Equity Best Practices The Case for Performance-Based Incentive Plans

CBIA’s 2014 Compensation & Benefits Conference

November 4, 2014

Your Discussion Leaders

Heather Royce, CEP

• Director, Compensation, The Priceline

Group

• 14 Year Equity Compensation Veteran

• Extensive history with equity plan design

and execution

• Board Member of CT National Association

of Stock Plan Professionals (NASPP)

Don Gillotti, CEP

• SVP Sales for EASi

• Professional focus in Equity Compensation for

over 15 years

• Holds a BS in Accounting from UCONN and

a Marketing MBA from Quinnipiac University

• Board Member of CT National Association of

Stock Plan Professionals (NASPP)

Today’s Topics

Pay for

Performance

Trends

Characteristics

of Performance-

Based Equity

Tax and

Accounting

Considerations

Best Practices Hot Topics

Today’s Topics

Pay for

Performance

Trends

Characteristics

of Performance-

Based Equity

Tax and

Accounting

Considerations

Best Practices Hot Topics

Regulatory Trends

Dodd Frank

Legislature mandating compliance

with various disclosure and

shareholder-voting provisions

regarding compensation practices

Provided the SEC the authority to

make additional rules in furtherance

of these requirements.

Say on Pay

Initiated a required shareholder

vote on the corporate executive

compensation plans

Non-binding vote at least once

every 3 years

Shareholder Advisories

OR

• Advise institutional shareholders whether or not to approve the executive compensation plan Purpose

• Ensure the alignment of equity plans with shareholder interests Agenda

• Glass Lewis

• Institutional Shareholder Services (ISS) Examples

The Case for Performance Awards

• Provide for close alignment of equity compensation with the best interests of the company (both management and employees) and shareholders

• Ensure that executives are being measured by, and rewarded in relation to, reaching targets that result in the advancement of a company’s strategic objectives

• Compensation practices are being regulated in a way that pressures companies to align pay with performance

Why does The Priceline Group use Performance Awards?

• Focus executives’ efforts on things within their

control that will contribute to the long term

financial success of the company

• The three-year term serves as significant retention

device

• More “at risk” compensation; better pay for

performance alignment

Today’s Topics

Pay for

Performance

Trends

Characteristics

of Performance-

Based Equity

Tax and

Accounting

Considerations

Best Practices Hot Topics

Setting yourself up for Success

Invite EVERYONE to the table!

Make sure performance metrics are objectively measurable and not subject to interpretation

Make sure the performance metrics align with the long term goals of the company

Make sure the employee understands the metrics and vesting schedule

Make sure the company fully understands the accounting impacts

PSU vs PSA

Performance Stock Awards

Predetermined # of shares

awarded at no cost at time of

grant

Performance and Service

conditions are met

Award is vested and shares are released

Performance Stock Units

A promise to award shares at no cost when conditions are

met

Performance and Service

conditions are met

Converted into shares and awarded

Lifecycle of a Performance Award

Award Vests Service

Period Ends Performance

is certified Performance Period Ends

Grant Performance

Goals Determined

Types of Performance Measures

Market Conditions Performance Conditions

Absolute Price Growth (%) Revenue (Gross or Net)

Profit (Net, OI, EPS, EPS Growth, EBITDA)

Stock Price Target ($) Product Release or Drug Approval

Ratio of Stock Price at Grant vs. Stock Price at Vest

Date

Return on Equity or Return on Assets

Total Shareholder Return (TSR) Employee Attitude Survey Results, Customer

Satisfaction Index

Performance for Private Companies You can do it too!

• As long as you can track the metrics you can create an

effective performance equity compensation strategy

• Use performance conditions as a measurement

• 500th client ; cash flow positive

• 2 ways to monetize the value of the units

• Cash settled or create a market for the stock

How does The Priceline Group use Performance Awards?

• Type of Award: Performance

Share Units (PSUs)

• Performance Metric: Adjusted

EBITDA

• Vesting Period: 3-year cliff vest

• Performance Period: 3 calendar

years

• Eligibility: Section 16 Officers;

other key senior executives (around

10% of equity plan participants)

• Grant Value: Awarded in USD,

converted to “target” units on date

of grant

Today’s Topics

Pay for

Performance

Trends

Characteristics

of Performance-

Based Equity

Tax and

Accounting

Considerations

Best Practices Hot Topics

Accounting Considerations

Market

Conditions

Must have valued by

an outside firm

using the Monte

Carlo option model

Performance

Conditions

Must be prepared to

adjust the expense

for the duration of

time

Cash

Settled

Has to be carried as

a liability and

marked to market

Things to think about for Taxation

Withhold to cover Sell to cover

+ Permissible for Insiders

during blackout

― Compliance issue for

insiders during blackout

+ Non-dilutive ― Dilutive

― Company must have

cash to cover taxes

+ No company cash

required to cover tax

― Accounting

considerations

+ No accounting impact

+ No commissions/fees ― Employee pays broker

commissions / fees

+ Easier to administer ― Administrative

complexity of sale

PSU PSA

Generally taxed at vesting;

shares available to cover

taxes (409A issue –

retirement eligibility)

Generally taxed at vesting

in US; tax point varies

outside US (e.g., grant,

vesting, release)

If shares deferred under

409A, federal and state

income tax deferred until

release; FICA/FUTA due

at vesting

Taxed at grant in US if

83(b) election filed; no

shares available to cover

taxes

Dividend equivalents taxed

when paid (typically

vesting)

Dividends taxed when

declared

Today’s Topics

Pay for

Performance

Trends

Characteristics

of Performance-

Based Equity

Tax and

Accounting

Considerations

Best Practices Hot Topics

Best Practices

• Use of Units

• Grant in $

• Communication during

performance period

• Withhold to cover (followed closely

by sell to cover)

Today’s Topics

Pay for

Performance

Trends

Characteristics

of Performance-

Based Equity

Tax and

Accounting

Considerations

Best Practices Hot Topics

Hot Topics

• Single vs multiple metrics

• Market vs internal conditions

• Forfeit vs pro-rata vest on retirement

• Who should be eligible for performance awards?

Want to know more?

• Helpful resources:

• CEP Institute free publication: “GPS Performance Awards” (available for download at www.scu.edu/business/cepi)

• National Association of Stock Plan Professionals (NASPP.com)

• National Center for Employee Ownership (NCEO.org)

• Don Gillotti, EASi

don.gillotti@easiadmin.com

925-730-4311