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NEW YORK – CEO compensation changes were modest, at best, in 2005, but one of the more notable trends was the continued alignment of pay with performance, according to a just-released survey. This is interesting news for credit unions, which in recent years have also moved aggressively toward tying compensation to performance. In its 14th year, the Mercer Human Resource Consulting 2005 CEO Compensation Survey analyzes and reports on the most current publicly available compensation information as disclosed in the proxy statements of 350 large U.S companies. The human resources firm held an April 12 webcast on the survey’s findings. According to the study, the median CEO base salary remained flat at $975,000. As evidence that compensation committees can make tough decisions, nearly one-third of the CEOs received no base salary increase last year. The median annual CEO bonus rose 8.4% to $1.4 million. Total annual compensation (base salary plus annual bonus) rose 7.1% to $2.4 million, continuing the trend of aligning cash compensation with corporate profitability. The median annual increase in net income for companies in the study was 13%. Continued pressure on long-term incentives, notably stock options, kept median total direct compensation such as base salary, annual bonus, and the present value of long-term incentives, for CEOs in check, rising 5% in 2005 to $6.8 million, the survey found. That increase corresponds closely with the median 6.8% total shareholder return in 2005, another indication that efforts to forge a stronger connection between CEO compensation and company performance are having the desired effect. Peter Chingos, a senior executive compensation consultant with Mercer in New York, thinks that the pay-for-performance culture that began several years ago is now standard operating procedure for many American corporations. “The close alignment of pay and performance reflected in the 2005 Mercer survey numbers indicates that organizations are moving toward more responsible executive compensation,” Chingos said. Chingos pointed out that the recent disclosure reform proposal put forward by the Securities and Exchange Commission is already contributing to a greater emphasis on both transparency and sound corporate governance. “The proposal has influenced proxy filings. We’re seeing more stock option value and total compensation columns, director compensation tables, perquisite tables, and expanded discussions of the rationale behind the programs,” Chingos said. Equity was the name of the game for CEO compensation a few years ago, the survey said. In 2002, long-term incentives represented 68% of the total CEO pay mix. By 2005, according to the survey, LTI represented 62% of the pay mix. Stock option use also continued to decline, from 57% of LTI value in 2004 to 52% in 2005. Companies are looking to other vehicles, notably restricted stock and performance shares. Use of restricted stock rose from 22% of LTI value in 2004 to 26% last year, according to the survey. the number of CEOs receiving stock option grants dropped from 273 in 2004 to 265 last year, while those receiving restricted stock grants jumped from 166 to 181 over the same period. In particular, performance-based LTI awards are being used by 57% of the surveyed companies, up from 51% in 2004 and only 37% in 2003. According to Diane Doubleday, global leader of Mercer’s executive remuneration business, the big change in 2006, will be the continued replacing of “rest and vest” restricted shares that vest over time, with performance shares that vest upon the achievement of pre-determined goals. “Governance norms will require that performance be a focal point for the equity component,” Doubleday said. “These plans are being put into place today. Next year, we will see many more companies using three equity vehicles for their senior management: options, restricted stock, and performance shares. And with new disclosure standards, investors will know a lot more about these programs.” -

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