It' about Building Engagement by MERCER

1. HROD TALK:
Building Engagement through Long-term Incentive
June 6, 2013

2. 212 November 2015
Contents
 Concept and Trend
 Case Study: “Breaking the Limitation”

3. Objectives
• To understand how to pay for long-term performance
• To understand the issues and overall trends in long-term performance
pay plans

4. 412 November 2015
Long-term incentives
• Incentives applying to more than one year
Advantages
• Focuses on long-term performance
• Balances short-term decision making
• Can award true value creation
• Stimulates group performance
Disadvantages
• May be difficult to establish measures
• Complex programs can be hard to
understand
• Takes time to develop
• Outside factors may unduly influence
performance

5. Why Have a Long-Term Incentive?
• Retain key employees for the long-term
• Increase competitiveness of pay
• Link self interest to company interests (agency theory)
• Create sense of corporate identity
• Build sense of belonging
• Motivate to achieve corporate goals

6. 12/11/15
Long-Term Incentive program objectives
• Align with shareholder interests
• Align pay and performance/strategy
• Align LTI program cost and participant “currency value”
• Retain employees
• Be simple to administer and communicate
• Minimize share usage and equity overhang
• Maximize tax effectiveness (personal and corporate)
• Facilitate stock ownership
• Minimize accounting cost

7. 712 November 2015
Long Term Incentives
Real Equity
Cash
Stock Appreciation Rights
Restricted Shares
Performance Unit Plan/ Long
Term Cash Bonus
Phantom Shares / Value
Appreciation Plans
Stock Options
Performance Shares
Deferred Annual Bonus
Co Investment Plan
Stock Purchase Plans
Cash/ Stock Based Profit Sharing
Long-Term Incentive plans
Two Primary Categories

8. 812 November 2015
“underwater
”
“in-the-money”
Exercise price
Share price
Time
Share
price
Gain
“Exercise”“Grant
”
Share options and appreciation rights

9. 912 November 2015
Share price
Time
Share
price Gain
1. “deferred shares delivered (eg
meeting performance targets)”
2. “restrictions lifted”
3. “exercise performance rights /
phantom shares”
“Grant”
Never “underwater”,
always “in-the-money”
Gain
Deferred shares, restricted shares, performance rights and phantom
shares

10. Snapshot on Global Compensation Practices
Early 1990s
• Quick hit compensation
• Over-emphasis on
options
• Shorter vesting periods
• Cash-less exercises
• Lower ownership
Early 1990s
• Quick hit compensation
• Over-emphasis on
options
• Shorter vesting periods
• Cash-less exercises
• Lower ownership
1980s
• Career-based
compensation
• Less emphasis on
variable pay
• Options a minor pay
component
• Pay increase linked to
performance appraisals
1980s
• Career-based
compensation
• Less emphasis on
variable pay
• Options a minor pay
component
• Pay increase linked to
performance appraisals
• Wealth accumulation
• Short-, Mid- and Long-
Term Plans
• Layered retention
“hooks”
• Ownership culture
• Less dependence on
option plans
• Need to reestablish
career-based
compensation
• Wealth accumulation
• Short-, Mid- and Long-
Term Plans
• Layered retention
“hooks”
• Ownership culture
• Less dependence on
option plans
• Need to reestablish
career-based
compensation
Late 1990s-Today

11. CEO’s LTI Compensation Mix
Source: Mercer 350 Report, Mercer/Wall Street Journal Studies
2002 2005
12%
12%
76%
52%
27%
21%
2002 2005
12%
12%
76%
52%
27%
21%
Stock Options
Restricted Stock/Cash
Performance Awards
CEO average mix of long-term incentives*

12. LTI Trend in Countries with Market-based Financial Systems
Percent of Companies Offering Various Long-Term Incentives
Revenue
Long-Term Incentives
Up To
$5M
$5M to
$20M
$20M to
$75M
$75M to
$300M
$75M to
$300M
$300M to
$1B
Over $1B
Restricted Stock Plans 4.4% 3.5% 6.9% 6.8% 6.8% 20.3% 30.8%
Incentive Stock Options Non-
Qualified
10.7% 6.5% 5.0% 9.0% 9.0% 13.8% 33.0%
Incentive Stock Options
Qualified
6.6% 3.8% 6.3% 11.7% 11.7% 13.3% 17.3%
Performance Share Plans 19.1% 4.9% 5.7% 8.4% 8.4% 12.2% 15.3%
Performance Unit Plans 1.1% 4.4% 8.6% 6.6% 6.6% 10.7% 19.1%
Phantom Stock 6.9% 4.1% 3.6% 3.9% 3.9% 3.5% 2.0%
Stock Appreciation Rights 8.6% 0.8% 4.4% 2.9% 2.9% 4.6% 2.6%
Other 3.5% 3.3% 2.4% 4.1% 4.1% 3.7% 4.8%
None Offered 6.9% 75.5% 70.9% 58.4% 58.4% 52.0% 26.2%

13. 1312 November 2015
How does company context help drive LTI design?
• Cash / share affordability
• Ability to set financial goals
• Clear set of competitors / peer group
• Desire to improve results versus the
market / peers
• Stock volatility
• Executive stock ownership levels
and intent
• Company growth expectations
• Business cycle stage
• Homogeneity of business units
• Shareholder return drivers (eg stock
price or dividends)
• Shareholder value creation drivers
(eg Earnings, Multiple, Strategy,
M&A, industry factors, commodity
prices, currency exchange rates)
• Executive risk / reward profile
• Executive turnover risk

14. Common Restrictions
• Continued employment
• Time limit before exercised
• Financial performance required
– Increase in share price
– Return on asset / equity

15. 1512 November 2015
What approach will be used to set performance standards?
DisadvantagesAdvantagesApproach
Budget Commits management to May bias the budgeting process,
achieving budgets requires history
Budget Commits management to May bias the budgeting process,
achieving budgets requires history
Milestone Focus on critical objectives, Undermines budget process
Do not need complex
measurement systems
Milestone Focus on critical objectives, Undermines budget process
Do not need complex
measurement systems
Historical Based on actual results Assumes past is predictive of
future
Historical Based on actual results Assumes past is predictive of
future
Relative to peer Implicitly recognizes May generate rewards when
group changing business conditions entire industry suffers
Relative to peer Implicitly recognizes May generate rewards when
group changing business conditions entire industry suffers
Improvement on Simple, avoids need to set Doesn’t recognize changing
prior year budget business conditions
Improvement on Simple, avoids need to set Doesn’t recognize changing
prior year budget business conditions
Share ratio Simple, easy to demonstrate Doesn’t recognize changing
economic proof business conditions
Share ratio Simple, easy to demonstrate Doesn’t recognize changing
economic proof business conditions
Performance measures
Standards/goals ensure the plan provides the desired impact

16. 1612 November 2015
Key Considerations
• Tensions created by company share price decreases and exchange rate
fluctuations
• Competitor groups
– Being competitive to comparable MNCs’ practices in the market
– Being competitive to local company practice
• Pay mix
– Is the global pay mix able to drive the desired behaviours in Asia given the
cultural difference?
• Availability of reliable market Pay and LTI data
– Peer group
– Valuation issues
• Governance, administration and communication issues
– Centralised vs. Decentralised
• Internal relativities

17. 1712 November 2015
Emerging Trends
• Reduction in stock option plans
• Replacement of share option plans with performance based share and
restricted stock plans
• Increased use of concrete performance measures
• More emphasis on cash plans but with deferred terms (long term) linking
to performance
• Narrowing eligibility
• Replacement of all-employee option plans
• Increased interest in tax-effective vehicles
• Greater pressure for disclosure
• Executives to share down-side risk
• Consider when a potential payment will be “too much”

18. 1812 November 2015
Communication and Administration
• Incentive plans are only as good as the participants’ level of
understanding
• Progressive organizations are involving several key executives in the
design of incentive plans
– Fosters awareness and buy-in early in the process
• Plan administration is closely tied to communication
– Simplicity is key

19. 1912 November 2015
Contents
 Concept and Trend
 Case Study: “Breaking the Limitation”