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incentive plans ceo day october 27 2010 pwc contents · introduction total compensation employee participation trends · case study 4 start-up phases foundation investor · share purchase plans in general facts and figures · options in general facts and figures new hires sale of shares ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 2 1

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introduction elements of total compensation best practice considerations · participation in the long-term sustainable value creation prospective view ownership alignment through holding of equity investment skin in the game lti · enforcement of corporate culture and business strategy · alignment of interests of shareholders and management through ownership · short-term retrospective performance measurement quantitative and qualitative goals bonus · risk adjustment and use of non-financial metrics including discretion · more long-term oriented deferred mechanism and bonus bank · fixed compensation element representing market value of function base salary · functional grading system serving as basis for total compensation system · stronger focus on base salary pensions social security fringe benefits · important remuneration element long-term wealth accumulation · pressure on funding of liabilities asset performance and ageing of society · social security planning and compliance · tailored and tax efficient offering · cost control ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 3 introduction salary elements and their impact lti lti variable retrospective short-term business and individual goals fix equity prospective long-term bonus bonus direct `cash out for the company base salary pensions social security fringe benefits ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 4 2

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introduction stages in a company`s development equity e.g options equity e.g shares equity e.g shares equity e.g options bonus bonus bonus base base base base start-up ceo day 2010 incentive plans pricewaterhousecoopers growth consolidation recovery october 27 2010 slide 5 introduction specific design shareholders equity based compensation company participants pre-ipo participation start-up ipo participation ongoing participation ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 6 3

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introduction eligible employees eligible employees top mgmt middle management equity-based compensation employees ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 7 introduction basic equity-based compensation models overview sorted by underlying real vs phantom real equity participation option plans tradable nontradable leveraged share plans shares plus options share purchase plans matching share plans restricted performance share units rsus psus phantom plans phantom shares ltip equity based compensation phantom options bonusbank models ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 8 4

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introduction market trends according to the pwc global equity incentive survey 2009 60 50 40 30 20 10 0 options service options perf/mkt rs rsu rs rsu service perf/mkt 2007 all companies sar service sar perf/mkt phantom stock espp 2009 all companies 2006 all companies ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 9 contents · introduction total compensation employee participation trends · case study 4 start-up phases foundation investor · share purchase plans in general facts and figures · options in general facts and figures new hires sale of shares ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 10 5

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case study 4 start-up phases chapter 1 foundation a assumptions · welldone inc is founded by two persons · share capital 100k 1`000 shares per nominal 100 · cash foundation 50k per founder i.e each 500 shares questions 1 which swiss individual tax treatment applies to the two founders with respect to the foundation 2 what are the potential issues to be considered for the newly founded company ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 11 case study 4 start-up phases chapter 1 foundation b proposed solution for first question · purchase of shares is not based on an employment relationship but is an investment · purchase price fair market value of the share results no swiss income taxation as the purchase of shares is an investment at fair market value shares held are subject to swiss net wealth taxation ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 12 6

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case study 4 start-up phases chapter 1 foundation c potential issues considerations inputs to second question issue consideration does the nominal value equal the fair value of the company if not taxes may arise upon foundation valuation shares need to be objectively valued for tax purposes and the valuation method needs to be the same at purchase and at sale of the shares in order to avoid tax issues current practice is getting tightened e.g zurich see slide 31 ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 13 case study 4 start-up phases chapter 2 investor ­ part i shares a assumptions company is growing needs funds conditional capital for future employee participations is approved investor gets in capital increase value of a share on the occasion of this financing round 180 at the same time the founders sell each 10 of their shares i.e each 50 shares to the management at a price of 150 per share · these shares sold are subject to a disposal restriction pre-emption right for the founders and re-purchase rights for the company within 3 years as from selling questions 1 which swiss individual tax treatment applies to the managers with respect to the share purchase 2 what are the potential issues to be considered for the company ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 14 · · · · · · 7

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case study 4 start-up phases share purchase plans in general facts and figures swiss income tax treatment 1/2 · · shares are generally taxed at grant share allocation irrespective of additional restrictions in case of blocking periods a tax discount on the fair market value of the shares applies tax discount blocking period only full years 1 2 3 4 5 6 7 8 9 10 on the fair market value 5.660 11.000 16.038 20.791 25.274 29.504 33.494 37.259 40.810 44.161 october 27 2010 slide 15 ceo day 2010 incentive plans pricewaterhousecoopers case study 4 start-up phases share purchase plans in general facts and figures swiss income tax treatment 2/2 tax discount tax discount purchase price paid by employee market value of the share tax value of the share taxable benefit for blocking period gross employment income ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 16 8

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case study 4 start-up phases chapter 2 investor ­ part i shares b proposed solution share purchase by the management share value price paid taxable benefit 180 financing round 150 30 results the amount of 30 per share purchase price reduction/discount represents a taxable benefit and is subject to swiss income taxation and swiss social security charges at purchase the shares held are subject to swiss net wealth taxation ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 17 case study 4 start-up phases chapter 2 investor ­ part i shares c potential issues issue general consideration in principle the same value issues as mentioned for the founders see slide 13 additional issues and topics mentioned below shareholder structure growth and exit strategy accounting legal nature of transaction social security costs number of shareholders will be growing loss in control shareholders agreement recommended topics to be set repurchase rights/obligations drag along tag along etc repurchase obligation if any for the company generally results in a liability to be analyzed in detail share purchase between shareholders or based on employment relationship company has to pay social security on taxable benefit ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 18 9

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case study 4 start-up phases chapter 2 investor ­ part i shares c potential issues issue particularly for start-ups selling/disposal restrictions share price consideration influence on tax value of the shares the selling/disposal restrictions are not blocking periods in the sense of the federal circular letter therefore no tax discount share price used for financing round relevant for tax purposes ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 19 case study 4 start-up phases chapter 2 investor ­ part ii options a assumptions besides the management is granted 800 options subject to the following conditions · exercise price 200 · term 10 years · blocked for 3 years i.e only exercisable after 3 years · no forfeiture in case of termination of employment i.e no vesting conditions · option value pursuant to valuation model 40 per option questions 1 which income tax impacts has the option grant for the management 2 what are the potential issues to be considered for the company ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 20 10

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case study 4 start-up phases options in general facts and figures swiss income tax treatment 1/2 most cantons mainly german speaking area vesting conditions yes no taxable moment exercise taxable value exercise gain difference between exercise price and underlying share value at exercise exemption zurich risk of taxation at vesting depending on actual design to be checked taxable moment grant of the option if valuable taxable value market value of the option at grant september 2010 draft of a new federal law regarding consistent approach of taxation at exercise currently discussed in the parliament ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 21 case study 4 start-up phases options in general facts and figures swiss income tax treatment 2/2 cantons geneva and vaud · generally taxation at grant for all options option value based on valuation · by means of a tax ruling the taxation for options with vesting clauses may possibly be deferred until the option exercise ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 22 11

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case study 4 start-up phases chapter 2 investor ­ part ii options b proposed solution options granted to the management · no vesting conditions legal ownership at grant · blocking period can be taken into account for the tax value of the options results income taxation at grant on the tax value of the options blocking period taken into account options held are subject to swiss net wealth taxation ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 23 case study 4 start-up phases chapter 2 investor ­ part ii options b proposed solution ­ illustrative option valuation market value share value at grant blocking period discounted share value blocking exercise price riskless interest rate volatility p.a option term dividend yield dividend yield on discounted share value option value taxable at grant in of share value ceo day 2010 incentive plans pricewaterhousecoopers tax value 180 3 years 151.13 180 200 3 25 10 years 2.5 200 3 25 10 years 2.98 40 24 22 13 october 27 2010 slide 24 12

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case study 4 start-up phases chapter 2 investor ­ part ii options c potential issues issue in general option design hedging social security costs accounting treatment particularly for start-ups valuation of the option at grant consideration taxable moment and amount consideration of distinctive cantonal taxation practices tax ruling recommended company has to provide shares in the future company has to pay social security on taxable benefit to be carefully analyzed in detail gathering of data e.g share price volatility etc if options cannot be objectively valued at grant they are taxed at exercise ruling recommended plus upon option exercise the participants are shareholders thus same issues like for share participation plans see slides 13 18 and 19 ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 25 case study 4 start-up phases chapter 3 new hires a assumptions 1/2 · company is growing · specialists are needed · the company pays lower base salaries but offers options as an additional incentive the total compensation will be as follows base salary p.a 400 options value at grant 50 each total value compensation chf 80`000 chf 20`000 chf100`000 design details see next slide ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 26 13

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case study 4 start-up phases chapter 3 new hires a assumptions 2/2 parameters of the options granted option term vesting period truncation share value at grant of option exercise price fair market value of the option at grant 10 years 3 years after the vesting period exercise within 12 months in case of termination of employment 250 250 at the money 50 per option according to valuation questions which swiss individual tax treatment applies to this employee ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 27 case study 4 start-up phases chapter 3 new hires b proposed solution results salary of chf 80`000 is subject to swiss income taxation and social security charges at the date of payment options with a design as mentioned in this example are subject to swiss income taxation at exercise i.e no taxation at grant might be different in case such person would be tax resident in geneva or vaud for swiss net wealth tax purposes the options have to be listed in the individual tax return asset statement with a pro memoria value until exercise ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 28 14

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case study 4 start-up phases chapter 3 new hires c potential issues issue option design consideration regarding taxable moment and amount please refer to slide 25 ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 29 case study 4 start-up phases chapter 4 sale of shares a assumptions · founders decide to sell the company trade sale · the value per share is 1000 · employees can sell their shares as well including the shares underlying the options which are exercised immediately questions 1 which income tax impacts has the sale of shares for the managers 2 what are the potential issues to be considered for the managers ceo day 2010 incentive plans pricewaterhousecoopers october 27 2010 slide 30 15

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