p. 1 SESSION 6 - Long-Term Incentives

p. 2 SESSION 6 - Long-Term Incentives Reward System Job Analysis Jpb Evaluation Managing Base Pay Managing Base Pay Job Description Benefits Working conditions Working conditions Variable Pay Recognition Awards Recognition Awards Long-term Incentives Long-term Incentives Recruitment Training & Dev’mt Perf. evaluation HR Planning Selection & Hiring Career planning

p. 3 SESSION 6 - Long-Term Incentives Long term Incentives Long term Incentives Deferred Compensation Deferred Compensation Benefits STOCKS Stock Options ESOP ESPP Restricted Stocks Long-term Cash

p. 4 SESSION 6 - Long-Term Incentives  LTI’s are compensation programs deferring the payout for more than one year focusing on performance beyond this one-year time line.

p. 5 SESSION 6 - Long-Term Incentives  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

p. 6 SESSION 6 - Long-Term Incentives  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

p. 7 SESSION 6 - Long-Term Incentives  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)

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

p. 10 SESSION 6 - Long-Term Incentives  Discounted 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.

p. 11 SESSION 6 - Long-Term Incentives  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.

p. 12 SESSION 6 - Long-Term Incentives  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

p. 13 SESSION 6 - Long-Term Incentives  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

p. 14 SESSION 6 - Long-Term Incentives  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.

p. 15 SESSION 6 - Long-Term Incentives  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.  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. 16 SESSION 6 - Long-Term Incentives  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

p. 17 SESSION 6 - Long-Term Incentives  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

p. 18 SESSION 6 - Long-Term Incentives  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

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p. 22 SESSION 6 - Long-Term Incentives