CSL Ltd Annual Report 2019

2.3 Performance – Short Term Incentive On an annual basis, each Executive KMP has a maximum of six KPIs. The KPIs are made up of two critical measures of CSL business strength, shared by all participants – NPAT and CFO, plus up to four individual business building KPIs (approved by the HRRC). Net Profit after Tax (NPAT) Cash Inflow from Operations (CFO) NPAT is part of the Profit and Loss Statement and is the final measure of profit/loss. NPAT is calculated as sales revenues less cost of sales, external expenses (which include Research and Development costs, sales and marketing costs (also known as commercial operations costs and administration costs)), net interest expense and taxes. NPAT is assessed at constant currency CFO is the amount of cash CSL generates from the revenues it brings in and the costs it incurs in doing so, excluding cash outlays related to capital or other investments, payments to and from shareholders and debt. CFO is assessed at reported rates KPIs are challenging and not just duties expected of an Executive KMP in the normal course of their role. There must be real difference between under achieve / achieve / over achieve targets and measures, set so that a challenging but meaningful incentive is provided. Hurdles are set at threshold, target and maximum levels of performance. The KPIs and hurdles are set to drive business performance and the creation of shareholder value. The key features of the program for cash awards for the year ended 30 June 2019 (paid in September 2019) are detailed as follows. Feature Description Performance Period Annual aligned with the financial year – 1 July 2018 to 30 June 2019 Performance Measure Financial Individual Top line growth is the foundation of long term sustainability and evidences our competitive advantage, whilst pursuing profitable growth aligns employee and shareholder objectives. The financial performance measures are NPAT and CFO. NPAT is measured at constant currency and CFO is the reported rate Individual performance hurdles align with strategic priorities, encourage appropriate decision making, and balance performance in non-financial priorities. The individual performance measures are based on individual responsibilities and categories include divisional performance, achievement of strategic objectives and improvement in operations, risk management, compliance, health and safety and quality KPI Weighting NPAT 50% / CFO 50% – P Perreault NPAT 35% / CFO 35% / Individual 30% – W Campbell and D Lamont NPAT 30% / CFO 30% / Individual 40% – G Boss, A Cuthbertson, K Etchberger, WMezzanotte, V Romberg and E Walker NPAT 15% / CFO 15% / Individual 70% – G Naylor Vesting Schedule Below Threshold 0% earned Between Threshold and Target 50% earned on achievement of threshold level performance, increasing on a straight-line basis to 100% earned on achievement of target level performance Target 100% earned Maximum 100% earned at target level performance, increasing on a straight-line basis to 150% earned on achievement of maximum level performance (capped) The above STI Outcome percentages are then multiplied by the KPI weighting and individual STI opportunity (as disclosed in Table 4) to determine the payment amount Cessation of Employment A “good leaver” (such as retirement) may receive a pro-rata payment paid in the ordinary course based on time elapsed since the start of the Performance Period, subject to Performance Measures being met 2.4 Alignment - Long Term Incentive The introduction of the new LTI framework in 2017 was designed to enable us to manage our business, to support our investments and align our executives’ equity interests by rewarding sustainable Return on Invested Capital (ROIC) outcomes over the longer term. When our target performance is achieved, we want our executives to have their LTI vest – we set targets that not only provide excellent outcomes for shareholders but also reward and assist us in retaining our talent. As discussed in the letter from the HRRC Chair earlier in this Report, we received feedback from investors over the year on the design of our LTI plan – the use of a single metric, measurement of the Return on Invested Capital (ROIC) performance across a seven year period, which included a retrospective review, and a short vesting period for the first two tranches of the award. Following feedback from investors, in 2019, the Board has introduced an annual threshold of ROIC performance that must be achieved before vesting can occur – the measure is the Investment Hurdle Rate (IHR). The IHR is the minimum return we require on our investments to ensure we are making sound investment decisions and appropriately manage risk and cover our cost of capital. This has been added as a provision of the LTI target to ensure that the ROIC is delivering an appropriate return each financial year as well as over the seven year rolling average period and aligns with shareholder outcomes and expectations. If the ROIC outcome is below the IHR, no vesting will occur in that year. CSL Limited Annual Report 2019 64 Directors' Report