SO, WHAT’S GOING ON?
─ Trends in Executive and
Director Compensation ─
Jeffrey M. Kanter
Frederic W. Cook & Co., Inc.
September, 2006
The Truth as I See It . . .
2
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 longterm plans is increasing
5. Share utilization and overhang is declining
6. Share conservation techniques are gaining importance
3
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)
4
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)

5
Disclosure at a Glance
Compensation Discussion
and Analysis
Stock Performance Graph
-- in Annual Report --
Compensation
With Respect to
Last Fiscal Year
Summary
Compensation
Table
-- Narrative Providing Overview --
Retirement and
Other Post Termination
Arrangements
Equity Holdings
Outstanding
Equity
Awards Table
Options Exercised
and Stock
Vested Table
Compensation
Committee
Report
Non-Qualified
Deferred
Compensation Table
Pension
Benefits Table
Potential
Termination and
Change-in-Control
Payments Narrative
Grants of
Plan-Based
Awards Table
6
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 shortterm 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
7
Executive Compensation Levels and Mix
CEO LTI value, 2001 – 2005 ($000) . . .
$14,000
$11,677
$12,000
2001 - 2005 75th Percentile LTI Percent
Change
-17%
$10,470
$10,000
2001 - 2005 Median LTI Percent
Change
3%
$8,000
$6,067
$6,176
$6,000
$9,815
$9,730
2004
2005
$9,148
$6,200
$6,225
2004
2005
$5,319
$4,000
$2,000
$0
2001
2002
2003
2001
2002
2003
8
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%
9
Executive Compensation Delivery
Medium entry level base salary for LTI participation
($000)…
$250
$217
$200
$220
$218
$177
$150
$126
$116
$100
$100
$112
$92
2002
2004
2006
$50
$0
Options/SARs
Performance Awards
Restricted Stock
10
Executive Compensation Delivery
Shift in grant practices continue…

But stock options are not dead – they still have a place
Executive Long-Term Incentive Grant Type Usage—Percent of Top 250 Companies
95%
100%
90%
2004 Report
88%
2005 Report
2006 Report
90%
72%
80%
66%
70%
55%
60%
44%
50%
40%
40%
30%
20% 21%
30%
19%
20%
10%
0%
Stock Options
Restricted Stock
Performance Shares
Performance Units
11
Executive Compensation Delivery
Executive stock option features – percent of Top 250
companies…
12%
2006 Report
2005 Report
2004 Report
10%
10%
8%
6%
6%
6%
6%
4%
3%
2%
2%
2%
2%
1%
1%
1%
0%
0%
Performance Options
Restoration Options
Premium Options
Discount Options
12
Executive Compensation Delivery
Grant type usage at FAS 123 companies versus
Non-FAS companies…
100%
FAS 123
91%
90%
Non-FAS 123
85%
80%
75%
69%
70%
69%
57%
60%
50%
40%
30%
20%
10%
10%
2%
0%
S tock Options
Restricted S tock
Performance Awards
S ARs
13
Executive Compensation Delivery
Shift in long-term value from options…

Long-term mix is now strategic, not competitively driven
Large-Cap Top-5 Grant Value Mix

Options
Performance
Stock/Cash
Restricted
Stock
2002
80%
15%
5%
2005
50%
20%
30%
Time-based restricted stock is the biggest gainer
14
Executive Compensation Delivery
Looking at the CEO mix amongst the Top 250…
CEO Grant Type as a Percent of Total LTI Value, 2001 - 2005
Stock Options
100%
Restricted Stock
Performance Awards
4%
11%
12%
90%
80%
14%
25%
13%
22%
70%
60%
38%
50%
40%
86%
76%
63%
30%
20%
37%
10%
0%
2001
2005
FAS 123 Companies
2001
2005
Non-FAS 123 Companies
15
Executive Compensation Delivery
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 singletrigger in new severance arrangements
Expect more stock-settled SARs to simplify exercises, save
shares, and open new design possibilities
16
Executive Compensation Delivery
Looking at the numbers…
Executive Stock Option Features—Percent of Top 250 Companies
2004 Report
10%
2005 Report
2006 Report
9%
8%
7%
6%
6%
6%
5%
3%
4%
2%
3%
2%
1%
2%
<1%
<1%
0%
1%
0%
Performance Options
Premium Options
Discount Options
17
Executive Compensation Delivery
Stock Ownership guidelines becoming the norm…
Prevalence of Executive Stock Ownership Guidelines
2004 Report
2005 Report
71%
100%
67%
Percentage of Companies
90%
80%
2006 Report
57%
70%
60%
50%
40%
30%
20%
10%
0%
1
18
Executive Compensation Delivery
With retention approaches (our preferred) gaining
a bit…
Types of Executive Stock Ownership Guidelines
2004 Report
Percentage of Companies With Guidelines
100%
2005 Report
2006 Report
90%
80%
70%
59%
64%
62%
60%
50%
40%
24%
30%
21%
14%
20%
9% 9%
20%
6% 7%
5%
10%
0%
Multiple of
Compensation
Fixed Shares/Other
Retention Approaches Retention Approaches
(Combination)
(Stand Alone)
19
Executive Compensation Delivery
Burn rates continue to drop with shift to full value
shares…
1.6%
1.4%
1.46%
1.38%
1.2%
1.09%
Run Rate
1.01%
1.0%
0.77%
0.8%
0.6%
0.49%
2002
2004
2006
0.4%
0.22%
0.2%
0.03%
0.10%
0.0%
Options/SARs
Full-Value
Total
Share Type
20
Executive Compensation Delivery
Value of grants (FVT - % of market cap) also
dropping…
Industrials
1.00%
0.80%
0.88%
0.75%
0.70%
0.70%
0.67%
0.86%0.87%
0.68%
0.78%
0.76%
0.77%
0.73%
0.68%
0.64%
0.57%0.58%
0.60%
0.42%
0.44%
0.49%
0.49%
0.46%
0.49%
0.49%
0.43%
0.40%
0.20%
0.00%
2005
2004
2003
3-Year Average
Small Cap
2004
Mid Cap
2003
2002
3-Year Average
Large Cap
21
Executive Compensation Delivery
Value of grants (FVT - % of market cap) also
dropping (cont’d)…
Hi-Tech
3.82%
4.00%
3.57%
3.50%
3.22%
2.43%
2.50%
2.00%
1.50%
1.00%
2.85%
2.82%
3.00%
1.89%
1.20%
2.13%
1.95%
1.15%
2.43%
2.79%
2.48%
2.33%
2.20%
1.93%
1.84%
1.25%
1.16%
1.06%
1.44%
1.31%
0.83%
0.50%
0.00%
2005
2004
2003
3-Year Average
Small Cap
2004
Mid Cap
2003
2002
3-Year Average
Large Cap
22
Executive Compensation Delivery
Value of grants (FVT - % of market cap) also
dropping (cont’d)…
Retail
2.00%
1.80%
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
1.70%
1.66%
1.49%
1.59%
1.39%
1.06%
0.95%
0.55%
2005
1.21%
1.05%
0.53%
2004
1.12%
0.63%
2003
1.23%
1.09%
1.09%
1.16%
1.02%
0.72%
0.62%
0.74%
0.55%
3-Year Average
Small Cap
0.79%
0.76%
2004
Mid Cap
2003
2002
3-Year Average
Large Cap
23
Executive Compensation Delivery
Looking at 3 year average based on size…
5.00%
Small Cap
Mid Cap
4.00%
3.57%
3.00%
2.00%
Large Cap
2.48%
1.84%
2.43%
1.59%
1.39%
1.44%
1.16%
1.09%
1.00%
0.64%
0.76%
0.68%
0.78%
1.06%
0.62%
0.46%
0.49%
0.74%
0.00%
2005
2004
2005
Industrials
2004
Hi-Tech
2005
2004
Retail
24
Executive Compensation Delivery
FVT as a % of revenue also dropping…
1.50%
1.00%
1.18%
1.14%
1.09%
1.01%
0.93%0.95%
0.86%
0.71%0.69%
0.63%
0.61%
0.66%
0.50%
0.00%
Mid Cap
Small Cap
2005
2004
2003
Large Cap
3-Year Average
25
Executive Compensation Delivery
% of revenue by industry…
By Industry
5.69%
5.61%
5.45%
6.00%
5.00%
4.12%
4.00%
3.00%
2.00%
1.00%
0.55%
0.60%
0.61%
0.56%
0.48%
0.44%
0.53%
0.49%
0.00%
Industrials
Hi-T ech
2005
2004
2003
Retail
3-Year Average
26
Performance Measures
Among sample of large companies…
Category
Performance Measures
Percent 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%
27
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
28
Emerging Trends
Recent CEO contracts…
1X
Lucent
2X
2.5X
3.0X
3M
Chevron (was 3X)
Allied Waste
Baxter
Sara Lee
Aon
Fiserv
Boeing
Hewitt
ConAgra
Hewlett-Packard (was 2.5X)
Mellon
JPMorgan Chase (was 3X)
NCR
Krispy Kreme
OfficeMax
Pathmark
Safeco
Siebel Systems
Saks
29
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
30
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 nonsolicitation in addition to confidentiality, non-disparagement and
non-compete clauses)
31
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
32
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
33
Directors’ Compensation
Don’t forget them . . .
$300,000
NASDAQ
$250,000
$232,035
$244,076
$199,448
$245,540
$200,000
$201,395
$249,222
$212,551
$255,801
NYSE
$215,000
$200,000
$150,000
$100,000
$50,000
$0
Board Member
Only
Compensation
Committee
Member
Audit
Committee
Member
Compensation
Committee
Chair
Audit
Committee
Chair
34
Directors’ Compensation
Stock options or restricted stock? . . .
Cash
36%
Cash
26%
Stock
Options
56%
Stock
Awards
49%
Stock
Awards
18%
NASDAQ
NYSE
Stock
Options
15%
35
Directors’ Compensation
Board retainers . . .
$70,000
$65,000
$60,000
$50,000
$37,500
$40,000
$30,000
$20,000
$10,000
$0
NASDAQ
NYSE
36
Directors’ Compensation
Committee members received . . .
Percentage of Companies
Median Retainer / Fee
NASDAQ
NYSE
NASDAQ
NYSE
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
Audit Committee
46%
50%
$1,500
$1,500
Compensation Committee
45%
49%
$1,500
$1,500
Nominating & Governance Committee
43%
50%
$1,500
$1,500
Additional Retainers
Committee Meeting Fees
(per meeting)
37
Directors’ Compensation
Additional fees for committee chairs . . .
Percentage of Companies
Median Retainer / Fee
NASDAQ
NYSE
NASDAQ
NYSE
Audit Committee
77%
92%
$11,040
$15,000
Compensation Committee
68%
92%
$9,000
$10,000
Nominating & Governance Committee
59%
90%
$5,894
$10,000
Audit Committee
24%
25%
$2,500
$500
Compensation Committee
5%
3%
$1,000
$500
Nominating & Governance Committee
4%
3%
$750
$500
Chair Additional Retainers
Chair Additional Meeting Fees
(per meeting)
38
Directors’ Compensation
Director ownership guidelines . . .
Retention
Requirements
Only
2%
Both
6%
Retention
Requirements
Only
12%
Both
31%
Ownership
Guidelines Only
31%
None
61%
NASDAQ
Ownership
Guidelines
Only
37%
None
20%
NYS E
39
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
Chicago
Los Angeles
San Francisco
London (Through Affiliation with
90 Park Avenue
35th Floor
New York, NY 10016
212-986-6330 phone
212-986-3836 fax
One North Franklin
Suite 910
Chicago, IL 60606
312-332-0910 phone
312-332-0647 fax
2121 Avenue of the Stars
Suite 990
Los Angeles, CA 90067
310-277-5070 phone
310-277-5068 fax
One Post Street
Suite 825
San Francisco, CA 94104
415-659-0201 phone
415-659-0220 fax
New Bridge Street Consultants)
20 Little Britain
London, EC1A 7DH
020-7282-3030 phone
020-7282-0011 fax
www.nbsc.co.uk
Jeffrey M. Kanter
jmkanter@fwcook.com
Website address:
www.fwcook.com