1. Performance Plans
in Current US Compensation Practice
Davos 2013
14th Global Employee Equity Forum
07 February 2013
Fred Whittlesey
Compensation Venture Group, Inc.
206.780.5547
www.compensationventuregroup.com
fred@compensationventuregroup.com
Blog: payandperformance.blogspot.com

2. Com pensation Venture Group and the W orld of Equity
Equity 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
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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
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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
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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
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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 2010
US CELLULAR CORP USM A3, C6 C3 36.0
JUNIPER NETWORKS INC JNPR A1M3 25.9 P3 36.0 A =Annual / SA = Semi-Annual
METROPCS COMMUNICATIONS INC PCS A1M3 25.9 A1Q3 29.6
ADOBE SYSTEMS INC ADBE M4 24.5 0-50-25-25, A3 33.0 P1A2 30.0 M =Monthly
WINDSTREAM CORP WIN A3, C3 P1 12.0
LEAP WIRELESS INTL INC LEAP 0-25-25-50 39.0 P20-20-20-40 33.6 Q = Quarterly
AOL INC AOL A1M3 25.9 0-50-25-25 33.0
ECHOSTAR CORP SATS A5 36.0 C = Cliff
BROCADE COMMUNICATIONS SYS BRCD A3 24.0 P2A1 36.0
BMC SOFTWARE INC BMC M4 24.5 A3 24.0 P2, P3 30.0 P = Performance
CROWN CASTLE INTL CORP CCI A3 24.0 P3 36.0
TELLABS INC TLAB A3 24.0 A3 24.0 P1A3 36.0
IAC/INTERACTIVECORP IACI 0-50-25-25 33.0 0-50-25-25 33.0
# = Years
COMVERSE TECHNOLOGY INC CMVT A1 12.0
SYNOPSYS INC SNPS Q4 25.5 P1A3 36.0
CINCINNATI BELL INC CBB A1M3 25.9 P3 36.0 Examples
TW TELECOM INC TWTC A4 30.0 A4 30.0 A3/SA3 = Annual or Semi-Annual 3 years
EQUINIX INC EQIX P1-50-25-25 33.0
LORAL SPACE & COMMUNICATIONS LORL
A4 =Annual 4 years
NUANCE COMMUNICATIONS INC NUAN C2 24.0 C2 24.0 P2 24.0 A1M3 = Annual for 1st year/monthly for 3 years
ARRIS GROUP INC ARRS A4 30.0 P3 36.0 A1Q3 = Annual for 1st year/qrtly for 3 years
AKAMAI TECHNOLOGIES INC AKAM A1Q3 29.6 A3 24.0 P3 36.0
VIASAT INC VSAT A4 30.0 A4 30.0
C3 = Cliff vesting after 3 years
SBA COMMUNICATIONS CORP SBAC A4 30.0 A4 30.0 P3 = performance vesting at end of year 3
EARTHLINK INC ELNK X1 14.2 P1A3 = Performance vest at 1 year/3 year annual
FAIR ISAAC CORP FICO A4 30.0 P1, P2 30.0
COMTECH TELECOMMUN CMTL A5 36.0
ROVI CORP ROVI A1M3 25.9 Average Time to vest:
PROGRESS SOFTWARE CORP PRGS M5 30.5 SA3 21.0
Example for 4 years
Prevalence of LTI Vehicle 69% 69% 52%
• (12+24+36+48)/4
Vesting 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
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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%
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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
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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
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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
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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
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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 Performance
Metric Appropriately Used, or Mostly Abused?” – Rotman International Journal of
Pension Management, Fall 2012, R. Burgman and M. Van Clieaf
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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
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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©?
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