MISO Board of Directors Compensation Review October 2014 Deb Bilak, Partner, Boston Aaron Moore, Sr. Associate, Chicago
Introduction Mercer Inc. ( Mercer ) has been engaged by the Board of Directors ( Board ) of Midcontinent Independent System Operator Inc. ("MISO"), to review the compensation program for the Independent Directors ( Director ) of MISO. The objective of the review is to ensure that compensation, including any recommended increases in compensation, for the Directors falls within a reasonable range of the market data. 1
Approach and Methodology Three primary external data sources Data Sources Commentary ISO/RTO Peers A 2013 study conducted by Mercer, of independent director compensation among 7 U.S. based ISO/RTOs. Most direct comparison from an industry perspective. Only 7 such organizations. Only PJM similar in scope/complexity to MISO. 75th percentile essentially compares MISO to itself. Utility Peers General Industry Peers 12 publicly traded utility companies within MISO s footprint. Revenues between $500 million and $2.5 billion and median revenues of $1.1 billion. 251 publically traded companies across all industries. Revenues between $100 million and $3 billion and median revenues of $800 million. Utility organizations that represents the complexity of an ISO/RTO. Equity is considered but discounted as MISO would not expect to provide the full value as a tax exempt organization. All organizations that are similar is size as the utility peers. Equity is considered but discounted as MISO would not expect to provide the full value as a tax exempt organization. 2
Approach and Methodology Our analysis showed minimal differences in cash compensation for independent directors of small- and mid-sized companies other than the equity compensation. Small-sized companies - revenues less than $1 billion. Mid-size companies - revenues between $1 billion and $3 billion. For MISO, we consider the value of equity awards provided to directors in public companies in the competitive market data. We apply a discount to the value of the public company equity awards to recognize that MISO, as a not-for-profit organizations, does not expect to replicate director compensation levels found in public companies. The discounted equity value recognizes that MISO is different than other not-for profit organization. MISO s board meetings are open to the public, whereas that is not the case for the majority of other not-for-profit organizations. MISO s board members cannot sit on any utility boards, while many of them have the skills and knowledge to serve on a utility board, so competitive compensation levels, closer to directors on utility boards, helps MISO to recruit and retain directors. 3
Findings MISOs Total Compensation compared to the three primary external data sources Total compensation ISO/RTOs Utilities General Industry Total compensation using same meeting structure as MISO Above the 75th Below 25th percentile (discounted equity). Below 25th percentile (discounted equity). Actual total compensation using each organizations meeting structure Above the 75th Below the 25th percentile of the market data (full equity value 1 ). MISO has more meetings than found in the market. Slightly above the 25th percentile of the market data (full equity value 1 ) MISO has more meetings than found in the market. 1 Full value as we are unable to carve out equity compensation from disclosure numbers 4
Findings MISO compared to the three primary external data sources By Compensation Element ISO/RTOs Utilities General Industry Board Chair Retainer At median. Below 25th MISO s is 1/8th of the market value. Below 25th MISO s is 1/4 of market value. Board Member Retainer Above the 75th At median. At 75th Committee Chair Retainers Limited data. Committee chair retainers are below the 25th Committee chair retainers are at the 25th Board and Committee Meeting Fees market median market median. market median. 5
Recommendations Modest increases to Director compensation Mercer Recommendation ISO/RTOs Utilities General Industry Board Chair retainer be increased by $12,500. Increases from median to 75th Remains below 25th Remains below 25th Board member retainer be increased by $10,000. (Increase deferral to $17,500 or 25%) Increases from 75th percentile to further above 75th Increases from median to above 75th Increases from 75th percentile to slightly above 75th Committee Chair retainer be increased by $5,000. Limited data. Increases from below 25th percentile to median. Increases from below 25th percentile to median. No change to Board and Committee Meeting Fees. market median market median. market median. 6
Recommendations Impact of increases (assuming no increase in MISO s Board membership) Impact of Recommendations on Total Compensation ISO/RTOs Utilities General Industry Total compensation using same meeting structure as MISO Remains above the 75th From below 25th percentile of market (discounted equity) to the 25th From below 25th percentile of market (discounted equity) to the 25th Actual total compensation using each organizations meeting structure Remains above the 75th From below the 25th percentile of the market data (full equity value 1 ) to the 25th From slightly above the 25th percentile of the market data (full equity value 1 ) to between the 25th percentile and median. 1 Full value as we are unable to carve out equity compensation from disclosure numbers 7
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