2015 EXECUTIVE COMPENSATION TRENDS By danIEL N. janich Greensfelder, Hemker & Gale 200 West Madison St., Ste 2700 Chicago, Illinois 60606 Phone: (312) 345-5003 Fax: (312) 419-1930 dnj.greensfelder.com

Why Should We Discuss Executive Compensation? Company growth and continued success—indeed the business’ mere survival—requires that it have effective and talented leadership. Executive compensation is the best if not the only means for attracting, rewarding and retaining senior management talent in a highly mobile and competitive business environment. Companies must understand and be mindful of current trends in the marketplace and adjust their strategic plan accordingly.

Focus of Discussion Will Be On. . . Privately Held Companies—S Corps, C Corps, LLCs But We Must Also Consider Executive Compensation in Public Companies Because: Public and Private Companies Compete for the Same Executive Talent Executive Compensation Trends in Public Companies Frequently Become Best Practices adopted by Private Companies

S Corps, C Corps & LLCs May Use Equity Compensation S and C Corporations LLCs (Hybrid: Corporation/ Partnership) Share or Stock Membership interest (unit) Shareholder Member Shareholder agreement Operating agreement Limited liability S Corp taxed as partnership; C Corp taxed as an entity Taxed as a partnership

What We Will Cover Types of Executive Compensation Applicable Laws & Pitfalls Current Trends

Types of Executive Compensation Executive compensation components (found in executive employment agreements): Base salary—Fixed/Yearly Adjustments Annual Bonus—Discretionary/Performance Based/Guaranteed Equity Awards—True Equity/Synthetic Equity/Fixed/Performance Based Perquisites & Employee Benefit Plan Participation— Car/Club Dues/Life Ins./Relocation/Etc./Retirement & Welfare Plans/Deferred Compensation Severance Arrangements—Parachutes/Continued Insurance Coverage/Etc.

Variable vs. Fixed Executive Compensation AMOUNT RECEIVED IS-- Fixed: Base Salary, Perquisites, Retirement and Welfare Plan Participation, Deferred Compensation, SERPs, Severance Arrangements Adjustable But Generally Not Forfeitable (Clawbacks) Variable: Short Term Incentives (Bonus), Long Term Incentives (Equity Awards) Usually Based on Company and/or Individual Performance

Incentive Based Compensation: Cash & Equity Awards Incentive Awards--Short and Long Term Grants Generally Make Up Biggest Portion of Employee’s Executive Compensation Awards of Public Companies Subject to Public Scrutiny & Legislative/Regulatory Actions Focus of Private and Public Company Compensation Philosophy in Competition for Talent Driver of Prevailing Executive Compensation Trends

Equity Awards: S & C Corps Stock Options – Broad Based or Management Only (common in public companies) Incentive Stock Options Nonqualified Stock Options Restricted Stock/Restricted Stock Units (common in public companies) Phantom Stock (common in privately held companies) Stock Appreciation Rights (common in privately held companies) Performance Shares/Units (common in privately held companies)

Equity Awards in LLCs Capital interests Profits interests Options (nonqualified only) Unit Rights and Unit Appreciation Rights (phantom equity)

Applicable Laws & Pitfalls Executive Compensation Triggers Income Tax, Corporate, Securities, ERISA Issues & Others Internal Revenue Code 409A – “Deferred Compensation” 280G – Parachute Payments/CIC Rules 422 – Incentive Stock Option Requirements 83(b) – Transfer of Property for Services 162(m) -- $1M Deduction Limits 3402 – Income Tax Withholding; FICA/FUTA

Applicable Laws & Pitfalls (Cont.) State Corporate Law – Governance Issues ERISA – Is compensation arrangement subject to ERISA? Securities Laws – State and Federal Registration & Reporting Requirements. Are there applicable exemptions that apply? Federal and/or State Laws may apply Host of Additional Federal Laws – ADEA (severance), Dodd-Frank (governance), etc.

Current Trends A Period of Intense Scrutiny Leads To Greater Transparency: Disclosure, Disclosure & More Disclosure Direct impact on Public Companies through Proxies; Recent Examples: Pay Ratio & Say on Pay Rules; Best Practices for Privately Held Companies due to War For Talent leads to disclosure of company financial performance Performance Based Grants and Vesting Application of Most Suitable Metrics to Measure Performance – Most Popular = Total Shareholder Return (TSR), but trend developing to use others, such as EBITDA

Current Trends (Cont.) Corporate Governance Fiduciary Concerns – Shareholders & Officers Clawbacks – SOX, Dodd-Frank Clawback Rules for Incentive Compensation; Forfeitures for Non compete Violations & Criminal Convictions

Current Trends (Cont.) Shift Away from Stock Option Grants and Toward Restricted Stock & Other Equity Vehicles Broad Based Option Plans in Decline – Options & Restricted Stock Grants to Senior Management 409A Problems Continue—Many Pitfalls Here; Increasing Employer Liability

Current Trends (Cont.) Shift Away from Discretionary Bonus Plans to Performance Based Cash Bonus Plans Short term as well as long term incentives must align company performance with executive compensation Stock Ownership through Substantial Equity Share Perks and SERPs are on downward trend due to shareholder activism

Professional Background Dan Janich is an attorney practicing in the areas of employment law, employee benefits and executive compensation in Chicago. His clients are private and publicly held businesses, C-level executives and other professionals. His experience includes designing and implementing retirement, welfare and equity compensation plans, and executive employment agreements and separation packages, and litigating benefit and executive compensation claims. Dan received his undergraduate and professional degrees from Marian University, Indianapolis (B.A.), The John Marshall Law School, Chicago (J.D.), and DePaul University College of Law, Chicago (LL.M. in Taxation). He has recently served on the Board of the National Center for Employee Ownership (NCEO) and the Senior Editorial Board for Employee Benefits Law treatise, and is currently an active member of the NCEO and the National Association of Stock Plan Professionals (NASPP).

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