Talking Points - What You Should Be Telling Your Board and Compensation Committee Now (10/12/06)

Current State of Affairs

• Executive Compensation is in the spotlight as never before:
  • Impact of new SEC rules
  • Importance of restraint and transparency
• Compensation Committees have new challenges but full Board needs to also be engaged.

Ten Important Issues for Boards and Compensation Committees to Consider

1. Is the executive program supported/respected internally?
2. Are surveys used fairly to monitor pay competitiveness?
3. Are internal equity considerations given equal weight to external competitiveness?
4. Is fairness to executives balanced with fairness to the company and shareholders?
5. Is the program administered consistently and not opportunistically?
6. Does the Committee monitor top executives' total compensation? Is total direct compensation reasonable given the Company's relative size and performance?
7. Does the Committee know what is owed to executive officers under various termination of employment and CIC scenarios?
8. Does the Committee know the total compensation implications of changing one element of pay?
9. Is the Committee receiving objective advice? Are the pros and cons and potential risks, of new proposals presented fairly?
10. Does the program meet evolving best practices and new standards for executive compensation design and board governance?

Hot Button Issues in Executive Compensation

• Perks – planes trains and automobiles
• Retirement benefits; SERPS
• Change of Control and Severance
• Why have a contract at all?
• Zero based thinking: don't just repeat every year. Is added incentive really needed?

Board and Compensation Committee Concerns

• Avoiding criticism/enhancing reputation
• High standards of care and due diligence
• Obtaining objective input
• Linking incentives to corporate strategy
• Assessing total compensation
• Avoiding surprises
• Shaping the debate on CEO pay for performance

What Committees Should be Asking From Their Advisors?

• Independence; duty of loyalty
• Due diligence; duty of care
• Proactive advice on best practices
• Identification of potential pitfalls and red flags
• Independent recommendations on CEO pay and benefits
• Ways to improve total compensation transparency and executive compensation governance
• Objective advice but also value-based points of view

What Lawyers and Consultants Should Now be Doing

• Be more than scribes for management; duty is to corporation (through Board)
• Present the full disclosure approach to boards, rather than the minimal required disclosure approach (and real potential liability e.g., Tyson and future SEC enforcement actions)
• The obligation of counsel to bring to their boards important guidance that directors need to see first hand (not distilled into a short summary or screened out entirely)
• Don't just hold your nose – do something