Heritage Financial Corporation

MANAGEMENT INCENTIVE PLAN

2017

 

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Management Incentive Plan

INTRODUCTION

Heritage Financial Corporation and Heritage Bank (the “Company”) are willing to
provide annual cash incentive award opportunities for eligible employees,
through the use of the Company’s Management Incentive Plan, a performance-based
annual incentive compensation plan (the “Plan”). The annual incentive awards
will provide a payment based upon attainment of specified goals and objectives.
The objective is to align the interests of these employees with the interests of
the Company in obtaining superior financial results.
I.
OBJECTIVE & PURPOSE

The Company believes in pay for performance, and desires to implement a
performance-based culture. The Company is committed to rewarding employees for
the achievement of annual performance goals. This Plan is designed to reward and
retain high performers, and to drive the long-term financial success of the
Company. The Plan should encourage teamwork and create an environment where
executives are rewarded if the Company and his/her department achieve or exceed
pre-determined annual performance criteria. The Plan is also designed to reward
employees for achieving and exceeding individual performance criteria. It is
prospective in design with the utilization of a defined payout formula that is
based upon the achievement of a combination of pre-determined Company and
department/individual performance criteria.
II.
PARTICIPATION/ELIGIBILITY

Each Plan Year the Company’s Chief Executive Officer (“CEO”) shall develop a
list of eligible employees (or employee groups) for participation in the Plan
for the upcoming Plan Year. In addition to a listing of the eligible employees,
the CEO shall also develop a summary of the annual incentive award tiers, the
incentive award opportunities for each tier, the weighting of Company versus
department/individual performance goals, and a summary of possible payouts. Each
Plan participant shall be notified of eligibility for participation in the Plan.
As appropriate, the CEO shall submit to the Compensation Committee (“Committee”)
of the Board of Directors of the Company the forgoing information with respect
to the Company’s senior officers, and others as may be requested by the
Committee, for the Committee’s review and approval.
A.
The 2017 Plan is limited to selected employees of the Company. The CEO will
identify such employees for eligibility under the Plan.

Additional eligibility requirements are the following:
•
New employees must be employed by October 31st in a given Plan Year to be
eligible for an award related to performance in that Plan Year.

•
Employees hired after October 31st must wait until the next fiscal year to be
eligible for an award.

•
Employees hired before October 31st who works a partial year will receive
pro-rated awards based on hours worked.

•
Plan participants must also receive a minimum annual performance review rating
of “satisfactory” or equivalent for the Plan Year to be eligible for any payout.
The company

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shall use the annual performance evaluation rating to determine if performance
achieves “satisfactory” or equivalent levels.
•
A Plan participant must be an active employee as of the award payout date to
receive an award.

•
Generally, participants are not eligible to participate in other annual or
production incentive plan which may exist, such as, but not limited to:

◦
Employee Annual Incentive Plan

◦
Cash Management Sales Officer Annual Incentive Plan

◦
SBA Business Development Officer Incentive Plan

◦
Mortgage Division Incentive Plans

◦
Wealth Strategies Advisor Incentive Plans

•
Eligible employees who have earned an annual incentive award and terminate
employment due to disability or death can receive a pro-rata award for the year,
even if they are not employed as of the award payout date based upon target
performance.

III.
PLAN YEAR/PERFORMANCE PERIOD

The Plan operates on a calendar year basis (January 1st to December 31st) and
Plan payouts will be made no later than 2½ months after the Plan Year that
represents the Performance Period, or a later date that would still permit the
payment to constitute a short-term deferral that is not subject to Section 409A
of the Internal Revenue Code (i.e., generally, no later than 2½ months after the
end of the year in which a participant obtains a legally binding right to such
award). This same Plan Year (calendar year) is the Performance Period for
determining the amount of incentive awards to be paid in the following Plan
Year.
IV.
PLAN DESIGN

The Plan design incorporates a tiered approach with annual incentive awards that
are linked to the achievement of pre-defined performance goals. The incentive
ranges (as a percent of salary) are designed to provide market competitive
payouts for the achievement of minimum, target and maximum performance goals.
This design should be reviewed and possibly adjusted on an annual basis to be
sure the Plan remains market competitive and includes all the appropriate Plan
participants. The basic Plan design must be approved by the Committee on an
annual basis, with respect to each Plan Year/Performance Period.
V.
AWARD OPPORTUNITIES

For each Plan Year/Performance Period Minimum, Target, and Maximum Performance
award opportunity levels, expressed as a percent of base salary on January 1 of
the plan year, will be set for each eligible employee. The actual payouts will
be calculated using a ratable approach, where payouts are calculated as a
proportion of minimum, target and maximum performance levels.
A.
Minimum Performance: The minimum level of performance needed to begin to be
eligible to receive an incentive award.

B.
Target Performance: The budgeted, or expected, level of performance based upon
both historical data and management's best judgment of expected performance
during the performance period.

C.
Maximum Performance: The level of performance which based upon historical
performance and management’s judgment would be exceptional or significantly
beyond the expected.

VI.
PERFORMANCE OBJECTIVES

The Plan will provide annual incentive awards to Plan participants based on
overall Company and department and/or Individual performance objectives. Subject
to Section XVI, the performance objectives are determined by using the Company’s
performance history, peer data, market data, and

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management's judgment of what reasonable levels can be reached, based on
previous experience. Once the Target Performance is established, the Minimum and
Maximum payout levels are also determined. The specific performance criteria for
each Plan participant will be based on the Plan’s overall goals, as approved by
the Committee, and will be communicated to Plan participants by management. The
communication will clearly define the performance objectives at Minimum, Target,
and Maximum Performance levels and will define the potential award opportunity
for the Plan participants. Regardless of the actual results relative to set
performance objectives, the participant must also receive minimum annual
performance review rating of “satisfactory” or equivelent to receive any bonus
payment.
A.
Company Performance - The Company’s performance will be based on the Company’s
success as measured by criteria determined by the Committee with input from the
CEO. The percentage of payout for overall Company performance will be allocated
based on the specific weighting of the Company’s goal based on the participant’s
tier, and the actual performance compared to the pre-determined Minimum, Target,
and Maximum Performance levels.

B.
Department or Individual Performance - Certain Plan participants may have a
portion of their annual incentive award based on a combination of department
and/or individual performance criteria. The number of performance criteria
included, the specific type of performance criteria to use, and the weighting of
each criteria for the overall incentive award will vary based on the position
and role of each Plan participant.

VII.
AWARD CALCULATION

The actual award payouts will be calculated using a ratable approach, where
award payouts are calculated as a proportion of minimum, target and maximum
award opportunities. If actual performance falls between a performance level,
the payout will also fall between the pre-defined performance level on a
pro-rated basis.
VIII.
EARNING OF ANNUAL INCENTIVE AWARDS

Incentive awards will be earned during each Plan Year/Performance Period. If the
Company does not meet minimum performance levels, there will be no payouts for
the Company performance objectives. However, the Plan participants may still be
eligible to receive payouts related to their department or individual
performance objectives.
A.
Plan Trigger: The Committee may at its discretion establish a plan trigger
applicable to any plan year. The Committee will set any such trigger at the
beginning of the performance period. If established, in order for the Annual
Incentive Plan to be funded and “activated”, the Company must achieve a
threshold performance level to be determined by the Committee for each Plan
Year/Performance Period. This performance level is not related to the Company
Minimum, Target, or Maximum Performance goals. It is instead a threshold level
of performance that needs to be attained for any incentive awards to be paid
out. If this threshold level of performance is not met, the Plan will not be
“turned on” for that given year and no payouts will be made, regardless of
Company or individual performance. If a plan trigger is not established by the
Committee at the beginning of the performance period, any payouts will be
determined based upon Company, department and/or individual performance
objectives as established and approved by the Committee, with input from the
CEO, as described in Section VIII.

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IX.
PAYMENT OF AWARDS

After all performance results are available following year-end, the awards will
be calculated for each Plan participant and, as appropriate or required, will be
recommended by the CEO for approval by the Committee. Awards are then paid out
less the necessary withholdings.
The following procedures will apply to the payment of awards:
•
Payments will be declared no later than 2½ months following the end of the Plan
Year that constitutes the Performance Period.

•
Payment will be made at the time provided for in Section III.

•
A Plan participant must be an active employee on the date of the award payout in
order to receive a payout.

•
The result of the performance criteria is calculated as a percent of the base
salary on January 1 of the plan year for participant during the current Plan
Year.

X.
PLAN ADMINISTRATION

Administration of the Plan is the joint responsibility of the Compensation
Committee, the CEO and the Human Resources department of the Company.
A.
Responsibilities of the Compensation Committee

The Committee has the responsibility to approve, amend, or terminate the Plan as
necessary. The actions of the Committee shall be final and binding on all
parties. The Committee shall also review the operating rules of the Plan on an
annual basis and revise these rules if necessary. The Committee also has the
sole ability to decide if an extraordinary occurrence totally outside of
management’s influence, be it a windfall or a shortfall, has occurred during the
current Plan Year, and whether the figures should be adjusted to neutralize the
effects of such events. After approval by the Committee, management shall, as
soon as practical, inform each of the Plan participants under the Plan of their
potential award under the operating rules adopted for the Plan Year.
B.
Responsibilities of the CEO

The CEO of the Company administers the program directly and provides liaison to
the Committee, including the following specific responsibilities, as may be
applicable to certain participants:
•
Recommend the Plan participants to be included in the Plan for a Plan
Year/Performance Period. This includes determining if additional employees
should be added to the Plan and if any Plan participants should be removed from
participating in the Plan.

•
Provide recommendations for the award opportunity amounts at target and maximum
for all other Plan participants. The CEO will review the objectives and
evaluations, adjust guideline awards for performance and recommend final awards
to the Committee for its approval.

•
Provide other appropriate recommendations that may become necessary during the
life of the Plan. This could include such items as changes to Plan provisions.

C.
Responsibilities of Human Resources

The Human Resources department of the Company will act as the Plan Administrator
with regard to responsibilities for tracking the performance criteria during the
course of the Plan Year. The Human Resources department will also have the
responsibility of administering

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the amount of the payouts following year end. Additional responsibilities may be
assigned to the Human Resources department by the Committee or CEO. All
necessary reporting to outside auditors for inclusion in annual reporting will
be carried out by the CEO or designee.
XI.
TERMINATION OF EMPLOYMENT

If a Plan participant is terminated by the Company, or voluntarily terminates
his/her employment with the Company prior to payout, no incentive award will be
paid. To encourage employees to remain employed by the Company, a participant
must be an active employee on the date the incentive is paid to receive an
award. However, there are exceptions for terminations as a result of death,
disability, as provided below.
A.
Disability or Death

If a participant is disabled and placed on long-term disability, his/her bonus
award for the Plan period shall be prorated so that no award will be earned
during the period of long-term disability. In the event of death, the Company
will pay to the participant’s estate the pro-rata portion of the target award
that had been earned by the participant.
XII.
AMENDMENTS AND PLAN TERMINATION

The Company has developed the Plan on the basis of existing business, market and
economic conditions, current services, and staff assignments. If substantial
changes occur that affect these conditions, services, assignments, or forecasts,
the Company may add to, amend, modify or discontinue any of the terms or
conditions of the Plan at any time with approval from the Committee. The
Committee may, at its sole discretion, terminate, change or amend any provision
of the Plan as it deems appropriate. In no event shall an amendment to the Plan
cause the Plan to cause any payment hereunder to violate Internal Revenue Code
(“Code”) Section 409A, or violate any regulatory requirement applicable to the
Company.
XIII.
PLAN FUNDING

The Plan shall not be funded. Amounts due hereunder shall be paid from the
general assets of the Company.
XIV.
CLAIMS AND REVIEW PROCEDURES

A.
Claims Procedure

A Plan participant or beneficiary (“claimant”) who has not received awards under
the Plan that he or she believes should be paid shall make a claim as follows:
1.
Initiation - Written Claim. The claimant initiates a claim by submitting to the
Plan Administrator a written claim for the benefits.

2.
Timing of Plan Administrator Response. The Plan Administrator shall respond to
such claimant within 90 days after receiving the claim. If the Plan
Administrator determines that special circumstances require additional time for
processing the claim, the Plan Administrator can extend the response period by
an additional 90 days by notifying the claimant in writing.

3.
Notice of Decision. If the Plan Administrator denies part or all of the claim,
the Plan Administrator shall notify the claimant in writing of such denial.

B.
Review Procedure

If the Plan Administrator denies part or all of the claim, the claimant shall
have the opportunity for review by the Plan Administrator of the denial, as
follows:

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1.
Initiation - Written Request. To initiate the review, the claimant, within 60
days after receiving the Plan Administrator’s notice of denial, must file with
the Plan Administrator a written request for review.

2.
Additional Submissions - Information Access. The claimant shall then have the
opportunity to submit written comments, documents, records and other information
relating to the claim.

3.
Considerations on Review. In considering the review, the Plan Administrator
shall take into account all materials and information the claimant submits
relating to the claim, without regard to whether such information was submitted
or considered in the initial benefit determination.

4.
Timing of Plan Administrator Response. The Plan Administrator shall respond in
writing to such claimant within 60 days after receiving the request for review.
If the Plan Administrator determines that special circumstances require
additional time for processing the claim, the Plan Administrator can extend the
response period by an additional 60 days by notifying the claimant in writing.

5.
Notice of Decision. The Plan Administrator shall notify the claimant in writing
of its decision on review. The Plan Administrator shall write the notification
in a manner calculated to be understood by the claimant.

XV.
COMMUNICATION OF PLAN TO PLAN PARTICIPANTS

Communication of the Plan will be vital to the overall success of the Plan. Key
communication events include the following:
A.
An initial communication to Plan participants of the Plan details, including the
performance targets set for the initial Plan Year. This will typically take
place in the first few months of the Plan Year

B.
Communication of new performance targets, Plan procedure changes, etc., at the
beginning of each Plan Year.

C.
Periodic reviews and/or performance updates throughout the Plan Year. These
reviews should include a year-to-date performance update and discuss any changes
that may be necessary to assure attainment of the Plan targets.

D.
A year-end review of estimated Plan results, including an estimate of the
Company's performance on each performance measure.

E.
An evaluation discussion surrounding the Plan participants’ final annual
incentive awards to be conducted by the appropriate manager upon final
determination of year-end results.

XVI.
RECOUPMENT BY THE COMPANY

A.
Any bonus payment which is later determined to have been paid in error or based
on inaccurate or incomplete information or financial reports will be subject to
recoupment by the Bank.

B.
At the sole discretion of Management or the Compensation Committee, loan or
other bank charge-offs or losses may result in elimination or reduction in the
originating, supervising or branch Officers future bonus payment.

XVII.
MISCELLANEOUS

A.
Binding Effect. This Plan shall bind the Plan the participant, the Company, and
their respective beneficiaries, survivors, executors, successors, administrators
and transferees.

B.
No Guarantee of Employment. This Plan is not an employment policy or contract.
It does not give the Plan participant the right to remain an employee of the
Company, nor does it interfere with the Company's right to discharge the Plan
participant.

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C.
Non-Transferability. Benefits under this Plan cannot be sold, transferred,
assigned, pledged, attached or encumbered in any manner.

D.
Reorganization. If the Company shall (1) merge into or consolidate with another
company, (2) reorganize, (3) sell substantially all of its assets to another
company, firm, or person, or upon a change in control involving Heritage
Financial Corporation stock, then the succeeding or continuing company, firm, or
person shall succeed to, assume and discharge the obligations of the Company
under this Plan. Upon the occurrence of such event, the term “Company” as used
in this Plan shall be deemed to refer to the successor or survivor company.

E.
Tax Withholding. The Company shall withhold any taxes that are required to be
withheld from the benefits provided under this Plan.

F.
Applicable Law. The Plan and all rights hereunder shall be governed by the laws
of the State of Washington, except to the extent preempted by the laws of the
United States of America.

G.
Entire Plan. This Plan constitutes the entire Plan between the Company and the
Plan participant as to the subject matter hereof. No rights are granted to the
Plan participant by virtue of this Plan other than those specifically set forth
herein.

H.
Code 162(m) Limitation.

1.
Any amounts payable hereunder that would not be deductible on account of the
limitations of Code Section 162(m) shall be paid in the next following year in
which the Company reasonably anticipates that the deduction of such payment
would not be barred by the application of Code Section 162(m).

2.
In the event that the payments hereunder are intended by the Committee to be
treated as “performance-based compensation” defined in Code Section 162(m), such
amounts shall be payable pursuant to the Company’s 2014 Omnibus Equity Pan, or
its successor plan (the “Omnibus Plan”), and may, at the Committee’s discretion,
be reflected in an award agreement under the Omnibus plan.

IN WITNESS WHEREOF, the Company has signed this Plan document as of
______________, 20______.
Company Name: Heritage Financial Corporation

By:     

Title: