Board Committee Forum: Compensation

Board Committee Forum: Compensation National Harbor, Maryland / Oct. 13, 2013 ADVANCING EXEMPLARY BOARD LEADERSHIP

Welcome and Objectives National Harbor, Maryland / Oct. 13, 2013 Jannice Koors Managing Director, Pearl Meyer & Partners ADVANCING EXEMPLARY BOARD LEADERSHIP

Legislation and Regulation Update National Harbor, Maryland / Oct. 13, 2013 John J. Gorman Partner, Luse Gorman Pomerenk & Schick; Director, SmartPros Jannice Koors Managing Director, Pearl Meyer & Partners ADVANCING EXEMPLARY BOARD LEADERSHIP

Topics for Discussion Dodd-Frank Update Legal Cases Other 4

On Sept. 18, the SEC Approved the Proposed Rules on the CEO to Median Employee Pay Ratio Requires companies to disclose total annual median employee pay, CEO total annual compensation, and the ratio between the two Disclosure required in 2015 proxies at the earliest; more likely 2016 Flexible approach to comply with DFA requirements to manage cost and enforcement complexity Population Covered In determining median employee pay, companies may either use the full population or a statistical sample (statistical sampling methodology not discussed) 5

On Sept. 18, the SEC Approved the Proposed Rules on the CEO to Median Employee Pay Ratio (cont d) Companies must include full-time, part-time, seasonal, temporary, and international employees Timing: Only those individuals employed on the last day of the fiscal year at issue will be included Annualization: Only permitted for full-time permanent workers who worked for a partial year; not allowed for seasonal or part-time employees Companies can use a reasonable method (e.g., W-2 wages) to determine which employee(s) represent the median, but the Summary Compensation Table method for calculating total compensation must be used for the ratio calculation Companies will be required to explain methodologies and estimates for calculating the ratio The comment period is open company feedback is important! 6

Internal Equity Compensation Ratio SEC Commissioner Luis Aguilar recently urged companies to make voluntary robust proxy disclosures this year to fully comply with Dodd-Frank Act (DFA), including the: Ratio between CEO compensation and median pay Relationship between executive compensation actually paid and a company s long-term performance Even so, full implementation of DFA continues to be uncertain. For example, the recently introduced Burdensome Data Collection Relief Act seeks to repeal the internal equity ratio disclosure requirement In anticipation of the requirement, Bloomberg calculated the CEO pay ratios for the top 250 companies. The chart below summarizes the data Bloomberg Calculated Ratios Median CEO Pay Ratio Median CEO Pay 1 ($MM) Median Avg Employee Pay 2 Median Top 250 S&P 500 Co's 269 $14.2 $54,936 25th%ile 210 $11.1 $43,604 75th%ile 356 $18.7 $63,339 1 Represents CEO pay as reported in the Summary Compensation Table of most recent proxy filing 2 Employee salaries determined by Bureau of Labor Statistics' database of average hourly pay for production and nonsupervisory employees by industry and increased by industry specific multipliers reflecting workers' benefits 7

DFA Update The SEC has only issued final rules and effective dates for three of seven provisions Provision Effective Dates in DFA Current Known Status or Scheduled Action Compensation Committee and Advisor Independence; Committee s Oversight Authority Disclosure of Compensation Consultant Conflict of Interest Disclosure of COB/CEO Roles Rules were to have been effective by 7/16/2011 Was supposed to have applied to proxy statements for meetings occurring on or after 7/21/2011 None stated, but it is so similar to 2010 rule that most companies have complied in the 2011 proxy SEC issued Final Rules June 2012 Exchanges issued proposed rules Sept. 25, 2012 SEC finalized the NYSE and Nasdaq listing standards related to compensation committees and their advisors Jan. 16, 2013 Advisor independence and charter: Effective July 1, 2013 Committee independence: Effective earlier of (1) first annual meeting after 01/15/2014, or (2) 10/31/2014 SEC issued Final Rules June 2012 Effective for 2013 proxy season Effective for 2011 proxy season Internal Equity Ratio Disclosure None stated Proposed Rules issued Sept. 18, 2013 Likely not effective until 2016 Clawback Policy Pay for Performance Disclosure None stated None stated Final and Proposed Rules pending per SEC Likely not effective until 2014, at earliest Final and Proposed Rules pending per SEC Likely not effective until 2014, at earliest Disclosure of Hedging None stated Final and Proposed Rules pending per SEC Likely not effective until 2014, at earliest 8

Noteworthy Court Rulings Proxy compensation disclosures and say-on-pay (SOP) lawsuits Excessive compensation, compensation that does not follow compensation discussion and analysis (pay when performance is lacking), failed SOP votes Most dismissed Make sure governance processes are in order Director compensation and independence Consider review of equity plans in which directors can participate to ensure grant maximums are reasonable Seinfeld v. Slager, Delaware Court of Chancery refuses to dismiss lawsuit challenging director compensation under stock plan 9

Noteworthy Court Rulings (cont d) Stockholder approved plan provided for grants of up to 10 million shares ($250 million), individual grant limit of up to 1.25 million shares per year ($30 million), but no plan limits for director grants Directors potentially self-interested 10

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Pay for Performance: Selecting Metrics and Setting Goals National Harbor, Maryland / Oct. 13, 2013 Erroll B. Davis Jr. Director, General Motors, Union Pacific Corp. Lynn Thompson Hoffman Director and Chair, Governance and Compensation Committee, Boston Private Financial Holdings Steven Van Putten Managing Director, Pearl Meyer & Partners ADVANCING EXEMPLARY BOARD LEADERSHIP

Topics of Discussion Marketplace overview of incentive metrics and vehicles Recent trends and developments in incentive compensation Key considerations in selecting metrics and setting goals How to assess whether your incentive program is working as intended Key discussion topics 13

Marketplace Overview of Incentive Metrics and Vehicles Fortune 100 Incentive Metric Use 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 93% 10% Both 49% Oper. 33% Net 56% 5% Both 17% Oper. 35% Net 2% 47% 46% 20% 33% 39% 27% Earnings TSR Revenue Returns Cash Flow 20% Fortune 100 Long-Term Incentive Vehicle Use Cash & Equity 18% Cash 14% Either 1% Equity 67% Of the companies using net earnings, ~65% use EPS vs. net income in annual plan and almost all use EPS in long-term plan Annual Plan Long-Term Plan 14

Recent Trends and Developments in Incentive Compensation Although annual incentive increases/decreases were relatively equally distributed, approximately 47% of companies exhibited a 25% or greater change (plus or minus) Majority of companies (52%) exhibited an increase in LTI grant value, primarily due to stock price increases Change in Annual Incentive Distribution Change in Total LTI Distribution 30% 44% 47% 30% 44% 52% 25% 25% 20% 23% 24% 20% 23% Prevalence 15% 10% 13% 15% Prevalence 15% 10% 16% 12% 16% 13% 16% 5% 8% 9% 8% 5% 4% 0% Decrease > -25% -10% to -25% Source: PM&P Top 200 Study Decrease < -10% No change Increase < -10% +10% to +25% Increase > 25% 0% Decrease > -25% -10% to -25% Decrease < -10% No change Increase < -10% +10% to +25% Increase > 25% 15

Recent Trends and Developments in Incentive Compensation (cont d) Preference for offering multiple LTI vehicles has not changed year-over-year Plain vanilla mix of stock options and restricted stock losing favor (9% vs. 13% last year) An increase in the mix of restricted stock and performance-contingent awards (16% vs. 10% last year) suggests that companies are going beyond stock price appreciation as their measure of long-term performance 4% 5% 9% 4% 6% 10% 27% 6% 24% 5% 2011 13% 2012 9% Source: PM&P Top 200 Study 27% 10% 16% Restricted Stock Only 27% Performance Contingent Only Stock Option / SAR Only Stock Option / SAR & Restricted Stock Restricted Stock & Performance Contingent Stock Option / SAR & Performance Contingent Restricted Stock, Stock Option / SAR, & Performance Contingent No LTI Note: Performance-based restricted stock is counted as performance-contingent 16

Why Consider Performance Shares? Key Questions Key Points What are performance shares? Grants of notional shares that are earned based on pre-set performance goals Plan typically offers upside/downside leverage Respond to trends in institutional investor and shareholder advisory firm preferences Manage shareholder dilution Why consider performance shares? Create link to shareholder value and long-term performance goals Replace grants of free restricted stock or RSUs (at least for top executives) Provide balance between stock option upside and downside protection from full value shares Improve deductibility compared with RSUs with service-based vesting How are they different from performancecontingent restricted stock? Performance shares are granted as contingent notional shares, so holders of performance share grants cannot vote their shares until they are earned Performance-contingent restricted shares also tend to be earned on an all or nothing basis 17

Key Considerations in Selecting Metrics Which metrics are appropriately correlated with company value? Strength of Relationship (R-Squared) 80% 70% 60% 50% 40% 30% 20% 10% 0% EBIT Growth Organizational Value Drivers Net Income Growth EPS Growth Net Income Margin Cash Flow ROE EVA Spread 1-Year 3-Year 5-Year What mix/balance of short- and long-term metrics will best motivate business objectives? Dynamic Tension Short-Term Incentive Long-Term Incentive Net income OCF margin Revenue Revenue FCF ROIC TSR Stock price 18

Setting Goals and Calibrating Slopes How likely is it that the target performance will be met? Probability of Achievement 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% What level of payout should correspond to varying levels of company performance? <-100% -100 to -80% Payout (% of target) -80 to - 60% 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% -60 to - 40% -40 to - 20% Probability of Achievement -20 to 0% 0 to 10% 10 to 15% 15 to 20% 20 to 40% Growth Achievement 40 to 60% 60 to 80% 80 to 100% Incentive Slope Calibration 100 to 120% 120 to 140% 140 to 160% 0% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% Performance (% of target) 160 to 180% 19

Assess Whether the Program Works as Intended Company performance vs. external market Relative pay and performance alignment (vs. peers) $160 $150 $140 $130 $120 $110 $100 $90 $80 3-Year Total Shareholder Return (2010 2012) Initial Investment ^DJIA NASDAQ Composite Peer Group Avg 3-Year Performance (TSR) Rank 3-Year Pay/Performance Alignment 100% Low Pay, High Performance 75% 50% 25% High Pay, Low Performance 0% 0% 25% 50% 75% 100% 3-Year Cumulative Realizable Pay Rank 20

Key Topics in Incentive Compensation Should executives benefit from a rising tide lifts all boats economy (and vice versa)? What role should discretion play in measuring performance and determining payouts? How to effectively balance complexity with clarity and motivational value? How to best achieve dynamic tension between shortand long-term incentives? Should new stock awards be adjusted (up or down) to reflect prior year performance? 21

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The Role of Compensation in Talent Management and Succession Planning National Harbor, Maryland / Oct. 13, 2013 Gregory E. Lau, Managing Director, Board of Directors Practice, RSR Partners; Former Director, Global Compensation and Corporate Governance, General Motors Co.; Director, NACD Singleton McAllister, Director, Alliant Energy, United Rentals; Partner, Williams Mullen David E. Preng, Director, Cal Dive International; President, Preng & Associates, NACD Texas TriCities Chapter Steven Van Putten, Managing Director, Pearl Meyer & Partners ADVANCING EXEMPLARY BOARD LEADERSHIP

Compensation Communication and Disclosure for Public Companies National Harbor, Maryland / Oct. 13, 2013 Jannice Koors Managing Director, Pearl Meyer & Partners David E. Preng Director, Cal Dive International; President, Preng & Associates, NACD Texas TriCities Chapter ADVANCING EXEMPLARY BOARD LEADERSHIP

Topics for Discussion The role of influencers Trends in compensation discussion and analysis (CD&A) disclosure The role of the board in communications 25

Key Voices Outside the Boardroom Can Influence Perceptions Around Pay Voting recommendations from advisory firms, primarily Institutional Shareholder Services (ISS) and Glass-Lewis, clearly impact results Large institutional shareholders often have their own expectations and guidelines It is critical to know your key shareholders and their particular sensitivities regarding executive compensation Media must be handled with care Journalists are sometimes unfamiliar with the complexities of disclosures Others employees/unions, regulators, etc. 26

Since Its Inception, Most Companies Have Passed Their Say-On-Pay Vote Impact of ISS Vote Recommendations* ISS voting recommendations (% For vs. % Against) have been relatively consistent. In 2013, ISS has issued a No vote recommendation for only 11% of companies. The average say-on-pay (SOP) vote approval rate when ISS issues a For vote recommendation is 93%. The average SOP approval rate when ISS issues a No vote recommendation is only 67%. SOP Vote Result Distribution* The number of companies that have failed SOP in 2013 is roughly similar to 2012, and is well below the number of ISS No recommendations. But more companies are in the danger zone of passing with less than 70% approval. 11% 12% 11% 89% 88% 89% ISS Against ISS For 100% 80% 60% 1.5% 2.4% 2.2% 8% 8% 12% 23% 22% 20% Percent Approval Below 50% 50%-70% Avg. Vote: Avg. Vote: For: 93% Avg. Vote: For: 93% Against: 67% For: 93% Against: 70% Against: 64% 40% 20% 68% 68% 66% 70%-90% > 90% 2011 2012 2013 * Based on 2,660 company votes as of July 19, 2013. 0% 2011 2012 2013 27

Emerging Trends in CD&A Disclosure Three main categories: Alternative pay disclosures Usually actual or realizable pay Supplemental charts/graphs Often focusing on some innovative approach to disclosure of pay and performance information Organization and story flow of information/presentation Relocation/reformat of the executive summary Checklists of dos and don ts governance practices to simplify reviews Examples can be found in the Appendix. 28

The Role of the Board Who is the right spokesperson Chair/lead director of the board Compensation committee chair With or without management? Proactive vs. reactive communications Does it differ by constituency? 29

Appendix ADVANCING EXEMPLARY BOARD LEADERSHIP

Johnson & Johnson Includes an Alternative Compensation Table Driven by Differences in Compensation Timing Johnson & Johnson views LTI awards as a reward for prior year performance. This results in a disconnect between the period in which LTI is disclosed in the proxy tables and how the committee views compensation for decision-making purposes. The options, PSU, and RSU grants made in 2013 are based on 2012 performance but not disclosed until spring 2014 The alternative compensation table discloses total pay based on how the committee views total pay in the context of its decision making. 31

Prudential Includes a Chart Comparing Grant Date Fair Value of Pay and the Realized/Realizable Value of Pay $20,000 CEO Total Compensation Grant Date Fair Value vs. Realized and Realizable Gains (in thousands) $15,000 $16,322 $16,206 $15,452 $15,626 $10,000 $11,206 $11,688 Total Compensation Based on Grant Date Fair Value $5,000 Total Compensation Based on Realized and Realizable Gains $0 2010 2011 2012 32

United Technologies includes a reconciliation of realizable pay and a comparison of realizable pay against summary compensation table pay CEO REALIZABLE COMPENSATION VS. SUMMARY COMPENSATION TABLE The follow ing chart compares the 2010, 2011 and 2012 CEO Summary Compensation Table values versus realizable compensation values. Over the past three years, the correlation betw een realizable compensation and TSR has been stronger than the correlation betw een Summary Compensation Table Values and TSR. 2009.5 2010 2010.5 CEO PAY (in thousands) 2011 2011.5 2012 2012.5 00 00 00 00 00 00 $0 $27,610 $27,562 $22,086 $15,945 $16,710 $14,714 2010 2011 2012 Realizable Compensation Summary Compensation Table 2010 2011 2012 1-Year TSR 20% 15% 10% 5% 0% -5% -10% 33

Hartford Financial Group Includes a Comparison Between Summary Compensation Pay, Realizable Pay, and Total Shareholder Return 34

State Auto Financial Corporation Includes a Chart Showing 5-Year Realizable Pay and Performance Alignment vs. Peers 35

Deere s Pay Mix Charts Communicate Quite a Bit. Deere Includes a Traditional Pay and Performance Chart and Accompanying Narrative 36

Coach Illustrates Long-Term Pay and Performance Alignment on an Absolute Basis, Similar to the ISS Test 37

Intel Corporation Includes a Chart Showing Long-Term Alignment Between Officer Incentives and Net Income The link between the company's financial performance and the listed officers' annual incentive cash plan is illustrated in the following graph, which shows how the average cash incentive payments have varied based on Intel's net income results. Limited Officer Average Incentive In Millions $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 Net Income in Millions $0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (1) (1) $0 Incentive Net Income 1 Non-GAAP net income was used for 2009 and 2010. 38

United Technologies Provides a Long-Term View of Performance FINANCIAL RESULTS (3 AND 10 YEARS)* *For 2012 and 2009, net income and diluted earnings per share metrics reflect continuing operations performance, as reported in the 2012 Annual Report on Form 10-K; 2002 net income and diluted earnings per share represent values reported in the 2002 Annual Report on Form 10-K and have not been adjusted for discontinued operations. For a definition of net income, earnings, free cash flow and other measures used for our incentive compensation plans and for reconciliation from cash flow to free cash flow, refer to page 46 of this Proxy Statement. TOTAL SHAREOWNER RETURN: UTC VS. COMPENSATION PEER GROUP 15% 13% 10% 8% 9% 4% 6% UTC 1-year 3-year 5-year 10-year CPG 0.3% 39

Hartford Financial s Proxy Summary Starts Immediately After the Letter to Shareholders 40

Hartford Financial s Proxy Summary Starts Immediately After the Letter to Shareholders (cont d) 41

Hartford Financial s Proxy Summary Starts Immediately After the Letter to Shareholders (cont d) 42

Prudential s Proxy Summary Begins Immediately After the Letter to Shareholders 43

Prudential s Proxy Summary Begins Immediately After the Letter to Shareholders 44

Thank You ADVANCING EXEMPLARY BOARD LEADERSHIP

Compensation Committee 2020 National Harbor, Maryland / Oct. 13, 2013 Jannice Koors Managing Director, Pearl Meyer & Partners Lynn Thompson Hoffman Director and Chair, Governance and Compensation Committee, Boston Private Financial Holdings ADVANCING EXEMPLARY BOARD LEADERSHIP