Introduction to Executive Compensation and Benefits

1
Introduction toExecutive CompensationandBenefit
s

• Session 203
• March 26, 2007
• John Lowell
• Max Schwartz

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Whats Hot?

• Disclosure issues
• Taxation issues
• Accounting issues
• Performance-based rewards
• Transparency
• Corporate governance
• More and more restrictive legislation

3
Whats Not?

• Perquisites without reason
• Massive severance benefits
• Benchmarking to the 75th percentile
• Option backdating
• Cooking the books and keeping your pay

4
How To Summarize Current Trends

• The most admired companies still provide large
  amounts of executive compensation and benefits
• But, their proxies are well laid out, and explain
  the rationales for all components
• General Electric (GE) recently filed their proxy
  with the SEC
• Its a good way to look at whats hot

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The Summary Compensation TableWhat Do They Get?
6
Lets Focus on Equity Compensation Stock Awards
and Option Awards

• Pages 16 and 17 of the Proxy discuss the
  rationale for awards
• Focus on performance
• Weighing somewhat equally the costs of the grants
  with the value of the grants as a compensation
  tool
• But remember whats in the table is NOT what
  the executive will actually realize as income.

7
Current Equity Award IssuesThe Very Basics

• Accounting FAS 123R
• Taxation
• Constructive receipt
• Section 162(m)
• Section 409A
• Alignment with stakeholder values and corporate
  goals
• Governance

8
Specific Equity Awards

• Stock Options and Restricted Stock Units
• Balance of upside potential with volatility
• Retention device
• Aligns performance with rewards
• Performance Share Units (PSUs)
• CEO only
• Fully at risk
• Performance targets must be met over a 5-year
  period

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Grants of Plan-Based Awards Table
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Deferred Compensation

• Most very large companies offer executives the
  ability to defer both salary and bonus
• GE offers executives the opportunity to defer
  salary and receive returns which vary between
  8.5 and 14
• Bonuses may be deferred into GE stock units, SP
  500 units, or cash units
• Some are subject to 5-year vesting

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Deferred CompensationBasic Technical Issues

• 409A
• Initial deferral election
• Changes in elections
• Dont forget regular constructive receipt rules
  either
• Proxy
• Above market returns must be disclosed as
  compensation
• Entire balance gets disclosed
• Matching on salary deferral plans
• Incentive to stay until end of vesting period
• Disclosed as compensation

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Deferred Compensation Table
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SERPsHistorically

• Always been viewed as something that could easily
  be provided
• FAS 87 accounting
• Old proxy table disclosed annual benefits, but no
  values
• Probably one of weaker areas of corporate
  governance historically
• May not be performance based

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SERPsThe Big Changes

• 409A
• New Pension Table
• Present values
• Numbers look larger than all but pension
  professionals ever imagined
• How does the SERP tie to the stated compensation
  philosophy?

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SERPs
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Pension Benefits Table
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Payments Upon Termination

• Severance
• 409A complications (pay cap)
• Disability
• Death
• Change-in-control
• 280G
• Double trigger/Single trigger

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GE Philosophy Magnifies Current Trends

• No agreements for
• Employment
• Severance
• Change-in-control
• Current hot governance issue at many
  organizations
• Are the executives in place to serve
  shareholders? OR,
• Are they just setting themselves up for a big
  payday

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Related Sessions at This Years Meeting

• 303 SEC Proxy Rules
• 702 Actuarial Guide to Stock Options
• 705 409A
• 802 FAS 123R
• Each of these is a more in-depth look at a
  particular topic

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Questions
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