Equity Compensation Trends

Transcription

1 Equity Compensation Trends An Equilar Publication August 2018 Featuring Commentary From

2

3 Contents CONTENTS Executive Summary 4 About the Contributors 7 Methodology 8 Key Findings 8 Equity Grant Practices 9 Equilar 500 Equity Compensation Package Prevalence 10 Average Grants by Companies Granting Stocks and Options 11 Stock Granted 12 Stock Outstanding 12 Median Stock Granted by Sector, Options Granted 14 Options Outstanding 14 Median Options Granted by Sector, Performance Equity 16 Performance Equity vs. Options to Named Executive Officers 17 Performance Equity by Sector 18 Target CEO Performance Equity as Percentage of Total Equity 19 Performance Equity by Vehicle and Plan Type, LTIP Performance Metrics 21 LTIP Performance Metrics by Sector, Equity Time-Based 24 Time-Based Equity: Cliff vs. Graded Vesting, Stock Vesting Schedules, Options Vesting Schedules, Time-Based Equity: Cliff vs. Graded Vesting by Sector Prevalence, Dilution 28 Total Dilution Overhang 29 Options Dilution Overhang 30 Stock Dilution Overhang 30 Run Rates 31 Disclosures 32 Equity Compensation Trends

4 Lead Author & Managing Editor Alex Knowlton Assistant Editors Amit Batish James Cheap Joseph Kieffer Contributing Authors Spencer Kim Jennifer Koo Jessica Phan Data and Analysis Courtney Yu Design & Layout Cristina Macaraig Elizabeth Vellutini Mike White 2018 Equilar, Inc. The material in this report may not be reproduced or distributed in whole or in part without the written consent of Equilar, Inc. This report provides information of general interest in an abridged manner and is not intended as a substitute for accounting, tax, investment, legal or other professional advice or services. Readers should consult with the appropriate professional(s) before acting on information contained in this report. All data and analysis provided in this report are owned by Equilar, Inc. Reports are complimentary for Equilar subscribers. Nonsubscribers may purchase individual reports for $995. Please contact info@equilar.com for more information. Executive Summary Compensation in the form of stock and option grants has played a large role in diversifying the pay packages of executives and employees. At the executive level specifically chief executive officers (CEO) and other named executive officers (NEO) equity-based awards generally make up a large portion of total compensation, while lower-level employees typically receive a smaller portion of equity as compensation. Equity is represented by time-based and performance-based vehicles, both of which can have multiple types of vesting schedules and, in the case of performance equity, many different performance criteria. Regardless of level, equity-based compensation provides companies the ability to acquire and maintain talent, both in the short- and long-term. At a more macro-view, equity in the form of options has dwindled over the past few years, largely due to the shift towards performance-based awards and the shareholder view that options may not be a very effective compensation tool. The idea of goal-based awards, such as achieving a specific total shareholder return (TSR), provides the notion that an executive vying for the award will have a greater incentive to perform than a time-based, option award could instill. As evidenced by the trends in this report, the move away from options has increased with each passing year. Stock Featured as Primary Equity Vehicle, Options on the Decline (pg. 10) Stock was used as an equity vehicle in 96.5% of all equity compensation packages granted to NEOs at Equilar 500 companies in 2017, a slight increase of 0.3 percentage points over Comparatively, options were only featured in 57% of equity packages in 2017, a 5.2% decline from the year prior. The combination of both stock and option vehicles was the most prevalent equity package in 2017, utilized 55.6% of the time. While still a majority, the combination of stock and options seen in 2017 marks an 18.1% decrease from Contrarily, use of stock as a lone equity vehicle has increased 43% since 2013, the first year of the study. The average size of equity grants at Equilar 500 companies that granted equity in 2017 was 3.1 million shares and 2.6 million shares of stock and options, respectively. The median grant of stock to NEOs in 2017 was one million shares, a 10% increase compared to 2015, while the median stock outstanding was roughly 2.37 million shares. The technology sector led the way in stock grants, with a median of 3.9 million shares, more than the financial and healthcare sectors the second and third highest stock granting sectors, respectively combined. Unlike stock, which has remained relatively consistent in usage throughout the study, the median options granted and outstanding decreased from 2013 to 2017 by 52% and 52.9%, respectively. Additionally, at the 25 th percentile, option grants were nonexistent across all five years, indicating that options were used far less as an equity vehicle.

5 Executive Summary Performance-Based Equity Used by Majority (pgs ) Performance-based equity has come to the forefront of the executive compensation landscape in roughly the last nine years. As a result, 81.6% of companies granting equity in 2017 used performance conditions, a 17.3% increase since 2013, yet a slight 3.5% decrease from The healthcare sector the only sector eclipsing 90% performance usage exhibited the highest prevalence of performance equity at 90.4%, while the technology sector showed the lowest prevalence at 73.8%. Breaking down the performance equity analysis even further, almost twothirds, or 63.2%, of Equilar 500 CEOs received at least half of their total equity in 2017 in the form of performance-based equity. Similarly, 2017 saw the lowest percentage of CEOs at 16.2%, receive less than a quarter of total equity in the form of performance equity. As was the case from 2013 to 2016, the most common performance metric was relative TSR, used as a metric by 52.5% of companies granting performance awards. Utilities companies led the way in TSR prevalence, with 95.5% of performancegranting companies in the sector conditioning awards on the metric. On the flip side, the services sector was the only one to not utilize relative TSR as the most prevalent performance metric, instead opting for return on capital and equity. Vesting Schedules Favor Three-year Period (pg. 26) Though performance-based awards have been in the spotlight recently, time-based equity still plays an important and prominent role in executive compensation. Leveraged as a way to further retain current talent and lure potential talent to the company, time-based awards are typically used by a majority of companies. Of time-based equity granted to NEOs at Equilar 500 companies in 2017, 56.9% were comprised of stock, while 43.1% represented options. Equilar Webinar Equity Compensation Trends 2018 Please Join Equilar and E*TRADE Corporate Services for a webinar that will dive deeper into how companies award equity to their employees and executives. Learn more about how large-cap companies provide equity compensation across the organization and gain insights into performance incentive plan design for top executives. Graded vesting, an equity award being paid out over time, was by far the most popular vesting schedule, with almost two-thirds of stock awards and 84.4% of option awards utilizing the vesting type. Breaking down vesting type further, three years was the most common time-frame for both stock and options, regardless of cliff or graded vesting type. A three-year period was used 76.8% and 73.9% of the time for cliff vesting options and stock, respectively. Dilution Continues Trend and Drops in 2017 (pgs ) Dilution of shares is an important aspect of shareholder voting, specifically concerning equity incentive plans for executives and employees. Shareholders are tasked with finding the sweet spot between maximizing the value of their own shares and allowing a specific amount of dilution from the equity compensation that a company must grant to retain talented executives by granting equity. Certain metrics, such as dilution and run rate, assist shareholders and allow them to make educated votes. (continued on next page) Equity Compensation Trends

6 Equilar Events Board Leadership Forum Join Equilar and Nasdaq for the Board Leadership Forum in New York on October 17 th. The goal of the Forum is to empower participants to build higher-performing boards through improved processes, strengthened director evaluations and recruitment efforts, and more effective shareholder engagement. Executive Summary (continued) Total dilution overhang the unvested shares of a company as a percentage of the total common shares outstanding is the primary measure used to estimate potential dilution of shareholder equity as a result of pay packages. The median total dilution overhang decreased by 35.6% from 2013 to 2017, with the total dilution overhang only 2.6% in Similarly, the dilution overhang specifically for options fell 54.6% over the same time period, while the median stock dilution overhang remained constant at 0.9%. Run rate, which is the percentage of common shares outstanding granted as shares, remained very consistent from 2013 to 2017, never dipping below 1.4% or going above 1.6%.

7 About the Contributor About the Contributor Contributor About E*TRADE Financial Corporate Services, Inc. E*TRADE Financial Corporate Services, Inc. ( E*TRADE ) is a premier provider of equity compensation management tools for some of the nation s top companies, serving 1.6 million+ participants¹. We offer flexible, easy-to-use & powerful solutions for complete equity compensation management, including support for most equity vehicles & seamless access to stock plan participant services / education from E*TRADE Securities. For 7 years running, E*TRADE s proprietary Equity Edge Online platform was rated #1 for Loyalty & Overall Satisfaction in Group Five s Stock Plan Administration Study². E*TRADE Corporate Services was also rated #1 in loyalty in 2018 and #1 in overall satisfaction for brokerage services two years in a row in the same study. 1. Data collected from the E*TRADE Financial Corporate Services, Inc. Equity Edge Online platform as of 7/31/ As of June 15, 2018, Equity Edge Online from E*TRADE Financial Corporate Services, Inc. was rated highest among partial administration plan sponsors in loyalty and overall satisfaction for the seventh consecutive year ( ) in the 2018 Group Five Stock Plan Administration Benchmark Study and Financial Reporting Benchmark Study. E*TRADE Corporate Services was also rated #1 in loyalty in 2018 and #1 in overall satisfaction for brokerage services two years in a row in the same study. Group Five, LLC is not affiliated with E*TRADE Financial Corporate Services, Inc. or the E*TRADE Financial family of companies. Securities products and services are offered by E*TRADE Securities LLC, member FINRA/SIPC and employee stock plan solutions are offered by E*TRADE Financial Corporate Services, Inc. which are separate but affiliated companies. Equity Compensation Trends

8 Methodology Equity Compensation Trends, an Equilar publication, examines equity compensation design and granting practices of Equilar 500 companies over the last five fiscal years. The Equilar 500 tracks the 500 largest public companies, by reported revenue, with headquarters in the U.S. that trade on one of the major U.S. stock exchanges (NYSE, Nasdaq or NYSE MKT (formerly AMEX)), and adjusted to approximate the industry sector mix of similar large-cap indices. Companies that filed a proxy statement (DEF 14A) or disclosed compensation information in an amended 10-K filing (10-K/A) by May 31, 2018 were included in the fiscal 2017 year. Previous years were defined similarly. The Equity Grant Practices and Dilution sections include company-wide equity grants, while the Performance Equity and Time-Based Equity Vesting sections refer to equity grants to named executive officers (NEOs). The term stock used throughout the report refers to all full-value shares, including restricted stock and restricted stock units. Options comprise of stock options and stock-appreciation rights (SARs). Performance equity encompasses any equity compensation vehicle linked to the achievement of performance criteria. Short-term incentive plan (STIP) equity is characterized by a performance period less than or equal to one year while long-term incentive plan (LTIP) equity refers to those grants with a performance period greater than one year. The narrative portion of this report identifies company trends around awards and design of equity compensation for their management teams and employees. E*TRADE Financial Corporate Services, Inc. ( E*TRADE Corporate Services ) has offered independent commentary to provide insight and context based on experience regarding how companies structure equity pay. Key Findings 1. Stock was used in 96.5% of all equity compensation packages granted to NEOs at Equilar 500 companies in The average option grant by company decreased by 23.5% from 2013 to 2017, while the average stock grant fell by 13.9% over that same period 3. The basic materials sector experienced the largest increase in performance equity prevalence with a 23.5 percentage point gain from 2013 to 2017 however, the prevalence of performance equity across the entire Equilar 500 decreased from 2016 to At 52.5%, relative TSR was the most prevalent performance metric in awards granted at Equilar 500 companies in 2017 as was the case in the previous four years 5. Nearly two-thirds of Equilar 500 companies that granted stock did so with a graded vesting schedule in Of those graded grants, 64.9% fully vested after three years 6. At the median, total dilution overhang decreased every year in the study, bottoming out at only 2.6% in the most recent year

9 Equity Grant Practices Equity Compensation Trends 2018 Equity Compensation Trends

10 Figure Equilar 500 Equity Compensation Package Prevalence 1.7% 2.2% 2.2% 2.0% 2.2% % 61.2% 59.5% 58.3% 55.6% % 28.6% 2.4% 1.6% 1.8% 1.4% 34.1% 36.6% 37.9% 40.9% Stock Options Both Neither Data Points There has been a continuous rise in compensation packages containing solely stock. From 2016 to 2017, there was a three percentage point increase in the number of Equilar 500 companies that only grant stocks (Fig. 1) Overall, the trends indicate a steady decrease in companies usage of option awards in the study (Fig. 1) Only 2.2% of all Equilar 500 companies opted to not grant any equity awards in 2014, 2015 and 2017, the most prevalent years in the study (Fig. 1)

11 Equity Grant Practices Figure 2 Equilar 500 Average Grants by Companies Granting Stocks and Options Stock Options Data Points Equilar 500 companies in 2017 granted fewer stocks and options overall. A decrease of 0.6 million shares and 0.2 million shares from 2016 for stock and option awards, respectively (Fig. 2) With an average grant of 3.7 million shares of stock granted, 2016 led all years in the study (Fig. 2) Average options granted continued to decrease over the past five years, falling 23.5% from 2013 to 2017 (Fig. 2) E*TRADE Commentary According to our proprietary data 1, the prevalence of restricted stock grants continues to increase (90% restricted stock v.10% stock options) and this pattern has been consistent for the last several years. While the trend is on the decline for granting stock options, the year-over-year changes have been gradual; about a 1-3% decrease in stock options granted each year from This data reflects a gentle decline, rather than a large exodus, suggesting companies may not be moving away from stock options entirely. This is the case across various company sizes and most sectors. Equity Compensation Trends

12 Data Points 2015 saw the lowest median of the five years included in the study, while the following year represented the highest median stock granted, at just over 1.1 million (Fig. 3) Between 2016 and 2017, the median stock granted decreased by 9.2%, with a median of one million shares in the most recent year (Fig. 3) Figure 3 3,000 2,500 2,000 1,500 1, Equilar 500 Stock Granted The median and 25 th percentile remained relatively parallel in yearto-year disparity over the past five years (Fig. 3) At the 75 th percentile, 2014 represented the largest amount of stock outstanding, at around 5.8 million shares (Fig. 4) The median stock outstanding decreased by 33,200 shares from 2016 to 2017 (Fig. 4) The 25 th percentile stock outstanding saw a slight increase of 1.7% from 2013 to 2017 (Fig. 4) th 2, , , , ,383.5 Median 1, , , th Figure 4 6,000 5,000 4,000 3,000 Equilar 500 Stock Outstanding 2,000 1, th 5, , , , ,600.0 Median 2, , , , , th 1, , , , ,029.1

13 Equity Grant Practices Figure 5 Equilar 500 Median Stock Granted by Sector, ,000 3,500 3, ,000 2,500 2,000 1,500 1, , , Basic Materials Consumer Goods Financial Healthcare Industrial Goods Services Technology Utilities Data Points Equilar 500 companies within the utilities sector granted the least amount of stock, with a median of 690,700 shares, followed closely by industrial goods companies at 706,000 shares (Fig. 5) The technology sector granted the most stocks by far 3.9 million shares more than double the financial sector, the second highest median in the study (Fig. 5) E*TRADE Commentary Restricted stock grants have a number of features that make them desirable forms of equity compensation when compared to options, including their relative simplicity for participants to understand and take action.one important factor to consider when looking at restricted stock vs. stock options is that restricted stock may hold value even in less favorable economic climates. There are also benefits to the company when it comes to restricted stock. As an example, in up markets, restricted stock can deliver value to employees helping companies achieve their retention goals. At the same time, restricted stock can also result in less dilution to the company relative to stock options, potentially saving the company on its overall stock compensation expense. In contrast, in a major market downturn, stock options lose much of their incentive value if they can t be exercised for gain. To further illustrate this point, our 2017 proprietary data shows that there were still options expiring out of the money from grants made in Equity Compensation Trends

14 Data Points As was the case the past four years, the 25 th percentile of options granted in 2017 was zero. This is due to a substantial portion of companies not granting options at all (Fig. 6) Both the median and 75 th percentile of options granted hit a low in 2017 of 300,000 shares and 1.4 million shares, respectively (Fig. 6) Figure 6 2,500 2,000 1,500 1, Equilar 500 Options Granted Options granted in 2017 in the 75 th percentile dropped by 15.8%, after a slight rise in prevalence between 2015 and 2016 (Fig. 6) The median options outstanding declined in every year in the study (Fig. 7) The median decrease from 2014 to 2015 was the largest in the study at 21.3%, with a 19.5% decrease between 2016 and 2017 a close second (Fig. 7) Options outstanding decreased only 5.9% from 2016 to 2017 at the 75 th percentile, while options outstanding at the 25 th percentile fell 69.7% the same years (Fig. 7) th 2, , , , ,403.5 Median th Figure 7 15,000 12,000 9,000 6,000 3,000 Equilar 500 Options Outstanding th 14,206 12,857 10,883 9,000 8,465 Median 6,000 5,111 4,023 3,513 2, th 1,

15 Equity Grant Practices Figure 8 Equilar 500 Median Options Granted by Sector, ,500 1,200 1, Basic Materials Consumer Goods Financial Healthcare Industrial Goods Services Technology Utilities Data Points The healthcare sector had by far the largest median at over 1.2 million options granted, more than twice the industrial goods sector (Fig. 8) Half of the eight sectors median options granted was more than the entire Equilar 500 median in 2017 Both the financial and utilities sectors granted less than 1,000 options in 2017 (Fig. 8) E*TRADE Commentary According to some of the companies we work with, the technology sector is leading the trend of decreasing reliance on stock option grants. With clear evidence of decreased grant values in 2017, stock options now reflect a smaller percentage of employee holdings for many participants working in the technology sector. On the other side of the coin is the healthcare sector, which, for our client base, has experienced an increased reliance on stock options relative to restricted stock in Regardless of industry sector or equity mix, we ve observed companies continuing to grant at equal or higher rates than prior years. A strong labor market driving the competition for talent and the overall stock market s performance have contributed to this trend. Equity Compensation Trends

16 Performance Equity Equity Compensation Trends 2018

17 Performance Equity Figure 9 Equilar 500 Performance Equity vs. Options to Named Executive Officers % 64.6% 75.6% 60.4% 79.6% 84.6% 58.4% 57.6% 81.6% 54.8% Performance Equity Options Data Points The prevalence of options grants has decreased by about 3.8% each year on average (Fig. 9) The prevalence of performance equity grants to named executive officers fell by 3.5% from 2016 to 2017, breaking a four year upward trend from 2013 to 2016 (Fig. 9) E*TRADE Commentary Due to their metrics-based design, performance-based grants can require more careful planning, communication and oftentimes administrative attention. All of these factors can be difficult to scale over a large employee base, which likely explains why companies often only make these grants to the C-suite or the C-suite and their direct reports. Additionally, the further down in the organization these awards are granted, the less control recipients may feel over the corporate-level performance metrics these awards are tied to. Be that as it may, our data is beginning to show trends of increased granting practices down to the vice president level to drive very specific business line results. However, companies should strongly consider how their employee base at more broad-based levels may react to performance-based equity, in both high-performing times and during times of low payouts. Although we are seeing more frequency in the adoption of these more broad-based performance plans, companies are wise to evaluate and understand the administrative and communication demands on their stock plan teams so that expectations are clearly outlined to award recipients. Equity Compensation Trends

18 Figure 10 Equilar 500 Performance Equity by Sector Equilar 500 Basic Materials Consumer Goods Financial Healthcare Industrial Goods Services Technology Utilities % 56.9% 64.2% 71.6% 82.7% 77.8% 72.8% 69.2% 85.2% % 64.7% 73.1% 75.0% 82.7% 77.8% 77.7% 73.8% 85.2% % 64.7% 76.1% 83.0% 90.4% 84.4% 79.6% 78.5% 81.5% % 70.6% 82.1% 87.5% 88.5% 93.3% 83.5% 86.2% 88.9% % 80.4% 74.6% 89.8% 90.4% 88.9% 77.7% 73.8% 81.5% Data Points The basic materials sector saw the largest increase in performance equity usage from 2013 to 2017, with an increase of 41.3% (Fig. 10) Five sectors saw a decrease in the prevalence of performance equity from 2016 to 2017 (Fig. 10) Only the utilities sector saw a lower prevalence of performance equity in 2017 than in 2013 (Fig. 10) Effectively Assess the Metrics in Your Incentive Plans Equilar and the Center On Executive Compensation have partnered to develop the Incentive Plan Analytics Calculator (IPAC sm ), which encompasses Financial Metric Correlation and Incentive Plan Design. With IPAC sm, you can assess the robustness of your incentive plan metrics compared to the metrics used by your peers, allowing you to adequately motivate your executives while satisfying investor interests. Learn more:

19 Performance Equity Figure 11 Equilar 500 Target CEO Performance Equity as Percentage of Total Equity % 22.2% 24.4% 24.0% 21.5% 24.4% 51-75% 34.9% 31.6% 37.8% 42.1% 38.7% 26-50% 15.8% 18.9% 16.5% 19.4% 20.6% 0-25% 27.1% 25.1% 21.8% 17.0% 16.2% Data Points Almost two-thirds of total equity granted to Equilar 500 CEOs in 2016 and 2017 consisted of at least 50% performance equity at the target (Fig. 11) Performance equity used as less than 25% of the total equity granted to CEOs decreased in each year in the study, evidence of the continuous move to tie equity to performance (Fig. 11) $? Tell Your Best CEO Pay Ratio Story The new CEO Pay Ratio Modeler assists companies in drafting the proxy narrative, developing a strategy for in-house corporate communications and demonstrating a clear presentation of the ratio. Benchmark pay ratio disclosures across industries and custom peer groups, and leverage up to nine different metrics to develop a customized pay ratio narrative. Learn more: Equity Compensation Trends

20 Figure 12 Equilar 500 Performance Equity by Vehicle and Plan Type, % 3.4% 10.2% 2% STIP Options STIP Stock 60.0% 24.0% STIP Units LTIP Options LTIP Stock LTIP Units Data Points Options continue to be the least common performance equity vehicle. Short-term incentive plan options were only used as a vehicle by 0.4% of companies, while long-term incentive plan options were only used by 2% of companies (Fig. 12) 84% of all long-term incentive plan vehicles were made up of stock and units (Fig. 12) Units were the most prevalent incentive plan vehicle used in the short-term (Fig. 12)

21 Performance Equity Figure 13 Equilar 500 LTIP Performance Metrics Relative TSR ROC / ROIC / ROE EPS Revenue Cash Flow % 22.1% 30.3% 19.6% 10.1% % 22.9% 27.9% 18.1% 11.7% % 22.0% 29.6% 16.7% 12.7% % 22.4% 29.7% 16.0% 13.4% % 23.8% 29.5% 15.7% 13.3% Data Points Relative total shareholder return was the most popular long-term incentive performance metric at Equilar 500 companies in each year in the study (Fig. 13) Revenue and EPS, while both still in the top five of most-used performance metrics, decreased in prevalence from 2013 to 2017 (Fig. 13) E*TRADE Commentary Companies may be challenged with trying to find a single metric that can encompass all organizational and compensation related goals. That said, TSR metrics, especially those that are relative to a peer group or index, can directly align pay with shareholder value. What s more, relative TSR targets can help isolate company performance against economic climates. However, it may be important for companies to keep a close eye on the current health of the business through metrics also tied to results like earnings, cash flow or revenue. If companies grant performance awards below the C-suite, it is also possible to design targets that are in more direct control of the business leads, which can motivate employee behavior. For these reasons, TSR awards are often used in conjunction with other performance targets that are relevant to the business strategy, rather than a sole measure of performance. Equity Compensation Trends

22 Figure 14 Equilar 500 LTIP Performance Metrics by Sector, 2017 Data Points EBIT, used by 14.5% of companies, replaced cash flow/cash from operations as the fifth most common performance metric for Equilar 500 companies (Fig. 14) The services sector was the only sector that did not utilize relative TSR as its primary performance metric. Instead, ROC / ROIC was the most common metric, utilized by 37.3% of companies (Fig. 14) Perhaps not surprising due to the nature of jobs, the utilities sector was the only sector to have safety among its five most common performance metrics (Fig. 14) Sector Performance Metric Prevalence Equilar 500 Relative TSR 52.5% EPS 29.5% ROC / ROIC 23.8% Revenue 15.7% EBIT 14.5% Basic Materials Relative TSR 68.3% ROC / ROIC 31.7% Cash Flow 17.1% EPS 12.2% Absolute TSR 7.3% Revenue 7.3% Stock Price 7.3% Consumer Goods Relative TSR 54.7% ROC / ROIC 39.6% EPS 22.6% EBIT 22.6% Revenue 20.8% Financial Relative TSR 38.0% EPS 29.1% Book Value 13.9% EBIT 10.1% Industry Specific 8.9% Healthcare Relative TSR 59.6% EPS 44.7% Revenue 27.7% ROC / ROIC 17.0% Stock Price 14.9% Industrial Goods Relative TSR 67.5% ROC / ROIC 42.5% Cash Flow 32.5% EPS 30.0% Revenue 25.0% Services ROC / ROIC 37.3% Relative TSR 34.9% EPS 30.1% EBIT 30.1% EBITDA 19.3% Technology Relative TSR 52.7% EPS 27.3% Cash Flow 18.2% Revenue 16.4% Operating Income / Margin 14.5% Utilities Relative TSR 95.5% EPS 45.5% Safety 22.7% Industry Specific 13.6% Debt Leverage/Debt Ratios 13.6%

23 Performance Equity E*TRADE Commentary Market fluctuations can create many uncertainties for companies, so it s always important to consider a plan for all economic climates. Long-term trends may be interrupted by unavoidable short-term fluctuations. In fact, metrics like TSR are especially sensitive to short-term price swings, and companies may want to consider design strategies to mitigate these irregularities. As an example, companies could implement strategies such as trailing average prices to measure returns or they could schedule grant dates to take place away from seasonally volatile periods. Further, many operational metrics such as individual business line profit or margin goals are inherently less subject to market fluctuations, relative to market conditions, which make them worth considering for some companies. Often when deciding how many shares to grant, some companies will set a target dollar value, and then back into the number of shares based on the stock price or accounting value. In these cases companies need to be cognizant of the impact a price swing on the grant date could have on the actual size of the grant. Equity Compensation Trends

24 Equity Time-Based Equity Compensation Trends 2018

25 Equity Time-Based Figure 15 Equilar 500 Time-Based Equity: Cliff vs. Graded Vesting, 2017 Stock 56.9% Stock Cliff 32.8% Options 43.1% Stock Graded 66.2% Options Graded 84.4% Options Cliff 9.4% Data Points Among time-based stock awards in 2017, graded vesting was about twice as common as cliff vesting (Fig. 15) Among time-based option awards in 2017, graded vesting was much more common, used in 84.4% of all option awards, while cliff-vesting awards made up only 9.4% of all time-based options (Fig. 15) Time-based stock awards were used more than option awards by 13.8 percentage points (Fig. 15) Equity Compensation Trends

26 Data Points Regardless of vesting type, a threeyear vesting period was the most common for stock, with three-year cliff-vesting the most common schedule at 73.9% (Fig. 16a) Figure 16a Equilar 500 Stock Vesting Schedules, Graded-vesting was more prevalent than cliff-vesting for four- and five-year stock vesting schedules (Fig. 16a) Both stock and option vesting schedules graded or cliff greater than five years comprised less than 1% of all awards (Figs. 16a & 16b) Three-year cliff vesting for options was the most popular schedule out of all types, at 76.8% of options (Fig. 16b) Cliff- Vesting Stock Graded- Vesting Stock >5 4.7% 4.1% 73.9% 9.9% 6.5% 0.9% 0.2% 2.4% 64.9% 24.1% 7.8% 0.7% Figure 16b Equilar 500 Option Vesting Schedules, >5 Cliff- Vesting Options Graded- Vesting Options 5.1% 0.7% 76.8% 10.1% 6.5% 0.7% 0.0% 0.6% 55.5% 35.2% 8.1% 0.5%

27 Equity Time-Based Figure 17 Equilar 500 Time-Based Equity, Cliff vs. Graded Vesting by Sector Prevalence, 2017 Equilar Basic Materials Consumer Goods Financial Healthcare Industrial Goods Services Technology Utilities Cliff Stock Graded Stock Cliff Options Graded Options Data Points The financial sector was the only sector to have a specific vesting-type for a vehicle exceed 50% prevalence, with graded stock being used 50.9% in 2017 (Fig. 17) The utilities sector was the only sector with cliff vesting stock as the most prevalent time-based equity (Fig. 17) Cliff vesting options made up less than 7% of time-based awards in all industries in 2017 (Fig. 17) Access the Data to Design Effective Incentive Plans In an environment of increased scrutiny from institutional investors, regulatory agencies, proxy advisors, shareholders and others, it is more important than ever to have access to the highest quality data. Beyond the proxy statement s Plan-Based Award Table incentive plan data that is available within Equilar Insight, Equilar has compiled the most comprehensive and sophisticated data set on incentive plans covering performance-based Annual Incentive Plans and Long-Term Incentive Plans. Learn more: Equity Compensation Trends

28 Dilution Equity Compensation Trends 2018

29 Dilution Figure 18 Equilar 500 Total Dilution Overhang th 5.7% 5.1% 4.8% 4.6% 4.4% Median 4.1% 3.6% 3.2% 3.0% 2.6% 25 th 2.3% 1.9% 1.7% 1.5% 1.4% Data Points The median total dilution overhang has declined by 1.5 percentage points since 2013 (Fig. 18) 2013 saw the highest total dilution overhang at all levels, while 2017 represented the lowest overhang at all levels (Fig. 18) Equity Compensation Trends

30 Data Points At the 25 th percentile, option dilution overhang was a mere 0.1% in 2017 (Fig. 19) The year-over-year decline in median option dilution overhang has been relatively steady at 0.2% to 0.3% since 2014, following a larger 0.6% drop from 2013 to 2014 (Fig. 19) Figure Equilar 500 Options Dilution Overhang Median stock dilution overhang 1 remained unchanged from 2013 to 2017, at 0.9% (Fig. 20) th 4.5% 4.0% 3.7% 3.4% 3.1% Median 2.6% 2.0% 1.8% 1.5% 1.2% 25 th 0.9% 0.6% 0.4% 0.3% 0.1% Figure 20 Equilar 500 Stock Dilution Overhang th 1.6% 1.6% 1.5% 1.5% 1.5% Median 0.9% 0.9% 0.9% 0.9% 0.9% 25 th 0.5% 0.6% 0.5% 0.5% 0.5%

31 Dilution Figure 21 Equilar 500 Run Rates th 2.4% 2.3% 2.2% 2.5% 2.2% Median 1.5% 1.4% 1.4% 1.6% 1.4% 25 th 1.0% 0.9% 0.8% 1.0% 0.8% Data Points The median run rate has remained mostly consistent over the last five years, with a range of only 0.2% (Fig. 21) Despite a spike in the median run rates in 2016, a decrease across all levels occurred in 2017 (Fig. 21) Equity Compensation Trends

32 PLEASE READ THE DISCLOSURES BELOW 1. Data collected from the E*TRADE Financial Corporate Services, Inc. Equity Edge Online platform as of 7/31/ As of June 15, 2018, Equity Edge Online from E*TRADE Financial Corporate Services, Inc. was rated highest among partial administration plan sponsors in loyalty and overall satisfaction for the seventh consecutive year ( ) in the 2018 Group Five Stock Plan Administration Benchmark Study and Financial Reporting Benchmark Study. E*TRADE Corporate Services was also rated #1 in loyalty in 2018 and #1 in overall satisfaction for brokerage services two years in a row in the same study. Group Five, LLC is not affiliated with E*TRADE Financial Corporate Services, Inc. or the E*TRADE Financial family of companies. Equilar is not affiliated with E*TRADE Financial Corporate Services, Inc. or the E*TRADE Financial family of companies. The E*TRADE Financial family of companies provides financial services that include trading, investing, banking, and managing employee stock plans. Employee stock plan solutions are offered by E*TRADE Financial Corporate Services, Inc. Securities products and services are offered by E*TRADE Securities LLC, Member FINRA/SIPC. In connection with stock plan solutions offered by E*TRADE Financial Corporate Services, Inc., E*TRADE Securities LLC provides brokerage services to stock plan participants. E*TRADE Securities LLC and E*TRADE Financial Corporate Services, Inc. are separate but affiliated companies. The laws, regulations and rulings addressed by the products, services, and publications offered by E*TRADE Financial Corporate Services, Inc. and its affiliates are subject to various interpretations and frequent change. E*TRADE Financial Corporate Services, Inc. and its affiliates do not warrant these products, services and publications against different interpretations or subsequent changes of laws, regulations and rulings. E*TRADE Financial Corporate Services, Inc. and its affiliates do not provide legal accounting or tax advice. Always consult your own legal, accounting and tax advisors E*TRADE Financial Corporation. All rights reserved.

33 Equity Compensation Trends

34 1100 Marshall Street, Redwood City, CA W. Wacker Drive #900A, Chicago, IL Phone: (650) Fax: (650)