What Directors Should Know About Executive Compensation

1. NACD Directors’ College Spring 2011 April 16, 2011 Co-Presented by: Henry OehmannGrant Thorntonhenry.oehmann@us.gt.com919.881.2773 Ron RaxterWilliams Mullenrraxter@williamsmullen.com919.981.4304

2. Agenda Overview of executive compensation Update-legal and regulatory environment Compensation and business event planning Top Ten Compensation Considerations Page 2

3. Overview of Compensation Objectives Three key objectives of your compensation program are the following: Attract and hire new executive skills Retain talent Motivate behavior and performance Page 3

4. The Compensation Consultant’s Perspective Start with the compensation philosophy Discuss and utilize each of the pay elements Link pay to company performance Use pay to support the major planning events: succession, strategic and crisis plans. Page 4

6. Geographic location

7. Supplemental executive perquisites, retirement benefits

8. Typically not at-risk based on performance

9. Basic benefits competitively targeted against the market

10. Total direct compensation

11. Long-term incentive opportunity, typically covers 3 – 5 year period

12. Long-term performance measures reviewed and approved periodically

13. Total cash compensation, calibrated to target market

14. Pay at-risk for performance

15. Short-term (annual) performance measures reviewed and approved annually

16. Base salary (not at-risk for performance)

17. Calibrated to target market based on job content and scopeExecutive Perquisites Core Benefits Long-Term Incentive Total Rewards Annual Incentive Total Cash Base Salary Bothdecision processes and competitiveness of these elements must be consistent with applicable tax provisions Page 5

18. Start with the Compensation Philosophy Balance executive needs with shareholder expectations; Rewarding performance: What is a fair share of profits for executives? Equity pay for executives can be dilutive for shareholders: Where’s the balance? Set a comparable position within the market; Should the 75th percentile be a default? Who should be compared? Page 6

19. Start with the Compensation Philosophy (continued) Assess role of each pay element and trade-offs; Base salary anchors the program; How should cash incentives and stock add to the mix? Retirement packages? Termination and CIC benefits? Perquisites and the public. Address the link between pay and performance. Page 7

20. Discuss the Role and Mix for Each of the Pay Elements Salary - attract and retain Incentives - leverage performance Risk: How much incentive pay is reasonable? Bonus at target-100% or 50% times base? Stock options vs. restricted stock; SERPS; Change-in-control pay. Page 8

21. Risk Adjustments for Incentive Compensation Risk adjusted (lower) awards Mandatory Deferrals Claw backs if performance revised Set up claw back bank Longer-term performance periods Less focus on short-term performance Re-evaluate golden parachutes and golden handshakes Page 9

22. Benchmarking and Peer Group Comparisons What is an appropriate peer group? Who should decide on the final peer group? How should the peer group data be used? Compensation comparisons; Performance assessments; Should more than one peer group be used? Regional vs. national vs. international Performance vs. compensation Page 10

23. Compensation Consultants What is the role of the outside compensation consultant? Who should choose the consultant? What are selection criteria? How should their role be communicated? Page 11

24. Stock-based Compensation Which type to use? Stock options; Restricted stock; Phantom stock. How to add stock compensation to mix; Annual grants Vesting requirements Ownership guidelines. Accounting, tax, securities law issues. Page 12

25. Link Pay to Company Performance Pay and performance decisions can be planned or discretionary; Planned: Goals set in advance and pay is formula based; Discretionary: Decisions are based on a retrospective view with wide latitude. Most plans permit both approaches; IRC §162(m) limits discretion to qualify. Page 13

26. Performance Metrics and the Role of Incentive Pay Key financial measures include “R’s”: ROA, ROI, ROE, ROS, RONA, ROIC, etc. Earnings drives the numbers: EPS, earnings growth, EBIT, EBITDA, EVA, etc. Non-financial measures are: Balanced score card approach; Milestone achievement; and Industry benchmarks Page 14 Page 14

27. Summary Comments Begin with the end in mind: pay philosophy drives pay decisions. Take a total compensation view; not a piece-meal element-by-element approach; The “Grasso” lesson Link pay and performance; Do a compensation stress-test; Use tally sheets Run multiple scenarios Page 15

28. Directors' Compensation - NACD Principles Five Principles Director compensation should be determined by the board and disclosed completely by shareholders. Director compensation should be aligned with the long-term interest of shareholders. Compensation should be used to motivate director behavior. Directors should be adequately compensated for their time and effort. Director compensation should be approached on an overall basis, rather than as an array of separate elements. Page 16

29. Directors' Compensation - NACD Best Practices Best Practices Boards should: Establish a process by which directors can determine the compensation program in a deliberate and objective way. Set a substantial target for stock ownership by each director and a time period during which this target is to be met. Define a desirable total value of all forms of director compensation. Pay directors solely in the form of equity and cash – with equity representing 50 to 100 percent of the total; dismantle the existing benefit programs and avoid creating new ones. Adopt a policy stating that a company should not hire a director or a director’s firm to provide professional services to the corporation. Disclose fully in the proxy statement the philosophy and process used in determining director compensation and the value of all elements of compensation. Page 17

30. Directors' Board Compensation Page 18

31. Directors' Committee Compensation Page 19

32. Landscape of Legal and Regulatory Changes Dodd-Frank Act: Compensation committees Compensation consultants Compensation clawbacks Say on Pay Pay for Performance disclosures Separation of roles of CEO and Chairman Page 20

33. Independence of Compensation Committee Current proxy rule: Companies must state if they have a compensation committee and disclose any committee members who are insiders or have interlocks with the compensation committees of other entities. SEC proposed rules under Dodd-Frank: Stock exchanges must require that each member of a company’s compensation committee be a member of the board of directors and be "independent." These proposed rules do not apply if the company allows the independent directors to approve compensation, only to companies that have a committee to approve compensation. In developing a definition of independence, the exchanges would be required to consider factors such as: • The board member's sources of compensation, including any consulting, advisory or compensatory fee paid by the company to the board member. • Whether the board member is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company. As with all listing standards, exchanges would need to seek the approval of the SEC before adopting them. Page 21

34. CompensationCommittee Authority and Funding SEC proposed rules under Dodd-Frank: Exchanges will be required to adopt listing standards providing that the compensation committee of a listed company: • May, at its sole discretion, retain or obtain the advice of a compensation advisor. • Is directly responsible for the appointment, payment and oversight of compensation advisors. • Must be funded appropriately by the listed company. Page 22

35. CompensationAdvisor Selection Current proxy rules: Disclose use of compensation consultants and fees paid (unless paid only for consulting on broad-based plans or the provision of non-customized benchmark data). SEC proposed rules under Dodd-Frank: Exchanges must adopt listing standards providing that a compensation committee may select a compensation consultant, legal counsel or other advisor only after considering the following five independence factors: • Whether the compensation consulting firm employing the compensation advisor is providing any other services to the company. • How much the compensation consulting firm that employs the compensation advisor has received in fees from the company, as a percentage of the consulting firm’s total revenue. • What policies and procedures have been adopted by the compensation consulting firm employing the compensation advisor to prevent conflicts of interest. • Whether the compensation advisor has any business or personal relationship with a member of the compensation committee. • Whether the compensation advisor owns company stock. The exchanges have the option to impose additional considerations. Page 23

36. CompensationConsultant Conflicts of Interest Disclosure Current proxy rules: Disclose use by the compensation committee of compensation consultants (unless paid only for consulting on broad-based plans or the provision of non-customized benchmark data). SEC proposed rules under Dodd-Frank: The proposed rules modify the existing rules to require disclosure about whether: • The compensation committee has retained or “obtained” the advice of a compensation consultant. • Management has retained the advice of a compensation consultant under certain conditions. • The work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and a discussion of how the conflict is being addressed. • The proposed rule would also eliminate the current disclosure exception for consultants paid only for consulting on broad-based plans or the provision of non-customized benchmark data. Page 24

37. Compensation Clawbacks “Clawback” refers to taking back monies or benefits previously awarded because of changed circumstances. Current rules (SOX -2002):Clawback of incentive-based compensation of CEOs and CFOs in the event of an accounting restatement attributable to material noncompliance with financial reporting requirements. TARP extended to numerous officers. Dodd-Frank: Strengthens SOX to require the clawback of incentive-based executive compensation, including stock options, even if no one, including the executive whose compensation is at issue, engaged in misconduct. The amounts subject to clawback are based upon the overstated results for the three years preceding the restatement date. Compensation would be recalculated according to the restated performance. SEC Action: SEC v. McCarthy, (N.D. Ga. March 3, 2011) is the second time the SEC has obtained clawback of executive compensation without alleging that the CEO in question personally engaged in any wrongdoing. The SEC's position is that the issuer's "misconduct" alone is enough, and that it need not establish any personal misconduct. The one federal district court decision that has been rendered on this issue supports the SEC position. SEC v. Jenkins (D. Ariz. 2010). Page 25

38. Say on Pay Requirements Current law: TARP companies must conduct annual shareholder say-on-pay votes. SEC final rules under Dodd-Frank: • At least every three years (starting in 2011 for large public companies), companies mustgiveshareholders a non-binding say-on-pay vote. Issuers must present four choices for the vote on the frequency of shareholder say-on-pay votes (annual, biennial, triennial, or abstain). • At least every six years, issuers mustput the say-on-pay frequency question to a nonbinding shareholder vote. • Brokers and other “street name” holders will not be able to vote to approve executive compensation in the absence of a beneficial owner direction. • Companies must address in their proxy statement's "compensation discussion and analysis" (CD&A) section whether and how they took into account the results of the say-on-pay vote. • Companies may exclude future shareholder proposals on say on pay or the frequency of say-on-pay votes only if the company adopts the provision receiving a majority vote. • The results of and the company's decision on vote frequency does not have to be reported on a Form 8-K until 150 days after the annual meeting. • Smaller reporting companies do not have to comply for two years (shareholder annual meetings occurring on or after January 21, 2013). • TARP companies do not have to comply until after TARP is repaid. Page 26

39. Golden Parachute Payments Current proxy rules: Large public companies must disclose in proxy statement a description of all compensation that may be triggered by a proposed transaction and the aggregate value of such payments, unless de minimis in amounts. SEC Final Rule: Public companies seeking shareholder approval for a merger or sale of substantially all assets are required to conduct a separate non-binding shareholder vote regarding any compensation paid to named executive officers ‘‘that is based on or otherwise relates to’’ the proposed transaction (unless these arrangements were subject to an earlier say on pay vote). • Acquired companies are required to disclose all golden parachute compensation in both narrative form and a new table (eliminates de minimis amount exclusion). • Rule does not apply to golden parachute arrangements between the acquiring company and the named executive officers of the target. • Third-party bidders need not include the "golden parachute" disclosure and approval in tender offer materials filed with SEC (as they may not have access to that information). Page 27

40. Illustrate Pay for Performance Current proxy rules: Require extensive tablature disclosure and written discussion of executive compensation and how it relates to financial performance. Dodd-Frank: SEC must issue rules that require disclosure of: • information that shows the relationship between executive compensation actually paid and the financial performance of the issuer as measured by stock price and paid dividends. • the ratio of “median employee compensation” to CEO compensation. • whether any director or employee can hedge ownership of equity securities. Page 28

41. Separation of CEO and Chairman Current proxy rules: Companies must disclose their leadership structure every year in the proxy statement and discuss why they believe the structure is appropriate. Dodd-Frank: SEC must require companies to explain in their proxy statements why the positions of chairman and CEO are separate or combined. Many shareholder advocates believe that best practices require separation of the roles of CEO and chair. Page 29

42. Linking Compensation Plans and Key Events Succession Planning Strategic Planning Crisis Planning Page 30

43. Succession, strategic and crisis plans Three key events should be a focus for the Board; Each plan can be linked to the executive pay package; One size will not fit all; Do the math: How much will the CIC cost? Page 31

44. Compensation Strategies for a Business Planning Event Ranking: 1.2.or 3 Priority: H-high; M- medium; L-low. Page 32

45. Major Event Planning The plan is developed independently of the compensation program; Compensation should support each of the plans: Strategic direction and pay for performance; Succession planning and promotion and retention; Crisis plans: Attract key talent for a turnaround Retention strategies to hold talent on board Page 33

46. 10 Possible Considerations Review your company’s process for determining executive compensation. If your company does not have a compensation committee,review whether it is appropriate to appoint one. Start a dialogue with your company’s stakeholders to solicit feedback on the company’s executive compensation practices. Review the total direct compensation provided to the company’s executive officers to ensure a connection between pay and performance. Assess the right mix of cash and equity Consider changing the bonus plan Assess the effectiveness of your deferred compensation plan Update your peer group and compensation benchmarking. Page 34

47. 10 Possible Considerations (continued) Consider conducting a compensation risk assessment. Assess whether your current compensation program fosters executive retention. Consider adopting a restricted share plan. For large reporting companies, review the Compensation Discussion & Analysis in your proxy statement to ensure that your company is telling a compelling story. Conduct an analysis of institutional shareholders to determine which of them follow voting guidelines provided by RiskMetrics Group, Glass Lewis & Co. or other proxy advisory firms, and which have their own voting guidelines. Review your CIC and other post-termination payments and update to corporate governance standards. Page 35

48. Questions Addressed at the Conclusion Page 36

49. J. Henry Oehmann, IIIDirector – National Executive Compensation Services T: 919.881.2773E: Henry.Oehmann@gt.com Ronald D. RaxterAttorney At LawT: 919.981.4304E: rraxter@williamsmullen.com

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