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TheFutureofExecutiveCompensationGeorgeB PaulinPresident CEO F W Cook Co Inc October6 2004 1 BackgroundOVERVIEW 5 yeartransitioninexecutivecompensation 2 BackgroundTODAY SDISCUSSION 1 2nd phasemarkettrendsinexecutivecompensationtransition2 Newandproposedregulations3 Shareholderinitiativesandvoting Implicationsandoutcomesfrom3areas 3 BackgroundMETHODOLOGY ComesfromtheF W Cook Co databaseGenerally large caps i e Fortune250 Butrepresentativeofbroaderpublic companypracticeValuesoptionsbasedontheBinomialmodelandstandardassumptions Competitivedatausedforillustrations 4 MarketTrendsTOTALDIRECTCOMPENSATION Top quartileoutliersaremovingbacktowardthemiddle 75thpercentileaspercentofmedian CEO CEO CEO Top5 Top5 Top5 1996 2002 2004 5 MarketTrendsLONG TERMGRANTS Shareusageasapercentofoutstandingshares runrates continuestodecrease 6 MarketTrendsLONG TERMGRANTS cont d Runrates anddilutionoverhang arenolongermeaningfulasgrantvalueshiftsfromoptionsGrant valuechangesarefrom2sourcesStockpricevariabilityDiscountinginconversionfromoptionsforfull valuegrantsReductioninlower levelgrantsonlypartiallycompleteDrivenbystock exchangerules notaccounting andmanyboard approvedplansstillhavesharesavailable Lookcarefullybeyondthesurveynumbers 7 MarketTrendsLONG TERMSTRUCTURE Shiftfromoptionstofull valuegrants i e restrictedandperformancestock cash 8 MarketTrendsOPTIONSTRUCTURE MorePrevalent Someformsofoptionswillbewinnersundernewaccounting 9 MarketTrendsOPTIONSTRUCTURE LessPrevalent Otherformswillbelosers 10 MarketTrendsOPTIONPROVISIONS 3 4yearvestingwillcontinuetospreadexpenseaccruals10 yeartermswillcontinuebecausethecosteffectofshortertermsisnotlinearPost terminationexercisemaybecomemorelimitedtoconservesharesGrantdatesmaybemovedtolateintheyearsovaluealignswithannualTSRundernewISSguidelines Regulatoryandshareholderconsiderationswillaffectoptiondesign 11 MarketTrendsLONG TERMGRANTDETERMINATION Anewapproachfordetermininggrantsizeisnecessarybutcontroversial 12 MarketTrendsSHAREHOLDERAPPROVEDPLANS EmployeesandoutsidedirectorseligibleAllpossiblegranttypesAdministrativeprovisionsingrantagreements nottheplanAs issuedsharecount Fungible sharepoolfortrading offoptionsandfull valuegrantsPotentialfor3rd partyoptiontransfers Flexibleomnibus typestructurewillbecomethestandard 13 MarketTrendsSHAREHOLDERAPPROVEDPLANS cont d TraditionalPool 10millionoptionshareswithupto3 3millionfullvaluesharesFungiblePool 16 6millionoptionshareswitheachfullvaluesharegrantedcountedas3options assuming33 Binomialoptionvalue FungiblesharepoolworksbestunderISS typevotingguidelines 14 MarketTrendsEXECUTIVEOWNERSHIP Pressurefromshareholdergroupswillincreaseprevalenceandenforcementsanctions 15 MarketTrendsMISCELLANEOUS SettinggoalsforannualbonusestobetterbalancepayforperformanceandpayforresultsValuingSERPs above marketinterestondeferredcompensation andseverancearrangementsAligningoutsidedirectors compensationwiththeircurrentresponsibilitiesandrisksAndcompensationcommitteesagaintakingchargeofdirectors compensation whereithasmovedtonominating governancecommittees Moretimewillbespenton 16 NewandProposedRegulationsINGENERAL NYSEruleseffective6 30 03 Nasdaqrulesaregenerallyinparallel FAS123proposalonaccountingforequity basedcompensationExposureDraft ED issued3 31 04Legislationpendingontaxationofdeferredcompensation 3areaswillbecovered 17 NewandProposedRegulationsSTOCKEXCHANGERULES Old loopholes fromshareholderapprovaleliminated 18 NewandProposedRegulationsFAS123STATUS Outcomecouldhavebeenworse 19 NewandProposedRegulationsFAS123STATUS cont d Straight lineaccrualsforinstallmentvestingLattice binomialnolongerspecificallypreferredCurrentaccountingtreatmentforcorporateincometaxesretainedSafe harborforqualifiedESPPsPurchasediscountnogreaterthan5 StepstomoderateED 20 NewandProposedRegulationsTAXDEFERRALSTATUS Manyelectionsforbonusesearned wholeorpart in2004andpaidin2005couldbeinvalidIfannualcompensation electionsmustpre date1 1 04Ifmulti year mustpre date2005paymentdatebyatleast12monthsElectionsforcompensationearnedin2005andpaidin2006mustbebefore1 1 05 Timingisuncertainandchangestocurrentproposalsarelikely 21 NewandProposedRegulationsTAXDEFERRALSTATUS cont d Noevent drivendistributiontriggersAmountsoriginallydeferredbeforeeffectivedategrandfathered ifnofurtherdeferralundersubsequentelectionGeneralscopewillhaveunintendedconsequencese g impactonSARs RSUs andSERPslikelytonecessitateadministrativerulingstoclarify Otherpossible probable effects 22 InvestorInitiativesandVotingINGENERAL ISS InstitutionalShareholderServices GlassLewis Co CalPERS CaliforniaPublicEmployeeRetirementSystem Significanttoalesserextentbecauseofperceivedlabor orientedpoliticalagenda Initiativesbythefollowingorganizationsarelikelytobeinfluential 23 InvestorInitiativesandVotingISS Opposeanyproposedplanandcommitteememberre electionifCEOpay disconnect fromsustainedcompanyperformanceMorethan50 ofCEOpayincreasefromequityawardsCEOparticipatesinproposedplanDisconnectif1and3yearTSRisnegative butCEO stotaldirectpayisaboveprioryearAppliestoRussell3000 publiclytraded3years andCEOinplaceatleast2years Newvotingguidelineseffectiveforannualmeetingsafter1 31 04 24 InvestorInitiativesandVotingGLASSLEWIS CO Proxyadvisorycompany anddirectcompetitortoISS formedin2003 EquitycompensationplansareevaluatedbasedonqualitativeandquantitativereviewQualitativereviewlooksatplanadministration methodandtermofexercise repricinghistory andotherfactorsQualitativereviewincludes20differentweightedanalysesEmploysapay for performancemodelwithassignedgradesbasedonCEOpayandperformancerelativetopeercompanymedianpracticeNoinformationprovidedonhowinformationisusedindevelopingvotingrecommendations 25 InvestorInitiativesandVotingCALPER