Learning from the Mistakes of OthersHow not to structure, run or design an equity plan

October 5, 2012

> Let’s talk about some of the things that can go wrong…

• Losing shareholder support with a performance pay plan

• Setting the bar too high

• Too much flexibility

• Trying too hard

Agenda

2

Losing shareholder support with a performance pay plan

> Background- Company’s plan

> Annual grants of restricted stock equal to about two-thirds of 50 th percentile

> Every 3 years, performance shares that will bring pay to the 75 th percentile at 75th percentile performance

> 78% of CEO pay performance-based

3

Pay and performance were aligned

> 3 Years- Pay – 100th percentile

- Performance – 85th percentile

> 5 Years- Pay – 12th percentile

- Performance – 16th percentile

> BUT – 1 Year- Pay – 97th

- Performance – 35th

4

The problem

> ISS recommended a “no” vote on Say on Pay- Only issue was the 1-year disconnect on pay-for-performance

- No significant “problematic pay” issues

- No issues on 3- and 5-year pay-for-performance

> The “real” issue – “your plan doesn’t look like everyone else’s so we don’t know how to measure it”

5

The response

> Establish internal response team of HR, Legal, IR and executives, with proxy solicitor and Compensation Consultant

> Went to ISS

> Reached out to top shareholders with full story- Company’s performance

- Unique structure of the plan

- Other shareholder groups (Glass-Lewis) supported

> Outcome – 75% positive vote from shareholders

6

Lessons learned

Have the right compensation story to tell – in this case, the company did have pay for performance, it was just too complicated for ISS to understand

- Use all your resources

- Reach out to shareholders early

- Keep the story as simple as possible

If your plan looks significantly different from the market, make sure you understand why it does

7

Setting the bar too high

> Everyone agrees that pay for performance is a good thing, right?

> The question is always:- How much pay?

- How much performance?

8

The mega-grant

> Company stock price - $20

> Front-loads the grant to capitalize on low stock price• 4 years of grants at 75th percentile at $20

> Performance-based vesting accelerator after twelve months:• 25% at $25, $30, $35 and $40/share• Otherwise stock vests at the end of 5 years

> What can possibly go wrong?

9

When was the grant made?

10

> No shares ever accelerated

> Shares were in the money for less than a month

Lessons learned

You are never granting at the bottom of the market

Dollar cost averaging works for investments; long-term incentives are investments

Options have long-term consequences – these were a drag on overhang for 10 years

11

Too Much Flexibility

> Company XYZ introduces their first Employee Stock Purchase Plan. The Company would like to see high participation so creates a design they believe will maximize flexibility and financial gain for their employees

12

Too Much Flexibility

> Plan design:- 24 month offering periods with 6 month purchase (Jan 1 & June 1)

- New offering period starting every 6 months for new participants (Jan 1 and June 1)

- 15% discount

- Look back

- Participant can withdraw from the offering period then re-enroll after a 6 month waiting period

- Participant can withdraw but leave their funds in until the next purchase

13

The Problem

> Participation low – plan too complicated for the average employee

> Participants tried to “game” the system withdrew and re-enrolled when the stock price was low

> The plan quickly became an administration NIGHTMARE

14

The Response

> Communication Campaign (failed)

> Changed the plan:- 6 month offering periods

- Look back

- 15% discount

- Same withdrawal rules

15

Lessons learned

> The new simple plan design was a success. Employees saw the value in the plan, understood how it worked, and participation increased dramatically.

> When designing a plan sometimes less flexibility may be better. If you can not simply communicate the rules, the average employee will not enroll.

16

Trying Too Hard

> Company XYZ has a broad-based non-qualified stock option plan that is outsourced to a financial firm for administration and transactional support. As an added benefit, the company pays the brokerage fees for the first few years of the plan. The stock price appreciates and many more employees are exercising and selling. The company wants to discontinue paying the fees but several of the executives are upset.

>

17

Trying Too Hard

> The company decides to:• Implement a net exercise program

• Nets shares for option cost

• Forces an immediate sale for remaining shares

> The net exercise program does lower the commission as less shares are sold.

> The administrator adds a processing fee for the net exercise.

> 18

The Problem

> The new program is hard to communicate and employees are upset and confused by the change

> The administrator can not handle the program as designed. The FMV is used for the net share calculation and the sale price is used for the forced sale

> The participants have a capital gain on the difference between the cost basis of the net shares and the sale price causing confusion and questions at tax time

> The processing fee is higher than the commission on small exercise amounts

19

The Response

>

> Company discontinued the Net Exercise program

> Negotiated a lower commission with their administrator

> The Company started a communication campaign that focused on the value of the plan, stressing the stock appreciation

20

Lessons learned

> The company realized that they can work with their administrator as a strategic partner. Together they were able to come up with a solution that worked.

> It may be impossible to make everyone happy. It is important to communication the value of the Equity Compensation plan not just the mechanics of the program.

21

Questions?

22

Ted BuyniskiPartnerRadfordAn Aon Hewitt Company508-628-1553 (o)508-468-4699 (c)tbuyniski@radford.com