What companies are doing, what they should be doing, and what they may want to stop doing This presentation discusses the influences, issues and trends for equity compensation as of August 2011

1. Hot Trends in
Equity Compensation
Grant and Award Practices
What companies are doing,
what they should be doing,
and what they may want to stop doing
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2. DAN WALTER, CEP
Dan Walter CEP, is the President of Performensation
(www.performensation.com). For more than 15 years, Dan has assisted
companies with equity and performance-based compensation issues. Dan
has extensive experience with both executive and broad-based programs. A
unique focus is the design and management of performance share and units.
Dan provides end-to-end solutions for private and public companies based in
both the United States and abroad. Dan is a popular speaker on topics
involving equity compensation and success growth. His extensive work with
both very small and very large companies provides his clients with a unique
perspective. He creates effective, company-specific solutions paired with
post-consultation support. Dan’s expertise includes diagnosis of issues, plan
design, communication, administration and reporting solutions.

3. The Winds of Change
Changing Faster Than Some Can Handle
• ISS and Glass Lewis Policies
• Say on Pay (and SOP Frequency)
• Academic Research
• Media Scrutiny
• Activist Shareholders
• Political Capital
• Underwater options (exchanged or not)
• Lions and Bulls and Bears ...Oh My!

4. Corporate Governance
• Influence of ISS and Glass-Lewis influence has
continued to grow
• Average CD&A has grown from about 20 pages to
approximately 30
• Linking pay to performance consistently
mentioned as a key goal for both proxy advisors
and boards
• Executive compensation now synonymous with
equity compensation

5. What Does ISS Want?
• Always recommends annual vote for Say on Pay
Frequency
• Negative Say on Pay recommendation if:
• Perception that CEO compensation is not
aligned with corporate performance
• Board has not been willing to discuss
compensation with ISS
• History of Problematic Pay Practices

6. Shoot-out at the Triple P!
Beware of Problematic Pay Practices
• Any new or extended CEO contract
that includes:
• Excise tax gross-up for CIC
payments
• Single or Modified trigger CIC
payments
• CIC payments >3 times current
base and bonus
• Excessive perqs or tax gross-ups
• Ability to reprice/exchange
underwater options without
shareholder approval The Good, the Bad and the Ugly

7. ISS Writes a New Rulebook
You’re Doing it Wrong If...
• CIC definition is deemed too • The total cost of equity plans
liberal is deemed unreasonable
• The company has a history of • Three year burn rate, exceeds
the “Triple P” and the equity defined limitations. Currently:
plan was in same way
involved. • 2% of the mean plus 1
standard deviation of the
• There is a disconnect between company’s industry group
company performance and
CEO Pay and at least 50% of • But, no more than 2
percentage points (+/-)
year-over-year increase in in
from the PY industry group
equity compensation
cap

8. Say on Pay
More than Many Planned for
• About 2% of companies
had failed SOP votes
• Multiple lawsuits filed on
behalf of shareholders
• Not a “check the box”
process
• Several companies have
modified equity programs
prior to final vote
Courtesy Ed Hauder: www.say-on-pay.com

9. Say on Pay
Concede, Correct or Fight?
• Eliminated tax gross-ups
• Disney
• Added/modified performance for equity
• Alcoa
• GE
• Lockheed Martin
• Filed additional info, new communications
• Tyco International
• Conoco Phillips
• Pfizer / Johnson & Johnson

10. Academic Research
More Volume, Less Conclusions
• Optimal Contracts or Managerial Power? • Manipulation and Equity-Based Compensation
Evidence on the Impact of CEO Compensation on American Economic Review, Vol. 98, No. 2, pp.
Bank Risk in Europe 285-90, 2008
Andre Uhde and Payam Elahi Lin Peng and Ailsa Röell
University of Bochum and University of Bochum Zicklin School of Business, Baruch College / CUNY
Date Posted: May 30, 2011 and Columbia University, School of International
and Public Affairs
• Share Repurchases, Equity Issuances, and the
Date Posted: April 24, 2011
Optimal Design of Executive Pay
Texas Law Review, Vol. 89, No. 5, p. 1113, 2011 • Seven Myths of Corporate Governance
Jesse M. Fried Rock Center for Corporate Governance at Stanford
Harvard Law School University of California, University Closer Look Series: Topics, Issues and
Berkeley - School of Law Controversies in Corporate Governance No.
Date Posted: May 20, 2011 CGRP-16
David F. Larcker and Brian Tayan
• The Valuation Differences between Stock Option
Stanford University - Graduate School of Business
and Restricted Stock Grants for US Firms
and Stanford University - Graduate School of
Journal of Business Finance & Accounting, Vol. 38,
Business
Nos. 3/4, pp. 395-412, 2011
Date Posted: June 2, 2011
James H. Irving , Wayne R. Landsman and Bradley
P. Lindsey • Optimal Contracts or Managerial Power?
College of William and Mary - Mason School of Evidence on the Impact of CEO Compensation on
Business , University of North Carolina (UNC) at Bank Risk in Europe
Chapel Hill - Accounting Area and College of Andre Uhde and Payam Elahi
William and Mary University of Bochum and University of Bochum
Date Posted: May 11, 2011 Date Posted: May 30, 2011

11. Equity Compensation Mix
Percentage of Shares Awarded
100%
27% 31% 35% 90%
• This and the preceding 80%
charts clearly show the 70%
miscommunication
60%
regarding the growth of
50%
full value equity usage
40%
73%
• All of the growth full 69%
65% 30%
value equity 20%
compensation can be 10%
attributed to the 0%
2007
growing use of 2008
2009
performance equity
Stock Options Restricted / Performance

12. Equity Compensation Mix
Values
100%
• CEO Stock Options 90%
37% 41% 80%
• 44% in 2008 40% 43% 49% 48%
70%
• 34% on 2010 60%
16%
• CEO Restricted Equity 22%
17% 20% 50%
17% 20% 40%
• 16% in 2008
30%
44%
• 17% in 2010 41% 39% 39% 20%
34%
31% 10%
• CEO Performance Awards
2008 CEO 2008 CFO 0%
2009 CEO
• 40% in 2008 2009 CFO 2010 CEO
2010 CFO
• 49% in 2010 Stock Options Restricted Performance

13. Any equity instrument can
be blended with others

14. WILL ITblend?
will it BLEND?

15. The Indomitable Stock Option
Stock Options Are Here To Stay
• Nearly all S&P 1500 companies still have stock options
(approximately 98% have outstanding options)
• Lately they just use LESS of them
• Outstanding Options were about 35% lower in 2010 as compared
to 2004
• Less companies are granting options and many grants are
several year old. We will see a continued drop-off in outstanding
options as a percentage of total outstanding equity awards.

16. Stock Options
Less shares, more value
• The percentage of companies granting options dropped from 2004
to 2010
BUT
• The value being granted dropped from 2004-2007, then rose back
to 2005 levels by 2009!

17. Stock Options
It’s good at the top
• In 2004 NEO’s received one out of every five stock option shares
granted
• In 2010 NEO’s received one out of every THREE stock options
shares granted
• 2009 median NEO stock option value was at its highest point
since prior to 2004

18. Time-Based Full Value Awards
Restricted Shares and Units
• In many industries a higher percentage of companies use
restricted awards than stock options!
• Overall growth in the use of time-based restricted equity has
leveled off
• Programs have generally remained linked to three-year vesting
scheduled with annual vesting events
• Most plans are RSUs due to more simplicity their use globally
• We will probably see a small surge of Restricted Stock Shares as
IPOs pickup, then a drop-off shortly after

19. Performance Equity Awards
High Growth Instruments!
• Recent surveys claim
50%-80% of companies
use performance awards
• Surveys are at least 8-12
months behind reality
• Most live polls show the
percentage of companies
who use equity and
incorporate performance
goals to be 75-85%

20. Performance Equity Awards
Common Performance Metrics
• Revenue
• EPS
• Operating Income
• ROIC
• Cash Flow
• Profit Margin

21. Performance Equity Awards
Common Market-based Metrics
• Total Shareholder Return (TSR)
• Relative-TSR - 88% of companies
• Absolute-TSR - 12% of companies
• Indexed Stock Price

22. Performance Equity Awards
• Performance-based Stock Options: Trend or Fad?
• Several companies have added performance criteria to
outstanding options in response to ISS or Glass Lewis
comments
• Example GE added performance to Jeffrey Immelt’s
2010 stock options (linked to cash flow and stock
performance) after a negative recommendation
during the recent proxy season.
• Opinion: FAD!

23. High-Level Issues
• Bow to the pressure and modify the obvious
• A struggle to balance poor predictability for defined metrics
against growing cry against goals discretion
• Clean-up the last few options while there may still be time
• Performance, Performance, Performance
• In many cases executive values are now above pre-recession
levels
• In nearly every case broad-based values still trail pre-recession
levels
• Some increased interest in IRC 423 ESPP

24. Hottest Equity Trend for 2011
ESPP
A
broadbased
Legacy
Award Performance
Equity
balanced Stock Options Restricted
Awards
meal
Equity

25. Equity Trends for 2011
•Hot Trend 1
•Leave “Market Data” for last
•Design the right plan and
levels for your company, then
check against survey data

26. Equity Trends for 2011
•Hot Trend 2
•Focus equity on management
•add cash and recognition for
everyone else)

27. Equity Trends for 2011
•Hot Trend 3
•Structure Performance
Awards so that Maximum
level pays out above 100%

28. Equity Trends for 2011
•Hot Trend 4
•Build Generic Grant Agreements
•with addendum for:
•Individual Countries
•Performance Metrics and Goals

29. Equity Trends for 2011
•Hot Trend 5
•Performance
Awards for 3
years with a
series of one-
year goals

30. DON’T DO THIS
• Equity Don’t 1 This
• Stop granting stock options
without considering is
intrinsic, modeled and worth...
expected potential value
• as if each stock option
share is a legitimate form
of currency regardless of Variable
price and value amounts
of this

31. DON”T DO THIS
• Equity Don’t 2
• Don’t think that your company
will avoid performance-based
equity. 95%+ of publicly traded
companies in the US will have
performance equity, at least for
executives, by Q1 2012.

32. DON’T DO THIS
•Equity Don’t 3
•Stop using compensation expense as an excuse
for a poor (or no) IRC 423 ESPP.
•Broad-based grants are probably a long-way off.
•ESPP’s provide a tangible attraction and
motivation device, while provide a perfect focal
point for communications from management.

33. DON’T DO THIS
• Equity Don’t 4
• Stop waiting for the big turn-
around to reevaluate and
improve your equity
compensation plans. Start
correcting your design,
communications and
administrative systems and
providers while things are still
calm enough to do it right.

34. DON’T DO THIS
• Equity Don’t 5
• Stop hoping that someone else will
ask that great question that’s in
your head. Be bold and ask away!

35. EQUITY ISSUES REVIEW
• THE MORE THINGS CHANGE, THE MORE THEY CHANGE
• SAY ON PAY
• PROBLEMATIC PAY PRATICES
• ACADEMIC RESEARCH HAS GROWN-UP
• OPTIONS ARE HERE TO STAY
• PERFORMANCE IS THE ONLY INSTRUMENT GROWING

36. EQUITY TREND REVIEW
• BALANCED MEAL APPROACH TO EQUITY
• LEAVE MARKET DATA FOR LAST
• FOCUS EQUITY ON MANAGEMENT
• STRUCTURE PERFORMANCE TO PAY MORE THAN 100%
• GENERIC AGREEMENTS WITH LOCATION-SPECIFIC
ADDENDUM
• 3 YEAR PERFORMANCE WITH ONE YEAR GOALS

37. Questions?
Da n Walt er
P r esid en t a n d CE O, Pe r for m ensation
Em ail : dw al te r@ per for m ensa ti on. com
P ho ne : 415 -6 25- 3406
m obi le : + 1 -917-734-4649
T witter: @per fo r mensa tion
Skype: per for mens ation
LinkedI n: www.lin ke din.com /in /danwa lter
Presenta tio n Librar y: www.slides hare. ne t/pe r for men sation
WWW.PERFORMENSATION.COM!
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38. Other online places to learn
(or find Dan Walter)
Equity Compensation Experts
FREE Online Networking
www.equitycompensationexperts.groupsite.com
ShareComp 2011
FREE Online Conference and Portal
(up to 16 houres of CEP credit)
www.bit.ly/sharecomp2011
(use passcode “GEMS”)
Compensation Cafe
Top 10 HR/Compensation Blog 2010
www.compensationcafe.com
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