Understanding Variable Compensation

Before you begin administering your variable compensation grants you should:

• Define the rounding rules.

• Set up your stock option plans.

• Allocate stock to stock option plans.

Variable compensation (VC, or variable comp) is pay that is not included in base pay. It generally varies according to performance, and can include non-monetary awards such as stock.

To administer stock through Variable Comp:

1. Set up Variable Comp tables and plans for stock awards.

   Responsibility: Variable Comp (VC) Administrator.

   The VC system supports five stock plan types: ISO, NQ, NSAR, RSA, and ISAR. Your VC administrator needs to set up variable comp plans that correlate to the stock option plan types you offer. Before the variable compensation plans are set up, you define in Stock Administration some of the data needed to define each plan such as stock ID, stock plans, and stock plan rules.

   In setting up the VC plan, your VC administrator defines:

   • VC Plan ID.

   • Stock plan and Stock ID.

   • Plan payout periods.

   • Plan membership on an Ad Hoc, individual, or group basis.

   • Valuation of a unit of stock. Stock grant valuation is based on your company's policy and business rules, and is for reporting purpose only.

   • Payout formulas at the target and optional minimum and maximum level.

   • Optional weighted or matrix goals.

   • Optional eligibility proration and proration period duration.

   • Optional plan approval and identification of the approver at the plan or group level.

2. Allocate stock units from Stock Administration Stock Option Plan to the Variable Comp Stock Fund.

   Responsibility: Stock Administrator.

   In Stock Administration, you allocate stock units from your Stock Option stock plans to the Variable Comp stock fund. From this allocation the VC administrator can fund multiple VC stock plans that have the same stock plan and stock ID. You can anticipate a future fund allocation and allocate those stock units now because the Stock Balances are adjusted when the grants are generated, not when the stock units are allocated.

3. Allocate funds from the Variable Comp Stock Fund to the Variable Comp Stock Plan.

   Responsibility: Variable Comp Administrator.

   From the Stock Administrator's allocation of shares by stock plan and stock ID, the Variable Compensation administrator can fund multiple stock plans that have the same stock plan and stock ID. If the VC plan is a group plan, the funds must be allocated among the groups.

4. Allocate the stock awards.

   Responsibility: Variable Comp Administrator.

   An employee's manager can allocate grants on an ad hoc basis without any eligibility or award calculation processes if the plan is set up with Ad Hoc Awards as the plan member rule. Otherwise various calculation processes are required, depending upon the VC plan definition.

   Managers can adjust the calculated individual awards of their direct reports. Finalized awards are automatically published to Stock Administration for grant generation.

   For non- Ad Hoc plans, the VC system calculates:

   • Eligibility and a proration factor according to the plan member rules and proration rules defined in the plan.

   • A performance factor if the plan uses goals.

   • Target awards, which it adjusts with the proration factor, performance factor, and specified minimums and maximums as appropriate.

   • An adjustment factor, which it applies if funding falls short of calculated payouts.

   • The award unit by applying stock rounding rules.

   • The award value by applying valuation and VC rounding rules to the award unit.

5. Generate the grants in Stock Administration.

   Responsibility: Stock Administrator.

   After Variable Comp publishes the stock awards, you can view them using the Generate Grants inquiry page, and run an Application Engine program to generate grants using the Generate Grants page. You can run multiple runs of the same Variable Comp stock plan, pay out period, and group, to pick up any stock award that have not been processed.

   As each stock grant is generated, each Variable Comp stock award record is updated with the grant number and grant value. Each grant created during this process adds a new record to the Grant table, using values in the award record and in the run control. The Variable Comp Plan ID is stored with each grant. You can select Reject Award Data for Plan ID on the Create Grants - VC Criteria process page if you want to reject all grants within a group ID.

6. Make appropriate adjustments for cancellations due to data entry errors.

   Responsibility: Stock Administrator.

   Once awards are generated, you may need to change them. Changes to the grant date or grant price may affect the award value in Variable Comp and must be transmitted back to Variable Comp for constancy between the two systems. You use the Modify Grant page to modify system-generated grants generated by the Generate Grant process or manually modify the grants using the Administer Grants component.

   You can modify grants created from Variable Comp awards, as you do for grants you create manually online, only you cannot change the number of shares granted. This also applies if the grant is split between an ISO and an NQ grant. The total number of shares granted cannot change. If the modification involves a change in the grant price, which in turn modifies the award value or the grant date, the modified grant information is transmitted to Variable Comp. To change the number of shares, void the grant and allocate a new award.

7. Make adjustments in Variable Comp Stock Funding, Stock Plans, and Stock Awards for stock splits and stock repricing.

   Responsibility: Stock Administrator.

   Some stock adjustments affect the valuation of the stock units in the Variable Comp plan, the stock price for all stock awards, or the number of shares available to allocate.

   Stock splits change the number of shares available in the Variable Comp stock plan, stock funding, and awards. They also change the values in stock awards and in the valuation table. The stock split processing that occurs in the Stock Administration system, also splits the stock in any Variable Comp stock plans, stock funding, and stock awards.

   When you reprice your stock, the values in stock awards and the valuation table change. You need to recalculate the value in stock awards and also in the valuation table.

8. Expire Variable Comp plans.

   Responsibility: Stock Administrator.

   A Variable Comp funding period expires when the period end date is reached. Run the Stock - VC Plan Expire process regularly to process the expired funding periods. Unused shares are returned to the Stock Plan from where they were originally allocated.

Stock Administration uses two integration points to grant and award variable compensation grants. The system uses the following service operations to transfer award and grant data between Stock Administration and the Variable Compensation business process.

In PeopleTools Application Designer you must activate the AWARD_GRANT_ISSUE and GRANT_AWARD_UPDATE messages. Make sure that you set the status of each selected message to Active, and set the status of the corresponding queue to Run.