Executive Change-in-Control and Severance Report · vide CIC-related cash severance benefitsto NEOs through a formal program or ... , and resulting in new “best practices ... 50%

Report Sept 26, 2011

Independence. Client-Focus. Expertise.1133 Avenue of the Americas | New York, NY 10036 | Phone: (212) 921-9350 | Fax: (212) 921-9227 | capartners.com

Executive Change-in-Control and Severance Report

october 2011

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[continued on next page]

Table of ContentsIntroduction ��3

Executive Summary ��4

Governing Documents & Covenants ��6• Non-Compete,Non-Solicitation/Interference,Confidentiality,ReleaseofClaims

Change-in-Control (“CIC”) Practices ��9• DefinitionofChangeinControl

• ValueofCICPaymentsforCEOandCFOuponTermination

• ProtectionPeriod

• CashSeveranceMultiples

• CashSeveranceFormulaComponents

• DefinitionBonusincludedinSeveranceFormula

• TriggerforCashSeverance

• BonusinYearofTermination

• TreatmentofEquity

• WelfareBenefitsContinuation

• §280GTaxGross-ups

Severance Practices ��22• CashSeveranceMultiples

• CashSeveranceFormulaComponents

• DefinitionBonusincludedinSeveranceFormula

• BonusinYearofTermination

• WelfareBenefitsContinuation

Recent Related Regulatory and Legislative Actions ��28• Dodd-FrankWallStreetReformandConsumerProtectionAct

• SayonGoldenParachutes

• SayonPay

Shareholder Advisory / Institutional Investor Policies ��30• InstitutionalShareholderServices(“ISS”)

• Fidelity

Company Profile ��33


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IntroductionCompensationAdvisoryPartners’2011ExecutiveChange-in-ControlandSeveranceReportprovides:

• Acomprehensivereviewofcurrentseniorexecutive(NamedExecutiveOfficers)CICandseverancepracticesamongtwodatasets,basedonproxystatementdisclosuresandincentiveplandocuments:

1.DowJonesIndustrialAverageComponentCompanies(“Dow30”)

Dow 30 Companies (n=30) Revenues

Market Cap. as of 12/31/2010

Number of Employees

($MM) ($MM) (000s)75thPercentile $113,315 $172,691 260

Median $62,036 $111,583 12725thPercentile $38,557 $60,008 83

2. “Mid-Sized”companiesreflecting20Fortune1000companieswithrevenuesclosestto$2.75B(“Mid-SizedCompanies”)

Mid-Sized Companies

(n=20) RevenuesMarket Cap.

as of 12/31/2010Number of Employees

($MM) ($MM) (000s)75thPercentile $3,006 $6,931 9

Median $2,753 $4,155 625thPercentile $2,584 $1,765 4

• Areviewofchangestoseniorexecutive(NamedExecutiveOfficers)CICandseverancepracticesfrom2007–2010amongtheDow30(marketleading/trendsettingcompanies)

• Observationsregardingourfindings,recenttrendsandnear-termoutlook

ThisreportwasauthoredbyMeredithSt.LawrenceandMattVnuk,withassistancefromHarshaRaghu-nath,MelissaBurekandMargaretEngel.Questionsandcommentsshouldbedirectedto:

• Meredith St. Lawrence,[email protected](212)921-9373

• Matt Vnuk,[email protected](212)921-9364

• Melissa Burek,[email protected](212)921-9374

NoteAs we find access to timely and targeted advice/data key to an informed and deliberate decision-making process, CAP regularly publishes research and articles focused on executive and director compensation, and related corporate governance issues, designated as a “CAPFlash.” To sign up, please visit our website at www.capartners.com.

Additional information on Compensation Advisory Partners can be found in the Company Profile section of the Appendix (page 33).


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Executive SummaryIn2007, theSECrequiredpubliccompanies toprovideproxy-baseddisclosureof thepotentialvalueofseverance and change-in-control (“CIC”) payments to proxy-level named executive officers (“NEOs”).Sincethen,seniorexecutiveseveranceandCICprogramshavebeensubjecttoincreased/intensescrutinybyshareholders,shareholderadvisors,institutionalinvestors,and,morerecently,legislators.

Asaresult,manycompanieshaverevisedtheirseveranceandCICpoliciestoprovidelessgenerouspay-mentsuponCICand/ortermination,andothershaveeliminatedtheseprogramsorscaledbackeligibility.Still,“goldenparachute”paymentsremainahigh-profileelementofpaypackages.Benchmarkingexistingplansagainstothercompaniescanhelpvalidateexistingbenefitsor indentifyopportunitiestoadjustar-rangements.

• CAP’sstudyfoundthat60%oftheDow30and85%ofourMid-Sizedcompanydatasetcurrentlypro-videCIC-relatedcashseverancebenefitstoNEOsthroughaformalprogramorindividualcontracts,andnearly90%ofthecompaniesreviewedprovideCIC/severance-relatedbenefitswhenlong-termandannualincentiveplanprovisionsareincluded.

• CashseverancemultiplesforNEOshavenotchangedsignificantlyforDow30companiesoverthepastthreeyears,andCEOcashseveranceformulasarecomparableamonglargerandsmallersizedcompa-niesstudied.AmongtheDow30,doubletriggerequityvestinguponaCIC(requiringaterminationofemploymentandaCIC)hasincreasedinprevalencefrom50%(in2007)to70%in2010,anddoubletriggerprovisionsareequallyprevalentamongoursampleofMid-Sizedcompanies.Whileexcisetaxgross-upshavebecomeaminoritypracticeamongtheDowcompanies,theyarestillprevalentamongMid-Sizedcompanies.

AmorecomprehensivedescriptionofnotablefindingsfromCAP’sseniorexecutive(NEO)CIC-andsever-ance-relatedresearchareincludedonthenextpage.

TheAppendixprovidesadditionaldetailonanddiscussionof:

• TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-Frank”),andrelatedprovi-sionsincludingSayonPayvotesandSayonGoldenParachutevotes

• InstitutionalShareholderServices(ISS)anditsrelatedpolicies

• Fidelityanditsrelatedpolicies

OutlookWehavewitnessedchangestoCIC-andseverancerelatedbenefitprovisionsatasomewhatacceleratedpaceoverthelast12-24monthsandexpectthegeneralmarkettrendofbenefitreductiontocontinue.Wealsoexpectthepoliciesandpracticesofsmallermarketcapitalization.companiestomigratetowardsthoseoflargercompanies,followingtheleadofcompaniessuchastheDow30,andresultinginnew“bestpractices”inthisarenaoverall.

Purpose of CIC ArrangementsCompanies enter into severance and CIC arrangements with the intention of maximizing shareholder value. These arrangements were originally established as a tool to encourage management continuity and also negotiation without the distraction of personal considerations. However, over time, many external critics have come to view them as a management windfall for executives.


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Element of Pay

NOTABLE FINDINGSDow 30 Mid-Sized Companies

Cash Severance (CIC)

Prevalence • CEO:57%(17of30cos.);consistentwith2007• NEOs:57%(17of30cos.);consistentwith2007

Prevalence• CEO:85%(17of20cos.)• NEOs:85%(17of20cos.)

Multiples – Most Prevalent• CEO:47%use≥2.99x(unchangedsince2007)• NEOs:30%use≥2.99x;29%(5of17cos.)use2x

and“Other”(nearlyunchangedsince2007)

Multiples– Most Prevalent• CEO:≥2.99xisthemostprevalentmultiple(50%)

NEOs:2xisthemostprevalentmultiple(50%)

Formula – Most Prevalent• CEO:71%calculatepaymentusing“base+bonus”

(downfrom76%in2007)• NEOs:71%calculatepaymentusing“base+bonus”

(downfrom76%in2007)

Formula– Most Prevalent• CEO:70%calculatepaymentusing“base+bonus”• NEOs:70%calculatepaymentusing“base+bonus”

Definition of Bonus – Most Prevalent• CEO:83%incorporatethetargetbonusvalue

(upfrom69%in2007)• NEOs:83%incorporatethetargetbonusvalue

(upfrom69%in2007)

Definition of Bonus – Most Prevalent• CEO:50%incorporatethetargetbonusvalue• NEOs:43%incorporatethetargetbonusvalue

Bonus Payment in Year of Termination– Most Prevalent• CEO:29%usetarget;24%useactual;47%donot

contractuallycommittoprovidingabonus(consistentwith2007)

• NEOs:35%usetarget;12%useactual;53%donotcontractuallycommittoprovidingabonus(consistentwith2007)

Bonus Payment in Year of Termination– Most Prevalent• CEO:45%usetarget;25%useactual;30%donot

contractuallycommittoprovidingabonus• NEOs:35%usetarget;30%useactual;35%donot

contractuallycommittoprovidingabonus

Treatment of Equity (CIC)

Acceleration – Prevalence• CEO / NEOs:80%(24of30cos.);consistentwith

2007Trigger – Most Prevalent• Nearly70%usedouble-triggervestingofequity

(upfrom50%in2007)

Acceleration - Prevalence• CEO / NEOs:100%(20of20cos.)

Triger – Most Prevalent• 75%usedouble-triggerequityvesting

Tax Gross-Ups

Prevalence• CEO:81%ofcompaniesdonotprovideanyform

oftaxgross-uponCICpayments(upfrom65%in2007)

• NEOs:84%ofcompaniesdonotprovideanyformoftaxgross-uponCICpayments(upfrom65%in2007)

• Allbutonecompanyprovidingsomeformofataxgross-uptotheCEOand/orNEOshave“grandfathered”thisbenefitforcurrentexecutivesandcommittedtoprospectivelynotofferingthebenefittofutureparticipants

Prevalence• CEO:50%provideexcisetaxgross-upand30%of

companiesdonotprovideanyformoftaxgross-uponCICpayments

• NEOs:50%provideexcisetaxgross-upand35%ofcompaniesdonotprovideanyformoftaxgross-uponCICpayments

• 1/3ofthecompaniesprovidingsomeformofataxgross-uptotheCEOand/orNEOshave“grandfathered”thisbenefitforcurrentexecutivesandcommittedprospectivelytonotofferingthebenefittofutureparticipants

Cash Severance Multiples (Non-CIC)

Multiples – Most Prevalent• CEO:57%haveamultipleof2x–2.99x

(downfrom63%in2007)• NEOs:42%haveamultipleof2x–2.99x

(generallyconsistentwith2007)

Multiples – Most Prevalent• CEO:29%use2x-≥2.99x;24%use1x-<1.99x• NEOs:35%use1x–<1.99x

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Governing Documents & Covenants � Non-compete, non-solicitation / interference, confidentiality, release of claims


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Cash Benefit Covered through CIC Plan or Employment AgreementSeniorexecutiveseveranceand/orCICbenefitsaretypicallycoveredunderCICSeveranceplansorindi-vidualemploymentagreements.Companiesmayprovideadditionalbenefitsinannualincentive,long-termincentiveandretirementplans.Thechartbelowshowstheprevalenceofcompaniesprovidingenhancedcash-basedCICbenefitstoexecutivesthroughanemploymentagreementorCIC/severanceplan.

41%47% 53%

59%53% 47%

0%10%20%30%40%50%60%70%

Dow 302010

(17 of 30 cos.)

Dow 302007

(17 of 30 cos.)

Mid-Sized Cos.2010

(17 of 20 cos.)

Chief Executive Officer

29% 35%53%

71% 65%47%

0%20%40%60%80%

Dow 302010

(17 of 30 cos.)

Dow 302007

(17 of 30 cos.)

Mid-Sized Cos.2010

(17 of 20 cos.)

Named Executive Officers

Employment Agreement CIC / Severance Plan

CAP Comment: While eighty-five percent (17 of 20) of the Mid-Sized companies provide cash severance to NEOs through a formal program or individual agreement(s), prevalence is lower among Dow 30 companies, fifty-seven percent (17 of 30).

CAP Comment: Adopting a CIC / severance plan allows for greater flexibility to modify the program in light of changing market conditions. Over the near-term, we expect the prevalence of such plans to remain somewhat steady, though continued change in the provisions is expected.

NoteIn many cases, the CIC / severance plan is provided to executives only and should not be interpreted as broad-based corporate practice.


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Prevalence of Covenants

Post-terminationpayments,cashand/orequityareoftentiedtocertaincovenants,intendedtoprotectthecompany.Theprevalenceofsomecommoncovenantsisdescribedinthechartbelow.1

54%46%

50%58%

46% 40%35% 31% 35%35%27%

15%

0%

20%

40%

60%

80%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


50%

38%45%

54%

38% 35%35%

12%

35%31% 27%15%

0%

20%

40%

60%

Dow 302010

Dow 302007

Mid-Sized Cos.2010

Named Executive Officer

Non-Compete Non-Solicit/Non-Interference Confidentiality Release of Claims

CAP Comment: Recently, as shown in the graph chart above, there has been an increase in the prevalence of these provisions. Over the near-term, we expect this trend to continue.

Non-Compete Preventstheemployeesfromworkingforadirectcompetitor.

Non-Solicitation Preventssolicitationofcustomersoremployees.

Non-Interference Preventstheemployeefrominterferingwithcertainrelationships:vendor/supplier,referralofcustomers.

Confidentiality Preventstheemployeefromtransferringconfidentialinformationandmaterials.

Release of Claims

Anagreementbetweentheemployerandtheemployeewhichlegallyreleasestheemployerfromallclaimsofdiscriminationandwrongfultermination,withemployeeagreeingnottosuetheemployerinreturnforseverance.

1 Prevalencedataisbasedonproxydisclosure.ChartsreflectsubsetofcompaniesthatprovideapaymentuponCIC.Dow30subsetreflects26companies;Mid-Sizesubsetreflects20companies.

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Change-in-Control (“CIC”) Practices � Definition of Change in Control

� Value of CIC Payments for CEO and CFO upon Termination

� Protection Period

� Cash Severance Multiples

� Cash Severance Formula Components

� Definition Bonus included in Severance Formula

� Trigger for Cash Severance

� Bonus in Year of Termination

� Treatment of Equity

� Welfare Benefits Continuation

� §280G Tax Gross-ups


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Definition of CIC ForpurposesoftriggeringaCIC-relatedpayment,companiesdefineaCICinanumberofways.ExamplesofCICdefinitions(forcompensationpurposes)amongtheDow30arebrokenoutbelow.2

Change in Control DefinitionPrevalence in Dow 30

Prevalence of Definition in Dow 30

Section 409(A) Definition of CIC2

Acquisition of Voting Power 63%19of30cos.

30%:5companies25%:2companies20%:10companies15%:1companyn/d:1company

30%

Merger, Consolidation or Reorganization 67%20of30cos.

80%:2companies50%+:8companies

Allorsubstantiallyall:4companiesn/d:6companies

-

Change in Board Composition 63%19of30cos.

67%:2companies50%/Majority:17companies -

Liquidation or Dissolution 57%17of30cos.

Completeliquidation:14companiesAllorsubstantiallyall:2companies

n/d:1company-

Sale of a Substantial Portion of Assets 43%13of30cos.

50%:3companies40%:2companies

Allorsubstantiallyall:7companiesn/d:1company

33%

2 Section409AoftheIRCdefinesthetreatmentof“non-qualifieddeferredcompensation”forfederalincometaxpurposes.


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Value of CIC Payments for CEO and other NEOs upon TerminationTheSECrequiresdisclosureintheannualproxystatement(DEF14A)ofestimatedpaymentstoNEOs,as-sumingaCICandotherterminationsoccuratyear-end.ThetablebelowsummarizesthevaluesdisclosedbytheDow30forCEOsandotherNEOs.34

CEO Summary Statistics4

2010 Total Value of Est. CIC Payment upon Termination ($000s)

Total Value of Est. CIC Payment as % of Market Capitalization

(as of 12/31/2010)Dow 30 CEOs Mid-Sized Cos. CEOs Dow 30 CEOs Mid-Sized Cos. CEOs

75thPercentile $41,661 $29,838 0.074% 0.797%Median $27,675 $14,019 0.057% 0.436%

25thPercentile $17,007 $8,574 0.015% 0.177%

NEOs (excluding CEO) Summary Statistics4

2010 Total Value of Est. CIC Payment upon Termination ($000s)

Total Value of Est. CIC Payment as % of Market Capitalization

(as of 12/31/2010)Dow 30 NEOs Mid-Sized Cos. NEOs Dow 30 NEOs Mid-Sized Cos. NEOs

75thPercentile $15,716 $7,626 0.018% 0.224%Median $9,662 $3,752 0.011% 0.109%

25thPercentile $6,593 $2,244 0.007% 0.055%

CAP Comment: The magnitude of these potential payments often draws the attention of outside observers.

CAP Comment: Describing this value as a percent of market capitalization provides one reference point when considering if these values could be prohibitive for a potential sale or merger. When a transaction is considered, the cost of this type of benefit is considered for all relevant employees (often a larger group of executives), not just NEOs. At companies with smaller market capitalizations, the aggregate value as a percent of market capi-talization can be substantially greater.

3 Valuesreflectadoubletriggersituation,wherebothaCICandinvoluntaryterminationofemploymentoccur.

4 SummarystatisticsreflectcompaniesprovidinganypaymentuponCICandinvoluntarytermination(excludeszeros).


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Definitions CIC Cash Severance Benefit TriggerCIC-relatedcashseverancepaymentscanhavea“single,”“double”or“modifiedsingle”trigger.Thechartbelowsummarizestheprevalenceoftheseprovisions.

Prevalence of Trigger for Cash Severance

Dow 30 (2010) Dow 30 (2007)Mid-Sized Companies

(2010)CEO NEOs CEO NEOs CEO NEOs(%) (%) (%) (%) (%) (%)

Single Trigger - - 6% 6% 5% 5%Double Trigger 100% 100% 94% 88% 90% 95%Modified Single Trigger - - - 6% 5% -

Single BenefitwillbecomepayableautomaticallyuponaCIC.

DoubleBenefitbecomepayableafterbothaCICandtheterminationoftheexecutive.Theterminationcanbeeitherbythecompanywithout“Cause”orbytheexecutivefor“GoodReason,”withinaspecifiedperiodfollowingtheCIC.

Modified Single Allowstheindividualtoterminateemploymentvoluntarily(“walkaway”)foranyreasonduringaspecifiedperiod(“window”)followingaCICandreceiveseverancepayments.

CAP Comment: ISS’ policies consider change-in-control payments without involuntary job loss or substantial diminution of duties (“single” or “modified single” triggers) to be an “egregious” pay practice (see section entitled “Shareholder Advisory / Institutional Investor Policies”).

CAP Comment: There has been a trend away from the “single” or “modified single” triggers. This is demon-strated in our sample where 100% of the Dow 30 companies now require a “double” trigger event before CIC-related payments are made.

Protection Period“Protectionperiod”describesthetimeframeinwhichaterminationbythecompanymustoccurfollow-ingachange-in-controlinordertoreceiveenhanced(CIC-related)cashseverancepayments.Typicallytheprotectionperiodextendsfortwoyears.

Protection Period

(# of years)

Dow 30 (2010) Dow 30 (2007) Mid-Sized Companies (2010)CEO NEOs CEO NEOs CEO NEOs(%) (%) (%) (%) (%) (%)

1 19% 19% 25% 19% 14% 14%2 68% 68% 69% 68% 72% 79%3 13% 13% 6% 13% 14% 7%


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Cash Severance Multiples (CIC)5

Prevalence of Benefit Dow 30 (2010) Dow 30 (2007) Mid-Sized Cos. (2010)

CEO 57%(17of30cos.)

57%(17of30cos.)

100%(20of20cos.)

NEOs 57%(17of30cos.)

57%(17of30cos.)

100%(20of20cos.)

CIC-relatedcashseverancepaymentsaremostoftendeterminedusingamultipleofcertaincomponentsofannualcompensation(mostoftendefinedasbase+bonus,seenextpage);theprevalenceofsuchmultiplesisdescribedbelow.Somecompaniesusedifferentmethodstodeterminethesecashpayments,whichwehaveclassifiedas“Other.”6

47% 47% 50%

24%29% 25%

0%6% 5%

29%18% 20%

0%10%20%30%40%50%60%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


30% 36%

20%29% 29%

50%

12% 12% 10%

29%23% 20%

0%10%20%30%40%50%60%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


≥ 2.99x 2x - 1x - Other

CAP Comment: The data indicates that companies typically differentiate between the multiple provided to the CEO and other named executive officers. There is no significant difference in CEO cash severance multiples between the Dow 30 and Mid-Sized companies.

CAP Comment: ISS’ policies define any new or extended agreements that provide for CIC payments exceeding 3x base salary and average/target/most recent bonus to be an “egregious” pay practice.

5 ChartsreflectsubsetofcompaniesthatprovideacashpaymentuponCIC.Dow30subsetreflects17companies;Mid-Sizesubsetreflects20companies.

6 ExamplesofthesetypesofpaymentsincludepaymentsonlydeterminedthroughCommitteediscretionorwherecompaniescontinuecertainpayments,suchasbasesalary,overaspecificperiodoftime(basedonyearsofserviceand/orbasedontheremainingtermofanindividual’semploymentagreement).

NoteNearly half of the companies in the Dow 30 (13 out of 30 companies) do not provide additional change-in-control benefits beyond those defined in long-term incentive plans.


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Cash Severance Formula (CIC)7

Asdescribedonthepriorpage,theformulausedtocalculateCIC-relatedcashseverancepaymentsmostoftenincorporatesamultipleofbasesalaryandbonus.Thegraphsbelowdescribetheprevalenceofdiffer-entdefinitionsofcompensationusedinthecashseveranceformulathatdeterminescertainCIC-relatedpayments.

24% 18% 15%

71% 76% 70%

6% 6% 15%

0%20%40%60%80%

100%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


18% 12% 15%

71% 76% 70%

12% 12% 15%

0%20%40%60%80%

100%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


Base only Base + Bonus Other



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Definition of Bonus included in Cash Severance Formula (CIC)8

For companies that includeabonusvalue in the cash severance formula, the chartbelowdescribes theprevalenceofvariousdefinitionsof“bonus.”

83%69%

50%

9% 8%0%0%

15%29%

8% 8%21%

0%

20%

40%

60%

80%

100%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


83%

69%

43%

17% 17%7%

0%7%

29%

0%7%

21%

0%

20%

40%

60%

80%

100%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


Target Actual - 1 year Actual (multi-year avg.) Highest of (target or actual)

CAP Comment: Our research found a shift to greater use of ‘target’ bonus in CIC-related cash severance for-mulas among Dow 30 companies over the past three years. We expect Mid-Sized companies will follow the lead of the Dow 30 and shift to a greater use of a “Target” bonus definition.

Target Bonus Targetbonusinyearoftermination.

Actual Bonus 1-year(e.g.,prioryear)actualbonusinyearoftermination.

Actual Bonus (multiple-year average) Theaveragebonuspaidoverapriornumberofyears(e.g.,threeyears).

“Highest of” Bonus Severanceisbasedonamultipleofthegreateroftwocriteria,usuallythetargetbonusintheyearofterminationortheaverageactualbonusoverapriornumberofyears.

8 ChartsreflectsubsetofcompaniesthatprovideacashpaymentuponCIC.Chartreflectsasubsetofcompaniesthatinclude“base+bonus”inthecashseveranceformula.


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Bonus Payment in Year of Termination (CIC)9

Ifaterminationoccursduringtheprotectionperiodfollowingachange-in-control,somecompanieswillprovideapro-ratedbonusforserviceduringtheyearoftermination.Thegraphsbelowhighlightthepreva-lenceofcompaniesthatprovideapro-ratedbonusintheyearoftermination,and,ifso,thedefinitionofbonusused.

29%35%

45%

24% 24% 25%

47%41%

30%

0%

20%

40%

60%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


35%29%

35%

12%18%

30%

53% 53%

35%

0%

20%

40%

60%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


Target Actual None

CAP Comment: Around one-half of Dow 30 companies do not have a contractual commitment to provide a pro-rated bonus for service during the year of termination following a CIC.



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Treatment of Equity (CIC)10

Accelerationofthevestingofoutstandingequityawards/compensationcantakeplacethroughasingle-triggerordouble-triggerevent.

10%

30%25%

70%

50%

75%

20% 20%

0%0%

20%

40%

60%

80%

Dow 302010

Dow 302007

Mid-Sized Cos.2010

Equity Vesting Trigger (CIC)

Single Double No Acceleration

Single Trigger BenefitswillbecomepayableautomaticallyuponaCIC.

Double TriggerBenefitsbecomepayableafterbothaCICandtheterminationoftheexecutive.Theterminationcanbeeitherbythecompanywithout“Cause”orbytheexecutivefor“GoodReason,”withinaspecifiedperiodfollowingtheCIC

CAP Comment: Our research revealed a marked shift away from single trigger equity acceleration, among Dow 30 companies, over the past three years. We believe that other companies are following this trend.

CAP Comment: Single trigger equity acceleration has received significant negative attention from shareholder/proxy advisory services over the past few years.

10 Chartsreflectcompletedatasets.Dow30datasetreflects30companies;Mid-SizeDatasetreflects20companies.


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Prevalence of Welfare Benefits Continuation Following CIC11

Approximately90%ofcompaniesprovidecontinuationofwelfarebenefitsfollowingachange-in-control.Thetablebelowoutlinestheprevalenceofcompaniesinoursamplethatprovidewelfarebenefitsandthemostprevalenttimeperiodthebenefitsarecontinued.

# of Month of Benefits

Continuation

Dow 30 (2010) Dow 30 (2007) Mid-Sized Companies (2010)

CEO NEOs CEO NEOs CEO NEOsNone 41% 41% 53% 65% 40% 30%

6 6% 6% - - - -12 6% 6% - 6% - 15%18 - - - - 5% 5%24 12% 24% 12% 6% 15% 30%36 35% 24% 35% 24% 35% 20%

Life - - - - - -

CAP Comment: Historically. the period of benefits continuation has often aligned with the period represented by the cash severance multiple (e.g., 3x = 3 years / 36 months). However, in our experience, some companies are decreasing the period for benefit continuation to 18 months or using the “lesser of ” multiple period (e.g., x = 12 months) or 18 months.

11 ChartsreflectsubsetofcompaniesthatprovideacashpaymentuponCIC.Dow30subsetreflects17companies;Mid-SizeDatasetreflects20companies.


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Prevalence of Outplacement Benefits Following CICSomecompaniesprovideoutplacementbenefitsupon termination followingachange-in-control,meanttofacilitatethejobsearchprocessofaterminatedindividual.Outplacementbenefitsaretypicallyprovidedoveraspecifiedtimeperiodormaybedescribedasadollarvalue.Thetablebelowsummarizesthepreva-lenceofcompaniesinoursamplethatprovideoutplacementservicestoterminatedCEOsandnamedex-ecutiveofficersfollowingaCIC.

Prevalence of Outplacement Dow 30 (2010) Dow 30 (2007)Mid-Sized Companies

(2010)

CEOPrevalence 17of30cos. 17of30cos. 20of20cos.

Yes 35% 18% 30%No 65% 82% 70%

NEOsPrevalence 17of30cos. 17of30cos. 20of20cos.

Yes 29% 29% 40%No 71% 71% 60%

Prevalence of Retirement Benefits Following CICIt isminority practice to provide enhanced retirement benefits upon termination following aCIC; anyspecialretirementbenefitsprovidedaretypicallydonesothroughlumpsumpaymentoftheaccruedvalue,acceleratedvesting,andadditionalageandservicecredits.

Retirement Benefit Dow 30 (2010) Dow 30 (2007)

Mid-Sized Companies (2010)

CEO NEOs CEO NEOs CEO NEOsPayout of Lump Sum of Accrued Value - - - - - -Additional Age / Service Credit 17% 10% 17% 13% 20% 20%Accelerated Vesting 3% 3% 3% 6% - -None 80% 87% 80% 84% 80% 80%

CAP Comment: Historically, the practice of providing enhanced retirement benefits was more prevalent than it is today. Over time, we expect the already low prevalence shown above to continue to decrease.


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Tax Gross-ups (CIC)IRC§280Glimitsacompany’staxdeductionforcertainpaymentsmadetoexecutivesasaresultofachange-in-control.Generally,ifparachutepaymentstoanexecutiveexceed2.99xthe“baseamount,”paymentsinexcessof1xthe“baseamount”aresubjecttopenalties.

• The“baseamount”istheexecutive'saverageW-2incomeforthe5yearsprecedingtheCIC

• Penaltyimposedontheexecutiveisa20%non-deductibleexcisetaxontheexcesspayment

• Penaltyimposedonthecorporationisthelossofthetaxdeductionontheexcessparachutepayments

Originally,“goldenparachute”provisionswereaddedtotheIRCbytheDeficitReductionActof1984.Inreactiontoperceivedexcessiveseverancepayments,Congressindicatedthatthepurposewastodiscouragegoldenparachutepaymentstoseniorexecutivesofacompanyintheeventofacorporatetakeover.Inreality,IRCSection280Gruleswerecounterproductive.

• SomecompaniesthatwerepreviouslyreluctanttoadoptCICprovisions,felttheyhadCongressional“determination”thatparachutepaymentsupto2.99xbaseamountwereappropriate

• Employer-provided“gross-up”paymentsontheexcisetaxesimposedonparachutepaymentsbecamerelativelycommon

• Thegross-upanddenialofdeductionsforgoldenparachutesincreasedexpensetoanacquiringcom-panyanddecreasedtheamountavailabletopayshareholders

Intermsofcompensationandexecutivebenefits,companiesconsiderthispotentialtaxinanumberofways,includingprovidingafullexcisetaxgross-up,aconditionalgross-up,amodifiedcapgross-up,acutback,ornogross-uppayment.Currentpracticesarebrokenoutonthenextpage.

Excise Tax Gross-up

Companypaystheexecutivewithsufficientadditionalamounts(the“gross-up”amount)topaytheparachuteandincometaxesonthegross-upamountandtheparachutetaxonthepaymentsandbenefitstowhichtheexecutiveisentitledwithoutthegross-up.Thepurposeistoputtheexecutiveinthesameafter-taxpositionthathe/shewouldhavebeenabsenttheexcisetax.

Conditional Gross-up

Companypaystheexcisetaxonlyifthepaymentsexceedthesafeharborbyacertainamount(e.g.,110%or$50,000).Ifnot,paymentsarecutbacktothesafeharbor.

Modified Cap Companycutsbackpaymentstothesafeharborlimitonlyiftheindividualwouldreceiveagreaterafter-taxbenefitthaniftheexcisetaxwerepaidbytheindividualontheexcessparachutepayments.

Cutback Companycutsbackallpaymentstothesafeharborlimitsothatnoexcisetaxisimposedontheindividualunderanycircumstance.

CAP Comment: The once prevalent practice of providing §280G tax gross-ups has been declining in prevalence, especially since enhanced disclosure of these potential payments was required by the SEC in 2007 and share-holder/proxy advisory groups began targeting this as a poor pay practice.


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Tax Gross-ups (CIC) (continued)12

Thegraphsbelowillustrate theprevalenceofgross-upbenefitsprovidedtoCEOsandNEOsinourtwodatasets,forCIC-relatedpayments.

11%27%

50%

8% 8% 10%0% 0% 5%0% 0% 5%

81%65%

30%

0%

20%

40%

60%

80%

100%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


8%23%

50%

8% 12%5%0% 0% 5%0% 0% 5%

84%

65%

35%

0%

20%

40%

60%

80%

100%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


Full Excise Tax Gross-up Conditional Gross-up Modified Gross-up Cutback None

CAP Comment: There has been a reduction in the number of Dow 30 companies providing a full excise tax gross-up since 2007, reflective of the broader marketplace. We expect this trend to continue in Mid-Sized companies.

CAP Comment: Nearly all of the Dow 30 companies providing some form of a tax gross-up for CIC-related payments to the CEO or NEOs have “grandfathered” this benefit for current executives and committed prospectively to not offer the benefit to future participants. The trend to eliminate tax gross-ups for future CIC-related payments is not as prevalent among the Mid-Sized companies, with only one-third committing to remove the benefit for future plan participants. We expect that, over time, an increasing number of companies will eliminate the tax gross-up benefit for new plan participants.

12 ChartsreflectsubsetofcompaniesthatprovideapaymentuponCIC.Dow30subsetreflects26companies;Mid-Sizesubsetreflects20companies.

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Severance Practices � Cash Severance Multiples

� Cash Severance Formula Components

� Definition of Bonus included in Severance Formula

� Bonus in Year of Termination

� Welfare Benefits Continuation


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Cash Severance Multiples (Non-CIC)13

Prevalence of Benefit Dow 30 (2010) Dow 30 (2007) Mid-Sized Cos. (2010)

CEO 57%(16of30cos.)

53%(16of30cos.)

85%(17of20cos.)

NEOs 57%(17of30cos.)

57%(17of30cos.)

90%(17of20cos.)

Uponinvoluntarytermination(“notforCause”),companieswilloftenprovidecashpaymentsthataretypi-callydeterminedusingamultipleofcertaincomponentsofannualcompensation(mostoftendefinedasamultipleofbasesalaryplusbonusorjustbasesalary);theprevalenceofsuchmultiplesisdescribedbelow.

6% 6% 6%

57%63%

29%

6%12%

24%31%

19%

41%

0%10%20%30%40%50%60%70%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


0% 0% 0%

42% 41%

24%29%

35% 35%29%

24%

41%

0%

15%

30%

45%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


≥ 2.99x 2x - 1x - Other

CAP Comment: Some companies use different methods to determine these cash payments, which we have classified as “Other.” Examples of “Other” types of payments include payments determined through Committee discretion or where companies continue certain payments, such as base salary, over a specific period of time (based on years of service and/or based on the remaining term of an individual’s employment agreement).

CAP Comment: Severance multiples are typically lower in non-CIC situations / terminations and we expect this relationship to be maintained even if companies lower CIC severance benefit multiples in the future.

13 Chartsreflectsubsetofcompaniesthatprovideacashpaymentupontermination.

NoteNearly half of the companies in the Dow 30 (13 out of 30 companies) do not provide contractual severance benefits.


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Cash Severance Formula (Non-CIC)14

Asdescribedonthepriorpage,theformulausedtocalculatecashseverancepaymentsmostoftenincorpo-ratesamultipleofbasesalaryandbonusoramultipleofjustbasesalary.Thegraphsbelowshowthepreva-lenceofdifferentdefinitionsofcompensationusedinthecashseveranceformulathatdeterminesseverancepaymentsintheabsenceofaCIC.

57%50%

24%

43%50% 52%

0% 0%

24%

0%

20%

40%

60%

Dow 302010

Dow 302007

Mid-Sized Companies2010


59% 53%29%

41% 47% 42%29%

0%20%40%60%80%

Dow 302010

Dow 302007

Mid-Sized Companies2010


Base only Base + Bonus Other

14 Chartsreflectdatasetofcompaniesthatprovideacashpaymentupontermination.


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Definition of Bonus included in Severance Formula (Non-CIC)15

For companies that includeabonusvalue in the cash severance formula, the chartbelowdescribes theprevalenceofvariousdefinitionsof“bonus”thatareused.

72%

50% 44%

14% 13% 12%0%

24% 22%14% 13%

22%

0%

20%

40%

60%

80%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


72%

50%42%

14% 12%0%0%

26% 29%

14% 12%

29%

0%

20%

40%

60%

80%

Dow 302010

Dow 302007

Mid-Sized Cos.2010


Target Actual - 1 year Actual (multi-year avg.) Highest of

CAP Comment: Our research found a shift to a greater use of ‘target’ bonus in cash severance formulas among Dow 30 companies over the past three years. We expect Mid-Sized companies will follow the lead of the Dow 30 and shift to a ‘Target’ bonus definition.

Target Bonus Targetbonusinyearoftermination.

Actual Bonus 1-year(e.g.,prioryear)actualbonusinyearoftermination.

Actual Bonus (multiple-year average) Averagebonuspaidoverapriornumberofyears(e.g.,threeyears).

“Highest of” BonusSeverancebenefitiscalculatedusingamultipleofthegreaterofthetargetbonusortheaverageactualbonusoverapriornumberofyears.

15 Chartsreflectdatasetofcompaniesthatprovideacashpaymentupontermination.Datasetreflectsasubsetofcompaniesthatinclude“base+bonus”inthecashseveranceformula.


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Prevalence of Welfare Benefits Continuation Following Termination (Non-CIC) Somecompaniesprovidecontinuationofwelfarebenefitsinanon-CICrelatedtermination.Thetablebelowoutlinestheprevalenceofcompaniesinoursamplethatprovidewelfarebenefitsandthetimeperiodsoverwhichbenefitsarecontinued.

Benefits Continuation

(# of mons.)

Dow 30 (2010) Dow 30 (2007) Mid-Sized Companies (2010)

CEO NEOs CEO NEOs CEO NEOsNone 50% 47% 50% 41% 35% 29%

6 6% 6% - - - -12 13% 24% 13% 24% 6% 35%18 - - - - 6% 18%24 31% 24% 38% 35% 29% 12%36 - - - - 6% -

Life - - - - 6% -Remainder of Employment Agreement

- - - - 12% 6%

CAP Comment: Historically, the period of benefits continuation has often aligned with the period represented by the cash severance multiple (e.g., 3x = 3 years / 36 months). However, in our experience, some companies are decreasing the period for benefit continuation to 18 months or using the “lesser of ” multiple period (e.g., x = 12 months) or 18 months.


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Prevalence of Outplacement Following Termination (Non-CIC)Some companiesprovideoutplacementbenefitsupon termination (typically “not forCause”),meant tofacilitatethejobsearchprocessofaterminatedindividual.Outplacementbenefitsareprovidedoveraspeci-fiedtimeperiodormaybedescribedasadollarvalue.Thetablebelowsummarizestheprevalenceofcom-paniesinoursamplethatprovideoutplacementservicestoterminatedCEOsandNEOs.

Prevalence of Outplacement Dow 30 (2010) Dow 30 (2007)Mid-Sized Companies

(2010)

CEOPrevalence 16of30cos. 16of30cos. 17of20cos.

Yes 44% 44% 29%No 56% 56% 71%

NEOsPrevalence 17of30cos. 17of30cos. 17of20cos.

Yes 35% 35% 35%No 65% 65% 65%

Prevalence of Retirement Benefits Following Termination (Non-CIC)Itisminoritypracticetoprovideenhancedretirementfollowinganyformoftermination,suchasalumpsumpaymentoftheaccruedvalue,acceleratedvesting,and/oradditionalageandservicecredit.

Retirement Benefit Dow 30 (2010) Dow 30 (2007)

Mid-Sized Companies (2010)

CEO NEOs CEO NEOs CEO NEOsPayout of Lump Sum of Accrued Value - - - - 10% 10%

Additional Age / Service Credit 7% 7% 3% 10% - -

Accelerated Vesting - - - - - -None 93% 93% 97% 90% 90% 90%

CAP Comment: No more than three companies in either dataset provided additional retirement benefits for executives. Of those few providing a benefit, companies provide additional age and service credit for 12 – 24 months following termination.

CAP Comment: Historically, the practice of providing enhanced retirement benefits was more prevalent than it is today. Over time, we expect the already low prevalence to continue to decrease.

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Recent Related Regulatory and Legislative Actions

� 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act

� Say on Golden Parachutes

� Say on Pay


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2010 Dodd-Frank Wall Street Reform and Consumer Protection ActIn2010,the“Dodd-FrankWallStreetReformandConsumerProtectionAct”(Dodd-Frank)wassignedintolawbyPresidentObama,legislationthatincludedexecutivecompensationandcorporategovernancereforms.TwoDodd-Frankreformsrelevanttothisresearchreportaremandatorynon-bindingSayonPayand“goldenparachute”shareholderadvisoryvotes.

Weanticipatealong-termconsequenceofthislegislationwillbeacontinueddecreaseinthevalueofgoldenparachutepayments.Forcompaniesthatdonotadjusttheirprograms,therequiredvotewillensurethatcompaniesdisclosethebusinesscaseformaintainingorgrandfatheringcertainpractices,suchasexcisetaxgross-upprovisionsandchange-in-controlpayments.

Say on Golden Parachutes

TheSEC’srulesrequireaseparatenon-bindingshareholderadvisoryvoteongoldenparachutecompensa-tion(relatedtoasale,consolidationormerger),totheextentnotpreviouslysubjecttoapriorgeneralSayonPayvote.Ifanychangesaremadeafterthemostrecentvotethatwouldresultinanincreaseinthevalueofthegoldenparachutepayments,thecompanywillhavetoholdasubsequentvoteongoldenparachutes.

Thefinalrulesalsorequirenewtabulardisclosureandenhancednarrativedisclosureofgoldenparachutepayments. Tabular disclosure of the following elements related to golden parachute payments for eachnamed executive officer is required: cash severance payments, dollar value of accelerated stock awards,in-the-moneyvalueofoptionsaccelerated,andpaymentstocancelstockoroptions;pensionanddeferredcompensationenhancements;perksandbenefits;gross-uppayments;other;total.

Say on Pay

ThefinalDodd-Frankrulesrequirecompanieswithapublicequityfloatabove$75milliontohaveaSayonPayVoteinitsfirstproxyforanannualmeetingafterJanuary21,2011,andtohaveadditionalvotesatleastonceeverythreeyears.Proposalsrequestthatshareholdersapprove,throughanon-bindingadvisoryvote,thecompensationofNamedExecutiveOfficersasdisclosedintheproxystatement,bothintheCompensa-tionDiscussionandAnalysisandthesupportingtabularnarrativedisclosure.TheproposedrulesindicatethatfutureCD&Adisclosurewillrequirecompaniestodiscusshowtheircompensationpoliciesanddeci-sionswereinfluencedbytheirSayonPayvoteresults.

For additional information on compensation-related Dodd-Frank provisions, see related CAPFlashes:

• September 2011: 2011 Proxy Season Summary - Say on Pay

• June 2011: 2011 Proxy Season Updates – Say on Pay and New Fidelity Voting Guidelines

• April 2011: SEC Proposed Rules on Compensation Committee and Consultant/Advisor Independence

• March 2011: SEC Final Rules on Say on Pay and SEC Timing Updates

• March 2011: FDIC and Related Agencies Propose Rules Under Dodd-Frank Reform Act Relating to Incen-tive-based Compensation Arrangements

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Shareholder Advisory / Institutional Investor Policies

� Institutional Shareholder Services Policies (“ISS”)

� Fidelity


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Institutional Shareholder Services Policies (“ISS”)ISS,aninfluentialshareholderadvisoryservice,providesrecommendationsfor(amongotherthings)com-pensation-relatedshareholdervotes.Initsvotingpolicies,ISShighlightsspecificpaypracticesthatitviewsas“egregious”andmayindependently,“bythemselves,[be]sufficientlyproblematictowarrantWithholdorAgainstvotesinmostcircumstances.”Certain“egregious”paypracticesarespecificallyrelatedtochange-in-control/severancepaymentsandinclude:

• Excessiveperquisitesortaxgross-ups, includinganygross-uprelatedtoaseculartrustorrestrictedstockvesting

• Neworextendedagreementsthatprovidefor:

■ CICpaymentsexceeding3xbasesalaryandaverage/target/mostrecentbonus

■ CICseverancepaymentswithoutinvoluntaryjoblossorsubstantialdiminutionofduties(“single”or“modifiedsingle”triggers)

■ CICpaymentswithexcisetaxgross-ups(including“modified”gross-up)

Companieswith“egregious”practicesaremorelikelytoreceiveeitheranAgainstvoterecommendationforSayonPayorAgainst/WithholdrecommendationonCompensationCommitteemembersinyearswhennoSayonPayvoteisontheballotorwhentheBoardhasfailedtorespondtoconcernsfrompriorSayonPayvotes.

For Say onGolden Parachute votes, ISS plans tomake vote recommendations on a case-by-case basis,thoughthevoterecommendationshouldbeconsistentwithISS’pre-existingpoliciesonproblematicpaypracticesrelatedtoseverancepackages.Specificfeaturesthatmaypotentiallyleadtoanegativevoterecom-mendationincludesomeofthefollowing:

• Recentlyadoptedormateriallyamendedagreementsthatincludeexcisetaxgross-upprovisions

• Recentlyadoptedormateriallyamendedagreementsthatincludemodifiedsingletrigger

• SingletriggerpaymentsthatwillhappenimmediatelyuponaCIC,includingcashpaymentandsuchitemsastheaccelerationofperformance-basedequitydespitefailuretoachieveperformancemeasures

• SingletriggervestingofequitybasedonadefinitionofCICthatrequiresonlyshareholderapprovalratherthantransaction

• Potentiallyexcessiveseverancepayments

• Recent amendmentsorother changes thatmaymakepackages so attractive as to influencemergeragreementsthatmaynotbeinthebestinterestofshareholders

For additional information, see the associated December 2010 CAPFlash: “ISS 2011 Policy Updates – Here Comes Say on Pay.”


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FidelityFidelity,alarge/influentialinstitutionalinvestor,hasstatedinitscompensation-relatedproxyvotingguide-linesthatitwillgenerallyvoteagainstproposalstosupportgoldenparachutes16.Additionally,indetermin-ingwhetherthereisamisalignmentbetweencompensationandshareholderinterests,Fidelitywilltakeintoaccount, amongother factors,whether theCompensationCommitteewaivedequityvesting restrictionsand/orthecompanyadoptedorextendedagoldenparachutewithoutshareholderapproval.

For additional information, see the June 2011 CAPFlash: “2011 Proxy Season Updates – Say on Pay and New Fidelity Voting Guidelines.”

16 Fidelitydefinesa“goldenparachute”as:“employmentcontracts,agreements,orpoliciesthatincludeanexcisetaxgross-upprovision;singletriggerforcashincentives;ormayresultinalumpsumpaymentofcashandaccelerationofequitythatmaytotalmorethan3xannualcompensation(base+bonus)intheeventofaterminationfollowingachange-in-control.”

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Company Profile � Compensation Advisory Partners

Please contact us at (212) 921-9350 if you have any questions about the issues discussed above or would like to discuss your own executive compensation issues. You can access our website at www.capartners.com for more information on executive compensation.

ReportCompensation Advisory Partners LLC (CAP) isanindependentconsultingfirmspecializinginexecutiveanddirectorcompensation,andrelatedcorporategovernancematters,withauniquecombina-tionofdeepexpertiseandintenseclient focus.Comprisedofsenior industryveteransfromMercerandKPMG,CAP’sconsultantshaveservedasindependentadvisortoBoardsandseniormanagementatmanyoftheworld’slargestandleadingcompaniesintheareasofcompensationgovernance,strategyandprogramdesign.

Formed in 2009, CAP’s founding principle is that compensationshouldbeamanagementtooltohelpsupportbusinessstrategy.Ourconsultingexperienceenablesour teamtoassist companies incre-atingandimplementingdefensible,performance-orientedexecutivecompensation programs thatmeet high governance standards in achangingregulatoryenvironment.

The staff has strong industry sector knowledge and a broad clientbase,rangingfromthelargestFortune100multi-nationalstostart-upcompaniesacrossallmajorindustries.

Thefirm’sbreadthofexperience,researchandclientelekeepitattheforefrontoftrendsandpracticesinallareasofexecutiveanddirectorcompensation.

CompensationAdvisoryPartnersprovidesBoardsofDirectorsandCompensationCommitteesbest-in-classadvice,whilealsomeetingtheincreasingneedtodemonstratetheindependenceandobjectivityofthatadvicefromatrulyindependentplatform.

Pleasecontactusifyouwouldliketodiscussyourownexecutiveordirectorcompensationissues.Youcanalsoaccessourwebsiteatwww.capartners.comformoreinformation.

Formed in 2009, CAP’s founding principle is that compensation should be a management tool to help support business strategy. Our consulting experience enables our team to assist companies in creating and implementing defensible, performance-oriented executive compensation programs that meet high governance standards in a changing regulatory environment.