Long-Term Incentive & Executive Compensation Model

Part 1: Tool Blueprint & Overview

This section outlines the foundational design, philosophy, and components of the toolkit.

1.1. Primary Objective

• To provide the Compensation Committee with a clear framework and actionable models to design an executive compensation plan that balances short-term financial results with long-term strategic integrity goals. The goal is to create a system that explicitly rewards leaders for how they achieve their results, not just what they achieve, thereby making integrity a core driver of both behavior and financial reward.

1.2. Key Components

• A. The Guiding Principles Document: A short, powerful document for the Compensation Committee outlining the core principles of an integrity-based compensation philosophy. This serves as the "charter" for the redesign process. (Content detailed in Part 2).

• B. A Library of Model Frameworks: A set of different, customizable models for structuring executive compensation. This will include examples of how to incorporate non-financial metrics (derived from the Board-Level Integrity Dashboard) into annual bonus calculations and long-term incentive plans (LTIPs). (Content detailed in Part 3).

• C. The Compensation Committee Briefing Deck: A presentation template that a CHRO or CEO can use to present a proposed new compensation model to the Compensation Committee and the full Board, including the business case and a risk assessment. (Content detailed in Part 4).

1.3. Core Concepts of the Toolkit

• 1. Balancing the "What" and the "How": The core concept is to move beyond purely financial KPIs. This toolkit provides methodologies for designing a formula that meaningfully incorporates both financial results (The "What") and demonstrated alignment with company values and strategic integrity initiatives (The "How"). This sends an unmistakable signal to the executive team that cultural leadership and ethical conduct are not "soft skills" but are hard-wired, non-negotiable components of their performance.

• 2. Mitigating Unintended Consequences: Every incentive plan creates the risk of "gaming the system." A plan that rewards a reduction in safety incidents, for example, could inadvertently lead to the under-reporting of incidents. This toolkit emphasizes the need to pressure-test any new compensation model to ensure it doesn't create new perverse incentives. The goal is to design a system that is robust against manipulation and rewards genuine, holistic performance.

• 3. Rewarding Long-Term Stewardship: In a world driven by quarterly earnings pressure, it is the board's duty to create incentives that focus leadership on the sustainable health of the enterprise. The framework promotes the use of multi-year performance periods, long-term vesting schedules, and non-financial strategic milestones to encourage leaders to act as patient and responsible stewards of the company, building a resilient organization that can thrive for decades.

Part 2: The Guiding Principles Document

This document is intended to be formally reviewed and adopted by the Board's Compensation Committee. It serves as the foundational charter for all executive compensation design and review activities.

A Charter for Integrity-Based Executive Compensation

Preamble:

Our company's long-term success depends on a culture of integrity and a deep commitment to creating sustainable value for all our stakeholders. We recognize that our executive compensation program is one of the most powerful tools we have to signal our priorities and shape leadership behavior. Therefore, this charter establishes the guiding principles that will govern the design, implementation, and review of all our executive incentive plans.

Our Five Guiding Principles:

1. Our Incentives Must Reward "Whole Performance."

• We reject the notion that financial results are the only measure of success. Our compensation model will be explicitly designed to reward both The What (the achievement of financial and operational goals) and The How (the alignment of a leader's behavior with our company's core values). A leader who achieves their financial targets by undermining our culture will not be considered a top performer.

2. Our Incentives Must Foster Long-Term Stewardship.

• We are building a company for the long term. Our compensation model will therefore be heavily weighted toward rewarding sustainable, multi-year performance. We will favor long-term incentive plans (LTIPs) with multi-year performance periods and vesting schedules to encourage our leaders to act as stewards of the enterprise, not as traders focused on the next quarter.

3. Our Incentives Must Be Tied to Our Strategic Integrity Goals.

• Our commitment to integrity is not separate from our business strategy; it is our strategy. Therefore, a meaningful portion of our incentive compensation will be directly linked to the achievement of the non-financial, strategic integrity goals approved by the Board. These may include metrics related to employee engagement, customer trust, and progress on our key sustainability and ethical initiatives, as tracked on our Board-Level Integrity Dashboard.

4. Our Incentives Must Be Simple and Transparent.

• A compensation plan that is too complex is a plan that cannot be trusted. We will strive to design plans that are easy to understand, with clear and direct links between performance and rewards. We commit to being transparent with our shareholders and employees about the structure and rationale of our executive compensation programs.

5. Our Incentives Must Be Rigorously Pressure-Tested for Unintended Consequences.

• We acknowledge that every incentive plan carries the risk of creating perverse incentives. Before implementing any new plan, we will conduct a thorough risk assessment to identify potential unintended consequences. We will build in checks and balances, including discretionary modifiers and clawback provisions, to mitigate these risks and ensure the plan rewards genuine performance, not clever gamesmanship.

Adoption:

By adopting this charter, we, the members of the Compensation Committee, commit to using these five principles as the non-negotiable foundation for all our future decisions regarding executive compensation.

Part 3: A Library of Model Frameworks

This section provides two distinct, customizable models for integrating integrity-based metrics into executive compensation. These are designed to be starting points for the Compensation Committee's design process.

Model A: The "Balanced Scorecard" Annual Bonus Model

This model uses a formulaic approach to calculate the annual executive bonus, giving a clear and transparent weighting to both financial and non-financial performance.

Structure:

The annual bonus is determined by two main components: a Financial Performance Factor and a Strategic Integrity Factor.

Bonus Calculation Formula (Example):

Target Bonus x (Financial Performance Factor x [60%-80%]) + (Strategic Integrity Factor x [20%-40%]) = Final Bonus Payout

Determining the Right Weighting:

The ideal split between financial and strategic integrity factors is a key strategic decision for the Committee. We recommend a range of 20% to 40% for the Strategic Integrity Factor.

• A 20% weighting is a strong starting point for a company just beginning this journey, making a clear but prudent statement.

• A 30% weighting represents a balanced and confident approach, suitable for most companies committed to this framework.

• A 40% weighting is a bold, market-leading stance, appropriate for a mission-driven company or one where brand trust and culture are the primary drivers of value.

1. The Financial Performance Factor (Example Weighting: 70%):

• This is based on 2-3 of the company's most critical, audited financial metrics.

• Example Metrics: Revenue Growth (30%), EBITDA Margin (25%), Free Cash Flow (15%).

• Payout Scale: Each metric is measured against a pre-set target, with a payout curve.

2. The Strategic Integrity Factor (Example Weighting: 30%):

• This is a scorecard of 3-4 key non-financial goals, drawn directly from the Board-Level Integrity Dashboard.

• Example Metrics: Customer Trust (NPS) (10%), Employee Engagement (VPCB Score) (10%), Strategic Initiative Progress (10%).

• Payout Scale: Each metric is assessed against its target, resulting in a weighted average score.

3. The "Values Modifier" (Discretionary Override):

• The Committee retains the discretionary authority to apply a "Values Modifier" to the final bonus payout to account for exceptional individual behavior not captured in the scorecard.

• Guidance for Application: This modifier is a critical tool for addressing the "talented terror" problem—a leader who hits their numbers but damages the culture. The Committee should use the "Whole Performance Matrix" (from the Ethical Alignment Cascade toolkit) as a guide.

• -10% to -25% Reduction: Considered for a leader who, despite hitting scorecard targets, is assessed as a "Talented Terror" due to documented evidence of behavior that violates the company's values (e.g., creating a toxic team environment, repeated compliance failures).

• 0% (No Adjustment): The standard application for leaders who meet behavioral expectations.

• +5% to +10% Recognition: Considered for a leader who demonstrated exceptional integrity or cultural leadership in a crisis or a particularly challenging situation, going far beyond the expectations of their role.

Model B: The "Strategic Gating" Long-Term Incentive Plan (LTIP) Model

This model is for multi-year (e.g., 3-year) equity or cash plans and is designed to ensure that a large payout is only possible if the company has been a responsible steward of its culture and values.

Structure:

The LTIP has two components: a Financial Performance Gate and a Strategic Integrity Multiplier.

LTIP Calculation Formula:

Target LTIP Award x Financial Performance Payout x Strategic Integrity Multiplier = Final LTIP Vesting

1. The Financial Performance Gate (The "What"):

• Based on a primary long-term financial metric (e.g., relative TSR). If a minimum threshold is not met, the entire award pays out at zero. This ensures that the plan is only funded when a baseline of shareholder value has been created.

2. The Strategic Integrity Multiplier (The "How"):

• If the financial gate is passed, the final payout is determined by a multiplier (e.g., 0.8x to 1.2x) based on the achievement of 2-3 critical, long-term integrity goals.

• Example Goals for the Multiplier:

• Achieve and maintain top-quartile employee engagement scores for three consecutive years.

• Meet the company's publicly stated multi-year sustainability targets (e.g., 30% carbon reduction by 2025).

• No significant (Class A) compliance or ethical breaches during the performance period.

Part 4: The Compensation Committee Briefing Deck

A Presentation for Adopting an Integrity-Based Executive Compensation Model

This is a complete presentation template for a CEO or CHRO to make the case to the Board's Compensation Committee for adopting a new executive compensation model aligned with the Logos Ethica framework.

Slide 1: Title Slide

Aligning Incentives with Integrity: A Proposed New Executive Compensation Model

A Presentation to the Compensation Committee

[Your Company Name]

[Date]

Slide 2: The Strategic Context (Principle 1)

Headline: Why This Conversation Matters Now

• The Evolving Nature of Risk: In today's transparent world, non-financial risks—such as reputational damage, ethical lapses, and the loss of key talent due to a toxic culture—have become material threats to long-term shareholder value.

• The Power of Incentives: Our executive compensation plan is the single most powerful signal we send about what we truly value as an organization. It is a critical tool for shaping behavior and driving our strategic priorities.

• Our Fiduciary Duty: As a board, our fiduciary duty requires us to ensure that our incentive structures are not only driving financial performance but are also proactively mitigating these critical non-financial risks.

Slide 3: The Problem with Traditional Models

Headline: The Hidden Risks of a Purely Financial Focus

A compensation model based solely on financial metrics, while simple, creates two significant, often hidden, risks:

1. It Incentivizes Short-Termism: An intense focus on quarterly or annual financial targets can inadvertently encourage leaders to sacrifice long-term health for short-term gains—for example, by cutting corners on quality to meet a shipping deadline or by underinvesting in critical R&D.

2. It Tolerates "Talented Terrors": It can reward leaders who hit their financial targets but do so in a way that damages our culture, burns out their teams, and creates a toxic work environment. The financial cost of the resulting employee turnover and loss of innovation is real and significant.

Slide 4: Our Philosophy: Rewarding "Whole Performance"

Headline: Moving from "What" to "What + How"

We propose a shift to a more complete and resilient definition of success: "Whole Performance."

• The "What" (Results): The achievement of specific, measurable financial and operational goals. This remains critically important.

• The "How" (Behaviors): The way in which those results are achieved, measured against our company's core values and strategic integrity goals.

By formally measuring and rewarding both dimensions, we send an unambiguous message: we are an organization that values not just victory, but honorable victory.

Slide 5: Our Five Guiding Principles

Headline: A Proposed Charter for Our Compensation Philosophy

We ask the Committee to formally adopt these five principles as the charter that will govern all our future compensation design:

1. Reward "Whole Performance": Our model will explicitly reward both results and behaviors.

2. Foster Long-Term Stewardship: Our model will be heavily weighted toward rewarding sustainable, multi-year performance.

3. Tie to Strategic Integrity Goals: A meaningful portion of incentive pay will be linked to our key non-financial goals (e.g., employee engagement, customer trust).

4. Be Simple and Transparent: Our plans will be easy to understand, with clear links between performance and rewards.

5. Pressure-Test for Unintended Consequences: We will rigorously assess all new plans to mitigate the risk of "gaming the system."

Slide 6: Proposed Model for Annual Bonus

Headline: The "Balanced Scorecard" Model

• Structure: The annual bonus will be calculated using a formula that balances financial and non-financial performance.

• Formula: Target Bonus x (Financial Factor x 70%) + (Strategic Integrity Factor x 30%) = Final Bonus

• Financial Factor (70%): Based on our 2-3 most critical, audited financial metrics (e.g., Revenue Growth, EBITDA Margin).

• Strategic Integrity Factor (30%): Based on 3-4 key non-financial goals from our Board-Level Integrity Dashboard (e.g., Customer Trust Score, Employee Engagement Score, Progress on Sustainability Goals).

• The "Values Modifier": The Committee will retain the discretionary authority to apply a +/- 15% "Values Modifier" to the final payout to account for exceptional individual behavior (positive or negative) not captured in the scorecard.

Slide 7: Proposed Model for Long-Term Incentives (LTIP)

Headline: The "Strategic Gating" Model

• Structure: This model for our multi-year (3-year) plan is designed to ensure a large payout is only possible if the company has been a responsible steward of its culture and values.

• Step 1: The Financial Performance Gate: The plan is only funded if a minimum threshold of long-term financial performance is met (e.g., relative Total Shareholder Return vs. peers). If this gate is not passed, the payout for all executives is zero.

• Step 2: The Strategic Integrity Multiplier: If the financial gate is passed, the final payout is determined by a multiplier (e.g., from 0.8x to 1.2x) based on the achievement of 2-3 critical, long-term integrity goals.

  • Example Goals:

    • Achieve and maintain top-quartile employee engagement scores for three consecutive years.

    • Meet the company's publicly stated multi-year sustainability targets.

    • No significant (Class A) compliance or ethical breaches during the performance period.

Slide 8: Risk Assessment & Mitigation (Principle 5)

Headline: Proactively Managing Unintended Consequences

• Risk 1: "Gaming the Metrics"

  • Example: A focus on improving employee engagement scores could lead to managers pressuring their teams for positive ratings.

  • Mitigation: We have selected a balance of metrics (e.g., engagement, turnover, hotline data) to create a holistic picture of culture. The discretionary "Values Modifier" also allows the Committee to adjust for behavior that meets the letter but not the spirit of the goals.

• Risk 2: "Perceived Lack of Objectivity"

  • Example: An executive might dispute a negative assessment on a "soft" metric like culture.

  • Mitigation: The non-financial metrics are drawn directly from data presented in the Board-Level Integrity Dashboard (e.g., survey results). The process for applying the "Values Modifier" will be documented, based on the "Whole Performance" framework, and applied consistently.

Slide 9: Communicating the New Plan to Build Trust (Principle 4)

Headline: Our Rollout Plan is Designed for Transparency

• Our Commitment: How we communicate this new plan is as important as the plan itself. Our goal is to build trust and clarity, not confusion.

• Key Communication Actions:

  • Leadership First: We will hold a dedicated session with all senior leaders to explain the new model in detail and equip them to answer questions from their teams.

  • All-Hands Meeting: The CEO will announce the new philosophy to the entire company, explaining the "why" behind the change.

  • Clear Documentation: We will publish a simple, one-page summary of the new incentive models on our company intranet, so every employee can see how leaders are measured.

Slide 10: Recommendation & Next Steps

Headline: Seeking Approval to Build a More Aligned Incentive System

• Recommendation: We recommend that the Committee approve the "Balanced Scorecard" model for the upcoming annual bonus plan and the "Strategic Gating" model for the next LTIP cycle.

• Next Steps:

  1. Formally adopt the "Charter for Integrity-Based Executive Compensation."

  2. Work with our external compensation consultant to finalize the specific metrics and targets for the [Year] plan.

  3. Present the final, detailed plan to the Committee for final approval at the next meeting.