7 June Dear Securityholder

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2 Macquarie Bank Limited ABN No.1 Martin Place Telephone (61 2) Sydney NSW 2000 Facsimile (61 2) GPO Box 4294 Internet Sydney NSW 1164 AUSTRALIA 7 June 2013 Dear Securityholder Please find enclosed notice of the 2013 Annual General Meeting of Macquarie Bank Limited (Macquarie Bank) which will be held at Macquarie s Melbourne office, The Conference Room, Level 23, 101 Collins Street, Melbourne, Victoria on Thursday, 25 July 2013, following the Macquarie Group Limited Annual General Meeting on the same date, but not earlier than 2:00 pm. An overview of the result for Macquarie Group, including Macquarie Bank, for the year ending 31 March 2013 will be presented at the 2013 Annual General Meeting of Macquarie Group Limited which will be held at the Grand Hyatt Melbourne, Savoy Ballroom, 123 Collins Street, Melbourne, Victoria starting at am (registration commences at 9.30 am). Holders of Macquarie Income Securities may attend the Macquarie Group Limited Annual General Meeting as visitors. The Macquarie Bank meeting will cover items of business set out in the Notice of Meeting. Holders of Macquarie Income Securities may attend the Macquarie Bank Annual General Meeting but are not entitled to vote on any of the proposed resolutions. You are referred to Macquarie Bank s 2013 Annual Report, available on Macquarie s website at Yours faithfully H Kevin McCann AM Chairman

3 Notice of Meeting The 2013 Annual General Meeting of Macquarie Bank Limited (ACN ) (Macquarie Bank, the Company), will be held at Macquarie s Melbourne office, The Conference Room, Level 23, 101 Collins Street, Melbourne, Victoria on Thursday, 25 July 2013 following the Macquarie Group Limited (Macquarie) Annual General Meeting on the same date, but not earlier than 2:00 pm. Registration will open at 1:40 pm. Ordinary Business 1 Financial Statements To consider and receive the Financial Report, the Directors Report and the Auditor s Report of Macquarie Bank for the financial year ended 31 March Remuneration Report To consider and, if thought fit, pass the following as an ordinary resolution: To adopt the Remuneration Report of Macquarie Bank for the year ended 31 March Special Business 3 Approval of termination benefits To consider and, if thought fit, pass the following as an ordinary resolution: That approval be given for all purposes (including for the purposes of sections 200B and 200E of the Corporations Act 2001) for the giving of all benefits to current or future key management personnel of the Company or persons who hold a managerial or executive office in the Company or a related body corporate, in connection with the person ceasing to hold an office or position of employment in the Company or a related body corporate, as set out in the Explanatory Notes to the Notice of Meeting convening this meeting. Voting Exclusion Statement A vote on Item 2 must not be cast (in any capacity) by, or on behalf of: a member or a former member of the key management personnel (KMP) of Macquarie Bank whose remuneration details are disclosed in the 2013 Remuneration Report; and a closely related party of such a KMP, unless the vote is cast by a person as proxy for a person entitled to vote in accordance with a direction on the proxy form. A closely related party includes close family members and companies the KMP controls. A vote must not be cast on Item 3 by a KMP, or a closely related party of a KMP, acting as proxy, if their appointment does not specify the way the proxy is to vote on Item 3. In addition, a vote on Item 3 must not be cast (in any capacity) by or on behalf of any person who may be entitled to receive a benefit in connection with that person s retirement from office, or position of employment, the subject of Item 3 (Relevant Executive), or an associate of that Relevant Executive. However, a person is entitled to cast a vote if: it is cast by a person as a proxy appointed by writing that specifies how the proxy is to vote on the resolution; and it is not cast on behalf of a Relevant Executive or an associate of a Relevant Executive. As at the date of this Notice of Meeting, no member of the KMP, no closely related party of a KMP, and no Relevant Executive, is an ordinary shareholder of Macquarie Bank. 1

4 Macquarie Bank Limited Notice of Meeting continued macquarie.com.au Proxy Voting by Chairman The Chairman of the Meeting will vote undirected proxies in favour of Item 2. The voting exclusion on KMP in Item 2 does not apply to the Chairman of the Meeting acting as proxy if the appointment expressly authorises the Chairman of the Meeting to exercise the proxy even if that item is connected directly or indirectly with the remuneration of a KMP of Macquarie Bank. As noted on the proxy form for the Meeting, where the Chairman of the Meeting is appointed as proxy and none of the For, Against or Abstain boxes is marked for Item 3, the appointing shareholder will be deemed to direct the Chairman to vote in favour of Item 3. By order of the Board Dennis Leong Company Secretary Sydney, 7 June

5 Notes Macquarie Bank is a subsidiary of Macquarie Group Limited. The following notes are provided for the ordinary shareholder(s) of Macquarie Bank. Holders of Macquarie Income Securities may attend and speak at the Annual General Meeting but are not entitled to vote on any of the proposed resolutions. 1 Proxies An ordinary shareholder may appoint a proxy to attend and vote for them. If they are entitled to cast two or more votes, they may nominate two persons to vote on their behalf at the meeting. If two proxies are appointed, each proxy may be appointed to represent a specified number or proportion of their votes. Fractions of votes will be disregarded. If no such number or proportion is specified, each proxy may exercise half their votes. Ordinary shareholders have been sent a proxy form with this Notice of Meeting. Proxy voting instructions are provided on the proxy form. A proxy need not be a shareholder. Votes may be cast For, Against or not voted on a resolution ( Abstain ). An ordinary shareholder may direct a proxy how to vote on any resolution by placing a mark (e.g. a cross) in the appropriate box on the proxy form and their votes may only be exercised in that manner. An ordinary shareholder may split their voting direction by inserting the number of shares or percentage of shares that they wish to vote in the appropriate box. If a mark is placed in the Abstain box, votes will not be counted in computing the required majority on a poll. 2 Proxy Delivery Proxies given by post, fax or delivery must be received by Macquarie Bank s share registry, Computershare Investor Services Pty Limited, at GPO Box 242, Melbourne, VIC, 3001 (facsimile number within Australia or from outside Australia ) or at Level 4, 60 Carrington Street, Sydney, NSW, 2000 or at Macquarie Bank s registered office in the ACT, by no later than 6:00 pm (Melbourne time) on Tuesday, 23 July Any revocations of proxies must be received at one of these places before the commencement of the meeting, or at the registration desk at Level 23, 101 Collins Street for the 2013 Annual General Meeting from 1:40 pm on the day of the meeting and no later than the commencement of the meeting. 3 Corporate Representatives If a corporate shareholder wishes to appoint a person to act as its representative at the meeting, that person should be provided with a letter or certificate authorising him or her as the company s representative (executed in accordance with the company s constitution) or with a copy of the resolution appointing the representative, certified by a secretary or director of the company. A form of appointment of corporate representative may be obtained from Macquarie s share registry. 4 Shareholders Eligible to Vote Pursuant to regulation of the Corporations Regulations 2001 (Cth), the holders of Macquarie Bank s ordinary shares for the purposes of the meeting, will be those registered holders of Macquarie Bank s ordinary shares at 7:00 pm (Melbourne time) on Tuesday, 23 July Voting at the Meeting It is intended that voting on each of the proposed resolutions at this meeting will be conducted on a show of hands. 6 Definitions The terms Voting Director and Executive Voting Director used here and in the Explanatory Notes on Items of Business accompanying this Notice of Meeting have the meaning given in Macquarie Bank s Constitution. The Voting Directors as at the date of the Notice of Meeting are: H Kevin McCann, Michael J Coleman, Diane J Grady, Michael J Hawker, Peter M Kirby, Catherine B Livingstone, Nicholas W Moore, John R Niland, Helen M Nugent, Greg C Ward and Peter H Warne. Mr Moore and Mr Ward are Executive Voting Directors. 3

6 Macquarie Bank Limited Explanatory Notes on Items of Business macquarie.com.au Item 1 Financial Statements As required by section 317 of the Corporations Act 2001 (Cth) (the Act), the Financial Report, Directors Report and Auditor s Report of Macquarie Bank Limited for the most recent financial year will be laid before the meeting. Ordinary shareholders of Macquarie Bank and holders of Macquarie Income Securities will be provided with the opportunity to ask questions or make comments about the reports, management or about Macquarie Bank generally but there will be no formal resolution put to the meeting. The reports are available on Macquarie s website at Item 2 Remuneration Report As required by section 250R(2) of the Act, a resolution that Macquarie Bank s Remuneration Report be adopted must be put to the vote. Section 250R(3) of the Act provides that the vote on the resolution is advisory. The Remuneration Report is contained within the Directors Report in Macquarie Bank s 2013 Annual Report on pages 7 to 29. Noting that each Voting Director has a personal interest in their own remuneration from Macquarie Bank, as described in the Remuneration Report, the Board unanimously recommends that shareholders vote in favour of adopting the Remuneration Report. Item 3 Approval of Termination Benefits Macquarie Bank is a subsidiary of Macquarie Group Limited (Macquarie). Macquarie is seeking shareholder approval at its 2013 Annual General Meeting, being held immediately before this meeting, in respect of termination benefits to certain directors and staff of Macquarie and its subsidiaries (Item 5 on the Macquarie Notice of 2013 Annual General Meeting (Macquarie 2013 AGM Notice). The reason Macquarie Bank requires the approval sought under Item 3 of this Notice is that Macquarie Bank and its subsidiaries may directly or indirectly fund or otherwise bear the cost of the remuneration arrangements to which the approval sought under Item 5 of the Macquarie 2013 AGM Notice applies, in respect of staff employed by or directors of Macquarie Bank or its subsidiaries (Banking Group Personnel). As a result, Macquarie Bank and its subsidiaries may directly or indirectly give benefits under Macquarie s remuneration arrangements in connection with Banking Group Personnel ceasing to hold a board, managerial or executive office in Macquarie Bank or a related body corporate of Macquarie Bank. Certain sections of the Macquarie 2013 AGM Notice, particularly the Explanatory Notes to Item 5, provide information that is relevant to the approval sought under Item 3 of this Notice. A summary of the key features of Macquarie s current remuneration framework is set out in the Explanatory Notes on Item 4 in the Macquarie 2013 AGM Notice. Appendix A to the Macquarie 2013 AGM Notice contains relevant information concerning the terms of Performance Share Units granted to the Macquarie Executive Committee members under the Macquarie Group Employee Retained Equity Plan. A copy of these sections of the Macquarie 2013 AGM Notice, is included as an appendix to these Explanatory Notes (Macquarie 2013 AGM Notice Extract). The following is supplementary information about Macquarie Bank s role in the remuneration arrangements which should be read together with the corresponding details in the Macquarie 2013 AGM Notice Extract. Terms used in this Notice which are defined in 4

7 the Macquarie 2013 AGM Notice Extract have the same meaning in this Notice. Superannuation The Explanatory Notes for Item 5 in the Macquarie 2013 AGM Notice Extract provide information on Macquarie s superannuation arrangements. Prior to November 2007, Macquarie Bank was the ultimate parent of the Macquarie Group and employed the majority of Macquarie Group s Australian staff. As the parent company, Macquarie Bank s policy on superannuation arrangements was the same as Macquarie s current policy. Macquarie Bank and its subsidiaries continue to make contributions to staff superannuation and pension funds in accordance with this policy, which will include the arrangements described in the Explanatory Notes for Item 5 in the Macquarie 2013 AGM Notice Extract. Macquarie Bank s ongoing role in the remuneration arrangements Banking Group Personnel participate in all of the arrangements for which approval is sought under Item 3 in this Notice. As noted above, Macquarie Bank and its subsidiaries may directly or indirectly bear the cost of these arrangements in respect of the Banking Group Personnel. The manner in which the amount or value of a termination benefit provided under these arrangements is to be calculated and the matters, events and circumstances that will, or are likely to, affect that amount or value, are the same as those set out in The Explanatory Notes to Item 5 in the Macquarie 2013 AGM Notice Extract. Additional information Ordinary shareholders of Macquarie Bank and holders of Macquarie Income Securities will be provided with the opportunity to ask questions about or make comments on Item 3. The Non-Executive Directors of the Board unanimously recommend that shareholders approve Item 3 in the Notice of Meeting. Greg Ward, being the Managing Director and Chief Executive Officer, has a material personal interest in the resolution and, therefore, has abstained from providing a recommendation. Nicholas Moore, the Managing Director and Chief Executive Officer of Macquarie Group, has similarly abstained from providing a recommendation. 5

8 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract macquarie.com.au The following Items 4 and 5 and Appendix A Performance Hurdles of PSUs are an extract from the Macquarie Group Limited Notice of 2013 Annual General Meeting Item 4 Remuneration Report As required by section 250R(2) of the Corporations Act 2001(Cth) (the Act), a resolution that Macquarie s Remuneration Report be adopted must be put to the vote. Section 250R(3) of the Act provides that the vote on the resolution is advisory. However, if more than 25% of the votes are cast against two consecutive annual section 250R(2) resolutions, the Act requires a shareholder vote on whether to convene a special meeting at which all directors (other than a managing director) who were in office when the second 250R(2) resolution was passed must stand for re-election. The Remuneration Report is contained within the Directors Report in Macquarie s 2013 Annual Financial Report on pages 41 to 78. The Executive Summary is largely reproduced below. Executive Summary During the year, Macquarie's Board of Directors (the Board) and the Board Remuneration Committee (the BRC) have assessed whether Macquarie s remuneration approach continues to support its objective of generating superior returns for shareholders having due regard for risk. In undertaking this assessment, the Directors of the Board (Directors) have considered factors including the degree of alignment between staff and shareholders, the evolving regulatory landscape, market developments, feedback from shareholders as well as the employment environment. Directors have also been mindful of the subdued market conditions experienced by some businesses during the year and have closely examined the resilience of the remuneration system, given the performance of each business. Directors have concluded that Macquarie s remuneration approach remains sound and is delivering results for shareholders while risk is being prudently managed, despite a challenging external environment. They support this conclusion for the following reasons. The objectives and framework remain appropriate. The remuneration framework seeks to attract, motivate and retain high quality people, while aligning the interests of staff and shareholders. The framework, which works as an integrated whole rather than in isolation, is comprised of fixed remuneration, a profit share scheme, and for Macquarie s most senior executives, the Executive Committee, Performance Share Units (PSUs). Fixed remuneration for senior staff remains relatively low compared to comparable roles in other organisations, although it is sufficient to avoid inappropriate risk-taking. Moreover, it is low as a proportion of overall remuneration. In 2013, fixed remuneration for Macquarie s 11 Executive Committee members comprised approximately 12 per cent of current year awarded remuneration. The balance remains at risk and is explicitly linked to performance. Performance-based remuneration is aligned with shareholders interests. The profit share pool is determined annually using the twin measures of net profit after tax (NPAT) and return on equity (ROE), measures which are known to be drivers of returns to shareholders. A portion of Macquarie s profit earned accrues to the profit share pool. Once the cost of equity capital is met, an additional portion of excess profit is accrued to the profit share pool. No ROE component of the profit share pool was created in FY2013. However, in line with policy, the Non-Executive Directors exercised their discretion to make an upward adjustment to the quantum of the profit share pool to recognise superior performers in those businesses that overall were impacted by subdued market conditions. In the past, such discretion has been exercised both down and up. Over time, the net aggregate impact on net profit of the exercise of these discretions has been nominal. Non-Executive Directors do not consider shareholders long-term interests would be served by losing the services of superior contributors whose performance was not adequately recognised. Indeed, they consider that the investment made in these businesses is paying dividends. 6

9 Profit share is allocated to Macquarie s businesses and, in turn, to individuals, based predominantly on performance. Performance criteria vary depending on an individual s role including: contribution to NPAT and ROE risk management and compliance assessed through independent reports from the Chief Risk Officer (CRO), the Chief Financial Officer (CFO) and Human Resources (HR) people leadership upholding Macquarie s Goals and Values. The Board also seeks to ensure that remuneration for staff whose primary role is risk and financial control, including the CRO and the CFO, preserves the independence of the function and maintains Macquarie s robust risk management framework. Performance-based remuneration is delivered in ways that encourage a longer-term perspective and ensure alignment with shareholders longer-term interests and staff retention. In turn, this encourages staff to maximise profit without exposing Macquarie to risk or behaviours that jeopardise long-term profitability or reputation. To achieve this outcome, a significant portion of performance-based remuneration is: retained and deferred over a long period (for example, 70 per cent of the Managing Director and Chief Executive Officer's (Managing Director and CEO s) profit share allocation is retained for up to seven years). After PSUs are taken into account, the effective deferral rate for the Managing Director and CEO is 77 per cent for this year delivered in equity subject to forfeiture in certain circumstances. PSUs are allocated to Executive Committee members based on their performance, using criteria similar to those used for profit share. PSUs vest in equal tranches after three and four years and are exercisable subject to the achievement of two performance hurdles, with no retesting. 50 per cent of the PSUs will become exercisable based on Macquarie s ROE performance relative to ten global investment banks based on a sliding scale. 50 per cent will become exercisable above the 50th percentile and 100 per cent at the 75th percentile. The reference group has been amended going forward to exclude Australian commercial banks, instead focusing on organisations against whom Macquarie benchmarks its performance. The other 50 per cent of PSUs will become exercisable in future based on Macquarie s compound average annual growth (CAGR) in earnings per share (EPS) on a sliding scale. 50 per cent will become exercisable where EPS CAGR is 7.5 per cent and 100 per cent will become exercisable where it is 12 per cent or higher. The EPS CAGR hurdle range has been amended in future from the previous range of 9 13 per cent to reflect changes in market conditions. Other conditions apply that seek to align staff and shareholder interests, while prudently managing risk. All Executive Directors are subject to a minimum shareholding requirement which can be satisfied through the delivery of equity under the current remuneration arrangements. This aligns shareholder and staff interests and provides the strongest incentive to staff to strive continuously to maximise long-term profitability and shareholder returns. Macquarie prohibits staff from hedging any of the following types of securities: shares held to satisfy the minimum shareholding requirement deferred and unvested awards to be delivered under the equity plan, the Macquarie Group Employee Retained Equity Plan (MEREP), including PSUs unvested options (under a previous scheme). Staff can only trade Macquarie ordinary shares and other securities during designated trading windows. 7

10 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au Performance metrics are creditable including against peers. In challenging circumstances, Macquarie has delivered improved results for shareholders while appropriately managing remuneration for staff. This can be demonstrated in the following ways. The table below shows that over the past year, NPAT has increased by 17 per cent, basic EPS by 20 per cent and dividends by 43 per cent, while total staff compensation expense has decreased by 8 per cent. Macquarie s NPAT growth rate over the past year has been faster than all but one of its global peers. At the same time, the compensation expense to income ratio has declined from 47.9 per cent to 45.9 per cent, placing it in the lower range of peers. Macquarie recorded a 7.8 per cent annual ROE, which is recognised as needing improvement. Nonetheless, only four of ten peers generated a higher ROE. In relation to Total Shareholder Return (TSR), Macquarie has outperformed all its global peers over the past year, generating a TSR for shareholders of 34.4 per cent Increase/ (Decrease)% Performance measures NPAT $Am Basic EPS Cents per share Dividends Cents per share Annual TSR (1) Per cent 34.4 (16.0) Executive remuneration measures Total Compensation Expense $Am 3,072 3,335 (8) Compensation Expense to Income ratio Per cent Present Pay CEO (2) $Am Future Pay CEO (3) $Am Statutory Remuneration CEO $Am Statutory Remuneration Comparable KMP (4) $Am (1) TSR represents the accumulated share price return for the period ending 31 March 2013 when all cash dividends are reinvested at the ex-dividend date. (2) Present pay is defined as the non-deferred element of remuneration awarded in respect of the financial year, recognising that some portion of present pay may in fact be paid in the subsequent financial year. This comprises current year fixed remuneration (including superannuation); and the non-deferred component of the current year profit share allocation (30 per cent for the CEO). (3) Future pay is defined as remuneration awarded in respect of the financial year, which is deferred for payment in future years. For the CEO this represents the deferred unvested component of the current year profit share allocation (70 per cent) which is allocated into a combination of Macquarie equity and Macquarie-fund equity (see sections of the Remuneration Report); and PSUs allocated in respect of the current year. PSUs vest after years three and four and are exercisable subject to the achievement of performance hurdles (see section of the Remuneration Report). (4) Comparable KMP are Executive KMP who were members of the Executive Committee for the full year in both FY2013 and FY

11 Strong remuneration governance has been exercised. The Board and the BRC remain committed to strong remuneration governance structures and processes. Conflicts of interest are managed proactively and assiduously. The BRC makes recommendations to the Non-Executive Directors on key decisions. An independent remuneration review has also been obtained from an independent consultant, Pay Governance, to provide an opinion on the appropriateness of Macquarie s remuneration arrangements. Pay Governance has provided its report free from management influence and has confirmed that Macquarie s remuneration approach remains appropriate. Non-Executive Director fees take into account market rates for relevant Australian financial organisations and reflect the time commitment and responsibilities involved within the shareholder approved aggregate limit. In summary, the overall approach to remuneration supports the overarching objective of delivering superior value for shareholders over the long-term while prudently managing risk. Noting that each Voting Director has a personal interest in their own remuneration from Macquarie, as described in the Remuneration Report, the Board unanimously recommends that shareholders vote in favour of adopting the Remuneration Report. 9

12 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au Item 5 Approval of termination benefits Executive Summary On 17 December 2009, Macquarie shareholders approved Macquarie giving termination benefits to departing staff consistent with Macquarie s remuneration framework and termination benefits arrangements (2009 Approval). While Macquarie s remuneration framework has remained largely unchanged since the 2009 Approval, good corporate governance practice suggests that the 2009 Approval be periodically refreshed. This approval is only for the purposes of approving termination benefits. It does not in and of itself result in: approving any increase in the remuneration of any employee or officer outside Macquarie s remuneration framework as described in the Remuneration Report approving the provision of any new benefits to any specific leaving employee or officer approving any variation to the existing discretions of the Board or its delegate under the remuneration arrangements described in the Remuneration Report, or sanctioning any change to the underlying employment arrangements or entitlements for any individual employee or officer. By passing Item 5, shareholders will provide Macquarie with the ability to ensure its ongoing compliance with section 200B of the Act and to meet expectations in relation to good corporate governance. For this reason, the Board considers it is in the interests of Macquarie and its shareholders to refresh the 2009 Approval at this time. 1 Termination benefits approval: Section 200B Corporations Act Who this approval affects The Act restricts companies from giving certain termination benefits to staff who hold a managerial or executive office (as defined in section 200AA(1) of the Act) in Macquarie. This includes a person: who is a director of any Macquarie Group entity, or whose remuneration details are included in Macquarie s Remuneration Report, and includes any person who held such an office in the three years before they ceased to be a director of, or ceased employment with, any Macquarie Group company (in these Explanatory Notes, any such person is referred to as a Relevant Executive ). While the number will vary over time, Macquarie currently has over 1,000 related bodies corporate and approximately 500 Macquarie Group employees who meet the definition of Relevant Executives, and are therefore subject to the termination benefits provisions. Macquarie has a uniquely diversified global business. It differentiates itself by focusing on new opportunities, both in products and geographies. New corporate structures are typically established for these opportunities. Macquarie s approach is to appoint senior staff with knowledge of the specific product or business to the boards of these related bodies corporate. For that reason it has a large number of executives who are Relevant Executives under section 200B of the Act. Shareholder approval of Macquarie s approach to termination benefits is essential for the continued operation of Macquarie s risk management approach, as well as Macquarie s remuneration policies which, through deferred equity-based retention, emphasise a longer-term perspective over a multi-year timeframe. 10

13 1.2 Shareholder approval Under the termination benefits provision of the Act, termination benefits cannot be provided to Relevant Executives unless approved by shareholders, or an exception applies. Termination benefits are defined to include a range of payments or benefits given in connection with a person ceasing to hold an office or position of employment, including termination payments and other benefits such as the acceleration or automatic vesting of share-based payments or entitlements at or due to retirement. Certain benefits are exempt from the termination benefits restrictions and include: certain types of deferred bonuses, including a bonus which is attributable to the release of a deferred bonus from a restriction due to death or incapacity genuine superannuation contributions paid by an employer or employee on or after 24 November 2009 genuine accrued benefits, such as accrued untaken annual leave, payable under an Australian law or the law of another country, and reasonable payments made in accordance with a policy that applies to all employees as a result of a genuine redundancy having regard to a person s length of service. There is an exception to the prohibition on the provision of certain termination benefits where the value of all termination benefits does not exceed one year s worth of the Relevant Executive s base salary (as calculated in accordance with the Act) (1 x Base Cap). The provision of any other benefit requires shareholder approval. At Macquarie, these include: deferred remuneration in the form of: profit share Performance Share Units (PSUs) other awards other superannuation and forms of retirement savings other leave benefits payments in lieu of notice (in certain circumstances) redundancy payments (in certain jurisdictions). In order to seek shareholder approval, shareholders must be provided with: details of the amount or value of the payment or benefit, or where the amount or value cannot be ascertained at the time of the disclosure: the manner in which the amount or value of the benefit is to be calculated, and any matter, event or circumstance that will, or is likely to, affect the calculation of the amount or value. In Macquarie s case, the amount of any payment or value of any other benefit that may be given to a Relevant Executive in connection with the termination of his or her employment or removal from office depends on a number of factors, not all of which are within Macquarie s control. It is not possible to determine in advance the monetary value of the potential benefits that may be received by any particular executive at some point in the future. Section 2 of these Explanatory Notes for Item 5, and the table contained in that section, set out the manner in which the amount or value will be calculated, and the matters, events and circumstances that will affect the amount or value of a termination benefit paid to a Relevant Executive when they leave Macquarie. Shareholder approval is sought under Item 5 to allow the provision of all benefits under Macquarie s remuneration framework which may be defined as termination benefits for the purposes of the termination benefits legislation and which are set out in these Explanatory Notes. Accordingly, the amount and value of the benefits for which shareholder approval is sought is the maximum potential benefit that could be provided to a Relevant Executive in connection with the person ceasing to hold an office or position of employment with Macquarie. 11

14 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au 2 Termination benefits provided to Relevant Executives The overall objectives of Macquarie s remuneration system are to drive shareholder returns over the longterm, while prudently managing risk. This is achieved in a number of ways, including by emphasising a performance-based remuneration approach where a significant portion of performance-based remuneration is: retained and deferred over a long period delivered in equity subject to forfeiture, but can be released upon leaving Macquarie in the case of genuine retirement, death, disability, redundancy or other limited exceptional circumstances. These arrangements could potentially result in Relevant Executives receiving termination benefits on termination of employment with Macquarie Group entities. The shareholder approval sought will cover the benefits set out in the following table, which may be provided in the circumstances described in the table. The following table also describes the manner in which the amount or value of the benefit is to be calculated and the matters, events and circumstances that will, or are likely to, affect that amount or value. 12

15 Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 1. Deferred remuneration profit share 1.1 A Relevant Executive s profit share allocation, which is a function of the following factors in varying proportions: The overall profit share pool Allocation to businesses Relevant Executive s performance The overall profit share pool is determined annually by: allocation of a proportion of the Group s NPAT allocation of an additional proportion of profit once the cost of equity capital is met exercise of discretion by the Non-Executive Directors to adjust the size of the pool up or down taking into account: shareholders interests the performance of each business and the divisions within each business risk and compliance the employment environment and market conditions staff retention risk. Allocation to businesses and teams based on: their contribution to profits (not revenue) taking into account capital usage, risk management, compliance and market dynamics. Allocation to risk and financial control groups and other support groups based on: the quality and integrity of control functions and the quality of business support services no direct link to profitability. Allocation to the Relevant Executive based on: their individual performance. Performance criteria vary depending on an individual s role including the following factors, in varying proportions, which can change from time to time: financial performance including contribution to NPAT and ROE risk management and compliance (assessed through independent reports from the CRO, the CFO and HR) business leadership people and organisational leadership, including upholding Macquarie s Goals and Values. For the Managing Director and CEO, refer to section 4.1 of Macquarie s Remuneration Report for further performance criteria considered. 13

16 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 1. Deferred remuneration profit share (continued) 1.2 The amount of profit share retained for a Relevant Executive, which is a function of the following factors in varying proportions: The per cent retained Time to vest and release Retention affects the value of deferred remuneration that a Relevant Executive may receive on termination. For Relevant Executives who are Executive Directors, this is generally within the range of 40 70% and for Relevant Executives who are not Executive Directors, this is generally within the range of 25 70% (above specific thresholds), in each case dependent on their role. However, retention can be higher in certain exceptional circumstances. The Board or the BRC has discretion to change the percentage of profit share allocations retained on an annual basis to meet changing market conditions as well as to comply with regulatory and corporate governance guidance, provided that the retention percentage is at least 30% for Executive Directors. Differing retention levels may also occur as the result of a business acquisition, where remuneration arrangements are entered into as part of a transition and/or integration process. Retention rates may vary from year to year for any Relevant Executive. For each year s allocation, once the retention rate has been determined it remains fixed for that allocation. In addition, the Board has discretion to change retention levels where local laws impact the application of Macquarie s retention arrangements. At all times these adjustments are to ensure that Relevant Executives are in a similar situation and not disadvantaged due to those restrictions. Macquarie s standard retention rates will continue to be disclosed each year in Macquarie s Remuneration Report. The length of vesting and the timing of release affects the value of deferred remuneration that a Relevant Executive may receive on termination. Retained profit share vests and is released over a period that reflects the scope and nature of a Relevant Executive s role and responsibilities. For Relevant Executives who are Executive Directors, vesting periods are typically within the range of 3-7 years, and for Relevant Executives who are not Executive Directors, vesting periods are typically within the range of 2-4 years. However, the vesting periods may be shorter or longer in response to local regulatory or legislative requirements. Differing vesting periods may also occur as the result of a business acquisition, where remuneration arrangements are entered into as part of a transition and/or integration process. The Board or the BRC has discretion to change the vesting and release period on an annual basis to meet changing market conditions as well as to comply with regulatory and corporate governance guidance. For each year s allocation, once the vesting period has been determined, it remains fixed for that allocation. The applicable standard vesting and release period will continue to be disclosed each year in Macquarie s Remuneration Report. 14

17 Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 1. Deferred remuneration profit share (continued) 1.2 The amount of profit share retained for a Relevant Executive, which is a function of the following factors in varying proportions: (continued) Where retained profit share is invested The change in value of the invested profit share Number of years the Relevant Executive has participated in the profit share scheme The allocation of retained profit share is a function of the Relevant Executive s role, responsibilities and level, as well as historical arrangements including acquisitions. Retained profit share is invested, either directly or notionally, in Macquarie equity or Macquarie-managed funds or, in subsidiaries in the case of acquired businesses. Retained profit share may be invested in varying proportions in a combination of these forms. In limited circumstances, and only with the approval of the BRC, retained profit share may be allocated to other than Macquariemanaged fund equity or the MEREP (1). An example might include investment in funds or products of a specific business group where there is a need to directly align the interests of employees with those of their specific types of clients. For Relevant Executives who are not Executive Directors, retained profit share is generally (but not exclusively) invested in the MEREP. The Board or the BRC has discretion to review the percentage allocated to Macquarie-managed fund equity and the MEREP on an annual basis to reflect a Relevant Executive s responsibilities and to strengthen shareholder alignment and risk management for Macquarie and the Macquarie-managed funds. The standard percentages allocated to the MEREP and Macquariemanaged fund equity for Executive Directors will continue to be disclosed each year in Macquarie s Remuneration Report. The change in the value of the investment can be caused by: an increase or decrease in the value of the equity or underlying equity returns on that equity including dividends and capital returns where applicable. The number of years that the Relevant Executive has participated in the profit share scheme impacts the quantum of unvested profit share. (1) The Macquarie Group Employee Retained Equity Plan. 15

18 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 1. Deferred remuneration profit share (continued) 1.2 The amount of profit share retained for a Relevant Executive, which is a function of the following factors in varying proportions: (continued) 1.3 Circumstances in which a termination benefit may be paid Application of Malus (if applicable) Circumstances of leaving Macquarie Each year, the BRC identifies the group of executives, some of whom are Relevant Executives, who are subject to Malus. For such Relevant Executives, the Board or its delegate has discretion to reduce or eliminate unvested profit share amounts (in respect of profit share years ending 31 March 2012 and onwards) where it determines that their action or inaction has thereby caused Macquarie significant reputational harm, caused a significant unexpected financial loss or caused it to make a material financial restatement (Malus). Additional terms may apply to staff in jurisdictions outside Australia to ensure compliance with local regulations. The specific terms are periodically reviewed by the BRC and may be amended as considered appropriate. Macquarie s standard Malus terms will continue to be disclosed in the Remuneration Report each year. In the case of death or serious incapacitation, the Board or its delegate will typically accelerate the vesting of retained profit share and immediately release it to the Relevant Executive, or to the Relevant Executive s legal personal representative. In the case of genuine retirement, redundancy, disability, serious illhealth or other limited exceptional circumstances (such as for business efficacy reasons), the Board or its delegate has discretion to accelerate the vesting of retained profit share, and in the case of Executive Directors, subject to the disqualifying events provisions set out below. In all cases where the discretion is exercised, the Board or its delegate may impose such other conditions as it considers appropriate. For other terminations, unvested retained profit share is forfeited. Disqualifying events provision (for Executive Directors) Where the Board or its delegate exercise discretion to accelerate the vesting of retained profit share, the Executive Director will not be entitled to receive any of their unvested retained profit share where the Board or its delegate determines that the Executive Director has during the period of employment with Macquarie or since leaving: (a) committed an act of dishonesty (including but not limited to misappropriation of funds and deliberate concealment of a transaction) (b) committed a significant and wilful breach of duty that causes material damage to Macquarie (c) joined a competitor of Macquarie Group (d) taken staff to a competitor or been instrumental in causing staff to go to a competitor, or (e) otherwise acted or failed to act in a way that thereby causes damage to Macquarie, including but not limited to situations where the action or inaction leads to a material financial restatement, a significant financial loss or any significant reputational harm to Macquarie or its businesses. 16

19 Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 1. Deferred remuneration profit share (continued) 1.3 Circumstances in which a termination benefit may be paid (continued) Circumstances of leaving Macquarie (continued) These provisions are subject to periodic review by the Board. Any changes will be disclosed in the Remuneration Report each year. The release will occur over the period from six months to two years after the Executive Director leaves, subject to different disqualifying event provisions: First period Second period Third period Time post departure 6 months 6 months 1 year 1 year 2 years Unvested retained profit share released From all but the last two years of employment From the second year prior to the end of employment From the year prior to the end of employment Subject to disqualifying events (a), (b), (c), (d) and (e) No disqualification during First Period and (a), (b), (d) and (e) in Second Period No disqualification during First Period and Second Period and (a), (b) and (e) in Third Period Where a Relevant Executive has a tax liability on termination of employment in respect of any retained profit share, the Relevant Executive may receive retained profit share up to an amount equal to the Relevant Executive s tax liability at an earlier time than noted above. Benefit 2. Deferred remuneration Performance Share Units (2) (PSUs) (applicable only to Executive Committee members) 2.1 A Relevant Executive s PSU allocation is a function of the following factors in varying proportions: The overall PSU pool The Relevant Executive s performance The overall dollar value of the PSU pool which is based on the exercise of Non-Executive Directors discretion taking into account the Group s overall performance and employment market factors. The dollar value of PSUs awarded to members of the Executive Committee which is based on their individual performance as assessed by the Non-Executive Directors of the Board. Performance criteria vary depending on an individual s role including the following factors, in varying proportions, which can change from time to time: financial performance including contribution to NPAT and ROE risk management and compliance (assessed through independent reports from the CRO, the CFO and HR) business leadership people and organisational leadership, including upholding Macquarie s Goals and Values. (2) Further information in regards to PSUs is set out in section of the 2013 Remuneration Report. 17

20 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 2. Deferred remuneration Performance Share Units (PSUs) (applicable only to Executive Committee members) (continued) 2.1 A Relevant Executive s PSU allocation is a function of the following factors in varying proportions: (continued) 2.2 Exercisability of PSUs Number of PSUs awarded The number of PSUs awarded which reflects the relevant assumptions adopted to determine the fair value of each PSU, and therefore the number of PSUs granted. The fair value is determined using a Monte- Carlo option pricing framework, designed to take account of trading restrictions and the vesting performance hurdles and timeframes. Further detail is provided in Appendix 4 of Macquarie s Remuneration Report. These assumptions are subject to periodic review. Any changes will continue to be disclosed each year in Macquarie s Remuneration Report. The exercisability of PSUs, which as set out in Appendix A, are subject to two performance hurdles, each applying individually to 50 per cent of the total number of each tranche awarded. Under both performance hurdles, the objective is examined once only. If the condition is not met when examined, the PSUs due to vest will not be exercisable upon vesting, resulting in a nil benefit to Executive Committee members. The hurdles are periodically reviewed by the Board, including the reference group, and the Board has discretion to change the performance hurdles in line with regulatory and corporate governance guidance. PSU hurdles will continue to be disclosed in each year s Remuneration Report. 2.3 Time to vest PSU grants made prior to 2012 vest in three equal tranches after two, three and four years. PSUs granted from 2012 vest in two equal tranches after three and four years. The Board or its delegate has discretion to change the vesting period on an annual basis to meet changing market conditions as well as to comply with regulatory and corporate governance guidance. For each year s allocation, once the vesting period has been determined it remains fixed for that allocation. The applicable vesting period will continue to be disclosed each year in Macquarie s Remuneration Report. 2.4 The change in the underlying value of shares 2.5 Circumstances of leaving Macquarie Share price appreciation or depreciation affects the value of the PSUs upon vesting. To ensure continued alignment with shareholders post termination, in cases of genuine retirement, PSUs continue to vest in accordance with the above vesting schedule and remain subject to the same performance hurdles. The Board or its delegate has the authority to accelerate the vesting of, or to forfeit PSUs, when an Executive Committee member leaves Macquarie. 18

21 Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 3. Other awards 3.1 Promotion awards 3.2 New hire or other awards 3.3 Transitioned amounts Relevant Executives who are promoted to Associate Director, Division Director or Executive Director receive a fixed allocation of MEREP awards, based on seniority. Currently these awards range from 1,000 to 4,000 awards depending on level. The BRC has discretion to change the quantum of awards on an annual basis. These awards vest on a pro-rata basis over years two, three and four. In the case of genuine retirement, redundancy, death, disability, serious ill-health or other limited exceptional circumstances, the Board or its delegate has discretion to accelerate the vesting of some or all of these awards and immediately release to the Relevant Executive. In all cases where the discretion is exercised, the Board or its delegate may impose such other conditions as it considers appropriate. Relevant Executives who join Macquarie as Director level staff receive a fixed allocation of MEREP awards as set out above under 3.1. In addition, occasionally Macquarie Director level staff may receive an equity grant when they join Macquarie to compensate for the value of deferred remuneration from their previous employer which they have forfeited upon leaving Macquarie. Typically, these awards would be structured to mirror the terms of the deferred remuneration which has been forfeited, including the period over which the award or grant will vest and be released. The value of such awards will be subject to the same matters, events and circumstances as those described in section above. The Board or its delegate has discretion to accelerate these amounts in the same circumstances and in the same way as set out above under 3.1. When the MEREP was established, Executive Directors were given the choice to move some or all of their pre-2009 retained profit share to the MEREP (Transitioned Amounts). These amounts vest on a straight line basis up to 2016 for Executive Committee members and 2014 for other Executive Directors. The Board or its delegate has discretion to accelerate such awards in the same circumstances and in the same way as set out above under Pre-2009 DPS Executive Directors pre-2009 retained profit share that was not transitioned to the MEREP is grandfathered in the Pre-2009 DPS Plan. Retained profit share amounts begin to vest after five years of service as an Executive Director and fully vest after 10 years of service. Vested retained profit share is released (subject to the non-occurrence of a disqualifying event) on the earlier of the Executive Director s ceasing employment with the Macquarie Group and the end of the ten year period commencing on the date on which the retained profit share was allocated to the Pre-2009 DPS Plan. The Board or its delegate has discretion to accelerate unvested amounts in the same circumstances and in the same way as set out above under 1.3.1, except when released on cessation of employment, the vested retained profit share is usually released six months after cessation date, to enable the Executive Committee or the Board to determine whether any disqualifying events have occurred post-cessation. 19

22 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 3. Other awards (continued) 3.5 Options Options for staff were discontinued in Some options remain outstanding. Executive Director Options can only be exercised if the exercise conditions are met. Options vest in three tranches after two, three and four years. Each Option cannot be exercised before vesting and will generally lapse unexercised if the holder leaves Macquarie before the Option is exercised. The Board or its delegate has discretion to vary option terms including variations to lapse dates in the same circumstances as set out above under 3.1. Benefit 4. Other superannuation and forms of retirement savings 4.1 The applicable minimum statutory contributions or established market practices, which may change over time 4.2 The Relevant Executive s total remuneration over time 4.3 Any earnings and capital gain or loss, on contributions by Macquarie 4.4 The Relevant Executive s years of service In Australia, Macquarie makes the compulsory superannuation contributions required by law (currently 9% - increasing to 9.25% on 1 July subject to the maximum contribution base which is indexed annually) on behalf of Relevant Executives. Currently, Macquarie does not contribute more than the statutory amount as an employer superannuation contribution, although executives may choose to salary sacrifice additional employee contributions. Outside Australia, Macquarie employs staff in a number of countries with statutory requirements for employers and/or employees to make contributions to superannuation or other forms of retirement savings. Macquarie complies with these obligations and may also facilitate employee contributions through salary sacrifice or other means. In other jurisdictions, there are established market practices for providing employer contributions to superannuation or other forms of retirement savings which may exceed the minimum statutory requirement or where there is no statutory requirement. Macquarie s approach is to follow reasonable market practices in these jurisdictions. The value of a Relevant Executive s benefits from such arrangements will be equal to the contributions made by Macquarie to the relevant superannuation fund or other arrangement over the period of employment and also earnings and capital growth or loss. The value of these benefits may also be a function of the terms of the particular scheme, years of service and salary upon termination of employment. 20

23 Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 5. Other leave benefits 5.1 The applicable statutory accruals or established market practices, which may change over time 5.2 The Relevant Executive s salary upon termination of employment 5.3 The Relevant Executive s length of service In Australia, Macquarie accrues annual leave for Relevant Executives over time as required by law. Outside Australia, Macquarie employs staff in a number of countries where local statutory requirements also require accruals for annual, holiday or vacation leave and Macquarie complies with these obligations. In other jurisdictions, there are established market practices for such leave accruals which may exceed the minimum statutory requirement and Macquarie s approach is to follow reasonable market practices in these jurisdictions. Depending on the statutory requirements and market practice of each jurisdiction, any such accrued but untaken leave benefit may become payable on termination of employment. The value of a Relevant Executive s benefit from such arrangements will be equal to the level of accrued but untaken leave which is required to be paid out to the Relevant Executive on termination of employment pursuant to either legislation or market practice. The value of the benefit will also therefore be a function of the Relevant Executive s length of service and salary upon termination of employment. Benefit 6. Payments in lieu of notice (in certain circumstances) 6.1 The Relevant Executive s remuneration at the time of termination, or in some cases, the period leading up to the time of termination 6.2 The length of the notice period for which payment is being made 6.3 Whether Macquarie s operational requirements at the time require the Relevant Executive to work through part or all of their notice period Relevant Executives have employment agreements which include notice periods. The majority of Relevant Executives have a contractual notice period of four weeks. Some Relevant Executives have notice periods that are aligned to local legislation or to country and regional markets and are other than four weeks or greater than the relevant legislative minimum. If the Relevant Executive serves their notice period, they will receive wages and accrued benefits which will be calculated up to that Relevant Executive s actual termination date, none of which will be a termination benefit. However, there are circumstances where Macquarie may determine that it is more commercially appropriate to terminate the employment of a Relevant Executive and make a payment in lieu of the remuneration that the Relevant Executive would have received for the balance of their relevant notice period, or is entitled to receive under their contractual notice provision. This discretion exists both under Macquarie s employment arrangements and under employment law generally and is common practice. If a payment is made in lieu of notice to a Relevant Executive, that payment is a benefit within the meaning of the Act. The amount of any such payments can only be determined once notice is given. The Board considers that having this flexibility is an important part of conducting its business. 21

24 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au Key matters, events and circumstances affecting the calculation of the amount or value of the termination benefits provided to Relevant Executives Benefit 7. Redundancy terms (in certain jurisdictions) 7.1 The applicable minimum statutory or contractual redundancy entitlements or established market practices, which may change over time 7.2 The Relevant Executive s fixed remuneration over time 7.3 The number of years the Relevant Executive has worked with Macquarie In most cases, redundancy payments to Relevant Executives are exempt from the termination benefit restrictions in the Act. Macquarie s approach is to align its redundancy policies in each jurisdiction with market practice in that place or, where required, with local law. In most cases, redundancy payments are a pro-rata amount based on the number of years of service and current base pay. In other cases, the amount may be based on a set number of months base remuneration in addition to a pro-rata amount. In some jurisdictions, Macquarie has full discretion as to the amount, if any, of redundancy payments whereas in other jurisdictions Macquarie s discretion is more limited. The relevant exemption applies to a reasonable payment made in accordance with Macquarie s redundancy policy as a result of a genuine redundancy, having regard to the length of a person s service with Macquarie. The approval sought under Item 5 will operate where the redundancy payment is not covered by this exemption, for example, where the payment is not made under Macquarie s standard redundancy policy for the relevant jurisdiction. 22

25 3 Other information A summary of the key features of Macquarie s current remuneration framework is set out in the Explanatory Notes on Item 4 and described in more detail in the 2013 Remuneration Report. This includes specific information on the way Macquarie s remuneration framework operates, the amount of profit share retained, how retained profit share is invested and forfeiture and vesting rules. Macquarie s 2013 Annual Financial Report, which includes the Remuneration Report, is available online at Further information in regards to items 3.3, 3.4 and 3.5 in the table in section 2 above, are set out in the Notice of Meeting for the 2009 Approval. Shareholders should reasonably anticipate that aspects of Macquarie s remuneration arrangements, including Relevant Executives deferred remuneration arrangements, will be amended from time to time. This is in line with market practice and changing regulatory and governance standards as well as legal requirements. These changes will be reported in Macquarie s future Remuneration Reports. 4 Consequences of approval not being obtained If the approval sought under Item 5 is not obtained, Macquarie will continue operating under the 2009 Approval. However, this could in future constrain Macquarie s ability to comply with, or adapt to, emerging, and sometimes conflicting, regulatory and legislative developments. This might create uncertainty for staff and impact Macquarie s ability to attract and retain high quality people. 5 Board Recommendation on Item 5 The Non-Executive Voting Directors of the Board unanimously recommend that shareholders approve Item 5 in the Notice of Meeting. Nicholas Moore being the Managing Director and CEO, has a material personal interest in the resolution and, therefore, has abstained from providing a recommendation. 23

26 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au Appendix A Performance Hurdles of PSUs PSUs issued under the MEREP become exercisable upon the achievement of two performance hurdles, each applying individually to 50 per cent of the total number of each tranche of PSUs awarded. The following table provides a summary of the hurdles: EPS CAGR Hurdle ROE Hurdle Application to PSU awards 50 per cent 50 per cent Performance measure Hurdle Compound annual growth rate (CAGR) in earnings per share (EPS) over the vesting period (three to four years) Sliding scale applies: 50 per cent becoming exercisable at EPS CAGR of 7.5 per cent 100 per cent at EPS CAGR of 12 per cent For example, if EPS CAGR was 9.75 per cent, 75 per cent of the relevant awards would become exercisable. Relative average annual return on equity over the vesting period (three to four years) compared to a reference group of global peers (1) Sliding scale applies: 50 per cent becoming exercisable above the 50th percentile 100 per cent at the 75th percentile For example, if ROE achievement was at the 60th percentile, 70 per cent of the relevant awards would become exercisable. Changes Hurdles are periodically examined by the BRC as part of their ongoing review of the remuneration approach, to ensure they continue to align the interests of staff and shareholders and provide a challenging but meaningful incentive to Executive Committee members. The BRC considers historical and forecast market data, the views of corporate governance bodies, shareholders and regulators as well as peer market practice. Rationale for hurdles For allocations from 2013, the EPS CAGR hurdle range has been amended from 9% 13% to 7.5% 12%. This change was made to reflect the change in market conditions since the hurdles were first set in The continued use of an absolute EPS hurdle requires Macquarie to deliver increased business results before awards are exercisable, lessening the chance that awards could be exercised when results are negative as with the use of a relative measure. The ROE Reference Group (1) has been amended for allocations from 2013 onwards to comprise the same group of peers used for ROE performance analysis in section 3 of the Remuneration Report. Use of an international peer group recognises the extent of Macquarie s internationalisation and its identified peer group. At 31 March 2013, over half of Macquarie s income and over half of Macquarie s staff were offshore. ROE and EPS are considered appropriate measures of performance as they drive longer-term shareholder returns and are broadly similar to the performance measures Macquarie uses for determining the annual profit share pool. ROE and EPS are appropriate to the Executive Committee because they can affect outcomes on both measures. In contrast, TSR is influenced by many external factors, including market sentiment, over which executives have limited control. ROE and EPS can be substantiated using information that is disclosed in audited financial statements. The use of a sliding scale diversifies the risk of not achieving the hurdles, provides rewards proportionate to performance for shareholders and is preferable to an all-or-nothing test which some have argued could promote excessive risk taking. The approach is consistent with that advocated by APRA in not using TSR as a measure. Being three and four year average measures from 2012 and aligned with the vesting period, Macquarie s performance hurdles reward sustained strong performance and are relatively well-insulated from short-term fluctuations. The time frame used for PSUs should also be considered in light of the three to seven year deferral of profit share for members of the Executive Committee. (1) The reference group comprises Macquarie s major international investment banking peers with whom Macquarie competes and frequently compares its performance. The reference group for awards made in 2013 is Bank of America, Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, Jefferies, JP Morgan Chase, Lazard, Morgan Stanley and UBS. The reference group for awards made prior to 2013 included Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and UBS as well as significant Australian commercial banks within the ASX 100 (ANZ Group, Commonwealth Bank, National Australia Bank, Westpac, Suncorp). 24

27 Testing of hurdles Under both performance hurdles, the objective is examined once only, effectively at the calendar quarter end immediately before vesting. If the condition is not met when examined, the PSUs due to vest will not be exercisable upon vesting. The PSUs which vested in July 2012 comprised the second tranche of those granted in 2009 and the first tranche of those granted in They did not become exercisable due to the performance hurdles not being met. PSUs that did not meet performance hurdles expired. PSU Tranche EPS CAGR Hurdle Macquarie result (for vesting period) Hurdle Outcome ROE Hurdle Macquarie result (for vesting period) Hurdle Outcome 2009 Tranche 2 (12.0%) At 9% 100% not exercisable 8.4% > 50 th percentile rank 100% not exercisable 2010 Tranche 1 (19.0%) At 9% 100% not exercisable 7.3% > 50 th percentile rank 100% not exercisable 25

28 Macquarie Bank Limited Appendix: Macquarie 2013 Annual General Meeting Notice Extract continued macquarie.com.au 26