November 20, 2014

Effective Incentive Planning

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Quick History of VisionLink

Founded in 19966 consultants with over 140 years

experience450 Clients in over 40 states and

CanadaFocus: compensation management

that drives growth“VisionLink” = rewards alignment

between shareholders and employees

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Four Most Desired Aspects of a Job

Compelling FuturePositive Work Environment

Opportunities for Personal and

Professional Growth

Meaningful Financial Rewards

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Salary

PerformanceIncentives

SalesIncentives

GrowthIncentives

CoreHealth &

Welfare Plans

Executive Benefit Plans

Qualified Retirement

Plans

Nonqualified Retirement

Plans

Salaries Competitive with market standards? In compliance with FLSA guidelines? Managed within a flexible but effective structure?

Performance Incentives Tied to productivity gains? Clear, achievable and meaningful? Self-financing?

Sales Incentives Challenging yet achievable? Reinforcing the right behaviors? Differentiating your offering?

Growth Incentives Linked to a compelling future? Supporting an ownership mentality? Securing premier talent?Core Benefits Responsive to today’s employee marketplace? Allocating resources where most needed? Evaluated to eliminate unnecessary expense?

Executive Benefits Flexible enough to address varying circumstances? Communicating a unique relationship? Reducing employee tax expense?

Qualified Retirement Plans Giving employees an opportunity to optimize retirement values? Operated with comprehensive fiduciary accountability? Avoiding conflicts and minimizing expenses?

Nonqualified Retirement Plans Optimizing tax-deferral opportunities? Aligning long-term interests of employees with shareholders? Structured to receive best possible P&L impact?

An Aligned Compensation

Strategy

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What returns are we looking for from our compensation investment?

Premier talent magnet Quality retention High productivity

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Bonus Plan Types

Executive/management incentive plan

Gain sharing planTeam based planProject based bonusesRetention bonusesHiring bonuses

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What’s the purpose of your bonus plan?

Motivate people? Change

Behavior?Share profits?

Keep up with market

standards?

Attraction and retention?

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Imagine…you call me one year from now.

“Craig, that plan VisionLink helped us build is having a tremendous impact. Just wanted to thank you.

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My follow up question

“What are you observing?”

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What I’d hope to hear

1. Sharper execution2. Unified vision3. Higher productivity (i.e., profits)

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Where do the first two come from?

1. Sharper execution2. Unified vision

Clarity Believability Meaning

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CEO Employee

These are the specific results that

create enough value to generate bonuses.

This is how your plan

works.

I understand

what results we’re

seeking. I see how I

can contribute.

I understand

how the plan works.

Clarity

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CEO Employee

Here are the results we’re

expecting. Here’s how we plan to get there.

Here’s why we’re

confident these

results are achievable.

I understand the results.

I understand what has to happen to achieve them. I

believe we can do it.

Believability

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CEO Employee

Here’s how much you

should expect to receive if we hit our minimum, expected

and superior

result levels.

Each of those

amounts is fair for the

results achieved.

I’m enthused

and grateful to be a part of this plan.

Meaning

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Where does the third one come from?

3. Higher productivity (i.e., profits)

Alignment between job duties and organizational goals

Individual involvement (faster, easier, cheaper, bigger)

Meaningful value

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Let’s discuss terms

Bonus

Incentive Plan

Short-term Incentive

Plan

Value Sharing Plan

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A Value Sharing Plan…

…doesn’t try to “change behavior” …doesn’t try to motivate

…makes a statement about: how the organization creates value how associates can contribute to that

creation how the organization shares the value

employees help create

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An effective value sharing plan…

Is tied to specific performance criteria

Is announced as early in the year as possible

Allows for some degree (15-25%) of subjectivity

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Two structural approaches to Value Sharing Plans

Both approaches seek alignment with critical profitability and growth goals Profit Based Allocation Target Award (“percent of salary plan”)

2020

ProfitBased

Allocation

(PBA)

TargetAward

(TA)

A percentage ofannual profits awarded

to employees

The award amountis divided among

employees based on apre-determined formula

Paid at year-end

Employees assigneda “targeted” incentivevalue – often based

on a percentage of salary

Achievement of award is tied tomultiple specific measurements

or “metrics.” Metricscan vary person to person.

Typically paid at year end,but may be quarterly.

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ProfitBased

Allocation

(PBA)

Focus

Value

Design

Essential

Solely annual profits

May be open-ended

Relatively simple

Strong PerformanceManagement System

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TargetAward

Focus

Value

Design

Essential

May include company, dept,team & individual metrics

Typically capped

Can run frombasic to complex

Selecting theright metrics

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VisionLink has developed a system of combining the best of both approaches

while eliminating most of the problems.

1. Allows the company to set a minimum financial threshold for the year.

2. This threshold must be met before the funding of any awards.

3. A percentage of profits in excess of the threshold will be credited to the pool

4. Values will be expressed to employees as a percentage of salary

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Three performance levels are selected at the beginning of the year (BOY) - Base, Target and Superior

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Actual value at end-of-year will be a factor of (a) final profit result, (b) dept results, and (c) individual employee performance

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The value is converted to a percentage of salary when expressed to employees (e.g., "at Target your award would be 10% of your salary" )

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The Pool is allocated to employees by tier or individually (e.g., 40% to tier 1, 30% to tier 2, 30% to tier 3)

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A percentage of profits above a minimum threshold is pre-determined to be set aside for employees - this is the Pool (e.g., 15% above $1,500,000)

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Each level is determined based on a forecasted profit value (e.g., $1,500,000, $2,000,000, $2,500,000)

2

6 Step Process

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Pool Funding and Allocation

Thresholds as % of Pre-Bonus OP Threshold $

Incremental Increase ($) in

ThresholdCumulative ($)

Threshold

Incremental Credit (%) at

Threshold

Incremental Credit ($) at Threshold

Total Credit ($) at Threshold

0.0% - - - 0.0% - - 75.0% 1,500,000 1,500,000 1,500,000 12.5% 187,500 187,500

100.0% 2,000,000 500,000 2,000,000 22.5% 112,500 300,000 125.0% 2,500,000 500,000 2,500,000 27.5% 137,500 437,500 150.0% 3,000,000 500,000 3,000,000 25.0% 125,000 562,500

Tier Allocation $ Amt @ Test $ Amt @ Base$ Amt @

Target $ Amt @ Superior EE Allocation1 50.0% 191,250 62,500 150,000 218,750 PS2 30.0% 114,750 37,500 90,000 131,250 PS3 20.0% 76,500 25,000 60,000 87,500 PS

Pool Allocation

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Matrix Approach

Two (or more) performance measures are linked together

The measures may be competing Highest payout follows successful

maximization of both factors

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Indicators

What specific and measurable indicators will best reflect the improvements desired?

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Indicators

Identify the indicators that will be used tomeasure performance in each area

For example: Company—Revenue Growth and Net

Margin

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10.2% 100% 120% 140% 160% 200%

9.4% 75% 100% 120% 140% 160%

8.5% 60% 75% 100% 120% 140%

7.7% 45% 60% 75% 100% 120%

6.8% 30% 45% 60% 75% 100%

13.0% 15.0% 17.0% 19.0% 21.0%

Actual ResultsRevenue Growth 8.8%Net Income 17.1%Multiplier 100%

Revenue Growth

Company Performance Matrix

Net Margin

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An employee in this plan…

…will understand and respect the importance of profits

…will understand what contribution he or she can make to the generation of profits

…will understand what his value sharing potential is at various performance levels

…will receive communication at various times throughout the year about the results he and the firm are on track to achieve

…will understand why his final award is what it is

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Balancing Short-and Long-Term Value Sharing Programs

Owners think about both short-term and long-term goals

Why would you want your employees to only think about short-term goals?

Shouldn’t value-sharing programs reward for the achievement of both?

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SalariesSTIP

Benefits

LTIP

Present Compan

y

FutureCompany

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Why Long-Term Value Sharing Matters

#1 Value sharing attracts the best talent and magnifies results

Attracting the “right” people▪ Willing and able to compete▪ Assume stewardship role in

safeguarding shareholder interests

▪ Willing to share in risks and rewards of value creation

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Why Long-Term Value Sharing Matters

#2: Value sharing plans (effectively designed) reinforce the company’s business model

Nurture a culture invested in the business model

▪ Reinforce leverage points

▪ Reinforce roles and expectations

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Why Long-Term Value Sharing Matters

#3: Value sharing protects against bad profits and promotes good profits

Everyone has an interest in good profits if everyone’s wealth multiplier rises or falls on the ability of the company to sustain the right kind of profitability.▪ Pay people in a way that

communicates long-term profitability expectations

▪ Protect company’s interest in generating good profits

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Why Long-Term Value Sharing Matters

#4: Value sharing promotes an ownership mindset

Build a rewards system that communicate “what’s important.”▪ Keep performance engine

working while moving the company forward towards growth goals

▪ Define “what’s important” the same way ownership does—revenue/EBITDA growth, profit/margin improvement, cost management

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Why Long-Term Value Sharing Matters

#5: Value sharing builds trust and accelerates results

Turn key people into “partners” in building the future business▪ Value sharing

communicates a sense of fairness

▪ Create a unified financial vision for growing the company

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Why Long-Term Value Sharing Matters

1. Value sharing attracts the best talent and magnifies results

2. Value sharing plans (effectively designed) reinforce the company’s business model

3. Value sharing protects against bad profits and promotes good profits

4. Value sharing promotes an ownership mindset

5. Value sharing builds trust and accelerates results

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How this happens

1. Paint a picture of the future

2. Monetize it3. Commit to sharing a

portion of it4. Present it to your key

employees5. Manage it right6. Consistently reinforce

it

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Grant Equity or Not Equity?

Full Value or Appreciation

Only?

Yes

Appreciation

Stock Option

Full Value

Performance Based?

Yes

Performance Shares

No

Restricted StockNo

Reward for Value Increase or Financial

Performance?

Value Increase

Full Value or Appreciation?

Appreciation

Phantom Stock Option

Full Value

Performance Based?

Yes

Performance Phantom Stock

No

Phantom Stock

Financial Performanc

e

Appreciation-Performance Based

or Employee Directed?

Performance Based Reward for

Profit/Cash Flow or Other Metrics?

ProfitsAllocation or

Objectives Based?

Allocation

Profit Pool

Objectives

Other Metrics

Performance Unit

Employee Directed

Strategic Deferred

Compensation

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How can incentive plans be more effective?

Payouts need to reflect performance“About 1/3rd of companies pay out awards even when they don’t achieve the minimum level of performance – a practice, not surprisingly, that’s associated with the least effective plans.”

A related tidbit: “Self-funded plans appear to be the most successful at improving business performance.”

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How can incentive plans be more effective?

Design and communication are “make or break” factors.

“Plans reported to improve results significantly had three outcomes in common, they:- improved individual performance,

- improved performance in target areas, and- engaged employees effectively.”

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“Almost any type plan can deliver – if it’s properly designed and if it’s supported by business literacy, consistent communication, performance management, and leadership involvement.”

How can incentive plans be more effective?

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Why do value sharing plans work?

Require management to clearly define strategy and establish priorities

Require communication of priorities and expected achievement levels

Engage employees in the determination of how they can contribute

Require ongoing communication of performance versus expectations

Reinforce importance by “putting money where the mouth is”

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VisionLink Philosophy

Variable compensation is an investment, not an expense Increase financial performance via “self

funding” programs▪ Production, profits, and/or share value

Recruit and retain quality employees Company performance is maximized

when owner and employee “visions” are linked Creates line of sight Win-win outcomes

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Q&A

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Craig Rutledge Partner(949) 265-5715crutledge@vladvisors.comwww.vladvisors.comwww.phantomstockonline.com

Thank you!