Fred E. Whittlesey

7 May 2001

Changing Behavior in the Wealth Economy

WorldatWork2001 Annual Conference and Exhibition

Presentation Overview

What is the “Wealth Economy” (and is there one?)

Characteristics of the Wealth Economy

Human Capital Management Challenges of the Wealth Economy

Human Capital Management Alternatives for the Wealth Economy

The Wealth Economy at Broadcom Corporation

Solutions for the Wealth Economy

What is the Wealth Economy?

Macroeconomically:

Record levels of equity prices and multiples

Record levels of equity holdings by investors and employees

Record levels of liquid assets

Record levels of real estate prices

Resulting in:

Lower savings rates

Higher consumption rates

Reliance on capital asset appreciation

What is the Wealth Economy?

Managerially, an economic climate created by:

Decades of wealth creation in the technology sector and the economy overall

Easy money from the bull market

Market factors overriding internal pay strategies

Realization of the need for self-funded capital accumulation

Growing use of equity-based compensation as a compensation vehicle

Workforce with fundamentally different financial needs and expectations

Characteristics of the Wealth Economy

Prevalence of and media attention to “millionaires” creating higher standards and expectations

Trend toward individual decision making vs. corporate and government administration

Political initiatives that seek to change traditional approaches to capital formation: Social Security funds invested in the stock market

The Internal Wealth Economy of a Corporation

The challenges of:

Voluntary workers

Vastly changed ideas about financial independence thresholds

Multi-class society

Depending on original and ongoing staffing strategies, the advantages of:

Population with a blurred line between work and play – life always organized around the workplace

Workers with diverse interests and corresponding alternative work roles

Candidates attracted by the success stories

Human Capital Management Challenges

For the Haves:

Retention – vs. retirement, competitor, new industry

Commitment – vs. changing to a lower-sacrifice lifestyle

Balancing the small-company memories with larger-company business needs

For the Have-Nots:

Heightened expectations based on early joiners’ risk-reward outcome

Consequences of extreme risk-taking to catch-up to the Haves

Highly visible reference points underscore “timing is everything”

Retention – vs. a faster get-rich opportunity

The Four Elements of Remuneration

Cash

Securities

Goods and Services

Time and Place

Wage and salaryShort-term incentive programsLong-term incentive programsLiquidation of other forms of payDeferred cash (savings/retirement)Expense reimbursement

Health and welfare benefitsWork toolsLeisure itemsEducation and trainingSocial activities

GrantOptionPurchase

CommonSecond classPreferredConvertible

Paid time offWork scheduleWork location

Unpaid time offLocation rulesLocation value

The Impact on Remuneration Systems

For the Haves:

Traditional financial programs are meaningless

Base salary unnoticedBusiness expense reimbursement unimportantMost benefit plans inconsequential and too rigidCompany car policy insulting

Equity compensation still important but scale is unaffordable through traditional plans

“Fourth quadrant” now primary area of interest

TimePlaceChoice

Interesting work, etc. assumed as a given

The Impact on Remuneration Systems

For Have-Nots:

Traditional programs needed as short-term bridge

Base salary provides cash flowBusiness expense reimbursement neededBenefit plans’ value seen in terms of cash conservationCompany car policy a temporary form of assistance

Special deals requested due to “ratchet effect”

Equity compensation is critical and the primary focus

Upside opportunity expectedGuarantees increasingly expected if “things go wrong”

“Fourth quadrant” is for future dreaming

Interesting work, etc. assumed as a given

Broadcom: Company Characteristics

Ultra high-growth resulting from multiple high-growth market segments

Growth from 1,100 to 2,800 employees in 9 months

Aggressive M&A strategy supplementing internal development

40% of employees from 18 acquisitions closed in 24 months

Focus on Execution, Execution, Execution

Flat organization structure

Decentralized business units

Minimal corporate policy/structure

Broadcom’s Approach to Remuneration

Total Compensation Philosophy

Focus on total compensation value

Emphasis on long-term stock-based compensation

Over time, substantial wealth transfer to employees

Emphasis on financial returns over non-financial benefits

Total Compensation Strategy

Conservative cash compensation

Top-of-the-market benefit program

Top-of-the-market stock equity programs

Broadcom’s Approach to Total Compensation

Cash Compensation Strategy

Conservative base salary at hire

No cash bonuses

Salary increases governed by total compensation perspective

Internal equity emphasized over market competitiveness

Stock Compensation Strategy

Largest transfer of wealth to employees in world history

Strong retention focus

Ongoing review of absolute and relative stock position

Aggressive program to address underwater options

Broadcom’s Approach to Total Compensation

Cash Compensation – a temporary bridge in cashflow, not a reward system

No job descriptions, salary grades, ranges, or structures

No reference to survey data

No assumption of annual salary increases

Salary increase elimination being considered based on absolute and relative total compensation levels

Base salary reduction/ elimination being considered based on similar criteria

Equity Compensation – the source of reward

Stock options only

99th percentile grant amounts

Creative design of vesting periods to accomplish compensation objectives

Broadcom’s Employee Stock Option Position

Note: Calculated based on granted stock options as a % of shares outstanding shares taken from most recent 10K’s, and shares outstanding per FirstCall 4/11/01.

0%

5%

10%

15%

20%

25%

30%

35%

BRCM

AMCC

PMCS

VTSS

MRVL

INTC

COMS

CSCO

JNPR

QCOM

Have we Changed Behavior? Created Wealth?

Staffing

Focus on hiring top 10% of talent pool

Less than 0.5% turnover per year since Company inception

Over 90% of candidates from employee referral (no referral bonus program)

Over 90% offer acceptance rate (on top of a low-offer-to-candidate ratio)

Compensation [@ 12-month stock price high ($274)]

Over time, 99% of total compensation from stock option gains

Highest proportion of employee millionaires in history

Average unvested option gains of $10 million per employee

And Now…?

Compensation [@ 24-month stock price low ($20)]

All but a few newly-hired employees have some underwater options

Substantial proportion of employees have only underwater options

Still have hundreds of millionaires, based only on outstanding options

Dual-class society of millionaires and underwater-only employees

Compensation Philosophy and Strategy

No change in philosophy: low cash, high equity

Solutions biased toward those with long-term confidence

Equity-based solutions to equity-based issues

Cash-based solutions require “investing” in BRCM

Broadcom’s Wealth Creation Response

Stock Option Exchange and Supplemental Option Program

Program allowing maximum employee choice for addressing underwater option positions, with two alternatives

Six-plus-one cancel/regrant program with 100% replacement

Supplemental option grant with grant size based on original grant price

Complete vesting preservation and credit regardless of combination of choices

Broadcom’s Wealth Creation Response

Complementary Strategies and Programs

Material headcount reduction due to economic slowdown

No change in cash compensation philosophy and delivery

Employee loan program established through partnership with financial institution

Increased flexibility in choice of cash/stock mix for new hires

Exploring cash/equity exchange program for current employees

Why the Strategy Works at Broadcom

Strong Culture Driven by CEO – a company of owners

Exceptionally high expectations No excuses (including laws of physics or need for sleep) 24/7 availability and instant response Individual ownership of tasks and results (“Who owns this?”) Open communication regarding sacrifices and payoffs Aggressive but civil focus on results No politics No resource constraints but rigorous scrutiny to expenditures

Daily vigilance to compensation philosophy and strategy

Intensive work with hiring managers Extensive work educating candidates on philosophy and potential Proactive coaching with acquired companies

Conclusions: Changing Behavior

Providing a wealth accumulation opportunity will be the core challenge in attracting talent

“Competitive” salary, benefits, “work experience” will be the ante for consideration

Key challenge for successful companies will be ensuring the commitment and retention of employees who have met their initial wealth accumulation target

Traditional compensation delivery approaches will be irrelevant

Behavior change efforts must be linked to wealth creation programs – most current approaches to “rewards” accomplish neither of these

Rethinking the entire financial and structural basis of the work relationship is required

Solutions to Managing in the Wealth Economy

Hire those who want to change the world, not become millionaires

Redefine the “organization” and peoples’ potential roles in it

EmployeeConsultantAdvisorService Provider of Supporting Business

Redefine the potential financial relationships with workers

Employer/compensatorBusiness partnerLenderCo-InvestorVenture Capitalist

Recognize the coming free-agent economy and transition from compensation structures to deal-making

Solutions to Managing in the Wealth Economy

Maintain a consistent position on wealth creation and implicit compensation strategy

Expand the temporal perimeters of the organization – contrary to “work hours”

Expand the physical perimeters of the organization – contrary to “the workplace”

Expand the business perimeters of the organization – contrary to outsourcing

Expand the workers’ opportunities on the balance sheet – assets, liabilities, equity

Expand the workers’ opportunities on the income statement – revenue, income, cash flow