This presentation considers regulatory trends in performance-based remuneration as well as trends in executive compensation, both short-term incentives (STI) and long-term incentives (LTI).

1. 2012 Human Capital Conference
23–26 October
Trends in performance-based
ti
remuneration

2. Disclaimer
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Page 2 Trends in performance-based remuneration

3. Presenters
► Allen Powley
y ► Henning Curti
g
► GlaxoSmithKline plc ► Ernst & Young GmbH
► allen.j.powley@gsk.com ► henning.curti@de.ey.com
Page 3 Trends in performance-based remuneration

4. Agenda
► Regulatory trends
► Short-term incentives (STI) — trends in executive
compensation
► Long-term incentives (LTI) — trends in executive
compensation
Page 4 Trends in performance-based remuneration

5. Regulatory trends

6. Financial services regulations are still
driving the emerging direction
Regulatory changes: examples
g y g p Key messages
y g
► Troubled Asset Relief Program ► Pay mix/levels
(TARP) ► Risk measurement
► Dodd-Frank legislation ► Appropriateness of executive
► Financial Services Authority compensation (say-on-pay)
(
(FSA)) ► Bonus with clawback
► Financial Stability Forum (FSF)
► Viral effect on other industries
— G20
► European Commission
p
► German VorstAG and InstVergV
► Walker Report — UK
► Corporations Act 2001 —
Australia
► Corporations Amendment Bill
2011 — Australia
Page 6 Trends in performance-based remuneration

7. Requirements for remuneration amounts
or pay mix increased significantly
► In Germany, the law on the appropriateness of
executive compensation (VorstAG) calls for
comparing compensation with peer group
companies and a long-term orientation of
variable compensation.
European
► Th current discussion on corporate
The t di i t
governance
governance in the UK stresses the increasing
frameworks
importance of long-term-oriented
executive remuneration.
► The Dutch Corporate Governance Code calls
for a predominantly long-term orientation of
long term
variable compensation.
Page 7 Trends in performance-based remuneration

8. Current discussions may lead to future
adaptations of long term compensation
long-term
► In France, a ceiling for corporate officers of
, g p
public companies was set. Their salaries (base
and recurring variable) will be limited to 20
times the average of the lowest salaries in these
companies; a cap of €450,000 and its
application in 2012 or 2013 has been
European discussed.
discussed
governance
► Following the Spanish Code of Corporate
frameworks
Governance, no requirements regarding
compensation amounts or mix of pay elements
currently apply.
► Current EU discussion may lead to future
Spanish requirements regarding a long-term
orientation of compensation.
Page 8 Trends in performance-based remuneration

9. US regulations stress the pay-performance
relation and risk assessment
► Dodd-Frank legislation focuses on say-on-pay,
risk assessments, clawbacks and relationship
p
of CEO compensation to rank and file
employee compensation.
► Shareholders and shareholder advisory fi
Sh h ld d h h ld d i firms
US
are increasingly scrutinizing pay levels
compared to company performance.
► The Securities and Exchange Commission
(SEC) in continuing to require more detailed
disclosures
disclos res regarding e ec ti e compensation
executive compensation.
Page 9 Trends in performance-based remuneration

10. Australian governance increases share-
holder influence on executive compensation
► Australian governance framework does not
explicitly regulate the quantum of pay or the
mix of pay elements of companies, but the
Corporations Amendment Bill (2011) introduces
attwo-strike and re-election process, i
t ik d l ti increasing
i
shareholders’ influence on board and executive
remuneration.
Australia ► Shareholders generally focus on the following
factors when considering executive pay:
► Remuneration decisions should be transparent and
justified (new regulation requires disclosure of details
relating to the use of remuneration consultants).
► The quantum of pay should be justified and the link
between variable pay, and th respective performance
b t i bl d the ti f
should be disclosed. Practice long-term incentives are
expected to measure performance over at least
three years.
ee yea s
Page 10 Trends in performance-based remuneration

11. STI trends

12. The pay-performance link in European STI
plans is mostly via earnings related KPI
Performance criteria: Stoxx50Europe — STI plans
Earnings
►Within the STI plans
Others* analyzed, earnings-related
criteria and other Key
Return
Performance Indicators
Individual (KPIs) such as strategic or
operational performance
Cash
targets are the most
Revenues common performance
measures in European
Qualitative
STI plans.
n/a ►Also, return and cash-
Value related as well as individual
added
0% 10% 20% 30% 40% goals are applied, but to a
In % of all KPIs lesser extent than in 2010.
Source: 41 of 50 audited annual reports 2011 (without German DAX30 companies)
**Others may include operational and strategic performance, scorecard targets, other quantitative measures etc.; please note: within one plan ,one or more KPIs may be applied
Page 12 Trends in performance-based remuneration

13. German STI plans put a relatively stronger
focus on individual goals
Performance criteria: DAX30 — STI plans
Earnings
E i ►In 2011 earnings-related
2011,
and individual indicators are
Individual
still the most commonly
Return applied performance
measure
measures.
Cash
►Furthermore, return
Revenues measures are also a
common KPI used in
Qualitative
German STI plans.
p
Others*
Value
added
0% 10% 20%
Percentage of plans
Source: 30 of 30 audited annual reports 2011
*Others contain dividends and not further specified company goals; please note: within one plan, one or more KPIs may be applied
Page 13 Trends in performance-based remuneration

14. US plans predominantly assess
performance by using earnings related KPI
earnings-related
Performance criteria: Sample of 250 US STI plans
►Financial performance
Earnings indicators were
complemented by individual
Revenue performance measures in
goals
most companies.
Cash
►Prevalence of cash flow
flow
and return measures
Returns decreased slightly
Other
Oth
compared to the p
p previous
year.
►Revenue-related KPI use
increased compared to
0% 20% 40% 60% 80% previous year.
Percentage of plans
Source: Audited annual reports 2011 of 250 listed companies
Page 14 Trends in performance-based remuneration

15. LTI trends

16. LTI plan designs show a distinct difference
between Europe and US/Australia
► While STI plans demonstrate relatively
homogenous patterns worldwide, LTI plans are
much more diverse across countries.
Worldwide ► European plan designs tend to be geared
LTI trends toward performance stock units (PSUs) while
plan designs in the US are still dominated by
stock options(SOs) / stock appreciation rights
(SARs); nevertheless, PSUs are also gaining
importance.
Source: Meridian Compensation Partners LLC, “2012 Trends and Developments in Executive Compensation”
Page 16 Trends in performance-based remuneration

17. LTI designs in Stoxx50 Europe companies are
dominated by share based equity-settled plans
share-based equity settled
Plantypen Stoxx50Europe
► Active plans*: 43 plans
► Thereof share based: 37 plans
► Thereof non-share based: 5 plans
Settlement*:
►Equity: 29 plans
►Cash: 7 plans
►Mixed: 5 plans
Payout profile*:
►Shares/PSU: 24 plans
►Stock options/SAR: 8 plans
►Mixed: 5 plans
►Others: 6 plans
Source: 41 of 50 audited annual reports 2011 (
p (without German DAX30 companies)
p )
* one or more companies make no disclosure; Please note: One company may apply one or more LTI plans
Page 17 Trends in performance-based remuneration

18. The prevalence of PSU plans in the UK is
largely in line with general European trends
Plan types of FTSE 250 companies
► Equity-settled plan
Equity settled
types are
Performance predominant.
shares/units
►P f
Performance shares/
h /
Stock option units mainly take the
plan form of nil cost
options with a three-
Share matching year performance
plan
p
period; within the
;
exercise period
Special plans*
options can be
converted into shares
0% 20% 40% 60% 80%
anytime because of
In % use of existing plans tax reasons.
Source: Ernst & Young 2012„ Directors` remuneration in FTSE250 and smaller companies“;
*please note: One company may apply one or more LTI plans; *Value creation plans
Page 18 Trends in performance-based remuneration

19. In the US, stock options are still widely
applied despite the increasing use of PSUs
Equity vehicles of US companies
Stock options
► Alth
Although options are l i
h ti losing
ground against full-value
PSUs shares, they are still the
most popular equity tool.
Restricted
stock units ► Full-value shares are
Restricted stock gaining popularity due to
increasing risk of a
SARs
negative development of a
Performance share price as a result of
stock
adverse market condition.
Other In this situation full-value
instruments provide a more
0% 20% 40% 60% 80% certain payout.
In % use of existing plans
Source: Deb Nielson, Kenexa, “Preparing for 2012 – Compensation Trends & Predictions”; “Equilar, 2011 Equity Trends Report – Update”
Page 19 Trends in performance-based remuneration

20. Stoxx50 LTI plans widely use TSR and EPS
while earnings related KPIs gain importance
earnings-related
Performance criteria: Stoxx50Europe – LTI plans
TSR
► The predominantly used
KPIs in European LTI
EPS plans are total shareholder
return (TSR) and earnings
Earnings
per share (EPS).
Others
Others* ► Net profit and EBITDA are
the most popular earnings-
Cash
related KPIs and are more
Individual often applied in 2011 than
in 2010.
Revenues
► Cost-related KPIs and
non-financial KPIs are
0% 10% 20% 30% 40%
increasingly applied.
In % of all KPIs
Source: 41 of 50 audited annual reports 2011 (without German DAX30 companies)
* Others may include qualitative targets, other financial and non- financial targets; please note: one LTI plan may apply one or more hurdles; some companies make no disclosure
Page 20 Trends in performance-based remuneration

21. German plan designs gradually align
applied KPIs to European trends
Performance criteria: DAX30 — LTI plans
Earnings ► TSR is increasingly
Share price becoming more relevant in
Return LTI plans compared to
measure
TSR previous years.
Qualitative ► Earnings-related criteria
Revenues and share price targets are
Others* the most common
Value added performance measures in
Cash 2011.
Individual ► Qualitative and individual
Economic
E i performance measures are
Value Added increasingly applied.
(EVA) 0% 10% 20%
In % of all KPIs
Source: 30 of 30 audited annual reports 2011
*Others contain dividends and not further specified company goals; please note: within one plan one or more KPIs may be applied
Page 21 Trends in performance-based remuneration

22. The majority of US LTI plans use
internal performance criteria
Performance criteria: % use of existing CEO incentive plans ► US companies
Financial measures US predominantly used
return measures, TSR
Return (EPS ROI, ROIC)
(EPS, ROI 41
and profit are KPIs for
TSR 36 LTIPs.
Profit 36 ► Most KPIs used by US
Revenue 27 companies are internal.
Individual performance 23
Other 14
Cash flow 5
Cost saving 2
Quality 2
Source: Deb Nielson, Kenexa, “Preparing for 2012 – Compensation Trends and Predictions“; Equilar, “2011 Equity Trends Report – Update“
Page 22 Trends in performance-based remuneration

23. Shareholders are increasingly open to
alternative KPI over the longer term
Performance criteria: % use of Top 100 companies — LTI plans
► Despite a decrease in the
Financial measures Top 100
prevalence of relative TSR
Relative TSR 69 among the Top 100, it is still
g p
Absolute EPS 31 the performance indicator
Others* 22 most frequently used.
Profit/earnings/revenue
P fit/ i / 13 ► Shareholders are
Return measure 11 increasingly open to
alternative key success
Absolute share price
p 3
indicators o er the longer
over
Absolute TSR 3 term.
Relative EPS 2
Source: Ernst & Young 2012 Executive and Board Remuneration Report;
* Others may include qualitative targets, other financial and non-financial targets
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24. Questions
Page 24 Trends in performance-based remuneration