1. George B. Paulin President & CEO Frederic W. Cook & Co., Inc. March 18, 2004 What the Top Compensation Consultants are NOW Telling Compensation Committees NASPP Webcast

2. 1 Overview 1.Move beyond the recent focus on regulatory compliance 2.Prepare for change in equity compensation structure 3.Abandon traditional methods for determining equity compensation grant amounts 4.Be persistent on executive ownership 5.Address all of the important related areas other than direct compensation Major points of “real-time” advice...

3. 2 Compliance Focus  Efforts in 2002-03 to improve process were largely effective  Independent membership  Compensation Committee Charters  Control of consultants and pay studies  Executive session meetings without management  Greater clarity in disclosure  Time, now, to concentrate on pay strategy  How should programs be designed for competitive advantage? Process has temporarily overtaken substance...

4. 3 Equity Compensation Structure  Employees and outside directors eligible  All possible grant types  Administrative provisions in grant agreements, not in the plan  As-issued share count  Anticipate fewer shares more often, and no evergreen authorizations  “Fungible” pool for trading-off options and full-value grants  Potential for 3 rd -party option transfers Provide maximum flexibility in the shareholder-approved stock plan...

5. 4 Equity Compensation Structure (cont’d)  Restricted stock is not pay for performance  Performance stock is preferable but requires multi-year goal setting  Very difficult for younger, growth companies  Option pricing models overstate option value  So discounting is necessary for a fair trade-off (e.g., 3-or-4 option shares to 1 full-value share) Shift from options to full-value grants should be carefully thought through...

6. 5 Equity Compensation Structure (cont’d) Expect FAS 123 to impact future option design... WinnersLosers Stock SARsCash SARs Attached dividend rightsISOs Discount pricePremium price Indexed priceReloads Performance vesting 3 rd -party transferability

7. 6 Equity Grant Amounts  “Run rates” are coming down  Executive grant values are coming down  About 20% lower year-to-year for proxy officers  75 th percentile is moving back closer to median  About 25% lower year-to-year for proxy officers  After spread above median roughly doubled in the last 10 years  Lower-level grants are coming down What the current data shows...

8. 7 Equity Grant Amounts (cont’d)  Run rates (and dilution overhang) are no longer meaningful as grant value shifts from options  Most of the grant-value reduction is from 2 sources  Lower stock prices in early 2003 versus early 2002  Discounting in conversion from options to full-value grants  Reduction in lower-level grants is only partially complete  Driven by stock-exchange rules (not accounting), and many board-approved plans still had shares available in 2003 Look beyond the numbers...

9. 8 Equity Grant Amounts (cont’d) New method for determining grant size is necessary but controversial... Old MethodNew Method Determine competitive individual grant values Convert to company shares (or cash) Aggregate individual grants to determine total grants Start with competitive aggregate grant value as a percent of company market cap Allocate to individuals based on competitive proportionate percentages of total grant value

10. 9 Equity Grant Amounts (cont’d)  Most agree with the logic  Equalizes different grant types (i.e., options vs. full-value)  Provides comparative basis for budgeting FAS 123 costs  Eliminates stock price impact on shares granted  Parallels ISS “SVT” methodology  However, implementation is slow  Higher grant value if market cap is relatively high and vice versa  No survey data on competitive lower-level allocations Transition to new method is difficult, especially for larger and more mature companies...

11. 10 Executive Ownership A major theme of investor groups and best-practice initiatives, but more work to be done... “Best Practice”Reality Ownership Guidelines Real ownership of specified salary multiple or number of shares; usually after 5 years About half of mid-to- large caps; almost never in small caps and techs or West of the Mississippi Retention Guidelines Hold net shares from compensation program for at least 1 year (i.e., no run-up and flipping) GE, Citicorp, Lilly and a few other early adopters; few have followed

12. 11 Related Areas  Setting goals for annual bonuses to better balance pay for performance and pay for results  Possibly the most significant implication of ISS’s new voting guidelines  Understanding the value of supplemental executive retirement plans (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 that may be less knowledgeable of compensation techniques Committees need to spend more time on...