Exelon Compensation

2007 NHRG Conference Compensation Trends Impacting Recruitment and Retention Victor Fonseca Vice President, Corporate Compensation May 4, 2007 . 1 What are the trends over the next 3-5 years? • Electric Industry Outlook – Nuclear Generation • Exelon Success Story • Compensation Philosophy • Pay-for-Performance Compensation Programs • Compensation Emerging Issues and Trends • Aging Workforce and Retention 2 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Electric Industry Outlook – Nuclear Generation • • • Electric utility stocks have climbed at three times the rate of the S&P 500 the past year Gains should continue for 3-5 years for nuclear players in power constrained markets Carbon eminent legislation to step up pollution reduction to comply with new emission standards − Nuclear destined to play bigger role on keeping the lights on − 14 companies have announced intensions to file license applications to build 34 reactors 3 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Electric Industry Outlook – Nuclear Generation (cont.) − − Producing a kilowatt hour of electricity costs an average 2.5 cents from coal and 8 cents from natural gas Producing a kilowatt hour from a nuclear plant costs about 1.7 cents The low cost nature of operating the nuclear plants and high-priced power environment should lead to margin expansion • Exelon assets concentrated in Illinois and Pennsylvania have roughly 66% of its generation from atomic power 4 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt The Exelon Story – Value Driven • Premier U.S. nuclear generator uniquely positioned to capture market opportunities through operational and commercial excellence • Primary source of Exelon’s value going forward • Completed the transition to a “wires-only” business with a regulatory recovery plan in place • Predictable source of earnings through transition period; preparing for 2011 • • • • ~9% annual operating EPS growth since inception Continued strong growth trend through 2011 Strong balance sheet and financial discipline Experienced management team 5 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Exelon’s 2005/2006 Performance vs. Select Peers Dimensions Run the Nuclear Fleet at World Class Levels Capitalize on Environmental Leadership and Clean Nuclear Energy Metrics • Capacity Factor • INPO Index • Nuclear Cost (per MWh) • Environmental (INNOVEST) 2 3 1 2 4 4 2 3 2 2 2 2 3 2 1 3 4 4 3 4 4 4 3 4 4 4 4 3 3 2 2 2 2 2 Build Value Through Disciplined Financial Management • Customer Rates* (2005 Rates) • 3 Year TSR (2004 – 2006) • 3 Year EPS Growth • ROIC+ • FFO/Debt+ • Free Cash Flow+ (per share) 2 1 2 1 2 1 1 3 3 3 3 4 1 2 1 1 1 4 2 4 2 3 4 3 2 2 2 4 1 3 4 1 1 1 1 1 3 2 2 3 2 2 4 2 1 2 1 3 3 3 3 3 4 1 1 4 3 2 2 4 3 1 1 1 2 1 Note: ACSI and financial data excluding FFO/Debt is 2006; all other data is 2005 *Based on quartiles set by top 25 metropolitan areas +Based on Bloomberg data; not identical to internal data in some cases 6 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt 2006 Financial Performance 2005 Adjusted (non-GAAP) EPS Operating Weather Normalized (1) $3.10 $2.98 $3.22 $3.29 n eA rag Ave 2006 2007 Guidance Operating Earnings per Share $4.00 – $4.30 l Gr nua h owt $3.10 $2.78 $3.22 2006 Highlights • Solid financial results - Higher generation margins - Strong nuclear and fossil performance - Offset by higher O&M costs • First IL power auction declared successful 2000 ~9 % $2.61 $2.41 $2.24 $1.93 2001 2002 2003 2004 2005 2006 • ComEd ring-fencing completed • Distribution rate case and rehearing results • Residential rate phase-in plan approved by the ICC 2006: 4% growth in operating earnings, 10% growth in weather-normalized operating earnings from 2005 (1) Excludes $0.12 per share favorable impact versus normal in 2005 and $0.07 per share unfavorable impact versus normal in 2006, based on Exelon models K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt 7 Nuclear Operating Performance Production Cost 2-Year Average Production Cost for Major Operators $25.00 $20.31 $20.86 1st Quartile (14.21) 2nd Quartile (16.32) 3rd Quartile (19.15) 4th Quartile (>19.15) $20.00 $16.32 $16.61 $17.42 $14.62 $15.09 $18.96 $19.34 $/MWh $15.00 $13.26 $13.61 $13.88 $14.54 $10.00 $5.00 $0.00 Exelon 8 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Nuclear Operating Performance Capacity Factor 9 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Exelon Total Compensation Philosophy • Exelon’s base salary and incentives are designed to attract, retain and reward employees for achieving high levels of business performance − Rewards the achievement of financial, operational and individual success • Targets compensation levels at the 50th percentile that are benchmarked to high-performing energy services and general industry firms while reinforcing pay-for-performance − When excellent Company performance and individual performance are achieved, compensation awards may exceed market levels − Failure to achieve target business and individual goals will result in below-market compensation awards 10 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Exelon Total Compensation Philosophy (cont.) • • • Emphasizes pay-at-risk, which increases at high levels in the organization Promotes stock ownership to encourage employees to think and act like owners Peer companies were selected on the basis of the following core criteria: − Revenues Median similar to Exelon’s $16 billion revenue scope − Market Capitalization Generally greater than $5 billion − Industry Segment A balance of industry segments with an emphasis on capital asset intensive companies K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt 11 Pay-for-Performance Compensation Programs • Base Salary Program − Results based, not automatic, one grade structure with specific market reference ranges for each position with annual merit review cycle Common annual merit review date • Annual Incentive Program − Company-wide annual plan that includes all employees and measures financial, operational and individual goals − Measures like EPS, generation net income, nuclear capacity, non-fuel production cost, INPO index factors, etc. • Long-term Incentives − Executives stock options and performance shares based on TSR − Key manager restricted stock 12 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Compensation Emerging Issues and Trends • Compensation disclosures in 10K and proxy • Executive compensation scrutiny and legislative actions • Will the new 10 CFR 26 Work Rules create issues in the lower level positions, especially if loss of overtime reduces standard of living? − Will it create FLSA challenges to try to replace income for lower level exempt positions? • Will pension reform legislation, universal healthcare debate in the campaigns and other regulatory issues eliminate a competitive advantage? − If healthcare is common, do we lose an advantage in recruiting and retaining where plans where our plans are superior to other industries? − If cost or legislation drive us to lessen pension and retiree medical benefits, do we lose an advantage in recruiting and retaining? 13 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Compensation Emerging Issues and Trends (cont.) Within the Nuclear premium packages, the trends we see are: Operations • NLO Premiums - still very uncommon to offer any form of additional equipment operator/nonlicensed operator premiums. No trends identified, not a recruiting issue yet • RO Premiums – common, in the form of a hourly wage adder or embedded in base rate. Appears to average 50-66% of SRO Premium. No trends identified not a recruiting issue • SRO Premiums – common, normally paid as a bi-weekly or monthly premium. We expect to see increases in regular premium, re-qual payments and increased prevalence of sign-ons as we all struggle to fill licensing classes Engineering • Qualified Nuclear Engineer Premiums – Increasingly common for 24x7 nature of the role • EIT / PE Attainment Premiums – One-time attainment bonuses increasingly common to upgrade skills. Expect to see more emphasis as means of creating internal talent pool Training • Ops Training – Common to have premium similar to SRO at about 50% of SRO premium 14 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Compensation Emerging Issues and Trends (cont.) Within the area of Pay for Time worked, the trends we see are: Exempt Extra Hours • Time and one-half is still not a prevalent practice in the industry • Straight-time for supervising hourly crews is common − Many have hurdles for hours worked before its paid, or a cap on maximum hours paid • Pay for extra hours for those other than supervision for exempt OT is rare − Often limited to approved project-related efforts Outage Bonuses • Used to reward performance on key outage metrics like safety, duration, dose, cost, percentage of work orders completed on time. No trend toward increased use yet Hourly Positions (Mechanics, Rad Pro Techs, Material Handlers) • Compression issues hiring experienced employees into the wage progression • Difficulty filling nuclear-specific positions like RP could result in premiums for ANSI or industry certifications to differentiate our skilled craft from other industries 15 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt The aging workforce and labor/skill shortages will impact entry-level recruiting, internal mid-career replacements • Is compensation a lever for future employees, especially for skilled trades? − Are the overtime, RDO, sick time and other pay practices competitive? • For young professionals − Can we answer the need for development, career path questions? − Can we address the lifestyle and location issues? • For mid-career transfers, can we address trailing spouse, relocation? 16 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt So what’s the answer for that future electrician? For the plant craft positions, part of the answer was nearly unlimited income on a high school diploma and an apprenticeship. We beat most other industries based on a somewhat higher base rate and OT • Because of outage and regular overtime, it is not unusual for skilled trades to have a shot at $100K W-2s, $120-K or more if your plant works significant OT • In many areas of the plant, the work rule changes to 10 CFR 26 will curb that − Where is the offset, if W-2s drop? Will the trades leave for the same money at non-nuclear positions? 17 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt So what’s the answer for that future electrician? (cont.) − − − − Increased base? Issue in prevailing wages states with their commissions Annual incentive? Possible negotiations issue at unionized locations Nuclear Premium Programs? With labor storages in skilled trades and healthy wage rates for those skills, given the next generations expectations, is more money going to be attractive? • Do we have to “grow our own” given the locations of most sites? 18 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt So what’s the answer for that future engineer? • There is a national reduction in the number of engineering graduates and increasing demand − Start rates may be raising in the 4-7% range for the next 5-10 years. This will create a need to consider internal compression. Consider pay progression concept We have had a career ladder for over 5 years. In 2006 we formally tied minimum salaries to those progression steps and shared the information with engineering management and employees New engineers know how they can earn their next promotion and have a real good feel for how much money that will mean to them • National statistics suggest, regardless of industry, 15-25% of fresh-out hires change companies in their first two years of employment 19 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Employer of Choice Criteria Top 10 Items Nuclear Candidates Currently Seek: 1. Competitive Salary 2. Retirement Savings Plans 3. Flexible Schedule--Flex-Time 4. Annual Bonus 5. Opportunity For Paid Continuing Education/ 6. Degree Programs 7. Senior Management That Listens To Employees 8. Supervisor Who Shows Active Interest In Your 9. Career Development 10. Career Planning/Chart Career Paths Source: February 2007, NEI workforce issues taskforce report 20 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Employer of Choice Criteria Top 10 Reasons External Candidates Accept Offers: 1. Location 2. Salary 3. Job Description/Type of Work 4. Company Reputation/Stability 5. Professional Opportunity/Advancement 6. Atmosphere/People 7. Only Offer/Needed Job 8. Previous Internship Experience 9. Educational Reimbursement 10. Work Schedule/Flexibility Source: November 2006, NA-GYN engineering candidate Benchmarking survey K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt 21 Aging Workforce • The majority of our workers are over 40 years old with less than 15% under 30 years old? Workforce Demographics 30 25 Percent, % - 20 15 10 5 18-22 23-27 28-32 33-37 38-42 43-47 48-52 53-57 58-62 63-67 Age Range, yrs US Industry Exelon Nuclear • There are two paths to obtain replacements: − − Seek and hire the best and brightest candidates we can find and teach them to be nuclear, or; Hire experienced talent and retirees Concern on escalating cost for talent K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt 22 Growing and Retaining Our Own • What have we accomplished so far taking this approach? − 100 best places to start a career − Positive results if interns-to-new hire approach in Engineering − Creating local community college programs where there are none (RP) • Looking to minimize attrition through phased retirement and other strategies − Implement retention programs Cash and equity − Address development and career planning − Pay-for-performance strategy delivering outstanding compensation for superior performance 23 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt Summary • • • • Challenges occur all the time View challenges as opportunities Anticipation and response will determine success Adjust compensation program to meet business needs 24 K:/Compensation Initiatives/NHRG Presentation/Compensation Trends 2007 NHRG 5 03 07 Revised.ppt