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Dupont’s 2005 Compensation Committee Report on Executive Compensation

The Compensation Committee (the "Committee") is responsible for establishing executive compensation policies and programs consistent with corporate objectives and stockholder interests. The Committee's membership is determined by the Board and is composed entirely of independent directors. The Committee meets at scheduled times during the year, and it also considers and takes action by written consent. The Committee Chair reports on Committee actions and recommendations at Board meetings. The Committee engages independent compensation consultants and considers their data and input.

  The Company's executive compensation policy is designed to attract, motivate, reward and retain high quality executives necessary for the leadership of the Company by aligning their interests with those of the stockholders and recognizing the individual and team performance of each executive's effectiveness in meeting the business objectives of the Company. The Company's executive compensation policy is intended
to provide each executive a total annual compensation that is commensurate with the executive's responsibilities, experience and demonstrated performance and competitive with a select group of peer companies as well as a larger group of other similarly sized industrial companies.

  When determining variable compensation, the Committee evaluates the Company's corporate performance and annual compensation against the peer group,
which are the same companies included in
the peer group index used in the stock performance graph shown on page 25. The policy also provides for competitive long-term compensation opportunity when compared with other major industrial companies, including many of those shown in the peer group index.

Stock Ownership Guidelines

The Committee believes senior leadership should have a significant equity position in the Company. Stock ownership guidelines are in place to better align executive officers and other senior leaders with the interests of stockholders and to encourage a longer-term focus in managing the Company. Stock ownership guidelines vary from a minimum of five times base salary for the CEO to one and one-half times for Vice Presidents. An annual review is conducted to assess compliance with the guidelines. The CEO and other named executive officers exceed the ownership guidelines.

Components of Compensation

Compensation for executive officers consists of the following components: salary, annual variable compensation, and long-term incentive grants consisting of stock options and performance-based and time-vested restricted stock units.

Salary

Consistent with the Company's policy, salaries are about the median of the peer group. Salary increases for executive officers are based on individual contribution and position relative to the median of the peer group. This is the same approach as used for other salaried employees.

Variable Compensation Plan

The Variable Compensation Plan (VCP) provides approximately 6,600 DuPont employees, including executive officers, with total annual compensation that varies up
or down based on the performance of the Company, the performance of their business unit and their individual contribution. Typically, 25% of variable compensation is paid in DuPont Common Stock, and senior leaders have the choice of receiving up to 100% in stock.

 As previously approved by stockholders,
the VCP limits the annual maximum funding
to 20% of consolidated net income after deducting 6% of net capital employed. Each year the Committee reviews operating results, excluding all special items, in determining the overall limit on variable compensation. This ensures that the amount available for variable compensation fluctuates in relation to the Company's operating results.

  In determining VCP payments to participants for 2004, the Committee used a formula which consisted of equally weighted components of earnings per share (EPS) (excluding special items) versus the prior year and return on investors' capital (ROIC) versus the average of the peer group.

  Variable Compensation differentiation by business unit is based on after-tax operating income (excluding special items), free cash flow, and revenue versus each unit's financial commitments for the year. In addition, payments may be differentiated
by platform and business unit based on a qualitative assessment of performance on the Company's core values: ethics and integrity; workplace environment, treatment and development of people, and strategic staffing (including diversity); and safety, health and environmental stewardship.

  In arriving at the level of payments for 2004, the Committee considered that 2004 EPS (excluding special items) were 143% of 2003, ROIC was 93% of the average of the peer group and average business unit performance was 126% of pre-established performance metrics.

  The combination of the corporate and business unit performance metrics described above resulted in an average payment of 122% of the award target (with individual business unit payouts ranging from 89% to 146%). The Committee approved awards for 2004 that totaled 121% of the 2003 grant.

 Variable compensation payments for 2004 were 43% of the maximum amount available under the VCP limit. Over the past ten years, the Committee has approved payments on average of 48% of the maximum available.

Stock Performance Plan

Long-term incentive grants are made to provide an incentive primarily for employees responsible for the growth and success of the Company. Long-term incentive grants are also intended to encourage the ownership
of DuPont stock and thereby further link
the interest of grantees with those of the Company's stockholders. About 2,100 employees, including executive officers, key leaders globally and middle management, received grants in 2004.

  The Committee has established long-term incentive targets for each participating level of responsibility within the Company based on a survey of practices by large industrial companies conducted by Mercer Human Resource Consulting. Mercer's survey included several of the peer group companies used for benchmarking total annual compensation and for the stock performance graph referenced above, as well as other publicly traded companies with multibillion dollar revenues. This broader group of companies, rather than the peer group is used for determining target long-term compensation because of the greater variability in value of long-term compensation plans. Targets for DuPont  are set to be near the median long-term incentive opportunity granted by the survey group.

  Stock options typically are granted annually and individual grants generally range from 0% to 200% of the target for each level of responsibility to reflect employees' future potential and individual performance, including achievement of critical operating tasks in such areas as organizational capacity and strategic positioning. Annual grants are made at market price on the date of grant, vest in one-third increments over three years, and carry a term of six years. Options require DuPont stock price appreciation in order for the grantees
to realize any benefit, thereby aligning employee and stockholder interests.

  Beginning with grants made in 2003, the Company has expensed stock options. The Company has never repriced stock options and has no intent to reprice options in the future.

  A reload feature is available for options granted from 1997 through 2003 to
facilitate stock ownership by management. Participants are eligible for reload options upon the exercise of those options with the condition that shares received from the exercise are held for at least two years. Reloads are granted as nonqualified stock options at fair market value and have a term equal to the remaining term of the original option. Reload options do not increase the combined number of shares and options held by the executive prior to the exercise. Effective with options granted in 2004, option grants do not include a reload feature.

  The Company's long-term incentive
program uses a blend of stock options, performance-based restricted stock units and time-vested restricted stock units. All options and restricted stock units are granted under the Company's Stock Performance Plan, previously approved by stockholders.

  These vehicles serve to balance a core program of options, intended to reward long-term value creation, with an opportunity to reward appropriate executives for achieving pre-established operational objectives over a mid-term (three year) time horizon. The utilization of time-vested restricted stock units provides capital accumulation opportunities and supports retention goals around key employees. Restricted stock units are paid out in shares of DuPont stock.

  For grants made in 2005, stock options represent 50%-75% of the long-term grant value.

  Performance-based restricted stock units represent about 25% of the 2005 long-term grant value for DuPont corporate officers, who drive the development and execution
of business strategy. Units are awarded to participants at the beginning of a three-year performance cycle. At the conclusion of the performance cycle, payouts can range from 0%-200% of the target grant based on pre-established performance-based objectives in both revenue growth and ROIC vs. the peer group, over a three year performance period.

  Time-vested restricted stock units represent 25% of a corporate officer's long-term grant value in 2005. The time-based restrictions will lapse in accordance with guidelines determined by the Committee, generally over a three-year period.

  The Chairman and CEO receives 50% of value in options and 50% of value in performance-based restricted stock units; he does not receive time-vested restricted stock units.

  Participants below the corporate officer level receive 75% of value in options and 25% of value in time-vested restricted stock units.

  In addition to annual grants, special grants of options, time-vested restricted stock units and performance-vested restricted stock units are made to employees to recognize advancement to key senior management positions and/or to recognize significant achievements.

 

Compensation for the Chief Executive Officer (CEO)

The Committee recommends to the Board specific individual compensation actions for the Chairman and Chief Executive Officer (CEO) based upon evaluation of the CEO's performance against Board-approved goals and objectives. The Committee has the practice of tracking the total annual compensation of CEOs of the peer group
to assist in the determination of the compensation of DuPont's CEO. The Committee also monitors the competitive practice of a broader range of Fortune 100 companies. There has been concern over increasing CEO compensation in the market, relative to that of average employees
without corresponding accountability for performance. Over the past decade, the position of DuPont's Executive Vice President has been used as an additional benchmark. Total annual cash compensation for the CEO is currently about twice that of the Executive Vice President.

  In reaching its decision on Mr. Holliday's base pay, 2004 variable compensation award, and long-term incentive grants, the Committee noted Mr. Holliday's performance and leadership in achieving strong operational results. The Committee also considered Mr. Holliday's oversight of completion of the sale of the majority of
the net assets of the Textiles & Interiors segment, significant progress on corporate-wide efforts to rationalize infrastructure costs and align resources, and the successful launch of the new DuPont. The following compensation actions were reviewed and approved by the Board based on its evaluation of Mr. Holliday's performance:

Base Pay

Mr. Holliday's last salary adjustment was effective January 1, 2003, when he received a three percent increase consistent with the salary adjustments for other senior leaders. At Mr. Holliday's request, his 2004 salary remained at the 2003 level of $1,118,000. For 2005 the Board has approved an increase in salary to $1,255,000. This increase will place his base pay at a level slightly below the expected 2004 median pay for peer group chief executive officers.

Variable Compensation

The computation of Mr. Holliday's 2004 variable compensation grant was consistent with the method followed for other corporate employees, reflecting the 122% award target based on corporate and business unit financial results and an individual performance factor of 120%. Mr. Holliday's variable compensation grant for 2004 was $2,400,000.

Long-term Incentives

In 2004, Mr. Holliday received 245,800 stock options and 64,000 performance-based restricted stock units. In February 2005, the Board approved a grant to Mr. Holliday
of 300,000 stock options and 70,000 performance-based restricted stock units.

  * * *

  The federal tax laws impose requirements in order for compensation payable to the CEO and certain executive officers to be fully deductible. The Company has taken appropriate actions to maximize its income tax deduction.

 The Compensation Committee believes the executive compensation programs and practices described above are competitive. They are designed to provide increased compensation with improved financial results and offer additional opportunity for capital accumulation, but only if stockholder value is increased.

COMPENSATION COMMITTEE

Lois D. Juliber, Chair
Alain J. P. Belda
H. Rodney Sharp, III

 

 

For more information, contact info@compensationstandards.com or call 925.685.5111.
© 2005, Executive Press, Inc.
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