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The Compensation Committee of the Board

From: Ethan Berman Date: Re: November 29, 2005 The 2005 Compensation Plan

Next week you will be meeting to set the company's overall compensation levels, as well as my compensation and that of the other key managers. I know HR will be giving you a formal presentation outlining our overall proposed plan, but last year I was disappointed in the way I was compensated and I have therefore taken to writing this note in the hope that it does not happen again in 2005. I see financial compensation at the company in five distinct parts. First there are a reasonably standard set of benefits, such as health care, vacation, and now 401k matching. These benefits are identical for all employees at the company regardless of position or years of service. It is my recommendation that this remains the same, as I don't believe that this is the part of compensation that should discriminate by seniority or performance. We should all be entitled to basic benefits in an equal fashion. Second, we have a profit-sharing plan. This is designed to have all employees participate in the current and future success of the company. In the past we have allocated 5% of our after-tax profit to this program, and then divided that amount equally among all employees regardless of position or salary. Again I would ask that this remain the same, though given the strong performance of the company this year, the amounts granted will be greater than we had originally forecast. I believe one identical payout, rather than a more traditional %-of-salary payout, actually instills a greater sense of shared purpose across the employees of the firm. And this creates a greater sense of ownership to those who are less well paid and not participating in the equity based compensation plans. Third, we have base salaries, determined primarily by three factors, responsibility, years of experience and inflation. These tend to go up every year for most employees, as at least one of these factors increases for everyone at a constant rate! I would ask, however, that this year my own salary remain the same. The banker J.P.Morgan once said that he would never lend money to a company where the highest paid employee was paid more than 20 times the lowest paid, as it was in his view, unstable. While we are a long way from that threshold, last year I felt I was given an overly generous raise putting my salary 20-40% higher than my direct reports. If the proposed salary increases are given to the other managers within the firm, my current salary will be at a level more appropriately above the other key employees in 2006. Fourth, we pay a discretionary bonus to all employees. In contrast to benefits and profit-sharing, we should strive to make great distinctions between employees' bonuses. Unlike, base salaries, an individual's performance should drive this form of compensation, not years of service or inflation. Moreover, these bonuses should be set with floors and ceilings based on the company's performance, not on what an individual was paid last year, or what their boss makes. As the company had a terrific year this year, far better than last, I would ask that overall subjective bonuses be significantly higher than in 2004. Perhaps surprisingly, however, I do not feel my own performance was as strong as in previous years. I would therefore ask that my discretionary bonus reflect this by an appropriate amount. Instead, the firm's stronger than expected performance was driven by a large number of employees in other roles, and therefore I would like to see the bulk of my

direct reports, and in fact many of their direct reports, paid greater bonuses than I receive. I am confident that in future years this will be reversed! Finally, we have stock-based compensation in the form of stock option grants. Unlike all other parts of our compensation, I do not believe that all employees should participate in this plan. Instead this form of compensation should be reserved for a small number of employees who we see as current and future leaders of the firm, individuals who we believe can make a difference to the company beyond our already high standards. These grants should be designed to be incentive for those select employees to think and behave as owners, to think about creating value for the long-term, and to increase their own personal commitment to the firm. Human resources will be giving you the list of individuals we believe should be eligible for grants this year. You will see that my name is not on that list. Like many CEOs, I am fortunate to already be a significant shareholder of the firm. As I told the committee before last year's meeting, there is no amount of stock options, restricted stock, or any other stock based compensation that would make me feel more of an owner, or increase my commitment to the company. (I would be concerned about any company whose CEO felt any differently.) Instead I ask the committee in looking at the list to broaden its definition of "leaders" beyond employees with significant managerial or financial responsibilities to those who display time and time again the values that we as a company believe in and therefore "lead" others by example not by mandate. That, as much as any other attribute, will create value in the long run. In giving me what I ask, I realize the committee will be going against the standard approaches to compensation. There will be no talk of "we look at what other executives at other similar companies are paid", or "payouts are based on defined financial targets". But I believe these approaches are random and self-serving, with little regard for an examination of an executive's own performance. I will never forget my first year receiving a bonus greater than my salary working at a bulge bracket investment bank. After hearing the amount from my boss, I immediately called my father with the news. The first words out of his mouth were "don't ever feel that you are worth it". I don't want him to say that to me again.


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