Valuing the long term incentive (LTI) grant

LTI grants are often expressed as a percentage of fixed remuneration: the actual value can differ considerably from this formula. Resolution 3 on Orora's 2015 AGM agenda for Thursday 15 October proposes a LTI grant to the MD/CEO. The value is said to be 100% of his fixed remuneration of $1.273 million, split 75% into performance rights, 25% as options. Given the proposed grant is 459,000 performance rights (zero exercise price options) priced using VWAP, and 1,383,500 options ($2.08 exercise price) priced using Black Scholes, you immediately intuit the impact of fair valuation: it results in a high number of options being awarded. If I use the same 5-day VWAP used to determine the exercise price of $2.08 to value the performance rights and deduct that from the $1.273 million, I value the options at $318,280 or around 23 cents/option. If instead I use $2.08 and multiply by the total number of units being awarded, I get a value of $3.83 million or 300% of fixed remuneration. I use this latter value to compare Orora's remuneration with the market.