20100920 cii aligning executive performance - abridged final
TRANSCRIPT
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2010 Farient Advisors LLC- All rights reserved
The Holy Grail: Aligning Executive
Performance and Pay
September 20, 2010
Robin Ferracone, Executive Chair, Farient Advisors LLC
These materials are confidential and may be used only with written authorization from Farient Advisors
for
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2 2010 Farient Advisors LLC- All rights reserved 2010 Farient Advisors LLC- All rights reserved
Survey of Investors Perspectives
In 2008, 20 of the top 25 institutional investors were interviewed by
the Center on Executive Compensation
Over 50% of those interviewed citedpay forperformance alignment
as among their most important issues of concern
Approximately 75% had no real concerns about the levels ofexecutive compensation, as long as there were strong connections
betweenpay andperformance
Performance measures were of concern
Investors were negative about disclosures
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3 2010 Farient Advisors LLC- All rights reserved 2010 Farient Advisors LLC- All rights reserved
Farients Perspectives on Alignment
Investors are concerned about it
- Fairness
- Incentive value
Alignment is a stated corporate objective in virtually all proxy
disclosures
There is no easy way to measure it
Alignment is an old and persistent issue
Alignment can be in conflict with other compensation objectives
(e.g., retention, motivation, etc.)
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4 2010 Farient Advisors LLC- All rights reserved
Case in Point: Copart
Founded in 1982; went public in 1994 (NA
SDAQ
ticker: CP
RT) Today, approximately $750 MM in revenue
In April 2009, Copart asked its shareholders to vote on a proposal
to exchange all forms of compensation for 2 MM stock options to
vest over 5 years for each of the top two executives
Copart CEO ar t Comp n at on Compar on
r or
Comp n at on
an
N w
Comp n at on
an
Sa ary $750,000 $1
Bonu $1,500,000 -
ota Opt on 150,000
Annually
2,000,000
over 5 Years
Opt on rant Va u $1,500,000 $20,000,000
nnua
z
d na $4,000,000
ar
t
nnua
z d
Comp n at on$3,750,000 $4,000,001
Notes:
Sto
k pr
e t r
t= $3
B
k Scho
e
e per optio @33% of
trike price = $
$0
$10
$20
$30
$40
$50
4/2004 4/2005 4/2006 4/2007 4/2008 4/2009
St k
i e
C
t
C i St k i e t i End
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5 2010 Farient Advisors LLC- All rights reserved 2010 Farient Advisors LLC- All rights reserved
Farients Definition of Alignment and Alignment Zone
PACTM
TSR
Alignment
AlignmentZone
Upper Alignment
O one
Lo er AlignmentO one
Source: Fair Pay, Fair Play: Aligning Executive Performance and Pay
Definition of Alignment
Fairpay, or alignedpay, is when
total compensation, after
performance has been factored
in, is:
1. Sensitive to companyperformance over time; and
2. Reasonable relative to the
mar et for executive talent
and for the performance
delivered
___________________________
Definition of Alignment Zone
A range of acceptable pay
outcomes for a companys size,
industry, andperformance
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Farient Alignment ReportTM
Source: Fair Pay, Fair Play: Aligning Executive Performance and Pay
07
0 !
05
04
03
020 "
00
$0
$5
$ 0
$ 5
$20
$25
-30% -20% - 0% 0% 0% 20% 30% 40% 50%
Ann alize
ACTM
(200 $MM )
$7B Re en e
Ann alize 3-Year TSR
F Corp. CEO ACTM
a or er orman e Alignment
Alignmentone
Textile Apparel an L x r
oo a Line
ata oint = 200
TSR = 27%
PACTM = $ 3.6 MM
F Corp.
Pa Tren Line
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7 2010 Farient Advisors LLC- All rights reserved 2010 Farient Advisors LLC- All rights reserved
From Myth to RealityThe RightTarget Pay The Right PACTM
% % % % % %
Annualized
ACTM
8 MM
Annualized Year TSR
Co art n . CE ACTM
rior CE rogram . Ca h Swa ed or Equity
ndu trialSe tor
Alignment
Zone
CE ew lan
MM tion
Salary
riorCE rogram
Salary
%Target onu
Annual tion
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8 2010 Farient Advisors LLC- All rights reserved 2010 Farient Advisors LLC- All rights reserved
From Myth to RealityHighly Paid Overpaid
# $
# %
& '
& (
# )
# 8# 9
8
0 1 2 3 # 3 1 2 3 $ # 3 % 2 3
Annuali ed
A TM
9 MM
Revenue
Annuali ed ear TSR
hevron A TM
ay or er ormance Alignment
Alignment
onenergy Sector ay Line
hevron
'Reilly ay Line
Rank4 5O 4 om 6 any
Actual 7 A 4TM
8 9MM @
1 HaA
wa
B
C
igA
aC
oD E F G
331.02 Is enberg H aborsIndustries $97.6
3 I ll ison Ora P le $58.9
4 Ala E ont Q ederal- R ogul $54.0
5 McClendon ChesaE
eaS
eI
nerg B $50.5
6 Adkerson Freeport-McMoran $49.6
7 Irani Oc cidental Petroleum $45.2. . . .. . . .. . . .
17 O'Reilly Chevro T Corp $25.3
Ab U olute V ighest P W id C X Os
3-Year PeriodX T
dingFY2009 (A nnualized)
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Source: Fair Pay, Fair Play: Aligning Executive Performance and Pay
From Myth to RealityHeavy Equity Alignment
080706
05
04
03
0
0
00
99
98
97
96
09
$ 0
$ 0 0
$ 00 0
$ ,000 0
-40% - 0% 0% 0% 40% 60% 80%
AnnualiPAC
Y
M
(2009 $MMs)Logarit mic
Scal
Annuali 3- ear SR(1)
OracleCor CEO PAC M
Pay orPerformanceAlignment
Soft are & Ser ices
IndustryPay Line
Alignment
Zone
( )a i
b
cal Yeacb
ab
c eportedby Oracle(d ) Ellib on received nob alary,bonub , oroptionb
during the e -yearperiod ending inf
g g e
$0 0
(2)
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10 2010 Farient Advisors LLC- All rights reserved 2010 Farient Advisors LLC- All rights reserved
Source: Fair Pay, Fair Play: Aligning Executive Performance and Pay
From Myth to RealityHigh TSR Performance Alignment
070
05
040
02
$0
$50
$100
$150
- 0 -15 0 15 0 45 0
lize
P Ch
i
(200 $ s)
lize -Ye TSR
Tec ologySecto Com yCEOP CTM
P y o Pe o m ce Alig me t
Alig me t
Zo eTec ologySecto
P y Li e
Com y
P y Li e
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11 2010 Farient Advisors LLC- All rights reserved 2010 Farient Advisors LLC- All rights reserved
Source: Fair Pay, Fair Play: Aligning Executive Performance and Pay
From Myth to RealityGoal-setting vs. udget Alignment
0
0
0
0
0
0
0302
0
00
0
2
0
2
0% 20% 0% 20% 0%
Annuali ed
PACp
q
200 s
Annuali ed3 Year SR
C nsumer Dis retionar Sector Compan PACPa for Performance Alignment
AlignmentZone
Consumer Discretionar
Sector Pa ine
Compan Pa ine
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Root Causes of Misalignment Design andDecisions
Source: Fair Pay, Fair Play: Aligning Executive Performance and Pay
Aggressive target pay
Turbo-charged upside
Conventional goal-setting
Short-term gain;
long-term pain
Flattening the curve
Ad hoc
decisions
Decision-
making
Influences
Compensation Design
Decision-Making
Processes
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Asymmetric Attri ution ias
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Investor Impact: Three Steps To ard Improving Alignment
1. Alignment is always relevant; dont ignore it when TSR is high
2. Ask for Farients Alignment Report
Historical
Prospective
Checklist of red flags
. Vote with your voice before your feet
Say on Pay makes it easy to explain your vote
Pay for Performance Disclosure should discuss fact, not fiction
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16 2010 Farient Advisors LLC- All rights reserved 2010 Farient Advisors LLC- All rights reserved
The eauty of the Alignment Report
Assesses pay relative to performance, not in a vacuum
Is dynamic, rather than static (performance scenarios across the
TSR spectrum)
Can be viewed both historically (in actual terms), as well as
prospectively (based on program design) Can evaluate pay vis vis any number of peer sets or even
individual companies
Assesses total compensation holistically. Includes design and
decisions
Gives strong guidance as to whether pay is aligned with
performance, or not
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Fair Pay Fair Play ligning Executive PerformanceandPay