EX-10 3 ex10-41.txt EXHIBIT 10.41 EXHIBIT 10.41 PHILADELPHIA SUBURBAN CORPORATION PENNSYLVANIA SUBURBAN WATER COMPANY CONSUMERS WATER COMPANY 2002 ANNUAL CASH INCENTIVE COMPENSATION PLAN BACKGROUND o In 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 with incentive compensation. o The study included interviews with 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 believe 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, managers and certain other key employees of the Company. The 2002 Management Incentive Program will cover officers, managers and certain key employees of Philadelphia Suburban Corporation, and its subsidiaries. o The plan is periodically reviewed by the Company's outside compensation consultant and the target bonus percentages are reviewed and approved each year as part of the compensation consultant's annual review of the Company's total compensation plan. 1 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 applicable company's performance and an Individual Rating Factor based on the individual employee's performance. The approach of having a plan tied to the applicable 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 participants' individual 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 applicable company's actual after-tax net income from continuing operations relative to its annual budget will be the primary measure for the company's performance. Each year a "Target Net Income" level will be established. Starting in 2000, portions of the Company Rating Factor may be tied to the net income targets of more than one company for some participants. For purposes of the Plan, the Target Net Income may differ from the budgeted net income level. For 2002, the Target Net Income will exclude the impact of any unbudgeted extraordinary gains or losses as a result of changes in accounting principles. -- 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 (the "Individual Factor"). Performance objectives for each participant are established at the beginning of the year and are primarily directed toward controlling costs, improving efficiencies and productivity, enhancing customer service and growing the company's customer base. Each objective has specific performance measures that are used to determine the level of achievement for each objective. 2 o Participation -- Eligible participants consist of officers, managers and certain key employees. -- 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 depending on duties and responsibilities. -- For each company, the Target Bonus Percentage for all the participants within that company will be applied to either their base salary or their salary grade midpoint as designated by the company's chairman, subject to the approval of the Executive Compensation and Employee Benefits Committee. -- 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. -- New employees who are hired into a position that is eligible to participate in the Management Incentive Plan, will normally be eligible to receive a portion of the bonus calculated in accordance with this Plan that is pro-rated based on the number of full calendar months between the new employee's hire date and the end of the calendar year. -- Employees who would otherwise be eligible to participate in this Management Incentive Plan, but who leave employment with the company either voluntarily, involuntarily or as a result of retirement, will not receive a bonus for the year in which their employment terminates. If an employee who would otherwise be eligible to participate in this Management Incentive Plan dies, the company will pay the deceased employee's estate a portion of the bonus the deceased employee would otherwise have been entitled to assuming a 100% Individual Rating Factor, but pro-rated for the number of full calendar months the employee completed before his or her death. 3 o Company Performance -- Company performance will be measured on the following schedule: Percent of Company Target Net Income Rating ----------------- -------- Threshold.............. <90% 0% 90 50 92 65 95 80 96 85 97 90 98 94 99 97 Plan................... 100 100 105 110 <110 125 -- The actual Company Factor 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 Factor -------------------- -------------- 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. 4 Sample Calculations o Example 1 Salary or midpoint $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 the Individual Factor is rated below 70 points, no bonus would be earned regardless of the Company Factor. Calculation: $7,000 x 100% x 0 = 0 5 o Example 4 -- If the Company Rating Factor is allocated between two companies, the bonus will be calculated separately based on the allocation. Calculation: Company Company Individual Target Bonus x Rating x Allocation x Rating = Bonus Earned ------------ ------ ---------- ------ $7,000 x 100% x 20% x 90% = $1,260 $7,000 x 110% x 80% x 90% = $5,544 ------ Total Bonus = $6,804 o Example 5 -- It is also possible that one portion of the applicable Company Rating Factor is zero, for which there would be no bonus, regardless of the participant's Individual Rating Factor. Calculation: Company Company Individual Target Bonus x Rating x Allocation x Rating = Bonus Earned ------------ ------ ---------- ------ $7,000 x 0% x 20% x 90% = $0 $7,000 x 110% x 80% x 90% = $5,544 ------ Total Bonus = $5,544 6 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 non-union employees not eligible for the management bonus plan for superior performance that contains costs, improves efficiency and productivity of the workforce and better serves our customers. Awards may also be made for 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 designated by the Chairman of PSC with the approval of the Executive Compensation and Employee Benefits Committee. 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 In general, Chairman's Awards will not be made to employees of a company that does not achieve at least 90% of its net income objective for the year. o Awards may be made throughout the year, however, no more than one-third of a company's Chairman's Award pool may be awarded until the company's final net income for the year is determined. o Nominations for employees to receive Chairman's Awards will be made to the applicable officer and should include documentation on the reasons for the recommendations. The applicable officer will review the nominations and forward their recommendations to the Chairman of PSC. o The Chairman will determine the individuals to actually receive a bonus and the amount.