SESSION 7 LongTerm Incentives Longterm Incentive Plans p

SESSION 7 - Long-Term Incentives Long-term Incentive Plans p. 1

Reward System SESSION 7 - Long-Term Incentives Job Analysis Benefits Job Description Managing Base Pay Jpb Evaluation Variable Pay Recruitment Selection & Hiring Training & Dev’mt Career planning Working conditions Long-term Incentives Recognition Awards Perf. evaluation HR Planning p. 2

Long-Term Incentive SESSION 7 - Long-Term Incentives Long term Incentives Deferred Compensation Benefits STOCKS Long-term Cash Stock Options ESOP ESPP Restricted Stocks p. 3

Long Term Incentive SESSION 7 - Long-Term Incentives Ø LTI’s are • compensation programs deferring the payout for more than one year • focusing on performance beyond this one-year time line. p. 4

Deferred Compensation SESSION 7 - Long-Term Incentives Ø Bonus or incentive deferred at a later date, typically to increase benefit retirement plan Ø No social security or other social contributions to be paid on the deferred amount until amount cashed Ø Tax effective in many countries as not cashed before retirement, therefore benefiting of favorable tax rates p. 5

Long-Term Cash Incentive (LTCI) SESSION 7 - Long-Term Incentives Ø Increasingly popular amongst multinationals Ø Usually spread over a 3 year period Ø Paid at the end of the period if objectives attained Ø In addition to the annual incentive plan and, very often, in replacement of a deficient stock option plan p. 6

Stock Option Plan (SOP) Ø Definition SESSION 7 - Long-Term Incentives • The right given: – by a company (granter) – to a person (optionee) – to buy(exercise) – a stated number of shares of company common stock – at a prescribed price(grant or strike price) – over a specified period(exercise period) p. 7

Stock Option Plan (SOP) SESSION 7 - Long-Term Incentives Ø Definition • Exercise Period: the time when the optionee has the right to buy a stated number of shares at the prescribed price • Vesting Period: the prescribed time that needs to be met before a stated number of shares may be purchased • Underwater: when the Grant Price is lower than the option price • In-the-Money: when the Grant Price is higher than the option price • Cash-Less: Simultaneously buy and sell the stock and receive the net appreciation in exercise price in stock or cash p. 8

Stock Option Plan (SOP) SESSION 7 - Long-Term Incentives Stock Price $ 13 $ 12 $ 11 $ 10 Strike/grant price grant In the money $9 $8 $7 $6 Underwater $5 Exercise period $4 $3 Waiting 25% 50% 75% 100% Vesting Period 1 2 3 4 5 6 7 8 9 10 Years p. 9

SOP - Discounted / Premium Prices SESSION 7 - Long-Term Incentives Ø Discounted • Option grants made with exercise prices below the fair market value at grand date Ø Premium-Priced • Option grants made with exercise prices above the fair market value at grand date. p. 10

SESSION 7 - Long-Term Incentives SOP - Indexed Stock Options Ø The exercise price is moving according to an Index like S&P 500 Ø Rationale: an executive should be rewarded for outperforming the market, not coasting it. p. 11

SESSION 7 - Long-Term Incentives SOP - Step Option Ø Option grants made with a fixed exercise price, but the grants are subject to forfeiture if performance goals are not met Ø Example: the company achieves 15% annual earnings per share growth over the next two years p. 12

SESSION 7 - Long-Term Incentives SOP - Cliff/Accelerated Vesting Ø These shares also generally vest after a specific number of years; however, vesting may be accelerated if the company achieves certain preestablished goals. Ø Example: EPS reached$ 0. 65 and maintained for at least 3 consecutive quarters Ø Example: when Operating Profit reach 100 mio, 25% of options are vesting immediately p. 13

Employee Stock Ownership Plan (ESOP) SESSION 7 - Long-Term Incentives Ø An ESOP is an employee benefit plan operating • through a trust that accepts tax-deductible contributions from the company • to accumulate company stock • which is then allocated to accounts for individual participants. Ø The ESOP can acquire both new and existing stock. p. 14

ESOP - Advantages SESSION 7 - Long-Term Incentives Ø Employees • ESOPs help employees develop a sense of ownership in and commitment to the firm, and help to build teamwork. • No taxes on ESOPs are due until employees receive a distribution from the trust, usually at retirement when their tax rate is lower. Ø Shareholders of closely held corporations • Helps to diversify their assets by placing their shares of company stock into an ESOP trust and allowing them to purchase other marketable securities for themselves in their place. p. 15

SESSION 7 - Long-Term Incentives Employee Stock Purchase Plan (ESPP) Ø Gives employees the chance to buy stock, usually through payroll deductions over a defined "offering period. " Ø The price is usually discounted up to 15% from the market price p. 16

SESSION 7 - Long-Term Incentives Restricted Stock Ø Awarding an employee a number of shares with restrictions placed on the holder’s ability to sell or transfer the shares. Ø When the restrictions lapse, the employee is allowed to hold or sell the shares free and clear of any restrictions p. 17

Type of Restricted Stock SESSION 7 - Long-Term Incentives Ø Time-Vested • An award of shares that actually are received only after the completion of a predefined service period Ø Performance-accelerated • Restricted stock granted only after attainment of specified performance objectives Ø Performance-versed • This is a grant of stock to employees upon attainment of defined performance objectives p. 18

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