Panelists: Mark Borges and Ron Mueller The SEC's Executive Compensation Disclosure Rules: Results in the First Year EXECUTIVE COMPENSATION: Strategy, Design, and Implementation ALI-ABA New York, NY June 21-22, 2007 Panelists: Mark Borges and Ron Mueller

Early Expectations for New Executive Compensation Disclosures Disclosures will be long: United Health: 105-page proxy, 60 pages of executive compensation, 25-page CD&A Average length of compensation disclosures: 29 pages Almost 51% of proxy statement Focus on new “total compensation” number: Instead, lots of variety in how that number is viewed New insights on perquisites, post-employment compensation and change in control arrangements Extensive new disclosures resulting in ISS withhold vote recommendations NY Times Article: “More Pieces. Still a Puzzle.” (4/8/07)

Compensation Discussion & Analysis Early reactions: Chairman Cox: “overlawyered” and “disappointed with the lack of clarity” John White: laments lack of “analysis” but notes, “Even if plain English principles are faithfully applied, under the new rules there may very well be substantially more disclosure required overall.” Little feedback to date from institutional investors Reaction of individual stockholders: What happened to the five-year stock performance graph?

Compensation Discussion & Analysis Six key aspects of named executive officer compensation to be described: The objectives of the registrant’s compensation programs; What the compensation program is designed to reward; Each element of compensation; Why the registrant chooses to pay each element; How the registrant determines the amount (and, where applicable, the formula) for each element; and How each compensation element and the registrant’s decisions regarding that element fit into the registrant’s overall compensation objectives and affect decisions regarding other elements of compensation.

Compensation Discussion & Analysis Companies struggled with: Length of the CD&A: some SEC staff compared it to the MD&A, others compared it to the “Overview” section of an MD&A How to format the CD&A: Q&A format; use of charts and tables Whether (and how) to explain differences from the SCT How much context to provide on the operation of compensation plans and grants: CD&A vs. narrative following SCT vs. other tables’ footnotes and text How much to describe process: CD&A vs. Item 407(e) disclosure vs. Compensation Committee report

Compensation Discussion & Analysis Companies struggled with: Discussion of performance targets Discussion of role of the CEO How the amount and mix of compensation elements was determined How to describe benchmarking and use of peer groups Reasons for retirement programs, severance, and change-in-control arrangements

Compensation Discussion & Analysis New Compensation Committee Report: Compensation Committees were more involved in the disclosure process than in past years What did the Compensation Committee discuss with management Will the second year be different? What was the role of the Audit Committee and the Board?

Impact on NEOs One survey indicated that the average number of NEOs was 5.8; some companies had 7 or 8. CFOs were frequently not otherwise among the highest paid executives. Recent Section 162(m) interpretive guidance excluding CFOs in most cases. Future effects: variability in NEOs and disclosure of severance arrangements.

Summary Compensation Table Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) NEOs Difficult Issues: Bonus vs. Non-Equity Incentive Plan Compensation Annual incentives vs. long-term incentives

Summary Compensation Table Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) NEOs Difficult Issues: What is treated as a Stock Award or Option Award How to reference assumptions used for FAS 123(R) calculations How to describe the amounts appearing in the equity award columns

Summary Compensation Table Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) NEOs Difficult Issues: What types of severance payments are reported as All Other Compensation What goes into footnotes vs. what goes into narrative disclosure

Disclosure of Performance Criteria Arrangements treated as Non-Equity Incentive Plan Compensation rather than Bonuses if: Intended to serve as incentive for performance to occur over a specified period; Outcome with respect to performance targets substantially uncertain when established; and Target communicated to executive. Wide variety in practice on how to describe and categorize incentive and bonus arrangements, reflecting wide variety of practice on the manner in which performance criteria are applied

Disclosure of Performance Criteria CD&A and tables must disclose criteria and specific target levels for quantitative or qualitative performance factors unless the criteria or factors involve confidential trade secrets or confidential commercial or financial information. Standard for confidentiality is the same as applies for confidential treatment requests, but no need to file a CTR. If criteria or targets are not disclosed, must discuss how difficult or how likely achievement of the targets will be. John White has singled this out as one area of review.

Summary Compensation Table All Other Compensation Column Name Perquisites ($) Tax Reimbursements ($) Insurance Premiums ($) Company Contributions to DC Plans ($) Severance Payments/Accruals ($) Change in Control Payments/ Accruals ($) NEOs Table not required but may be helpful.

Perquisites Two part test: Not a perquisite if integrally & directly related to performance of duties; Does it confer a direct or indirect benefit that has a personal aspect and is not generally available to all employees on a non-discriminatory basis. Staff interpretation distinguishes between perquisites where incremental cost is reimbursed vs. perquisites where total cost is reimbursed Obligation to describe incremental cost technique applies whenever a perquisite is required to be quantified Debate on how to treat perquisites’ tax impact on company

Grants of Plan-Based Awards Table Grant of Plan- Based Awards in Fiscal Year 200x Estimated Future Payouts Under Non-Equity Incentive Plan Awards Non- Equity Rights (#) Estimated Future Payouts Under Equity Incentive Plan Awards All Other Stock Awards: Number of Shares of Stock or Units (#) All Other Option Awards: Number of Securities Under-lying Options (#) Exercise or Base Price of Option Awards ($/Sh) Market Price on Grant Date ($) Grant Date Fair Value of Stock and Option Awards Name Grant Date Approval Date Threshold ($) Target ($) Maximum ($) Threshold (#) Target (#) Maximum (#) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) NEOs Separate line for each grant; Importance of identifying types of awards/arrangements appearing in different rows Timing issues: reporting annual arrangements that also appear in SCT and reporting equity grants based on FAS 123(R) standard Format does not accommodate pure “formula” arrangements well

Outstanding Equity Awards at Fiscal Year End Table Outstanding Equity Awards at 200x Fiscal Year End Option Awards Stock Awards Name Number of Securities Underlying Options (#) Exercisable Number of Securities Underlying Unexercised Options(#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) NEOs Grant by grant reporting for options; aggregate reporting for each type of other awards Lengthy tables and even longer footnotes to disclose vesting schedules Did not include most sought-after information: intrinsic value of options

Option Exercises and Stock Vested Table Option Exercises and Stock Vested in Fiscal Year 200x Option Awards Stock Awards Name Number of Shares Acquired on Exercise (#) Value Realized Upon Exercise($) Number of Shares Acquired upon Vesting (#) Value realized upon Vesting ($) (a) (b) (c) (d) (e) NEOs Report gross, not net, number of shares exercised or vested Stock awards includes more than just service-based restricted stock Complications from dividend equivalent shares on RSUs and share deferrals

Pension Benefits Table Pension Benefits for the 200x Fiscal Year Name Plan Name Number of Years of Credited Service (#) Present Value of Accumulated Benefit ($) Payments During Last Fiscal Year ($) (a) (b) (c) (d) (e) NEOs Wide variety in extent of discussion of benefit formula Difficult issues with cash balance plans Confusing presentations due to requirement of a separate row for each plan and variations in available forms of distribution Many plan descriptions were not “succinct”

Nonqualified Deferred Compensation Table Nonqualified Deferred Compensation for the 200x Fiscal Year Name Executive Contributions in last fiscal year ($) Registrant Contributions in last fiscal year ($) Aggregate Earnings in last fiscal year ($) Aggregate Withdrawals/ Distributions ($) Aggregate Balance at last fiscal year end ($) (a) (b) (c) (d) (e) (f) NEOs Variety of practice on whether table is presented on an accrual basis (to tie to the SCT) or on a cash basis Complications on reporting RSUs and dividend accruals Some companies provided detail on investment funds and rates of return

Termination/Change in Control Payments Tedious and time-consuming preparation Often the longest or (after CD&A) second-longest disclosure section JC. Penney – 28 pages (1/3 of proxy), 11 tables, 100+ footnotes Wide variety of formats: – separate presentation for each NEO – separate presentation for each triggering event – separate presentation for each type of benefit

Termination/Change in Control Payments Interpretive questions: How to report equity values intrinsic value Black-Scholes value unexpensed 123(R) value) Does the post-termination term to exercise options get valued Disclosure of retirement benefits What can be excluded as a broad-based arrangement

Termination/Change in Control Payments Extensive disclaimers and descriptions on what is and is not included in the presentation Not much discussion on assumptions used in calculating golden parachute payments Not many proxy statements presented a range of amounts payable Variety on extent of disclosures provided for “non-controversial” triggers: retirement, death, etc.

Director Compensation Table Director Compensation in Fiscal 200x Name Fees Earned or Paid in Cash ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Change in Pension Value and Nonqualified Deferred Compensation Earnings All Other Compensation ($) Total ($) (a) (b) (c) (d) (e) (f) (g) (h) Directors Each director on a separate row unless all elements/amounts identical Footnote disclosure of aggregate number of stock awards and aggregate number of option awards outstanding at fiscal year end Some companies included an additional table describing standard compensation arrangements Some companies included a “mini-CD&A”