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Stock Option Bandwagon Stalls - CEO Pay Down, Restricted Stock Up
Boards Require Increased Executive Accountability and Ownership

NEW YORK, March 22, 2004 - The biggest overhall of top executive pay in a decade is underway, with more than half of major companies analyzed making program changes in 2003 aimed at transforming executives from optionees into long-term owners at real financial risk, according to a 2004 proxy review by compensation consultants Pearl Meyer & Partners.

Among 50 early proxy filers with average revenues of $22.5 billion that had the same CEOs in 2002 and 2003, 40% made significant changes in their option programs – eliminating or reducing option use, trimming participation or restructuring programs. Addionally, nearly one-third increased their use of restricted stock – in some cases by partly or totally substituting restricted stock for stock option grants. Some firms that did not make restricted stock grants a year earlier made multi-million dollar awards to their CEOs, while others doubled the size of the previous year's awards. In a related move, 16% introduced or increased executive stock ownership guidelines, including several that imposed mandatory share retention requirements for equity awards.

"We are in the midst of a radical – and overdue – rethinking of stock-based compensation by the American corporation," said Steven E. Hall, President of Pearl Meyer & Partners. He noted that stock option values, which peaked at 57% of CEO pay in 2002, have rapidly declined as the compensation landscape has been roiled by governance concerns regarding corporate misdeeds, along with the prospect of higher costs should mandatory option expensing begin as scheduled next year. "Stock options will remain an important component of executive compensation programs – but they will no longer be the dominant reward for executive performance or the sole driver of executive wealth," said Mr. Hall. "That's a change for the better."

Restricted Stock on the Rise
The value of 2003 restricted stock grants to these large company CEOs doubled to $2.0 milion, while salary rose 6% to $1.1 million. The economic recovery in the second half of 2003 helped boost annual bonuses by 23% to $2.2 million, for an overall 17% rise in total cash compensation. The value of long-term incentives rose 13% to $313,450. In sharp contrast, stock options – most of which were granted in early 2003 – dropped one-third in value to $4.7 million, reflecting lower share prices at the beginning of 2003, as well as significant reductions in the number of shares granted. The overall result was an 8% decline in average CEO total remuneration to $10.3 million.

These proxy numbers exemplify the rehabilitation of restricted stock, which only a decade ago was widely derided as an executive giveaway. "Governance activists now recognize that restricted stock, particularly grants with performance requirements, can offer management an immediate ownership stake that is earned through performance as well as future services, delivering real value at reasonable cost," said Mr. Hall. "A key issue going forward will be whether companies adjust the size of equity grants to reflect the very different risk levels between options and full value shares."

Along with Microsoft, which made headlines by ending its renowned broad-based program, options were replaced by grants of restricted stock to the CEOs and/or other senior executives at companies such as Boise Cascade, Cendant, ConAgra, Goldman Sachs and Progressive. In a related move, Weyerhaueser's proposed new equity plan would allow outstanding options to be replaced by SARs paid in shares if mandatory option expensing is instituted.

Among those companies continuing option use, three made significant program changes – IBM priced its 2003 option grants at 10% above fair market value, Schlumberger capped gains at 125% of the exercise price and Alcoa both shortened its option term to six years and eliminated reloads. In contrast, Bear Stearns bucked the prevailing trend by cutting cash and boosting the value of its CEO option grant from $2.3 million to $8.5 million.

Other Early Filer Trends
Nearly 20% of the companies analyzed made changes to their annual incentive plans, most often through expanded bonus opportunities or increased performance measures.

Other developments in early proxy filings:

• More than one-third of the companies made changes in their Director pay programs, with most increasing compensation.
• One-quarter submitted new or amended equity plans for shareholder approval.
• 24% adopted option expensing

About Pearl Meyer & Partners
Founded in 1989, Pearl Meyer & Partners is recognized for its counsel to Board Compensation Committees and senior managements. The firm specializes in the evaluation, design, development and implementation of compensation programs for executives, employees and Boards, as well as issues related to corporate governance. Services also include customized marketplace surveys, organizational development and sales incentives, all supported by strong actuarial and benefits expertise. Headquartered in New York, Pearl Meyer & Partners maintains offices in Atlanta, Boston, Charlotte, Chicago, Houston and Los Angeles.

Pearl Meyer & Partners is a practice of Clark Consulting (NYSE: CLK), a leading publicly traded firm in its field, serving more than 3,800 U.S. companies nationwide with comprehensive advice on the design, financing and administration of compensation and benefit programs.

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