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National Association of Corporate Directors

National Association of Corporate Directors. THE CHANGING LANDSCAPE OF BOARD REMUNERATION March 12, 2003. Board Remuneration in Holding Pattern during 2002. Calm before the storm Awaiting full impact of Sarbanes-Oxley Multiple major governance proposals by regulators

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National Association of Corporate Directors

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  1. National Association of Corporate Directors THE CHANGING LANDSCAPE OF BOARD REMUNERATION March 12, 2003

  2. Board Remuneration in Holding Pattern during 2002 • Calm before the storm • Awaiting full impact of • Sarbanes-Oxley • Multiple major governance proposals by regulators • Blue ribbon studies/commentaries/recommendations • Reluctance to increase Board remuneration in year of poor performance, lower payouts and cutbacks • Total remuneration up 1% overall among Top 200 U.S. public corporations • Smallest increase since 1996 • Average 10% compound per annum rise registered over past five years

  3. New Landscape in 2003 • Year of major transition • Minimum increase of 20% expected in 2003 • 50% to 100% rise expected by 2005/6

  4. Board Remuneration from 1997 to 2002 • Average $154,024 among Top 200

  5. Stock Now Major Pay Component • 63% of Board pay delivered in stock vs. 44% in 1997 • Seven companies pay 100% in stock • CVS, Goldman Sachs, Kohls, Pepsi Bottling, PepsiCo, Staples and UnumProvident • 75% grant options and 73% full value shares • 50% utilize both options and full value shares • Many Directors, like executives and employees, now hold underwater options

  6. Stock Now Major Pay Component 2002 1997 Cash 37% Equity 63% Cash 56% Equity 44%

  7. Highest and Lowest Paying Industries in 2002among Top 200 Corporations

  8. 2002 Pay Components among Top 200 – Averages and Rankings by Industry

  9. 2001/2 Average Total Remuneration* among 1300 Companiesby Industry and Company Size: Cash vs. Equity * Excludes value of pension benefit.

  10. 2003 and Looking Ahead • Board service now involves increased personal commitment • Exploding time demands • More frequent and longer meetings • Increased preparation time • Heavier responsibilities • Greater reputational/personal risk • D&O insurance coverage more costly and limitations sought by carriers • Substantiation of business judgment required • Demonstrate due consideration, leave tracks, observe process • Advice of outside counsel

  11. 2003 and Looking Ahead • Recruitment more difficult • About one-third of Boards surveyed adding outside Directors • CEOs and Directors limiting number of seats • Functional officers sought (VP Finance, Controller, etc.) • Diversity desired • Compensation increases planned by companies and sought by Directors • 43% of companies surveyed in 2002 plan to increase Board pay in 2003; 81% to increase cash and 28% equity

  12. 2003 and Looking Ahead • Board work increasingly done at Committee level • Audit • Compensation • Governance/Nominating • Premium meeting fees/retainers for Committees and Chairs based on work loads and responsibilities • Results in wider pay differentiation among Board members • Payments to individual Directors for special assignments more limited • None permitted to Audit Committee members

  13. Prevalence of Pay Components in 2002 and Future

  14. 2003 and Looking Ahead • Equity • Shift from trend to stock options back to full value grants • Immediate ownership • Long term perspective • Better alignment with stockholder interests • Stock market decline • Decline in public view of options

  15. 2003 and Looking Ahead • Customization and flexibility • Opportunity to individualize compensation to suit diverging Director needs • Timing of receipt – current income vs. deferred investment • Elective shift from cash to equity (36%) • Premium of 10% to 50% • Elective shift between forms of equity (12%) • Active executives • Retirees • Non-profit and government backgrounds

  16. 2003 and Looking Ahead • Governance • Movement to Lead Director rather than non-CEO Chair or Presiding Director • Special compensation arrangements • Current prevalence among Top 200 • 83% of Chairs are also CEOs • 13% of Chairs are non-CEOs who are retired CEOs in transition • 1% of Chairs are non-CEOs who are former CEO/ Chairs of acquired companies • Only 2% to 3% are non-employee Chairs

  17. 2003 and Looking Ahead • Governance • Use of outside advisors • Share ownership guidelines for Directors • Over 53% prevalence disclosed in 2002 by Top 200 • Mandatory holding of stock compensation until retirement • 35% prevalence in 2002 by Top 200

  18. 2003 and Looking Ahead • Other new governance steps adopted/proposed/ required • Committee Charters • Code of Ethics for Directors, officers and all employees • Board Guidelines for Director Independence • Independent Committee members for Audit, Compensation and Nominating • Improved process • Scheduled meetings • Calendars of events/topics • Complete minutes

  19. 2003 and Looking Ahead • Other new governance steps adopted/proposed/ required • CEO evaluation • Board, Committee and individual Director evaluation • Board and Committee executive sessions • Limitation on number of Boards • CEO • Directors • Letters of resignation with reasons • Shareholder approval of all equity plans

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