Don't Ask How How High, Always Go the Limit - Performance-based Equity

Don’t Ask How High,!
Always Go the Limit! "

Performance-based plans are here to stay. "
Learn how to implement, manage and
communicate these plans in the real world."

Presenters"
Peter Djokovich - Strategix 20/20!
Pdjokovich@strategixperformance.com"
801-363-7267"
Karen Needham, ISP Advisors!
Karen.needham@ispadvisors.com"
603-887-7650"
Dan Walter, Performensation!
dwalter@performensation.com"
917-734-4649"

Overview"
•! Performance-based plans are no longer only for the Top
5 executives. "
•! Even before the crash of the market companies were
increasingly turning to performance shares and units,
premium-priced options and other pay-for-performance
models to help drive corporate performance and justify
better than average compensation. "
•! The market downturn has added a new push for these
types of programs and equity compensation
professionals will be asked to do more than ever before."

“If you can measure that of which you speak and can
express it by a number, you know something of your
subject; but if you cannot measure it, your knowledge is
meager and unsatisfactory."
~LORD KELVIN

Or, in today’s vernacular

"What gets measured , gets done ."
~TOM PETERS

Does Paying for Performance Work?"
•! Performance works when goals are:"
–! Relevant"
–! Understood"
–! Objective"
•! Redeﬁning “performance”"
–! Too often based on luck, not science"
–! Imprecise and clumsy goals can work too well or not at
all"
•! Performance programs should drive goals, before
rewarding them"
–! Results-only goals can lead to manipulation or failure"

Long-Term Success

TSR EPS Share Price

Dividends

Market Conditions Debt Control

Revenue Growth Tax Management

EBITDA Risk Profile
Cost Reduction
Legacy Client Growth Customer Satisfaction

New Products
New Clients

Mission
Strategy Culture

Designing and Shaping Your Plan"
•! How to shape a plan"
–! Successful performance programs are about details and
nuances"
–! You must understand your data and direction"
–! KPIs, metrics and measurements"
–! Internal struggles during plan creation"
•! Motivation factors"
•! Administrative Simplicity"
•! Performance drivers versus performance results"
•! Absolute, Almost and Never"
•! Engagement Factors"
•! What Versus How"

11 types of performance-based equity"
1.! Performance Awarded Shares"
2.! Performance Awarded Units"
3.! Performance Leveraged Units"
4.! Performance Earned Units"
5.! Performance Accelerated Units"
6.! Performance Priced Units"
7.! Indexed Options"
8.! Performance Granted Options"
9.! Performance Accelerated Options"
10.!Premium Priced Options"
11.!Performance Earned Options"

Common KPI for Equity"
•! Relative TSR"
•! Revenue Growth"
•! Operating Income"
•! Share Price"
•! Net Income"
•! EBITDA - (Earnings Before Interest, Taxes, Depreciation and Amortization)"
•! EBIT (Earnings Before Interest and Taxes) "
•! Turnover/Retention"
•! Reduced Expense (usually for large companies)"
•! ROI (Return on Investment) (usually for small companies)"
•! Reduced Risk Proﬁle (recent addition to the mix)"
•! Other "
–! reserve of outstanding inventory"
–! customer satisfaction rating"
–! project delivery "
–! annual review score"

Historic Pitfalls and Issues"
•! Too many metrics, too complex"
•! Multiple year metrics in non-mature or
unpredictable companies"
•! “Guaranteed” metrics in mature, predictable
companies"
•! Acquisitions or divestitures (internal and peers)"
•! Variable Accounting"
•! Limited Administration, Communication and
Reporting tools"
•! Poorly communicated and understood,
(especially in the period between award and
measurement date)"

Ways to “Game the Plan”"
•! Sand bag numbers for easy targets"
•! Make award subject to Board approval"
•! Reset targets if necessary"
•! Forgive missed goals and allow for re-
measurement"
•! Set metrics off industry standards instead of
company-speciﬁc goals"

So, you just got a new plan, what now?"
•! Support via your stock administration software
or provider"
•! Handling the stuff that just doesn’t ﬁt anywhere"
•! Creating a list of priorities"
–! Do immediately"
–! Get it done soon"
–! Get it done someday"
–! Nice to have, but is it realistic?"

Communicate before, during and after"
•! How to summarize complex progress and results"
•! What to say and what NOT to say"
•! How to communicate bad news"
•! Dealing with over-performance (or poorly
structured plans)"

Managing Performance"
•! Understand your KPI"
–! How were they chosen?"
–! What are the underlying components?"
–! How does a participant impact them?"
–! How does the market impact them?"
•! Know where you stand"
–! Communicate interim performance regularly"
–! Show trending and historical comparisons"
–! Communicate what need to be done, rather than just
what has been done"
•! Focus on percentages and measurement levels
rather than payout amounts"
•! Use performance programs as the foundation for
communication, instead of an afterthought"

The Administrative Conundrum"
•! Processes"
–! How to ﬁt new features and manual processes into
Sarbanes-Oxley approved processes"
•! Responsibility"
–! Who is responsible for each piece? Checks an balances.
From beginning to end"
•! Accountability"
–! Who can be held accountable if it goes wrong?"
•! Plan Evolution"
–! Tomorrows plan design in today’s systems"
–! How to augment the familiar with the unusual"

The Impact of Performance on Admin"
•! Requires systems to be more nimble and flexible"
–! Lack of fixed dates, fixed prices and fixed numbers of
shares significantly increases system complexity"
•! Accounting"
–! Systems are catching up to the most common plan
designs"
•! Valuation"
–! Market-based goals require more complex valuation
that can be automatically offered by software"
–! Additional cost and timing of using valuation
professionals as frequently as every quarter"

External Parties"
Shareholders"

Transfer Agents" Tax Authorities"

Third-party Accounting
Administrators" Regulators"

External
Stock Exchanges"
Auditors"

Compensation Stock Plan Valuation
Consultants" Administration" Specialists"

Case Study - Plan in Action"
•! Creating the Plan"
•! Roll-out and Implementation"
•! Choosing an administrative solution"
•! On-going management reporting"

Plan Design in the Real World"
•! Data Analysis"
•! Plan Goals"
•! KPI Selection"
•! Equity Instrument"
•! Measurement Creation"
•! Plan Structure"
•! Review by External and Internal Stakeholders"
•! Plan Documentation"
•! Approval"
•! Roll-out and Implementation"
* Note this entire process can take 1- 2 years!

Working with other stakeholders."
•! Accounting Issues"
•! Why the CFO is a believer"
•! How HR can utilize a well-managed program for
other purposes"
•! Legal"
•! Executive Management"
•! Auditors"

The Future of Performance Equity "
•! Design trends and possible future directions"
–! March 2009 - Mercer data: 48% of Large and Mid-sized
companies offer a mix of equity that includes some form
of performance"
–! April 2009 - Grant Thornton: 40% of companies plan on
implementing performance equity in 2009"
•! Where are systems today and where are they
headed?"
–! Current stock admin focus is getting accounting correct"
–! Linked tools for tracking, managing and communicating"
•! Is this just another fad, or will we doing this 10
years from now?"
–! The has been very little moving backward in the history
of equity compensation (unless driven by changes in
regulations)"

Conclusion"
•! Performance-based equity is the current wave of
evolution in equity compensation"

•! Your plan must be as unique as your company,
but still be comparable to your peers"

•! Strong communication is a basic requirement
rather than a “value-added” feature"

•! Administration and accounting systems are
improving and even the most complex plans can
be handled well"

A Few Resources"
•! www.performancemanager.com!

•! www.equitycompensationexperts.groupsite.com!

•! www.performensation.com!

•! www.RelativeTSR.com!

•! Pay for Results"
–! Mercer, 2009"

•! Pay Without Performance!
–! Bebchuk and Fried, 2004"

Contact any of the presenters for more information"

Don't Ask How How High, Always Go the Limit - Performance-based Equity

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Don't Ask How How High, Always Go the Limit - Performance-based Equity