Qantas 2008 Annual Report Download - page 67

65 Qantas Annual Report 2008
Directors’ Report
for the year ended 30 June 2008
Delta Airlines is excluded from the airline basket for the 2006/07 award as in September
2005 Delta Airlines fi led voluntary petitions for reorganisation under Chapter 11 of the US
Bankruptcy Code.
1
Remuneration Report (Audited) continued
Performance Rights Plan continued
Approach
Annual grants of Rights are awarded to selected individuals. Subject
to achievement against the three year performance hurdle relating
to each grant, the Rights may be converted (on a one-for-one basis)
to Qantas shares. Shares are purchased on-market or issued.
Performance Measures and Rationale
2004/05, 2005/06 and 2006/07 Awards
The performance hurdle set by the Qantas Board for these awards
is the TSR of Qantas over the performance period in comparison to:
companies with ordinary shares included in the S&P/ASX 100 Index
at the date of each respective grant (excluding Qantas) in relation
to one half of the Rights; and
a basket of global listed airlines comprising Air France-KLM,
Air New Zealand, AMR Corporation (American Airlines), British
Airways, Cathay Pacifi c, Delta Airlines1, Japan Airlines, Lufthansa,
Ryanair, Singapore Airlines, Southwest Airlines and Virgin Blue in
relation to the other half of the Rights.
The S&P/ASX 100 Index represents the broader Australian market, while
the basket of global airlines represents a mix of Qantas’ competitors.
TSR testing for the 2004/05 award is being performed quarterly over
the two years from 30 June 2007 until 30 June 2009, or until the tests
indicate that full vesting has been achieved. This refl ects the Plan
conditions outlined to shareholders when approval was obtained
for awards to Executive Directors in October 2004. TSR testing for
the 2005/06 award commenced on 30 June 2008. As at 30 June 2008,
80 per cent of the performance hurdle set by the Qantas Board
under the 2004/05 award has been achieved with 72.5 per cent
achieved under the 2005/06 award.
Similarly, TSR testing for the 2006/07 awards occurs during the period
between three and fi ve years from award, in accordance with the
conditions of the awards approved by shareholders.
Testing over these timeframes recognises that Qantas is exposed to
a high degree of business and share price volatility compared to many
other major Australian companies. As the award date remains the base
point for comparison, it ensures that there is no reduction in the rigour
of the performance requirement.
The performance hurdle will be considered satisfi ed in accordance with
the following table:
Qantas TSR Performance Compared
to the Relevant Peer Group
Satisfaction of the Performance Hurdle
Relating to Each Half of the Rights
0 to 49th percentile Nil
50th to 74th percentile 50% – 99%
75th to 100th percentile 100%
The Qantas Board resolved at its October 2005 Meeting that it will not
exercise its discretion in relation to the performance hurdle for the 25th
to 49th percentile.
A progressive vesting scale prevents payment for below median
performance and does not deliver full reward until 75th percentile
performance is achieved.
2007/08 Awards
Following a review of the performance hurdles applicable to awards of
Performance Rights, the Qantas Board at its December 2007 Meeting
fi nalised the hurdles for the 2007/08 awards.
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The relative TSR measure in comparison to companies with ordinary shares
included in the S&P/ASX 100 Index (as outlined above) was retained in relation
to one half of the award of 2007/08 Rights. Testing of the hurdle occurs on a
bi-annual basis during the period between three and fi ve years from award.
There is no relaxation of the rigour of the performance requirement.
In relation to the other half of the Rights, the Qantas Board set an EPS
hurdle expressed as a compound annual growth rate (CAGR) target which
is assessed at the end of three years.
By adopting these dual hurdles, Qantas has a framework that relates
reward to shareholder returns relative to other major Australian
companies as well as the earnings achieved by management against a
challenging long-term target.
The vesting scale for Rights based on Qantas EPS growth is outlined
in the below table:
EPS Performance
vs Target EPS CAGR
Satisfaction of the
Performance Hurdle
EPS result below
threshold Below 9.5% Nil
EPS result between
threshold and
stretch target 9.5% to 12.4%
Linear scale:
50% to
99% satisfi ed
EPS result at or
above stretch target 12.5% or above 100% satisfi ed
The setting by the Qantas Board of the above EPS targets does not
represent an earnings forecast nor is it a disclosure of targets under
Qantas’ long-term budget.
Any Rights which have not vested will lapse if the relevant Executive
ceases employment with the Qantas Group, except in special
circumstances where Remuneration Committee approval would be
sought. Rights will also lapse if the Executive is guilty of gross misconduct.
The grant dates and number of Rights awarded to KMP is outlined
on page 128.
Retention Plan
The Qantas Board regularly reviews Qantas’ talent needs for achieving
its long-term business objectives. It has implemented a Retention
Plan with a required service period. The Retention Plan is focused
on less than 1 per cent of Executives whose roles and contribution
are identifi ed as critical to the continued success of the Qantas Group.
The award to any individual under the Retention Plan can be delivered
either in deferred shares or by way of a deferred cash payment.
Satisfactory performance, which involves achievement of personal KPIs
set during the period, is a further requirement under this Plan. The most
recent of these were the awards approved by Shareholders at the 2007
AGM to the Executive Directors.
The vesting schedule for the awards made under the Retention Plan
means that 2007/08 is the year in which the majority of grant value
of the award is recognised under accounting rules. This is the primary
reason for the increase in disclosed value of Share-based Payments
for 2007/08. The 2007/08 accounting accrual of the 2006/07 Retention
Plan award is substantially higher than the accrual that will be incurred
in 2008/09, as refl ected in the table set out on page 69.
The grant dates and number of shares awarded to KMP is outlined
on page 127.
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