The Boards Role in Executive Compensation Strategy Financial Executives International

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The Boards Role in Executive Compensation
StrategyFinancial Executives International
March 23,2004

• Robert F. Dow
• Arnall Golden Gregory LLP
• [phone]
• Robert.Dow_at_AGG.com

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New Source of Executive Compensation Guidance
for Corporate Boards

• New listing standards NYSE/Nasdaq/Amex
• Conference Board Commission on Public Trust and
  Private Enterprise
• NACD Report Blue Ribbon Commission
• Delaware decisions in Disney, Pereira
• Breeden Report (MCI/Worldcom)
• New ISS guidelines
• Countless commentaries from law firms and
  consultants

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Lessons from Disney Decision

• Boards no longer allowed to rubber stamp
  management proposals
• Higher level of diligence required
• Need to review terms of major executive contracts
• Understand terms under various scenarios, e.g.
  severance, change-in-control, retirement
• Adequate time and analysis of issues
• Court is affected by Sarbanes-Oxley and related
  governance reforms.

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Quotable Quotes

• One of the great, as-yet-unsolved problems in
  the country today is executive compensation and
  how it is determined. W. Donaldson, SEC
  Chairman, Speech to Natl Press Club, 8/1/03
• There is a belief - I suggest it is a myth -
  that there is no limit to what compensation
  committees may award CEOs and other managers
  Judicial review of these kinds of director
  decisions is not about dollar amounts in
  isolation. It is all about process, and process
  is all about due care and good faith as well as
  loyalty. E. N. Veasey, Chief Justice of
  Delaware, Speech to NACD, 10/21/03

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Quotable Quotes (contd)

• The allegations give rise to a question
  whether the defendant directors should be held
  personally liable to the corporation for a
  knowing or intentional lack of due care in the
  directors decision making process The
  complaint suggests that the Disney directors
  failed to exercise any business judgment and
  failed to make any good faith attempt to fulfill
  their fiduciary duties to Disney and its
  stockholders. In Re Walt Disney Co. Derivative
  Litigation, 825 A.2d 275 (Del. Ch. 2003)
• The Compensation Committee should exercise
  independent judgment in determining the proper
  levels and types of executive compensation to be
  paid unconstrained by industry median
  compensation statistics or by the companys own
  past compensation practices and levels. The
  Conference Board Commission on Public Trust and
  Private Enterprise, 9/17/02

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New NYSE Compensation Committee Rules

• All members must be independent
• Written charter
• Establishing goals/objective relevant to CEO
  compensation
• Evaluating CEO performance and determining CEO
  compensation
• Recommendation to Board re non-CEO company,
  incentive plans and equity-based plans

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Best Practices for Operation of Committee

• Frequency and duration of meetings
• Sufficient materials, sufficient time
• Calendar and agenda
• Periodic self evaluation
• Program to educate committee members

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Compensation Consultants

• Selected by and accountable to the committee
• The reports go to the committee without preview
  or editing by management
• Readily available to committee for consultation
• Provide analysis of executive employment
  agreements and compensation programs

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NACD Principles for Compensation

• Philosophy clearly articulated philosophy to
  guide decisions.
• Independence
• capacity for objective judgment
• use independent consultants
• Fairness
• Compensation perceived as fair internally and
  externally
• Compare to true peer companies

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NACD Principles for Compensation(contd)

• Long-term shareholder value
• encourage long-term commitment
• achieving key metrics over long period of time
• Link to performance
• Transparency simplicity in design, full
  disclosure

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Compensation Philosophy

• Identify strategic objectives of the company
• Identify key drivers of long-term value
• Consider both corporate performance and
  individual performance
• Link compensation to objectives and performance
• Benchmarking is an important data point, but not
  sole determinant
• Consider mix of compensation elements
• Cash Equity Deferred Other benefits

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Excerpts from SYSCO Compensation Committee Report

• For executive officers, incentive bonuses earned
  in fiscal 2003 and paid in fiscal 2004 were
  calculated under the MIP in two parts. The first
  part was based on the overall performance of
  SYSCO and was based upon the interplay between
  the percentage increase in earnings per share and
  the return on shareholders' equity. The MIP
  utilized a matrix based on these two factors to
  determine award levels, resulting in an award of
  161 of base salary to each executive officer
  participating in this portion of the MIP. The
  second portion of the fiscal 2003 incentive bonus
  under the MIP for executive officers was based
  upon the number of SYSCO operating companies that
  achieved a target return on capital. This portion
  of the incentive bonus is paid only when the
  operating companies achieving the goals, in the
  aggregate, represent at least 50 of the total
  capital of all of SYSCO's operating companies,
  which was the case during fiscal 2003, resulting
  in an award of 96 of base salary to each
  executive officer participating in this portion
  of the MIP.

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Equity Compensation

• Analyze aggregate grant values and total
  shareholder dilution
• Consider appropriate allocation among executives
  and employees
• Consider in relation to total compensation mix
• Tie grants and vesting to corporate and
  individual performance
• Consider requiring executives to build and
  maintain equity ownership
• Analyze impact of expensing are we getting the
  full benefit in relation to cost?