Long Term Incentives :Overview & Landscape in Asia
APCBF FORUM MEETING11th-13th March 2013
Puneet SwaniInformation Solutions Leader & Rewards Practice Leader -Asia, Middle East and Africa
MERCER
Agenda
• Introduction to Long Term Incentives Plans
• Valuing a Long term Incentive Plan
• Emerging Trends in Long Term Incentives
MERCER
The Performance
Long-term incentives
The Position
Reference salary
Through JobEvaluation
Through PerformanceReview
The Person
Through PersonAssessment
Allowances
Market premium
Short-term incentives
3P’s of Compensation – Paying it out
3
Advantages Disadvantages
Focuses on long-term performancehorizonsBalances short-term decision-makingCan award for true value creationStimulates group performance
May be difficult to establish measuresComplexity of program may lead tolack of understandingTakes time to developOutside factors may unduly influenceperformance
Long-term Incentives
Long term incentive plans have three-top level critical elements:• Alignment of reward with performance and value, with leverage• Performance measures based on financial value of the organisation• Timeframe exceeding one year
LTI Plans create alignment between owners and managers, by providingleveraged rewards for managers based on organisation value
4
Long Term Incentives
Equity
Cash
Stock Appreciation Rights
Restricted Shares
Performance Unit Plan/ LongTerm Cash Bonus
Phantom Shares / ValueAppreciation Plans
Stock Options
Performance Shares
Deferred Annual Bonus
Co Investment Plan
Stock Purchase Plans
Cash/ Stock Based Profit Sharing
Long-Term Incentive plansTwo Primary Categories
5
Types ofLTI Key Features Pros Cons
StockOption
Right to purchase shares of company ata stated price – typically fair marketvalue (FMV) on date of grant for adefined period of time (typically 10years)
No cash outflow forcompany
Benefit employee if theactual share price > FMVat point of exercise
Dilution of earnings pershare
Typically expire withtermination of employment
StockAppreciationRights(SARs)
Right to receive appreciation in stockprice from date of grant to date ofexercise; no investment required;payment in cash or shares
Cash-flow required forcompensation
Dilution of earnings pershare if paid in stock
PhantomStock
The right to receive an amount equal tothe appreciation – typically fair value orbook value – in stock price that occursbetween the grant date and a specifiedfixed maturity date; very similar toSARs
Substitute for options innon-listed companies
Appreciation andunderlying organisationvalue calculations can beunreliable
Types of Long-term Incentives
6
Types of LTI Key Features Pros Cons
RestrictedStock
A conditional grant of shares, withvesting contingent on continuedemployment
Simple Not performance related
PerformanceShares
A conditional grant of shares or unitswith payment or vesting contingent onachievement of specified performancegoals over a multi-year performanceperiod; typically have minimum, target,and maximum payout levels
Complex Performance related andcan provide high rewardsfor high performance
DeferredCashPayment
More commonly used in non-listedcompanies
Does not requireexistence of shares
Requires creation ofperformance measuresand “equity” vehicle
Types of Long-term Incentives
7
Different objectives may be better served by different plan vehicles
Fully meets therequirements
Somewhat meetsthe requirements
Partially meets therequirements
Does not meet therequirements
Objectives Plain VanillaStock Options
PerformanceShares
Plain-VanillaRestricted Shares
PerformanceCash Plan Option Plan
Strong performance emphasis tied toaggressive rewards
Significantly supports retention
Alignment with shareholder interestand corporate governance practices
Wealth sharing with employees
Simple and transparent
Provide competitive and motivationalcompensation opportunity
* Depends on metrics** Note: Pre-IPO and Post-IPO will differ
Accounting cost impact Cost neutral based on current % of annual base salary approachNote: accounting treatment is different for cash-settled and equity-settled plans
Dilution cost impactWe note that tax impact is not a decision criteria
Fulfils most of therequirements
Legend:
8
RapidGrowth
ModerateGrowth
Declining/Reinvent
Increase investmentExpand market shareEmphasis on acquisition,R&D, etc.
Reduce costs / improvebalance sheetImprove productivityMaintain market share
Generate cash / sellassetsOptimize productionNew strategic direction
BusinessStrategy
Entrepreneurial (risk taker) Operator / professionalmanager (risk averse)
Profiteer (risk taker andrisk averse)
HCProfile
Stock options / SARs / Valueappreciation cash plans
Performance sharesand/or Restricted stocks
Performance sharesand stock options
LTI Plan toconsider
LTI Role Designed to attract andretainLots of upside, no safetynet
Designed to retain anddrive performanceModerate volatility: preventwindfalls, limit downside
Designed to driveperformanceModerate volatility, butre-energize
Example LTI Design DriversBusiness Cycle Stage and Growth Expectations
MERCER 913 March 2014
Long Term IncentiveValuations
MERCER 13/03/2014
LTI Valuation Overview
• Value for any plan type is equal to:– Basic Plan Value, adjusted by– Performance Discount (if applicable), and– If needed, adjusted to reflect grant frequency, if not annual (we call this the
“Annualization Factor”)
• Basic Plan Value– For Appreciation-based plans, there are two Basic Plan Values
- Black-Scholes Value = # shares * B-S Multiple (calculated using our standard methodology)- Accounting Cost Value = # shares * Accounting Cost value (as reported by participant)
– For Stock-/Share-based plans,- Basic Plan Value = # shares * Market Value per share at grant (as reported by participant)- For these plans, Accounting Cost value = Basic Plan Value
– For Cash-denominated plans,- Basic Plan Value = Cash Value of Award (as reported by participant, may be either a total
amount or a calculated value (for cash unit programs) equal to # units * per unit cash value)- For these plans, Accounting Cost value = Basic Plan Value
MERCER 13/03/2014
• Performance Discount (applicable to all Plan Types)
– Zero discount for vesting that is Service-based or Performance-accelerated– Zero discount if Plan Structure is “Defined Target” (in which case, the value is
the “target” award level)– 20%-50% discount if vesting is designated as Performance-based and the Plan
Structure is either “Fixed Amount” or “Defined Maximum”, where…– Discount =
- 50% if Performance Measure is Relative TSR exclusively- 35% if more than one Performance Measure consisting of Relative TSR with other
financial/operational measures- 20% if one or more Performance Measure and Relative TSR is not one of the measures
LTI ValuationPerformance Discount
MERCER 13/03/2014
• Annualization Factor (applicable to all Plan Types)– Based on Frequency– Annual grants are not adjusted– Grants that are Biennial (every two years) are reduced by 50%– Grants that are Triennial (every 3 years) are reduced by two-thirds– Special One Time Grants or Upon Hire/Promotion Grants are reduced by
two-thirds– Grants that are made Semi-annualy are multiplied by two– Grants that are made Quarterly are multiplied by four
LTI Valuation Information
MERCER 1313 March 2014
Long Term IncentivesLandscape in Asia
MERCER 1413 March 2014
Long-term incentivesOffer LTI plans
MERCER 1513 March 2014
Long-term incentivesNumber of plans in operation
MERCER 1613 March 2014
Executive compensation trendsCompensation mix – Companies granting LTI awardsBy revenue size
Source :2012/2013 Asia Executive Remuneration Snapshot Survey
MERCER
1713 March 2014
Long-term incentivesLTI plan types
.
MERCER
US-style stock options or performance-based programs more prevalent
ASIA
• Australia: Trend has moved away from share options. Institutional investorguidelines have promoted more performance-based plans, particularlyperformance shares. Performance-contingent vesting most common
• Japan: Present value of executive stock options is very small – only 3% oftotal CEO compensation. Relatively recent interest in employee share plans.Start-up companies are encouraged through tax incentives to offer employeeshare plans. Most share plans are offered by foreign multinationals.
• India: Strong US influence. Options most prevalent. Grant of option and notthe vesting performance-based. Discount on option price common. In high-tech sector the option plan is broad-based. Stock purchase offered largely byforeign multinationals in India.
MERCER 1913 March 2014
Long-term incentivesLTI plan types
MERCER 2013 March 2014
Long-term incentivesDetermination of grant size
LTI Fair value at grant (as a percentage of annual base salary)
• The LTI value as a percentage of annual base salary typically varies by job level.
MERCER 2113 March 2014
Long-term incentivesDetermination of grant size
LTI Fair value at grant (as a percentage of annual base salary)
MERCER 2213 March 2014
Long-term incentivesGrant frequency
MERCER 2313 March 2014
Long-term incentivesReasons for non-regular grant
% of Companies making non-regular grants for the following reasons
MERCER 2413 March 2014
Long-term incentivesDetermination of grant size
MERCER 2513 March 2014
Long-term incentivesVesting type
MERCER 2613 March 2014
Long-term incentivesVesting period
• For most of the LTI plans, the most coming vesting period is three years,followed by five years.
MERCER 2713 March 2014
Long-term incentivesGraded vesting
MERCER
2813 March 2014
Long-term incentivesPerformance vesting measures
MERCER 2913 March 2014
Long-term Incentive ProgramsAnticipated direction of 2013 LTI grant levels
Source: Mercer Executive Remuneration Pulse Survey May 2013
Top Executives Other Executives
Reduce the LTI Grant Level 6% 9%
Maintain the LTI Grant Level 77% 75%
Increase the LTI Grant Level 7% 7%
Estimation Not Possible 10% 9%
No. of Responses 71 68
MERCER 3013 March 2014
Long-term Incentive ProgramsChanges to the mix of LTI grants in 2013 vs. 2012
Source: Mercer Executive Remuneration Pulse Survey May 2013
Other Executives
Increase No Change Decrease No. ofResponses
Stock Options 8% 81% 11% 26
Stock Appreciation Rights (SARs) 13% 87% 0% 8
Restricted Stock/Share Units 19% 76% 5% 21
Performance Shares, Performance Units 12% 85% 3% 34
Performance-based Cash-denominated LTI 0% 100% 0% 21
Top Executives
Increase No Change Decrease No. ofResponses
Stock Options 7% 74% 19% 27
Stock Appreciation Rights (SARs) 10% 90% 0% 10
Restricted Stock/Share Units 23% 73% 4% 22
Performance Shares, Performance Units 19% 81% 0% 37
Performance-based Cash-denominated LTI 0% 95% 5% 22
MERCER 3113 March 2014
Long-term Incentive Programs
Source: Mercer Executive Remuneration Pulse Survey May 2013
Actions that have been/will be taken by organizations with respect toLTI grants in 2013
Top ExecutivesHave Implemented/
Are Considering Implementing in2013
Not Considering No. ofResponses
Differentiate grant sizes based on individual performance 31% 69% 58
Use special retention grants 15% 85% 53
Reduce participation in the LTI program 7% 93% 55
Increase participation in the LTI program 8% 92% 53
Other 12% 88% 25
Other ExecutivesHave Implemented/
Are Considering Implementing in2013
Not Considering No. ofResponses
Differentiate grant sizes based on individual performance 31% 69% 61
Use special retention grants 21% 79% 57
Reduce participation in the LTI program 9% 91% 56
Increase participation in the LTI program 18% 82% 56
Other 12% 88% 25
MERCER 3213 March 2014
Long-term Incentive Programs
Source: Mercer Executive Remuneration Pulse Survey May 2013
Primary drivers for making changes to LTI programs
Percentage of Organizations0% 10% 20% 30% 40% 50% 60% 70%
Align with corporate governance best practices/industry/peer group practices
Align with guidelines from institutional shareholder/regulators or legal requirements
Differentiate awards based on individual performance
Have a better story to tell under new disclosure rules
Manage share usage/share reserve
Prepare for the uncertain business outlook in 2013
Reduce costs
Respond to recent market volatility
Respond to say on pay vote (past or future)
Retain key/top talent
Other
Top Executives Other Executives
MERCER 3313 March 2014
APCBF LTIData Insights
MERCER 3413 March 2014
Long Term IncentivesEligibility from 2010 to 2013
38.7%
3.7%
32.4%
4.1%
39.1%
3.1%
39.4%
5.7%
0
5
10
15
20
25
30
35
40
45
Executive Management2010 2011 2012 2013
Source : 2013 APCBF Survey
MERCER 3513 March 2014
Type of vestingMoving away from service based vesting?
75.5
48.5
59.2
24.5
51.4
40.8
0
10
20
30
40
50
60
70
80
2011 2012 2013
Type of Vesting : Executive
Service based Performance Based
Source : 2013 APCBF Survey
MERCER 3613 March 2014
Long term incentives as a percentage of base salaryNew entrants receive higher % of LTI (and performance based?)
18.720.0 20.8
7.69.9
5.3
0
5
10
15
20
25
2011 2012 2013
Year over year LTI to ABS ratio( All incumbents)
Executive Management
Source : 2013 APCBF Survey
MERCER
Long Term IncentivesThe Changing landscape….
0.12%
1.50%
5.43%
16.78%
34.65%
41.52%
0% 10% 20% 30% 40% 50%
Share Appreciation Rights
Performance Cash units
Long-term cash
Stock Share options
Restricted Shares
Performance Shares
Executive & Management Career Stream
3713 March 2014
Source : 2013 APCBF Survey
MERCER
In Summary………….
• Reduction in stock option plans
• Replacement of share option plans with performance based share plans andrestricted stocks
• Increased use of concrete performance measures (i.e., linking to shareholders’values) and relative plans such as short term annual incentive plans
• More emphasis on cash plans but with defer terms (long term) linking toperformance
• Narrowing eligibility and reducing grant sizes/values
• Replacement of all-employee option plans with all employee purchase plans
• Increased interest in tax-effective vehicles
MERCER
Mercer (Singapore) Pte Ltd (1978 02499E)
