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1、 The Future of Executive CompensationGeorge B. PaulinPresident & CEO, F.W. Cook & Co., Inc.October 6, 20040BackgroundOVERVIEW 5-year transition in executive compensation . . .1st Phase2nd PhasePeriod2002-032004-06CatalystsSarbanes-Oxley, stock exchange rules, institutional investor initiativesNew FA

2、SB rules, option-valuation refinements, political/labor pressureFocusCorporate governanceProgram designImpactBoard compensation committee processUse of stock options1BackgroundTODAYS DISCUSSION 1.2nd-phase market trends in executive compensation transition 2.New and proposed regulations 3.Shareholde

3、r initiatives and voting Implications and outcomes from 3 areas . . .2BackgroundMETHODOLOGYComes from the F.W. Cook & Co. data baseGenerally, large-caps (i.e., Fortune 250)But representative of broader public-company practiceValues options based on the Binomial model and standard assumptionsCompetit

4、ive data used for illustrations . . .3Market TrendsTOTAL DIRECT COMPENSATIONTop-quartile outliers are moving back toward the middle (75th percentile as percent of median) . . .CEOCEOCEOTop 5Top 5Top 51996200220044Market TrendsLONG-TERM GRANTS Share usage as a percent of outstanding shares (“run rate

5、s) continues to decrease. . .Share Usage as % Outstanding Shares199620022004MedianOptions0.94%1.38%1.01%Other0.05%0.03%0.10%Total1.07%1.46%1.09%75th POptions1.32%1.82%1.43%Other0.16%0.13%0.24%Total1.45%1.87%1.55%5Market Trends LONG-TERM GRANTS (contd.)Run rates (and dilution overhang) are no longer

6、meaningful as grant value shifts from optionsGrant-value changes are from 2 sourcesStock price variabilityDiscounting in conversion from options for full-value grantsReduction in lower-level grants only partially completeDriven by stock-exchange rules (not accounting), and many board-approved plans

7、still have shares availableLook carefully beyond the survey numbers . . .6Market TrendsLONG-TERM STRUCTUREShift from options to full-value grants (i.e., restricted and performance stock/cash) . . .Annual MixYearLevelOptionsFullValue1996CEOTop-573.7%73.2%26.3%26.8%2002CEOTop-579.2%78.0%20.8%22.0%2004

8、CEOTop-551.5%49.8%48.5%50.2%7Market TrendsOPTION STRUCTURE: More PrevalentSome forms of options will be winners under new accounting . . .Grant TypeAdvantage toPlain-Vanilla OptionsStock-only SARsFewer shares issuedDiscount OptionsLow cost to intrinsic valueOptions with Dividend RightsLow cost to in

9、trinsic valuePerformance OptionsPay-for-performanceIndexed OptionsPay-for-performance8Market TrendsOPTION STRUCTURE: Less PrevalentOther forms will be losers . . .Grant TypeDisadvantage toPlain-Vanilla OptionsISOsNo tax benefitReloadsAdditive expenseCash-only SARsVariable costPremium OptionsHigh cos

10、t to intrinsic valueESPPsFair value expense (no expense now)9Market TrendsOPTION PROVISIONS3-4 year vesting will continue to spread expense accruals10-year terms will continue because the cost effect of shorter terms is not linear Post-termination exercise may become more limited to conserve sharesG

11、rant dates may be moved to late in the year so value aligns with annual TSR under new ISS guidelinesRegulatory and shareholder considerations will affect option design . . .10Market TrendsLONG-TERM GRANT DETERMINATIONA new approach for determining grant size is necessary but controversial . . .Old M

12、ethodNew MethodDetermine competitive individual grant valuesConvert to company shares (or cash)Add individual grants to determine total grantsStart with competitive aggregate grant value as a percent of company market capAllocate to individuals based on competitive percent of total grant value11Mark

13、et TrendsSHAREHOLDER APPROVED PLANSEmployees and outside directors eligibleAll possible grant typesAdministrative provisions in grant agreements, not the planAs-issued share count“Fungible share pool for trading-off options and full-value grantsPotential for 3rd-party option transfersFlexible omnibu

14、s-type structure will become the standard . . .12Market TrendsSHAREHOLDER APPROVED PLANS (contd.)Traditional Pool: 10 million option shares with up to 3.3 million full value sharesFungible Pool: 16.6 million option shares with each full value share granted counted as 3 options (assuming 33% Binomial

15、 option value):Fungible share pool works best under ISS-type voting guidelines . . .ISS “Cost” in Option EquivalentsShares Available for GrantTraditional Pool6.7 + 9.9 = 16.6 million10 MillionFungible Pool16.6 million5.5 to 16.6 million depending on mix of options and full value shares13Market Trend

16、sEXECUTIVE OWNERSHIPPressure from shareholder groups will increase prevalence and enforcement sanctions . . .“Best Practice”RealityOwnership GuidelinesReal ownership of specified salary multiple or number of shares; usually after 5 yearsAbout half of large caps; few small caps and techs or West of t

17、he MississippiRetention GuidelinesHold net shares from compensation program for at least 1 year (i.e., no run-up and flipping)GE, Citicorp, Lilly and a couple of other early adopters; few followers14Market TrendsMISCELLANEOUSSetting goals for annual bonuses to better balance pay for performance and

18、pay for resultsValuing SERPs, above-market interest on deferred compensation, and severance arrangementsAligning outside directors compensation with their current responsibilities and risksAnd compensation committees again taking charge of directors compensation, where it has moved to nominating/gov

19、ernance committeesMore time will be spent on . . .15New and Proposed RegulationsIN GENERALNYSE rules effective 6/30/03 (Nasdaq rules are generally in parallel)FAS 123 proposal on accounting for equity-based compensationExposure Draft (ED) issued 3/31/04Legislation pending on taxation of deferred com

20、pensation3 areas will be covered . . .16New and Proposed RegulationsSTOCK EXCHANGE RULESOld “l(fā)oopholes from shareholder approval eliminated . . .Former ExemptionsCurrent ExemptionsBroad-based plansCertain share authorizations not exceeding 5%, i.e., “Broker No-Vote”Grants in Treasury sharesNew-hire

21、grantsPlan amendments other than participant eligibility, grant types, and share limitNew-hire grantsShares in lieu of cash“Immaterial” plan amendments17New and Proposed RegulationsFAS 123 STATUSOutcome could have been worse . . .Bad NewsGood NewsProposed rules will be adoptedPossibly later (1/1/06)

22、 than sooner (1/1/05)Option pricing models will be basis for expenseFlexibility in modeling will reduce option expenseTransition is inherently painfulChoice between “modified prospective” and restatement, plus other steps to moderate original ED18New and Proposed RegulationsFAS 123 STATUS (contd.)St

23、raight-line accruals for installment vestingLattice-binomial no longer specifically preferredCurrent accounting treatment for corporate income taxes retainedSafe-harbor for qualified ESPPsPurchase discount no greater than 5%Steps to moderate ED . . .19New and Proposed RegulationsTAX DEFERRAL STATUSM

24、any elections for bonuses earned (whole or part) in 2004 and paid in 2005 could be invalidIf annual compensation, elections must pre-date 1/1/04If multi-year, must pre-date 2005 payment date by at least 12 monthsElections for compensation earned in 2005 and paid in 2006 must be before 1/1/05Timing i

25、s uncertain and changes to current proposals are likely . . .20New and Proposed RegulationsTAX DEFERRAL STATUS (contd.)No event-driven distribution triggersAmounts originally deferred before effective date grandfathered, if no further deferral under subsequent electionGeneral scope will have uninten

26、ded consequencese.g., impact on SARs, RSUs, and SERPs likely to necessitate administrative rulings to clarifyOther possible (probable) effects . . .21Investor Initiatives and VotingIN GENERALISS (Institutional Shareholder Services)Glass Lewis & Co.CalPERS (California Public Employee Retirement Syste

27、m)Significant to a lesser extent because of perceived labor-oriented political agendaInitiatives by the following organizations are likely to be influential . . .22Investor Initiatives and VotingISSOppose any proposed plan and committee member re-election ifCEO pay “disconnect from sustained company

28、 performanceMore than 50% of CEO pay increase from equity awardsCEO participates in proposed planDisconnect if 1 and 3 year TSR is negative, but CEOs total direct pay is above prior yearApplies to Russell 3000, publicly traded 3 years, and CEO in place at least 2 yearsNew voting guidelines effective

29、 for annual meetings after 1/31/04 . . .23Investor Initiatives and VotingGLASS LEWIS & CO.Proxy advisory company, and direct competitor to ISS, formed in 2003 . . .Equity compensation plans are evaluated based on qualitative and quantitative reviewQualitative review looks at plan administration, method and term of exercise, repricing history, and other factorsQualitative review includes 20 different weighted analysesEmploys