Download So Everyone is Using Market Conditions: Great! What Does that

So Everyone is Using Market Conditions:
Great! What Does that Mean?
SPEAKERS
Kevin McDonald, Director, Executive Compensation, Covidien (US)
Dr. Thomas Schmalberger, Head of Reward & Organizational Effectiveness, OC Oerlikon, (CH)
David Tuch, Partner, New Bridge Street, an Aon Hewitt Company (UK)
MODERATOR
Jon Burg, Associate Partner, Radford, an Aon Hewitt Company (US)
“Market Condition” – an accounting term
• Market condition – vesting of share award is related to
share price e.g.:
• Absolute Share price target
• Absolute TSR target
• Relative TSR target – Company’s TSR vs. comparator
group or vs. index
• Non-market condition – vesting related to condition not
related to share price e.g.:
• Growth in EPS
• Return on equity
Brief history
• Initially companies used non market based performance
conditions such as growth in EPS over 3 year period but:
• Increasingly difficult to set robust targets
• Company’s don’t always like setting/disclosing targets
• Shareholders expect targets to get harder if strong
past performance/prospects look easier but not
weaker if poor past performance/prospects look
tougher
• Use of relative TSR targets deals with many of these
issues (note shareholders don’t like absolute share price
or TSR targets)
About OC Oerlikon
OC Oerlikon provides innovative industrial solutions for the efficient and clean production of Food,
Clothing, Transportation Systems, Infrastructure, Energy and Electronics.
Headquartered and publicly traded (OERL) in Switzerland, we are present in 34 countries world wide
with about 160 sites and nearly 13 000 employees.
Three years ago we sharpened our mission …
•Strive to be your most reliable business partner, worldwide.
•Increase value through high-quality innovative industrial solutions, continuously.
•Engage highly qualified professionals.
•Our commitment is your success!
… and re-launched our core values …
Integrity, Team Spirit, Excellence and Innovation
… preparing the ground for a philosophy of «Best-in-Class».
«Best-in-Class» designates the position in a peer group relating to operational and market performance
and applies equally to financial results, processes and culture. Topics range from operational
excellence and procurement efficiency to health, safety and environmental standards and employee
engagement levels. All functions are encouraged to compare against peers to learn and improve.
The success is reflected in business results.
2012
Revenue (in MCHF) 2’906
EBIT (in MCHF)
421
Net Income (in MCHF) 385
Diluted EPS
1.16
P/E Ratio
8.77
2011
2’731
318
224
0.68
7.40
( 6.4%)
(31.4%)
(71.9%)
(70.5%)
(15.6%)
2010*
4’182
51
5
0.01
490.0
( 16%)
(>100%)
(>100%)
(>100%)
* Incl discontinued business
Starting in 2011, we adapted our compensation strategy to the best-in-class philosophy and plan to
have it implemented globally by the end of 2013.
• Spun from Tyco International in 2007
• Is a global medical device and pharmaceutical manufacturing
company with nearly $12 Billion in annual revenue
2012 Sales by Segment
Medical Supplies
$1.8B
2012 Sales by Geography
Other Americas
$0.7B
Asia-Pacific
$1.9B
Pharmaceuticals
Medical Devices
$2.0B
$8.1B
United States
$6.6B
Europe
$2.7B
 Medical device products in the
endomechancial, soft tissue
repair, energy, airway &
ventilation, oximetry &
monitoring and vascular markets
 Generic and branded
pharmaceuticals, active
pharmaceutical ingredients,
contrast agents and delivery
systems, radiopharmaceuticals
 Medical supplies including
wound care, incontinence,
needles and syringes, enteral
feeding, operating room kits and
accessories
Our Mission
Create and deliver innovative healthcare solutions, developed
in ethical collaboration with medical professionals, which enhance
the quality of life for patients and improve outcomes for our
customers and our shareholders.
Our Vision
Deliver unmatched value to our customers by providing solutions
that improve patient outcomes and healthcare delivery through
clinically relevant and economically valuable innovation.
So how does a relative TSR target work?
% vesting
• Most common – Company vs. Peer Group
• Companies in an index (e.g. FTSE
100)
• Bespoke group of companies
• Less common – Company vs. Index –
• Often used when small number of
comparators available
• Recognised index (e.g. FTSE 100)
• Index of bespoke group of companies
10 0 %
80%
60%
40%
20%
0%
Median
Upper quartile
Co TSR performance vs. peers
% vesting
10 0 %
80%
60%
40%
20%
0%
Index
Index + X% p.a.
Co TSR performance vs. Index
Compensation Strategy
Attract the finest talent and to motivate and reward
best-in-class performance through
Base salary aligned to market level
STI aimed above the market level and at all
managers and professionals
LTI aligned to market level and for Global
Leaders
LTI
Pay Level
LTI
STI
Base
Previous
STI
Base
Current
Pay-for-(Long-Term) Performance
• The Long-Term Incentive (LTI) is a three-year equity program aimed at
motivating Global Leaders to plan and act with a long-term view.
• Eligibility in the LTI program was enlarged from some 30 to some 130
Global Leaders.
• The LTI is specifically designed for rewarding the relative increase in
total shareholder return compared to the total shareholder return of
relevant peers.
• Peers are the 27 companies we compare ourselves to in terms of
operational performance as well as shareholder return.
Company
Sector
Company
Sector
Jingwei
Textile
Bodycote
Coating
Lakshmi
Textile
Kennametal
Coating
Rieter Textile
Textile
Praxair
Coating
Schweiter
Textile
Sandvik tooling
Coating
Am Axle
Drive Systems
General Electric
Industry Group
Brembo
Drive Systems
Siemens
Industry Group
Carraro
Drive Systems
GEA
Industry Group
Dana
Drive Systems
Sumitomo
Industry Group
Bharat Gears
Drive Systems
Thyssen Krupp
Industry Group
BorgWarner
Drive Systems
ABB
Swiss Industry Group
Atlas
Vacuum
Sulzer
Swiss Industry Group
Gardner
Vacuum
Georg Fischer
Swiss Industry Group
Inficon
Vacuum
OC Oerlikon
Swiss Industry Group
Ingersoll Rand
Vacuum
Pfeiffer
Vacuum
Upper Quartile
Market Median
LTI Plan Design – Performance Share Awards (PSA)
LTI 2012
2012
LTI 2013
2013
2014
2013
2014
2015
2014
2015
LTI 2014
Starting Value: VWAP over first 30 days of Year 1
Ending Value: VWAP over last 30 days of Year 3
Performance Condition – Total Shareholder Return (TSR)
Relative TSR
Rank 3 of peer group or above
Rank 10 of peer group
Rank 15 of peer group
Rank 20 of peer group or below
Payout Factor
200% (Max.)
100%
80%
0%
Vesting Period
2016
Performance Period
Pay-for-(Long-Term) Performance
Target PSA
X
Payout
Factor
=
Effective
Shares
Example
Rank
3
CHF 10’000 /
VWAP°10.00 =
PSA 1’000
10
PSA 1’000 *
Factor 1.5 =
PSA 1’500
OERL 1’500 *
SP 11.00 =
CHF 16’500
15
20
°VWAP over the first ten trading days after publication of the previous
year’s financial results.
Payout Factor
Covidien’s Executive Long-term
Incentive Structure
Performance Share Payout Curve and
Healthcare Industry Index
Capped at 2.0x
RSUs
20%
Stock
Options
40%
Performance
Shares
40%
 Stock options and RSUs have four year prorated
vesting
 Performance shares have a three year cliff vest based
on total shareholder return against an industry index
 Employee equity mix is 50% stock options and 50%
RSUs
No payout below 30th
percentile
3-year total percentile performance vs.
healthcare industry index (below)
Abbott
CareFusion
Stryker Corp.
Baxter Int’l
Hospira
Teleflex
Becton, Dickinson
Johnson & Johnson
Thermo Fisher
Boston Scientific
Medtronic
Zimmer Holdings
C.R. Bard
Owens & Minor
Cardinal Health
St. Jude Medical
Selecting a bespoke peer group
low
Volatility vs. Correlation for each potential
peer company
70%
high likelihood of
achieving both
maximum and zero
payouts; average
result fairly high
high
TSR
VOLATILITY
(RELATIVE
TO PEER
GROUP)
payouts vary
significantly but on
average fairly high;
outcomes have little
perceived link to
company
performance
TSR
volatility
60%
50%
40%
30%
moderate variance
of outcome about
median, leading to
partial payout in
some years
company generally
close to median,
leading to low
average payout
low
high
Example of how to interpret volatility and
correlation analysis
20%
10%
0%
0%
low
high
10%
20%
low
TSR CORRELATION WITH PEER GROUP
Ideal
position
The low correlations of these
companies suggests they
might not be appropriate
peers
30%
40%
50%
high
60%
TSR
correlation
The high correlations of the larger
companies suggest they would
still be appropriate peers
Why do shareholders like relative TSR?
• Alignment of interests
• Removes scope for management gaming the setting of
target range
• Should take out impact of external factors that impact on
performance i.e. should be a robust measure irrespective
of general economic conditions/position within a cycle
• Should show how management have performed vs. their
competitors
• In theory, TSR should take account of all performance
indicators and market’s view of future performance
Challenges with TSR Performance Share Plan
• Initially, performance shares were granted to all
employees
• Until first payout, plan was not widely understood or
valued
• Changes in index due to corporate transactions
• Continued pressure to align plan with market
• Communication was a challenge; solved by PeerTracker
Overall plan has been a success with positive feedback from
executives, the Compensation Committee and shareholders
Three Challenges
Introducing equity-settled compensation requires some learning in terms of:
• Investors, in addition to customers, suppliers and staff
• Insider trading regulations
Replacing an accounting-based with a market-based LTI plan requires a change in
mindset from:
• My division to my corporation
• My business presentation to our equity story
• My business performance to our stock performance
In addition, building an LTI plan on a «Best-in-Class» philosophy requires a change in
mindset from:
• My comfort zone (good and better) to the edge (best)
More issues to consider with relative TSR?
• Can be seen by management as a lottery
• Can be difficult to select an appropriate comparator
(group of companies or index)
• Lack of clear line of sight between actions taken by
management and results
• Potentially difficult for management to see how they are
doing unless TSR vs. published index
LTI Communication
Webinar Series
Twice a year we offer webinars to new and existing LTI Participants to present the LTI plan in the context of the
compensation strategy, explain the plan design and demo the Administration and Communication Platform.
Administration and Communication Platform
We offer LTI participants an administration and communication platform from a third party to support the election of annual
allocations, monitor the performance and value of their unvested and vested grants and transfer or sell their vested shares.
Performance and Payout Tracker
Within the administration and communication platform we provide participants with daily updates of the total shareholder
return of Oerlikon and its peers as well as the associated payout factor of their grant.
Performance
Payout Factor
Administration & Communication Platform
Questions?
Thank You!
Jon Burg, FSA
Radford, an Aon Hewitt Company
[email protected]
Kevin McDonald
Covidien
[email protected]
David Tuch
New Bridge Street, an Aon Hewitt Company
[email protected]
Dr. Thomas Schmalberger
OC Oerlikon
[email protected]