Exhibit No. 10(J)
THE PROGRESSIVE CORPORATION
2004 EXECUTIVE BONUS PLAN
1. The Progressive Corporation and its subsidiaries ("Progressive") have
designed an executive compensation program consisting of three
components: salary, annual bonus and equity-based incentives. These
components have been structured to reflect the market for executive
compensation and to promote both the achievement of corporate goals and
performance that is in the long-term interest of shareholders. The
annual bonus component of this program is performance-based and focuses
on current results.
2. The 2004 Executive Bonus Plan (the "Plan") provides, in whole or in
part, the annual bonus component of Progressive's executive
compensation program for Plan participants. The Plan shall be
administered by or under the direction of the Compensation Committee
(the "Committee") of the Board of Directors of The Progressive
Corporation. Executive officers of Progressive may be selected by the
Committee to participate in the Plan for one or more Plan years. Plan
participants may also be eligible to participate in other Progressive
bonus or gainsharing plans, as determined by the Committee. Plan years
shall coincide with Progressive's fiscal years.
3. Subject to the following sentence, the amount of the annual bonus
earned by any participant under the Plan for any Plan year ("Annual
Bonus") will be determined by application of the following formula:
Annual Bonus = Paid Salary x Target Percentage x Performance Factor
The Annual Bonus payable to any participant with respect to any Plan
year shall not exceed $5,000,000.00.
4. The salary rate of each Plan participant for any Plan year shall be
established by the Committee no later than ninety (90) days after
commencement of such Plan year. For purposes of the Plan, "salary" and
"Paid Salary" shall include regular, used Earned Time Benefit, sick,
holiday and funeral pay received by the participant during the Plan
year for work or services performed by the participant as an officer or
employee of Progressive, but shall not include any (a) short-term or
long-term disability payments, (b) lump sum merit adjustments, (c)
discretionary or other bonus or incentive payments, (d) unused Earned
Time Benefit, or (e) the earnings replacement component of any worker's
compensation award.
5. The Target Percentages for the participants in the Plan shall be
determined by the Committee, but will not exceed 200% for any
participant. Target Percentages may vary among Plan participants and
may be changed from year to year by the Committee.
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6. The Performance Factor
A. General
The Performance Factor shall consist of one or more of the
following components: a Core Business Profitability and Growth
Component, one or more Business Segment Performance
Components, a Cost Structure Improvement Component and an
Investment Performance Component (the "Bonus Components" or
"Components"). An appropriate combination of Bonus Components
will be designated for each participant, and the designated
Bonus Components will be weighted, based on such participant's
assigned responsibilities, as determined by the Committee.
The relative weighting of the Bonus Components may vary among
Plan participants and may be changed from year to year by the
Committee.
For purposes of computing the amount of the Annual Bonus for
any Plan year, a Performance Score will be calculated for each
of the designated Bonus Components, based on the performance
of the business(es), product(s) or function(s) being measured
by that Component, as described below. The Performance Score
will equal 1.0 if specified performance goals are met, and can
vary from 0 to 2.0, based on actual performance versus the
pre-established objectives. The Performance Score achieved for
each of the designated Bonus Components will then be
multiplied by the applicable weighting factor to produce a
Weighted Performance Score for that Component. The sum of the
Weighted Performance Scores for the applicable Bonus
Components will equal the Performance Factor, which can
likewise vary from 0 to 2.0. The Performance Factor cannot
exceed 2.0, regardless of results.
Actual performance results achieved for any Plan year, which
will be used to calculate the Performance Score achieved for
each of the applicable Bonus Components, must be certified by
the Committee prior to payment of the Annual Bonus.
B. Core Business Profitability and Growth Component
The Core Business Profitability and Growth Component measures
the overall operating performance of Progressive's Core
Business for the Plan year for which an Annual Bonus payment
is to be made. The Core Business will consist of the Agency
Business Segment, the Direct Business Segment, the Commercial
Auto Business Segment and/or such other Business Segment(s)
(as defined below), if any, as shall be designated and defined
by the Committee for the Plan year. The Performance Score for
this Component is based on weighted operating performance
results for each of the Business Segments included in the Core
Business (the "Core Business Segments"). Each Plan year, a
separate
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Performance Matrix for each Core Business Segment will be
established by or under the direction of the Committee. Each
such Performance Matrix will assign a Performance Score to
various combinations of profitability and growth outcomes for
the applicable Business Segment, based on the following
criteria:
- profitability will be measured by one of the following, as
designated by the Committee: combined ratio, weighted
combined ratio, variation in combined ratio from a
targeted combined ratio, return on equity or return on
revenue; and
- growth will be measured by changes in one of the
following, as designated by the Committee: net earned
premium, net written premium or lifetime earned premium
(i.e., the amount of earned premium expected to be
generated over time with respect to policies written
during a Plan year, including any subsequent renewals
thereof, as determined by a formula approved by the
Committee).
Profitability and growth will be separately determined for
each of the Core Business Segments, using the performance
criteria designated by the Committee for the Plan year, and
will then be matched using the applicable Performance Matrix,
to determine a Performance Score for each Core Business
Segment.
The resulting Performance Scores for each Core Business
Segment will then be multiplied by a weighting factor (based
on the percentage of net earned premiums generated by such
Core Business Segment during the Plan year or such other
factor(s) as shall be approved by the Committee), the weighted
Performance Scores will be combined and the sum of the
weighted Performance Scores will be the Performance Score for
the Core Business Profitability and Growth Component.
C. Business Segment Performance Component
The Business Segment Performance Component measures the
performance of one or more designated Business Segments (as
defined below) in terms of any one or more of the following
criteria selected by the Committee:
- profitability -- measured by the combined ratio, weighted
combined ratio, variation in combined ratio from a
targeted combined ratio, return on equity or return on
revenue;
- growth -- measured by changes in net written premium, net
earned premium or lifetime earned premium, as described
above; or
- operating effectiveness -- measured by systems
availability or timeliness of response.
A Business Segment may consist of a distribution channel,
business unit, product, class or type of business (e.g.,
designated types of policies written in a distribution
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channel or by a business unit), function, process or other
business category, such as new or renewal business.
The Committee may designate one or more Business Segment
Performance Components for an individual Plan participant for
any Plan year and, for each such Component, will determine the
applicable criteria by which performance will be measured, the
goals to be achieved and the Performance Scores that will
result from various levels of performance, and the relative
weighting thereof. The applicable performance criteria,
related goals and resulting Performance Scores may be set
forth in a Business Segment Performance Matrix or other format
approved by the Committee. Business Segment Performance
Components, performance criteria, goals, resulting Performance
Scores and relative weightings may vary among participants and
may be changed from year to year by the Committee.
D. Cost Structure Improvement Component
The Cost Structure Improvement Component measures success in
achieving cost structure improvement for the Core Business, as
a whole, or for an assigned Business Segment, if applicable.
Results are reflected in a Cost Structure Improvement Score.
For purposes of computing the Cost Structure Improvement
Score, cost structure improvement is measured by comparing the
sum of the GAAP Underwriting Expense Ratio ("Underwriting
Expense Ratio") and Loss Adjustment Expense Ratio ("LAE
Ratio") achieved for the Plan year (collectively, "Actual
Expense Ratio") against defined expense objectives for that
year, as established by or under the direction of the
Committee ("Target Expense Ratio"). The Target Expense Ratio,
including its individual components, may vary by Business
Segment and/or for the Core Business as a whole, and may be
changed from year to year by or under the direction of the
Committee.
The Cost Structure Improvement Score will be computed in
accordance with the following formula:
Cost Structure Improvement = 1 + [Target Expense Ratio-Actual Expense Ratio]
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E. Investment Performance Component
The Investment Performance Component compares the investment
performance of individual segments of Progressive's investment
portfolio ("Portfolio Segments") against the performance of
selected groups of comparable investment funds, indexes or
other benchmarks ("Investment Benchmarks") over such period or
periods as shall be determined by the Committee. Such
Investment Benchmarks may be risk-adjusted in accordance with
such formula or other method as may be determined by the
Committee. Investment results are marked
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to market in order to calculate total return, which is then
compared against the designated Investment Benchmarks to
produce a Performance Score, pursuant to a formula or other
criteria determined by the Committee, for each Portfolio
Segment.
The applicable Portfolio Segments will be identified, and the
related Investment Benchmarks will be determined, by the
Committee and may be changed from year to year by the
Committee.
In the event that any participant's Annual Bonus is to be
determined by the performance of two or more Portfolio
Segments, the Performance Scores for each of the Portfolio
Segments will be weighted, based on the average amounts
invested from time to time in each of such Portfolio Segments
during the Plan year, and the weighted Performance Scores for
the applicable Portfolio Segments will be then combined to
produce the Investment Performance Score. Investment expense
is not included in determining investment performance vs.
benchmark.
7. The Annual Bonus for any Plan year will be paid to participants as soon
as practicable after the Committee has certified performance results
for the Plan year, but no later than March 15 of the immediately
following year. The provisions of this Paragraph shall be subject to
Paragraph 8 hereof.
Any Plan participant who is eligible to participate in The Progressive
Corporation Executive Deferred Compensation Plan ("Deferral Plan") may
elect to defer all or a portion of the Annual Bonus otherwise payable
under this Plan, subject to and in accordance with the terms of the
Deferral Plan.
8. Unless otherwise determined by the Committee, in order to be entitled
to receive an Annual Bonus for any Plan year, the participant must be
employed by Progressive on the date designated for payment thereof
("Qualification Date"); provided, however, that if any participant who
is employed by Progressive on the last day of any Plan year shall die
at any time between the end of such Plan year and the Qualification
Date, his or her estate shall be entitled to receive the Annual Bonus
that would have been payable to such deceased participant had he or she
lived until and been employed by Progressive on the Qualification Date.
Any participant who is on a leave of absence covered by the Family and
Medical Leave Act of 1993, personal leave of absence with the approval
of the Company, military leave or short or long-term disability on the
Qualification Date with respect to any Plan year will be entitled to
receive an Annual Bonus payment for such Plan year, calculated as
provided in Paragraphs 3 through 6 above and based on the amount of
Paid Earnings received by such participant during the Plan year.
Annual Bonus payments made to participants will be net of any legally
required deductions for federal, state and local taxes and other items.
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9. The right to any of the Annual Bonuses hereunder may not be
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.
10. The Plan will be administered by or under the direction of the
Committee. The Committee will have the authority to adopt, amend,
revise 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 hereunder. 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.
The Plan will be administered by the Committee in accordance with the
requirements of Section 162(m) of the Internal Revenue Code, as
amended, and the rules and regulations promulgated thereunder (the
"Code").
11. The Plan is subject to approval by the holders of The Progressive
Corporation's Common Shares, $1.00 par value ("shareholders") in
accordance with the requirements of Section 162(m) of the Code and no
Annual Bonus will be paid hereunder unless the Plan has been so
approved.
12. 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; provided that the Committee may not increase the amount of
compensation payable hereunder to any participant above the amount that
would otherwise be payable upon attainment of the applicable
performance goals, or accelerate the payment of any portion of the
Annual Bonus due to any participant under the Plan without discounting
the amount of such payment in accordance with Section 162(m) of the
Code, and further provided that any amendment or revision of the Plan
required to be approved by shareholders pursuant to Section 162(m) of
the Code will not be effective until approved by The Progressive
Corporation's shareholders in accordance with the requirements of
Section 162(m).
13. The Plan will be unfunded and all payments due under the Plan will be
made from Progressive's general assets.
14. 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, positions, duties or compensation.
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15. 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.
16. 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
Progressive Corporation 1999 Executive Bonus Plan, as heretofore in
effect (the "Prior Plan"), which is and shall be deemed to be
terminated as of December 27, 2003 (the "Termination Date"); provided,
that any bonuses or other sums earned under the Prior Plan with respect
to any period 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.
17. This Plan is adopted and, subject to the provisions of Paragraph 11
hereof, is to be effective, as of December 28, 2003, which is the
commencement of Progressive's 2004 fiscal year. Subject to the
provisions of Paragraph 11, this Plan shall be effective for the 2004
Plan year (which coincides with Progressive's 2004 fiscal year) and for
each Plan year thereafter unless and until terminated by the Committee.
18. This Plan shall be interpreted and construed in accordance with the
laws of the State of Ohio.
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