3. Linking Remuneration to Performance
3.2 Long Term Performance
The executive remuneration structure also focuses on driving performance and creating shareholder alignment in the longer term, by providing Executives with LTI awards in the form of Reward Rights with a four year vesting period. Vesting is subject to performance against relative Total Shareholder Return (TSR) and relative Customer Satisfaction hurdles. The table below provides an overview of the CEO and Group Executives’ current LTI awards which have not yet vested.
Overview of Unvested Long Term Incentive Awards at the end of the 2013 Financial Year
Performance
Period Ends Equity Plan Performance Hurdles
30 June 2014 30 June 2015 30 June 2016
Group Leadership Reward Plan (GLRP)
Each reward is split and tested:
75% TSR relative to peer group
25% Customer Satisfaction ranking relative to peer group
GLRP Award vested during 2013 Financial Year
The GLRP award granted during the 2010 financial year reached the end of its four year performance period on 30 June 2013.
The GLRP 2010 award was weighted against two performance hurdles, Customer Satisfaction (50% of the award) and TSR (50%
of the award). At the end of the performance period, the results against these measures were solid and included:
100% vesting against the TSR hurdle.
75% vesting against the Customer Satisfaction hurdle, which compared CBA’s performance to the three other major banks and St.George.
In line with the plan rules for this award, 87.5% of the total award vested.
The Board reviewed the measurement outcomes of this award and concluded that the above vesting appropriately reflects performance over the four year performance period. No discretion was exercised.
2013 GLRP Award granted in the 2013 Financial Year
The CEO and Group Executives currently receive LTI awards under the GLRP. The awards granted may deliver value to Executives at the end of the four year performance period, subject to meeting performance hurdles as set out in the diagram below:
Reward Rights granted
4 year performance period
Customer Satisfaction hurdle = 25%
Total Shareholder Return hurdle = 75%
The following table provides the key features of the 2013 GLRP award:
Feature Description
Instrument Reward Rights. Each Reward Right entitles the Executive to receive one CBA share in the future, subject to meeting the performance hurdles set out below. The number of rights that vest will not be known until the end of the performance period.
Determining the number of Reward Rights
The number of Reward Rights allocated depends on each Executive’s LTI Target (see diagram on page 52 for explanation of target remuneration). The number of Reward Rights allocated is calculated taking into account the expected number of shares to vest at the end of the performance period.
Performance Period
The performance period commences at the beginning of the financial year in which the award is granted. For the GLRP award granted in the 2013 financial year, the performance period started on 1 July 2012 and ends after four years on 30 June 2016. Any vesting will result in participants receiving shares during the first available trading window following the end of the performance period.
Performance Hurdles
75% of each award is subject to a performance hurdle, which measures the Group’s TSR performance relative to a set peer group(1). This is made up of the 20 largest companies on the Australian Securities Exchange (ASX) by market capitalisation at the beginning of the performance period, excluding resources companies and Commonwealth Bank of Australia; and
25% of each award is subject to a performance hurdle that measures the Group’s Customer Satisfaction outcomes relative to a peer group of Australia & New Zealand Banking Group Limited (ANZ), National Australia Bank Limited (NAB), Westpac Banking Corporation (WBC), and other key competitors for the wealth business.
Vesting Framework
TSR (75% of the award)
100% vesting is achieved if the Group’s TSR is ranked in the top quarter of the peer group, (i.e. 75th percentile or higher);
If the Group is ranked at the median, 50% of the Reward Rights will vest;
Vesting occurs on a sliding scale if the Group is ranked between the median and the 75th percentile; and
No Reward Rights in this part of the award will vest if the Group’s TSR is ranked below the median of the peer group.
Customer Satisfaction (25% of the award)
100% vesting applies if the weighted average ranking for the Group over the performance period is 1st;
50% will vest if the Group’s weighted average ranking is 2nd; and
Vesting of between 50% and 100% will occur on a pro-rata straight line basis if the Group’s weighted average ranking is between 2nd and 1st.
No Reward Rights in this part of the award will vest if the Group’s weighted average ranking is less than 2nd.
Calculation of TSR is calculated independently by an external provider.
Board Discretion
The Board also retains sole discretion to determine the amount and form of any award that may vest (if any) to prevent any unintended outcomes, or in the event of a corporate restructuring or capital event.
Expiry At the end of the applicable performance period, any Reward Rights that have not vested will expire.
(1) The peer group (at the beginning of the performance period) for the TSR performance hurdle (at the time of grant) comprised AGL Energy Limited, Amcor Limited, AMP Limited, Australia and New Zealand Banking Group Limited, Brambles Industries Limited, CSL Limited, Insurance Australia Group Limited, Macquarie Group Limited, National Australia Bank Limited, QBE Insurance Group Limited, Orica Limited, Stockland, Suncorp Group Limited, Telstra Corporation Limited, Transurban Group NPV, Wesfarmers Limited, Westfield Group Limited, Westfield Retail Trust, Westpac Banking Corporation and Woolworths Limited.
Hedging of Unvested Equity Awards
Employees are prohibited from hedging in relation to all of their unvested CBA equity awards, including shares or rights.
Prohibited activity includes Executives controlling their exposure to risk in relation to their unvested awards. The CEO’s direct reports are also prohibited from using instruments or arrangements for margin borrowing, short selling or stock lending of any Bank securities or the securities of any other member of the Group. All hedging restrictions are included in the Group’s Securities Trading Policy.
Long Term Performance against Key Measures
As detailed above, long term incentive arrangements are designed to align Executives with the Group’s long term strategy and shareholder interests. The remainder of this section illustrates performance against key related metrics over time.
Financial Performance
The following graphs show the Group’s cash Net Profit after Tax (cash NPAT), cash Earnings per Share (cash EPS), share price movement and full-year dividend results over the past five financial years (including 2013). The solid performance has delivered sound returns to shareholders.
Cash Net Profit after Tax (Cash NPAT) Cash EPS (Basic)
4,415 6,101
6,835 7,113
7,819
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000
Jun 09 Jun 10 Jun 11 Jun 12 Jun 13
$ Million 305.6
395.5
438.7 449.4 485.8
0.0 100.0 200.0 300.0 400.0 500.0 600.0
Jun 09 Jun 10 Jun 11 Jun 12 Jun 13
Cents
Share Price Dividends per Share
$0
$10
$20
$30
$40
$50
$60
$70
Jun 09 Jun 10 Jun 11 Jun 12 Jun 13
Share Price
2.28
2.90
3.20 3.34
3.64
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Jun 09 Jun 10 Jun 11 Jun 12 Jun 13
Relative TSR Performance against the Group’s Peers
The graph below represents CBA’s TSR performance against the comparator peer group for the period 1 July 2009 to 30 June 2013. The Group was ranked first relative to the peer group at the end of the period. TSR is calculated by an independent external supplier.
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
Total Shareholder Return 2013 (4 years)
Comparator Peer Group
(1) The peer group (at the end of the performance period) for the TSR performance hurdle (at the time of grant) comprised AGL Energy Limited, AMP Limited, Australia and New Zealand Banking Group Limited, ASX Limited, Brambles Industries Limited, Coca-Cola Amatil Limited, CSL Limited, Insurance Australia Group Limited, Macquarie Group Limited, National Australia Bank Limited, Qantas Airways Limited, QBE Insurance Group Limited, Stockland, Suncorp-Metway Limited, Telstra Corporation Limited, Transurban Group, Wesfarmers Group Limited, Westfield Group Limited, Westpac Banking Corporation and Woolworths Limited.
Performance against Customer Satisfaction
The following graphs show CBA’s customer satisfaction performance across Retail and Business areas. During the 2013 financial year, CBA achieved its number one rank amongst the major banks in retail MFI customer satisfaction(1) in January 2013 for the first time since setting its goal to be number one in 2006. Since January 2013, CBA continues to lead the major banks and achieved several record high scores. The Wealth Management results ranked the Group first for advisor satisfaction for the year ended 30 June 2013. Overall, positive improvements have been made against this measure.
Retail Main Financial Institution Customer Satisfaction - Competitive Context
70%
75%
80%
85%
90%
fied ('Very Satisfied' or 'Fairly Satisfied')
Major Bank 1 Major Bank 2 Major Bank 3 Regional Bank 1 CBA
Diff to No.1 - 12.3%
Business Main Financial Institution Customer Satisfaction - Competitive Context
6 7 8
Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
Satisfaction -Average
Major Bank 1 Major Bank 2 Major Bank 3 Regional Bank 1 CBA
Source: DBM, Business Financial Services Monitor 6 month rolling average
(1) DBM Business Financial Services Monitor (June 2013), average satisfaction rating of each financial institution’s MFI business customers across all Australian businesses, 6 month rolling average.