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  1. 1. Performance Plansin Current US Compensation PracticeDavos 201314th Global Employee Equity Forum 07 February 2013 Fred Whittlesey Compensation Venture Group, Inc. 206.780.5547 Blog:
  2. 2. Com pensation Venture Group and the W orld of EquityEquity Interests and Professional Roles Advisory Roles Executive and Equity Compensation Consulting Online Content Pay and Performance: The Compensation Blog Conscious Compensation: The Impact Compensation Blog Effective Equity: The Equity Compensation Blog 2
  3. 3. Our Topic Today Reasons for Performance Plans Types of Performance Plans Prevalence in the US: Large vs. midcap/smallcap firms The Problem with Prevalence Key Issues for Boards of Directors  The Governance Ups and Downs of Performance Plans  Understanding Valuation The Continuing Debate: Incentive or Pay Delivery 3
  4. 4. R easons for P erform ance P lans Flat equity markets Growth companies grew up Accounting rule changes “leveled the playing field” Volatility was not making stock options “more valuable” RSUs emerged as stock options were moved into the “bad” column Pay without performance continued Global changes in governance mandated change Line of sight was lacking with stock price Investor and proxy advisor solution: performance based on stock price 4
  5. 5. Types of P erform ance P lans: K ey Design P aram eters Performance plans vs. performance shares  Measurement and settlement Performance features  Applied to full-value shares or options Impact of performance on vesting  Contingency or acceleration Denomination  Shares or dollars Settlement  Shares or cash Determination of settlement  Formula or discretion or participant choice 2^5*3 = 96 plan designs 5
  6. 6. Types of P erform ance P lans: Vesting  And then add vesting alternatives… SO/SAR RS/RSU Performance Plans Company Ticker Schedule Avg Time to V Schedule Avg Time to V Schedule Avg Time to V Vesting Frequency in 2010US CELLULAR CORP USM A3, C6 C3 36.0JUNIPER NETWORKS INC JNPR A1M3 25.9 P3 36.0 A =Annual / SA = Semi-AnnualMETROPCS COMMUNICATIONS INC PCS A1M3 25.9 A1Q3 29.6ADOBE SYSTEMS INC ADBE M4 24.5 0-50-25-25, A3 33.0 P1A2 30.0 M =MonthlyWINDSTREAM CORP WIN A3, C3 P1 12.0LEAP WIRELESS INTL INC LEAP 0-25-25-50 39.0 P20-20-20-40 33.6 Q = QuarterlyAOL INC AOL A1M3 25.9 0-50-25-25 33.0ECHOSTAR CORP SATS A5 36.0 C = CliffBROCADE COMMUNICATIONS SYS BRCD A3 24.0 P2A1 36.0BMC SOFTWARE INC BMC M4 24.5 A3 24.0 P2, P3 30.0 P = PerformanceCROWN CASTLE INTL CORP CCI A3 24.0 P3 36.0TELLABS INC TLAB A3 24.0 A3 24.0 P1A3 36.0IAC/INTERACTIVECORP IACI 0-50-25-25 33.0 0-50-25-25 33.0 # = YearsCOMVERSE TECHNOLOGY INC CMVT A1 12.0SYNOPSYS INC SNPS Q4 25.5 P1A3 36.0CINCINNATI BELL INC CBB A1M3 25.9 P3 36.0 ExamplesTW TELECOM INC TWTC A4 30.0 A4 30.0 A3/SA3 = Annual or Semi-Annual 3 yearsEQUINIX INC EQIX P1-50-25-25 33.0LORAL SPACE & COMMUNICATIONS LORL A4 =Annual 4 yearsNUANCE COMMUNICATIONS INC NUAN C2 24.0 C2 24.0 P2 24.0 A1M3 = Annual for 1st year/monthly for 3 yearsARRIS GROUP INC ARRS A4 30.0 P3 36.0 A1Q3 = Annual for 1st year/qrtly for 3 yearsAKAMAI TECHNOLOGIES INC AKAM A1Q3 29.6 A3 24.0 P3 36.0VIASAT INC VSAT A4 30.0 A4 30.0 C3 = Cliff vesting after 3 yearsSBA COMMUNICATIONS CORP SBAC A4 30.0 A4 30.0 P3 = performance vesting at end of year 3EARTHLINK INC ELNK X1 14.2 P1A3 = Performance vest at 1 year/3 year annualFAIR ISAAC CORP FICO A4 30.0 P1, P2 30.0COMTECH TELECOMMUN CMTL A5 36.0ROVI CORP ROVI A1M3 25.9 Average Time to vest:PROGRESS SOFTWARE CORP PRGS M5 30.5 SA3 21.0 Example for 4 yearsPrevalence of LTI Vehicle 69% 69% 52% • (12+24+36+48)/4Vesting Schedule Avg Time to Vest Mode 25.9 24.0 36.0(months) 75th 30.0 31.5 31.5 Average 28.3 27.1 32.0 • Average = 30 months Median 25.9 29.6 29.6 25th 25.7 24.0 24.0 6
  7. 7. P revalence in the US  Survey-driven headlines indicate performance award prevalence is booming  A “Top 250” analysis indicates performance share prevalence has grown from 63% in 2009 to 75% in 2012 for “executives” (NEOs)  An analysis of the S&P 1500 companies indicates performance share prevalence for CEOs increased from 47% in 2009 to 58% in 2011  Technology sector survey of 422 companies – “any use of performance shares” = 30% Performance Award  Directly correlated to revenue size Revenue Range Prevalence <$50mm 3% $50mm-$200mm 16% $200mm-$500mm 25% $500mm-$1B 33% $1B-$3B 42% >$3B 55% ALL 30% 7
  8. 8. The P roblem s w ith “P revalence” Depth into organization  CEO  NEOs  Officers  Range of # of participants in a company in the US: 1 to 15,000 (4.3%) Mix of performance awards vs. stock options and RSUs  Ranges from 5% to 100% performance awards “Rigor” of performance goals  Cases of 3x no payout and 3x max payout Year-to-year changes in design  Piñata plan design 8
  9. 9. K ey I ssues for Boards of Directors What Problem are we Trying to Solve?  Check-box plan design?  Specific shareholder/adviser concerns? Key challenges  Interpreting survey and proxy data  Mix and weighting of equity vehicles  Understanding valuation  Extreme variations in accounting value based on design features  Performance measures  Performance period(s) Interaction with other market trends  Ownership guidelines and holding requirements  Clawbacks 9
  10. 10. Governance Ups and Dow ns: Em erging P roblem s Goals Plan Structure 1. Low ball goals 11. Valuation-based compensation numbers 2. Timing of adoption of relative TSR plans 12. Annual incentive plans hiding in an “LTI” 3. Relative TSR payouts with negative absolute TSR 13. Part of the “LTI portfolio” 4. Financial measures that don’t 14. Liberal termination provisions support value creation 15. Liberal change in control 5. Interim milestone-based goals provisions 6. Non-GAAP measures 16. Unnecessary complexity 7. Vague subjective goals 17. Total cost of plan operation 8. Remco discretion 18. Administration on spreadsheets 9. Mid-cycle modifications 19. Participant skepticism and lack of perceived value 10. After-the-fact overrides 10
  11. 11. Understanding Valuation From: “Value and Valuation: Making Sense of Long-Term Incentive Data” with Terry Adamson of Aon Hewitt, presented at:  WorldatWork Annual Conference 2012  National Association of Stock Plan Professionals (NASPP) Conference 2012  NASPP Boston Chapter meeting November 2012  WorldatWork White Paper to be published in early 2013 11
  12. 12. The Continuing Debate: I ncentive or P ay Delivery Shareholders and advisers want pay delivery tied to results…as they define results and increasingly defined as TSR TSR-based measures are creating a lottery environment  Over time, few companies will be able to sustain favorable relative TSR  Pattern of TSR adoption and abandonment is correlated with both share price cycles and payout experience of programs TSR is mistakenly assumed to be a measure of shareholder value  “Share price reflects expectations about future cash flows. So what TSR really measures is a shift in shareholder expectations about future cash flows…It is possible for shareholder value to be destroyed while TSR is indicating otherwise.”* TSR-based performance awards are enforcing a collar on payouts to executives based on the experience of relatively short-term shareholders* From ”Total Shareholder Return and Management Performance: A PerformanceMetric Appropriately Used, or Mostly Abused?” – Rotman International Journal ofPension Management, Fall 2012, R. Burgman and M. Van Clieaf 12
  13. 13. The Continuing Debate: I ncentive or P ay Delivery Market trading dynamics and global economic concerns are muting executive impact on share price  Average investors’ holding period in US: 3.5 years  3.5 months  70% of US market trading volume is high-frequency trading: 3.5 hours?  Euro crisis  China currency valuation issue  Climate change Late breaking news in the US (week of 03 December 2012)  Spread of “special dividend” in December to optimize tax impact given “fiscal cliff” situation  SEC focus on “window dressing” by mutual funds that causes share price spikes on the last day (in the last half-second) of a fiscal period, and a significant drop the next trading day 13
  14. 14. The Continuing Debate: I ncentive or P ay Delivery Shareholder-driven plan design is exacerbating single-stakeholder view of performance, but what about…  Employee ownership?  Seen as “dilution” through proxy advisers’ static models  ESG?  Dismissed as “nonquantitative, non-objective measures”  Conscious Capitalism©? 14