Equity Best Practices The Case for Performance-Based Incentive Plans CBIA s 2014 Compensation & Benefits Conference November 4, 2014
Your Discussion Leaders Heather Royce, CEP Director, Compensation, The Priceline Group 14 Year Equity Compensation Veteran Extensive history with equity plan design and execution Board Member of CT National Association of Stock Plan Professionals (NASPP) SVP Sales for EASi Don Gillotti, CEP Professional focus in Equity Compensation for over 15 years Holds a BS in Accounting from UCONN and a Marketing MBA from Quinnipiac University Board Member of CT National Association of Stock Plan Professionals (NASPP)
Today s Topics Pay for Performance Trends Characteristics of Performance- Based Equity Tax and Accounting Considerations Best Practices Hot Topics
Today s Topics Pay for Performance Trends Characteristics of Performance- Based Equity Tax and Accounting Considerations Best Practices Hot Topics
Regulatory Trends Dodd Frank Legislature mandating compliance with various disclosure and shareholder-voting provisions regarding compensation practices Provided the SEC the authority to make additional rules in furtherance of these requirements. Say on Pay Initiated a required shareholder vote on the corporate executive compensation plans Non-binding vote at least once every 3 years
Shareholder Advisories Purpose Agenda Advise institutional shareholders whether or not to approve the executive compensation plan Ensure the alignment of equity plans with shareholder interests OR Examples Glass Lewis Institutional Shareholder Services (ISS)
The Case for Performance Awards Provide for close alignment of equity compensation with the best interests of the company (both management and employees) and shareholders Ensure that executives are being measured by, and rewarded in relation to, reaching targets that result in the advancement of a company s strategic objectives Compensation practices are being regulated in a way that pressures companies to align pay with performance
Why does The Priceline Group use Performance Awards? Focus executives efforts on things within their control that will contribute to the long term financial success of the company The three-year term serves as significant retention device More at risk compensation; better pay for performance alignment
Today s Topics Pay for Performance Trends Characteristics of Performance- Based Equity Tax and Accounting Considerations Best Practices Hot Topics
Setting yourself up for Success Invite EVERYONE to the table! Make sure performance metrics are objectively measurable and not subject to interpretation Make sure the performance metrics align with the long term goals of the company Make sure the employee understands the metrics and vesting schedule Make sure the company fully understands the accounting impacts
PSU vs PSA Performance Stock Awards Performance Stock Units Predetermined # of shares awarded at no cost at time of grant Performance and Service conditions are met Award is vested and shares are released A promise to award shares at no cost when conditions are met Performance and Service conditions are met Converted into shares and awarded
Lifecycle of a Performance Award Performance Goals Determined Grant Performance Period Ends Performance is certified Service Period Ends Award Vests
Types of Performance Measures Market Conditions Absolute Price Growth (%) Stock Price Target ($) Ratio of Stock Price at Grant vs. Stock Price at Vest Date Total Shareholder Return (TSR) Performance Conditions Revenue (Gross or Net) Profit (Net, OI, EPS, EPS Growth, EBITDA) Product Release or Drug Approval Return on Equity or Return on Assets Employee Attitude Survey Results, Customer Satisfaction Index
Performance for Private Companies You can do it too! As long as you can track the metrics you can create an effective performance equity compensation strategy Use performance conditions as a measurement 500 th client ; cash flow positive 2 ways to monetize the value of the units Cash settled or create a market for the stock
How does The Priceline Group use Performance Awards? Type of Award: Performance Share Units (PSUs) Performance Metric: Adjusted EBITDA Vesting Period: 3-year cliff vest Performance Period: 3 calendar years Eligibility: Section 16 Officers; other key senior executives (around 10% of equity plan participants) Grant Value: Awarded in USD, converted to target units on date of grant
Today s Topics Pay for Performance Trends Characteristics of Performance- Based Equity Tax and Accounting Considerations Best Practices Hot Topics
Accounting Considerations Market Conditions Must have valued by an outside firm using the Monte Carlo option model Performance Conditions Must be prepared to adjust the expense for the duration of time Cash Settled Has to be carried as a liability and marked to market
Things to think about for Taxation PSU PSA Withhold to cover Sell to cover Generally taxed at vesting; shares available to cover taxes (409A issue retirement eligibility) If shares deferred under 409A, federal and state income tax deferred until release; FICA/FUTA due at vesting Dividend equivalents taxed when paid (typically vesting) Generally taxed at vesting in US; tax point varies outside US (e.g., grant, vesting, release) Taxed at grant in US if 83(b) election filed; no shares available to cover taxes Dividends taxed when declared + Permissible for Insiders during blackout + Non-dilutive Dilutive Company must have cash to cover taxes Accounting considerations Compliance issue for insiders during blackout + No company cash required to cover tax + No accounting impact + No commissions/fees Employee pays broker commissions / fees + Easier to administer Administrative complexity of sale
Today s Topics Pay for Performance Trends Characteristics of Performance- Based Equity Tax and Accounting Considerations Best Practices Hot Topics
Best Practices Use of Units Grant in $ Communication during performance period Withhold to cover (followed closely by sell to cover)
Today s Topics Pay for Performance Trends Characteristics of Performance- Based Equity Tax and Accounting Considerations Best Practices Hot Topics
Hot Topics Single vs multiple metrics Market vs internal conditions Forfeit vs pro-rata vest on retirement Who should be eligible for performance awards?
Want to know more? Helpful resources: CEP Institute free publication: GPS Performance Awards (available for download at www.scu.edu/business/cepi) National Association of Stock Plan Professionals (NASPP.com) National Center for Employee Ownership (NCEO.org) Don Gillotti, EASi don.gillotti@easiadmin.com 925-730-4311