Compensation Spotlights for 2014 Boston NASPP Chapter Meeting December 20, 2013

1. Compensation Spotlights for 2014Boston NASPP Chapter MeetingDecember 20, 2013 Theo Sharp 781-591-3397 tjsharp@fwcook.com Dana Etra 781-591-3398 dwetra@fwcook.com

2. Agenda ISS policy update CEO pay ratio Realized / realizable pay Performance equity trends IPO preparation 2

3. ISS Policy Update – Background • ISS performs annual evaluations of CEO pay to recommend say-on-pay vote Test 1: Relative Degree of Alignment Test 2: Absolute Alignment Test 3: Multiple of Median Qualitative Assessment Factors • The ratio of: 1) performance- to time-based equity awards and 2) performance-based compensation to overall compensation • The completeness of disclosure and rigor of performance goals; • The company's peer group benchmarking practices; • Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative • Special circumstances (e.g., new CEO in prior FY, multi-year awards) • Realizable pay compared to grant pay* • Any other factors deemed relevant

4. ISS Policy Update – Changes to Evaluation • Key Changes: • Changed the calculation of the first quantitative test, the relative degree of alignment (RDA) • Lessened the weighting on the most recent year’s TSR and TDC • Impact of the change • Easier to understand, simpler to calculate • Diminishes effects from timing of equity awards • Longer-term, more balanced quantitative view of pay-for-performance alignment 4

5. ISS Policy Updates – Effect on Equity Compensation • Grant timing (quantitative test policy change) • Prior methodology: advantageous to make a grant by the end of a good TSR year • New methodology: the most recent year’s TSR is won’t dictate a company’s overall performance rank to mask higher compensation • Realizable pay (qualitative test) • Companies need to review realizable pay on a regular basis • Best practice will likely be at least an annual review of realizable pay by the Compensation Committee • Better understand ISS outcomes • As input to annual grant decisions 5

6. CEO Pay Ratio – Background September 18, 2013 SEC votes 3-2 to propose a new rule to require public companies to disclose the ratio of CEO pay to median employee pay (required under Dodd-Frank Act) Median Employee Pay Calculation Methodology 6 Median of “all employees”, including full- and part-time, temporary, seasonal, and non-U.S. employees Does not prescribe a specific methodology for calculating pay ratio Companies have the flexibility to determine the median pay of employees in a way that best suits their particular circumstances Companies required to disclose the methodology used to identify the median Must determine actual pay using SCT methodology

7. CEO Pay Ratio – Effect on Equity Compensation • Grant timing (again) • Companies may consider making mega-grants every few years • Time the grants so that a mega-grant happens when the company is doing well and has top ranked TSR to diminish backlash for high ratio • In other years, the ratio will be low due to no equity grants • Renewed focus on option/restricted stock valuation • Adjustments to expected life and volatility can swing CEO compensation numbers significantly • Performance-based share valuation can increase grant value (market-based awards) • Administrative burden • Stock plan administrators will need to be ready to report grant value for input in to median employee calculation • Different payrolls for multiple subsidiaries and countries will be a burden • Alternative reporting? • Even larger administrative burden for the company and the administrators • Will some companies also report realized/realizable pay ratio? 7

8. Realized / Realizable Pay – Background • ISS realizable pay calculation uses current Black-Scholes value of options granted (based on current assumptions and full remaining term) 8

9. Realized / Realizable Pay – Calculation Example Grant date Period end • Stock price: $10.00; BSV $6.00 • 100 stock options • 100 restricted shares • 100 performance shares (1-year period) • Stock price: $15.00 • Exercise 50 options • 50 restricted shares vest (50 unvested) • Payout of 50 performance shares (50 forfeited) Reported (SCT) Realizable Realized Stock options $600 $500 $250 Restricted shares $1,000 $1,500 $750 Performance shares $1,000 $750 $750 9

10. Realized / Realizable Pay – Disclosure • Disclosure in the CD&A • Past: • SEC discouraged alternative views of the Summary Compensation Table (SCT) in the CD&A • Highlighted the difference between grant value and realized/realizable value • Median hyped the SCT grant values of options and excessive grants regardless of in-the-money value • ISS and Glass Lewis focused on the SCT grant values (and still do to an extent) • Present: • SEC had accepted CD&A reporting of realized/realizable compensation in tabular format • ISS is implementing a realizable pay analysis for certain companies • Glass Lewis is considering similar analyses 10

11. Realized / Realizable Pay – Disclosure Example from United Technologies proxy: 11

12. Realized / Realizable Pay – Disclosure Example from ISS report: 12

13. Realized / Realizable Pay – Effect on Equity Compensation • Real-time calculations • Companies need to know what the realized/realizable pay is several times throughout the year • Flexibility in the definition will be key for administrators • Vested vs. unvested • All outstanding vs. options only, etc. • Increased or decreased grants based on current values • Renewed discussion of “how much is enough” • Renewed discussion of “granting at the bottom” • Renewed discussion of “rewarding failure” 13

14. Performance Equity Trends – Background • Data shows that the majority of equity-granting public companies utilize some form of performance-based grant • These plans have become more prevalent and bring a host of decisions along 14

15. Performance Equity Trends Executive Long-Term Incentive Grant Type Usage Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 15

16. Performance Equity Trends Long-Term Incentive Grant Type Usage By Sector Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 16

17. Performance Equity Trends Number of Performance Measures Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 17

18. Performance Equity Trends Performance Measure Categories Measurement Approach Relative Absolute Both Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 18

19. Performance Equity Trends Performance Award Period Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 19

20. Performance Equity Trends Performance Award Maximum Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 20

21. Performance Equity Trends – Effect on Equity Compensation • Valuation is getting more complicated (specifically for market-based awards) • Market-based / absolute TSR plans often require complex valuation • Generally, need to hire a outside valuation expert • Fees run $5,000 - $20,000+ • Administrators may start getting into the business • Modeling is becoming more prevalent • Comparing potential payouts to increases in financial performance is prevalent • Increased market cap • Increased profits • Increased revenue • Ties in with realized/realizable pay 21

22. Performance Equity Trends – As An Aside… Some have questioned whether performance-based equity aligns with performance Not really, but it may be just as powerful as an incentive and a pay-for-performance control 22

23. IPO Preparation – Background • The IPO market has been robust • An IPO brings executive compensation issues, many of which have to do with equity compensation • Pre-IPO grants • When • To whom • How much • Instrument • Option / SARs • Time-based restricted stock / units • Performance-based stock / units • Plan terms • Evergreen • Fungible • Plan limits • Instruments • Employment terms are also important 23

24. IPO Preparation – Award Opportunity Median Equity Grant Opportunity (as a % of fully diluted shares) Post-IPO Pre-IPO

25. IPO Preparation – Award Timing Prevalence of Equity Grant Timing Life Sciences Software

26. IPO Preparation – Realizable Value of Awards Value 1 Year After IPO Post-IPO Grants Pre-IPO Grants

27. IPO Preparation – Severance & CIC Equity Acceleration – Absent CIC Life Sciences Software

28. IPO Preparation – Severance & CIC Equity Acceleration – Following CIC Life Sciences Software

29. Frederic W. Cook & Co. Theo Sharp 781-591-3397 tjsharp@fwcook.com Dana Etra 781-591-3398 dwetra@fwcook.com 29