SO, WHAT’S GOING ON? ─ Trends in Executive and Director Compensation ─ Jeffrey M. Kanter Frederic W. Cook & Co., Inc. September, 2006

SO, WHAT’S GOING ON?

─ Trends in Executive and Director Compensation ─

Jeffrey M. KanterFrederic W. Cook & Co., Inc.

September, 2006

2

The Truth as I See It . . .

3

Big Picture

Visible executive compensation trends…

1. Pay-level growth has moderated and disparities between companies are narrowing

2. Equity compensation is again being concentrated among key employees

3. Stock option use is declining but not disappearing

4. Use of time-based restricted stock and performance-based long-term plans is increasing

5. Share utilization and overhang is declining

6. Share conservation techniques are gaining importance

4

Big Picture

Visible trends (cont’d)…

7. Voluntary deferred compensation is less flexible but still popular

8. Disclosure is clearer, more immediate, and soon-to-be truly transparent

9. Pension-fund investors and organized labor are gaining influence through the ballot box

10. Board compensation committees are spending more time on compensation issues, are better informed, and are stronger

11. Growing concern about proxy advisory services and their level of influence (conflict with consulting practices, accountability and black box approach)

5

Big Picture

Below the Surface… Options cost less than expected because of flexible

inputs and assumptions allowed by FASB, and these lower costs will be disclosed in the new proxies

Inflated option values from pay surveys (i.e., not cost-based values) were converted to restricted/performance stock and are now embedded in competitive compensation

Pay delivery is less correlated with shareholder value under restricted/performance stock arrangements that replaced options

Little abatement in recruiting premiums for star talent, or high SERPs and severance packages (most of which were set before SOX)

6

Disclosure at a Glance

CompensationWith Respect to Last Fiscal Year

Equity HoldingsRetirement and

Other Post Termination Arrangements

Summary Compensation

Table

Grants of Plan-Based

Awards Table

Outstanding Equity

Awards Table

Options Exercisedand Stock

Vested Table

Pension Benefits Table

Potential Termination and

Change-in-Control Payments Narrative

Non-QualifiedDeferred

Compensation Table

Compensation Discussionand Analysis

-- Narrative Providing Overview --

CompensationCommittee

Report

Stock Performance Graph

-- in Annual Report --

CompensationWith Respect to Last Fiscal Year

Equity HoldingsRetirement and

Other Post Termination Arrangements

Summary Compensation

Table

Grants of Plan-Based

Awards Table

Outstanding Equity

Awards Table

Options Exercisedand Stock

Vested Table

Pension Benefits Table

Potential Termination and

Change-in-Control Payments Narrative

Non-QualifiedDeferred

Compensation Table

Compensation Discussionand Analysis

-- Narrative Providing Overview --


Report

Stock Performance Graph

-- in Annual Report --

7

Executive Compensation Levels and Mix

Status quo… Median salaries are up modestly (3-4.5%), and

earned annual bonuses (for 2005 performance) are up only slightly

Meanwhile, 2006 target bonuses are increasing for senior executives (i.e., more performance risk and leverage in short-term plans)

Long-term grant values are flat at median and down moderately at the 75th percentile, based on constant valuation

Smaller grants (i.e., down 10-25%) and more selectivity below the executive level

Median total direct compensation is flat to up only about 3% from 2004 to 2005

8

Executive Compensation Levels and Mix

$6,225

$11,677

$10,470

$9,148$9,815 $9,730

$6,067 $6,176

$5,319

$6,200

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2001 2002 2003 2004 2005 2001 2002 2003 2004 2005

2001 - 2005 Median LTI Percent Change

3%

2001 - 2005 75th Percentile LTI Percent Change

-17%

CEO LTI value, 2001 – 2005 ($000) . . .

9

Executive Compensation Relationships

Relatively constant amongst a company’s top five executives for the past three years . . . % of CEO

Base Salary

Total Cash

2nd Highest Paid Executive

62% 48%

3rd Highest Paid Executive

52% 43%

4th Highest Paid Executive

49% 35%

5th Highest Paid Executive

46% 34%

10

Executive Compensation Delivery

$100

$217 $220

$92

$218

$126$116

$177

$112

$0

$50

$100

$150

$200

$250

Options/SARs Performance Awards Restricted Stock

2002

2004

2006

Medium entry level base salary for LTI participation ($000)…

11


Shift in grant practices continue… But stock options are not dead – they still have a

place95%

90%88%

55%

66%

72%

30%

40%44%

19%20% 21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Stock Options Restricted Stock Performance Shares Performance Units

Executive Long-Term Incentive Grant Type Usage—Percent of Top 250 Companies

2004 Report 2005 Report 2006 Report

12


6%

10%

2%

1%

6% 6%

2%

1%

3%

2%

1%

0%0%

2%

4%

6%

8%

10%

12%

Performance Options Restoration Options Premium Options Discount Options


Executive stock option features – percent of Top 250 companies…

13


Grant type usage at FAS 123 companies versusNon-FAS companies…

10%

69%

75%

85%

2%

57%

69%

91%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Stock Options Restricted Stock Performance Awards SARs

FAS 123 Non-FAS 123

14


Shift in long-term value from options…

Long-term mix is now strategic, not competitively driven

Time-based restricted stock is the biggest gainer

Large-Cap Top-5 Grant Value Mix

Options

Performance

Stock/Cash

Restricted

Stock

2002 80% 15% 5%

2005

50% 20% 30%

15


Looking at the CEO mix amongst the Top 250…

CEO Grant Type as a Percent of Total LTI Value, 2001 - 2005

76%

37%

86%

63%

13%

38%

12%

22%

11%

25%

4%

14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2005 2001 2005

Stock Options Restricted Stock Performance Awards

FAS 123 Companies Non-FAS 123 Companies

16


Option changes are subtle… Plain-vanilla structure remains the norm

7-year terms sometimes replacing 10 years without additional shares

10% vs. 82% Post-retirement treatment often more limited At-the-money strike price and simple time vesting

still the norm Double-trigger change-in-control acceleration

replacing single-trigger in new severance arrangements

Expect more stock-settled SARs to simplify exercises, save shares, and open new design possibilities

17


Looking at the numbers…

6% 6%

3%

2% 2%

1% <1% <1%0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Performance Options Premium Options Discount Options

Executive Stock Option Features—Percent of Top 250 Companies


18


Stock Ownership guidelines becoming the norm…

57%

67%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Per

cen

tage

of

Com

pan

ies

1

Prevalence of Executive Stock Ownership Guidelines


19


With retention approaches (our preferred) gaininga bit…

59% 64% 62%

14%9% 9%

21% 20%24%

6% 7%

5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Per

cent

age

of C

ompa

nies

Wit

h G

uide

lines

Multiple ofCompensation

Fixed Shares/Other Retention Approaches(Combination)

Retention Approaches(Stand Alone)

Types of Executive Stock Ownership Guidelines


20


Burn rates continue to drop with shift to full value shares…

1.38%

0.03%

1.46%

1.01%

0.10%

1.09%

0.49%

0.22%

0.77%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

Options/SARs Full-Value Total

Share Type

Ru

n R

ate

2002

2004

2006

21


Value of grants (FVT - % of market cap) also dropping…

Industrials

0.75%0.70%

0.88%

0.64%0.57%

0.73%

0.86%

0.76%0.70%

0.67% 0.68% 0.68%

0.42% 0.44%0.49% 0.46% 0.43%

0.49% 0.49% 0.49%

0.78%

0.87%

0.77%

0.58%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

2005 2004 2003 3-Year Average 2004 2003 2002 3-Year Average

Small Cap Mid Cap Large Cap

22


Value of grants (FVT - % of market cap) also dropping (cont’d)…

Hi-Tech

1.20%

2.13% 2.20%

1.84%

2.43% 2.33%

2.79%2.48%

1.89% 1.95%

2.82%

2.43%

2.85%

3.22%

3.82%3.57%

0.83%

1.15% 1.25%1.06% 1.16%

1.31%

1.93%

1.44%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%



23


Value of grants (FVT - % of market cap) also dropping (cont’d)…

Retail

1.06%1.21%

1.70%

1.39%

1.09%

1.66%

1.49%1.59%

0.95%1.05%

1.12% 1.09%1.23%

1.02%

0.76%

1.16%

0.55% 0.53%0.63% 0.62% 0.55%

0.72%0.79% 0.74%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%



24


Looking at 3 year average based on size…

0.64% 0.76% 0.68% 0.78%0.46% 0.49%

1.84%

2.48% 2.43%

3.57%

1.06%1.44%1.39%

1.59%

1.09% 1.16%

0.62% 0.74%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

2005 2004 2005 2004 2005 2004

Industrials Hi-Tech Retail


25


FVT as a % of revenue also dropping…

0.66%

1.09%

0.61%

1.01%

1.14%

0.71%

0.93%0.86%

0.69%

0.95%

1.18%

0.63%

0.00%

0.50%

1.00%

1.50%


2005 2004 2003 3-Year Average

26


% of revenue by industry…

By Industry

4.12%

0.53% 0.61%

5.69%

0.49%

5.45%

0.56%0.44% 0.55%

5.61%

0.48% 0.60%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Industrials Hi-Tech Retail

2005 2004 2003 3-Year Average

27

Performance Measures

Category Performance MeasuresPercent of Companies

Using

Profit Earnings per share, net income, EBIT/EBITDA, operating income, pretax profit

51%

Total Shareholder Return

Stock price appreciation plus dividends

38%

Efficiency Return on equity, return on assets, return on operating income, return on capital, economic value added

34%

Other Cash flow, revenue growth, discretionary, individual performance

28%

Among sample of large companies…

28

Emerging Trends

Changing programs in response to market environment…

Companies are reviewing their change-in-control and severance programs for reasonableness

While typical severance is still 3 times salary and bonus for the CEO and 2-3 times for the next tier of executives, trend is to reduce the severance levels

Expect to see the new levels reflected in surveys in two-to-three years

Continued pressure from shareholders to ensure that retiring executives do not also receive large severance payments

“Valley provisions” (also referred to as “modified gross-ups”) are becoming more prevalent

If the executive’s potential payment only exceeds the 2.99 threshold by a small amount, cut back to less than 2.99 to avoid a large gross-up payment for just a small additional benefit

29

Emerging Trends

Recent CEO contracts…

1X 2X 2.5X 3.0X

Lucent 3M

Baxter

Fiserv

Hewitt

Hewlett-Packard (was 2.5X)

JPMorgan Chase (was 3X)

Krispy Kreme

Pathmark

Siebel Systems

Chevron (was 3X)

Sara Lee

Allied Waste

Aon

Boeing

ConAgra

Mellon

NCR

OfficeMax

Safeco

Saks

30

Emerging Trends

Changing programs (cont’d) … New equity plans have “double-trigger”

provisions at a CIC Unvested equity only vest if terminated after a

CIC (i.e., not upon CIC event alone) Reduces cost of keeping acquired company

executives and eliminates perceived inequity between old and new employees

Examples include: Gartner and Eastman Kodak Taking long-term incentives out of SERPs and

severance: Pfizer no longer covers long-term incentives in

their retirement programs

31

Emerging Trends

Changing programs (cont’d) … Less-biased employment agreements

Broader definition of “Cause” More narrow definition of “Good Reason”

termination Avoidance of double dipping (e.g., no severance

payments beyond retirement date) Inclusion of more restrictive covenants (e.g.,

inclusion of non-solicitation in addition to confidentiality, non-disparagement and non-compete clauses)

32

Emerging Trends

Changing programs (cont’d) … Continuing emphasis on pay-for-performance

Only pay target long-term incentives if performance is at or above median

Duke Energy Replace options and restricted stock with

performance shares General Electric’s CEO grants

Review peer groups to assure stretch in relative performance arrangements

Pfizer

33

Emerging Trends

Changing programs (cont’d) … Committee more involved in setting goals:

Previously reviewed goals set by Management Now may change the types of goals and/or

increase the required level of performance to align with what the Company needs to achieve to be successful

However, Committees are expressing frustration that performance (as written about by the press) is tied to only one measure – TSR, often over one year

Adopting policies to clawback incentive compensation paid to guilty parties if payments based on fraudulent results

34

Directors’ Compensation

Don’t forget them . . .

$249,222 $255,801$232,035 $245,540$244,076

$215,000$200,000 $201,395

$212,551$199,448

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Board MemberOnly


Member

AuditCommittee

Member


Chair

AuditCommittee

Chair

NASDAQ

NYSE

35


Stock options or restricted stock? . . .

NASDAQ

Cash 26%

Stock Awards 18%

Stock Options

56%

NYSE

Stock Awards 49%

Cash 36%

Stock Options

15%

36


Board retainers . . .

$65,000

$37,500

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

NASDAQ NYSE

37


Percentage of Companies Median Retainer / Fee

NASDAQ NYSE NASDAQ NYSE

Additional Retainers

Audit Committee 42% 31% $10,000 $7,500

Compensation Committee 34% 14% $5,000 $9,000

Nominating & Governance Committee 27% 12% $5,000 $8,500

Committee Meeting Fees(per meeting)

Audit Committee 46% 50% $1,500 $1,500



Committee members received . . .

38


Percentage of Companies Median Retainer / Fee

NASDAQ NYSE NASDAQ NYSE

Chair Additional Retainers

Audit Committee 77% 92% $11,040 $15,000



Chair Additional Meeting Fees(per meeting)

Audit Committee 24% 25% $2,500 $500

Compensation Committee 5% 3% $1,000 $500

Nominating & Governance Committee 4% 3% $750 $500

Additional fees for committee chairs . . .

39


NYSE

Ownership Guidelines

Only37%

None20%

Both31%

Retention Requirements

Only12%

NASDAQ

None61%

Ownership Guidelines Only

31%

Retention Requirements

Only 2%

Both 6%

Director ownership guidelines . . .

Company Profile Frederic W. Cook & Co., Inc. is an independent consulting firm specializing in executive and director compensation and related corporate governance matters. Formed in 1973, our firm has served more than 1,900 corporations, including 40 percent of the current Fortune 200 during the past two years, in a wide variety of industries from our offices in New York, Chicago, Los Angeles, and San Francisco. Our primary focus is on performance-based compensation programs that help companies attract and retain business leaders, motivate and reward them for improved performance, and align their interests with shareholders. Our range of consulting services includes:

Annual Incentive Plans Directors’ Remuneration Regulatory Services

Change-in-Control and Severance Incentive Grants and Guidelines Restructuring Incentives

Compensation Committee Advisor Long-term Incentive Design Shareholder Voting Matters

Competitive Assessment Ownership Programs Specific Plan Reviews

Corporate Governance Matters Performance Measurement Strategic Incentives

Corporate Transactions Recruitment/Retention Incentives Total Compensation Reviews Our office locations:

New York 90 Park Avenue 35th Floor New York, NY 10016

Chicago One North Franklin Suite 910 Chicago, IL 60606

Los Angeles 2121 Avenue of the Stars Suite 990 Los Angeles, CA 90067

San Francisco One Post Street Suite 825 San Francisco, CA 94104

London (Through Affiliation with New Bridge Street Consultants) 20 Little Britain London, EC1A 7DH

212-986-6330 phone 312-332-0910 phone 310-277-5070 phone 415-659-0201 phone 020-7282-3030 phone 212-986-3836 fax 312-332-0647 fax 310-277-5068 fax 415-659-0220 fax 020-7282-0011 fax www.nbsc.co.uk

Jeffrey M. Kanter Website address: [email protected] www.fwcook.com

Documents

SO, WHAT’S GOING ON? ─ Trends in Executive and Director Compensation ─ Jeffrey M. Kanter Frederic W. Cook & Co., Inc. September, 2006