Performance Grants and TSR Upside:

Transcription

1 Performance Grants and TSR Upside: An Approach to Plan Design, Expensing, Plan Administration and Communication Jon Burg, FSA, Vice President, Radford, an Aon Hewitt Company Barry Sullivan, Principal, Semler Brossy Consulting Group Jule Torre, Global Stock Programs Manager, Applied Materials James Clark, Senior Director Executive and Equity Compensation, Applied Materials

2 Applied Materials: At A Glance Applied Materials solar energy system at its campus in Sunnyvale, CA, is one of the largest corporate solar power installations in the U.S. Stock Ticker: Market Cap * : Fiscal 2011 Revenue: Fiscal 2011 R&D: Nasdaq: AMAT $14.35 billion $10.52 billion $1.2 billion Founded: November 10, 1967 Headquarters: Global Presence: RD&E and/or Manufacturing Centers: Employees: Patents: Santa Clara, California 83 locations in 19 countries Canada, China, Germany, India, Israel, Italy, Singapore, Switzerland, Taiwan, United States ~15,000 worldwide ~9,300 issued 2

3 The Challenge: How to bring total shareholder return into focus? 3

4 Performance Metrics for PRSU Grants Financial Performance and Market Condition Relative Operating Profit Margin (OPM) is the primary measure of performance Requires Applied to be ranked at the 40 th percentile to begin earning grants Compared to Applied Peer Group Non-GAAP OPM adjusted for nonrecurring items Relative Total Shareholder Return (TSR) upside measure of performance Applies to shares vested from a given grant Must be at 60 th percentile or higher Measured at end of the second year of a given grant 4

5 Current Performance RSU Plan Design 4-year performance window; 1-year performance periods Each grant has a re-earn provision; unearned shares are eligible through the fourth performance window Y1 Y2 Y3 Y4 Y1 Y2 Y3 Y4 Y1 Y2 Y3 Y4 Y1 Y2 Y3 Y4 1-year Operating Margin relative to peers Earn-out % at 65 th %ile and above results in 100% earn-out additional 15% vests for each 5 percentile performance improvement 40 th %ile to 45 th %ile 25% Below 40 th %ile No earn-out 5

6 The Starting Point: Performance RSU s 4-year performance window; 1-year performance periods New grants each year that tie to a new 4-year window Y1 Y2 Y3 Y4 Y1 Y2 Y3 Y4 Y1 Y2 Y3 Y4 Performance in any year could apply to 4 active cycles Y1 Y2 Y3 Y4 1-year Operating Margin relative to peers Earn-out % at 65 th %ile and above results in 100% earn-out additional 15% vests for each 5 percentile performance improvement 40 th %ile to 45 th %ile 25% Below 40 th %ile No earn-out 6

7 The Path Forward: Upside Opportunity Tied to Relative TSR Maintain the structure of the current program Operating Margin for efficiency at any point of the cycle Relative measure for outperformance and to help with goal-setting Four one-year performance periods to address differences across peers Bring fresh attention to share price with relative TSR External optics are clear Maintain Operating Margin as superordinate? TSR relative to whom? 7

8 Determining the relative basis: Back-testing TSR Back-tested a handful of potential groups SELECTION: S&P500 Information Technology Sector competitors for capital objective third-party definition meaningful sample size 8

9 The Plan: 4 year period 2 year TSR Performance 4-year window; 1-year relative Operating Margin as principal basis New 2-year relative TSR key market reference at midpoint of each 4-year window 2yr TSR relative to S&P Tech at 75th %ile and above Upside on shares already earned results in + 50% 70 th to 75 th + 40% 65 th to 70 th + 30% 60 th to 65 th + 20% Below 60 th %ile No additional shares 9

10 Lessons Learned: the Good, the Bad, the Compromise Tool Keep the Good Don t do away with the current practice for the sake of change Avoid the Bad: Look ahead to where design may go wrong and work backwards Stand Ready to Compromise Know the boundaries for each major decision point and work within those boundaries 10

11 How to Value the TSR Upside All PRSU target shares are subject to the market condition TSR Upside performance can earn an additional 50% based on the underlying OPM target shares that vest The market condition is a modifier of the OPM shares from 1.0x to 1.5x. The Monte Carlo simulation captures the possible outcomes of 1.0x to 1.5x. Value is then used as the underlying fair value used for the OPM shares 11

12 Ten Tips in a Nutshell.. 1. Get Started as Soon as Possible 2. Engage in Conversations and Dialogs Early 3. Create a Checklist 4. Make an Effort to Understand and Address Differences 5. Be Aware of Differences in Expectations 6. Don t Be In the Dark Regarding Compliance Activities 7. Work with Advisors to Review Regulations and Applications 8. Extensive Communications are Critical to Success 9. Special Issues: Expect the Unexpected 10. Keep your sense of Humor! 12

13 Special Issues: Expect the Unexpected Design Implementation Execution Handling special agreements and restrictions Systems limitations for equity programs Customizing procedures Advice regarding conflict resolution, e.g. varying interpretations of agreements Compensation and its advisors Finance - External Reporting, Tax, Treasury, Payroll Legal and Securities Vendor applications 13

14 Miscellaneous Items Determine responsible party for the communications and documentation Coordinator of internal process Global issues including expats, multiple payroll systems, withholding tax rates, etc. Audit and risk tolerance No one does it perfectly Work in Progress 14

15 Communicating New Plan Design Feature: TSR Performance Shares Summary Document Explains both the OPM and TSR performance metrics for PRSU s Provides examples of potential earn-outs Performance share agreement PeerTracker Web site Plan Summary TSR Performance OPM Performance More Information 15

16 Performance Shares Summary Document Relative Operating Profit Margin and Relative Total Shareholder Return Thresholds Peer Group (OPM and TSR) Earn-out tables Provides examples of potential earn-outs OPM and TSR Performance Share Agreement 16

17 PeerTracker Custom Web site for Applied Materials 17

18 PeerTracker Custom Web site for Applied Materials 18

19 PeerTracker Custom Web site for Applied Materials 19

20 PeerTracker Custom Web site for Applied Materials 20

21 Contact Information: Jon W. Burg, FSA Barry Sullivan Radford Semler Brossy Vice President Principal Phone: +1 (415) Phone: +1 (310) Jule Torre James Clark Applied Materials, Inc. Applied Materials, Inc. Global Stock Programs Manager Senior Director, Executive and Equity Compensation Phone: +1 (408) Phone: +1 (408)