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EY Human Capital Conference 2012: Trends in performance-based remuneration

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This presentation considers regulatory trends in performance-based remuneration as well as trends in executive compensation, both short-term incentives (STI) and long-term incentives (LTI).

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2012 Human Capital Conference 23–26 October Trends in performance-based ti remuneration
Disclaimer ► Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US. ► This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or LLP reproduction distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. ► The views expressed by panelists in this session are not necessarily those of Ernst & Young LLP LLP. Page 2 Trends in performance-based remuneration
Presenters ► Allen Powley y ► Henning Curti g ► GlaxoSmithKline plc ► Ernst & Young GmbH ► allen.j.powley@gsk.com ► henning.curti@de.ey.com Page 3 Trends in performance-based remuneration
Agenda ► Regulatory trends ► Short-term incentives (STI) — trends in executive compensation ► Long-term incentives (LTI) — trends in executive compensation Page 4 Trends in performance-based remuneration
Regulatory trends
Financial services regulations are still driving the emerging direction Regulatory changes: examples g y g p Key messages y g ► Troubled Asset Relief Program ► Pay mix/levels (TARP) ► Risk measurement ► Dodd-Frank legislation ► Appropriateness of executive ► Financial Services Authority compensation (say-on-pay) ( (FSA)) ► Bonus with clawback ► Financial Stability Forum (FSF) ► Viral effect on other industries — G20 ► European Commission p ► German VorstAG and InstVergV ► Walker Report — UK ► Corporations Act 2001 — Australia ► Corporations Amendment Bill 2011 — Australia Page 6 Trends in performance-based remuneration
Requirements for remuneration amounts or pay mix increased significantly ► In Germany, the law on the appropriateness of executive compensation (VorstAG) calls for comparing compensation with peer group companies and a long-term orientation of variable compensation. European ► Th current discussion on corporate The t di i t governance governance in the UK stresses the increasing frameworks importance of long-term-oriented executive remuneration. ► The Dutch Corporate Governance Code calls for a predominantly long-term orientation of long term variable compensation. Page 7 Trends in performance-based remuneration
Current discussions may lead to future adaptations of long term compensation long-term ► In France, a ceiling for corporate officers of , g p public companies was set. Their salaries (base and recurring variable) will be limited to 20 times the average of the lowest salaries in these companies; a cap of €450,000 and its application in 2012 or 2013 has been European discussed. discussed governance ► Following the Spanish Code of Corporate frameworks Governance, no requirements regarding compensation amounts or mix of pay elements currently apply. ► Current EU discussion may lead to future Spanish requirements regarding a long-term orientation of compensation. Page 8 Trends in performance-based remuneration
US regulations stress the pay-performance relation and risk assessment ► Dodd-Frank legislation focuses on say-on-pay, risk assessments, clawbacks and relationship p of CEO compensation to rank and file employee compensation. ► Shareholders and shareholder advisory fi Sh h ld d h h ld d i firms US are increasingly scrutinizing pay levels compared to company performance. ► The Securities and Exchange Commission (SEC) in continuing to require more detailed disclosures disclos res regarding e ec ti e compensation executive compensation. Page 9 Trends in performance-based remuneration
Australian governance increases share- holder influence on executive compensation ► Australian governance framework does not explicitly regulate the quantum of pay or the mix of pay elements of companies, but the Corporations Amendment Bill (2011) introduces attwo-strike and re-election process, i t ik d l ti increasing i shareholders’ influence on board and executive remuneration. Australia ► Shareholders generally focus on the following factors when considering executive pay: ► Remuneration decisions should be transparent and justified (new regulation requires disclosure of details relating to the use of remuneration consultants). ► The quantum of pay should be justified and the link between variable pay, and th respective performance b t i bl d the ti f should be disclosed. Practice long-term incentives are expected to measure performance over at least three years. ee yea s Page 10 Trends in performance-based remuneration
STI trends
The pay-performance link in European STI plans is mostly via earnings related KPI Performance criteria: Stoxx50Europe — STI plans Earnings ►Within the STI plans Others* analyzed, earnings-related criteria and other Key Return Performance Indicators Individual (KPIs) such as strategic or operational performance Cash targets are the most Revenues common performance measures in European Qualitative STI plans. n/a ►Also, return and cash- Value related as well as individual added 0% 10% 20% 30% 40% goals are applied, but to a In % of all KPIs lesser extent than in 2010. Source: 41 of 50 audited annual reports 2011 (without German DAX30 companies) **Others may include operational and strategic performance, scorecard targets, other quantitative measures etc.; please note: within one plan ,one or more KPIs may be applied Page 12 Trends in performance-based remuneration
German STI plans put a relatively stronger focus on individual goals Performance criteria: DAX30 — STI plans Earnings E i ►In 2011 earnings-related 2011, and individual indicators are Individual still the most commonly Return applied performance measure measures. Cash ►Furthermore, return Revenues measures are also a common KPI used in Qualitative German STI plans. p Others* Value added 0% 10% 20% Percentage of plans Source: 30 of 30 audited annual reports 2011 *Others contain dividends and not further specified company goals; please note: within one plan, one or more KPIs may be applied Page 13 Trends in performance-based remuneration
US plans predominantly assess performance by using earnings related KPI earnings-related Performance criteria: Sample of 250 US STI plans ►Financial performance Earnings indicators were complemented by individual Revenue performance measures in goals most companies. Cash ►Prevalence of cash flow flow and return measures Returns decreased slightly Other Oth compared to the p p previous year. ►Revenue-related KPI use increased compared to 0% 20% 40% 60% 80% previous year. Percentage of plans Source: Audited annual reports 2011 of 250 listed companies Page 14 Trends in performance-based remuneration
LTI trends
LTI plan designs show a distinct difference between Europe and US/Australia ► While STI plans demonstrate relatively homogenous patterns worldwide, LTI plans are much more diverse across countries. Worldwide ► European plan designs tend to be geared LTI trends toward performance stock units (PSUs) while plan designs in the US are still dominated by stock options(SOs) / stock appreciation rights (SARs); nevertheless, PSUs are also gaining importance. Source: Meridian Compensation Partners LLC, “2012 Trends and Developments in Executive Compensation” Page 16 Trends in performance-based remuneration
LTI designs in Stoxx50 Europe companies are dominated by share based equity-settled plans share-based equity settled Plantypen Stoxx50Europe ► Active plans*: 43 plans ► Thereof share based: 37 plans ► Thereof non-share based: 5 plans Settlement*: ►Equity: 29 plans ►Cash: 7 plans ►Mixed: 5 plans Payout profile*: ►Shares/PSU: 24 plans ►Stock options/SAR: 8 plans ►Mixed: 5 plans ►Others: 6 plans Source: 41 of 50 audited annual reports 2011 ( p (without German DAX30 companies) p ) * one or more companies make no disclosure; Please note: One company may apply one or more LTI plans Page 17 Trends in performance-based remuneration
The prevalence of PSU plans in the UK is largely in line with general European trends Plan types of FTSE 250 companies ► Equity-settled plan Equity settled types are Performance predominant. shares/units ►P f Performance shares/ h / Stock option units mainly take the plan form of nil cost options with a three- Share matching year performance plan p period; within the ; exercise period Special plans* options can be converted into shares 0% 20% 40% 60% 80% anytime because of In % use of existing plans tax reasons. Source: Ernst & Young 2012„ Directors` remuneration in FTSE250 and smaller companies“; *please note: One company may apply one or more LTI plans; *Value creation plans Page 18 Trends in performance-based remuneration
In the US, stock options are still widely applied despite the increasing use of PSUs Equity vehicles of US companies Stock options ► Alth Although options are l i h ti losing ground against full-value PSUs shares, they are still the most popular equity tool. Restricted stock units ► Full-value shares are Restricted stock gaining popularity due to increasing risk of a SARs negative development of a Performance share price as a result of stock adverse market condition. Other In this situation full-value instruments provide a more 0% 20% 40% 60% 80% certain payout. In % use of existing plans Source: Deb Nielson, Kenexa, “Preparing for 2012 – Compensation Trends & Predictions”; “Equilar, 2011 Equity Trends Report – Update” Page 19 Trends in performance-based remuneration
Stoxx50 LTI plans widely use TSR and EPS while earnings related KPIs gain importance earnings-related Performance criteria: Stoxx50Europe – LTI plans TSR ► The predominantly used KPIs in European LTI EPS plans are total shareholder return (TSR) and earnings Earnings per share (EPS). Others Others* ► Net profit and EBITDA are the most popular earnings- Cash related KPIs and are more Individual often applied in 2011 than in 2010. Revenues ► Cost-related KPIs and non-financial KPIs are 0% 10% 20% 30% 40% increasingly applied. In % of all KPIs Source: 41 of 50 audited annual reports 2011 (without German DAX30 companies) * Others may include qualitative targets, other financial and non- financial targets; please note: one LTI plan may apply one or more hurdles; some companies make no disclosure Page 20 Trends in performance-based remuneration
German plan designs gradually align applied KPIs to European trends Performance criteria: DAX30 — LTI plans Earnings ► TSR is increasingly Share price becoming more relevant in Return LTI plans compared to measure TSR previous years. Qualitative ► Earnings-related criteria Revenues and share price targets are Others* the most common Value added performance measures in Cash 2011. Individual ► Qualitative and individual Economic E i performance measures are Value Added increasingly applied. (EVA) 0% 10% 20% In % of all KPIs Source: 30 of 30 audited annual reports 2011 *Others contain dividends and not further specified company goals; please note: within one plan one or more KPIs may be applied Page 21 Trends in performance-based remuneration
The majority of US LTI plans use internal performance criteria Performance criteria: % use of existing CEO incentive plans ► US companies Financial measures US predominantly used return measures, TSR Return (EPS ROI, ROIC) (EPS, ROI 41 and profit are KPIs for TSR 36 LTIPs. Profit 36 ► Most KPIs used by US Revenue 27 companies are internal. Individual performance 23 Other 14 Cash flow 5 Cost saving 2 Quality 2 Source: Deb Nielson, Kenexa, “Preparing for 2012 – Compensation Trends and Predictions“; Equilar, “2011 Equity Trends Report – Update“ Page 22 Trends in performance-based remuneration
Shareholders are increasingly open to alternative KPI over the longer term Performance criteria: % use of Top 100 companies — LTI plans ► Despite a decrease in the Financial measures Top 100 prevalence of relative TSR Relative TSR 69 among the Top 100, it is still g p Absolute EPS 31 the performance indicator Others* 22 most frequently used. Profit/earnings/revenue P fit/ i / 13 ► Shareholders are Return measure 11 increasingly open to alternative key success Absolute share price p 3 indicators o er the longer over Absolute TSR 3 term. Relative EPS 2 Source: Ernst & Young 2012 Executive and Board Remuneration Report; * Others may include qualitative targets, other financial and non-financial targets Page 23 Trends in performance-based remuneration
Questions Page 24 Trends in performance-based remuneration

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EY Human Capital Conference 2012: Trends in performance-based remuneration

  • 1. 2012 Human Capital Conference 23–26 October Trends in performance-based ti remuneration
  • 2. Disclaimer ► Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US. ► This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or LLP reproduction distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. ► The views expressed by panelists in this session are not necessarily those of Ernst & Young LLP LLP. Page 2 Trends in performance-based remuneration
  • 3. Presenters ► Allen Powley y ► Henning Curti g ► GlaxoSmithKline plc ► Ernst & Young GmbH ► allen.j.powley@gsk.com ► henning.curti@de.ey.com Page 3 Trends in performance-based remuneration
  • 4. Agenda ► Regulatory trends ► Short-term incentives (STI) — trends in executive compensation ► Long-term incentives (LTI) — trends in executive compensation Page 4 Trends in performance-based remuneration
  • 6. Financial services regulations are still driving the emerging direction Regulatory changes: examples g y g p Key messages y g ► Troubled Asset Relief Program ► Pay mix/levels (TARP) ► Risk measurement ► Dodd-Frank legislation ► Appropriateness of executive ► Financial Services Authority compensation (say-on-pay) ( (FSA)) ► Bonus with clawback ► Financial Stability Forum (FSF) ► Viral effect on other industries — G20 ► European Commission p ► German VorstAG and InstVergV ► Walker Report — UK ► Corporations Act 2001 — Australia ► Corporations Amendment Bill 2011 — Australia Page 6 Trends in performance-based remuneration
  • 7. Requirements for remuneration amounts or pay mix increased significantly ► In Germany, the law on the appropriateness of executive compensation (VorstAG) calls for comparing compensation with peer group companies and a long-term orientation of variable compensation. European ► Th current discussion on corporate The t di i t governance governance in the UK stresses the increasing frameworks importance of long-term-oriented executive remuneration. ► The Dutch Corporate Governance Code calls for a predominantly long-term orientation of long term variable compensation. Page 7 Trends in performance-based remuneration
  • 8. Current discussions may lead to future adaptations of long term compensation long-term ► In France, a ceiling for corporate officers of , g p public companies was set. Their salaries (base and recurring variable) will be limited to 20 times the average of the lowest salaries in these companies; a cap of €450,000 and its application in 2012 or 2013 has been European discussed. discussed governance ► Following the Spanish Code of Corporate frameworks Governance, no requirements regarding compensation amounts or mix of pay elements currently apply. ► Current EU discussion may lead to future Spanish requirements regarding a long-term orientation of compensation. Page 8 Trends in performance-based remuneration
  • 9. US regulations stress the pay-performance relation and risk assessment ► Dodd-Frank legislation focuses on say-on-pay, risk assessments, clawbacks and relationship p of CEO compensation to rank and file employee compensation. ► Shareholders and shareholder advisory fi Sh h ld d h h ld d i firms US are increasingly scrutinizing pay levels compared to company performance. ► The Securities and Exchange Commission (SEC) in continuing to require more detailed disclosures disclos res regarding e ec ti e compensation executive compensation. Page 9 Trends in performance-based remuneration
  • 10. Australian governance increases share- holder influence on executive compensation ► Australian governance framework does not explicitly regulate the quantum of pay or the mix of pay elements of companies, but the Corporations Amendment Bill (2011) introduces attwo-strike and re-election process, i t ik d l ti increasing i shareholders’ influence on board and executive remuneration. Australia ► Shareholders generally focus on the following factors when considering executive pay: ► Remuneration decisions should be transparent and justified (new regulation requires disclosure of details relating to the use of remuneration consultants). ► The quantum of pay should be justified and the link between variable pay, and th respective performance b t i bl d the ti f should be disclosed. Practice long-term incentives are expected to measure performance over at least three years. ee yea s Page 10 Trends in performance-based remuneration
  • 12. The pay-performance link in European STI plans is mostly via earnings related KPI Performance criteria: Stoxx50Europe — STI plans Earnings ►Within the STI plans Others* analyzed, earnings-related criteria and other Key Return Performance Indicators Individual (KPIs) such as strategic or operational performance Cash targets are the most Revenues common performance measures in European Qualitative STI plans. n/a ►Also, return and cash- Value related as well as individual added 0% 10% 20% 30% 40% goals are applied, but to a In % of all KPIs lesser extent than in 2010. Source: 41 of 50 audited annual reports 2011 (without German DAX30 companies) **Others may include operational and strategic performance, scorecard targets, other quantitative measures etc.; please note: within one plan ,one or more KPIs may be applied Page 12 Trends in performance-based remuneration
  • 13. German STI plans put a relatively stronger focus on individual goals Performance criteria: DAX30 — STI plans Earnings E i ►In 2011 earnings-related 2011, and individual indicators are Individual still the most commonly Return applied performance measure measures. Cash ►Furthermore, return Revenues measures are also a common KPI used in Qualitative German STI plans. p Others* Value added 0% 10% 20% Percentage of plans Source: 30 of 30 audited annual reports 2011 *Others contain dividends and not further specified company goals; please note: within one plan, one or more KPIs may be applied Page 13 Trends in performance-based remuneration
  • 14. US plans predominantly assess performance by using earnings related KPI earnings-related Performance criteria: Sample of 250 US STI plans ►Financial performance Earnings indicators were complemented by individual Revenue performance measures in goals most companies. Cash ►Prevalence of cash flow flow and return measures Returns decreased slightly Other Oth compared to the p p previous year. ►Revenue-related KPI use increased compared to 0% 20% 40% 60% 80% previous year. Percentage of plans Source: Audited annual reports 2011 of 250 listed companies Page 14 Trends in performance-based remuneration
  • 16. LTI plan designs show a distinct difference between Europe and US/Australia ► While STI plans demonstrate relatively homogenous patterns worldwide, LTI plans are much more diverse across countries. Worldwide ► European plan designs tend to be geared LTI trends toward performance stock units (PSUs) while plan designs in the US are still dominated by stock options(SOs) / stock appreciation rights (SARs); nevertheless, PSUs are also gaining importance. Source: Meridian Compensation Partners LLC, “2012 Trends and Developments in Executive Compensation” Page 16 Trends in performance-based remuneration
  • 17. LTI designs in Stoxx50 Europe companies are dominated by share based equity-settled plans share-based equity settled Plantypen Stoxx50Europe ► Active plans*: 43 plans ► Thereof share based: 37 plans ► Thereof non-share based: 5 plans Settlement*: ►Equity: 29 plans ►Cash: 7 plans ►Mixed: 5 plans Payout profile*: ►Shares/PSU: 24 plans ►Stock options/SAR: 8 plans ►Mixed: 5 plans ►Others: 6 plans Source: 41 of 50 audited annual reports 2011 ( p (without German DAX30 companies) p ) * one or more companies make no disclosure; Please note: One company may apply one or more LTI plans Page 17 Trends in performance-based remuneration
  • 18. The prevalence of PSU plans in the UK is largely in line with general European trends Plan types of FTSE 250 companies ► Equity-settled plan Equity settled types are Performance predominant. shares/units ►P f Performance shares/ h / Stock option units mainly take the plan form of nil cost options with a three- Share matching year performance plan p period; within the ; exercise period Special plans* options can be converted into shares 0% 20% 40% 60% 80% anytime because of In % use of existing plans tax reasons. Source: Ernst & Young 2012„ Directors` remuneration in FTSE250 and smaller companies“; *please note: One company may apply one or more LTI plans; *Value creation plans Page 18 Trends in performance-based remuneration
  • 19. In the US, stock options are still widely applied despite the increasing use of PSUs Equity vehicles of US companies Stock options ► Alth Although options are l i h ti losing ground against full-value PSUs shares, they are still the most popular equity tool. Restricted stock units ► Full-value shares are Restricted stock gaining popularity due to increasing risk of a SARs negative development of a Performance share price as a result of stock adverse market condition. Other In this situation full-value instruments provide a more 0% 20% 40% 60% 80% certain payout. In % use of existing plans Source: Deb Nielson, Kenexa, “Preparing for 2012 – Compensation Trends & Predictions”; “Equilar, 2011 Equity Trends Report – Update” Page 19 Trends in performance-based remuneration
  • 20. Stoxx50 LTI plans widely use TSR and EPS while earnings related KPIs gain importance earnings-related Performance criteria: Stoxx50Europe – LTI plans TSR ► The predominantly used KPIs in European LTI EPS plans are total shareholder return (TSR) and earnings Earnings per share (EPS). Others Others* ► Net profit and EBITDA are the most popular earnings- Cash related KPIs and are more Individual often applied in 2011 than in 2010. Revenues ► Cost-related KPIs and non-financial KPIs are 0% 10% 20% 30% 40% increasingly applied. In % of all KPIs Source: 41 of 50 audited annual reports 2011 (without German DAX30 companies) * Others may include qualitative targets, other financial and non- financial targets; please note: one LTI plan may apply one or more hurdles; some companies make no disclosure Page 20 Trends in performance-based remuneration
  • 21. German plan designs gradually align applied KPIs to European trends Performance criteria: DAX30 — LTI plans Earnings ► TSR is increasingly Share price becoming more relevant in Return LTI plans compared to measure TSR previous years. Qualitative ► Earnings-related criteria Revenues and share price targets are Others* the most common Value added performance measures in Cash 2011. Individual ► Qualitative and individual Economic E i performance measures are Value Added increasingly applied. (EVA) 0% 10% 20% In % of all KPIs Source: 30 of 30 audited annual reports 2011 *Others contain dividends and not further specified company goals; please note: within one plan one or more KPIs may be applied Page 21 Trends in performance-based remuneration
  • 22. The majority of US LTI plans use internal performance criteria Performance criteria: % use of existing CEO incentive plans ► US companies Financial measures US predominantly used return measures, TSR Return (EPS ROI, ROIC) (EPS, ROI 41 and profit are KPIs for TSR 36 LTIPs. Profit 36 ► Most KPIs used by US Revenue 27 companies are internal. Individual performance 23 Other 14 Cash flow 5 Cost saving 2 Quality 2 Source: Deb Nielson, Kenexa, “Preparing for 2012 – Compensation Trends and Predictions“; Equilar, “2011 Equity Trends Report – Update“ Page 22 Trends in performance-based remuneration
  • 23. Shareholders are increasingly open to alternative KPI over the longer term Performance criteria: % use of Top 100 companies — LTI plans ► Despite a decrease in the Financial measures Top 100 prevalence of relative TSR Relative TSR 69 among the Top 100, it is still g p Absolute EPS 31 the performance indicator Others* 22 most frequently used. Profit/earnings/revenue P fit/ i / 13 ► Shareholders are Return measure 11 increasingly open to alternative key success Absolute share price p 3 indicators o er the longer over Absolute TSR 3 term. Relative EPS 2 Source: Ernst & Young 2012 Executive and Board Remuneration Report; * Others may include qualitative targets, other financial and non-financial targets Page 23 Trends in performance-based remuneration
  • 24. Questions Page 24 Trends in performance-based remuneration