Dupont’s 2005 Compensation Committee Report on Executive Compensation
The Compensation Committee (the "Committee") is responsible
for establishing executive compensation policies and programs consistent with
corporate objectives and stockholder interests. The Committee's membership is
determined by the Board and is composed entirely of independent directors. The
Committee meets at scheduled times during the year, and it also considers and
takes action by written consent. The Committee Chair reports on Committee
actions and recommendations at Board meetings. The Committee engages independent
compensation consultants and considers their data and input.
The Company's executive compensation policy is designed
to attract, motivate, reward and retain high quality executives necessary for
the leadership of the Company by aligning their interests with those of the
stockholders and recognizing the individual and team performance of each
executive's effectiveness in meeting the business objectives of the Company. The
Company's executive compensation policy is intended
to provide each executive a total annual compensation that is commensurate with
the executive's responsibilities, experience and demonstrated performance and
competitive with a select group of peer companies as well as a larger group of
other similarly sized industrial companies.
When determining variable compensation, the Committee
evaluates the Company's corporate performance and annual compensation against
the peer group,
which are the same companies included in
the peer group index used in the stock performance graph shown on page 25. The
policy also provides for competitive long-term compensation opportunity when
compared with other major industrial companies, including many of those shown in
the peer group index.
Stock Ownership Guidelines
The Committee believes senior leadership should have a
significant equity position in the Company. Stock ownership guidelines are in
place to better align executive officers and other senior leaders with the
interests of stockholders and to encourage a longer-term focus in managing the
Company. Stock ownership guidelines vary from a minimum of five times base
salary for the CEO to one and one-half times for Vice Presidents. An annual
review is conducted to assess compliance with the guidelines. The CEO and other
named executive officers exceed the ownership guidelines.
Components of
Compensation
Compensation for executive officers consists of the
following components: salary, annual variable compensation, and long-term
incentive grants consisting of stock options and performance-based and
time-vested restricted stock units.
Salary
Consistent with the Company's policy, salaries are about
the median of the peer group. Salary increases for executive officers are based
on individual contribution and position relative to the median of the peer
group. This is the same approach as used for other salaried employees.
Variable Compensation
Plan
The Variable Compensation Plan (VCP) provides approximately
6,600 DuPont employees, including executive officers, with total annual
compensation that varies up
or down based on the performance of the Company, the performance of their
business unit and their individual contribution. Typically, 25% of variable
compensation is paid in DuPont Common Stock, and senior leaders have the choice
of receiving up to 100% in stock.
As previously approved by stockholders,
the VCP limits the annual maximum funding
to 20% of consolidated net income after deducting 6% of net capital employed.
Each year the Committee reviews operating results, excluding all special items,
in determining the overall limit on variable compensation. This ensures that the
amount available for variable compensation fluctuates in relation to the
Company's operating results.
In determining VCP payments to participants for 2004, the
Committee used a formula which consisted of equally weighted components of
earnings per share (EPS) (excluding special items) versus the prior year and
return on investors' capital (ROIC) versus the average of the peer group.
Variable Compensation differentiation by business unit is
based on after-tax operating income (excluding special items), free cash flow,
and revenue versus each unit's financial commitments for the year. In addition,
payments may be differentiated
by platform and business unit based on a qualitative assessment of performance
on the Company's core values: ethics and integrity; workplace environment,
treatment and development of people, and strategic staffing (including
diversity); and safety, health and environmental stewardship.
In arriving at the level of payments for 2004, the
Committee considered that 2004 EPS (excluding special items) were 143% of 2003,
ROIC was 93% of the average of the peer group and average business unit
performance was 126% of pre-established performance metrics.
The combination of the corporate and business unit
performance metrics described above resulted in an average payment of 122% of
the award target (with individual business unit payouts ranging from 89% to
146%). The Committee approved awards for 2004 that totaled 121% of the 2003
grant.
Variable compensation payments for 2004 were 43% of the
maximum amount available under the VCP limit. Over the past ten years, the
Committee has approved payments on average of 48% of the maximum available.
Stock Performance Plan
Long-term incentive grants are made to provide an incentive
primarily for employees responsible for the growth and success of the Company.
Long-term incentive grants are also intended to encourage the ownership
of DuPont stock and thereby further link
the interest of grantees with those of the Company's stockholders. About 2,100
employees, including executive officers, key leaders globally and middle
management, received grants in 2004.
The Committee has established long-term incentive targets
for each participating level of responsibility within the Company based on a
survey of practices by large industrial companies conducted by Mercer Human
Resource Consulting. Mercer's survey included several of the peer group
companies used for benchmarking total annual compensation and for the stock
performance graph referenced above, as well as other publicly traded companies
with multibillion dollar revenues. This broader group of companies, rather than
the peer group is used for determining target long-term compensation because of
the greater variability in value of long-term compensation plans. Targets for
DuPont are set to be near the median long-term incentive opportunity granted by
the survey group.
Stock options typically are granted annually and
individual grants generally range from 0% to 200% of the target for each level
of responsibility to reflect employees' future potential and individual
performance, including achievement of critical operating tasks in such areas as
organizational capacity and strategic positioning. Annual grants are made at
market price on the date of grant, vest in one-third increments over three
years, and carry a term of six years. Options require DuPont stock price
appreciation in order for the grantees
to realize any benefit, thereby aligning employee and stockholder interests.
Beginning with grants made in 2003, the Company has
expensed stock options. The Company has never repriced stock options and has no
intent to reprice options in the future.
A reload feature is available for options granted from
1997 through 2003 to
facilitate stock ownership by management. Participants are eligible for reload
options upon the exercise of those options with the condition that shares
received from the exercise are held for at least two years. Reloads are granted
as nonqualified stock options at fair market value and have a term equal to the
remaining term of the original option. Reload options do not increase the
combined number of shares and options held by the executive prior to the
exercise. Effective with options granted in 2004, option grants do not include a
reload feature.
The Company's long-term incentive
program uses a blend of stock options, performance-based restricted stock units
and time-vested restricted stock units. All options and restricted stock units
are granted under the Company's Stock Performance Plan, previously approved by
stockholders.
These vehicles serve to balance a core program of
options, intended to reward long-term value creation, with an opportunity to
reward appropriate executives for achieving pre-established operational
objectives over a mid-term (three year) time horizon. The utilization of
time-vested restricted stock units provides capital accumulation opportunities
and supports retention goals around key employees. Restricted stock units are
paid out in shares of DuPont stock.
For grants made in 2005, stock options represent 50%-75%
of the long-term grant value.
Performance-based restricted stock units represent about
25% of the 2005 long-term grant value for DuPont corporate officers, who drive
the development and execution
of business strategy. Units are awarded to participants at the beginning of a
three-year performance cycle. At the conclusion of the performance cycle,
payouts can range from 0%-200% of the target grant based on pre-established
performance-based objectives in both revenue growth and ROIC vs. the peer group,
over a three year performance period.
Time-vested restricted stock units represent 25% of a
corporate officer's long-term grant value in 2005. The time-based restrictions
will lapse in accordance with guidelines determined by the Committee, generally
over a three-year period.
The Chairman and CEO receives 50% of value in options and
50% of value in performance-based restricted stock units; he does not receive
time-vested restricted stock units.
Participants below the corporate officer level receive
75% of value in options and 25% of value in time-vested restricted stock units.
In addition to annual grants, special grants of options,
time-vested restricted stock units and performance-vested restricted stock units
are made to employees to recognize advancement to key senior management
positions and/or to recognize significant achievements.
Compensation for the Chief Executive Officer (CEO)
The Committee recommends to the Board specific individual
compensation actions for the Chairman and Chief Executive Officer (CEO) based
upon evaluation of the CEO's performance against Board-approved goals and
objectives. The Committee has the practice of tracking the total annual
compensation of CEOs of the peer group
to assist in the determination of the compensation of DuPont's CEO. The
Committee also monitors the competitive practice of a broader range of Fortune
100 companies. There has been concern over increasing CEO compensation in the
market, relative to that of average employees
without corresponding accountability for performance. Over the past decade,
the position of DuPont's Executive Vice President has been used as an
additional benchmark. Total annual cash compensation for the CEO is currently
about twice that of the Executive Vice President.
In reaching its decision on Mr. Holliday's base pay, 2004
variable compensation award, and long-term incentive grants, the Committee noted
Mr. Holliday's performance and leadership in achieving strong operational
results. The Committee also considered Mr. Holliday's oversight of completion of
the sale of the majority of
the net assets of the Textiles & Interiors segment, significant progress on
corporate-wide efforts to rationalize infrastructure costs and align resources,
and the successful launch of the new DuPont. The following compensation actions
were reviewed and approved by the Board based on its evaluation of
Mr. Holliday's performance:
Base Pay
Mr. Holliday's last salary adjustment was effective
January 1, 2003, when he received a three percent increase consistent with the
salary adjustments for other senior leaders. At Mr. Holliday's request, his 2004
salary remained at the 2003 level of $1,118,000. For 2005 the Board has approved
an increase in salary to $1,255,000. This increase will place his base pay at a
level slightly below the expected 2004 median pay for peer group chief executive
officers.
Variable Compensation
The computation of Mr. Holliday's 2004 variable
compensation grant was consistent with the method followed for other corporate
employees, reflecting the 122% award target based on corporate and business unit
financial results and an individual performance factor of 120%. Mr. Holliday's
variable compensation grant for 2004 was $2,400,000.
Long-term Incentives
In 2004, Mr. Holliday received 245,800 stock options and
64,000 performance-based restricted stock units. In February 2005, the Board
approved a grant to Mr. Holliday
of 300,000 stock options and 70,000 performance-based restricted stock units.
* * *
The federal tax laws impose requirements in order for
compensation payable to the CEO and certain executive officers to be fully
deductible. The Company has taken appropriate actions to maximize its income tax
deduction.
The Compensation Committee believes the executive
compensation programs and practices described above are competitive. They are
designed to provide increased compensation with improved financial results and
offer additional opportunity for capital accumulation, but only if stockholder
value is increased.
COMPENSATION COMMITTEE
Lois D. Juliber, Chair
Alain J. P. Belda
H. Rodney Sharp, III
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