Executive Compensation in the Say-on-Pay
Era Winning the Shareholder Vote — Without Losing the Election Presenters: Doug Friske, James Kroll, Steven Seelig, Olivia Wakefield April 7, 2011 © 2011 Towers Watson. All rights reserved.

Today’s experts Doug Friske is
the global leader of Towers Watson's Executive Compensation business and is based in Chicago. He has more than 20 years’ experience advising a wide range of organizations on all aspects of executive compensation. James Kroll is a senior consultant in Towers Watson’s Executive Compensation practice, based in New York. He specializes in corporate governance and executive compensation issues and assists clients with shareholder approval of equity plans, advisory votes on executive pay and other compensation-related governance issues. Steve Seelig is the executive compensation counsel for Towers Watson’s Research and Information Center in Washington, D.C. His expertise includes the taxation, accounting and legal implications (including SEC disclosure requirements) of all forms of executive compensation and perquisite programs. Olivia Wakefield is a senior consultant in Towers Watson’s Executive Compensation practice, based in Boston. Specializing in executive compensation programs, she advises clients on topics such as annual and long-term incentive performance metric calibration and plan design, equity pool management and corporate governance. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 2

Current context: Business performance has
bounced back to pre-recession levels 1,600 S&P 500 Composite 1,400 1,200 1,000 800 600 400 200 0 1/08 3/08 5/08 7/08 9/08 11/08 1/09 3/09 5/09 7/09 9/09 11/09 1/10 3/10 5/10 7/10 9/10 11/10 800 Cash Flow Net Income and Cash Flow Net Income 600 400 200 0 -200 -400 Q1Y08 Q2Y08 Q3Y08 Q4Y08 Q1Y09 Q2Y09 Q3Y09 Q4Y09 Q1Y10 Q2Y10 Q3Y10 Q4Y10 Source: Standard and Poor’s Compustat® database. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 3

So, what are we seeing
as the say-on-pay era unfolds? Evidence that contemporary pay practices have largely worked…. Overwhelming support for pay plans for most companies in the current say-on-pay cycle (at least so far) Pay levels that have returned to mid-2000 levels Incentive designs that are essentially unchanged in recent years Continued correlation between pay and performance …although companies are continuing to refine their approaches Push back on “poor” pay practices More complete and thoughtful disclosure Ongoing debate regarding the rigor in goal setting and the role of explicit performance conditions for long-term incentives It appears that most companies are getting it right, but with shareholders and other constituents paying close attention, the situation can change quickly and there’s no room for complacence towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 4

Now we’ll take a look
at where we’ve been — and where we’re headed Topic Presenter Recent Trends in Pay Levels and Practices: Olivia Wakefield The Tale of the Proxies What We Know About Say-on-Pay Votes, So Far James Kroll What’s on the Regulatory Horizon? Steve Seelig Wrap-up and Q&A Doug Friske towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 5

Recent Trends in Pay Levels
and Practices The Tale of the Proxies towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 6 S:EGS2010ECR175418MKTProxy Webcast.ppt

The sample… 170 Fortune 1000
companies holding annual meetings on or after January 21, 2011 (deadline for required say-on-pay votes under Dodd- Frank) that filed proxies by late March Annual Market Revenue* Capitalization* 25th Percentile $3,000 $2,800 50th Percentile $6,500 $7,900 75th Percentile $13,500 $18,200 CEOs (principal executive officers) in the role for the past 36 months *In millions of dollars. Source: Standard and Poor’s Compustat® database. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 7

2010 pay levels clearly reflect
companies’ improving performance 2009 Median 2010 Median Pay Element Includes Change Change Base salary Annual salary 0% 3% Total cash Base + bonus (discretionary) 3% 17% compensation + short-term non-equity (TCC) incentive compensation Total direct TCC + grant date value for -1% 9% compensation stock options, restricted stock (TDC) and performance plans Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 8

The total pay mix really
hasn’t changed that much 2008 2009 2010 41% 43% 42% 22% 19% Cash 20% 21% Cash 24% 19% Cash 15% 14% 22% 23% 22% 15% 23% 22% 19% 59% 57% 58% LTI LTI LTI Base Bonus Stock Options Restricted Stock Performance Plans Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 9

What has changed is the
long-term incentive mix 2008 2009 2010 33% 37% 39% 36% 38% 41% 24% 26% 26% Stock Options Restricted Stock Performance Plans Companies may be reacting to the recent volatility in the market and are less comfortable using as many options Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 10

Prevalence of performance measures in
long-term incentive plans remained fairly constant… Prevalence of Long-Term Incentive Performance Measures 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% EPS/Net Income TSR Operating Income/Margin ROC/ROIC Revenue 2010 Other Non-Financial 2009 2008 ROE Cash Flow Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 11

…as have annual plan measures
for the most part… Prevalence of Annual Incentive Plan Measures 0% 10% 20% 30% 40% 50% 60% 70% EPS/Net Income Individual Performance Operating Income/Margin Business Unit Performance Revenue Operating/Strategic 2010 2009 Cash Flow 2008 ROC/ROIC ROE Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 12

…although a number of companies
made adjustments in 2010 For annual plans A quarter (25%) of companies changed the performance measures used for 2010 annual awards from those used in 2009 For LTI plans Almost as many (24%) changed performance goals used for 2010 LTI awards Bottom line: Many companies continue to fine-tune their programs to try to get it right Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 13

The distribution of CEO bonuses
is back to pre-crisis levels… Percent of CEOs Receiving an Actual Bonus That is… 0% 5% 10% 15% 20% 25% 30% 35% 40% >200% of target >150% – 200% of target >100% – 150% of target >50% – 100% of target 2007 2008 2009 <50% of target 2010 0% Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 14

…and the alignment with performance
continues to be strong 2008 2009 2010 Total Direct Compensation Total Direct Compensation Total Direct Compensation Above Market Above Market Above Market 15% 12% 18% 68% Below Market 76% 66% Below Market Below Market 17% 12% 16% Below Industry Above Industry Below Industry Above Industry Below Industry Above Industry Total Shareholder Returns Total Shareholder Returns Total Shareholder Returns Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 15

We also saw a close
correlation between investor returns and the value of LTI granted that the CEO realizes Three-year TSR LTI Realized/ (2008 to 2010) LTI Granted* Top-third TSR performance 33% 118% Middle-third TSR performance -1% 89% Bottom-third TSR performance -34% 49% *Values include equity awarded to CEOs in fiscal years 2008, 2009 and 2010. Source: Towers Watson Executive Compensation Resources; Standard and Poor’s Compustat® database. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 16

Companies made more one-time grants
in 2010 Almost a third (29%) of companies made one-time and/or retention grants in 2010, compared to 16% in 2009 In both years, the great majority of these grants were time-based Companies Making One-Time and/or Retention Grants 2009 2010 16% 29% 71% 84% One-time or retention grants made No grants made Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 17

Finally, our review found many
changes in CD&As They are longer Average length increased by 7% Executive summaries are now the rage Half (50%) of companies added an executive summary during 2011, so that a majority (64%) of companies now include one Disclosures of annual plan goals improved Fully 85% of companies disclosed the specific performance goals for the 2010 plan year More than three-quarters (78%) of companies showed actual performance attained for 2010 to support the bonus paid Source: Towers Watson Executive Compensation Resources. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 18

What We Know About Say-on-Pay
Votes, So Far towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 19 S:EGS2010ECR175418MKTProxy Webcast.ppt

Key observations to date Overall,
we’re seeing strong support for most companies’ proposals, similar to last proxy season Proxy advisors and some shareholders acknowledge that “outliers” will come in for added scrutiny The circumstances behind negative votes and company responses are highly situational No one approach will work for all companies towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 20

Early say-on-pay votes show most
companies are receiving strong shareholder support… Distribution of Support for Say-on-Pay Proposals: 2011* Percentage of Companies in Support Range 80% 74.7% 60% 40% 20% 13.7% 5.5% 2.7% 1.4% 2.0% 0% Below 50% 50% – 59.9% 60% – 69.9% 70% – 79.9% 80% – 89.9% 90%+ Support for Say-on-Pay Proposal *Source: Towers Watson Executive Compensation Resources analysis as of April 4, 2011. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 21

…but a negative ISS vote
recommendation has an impact The 14% of companies receiving negative Institutional Shareholder Services (ISS) vote recommendations have received above-average opposition from shareholders ISS Vote Number of Votes in Recommendation Companies Favor For 126 94% Against 20 71% Four companies have failed to get majority support for their say-on-pay proposals On average, only about 46% of shareholders at each of these companies voted in favor of the say-on-pay proposal ISS recommended votes against these proposals, citing such concerns as a pay-for-performance “disconnect” or change-in-control provisions containing tax gross-ups Source: Towers Watson Executive Compensation Resources analysis as of April 4, 2011. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 22

Subpar TSR performance doesn’t necessarily
result in a negative ISS vote recommendation Almost a third (29%) of companies failed both the one- and three-year TSR test Yet ISS recommended votes in favor of say-on-pay at more than two-thirds (68%) of these companies ISS Say-on-Pay Vote Recommendations for Companies With Below-Median TSR Negative recommendations (32%) 9% ISS support despite 18% pay-for-performance concern ISS support, other factors (e.g., 23% pay decrease, new CEO) ISS negative, pay-for- performance concern ISS negative, other concern 50% Positive recommendations (68%) Source: Towers Watson Executive Compensation Resources analysis as of April 4, 2011. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 23

Say when on pay: After
an early push for triennial, annual votes gain steam Three quarters (76%) of companies have seen annual vote frequency receive majority support Only one-third (33%) of companies recommending triennial votes received majority support Implementation of Say-on-Pay Vote Frequency Original Companies Frequency Implemented Frequency Frequency Recommending Decision Recommendation Frequency Annual Biennial Triennial Pending Annual 49 20 None None 29 Biennial 9 3 1 None 5 Triennial 80 20 None 14 46 None 8 3 None None 5 Total 146 46 1 14 85 Source: Towers Watson Executive Compensation Resources analysis as of April 4, 2011. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 24

After say-on-pay, now what? Some
next steps to consider Define the vote outcome you want to see Review proxy advisor reports for accuracy Determine what additional information will help you gain greater shareholder support Assess the influence of proxy advisor vote recommendations Determine who will represent the company in the shareholder engagement process and the timing of outreach efforts towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 25

What’s on the Regulatory Horizon?
towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 26 S:EGS2010ECR175418MKTProxy Webcast.ppt

One set of Dodd-Frank enabling
regulations was released in late March… Exchange Listing Disclosure of Requirements — “Independence” “Conflicts of Interest” Who Compensation consultants, lawyers and other Compensation consultants advisors to the compensation committee What Factors in evaluating independence: Proxy disclosure expanded to address: 1. Other services provided by the advisor’s Whether the work of the compensation firm consultant raised any conflict of interest and, if so, the nature of the conflict and how 2. Fees as a percentage of firm revenue it was addressed 3. Policies and procedures to prevent conflicts of interest How the five factors influenced the committee’s conclusion 4. Other business or personal relationships with compensation committee members 5. Company stock owned A second set of proposed regulations addresses the independence of compensation committee members towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 27

…while we await others later
in 2011 1 Disclosure of pay for performance How will pay be measured? What is the time period required? How will performance be measured — only TSR? Will this be in place for the 2012 proxy? 2 Disclosure of CEO pay versus median employee pay Repeal legislation has been introduced in the House SEC officials have testified to Congress that there is little leeway because the statute requires median rather than average compensation 3 Clawbacks of compensation paid based on misstated financial results Can discretion be exercised in enforcing the clawback? Would existing contracts be grandfathered? How is incentive compensation defined? Would the SEC regulate indemnity clauses? Source: Towers Watson Executive Compensation Resources analysis as of April 4, 2011. towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 28

Wrap-up and Q&A towerswatson.com ©
2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 29 S:EGS2010ECR175418MKTProxy Webcast.ppt

Where do we go from
here? Get behind the say-on-pay vote totals Even if your 2011 vote was highly favorable, things can change year to year depending on performance and pay Understand the input from shareholders and proxy advisors Stay committed to your principles and practices — you don’t need to conform to have a successful program or shareholder vote Understand the value and implications of outstanding incentives Significant value created the past few years, given market volatility Influences expectations, with big vesting cliff likely on the horizon Fine-tune your thinking in advance of the next round of SEC rule making Consider potential pay-for-performance rationalization and disclosure towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 30

Questions? doug.friske@towerswatson.com james.kroll@towerswatson.com steven.seelig@towerswatson.com olivia.wakefield.lee@towerswatson.com
Watch for our soon-to-be-launched blog, Executive Pay Matters, for ongoing updates and information on the latest trends and emerging issues in executive pay towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. 31