1. ©2010 CURRENT TRENDS IN EXECUTIVE COMPENSATION Robert L. Musick, Jr. J.D., University of Virginia M.L.T, William and Mary Your Strategic HR Partner

2. ©2010 To 'run amok' is to behave in a wild or unruly manner. 'Run amok' is now synonymous with the term 'go crazy', but originally meant 'a murderous frenzy or rage'. (the Phrase Finder) In the beginning, Enron…2001 Other dishonorable mentions—Tyco, Adelphia, WorldCom Reaction to perceived abuses o “Cooking the books” begets “Sox” o “Free” stock options result in accounting change o Nonqualified deferred compensation and the “haircut” cash-out lead to Section 409A At the core, deceptive business practices were the problem, but egregious compensation abuses attracted special attention. Background—Executive compensation run amok!

3. ©2010 Sarbanes-Oxley Act of 2002 addressed many issues, including: o Boardroom inattention: Corporate failures pointed to Board members who either did not exercise their responsibilities or did not have the expertise to understand the complexities of the businesses. In many cases, Audit Committee members were not truly independent of management. o Executive compensation: Stock option and bonus practices, combined with volatility in stock prices for even small earnings "misses," resulted in pressures to manage earnings. In addition, stock options were not treated as an expense by companies, encouraging this form of compensation. Good Governance—Who is responsible?

4. ©2010 Securities Exchange Commission oEnhanced disclosure—detailed tables of various types of compensation oRequirement of the Compensation Discussion and Analysis—the company’s executive compensation “story” oResponsibility of the Compensation Committee—certification required Nonqualified deferred compensation reform – Section 409A oEffective for 2005 oStrict rules as to time of election/time of payment oNo more “haircuts” and early distributions Accounting for stock options – FAS 123(R) oEffective for 2006 oOptions must be reported as compensation expense over service period Good Governance—Who is responsible?

5. ©2010 Financial meltdown 2008-09 results in Troubled Asset Relief Program (TARP) oExecutive compensation caps as a condition to receiving aid o $500,000 limit on compensation o No bonuses o Restricted stock only (no options), vesting when TARP money repaid o “Clawbacks” for incentives awarded on erroneous financial data oCertification of risk analysis by Compensation Committee oNon-binding shareholder vote (“Say on Pay”) Dodd-Frank Act of 2010—massive new regulatory impact on financial and other public companies oComparing company performance with executive compensation oComparing chief executive compensation with median employee compensation (“internal pay equity”) o“Clawbacks” for incentives awarded on erroneous financial data o“Say on Pay” and “Say on Golden Parachutes” advisory shareholder votes Good Governance—Who is responsible?

6. ©2010 oBoard accountability/Committee responsibility oReview and retrenchment generally oRe-thinking “Pay for Performance” oTrickle-down Effect Major Trends Emerge

7. ©2010 Independence—those who oversee executive compensation must be independent of the executives themselves Tally sheet—committee must see and understand the value of “total compensation” (fixed and variable, short- and long-term, cash and stock, current and deferred) for executives Market data/analysis—what are similarly situated companies doing? How are they performing? Executive compensation philosophy—how does the executive compensation structure connect with the company’s business strategy? How much compensation is fixed, variable, performance-driven, etc. Aligning with shareholder interests—does pay link to shareholder value? Prudent Process—An Overview of Compensation Committee Procedures

8. ©2010 Variable incentives drive behavior—is it clear that “good” behavior benefits the company in the long run? Risks are associated with most types of incentives—what are they? Risk mitigation is necessary to protect the company—how do we do that? oFocus on “team goals” that assure individual income depends upon the company’s success o“Clawbacks”—recovering incentives paid on the basis of bad data o“Holdbacks”—delaying payment of earned incentives to be sure risk to the company has passed Balancing Reward Against Risk—A Lesson Learned but Forgotten from Enron!

9. ©2010 The Way Ahead—“Reform” run amok? The cost of compliance is still undetermined, as are the benefits. Do stronger rules produce better conduct? Expect continued close scrutiny of executive compensation process.

10. ©2010 Contact Us! Website: www.TitanHR.com Telephone: (804) 754-8330 Titan Blog: HRScorecard.wordpress.com Become a Fan on Facebook!