Download ppt - Total Exposure in Executive Compensation

©2007 Pearl Meyer & Partners

Total Exposure in Executive Compensation

Melissa L. Means, Vice PresidentPearl Meyer & Partners

132 Turnpike Road, Suite 300Southborough, MA 01772

(508) 630-1487

2©2007 Pearl Meyer & Partners

Agenda

The State of Executive Compensation

Executive Compensation Tools

New Executive Compensation Tools

Case Studies

Conclusion





Interested parties

Recent issues in the Spotlight

Changing Landscape

Topics of Interest


Interested Parties

Regulatory groups

Institutional shareholders

Shareholder activist groups

General public (shareholders)

Media


Recent Issues in the Spotlight

Former Tyco CEO Dennis Kozlowski“The Tyco Tryst”

Former NYSE CEO Dick Grasso

“The Grasso Fiasco”

Former Enron CEO Jeffrey Skilling

“The Enron End Run”

Former Disney President

Michael Ovitz“The Disney Disaster”

Former GE CEOJack Welch

“The Welch Whoops”

Former Home Depot CEO

Robert Nardelli“The Nardelli Two-

Step”


Changing Landscape

Stock option expensing (SFAS 123R)• No longer a footnote expense• Shift in LTI instruments used

Greater institutional shareholder oversight• Manage equity grant practices• Push for pay for performance• Independent compensation consultants

Emerging good governance practices• Performance metrics• Ownership guidelines• Dynamic pay models

Disclosure• Expanded disclosure


Topics of Interest

Supplemental retirement plans (SERP)

Supplemental benefits and perquisites

Severance arrangements - employment & change in control agreements

Tax gross-ups

Pay for performance


Executive Compensation Tools


Primary Executive Compensation Assessment Tools

Competitive analysis

• Compares compensation to competitive data (survey and proxy data)

• Provides comparison of target compensation

Tally sheets (or some form of)

• Tally up total direct compensation (TDC) typically at target

• Provides payout information of various programs:

» Retirement plans

» Deferred comp plan

» Severance arrangements


Challenges with Current Tools

Does not provide a complete picture of an executive compensation package

• Provides “static”, point-in-time snapshot of the amount of compensation to be delivered typically at target

• May encourage “competitive compensation” programs not necessarily performance-based compensation

• Not focused on what an executive could earn



Economic Impact Analysis (EIA)

Incremental Pay & Performance Alignment Analysis



Economic Impact Analysis (EIA)

5%20%

35%50%

65%80%

95%

5%

20%

35%50%

65%80%

95%

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

Company Performance

Stock Performance

Total Potential TDC

$6,000,000-$7,000,000

$5,000,000-$6,000,000

$4,000,000-$5,000,000

$3,000,000-$4,000,000

$2,000,000-$3,000,000

$1,000,000-$2,000,000

$0-$1,000,000


EIA Approach

Illustrates the compensation opportunity for each component and in total over a period of time

• Dynamic, not static assessment

Shows the relationship between pay and performance in terms of company financial and stock price performance

Simulates potential results of a compensation program

Serves as an alternative way of reviewing executive compensation packages


EIA Graphics

5% 15% 25

% 35% 45

% 55% 65

% 75% 85

% 95%

5%

20%

35%

50%

65%

80%95%

$0

$800,000

$1,600,000

$2,400,000

$3,200,000

$4,000,000

Company Performance

Stock Performance

Stock Options

$3,200,000-$4,000,000

$2,400,000-$3,200,000

$1,600,000-$2,400,000

$800,000-$1,600,000

$0-$800,000

5%

20%35%

50%65%

80%95%

5%

20%

35%

50%

65%

80%

95%

$0

$400,000

$800,000

Company Performance

Stock Performance

Base Salary

$400,000-$800,000

$0-$400,000

5%20%

35%50%

65%80%

95%

5%

25%

45%

65%

85%

$0

$300,000

$600,000

$900,000

$1,200,000

$1,500,000

Company Performance

Stock Performance

Total Cash (Base plus Annual Incentive)

$1,200,000-$1,500,000

$900,000-$1,200,000

$600,000-$900,000

$300,000-$600,000

$0-$300,000

5%20%

35%50%

65%80%

95%

5%

20%

35%

50%

65%

80%

95%

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Company Performance

Stock Performance

Mid-Term Incentive

$1,000,000-$1,200,000

$800,000-$1,000,000

$600,000-$800,000

$400,000-$600,000

$200,000-$400,000

$0-$200,000


5%20%

35%50%

65%80%

95%

5%

25%

45%

65%

85%

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

Company Performance

Stock Performance

Total Potential TDC

$6,000,000-$7,000,000

$5,000,000-$6,000,000

$4,000,000-$5,000,000

$3,000,000-$4,000,000

$2,000,000-$3,000,000

$1,000,000-$2,000,000

$0-$1,000,000

EIA Graphics and Charts

10% 20% 30% 40% 50% 60% 70% 80% 90%

10% $459,411 $528,058 $608,470 $713,499 $814,640 $910,975 $1,085,831 $1,414,389 $1,735,496

20% $1,030,427 $1,099,074 $1,184,533 $1,299,806 $1,411,006 $1,516,616 $1,701,778 $2,042,764 $2,380,187

30% $1,442,169 $1,510,816 $1,599,915 $1,722,574 $1,841,028 $1,953,326 $2,145,920 $2,495,867 $2,845,055

40% $1,793,988 $1,862,635 $1,954,844 $2,083,814 $2,208,466 $2,326,478 $2,525,422 $2,883,027 $3,242,267

50% $2,122,825 $2,191,472 $2,286,587 $2,421,456 $2,551,901 $2,675,254 $2,880,134 $3,244,896 $3,613,532

60% $2,451,661 $2,520,308 $2,618,330 $2,759,098 $2,895,336 $3,024,031 $3,234,846 $3,606,765 $3,984,796

70% $2,803,480 $2,872,127 $2,973,259 $3,120,338 $3,262,774 $3,397,183 $3,614,349 $3,993,924 $4,382,009

80% $3,215,223 $3,283,870 $3,388,641 $3,543,106 $3,692,796 $3,833,893 $4,058,491 $4,447,027 $4,846,876

90% $3,786,238 $3,854,885 $3,964,704 $4,129,413 $4,289,162 $4,439,534 $4,674,438 $5,075,402 $5,491,567

Sto

ck P

erfo

rman

ce

Company PerformancePercentiles


Helps Assess

Whether a program has the appropriate performance-orientation

If there is to much focus on company vs. stock price performance or vice-versa

If incentive opportunities are appropriately aligned (payouts vs. performance achievement)

If the current compensation mix is appropriate

If the program is to heavily weighted towards time-based awards

If incentive programs, as designed, support the business strategy and its corresponding time horizon


Potential Outcomes

Redesign of various compensation programs including changes to:

• Amounts paid to executives

• Mix of instruments in the program

• Performance metrics and goal-setting

• Incentive / payout opportunities

• The compensation strategy/philosophy


10% 20% 30% 40% 50% 60% 70% 80% 90%

10% $4,084,089 $4,375,795 $4,586,193 $4,765,970 $4,934,003 $5,186,054 $5,455,719 $5,771,316 $6,208,875

20% $6,611,269 $6,902,975 $7,113,373 $7,293,150 $7,461,184 $7,713,234 $7,982,900 $8,298,497 $8,736,056

30% $8,433,544 $8,725,250 $8,935,648 $9,115,425 $9,283,459 $9,535,509 $9,805,175 $10,120,772 $10,558,331

40% $9,990,611 $10,282,317 $10,492,714 $10,672,492 $10,840,525 $11,092,575 $11,362,241 $11,677,838 $12,115,397

50% $11,445,963 $11,737,669 $11,948,067 $12,127,845 $12,295,878 $12,547,928 $12,817,594 $13,133,191 $13,570,750

60% $12,901,316 $13,193,022 $13,403,420 $13,583,197 $13,751,231 $14,003,281 $14,272,947 $14,588,544 $15,026,103

70% $14,458,383 $14,750,089 $14,960,487 $15,140,264 $15,308,297 $15,560,348 $15,830,014 $16,145,610 $16,583,169

80% $16,280,658 $16,572,364 $16,782,762 $16,962,539 $17,130,572 $17,382,623 $17,652,288 $17,967,885 $18,405,444

90% $18,807,838 $19,099,544 $19,309,942 $19,489,719 $19,657,753 $19,909,803 $20,179,469 $20,495,066 $20,932,625

Company Performance

Sto

ck P

erfo

rman

ce

Percentiles

Key Discussion Points

1.) Is this to much compensation for a CEO performing between the 10th - 20th percentile for company and stock price performance? 2.) Is this an appropriate amount of

compensation for a CEO performing at the 50th percentile for company and stock price performance?

3.) Is this an appropriate amount of compensation for a CEO performing between the 80th - 90th percentile for company and stock price performance?

4.) Is an incremental change in potential TDC of 9.7% (btw the 30th and 70th percentile for company performance only) enough incentive to drive executive behaviors on company performance?

5.) Is enough of the TDC package driven by company performance?

6.) Is an incremental change in potential TDC of 67% (btw the 30th and 70th percentile for stock price performance only) an appropriate amount of incentive to drive executive behaviors?

7.) Is an appropriate amount of the TDC package driven by stock price performance?

8.) Is the mix between company and stock price performance appropriate?

9.) Does this compensation program have a true pay-for-performance orientation?

10.) What behaviors does this type of compensation program drive?


Assumptions

Used to forecast potential performance outcomes for the compensation program (mean and standard deviations)

• Are very important and can substantially impact outcomes

Typically analyze the following:

• Look Back – historical performance of the firm

• Look Around

» Historical performance of a peer group of firms

» Historical performance of a specific industry

» Historical performance of an Index

• Look Forward – Value Line’s forecasted performance

• Expected Value –annualized expected return using the Black-Scholes model

• Management Estimates

Each component is evaluated using an appropriate time period




CEO Total Potential TDC vs. Incremental Market Value over 7 years

$17.9M

$38.4M

$3.2M

$0.8B

$1.5B

$0.2B-$5,000,000

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

$45,000,000

10thP'tile

20thP'tile

30thP'tile

40thP'tile

50thP'tile

60thP'tile

70thP'tile

80thP'tile

90thP'tile

Co

mp

ensa

tio

n V

alu

e

($200,000,000)

$80,000,000

$360,000,000

$640,000,000

$920,000,000

$1,200,000,000

$1,480,000,000

$1,760,000,000

$2,040,000,000

$2,320,000,000

$2,600,000,000

Incr

emen

tal M

arke

t V

alu

e

Compensation Incremental Market Value


Purpose

Compares total potential total direct compensation (TDC) to the incremental market value created for shareholders

• Reflects a reasonably aligned pay and performance orientation


$17.9M

$38.4M

$3.2M

$0.8B

$1.5B

$0.2B-$5,000,000

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

$45,000,000

10thP'tile

20thP'tile

30thP'tile

40thP'tile

50thP'tile

60thP'tile

70thP'tile

80thP'tile

90thP'tile

Co

mp

ensa

tio

n V

alu

e

($200,000,000)

$80,000,000

$360,000,000

$640,000,000

$920,000,000

$1,200,000,000

$1,480,000,000

$1,760,000,000

$2,040,000,000

$2,320,000,000

$2,600,000,000

Incr

emen

tal M

arke

t V

alu

e



Helps Assess

The relationship of total potential payouts for executives as compared to the incremental market value delivered to shareholders

The orientation of the lines:

• Rise and run

• Inverse relationship

Amount of compensation delivered


Different Alignment

Reflects differently aligned pay and performance orientations

Firm X

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

10th 20th 30th 40th 50th 60th 70th 80th 90th

Com

pens

atio

n V

alue

($1,000,000,000)

$0

$1,000,000,000

$2,000,000,000

$3,000,000,000

$4,000,000,000

$5,000,000,000

$6,000,000,000

Incr

emen

tal M

arke

t Val

ue


Firm Y

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000


Com

pens

atio

n V

alue

($1,000,000,000)

$0

$1,000,000,000

$2,000,000,000

$3,000,000,000

$4,000,000,000

$5,000,000,000

$6,000,000,000

Incr

emen

tal M

arke

t Val

ue



Case Study #1


About Firm A

Information about Firm A:

• Life Sciences firm with ~ 8,000 employees

• Revenues ~$1B; Market cap ~$3B

• Historical revenue growth 5-10%


Compensation Program

Compensation Program for the CEO:

Compensation Firm A - CEO

Base Salary Targeted at the competitive market median

Annual Short-Term Incentive (STI)

Threshold: 0% of salary Target: 100% of salary Maximum: 250% of salary (2.5 times the target award) Metrics: Corp EPS, Corp Operating Income, Corporate Sales,

Corp ROA

Annual Long-Term Incentives (LTI)

Stock Options – time-based vesting (50% of LTI mix) Restricted Stock – time-based vesting (50% of LTI mix)


Assumptions

Firm A only uses financial performance for its STI plan

Threshold and maximum performance range +/-10-15% of target for STI plan

Evaluated the following to determine appropriate growth assumptions:

• Look back - One year historical TSR for 10 years

» Average return - 12%, standard deviation – 20%

• Look around - One year historical avg TSR over 20 years for Dow Jones and S&P

» Average return – 10%, standard deviation – 15%

Assumptions:

• Used the combined Index return (10%) and standard deviation (15%)

• Simulated TSR results for 3 & 7 year periods (restricted stock & options)

• Achievement on all financial performance metrics are at the same level


Base Salary

5% 20% 35%

50%

65%

80%

95%

5%

35%

65%

95%

$0

$500,000

$1,000,000

$1,500,000

Company Performance

Stock Performance

Base Salary

$1,000,000-$1,500,000

$500,000-$1,000,000

$0-$500,000

CEO

Salary - $800,000

Base salary is not impacted by company or stock price performance; therefore it is one-dimensional


Total Cash Compensation

5% 20

% 35

%

50

%

65

%

80

%

95

%

5%

35%

65%

95%

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

Company Performance

Stock Performance

Total Cash (Base Salary plus STI)

$2,500,000-$3,000,000

$2,000,000-$2,500,000

$1,500,000-$2,000,000

$1,000,000-$1,500,000

$500,000-$1,000,000

$0-$500,000

CEO

Salary - $800,000

STI:

• Min – 0%

• Target STI – 100%

• Max STI – 250%

Total cash compensation is impacted by company performance only; therefore the graphic moves from left to right. Potential value ranges from $800K-$2.75M


Restricted Stock

5%20%

35%50%

65%80% 95%

5%

35%

65%

95%

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

Company Performance

Stock Performance

Restricted Stock

$6,000,000-$7,000,000

$5,000,000-$6,000,000

$4,000,000-$5,000,000

$3,000,000-$4,000,000

$2,000,000-$3,000,000

$1,000,000-$2,000,000

$0-$1,000,000

CEO

Salary - $800,000

STI:

• Min – 0%


• Max STI – 250%

Restricted Stock:

• 70,000 shares

• Vests in 3 years

Restricted stock is impacted by stock price performance only; therefore the graphic moves from right to left. Potential value ranges from $2.5M-$5.5M


Stock Options

5%

15%

25%

35%

45%

55%

65%

75%

85%

95%

5%20%

35%50%

65%80%

95%

$0

$3,000,000

$6,000,000

$9,000,000

$12,000,000

$15,000,000

Company Performance

Stock Performance

Stock Options

$12,000,000-$15,000,000

$9,000,000-$12,000,000

$6,000,000-$9,000,000

$3,000,000-$6,000,000

$0-$3,000,000

CEO

Salary - $800,000

STI:

• Min – 0%


• Max STI – 250%

Restricted Stock:

• 70,000 shares


• Options:

• 160,000 options

• 7 year term

Stock options are impacted by stock price performance only; therefore the graphic moves from right to left. Potential value ranges from $0-15M


Total Direct Compensation

CEO

Salary - $800,000

STI:

• Min – 0%


• Max STI – 250%

Restricted Stock:

• 70,000 shares


• Options:

• 160,000 options

• 7 year term

5%20%

35%50%

65%80%

95%

5%20%

35%50%

65%80%

95%

$0

$4,000,000

$8,000,000

$12,000,000

$16,000,000

$20,000,000

$24,000,000

Company Performance

Stock Performance

Total Potential TDC

$20,000,000-$24,000,000

$16,000,000-$20,000,000

$12,000,000-$16,000,000

$8,000,000-$12,000,000

$4,000,000-$8,000,000

$0-$4,000,000

Total direct compensation is impacted by both company and stock price performance. Overall, this program is more oriented towards stock price performance than company performance


10% 20% 30% 40% 50% 60% 70% 80% 90%

10% $3,712,460 $3,987,007 $4,185,029 $4,354,231 $4,512,380 $4,749,604 $5,003,407 $5,300,439 $5,712,259

20% $6,300,031 $6,574,578 $6,772,600 $6,941,802 $7,099,951 $7,337,175 $7,590,978 $7,888,010 $8,299,830

30% $8,165,852 $8,440,399 $8,638,420 $8,807,622 $8,965,771 $9,202,995 $9,456,798 $9,753,831 $10,165,651

40% $9,760,127 $10,034,673 $10,232,695 $10,401,897 $10,560,046 $10,797,270 $11,051,073 $11,348,106 $11,759,926

50% $11,250,257 $11,524,804 $11,722,825 $11,892,028 $12,050,177 $12,287,401 $12,541,204 $12,838,236 $13,250,056

60% $12,740,388 $13,014,934 $13,212,956 $13,382,158 $13,540,307 $13,777,531 $14,031,334 $14,328,366 $14,740,187

70% $14,334,662 $14,609,209 $14,807,231 $14,976,433 $15,134,582 $15,371,806 $15,625,609 $15,922,641 $16,334,462

80% $16,200,483 $16,475,030 $16,673,051 $16,842,254 $17,000,403 $17,237,626 $17,491,430 $17,788,462 $18,200,282

90% $18,788,054 $19,062,601 $19,260,622 $19,429,824 $19,587,974 $19,825,197 $20,079,000 $20,376,033 $20,787,853

Company Performance

Sto

ck P

erfo

rman

ce

Percentiles













Mix of Pay

Stock options are the primary vehicle with the largest potential value based on stock price performance• Stock options make up 4% of the total direct compensation (TDC) value assuming a

10th percentile stock price performance and 62% of the value assuming a 90 th percentile stock price performance

CEO Total Direct Compensation Composition

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

Options

Restricted Stock

STI

Base

Stock & 10th & 10th & 10th & 50th & 50th & 50th & 90th & 90th & 90th & Company 10th 50th 90th 10th 50th 90th 10th 50th 90thPerformance



Total potential value of the CEO’s total direct compensation (TDC) and incremental wealth creation for shareholders

• Over a 5 year period:

» Firm A will pay the CEO between $19M to $104M

» In turn, Firm A’s market value will return up to ~$4 billion in incremental market value to shareholders


$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000


Co

mp

en

sati

on

Valu

e

($1,000,000,000)

$0

$1,000,000,000

$2,000,000,000

$3,000,000,000

$4,000,000,000

$5,000,000,000

$6,000,000,000

Incre

men

tal

Mark

et

Valu

e



Findings and Outcomes

Findings:

• STI plan allows for threshold level payouts below last year’s performance achievement level

» Results from using +/-10-15% to set thresholds and maximums

• Minimum orientation of pay programs to company financial performance

» Financial performance metrics used only in STI plan

Outcomes:

• Adjusted STI plan so thresholds and maximums are set more appropriately each year specific to targets for the year

» Eliminates potential for threshold payouts for performance below last year

• Implemented new performance-based LTI plan

» LTI awards now reflect options, time- and performance-based restricted stock


Case Study #2


About Firm B

Information about Firm B:

• Semiconductor Equipment firm with ~ 2,500 employees

• Revenues ~$500M; Market cap ~$800M

• Cyclical industry – 3 year cycles

» 2006 was an outstanding performance year


Compensation Program

Compensation Program for the CEO:

Compensation Firm B - CEO

Base Salary Targeted at the competitive market median

Annual Short-Term Incentive (STI)

Threshold: 0% of salary Target: 70% of salary Maximum: 210% of salary (3 times the target award) Metric: Corp EPS (100%)

Annual Mid-Term Incentive (MTI)

3 year performance-based restricted stock plan Earn more or less than target awards based on performance

achievement Metric: Corp EPS (100%)

Annual Long-Term Incentive (LTI)

Stock Options – time-based vesting


Assumptions

Financial Performance Assumptions:

• Used Firm B’s historical EPS mean (10%) and standard deviation (35%)

• Simulated EPS results for 1 and 3 year periods for the STI and MTI

• Achievement on Corp EPS assumed at the same level for both STI & MTI

Stock Price Performance Assumptions:

• Firm B uses stock price performance for both the MTI and LTI

• Evaluated the following to determine appropriate growth assumptions:

Alternatives Look Back Look Forward Look Around Expected ValueManagement

Outlook

Annualized TSR – Average (Mean)

20% 5% 4% - 5% 7% 10%

Annualized TSR - Standard Deviation

15% 8% 12% - 20% 40% 15%


Base Salary

CEO

Salary - $400,000

5%20%

35%50%

65%80%

95%

5%20%

35%50%

65%80%

95%

$0

$400,000

$800,000

Company Performance

Stock Performance

Base Salary

$400,000-$800,000

$0-$400,000

Base salary is not impacted by company or stock price performance; therefore it is one-dimensional


Total Cash Compensation

CEO

Salary - $400,000

STI:

• Min – 0%


• Max STI – 210%

5%20%

35%50%

65%80%

95%

5%20%

35%50%

65%80%

95%

$0

$300,000

$600,000

$900,000

$1,200,000

$1,500,000

Company Performance

Stock Performance

Total Cash (Base plus Annual Incentive)

$1,200,000-$1,500,000

$900,000-$1,200,000

$600,000-$900,000

$300,000-$600,000

$0-$300,000

Total cash compensation is impacted by company performance only; therefore the graphic moves from left to right. Potential payout ranges from $400K-$1.2M


Mid-Term Incentive

CEO

Salary - $400,000

STI:

• Min – 0%


• Max STI – 210%

MTI:

• Min MTI – 0 shares

• Target MTI – 8,000

• Max MTI – 15,000

5%20%

35%50%

65%80%

95%

5%20%

35%50%

65%80%

95%

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Company Performance

Stock Performance

Mid-Term Incentive

$1,000,000-$1,200,000

$800,000-$1,000,000

$600,000-$800,000

$400,000-$600,000

$200,000-$400,000

$0-$200,000

The Mid-Term Incentive plan is impacted by both company and stock price performance; therefore the graphic moves up the center. Potential value ranges from $0-$1.2M


Stock Options

CEO

Salary - $400,000

STI:

• Min – 0%


• Max STI – 210%

MTI:



• Max MTI – 15,000

• Options – 45,000

5%20%

35%50%

65%80%

95%

5%20%

35%50%

65%80%

95%

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

Company Performance

Stock Performance

Stock Options

$4,000,000-$5,000,000

$3,000,000-$4,000,000

$2,000,000-$3,000,000

$1,000,000-$2,000,000

$0-$1,000,000

Stock options are impacted by stock price performance only; therefore the graphic moves from right to left. Potential value ranges from $0-$4.5M


Total Direct Compensation

CEO

Salary - $400,000

STI:

• Min – 0%


• Max STI – 210%

MTI:



• Max MTI – 15,000

• Options – 45,000

5%20%

35%50%

65%80%

95%

5%

25%

45%

65%

85%

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

Company Performance

Stock Performance

Total Potential TDC

$6,000,000-$7,000,000

$5,000,000-$6,000,000

$4,000,000-$5,000,000

$3,000,000-$4,000,000

$2,000,000-$3,000,000

$1,000,000-$2,000,000

$0-$1,000,000

Total direct compensation is impacted by both company and stock price performance. This program is more equally-oriented towards company and stock price performance


10% 20% 30% 40% 50% 60% 70% 80% 90%

10% $468,267 $536,913 $619,533 $729,065 $834,579 $934,941 $1,114,342 $1,448,356 $1,776,563

20% $1,153,485 $1,222,132 $1,310,160 $1,430,671 $1,546,958 $1,657,252 $1,847,702 $2,195,034 $2,540,716

30% $1,647,576 $1,716,223 $1,808,151 $1,936,578 $2,060,633 $2,178,089 $2,376,506 $2,733,442 $3,091,725

40% $2,069,759 $2,138,406 $2,233,665 $2,368,856 $2,499,550 $2,623,125 $2,828,350 $3,193,492 $3,562,541

50% $2,464,363 $2,533,010 $2,631,383 $2,772,897 $2,909,795 $3,039,090 $3,250,678 $3,623,489 $4,002,602

60% $2,858,967 $2,927,614 $3,029,102 $3,176,937 $3,320,039 $3,455,054 $3,673,005 $4,053,486 $4,442,663

70% $3,281,149 $3,349,796 $3,454,616 $3,609,216 $3,758,956 $3,900,090 $4,124,849 $4,513,536 $4,913,480

80% $3,775,240 $3,843,887 $3,952,607 $4,115,123 $4,272,631 $4,420,927 $4,653,653 $5,051,944 $5,464,488

90% $4,460,459 $4,529,106 $4,643,234 $4,816,728 $4,985,010 $5,143,238 $5,387,014 $5,798,622 $6,228,642

Company Performance

Sto

ck P

erf

orm

an

ce

Percentiles













Mix of Pay

Stock options are the primary vehicle with the largest potential value based on stock price performance

• Stock options make up 11% of TDC value assuming a 10th percentile stock price performance and 65% of the value assuming a 90th percentile stock price performance

CEO Total Direct Compensation Composition

15%86% 7%7%

STI: 3%13%8%

15%

65%

70%

Options: 11%

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

10th Percentile 50th Percentile 90th Percentile

Company Financial and Stock Performance Percentile

Com

pens

atio

n

Options

MTI

STI

Base



Total potential value of TDC and incremental wealth creation for shareholders

• Over a 7 year period:

» Firm B will pay the CEO between $3.3M to $43.6M

» In turn, Firm B’s market value will return up to ~$1.5 billion in incremental market value to shareholders


$43,6M

$20.4M

$3.3M

$0.8B

$1.5B

$0.2B-$5,000,000

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

$45,000,000

10thP'tile

20thP'tile

30thP'tile

40thP'tile

50thP'tile

60thP'tile

70thP'tile

80thP'tile

90thP'tile

Co

mp

en

sa

tio

n V

alu

e

($200,000,000)

$80,000,000

$360,000,000

$640,000,000

$920,000,000

$1,200,000,000

$1,480,000,000

$1,760,000,000

$2,040,000,000

$2,320,000,000

$2,600,000,000

Inc

rem

en

tal

Ma

rke

t V

alu

e



Findings and Outcomes

Findings:

• Executive compensation program aligns with how the program was designed and provides the intended results

» In years when company is not performing – no payouts

» In years when company is performing – target payouts

» In years when company is outperforming – maximum payouts

Outcomes:

• No changes were made to the existing executive compensation program


Conclusion


Conclusion

Solid assessment tools:

• Competitive analysis

• Tally sheets (or some form of)

Comprehensive assessment tools:

• EIA

• Incremental pay & performance alignment analysis

• Competitive analysis

• Tally sheets (or some form of)


Questions

For more information, please contact:

Melissa L. MeansPearl Meyer & Partners

132 Turnpike Road, Suite 300Southborough, MA 01772

(508) [email protected]

OR

Visit our website:www.pearlmeyer.com

Click on Our Knowledge then Presentations and Speeches