MarkeTrends - Aon

MarkeTrends

Inside

MarkeTrends 2010-02

Analysis of Form 4 Filings ■ Analysis of Form 4 Filings

⎯ ⎯

Methodology Companies Included in the Analysis

Analysis of Form 4 Filings Due to the economic and stock market turmoil of late 2008 and early 2009, most companies decided to decrease the value of long-term incentive (LTI) grants made to executives in 2009. As the markets have recovered, many have expected 2010 LTI grants to increase from last year’s levels. Hewitt's analysis of recent Securities and Exchange Commission (SEC) filings finds this to be the case. In 2010, total median economic value delivered increased 23%, which nearly reverses the 20% drop from 2008 to 2009. Consistent with our 2009 analysis of Form 4 filings, the 2010 percentage change in total economic value is roughly 50% of the percentage change in stock price. Conversely, the number of shares awarded to achieve the higher dollar values fell by 19% at the median. This brought 2010 annual run rates more in line with historical norms. 2009 to 2010 LTI Analysis: All Industries (157 Companies) Change in:

Restricted Stock Value

Stock Options Value

Total LTI Economic 1 Value

75th %ile

46%

64%

56%

82%

-2%

Average

28%

55%

48%

70%

-19%

Median

14%

30%

23%

44%

-19%

th 25 %ile

1%

11%

8%

19%

-33%

1

Stock Price

Number of Shares Awarded

Stock options valued at 18.4% of face in 2009, 21.6% in 2010; restricted stock at 95% of face.

Industry Analysis Notably, LTI grants to companies in the financial and health care industries deviated from the median trend. In aggregate, financial companies increased LTI grant value but at a lower ratio to the share price increase—roughly one-third of the increase in stock price. Health care companies increased on a percentage basis grant values more than the percentage increase in stock price.

Copyright © 2010 Aon Hewitt

1

April 30, 2010

MarkeTrends

2009 to 2010 LTI Analysis by Industry Median Change in:

Industry Group

Companies

Restricted Stock Stock Options Value Value

Consumer Discretionary

23

8%

45%

22%

50%

-17%

Consumer Staples

11

1%

28%

19%

29%

-16%

All Consumer

34

8%

33%

22%

43%

-17%

Energy (Oil/Gas)

17

13%

21%

18%

40%

-22%

Financials

22

21%

23%

19%

65%

-31%

Health Care

22

8%

40%

35%

30%

-16%

Industrials

23

14%

46%

26%

42%

-10%

Materials

15

22%

11%

25%

63%

-42%

1

Total LTI Economic 1 Value

Stock Price

Number of Shares Awarded

Stock options valued at 18.4% of face in 2009, 21.6% in 2010; restricted stock at 95% of face.

Readers should exercise caution in extrapolating this general industry analysis to specific industries, peer groups, or companies. Furthermore, performance share/unit plan grants are not disclosed and associated changes in LTI mix cannot be captured in this analysis. Anecdotally we are aware of some companies that reduced or eliminated performance share grants in 2009 only to reinstate them in 2010 Methodology This data comprises a constant sample of LTI participants at 157 Standard & Poors 500 (S&P 500) companies granting LTI between December 1, 2009 and March 31, 2010. Companies disclosing changes to LTI mix involving performance plans were excluded, as were companies participating in TARP during their respective LTI cycles. To appropriately reflect the impact of significant changes in stock price volatility, dividend yield, and interest rates we also calculated present values for stock options and restricted stock using Hewitt’s modified Black-Scholes option pricing model and our restricted stock valuation model. Rather than valuing each company individually, we created a single modified Black-Scholes as a percent of fair market value and applied this percentage to the fair market value of each grant. The inputs for this value were:

■ Volatility: The five-year daily volatility for the S&P 500 index through February 1, 2010 (or 2009 in the case of 2009 grants).

■ Dividend yield: Fourth quarter S&P 500 index dividends annualized and then divided by average fourth quarter S&P index price.

■ Risk-free rate: February zero-coupon rates. Copyright © 2010 Aon Hewitt

2

April 30, 2010

MarkeTrends

■ All other inputs: The most prevalent 2009 equity incentive plan design provisions as reported in Hewitt’s 2009 Compensation Policies and Programs report. Using our version of the Black-Scholes model, the 2009 stock option grants have a value of 18.40% of face value and the 2010 grants have a value of 21.63% of face value based on the following assumptions:

5-year stock price volatility Dividend yield Risk-free rate

2010 Valuation Inputs

2009 Valuation Inputs

24.18% 2.95% 3.86%

21.23% 3.00% 3.42%

The primary driver higher stock option valuation in 2010 is the increase in volatility. The slight decrease in dividend yield and modest increase in interest rates had a lesser effect on the valuation, but contributed to its increase in percent of face value. Restricted stock was also valued using the most prevalent 2009 design provisions and has a value of 95% of face value. Custom Analyses Available We are able to provide a customized analysis for any company that wants to better understand the grants made by its specific industry or peer group.


3

April 30, 2010

MarkeTrends

Companies Included in the Analysis 3M Co Abbott Laboratories Adobe Systems Inc AES Corp Air Products & Chemicals Inc AK Steel Holding Corp Allergan Inc Allstate Corp Altria Group, Inc. American Express Co American Tower Corp Ameriprise Financial Inc AmerisourceBergen Corp Assuranct Inc Autodesk Inc Automatic Data Processing Inc AvalonBay Communities Inc Avon Products Ball Corp Bank of New York Mellon Corp Baxter International Inc Big Lots Inc Boeing Co Capital One Financial Corp Carnival Corp Caterpillar Inc Cephalon Inc Chevron Corp Chubb Corp CIGNA Corp Cincinnati Financial Corp Cliffs Natural Resources Inc The Coca-Cola Company Comcast Corp ConocoPhillips Consol Energy Inc Cummins Inc Danaher Corp Dean Foods Co Deere & Co Dentsply International Inc Devon Energy Corp Dominion Resources Inc Dow Chemical Co Copyright © 2010 Aon Hewitt

Dr. Pepper Snapple Group Inc Dun & Bradstreet Corp E I Dupont De Nemours & Co eBay Inc Edison International Equity Residential Exelon Corp Federated Investors Inc Fiserv Inc Fluor Corp FMC Corp Ford Motor Co Forest Laboratories Inc Freeport McMoran Copper & Gold Inc Frontier Communications Corp Gamestop Corp. Gannett Co Inc The Gap Inc General Dynamics Corp Genworth Financial Inc Goodrich Corp Halliburton Co Hershey Co Hess Corp Home Depot Corp Hormel Foods Corp Hospira Inc Illinois Tool Works Inc Integrys Energy Group Inc IntercontinentalExchange Inc Intuitive Surgical Inc ITT Corp Johnson & Johnson JPMorgan Chase & Co Juniper Networks Inc Kellogg Co King Pharmaceuticals Inc Kraft Foods Inc Laboratory Corp Of America Holdings Leggett & Platt Inc Lockheed Martin Corp Lowe’s Companies Inc LSI Corp Marathon Oil Corp 4

April 30, 2010

MarkeTrends

Republic Services Inc Robert Half International Inc Rockwell Automation Inc Roper Industries Inc Ryder System Inc Sandisk Corp Schlumberger Ltd Scripps Networks Interactive, Inc. Sempra Energy Southwestern Energy Co St Jude Medical Inc Stanley Works Stericycle Inc Stryker Corp Sunoco Inc Target Corp Tenet Healthcare Corp Thermo Fisher Scientific Inc Tiffany & Co Time Warner Inc U S Bancorp United Technologies Corp Verisign Inc VF Corp Vornado Realty Trust Vulcan Materials Co Walt Disney Co Wal-Mart Stores Inc Waters Corp Western Union Co Weyerhaeuser Co Williams Companies Inc Yum! Brands Inc Zimmer Holdings Inc

Marsh & McLennan Cos Masco Corp MasterCard Inc McDonalds Corp MeadWestvaco Corp Millipore Corp Moody’s Corp Murphy Oil Corp National Oilwell Varco Inc New York Times Co Newell Rubbermaid Inc Noble Energy Inc Northeast Utilities Northern Trust Corp Novellus Systems Inc Occidental Petroleum Corp Office Depot Inc O'Reilly Automotive Inc Owens-Illinois Inc Pall Corp Peabody Energy Corp PerkinElmer Inc Philip Morris International Pioneer Natural Resources Co Pitney Bowes Inc Plum Creek Timber Co Inc PPG Industries Inc PPL Corp Praxair Inc Principal Financial Group Inc Prudential Financial Inc Public Service Enterprise Group Pulte Homes Inc Quest Diagnostics Inc Qwest Communications International Inc


5

April 30, 2010

MarkeTrends

*

*

*

*

*

The Executive Compensation Report—MarkeTrends is prepared by Aon Hewitt’s Executive Compensation Center of Technical Expertise led by Dave Sugar. Questions regarding executive compensation technical issues may be directed to Dave Sugar at 847-295-5000 or [email protected]. This report is a publication of Aon Hewitt, provides general information for reference purposes only, and should not be construed as legal or accounting advice or a legal or accounting opinion on any specific fact circumstances. The information provided here should be reviewed with appropriate advisors concerning your own situation and any specific questions you may have. http://www.aonhewitt.com


6

April 30, 2010