CEO Pay: A Middle Market Perspective, presented to the Minneapolis-St. Paul NASPP Chapter on March 27, 2014. Executive compensation has continued to evolve in recent years. Companies are increasingly required to balance the need for competitive pay with the need to respond to increased scrutiny, particularly with regard to the relationship between pay and performance. To provide some insight and perspective, Buck Consultants has recently completed a study of executive compensation practices and trends in the middle market. In this study, Buck analyzed total direct compensation for Chief Executive Officers in companies listed on the S&P 400 MidCap Index. In this presentation, we will discuss our findings with regard to both current practices and trends for CEO pay in these Mid-Cap companies. Because long-term incentives typically comprised the largest portion of executive compensation, our study focused on prevalence, mix, usage and design of equity vehicles. Finally, we will look at governance issues, including corporate governance concerns and the degree of alignment between pay and performance.

1. A Middle Market Perspective
Executive Compensation
March 27, 2014

2. Agenda
• Today, we will:
- Take a look back
o Perspectives on 2013
o Results of the S&P Mid-Cap Index Study
- Take a look forward
o 2014 issues and emerging trends
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MSP NASPP: CEO Pay

3. What did we see in 2013
Simply put…more of the same… “drifting with a purpose”
• Pay less while paying more
• “Play” for performance
• Decisions driven by disclosure
• “Optics” continue to be a major feature in plan design
• Continued pressure on “problematic” practices
• Continued oversight by outside advisors, e.g., ISS, Glass Lewis
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MSP NASPP: CEO Pay

4. S&P 400 Midcap Index
• This study covers CEO’s in 321 non-financial companies
within the S&P Midcap 400 Index
• This database is updated twice a year, in June and in
December
• As a result, data can span fiscal years based on filing
dates and when the database was last updated
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MSP NASPP: CEO Pay

5. Industry Breakout
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MSP NASPP: CEO Pay
This Index provides a good cross section of industries
Consumer
Discretionary
21%
Consumer Staples
4%
Energy
7%
Healthcare
12%Industrials
21%
Information
Technology
19%
Materials
8%
Telecommunication
Services
1%
Utilites
7%
Industry Distribution

6. Revenue Breakout
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MSP NASPP: CEO Pay
Also provides a good representation of “Middle Market”
Less $1B, 17%
$1B- $5B, 67%
$5B - $10B, 13%
"10B +, 3%
Revenue Breakout

7. Target Total Direct Compensation
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MSP NASPP: CEO Pay
• Targeted TDC increased 12% from 2011/2012 to 2012/2013,
slightly above the annual 9% movement we saw last year
7
Target Total Direct Compensation = Base Salary + Target Cash Short-Term Incentive + Grant Date Value of Stock Options
(as reported by Company) + Grant Date Value of Restricted Shares + Target Value of Performance Share Grants.
$2,642,565
$3,123,328
$3,460,775
$4,175,268
$4,547,221
$5,110,040
$5,654,551
$6,042,506
$7,069,947
2010/2011 2011/2012 2012/2013
Target Total Direct Compensation
25th %ile 50th %ile 75th %ile

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MSP NASPP: CEO Pay
Target Total Direct Compensation
$6,568,500
$5,531,253
$4,787,403
$4,704,182
$4,614,921
$4,271,669
$3,508,264
$2,817,634
Construction
Wholesale/Retail
Services
Manufacturing
Communications
Mining
Transportation
Utilities
Last Fiscal Year Target Total Direct Compensation
By Industry

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MSP NASPP: CEO Pay
Target Total Direct Compensation
-7%
12%
13%
10%
6%
13%
21%
14%
Year over Year Change in Target Total Direct Compensation
By Industry Median

10. Base Salary
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MSP NASPP: CEO Pay
$634,729 $673,308 $700,000
$806,540 $835,000 $840,000
$969,755 $1,000,000 $1,000,000
2010/2011 2011/2012 2012/2013
CEO Base Salaries
25th %ile 50th %ile 75th %ile
CEO base salaries were relatively flat compared to last year,
following a 3.5% increase over the prior year

11. Short-Term Incentive Plans (STIP)
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MSP NASPP: CEO Pay
$660,000
$723,000 $678,330
$846,260 $903,455 $900,800
$1,125,000
$1,230,408 $1,209,500
2010/2011 2011/2012 2012/2013
Short-Term Incentive Plan Targets
(Excludes Zeroes)
25th %ile 50th %ile 75th %ile
Target STIP values were also relatively flat compared to last
year, following a 6.8% increase over the prior year

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MSP NASPP: CEO Pay
Short-Term Incentive Plan Payouts
Over 90% of the companies with a formal STIP paid out above
target in all three years with payouts relatively flat compared to
last year, following a 31% increase over the prior year
$579,920
$690,000 $705,729
$837,500
$1,100,000 $1,020,044
$1,313,200
$1,605,294 $1,560,080
2010/2011 2011/2012 2012/2013
Short-Term Incentive Plan Payouts
(Excludes Zeroes)
25th %ile 50th %ile 75th %ile

13. Paying for Performance – Short Term
Year over Year Increase in Total Cash vs. Net Income Growth Alignment
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MSP NASPP: CEO Pay
-43%
6%
43%
3% 4% 4%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Bottom Third Middle Third Top Third
CEO YoY Total Cash Compensation Change
vs YoY Net Income Change
% Change in NI % Change in Total Cash
The top 1/3 of performers saw the same change in cash as the
middle 1/3, which saw nominally more cash than the bottom 1/3

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MSP NASPP: CEO Pay
About 20% utilized some cash payment in the form of a
discretionary payment
21%
17%
19%
2010/2011 2011/2012 2012/2013
Prevalence Discretionary Bonus Payments
(% of Companies that Awarded a Discretionary Bonus to the CEO)
Discretionary Bonus Payments

15. Discretionary Bonus Payments
The value of discretionary increases declined by about 12%,
following a 15% increase in the prior year
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MSP NASPP: CEO Pay
$212,000
$150,000 $148,350
$430,000
$494,400
$432,800
$750,000
$921,281
$1,000,000
2010/2011 2011/2012 2012/2013
Discretionary Bonus Payments
(Excludes Zeroes)
25th %ile 50th %ile 75th %ile

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MSP NASPP: CEO Pay
Pay Mix: Short-Term vs. Long-Term
Long-term compensation continues to surpass that of short-term
compensation in the CEOs pay mix
16
41% 38% 44%
59% 62% 56%
0%
20%
40%
60%
80%
100%
120%
2010/2011 2011/2012 2012/2013
Pay Mix
Short Term Target Comp vs. Long Term Target Comp
PAY MIX Long-Term
PAY MIX Short-Term

17. 17
MSP NASPP: CEO Pay
Long-Term Incentive Grant Values
Long-term incentives as a multiple of base salary have increased
significantly in year-over-year comparisons
0.00
1.00
2.00
3.00
4.00
5.00
25th Median 75th
1.30
2.40
3.91
1.92
2.90
4.46
2.10
3.14
4.67
Long-Term Incentive Values
as Multiple of CEO Base Salary
2010/2011 2011/2012 2012/2013

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MSP NASPP: CEO Pay
Average Equity Grant Makeup – Mix Value
Equity grants continue to shift away from stock options, with the
heaviest weight now on performance-contingent shares
18
42% 37% 33% 27%
32%
30%
31%
33%
26%
32% 37% 41%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009/2010 2010/2011 2011/2012 2012/2013
Average Equity Grant Makeup
Performance-Based Restricted Stock
Time-Based Restricted Stock
Stock Options

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MSP NASPP: CEO Pay
Equity Grant Vesting

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Equity Grant Vesting
20
0% 10% 20% 30% 40% 50% 60%
Immediate
1
2
3
4
5+
1%
3%
4%
56%
25%
12%
Vesting for Service-Based Full Value Awards

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MSP NASPP: CEO Pay
Cash-Based Performance Unit Vesting
21
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
LFY LFY-1 LFY-2
Performance Contingent Awards
Performance Period
25th Percentile 50th Percentile 75th Percentile

22. Performance Period for Performance Share Plans
The most common performance period is 3 years. Companies
with shorter performance periods typically vest over 3 years
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MSP NASPP: CEO Pay

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Prevalence of LTI Vehicles
• Fewer companies granting stock options
• Performance-Based Restricted Stock remained steady while Time-
Based Restricted Stock saw a slight gain
• Cash programs declined slightly
57%
51%
62%
14%
6%
60%
56% 56%
14%
7%
60% 59%
50%
8% 9%
0%
10%
20%
30%
40%
50%
60%
70%
PBRS TBRS Stock Options Cash None
3-Year Long-Term Incentive
Vehicle Utilization
LFY-2 Prevalence
LFY-1 Prevalence
LFY Prevalence

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MSP NASPP: CEO Pay
Value of Long-Term Incentive Plan Targets
Date of Grant values for Last Fiscal Year (LFY) LTIP remained
relatively steady after an 11% increase in the prior year
$1,542,740
$1,921,173 $1,829,954
$2,660,272
$2,950,520 $2,876,446
$3,835,618
$4,218,631 $4,243,434
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
LFY-2 LFY-1 LFY
Long-Term Incentive Plan Grant Values
(excludes zeroes)
25th Percentile 50th Percentile 75th Percentile

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MSP NASPP: CEO Pay
Long-Term Incentive Realizable Values?
• Companies will continue to refine the “message” in their CD&A
disclosure to help explain equity pay practices to shareholders
• We are seeing greater use of “realizable pay” disclosures as a
clarifying alternative to grant date LTIP values
• Demonstrate that the real value of pay opportunities depends on future
stock prices and/or achievement of performance goals which may not
ultimately be delivered, not accounting/valuation models
• Investors believe that this should be a consideration in a pay-for-
performance analysis
• ISS has generally considered amounts of "realized" equity and
performance grants in the qualitative analysis phase of its pay-for-
performance analysis
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MSP NASPP: CEO Pay
Paying for Performance – Realized Value
Overall alignment between 3-Year TSR and 3-Year Average
Realized LTI shows greater gap at high end than low end
26
Realized LTI includes gains from exercisable options, value of vested shares, and Cash LTI
payments made within each fiscal year (2010-2013) for a sample of 121 companies.
$3,954
$5,774
$13,342
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
Bottom Third Middle Third Top Third
Pay and Performance
3-Year Avg Realized LTI vs. 3-Year Total Shareholder Retun
3-Year Avg Realized LTI ($000)
3-Yr TSR
29.4%
3-Yr TSR
12.7%3-Yr TSR
-6.4%

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MSP NASPP: CEO Pay
Long-Term Incentive Vehicle Combinations - LFY
• A “portfolio” approach is still popular among companies, with
no single combination a “benchmark”; TBRS & PBRS
combination was the most common at 19% of companies
19%
17%
13%
13%
13%
10%
7%
3%
2%
1%
1%
1%
1%
0.3%
0% 5% 10% 15% 20% 25%
TBRS & PBRS
Options, TBRS, PBRS
PBRS Only
Options & TBRS
Options & PBRS
TBRS Only
Options Only
Cash, Options, TBRS
Cash, PBRS, TBRS
Cash & Options
Options, TBRS, PBRS, Cash
Cash & TBRS
Cash, Options, PBRS
Cash & PBRS
Percent of Companies with Combination
LFY Long-Term Incentive Vehicle Combinations

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MSP NASPP: CEO Pay
Performance Metrics
28
Groups like ISS and Glass Lewis prefer different metrics for short
and long-term incentives to mitigate unintended risk
0% 20% 40% 60% 80%
MBO
Share Price
Not Disclosed
TSR
Relative TSR
EVA
Working Capital
Other Ratio
Division Performance
Cost/ Cost-Ratio
Other
Return
Cash Flow
Qualitative Metrics
EPS
Revenue
Profit/Income/Earnings
STI - Performance Share Metrics - FY-1
0% 5% 10% 15% 20%
MBO
Cost/ Cost-Ratio
Division Performance
Not Disclosed
Other
Qualitative Metrics
Other Ratio
Share Price
EVA
Cash Flow
Revenue
TSR
Return
Relative TSR
EPS
Profit/Income/Earnings
LTI - Performance Share Metrics - FY-1

29. • Now, a look forward…
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MSP NASPP: CEO Pay
29

30. CEO Pay Ratio
• Section 953(b) of the Dodd-Frank Act directs the Commission to
amend existing rules to require companies to disclose:
- The median of the annual total compensation of all employees of the
company
- The ratio of that median to the annual total compensation of its CEO
• Since September announcement, almost 1,000 "unique" letters and
127,000 form letters have been sent to the SEC
• Compliance costs for some companies could be "substantial," even
though smaller companies exempt and SEC does not spell out a
specific methodology for companies to identify a median employee
• Consensus thinking: final rules will be adopted this year substantially
as proposed, with the pay ratio disclosure required in 2016 proxies
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MSP NASPP: CEO Pay

31. SEC and Advisory Firms
• SEC announced that it will soon review recommendations for
possible regulatory action targeting proxy advisory firms
• At an earlier roundtable, concerns were raised about whether the
firms properly disclose potential conflicts of interest and whether
investment advisers too heavily rely on their advice when they vote
on behalf of clients
• SEC became concerned after the SEC staff issued letters that permit
advisers to rely on the advice without the fear of possible
enforcement action
• SEC will issue recommendations in “near term”; likely to require more
disclosures of conflicts, such as whether a proponent of a
shareholder proposal or a competing director slate is a client
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MSP NASPP: CEO Pay

32. Dodd-Frank: Rules not yet Proposed
• Disclosure of Pay vs. Performance
- Complex disclosure on relationship between executive compensation
actually paid and the financial performance of the issuer
- Proposal scheduled end of October 2014
• Recovery of Erroneously Awarded Compensation
- “Clawbacks”, likely with teeth
- Proposal scheduled end of October 2014
• Disclosure regarding Employee and Director Hedging
- Disclose whether employees or directors are permitted to hedge equity of
the issuer (granted as compensation or otherwise held)
- Proposal scheduled end of October 2014
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MSP NASPP: CEO Pay

33. Hedging and Pledging
• Corporate law does not prohibit a director or executive from pledging
or hedging stock, but disclosure is required and no loans under SOX
• Section 955 of the Dodd-Frank Act requires that companies disclose
whether directors or employees are permitted to hedge company
securities. No proposed rules have been published by the SEC
• ISS 2013 policy updates identified “hedging of company stock and
significant pledging of company stock” by directors and/or executives
as examples of “failures of risk oversight.” “Significant” is not defined
• The ISS warned issuers that this type of failure, “under extraordinary
circumstances,” may result in a vote against or a “withhold vote”
declaration with respect to “directors individually, committee
members, or entire board.”
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MSP NASPP: CEO Pay

34. Hedging and Pledging
• ISS has opted for a substantive, facts-and-circumstances standard
• Will consider the following factors “in determining vote
recommendations for election of directors of companies who
currently have executives or directors with pledged company stock”:
- Presence in the company’s proxy statement of an anti-pledging policy
that prohibits future pledging activity
- Magnitude of aggregate pledged shares in terms of total common shares
outstanding or market value or trading volume
- Disclosure of progress or lack thereof in reducing the magnitude of
aggregate pledged shares over time
- Disclosure in the proxy statement that shares subject to stock ownership
and holding requirements do not include pledged company stock
- Any other relevant factors
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MSP NASPP: CEO Pay

35. ISS 2014 Policy Updates
• The final updates revise ISS proxy voting policies for U.S. listed
companies relating to executive compensation and governance:
- Board Response to Majority-Supported Shareholder Proposals
o Now: case by case basis
- The Quantitative Pay-for-Performance Test Impacting ISS’s Evaluation of
Say on Pay (“SOP”) Proposals
o TSR and CEO pay relative to ISS peer group solely over 3 year period
- The Qualitative Pay-for-Performance Assessment Impacting ISS’s
Evaluation of SOP Proposals
o Quantitative assessment performed where qualitative analysis
demonstrates “significant unsatisfactory long-term pay for performance
alignment
o “Realizable pay” and granted pay compared to S&P 1500 companies
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MSP NASPP: CEO Pay

36. ISS 2014 Policy Updates
• Glass Lewis now uses a pay-for-performance model that
benchmarks executive pay and company performance against four
peer groups across seven metrics.
- Companies can receive a grade of A to F based on quantitative review
- Will vote against say on pay and withhold “For” votes for compensation
committee members with pattern of failing
• Must disclose extent that short-term incentive have been achieved
against relevant targets
- Must justify any non-disclosure
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MSP NASPP: CEO Pay

37. ISS Longer Term Policy Changes
• Director tenure
• Director independence
• Shareholder proposals to require independent chair of
board
• Evaluation of equity plans (US and Canada)
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MSP NASPP: CEO Pay

38. What To Expect Going Forward
No chance for R&R…
• Take a proactive approach to shareholder and advisory group
concerns
– Look for low hanging fruit
• Many companies may considered:
– Plan design changes
– Holding discussions with institutional investors
– Supplemental filings
• Enhance strategies to improve shareholder support
– Assess pay programs from an advisory group perspective
– Re-orient your CD&A so that it serves as an advocate for your pay program
and your successes as a company (like an MD&A)
• Reach out to major shareholders proactively to understand concerns
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MSP NASPP: CEO Pay

39. What To Expect Going Forward
• Also, you can expect executive compensation to
continue to go up…
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MSP NASPP: CEO Pay

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MSP NASPP: CEO Pay
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Questions
Jim Sillery
Principal
952.806.6114
312.315.2815
James.sillery@buckconsultants.com