Current Trends in CompensationDallas CPA SocietyContinuing Education Day Conference

May 26, 2011www.pwc.com

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Todays AgendaUpdate on Compensation Committee Governance IssuesDifferences in Executive and Managerial CompensationTrends in Executive and Managerial CompensationCurrent Equity Based Compensation TechniquesCurrent Board Compensation Issues

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Update on Compensation Committee Governance IssuesSlide *

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Executive Compensation Climate 2011Extended period of stormy weatherSlide *Regulatory developments and impact since the financial crisis

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Impact On Compensation Committees Increased time commitment and diligenceAmong the trends in compensation committee processes, we have observed the following:Two-step decision making (one meeting to review proposals, second meeting for approvals)Requests for additional documentation of compensation processesLonger committee meeting agendasGreater interaction with other board committees and full boardThe push for increased shareholder interaction may affect committee chairs:Accepted practice in the UK for RemCo chairs to present to shareholdersEncouraged by selected US director associationsSlide *

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Say On Pay Preparation Reflections on 2011 proxy seasonDisclosureCD&A executive summary focusing on pay for performance, risk alignment, peer groups, severance/change in control, executive benefits, and governancePay for performance supplemental disclosuresProgram changesElimination of gross up provisions and other executive benefitsEstablishment of performance conditions on long-term incentive grantsShareholder EngagementProxy advisor rebuttalsInstitutional shareholder outreach

Companies have modified practices for say on pay right up until the voteSlide *

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Say On Pay ResultsEarly returnsFortune 100 companies (15 as of 4/29):Yes votes (14):Median 93% in favor25th percentile 82% in favorNo votes (1): 48% in favorBroad sample (503 as of 4/29)98% received majority in favor2% (11 companies) received majority no votesMost companies are receiving a strong majority of say on pay votes in favor of compensationSlide *

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Say On Pay Frequency ResultsEarly returnsAnnual votes are preferred by shareholders and increasingly recommended by companiesSlide *Companies recommending triennial vote, but receiving annual majority:Fortune 100: 4 of 6 (75%)Broad sample: 62 of 145 (43%)* Includes those precluded from making a recommendation due to TARP restrictions

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Say On Pay Post MortemInterpreting the resultsCompanies will reflect on say on pay results during 2011SEC regulations require companies to report on the impact of say on pay votes in future year proxy statementsCovers most recent say on pay voteWhether issuer considered say on pay in determining policies and decisionsHow say on pay results affected policies and decisionsShareholder engagementHow will companies gain insights on reasons for no votes?What methods of engagement will companies use outside the annual proxy statement?

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Expected 2011 Rulemaking More to come, with questions to be answeredCEO pay ratio disclosure (ratio of CEO pay to median employee pay)Potential repeal (H.R. 1062)Questions on population and definitionsPay for performance disclosureWhat are the relevant definitions of pay?What performance metrics can be used (market, operating)?What is the appropriate time horizon for measurementRecovery of executive compensation (clawbacks)Excess incentive-based compensation, including stock optionsThree-year look-back on any restatement (not subject to misconduct)All executive officersQuestions on affected metrics, board discretion, and treatment of equity

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Differences in Executive and Managerial CompensationSlide *

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Executive vs. Managerial Pay Structures Slide *

Pay ComponentExecutiveManagerSalary Smaller % of overall pay Larger % of overall payAnnual Incentives Larger % of overall pay Generally available to all execs and tied to overall company performance Smaller % of overall pay Generally available to all senior management and most managers but may be tied to performance of company overall, business unit, and/or individual metrics.Long-term Incentives Larger % of overall pay Generally available to all execs May be in multiple forms (e.g., stock, options, cash, etc.) Smaller % of overall pay Availability depends on company but most managers and higher eligible Limited in forms

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Executive vs. Managerial Pay Structures Slide *

Pay ComponentExecutiveManagerHealth & Welfare Benefits Eligible for company-wide plans May also receive premium benefits (e.g., reimbursement)* Eligible for company-wide plans

Retirement Benefits Eligible for company-wide plans May also be eligible for NQDC, SERP, and/or Restoration Plan* Eligible for company-wide plans May also be eligible for NQDCPerquisites Generally available to execs* Less prevalentSeverance/CIC Generally limited to officers* Not prevalent* Many benefits which have been historically executive-only are on the decline with many companies completely eliminating them.

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Trends in Executive and Managerial CompensationSlide *

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Overall Trends

Overall, compensation trends have been focused on:Performance measurementCompensation riskElements of remunerationElimination of executive benefits (e.g., SERPs, perquisites)Focus on severance periods, single trigger change in control benefits, tax gross-ups

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Trends In Program DesignAssessing the impact of the regulatory climateTrends have been developing since the financial crisisRe-evaluating performance metrics:Risk adjustment and sustainabilityLess emphasis on formulaic plansLengthening time horizons:Greater proportion of compensation deferredPerformance conditions applied to deferralsPressure on dilutive impact of equity plansReducing executive protection:Elimination of executive benefits (e.g., SERPs, perquisites)Focus on severance periods, single trigger change in control benefits, tax gross-upsNew requirements for financial institutions to disclose compensation to regulatory agencies (SEC, Federal Reserve, FDIC, OCC, OTS, NCUA, FHFA)

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Refining The Pay-For-Performance Model

Highlights: New compensation guidance is equal parts business opportunity and compliance. Compensation policies will need to focus more on long-term value creation and corporate stability. Companies must now consider the interaction of risk and performance across their entire organization, not just within the C-suite. Businesses may have to disclose more about their risk-and-reward models, as well as rethink the roles of key control.

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Todays Perspectives

Pay-for-performance models are under increasing scrutiny from US policymakers and their global counterparts. Collective goal is to ensure that compensation does not put the long term health of businesses and the overall economy at undue risk. Not just banks and financial services institutionsUS lawmakers and regulators want to lessen companies emphasis on short-term performance. Want greater disclosure about how public companies' compensation policies might precipitate events that businesses don't have the financial wherewithal to withstand. New guidance will force companies to take a much broader view of both performance and risk.If viewed as an opportunity, rather than just a compliance exercise, companies may derive long-term benefits from the pay-for performance model's evolution.Slide *

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What Does It Mean For Companies?

Spotlight on the Risk-Compensation relationshipWhat it means for companies:Companies will need to demonstrate that compensation models are layering in risk considerations.Boards will have to assess the compensation policies for any employee who could put the business at heightened risk.Putting compensation "at risk" for longer periods so that the timing of incentive pay and performance are not misaligned.- May pose challenges for companies in light of recent tax rule changes.Greater disclosure on risk and reward may inform shareholder views/votes on compensation decisions.

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Redefining Performance

In their effort to address the various complex causes of the financial crisis, policymakers have been contemplating the role corporate pay packages played.-The result is compensation guidance from multiple agencies.Collectively, the guidance aims to ensure that compensation policies do not promote behavior that could put companiesand, by extension, marketsin jeopardy. To this end, policymakers want corporate compensation plans to take risk and long-term performance into greater account.

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Redefining Performance

Regulator/shareholder tension Some shareholders have traditionally focused on short-term returns, paying less attention to long-term value creation and risk. This was particularly evident in the run-up to the financial crisis.Various companies that have fared relatively well in the wake of the crisis were criticized by shareholders (one to two years earlier) for not playing more aggressively in the subprime loan market. Many policymakers argue that the interests of such shareholders are not necessarily aligned with the interests of the general public and the goal of market stability. The new guidance attempts to bring those interests into balance.

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Redefining Performance

Pressure on boardsShareholders are beginning to bring about some of that balance themselves, post-crisis, giving greater consideration to the long-term corporate health of the companies they invest in. As a result, shareholders' usual pressure on boards to show a demonstrable and explicit link between pay and performance may start to shift in emphasisso that the long-term view of performance is stressed as much as the short-term view. Indeed, certain institutional investors (e.g., pension funds) have long made this their policy.Such pressure will be easier to apply if Congress requires public companies to grant shareholders a nonbinding advisory vote on executive pay ("say on pay"). Slide *

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Redefining Performance

Pressure on boards (Contd)Boards also continue to confront public pressure, with negative sentiment about executive pay potentially diminishing corporate reputation and value. And, there may be pressure from within the board itself: -Although much of the new compensation guidance is directed at banks and other financial institutions, its core elements are likely to migrate to other sectors through cross-directorships and broader director education.

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Viewing Risk Through a Wider Lens

Looking past the habitual sightlinesAs the SEC and Fed see it, the risk compensation relationship isn't necessarily confined to the C-suite. Rather, any employee and business unit may, depending on their role, function, and how they are paid, put a company at heightened riskand, in turn, pose an indirect risk to the financial system and broader economy.Those two agencies, therefore, expect companies to assess the compensation policies for non-officer employees whose individual or collective decisions create such risks. The SEC also wants companies to disclose those policies in their proxy statements if they could result in potentially harmful consequences for the companies.

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Is Workforce Talent a New Measure?

Talent may be biggest challenge during economic recoveryMany companies that downsized aggressively could soon face a shortage of skills suited to the new global economyIncreased workloads, job reductions, and overall economic and employment uncertainty have strained employee moraleCompanies focusing more on finding and motivating the right talent to support the companys business strategyMay be driven outside of HR if not a strategic partnerUnderstand how management is reshaping the skills and size of the companys workforce in light of its strategy and todays economic conditionsSlide *

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Current Equity-based Compensation TechniquesSlide *

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Equity-based Compensation Plans Past practiceHistorically, stock options were the most common form of equity-based compensation.Often leveraged down to all employees in the organization.May be tax qualified or nonqualified.Companies also historically offered ESPPs but many companies discontinued or modified their plans following 123R.Companies which used restricted stock generally awarded them with service-only requirements.Slide *

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Equity-based Compensation Plans

Current landscape and techniquesShift away from pure stock optionsLimited employee population eligible for awardsMay be limited to employees directly responsible for driving company growthCash may be used for other employees instead of equityOrganizations, such as ISS, and shareholders recommend the use of performance measures to earn awards (both stock and options) Internal measures such as EPS and Cash Flows have been used more oftenPrevalence towards metrics highly visible to shareholdersExternal measures have been used more recently such as tied to solely to stock price appreciation or based on relative performance to competitors or indices.

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Current Board Compensation IssuesSlide *

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Role of the Compensation CommitteeMaintain and Review

Review philosophy and Compensation Committee Charter periodicallyReview compensation process periodicallyReview proxy disclosures / CD&A annuallyConduct competitive compensation analyses annuallyReview peer set annually for any changes in size or operations through acquisition / divestitureDevelop incentive metrics and performance targets annuallyReview aggregate share use annuallySlide *

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Role of the Compensation Committee (Contd)Maintain and Review

Review CEO (and other key executive pay) annuallyReview incentive plan targets annuallyReview Board of Director pay periodicallyPeriodic review of retirement and benefits plans (cost review annually)Key executive shareholdings (annually) and stock transactions (quarterly)Review of external relationships and fees annuallyReview of succession planning annuallyReview of policies and procedures as neededEngagement with key executive hires and employment agreementsEducation / training / update of trendsSlide *

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Compensating the Board Board TrendsMajority of Boards have 10 members (8 outside Directors)6 Board meetings per yearMembers spend on average 10 to 15 hours a month on Board mattersTrend for 2011 indicates a continued increaseSub-committee meetings range from 3 to 5 meetings per yearPosition of Chairperson and CEO is dividedCompensation levels has stayed flat for 2010 compared to 2009* Source: Compensation Resources: 2010 BOD Compensation SurveySlide *

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Compensating the Board Components of Board CompensationAnnual Cash RetainersTypically cash payments, some companies provide in form of equityEquity GrantsStock options still prevalent, with Restricted Stock a strong secondEquity size determined on value versus number of sharesStock ownership guidelinesBoard Meeting FeesStill prevalent, but trend is reducing and to include in retainerBenefits and PerquisitesMajority of companies do not provideLife, medical, dentalMatching gift programs

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Compensating the Board Components of Board Compensation

Committee Chair RetainersAudit and Compensation Committee Chairs highest paid

Committee Meeting FeesStill prevalent, but trend is to pay only committee retainer

Chairman Of the Board RetainersGenerally only to independent chairman or lead independent directorSlide *

www.pwc.com 2011 PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

***Regulatory activity dates back to the fall of 2008 (in the UK and Europe)Global support for regulation in financial services (FSB, endorsed by G20)Initial round of regulatory guidance entirely principles based and limited to a subset of financial institutionsWatershed events in 2010 included the introduction of prescriptive guidance (around deferrals) in CRD III and Dodd-Frank Section 956, and the broadening of covered companies (e.g., 26 2,500 in the UK alone)SEC risk disclosures comment letters requesting documentation of process to determine whether to disclose under 402(s) and who was involved in decisionFRB response to initial disclosures include 1) determination of covered persons based on total risk (rather than after mitigation and controls); 2) evaluation and documentation of breadth of risk adjustment mechanisms; 3) linking deferred compensation to risk outcomes (beyond time-vested equity); 4) simulation/validation of risk and incentives, and incorporate into future designSignificant rulemaking on Dodd-Frank has been postponed until the second half of 2011

*Is the compensation committee now the most demanding of the board committees?How do compensation committees meet heightened expectations without 1) expanding the number of executives that they personally review; or 2) broadening their role into management rather than oversight?Will compensation committee chairs of US companies ever engage with shareholders the way that RemCo chairs of UK firms currently do? Is that the right role for a non-executive board member within US governance structures?

*Examples from executive summaries:Exxon Mobil supplement to proxy with executive compensation overviewComerica excluded pay practices (e.g., single trigger CIC benefits)Prudential proxy executive summary (governance summary, signed by all directors)Assorted companies summary of business results and highlights, executive compensation results and changes11th hour changes GE performance conditions on option grants to CEO, Disney elimination of tax gross upsAppeals to institutional shareholdersRebuttals to ISS recommendations through supplemental proxy materialsHow will pay for performance disclosures stand up to the pending SEC rules expected in late 2011?*What will be the standard of an unacceptable no vote? How does this compare to the standards applied to incentive/equity plan approvals?Some instances of shareholder suits following unsuccessful say on pay votingContrast to the UK less than a dozen failed say on pay votes in almost 10 years*Tide has shifted among recommended frequency. Triennial recommendations were more common among early filers.Some expanded rationale for triennial frequency among recent filers (aligned with longer time horizon of executive comp program, allows for multi-year consideration of changes in pay practices, e.g., board process of changing programs in response to previous votes, etc.)Shareholders have expressed a preference for annual votes (including almost 50% annual majorities among companies recommending triennial frequency)*Examples:Off-cycle solicitation/post mortem on pay programs and proxy disclosure to selected investorsCorporate governance website soliciting views on executive compensation programs and proxy disclosurePeriodic meetings with shareholders to discuss views on companys compensation programs (common in the UK, emerging in the US)How do you satisfy shareholders with disparate views? Not all US shareholders speak with one voice on compensationHow do shareholders views contrast with some of the regulatory developments which may be at odds with a purist pay for performance relationship in any single year?*Pay for performance pay definitions:Expected value of compensationRealized value of compensationChange in executive wealth including unvested equity grants, equity beneficially owned, etc.Performance definitions:Earnings/return measuresEconomic profitMarket value addedTotal shareholder returnTime horizon point to point versus overlapping; actual time horizon (CEO tenure, 1-yr, 3-yr)ClawbacksUse of GAAP measures (e.g., those subject to restatement) versus non-GAAP measuresWhat portion of cash compensation can be recovered?How do stock options or other equity not subject to performance conditions become eligible for clawback? Does it relate to grant date, vesting date, exercise/settlement date? What is the value of equity compensation? The value on the date of the restatement, or on the date of vesting/exercise/settlement?**Also discuss how benchmark assessments are done. More common proxy comparison for execs while limited to surveys which may not be as precise for management.Differences in performance measures for incentives are aligning to be more focused on overall company performance for management.*Benefits aligning between exec and management due to regulatory and shareholder pressure to eliminate added benefits for execs.**Also Tax uncertainty (extension of Bush tax cuts, implication on non-qualified deferred comp plans)Rebound of performance in 2010 led to higher bonus levels (in general). Similarly, the impact of equity grants with low basis during 2009/2010 may result in outsized gains for executives in future years. How will this pay for performance play out in future say on pay votes?In 2007/2008 there was speculation about the impact of private equity owned firms executive compensation programs on public company compensation/labor markets? Are we headed for another debate on the efficacy of being a public company?

*The requirements of Section 956 of the Act are expected to be enforced by the appropriate Federal regulator (or "Agency") otherwise responsible for the supervision of the covered financial institutions. The Agencies include:Office of the Comptroller of the Currency, Treasury (OCC)Board of Governors of the Federal Reserve System (Board)Federal Deposit Insurance Corporation (FDIC)Office of Thrift Supervision (OTS)National Credit Union Administration (NCUA)U.S. Securities and Exchange Commission (SEC)Federal Housing Finance Agency (FHFA)

***Spotlight on the risk-Compensation relationshipWhat it means for companies:1. Companies will need to demonstrate that compensation models are layering in risk considerations and long-term corporate stability to a much greater degree than before.2. Boards will have to assess the compensation policies for any employee who, by virtue of his or her corporate function, could put the business at heightened risk.3. Companies may need to consider putting compensation "at risk" for longer periods so that the timing of incentive pay and performance are not misaligned.4. Putting compensation at risk for longer periods may pose challenges for companies in light of recent tax rule changes.5. Greater disclosure about risk and reward may inform shareholder views/votes on compensation decisions.*****************