Schrodinger's Cat And Compensation

© Copyright 2013. Compensation Venture Group, Inc. All rights reserved.© Copyright 2013. Compensation Venture Group, Inc. All rights reserved.

Trends in Compensation:Schrödinger’s Cat is Alive (and Dead)

14th Annual Venture Capital Financing Conference

26-April-2013

Compensation Venture Group, Inc.www.compensationventuregroup.comfred@compensationventuregroup.com

© Copyright 2013. Compensation Venture Group, Inc. All rights reserved.

About the SpeakerFred Whittlesey is the founder and Principal Consultant of Compensation Venture Group (CVG), a West Coast consulting firm specializing in compensation strategy, director and executive compensation, equity-based compensation, and incentive design with a primary focus on entrepreneurial growth companies.

Fred’s consulting experience includes positions with Mercer, KPMG, Buck Consultants, and Hay Group. His corporate compensation experience includes the role of Director of Global Compensation for Amazon.com and Broadcom, and Chief Compensation Officer of Payscale.com.

Fred is co-founder and past Board member of the not-for-profit Global Equity Organization (GEO), a Founding Member of the National Association of Stock Plan Professionals (NASPP), past President of the NASPP Orange County chapter, past member of the NASPP Advisory Board, and a current member of the Advisory Board of CompensationStandards.com. He also is past Chair of the Advisory Board for the Certified Equity Professional (CEP) Institute at Santa Clara University.

Fred was a top-rated faculty member and certification course developer for 13 years for WorldatWork's "Accounting and Finance for HR Professionals" as well as the basic and advanced executive compensation courses, delivering instruction both in the classroom and online.

He has authored dozens of articles in major compensation periodicals and has presented his ideas at compensation conferences around the world. His published works include “Say on Pay’s Impact on Equity Plan Design: Horse or Camel?” in GEOnomics 2012; “The Governance Ups and Downs of Performance Plans” in GEOnomics 2011; “Understanding Executive Pay Equity and Fairness: Ratios and Rationality” in WorldatWork Journal; “Behavioral Economics and Equity Compensation” in GEOnomics2009; and “Measuring the ROI of Compensation Expenditures” in The Compensation Handbook.

Fred received his MBA with Distinction from UCLA and a BA in industrial/organizational psychology from San Diego State University where he graduated Magna Cum Laude and Phi Beta Kappa. He has earned the Certified Equity Professional (CEP), Certified Executive Compensation Professional (CECP) and Certified Compensation Professional (CCP) designations.

© Copyright 2013. Compensation Venture Group, Inc. All rights reserved.© Copyright 2011. Compensation Venture Group, Inc. All rights reserved.

Compensation Venture Group

Equity Interests andAdvisory Roles

Professional Roles

Online Content

Pay and Performance: The Compensation Blog

Conscious Compensation: The Impact Compensation Blog

Effective Equity: The Equity Compensation Blog

Compensation

Consulting

3

Expert Witness


Presentation Outline

What you need to know as an…Entrepreneur InvestorBoard Member (Compensation

Committee)

Trends in Long-Term Incentive Compensation

Acceleration for Founders and Employees

Trends in Cash CompensationBase SalaryCash Bonuses

Schrödinger’s Cat and Compensation4


The Observer Effect in Compensation

• Observation

• Disclosure

• Complexity

5


What You Need to Know About Compensation Influences

6


Founding

7

InvestorsFounders

Board Members


Financing

8

Founders

InvestorsBoardMembers


Preparation for Exit

9

Founders Investors

BoardMembersBoards of

Private Companies

Boards of Public

Companies

Boards of Venture

Companies

Boards of Other

Companies


Life as a Public Company

10

Founders

VentureInvestors

BoardMembers

ProxyAdvisers

Institutional Investors

SEC

Media

Peer Companies


Life as a Public Company

11

Founders

VentureInvestors

BoardMembers

ProxyAdvisers


SEC

Media

Peer Companies


What You Need to Know About Compensation

Converging forces are affecting, and will continue to affect, the compensation culture and compensation design at emerging companies as they grow and mature – public company spillover

External forces are increasingly influencing companies’ compensation design, sometimes overweighted vs. strategy

Changes outside the US are quickly influencing US compensation in public companies

Also driven by external governance organizations with sociopolitical views influencing corporate governance ideas (e.g., excessive CEO pay, caps on banker bonuses)

Compliance and conformance are occupying the majority of compensation design discussions at the Board level

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What You Need to Know as an Entrepreneur

Exit is more likely as M&A than IPO Acqui-hire prevalence S-1s filed as “for sale” signs Need to re-forecast compensation potential

“No exit” is more likely than an exit Implications for equity compensation design

Employee exits are most likely of all

Liquidity event is likely much further in the future than vesting schedules’ duration

Consider status of equity upon termination Must decide on sharing with former employees vs.

retention focus13


What You Need to Know as an Investor Market norms are diverging from long-term patterns of

compensation for emerging companies

Changes in the form of equity: options-only to RSUs Not exit-contingent – employee liquidity in later

rounds Not value-increase contingent

Changes in the permanence of equity Vest-and-leave to termination-buybacks Performance-based option cancellations

Shareholder/proxy adviser influence continuing to change executive pay and employee pay

Dilution a bigger issue than executive pay Anti-stock option attitude

Institutional shareholder/proxy adviser view: 1/3/5-year TSR

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What You Need to Know as a Board (CC) Member

Pressure exists to make activist-compliant compensation decisions that may contradict business strategy, finance strategy, and business judgment

Say-on-pay and related litigation is personally targeting Committee members over:

Say-on-pay outcomes Proxy statement disclosures Section 162(m) (“million dollar cap”) policy and

practice Change-in-control arrangements

Litigation risk is driving risk-avoidance decision-making in plan design:

Proxy adviser good/bad lists Peer group norms “Best practice” mentality

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Continued backlash on dilution from employee stock plans

ESPPs still excluded from scrutiny - opportunity

Stock options not considered “performance-based pay” by ISS

Companies being “encouraged” to add performance conditions to both full-value awards and stock options for executives

Pre-transaction companies increasing use of RSUs due to

Market volatility Section 409A concerns Employee perceptions of value Increased interim liquidity offered by alternative

investors

The most creative LTI programs are “under the radar” and never reported in surveys or proxy statements

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Performance conditions on full-value shares (RSUPRSU)

Primarily for executives though being extended lower

Performance conditions on stock options

Stock ownership guidelines and holding periods

Often quietly coupled with a “special” RSU grant

“Portfolio approach” to long-term incentives

Options + RSUs + PRSUs + Cash LTI

Year-to-year changes in mix and performance measures 17


Trends in Long-Term Incentive Compensation: Example

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Name

Approval Date

Grant Date

Estimated Future

Payouts Under Non-Equity Incentive Plan Awards(1)

Estimated Future Payouts Under Equity

Incentive Plan Awards(2) All

Other Stock

Awards: Number

of Shares

of Stock or Units

(#)

All Other Option

Awards: Number of Securities

Underlying Options

(#)

Exercise or Base Price of Option Awards ($/Sh)

Grant Date Fair

Value ($)(3)

Threshold ($)

Target ($)

Maximum ($)

Threshold (#)

Target (#)

Maximum (#)

John J. Donahoe 3/28/2012 4/2/2012 — — — — — — — 170,068 36.59 2,000,000 3/28/2012 4/2/2012 — — — — — — 81,989 — — 2,999,978

eIP – company performance(4) N/A N/A 636,794 1,273,588 2,547,175 — — — — — — — eIP – individual performance(5) N/A N/A — 424,529 849,058 — — — — — — — PBRSUs (2012-2013 performance period) 3/28/2012 4/2/2012 — — — 34,162 136,649 327,958 — — — 5,849,985 PSUs (2012-2016 performance period) 3/28/2012 4/2/2012 — — — N/A 500,000 N/A — — — 14,880,000

Vesting Conditions* Portion of Performance Share

Unit Award Vesting eBay’s 2013 TSR or cumulative 2012-2013 TSR above the

median TSR for eBay’s 2012 peer group 20 % eBay’s 2014 TSR or cumulative 2012-2014 TSR above the



median TSR for eBay’s 2012 peer group 30 %



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Name

Number of Securities

Underlying Unexercised

Options (#)

Exercisable



Options (#)

Unexercisable

Equity Incentive

Plan Awards:



Unearned Options

(#)

Option Exercise

Price ($)

Option Expiration

Date

Number of Shares or Units of Stock

That Have Not

Vested (#)

Market Value

Shares or Units of Stock That

Have Not Vested ($)(1)

Equity Incentive

Plan Awards: Number

of Unearned

Shares, Units or Other Rights That

Have Not Vested

(#)

Equity Incentive

Plan Awards: Market

or Payout Value of

Unearned Shares, Units or Other Rights That

Have Not Vested ($)(1)

John J. Donahoe 260,400 0 0 31.93 3/1/2014

226,774 0 0 25.85 3/3/2015

258,891 0 0 25.85 3/3/2015

1,000,000 0 0 35.50 3/25/2015

258,891 0 0 24.93 9/1/2015

399,163 36,611 (2) 0 10.50 3/2/2016

343,750 156,250 (3) 0 23.88 3/1/2017

155,083 199,394 (4) 0 32.29 3/1/2018

28,345 141,723 (5) 0 36.59 4/2/2019

94,356 (6) 4,812,156

62,500 (7) 3,187,500

66,196 (8) 3,375,996

81,875 (9) 4,175,625

81,989 (10) 4,181,439

500,000 25,500,000 (11)

327,958 16,725,858 (12)



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(2) Focal grant. Becomes fully vested after four years; 6/48th of the grant vested on September 1, 2009, and 1/48th of the grant vests monthly thereafter.



(5) Focal grant. Becomes fully vested after four years; 6/48th of the grant vested on October 1, 2012, and 1/48th of the grant vests monthly thereafter.

(6) Focal grant. Becomes fully vested after four years, with 25% of the grant vesting on each of March 1, 2010, March 1, 2011, March 1, 2012, and March 1, 2013.



(9) PBRSU grant. Becomes fully vested after one year, with 50% of the grant vesting on the grant date (March 1, 2012) and the remaining 50% of the grant vesting on the one-year anniversary of the grant date (March 1, 2013).

(10) Focal grant. Becomes fully vested after four years, with 25% of the grant vesting on each of April 1, 2013, April 1, 2014, April 1, 2015, and April 1, 2016.

(11) Grant of PSUs. The PSUs vest based on the TSR of eBay common stock exceeding the median TSR of the companies in eBay’s 2012 peer group over annual performance periods from 2013-2016 or cumulative performance periods from 2012-2016. See “Compensation Discussion and Analysis — Elements of Compensation/Executive Compensation Practices — Equity Incentive Awards — Performance Share Units” above for a more detailed discussion of these multi-year performance share unit awards.

(12) Allocation of PBRSUs. Represents the estimated future award of performance-based restricted stock units at the maximum level (240% of target) under

the 24-month 2012-2013 performance period, assuming eBay meets the maximum threshold for non-GAAP operating margin and revenue growth and that the maximum return on investment capital modifier is applied. See “Compensation Discussion and Analysis — Elements of Compensation/Executive Compensation Practices — Equity Incentive Awards — Performance-Based Restricted Stock Units” above for a more detailed discussion of these target awards and related performance measures.


Life as a Public Company: Redux

21

Founders

VentureInvestors

BoardMembers

ProxyAdvisers


SEC

Media

Peer Companies


Acceleration for Founders and Employees

Single trigger CIC provision has long been a potential deterrent for M&A

One school of thought highlights the fairness of this vs. accelerating vesting for those fired

Now a “bad list” item for proxy advisers

Full acceleration – even double trigger – increasingly being questioned

One year of additional vesting increasing in prevalence

With M&A and acqui-hire transactions, some outstanding awards are converted and vesting time added: deceleration

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Trends in Cash Compensation Base salary levels continue to grow faster than

represented by surveys of “merit increases”

One-off adjustments unreported “Promotions” not included High turnover rates with increases not captured

Staying competitive on base salary requires more competitive intelligence than offered by surveys

Annual cash incentives/bonuses continue to evolve

Backlash from financial crisis about “risk incentives” Proxy adviser/investor pressure against discretion Non-GAAP measures Mandatory deferral Payment in restricted stock/units

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Schrödinger’s Cat and Compensation

Compensation practices have more observers than ever before

Observers have increased influence due to both technology (sec.gov) and the shareholder democracy movement

Corporate governance is disproportionately focused on executive and equity compensation and observers have become de facto plan designers

Recent research indicates that purported “good governance” practices of executive compensation observers are associated with shareholder value destruction, not creation

Current corporate governance concepts are in conflict with fundamental venture financing principles but creative design opportunities exist – no observers yet!

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Contact Information

Fred Whittlesey, CEP, CCP, CECP

[email protected]

www.compensationventuregroup.com

Compensation Blog: payandperformance.blogspot.com

Impact Compensation Blog: consciouscompensation.blogspot.com

Equity Compensation Blog: effectiveequity.blogspot.com

Twitter: @FredWhittlesey

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Schrodinger's Cat And Compensation

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