This excerpt taken from the AFL DEF 14A filed Mar 18, 2008.
V. Executive Compensation Policies
This excerpt taken from the AFL DEF 14A filed Mar 23, 2007.
IV. Executive Compensation Policies
1. Total direct compensation relative to market
The Companys total direct compensation (base salary, annual non-equity incentive bonus, and long-term equity incentive compensation) for our NEOs is generally designed to provide competitive compensation relative to companies in the Companys peer group for target performance results. For the CEO, the Companys practice is to measure performance relative to peers, which ensures that the CEOs compensation in a given year directly correlates with the Companys relative performance rank for the prior year. This process is explained in greater detail below in the section labeled CEO Compensation. We note that the Companys performance has ranked first or second in six of the nine years for which such data has been gathered, and has always been above the peer group median.
The peer group consists of 16 major insurance companies identified below. These peer companies are engaged in similar businesses, of similar size, although the Company is slightly above the median revenues, market capitalization, and assets of the peer group, and are competitors for talent. Peer group companies include: Aetna Inc., The Allstate Corporation, Aon Corporation, Assurant, Inc., The Chubb Corporation, CIGNA Corporation, Conseco, Inc., Genworth Financial, Inc., The Hartford Financial Services Group, Inc., Lincoln National Corporation, Manulife Financial Corporation, The Progressive Corporation, Prudential Financial, Inc., The Travelers Companies, Inc., Safeco Corporation, and Unum Group.
2. Current vs. long-term compensation
The components of current compensation include an annual salary and an annual cash-based incentive bonus. Long-term compensation is provided to link executive compensation to the delivery of shareholder value. The equity-linked long-term incentive compensation components include stock options, performance-based restricted stock (PBRS), and in some cases, time based restricted stock awards (TBRS). The Company has two long-term equity incentive plans. The first is a stock option plan, the 1997 Stock Option Plan, which allows for grants of both incentive stock options (ISOs) and non-qualifying (NQ) stock options. This plan expired on February 11, 2007 (although options granted before that date remain outstanding in accordance with their terms). The second plan, the 2004 Long Term Incentive Plan, allows for ISOs, NQs, restricted stock, restricted stock units, and stock appreciation rights.
On an annualized present value basis, the proportion of long-term incentives to target annual cash incentives varies based on the responsibility level of the participants job and the ability to impact results over time. In general, the higher the responsibility level, the greater the proportion of longer-term equity incentives compared with target annual cash incentives. In the case of the non-sales NEOs, the present value of long-term equity incentive grants is greater than their target annual cash incentives.
In the case of Mr. Kirkland, the annual non-equity incentive compensation is the dominant feature of his compensation arrangement. In 2006, Mr. Kirkland earned an annual non-equity incentive that was 4.4 times larger than his earned equity award, as presented in the Summary Compensation Table under the columns Stock Awards and Option Awards. The annual non-equity incentive compensation for a sales-NEO will vary directly each year in proportion to sales results achieved, which is the primary responsibility of Mr. Kirkland.
3. Fixed vs. variable compensation
The portion of an executives compensation that is variable increases as the scope and level of the individuals responsibilities increase. For the NEOs, variable compensation accounts for a substantial portion of total compensation, as annual salary is the only fixed compensation component. Annual cash incentives increase or decrease with performance. The amount of equity-linked compensation granted each year is based partially on individual performance and partially on level of responsibility. The earning of PBRS is highly contingent, as the award is based on achieving a performance measure for a three-year period. Other contingent components include vesting restrictions on stock options and TBRS, which require the recipients to fulfill a continuing employment obligation before they can exercise any option or vest in the TBRS.
4. Mix of long-term incentives
In 2006, the Compensation Committee approved a combination of equity-linked incentive compensation awards for the executive officers.
Based on the value of equity grants as presented in the Summary Compensation Table (which measures their FAS 123(R) costs for 2006) under the columns Stock Awards and Option Awards, stock options represented 83% of total long-term incentives for the CEO and PBRS represented 17%.
For all other NEOs, stock options ranged from 60% to 81% and PBRS ranged from 19% to 40% of total long-term equity incentive value.
5. Total compensation in light of best practices and costs
Every year the Committee reviews the incentive compensation components of all executive officers with the help of the Consultant. The Committee believes that many best practices are reflected in the existing compensation strategy and that the Companys compensation expenses are reasonable and appropriate given the superior financial and stock market performance that the Company has produced over a long period of time. Modifications to the compensation program are periodically made in order to remain consistent with the competitive market and emerging best practices.