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EXHIBIT 10.3
SYBRON DENTAL SPECIALTIES, INC.
SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
POLICY STATEMENT
1. OBJECTIVES
The Sybron Dental Specialties, Inc. Senior Executive Incentive
Compensation Plan (the "Incentive Plan") is designed to:
- Focus the efforts of the organization on improving shareholder
value.
- Effectively motivate and reward key employees according to their
contributions to organizational success.
- Serve as a management tool in directing the energies of key
employees towards the achievement of agreed upon operating goals
for Sybron Dental Specialties, Inc. (the "Corporation") and
its subsidiaries.
- Equate personal financial success with organizational financial
success.
- Assist in retaining and attracting qualified, managerial employees
by providing a total compensation opportunity competitive with the
marketplace.
2. ADMINISTRATION
The Incentive Plan shall be administered by the Compensation Committee of
the board of directors (the "Committee"). No member of the Committee shall be
eligible for awards under the Incentive Plan.
The Committee shall interpret the Incentive Plan, establish rules and
regulations for the administration thereof, and make all determinations deemed
necessary or advisable for the administration of the Incentive Plan. The
Committee shall be assisted by the Corporation's Human Resources Department
staff in fulfilling its administrative responsibilities.
3. ELIGIBILITY
Key executives whom the Committee has identified as having the ability to
directly influence the financial results of the Corporation or its subsidiaries
shall constitute the employees eligible for participation in the Incentive Plan.
An individual's eligibility to participate in the Incentive Plan shall be
determined annually by the Committee. Participation in the Incentive Plan during
a fiscal year shall not imply the right of participation in any following year.
4. DETERMINATION OF INCENTIVE AWARDS
A participant's Incentive Award will be determined by multiplying the
participant's total Target Bonus Amount by a Success Factor.
5. TARGET BONUS AMOUNTS
Target Bonus Amounts for all participants shall be a percentage of the
participant's actual annual base salary as of the end of each fiscal year for
which an Incentive Award is payable. The percentage shall be determined from the
salary grade to which the participant is assigned as of the end of the fiscal
year, all as set forth in the Administrative Guidelines for the Incentive Plan
which are included by reference herein.
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6. SUCCESS FACTOR
The Success Factor is the aggregate of two different components of
financial performance; namely, operating income compared with budget and growth
in operating income over prior year. The budgeted operating income component
cannot exceed 100%.
Composition of the Success Factor is as follows:
<TABLE>
<S> <C>
Operating income performance vs. budget (capped at 100%) = a
Growth in operating income performance = b
-----
Success Factor = a+b
=====
</TABLE>
Section 3 of the Administrative Guidelines defines the components of the
Success Factor in detail and a rather complete example of how an individual's
Incentive Award is computed can be found in Section 8 of the Administrative
Guidelines.
Notwithstanding any other provision of this Incentive Plan, in no event
shall the Incentive Award for a fiscal year for any participant exceed
$2,000,000 (the "Maximum Dollar Amount").
7. CHANGE IN EMPLOYMENT STATUS
Participants who terminate employment (except for termination due to
retirement, disability or death) with the Corporation or a subsidiary of the
Corporation, or whose employment is terminated by the Corporation or one of its
subsidiaries, at any time during a fiscal year, or before award payments for a
fiscal year are made, shall not be entitled to receive any award under the
Incentive Plan for that fiscal year, unless an award is specifically approved by
the Committee.
Participants (or their beneficiaries or legal representatives) who
retire, become disabled or die during a fiscal year shall receive a prorated
Incentive Award that is calculated by multiplying the participant's calculated
Incentive Award by a percent equal to the percent of the fiscal year for which
the participant was actively employed.
8. METHOD OF PAYMENT
Awards under the Incentive Plan shall be paid in cash as soon as
practicable after financial results for the fiscal year have been determined and
verified.
9. COMMITTEE DISCRETION
In the event of special circumstances of an unusual or significant nature
outside the course of normal business operations, the Committee may adjust
previously approved financial objectives of the Corporation or any of its
subsidiaries or the amount of the Incentive Awards earned, when it believes the
integrity, purpose and fairness of the Incentive Plan will be better served. Any
such adjustment made after the beginning of the period in which the awards are
earned shall not, however, permit Incentive Awards, either to any person or in
the aggregate, to be greater than they otherwise would have been under the
financial objectives approved prior to the beginning of such period.
10. AMENDMENT, SUSPENSION OR TERMINATION OF THE INCENTIVE PLAN
The Committee may, at any time, amend, suspend or terminate the Incentive
Plan.
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ADMINISTRATIVE GUIDELINES
These Administrative Guidelines ("Guidelines") have been approved by the
Compensation Committee (the "Committee") of the board of directors, and shall
remain in effect until changed by the Committee. These Guidelines, combined with
the Sybron Dental Specialties, Inc. Senior Executive Compensation Incentive Plan
Policy Statement shall govern the amounts and terms of Incentive Awards payable
to eligible participants under the Incentive Plan.
1. INCENTIVE AWARDS
A participant's Incentive Award will be determined by multiplying the
participant's total Target Bonus amount by a Success Factor, provided that no
Incentive Award for any fiscal year for any participant shall exceed the
Maximum Dollar Amount.
2. TARGET BONUS AMOUNTS
Target Bonus Amounts shall be determined from a participant's salary
grade. Current salary grades and Target Bonus Amount percentages for U.S. and
non-U.S. participants are included in Section 7 below. The Target Bonus Amount
for all participants shall be the pre-determined percentage for the
participant's salary grade applied against the base salary of the participant as
of the end of each fiscal year.
3. SUCCESS FACTOR
The Success Factor is calculated by totaling the percentages determined
from a comparison of actual performance with respect to certain financial
measurement components to the goals set for such components. The financial
measurement components of the success factor are as follows:
(i) Actual operating income compared with budget.*
This component will be zero until 90% of budgeted operating income
is achieved. Maximum award will be equal to 100% when budgeted
operating income is achieved. Performance between 90% and 100% of
budgeted operating income would result in a proportional award
being earned.
OPERATING INCOME
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Budget
Amount ($000)
Percent Achievement 90 91 92 93 94 95 96 97 98 99 100
</TABLE>
(ii) Actual rate of growth in operating income over prior year.*
- This component will be zero until 6% growth in operating
income over prior year is achieved. At a growth level of
6%, this component will be equal to 80%.
- At 8% growth, this component will be equal to 100%. For
each percentage point of growth beyond 8% there is an
increase in this component of 12.5 percentage points.
Thus, at 10% growth, this component will equal 125%, at 12%
growth this component will equal 150%, at 14% growth this
component will equal 175%, continuing on a linear basis, in
an unlimited fashion.
OPERATING INCOME GROWTH
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percent Growth Achieved 6 8 10 12 14 16 18 20 22 24
----------------------------------------------------------------------------------------------
Percent Achievement 80 100 125 150 175 200 225 250 275 300
----------------------------------------------------------------------------------------------
</TABLE>
*Earnings from acquired businesses will also be included,
subject to adjustment as described below.
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4. EARNINGS FROM ACQUISITIONS
An important goal of this Incentive Plan is to encourage the acquisition
of suitable companies and/or product lines as a way of growing operating income.
Earnings from acquisitions will, therefore, be included in the Success
Factor components after an adjustment is made to the basis of measurement to
offset the imputed cost of funding the acquisition and the amortization of
intangibles associated with the acquisition.
5. IMPUTED COST OF CAPITAL
With respect to acquisitions, there will be charged an imputed cost of
capital equal to 8% of the purchase price of the acquired business for the first
twelve months following an acquisition. Thereafter, this charge will be
decreased by 1 percentage point each year to reflect the anticipated positive
cash flow from the earnings of the acquired entity.
An imputed cost of capital of 8% will be charged when the amount by which
the applicable fiscal year's working capital ratio (computed on a 13-month
average, September through September, basis) exceeds the average of the previous
four years' working capital ratios (computed on a similar basis). The charge is
calculated by multiplying such excess, if any, by the applicable fiscal year's
sales, and charging 8% of such product. Additionally, an imputed cost of capital
of 8% will be charged for the amount by which the applicable fiscal year's
capital expenditures exceed such year's depreciation if such excess occurs.
From time to time the percentage imputed cost of capital charge may
change if commercial interest rates change.
6. DEFINITION OF OPERATING INCOME
For purposes of this Incentive Plan, operating income is operating income
as adjusted, which means operating income as reported on management accounting
statements, less amortization of intangible assets, less the imputed cost of
capital.
EXAMPLE
<TABLE>
<S> <C>
Operating income for applicable fiscal year excluding acquisition $100,000,000
Acquisition cost of "NEWCO" made 10/1 of year 1.................. 5,000,000
Net book value of "NEWCO" ....................................... 3,000,000
"NEWCO" goodwill................................................. 2,000,000
"NEWCO" annual operating earnings................................ 1,000,000
Applicable fiscal year's sales................................... 425,000,000
Applicable fiscal year's working capital ratio................... 25.1%
Average of previous four years' working capital ratios........... 23.4%
Capital expenditures for applicable fiscal year.................. 10,000,000
Depreciation for applicable fiscal year.......................... 8,000,000
</TABLE>
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A. COST OF CAPITAL CHARGE FOR ACQUISITIONS ($ IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost of Capital Rate 8% 7% 6% 5% 4%
Purchase Cost of "NEWCO" 5,000 5,000 5,000 5,000 5,000
Cost of Capital Charge (400) (350) (300) (250) (200)
-------------------------------------------------------------------------
</TABLE>
B. COST OF CAPITAL CHARGE FOR EXCESS WORKING CAPITAL ($ IN THOUSANDS)
<TABLE>
<S> <C>
- Applicable Fiscal Year's Working Capital Ratio 25.1%
- Average of Prior Four Years' Working Capital Ratio 23.4%
- Applicable Fiscal Year's Sales 425,000
------------------------------------------------------------------
Working Capital Charge 425,000 x (.251-.234) x .08 578
</TABLE>
C. COST OF CAPITAL CHARGE FOR EXCESS CAPITAL EXPENDITURES ($ IN
THOUSANDS)
<TABLE>
<S> <C>
Applicable Fiscal Year's Capital Expenditures 10,000
Applicable Fiscal Year's Depreciation 8,000
-------------------------------------------------------------------
Cost of Capital Charge (10,000 - 8,000) x .08 160
</TABLE>
D. ADJUSTED OPERATING INCOME COMPUTATION ($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- Subsidiary Earnings 100,000 100,000 100,000 100,000 100,000
Excluding Acquisition
- "NEWCO" Earnings 1,000 1,000 1,000 1,000 1,000
- Amortization of Goodwill (100) (100) (100) (100) (100)
- Cost of Capital - Acquisitions (400) (350) (300) (250) (200)
- Cost of Capital - Excess Working Capital (578)
- Cost of Capital -Excess Capital Expenditures (160) * * * *
* * * *
-------------------------------------------------------------------------------------------------------
Adjusted Operating Income 99,762 100,550 100,600 100,650 100,700
</TABLE>
* Amount depends on working capital, capital expenditures and depreciation
calculations for three years.
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7. SALARY GRADES/TARGET BONUS AMOUNT PERCENTAGES
SALARY GRADES/
TARGET BONUS AMOUNT PERCENTAGES
<TABLE>
<CAPTION>
U.S. NON-U.S.
--------------------------------------------------------------------
Salary TARGET BONUS Salary TARGET BONUS
Grade AMOUNT % Grade AMOUNT %
--------------------------------------------------------------------
<S> <C> <C> <C>
3 16% 3 11%
4 18% 4 13%
5 20% 5 15%
6 22% 6 17%
7 24% 7 19%
8 26% 8 21%
9 28% 9 23%
10 30% 10 25%
11 33%
12 36%
13 39%
14 42%
15 45%
16 48%
17 50%
18 52%
19 53%
20 54%
21 55%
</TABLE>
8. FORMULA FOR CALCULATION OF INCENTIVE AWARD
Target Bonus Amount
Base Salary at 9/30 x Salary Grade Target = Target Bonus Amount
Bonus Amount Percent
Success Factor Components
Operating Income Percent Achieved (capped at 100%)
+ Operating Income Growth Percent Achieved
----------------------------------------
= Success Factor
Incentive Award
Target Bonus Award x Success Factor = Incentive Award
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EXAMPLE
Assumptions:
1. U.S. executive - Grade 12
2. Base Salary - $150,000
3. Budgeted operating income - $112,000,000
4. Actual operating income - $112,000,000
5. Prior year's operating income - $100,000,000
6. Operating income growth - 12%
Determination of Success Factor
(i) Operating Income Achievement
<TABLE>
<S> <C>
Actual $112,000,000
-------------------------------------
Budget $112,000,000
</TABLE>
Performance equals 100%, therefore,
component is equal to the maximum of 100%
(ii) Operating Income Growth
Actual growth = 12%
Component therefore equals 150%
<TABLE>
<S> <C>
Operating Income Percent Achieved = 100%
+ Operating Income Growth Percent Achieved = 150%
----
Success Factor 250%
===
</TABLE>
Target Bonus Amount
Grade 12 Target Bonus Award % = 36%
0.36 x $150,000 = $54,000
Incentive Award
Success Factor x Target Bonus Amount = Incentive Award (not to
exceed Maximum Dollar
Amount.)
250% x $54,000 = $135,000
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SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
FINANCIAL MEASUREMENT CRITERIA
DEFINITIONS
1. OPERATING INCOME, AS ADJUSTED
Net Sales
- (Cost of Sales)
- (Commercial Expenses)
- (Cost of Capital Imputation)
- (Amortization of Intangibles)
-----------------------------
= Adjusted Operating Income
2. WORKING CAPITAL
Trade Accounts Receivable
+ Inventory
- (Trade Accounts Payable)
------------------------
= Working Capital
3. WORKING CAPITAL RATIO
Working Capital x 100%
---------------
Sales
4. COST OF CAPITAL
For imputation on acquisition earnings = 8% of transaction cost.
For imputation on excess working capital = 8% of the product of
the amount (if any) by which the applicable year's working capital
ratio exceeds the average of the previous four years' working
capital ratios, multiplied by the applicable fiscal year's sales.
For imputation on excess capital expenditures = 8% of the amount
(if any) by which the applicable fiscal year's capital
expenditures exceed such fiscal year's depreciation.
(Rate subject to annual review.)
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