Wall Street Reform and Executive Compensation

1. Wall Street Reform and Executive Compensation A briefing on the Dodd-Frank Act • November 16, 2010 • Boston NASPP

2. Overview of Dodd-Frank Act

3. Overview of Dodd-Frank Act Overview • The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21 by President Obama • This landmark piece of legislation addresses a range of issues, including: • Banking regulation • Consumer protection • Regulation of private placements and private investment funds • Executive compensation and governance reforms • This presentation outlines the key executive compensation and governance provisions included in the legislation, and the likely impact on executive compensation next year and beyond • Note that the Act directs the Securities and Exchange Commission (SEC) and the securities exchanges to interpret the law and make new rules, many of which are yet to come

4. Overview of Dodd-Frank Act The impact of regulatory reform – a new world order • Dodd-Frank is a law that enhances the power and influence of your company’s institutional shareholders on executive and director pay matters • Access to more and “better” information about pay programs (via disclosure rules) • Regular opportunity to tell directors how they feel about their pay decisions (via say on pay) • Institutional investment managers must disclose how they voted • Changes to broker voting, which will dilute the impact of the more typically management-friendly votes • Institutional shareholder advisory groups gain more power (ISS, Glass Lewis) • CEO pay ratio – a meaningless statistic designed to embarrass executives & directors • Shareholders will be forced to be more vocal on these issues, inside and outside of say on pay

5. Overview of Dodd-Frank Act Dodd-Frank Act: key executive pay and governance provisions

6. Overview of Dodd-Frank Act Dodd-Frank Act: key executive pay and governance provisions (cont’d)

7. Key Executive Pay and Governance Provisions

8. Key Executive Pay and Governance Provisions SEC Issues Rulemaking Calendar • October –November 2010 • Proposal regarding Shareholder votes on Executive Compensation and Golden Parachutes • Propose exchange listing standards on Compensation Committee Independence, Compensation Committee advisor independence and Compensation Committee consultant conflicts • January – March 2011 • Adopt Rules Regarding Shareholder votes on Executive Compensation and Golden Parachutes • April – July 2011 • Adopt exchange listing standards on Compensation Committee independence, Compensation Committee advisor independence and Compensation Committee consultant conflicts • Propose rules regarding disclosure of pay-for performance, pay ratios and hedging by employees and directors • After July 2011 • Under development

9. SEC issued proposal on Shareholder approval of Executive Compensation / Golden Parachute on October 18, 2010 Comment period on proposal through November 18, 2010 Effective Dates For first Annual or Other Meeting of Shareholders occurring on or after January 21, 2011 for which proxy rules require executive compensation disclosure Proxy statements filed before January 21, 2011 for meetings after such date must include Say on Pay / Say on Frequency Effective regardless of status of SEC proposal Disclosure around Golden Parachute arrangements in merger proxy NOT effective until final rules issued Key Executive Pay and Governance Provisions Say-on-Pay / Say-on-Frequency / Say-on-Golden Parachute

10. Say-On-Pay ISS’ Executive Compensation Evaluation policy applies to Say-On-Pay Policy consists of three sections: Pay for performance Problematic pay practices Board communication and responsiveness Recommendations issued under the Executive Compensation Evaluation policy will apply to Say-On-Pay if on ballot If egregious practices are identified, or if a Company previously received a negative recommendation on a Say-On-Pay resolution related to an issue that is still on-going, ISS may also recommend Withhold votes against Compensation Committee members Key Executive Pay and Governance Provisions Say-on-Pay / Say-on-Frequency / Say-on-Golden Parachute (ISS Proposals)

11. Say-On-Frequency ISS will adopt a new policy to vote in favor of companies providing for annual Say-On-Pay Say-On-Golden Parachute ISS will vote case-by-case on proposals to approve the Company's golden parachute compensation, consistent with ISS policies on problematic pay practices related to severance packages Final “2011 Proxy voting Guidelines” to be issued in late November Key Executive Pay and Governance Provisions Say-on-Pay / Say-on-Frequency / Say-on-Golden Parachute (ISS Proposals)

12. Key Executive Pay and Governance Provisions Say-on-Pay • Non-binding Shareholder advisory vote on the compensation of the Company’s named executive officers • Vote covers all named executive officers’ compensation • Covers CD&A, compensation tables and other Item 402 disclosure • Does not cover directors’ compensation • Does not cover disclosure about compensation policies and practices as they relate to risk management and risk taking in general • Smaller reporting companies do not have to include CD&A • No preliminary proxy statement required • No discretionary broker voting • Future mandatory disclosure in CD&A on how Board has taken into account Say-on-Pay results • Smaller reporting companies do not have this requirement but may need to disclose in narrative disclosure

13. SEC is NOT prescribing specific form of resolutions for Shareholder advisory vote Sample 1 (CitiGroup) Resolved, that the stockholders approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the compensation discussion and analysis, the compensation tables and any related material disclosed in this proxy statement. Sample 2 (Verizon) Resolved, that the shareholders approve the overall executive pay-for-performance compensation policies and procedures employed by the Company, as described in the Compensation Discussion and Analysis and the tabular disclosure regarding named executive officer compensation, together with the accompanying narrative disclosure, in the proxy statement. Sample 3 (Motorola) (not meant to comply with new rules) Resolved, that the stockholders approve the overall executive compensation policies and procedures employed by the Company, as described in the Compensation Discussion and Analysis regarding named executive officer compensation (together with the accompanying narrative disclosure) in this Proxy Statement. Sample 4 (Intel) (not meant to comply with new rules) Do you approve of the Compensation Committee’s executive compensation philosophy, policies, and procedures as described in the ‘Compensation Discussion and Analysis’ section of this proxy statement Key Executive Pay and Governance Provisions Say-on-Pay

14. Non-binding Shareholder advisory vote in proxy statements for annual meetings to determine whether the Say-on-Pay vote will occur every 1, 2 or 3 years First vote to be held at first annual or other meeting requiring executive compensation disclosure following January 21, 2011 and then held not less often than every six years Proxy card to allow for following choices: 1, 2, 3 years or abstain Board may recommend a choice, but proxy statement must be clear that vote is a choice and not a vote for or against Disclosure in Form 10-Q during period in which Say-on-Frequency occurs stating Board’s decision on frequency Disclosure of Shareholder advisory vote on Form 8-K (Item 5.07) within four business days still in effect If Board policy consistent with plurality vote on Say-on-Frequency, Company may exclude shareholder proposals on Say-On-Pay Key Executive Pay and Governance Provisions Say-on-Frequency

15. Two Parts to Say-on-Golden Parachute Separate Non-binding Shareholder advisory vote On “any agreements or understandings that such person [Company] has with any named executive officers of such issuer (or of the acquiring issuer, if such issuer is not the acquiring issuer) concerning any type of compensation (whether present, deferred, or contingent) that is based on or otherwise relates to the acquisition, merger, consolidation, sale or other disposition of all or substantially all of the assets of the issuer” (Golden Parachute) New disclosure obligations for Golden Parachute (In connection with seeking approval of merger) Disclosure of any agreements Company has with NEOs (or NEOs of Acquiring Company) concerning compensation that is based on transaction Proposed rules provide more detailed disclosure than existing requirements to describe “substantial interest” by executive officers and directors Acquiring Company has similar disclosure obligations if it is seeking shareholder approval as well Although not required under Dodd-Frank, SEC amended other forms to require Golden Parachute disclosure: Going private transactions (Schedule 13E-3) Third party tender offers (Schedule TO and 14D-9) Bidders required to disclose Target Company’s Golden Parachute compensation arrangements after reasonable inquiry Registrations statements on S-4 containing disclosure on mergers and similar transactions Proxy solicitations that do not contain merger proposals but require Item 14 disclosure of Schedule 14A Key Executive Pay and Governance Provisions Say-on-Golden Parachute

16. No specific language or form of resolutions proposed by SEC Smaller reporting companies must comply Shareholder advisory vote NOT required for: Golden Parachute compensation between Acquiring Company and NEOs, but disclosure still required Golden Parachute compensation previously approved in an annual meeting S-O-P vote, but Approval of existing change of control disclosure does not satisfy this requirement New arrangements or revised terms would still be subject to separate vote Annual meeting with no merger or similar vote (discretionary) Key Executive Pay and Governance Provisions Say-on-Golden Parachute

17. New Tabular Disclosure (Item 402(t) of Regulation S-K) If in merger proxy, assume triggering event took place on latest practicable date, and price per share is closing price on latest practicable date If in Annual meeting proxy, assume triggering event took place at year end and price per share is closing price at year end Multiple Tables required if approving Revisions or Amendments to Golden Parachutes only Key Executive Pay and Governance Provisions Say-on-Golden Parachute • Golden Parachute Compensation • Name Cash Equity Pension Perquisites Tax /NQDC /Benefits Reimbursement Other Total • PEO • PFO • A • B • C

18. Cash – Cash Severance payments (base salary, bonus, pro rata non equity incentive plan payments) Equity – Dollar value of accelerated stock awards, in the money options for which vesting accelerated, payments in cancellation of stock and option awards Pension – Pension and non qualified deferred compensation benefit enhancements Perquisites -- Perquisites and other personal benefits and health and welfare (No de-minimus exceptions; no exception for non discriminatory health and welfare plans) Tax Reimbursements - 280G tax Gross Ups Other – Any other arrangements not called for above Total – All elements listed above Key Executive Pay and Governance Provisions Say-on-Golden Parachute

19. New Tabular Footnote disclosure Each separate form of compensation to be quantified Individual perquisites and personal benefits to be identified and quantified Separate footnote identifying Amounts attribute to “single trigger” and “double trigger” arrangements Time frames for “double trigger” events Narrative Disclosure Succinct narrative disclosure of any material facts necessary to understanding Golden Parachute Compensation Specific circumstances that would trigger payments Payments to be made in lump sum or over time Who is to make payments Material conditions to receipt of payments or benefits Non compete, non solicitations, non disparagement Duration of such agreements and provisions on waiver or breach Key Executive Pay and Governance Provisions Say-on-Golden Parachute

20. Company’s proxy materials to provide shareholders with information about, and ability to vote for, a shareholder or shareholder group’s nominee Proxy Access included in Dodd Frank, although SEC had previously issued proposed rules in 2009 Effective Date was to be November 15, 2010 Legal Challenge: SEC has stayed Effective Date until resolution of Business Roundtable and Chamber of Commerce suit challenging new rule Some states including Delaware have amended their state corporate law to allow companies to adopt proxy access procedures Key Executive Pay and Governance Provisions Proxy Access

21. Ownership Requirements: significant, long-term stake required Shareholder (or group) must own 3% of total voting power Shareholder must have investment AND voting power over shares Borrowed shares NOT included Short shares NOT included; Shares on loan MAY BE included if: Shareholder has right to recall shares Shareholder recalls shares if nominee included in proxy Three year prior holding period, with intent to hold shares through date of election Eligibility Not available for shareholder seeking “change of control” Not available for nominee or shareholder that has agreement with Company regarding the nomination Nominee, if elected, must not violate federal or state law or rules of national securities exchange Nominee must satisfy objective standards of independence Subjective Board determination required by national exchanges does not apply Key Executive Pay and Governance Provisions Proxy Access

22. Number and Priority of Nominees Greater of: 1 or 25% of Board, rounded down Shareholder (or Group) with largest holdings given priority (regardless of timing of notice filing (Schedule 14N) Shareholder Nominee will count against limit even if Company allows nominee to be unopposed New Schedule 14N to be filed by Shareholder To be filed with SEC between 150 and 120 days before anniversary of mailing date of Company’s definitive proxy statement for previous year: Up to 500 word statement of support Certification that nomination is not intended to result in change of control Information on share ownership, shareholder, and nominee Key Executive Pay and Governance Provisions Proxy Access

23. Deadlines Company to notify shareholder within 14 days after deadline for Schedule 14N if NOT including nominee Shareholder has 14 days to correct any eligibility or procedures deficiencies Company to notify SEC if excluding shareholder nominee at least 80 days before filing of definitive proxy statement Shareholder to be notified no later than 30 days before Company files definitive proxy statement that shareholder nominee included Other Points Shareholder (or Group) may use Schedule 13G, unless they are conducting other activities that trigger Schedule 13D Shareholder proposals on proxy access procedures permitted under proxy rules Key Executive Pay and Governance Provisions Proxy Access

24. Independence of Compensation Committee and Advisors Compensation committee members must meet new independence standards to be established by the national securities exchanges. Committee must have authority to retain its own compensation consultants, legal counsel, and other advisors, but only after the committee has considered whether they are “independent” based on factors identified by the SEC. Expansion of Executive Compensation Disclosure The relationship between “executive compensation actually paid” and corporate financial performance; The ratio between CEO total compensation and the median total compensation of all employees; and Policies on employee and director equity hedging. Clawbacks Companies will be required to implement a “clawback” policy requiring current and former executive officers to return erroneously-paid incentive compensation (including equity) received during the three-year period preceding an accounting restatement due to material noncompliance with any accounting requirement. Key Executive Pay and Governance Provisions Compensation Committee / Expansion of Comp Disclosure / Clawbacks

25. What to expect going forward

26. What to expect going forward More conservative practices • “Cleaner” pay practices across the board • Perquisites to continue their decline • Gross-ups on change-in-control payments • Single-trigger on equity will rapidly move to a double-trigger • Severance multiples • Less targeting of the 75th percentile – more targeting of the median

27. What to expect going forward Greater pressure on share pools • Share usage and dilution are critical issues for your company’s institutional shareholders, and their advisory groups • This issue has never been more acute after a 2009 in which share consumption jumped in most companies • Harder to get shares in 2011 • Linkage between vote on shares and “say on pay” • Used to get five years’ worth – now we’re lucky to get three • Eligibility to be restricted in some companies • Average salary levels for equity-eligible employees continue to increase • Greater use of cash-based LTI and phantom stock in others • David Ellis’ CNN Money, July 12 - Phantom stock may be the next big thing in employee pay • Liability accounting, tracking and administering cash-based performance plans = fun for stock plan administrators • How do you retain your “next level” when you lose the perfect retention vehicle?

28. What to expect going forward Greater use of relative performance measurement • Two events driving this: • In some sectors, uncertainty is making absolute goal-setting difficult • Disclosure of relationship between financial performance and pay • The new disclosure requirement provides shareholders with all the information they need to conduct a relative pay-for-performance analysis fairly easily • No Board will want to explain why they underperformed their three largest competitors but also increased the CEO’s TDC • Could have substantial implications for HR, accounting teams and stock plan administrators • Greater use of relative TSR programs  valuation complexity • Puts a premium on ability to track “performance condition” plans to handle quarterly true-ups • Puts a premium on the communications to employees about how the plan is tracking, as relative performance makes it much harder for the average employee to predict payouts • May require use of third party benchmarking resources, depending on the performance measure

29. What to expect going forward More companies will consider premium-priced or performance-vested option plans • The “pay ratio” requirement is the silliest of all provisions within Dodd-Frank • A meaningless statistic without accounting for organizational structure, job size, etc. • Was a top focus of business lobby • Nonetheless, Boards will start looking at it too, and what gets watched, gets addressed • CEO TDC is driven primary by the LTI, which will prompt Boards to look for ways to lower the grant value of LTI while still giving the CEO significant upside opportunity • Hence, premium-priced or performance-vested options • Both plans will have lower valuations than plain vanilla stock options • Alternatively, some Boards will explore raising pay levels throughout the organization… • Which will not be a tenable solution long-term • However, this runs counter to the concern about dilution – the lower the value, the more you have to grant (theoretically) • Regardless, expect some companies with large ratios to dust these plans off

30. What to expect going forward The other things to watch for • Never underestimate the power of director embarrassment • Board consultants to stop doing any other work - period • Less use of traditional HR firms, more use of the boutiques • Has implications for other areas of HR where the same consultant is used for various services • Tracking of previously-exercised stock options may become more detailed • Clawback provision to apply to stock option gains, not just bonuses • Assessing how much to claw back will become quite an exercise

31. What to expect going forward Preparing for 2011 • These provisions will cause most compensation committees to reexamine their programs in light of the new requirements and required disclosures as they determine what programs should look like in 2011 • Some companies will naturally react to look for comfort in replicating what peers are doing – seeking out the “middle ground”. We are cautioning our clients that there is no safety in this “middle ground”, and that changing programs to look the same as that of peers may very well be an adverse outcome • The one area where we expect companies to find defensibility in their programs – regardless of the actual features of those programs – is in linkage to strategy • Companies need to explore every element of their pay program and redouble their efforts to ensure their program maintains a strong link to business strategy, and that this gets clearly communicated to shareholders • Not just disclosure, but active and targeted communication

32. What to expect going forward The questions to ask – and answer – before next year • Does the mix of pay – or emphasis on fixed vs. variable pay, on annual vs. long-term performance – link to the time horizons of the company’s key challenges? • Does the use of long-term incentive vehicles – or emphasis on stock performance vs. strategic performance vs. ownership – map to the way in which the company intends to create value? • Does the make-up of top executives’ vested and unvested share holdings provide sufficient sensitivity to changes in the stock price to make a significant – but not excessive – difference in the value of those shares? • Are the performance measures chosen for the incentive plans linked to the strategic plan, and adequately controllable by executive behavior? • Are the performance levels selected for the incentive plans calibrated to the strategic plan, representative of true incremental value creation, and set at levels that are reachable? • If there are “other” components of the program – perquisites, severance or change-in-control provisions, and the like – can their link to strategy be identified and rationalized? • Taken together, the answers to these questions should provide a read on the degree to which the current program is linked to strategy, and provide a platform for shareholder communication

33. What to expect going forward Key discussion areas

34. Questions? Speaker contact information Michael AndresinoPosternak Blankstein & Lund LLPBoston617-973-6113mandresino@pbl.com David WiseHay GroupMetro New York201-557-8406david.wise@haygroup.com