A review of CEO Incentive Compensation Plans among U.S. Companies

1. Copyright © 2019 Steven Hall & Partners. All rights reserved.
A review of CEO Incentive Compensation Plans among U.S. Companies
Steven Hall Jr.
Devin Reilly
William Fiske
Paying for Performance

2. 2
• What defines a well-designed incentive program?
–Pay opportunities tightly aligned with responsible performance
–Balanced approach to delivering compensation
–Don’t want all your eggs in one basket
–Mitigates risk
–Reflects environment
–Internal
–What will attract, motivate and retain executives?
–What will drive corporate performance and the achievement of strategic objectives?
–External
–Comparators
–Shareholders
–Other Stakeholders
Paying for Performance
Introduction

3. 3
Section 162(m) - the $1 million deductibility cap - overhauled by the 2017 Tax Cuts and Jobs Act
• The “performance-based compensation” exclusion is gone
• Covered employees
–Now five or more executive officers, not four
–CFO is in, not out
–Interim and departed CEO/CFOs are in
–No requirement that executive be serving at year end
• The new “once in-always in” rule for covered employees
–Limits deductions for post-termination compensation
• “Grandfathering” rules apply (are you good at puzzles)?
Paying for Performance
Trends in Incentive Compensation

4. 4
• Continued refinement of incentive plan performance metrics
–Relative vs. absolute metrics
–Evolving use of relative TSR
• Environmental, Social & Governance (ESG) metrics
• 2nd year of CEO Pay Ratio disclosure
–Year over year comparisons
• Continued shareholder outreach and engagement
Paying for Performance
Trends in Incentive Compensation

5. 5
Fixed
26%
Fixed
20%
Fixed
13%
Variable
74%
Variable
80%
Variable
87%
Small 200
Mid 200
Top 200
CEO Average Target Pay Mix
Annual
24%
Long-
Term
50%
Annual
21%
Long-
Term
59%
Annual
19%
Long-
Term
68%
Steven Hall & Partners reviewed CEO
incentive compensation plans among 600 US
companies
• Top 200 – Largest US companies by revenue
• Mid 200 – Included in the S&P Mid Cap 400
• Small 200 – Included in the S&P Small Cap 600
Paying for Performance
Incentive Compensation Study

6. 6
Annual Incentive Plans

7. 7
• CEO target annual incentives correlated with
company size
• Target bonus
–Between 100% and 167% of base salary
–Between $750,000 and $2.38 million
• Payout range
–Threshold – between 25% and 50% of
target
–Maximum – 200% of target for all groups
Annual Incentive Plans
CEO Target Annual Incentive
Top 200 Target Annual Incentive
Dollar % of Target Annual Incentive Range
Value Salary Threshold - Maximum
Average $2,723,015 190% 25% - 210%
Median $2,381,250 167% 25% - 200%
25th Percentile $1,875,000 150% 0% - 200%
75th Percentile $2,828,211 200% 50% - 200%
Mid 200 Target Annual Incentive
Dollar % of Target Annual Incentive Range
Value Salary Threshold - Maximum
Average $1,183,164 129% 31% - 199%
Median $1,079,009 120% 40% - 200%
25th Percentile $875,182 100% 0% - 180%
75th Percentile $1,312,500 130% 50% - 200%
Small 200 Target Annual Incentive
Dollar % of Target Annual Incentive Range
Value Salary Threshold - Maximum
Average $801,597 110% 36% - 189%
Median $750,000 100% 50% - 200%
25th Percentile $592,401 98% 17% - 150%
75th Percentile $946,619 120% 50% - 200%

8. 8
• CEOs at larger companies earned larger
bonuses as % of target
–Payouts ranged from 92% to 115% of
target
–$624,000 - $2.7 million
Annual Incentive Plans
CEO Annual Incentive Payout
Top 200 Actual Annual Incentive Payout
Dollar % of
Value Target
Average $3,047,349 111%
Median $2,675,124 115%
25th Percentile $1,603,943 78%
75th Percentile $4,011,465 147%
Mid 200 Actual Annual Incentive Payout
Dollar % of
Value Target
Average $1,259,864 105%
Median $1,022,199 100%
25th Percentile $592,455 74%
75th Percentile $1,557,843 140%
Small 200 Actual Annual Incentive Payout
Dollar % of
Value Target
Average $724,422 88%
Median $623,875 92%
25th Percentile $75,310 37%
75th Percentile $1,044,412 126%

9. 9
• Philosophy on performance metrics
–Performance measures should be aligned with business strategy
–Reflect the key drivers of corporate and shareholder value
–Create clear line of sight for key employees that focuses their efforts and maps their
accountability
–Goals should be realistic and motivational and represent sustainable performance relative to
benchmarks
–Historical performance and volatility
–Future prospects / market expectations
–Ability to forecast future performance – how strong is the budgeting / business planning
process?
Annual Incentive Plans
Performance Metrics

10. 10
• Majority of annual incentive plans utilize two or three performance metrics
• Larger companies include more metrics/complexity
• Smaller companies utilize fewer metrics
Performance Metrics
13%
21%
27%
17%
7%
15%
13%
27% 26%
13%
11%
10%
23%
28%
21%
12%
8% 8%
1 2 3 4 5 6+
Number of Performance Metrics in CEO AIP
Top 200 Mid 200 Small 200
Annual Incentive Plans

11. 11
–Non-Financial
– MBOs / KPIs
– Management by Objectives, Key Performance
Indicators
– Individual
– Strategic Goals
– Health, Safety & Environmental
– Customer Satisfaction/Experience
–Financials
– Earnings
– Net income, EPS, Operating income
– Revenues/Sales
– Cash Flow
– Free cash flow, Cash from operations
– Returns
– Return on assets, Return on equity, Return on
invested capital
– Ratios
– Operating income margin, EBIT margin,
Efficiency ratio
– Costs/Expenses
Annual Incentive Plans
Performance Metrics

12. 12
• Annual incentive payouts largely tied to earnings performance
Annual Incentive Plans
Performance Metric Prevalence
88%
39%
34%
29%
85%
37%
30%
23%
85%
34%
29%
10%
Earnings Revenues Individual Cash Flow
CEO AIP Performance Metric Prevalence
Top 200 Mid 200 Small 200

13. 13
• Earnings metrics are also the most heavily weighted in annual incentive plans
Annual Incentive Plans
Performance Metric Weightings
50%
25%
20%
25%
50%
35%
20% 22%
70%
30%
20%
25%
Earnings Revenues Individual Cash Flow
Median CEO AIP Performance Metric Weightings
Top 200 Mid 200 Small 200

14. 14
• Shareholders focused on Environmental, Social & Governance (ESG) metrics
• Adoption of ESG metrics has been slow
• How should ESG be incorporated in incentive plans?
–Short-term plan vs. long-term plan
–Which executives?
–What is the proper weighting?
–Are the metrics quantifiable?
–Absolute vs. relative metrics
Annual Incentive Plans
ESG Performance Metrics
29%
23%
15%
Top 200 Mid 200 Small 200
Prevalence of ESG Metrics

15. 15
• SH&P identified several common groups of ESG metrics
• Talent & Diversity metrics most common
Annual Incentive Plans
ESG Performance Metrics
77%
42%
30%
5%
12%
50% 48%
24%
2% 11%
72%
31%
3%
7% 7%
Talent & Diversity Health & Safety Environmental & Sustainability Community Impact Regulatory & Compliance
ESG Metric Prevalence
Among Companies Disclosing the Use of 1 or More ESG Metrics
Top 200 Mid 200 Small 200

16. 16
Long-Term Incentives

17. 17
• Long-term incentives are awards earned
and paid based upon achievement of goals
over a period exceeding one year
–Goals may be based on stock price or
business performance
–Typically equity-based, but a small number
of firms use cash
Long-Term Incentives
Long-
Term
Incentive
Objectives
Align
executive /
shareholder
interests
Attract,
retain and
motivate
Focus
participants
on critical
performance
criteria
Provide
competitive
pay
opportunities
based on
performance
Create
wealth

18. 18
Long-Term Incentives
Vehicle Types
Appreciation Vehicles
• Stock options
• Stock appreciation rights
Service-Vested
Full Value vehicles
• Restricted stock
• Restricted stock units
Performance
Vehicles
• Performance shares
• Performance share units
• Performance cash plans
• Performance-vested
options (rare)

19. 19
• Majority of companies use a portfolio approach to long-term incentives
–Grant two or more long-term vehicles
–In each group, a small percentage of companies did not grant LTI awards to the CEO
Long-Term Incentives
Number of Vehicles
15%
57%
25%
4%22%
51%
25%
2%18%
62%
16% 5%
1 2 3+ 0
Number of LTI Vehicles Granted
Top 200 Mid 200 Small 200

20. 20
• Performance-based LTI awards are the most prevalent vehicle among all three groups
• In general, the usage of full-value service-based restricted stock increases as the revenue
scope of companies decreases
Long-Term Incentives
Vehicle Prevalence
54% 56%
92%
43%
68%
88%
35%
78% 79%
Stock Options Service-Vested
Restricted Stock
Performance-Vested Awards
LTI Vehicle Prevalence
Top 200 Mid 200 Small 200

21. 21
• Performance-based LTI awards represent the largest portion of LTI value mix for each of the
three groups
• Portion of LTI value granted as service-based awards increases as company size decreases
Long-Term Incentives
Vehicle Mix
20%
17%
16%
20%
28%
35%
60%
55%
49%
Average CEO LTI Mix
Stock Options Service-Vested Restricted Stock Performance-Vested Awards
Top 200
Small 200
Mid 200

22. 22
Cons
• Not viewed as performance-based by some
• Not tied explicitly to company financial
performance
• Dilution; stock-settled SARs are less dilutive
than options
• Expense recognized even if option expires
worthless
Pros
• Alignment w/ shareholders
• Easy to communicate
• Leverage
• Fixed expense
Long-Term Incentives
Stock Options

23. 23
• Stock options are generally granted with
–Three-year step vesting schedule
–Ten-year term
Long-Term Incentives
Stock Options
1%
14%
39%
45%
1%
9%
34%
56%
1%
1%
8%
32%
59%
6+
5
4
3
2
Years
Options Vesting Schedule
Top 200 Mid 200 Small 200
78%
72%
90%
4%
2%
1%
12%
22%
7%
1%
1%
4%
2%
2%
Small 200
Mid 200
Top 200
Options Term Schedule
10 Years 8 Years 7 Years 6 Years 5 Years

24. 24
Cons
• Viewed negatively as “pay for pulse”
• Not tied explicitly to company financial
performance
• No leverage
Pros
• Strong retention value and popular with
employees
• Alignment with shareholders
• Less dilutive
• Easy to communicate
• Fixed expense
Long-Term Incentives
Service-Vested Restricted Stock

25. 25
• Service-based restricted stock awards are generally
granted with a three-year step vesting schedule
Long-Term Incentives
Service-Vested Restricted Stock
1%
9%
25%
65%
4%
27%
68%
1%
10%
19%
69%
1%
1%
6+
5
4
3
2
1
Immediate
Years
Restricted Stock Vesting Schedule
Top 200 Mid 200 Small 200
82%
70%
70%
18%
30%
30%
Small 200
Mid 200
Top 200
Restricted Stock Vesting Type
Step Cliff

26. 26
Cons
• Challenges in setting performance criteria
• Poor goal setting may lead to perception that
they are less valuable
• Reversal of expense is not possible for
awards earned based on market conditions
(stock price/TSR)
Pros
• Strong focus on performance
• Alignment with shareholders; popular with
advisory firms
• Fixed expense may be subject to reversal if
performance goals are not met
• May be less dilutive
Long-Term Incentives
Performance-Based Awards

27. 27
• Performance-based awards are generally
–Based on a three-year performance period
–Payout in shares of company stock
Long-Term Incentives
Performance-Based Awards
4%
75%
21%
4%
83%
13%
6%
89%
5%
4+
3
1 - 2
Years
Performance Period Length
Top 200 Mid 200 Small 200
90%
87%
83%
6%
7%
6%
1%
4%
9%
1%
1%
2%
2%
1%
Small
200
Mid
200
Top
200
Payout Type
Stock Cash Cash & Stock Options Stock & Options

28. 28
• Majority of Top 200 and Mid 200 performance-based awards utilize two or more performance
metrics
• Majority of Small 200 companies use only one performance metric
Long-Term Incentives
Performance Metrics
27%
42%
22%
6%
4%
43%
38%
14%
2% 3%
51%
32%
13%
2% 2%
1 2 3 4 5+
Number of Performance Metrics in LTIP
Top 200 Mid 200 Small 200

29. 29
• The two most common performance metrics were total shareholder return (TSR) and earnings
Long-Term Incentives
Metric Prevalence
54% 54%
42%
18% 17%
50%
45%
25%
7%
17%
38%
41%
22%
3%
17%
TSR Earnings Returns Cash Flow Revenues
LTIP Performance Metric Prevalence
Top 200 Mid 200 Small 200

30. 30
• On average, CEO performance-based payouts for the most recently completed performance
cycle were at the target level
–Indicates that goal setting is generally balanced
Long-Term Incentives
CEO Performance-Based Payouts
106%
96% 101%
Top 200 Mid 200 Small 200
CEO LTIP Payout as a % of Target
Top 200 Mid 200 Small 200

31. 31
Things to Consider

32. 32
• Follow the business plan – Well-designed incentive plans should be aligned with your organization’s strategic plan in
order to focus and reward executives for accomplishing objectives that will drive long-term shareholder value. The mix
of vehicles and performance metrics selected should provide an appropriate and balanced focus on achievement of key
strategic objectives and retention of executive talent.
• Periodically reconsider the program – Incentive programs need not remain static over time. Instead, companies
should periodically reevaluate programs to ensure that they continue to support the organization’s strategic objectives.
Companies should periodically evaluate their mix to ensure that the program continues to make sense.
• Understand the ramifications of change – If you are making substantial modifications to your incentive plans, make
sure you understand all the legal and accounting ramifications of the changes. Nothing upsets executives, directors
and shareholders more than surprises.
Things to Consider

33. 33
• Mitigate excessive risk-taking – Make sure performance targets are attainable and fair to both executives and
shareholders. Establish maximum performance goals and payout levels that will challenge executives, but won’t
encourage them to take on excess risk. Performance metrics should also be thoughtfully selected to ensure that they
are complementary with other goals used in both the short-term and long-term plans.
• Communication is paramount – All stakeholders should understand how the plan works and what performance will
drive payouts under the plan. Ascertaining the views of significant shareholders on essential program design issues is a
key part of ongoing shareholder outreach. Additionally, regular communications to participants about the status of
awards can go a long way towards ensuring continued focus on desired objectives and reinforcing the potential value of
awards if performance goals are achieved.
• Do the right thing – If your company faces a unique situation, the incentive plans should be reflective of and
responsive to that situation. Don’t automatically shy away from vehicles or metrics that are unpopular with shareholder
advisory services or governance experts if they support your specific strategic objectives. Make sure your shareholders
understand the choice and why it ultimately aligns executive interests with theirs.
Things to Consider

34. 34
Questions?
Steven Hall Jr.
Managing Director
sehall@shallpartners.com
www.shallpartners.com
Devin Reilly
Consultant
dreilly@shallpartners.com
William Fiske
Analyst
wfiske@shallpartners.com