Absolute performance measure is based on a stated specific mathematical value or percentage, for example, Share price absolute where a company’s share price must increase to or by a certain stated value or percentage.

Vesting is the process, usually through the passage of time or the achievement of performance hurdles, of earning full ownership of an award but not necessarily conferring the right to exercise which may still be subject to a performance hurdle. In an equity incentive plan the standard vesting schedule accelerates (i.e. the vesting date is earlier) in part or in whole under certain conditions, such as termination of employment due to resignation, disability, death or retirement, or if the company undergoes a change in control. Acceleration may be triggered by the achievement of predefined performance goals.

Standards for acceptable practices and procedures issued by the Australian Accounting Standards Board. These include practices in regard to disclosure and accounting treatment of remuneration.

A numerical index of movement in a financial market, which takes account of price movement (capital) and income (dividends), and is used to assess investment performance. See also All Ordinaries Index.

An accumulation index measuring movements in the price (capital) and dividends (income) of the top 500 stocks listed on the ASX. The index is calculated continuously, and expressed as a number, which allows market fluctuations to be gauged (for example if the index was 2000 points and the overall value of the shares rose by 10%, then the index would rise to 2200).

The index is weighted according to company size in terms of market capitalisation.

Accumulation indices are calculated once daily after the close of trading using the following formula:

Where AMV is the Aggregate Market Value; the sum of the market capitalisation of all companies in the All Industrials Index.

A right under an employee equity plan to be allocated a form of equity, usually a fully-paid share (or its equivalent in cash).

These were formerly the rules adopted by a company when it formed that governed the company’s internal affairs and other matters affecting the shareholders and the company. These matters are now dealt with in the company constitution.

(Source: ASX Glossary of Sharemarket terms)

ASX/S&P Industrials and Resources Indices are comprised of industrial and resources stocks. There are sub-indices for sectors within these groups.

Australian Accounting Standards Board (until 1 January 1991 the Australian Accounting Standards Review Board). The AASB is the body which issues the standards of acceptable accounting practices and procedures.

ASIC is the Commonwealth government authority responsible for the regulation of the Corporations Act throughout Australia.

The average or arithmetic mean is determined by dividing the sum of any set of measurements by the total number of measurements in that set.

The Binomial Model is a method of valuation of options and is similar to the Black-Scholes Model; in fact the Black-Scholes Model is a special case of the Binomial Model with infinite time steps. The Binomial Model assumes that the share price of the underlying share will either rise or fall at each time step with a probability geared to the share’s volatility. From this assumption an estimated share price can be determined for any given time in the future and the value of the option can be determined.

A complex mathematical equation for the valuation of employee share options. The model takes into account a variety of factors, including volatility of the underlying share, value of the underlying share, risk-free interest rate, dividends, option price, and time remaining to expiration.

Black-Scholes Valuation

Created for the purpose of valuing options traded on exchanges, the Black-Scholes formula determines the current fair value of options. Share price, option price time to expiration, risk-free rate, investment risk (share price volatility) and share dividend payments all affect the value of options.

The difference between the proceeds from the sale of a security and the initial cost of the investment. If the proceeds exceed the cost this is said to be a capital gain.

(Source: ASX Glossary of Sharemarket terms)

A tax on the increase in capital of investments, payable when the capital gain is realised.

The simultaneous exercise and sale of shares which enables an optionholder to pay for the exercise of the share options, and any applicable withholding taxes, with proceeds from the sale of some of the shares resulting from the exercise.

A share option plan that allows the employer to grant a combination or shares, share options and performance shares to executives under one set of plan rules. Also called an omnibus plan.

See: Ordinary share

An index measuring the price of selected goods and services which are indicative of those purchased by Australian households. It allows comparisons of the relative cost of living, and is a measure of inflation.

Continuous disclosure is the timely advising by companies to keep the market informed of developments as they occur. The ASX Listing Rules require that once an entity becomes aware of information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately inform the ASX.

A security for a loan made to a company at a fixed rate of interest with the right to be either redeemed (i.e. repaid by the company) for cash or converted into ordinary shares at a predetermined date or within a certain period.
(Source: ASX Glossary of Sharemarket terms)

Principles of Good Corporate Governance and Best Practice Recommendations published by the ASX Corporate Governance Council in 2003 defined corporate governance as the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised commensurate with the risks involved.

A statistical measure dividing a sample that has been ranked from high to low into ten numerically equal groups. For example, the 9th decile (D9) represents a value that is higher than 90% of the values in the sample, and lower than the other 10% of the occurrences.

Process by which employees defer the delivery of a remuneration element such as share options and thus the tax payable on the options.

The removal of a company’s shares from listing on the stock exchange.

A measure used to determine a company’s share price taking into account potential outstanding shares during the reporting period.

When additional shares are issued by a company, the percentage of each shareholders’ ownership, or relative interest in the company is reduced. This reduction is called dilution.

The rate of interest applied to future cash flows to calculate their value expressed in today’s dollars. See also Time Value of Money

Where, in an equity plan, a performance measure in a performance hurdle is described as being at the Board’s discretion, it means that the Board has the right to decide on the performance measure to be used.

The annual dividend shown as a percentage of the last sale price for the shares. A simplified rate of return on an investment. See also Egan Methodology: Dividend Yield.
(Source: ASX Glossary of Sharemarket terms)

Measures the relationship between earnings and the number of shares issued by a company. It is calculated as the net profit (operating profit after income tax) divided by the number of ordinary shares on issue. The ratio is usually expressed in cents per share. Earnings per share is commonly used as a performance measure in employee equity plans.

A measure of the financial performance of a company. It is similar to net profit, except that the effects of tax benefits, deductions and loans are factored out, providing a better measure of companies’ underlying performance.

A measure of the financial performance of a company. As per EBIT but also excluding depreciation and amortisation.

*© Stern Stewart EVA is a measure of economic profit after all costs, including the cost of the equity capital employed in the business.

    EVA = NPAT – (c´ Capital)

Where:

c = is the company or business unit’s weighted average cost of capital.

Capital = is the total debt and equity capital employed in the business.

Related measures include Market Value Added (MVA) and Cash Flow Return on Investment (CFROI).

Reflects total assets of the enterprise as recorded in the Annual Report.

Egan Associates has developed simplified box plots to indicate the spread of the inter-quartile range. The indicators of the range (Tukey’s whiskers) have been removed. The Box Plot charts indicate the spread of the inter-quartile range, whereby the top of each box represents the 75th percentile, the bottom is the 25th percentile and the median is marked as a thick black line. From the length of the box it is possible to determine the spread, or variability of observations. If the median is not in the centre of the box then the values do not represent a normal distribution, that is, if the median is closer to the top of the box, the data is positively skewed.

This service provides demographic information about boards and committees. This is statistical analysis of aspects such as age, gender, and attendance at meetings, length of service and industry differences. Multiple directorships and interlocking directorships are also examined.

The dividend yield expresses the dividend per share as a percentage of the share price. The underlying dividend used by Egan Associates is calculated as the current annualised dividend rate. It is intended to represent the anticipated payment over the following 12 months and therefore may be calculated on a rolling 12-month basis, or as the indicated annual amount, or it may be a forecast. Special or once-off dividends are generally excluded. The dividend yield is based on gross dividends including tax credits. (Source: DataStream).

For the purpose of valuing the remuneration impact of the long term incentives, Egan Associates favour the future realisable value model. This share option valuation model values options based on the future value of the granted options assuming a subjective estimate of annual share price increases discounted back to the grant date to take into account the time value of money.

Reflects the operating profit of the organisation as reported in the Annual Report, exclusive of extraordinary items, either positive or negative, and before tax.

The method by which assistance is given to share plan participants to fund either the purchase of shares or the exercise of options. The following tables lists the purchase assistance types with a brief definition.

Code Description

C — Cashless Exercise – company provides short-term funds to exercise options.

D — Loan offered – loan may be repaid by dividends.

E — Loan offered – loan may be repaid by dividends and remuneration deductions.

F – Issued Fully Paid

G — Gift -Free Shares (generally to the value of $1,000 to all employees).

I — In lieu of incentive.

L — Loan offered – loan repaid by remuneration deductions.

N — None – no assistance provided.

S — Total Remuneration – Subscription (rather than loan) for shares via remuneration deductions.

T — Total Remuneration – Subscription of $1000 worth of shares via remuneration deductions.

Revenue, (or sales) is equivalent to the annual income of the enterprise noted in the Annual Report.

The risk free rate of return represents the hypothetical minimum return that would be received from an investment that is entirely risk free. While no investment is entirely free of risk, some investments, most notably government bonds, carry only minimal levels of risk and can be used as an estimate of the risk free rate of return. In the United States the government bond yield commonly used for this purpose is the zero coupon bond rate for a bond with a remaining term equal to the expected term of the options. A similar Australian bond would be an ideal measure for this purpose, however the Australian government does not issue zero coupon bonds. Egan Associates have found that the Commonwealth Government ten year bond rate is the most commonly used ‘best estimate’ of the risk free rate of return in Australia, and is recommended by Commonwealth Treasury for use by Australian Government organisations. Egan Associates believe this to be the most appropriate measure over the long term. In the case of options, however, the term under consideration is generally much shorter than 10 years. Therefore, the use of a Commonwealth Government bond that corresponds with the term of the options is more suitable, for example a 3 or 5 year Commonwealth Government bond.

Egan Associates use the following standards in our analysis to ensure that sample sizes are sufficient:

     90th (P90) and 10th (P10) percentiles – Sample size equal to or greater than 15,

     75th (Q3) and 25th percentiles (Q1) – Sample size equal to or greater than 7

     Median and Average – Sample size equal to or greater than 4

AASB 1017 – Related Party Disclosures and AASB 1034 – Information to be Disclosed in Financial Reports, set out the standards for the disclosure of director and executive remuneration.

Target annual bonus is the actual annual incentive payable on meeting plan targets.

Target remuneration potential is the expected annual total remuneration assuming a fully competent “on plan” performance.

TAR is inclusive of TEC plus actual annual incentive/bonus payments.

TC-S embraces TEC less the company’s deemed or actual contribution towards the executive’s superannuation plan. ‘Salary sacrifice’ superannuation contributions are included in nominal salary.

TEC embraces the ‘grossed up’ cost to the company of an executive’s fixed reward including nominal salary, the provision of a company vehicle(s), superannuation, FBT* and non deductible costs. TEC excludes incentive payments either annual or long term in nature, including payments (dividends) and deemed benefits arising out of share plan participation.

*Note: FBT is excluded in jurisdictions where the employer is not accountable for paying FBT

TR is inclusive of TEC plus actual annual incentive/bonus payments plus annualised value, at grant date, of all share, and share option grants.

Or

Total reward is inclusive of TAR plus annualised value, at grant date, of all share, and share option grants.

The conditions set by the share plan rules for participation. Eligibility may be based on permanent employment, length of service, seniority or employment in particular business units. Many plans reserve to the Board the discretion of deciding eligibility.

In sharemarket terms, equity is a synonym for share and represents part-ownership of a company, as distinct from debt securities such as bonds and debentures. (Source: ASX Glossary) Equity is also used to refer to rights to acquire shares such as options and allocation awards or rights.
(Source: ASX Glossary of Share market terms)

The date an options or rights holder can exercise the rights on the option/right by buying the underlying security.

The price at which an option/rights holder has the right to buy the underlying security. Also known as the Strike Price.

Notification by the option/right holder of a decision to buy or sell the underlying securities.

The date on which the right to buy or sell a security under option expires.

The quoted market price of a share that trades freely in an established market.

Fair value of a stock index futures contract is the current value of the underlying shares or index, plus an amount referred to as the ‘cost of carry’. This amount reflects the cost of the money required to buy and hold the basket of stocks which make up the index, less the value of the dividends paid on those shares during the term of the futures contract.
(Source: ASX Glossary of Sharemarket terms)

FASB Statement No. 123, Accounting for Stock-Based Compensation – US Financial Accounting Standards Board

Prescribes accounting procedures and disclosure for share-based remuneration plans in the United States. 
(See also Australian Accounting Standards Board)

FASB Statement No. 128, Earnings per Share

Prescribes how potential dilution should be calculated and presented in the earnings per share amounts disclosed in the financial statements of public listed companies in the United States.

The designated board overseeing financial accounting standards in the United States
(See also Australian Accounting Standards Board)

A United States based accounting method for measuring remuneration expense for share options where the measurement date is fixed at the grant date. The measurement date is the first date that both the number of shares and the price to be paid are known.

The sum of annual remuneration payments not contingent on individual, group nor company performance.

This share option valuation model values options based on the future value of the granted options assuming a subjective estimate of annual share price increases discounted back to the grant date to take into account the time value of money.

This is a simple compound growth model, however through the use of a discount rate it values options at the date of grant, rather than the date of exercise. Valuations are based on the future value of the granted options assuming a subjective estimate of annual share price increases discounted back to the grant date to take into account the time value of money.

This is a simple compound growth model – inflation adjusted future value of share price gain.

Accounting principles that are comprised in a country’s accounting standards and legislation. Also defined as accounting rules recognised worldwide – although there are variations between countries in their application.

Accounting principles that are comprised in a country’s accounting standards and legislation. Also defined as accounting rules recognised worldwide – although there are variations between countries in their application.

The date that a company awards shares, share options or rights.

EPS = Net Profit After Tax / Weighted Average Number of Ordinary Shares

Headline inflation measures changes in the cost of living based on movement in the prices of a specified basket of major commodities, and refers to the year-on-year change in CPI.

Investment and Financial Services Association.
(Former name Australian Investment Managers’ Association)

An IPO is the first sale of shares of a company to the public. Also called a float.

The discount rate which results in future cash flows having a Net Present Value of zero.

The IASB is an independent accounting standard setter, established in 2001 and based in England. IASB cooperates with national accounting standard setters to achieve convergence in accounting standards around the world.

The difference between the current market price of the underlying asset and the exercise price of the option or warrant, but not less than zero. Expressed another way, the value of an option or warrant should it expire immediately with the underlying asset remaining at its current price. When calculating the intrinsic value for warrants, the conversion ratio needs to be taken into account.
(Source: ASX Glossary of Sharemarket terms)

The excess of the related share’s fair market value above the exercise price of the option.

Kurtosis is the extent to which observations cluster around a central point. Accordingly, cases can cluster more towards the extremes of the distribution, resulting in a flatter distribution (positive kurtosis). Alternatively, cases may tend to cluster more towards the centre, as in a normal distribution, resulting in a more peaked distribution (negative kurtosis).

A share plan in which the employees purchase shares funded by a loan from the employer.

Incentive payment based on a performance period of three to five years.

This option requires payment of a predetermined value, less the market price at date of grant, from the holder of the option on its exercise.

Q1 represents a value that is at the top of 25% of the values in the sample, and lower than the other 75%.

The market value of a company determined by the total number of shares on issue multiplied by their market price.

Market value is the amount which an asset would realise if sold at a given point of time in an informed open market by willing parties at arm’s length.

Market value priced options require a payment of the full market price at date of grant from the holder of the option on its exercise.

The median is the middle ranking value, which 50% of the reported values are equal to or above and 50% are equal to or below.

Incentive payment based on a performance period of two to three years.

Total assets minus total liabilities; proprietorship; owner’s equity.
(Source: ASX Glossary of Sharemarket terms)

NPV is a form of investment analysis and is the difference between the capital cost of an investment and the present value of the future cash flows to which the investment will give rise.

See: Ordinary share

An option confers the right, but not the obligation, to buy or sell a share at a particular price fixed at the outset. It provides the gain on a share, but none of the risk if the share price drops below the exercise price. 
See also Share Option

Shares (other than preference shares) issued to investors that represent ownership in a company. An investor typically has such rights as voting in board elections and may be eligible to receive dividends.

See: Underwater

Overhang is calculated as the number of options outstanding plus the number of shares available for grant from an option plan, divided by the total number of company shares outstanding. If this ratio becomes too large, it can cause dilution.

Shares which have been issued with only part of their value paid. The balance outstanding is payable when calls for payment are made by the Company.

A statistical measure dividing a sample that has been ranked from high to low into groups, each representing one percentage of the sample. Percentiles sub-divide a total distribution. The 75th percentile is the value below which 75% and above which 25% of the cases fall. Percentiles also define the quartiles, as the total distribution is divided into four quarters. The first quartile (Q1) is the top value of the 25th percentile; the second quartile (Q2) is the median; the third quartile (Q3) is the top value of the 75th percentile.

A right but not an obligation to purchase a share or unit, typically at zero cost, within a given period upon attainment of predefined performance hurdles.

Performance shares are shares where retention of the shares is contingent upon the atainment of performance hurdles. See also Restricted Share

A share (or share unit) plan in which the right to the shares is contingent upon achievement of a predetermined performance hurdle over a specified period.

An incentive plan simulating a share plan by granting units that grow or decline in value based on the company’s share price over a specified period, typically two to five years. The total value that the unit increases or decreases over this period may be paid out in cash or may be delivered in shares.

An equity security that has specific features distinguishing it from ordinary shares. Preference shares generally have priority of claim over ordinary shares on the assets of the company in the case of dissolution. Priority is also granted over ordinary shares in the payment of dividends. Holders of preference shares usually have no voting rights.

Premium priced options require payment from the holder of the option on its exercise of a predetermined value in excess of the market price at date of grant. The premium price is equivalent to a performance hurdle.

The method by which assistance is given to share plan participants to fund either the purchase of shares or the exercise of options. See also Egan Methodology: Purchase Assistance

An option which a person has the right but not the obligation to sell, at a nominated price, within a specified period.

A statistical measure dividing a sample that has been ranked from high to low into four numerically equal groups. For example, the 3rd quartile (Q3) represents a value that is at the top of 75% of the values in the sample, and lower than the other 25%.

A related party of a public company is defined in the Corporations Act to include a director of the company or of its parent, a spouse or de facto spouse of such a director, a parent, son or daughter of such director or spouse, and a company of which the company is the parent entity.

A measure that is compared with that of a group of other companies or a particular index, for example, TSR relative where the company’s TSR must perform as well or better than a stated peer group of companies or market index. Typical comparison groups or indices include the ASX All Ordinaries Index or a group of companies from a similar sector to that of the target company.

Repricing is undertaken when the existing exercise price of a parcel of options granted under an employee option plan is greater than the current or anticipated market price. Repricing is reducing the exercise price so that the exercise price is equal to or less than the current or anticipated market value.

Restricted shares are shares held (usually under an employee equity plan) subject to a restriction on dealing with the shares until a specific event occurs. This is usually the completion of continuous employment with the company over a period of years. Dealing includes sale, transfer or mortgage.

In analysing shares as investments, return on assets is calculated to show how much profit a company is making on the assets used in its business.

Return on assets = (Earnings before interest & tax / Total assets) x100 = %.

(Source: ASX Glossary of Sharemarket terms)

In analysing shares as investments, return on equity is calculated to show the return the company has made for shareholders on their investment. Shareholders’ equity normally excludes intangible assets such as goodwill and is calculated by deducting total liabilities and intangibles from total assets.

Return on equity = (After-tax profits / Shareholders’ equity) x100 = %.

(Source: ASX Glossary of Sharemarket terms)

ROI is a measure of company performance and assesses the effectiveness with which management utilises the total assets at their disposal. ROI is calculated as EBIT as a percentage of total assets. ROI is also termed EBIT on total assets

Revenue is defined in AASB 1004 ‘Revenue’ as inflows or other enhancements, or savings in outflows, of future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners, that result in an increase in equity during the financial year. More generally revenue is the accomplishments of the earning activities of an entity during a period, resulting in increases in proprietorship. They represent actual or expected cash inflows that have occurred or will eventuate from delivering or producing goods, rendering services, or carrying out other activities that represent the entity’s on-going operations.

(Source: ASX Glossary of Sharemarket terms)

The risk free rate of return represents the hypothetical minimum return that would be received from an investment that is entirely risk free. While no investment is entirely free of risk, some investments, most notably government bonds, carry only minimal levels of risk and can be used as an estimate of the risk free rate of return. In the United States the government bond yield commonly used for this purpose is the zero coupon bond rate for a bond with a remaining term equal to the expected term of the options. A similar Australian bond would be an ideal measure for this purpose, however the Australian government does not issue zero coupon bonds.

Remuneration is broadly the money and benefits received for the performance of employment. It is defined for various purposes in the Corporation Act and the Accounting Standards.

The United States government authority responsible for protecting investors and maintaining the integrity of the securities markets.

A share represents ownership in a company, purchased for dividend income and the expectation of an increase in market value.

Contractual right of the employee to receive in cash the appreciation in the value of company shares over a certain period of time.

Share options refer to a contract giving the holder the right to purchase shares.

Incentive rewards based on the attainment of individual, company or group results measured over a period of one year or less.

A sample is designated as skewed if it is not a normal distribution and the median and average are not equal. If the data is positively skewed the extreme values tend to be at the higher end, conversely a negatively skewed distribution would tend towards extreme values at the lower end.

Smoothing dampens the effects of volatility of performance indicators and is used to stabilise volatility in performance measures such as share price. Smoothing makes use of a series of occurrences over time to calculate an outcome at a predefined instant in time; for example a 10-day moving average of a particular performance indicator is used to determine performance on a specific day, and this rolling average is recalculated over 10 days for each of the days under review.

The difference between the fair market value of the share and the exercise price.

See: Exercise Price

The actual annual incentive payable on meeting plan targets which may include financial targets (budget) and other key objectives.

The expected annual total remuneration assuming a fully competent “on plan” performance.

The concept that a dollar in the future is worth less than a dollar today. The reason for this is that the dollar today can be invested and earn interest, growing to be more valuable than the dollar in the future. Additionally the dollar in the future may be worth less because of the effect of inflation.

TAR is inclusive of TEC plus actual annual incentive/bonus payments. 
See also Total Employment Cost (TEC)

TC-S embraces TEC less the company’s deemed or actual contribution towards the executive’s superannuation plan. ‘Salary sacrifice’ superannuation contributions are included in nominal salary.

TEC embraces the ‘grossed up’ cost to the company of an executive’s fixed reward including nominal salary, the provision of a company vehicle(s), superannuation, FBT* and non deductible costs. TEC excludes incentive payments either annual or long term in nature, including payments (dividends) and deemed benefits arising out of share plan participation.

(*Note: FBT is excluded in jurisdictions where the employer is not accountable for paying FBT)

Total reward in the Egan methodology is inclusive of total employment cost (TEC) plus actual annual incentive/bonus payments plus annualised value, at grant date, of all share, and share option grants. 
See also Total Employment Cost (TEC)

Or

Total reward in the Egan methodology is inclusive of Total Annual Reward (TAR) plus annualised value, at grant date, of all share, and share option grants. See also Total Annual Reward (TAR)

TSR is a measure of the annualised return on investment of a hypothetical $1000 in a company’s ordinary shares. In calculating TSR, bonus shares are held, rights are sold on the first day of trading and reinvested in the underlying security, dividends are reinvested in the underlying security at the end month price following each ex-dividend date, no brokerage fees are included in the return calculation. In short, all capital gains and dividend payments over the period under consideration are incorporated. The return per annum is based on a twelve monthly compounding rate.

Underlying Inflation is a calculation measure that takes the headline inflation rate and excludes certain volatile items that are affected by factors other than general economic conditions.
(See also Consumer Price Index; Headline Inflation).

A share option is “underwater” or “out-of-the-money” when its exercise price is above the current market price.

Shares underlying options that an employee cannot yet exercise. Alternatively, owned shares with restrictions on transfer or subject to a period of time before they become transferable and subject to a substantial risk of forfeiture.

Q3 represents a value that is at the top of 75% of the values in the sample, and lower than the other 25%.

A US based accounting method for measuring the remuneration expense for share options where the measurement date is other than the grant date. Changes in the market value of the underlying shares are recognised as a remuneration expense on a periodic basis until the measurement date becomes known.

The process, usually through the passage of time or the achievement of performance hurdles, of earning full ownership of an award but not necessarily conferring the right to exercise which may still be subject to a performance hurdle.

The dates set out under the rules of an option or rights plan when parcels of options or rights become vested, and, under some plans, when they are exercisable.

Measure of the amount of fluctuation in price of the underlying security calculated using the standard deviation of average daily price change.

(Source: ASX Glossary of Sharemarket terms)

A ZEPO is a share option that is subject to a performance hurdle and often provides a restricted share on exercise. No payment is required from the holder of the option on its exercise.