A mining client was in a multi-year transition to realign its business and put the organization on a more stable financial footing. Over the years, various measures were added to the incentive plans (both short and long term). As a new management team was brought on board, questions were raised as to whether the incentive plan aligned with the go-forward strategy and provided an appropriate risk/reward framework to incent success.
The incentive plan was complex with numerous performance measures in the short-term incentive plan (measured at different levels) resulting in payouts that trended towards target given the company would outperform on some and underperform on others. In addition, performance was not calibrated to reflect the potential range of outcomes creating odd performance outcomes that did not align with where value was being created. The long-term incentives had significant weighting on short-term and relative performance which made it hard for management to be recognized for absolute value creation.
A detailed analytic review of past performance outcomes and market practice led to collaboration with management and the human resources committee to identify challenges in the current design. A series of working sessions led to plan design alternatives that focused on the short-term incentive, a clearer long-term incentive, with a better way to calibrate relative TSR performance. This resulted in the reintroduction of stock options to provide greater alignment to absolute share price growth.