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A Primer on Executive Pay

May 26, 1996

Here are definitions of some of the terms commonly used in connection with executive compensation:

Black-Scholes pricing model: A complex valuation method commonly used by companies and compensation experts to assign a present--or current--value to stock option grants.

Stock option: The right to purchase or sell a stock at a specified price within a stated period. Options are the most widely used type of long-term incentive grant among large companies. They are mostly used for executives.

Strike price: The price at which an executive may sell options. It is also known as the exercise price.

Restricted stock: Represents outright grants of shares earned solely by continued employment. The stock is subject to certain conditions, such as when the holder can sell.

Proxy statement: Information the Securities and Exchange Commission requires to be provided to shareholders before a firm's annual meeting. The statement contains pertinent details about pay, bonus and incentive plans for executives and directors.

Standard & Poor's 500 index: An index showing the change in the aggregate market value of 500 stocks. The index consists of 400 industrial, 60 transportation and utility companies and 40 financial issues.

* Sources: Dictionary of Finance and Investment Terms; Frederic W. Cook & Co.

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