United Defense ----------------------------------------
STANDARD POLICY NO. UDLP - COMP-003
----------------------------------------
--------------------------------------------------------------------------------
EFFECTIVE DATE: January 1, 1998
TITLE: REV. LEVEL: None
UDLP MANAGEMENT INCENTIVE PLAN SUPERSEDES: None
APPLICABILITY: UDLP-Wide
--------------------------------------------------------------------------------
Description of Changes: Initial release
--------------------------------------------------------------------------------
CONTENTS
PAGE #
2 MANAGEMENT INCENTIVE PLAN
2 Philosophy
2 General Features
3 Setting Targets and Objectives
4 Business Performance Measurement
4 Strategic Performance Measurement
4 Incentive Calculation
4 Summary
MANAGEMENT INCENTIVE PLAN
Philosophy
The UDLP Management Incentive Plan (often called the Bonus Plan) is a variable
cash based incentive plan designed to focus management attention on performance
factors important to the continued success of their business unit and the
company overall. Achievement of high standards of business and individual
performance should be rewarded financially and conversely, significant
compensation should be at risk for failing to achieve those high standards.
The opportunity to earn compensation in addition to base salary is an integral
part of our total compensation approach. The Management Incentive Plan serves as
a direct link between a participant's compensation and the performance of a
business unit or the company overall.
General Features
Participants are senior managers in a position to significantly affect the
performance of their business unit. These are generally managers with
responsibility across an entire business unit, i.e. headquarter executives;
division and other general managers; and selected functional managers at the
division, and headquarter levels. Only those participants who are full-time UDLP
employees at the end of the incentive period are eligible to receive an award.
1
Target incentive compensation is over and above the base salary. It is a
function of the annual results, both by the individual and the relevant business
unit.
Base salary levels are established using competitive comparisons. The target
incentive compensation, a percent of base salary, is similarly determined, thus
ensuring the competitiveness of UDLP's total target compensation. Base salary
and target annual incentives are considered competitive total compensation.
Actual incentive awards may range from zero to two hundred percent of target.
The target incentive percent varies from 15 to 65 percent of base salary,
depending on the participant's salary grade.
Incentive awards are not guaranteed. The plan requires reasonable risk on the
part of the participant, commensurate with potential reward-an opportunity to
raise total compensation significantly above the target opportunity.
Setting Targets and Objectives
Key to an effective and equitable management incentive plan are the quality,
realism and stretch of the targets and objectives. In setting these targets and
objectives we focus on high standards continuous improvement and participant
involvement.
Incentive award targets and performance measurements are built around two basic
factors: business performance (BPF) and strategic performance (SPF). The
weighting of those factors, can vary from one business unit to another,
reflecting the relative importance of business to individual performance for
that unit during any one incentive period. However at the present time, all
units are on 80% BPF and 20% SPF. Between them, business (BPF) and strategic
(SPF) performance factors total 100 percent.
The business performance factor (BPF) uses financial performance measures
important to the business unit. Currently, cash flow and Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) are the primary business
performance measures. Budgets as well as past and expected future performance
results are the criteria used in setting BPF targets. Each business unit has its
own cash flow targets. These are reviewed and approved by headquarters.
Achievement of the business performance targets results in a 1.0 BPF rating.
Strategic performance (SPF) objectives are set annually for each participant.
They are intended to be significant results that need to be achieved if the
business unit's strategic and overall performance objectives are to be realized.
Strategic performance objectives are important personal objectives directly
related to a participant's major responsibilities. For example, these objectives
could include such areas as market and/or customer share improvement; cost
improvements; globalization; pricing; inventory levels; introduction or
improvement of products, processes or systems; health, safety and environmental
performance; management development; or
developing a diverse, innovative and productive team. In almost all cases, SPFs
should include a manager's responsibility for management development and
achieving the company's diversity objectives.
Business Performance Measurement
Actual business performance is adjusted to level the effect of currency
translations, accounting changes, R&D investments, acquisitions costs, land
sales, strategic restructuring costs, capital expenditures, etc. Adjusted
performance results are compared with the previously set targets and the zero
(0) and two (2.0) performance levels. This comparison results in a business
performance factor (BPF) rating for each business unit that is somewhere on a
scale of zero to two.
Strategic Performance Measurement
Strategic performance (SPF) objectives are mutually agreed to by the participant
and his or her manager. These objectives, should be documented, along with the
results expected and measurements to be used. In rating SPF performance,
achievement of SPF objectives, overall job performance, response to unplanned
major events and contributions to the overall management team are all to be
considered. Performance is rated using the entire zero to two spectrum. Guides
for strategic performance rating are provided.
Incentive Calculation
To determine a participant's incentive, both performance factors, BPF and SPF
are rated and weighted according to the predetermined split. The two results are
totalled and multiplied by the participant's incentive-year base salary earnings
(pro-rated for partial-year participation) to determine the actual incentive.
Summary
UDLP's Management Incentive Plan is a major element in its Compensation system.
This plan is an integral part of our competitive total compensation program,
offering incentives and rewards offset by commensurate risk.
Participants are individually selected from among those managers whose decisions
significantly affect UDLP's performance.
Business and strategic performance targets and objectives are set in areas that
require focus and emphasis in the current year including actions intended to
execute longer term strategies. Performance is rigorously measured against the
targets, objectives and on an overall basis.
Both business unit and individual performance affect incentive awards.
Business Performance Factor
Guidelines for Objective Setting and Evaluation
The 1.0 targets are the levels at which the unit is expected to perform for the
year. Each
unit's budget is the primary starting point for 1.0 target levels. No incentive
is paid for results at or below the zero level, and twice the target incentive
is paid for results at or above the 2.0 level.
--------------------------------------------------------------------------------
Factor Example Targets at:
--------------------------------------------------------------------------------
0 1.0 2.0
--------------------------------------------------------------------------------
Cash Flow 41.8 Mil 63.4 Mil 106.5 Mil
--------------------------------------------------------------------------------
Earnings Before Interest,
Taxes, Depreciation and
Amortization (EBITDA) 61.8 Mil 65.7 Mil 69.6 Mil
--------------------------------------------------------------------------------
. The 1.0 targets are established at levels judged to have a 50/50
chance of attainment and the zero and 2.0 extremes are balanced in
terms of reasonable achievement and relative risk.
. Targets are first developed by division management. The CEO and
appropriate staff discuss the targets and agree upon zero, one and
two levels.
. In determining the business performance ratings, actual
performance is adjusted to level the effect of currency
translations, accounting changes, R&D investments, acquisition
costs, land sales, strategic restructuring costs, capital
expenditures, etc.
. Adjusted performance results are compared with targets which
results in a BPF rating for each business unit that is somewhere
on the scale of zero to two.
STRATEGIC PERFORMANCE FACTOR
Guidelines for Objective Setting and Evaluation
Each participant submits strategic performance objectives in
writing to his/her manager. Performance objectives are based on the major
responsibilities assigned to the individual and are related to the business
units strategic and/or UDLP's overall performance objectives.
. To develop individual performance objectives, each participant
must understand and commit to the operating units business and
human resources strategies.
. Participants should review their major responsibility areas. Each
MRA should be reviewed to determine the results that must be
accomplished to ensure the business unit meets or exceeds its
operating and strategic objectives. This activity assists in
identifying high-priority performance needs.
. The two to five most important individual objectives should be
submitted to the next higher level manager for review and
approval.
Objectives should state results required ensuring that the
performance can be measured. In many cases, measurement of results can not be
quantified. When this quantification is not possible, there should be a clear
statement of the criteria that will be used to judge the accomplishment of the
SPF. For example, if the SPF is to develop a strategic plan, success is not
determined primarily by a plan being developed on time but rather the quality of
thinking that the plan portrays. The SPF should lay out the criteria to
determine the quality.
Measurements enable the participant and manager to determine
whether the objective or a portion of the objective has been successfully
achieved.
. Objectives should be stated in measurable terms and should include
timing.
. Objectives should identify specific achievements expected and not
merely restate major responsibilities or plans to accomplish them.
. Objectives should be realistic with some stretch and be based on
actual conditions.
. The degree of difficulty may vary among the objectives. A priority
ranking or assessment of relative difficulty, included in the
objectives statement, will be of value during the review to
determine the strategic performance factor rating.
In determining the strategic performance rating, the following are
considered:
. The accomplishment of annual objectives and the significance of
those objectives to overall business unit results.
. Degree of difficulty of the objectives.
. Overall performance of major responsibilities including
self-development.
. Performance in response to unanticipated circumstances or
opportunities.
. Contributions to the management team and important corporate
initiatives.
Two exhibits are included to use in the SPF rating process.
Guidelines for Evaluating Overall Performance: creates five general levels of
performance with definitions of possible performance and a suggested range of
ratings for each.
Guidelines for Evaluating Objectives: shows a matrix of the five SPF levels
against four possible degrees of difficulty for the objectives being evaluated
and a guideline range of ratings for each.
GUIDELINES FOR REVIEWING OVERALL PERFORMANCE
FOR STRATEGIC PERFORMANCE RATING (SPF)
Management Incentive Plan - United Defense LP
Was this helpful?