This month’s issue of Executive Compensation Trends focuses on two topics: regional variance in executive pay and newly emerging stock ownership guidelines practices. On the executive pay front, CEO pay is rising across the country, with the largest companies in the Eastern region providing the highest level of pay. And in the arena of stock ownership guidelines, companies are now disclosing in greater detail some significant but perhaps lesser-known aspects of these policies.

As always, please feel free to contact our research team at 877.441.6090 or info@equilar.com if you have questions, comments, or if you would like a more specialized analysis of the data presented in this newsletter.

In July, Equilar analyzed trends in chief executive pay over a five-year period for the 300 largest companies (by fiscal year-end market capitalization) in each of the Western, Central and Eastern regions of the United States. The study examines differences in overall compensation levels among the regions and the prevalence of key compensation vehicles. To be included in this analysis, companies must have reported compensation data for their most recent fiscal year between March 2005 and February 2006. For a detailed summary of key statistics for the Western, Central and Eastern regions, please see the “Regional Statistics” discussion at the end of this article.

Total Direct Compensation

All Regions

Median chief executive total direct compensation (TDC) for the 300 largest companies in each region of the United States varied significantly in 2005. Compared with CEOs in the Western and Central regions of the country who earned approximately $5.4 and $4.7 million respectively, corporate chiefs in the Eastern states earned nearly $7.1 million. However, in the last five years, all three regions saw similar overall growth in pay. From 2001 to 2005, median CEO total compensation increased at an annual rate of 5.0% in the Western and Eastern regions and a slightly higher 8.3% in the Central region.

The following chart displays median 2005 CEO compensation and five-year compound annual growth rates for each region.

Note: For the analysis, total direct compensation (TDC) is calculated as the sum of base salary, bonus, restricted stock awards, the estimated value of stock option awards (as calculated using the Black-Scholes methodology), long-term incentive plan (LTIP) payouts, and other compensation.

To further examine trends in CEO total compensation at the regional level, the following three charts present a five-year overview of median pay levels for the Western, Central and Eastern regions of the country.

West Region

In the Western region of the United States, chief executive total direct compensation increased by a compound annual rate of 5.0% from 2001 to 2005, leading to a median total pay package of approximately $5.4 million in 2005. The following chart shows median CEO total pay levels for 2001 to 2005.

Central Region

In the Central region of the United States, chief executive total direct compensation increased by a compound annual rate of 8.3% from 2001 to 2005, leading to a median total pay package of approximately $4.7 million in 2005. The following chart shows median CEO total pay levels for 2001 to 2005.

East Region

In the Eastern region of the United States, chief executive total direct compensation increased by a compound annual rate of 5.0% from 2001 to 2005, leading to a median total pay package of approximately $7.1 million in 2005. The following chart shows median CEO total pay levels for 2001 to 2005.

Total Cash Compensation

All Regions

Like total direct compensation, total cash compensation for chief executives increased in all regions of the United States from 2001 to 2005. CEOs in the Eastern region saw their cash compensation rise most steeply during the period, at an annual rate of 12.0%. However, CEOs in the Central and Western regions followed close behind with 11.8% and 11.4% annual growth rates, respectively.

The following chart displays the median value of 2005 CEO total cash compensation and five-year annual growth rates in each region.

Note: For this analysis, TCC is calculated as the sum of base salary and bonus.

Bonuses

Large increases in annual bonus awards account for much of the growth in overall CEO compensation between 2001 and 2005. In each of the three regions of the country, the median size of bonus awards (expressed as a percentage of base salary) climbed by at least 45.0% over the entire five-year period. The following charts present data on regional differences in both bonus size and value.

All Regions

As with most elements of CEO compensation, the median value of bonus awards increased from 2001 to 2005. More significantly, the five-year annual growth rate for bonus awards was nearly identical across all three regions and approached nearly 20.0% in each case. In 2005, chief executives in the Eastern region earned a median bonus award of approximately $1.3 million, followed by median bonus awards of nearly $1.0 and $0.9 million in the Western and Central regions respectively.

The following chart displays median 2005 CEO bonus awards and five-year compound annual growth rates in each region.

To further examine trends in CEO bonus compensation at the regional level, the following three charts present a five-year overview of median bonus awards for the Western, Central and Eastern regions of the country.

West Region

In the Western region of the United States, chief executive officers earned a median annual bonus of approximately $1.0 million in 2005. These awards represent a median of 124.6% of base salary.

Central Region

In the Central region of the United States, chief executive officers earned a median annual bonus of approximately $0.9 million in 2005. These awards represent a median of 125.2% of base salary.

East Region

In the Eastern region of the United States, chief executive officers earned a median annual bonus of approximately $1.3 million in 2005. These awards represent a median of 152.7% of base salary.

Long-Term Incentive Compensation

All Regions

Total long-term incentive (LTI) compensation for CEOs increased in all regions of the United States from 2001 to 2005. However, unlike changes in total cash compensation and bonus awards, the rate of change varied among the three regions.  Mirroring trends in total direct compensation, LTI pay saw the greatest increase in the Central region of the country. At companies in the Central region, median CEO LTI increased at an annual rate of 9.3% from 2001 to 2005, outpacing the 3.4% and 2.4% annual growth rates in the Western and Eastern regions, respectively. Still, CEO LTI pay was highest in the Eastern region, where chief executives received LTI compensation with a median value of approximately $4.0 million to 2005.

The following chart displays median 2005 CEO LTI compensation and their five-year compound annual growth rates in each region.

Note: LTI compensation is calculated as the sum of restricted stock awards, the estimated value of stock option awards (as calculated using the Black-Scholes methodology), and long-term incentive plan (LTIP) payouts.

Stock Options

Stock options remain a key component of executive compensation programs in all regions of the United States. However, regulatory changes like FAS123(R) have served to curtail their prevalence. With concerns over stock option backdating and spring-loading growing daily, the decline in the use of stock options may continue. To further explore this trend, the following charts present data on regional differences in stock option award value and prevalence.

All Regions

Unlike all other elements of pay, for CEOs in the Western and Eastern regions of the United States who received stock option awards, the median value of these awards fell from 2001 to 2005. In these two regions, median CEO stock options awards declined at an annual rate of 7.8% and 5.9%, respectively. Only CEOs in the Central region of the country saw the median value of their stock option awards climb during the last five years. In this region, the median value of CEO stock option awards rose by 1.0% annually.

The following chart displays median 2005 CEO stock option award values and five-year compound annual growth rates in each region.

West Region

In 2005, 66.3% of CEOs in the Western region of the United States received stock option awards. These awards have a median value of approximately $3.1 million.

Central Region

In 2005, 74.3% of CEOs in the Central region of the United States received stock option awards. These awards have a median value of approximately $2.3 million.

East Region

In 2005, 67.3% of CEOs in the Eastern region of the United States received stock option awards. These awards have a median value of approximately $3.3 million.

Restricted Stock

The decline in prevalence of CEO stock option awards has been accompanied by strong growth in the prevalence of restricted stock awards. In 2005, the prevalence of restricted stock awards approached 50.0% in all regions of the United States, and the median value of awards exceeded $1.5 million in each region.

The following chart displays the median value of 2005 CEO restricted stock awards in each region and the prevalence of such awards.

Regional Statistics To provide a better understanding of the make-up of companies in the Western, Central and Easter regions of the United States, key summary data is presented below. Again, this analysis examined chief executive pay over a five-year period for the 300 largest companies (by fiscal year-end market capitalization) in each of the Western, Central and Eastern regions of the country.
2005 Fiscal Year Market Capitalization	2005 Fiscal Year Revenue Data

Industry Breakdown

For each region in the analysis, the top three industries within the region are presented in the following table. The named industries account for at least 60% of the companies in the Western, Central and Eastern regions.

Regional Make-Up

For this analysis, regional boundaries are defined by the following three groups of states:

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Against a backdrop of spreading corporate scandals and growing shareholder activism, companies are seeking effective, manageable, and visible ways to more strongly align the interests of executives and directors with the interests of shareholders. In such a climate, stock ownership guidelines and holding requirements are becoming an increasingly common and laudable corporate governance practice.

Ownership guidelines require individuals to attain and maintain a certain level of equity ownership in the company. Holding requirements prohibit individuals from selling a certain percentage of equity acquired in the company for a specified length of time.

Along with the growing prevalence of ownership requirements, Equilar has also observed that disclosure of policy details has become more thorough and sophisticated. In addition to specifying mandatory ownership levels by position, companies also describe the types of equity vehicles that count toward the goal, the status of individuals in meeting the requirement, as well as any milestone targets, compliance incentives, noncompliance consequences, hardship provisions, and hedging restrictions.

The Equilar research team is nearing completion on a comprehensive database as well as a full analysis and report on executive and director stock ownership guidelines and retention requirements at Fortune 500 companies. We offer below a sneak preview of our findings and samples of detailed disclosure:

Process Disclosure

• AK Steel Holding Corp. – DEF14A filed on April 17, 2006 – LINK
  

“Director Stock Ownership Guidelines: Effective July 21, 2005, upon the recommendation of the Nominating and Governance Committee, the Board adopted stock ownership guidelines for all non-employee directors. Those guidelines provide that each director should own shares of the Company’s common stock equal in market value to five times the cash portion of the Board’s annual retainer. (By way of example, assuming the cash portion of the Board’s annual retainer is $40,000, the target ownership level for a director would be $200,000.) Then-sitting directors are expected to attain the minimum level of target ownership within a period of five years from the effective date of the policy. A new director will be expected to attain the minimum level of target ownership within a period of five years from the date he or she is first elected to the Board. All Directors are in compliance with the policy, either by already owning shares in excess of the Director’s minimum target ownership level or by being on track to reach the applicable target ownership level within the compliance timeframe. For purposes of these guidelines, the term “ownership” includes: (a) shares of Company stock held directly by a director, (b) shares of Company stock held by a director’s family member living in the same household, and (c) shares of Company restricted stock held directly by a director, whether or not yet vested. The term “ownership” does not include options to purchase stock.”

• Bristol Myers Squibb – DEF14A filed March 22, 2006 - LINK

“In order to preserve the linkage between the interests of executives and those of stockholders, executives are expected to use the shares obtained on the exercise of their stock options, after satisfying the cost of exercise and taxes, to establish a significant level of direct ownership. Our company continues to maintain long-standing share ownership expectations for its executives to meet through the exercise of stock option awards. These share ownership guidelines were revised slightly in 2006 for named executive officers to be consistent with competitive practice while ensuring good corporate governance. Under these guidelines, the Chief Executive Officer must retain shares with a value of eight times his base salary prior to selling any of the net shares obtained upon exercise. The other named executive officers must retain shares with a value of five times their base salary prior to selling any of the net shares obtained upon exercise. Even after these ownership thresholds are satisfied, executives must retain 75% of all net shares obtained as a result of subsequent option exercises for at least two years. These same share retention guidelines apply to restricted stock awards. The Chief Executive Officer and other named executive officers may not sell any of the net shares of stock obtained upon vesting until the ownership thresholds above are satisfied. Thereafter, the executive must still retain 75% of the net shares obtained when a restricted stock award vests for at least two years. We believe these retention requirements are an important tool in aligning the interests of our company’s executives with the long-term interests of our company’s stockholders.”

Noncompliance Penalties

To enforce ownership requirements, numerous companies have established penalties that take effect if an executive or director fails to meet their ownership target in the required time frame or does not make satisfactory progress. The wide variety of consequences include holding requirements, reduced or forfeited compensation, and mandatory stock payout or deferrals of cash compensation. Below are just a few examples of noncompliance penalties:

• W.W. Grainger Inc. – DEF14A filed on March 24, 2006 – LINK

“Officers who fail to achieve these ownership levels will not be eligible to receive any stock-based awards until they achieve their required ownership level.”

• U.S. Bancorp – DEF14A filed on March 8, 2006 – LINK

“In the event that a senior manager does not meet the stock ownership guidelines, that manager (i) is prohibited from selling any stock acquired through vesting of restricted stock or upon the exercise of stock options, except to pay for applicable taxes or the exercise price and (ii) must use the entire net after tax amount of his or her annual cash bonus to purchase shares of our common stock, until the manager satisfies the requirements.”

• Ashland Inc. – DEF14A filed on December 15, 2005 – LINK

“If the non-employee director has not met his or her minimum stock ownership guidelines, the Board of Directors has recommended that the annual retainer be, either (i) paid in Ashland Common Stock, or (ii) deferred into stock units (share equivalents) in the hypothetical Ashland Common Stock Fund in Ashland’s deferred compensation plans for non-employee directors.”

Hardship Provisions

A number of companies recognize that exceptions to ownership requirements may be necessary in special circumstances and thus include hardship provisions in their disclosure of ownership guidelines. A couple examples are shown below:

• Avery Dennison Corp. – DEF14A filed on March 20, 2006 – LINK

“The Company is mindful that each individual’s personal circumstances will affect progress toward the targeted levels of stock ownership. Officers who are unable to achieve or maintain the targeted level of ownership within the prescribed time period should consult with the Executive Vice President and General Counsel, who will review the situation with the Senior Vice President of Human Resources and, in appropriate circumstances, with the President and CEO.”

• Tenneco Inc. – www.tennco.com – LINK

“There may be instances in which the Stock Ownership Guidelines would place a severe hardship on the participant or prevent the participant from complying with a court order, such as a divorce settlement. In these instances, the participant must submit a request in writing to the Sr. Vice President of Global Administration or the Compensation/Nominating/Governance Committee of the Board of Directors that summarizes the circumstances and describes the extent to which an exemption is being requested. The Sr. Vice President of Global Resources (after reviewing the request with the Chairman and Chief Executive Officer) or the Committee, as applicable, will make the final decision as to whether an exemption will be granted. If such a request is granted in whole or part, the Sr. Vice President of Global Administration will work with the participant to develop an alternative stock ownership plan that reflects both the intention of these Stock Ownership Guidelines and the participant's individual circumstances.”

Restrictions on Hedging

Since the aim of ownership guidelines and retention requirements is to ensure that members of management and the board have a direct personal financial stake in the company’s performance, any form of hedging transaction on the part of an executive or director would defeat the purpose of such ownership policies. Thus, several companies complement ownership guidelines with restrictions on hedging; some examples follow:

• Aetna Inc. – DEF14A filed on March 21, 2006 – LINK

“The Code of Conduct prohibits Directors from engaging in hedging strategies using puts, calls or other types of derivative securities based upon the value of Aetna stock.”

• SLM Corp. – DEF14A filed on April 10, 2006 – LINK

“Hedge transactions to protect against losses due to a falling stock price are not permitted.”

Participate in our Stock Ownership Guidelines Survey:

Please enter and complete the appropriate survey to receive a free copy of the 2006 Executive and Director Stock Ownership Guidelines summary report.

Please enter and complete the appropriate survey to receive a free copy of the 2006 Executive and Director Stock Ownership Guidelines summary report.

Equilar research appeared in several news articles published in late June and Early July. Click the links below to view these articles. For a complete list of articles including Equilar research, please visit our online Knowledge Center.

• CFO pay the silver lining of SOX
  Financial Week – July 17, 2006

• What the boss makes
  The Seattle Times – July 9, 2006

• Directors Now Paid in Full-Value Shares at Eli Lilly, Bellsouth
  Agenda – June 5, 2006 (Password Protected)

• Top Execs Flying High
  Pittsburgh Tribune-Review – June 4, 2006

• CEO Pay Under the Microscope
  Electronic Business – June 1, 2006

Members of the press who are interested in obtaining Equilar research or data for their stories should feel free to contact Equilar at press@equilar.com.