Current Developments in Association Compensation

June 7, 2011

National Association of Manufacturers Council of Manufacturing Associations

Charles W. Quatt, Ph.D.

President

Quatt Associates, Inc.

2233 Wisconsin Avenue, NW

Suite 501

Washington, DC 20007

(202) 342 1000 x. 103

cquatt@quatt.com

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Discussion Topics

National Association of Manufacturers Council of Manufacturing Associations Survey Trends

Approaches to Market Pricing: Defining the Marketplace

Using Survey Data

Current Trends in Executive Compensation

Governance Trends

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NAM CMA Survey Trends Participation has risen by 50% since the survey’s inception in 2009.

Survey median budgets have decreased since 2009.

Organizations that participated in all three years: budgets dip in 2010.

2009 54

2010 69

2011 81

Number of Participants 2009-2011

2009 $4,800,000

2010 $4,500,000

2011 $3,307,594

Median Budgets Among All Participants

2009-2011

2009 $4,207,000

2010 $3,550,000

2011 $4,197,000

Median Budgets Among Common

Participants 2009-2011

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NAM Survey Trends among Three Year Survey Participants

Change in Total Cash Compensation 2009-2011

(Common Participants)

Respondents

2009

Change/ 2009

to 2010

Respondents

2010

Change/ 2010

to 2011

Respondents

2011

Change/ 2009

to 2011

Highest Paid 26 -2.10% 26 8.70% 25 6.41%

Second Highest Paid 25 6.80% 24 6.88% 24 14.15%

Third Highest Paid 24 5.98% 21 0.00% 22 5.98%

Fourth Highest Paid 23 15.53% 19 -11.26% 21 2.52%

Top Finance and Administration 20 3.05% 20 3.69% 20 6.84%

Top Government Relations 11 0.82% 11 5.28% 11 6.41%

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NAM Survey Trends

Change in Total Cash Compensation 2009-2011

(All Participants by Budgetary Category)

2009-2010

Change

2010-2011

Change

2009-2011

Change

2009-2010

Change

2010-2011

Change

2009-2011

Change

2009-2010

Change

2010-2011

Change

2009-2011

Change

Highest Paid 9.7% 10.4% 20.1% -5.1% 15.9% 10.8% 4.3% 6.7% 11.1%

Second Highest Paid 6.2% -12.4% -6.2% 15.1% -1.1% 14.0% 13.7% 0.4% 14.1%

Third Highest Paid 13.9% -13.3% 0.6% 18.3% 0.3% 18.6% -0.4% 15.3% 14.9%

Fourth Highest Paid 9.0% -14.1% -5.1% 18.6% -6.8% 11.8% 7.9% 13.7% 21.6%

Chief Executive Officer 9.3% 10.6% 19.9% -5.1% 20.1% 15.0% 4.3% 1.9% 6.2%

Number Two Executive Position -12.3% 6.6% -5.7% -1.6% -3.8% -5.4% 8.8% -2.9% 5.9%

Top Finance and Administration 14.1% -20.7% -6.6% 9.7% -5.5% 4.2% 2.8% 7.3% 10.0%

Top Government Relations Position 12.0% -26.5% -14.5% -12.4% 6.5% -5.8% 20.4% 6.2% 26.6%

Less than $2.5 Million $2.5 to $7.5 Million Greater than $7.5 Million

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NAM Survey Trends

Incentive Compensation Awards as Percentage of Base Salary 2009-2011

(All Participants and by Budgetary Category)

2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011

Chief Executive Officer

Q1 7.0% 12.0% 7.9% 4.7% 8.7% 5.6% 5.7% 11.9% 8.6% 15.3% 10.2% 15.5%

Median 14.0% 19.9% 14.2% 8.2% 15.6% 10.3% 10.8% 20.2% 12.7% 20.7% 14.1% 17.1%

Q3 20.4% 22.5% 20.1% 17.4% 24.2% 17.9% 16.4% 22.6% 25.6% 30.0% 22.1% 26.4%

Executives

Q1 4.2% 4.3% 4.5% 4.6% 1.8% 2.1% 3.7% 4.2% 4.1% 6.2% 8.5% 5.1%

Median 6.5% 8.1% 6.7% 6.1% 3.3% 4.2% 5.1% 6.7% 5.9% 12.0% 11.0% 7.9%

Q3 12.9% 13.5% 8.6% 9.7% 6.3% 7.8% 6.5% 11.3% 8.3% 18.7% 15.0% 17.7%

All Participants Less than $2.5 M $2.5 to $7.5 M Greater than $7.5 M

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NAM Survey Trends – Incentive Compensation Practices

Percentage Awarding Incentive Compensation 2009-2011

(All Participants by Budgetary Category)

2009 2010 2011 2009 2010 2011 2009 2010 2011

Chief Executive Officer 66.7% 43.5% 66.7% 73.3% 66.7% 65.2% 81.3% 85.7% 87.5%

Overall (All Positions) 58.4% 38.5% 60.3% 47.5% 62.4% 61.4% 76.7% 72.2% 81.5%

$2.5 to $7.5 MillionLess than $2.5 MillionGreater than $7.5

Million

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Approaches to Market Pricing: Defining the Marketplace Defining the peer group of market comparators is the most crucial step in market pricing. There

is increasing scrutiny of the peer group by Board members, the public, and other stakeholders.

Factors in developing an accurate and defensible comparator peer group:

Organizations with similar

Mission

Location

Scope

Budget

Staff size

Impact

Similar talent pool for executive attraction/retention

Specific characteristics of the executive

Work history, professional background, other (e.g., political background)

Education and experience requirements

Time in position

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Using Survey Data

Review the database, ensuring sufficient number of data points

Make sure position matches are appropriate

Be able to defend survey choices

Understand use of base salary versus total cash compensation in selecting survey data

When setting compensation levels for the CEO and other senior positions, consider:

Compensation philosophy

Organization financial status and affordability of executive compensation

Internal pay practices among executives and staff

Board opinion

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Trends – Base Salary

2010 vs. 2011 Projected Salary Increase Comparison:

Chief Executive Total Salary Increase2

3.0% 2.1%

Executive Total Salary Increase2

3.0% 2.1%

Staff Total Salary Increase2

3.0% 2.3%

8.8% 36.4%

2 Results include organizations reporting holding salaries flat.

2011 Projected Data

(Obtained in October 2010)

2010 Projected Data

(Obtained in October 2009)

Results of Quatt Associates Surveys1

Percentage of Organizations Holding

Salaries Flat

1 Data are salary increases measured as a percentage of budget, not as a percentage of incumbent salary.

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Trends – Annual Incentive

Continued and growing use of incentive compensation plans. Focus on ensuring:

Goals are defined relative to mission and strategy.

Incentive levels are supported by meeting financial goals

Plan is driving the right types of results and leadership behaviors

Incentive payouts (individually and in total) correspond to the level of performance achieved

More organizations are using formal, objective-based, formula-driven plans rather than using

discretion in determining awards

The best formula-driven plans have formal plan documents and define:

Formal tie between performance goals and the compensation plan

Measurements for success – both an institutional “scorecard” and a leadership assessment

score

Award levels: threshold, target and maximum

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Trends – Long Term and Retention Incentive Plans

The prevalence of long-term incentive plans (LTIPs) has been increasing in the last few years,

LTIP’s are often structured in 457(f) plans.

The main objectives of LTIPs are to reward long-term performance and promote executive

retention

Award amounts are usually much lower than in for-profits, where they can generate a significant

portion of an executive’s pay package

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Trends: Governance

Increased level and demands of governance related to executive compensation and performance

assessment due to:

Increased availability of compensation information through the new 990 reporting requirement

Significantly greater scrutiny of compensation data by the public, stakeholders, the press,

government and internal staff

Board Committees, not individual Board Chair, making decisions

Greater engagement of full Board

New 990’s are asking if all Board members have received the 990.

Greater practice in documenting compensation philosophy, system, annual performance and

decision processes

Documented defensibility

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Board Compensation Decision Making Factors

Factors for determining appropriate executive compensation

Market value of the position

Pay trends in the sector in which board members and stakeholders operate

Compensation trends among peer organizations and in the geographical area

Contract terms and compliance with the established compensation philosophy and

compensation system, including the pay for performance system

The performance of the organization, including its financial performance

Staff compensation practice, for example the differential between executive compensation

and staff compensation

Perceived fairness on the part of observers, including:

The board members

The stakeholders

The public