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1、A 0 FinancialIncentives PerspectivesandImplementationGuidance A 1 CONTENTS PerspectivesonfinancialincentivesImplementationguidelinesExhibits A 2 EMERGINGPERSPECTIVESONFINANCIALINCENTIVES A 3 EMERGINGPERSPECTIVESONFINANCIALINCENTIVES CONTINUED A 4 KEYISSUESTOADDRESSWHENDESIGNINGANINCENTIVESYSTEM What
2、drivesbasicsalaryandsalaryincreases Whatkeyindicatorsmakeupthe gate toannualorlong termincentives Howdoyoudeterminerealisticstretchtargetswithinmanagementcontrol butwithoutgoingintodetailedannualnegotiation Howsteeplydoestherewardincreaseasmanagersapproachtheiragreedstretch Howdoappropriateorinappro
3、priatebehaviorsimpacttherewardlevel Howisperformancebeyondstretchrewarded Whatcombinationofshort andlong termincentivesisappropriate Whatistherightmixoffocusonindividualandgroup peergroupresults Exhibits8 11providemoredetailandcaseexamplesastheunderlyingmentalmodelforincentivedesigns A 5 Step1 Trans
4、lateoverallstrategyintospecifictargets2 Establishguidingprinciples3 Conductcompetitivebenchmarking4 Designhigh levelcompensationframework5 Developcompensationprogrambycategoryofseniormanagement6 Stress testthecompensationprogram7 Determinelegalandtaximplications8 Implementindividualplans9 Designimpl
5、ementationapproach10 Createongoingmanagementprocesses BriefdescriptionClarifyinggrowthaspirationintermsofclearvaluedrivers typically3 5 e g AUM earnings EVAtm etc Developingsetofguidingprinciples e g levelofconformancetocompany scompensationpolicies useofvariablecompensation levelofdeferredcompensat
6、ion etc Benchmarkingcompetitivecompensationlevelsandstructures upper lowerquartilesforeachlevel etc Foreachcategoryofseniormanagement establishcompetitivecompensationlevelsDefiningoverallcompensationframeworkintermsofthreefactors Compositionandvariability i e salaryvs incentivesTiming i e currentvs
7、deferred vestingperiodInstruments e g cash companystock options XYZphantomstockLinkingvaluedriversandthecompensationprogramDeveloprobustperformancemetricstailoredtoeachcategoryofseniormanagementDesignincentivestooptimizeperformancemetrics usingcompensationframeworkTestingrobustnessofcompensationsyst
8、embymodelingthepay outunderavarietyofscenarios e g differenceperformancelevelsandmarketconditions andmodelingaggregateimpactofpay outonXYZoverallfinancialresultsIdentifyingpotentialadverseincentivesandloopholescreatedbythesystemClarifyinglegalandtaximplicationsofnewcompensationplansandidentifyingpot
9、entialissuesoverallDefiningunambiguousterminationconditions administrationresponsibilities limitsonawards redemptionprocesses non competitionconditions taxwithholdingpolicies etc Developingindividualplansconsistentwithcategorycompensationprogram keepinginmindtheguidingprinciplesandcompetitivebenchma
10、rkingNeedstobeinthecontextofcurrentcompensationlevelsandofcompetitivebenchmarksCreatingcleardocumentationandcommunicationmaterialsConductingaseriesofmeetingwithkeyindividualstoplanroll outDevelopingthegoal setting performancereview andcompensationcycleCreatingcontingencyplansforchangesinenvironment
11、e g fallinphantomstockprice STEPSINDESIGNINGNEWCOMPENSATIONSYSTEM A 6 Revisebasedonfinancialimpact perverseincentives etc Conductinparallelwhilebuildingcompensationprogram Revisebasedonlegal taxissues OverallsuccessandspeedofprocessdependsonQualityofexistingcompensationsystemDegreeofchangeimposedbyn
12、ewsystemCompensationframeworkPerformancemetricsIndividualcompensationAbilitytotrackandconfidenceinnewperformancemetricsManagementprocessinfrastructure e g performancereviews etc PROCESSFORDESIGNINGNEWCOMPENSATIONSYSTEM 1 Translateoverallstrategyintospecifictargets 3 Conductcompetitivebenchmarking 4
13、Designhigh levelcompensationframework 5 Developcompensationprogrambycategoryofseniormanagement 6 Stress testcompensationprogram 7 Determinelegalandtaximplications 8 Implementindividualplans 9 Designimplementationapproach 10 Createongoingmanagementprocesses 2 Establishguidingprinciples A 7 Exhibits A
14、ppendix1 A 8 ExecutiveteampayMedian Thousand 1 990 1 500 ExecutiveteampaybreakdownMedian percentoftotalpay Basepay At riskpay ValuedwithBlack Scholes indexedto1997dollarsSource Dr RakeshKhurana MIT Dr BrianHall HBS Evergreencompanydatabase Sharpbenders executivesgetpaidwithlargerportion atrisk Equit
15、yandoptions marketcapitalizationsMedian percent 1992 96 EquityandoptionsMedian Thousand 1992 96 andholdmuchlargerequitystakes Winners Losers WINNERSPAYMOREANDUSELONG TERMINCENTIVES 100 100 Winners Losers CEOonly Top5executives Winners Losers 58 1 6 7 20 4 3 6 Winners Losers CEOonly Top5executives Wi
16、nners Losers 1 5 0 5 1 2 0 8 Winners Losers 2 7 1 3 A 9 Top20executives Morethan15 abovebenchmarkaverage Upto15 abovebenchmarkaverage Atbenchmarkaverage Upto15 belowaverage Morethan15 belowaverage Top300executives TOTALCOMPENSATION Averagepercentofcompaniesresponding Source TT sWarforTalentExecutiveSurvey finalresultsbasedon72companies Total Top quintilecompanies Mid quintilecompanies Total Top quintilecompanies Mid quintilecompanies A 10 Top20executives Morethan15 abovebenchmarkaverage Upto15 a
