Overview of Relative TSR Plans

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As accounting and disclosure rules change, employers are turning away from traditional stock option plans and full value shares in a quest for more innovative programs that better align employee rewards with prevailing market conditions.

Relative Total Shareholder Return (TSR) programs are rapidly gaining ground among Fortune 1000 companies, as a means to drive superior performance and link it to broad-based financial rewards. In short, such programs deliver rewards based on the relative standing of an organization among its peers, with a rich upside opportunity.

Let's take a closer look at the basics of a typical TSR program. Awards are granted at the beginning of a three-year period across a broad spectrum of employees. At the end of the period, the awards vest according to a schedule reflecting the organization's ranking within an established index such as the S&P 500. A typical vesting schedule follows:

In our example, the upside opportunity kicks in when your TSR exceeds the median of a comparator group, with a maximum outperformance payout of 200%.

The chart below outlines the value delivered to an employee holding either 3,000 traditional stock options, 1,000 time-based restricted stock units (RSUs) or 1,000 Relative TSR units. All three vehicles are assumed to be granted when the Company’s stock is trading at $10.00. Stock options have the greatest leverage if the Company’s stock price appreciates after grant, as demonstrated by the steep red line in Figure 3. RSUs, illustrated with the green line, don’t have as much upside leverage as the options, however they maintain significant value when the Company’s stock price depreciates below $10.00 whereas the options fall underwater and are worth nothing.

The blue line in the chart above is the payout curve for a Relative TSR plan (assuming the Comparitor Group median TSR is 10% annually). Dividing the chart into three "zones" enables us to discuss the advantages of Relative TSR over the other two vehicles.

• Zone 1 — Downside
  - Provides performance-based retention value when options otherwise fall underwater
  - Avoids RSUs' straight-lined "giveaway" often criticized by shareholders
• Zone 2 — Reasonable Upside
  - Greater upside leverage than RSUs
  - Similar to or greater upside than options
• Zone 3 — Outlying Upside
  - Greater leverage than RSUs
  - Tempers what is often criticized by shareholders as "windfall" gains from options
  - Does not excessively reward risk, as the outlying upside returns are less leveraged compared to stock options

For further information on plan design considerations, please consult our Relative TSR Plan Design Whitepaper. To learn more about how Radford can assist in the design of your equity incentive program, contact one of your Radford consultants.

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Jon Burg jburg@radford.com Brett Harsen bharsen@radford.com Matt Ward mward@radford.com	Terry Adamson tadamson@radford.com Ted Buyniski tbuyniski@radford.com Ed Speidel espeidel@radford.com