GEO Midwest Flash Survey

1
GEO Midwest Flash Survey 1Global Responses to
Mandatory Stock Option Expensing
September 8, 2005
2
Participant Profile

• 73 publicly-traded companies participated in the
  survey (Appendix A)
• Median revenues of 7.8 billion
• Half of the respondents are high tech or
  manufacturing companies
• All companies are headquartered in the Unites
  States
• 70 have calendar year-ends, with the remainder
  spread evenly throughout the rest of the year

3
Drivers of Change

• Stock program expense and dilution/overhang were
  prime drivers of change for companies that have
  either modified their program or plan to in the
  next year
• The charts show the historical expense, dilution,
  and overhang for the respondents
• 26 have adopted stock option expensing, most in
  the past year
• 56 of companies have modified their LTI programs
  in the past 12 months of the remainder, half of
  them expect to modify their LTI programs in the
  next 12 months

4
Eligibility

• Eligibility looks to remain close to historical
  levels
• Virtually all executives at the Director/Senior
  Manager levels and above will be eligible for
  stock-based compensation
• Employees at or below the Manager/Supervisor
  level will be eligible on an infrequent basis

5
Participation

• Participation begins to fall below 100 of
  eligible employees at the Director/Senior Manager
  level
• At the lowest levels, companies are split between
  allowing all eligible employees to participate or
  not

6
Mix of Compensation Vehicles
7
Expense and Dilution Results

• Over half of the companies expect that their
  share-based compensation accounting expense will
  not decrease significantly
• In some cases, the expense is expected to
  increase
• However, dilution rates are expected to fall
  considerably
• These findings are consistent with the use of
  more full value vehicles to deliver long-term
  incentives

8
Other Results

• Most companies are not replacing LTI value lost
  due to program changes
• Where value is being replaced, 25 or less of the
  lost value is provided through other programs,
  typically additional annual incentive
• Only 9 of companies are considering accelerating
  vesting on underwater stock options

9
Other Results

• Most companies are maintaining their vesting
  provisions for retirement-eligible employees
• Most companies are sticking with Black-Scholes

10
Administration

• 40 of companies translate program documents
  based on what is legally required in the
  jurisdictions in which they operate

11
Administration

• Two-thirds of companies obtain authorization
  acknowledgement from participants
• Three quarters of Companies grant equity to
  employees on international assignment based on
  grant levels in the persons home country

12
Communication

• Not surprisingly, the majority of companies have
  a formal strategy in place for communicating
  program changes, which in at least a third of
  cases includes multiple messages over time
• Electronic media and managers are the primary
  conduits of messages half of companies also
  employ traditional mailings
• Other methods include informational seminars,
  employee meetings, computer-based training,
  newsletter, brochures

13
Communication

• Companies typically use standalone communications
  tailored to a targeted employee group

14
Legal Updates and Program Review

• Most companies review their programs as they
  become aware of emerging legal issues
• Not surprisingly, internal and external legal
  counsel are the source for most updates on legal
  issues affecting equity compensation

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GEO Midwest Flash Survey 1Appendix A
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Survey Participants

• 3M
• Abbott Laboratories
• Agere Systems
• Agilent Technologies
• Allstate Insurance Company
• Anheuser-Busch Companies Inc.
• Apple Computer, Inc.
• Applied Materials
• Aramark
• Automatic Data Processing
• Baker Hughes Incorporated
• Baxter International, Inc.
• BearingPoint, Inc.
• Beckman Coulter, Inc.
• Borders Group
• Bristol Myers Squibb
• Cardinal Health
• Caterpillar Inc.
• Charles Schwab Co.

• Ecolab
• Eli Lilly and Company
• ExpressJet
• First Data Corporation
• General Cable Corporation
• General Mills, Inc.
• General Motors Corp
• Health Net Inc.
• Huntington Bank
• IBM
• Ingram Micro
• Intel Corp.
• Johnson Johnson
• Kraft Foods
• Leggett Platt, Incorporated
• Lehman Brothers
• McDonalds Corporation
• Medco Health Solutions, Inc.
• Medtronic Inc.

• Pentair, Inc.
• PerkinElmer, Inc.
• Perot Systems Corporation
• PETsMART, Inc.
• Phelps Dodge Corp
• Pride International
• Proctor Gamble
• Rohm Haas Company
• Ross Stores, Inc.
• Schering-Plough Corporation
• Seagate Technology
• Siebel Systems
• SIRVA, Inc.
• Sonoco Products
• Sprint
• Staples, Inc.
• Steelcase Inc.
• Teradyne
• Texas Instruments

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GEO Midwest Flash Survey 1Appendix
BAdditional Results
18
Additional Results
Demographics
Expensing Status
19
Additional Results
Change Status Drivers
20
Additional Results
21
Additional Results
22
Additional Results
23
Additional Results
24
Additional Results
25
Legal and Regulatory Update

• Mary K. Samsa Gardner Carton Douglas LLP191
  N. Wacker DriveChicago, Illinois
  60606msamsa_at_gcd.com
• Aimee A. SoodanPricewaterhouseCooperOne North
  Wacker DriveChicago, Illinois 60606aimee.a.sooda
  n_at_us.pwc.com
• Brian K. WydajewskiBaker McKenzieOne
  Prudential PlazaChicago, Illinois
  60610brian.k.wydajewski_at_bakernet.com

26
FAS 123(R)

• Grant Date
• FASB has clarified that Board approval alone may
  not be sufficient to establish a grant date
• Grant date may not occur until grant is
  communicated to employees (because up to that
  point the Board decision could be reversed)
• How are companies aligning the accounting grant
  date with the Board or Compensation Committee
  approval date?
• Potential problems
• Achieving a mutual understanding with all
  recipients on the same date so as to achieve a
  single fair market value for the grant
• Uniformity in guidance from auditors

27
FAS 123(R) (contd)

• Other issues companies are grappling with for
  which feedback is sought
• What countries are other companies asking their
  equity vendors to do tax withholding for option
  exercises?
• What are companies doing to track employee
  movements through the equity process
  (grant/vesting/exercise)?
• Is this tracked internally at the company or do
  the equity vendors assist?
• How many companies accelerate vesting upon
  reaching retirement age (which would required
  accelerated expensing even if the employee does
  not retire)?
• Of those companies, which companies are
  continuing this practice?
• Has anyone developed a treatment/description to
  circumvent the expense?

28
FAS 123(R) (contd)

• Other issues companies are grappling with for
  which feedback is sought
• What companies are considering accelerating
  options or have accelerated vesting of options
  where the grants are NOT underwater?
• What is the key message delivered to the
  investment community, shareholders, employees
  regarding why the acceleration feature was
  pursued?
• Anyone accelerating underwater options?
• If so, what criteria have those companies used to
  determine to accelerate?

29
EU Prospectus Directive Overview

• Purpose To improve market efficiency across the
  EU by enabling issuers to use a single prospectus
  for a public offering of securities in any EU
  member state without the need to obtain separate
  approvals from each EU member in which that offer
  is made
• Requirement For any public offering of
  securities in any EU member state, an issuer must
  prepare a prospectus and have it approved by the
  competent securities authority of its Home Member
  State

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EU Prospectus Directive Overview (contd)

• Scope Any public offering of securities or debt
  (not just equity compensation)
• Home Member State For issuers not listed on an
  EU regulated market, the EU member state in which
  the issuer first offers its securities to the
  public after December 31, 2003
• Exemptions/Exclusions
• Consideration less than EUR 2.5 million in 12
  month period
• Offers to fewer than 100 persons per Member State
• Employee Share Exemption

31
EU Prospectus Directive Hot Interpretive Issues

• Definition of Securities
• Options
• Stock purchase rights
• Free shares (restricted stock, RSUs, SARs)
• Scope of EUR 2.5 million exemption
• No consideration
• Across EU vs. Per Member State
• Scope of Employee Share Exemption
• Issuer Listings vs. Third Party Listings
• Designation of Home Member State
• What is a public offer?

32
OECD Model Tax Convention

• OECD Organization for Economic Co-operation and
  Development
• Issued in September, 2004
• Designed to achieve common interpretation of how
  tax treaties should apply with respect to
  employees who receive equity grants as part of
  their remuneration

33
OECD Model Tax Convention (contd)

• Basic premises
• Relief from double taxation should be granted by
  the residence country even if it taxes the
  employment benefit derived from stock options in
  a year that is different from the source country
• The moment of exercise should be the dividing
  line between the employment benefit and any
  capital gain
• When employment services are provided in more
  than one state, the employment benefit derived
  from a specific country should be determined
  based on the of days during which employed in
  that country

34
OECD Model Tax Convention (contd)

• Model Convention is influencing tax law changes
• Belgium
• If in Belgium on grant date and accept grant
  within 60 days, Belgium will tax benefit on date
  of grant
• If not in Belgium on grant date and accept grant
  within 60 days and then moved to Belgium prior to
  vesting date, then potentially subject to tax on
  date enter Belgium
• UK
• If in UK on grant date but depart before vesting
  date, UK will tax only the portion of spread at
  exercise based on number of days worked in the UK
• If not in UK on grant date, UK will not tax any
  portion of the spread

35
Other Potential Items of Interest

• China
• As of March 28, 2005, companies (prior to
  implementation) are now required to register
  their stock plans with the relevant local Chinese
  tax authorities
• Must provide copy of stock plan, grant agreement,
  notice of grant, notice of exercise and notice of
  any adjustments to the grant
• Fines for non-registration are nominal, but fines
  for non-withholding can be significant (50 to
  300 of amount to be withheld on employer and
  employee)

36
Other Potential Items of Interest (contd)

• France
• Free shares legislation extended to foreign
  corporations
• Legislation in original form limited preferential
  tax treatment to shares awarded by French-listed
  companies
• Free shares meeting qualifications will receive
  preferential tax treatment (no tax until sale,
  reduced flat tax rate, no social tax)

37
Other Potential Items of Interest (contd)

• Japan
• Changes to securities disclosure requirements
• For those foreign companies subject to filing of
  an annual and semi-annual report, English
  versions now permitted (i.e., Form 10-K or 10-Q
  now acceptable)
• Japanese translation of a summary and
  supplemental information must accompany
  submission (guidelines for preparation of the
  summary not yet disclosed)
• US
• Where the heck is the 409A guidance?

38
Questions?

39
Communicating theGlobal EquityCompensation
Program
September 8, 2005
40
Discussion Overview

• Awareness to Action Model
• Communication Process
• Planning
• Design
• Implementation
• Evaluation

41
Awareness to Action Model

42
The Communication Process

• Planning
• Design
• Implementation
• Evaluation

43
Planning

• Project overall goal (Awareness Action)
• Values of organization
• Objectives of program
• Company culture
• Global issues/sensitivities
• Audiences
• Anticipated reaction to program by audiences
• Communications shared up to this point
• Available/new media to consider
• Potential obstacles to success
• Ideas around theme, look and feel for materials
• Possible training vehicles
• Evaluation tools to consider

44
Design

• Develop key messages
• Theme/logo
• Select media
• Draft communications (possibilities)
• Chairman/President announcement
• Business launch letter
• Employee awareness launch letter
• Summary plan brochure
• Plan Q As
• Local coordinator training
• Country specific materials
• Translation strategy
• Draft evaluation tool

45
Implementation

• Present theme/logo
• Translate materials
• Conduct local coordinator training
• Produce/Distribute communications

46
Evaluation

• Distribute evaluation tool
• Measure results
• Learn from the results
• Change where necessary

47
CommunicatingGlobal Plans
Eric Gee Genworth Financial September 8, 2005

• GEO - Midwest Chapter
• September 8, 2005 (Draft 9/6/05)

48
Who We Are

• A Leading Insurance Holding Company In The U.S.,
  With An Expanding International Presence
• Serving The Life And Lifestyle Protection,
  Retirement Income Investments, And Mortgage
  Insurance Needs Of More Than 15 Million Customers
• More Than 103 Billion In Assets1
• Global Operations In Over 20 Countries
• More Than 6,000 Employees
• Extensive And Diversified Distribution Network
• Leading Market Positions In Key Segments

1 As of 12/31/04
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Initial Public Offering in May 2004

• Conversion Grant of GE Awards
• Targeted Population
• General Understanding
• Founders Grant to All Employees
• Global Program
• Stock Options
• Multiple Objectives
• Sync with IPO Communications

50
Compensation Structure Changes

• Introduction Of New Compensation Structure
• New Compensation Committee
• Evolution Of Philosophy
• Global Transition Over Time
• High Touch For Executives
• Transition To Stock Option Restricted Stock
  Unit Combination
• Goals Different From Founders Grant
• Link To Philosophy
• Brand As Performance Leadership Grant

51
2005 Grant Communications

• Country-By-Country Reviews
• Cross-Functional Team
• Award Type Determination
• Communications
• Verbal Communication First
• Manager Talking Points
• RSUs New Vehicle For Most
• Individual Grant Materials Second
• Branding of Grant / CEO Letter
• Additional Touchpoint For Performance Discussion
• Included New Materials
• Award Highlight Sheets
• Managing Your Grant
• Tear-Away Forms

52
Performance Leadership Grant Materials

• Grant Package
• Certificate
• CEO Letter
• Award Info
• Managing Your Award
• Forms
• Signature Acceptance

53
Procter Gamble-Recent Equity Communication
Challenges
Jenny Ostendorf Procter Gamble September 8,
2005
54
PG Stock Option Program Changes

• Reduced participation from 10,000 to 3,000
• Lowest level participating went from 100 to 10
  annual participation
• Reduced grant value outside the US to match local
  market
• Based on a global survey

55
PG Stock Option Program Change Communication

• Communication Strategy
• Communication Materials
• Results

56
Communication Strategy

• Involve Line Management, starting with the CEO
• Communication primarily in face-to-face meetings,
  supplemented with video, powerpoint presentation
  and handouts
• Tailor communications to individuals personal
  situations

57
Communication Materials

• Meeting Leaders Discussion Guide
• Powerpoint presentation
• Video of CEO and Global HR Officer
• Memo to managers remaining in program at full
  participation
• Discussion guide with tailored communication for
  managers being eliminated from ongoing program
  participation
• Frequently Asked Questions
• Teamspace for HR to assist line managers

58
Meeting Leaders Guide

• Objectives
• Share changes and reasons
• Explain impact
• Prepare managers to deploy changes to those
  directly affected by participation change
• Theme
• Meeting in a Box
• Action Steps
• Communications Expectations

59
Discussion Guide for those at level where
participationwas reduced

• Objectives
• Principles
• Background
• Program Changes
• Impact on You (varied)
• High Potential
• Long term, highly rated
• Medium to long term continuity, medium rated
• Less than 2 years as participant, medium rated
• Medium to long term not highly rated

60
Results

• Much better than expected!
• Why?
• Presented within the framework of compensation
  principles weve been using for quite awhile
• Individuals understood the market basis for
  program changes
• Was not solely an HR or Compensation based
  communication it came from individuals
  managers
• Cascaded from the top so that all managers
  understood and bought in to changes

61
PG / Gillette Merger

• Early questions relating to executive
  compensation elements in light of merger
  announcement
• General employee communications plan as merger
  approaches

62
Early Executive Compensation Questions

• Memo to Gillette participants within 2 weeks of
  merger announcement from Gillette Sr. VP HR
• Impact on 2005 bonus
• Impact on stock options
• What happens before merger and at close?
• What happens if I leave before the merger?
• What happens if I leave after the merger?
• Will Gillette options be granted in 2005?

63
Employee Communications Plan

• Principle employees are our most important
  audience
• Objectives employee engagement, clarity of
  vision, inclusiveness and knowledgeCreate a
  winning, inclusive culture that drives the best
  consumer goods company in the world
• Win hearts and minds

64
Message Track for Internal Communications

• Our employees and our brands are our greatest
  assets
• Stay focused to deliver and win
• Moving forward looking ahead

65
Internal Communications Plan

• Messages from Gillette and PG executives working
  on integration
• Employee profiles
• Steering committee updates
• General Guidance
• Get to Know Events
• Get to Know Senior Leaders
• Day 1 Plan / Week 1 Plan
• First 90 Days You Should Know newsletters