Performace Bonus Study

Presentation to the Board

ASME

November 6, 2005

A Brief Overview of Bonus Plans and Issues

Appendix X

Mercer Human Resource Consulting 2

Background

ASME asked Mercer to present background information and facilitate a brief discussion regarding bonus programs, or more broadly stated, variable compensation programs

One of the goals of this overview is to begin to establish direction for a new, integrated, variable compensation program (recommended by COS and approved by BOG)

The material that follows closely parallels the pre-meeting reading materials on bonus programs

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Background (continued)

Discussion of Variable Compensation is one component of an integrated Reward System, which includes:

Compensation

Benefits

Career Opportunities

This integrated approach should:

Support strategic initiatives and business performance

Support an environment of learning, innovation, and continuous improvement

Maximize employee satisfaction and engagement

Create broader employee business knowledge

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Key Topic Areas

I. Definition of Variable Compensation

II. Basic Short-Term Program Definitions/Descriptions

III. Existing ASME Variable Compensation Programs

IV. Illustrative Program Development Issues

V. Representative Learnings

VI. ASME Integrated Variable Compensation Program

VII.Next Steps

Appendix X


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I. Variable Compensation These programs provide compensation awards that vary in size based on some combination of organization, unit, group and/or individual performance

A. Short-term Programs the performance measurement period is one-year or less

B. Long-term Programs the performance measurement period is longer than one year

Stock options are the most common vehicle Non-stock based plans are also frequently used Long-term programs are not the focus of todays discussion

QUESTIONS?QUESTIONS?

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II. Basic Short-Term Program Definitions/ Descriptions

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II. Basic Short-Term Program Definitions/Descriptions

A. Short-term Bonus Programs

Distinguished from incentive programs by the discretionary nature of the rewards

Typically, bonuses are given to individuals without prior objectives being established

Typical such programs:- Annual Bonus:

1. Given at close of year to recognize an individual or group2. Specific performance objectives have not been pre-established

- Spot Bonus1. Given periodically to individuals, team members, or a whole team for

significant accomplishments2. Typically specific objectives have not been pre-established

ASMEs current recognition bonus is a short-term bonus program- No specific objectives- Discretionary- Limited number of awards


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II. Basic Short-Term Program Definitions/Descriptions (continued)

B. Annual Individual Incentive Programs

These programs initially establish a specific performance and reward scenario

The incentive may be paid in an accounting period (month, quarter, year) or following an event (reaching an objective)

Typically, key measures and goals are specified at the beginning of the period

Often for industrial organizations the ranges of potential awards are also pre-determined (i.e., threshold, target, maximum incentive opportunities)

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B. Annual Individual Incentive Programs (continued)

Typically address:- Eligibility who can participate:

1. Can be defined based on; salary band/grade, reporting relationship, minimum salary

- Type of Plan:1. Performance Target (most common)

Individual/organizational goals established Target/threshold/maximum reward levels set

Award based on degree of achievement versus goals

2. Formula A formula generates an overall incentive pool Amount of an award often based on performance vs. goals

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B. Annual Individual Incentive Programs (continued)

Typically address (continued):- Performance measures generally, effective measures take into

account:

1. The business/operating plan

2. Results/behaviors the organization wants to reward

Individual, team, unit, organization-wide, or a blend of these factors


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C. Annual Group/Team Incentive Programs

These programs take into account group and/or individual performance The programs also establish a specific performance and reward scenario:

- Key measures/goals- Range of potential awards- Performance period/event- Organization Focus

1. Group organizational unit, department, sector

2. Team small number of members with complementary skills, committed to a common purpose

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C. Annual Group/Team Incentive Programs (continued)

- Performance measures can Involve:1. Organization objectives i.e., meeting financial targets (revenues,

profit, etc.)

2. Team/Group Objectives such as developing a new product/service, budget variances, etc.

3. Individual Objectives such objectives might include: demonstration of specific competencies, particular contributions, etc.


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III. Existing ASME Variable Compensation Programs

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III. Existing ASME Variable Compensation Program

A. ASMEs Current Programs are Annual Bonus Programs the societys current variable compensation programs are forms of bonus program

B. Not Incentive Programs ASMEs current programs are not formally incentive programs because:

No specific objectives Discretionary Very limited number of awards

C. Introduction of BSC Requires Compensation Carrot ASMEs BSC consultant has indicated the need for an effective variable compensation program

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A. What are the Basic goals of the Program

Several goals may be specified

Experience indicates that, initially, a limited number of goals is advisable

Representative questions regarding goals include:

- What messages does ASME want to send?- What behaviors does it want to reward?- What can ASME currently credibly recognize/evaluate?- Etc.

Program must be integrated with total rewards system.


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IV. Illustrative Program Development Issues (continued)

B. Funding/Probability of Pay-out

Experience has indicated that attempting to implement- A continuing program that:

Does not pay-out at a reasonable level in the first year

OR

Has a very limited probability of pay out in the second year

Can well have a significant negative impact on morale

For various reasons, including available funds, ASME to date has focused on a discretionary bonus program


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C. Award Levels

Market recent variable compensation practice

$24.1 $41.0$67.8 $93.5

$132.0

$218.4

$-$50

$100$150$200$250$300$350$400

$23 $39 $63 $85 $113 $168

Base Salary ($000)

November 2005

- Illustrative Analysis of 2005 U.S. Short-term Incentive Database Industrial & Not-for-Profit Practices -Representative Projected Total Cash Compensation Levels (Base Salary + Incentive) vs. Base Salary for

Organizations Reporting a Short Term Incentive Plan at Representative Salary Levels(1)(2)(3)

Market Average Award % 4.7% 5.0% 7.6% 10.0% 16.8% 30.0%

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(1) 2005 Mercer Benchmark Database, Data cut excludes Healthcare & Financial/Banking participants.(2) NOTE: Due to a number of factors, incentive survey data tends to be relatively volatile from year-to-year. Thus, the information above should be viewed as an

approximation of competitive practices.(3) Data excludes 0 bonuses

IV. Illustrative Program Development Issues (continued)Appendix X


C. Award Levels Market vs. ASME recent variable compensation practice

Illustrative Analysis of 2005 U.S. Short-term Incentive Database Industrial & Not-for-Profit Practices -

$24.1 $41.0$67.8

$93.5$132.0

$218.4

$-$50

$100$150$200$250$300$350$400

$23 $39 $63 $85 $113 $168

Base Salary ($000)

November 2005

Market Average Award % 4.7% 5.0% 7.6% 10.0% 16.8% 30.0%

ASME Average Awards % 0% 3.5% 4.0% 4.4% 5.8% 7.2% % ASME staff who Recd 0% 2.0% 15.0% 36.0% 56.0% 91.0% (Note: ASME data includes both the recent June and September Awards) Overall:

In a Normal Year the majority of employees in the market data receive some award. Comparatively few ASME employees receive variable compensation. When incentives are given at ASME, the average rewards are well below market norms.

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IV. Illustrative Program Development Issues (continued)Appendix X



C. Award Levels (continued)

ASMEs desired competitive positioning vs. both its past practices and current market practices:- Organizations often select a desired competitive posture vs. the market for target

bonuses

- ASME may decide to gradually improve the competitiveness of its variable compensation


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D. What Groups of Employees will be Eligible?

Typically specified in terms of salary bands/grades, reporting relationship, salary level, etc.

New programs often start with a relatively limited group and then, over time, are gradually expanded


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IV. Initial Issues Program Development (continued)

E. Performance Evaluation Includes establishing both appropriate measurement and processes

Measurement appropriate approaches for accurately/easily/creditably/ evaluating performance

AND

Processes approaches for easily accurately/credibly using measures


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IV. Initial Issues Program Development (continued)

F. Plan Development Approach

Agree on an overall approach for developing the new program- Time frame- Participants- Roles- Etc.

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A. Initially developing/implementing the program may take longer than expected

B. Organizations often start with a limited eligible group and then gradually expand participation

C. Incentive programs are frequently implemented from the top down

D. Assume that after the first year the program will benefit from fine tuning and plan for it

E. Simple/credible performance measurement is important

Dont be overly complex Allow for management judgment Not everything can be easily/credibly quantified

F. Effective program communication is important

G. Etc.

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The Society should strongly consider the development of an effective variable compensation program, Included in this process would be

A. Identification of the Plan Purpose(s) determination of key goals and objectives

B. Determination of the Plan Development Approach

Agreement on the basic development approach to be followedC. Budgeting, administration, etc.


Appendix X

VI. Next Steps

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VII. Next Steps

Board Discussion and agreement on overall approach for developing ASMEs new variable compensation program:

Form Integrated Project Team with Requisite Knowledge base it is anticipated that the project would be carried out by a team. It is recommended that staff would bring options to the table for review and approval.

Study Effort over Next 3-5 years as per BOG Action in COS Recommendation it is also anticipated that complete development and implementation will occur in phases over 3-5 years

Appendix X

Performace Bonus Study

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