This presentation covers the realities of performance-0based equity in the Silicon Valley. Presenters includes professionals from Intel, eBay, Applied Materials and Performensation. Learn about the foundation and details of adding performance to equity compensation plans.

1. Performance-based Equity Understanding to newest “new” thing in the Total Rewards Portfolio

2. Presenters Brit Wittman Director, Exec Comp and Corporate Comp Design Intel Steve Lensing Sr. Manager, Equity and Executive Compensation eBay Dan Walter, CEP President and CEO (917) 734-4649 dwalter@performensation.com

3. What is meant by “performance-based equity”? Award is given for meeting goals Vesting is accelerated for meeting goals Vesting occurs after a period of time AND goals are met Vesting occurs ONLY when goals are met Shares are earned, but not vested, when goals are met Payout may be separate from earning and vesting

4. Why do companies implement performance-based equity? Performance was always the stated “reason” for offering equity “We want people to share in the success and growth of the company” NOTE: Very little mention of failure and demise of the company External optics (Glass Lewis, RMG) Practice at peer companies Is performance simply stock price (total Shareholder Return)? When does stock price no longer provide a reasonable link to pay?

5. The Equity Compensation Dilemma 1988-1999 the “No Lose” zone (and the period of the greatest growth in the use and value of equity compensation plans)

7. Risk

8. Staff Retention

9. Innovation / Product Development

10. HRIS

11. Performance Appraisal / Human Capital Management score

13. Provide line of sight to staff below C-Suite

14. Link corporate long-term success to plan

15. Pay evenly. Peer groups can differ widely, skewing results

16. Reflect risk or other factors in today’s payout

17. Companies are starting to combine it with other metrics

18. Create a balance using Financial, HRIS and Project goals – Total Compensation Intelligence™

19. Multiple Independent goals

20. Co-dependent goals – Generally must meet TSR threshold to be eligible for other goalsRelative TSR is King for now, but…

21. Profits / Revenues – without a balance to costs and/or risk these can provide unsustainable performance and even allow gaming the system Individual Goals – Can pay without corporate performance Companies generally over-leverage the upside and minimize the downside. All carrot, no stick means staff can just go for homeruns, without trying to win the game Single metric without a balancing component can result in unexpected results (and possible media headlines) Are there any pitfalls for using specific types of performance metrics?

22. What do performance equity plan structures look like? Most common US structure is Performance Unit award with a three-year measurement period Relative TSR against a peer group Minimum payout set at a level that shows effort Target payout set at a slight stretch goal Maximum Payout set at a significant stretch goal Smaller companies often use shorter measurement periods Some companies allow for “forgiveness” of missed goals (Frowned upon by RMG) Outside the US there is more use of multiple layered goals

23. CEO and executive management Scientists, key Individual Performers Individuals with long-term project deliverables Outside the US it is not uncommon for these to go below the mid-level of and organization Who receives performance-based equity?

24. Between 35% and 60% of companies offer performance equity These numbers have been very volatile Some sources show this percentage decreasing (PWC, FW Cook) Some sources show this number increasing (Equilar, Mercer) Common in Finance and Life Science, growing use in Tech Many companies are pushing these plans down in the organization Microsoft – Top 1,200 HP – Approx. 30,000? Used at both large and small companies Who awards performance-based equity?

25. Communication and engagement with goals and awards Best practices for communicating performance-based equity? “Communication is the key to a successful program” – Allison McBride, International Paper Educate participants on how the goals drive corporate success and why they apply to the individual Communicate often, consistently and with enough detail for individuals to understand how they are linked to the movement of the underlying metrics Do employees like receiving performance-based equity? Results are mixed When alignment and line-of sight are correctly positioned and the individuals can see their role plans seem to be positively received When performance is low, the result can be similar to impact of underwater stock options For lower level staff minimums may need to be structured to ensure some value even when performance is not great

26. What should my company consider before implementing performance-based stock? Looking at the payout curve, performance levels versus payouts Alignment with the employee’s total compensation Improperly designed programs can have the same over-leveraged results as stock options Too little leverage provides no motivation to out-perform Too steep a curve can create risk-adverse staff “A share in my hand is worth five potential shares that may be lost if I miss my goal” Alignment of performance metrics to key company goals One or multiple metrics Payouts levels vs. company performance Alignment of payout with Shareholder return and market peers Are you willing to “stick to your guns” if goals are missed?

27. What should my company consider before implementing performance-based stock? Disclosure: CD&A must include metrics and reasons why they were used Tax implications Less predictable income planning BUT Better income deferral potential under 409A Administration Data Integration Financial Reporting Transaction Support Impact on CIC provisions and clawbacks Accounting impact is more complex than time-base equity Market-based awards have a fixed expense, but you cannot reverse it if goals are not met Performance-based goals (not based on stock price) require determining the probability of goals achievement and adjusting expense accordingly

28. Performance Based Equity at Intel Eligible: Management Committee Members (20 employees) Equity mix: 66% “OSUs” (performance RSUs) / 11% RSUs / 22% Options 3-year Performance Period; overlapping cycles Performance Measures Relative TSR over performance period – median TSR of 15 direct competitors (the “Tech 15”) averaged with median TSR for the S&P 100 Payout Range Floor of 33% Maximum of 200% More highly leveraged above target than below (2 down; 3 up) 3-year Vest 100% vested and paid out at end of 3-year performance cycle

29. Eligible: SVPs and above (18 employees) Equity mix: 50% Options / 25% RSUs / 25% Performance RSUs 2-year Performance Period 2009-2010 and 2010-2011 periods were “decoupled” into two consecutive 12-month targets Performance Measures FX-neutral revenue threshold Non-GAPP operating margin Both minimum FX-neutral revenue and non-GAAP operating margin thresholds must be met in order of there to be any incentive payout Return on invested capital 2-year Vest 50% of the amount awarded is immediately vested upon grant and 50% will vest on the first anniversary of the grant Performance Based Equity at eBay

30. Outside the US, performance is becoming the main foundation of share-based compensation 98% of FTSE 300 have performance share schemes More than 90% of Australian companies have performance-based share remuneration Say on Pay is the biggest driver of these plans Countries with some version of Say on Pay rules: UK, Australia, Sweden, Norway, Netherlands, Italy, Portugal, Spain, Austria, Germany, Ireland, Croatia, Hungary, Poland, Denmark, Finland, Estonia, Luxembourg, Switzerland, and Belgium What is happening in the ROW?

31. What can we expect in the future? Say on Pay will become a reality Use of performance-based equity will grow first in the C-suite and then push quickly down into upper and middle management US plan designs will quickly catch up with ROW plan designs PREDICTION – Silicon Valley will embrace these plans as a best-practice and innovate them just as they did stock options. Performance plans provide a similar upside and downside risk that is better structured for our current volatile market