1. ©2008 Pearl Meyer & Partners NECC Executive Compensation Forum Trends in Long-Term Incentives March 6, 2008 Melissa Means Vice President Pearl Meyer & Partners (508) 630-1487 Melissa.means@pearlmeyer.com www.pearlmeyer.com

2. 1 ©2008 Pearl Meyer & Partners Agenda  Trends in Long-Term Incentives: Changing Landscape Long-Term Incentive (LTI) Usage » Total Overhang » Burn Rates » New Share Requests Mix and Instruments Usage » Mix » Stock Options » Stock » Performance-Based Awards Other » Exchange Ratios » Ownership Guidelines » RiskMetrics Group (formerly ISS)

3. 2 ©2008 Pearl Meyer & Partners The Changing Landscape  External influences significantly changing the use of LTI Perceived abuses » Option backdating and other scandals SEC disclosure rules (CD&A) » Increased transparency » Mandated quantification Tax and accounting rules » SFAS 123R » 162(m) Unprecedented investor scrutiny » Greater visibility and power » More stringent requirements » RiskMetrics (formerly ISS)  As a result: LTI remains in the forefront of public interest for the coming years Companies continue to re-evaluate the efficacy of their existing LTI programs

4. 3 ©2008 Pearl Meyer & Partners Usage – Total Overhang  Headline – Another consecutive year of reduced overhang levels Reality of expensing and shareholder pressures continue to drive companies to reduce total equity usage  The following outlines current total overhang levels for companies in the high technology industry (by industry and revenue):

5. 4 ©2008 Pearl Meyer & Partners Usage – Burn Rates  Headline – Another consecutive year of reduced burn rate levels To reduce total equity usage on an annual basis companies are: » Reducing participation levels » Reducing grant values » Changing use of LTI instruments to deliver more value using fewer shares  The following outlines current total burn rate levels for companies in the high technology industry (by industry and revenue):

6. 5 ©2008 Pearl Meyer & Partners Usage – New Share Requests  Headline – companies seeking more frequent authorization of smaller pools of available shares  The following outlines the percent of companies in the high technology industry seeking share approval in the past 3 years (by industry and revenue):

7. 6 ©2008 Pearl Meyer & Partners Mix & LTI Instrument – Mix  Headline - Companies continuing to evaluate and rebalance the mix of LTI instruments  Companies are also using multiple instruments to deliver LTI awards

8. 7 ©2008 Pearl Meyer & Partners Mix & LTI Instrument – Stock Options  Headline - Stock options are on the decline for another straight year Companies are continuing to use other LTI instruments in lieu of options to address: » Mandatory accounting issues (SFAS 123R) » Constraints on dilution and burn rates (vs. competitors who shifted to restricted stock) » Incentivize the proper behaviors  The following outlines option usage levels in the high technology industry (by industry and revenue) over the past 3 years:

9. 8 ©2008 Pearl Meyer & Partners  Headline - Use of restricted stock (RS) continues to increase ~20% Restricted stock can deliver the same value as options using fewer shares  Continued investor pressure when using restricted stock Time-based awards minimum vesting over 3 years Performance-based awards must have at least 1 year of vesting  The following outlines restricted stock usage levels in the high technology industry (by industry and revenue) over the past 3 years: Mix & LTI Instrument - Restricted Stock

10. 9 ©2008 Pearl Meyer & Partners  Headline - Many companies are implementing or investigating the use of performance metrics in an LTI plan Stronger link between pay and performance More in line with shareholder and institutional expectations  44% of the Fortune 1000 and 62% of the S&P 500 have implemented a performance-based LTI plan Typically a 3 year plan that pays out in stock  However, performance-based plans can be challenging to design and administer. The following outlines key deign considerations for a performance-based plan: Single vs. multiple measures Shorter vs. longer time periods Absolute vs. relative measures Cumulative vs. point-in-time measures Performance/payout leverage and scaling Consecutive vs. overlapping cycles Mix & LTI Instrument – Performance-Based LTI

11. 10 ©2008 Pearl Meyer & Partners  The key to performance-based plans: Keep them as simple as possible Limit the plan initially to the top executives, consider expansion once plan is successful Consider shorter measurement periods for companies of high growth or acquisitive industries Selection of an appropriate performance metric Develop an appropriate performance/payout scale Discuss how to address unexpected financial circumstances Start slowly – consider consecutive cycles Mix & LTI Instrument – Performance-Based LTI

12. 11 ©2008 Pearl Meyer & Partners  Headline - 3 ways to think about LTI exchange ratios: Cost Neutral Ratio » Assume SFAS 123R option cost is 33% of FMV and RS cost is 100% FMV » Cost neutral ratio is 3 options : 1 restricted share » 1 RS more valuable than 3 options until FMV increases 50% Premium Ratio » Whatever cost neutral ratio is “+1” Risk Adjusted – looking forward Mix & LTI Instrument –Exchange Ratios

13. 12 ©2008 Pearl Meyer & Partners Stock Ownership Guidelines  Headline – Continued movement towards stock ownership guidelines Ownership guidelines – mandate number of shares to be owned at all times » Best for firms using full value instruments (e.g., restricted stock) » Often serves as quid pro quo for implementing time-based restricted stock Disposition guidelines – mandate number of shares to be retained on post- exercise basis » Best for firms using appreciation only instruments (e.g., options)  Programs are encouraged and well received by institutional shareholders  Actual guidelines and compliance periods vary by position

14. 13 ©2008 Pearl Meyer & Partners RiskMetrics Group (formerly ISS)  Average Burn Rates continue to trend downwards  Shareholder Value Transfer (SVT) increased in many segments due to changes in methodology in 2007 Full value awards valued at full 200-day average share price Option cancellations/forfeitures and warrants/convertible debt not considered  SVT and Burn Rate allowable caps remain about the same as in 2007  Poor Pay Practices Could result in a “Withhold” vote for a Director up for re-election  Pay for Performance Policy in 2008 ~1/3 of the Russell 3000 had negative 1 and 3-year TSR as of 12/31/07

15. 14 ©2008 Pearl Meyer & Partners Looking Forward  More long-term plans driven by non-market measures  Continuing shift from options to restricted stock Desire to link executives with financial performance » Recent trend of higher option concentration at top executive level Time-based restricted stock for mid-to-lower level employees  Continuing evolution of linking pay and performance

16. 15 ©2008 Pearl Meyer & Partners About Pearl Meyer & Partners Pearl Meyer & Partners is the leading independent compensation consultancy serving as a trusted advisor to Boards and their senior management in the areas of governance, strategy and compensation program design. Learn more about our expertise in:  Employee Compensation  Compensation Surveys  Executive Compensation  Board Compensation www.pearlmeyer.com