National Association of Corporate Directors

Pearl MeyerChairman

Pearl Meyer & Partners

445 Park AvenueNew York, NY 10022

(22) 644-2300

National Association of Corporate Directors

THE CHANGING LANDSCAPE

OF BOARD REMUNERATION

March 12, 2003

2

Board Remuneration in Holding Pattern during 2002

Calm before the storm Awaiting full impact of

Sarbanes-Oxley

Multiple major governance proposals by regulators

Blue ribbon studies/commentaries/recommendations

Reluctance to increase Board remuneration in year of poor performance, lower payouts and cutbacks Total remuneration up 1% overall among Top 200 U.S.

public corporations

• Smallest increase since 1996

• Average 10% compound per annum rise registered over past five years

3

New Landscape in 2003

Year of major transition

Minimum increase of 20% expected in 2003

50% to 100% rise expected by 2005/6

4

Board Remuneration from 1997 to 2002

Average $154,024 among Top 200

$138,747$133,349

$112,451

$95,416

$154,025$152,626

$0

$40,000

$80,000

$120,000

$160,000

200220012000199919981997

5

Stock Now Major Pay Component

63% of Board pay delivered in stock vs. 44% in 1997

Seven companies pay 100% in stock CVS, Goldman Sachs, Kohls, Pepsi Bottling,

PepsiCo, Staples and UnumProvident

75% grant options and 73% full value shares

50% utilize both options and full value shares Many Directors, like executives and employees, now

hold underwater options

6

Stock Now Major Pay Component

Cash 56%

Equity 44%

Cash 37%

Equity 63%

1997 2002

Cash Retainer

29%

Pension Value4%

Stock Options

23%

Meeting/Chair Fees

& Retainers23%

Full-Value Shares21%

Stock Options

39%

Full-Value Shares24%

Cash Retainer

23%

Meeting/Chair Fees

& Retainers14%

Pension Value<1%

7

Highest and Lowest Paying Industries in 2002among Top 200 Corporations

Highest Payers

Rank

Lowest Payers

Rank

Healthcare 1 Motor Vehicles/Parts 21

Diversified Financial and Brokerage

2 Chemical/Paper 20

Pharmaceuticals 3 Transportation/Delivery 19

Technology 4 Wholesale/Distributors 18

Telecommunications 5 Food/Drug Chains 17

8

2002 Pay Components among Top 200 – Averages and Rankings by Industry

Annual Total Total Stock AwardNo. of Cash Meeting Full-Value Stock TotalCos. Retainer Rank Fees Rank Shares Rank Option Rank Total Rank Remun. Rank

Aerospace 8 $43,175 3 $21,854 11 $46,498 6 $52,397 11 $98,895 6 $163,924 6

Chemical/Paper Products 8 36,750 10 23,167 9 26,395 16 32,238 19 58,633 21 118,550 20

Commercial Banks 10 42,350 4 23,950 7 37,844 10 46,488 14 84,333 14 150,633 8

Consumer Products 9 32,667 11 16,228 17 36,002 11 54,498 9 90,500 10 139,395 12

Diversified Financial & Brokerage 14 40,464 5 23,625 8 54,708 3 79,133 4 133,841 2 201,491 * 2

Electronics/Electrical Equipment 4 31,250 13 18,375 14 37,854 9 37,301 17 75,155 18 137,977 * 16

Entertainment/Hotels/Food Services 6 31,250 13 20,708 13 9,167 21 84,484 3 93,651 8 145,608 11

Food, Beverages & Tobacco 12 39,583 6 20,829 12 45,733 7 49,813 13 95,546 7 155,958 7

Food/Drug Stores Chains 6 29,125 17 10,300 21 31,370 14 58,722 7 90,092 11 129,517 17

General Merch./Specialty Retailers 19 28,816 18 18,336 16 20,293 20 70,991 6 91,283 9 138,435 15

Healthcare 10 26,550 20 29,083 2 47,003 5 138,626 1 185,629 1 241,262 1

Industrial, Machinery & Metal Products 5 52,000 1 13,600 20 47,750 4 35,037 18 82,787 15 148,387 9

Insurance 8 28,438 19 24,335 6 35,863 12 50,283 12 86,145 13 138,918 13

Miscellaneous 8 26,000 21 25,645 5 32,655 13 54,343 10 86,999 12 138,643 14

Motor Vehicle & Parts 8 37,250 9 18,375 14 40,682 8 18,252 20 58,934 20 114,559 21

Petroleum/Crude-Oil Production & Pipelines 13 39,069 7 26,951 4 62,745 2 17,679 21 80,425 16 147,572 * 10

Pharmaceuticals 9 46,722 2 29,750 1 64,809 1 42,146 15 106,955 4 183,428 3

Technology (Excludes Oracle) 13 31,846 12 15,244 19 20,323 19 109,062 2 129,385 3 176,474 4

Telecommunications 8 38,750 8 28,578 3 28,937 15 74,599 5 103,536 5 170,864 5

Transportation/Delivery 10 29,700 16 21,870 10 26,046 17 39,624 16 65,670 19 119,879 * 19

Wholesalers/Distributors 11 30,432 15 15,823 18 23,263 18 56,321 8 79,584 17 125,839 18

Average (All Companies) (c) 199 $35,057 $21,496 $37,055 $59,695 $96,750 $154,025 *

* Includes estimate value of pension benefit.

(a) Board meeting fees are calculated using the actual number of Board meetings held. Committee meeting fees are calculated using the assumption that each committee meets five times and each director

is a member of two committee's, serving as chair of one.

(b) All stock valuations are based on the respective company's stock price on the date of its Annual Meeting. Options valued at 33.3% of grant value.

9

2001/2 Average Total Remuneration* among 1300 Companiesby Industry and Company Size: Cash vs. Equity

Smaller Small Medium Large Top 200Revenues (<$200 mil.) Revenues ($200 mil. - 600 mil.) Revenues ($600 mil. - 1.7 bil.) Revenues ($1.7 - 8.0 bil.) Revenues (>$8.0 bil.)

Total % Tl. Remun Total % Tl. Remun Total % Tl. Remun Total % Tl. Remun Total % Tl. RemunIndustry (26) Remun. Cash Stock Remun. Cash Stock Remun. Cash Stock Remun. Cash Stock Remun. Cash Stock

Aerospace $120,951 49 % 51 %

Apparel & Textiles $20,339 66 % 34 % $34,904 71 % 29 % $54,974 58 % 42 % $109,044 52 % 48 %

Banks/Savings & Loans 26,946 63 37 40,141 61 39 48,700 65 35 88,797 48 52 116,384 58 42

Chemical/Paper & Rubber Products 29,260 61 39 48,032 65 35 49,869 70 30 94,626 48 52 99,258 58 42

Commercial Services 35,730 48 52 37,656 69 31 87,918 40 60 103,969 37 63

Consumer Products/Div. Manufacturers 36,378 59 41 46,267 45 55 59,746 63 37 80,475 56 44 140,995 35 65

Diversified Financial & Brokerage 46,534 26 74 92,812 44 56 138,502 23 77 107,377 43 57 197,284 33 67

Electronics/Electrical Equipment 45,910 40 60 32,493 56 44 68,286 47 53 105,216 36 64 193,241 32 68

Engineering, Construction 13,723 91 9 42,433 61 39 45,730 74 26 102,744 39 61

Entertainment/Hotels/Restaurants 32,483 57 43 64,076 44 56 80,584 56 44 100,556 32 68 124,174 53 47

Food, Beverages & Tobacco 31,788 39 61 41,654 25 75 57,471 91 9 99,949 39 61 147,273 43 57

Food/Drug Stores 29,227 64 36 44,935 71 29 46,339 70 30 96,185 38 62

General Merch./Specialty Retailers 32,376 43 57 47,458 50 50 64,261 42 58 59,447 53 47 121,562 42 58

Healthcare 26,662 34 66 37,083 55 45 59,491 55 45 123,884 33 67 211,441 26 74

Industrial, Machinery & Metal Products 16,640 76 24 49,296 63 37 58,290 61 39 80,940 51 49 131,523 48 52

Insurance 30,512 75 25 50,620 70 30 65,137 54 46 99,556 44 56 124,882 37 63

Miscellaneous 53,310 50 50 36,796 65 35 69,733 46 54 104,724 37 63 108,287 53 47

Motor Vehicles & Parts 29,928 81 19 23,411 61 39 48,988 66 34 61,219 75 25 103,867 58 42

Petroleum/Oil Production, Pipelines & Mining 30,399 77 23 55,686 45 55 90,427 45 55 77,596 60 40 159,917 41 59

Pharmaceutical & Medical Products 74,335 30 70 68,950 40 60 101,053 32 68 156,527 22 78 199,783 37 63

Publishing & Printing 58,700 26 74 65,263 40 60 60,089 53 47 110,614 46 54

Technology 81,065 16 84 142,498 12 88 147,356 25 75 132,864 34 66 264,363 24 76

Telecommunication/Cable 76,116 21 79 58,022 44 56 146,578 20 80 123,821 30 70 188,050 36 64

Transportation/Delivery 29,231 61 39 36,999 54 46 76,476 44 56 70,979 52 48 110,701 45 55

Utility & Energy 26,952 93 7 38,855 63 37 96,417 61 39 85,353 51 49

Wholesalers/Distributors 16,557 63 37 17,113 58 42 66,272 49 51 77,503 38 62 106,537 36 64

Average All Companies $45,309 38 % 62 % $57,051 42 % 58 % $77,697 46 % 54 % $94,281 43 % 57 % $151,776 38 % 62 %

* Excludes value of pension benefit.

10

2003 and Looking Ahead

Board service now involves increased personal commitment Exploding time demands

More frequent and longer meetings Increased preparation time

Heavier responsibilities Greater reputational/personal risk

D&O insurance coverage more costly and limitations sought by carriers

Substantiation of business judgment required Demonstrate due consideration, leave tracks, observe

process Advice of outside counsel

11

2003 and Looking Ahead

Recruitment more difficult About one-third of Boards surveyed adding outside

Directors CEOs and Directors limiting number of seats Functional officers sought (VP Finance, Controller,

etc.) Diversity desired

Compensation increases planned by companies and sought by Directors 43% of companies surveyed in 2002 plan to increase

Board pay in 2003; 81% to increase cash and 28% equity

12

2003 and Looking Ahead

Board work increasingly done at Committee level Audit Compensation Governance/Nominating

Premium meeting fees/retainers for Committees and Chairs based on work loads and responsibilities

Results in wider pay differentiation among Board members Payments to individual Directors for special

assignments more limited None permitted to Audit Committee members

13

Prevalence of Pay Components in 2002 and Future

2002Prevalence

Trend up to 2002

Forecast 2003 and Future Prevalence Amount

Cash Retainer 93%

Board/Committee Meeting Fees

71%

Chair Fees/Retainers 76%

Equity

Options

Full Value Grants

99%

75%

73%

Pension 2%

14

2003 and Looking Ahead

Equity Shift from trend to stock options back to full value

grants Immediate ownership Long term perspective Better alignment with stockholder interests Stock market decline Decline in public view of options

15

2003 and Looking Ahead

Customization and flexibility Opportunity to individualize compensation to suit

diverging Director needs Timing of receipt – current income vs. deferred

investment Elective shift from cash to equity (36%)

• Premium of 10% to 50% Elective shift between forms of equity (12%)

• Active executives• Retirees• Non-profit and government backgrounds

16

2003 and Looking Ahead

Governance Movement to Lead Director rather than non-CEO

Chair or Presiding Director Special compensation arrangements

Current prevalence among Top 200 83% of Chairs are also CEOs 13% of Chairs are non-CEOs who are retired CEOs in

transition 1% of Chairs are non-CEOs who are former CEO/

Chairs of acquired companies Only 2% to 3% are non-employee Chairs

17

2003 and Looking Ahead

Governance Use of outside advisors Share ownership guidelines for Directors

Over 53% prevalence disclosed in 2002 by Top 200 Mandatory holding of stock compensation until

retirement 35% prevalence in 2002 by Top 200

18

2003 and Looking Ahead

Other new governance steps adopted/proposed/ required Committee Charters Code of Ethics for Directors, officers and all

employees Board Guidelines for Director Independence

Independent Committee members for Audit, Compensation and Nominating

Improved process Scheduled meetings Calendars of events/topics Complete minutes

19

2003 and Looking Ahead

Other new governance steps adopted/proposed/ required CEO evaluation Board, Committee and individual Director evaluation Board and Committee executive sessions Limitation on number of Boards

CEO Directors

Letters of resignation with reasons Shareholder approval of all equity plans