STUDY OF 2015 SHORT- AND LONG-TERM INCENTIVE DESIGN CRITERIA AMONG TOP 200 S&P 500 COMPANIES

STUDY OF 2015 SHORT- AND LONG-TERM INCENTIVE DESIGN CRITERIA AMONG TOP 200 S&P 500 COMPANIES December 2016 By James F. Reda, David M. Schmidt & Kimberly A. Glass Arthur J. Gallagher & Co. Human Resources & Compensation Consulting Practice 250 Park Avenue, 3rd Floor New York, New York 10177 www.ajg.com Main: (646) 367-4460

CONTENTS Introduction... 4 Executive Compensation Overview... 6 Overview of Study... 7 Objectives... 7 Data... 7 Procedures... 7 Incentive Design Overview... 7 Performance Measures Overview... 7 Pay-for-Performance Formula Overview... 8 Disclosure Overview... 8 Study Highlights... 9 Umbrella (Inside/Outside) Plans... 9 Individual Objectives in STIPs and Use of Discretion... 10 Realizable and Realized Pay Analysis... 10 Setting STIP Targets... 10 Pay-for-Performance... 11 Stock Option Grants Receding... 11 Detailed Observations... 13 Performance Measures Used in Incentive Plans... 13 Short-Term Incentive Plans (Bonus Plans)... 13 Performance Awards/Long-Term Incentive Plans... 14 Summary of Reported Measures... 15 Types of Measures... 15 Number of Measures... 18 Weights on Measures... 18 Absolute vs. Relative Measures... 19 Short-Term Incentive Plans... 19 Performance Levels... 19 Payout Levels... 20 Performance-Payout Relationships... 21 Long-Term Incentive Programs... 21 Long-Term Incentive Mix (Prevalence and Value)... 21 Vesting... 24 2

Details on Performance-Based Programs ( LTIPs )... 25 Performance Levels... 25 Payout Levels... 26 Performance-Payout Relationships... 26 Detailed Observations Of Disclosures... 27 Introduction... 27 The Importance of Disclosure... 27 Prevalence of Disclosure of Performance Measures and Targets... 28 Lack of Information on Pay-for-Performance Relationship... 29 162(m) Disclosures... 32 Short-Term Incentives... 32 Long-Term Incentives... 32 Conclusions... 33 Short-Term Incentives... 33 Long-Term Incentives... 33 Disclosure... 34 Final Thoughts... 34 Appendix 1: S&P 500 Large Cap Companies Top 200... 35 Appendix 2: Summary of Top 200 Companies by Industry Code... 37 Appendix 3: Short-Term Incentive Measure Prevalence... 38 Appendix 4: Long-Term Incentive Measure Prevalence... 39 Appendix 5: Short-Term Incentive Details... 40 Appendix 6: Executive Grant Type Usage by Company... 43 Appendix 7: Long-Term Incentive Details... 49 Appendix 8: Industry Long-Term Incentive Mix... 55 About Arthur J. Gallagher & Co. HR & Compensation Consulting Practice... 56 3

INTRODUCTION Over six years ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ) was signed into law. Implementation of this Act by the Securities and Exchange Commission ( SEC ) continues to unfold slowly and with increasing uncertainty following this year s election. The initial proposal of the CEO pay ratio disclosure rule was released on Sept. 18, 2013 with comments due Dec. 2, 2013. The SEC had targeted fall of 2014 for action on this regulatory initiative, which was pushed back until the rules were finalized on Aug. 18, 2015. The final rules require that CEO total annual compensation, as stated in the summary compensation table, be compared to the median total annual compensation of all the other employees of the company, both foreign and domestic. The impact of these final rules on CEO pay remains a matter of speculation. Nonetheless, CEO pay ratio disclosures will become a part of the corporate executive compensation disclosure package for fiscal year reports beginning on or after Jan. 1, 2017, which for many would be at their 2018 annual shareholders meeting. The SEC released three anticipated rule proposals in 2015 that have yet to be adopted: pay-for-performance comparison (April 2015), hedging policy disclosures (February 2015) and compensation recoupment (a.k.a. clawback) policies (July 2015). The final rules for all of these 2015 proposals will likely impact corporate governance, the way companies and boards structure incentives, and overall executive pay mix in the future. The pay-for-performance proposal would add a table to existing named executive officer (NEO) compensation disclosures, comparing the executive compensation actually paid to the company s total shareholder return (TSR) performance and the TSR performance of a peer group over a five-year period. The heavy emphasis on TSR in this pay-for-performance disclosure proposal may further increase the prevalence and scope of this metric. However, the proposed pay-for-performance guidelines were approved by the SEC by a 3-to-2 margin along party lines, making uncertain if the outstanding proposed guidelines will ever be finalized. Despite this uncertainty, shareholder interest in executive compensation structures that pay for performance will not diminish. The hedging policy proposal requires the disclosure of details for any corporate provisions that allow an employee or director to hedge or offset any decrease in the fair market value of company stock. This is not an outright prohibition, but it would inform investors of situations where hedging policies run counter to the general intent of performance-based incentives. The clawback policy disclosure proposal would require stock exchanges to adopt written policies for the recovery of excess incentive-based compensation from current or former executive officers that were the result of a materially noncompliant financial statement. This would impact the policies of all the companies listed on U.S. stock exchanges. The only remaining Dodd-Frank compensation issue not yet addressed by the SEC is the disclosure relating to why a company has chosen the chairman and CEO structure that they have, whether the position is combined or held by two separate individuals. The SEC currently does not anticipate providing guidance for this provision of the Act, possibly because this issue is already addressed to some degree in the CD&A. The CEO pay ratio now joins provisions related to executive compensation that have already been implemented to date, which involve shareholder votes: Say On Pay (SOP), Say When On Pay, and Say On Golden Parachute. In 2011, the inaugural year for SOP and Say When On Pay, just 44 companies (1.4% of companies with SOP proposals) failed to receive majority shareholder support. In the following year, the percent of failures increased to 2.6%, and remained above 2.4% in each succeeding year through 2015. In 2016, for the first time since the inaugural year, the failure percentage dropped below 2% (1.6%). 4

An analysis by Institutional Shareholder Services ( ISS ) indicates approximately three-quarters of the failed votes are due to pay-for-performance issues. Indeed, the leading factors causing SOP failures continue to be the pay-for-performance relationship, the rigor of performance goals, and problematic pay practices ( ISS Voting Analytics ). With SOP now entrenched in the psyche of compensation committees along with evolving ISS standards, improving disclosure of measures used, the values associated with those measures, and how they can be expected to drive performance should continue to be a priority for all public companies. The SEC requires company proxy statements to disclose the specifics of their executive compensation policies in clear language for investors. This requirement has developed from the assertion by the SEC that if executive compensation performance targets are central to a company s decision-making process, these targets must be disclosed to investors. ISS is also explicit in the need for robustness of disclosure, as this is a component of their qualitative assessment of SOP proposals. ISS bases its SOP recommendation on three separate quantitative tests and a thorough qualitative review of various factors relating to performance-based pay, such as the ratio of performance-based compensation to total compensation, the ratio of performance-based equity to time-based equity, financial and operational performance, realizable pay, and the completeness of disclosure and rigor of performance goals. Beginning with meetings on or after Feb. 1, 2017, the qualitative assessment will also include a review of the company's performance relative to other financial metrics besides TSR for the same peer group used in the quantitative screens. It seems clear that companies will be under constant pressure to include in their proxy statements complete pay-for-performance disclosures such as minimum, target, and maximum performance goals and corresponding payout levels. The SEC rules require that all performance measures and goals be released and compared with actual results for both short- and long-term incentive plans. This study provides a behind-the-scenes look at how incentives are being structured to connect pay and performance. Because incentive compensation comprises the bulk of executive pay packages at publicly traded companies, boards of directors and senior management are continually searching for the right performance measures to balance rewards with financial, stock price and operational performance as well as non-financial and individual performance. Once companies get beyond the difficulties of designing executive programs that adequately balance pay versus performance, they then have the added pressure of clearly explaining their pay-for-performance formula to investors. There are four broad issues for publicly traded companies relating to performance-based compensation: Selection of short- and long-term performance measures that have been approved by shareholders (i.e., contained in incentive and equity plans); Adequate disclosure of performance goals (measures and levels) in the proxy filing; Review of the risk associated with performance plans and appropriate proxy disclosure; and Clawback of incentive payouts if financial statements have been restated, causing the performance goals to not be met (included in Dodd-Frank, proposed regulations issued but final rules pending). 5

Outside advisors, lawyers and consultants play a substantial role in the process of setting and describing performance measures and goals because designing the appropriate compensation package for senior executives is a difficult process. The unique environment of the company and the individual needs of executives must be considered as compensation programs are designed. In addition to these considerations, public scrutiny of executive pay decisions and practices complicates the overall process of setting executive pay. Most public companies have redesigned their incentive programs over the last several years to ensure there is a link between performance achievement for the company and executive, and performance achievement for shareholders. Indeed, we continue to see increases in the use of performance-vested grants as a means for more closely linking pay to performance. A disconnect stemming from faulty incentive design could expose an executive and the board of directors to unwelcome scrutiny from shareholders and the general public. Additionally, the risk of a negative SOP recommendation and vote can lead to increased costs in responding to a failed SOP vote. In order to investigate what (and how much) is being shared in annual proxy statements about executive pay packages and how incentive pay is designed, Arthur J. Gallagher & Co. s Human Resources & Compensation Consulting Practice has conducted a study of the 2016 annual proxy statement disclosures for 200 of the top U.S. companies (based on revenue and market capitalization). This is the eighth consecutive year this in-depth analysis has been conducted for the top 200 public companies. A list of the companies studied is included in Appendix 1. The sector mix was led by capital goods companies. Industry details are shown in Appendix 2. EXECUTIVE COMPENSATION OVERVIEW There are five elements to executive compensation: Base salary, including cost of living, merit and promotional increases; Short-term incentives (also referred to as annual bonuses), which measure performance over a period of one year or less and are almost always paid in cash; Long-term incentives, which are typically denominated in shares of stock and reward performance for a period of time greater than one year; Benefits and perquisites, including basic benefits, supplemental executive retirement plans (SERPs), retirement, personal use of aircraft, financial counseling and other excess benefit plans; and Severance, including severance with or without a change in control, death, disability, or other. There are multiple factors that impact the alignment of pay and performance, and are crucial to the overall executive program design: Performance measures; Pay-for-performance formula (minimum, target, and maximum levels for performance goals and payout levels); Long-term incentive pay mix; and Severance pay 1. 1 For more information, refer to our 2015 article entitled Executive Severance Arrangements: How and Why They are Changing https://www.ajg.com/media/1697729/executive-severance-arrangements-how-andwhy-they-are-changing.pdf 6

OVERVIEW OF STUDY OBJECTIVES The objectives of this research study were: DATA To identify the primary characteristics of short- and long-term incentive plan designs; To identify trends in long-term incentive programs, including stock options, time-based restricted stock, and performance-based programs; To review target setting as compared with actual results; and To analyze the trends in plan design disclosure over time. The data used for this study was collected from SEC filings (in most cases from proxy statements) based on information provided in the CD&A and related tables. The data was disclosed by companies in a variety of ways, including tables, descriptive text and footnotes. PROCEDURES The pay-for-performance formula characteristics examined in this study include: Performance measures (types of measures and weightings); Performance levels (at threshold, target and maximum); and Payout levels (at threshold, target and maximum). For the purposes of providing comparable analysis given the variability of reporting and data, judgments were made as to the best ways to combine data. The data was carefully reviewed for completeness and accuracy. Proxies that were reviewed were filed through September 2016 with fiscal years ending in 2015 or early 2016 (May 2016 was the fiscal year-end cutoff). INCENTIVE DESIGN OVERVIEW PERFORMANCE MEASURES OVERVIEW Performance can be measured against a fixed goal (such as an earnings target) or a relative goal (as compared against a peer group of companies or industry index). Long-term incentive plans (LTIPs) often use relative measures that can be disclosed without revealing strategically important information. Companies using measures expressed as levels or percent changes might not always disclose the goal values, claiming disclosure could cause competitive harm. Performance measures can be segregated into two main categories: market-based (stock price or TSR) and financial-based (earnings per share, return on assets, etc.). Some refer to these performance classes as external and internal. Ideally, a balanced incentive program (including short- and long-term incentives) should include financial goals and stock-appreciation goals as well as absolute goals and relative goals. Thus, if the company does well against its business plan but underperforms its industry, the incentive payout will fairly reflect overall performance. On the flip side, if a company does not hit its internal goals but outperforms its peers and/or the broader stock market, then some level of payout may be warranted. 7

This past year, interesting design features were noted. A large oil company implemented a bonus payout cap of 100% of target if the company experiences either negative earnings or negative TSR. A similar cap can also be found in several performance equity designs where performance equity payouts are capped at target if TSR is negative. A version of this was seen at a major industrial company, whereby if absolute TSR performance is negative, payout at target would be the maximum regardless of performance compared to performance targets. In addition, if the absolute TSR performance is positive, a minimum of 25% of target performance equity will vest. A large telecommunications company provides for discretion to reduce the payout up to 25% if TSR is negative over the performance period. PAY-FOR-PERFORMANCE FORMULA OVERVIEW Investors are generally aware of executive compensation issues and are interested to see if pay corresponds with performance. Indeed, with SOP voting an annual event for most companies, pay-for-performance has become a core issue for investors and a priority measurement item for proxy advisory firms such as ISS, Glass Lewis and others. As a result, companies are more focused than ever on ensuring that shareholders agree with their strategies by more clearly communicating their goals. Performance-based compensation is used by almost all companies to balance executive pay with corporate and individual performance. A fair balance can be struck between the goals of shareholders and senior management under the oversight of the board of directors, but it is not a simple task. The selection of performance measures and corresponding performance levels can be one of the most difficult aspects of designing an incentive compensation program. Goals should be reasonable and aligned with the business plan and investor communications. In addition, the threshold payout for an incentive plan should be adjusted to be fair to both executives and shareholders. Likewise, the maximum performance and payout level should be set appropriately to encourage stretch levels of performance without providing a windfall payout. DISCLOSURE OVERVIEW Because the relationship between pay and performance is often complex, communicating the purpose and design details of the executive performance program is challenging. However, despite changing disclosure expectations and interpretations, the interest in pay-for-performance continues to grow and is expected to be standardized as proposed by the SEC. Specifically, the proposed amendments to Item 402 of Regulation S-K to implement Section 14(i) of the Securities Exchange Act of 1934 (the Exchange Act ), as added by Section 953(a) of the Dodd-Frank act. Section 14(i) directs the Commission to adopt rules requiring registrants to disclose in a clear manner the relationship between executive compensation actually paid and the financial performance of the registrant. Under the rules proposed in April 2015, companies would need to disclose five years of annual compensation paid to the CEO and the average annual compensation paid to the other named executive officers relative to total shareholder return. In addition, companies would be required to show the relationship between company TSR and the TSR of the company s peer group. This would represent a completely new disclosure for most companies as just 12% of the Top 200 companies provide some type of pay versus TSR performance disclosure. 8

STUDY HIGHLIGHTS UMBRELLA PLANS Of the 200 companies reviewed last year, 61% of companies with short-term incentive plans ( STIPs ) indicated the use of umbrella STIP plans (also referred to as inside/outside plans or plan within a plan ), which along with prior-year results, were the highest in the past five years. Companies with these types of plans often disclose fewer performance metrics than companies without these plans, in part due to the inclusion of more qualitative rather than quantitative measures. Similar to other performance-based programs, umbrella plans must follow specific guidelines in order to qualify as performance-based compensation that is in compliance with Internal Revenue Code 162(m), and thus tax deductible. Two somewhat different plan designs are evident. The plan design found most often involves creating a bonus pool, usually based on a percentage of an income measure ( outside plan ). Sixty-four percent (64%) of umbrella plans use this approach. Each executive covered under this plan is allocated a percentage of the pool, which represents the maximum allowable payout to each person. Actual payouts are based on an inside plan which often includes a combination of financial/formulaic performance measures with corresponding threshold, target and maximum levels, and qualitative individual or discretionary goals. Because the outside plan is based on a financial measure that is approved by shareholders and meets the other 162(m) requirements, these individual/discretionary amounts are considered performance-based and therefore are tax deductible. To qualify for 162(m) deductibility, an executive s payment must be below the disclosed maximum amount, and the sum of payments to all executives must be less than or equal to the pool amount. Additionally, a reduction in one executive s payment cannot result in an increase to another executive s payment. Once the pool and individual amounts have been established, only negative discretion can be used to adjust the payout amounts. The second plan type used by 36% of companies with umbrella plans involves establishing a financial hurdle or hurdles which must be achieved before bonus payments can be made. These hurdles are designed to cover the amounts necessary to pay bonuses to the top executives. The actual bonus pool is usually a multiple of salaries of those executives participating in the plan. As described above, performance and individual goals can be created for determining the actual payment amounts. Because there is an overarching financial hurdle or threshold and payment limits established for the executives, this type of plan would qualify for 162(m) tax deductibility. Figure 1: STI Umbrella Plans Percent of Companies Type of Measure 2015 2014 2013 2012 2011 Hurdle 22% 21% 21% 20% 16% Pool 39% 39% 38% 37% 34% TOTAL 61% 60% 59% 57% 50% 9

INDIVIDUAL OBJECTIVES IN STIPS AND USE OF DISCRETION Many companies use individual performance measures in their STIPs. Of the 198 companies with some form of a short-term incentive, including companies with umbrella plans, 27% included individual, specific objectives for one or more NEOs. Twenty-four percent (24%) of CEOs had individual objectives. When considering nonumbrella companies, 23% use individual objectives as part of the overall performance assessment. Individual objectives can be based on a combination of financial and non-financial measures. Of the executives that had individual objectives in 2015 (56% of CEOs and 57% of other NEOs) had a separate weighting for individual objectives ranging from 10% to 50%. In other cases, the final award was based on an adjustment to a calculated, formulaic amount using discretion, or a predetermined plus and minus range. Discretion, excluding negative discretion related to umbrella plans, was used at 64% of companies with STIPs in 2015 to determine at least a portion of the bonuses paid to executives. This was an increase from 61% in 2014 but similar to 63% in 2013. Discretion can reflect individual performance or overall company performance relative to the industry, can recognize special contributions, or be based on other factors that the CEO or compensation committee deem valuable to the company. The use of discretion is not related to the use of individual objectives, although these practices can overlap. REALIZABLE AND REALIZED PAY ANALYSIS Several years ago much had been written and discussed on this topic. Many compensation consultants have argued that this is a more appropriate measure for comparing executive pay with performance than using the target or grant date value. ISS has given a nod to this point of view by including a realizable pay analysis as part of a company s qualitative review. Indeed, when this version of pay-for-performance was promoted by executive compensation consulting firms, a number of leading corporations began including a realizable pay analysis in their proxy statements. However, based on this top 200 review, this type of disclosure has not gained much traction. Of the 200 companies reviewed, just 16 companies (8%) included a realizable pay versus performance analysis, the same number of companies in 2014. This is down from 20 companies in 2013. And because t a new pay-for performance disclosure required by the SEC is expected to be effective in 2018, declines in realized pay disclosures are expected to continue. SETTING STIP TARGETS The median year-over-year increase in target goals (target over prior-year target) for 2015 was again 4%, matching 2013 and 2014. Thirty-seven percent (37%) of target performance goals were set at levels that were lower than the prior-year actual results and 31% of goals were below the prior year target value. The difference between the 25 th percentile to 75 th percentile target change remains quite narrow, with a difference of 13 percentage points (-2% to 11%) in 2015, down from 20 points in 2012 (see Figure 2). 10

Figure 2: Strength of Targets Percentile Target Change (%) 2015 2014 2013 2012 Target Over Prior Year Results (%) Target Change (%) Target Over Prior Year Results (%) Target Change (%) Target Over Prior Year Results (%) Target Change (%) Target Over Prior Year Results (%) 25 th -2% -5% -2% -6% -3% -4% -2% -4% Median 4% 2% 4% 3% 4% 4% 6% 4% 75 th 11% 9% 14% 7% 11% 9% 18% 9% PAY-FOR-PERFORMANCE An examination of 2015 short-term incentive payouts relative to target indicates there was an increase in the percentage of NEOs that were paid above target. Among companies that reported short-term incentive payouts in 2015, 62% of NEOs were paid at or above target levels as compared with 63% in 2014, 60% in 2013, and 62% in 2012. Of the companies that disclosed long-term incentive performance and payout information, the percentage that were paid at or above target was 61% in 2015, up slightly from 60% in 2014, 57% in 2013 and 52% in 2012. Also reviewed was how STIP target levels are set relative to the prior-year target to see if decreasing the target value resulted in companies more able to exceed target. Companies with reduced targets from the prior year achieved above-target performance for a given measure at a lower rate as compared to companies that increased performance targets (57% vs. 62%). In 2014 the results were reversed (63% vs. 58%). Here are additional findings of note. Sixty-one companies, or 31% of all companies with STI plans, included one or more measures with a lower target than the previous year. Excluding discretionary plans, some of which include measures with targets but no weights, the percentage increases to 36%. Finally, when looking at all disclosed STI measures, 64% had target values greater than prior-year target values, while 63% of targets were set above prior-year actual results. Five percent of target values did not change from the prior year. STOCK OPTION GRANTS RECEDING Continuing in 2015 and for the seventh consecutive year was the shift away from appreciation awards (stock options/stock appreciation rights ( SARs )) and towards performance awards that are earned based on achieving performance goals. Also, for the sixth consecutive year, the prevalence of grants of performancebased awards exceeded the prevalence of time-based appreciation awards, and the gap continues to grow. Since 2009 when the prevalence was about even, performance-based awards have increased to nearly 30 percentage points higher than stock options/sars (95% vs. 61%). Nonetheless, appreciation awards are still more prevalent than time-based restricted stock, even though the gap has narrowed over time as time-vested share grants have declined moderately. For example, in 2008, the difference in prevalence was 34 percentage points (82% vs. 48%), but in 2015 the difference was just 9 points (61% vs. 52%). The collective use of performance-based awards (which includes performance shares/units, performancebased restricted stock, performance stock options, premium stock options, and long-term cash plans) totaled 95% in 2014 and 2015, up from 93% in 2013, 88% in 2012, 82% in 2011 and 77% in 2010. On the flip side, the prevalence of stock option/sar grants, in total, has declined steadily from 82% in 2008 to 61% in 2015. 11

The steep shift from appreciation awards to performance awards can be attributed to the impact of SOP and the influence of ISS, particularly their classification of time-based stock options as non-performance-based grants. See Figure 3 for further details. 100% Figure 3: Prevalence of Use Percent of Companies Using 80% 60% 40% 20% 0% 2008 2009 2010 2011 2012 2013 2014 2015 Appreciation Awards Restricted Stock/Units Performance-Based Stock/Cash In addition to the decrease in prevalence of appreciation awards, the value provided in the form of stock options/sars is also declining. In 2008, an average of 40% of the total LTI value was provided in the form of appreciation awards, 41% in performance-based awards, and 19% in time-based restricted stock/units. By 2015, the average of Top 200 performance-based awards had increased to 59% of the total LTI value with a corresponding decrease in stock options/sars (with time-based restricted stock/units remaining relatively flat). See Figure 4. 12

Figure 4: Average LTI Mix Average Value Share of LTI Grants 100% 80% 60% 40% 20% 0% 2008 2009 2010 2011 2012 2013 2014 2015 Appreciation Awards Restricted Stock/Units Performance-Based Stock/Cash DETAILED OBSERVATIONS PERFORMANCE MEASURES USED IN INCENTIVE PLANS S HORT-TERM INCENTIVE PLANS Findings include the following: Earnings per share (EPS) was the most common single measure used by the companies in the study that disclosed their performance measures. Thirty-eight percent (38%) of companies with nondiscretionary STIPs used EPS in 2015, which is slightly lower than last year (40%). Ninety percent (90%) of companies disclosing specific measures and metrics used at least one type of income-based measure in 2015, which is lower than last year (93%). This category includes EPS, net income, operating income, EBITDA, etc. Other common measures used in 2015 included revenue (42%), cash flow (33%), and capital efficiency ratios (21%, which was slightly lower than last year s 24%). Total shareholder return (TSR), the most commonly used measure in an LTIP, is not often used in a STIP. Only 2% of companies with STIPs used TSR in 2014 or 2015 as one of their performance measures. For companies disclosing measures, the use of non-financial measures (such as customer satisfaction, production goals, and new-business market share) were disclosed at 50% of companies, relatively consistent with previous years. Thirty-eight percent (38%) of companies with STIPs and LTIPs used one or more of the same measures in both incentive programs, which is slightly more than 37% in 2014. Median performance over target was 1.4% as compared with 7.0% in 2014. Median payout was 10.8% over target as compared with 21.5% in 2014. 13

PERFORMANCE AWARDS/LONG-TERM INCENTIVE PLANS Findings include the following: The number of companies granting performance-based equity and/or long-term cash incentives at top 200 companies held steady at 190, matching 2014. The incidence of these performance-based plans had been steadily increasing each year, from 162 companies in 2011 to 173 in 2012 and 185 in 2013. TSR is the most commonly used performance measure in LTIPs, with 56% of LTIPs using TSR in 2015, down slightly from 57% in 2014. This measure had steadily increased in use over the past few years, from 46% in 2011, to 51% in 2012 and 55% in 2013. TSR is usually used as a relative measure that compares company performance to a peer group (56%) or composite index (39%). Five percent (5%) of companies used both a composite index and a peer group for measuring comparative performance. Twenty percent (20%) of companies using TSR used the S&P 500 index as a benchmark, and an additional 13% used an S&P 500 industry index. Sixteen companies (8%) with LTIPs used a TSR-based modifier to adjust the final performance result, with seven of these companies using the S&P 500 index as the relative measure. As recently as 2012, only 5% of TSR usage was as a modifier. Similar to STIPs, some type of income measure is commonly used in LTIPs. Fifty-one (51%) of companies with LTIPs used at least one measure of income in 2015, up from 49% in 2014 but less than the 53% prevalence in 2013. Of the income measures, EPS is still used most often with 58% prevalence in 2015 as compared to 57% in both 2013 and 2014. Forty-seven percent (47%) of the companies used a capital efficiency measure in 2015, which has increased from 31% in 2009. This category includes return on invested capital, return on equity, return on capital, return on net assets, economic profit, and economic value added. The use of revenue measures was flat with 2014 at 20% of companies, up from 18% in 2013. This was just below the high of 21% over the last six years. Eighty-seven percent (87%) of performance-based grants included the common design of threshold/target/maximum performance and payout levels. Thirteen percent (13%) of grants used a performance hurdle or capped the payout at target. Seventy-five percent (75%) of performance periods reported were three years in length, which is up from 69% in 2014. Twenty percent (20%) used one-year performance periods, down from 27% in 2014. Twenty-one percent of these plans added two or more additional vesting years to get to at least three years of vesting. Also, for those companies using one-year performance periods, over half (56%) set performance goals annually over a three-year period. Median payout was 4.0% over target, up from 2.0% over target in 2014. For those companies disclosing results, performance was 5.0% over target as compared with 4.6% in 2014. Performance measure data is summarized in Figure 5. 14

SUMMARY OF REPORTED MEASURES T YPES OF MEASURES Figure 5: By Company (% of STI/LTI plans, Non-Discretionary)* Performance Measure Income: EPS, net income, EBIT/EBITDA, operating income, pretax income, EBITDA margin Total Shareholder Return: Stock price appreciation plus dividends (relative and absolute), stock price Capital Efficiency: Return on equity, return on assets, return on investment, return on capital, economic value added Revenue: Revenue, revenue growth Cash Flow: Cash flow, cash flow growth 2015 2014 2013 2012 STI LTI STI LTI STI LTI STI LTI 90% 51% 93% 49% 91% 53% 90% 52% 2% 56% 2% 57% 5% 55% 3% 51% 21% 47% 24% 46% 24% 44% 25% 40% 42% 20% 42% 20% 40% 18% 35% 20% 33% 13% 34% 12% 33% 13% 29% 12% *The sum of percentages is greater than 100% since most companies use more than one measure. Sample size (number of companies): 200 STIPs: 170 (2015), 170 (2014), 169 (2013), 171 (2012) LTIPs: 190 (2015), 190 (2014), 185 (2013), 173 (2012) In the case of STIPs, this chart does not include individual discretionary performance plans (28 companies in 2015). Also, two companies did not disclose a STIP in 2015. The use of STI measures by industry is displayed in Figure 6. With the exception of Materials and Telecommunications Services, income measures were most prevalent. Sample sizes are very low for several industries, so drawing conclusions is limited by that fact. See Appendix 3 for the number of companies in each industry as well as the prevalence of performance measures by industry. 15

Figure 6: STI Measures by Industry STI Measures 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Other Cash Flow Revenue Cap Eff TSR Income 0% Note: The Real Estate industry was represented by one company which had a discretionary STI with no measures disclosed. 16

The use of LTI measures by industry is displayed in Figure 7. As with STIPs, sample sizes are low for a number of industries. Income measures, total shareholder return, and capital efficiency ratios are used to varying degrees by most industries. See Appendix 4 for the number of LTIPs by industry and the prevalence of measures. Figure 7: LTI Measures by Industry LTI Measures 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Other Cash Flow Revenue Cap Eff TSR Income 17

N UMBER OF MEASURES Most companies include multiple measures in their STIPs (Figure 8). In 2015, 80% of companies with STIPs used two or more financial measures in their plan design, which has steadily increased from 68% in 2010. When financial and non-financial measures are included, 90% of companies use two or more measures, with the highest prevalence in the category of 6 or more measures. Figure 8: Short-Term Incentive Plan Financial Measures Number of Measures 2015* 2015 2014* 2014 2013* 2013 2012 2011 2010 1 10% 20% 10% 18% 13% 21% 27% 29% 32% 2 21% 35% 19% 34% 17% 31% 35% 33% 32% 3 19% 28% 19% 30% 18% 29% 25% 22% 23% 4 12% 12% 11% 10% 12% 12% 9% 7% 9% 5 8% 2% 10% 6% 10% 5% 2% 5% 2% 6 or more 30% 3% 31% 2% 30% 2% 2% 3% 2% Weighted Average 5.16 2.51 4.98 2.62 4.76 2.52 2.32 2.35 2.28 * Includes non-financial measures It is most common to have two performance measures in an LTIP. The use of just one measure continues to decline in practice. As shown in Figure 9 below, the number of companies using one measure has declined from 46% in 2009 to 24% in 2015. The number of companies using two measures reached a high in 2015 of 44%. Figure 9: Long-Term Incentive Plans Number of Measures 2015 2014 2013 2012 2011 2010 2009 1 24% 29% 28% 37% 39% 41% 46% 2 44% 43% 40% 35% 35% 39% 37% 3 22% 21% 22% 21% 22% 15% 14% 4 or more 10% 7% 10% 8% 5% 5% 3% Weighted Average 2.21 2.11 2.19 2.07 1.88 1.86 1.73 W EIGHTS ON MEASURES Not only are income goals common in both STIPs and LTIPs, but the weighting assigned to them tends to be relatively high. For example, the weight on EPS in STIPs tends to be higher than the weights on revenue or capital efficiency measures, two other commonly used performance measures. In 2015, 54% of companies using EPS assigned a weight of 50% or higher to this goal compared with 15% for capital efficiency measures and 10% for revenue. (Appendix 5, Table 1) In 2015, 74% of companies using an EPS measure in LTIPs had a weight of 50% or more. In fact, 29% of companies using EPS had a 100% weight (single measure). However, contrary to STIPs, LTIP return/efficiency measures generally had high weights, with 70% having a weight of 50% or higher. High weights are also generally applied to TSR measures with 82% having a weight of 50% or higher (Appendix 7, Table 4). Of course, the measures used and how they are weighted depends on the industry, as presented previously in Figures 6 and 7. Among the CEOs and other NEOs we reviewed, 47 companies had a single LTIP measure, excluding modifiers (TSR 43%, capital efficiency ratio 26%, and EPS 15%). 18

ABSOLUTE VS. RELATIVE MEASURES All companies with a STIP used at least one absolute measure to evaluate performance. Only 8% of STIPs included a relative measure in 2015, which has been consistent over the last four years. Of the 190 companies with LTIPs, 65% used at least one relative measure in their 2015 LTIP design, higher than last year s 62% prevalence. This is the highest percentage in the past eight years, and it can be attributed to the attempt by companies to more directly link long-term pay with performance. Sixty-eight percent (68%) of relative measures used by Top 200 companies were TSR in 2015, lower than last year s 70% prevalence. Eighty-two percent (82%) of companies included at least one absolute measure in their LTIP. In addition, 47% used a combination of absolute and relative measures. One such combination is applying a TSR modifier to the results generated by an absolute performance goal, which was used by 16 of 107 companies using relative TSR. When all performance measures are aggregated, 63% of all LTIP measures were based on absolute goals and 37% were based on relative performance. SHORT-TERM INCENTIVE PLANS PERFORMANCE LEVELS For short-term incentives, EPS threshold percent of targets shifted slightly from 90% and higher to 80% 89%. For income measures and capital efficiency measures, the 90% and higher group increased over 2014. This can be seen in Figure 10. Also, income and capital efficiency measures increased in the 101% to 110% group (Figure 11). The percentage for income and capital efficiency measures showed a tightening around the target value for thresholds and maximums in 2015. Percent of Target Figure 10: STIP: Threshold Performance Percentages Measure EPS Income Capital Efficiency 2015 2014 2013 2015 2014 2013 2015 2014 2013 90% 99% 55% 60% 62% 45% 38% 41% 39% 26% 49% 80% 89% 33% 29% 21% 32% 35% 24% 17% 41% 20% 70% 79% 5% 9% 14% 15% 16% 25% 22% 15% 17% < 70% 7% 2% 3% 7% 10% 10% 22% 18% 15% Percent of Target Figure 11: STIP: Maximum Performance Percentages Measure EPS Income Capital Efficiency 2015 2014 2013 2015 2014 2013 2015 2014 2013 101% 110% 60% 66% 68% 51% 41% 44% 32% 26% 14% 111% 120% 32% 26% 29% 33% 42% 38% 32% 44% 38% 121% 130% 5% 5% 0% 10% 10% 11% 18% 15% 27% > 130% 3% 3% 3% 7% 7% 7% 18% 15% 21% 19

It is important to note that the threshold and maximum spread is usually related to the financial measure being used, and whether it is expressed as a level or a percent change EPS and other income measures usually have thresholds within 80% of target and maximums or caps at 120% or less of target. Capital efficiency measures like return on invested capital (ROIC) or a percent-change goal for EPS or income typically have lower threshold percentages and higher caps. Figures 12 and 13 illustrate how performance ranges can be considerably different depending on the type of measure and how the measure is expressed. Forty percent (40%) of companies use a revenue measure which is sometimes expressed in growth terms. Revenue goals have very tight threshold and maximum values. Financial measures, including revenue, expressed as percentage growth, usually have very low thresholds (less than 70% of target) and high maximums as a percent of target (greater than 130% of target). Figure 12: Performance Thresholds by Type of Measure Measure Type Threshold Relative to Target 90% or higher 80% or higher 70% or higher EPS Level (n=84) 55% 88% 93% Income Level (n=124) 45% 87% 93% Cap Efficiency (n=39) 39% 56% 78% Revenue Level (n=40) 75% 96% 100% Measure Growth (n=36) 4% 23% 37% Figure 13: Performance Maximums by Type of Measure Measure Type Maximum Relative to Target 110% or lower 120% or lower 130% or lower EPS Level (n=80) 60% 93% 97% Income Level (n=120) 51% 84% 93% Capital Efficiency (n=44) 32% 64% 82% Revenue Level (n=46) 74% 100% 100% Measure Growth (n=50) 4% 24% 32% PAYOUT LEVELS Twenty-six percent (26%) of companies used a payout range (threshold to maximum) of 0% to 200% for their STIPs, which is relatively consistent with previous years. The next most common payout ranges were 50% to 200% and 50% to 150%, with prevalence of 19% and 8%, respectively. STIP threshold payout percentages have changed very little, with the exception of a greater use of the 50% payout threshold (from 19% in 2012 to 32% in 2015) and decrease in payout thresholds greater than 50%. A 0% payout threshold is still most prevalent at 40%. Maximum payout percentages of 200% of target have been used by 65% of companies in the past two years, up from only 44% in 2009. For those companies not using 200% as the maximum, it is a similar split between companies setting the maximum below 200% (19% of companies) and above (17%). This compares to 28% of companies in 2009 providing a maximum opportunity under 200% and 28% above. (Appendix 5, Tables 2 4) 20

PERFORMANCE-PAYOUT RELATIONSHIPS We reviewed the most typical performance-payout curves or relationships. This is defined as the performance threshold and performance maximum as a percent of target as compared to the payout percentages of target at threshold and maximum performance. Generally, there are no typical performance-payout combinations. In 2015, the most common combination for STIPs was 85% to 115% performance range with 50% to 200% payout range which had a prevalence of 4.3%. We have included the four additional combinations of performance-payout ranges that have been popular the past several years. Notice that the shift in performance ranges have become wider. (Appendix 5, Table 5) The median performance threshold percentage of target was 87% in 2015, up slightly from 2014. The average of 80% is consistent with prior years. The median payout threshold percentage of 13% in 2014 and 2015 are up from 10% in 2013, but much lower than the 25% median payout percentage in 2011. STIP maximum performance goals as a percent of target performance have been relatively unchanged since 2011. The median of 112% compares with 2013 low of 112% in and the high of 115% in 2011. The average performance maximum has also been stable. Maximum payouts as a percentage of target payouts are similar to prior years with the median holding steady at 200% of target. The average maximum payout percent of salary was 205%, the lowest of the past five years. For a side-by-side comparison of performance and payout results, see Appendix 5, Tables 6 and 7. LONG-TERM INCENTIVE PROGRAMS LONG-TERM INCENTIVE MIX (PREVALENCE AND V ALUE) One of the primary topics when designing a long-term incentive program is what types of vehicles should be used. To answer this question, proxy statements were reviewed to determine the most prevalent LTI mixes. Eighty-four percent (84%) of companies granting long-term incentives in 2015 used more than one type of long-term incentive vehicle in their program. For purposes of this study, long-term incentive grants were categorized into one of five groups: 1. Appreciation awards (plain vanilla stock options and stock appreciation rights) AA 2. Restricted stock and restricted stock units (time based) RS Performance-based awards PB (includes the following three categories below) 3. Performance restricted stock and performance restricted stock units (hurdle goal) PRS 4. Performance shares, performance share units, premium/performance stock options PS 5. Long-term cash plans LTI CASH Figure 14 shows the continued trend away from stock options in favor of performance-based long-term incentives. 21

Figure 14: Prevalence of Long-Term Incentives Grant Type Percent of Companies Making Grants* 2015 2014 2013 2012 2011 2010 2009 Appreciation Awards 61% 63% 66% 68% 74% 75% 76% Stock Options 57% 60% 62% 64% 71% 71% 71% SARs 4% 3% 4% 4% 4% 4% 5% Restricted Stock/Units 52% 52% 49% 55% 60% 57% 55% All of Performance-Based Awards 95% 95% 93% 88% 82% 77% 75% Performance Shares/ Units 86% 82% 80% 72% 65% 60% 54% Performance Restricted Stock/Units (performance hurdles) Performance/Premium Stock Options 13% 15% 13% 13% 15% 11% 13% 2% 3% 4% 3% 2% 2% 3% Long-Term Cash 12% 15% 16% 16% 17% 18% 20% * Company-by-company prevalence detail is provided in Appendix 6. All 200 companies made equity and/or long-term cash grants to one or more top executives during 20154. The prevalence of performance-based plans, which had been essentially flat between 2008 and 2010, began increasing annually in 2011, hitting a new high of 95% in 2014 from 77% in 2010. Concurrently, the prevalence of stock options and SARs continued to drop, falling to 61% in 2015 from 75% in 2010. So while the prevalence of performance awards and restricted stock and units appear to have leveled off, stock option prevalence continues to fall. In 2015, there were slightly more companies in 2015 dropping stock options than adding stock options (two added, five dropped). Figure 15 also shows the continued trend away from stock options/sars in favor of performance-based longterm incentives. Performance-based incentives first reached an average 50% of LTI grant value in 2012, with usage continuing to grow with the average value of performance-vested equity and cash reaching 59% of the LTI mix in 2015. As performance-based awards have increased in both frequency of use and LTI mix share, both appreciation awards and restricted stock/units have declined, although time-vested restricted stock and stock unit averages have leveled off at 18% since 2013. Following several years of declining weights for stock options and SARs, the number of companies decreasing the weights on these LTI types was only slightly higher than the number of companies increasing the weights (12.5% decreased vs. 8.5% increased). Seventy-nine percent (79%) of companies kept the weights the same, which includes companies that do not grant stock options or SARs (e.g. weight = 0). For companies that changed stock option or SAR weights, the median negative weight change was 14%; the median positive weight change was 5%. These figures include companies who might have added or dropped appreciation awards in 2015. 22

Figure 15: Average Long-Term Incentive Mix Grant Type Average Mix 2015 2014 2013 2012 2011 2010 2009 2008 Appreciation Awards 23% 25% 26% 29% 32% 34% 37% 40% Restricted Stock/Units 18% 18% 18% 21% 22% 23% 22% 19% Performance-Based Awards 59% 57% 56% 50% 46% 43% 41% 41% Figure 16 shows the prevalence of various combinations of equity vehicles. The most common combinations are a mix of stock options and performance-based awards (34%) followed by a blend of stock options, timevested stock, and performance-based awards (26%). Also, we continue to see a surge in restricted stock and performance-based award combinations. Figure 16: LTI Mix Prevalence LTI Mix 2015 2014 2013 2012 2011 Appreciation Awards/Performance-Based (PB)* 34% 34% 34% 31% 28% Appreciation Awards/Restricted Stock/Performance-Based (PB)* 26% 28% 29% 31% 32% Performance-Based (PB) Only* 12% 13% 15% 11% 10% Restricted Stock/Performance-Based (PB)* 22% 17% 14% 14% 11% Appreciation Award Only 1% 3% 3% 3% 3% Appreciation Awards/Restricted Stock 2% 2% 3% 5% 11% Restricted Stock Only 3% 3% 3% 5% 5% * Performance-based includes performance shares, performance stock units, performance or premium stock options, performance restricted stock/units, and long-term incentive cash. Figure 17 shows that the number of companies granting only performance-based equity rebounded in 2015. The 50/50 mix of options and performance-based equity declined. Otherwise, there were no changes from 2014. Figure 17: Most Prevalent LTI Value Mix Trend LTI Value Mix Percent of Companies* 2015 2014 2013 2012 2011 2010 2009 100% PB 15.2% 14.7% 17.9% 13.5% 10.8% 11.3% 10.6% 50% AA / 50% PB 10.2% 11.2% 10.2% 9.9% 10.3% 10.3% 9.5% 40% AA / 60% PB 6.1% 6.1% 7.1% 6.3% 45.7% 5.7% 5.8% 25% AA / 25% RS / 50% PB 7.1% 7.1% 4.1% 2.6% 3.1% 1.5% 1.1% 50% RS / 50% PB 3.0% 3.0% 3.6% 3.6% 3.1% 2.6% 2.1% 100% RS 2.5% 2.5% 3.1% 3.6% 4.1% 4.7% 5.3% 100% AA 1.0% 1.0% 2.6% 3.1% 4.6% 5.2% 7.4% 50% AA / 25% RS / 25% PB 2.0% 2.0% 2.6% 3.6% 3.1% 2.6% 2.6% 33% AA / 33% RS / 33% PB 3.6% 3.6% 2.0% 4.2% 2.6% 3.1% 3.2% 50% AA / 50% RS 1.5% 1.5% 1.0% 2.1% 2.6% 5.7% 4.8% * See Appendix 6 for company-level LTI grant type and weight change. 23