A True Pay for Performance Model Lessons Learned from Private Equity Julie Casella, Director

2 Agenda √ Current State of Pay for Performance √ Private Equity Introduction √ Private Equity Compensation Strategy √ Private Equity Best Practices √ Public Companies Post Private Equity Ownership

3 Current State of Executive Pay Executive Base Salary at highest levels in history High fixed cost justified by market pressure and executive retention Annual Incentive Plans have moved to a more formulaic approach Pros – more aligned to specific financial results Cons – greater utilization of individual objectives not tied to returns or cash flow Long-term Incentive Plan mix favors restricted stock (for retention and performance based metrics) with less focus on stock options (intrinsic appreciation vehicle) Pros – Ability to attract and retain Cons – Can create misalignment with shareholder return and dilute the definition of “long-term”

4 Current State of Pay for Performance The chart below shows the comparison of total direct compensation (base salary + annual incentive + long-term incentive) to five-year total shareholder return in Fortune 250 Companies 5 Yr Total Shareholder Return 5 Yr CEO Total Direct Compensation Private Equity Investor Return Realization Expectations

5 Private Equity Introduction What is Private Equity? Private Equity (“PE”) is an investor class which primarily invests in the ownership of privately held companies: Active and involved investors Control the boards of directors Management team continues to run operations PE takes the form of various investment strategies: Life CycleStartupEarly Stage/High Growth Mature, Stable or Growing Struggling, Bankrupt Investment$0 - $50MM$50-$200MM$200MM - $1B +Varied Key Objectives Develop a strong team, technology, and market share. Ability to expand markets and operations/ management improvements. Growth in earnings, reduce debt, and maintain to moderate growth in market share. Complete shift in strategy and operations, as well as cycle change.

6 Private Equity Introduction Source New Investment Opportunities Due Diligence Operational Transformation Drive Desired Results Exit Strategy Liquidity / Return on Investment Private Equity Life Cycle

7 Private Equity Compensation Strategy Risk Reward Strategy: Equity vs Cash Tradeoff Base salary targeted at median Annual cash incentives are low and hurdles to achieve payout are high -Earnings based metrics -Likely without a cap High upside in the form of long-term equity incentive -Based on transaction or event The Focus is on “Hitting the Home Run”

8 Private Equity Best Practices Key Best Practices Applicable to Non-PE Owned Companies #1. Ownership Mindset #2. Incentive Plans: Keep it Simple #3. Upfront Equity “Mega” Grants #4. Investors are Paid First

9 Private Equity Best Practice #1 Ownership Mindset Key executives should make a cash investment when joining a firm -Demonstrates commitment to company and shareholders/stakeholders -Immediate alignment of interest with shareholders -Promotes long-term perspective – strategy and decision making -Culture of ownership and commitment Public Companies do not have “buy in” requirements Market competitive reality check: Executives travel back and forth between the public company and private equity space, and private equity firms are successful in getting executives to buy in. The buy-in condition is neither non-competitive, nor unreasonable.

10 Private Equity Best Practice #2 Incentive Plans: Keep it Simple The majority of executive compensation should be tied to the long-term incentive “equity” Annual cash incentive performance goals focus on year over year earnings Performance goals support the most important objective  share value creation, linking long-term and short-term performance with incentives Market competitive reality check: As the memory of the Recession fades, annual incentive formulas are getting more complicated, and less tied to earnings. In both the private and public sectors, companies that want to send shareholders a clear and positive message, an earnings only formula ought to be considered.

11 Private Equity Best Practice #3 Upfront Equity “Mega” Grants The primary advantage of an up-front grant is that it places the company/executive bargain squarely in front of the investor -Aligns with a long-term strategy, rather than every year being able to shift strategy and having layered payouts from previous grants In contrast, the public and private company practice of layering on annual grants in the form of restricted stock, stock options, performance units, etc. -A natural consequence of annual grants is that performance standards go up and down with each grant Market competitive reality check: A small minority of both public and private companies figured out the advantage of “up-front” grants, and they have been employing the technique for years. They make “mega” grants every three to five years, with no grants in between. Public company executives would protest at up-front grants, on the grounds that they are not competitive; arguing that market and economic conditions are always changing, and annual grants are necessary in order to reset option strike prices and performance goals to reflect those changing conditions. Investors/shareholders do not have the luxury of changing their buy-in price to reflect market conditions.

12 Private Equity Best Practice #4 Investors are Paid First The PE liquidity event for both investors and executives takes place in a similar time frame, for example: -Investors must first retrieve their initial capital before executive equity can vest -Investors must first retrieve their equity capital plus a target minimum return (8% is most common) before the executive’s equity vests -Investors must receive an even higher return before executive equity vests and/or the performance multiplier is trigged A version of the PE practice can be adopted for some public companies while it is more difficult to implement: -Executives could cash out shares as long as total shareholder return (“TSR”) achieved a minimum rate over the last five years (e.g. 7 percent CAGR) -Failure to achieve the hurdle delays the cash out of shares until the minimum TSR is achieved -TSR is the gate and performance vesting could be determined by other metrics Market competitive reality check: Proxy advisory firms and many institutional shareholders are insisting that TSR play a strong role in setting annual total direct compensation. This concept is simply an extension of that view in an easy to understand format.

13 Public Companies Post Private Equity Ownership The chart below shows the comparison of total direct compensation (base salary + annual incentive + long-term incentive) to shareholder return for a sample of twelve companies formerly owned by PE. This is over the time period of years 4-6 Post IPO. 3 Year Total Shareholder Return 3 Year CEO Total Direct Compensation

14 QUESTIONS? p: For any questions about today’s presentation please contact Julie at Compensation & Benefit Solutions serves as a strategic partner to help leverage your organization's compensation plans to achieve your long-term goals and objectives. Our team is led by, and comprised primarily of, former senior management of the compensation consulting practices at various leading consulting firms. With compensation expertise across all industries, CBS has the knowledge and experience to ensure that both your organization and your employees receive the most out of your compensation programs.