ALLIANCE DATA SYSTEMS CORPORATION
2003 Incentive Compensation Plan
(As Amended and Restated Effective January 1, 2003)
Table of Contents
| PLAN PHILOSOPHY | 3 | |
EFFECTIVE DATE | 3 | |
ELIGIBILITY | 3 | |
BASE COMPENSATION USED IN CALCULATING IC PAYOUT | 4 | |
DETERMINING IC TARGETS | 4 | |
IC COMPONENTS | 4 | |
STANDARD WEIGHTINGS CHART FOR IC COMPONENTS | 5 | |
DETERMINING PAYMENT CALCULATIONS | 6 | |
TIMING OF PAYMENT | 6 | |
STATUS CHANGES THAT MAY AFFECT IC TARGETS AND PAYOUTS | 6 | |
OTHER TERMS AND CONDITIONS | 8 | |
ATTACHMENT A—ASSOCIATE SATISFACTION INDEX (ASI) INFORMATION | A-1 | |
ATTACHMENT B—EXAMPLE INDIVIDUAL EXPECTATIONS WORKSHEET | B-1 | |
ATTACHMENT C—PERFORMANCE/PAYOUT TABLE FOR REVENUE, EBITDA AND INDIVIDUAL EXPECTATIONS | C-1 |
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Plan Philosophy
The intent of the Alliance Data Systems Incentive Compensation ("IC") Plan ("Plan") is to:
Participation in this Plan reflects the importance of an associate's position and the impact that the associate's performance can have on the success of the Company.
Effective Date
The Plan Year is January 1, 2003 through December 31, 2003.
Eligibility
Associates are covered by this Plan if they are:
Associates are not eligible if they:
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Base Compensation Used in Calculating IC Payout
Annualized base pay as of October 1, 2003 will be used as part of the IC calculation. The IC target percentage(s) will be applied to October 1, 2003 base salary for purposes of calculating the dollar target amount.
Determining IC Targets
Each participant has an IC target. The Compensation Committee of the Board of Directors assigns IC targets for the Executive Committee members. IC targets for other positions are determined by the participant's manager using the guidelines established by Corporate Compensation in the following table:
| Grade Level | IC Target | |
|---|---|---|
| Executive Committee Member | Determined by the Board's Compensation Committee | |
| (Senior Vice President) 3 | 35% or 40% or 45% | |
| (Vice President) 4 | 25% or 30% or 35% | |
| (Director/Senior Director) 5 | 15% or 20% or 25% | |
| 8-10, 21-23, and 33-35 | 10% or 15% | |
| 11 & 32 | 5% or 10% |
IC targets are set in5% increments. When determining the appropriate target, the following are considered:
IC targets will be set at the beginning of the Plan year or at time of hire. If the IC target percentage changes, the manager will explain how the target will be prorated for payout purposes (if appropriate) and whether or not the performance expectations and weightings will change for the current Plan year.
IC Components
All performance goals should be established and communicated to the participant at the beginning of the Plan year or within 30 days of becoming a participant in the Plan. The degree to which these performance goals are accomplished have an impact on the actual incentive earned from the Plan.
Alliance Revenue and EBITDA Targets: The Revenue and Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") targets make up 25%-75% of a participant's IC payment (see Standard Weightings Chart below). The Board of Directors of the Company approves the Revenue and EBITDA targets.
LOB Revenue and EBITDA Targets: There are a number of financial measures that can be used to determine success for a particular area or individual. The appropriate Executive Vice President, along with the Senior Vice President of Human Resources and Corporate Compensation will determine if sub-measures will be used for a particular LOB or a particular individual. However, it is intended that the Board of Directors approve the achievement of LOB Revenue and EBITDA for payout purposes.
Associate Satisfaction Index: The annual administration of the Associate Survey and the tracking of data (i.e., improvement expectations) are designed to motivate ongoing attention to issues that affect
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quality of client service, as well as the development and retention of associates. The Associate Satisfaction Index ("ASI") is a component of the Associate Survey process. The ASI component is designed to recognize and incent critical non-financial organizational factors that contribute to sustainable business performance and provide a competitive advantage in recruiting, developing and retaining high performing associates. Targets are set at the beginning of each year along with a payout schedule. See Attachment A for more information.
Individual Expectations: The Weightings Chart identifies those participants that have 25%-50% of their IC payments based upon the achievement of individual expectations or team strategic imperatives (or action steps to accomplish the strategic imperatives) as determined between the participant and his or her manager. A sample worksheet has been provided in Attachment B.
Standard Weightings Chart for IC Components
IC objectives are weighted to drive financial and individual performance and increase associate satisfaction. LOBs have the ability to use specific components that closely reflect Alliance Scorecard measurements. In addition, LOBs may adjust the standard components to include measurable financial drivers, such as bad debt or specific client revenue goals, with review and approval by the appropriate Executive Vice President, along with the Senior Vice President of Human Resources and Corporate Compensation. The participant's grade/job level as of October 1, 2003 will be used to determine the overall weightings.
2003 IC Plan
Standard Components and Weightings
| | | Senior Leadership Team1 | Exempts with Direct Supervisory Responsibility | All Other Exempts2 | |||||
|---|---|---|---|---|---|---|---|---|---|
| LOB | LOB EBITDA | 50 | % | 25 | % | 25 | % | ||
| LOB Revenue | 25 | % | 25 | % | 25 | % | |||
| Associate Satisfaction3 | 25 | % | 25 | % | 0 | % | |||
| Individual Expectations4 | 0 | % | 25 | % | 50 | % | |||
BSG | Alliance EBITDA | 50 | % | 25 | % | 25 | % | ||
| Alliance Revenue | 25 | % | 25 | % | 25 | % | |||
| Associate Satisfaction3 | 25 | % | 25 | % | 0 | % | |||
| Individual Expectations4 | 0 | % | 25 | % | 50 | % |
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Determining Payment Calculations
Attachment A: ASI Information
Identifies the relationship between level of performance and the percentage to be paid for achievement of 2003 Associate Satisfaction Survey target results. For the ASI component to be paid over 100%, both the applicable EBITDA and Revenue targets must be achieved at 100% or greater.
Attachment B: Example Individual Expectations Worksheet
The sample form is provided to facilitate the setting of the Individual Expectations. If a participant is being held accountable for a Company-level strategic imperative (or an action item to accomplish the strategic imperative for the LOB/BSG), that form may also be used. Regardless of the form used, an overall percentage of achievement of the Individual Expectations will be required at the end of 2003 in order to determine the dollar payment for this IC component.
Attachment C: Performance/Payout Table for Revenue, EBITDA and Individual Expectations
Identifies the relationship between level of performance and the percentage to be paid for the achievement of the Alliance Revenue & Alliance EBITDA, LOB Revenue & LOB EBITDA, and Individual Expectations targets. A minimum of 80% must be achieved for any payment to be received; performance of 120% or greater receives the maximum payment of 150%. Percentages are rounded to the nearer whole number.
For BSGs, both the Alliance EBITDA and Alliance Revenue targets must be achieved at 100% or greater in order for Individual Expectations to be paid above 100% of target. For LOBs, both the LOB EBITDA and LOB Revenue targets must be achieved at 100% or greater in order for Individual Expectations to be paid above 100% of target.
Timing of Payment
IC earned for the 2003 Plan year is paid in the first quarter of the following year. A participant must be actively employed on the date payment is made to receive his or her award. Any participant who is on an approved leave of absence or disability but still on active status will receive his or her payment even if he or she is not actively at work on the date payment is made.
Status Changes That May Affect IC Targets and Payout
Status changes can affect the amount of incentive a participant receives. Status changes include:
Transfers: The LOB or BSG a participant is assigned to as of October 1, 2003 will be used to determine any payments dependent upon LOB/BSG level of performance (see Standard Weightings Chart). Year-end performance for the LOB/BSG will be used to calculate the incentive amount to be paid for this component. No prorating will be done for the amount of time spent in another LOB/BSG over the Plan year without prior approval of the appropriate Executive Vice President, along with the Senior Vice President of Human Resources and Corporate Compensation.
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For the ASI component, leaders who have moved or transferred during the course of the year, and who could therefore have their compensation tied to different reporting groups, will be reviewed as follows:
New Hires: For associates hired between January 1 and September 30, 2003 into an IC eligible position, the base salary as of October 1, 2003 will be used to calculate the IC dollar target. The dollar target will be prorated as follows:
| Hired Between These Dates | Prorated Amount | ||
|---|---|---|---|
| January 1 - March 31 | 100 | % | |
| April 1 - June 30 | 75 | % | |
| July 1 - September 30 | 50 | % | |
| October 1 - December 31 | No IC |
For example, if an associate is hired on March 12, the IC dollar target will not be prorated. If an associate is hired on July 4, then the IC dollar target will be prorated by 50%.
IC Target Changes: For current Alliance associates, if there is a promotion or a grade level change during the Plan year but before October 1, and this causes a change in IC target, the IC target will be prorated according to the chart below depending on the associate'sIC eligible effective date. Note: changes in IC targetsafter October 1, 2003 will not be used to calculate IC payout for the 2003 Plan year.
| IC Eligible Effective Date Between These Dates | Prorated Amount For Old/New IC % Target | |
|---|---|---|
| January 1 - March 31 | 0% / 100% | |
| April 1 - June 30 | 25% / 75% | |
| July 1 - September 30 | 50% / 50% | |
| October 1 - December 31 | 100% / 0% |
The base salary as of October 1 will be used to calculate the dollar target, even if there is a corresponding change in base salary at the time of the promotion or IC target change. For example, a grade level change in April results in an IC target change from 5% to 10% and a base salary change from $35,000 to $40,000. The base salary on October 1 is $40,000, so that is the salary used in the calculation. The IC dollar target is then calculated using the following formula:
| | 10/01 Base | IC | Target | Prorate | Subtotal | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Old | $ | 40,000 | 5 | % | $ | 2,000 | 25 | % | $ | 500 | |||
| New | $ | 40,000 | 10 | % | $ | 4,000 | 75 | % | $ | 3,000 | |||
| TOTAL | $ | 3,500 | |||||||||||
The participant's manager should communicate to the participant the new weightings of financial and Individual Expectations (if applicable).
Leaves of Absence: If a participant takes a leave of absence in excess of 30 consecutive days, either paid or unpaid, during the Plan year, he or she may be eligible for a prorated award at the
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discretion of the appropriate Executive Vice President, along with the Senior Vice President of Human Resources and Corporate Compensation.
Terminations: If a participant terminates his or her position voluntarily or involuntarily during the Plan year, he or she willnot be eligible for an IC payment because he or she would not be on active status on the date of the award distribution. If a participant retires, becomes disabled or dies during the Plan year, he or she may be eligible for a prorated award at the discretion of the appropriate Executive Vice President, along with the Senior Vice President of Human Resources and Corporate Compensation. In the event of death, any incentive award is made to the beneficiary named in the Company-paid life insurance program.
Other Terms and Conditions
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within 30 business days, the participant may submit the dispute in writing within five business days thereafter to the Senior Vice President of Human Resources, whose decision regarding the dispute shall be final and binding on each participant or person claiming under the Plan.
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ASSOCIATE SATISFACTION INDEX (ASI) INFORMATION
The Alliance Scorecard views associates as one of three key constituencies (along with clients and stockholders). Research has demonstrated, and Alliance believes, that satisfied associates provide higher levels of service quality and value creation/delivery, cultivating client retention and loyalty, and in turn providing greater profitability and growth. The degree to which associates feel valued/satisfied has been shown to be a primary determinant of long-term financial performance. The Associate Satisfaction survey and the resulting ASI represent an accountability mechanism that puts value on people and "walking the talk" when it comes to Alliance's company values, as well as financials and EBIDTA.
The ASI is intended to drive the Company towards Employer of Choice levels of performance and to reward progress towards these levels and recognize actual scores. Launched in 2001, the ASI is made up of 18 "core" items, asked and tracked on each annual Associate Survey.
The ASI consists of two main components: a progress calculation and actual scores (current year mean percent favorable score on the 18 items). Scores are evaluated against both progress made since the previous year (as measured by "potential change") and current year scores. The final payout is determined by equally weighing the two measures (see "Payout Table for Associate Satisfaction Results").
Key elements of the ASI calculation:
Progress Calculation—The progress target scores at the Company-wide level and for all subgroups is set at 16% of potential change. Alliance has set the maximum target score for any group at 75. In the ASI computation, change is based onpotential change, not absolute change. Computing scores based on potential change recognizes the increased difficulty of making continued progress as scores get higher. Regressions will be calculated in a similar manner.
Actual Score—For 2003, the goal at the Company-wide level is to achieve an actual score of 71. Each subgroup's actual score will be measured relative to the Company-wide goal of 71.
Final Payout—Alliance recognizes the importance of both progress and actual score relative to the Company-wide goals. The final payout is calculated by equally weighing the payout achieved for a group's progress score and its actual score.
In addition, the payout calculation for 2003 is based on the following:
A-1
change." We have set a goal for Alliance to increase our associate satisfaction by 16% of potential change each year. Each of the progress targets in this attachment was calculated using this same growth percentage. As an example, the formula used to determine the 2003 progress target for the Alliance consolidated score of 71 is:
2002 Base Score* = 65
100 - 65 = 35
(100 - 2002 Base Score* = Potential for Change)
35 × 16% = 5.60
(Potential for Change × Alliance Organizational Improvement = Increase Needed)
65 + 6 = 71
(2002 Base Score* + Increase Needed = Target Percent Favorable Score for 2003 Survey)
A-2
TARGET SCORES (PERCENT FAVORABLE MEAN) FOR 2003 ASSOCIATE SATISFACTION
| Report Name | 2003 Progress Target Score | |
|---|---|---|
| Alliance Data Systems Consolidated (Without FMI, NZ) | 71 | |
| Transaction Services | | |
| Transaction Services Consolidated (Without MB, FMI, NZ, Marketing) | 69 | |
| Network Services Consolidated | 66 | |
| Network Services (Lenexa & Johnson City) | 66 | |
| Network Services (Lenexa) | 74 | |
| Network Services (Johnson City) | 60 | |
| Network Services (Buffalo Grove) | 68 | |
| Network Services (excluding Johnson City & Lenexa) | 71 | |
| Utility Services Consolidated | 71 | |
| Call Center Operations (Atlanta & Walnut St.) | 70 | |
| Call Center Operations (Atlanta) | 64 | |
| Call Center Operations & Human Resources—(Walnut St.) | 72 | |
| Systems Development Consolidated (includes Seattle) | 73 | |
| Systems Development (Atlanta) | 70 | |
| Systems Development (HQ2) | 75 | |
| Systems Development (Seattle) | 67 | |
| Frequency Marketing | 68 | |
| Mail Box Corp | 65 | |
| Information Technology Solutions | | |
| Information Technology Solutions Consolidated | 71 | |
| Information Technology Solutions (San Antonio) | 70 | |
| Information Technology Solutions (Reynoldsburg) | 71 | |
| Information Technology Solutions (excluding San Antonio & Reynoldsburg) | 71 | |
| Retail Services | | |
| Retail Services Consolidated (With Marketing & Voorhees) | 74 | |
| Marketing Services | 54 | |
| Bank Operations Consolidated | 71 | |
| Other Operations Consolidated | 71 | |
| Retail Information Technology | 75 | |
| Retail Services (Voorhees) | 61 | |
| Retail Services (Broad St.) | 72 | |
| Retail Services (Westerville Call Center) | 75 | |
| Retail Services (Westminster) | 74 | |
| Retail Services (Lenexa) | 75 | |
| Retail Services (Reno) | 75 | |
| Retail Services (Other) | 75 | |
| Corporate Support Services, CFO and LCAS | | |
| Corporate Support Services, CFO, LCAS | 75 |
A-3
PAYOUT TABLE FOR ASSOCIATE SATISFACTION RESULTS
Payout for the ASI Component is a combination of Actual Score and the Percent of Target Achieved.
Examples:
| 2002 Base Score: | 66 | 2002 Base Score: | 73 | |||||||
| 2003 Target: | 71 | 2003 Target: | 75 | |||||||
| 2003 Results and Possible Payment | 2003 Results and Possible Payment | |||||||||
| Actual Score: | 69 | 90% payout | Actual Score: | 75 | 140% payout | |||||
| Percent of Target Achieved: | 97 | % | 70% payout | Percent of Target Achieved: | 100 | % | 100% payout | |||
| Payment would be the average of the two = 80% | Payment would be the average of the two = 120%* | |||||||||
| Actual Score (% Favorable Mean) | 2003 Payout | Percent of Target Achieved | 2003 Payout | ||||
|---|---|---|---|---|---|---|---|
| 52 or Less | 0 | % | 89% or Less | 0 | % | ||
| 53 | 10 | % | 90% | 10 | % | ||
| 54 | 15 | % | 91% | 15 | % | ||
| 55 | 20 | % | 92% | 20 | % | ||
| 56 | 25 | % | 93% | 30 | % | ||
| 57 | 30 | % | 94% | 40 | % | ||
| 58 | 35 | % | 95% | 50 | % | ||
| 59 | 40 | % | 96% | 60 | % | ||
| 60 | 45 | % | 97% | 70 | % | ||
| 61 | 50 | % | 98% | 80 | % | ||
| 62 | 55 | % | 99% | 90 | % | ||
| 63 | 60 | % | 100% | 100 | % | ||
| 64 | 65 | % | 101% | 105 | % | ||
| 65 | 70 | % | 102% | 110 | % | ||
| 66 | 75 | % | 103% | 115 | % | ||
| 67 | 80 | % | 104% | 120 | % | ||
| 68 | 85 | % | 105% | 125 | % | ||
| 69 | 90 | % | 106% | 130 | % | ||
| 70 | 95 | % | 107% | 135 | % | ||
| 71 | 100 | % | 108% | 140 | % | ||
| 72 | 110 | % | 109% | 145 | % | ||
| 73 | 120 | % | 110% or more | 150 | % | ||
| 74 | 130 | % | |||||
| 75 | 140 | % | |||||
| 76 or More | 150 | % |
A-4
EXAMPLE INDIVIDUAL EXPECTATIONS WORKSHEET
| Name: | Target IC (%): | |||||||
| Position Title: | Grade Level: | |||||||
| | | Ratings | (e) Overall Perf. Score % (c x d) | |||||
|---|---|---|---|---|---|---|---|---|
| (a) Specific Expectations / Standards of Measure (Deliverables to be Achieved) | (b) Accomplishments / Results (Actual Results Achieved in Performance Period) | (c) Weighting % | (d) Actual Perf. % | |||||
| 1. | ||||||||
2. | ||||||||
3. | ||||||||
4. | ||||||||
5. | ||||||||
100% | ||||||||
Total Score on Specific Expectations (add column "e") > | ||||||||
| Signed by: Associate | Manager |
B-1
PERFORMANCE/PAYOUT TABLE
FOR REVENUE, EBITDA AND INDIVIDUAL EXPECTATIONS
| | % of Objective(s) Achieved* | % Payout* | | |||
|---|---|---|---|---|---|---|
| 80% is the threshold for performance | 79% or less | 0% | ||||
| achievements to result in a payout.--> | 80% | 65% | ||||
| 81% | 67% | |||||
| 82% | 69% | |||||
| 83% | 70% | |||||
| 84% | 72% | |||||
| 85% | 74% | |||||
| 86% | 76% | |||||
| 87% | 77% | |||||
| 88% | 79% | |||||
| 89% | 81% | |||||
| 90% | 83% | |||||
| 91% | 84% | |||||
| 92% | 86% | |||||
| 93% | 88% | |||||
| 94% | 89% | |||||
| 95% | 91% | |||||
| 96% | 93% | |||||
| 97% | 95% | |||||
| 98% | 96% | |||||
| 99% | 98% | |||||
| 100% | 100% | <--100% is the target for performance | ||||
| 101% | 102.5% | achievements to receive 100% payout. | ||||
| 102% | 105.0% | |||||
| 103% | 107.5% | |||||
| 104% | 110.0% | |||||
| 105% | 112.5% | |||||
| 106% | 115.0% | |||||
| 107% | 117.5% | |||||
| 108% | 120.0% | |||||
| 109% | 122.5% | |||||
| 110% | 125.0% | |||||
| 111% | 127.5% | |||||
| 112% | 130.0% | |||||
| 113% | 132.5% | |||||
| 114% | 135.0% | |||||
| 115% | 137.5% | |||||
| 116% | 140.0% | |||||
| 117% | 142.5% | |||||
| 118% | 145.0% | |||||
| 119% | 147.5% | |||||
| 120% or greater | 150.0% | <--150% is the maximum payout level. |
For business support groups, both Alliance EBITDA and Alliance Revenue targets must be achieved at 100% or greater in order for Individual Expectations to be paid above 100% of target. For lines of business, both LOB EBITDAand LOB Revenue targets must be achieved at 100% or greater in order for Individual Expectations to be paid above 100% of target.
C-1
