Exhibit No. 10(G)
2003 PROGRESSIVE CAPITAL MANAGEMENT
BONUS PLAN
1. The Progressive Corporation and its subsidiaries (collectively
"Progressive" or "Company") have adopted the 2003 Progressive Capital
Management Bonus Plan ("Plan") as part of their compensation program for
investment professionals. The Plan is performance-based and is
administered under the direction of the Compensation Committee of the
Board of Directors of The Progressive Corporation ("Committee").
2. Progressive employees who are assigned primarily to the Company's capital
management function are eligible to be selected for participation in the
Plan. Eligible employees may be selected by the Chief Executive Officer
("CEO") to participate in the Plan for one or more Plan years.
Participants may also participate in other gainsharing, bonus or incentive
compensation plans maintained by Progressive, if so determined in the
discretion of the CEO. Plan years shall coincide with Progressive's fiscal
years. For 2003, and each Plan year thereafter until otherwise determined
by the CEO, the following individuals will be entitled to participate in
the Plan: William Cody, Steve Anderson, Evelyn Erb, David Benson, Anthony
Grandolfo, Eleanora Crosby, Nhu Nguyen, Dominic Visco and Sandy Richards.
Other eligible employees of the Company may be selected for participation
in the Plan for or at any time during a Plan year by the CEO.
3. The Plan offers participants the opportunity to earn bonus compensation
through two (2) separate components: the Portfolio Performance Component
and the Discretionary Bonus Pool Component, as described in Sections 4 and
5 below ("Bonus Components"). The term "Annual Bonus," as used herein,
shall mean the aggregate of all bonuses earned by or awarded to a
participant under the two (2) Bonus Components.
4. The Portfolio Performance Component
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A. The amount of the Portfolio Performance Bonus earned by any
participant under the Plan for any Plan year will be determined by
application of the following formula:
Portfolio Performance Bonus = Paid Earnings x Target Percentage x
Portfolio Performance Factor
B. For purposes of the Plan, "Paid Earnings" shall include (a) regular,
vacation, sick, holiday and funeral pay received by the participant
for the Plan year for work or services performed by the participant
as an officer or employee of Progressive, (b) retroactive payments
of any of the foregoing relating to the same Plan year and (c) for
the 2003 Plan year only, any lump sum merit awards for calendar year
2002 performance, which are payable in 2003.
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For purposes of the Plan, Paid Earnings shall not include any (a)
short-term or long-term disability payments, (b) lump sum merit
awards earned for any calendar year after 2002, (c) payments from
the merit cash pool, (d) discretionary or other bonus or incentive
payments or (e) the earnings replacement component of any worker's
compensation award. If additional participants are added during the
course of a given Plan year, their Portfolio Performance Bonus will
be based on the portion of their salary earned during the Plan year.
C. The Target Percentages for participants in the Plan shall be
determined by the Committee, but will not exceed 125% for any
participant. Target Percentages may vary among Plan participants and
may be changed from year to year by the Committee. For 2003, and
each Plan year thereafter until otherwise determined by the
Committee, the Target Percentages for the Plan participants shall be
as follows:
Name Target Percentages
---- ------------------
William Cody 100%
Steve Anderson 100%
Evelyn Erb 100%
David Benson 100%
Anthony Grandolfo 100%
Eleanora Crosby 18.75%
Nhu Nguyen 11.25%
Dominic Visco 11.25%
Sandy Richards 6.0%
D. Portfolio Performance Factor
The Portfolio Performance Factor is determined by comparing the
actual performance of designated segments of Progressive's
investment portfolio ("Portfolio Segments") against specified
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external benchmarks, which shall be risk-adjusted as provided herein
("Investment Benchmarks").
The applicable Portfolio Segments, the weighting of the applicable
Portfolio Segments for any participant, the related Investment
Benchmarks and the funds, collection of funds or indexes which
comprise the Investment Benchmarks will be designated, and may be
changed from year to year, by the Committee.
The Portfolio Performance Factor is based on Plan year performance.
Investment results are marked to market in order to calculate total
return, which is then compared against the designated risk-adjusted
Investment Benchmark to produce a Performance Score for the
applicable Portfolio Segment.
For 2003, and for each Plan year thereafter until otherwise
determined by the Committee, for purposes of the Plan, performance
shall be measured on the basis of a single Portfolio Segment: the
fixed income portfolio ("Fixed Income Portfolio").
Fixed Income Portfolio. At the conclusion of a Plan year, the
investment funds which comprise the selected Investment Benchmark
for the Fixed Income Portfolio will be risk-adjusted through
application of the Modigliani formula for measuring risk-adjusted
performance ("Modigliani Formula") in accordance with the provisions
of Exhibit I hereto, and ranked according to their respective
risk-adjusted returns for the Plan year. In applying the Modigliani
Formula to the Investment Benchmark for the Fixed Income Portfolio,
risk-adjusted returns are calculated using the standard deviation of
three years of quarterly returns (i.e. 12 data points). The
investment performance achieved by the Fixed Income Portfolio for
the Plan year will then be compared against the risk-adjusted
performance of the several investments which comprise the applicable
Investment Benchmark to determine the decile in which such
Portfolio's performance falls ("Decile Ranking"). The
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Performance Score of the Fixed Income Portfolio is determined by its
Decile Ranking for the Plan year, as follows:
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DECILE PERFORMANCE
RANKING SCORE
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1st 2.00
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2nd 1.78
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3rd 1.56
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4th 1.33
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5th 1.11
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6th .89
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7th .67
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8th .44
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9th .22
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10th 0
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Performance of the Fixed Income Portfolio shall be measured by any
one, or a combination of any two or more, of the following
benchmarks, or such other benchmark or benchmarks, as shall be
designated by the Committee, which will be risk-adjusted as
described above:
Rogers Casey Intermediate Fixed Income Funds
Rogers Casey Limited Duration Fixed Income Funds
Lehman Intermediate Corp./Gov. Index
The applicable Investment Benchmark(s), or combination thereof, will
be selected, and may be changed on an annual or quarterly
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basis, by or with the approval of the Committee. For 2003, and for
all subsequent Plan years until otherwise determined by the
Committee, the performance of the Fixed Income Portfolio will be
measured by the Rogers Casey Intermediate Fixed Income Funds
benchmark. In the event that different Investment Benchmarks are
applicable to different quarterly periods within a given Plan year,
the quarterly performance results will be combined and the
arithmetic mean of such results will equal the Performance Score for
the Plan year.
The Portfolio Performance Factor for any participant can vary from 0
to 2.0, based on actual performance versus the pre-established
Benchmarks.
5. Discretionary Bonus Pool Component
A. A pool of bonus money will be objectively determined and made
available to the CEO to distribute among designated participants at
his or her sole discretion, subject to approval by either the Chief
Human Resource Officer or Chief Financial Officer. The CEO shall
designate the individuals, if any, who are eligible to participate
in the Discretionary Bonus Pool Component for a given Plan year. For
2003, and each Plan year thereafter until otherwise determined by
the CEO, the eligible participants for the Discretionary Bonus Pool
Component are Steve Anderson, Evelyn Erb, David Benson and Anthony
Grandolfo. The CEO is not obligated to disburse all of the funds in
the bonus pool, and may not disburse more than the value of the
pool. Undisbursed funds will not be carried over to future years.
B. The Discretionary Bonus Pool is based on the Fixed Income Portfolio
performance and is calculated by adding the product of each
participant's Paid Earnings multiplied by the target percentage
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designated by the CEO for the purpose of determining the amount of
the Discretionary Bonus Pool (not to exceed 20%), multiplied by the
performance score of the Fixed Income Portfolio, which can range
from 0 to 2. The Discretionary Bonus Pool will be calculated using
the amount of salary actually paid to eligible participants during
the course of the Plan year.
6. After the end of each Plan year, and after the investment results and
Benchmark data for such Plan year have become available, the bonuses
earned by each participant pursuant to the provisions of Sections 4 and 5
of this Plan will be calculated and then aggregated to determine the
Annual Bonus earned by each participant in the Plan. Subject to the
following paragraph and Paragraph 7 below, the Annual Bonuses for a Plan
year will be paid to Plan participants as soon as practicable after
investment results and Benchmark data for such Plan year become available,
but no later than March 15th of the following year.
Any Plan participant who is eligible to participate in The Progressive
Corporation Executive Deferred Compensation Plan ("Deferral Plan") may
elect to defer all or any portion of his or her annual Portfolio
Performance Bonus otherwise payable under this Plan, subject to and in
accordance with the terms of the Deferral Plan. Bonuses based on the
Discretionary Bonus Pool Component are not eligible for deferral under the
Deferred Plan.
7. Unless otherwise determined by the Committee, and except as otherwise
provided herein, in order to be entitled to receive an Annual Bonus for
any Plan year, the participant must be an active employee of Progressive
on the last day of such Plan year ("Qualification Date"). Any participant
who is on a leave of absence covered by the Family and Medical Leave Act
of 1993, personal leave approved by the Company, military leave or short
or long-term disability on the Qualification Date relating to any Plan
year will be entitled to receive an Annual Bonus for the Plan year based
on the Paid Earnings received by the participant during the Plan year.
Annual
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Bonus payments made to participants will be net of any legally required
deductions for federal, state and local taxes and other items.
8. The right to any Annual Bonuses hereunder may not be sold, transferred,
assigned or encumbered by any participant. Nothing herein shall prevent
any participant's interest hereunder from being subject to involuntary
attachment, levy or other legal process.
9. The Plan will be administered by or under the direction of the Committee.
The Committee will have the authority to adopt, alter, amend, modify and
repeal such rules, guidelines, procedures and practices governing the Plan
as it, from time to time, in its sole discretion deems advisable.
The Committee will have full authority to determine the manner in which
the Plan will operate, to interpret the provisions of the Plan and to make
all determinations thereunder. All such interpretations and determinations
will be final and binding on Progressive, all Plan participants and all
other parties. No such interpretation or determination may be relied on as
a precedent for any similar action or decision.
Unless otherwise determined by the Committee, all of the authority of the
Committee hereunder (including, without limitation, the authority to
administer the Plan, select the persons entitled to participate herein or
with respect to the various Bonus Components provided for herein,
interpret the provisions hereof, waive any of the requirements specified
herein and make determinations hereunder and to establish, change or
modify Bonus Components, Component weightings, Investment Benchmarks,
Performance Targets and Target Percentages) may be exercised by the CEO
and Chief Human Resource Officer, acting jointly. If either of said
officers is unavailable or unable to participate, or if either of such
positions are vacant, the Chief Financial Officer may act instead
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of such officer. In the event of a dispute or conflict, the determination
of the Committee will govern.
10. The Plan may be terminated, amended or revised, in whole or in part, at
any time and from time to time by the Committee, in its sole discretion.
11. The Plan will be unfunded and all payments due under the Plan will be made
from Progressive's general assets.
12. Nothing in the Plan shall be construed as conferring upon any person the
right to remain a participant in the Plan or to remain employed by
Progressive, nor shall the Plan limit Progressive's right to discipline or
discharge any of its officers or employees or change any of their job
titles, duties or compensation.
13. Progressive shall have the unrestricted right to set off against or
recover out of any bonuses or other sums owed to any participant under the
Plan any amounts owed by such participant to Progressive.
14. This Plan supersedes all prior plans, agreements, understandings and
arrangements regarding bonuses or other cash incentive compensation
payable or due to any participant from Progressive. Without limiting the
generality of the foregoing, this Plan supersedes and replaces the 2002
Progressive Capital Management Bonus Plan (the "Prior Plan"), which is and
shall be deemed to be terminated as of December 31, 2002 (the "Termination
Date"); provided, that any bonuses or other sums earned and payable under
the Prior Plan with respect to any Plan year ended on or prior to the
Termination Date shall be unaffected by such termination and shall be paid
to the appropriate participants when and as provided thereunder.
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15. This Plan is adopted and, is to be effective, as of January 1, 2003. This
Plan shall be effective for 2003 and for each year thereafter unless and
until terminated by the Committee.
16. This Plan shall be interpreted and construed in accordance with the laws
of the State of Ohio.
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METHOD USED TO CALCULATE THE VARIABLE COMPENSATION FOR PCM
FIXED INCOME PORTFOLIO
The performance factor that determines the variable component of PCM
compensation depends on the decile ranking of the PCM Portfolio Segment's total
return compared to the risk-adjusted total return of its peers from the
Rogers-Casey survey of Intermediate Fixed Income fund managers. Because the R-C
survey is only conducted quarterly, we must use quarterly data for both returns
standard deviation. The annual returns are calculated from the 4 quarterly
returns of the year, but the standard deviation calculation is derived from the
most recent 12 quarters (3 years) and converted to annual terms. A fund must
have return data for all 12 quarters to be included in the comparison sample.
To calculate the decile ranking of PCM returns relative to the returns from the
Rogers-Casey survey, we adjust the individual R-C fund managers' returns to
match the risk of the PCM Portfolio Segment by applying the Modigliani &
Modigliani (M2) formula. Thus, the raw PCM return and the risk-adjusted PCM
return will be identical, while the individual fund manager returns will be
adjusted according to how much risk each has relative to PCM. The formula and
definitions are given below.
RA Return (fund) = [STDpgr/STDfund] * [Raw Return (fund) - Rf] + Rf
STDpgr = Sample Standard Deviation of Quarterly Returns (Annualized) for 3
Years (i.e., 12 data points)
STDfund = Sample Standard Deviation of Quarterly Returns (Annualized) for
3 Years (i.e., 12 data points)
Raw Return (fund) = Total Return of Individual R-C Fund Manager for 4
Quarters (Annual return)
Rf = "Risk-free rate" 90-day LIBOR Rate at Beginning of Each Quarter for 4
Quarters (Annual return)
Example 1: Example 2:
Fund had more risk than PCM Fund had less risk than PCM
STDpgr = 15% STDpgr = 15%
STDfund = 20% STDfund = 10%
Raw Return (fund) = 8% Raw Return (fund) = 8%
Rf = 4% Rf = 4%
RA Return (fund) = [15% / 20%]*[8% - 4%] + 4% RA Return (fund) = [15% / 10%]*[8% - 4%] + 4%
RA Return (fund) = 7% RA Return (fund) = 10%
Because the fund was riskier, its RA return Because the fund was less risky, its RA return
is lower is higher
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