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## Hurdle 1: Annual TSR 

<img src='content_image/280468.jpg'>

The above table is presented in the chart below using actual FY11 outcomes as an example. 

<img src='content_image/280475.jpg'>

The hurdle detailed in the above table and chart materially reward management only when shareholders receive superior TSR. Conversely, management is either not rewarded or financially penalised, when TSR is insufficient or negative. 

Management receives no reward until TSR reaches 4% (a reasonable dividend yield). Immaterial rewards commence at this point and progressively grow until a cap is reached at 14% TSR. If the cap is triggered, the following year’s opening share price is set at a level that would have achieved a TSR of 14%. 

The financial penalty for management commences when TSR is less than minus 4%. Similar to the upside potential, there is a floor on the financial penalty at minus 14%. If the floor is triggered, the following year’s opening share price is set at a level that would have achieved a TSR of minus 14%. 

This cap and floor mechanism assists in controlling excessive reward or penalty to management, in any given year, where the significant increase or significant decrease in TSR was only temporary. 

## Hurdle 2: Annual growth in EBIT/Funds Employed 

<img src='content_image/280476.jpg'>

The above table is presented in the chart below using actual FY11 outcomes as an example. 

<img src='content_image/280484.jpg'>

The Board believes that the current return on funds employed for AGL is not sufficient. The hurdles detailed in the above table and chart reward management when EBIT/Funds Employed grows. Conversely, management is either not rewarded or financially penalised, when growth in EBIT/Funds Employed is insufficient or negative. 

The hurdles also recognise that the industry structure is such that, all things being equal, additional working capital is required every year because AGL must pay increased network charges monthly, but cannot recoup these increased charges for up to three months. This structure is beyond management’s control and that is why rewards commence when growth reaches 2%, but the financial penalty does not commence until there is a 4% deterioration in EBIT/Funds Employed. 

As with TSR, there is the same cap and floor mechanism for EBIT/ Funds Employed that assists in controlling excessive reward or penalty to management, in any given year, where the significant increase or significant decrease in EBIT/Funds Employed was only temporary. The cap and floor have been set at different rates to reflect the working capital issue highlighted above. 

Note: SPRs banked under the LTIP can be both positive and negative. SPRs can only vest if there is a predetermined improvement on the previous year. Importantly however, if performance falls below a predetermined level in any year, previously banked SPRs will be clawed back to the extent calculated under the performance hurdles. This feature provides the opportunity to assess performance over multiple years and therefore supports the intent of the LTIP to align shareholder and Senior Executive interests over the long term. 

4. After testing any notionally granted SPRs against the relevant performance hurdle the SPRs are deposited into (or deducted from) the relevant share bank account for each participant. At the end of every financial year 40% of any positive bank account balance is distributed to participants as AGL shares. The balance (if any) of each bank account is carried forward and may vest or be clawed back in future years. Any negative balance is also carried forward. 

The below example shows how the LTIP worked in July 2011 for the CEO (using actual figures). 

## Calculation of SPR award to CEO Michael Fraser 

<img src='content_image/280486.jpg'>

