PHILADELPHIA SUBURBAN CORPORATION
PHILADELPHIA SUBURBAN WATER COMPANY
1998 ANNUAL CASH INCENTIVE COMPENSATION PLAN
BACKGROUND
o During the first quarter of 1989, the Company and its compensation
consultant conducted a feasibility study to determine whether the
Company should implement an incentive compensation plan. The study was
prompted by the positive experience of other investor-owned water
companies and PSC's experience with incentive compensation.
o The study included interviews with PSWC and PSC executives and an
analysis of competitive compensation levels. Based on the results, the
compensation consultant recommended that the Company's objectives and
competitive practice supported the adoption of an annual incentive plan
(the "Plan"). The Company has had a cash incentive compensation plan in
place since 1990 and management and the Board of Directors feel it has
had a positive effect on the Company's operations, aiding employees,
shareholders (higher earnings) and customers (better service and
controlling expenses).
o The Plan has two components - a Management Incentive Program and an
Employee Recognition ("Chairman's Award") Program.
o The Plan is designed to provide an appropriate incentive to the
officers and managers of the Company. The 1998 Management Incentive
Program will cover all officers and managers of Philadelphia Suburban
Corporation, and its subsidiaries.
MANAGEMENT INCENTIVE PROGRAM
o Performance Measures
-- Annual incentive bonus awards are calculated by multiplying an
individual's Target Bonus by a Company Rating factor based on
the Company's performance and an Individual Rating factor
based on the individual employee's performance.
The approach of having a plan tied to the Company's income
performance is appropriate as the participants' assume some of
the same risks and rewards as the shareholders who are
investing in the Company and making its capital construction
and acquisition programs possible. Customers also benefit from
the Company's employees' objectives being met as improvements
in performance are accomplished by controlling costs,
improving efficiencies and enhancing customer service. For
these reasons, future rate relief should be lessened and less
frequent, which directly benefits all customers.
-- The Company's actual after-tax net income from continuing
operations relative to the annual budget will be the primary
measure for the Company's performance. Each year a "Target Net
Income" level will be established. For purposes of the Plan,
the Target Net Income may differ from the budgeted net income
level. For 1998, the Target Net Income will exclude the impact
of adverse PUC or court rulings on FAS 106, the effect of any
unbudgeted extraordinary gains or losses, changes in
accounting principles, changes in tax rates and any gains or
losses related to the discontinued operations.
-- Based on a review of historic performance, the minimum or
threshold level of performance is set at 90 percent of the
Target Net Income. That is, no bonus awards will be made if
actual net income is less than 90 percent of the Target Net
Income for the year. No additional bonus will be earned for
results exceeding 110 percent of the Target Net Income.
-- Each individual's performance and achievement of his or her
objectives will also be evaluated and factored into the bonus
calculation. Performance objectives for each participant are
established at the beginning of the year and are primarily
directed toward controlling costs, improving efficiencies and
productivity and enhancing customer service. Each objective
has specific performance measures that are used to determine
the level of achievement for each objective.
o Participation
-- Participation in the Management Incentive Program will be
determined each year. Each participant will be assigned a
"Target Bonus Percentage" ranging from 5 to 50 percent of
salary depending on duties and responsibilities.
-- Actual bonuses may range from 0, if the Company's financial
results fall below the minimum threshold or the participant
does not make sufficient progress toward achieving his or her
objectives (i.e. performance measure points totaling less than
70 points), to 187.5 percent if performance -- both Company
and individual -- is rated at the maximum.
o Company Performance
-- Company performance will be measured on the following
schedule:
Percent of Company
1996 Plan Rating
--------- ------
Threshold.............. greater than 90% 0%
90 50
92 65
95 80
96 85
97 90
98 94
99 97
Plan................... 100 100
105 110
greater than 110 125
-- The actual Company Rating should be calculated by
interpolation between the points shown in the table above.
-- Regardless of the Company rating resulting from this Schedule,
the Executive Compensation and Employee Benefits Committee
retains the authority to determine the final Company Rating
for purposes of this Plan.
o Individual Performance
-- Individual performance will be measured on the following
scale:
Performance Measure Individual
Points Rating
------------------- ----------
0 - 69 0%
70 70%
80 80%
90 90%
100 100%
110 110%
-- In addition, up to 40 additional points and additional
percentage points may be awarded to a participant at the
discretion of the Chief Executive Officer for exemplary
performance. Individual Performance points for the Chief
Executive Officer are determined by the Executive Compensation
and Employee Benefits Committee.
Sample Calculations
o Example 1
Salary $70,000
Target Bonus 10 percent ($7,000)
Company Rating 100 percent
Individual Rating 90 percent
Calculation:
Company Individual
Target Bonus x Rating x Rating = Bonus Earned
------------ ------ ---------- ------------
$7,000 x 100% x 90% = $6,300
======
o Example 2
-- Using the same salary and target bonus, but assuming Company
performance was less than 90 percent of Target Net Income,
there would be no bonus earned.
Calculation:
$7,000 x 0 x 90% = 0
o Example 3
-- Similarly, if individual Performance is rated below 70 points,
no bonus would be earned regardless of the Company Rating.
Calculation:
$7,000 x 100% x 0 = 0
EMPLOYEE RECOGNITION ("CHAIRMAN'S AWARD") PROGRAM
o In addition to the Management Incentive Program, the Company maintains
an Employee Recognition Program known as the Chairman's Award program
to reward employees not eligible for the management bonus plan for
superior performance or a special action, or heroic deed, or for a
project that positively impacts the performance or image of the
Company.
o Awards will be made from an annual pool, not to exceed $175,000 (which
represents approximately 2% of the base payroll for the non-union
employees who do not participate in the Management Incentive Program),
established at the beginning of the year. Unused funds will not be
carried over to the next year. If financial performance warrants,
management may request permission from the Executive Compensation and
Employee Benefits Committee for special awards under the program.
o Awards will be made throughout the year and through the first quarter
of the following year with payment as close to the timing of the event
being rewarded as possible.
o Department Heads may nominate individuals in their unit to the
applicable Vice President and document the reasons for the
recommendations. The applicable Vice President will review the
nominations and forward their recommendations to the Chief Executive
Officer.
o The Chief Executive Officer will determine the individuals to actually
receive a bonus and the amount.