The ClearBridge 100 Report January 2014 Annual and Long-Term Incentive Design Practices for Executives
TABLE OF CONTENTS Executive Summary... 1 Introduction... 2 Overview of the ClearBridge 100... 2 Characteristics of ClearBridge 100... 2 ClearBridge 100 Industry Composition... 2 Analysis Scope and Methodology... 2 Definitions... 3 Annual Incentive Plan Design Features Performance Measures... 5 Number of Performance Measures... 5 Types of Performance Measures... 5 Absolute vs. Relative Performance Measures... 6 Payout Leverage... 6 Long-Term Incentive Plan Design Features Vehicles and Mix... 8 Prevalence of Vehicles... 8 Number of Vehicles... 8 Time-Vested Long-Term Incentive Award Features... 9 Vesting Period... 9 Vesting Type... 9 Stock Options/SARs Term... 10 Performance-Vested Long-Term Incentive Award Features... 10 Vehicles... 10 Performance Periods... 10 Number of Performance Measures... 11 Types of Performance Measures... 11 Absolute vs. Relative Performance Measures... 12 Relative Measure Benchmarks... 12 ClearBridge 100 Companies... 14 About ClearBridge... 17
EXECUTIVE SUMMARY This ClearBridge 100 Report presents findings on annual incentive plan ( AIP ) and long-term incentive ( LTI ) plan design practices for the executives of 100 large publicly-traded US companies, collectively the ClearBridge 100. The ClearBridge 100 is comprised of 100 S&P 500 companies to provide a database representative of executive compensation practices and trends of the broad US market. As Say on Pay enters its fourth year and shareholders and shareholder advisory groups continue to turn up the heat on pay-for-performance, companies are looking for more effective ways to align their executive pay programs with company performance. The increasing prevalence of performance-vested LTI programs highlighted in a previous ClearBridge 100 report (January 2013) showcased one facet of this growing focus on pay-forperformance alignment. This ClearBridge 100 Report provides an expanded look into the features of both shortterm and long-term incentive plans to provide a comprehensive perspective on executive incentive design trends. Key Findings Key findings from this ClearBridge 100 Report include: Annual Incentive Plans Nearly all ClearBridge 100 companies (94%) have an AIP in 2013. Approximately 80% of companies use multiple AIP performance measures, with three performance measures being most prevalent (30%) in 2013. A significant majority of companies use an earnings measure, typically in combination with other measures. AIP performance is overwhelmingly measured on an absolute basis, with only 5% of companies using relative measures. Long-Term Incentive Plans The use of performance-vested LTI continues to increase: 92% of companies used performance-vested LTI in 2013, an increase from 88% in 2012. The percentage of ClearBridge 100 companies granting time-vested stock options/sars declined from 70% in 2012 to 61% in 2013, reflecting a continued market shift away from stock options/sars into performance-vested LTI. Performance shares/units remain the most commonly used form of performance-vested LTI (72%). Three-year performance measurement periods continue to be most prevalent (80%). Companies typically use multiple LTI performance measures, with two performance measures being most common (39%) in 2013. Use of a stock-based measure, like stock price appreciation or total shareholder return, as an LTI measure increased from 40% in 2012 to 51% in 2013, making stock-based measures the second most common LTI measure after earnings (54%). LTI performance measurement on a relative basis, particularly when in combination with an absolute measure, increased in prevalence in 2013. The following pages present the detailed analyses underlying these key findings, along with additional analyses and information. Standard & Poor's S&P 500 Index is a registered trademark of Standard & Poor's, a division of the McGraw-Hill Companies Inc 1
INTRODUCTION Overview of the ClearBridge 100 The ClearBridge 100 consists of companies in the S&P 500 Index, selected to roughly approximate the industry composition and size of the S&P 500 in order to provide a representation of the broad US market. See the ClearBridge 100 Companies section of this report for a list of the companies included in the analysis. Characteristics of ClearBridge 100 FY2013 Revenue ($ Millions) Market Value as of 12/31/2013 ($ Millions) 75 th Percentile $22,665 $59,597 Median $10,748 $25,231 25 th Percentile $5,211 $12,239 ClearBridge 100 Industry Composition 2% 6% 16% 6% Consumer Staples Energy 15% 9% 8% 11% Materials Telecommunication Services 11% 16% Utilities Analysis Scope and Methodology This report analyzes the design of annual and long-term incentive plans as disclosed in proxy statements for each of the ClearBridge 100 companies. The focus of this study is on standard executive incentive programs and only includes data on the core compensation program (i.e., special one-time awards are not included). The design features of each incentive award were reviewed based on information disclosed in 2012 and 2013 proxy statements for each of the ClearBridge 100 companies. The results were then aggregated and analyzed to provide a broad-market view of executive incentive plan practices and trends. Information in this report is presented in summary form and is either expressed as a percentage of ClearBridge 100 companies in total, or as a percentage of companies with a particular type of award. In certain charts and tables presented throughout the report, totals may not add up to 100% due to awards that incorporate more than one form of practice. 2
DEFINITIONS This section provides definitions for terms used throughout the remainder of this report. Annual Incentive Plans are awards (typically cash) that are paid based on one year performance. Time-Vested Long-Term Incentives ( Time-Vested LTI ) are awards of cash or equity that vest over a time period of longer than one year. Time-Vested Restricted Stock/Units are shares or share units representing actual shares of a company s common stock with vesting dependent on the lapse of a pre-specified time period (the vesting period). Time-Vested Stock Options/Stock Appreciation Rights ( SARs ) are rights to purchase company stock at a pre-specified price (the exercise price) over a set time period (the option term) with vesting dependent on the lapse of a pre-specified time period (the vesting period). SARs function similarly to stock options; however, at time of exercise, the executive receives the value of the difference (the spread value) between the exercise price and the then current stock price in either cash or stock of equivalent value, dependent on company policy. Performance-Vested Long-Term Incentives ( Performance-Vested LTI ) are awards of cash or equity that vest over a period of longer than one year dependent on the achievement of pre-established performance objectives. The categories of Performance-Vested LTI analyzed are: Performance Shares/Units are shares or share units representing actual shares of a company s common stock with vesting dependent on the achievement of pre-established performance objectives. Performance shares/units have a specified target number of shares with the potential to earn a greater or lesser amount dependent on performance against goals. Performance shares/units may be settled in either cash or stock dependent on company policy. Performance Cash awards are awards denominated and settled in cash with payout dependent on the achievement of pre-established performance objectives. Performance cash awards have a specified target dollar amount with the potential to earn a greater or lesser amount dependent on performance against goals. Performance-Vested Restricted Stock/Units are shares or units that represent actual shares of a company s common stock with vesting dependent on the achievement of pre-established performance objectives. Performance-vested restricted stock/unit awards can be earned in full, or a lesser amount, dependent on performance against goals. Performance-Vested Stock Options/Stock Appreciation Rights ( SARs ) are rights to purchase company stock at a pre-specified price (the exercise price) over a set time period (the option term) with vesting dependent on the achievement of pre-established performance objectives. Performancevested Stock Options/SARs can be earned in full or a lesser amount dependent on performance against goals. SARs function similarly to stock options; however, at time of exercise, the executive receives the value of the difference (the spread value) between the exercise price and the then current stock price in either cash or stock of equivalent value, dependent on company policy. 3
ANNUAL INCENTIVE PLAN DESIGN FEATURES
ANNUAL INCENTIVE PLAN DESIGN FEATURES The vast majority of ClearBridge 100 companies (94%) provided an annual incentive opportunity to their executives in 2013. The following section studies the design features of these plans. Performance Measures Number of Performance Measures The most common approach among the ClearBridge 100 is to use three performance measures in the AIP. There was a slight decline in the number of companies using three measures from 2012 to 2013 (from 33% to 30%) and an uptick in companies using two measures (from 18% to 21%). Number of AIP Performance Measures: % of Companies Year 1 2 3 4 5+ 2013 18% 21% 30% 19% 12% 2012 19% 18% 33% 18% 12% Types of Performance Measures Earnings continues to be the most prevalent AIP performance measure by a wide margin, with 80% use in 2013. The next most common measure was revenue, used by 37% of companies in 2013. Performance measures used were generally consistent from 2012 to 2013, with earnings, revenue, and cash flow all seeing slight increases in prevalence. AIP Performance Measures: % of Companies Earnings 78% 80% Revenue 35% 37% Cash Flow Non-Financial* Individual Performance Other Financial** 26% 29% 27% 27% 28% 27% 22% 19% 2012 2013 Margin Economic Profit/EVA Return TSR 9% 6% 5% 5% 2% 2% 1% 2% *Other Non-Financial Measures include: Strategic Initiatives, Customer Satisfaction and Other Non-Financial measures **Other Financial Measures include: Capital Efficiency, Net Debt, and Other Financial measures 5
ANNUAL INCENTIVE PLAN DESIGN FEATURES Absolute vs. Relative Performance Measures The most common AIP measurement approach is on a purely absolute basis, with 95% prevalence among ClearBridge 100 companies in 2013. A small number of companies use a relative measure in combination with an absolute measure (4%), or a relative measure only (1%). Absolute vs. Relative AIP Measures: % of Companies 1% 4% 95% Absolute Only Relative Only Both Payout Leverage The majority of ClearBridge 100 companies (66%) set the maximum AIP opportunity at 200% of target in 2013, which is a marginal increase from 65% in 2012. A very small minority of companies set maximum AIP opportunities below 150% of target or above 300% of target. AIP Maximum Payout as % of Target Payout: % of Companies 65% 66% 4% 4% 13% 14% 12% 8% 6% 7% 0% 1% < 150% 150% - < 200% 200% > 200% - 250% > 250% - 300% > 300% 2012 2013 6
LONG TERM INCENTIVE PLAN DESIGN FEATURES
LONG TERM INCENTIVE PLAN DESIGN FEATURES Long-term incentives are provided by nearly all (97%) ClearBridge 100 companies and are increasingly performance-vested in nature. The following section studies the design features of these LTI plans among the ClearBridge 100. Vehicles and Mix Prevalence of Vehicles The use of time-vested stock options/sars among ClearBridge 100 companies declined from 70% in 2012 to 61% in 2013, consistent with a longer-term trend of decreasing prevalence of stock options/sars. Performancevested LTI vehicles saw greater use across the board, with 92% of companies granting performance-vested LTI in 2013, an increase from 88% in 2012. LTI Vehicles: % of Companies 92% of companies granted performance-vested LTI in 2013 70% 61% 56% 55% 64% 66% 19% 21% 16% 18% 1% 3% Time-Vested Stock Options/SARs Time-Vested Restricted Stock/Units Performance Shares/Units Performance Cash Perf-Vested Restricted Stock/Units Perf-Vested Stock Options/SARs 2012 2013 Number of Vehicles Most ClearBridge 100 companies take a portfolio-based approach to long-term incentive compensation, using two or more LTI vehicles. Specifically, the use of two LTI vehicles is the most common approach in 2013 with 46% prevalence, a rise from 41% in 2012. A significant minority (32%) of companies use three LTI vehicles, a decline from 36% in 2012. 41% Number of LTI Vehicles: % of Companies 46% 36% 32% 19% 18% 4% 4% 1 Vehicle 2 Vehicles 3 Vehicles 4 Vehicles 2012 2013 8
LONG TERM INCENTIVE PLAN DESIGN FEATURES Time-Vested LTI Award Features Vesting Period Three- and four-year vesting periods for time-vested LTI are the most prevalent among ClearBridge 100 companies, with variability by vehicle. Companies generally favor three-year (60%) vesting periods for time-vested restricted stock/units, while practices among companies granting stock options/sars are more mixed with 44% using three-year vesting and 46% using four-year vesting. Only a minority of companies use vesting periods that are shorter than three years or are five years or longer. Restricted Stock/Units Vesting Period: % of Companies Stock Option/SARs Vesting Period: % of Companies 8% 6% 10% 26% 44% 60% 46% < 3 Years 3 Years 4 Years 5+ Years < 3 Years 3 Years 4 Years 5+ Years Vesting Type Ratable vesting, where awards vest in tranches over time, is the most commonly used vesting approach, with variability by vehicle. Among companies granting restricted stock/units the practice is somewhat mixed; a majority (60%) use ratable vesting while a significant minority (40%) uses cliff vesting. However, among companies granting stock options/sars, the vast majority of companies use ratable vesting (92%). Restricted Stock/Units Vesting Type: % of Companies Stock Options/SARs Vesting Type: % of Companies 8% 40% 60% 92% Cliff Ratable Cliff Ratable 9
LONG TERM INCENTIVE PLAN DESIGN FEATURES Stock Options/SARs Term Stock options/sars typically have a term of ten years (81%), with the next most common term being seven years (14%). Time-Vested Stock Options/SARs Terms: % of Companies 81% 81% 2012 2013 3% 3% 15% 14% 1% 2% < 7 Years 7 Years 8 Years 10 Years Performance-Vested LTI Award Features Vehicles Performance shares/units are the most prevalent performance-vested LTI vehicle (72%), followed by performance cash (22%), and performance-vested restricted stock/units (19%). The use of performance-vested stock options/sars remains a minority practice. Performance-Vested LTI Vehicles: % of Companies Year Performance Shares/Units Performance Cash Perf.-Vested Restricted Stock/Units Perf.-Vested Stock Options/SARs 2013 72% 22% 19% 3% 2012 73% 21% 19% 1% Performance Periods Three-year performance periods are most common by a wide margin, with 80% of ClearBridge 100 companies using this approach. Companies with performance periods of less than three years typically extend vesting for one or two years after the end of the performance period. LTI Performance Period Length: % of Companies 79% 80% 2012 2013 19% 19% 5% 6% 9% 10% 1 Year 2 Years 3 Years 4+ Years 10
LONG TERM INCENTIVE PLAN DESIGN FEATURES Number of Performance Measures The use of one or two measures remains the most popular approach with 39% of companies using two measures and 27% of companies using one measure. However, from 2012 to 2013 there has been a slight decline in the number of companies using one or two measures. In contrast, the number of companies using three or four measures has seen a slight uptick from 2012 to 2013. Number of LTI Performance Measures: % of Companies Year 1 2 3 4 5+ 2013 27% 39% 23% 9% 2% 2012 29% 41% 20% 6% 4% Types of Performance Measures While earnings remains the most prevalent LTI performance measure (54%), the use of TSR / stock price increased significantly from 40% in 2012 to 51% in 2013, making TSR / stock price the second most common LTI performance measure. LTI Performance Measures: % of Companies Earnings TSR/Stock Price 40% 51% 53% 54% Revenue 29% 29% Return 21% 25% Cash Flow Other Financial* Non Financial** 13% 17% 15% 11% 11% 11% 2012 2013 Margin Economic Profit/EVA Individual Performance 3% 3% 4% 2% 1% 1% *Other Financial Measures include: Capital Expenditures and Other Financial measures **Non-Financial Measures include: Strategic Initiatives, Customer Satisfaction and other Non-Financial measures 11
LONG TERM INCENTIVE PLAN DESIGN FEATURES Absolute vs. Relative Performance Measures The majority (46%) of ClearBridge 100 performance-vested LTI awards in 2013 are measured only on an absolute basis, while 21% of 2013 awards are measured only on a relative basis, and 33% are based on both a relative and absolute performance measure. The use of both absolute and relative measures has increased from 25% in 2012 to 33% in 2013; there has also been a downward shift from 54% to 46% of companies that use purely an absolute measure. Among awards that use a non-stock based measure (i.e., a financial / strategic / operating performance measure), performance is overwhelmingly measured on an absolute basis only (88%). However, awards that use a stock-based measure (e.g., stock price, TSR) are most often based only on relative performance (82%). Absolute vs. Relative Performance Measures: % of Companies All Performance-Vested LTI Awards Awards w/ Non-Stock Based Measures Awards w/ Stock-Based Measures 2012 2013 2012 2013 2012 2013 Absolute Only 54% 46% 89% 88% 8% 9% Relative Only 21% 21% 11% 11% 84% 82% Both 25% 33% 0% 1% 8% 9% Relative Measure Benchmarks Among awards that use a relative measure, the most common benchmark is a self-selected peer group (67%) followed by a broad market index, such as the S&P 500 (23%). From 2012 to 2013, there has been a decrease in the use of self-selected peer group benchmarking (74% to 67%) and an uptick in the use of both broad market indices (18% to 23%) and industry indices (8% to 15%). 74% 67% Relative Performance Benchmarks: % of Companies 2012 18% 23% 8% 15% 2013 Peer Group Broad Market Index Industry Index 12
CLEARBRIDGE 100 COMPANIES
CLEARBRIDGE 100 COMPANIES Company ACTAVIS PLC ADOBE SYSTEMS INC AETNA INC AGL RESOURCES INC AKAMAI TECHNOLOGIES INC AMAZON.COM INC AMERICAN EXPRESS CO AMGEN INC ANADARKO PETROLEUM CORP AON PLC AT&T INC AVON PRODUCTS BAKER HUGHES INC BALL CORP BANK OF NEW YORK MELLON CORP BARD (C.R.) INC BB&T CORP BIOGEN IDEC INC BLACKROCK INC BORGWARNER INC BOSTON PROPERTIES INC BOSTON SCIENTIFIC CORP BRISTOL-MYERS SQUIBB CO CBRE GROUP INC CHUBB CORP CINCINNATI FINANCIAL CORP COCA-COLA CO COLGATE-PALMOLIVE CO CONSOL ENERGY INC CONSOLIDATED EDISON INC CORNING INC CVS CAREMARK CORP DANAHER CORP DENBURY RESOURCES INC DISCOVERY COMMUNICATIONS INC DOMINION RESOURCES INC Industry Utilities Energy Telecommunication Services Consumer Staples Energy Materials Consumer Staples Consumer Staples Energy Utilities Consumer Staples Energy Utilities 14
CLEARBRIDGE 100 COMPANIES Company DOW CHEMICAL EATON CORP PLC EBAY INC ECOLAB INC EMC CORP/MA EQUIFAX INC EXELON CORP EXXON MOBIL CORP FIRST HORIZON NATIONAL CORP FMC TECHNOLOGIES INC FOSSIL GROUP INC FRONTIER COMMUNICATIONS CORP GENERAL ELECTRIC CO GOLDMAN SACHS GROUP INC GOOGLE INC HARLEY-DAVIDSON INC HERSHEY CO HESS CORP ILLINOIS TOOL WORKS INTEL CORP INTL BUSINESS MACHINES CORP JPMORGAN CHASE & CO JUNIPER NETWORKS INC KELLOGG CO KRAFT FOODS GROUP INC L BRANDS INC M & T BANK CORP MASCO CORP MATTEL INC MCDONALD'S CORP MEADWESTVACO CORP MERCK & CO MOODY'S CORP MOTOROLA SOLUTIONS INC MYLAN INC NASDAQ OMX GROUP INC Industry Materials Materials Utilities Energy Energy Telecommunication Services Consumer Staples Energy Consumer Staples Consumer Staples Materials 15
CLEARBRIDGE 100 COMPANIES Company NEWELL RUBBERMAID INC NEWMONT MINING CORP NISOURCE INC NVIDIA CORP PACCAR INC PENTAIR LTD PEPSICO INC PFIZER INC PIONEER NATURAL RESOURCES CO PPL CORP PRICELINE.COM INC QUANTA SERVICES INC QUEST DIAGNOSTICS INC SCHWAB (CHARLES) CORP SHERWIN-WILLIAMS CO STARWOOD HOTELS&RESORTS WRLD TARGET CORP TERADATA CORP TEXAS INSTRUMENTS INC TIFFANY & CO TIME WARNER INC UNITED PARCEL SERVICE INC UNITED TECHNOLOGIES CORP VF CORP WAL-MART STORES INC XEROX CORP YAHOO INC YUM BRANDS INC Industry Materials Utilities Consumer Staples Energy Utilities Materials Consumer Staples 16
ABOUT CLEARBRIDGE ClearBridge Compensation Group is an independent consulting firm providing advice to boards of directors and senior management on the design of effective executive and incentive compensation programs with a focus on alignment with shareholders, linkage with business strategy, and adherence to strong governance standards. Our consultants have extensive experience and expertise in executive compensation program design. Our work spans across industries for both publicly-traded and privately-held companies. Our aim is to establish transparent connections between management and shareholders and understandable links between performance and compensation. We provide an array of compensation services to meet the individual needs of our clients. A sample of our consulting services includes: Total Compensation Review and Design Annual Incentive Design Long-term Incentive Design Performance Measurement Board of Director Compensation Stock Ownership Programs Employment Agreements Severance / Change in Control Arrangements Compensation Governance Review Proxy / Say on Pay Preparation Corporate Transactions (e.g., M&A, Spin-offs, etc.) This report was authored by Yonat Assayag, Kristine Bhalla and Tadashi Shida. For questions specific to this ClearBridge 100 report, or for more information on ClearBridge Compensation Group or any of the services outlined above, please visit our website or contact our New York City office at: 515 Madison Avenue 32 nd Floor New York, NY 10022 212-886-1022 www.clearbridgecomp.com 17