Role of the Committee

The Executive Compensation and Development Committee is made up of four independent members of the Board of Directors. The Committee members are neither employees nor former employees of the Company. The functions of the Committee include:

• reviewing the Company’s executive compensation strategy,
• reviewing the design of the Company’s executive compensation program,
• overseeing the administration of the executive compensation plans,
• monitoring and overseeing the career development of executives,
• annually establishing performance commitments for the CEO, executive officers and key management,
• reviewing performance annually and determining the individual elements of total compensation for the CEO and other designated executives, and
• reviewing at least annually diversity representation within the Company.

Principles of Executive Compensation

The Company’s executive compensation program is designed to:

• tie compensation to performance that is consistent with the Company’s values and increases shareholder value,
• attract and retain employees needed to meet the Company’s growth and performance objectives,
• set the total compensation of the Company’s executives at market-competitive levels,
• link compensation to both short- and long-term Company performance,
• place a significant portion of each executive’s compensation at risk; the more senior an executive’s position, the more compensation should be at risk, and
• link the interests of the Company’s executives with its owners through stock ownership.

Executive Compensation Practices

Each year, the Company participates in surveys prepared by outside consultants. The companies included in these surveys are those the Company competes with for executive talent. Most, but not all, of these companies are included in the Dow Jones Industrial Index, the performance of which is shown in the Performance Graph on page 30. Based largely on the median compensation of these surveyed companies, the Committee sets the target compensation of the Company’s senior executives.

At the Committee’s request, the Company undertook a study during 2001 to determine whether its executive compensation program was fulfilling its stated principles and objectives. As a result of this study, the Committee approved a new annual executive assessment and reward program for the Company beginning in 2002. This plan establishes a new way to set executive expectations and goals, measure executive performance and differentiate rewards based on results. Its chief features are greater focus on revenue growth, fewer key goals, a new assessment of people leadership and greater discretion in assessing rewards. In addition to revenue, economic profit will be the other performance measure used in funding the plan’s award pool. Both measures will be measured annually, rather than on a three year weighed average basis, as was the case with the plan’s prior performance measure, Economic Value Added (EVA). These same two measures will also be used to establish the annual performance goals under the Wage Dividend Plan, the Company’s annual bonus program for its U.S. employees, other than its executives.