CII Aligning Executive Performance - ABRIDGED FINAL

September 20, 2010
The Holy Grail: Aligning Executive

Performance and Pay
for
Robin Ferracone, Executive Chair, Farient Advisors LLC
These materials are confidential and may be used only with written authorization from Farient Advisors
© 2010 Farient Advisors LLC - All rights reserved

Survey of Investors’ Perspectives
 In 2008, 20 of the top 25 institutional investors were interviewed by

the Center on Executive Compensation
 Over 50% of those interviewed cited pay for performance alignment
as among their most important issues of concern
 Approximately 75% had no real concerns about the levels of
executive compensation, as long as there were strong connections
between pay and performance
 Performance measures were of concern
 Investors were negative about disclosures
2
Farient’s Perspectives on Alignment
 Investors are concerned about it

- Fairness
- Incentive value
 Alignment is a stated corporate objective in virtually all proxy
disclosures
 There is no easy way to measure it
 Alignment is an old and persistent issue
 Alignment can be in conflict with other compensation objectives
(e.g., retention, motivation, etc.)
3
Case in Point: Copart
 Founded in 1982; went public in 1994 (NASDAQ ticker: CPRT)
 Today, approximately $750 MM in revenue
 In April 2009, Copart asked its shareholders to vote on a proposal
to exchange all forms of compensation for 2 MM stock options to
vest over 5 years for each of the top two executives
Copart
Copart CEO Target Compensation Comparison Closing Stock Price at April End
Prior New $50
Compensation Compensation
Plan Plan $40
Salary $750,000 $1
Bonus $1,500,000 - $30
Stock
150,000 2,000,000
Total Options Price $20
Annually over 5 Years
Option Grant Value $1,500,000 $20,000,000
Annualized na $4,000,000 $10
Target Annualized
$3,750,000 $4,000,001
Compensation $0
Notes:
Stock price at grant = $30 4/2004 4/2005 4/2006 4/2007 4/2008 4/2009
Black-Scholes value per option @33% of strike price = $10
4
Farient’s Definition of Alignment and Alignment Zone
Definition of Alignment
Alignment
Fair pay, or aligned pay, is when
total compensation, after
Upper Alignment performance has been factored
NOzone in, is:
Alignment 1. Sensitive to company
Zone performance over time; and
PACTM 2. Reasonable relative to the
market for executive talent
and for the performance
delivered
Lower Alignment ___________________________
NOzone Definition of Alignment Zone
TSR A range of acceptable pay
outcomes for a company’s
size, industry, and
performance
Source: Fair Pay, Fair Play: Aligning Executive Performance and Pay
5
Farient Alignment ReportTM
VF Corp. CEO PACTM
Pay for Performance Alignment
$25
$20
Data Point = 2006

Alignment
Annualized TSR = 27%
$15 Zone
PACTM = $13.6 MM 06
PACTM
(2009 $MMs) 04
$10 07
05
$7B Revenue 03
01 02 Textiles, Apparel, and Luxury
$5 00 Goods Pay Line
VF Corp.
$0
Pay Trend Line
-30% -20% -10% 0% 10% 20% 30% 40% 50%
Annualized 3-Year TSR
6
From Myth to Reality
The Right Target Pay ≠ The Right PACTM
Copart Inc. CEO PACTM

Prior CEO Program vs. Cash Swapped for Equity
$50
CEO New Plan:
2MM Options
$40 $1 Salary
Annualized $30 Prior CEO Program:

PACTM $750,000 Salary
(2008 $MMs) $20 200% Target Bonus
150,000 Annual Options
$10 Industrials
Sector
Alignment
$0
Zone
-30% -15% 0% 15% 30% 45%
7
Highly Paid ≠ Overpaid
Absolute Highest Paid CEOs Chevron CEO PACTM

3-Year Period Ending FY2009 (Annualized) Pay for Performance Alignment
Actual PACTM $80
Rank CEO Company ($MM)
1 Hanway Cigna Corp. $331.0 Alignment
2 Isenberg Nabors Industries $97.6 $60 Energy Sector Pay Line Zone
Annualized
3 Ellison Oracle $58.9 PACTM
(2009 $MMs)
4 Alapont Federal-Mogul $54.0
$40
5 McClendon Chesapeake Energy $50.5 $160B Revenue
6 Adkerson Freeport-McMoran $49.6 06 07
09 08
$20 05
7 Irani Occidental Petroleum $45.2 03 04
. . . . Chevron CEO
. . . .
. . . .
O'Reilly Pay Line
17 O'Reilly Chevron Corp $25.3 $0
-15% 0% 15% 30% 45%
8
Heavy Equity ≠ Alignment
Oracle Corp. CEO PACTM
$1,000.0
00
01
Software & Services
Industry Pay Line
$100.0 07 08
Annualized 02
06 09 97
PACTM 99
96
(2009 $MMs) 98
Logarithmic 05
Scale
$10.0 Alignment
Zone
04
(2)
03
$1.0
$0.0
(1) Fiscal
-40% -20% 0% 20% 40% 60% 80%
Years as reported by Oracle
(2) Ellison received no salary, bonus, or options
during the 3-year period ending in 2003

Annualized 3-Year TSR (1)
ource: Fair Pay, Fair Play: Aligning Executive Performance and Pay
9
High TSR Performance ≠ Alignment
Technology Sector Company CEO PACTM
04
03
$150
Company
Pay Line
Annualized
PACTM $100
(2009 $MMs) 05
02 Alignment
Zone
$50 Technology Sector
Pay Line
06
07
$0
-30% -15% 0% 15% 30% 45% 60%
ource: Fair Pay, Fair Play: Aligning Executive Performance and Pay 10
Goal-setting vs. Budget ≠ Alignment
Consumer Discretionary Sector Company PACTM
$12
$10
Consumer Discretionary
$8 Sector Pay Line Alignment
Zone
Annualized 00
PACTM $6
05 01
(2009 $MMs)
04
$4 02
09 99
03
06 98
95 97
$2 96
07
08 Company Pay Line
$0
-40% -20% 0% 20% 40%
ource: Fair Pay, Fair Play: Aligning Executive Performance and Pay 11
High Earnings Growth ≠ Alignment
Industrials Sector CEO PACTM Company and Proxy Peers

Pay for Performance Alignment Annual EPS Growth vs. Annual TSR
$25 2005-2009
80%
$20 Alignment
60%
Company Pay Line
Zone
Annualized
07
PACTM $15 01
06
Annual 40% R² = 0.00
(2009 $MMs) 08
05
TSR 20%
$10 02 Proxy Peers
09 04 03 0%
Pay Line
$5 Industrials
-20%
Sector
Pay Line
$0 -40%
-30% -15% 0% 15% 30% 45% -50% 0% 50% 100%
Annualized 3-Year TSR Annual EPS Growth
12
Root Causes of Misalignment – Design and Decisions
Compensation Design
Aggressive target pay Decision-Making
Turbo-charged upside Processes
Ad hoc Decision-
Conventional goal-setting
decisions making
Short-term gain; Influences
long-term pain
Flattening the curve
Source: Fair Pay, Fair Play: Aligning Executive Performance and© 2010
Pay Farient Advisors LLC - All rights reserved 13
Asymmetric Attribution Bias
14
Investor Impact: Three Steps Toward Improving Alignment
1. Alignment is always relevant; don’t ignore it when TSR is high
2. Ask for Farient’s Alignment Report

 Historical
 Prospective
 Checklist of red flags
3. Vote with your voice before your feet

 Say on Pay – makes it easy to explain your vote
 Pay-for-Performance Disclosure – should discuss fact, not fiction
15
The Beauty of the Alignment Report
 Assesses pay relative to performance, not in a vacuum

 Is dynamic, rather than static (performance scenarios across the TSR
spectrum)
 Can be viewed both historically (in actual terms), as well as
prospectively (based on program design)
 Can evaluate pay vis-à-vis any number of peer sets or even
individual companies
 Assesses total compensation holistically. Includes “design and
decisions”
 Gives strong guidance as to whether pay is aligned with
performance, or not
16
Fair Pay, Fair Play: Aligning Executive Performance and Pay
17

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September 20, 2010

The Holy Grail: Aligning Executive

Robin Ferracone, Executive Chair, Farient Advisors LLC

© 2010 Farient Advisors LLC - All rights reserved

 In 2008, 20 of the top 25 institutional investors were interviewed by

 Investors are concerned about it

Data Point = 2006

Copart Inc. CEO PACTM

Annualized $30 Prior CEO Program:

Absolute Highest Paid CEOs Chevron CEO PACTM

during the 3-year period ending in 2003

Industrials Sector CEO PACTM Company and Proxy Peers

1. Alignment is always relevant; don’t ignore it when TSR is high

2. Ask for Farient’s Alignment Report

3. Vote with your voice before your feet

 Assesses pay relative to performance, not in a vacuum

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