Hot Topic: More Effective Long-Term Incentive Plans

1 Hot Topic: more Effective Long-Term Incentive Plans Hot Topics in Executive Compensation Webinar Series 2013 Aon plc To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt Hot Topics in Executive Compensation Webinar Series 1 July 17 Getting an Early Read on the Coming Year August 7 Hot Topic: Pay for Performance August 28 Hot Topic: more Effective Long-Term Incentive Plans September 18 Hot Topic: Assuring Effective Disclosure Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 Virginia Fischetti Partner, Aon Hewitt Today s Speaker 2 Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 3 Today s Agenda Section 1 Why Is LTI design a Hot Topic ?

2 Section 2 Market Practice Regarding Long-Term incentives and Plans for 2013 Section 3 Key Design Parameters, Challenges, and Potential Pitfalls Section 4 Case Study Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 4 Agenda Tracker Section 1 Why Is LTI design a Hot Topic ? Section 2 Market Practice Regarding Long-Term incentives and Plans for 2013 Section 3 Key Design Parameters, Challenges, and Potential Pitfalls Section 4 Case Study Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 Prevalence of performance-based LTI Plans has increased: since 2005, we have seen a shift from options to full value share Plans , particularly performance shares Why Is LTI Design a Hot Topic ?

3 5 Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 LTI plan Prevalence 71% 58% 30% 30% 66% 77% 56% 32% 0%10%20%30%40%50%60%70%80%90%OptionsRest ricted StockPerformance SharesPerformance Units20052012 Why Is LTI Design a Hot Topic ? 6 Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 Proxy advisor groups are paying attention to LTI design parameters and have strong opinions about desired features Compensation Committees, shareholders and executives care about the design Are goals sufficiently difficult to achieve? Can executives influence the outcome of the measure(s) selected?

4 Does the benefit of the program outweigh the cost? Will executives be rewarded commensurately with performance? Are the right employees eligible for the program? Are executive interests aligned with those of shareholders? Do they win together/lose together? Why Is LTI Design a Hot Topic ? 7 Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 Total Cash and LTI Distribution Fortune 250 Executive Positions* * Weighted Average of CEO, CFO, Law, Controller, Human Resources, Group Head and Division Head ** Figures in parenthesis indicate number of companies Long-Term incentives make up the largest (and growing) part of an executive s total compensation 2006 (146) 2008 (123) 2010 (92) 2012 (106) Base Salary 21% 20% 21% 19% Bonus 22% 22% 20% 22% Total LTI 57% 58% 59% 59% % of Net Total Compensation 100% 100% 100% 100% 2006 (146) 2008 (123) 2010 (92) 2012 (106)

5 Base Salary $511,672 $533,269 $539,883 $560,910 Bonus $525,009 $594,637 $508,012 $643,798 Total LTI $1,351,840 $1,574,590 $1,543,707 $1,759,685 % of Net Total Compensation $2,388,521 $2,702,496 $2,591,602 $2,964,393 8 Agenda Tracker Section 1 Why Is LTI design a Hot Topic ? Section 2 Market Practice Regarding Long-Term incentives and Plans for 2013 Section 3 Key Design Parameters, Challenges, and Potential Pitfalls Section 4 Case Study Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 9 Market Practice Regarding Long-Term incentives Eligibility Long-Term Incentive eligibility has been declining and is expected to continue to decline as companies address impact of results, affordability of programs and share pool management Median Employee Eligibility Aon Hewitt s Executive Compensation Policies and Programs 2005 and 2012.

6 Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 Salary of Lowest Eligible Employee Stock Options Restricted Stock Performance Shares Performance Units 2005 $82,450 $102,800 $132,600 $140,000 2012 $125,000 $115,000 $175,000 $142,748 10 Market Practice Regarding Long-Term incentives Award Size Determination Percent totals exceeding 100% indicate multiple responses. Aon Hewitt s Executive Compensation Policies and Programs 2005 and 2012. Method of Determining Number of Shares Awarded to Individuals Options Restricted Stock Perf. Shares Perf. Units 2005 2012 2005 2012 2005 2012 2005 2012 Individual Performance 60% 63% n/a n/a n/a n/a n/a n/a Market Analysis 52% 71% 23% 66% 41% 62% 21% 64% Predetermined # of Shares/Units 29% 12% 20% 13% 22% 9% 15% 11% % of Midpoint/Salary 32% 26% 24% 32% 30% 34% 56% 34% Discretion 56% 15% 59% 11% 11% 13% 11% 9% Market competitive Long-Term Incentive levels have become increasingly important in determining the size of LTI awards, while discretionary judgment has decreased Companies are asking: how much do we need to spend on LTI awards?

7 Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 Plans for 2013 11 1 Results will not total 100% due to multiple responses Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 Aspect Prev Vehicle Use (number of vehicles used and weighting) 65% Performance Leverage (threshold and maximum) 54% Payout Opportunities (minimum, target and maximum) 47% Performance Measures (number of measures used and weighting) 41% Eligibility 37% Administrative Provisions 27% Review Needed 40% All Aspects Working Well 60% Prevalence of thought regarding current program design Aspects of current Long-Term programs that organizations may review in 20131 While most companies indicate that their Long-Term Incentive programs are working well, many feel that aspects of their programs should be reviewed 12 Plans for 2013 Design Aspects Anticipated for Review Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28.

8 2013 9% 17% 18% 19% 22% 30% 30% 37% 37% 39% 40% 44% Forfeiture provisionsMinimum award payout opportunitiesMaximum performance levels to trigger maximum payoutVesting provisionsMaximum award payout opportunitiesThreshold performance levels to trigger minimum payoutUse of stock options in annual grantsNumber of equity vehicles used to deliver valueEligibilityTarget award payout opportunitiesNumber of performance measures evaluatedWeight/emphasis of performance-based vs other vehicles13 Agenda Tracker Section 1 Why Is LTI design a Hot Topic ? Section 2 Market Practice Regarding Long-Term incentives and Plans for 2013 Section 3 Key Design Parameters, Challenges, and Potential Pitfalls Section 4 Case Study Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 Linking Pay and Performance: Overview Key Design Parameter Overview Performance Measurement Relative; Absolute Performance Measures Total Shareholder Return; Financial/Strategic Performance Goal Setting Relative; Absolute.

9 Degree of stretch Pay/Performance Relationship Performance expectation level and payout opportunity at threshold, target and maximum 14 Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28, 2013 Performance Measurement Relative Absolute Definition Company performance compared to performance of predetermined peer group Percentile scale Relative to median scale Company performance compared to goal Typically multiyear, cumulative goal Sum of multiple annual goals minority practice Pros/Cons Adjusts for economic conditions common to all peers Easier to set scale Provides strategic link Provides Incentive Do this/get that No excuses Cons May be difficult to construct good enough peer group more reward than Incentive Comparing financials often takes work Setting fair goals is challenging Achievable, but a stretch Works Best TSR Return measures Financial measures Key strategic measures 15 Proprietary & Confidential | Hot Topics in Executive Compensation Webinar | August 28.

10 2013 Performance Measure Prevalence 2005 2012 Profit Measures 34% 35% EPS 23% 25% EBITDA 7% 6% Net Income 2% 5% Operating Income/EBIT 2% 6% Return Measures 21% 24% Return on Capital 13% 13% Return on Net Assets 4% 1% Return on Equity 3% 6% EVA/Cash Flow Measures 9% 7% Cash Flow 5% 7% EVA 4% 0% Other Measures TSR 34% 36% Revenue 7% 14% Discretionary 2% 1% Strategic Goals 2% 1% 16 Market Practice Regarding Long-Term incentives Performance Measures The types of measures used in performance Plans have not changed significantly from 2005 to 2012 There has been a slight decrease in the use of relative metrics: In 2005, 50% of companies reported use of relative metrics compared to 42% in 2012 Of this group, more tend to use specific peer groups for comparison compared to indices (57% in 2005 vs.)