Calculation Manual

Terminology Bridge

This manual captures the full knowledge base behind the Extended TRS™ framework. The table below maps each abbreviation to its full research name, its board-level translation, and what it measures.

Why Transparency Is Not Enough

Regulators required companies to disclose climate and sustainability exposures. Markets cannot price risks they cannot see. But transparency alone did not change behaviour. This framework goes further: it gives CEOs the mandate and boards the structure to tie asset preservation to compensation.

What This Framework Measures: Asset Base Health

The framework measures asset base health: is the asset base compounding (growing stronger through circular practices, declining material dependency, rising revenue per installed asset) or eroding (spread compressing, cash flow declining, capital expenditure consuming more than it returns)?

Market sentiment, reflected in Total Return to Shareholders (TRS), captures what investors believe today. Asset base health captures what is happening underneath: whether the company earns above its cost of capital, whether circular infrastructure converts to revenue, whether the business model is extractive or custodial.

The divergence between market sentiment and asset base health is where the framework creates visibility. A stock can rise while the asset base erodes. TRS improves while the Capital Discipline Quality (CDQ) deteriorates. The Asset Preservation Analysis reveals what TRS cannot see.

Asset base health is measured through two layers. The Asset Viability Factor combines Resource Allocation Ratio (RAR, primary material dependency), Lifetime Value Extension (LVE, revenue per installed asset), and Circular Value Capture (CRR, circular activity converting to auditable revenue). The System Conditions Factor combines Asset Revenue Alignment (ARA, movement away from extractive business models), Value Chain Integration (VCI, supply chain resilience), and Ecosystem Contribution (ECR, systemic restoration beyond the company's own operations). Together they answer one question: is the asset base getting healthier or sicker?

Calculation Integrity Protocol

When calculating accelerator impact on matrix positions, the following protocol prevents disconnected calculations. Every step must be completed in sequence. Skipping a step produces incorrect matrix positions.

Step 1: Establish Baseline

Extract from audited financial reports for the baseline fiscal year: Return on Invested Capital (ROIC), Weighted Average Cost of Capital (WACC), spread (ROIC minus WACC), Free Cash Flow (FCF), Earnings Before Interest and Tax (EBIT) margin, and all framework metric inputs (RAR, LVE, CRR, ARA, VCI, ECR). State the fiscal year on every number.

Step 2: Calculate Current Position

Using the baseline spread and metric inputs, calculate the Asset Preservation Multiplier (RM), Capital Discipline Quality (CDQ), Restorative Exposure (RE), and matrix coordinates. Verify: does the matrix position match the quadrant description? If CDQ is Moderate but the dot sits in the Resilient Transformation Zone, the calculation is wrong.

Step 3: Define Accelerator Targets

For each accelerator, state the target metric value (e.g., CRR_rev from 0.08 to 0.30). Calculate the post-acceleration RM and RE using the target values.

Step 4: Financial Feedback Check (mandatory)

This is the step most commonly skipped. If the accelerators change the company's revenue, margin, or capital structure, the ROIC itself changes. The spread changes. CDQ changes. The matrix position changes.

The check: do the accelerators produce a financial impact that changes ROIC? If yes, recalculate the spread using the post-acceleration ROIC, not the baseline ROIC. Use the new spread in all subsequent CDQ calculations.

Example: if Circular Value Capture conversion adds EUR 20bn in circular service revenue at 12-18% EBIT margin, EBIT rises, ROIC rises, spread widens. CDQ calculated on the old spread will be wrong. CDQ calculated on the new spread will be correct.

Rule: if a Financial Implications projection exists, the target ROIC from that projection must feed back into the CDQ calculation. The spread is not a constant. It is an output of the financial model.

Step 5: Calculate Target Position

Using the post-acceleration RM, the post-acceleration spread (from Step 4), and the post-acceleration ARA, calculate the target CDQ and matrix coordinates. Each accelerator scenario (1 only, 1+2, 1+2+3, all 4) must use its own ROIC and spread estimate.

Step 6: Sanity Checks

Before presenting any matrix position, verify:

(a) If the Financial Implications show ROIC improving from 9% to 14%, but the matrix position barely moves rightward, the calculation skipped Step 4.

(b) If RM improves significantly but the matrix position does not move upward, the vertical calculation is wrong.

(c) If two scenarios (e.g., 3 accelerators and 4 accelerators) produce nearly identical matrix positions, the additional accelerator's financial impact was not fed back into the spread.

(d) If the sensitivity table shows different CDQ values for different scenarios but the matrix dots overlap, the position calculation does not use scenario-specific CDQ values.

Step 7: Cross-Reference

The sensitivity table, the matrix positions, and the Financial Implications tab must tell the same story. If the sensitivity table shows CDQ going from 6.1pp to 15.2pp but the matrix position moves only slightly, one of the three is wrong. Find it. Fix it before presenting.

1. Return Construction

1.1 TRS as the Baseline

TRS remains the market reference. It captures realised shareholder outcomes and applies universally. Total Return to Shareholders remains the baseline reference for financial performance. It anchors market accountability and comparability.

1.1a Unlisted Companies: Enterprise Value Return

For unlisted (privately held) companies, TRS is replaced by Enterprise Value Return (EVR). The return captures enterprise value change plus owner distributions over the analysis period. All downstream calculations (TR²S, TR³S, CDQ, CDG, quadrant positioning, compensation alignment) apply identically. The framework is ownership-structure-neutral: the same capital discipline and asset viability logic governs whether the company is listed or unlisted.

Calculator Workflow: Listed vs Unlisted

The Calculator adapts its interface and data collection workflow based on whether the company is listed or unlisted. The framework logic is identical. Only the return baseline and data sourcing differ.

1.2 TR²S - Total Regenerative Return to Shareholders

TR²S measures whether the company preserves and regenerates its own asset base through circular business practices. It captures asset allocation, lifetime extension, and circular value capture. A company that recovers materials, extends product lifetimes, and converts circular infrastructure into auditable revenue scores higher than one that depletes and discards.

The Asset Preservation Multiplier (RM)

When TRS ≥ 0: The Asset Preservation Multiplier acts as an uplift on base returns.
Example: If TRS = 40% and RM = 0.5, then TR²S = 40% × 1.5 = 60%.
Companies that get more value from existing assets are rewarded with higher extended returns.

When TRS < 0: When market returns are negative, the downside damping coefficient (θ) limits the negative impact.
Higher RM reduces losses: a company with strong asset preservation loses less than one without.

Downside Coefficient θ (Theta) by Sector

When TRS is negative, the downside coefficient limits how much the Asset Preservation Multiplier can reduce losses. Higher θ means the sector faces greater stranded-asset risk during downturns, so the formula applies a stronger correction.

Asset Preservation Multiplier (RM) Structure

The three inputs to the Asset Preservation Multiplier derive from evidence-based assessment questions:

RAR (from Primary Material Dependency): What share of inputs comes from secondary vs. primary raw materials? High secondary material share (>50%) = RAR approaching 1.0. High primary dependency = RAR approaching 0.0. Evidence: material flow analysis, procurement data, recycled content certifications.

LVE (from Asset Utilization Intensity): Does the company extract more value from existing assets, or does growth require constant new asset creation? Improving utilization (declining capex intensity) = LVE approaching 1.0. Worsening utilization = LVE approaching 0.0. Evidence: revenue per installed base, asset turnover trends, capex intensity.

CRR (Circular Value Capture): CRR is a composite measure with two components that distinguishes between companies that have built circular infrastructure and companies that have monetised it. A company with extensive closed-loop partnerships, remanufacturing capacity, and material recovery systems but zero auditable circular revenue scores differently from a company that has done nothing. Both situations previously scored identically at zero, removing the incentive gradient that drives business model conversion.

CRR is computed as a weighted composite:

CRR_rev (Circular Revenue): What share of revenue comes from services, aftermarket, maintenance contracts, repair, refurbishment, remanufacturing, lifecycle custody, and material recovery? High circular service revenue (>40%) = CRR_rev approaching 1.0. Low circular service revenue (<10%) = CRR_rev approaching 0.0. Evidence: segment reporting, service contract revenue, aftermarket revenue, remanufacturing revenue, material credit revenue. CRR_rev carries 70% weight because revenue proves economic viability. Service revenue intensity remains the primary observable proxy: it is audited, disclosed in standard financial reporting, and verifiable by the CFO.

CRR_infra (Circular Infrastructure Readiness): Has the company built operational circular capacity that is not yet fully monetised? Evidence: active closed-loop partnerships with throughput data, remanufacturing facilities with capacity utilisation rates, material recovery systems with recovery rates, take-back programmes with return volumes, battery recycling or second-life programmes with operational metrics. High readiness (multiple operational partnerships, measurable throughput, scaling capacity) = CRR_infra approaching 1.0. No infrastructure = CRR_infra = 0.0. CRR_infra carries 30% weight because infrastructure without monetisation is a cost centre, not a revenue source. The infrastructure component creates a measurable gradient between "has not built" and "has built but has not yet converted," making the conversion opportunity visible to the board.

The composite structure creates a diagnostic signal: when CRR_infra is high but CRR_rev is low, the board sees that the highest-leverage move is business model conversion, not further infrastructure investment. When both are low, the priority is building circular capacity. When both are high, the company has achieved circular value capture.

Downside Protection Factor (θ)

The θ factor is derived from Resource Cost Exposure: How strongly do raw material price fluctuations affect margins? Companies with low exposure (margins stable despite commodity swings) receive higher θ values, providing greater downside protection in negative TRS years. Companies with high exposure (margins volatile with commodity prices) receive lower θ values. Evidence: COGS sensitivity to commodity indices, margin volatility during price spikes.

TR²S Sector Weights (Asset Viability Factor)

Note: θ values shown are sector baselines. Actual θ is adjusted based on company-specific Resource Cost Exposure assessment.

1.3 TR³S - Total Restorative Regenerative Return to Shareholders

TR³S is the restorative layer. It measures whether a company moves away from extractive business models toward restorative ones. A company can score well on TR²S by preserving its own asset base (Caterpillar has refurbished engines since the 1960s), yet still serve extractive clients and depend on extractive supply chains. TR³S captures this distinction: does the revenue structure move toward or away from extraction?

Regenerative Exposure (RE) Structure

RE captures how a company treats the natural systems that feed its business. Every company depends on something: minerals from the earth, water from rivers, timber from forests, fish from the ocean, fertile soil for crops. RE asks: is the company depleting these resources and moving on, or investing in their restoration? A mining company that destroys mountains scores negative; one that rehabilitates land and restores water systems scores positive.

Asset Revenue Alignment (ARA)

Does the business model profit from resource depletion or regeneration? ARA is derived from the share of revenue linked to extractive end-use applications. This is not about the company's internal operations (captured by RAR, LVE, CRR) but about what its products and services enable in the world. Caterpillar remanufactures engines (high RAR), but its clients destroy ecosystems (high extractive end-use). Schneider Electric sells energy efficiency solutions (low extractive end-use). The distinction matters: a company can preserve its own assets while accelerating depletion elsewhere.

Observable proxy: % of revenue from extractive end-use clients or applications.

Source: Annual Report segment reporting, customer industry breakdown, sustainability report revenue by end-market.

Extractive end-use includes: mining operations, fossil fuel extraction, deforestation-linked agriculture, single-use packaging for disposal, weapons systems for resource-conflict zones. Regenerative end-use includes: renewable energy systems, circular service platforms, ecosystem restoration services, resource recovery and recycling infrastructure.

Resilience Index (RI) Structure

RI measures two things: how secure is the supply of natural inputs (VCI), and how much is the company giving back to the ecosystems it depends on (ECR). A company with diversified suppliers and closed-loop partnerships is more resilient. A company investing in reforestation, water treatment, or soil regeneration is contributing to ecosystem health. Higher RI means the business is building long-term security, not just extracting short-term value.

Supply Chain Resilience (VCI)

How resilient is the supply chain against resource shocks? VCI is derived from two observable data points: the number of critical single-source dependencies and the share of procurement from diversified or circular sources.

Observable proxy 1: Number of critical single-source dependencies. A critical dependency exists when a single supplier, single country, or single material source accounts for more than 30% of a key input with no qualified alternative. Disclosed in the risk section of the annual report, procurement reports, or supply chain risk assessments.

Observable proxy 2: % of procurement from certified circular or diversified sources. Closed-loop partnerships, multi-sourced inputs, recycled feedstock agreements, long-term supply contracts with alternative suppliers. Disclosed in sustainability report procurement section.

Source: Annual Report risk section, procurement disclosures, sustainability report supply chain section.

Ecosystem Contribution (ECR)

How much does the company invest in restoring the ecosystems it depends on? ECR is derived from ecosystem restoration spend as a percentage of EBITDA. This is not CSR donations or philanthropic contributions. It is operational expenditure on restoring the natural systems the business directly depends on: reforestation for timber companies, water treatment for chemical companies, soil restoration for agricultural companies, mine rehabilitation for extractive companies, biodiversity programmes for land-intensive operations.

Observable proxy: Ecosystem restoration spend as % of EBITDA.

Source: Sustainability report, environmental capex disclosure, restoration programme budgets, mine rehabilitation provisions.

TR³S Sector Weights (System Conditions Factor)

1.4 CDQ Score

The Calculator produces a pre-return diagnostic score that captures economic value creation adjusted for asset preservation quality. CDQ is not a vesting metric; it is a screening tool for initial positioning on the Extended Return Risk Assessment Matrix before full TR²S/TR³S calculation.

CDQ uses the same additive RM formula as the Calculator. Each dimension (materials, utilization, circular value capture) contributes independently. A company with strong primary material reduction (RAR) but low circular revenue (CRR_rev) receives partial CRR credit if it has built operational circular infrastructure (CRR_infra). This reflects the consulting reality that transformation is incremental: infrastructure precedes monetisation, and the framework must make this progression visible rather than scoring both stages identically at zero.

The CDQ score is computed by the Calculator as an immediate output after data entry. It provides the board-level screening decision: proceed to full TR²S/TR³S calculation, or address capital discipline and asset viability gaps first.

2. Capital Discipline

Extended return logic may inform long-term incentives only when the company demonstrates capital discipline. The Capital Discipline Gate (CDG) therefore precedes all vesting calculations.

2.1 The Three Gates

Before extended return logic can inform compensation, governance must first establish that the company is financially sound. The three gates determine whether asset preservation is economically viable.

Gate 1: ROIC ≥ WACC

This gate tests whether the company creates or destroys value from its capital base. ROIC must exceed WACC; if ROIC ≤ WACC, capital is not rewarded adequately and asset preservation becomes secondary to financial stabilisation.

Gate 2: FCF Conversion

FCF must be structurally positive and convert earnings into cash at a healthy ratio.

Gate 3: Leverage Ratio

Net leverage must be within a sector-specific cap.

2.2 Capital Discipline Gate (CDG)

CDG condenses the three gates into a binary status:

The framework is not a blank check: CDG = FAIL blocks all extended bonuses if ROIC falls below WACC. CDG is determined mechanically from the three gates and carried forward into vesting mechanics.

3. Sector Weights

Different sectors have different materiality profiles. The weighting tables reflect where circular and regenerative value creation is most material.

3.1 Asset Viability Factor (AVF) Weights

The AVF weights determine how the four assessment questions contribute to TR²S calculation:

• θ (Downside): Derived from Resource Cost Exposure. Higher θ = stronger downside protection.
• α (RAR): Weight for Primary Material Dependency. Higher α = greater importance of secondary material use.
• β (LVE): Weight for Asset Utilization Intensity. Higher β = greater importance of extracting value from existing assets.
• γ (CRR): Weight for Circular Value Capture. Higher γ = greater importance of converting circular infrastructure into auditable revenue. CRR is a composite of monetised circular revenue (70% weight) and circular infrastructure readiness (30% weight).

3.2 System Conditions Factor (SCF) Weights

The SCF weights determine how VCI and ECR contribute to the Resilience Index (RI) for TR³S calculation.

3.3 Sector Weight Rationale

Each sector has distinct materiality drivers for circular and regenerative value creation.

Extractives & Primary Materials

Rationale: Primary Material Dependency is critical because extractors deplete finite resources. The high α (RAR) weight reflects the imperative to shift from primary to secondary materials. The elevated θ acknowledges high Resource Cost Exposure and stranded-asset risk. The high μ (ECR) weight in TR³S recognises that ecosystem restoration is the primary pathway to regenerative value creation.

Manufacturing

Rationale: Primary Material Dependency and Asset Utilization are equally material because manufacturing firms both consume raw materials and operate long-lived production assets. The balanced α/β weights reward both secondary material use and extracting more value from existing equipment.

Construction & Built Environment

Rationale: Asset Utilization Intensity dominates because buildings and infrastructure have multi-decade lifecycles. The high β (LVE) weight reflects that extending useful life of built assets creates more value than material substitution alone.

Consumer Goods & Fashion

Rationale: Circular value capture is the dominant lever because consumer goods firms can monetise take-back, resale, rental, and subscription models. The high γ (CRR) weight rewards business model conversion from product sales to lifecycle custody. The infrastructure component of CRR is particularly relevant here: many consumer firms have built take-back and recycling infrastructure that remains a cost centre. The high λ (VCI) weight in TR³S reflects that value chain integration is more material than ecosystem restoration for consumer-facing firms.

Transport & Logistics

Rationale: Primary Material Dependency and Asset Utilization are equally material because transport firms both consume materials (fuel, parts) and operate long-lived assets (ships, aircraft, rolling stock). The elevated λ (VCI) weight reflects that logistics firms create circular value primarily through network optimisation and reverse logistics.

Chemicals & Polymers

Rationale: Feedstock substitution (fossil to bio-based and chemically recycled inputs) is the core circular lever for chemical producers, justifying the high α (RAR) weight. The elevated θ reflects that chemical firms face substantial Resource Cost Exposure through energy and petrochemical feedstock price volatility. LVE is weighted lower because polymers are intermediate goods, not end assets with lifecycle extension potential. The elevated γ (CRR) recognises that circular business models (chemical recycling, CO₂-as-feedstock, product-as-a-service, Circular Intelligence labelling) are emerging competitive differentiators. In TR³S, the high μ (ECR) weight reflects that chemical producers have direct, measurable ecosystem impact through emissions, water use, and site contamination, making ecosystem restoration the primary regenerative obligation.

Technology & Digital Platforms

Rationale: Circular value capture and value chain integration dominate because tech firms enable circularity for others. The low θ reflects lower Resource Cost Exposure (intangible-heavy balance sheets). The high λ (VCI) weight acknowledges that tech firms create regenerative value primarily by enabling circular business models across value chains. For tech firms, CRR_infra may include platform infrastructure that enables circular transactions for ecosystem partners.

4. Extended Return Risk Assessment Matrix

The framework integrates capital discipline and asset viability into a single diagnostic. Two axes reveal where a company stands and what strategic risks remain.

The horizontal axis measures Capital Stewardship. ROIC at or below WACC on the left (high capital risk). ROIC exceeding WACC on the right (low capital risk). This is the Governance Gate. Fail here, and the extended lenses do not activate.

The vertical axis measures Economic Asset Viability. Commoditisation and moat erosion at the bottom (high asset risk). Service-led models and ecosystem lock-in at the top (low asset risk).

4.1 The Four Quadrants

Stranded Asset Risk Zone (Bottom Left)

Companies produce ambitious sustainability reports while ROIC hovers at or below WACC. The framework assigns CDG = FAIL and blocks all extended metric bonuses. No amount of circular messaging compensates for failing capital discipline.

Commoditization Risk Zone (Bottom Right)

Strong capital discipline meets real physical transformation, yet the economic moat is destroyed and the product becomes a commodity. The company recycles, extends lifetime, builds take-back loops, but cannot capture the value created. Margins erode despite operational excellence.

Undervalued Asset Risk Zone (Top Left)

Strong asset viability and sound transformation logic, but heavy investment cycles suppress short-term returns. ROIC may temporarily fall below WACC during transition. These companies are building future moats but face near-term capital risk.

Resilient Transformation Zone (Top Right)

The target quadrant. Service-led models, ecosystem orchestration, competitive advantage rooted in system logic. ROIC exceeds WACC and asset viability is high. Position is not permanence. System discontinuities, regulatory shifts, or material scarcity can collapse the moat. The framework makes this risk visible.

4.2 Measuring Economic Asset Viability

The vertical axis of the Extended Return Risk Assessment Matrix measures Economic Asset Viability. The core question: Is the company preserving its asset base by reducing dependence on primary resources? The ideal trajectory moves toward zero primary material input and zero associated costs.

The Value Capture Gap

A company can invest heavily in circularity: high recycled content, renewable energy, certified supply chains. The physical transformation can be real. Yet the company may be destroying economic value in the process: commoditising products, losing pricing power, cannibalising revenue streams. Asset preservation and capital stewardship alone do not guarantee competitive viability. A company can do everything "right" in physical terms and still land in a strategic dead end.

To prevent self-serving assessments, the framework requires evidence-based answers to four questions. Each question maps to a quantitative input used in the TR²S and TR³S formulas:

1. Primary Material Dependency → RAR (Regenerative Asset Ratio)

What share of inputs comes from primary vs. secondary raw materials?

Evidence: Material flow analysis, procurement data, supplier audits, recycled content certifications.

Scoring: High secondary material share (>50%) = RAR approaching 1.0. High primary dependency (<20% secondary) = RAR approaching 0.0. A company moving up the Y-axis shows increasing secondary material share over time.

Formula input: RAR feeds into the Asset Preservation Multiplier (RM) with sector weight α.

2. Resource Cost Exposure → θ (Downside Protection Factor)

How strongly do raw material price fluctuations affect margins?

Evidence: Sensitivity analysis of COGS to commodity price indices, hedging requirements, margin volatility during price spikes, raw material cost as percentage of total costs.

Scoring: Low exposure (margins stable despite commodity swings) = higher θ. High exposure (margins highly volatile with commodity prices) = lower θ. Lower exposure indicates stronger asset preservation and justifies higher downside protection in the formula.

Formula input: θ determines downside dampening in the Asset Viability Factor. Sectors with high resource cost exposure receive higher baseline θ values.

3. Circular Value Capture → CRR

CRR is a composite measure: has the company built circular infrastructure, and has it converted that infrastructure into auditable revenue?

Component A: CRR_rev (Circular Revenue, 70% weight). What share of revenue comes from services, aftermarket, maintenance contracts, repair, refurbishment, remanufacturing, lifecycle custody, and material recovery? Evidence: segment reporting, service revenue as % of total, aftermarket revenue, maintenance contract revenue, remanufacturing revenue, material credit revenue. Scoring: High share (>40%) = 0.8-1.0, Medium (10-40%) = 0.3-0.7, Low (<10%) = 0.0-0.2.

Component B: CRR_infra (Circular Infrastructure Readiness, 30% weight). Has the company built operational circular capacity? Evidence: active closed-loop partnership agreements with throughput data, remanufacturing facility capacity utilisation, material recovery rates from recycling programmes, take-back system return volumes, battery recycling or second-life programme operational metrics. Scoring: Multiple operational partnerships with measurable throughput = 0.7-1.0, Early-stage partnerships or pilot programmes = 0.3-0.6, No circular infrastructure = 0.0-0.2.

Composite CRR: CRR = 0.7 x CRR_rev + 0.3 x CRR_infra. The 70/30 weighting ensures that revenue dominates: infrastructure alone is a cost centre. The infrastructure component prevents the framework from being blind to companies that have invested in circular capacity but have not yet converted it to revenue.

Formula input: CRR feeds into the Asset Preservation Multiplier (RM) with sector weight γ.

4. Asset Utilization Intensity → LVE (Lifetime Value Extension)

Does the company extract more value from existing assets, or does growth require constant new asset creation?

Evidence: Revenue per unit of installed base, asset turnover trends, capex intensity relative to revenue growth, maintenance and upgrade revenue.

Scoring: Improving utilization (declining capex intensity, more value from existing assets) = LVE approaching 1.0. Worsening utilization (growth requires constant new assets) = LVE approaching 0.0. Companies preserving assets show declining capex intensity over time.

Formula input: LVE feeds into the Asset Preservation Multiplier (RM) with sector weight β.

The Y-Axis Trajectory

The Y-axis trajectory moves from full primary resource dependency at the bottom toward reduced primary input at the top. A company in the Commoditization Risk Zone may have real physical transformation but fails to translate asset preservation into economic resilience. Moving up requires reducing primary material dependency while maintaining or expanding margins.

4.3 Measuring Capital Stewardship

The horizontal axis of the Extended Return Risk Assessment Matrix measures Capital Stewardship. The core question: Is the company directing capital toward genuine value creation, or is it generating returns from models that deplete the asset base they depend on?

The Governance Gate

The Governance Gate is the binary entry condition. ROIC at or below WACC positions the company on the left side of the matrix (High Capital Risk). ROIC exceeding WACC positions it on the right (Low Capital Risk). A company that fails the gate cannot apply extended return metrics (TR²S, TR³S) to executive compensation, regardless of its Y-axis position. Asset preservation without capital discipline does not qualify.

Beyond the Gate: Two-Layer Positioning

Passing the Governance Gate is necessary but not sufficient for a strong horizontal position. A company with high ROIC can still deploy capital toward extraction. The framework uses a two-layer approach to determine the precise x-axis placement.

Layer 1 (TR²S): CDQ Score

The CDQ Score adjusts the raw ROIC-WACC spread by the Asset Preservation Multiplier (RM) and Resource Cost Exposure (θ). The spread is the foundation:

CDQ = (ROIC − WACC) × (1 + RM + θ) captures whether capital discipline and asset preservation reinforce each other. A company with strong ROIC but low RM (limited circular practices) receives a lower CDQ than a company with moderate ROIC but high RM. However, when the raw spread is large, CDQ alone can still produce a strong score for companies with weak circular metrics.

Layer 2 (TR³S): Restorative Exposure Adjustment

CDQ alone does not prevent the matrix from rewarding efficient extraction. A company can score well on TR²S metrics (RAR, LVE, CRR) while serving extractive industries. Caterpillar has refurbished engines since the 1960s, yet its customers deplete planetary assets. Inditex achieves ROIC of 22-25% while accelerating fast-fashion throughput. Without a second layer, both would land on the far right of the matrix.

The TR³S layer introduces Restorative Exposure (RE = ARA × RI) as a directional adjustment to the x-axis position. Asset Revenue Alignment (ARA) is the critical variable:

Positive ARA (business model moves away from extraction): the x-position holds or shifts rightward. Capital stewardship is genuine. Example: Rolls-Royce TotalCare extends engine life, reduces replacement cycles, locks in 10-20 year service contracts. Capital is deployed toward asset preservation.

Neutral ARA (business model neither extractive nor restorative): no adjustment. The CDQ Score determines position.

Negative ARA (business model profits from resource depletion): the x-position compresses leftward, regardless of ROIC spread. Capital discipline exists, but it serves the wrong purpose. Example: Caterpillar achieves 18% ROIC and 37% services revenue, but the system it serves depletes planetary assets. The capital is brilliantly managed toward the wrong outcome.

This is the anti-greenwashing mechanism. Without the RE adjustment, every financially strong company lands on the right side of the matrix. With it, the framework distinguishes between capital efficiency that builds long-term viability and capital efficiency that accelerates depletion.

Data Requirements

The horizontal position requires three data inputs:

ROIC: Operating profit after tax divided by invested capital. Use 3-year average to smooth cyclical effects. Source from audited financial statements or verified third-party financial data providers.

WACC: Weighted cost of equity and debt reflecting the company's capital structure. Current market estimate preferred over historical. Source from financial data providers or company investor presentations.

ARA (Asset Revenue Alignment): Does the business model profit from resource depletion or regeneration? Range: -1 (extractive) to +1 (regenerative). Neutral = 0. Assessed through value chain analysis, revenue source mapping, and end-market dependency evaluation.

Interpreting the X-Axis Position

The horizontal position reflects the combined Capital Stewardship Score, incorporating both CDQ and the RE adjustment:

Far left: CDG FAIL with significant negative spread.

Center-left: CDG FAIL (ROIC near WACC), or CDG PASS with negative ARA compressing the position leftward. Strong financials deployed toward extractive or linear models.

Center-right: CDG PASS with moderate CDQ and neutral-to-positive RE.

Far right: CDG PASS with strong CDQ amplified by positive RE. Capital discipline and restorative direction reinforce each other.

The X-Axis Trajectory

Movement on the X-axis reflects changes in Capital Stewardship quality. Rightward movement requires both improving spread (capital discipline) and improving RE (restorative direction). A company moving leftward may be experiencing spread compression through margin erosion, or RE compression as its business model becomes more extractive despite stable returns.

4.4 ARA Validation Protocol

Asset Revenue Alignment (ARA) is the most judgment-dependent input in the framework. External research tools (Perplexity, financial databases) systematically underreport extractive end-use because they read company self-descriptions rather than analyzing actual business model structure. A company that sells engines to mining clients describes itself as a "technology company" or "industrial solutions provider," not as an enabler of resource extraction.

The Calculator applies a sector-level heuristic validation after importing research data. When the reported extractive/regenerative percentages are implausible for the sector and business model type, the Calculator adjusts ARA automatically and displays the original value, the adjusted value, and the reasoning. This correction is visible on the calculator output and traceable in the verification trail.

Sector Heuristics

The validation checks both directions: under-reported extractive dependency (Perplexity reads company self-descriptions as neutral when customers deplete ecosystems) and under-reported regenerative contribution (Perplexity misses structural circularity embedded in the business model).

5. Compensation Architecture

Extended return interpretation matters only when reflected in long-term incentives. This section provides the complete mechanics for designing, calculating, documenting, and recovering executive compensation tied to TR²S and TR³S.

5.1 Compensation Components

Executive compensation typically consists of three components:

Base Salary

Fixed annual cash compensation. Not performance-linked. Provides income stability and reflects role scope, experience, and market benchmarks. Base salary is not affected by TR²S or TR³S performance.

Short-Term Incentive (STI)

Annual cash bonus tied to one-year performance targets. Typically expressed as a percentage of base salary (e.g., 100% of base at target). STI targets usually include financial metrics (revenue, EBITDA, cash flow) and may include operational or strategic objectives. The TR²S/TR³S framework does not directly modify STI, but boards may choose to include circular economy KPIs in STI scorecards.

Long-Term Incentive (LTI)

Equity or cash awards that vest over multiple years (typically 3-5 years). LTI aligns executive interests with long-term shareholder value. Common forms include:

Performance Share Units (PSUs): Shares granted based on achieving performance conditions over a multi-year period.
Restricted Stock Units (RSUs): Shares that vest based on continued employment (time-based).
Stock Options: Right to purchase shares at a fixed price; value depends on share price appreciation.

The TR²S/TR³S framework applies to the performance conditions of PSU awards. It determines what percentage of target shares actually vest based on extended return performance.

Typical Executive Package Structure

5.2 Industry Metric Determination

The governing LTI metric is determined by the industry profile, not by board selection. The framework always calculates TRS, TR²S, and TR³S. All three values are shown in the payout table for transparency. The industry profile determines which extended metric is recommended as the governing measure for LTI vesting.

The European CEO median base salary is EUR 1,571,000 (source: Mercer Board and CEO Remuneration in Europe, November 2024, based on the 100 largest STOXX 600 companies). The Swiss CEO median base salary for smaller listed companies (SPI) is approximately CHF 1,500,000 (source: Ethos study 2024). The calculator uses the European median as default values, which can be overwritten with actual company data from the remuneration report.

5.3 Vesting Mechanics

What is Vesting?

Vesting is the process by which an executive earns the right to receive a granted award. Until vesting conditions are met, the award remains "unvested" and can be forfeited. Vesting protects shareholders by ensuring executives only receive full awards when performance targets are achieved.

Performance Period

The time window over which performance is measured. For LTI awards tied to TR²S or TR³S, the performance period is typically 3 years. At the end of the performance period, actual return is calculated and compared to the vesting ladder to determine payout.

The Vesting Ladder

The vesting ladder translates return outcomes into vesting percentages. Four levels define the payout curve:

Threshold: Minimum performance required for any payout. Below threshold = 0% vesting.
Target: Expected performance level. Achieving target = 100% of LTI target vests.
Stretch: Above-target performance. Achieving stretch = 150% of LTI target vests.
Cap: Maximum payout level. Performance above cap still pays cap (no unlimited upside).

TR²S and TR³S have lower thresholds than TRS because they already incorporate asset preservation and system resilience, making them harder to achieve. A 25% TR²S is more demanding than a 30% TRS.

Linear Interpolation

Vesting interpolates linearly between levels. If actual performance falls between two levels, the vesting percentage is calculated proportionally.

Example: If TR²S target is 25% (100% vesting) and stretch is 35% (150% vesting), then achieving 30% TR²S results in 125% vesting (halfway between target and stretch).

5.4 Payout Calculation

Final Vesting Factor (FVF)

The Final Vesting Factor combines the vesting percentage from the ladder with the Capital Discipline Gate:

If CDG = FAIL, FVF = 0 regardless of return performance. This is the governance gate. A company that fails capital discipline (ROIC below WACC, negative FCF, or excessive leverage) cannot pay extended bonuses even if TR²S or TR³S performance is strong.

LTI Payout Formula

Worked Example

5.5 Clawback Provisions

Clawback provisions allow the company to recover compensation already paid if certain conditions are later discovered. Robust clawback language protects shareholders and ensures accountability.

Mandatory Clawback Triggers

The following events trigger mandatory recovery of paid LTI awards:

1. Financial Restatement
If the company restates financial results that were used to calculate TRS, TR²S, or TR³S, and the restatement would have resulted in a lower payout, the excess must be recovered. Recovery applies regardless of whether the executive was at fault.

2. Gate Failure Discovered Post-Payout
If it is later discovered that any of the three capital discipline gates were not actually passed during the performance period (e.g., ROIC was incorrectly calculated, leverage was understated), the entire extended bonus (TR²S or TR³S component) must be recovered. CDG should have been FAIL; therefore FVF should have been 0.

3. Data Manipulation
If the executive knowingly provided false or misleading data for any of the assessment inputs (Primary Material Dependency, Resource Cost Exposure, Circular Value Capture, Asset Utilization Intensity, PA, VCI, ECR), the full LTI award tied to the manipulated metric is subject to recovery. For CRR specifically, manipulation includes misrepresenting circular infrastructure readiness (CRR_infra) or inflating service revenue classification (CRR_rev).

4. Misconduct
Material misconduct by the executive (fraud, breach of fiduciary duty, violation of company policy causing reputational or financial harm) triggers full clawback of unvested and vested-but-unpaid awards. For paid awards, recovery is at board discretion.

Clawback Period

Clawback provisions apply for a minimum of 3 years after payout. Best practice extends this to 5 years for senior executives (CEO, CFO). The period should be specified in the executive's employment contract and LTI grant agreement.

Recovery Mechanisms

Recovery may be effected through:

- Offset against future compensation payments
- Cancellation of unvested awards
- Direct cash repayment
- Reduction of retirement benefits (where legally permissible)

5.6 Documentation and Audit Trail

Complete documentation protects the company in litigation and regulatory review. Every calculation must be traceable.

Required Documentation

A. Grant Documentation

- Board resolution approving LTI grant
- Grant agreement signed by executive
- Vesting ladder with specific thresholds for the grant
- Selected metric (TRS, TR²S, or TR³S) and rationale
- Performance period start and end dates

B. Gate Verification (Annual)

- ROIC calculation worksheet with source data
- WACC calculation and third-party verification
- FCF calculation and conversion ratio
- Leverage ratio calculation
- CDG determination (pass/fail on each gate)
- Sign-off by CFO and external auditor

C. Asset Viability Assessment Documentation

- Primary Material Dependency: Material flow analysis, procurement data, secondary/recycled content evidence → RAR score
- Resource Cost Exposure: COGS sensitivity analysis, margin volatility data → θ adjustment
- Circular Value Capture: CRR_rev from segment reporting and service revenue breakdown; CRR_infra from partnership throughput data, remanufacturing capacity utilisation, material recovery rates, take-back return volumes → composite CRR score
- Asset Utilization Intensity: Capex intensity trend, revenue per installed base → LVE score
- PA: Business model assessment, board-approved scoring
- VCI: Supply chain resilience assessment, supplier diversification data
- ECR: Ecosystem investment records, restoration project documentation

D. Payout Calculation

- Final TRS/TR²S/TR³S calculation with all inputs
- Vesting percentage determination (with interpolation if applicable)
- FVF calculation
- Final payout amount
- Cap verification
- Board approval of payout
- Payment date and method

Retention Period

All documentation must be retained for a minimum of 10 years after the final payment. This exceeds typical statute of limitations periods for compensation disputes and regulatory investigations.

Audit Rights

The board (via Compensation Committee or Audit Committee) retains the right to commission independent verification of any calculation at any time. External auditors should review gate calculations annually as part of the financial audit.

Safe Harbor Statement

Include the following language in all grant agreements:

5.7 Unlisted Company Compensation

The compensation framework applies to unlisted companies with two structural adaptations. The return baseline changes from TRS to EVR. The governance context changes from public market accountability to private ownership accountability. The vesting ladder, CDG gate, sector weights, and payout calculation are identical.

Owner-Managed Companies

Where the CEO is also the owner (or controlling shareholder), the compensation framework serves as a capital allocation discipline tool rather than a management incentive mechanism. The vesting ladder measures whether the business preserves its asset base, regardless of who makes the decision. The LTI payout calculation provides a structured benchmark: it quantifies what the owner-CEO's stewardship quality would be worth if measured against the same standard as a listed company CEO. This benchmark is valuable for succession planning, PE exit preparation, and governance maturity assessment.

External CEO in Private Ownership

Where an external CEO manages a privately held company (PE portfolio company, family office with professional management, foundation-owned enterprise), the full vesting and payout logic applies as for listed companies. EVR replaces TRS as the return baseline. Phantom shares or cash-settled equivalents replace share-based payment. The CDG gate, RM-based vesting adjustments, and clawback provisions apply without modification.

6. Data Collection Protocol

Extended return calculations require structured data collection. This section provides the protocol for gathering the inputs needed for TR²S and TR³S calculation.

6.1 Perplexity Deep Research Prompt

The following prompt template enables systematic data collection using AI-assisted research tools:

6.2 Data Governance Rule