HomeMy WebLinkAbout20170724Attachment 11A.pdf2016 EXECUTIVE OFFICER
ANNUAL CASH INCENTIVE PLAN
PLAN PROVISIONS
Approved by Board February 2016
Purpose: The Executive Officer Annual Cash Incentive Plan (Plan) is designed to align
the interests of our NEOs and senior management with both shareholder and customer
interests to achieve overall positive financial and operational performance for the
Company. The Plan is an important element of the overall compensation of our
executives which provides a compensation structure that is competitive with
compensation paid to comparable executives of companies within the energy/utility
industry and ensures the Company can attract and retain quality employees in key
positions to lead the Company.
Plan Year: January 1, 2016 – December 31, 2016
Eligibility:
All executive officers hired prior to October 1st and actively employed on December
31st of the plan year, are eligible to participate
Subsidiary officers are not eligible to participate
Other details available in section Exceptions to Eligibility and Circumstances for
Proration
Performance Measurements: The Plan focuses on shareholders and customers by
providing value through sound financial performance and controlling costs through driving
efficiencies while paying close attention to our customers’ voices regarding the products
and services we provide. The Plan incorporates Earnings per Share (EPS) and Operating
& Maintenance Cost per Customer (O&M CPC) as financial performance measurements
plus three non-financial measurements: Customer Satisfaction Rating (Customer
Satisfaction), Reliability Index (Reliability), and Dispatched Gas Emergency Response
Time (Response Time). These performance goals help increase shareholder value, gain
financial strength and maintain safe and reliable cost-effective service levels essential for
our customers and for the long-term success of the Company, and, with the exception of
the earnings per share goal, are identical to performance metrics used in the Company’s
annual cash incentive plan for non-officer employees. The Compensation Committee
believes that having similar metrics for both the officer plan and the non-officer plan
encourages employees at all levels of the Company to focus on common objectives.
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Consolidated Diluted EPS - This metric reflects the financial strength and alignment of
interests between officers and shareholders. Consolidated EPS includes Alaska
Electric Light & Power (AEL&P) and other non-utility businesses within the
corporation.
O&M CPC - The O&M CPC is a measure that focuses on controlling costs and driving
efficiencies in order to keep our costs reasonable for our customers. The metric is
based on targeted O&M expense and number of customers. These components are
combined to create the O&M CPC metric.
Customer Satisfaction - This measure is derived from a Voice of the Customer survey,
which is conducted each quarter by an independent agency. The rating measures the
customer’s overall satisfaction with the service they received during a recent contact
with the Company’s contact center and/or service center.
Reliability - This measure tracks how quickly the Company restores outages, how
frequently customers are affected by outages and what percent of customers
experience more than three sustained outages per year. The Company combined
three common industry indices in order to balance our focus.
Response Time - This measure tracks how quickly the Company responds to dispatched
natural gas emergency calls. The primary objective is customer and public safety
while consistently treating customers the same throughout our service territory.
Award Opportunity: The Plan has five
independent metrics, each having their own
goal to achieve. The Plan is sliced into
pieces – like a pie. Each piece or
component makes up a portion of the
employee’s total incentive award
opportunity as represented in the graph.
Consolidated EPS makes up 60 percent of
the total incentive award opportunity while
O&M CPC is 20 percent, customer
satisfaction and reliability each 8 percent,
and response time 4 percent.
Non-financial metrics: The non-financial pieces of the award (customer satisfaction,
reliability, and response time) are all-or-nothing goals. If the Company meets or
exceeds the target goal for any one of the metrics, employees receive 100% of the
incentive award percentage related to the metric such as 4% for response time. If the
Company fails to meet the target, employees would receive no award related to the
metric. For example, if the Company achieves Customer Satisfaction with a 90% or
better rating, employees would receive 8% of their total incentive award opportunity. If
the Company achieves 88% which is below the target, employees would receive no
award related to the metric. This works the same for each non-financial measurement.
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The maximum amount an employee could receive related to the non-financial metrics
is 8% for customer satisfaction, 8% reliability and 4% response time.
Financial metrics: The Consolidated EPS and O&M CPC metrics work a little differently
due to the various performance levels that can be met. Depending on the Company’s
level of performance under each metric, employees may earn more or less than 100%
of the award percentage related to each financial metric. Increasing levels of
performance are established between threshold and maximum by using a sliding
scale. The following graphs
represent the relationship
between the Company’s
performance targets and the
award opportunity.
Performance levels were
rounded up for graphing
purposes only.
For employees to receive at
least 50% of their award
percentage related to the
metric the Company must
achieve or surpass the
minimum or threshold level of
performance. The better the
Company performs, the more
employees may earn as seen
in the graphs. For employees
to receive 100% of their
award percentage related to
a financial metric, the
Company must achieve the
level of performance selected
for target. If the Company
performs above target level,
employees may earn up to a maximum of 167% (rounded up) for Consolidated EPS
and 150% (rounded up) for O&M CPC. Performance below threshold results in no
award payment for the related metric.
For example, if the Company achieves O&M CPC of $389.33 which is a performance
level of 62% (rounded), employees would receive approximately 12% (20% multiplied
by 62.0504% = 12.41008%) rather than 20% of their award opportunity related to
CPC. If the Company achieves $380.30 which exceeds target performance,
employees would receive approximately 28% (20% multiplied by 139.4527% =
27.89054%) rather than 20%. If the Company achieves an amount below threshold
such as $392.54, employees would receive no award related to the O&M CPC metric.
The maximum an employee may earn under the EPS portion of their total incentive
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award opportunity is 100% (60% multiplied by 166.666666% = 99.999996%) and 30%
(20% multiplied by 150.0000% = 30%) for O&M CPC.
For ease of communication and display purposes performance levels may be rounded
using the accounting rules such as to the nearest whole number or up to two
decimals. To calculate actual payments and to ensure no overpayments occur the
performance levels within the sliding scale actually extend out six (6) decimal places
(ex. 166.666666%) for Consolidated EPS and four (4) decimals (ex. 149.9430%) for
Cost per Customer. See Calculation of Awards section for more details on how
payments are calculated.
Establish Targets: The Compensation and Organization Committee of the Board
(Committee) in conjunction with management reviews and reestablishes the targets for
each measurement on an annual basis. The computations for this Plan are described
below:
Consolidated EPS: To determine the Consolidated EPS goal for the Plan, the Committee,
in conjunction with the Finance Committee of the Board and management, considered
and incorporated the EPS target range contained in the Company’s original publicly
disclosed earnings guidance and reviewed this in light of the budgeted EPS numbers.
The earnings guidance for the Consolidated EPS excludes the earnings impact
associated with changes in the Energy Recovery Mechanism (ERM). The target in the
Plan is Diluted Earnings per Share and includes executive incentive payout/accrual-
pro-forma and net of taxes. The actual Consolidated EPS results will be affected by
positive or negative changes in the ERM when computing the Plan payout.
Occasionally, adjustments to actual results may be deemed necessary. An example of
such an adjustment was in 2008 when the positive effect of an accounting error
related to Allowance for Funds Used during Construction (AFUDC) was excluded from
EPS.
The Company’s original 2016 guidance for EPS is $1.96 to $2.16. The projected ERM
benefit is $0.06, which is excluded for guidance. The Company used the low end of
guidance to set the threshold level, the midpoint to set target and the top for the
maximum level.
Since the portion of the incentive related to EPS indirectly benefits the customer it is
charged below the line to account 417.
O&M CPC: For this measurement the Company uses the total budget for O&M expense
(numerator) plus customer growth (denominator).
Numerator: The numerator of the formula is derived from the Company’s total budget
for O&M expense. Certain items are excluded from the total O&M budget such as,
Pacesetters and certain accounting adjustments. For each performance level, the
Company estimates the potential payout for the incentive which includes payroll
taxes and subtracts the result from the total O&M budget. The estimation is based
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on budgeted labor costs, employee job levels and the corresponding individual
target award opportunities.
To establish the performance levels between threshold and target, the Company
assumes a 1:1 ratio between O&M spend (solid line) and threshold and target
(dash line). Cost sharing occurs once we exceed target at 100%. Performance
levels between target and maximum assumes a 2:1 ratio between O&M spend and
target and maximum (disregarding the impact of customer growth). Achieving
maximum payout would result in an additional pre-tax expense of $3.14M of
incentive plus an additional $3.14M in savings. Therefore $6.28M in combined
savings is required to achieve the maximum payout. The chart above illustrates the
concept.
Denominator: The target uses a customer growth factor of 7,220, which is slightly
higher than both our 4 and 5 year averages, but aligns with our recent customer
growth experience. Variability in the final customer count will impact the amount of
O&M savings necessary to achieve an incentive payment. For example, missing
the growth target by 1,000 customers would require an additional savings of
approximately $387K to achieve the target level payout.
Customer Satisfaction: For this measure, the Company uses the ratings from question Q3
from the Voice of the Customer survey which measures the customer’s Overall
Satisfaction with the service they received in a recent contact through the Avista
contact center and/or service center. The Overall Satisfaction question from surveys
such as this is widely used in the industry for external reporting purposes. Rather than
using the standard “satisfied” rating, which is typically used in the industry, the
Company uses the average of the combined “satisfied” and “very satisfied” ratings. By
combining these two ratings the target is more difficult to achieve and more emphasis
is placed on serving the customer. In this Plan, the target is set at 90% very
satisfied/satisfied for the customer’s Overall Satisfaction rating.
Reliability: This index combines Customer Average Interruption Duration Index (CAIDI),
System Average Interruption Frequency Index (SAIFI) and Customer Experiencing
Multiple Interruptions (CEMI3). CEMI3 measures the percentage of customers that
experience more than three sustained outages in the year. The Company chose this
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level of outages over others because industry data received from JD Power’s
customer service surveys indicate that customers are more apt to be dissatisfied after
three outages. Providing safe and reliable energy to our customers is the backbone of
our business, therefore, it makes good sense to focus on service levels for our
customers. By focusing on these measurements it enables the Company to direct our
resources appropriately and efficiently in order to contain costs and plan for future
infrastructure upgrades that will benefit the customer.
To determine the target for the Reliability portion of the Plan, the Company sets a
separate target for each metric, weighs them equally and combines them into one
metric (see the formula below). In this Plan the target is set at 1.00.
Index = CAIDI Target / CAIDI Actual + SAIFI Target / SAIFI Actual + CEMI3 Target / CEMI3 Actual
3 3 3
The formula used to set the target for each metric is described below:
Customer Average Interruption Duration Index (CAIDI): outage duration multiplied
by the number of customers affected for all sustained outages (> 5 minutes),
divided by the number of customers which had sustained outages. Per industry
practice Major Event Days (MEDs) are excluded from this metric. In this Plan the
Company uses a 5 year average with a standard deviation of 0.72 (76%
probability) to set the target which is 2 hours and 21 minutes restoration time.
System Average Interruption Frequency Index (SAIFI): the number of customers
which had sustained outages (> 5 minutes), divided by the number of customers
served. Per industry practice MEDs are excluded from this metric. In this Plan the
Company uses a 5 year average and a standard deviation of 0.72 (76%
probability) to set the target which is 1.11 outages per customer.
Customers Experiencing Multiple Sustained Interruptions more than 3 (CEMI3): the
total number of customers that experience more than 3 sustained outages per
year, divided by total number of customers served. To be consistent with the other
two indices, MEDs are excluded from this metric. In this Plan the Company uses a
5 year average with a standard deviation of 0.72 (76% probability) to set the target
at 6.9% of our customers.
Response Time: This metric measures how quickly the Company responds to natural gas
system emergency calls. The Company tracks the average response time between
the receipt of the emergency call to the time our crew or serviceman arrives on-site,
assesses the situation and reports back to dispatch. The Company wants crews
and/or serviceman to respond within the targeted response time goal. To be
consistent with other service metrics, response times in excess of 24 hours are
excluded from the metric. A “natural gas system emergency” is defined as an event
when there is a natural gas explosion or fire, fire in the vicinity of natural gas facilities,
police or fire are standing by, leads identified in the field as “Grade 1”, high or low gas
pressure problems identified by alarms or customer calls, natural gas system
emergency alarms, carbon monoxide calls, natural gas odor calls, runaway furnace
calls, or delayed ignition calls. In this Plan the Company aligns the response time with
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the Service Reliability Target negotiated with the Washington Utility Commission and
set the target goal to respond within an average of, and not to exceed, 55 minutes.
Incentive Targets for 2016:
Consolidated
EPS
O&M Cost
per
Customer
Customer
Satisfaction
Reliability
Index Response Time
% of Total
Opportunity 60% 20% 8% 8% 4%
Sliding Scale Meet/Not Meeting Goals
Minimum 50% $1.96 $390.00
Target 100%
Maximum 166.67%* $2.16
Maximum 150%* $378.45
*rounded for display or communication purposes only
Individual Target Award Opportunities: During the February Board meeting, the
Committee and the Chief Executive Officer (CEO) jointly review and approve the
individual target award opportunities for the participants of the Plan. Each eligible
employee has an incentive target award opportunity expressed as a percentage of their
base salary. Target opportunities range from 40% to 100% of base salary and are
assigned based on position. Actual award payments are calculated based on the
employee’s target award opportunity in effect as of December 31st and year-end regular
earnings unless otherwise noted in the Plan document (see provisions under Exceptions
to Eligibility and Circumstances for Proration section).
2016 Individual Target Award Opportunity
% of Base Pay by Position Type
CEO Senior VP VP
100% 60% 40%
Distribution of Awards: If earned, incentive award payments will be distributed as soon
as feasible usually in February after the Compensation Committee of the Board certifies
and approves the achievement of the performance goals.
Calculation of Awards: In most instances actual amounts will be calculated using the
participant’s regular year-end earnings (as defined in the provisions section of the Plan),
individual target award opportunity and employment status in effect as of December 31st
of the Plan year. See the section Exceptions to Eligibility and Circumstances for Proration
for definitions and exceptions.
For purposes of calculating the actual payments and to ensure no overpayments or
underpayments occur, the final performance results will be extended out six (6) decimal
places (ex. 166.666666%) for Consolidated EPS and four (4) decimals (ex. 149.9323%)
for Cost per Customer and rounded based on accounting rules. The following table shows
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how an overpayment can occur if the final performance level is rounded to two decimals
and used to calculate the final payment.
Since the non-financial metrics have only two performance levels, 0% or 100%, rounding
the final results is not an issue.
Once the total incentive amount is calculated, all cash payments will be rounded to the
nearest penny (ex. $22,855.27) based on accounting rules.
Example Award Calculation: Below is an example of the methodology the Company will
use to calculate final payments.
The Company achieved the targets indicated below:
1) Consolidated EPS = 166.666666% on the sliding scale
2) Cost per Customer = 148.6468% on the sliding scale
3) Customer Satisfaction = 100% = met/pass
4) Reliability = 100% = met/pass
5) Response Time = 0% = fail to meet
Non-CEO Average Earnings = $290,000 Average Target Opportunity = 48% = $139,200
Goal Opportunity Weighting % Results Amount
Consolidated EPS $139,200 x 60% x 166.666666% = $139,200.00
Cost per Customer $139,200 x 20% x 148.6468% = $41,383.27
Customer Satisfaction $139,200 x 8% x 100% = $11,136.00
Reliability $139,200 x 8% x 100% = $11,136.00
Response Time $139,200 x 4% x 0% = $0
Total Payout = $202,855.27 or 145.73% of Target
Communication: When communicating the results of the financial metrics and the
payout, the Company will round results to the nearest 100th percent based on accounting
rules. For example, if the O&M CPC result is 148.6468%, the Company will communicate
the results using 148.65%.
When communicating the results of the non-financial metrics, the Company will round
results to the nearest whole number or, in the case of reliability, out two decimal points
based on accounting rules. For example, customer satisfaction would be rounded to 93%
from 92.8% and reliability would be 1.23 from 1.232.
Recoupment Policy: All incentive awards earned by a participant under this Plan are
subject to the Recoupment Policy adopted by the Company’s Board of Directors as
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amended from time to time (“Recoupment Policy”). If a participant becomes subject to the
Recoupment Policy any award may be forfeited in whole or in part and all or part of any
distribution payable to a participant or his or her beneficiary under this Plan may be
recovered by the Company pursuant to the Recoupment Policy.
Administration of Plan: The Committee is responsible for administering the Plan and
may delegate specific administrative tasks to corporate staff, as appropriate. The
Committee has the authority to:
Terminate, amend or modify this Plan in whole or in part for any reason at any
time without prior notice to participants
Modify or adjust financial targets due to extraordinary occurrences and/or
significant reorganizations
Grant discretionary awards up to 15% of the individual target award
opportunity
May pay incentive amounts in excess of 100% (up to 150%) of an individual’s
target opportunity in the form of non-cash equivalents
Participation in this Plan should in no way be construed as a contract or promise of
employment and/or compensation.
Exceptions to Eligibility and Circumstances for Proration:
Pay Periods: There are 26 pay periods and pay dates during the Plan year. A pay period
(pp) is made up of two pay weeks. Each pay week typically starts 12:00am Monday
and ends 11:59pm Sunday. Employees are paid on the pay date on the following
Friday, after the end of the pay period. The first pay period of the year consists of the
date range 12/28/2015 – 1/10/2016 which is paid on pay date 1/15/2016. Changes
effective during this pay period will count towards the 2016 plan since the earnings
and pay date are part of 2016. Changes effective during the dates 12/26/2016 –
1/08/2017 are not included in the 2016 Plan because the earnings and pay date are
part of 2017.
Pay Period Schedule for 2016:
Pay Period Date Range Pay
Date Pay Period Date Range Pay
Date
1 12/28/2015 – 1/10/2016 1/15 14 6/27 – 7/10 7/15
2 1/11 – 1/24 1/29 15 7/11 – 7/24 7/29
3 1/25 – 2/7 2/12 16 7/25 – 8/7 8/12
4 2/8 – 2/21 2/26 17 8/8 – 8/21 8/26
5 2/22 – 3/6 3/11 18 8/22 – 9/4 9/9
6 3/7 – 3/20 3/25 19 9/5 – 9/18 9/23
7 3/21 – 4/3 4/8 20 9/19 – 10/2 10/7
8 4/4 – 4/17 4/22 21 10/3 – 10/16 10/21
9 4/18 – 5/1 5/6 22 10/17 – 10/30 11/4
10 5/2 – 5/15 5/20 23 10/31 – 11/13 11/18
11 5/16 – 5/29 6/3 24 11/14 – 11/27 12/2
12 5/30 – 6/12 6/17 25 11/28 – 12/11 12/16
13 6/13 – 6/26 7/1 26 12/12 – 12/25 12/30
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Proration: Prorating an employee’s award is based on the number of pay dates
associated with a change. Each change of status (COS) has an effective date. The date
determines which pay period and pay date is to be counted as part of the proration.
Use the Pay Period Schedule above to count the pay dates. Using the effective date
from the COS, search through the date ranges to find the pay period and pay date
associated with it. Count the pay dates to the end of the Plan year or to the next COS
effective date whichever comes first. The employee receives 1 pay period credit for each
pay date counted.
For example:
Employee #1 is hired on 5/10 and remains employed through the end of the year.
The date 5/10 falls in the date range associated with pay period 11 which is paid
on pay date 5/22. Since employee #1 worked till the end of the year count the
number of pay dates till the end of the year. The employee receives 17 pay periods
towards his award.
Employee #2 is hired on 9/22 and remains employed through the end of the year.
Her date falls in pay period 21 and is associated with pay date 10/9. She receives
7 pay periods towards her award.
Employee #3 receives credit for his time working in a non-union position. He
transfers temporarily from a union position to a non-union position on 5/20 and
returns to his regular union position on 12/6.The transfer date of 5/20 falls within
pay period 12 which is associated with pay date 6/5. The returning date of 12/6
falls within pay period 26 which is associated with pay date 12/18. Count the
number of pay dates starting with 6/5 and end with 12/4 which is the pay date prior
to the next COS date of 12/6. He receives 14 pay periods of credit towards the
non-union portion of his incentive award. Remember you only count the pay
periods until the next COS date or until the end of the year whichever comes first.
He also receives 12 pay periods credited (26-14=12) toward his union incentive
award.
Pay Period Date Range Pay Date EE #1 EE #2 EE #3
10 4/20 – 5/3 5/8
11 5/4 – 5/17 5/22 1
12 5/18 – 5/31 6/5 1 1
13 6/1 – 6/14 6/19 1 1
14 6/15 – 6/28 7/3 1 1
15 6/29 – 7/12 7/17 1 1
16 7/13 – 7/26 7/31 1 1
17 7/27 – 8/9 8/14 1 1
18 8/10 – 8/23 8/28 1 1
19 8/24 – 9/6 9/11 1 1
20 9/7 – 9/20 9/25 1 1
21 9/21 – 10/4 10/9 1 1 1
22 10/5 – 10/18 10/23 1 1 1
23 10/19 – 11/1 11/6 1 1 1
24 11/2 – 11/15 11/20 1 1 1
25 11/16 – 11/29 12/4 1 1 1
26 11/30 – 12/13 12/18 1 1
Total Pay Periods 16 6 14
Staff_PR_011 Attachment A Page 10 of 12
Regular Earnings: Regular earnings will be used in calculating the final awards. The
earnings to be used in the calculation are as follows: earnings designated regular
(earnings code 01, 02, 32), light duty (29), Swing Shift (31), alternative/dual (20), relief
pay (08), retro pay (70), One Leave (10, 14, 15, 16), short-term disability 100% and 60%
(18, 80), workers compensation (19, 19A, 85, 85c, 86, 87, 88), holiday (25, 75), jury duty
(35), and military pay (36, 36c).
New Hires: Employees hired on or after October 1st will not be eligible for an award
under this Plan. Employees hired prior to October 1st will have their awards calculated
based on the provisions detailed above.
Leave of Absence: Eligible employees on approved unpaid leave of absence must have
at least 6 full pay periods of active service during the Plan year to receive an award.
Awards will be calculated based on the provisions detailed above. Short-term
disability leave does not affect an eligible employee’s award and is excluded from this
provision.
Resignation/Termination: Any eligible employee who resigns or is terminated for
reasons other than retirement, disability or death prior to December 31st will not be
eligible to receive an award under this Plan. Eligible employees who terminate after
the Plan year may receive an award at the time of distribution unless reason for
termination is due to poor performance or for cause, see section on Discipline or Poor
Performance below.
Death, Long-term Disability & Retirement: In the case of death, total disability (as
defined under the Company’s Long-term Disability Plan) or retirement (as defined
under the Retirement Plan for Employees), an eligible employee or estate must have
at least 6 pay periods of active service within the Plan year to be eligible to receive an
award. Awards will be calculated based on the provisions detailed above.
Discipline or Poor Performance: Employees who receive a fails to meet performance
rating for the Plan year or a Last Chance Agreement under the Company’s formal
discipline program and effective as of December 31st are not eligible to receive an
award under this Plan. Any employee who is terminated for poor performance or for
cause by the Company after December 31st and up to the time of distribution, will not
be eligible to receive an award under this Plan.
Transfers from Subsidiaries to Corp/Utilities: Eligible employees who transfer from a
subsidiary will be treated as a new hire to the Company and all Plan criteria apply as
is. Prorated awards are at the discretion of the Committee and CEO.
Other Company Short-term Incentive Plans: Employees can only participate under one
formal incentive plan a year. If the employee becomes eligible for a different plan
during the year, the Committee and CEO has full discretion to determine which plan
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the employee may receive an award under. Status and/or time in position may be
factors in determining whether the employee receives a prorated award from both
plans or from one plan based on the employee’s position and/or status as of
December 31st.
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