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Corporate Equity Shifts Into Reverse

New York, February 1, 2005 - For the first time in nearly 15 years, America's largest companies reported allocating a smaller share of corporate equity for executive and employee stock incentives, according to a survey of 2004 proxy reports by compensation consultants Pearl Meyer & Partners. In a related development, the rate of grants to employees dipped for a third straight year, approaching stock utilization levels last seen six years ago.

Total allocations fell to 16.36% of common shares outstanding from a peak of 17.32% a year earlier, according to Pearl Meyer's annual survey of equity use among the nation's Top 200 industrial and service companies. The decline was due in large part to increased utilization of full-value stock grants, which generally require the use of fewer shares than options to deliver the same or greater value.

Drive to Conserve Share Use
The average "burn" or grant rate dropped to 2.02% of outstanding shares, down sharply form 2.21% the previous year and a peak of 2.69% in 2001, according to Pearl Meyer & Partners' study of 2004 company filings. Even some of the biggest users of equity were not immune - nearly half of the 20 companies with the highest grant rates in 2004 either maintained or reduced use from a year earlier.

The new equity environment also has prompted an ongoing retreat from so-called mega option grants, meaning awards with a face value in excess of $10 million. For the first time in six years, fewer than half of Top 200 CEOs - 46% - received such awards, compared to a peak of 65% in 2002.

Growing criticism of large overhangs and mega option grants, combined with shareholder resistance to new equity authorizations, have also enhanced the appeal of full-value grants over stock options. For example, by replacing half the value of its employee option grants with full-value shares, General Electric slashed its burn rates by 80%, to 0.9% of the outstanding - the lowest share utilization reported by a Top 200 firm in 2004.

Reduced Price Tag for Option Use
In line with the retreat from stock options and changes in option valuation assumptions, companies' annual estimate of the pro forma impact of option use on net earnings declined for the first time since the calculation was mandated by regulators in 1998. The median decline in pro forma earnings was estimated at 4.7%, down from 6.7% a year earlier.

Other Trends Revealed
Among other equity findings from 2004 proxies and 10Ks:

• As a market recovery buoyed option exercises, shares reserved by companies for outstanding grants declined for the first time in 14 years.
• The Securities industry reported the highest average equity allocation, at 58.78% of outstanding shares, with Energy/Utilities companies posting the lowest allocation at 9.37%.
• For the second consecutive year, Lehman Brothers reported the top allocation at 77.26% of outstanding shares.
• In a continuing downward trend, five Top 200 companies eliminated evergreen provisions in their equity plans, leaving only 22 such programs in place.

About Pearl Meyer & Partners

For over 20 years, Pearl Meyer & Partners (www.pearlmeyer.com) has served as a trusted independent advisor to Boards and their senior management in the areas of compensation governance, strategy and program design. The firm provides comprehensive solutions to complex compensation challenges for companies ranging from the Fortune 500 to not-for-profits as well as emerging high-growth companies.These organizations rely on Pearl Meyer & Partners to develop programs that align rewards with long-term business goals to create value for all stakeholders: shareholders, executives, and employees. The firm maintains offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, Los Angeles and San Jose.