The document discusses trends in executive benefits, including trends in cash and incentive compensation, retirement plans, and equity programs. It provides examples of different types of non-qualified deferred compensation plans, cash bonus plans, long-term incentive plans, and retirement plans that employers can offer executives. The summaries highlight advantages and disadvantages for both employers and executives of these various executive benefit plan types.

1. Lorrie Baldevia November 12, 2008 Trends in Executive Benefits

2. Important Disclaimer This material has been prepared by MCM and is designed to provide general information in regard to the subject matter covered. It should be noted that the information provided is given with the understanding that MCM does not engage in the practice of law, or give legal, accounting, or tax advice. You are advised to seek counsel in these areas from your appropriate advisors.

3. Agenda Executive Compensation & Benefits Overview Executive Compensation Strategy Nonqualified Plans Overview Trends in Executive Benefit Programs Trends in Cash & Incentive Compensation Trends in Executive Retirement Plans Trends in Equity Programs Trends in Protection Benefits Trends in Executive Perquisites Sample Client Strategies: Sample Executive Compensation & Benefit Packages Questions???

4. Executive Compensation & Benefits Overview 9

5. Executive Compensation & Benefit Overview What makes up Executive Compensation? Salary Annual Incentive/ Bonus Long Term Incentives Benefits Executive Benefits Executive Compensation

6. Issues to consider: How the compensation strategy will support the business strategy. Which positions should have each pay component (i.e., salary, annual incentives, long-term incentives, etc.) How to design each component to link executive pay with business objectives. Every compensation package can be designed to: Reward ongoing, day-to-day responsibilities, experience and expertise with salary. Reward results with variable pay: Use short-term incentives for short-term results. Use long-term incentives for long-term results. Align executive interests with shareholder interests. Executive Compensation Strategy Evaluating Compensation

7. Nonqualified deferred compensation plan : A plan, agreement, arrangement or promise By an employer to its employee To pay compensation to the employee at some future date The plan must be : Limited to a group of management or highly compensated employees Not subject to qualified plan limitations: Not required to comply with contribution limits or testing requirements of qualified plans Can be used to correct “reverse discrimination” of qualified plans The promise to pay is unsecured: Funds may be set aside to meet future payment obligations Executive Compensation & Benefits Overview What is a nonqualified plan?

8. Qualified Plans have specific rules in design, administration, and funding Examples: 401k Plans, Defined Benefit Pension Plans Governed by ERISA Constraints on participation and deferral amounts Non-Qualified Plans provide significant flexibility No limitations on the amounts that can be deferred Provides option for broader benefits to highly compensated employee groups due to qualified plan restrictions Key Difference : Qualified Plans are formally funded. Non-Qualified Plans are not formally funded . The promise to pay is unsecured, although funds may be set aside to meet future payment obligations. Executive Compensation & Benefits Overview Non-Qualified vs. Qualified Plans

9. Attract talented key employees to the organization Retain key value-creators in the corporation for the long term Align interests of the executive, the company, and its shareholders Reward key employees for value creation Tie compensation to performance Provide incentives to obtain or surpass corporate objectives Create a competitive total compensation and benefits package Replace lost benefits due to qualified plan limitations Provide executives with an opportunity to defer current income tax on compensation Provide executives with wealth building opportunities & financial planning flexibility Executive Compensation & Benefit Overview Why employers create executive compensation & benefit plans?

10. 9 Trends in Executive Benefit Programs

11. Trends in Executive Benefit Programs Benefit Focus Cash Incentives Retirement Equity Protection Perquisites

12. 9 Trend #1: Cash & Incentive Compensation

13. Plan Types Available: Executive Cash Plans Cash Bonus Plans Executive Choice Plans Long Term Incentive Plans Nonqualified Plans Plan design can allow for deferred income with tax-deferred earnings and growth Trend #1: Cash & Incentive Compensation

14. Plan Description: Executive Cash Plans Plan Design #1: Cash Bonus Plans Designated cash bonus promised to executive Specified delivery date – typically short term Signing bonus Annual bonus Minimum guarantee Can be based on performance or service achievements Plan Design #2: Executive Choice Plans Allocated cash amount to executive To be used as individually desired in choice of benefit options Plans usually offer menu of benefit choice options Must use or lose Cannot convert to cash Trend #1: Cash & Incentive Compensation

15. Plan Description: Long Term Incentive Plan Contractual Agreement to provide deferred benefits for the executive Type of nonqualified deferred compensation plan May be designed to provide increased benefit based upon performance Typically an incentive paid over longer term 1 – 3 years: Short term incentive 3 years of more: Long term incentive May be as long as retirement Flexibility in payout design Lump sum or installment payments In-service or retirement Trend #1: Cash & Incentive Compensation

16. Plan Type: Executive Cash Plans Trend #1: Cash & Incentive Compensation Advantages & Disadvantages Disadvantages: EMPLOYER Must be paid no later than 2 ½ months after calendar year in which earned 100% vested to the executive Little value as a retention tool EXECUTIVE May put in higher tax bracket If designed as a benefit choice, may lose benefits not used in a given calendar year Benefit choice plans cannot be converted to cash Advantages: EMPLOYER Easy to establish Deducted as compensation expense Provides incentives that retain executives EXECUTIVE Provides supplemental income Creates increased benefit options Provides benefit choices that are meaningful to the individual

17. Plan Type: Long Term Incentive Plan Trend #1: Cash & Incentive Compensation Advantages & Disadvantages Disadvantages: EMPLOYER Tax deduction delayed until benefits are paid out EXECUTIVE Cash payout for performance is not immediate Risk of forfeiture Payments are taxable to employee when received Advantages: EMPLOYER Employers can select participants Performance metrics can be aligned with company objectives Employers have “handcuffs” to retain key employees EXECUTIVE Supplemental income Savings accumulation vehicle Tax deferred earnings & growth Distributions pre-elected

18. 9 Trend #2: Retirement

19. Plan Types Available: Non-qualified Deferred Compensation Plans Elective Deferral Design: Executive Deferred Compensation Plan 401(k) Mirror Plan Excess Benefit Design: Supplemental Executive Retirement Plans (“SERP”) Hybrid Plan Design: Voluntary Deferral + Defined Contribution SERP Executive Bonus Plans Restricted Executive Bonus Trend #2: Retirement

20. Plan Description: Non-Qualified Deferred Compensation Plan Contractual Agreement to provide deferred benefits for the executive Plan allows voluntary compensation deferral opportunities for executive Salary Bonus Other forms of compensation Plan can allow employer contributions with vesting Match Discretionary contributions Scheduled contributions Target retirement benefit Contributions and earnings grow tax-deferred Can provide investment options for executive deferral accounts Payout options elected at time of deferral Designated event or payout date Elected payout form Trend #2: Retirement

21. Plan Description: Executive Bonus Plan Contractual Agreement to provide supplemental life insurance to executive Design also provides retirement income source to executive Combination retirement & protection benefit Life insurance policy has both death benefit and cash value components Plan designed to retain key employees by providing employer contributions to an insurance contract Both employer and employee make annual premium contributions Premium allocation to employee typically limited to cost of life insurance protection only Plan design creates golden handcuff as employer controls policy Cash value in policy can provide source of retirement income to executive Insurance contract has tax-favored accumulation and income-tax-free proceeds to executive’s beneficiary Trend #2: Retirement

22. Plan Type: Nonqualified Deferred Compensation Plans Trend #2: Retirement Advantages & Disadvantages Disadvantages: EMPLOYER Tax deduction is delayed until benefits are received IRS rules must be strictly followed to avoid penalties EXECUTIVE Payments are taxable to employee when received No rollover to qualified plan Risk of forfeiture Amounts deferred cannot be taken out ahead of selected payment date except under limited circumstances Advantages: EMPLOYER Employer can select participants Broad flexibility in plan design Useful employee attraction tool ER contributions serve to reward and retain EXECUTIVE Supplemental retirement income Tax deferred earnings & growth Vehicle for employer contributions Distribution options

23. Plan Type: Executive Bonus Plans Trend #2: Retirement Advantages & Disadvantages Disadvantages: EMPLOYER Plan may require medical underwriting for executives which can limit participation Requires contributions from employee for death benefit protection (can be grossed up) EXECUTIVE Bonus to pay premium may put employee in higher tax bracket Benefit may be perceived by employee as imperfect due to paying taxes now but having restricted use of the asset Advantages: EMPLOYER Easy to establish Employer can select participants Premium payments deducted as compensation expense Golden handcuffs EXECUTIVE Supplemental life insurance protection above group policy Lower out-of-pocket cost than if obtained individually Tax-deferred earnings Insurance cash value can be accessed to supplement income

24. 9 Trend #3: Equity

25. Plan Types Available: Stock Based Plans Stock Grants Stock Options Restricted Stock Stock Appreciation Rights (“SAR”) Incentive Stock Options (“ISO”) Phantom Stock Option Plan Nonqualified Plan with “Phantom Stock” Trend #3: Equity

26. Plan Description: Stock Based Plans Type of nonqualified deferred compensation plan with an equity based design Contractual agreement to provide equity to executive Actual equity results in shareholder dilution Award design flexibility Initial grant + share growth Share growth from date of grant to date of award only Equity awarded to executive based upon pre-determined criteria ROA Stock appreciation Other corporate &/or individual goals & objectives Design features have changed significantly since implementation of IRC 409A rules Discounts Deferral of income Stock valuations & re-valuations Trend #3: Equity

27. Plan Description: Phantom Stock Plan Type of nonqualified deferred compensation plan with an equity-based design Provides phantom shares to executives with valued based on actual company stock appreciation Contractual Agreement to provide deferred benefits to the executive based upon increase in equity value Phantom equity provides upside potential without share dilution Equity awarded to executive based upon pre-determined criteria ROA Stock appreciation Other corporate &/or individual goals & objectives Design features have changed significantly since implementation of IRC 409A rules Discounts Deferral of income Stock valuations & re-valuations Trend #3: Equity

28. Plan Type: Stock Based Plans Trend #3: Equity Advantages & Disadvantages Disadvantages: EMPLOYER Dilutes share value Company must undergo annual corporation valuation More expensive to administer than other plan options Strict compliance requirements EXECUTIVE Payments are taxable to employee when received Risk of forfeiture Usually have non-competes and other restrictions to obtain benefit Advantages: EMPLOYER Employer can select participants Aligns executive and shareholder interests Units granted only upon specific performance metric EXECUTIVE Tax deferred earnings & growth Units grow in value based on corporate valuations Executives become shareholders in company Executives paid for value creation

29. Plan Type: Phantom Stock Plan Trend #3: Equity Advantages & Disadvantages Disadvantages: EMPLOYER Company must undergo annual corporation valuation More expensive to administer than other plan options Strict compliance requirements EXECUTIVE Payments are taxable to employee when received Risk of forfeiture Usually have non-competes and other restrictions to obtain benefit Advantages: EMPLOYER Employer can select participants Aligns executive and shareholder interests No shareholder dilution Units granted upon specific performance metric EXECUTIVE Tax deferred earnings & growth Units grow in value based on corporate valuations Executives paid for value they create

30. 9 Trend #4: Protection

31. Plan Types Available: Executive Life Insurance Executive Bonus Plans Split Dollar Plans Key Man Coverage Executive Disability LTD Executive Long Term Care LTC Trend #4: Protection

32. Plan Description: Executive Life Insurance Provides life insurance benefit to executives May also have a retirement income component Benefits can be for executive’s heirs and/or the corporation Executive Disability Provides disability insurance benefit to executives Company can modify existing plan or can implement individual plans If plan already in place, additional executive plan increases benefits provided under standard plan Executive Long Term Care Provides source of funds to cover costs associated with care of an executive who can no longer perform activities of daily living (ADL) Protection of assets against liabilities associated with long term care costs Plan designs vary widely Reimbursement programs Pre-established periodic benefit In-facility vs. at-home care Trend #4: Protection

33. Plan Type: Executive Life Insurance Trend #4: Protection Advantages & Disadvantages Disadvantages: EMPLOYER Premiums primarily borne by employer Premium costs will differ based on executive health Premium payments must be allocated to employee as income EXECUTIVE Benefit can be designed to end upon executive termination Eligibility for executives may depend on medical underwriting Taxable income attributed to premium paid by employer Advantages: EMPLOYER Provides tax free proceeds to protect assets of corporation at death of key employee Provides tax free benefits to executive’s heirs Valuable recruiting & retention tool EXECUTIVE Company pays premiums, executive cost is minimal Benefits are income tax-free Death proceeds provide salary continuation to heirs

34. Plan Type: Executive Disability Trend #4: Protection Advantages & Disadvantages Disadvantages: EMPLOYER May require additional administration if multiple executives are insured EXECUTIVE Tax free benefits will require some employee costs Advantages: EMPLOYER Easy to establish Can be provided to a select group Cost increases are low/moderate EXECUTIVE Company pays premiums, executive cost is minimal Disability benefits can be tax free

35. Plan Type: Executive Long Term Care Trend #4: Protection Advantages & Disadvantages Disadvantages: EMPLOYER Benefits must be clearly explained to executives EXECUTIVE Premiums paid by the corporation are taxable to executive Benefits may not be utilized during working years Advantages: EMPLOYER Easy to establish Can be provided to a select group Premiums are stable Valuable attraction & retention tool EXECUTIVE No medical underwriting LTC benefits can be tax free Becoming highly desirable benefit as baby boomers age

36. 9 Trend #5: Executive Perquisites

37. Plan Types Available: Cash-based programs: Signing bonus Annual incentive / Guarantees Executive Loans (for stock, life insurance, taxes, home purchase, etc.) / Loan forgiveness Tuition reminbursement for advanced education &/or college tuition for children Tax gross-ups for taxable benefits Paid sabbatical leave Services: Financial / Tax / Estate planning services Access to investment brokerage services Legal planning services Protection programs: Supplemental executive medical insurance Golden parachute provisions Termination/Severance provisions Other: First-class air travel Expanded insurance program for family members Health / Golf / Professional club membership Use of company plane Company car Trend #5: Executive Perquisites

38. Plan Type: Perquisites Trend #5: Executive Perquisites Advantages & Disadvantages Disadvantages: EMPLOYER Once established, difficult to eliminate Can create a culture of “haves and have nots” EXECUTIVE May be income imputed to value of benefit for which taxes will be due Typically not all offerings provided to all executives Advantages: EMPLOYER Easy to establish Can be provided to select group Can be customized to individual executive Costs are relatively small EXECUTIVE Allows executive to feel a part of a select group Provides benefits that can be enjoyed by family members as well Allows executive to stay focused on the job

39. 9 Questions ???? Contact Us! Lorrie Baldevia, VP Toll Free: (800) 347-2303 Email: [email_address]