53 AGL Energy Limited Annual Report 2012 The calculation process is as follows: 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 is 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. 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 is financially  penalised, when growth in EBIT/Funds employed is insufficient  or negative. The hurdle also recognises 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. 1. At the commencement of the financial year, each participant  receives an initial notional grant of the number of SPRs  determined by multiplying their total fixed remuneration (TFR)  by their long-term incentive opportunity (which is expressed as  a percentage of TFR), and dividing the resulting number by the  Volume Weighted Average Price at which AGL’s shares traded on  the ASX during the 30 calendar days up to and including 30 June  of the preceding financial year (see example below). Fractional  entitlements are rounded up. Example: Calculation of financial year 2012 (FY2012) notional grant  of Share Performance Rights: Total fixed remuneration (TFR) X LTI opportunity (as a % of TFR) $14.23 (Volume Weighted Average Price at which AGL’s shares traded  on the ASX during the 30 calendar days up to and including  30 June 2011) 2. That notional grant is then split 50/50 between each  performance hurdle – that is, half of the SPRs in the total  notional grant are allocated to be tested against the TSR hurdle  and the other half are allocated to be tested against the EBIT/ Funds Employed hurdle, at the end of the financial year. 3. The final number of SPRs to be banked in each relevant bank  account is then determined according to AGL’s performance  against the relevant hurdle as follows: Hurdle 1: Annual TSR Annual TSR Number of SPRs banked for this hurdle Equal to or greater than 14%  2 times SPRs notionally granted Greater than 4% and less  than 14% Progressive on a straight-line basis  from zero to 2 times SPRs notionally  granted Between 4% and minus 4% Zero SPRs notionally granted Less than minus 4% and  greater than minus 14% Progressive deduction on a straight- line basis from zero to minus 2 times  SPRs notionally granted Equal to or less than minus  14%  Minus 2 times SPRs notionally  granted Annual growth in EBIT/Funds  Employed Number of SPRs banked for this hurdle Equal to or greater than 13%  2 times SPRs notionally granted Greater than 2% and less  than 13%  Progressive on a straight-line basis  from zero to 2 times SPRs notionally  granted Between 2% and minus 4%  Zero SPRs notionally granted  Less than minus 4% and  greater than minus 15%  Progressive on a straight-line basis  from zero to minus 2 times SPRs  notionally granted Equal to or less than minus  15% Minus 2 times SPRs notionally  granted Hurdle 2: Annual growth in EBIT/Funds Employed The above table is presented in the chart below using actual  FY2012 outcomes as an example. The above table is presented in the chart below using actual  FY2012 outcomes as an example.  0.0 x 0.5 x 1.0 x 1.5 x 2.0 x 2.5 x 3.00 6.00 9.00 12.00 15.00 -16.00 -12.00 -15.00 -9.00 -6.00 -3.00 0.00 -2.5 x -2.0 x -1.5 x -1.0 x -0.5 x Notional SPR Multiplier Growth in EBIT/Funds Employed (%) Actual multiplier was 1.65x Actual growth was 11.1% 0.0 x 0.5 x 1.0 x 1.5 x 2.0 x 2.5 x 1.00 4.00 7.00 10.00 13.00 15.00 -15.00 -14.00 -11.00 -8.00 -5.00 -2.00 -2.5 x -2.0 x -1.5 x -1.0 x -0.5 x Notional SPR Multiplier Annual TSR (%) Actual multiplier was 1.98x Actual TSR was 13.9%