Executive Compensation and 409A Refressher

1. Executive Compensation and 409A Refressher Cynthia Boyle Lande BrownWinick 666 Grand Avenue, Suite 2000 Des Moines, IA 50309-2510 Telephone: 515-242-2476 Facsimile: 515-323-8576 E-mail: lande@brownwinick.com

2. Overview • Purpose • Equity Compensation • Internal Revenue Code § 409A • Public Company Shareholder Issues • Documentation

3. Purposes • Incentive past and future performance • Provide optimal tax treatment • Align the interests of the company’s executives with those of the company’s shareholders

4. Types of Equity Compensation • Options • Restricted Stock • Stock Appreciation Rights • Stock Bonuses

5. Stock Options • Two Types • Incentive Stock Options (ISOs) • Nonqualified Stock Options (NQOs)

6. Incentive Stock Options • Restricted to employees • Must be issued under a shareholder-approved plan designating the number of shares that may be issued and which employees may participate • Must be exercised while the participant is an employee or within 3 months following termination of employment

7. Incentive Stock Options (Continued) • Exercise term may not exceed 10 years • Exercise price may not be less than FMV as of grant date • Special rules for options granted to 10% shareholders • Limited to $100,000 per year per employee • Can be subject to vesting requirements

8. Incentive Stock Options – Tax Treatment • Holding Period Requirement • Must be held until the later of 1 year from the date of exercise or 2 years from the grant date • Treatment to employee: • Not taxable at time of issuance • Difference between sales price and exercise price taxable at capital gains rates • Treatment to company: • No deduction to the company

9. Nonqualifed Stock Options • Can be issued to non-employees • No exercise price or holding period requirements • Less favorable tax treatment to recipient

10. Nonqualified Stock Options – Tax Treatment • Generally subject to tax at ordinary income tax rates at time of exercise • Amount subject to tax: difference between FMV and exercise price • Exception: options with readily ascertainable FMV at time of issuance • Company entitled to tax deduction at same time and in same amount as optionholder • Capital gains treatment on sale

11. Restricted Stock • Stock issued to service providers but subject to transfer restrictions and potential forfeiture

12. IRC Section 83 • Property received in exchange for services is taxable at the earlier of the following: • The property is freely transferable; or • The property is not subject to a substantial risk of forfeiture • Deductibility to company mirrors tax treatment to service provider

13. Substantial Risk of Forfeiture • Exists only when service provider’s rights are conditioned on: • The performance of future services; or • The occurrence of a condition related to the purpose of the transfer. • Whether a risk of forfeiture is substantial is based on both of the following: • Likelihood of the forfeiture event; and • Likelihood that the forfeiture will be enforced.

14. Section 83(b) Election • Service provider may elect to include difference between FMV of stock and any amount paid in gross income in the year of issuance • Risk: cannot revoke if stock is subsequently forfeited

15. Stock Appreciation Rights • Right to receive amount equal to appreciation in value of underlying shares between the grant date and exercise date • Tax Treatment: • Ordinary income on exercise • Corresponding deduction to employer

16. Stock Bonus • Fewest restrictions • Fully taxable to service provider and deductible to company

17. 409A • When does it apply? • What does it require? • What if the employer violates 409A?

18. “Deferred Compensation” • “A legally binding right during a taxable year to compensation that, pursuant to the terms of the plan, is or may be payable . . . in a later taxable year”

19. Commonly Found In • Employment agreements • Severance agreements • Bonus plans • Equity compensation arrangements

20. Legally Binding Right • There is no legally binding right to compensation if the service recipient may unilaterally reduce or eliminate the compensation. • Example: Employee receives a bonus that will be paid over two years after the year in which the bonus is earned. The bonus provides that the employer may reduce or eliminate the amount owed at any time during those two years if the employer determines, in its discretion, that the employee’s performance is unsatisfactory.

21. Legally Binding Right • An employee may still have a legally binding right to compensation even if payment is conditioned upon future events or other objective criteria creating a substantial risk of forfeiture.

22. Legally Binding Right • Example: Under an incentive bonus plan, an employee will receive certain bonus payments upon the completion of certain service thresholds. The employer does not have the discretion to reduce or eliminate the bonus payments after the employee has reached the thresholds. • Example: Employment agreement provides that severance payments will be made only if the employee is terminated without cause.

23. Exceptions • Short-Term Deferral • Separation Pay Plans • Restricted Property

24. Short-Term Deferral • A deferral of compensation will not occur if the service provider actually or constructively receives payment within 2 ½ months following the year in which the service provider’s right to payment is no longer subject to a substantial risk of forfeiture.

25. Separation Pay Plan • Payment contingent upon an involuntary separation from service does not provide for deferred compensation to the extent that: • The amount of separation pay does not exceed two times the lesser of: • The service provider’s annual compensation, or • The amounts set forth under IRC Section 401(a)(17) • The plan provides that payment must be made no later than that last day of the second year following the year of separation

26. Involuntary Separation from Service • Includes separation for “good reason” • Involuntary separation from service: • Independent exercise of the unilateral authority of the service recipient, other than due to the service provider’s implicit or explicit request, where the service provider was willing and able to continue performing services

27. Involuntary Separation from Service • Separation for Good Reason: • Material negative change to the service provider in the service relationship, such as to duties to be performed, the conditions under which such duties are to be performed, or the compensation to be received for performing such duties

28. Good Reason Safe Harbor • The separation from service occurs during a period (defined under the plan and not to exceed 2 years) following the existence of one or more of the following conditions: • Material reduction in service provider’s compensation • Material reduction in the service provider’s authority • Material reduction in the authority, duties, or responsibilities of the service provider’s supervisor • Material reduction in service provider’s budget • Material change in geographic location at which service provider performs services • Material breach of agreement by service recipient

29. Good Reason Safe Harbor (Continued) • Amount, time, and form of payment is substantially identical to amount, time and form of payment due to an actual involuntary separation from service • Plan or agreement must require service provider to give service recipient notice of existence of condition within a period of 90 days, upon which the service recipient must have a period of at least 30 days to remedy the condition

30. Separation Pay Plan (Recap) • Payment contingent upon an involuntary separation from service does not provide for deferred compensation to the extent that: • The amount of separation pay does not exceed two times the lesser of: • The service provider’s annual compensation, or • The amounts set forth under IRC Section 401(a)(17) • The plan provides that payment must be made no later than that last day of the second year following the year of separation

31. Restricted Property • Amounts received by a service provider do not become deferred compensation merely because the value of property is not includible in taxable income at the time of receipt because the property is substantially nonvested, or because the value is includible in income solely due to a valid election under Section 83(b)

32. Requirements for Deferred Compensation • If a service provider can elect whether to defer compensation, the election must be made and become irrevocable prior to the first day of the taxable year in which the services will be performed. • Amounts deferred must be payable only upon the occurrence of certain specified events. • Deferred compensation cannot be accelerated or delayed, except in limited circumstances.

33. Allowable Payment Events • Separation from Service • Disability of the Service Provider • Death of the Service Provider • Fixed Time or Schedule • Change of Control of Service Recipient • Unforeseeable Emergency

34. Allowable Payment Events • Plan may designate only one time and form of payment for each payment event • Amounts will be treated as paid on date of specified event if paid: • In the same taxable year as event, or if later, by the 15th day of the 3rd month following the event, so long as the service provider is not permitted to designate the taxable year of payment • No earlier than 30 days prior to the designated payment date

35. Consequences of Failing to Comply • Compensation is immediately includible in income upon vesting • Additional 20% tax penalty • Increased interest rate • All taxes, penalties, and interest apply at the service provider level

36. Section 162(m) • Limits publicly held corporations to annual compensation deductions of $1 million per year for certain top-level executives • Exception: Performance-Based Compensation • Requires executives to meet objective performance goals approved by shareholders

37. “Say on Pay” • Dodd Frank Act • Stockholders have right to non-binding advisory vote on certain elements of deferred compensation • Companies must disclose whether their actions are consistent with Say on Pay votes

38. Documentation • Plan Document • Award Agreements • Board Approval • Shareholder Approval (if necessary) • Service Provider Elections

39. Website: www.brownwinick.com Toll Free Phone Number: 1-888-282-3515 OFFICE LOCATIONS: 666 Grand Avenue, Suite 2000 Des Moines, Iowa 50309-2510 Telephone: (515) 242-2400 Facsimile: (515) 283-0231 616 Franklin Place Pella, Iowa 50219 Telephone: (641) 628-4513 Facsimile: (641) 628-8494 DISCLAIMER: No oral or written statement made by BrownWinick attorneys should be interpreted by the recipient as suggesting a need to obtain legal counsel from BrownWinick or any other firm, nor as suggesting a need to take legal action. Do not attempt to solve individual problems upon the basis of general information provided by any BrownWinick attorney, as slight changes in fact situations may cause a material change in legal result.