Long-term Incentive Plans SESSION 7 - Long-Term Incentives

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

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

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

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

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

Stock Option Plan (SOP) Definition 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) SESSION 7 - Long-Term Incentives

Stock Option Plan (SOP) 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 SESSION 7 - Long-Term Incentives

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

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

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

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

SOP - Cliff/Accelerated Vesting These shares also generally vest after a specific number of years; however, vesting may be accelerated if the company achieves certain pre-established goals. Example: EPS reached$ 0.65 and maintained for at least 3 consecutive quarters Example: when Operating Profit reach100 mio, 25% of options are vesting immediately SESSION 7 - Long-Term Incentives

Employee Stock Ownership Plan (ESOP) 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. The ESOP can acquire both new and existing stock. SESSION 7 - Long-Term Incentives

ESOP - Advantages Employees Shareholders of closely held corporations 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. 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. SESSION 7 - Long-Term Incentives

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

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

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

SESSION 7 - Long-Term Incentives

SESSION 7 - Long-Term Incentives

SESSION 7 - Long-Term Incentives

SESSION 7 - Long-Term Incentives