PIN Wave 6: Sales Compensation

1. PIN Wave 6: Sales Compensation

2. Agenda • Background • Goals and objectives • Variable pay structure • Incentive • Roll-in and Timing • Advantages/Disadvantages • Targets • Other • Appendix

3. Background • Overall sales compensation structure not as effective as it could be • Too complicated; “PhD in Compensation Science” to understand; limited line of sight • Variable component not meaningful • Incentive targets out of touch with reality; not motivational • PIN formed to explore new plan • Conducted research to ground the process in market comparables • Confirmed variable at-risk pay is well below industry averages--5% NP vs 20% industry • Overall compensation in line • Attainment levels over past two years below recommended target of 70%+ Low variable component; competitive overall comp Source: Source: Hewitt 2008; Watson Wyatt 70%+ Source: Society for Human Resource Management

4. New Plan Goals and Objectives • Goals of the program • Provide on-going motivation to the sales team for delivering revenue • Ensure an adequate balance between compensation and business results • Reward people based on performance • Help attract and retain talent • Easy to understand and adaptable to a changing market conditions • Key objectives of the program • 20% variable pay = Target (in line with industry data) at end-state • Tiered to encourage stretch and continuous performance; differentiates performers • Desired 70% at or above Target Payout • Manage the change in a manner that is respectful and responsible toward people’s personal obligations • Structure should remain consistent, but provide flexibility in targets to respond to changes in the market (up or down) • Simple, visible, and drives behavior

5. Variable Incentive • Payouts based on a percentage of base salary • Determined versus performance versus an individualized target • Must achieve at least a minimal level of performance to achieve (-10% target) • Percentage increases with performance; linear with a “bump” when reach target • Differences in base pay will reflect varying degrees of responsibility, performance, territory size, and skills within the selling organization • Increased responsibility on base comp management

6. Payout Timing • Movement to semi-monthly payments (once every two weeks) • Base Wage = month-end • Variable Wage = 15th of the month following the performance • Payouts based on cumulative performance • Risk of overpayment carried by business in year 1; helps to ease team into the program and reduce anxiety • Proposed mechanism to correct, if needed • If, at the end of the year, the person was “overpaid”, their balance carries forward into the next year; earn it back • For example, if a rep “owed” NP $1,000 (earned/paid in Jan, though full year should have earned $0), the rep would start out the following year at ($1,000)—meaning they would need to earn over $1,000 to begin receiving variable pay • In the event that a person is separated before “all is square”, overpayment amount is reduced from severance or final paycheck

7. Plan Roll-in • Three-year roll-in plan • Moratorium on merit increases for the sales team to right size the base (improve variable/fixed ratio) • Exception for base pay remediation, if warranted • Variable incentive % to increase annually; performance is the sales team’s mechanism to earn more money • ~2x the opportunity in variable incentive vs. merit increases; balance of risk/reward • One program for all employees • New hires brought in at end-state program

8. Advantages/Disadvantages

9. Targets • Variable incentive will be paid based on performance vs targets • Different roles will have targets tailored to their responsibilities • Process to set targets • Overall business direction provided to ASD’s • Targets are established by the ASD’s for the territories in their region • Multiple mechanisms used mathematically influence the target • Discretion to modify based on extraneous factors • [Apply curvature to the target; facilitates monthly payout] • Calibration session if regional roll-up • Ensures alignment with business objectives • If a large gap is present, challenge session to reconcile between ASD’s and business leadership team • Territory target reviewed with sales rep • Explanation of the factors that went into shaping the target and why its reasonable; chance for rep to ask questions • Not a negotiation

10. Other • At least once per year, a mid-period status check on the relative success of the program will be performed • Recommend check-up performed after Q2 • Success measured by % of employees at or above target (goal = 70%) • Ability to adjust targets, but only under unusual circumstances • Each employee will review a compensation worksheet (that details the program and targets) • ASD’s to review 1-1 with the employees to ensure comprehension of plan and targets • On-going scorecard (vs. targets) to be provided on monthly basis, with desired daily “reminder” (in development)

11. Appendix—ASD Framework to Set Target • Targets allow for management discretion; more subjective than prior variable compensation bases • Helps accommodate the strategic actions of the business • Allows to be more realistic (e.g. incorporate a decline, if appropriate) Territory projection by customer (strat acct plan) PY sales adjusted for anticipated market performance Territory Target Discretionary Adjustments Starting point • Distribution changes • Strategic entry/exit of new products • Known changes in large end-use pieces of business • Product revisions • Territory performance (A) (B) = (C) 3-yr Territory CAGR applied to PY Sales

12. Appendix—ASD Framework in Action—an Example Assumes 2009 Territory Sales = 10.2 million Strat Acct Plan= 9.6 PY Sales (market fcst -10%) = 9.2 Territory Target = 9.7 Discretionary Adjustments Starting point* = 9.0 • + 0.2 million color copy • + 0.2 million prem opaque • +0.5 million market rebound • 0.2 million distribution • +0.7 million total adjustments 3-yr CAGR (-18%) applied to PY = 8.4 (A) (B) (C) = *Assumes equal weighting in the example, though real life doesn’t need

13. Appendix—Example CAGR Analysis • Avg territory = $9.8 million