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TheFutureofExecutiveCompensationGeorgeB.PaulinPresident&CEO,F.W.Cook&Co.,Inc.October6,20040

0Background

OVERVIEW

5-yeartransitioninexecutivecompensation...1stPhase2ndPhasePeriod2002-032004-06CatalystsSarbanes-Oxley,stockexchangerules,institutionalinvestorinitiativesNewFASBrules,option-valuationrefinements,political/laborpressureFocusCorporategovernanceProgramdesignImpactBoardcompensationcommitteeprocessUseofstockoptions1Background

OVERVIEW 5-yeartrBackground

TODAY’SDISCUSSION1. 2nd-phasemarkettrendsinexecutivecompensationtransition2. Newandproposedregulations 3. Shareholderinitiativesandvoting

Implicationsandoutcomesfrom3areas...2Background

TODAY’SDISCUSSIONBackground

METHODOLOGYComesfromtheF.W.Cook&Co.databaseGenerally,large-caps(i.e.,Fortune250)Butrepresentativeofbroaderpublic-companypracticeValuesoptionsbasedontheBinomialmodelandstandardassumptionsCompetitivedatausedforillustrations...3Background

METHODOLOGYComesfrMarketTrends

TOTALDIRECTCOMPENSATIONTop-quartileoutliersaremovingbacktowardthemiddle(75thpercentileaspercentofmedian)...CEOCEOCEOTop5Top5Top51996200220044MarketTrends

TOTALDIRECTCOMMarketTrends

LONG-TERMGRANTSShareusageasapercentofoutstandingshares(“runrates”)continuestodecrease...ShareUsageas%OutstandingShares199620022004MedianOptions0.94%1.38%1.01%Other0.05%0.03%0.10%Total1.07%1.46%1.09%75thPOptions1.32%1.82%1.43%Other0.16%0.13%0.24%Total1.45%1.87%1.55%5MarketTrends

LONG-TERMGRANTSMarketTrends

LONG-TERMGRANTS(cont’d.)Runrates(anddilutionoverhang)arenolongermeaningfulasgrantvalueshiftsfromoptionsGrant-valuechangesarefrom2sourcesStockpricevariabilityDiscountinginconversionfromoptionsforfull-valuegrantsReductioninlower-levelgrantsonlypartiallycompleteDrivenbystock-exchangerules(notaccounting),andmany

board-approvedplansstillhavesharesavailableLookcarefullybeyondthesurveynumbers...6MarketTrends

LONG-TERMGRANTMarketTrends

LONG-TERMSTRUCTUREShiftfromoptionstofull-valuegrants(i.e.,restrictedandperformancestock/cash)...AnnualMixYearLevelOptionsFullValue1996CEOTop-573.7%73.2%26.3%26.8%2002CEOTop-579.2%78.0%20.8%22.0%2004CEOTop-551.5%49.8%48.5%50.2%7MarketTrends

LONG-TERMSTRUCTMarketTrends

OPTIONSTRUCTURE:MorePrevalentSomeformsofoptionswillbewinnersundernewaccounting...GrantTypeAdvantagetoPlain-VanillaOptionsStock-onlySARsFewersharesissuedDiscountOptionsLowcosttointrinsicvalueOptionswithDividendRightsLowcosttointrinsicvaluePerformanceOptionsPay-for-performanceIndexedOptionsPay-for-performance8MarketTrends

OPTIONSTRUCTUREMarketTrends

OPTIONSTRUCTURE:LessPrevalentOtherformswillbelosers...GrantTypeDisadvantagetoPlain-VanillaOptionsISOsNotaxbenefitReloadsAdditiveexpenseCash-onlySARsVariablecostPremiumOptionsHighcosttointrinsicvalueESPPsFairvalueexpense(noexpensenow)9MarketTrends

OPTIONSTRUCTUREMarketTrends

OPTIONPROVISIONS3-4yearvestingwillcontinuetospreadexpenseaccruals10-yeartermswillcontinuebecausethecosteffectofshortertermsisnotlinearPost-terminationexercisemaybecomemorelimitedtoconservesharesGrantdatesmaybemovedtolateintheyearsovaluealignswithannualTSRundernewISSguidelinesRegulatoryandshareholderconsiderationswillaffectoptiondesign...10MarketTrends

OPTIONPROVISIONMarketTrends

LONG-TERMGRANTDETERMINATIONAnewapproachfordetermininggrantsizeisnecessarybutcontroversial...OldMethodNewMethodDeterminecompetitiveindividualgrantvaluesConverttocompanyshares(orcash)AddindividualgrantstodeterminetotalgrantsStartwithcompetitiveaggregategrantvalueasapercentofcompanymarketcapAllocatetoindividualsbasedoncompetitivepercentoftotalgrantvalue11MarketTrends

LONG-TERMGRANTMarketTrends

SHAREHOLDERAPPROVEDPLANSEmployeesandoutsidedirectorseligibleAllpossiblegranttypesAdministrativeprovisionsingrantagreements,nottheplanAs-issuedsharecount“Fungible”sharepoolfortrading-offoptionsandfull-valuegrantsPotentialfor3rd-partyoptiontransfersFlexibleomnibus-typestructurewillbecomethestandard...12MarketTrends

SHAREHOLDERAPPRMarketTrends

SHAREHOLDERAPPROVEDPLANS(cont’d.)TraditionalPool:10millionoptionshareswithupto3.3millionfullvaluesharesFungiblePool:16.6millionoptionshareswitheachfullvaluesharegrantedcountedas3options(assuming33%Binomialoptionvalue):FungiblesharepoolworksbestunderISS-typevotingguidelines...ISS“Cost”inOptionEquivalentsSharesAvailableforGrantTraditionalPool6.7+9.9=16.6million10MillionFungiblePool16.6million5.5to16.6milliondependingonmixofoptionsandfullvalueshares13MarketTrends

SHAREHOLDERAPPRMarketTrends

EXECUTIVEOWNERSHIPPressurefromshareholdergroupswillincreaseprevalenceandenforcementsanctions...“BestPractice”RealityOwnershipGuidelinesRealownershipofspecifiedsalarymultipleornumberofshares;usuallyafter5yearsAbouthalfoflargecaps;fewsmallcapsandtechsorWestoftheMississippiRetentionGuidelinesHoldnetsharesfromcompensationprogramforatleast1year(i.e.,norun-upandflipping)GE,Citicorp,Lillyandacoupleofotherearlyadopters;fewfollowers14MarketTrends

EXECUTIVEOWNERSMarketTrends

MISCELLANEOUSSettinggoalsforannualbonusestobetterbalancepayforperformanceandpayforresultsValuingSERPs,above-marketinterestondeferredcompensation,andseverancearrangementsAligningoutsidedirectors’compensationwiththeircurrentresponsibilitiesandrisksAndcompensationcommitteesagaintakingchargeofdirectors’compensation,whereithasmovedtonominating/governancecommitteesMoretimewillbespenton...15MarketTrends

MISCELLANEOUSSetNewandProposedRegulations

INGENERALNYSEruleseffective6/30/03(Nasdaqrulesaregenerallyinparallel)FAS123proposalonaccountingforequity-basedcompensationExposureDraft(ED)issued3/31/04Legislationpendingontaxationofdeferredcompensation3areaswillbecovered...16NewandProposedRegulations

INewandProposedRegulations

STOCKEXCHANGERULESOld“loopholes”fromshareholderapprovaleliminated...FormerExemptionsCurrentExemptionsBroad-basedplansCertainshareauthorizationsnotexceeding5%,i.e.,“BrokerNo-Vote”GrantsinTreasurysharesNew-hiregrantsPlanamendmentsotherthanparticipanteligibility,granttypes,andsharelimitNew-hiregrantsSharesinlieuofcash“Immaterial”planamendments17NewandProposedRegulations

SNewandProposedRegulations

FAS123STATUSOutcomecouldhavebeenworse...BadNewsGoodNewsProposedruleswillbeadoptedPossiblylater(1/1/06)thansooner(1/1/05)OptionpricingmodelswillbebasisforexpenseFlexibilityinmodelingwillreduceoptionexpenseTransitionisinherentlypainfulChoicebetween“modifiedprospective”andrestatement,plusotherstepstomoderateoriginalED18NewandProposedRegulations

FNewandProposedRegulations

FAS123STATUS(cont’d.)Straight-lineaccrualsforinstallmentvestingLattice-binomialnolongerspecificallypreferredCurrentaccountingtreatmentforcorporateincometaxesretainedSafe-harborforqualifiedESPPsPurchasediscountnogreaterthan5%StepstomoderateED...19NewandProposedRegulations

FNewandProposedRegulations

TAXDEFERRALSTATUSManyelectionsforbonusesearned(wholeorpart)in2004andpaidin2005couldbeinvalidIfannualcompensation,electionsmustpre-date1/1/04Ifmulti-year,mustpre-date2005paymentdatebyatleast12monthsElectionsforcompensationearnedin2005andpaidin2006mustbebefore1/1/05Timingisuncertainandchangestocurrentproposalsarelikely...20NewandProposedRegulations

TNewandProposedRegulations

TAXDEFERRALSTATUS(cont’d.)Noevent-drivendistributiontriggersAmountsoriginallydeferredbeforeeffectivedategrandfathered,ifnofurtherdeferralundersubsequentelectionGeneralscopewillhaveunintendedconsequencese.g.,impactonSARs,RSUs,andSERPslikelytonecessitateadministrativerulingstoclarifyOtherpossible(probable)effects...21NewandProposedRegulations

TInvestorInitiativesandVoting

INGENERALISS(InstitutionalShareholderServices)GlassLewis&Co.CalPERS(CaliforniaPublicEmployeeRetirementSystem)Significanttoalesserextentbecauseofperceivedlabor-orientedpoliticalagendaInitiativesbythefollowingorganizationsarelikelytobeinfluential...22InvestorInitiativesandVotinInvestorInitiativesandVoting

ISSOpposeanyproposedplanandcommitteememberre-electionifCEOpay“disconnect”fromsustainedcompanyperformanceMorethan50%ofCEOpayincreasefromequityawardsCEOparticipatesinproposedplanDisconnectif1and3yearTSRisnegative,butCEO’stotaldirectpayisaboveprioryearAppliestoRussell3000,publiclytraded3years,andCEOinplaceatleast2yearsNewvotingguidelineseffectiveforannualmeetingsafter1/31/04...23InvestorInitiativesandVotinInvestorInitiativesandVoting

GLASSLEWIS&CO.Proxyadvisorycompany,anddirectcompetitortoISS,formedin2003...EquitycompensationplansareevaluatedbasedonqualitativeandquantitativereviewQualitativereviewlooksatplanadministration,methodandtermofexercise,repricinghistory,andotherfactorsQualitativereviewincludes20differentweightedanalysesEmploysapay-for-performancemodelwithassignedgradesbasedonCEOpayandperformancerelativetopeercompanymedianpracticeNoinformationprovidedonhowinformationisusedindevelopingvotingrecommendations24InvestorInitiativesandVotinInvestorInitiativesandVoting

CALPERSModeltoidentifyU.S.portfoliocompaniesthatarebothhighpayandlowperformance,andareopeningdialoguewiththesecompaniestogetthemtochangetheirpracticesWantcompaniestodevelopexecutivecompensationpoliciesforshareholderapprovalIncludecompensationphilosophy;targetedmixofsalaryandincentives;methodologiesforalignmentofemployeeandshareholderinterest;andparametersforemploymentcontractprovisions/severanceAdvocateallequitycompensationtiedtoperformancecriteriaincludingoptionsandrestrictedstockTheyareworkingincloseconjunctionwithGlassLewis&Co....25InvestorInitiativesandVotin

CONCLUSION...LeadorfollowLookbeyondthedataUnderstandnewandproposedregulationsListentoshareholders26

CONCLUSION...Leadorfollo演讲完毕，谢谢观看！演讲完毕，谢谢观看！

TheFutureofExecutiveCompensationGeorgeB.PaulinPresident&CEO,F.W.Cook&Co.,Inc.October6,200428

0Background

OVERVIEW

5-yeartransitioninexecutivecompensation...1stPhase2ndPhasePeriod2002-032004-06CatalystsSarbanes-Oxley,stockexchangerules,institutionalinvestorinitiativesNewFASBrules,option-valuationrefinements,political/laborpressureFocusCorporategovernanceProgramdesignImpactBoardcompensationcommitteeprocessUseofstockoptions29Background

OVERVIEW 5-yeartrBackground

TODAY’SDISCUSSION1. 2nd-phasemarkettrendsinexecutivecompensationtransition2. Newandproposedregulations 3. Shareholderinitiativesandvoting

Implicationsandoutcomesfrom3areas...30Background

TODAY’SDISCUSSIONBackground

METHODOLOGYComesfromtheF.W.Cook&Co.databaseGenerally,large-caps(i.e.,Fortune250)Butrepresentativeofbroaderpublic-companypracticeValuesoptionsbasedontheBinomialmodelandstandardassumptionsCompetitivedatausedforillustrations...31Background

METHODOLOGYComesfrMarketTrends

TOTALDIRECTCOMPENSATIONTop-quartileoutliersaremovingbacktowardthemiddle(75thpercentileaspercentofmedian)...CEOCEOCEOTop5Top5Top519962002200432MarketTrends

TOTALDIRECTCOMMarketTrends

LONG-TERMGRANTSShareusageasapercentofoutstandingshares(“runrates”)continuestodecrease...ShareUsageas%OutstandingShares199620022004MedianOptions0.94%1.38%1.01%Other0.05%0.03%0.10%Total1.07%1.46%1.09%75thPOptions1.32%1.82%1.43%Other0.16%0.13%0.24%Total1.45%1.87%1.55%33MarketTrends

LONG-TERMGRANTSMarketTrends

LONG-TERMGRANTS(cont’d.)Runrates(anddilutionoverhang)arenolongermeaningfulasgrantvalueshiftsfromoptionsGrant-valuechangesarefrom2sourcesStockpricevariabilityDiscountinginconversionfromoptionsforfull-valuegrantsReductioninlower-levelgrantsonlypartiallycompleteDrivenbystock-exchangerules(notaccounting),andmany

board-approvedplansstillhavesharesavailableLookcarefullybeyondthesurveynumbers...34MarketTrends

LONG-TERMGRANTMarketTrends

LONG-TERMSTRUCTUREShiftfromoptionstofull-valuegrants(i.e.,restrictedandperformancestock/cash)...AnnualMixYearLevelOptionsFullValue1996CEOTop-573.7%73.2%26.3%26.8%2002CEOTop-579.2%78.0%20.8%22.0%2004CEOTop-551.5%49.8%48.5%50.2%35MarketTrends

LONG-TERMSTRUCTMarketTrends

OPTIONSTRUCTURE:MorePrevalentSomeformsofoptionswillbewinnersundernewaccounting...GrantTypeAdvantagetoPlain-VanillaOptionsStock-onlySARsFewersharesissuedDiscountOptionsLowcosttointrinsicvalueOptionswithDividendRightsLowcosttointrinsicvaluePerformanceOptionsPay-for-performanceIndexedOptionsPay-for-performance36MarketTrends

OPTIONSTRUCTUREMarketTrends

OPTIONSTRUCTURE:LessPrevalentOtherformswillbelosers...GrantTypeDisadvantagetoPlain-VanillaOptionsISOsNotaxbenefitReloadsAdditiveexpenseCash-onlySARsVariablecostPremiumOptionsHighcosttointrinsicvalueESPPsFairvalueexpense(noexpensenow)37MarketTrends

OPTIONSTRUCTUREMarketTrends

OPTIONPROVISIONS3-4yearvestingwillcontinuetospreadexpenseaccruals10-yeartermswillcontinuebecausethecosteffectofshortertermsisnotlinearPost-terminationexercisemaybecomemorelimitedtoconservesharesGrantdatesmaybemovedtolateintheyearsovaluealignswithannualTSRundernewISSguidelinesRegulatoryandshareholderconsiderationswillaffectoptiondesign...38MarketTrends

OPTIONPROVISIONMarketTrends

LONG-TERMGRANTDETERMINATIONAnewapproachfordetermininggrantsizeisnecessarybutcontroversial...OldMethodNewMethodDeterminecompetitiveindividualgrantvaluesConverttocompanyshares(orcash)AddindividualgrantstodeterminetotalgrantsStartwithcompetitiveaggregategrantvalueasapercentofcompanymarketcapAllocatetoindividualsbasedoncompetitivepercentoftotalgrantvalue39MarketTrends

LONG-TERMGRANTMarketTrends

SHAREHOLDERAPPROVEDPLANSEmployeesandoutsidedirectorseligibleAllpossiblegranttypesAdministrativeprovisionsingrantagreements,nottheplanAs-issuedsharecount“Fungible”sharepoolfortrading-offoptionsandfull-valuegrantsPotentialfor3rd-partyoptiontransfersFlexibleomnibus-typestructurewillbecomethestandard...40MarketTrends

SHAREHOLDERAPPRMarketTrends

SHAREHOLDERAPPROVEDPLANS(cont’d.)TraditionalPool:10millionoptionshareswithupto3.3millionfullvaluesharesFungiblePool:16.6millionoptionshareswitheachfullvaluesharegrantedcountedas3options(assuming33%Binomialoptionvalue):FungiblesharepoolworksbestunderISS-typevotingguidelines...ISS“Cost”inOptionEquivalentsSharesAvailableforGrantTraditionalPool6.7+9.9=16.6million10MillionFungiblePool16.6million5.5to16.6milliondependingonmixofoptionsandfullvalueshares41MarketTrends

SHAREHOLDERAPPRMarketTrends

EXECUTIVEOWNERSHIPPressurefromshareholdergroupswillincreaseprevalenceandenforcementsanctions...“BestPractice”RealityOwnershipGuidelinesRealownershipofspecifiedsalarymultipleornumberofshares;usuallyafter5yearsAbouthalfoflargecaps;fewsmallcapsandtechsorWestoftheMississippiRetentionGuidelinesHoldnetsharesfromcompensationprogramforatleast1year(i.e.,norun-upandflipping)GE,Citicorp,Lillyandacoupleofotherearlyadopters;fewfollowers42MarketTrends

EXECUTIVEOWNERSMarketTrends

MISCELLANEOUSSettinggoalsforannualbonusestobetterbalancepayforperformanceandpayforresultsValuingSERPs,above-marketinterestondeferredcompensation,andseverancearrangementsAligningoutsidedirectors’compensationwiththeircurrentresponsibilitiesandrisksAndcompensationcommitteesagaintakingchargeofdirectors’compensation,whereithasmovedtonominating/governancecommitteesMoretimewillbespenton...43MarketTrends

MISCELLANEOUSSetNewandProposedRegulations

INGENERALNYSEruleseffective6/30/03(Nasdaqrulesaregenerallyinparallel)FAS123proposalonaccountingforequity-basedcompensationExposureDraft(ED)issued3/31/04Legislationpendingontaxationofdeferredcompensation3areaswillbecovered...44NewandProposedRegulations

INewandProposedRegulations

STOCKEXCHANGERULESOld“loopholes”fromshareholderapprovaleliminated...FormerExemptionsCurrentExemptionsBroad-basedplansCertainshareauthorizationsnotexceeding5%,i.e.,“BrokerNo-Vote”GrantsinTreasurysharesNew-hiregrantsPlanamendmentsotherthanparticipanteligibility,granttypes,andsharelimitNew-hiregrantsSharesinlieuofcash“Immaterial”planamendments45NewandProposedRegulations

SNewandProposedRegulations

FAS123STATUSOutcomecouldhavebeenworse...BadNewsGoodNewsProposedruleswillbeadoptedPossiblylater(1/1/06)thansooner(1/1/05)OptionpricingmodelswillbebasisforexpenseFlexibilityinmodelingwillreduceoptionexpenseTransitionisinherentlypainfulChoicebetween“modifiedprospective”andrestatement,plusotherstepstomoderateoriginalED46NewandProposedRegulations

FNewandProposedRegulations

FAS123STATUS(cont’d.)Straight-lineaccrualsforinstallmentvestingLattice-binomialnolongerspecificallypreferredCurrentaccountingtreatmentforcorporateincometaxesretainedSafe-harborforqualifiedESPPsPurchasediscountnogreaterthan5%StepstomoderateED...47NewandProposedRegulations

FNewandProposedRegulations

TAXDEFERRALSTATUSManyelectionsforbonusesearned(wholeorpart)in2004andpaidin2005couldbeinvalidIfannualcompensation,electionsmustpre-date1/1/04Ifmulti-year,mustpre-date2005paymentdatebyatleast12monthsElectionsforcompensationearnedin2005andpaidin2006mustbebefore1/1/05Timingisuncertainandchangestocurrentproposalsarelikely...48NewandProposedRegulations

TNewandProposedRegulations

TAXDEFERRALSTATUS(cont’d.)Noevent-drivendistributiontriggersAmountsoriginallydeferredbeforeeffectivedategrandfathered,ifnofurtherdeferralundersubsequentelectionGeneralscopewillhaveunintendedconsequencese.g.,impactonSARs,RSUs,andSERPslikelytonecessitateadministrativerulingstoclarifyOtherpossible(probable)effects...49NewandProposedRegulations

TInvestorInitiativesandVoting

INGENERALISS(InstitutionalShareholderServices)GlassLewis&Co.CalPERS(CaliforniaPublicEmployeeRetirementSystem)Significantt