Aon Hewitt
Talent, Rewards & Performance
July 2016
Valuation Services: Expert Insight
Currency Conversions for Global Relative TSR Plans: Highlight on Brexit
Introduction
On June 23, 2016, the British public voted to exit the European Union. In response to the referendum result, the
value of the British pound fell and the euro weakened. The impact of this decision will most likely continue to
develop over the next couple of years as the change is implemented. Because the British pound and euro will
undoubtedly continue to fluctuate, this is another important reminder to consider currency conversion when
tracking your relative Total Shareholder Return (“TSR”) plans.
As a result of the change in value of both the pound and the euro, the perceived value of stocks traded in British
pounds would fluctuate more dramatically when converted to USD or other currencies. The FTSE 100 Index
experienced losses in GBP during the days following the referendum, as represented above in blue. When
compounded by the decrease in the value of the pound, this loss becomes more pronounced (shown in red). In a
peer group that includes companies traded in a mix of currencies, the value of the companies would be influenced
by trends in the value of their respective currencies.
Failing to account for the exchange rate fluctuation would put British companies at a deceptive advantage, since
only the drop in equity prices would be captured, while the weakening of the British pound would be ignored.
Conversely, companies trading in other currencies would not see the corresponding increase in value of their
stock (in pounds) when compared to companies trading on the British market. It may therefore sound
advantageous to a British company to not incorporate currency fluctuations in their plans, but in the end this
would not be an accurate picture when comparing TSR between peers. Given that relative TSR is meant to
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reflect the return a single shareholder could receive when investing in each peer company (using their domestic
currency), to make a more appropriate comparison of companies, we should convert all values to a common
currency.
Currency Conversion Up-Close
This twofold change in value for companies traded in British pounds reminds us of the importance of converting to
a common currency when designing relative TSR incentive plans when the peer group includes international
companies trading in different currencies.
The current situation in the British market is not the first to highlight the importance of currency conversion.
Recent currency swings in Argentina, Russia, and Switzerland come to mind. In particular, see Switzerland
Reminds us of the Importance of Currency Conversions for Global Relative TSR Plans. Likewise, the current
downward trend in the Japanese market could put any peers trading on that market at a disadvantage when
compared to international peers. With that in mind, we decided to examine the potential impact of currency and
market fluctuations using five large, global companies trading in US Dollars (USD), British Pounds (GBP), Euros
(EUR), Japanese Yen (JPY), and Swiss Francs (CHF).
The following shows the TSR ending June 30, 2016, without conversion into a common currency.
Company Ranking without Currency Conversion
Beginning Average
(1-Jun-15 to 30-Jun-15)
German Company (EUR)
142.60
Swiss Company (CHF)
269.53
British Company (GBP)
11.34
American Company (USD)
151.29
Japanese Company (JPY)
6,004.05
Ending Average
(1-Jun-16 to 30-Jun-16)
TSR
Rank
140.12
-1.7%
1
257.65
-4.4%
2
10.16
-10.4%
3
128.11
-15.3%
4
4,598.73
-23.4%
5
Now, the following table shows performance for the same companies, with currency converted to the British
pound.
Company Ranking with Currency Conversion
Beginning Average
(1-Jun-15 to 30-Jun-15)
German Company (GBP)
102.79
Swiss Company (GBP)
185.69
Japanese Company (GBP)
31.16
American Company (GBP)
97.09
British Company (GBP)
11.34
Ending Average
(1-Jun-16 to 30-Jun-16)
TSR
Rank
110.78
7.8%
1
187.27
0.9%
2
30.76
-1.3%
3
90.26
-7.0%
4
10.16
-10.4%
5
rd
th
After leveling the playing field, the British Company moved from 3 to 5 which more accurately reflects the
impact of the referendum on the British market.
Currency Conversions for Global Relative TSR Plans: Highlight on Brexit
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Below is a more visual representation of the change in TSR for each company before and after converting to
British pounds. The first shows each company’s TSR from July 1, 2015, using a 30 day averaging period for the
month of June 2016, without converting to a common currency.
Notice the upward trend of the British Company from 5th to 3rd place over the course of the month. However, the
next chart shows each company’s TSR for the same period, again using 30-calendar day averages, converting all
companies to British pounds:
Currency Conversions for Global Relative TSR Plans: Highlight on Brexit
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Unfortunately, after converting to pounds, the British Company’s climb in value is still apparent, but no longer
translates to an improvement of percentile rank. Because the effect of the exchange rate has been accounted for,
this is a more accurate picture of the peer group. Additionally, the German Company takes an even larger lead.
Finally, notice that the recent losses in the Japanese market are effectively neutralized to ensure the Japanese
Company is fairly represented in the peer group.
Conclusion
When dealing with relative TSR plans that contain international peers, it is important to consider the following
points:

The overarching goal of a relative TSR plan is to align the award holder’s compensation with the value
returned to shareholders

Including international companies in a peer group implicitly states that the “value returned to shareholders”
should be determined on a global scale

Fluctuations in exchange rate, while out of a company’s control, can either mask or exaggerate market trends
In light of these points, we continue to believe it is essential to convert peer stock prices into a common currency
before calculating TSR in order to neutralize the effect of variable exchange rates. As we have referenced in the
past, the Investment Association (IA) supports this approach, stating in their Principles of Remuneration, dated
July 3, 2016:
“Where TSR is used as a performance criterion and the chosen comparator group includes companies listed
in overseas markets, it is essential that TSR be measured on a consistent basis. The standard approach
should be for a common currency to be used. Where there are compelling grounds for the calculation to be
based on local currency TSR of comparator group companies, then the reasons for choosing this approach
should be fully explained.”
Given the evidence provided by the impact of Brexit on the British pound in addition to the IA’s recommendation,
the argument for use of common currency is validated once again. After all, the goal of relative TSR programs is
to establish the fairest performance comparison possible and now we see a real world example where the
exclusion of exchange rates prevented that from happening. For more detail regarding the use of exchange rates
in relative TSR plans, please see our whitepaper, Managing Relative TSR with Global Peers: The Impact of
Currency Fluctuations.
To learn more about the Equity Valuation Services practice at Aon Hewitt and Radford, please visit:
radford.com/home/valuation/
Currency Conversions for Global Relative TSR Plans: Highlight on Brexit
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Contact Information
To start a conversation with a member of the Equity Valuation Services team at Aon Hewitt and Radford, please
contact one of our associates below:
Dan Coleman
Associate Partner, Equity
Valuation Services
Aon
Chicago, IL
+1 (312) 381-4111
[email protected]
Sian Halcrow
Head of Reward Analytics,
Executive Compensation
Aon
London, England
+44 (0)20 7086-9392
[email protected]
Dan Kapinos, CEP
Director, Equity Valuation
Services
Aon
Philadelphia, PA
+1.215.255.1874
[email protected]
Julia Franke
Senior Consultant, Equity
Valuation Services
Aon
Philadelphia, PA
+1 (215) 589-5558
[email protected]
Currency Conversions for Global Relative TSR Plans: Highlight on Brexit
Kellie Matthews
Associate, Equity Valuation
Services
Aon
Philadelphia, PA
+1.215.255.0302
[email protected]
5
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About Radford
Radford delivers compensation data and advice to technology and life sciences companies. We empower the
world’s most innovative organizations, at every stage of development, to hire, engage and retain the top talent
they need to do amazing things. Today, our surveys provide in-depth compensation insights in more than 80
countries to 2,850 participating organizations and our consultants work with hundreds of firms annually to design
rewards programs for boards of directors, executives, employees and sales professionals. Radford is part of Aon
Hewitt, a business unit of Aon plc (NYSE: AON). For more information on Radford, please visit radford.com.
About Aon Hewitt
Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement
and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate
talent to drive organizational and personal performance and growth, navigate retirement risk while providing new
levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt
is the global leader in human resource solutions, with over 35,000 professionals in 90 countries serving more than
20,000 clients worldwide across 100+ solutions. For more information on Aon Hewitt, please visit aonhewitt.com.
This article provides general information for reference purposes only. Readers should not use this article as a replacement for legal,
tax, accounting, or consulting advice that is specific to the facts and circumstances of their business. We encourage readers to
consult with appropriate advisors before acting on any of the information contained in this article.
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© 2016 Aon plc. All rights reserved.
Currency Conversions for Global Relative TSR Plans: Highlight on Brexit
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