Building Appreciation For Incentive Plans Fort Worth HR February 15, 2018 Lane Transou, CCP, GRP, SPHR, SHRM-SCP Lane Transou & Associates, LLC lane@lanetransou.com

Incentive Plan Basics Purpose of incentive plans is to motivate employees to perform work that is above and beyond their day to day role and helps the company achieve certain business/financial goals. Requires continuous assessment to balance: Reflect the annual success of the business Appropriate for the business life cycle Aligns with human capital plan

Life Cycle of a Business World At Work Variable Pay

Business Life Cycle & Pay

Life Cycle Determines Pay Practices

How Are Incentives Applied In Each Cycle for Business Strategy

Human Capital Planning (Jobs) Companies are Dynamic – Jobs should be planned to adjust as the company grows Company Human Capital Planning (Jobs) Employees

Human Capital Planning Creates the platform for jobs Why a job exists When the job is needed Creates context for order and structure to jobs Grows with the company Engages managers and HR in discussions of work – not people Engages employees in discussions of their career

Human Capital Planning Know your jobs Job Families Organizes jobs into disciplines Operations, Finance, HR, IT, Legal Sub Families may further identify the job families Finance: Accounting, Tax, Finance,

Career Streams & Career Levels

Sample of Basic Career Levels (generic)

Short Term Incentives (STI) Reward based Performance based Project base Budgeted Targeted financial success On time completion of a project Looks back at performance 1 year or less performance period

Types of STI Incentive Plans Performance Based Incentive Programs Pre approved plan Approved by shareholders for publicly traded Budgeted Identifies participants Paid upon meeting goals Performance Financial 1 year performance period Participants know performance targets in advance Supports business objectives and strategy Aligned with life cycle

Types of STI Incentive Plans Project Bonus Based on milestones achieved Budgeted into project (CAPEX) Based on key milestones with defined dates No more than 3 set milestones Participant Population May Vary Full Time Part Time Bonus Payments Cash based Larger % for those full time May consider a early completion bonus

Types of STI Incentive Plans Profit Sharing Plans Paid if certain financial goals met No individual performance Spot Bonus Truly the only discretionary bonus Funds budgeted by department Recipients are technical, administrative and early professional Amount may range from $100 - $1,000 Company may have policy around spot bonus award standards

STI Design Performance Based STI Written plan defines types of performance measurements Should be broadly stated to allow for year over year changes Annual performance goals communicated early in performance year Performance is tied to multiple criteria Overall company performance 20% - 50% EBITDA Margin Department performance 10% - 35% Budget Operational Success Individual performance 10% - 25% Core Performance Objectives 5% - 10% Safety Quality

STI Design Performance Based STI (continued) Threshold / Target / Maximum Threshold – the minimum performance in order to fund the bonus Usually @80% of Target Target – what is communicated to employee Maximum – stretch goals achieved Stretch goals could be as high as 200% Circuit Breakers Corporate performance criteria must be met at threshold in order to fund any of the bonus Keeps cash payouts in check Personal Objectives Subjective Best practice is with quarterly KPI reporting Low value is when annual performance rating is used

Long Term Incentives (LTI) Retention based Forward focused Performance criteria longer than 1 year but less than 5 Popular with publicly traded companies (stock)

Types of LTI Plans Stock Plans Requires a Plan Document Defines participants # of shares of stock Vesting Plan must be approved by shareholders Important to follow the terms and conditions of Plan. Administration requires multiple work groups Legal HR Accounting

Types of LTI Plans Phantom Stock Plans Private Equity Stock Awards Retention focus Popular with private companies Cash based Requires a company valuation Becomes a financial liability on company records Private Equity Stock Awards Similar to above but based on when the company is sold or goes public More of a retention factor Deferred Compensation Bonus 409A concerns

LTI Design LTI Performance Based Awards Based on company financials defined in the Plan TSR EPS Division financial performance Population is limited May allow for minimal stock award to non plan participants Awards vest over a 3 year period Performance criteria may include Threshold/Target/Maximum

Allocate Incentives by Career Levels

Communication Incentive Plans Well Designed and Well Aligned Are Easy To Communicate Participants know how they impact the organization Progress reports have relevance Awards based on job level is viewed as equitable Participants see how their jobs impact business success Communication Basics Introduce incentive program Goal/Targets/Timeline/Award/Payout Provide regular updates on progress Communicate the good news and the bad news as appropriate (just the facts)

Questions Lane Transou, CCP, GRP, SPHR, SHRM-SCP Lane Transou & Associates, LLC lane@lanetransou.com