This document summarizes a discussion on reconstructing executive incentives. It outlines institutional shareholder preferences for limiting dilution from share plans and a focus on total shareholder return (TSR) as a performance metric. However, TSR alone may not incentivize long-term thinking. The document also introduces the concept of "Conscious Compensation" which considers a broader set of stakeholders beyond just shareholders. It provides examples of incentive plans that incorporate metrics related to operational excellence, customer value, employee safety, and environmental leadership. While a step in the right direction, the document notes there is still work to be done in areas like rebalancing fixed and variable pay and improving goal setting and measurement.

1. The Reconstruction of Executive
Incentives: A Discussion
Davos 2014
15th Global Employee Equity Forum
06 February 2014
Fred Whittlesey
Compensation Venture Group, Inc.
+1 206.780.5547
www.compensationventuregroup.com
fred@compensationventuregroup.com
Blog: payandperformance.blogspot.com

2. The Organization
Equity Interests Content and Education Roles
Online Content
Pay and Performance: The Compensation Blog
Conscious Compensation: The Impact Compensation Blog
2
Effective Equity: The Equity Compensation Blog
Executive
and
Equity
Compensation
Consulting

3. Our Discussion Today
 Institutional shareholder design preferences
 Dilution limits and employee ownership
 What’s wrong with the “S” in TSR
 Shareholder-Driven vs. Multi-Stakeholder program design
 Conscious Compensation® and executive incentives
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4. Buzzwords
 Corporate Social Responsibility (CSR)
 Sustainability
 ESG (Environment, Social, Governance)
 Social Impact
 Triple Bottom Line
 Conscious Capitalism®
 Responsible Investing
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5. Institutional Shareholder Design Preferences
 Major Players
 World’s largest sovereign and public worker pension funds
 World’s largest mutual fund companies
 Insurance companies
 Corporate pension funds
 Their advisers
 ISS
 Glass Lewis
 GMI
 Their views…
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6. Institutional Shareholder Design Preferences
 Dilution from Share Plans
 Generalized standards (10%/15%)
 Industry-based caps
 Comparison to top quartile performers (ISS)
 Share Plan Design (for Executives)
 Performance conditions
 TSR focus
 Alternative performance measures
 Resistance to ESG measures
 Dislike of discretion and subjectivity
 Short timeframes (1-3-5 years)
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7. Institutional Shareholder Design Preferences
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Executive
Pay
Employee
Equity
ESG
Dilution from
share plans
Share program design
Alternative
performance
measures
CC®

8. Dilution Limits and Employee Ownership
 Industry-based caps
 Ignore total compensation philosophy
 Drives reduction in participation
 Incents gaming of valuation (e.g., shorter option term)
 Say-on-Pay Impact
 Punishes all-employee pools for CEO pay vs. TSR and
broad industry fluctuations
 (US) Forcing extensive disclosures for share pool additions
 Allowances for all-employee plans
 Uneven treatment of dilution from a share
 Prohibits individual differentiation on performance
 Typically limits use at higher organization levels
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9. TSR: How We Got Here
 Investor and proxy adviser desire for performance features
 Board/Committee difficulty in goal-setting
 Increased market and economic volatility
 “Prevalence” effect of peer groups and survey data (Davos 2012)
 “Ensures alignment with shareholders”
 Embedded in “pay-for-performance” metrics
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10. What’s Wrong with the “S” in TSR
 Paul Polman, CEO, Unilever
"I don't think our fiduciary duty is to put shareholders first. I
say the opposite. What we firmly believe is that if we focus our
company on improving the lives of the world's citizens and
come up with genuine sustainable solutions, we are more in
synch with consumers and society and ultimately this will
result in good shareholder returns.”
 “Big Money Is Moving To Socially Responsible Investing”
“…two of California’s largest pension funds (CalPERs &
CalSTRs) have recently made environmental, social and
governance (ESG) issues a major theme to their investment
process.”
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11. What’s Wrong with the “S” in TSR
 ISS position
 Voting guidelines: 3-year and 5-year TSR vs. peers
 Changes for 2014: Elimination of 1-year TSR
 Shareholder Primacy argument
 Shareholders are not owners
 Stakeholder set is broad and diverse
 Shareholder timeframes are diverse
 Pension and insurance: decades
 Mutual funds: calendar quarter and year
 Traders: milliseconds (over 50% of trading volume in US)
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12. What’s Wrong with the “S” in TSR
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Stakeholder Group Tactics for Maximizing TSR
Shareholders Earnings “management”; share
repurchases; special dividends
Bondholders/Lenders Restructuring of terms; threat of
bankruptcy; risky business strategies
Employees Layoffs; reduced staffing; benefits
reductions
Customers Price increases; reduction of product choice;
quality compromises
Suppliers Pricing pressure; stringent terms (location,
shipment, payment)
Community Reduction in charitable contributions;
inflexible employee work arrangements
Environment Pollution; excessive consumption of
resources; cheap sources of energy (coal)

13. Conscious Compensation®
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Traditional
Capitalist
Compensation
Conscious
Compensation®
Concepts
Socially/Politically
Correct
Compensation
• Base salary
• Merit-based salary increases
• Annual incentive
• Primarily financial metrics
• Stock-based compensation
focused on executives
• Graded annual vesting
• Increasing cost to employees
for benefits
• Primarily self-funded
retirement - 401(k) with match
• Executive supplemental
benefits and perks
• Top-down performance review
• CEO pay capped at
multiple of lowest paid or
median worker
• Living wage levels
• Employer payment of all
benefits costs
• Liberal paid time off
• Employer-funded pension
• Employee profit-sharing
• Employee equity
participation
• Employee ownership
• Length of service/ seniority
as basis for pay increases
• Peer (internal 360°) review
• Base rate
• No individual increases
• No annual incentives for
financial performance
• Periodic distributions linked
to strategic achievements
• Links to stakeholder
benefits
• Stakeholder-driven metrics
• Stock-based compensation
for all employees
• Interim liquidity for equity
• Same benefits and perks for
all employees
• Total compensation value
equivalence by level
• External 360° reviews

14. The Reconstruction of Executive Incentives: STI Example
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2012
Corporate
Goal
%
Weight
Key
Performance
Indicator
Threshold Target Maximum Actual % Payout
Operational
Excellence
15% System Average
Interruption
Duration Index
86-90 80-85 75-79 78 150%
15% Unplanned
Outage Rage
(UOR)
7.4 6.4 5.4 5.4 150%
Value to the
Customer
15% Public Safety
Index
50 100 150 135 135%
15% Customer Value
(Survey Rating)
80-82% 83-
85%
86-88% 85% 100%
Employee
Safety and
Engagement
15% OSHA Recordable
Event Rate
1.90 1.55 1.28 1.47 150%
5% Employee
Engagement
(Survey Rating)
70 80 90 80 100%
Environmenta
l Leadership
20% Demand-Side
Management
(GWh)
775 814 853 973 150%
Source: Annual Proxy Statement, Xcel Energy, 2013
Uniform step-ups in performance levels

15. The Reconstruction of Executive Incentives: LTI Example
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Grant Type %
Weight
Performance Measure Threshold Target Maximum
Performance Units
(60%)
67% EPS Growth 12% 15% 18%
33% Clean Energy-Competitive
Price: Retail Average Rate
vs. Peers
35th
percentile
50th
percentile
75th
percentile
Performance
Shares (40%)
100% 3-year Relative TSR vs.
Peers (n = 50)
35th
percentile
50th
percentile
75th
percentile
Source: Annual Proxy Statement, Xcel Energy, 2013
Max payout at
75th percentile
performance

16. More Work to Be Done
 Base/STI/LTI mix
 Goal-setting
 Degree of difficulty
 Number of measures
 Minimum weight
 Subjective measurement/discretion
 Mix of guaranteed forms of pay
 Base salary
 SERP
 Severance/golden parachute
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17. Discussion
 US vs. Europe
 Shareholder vs. Stakeholder
 Performance Metrics
 Annual Cycle
 Your Issues and Questions
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