This presentation provides a look at Performance-based Equity from three angles: Design, Legal issues (provided by Jennifer George at Orrick) and Administration concerns (provided by Paz Dizon of Gilead). The administrative concerns is especially interesting since Paz drills deep into some of the difficulties and how she handled them.

1. Design, Legal and Administration
Domestic and International Realities of Our Future
June 27, 2010

2. Paz Dizon, CEP
Associate Mgr, Stock Administration
Jennifer George
Partner
Dan Walter, CEP
President and CEO

3. Multi Trigger, Multi Measurement Period, Multiple Payout Levels
Three-year performance measurement period
Performance Metrics are: Relative TSR (Goal 1) and Revenue Growth (Goal 2)
Goal 1, Relative TSR (each year):
Threshold - 50th Percentile, Target - 75th Percentile, Maximum - 90th Percentile
Goal 2, Combined Score of Revenue and Cost Reduction (based on internal scoring system)
Year 1: Score 85, Target 87, Maximum 90
Year 2: Threshold 87, Target 90, Maximum 92
Year 3: Threshold 90, Target 92, Maximum 95
Goal 1 threshold must be met each year before Goal 2 performance is allowed to payout.
Payout is based on:
Threshold = 50%, Target = 100%, Maximum = 200%
50% of awarded units are subject to Goal 1, 50% of awarded units are subject to Goal 2
If Goal 2 performance is met in a year when Goal 1 threshold is not:
Earned Goal 2 units will be carried forward into future measurement periods and paid
out if Goal 1 is met in the future

4. Multi Trigger, Multi Measurement Period, Multiple Payout Levels – Continued
Dividend Equivalents are calculated when regular dividends are paid and converted into child
units which are paid out relative to earned units, if and when they vest
Retired Employees are paid out when:
Most recent measured performance as of retirement date
Actual term of service during the life of the award as a percentage of the total term of
the award
All unvested units are forfeited upon earlier of termination or end of performance
measurement period
Earned shares vest over three years, annually
Dividends in cash with no restrictions relative to vesting

5. Royal Dutch Shell – 2008 Annual Report
Long-Term Incentive Plan and Performance Share Plan
In July 2005, Royal Dutch Shell adopted an amended Long-term
Incentive Plan (LTIP). When awards are made under the LTIP other than
to the Executive Directors the plan is called the Performance Share Plan
(PSP). On the award date conditional awards are made of Royal Dutch
Shell shares. To date for the LTIP, the actual amount of shares that may
vest, which can be between 0 – 200% of the conditional award, depends
on the total shareholder return (TSR) of Royal Dutch Shell versus four of
its main competitors over a three-year performance period. For the PSP
awards made in 2005 and 2006, the extent to which the awards vest
depends on the TSR of Royal Dutch Shell compared with four of its main
competitors over a specific measurement period.

6. Royal Dutch Shell – 2008 Annual Report, continued
For the PSP awards made in 2007 onwards, the extent to which the
awards vest will be determined by two performance conditions. The
relative TSR measure over the measurement period will be used to
determine the vesting of half the award and the other half of the award
will be linked to the declared Business Performance Factor (Shell
scorecard results). For the shares granted in 2008, the measurement
period is three years from January 1, 2008 (for the shares granted in
2006 and 2007, the measurement period is three years from January 1,
2006 and January 1, 2007 respectively). Awards made in 2007 and
2008 under the LTIP and PSP to individuals employed in the Netherlands
at the time of the award will be cash-settled. None of the awards will
result in beneficial ownership until the shares are released.

7. !! 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

8. !! TSR – Total Shareholder return
!! Absolute – your company’s number
!! Relative – compared against peer group(s)
!! Financial Goals
!! Revenue
!! ROIC
!! EBITDA
!! Cost
!! Other
!! Risk
!! Staff Retention
!! Innovation / Product Development
!! HRIS
!! Performance Appraisal / Human Capital Management score
!! About a million others

9. !! As a stand-alone goal it may not
!! Provide line of sight to staff below C-Suite
!! Link corporate long-term success to plan
!! Pay evenly. Peer groups can differ widely, skewing results
!! Reflect risk or other factors in today’s payout
!! Companies are starting to combine it with other
metrics
!! Create a balance using Financial, HRIS and Project goals –
Total Compensation Intelligence™
!! Multiple Independent goals
!! Co-Dependent goals – Usually must meet TSR threshold to
be eligible for other goals

10. !! The National Association of Pension Funds (NAPF) and Association of British Insurers (ABI) have
issued guidelines on equity plans:
!! Share Schemes as Remuneration
!! …It is a fundamental requirement that exercise of executive share options should be
subject to some realistic measure of management performance. The difficulties of
prescribing one single measurement of long term sustained performance - which will be
regarded as appropriate for all situations - is recognised. It is generally acknowledged,
however, that linking the exercise of options to sustained underlying financial
performance is in the best interest of the company and long term investors. Such
linkage requires sustained results before any benefit can be taken by an option holder
and creates a community of interest between corporate management and the
shareholder.
!! It is expected that the rules of any executive scheme should include prudent limits
concerning the level of share option grant to any individual and concerning the timing or
phasing of such grants.
!! Although, by law, companies are permitted to issue executive options at a discount to
the share's market price in certain circumstances, companies should note that this is
viewed as undesirable.
!! summary: link to performance and have prudent limits

11. !! Remuneration Committee
!! Any company proposing a share scheme should note, therefore, that support
for the proposals is unlikely to be forthcoming unless the company has in
existence a properly constituted Remuneration Committee which has formal
responsibility for the scheme. Such a Committee will be fully aware of the
circumstances of the company in question and it follows that it should,
therefore, be in the best position to determine the most relevant and
effective performance criteria.
!! It is important that shareholders understand the basis on which the chosen
criteria have been set. Full details of the criteria which are felt appropriate
should, therefore, be disclosed both when the scheme is put forward for
approval by shareholders and annually thereafter.
!! summary: use effective performance criteria and explain the
basis of why they were used

12. !! Remuneration Committee, continued
!! The ABI and the NAPF are agreed that the aim of any formula should be to
produce significant and sustained improvement in the underlying financial
performance of the concern in question. Both will expect the formula to be
based, therefore, on criteria which genuinely reflect the effort and
achievement of the management in question.
!! Safeguards must be incorporated by the Remuneration Committee to ensure
that measures chosen are appropriate to the circumstances of the company
and are used consistently. Furthermore, they must not be capable of
manipulation nor must they be influenced by the particular accounting
treatment of various items.
!! summary: base formula on effort and achievement and
incorporate safeguards to prevent manipulation and influence
from accounting treatment

13. !! Outside the US, performance is the main foundation of share-
based compensation
!! 98% of FTSE 300 have performance share schemes
!! More than 80% of Australian companies have performance-
based share remuneration
!! Say on Pay is the biggest driver of these plans
!! The following countries have some version of Say on Pay rules
in place
!! UK, Australia, Sweden, Norway, Netherlands, Italy, Portugal, Spain,
Austria, Germany, Ireland, Croatia, Hungary, Poland, Denmark,
Finland, Estonia, Luxembourg, Switzerland, Belgium and more on
the way

14. All the same tax and legal issues as for non
performance awards plus
–!Additional labor law risk/considerations
and
–!Unique tax considerations
14

15. –!More involvement from local entity/employer if awards or
vesting of awards based on individual performance or
local entity performance
–!Performance is more easily tied to employment as
compared to broad-based grants with time-based vesting
15

16. Acquired rights/entitlements
—!employee may not have to forfeit award upon termination
—!may be more difficult to stop making grants in the future
More likely to be considered part of local compensation
especially if targets tied to individual performance
—!Termination/severance indemnities
—!local bonuses/benefit plans
—!Social insurance contributions due?
Work Councils?
16
Translations?

17. Taxable event may be an earlier date than expected if
after the performance period, the employee does not
have to do anything else to receive benefit, but benefit
is not paid until later (usually comes up for RSUs)
—!Comes up if want terminated employees to get portion of pay-out
—!Comes up if don’t require continued employment through pay-out/
settlement date
Don’t overlook tax qualified program availability –
could work for certain performance awards in some
countries
17

18. Australia: Be careful with new tax rules that will tax at
point in time where no longer a substantial risk of
forfeiture (even for options)
Canada: If RSUs can be settled in cash or shares and
the performance period and vesting period added
together is more than 3 years, tax may be due at grant
(deferred compensation rules)
Denmark: Performance conditions can help to defer
taxable event from grant for RSUs
18

19. Make sure that you obtain professional advice before
rolling out a performance award program
May need special documentation/acknowledgements
from employees beyond what using for time-based
awards
Don’t assume that tax favored treatment will/will not be
available for performance awards (e.g., France)
Be prepared to make changes to program design for non-
U.S. employees
19

20. !! Type of plan
!! PSUs for annual merit awards for VPs and above
!! PSUs with individual, non-market based performance
milestones for new hire VPs
!! Initially Rolled out
!! First PSUs issued in January 2007
!! Number of participants
!! 45 VPs and above are eligible

21. !! Goals, Metrics, Earning Period, Vesting Period and Payout
Period
!! 3-year performance period, vest and release is in March of
the year following the end of the 3rd year
!! Combination of 2 goals – (1) relative TSR (against Amex Bio
Pharma Index) and (2) Revenue Growth
!! 0% - 200%, based on matrix designed to arrive at a
combined attainment percentile level of the two goals

22. !! What can be automated and how?
!! Valuation of awards with one or more market-based
conditions will have to be derived or computed using a
custom lattice model or Monte Carlo simulation. These
models consider all possible outcomes or scenarios so that
these are baked into the grant-date fair value of the award
!! Once you have the valuation per share, some service
providers have developed modules to properly allocate and
amortize the expense over the expected service period
!! In prior years, tracking of expense associated with
performance shares has been entirely manual using excel,
and painstaking

24. !! What is manual and why?
!! What will always be manual is the monitoring of the
probability of achievement of goals that are non-market
based. Someone will have to periodically assess and
somehow build this into the expense accrual for these
awards to properly reflect the costs attributed to that
particular period

25. !! How is your job different than when you only had time-based
vesting?
!! Managing performance shares is quite different from managing
awards with time-based vesting – there’s a whole other dimension
to managing these types of awards
!! With time based vesting, you just need to make sure that these are
correctly entered into the database with the correct vesting dates,
valuation is simply fair market value on grant date x number of
shares, and shares are released at specific points in time, and
service periods are explicit so you now exactly over what period to
allocate expense
!! With performance shares, you have to understand and analyze the
goals associated with each tranche of shares in order to know how
to allocate the expense; you need to monitor probabilities if
valuation is not calculated using a lattice model or Monte Carlo
simulation; and achievement of milestones that trigger vesting
needs to be communicated timely to Stock Admin

26. !! How does interaction with other stakeholders differ from
basic time-based awards?
!! With time-based awards, we get the list approved by the comp committee,
we enter them in the system, prepare grant agreements, send out pre-
vesting communication, process releases and send tax info to Payroll, and
then send out confirmations – almost no interaction with stakeholders
!! With performance-based awards, we do all of the above, plus we have to
meet with HR and Legal prior to issuing the annual awards to discuss goals
and metrics, external counsel will draft new agreements specific to this
new batch of grants. Accounting and HR need to confirm the probability
of achievement for grants with performance milestones, and communicate
the same to Stock Admin. Stock Admin should receive prior notice when
the BOD is asked to approve achievement of milestones, and confirm with
Stock Admin once the BOD does confirm.
!! In managing performance shares all lines of communication have to be
open and information must flow to Stock Admin timely – time is of the
essence!

27. !! How is their job different?
!! Whereas Stock Admin used to be an “afterthought” in many
instances, it has become apparent that we need to be
included in the planning and preparation of board
resolutions
!! We learned this the hard way – there have been recent
instances when we didn’t know that there was a telephonic
BOD meeting where the attainment of personal milestones
was approved and PSUs should have vested, and they
“forgot” to tell us, so there was a big re-do of 10K
documents and payroll tax withholding statements

28. !! How is everything communicated?
!! Currently we have been doing everything by e-mail,
because we need to act long before Board minutes are
finalized.
!! What would make your life easier?
!! My life will be easier when we are able to have a seamless
path of communication, from number of shares approved
for grant by the board, confirmation from Legal or HR of
the goals and metrics, to the approval of the number of
shares vesting and lastly, any decisions regarding stock
should immediately be forwarded to Stock Admin

29. !! If Say on Pay doesn’t happen:
!! Slow march toward these plans. With 5 years 50-70% of
companies will have performance equity for C-suite
!! Some surveys suggest performance is already at these levels
!! A limited number of aggressive companies will continue to expand
performance programs broader populations
!! If Say on Pay happens:
!! Within 5 years nearly every public company will have
performance-based equity
!! Performance programs will evolve as companies work to remain
different that their competitors, especially in the Silicon Valley
!! Performance shares and units will become “normal” and
performance will start being added to other program types

30. !! RTSR/TSR has been used more than 10 years
outside the US.
!! Academic studies are already showing where and how it works and
where and how it fails
!! Multiple TSR peer groups are already happening at large
companies
!! Beyond RTSR
!! Companies will first expand financial metrics as goals
!! Already measured and reported
!! Already linked in company performance
!! Companies will move to Total Compensation Intelligence™ programs
!! Link of HRIS, Compensation and Financial Data into more complex and
dynamic goals
!! Reflection of the individual, group and company in long-term success

31. !! The Basics
!! Types of plans and awards
!! Who is working on this TODAY at your company
!! International
!! Which countries have a concentration of senior staff
!! Where in the world does performance equity make you
MORE competitive for desired talent
!! Administration
!! Limitations and Features of your Stock Admin system and
providers
!! Delivery schedule for new performance features and
specifics of those features

32. !! Stock Administrators become more strategic by determining
how to measure true effectiveness of plan
!! Link equity implementation, communication, vesting events and value to
past and future corporate performance
!! Understand what your participants truly understand about equity to better
plan for rolling out these more complex plans
!! Stock Administrators must learn the principles of
performance in the same we all had to learn the principles of
ownership
!! You may want to start with:
!! “Pay for Results”, by Mercer
!! “Pay without Performance” by Lucien Bebchuck and Jesse Fried

33. Paz Dizon, CEP
+1-650-522-5517
pdizon@gilead.com
Jennifer George
+1-415-773-5640
Jennifer.george@orrick.com
Dan Walter, CEP
+1-917-734-4649
dwalter@performenation.com