Long term equity traders know that short term losses during in a market dip can be outweighed by purchases of equity at lower prices. But this doesn’t appear to be grasped by “sophisticated” participants in long term incentives (LTI) – nor, apparently, by company boards.
29 October 2025
Many Stakeholders Don’t Get This Fundamental Feature of Long Term Reward
It is well understood among long term equity traders that crisis represents opportunity. A market crash, dip or correction might not be the best time to sell and realise gains, and short term investors likely suffer, however, it is often a time when long term investors will buy in or increase their stakes. Having confidence that any short term losses from mistiming the bottom price will be outweighed by much larger gains from being able to acquire increased amounts of equity at what will come to be low prices in the long term, hardly requires a sophisticated investor. Despite most participants in Long Term Variable Remuneration (LTVR or LTI) arguably being sophisticated investors, most do not understand that the same applies to their equity-based remuneration. Many boards also do not appear to understand this, as indicated by the concerns often raised by executives and directors, when share prices are suffering a short to medium term dip. Instead of executives becoming disengaged from the LTVR/LTI when corrections are being endured, executives should be more engaged than ever. Equity plans should always be amplifying performance and market signals, aligning with stakeholders, and this is true during crisis as much as any other time. In this insight we explore how annual, overlapping, 3+ years tested grants of LTVR/LTI smooths out market volatility, and creates a situation where crisis is opportunity, for participants in equity plans. Executives will rarely lose, as long as they have a long term mind-set and continue in employment to create sustainable improvements in the business (assuming they are able).
The Stakeholder Issues We Keep Seeing
The most common issue we see when the share price dips is that executives will immediately claim that any prior grants of equity no longer have any value or impact, particularly if they have share price or Total Shareholder Return (TSR) related vesting conditions, or an exercise price. This often leads to a further request for additional grants of equity to be made to replace those previous grants that are now “under water”, or to offer equity that is subject to service-only vesting conditions. An example of this is arguably currently playing out in the public domain, as noted by the Australian Financial Review, in relation to Accent Group. Here, the Board appears to have been persuaded to seek a waiver from the ASX to then seek shareholder approval to then lower the hurdles on previous grants, rather than let the framework play out as intended. This has recently been the subject of other GRG Insights.
Putting aside the fact that at least part of long term reward, the part that is subject to share price or TSR related vesting conditions, generally has the stated purpose of directly reflecting the experience of shareholders (i.e. not vesting if shareholders are losing value), and putting aside that long term reward is itself only a part of the total package intended to provide alignment with stakeholders, we ask you to consider that a regular long term reward framework will still function appropriately, and automatically adjust for share price correction.
Most often the fundamental problem that we observe is not that the long term reward frameworks themselves are ineffective; instead it is that a poor or incomplete understanding of long term reward renders them ineffective, and leads to erroneous, knee-jerk reactions that fuel short-termism, upset stakeholder balances and can lead to executive pay arrangements becoming unnecessarily generous, (in amount and/or structure), while also unnecessarily undermining stakeholder alignment. It also tends to further reward short termism. Worse, incomplete understanding of LTI dynamics may lead to loss of talent and high turnover if long term reward is no longer viewed as likely to produce value.
We will demonstrate the efficacy of a standard long term reward framework in a model, which is based on some assumptions, some of which can of course be debated, but at a high level; this model will hold true for many scenarios and performance metrics. It is hoped that this will provide an asset for many stakeholders and enable them to better educate other stakeholders, in an effort to restore the perceived value of long term reward across the Australian reward landscape and combat the trend of short termism in remuneration and behaviour increasingly observed among ASX companies. There are a range of other matters that further undermine the perceived value of equity remuneration, such as archaic approaches to service testing based on false retention myths. For further discussion of some of the most relevant issues, refer to our recent article on debugging KMP remuneration (Insight 180), however we will likely offer a series of Insights specific to optimising/restoring equity.
Fundamental Concepts
Our argument and model is based on the assumption that long term equity opportunities, LTVR or LTI are granted to executives each and every year. This is dominant market practice among the ASX 300, and indeed across most of the ASX. Those companies that do not adopt this cadence usually regret the decision to front-end-load remuneration, for reasons that may be explored in another insight. In short, annual granting provides an opportunity to reset right values and performance hurdles as circumstances change, which is part of what will be shown in the model.
Taken from the 2025 GRG Variable Remuneration Guide (ASX 300 sample)
In this model it will also be assumed that the share price around the start of each year will be used to calculate grant value, which is the dominant ASX 300 market practice.
Taken from the 2025 GRG Variable Remuneration Guide (ASX 300 sample)
It is also assumed that the number of Rights to be granted is based on a constant dollar target, being a policy percentage of Fixed Pay, which is dominant ASX market practice.
As a result of the foregoing, as the share price falls, the number of Rights granted rises, and vice versa, just as the number of shares you could buy with a fixed dollar value of purchasing power would rise and fall. However, unlike a typical equity investment, market signals are amplified and multiplied; as share price rises, not only does the value of the Right rise, but the number of Rights expected to be received (vest) also rises. When Rights are granted annually, it creates an overlapping framework that rewards for continuous improvement, but which also resets regularly and smooths out volatility over time, so that there is a continuous incentive for improvement regardless of changing, even volatile, circumstances.
The Model
Below is a model of a typical annual granting structure, where there is a single vesting condition of Absolute TSR (Threshold 10%, Target 12.5%, Stretch 15% CAGR), the intended target value of the LTVR/LTI is $100,000 p.a. (stretch or maximum of double this or $200,000, being reflective of a typical vesting scale that offers 50% vesting at Target and 100% vesting at Stretch), while the share price is the subject of variation in the form of volatility, first rising, then being “corrected” then “restored”:
Observations
In respect of the first two years, no vesting is available as the minimum performance period is 3 years (simulating a new employee). Despite no vesting due to performance against the vesting scale in 3 of the 10 years in respect of which vesting was available (3-year TSR was below the 10% TSR CAGR minimum), on average the value of the reward received still exceeded the target or intended value at grant.
This is because the annual granting framework automatically increases the amount of “skin-in-the-game” when the share price falls, which multiplies against both future share price growth, and improved vesting percentages, when recovery occurs. This mathematical dynamic is like a “self-healing” property of the reward framework and is something that only equity/LTI/LTVR is capable of.
The highest levels of reward are those that follow the point of inflection at the bottom of the share price change; therefore, an educated executive should understand that remaining loyal to or joining a company that is finding the bottom of its share price is likely to present significant reward opportunities.
While this example was based on absolute TSR, for simplicity, similar outcomes can be expected from relative TSR. In fact, in respect of other metrics that are often considered in “transformation” or “turnaround” circumstances, the model presented is likely conservative, since operational metrics, strategic metrics and other internal views of performance like financial metrics will often improve faster and have lower/adjusted hurdles than TSR.
Conclusion
While this dynamic is often poorly understood, those executives that understand it should be more likely to see the opportunity in a share price crisis, remain committed to the business and be appropriately focused on long term sustainable improvements. The framework appropriately aligns their interests with shareholders in the circumstances of a “turnaround” or “recovery” challenge, or even a “correction” that may be permanent. Many other approaches arguably incentivise further short-termism, undermine sustainability and alignment and double-reward for poor outcomes. However, in order to be effective, a few key assumptions need to hold true:
- Executives and other stakeholders need to be educated in this dynamic, something which most companies fail to do, even in a crisis, instead opting for approaches that likely break the framework and create other stakeholder tensions,
- Grant calculations need to be based on a consistent policy referring to both:
- Fixed Pay percentages, and
- A consistent grant calculation share price.
- Boards need to ensure that they are making appropriate scaling adjustments between target and stretch based on vesting scales, and that they are linking this appropriately to market benchmarking. Often boards will benchmark stretch remuneration against target values and do not recognise differences in vesting scales when making grants.
While this example has focused on a company-specific crisis, the same model holds for economic crises. This was observed during COVID, across much of the market. It may be highly relevant to current circumstances as geopolitical tensions continue to create volatility in global and local share markets.
GRG is on a mission to restore the value of equity remuneration in the minds of executives, which relies on boards modernising their equity plans, governance frameworks and educating all stakeholders. The purpose of this mission is to support long term stability and sustainability in ASX listed companies and the economy more broadly, and to make Australia more competitive on the global stage, which was the focus of significant improvements to legal and tax reforms impacting equity remuneration in recent years.
When appropriately structured and supported, equity remuneration should be the most compelling component of remuneration for all employees. GRG offers equity workshops for boards and executives to ensure that executive teams understand, are engaged with and inspired by their equity programs. Often long term modelling and examples are critical to executives valuing long term remuneration and therefore are key to whether or not this component of remuneration can achieve its objectives.
