EXHIBIT 10(b)
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2002 SENIOR EXECUTIVE COMPENSATION BONUS PROGRAM
The Senior Executive Bonus Program is a measure of the three areas often
looked at when comparing results of different companies or in comparing
current company results from one year to the next.
PURPOSE
1. To provide a motivational tool in the form of compensation to help
executives focus on specific organizational goals to improve profits,
surplus and service in all areas of the corporation.
2. To maintain competitive advantage in terms of recruitment and retention
of senior executives.
3. To provide a plan based on EMC results and industry results, to provide
a better measure of performance.
4. Reward superior results more appropriately.
5. Provide a maximum bonus difficult to attain so there is incentive to
strive for better results.
6. To provide a measure of safety to the company so that senior officers'
total compensation is reduced if company performance declines.
GENERAL BONUS CALCULATION
The bonus plan uses production, surplus growth and the combined ratio, all
valid measures of performance, as follows:
1. EMC WRITTEN PREMIUM - Compares consolidated written premium to a goal
that is established each year.
2. CHANGE IN SURPLUS
3. COMBINED RATIO - Compares EMC combined ratio to a target ratio
established by the Committee each year. Also compares EMC's combined
ratio to that of the industry.
Fifty percent of any bonus would be based on the industry estimate
published in January by A.M. Best and paid at that time. The remaining
fifty percent would be paid when final numbers are released by A.M. Best
(generally in March).
ALL CALCULATIONS ARE ROUNDED TO THE NEAREST ONE TENTH OF ONE PERCENT.
The factors in each of the formulas are subject to change each year with final
approval by the Senior Executive Compensation and Incentive Stock Option
Committee.
WRITTEN PREMIUM
This component is based on actual net written premium growth compared to a
consolidated written premium goal established each year and approved by the
Committee.
Achieving goal results in a bonus contribution of plus 7.5 percent of salary.
This changes by 1.5 percent for each 1.0 percent variation from goal, subject
to a maximum contribution of plus 15.0 percent and a minimum contribution of
minus 15.0 percent.
The written premium component is determined as follows:
Percent of actual change, minus goal, plus 5.0, times 1.50.
Example 1: The goal equals 8.5 percent premium growth.
- ---------- The actual change equals 7.5 percent premium growth.
7.5 percent minus 8.5 percent equals minus 1 plus 5.0, equals 4.0 times 1.50
equals 6.0. The contribution in this example of written premium towards the
total bonus is equal to 6.0 percent.
Example 2: The goal equals 5.7 percent premium growth. The actual change
- ---------- equals minus 1.3 percent premium growth.
Minus 1.3 percent minus 5.7 percent equals minus 7.0 plus 5.0 equals minus 2.0
times 1.50 equals minus 3.0.
Example 3: The goal equals 4.7 percent premium growth.
- ---------- The actual change equals 9.8 percent premium growth.
9.8 percent minus 4.7 percent equals 5.1 percent plus 5.0 equals 10.1 times
1.50 equals 15.2 percent. The contribution in this example of written premium
towards the total bonus equals plus 15.0 percent.
(This component not to exceed plus or minus 15.0 percent of total bonus.)
SURPLUS
The component of surplus is based on the actual change in surplus. Each one
percent change in surplus represents a change in bonus equal to 1.00 percent
of salary subject to a maximum of 25.0 percent and a minimum of minus 20.0
percent.
The surplus component is determined as follows:
Percent surplus change times multiplier of 1.00.
Example 1: Change in surplus equals plus 4.6 percent.
- ---------- Contribution towards total bonus from surplus component equals
4.6 percent times 1.00 equals 4.6 percent.
Example 2: Change in surplus equals a minus 2.4 percent. Contribution
- ---------- towards total bonus from surplus component equals minus 2.4
percent times 1.00 equals minus 2.4 percent.
Example 3: Change in surplus equals a plus 10.7 percent. Contribution
- ---------- towards total bonus from surplus component equals 10.7 percent
times 1.00 equals 10.7 percent.
COMBINED RATIO
The component for combined ratio is based on EMC's consolidated combined ratio
relative to a target combined ratio on a trade basis, adjusted by a comparison
of the EMC combined ratio to that of the industry.
The target combined ratio for 2002 is 103.0 percent. Current actuarial
calculations estimate that a combined ratio of 103.0 percent produces a return
on statutory surplus of 12.5 percent after taxes. This considers income from
all sources including investment return on surplus and assumes a premium to
surplus ratio of two to one.
The formula uses a target ratio of 103.0 percent which is subject to Committee
approval each year. For each 1.0 percent change in the combined ratio, the
bonus contribution changes 5.0 percent subject to a maximum contribution of
plus 65.0 percent and a minimum contribution of minus 40.0 percent.
First determine EMC's relationship to the industry by subtracting EMC's
combined ratio from that of the industry.
The initial Industry estimate published in December or January by A.M. Best
will be the number used in the calculation. Adjusments will be made as
required when A.M. Best releases final numbers, generally in March.
If the result is a positive number, subtract result (not to exceed 3.0
percent) from EMC's combined ratio to obtain adjusted combined ratio.
Subtract adjusted combined ratio from target combined ratio, add 6.0, multiply
by 5.00 to equal the bonus produced by the combined ratio component.
If the result is a negative number or 0.0, no adjustment is necessary and the
EMC combined ratio is the adjusted combined ratio. Subtract the adjusted
combined ratio from the target combined ratio, add 6.0, multiply by 5.00 to
equal the bonus produced by the combined ratio component.
The combined ratio formula is determined as follows:
103.0 minus the adjusted combined ratio plus 6.0 times 5.00.
Example 1: Industry ratio equals 101.6 percent.
- ---------- EMC ratio equals 97.1 percent.
Adjustment * 101.6 minus 97.1 equals 3.0 (maximum
adjustment allowed).
Adjusted ratio * 97.1 minus 3.0 equals 94.1 percent. Target
ratio equals 103.0 percent.
103.0 percent minus 94.1 percent equals 8.9 plus 6 equals 14.9
times 5.00 equals 74.5 percent. (Capped at 65.0)
The contribution towards total bonus from the combined ratio component equals
65.0 percent.
Example 2: Industry ratio equals 101.6 percent.
- ---------- EMC ratio equals 100.1 percent.
Adjustment * 101.6 minus 100.1 equals 1.5 percent.
Adjusted ratio * 100.1 minus 1.5 equals 98.6 percent.
Target ratio equals 103.0 percent.
103.0 percent minus 98.6 percent equals 4.4 percent plus 6.0
equals 10.4 percent times 5.00 equals 52.0 percent.
The contribution towards the total bonus from the combined ratio component
equals 52.0 percent.
Example 3: Industry ratio equals 101.6 percent.
- ---------- EMC ratio equals 110.1 percent.
Adjustment - None (If EMC performance is worse than the
industry average, use the EMC ratio in the formula).
Adjusted ratio * 110.1.
Target ratio equals 103.0 percent.
103.0 percent minus 110.1 percent equals minus 7.1 plus 6.0
equals minus 1.1 times 5.00 equals minus 5.5.
The contribution towards the total bonus from the combined ratio component
equals minus 5.5 percent.
Assuming each example represents one year, the bonus for the three years would
be as follows:
Component Example 1 Example 2 Example 3
Written Premium 6.0% -3.0% 15.0%
Surplus 4.6% -2.4% 10.7%
Combined Ratio 65.0% 52.0% -5.5%
----- ----- -----
Total Bonus 75.6% 46.6% 20.2%
* Maximum bonus for Vice President is 75.0 percent.
This represents the bonus for Vice Presidents. Factors would be
applied as follows to arrive at the bonus calculations for Senior Vice
Presidents, Executive Vice President, and President.
Position Example 1 Example 2 Example 3
Vice President 75.0% 46.6% 20.2%
Senior VP Multiply by 1.10 82.5% 51.3% 22.2%
Executive VP Multiply by 1.20 90.0% 55.9% 24.2%
President Multiply by 1.30 97.5% 60.6% 26.3%
MAXIMUM BONUS
For Vice Presidents, the total bonus is the sum of the three components
subject to a maximum of 75 percent of salary.
Maximum Bonus
For Vice Presidents, the percent of salary is 75.0 %
For Senior Vice Presidents, multiply the bonus
percentage by 1.10. 82.5 %
For Executive Vice President, multiply the bonus
percentage by 1.20. 90.0 %
For President, multiply the bonus percentage by
1.30. 97.5 %
EXECUTIVES ELIGIBLE FOR BONUS
Vice Presidents Senior VP Executive VP President
Mark E. Reese John D. Isenhart Ronald W. Jean Bruce G. Kelley
Richard W. Hoffmann David O. Narigon William A. Murray
Douglas J. Zmolek Raymond W. Davis
Steven C. Peck Donald D. Klemme
A. Beech Turner Kevin Hovick
Richard L. Gass
Jeffrey T. Dahms
PLAN ADMINISTRATION
1. An executive must be on the payroll a minimum of six months
before he/she is eligible for a bonus payment.
2. An executive terminating employment with the companies before
the established date for the payment of bonuses will not be
paid a bonus.
3. Executives retiring or becoming deceased or disabled before
the established date for the payment of bonuses will receive
a bonus on the basis of the portion of the year he/she was on
the payroll.
4. If an executive becomes a member of the Policy Committee at
some time during the year, they will receive a prorata bonus
for that portion of the year they are a member.
5. If an executive is promoted during the year and/or given a
salary increase, the bonus will be prorated on the basis of
the position and/or the salaries paid for the specific
position.
6. Deductions for federal and state income taxes, and FICA, if
applicable, will be made from each bonus on the basis of IRS
regulations.
7. Before any bonuses are paid, a member of Ernst & Young
Auditing Firm will determine that the calculations are
correct according to the bonus plan document.
8. The Executive Compensation Committee may, at its discretion
adjust the bonus calculation for unusual or extenuating
circumstances that unfairly impact the results.
9. The EMC Employee Contingent Salary Plan provides that
employees eligible under a separate "bonus" program will
receive the larger of the "bonus" and the "contingent salary"
for the plan year. In the unlikely event the "contingent
salary" is larger than the "senior executive bonus" the
Executive Compensation Committee may, at its discretion,
approve payment of the "contingent salary" in lieu of the
"senior executive bonus".
10. If there is a disagreement or misunderstanding of the basis
for the bonus or in the calculation in the amounts, the
decision of the Senior Executive Compensation and Incentive
Stock Option Committee will be final.