the ROE
hurdle and 50% subject to the TSR hurdle:
ROE is measured relative to IAG’s WACC. The ROE hurdle uses cash ROE to align with the reporting
of IAG’s financial performance to the external market and is used to determine the dividend. Cash
ROE is reported ROE adjusted for amortisation and impairment of acquired identifiable intangible
assets and for unusual items; and
TSR is measured against that of the top 50 industrials within the S&P/ASX 100 Index. An
averaging calculation is used for TSR over a 90-day period for start and test day values to reduce
the impact of share price volatility.
Rationale for choosing
performance hurdles
The hurdles require superior financial performance over a 3-4 year period and are directly linked to
IAG’s strategy.
ROE provides evidence of company growth in profitability and is linked to shareholder return. IAG uses
ROE as a key internal measure of the efficiency of its financial performance. IAG has a stretch strategic
target of achieving an ROE that is one and a half times greater than its WACC.
TSR provides a direct link between Executive reward and shareholder return by measuring the value
created for shareholders through the appreciation of the share price and the value of dividends. The
value created is compared to that of companies within IAG’s peer group. IAG has a strategic target of
providing total shareholder returns in the top quartile of its peer group.
Testing of performance
hurdles
ROE
The ROE portion of LTI is tested from 1 July of the grant year to 30 June three years later. The vesting
schedule is shown below:
no vesting below 1.2 x WACC;
minimum vesting at 1.2 x WACC (20% of ROE portion); and
maximum vesting at 1.6 x WACC (100% of ROE portion)
with straight line vesting in between.
TSR
The TSR portion of LTI is tested four years after the base date (being 30 September 2018 for the
September 2014 grant). The TSR portion of awards granted after 1 July 2013 is subject to a four year
performance period with no additional opportunity for retesting. For EPR granted prior to 1 July 2013,
the TSR portion of LTI is tested three years after the base date and then again at four years and five
years.
The vesting schedule is shown below:
no vesting below 50th percentile of IAG’s performance measured against the top 50 industrials
within the S&P/ASX 100 Index;
minimum vesting at 50th percentile (50% of TSR portion); and
maximum vesting at or above 75th percentile (100% of TSR portion)
with straight line vesting in between.
Instrument
Rights granted after 1 July 2013 may be settled with IAG ordinary shares or with cash if performance
hurdles are achieved, as determined by the Board. Rights granted prior to 1 July 2013 are settled with
IAG ordinary shares. These are exercisable for shares if performance hurdles are achieved.
Forfeiture conditions
Under the terms of the LTI, if an Executive ceases employment with IAG voluntarily before the
performance hurdles are tested, the unvested EPR will generally lapse. In cases where the Executive
acts fraudulently or dishonestly or is, in the Board’s opinion, in breach of his or her obligations to the
Company, the unvested EPR will lapse.
24 IAG ANNUAL REPORT 2015
