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Variable Pay Funding Finance Accrual Model Update

Variable Pay Funding Finance Accrual Model Update. 6/12/2008 Update. Project Summary. PROBLEM STATEMENT: Each of the Business Entities uses a slightly different methodology, or adjusts the accrual rates at different times or based on unique perspectives.

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Variable Pay Funding Finance Accrual Model Update

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  1. Variable Pay Funding Finance Accrual Model Update 6/12/2008 Update

  2. Project Summary • PROBLEM STATEMENT: Each of the Business Entities uses a slightly different methodology, or adjusts the accrual rates at different times or based on unique perspectives. • OBJECTIVES:The objective this phase is to conduct financial modelling for the Discretionary Bonus Plan (DBP) plan only at a HNAH level and by business entity to determine: • how to create the DBP pool – what percent of PBT will be required in order to payout at • a.) target level business performance • b.) above target level business performance • c.) below target level business performance • what methodology / process should be used in allocating the HNAH PBT pool by business entity and department level based on varying business entity performance • KEY STAKEHOLDERS: • Executive Champion: • Key Stakeholders: • SCI Manager: • Team Members: • KEY PROJECT DATES: • START DATE: IMPLEMENTATION DATE: CLOSE DATE: 2

  3. Agenda • Review existing accrual plan for 2008 • Present new HNAH model • Critical inputs that will feed the model • Variances in new model and results • Assumptions in the model • Market data points (HBUS 47% HBIO 54%)

  4. Current Accrual Methodology for 2008 • HBUS - Centrally based on historic data • HBIO - BU based on 120% of target x salary • HBCA - Centrally based on historic data • HTSU - TSI based on historical data

  5. Agreed HNAH Model • (Market Data Point) x (1 + Bonus Target %) = Total Cash Available • (Total Cash Available) – (Actual Salary) = Available Bonus • (Available Bonus) x (Finance Performance Factor) = Adjusted Bonus • Inputs • Market Data Point, Bonus Target and Actual Salary by individual and Legal Entity • Finance Performance Factor based on HNAH PBT against AOP

  6. Example • Midpoint $100,000 x 1.15 (15% target) = $115,000 • $115,000 - $102,000 (actual salary) = $13,000 (available bonus) • $13,000 x 1.0 (finance performance factor) = $13,000 (adjusted bonus) • * Assumptions: • Midpoint - 20/70/10 weighted average performance management rating scale, ~55th percentile • Finance performance factor - percentage variance from pre-tax AOP (1.0 = on AOP) • Computed at the HNAH level and then pushed down 6

  7. Finance Factor • 5% of Pre-Tax variance from AOP • Upside Capped at 200% payout • Downside Floored at 50% payout • Example 1: Pre-Tax AOP = ($2.0) Billion Bonus Pool = $0.3 Billion Actual Pre-Tax = ($1.5) Billion Increased Bonus Pool = $0.5 Billion x 5% = $25 Million Finance Factor = 1.083 • Example 2: Pre-Tax AOP = ($2.0) Billion Bonus Pool = $0.3 Billion Actual Pre-Tax = ($2.5) Billion Increased Bonus Pool = ($0.5) Billion x 5% = ($25) Million Finance Factor = 0.917 7

  8. Agree Model Methodology • Obtain Market Data and Salaries • Agree Finance Factor Methodology • Compute HNAH 3rd Quarter Bonus Target • Prepare Communication for HNAH Finance and HR Teams Next Steps:

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