TSR Tracking: Index vs Select Peer Group

Last month we examined the effect of including or excluding delisted companies from an agreed peer group on tracking total shareholder return for the assessment and verification of employee entitlements.

This month we look at the difference a tailored comparator group can make in determining vesting entitlements.

Many companies benchmark their long term performance against the performance of an ASX index.

We have mentioned that this is not always appropriate and that a more selective comparator group of like entities may be more representative.

Yet what happens when a company operates in the international market and has almost no local comparators?

Should the company revert to comparing its total shareholder return performance with a broader Australian index? Or measure itself against its true international competitors?

This decision can make an enormous difference to the equity vesting to executives as demonstrated in the graphs below of an example company’s relative total shareholder return performance.

Let us again assume a company has a vesting profile where 50% of the equity vests at the median of the peer group (in this case we’ve chosen the ASX300) and 100% at the 75th percentile. We have used 60-day smoothing. TSR is rebased to 100 at the beginning of the period.

In the first graph we compare the company against the ASX 300 index. As can be seen, almost all of the equity would vest to the executives.

TSR tracking using an ASX index

In the second graph comparing the company against international competitors, none of the equity would vest to the executives.

TSR tracking using an ASX index

So which of the comparator groups is more representative of the company’s performance? Finding the right answer to this question is difficult and it is imperative that companies get it right.

Egan Associates’ analytics function supports clients in this area, providing advice on what is most appropriate for the organisation.

We provide a benchmark analysis service for relative TSR to determine the percentage of rights/options which vest and verify Board and/or Remuneration Committee decisions to vest securities. We also monitor relative TSR performance over a series of grants on a quarterly or six monthly basis as requested by clients to inform the Board, Remuneration Committee and key executives how performance is tracking against TSR hurdles.

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