Robert B. Jones, JD, CPA, CEBS, CSCP CEO, Innovative Compensation and Benefits Concepts, LLC

1. Philadelphia Chapter of NACD 2014 Compensation Update:“Following the Right Path in 2014” Robert B. Jones, JD, CPA, CEBS, CSCP CEO, Innovative Compensation and Benefits Concepts, LLC Philadelphia, PA May 14th, 2014 • Robert B. Jones, JD, CPA, CEBS, CSCP • CEO, Innovative Compensation and Benefits Concepts, LLC • Conshohocken, PA • November 22, 2011Robert B. Jones, JD, CPA, CEBS, CSCP • CEO, Innovative Compensation and Benefits Concepts, LLC • Philadelphia, PA • Februrary 22, 2011

2. Quotable “Despite our concerns regarding the goals of the original provision, we understand that as a matter of U.S. law, …SEC… is mandated to pass a rule implementing it. In a previous comment letter…..sent Nov. 18, 2010, NACD noted an “unfavorable cost-benefit ratio for the rule, with no perceivable benefits and significant costs,” and urged the SEC to implement this provision with “extreme care.We still believe this to be true…”. NACD letter of 12/1/13 “The pushback is that this calculation between top executive pay and median employee pay is actually a really hard calculation to make. It can be extremely hard with a global corporation with hundreds of thousands of employees or even millions of employees in the case of a company like Wal-Mart to figure out what exactly the median employee's paid, especially since some work part time, some may work in other nations”. Lynn Stout, Cornell Law Professor, NPR, 10/26/13

3. Today’s Agenda 1. Brief Review of executive pay practice trends for 2014. 2. Brief Review of best practices for Say on Pay in 2014. 3. The New Dodd-Frank SEC Pay Ratio Rule--Value or Folly?

4. The Changing Compensation Environment—Companies Continue to Re-Think their Compensation Strategy Innovative Compensation and Benefits Concepts

5. The changing compensation environment-rethinking the compensation strategy Significant Forces Affecting Executive Compensation in 2014 Regulators • SEC • FASB and IASB Financial • Manage earnings expense • Manage dilution • Cost vs. perceived value • Economic conditions Lawmakers • Sarbanes-Oxley Act • Deferred comp reform • More from Congress? Impact on Future Designs Stakeholders • Shareholders • Proxy advisory firms • Employees/Retirees • Labor unions • Corporate governance Stock Exchanges • New proposed governance rules • Listing requirements Media • Heightened vigilance and skepticism

6. Major Issues in 2014 In a “perfect storm” 3 main issues are surfacing at once: How can organizations be confident that their compensation programs are fully aligned with 2014 business objectives? What does the current regulatory environment mean for the future design of executive remuneration programs? How can organizations be sure that their rewards programs attract, retain, and motivate their top executives for the long term?

7. 1. Executive pay practice trends for 2014 Innovative Compensation and Benefits Concepts

8. Key Equity Compensation Trends from 2013 • For the 3rd year in a row, long-term performance shares increased in prevalence. According to one major survey, they are now used by 81% of the Top 250 (up from 75% in the 2012 report), and are the most prevalent form of equity. Restricted stock usage has also increased this year, from 58% to 63%, while the use of stock options and long-term cash plans remains largely unchanged. • Companies are still emphasizing a portfolio approach to their long-term incentive programs (LTIPs), with an increasing number of companies using 3 LTI grant types (39%), while those granting one or two types declined. • Total Shareholder Return (TSR)has become the most prevalent performance metric (for the first time) for LTIPs, featured in 50% of all performance awards, as companies continue to look for ways to tie executive compensation to shareholder experience at the urging of proxy advisory firms and shareholder advocates. • Overall, the design of LTIPs has become more complex as the number of grant types, number of performance award measures, and prevalence of the concurrent use of absolute and relative measures all increased. Source: Frederic W. Cook & Co. 2013 Top 250 report

9. Current Equity Pay Trends ---2 • Because of the rising stock market last year, while the total dollar value of LTIP awards increased, the number of shares required for those awards decreased. • The use of full-value awards continues to increase, with companies showing a median equity mix of 67% full-value awards and 33% appreciationawards based on the number of shares granted, and 86% full-value awards and 14% appreciation awards based on the fair value of equity awarded in the year. • For the near term, it seems clear that full-value awards, particularly performance-based awards, will continue to be the primary award vehicle in the LTIP portfolio of large U.S. companies. However, while decreasing in influence, stock appreciation awards are in no danger of disappearing and continue to have a place in the LTI mix. The evolution in equity award usage will continue. Source: Frederic W. Cook & Co. 2013 Top 250 report

10. So what’s the problem ?...... Major Disconnect between the views of investors and the views of directors: • Nearly 3 in 4 investors (72%) say that the executive pay model in the US has led to excessive CEO pay levels while only 1 in 5 directors(20%) say the executive pay model has led to excessive pay levels • 7 in 10 directors(70%) say the executive pay model at most companies is closely linked to company strategy, compared with just 1 in 3 investors (34%). • Less than one-fourth of directors(23%) say executive pay is overly influenced by management, versus two-thirds of investors (66%). Source: Towers Watson, January 16, 2014; Evolving Director and Investor Views of Executive Pay in the Say-on-Pay Era

11. Current Equity Pay Trends --3 According to one survey, stock grants are most common, followed by performance shares/units. • Stock Grants/Awards: 81% • Performance Shares/Units: 72% • Stock Options/SARs: 54% Source: Deloitte/ NASPP Annual 2013 Survey—”Top Trends in Equity Plan Design”

12. Say on Pay for 2014 Innovative Compensation and Benefits Concepts

13. Executive Summary Key Takeaways from the Past Year: • Compensation committees have become more disciplined and effective in analyzing and designing executive compensation programs. • The adoption of Say-on-Pay for publicly-traded companies and additional shareholder scrutiny of executive compensation arrangements have definitely played a role in the increase of granting performance-based awards. • Most companies, even those with good Say-on-Pay shareholder voting results, have been proactively reaching out to shareholders over the past few years to interactively discuss, review and analyze what their key shareholders think about executive compensation.

14. Say on Pay Results • 3,363 companies held Say on Pay votes in 2013 • 73 companies have failed with an average 60% “Against” vote (Two additional companies received less than 50% ‘For’ but considered the vote a win because ‘For’ votes outnumbered ‘Against’ votes due to abstentions). • 15 companies failed previous votes • 70.6% of companies have received a greater than 90% ‘For’ vote • 8.4% Average ‘Against’ vote • 1.8% Abstentions • [One company, Looksmart, received 100% ‘Against’ on their Say on Pay vote]

15. Say on Pay Results ---2 • Total fail rate= 2.2% • Average vote for those who passed: 91% • Average vote for those who failed: 37% • >90% “For” vote: 70.6% • 70-90% “For” vote: 20.8% • 50-70% “For” vote : 6.2% • <50% “For” vote: 2.3% - - -

16. Say on Pay Results---3 • ISS: <70% approval rating---will have to address any perceived shortfalls in procedures, votes, etc. • Glass-Lewis: <75% of vote, will be looking for an explanation from the Company

17. NACD Pay for Performance research December, 2013 NACD Paper on P4P: • 1. Need for Standard Definitions • 2. Need for consistent time horizons oriented to the Long Term • 3. Need for Disclosure beyond the CEO • 4. Importance of Board Judgment and Company Context

18. Pay for Performance is Still Key Bottom Line: • Companies need to stress in their CD&A/proxies the linkage between pay-for-performance and what they have accomplished as a management team during. the past year. Pay-for-performance is now the mantra for compensation consultants and investors—and compensation committees too. • Companies also need to show how their pay practices have aligned with the performance of the Company and the performance of the pay packages for the NEOs

19. Important to Also View Pay for Performance from the Proxy Advisors’ Perspective • Public companies also must develop a clear understanding of the perspective of proxy advisory services that analyze company practices and advise institutional investors on the voting of their shares. • One of the most well-known proxy advisors, (ISS) uses detailed criteria to assess companies’ executive pay practices: • These criteria include: • The long-term relationship between CEO pay and total shareholder return • The portion of total compensation delivered via performance-based vehicles • The use, type and disclosure of performance measures and goals • The existence of “poor” pay policies and practices.

20. CEO Pay Ratio Controversy Innovative Compensation and Benefits Concepts

21. The Pay-Ratio Rule in Broad Terms The pay ratio rule is a provision in the Dodd-Frank Act that requires the SEC to publish rules requiring public companies to disclose the ratio of the CEO’s total compensation to the median employee’s total compensation. The average multiple of CEO compensation to that of rank-and-file workers at companies in the S&P 500 Index is 204, according to data compiled by Bloomberg.

22. What do opponents and proponents say ? Critics say the rule will do the following: • The ratio will be misleading • The pay ratio is a headline statistic, not an actionable tool • Compliance will be costly Supporters say the rule will do the following: • Provide greater transparency • Reduce pay

23. Tempest Brewing: Many Business Groups Urge Repeal of CEO-to-Worker Pay Ratio Disclosure Rule • The provision was reportedly a last-minute addition to the Dodd-Frank legislation. • Many business groups have been fighting this provision. • A proposed rule was issued on September 18, 2013 with the SEC voting 3-2 along partisan lines. • A 60-day comment period for the SEC began with the publication of the rule. Comments were due by December 2nd, 2013, but are expected well into 2014.

24. Many Business Groups Urge Repeal of CEO-to-Worker Pay Ratio Disclosure Rule ---2 • On the day the proposed rule was announced, the SEC said it had already received 22,860 comment letters and a petition’s sender that was not disclosed with 84,700 signatories. Many of the comment letters were form letters. The actual number of unique letters was 260, fairly evenly divided between pro and con. • From the “pro rule” camp, the SEC received letters from labor groups such as AFL-CIO, UAW Retiree Medical Benefits Trust, (left-leaning) Institute for Policy Studies, and the Independent Drucker Institute, Calvert Investment Management, and Americans for Financial Reform. • From the “against the rule” camp, the SEC received letters from NACD, American Bar Association and numerous law firms, Society of Human Resources Management (SHRM), Towers Watson, Pay Governance, Meridian Compensation Partners, and the Society of Corporate Secretaries and Governance Professionals.

25. Business Groups Urge Repeal of CEO-to-Worker Pay Ratio Disclosure Rule --3 • The new rule, required under the Dodd-Frank Act, would not prescribe a specific methodology for companies to use in calculating a “pay ratio.”  Instead, companies would have the flexibility to determine the median annual total compensation of its employees in a way that best suits its particular circumstances. • In a letter sent to SEC Chair Mary Schapiro, nearly two dozen business groups asked the agency to "engage in expanded public outreach and consideration of alternatives" before moving forward with implementing the new rule. • The proposed rule would not specify any required calculation methodologies for identifying the median employee in terms of total compensation for all employees.  Instead, it would allow companies to select a methodology that is appropriate to the size and structure of their own businesses and the way they compensate employees. 

26. Business Groups Urge Repeal of CEO-to-Worker Pay Ratio Disclosure Rule --4 • For example, a company would be permitted to identify the median employee based on total compensation using either its full employee population or a statistical sample of that population. • A company could, for example, identify the median of its population or sample: • Using annual total compensation as determined under existing executive compensation rules. • Using any consistently used compensation measure such as compensation amounts reported in its payroll or tax records.  A company would then calculate the annual total compensation for that median employee in accordance with the definition of total compensation set forth in the SEC’s executive compensation rules.

27. CEO-to-Worker Pay Ratio Rule--Early Returns • For total direct compensation overall, one consulting firm found that the median CEO pay multiple among all companies studied is 25.8x, although there was considerable variability within the studied companies. • While they found no compelling differences between industry groupings, they found that the CEO pay multiple is most closely correlated to organizational size; the larger the company the higher the multiple. • The second most influential factor for CEO pay multiples appears to be a company’s degree of globalization. The finding was that the CEO pay multiple to non-US employees is more than twice as large as the multiple to US employees. Source: Radford

28. CEO pay has clearly risen....

29. But, the CEO job today is much more demanding… • Research from some sources shows that the CEO’s pay package compared to the size of the S&P 500 has tracked its growth very closely since World War II.(Columbia University Professor Guadalupe’s study using proxies since WWII). She argues that 3 factors: increased company size, a strong market for generalists, and global competition have helped to cause the rapid increase in CEO pay over the past 30 years. • The CEO’s job is extraordinarily complex in 2014, encompassing many more skillsets than in 1980, nearly 35 years ago. The world is much more complicated today. One more quote: “Where is the outrage at professional athletes who make that kind of money? Managing an international company with thousands of employees is more important than winning a championship. There is a similarity though, in that its worth paying top dollar for the very best. If you have a billion dollars a year in revenue, you don't want to skimp on who you put in charge of that”.----Adam Allen post

30. The view in support of the SEC pay ratio rule… What is so important about the pay ratio numbers ? • Peter Drucker, the father of business management, famously said the CEO-to worker salary ratio should not exceed 20:1, which is what existed in the United States in 1965. Beyond that, managers will see an increase in 'resentment and falling morale,' said Drucker. (Reportedly, Andrew Carnegie also had his own ratio in mind). • Many supporters say that the rule will continue to draw public attention to the disparity in executive pay compared to the rank and file, even causing executive pay to not continue to rise at such a high rate. • A few experts have suggested that the IRS make CEO pay a non-deductible business expense when it is higher than a given number such as 100 times the minimum wage.

31. The view in support of the SEC pay ratio rule---2 Across the “pond”-------- • The movement in Europe is to make say on pay votes not merely advisory but mandatory. In Great Britain, where it has become a binding vote, UK firms responded to negative say on pay voting outcomes by removing controversial CEO pay practices criticized as rewards for failure (e.g., generous severance contracts) and increasing the sensitivity of pay to poor realizations of performance. • Swiss voters, (from a traditionally business-friendly and conservative European country) on November 24th, 2013 decisively rejected a proposal to cap pay for top executives. Final results showed that votes against were 65.3% to 34.7%. The ground-breaking proposal would have meant executives would have been unable to earn more in a month than their lowest-paid workers in a year (12x). In March, voters approved a measure that boosted shareholders’ power over managerial salaries and banned one-off bonuses – so-called "golden hellos" and "golden goodbyes".

32. The view in support of the SEC pay ratio rule ---3 • California lawmakers are proposing higher tax rates on companies that pay their chief executive officers more than 100 times the wages of a typical worker. The bill, which would likewise give tax breaks to companies with lower ratios, passed the Senate Governance and Finance Committee yesterday in a 5-2 vote, with Democrats in favor and Republicans opposed. California would be the first state to penalize or reward publicly traded corporations for their compensation practices. • Whole Foods is reportedly one of the few public companies to disclose that it maintains a fixed ratio between executives and worker pay (cash compensationlimited in 2013 to 19 times the average annual wage).

33. NACD’s comments (12/1/13 letter to the SEC) • “Our views reflect recent surveys of our members, as well as the values implicit in the findings of NACD’s thought leadership groups such as our Blue Ribbon Commissions and Fortune 500 committee chair advisory councils. This letter also incorporates perspectives from NACD chapter leader roundtables, director forums, director education programs, and other events focused on promoting effective governance practices”. • “The pay ratio provision appears to have two main goals—one related to information and one related to social change. Its original sponsor wrote it “so that investors and the general public know whether public companies’ pay practices are fair to their employees, especially compared to their highly compensated CEOs. In addition, some supporters clearly hope that the disclosure will have the ultimate effect of narrowing differentials in pay. We do not believe that the rule accomplishes the first goal, and question the appropriateness of the second”.

34. What’s the view opposing the SEC pay ratio rule?---4 Several pieces of legislation have called for the repeal of the act in whole or in part: • HR 46---filed by Michelle Bachmann, (R-MN) • S. 20----filed by Sen. David Vitter (R-LA) • The US House Financial Services Committee voted in favor of the Burdensome Data Collection Relief Act (HR 1135), sponsored by Rep. Bill Huizenga (R-MI) to repeal the entire law. 2 main legal cases are pending: • A group of banks challenged the law in State National Bank of Big Spring v. Geithner (appealed to higher court);in September the attorney generals of Michigan, Oklahoma and South Carolina joined the case as plaintiffs; • National Association of Manufacturers (NAM), Chamber of Commerce, and the Business Roundtable in July sued the SEC in the lower court and got rejected; NAM has filed a notice of intent to appeal the July 23rd,decision.

35. Actions to Consider Innovative Compensation and Benefits Concepts

36. What Actions Should Employers Consider ? • Review compensation strategy in light of current environment • Review your Compensation Committee’s usage of peer groups and how they fit into the overall evaluation of executive pay. • Examine your employees’ situation from a Total Rewards standpoint—consider the total picture • Promote stock ownership for employees wherever possible—owning a piece of the rock is important • Review your Board governance and compensation practices • Monitor the ongoing programs carefully each year based on your Compensation Philosophy and your targets

37. Any Questions ???