20100920 CII Aligning Executive Performance - ABRIDGED FINAL

8/8/2019 20100920 CII Aligning Executive Performance - ABRIDGED FINAL

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2010 Farient Advisors LLC- All rights reserved

The Holy Grail: Aligning Executive

Performance and Pay

September 20, 2010

Robin Ferracone, Executive Chair, Farient Advisors LLC

These materials are confidential and may be used only with written authorization from Farient Advisors

for


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2 2010 Farient Advisors LLC- All rights reserved 2010 Farient Advisors LLC- All rights reserved

Survey of Investors Perspectives

In 2008, 20 of the top 25 institutional investors were interviewed by

the Center on Executive Compensation

Over 50% of those interviewed citedpay forperformance alignment

as among their most important issues of concern

Approximately 75% had no real concerns about the levels ofexecutive compensation, as long as there were strong connections

betweenpay andperformance

Performance measures were of concern

Investors were negative about disclosures


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Farients Perspectives on Alignment

Investors are concerned about it

- Fairness

- Incentive value

Alignment is a stated corporate objective in virtually all proxy

disclosures

There is no easy way to measure it

Alignment is an old and persistent issue

Alignment can be in conflict with other compensation objectives

(e.g., retention, motivation, etc.)


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4 2010 Farient Advisors LLC- All rights reserved

Case in Point: Copart

Founded in 1982; went public in 1994 (NA

SDAQ

ticker: CP

RT) Today, approximately $750 MM in revenue

In April 2009, Copart asked its shareholders to vote on a proposal

to exchange all forms of compensation for 2 MM stock options to

vest over 5 years for each of the top two executives

Copart CEO ar t Comp n at on Compar on

r or

Comp n at on

an

N w

Comp n at on

an

Sa ary $750,000 $1

Bonu $1,500,000 -

ota Opt on 150,000

Annually

2,000,000

over 5 Years

Opt on rant Va u $1,500,000 $20,000,000

nnua

z

d na $4,000,000

ar

t

nnua

z d

Comp n at on$3,750,000 $4,000,001

Notes:

Sto

k pr

e t r

t= $3

B

k Scho

e

e per optio @33% of

trike price = $

$0

$10

$20

$30

$40

$50

4/2004 4/2005 4/2006 4/2007 4/2008 4/2009

St k

i e

C

t

C i St k i e t i End


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Farients Definition of Alignment and Alignment Zone

PACTM

TSR

Alignment

AlignmentZone

Upper Alignment

O one

Lo er AlignmentO one

Source: Fair Pay, Fair Play: Aligning Executive Performance and Pay

Definition of Alignment

Fairpay, or alignedpay, is when

total compensation, after

performance has been factored

in, is:

1. Sensitive to companyperformance over time; and

2. Reasonable relative to the

mar et for executive talent

and for the performance

delivered

___________________________

Definition of Alignment Zone

A range of acceptable pay

outcomes for a companys size,

industry, andperformance


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Farient Alignment ReportTM


07

0 !

05

04

03

020 "

00

$0

$5

$ 0

$ 5

$20

$25

-30% -20% - 0% 0% 0% 20% 30% 40% 50%

Ann alize

ACTM

(200 $MM )

$7B Re en e

Ann alize 3-Year TSR

F Corp. CEO ACTM

a or er orman e Alignment

Alignmentone

Textile Apparel an L x r

oo a Line

ata oint = 200

TSR = 27%

PACTM = $ 3.6 MM

F Corp.

Pa Tren Line


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From Myth to RealityThe RightTarget Pay The Right PACTM

% % % % % %

Annualized

ACTM

8 MM

Annualized Year TSR

Co art n . CE ACTM

rior CE rogram . Ca h Swa ed or Equity

ndu trialSe tor

Alignment

Zone

CE ew lan

MM tion

Salary

riorCE rogram

Salary

%Target onu

Annual tion


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From Myth to RealityHighly Paid Overpaid

# $

# %

& '

& (

# )

# 8# 9

8

0 1 2 3 # 3 1 2 3 $ # 3 % 2 3

Annuali ed

A TM

9 MM

Revenue

Annuali ed ear TSR

hevron A TM

ay or er ormance Alignment

Alignment

onenergy Sector ay Line

hevron

'Reilly ay Line

Rank4 5O 4 om 6 any

Actual 7 A 4TM

8 9MM @

1 HaA

wa

B

C

igA

aC

oD E F G

331.02 Is enberg H aborsIndustries $97.6

3 I ll ison Ora P le $58.9

4 Ala E ont Q ederal- R ogul $54.0

5 McClendon ChesaE

eaS

eI

nerg B $50.5

6 Adkerson Freeport-McMoran $49.6

7 Irani Oc cidental Petroleum $45.2. . . .. . . .. . . .

17 O'Reilly Chevro T Corp $25.3

Ab U olute V ighest P W id C X Os

3-Year PeriodX T

dingFY2009 (A nnualized)


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From Myth to RealityHeavy Equity Alignment

080706

05

04

03

0

0

00

99

98

97

96

09

$ 0

$ 0 0

$ 00 0

$ ,000 0

-40% - 0% 0% 0% 40% 60% 80%

AnnualiPAC

Y

M

(2009 $MMs)Logarit mic

Scal

Annuali 3- ear SR(1)

OracleCor CEO PAC M

Pay orPerformanceAlignment

Soft are & Ser ices

IndustryPay Line

Alignment

Zone

( )a i

b

cal Yeacb

ab

c eportedby Oracle(d ) Ellib on received nob alary,bonub , oroptionb

during the e -yearperiod ending inf

g g e

$0 0

(2)


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From Myth to RealityHigh TSR Performance Alignment

070

05

040

02

$0

$50

$100

$150

- 0 -15 0 15 0 45 0

lize

P Ch

i

(200 $ s)

lize -Ye TSR

Tec ologySecto Com yCEOP CTM

P y o Pe o m ce Alig me t

Alig me t

Zo eTec ologySecto

P y Li e

Com y

P y Li e


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From Myth to RealityGoal-setting vs. udget Alignment

0

0

0

0

0

0

0302

0

00

0

2

0

2

0% 20% 0% 20% 0%

Annuali ed

PACp

q

200 s

Annuali ed3 Year SR

C nsumer Dis retionar Sector Compan PACPa for Performance Alignment

AlignmentZone

Consumer Discretionar

Sector Pa ine

Compan Pa ine


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Root Causes of Misalignment Design andDecisions


Aggressive target pay

Turbo-charged upside

Conventional goal-setting

Short-term gain;

long-term pain

Flattening the curve

Ad hoc

decisions

Decision-

making

Influences

Compensation Design

Decision-Making

Processes


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Asymmetric Attri ution ias


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Investor Impact: Three Steps To ard Improving Alignment

1. Alignment is always relevant; dont ignore it when TSR is high

2. Ask for Farients Alignment Report

Historical

Prospective

Checklist of red flags

. Vote with your voice before your feet

Say on Pay makes it easy to explain your vote

Pay for Performance Disclosure should discuss fact, not fiction


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The eauty of the Alignment Report

Assesses pay relative to performance, not in a vacuum

Is dynamic, rather than static (performance scenarios across the

TSR spectrum)

Can be viewed both historically (in actual terms), as well as

prospectively (based on program design) Can evaluate pay vis vis any number of peer sets or even

individual companies

Assesses total compensation holistically. Includes design and

decisions

Gives strong guidance as to whether pay is aligned with

performance, or not


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Fair Pay Fair Play ligning Executive PerformanceandPay

Documents

20100920 CII Aligning Executive Performance - ABRIDGED FINAL