Avoiding Compensation Complacency: Designing Programs that Withstand Market Fluctuations Guest Presenters: Brennan Rittenhouse and Jeff Swerdlow Alvarez & Marsal TalentTakeaways webinar & podcast series

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About the Presenters AGENDA Talent Takeaways Series Brennan Rittenhouse is a Managing Director with Alvarez & Marsal in Denver, Colorado, specializing in compensation and benefits planning and consulting.  He brings an expertise in all areas of executive, independent director, and broad-based compensation consulting. Some of the areas in which he has significant experience include compensation benchmarking, designing and implementing both short- and long-term incentive plans, and creating salary structures. He is also a subject matter expert in all areas of equity plan administration, including systems, implementation, accounting, reporting, and tax.   Jeff Swerdlow is a Director with the Alvarez & Marsal, LLC Compensation & Benefits group based in Denver, CO.  Jeff specializes in executive and broad-based compensation consulting, incentive compensation plan design and implementation, nonqualified deferred compensation consulting, equity plan administration, golden parachute calculations, institutional investor pay for performance analyses, and litigation support/expert testimony.  After attending Muhlenberg College for his undergraduate degree, Jeff attended law school at Stetson University College of Law and obtained his LL.M. in Taxation from the University of Denver Sturm College of Law. Talent Takeaways Series

Agenda

Contents 1 Agenda 2 Poll Question #1 3 Stuck in a Different Era? 5 4 Designing a Sustainable Compensation Program 10 Using Total Rewards to Increase your Value Proposition 15 6 Poll Question #2 19 7 Consistency, Consistency, Consistency! 21 8 Questions? 23

Poll Question # 1 Do you have a group or function that you benchmark to the market 75th percentile?

Stuck in a Different Era?

Signs of an Outdated Compensation Program Compensation Philosophy Compensation Philosophy targets market percentiles that are no longer representative of the actual market for talent If the target is too low, the program may have been designed before demand for talent reached current levels If the target is too high, the program may have been designed in a much different market for talent Guaranteed or expected increases baked into the compensation philosophy

Signs of an Outdated Compensation Program Pay Mix Is your compensation philosophy overly weighted to pay-for-performance or vice versa? Compensation structures dependent on large bonus payouts to align with market may not be suitable for times when company performance is not certain Compensation structures overly weighted to base salary are inflexible, as it is very difficult to “manage down” fixed pay

Signs of an Outdated Compensation Program Short-Term Incentive Compensation How many plans? A one-size-fits all may be a sign of a plan from an outdated era What types of goals is the plan based on? Plans overly weighted to company performance may not pay out if the market turns While that may be expected at the senior levels, often perceived as unfair for broad-based employee populations that have little impact on financial results Private companies are utilizing between 2-4 short-term incentive (“STI”) plans Multiple plans geared for different levels (executive vs. department vs. broad-based) Executive only incentive plans are now in the minority in private sector

Signs of an Outdated Compensation Program Equity Vehicles What types of equity does your company award? Effectiveness of equity vehicles (relative to the compensation expense) varies depending on the market and the growth stage of the company Stock options provide little value for large, stable companies, as there is less growth to be had (requiring more options, and therefore more expense, to be granted to deliver any substantial value) If the equity program is largely option based, often times a sign that it was designed for an “up” market and not positioned for a downturn (when options can become worthless)

Designing a Sustainable Compensation Program

Finding the Right Balance Pay Mix If bonuses don’t pay out, is your compensation structure still reasonably aligned with market? If too focused on bonus, base salaries will be significantly below market If too high on base, costs may not be sustainable What do my employees expect? Key is to stress test

Finding the Right Balance Stress Testing Bottom up cost analysis What’s the total cost of the program, both in good and bad years? Don’t forget to account for annual increases: COLA & merit Is the program affordable? Do my metrics make sense? Will bonus plans pay out too much in down years?

Finding the Right Balance Taking Advantage Down markets are a great time for options Make employees earn their equity: vesting, holding, and retention requirements Nonqualified deferred compensation as an opportunity Bonus conversions: paying out bonuses in stock or deferring and converting

Finding the Right Balance Total Rewards How can we increase our total rewards value proposition without increasing costs? Total rewards opportunities and emphasizing work- life balance opportunities

Using Total Rewards to Increase your Value Proposition

Finding the Right Balance Total Rewards How can we increase our total rewards value proposition without increasing costs? Total rewards opportunities and emphasizing work- life balance opportunities Don’t just guess! Ask!

Finding the Right Balance Total Rewards Variations between Employee and Employer perspectives when attracting employees: *Data obtained from the Willis Towers Watson 2016 Global Talent Management Rewards and Global Workforce Studies report

Finding the Right Balance Total Rewards Variations between Employee and Employer perspectives when retaining employees: *Data obtained from the Willis Towers Watson 2016 Global Talent Management Rewards and Global Workforce Studies report

Do your employees “expect” a bonus every year? Poll Question # 2 Do your employees “expect” a bonus every year?

Consistency, Consistency, Consistency!

The Importance of Consistency in Messaging Managing Expectations Shifts from “what has always been” have potential to significantly impact morale and employee concerns Impact of the workforce generations, employees more willing to jump ship Manage messaging to ensure employees are getting the info they want and need Don’t mix messages! If bonuses aren’t paying out, don’t talk about how great things are! Align executive pay programs with broader population: making employees feel the pain while the executives are not is a recipe for disaster

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Jeff Swerdlow, Director jswerdlow@alvarezandmarsal.com 303-220-2078 Contacts Contact us Brennan Rittenhouse, Managing Director brittenhouse@alvarezandmarsal.com 303-779-2082 Jeff Swerdlow, Director jswerdlow@alvarezandmarsal.com 303-220-2078

Avoiding Compensation Complacency November 13, 2018 Designing Programs that Withstand Market Fluctuations CONFIDENTIAL – NOT FOR DISTRIBUTION

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