Executive Compensation Update

1. Executive Compensation Update Bill Sweetnam John McGuiness Eric Cotts October 19, 2006

2. Overview • §409A • SEC Exec Comp Disclosure Rules • Backdated Options • Congressional Hearings

3. §409A • New Notice 2006-79 extends until end of 2007: • Good faith compliance period • Deadline for documentary compliance • Transition relief for distribution elections • Final regs still anticipated later this fall

4. §409A • Reporting and Withholding • Not addressed in Notice 2006-79 • Guidance should be issued shortly • Guidance should require reporting and withholding on §409A violations in 2006 • Anticipated extension of time for reporting of annual deferred compensation amounts

5. §409A Problem Areas – Retirement Plans • Determining key employees • Avoiding material modifications • changes made to related qualified plan • 30-day rule for new participants • no prior participation in any similar plan • §401(k) mirror plans • contingent benefit rule under §401(k)

6. §409A Problem Areas – Equity Plans • Definition of service recipient stock • options to buy subsidiary stock • FMV of private company stock • Stock option exercise extensions • RSUs with retirement feature • Deferrals of RSUs

7. §409A Problem Areas – Executive Severance • Fitting arrangements into §409A exemptions • bifurcation • good reason payment triggers • Treatment of medical and other post-employment fringes

8. §409A PPA amends §409A to provide adverse treatment for funding (including rabbi trusts) of NQ plan benefits for public company officers where: • Qualified DB plan in controlled group is “at risk” • Plan sponsor in bankruptcy • Underfunded qualified DB plan termination occurs

9. SEC Exec Comp Disclosure • New rules apply to 2007 proxy statements • issued in August 2006 • Significant changes to the January 2006 proposed rules on option grants and pension plan disclosures

10. SEC Exec Comp Disclosure Requirement of a single total compensation figure provided for each covered executive, including: • Value of option and other equity grants • Annual change in actuarial value of DB plans (qualified and nonqualified) and above-market earnings on NQDC • use FAS 87 assumptions • Perks – $10,000 exemption

11. SEC Exec Comp Disclosure Significantly expanded retirement and severance benefits disclosures • Pension benefits table – lump sum values • FAS 87 assumptions used • NQDC table • Potential severance/change of control benefits payments estimated • assuming 12/31/06 termination

12. SEC Exec Comp Disclosure Stock option grant disclosures • Rules do not use the term “backdating” or prohibit the practice • Increased disclosure of (1) timing of grant, and (2) determination of exercise price • Additional disclosure required if exercise price not based on closing price on grant date

13. SEC Exec Comp Disclosure New “Compensation, Discussion and Analysis” section discussing policies and decisions, including: • Option and equity grant practices • Decisions to waive or modify performance goals • Impact of accounting and tax treatment, including Section 162(m) • 2007 proxy will address 2006 decisions

14. Backdated Options SEC and others investigating whether companies engaged in backdating stock option grants • SEC investigating over 100 companies • Issuance of option with exercise price below value on date of grant (“discounted option”) may result in securities law disclosure issues, accounting charges, tax issues and shareholder suits

15. Backdated Options • Potentially significant tax issues for companies and executives with discounted options • §162(m) – FMV and shareholder approval requirements • §409A – Generally subject to – and will violate – §409A rules (unless vested before 2005) • Disqualification of ISOs – nonqualified option treatment

16. Backdated Options • IRS requesting information about options as part of audit • Copies of SEC reports or filings or internal investigation reports regarding the company's practice with grants and exercise of stock options • Details regarding any options referenced in the filings or reports exercised during the years under examination • Date all corporate action completed for option grant • Effective date of option grant • Fair market value of underlying stock at these two dates

17. Congressional Hearings • Driven by backdating stories • Senate Finance hearing focuses on government’s response to backdating • Are current tax laws, regulations adequate to “rein in and prosecute” backdating? • Senate Banking hearing at which SEC Chairman Cox testified

18. Congressional Hearings • Big focus of the Senate Finance hearing on Section 162(m) • Complaints it has skewed compensation away from cash comp to options and other “performance-based compensation” • Chairman Grassley and Baucus both indicated may need to revisit 162(m)

19. Congressional Hearings Senate Finance Committee may look at taxation of certain “fringe benefits” • Particular focus on executive health benefits • noted lavish benefits despite nondiscrimination rules • Much discussion of income tax treatment of executives’ personal use of corporate aircraft • Appropriateness of tax gross-ups

20. Congressional Hearings • What will happen under new Congress • Continued emphasis on executive compensation, no matter what party is in control • If change in control, expect more restrictions on deferred compensation • Source of revenue • Sense of fairness • Interaction with qualified retirement plans