Exhibit No. 10(A)
THE PROGRESSIVE CORPORATION
2005 GAINSHARING PLAN
1. The Progressive Corporation and its subsidiaries (collectively
"Progressive" or the "Company") have adopted The Progressive Corporation
2005 Gainsharing Plan (the "Plan") as part of their overall compensation
program. The Plan is performance-based and is administered under the
direction of the Compensation Committee of the Board of Directors of The
Progressive Corporation (the "Committee").
2. Plan participants for each Plan year shall be selected by the Committee
from those officers and regular employees of Progressive who are assigned
primarily to the Core Business (as defined below), another operating
business unit or a corporate support function. The gainsharing
opportunity, if any, for those executive officers who participate in The
Progressive Corporation 2004 Executive Bonus Plan ("Executive Plan") will
be provided by and be a component of that plan, although participants in
the Executive Plan may also participate in this Plan if and to the extent
determined by the Committee. Plan years will coincide with Progressive's
fiscal years.
3. Annual Gainsharing Payments under the Plan will be determined by
application of the following formula:
Annual Gainsharing Payment = Paid Earnings x Target Percentage x
Performance Factor
4. Paid Earnings for any Plan year shall mean and include: (a) regular, used
Earned Time Benefit, sick, holiday, funeral and overtime pay received by
the participant during the Plan year for work or services performed during
the Plan year as an officer or employee of Progressive, and (b)
retroactive payments of any of the foregoing items relating to the same
Plan year.
For purposes of the Plan, Paid Earnings shall not include any short-term
or long-term disability payments made to the participant, the earnings
replacement component of any worker's compensation award, any lump sum
merit award, payments from the merit cash pool or any other bonus or
incentive compensation awards and unused Earned Time Benefit.
Notwithstanding the foregoing, if the sum of the regular, used Earned Time
Benefit, sick, holiday and funeral pay received by a participant for a
Plan year exceeds his/her salary range maximum for the Plan year
(determined on an individual pay period basis as of the end of the 24th
pay period), then his/her Paid Earnings for that Plan year shall equal
his/her salary range maximum, plus any of the following items received by
such participant for that Plan year: (a) overtime pay, and (b) retroactive
payments of regular,
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used Earned Time Benefit, sick, holiday, overtime and funeral pay relating
to that Plan year.
5. Target Percentages vary by position. Target Percentages for Plan
participants typically are as follows:
POSITION TARGET %
- -------------------------------------------------------- ----------
Senior Executives, Executive Level Managers and Business 60 - 135%
Leaders
Directors of Large Functional Areas 35-60%
Senior Managers 20-35%
Middle Managers 15-20%
Senior Professionals and Entry Level Managers 9 - 15%
Administrative Support and Entry Level Professionals 0 - 8%
Target Percentages will be established within the above ranges by, and may
be changed with the approval of, the following officers of The Progressive
Corporation (collectively, the "Designated Executives"): (a) the Chief
Executive Officer, and (b) either the Chief Human Resource Officer or the
Chief Financial Officer. Target Percentages also may be changed from year
to year by the Designated Executives.
6. The Performance Factor
A. General
The Performance Factor shall consist of one or more Profitability
and Growth Components, as described below ("Performance
Components"). The Performance Components may be weighted to reflect
the nature of the individual participant's assigned
responsibilities. The weighting factors may differ among
participants and will be determined, and may be changed from year to
year, by or under the direction of the Committee.
B. Profitability and Growth Components
The Profitability and Growth Components measure the overall
operating performance of Progressive's Core Business (including the
Agency Business
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Segment, the Direct Business Segment and the Commercial Auto
Business Segment, but excluding Midland Financial Group, Inc.), or a
designated Business Segment, for the Plan year for which an Annual
Gainsharing Payment is to be made. For purposes of computing a
Performance Score for these Components, operating performance
results are measured by one or more Performance Matrices, as
established by or under the direction of the Committee for the Plan
year, which assign a Performance Score to various combinations of
profitability and growth outcomes. Except as provided below, under
the Performance Matrices, profitability is measured by the GAAP
Combined Ratio and growth is based on the year-to-year change in Net
Earned Premiums.
For 2005, and for each Plan year thereafter until otherwise
determined by the Committee, separate Performance Scores will be
determined, and separate Gainsharing Matrices will be used, for the
Agency Business Segment, the Direct Business Segment and the
Commercial Auto Business Segment. For purposes hereof, the Agency
Business Segment includes Agency Auto (including Strategic Alliances
Agency Auto) and Agency Special Lines. The Direct Business Segment
includes Auto and Special Lines business produced by phone or over
the Internet. For purposes of this Plan, the Midland Financial
Group, Inc.'s results are excluded from the Agency, Direct and
Commercial Auto Business Segments and, thus, from Core Business
results. Net operating gains/losses from other Core products, if
any, will be apportioned among the Agency, Direct and Commercial
Auto Business Segments in accordance with the respective amount(s)
of Net Earned Premiums generated by such products in each such
Business Segment and the apportioned gains/losses will be included
in the calculation of the Combined Ratio.
The GAAP Combined Ratio will be separately determined for each of
the Agency Business Segment, the Direct Business Segment and the
Commercial Auto Business Segment. The GAAP Combined Ratio of each
such Business Segment will then be matched with growth in Net Earned
Premiums for such Business Segment using the applicable Gainsharing
Matrix, to determine a Performance Score ("Standard Performance
Computation").
For 2005 and for each Plan year thereafter until otherwise
determined by the Committee, a portion of the Annual Gainsharing
Payment earned by members of the Direct Business Leadership Group
(as defined below) will be determined by measuring operating results
achieved by the Direct Business Segment in terms of certain modified
profitability and growth criteria (as described below) and by
comparing the results against pre-established targets that are set
forth in a performance matrix approved by or under the direction of
the Committee ("Modified Performance Computation"). The Modified
Performance Computation will apply only to members of the Direct
Business Leadership Group and only as and to the extent set forth
below.
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The Direct Business Leadership Group includes the Direct Business
Leader, the IT Director for the Direct Business Segment and all
other employees assigned primarily to the Direct Business Segment
who are eligible to participate in the Company's equity incentive
plans and have been designated by the Direct Business Leader.
For purposes of the Modified Performance Computation:
(i) Profitability is measured by the variance between (i) the GAAP
Combined Ratio for premium earned during the Plan year with
respect to new Auto and Special Lines policies written by the
Direct Business Segment, and (ii) a target Combined Ratio,
which is adjusted quarterly to reflect the then current
pricing targets established and business mix (i.e., the
percentage of business earned in each business line and risk
tier). The Combined Ratio and pricing targets are subject to
approval by or under direction of the Committee.
(ii) Growth is measured by the year-to-year change in Lifetime
Earned Premium (as defined below) for business written by the
Direct business Segment. Lifetime Earned Premium is the amount
of earned premium that the Company is projected to generate
over time with respect to new policies written by the Direct
Business Segment during a given Plan Year (including any
subsequent renewals thereof), which is determined by a
formula, as approved by or under the direction of the
Committee, that utilizes a combination of historical
experience data and statistical analysis.
C. Component Weighting
For most participants, the Performance Factor will be determined
solely by the performance results for the Core Business, consisting
of the Agency, Direct and Commercial Auto Business Segments. The
Performance Score for each such Business Segment will be separately
determined, as described above, by application of the Standard
Performance Computation and the appropriate Gainsharing Matrix. The
resulting Performance Scores for each of the Agency, Direct and
Commercial Auto Business Segments will then be multiplied by a
weighting factor (based on the percentage of Net Earned Premiums
generated by each such Business Segment during the Plan year), the
weighted Performance Scores will be combined and the sum of the
weighted Performance Scores will be the Performance Score for the
Core Business.
As noted above, for most participants, the Performance Factor will
be the Performance Score for the Core Business. For certain
employees designated by or under the direction of the Committee,
however, the Performance Factor will be based on the Performance
Scores for both the Core Business, as a whole, and their assigned
Business Segment. Generally, for these employees,
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the Performance Factor will be based 50% on the Core Business
Performance Score and 50% on their assigned Business Segment's
Performance Score.
With respect to each of the IT Business Leaders selected by the
Designated Executives, the Performance Factor will be based on both
the Core Business Performance Score and the Business Segment
Performance Score of his or her assigned Business Segment, in such
ratio or otherwise weighted as shall be determined by or under the
direction of the Committee.
Except as otherwise determined by the Committee, for members of the
Direct Business Leadership Group, the Performance Factor will be
based 50% on the Core Business Performance Score, 25% on the Direct
Business Performance Score (Standard Performance Computation) and
25% on the Direct Business Performance Score (Modified Performance
Computation).
The Performance Score for each Performance Component will be
multiplied by the assigned weighting factor to produce a Weighted
Performance Score. The sum of the Weighted Performance Scores equals
the Performance Factor. The final Performance Factor can vary from 0
to 2.0, based on actual performance versus the pre-established
objectives. The Performance Factor cannot exceed 2.0, regardless of
results.
7. Subject to Paragraph 9 below, no later than December 31 of each Plan year,
each participant will receive an initial payment in respect of his or her
Annual Gainsharing Payment for that Plan year equal to 75% of an amount
calculated on the basis of Paid Earnings for the first 24 pay periods of
the Plan year, estimated earnings for the remainder of the Plan year,
performance data through the first 11 months of the Plan year (estimated,
if necessary) and forecasted operating results for the remainder of the
Plan year. No later than February 15 of the following year, each
participant will receive the balance of his or her Annual Gainsharing
Payment, if any, for such Plan year, based on his or her Paid Earnings and
performance data for the entire Plan year.
Any Plan participant who is then eligible to participate in The
Progressive Corporation Executive Deferred Compensation Plan ("Deferral
Plan") may elect to defer all or a portion of the Annual Gainsharing
Payment otherwise payable to him/her under this Plan, subject to and in
accordance with the terms of the Deferral Plan.
8. If, for any Plan year, an employee has been selected to participate in
both the Plan and another incentive plan offered by the Company, then with
respect to such employee, the Gainsharing formula set forth in Paragraph 3
hereof shall be appropriately adjusted by applying a weighting factor to
reflect the proportion of the employee's total annual incentive
opportunity that is being provided by the Plan. The Committee shall have
full authority to determine the incentive plan or plans in which any
employee shall participate during any plan year and, if an employee is
selected to participate in more than one plan, the weighting factor that
will apply to each such plan.
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9. Unless otherwise determined by the Committee, and except as expressly
provided herein, in order to be entitled to receive an Annual Gainsharing
Payment for any Plan year, the participant must be assigned to the Core
Business or a participating business unit or support function, and be an
active employee of the Company, on November 30 of the Plan year
("Qualification Date"). Individuals who are hired on or after December 1
of any Plan year are not entitled to an Annual Gainsharing Payment for
that Plan year.
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 Gainsharing 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 Gainsharing will be net of any legally required deductions for
federal, state and local taxes and other items.
10. The right to any Annual Gainsharing Payment 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.
11. The Plan shall be administered by or under the direction of the Committee.
The Committee shall have the authority to adopt, amend, revise and repeal
such rules, guidelines, procedures and practices governing the Plan as it
shall, from time to time, in its sole discretion, deem advisable.
The Committee shall 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
shall be final and binding on Progressive, all Plan participants and all
other parties. No such interpretation or determination shall 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,
interpret the provisions thereof, waive any of the requirements specified
herein and make determinations hereunder and to select, approve,
establish, change or modify Performance Components and their respective
formulae, weighting factors, performance targets and Target Percentages)
may be exercised by the Designated Executives. In the event of a dispute
or conflict, the determination of the Committee will govern.
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.
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13. The Plan will be unfunded and all payments due under the Plan shall 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, duties or compensation.
15. Progressive shall have the unrestricted right to set off against or
recover out of any Annual Gainsharing Payment 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 to participants by or due from Progressive. Without limiting the
generality of the foregoing, this Plan supersedes and replaces The
Progressive Corporation 2004 Gainsharing Plan (the "Prior Plan"), which is
and shall be deemed to be terminated as of January 1, 2005 (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.
17. This Plan is adopted, and is to be effective, as of January 2, 2005, which
is the commencement of Progressive's 2005 fiscal year. This Plan shall be
effective for the 2005 Plan year (which coincides with Progressive's 2005
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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