1. Sustainability Comes to Equity Compensation Athanasia Karananou, Investor Engagements, United Nations Principles of Responsible Investing Initiative (UK) Fred Whittlesey, Principal Consultant, Compensation Venture Group, SPC A Certified B Corporation (US) Brit Wittman, Director, Executive and Equity Compensation Intel Corporation (US)

2. Discussion Topics What is sustainability? The global movement Executive compensation meets ESG Equity compensation and stakeholders The United Nations PRI Intel’s Compensation Programs Conscious Compensation ® in startups

3. What is Sustainability?

4. Conscious Capitalism ESG (environment, social, governance) CSR (corporate social responsibility) Responsible Investing Social Impact Triple Bottom Line

5. Is Anyone Taking This Seriously? You know about ISS – What about ISS SRI? You know about the FASB – What about the SASB? You know about ISS’s EPSC – What about GIIRS? – RobecoSAM Sustainability? – Dow Jones Sustainability Index?

6. Is Anyone Taking This Seriously? “…socially responsible investors have dual objectives: financial and social. Socially responsible investors invest for economic gain, as do all investors, but they also require that the companies in which they invest conduct their business in a socially and environmentally responsible manner.” In voting their shares, socially responsible institutional shareholders are concerned not only with sustainable economic returns to shareholders and good corporate governance but also with the ethical behavior of corporations and the social and environmental impact of their actions. Generally, we take as our frame of reference policies that have been developed by groups such as the Interfaith Center on Corporate Responsibility, the General Board of Pension and Health Benefits of the United Methodist Church, Domini Social Investments, and other leading church shareholders and socially responsible mutual fund companies. Additionally, we incorporate the active ownership and investment philosophies of leading globally recognized initiatives such as the United Nations Environment Programme Finance Initiative (UNEP FI), the United Nations Principles for Responsible Investment (UNPRI), the United Nations Global Compact, and environmental and social European Union Directives. Source: Institutional Shareholder Services (ISS) 2015 SRI Proxy Voting Guidelines

7. Is Anyone Taking This Seriously? Socially responsible shareholder resolutions are receiving a great deal more attention from institutional shareholders today than in the past. In addition to moral and ethical considerations intrinsic to many of these proposals, there is a growing recognition of their potential impact on the economic performance of the company. Among the reasons for this change are: The number and variety of shareholder resolutions on social and environmental issues has increased; Many of the sponsors and supporters of these resolutions are large institutional shareholders with significant holdings, and therefore, greater direct influence on the outcomes; The proposals are more sophisticated – better written, more focused, and more sensitive to the feasibility of implementation; Investors now understand that a company’s response to social and environmental issues can have serious economic consequences for the company and its shareholders. Source: Institutional Shareholder Services (ISS) 2015 SRI Proxy Voting Guidelines

8. The PRI at a glance Launched in April 2006 at the NYSE, the Principles for Responsible Investment has:

9. The PRI: The six principles

10. This is about being a better investor PERFORMANCE not philanthropy “The high-sustainability companies dramatically outperformed the low-sustainability ones in terms of both stock market and accounting measures” Harvard Business School RISK MANAGEMENT not breach of fiduciary duty “As we note above, the links between ESG factors and financial performance are increasingly being recognised. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.” Freshfields Bruckhaus Deringer RETURNS not sacrifice “There are positive, strongly statistically returns associated with going long good corporate governance firms and shorting those with poor governance.” Yale School of Management DIVERSE APPROACHES not just excluding “unethical” investments “We believe that ESG analysis should be built into the investment processes of every serious investor and into the corporate strategy of every company that cares about shareholder value.” Deutsche Bank

11. An inevitable agenda gathering momentum

12. The Signatories The current 1,359 signatories include: – Asset owners BP Pension Fund (UK) BT Pension Scheme (UK) Harvard University Endowment (US) Marks & Spencer Pension Scheme (UK) Pension Fund City of Zurich (CH) Petros (BR) Skandia (SW) University of California (US)

13. The Signatories The current 1,359 signatories include: – Investment Managers ABN AMRO Bank NV (NL) Allianz Global Investors (DE) BayernInvest Kapitalverwaltungsgesellschaft mbH (DE) BNP Paribas Investment Partners (FR) ING Investment Management (NL) JP Morgan Asset Management (US) The Vanguard Group (US) UBS Global Asset Management (UK)

14. The Signatories The current 1,359 signatories include: – Professional Service Partners Aon Hewitt (UK) Bloomberg LP (US) Glass, Lewis, & Co LLC (US) GMI Ratings (US) Institutional Shareholder Services-ISS (US) McGraw Hill Financial (US) Mercer Investments (CA) MSCI (US) Thomson Reuters (US) Towers Watson (US)

15. How the PRI supports signatories

16. Investor engagements: collaborative investor initiatives

17. Should ESG issues be linked to pay?  Opportunities Aligning pay and long-term strategy = sustained shareholder value Long-term thinking is rewarded ESG value drivers & risks = new business opportunities & cost savings  Challenges Lack of universal standards for companies and consultants Risk of creating perverse incentives vs. holistic approach Different performance metrics to compete & complexity

18. PRI initiative: Integration of ESG issues into executive pay PRI Guidance to help investors engage in dialogue with companies on how to integrate ESG issues into executive pay in a meaningful way (2012) Recommendations for companies: 1.Adopt a clear process for identifying appropriate ESG metrics to be linked to pay 2.Link these appropriate ESG metrics to reward systems in a way that they form a meaningful component of the overall remuneration framework 3.Endeavour to clearly and concisely disclose the rationale, method and challenges presented by the incorporation of ESG metrics into executive pay

19. Executive compensation meets ESG Review of 84 companies in utilities and extractives:

20. Executive compensation meets ESG Investors also asked:  What is the proportion of incentives awarded for ESG performance?  Approx. 10%  In determining payouts, are factors considered retrospectively or are they preset at the beginning of the performance cycle?  Fewer than half of executive pay plans are based on pre-set targets  Are ESG factors incorporated into the measurement of corporate goals and/or individual objectives?  Far more likely to be measured relative to corporate-level targets  Are ESG factors a precondition for a portion of the incentive award to vest? Can ESG factors reduce awards otherwise earned?  Yes, but rarely

21. Executive compensation meets ESG Type of ESG issues linked to pay by sector:

22. Executive compensation meets ESG Are companies linking the right issues?  Safety was by far the most prevalent ESG factor  Safety is a key issue for the industry. However, no other ESG factor was employed by almost half of companies reviewed. Is there excessive focus on just one issue?  Climate (i.e. carbon emissions) was the least prevalent ESG factor  This was despite many references to climate related issues as a material risk by the companies’ own sustainability reporting. Is there a disconnect between companies’ own reporting and selecting appropriate issues to link to pay?  Approximately 30% use integrated ESG metrics  While the use of integrated ESG scorecard factors addresses a broad range of ESG performance in some cases, these factors typically lack transparency, specificity, or disclosed performance metrics, thereby diluting their incentive value

23. Executive compensation meets ESG What will investors be asking going forward? Investors will be encouraging companies that do not incorporate ESG issues into executive pay to consider doing so, or explain why not appropriate For companies that do incorporate ESG factors, investors will expect disclosure of clear targets, performance against targets and link to pay-outs, as well as discussion of material issues and progress towards goals Given the long-term nature of ESG issues, investors will be inviting more companies to incorporate ESG factors into LTIPs; or even moving away from traditional structures but ensuring an appropriate long-term time horizon Investors will also expect any discretionary power of the compensation committee to be applied for downward adjustments to account for unusual events or unintended consequences, and that awards are subject to claw-back provisions

24. Executive Compensation Meets ESG Not a new issue: Equity Residential 2011 shareholder proposal (3.7% yes) RESOLVED: That the shareholders of Equity Residential (“Equity” or “Company”) request the Board’s Compensation Committee, when setting senior executive compensation, include sustainability as one of the performance measures for senior executives under the Company’s annual and/or long-term incentive plans. Sustainability is defined as how environmental, social and financial considerations are integrated into corporate strategy over the long term. British utility company National Grid announced last year it would partly base executive compensation on meeting targets for reducing carbon emissions. In addition, Xcel Energy in its 2009 proxy statement discloses that certain annual incentive payments are dependent on green house gas emission reductions alongside the weight given to meeting earnings per share targets. Also, Intel Corporation calculates every employees annual bonus based on the firm’s performance on measures that include energy efficiency, completion of renewable energy and clean energy projects, and the company’s reputation for environmental leadership.

25. Executive Pay and Shareholders How do companies protect shareholders through executive pay design? – Burn rate/value transfer limitation – Vesting schedules – Performance conditions – Stock ownership guidelines – Clawbacks

26. Equity Compensation and Stakeholders Long history of shareholder-focused concerns…assuming these affect shareholder value – Dilution – Executive pay – Board independence – Share plan design

27. Equity Compensation and Stakeholders

28. Intel’s Compensation Programs Annual Cash Incentive: all employees (currently ~107k) participate in program – Payout is based half on financial metrics and half on operational metrics – Operational metrics change annually but have/do include: Environmental/sustainability goals (energy consumption; carbon-footprint reduction; recycling) Conflict-free sourcing Employee population diversity and inclusion

29. Intel’s Compensation Programs Stock Program Summary – Employee Perspective: – Virtually all (~98%) employees participate annually – For Exec Population (top ~350) equity is: 60% performance-based RSUs; rTSR to basket of 15 high- performing peers; 3-year cycle; more leverage up than down (but w/threshold & max) 40% time-based RSUs; quarterly vesting over 3 years This population also has holding requirements (total share, not per grant) – Broad-based population equity is exclusively time-based RSUs, vesting annually over 4 years – Additionally, Intel has a Qualified Stock Purchase Plan with high participation worldwide

30. Intel’s Compensation Programs Stock Program Summary – Stockholder perspective: – Annual dilution commitment of <2%; currently running closer to 1% – Return to shareholders every 2 years for authorization approval

31. Conscious Compensation ® in Startups Linked to concepts of Conscious Capitalism ® Parallel thinking with strategy for investors, customers, suppliers, governance, and staffing Contrary to the legacy “startup” model of pay

32. How Would Sustainable Equity Look? All-employee participation Dynamic dilution measurement, not burn An equity grant size “ratio” (vs. CEO) Longer vesting schedules Required holding periods ESG performance measures for all Other ideas?

33. Athanasia Karananou United Nations Principles for Responsible Investment athanasia.karananou@unpri.org Fred Whittlesey Compensation Venture Group, SPC fred@compensationventuregroup.com Brit Wittman Intel Corporation brit.wittman@intel.com Contact Information