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THE PROGRESSIVE CORPORATION
1994 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 in the form of
non-qualified stock options. 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
interests of shareholders. The annual bonus component is performance-based
and focuses on current results.
2. The 1994 Executive Bonus Plan (the "Plan") shall be administered by or
under the direction of the Executive Compensation Committee (the
"Committee") of the Board of Directors. Executive officers of Progressive
may be selected by the Committee to participate in the Plan for one or more
Plan years. Plan years shall coincide with Progressive's fiscal years.
3. The following executive officers have initially been selected for
participation in the Plan: Charles B. Chokel, Peter B. Lewis, Bruce W.
Marlow, Michael C. Murr, David M. Schneider and Tiona M. Thompson (the
"participants"); provided that the participation of Messrs. Chokel, Lewis,
Marlow and Murr (the "senior participants") in the Plan shall be subject
to shareholder approval in accordance with the requirements of Section
162(m) of the Internal Revenue Code, as amended (the "Code"), and the
rules and regulations promulgated thereunder.
4. Subject to the following sentence, the amount of the annual bonus earned by
any participant under the Plan ("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
may not exceed $2,000,000.00.
5. The salary of each Plan participant shall be as established by the
Committee prior to commencement of the Plan year (or prior to April 1, 1994
with respect to the
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1994 Plan year), and will be determined through market analysis based on
data reported in published national compensation surveys.
6. The Target Percentages for the participants in the Plan are as follows:
Participant Position Target Percentage
----------- -------- -----------------
Charles B. Chokel Chief Financial Officer 80%
Peter B. Lewis Chief Executive Officer 100%
Bruce W. Marlow Chief Operating Officer 80%
Michael C. Murr Chief Investment Officer 167%
David M. Schneider Chief Legal Officer 50%
Tiona M. Thompson Chief Human Resources Officer 50%
<FN>
Target Percentages may be changed from year to year by the Committee.
7. The Performance Factor
----------------------
A. General
-------
The Performance Factor shall be determined by the performance
results achieved with respect to one or more of the following
components: Core Business Gainsharing, Return on Average
Equity ("ROE") and Investment Performance, as described below
(the "Bonus 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.
The combination of Bonus Components designated for each of the
participants, and the relative weighting of those Components, are as
follows:
+---------------+---------------------+-----------------+-----------------+
| | Core Business | ROE | Investment |
| Participant | Gainsharing | Component | Performance |
| | Component | | Component |
+---------------+---------------------+-----------------+-----------------+
| Chokel | 60% | 30% | 10% |
+---------------+---------------------+-----------------+-----------------+
| Lewis | 50% | 30% | 20% |
+---------------+---------------------+-----------------+-----------------+
| Marlow | 80% | 20% | 0% |
+---------------+---------------------+-----------------+-----------------+
| Murr | 0% | 50% | 50% |
+---------------+---------------------+-----------------+-----------------+
| Schneider | 70% | 30% | 0% |
+---------------+---------------------+-----------------+-----------------+
| Thompson | 80% | 20% | 0% |
+---------------+---------------------+-----------------+-----------------+
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The relative weighting of the Bonus Components may vary among
Plan participants and may be changed from year to year by the
Committee.
Actual performance results achieved for any Plan year, as used
to calculate the performance score achieved for each of the
applicable Bonus Components, shall be as certified by the
Committee prior to payment of the Annual Bonus.
For purposes of computing the amount of the Annual Bonus, the
performance score achieved for each of the designated Bonus
Components will be multiplied by the applicable weighting
factor to produce a Weighted Component Score. The sum of the
Weighted Component Scores equals the Performance Factor. The
Performance Factor can vary from 0 to 2.0, based on actual
performance versus the pre-established objectives.
B. Core Business Gainsharing Component
-----------------------------------
The Core Business Gainsharing Component consists of the
following factors:
(i) Profitability and Growth Factor
-------------------------------
The Profitability and Growth Factor measures overall
operating performance of Progressive's core personal
and commercial automobile insurance business ("Core
Business") for the Plan year in respect of which an
Annual Bonus is to be paid. For purposes of
computing a score for this Factor, results will be
measured by the Gainsharing Matrix, as established by
the Committee for the Plan year, which assigns a
performance score to various combinations of
profitability and growth outcomes. For this Factor,
profitability is measured by the GAAP combined ratio
and growth is measured by the year-to-year change in
market share. Change in market share is measured in
terms of net written premium, based on industry data
(which may be estimated), as reported by A.M. Best
Company, Inc. in BEST WEEK, or any successor
publication, upon conclusion of the Plan year for
which the Annual Bonus is to be paid. The
Profitability and Growth Factor is weighted 70% in
computing the Core Business Gainsharing Score.
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(ii) Cost Structure Improvement Factor
---------------------------------
The Cost Structure Improvement Factor measures
success in achieving cost structure improvement for
the Core Business. 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 in the Core
Business for the Plan year (collectively, "Actual
Expense Ratio") against the defined expense
objectives for that year, as established by the
Committee ("Target Expense Ratio"). For 1994 and
thereafter until otherwise directed by the Committee,
the Target Expense Ratio shall be 34, based on a
target LAE Ratio of 10 and a target Underwriting
Expense Ratio of 24. The Cost Structure Improvement
Factor is weighted 30% in computing the Core Business
Gainsharing Score.
The Cost Structure Improvement Score will be computed
in accordance with the following formula:
Cost Structure [Target Expense Ratio-Actual Expense Ratio]
Improvement = 1+ -------------------------------------------
Score 4
Expense targets and the relative weighting of the above
Factors may be changed from year to year by the Committee.
C. Return on Average Equity Component
----------------------------------
This Component is based on Progressive's Return on Average
Equity ("ROE") for the Plan year. The ROE will be calculated
for each month of the Plan year and such monthly results will
be averaged to determine the ROE for the Plan year. For
purposes of this Plan, ROE shall be calculated as follows:
ROE = net income - Preferred Share dividends
-------------------------------------------
average common shareholders' equity
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In determining the ROE Performance Score, actual performance will be compared to a scale which excludes the
effect of inflation, in accordance with the following scoring table:
+----------------------------+------------------+
| ROE (excluding effect of | ROE Performance |
| inflation, as reflected in | Score |
| the CPI) | |
+----------------------------+------------------+
| 11% or lower | 0.0 |
+----------------------------+------------------+
| 12% | 0.3 |
+----------------------------+------------------+
| 13% | 0.5 |
+----------------------------+------------------+
| 14% | 0.7 |
+----------------------------+------------------+
| 15% | 1.0 |
+----------------------------+------------------+
| 16% | 1.1 |
+----------------------------+------------------+
| 17% | 1.2 |
+----------------------------+------------------+
| 18% | 1.3 |
+----------------------------+------------------+
| 19% | 1.4 |
+----------------------------+------------------+
| 20% | 1.5 |
+----------------------------+------------------+
| 21% | 1.6 |
+----------------------------+------------------+
| 22% | 1.7 |
+----------------------------+------------------+
| 23% | 1.8 |
+----------------------------+------------------+
| 24% | 1.9 |
+----------------------------+------------------+
| 25% or higher | 2.0 |
+----------------------------+------------------+
To achieve a given ROE Performance Score for any Plan year,
Progressive's ROE for that year must equal or exceed the
required ROE level set forth in the above scoring table,
without rounding, and ROE Performance Scores will not be
derived from or subject to an interpolative or similar
process.
For purposes of this Plan, CPI shall mean the Consumer Price
Index for All Urban Consumers (CPI-U) for the U.S. City
Average for All Items (1982-1984 equals 100) or such other
index as the Committee may designate prior to the applicable
Plan year.
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D. Investment Performance Component
--------------------------------
The Investment Performance Component compares investment
performance against targets ("Benchmarks") established for the
individual segments of Progressive's investment portfolio.
Investments are marked to market in order to calculate total
return, which is then compared against the designated
Benchmarks to produce a Performance Score for each segment of
the portfolio. The Performance Scores for the several
segments are weighted, based on the actual amounts invested in
each segment (valued monthly), and the weighted Performance
Scores for the several segments are then combined to produce
the Investment Performance Score. Investment expense is not
included in determining investment performance vs. benchmark.
The Portfolio Segments and Benchmark measures are as follows:
+-------------------------------------+--------------------------------------------+
| Portfolio Segment | Investment Benchmark |
+-------------------------------------+--------------------------------------------+
| Equities | S&P 500 including dividends |
+-------------------------------------+--------------------------------------------+
| High Yield Investments | 70% of the average of Merrill Lynch |
| | High Yield Index and Merrill Lynch |
| | Bankruptcy Index |
+-------------------------------------+--------------------------------------------+
| Short Term Fixed Income | 3 Year Treasury Securities + 75 basis |
| | points, tax equivalent basis |
+-------------------------------------+--------------------------------------------+
The scoring table for comparing Investment Performance against the
designated Benchmarks is as follows:
+-----------------------+----------------+
| Investment | Investment |
| Performance | Performance |
| Versus | Score |
| Benchmark | |
| (weighted) | |
+-----------------------+----------------+
| below 90% | 0.00 |
+-----------------------+----------------+
| 90 - 94.99% | 0.75 |
+-----------------------+----------------+
| 95 - 99.99% | 0.90 |
+-----------------------+----------------+
| 100% and above | 1.00 |
+-----------------------+----------------+
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To achieve a given Investment Performance Score for any Plan year,
Investment Performance results must equal or exceed the required
performance level indicated in the above scoring table, without
rounding, and Investment Performance Scores will not be derived from
or subject to an interpolative or similar process.
8. The Annual Bonus for any Plan year shall be paid to participants in
two installments. The first installment, in an amount equal to 90% of
the Annual Bonus, determined in accordance with the formula set forth
in Paragraph 4 above, will be paid as soon as practicable after the
Committee has certified performance results for the Plan year, but no
later than March 31 of the immediately following year. The second
installment, in an amount equal to 10% of the Annual Bonus, will be
paid to participants on the September 30 immediately following the end
of the Plan year for which such Annual Bonus is to be paid. The
provisions of this Paragraph shall be subject to Paragraph 9 hereof.
9. Unless otherwise determined by the Committee, in order to be entitled
to receive any installment of the Annual Bonus for any Plan year, the
participant must be employed by Progressive on the date designated for
payment thereof. Annual Bonus payments made to participants will be
net of any federal, state and local taxes required to be withheld.
10. The right to any of the Annual Bonuses hereunder shall 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.
11. The Plan shall be administered by or under the direction of the
Committee. The Committee shall have the authority to adopt, alter 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 thereunder. 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.
As it applies to the senior participants, the Plan shall be
administered, by the Committee in accordance with the requirements of
Section 162(m) of the Code.
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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 senior 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 shall not be effective as to any of the
senior participants until approved by Progressive's shareholders in
accordance with the requirements of Section 162(m).
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
their job duties or compensation.
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 Management Bonus Plan, as heretofore in effect
(the "Prior Plan"), which is and shall be deemed to be terminated as
of December 31, 1993 (the "Termination Date"); provided, that any
bonuses or other sums earned under the Prior Plan 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 3
hereof is to be effective, as of January 1, 1994. Subject to the
provisions of Paragraph 3, this Plan shall be effective for 1994 and
for each 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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