The SEC’s Disclosure Proposals for Executive Compensation

1. February 17, 2006 The SEC’s Disclosure Proposals for Executive Compensation

2. Today’s Speakers Mark Borges Principal – Mercer Human Resource Consulting Cathy Creech Partner – Benefits Group of Davis 7 Harman LLP Lynn Dudley Vice President – American Benefits Council John McGuiness Principal – Groom Law Group

3. Agenda • Overview • Summary of Executive Compensation Proposals • Individuals Covered • Compensation Discussion and Analysis • Summary Compensation Table • Outstanding Equity Awards and Realized Gains • Post-Employment Payments and Benefits • Director Compensation • Preparing for Next Year’s Disclosure • Questions

4. Overview • Proposals issued by SEC on January 27, 2006 • First significant revision in 14 years • What happens next? • 60-day comment period – ends April 10, 2006 • SEC staff will evaluate comments and formulate final recommendations • Commission will consider and adopt final rules later this year • Effective dates – new rules will apply to: • Proxy statements filed 90 days or more after publication of final rules • Annual reports for fiscal years ending 60 days or more after publication • Forms 8-K filed for triggering events occurring 60 days or more after publication • Registration statements that become effective 120 days or more after publication

5. Summary of Executive Compensation Proposals

6. Individuals Covered • Named executive officers • Any person who during the last fiscal year served (at any time) as • principal executive officer • principal financial officer, PLUS • Three most highly-compensated executive officers (other than the PEO and PFO) who were serving as executive officers at end of last fiscal year, PLUS • Based on total compensation • Disclosure not required if total compensation does not exceed $100,000 • Up to two additional individuals who would have been among the top three most highly-compensated executive officers except they were no longer serving as executive officers at end of last fiscal year

7. Compensation Discussion and Analysis • Replaces Board Compensation Committee Report and Performance Graph • Overview of executive compensation program • Summary of each program element • Provides context for tabular disclosure • Must discuss six specific items: • Program objectives • Behaviors that program is designed to reward and not reward • Elements of compensation • Rationale for each element • Methodology (including formula) used to determine amount for each element • How each element and decisions regarding that element fit into overall compensation objectives and affect decisions regarding other elements

8. Compensation Discussion and Analysis • Considered company, rather than compensation committee, disclosure • Will be considered “filed” with, rather than “furnished” to, the SEC • Subjects CD&A to full liability under the federal securities laws • Covered by SOX Section 302 CEO and CFO certifications to the extent incorporated into an Securities Exchange Act periodic report (for example, Form 10-K) • Need not disclose performance target levels, or factors/criteria involving confidential commercial or business information

9. Summary Compensation Table

10. Summary Compensation Table – All Other Compensation • Any compensation item that is not properly reported in any other column • Perquisites and other personal benefits • Earnings on NQDC arrangements (including defined contribution plans) • Tax “gross-ups” and reimbursements • Discount stock purchases (unless arrangement is broadly available) • Amounts paid or accrued under severance or change-in-control arrangements • Company contributions to qualified defined contribution plans • Aggregate increase in actuarial value of defined benefit pension plans • Value of insurance premiums paid by company for NEO life insurance • Item must be identified and quantified if amount exceeds $10,000

11. Perquisites • While not defined, proposals provide analytical framework for determining: • An item: • Is not a perquisite if “integrally and directly related to the performance of the executive’s duties” • Is a perquisite if “confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company” • Proposed disclosure requirements • Must be disclosed if aggregate value perquisites is $10,000 or more • If disclosed, must be individually identified • Must be quantified only if individual item has value in excess of greater of: • $25,000 or • 10% of total perquisites

12. Name Perform-ance-Based Stock and Stock-based Incentive Plans: number of shares, units or other rights(#) Perform-ance-Based Options: number of securities underlying Options(#) Non-Stock Incentive Plan Awards: number of unitsor other rights(#) Dollar amount of consid-eration paid for award, if any($) Grant Datefor Stock or Option Awards Perform-ance or other period until vesting or payout and Option Expira-tion Date Estimatedfuturepayouts Threshold($)or(#) Target($)or(#) Maxi-mum($)or(#) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) PEO PFO A B C SCT Supplemental Table:Grants of Performance-Based Awards Table

13. SCT Supplemental Tables:Grants of All Other Equity Awards Table

14. SCT Supplemental Narrative • Must discuss any “material factors” required to make presentation in SCT and supplemental tables understandable: • Materials terms of NEO employment agreements • Description of any option repricing or material modification of outstanding equity award • Material terms of performance-based awards • Assumptions underlying calculation of defined benefit pension plans actuarial value • Narrative must also include total compensation and job description for up to three non-executive employees whose total compensation exceeded that of any NEO

15. Outstanding Equity Awards at Fiscal Year-End Table

16. Option Exercises and Stock Vested Table

17. Post-Employment Payments and Benefits • Proposals would require individualized disclosure for each NEO • Retirement Plan Potential Annual Payments and Benefits Table • Nonqualified Defined Contribution and Other Deferred Compensation Plans Table • Potential payments upon termination or change-in-control • Narrative, rather than tabular, disclosure • Must quantify amount payable to each NEO • Must disclose assumptions

18. Retirement Plan Potential Annual Payments and Benefits Table

19. Nonqualified Defined Contribution and Other Deferred Compensation Plans Table

20. Potential Payments Upon termination or Change-in-Control • Covers any contract, agreement, plan, or arrangement (whether or not in writing) providing for payments at, following, or in connection with any termination of employment, including: • Resignation • Retirement • Termination without cause (including a constructive termination) • Termination with cause • Change-in-control • Covers any payments and other benefits (including perquisites) payable upon the occurrence of any of these events

21. Director Compensation

22. Preparing for Next Year’s Disclosure

23. Implications for Next Year’s Disclosure • Although probably not effective until 2007, current compensation decisions are affected • Should assess current disclosure practices under proposals • Are improvements needed? • Are shareholders requesting disclosure not covered in proposals? • Consider how current program will be described under proposals • What more is needed to “explain the numbers?” • Can compensation philosophy be explained thoroughly and succinctly? • Consider presentation formats that are easy to understand • Look for potential “double counting” pitfalls

24. Implications for 2007 Disclosure • CD&A will require significantly more detailed disclosure • Provides a broad framework, but companies must “tell their own story” • Proposals emphasize the “how” and “why” as much as the “how much” • Requires greater demonstration of pay-for-performance relationship • Putting policies and decisions in writing may be a daunting task • Can you tell a compelling story? • Identify compensation elements that will comprise “Total Compensation” figure • Develop internal “tally” sheets • Review benchmark data and process and validate what is “competitive pay” • Decide whether certain program elements should be revised or eliminated • Will need to monitor all executive officers to identify NEOs

25. Implications for 2007 Disclosure • Determine appropriate and consistent valuation methods • Equity valuation • Nonqualified deferred compensation earnings • Defined benefit pension plan actuarial values • Perquisites • Examine impact of new disclosure values and calculations • Post-employment payments and benefits arrangements may generate numbers that may never be realized • Defined benefit pension plan calculation likely to be complex and confusing • Disclosure of NQDC arrangements will duplicate aspects of the SCT • Severance and change-in-control disclosure to be continued hot button • Model various termination scenarios to select appropriate disclosure • Select reasonable assumptions

26. Implications for 2007 Disclosure • Items to remember • Quality – not quantity, is key • Use “plain English” in narrative discussions • Consider using charts and bullets • The Performance Graph (which charts TSR), not the discussion of TSR, is being eliminated • Disclosure is not limited to the proxy statement • Consider using websites and other venues Bottom line: Begin planning now!

27. Questions