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Things Well Discuss
The Environment
Worst Practices
Best Practices
Possible Change Areas
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The Environment
Enron/Andersen collapse
Depressed market despite stronger earnings
Continued investor dilution concerns New disclosure for stock plans
Continued concern about stock plan approval
Finalization of EITF 00-23, but IASB is here
Options continue to be underwater
Missed incentive goals
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Enron/Andersen Collapse
Heavy scrutiny of stock options
Distrust of financial disclosure
Earnings comparisons less meaningful
Whats in the numbers?
Re-thinking director compensation Are options right?
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Continued Investor Concerns
Higher average potential dilution from stockplans
1997 2001 % change
S&P 500 10.0% 13.7% 37.0%
S&P Mid Cap 10.5% 15.6% 48.5%
S&P Small Cap 13.8% 17.0% 23.2%
Total Super 1500 11.6% 14.1% 21.6%
Continued scrutiny from institutional investors
Source: Stock Plan Dilution, 2002: Overhang from Stock Plans at S&P Super 1,500 CompaniesInvestor Responsibility Research Corp
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Continued Investor Concern
35819737 95
32%31%
22%
18%
18%
0
20
40
60
80
100
120
< 10% 10-15% 15-20% 20%-30% > 30%Total Potential Dilution Range
#ofplans
0%
5%
10%
15%
20%
25%
30%
35%
%N
egative
Votes
No. of Companies-2001 % Negative Votes-2001
Source: Stock Plan Dilution, 2002: Overhang from Stock Plans at S&P Super 1,500 CompaniesInvestor Responsibility Research Corp
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Public Perceptions
Executive greed and duplicity contributed toEnron debacle
Mega-options drove management to falsify accountingto keep stock prices high and rising
Executives used inside information to exercise and selloptions while price high
Stock option accounting contributed to the
speculative bubble in stocks by inflating thegrowth rate in EPS
Stock options cause short-term behavior and aremisaligned with long-term interests of
shareholders
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New Financials
EBIT: Earnings Before Irregularities and
Tampering
ROIC: Restated on Instructions of Counsel
CFO: Chief Fraud Officers
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Worst Practices
Enron
Philosophy to reward shareholder valuecreation
Stock options and restricted stock (50/50)
RS vesting accelerated based on TSR performance
4 year reduced to 1 year
Large grants (Lay: 1.3 million in 2000)
Limited partnership interests
Executive loans and repayments
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Worst Practices
Tyco
Loans
Stock sales Actions without compensation committee
knowledge
$20 million to director
Chair of Corporate Governance and NominatingCommittee
Reloads with 10-year terms
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Worst Practices
E-Trade
CEO loan settlement
Forgiveness $15,000,000
Tax Gross-Up 15,211,481
$30,211,481 For elimination of certain contractual
relocation benefits
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Worst Practices
K-Mart
Full recourse retention loans
$2.5 - $5.0 million
Made in 20002002
Vest in 2004, i.e., Forgiveness
Tax gross-up
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Worst Practices
WorldCom
Stock options only
Large grants (Ebbers1.2-1.9 million per year) Loan arrangements
Company guaranteed $195.6 million (B of A)
Company paid at $198.7 million plus $35 million for LC Company direct loan of $165 million
Why: to avoid the need for Mr. Ebbers to sell
large quantities of WorldCom stock
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Worst Practices - Other
GE
3,000,000 stock options and 850,000 RSUs
($48 million) to Welch 1 year vesting
Recognize 20 years of service and developing
and implementing plansConseco
$45 million cash signing bonus to Gary Wendt
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Worst Practices - Other
Dell and Oracle
38 million options from 1996 to 1998 to MichaelDell
Already owned 353 million shares
20 million options to Larry Ellison
Already owned 700 million shares
Dynergy CEO severance 2.99x base and incentive
compensation
But incentive compensationincludes stock options
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Worst Practices
Layoffs with big pay
Pay Layoffs
Disney $72.8 4,000
Cisco Systems $28.7 8,500
WorldCom $10 million 6,000
stay bonus
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Best Practices (?)
Amazon.comAMB Property Corp.Bank OneBoeingCoca-ColaDole FoodsFannie MaeFreddie MaciStar FinancialLevel 3 CommunicationsSovereign BancorpWashington Post
Winn-Dixie
Delta Air LinesHeinzTarget Stores
Others:Companies
Expensing OptionsCompanies Considering
Expensing Options
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Best Practices
Krispy Kreme
Since 1937; public since early 2000
Development rights agreements while private
Also had franchise equity pool for
management
All pools and rights agreements terminated
Return of original investment
All sales through 10b5-1 plans
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Best Practices
Ownership Guidelines
13% of Top 250
Not a lot, but more considering
Most use multiple of retainer
5x most common
Comcast & Fordmultiple of retainer/fees
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Best Practices
Ownership Guidelines
Other examples
Citigroup75% of shares granted Pitney-Bowes$350k owned in order to sell
stock
PNC Bankmust use of retainer to purchase
stock
Tribune5x most recent stock grant
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Best Practices
Director Performance Options
Computer Associates# based on ROE
ADC Telecomgrant only if 10% ROE
SYSCOoptions granted only if 10% growth
in EPS
UP & CapOneoptions vest on stock price
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Possible Change Areas
1. Compensation Committee Governance
Committee Charter x x 100% Disinterested (Audit Standard) x x
Compensation Literacy and Experience x
Strong Chair, Periodic Rotation x
Code of Conduct (conflicts of interest; sales) x x
Total Compensation Oversight x
Access to Outside Advisors and Staff Support x x
Legal Representation x x
Executive Sessions x
CEO Pay Determination x
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Possible Change Areas
2. Annual and LTIP Design
Relevant Metrics x
Audit Confirmation of Formula Results x
Negative Discretion x
Strategic and Qualitative Factors x
Recapture for Restatements x x
Operational vs. Market Goals x
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Possible Change Areas
3. Stock Options
SFAS 123 Accounting x x
Managed Run Rate and Overhang x
Nonshareholder Approved Plans x x
Mega Grants x
Performance Vesting x
Ownership Intent x
Inside Information x
Repricings x x
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Possible Change Areas
5. Deferred Compensation
SERP Accrual Disclosure x
Lump Sum Settlements x x
Recapture for Bankruptcy x
Stock Account Switching x x
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Possible Change Areas
6. Directors Compensation
Stock Options x
Restricted Stock x
Committee Chair Fees x
Ownership Standards x
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Freder ic W. Cook & Co., I nc.provides management compensation consulting services to business clients. Formed in 1973, our
firm has served over 1,200 corporations in a wide variety of industries from our offices in New York, Chicago, and Los Angeles. Our
primary focus is on performance-based compensation programs which help companies attract and retain key employees, motivate and
reward them for improved performance, and align their interests with shareholders. Our range of consulting services encompasses the
following areas:
Total Compensation Reviews
Strategic Incentives
Specific Plan Reviews
Restructuring Services
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Incentive Grant Guidelines
Executive Ownership Programs
All-Employee Plans
Directors Compensation
Equity Instruments
Performance Measurement
Globalization
Privatization
Compensation Committee Advisor
Stock Option Enhancements
Our offices are located:
New York
90 Park Avenue
35thFloor
New York, New York 10016
212-986-6330 phone
212-986-3836 fax
Chicago
19 South LaSalle Street
Suite 400
Chicago, Illinois 60603
312-332-0910 phone
312-332-0647 fax
Los Angeles
2029 Century Park East
Suite 1130
Los Angeles, California 90067
310-277-5070 phone
310-277-5068 fax
Website address:
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