Presented by:

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Time for ChangeTrends in Executive Compensation
and Benefits
September 25, 2008

• Presented by
• John Mancuso
• Managing Director
• Executive Compensation Benefits
• The Bostonian Group
• Thomas B. Wilson
• President
• The Wilson Group
• Susan Malanowski
• Principal
• The Wilson Group

The Bostonian Group Four Copley Place, 6th
Floor Boston, MA 02116-6502 Tel
617-587-2300 Fax [phone]
www.BostonianGroup.com
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Overview of the Session

• Forces Reshaping the Business Environment
• Critical Trends Impacting Executive Compensation
• Case Study Illustrations
• Q A and Discussion

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I. Forces Reshaping the Business Environment

• Business is becoming more complex and uncertain
• Businesses are becoming globalized.
• Barriers to suppliers and competitors are
  shrinking.
  
• Technology is becoming more accessible, less
  expensive and integrated into everyones job.
  
• Information is increasing exponentially.
• Business is becoming more volatile
• Many companies are facing serious shortfalls in
  achieving their 2008 business goals.
  
• The cost of capital is increasing.
• Growth markets are found in niches.
• People issues are more visible
• Attracting and retaining critical talent has
  become a C Suite challenge.
  
• Compensation and benefits practices are facing
  increased scrutiny.
  

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I. Forces Reshaping the Business Environment
Economic Forecasts 1 2008 2009
Gross Domestic Product 0.3 1.2 2.0 2.8
Inflation 3.1 3.4 1.9 2.3 Unemployment
5.5 5.7 5.2 5.7 Business Confidence 2 Le
ading Economic Indicators 101.2 - 0.7
CEO Confidence 39 1.0
Consumer Confidence 56.9 5.0
Human Resource Challenges 3 Importance of Tal
ent Attraction 75 Importance of Talent Retenti
on 52 Projections in Total Compensation 4
Base salaries for executives
4.0 Total cash compensation increases 7.0
Source (1) Federal Reserve Forecasts (August),
(2) Conference Board (August), (3) Aberdeen
Group, 2008, (4) WorldatWork 2008-2009 Salary Bud
get Survey.
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I. Forces Reshaping the Business Environment
Definition of Primary Terms
Base salary Annual bonus and incentive pay
Total Cash Compensation Value of annual
equity awards Executive benefits and perquisit
es Executive retirement/wealth accumulat
ion Total Direct Compensation Personal
needs and wants Total Rewards
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II. Critical Trends Impacting Executive
Compensation

• Boards and Compensation Committees are
  professionalizing the governance practices for
  designing and managing executive pay plans.
  
• Companies are shifting from stock options to a
  portfolio of equity vehicles.
  
• Equity/long-term incentive plans are becoming
  more based on performance than time.
  
• Companies are changing the mix and metrics of
  Total Direct Compensation.
  
• Companies are replacing perquisites with wealth
  accumulation and wealth protection plans.
  

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II. Critical Trends Impacting Executive
Compensation
1. Boards and Compensation Committees are
professionalizing the governance practices for
designing and managing pay plans.

• The Proxy is now studied by shareholders,
  employees, potential investors, investment
  advisory firms, job candidates and the SEC.
  
• The amount of work and expertise for Compensation
  Committee members is increasing.
  
• Pay levels are being examined for internal equity
  and fairness consistency, with less weight is
  placed on external benchmark comparisons.
  
• Decisions now have to be based on sound,
  defensible reasons.
  
• Companies are finally developing a meaningful
  Total Compensation Philosophy.
  

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II. Critical Trends Impacting Executive
Compensation
Understanding the Total Compensation Philosophy
and Strategy
Mission Focused
Market Focused
1 2 3
4 5 6
7 8
9 10

• Driven by what the organization performs
• High focus on retention
• Everyone understands whats important
• High base salary, variable pay based on
  overall company results
  
• Few clear goals meaningful and engaging

• Driven by the performance of the
  organization
  
• High focus on performance
• Everyone knows what they need to do
• High variable pay based on business unit
  individual results
  
• Very clear goals stretch and challenging

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II. Critical Trends Impacting Executive
Compensation
Understanding the Total Compensation Philosophy
and Strategy
Mission Focused
Market Focused
Base Salary Variable Pay Equity Comp
Benefits Perquisites Other
Elements

• Low relative to total
• Moderate/High, based on team and individual
• Performance based, wealth achievement
• Basic coverage, personalized
• Limited
• Career based on achievements

• High relative to total
• Low/Moderate, based on group or overall
  company
  
• Time based, wealth accumulation
• Full featured, attractive and builds over
  long-term
  
• Personalized
• Career growth oriented

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Case Study Illustration
Case Study Translating Compensation Strategy
into Action

• Background
• Strong, well established software services
  company.
  
• Provide technology that decreases our customers
  time to market for new and existing products.
  
• Relationships with customers creates competitive
  advantage understanding their strategic
  imperatives and their viewing us as a strong
  partner are critical to our future success.
• Overall Statement of Philosophy
• We provide a variety of total reward programs
  that can be personalized to the needs and
  situation of the individual.
  
• Performance based variable pay plans focus on
  customer centric measures and encourage
  collaboration and the optimal use of critical
  resources.
• Individuals will share in the success of the
  business units where they provide the greatest
  value and have the greatest responsibility.
  
• Executives and those that impact the long-term
  value of our company need to become owners, and
  have a personal stake in the value of the
  enterprise.

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Case Study Illustration
Case Study Translating Compensation Strategy
into Action

• Performance Based Restricted Stock Plan
• Performance Measure and Goals Cumulative
  Earnings before tax
  
• Vehicles Restricted stock
• Mechanism Stock will be granted in relation
  to performance
  
• Timeframe If not achieved in 5 years 50 of
  stock will vest

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II. Critical Trends Impacting Executive
Compensation
2. Companies are shifting from stock options to a
portfolio of equity vehicles.
The change prevalence of various equity vehicles
from 2004 - 2007
Source FW Cook Survey of Top 250 Companies,
2008
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II. Critical Trends Impacting Executive
Compensation
Comparison of Alternative Equity Vehicles A
Decision Criteria

• Maximizes gain opportunity
• Creates sense of ownership
• Rewards performance
• Retains individuals
• Attracts individuals
• Minimizes dilution
• Minimizes expenses
• Maximizes tax deduction for the company
• Minimizes tax liability to the individual
• East to understand and communicate

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II. Critical Trends Impacting Executive
Compensation
Comparison of Alternative Equity Vehicles A
Decision Criteria
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Case Study Illustration
The Decision to Move From Options to Both Options
and Restricted Stock An Illustration

• Background and Philosophy
• Young and growing firm in the alternative energy
  industry, publicly traded
  
• Strong philosophy that options are the vehicle of
  choice for executives because they are
  performance based but dilution was too high
  
• High run rate compared to industry
• Considerations
• Compensation committee suggested they were open
  to performance based restricted stock
  
• Performance based restricted stock, e.g., early
  vesting opportunity, were considered but not
  supported by the executives
  
• Our recommendation was a combination of stock
  options and time based restricted stock
  
• Actions Implemented
• Executives awarded options and restricted stock,
  non-executives awarded restricted stock
  

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Case Study Illustration
The Decision to Move to From Options to Both
Options and Restricted Stock An Illustration

• Convergence of objectives
• Minimize dilution
• Market competitive levels of LTI
• Performance based
• Growth company
• Assumptions 1 stock price, 40 gain at vesting

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II. Critical Trends Impacting Executive
Compensation
3. Equity/long-term incentive plans are becoming
more based on performance than time.

• As companies link more rewards to performance,
  what measures fit with the desired mechanism?
  
• Are the awards based on achieving pre-determined
  goals (i.e., absolute) or achieving better than
  the market or peer group set of companies (i.e.,
  relative)
• How does one calculate the Risk/Reward Ratio
  from performance based compensation plans? What
  is the value of time based stock option vs.
  performance based restricted stock?
• If the company does not meet its goals, what is
  the risk to retention? Performance may conflict
  with Retention.

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II. Critical Trends Impacting Executive
Compensation
Return Metrics
Financial Metrics
Strategic Goals
Source The Mercer 350 Report (2006) and
Wilson Group Survey on Variable Pay Trends and
Practices.
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Case Study Illustration
Linking Performance to Equity Vehicles

• Case Study A Performance based restricted stock
  units for a public company
  
• Performance Measures and Goals EPS and Return
  on Capital
  
• Vehicles Restricted Stock Units Awards
  are paid in stock
  
• Mechanism Target of shares x Achievement
  Percent
  
• Timeframe 3 years

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Case Study Illustration
Linking Performance to Equity Vehicles
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Case Study Illustration
Linking Performance to Equity Vehicles
Case Study B Equity Simulator Long term
incentive for a private company
Dollars
Net Gain Incentive Income
Years
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II. Critical Trends Impacting Executive
Compensation
4. Companies are changing the mix and the metrics
of total compensation.
Degree of Interdependency
Line of Sight Degree of Control
High
Low
Low
High
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II. Critical Trends Impacting Executive
Compensation
The Percent of Employees Groups Linked to
Performance of Different Units
Source Wilson Group Survey Report Changes in
Variable Pay Plans 2007 2008
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Case Study Illustration
Case Study New Executive Bonus Plan

• Requirements
• Payouts are determined by multiple measures.
• Corporate, Divisional, Business Unit, Individual
• Financial, Operational, Customer Focused and
  Strategic
  
• Measures needed to be weighted, because they
  dont have the same importance.
  
• Payout needs to be linked to the performance in
  all areas, not just one or two.
  
• Needs to provide a range of performance levels
  challenging but achievable.
  
• Needs to be simple to communicate and
  understand.
  

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Case Study Illustration
Case Study Multiple Measure Scorecard Bonus
Plans
Threshold
Target
Exceptional
Performance Measures
Score
50
75
125
Weight
100
150
Corporate Profitability -- Gross Margin
Performance
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10
12
15
20
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Business Unit Performance XYZ Division Profit Con
tribution
15M
18M
12M
40
20M
10M
Customer Metric -- Quality of Products and
Services (score)
95
99
85
80
20
90
Strategic Metric Revenues from new product lau
nch
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2.0M
2.25M
2. 5M
3.0M
4.0M
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II. Critical Trends Impacting Executive
Compensation

• Companies are replacing perquisites with wealth
  preservation and wealth accumulation plans.

• Employers are seeking ways to be more creative
  with the structure of a Total Compensation
  package for executives in light of increased
  scrutiny by shareholders, SEC, IRS and Congress.
• As employers evaluate their ROI on their annual
  compensation spend, they ask What programs can
  best improve ROI?
  
• As employers attempt to enhance their
  capabilities to attract and retain executive
  talent they ask What is most valued by our
  executives?
• Employers are asking What is the marketplace
  doing to attract and retain talent?

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II. Critical Trends Impacting Executive
Compensation
Executive Benefits in Group Plans
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II. Critical Trends Impacting Executive
Compensation
Advantages of Supplemental Retirement, Disability
Income, Life Insurance and/or a Long Term Care
Program

• Create Parity between executives and workforce at
  large.
  
• Reward and Retain Key Executive Talent
• Recognize executives value to the employer.
• Create competitive advantage when hiring
  executive talent.
  
• Reduce drain on accumulated wealth.

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II. Critical Trends Impacting Executive
Compensation
Supplemental Retirement Benefits

• Allows Executive to accumulate additional funds
  for retirement in addition to 401(k) plan.
  
• Benefit accumulates tax deferred.
• Employer can be highly selective in setting
  eligibility criteria.
  
• Funds can be accessed prior to Executives
  separation from employment.
  
• Plan can be designed with a vesting schedule for
  Employer contributions.
  
• Plan can be designed to provide investment fund
  line-up for Executive to determine appropriate
  asset allocation.
  
• Benefit can be paid out in lump sum or
  installments.

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Supplemental Disability Income
II. Critical Trends Impacting Executive
Compensation

• Enhances a group LTD program by filling the gap
  between target disability income and base
  disability benefit.
  
• A gap exists when group LTD
• Is employer paid - the benefit is taxable.
• Benefit has a monthly dollar limit - executives
  receive less than 60 replacement.
  
• Plan does not include bonus or commission.
• Reduced Participation Requirements and Premium
  Discounts.
  
• Evidence of insurability is not required.
• Discounts range from 20 to 25 vs. individual
  purchase.
  
• Plan is portable.

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Employer Sponsored - Taxation
II. Critical Trends Impacting Executive
Compensation

• Employer pays
• Premiums are tax deductible.
• Benefit is taxable to executive.
• If premium is imputed W-2, benefit is income
  tax-free.
  
• Employee pays
• Premiums are not tax-deductible.
• Benefit is income tax-free.

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Supplemental Disability Income
II. Critical Trends Impacting Executive
Compensation
2,000,000 estate at time of disability - Cost to
self-insure
Assumes disability continues to age 65
3 after tax rate of return coverage starts at
age 35 The benefit of 72,000 per year is paid fr
om age at disability to age 65
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Supplemental Disability Income - Example
Case Study Illustration

• .

Executive Age 51 Annual income 275,000 Base
and 100,000 Bonus Group monthly LTD plan covers
60 of compensation to a maximum of 10,000.
This benefit is taxable, and bonus income is not
covered. Actively Working Gross Monthly Inc
ome 22,917 Less 25 tax 5,729 Curre
nt Net Monthly Income 17,188
Annual Bonus Income 100,000 Annual Gross
Income 375,000 Annual Net Income 281,25
0
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Supplemental Disability Income Example (cont)
Case Study Illustration

• .

Sample Executive Becomes Totally Disabled
Gross Group LTD Monthly Disability Benefit 10,
000 Less 20 Tax 2,000 Net Group LTD Mo
nthly Disability Benefit 8,000
(this represents 43 of pre-disability take home
pay) Shortfall in monthly take home pay during
disability 9,188 Annual take home pay duri
ng disability 96,000 Shortfall in annual ta
ke home pay during disability 185,250
Recommendation for Supplemental Disability Cover
age 4,000/month Current Net Group LTD Monthly
Benefit 8,000 Proposed Net Monthly Supplement
al Coverage 4,000 TOTAL MONTHLY BENEFIT 1
2,000 This represents 70 of take home pay.
TOTAL MONTHLY COST for SUPPLEMENTAL BENEFIT 21
0
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Long Term Care Coverage
II. Critical Trends Impacting Executive
Compensation

• Income sources (e.g., social security, retirement
  plans (401(k) plans)) may not be adequate to
  cover daily income needs during retirement and
  fund the cost of long term care when needed.
• Enables an individual to preserve their assets
  and their choice of care.
  
• Provides a benefit for skilled, intermediate and
  custodial care received at home or in an adult
  day care center, nursing facility or assisted
  living facility.
• Plan benefit designs range from a 50 per day
  benefit to a 400 per day benefit.
  
• Available benefit periods range from 2 years to a
  lifetime benefit.
  
• Additional optional features include the ability
  to increase the monthly benefit to keep up with
  the cost of inflation.
  
• Premium is based on age at initial enrollment and
  does not increase annually.
  

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Long Term Care Coverage
II. Critical Trends Impacting Executive
Compensation

• Chance of needing long term care
• Over age 25 1 in 4.
• Over age 50 1 to 2.
• Cost of facility care up to 9,000 per month,
  with annual increases greater than inflation.
  
• Expected length of stay 3 years.
• Options For Payment of Long Term Care
• Medicare
• Medicaid
• Severe financial need
• The look-back period for all asset transfers made
  by Medicaid applicants has been extended from 3
  years to 5 years
  
• Self-Funding
• Long Term Care Insurance

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II. Critical Trends Impacting Executive
Compensation
Long Term Care Coverage

• Advantages of a Company Provided Program
• Each contract is individually owned and
  portable.
  
• Coverage may be offered with limited or no
  medical underwriting.
  
• Premium discounts are available.
• Discounts range from 5-10

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Employer Sponsorship Long Term Care Coverage
II. Critical Trends Impacting Executive
Compensation

• Employer pays
• Premiums are tax deductible.
• Benefits received are income tax free.
• Employee pays
• Premiums may be tax-deductible.
• Benefits received are income tax-free.

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Long Term Care Coverage
Case Study Illustration
2,000,000 Estate at time of initial coverage
Cost to self-insure
Age at LTC event 85 monthly benefit in 2008 -
9,000 3 year benefit period 3 after tax rate
of return
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Prevalence of Executive Benefits and Perquisites
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III. Open Q A and Discussion
Key Points to Remember

• Total Compensation Philosophy provides to
  framework to make key decisions.
  
• Business strategy and values
• Requirements and opportunities
• Purpose and structure of total compensation
  plans
  
• Create the right balance between time (retention)
  and performance.
  
• Short-term and long term
• Wealth accumulation and wealth protection
• Meaningful to the individual and important to the
  company
  
• 3. Develop the approach that best meets your
  specific requirements.
  
• Focuses people on the your companys strategy and
  their role in its performance
  
• Utilize an approach that enables each program to
  do what it does best
  
• Keep it simple but not simplistic

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And Now Time for More Questions
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A Thought To Remember
When you do common things in uncommon ways,
you command the attention of the world.

-- George Washington Carver
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THANK YOU!
Tom Wilson twilson_at_wilsongroup.com Susan Malan
owski smalanowski_at_wilsongroup.com 978-371-0476


John Mancuso john.mancuso_at_bosgroup.com 6
17-587-2339

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