Compensation Responses to teh Continuing Economic Uncertainty

1. Connell & Partners
2012 Fall Pulse Survey –
Compensation Responses
to the Continuing
Economic Uncertainty

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Introduction
The continuing weakness in the global economy as evidenced by the Q2 earnings season has resulted
in many companies missing revenue and earnings estimates and revising future estimates downward
for Q3 and in some cases for the remainder of the year. We will gain a better understanding of the
extent of the continuing challenges as Q3 earnings season kicks off in earnest. Recent news from
around the globe suggests that this weakness is anticipated for Q3 and at least into Q4.
In response to these challenges, our Pulse Survey endeavored to find out what, if anything, companies
might be doing from a compensation perspective in these uncertain times to ensure that their
employees remain engaged and incentivized to help their companies weather the economic storm.
We received responses from over 70 companies in various industries, sizes and stages. Some answers
allowed for multiple responses. The results are presented below:
Demographics
Responses generally reflect all industries, led by High-Tech, Software and/or Services (19.8%):
Energy
I n which industry does your company primarily operate?
Materials
1.2%
2.5% Commercial & Professional Services
Consumer Durables & Apparel (Retail)
1.2%
11.1% 7.4% 3.7% Consumer Services (Gaming,
3.7% Education)
2.5% Media
Healthcare Equipment & Services
2.5%
Pharmaceuticals, Biotechnology, Life
8.6% Sciences
Financial (Banking, Financial Services)
11.1% Insurance
Real Estate
19.8% 4.9% High-Tech (Hardware)
High-Tech (Software and/or Services)
High-Tech (Hard- and Software)
7.4% 4.9%
6.2% Telecommunications
1.2% Utilities

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Size ranges of respondents represented a diverse sample, as measured by employees and revenues:
Company Size - Employees
30%
25%
Percent of Respondents
20%
15%
10%
5%
0%
Less 100 - 500 - 1,000 - 3,000 - 5,000 - 10,000+
than 100 499 999 2,999 5,000 9,999
Number of Employees
Company Size - Revenues
30%
Percent of Respondents
25%
20%
15%
10%
5%
0%
Less $50M - $100M - $500M - $1.0B - $3.0B - $5.0B - $10B+ Do not
than $99M $499M $999M $2.9B $4.9B $9.9B know
$49M
Revenue Range

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Summary Results – Key Findings
Are Companies Responding?
Surprisingly, approximately 7% of companies indicated that the broader macro-economic challenges
are not impacting their organizations in a negative way, and therefore, they do not see a need to do
anything at this time. Some companies, however (16%), are beginning to enact near-term solutions to
try to proactively stay ahead of potential challenges to come. While for many companies (45%), it’s
still too early to tell, and they are taking a “wait and see” approach to determine whether they need to
respond to the challenges, and will continue to monitor the situation.
If So, What are Companies Doing in the Short-Term?
Of the responses that indicated that their companies are trying to address potential challenges now, 71%
of them (12 of 17) are making changes to their short-term incentive plan (35% re-setting goals, 24%
adjusting the slope of their payout curve, and 15% are guaranteeing some level of funding for payouts).
Many others (39%; 5 of 17)) are either implementing retention plans or making additional equity
awards to ensure their “critical” and “key” talent remain retained and engaged.
What Impact is the Uncertainty Having on Your Compensation Plans?
The economic impact could potentially have a significant impact on employee motivation and
engagement, as 50% of companies (36 of 72) believe that their bonus plans will payout at some level
below target. A little over one-third (36%; 26 of 72) believe that they will pay out at target and an
apparent fortunate minority (14%; 10 of 72) anticipate above-target payouts.
Consistent with the sentiment of the target and below respondents for short-term incentives, 10% (6 of
61) believe that their merit adjustment pools will be lower than last year, while two-thirds of
companies believe that their merit increase budgets will be the same. Fortunately for some companies,
23% (14 of 61) anticipate merit budgets will be higher than last year, suggesting that there may be a
light at the end of the tunnel, and that while this year may be challenging, there may be a brighter days
ahead.
Overall, most companies anticipate funding merit adjustments pools between 2.5% - 3.5%. Only
approximately 3% believe that they will NOT fund merit increases next year. The chart below
highlights the anticipated merit budgets:
Projected Merit Increase Budgets
50.0%
Percent of Companies
40.0%
30.0%
20.0%
10.0%
0.0%
2.0% 2.5% 3.0% 3.5% 4.0% 5.0%
Merit Increase Budget

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So, What Can Companies Do For the Future?
While the majority of companies are taking the “wait and see approach” for future compensation plan
design changes, some companies are either actually beginning to make changes for the longer-term or
considering changes in the near future. We found that companies are exploring a variety of ways
within their compensation programs and structures to try to address some of the challenges brought
about by the economic uncertainty:
Changes Actually Being Implemented or Contemplated Already Thinking About Doing
In the Near Future Doing In the Near Future
1. Increasing LTI award sizes to enhance retention 15% 17%
2. Adjusting the performance period in the annual
bonus plan to something shorter than annual
(e.g., quarterly, semi-annually) in order to allow
for shorter performance periods, better forecast 9% 14%
accuracy, and opportunity to re-set goals if
macro factors outside of Company control
impact performance
3. Shift from a goals-based, prospective plan to more of a
profit-sharing retrospective approach (e.g., profits
greater than 5% growth) to incentive plans to mitigate 7% 13%
the challenge of forecasting goals in an uncertain
environment
4. Adjusting the mix of equity vehicles offered (e.g.,
introducing restricted stock or RSUs, or performance
shares based on operational performance to redirect 23% 12%
some of the focus away from near-term stock price
swings)
5. Adding a discretionary component to bonus plans to
allow for facts and circumstances beyond formulaic
32% 10%
results to be considered in determining the final payouts
or funding
6. Incorporating a relative performance factor into
incentive plan performance assessments to alleviate the 19% 10%
uncertainty of setting internal goals
7. Making equity grants more than once per year to smooth
3% 3%
out stock price volatility

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Conclusion
In conclusion, while the future may continue to bring challenges, there are opportunities and
mechanisms from a compensation perspective to consider in trying to help keep your employees
engaged and motivated, which in turn, may help companies weather the economic storm.
Detailed Findings
I s y our Company making any changes to its current incentive plans (e.g.,
adjusting targets, making additional equity grants, implementing a retention
plan) to address t he broader economic uncertainty?
6.8% No, the broader economic
16.4% challenges are not impacting our
Company.
No, we will let our plans continue
as is.
31.5%
No, not now, but we will continue to
monitor and assess.
45.2%
Yes
N = 73

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A t what level do you currently expect your short-term incentive plan to f und?
1.4%
4.2% 4.2%
2.8%
8.3% Below the minimum to zero
13.9% At the minimum
Well below target
Somewhat below target
At target
Somewhat above target
36.1%
29.2% Well above target
At the maximum
N = 72
What are your plans for base salary increase budgets for 2013?
18.7%
Same % as last year.
Lower % than last year.
Higher % than last year.
18.7% 54.7%
We haven't decided yet.
8.0%
N = 75

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Has y our company thought about making future changes t o your s hort-
t erm incentive plan's performance period (e.g., less than a year,
quarterly, semi-annual)?
No, we haven't thought about it.
2. 8% 11. 3%
Yes, we thought about it but
decided against it.
8. 5%
Yes, we are already doing it.
11. 3%
66. 2% Yes, and we have decided to
implement the change next year.
Yes, we will think about doing it in
the future.
N = 71
Has y our company thought about allowing for discretionary payouts either
ins ide or outside of your existing incentive plans?
1.4% No, we haven't thought about it.
8.5%
Yes, we thought about it but
decided against it.
47.9% Yes, we are already doing it.
32.4%
Yes, and we have decided to
implement the change next year.
Yes, we will think about doing it in
9.9% the future.
N = 71

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Hav e you considered making equity awards more often than only once a year
(e. g., t o smooth out market volatility)?
3.2% 3.2%
No, we haven't thought about it.
17.7%
Yes, we thought about it but decided
against it.
Yes, we are already doing it.
75.8%
Yes, we will think about doing it in the
future.
N = 62
Hav e you considered adjusting the use or types of different equity vehicles in
y our long-term incentive plan (e.g., incorporating or adding more of a f ull-
v alue vehicle like RS/RSUs/Performance Shares)?
12.3% No, we haven't thought about it.
Yes, we thought about it but decided
against it.
23.1%
53.8%
Yes, we are already doing it.
10.8% Yes, we will think about doing it in the
future.
N = 65

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Hav e you considered incorporating a relative performance factor in any of
y our incentive plans to alleviate s ome of the challenges of s etting goals in an
unc ertain environment?
10.0% No, we haven't thought about it.
Yes, we thought about it but decided
18.6% against it.
57.1% Yes, we are already doing it.
14.3%
Yes, we will think about doing it in the
future.
N = 70
Hav e you considered shifting your plans from a prospective goals based
plan (pre-established goals determine funding) to more of a profit sharing
plan?
No, we haven't thought about it.
1.4% 11.3%
Yes, we thought about it but decided
against it.
7.0%
7.0% Yes, we are already doing it.
73.2% Yes, and we have decided to
implement the change next year.
Yes, we will think about doing it in the
future.
N = 71

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Hav e you considered increasing the size of LTI awards to enhance
ret ention?
No, we haven't thought about it.
16.9%
Yes, we thought about it but decided
against it.
15.4%
58.5% Yes, we are already doing it.
9.2%
Yes, we will think about doing it in the
future.
N = 71
Participants
The following chart illustrates those participants providing demographic information:
A123 Systems Egenera Ocean Spray
AIPSO EMC Optimization Group
Air Liquide EMD Millipore - Merck KgAa Optos
American Tower FM Global PartyLite Worldwide
American Water Gallagher Peoplefluent
Avid Goldman Philips
Benchmark Electronics GSI Group PTC
Black Duck Software Haemonetics RE/MAX
Bleck Design Group Hay Group Research Now
Blue Cross & Blue Shield of RI Hebrew SeniorLife RFMD
Bose Corporation Houghton Mifflin Harcourt Sapient Corporation
Boston Business Group Idenix Silicon Image
Boston Children's Hospital Kenexa Staples
Boston Red Sox Kitty Hawk Capital Sunovion Pharmaceuticals
Casa Systems Kronos The Carter Group
Charles River Laboratories Levitronix Technologies The Hanover Insurance Group
Choice Solutions MAPFRE Insurance Tufts Health Plan
Clean Harbors MathWorks Vistaprint
Comdel MCCA VivaKi
Covidien MITRE Waters Corporation
D&M Holdings Monster Worldwide Wright Express
Dana-Farber Cancer Institute NEI
Deluxe Corp Northeastern University
Draper Laboratory Nypro
Eastern Bank

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About Connell & Partners
Connell & Partners is a full-service executive compensation consulting firm, helping clients of all sizes
and industries, with an emphasis on high growth technologies and companies, to align their
compensation strategies to help drive the business. From benchmarking pay levels, to short- and long-
term incentive plan design, through transactions (IPO, M&A), and employing sound corporate
governance principles, we help our clients use compensation as a competitive advantage to attract,
retain, and reward their most critical assets.
Connell & Partners is an independently run division of Gallagher Benefit Services, which is a division
of Arthur J. Gallagher, a $2B publicly-traded company (NYSE:AJG).
About the Authors
Jack Connell
Jack is Founder and founder and Managing Director of Connell & Partners, Inc., an independently run
division of Gallagher Benefits Services (GBS), itself a division of Arthur J. Gallagher (NYSE:AJG).
Jack is a nationally recognized expert in executive compensation, incentive plan design (short-term and
long-term), linking pay and company performance, and total reward strategy development. He works
with organizations ranging from start-ups to Fortune 50 companies. He has worked on over 100 IPOs
over the course of his consulting career. He focuses on industries with intensive human capital needs,
including high technology and life sciences. He also has special expertise in mergers and acquisitions,
and turnarounds.
Jack has significant experience at both consulting firms and corporations, and brings both perspectives
to his work when advising clients. His consulting experience includes serving as Managing Director
and National High Technology and Life Science Practice Head for Pearl Meyer and Partners,
Managing Director and East Coast Practice Leader for iQuantic, Managing Director and National
Consulting Practice Leader of The Wilson Group, and President and Founder of Solutions at Work. His
corporate experience includes serving as Senior Vice President of Global HR for Geac Computer;
Senior Director of Compensation, Benefits, and HRIS at Avid Technology and Stratus Computer; and
various HR, and compensation and benefits roles at Digital Equipment Corporation and Data General
Corporation.
He earned a Bachelor's Degree in Economics from the University of Michigan and an MBA in
Organizational Behavior and Corporate Strategy from the University of Michigan Ross Graduate
School of Business. Jack has also been an adjunct professor at Bentley College and Babson College,
and an instructor for WorldatWork.
Jack has published more than 40 articles and book chapters, including articles in Forbes, WorldatWork
Journal, Chief Legal Executive, Mass High Tech, and Boston Business Journal. He has been quoted
extensively in such publications as The Wall Street Journal, Business Week, CFO Magazine/CFO.com,
Red Herring, USA Today, The San Jose Mercury News, Corporate Governance News, Employee
Benefits News, and Compliance Week. Jack speaks regularly at many national and regional
conferences.

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Justin Fossbender
Justin is a Principal Consultant for Connell & Partners. He is responsible for client delivery and
business development for the firm.
Justin brings a balanced perspective to clients, having both significant consulting and in-house,
corporate senior leadership experience. He has been responsible for client service, delivery and
business development on the executive compensation consulting side at Hewitt, now AonHewitt, Fred
Cook & Company, and Watson Wyatt (now Towers Watson). He has also led significant change
management initiatives through his leadership of the compensation, benefit, talent management and
HR technology functions as Vice President of Total Rewards at Millipore Corporation, a $1.7B
leading-edge Life Science Company, until Millipore’s acquisition by Merck, KGaA and then Senior
Director of Total Rewards, HRIS and Talent Management at VCE, The Virtual Computing
Environment Company, a joint venture between EMC, Cisco Systems and VMware, focused on cloud
computing.
Through Justin’s consulting and in-house leadership experience, he has provided strategic advice and
counsel to Senior Management and Boards of Directors across all aspects of the executive
compensation area, including compensation strategy and philosophy development, short- and long-
term incentive plan design, M&A, employment arrangements, retention plan design, communications,
and corporate governance.
Justin graduated from Columbia University with a Bachelor of Arts degree. He then obtained a Juris
Doctor degree from New York Law School. He is licensed to practice law in the state of New York.
David Dreyfus
David is a Managing Consultant for Connell & Partners. He is responsible for day to day project
management and quality control for many of our clients.
David began his career in the Business Analyst program at Capital One Financial Corp. He worked on
the Sales Strategy and Analysis team in the Point of Sale Finance Division in Framingham, MA. There
he designed and implemented the sales compensation plans. He also worked on the Workforce
Planning team at Vistaprint, N.V. in Lexington, MA, a publically traded e-commerce company.
David graduated from the Olin Business School at Washington University in St. Louis with a Bachelor
of Science in Business Administration. There he double-majored in Finance and Economics.
Contact Information
Jack Connell Justin Fossbender David Dreyfus
Managing Director Principal Consultant Managing Consultant
781.647.2739 781-496-3406 781.647.2722
jack_connell@ajg.com g justin_fossbender@ajg.com david_dreyfus@ajg.com
Visit our website at www.dolmatconnell.com.