August 28, 2012 “How to Build Long‐Term Value for Key Producers” Today’s Presenter: Ken Gibson Senior Vice President ( (949) 265‐5703 ) 6 kgibson@vladvisors.com 7700 Irvine Center Drive  Suite 930  Irvine, CA 92618  949-852-2288  www.VLadvisors.com 2 We’re happy to provide a copy of today’s slides. Information will be provided at the close of the presentation. For questions during today’s presentation: Use the question panel to the right of your screen 7700 Irvine Center Drive  Suite 930  Irvine, CA 92618  949-852-2288  www.VLadvisors.com 3 Today’s Focus y How to use long‐ term value sharing as a tool of business l fb transformation Key Producer Compensation 4 Key Questions y What is meant by value creation and value What is meant b al e creation and al e sharing? 2. Does long‐term value sharing really matter? Does long term value sharing really matter? 3. If so, what does it impact? What does it change? 4. How is long‐term value shared most effectively with those who produce it? 1. 5 Value Creation and Sharing Wh D i R ll M What Does it Really Mean? ? Case Study (Source: Chief Executive Magazine, May/June 2012 Edition) Keith Williams 6 Global independent safety science company f Validates the safety of certain products and processes  Puts the UL stamp of approval on products that have met its standards h h d d  The company is 118 years old   7 Keith Williams      Assumed leadership of UL in 2005 C Company carrying considerable debt i id bl d bt Losing market share L Low employee morale l l UL had become bureaucratic and “siloed”  Regional divisions undercutting each other ld d h h 8 5 5 Core Changes g Compensation (Value Sharing):  Took away local measurements driving management incentive plans—all paid on same metrics  “We live together and we die together” We live together and we die together  Aligned everyone behind company success  “I call it ‘pay the company first.’” “I call it ‘pay the company first ’” Williams clearly defined what value creation meant and how it would be shared 9 Pay the Company First y p y “Basically Basically, up to up to the company’s operating profit target, all of the profits go to the company; and only after that target is met, do we start funding the incentive pool.” Example: If UL’s target Example: If UL s target is $80 million‐‐ is $80 million ‐‐  100% of first $80 in profit goes to company  The next $20 million goes to the incentive pool  From there on, 50/50 between company & incentive pool 10 Pay the Company First y p y EVA=Economic Value Added. EVA=Economic Value Added. UL’s UL’s definition of value creation definition of value creation. 11 Pay the Company First y p y Once value creation is defined, compensation can follow a formula for sharing value in a way that aligns kkey producers with the d ith th company’s business plan and priorities and priorities. 12 The Value of Profit Wealth Multiplier Profits Future Business Employees Shareholders 13 The Value of Profit Wealth Multiplier Profits Future Business Employees A Sense of Partnership Translates to a Growth Multiple Shareholders 14 Profits Generate additional C it l Capital Wealth Multipliers continually look for ways to d l deploy that capital more productively. h l d l 15 Capital Deployment “Portfolios” p p y       Product Portfolio f Training Portfolio Finance Portfolio f l Innovation Portfolio Marketing Portfolio k f l Compensation Portfolio f l 16 Capital Deployment in C Compensation ti Compensation is a deployment of capital—an investment.  Investments must be properly allocated  Investments must be properly measured (ROTRI)  Investments in human capital h l should improve productivity 17 Compensation Allocation “P tf li ” “Portfolios”  Performance Class f l ▪ Paid to help company meet its “budgeted” or targeted level of p performance ▪ Today focused  Growth Class ▪ Paid for helping company achieve superior levels of performance P id f h l i hi i l l f f ▪ Future‐focused  Transformation Class ▪ Paid for fundamentally altering the course of the industry through unique breakthroughs ▪ Wealth Wealth‐multiplier mindset multiplier mindset ▪ Most highly productive class 18 Key Concept y p Companies that work on compensation in their transformation portfolio have a wealth multiplier and not just a wealth creator mindset. They envision people–both the customers they serve and the workforce they employ–experiencing life in a whole y p y p g different realm. (Think Apple, Disney, Amazon and others.) As a result, they don’t just create compensation programs. They market a future to their employees on all levels–product development, market penetration, innovation expectations and yes, rewards–so that all company d th t ll “portfolios” are completely aligned. 19 Why Long‐Term Value Sharing Matters 20 Why Long‐Term Value Sharing M tt Matters #1 Value sharing attracts the l h h best talent and magnifies results  Attracting the “right” people ▪ Willing and able to compete g p ▪ Assume stewardship role in safeguarding shareholder interests ▪ Willing to share in risks and rewards of value creation ▪ Seek mini‐entrepreneurial experience 21 Why Long‐Term Value Sharing M tt Matters #2: Value sharing plans l h l (effectively designed) reinforce the company s reinforce the company’s business model  Nurture a culture invested in the business model ▪ ▪ ▪ Reinforce virtuous cycles R i f Reinforce leverage points l i t Reinforce roles and expectations 22 Why Long‐Term Value Sharing M tt Matters #3: Value sharing protects #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 g p y the right kind of profitability. ▪ ▪ Pay people in a way that communicates long‐term profitability expectations p y p Protect company’s interest in generating good profits 23 Why Long‐Term Value Sharing M tt Matters #4: Value sharing promotes an ownership mindset  Build a rewards system that B ild d h communicate “what’s important.” p ▪ ▪ Keep performance engine working while moving the company forward towards growth goals g g Define “what’s important” the same way ownership does—revenue/EBITDA growth, profit/margin improvement, cost managementt 24 Why Long‐Term Value Sharing M tt Matters #5: Value sharing builds trust l h b ld 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 Validate your trust in their unique abilities 25 Why Long‐Term Value Sharing M tt Matters 1. 2 2. 3. 4. 5 5. Value sharing attracts the best talent and magnifies results Value sharing plans (effectively designed) reinforce the company’s business model V l h i Value sharing protects against i bad profits and promotes good p profits Value sharing promotes an ownership mindset Value sharing builds trust and accelerates results 26 From Why to How 27 How to Share Long‐Term Value Eff ti l Effectively  Focus on transformation, not just growth   Match growth goals of company with growth goals of key producers   Develop an effective financial model Communicate and promote the plan   Employ a decision tree process Project outcomes   Focus on employee “hierarchy of needs” Explore appropriate options   Be a wealth multiplier not just wealth creator View employees as “customers” of your value proposition Evaluate and refine  Make sure you’re achieving “line of sight” y g g 28 Transformation not just Growth Wealth Multipliers not just Wealth Creators Wealth Creators      Profitability focus Recruit to skills and experience Comp is an important expense to be managed b d Salaries and total pay should be “at market” “Pay‐for‐performance” W lth M lti li Wealth Multipliers      Transformation focus Recruit premier talent that relates to our culture Comp is an investment that should produce a growing return Salary benchmarking can be helpful but pay should be tied to positional value “Share wealth created” Share wealth created 29 Link Company & Employee Goals Employee “Hierarchy of Needs” l i h f d 5 Wealth Accumulation Wealth Multiplier Philosophy 4 Value Sharing Short & Long‐Term Incentive Plans 3 Retirement Planning Qualified & Executive Retirement Plans 2 Risk Protection Comprehensive, Flexible Benefits Plan 1 Cash Flow & Living Standard Clear Pay Philosophy Salary & Bonus 30 Explore Appropriate Options p pp p p Exploring Options Salary Nonqualified Retirement Plans Short-term Cash Bonuses Long-term Cash C h Awards A d Qualified Retirement Plans GOALS – 3 Years (Sample Company) 1) 70% increase in revenue 2) Double market share 3) National expansion 4) 125% increase in business net worth KEY OUTCOMES O CO S 1) Increased focus on long long--term growth 2) Motivated workforce 3) Ownership Mentality 4) Compensation linked to performance 5) Unified financial vision Equity Awards Executive Benefit Plans Core Health & Welfare Plans Compensation Allocation 31 Yes Full Value Full Value or Appreciation Only? Grant Equity or Not Equity? Performance Based? Appreciation No Reward for Value Increase or Financial Performance? Yes Stock Option Performance Shares Value Increase Full Value or Appreciation? P f Performance B Based? d? AppreciationPerformance Based or Employee Directed? Employee Directed Strategic Deferred Compensation Performance Phantom Stock Reward for Profit/Cash Flow or Other Metrics? Other Metrics No Yes Phantom Stock Option Performance Based Restricted Stock Full Value Appreciation Financial Performance No Profits Objectives Performance Unit Phantom Stock Allocation or Objectives Based? Allocation Profit Pool 32 Project Outcomes j Develop and Effective Financial Model l d ff l d l 33 Sample LTIP Model – P&L Forecast 34 Sample LTIP Model – PSO Projections 35 Communicate and Promote the Plan Pl 1. Explain, celebrate and reinforce the total value proposition iti 2 2. Communicate a sense of partnership 3. Project the wealth multiplier opportunity 36 Key Producer E l Employee Value Statement V l St t t Year  1 2 3 4 5 Sample EVS 5-Year Plan Achievement Level 100% 100% 100% 100% 100% Current and Inflated Salary $ 160,000 $ 166,400 $ 173,056 $ 179,978 $ 187,177 Cash Incentives Paid at Target $ 64,000 $ 66,560 $ 69,222 $ 71,991 $ 74,871 LTIP Vested Value at Year End $ $ 74,000 $ 186,000 $ $ 448,000 Retirement Plan Value (at 7%) $ 17,120 $ 36,123 $ 57,169 $ 80,428 $ 106,086 Total Cash Received $ 224,000 $ 232,960 $ 242,278 $ 251,970 $ 262,048 Total Wealth Accumulation $ 17,120 $ 110,123 $ 243,169 $ 391,428 $ 554,086 Total Paid or Accumulated $ 241,120 $ 567,083 $ 942,407 $ 1,342,636 - 311,000 $ 1,767,343 37 Evaluate & Refine Rewards Line of Sight What What’ss in it for me? Roles and Expectations My Contribution? Model & Strategy How ? Vision Where? 38 First Step p  Ali Alignment Appraisal™ A i l™  A focused look at your current practices with a comparative eye on whether your company is building a “Unified Financial Vision for Growing th B i the Business” ”  Process—online employee survey 39 Alignment Appraisal™ g pp  A focused look at your current practices with a A f d l k t t ti ith comparative eye on “World Class Compensation” standards. “Is your total rewards program enhancing or slowing growth?”  The AA is broken into two categories: Structure (are we constructing our pay plans in the best possible way?) and Mindset (are we creating the best possible perception of our plans by our employees?)  Process—simple online survey 40 Building a Unified Financial Vision for Growing the Business IMPACT: Alignment Meaning Stewardship p Partnership Reinforcement Vision Structure Business M d l Model Focus Execution Sustained Results Sustained Results Culture of Confidence Compensation G Pl GamePlan Growth Wealth Multiplier Mindset Strategy IMPACT: Compelling p g Connection Fairness Value‐Sharing Engagement 41 Compensation Practices (Structure) The Alignment Appraisal™ assesses the pay philosophy and practices of the g pp p yp p y p company relative to world‐class standards. Alignment Do we align our pay strategy with our business l h b strategy? Meaning Does our pay strategy offer fair and meaningful value to our top contributors? Stewardship Are we effective stewards of the compensation investment being made by shareholders? Partnership Do the design components of our incentive plans promote a value sharing partnership philosophy? promote a value‐sharing, partnership philosophy? Reinforcement Are we excellent communicators of the value and purpose of our rewards programs? pu pose o ou e a ds p og a s 42 Compensation Impact (Mindset) The Alignment Appraisal™ assesses the impact of your pay practices on your g pp p y p yp y employees’ perception of how well they fit in your company. Compelling Do your employees perceive themselves as belonging to a dynamic organization with a compelling future? Connection Do your employees see the connection between D l h i b company success and personal rewards? Fairness Do your employees feel that your pay practices y p y y p yp are fair, consistent and purposeful? Value‐Sharing Value Sharing Are the design components of your incentive plans based on a value‐sharing plans based on a value sharing, partnership partnership philosophy? Engagement g g Do your employees feel fully engaged in their jobs? 43 Structure Index = 52* *Scale of 100 Net Score ‐55.0% 10 Leadership Appraisal 25.9 0 ‐10 Alignment Meaning Stewardship Partnership 62 6.2 53 5.3 58 5.8 48 4.8 Reinforcement 38 3.8 44 Mindset Index = 60* *Scale of 100 Net Score ‐32.0% 10% Employee Appraisal 30.2 0 ‐10% Compelling Connection Fairness Value‐Sharing 70 7.0 64 6.4 54 5.4 50 5.0 Engagement 64 6.4 45 Special Offer p This Appraisal is typically $1,800. For today’s webinar attendees only: N No cost Indicate interest on final survey 46 Focus: Creating a Unified Financial Vision The Wealth Multiplier  Partnership Relationship  Shared Vision  Engaged Employees E d E l  Effective Practices  Sustained Productivity Wealth “Multipliers” Multipliers 5% Missing Structure Focus: Fulfilling Ownership Vision Wealth “Creators” % 95% The Wealth Creator  Subordinate Relationship  Divided Visions  Loyal Employees  Inconsistent Practices  Bursts of Productivity 47 Creating Long‐Term Value for P Premier Talent i T l t They will find non‐traditional Th ill fi d t diti l pay structures alluring and differentiating  The pay structure will respect their entrepreneurial mindset and appeal to their interest in wealth accumulation opportunities  They will accept the responsibilities and p accountability associated with true value creation (i.e., they won’t “expect” higher pay without creating results)  48 Next Online Seminar: “Compensation Standards that both p Shareholders and Employees will Embrace” To be held on: To be held on Tuesday, September 25th, 2012 7700 Irvine Center Drive  Suite 930  Irvine, CA 92618  949-852-2288  www.VLadvisors.com 49 Check out our NEW website: www PhantomStockOnline com www.PhantomStockOnline.com You can also subscribe to our blog 50 UPDATED website: www VLadvisors com www.VLadvisors.com You can also subscribe to our blog 51 NOW AVAILABLE! NOW AVAILABLE! Express interest on the final survey 52 @vladvisors youtube.com/VisionLinkAdvisors 53 Questions? 54 Thank you for attending y g Please complete our brief survey immediately following our presentation. We value your input. You may request a copy of our slides, slides the White Paper and more information about the Alignment Appraisal. Appraisal 55 Thank you! Ken Gibson Senior Vice President d (949) 265‐5703 kgibson@vladvisors.com 56