Executive Compensation and the Role of the Compensation Committee

THE EXECUTIVE COMPENSATION PLAN

Designing a comprehensive well-aligned executive compensation program requires balancing short-term pay-for-performance with long-term sustainable growth. Key inputs are the company vision, business strategy, roles, expectations, and a compensation philosophy. Effective plan design should:

• align awards to shareholder desired business outcomes measured by operational performance conditions and market stock price performance
• balance between short-term and long-term incentives relative to risk taking
• have meaningful incentive payouts using base salary as an index
• include metrics that employees have control over and can directly impact

Pay-for-Performance Relationships

How an organization establishes pay for performance in their organization and related programs should be explained to stakeholders. For executive compensation programs, a number of factors are evaluated:

The Right Level of Pay - the pay level should be set by reviewing a number of factors such as competitive practice and market benchmarks, the company's pay mix philosophy and risk profile, and the individual's contribution to performance. This can often be expressed as a pay positional strategy (e.g. 75th percentile in Total Cash Compensation)

The Right Performance Measures - Thoroughly assess whether all the compensation programs' performance measures are aligned with the business strategy and correlated to value creation for shareholders. Performance measures should apply to management actions in an appropriate timeframe, be complementary across programs, not conflict, and be measurable. As mentioned earlier, the measure may be internal operational financial measures or based on market stock price performance.

The Right Level of Performance - the goal-setting process should be based on threshold, target and superior performance levels and reflect a comparison to historical performance levels, peer performance, and future expectations of shareholders and relevant financial markets.

• Each of these perspectives should be supported by multiple forms of analysis and the resulting performance goals aligned with corresponding incentive award levels to create a pay-for-performance relationship that is appropriate at all points along the payout curve.
• As a best practice, Compensation Committees should require annual back-testing of their incentive plans to determine whether the "targeted" pay-for-performance relationship was actually achieved, recognizing that the lack of a performance alignment can result in a non-sustainable compensation level (e.g. relative pay above relative performance) or create retention risks (e.g. relative pay below relative performance).