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EvaluatingPayforPerformanceAlignmentImplementingaPayforPerformanceModelforAustralia

Authors:VasiliKolesnikoffSarahGallard

Published:August2017

EvaluatingPayforPerformanceAlignment

Enablingthefinancialcommunitytomanagegovernanceriskforthebenefitofshareholders.©2017ISS|InstitutionalShareholderServices 2of16

TABLEOFCONTENTS

EXECUTIVESUMMARY..................................................................................................................................................3

INTRODUCTION............................................................................................................................................................4TheISSPFPquantitativemethodologydeliversacommon,globalapproach........................................................4WhatWeMeasure--Pay.....................................................................................................................................4

CalculatingAustralianTotalPay..............................................................................................................................5WhatWeMeasure--Performance.......................................................................................................................5WhatWeMeasure--RelativeandAbsoluteAlignmentOverTime.......................................................................6

ISS'QUANTITATIVEEVALUATIONOFPAY-FOR-PERFORMANCEALIGNMENT................................................................7MeasuresofPay-for-PerformanceAlignment......................................................................................................7MeasuresofRelativeAlignment..........................................................................................................................7

RelativeDegreeofAlignment(RDA).......................................................................................................................7MultipleofMedian(MoM).....................................................................................................................................8

MeasureofAbsoluteAlignment...........................................................................................................................8Pay-TSRAlignment(PTA)........................................................................................................................................8

THEAUSTRALIANAPPROACHTOPEERGROUPCONSTRUCTION...................................................................................9NumberofPeers.....................................................................................................................................................9RemunerationDataandIndustryClassification......................................................................................................9PeerGroupConstruction........................................................................................................................................9Company-DisclosedPeers.....................................................................................................................................10

NOTESONIMPLEMENTATION....................................................................................................................................11PresentationWithintheResearchReports...........................................................................................................11

APPENDIX:BACK-TESTINGTHEMODEL.......................................................................................................................14RelativeDegreeofAlignment...............................................................................................................................14MultipleofMedian...............................................................................................................................................14Pay-TSRAlignment................................................................................................................................................14



EXECUTIVESUMMARY

Inthe2017annualmeetingseason,ISSisintroducingaquantitativepay-for-performance(PFP)assessmentcoveringthelargestAustraliancompanies.WehavesoughttoleveragethecommonfeaturesoftheISSpay-for-performancemodelsimplementedintheU.S.,Canada,andEuropewhereappropriate.Inaddition,theapproachhasbeenadaptedasnecessarytofittheAustraliancontext,notablyinrelationtotheconstructionofpeergroupsandthepaycalculationmethodology.

TheISSAustralianPFPmodelusesavariationofthegrant-day(orgranted)definitionofpaythatissimilartotheonecurrentlyusedintheISSPFPmodelsfortheUSandCanada,adaptedtothedisclosurepracticesinAustralia.Andsimilartootherglobalpay-for-performancemodels,themeasureofperformanceinthequantitativetestistotalshareholderreturn(TSR).AnISSPeerGroupisconstructedforeachsubjectcompanytomakearelativecomparisonofpayandperformancebetweenthesubjectcompanyandthelistofcomparablepeercompanies.Additionaldetailsoneachofthesetopicsisprovidedlaterinthisdocument.

ForISSbenchmarkvotingpolicy,assessmentofremunerationforAustraliancompaniesfollowstheISSGlobalPrinciplesonExecutiveandDirectorRemunerationwhicharedetailedbelow.Thesetakeintoaccountglobalcorporategovernancebestpracticeprinciples.

TheISSGlobalPrinciplesonRemuneration

Companiesshould:

1.Provideshareholderswithclear,comprehensiveremunerationdisclosures;

2.Maintainappropriatepay-for-performancealignmentwithemphasisonlong-termshareholdervalue;

3.Avoidarrangementsthatrisk“payforfailure;”

4.Maintainanindependentandeffectiveremunerationcommittee;

5.Avoidinappropriatepaytonon-executivedirectors.

TheISSAustralianPFPmodelwillprovidequantitativeelements,whichconsiderbothrelativePFPalignmentcomparedwithpeergroupsandabsolutePFPalignment.Themethodologyisdescribedinthispaper,and,likeourPFPmethodologyforothermarkets,itincorporatesmodelsforRDA(RelativeDegreeofAlignment,)MoM(MultipleofMedian)andPTA(Pay-TSRAlignment).

ItisimportanttoemphasisethattheadditionoftheAustralianpay-for-performancemodeltoISSbenchmarkresearchreportswillbeadditiveandisintendedtoprovideadditionaldatapointsforcomparability.Therefore,whilethePFPmodelreviewstotalpayversusTSRperformance,thequalitativereviewbyISSresearchanalystswillcontinuetotakeintoaccountvariouspayelements,suchasawardopportunities,servicecontracts,performancemeasuresandachievements,andactualawardpayouts,amongotherfactors.ThequalitativefactorsthatISSconsidersinitsholisticanalysisofpayarediscussedintheseparateISSAustralianbenchmarkpolicy.

TheinitialAustralianPFPcoverageuniversewillcomprisecompaniesintheS&P/ASX3001thatfallunderISS’Australiapolicycoverage.Forthe2017introductionofthemodel,theuniverseofconstituentswassetinJune2017.Indexconstituentswillbereviewedannuallygoingforward.ISSresearchreportsoncompaniescoveredbyAustralianPFP

----------------------1https://us.spindices.com/indices/equity/sp-asx-300



assessmentwillincludethepay-for-performanceassessmentformeetingsonorafter1October2017.

FurtherinformationwillbeavailablefromtheISSPFPhelpdesk,whichshouldbecontactedinthefirstinstanceforanyqueries.TheHelpdeskcanbecontactedusingthefollowingemailaddress:[email protected].

INTRODUCTION

ThecurrentISSpay-for-performance(PFP)modelfortheU.S.waslaunchedin2012,andsimilarmodelswereimplementedforCanadain2013andEuropein2016.Feedbackfrominstitutionalinvestorshasidentifiedsignificantinterestinaquantitativepay-for-performancemodelforAustraliaaspartofacommonframeworkofmeasuringpayandperformancealignmentinglobalmarkets.

However,ISSrecognisesthatremunerationdisclosureswithintheAustralianmarketdifferfromthoseoftheU.S.,Canada,andEurope;therefore,quantitativemethodologiesneedtobeadaptedtobeappropriatefortheAustraliancontext.ThepaydefinitionadoptedforISS’AustralianPFPmodelthereforetakesintoaccountthevariouselementsofpaycommonwithinthemarketandaccountsforAustralia-specificdisclosurepracticesinordertouseastandarddefinitionthatcanbeusedinrelativecomparisonsbetweenAustraliancompanies.

ThepurposeofISS'pay-for-performanceevaluationistomeasurethealignmentbetweenpayandperformanceoverasustainedperiod,andidentifycompanieswherethereappearstobeamisalignment..TheISSPFPquantitativeassessmentisdesignedtoidentifysuchmisalignments,basedonbothrelativeandabsolutepay-performanceevaluations,aswellastoidentifyapparentgoodorsatisfactoryalignmentthatinvestorsalsoappreciatebeingawareof.

TheISSPFPquantitativemethodologydeliversacommon,globalapproach

Thequantitativemethodologyutilisestwocomponents:

› Arelativeevaluation–rankingsofCEOpayandperformancerelativetopeercompanies.› Anabsoluteevaluation–CEOpayrelativetoshareholderreturnforthesubjectcompany.

Bothareconsideredfromaninvestor'sperspectiveinevaluatingtheefficacyoftopexecutivepaypackagesovertime.Fortherelativeevaluation,ISSpeergroupsaredesignednotforpaybenchmarkingorstock-pickingbutrathertocomparepayandcompanyperformancewithinagroupofcompaniesthatarereasonablysimilarintermsofindustryprofileandsize.

Theevaluationfocusesonthetotalpayfortheleadexecutive,typicallytheCEO,fortheperiodunderconsideration,althoughitisimportanttonotethatthethreedifferentmodelsmeasurepayoverthreedifferenttimeperiods(typicallyone,threeandfiveyearsfortheMOM,RDAandPTAmodelsrespectively.)Tokeepthingssimple,fortherestofthedocument,wewillrefertothisastotalCEOpay,asthisiswhatwillbeanalysedinthevastmajorityofcases.

WhatWeMeasure--Pay

AllfiguresintheAustralianPFPmodelarebasedonavariationofgrant-day(orgranted)pay.TheCEO’stotalremunerationincludesbasesalary,benefits,actualcashincentivesreceived(paidout),andthegrantedorgrant-datevalueofanysharerights(stock)oroptionawards.



Duringthedevelopmentofthemodel,theISSAustralianResearchteamreviewedtypicalpaydisclosuresinthemarketandtheoutcomewasthatamodelbasedongrantedpaywasdeterminedtobethebestfitandismostcloselyassociatedwiththemandateddisclosuresinthemarket.

CalculatingAustralianTotalPay

TheAustralianPFPmodelcalculatestotalpaybasedontheCEO’searnedcashandgrantedequityfortheyearsunderreview.Wherecompanydisclosureisconsideredtoolimitedtopermitthiscalculation,acompanymaybeexcludedfromthemodelforinsufficientpayinformation.Ifacompanywishestoseehowitstotalpayfigurewascalculated,itcanrequestthisinformationfromtheISSPFPhelpdeskviaAustralianP4PSupport@issgovernance.com.

BelowisabreakdownofthepaycomponentscoveredbytheAustralianPFPmodelalongwithadescriptionofeachcomponent:

Figure1.AustralianPFPTotalPayComponents

Item Description

TotalPay

FixedPay

Basesalary Theannualbasesalaryreceivedforthefiscalyear.Thisfigureisannualisedincasesofpartial-yearCEOs.

Non-monetarybenefits

Anynon-cashbenefitsandmiscellaneousamountsgiventotheindividual.Examplesarelifeinsurance,fringebenefitstax,andcommercialinterestonemployeeloans.

Superannuation Thestatutorypaymentforretirementtotheexecutivebythecompany(companycontribution).

RetirementAccrual Thenon-statutorybenefitsforretirementpaidtotheexecutivebythecompany.

Expatbenefits Thenon-cashbenefitsormiscellaneousamountinrelationtorelocationcostsgiventotheexecutive.

Otherbenefits Allotherpaymentsthatdonotfitintoanyothercategory,suchasclubmembershipfees,securitypayments,andhousingallowances.

Sign-onpayment

Thesign-onbenefitsamountthatanindividualreceiveduponjoiningthecompany.

Short-Term

Incentives

CashBonus Theearnedcashcomponentoftheshort-termincentives(paidoutanddeferred).DeferredShareBonus

Theearnedvalueoftheequitycomponentoftheshort-termincentivesthatanindividualearnedinrelationtothefiscalyear.

One-TimeSTI Thevalueoftheone-timeSTIawardthattheindividualreceivedduringthefiscalyear.Thiscaneitherbecashorequity.

Long-Term

Incentives

OptionAwardsThecompanydisclosedoptionawardfairvalue(companydisclosedgrant-datefairvalue)foreachLTIoptionawardgrantedwithinthefiscalyear.Includestime-based,performance-based,andretentionawards.

StockAwards

ThegrantdatevalueofLTIstockawardsgrantedwithinthefiscalyear,ascalculatedbyISS.ThestockawardsvaluesarecalculatedbyISSbytakingthetargetnumberofsharesgrantedandvaluingthematthegrantdateshareprice.Includestime-based,performance-based,andretentionawards.

WhatWeMeasure--Performance

Therearemanywaystomeasurecorporateperformance,andkeymetricsmayvaryconsiderablyfromindustrytoindustryandfromcompanytocompanydependingontheirparticularbusinessstrategyatanygiventime.Investorsgenerallyexpectincentiveplanmetricstostemfromthatstrategyandbedesignedtomotivatethebehaviorandexecutivedecisionsthatwillleadtoitssuccessfulexecution,buttheonekeycommonmeasureforinvestorsinthecontextofalong-termpay-for-performanceevaluationistotalshareholderreturn(TSR).



WewouldnotethatthisdoesnotimplythatISSadvocatesforcompaniestouseTSRasthesinglemetricunderlyingtheirincentiveprograms;manycompaniesandshareholdersmaypreferthatincentiveawardsbetiedtothecompany'sbusinessgoalsmorebroadlythanTSR.However,ifacompany’sbusinessstrategyissoundandwellexecuted,theexpectationisthatitwillcreatevalueforshareownersovertime,andthiswillgenerallybereflectedinlong-termtotalshareholderreturns.TSRisthereforetheprimarymeasureusedinISS'quantitativepay-for-performancealignmentmodels.VariousotherfinancialandoperationalmetricsarealsoconsideredwhencompanypracticesandremunerationdecisionsareanalysedaspartofthequalitativereviewundertakenforISSproxyresearchreports.

TheTSRdatausedintheAustralianpay-for-performancemodelisprovidedbythesamedatavendor(S&P/CompustatXpressFeed)usingthesameTSRmethodology(S&P’sstandardTSRmethodology)astheTSRdataalreadyincludedintheISSproxyresearchreports.

WhatWeMeasure--RelativeandAbsoluteAlignmentOverTime

In2011,asubstantialmajorityofinstitutionalinvestorrespondentstoISS'globalpolicysurveyconfirmedtwofactorsasimportantindeterminingpay-for-performancealignment:payrelativetopeers(consideredveryrelevantby62percentofinvestorrespondents),andpayincreasesthataredisproportionatetothecompany'sperformancetrend(consideredveryrelevantby88percentofinvestorrespondents).Amajorityofcompany(issuer)respondentsalsoindicatedthesefactorsasatleastsomewhatrelevanttoapay-for-performanceevaluation.

Inlightofthisandsimilarfeedbackfromroundtablesandotherdiscussionforumsoveranumberofyears,ISSincorporatedbothperspectivesintothequantitativecomponentofitspay-for-performanceanalysiswhendevelopingtheUSpay-for-performanceapproachwhichwaslaunchedin2012followedbythePFPmodelsforCanadain2013andEuropeinin2016.Thisensuresabalancedevaluationfrombothrelativeandabsolutepay-for-performanceperspectives.



ISS'QUANTITATIVEEVALUATIONOFPAY-FOR-PERFORMANCEALIGNMENT

MeasuresofPay-for-PerformanceAlignment

Atthecoreofthequantitativemethodologyarethreemeasuresofalignmentbetweenexecutivepayandcompanyperformance:tworelativemeasureswhereacompany’spay-for-performancealignmentisevaluatedinreferencetoagroupofcomparablecompanies,andoneabsolutemeasure,wherealignmentisevaluatedindependentlyofothercompanies’performance.

Thethreemeasuresare:

› RelativeDegreeofAlignment.Thisrelativemeasurecomparesthepercentileranksofacompany’sCEOpayandTSRperformance,relativetoanindustry-and-sizederivedcomparisongroup(i.e.,ISSPeerGroup),overathree-yearperiod.

› MultipleofMedian.Thisrelativemeasureexpressestheprioryear’sCEOpayasamultipleofthemedianpayofitscomparisongroupforthesameperiod.

› Pay-TSRAlignment.ThisabsolutemeasurecomparesthetrendsoftheCEO’sannualpayandthevalueofaninvestmentinthecompanyoverthepriorfive-yearperiod.

MeasuresofRelativeAlignment

RelativeDegreeofAlignment(RDA)

Thismeasureaddressesthequestion:IsthepaytheCEOhasreceivedfortheperiodunderreviewcommensuratewiththeperformanceachievedbythecompanyinthesameperiod,relativetoacomparablegroup?Themeasurecomparesthepercentileranksofacompany’sCEOpayandTSRperformance,relativetoacomparisongroupofatleast11companiesselectedbyISSonthebasisofsizeandindustryoverathree-yearperiod.

Todeterminethismeasure,thesubjectcompany’spercentileranksforpayandperformancearecalculatedforthethree-yearperiod.BecauseofthesensitivityofTSRtooverallmarketperformance,annualisedTSRperformanceforallcompanieswillbemeasuredforthesameperiod.

Combinedpercentileranksforpayandforperformancearecalculated,andtheRelativeDegreeofAlignmentisequaltothedifferencebetweentheranks:thecombinedperformancerankminusthecombinedpayrank.

Figure2.ExampleofcalculatingRDAscore

Performance Pay Difference

3-yearpercentile

rank32 59 -27

ValuesfortheRelativeDegreeofAlignmentmeasurerangebetween-100and+100,with-100representingthehighpayforlowperformance(i.e.,100thpercentilepaycombinedwith0thpercentileperformance),zerorepresentingahighdegreeofalignment(thepayrankisequaltotheperformancerank),andpositivevaluesrepresentingarelativeperformancerankabovetherelativepayrank.



Ifasubjectcompanydoesnothave3years’worthofpayorTSRdata,thenRDAwillberunusinga2-yearscope.Ifasubjectcompanydoesnothave2yearsofpayorTSRdataasofthemeasurementdate,theRDAtestwillbeexcludedfromthePFPassessment.

MultipleofMedian(MoM)

ThisrelativemeasureidentifiesinstanceswhereCEOpaymagnitudeissignificantlyhigherthanamountstypicalforitscomparisongroup,independentofcompanyperformance.

Calculatingisstraightforward:thecompany’sone-yearCEOtotalpayisdividedbythemedianpayforthecomparisonISSpeergroup.

Valuescanthereforerangefromzero(ifthesubjectcompanypaiditsCEOnothing)toanypositivevalue,withnoupperlimit.AMOMvalueof1.00indicatesthatCEOpayinthelastfiscalyearisequivalenttotheISSpeermedian.

MeasureofAbsoluteAlignment

TheabsolutealignmenttestisintendedtocomparepayandTSRtrendstodeterminewhethershareholders’andexecutives’experiencesaredirectionallyaligned.

Pay-TSRAlignment(PTA)

PTAisalong-termmeasureofdirectionalalignment.ItisimportanttonotethatitisnotdesignedtomeasurethesensitivityofCEOpaytoperformance–i.e.whetherpayandperformancegoupanddowntogetheronayear-over-yearbasis.

Themeasureiscalculatedasthedifferencebetweentheslopesofweightedlinearregressionsforpayandforshareholderreturnsoverafive-yearperiod.ThisdifferenceindicatesthedegreetowhichCEOpayhaschangedmoreorlessrapidlythanshareholderreturnsoverthatperiod.Fortechnicalinformationonhowtheregressionsarecalculated,pleaseseetheUSpay-for-performancewhitepaper,Pay-for-PerformanceMechanics,publishedinDecember2016.

Thetrendlinescalculatedbytheseregressionsareanalogoustoa5-year“trendrate”forpayandperformance,weightedtoplaceagreateremphasisonmorerecenthistory.ThefinalPay-TSRAlignmentmeasureissimplyequaltothedifference:performanceslopeminusthepayslope.



THEAUSTRALIANAPPROACHTOPEERGROUPCONSTRUCTION

TheapproachtopeergroupsintheAustralianpay-for-performancemodelmirrorsthatofothermarketsbybuildingpeergroupsbasedonacompany’sindustryandsize.Unlikeothermarkets,theAustralianISSpeergroupconstructionprocessdoesnotincludeacompany’sownself-disclosedpeergroup,andinanycase,manycompaniesinthismarketdonotdisclosetheirpeersgroups.Additionally,theAustralianconstructionprocessincludesareviewofeachsubjectcompany’sISSpeergroupbytheISSResearchteamtoensureanappropriatefitofpeercompanies,whichisparticularlyimportantgiventhesmallersizeoftheAustralianmarketandtheavailablepoolofpeercompaniesrelativetootherlargermarketssuchastheUSandEurope.

NumberofPeers

TheAustralianmodeltypicallyhasaminimumof11peers.TherelativePFPtests(RDAandMoM)requireaminimumof11peerswithsufficientdatatorun.

RemunerationDataandIndustryClassification

ISS’remunerationdatasamplecoversabout600Australiancompanies'totalremunerationforthepast3to5years–roughly300subjectcompaniesintheASX300androughlyanother300publiccompaniesintheAustralianmarketforuseaspeers-only.Allmonetaryamountsareconvertedtothedisclosurecurrencyofthesubjectcompany.

TheindustryclassificationusedistheGlobalIndustryClassificationStandard(GICS)2code,whichisafour-tiered,hierarchicalindustryclassificationsystemconsistingof11sectors(GICS2),24industrygroups(GICS4),68industries(GICS6)and157sub-industries(GICS8).Eachcompanyhasan8-digitGICScodebasedonitsprincipallineofbusinessactivity.

ISSPeerGroupConstruction

ISSconstructsacomparisongroupofaminimumof11AustralianpeercompaniesforeachsubjectcompanycoveredbythePFPmethodology.Peergroupsforallsubjectcompaniesanalyzedunderthismethodologyareconstructedonceperyear,basedondataprovidedbyanindependentsource(S&PXpressFeedQuarterlyDataDownload[QDD]).Thefollowingcriteriaareusedtodeterminepeercompanies:

› theGICSindustryclassificationofthesubjectcompany› Sizeconstrainsforforbothrevenue(orassetsforcertainfinancialcompanies)andmarketvalue,utilizingfour

marketcap"buckets"(micro,small,mid,andlarge)

Subjecttothesizeconstraints,andwhilechoosingcompaniesthatpushthesubjectcompany'ssizeclosertothemedianofthepeergroup,peersareselectedfromapotentialpeeruniverseinthefollowingorder:

1. fromthesubject'sown8-digitGICSgroup2. fromthesubject'sown6-digitGICSgroup3. fromthesubject'sown4-digitGICSgroup4. fromthesubject’sown2-digitGICSgroup5. fromthesubject’s“SuperGICS”group(describedfurtherbelow)

If11comparatorgroupmembersarenotselectedfromthecompaniesintheuniversethatsharethesubjectcompany’seight-digitGICScategory,theprocessisrepeatedwithcompaniesinthecomparisonuniversethatsharethecompany’ssix-digitGICScategory,maintainingthecompanyatthemedianpositionwherepossible,until11ormorecomparison

----------------------2https://www.msci.com/gics



companiesareselected;if11comparisoncompaniescannotbeselectedusingthepeers’six-digitGICScategory,thentheprocessisrepeatedusingthenextuniversesetlistedabove(i.e.,thesubject’sfour-digitGICSgroup),until11ormorecompaniesareselected;andsoon.

Insomecaseswherelessthan11peershavebeenidentifiedusingthestandardmethodology,theindustrygrouptowhichthesubjectcompanybelongsisexpandedtoincludecompaniesthatareotherwisecomparabletothesubjectcompanyoperationally.Todothis,ISScreatesa“SuperGICS”group,whichcombinescloselyrelatedtwo-digitGICSgroupstocreatealargerpeeruniverseforcompaniesthathavefewerthan11peers.TheSuperGICSgroupsusedbyISSare:

SuperGICSCategory Two-DigitGICSIncluded NamesofIncludedSectorsA 10,15,20,55 Materials,Industrials,EnergyandUtilitiesB 25,30,35 ConsumerDiscretionary,ConsumerStaples,andHealthCareC 45,50 TechnologyandTelecom

QualitativePeerGroupReview

Aspartofpeergroupselectionprocess,ISSalsoincludesaaqualitativereviewofthecompanycomparatorgroupsbytheISSAustraliaResearchteamtoensurethatthecomparisoncompaniesareconsideredappropriate.ISShasandwillcontinuetoadjustcomparatorgroupswherethequantitatively-constructedcomparatorcompaniesaredeemedinappropriate.

Ifacompanydoesnotagreewiththepeerswhichhavebeenallocatedbythemodel,orconsiderstheyhavebeenwronglyallocated,itcanprovidethisfeedbacktotheISSPFPhelpdeskviaAustralianP4PSupport@issgovernance.com.

Company-DisclosedPeers

IntheUSandCanada,mostcompaniesincludetheirchosenpeersforpaybenchmarkingpurposesintheirdisclosedmeetingmaterials.InAustralia,itisstillveryraretoseecompaniessystematicallyincludeself-selectedpeersintheannualreportorothermaterials,withtheexceptionofsomelargercompaniesincertainmarkets.

AsthisisnotawidespreadpracticeintheAustralianmarket,thedecisionwasmadeforthe2017seasontoonlyuseISS-selectedpeersintheAustralianpay-for-performancemodel.However,ifovertimemoreAustraliancompaniesbegintodisclosetheircompany-selectedpeers,thisdecisionmaybereviewedagaininfuture,inlinewithdevelopmentsinmarketpractice.



NOTESONIMPLEMENTATION

ItisimportanttoemphasisetheadditionoftheAustralianpay-for-performancemodeltotheISSbenchmarkresearchreportswillbeadditiveandisintendedtoprovideourclientswithadditionaldatapointsforcomparability.Also,whilethemodelisbasedonananalysisofCEOpayandTSR,thequalitativereviewsbyISSresearchanalystswillcontinuetotakeaholisticviewoftheentiretyoftheremunerationreport,includingnumerouselementsofthepayprogramfortheCEO,namedexecutiveofficers,anddirectors.

Therestofthissectionwilldiscusshowthepay-for-performancechartswillbepresentedintheISSbenchmarkresearchreports,andhowfrequentlythemodelwillbeupdated.

PresentationWithintheResearchReports

BeginningwithISSreportsformeetingsonorafter1October2017,therelevantISSAustralianproxyresearchreportsforthecompaniesincludedintheAustralianPFPmodelwillincludepay-for-performancegraphssimilartothoseseeninothermarkets.

Withintheanalysisfortheagendaitempertainingtotheremunerationreport,aComponentsofPaytablewillbepresentedtoillustratehowthetotalpaynumberwasreached(Figure4);thisisfollowedbythethreemodelsunderthePayforPerformanceassessment–theRDA,MoMandPTAcharts(Figure5).Alongwiththethreetestsandtheirscores,anoveralllevelofconcernispresentedasLow,Medium,orHigh,indicatingthestrengthofCEOpayforTSRperformancealignmentasdeterminedbyatriageassessmentofthreetests.

Figure4.RemunerationProfile–ComponentsofPay



WithintheISSresearchreports:

› TheRelativeAlignment(RDA)chartcomparestheperformanceandpayrankingsofthesubjectcompanyanditspeersover(typically)threeyears.

› TheMagnitudeofPay(MoM)chartshowstheCEOpayforthemostrecentyearcomparedwiththatofitspeers.› TheAbsoluteAlignment(PTA)chartcomparesthesubjectcompany’sCEOpaywithindexedTSRover(typically)

fiveyears.› ThePay-For-PerformanceQuantitativeScreensummarisestheoveralllevelofconcern.

Figure5.PayforPerformanceEvaluation

Immediatelyfollowingthepayforperformancetests,asummaryfortheISSpeersusedintherelativeassessmentsisdisplayed(Figure6),withalistofthepeersandchartdisplayingtheirsizerelativetothesubjectcompany.Aspreviouslydiscussed,therewillbenocompany-selectedpeersintheAustralianmodelsotheelementsofothermarkets’reportswhichdisplaythisISSvs.disclosedpeercomparisonwillnotbepresentintheAustralianreports.



Figure6.PayforPerformancePeerGroup



APPENDIX:BACK-TESTINGTHEMODEL

Thedistributionofscoreshasbeentestedforthethreemodels,RDA,MOMandPTA,andwasbroadlyinlinewiththatseenfortheNorthAmericanandEuropeanmodels.

RelativeDegreeofAlignment

Figure7.DistributionofRDAScores

MultipleofMedian

Figure8.DistributionofMOMScores

Pay-TSRAlignment



Figure9.DistributionofPTAScores



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