I did not see the reference to that 16% ROE hurdle, but that...

I did not see the reference to that 16% ROE hurdle, but that aside, I am against incentives that senior people in public companies grant to themselves, often at the recommendation of remuneration experts beholden to management for the brief obtained at shareholders expense – a pox on them all.

Managers are well remunerated, and if the are inclined to goof of if they do not get extra rewards, they have the wrong attitude, and should leave. Incentives often favour short-term benefits at the expense of long-term benefits. An ROE-based incentive may be dysfunctional if set too high (explained below), and a low hurdle is an indulgence in apparent effectiveness. If we could have management owning sufficient shares, then their incentive would be aligned with shareholders's interests, and that should suffice to induce their best efforts to steer the company on an optimal long-term path.

Conventional accounting lowers short-term NPAT and ROE if a company grows organically, rather than via acquisitions. If a company buys growth via an acquisition, the price is debited to the Balance Sheet (and partly amortised in later years), but if the company “invests in growth”, as TGA likes to phrase it, the expense is debited to P&L Accounts, and hence it reduces NPAT and ROE in that accounting period (see example in next paragraph). Likewise with over provisioning, which TGA indulges in to be on the safe side, the net-of-provisions asset is reduced in the Balance Sheet, and the contra debit to Trading Accounts reduces NPAT and ROE. Management incentives should not militate against organic growth and conservative provisioning.

If company that paid $1.2m dividends made $2m NPAT, its retained earnings would be $.8m, so if its equity were $10m at the start of the year, it would be $10.8m at EOY. ROE would be reported as $2m ÷ (($10m + $10.8) ÷ 2) = $2m ÷ $10.4m = 19.23%. If the company could relive that year, and it expensed a further $200K to launch an attractive initiative that would earn nothing in that year, the NPAT would fall to $1,8m, and if the dividend remained $1.2m, the equity would be $10.6m at EOY, and hence ROE would be reported as $1.8m ÷ $10.3m = 17.48%. If the dividend payout ratio were kept at 60%, the ROE would be $1.8m ÷ $10.36m = 17.37%.

I hold shares in BYL, and the measurement it uses for incentives is NPAT, which means management can increase the number of shares, and so lower EPS, but still get a bonus if NPAT increases! Management incentives are like Greeks bearing gifts – be fearful of them.