National Association Of Stock Plan Professionals

Lessons Learned From The Current Proxy Season

Larry SchumerPrincipal, Boston

May 6, 2009

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Today’s Discussion

Topics and Trends in the Headlines

Our Research

Overview: Compliance, Concession, and Innovation

Findings

Implications for Evaluation and Design

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Topics and Trends in the Headlines

Topics

Pay limits

Incentives and risk

Pay for failure

Repayment of bonuses

Misalignment with shareholders

Trends

Say on Pay

Clawbacks

Option exchanges

Executive pay cuts

Performance plans

Caveats

Focused on troubled industries – financial, auto

Focused on largest companies

Actions driven by compliance and concession

Little focus on innovation

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Our Objectives

Provide a mid-season glimpse of emerging pay trends and practices through a review of recent proxy statements

Explore whether pay programs are reflecting recent years’ executive and equity compensation debates

Analyze whether two key industry sectors reflect the topics and trends in the media headlines

Investigate the differences between larger firms and smaller firms in each sector

Consider the implications of our findings for compensation professionals faced with a high degree of scrutiny of executive compensation practices

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Our Research

Two industry sectors that are a continuing source of US economic competitiveness: technology and biopharma

Two sectors known for innovation in products, business processes…and pay

Currently under less scrutiny than the troubled industries: financial services, auto, retail

The research questions:

Are those sector specific practices making the headlines spilling over to other sectors?

Are the pay issues in the headlines common to companies of all sizes or just the larger ones?

Are the nontraditional pay practices of the tech and biopharma sectors immune to the current pay governance pressures?

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Our Research

Explored differences between the “big companies” and the “next tier” in each sector

Considered both revenue and market capitalization

Revenue generally stable (except in semiconductors), though down in Q4, in technology sector

Market cap important for capturing high-potential biopharma companies

Reviewed both revenue and market cap rankings for both sectors with final list based on

Technology companies ranked by revenue

Biopharma companies ranked by market capitalization

Compared Top 25 and Next 25

– Divided in technology at $4 billion revenue

– Divided in biopharma at $3 billion market cap

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Our Research Companies: Technology

HEWLETT-PACKARD COINTL BUSINESS MACHINES CORPDELL INCMICROSOFT CORPCISCO SYSTEMS INCINTEL CORPAPPLE INCORACLE CORPGOOGLE INCEMC CORP/MASUN MICROSYSTEMS INCSEAGATE TECHNOLOGYTEXAS INSTRUMENTS INCQUALCOMM INCEBAY INCAPPLIED MATERIALS INCWESTERN DIGITAL CORPYAHOO INCSYMANTEC CORPMICRON TECHNOLOGY INCADVANCED MICRO DEVICES INCFREESCALE SEMICONDUCTOR INCNCR CORPBROADCOM CORPLEXMARK INTL INC -CL A

CA INCADOBE SYSTEMS INCNVIDIA CORPSANDISK CORPNETAPP INCDIEBOLD INCINTUIT INCMARVELL TECHNOLOGY GROUP LTDLSI CORPAMKOR TECHNOLOGY INCANALOG DEVICESKLA-TENCOR CORPSPANSION INCLAM RESEARCH CORPAUTODESK INCIMATION CORPMAXIM INTEGRATED PRODUCTSMEMC ELECTRONIC MATRIALS INCNATIONAL SEMICONDUCTOR CORPXILINX INCTERADATA CORPBMC SOFTWARE INCFAIRCHILD SEMICONDUCTOR INTLATMEL CORPCADENCE DESIGN SYSTEMS INC

Top 25 Next 25

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Our Research Companies: Technology

Company Revenue Market Cap Employees Rev/Ee MktCap/Ee3 4 5 6 7

Maximum $118,364 $170,669 398,455 $1,077,814 $6,112,171

75th Percentile $33,756 $89,220 69,322 $605,768 $1,501,751

Top Average $26,101 $48,116 64,520 $477,402 $1,185,171

25 Median $12,605 $20,763 32,219 $410,470 $791,525

25th Percentile $6,875 $5,013 16,000 $309,164 $164,717

Minimum $4,528 $1,441 7,402 $161,248 $61,723

Maximum $4,277 $12,945 20,500 $1,372,357 $1,732,087

75th Percentile $3,071 $6,126 9,000 $487,806 $940,033

Next Average $2,496 $4,212 7,609 $416,651 $662,341

25 Median $2,501 $3,504 6,400 $312,190 $673,692

25th Percentile $1,886 $1,732 5,331 $258,342 $263,712

Minimum $1,039 $27 1,570 $129,688 $2,944

Top vs. Next Average 10.5 11.4 8.5 115% 179%

Top vs. Next Median 5.0 5.9 5.0 131% 117%

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Our Research Companies: Biopharma

ALEXION PHARMACEUTICALS INCPHARMACEUTICAL PROD DEV INCPHARMION CORPWARNER CHILCOTT LTDCOVANCE INCGEN-PROBE INCPERRIGO COENDO PHARMACEUTICALS HLDGSADAMS RESPIRATORY THERAPEUTICS, INC.KING PHARMACEUTICALS INCTECHNE CORPCHARLES RIVER LABS INTL INCOSI PHARMACEUTICALS INCBIO-RAD LABORATORIES INCLIFECELL CORPPERKINELMER INCSEPRACOR INCUNITED THERAPEUTICS CORPVALEANT PHARMACEUTICALS INTLISIS PHARMACEUTICALS INCONYX PHARMACEUTICALS INCAMYLIN PHARMACEUTICALS INCCV THERAPEUTICS INCBRUKER CORPAUXILIUM PHARMA INC

Top 25 Next 25JOHNSON & JOHNSONPFIZER INCABBOTT LABORATORIESMERCK CO INCAMGEN INCBRISTOL-MYERS SQUIBB COGILEAD SCIENCES INCLILLY (ELI) & COCELGENE CORPTHERMO FISHER SCIENTIFIC INCALLERGAN INCGENZYME CORPBIOGEN IDEC INC.FOREST LABORATORIES -CL ALIFE TECHNOLOGIES CORPCEPHALON INCILLUMINA INCMYLAN INCVERTEX PHARMACEUTICALS INCMYRIAD GENETICS INCWATERS CORPMGI PHARMA INCMILLIPORE CORPWATSON PHARMACEUTICALS INCVENTANA MEDICAL SYSTEM INC

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Our Research Companies: Biopharma

Company Revenue Market Cap Employees Rev/Ee MktCap/Ee

Maximum $63,747 $146,905 118,700 $1,550,639 $11,816,278 75th Percentile $15,003 $40,660 34,500 $634,793 $3,069,835

Top Average $10,898 $26,478 21,437 $531,100 $2,429,266 25 Median $4,098 $14,428 5,900 $500,099 $1,330,084

25th Percentile $1,602 $4,239 2,780 $335,643 $914,512 Minimum $176 $3,101 540 $131,661 $296,607

Maximum $1,937 $2,847 10,500 $1,036,625 $7,487,740 75th Percentile $1,343 $2,247 4,400 $538,454 $3,941,106

Next Average $837 $1,936 2,894 $467,502 $2,383,139 25 Median $657 $1,945 1,115 $431,445 $2,303,146

25th Percentile $259 $1,498 504 $280,864 $362,424 Minimum $107 $1,041 197 $149,277 $208,133

Top vs. Next Average 13.0 13.7 7.4 114% 102%

Top vs. Next Median 6.2 7.4 5.3 116% 58%

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Our Analysis

We first classified our findings into two general areas:

Disclosure Design

We categorized our findings into those that, from our daily experience working with clients and understanding of marketplace dynamics, seem to be the basis for change

Compliance – changes implemented to meet specific requirements such as proxy disclosure rules or changes in government regulations

Concession – changes implemented in response to external pressures from shareholders, proxy advisors, regulators, or the overall political climate

Innovation – changes implemented for specific strategic, financial or other business reasons for the purpose of optimizing compensation design to support business strategy and value creation

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Overview of Findings Across Sectors and Size

ComplianceCompliance ConcessionConcession InnovationInnovation

DesignDesign

DisclosureDisclosure

Peer groups/processPeer groups/process

Performance metricsPerformance metrics

Post-FY end actionsPost-FY end actions

Advisor independenceAdvisor independence

409A409A

457A457A

Shareholder approvalShareholder approval

Performance targetsPerformance targets

Risk assessmentRisk assessment

Tally sheetsTally sheets

Wealth Wealth

accumulationaccumulation

Say on Pay Say on Pay

Salary freeze/cutSalary freeze/cut

Perk cutbacksPerk cutbacks

ClawbacksClawbacks

Ownership Ownership

guidelinesguidelines

EA/GP eliminationEA/GP elimination

Share requestsShare requests

Fungible share Fungible share

ratiosratios

Executive summaryExecutive summary

Supplemental tablesSupplemental tables

Alternative tablesAlternative tables

FV vs. current valueFV vs. current value

Performance plansPerformance plans

Peer groupsPeer groups

Option exchangesOption exchanges

One-time LTI grantsOne-time LTI grants

Perf-based retentionPerf-based retention

Changes in ST/LT mixChanges in ST/LT mix

Retention grantsRetention grants

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Our Analysis

We discuss our findings based on our two criteria of industry and size, with disclosure and design practices that:

Are common across all four categories

Differ between the two industry sectors (sector-specific)

Different between the two size categories (size-specific)

Are of extremely low prevalence in all four sector/size categories

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Few Pay Practices are Specific to Both Sector and Size

TechnologyTechnology BiopharmaBiopharma

Next 25Next 25

Top 25Top 25 Retention grantsRetention grants

????

????

????

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Findings – Not Sector or Size-Specific

Equity plans: Plan amendments, primarily additional share requests

Some changing option:share ratios

Peer groups: More than half of companies (56%) made changes to their peer group due to:

Acquisitions and mergers of peer companies Change in business strategy or lines of business Change in company size due to growth or acquisition/merger

Peer groups: One-fourth of the companies use more than one peer group for pay comparison purposes

STI performance measures: Continuing use of revenue and profit-based measures for short-term incentive programs with little use of cash- or return-based measures

Many of the profit-based measures are “adjusted” versions of GAAP measures (e.g., “adjusted earnings per share” rather than pure EPS)

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Findings – Not Sector or Size-Specific, cont’d

2009 STI performance measures: More than half of the companies discussed their plan

Approximately half of those disclosed specific performance measures but few disclosed specific performance targets

Performance share measures: While 60% of the companies have a performance-based full-value share plan, there is great variation among the companies in number and type of performance measures used

The smaller companies tend to use traditional revenue and earnings measures

LTI metrics: just under half discussed the metrics for 2009

Half disclosed performance measures

Very few disclosed targets

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Findings – Sector-Specific

Pay freezes: Freezes are much more common for one or more executives in the technology sector (just over 50%) than the biopharma sector (just over 25%)

Four technology companies reduced executive salaries but only one biopharma firm did so

CEO bonus: The average CEO bonus was well above the target level for 2008

Biopharma CEOs averaged 140% of target vs. 125% of target for technology CEOs

30% of the technology CEO’s received no bonus (zeroes not included in above percentage calculations)

Tally sheets: One-third of companies report the use of tally sheets in the compensation decision process but this varies greatly by industry sector

Half of biopharma companies but only one quarter of technology companies are using tally sheets

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Findings – Sector-Specific, cont’d

Approximately one-third of companies in each sector requested shareholder approval of additional shares for their equity compensation plan but there are marked differences between them (% of shares outstanding)

Technology = 2.8%

Biopharma = 4.8%

Note:

3-year average gross run rate among the 50 technology companies is 2.2%

3-year average gross run rate among the 50 biopharma companies is 2.1%

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Findings – Size-Specific

Difficulty of goals: Though the SEC is encouraging companies to discuss the relative difficulty of achieving performance targets for incentive compensation, only 30% of these companies did so

A greater proportion of smaller companies provided this disclosure, with just under 40% of the smaller companies versus 20%of the larger companies

Clawbacks: Only one-third of the companies have clawbacks for short-term and/or long-term incentive plans

Much lower prevalence among the small biopharma companies

Effect of downturn: Changes in how the market downturn affected equity compensation awards

30% addressed the issue Least prevalent among the smaller technology companies

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Findings – Size-Specific, cont’d

Risk-assessment: Only 25% of the companies disclosed an assessment of the degree to how the executive compensation program encourages or discourages taking risk

The prevalence of this disclosure was much lower among the Next 25 companies

Ownership guidelines: These are prevalent across the groups with 3/4 of the larger companies and 2/3 of the smaller companies having adopted stock ownership guidelines

Only 4 companies introduced guidelines for the first time this year

No companies reported modifying their guidelines this year despite the severe market downturn that resulted in changes in dollar-denominated ownership levels

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Findings – Size-Specific, cont’d

Retention grants: Retention grants were made to one or more NEOs in 30% of the Top 25 technology companies (prevalence of approximately 10% among smaller companies, and also large biopharma)

Grants reflected the diversity of LTI vehicles in use in these sectors: options, time-based restricted stock, and performance-based stock grants

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Findings - Very Low Prevalence

Less than 10% of the 100 companies report actions that are receivingmuch attention in other industry sectors

Peer groups: Few companies have created a separate peer group for performance comparisons vs. pay comparisons

Payment in stock: Only two companies reported paying a portion of STI awards paid in stock

Option exchanges: Only 4 of the 50 companies are pursuing an exchange of underwater stock options – 3 Top 25 and 1 Next 25 technology companies

Agreements and severance: Elimination or reduction of employment agreements, severance arrangements, and change in control provisions

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Implications for Evaluation and Design

Companies must understand the market and business dynamics of their industry sector and look beyond both broad headlines and narrowly-defined peer groups to understand executive pay practices and trends

Midsized and smaller companies must ensure that the perception of trends and norms is not driven by large-company news

Companies subject to an increasingly diverse set of requirements and expectations must understand those of their peer companies before using those benchmarks as a guide to decision making

Increasingly, the information from proxy analysis is of greater value than the data – and the information gathering is a manual process

Data – pay levels, forms, mix – must be put in the context of the increasingly voluminous and complex information to serve as a sound benchmark

The prevalence of non-calendar year fiscal years in the technology sector results in many of the proxies during spring “proxy season” having been issued before many of the recent developments

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Closing Thoughts

The “latest news” in executive pay may or may not be the latest and may not be news

Media and regulatory pressures will continue to draw attention to executive pay and often be slanted by sociopolitical agendas

Understanding complex executive pay structures, practices, and trends can no longer be accomplished by data downloads

Especially in 2009 (and 2010?)

The interaction of complex pay, extensive disclosures, and information overriding data creates a challenge for compensation practitioners analyzing and communicating pay issues and answers

Narrowly defined peer groups of 15 to 20 companies may have outlived their usefulness as the sole, appropriate benchmark reference point

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Contact Information

Larry SchumerPrincipal, Boston OfficeBuck Consultants617.275.8048larry.schumer@buckconsultants.com

www.buckconsultants.com

www.bucksurveys.com