The SEC's final regulations relating to enhanced executive compensation disclosure in annual proxy statements will be effective for all 2006 proxy statements.

These new regulations dramatically increase the amount and complexity of the disclosure, including:

• Increasing the number of tables from four to seven
• Describing in detail the rationale and operations of your executive compensation program, including metrics used in incentive award determinations
• Providing executive-specific information about retirement, severance and change of control programs
• Reducing the level of fringe benefit expenditure that triggers individual disclosure
• Requiring that the disclosures be made in 'plain English', as opposed to the formalized and often repetitive language that was previously the norm

Additionally, the new regulation requires the chief executive officer and principal accounting officer certify the executive compensation portion of the proxy (in the same manner that they certify the financial statements), in addition to making the compensation committee of the board of directors approve the overall statement.

What does this mean to those people at a company who have responsibility for the executive compensation proxy disclosure? The 2007 proxy season filing document will:

• Be significantly longer and more involved
• Need input from more sources prior to completion
• Take a longer time to complete and review
• Place a greater burden on documentation and record keeping processes

Top 5 CAN HELP YOU THROUGH THIS PROCESS. Top 5's team of compensation experts offers a wide range of services to help in the completion of your company's proxy. Depending on your needs, time and available resources, Top 5 can offer the following services:

• Project co-ordination: Top 5 can help break down the requirements into discrete work steps, manage the process of obtaining and compiling data (from internal and external sources), as well as guide the work product around your company (including CEO, CFO and compensation committee members) and outside SEC counsel for approval.

• 2006 activities: Top 5 can review your current executive compensation practices and discuss with you how those practices may be viewed by the investing public upon disclosure in the 2007 proxy. We can suggest changes based upon our knowledge of the regulations and your peers; for example, we can model your change of control program reportable payments—and if your programs appear unreasonably generous (based on our market knowledge), they could be amended before year end and included in the executive compensation report.

• Text preparation: Top 5 will review your existing programs and meet with the compensation committee and management to obtain an in-depth understanding of your company's executive compensation process and convert that knowledge into an explanation that will satisfy the 'plain English' requirement of the regulation. Our knowliedge of evolving proxy disclosure best practices will help your company's disclosure contain an appropriate level of detail—while providing sufficient information for investors to create an informed opinion about your executive compensation practices.

• Table (and other numerical information) preparation: The regulations envision an expanded summary compensation table which is supported by five other tables; additionally, a table of board of director compensation is now required. There are additional requirements for numeric disclosure, which could be presented in tabular format. Some of the figures which need to be included are the result of technical calculations (severance, golden parachutes), valuations (fringe benefits, incremental increases in SERP values, equity grants) as well as detailed calculations (option vesting, long term incentive payout tracking). Top 5 is uniquely qualified to help your company in the preparation of any (or all) tabular disclosure, as a result of its understanding of the underlying programs which led to payout/accrual as well as the technical requirements related to the calculation. The tables will be repeated in subsequent proxies (as is the case now) and Top 5 is creating a methodology for efficient updating.

• CEO, CFO and Board level review assistance: The CEO and the CFO now need to certify as to the accuracy and completeness of the executive compensation disclosure in the proxy statement, in the same manner that they certify the accuracy of the financial statements which are contained in quarterly and annual SEC filings. We can assist the CEO, CFO, and the board of directors in their review of your company's executive compensation programs and the proxy itself; the assistance can be tailored to the needs of the reviewer, and can range from written reports to individual meetings.

• Compensation committee guidance: The SEC's initiative reflected a belief by the investing public that many boards of directors do not have a good grasp on the total amount of executive compensation, and do not adequately relate executive pay to corporate performance. Top 5 can assist the board in understanding the total compensation package that is currently offered to executives (through the use of tally sheets and peer group analysis), determine the current pay-for-performance relationship compared to the market and suggest program and/or metric changes that may provide for more comfort to the board and the investors in this area.

• 2007 Activities: After the proxy is completed, Top 5 can help your company understand the executive compensation marketplace based on programs disclosed in the 2007 proxies submitted by your company's peers. If your company is looking to attract or retain executives, or is concerned that its executive pay programs are looked at unfavorably by investors, enhanced proxy disclosure will give us far greater insight than we have ever had into the types of programs and goals that companies use in compensating their executives. Top 5 can help your company distill and understand this data and use it as a basis for taking action during 2007.

WHY Top 5? Top 5 is a consulting firm focused on executive compensation in the life sciences area. As a result, we have a great deal of expertise in program design and operation, as well as regulatory compliance issues. Our boutique size means that we limit the number of assignments that we accept, so that each client receives individualized attention from a principal who is personally involved in every step of the work performed. We do not believe that one answer, format or method of analysis fits all client situations.

To discuss our services in this area in more detail, please feel free to contact any of the following members of our consulting group. To email a consultant, simply click on their name below.

Jay Edelman: 510-745-8675