,The Future of Executive Compensation George B. Paulin President & CEO, F.W. Cook & Co., Inc. October 6, 2004,1,Background OVERVIEW,5-year transition in executive compensation . . .,2,Background TODAYS DISCUSSION,1. 2nd-phase market trends in executive compensation transition 2. New and proposed regulations 3. Shareholder initiatives and voting,Implications and outcomes from 3 areas . . .,3,Background METHODOLOGY,Comes from the F.W. Cook & Co. data base Generally, large-caps (i.e., Fortune 250) But representative of broader public-company practice Values options based on the Binomial model and standard assumptions,Competitive data used for illustrations . . .,4,Market Trends TOTAL DIRECT COMPENSATION,Top-quartile outliers are moving back toward the middle (75th percentile as percent of median) . . .,CEO,CEO,CEO,Top 5,Top 5,Top 5,1996,2002,2004,5,Market Trends LONG-TERM GRANTS,Share usage as a percent of outstanding shares (“run rates”) continues to decrease. . .,6,Market Trends LONG-TERM GRANTS (contd.),Run rates (and dilution overhang) are no longer meaningful as grant value shifts from options Grant-value changes are from 2 sources Stock price variability Discounting in conversion from options for full-value grants Reduction in lower-level grants only partially complete Driven by stock-exchange rules (not accounting), and many board-approved plans still have shares available,Look carefully beyond the survey numbers . . .,7,Market Trends LONG-TERM STRUCTURE,Shift from options to full-value grants (i.e., restricted and performance stock/cash) . . .,8,Market Trends OPTION STRUCTURE: More Prevalent,Some forms of options will be winners under new accounting . . .,9,Market Trends OPTION STRUCTURE: Less Prevalent,Other forms will be losers . . .,10,Market Trends OPTION PROVISIONS,3-4 year vesting will continue to spread expense accruals 10-year terms will continue because the cost effect of shorter terms is not linear Post-termination exercise may become more limited to conserve shares Grant dates may be moved to late in the year so value aligns with annual TSR under new ISS guidelines,Regulatory and shareholder considerations will affect option design . . .,11,Market Trends LONG-TERM GRANT DETERMINATION,A new approach for determining grant size is necessary but controversial . . .,12,Market Trends SHAREHOLDER APPROVED PLANS,Employees and outside directors eligible All possible grant types Administrative provisions in grant agreements, not the plan As-issued share count “Fungible” share pool for trading-off options and full-value grants Potential for 3rd-party option transfers,Flexible omnibus-type structure will become the standard . . .,13,Market Trends SHAREHOLDER APPROVED PLANS (contd.),Traditional Pool: 10 million option shares with up to 3.3 million full value shares Fungible Pool: 16.6 million option shares with each full value share granted counted as 3 options (assuming 33% Binomial option value):,Fungible share pool works best under ISS-type voting guidelines . . .,14,Market Trends EXECUTIVE OWNERSHIP,Pressure from shareholder groups will increase prevalence and enforcement sanctions . . .,15,Market Trends MISCELLANEOUS,Setting goals for annual bonuses to better balance pay for performance and pay for results Valuing SERPs, above-market interest on deferred compensation, and severance arrangements Aligning outside directors compensation with their current responsibilities and risks And compensation committees again taking charge of directors compensation, where it has moved to nominating/governance committees,More time will be spent on . . .,16,New and Proposed Regulations IN GENERAL,NYSE rules effective 6/30/03 (Nasdaq rules are generally in parallel) FAS 123 proposal on accounting for equity-based compensation Exposure Draft (ED) issued 3/31/04 Legislation pending on taxation of deferred compensation,3 areas will be covered . . .,17,New and Proposed Regulations STOCK EXCHANGE RULES,Old “loopholes” from shareholder approval eliminated . . .,18,New and Proposed Regulations FAS 123 STATUS,Outcome could have been worse . . .,19,New and Proposed Regulations FAS 123 STATUS (contd.),Straight-line accruals for installment vesting Lattice-binomial no longer specifically preferred Current accounting treatment for corporate income taxes retained Safe-harbor for qualified ESPPs Purchase discount no greater than 5%,Steps to moderate ED . . .,20,New and Proposed Regulations TAX DEFERRAL STATUS,Many elections for bonuses earned (whole or part) in 2004 and paid in 2005 could be invalid If annual compensation, elections must pre-date 1/1/04 If multi-year, must pre-date 2005 payment date by at least 12 months Elections for compensation earned in 2005 and paid in 2006 must be before 1/1/05,Timing is uncertain and changes to current proposals are likely . . .,21,New and Proposed Regulations TAX DEFERRAL STATUS (contd.),No event-driven distribution triggers Amounts originally deferred before effective date g