1. Executive Compensation and Succession Strategies Joel C. Farrar Foster Swift Collins & Smith PC 517.371.8305 jfarrar@fosterswift.com

2. Executive Compensation and Management Succession Strategies January 28, 2016 2  2016, Foster Swift Collins & Smith PC Executive Compensation It’s not the employer who pays the wages. Employers only handle the money. It’s the customer who pays the wages. – Henry Ford Beware of little expenses. A small leak will sink a great ship. – Benjamin Franklin

3. Executive Compensation and Management Succession Strategies January 28, 2016 3  2016, Foster Swift Collins & Smith PC Step One: Identify Business Goals Strategic Planning ■ Increase revenue ■ Decrease expenses ■ Expansion and project-specific goals ■ Department goals ■ Retention goals ■ Customer service goals ■ Safety goals ■ M&A goals

4. Executive Compensation and Management Succession Strategies January 28, 2016 4  2016, Foster Swift Collins & Smith PC Step One: Identify Business Goals Categorize Goals ■ Company-Wide ■ Department ■ Individual ■ Short Term ■ Long Term Develop Metrics to Measure Improvements

5. Executive Compensation and Management Succession Strategies January 28, 2016 5  2016, Foster Swift Collins & Smith PC Step Two: Review Compensation Structure Base salary, bonus and incentive programs, “qualified” plans, welfare benefits, severance benefits, “non-qualified” programs, others Evaluate current strategy in light of goals Identify opportunities to improve

6. Executive Compensation and Management Succession Strategies January 28, 2016 6  2016, Foster Swift Collins & Smith PC Step Three: Develop Strategy Group Employees ■ “C-Suite” Executives ■ Other “top hat” executives  “Select group of management or highly compensated employees”  Usually SVPs  Sometimes directors and top salespeople  Usually not managers and below ■ Mid-management ■ Administration ■ Movers Evaluate each group’s ability to affect business goals Select goals to incentivize for each group & key individuals Prepare compensation philosophy and strategy

7. Executive Compensation and Management Succession Strategies January 28, 2016 7  2016, Foster Swift Collins & Smith PC Step Four: Evaluate Options Limitations on “non-qualified” benefits ■ ERISA – “Top hat” and funding issues (Rabbi Trust) ■ Section 409A – Exemption, compliance and flexibility issues ■ Income tax and deduction issues  Timing  Company investments  Pass-through entities

8. Executive Compensation and Management Succession Strategies January 28, 2016 8  2016, Foster Swift Collins & Smith PC Step Four: Evaluate Options Program Types ■ Short-term bonus programs ■ Long-term incentive programs ■ Synthetic equity programs ■ Equity programs ■ Elective deferral programs ■ Change of control programs

9. Executive Compensation and Management Succession Strategies January 28, 2016 9  2016, Foster Swift Collins & Smith PC Step Four: Evaluate Options Short-Term Bonus Programs ■ Available for all employees ■ Discretionary Annual Programs (Growing companies only) ■ Performance-Based Annual Programs  Discretionary or non-discretionary performance targets  Performance period (1 to 3 years)  Performance targets – Company-wide targets (profit, growth, peer group) – Unit/Department targets (profit, expenses) – Individual targets ■ Targeted Incentive Programs  Absenteeism  Customer satisfaction  Move Efficiency

10. Executive Compensation and Management Succession Strategies January 28, 2016 10  2016, Foster Swift Collins & Smith PC Step Four: Evaluate Options Long-Term Incentive Programs ■ “Top Hat” only ■ Company credits – Long-Term Performance or Excess Benefit ■ Vesting – Golden Handcuff & Non-Compete ■ “Deemed” Investments – ERISA and Tax Issues ■ Payment Events – Section 409A

11. Executive Compensation and Management Succession Strategies January 28, 2016 11  2016, Foster Swift Collins & Smith PC Step Four: Evaluate Options Synthetic Equity Programs ■ “Top Hat” only ■ Performance Unit, Restricted Stock Unit & Phantom Stock Plans ■ Stock Appreciation Right Plans ■ Form of LTIP – Different from True Equity Benefits ■ No Minority Shareholder Issues, But:  Complexity and valuation issues  Reduced “ownership” mentality

12. Executive Compensation and Management Succession Strategies January 28, 2016 12  2016, Foster Swift Collins & Smith PC Step Four: Evaluate Options Equity Programs ■ Available for all employees ■ Stock Options – Qualified or Non-Qualified; Valuation Issues ■ Restricted Stock – Tax and Liquidity Issues ■ LLCs – “Profits” or “Capital” interests ■ Advantage: “Ownership” Mentality ■ Disadvantages: Taxes and Minority Shareholder Issues  Access to Information and Meetings  Voting Rights  Dissenter’s Rights  Shareholder Agreement Recommended

13. Executive Compensation and Management Succession Strategies January 28, 2016 13  2016, Foster Swift Collins & Smith PC Step Four: Evaluate Options Elective Deferral Programs ■ “Top Hat” only ■ Employee Deferrals  Income tax deferral (watch owners)  Delayed tax deduction  Section 409A timing rules ■ “Deemed” investments ■ Payment events

14. Executive Compensation and Management Succession Strategies January 28, 2016 14  2016, Foster Swift Collins & Smith PC Step Four: Evaluate Options Change of Control Programs ■ “Top Hat” only ■ What happens if the company is sold? ■ Retention goal (pre-transaction through transition) ■ Amount of benefit?  Fixed amount?  Treat like a shareholder? ■ Double or single “trigger”? ■ Section 409A issues

15. Executive Compensation and Management Succession Strategies January 28, 2016 15  2016, Foster Swift Collins & Smith PC Step Five: Implement Strategy Select Mix of Benefits Prepare formal program documents ■ Section 409A Issues ■ ERISA Issues (120-day letter) Communicate programs to employees regularly to maximize incentives Review and refine together with strategic plan

16. Executive Compensation and Management Succession Strategies January 28, 2016 16  2016, Foster Swift Collins & Smith PC Succession Planning Failing to plan is planning to fail. – Benjamin Franklin

17. Executive Compensation and Management Succession Strategies January 28, 2016 17  2016, Foster Swift Collins & Smith PC Why is Succession Planning Important? Succession is inevitable and often catastrophic ■ 70% of business fail to survive the second generation ■ 85% fail to survive the third generation Proactive planning allows us to: ■ Avoid business disturbances ■ Avoid problems with customers, suppliers and employees ■ Improve successor retention ■ Mitigate tax and legal issues ■ Minimize disputes, particularly in family-owned businesses ■ Avoid surprises

18. Executive Compensation and Management Succession Strategies January 28, 2016 18  2016, Foster Swift Collins & Smith PC What is Succession Planning? It means different things to different people: ■ “Selling” or “Getting Out” ■ Keeping a business “in the family” ■ Retiring from a continuing business Process to formally transition management and ownership between generations or to a buyer

19. Executive Compensation and Management Succession Strategies January 28, 2016 19  2016, Foster Swift Collins & Smith PC Practical Considerations Outstanding Debt Value in land, buildings and equipment Owner’s retirement income needs Treating children “fairly” Common solution – Life Insurance

20. Executive Compensation and Management Succession Strategies January 28, 2016 20  2016, Foster Swift Collins & Smith PC Step One: Identify Potential Successors Co-owners Family members (Family issues? Estate planning issues?) Current employees New hires Potential buyers (Competitors)

21. Executive Compensation and Management Succession Strategies January 28, 2016 21  2016, Foster Swift Collins & Smith PC Step Two: Determine Goals Retirement assets and income Keeping the business “in the family” Family’s goals “Getting out” Business continuity

22. Executive Compensation and Management Succession Strategies January 28, 2016 22  2016, Foster Swift Collins & Smith PC Step Three: Plan for Management Succession Identify and groom successors ■ Transitioning responsibilities, authority and relationships ■ Evaluations, feedback and training ■ Retention strategies (discussed previously) Restructure management ■ Dividing responsibilities (checks and balances) ■ Formalizing positions, reporting and responsibilities ■ Outside board of directors?

23. Executive Compensation and Management Succession Strategies January 28, 2016 23  2016, Foster Swift Collins & Smith PC Step Four: Plan for Ownership Succession Estimate cash needs and cash flow ■ Can the business support both the owner and the successors? ■ How will estate taxes be paid? Consider life insurance Determine transaction structure ■ Earn-in (stock purchases, profits interests, executive compensation plans) ■ Earn-out (installment sale of stock, leveraged buy-out) ■ Gifting (annual exclusion $14k; unified credit $5.43M)  Viable for smaller businesses  “Two-stage” transactions preserve discounts  Estate freezing techniques (GRAT) ■ ESOP ■ Third party sale Formalize plan in connection with estate planning Consider appraisals and minority discounts

24. Executive Compensation and Management Succession Strategies January 28, 2016 24  2016, Foster Swift Collins & Smith PC Step Five: Prepare the Business Formalize policies and procedures, legal forms, operating procedures and recordkeeping Corporate Restructuring ■ Entity conversions ■ S corporation election (10 years) ■ Asset divisions and spin-offs ■ Structure future capital investments advantageously (leases, asset purchases, etc.)

25. Executive Compensation and Succession Strategies Joel C. Farrar Foster Swift Collins & Smith PC 517.371.8305 jfarrar@fosterswift.com