Leveraging Executive LTI Rights

Leveraging executive LTI rights can align incentives with shareholder value and, with vesting scale adjustments, deliver leverage comparable to or exceeding options.

GRG Remuneration Insight 184

31 January 2026

Leveraging Executive LTI Rights to Enhance Incentive Outcomes

For companies that face outstanding opportunities for growing shareholder value it makes sense for executive long-term incentive (LTI) opportunities to also be outstanding and leveraging executive LTI rights can be an effective way of achieving this alignment. Traditionally leverage has been achieved by granting options but they are far less appealing to executives than rights (see later comments). With simple changes to the vesting scale for rights they can match and even exceed the leverage contained in a comparable grant of options. This Insight compares grants of rights that have different levels of leverage with a grant of options.

The leverage is achieved by changing the calibration of the grant, adding greater difficulty to the scale and adjusting the percentage of a grant that vests when target performance is achieved. This in turn results in larger numbers of rights being granted at the stretch level but does not result in any change to the number of rights that vest when target performance is achieved.

Example Used for Comparison Purposes

Grant Calculation for Leveraging Executive LTI Rights

The best practice method of calculating the number of rights or options (equity units) to be granted is to apply the following formula.

The number to be granted represents the stretch or maximum number of equity units that may vest if stretch performance goals are achieved. The division by Target Vesting % grosses up a target value to stretch/maximum such that when target vesting occurs, the intended value is delivered.

Standard Options and Rights

The example grant calculation relates to a typical vesting scale where 50% of the grant vests when target performance is achieved. For illustrative purposes it is assumed that one vesting condition, being share price growth, is used.

The illustration shows the number that vest when various share prices are achieved. It also shows the total benefit value when vesting occurs. Options outperform rights when strong share price growth is achieved due to the exponential leverage inherent in options.

Adding Leverage to Executive LTI Rights

A way of adding leverage to rights is to change the vesting scale by lowering the percentage that vest at target performance. This change results in larger numbers of rights being granted at the stretch level. This change does not change the number or value of rights that vest when target (or threshold) performance is achieved. However, it does change the number and value of rights that vest when target performance is exceeded. The following examples illustrate this point for target vesting percentages of 40%, 30%, 20% and 10%. In all cases the leveraged rights produce more benefit than standard rights. At 40% and 30% the leveraged rights still produce less benefit than options. At 20% the rights and options produce the same amount of benefit. At 10% leveraged rights produce greater benefit than standard options.

Advantages of Executive LTI Rights Over Options

Rights have several advantages over options including the following.

1. The full value of the right represents the benefit for the executive whereas with options the benefit is limited to the excess of the future share price over the exercise price. If performance vesting conditions other than share price growth or total shareholder return (TSR) are used then vesting can occur and yet leave the executive with little or no benefit from options. As a result, options are relatively high risk.
2. An exercise price does not need to be paid to exercise a right. With an option, the executive needs to fund the exercise price.
3. The term of options is generally limited to 5 years but rights can have terms of up to 15 years or longer.  This is important because the exercise of a right or option generally triggers the taxing point under the employee share scheme (ESS) taxing provisions. Under the ESS taxing provisions 100% of the gain at the taxing point is subject to tax.  Taxing points typically lead to disposal of the interest, reduced skin-in-the-game, and loss of the financial and tax benefits from long term holding and ESS tax treatment when the share price is rising (equivalent to 100% CGT discount, see our separate article on this aspect).
4. If an option has an exercise price sufficiently in excess of the share price at the time of grant the option can have a nil value under taxation regulations at grant and therefore fall under the capital gains tax (CGT) instead of the ESS taxing provisions. Because of the need to fund the exercise price, executives generally need to sell the shares acquired on exercise to recover the exercise price.  If this occurs 100% (the same as under the ESS taxing provisions) of the gain will be tax as a capital gain if the shares have been held for less than 12 months. Variations can be made to enable the shares to be held for more than 12 months, including loans to fund the exercise price (interest saving benefit may be subject to FBT) and/or disposal restrictions on the shares for at least 12 months but both add to complexity and diminish flexibility for the executive.

Stakeholder Attitudes

In the past we have tested increasing the target vesting percentage above the standard 50% as it would reduce the number of equity units granted and reduce the incentive to strive for stretch performance.  We saw this a reasonable approach for companies with very stable inelastic businesses where maintaining a steady risk averse strategy was seen as most appropriate by the board.  However, some stakeholders were resistant to higher vesting at target performance even though no more equity units would vest.

We did not understand this reaction and therefore cannot predict what their reaction will be to leveraged rights.  Clearly, they would not be suitable in all company circumstances but when appropriate one would expect support from shareholders.