SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
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The Charles Schwab Corporation
- --------------------------------------------------------------------------------________________________________________________
(Name or Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
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[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
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The Charles Schwab Corporation 2001 Proxy Statement2003 PROXY STATEMENT
==============================================================
THE CHARLES SCHWAB CORPORATION
LETTER TO STOCKHOLDERS
March 26, 2001
Dear Fellow Stockholders:MARCH 28, 2003
DEAR FELLOW STOCKHOLDERS:
We cordially invite you to attend our 2001 Annual Meeting2003 annual meeting of Stockholders.stockholders. The
meeting will be held on Monday,Friday, May 7, 2001,9, 2003, at 2:00 p.m., Pacific time, at the
Palace Hotel, 2 New MontgomeryNob Hill Masonic Center, 1111 California Street, San Francisco, California.
At the meeting we will:
*o elect four directors for three-year terms,
*o vote on a proposal to amendapprove an amendment to the Certificate of Incorporation2001 Stock Incentive Plan
regarding grants to increase
the number of authorized shares of common stock,
*non-employee directors,
o vote on a proposal to approve the 2001 StockLong-Term Incentive Plan,
*o vote on a proposal to approve the Annual Executive Individual Performance
Plan, asannual bonus provisions contained in
Charles R. Schwab's amended Employment Agreement,
o vote on a proposal to approve an incentive plan for Lon Gorman,
o vote on a stockholder proposal regarding the expensing of stock options, and
* transacto conduct any other business properly coming before the meeting.
We also will report on our corporate performance in 20002002 and answer your
questions.
In view of your interest in the webcast of last year's annual meeting, we will
offer a webcast of this year's meeting.
We are continuing to make our proxy statement and annual report available over
the Internet. Also,Internet and to make it possible for all stockholders again will be able to vote on the
Internet. WE ENCOURAGE YOU ONCE AGAIN TO TAKE ADVANTAGE OF INTERNET VOTING. IT IS A SIMPLE
PROCESS AND THE LEAST EXPENSIVE WAY FOR US TO PROCESS YOUR VOTE. Furthermore, ifWhen you vote
on the Internet, you will have the option at that time to enroll in Internet delivery. WE
ENCOURAGE STOCKHOLDERS WHO HAVE NOT YET DONE SO TO ENROLL IN INTERNET DELIVERY.
IT IS THE LEAST EXPENSIVE AND QUICKEST WAY FOR US TO SEND PROXY MATERIALS TO
YOU.
You will find a form in the proxy materials which enables us, as the SEC now
permits, to deliver just one set of proxy materials to households with multiple
stockholders. If you live in such a household (and choose not to enroll in
Internet delivery), we encourage you to allow us to send your household a
single set of proxy materials to help us reduce future proxy printing and
distribution costs.
As we reflect on significant recent developments in our corporate governance,
we are pleased that our Board has appointed two new directors. In April 2002,
Paula A. Sneed joined our Board, and Robert N. Wilson, whose appointment was
approved in March 2003, will join our Board beginning at the time of our annual
meeting. Ms. Sneed is Group Vice President and President of E-Commerce and
Marketing Services for Kraft Foods North America, part of Kraft Foods, Inc. Mr.
Wilson has had a long and prominent career at Johnson & Johnson, and will be
retiring from his current position as Senior Vice Chairman of its board of
directors in May 2003. Mr. Wilson is also a director of Amerada Hess
Corporation and U.S. Trust Corporation (which became a subsidiary of the
Company through a merger in May 2000).
We also want to express our appreciation to Dr. Condoleezza RiceArun Sarin, who after 18 months
of valued service, resignedwill retire from
our Board at the time of Directors in January 2001, after
which time she began serving asour annual meeting, for his valued contributions to
the National Security Advisor of the United
States. While performing this governmental service, Dr. Rice is on leave from
Stanford UniversityCompany as a Senior Fellow atdirector since 1998. Mr. Sarin's decision to retire from our
Board was prompted by his appointment to be Chief Executive Officer of Vodafone
PLC, requiring his relocation to London where Vodafone is headquartered. We
also want to thank Jeffrey Maurer, who recently retired from his director and
executive officer positions with both the Hoover InstitutionCompany and U.S. Trust, for the
significant services he provided following the Company's merger with U. S.
Trust, and we wish to acknowledge his long and distinguished Professor of Political Science.career at U.S.
Trust.
We look forward to seeing you at theour annual meeting. If you cannot attend the
meeting in person, we encouragehope you towill join us via the Internet broadcast.our Webcast.
Sincerely,
/s/ CHARLES R. SCHWAB /s/ DAVID S. POTTRUCK
- --------------------- ---------------------__________________________ __________________________
CHARLES R. SCHWAB DAVID S. POTTRUCK
CHAIRMAN OF THE BOARD AND PRESIDENT AND
CO-CHIEF EXECUTIVE OFFICER CO-CHIEF EXECUTIVE OFFICER
1
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[PHOTO OF CHARLES R. SCHWAB AND DAVID S. POTTRUCK]
TABLE OF CONTENTS
NOTICE OF 20012003 ANNUAL MEETING OF STOCKHOLDERS..................................3STOCKHOLDERS............. 3
PROXY STATEMENT................................................................4
Questions and Answers.......................................................5
Proposals To Be Voted On...................................................10
The Board of Directors.....................................................13
Board and Committee Meetings...............................................17
Compensation Committee Interlocks and Insider Participation................18
Director Compensation......................................................19
Principal Stockholders.....................................................20
Performance Graph..........................................................22
Summary Compensation Table.................................................23
Option Grants..............................................................26
Options Exercised..........................................................27
Compensation Committee Report..............................................28
Audit Committee Report.....................................................34
Auditor Independence.......................................................35
Other Information..........................................................36
Certain Transactions..................................................36
SectionSTATEMENT........................................... 4
QUESTIONS AND ANSWERS................................. 5
PROPOSALS TO BE VOTED ON.............................. 9
THE BOARD OF DIRECTORS................................ 22
BOARD AND COMMITTEE MEETINGS.......................... 26
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION....................................... 28
DIRECTOR COMPENSATION................................. 29
PRINCIPAL STOCKHOLDERS................................ 31
PERFORMANCE GRAPH..................................... 33
SUMMARY COMPENSATION TABLE............................ 34
OPTION GRANTS......................................... 37
OPTIONS EXERCISED..................................... 39
PENSION PLAN TABLE.................................... 40
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY
COMPENSATION PLANS.................................. 41
COMPENSATION COMMITTEE REPORT......................... 43
AUDIT COMMITTEE REPORT................................ 50
AUDITOR INDEPENDENCE.................................. 51
OTHER INFORMATION..................................... 53
CERTAIN TRANSACTIONS................................ 53
CERTAIN RELATIONSHIPS............................... 54
SECTION 16(a) Beneficial Ownership Reporting Compliance...............37
Stockholder Proposals.................................................37
Costs of Proxy Solicitation...........................................37
Incorporation by Reference............................................37BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE........................................ 55
STOCKHOLDER PROPOSALS............................... 55
EFFECT OF NOT RETURNING PROXY....................... 55
COSTS OF PROXY SOLICITATION......................... 56
INCORPORATION BY REFERENCE.......................... 56
HOUSEHOLDING........................................ 57
TICKETS AND INTERNET ACCESS TO THE ANNUAL MEETING.............................38MEETING......... 58
APPENDIX A
- - DESCRIPTION OF CHARLES R. SCHWAB'S EMPLOYMENT AND
LICENSE AGREEMENTS...............39AGREEMENTS.................................. 59
APPENDIX B
- -DESCRIPTION OF H. MARSHALL SCHWARZ'S SEPARATION AND
EMPLOYMENT AGREEMENTS............................... 62
APPENDIX C
DESCRIPTION OF JEFFREY S. MAURER'S SEPARATION AND
EMPLOYMENT AGREEMENTS............................... 64
APPENDIX D
DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN...................42PLAN.......... 66
APPENDIX C - -E
NEW PLAN BENEFITS TABLE FOR THE 2001 STOCK INCENTIVE
PLAN................................................ 72
APPENDIX F
DESCRIPTION OF THE ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE
PLAN...........................................................47LONG-TERM INCENTIVE PLAN........... 73
APPENDIX D - -G
NEW PLAN BENEFITS TABLE........................................49TABLE FOR THE LONG-TERM INCENTIVE
PLAN................................................ 75
APPENDIX E - -H
DESCRIPTION OF LON GORMAN'S EMPLOYMENT AGREEMENT...... 76
APPENDIX I
AUDIT COMMITTEE CHARTER........................................50CHARTER............................... 79
2
NOTICE OF 20012003 ANNUAL MEETING OF STOCKHOLDERS
The 2001 Annual Meeting2003 annual meeting of Stockholdersstockholders of The Charles Schwab Corporation will
be held on Monday,Friday, May 7, 2001,9, 2003, at 2:00 p.m., Pacific time, at the Palace Hotel,
2 New MontgomeryNob Hill
Masonic Center, 1111 California Street, San Francisco, California, to conduct
the following items of business:
*o elect four directors for three-year terms,
*o vote on a proposal to amendapprove an amendment to the Certificate of Incorporation2001 Stock Incentive Plan
regarding grants to increase
the number of authorized shares of common stock,
*non-employee directors,
o vote on a proposal to approve the 2001 StockLong-Term Incentive Plan,
*o vote on a proposal to approve the Annual Executive Individual Performance
Plan, asannual bonus provisions contained in
Charles R. Schwab's amended employment agreement,
o vote on a proposal to approve an incentive plan for Lon Gorman,
o vote on a stockholder proposal regarding the expensing of stock options, and
* transacto conduct any other business properly coming before the meeting.
Stockholders who owned shares of our common stock at the close of business on
March 8, 200110, 2003 are entitled to attend and vote at the meeting and any
adjournment or postponement of the meeting. A complete list of registered
stockholders will be available prior to the meeting at our principal executive
offices at 120 Kearny Street, San Francisco, California 94108.
By Order of the Board of Directors,
/s/ CARRIE E. DWYER
- -------------------________________________
CARRIE E. DWYER
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND
CORPORATE SECRETARY
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THE 20012003 ANNUAL
MEETING OF
STOCKHOLDERS WILL BE
HELD ON MONDAY,FRIDAY, MAY 7,
2001,9,
2003, AT 2:00 P.M., AT
THE PALACE HOTELNOB HILL MASONIC
CENTER IN
SAN FRANCISCO,
CALIFORNIA.CALIFORNIA
PROXY STATEMENT
As a stockholder of The Charles Schwab Corporation, you have a right to vote on
certain matters affecting the company.Company. This proxy statement discusses the
proposals you are voting on this year. Please read this proxy statement
carefully because it contains important information for you to consider when
deciding how to vote. YOUR VOTE IS IMPORTANT.
In this proxy statement, we refer to The Charles Schwab Corporation as the
"Company." We also refer to this proxy statement, the proxy card and our 20002002
annual report as the "proxy materials."
The Board of Directors is sending proxy materials to you and all other
stockholders on or about March 26, 2001.28, 2003. The Board is asking you to vote your
shares by completing and returning the proxy card or otherwise submitting your
vote in a mannerone of the ways described on pages 5 and 6 of this proxy statement
under "Questions and Answers - HowAnswers--How Do I Vote?"
Unless we state otherwise, all information in this proxy statement concerning
Company common stock reflects the May 2000 three-for-two stock split.
This proxy statement includes summary information on the Company's financial
performance. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
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STOCKHOLDERS OWNING
COMPANY SHARES AT
THE CLOSE OF BUSINESS
ON MARCH 8, 200110, 2003 ARE
ENTITLED TO ATTEND AND
VOTE AT THE MEETING.
QUESTIONS AND ANSWERS
Q: WHO CAN VOTE AT THE ANNUAL MEETING?
A: Stockholders who owned Company common stock on March 8, 200110, 2003 may attend and
vote at the annual meeting. Each share is entitled to one vote. There were
1,386,965,3891,352,529,053 shares of Company common stock outstanding on March 8, 2001.10, 2003.
Q: WHAT IS IN THIS PROXY STATEMENT?
A: This proxy statement describes the proposals on which we would like you, as
a stockholder, to vote. It also gives you information on the proposals, as well
as other information, so that you can make an informed decision.
Q: WHAT IS THE PROXY CARD?
A: The proxy card enables you to appoint Charles R. Schwab and David S.
Pottruck as your representatives at the annual meeting. By completing and
returning the proxy card, you are authorizing Mr. Schwab and Mr. Pottruck to
vote your shares at the meeting as you have instructed them on the proxy card.
This way, your shares will be voted whether or not you attend the meeting. Even
if you plan to attend the meeting, it is a good idea to complete and return
your proxy card before the meeting date just in case your plans change.
Q: WHAT AM I VOTING ON?
A: We are asking you to vote on:
*o the election of four directors for terms of three years,
*o a proposal to amendapprove an amendment to the Certificate of Incorporation2001 Stock Incentive Plan
regarding grants to increase the
number of authorized shares of common stock,
*non-employee directors,
o a proposal to approve the 2001 StockLong-Term Incentive Plan,
and
*o a proposal to approve the Annual Executive Individual Performance Plan,
as amended.annual bonus provisions contained in Charles R.
Schwab's amended employment agreement,
o a proposal to approve an incentive plan for Lon Gorman, and
o a stockholder proposal regarding the expensing of stock options.
The section entitled "Proposals To Be Voted On," beginning on page 10,9, gives you
more information on these matters.
Q: HOW DO I VOTE?
A: You may vote by mail or telephone, on the Internet or in person at the
meeting, as discussed below.
YOU MAY VOTE BY MAIL.
You do this by completing and signing your proxy card and mailing it in the
enclosed prepaid and addressed envelope. If you mark your voting instructions
on the proxy card, your shares will be voted:
*o as you instruct, and
*o according to the best judgment of Mr. Schwab and Mr. Pottruck if a proposal
comes up for a vote at the meeting that is not on the proxy card.
If you do not mark your voting instructions on the proxy card you mail in, your
shares will be voted:
*o FOR the four named nominees for directors,
* FOR approval of the amendment to the Certificate of Incorporation to
increase the number of authorized shares of common stock,
* FOR approval of the 2001 Stock Incentive Plan,
* FOR approval of the Annual Executive Individual Performance Plan, as
amended, and
5
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WHO CAN VOTE AT THE
ANNUAL MEETING?
WHAT IS IN THIS PROXY
STATEMENT?
WHAT IS THE PROXY
CARD?
WHAT AM I VOTING ON?
HOW DO I VOTE?
QUESTIONS AND ANSWERS
*o FOR approval of the amendment to the 2001 Stock Incentive Plan regarding
grants to non-employee directors,
o FOR approval of the Long-Term Incentive Plan,
o FOR approval of the annual bonus provisions contained in Charles R. Schwab's
amended employment agreement,
o FOR approval of the incentive plan for Lon Gorman,
o AGAINST the stockholder proposal regarding the expensing of stock options,
and
o according to the best judgment of Mr. Schwab and Mr.PottruckMr. Pottruck if a proposal
comes up for a vote at the meeting that is not on the proxy card.
YOU MAY VOTE BY TELEPHONE.
You do this by following the "Vote by Telephone" instructions that came with
your proxy statement. If you vote by telephone, you do not have to mail in your
proxy card.
YOU MAY VOTE ON THE INTERNET.
You do this by following the "Vote by Internet" instructions that came with
your proxy statement. If you vote on the Internet, you do not have to mail in
your proxy card.
YOU MAY VOTE IN PERSON AT THE MEETING.
We will pass out written ballots to anyone who wants to vote in person at the
meeting. However, if you hold your shares in street name, you must request a
proxy from your stockbroker in order to vote at the meeting. Holding shares in
"street name" means you hold them through a brokerage firm, bank or other
nominee, and therefore the shares are not held in your individual name.
Q: HOW DO I VOTE MY DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN SHARES?
A: If you participate in the Dividend Reinvestment and Stock Purchase Plan
managed by our transfer agent, Wells Fargo Bank Minnesota, N.A., the proxy card
you receive from Wells Fargo will include your Company shares held under that
plan.
If you participate in our Dividend Reinvestment and Stock Purchase Plan through
the Company's principal brokerage subsidiary, Charles Schwab & Co., Inc., the
proxy card you receive from that firm will include Company shares held in your
brokerage account and under that plan.
If you hold Company shares through the U.S. Trust Corporation Employee Stock
Purchase Plan, the proxy card you receive from Wells Fargo will include those
shares.account.
WE ENCOURAGE YOU TO EXAMINE YOUR PROXY CARD AND VOTING INSTRUCTIONS CLOSELY TO
MAKE SURE YOU ARE VOTING ALL OF YOUR COMPANY SHARES.
Q: HOW DO I VOTE MY RETIREMENT PLAN SHARES?
A: The proxy card you receive from our transfer agent will include your Company
shares, if any, held under The SchwabPlan Retirement Savings and Investment
Plan and under the U.S. Trust Corporation 401(k) Plan and ESOP of United States Trust Company of New York
and Affiliated Companies.Plan. By completing and
returning your proxy card, you provide voting instructions:
*o to the transfer agent for shares you hold in your individual name at Wells
Fargo Bank Minnesota, N.A., and
*6
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HOW DO I VOTE MY
DIVIDEND REINVESTMENT
AND STOCK PURCHASE
PLAN SHARES?
HOW DO I VOTE MY
RETIREMENT PLAN
SHARES?
QUESTIONS AND ANSWERS
o to these plans' purchasing agents for shares you hold through these plans.
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
A: It means that you have multiple accounts at the transfer agent or with
stockbrokers. Please complete and return all proxy cards to ensure that all
your shares are voted.
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HOW DO I VOTE MY
DIVIDEND REINVESTMENT
AND STOCK PURCHASE
PLAN SHARES?
HOW DO I VOTE MY
RETIREMENT PLAN
SHARES?
WHAT DOES IT MEAN IF I
RECEIVE MORE THAN ONE
PROXY CARD?
QUESTIONS AND ANSWERS
Unless you need multiple accounts for specific purposes, it may be less
confusing if you consolidate as many of your transfer agent or brokerage
accounts as possible under the same name and address.
Q: WHAT IF I CHANGE MY MIND AFTER I RETURN MY PROXY?
A: You may revoke your proxy and change your vote by:
*o signing another proxy card with a later date and returning it before the
polls close at the meeting,
*o voting by telephone or on the Internet before 12:00 p.m., Central time, on
May 4, 20018, 2003 (your LATEST telephone or Internet vote is counted), or
*o voting at the meeting.
Q: WILL MY SHARES BE VOTED IF I DO NOT RETURN MY PROXY?
A: IF YOUR SHARES ARE HELD IN STREET NAME, YOUR BROKERAGE FIRM, UNDER CERTAIN
CIRCUMSTANCES, MAY VOTE YOUR SHARES.
Brokerage firms have authority under New York Stock Exchange rules to vote
customers' unvoted shares on some "routine" matters. The New York Stock Exchange
has determined that except for the proposal to approve the 2001 Stock Incentive
Plan, all of the proposals described under "Proposals To Be Voted On," beginning
on page 10, are considered routine matters.
If you do not give a proxy to vote your shares, your brokerage firm may either:
* vote your shares on routine matters, or
* leave your shares unvoted.
As a brokerage firm, Charles Schwab & Co., Inc. may vote its customers' unvoted
shares on routine matters. However, as the Company's subsidiary, when it is
voting on Company proposals, it must follow a stricter set of New York Stock
Exchange rules. Specifically, our brokerage subsidiary can vote unvoted Company
shares held in brokerage accounts only in the same proportion as all other
stockholders vote.
When a brokerage firm votes its customers' unvoted shares on routine matters,
these shares are counted to determine if a quorum exists to conduct business at
the meeting. A brokerage firm cannot vote customers' unvoted shares on
non-routine matters. These shares are considered not entitled to vote on
non-routine matters,rather than having the effect of a vote against the matters.
We encourage you to provide instructions to your brokerage firm by giving your
proxy. This ensures your shares will be voted at the meeting.
YOU MAY HAVE GRANTED TO YOUR STOCKBROKER DISCRETIONARY VOTING AUTHORITY OVER
YOUR ACCOUNT.
Your stockbroker may be able to vote your shares depending on the terms of the
agreement you have with your stockbroker.
A PURCHASING AGENT UNDER A RETIREMENT PLAN MAY BE ABLE TO VOTE A PARTICIPANT'S
UNVOTED SHARES. FOR EXAMPLE, IF YOU ARE A PARTICIPANT IN THE SCHWABPLAN RETIRE-
MENT SAVINGS AND INVESTMENT PLAN, THE PLAN'S PURCHASING AGENT, UNDER CERTAIN
CIRCUMSTANCES, CAN VOTE YOUR SHARES.
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WHAT IF I CHANGE MY
MIND AFTER I RETURN MY
PROXY?
WILL MY SHARES BE
VOTED IF I DO NOT
RETURN MY PROXY?
QUESTIONS AND ANSWERS
Specifically, the purchasing agent will vote shares you hold under the Employee
Stock Ownership Plan ("ESOP") component of The SchwabPlan Retirement Savings and
Investment Plan if the purchasing agent does not receive voting instructions
from you. The purchasing agent will vote your unvoted shares held under the ESOP
component of the overall plan in the same proportion as all other plan partici-
pants vote their shares held under the ESOP component of the overall plan.
Q: HOW MANY SHARES MUST BE PRESENT TO HOLD THE MEETING?
A: To hold the meeting and conduct business, a majority of the Company's
out-
standingoutstanding shares as of March 8, 200110, 2003 must be present at the meeting. This is
called a quorum.
Shares are counted as present at the meeting if the stockholder either:
*o is present and votes in person at the meeting, or
*o has properly submitted a proxy (including voting by telephone or over the
Internet).
Q: HOW MANY VOTES MUST THE NOMINEES RECEIVE TO BE ELECTED AS DIRECTORS?
A: TheBecause four nomineesdirectors are to be elected at the annual meeting, the four
individuals receiving the highest number of votes FOR election will be elected as directors. This number is called a plurality.elected.
Q: HOW MANY VOTES MUSTARE NEEDED FOR THE AMENDMENT TOAPPROVAL OF EACH OF THE CERTIFICATEPROPOSALS OTHER
THAN THE PROPOSAL FOR THE ELECTION OF INCORPORATION
RECEIVE TO BE APPROVED?DIRECTORS?
A: The amendment will be approved if a majorityEach of the Company's shares out-
standing asproposals that we are asking you to vote on, other than the
proposal for the election of March 8, 2001 vote FOR approval.
Q: HOW MANY VOTES MUST THE 2001 STOCK INCENTIVE PLAN RECEIVE TO BE APPROVED?
A: The 2001 Stock Incentive Plan will be approved if a majority of the shares
present at the meeting in person or by proxy vote FOR approval.
Q: HOW MANY VOTES MUST THE ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE PLAN RECEIVE
TO BE APPROVED?
A: The Annual Executive Individual Performance Plan, as amended,directors discussed immediately above, will be
approved if a majority of the shares present at the meeting in person or by
proxy vote FOR approval.
Q: WHAT HAPPENS IF A DIRECTOR NOMINEE IS UNABLE TO STAND FOR ELECTION?
A: The Board may reduce the number of directors or select a substitute nominee.
In the latter case, if you have completed and returned your proxy card, Charles
R. Schwab and David S. Pottruck can vote your shares for a substitute nominee.
They cannot vote for more than four nominees.
87
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WHAT DOES IT MEAN IF I
RECEIVE MORE THAN ONE
PROXY CARD?
WHAT IF I CHANGE MY
MIND AFTER I RETURN MY
PROXY?
HOW MANY SHARES MUST
BE PRESENT TO HOLD THE
MEETING?
HOW MANY VOTES MUST
THE NOMINEES RECEIVE
TO BE ELECTED AS
DIRECTORS?
HOW MANY VOTES MUSTARE
NEEDED FOR THE
AMENDMENT TOAPPROVAL OF EACH OF
THE CERTIFICATEPROPOSALS OTHER
THAN THE PROPOSAL FOR
THE ELECTION OF
INCORPORATION RECEIVE
TO BE APPROVED?
HOW MANY VOTES MUST
THE 2001 STOCK
INCENTIVE PLAN RECEIVE
TO BE APPROVED?
HOW MANY VOTES MUST
THE ANNUAL EXECUTIVE
INDIVIDUAL
PERFORMANCE PLAN
RECEIVE TO BE
APPROVED?DIRECTORS?
WHAT HAPPENS IF A
DIRECTOR NOMINEE IS
UNABLE TO STAND FOR
ELECTION?
QUESTIONS AND ANSWERS
Q: HOW ARE VOTES COUNTED?
A: You may vote either "for" each director nominee or withhold your vote from
any one or more of the nominees.
You may vote "for" or "against" or "abstain" from voting on each of the other
three proposals.five proposals discussed under "Proposals To Be Voted On," beginning on page 9.
If you abstain from voting on any proposal,of these five proposals, it will have the
same effect as a vote "against" the proposal.
If you give your proxy without voting instructions, your shares will be counted
as a votevote:
o FOR each director nominee,
ando FOR each of the other three proposals.proposals discussed under "Proposals To Be Voted On,"
beginning on page 9, except for the stockholder proposal regarding the
expensing of stock options, and
o AGAINST the stockholder proposal regarding the expensing of stock options.
For a discussion of the effect of not returning your proxy if your shares are
held in street name through your brokerage firm, see "Other Information--Effect
of Not Returning Proxy" on page 55.
Voting results are tabulated and certified by our transfer agent, Wells Fargo
Bank Minnesota, N.A.
Q: IS MY VOTE KEPT CONFIDENTIAL?
A: Proxies, ballots and voting tabulations identifying stockholders are kept
confidential by the Company's transfer agent and will not be disclosed except
as may be necessary to meet legal requirements.
Q: HOW DO I ACCESS THE ANNUAL MEETING ON THE INTERNET?
A: For information on how to receive the real-time broadcast of the annual
meeting over the Internet, go to WWW.SCHWABEVENTS.COM.www.schwabevents.com.
Q: WHERE DO I FIND THE VOTING RESULTS OF THE MEETING?
A: We will announce preliminary voting results at the annual meeting. We will
publish the final results in our quarterly report on Form 10-Q for the second
quarter of 2001.2003. We will file that report with the Securities and Exchange
Commission in mid-August, and you can get a copy by contacting our Investor
Relations Hotline at (415) 636-2787 or the SEC at (800) SEC-0330 for the
location of its nearest public reference room. You can also get a copy on the
Internet at WWW.SCHWAB.COMwww.aboutschwab.com/irelations by clicking on "About Schwab""Financials" or
through the SEC's electronic data system called EDGAR at WWW.SEC.GOV.
9www.sec.gov.
8
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HOW ARE VOTES
COUNTED?
IS MY VOTE KEPT
CONFIDENTIAL?
HOW DO I ACCESS THE
ANNUAL MEETING ON THE
INTERNET?
WHERE DO I FIND THE
VOTING RESULTS OF THE
MEETING?
PROPOSALS TO BE VOTED ON
1. ELECTION OF DIRECTORS
WE ARE ASKING YOU TO ELECT OUR FOUR NOMINEES FOR DIRECTORS.
Nominees for directors this year are Donald G. Fisher, Anthony M. Frank, JeffreyNancy H. Bechtle, C. Preston Butcher,
David S. MaurerPottruck and Arun Sarin.George P. Shultz.
Each nominee is presently a director of the Company and has consented to serve
a new three-year term.
THE BOARD RECOMMENDS A VOTE FOR THESE NOMINEES.
2. APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
We are asking2001 STOCK INCENTIVE PLAN REGARDING GRANTS TO
NON-EMPLOYEE DIRECTORS
WE ARE ASKING YOU TO APPROVE AN AMENDMENT TO THE 2001 STOCK INCENTIVE PLAN TO
CHANGE THE GRANTS MADE TO THE COMPANY'S NON-EMPLOYEE DIRECTORS.
In late 2002 and early 2003, a review of the non-employee directors'
compensation program was performed as part of the Company's periodic
re-evaluation of the appropriateness of the compensation of non-employee
directors. The review included a comparison to directors' compensation at peer
group companies. The Board had last reviewed the non-employee directors'
compensation program in 2001. In January 2003, based on the most recent review,
the Compensation Committee of the Company's Board of Directors approved changes
to the stock-based grants to non-employee directors, as outlined below, and
recommended that the Board approve the changes. In January 2003, the Board
(including the employee directors who do not receive stock-based grants in
their capacity as directors) also approved the changes, subject to the approval
of stockholders, to approveand in March 2003, the Board authorized an amendment to the
Company's Certificate2001 Stock Incentive Plan reflecting the changes to be submitted to
stockholders for a vote.
Currently, upon joining the Board, a non-employee director is entitled to a
one-time grant of Incorporationoptions on 10,000 shares of Company common stock. In
addition, the plan currently provides for annual, automatic option grants to
increase thenon-employee directors. The number of authorized shares of Company common stock from 2 billion to 3 billion. Ascovered by
each such option grant is determined by dividing $150,000 by the closing price
of December 31, 2000, 1.507 billionCompany common stock on the grant date. The automatic grants occur on May 15
of each year, or on the next business day if May 15 is not a business day. All
of the 2
billion authorized shares had been used or reserved for use as follows:
* 1.386 billion issuedgrants mentioned above are immediately vested and outstanding shares,
* 97 million shares reserved for stockexercisable.
The amendment to the plan would make the following changes:
o A new non-employee director would receive an initial grant of options that have been granted,
* 22 million shares reserved for future grants under incentive plans, and
* 2 million shares required for other purposes.
Therefore, there are 493 million remaining available authorizedon
5,000 shares of Company common stock.
Increasing the numbero The annual, automatic grants to non-employee directors would consist of
authorized(i) options on 5,000 shares of common stock will give the Company
greater flexibility for:
* stock splits and stock dividends,
* grants under employee benefit and employee stock incentive plans,
* financings, corporate mergers and acquisitions,
* issuance of shares under the Company's Dividend Reinvestment and Stock
Purchase Plan, and
* other general corporate purposes.
Having this additional authorized capital stock available for future use will
allow the Company to issue additional shares of common stock without the expense
of a special meeting of stockholders.
The additional authorized shares will:
* be part of the existing class of common stock,
* not affect the terms of the common stock or the rights of the holders of common stock and * have the same rights and privileges as the(ii) a number of
restricted shares of Company common stock presently outstanding.
Stockholders' current ownershipdetermined by dividing $50,000 by
the average of the high and low market prices of Company common stock will not give them automatic
rights to purchase any of the additional authorized shares.
Any future issuance of additional authorized shares of common stock will
decrease the existing stockholders' equity ownership and may have a dilutive
effect on earnings per share of common stock and on the
equity and voting rights
of those holding common stock atgrant date.
o Although the timeinitial option grants to new non-employee directors would
continue to vest fully on the additional authorized shares are
issued.
Although not a factor in the Board's decision to propose the amendment to the
Certificate of Incorporation, one of the effects of the amendment may be to
enable
10grant date,
9
[side bar]
ELECTION OF DIRECTORS
o DONALD G. FISHERNANCY H. BECHTLE
o ANTHONY M. FRANKC. PRESTON BUTCHER
o JEFFREYDAVID S. MAURERPOTTRUCK
o ARUN SARINGEORGE P. SHULTZ
APPROVAL OF
AMENDMENT TO CERTIFICATE OF
INCORPORATION2001
STOCK INCENTIVE PLAN
REGARDING GRANTS TO
NON-EMPLOYEE
DIRECTORS
PROPOSALS TO BE VOTED ON
the Board to make more difficult or to discourage an attempt to obtain controlannual grants of options and restricted shares would vest over a
three-year period as follows:
o 25% on each of the Companyfirst and second anniversaries of the grant date, and
o the remaining 50% on the third anniversary of the grant date.
Full vesting would occur on a director's death, disability or retirement from
the Board.
The Compensation Committee and Board approvals of these changes to the
stock-based grants to non-employee directors were accompanied by meanstheir approval
of a merger, tender offer, proxy contest or otherwise,an increase in directors' cash compensation which became effective in
January 2003. For more information about the previous and as a result protect the continuity of present management.new directors' cash
compensation for non-employee directors, see "Director Compensation" on page 29.
The Company is not
aware of any effortbelieves that the changes in the stock-based grants to accumulate its securities or obtain control ofnon-employee
directors, including dividing the Company by means of a tender offer, proxy contest or otherwise.
The Company is not presently negotiatinggrants between stock options and restricted
stock, and the increase in non-employee directors' cash compensation will
better align the Company's non-employee directors' compensation with
anyone concerningstockholders' interests and with peer group directors' compensation.
For more information about the issuance or
use of any material amount of shares of common stock. Furthermore, except2001 Stock Incentive Plan, as it would be
amended, see the description in Appendix D. See also the table in Appendix E
for the 119 million shares reservedstock-based grants that would have been made under the plan in 2002 to
cover past and future grants under existing
incentive plans (as identified above),non-employee directors, based on certain assumptions, had the Company has no present arrangements,
understandings or plans concerning the issuance or use of a material amount of
shares of common stock.amended plan been
in effect in 2002.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION.
3. APPROVAL OF 2001 STOCK
INCENTIVE PLAN We are asking stockholders to approve the 2001 Stock Incentive Plan. This new
plan has been approved by the Board but will become effective only upon
stockholder approval.REGARDING GRANTS TO NON-EMPLOYEE DIRECTORS.
3. APPROVAL OF LONG-TERM INCENTIVE PLAN
WE ARE ASKING YOU TO APPROVE THE LONG-TERM INCENTIVE PLAN.
The new plan will replace the 1992 StockLong-Term Incentive Plan which expires in March 2002 (before the next annual meeting of stockholders).
The new plan, which has a maximum ten-year term, is substantially the same as
the 1992 plan, as amended. Stockholders approved the 1992 plan at the 1992
annual meeting of stockholders and approved various amendments to the 1992 plan
in 1994, 1996, 1997, 1998 and 1999.
If stockholders approve the new plan, we will be able to issuewould currently cover up to 70 million
shares of common stock under the new plan.
Non-employee directorsapproximately
800 executive and key employees will participate in the new plan. The
purpose of the new plan is to promote the long-term success of the Company and
increase stockholder value by:
* linking the interests of non-employee directors and key employees directly
to stockholder interests,
* encouraging non-employee directors and key employees to focus on long-term
objectives, and
* attracting and retaining non-employee directors and key employees with
exceptional qualifications.
For more information about the new plan, see the description of its terms in
Appendix B. See also the table in Appendix D for the amount of stock-based
compensation that would have been awarded under the new plan in 2000, based on
certain assumptions, had the new plan been in effect in 2000.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE 2001 STOCK INCENTIVE PLAN.
4. APPROVAL OF ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE PLAN
We are asking stockholders to approve the Annual Executive Individual
Performance Plan, as amended. This bonus plan covers certain executiveother officer participants selected by the Board Compensation
Committee but Co-Chief
Executive Officers Charles R. Schwabof the Company's Board of Directors. In January 2003, the
Compensation Committee approved the plan and David S.
11recommended that the Board approve
it. In March 2003, the Board also approved the plan, subject to the approval of
stockholders. As discussed below, stockholder approval is necessary to achieve
the desired tax results for cash incentive payments to executive officers under
the plan.
In late 2002 and early 2003, the Company reviewed the program by which it has
provided long-term incentive compensation to employees. In order to enhance
incentives to employees, and in view of uncertainties with respect to the
future accounting for employee stock options, the company decided to change the
focus of its long-term incentive compensation for 2003 from stock option grants
to a combination of cash and restricted stock awards. The Long-Term Incentive
Plan is part of this new overall long-term incentive compensation program and
would provide the cash component of long-term incentive compensation awards.
10
[side bar]
APPROVAL OF 2001
STOCKLONG-TERM
INCENTIVE PLAN
APPROVAL OF ANNUAL
EXECUTIVE INDIVIDUAL
PERFORMANCE PLAN
PROPOSALS TO BE VOTED ON
Pottruck are not eligible to participate. The plan was originally adoptedrestricted stock component of the long-term incentive compensation awards
would come from the 2001 Stock Incentive Plan (which is discussed in 1995. In Februarythe
"Compensation Committee Report" under "Variable Compensation--1992 and 2001
the Board approved amendments to the plan to meet
certain tax requirements, as explained below. We will be able to achieve the
desired tax results for certain bonus payments under the amended plan only if
stockholders approve it.Stock Incentive Plans, beginning on page 46," and described in Appendix D).
Section 162(m) of the Internal Revenue Code authorizes tax deductions for
certain executive compensation in excess of $1 million only if, among other
things, such compensation is based on performance and the plan under which it
is paid is approved by stockholders. The aggregatecash incentive amount of bonuses payable to
executive officers as a group, under the Individual PerformanceLong-Term Incentive Plan has always
beenis based strictly on ourthe Company's
corporate performance. However, because the bonuses
of each executive within the group have been based on a subjective
determination, those bonuses have not qualified for deduction under Section
162(m). To meet certain requirements of Section 162(m), the amendments to the
plan approved by the Board establish objective performance-based criteria (I.E.,
net revenue growth and pre-tax operating profit margin) for bonus amounts
payable to each executive officer.performance, as discussed below.
If stockholders approve the Individual PerformanceLong-Term Incentive Plan, as amended, and the Company complies
with certain other requirements of Section 162(m), requirements, payments to executive officers
under the plan will qualify for deduction under Section 162(m). If stockholders
do not approve the amended plan, the amendmentsit will not become effectiveeffective.
The objectives of the new overall long-term incentive compensation program, of
which the Long-Term Incentive Plan is a part, include the following:
o Provide financial incentives to selected executive and bonusother officers to
contribute to the long-term success of the Company; and
o change the way the Company delivers potential long-term compensation to most
officers from grants made entirely in stock-based awards (primarily stock
options) to grants made 50% in cash incentive payments madeunder the Long- Term
Incentive Plan and 50% in restricted shares of Company common stock under
the 2001 Stock Incentive Plan.
Subject to certain executivethe approval of the Long-Term Incentive Plan by stockholders, the
Compensation Committee has established an initial four-year performance period
under the plan, beginning January 1, 2003. The Compensation Committee has
determined that cash incentive payments for the initial performance period will
be based on the Company's cumulative earnings per share over that four-year
period. If cumulative earnings per share exceed $1.18, the amount of cash
incentive payments over the initial performance period would range between 50%
of each officer's target cash award (where cumulative earnings per share reach
$1.19) and 400% of the officer's target cash award (where cumulative earnings
per share reach $2.77). On the other hand, if cumulative earnings per share do
not exceed $1.18 over the initial performance period, officers will only be
eligible to receive cash incentive payments (which may not qualify for deduction under Section 162(m) to the extent that certain
compensation paid to any such executive officerexceed 49% of each
officer's target cash award) solely in any calendar year exceeds $1
million.management's discretion. In that case,
the Company wouldsuch payments may not be permitted a tax deductiondeductible for certain compensation paid to the affected executive officers.
Any cash incentive payments under the Long-Term Incentive Plan would be in
addition to officers' base salaries and any annual bonus payments under annual
bonus plans or programs for officers, including payments to executive officers
under the Corporate Executive Bonus Plan and the Annual Executive Individual
Performance Plan. These two annual bonus plans, which are discussed under
11
[side bar]
APPROVAL OF LONG-TERM
INCENTIVE PLAN
PROPOSALS TO BE VOTED ON
separate headings in the "Compensation Committee Report," beginning on page 45,
have previously been approved by stockholders.
Under the Individual PerformanceLong-Term Incentive Plan, as amended, the Board Compensation Committee will continue to have the
authority to amend the plan without stockholder approval in ways that could
increase or decrease the cost of the plan or change the allocation of benefits
among the participants.
For more information about the Individual PerformanceLong-Term Incentive Plan, as amended, see the description of its terms in
Appendix C.F. See also the table in Appendix DG for the bonuscash incentive amounts
that would have beenbe payable under the amended plan, in 2000, based on certain assumptions, for the
four-year performance period beginning January 1, 2003 with respect to
long-term incentive compensation awards for 2003.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE LONG-TERM INCENTIVE PLAN.
4. APPROVAL OF ANNUAL BONUS PROVISIONS CONTAINED IN CHARLES R. SCHWAB'S AMENDED
EMPLOYMENT AGREEMENT
WE ARE ASKING YOU TO APPROVE THE PROVISIONS OF AN AMENDMENT TO THE EMPLOYMENT
AGREEMENT WITH THE COMPANY'S CHAIRMAN OF THE BOARD AND CO-CHIEF EXECUTIVE
OFFICER, CHARLES R. SCHWAB, THAT GOVERN THE CALCULATION OF MR. SCHWAB'S ANNUAL
BONUS.
As a result of the amendment to the employment agreement, Mr. Schwab's
potential maximum total cash compensation for any year (salary and bonus) would
be reduced from $12 million to $8 million, reflecting the change in
Mr. Schwab's title to Chairman of the Board only, effective May 9, 2003.
The Company's stockholders previously approved the employment agreement when it
was originally entered into with Mr. Schwab.
Mr. Schwab's original employment agreement became effective on March 31, 1995
and provides for employment of Mr. Schwab as Chairman of the Board and Co-Chief
Executive Officer. The employment agreement also provides for an initial term
of five years, to be automatically extended by an additional year on the same
terms and conditions on each March 31 (so that as of each March 31, the term of
the agreement remains five years) unless either party provides notice to the
other of an intention not to extend the term. The current five-year term
commenced on March 31, 2002.
The original employment agreement provided for an annual base salary of
$800,004, subject to annual inflation adjustments. For the contract year ending
March 30, 2003, Mr. Schwab's annual base salary had been increased to $900,000.
The original employment agreement also entitled Mr. Schwab to participate in
all compensation and fringe benefit programs made available to other senior
executives, including the Company's stock-based incentive plans. However,
instead of participating in the Company's executive bonus plans, Mr. Schwab's
annual bonus, if any, was determined as a
12
[side bar]
APPROVAL OF ANNUAL
BONUS PROVISIONS
CONTAINED IN CHARLES
R. SCHWAB'S AMENDED
EMPLOYMENT
AGREEMENT
PROPOSALS TO BE VOTED ON
multiple of his base salary, based solely on the Company's performance for the
year as measured against its targets of net revenue growth and pre-tax
operating profit margin. This amount was calculated based on a performance
matrix, adopted from time to time by the Compensation Committee of the
Company's Board of Directors, that established the relationship between
Mr. Schwab's bonus and specified levels of Company performance, provided the
maximum annual payment of salary and bonus to Mr. Schwab could not exceed $12
million.
The original employment agreement also provided that certain compensation and
benefits would be paid or provided to Mr. Schwab (or his immediate family or
estate) if his employment were terminated.
In March 2003, the Compensation Committee approved an amendment to the
employment agreement which would make the following changes effective as of May
9, 2003:
o The employment agreement will reflect the change in Mr. Schwab's employment,
approved by the Board effective as of May 9, 2003, from the Company's
Chairman of the Board and Co-Chief Executive Officer to Chairman of the
Board only;
o Mr. Schwab's base salary for the year beginning March 31, 2003 was
established at $900,000, and in subsequent years will be subject to
adjustment (up or down) by the Compensation Committee; and
o Subject to the approval of stockholders, the annual bonus formula will be
changed and the maximum amount of the annual bonus payable to Mr. Schwab
under the employment agreement will be reduced, so that the maximum annual
payment of salary and bonus to Mr. Schwab cannot exceed $8 million (instead
of $12 million).
In addition, under the amended employment agreement, the Compensation Committee
may determine Mr. Schwab's annual bonus based on measures of corporate
performance selected from among the following: revenue growth, net revenue
growth, operating revenue growth, consolidated pre-tax profit margin,
consolidated pre-tax operating margin, consolidated after-tax profit margin,
consolidated after-tax operating profit margin, client net new asset growth,
stockholder return, return on assets, earnings per share, return on
stockholders' equity, and return on investment. Prior to amendment, the
employment agreement required the use of net revenue growth and pre-tax profit
margin in determining the performance matrix used to calculate his annual bonus.
We are requesting your approval of the amendment to the provisions in the
employment agreement that govern the calculation of Mr. Schwab's annual bonus.
Approval is necessary to achieve the desired tax results under Section 162(m)
of the Internal Revenue Code for annual bonus payments to Mr. Schwab. Section
162(m) authorizes tax deductions for certain executive compensation in excess
of $1 million only if, among other things, such compensation is based on
performance and the plan beenunder which it is paid is approved by stockholders. If
stockholders approve the amendment to
13
[side bar]
APPROVAL OF
ANNUAL BONUS
PROVISIONS CONTAINED
IN CHARLES R. SCHWAB'S
AMENDED EMPLOYMENT
AGREEMENT
PROPOSALS TO BE VOTED ON
the provisions in effectthe employment agreement that govern the calculation of Mr.
Schwab's annual bonus, and the Company complies with certain other Section
162(m) requirements, payments of bonuses to Mr. Schwab under the employment
agreement will qualify for deduction under Section 162(m).
If this amendment is not approved, Mr. Schwab will not be entitled to any
formula bonus under the amended employment agreement or the original employment
agreement and will only be eligible for discretionary bonuses as determined in
2000.the sole discretion of the Compensation Committee, which may be nondeductible.
For more information about Mr. Schwab's employment agreement, as it would be
amended, see the description in Appendix A.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE ANNUAL BONUS PROVISIONS
CONTAINED IN MR. SCHWAB'S AMENDED EMPLOYMENT AGREEMENT.
5. APPROVAL OF INCENTIVE PLAN FOR LON GORMAN
WE ARE ASKING YOU TO APPROVE THE SCHWAB CAPITAL MARKETS INCENTIVE PLAN INCLUDED
AS PART OF THE EMPLOYMENT AGREEMENT WITH LON GORMAN, VICE CHAIRMAN AND
PRESIDENT--SCHWAB CAPITAL MARKETS.
Mr. Gorman entered into the employment agreement in July 2002 with the Company
and Schwab Capital Markets L.P. (a New Jersey limited partnership indirectly
wholly owned by the Company).
Mr. Gorman's employment with the Company began in June 1996, and since then he
has been in charge of the Company's capital markets operations, which include
providing the Company's clients with quick and efficient access to the
securities markets by offering trade execution services in Nasdaq,
exchange-listed, other equity and fixed income securities and options through
market making, specialist and agency desk operations. One of the Company's six
current strategic priorities is retaining a strong capital markets business to
address both individual and institutional clients' financial product and trade
execution needs. During 2002, the Company expanded its capital markets-related
financial product offerings and trade execution capabilities, including its
equity trading capabilities for serving institutional clients, and intends to
continue to strengthen and expand such offerings and capabilities.
Because a strong capital markets business is a strategic priority of the
Company and because of the Company's desire to retain Mr. Gorman to lead the
strengthening and expansion of this business, including institutional equities
trading, the Compensation Committee and the Board of Directors believed it to
be in the best interest of the Company to secure Mr. Gorman's continued
employment through an employment agreement and to secure his agreement, among
other things, not to compete with the Company until one year after any
termination of his employment with the Company.
14
[side bar]
APPROVAL OF INCENTIVE
PLAN FOR LON GORMAN
PROPOSALS TO BE VOTED ON
In May 2002, the Compensation Committee approved Mr. Gorman's employment
agreement for a term of five years and recommended that it be approved by the
Board. In July 2002, the Board approved the employment agreement, except that
the Schwab Capital Markets Incentive Plan, under which Mr. Gorman would receive
certain incentive payments, would become effective for any calendar year after
2002 only if the plan were approved by stockholders. As discussed below,
stockholder approval is necessary to achieve the desired tax results for
payments to Mr. Gorman under the plan.
The terms of the Schwab Capital Markets Incentive Plan, included as part of
Mr. Gorman's employment agreement, reflect the competitive market compensation
in the capital markets industry, in particular in the institutional equities
trading industry. The Compensation Committee and the Board believed that, in
order to retain Mr. Gorman's services, it was necessary for his compensation to
be structured in a manner that was competitive with the compensation of heads
of other capital markets businesses that include institutional equities trading.
Section 162(m) of the Internal Revenue Code authorizes tax deductions for
certain executive compensation in excess of $1 million only if, among other
things, such compensation is based on performance and the plan under which it
is paid is approved by stockholders. If stockholders approve the Schwab Capital
Markets Incentive Plan, and the Company complies with certain other
Section 162(m) requirements, payments to Mr. Gorman under the plan for calendar
years after 2002 will qualify for deduction under Section 162(m). If
stockholders do not approve the plan, no bonus payments will be made to Mr.
Gorman under the plan for calendar years after 2002. In that case, Mr. Gorman
will only be eligible for bonuses determined under the Company's Corporate
Executive Bonus Plan and Annual Executive Individual Performance Plan, plus any
discretionary bonuses, as determined in the sole discretion of the Compensation
Committee, which may be nondeductible.
Although stockholder approval was not required in order for the Schwab Capital
Markets Incentive Plan to be effective for 2002, the business results for 2002
fell below the minimum award threshold. Accordingly, no compensation was
payable to Mr. Gorman under the plan for 2002. However, the Compensation
Committee authorized the payment of a $1 million discretionary bonus to Mr.
Gorman for progress made in building the capabilities of the Company's capital
markets business.
The Company's objective in including the Schwab Capital Markets Incentive Plan
as part of Mr. Gorman's employment agreement is to link a significant portion
of his compensation to the success of Schwab Capital Markets and the related
capital markets businesses for which he is responsible. Accordingly, the plan
emphasizes variable compensation. Specifically, the amount of compensation
under the plan will be determined on the basis of the financial performance of
Schwab Capital Markets as measured by the pre-tax profits (subject to certain
15
[side bar]
APPROVAL OF INCENTIVE
PLAN FOR LON GORMAN
PROPOSALS TO BE VOTED ON
adjustments) of the capital markets-related businesses that report to Mr.
Gorman.
The target annual incentive compensation for Mr. Gorman under the Schwab
Capital Markets Incentive Plan is $3 million, while the maximum annual
incentive compensation payable to Mr. Gorman under the plan is $7 million. The
first $1 million in such annual incentive compensation would be payable in
cash. Any amount of such annual incentive compensation above $1 million would
be paid 50% in cash and 50% in restricted shares of Company common stock. No
payment would be required under the plan for any year unless Schwab Capital
Markets attains at least 80% of its financial goals established by the
Compensation Committee for that year and Mr. Gorman is in charge of Schwab
Capital Markets on the date payment would be due.
Any payments under the Schwab Capital Markets Incentive Plan would be in
addition to Mr. Gorman's current base salary, which is approximately $580,000,
and in addition to any payments under the Corporate Executive Bonus Plan and
the Annual Executive Individual Performance Plan, which are discussed under
separate headings in the "Compensation Committee Report," beginning on page 45.
These two bonus plans, which have previously been approved by stockholders,
presently result in a targeted annual bonus amount for Mr. Gorman of
approximately $1.35 million in 2003.
If stockholders do not approve the Schwab Capital Markets Incentive Plan,
Mr. Gorman will have the right to terminate his employment with the Company. He
would, however, be required to sign a general release of any claims against the
Company and observe the one- year non-competition and non-solicitation and
various other restrictions in his employment agreement. In return for granting
this protection to the Company's capital markets business, Mr. Gorman would
receive any unpaid bonuses earned for the year preceding termination, and any
prorated bonuses earned for the year in which the termination occurs, under the
Schwab Capital Markets Incentive Plan, the Corporate Executive Bonus Plan and
the Annual Executive Individual Performance Plan. He would also receive his
salary for the three-year period following termination; an additional $10
million; and an amount equal to three years of bonuses payable under the
Corporate Executive Bonus Plan and the Annual Executive Individual Performance
Plan, based on Mr. Gorman's target bonus levels under those plans. In addition,
Mr. Gorman would be entitled, among other things, to continued vesting of his
outstanding stock options, restricted stock grants and other equity-based
awards for three years.
For more information about Mr. Gorman's employment agreement, including the
Schwab Capital Markets Incentive Plan, see the description in Appendix H.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE INCENTIVE PLAN FOR MR. GORMAN.
16
[side bar]
APPROVAL OF INCENTIVE
PLAN FOR LON GORMAN
PROPOSALS TO BE VOTED ON
6. STOCKHOLDER PROPOSAL REGARDING THE EXPENSING OF STOCK OPTIONS
WE ARE ASKING YOU TO VOTE AGAINST THE STOCKHOLDER PROPOSAL REGARDING THE
EXPENSING OF STOCK OPTIONS.
The Sheet Metal Workers' National Pension Fund, by Matthew Benny Hernandez, 601
North Fairfax Street, Suite 500, Alexandria, Virginia 22314-2075, a stockholder
of approximately 44,800 shares of Company common stock, has submitted a
proposal for consideration at the annual meeting. The proposal and
stockholder's statement of support, as submitted, appear in italics below. The
Company's statement in opposition to the proposal follows the stockholder's
statement.
STOCKHOLDER RESOLUTION
RESOLVED, THAT THE SHAREHOLDERS OF CHARLES SCHWAB ("COMPANY") HEREBY REQUEST
THAT THE COMPANY'S BOARD OF DIRECTORS ESTABLISH A POLICY OF EXPENSING IN THE
COMPANY'S ANNUAL INCOME STATEMENT THE COSTS OF ALL FUTURE STOCK OPTIONS ISSUED
BY THE COMPANY.
STOCKHOLDER'S STATEMENT OF SUPPORT
CURRENT ACCOUNTING RULES GIVE COMPANIES THE CHOICE OF REPORTING STOCK OPTION
EXPENSES ANNUALLY IN THE COMPANY INCOME STATEMENT OR AS A FOOTNOTE IN THE
ANNUAL REPORT (SEE: FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT 123). MOST
COMPANIES, INCLUDING OURS, REPORT THE COST OF STOCK OPTIONS AS A FOOTNOTE IN
THE ANNUAL REPORT, RATHER THAN INCLUDE THE OPTION COSTS IN DETERMINING
OPERATING INCOME. WE BELIEVE THAT EXPENSING STOCK OPTIONS WOULD MORE ACCURATELY
REFLECT A COMPANY'S OPERATIONAL EARNINGS.
STOCK OPTIONS ARE AN IMPORTANT COMPONENT OF OUR COMPANY'S EXECUTIVE
INDIVIDUAL
PERFORMANCE PLAN,COMPENSATION PROGRAM. OPTIONS HAVE REPLACED SALARY AND BONUSES AS AMENDED.THE MOST
SIGNIFICANT ELEMENT OF EXECUTIVE PAY PACKAGES AT NUMEROUS COMPANIES. THE LACK
OF OPTION EXPENSING CAN PROMOTE EXCESSIVE USE OF OPTIONS IN A COMPANY'S
COMPENSATION PLANS, OBSCURE AND UNDERSTATE THE COSTS OF EXECUTIVE COMPENSATION
AND PROMOTE THE PURSUIT OF CORPORATE STRATEGIES DESIGNED TO PROMOTE SHORT-TERM
STOCK PRICE RATHER THAN LONG-TERM CORPORATE VALUE.
A RECENT REPORT ISSUED BY STANDARD & Poor's indicated that the expensing of
stock option grant costs would have lowered operational earnings at companies
by as much as 10%. "The failure to expense stock option grants has introduced a
significant distortion in reported earnings," stated Federal Reserve Board
Chairman Alan Greenspan. "Reporting stock options as expenses is a sensible and
positive step toward a clearer and more precise accounting of a company's
worth." Globe and Mail, "Expensing Options is a Bandwagon Worth Joining," Aug.
16, 2002.
17
[side bar]
STOCKHOLDER PROPOSAL
REGARDING THE
EXPENSING OF STOCK
OPTIONS
PROPOSALS TO BE VOTED ON
WARREN BUFFETT WROTE IN A NEW YORK TIMES OP-ED PIECE ON JULY 24, 2002:
THERE IS A CRISIS OF CONFIDENCE TODAY ABOUT CORPORATE EARNINGS REPORTS AND
THE CREDIBILITY OF CHIEF EXECUTIVES, AND IT'S JUSTIFIED.
FOR MANY YEARS, I'VE HAD LITTLE CONFIDENCE IN THE EARNINGS NUMBERS REPORTED
BY MOST CORPORATIONS. I'M NOT TALKING ABOUT ENRON AND WORLDCOM--EXAMPLES OF
OUTRIGHT CROOKEDNESS. RATHER, I AM REFERRING TO THE LEGAL, BUT IMPROPER,
ACCOUNTING METHODS USED BY CHIEF EXECUTIVES TO INFLATE REPORTED EARNINGS...
OPTIONS ARE A HUGE COST FOR MANY CORPORATIONS AND HUGE BENEFIT TO EXECUTIVES.
NO WONDER, THEN, THAT THEY HAVE FOUGHT FEROCIOUSLY TO AVOID MAKING A CHARGE
AGAINST THEIR EARNINGS. WITHOUT BLUSHING ALMOST ALL C.E.O.'S HAVE TOLD THEIR
SHAREHOLDERS THAT OPTIONS ARE COST-FREE...
WHEN A COMPANY GIVES SOMETHING OF VALUE TO ITS EMPLOYEES IN RETURN FOR THEIR
SERVICES, IT IS CLEARLY A COMPENSATION EXPENSE. AND IF EXPENSES DON'T BELONG
IN THE EARNINGS STATEMENT, WHERE IN THE WORLD DO THEY BELONG?
MANY COMPANIES HAVE RESPONDED TO INVESTORS' CONCERNS ABOUT THEIR FAILURE TO
EXPENSE STOCK OPTIONS. IN RECENT MONTHS, MORE THAN 100 COMPANIES, INCLUDING
SUCH PROMINENT ONES AS COCA COLA, WASHINGTON POST AND GENERAL ELECTRIC HAVE
DECIDED TO EXPENSE STOCK OPTIONS IN ORDER TO PROVIDE THEIR SHAREHOLDERS MORE
ACCURATE FINANCIAL STATEMENTS. OUR COMPANY HAS YET TO ACT. WE URGE YOUR SUPPORT.
THE COMPANY'S STATEMENT IN OPPOSITION TO PROPOSAL
After careful reconsideration of the Company's policy regarding the accounting
for employee stock options, the Company believes that the expensing of options
in its annual income statement would fail to advance the interests of investors
at this time and, therefore, believes that the proposal from the Sheet Metal
Workers' National Pension Fund is premature and ill-advised. This is because
under existing accounting standards, there is no uniform methodology for
valuing stock options. Consequently, as explained more fully below, the use of
inconsistent valuation methodologies, including underlying assumptions, will
result in financial statements that do not allow accurate comparisons between
companies of similar sizes or within similar industries, and will affect the
reliability of compensation expense estimates.
The Company believes that investors have a compelling need for such
comparability and reliability in order to make informed investment choices.
Current accounting rules adopted by the Financial Accounting Standards Board
("FASB") give companies the choice of accounting for stock options using the
"intrinsic value" method of accounting, which generally results in no expense
for stock option awards, or the "fair value" method of accounting, which
generally results in expense recognition. However, even if the intrinsic value
method is used, accounting rules require a company to disclose in the footnotes
to the financial statements the impact that the fair value
18
[side bar]
STOCKHOLDER PROPOSAL
REGARDING THE
EXPENSING OF STOCK
OPTIONS
PROPOSALS TO BE VOTED ON
method of accounting would have had on earnings.
The Company accounts for employee stock options using the intrinsic value
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The "intrinsic value" of the option
is the amount by which the market price of the stock exceeds the exercise price
of the option on the date of grant. Generally, the Company's option awards have
had zero intrinsic value on the date of grant as the exercise price is set at
the market price of the stock on that date.
The fair value method of accounting, prescribed by FASB Statement No. 123,
"Accounting for Stock-Based Compensation," computes compensation expense based
on the estimated fair value of the option at the date of grant. "Fair value" is
determined using an option-pricing model that takes into account various
factors in estimating value. However, no single methodology is mandated for
computing estimated fair value and the provisions of FASB Statement No. 123
related to the fair value calculation are subject to wide interpretation which
can have a material impact on the calculation of expense.
Not only do companies have a choice of valuation methodologies, but they also
have a choice of underlying assumptions when employing these methodologies, so
long as the methodologies take into account six different variables the FASB
considers important. The FASB has requested comments regarding the problematic
result that similarly situated companies may use different methodologies, or
may use different assumptions in applying the same methodologies, when
calculating the cost of options. (See FASB's Invitation to Comment--ACCOUNTING
FOR STOCK-BASED COMPENSATION (November 18, 2002), relating to the comparison of
FASB Statement No. 123, and its related interpretations, with the International
Accounting Board's proposed International Financial Reporting Standard on
share-based payments.) The FASB acknowledges in this Invitation to Comment that
the inconsistent use of methodologies and key assumptions impairs the
comparability of financial results of different companies and further
acknowledges that such inconsistent use affects the reliability of compensation
expense estimates. (See pages 10, 20 and 21 of the Invitation to Comment.) The
FASB is seeking comments in order to enable it to evaluate how this lack of
consistency and comparability can be addressed and how reliability in
compensation expense estimates can be improved.
The Company, among many others, has responded to the FASB's Invitation to
Comment. In its response dated January 31, 2003, the Company urged the FASB to
adopt a uniform approach to valuing employee stock options that takes into
account the unique characteristics of employee stock options not accommodated
by existing option-pricing models. Those unique characteristics include:
o the general lack of transferability of the options,
19
[side bar]
STOCKHOLDER PROPOSAL
REGARDING THE
EXPENSING OF STOCK
OPTIONS
PROPOSALS TO BE VOTED ON
o the absence of a liquid market in which option valuations are readily
available,
o the long term over which the options vest,
o the inability to realize gains before vesting, and
o the cancellation of the options generally triggered by an employee's
departure.
In its response to the FASB, the Company also expressed its willingness to
participate in a cross-industry task force charged with developing an
appropriate employee stock option-pricing model.
On March 12, 2003, the FASB announced an additional project that will seek to
improve the accounting and disclosures relating to stock-based compensation.
The project will address whether to require companies to expense the cost of
employee stock options. As part of the project, the FASB will examine whether
there are ways to improve the precision and consistency of measuring the cost
of employee stock options. The FASB expects to issue an exposure draft later in
2003 that could become effective in 2004.
In view of the FASB's ongoing consideration of and recent announcement
regarding the valuation of employee stock options, it would be premature for
the Company to begin expensing options at this time. The FASB's process should
be allowed to run its course. Furthermore, until an appropriate uniform
methodology for valuing employee stock options is developed in a manner that
achieves comparability and reliability of compensation expense estimates, that
financial information would have limited usefulness to investors and,
therefore, it would be ill-advised for the Company to begin expensing options
at this time.
Although several companies have announced their intent to expense employee
stock options, a wide variety of companies, particularly those that make
broad-based stock option grants to their employees, have elected not to expense
employee stock options. With respect to the companies that have announced their
intent to expense employee stock options, the Company's research indicates that
these companies are employing various different methodologies and underlying
assumptions to value those options. Therefore, the concerns regarding
comparability and reliability will continue in the absence of an appropriate
uniform methodology for valuing employee stock options.
It also warrants emphasis that although the intrinsic value method of
accounting for employee stock options, which the Company currently uses, does
not result in an option expense in the Company's annual income statement, the
impact of the potential expense is clearly disclosed in the notes to the
Company's consolidated financial statements. (See Stock-Based Compensation
under Note 2--Significant Accounting Policies--and Note 17--Employee Incentive
and Deferred Compensation Plans--to the consolidated financial statements for
2002 contained in the Company's annual report.)
The Company will continue to monitor the actions of the FASB and the Company's
industry peer group to see
20
[side bar]
STOCKHOLDER PROPOSAL
REGARDING THE
EXPENSING OF STOCK
OPTIONS
PROPOSALS TO BE VOTED ON
whether a uniform methodology for valuing employee stock options is developed
or emerges. Until such uniformity is achieved, the Company believes that it
would be premature and ill-advised to expense employee stock options in the
Company's annual income statement.
THE BOARD RECOMMENDS A VOTE AGAINST THE STOCKHOLDER PROPOSAL REGARDING THE
EXPENSING OF STOCK OPTIONS.
OTHER BUSINESS
The Board knows of no other business to be considered at the meeting. However,
if:
*o other matters are properly presented at the meeting, or forat any adjourn-
mentadjournment
or postponement of the meeting, and
*o you have properly submitted your proxy,
then Charles R. Schwab and David S. Pottruck will vote your shares on those
matters according to their best judgment.
1221
[side bar]
OTHER BUSINESS
THE BOARD OF DIRECTORS
NANCY H. BECHTLE
DIRECTOR SINCE 1992
Ms. Bechtle, age 63, has been65, served as President and Chief Executive Officer of the San
Francisco Symphony sincefrom 1987 until December 2001, and has served as a member of
the San Francisco Symphony Board of Governors since 1984. She was a director
and Chief Financial Officer of J.R. Bechtle & Co., an international consulting
firm, from 1979 to 1998. Ms. Bechtle also has served as Chairman and Chief
Executive Officer of Sugar Bowl Ski Resort, and as a director of Sugar Bowl
Corporation, since 1998. Ms. Bechtle's term expires in 2003.Bechtle is a nominee for election this year.
C. PRESTON BUTCHER
DIRECTOR SINCE 1988
Mr. Butcher, age 62,64, has been Chairman and Chief Executive Officer of Legacy
Partners (formerly Lincoln Property Company N.C., Inc.), a real estate
development and management firm, since 1998. Mr. Butcher served as President,
Chief Executive Officer and Regional Partner of Lincoln Property Company N.C.,
Inc. from 1967 until 1998. Mr. Butcher's term expires in 2003.Butcher is a nominee for election this year.
DONALD G. FISHER
DIRECTOR SINCE 1988
Mr. Fisher, age 72,74, is Chairman of the Board of Gap, Inc., a nationwide
specialty retail clothing chain. He was also Chief Executive Officer of Gap,
Inc. from 1969 to November 1995. Mr. Fisher has been a trustee of the Presidio
Trust by appointment of former President Clinton since 1997. He is a nomineemember of
the California State Board of Education and served on the Advisory Council for
election this year.the Office of the U.S. Trade Representative from 1987 until 1998. Mr. Fisher's
term expires in 2004.
ANTHONY M. FRANK
DIRECTOR SINCE 1993
Mr. Frank, age 69, has been Founding71, is Chairman Emeritus and co-founder of Belvedere Capital
Partners, a bank holding company and a general partner of an investment fund
specializing in financial institutions,
since 1993.institutions. He served as Chairman of Belvedere
Capital Partners from 1993 until 2000. From 1988 until 1992, Mr. Frank served
as Postmaster General of the United States. Mr. Frank is a director of
Temple-Inland, Inc., a maker of con-
tainers,containers, cardboard products and building
products and a provider of financial services; Cotelligent, Inc., an
information technology services company; and Bedford Properties Investors and
Crescent Real Estate Equities, both real estate investment trusts. Mr. Frank
previously served as a director of the Company from April 1987 until February
1988 and from March 1992 until April 1993. He rejoined the Board in December
1993. Mr. Frank is a nominee for election this year.Frank's term expires in 2004.
22
[side bar]
BIOGRAPHIES
o NANCY H. BECHTLE
o C. PRESTON BUTCHER
o DONALD G. FISHER
o ANTHONY M. FRANK
THE BOARD OF DIRECTORS
FRANK C. HERRINGER
DIRECTOR SINCE 1996
Mr. Herringer, age 58, is60, has been Chairman of the Board of Transamerica
Corporation, a financial services company. At Transamerica, he has been Chairmancompany, since 1996,
and he was1996. He served as Chief
Executive Officer of Transamerica from 1991 to 1999 and President from 1986 to
1999, when Transamerica was acquired by Aegon N.V. From the date of the
acquisition until May 2000, Mr. Herringer served on the Executive Board of
Aegon N.V. and as Chairman of the 13
[side bar]
BIOGRAPHIES
o NANCY H. BECHTLE
o C. PRESTON BUTCHER
o DONALD G. FISHER
o ANTHONY M. FRANK
o FRANK C. HERRINGER
THE BOARD OF DIRECTORS
Board of Aegon U.S.A. Mr. Herringer is also a
director of AT&T Corporation, a voice, video and data communications company;
Unocal Corporation, an oil company; and Mirapoint, Inc., an Internet message
infrastructure equipment developer. Mr. Herringer's term expires in 2002.
JEFFREY S. MAURER
DIRECTOR SINCE May 2000
Mr. Maurer, age 53, has been an Executive Vice President of the Company since
May 2000. He also is Chief Executive Officer of U.S. Trust Corporation and
United States Trust Company of New York (each of which is a subsidiary of the
Company) and is a director of both companies. Mr. Maurer joined United States
Trust Company in 1970 and was made manager of the Asset Management and Private
Banking Group in 1978. He became Senior Vice President in November 1980,
Executive Vice President in May 1986, President in February 1990, Chief
Operating Officer in December 1994, and Chief Executive Officer in January 2001.
Mr. Maurer is also a director of Forbes.com, an Internet media company; and the
Greater New York Mutual Insurance Companies, a property and casualty insurance
company. Mr. Maurer is a nominee for election this year.2005.
STEPHEN T. MCLIN
DIRECTOR SINCE 1988
Mr. McLin, age 54,56, has been Chairman and Chief Executive Officer of STM
Holdings LLC, which offers merger and acquisition advice for technology
companies, since 1998. From 1987 until 1998, he was President and Chief
Executive Officer of America First Financial Corporation, a finance and
investment banking firm. Mr. McLin is a director of Tuttle Decision Systems, a technology company
wholly-owned by Microsoft Corporation; and Your :) Bank.com, a wholly-owned
subsidiary of Gateway 2000,BCG ValueScience, Inc., a
computer company.joint venture of the Boston Consulting Group and ValueScience, Inc.; and is an
advisory director of Headwaters MB, a merchant bank; Webify, Inc., a software
company; and Financial Technology Ventures, a private equity fund. Mr. McLin's
term expires in 2002.2005.
DAVID S. POTTRUCK
DIRECTOR SINCE 1994
Mr. Pottruck, age 52,54, is President and Co-Chief Executive Officer of the
Company.Company, and he will become sole Chief Executive Officer effective on May 9,
2003. He became President in 1992, and Co-Chief Executive Officer in January
1998. He was also the Company's Chief Operating Officer from 1994 until
September 1998. He became Chief Executive Officer of Charles Schwab & Co., Inc.,
the Company's principal brokerage subsidiary, in 1992. Mr. Pottruck is currently a director of U.S. Trust Corporation
and United States Trust Company of New York (each of which is a subsidiary of
the Company); the Nasdaq Stock Market; Intel Corporation, a maker of
microcomputer components and related products; McKesson HBOC, Inc., a healthcare
services company; Dovebid,and DoveBid, Inc., a provider of
online business-to-business capital asset auctions and valuation services; and Epoch Partners, Inc., an
online investment banking firm owned in part by the Company. He serves on the
Board of Governors of both the National Association of Securities Dealers, Inc.
and the Nasdaq Stock Market. He was a member of the Federal Advisory Commission
on Electronic Commerce from 1998 until 1999.services. Mr.
Pottruck's term expires in
2003.
14
[side bar]
BIOGRAPHIES
o JEFFREY S. MAURER
o STEPHEN T. McLIN
o DAVID S. POTTRUCK
THE BOARD OF DIRECTORS
ARUN SARIN
DIRECTOR SINCE December 1998
Mr. Sarin, age 46, was Chief Executive Officer of Infospace, Inc., a provider of
Internet infrastructure services, between April 2000 and January 2001. From July
1999 until April 2000, he was Chief Executive Officer of USA/Asia Pacific Region
of Vodafone Group Plc, a wireless telecommunications services company. He served
as President and Chief Operating Officer of AirTouch Communications, Inc. from
1997 until July 1999, and prior to his appointment to these positions in 1997,
Mr. Sarin was President and Chief Executive Officer of AirTouch International.
Mr. Sarin joined AirTouch (formerly Pacific Telesis Group) in 1984 and held a
variety of positions, including Vice President and General Manager, Vice
President - Chief Financial Officer and Controller, and Vice President of
Corporate Strategy. Mr. Sarin is a director of Vodafone Group Plc; and Cisco
Systems, Inc., a computer networking company. Mr. SarinPottruck is a nominee for election this year.
CHARLES R. SCHWAB
DIRECTOR SINCE 1986
Mr. Schwab, age 63,65, was a founder of Charles Schwab & Co., Inc. in 1971, and
has been its Chairman since 1978. He has been Chairman and a director of the
Company since its incorporation in 1986. He also served as Chief Executive
Officer from 1986 until January 1998, when he and David S. Pottruck became
Co-Chief Executive Officers. Effective
23
[side bar]
BIOGRAPHIES
o FRANK C. HERRINGER
o STEPHEN T. MCLIN
o DAVID S. POTTRUCK
o CHARLES R. SCHWAB
THE BOARD OF DIRECTORS
May 9, 2003, Mr. Schwab will cease serving as Co-Chief Executive Officer and
become Chairman only. Mr. Schwab is a director of U.S. Trust Corporation and
United States Trust Company of New York (each of which is a subsidiary of the
Company); Gap, Inc.; AudioBase, Inc., a company that provides music and voice to Internet
publishers, advertisers and marketers; Siebel Systems, Inc., a company that provides support for
software systems; and Xign, Inc., a developer of electronic payment systems
using digitally signed electronic check technology. He is also a trustee of The
Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and
Schwab Annuity Portfolios, all registered investment companies. Mr. Schwab's
term expires in 2002.
H. MARSHALL SCHWARZ
DIRECTOR SINCE MAY 2000
Mr. Schwarz, age 64, has been an Executive Vice President of the Company since
May 2000. He also is Chairman of the Board of U.S. Trust Corporation and United
States Trust Company of New York (each of which is a subsidiary of the Company).
Mr. Schwarz joined United States Trust Company in 1967 after a seven-year
association with Morgan Stanley & Co., Incorporated, an investment banking firm.
In 1972, he was elected a Senior Vice President and head of the Banking
Division. He was elected Executive Vice President and Chief Operating Officer of
United States Trust Company's Bank Group in 1977 and Chief Operating Officer of
the Asset Management Group in 1979. Mr. Schwarz served as President of U.S.
Trust Corporation and United States Trust Company from June 1986 through January
1990 and became Chairman and Chief Executive Officer effective February 1, 1990.
He stepped down as Chief Executive Officer on December 31, 2000.
15
[side bar]
BIOGRAPHIES
o ARUN SARIN
o CHARLES R. SCHWAB
o H. MARSHALL SCHWARZ
THE BOARD OF DIRECTORS
Mr. Schwarz is also a director of Atlantic Mutual Companies, a property and
casualty insurance company; and Bowne & Co., Inc., a financial printer and
information and document management company. Mr. Schwarz' term expires in 2002.2005.
GEORGE P. SHULTZ
DIRECTOR SINCE 1997
Dr. Shultz, age 80, is82, has been Professor Emeritus of International Economics at
the Graduate School of Business at Stanford University since 1989, and a
Distinguished Fellow at the Hoover Institution.Institution since 1991. He has held United
States government positions as Secretary of Labor (1969-1970), Director of the
Office of Management and Budget (1970-1972), Secretary of the Treasury
(1972-1974) and Secretary of State (1982-1989). In 1989, he was awarded the
Medal of Freedom, the nation's highest civilian honor. Dr. Shultz is a director
of Bechtel Group, Inc., a provider of engineering, construction and related
management services; Fremont Group, Inc., an investment company; Gilead
Sciences, Inc., a biotechnology company; and UNext, a provider of business
education and training over the Internet. He is also Chairman of J.P. Morgan
Chase's International Advisory Council and Chairman
of the Advisory Board of Infrastructure World, an Internet-based intermediary in
infrastructure projects.Council. He was President of Bechtel Group, Inc.
from 1974 to 1982. Dr. Shultz'Shultz is a nominee for election this year.
PAULA A. SNEED
DIRECTOR SINCE 2002
Ms. Sneed, age 55, has been Group Vice President and President of E-Commerce
and Marketing Services for Kraft Foods North America, part of Kraft Foods,
Inc., a national food packaging company, since September 2000. She joined
General Foods Corporation (which later merged with Kraft Foods) in 1977 and has
held a variety of management positions, including Vice President, Consumer
Affairs; Vice President and President, Foodservice Division; Executive Vice
President and General Manager, Desserts Division; Executive Vice President and
General Manager, Dinners and Enhancers Division; Senior Vice President,
Marketing Service and Chief Marketing Officer; and Executive Vice President,
President E-Commerce Division. Ms. Sneed is a member of the board of directors
of Airgas, Inc., a national distributor of industrial, medical and specialty
gases and related equipment. Ms. Sneed's term expires in 2003.2004.
ROGER O. WALTHER
DIRECTOR SINCE 1989
Mr. Walther, age 65,67, has served as Chairman and Chief Executive Officer of
Tusker Corporation, a real estate and business management company, since August
1997. He
24
[side bar]
BIOGRAPHIES
o GEORGE P. SHULTZ
o PAULA A. SNEED
o ROGER O. WALTHER
THE BOARD OF DIRECTORS
served as Chairman and Chief Executive Officer of ELS Educational Services,
Inc., a provider in the United States of courses in English as a second
language, from Aprilbetween 1992 through Augustand 1997. Mr. Walther was President, Chief Executive
Officer and a director of AIFS, Inc., which designs and markets educational and
cultural programs internationally, from 1964 to February 1993. Since 1985, Mr.
Walther has served as Chairman and has been a director of First Republic Bank.
Mr. Walther's term expires in 2002.2005.
APPOINTMENT OF ROBERT N. WILSON
In March 2003, the Board appointed Robert N. Wilson as a director, effective at
the time of our upcoming annual meeting of stockholders, to fill a vacant seat
on the Board. Mr. Wilson's term will expire at the time of our annual meeting
of stockholders in 2005. Biographical information on Mr. Wilson appears below:
Mr. Wilson, age 62, has been Senior Vice Chairman of the board of directors of
Johnson & Johnson, a manufacturer of health care products and provider of
related services for the consumer, pharmaceutical and medical devices and
diagnostics market, since 2001. He is retiring from that position and Johnson &
Johnson's board in May 2003. Mr. Wilson joined Johnson & Johnson in 1964. He
was appointed to Johnson & Johnson's executive committee in 1983 and was
elected to its board of directors in 1986. Mr. Wilson is also a director of
U.S. Trust Corporation and United States Trust Company of New York (each of
which is a subsidiary of the Company); and Amerada Hess Corporation, an
integrated oil and gas company.
NUMBER OF DIRECTORS AND TERMS
The Companyauthorized number of directors is fourteen. The company currently has
thirteentwelve directors. As discussed above, Robert Wilson will become a director
effective at the time of our upcoming annual meeting. Effective at the same
time, Arun Sarin is resigning from the Board because of his appointment to be
Chief Executive Officer of Vodafone Plc, requiring his relocation to London
where Vodafone is based. Therefore, after our annual meeting there will still
be two vacant seats on the Board.
Four directors are nominees for election this year. The remaining nineEight directors (including
Mr. Wilson) will continue to serve the terms described in their biographies.
Our directors serve staggered terms. This is accomplished as follows:
*o each director who is elected at an annual meeting of stockholders serves a
three-year term,
*o the directors are divided into three classes,
*o the classes are as nearly equal in number as possible, and
*o the term of each class begins on a staggered schedule.
1625
[side bar]
BIOGRAPHIES
o GEORGE P. SHULTZ
o ROGER O. WALTHERAPPOINTMENT OF
ROBERT N. WILSON
NUMBER OF DIRECTORS
AND TERMS
BOARD AND COMMITTEE MEETINGS
The Board held eight regular meetings and threeone special meetingsmeeting in 2000.2002. Each
director attended at least 75% of all Board and applicable committee meetings
during 2000, except Donald G. Fisher who had a 71% attendance record.2002. This table describes the Board's committees. The Board does not have a nominating committee
or a committee serving a similar function.
NAME OF COMMITTEE FUNCTIONS NUMBER OF
AND MEMBERS OF THE COMMITTEE MEETINGS IN 2000
- -------------------------------------------------------------------------------------------------2002
_______________________________________________________________________________________
AUDIT *o reviews the integrity of the financial 45
reporting process
Nancy H. Bechtle *Stephen T. McLin, o reviews the adequacy of internal controls
C. Preston Butcher *Chairman o reviews the audit process, including the
Nancy H. Bechtle performance of internal and external
C. Preston Butcher (1) auditors and independence of external
Donald G. Fisher independence and performance of internalauditors
Anthony M. Frank and external auditorso retains sole authority to select
Frank C. Herringer * recommends to the Board the selection of
Stephen T. McLin *(1) independent auditors, approve audit fees
Arun Sarin - -------------------------------------------------------------------------------------------------and establish policies and procedures
regarding pre-approval of fees for non-
audit services
o reviews compliance with legal and
regulatory requirements
_______________________________________________________________________________________
COMPENSATION *o determines the compensation of the Co-Chief 9Co- 8
Chief Executive Officers and executive
Roger O. Walther, officers
Chairman o reviews and approves:
Nancy H. Bechtle * reviews and approves:(1) o executive compensation philosophy
C. Preston Butcher * executive compensation philosophy
Stephen T. McLin *o programs for annual and long-term
Frank C. Herringer (2) executive compensation
Stephen T. McLin (1) o other executive programs
George P. Shultz compensation
Roger O. Walther * * other executive programs
*o has authority to grant options and other
Paula A. Sneed equity awards under stock incentive plans
and bonus awards under executive
incentive plans
- -------------------------------------------------------------------------------------------------o has authority to make cash awards under
long-term incentive plans
26
[side bar]
THIS TABLE DESCRIBES
THE BOARD COMMITTEES.
BOARD AND COMMITTEE MEETINGS
NAME OF COMMITTEE FUNCTIONS NUMBER OF
AND MEMBERS OF THE COMMITTEE MEETINGS IN 2002
____________________________________________________________________________________
CUSTOMER * monitorso assesses service quality 21
QUALITY * assesseso reviews results of client satisfaction
and reviews
ASSURANCE results of Charles Schwab & Co., Inc.
client surveys
Nancy H. Bechtle *COMMITTEE(3) o proposes initiatives to research service
Donald G. Fisher quality
Anthony M. Frank*Frank,
Chairman
Nancy H. Bechtle
Donald G. Fisher
Frank C. Herringer
Jeffrey S. Maurer
Arun Sarin
Charles R. Schwab
H. Marshall Schwarz
George P. Shultz
Roger O. Walther
* Chairperson____________________________________________________________________________________
NOMINATING AND o identifies individuals qualified to serve on 1
CORPORATE the Board
GOVERNANCE(4) o recommends nominees to fill vacancies
on the Board and each Board committee
Frank C. Herringer, and recommends a slate of nominees for
Chairman election or re-election as directors by the
Nancy H. Bechtle stockholders at the annual meeting to fill
C. Preston Butcher the seats of directors whose terms are
Donald G. Fisher expiring
Anthony M. Frank o leads the Board in its annual review of the
Stephen T. McLin Board's performance
Arun Sarin o develops corporate governance principles,
George P. Shultz policies and procedures and recommends
Paula A. Sneed their adoption by the Board
Roger O. Walther
(1) The director's membership on the committee ended when committee memberships
were changed in October 2002.
(2) The director's membership on the committee began when committee memberships
were changed in October 2002.
(3) The Board decided to eliminate the Customer Quality Assurance Committee in
October 2002 in order to allow more focus on the other committees and the
creation of the Nominating and Corporate Governance Committee.
(4) The Nominating and Corporate Governance Committee was formed in October
2002. The Committee will consider director candidates recommended by
stockholders. Any recommendations may be sent to the address specified, and
a copy of the bylaw procedural requirements regarding nominations may be
obtained as provided, in "Other Information--Stockholder Proposals" on page
55.
1727
[side bar]
THIS TABLE DESCRIBES
THE BOARD'SBOARD COMMITTEES.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2000:
*2002:
o none of the members of the Board Compensation Committee was an officer (or
former officer) or employee of the Company or any of its subsidiaries;
*o none of the members of the Board Compensation Committee entered into (or
agreed to enter into) any transaction or series of transactions with the
Company or any of its subsidiaries in which the amount involved exceeds
$60,000;
*o none of the Company's executive officers served on the compensation
committee (or another board committee with similar functions or, if there
was no such committee, like that, the entire board of directors) of another entity
where one of that entity's executive officers served on the Company's Board
Compensation Committee or otherwise served on the Company's Board; and
*o none of the Company's executive officers was a director of another entity
where one of that entity's executive officers served on the Company's Board
Compensation Committee.
1828
[side bar]
DURING 2000,2002, OUR BOARD
COMPENSATION
COMMITTEE CONSISTED
OF ALL NON-EMPLOYEE
DIRECTORS, AND WE DID
NOT HAVE ANY
COMPENSATION
COMMITTEE INTERLOCKS.
DIRECTOR COMPENSATION
We do not pay directors who are also officersemployees of the Company additional
compensation for their service as directors.
In 2000,2002, cash compensation for non-employee directors included the following:
*o an annual retainer of $35,000,
*o $2,000 for each Board meeting attended,
*o $500 for each Board committee meeting attended on the same day as a Board
meeting, and $1,000 for each other Board committee meeting attended, *and
o an annual retainer of $3,000 to committee chairpersons,chairpersons.
Beginning in 2003, cash compensation for non-employee directors includes the
following:
o an annual retainer of $45,000,
o $2,800 for each Board meeting attended,
o $500 for each Board committee meeting attended on the same day as a Board
meeting, and *$2,000 for each other Board committee meeting attended, and
o an annual retainer of $10,000 to committee chairpersons.
Directors also are reimbursed for expenses of attending Board and committee
meetings.
Non-employee directors may participate in the Directors' Deferred Compensation
Plan. Since January 2000, this plan has allowed non-employee directors to defer
receipt of all or a portion of their directors' fees and, at their election, to
either:
*o receive a grant of stock options which:
*o have a fair value on the grant date equal to the amount of the deferred
fees (as determined under an appropriate options valuation method)the Black-Scholes option pricing model),
*o have an option exercise price equal to the fair market value of Company
common stock on the date the deferred fee amount would have been paid, and
*o vest immediately upon grant and generally expire ten years after the grant
date,date.
- or -
*o invest the amount of the deferred fees in shares of Company common stock to
be held in a trust and distributed to the director (in shares) when the
director leaves the Board.
Each of the directors has elected to convert fees that were deferred before
January 2000 (except for deferred fees already invested in stock options)
into Company stock to be held in the trust and distributed as described
immediately above.
In 2000, under the 1992 Stock Incentive Plan, non-employee directors were
entitled to an annual, automatic grant of either:
* options on 2,500 shares of Company common stock if the fair market value
of the stock on the grant date was $35 or more, or
* options on 3,500 shares of Company common stock if the fair market value
of the stock on the grant date was less than $35.
"Fair market value" is defined in the 1992 Stock Incentive Plan as the closing
price of Company common stock on the date the option is granted.
The annual, automatic option grant to non-employee directors of 2,500 shares of
common stock was made on May 15, 2000 at an exercise price of $43.3750 per
share. As a result of the May 2000 three-for-two stock split, this stock option
grant was adjusted to 3,750 shares with an exercise price of $28.9167.
If2001, stockholders approved the 2001 Stock Incentive Plan is approved by stockholders,Plan. That plan
provides for annual, automatic option grants to non-employee directors.
Currently, the number of optionsshares covered by each annual option grant to each
non-employee directors will receive in the annual, automatic grant will
bedirector is determined by dividing $150,000 by the closing price
of Company common stock on the grant date. (See "Proposals To Be Voted On," beginningEach such grant for 2002, which was
made on page 10, and
Appendix B.)
19May 15, 2002, consisted of options on 12,306 shares of Company common
stock, with a per share exercise price of $12.19. In
29
[side bar]
THE COMPANY PAYS ITS
DIRECTORS WITH CASH
AND EQUITY-BASED
COMPENSATION.
SINCE THE INITIAL CASH
DIVIDEND IN 1989, THE
COMPANY HAS PAID 47
CONSECUTIVE QUARTERLY
CASH DIVIDENDS AND
HAS INCREASED THE
CASH DIVIDEND 12 TIMES.
SINCE 1989, CASH
DIVIDENDS HAVE
INCREASED BY A 32%
COMPOUNDED ANNUAL
GROWTH RATE.
THIS PROXY STATEMENT
INCLUDES ADDITIONAL
SUMMARY INFORMATION
ON THE COMPANY'S
FINANCIAL
PERFORMANCE. PLEASE
REMEMBER THAT PAST
PERFORMANCE IS NOT
PREDICTIVE OF FUTURE
RESULTS.
DIRECTOR COMPENSATION
addition, upon Paula A. Sneed's appointment to the Board in April 2002, she
received an initial, automatic grant of options on 10,000 shares of Company
common stock, with a per share exercise price of $13.04. All options granted to
directors in 2002 were fully vested and immediately exercisable.
If the amendment to the 2001 Stock Incentive Plan is approved by stockholders
(as discussed in "Proposals To Be Voted On," beginning on page 9), the annual,
automatic grants to non-employee directors will, effective May 15, 2003,
consist of (i) options on 5,000 shares of Company common stock and (ii) a
number of restricted shares of Company common stock determined by dividing
$50,000 by the average of the high and low market prices of Company common
stock on the grant date. In addition, each new non-employee director will
receive an initial grant of options on 5,000 shares of Company common stock
(instead of options on 10,000 shares).
30
PRINCIPAL STOCKHOLDERS
This table shows how much Company common stock is beneficially owned by the
directors, certain executive officers and owners of 5% or more of the
Company's
outstanding Company common stock, as of March 8, 2001.
10, 2003.
AMOUNT AND NATURE OF SHARES BENEFICIALLY OWNED
NUMBER OF
SHARES RIGHT TO RESTRICTED PERCENT OF
OWNEDSHARES ACQUIRE STOCK OUTSTANDING
NAME OWNED (#)/(1)/ (#)/(2)/ (#)/(3)/ SHARES
- -----------------------------------------------------------------------------------------------------_________________________________________________________________________________
CHARLESCharles R. SCHWAB(4) 261,528,402 3,855,000Schwab (4) 261,358,058 4,837,500 0 19.1%
SCHWABPLAN RETIREMENT SAVINGS AND 68,946,15519.6%
Fidelity Management and
Research Company (5) 134,223,254 0 0 5.0%
INVESTMENT PLAN (5)
DAVID9.9%
David S. POTTRUCK(6) 6,500,108 6,840,981Pottruck (6) 5,991,296 9,660,981 0 1.0%
NANCY1.2%
Nancy H. BECHTLE 207,405 117,193Bechtle 239,253 139,222 0 *
C. PRESTON BUTCHER(7) 1,026,066 170,173Preston Butcher (7) 1,058,231 192,043 0 *
DONALDDonald G. FISHER(8)Fisher (8) 4,560,561 7,50039,960 0 *
ANTHONYAnthony M. FRANKFrank 547,500 98,082141,500 0 *
FRANKFrank C. HERRINGER(9) 100,236 116,114Herringer (9) 95,536 167,039 0 *
JEFFREYJeffrey S. MAURER 638,034 0 22,500 *
STEPHEN T. MCLIN(10) 152,271 91,946Maurer 389,322 513,723 0 *
ARUN SARINStephen T. McLin (10) 153,391 114,749 0 *
Arun Sarin 3,000 46,52990,579 0 *
H. MARSHALL SCHWARZ(11) 555,277 0Marshall Schwarz (11) 505,943 63,298 0 *
GEORGEGeorge P. SHULTZShultz 67,500 100,484141,817 0 *
ROGER O. WALTHER (12) 135,380 95,472Paula A. Sneed 2,500 26,280 0 *
JOHN PHILIP COGHLAN 1,308,021 987,796 150,866Roger O. Walther (12) 166,252 148,162 0 *
STEVEN L. SCHEID 239,365 610,257 90,000Lon Gorman 208,620 672,002 99,010 *
DAWNDawn G. LEPORE(13) 697,258 903,027 90,000Lepore (13) 507,657 1,025,405 99,010 *
LINNET F. DEILY 240,469 290,499 78,750John Philip Coghlan 1,049,146 1,447,049 99,010 *
LON GORMAN 226,109 369,816 106,875Christopher V. Dodds 319,922 429,380 82,509 *
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP
(22 PERSONS)Directors and Executive Officers
as a Group (24 Persons) (14) 280,981,746 16,274,472 553,125 21.2%
- -----------------------------------------------------------------------------------------------------
*Less277,678,705 21,068,686 1,003,836 21.8%
* Less than 1%
(1) Includes shares for which the named person:
*o has sole voting and investment power,
*o has shared voting and investment power with his or her spouse, or
*o holds in an account under The SchwabPlan Retirement Savings and
Investment Plan or the 401KU.S. Trust Corporation 401(k) Plan, and ESOP of United States Trust Company of New York and Affiliated Companies, unless
otherwise indicated in the footnotes.
Excludes shares that:
*o may be acquired through stock option exercises, or
*o are restricted stock holdings.
(2) Shares that can be acquired through stock option exercises through May 7, 2001.9,
2003, or shares that were acquired under the terms of Directors' Deferred
Compensation Plan
31
[side bar]
A FUNDAMENTAL TENET
OF THE COMPANY'S
COMPENSATION POLICY
IS THAT SIGNIFICANT
EQUITY PARTICIPATION
CREATES A VITAL LONG-
TERM PARTNERSHIP
BETWEEN MANAGEMENT
AND OTHER
STOCKHOLDERS.
PRINCIPAL STOCKHOLDERS
in connection with service on the Board of Directors of the Company or U.S.
Trust Corporation.
(3) Shares subject to a vesting schedule, forfeiture risk and other
restrictions.
20
[side bar]
OPERATING INCOME
FOR 2000 WAS
$849 MILLION,
A 27% INCREASE
OVER 1999.
OPERATING INCOME
REPRESENTS AN
ADJUSTED OPERATING
INCOME MEASURE WHICH
IN 2000 EXCLUDES
MERGER- AND
ACQUISITION-RELATED
CHARGES.
PRINCIPAL STOCKHOLDERS
(4) Includes 7,977,765 shares held by Mr. Schwab's spouse.
Includes 45,203,958 shares held by a limited liability company.
Includes the following shares for which Mr. Schwab disclaims beneficial
ownership:
* 15,455,685. 15,511,185 shares held by a non-profit public benefit corporations.
* 87,120corporation
established by Mr. Schwab.
. 6,000 shares held in trustsa trust for which Mr. Schwab acts as trustee.
Includes the following shares for which Mr. Schwab may be deemed to have
shared voting and investment power, but disclaims beneficial ownership:
* 1,831,229. 1,821,522 shares held by investment companies and managed by a
wholly-owned subsidiary of the Company.
Mr. Schwab's address is c/o The Charles Schwab Corporation, 120 Kearny
Street, San Francisco, California 94108.
(5) As of March 8, 2001, The SchwabPlan Retirement Savings and Investment Plan held a total of 68,946,155
shares, all of which were allocated to participants under the plan.
Participants direct the voting and disposition ofIncludes shares held for their
benefit or allocated to their plan accounts. The purchasing agent will vote
any plan participants' unvoted shares held under the ESOP componentby Fidelity Management & Research Company and other
subsidiaries of the overall plan in
the same proportion as shares directed by participants in the ESOP component of the overall plan.FMR Corp. The address of The SchwabPlan Retirement Savings and Investment PlanFMR Corp. is c/o The Charles Schwab Corporation, 101 Montgomery92 Devonshire Street,
San
Francisco, California 94104.Boston, Massachusetts 02109.
(6) Includes 74,57824,677 shares held by Mr. Pottruck's spouse and children.spouse.
Includes the following shares for which Mr. Pottruck disclaims beneficial ownership:
* 612,658277,598 shares held in trusts for which Mr. Pottruck acts as
trustee.
* 360,936Includes 260,936 shares held by a non-profit public benefit corporation.corporation
established by Mr. Pottruck, but for which he disclaims beneficial
ownership.
(7) Includes 273,630 shares275,420 held by Mr. Butcher's spouse.
(8) Includes 780,000390,000 shares held in certain charitable remainder trusts by Mr. Fisher and his spouse. Includes the following sharesa non-profit public benefit corporation for
which Mr. Fisher has shared voting and investment power, but disclaims
beneficial ownership:
* 390,000 shares held by a non-profit public benefit corporation.ownership.
(9) Includes 50,625 shares held by Mr. Herringer's spouse.
(10) Includes 13,74013,841 shares held by a non-profit public benefit corporation
established by Mr. McLin.McLin, but for which he disclaims beneficial ownership.
(11) Includes 56,38517,349 shares held by Mr. Schwarz's spouse.
Includes 84,385 shares held by a non-profit public benefit corporation
established by Mr. Schwarz.Schwarz, but for which he disclaims beneficial ownership.
(12) Includes 26,68726,908 shares held by Mr. Walther's spouse.
(13) Includes 20,99421,149 shares held by Ms. Lepore's spouse.
(14) In addition to the officers and directors named in this table, fourseven other
executive officers are members of the group.
21
[side bar]
FROM YEAR-END 1990
THROUGH YEAR-END 2000,
THE MARKET PRICE PER
SHARE OF COMPANY
COMMON STOCK HAS
GROWN AT A
COMPOUNDED ANNUAL
RATE OF 61%. THIS
INCREASE CREATED
$39 BILLION IN
STOCKHOLDER WEALTH.
A FUNDAMENTAL TENET
OF THE COMPANY'S
COMPENSATION POLICY IS
THAT SIGNIFICANT EQUITY
PARTICIPATION CREATES A
VITAL LONG-TERM
PARTNERSHIP BETWEEN
MANAGEMENT AND
OTHER STOCKHOLDERS.32
PERFORMANCE GRAPH
The following graph shows a five-year comparison of cumulative total returns
for Company common stock, the Dow Jones Securities Brokerage Group Index and
the Standard & Poor's 500 Index, each of which assumes an initial investment of
$100 and reinvestment of dividends.
Comparison of Five-Year Cumulative Total Return
- --COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[GRAPH APPEARS HERE]
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
___________________________________________________________________________
The Charles Schwab
Corporation - --$100 $202 $275 $307 $168 $118
Dow Jones Securities
Brokerage Group Index - --$100 $117 $182 $226 $173 $127
Standard & Poor's 500
Index GRAPH APPEARS HERE
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
The Charles Schwab Corporation $100 $160 $316 $639 $871 $970
Dow Jones Securities Brokerage Group Index $100 $151 $275 $322 $501 $622
Standard & Poor's 500 Index $100 $123 $164 $211 $255 $232
22$100 $129 $156 $141 $125 $ 97
33
[side bar]
ON A DIVIDEND-
REINVESTED BASIS, FROM
DECEMBER 31, 1995
THROUGH DECEMBER 31,
2000, THETHIS GRAPH COMPARES
FIVE-YEAR CUMULATIVE
TOTAL RETURNRETURNS FOR
COMPANY COMMON
STOCK, WAS 870%
COMPARED TO 522% FOR THE DOW JONES
SECURITIES BROKERAGE
GROUP INDEX AND
132% FOR THE
STANDARD & POOR'S 500
INDEX.
SUMMARY COMPENSATION TABLE
This table shows, for the last three fiscal years, compensation information for the
Company's Co-Chief Executive Officers and the next fivesix most highly compensated
executive officers.officers during 2002. We refer to each of these officers as a "named
executive officer."
WITH RESPECT TO THE "SECURITIES UNDERLYING OPTIONS" COLUMN, NOTE THAT THE
CO-CHIEF EXECUTIVE OFFICERS HAVE RELINQUISHED ALL OF THE STOCK OPTIONS THAT
WERE GRANTED TO THEM IN 2002, 2001 AND 2000. (SEE FOOTNOTE 6 BELOW.)
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
- ----------------------------------------------------------------------------------------------------------------------------------________________________________________________________________________________________________________________________
OTHER RESTRICTED
NAME AND PRINCIPAL POSITION ANNUAL STOCKRESTRICTED SECURITIES ALL OTHER
YEARNAME AND SALARY BONUS ($) COMPENSATION STOCK AWARDS ($) UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) (1) ($) ($) (2) ($) (3) (4)(5) OPTIONS (#)(5) ($)(6)
- ---------------------------------------------------------------------------------------------------------------------------------- (4)
________________________________________________________________________________________________________________________
CHARLES R. SCHWAB 2002 $883,334 0 (5) -- 0 1,300,000 (6) $10,250
CHAIRMAN AND 2001 $650,003 0 -- 0 1,116,000 (6) $8,750
CO-CHIEF EXECUTIVE OFFICER 2000 $800,004 $8,101,000 --- 0 300,000 $ 9,894
CHAIRMAN AND CO-CHIEF EXECUTIVE 1999 $800,004 $8,200,225 - 0 0 $14,759
OFFICER
1998 $800,004 $6,145,225 - 0 2,100,000 $19,472(6) $9,894
DAVID S. POTTRUCK 2002 $883,334 0 (5) $149,934 0 1,300,000 (6) $10,250
PRESIDENT AND 2001 $650,003 0 -- 0 1,116,000 (6) $8,750
CO-CHIEF EXECUTIVE OFFICER 2000 $800,004 $8,101,000 --- 0 300,000 $ 9,894(6) $9,894
JEFFREY S. MAURER (7) 2002 $578,873 $3,412,567 (4)(7) -- 0 125,000 $138,000
EXECUTIVE VICE PRESIDENT AND CO-CHIEF2001 $526,330 -- (4) -- 0 300,000 $162,500
2000 $326,154 $885,000 (4) -- $886,250 88,723 $750,800
H. MARSHALL SCHWARZ (7) 2002 $199,213 $2,333,333 (7) -- 0 57,386 $7,917
EXECUTIVE 1999 $800,004 $8,200,225 -VICE PRESIDENT 2001 $673,442 0 (8) -- 0 0 $14,759
OFFICER
1998 $800,004 $6,145,225 -$59,000
2000 $405,385 $848,000 (4) -- 0 5,700,000 $19,47288,723 $1,039,300
LON GORMAN 2002 $586,017 $1,000,000 -- 0 300,000 $10,250
VICE CHAIRMAN AND PRESIDENT-- 2001 $499,125 0 -- 0 340,000 $8,750
SCHWAB CAPITAL MARKETS 2000 $474,782 $1,659,189 -- 0 220,001 $9,894
DAWN G. LEPORE 2002 $613,617 $400,942 -- 0 300,000 $10,250
VICE CHAIRMAN--TECHNOLOGY, 2001 $526,388 0 -- 0 340,000 $8,750
OPERATIONS AND 2000 $521,667 $1,620,408 -- 0 220,001 $9,894
ADMINISTRATION
JOHN PHILIP COGHLAN 2002 $597,475 $365,000 $65,495 0 300,000 $10,250
VICE CHAIRMAN AND PRESIDENT-- 2001 $499,125 0 -- 0 340,000 $8,750
INDIVIDUAL INVESTOR 2000 $481,666 $1,678,464 --- 0 220,001 $ 9,894
VICE CHAIRMAN AND$9,894
CHRISTOPHER V. DODDS 2002 $528,458 $325,000 -- 0 250,000 $10,250
EXECUTIVE VICE 1999 $439,167 $1,786,777 $1,433,320 0 90,000 $14,759
PRESIDENT
1998 $379,167 $775,225 $609,308 $1,406,559 225,002 $19,472
STEVEN L. SCHEID 2000 $501,282 $1,656,922 - 0 220,001 $ 9,894
VICE CHAIRMAN AND EXECUTIVE VICE 1999 $439,167 $1,786,777 - 0 90,000 $14,759
PRESIDENT
1998 $379,167 $775,225 $620 $1,569,996 225,002 $19,472
DAWN G. LEPORE 2000 $521,667 $1,620,408 - 0 220,001 $ 9,894
VICE CHAIRMAN, EXECUTIVE VICE 1999 $475,000 $1,830,537 $1,433,320 0 90,000 $14,759
PRESIDENT AND 2001 $425,594 0 -- 0 340,000 $8,750
CHIEF INFORMATIONFINANCIAL OFFICER 1998 $385,833 $650,225 $609,386 $1,569,996 225,002 $19,472
LINNET F. DEILY 2000 $510,833 $1,623,138 -$386,088 $1,027,650 -- 0 220,001 $ 9,894
VICE CHAIRMAN AND EXECUTIVE VICE 1999 $452,500 $1,802,943 - 0 90,000 $14,759
PRESIDENT
1998 $369,167 $800,225 $59,957 $1,373,747 195,002 $19,472
LON GORMAN 2000 $474,782 $1,659,189 - 0 220,001 $ 9,894
VICE CHAIRMAN AND EXECUTIVE VICE 1999 $399,933 $1,763,537 - 0 90,000 $14,759
PRESIDENT
1998 $340,000 $810,225 $629 $1,569,996 225,002 $19,472
(1) For Mr. Schwab, includes amounts paid under his employment agreement
dated March 31, 1995. (See "Employment Agreement and Name Assignment"
in Appendix A.)
23
SUMMARY COMPENSATION TABLE
(2) "Other Annual Compensation" includes payments that are not properly
categorized as salary or bonus. The following chart explains payments
to the named executive officers listed below arising out212,500 $9,894
34
SUMMARY COMPENSATION TABLE
(1) This column reflects a reduction in the salary originally established for
2001 for each named executive officer. The reduction, which was for a
five-month period, was part of certain
restricted stock grants.
CASH PAYMENT BASED ON PAR VALUE PAYMENT ON RESTRICTED TOTAL
NAME YEAR SCHWAB PERFORMANCE* STOCK**
----------------------------------------------------------------------------------------------------------------
MR. COGHLAN 2000 0 0 0
1999 $1,433,320 0 $1,433,320
1998 $608,766 $542 $609,308
MR. SCHEID 2000 0 0 0
1999 0 0 0
1998 0 $620 $620
MS. LEPORE 2000 0 0 0
1999 $1,433,320 0 $1,433,320
1998 $608,766 $620 $609,386
MS. DEILY 2000 0 0 0
1999 0 0 0
1998 0 $542 $542
MR. GORMAN 2000 0 0 0
1999 0 0 0
1998 0 $629 $629
* Some executive officers received cash payments based on the Company's common stock (including price appreciationcost containment measures
during 2001. For that five-month period, Mr. Schwab's and dividend reinvestment)
outperforming,Mr. Pottruck's
salaries were reduced by a specified margin, the return on the Standard &
Poor's 500 Index. These payments are intended to encourage executives
to continue holding Company stock after vestingapproximately 50%, and Mr. Gorman's, Ms. Lepore's,
Mr. Coghlan's and Mr. Dodds' salaries were reduced by helping them satisfy
the income tax liability resulting from the vesting of the shares.
** Consists of payment by the Company of the par value of restricted stock
awarded to named executive officers.
(3)approximately 25%.
(2) "Other Annual Compensation" includes relocation expensespayments that are not properly
categorized as salary or bonus. For 2002, this included personal travel
aboard Company aircraft and related tax gross-up payments (explained below),and financial
planning reimbursements, in addition to other perquisites, as shown in the
following chart.
RELOCATIONchart below.
SEC regulations exclude from proxy statement reporting requirements a named
executive officer's perquisites if their value in any year does not exceed
the lesser of (a) $50,000 or (b) 10% of the total of the named executive
officer's annual salary and bonus for that year. Based on these
regulations, we have reported perquisites only for 2002 for the named
executive officers identified in the chart below. In addition, SEC
regulations require the identification by type and amount of each
perquisite of a named executive officer that exceeds 25% of the total
amount of his or her perquisites.
COMPANY
AIRCRAFT
TRAVEL AND FINANCIAL
RELATED PLANNING OTHER
TAX GROSS-UP OTHERREIMBURSEMENT PERQUISITES TOTAL
EXPENSES PAYMENTS PERQUISITES
NAME 1998 1998 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------
MS. DEILY $21,277 $2,059 $36,079 $59,415___________________________________________________________________
David S. Pottruck $110,338 $35,342 $ 4,254 $149,934
John Philip Coghlan $ 26,102 $22,169 $17,224 $ 65,495
(3) RESTRICTED STOCK--DATE OF GRANT VALUE. For Mr. Maurer, the amount shown in
this column represents the market value on the date of grant (July 12,
2000) of a restricted stock award, based on the closing price of Company
common stock on that date ($28.875).
RESTRICTED STOCK--YEAR-END VALUE. On December 31, 2002, Mr. Maurer held
7,500 shares of unvested restricted stock. The year-end value of these
shares was $81,375, based on a closing price of Company common stock on
December 31, 2002 of $10.85. The other named executive officers held no
shares of unvested restricted stock on December 31, 2002.
RESTRICTED STOCK--RIGHTS. Restricted stockholders have voting and dividend
rights.
RESTRICTED STOCK--VESTING SCHEDULE. All of Mr. Maurer's shares vested on
January 31, 2003 under the terms of his separation agreement. (See Appendix
C.)
(4) 401(k) PLAN CONTRIBUTIONS. For Messrs. Schwab, Pottruck, Gorman, Coghlan
and Dodds and Ms. Lepore, the amounts in this column represent
contributions under The SchwabPlan Retirement Savings and Investment Plan.
Mr. Maurer and Mr. Schwarz each received contributions of $8,500 and $6,800
under the U.S. Trust Corporation 401(k) Plan for 2001 and 2000,
respectively. In addition, for 2002, Mr. Maurer received a contribution of
$10,250 under that plan.
35
SUMMARY COMPENSATION TABLE
BENEFIT EQUALIZATION PLAN AMOUNTS. Under U.S. Trust Corporation's Benefit
Equalization Plan, the sum of $127,750 was credited to Mr. Maurer's
retirement plan account for 2002, and the sum of $54,000 was credited to
his retirement plan account for each of 2001 and 2000. In addition, under
that plan, the sum of $7,917 was credited to Mr. Schwarz's retirement plan
account for 2002, and the sum of $50,500 was credited to his retirement
plan account for each of 2001 and 2000. These sums provide benefit amounts
in excess of the Internal Revenue Code compensation limitation. (See
"Pension Plan Table" on page 40.)
DEFERRED COMPENSATION PLAN AMOUNTS. For Mr. Maurer, the sum of $590,000,
and for Mr. Schwarz, the sum of $732,000, which otherwise would have been
payable as bonus for 2000, was subject to mandatory deferral into the U.S.
Trust Corporation Executive Deferred Compensation Plan with certain vesting
conditions. This amount is reflected in the "All Other Compensation" column
rather than the "Bonus" column.
LIFE INSURANCE PAYMENTS. For Mr. Maurer, the sum of $100,000 for each of
2001 and 2000 represents a payment for insurance on his life, which was
made in connection with his voluntary waiver of a $100,000 bonus amount for
each of those years. For Mr. Schwarz, the sum of $250,000 for 2000
represents a payment for insurance on his life, which was made in
connection with his voluntary waiver of bonus for 2000. These amounts are
reflected in the "All Other Compensation" column rather than the "Bonus"
column. U.S. Trust Corporation, a subsidiary of the Company, is the owner
of each policy. Each of these named executive officers has irrevocably
assigned his interest in the policy on his life to a trust established for
the benefit of his heirs, and the trust is the beneficiary under the policy.
(5) Mr. Schwab and Mr. Pottruck each declined a recommended bonus for 2002 so
that the amount declined would be available for bonuses for other employees.
(6) In 2002, Mr. Schwab and Mr. Pottruck voluntarily relinquished all stock
option grants made to them in 2002, 2001 and 2000, a combined total of
5,432,000 underlying shares. Consequently, all of the options shown in the
"Securities Underlying Options" column have been canceled. The purpose of
Mr. Schwab's and Mr. Pottruck's action was to support grants to other
officers of the Company in an effort to motivate key employees and retain
talent in the face of unprecedented business uncertainties, while
minimizing dilution to stockholders.
(7) Mr. Maurer and Mr. Schwarz joined the Company in May 2000, at the time of
the merger involving the Company and U.S. Trust Corporation. Based on SEC
requirements, we have not provided information on compensation paid to
Mr. Maurer or Mr. Schwarz for periods prior to the merger.
Under the employment agreements entered into by Mr. Maurer and Mr. Schwarz
with the Company and U.S. Trust Corporation in connection with the merger
and under a key employee retention program, Mr. Maurer and Mr. Schwarz were
each entitled to a cash retention bonus of $2,333,333 for continuous
employment within the Company through the second anniversary date of the
merger. Mr. Maurer was employed within the Company through that date and
received a cash payment of $2,333,333 in 2002, but has since resigned from
the Company. Although Mr. Schwarz, was not employed within the Company
through that date, he nevertheless received a cash payment of $2,333,333
under his separation agreement with the Company. These cash payments are
reflected in the "Bonus" column.
For more information about Mr. Schwarz's and Mr. Maurer's separation and
employment agreements, see the descriptions in Appendices B and C.
(8) Mr. Schwarz voluntarily waived the receipt of any bonus for 2001.
SEC regulations exclude from proxy statement reporting requirements a
named executive officer's perquisites if their value in any year does
not exceed the lesser of (a) $50,000 or (b) 10% of the total of the
named executive officer's annual salary and bonus for that year. Based
on these regulations, we have reported perquisites only for Ms. Deily
for 1998.
Ms. Deily's expenses were for relocation from Houston, Texas to San
Francisco, California. Because some of the relocation expense payments
were considered taxable income, Ms. Deily received tax gross-up
payments to cover the taxes on that income.
24
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IN 2000, THE COMPANY
ACHIEVED ITS ELEVENTH
CONSECUTIVE YEAR OF
RECORD REVENUES.
SUMMARY COMPENSATION TABLE
(4) RESTRICTED STOCK - DATE OF GRANT VALUE. This column shows the market
value of restricted stock awards on date of grant.
RESTRICTED STOCK - YEAR-END VALUE. The following chart shows the number
and year-end value of all shares of unvested restricted stock held on
December 31, 2000 by named executive officers (except for Mr. Schwab
and Mr. Pottruck, who held none). The year-end value is based on the
closing price of Company common stock on that date ($28.375).
NUMBER OF YEAR-END
NAME SHARES VALUE
----------------------------------------------
MR. COGHLAN 150,866 $4,280,823
MR. SCHEID 180,000 $5,107,500
MS. LEPORE 180,000 $5,107,500
MS. DEILY 167,625 $4,756,359
MR. GORMAN 217,125 $6,160,922
RESTRICTED STOCK - RIGHTS. Restricted stockholders have voting and
dividend rights.
RESTRICTED STOCK - VESTING SCHEDULE.
* 50% of the shares vest three years after the grant date, and
* the remaining 50% of the shares vest four years after the grant date.
(5) Adjusted for the May 2000 three-for-two stock split of Company common
stock.
(6) Represents Company contributions under The SchwabPlan Retirement
Savings and Investment Plan.
25
[side bar]
THE COMPANY AND ITS
SUBSIDIARIES PROVIDE
SECURITIES BROKERAGE
AND RELATED FINANCIAL
SERVICES FOR 7.5 MILLION
ACTIVE CLIENT
ACCOUNTS. CLIENT
ASSETS IN THESE
ACCOUNTS TOTALED
$871.7 BILLION AT
DECEMBER 31, 2000, UP
3% OVER YEAR-END 1999.36
OPTION GRANTS
This table shows stock option grants to the named executive officers during the
last fiscal year.
NOTE THAT THE CO-CHIEF EXECUTIVE OFFICERS HAVE RELINQUISHED ALL OF THE STOCK
OPTIONS THAT WERE GRANTED TO THEM IN 2002 (AS WELL AS THOSE GRANTED IN 2001 AND
2000). (SEE FOOTNOTE 3 BELOW.)
OPTIONS GRANTED IN 20002002
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERM (2)
NAME NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OR
OPTIONS EMPLOYEES OR BASE
GRANTED IN BASEFISCAL PRICE EXPIRATION
DATE
GRANTEDNAME (#) FISCAL(1) YEAR ($/SH) DATE 5% ($) 10% ($)
(1)
- --------------------------------------------------------------------------------------------------------------------------------______________________________________________________________________________________________
CHARLES R. SCHWAB 300,000 1.14% $26.3751,300,000 (3) 5.03% $13.11 2/23/2010 $4,650,350 $12,091,73827/2012 $11,110,000 $27,785,948
DAVID S. POTTRUCK 300,000 1.14% $26.3751,300,000 (3) 5.03% $13.11 2/23/2010 $4,650,350 $12,091,73827/2012 $11,110,000 $27,785,948
JEFFREY S. MAURER 75,000 0.29% $13.11 2/27/2012 $ 640,962 $ 1,603,035
50,000 0.19% $ 9.71 11/8/2012 $ 313,880 $ 787,379
H. MARSHALL SCHWARZ 6,153 (1) 0.02% $12.19 5/15/2012 $ 46,669 $ 118,741
51,233 (1) 0.20% $28.25 5/31/2005 0 0
LON GORMAN 150,000 0.58% $13.11 2/27/2012 $ 1,281,923 $ 3,206,071
150,000 0.58% $ 9.71 11/8/2012 $ 941,640 $ 2,362,137
DAWN G. LEPORE 150,000 0.58% $13.11 2/27/2012 $ 1,281,923 $ 3,206,071
150,000 0.58% $ 9.71 11/8/2012 $ 941,640 $ 2,362,137
JOHN PHILIP COGHLAN 120,001 0.46% $26.375150,000 0.58% $13.11 2/23/2010 $1,860,155 $4,836,736
100,000 0.38% $28.750 12/15/2010 $1,772,440 $4,525,271
STEVEN L. SCHEID 120,001 0.46% $26.37527/2012 $ 1,281,923 $ 3,206,071
150,000 0.58% $ 9.71 11/8/2012 $ 941,640 $ 2,362,137
CHRISTOPHER V. DODDS 125,000 0.48% $13.11 2/23/2010 $1,860,155 $4,836,736
100,000 0.38% $28.750 12/15/2010 $1,772,440 $4,525,271
DAWN G. LEPORE 120,001 0.46% $26.375 2/23/2010 $1,860,155 $4,836,736
100,000 0.38% $28.750 12/15/2010 $1,772,440 $4,525,271
LINNET F. DEILY 120,001 0.46% $26.375 2/23/2010 $1,860,155 $4,836,736
100,000 0.38% $28.750 12/15/2010 $1,772,440 $4,525,271
LON GORMAN 120,001 0.46% $26.375 2/23/2010 $1,860,155 $4,836,736
100,000 0.38% $28.750 12/15/2010 $1,772,440 $4,525,27127/2012 $ 1,068,269 $ 2,671,726
125,000 0.48% $ 9.71 11/8/2012 $ 784,700 $ 1,968,448
(1) These options were granted in February, May and November 2002 under the
1992 Stock Incentive Plan and/or the 2001 Stock Incentive Plan. These
options:
o were granted at an exercise price equal to 100% of the fair market value
of the common stock on the grant date, except for the 51,233 options
granted to Mr. Schwarz in May 2002, and
o expire ten years from the grant date, unless sooner terminated because
of certain events related to termination of employment, except for the
May 2002 grant to Mr. Schwarz.
37
OPTION GRANTS
The options granted in February 2002 vest in four equal annual installments
beginning on the first anniversary of the grant date.
The grant of 6,153 options to Mr. Schwarz in May 2002 was made in his
capacity as a director of U. S. Trust Corporation and vested immediately.
The grant of 51,233 options to Mr. Schwarz in May 2002 was made pursuant to
the terms of Mr. Schwarz's severance agreement, had an exercise price equal
to 247% of the fair market value of the common stock on the grant date,
expire three years from the grant date and vested immediately.
The options granted in November 2002 vest on the following schedule: 25% on
each of the second and third anniversary of the grant date and 50% on the
fourth anniversary of the grant date.
(2) Based on SEC's rules, we use a 5% and 10% assumed rate of appreciation over
the option term. This does not represent the Company's estimate or
projection of the future common stock price. If Company common stock does
not appreciate above the exercise price, the named executive officers will
receive no benefit from the options.
(3) In October 2002, Mr. Schwab and Mr. Pottruck voluntarily relinquished all
option grants made to them in February 2002. At the same time, they also
relinquished all option grants made to them in 2001 and 2000. Consequently,
all of the options granted to them in 2002, 2001 and 2000 have been
canceled. The purpose of Mr. Schwab's and Mr. Pottruck's action was to
support grants to other officers of the Company in an effort to motivate
key employees and retain talent in the face of unprecedented business
uncertainties, while minimizing dilution to stockholders.
(1) These options were granted in February and December 2000 under the 1992
Stock Incentive Plan. The February grants have been adjusted for the May
2000 three-for-two stock split of Company common stock. These options:
* were generally granted as 50% non-qualified stock options and 50%
incentive stock options (except as limited by tax law and except
that the options granted in December were all non-qualified
stock options),
* were granted at an exercise price equal to 100% of the fair market
value of the common stock on the date of grant, and
* expire ten years from the date of grant, unless otherwise earlier
terminated because of certain events related to termination of
employment.
The options granted in February generally vest in 25% increments on each of
the first four anniversaries of the date of grant, and the options granted
in December vest in 50% increments on the third anniversary and fourth
anniversary of the date of grant.
(2) Based on the SEC's rules, we use a 5% and 10% assumed rate of appreciation
over the ten-year option term. This does not represent the Company's
estimate or projection of the future common stock price. If the Company
common stock does not appreciate above the exercise price, the named
executive officers will receive no benefit from the options.
2638
OPTIONS EXERCISED
This table shows stock option exercises and the value of unexercised stock
options held by the named executive officers during the last fiscal year.
AGGREGATED OPTION EXERCISES IN 20002002
AND FISCAL YEAR-END OPTION VALUES(1)
SHARES ACQUIRED VALUEVALUES
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ON EXERCISE (#) REALIZED UNDERLYING UNEXERCISEDACQUIRED VALUE OPTIONS AT IN-THE-MONEY OPTIONS
($)(2)ON EXERCISE REALIZED FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(3)(2)
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------_______________________________________________________________________________________________
CHARLES R. SCHWAB 750,000 $19,122,628 3,600,000 1,875,000 $84,121,876 $34,087,5010 0 4,837,500 0 $21,944,502 0
DAVID S. POTTRUCK 2,239,500 $63,404,959 6,585,981 6,375,000 $156,323,283 $84,025,0000 0 9,660,981 2,700,000 $40,227,562 0
JEFFREY S. MAURER 0 0 108,750 404,973 $ 35,700 $124,800
H. MARSHALL SCHWARZ 0 0 63,298 0 0 0
LON GORMAN 58,317 $241,890 533,252 723,251 $ 575,533 $188,760
DAWN G. LEPORE 0 0 866,655 723,251 $ 2,134,449 $188,760
JOHN PHILIP COGHLAN 1,188,216 $34,411,973 898,738 492,812 $21,905,730 $4,363,008
STEVEN L. SCHEID 310,368 $8,973,712 411,508 540,628 $8,461,076 $5,417,461
DAWN G. LEPORE 632,337 $20,159,180 695,844 549,065 $15,545,069 $5,607,609
LINNET F. DEILY 207,500 $5,620,216 141,816 507,437 $2,564,070 $4,679,461
LON GORMAN 209,560 $6,149,763 221,691 506,879 $4,202,779 $4,649,438
(1) Adjusted for the May 2000 three-for-two stock split of Company common stock.
(2) The amounts in this column are calculated as follows:
*0 0 1,308,299 723,251 $ 6,559,738 $188,760
CHRISTOPHER V. DODDS 0 0 336,256 635,750 $ 650,368 $159,510
(1) The amounts in this column are calculated as follows:
o if upon exercising the stock options, the named executive officer kept
the shares he or she acquired, then by averaging the high and low market
prices of Company stock on the date of exercise to get the "market
price," or
o if upon exercising the stock options, the named executive officer sold
the shares he or she acquired, then by using the sale price as the
"market price,"
o then subtracting the option exercise price from the market price to get
the "value realized per share," and
o then multiplying the value realized per share by the number of shares
acquired upon exercise.
The amounts in this column may not represent amounts actually realized by
the named executive officers.
(2) The amounts in this column are calculated by:
o subtracting the option exercise price from the Company's December 31,
2002 average market price ($10.85) per share (as reported in the New
York Stock Exchange Composite Transactions Index) to get the "average
value per option," and
o then multiplying the average value per option by the number of
exercisable or unexercisable options, as applicable.
The amounts in this column may not represent amounts that will actually be
realized by the named executive officers.
39
PENSION PLAN TABLE
H. Marshall Schwarz and Jeffrey S. Maurer participate in the Employees'
Retirement Plan of United States Trust Company of New York and Affiliated
Companies, a tax qualified noncontributory defined benefit pension plan. An
annual pension benefit equal to a percentage (based on credited years of
service up to a maximum of 35 years) of average base salary (based on a
participant's highest five consecutive years of base salary during the last ten
plan years of employment), reduced by a portion of the participant's annual
Social Security covered compensation, is payable after retirement in the form
of an annuity.
The amount of benefits payable from the Retirement Plan trust is limited by the
restrictions applicable to qualified plans under the Internal Revenue Code. Mr.
Schwarz retired from the Company on March 1, 2002 at age 66, and Mr. Maurer
retired from the Company on February 1, 2003 at age 56. Accordingly, the table
below shows the actual annual pension benefit currently payable to Mr. Schwarz
and Mr. Maurer as a single life annuity under the Retirement Plan.
PENSION PLAN TABLE
ANNUAL RETIREMENT
NAME BENEFIT
_____________________________________
H. MARSHALL SCHWARZ $96,492
JEFFREY S. MAURER $74,820
Benefits under the Retirement Plan vested after five years of service.
In addition, under U.S. Trust Corporation's Benefit Equalization Plan, an
amount is credited each year to the account of a Retirement Plan participant
equal to a specific percentage (based on the participant's age at December 31
of such year) of the participant's base salary in excess of the Internal
Revenue Code compensation limitation. Such amounts credited to Mr. Schwarz and
Mr. Maurer are included under the caption "All Other Compensation" in the
Summary Compensation Table. At retirement, a participant is paid, in addition
to his or her benefit under the Retirement Plan, the value of his or her
individual Benefit Equalization Plan account in either a lump sum or
installments.
40
[side bar]
PENSION PLAN TABLE
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes information as of December 31, 2002 with respect
to equity compensation plans approved and not approved by stockholders (shares
in millions):
(A) (B) (C)
SHARES
AVAILABLE
SHARES TO BE FOR FUTURE
ISSUED UPON WEIGHTED-AVERAGE ISSUANCE
EXERCISE OF EXERCISE PRICE OF (EXCLUDING
OUTSTANDING OUTSTANDING SHARES IN
PLAN CATEGORY OPTIONS OPTIONS COLUMN A)
___________________________________________________________________________________________________
EQUITY COMPENSATION PLANS APPROVED BY STOCKHOLDERS 109 (1) $14.37 38
EQUITY COMPENSATION PLANS NOT APPROVED BY STOCKHOLDERS 47 (2) $17.76 3
Total 156 $15.38 41 (3)
(1) Represents shares of common stock issuable upon exercise of outstanding
options under the Company's 1987 Stock Option Plan, 1987 Executive Officer
Stock Option Plan, and the 1992 and 2001 Stock Incentive Plans, which are
generally used for grants to officers and directors. Although stock and
stock-based awards are still outstanding under the 1987 Stock Option Plan
and 1987 Executive Officer Stock Option Plan, no new shares are available
under these plans for future grants.
(2) Represents shares of common stock issuable upon exercise of outstanding
options under the Company's Employee Stock Incentive Plan. Grants under
this plan are used for employees other than officers and directors and,
accordingly, did not require stockholder approval. The material features of
this plan are described below.
(3) In addition to options, restricted shares may be granted under the 1992 and
2001 Stock Incentive Plans and the Employee Stock Incentive Plan, and
performance-based shares may be granted under the 1992 and 2001 Stock
Incentive Plans.
MATERIAL FEATURES OF EMPLOYEE STOCK INCENTIVE PLAN
PURPOSE. The Company's Board of Directors approved the Employee Stock
Incentive Plan to promote the long-term success of the Company and the creation
of incremental stockholder value by (a) encouraging employees to focus on
long-range objectives, (b) encouraging the attraction and retention of
employees with exceptional qualifications and (c) linking employees directly to
stockholder interests. The plan seeks to achieve this objective by providing
for grants of options and restricted stock to employees. All or a portion of
the shares issuable under the plan may be granted in the form of options or
restricted stock.
OPTION GRANTS. Options granted under the plan allow employees to purchase
shares of Company common stock at an exercise price not less than 100% of the
fair market value of a share on the date of exercisegrant. Options become exercisable
and expire within the times and upon the events determined by a committee of
the Board or by persons to getwhom the "market
price," or
* if upon exercising the stock options, the named executive officer sold the
shares he or she acquired, then by using the sale price as the "market
price,"
* then subtracting the optioncommittee may delegate such responsibility.
The exercise price from the market price to get
the "value realized per share," and
* then multiplying the value realized per shareof options must be paid by cash or, if permitted by the
numbercommittee or its delegates, the exercise price may be paid by the surrender of
shares acquired upon exercise.
The amounts in this column may not represent amounts actually realizedof Company common stock valued at their fair market value on the date
41
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
when the new shares are purchased, or by the named executive officers.
(3) The amountsproceeds from a "same-day sale"
commitment.
RESTRICTED STOCK GRANTS. Restricted stock becomes vested, in this column are calculated by:
* subtractingfull or in
installments, upon the option exercise price from the Company's December 31, 2000
average market price ($28.875) per share, as reported in the New York
Stock Exchange Composite Transactions Index) to get the "average value
per option," and
* then multiplying the average value per optionsatisfaction of certain conditions established by the
numberBoard committee or its delegates.
EFFECT OF CHANGE IN CONTROL. At the time of granting options or restricted
stock, the Board committee or its delegates may determine that the options or
restricted stock shall become fully exercisable or unexercisable options, as applicable.
The amountsvested if a change in
this column may not represent amounts that will actually be
realized bycontrol occurs with respect to the named executive officers.
27
[side bar]
THE COMPANY'S
REVENUES WERE
$5.788 BILLION IN 2000,
UP 29% OVER 1999.Company.
42
COMPENSATION COMMITTEE REPORT
In this section, we describe our executive compensation policies and practices,
including the compensation we pay our Co-Chief Executive Officers and the next
fivesix most highly compensated executive officers.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During 2000,2002, the following individuals served on the Compensation Committee of
the Company's Board of Directors consistedand participated in decisions concerning the
compensation of the Company's executive officers: Roger O. Walther, Nancy H.
Bechtle, C. Preston Butcher, Frank C. Herringer, Stephen T. McLin, Condoleezza Rice (who resigned as a director effective in January 2001)
and George P.
Shultz.Shultz, and Paula A. Sneed. No member of our committee during 20002002 was an
employee of the Company or any of its subsidiaries. Each member qualifies as a
"non-employee director" under Rule 16b-3 of the Securities Exchange Act of 1934
and as an "outside director" under Section 162(m) of the Internal Revenue Code.
Our committee has overall responsibility for the Company's executive
compensation policies and practices. Our committee's functions include:
*o determining the compensation of the Co-Chief Executive Officers, Charles R.
Schwab and David S. Pottruck,
*o on recommendation of the Co-Chief Executive Officers, reviewing and
approving the other executive officers' compensation, including salary and
payments under the annual executive bonus plans, and
*o granting awards under the Company's stock and other long-term incentive
plans.
Our committee is providing the following report on the Company's executive
compensation policies, the relationship of the Company's performance to
executive compensation, and the Co-Chief Executive Officers' compensation.
COMPENSATION POLICIES
The Company's executive compensation policies are designed to address a number
of objectives, including rewarding financial performance and motivating
executive officers to achieve significant returns for stockholders. The
Company's policies rely on two principles:
*o first, a significant portion of executive officers' total compensation
should be in the form of Company common stock and stock-based incentives, and
*o second, a large portion of their cash compensation should be at risk and
vary, depending on meeting stated financial objectives.
When establishing salaries, bonus levels and stock-based awards for executive
officers, our committee considers the individual's role, responsibilities and
performance during the past year, and the amount of compensation paid to
executive officers in similar positions of comparable companies, based on
periodic reviews of competitive data obtained from independent consultants. Our
committee reviews companies whose size, rates of growth and financial returns
are similar to the Company's, including some of the
43
[side bar]
IN THIS SECTION, WE
DESCRIBE THE
COMPENSATION WE PAY
OUR CO-CHIEF EXECUTIVE
OFFICERS AND THE NEXT
SIX MOST HIGHLY
COMPENSATED
EXECUTIVE OFFICERS.
COMPENSATION POLICIES
COMPENSATION COMMITTEE REPORT
companies in the Dow Jones Securities Brokerage Group Index.
Our committee selects companies outside the financial services industry for
inclusion
28
[side bar]
IN THIS SECTION, WE
DESCRIBE THE
COMPENSATION WE PAY
OUR CO-CHIEF EXECUTIVE
OFFICERS AND THE NEXT
FIVE MOST HIGHLY
COMPENSATED
EXECUTIVE OFFICERS.
COMPENSATION POLICIES
COMPENSATION COMMITTEE REPORT in the review based on the extent to which they satisfy a list of
selection criteria, including size, growth rates, similar financial
performance, leadership status in their industry, reputation for innovation,
and the extent to which they compete with the Company for executives. Not all
of these criteria will necessarily be satisfied in any particular case. Our
committee includes in its review companies other than those included in the Dow
Jones Securities Brokerage Group Index because the Company frequently recruits
executives from outside the financial services industry, depending on the
specific skills required for the position.
Our committee uses comparative data to set compensation targets that will
provide executive officers with total compensation that:
*o exceeds the average amounts paid to similar executives of comparable
companies in years in which the Company achieves superior performance, and
*o falls below the average amounts paid to similar executives of comparable
companies in years in which the Company fails to achieve superior
performance.
However, our committee also makes discretionary and subjective determinations
of appropriate compensation amounts to reflect, for example, the Company's
philosophy of compensating executives for the success they achieve in managing
specific enterprises.
In Mr. Pottruck's case, our committee placeshas placed considerable weight on the
recommendations of Mr. Schwab, and in the case of executive officers other than
Mr. Schwab and Mr. Pottruck, our committee placeshas placed considerable weight on
the recommendations of Mr. Schwab and Mr. Pottruck.
THE IMPORTANCE OF OWNERSHIP
A fundamental tenet of the Company's compensation policy is that significant
equity participation creates a vital long-term partnership between management
and other stockholders. Through various stock incentive plans, The SchwabPlan
Retirement Savings and Investment Plan, and the U.S. Trust Corporation 401(k)
Plan, and ESOP of United
States Trust Company of New York and Affiliated Companies, the benefits of equity ownership are extended to non-employee directors,
executive officers and employees of the Company and its subsidiaries.
As of March 8, 2001,10, 2003, the directors and executive officers of the Company owned
an aggregate of 281,534,871278,634,973 shares (including restricted shares) and had the
right to acquire an additional 16,274,47221,068,686 shares upon the exercise (on or
before May 7, 2001)9, 2003) of stock options. As of March 8, 2001,10, 2003, The SchwabPlan
Retirement Savings and Investment Plan and the U.S. Trust Corporation 401(k)
Plan and ESOP of United States Trust Company of New York and
Affiliated Companies held an aggregate of 82,881,14574,808,371 shares that had been allocated to
participants' accounts. The Company intends to continue its strategy
of encouraging its employees to become stockholders.
2944
[side bar]
THE IMPORTANCE OF
OWNERSHIP
COMPENSATION COMMITTEE REPORT
The performance graph on page 22 of this proxy statement compares changes in the
Company's cumulative total returns with those of the Dow Jones Securities
Brokerage Group Index and the Standard & Poor's 500 Index. From December 31,
1995 through December 31, 2000, the cumulative total return for Company stock
was 870%. By comparison, in the same period the Dow Jones Securities Brokerage
Group Index grew 522% and the Standard & Poor's 500 Index grew 132%.encouraging its employees to become stockholders. Our committee believes
employees' equity participation in the Company is a meaningful factor
contributing to the Company's success.
ANNUAL BASE SALARY
The Company believes that base salary is frequently a significant factor in
attracting, motivating and retaining skilled executive officers. Accordingly,
our committee reviews base salaries of executive officers annually and
generally sets the base salary of executive officers at or near the average of
the levels paid by the other companies it reviews. (See "Compensation Policies"
earlier in this report.)
VARIABLE COMPENSATION
CORPORATE EXECUTIVE BONUS PLAN
The Corporate Executive Bonus Plan covers certain executive officer
participants selected by our committee, but Mr. Schwab is not eligible to
participate. (Mr. Schwab is covered under an employment agreement with the
Company. See "Co-Chief Executive Officers' Compensation" later in this report.)
This bonus plan pays bonuses each year based on corporate performance.
DependingCurrently, bonus amounts under this bonus plan are paid out at a percentage of
each participant's bonus target, depending on the Company's pre-tax operating
profit margin and net revenue growth, this bonus plan is paid
out at a percentage of each participant's bonus target. (The pre-tax operating
profit margin represents an adjusted operating income measure which in 2000
excludes merger- and acquisition-related charges.)growth. Targets are expressed as a percentage of
base salary, which our committee determines based on the factors discussed
earlier in this report. (See "Compensation Policies."Policies" earlier in this report.)
Our committee setshas set target bonuses in the first quarter of each year based on
the recommendations of Mr. Schwab and Mr. Pottruck (except that Mr. Pottruck's
target bonus ishas been based on the recommendation of Mr. Schwab only). In the
case of Mr. Pottruck, who receives all of his annual incentive compensation
under this bonus plan, our committee determined that it would be appropriate to
set a target bonus for 20002002 that would result in an annual bonus payment to
Mr. Pottruck equal to the annual bonus payable to Mr. Schwab under his
employment agreement, depending on ourthe Company's corporate performance. (See
"Co-Chief Executive Officers' Compensation" later in this report.) In the case
of the remaining executive officers whoparticipatewho participate in this bonus plan, the
target bonuses for 20002002 under this bonus plan could be up to 100% of base
salary. These remaining executive officers also participate in the Annual
Executive Individual Performance Plan (discussed later in this report).
The target bonus is adjusted upward or downward, according to a payout matrix
our committee adopted when we set the target bonus. This results in a payout of
a 30
[side bar]
ANNUAL BASE SALARY
VARIABLE COMPENSATION
COMPENSATION COMMITTEE REPORT
multiple (or fraction) of the target bonus depending on ourthe Company's
corporate performance. The factors determiningcurrently used to determine bonuses in the
matrix are pre-tax operating profit margin and net revenue growth. In general,
a given percentage change in pre-tax operating profit margin will have a
greater impact on the determination of bonus payments than the same percentage
change in the net revenue growth rate. In 2000,2002, the Company
achieved45
[side bar]
ANNUAL BASE SALARY
VARIABLE
COMPENSATION
COMPENSATION COMMITTEE REPORT
attained a pre-tax operating profit margin of 24%15.2% and net revenue growth of 29%declined
5%. Based on this performance, executive officers who participate in this bonus
plan received no bonuses exceeding their targetin 2002. However, the Committee determined to award
certain discretionary bonus amounts in 2000.payments to executive officers (other than Mr.
Schwab and Mr. Pottruck) from outside the Corporate Executive Bonus Plan, based
on the Committee's assessment of the individual performance of the executive
officers.
ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE PLAN
The Annual Executive Individual Performance Plan covers certain executive
officer participants selected by our committee,the Board Compensation Committee, but
Mr. Schwab and Mr. Pottruck are not eligible to participate. The Individual
Performance Plan presently pays bonuses based on a subjective determination of each
officer's individual contribution to the attainment of corporate performance
objectives. Our committee makes this determination based on the recommendations
of Mr. Schwab and Mr. Pottruck. In general, their recommendations are based in
significant part on the officer's success in achieving specific goals
identified in the officer's business plan.
The maximum amount available for payments underpayment to any participant in the Individual
Performance Plan is generally calculated by multiplying the amountsmaximum amount
payable to the participantsthat participant under the Corporate Executive Bonus Plan by a fixed
amount. Individual bonusesamount that is the same for all participants. A participant may receive a bonus
under the Individual Performance Plan may vary,equal to some, all, or none of this
amount, depending on the Committee's assessment of individual achievements. However,performance.
Thus, the aggregatemaximum amount of bonusesbonus payable to any executive officers, as a group,officer under the
Individual Performance Plan is based strictly on our corporate performance.
Based on this performance, executive officers who participate in the Individual
Performance Plan received no bonuses from this plan in 2002.
1992 AND 2001 STOCK INCENTIVE PLANPLANS
In 1992, the Board approved the 1992 Stock Incentive Plan, which was approved
by the Company's stockholders at the 1992 annual meeting and became effective
on May 8, 1992. In 2001, the Board approved the 2001 Stock Incentive Plan,
which was approved by the Company's stockholders at the 2001 annual meeting and
became effective on May 7, 2001. Under theeach plan, our committee grants stock
options and restricted stock to executive officers, based on the factors
discussed earlier in this report. (See "Compensation Policies."Policies" earlier in this
report.) OurThrough 2002, our committee has had a policy of granting annual stock
options and occasional restricted stock awards to executive officers, because of our belief that an emphasis on annual
awards provides a powerful incentive to executive officers to obtain superior
performance results.
Ourresults, and in 2002 our committee intends thatutilized stock-based incentives
will beas the sole long-term incentives payable to executive officers.
During 2000,2002, our committee granted stock options to eachcertain of the Company's
executive officers. To determine the size of the grants, our committee reviewed
data
46
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VARIABLE
COMPENSATION
COMPENSATION COMMITTEE REPORT
obtained from an independent consultant concerning levels of long-term
compensation for executive officers of selected financial services companies
and companies of comparable size, rates of growth, and/or financial returns.
31
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VARIABLE COMPENSATION
COMPENSATION COMMITTEE REPORTOTHER PAYMENTS
During 2002, payments of $2,333,333 were made to each of two executive
officers, Jeffrey S. Maurer and H. Marshall Schwarz. These payments were made
in accordance with the terms of Mr. Maurer's employment agreement and Mr.
Schwarz's separation agreement. These payments were based on the amounts
specified in an employee retention program, which had been established
following approval by the Board of Directors in connection with the merger of
the Company and U.S. Trust Corporation in May 2000. Under the employee
retention program, certain individuals who had been employed by U.S. Trust
prior to the merger would become entitled to certain payments if they remained
employed within the Company for the retention period (two years). Mr. Maurer
remained employed within the Company beyond that period and, therefore,
received the full retention payment of $2,333,333. Although Mr. Schwarz did not
remain employed within the Company for that entire period, he nevertheless
received a payment of $2,333,333 under his separation agreement.
CO-CHIEF EXECUTIVE OFFICERS' COMPENSATION
CHARLES R. SCHWAB
Mr. Schwab, Chairman and Co-Chief Executive Officer, is compensated based on an
employment agreement that was entered into between the Company and Mr. Schwab
and approved by the stockholders, effective March 31, 1995. (See "Employment
Agreement and Name Assignment" in Appendix A.)
Under the terms of hisMr. Schwab's employment agreement Mr. Schwab receives aspecifies an annual base salary of $800,004.$800,004,
subject to annual review by the Compensation Committee. Mr. Schwab's annual
bonus, if any, is a multiple of his base salary. The multiple is based on our
corporate pre-tax operating profit margin and net revenue growth for the year,
and is determined under a matrix adopted by our committee. Our committee has
the authority to adjust the matrix from time to time (provided that for any
year we may not change the matrix more than 90 days after the beginning of the
year). Based on the Company's performance in 2002, no annual bonus was paid to
Mr. Schwab under his employment agreement for the year.
Our committee believes that Mr. Schwab's leadership is a vital factor in our
corporate success. Specifically, our committee believes that:
*o MR. SCHWAB PROVIDES THE LEADERSHIP, VISION AND INSPIRATION FOR INNOVATION
THAT HAS GENERATED CORPORATE GROWTH AND SUPERIOR PERFORMANCE, *AND
o THE OVERALL STRATEGIC DIRECTION DEVELOPED BY MR. SCHWAB IS CRITICAL TO
ENHANCING THE FUTURE LONG-TERM VALUE OF THE COMPANY FOR ITS STOCKHOLDERS,
AND
* MR. SCHWAB'S LEADERSHIP HAS ENABLED THE COMPANY, ON THE WHOLE, TO
SUBSTANTIALLY OUTPERFORM BOTH THE DOW JONES SECURITIES BROKERAGE GROUP
INDEX AND THE STANDARD & POOR'S 500 INDEX OVER THE PAST FIVE YEARS.
The Company attained a pre-tax operating profit margin of 24% and net revenue
growth of 29% in 2000, which resulted in pre-tax operating profit of $1.388
billion. The amount of the annual bonus for 2000 paid to Mr. Schwab under his
employment agreement was $8,100,000.STOCKHOLDERS.
47
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CO-CHIEF EXECUTIVE
OFFICERS'
COMPENSATION
COMPENSATION COMMITTEE REPORT
DAVID S. POTTRUCK
Mr. Pottruck, President and Co-Chief Executive Officer, is compensated in the
form of a base salary and an annual bonus payable under the Corporate Executive
Bonus Plan that is dependent on our corporate pre-tax operating profit margin
and net revenue growth. (See "Corporate Executive Bonus Plan" earlier in this
report.) For 2000,2002, our committee determined that, based on the relative
responsibilities of Mr. Schwab and Mr. Pottruck, it was appropriate for
Mr. Pottruck to receive a base salary equal to the base salary payable to Mr.
Schwab under his employment agreement. For the same reason, we determined it to
be appropriate to set a target bonus for Mr. Pottruck under the Corporate
Executive Bonus Plan that would cause Mr. Pottruck to receive an annual bonus
equal to the annual bonus payable to Mr. Schwab under his employment agreement,
depending on ourthe Company's corporate performance. Specifically, ourBased on the Company's
performance for 2002, no annual bonus was paid to Mr. Pottruck under the
Corporate Executive Bonus Plan for the year.
Our committee believes that:
*o MR. POTTRUCK PROVIDES STRATEGIC AND DAY-TO-DAY LEADERSHIP THAT HAS
CONTRI-
BUTEDCONTRIBUTED AND CONTINUES TO CONTRIBUTE SIGNIFICANTLY TO THE COMPANY'S
GROWTH AND SUPERIOR PERFORMANCE, 32
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CO-CHIEF EXECUTIVE
OFFICERS' COMPENSATION
COMPENSATION COMMITTEE REPORT
*AND
o MR. POTTRUCK GUIDES THE COMPANY IN THE DELIVERY OF HIGHLY COMPETITIVE
PRO-
DUCTSPRODUCTS AND SERVICES TO ITS CLIENTS, AND THIS ABILITY TO COMPETE IS
IMPERATIVE TO BUILDING FUTURE LONG-TERM VALUE FOR STOCKHOLDERS, AND
* OVER THE PAST FIVE YEARS, THE COMBINATION OF MR.POTTRUCK'S AND MR. SCHWAB'S
LEADERSHIP HAS ENABLED THE COMPANY, ON THE WHOLE, TO SUBSTANTIALLY
OUTPERFORM BOTH THE DOW JONES SECURITIES BROKERAGE GROUP INDEX AND THE
STANDARD & POOR'S 500 INDEX.STOCKHOLDERS.
In determining Mr. Pottruck's compensation for 2003, the Committee intends to
take into account the increased responsibilities for Mr. Pottruck that will
result from his change of role from Co-Chief Executive Officer to Chief
Executive Officer of the Company.
TAX LAW LIMITS ON EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code limits tax deductions for certain
executive compensation over $1 million. Certain types of compensation are
deductible only if performance criteria are specified in detail, and
stockholders have approved the compensation arrangements. The Company believes
that it is generally in the best interests of its stockholders to structure
compensation plans so that compensation is deductible under Section 162(m).
Accordingly, the Company's Corporate Executive Bonus Plan, 1992 Stock Incentive
Plan, 2001 Stock Incentive Plan, Annual Executive Individual Performance Plan
and Mr. Schwab's employment agreement have been approved by stockholders.
In addition, stockholders are being asked to approve the 2001 Stock Incentive
Plan and the Annual Executive Individual Performance Plan, as amended, at this
year's annual meeting of stockholders. (See "Proposals To Be Voted On,"
beginning on page 10, and Appendices B and C.)
However, the Company believes that there may be times when the benefit of the
deduction would be outweighed by other corporate objectives, such as the need
for flexibility.
In 2002, the Committee authorized certain non-deductible compensation,
including non-deductible compensation to Lon Gorman, Vice Chairman and
President--Schwab Capital Markets.
Mr. Gorman's annual bonus is generally determined in accordance with the terms
48
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TAX LAW LIMITS ON
EXECUTIVE
COMPENSATION
COMPENSATION COMMITTEE REPORT
of an incentive plan included in an employment agreement that was entered into
between the Company and Mr. Gorman in 2002, following approval by our committee
and the Board of Directors. The incentive plan contained in the employment
agreement is subject to stockholder approval (see "Proposals To Be Voted
On--Approval of Incentive Plan for Lon Gorman," beginning on page 14). If
stockholders approve this incentive plan, any bonus payments made in future
years to Mr. Gorman pursuant to this incentive plan will satisfy the
requirements for tax deduction under Section 162(m). Based on 2002 performance,
no bonus was payable to Mr. Gorman under the terms of this incentive plan.
Nevertheless, for 2002, the Committee authorized the payment to Mr. Gorman of
cash awards (in addition to Mr. Gorman's salary) totalling $1,000,000, a
portion of which does not qualify for tax deduction under Section 162(m), based
on the Committee's subjective assessment of Mr. Gorman's performance.
In addition, during 2002, certain non-deductible payments were made to
Jeffrey S. Maurer, Executive Vice President, in accordance with the terms of
his employment agreement (see Appendix C), which may not be tax deductible. The
payments were based on amounts specified in an employee retention program,
which had been entered into in connection with the merger involving the Company
and U.S. Trust Corporation in May 2000.
Our committee will continue to monitor issues concerning the tax deductibility
of executive compensation and will take appropriate action if we believe it is
warranted. Since corporate objectives may not always be consistent with the
requirements for full deductibility, our committee is prepared, if we believe
it is appropriate, to enter into compensation arrangements or provide
compensation under which payments may not be deductible under Section 162(m).
Tax
deductibility will not be the sole factor we consider in determining appropriate
levels or types of compensation.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Roger O. Walther, Chairman
Nancy H. Bechtle
C. Preston Butcher
Frank C. Herringer
Stephen T. McLin
George P. Shultz
33Paula A. Sneed
49
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TAX LAW LIMITS ON
EXECUTIVE
COMPENSATION
AUDIT COMMITTEE REPORT
The Audit Committee of the Company's Board of Directors currently consists of
sevenfive directors. None of the directors who are not employeeson our committee has been an employee of
the Company or any of its subsidiaries. The Board believes that all of the
members of our committee are "independent directors" as defined under
applicable stock exchange listing standards. Furthermore, all of the members of
our committee are financially literate and a majority of the members have
accounting or related financial management expertise.
The Board of Directors has adopted a written Audit Committee Charter. AWe last
attached a copy of the Charter ischarter to our proxy statement in 2001. Because our
committee revised the charter in 2002 to clarify the responsibilities of our
committee in light of new and proposed laws and rules, we have attached asa copy
of the charter to this year's proxy statement. (See Appendix E.I.)
Our committee has met and held discussions with management and the Company's
independent auditors. As part of this process, we have:
*o reviewed and discussed the audited financial statements with management,
*o discussed with the independent auditors the matters required to be discussed
by Statement on Auditing Standards No. 61 (Communication with Audit
Committees), and
*o received the written disclosures and the letter from the independent
auditors required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), and discussed with the
independent auditors the independent auditors'their independence.
Based on the review and discussions referred to above, our committee
recommended to the Board of Directors that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000,2002, for filing with the SEC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Stephen T. McLin, Chairman
Nancy H. Bechtle
C. Preston Butcher
Donald G. Fisher
Anthony M. Frank
Frank C. Herringer
Arun Sarin
3450
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BOARD AUDIT COMMITTEE
REPORT
AUDITOR INDEPENDENCE
SELECTION
OurThe Audit Committee of our Board of Directors has selected Deloitte & Touche
LLP and the member firms of Deloitte Touche Tohmatsu (collectively referred to
as "Deloitte & Touche") as the Company's independent auditors for the current2003
fiscal year. They haveDeloitte & Touche has served as auditors for Charles Schwab & Co.,
Inc. or the Company since 1976. We expect representatives of Deloitte & Touche
to attend the annual meeting of stockholders in order to respond to appropriate
questions from stockholders, and they will have the opportunity to make a
statement.
AUDIT FEES
The aggregate fees for professional services rendered by Deloitte & Touche in
connection with their audit of our consolidated financial statements and
reviews of the consolidated financial statements included in our quarterly
reports on Form 10-Q for the fiscal year ended December 31, 20002002 were
$3.7approximately $4.4 million.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
The aggregate fees for information technology services rendered by Deloitte & Touche relating todid not perform on behalf of the Company, and therefore did
not bill the Company for, any financial information and systems design and
implementation services for the fiscal year ended December 31, 2000 were $0.7 million.2002.
ALL OTHER FEES
The aggregate fees for all other services rendered by Deloitte & Touche for the
fiscal year ended December 31, 20002002 were $6.0approximately $3.7 million and can be
sub-categorized as follows:
ATTESTATIONAUDIT-RELATED FEES
The aggregate fees for attestationaudit-related services for matters such as SEC
regis-
trationregistration statements, comfort letters, Statement on Auditing Standards No.70No.
70 reports, employee benefit plan audits, due diligence related to
acquisitions, and agreed-upon procedures were $1.0approximately $2.7 million.
51
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SELECTION
AUDIT FEES
FINANCIAL INFORMATION
SYSTEMS DESIGN AND
IMPLEMENTATION FEES
ALL OTHER FEES
AUDITOR INDEPENDENCE
OTHER FEES
The aggregate fees for all other services, including due diligence related
to acquisitions,tax consulting and
compliance, business and operational process improvement, tax
consulting and regulatory
matters, were $5.0approximately $1.0 million.
The "Audit-Related Fees" are for services generally required to be performed by
Deloitte & Touche because they follow upon and are linked to Deloitte &
Touche's audit of the Company's consolidated financial statements. With respect
to the audit-related services consisting of due diligence for acquisitions, the
Company believes that it is efficient to engage Deloitte & Touche for those
services because their audit will have to cover any acquisition after its
completion.
Approximately 67% of the $1.0 million in "Other Fees" relate to tax consulting
and compliance services provided by Deloitte & Touche, while the other 33%
relate to all other services listed under "Other Fees."
REVIEW OF AUDITOR INDEPENDENCE
The Board Audit Committee has considered whether the provision of non-audit
services by Deloitte & Touche, as described above in "Financial Information
Systems Design and Implementation Fees" and "All Other Fees," is
compatible with maintaining Deloitte & Touche's independence as the Company's
principal auditor.
3552
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SELECTION
AUDIT FEES
FINANCIAL INFORMATION
SYSTEMS DESIGN AND
IMPLEMENTATION FEES
ALL OTHER FEES
REVIEW OF AUDITOR
INDEPENDENCE
OTHER INFORMATION
CERTAIN TRANSACTIONS
EXTENSIONS OF CREDIT IN THE ORDINARY COURSE OF BUSINESS
Directors and executive officers may maintainof the Company have maintained margin trading
accounts with Charles Schwab & Co., Inc., the Company's principal brokerage
subsidiary, and asset management and private banking accounts with subsidiary
banks of U.S. Trust Corporation. Extensions of credit in such accounts:
* areo have been made in the ordinary course of business,
* areo have been made on the same or substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unaffiliated persons, and
* doo have not involveinvolved more than the normal risk of collectibility or presentpresented
other unfavorable features.
On July 30, 2002, the Sarbanes-Oxley Act was signed into law. As a result, the
Company can no longer make margin loans to any non-employee director or any
executive officer who is not an employee of Charles Schwab & Co., Inc. However,
margin loans made to such persons that were outstanding on the July 30, 2002
enactment date may continue in existence, but there can be no material
modification or renewal of such loans.
SENIOR MANAGEMENT LOAN PROGRAM
The table below shows the only loan made by the Company to an executive officer
under a certain senior management loan program that was still outstanding
during 2002. The loan program was established by the Board of Directors to
assist senior management officers in special circumstances. The interest rate
on this loan was set at a market rate determined to be appropriate based on
program requirements. This loan was repaid in full.
As a result of the Sarbanes-Oxley Act, the Company cannot make any new loans to
executive officers under this loan program.
SENIOR MANAGEMENT LOAN PROGRAM
LARGEST
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OUTSTANDING OUTSTANDING AS INTEREST
NAME AND TITLE SINCE 1/1/02 OF 3/17/03 RATE
_____________________________________________________________________________________
JOHN PHILIP COGHLAN $250,000 0 5.43%
VICE CHAIRMAN AND EXECUTIVE VICE PRESIDENT
53
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CERTAIN TRANSACTIONS
OTHER INFORMATION
COMMISSION DISCOUNTS
Employees and directors of the Company who engage in brokerage transactions at
Charles Schwab & Co., Inc. receiveare entitled to a 20% discount from its standard
commission rates for brokerage transactions.
In addition,CERTAIN RELATIONSHIPS
The directors identified below have family members who were employed within the
Company during 2002:
o Stephen T. McLin is the Chairman and one of the five members of the
Company's Audit Committee. During 2002 (and presently), Mr. McLin's son,
Stephen D. McLin, was employed within the Company in the non-officer
position of Product Developer, Web Publishing, earning aggregate cash
compensation of approximately $65,000 and receiving options to purchase 250
shares of Company common stock at a per share exercise price of $11.75.
Mr. McLin's daughter-in-law, Ashley McLin, was also employed within the
Company during 2002 as a Branch Client Specialist, earning aggregate cash
compensation of March 16, 2001,approximately $32,000. She did not receive any stock options
in 2002. Ms. McLin left the executive officers listed below had
outstanding loans made byCompany in October 2002.
o Roger O. Walther is the Chairman and one of the five members of the
Company's Compensation Committee. During 2002, Mr. Walther's daughter, Wendy
Walther Miller, was employed within the Company as specified below. The Company made
these loansa Vice President of
Business Development, earning aggregate cash compensation of approximately
$125,000 and receiving options to encourage the executives to continue holdingpurchase 3,000 shares of Company restrictedcommon
stock after vesting by providing funds to satisfyat a per share exercise price of $8.57. Ms. Walther Miller left the
income tax
liability resulting fromCompany in September 2002.
o Charles R. Schwab is the vestingCompany's Chairman of the shares. These loans doBoard and Co-Chief
Executive Officer and is not bear
interest. However, under Internal Revenue Code regulations,a member of the executivesAudit Committee, Nominating and
Corporate Governance Committee or Compensation Committee. During 2002 (and
presently), Mr. Schwab's daughter, Carolyn Schwab Pomerantz, was employed
within the Company as a Vice President of Consumer Education, earning
aggregate cash compensation of approximately $160,000, and receiving options
to purchase 5,000 shares of Company common stock at a per share exercise
price of $9.71. In addition, Mr. Schwab and Ms. Schwab-Pomerantz co-authored
a book entitled IT PAYS TO TALK, which was published in 2002. The copyright
for the book is registered in the name of the Company, and the company
receives royalties for the book, some of which cover costs related to the
book, and some of which will be taxed on imputed incomedonated to charity. Neither Mr. Schwab nor
Ms. Schwab-Pomerantz receives any royalties or other compensation in
amounts based on required IRS interest rates.
These loans were made inconnection with the fiscal year which began January 1, 2001.
LARGEST AMOUNT AMOUNT
OUTSTANDING OUTSTANDING AS OF
NAME AND TITLE AT ANY TIME 3/16/01
-------------- -------------- -----------------
Linnet F. Deily $638,499 $638,499
Vice Chairman and Executive Vice President
Lon Gorman $813,564 $813,564
Vice Chairman and Executive Vice President
Daniel O. Leemon $566,713 $566,713
Executive Vice President and Chief Strategy Officer
Dawn G. Lepore $647,672 $647,672
Vice Chairman, Executive Vice President and
Chief Information Officer
Steven L. Scheid $647,672 $647,672
Vice Chairman and Executive Vice President
36book.
54
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CERTAIN TRANSACTIONSRELATIONSHIPS
OTHER INFORMATION
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes that during 20002002 all filings with the SEC by its officers,
directors and 10% stockholders complied with requirements for reporting
ownership and changes in ownership of Company common stock under Section 16(a)
of the Securities Exchange Act of 1934, except that the January 2000 transactionfor an inadvertent late report
of Karen Chang,a sale of shares by Jeffrey S. Maurer, Executive Vice President, was inadvertently reported late. The
transaction involved only the exercise of stock options. Ms. Chang did not sell
the shares of common stock acquired in the exercise. The report, which was dueDecember
2001 and by Dawn G. Lepore, Vice Chairman--Technology, Operations and
Administration, in February 2000,2002. In Mr. Maurer's case, the sale should have
been reported in January 2002, but instead was reported on an amended Form 4
filed in March 2000.2002. In Ms. Lepore's case, the sale should have been reported
in March 2002. The sale was reported on a Form 4 filed in March 2002, but after
the filing deadline.
STOCKHOLDER PROPOSALS
If you want us to consider including a proposal in our proxy statement next
year, you must deliver it to the Company's Corporate Secretary at our principal
executive office no later than November 26, 2001.29, 2003. The Company's bylaws contain
specific procedural requirements regarding a stockholder's ability to nominate
a director or submit a proposal to be considered at a meeting of stockholders.
If you would like a copy of the procedures contained in our bylaws, please
contact:
Assistant Corporate Secretary
The Charles Schwab Corporation
101 Montgomery Street (88/5)(120/4)
San Francisco, California 94104
(415) 636-1337636-3087
For next year's annual meeting of stockholders, the persons appointed by proxy
to vote stockholders' shares will vote those shares according to their best
judgment on any stockholder proposal the Company receives after March 8, 2002.10, 2004.
EFFECT OF NOT RETURNING PROXY
IF YOU DO NOT RETURN YOUR PROXY AND YOUR SHARES ARE HELD IN STREET NAME, YOUR
BROKERAGE FIRM, UNDER CERTAIN CIRCUMSTANCES AS DESCRIBED BELOW, MAY VOTE YOUR
SHARES.
Brokerage firms have authority under New York Stock Exchange rules to vote
customers' unvoted shares on some "routine" matters. The New York Stock
Exchange has determined that five of the proposals described under "Proposals
To Be Voted On," beginning on page 9, are considered routine matters. However,
brokerage firms will not have authority to vote customers' unvoted shares on
the sixth proposal, which is the stockholder proposal regarding the expensing
of stock options.
If you do not give a proxy to vote your shares, your brokerage firm may either:
o vote your shares on routine matters, or
o leave your shares unvoted.
As a brokerage firm, Charles Schwab & Co., Inc. may vote its customers' unvoted
55
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SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING
COMPLIANCE
STOCKHOLDER
PROPOSALS
EFFECT OF NOT
RETURNING PROXY
OTHER INFORMATION
shares on routine matters. However, as the Company's subsidiary, when it is
voting on Company proposals, it must follow a stricter set of New York Stock
Exchange rules. Specifically, our brokerage subsidiary can vote unvoted Company
shares held in brokerage accounts only in the same proportion as all other
stockholders vote.
When a brokerage firm votes its customers' unvoted shares on routine matters,
these shares are counted to determine if a quorum exists to conduct business at
the meeting. A brokerage firm cannot vote customers' unvoted shares on
non-routine matters. These shares are considered not entitled to vote on
non-routine matters, rather than having the effect of a vote against the
matters.
We encourage you to provide instructions to your brokerage firm by giving your
proxy. This ensures your shares will be voted at the meeting.
YOU MAY HAVE GRANTED TO YOUR STOCKBROKER DISCRETIONARY VOTING AUTHORITY OVER
YOUR ACCOUNT.
Your stockbroker may be able to vote your shares depending on the terms of the
agreement you have with your stockbroker.
A PURCHASING AGENT UNDER A RETIREMENT PLAN MAY BE ABLE TO VOTE A PARTICIPANT'S
UNVOTED SHARES. FOR EXAMPLE, IF YOU ARE A PARTICIPANT IN THE SCHWABPLAN
RETIREMENT SAVINGS AND INVESTMENT PLAN, THE PLAN'S PURCHASING AGENT, UNDER
CERTAIN CIRCUMSTANCES, CAN VOTE YOUR SHARES.
Specifically, the purchasing agent will vote shares you hold under the Employee
Stock Ownership Plan ("ESOP") component of The SchwabPlan Retirement Savings
and Investment Plan if the purchasing agent does not receive voting
instructions from you. The purchasing agent will vote your unvoted shares held
under the ESOP component of the overall plan in the same proportion as all
other plan participants vote their shares held under the ESOP component of the
overall plan.
COSTS OF PROXY SOLICITATION
The Company is paying for distributing and soliciting proxies. As a part of
this process, the Company reimburses brokers, nominees, fiduciaries and other
custodians for reasonable fees and expenses in forwarding proxy materials to
stockholders. The Company is not using an outside proxy solicitation firm this
year, but employees of the Company or its subsidiaries may solicit proxies
through mail, telephone, the Internet or other means. Employees do not receive
additional compensation for soliciting proxies.
INCORPORATION BY REFERENCE
The Company's filings with the SEC sometimes "incorporate information by
reference." This means that the Company is referring you to information that
has previously been filed with the SEC, so the information should be considered
as part of the filing you are reading. Based on the SEC'sSEC rules, the performance
graph on page 2233 of this proxy statement, the "Compensation Committee Report"
on page 28-33,pages 43, and the
56
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COSTS OF PROXY
SOLICITATION
INCORPORATION BY
REFERENCE
OTHER INFORMATION
"Audit Committee Report" on page 34, and the "Audit Committee
Charter" (Appendix E) on pages 50-5250 specifically are not incorporated by
reference into any other filings with the SEC.
You are receiving this proxy statement as part of the proxy materials for the
annual meeting of stockholders. You may not consider this proxy statement as
material for soliciting the purchase or sale of Company common stock.
37HOUSEHOLDING
The SEC now permits companies to deliver a single set of proxy materials to
households with multiple stockholders, provided such stockholders give their
affirmative or implied consent and certain other conditions are met. This is
called householding. Like last year, the Company's proxy materials contain a
form that will enable the householding of the Company's proxy materials.
Householding may help reduce the Company's future proxy printing and
distribution costs.
Some households with multiple stockholders may have already provided the
Company with their affirmative householding consent or given a general
householding consent relating to securities they hold. We will provide only one
set of proxy materials to each such household unless we have received contrary
instructions from any affected stockholder.
We will promptly deliver separate copies of our proxy statement and annual
report at the request of any stockholder who is in a household that
participates in the householding of the Company's proxy materials. The request
may be made by calling the toll-free telephone number included in the
householding notice that accompanies the proxy materials or by sending it to:
Assistant Corporate Secretary
The Charles Schwab Corporation
101 Montgomery Street (120/4)
San Francisco, California 94104
57
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SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING
COMPLIANCE
STOCKHOLDER
PROPOSALS
COSTS OF PROXY
SOLICITATION
INCORPORATION BY
REFERENCEHOUSEHOLDING
TICKETS AND INTERNET ACCESS TO THE ANNUAL MEETING
TICKETS AND INTERNET ACCESS TO THE ANNUAL MEETING
Seating is limited and, therefore, admission to the annual meeting is by ticket
only on a first-come, first-served basis. To request a ticket, you may either:
*.. go to WWW.SCHWABEVENTS.COM,
*www.schwabevents.com
.. write the Assistant Corporate Secretary at this address:
Assistant Corporate Secretary The Charles Schwab Corporation 101 Montgomery
Street (88/5)(120/4) San Francisco, CA 94104
- or -
*.. call the Assistant Corporate Secretary at (415) 636-1337.636-3087
We also will broadcast the annual meeting over the Internet. For information on
how to receive the real-time webcast,Webcast, go to WWW.SCHWABEVENTS.COM.www.schwabevents.com.
By Order of the Board of Directors,
/s/ CARRIE E. DWYER
- ------------------------_________________________
CARRIE E. DWYER
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND
CORPORATE SECRETARY
March 26, 2001
San Francisco, California
38MARCH 28, 2003
SAN FRANCISCO, CALIFORNIA
58
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ADMISSIONTICKETS AND INTERNET
ACCESS TO THE ANNUAL
MEETING
IS BY
TICKET ONLY ON A FIRST-
COME, FIRST SERVED
BASIS. YOU MAY ALSO
JOIN US VIA THE REAL-
TIME WEBCAST OF THE
ANNUAL MEETING.
APPENDIX A DESCRIPTION OF CHARLES R. SCHWAB'S EMPLOYMENT AND LICENSE AGREEMENTS
This Appendix A contains descriptions ofdescribes agreements between the Company and Charles R. Schwab
relating to his employment and the use of the name "Schwab" by The Charles Schwab Corporation.the Company.
EMPLOYMENT AGREEMENT AND NAME ASSIGNMENT
The Company and Mr. Schwab entered into an employment agreement effective March
31, 1995. Stockholders approved the employment agreement. ItThe Company and Mr.
Schwab entered into an amended employment agreement effective March 31, 2003.
The amended agreement has an initial term of five years, and provides that as
of each March 31, the term of the employment agreement is automatically
extended by an additional year, under the same terms and conditions, unless
beforehand either party provides notice to the other of an intention not to
extend it.
The amended employment agreement provides for an annual base salary of
$800,004$900,000, subject to annual review by the Compensation Committee, and provides
that Mr. Schwab will be eligible to participate in all compensation and fringe
benefit programs made available to other executive officers, including the
stockstock-based incentive plans. Instead of participating in the executive bonus
plans, Mr. Schwab's annual bonus, if any, is a multiple of his base salary.
This multiple is based on our corporate performance, and is determined from
among the following: revenue growth, net revenue growth, operating revenue
growth, consolidated pre-tax profit margin, consolidated pre-tax operating
margin, consolidated after-tax profit margin, consolidated after-tax operating
profit margin, client net new asset growth, stockholder return, return on
assets, earnings per share, return on stockholders' equity, and return on
investment. For 2003, the Compensation Committee authorized net revenue growth
and consolidated after-tax operating profit margin as the measures for
the year, and is determined under a matrix adopted by the Board Compensation
Committee.corporate performance to be used in calculating Mr. Schwab's annual bonus. The
committee has the authority to adjust the matrix periodically (except the
committee may not change the matrix more than 90 days after the beginning of
any year). The matrix is also adjusted automatically eachcannot result in a payment that would cause Mr. Schwab's
total cash compensation for the year based on increases in the Consumer Price Index.(base salary and bonus) to exceed
$8,000,000.
The employment agreement also provides that certain compensation and benefits
will be paid or provided to Mr. Schwab (or his immediate family or estate) if
his employment is terminated involuntarily, except for cause, before the
expiration of the employment agreement. "Cause" is defined as the commission of
a felony, or willful and gross negligence, or misconduct that results in
material harm to the Company.
"Involuntary termination" includes Mr. Schwab's resignation following a
material change in his capacities or duties at the Company or Charles Schwab &
Co., Inc. If an involuntary termination is not due to death, disability or
"cause":
*o Mr. Schwab will be entitled to receive for a period of 36 months all
compensation to which he would have been entitled had he not been
59
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CHARLES R. SCHWAB'S
EMPLOYMENT
AGREEMENT
APPENDIX A DESCRIPTION OF CHARLES R. SCHWAB'S EMPLOYMENT AND LICENSE AGREEMENTS
terminated, including his base salary and participation in all bonus,
incentive and other compensation and benefit plans for which he was or would
have been eligible (but excluding additional grants under stock incentive
plans), and
*o all his outstanding, unvested awards under stock incentive plans will vest
fully on the termination date.
If an involuntary termination is due to disability, Mr. Schwab will be entitled
to receive:
*o his base salary, less any payments under the corporate long-term disability
plan, and benefits (but not bonuses or other incentive compensation) for a
period of 36 months from the termination date, and
39
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EMPLOYMENT AGREEMENT
AND NAME ASSIGNMENT
APPENDIX A DESCRIPTION OF EMPLOYMENT AND LICENSE AGREEMENTS
*o a prorated portion of any bonus or incentive payments for the year in which
the disability occurs.
If an involuntary termination is due to death, a lump sum payment will be made
to Mr. Schwab's estate equal to five times his then base salary.
If Mr. Schwab voluntarily resigns his employment within 24 months of a change
in control of the Company, he will be entitled to receive a prorated portion of
any bonus or incentive payments payable for the year in which the resignation
occurs. In addition, if Mr. Schwab voluntarily resigns his employment, or his
employment is involuntarily terminated, within 24 months of a change in control
of the Company, he will have the right (but not the obligation) to enter into a
consulting arrangement with the Company. Under that arrangement, Mr. Schwab
would provide certain consulting services to the Company for a period of five
years for an annual payment equal to $1 million or 75% of his then base salary,
whichever is less.
The employment agreement prohibits Mr. Schwab from becoming associated with any
business competing with the Company for a period of five years following a
voluntary resignation of employment. (However, that restriction does not apply
if Mr. Schwab resigns his employment within 24 months of a change in control of
the Company.)
LICENSE AGREEMENT
The Company and Charles Schwab & Co., Inc. also are parties to an Assignmentassignment
and Licenselicense agreement with Mr. Schwab that was approved in July 1987 by the
Company's non-employee directors. Under the agreement, Mr. Schwab has assigned
to the Company all service mark, trademark, and trade name rights to Mr.
Schwab's name (and variations on the name) and likeness. However, Mr. Schwab
has retained the perpetual, exclusive, irrevocable right to use his name and
likeness for any activity other than the financial services business.
Beginning immediately after any termination of his employment, Mr. Schwab will
be entitled to use his likeness in the financial services business for some
purposes (specifically, the sale, distribution, broadcast and promotion of
books, videotapes, lectures, radio and television programs, and also any
financial planning services that do not directly
60
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CHARLES R. SCHWAB'S
LICENSE AGREEMENT
APPENDIX A DESCRIPTION OF CHARLES R. SCHWAB'S EMPLOYMENT AND LICENSE AGREEMENTS
compete with any business in which the Company or its subsidiaries are then
engaged or plan to enter within three months). Beginning two years after any
termination of his employment, Mr. Schwab may use his likeness for all other
purposes, as long as that use does not cause confusion about whether the
Company is involved with goods or services actually marketed by Mr. Schwab or
by third parties unrelated to the Company.
So long as Mr. Schwab does not cause actual confusion among customers,clients, he will at
all times be able to use his own name to identify himself, but not as a service
mark, trademark or trade name in the financial services business. The
Assignmentassignment and Licenselicense agreement defines the "financial services business" as
the business in which Charles Schwab & Co., Inc. is currently engaged and any
additional and related businesses in which that firm or the Company is
permitted to engage under
40
[side bar]
EMPLOYMENT AGREEMENT
AND NAME ASSIGNMENT
APPENDIX A DESCRIPTION OF EMPLOYMENT AND LICENSE AGREEMENTS rules and regulations of applicable regulatory
agencies. The Company's ability to assign or license the right to use
Mr. Schwab's name and likeness is severely limited during Mr. Schwab's lifetime.
No cash consideration is to be paid to Mr. Schwab for the name assignment while
he is employed by the Company or, after that employment terminates, while he is
receiving compensation under an employment agreement with the Company.
Beginning when all such compensation ceases, and continuing for a period of 15
years, Mr. Schwab or his estate will receive three-tenths of one percent (0.3%)
of the aggregate net revenues of the Company (on a consolidated basis) and
those of its unconsolidated assignees and licensees that use the name or
likeness. These payments may not, however, exceed $2 million per year, adjusted
up or down to reflect changes from the cost of living prevailing in the San
Francisco Bay Area during specified months in 1987, and they will terminate if
the Company and its subsidiaries cease using the name and likeness.
4161
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EMPLOYMENTCHARLES R. SCHWAB'S
LICENSE AGREEMENT
AND NAME ASSIGNMENT
APPENDIX B DESCRIPTION OF H. MARSHALL SCHWARZ'S SEPARATION AND EMPLOYMENT
AGREEMENTS
This Appendix B describes H. Marshall Schwarz's separation agreement and
certain terms of his employment agreement, which has been superseded for the
most part by the separation agreement.
SEPARATION AGREEMENT
Although Mr. Schwarz had planned to retire in November 2001, he delayed his
retirement at the Company's request so that U.S. Trust Corporation and its
subsidiaries would be able to continue to benefit from his experience,
expertise and guidance at a critical juncture in U.S. Trust's history. Having
successfully completed that additional service, on February 28, 2002, Mr.
Schwarz retired from his position as Chairman of U.S. Trust and Executive Vice
President of the Company.
Under the terms of a separation agreement with the Company and U.S. Trust,
Mr. Schwarz received a one-time lump-sum payment in the amount of $2,333,333 in
June 2002, as well as fully vested options to purchase 51,233 shares of Company
common stock. This payment and option grant are in place of any compensation
that otherwise might have been payable under the Company's or U.S. Trust's
compensation plans and programs and under Mr. Schwarz's employment agreement
with the Company and U.S. Trust (certain terms of which are described below).
In addition, Mr. Schwarz will receive any benefits which had accrued and vested
as of his retirement date.
Under the terms of the separation agreement, Mr. Schwarz has agreed to continue
to serve as a U.S. Trust board member until the earlier of his (i) resignation
from the board; (ii) 72/nd/ birthday; or (iii) death, incapacity or other
inability to perform his duties as a board member.
Although the separation agreement supersedes the terms of his employment
agreement for the most part, Mr. Schwarz remains subject to certain provisions
of his employment agreement. They include provisions prohibiting him from
becoming associated with any business competing with the Company or U.S. Trust,
or any of the Company's other subsidiaries or affiliates, in certain specified
geographical areas for two years following the date of his retirement.
Certain other provisions of Mr. Schwarz's employment agreement are described
below because of their relevance to information concerning Mr. Schwarz
contained elsewhere in this proxy statement.
EMPLOYMENT AGREEMENT
The Company, U.S. Trust and H. Marshall Schwarz entered into an employment
agreement as of January 12, 2000. His employment term began on May 31, 2000
(the effective date of the merger involving the Company and U.S. Trust). His
employment term would have terminated on the third anniversary of the merger if
Mr. Schwarz had not retired (and his employment term had not been otherwise
terminated earlier under the terms of the employment agreement).
62
H. MARSHALL SCHWARZ'S
SEPARATION
AGREEMENT
H. MARSHALL SCHWARZ'S
EMPLOYMENT
AGREEMENT
APPENDIX B DESCRIPTION OF H. MARSHALL SCHWARZ'S SEPARATION AND EMPLOYMENT
AGREEMENTS
The employment agreement provided for an annual base salary equal to the base
salary paid by U.S. Trust to Mr. Schwarz before the merger and an annual bonus
with a target of 165% of his base salary. It further provided that, for 2000,
Mr. Schwarz's bonus would not be less than the bonus he received for 1999, and
for 2001, it would not be less than 80% of the bonus he received for 1999.
(Mr. Schwarz voluntarily waived the receipt of any bonus for 2001.)
The employment agreement also provided for grants of options on Company common
stock, subject to the approval of the Board Compensation Committee.
(Mr. Schwarz voluntarily waived the receipt of any options in 2001.) The
employment agreement also provided for other executive benefits, including
participation in employee benefits and executive compensation plans and
programs made available to other executive officers (except for plans that
provide for severance pay or benefits).
63
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H. MARSHALL SCHWARZ'S
EMPLOYMENT
AGREEMENT
APPENDIX C DESCRIPTION OF JEFFREY S. MAURER'S SEPARATION AND EMPLOYMENT
AGREEMENTS
This Appendix C describes Jeffrey S. Maurer's separation and employment
agreements.
SEPARATION AGREEMENT
On November 4, 2002, Mr. Maurer entered into an agreement for a change in
position in the Company and to govern the parties' rights and obligations in
the event of Mr. Maurer's separation from the Company. Under the terms of the
agreement, Mr. Maurer's departure from the Company or termination with or
without cause at any time prior to May 31, 2003 would entitle him to certain
compensation, benefits and perquisites. Mr. Maurer resigned as a director and
executive officer of the Company effective December 30, 2002. He separated from
the Company effective January 31, 2003 when he resigned his remaining position
as Chairman of U.S. Trust.
Under the terms of the agreement, Mr. Maurer received his base salary as
Chairman and Chief Executive Officer of U.S. Trust Corporation through the end
of 2002, with his salary beginning January 1, 2003 to be determined in
accordance with the salaries of Executive Committee members with similar
functions. In addition, the agreement provided for a cash bonus to Mr. Maurer,
payable on the first business day of January 2003, equal to 170% of his 2001
base salary. The agreement also provided for a bonus for 2002 in accordance
with the payout received by other Executive Committee members and a prorated
bonus for 2003 based on service until separation from the Company.
As a result of his separation from the Company, Mr. Maurer received additional
lump-sum cash payments of $1,130,000 (equal to two times his salary) and
$1,921,000 (equal to two times his adjusted target bonus). He also received a
cash payment for unused vacation days. He also received full and immediate
vesting of all outstanding stock options and equity-based awards. Mr. Maurer is
also entitled to certain benefits, including a monthly pension benefit and
participation in the retirement medical plan. In addition, the Company is
required to make certain tax gross-up payments to Mr. Maurer in the event of
the imposition of excise taxes on payments received by him in connection with
his separation from the Company.
Despite the separation agreement, Mr. Maurer remains subject to certain
provisions of his employment agreement, as modified by the separation
agreement, including provisions prohibiting him from becoming associated with
any business competing with the Company or U.S. Trust, or any of the Company's
other subsidiaries or affiliates, with certain exceptions, in certain specified
geographical areas. Under the separation agreement, the non-competition and
non-solicitation clauses of Mr. Maurer's employment agreement were modified to
run from October 4, 2002 until October 4, 2003 (with certain non-solicitation
clauses remaining effective until January 1, 2004).
Certain other provisions of Mr. Maurer's employment agreement are described
below because of their relevance to
64
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JEFFREY S. MAURER'S
SEPARATION
AGREEMENT
APPENDIX C DESCRIPTION OF JEFFREY S. MAURER'S SEPARATION AND EMPLOYMENT
AGREEMENTS
information concerning Mr. Maurer contained elsewhere in this proxy statement.
EMPLOYMENT AGREEMENT
The Company, U.S. Trust Corporation and Jeffrey S. Maurer entered into an
employment agreement as of January 12, 2000. His employment term began on May
31, 2000 (the effective date of the merger involving the Company and U.S.
Trust). His employment term would have terminated automatically on the third
anniversary of the merger if he had not separated from the Company before then.
(See the discussion above under "Separation Agreement.")
The employment agreement provided for an annual base salary equal to the base
salary paid by U.S. Trust to Mr. Maurer before the merger and an annual bonus
with a target of 150% of his base salary. It further provided that, for 2000,
Mr. Maurer's bonus would not be less than the bonus he received for 1999, and
for 2001, it would not be less than 60% of the bonus he received for 1999. The
employment agreement allowed the Company, after December 31, 2001, to modify,
in its sole discretion, the specific terms of Mr. Maurer's bonus arrangement.
Effective January 1, 2002, the Company elected to make Mr. Maurer eligible to
participate in the Company's Corporate Executive Bonus Plan and Annual
Executive Individual Performance Plan. (For a description of these plans, see
the "Compensation Committee Report" under "Variable Compensation," beginning on
page 45.)
The employment agreement also provided for grants of options on Company common
stock, subject to the approval of the Board Compensation Committee. The
employment agreement also provided other executive benefits, including
participation in employee benefits and executive compensation plans and
programs made available to other executive officers (except for plans that
provide for severance pay or benefits).
In connection with the merger involving the Company and U.S. Trust, a key
employee retention program was established. Under the terms of the retention
program, because Mr. Maurer was an employee of U.S. Trust on May 31, 2002, he
received a payment equal to $2.8 million of which $2,333,333 was paid in cash.
The remainder consisted of stock options (based on a valuation formula).
The employment agreement prohibited Mr. Maurer from becoming associated with
any business competing with the Company or U.S. Trust, or any of the Company's
other subsidiaries or affiliates, in certain specified geographical areas for a
period of one year following a termination of employment that occurred after
May 31, 2002.
65
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JEFFREY S. MAURER'S
EMPLOYMENT
AGREEMENT
APPENDIX D DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
GENERAL DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
ELIGIBILITY TO RECEIVE AWARDS
Key employees of the Company and its subsidiaries, including directors who are
also employees, are eligible for awards under the plan. Non-employee directors
are eligible for an automatic grant of non-qualified stock options upon
becoming a director and an annual, automatic grant of non-qualified stock
options.
In 2000, approximately 1,3502002, 861 persons received awards under the 1992 Stock
Incentive Plan, which is to be replaced by the 2001 Stock Incentive Plan.
Based
onBOTH TABLES BELOW INCLUDE STOCK OPTIONS THAT HAVE BEEN GRANTED UNDER THE 2001
STOCK INCENTIVE PLAN TO THE CO-CHIEF EXECUTIVE OFFICERS, BUT THEY HAVE
RELINQUISHED ALL SUCH OPTIONS AND THE COMPANY HAS CANCELED THEM.
As of March 10, 2003, our Co-Chief Executive Officers and the current number and classessix other most
highly compensated executive officers have been granted options to purchase
shares of employees within the Company and current
stock-based award practices, we expect to have a comparable number of
participantscommon stock under the 2001 Stock Incentive Plan, on an annual basis.over the
life of the plan, as follows:
OPTIONS
NAME GRANTED
_______________________________________
CHARLES R. SCHWAB 1,486,000
CHAIRMAN AND
CO-CHIEF EXECUTIVE OFFICER
DAVID S. POTTRUCK 1,486,000
PRESIDENT AND
CO-CHIEF EXECUTIVE OFFICER
JEFFREY S. MAURER 150,000
EXECUTIVE VICE PRESIDENT
H. MARSHALL SCHWARZ 0
EXECUTIVE VICE PRESIDENT
LON GORMAN 180,000
VICE CHAIRMAN AND PRESIDENT--
SCHWAB CAPITAL MARKETS
DAWN G. LEPORE 180,000
VICE CHAIRMAN--TECHNOLOGY,
OPERATIONS AND ADMINISTRATION
JOHN PHILIP COGHLAN 180,000
VICE CHAIRMAN AND PRESIDENT--
INDIVIDUAL INVESTOR
CHRISTOPHER V. DODDS 305,000
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Our current executive officers as a group, current non-employee directors as a
group and our current employees (excluding executive officers and directors)
have been granted options to purchase shares of Company common stock under the
2001 Stock Incentive Plan, over the life of the plan, as follows:
OPTIONS
GROUP RECEIVED
____________________________________
CURRENT EXECUTIVE 4,867,800
OFFICERS
CURRENT NON-EMPLOYEE 206,243
DIRECTORS
CURRENT EMPLOYEES 29,123,035
(EXCLUDING EXECUTIVE
OFFICERS AND DIRECTORS )
LIMITS ON AWARDS
The following are the limits on the number of shares that may be granted to any
one participant in any one year:
*o 5 million shares under options,
*o 1 million restricted shares, and
*o 1 million performance share awards.
These annual limits are adjusted automatically for any stock split, declaration
of a stock dividend or other similar event.
TYPES OF AWARDS
Awards under the 2001 Stock Incentive Plan may take the form of restricted
shares, performance share awards and options to acquire the Company'sCompany common stock,
as described below.
*o Restricted shares are similar to common stock in that they have the
66
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GENERAL DESCRIPTION OF
THE 2001 STOCK
INCENTIVE PLAN
APPENDIX D DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
same voting and dividend rights, but the recipient will forfeit the
restricted shares if the applicable vesting conditions are not satisfied.
*o Performance share awards are obligations of the Company to issue and deliver
in the future shares of common stock if the applicable conditions are
satisfied.
*o Options are the rights to acquire common stock at an exercise price at least
equal to the fair market value of the Company'sCompany common stock on the date of grant.
Options include non-qualified stock options and incentive stock options.
Incentive stock options are intended to qualify for special tax treatment.
Options vest according to a schedule.
*o An award under the plan may consist of one or more of these grant types,
except that non-employee directors will only be eligible to receive
non-qualified stock options.options and restricted shares.
No payment is required on the grant of any award, except (in the case of
restricted shares and performance shares) payment of the $.01 per share par
value of the stock awarded. Upon exercise of an option, the option holder must
pay the option exercise price to the Company. On March 16, 2001,10, 2003, the closing
price of Company common stock was $16.49$6.85 per share.
A total of 70 million shares may be issued under the plan under options and
performance share awards and as restricted 42
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GENERAL DESCRIPTION
OF THE 2001 STOCK
INCENTIVE PLAN
APPENDIX B DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
shares. This number adjusts
automatically for any stock split, declaration of a stock dividend or other
similar event.
As of February 28, 2001,March 17, 2003, the number of remaining shares under the 19922001 Stock
Incentive Plan was 6,896,430,31,394,884 and the number of remaining shares under all
other Company stock incentive plans was 9,225,145. The Company will continue to make
grants under the 1992 Stock Incentive Plan until all the remaining shares have
been used or until that plan expires in 2002, whichever is sooner.6,686,098.
Under the terms of the 2001 Stock Incentive Plan, if:
*o the recipient forfeits any restricted shares, performance share awards or
options,
*o any performance share awards terminate for any other reason without the
associated common stock being issued, or
*o options terminate for any other reason before exercise,
then the underlying shares again become available for awards.
ADMINISTRATION, AMENDMENT AND TERMINATION
The 2001 Stock Incentive Plan is administered by the Board Compensation
Committee. The committee, on advice of the Company's executive management,
*o selects the key employees who will receive awards,
*o determines the amount, vesting requirements, performance criteria, if any,
and other conditions of each award,
*o interprets the provisions of the plan, and
*o makes all other decisions regarding the operation of the plan.
67
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GENERAL DESCRIPTION OF
THE 2001 STOCK
INCENTIVE PLAN
APPENDIX D DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
The annual grant of non-qualified stock optionsawards to non-employee directors is made annually,automatically, and
the committee has no discretion with respect to those awards. (See "Grants of
Options to Non-Employee Directors" below.)
GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS
Under the 2001 Stock Incentive Plan, each new director receives a grant of
options to purchase a total of 10,000 shares of Company common stock. Also,
each non-employee director receives an annual, automatic grant of options. The
number of options in the grant is determined by dividing $150,000 by the
closing price of Company common stock on the grant date. This grant is made on
May 15 of each year, but if May 15 is not a business day, then the grant is
made on the next business day. All of these grants are fully and immediately
vested and exercisable.
If stockholders approve the proposed amendment to the 2001 Stock Incentive
Plan, each new non-employee director would receive an initial grant of options
to purchase a total of 5,000 shares of Company common stock. Also, each
non-employee director would receive an annual, automatic grant consisting of
(i) options on 5,000 shares of Company common stock and (ii) a number of
restricted shares of Company common stock determined by dividing $50,000 by the
average of the high and low market prices of Company common stock on the grant
date. These grants would be made on May 15 of each year, but if May 15 is not a
business day, the grant would be made on the next business day. Although the
initial option grants to new non-employee directors would continue to vest
fully on the grant date, the annual grants would vest over a three-year period
as follows:
o 25% on each of the first and second anniversaries of the grant date, and
o the remaining 50% on the third anniversary of the grant date.
Full vesting would occur on a director's death, disability or retirement from
the Board.
In addition, a non-employee director who elects to defer directors' fees under
the Directors' Deferred Compensation Plan can, instead of receiving fees, elect
either to:
*o receive a grant of stock options which:
*o have a fair value on the grant date equal to the amount of the deferred
fees (as determined under an appropriate options valuation method),
*o have an option exercise price equal to the fair market value of Company
common stock on the date the deferred fee amount would have been paid, and
*o vest immediately upon grant and generally expire ten years after the grant
date,
- or -
43
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GENERAL DESCRIPTION
OF THE 2001 STOCK
INCENTIVE PLAN
APPENDIX B DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
*o invest the amount of the deferred fees in shares of Company common stock to
be held in a trust and distributed to the director (in shares) when the
director leaves the Board.
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GENERAL DESCRIPTION OF
THE 2001 STOCK
INCENTIVE PLAN
APPENDIX D DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
RESTRICTED SHARES AND PERFORMANCE SHARE AWARDS
Recipients of restricted shares cannot transfer them before they vest (except
that the recipient can transfer them by gift to certain trusts and partnerships
formed for the benefit of family members).
Recipients of performance share awards cannot transfer them, and the recipients
have no voting or dividend rights until the associated shares of common stock
are issued. At that time the recipients will have the same voting, dividend and
other rights as the Company's other stockholders.
Generally, vesting of all or a portion of restricted shares and performance
share awards is accelerated if the recipient dies, becomes disabled, or
retires, and may be accelerated if a "change in control" occurs. (We explain
that term later in this Appendix BD under "Change in Control.")
When granting an award, the Board Compensation Committee determines the number
of performance share awards or restricted shares to be included in the award as
well as the vesting or issuance conditions. The vesting or issuance conditions
may be based on:
*o the employee's individual performance,
*o the Company's performance, or
*o other appropriate criteria.
When the committee uses the Company's performance as a vesting or issuance
condition, it establishes performance goals based on one or more of the
following business criteria:
*o pre-tax adjusted income,
*o adjusted operating income,
*o cash flow,
*o stockholder return,
*o revenue,
*o revenue growth,
*o return on net assets,
*o net income,
*o net new assets,
*o earnings per share,
*o return on equity,stockholders'equity, or
*o return on investment.
TERMS OF STOCK OPTIONS
The exercise price of any stock option granted under the plan must be equal to
or greater than the fair market value of the Company'sCompany common stock on the date of
grant. The 2001 Stock Incentive Plan defines "fair market value" as the closing
price of the Company'sCompany stock as reported by the New York Stock Exchange Composite
Transactions Index for the date of grant.
The term of an incentive stock option cannot exceed ten years. The Board
Compensation Committee establishes vesting conditions when it grants an option.
Generally, vesting is accelerated if the recipient dies, becomes disabled, or
retires, and may be accelerated if a "change
4469
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GENERAL DESCRIPTION OF
THE 2001 STOCK
INCENTIVE PLAN
APPENDIX BD DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
in control" occurs. (We explain that term in the following section of this
Appendix B.D.)
Recipients may transfer options (other than incentive stock options, which must
be nontransferable to qualify as incentive stock options) to certain trusts and
partnerships formed for the benefit of family members.
CHANGE IN CONTROL
Under the 2001 Stock Incentive Plan, the term "change in control" means:
*o the Company undergoes any change in control which would have to be disclosed
in the Company's next proxy statement under SEC rules, or
*o any person becomes the beneficial owner, directly or indirectly, of at least
20% of the combined voting power of the Company's outstanding securities,
except as a result of a repurchase by the Company of its own securities, or
*o the composition of the Board of Directors changes, and as a result fewer
than two-thirds of the incumbent directors:
*o had been directors of the Company 24 months earlier, or
*o had been elected or nominated with the approval of at least a majority of
the directors who had been directors of the Company 24 months earlier and
who were still directors at the time of the incumbent directors' election or
nomination.
FEDERAL TAX CONSEQUENCES
The following is a summary of the federal income tax consequences of awards
under the 2001 Stock Incentive Plan.
OPTIONS
When the options are granted, there are no federal income tax consequences to
the Company or the option holder.
On the exercise of a non-qualified stock option, the option holder generally
will have ordinary income. The amount of the income will be equal to:
*o the fair market value of the shares on the exercise date, minus
*o the option exercise price.
The income will be subject to tax withholding. Generally, in the same year that
the option holder has income from the option exercise, the Company will be able
to take a tax deduction in the amount of that income.
On any subsequent disposition of the shares, any additional gain or loss
recognized by the holder generally will be a capital gain or loss.
In contrast, the exercise of incentive stock options will not normally result
in any taxable income to the option holder at that time; nor will the Company
be entitled to any tax deduction. However, the exercise will result in an
amount that is taken into account in computing the option holder's alternative
minimum taxable income. This amount will be equal to:
*o the fair market value of the shares on the exercise date, minus
*70
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FEDERAL TAX
CONSEQUENCES
APPENDIX D DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
o the option exercise price.
If the option holder exercises the options, holds the shares for the period
required by law, and then sells the shares, the difference 45
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FEDERAL TAX
CONSEQUENCES
APPENDIX B DESCRIPTION OF THE 2001 STOCK INCENTIVE PLAN
between the sale
price and the exercise price generally will be taxed as a capital gain or loss.
If the option holder does not hold the shares for the period required by law,
he or she generally will have ordinary income at the time of the early
disposition. The amount of the income will be equal to:
*o the fair market value of the shares on the exercise date (or, if less, the
sale price), minus
*o the option exercise price.
The Company generally will be entitled to a tax deduction in that same amount.
Any additional gain upon the disposition generally will be taxed as a capital
gain.
RESTRICTED SHARES
Unless the recipient of restricted shares elects to be taxed when the shares
are granted, there will be no federal income tax consequences to the recipient
or to the
Company while the shares have vesting restrictions. Upon vesting the recipient
will have ordinary income. The amount of the income will be equal to:
*o the fair market value of the shares on the vesting date, minus
*o the amount paid for the shares.
The income will be subject to tax withholding. The Company generally will be
entitled to a tax deduction in the amount of the recipient's income. Upon any
subsequent disposition of the shares, any additional gain or loss recognized by
the holder generally will be a capital gain or loss.
PERFORMANCE SHARE AWARDS
The grant of performance share awards will have no federal income tax
consequence to the Company or the recipient at the time of the grant. When a
recipient becomes entitled to receive any common stock under the terms of the
performance share award, the recipient generally will have ordinary income. The
amount of the income will be equal to:
*o the fair market value of the shares on that date, minus
*o any amount paid for the shares.
The income will be subject to tax withholding.
The Company generally will be entitled to a tax deduction in the amount of the
recipient's income. Upon any subsequent disposition of the shares, any
additional gain or loss recognized by the holder generally will be a capital
gain or loss.
4671
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FEDERAL TAX
CONSEQUENCES
APPENDIX CE NEW PLAN BENEFITS TABLE FOR THE 2001 STOCK INCENTIVE PLAN
NEW PLAN BENEFITS /(1)/
SHARES ANNUAL, AUTOMATIC
UNDERLYING GRANTS
INITIAL OPTION TO NON-EMPLOYEE
GRANTS TO DIRECTORS
NEW SHARES
NON-EMPLOYEE UNDERLYING RESTRICTED
DIRECTORS (2) OPTIONS (3) SHARES (4)
__________________________________________________________________________
ALL CURRENT DIRECTORS WHO ARE NOT
EXECUTIVE OFFICERS, AS A GROUP
(10 PERSONS) 5,000 50,000 41,190
(1) This table shows the grants that would have been made in 2002 to
non-employee directors had the proposed amendment to the 2001 Stock
Incentive Plan been in effect in 2002. (See "Proposals To Be Voted
On--Approval of Amendment to 2001 Stock Incentive Plan Regarding Grants to
Non-Employee Directors," beginning on page 9, and Appendix D.) Since the
proposed amendment relates only to non-employee directors, this table is
not applicable to executive officers or other employees of the Company.
(2) The first column shows the aggregate number of shares of Company common
stock underlying options that would have been awarded in 2002 in initial
grants to non-employee directors who joined the Company's Board of
Directors in 2002 had the proposed amendment to the 2001 Stock Incentive
Plan been in effect in 2002. One new non-employee director joined the Board
in 2002.
(3) The second column shows the aggregate number of shares of Company common
stock underlying options that would have been granted on May 15, 2002 in
the annual, automatic grant of options to the ten non-employee directors,
as a group, had the proposed amendment to the 2001 Stock Incentive Plan
been in effect in 2002.
(4) The third column shows the aggregate number of shares that would have been
granted on May 15, 2002 in the annual, automatic grant of restricted shares
of Company common stock to the ten non-employee directors, as a group, had
the proposed amendment to the 2001 Stock Incentive Plan been in effect in
2002. The number of restricted shares granted to each non-employee director
would have been 4,119, determined by dividing $50,000 by $12.14 (which was
the average of the high and low market prices of Company common stock on
May 15, 2002). Therefore, the aggregate number of restricted shares that
would have been granted to the ten non-employee directors, as a group,
would have been 41,190.
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NEW PLAN
BENEFITS TABLE
FOR THE 2001 STOCK
INCENTIVE PLAN
APPENDIX F DESCRIPTION OF THE ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCELONG-TERM INCENTIVE PLAN
GENERAL DESCRIPTION OF THE ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCELONG-TERM INCENTIVE PLAN
PLAN PARTICIPANTS
The participants in the AnnualLong-Term Incentive Plan include the President and
Co-Chief Executive Individual Performance Plan, as
amended, include theOfficer, Vice Chairmen, Executive Vice Presidents and from time to
time, certain other
officers having comparable positions, in each caseof the Company and its affiliates, as selected for participation by
the Compensation Committee of the Company's Board Compensation Committee. Currently, nine
executiveof Directors. If the plan is
approved, approximately 800 officers would initially participate in the Individual Performance Plan.plan,
11 of whom would be executive officers.
DETERMINATION OF BONUSCASH PAYMENT AMOUNTS
The Individual PerformanceEach performance period under the Long-Term Incentive Plan specifies a maximum bonuswill be four years
long or such other length of time as the Compensation Committee may determine.
At the beginning of each performance period, the Compensation Committee will
determine target awards for that period for each participant which is 160% of the amount of the executive's bonus computed under the
Corporate Executive Bonus Plan. Participants in the Individual Performance Plan
may receive some, all, or none of their maximum bonus under the plan, depending
upon an assessment of their achievement of individual performance goals, which
is made by the Compensation Committee. The following paragraph describes how an
executive's bonus is computed under the Corporate Executive Bonus Plan.
To determine the bonus payable to an executive under the Corporate Executive
Bonus Plan, the Compensation Committee first determines a target bonus for each
executive, which is expressed as a percentage of the executive's annual base
salary, and dependsbased upon an
assessment of the executive'sparticipant's roles and responsibilities. The Committee setsmaximum target
bonusesaward that may be awarded to a participant in any year is $3 million. An award
will entitle eligible participants to receive a cash payment at the first quarter of each
year, based upon the recommendationsend of the
Chairman and Co-Chief Executive
Officer and, where appropriate, the President and Co-Chief Executive Officer.
For the executives who participate in the Individual Performance Plan, the
target bonus percentages under the Corporate Executive Bonus Plan can be up to
100%performance period. The value of the executive's annual base salary. Theaward at the time of payment will equal
the amount of the target bonus is
thenaward, multiplied by a payout percentage, which is derivedmay vary from
a matrix fixed0% to 400% depending on the Company's performance over the performance period
in relation to the performance measures established by the Compensation
Committee in advance, and which can rangeat the beginning of the performance period from 0% to 400% foramong the executives who participate infollowing
performance measures permitted by the Individual Performance Plan. The matrix
establishes the relationship between the payout percentage and the Company's
performance for the year relative to its targets ofplan: revenue growth, net revenue growth,
andoperating revenue growth, consolidated pre-tax profit margin, consolidated
pre-tax operating margin, consolidated after-tax profit margin. In any event,margin, consolidated
after-tax operating profit margin, client net new asset growth, stockholder
return, return on assets, earnings per share, return on stockholders' equity,
and return on investment. If a participant terminates employment before the amount of base salary
included in the computationend
of the target bonus amountperformance period, the participant may be entitled to receive a partial
payment, depending upon the length of time the participant was employed during
the performance period and the reason for each participant in
any year maythe termination, but the partial
payment generally will not exceed 250%be payable until the end of the base salary, determined as of March 31,
2000, payable to the participant holding the same or substantially similar
position on March 31, 2000.
The amount so derived from multiplying the executive's target bonus by the
payout percentage determined pursuant to the matrix is the amount of the bonus
payable under the Corporate Executive Bonus Plan. This latter amount is then
multiplied by 160% to determine the maximum bonus payable to the executive under
the Individual Performance Plan.
47
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GENERAL DESCRIPTION OF
THE ANNUAL EXECUTIVE
INDIVIDUAL
PERFORMANCE PLAN
APPENDIX C DESCRIPTION OF THE ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE PLAN
BONUSperformance period.
AWARD PAYMENTS
Payments are generally made in cash, except that the Compensation Committee may
decide to make all or a portion of the payments in Company stock or other
equity-based awards (including stock options or restricted stock) with
equivalent value. However, not more than 0.5% of the Company's outstanding
shares may be issued in any year under the Individual Performance Plan (combined
with any such shares issued under the Corporate Executive Bonus Plan).
Amounts payable under the Individual PerformanceLong-Term Incentive Plan are generally paid in cash
within a reasonable time after the end of the yearperformance period in which they
are earned. However, a recipient may elect to defer receipt of all or any
portion of the amounts payable under the plan until a specified date, or until
termination of employment, but deferrals will be paid immediately if control of
the Company undergoes a
change in control.changes. Deferrals may be credited with growth rates, determined by
the total return that would result from investments in certain registered
investment companiestypes of investments selected
from time to time by the Company, the allocation among which is determined by
the participant.
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GENERAL DESCRIPTION OF
THE LONG-TERM
INCENTIVE PLAN
APPENDIX F DESCRIPTION OF THE LONG-TERM INCENTIVE PLAN
PLAN ADMINISTRATION
The Compensation Committee administers the Individual PerformanceLong-Term Incentive Plan and makes
all decisions regarding the operation of the plan and payments under it. The
Compensation Committee determines the length of the performance period, selects
the performance measures used to determine Company performance from the
performance measures permitted by the plan, and determines the matrix used to
calculate the value of a target award. Awards are generally made at the
beginning of the performance period.
However, the Compensation Committee may start a new performance period at any
time. The Compensation Committee may amend or terminate the plan at any time
and for any reason.
48reason so long as the action does not affect the rights of
participants to awards granted before the amendment or termination.
74
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GENERAL DESCRIPTION OF
THE ANNUAL EXECUTIVE
INDIVIDUAL
PERFORMANCELONG-TERM
INCENTIVE PLAN
APPENDIX DG NEW PLAN BENEFITS TABLE FOR THE LONG-TERM INCENTIVE PLAN
NEW PLAN BENEFITS
2001 ANNUAL EXECUTIVE INDIVIDUAL
STOCK INCENTIVE PLAN(1)ESTIMATED FUTURE CASH PAYOUTS
PERFORMANCE PLAN (2)
NUMBER OF SHARES NUMBER OF RESTRICTED DOLLAR VALUE ($)
NAME UNDERLYING OPTIONS(#) AND OTHER SHARES(#)
- -----------------------------------------------------------------------------------------------------------------------------------THRESHOLD TARGET MAXIMUM
PERIOD AWARDS (1) AWARDS (1) AWARDS (1)
_____________________________________________________________________________________
CHARLES R. SCHWAB(3) 300,000 0SCHWAB 2003-2006 N/A N/A N/A
CHAIRMAN AND CO-CHIEF EXECUTIVE
OFFICER
DAVID S. POTTRUCK(3) 300,000 0 N/APOTTRUCK 2003-2006 $750,000 $1,500,000 $6,000,000
PRESIDENT AND CO-CHIEF EXECUTIVE
OFFICER
LON GORMAN 2003-2006 $375,000 $750,000 $3,000,000
VICE CHAIRMAN AND PRESIDENT --
SCHWAB CAPITAL MARKETS
DAWN G. LEPORE 2003-2006 $375,000 $750,000 $3,000,000
VICE CHAIRMAN -- TECHNOLOGY,
OPERATIONS AND ADMINISTRATION
JOHN PHILIP COGHLAN 220,001 0 $ 826,4782003-2006 $375,000 $750,000 $3,000,000
VICE CHAIRMAN AND EXECUTIVE VICE PRESIDENT STEVEN L. SCHEID 220,001 0 $ 843,553
VICE CHAIRMAN AND EXECUTIVE VICE PRESIDENT
DAWN G. LEPORE 220,001 0 $ 821,645
VICE CHAIRMAN,--
INDIVIDUAL INVESTOR
CHRISTOPHER V. DODDS 2003-2006 $312,500 $625,000 $2,500,000
EXECUTIVE VICE PRESIDENT AND CHIEF
INFORMATIONFINANCIAL OFFICER
LINNET F. DEILY 220,001 0 $ 876,683
VICE CHAIRMAN ANDALL CURRENT EXECUTIVE VICE PRESIDENT
LON GORMAN 220,001 0 $ 820,345
VICE CHAIRMAN AND EXECUTIVE VICE PRESIDENT2003-2006 $3,875,000 $7,750,000 $31,000,000
OFFICERS, AS A GROUP
(12 PERSONS)
ALL CURRENT DIRECTORS WHO 2003-2006 N/A N/A N/A
ARE NOT EXECUTIVE OFFICERS,
AS A GROUP 1,034,984 60,000 $6,523,864
(13 PERSONS -- 2001 STOCK INCENTIVE PLAN;
9 PERSONS -- 2001 ANNUAL EXECUTIVE INDIVIDUAL
PERFORMANCE PLAN)(10 PERSONS)
ALL CURRENT DIRECTORS WHO ARE NOT EXECUTIVE OFFICERS, AS 53,283 194 N/A
A GROUP (9 PERSONS) (4)
ALL CURRENT EMPLOYEES, 2003-2006 $19,930,500 $39,861,000 $159,444,000
OTHER THAN EXECUTIVE
OFFICERS, AS 15,076,861 1,193,500 N/A
A GROUP (4)(UP
TO APPROXIMATELY
800 OFFICERS)
(1) This column assumes that had the 2001 Stock Incentive Plan been in effect in 2000, the same number of options and restricted
and other shares would have been granted in 2000 under that plan as were granted in 2000 under the 1992 Stock Incentive Plan.
(2) This column identifies theThe above table shows cash amounts that would have beenbe payable for the four-year
performance period from January 1, 2003 through December 31, 2006 with
respect to the cash component of long-term incentive compensation awards
for 2003, assuming the Company's cumulative earnings per share over that
period reach a level that would result, alternatively, in threshold awards,
target awards or maximum awards under the Annual Executive Individual PerformanceLong-Term Incentive Plan. (See
"Proposals To Be Voted On--Approval of Long-Term Incentive Plan, as
amended, for 2000, had the amended plan been in effect in 2000, based on:
* 2000 base salaries" beginning
on page 10, and target bonuses,
* the Company's 2000 net revenue growth of 29% and pre-tax operating profit margin of 24%, and
* an assumption that each executive officer receives his or her full target bonus under the amended plan.
(3) Mr. Schwab and Mr. Pottruck do not participate in the Annual Executive Individual Performance Plan.
(4) Only executive officers are eligible to participate in the Annual Executive Individual Performance Plan.Appendix F.)
4975
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NEW PLAN
BENEFITS TABLE
FOR THE LONG-TERM
INCENTIVE PLAN
APPENDIX EH DESCRIPTION OF LON GORMAN'S EMPLOYMENT AGREEMENT
This Appendix H describes Lon Gorman's employment agreement, which includes the
Schwab Capital Markets Incentive Plan.
EMPLOYMENT AGREEMENT
The Company, Schwab Capital Markets L.P. and Mr. Gorman entered into an
agreement effective July 2002 for his employment as Vice Chairman of the
Company and President of Schwab Capital Markets L.P. The employment agreement
has a term of five years from its effective date.
The employment agreement provides for an annual base salary of $560,000,
subject to annual review and adjustment by the Co-Chief Executive Officers of
the Company and the Compensation Committee (provided, however, that
Mr. Gorman's base salary shall not be reduced below $560,000 except to the
extent consistent with adjustments made to the base salaries of other current
Vice Chair-level members of the Executive Committee of the Company). Mr. Gorman
is eligible to participate in the Company's Corporate Executive Bonus Plan and
Annual Executive Individual Performance Plan (the "Company's bonus plans"),
with a target annual bonus of 125% of his base salary. Mr. Gorman is also
eligible to participate in the employee benefit plans and perquisites of the
Company comparable to those available to other Vice Chair-level members of the
Executive Committee of the Company.
The employment agreement provides for incentive compensation under the Schwab
Capital Markets Incentive Plan, which is subject to stockholder approval. The
target annual incentive compensation under the plan is $3 million, while the
maximum annual incentive compensation payable to Mr. Gorman under the plan is
$7 million. The first $1 million in such annual incentive compensation would be
payable in cash. Any amount of such annual incentive compensation above $1
million would be paid 50% in cash and 50% in restricted shares of Company
common stock. No payment would be required under the plan for any year unless
Schwab Capital Markets attains at least 80% of its financial goals established
by the Compensation Committee for that year and Mr. Gorman is in charge of
Schwab Capital Markets on the date payment would be due.
The employment agreement also provides that certain compensation and benefits
will be provided to Mr. Gorman upon termination of the employment agreement
without cause before the expiration of the employment agreement. "Cause" is
defined to include the failure or refusal to substantially perform his duties,
gross negligence or willful misconduct in the performance of his duties, the
commission of a felony, or misconduct that results in material harm to the
Company.
If the Company or Schwab Capital Markets terminates the employment agreement
without cause, Mr. Gorman will be entitled to receive:
o any bonuses not yet paid under the Company's bonus plans or the Schwab
Capital Markets Incentive Plan for the prior year, and any pro-
76
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LON GORMAN'S
EMPLOYMENT
AGREEMENT
APPENDIX H DESCRIPTION OF LON GORMAN'S EMPLOYMENT AGREEMENT
rated bonuses earned for the year in which the termination occurs;
o his base salary for the three-year period following termination;
o an additional $10 million;
o an amount equal to three years of bonuses payable under the Company's bonus
plans, based on his target bonus levels under those plans;
o continued vesting of all outstanding stock options, restricted stock grants
and other equity-based awards for the three-year period following
termination;
o continuation of medical, dental and life insurance coverage for the
three-year period following termination; and
o various other benefits, including payment for unused vacation days through
the date of termination.
If Mr. Gorman resigns his employment with "good reason," he will be entitled to
the same benefits outlined immediately above. If he resigns without good
reason, he will, for one year following his resignation, receive his salary and
be entitled to the continuation of his medical, dental and life insurance
coverage, and he will be paid for his unused vacation days. "Good Reason" is
defined as a material breach of the agreement by the Company or Schwab Capital
Markets L.P., a substantial diminution in Mr. Gorman's duties, a relocation of
Mr. Gorman's principal place of business more than 25 miles from Jersey City,
New Jersey without his consent, a failure of the majority of the Company's
stockholders to approve the Schwab Capital Markets Incentive Plan, or a
reduction in his base salary or bonus opportunity (unless the reduction
similarly affects all other Vice Chair-level members of the Company's Executive
Committee).
If Mr. Gorman's employment terminates due to his death, his estate will be
entitled to receive:
o his base salary through the last day of the month in which his death occurs;
o any bonuses not yet paid under the Company's bonus plans or the Schwab
Capital Markets Incentive Plan for the prior year, and any pro-rated bonuses
earned for the year in which the death occurs;
o full and immediate vesting of all then outstanding stock options, restricted
stock grants and other equity-based awards, which, in the case of stock
options, shall remain exercisable for one year following the date of death
(but not beyond their original term); and
o various other benefits, including payment for unused vacation days through
the date of death and payment under any plan providing life insurance
benefits for Mr. Gorman.
If Mr. Gorman's employment terminates due to his disability, Mr. Gorman will be
entitled to receive:
o his base salary through the date of termination;
o any bonuses not yet paid under the Company's bonus plans or the
77
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LON GORMAN'S
EMPLOYMENT
AGREEMENT
APPENDIX H DESCRIPTION OF LON GORMAN'S EMPLOYMENT AGREEMENT
Schwab Capital Markets Incentive Plan for the prior year, and any pro-rated
bonuses earned for the year in which the termination occurs;
o full and immediate vesting of all then outstanding stock options, restricted
stock grants and other equity-based awards, which, in the case of stock
options, shall remain exercisable for one year following the date of
termination (but not beyond their original term); and
o various other benefits, including payment for unused vacation days through
the date of termination and payment under any plan providing disability
insurance benefits to Mr. Gorman.
If the employment agreement is not earlier terminated, and Mr. Gorman retires
as of the last day of the employment term, Mr. Gorman will receive his base
salary for a one-year period following the retirement date, a bonus under the
Company's bonus plans following the one-year anniversary of the retirement
date, and vesting of any unvested shares of restricted stock granted under the
Schwab Capital Markets Incentive Plan effective upon the one-year anniversary
of the retirement date.
The employment agreement prohibits Mr. Gorman from becoming associated with any
business competing with the Company, Schwab Capital Markets L.P. or their
affiliates, or soliciting or hiring their employees, for a period of one year
following his termination.
The benefits payable in the case of the termination of Mr. Gorman's employment
without cause or the resignation by Mr. Gorman with or without good reason are
subject to Mr. Gorman signing a general release of claims against the Company
and observing the one-year non-competition and non-solicitation and various
other restrictions in the employment agreement. The benefits payable to Mr.
Gorman in the case of disability are subject to Mr. Gorman signing a general
release. The benefits payable in the case of Mr. Gorman's retirement as of the
last day of his employment term are subject to Mr. Gorman observing the
one-year non-competition and non-solicitation and various other restrictions.
78
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LON GORMAN'S
EMPLOYMENT
AGREEMENT
APPENDIX I AUDIT COMMITTEE CHARTER
PURPOSE AND AUTHORITY
The Audit Committee of the Board of Directors assists the Board in fulfilling
its oversight responsibilities by reviewing (1) the integrity of the Company'scompany's
financial statements and financial reporting process; (2) the adequacyqualifications
and independence of the Company's internal
controls; (3) the audit process, including the independenceindependent auditors and performance of the Company'scompany's
internal audit function and externalindependent auditors; (3) compliance with legal and
regulatory requirements; and (4) such other matters as directed by the Board or
this Charter.
COMPOSITION AND MEMBERSHIP
The Board appoints the members of the Audit Committee. The Audit Committee shall
consist of at least three independent directors, all of whom shall be
financially literate. At least one memberprepares the report required by the rules of the Audit Committee shall have
accounting or related financial management experience. The term of each member
shallSecurities
and Exchange Commission to be two years, with alternating dates of expiration so as to provide
continuity toincluded in the Audit Committee.
AUTHORITYcompany's annual proxy statement.
The Audit Committee shall have the sole authority to retain special independent
legal, accounting or other consultants to advise the Committee. The Audit
Committee may request any officer or employee of the Companycompany or the Company'scompany's
outside counsel or independent auditors to attend a meeting of the Committee or
to meet with any members of, or consultants to, the Committee. MEETINGS
ThereThe Audit
Committee may also meet with the company's investment bankers, financial
analysts or credit agencies who follow the company.
A majority of members of the Committee shall be four regular meetings each year and additional meetings may be
held as circumstances warrant.constitute a quorum. A majority of
the members present shall decide any question brought before the Committee.
RESPONSIBILITIES
The responsibilities of the Audit Committee include, but are not limited, to
the following:
OVERSIGHT OF FINANCIAL DISCLOSURE MATTERS
QUARTERLY:
1. Review an analysis prepared by management and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for approval.
2. Recommend to the Board the appointment of the independent auditors which
firm is ultimately accountable to the Audit Committee and the Board.
3. Review the performance of
the independent auditors and, if so determined by
the Audit Committee, recommend that the Board replace the independent
auditors.
4. Review the annual audited financial statements with management,
including major issues regarding accounting and auditing principles and
practices, as well as the adequacy of the internal controls that could
significantly affect the Company's financial statements.
5. Review any analyses prepared by management and/or the independent
auditors of(1) significant financial reporting issues and judgments made in connection
with the preparation of the company's financial statements, including any
significant changes in the company's selection or application of accounting
principles, (2) any significant deficiencies in the design or operation of
internal controls or material weaknesses therein and any fraud involving
management or other employees who have a significant role in the Company's
internal controls (as well as any special steps adopted in light of such
control issues), (3) the development, selection and disclosure of critical
accounting estimates, (4) analyses of the effect of alternative
assumptions, estimates or GAAP methods on the company's financial
statements and (5) a description of any transactions as to which management
obtained Statement on Auditing Standards No. 50 letters.
2. Discuss with management and the internal and external auditors the process
for ensuring compliance with the company's policies regarding interested,
related, insider or affiliated transactions and corporate opportunity
matters, and receive and review reports and disclosures concerning such
transactions.
3. Discuss with management and the independent auditors the effect of
regulatory and accounting initiatives as well as off-balance sheet
structures
79
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PURPOSE AND
AUTHORITY
RESPONSIBILITIES
APPENDIX I AUDIT COMMITTEE CHARTER
on the company's financial statements.
6. Review4. Discuss with management the company's major risk exposures and the steps
management has taken to monitor and control such exposures, including the
company's risk assessment and risk management policies.
5. Discuss with management and the independent auditors any problemscorrespondence
with regulators or difficulties the
auditors may have encounteredgovernmental agencies and any employee complaints or
published reports that raise material issues regarding the company's
financial statements or accounting policies.
6. Discuss with management letter provided by the auditorstypes of information and the Company's responsetype of
presentation to that letter. Such review should
include any difficulties
50
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PURPOSE
COMPOSITION AND MEMBERSHIP
AUTHORITY
MEETINGS
RESPONSIBILITIES
APPENDIX E AUDIT COMMITTEE CHARTER
encounteredbe made in the coursecompany's earnings press releases, including
the use of "pro forma" or "adjusted" non-GAAP information, as well as the
audit work, including any restrictions on the
scopenature of activities or accessand process for providing information to required information.analysts and rating
agencies.
7. Receive written periodic reports fromReview and discuss with management and the independent auditors regarding
the
auditors' independence, discuss such reports with the auditors,company's quarterly financial statements, including disclosures made in
management's discussion and if
so determined by the Audit Committee, recommend that the Board take
appropriate action to ensure the independence of the auditors.
8. Review and approve fees for audit services provided by the independent
auditors. Review fees for information technology consulting and all other
services provided by the independent auditors during the fiscal year.
9. Consider whether the provision of non-audit services by the independent
auditors is compatible with maintaining auditor independence.
10. Meet with the independent auditorsanalysis, prior to the audit to review the planning
and staffingfiling of the audit.
11.company's
Form 10-Q, including the results of the independent auditors' reviews of
the quarterly financial statements.
ANNUALLY:
8. Discuss with the independent auditors matters required to be discussed by
Statement on Auditing Standards No. 61 relating to the conduct of the
audit. 12. Discuss,In particular, discuss:
(a) The adoption of, or delegate to the Chairman to discuss, matters communicated by
the independent auditors in connection with interim financial reviews prior
to the filing of interim financial information with a regulatory agency, if
practicable.
13. Review major changes to, the Company'scompany's significant auditing and
accounting principles and
auditing practices as suggested by the independent
auditors, internal auditors or management.
(b) The management letter provided by the independent auditors and the
company's response to that letter.
(c) Any difficulties encountered in the course of the audit work, including
any restrictions on the scope of activities or access to requested
information, and any significant disagreements with management.
(d) Any accounting adjustments that were noted or proposed by the auditor.
(e) The process followed and the conclusions drawn by the independent
auditors to assure the audit was conducted in a manner consistent with
Section 10A of the Securities Exchange Act of 1934, as amended.
(f) The form of the opinion the independent auditors propose to render to
the Board of Directors and the stockholders.
9. Review and discuss with management and the independent auditors the annual
audited financial statements, including disclosures made in management's
discussion and analysis, and recommend to the Board whether the audited
financial statements should be included in the company's Form 10-K.
OVERSIGHT OF THE RELATIONSHIP WITH THE INDEPENDENT AUDITORS
10. Retain sole authority to hire, retain and terminate the independent
auditors (subject, if applicable, to shareholder ratification).
11. Retain sole authority to approve all audit engagement fees and terms, as
well as establish policies and procedures, as permitted by
80
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RESPONSIBILITIES
APPENDIX I AUDIT COMMITTEE CHARTER
regulations, regarding pre-approval of any permitted non-audit services
provided by the independent auditors.
12. Obtain and review annually a report by the independent auditor describing:
(a) the firm's quality-control procedures;
(b) any material issues raised by the most recent internal quality-control
review, peer review or inspection, of the firm, or by any inquiry or
investigation by governmental or professional authorities, within the
preceding five years, respecting one or more independent audits carried
out by the firm, and any steps taken to deal with any such issues;
(c) all relationships between the independent auditor and the company,
including an assessment of whether any non-audit services provided
complies with applicable laws and regulations and is compatible with
maintaining the auditor's independence;
(d) procedures adopted to ensure that permitted non-audit services will not
be provided to the company unless pre-approved by the Audit Committee;
and
(e) procedures adopted to ensure audit partner rotation and "conflicts of
interest" practices, (with respect to the audit of the company's
financial statements), as well as the content and timeliness of
communications to the Audit Committee, comply with applicable laws and
regulations.
13. Evaluate the qualifications, performance and independence of the
independent auditors, including an evaluation of the lead partner of the
independent auditor. In the evaluation, the Audit Committee may take into
account the reports of the independent auditors and the opinions of
management and the internal auditors. The evaluation should further
consider whether it is appropriate to rotate the lead audit partner, or the
audit firm itself, to assure continuing auditor independence. The Audit
Committee should present its conclusions with respect to the independent
auditor to the full Board.
14. Meet with the independent auditors prior to the audit to review the
planning and staffing of the audit.
15. Recommend to the Board policies for the company's hiring of employees or
former employees of the independent auditors who were engaged on the
company's account.
16. Discuss with the independent auditors issues on which their national office
was consulted by the company's audit team.
OVERSIGHT OF THE INTERNAL AUDIT FUNCTION
17. Review the annual audit plans of the internal audit department.
18. Review the activities, organizational structure, budget and qualifications
of the internal audit department.
19. Review the appointment and replacement of the senior internal auditing
executive.
15.20. Review with the independent auditors the internal audit department
responsibilities, budget and staffing, and any changes required in the
planned scope of the internal audit.
16.21. Review summaries of the significant reports to management prepared by the
internal audit-
ingauditing department and management's responses.
17.81
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RESPONSIBILITIES
APPENDIX I AUDIT COMMITTEE CHARTER
OVERSIGHT OF COMPLIANCE MATTERS
22. Review with the Company'scompany's General Counsel legal matters that may have a
material impact on the financial statements, the Company'scompany's compliance
policies and any material reports or inquiries received from regulators or
governmental agencies.
18. Meet periodically with23. Obtain and review reports from management, to review the Company's major
financial risk exposuresGeneral Counsel, the Chief
Compliance Officer, the senior internal auditing executive and the
steps management has taken to monitorindependent auditor regarding the policies and control such exposures.
19. Maintain communicationprocedures for ensuring
compliance with, and when appropriate, meetwhether the company and its affiliated entities are in
compliance with, applicable legal requirements and the company's code of
business conduct and ethics.
OTHER GOVERNANCE RESPONSIBILITIES
24. Meet separately, periodically, with the independent auditors, the Chief
Financial Officer, the Senior Vice President
of Internal Audit,senior internal audit executive, and the General
Counsel.
51
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RESPONSIBILITIES
APPENDIX E AUDIT COMMITTEE CHARTER
20.25. Review policies and procedures with respect to officers' expense accounts
and perquisites, including their use of corporate assets, and consider the
results of any review of these areas by the auditors.
26. Review and approve disclosures required by the rules of the Securities and
Exchange Commission to be included in the Company'scompany's annual proxy statement.
21. Oversee27. Review procedures for (a) the receipt, retention and treatment of
complaints received by the company regarding accounting, internal
accounting controls, or auditing matters; and (b) the confidential,
anonymous submission by employees of the issuer of concerns regarding
questionable accounting or auditing matters.
28. Establish a process for determining compliance with the Company's Code of
Conduct. Review and approve significant revisions thereto.
22. Request reportsappropriating funding from the independentcompany for payment
of the external auditors and internal auditors regarding
any areas that may requireadvisors employed by the Audit Committee's special attention.
23.Committee.
29. Report its activities to the full Board on a regular basis.
While30. Review and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for approval.
31. Review annually the performance of the Audit Committee hasCommittee.
COMPOSITION AND MEMBERSHIP
The Board appoints the responsibilities and powers set forth in this
Charter, it is not the dutymembers of the Audit Committee to plan or conduct audits or
to determine thaton the Company's financial statements are completerecommendation of
the Nominating and accurateCorporate Governance Committee. The Audit Committee shall
consist of at least three directors, all of whom shall meet independence and
areexperience requirements in accordance with accounting principles generally accepted in the
United States of America. This is the responsibility of managementapplicable laws, Securities and
the
independent auditors. Nor is it the dutyExchange Commission and New York Stock Exchange rules. Members of the Audit
Committee to conduct
investigations, to resolve disagreements, if any, between management andshall not simultaneously serve on the independent auditors or to assure compliance with laws and regulations and the
Company's Codeaudit committees of Conduct.
52more than
two other public companies.
82
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COMPOSITION AND
MEMBERSHIP
APPENDIX I AUDIT COMMITTEE CHARTER
MEETINGS
There shall be not less than five regular meetings each year and additional
meetings may be held as circumstances warrant.
WHILE THE AUDIT COMMITTEE HAS THE RESPONSIBILITIES AND POWERS SET FORTH IN THIS
CHARTER, IT IS NOT THE DUTY OF THE AUDIT COMMITTEE TO PLAN OR CONDUCT AUDITS OR
TO DETERMINE THAT THE COMPANY'S FINANCIAL STATEMENTS AND DISCLOSURES ARE
COMPLETE AND ACCURATE AND ARE IN ACCORDANCE WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. THIS IS THE RESPONSIBILITY
OF MANAGEMENT AND THE INDEPENDENT AUDITORS. NOR IS IT THE DUTY OF THE AUDIT
COMMITTEE TO CONDUCT INVESTIGATIONS, TO RESOLVE DISAGREEMENTS, IF ANY, BETWEEN
MANAGEMENT AND THE INDEPENDENT AUDITORS OR TO ASSURE COMPLIANCE WITH LAWS AND
REGULATIONS AND THE COMPANY'S CODE OF CONDUCT.
83
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MEETINGS
THE CHARLES SCHWAB CORPORATION
101 MONTGOMERY STREET
SAN FRANCISCO, CAMontgomery Street
San Francisco, California 94104
415.627.7000
NYSE(415) 627-7000
www.schwab.com
ATTACHMENT 1
EMPLOYMENT AGREEMENT
This Agreement, as amended, is made and entered into effective
as of March 31, 2003 by and between The Charles Schwab Corporation, a Delaware
Corporation (hereinafter referred to as the "Company"), and Charles R. Schwab,
an individual (hereinafter referred to as the "Executive") .
WITNESSETH:
WHEREAS, the Company desires to reward the Executive for his
continuing contribution to the Company and provide additional security for the
Executive and to provide an inducement to the Executive to remain with the
Company and not to engage in competition with it.
NOW THEREFORE, in consideration of the mutual obligations
herein contained, the parties hereto, intending to be legally bound hereby,
covenant and agree as follows:
1. EMPLOYMENT
(a) The Company hereby employs the Executive to render
services to the Company in the positions of Chairman of the
Board in the capacity defined in the By-laws of the Company,
as may be amended from time to time. The Executive shall
perform such duties commensurate with his position and shall
have authority and responsibility in working with the Chief
Executive Officer, subject to the control of the Board of
Directors, for the overall strategic direction and leadership
of the Company.
(b) Throughout the term of this Agreement, the Executive
shall devote his full business time and undivided attention
to the business and affairs of the Company and its
subsidiaries, except for reasonable vacations and except for
illness or incapacity, but nothing in the Agreement shall
preclude the Executive from devoting reasonable periods
required for serving, as appropriate, on Boards of Directors
of other companies, and from engaging in charitable and
public service activities provided such activities do not
materially interfere with the performance of his duties and
responsibilities under this Agreement.
2. TERM
This Agreement shall commence on March 31, 2003, and shall continue
through March 31, 2008, subject to the terms and conditions herein
set forth. Beginning on March 31, 2004, and on each subsequent
anniversary of this date, one year
1
shall be added to the term of the Agreement, unless, prior to such
anniversary, the Company or the Executive has notified the other
party hereto that such extension will not become effective.
3. COMPENSATION
For services rendered by the Executive during the term of this
Agreement, and for his performance of all additional obligations of
employment, the Company agrees to pay the Executive and the Executive
agrees to accept the following salary, other compensation, and
benefits:
(a) BASE SALARY. During the term of this Agreement, the
Company shall pay the Executive in periodic installments, a
base salary at the annual rate of $900,000, such base salary
to be reviewed on March 31, 2004, and on each subsequent
anniversary the Board may adjust it up or down, taking into
account, among other things, individual performance,
competitive practice, and general business conditions.
(b) ANNUAL INCENTIVE. In addition to the base salary provided
in Section 3(a) above, the Executive shall be eligible to
receive an annual incentive award based upon the Company's
attainment of pre-established performance targets relative to
specified performance standards. The performance standards
upon which annual incentive payments will be earned shall be
adopted at the beginning of each year by the Compensation
Committee of the Board of Directors (the "Committee"), to be
selected by the Committee from among the following: revenue
growth, net revenue growth, operating revenue growth,
consolidated pretax profit margin, consolidated pretax
operating margin, consolidated after-tax profit margin,
consolidated after-tax operating profit margin, customer net
new asset growth, stockholder return, return on assets,
earnings per share, return on equity, and return on
investment.
For each fiscal year during the term of this Agreement, the
Executive's incentive opportunity shall be computed as the
amount of total cash compensation earned pursuant to the
formula-based matrix, which shall be adopted each year by the
Compensation Committee of the Board of Directors of the
Company, minus the Executive's actual base salary paid during
that year. For the 2003 fiscal year, the target total annual
cash compensation amount (including base salary) is
$5,400,000; therefore, the incentive target is $4,500,000 for
achieving specified objectives (see above).
The formula-based matrix, as amended at the sole discretion
of the Committee, shall be the sole basis for determining the
Executive's annual incentive award. The Committee shall
annually review and approve the
2
performance standards and targets with respect to the
Executive's incentive opportunity, which review and approval
shall be completed no later than the 90th day of the Company's
fiscal year for which such incentive opportunity may be
earned.
Notwithstanding anything to the contrary, the Executive's
maximum annual cash compensation (including base salary and
annual incentive) may not exceed $8,000,000.
(c) LONG-TERM INCENTIVE. The Executive will be considered for
stock options in accordance with the Company's 2001 Stock
Symbol: SCH
www.schwab.com
creatingIncentive Plan, as amended, or any successor thereto ("Stock
Option Program") and any other long-term incentives offered
to other executives of the Company from time to time during
the term of this Agreement.
(d) BENEFITS. The Executive shall be entitled to participate,
as long as he is an employee of the Company, in any and all
of the Company's present or future employee benefit plans,
including without limitation pension plans, thrift and
savings plans, insurance plans, and other benefits that are
generally applicable to the Company's executives; provided,
however, that the accrual and/or receipt by the Executive of
benefits under and pursuant to any such present or future
employee benefit plan shall be determined by the provisions
of such plan.
(e) PERQUISITES. The Executive will be provided such
additional perquisites as are customary for senior level
executives of the Company provided that each perquisite is
approved by the Board of Directors.
(f) BUSINESS EXPENSES. The Executive will be reimbursed for
all reasonable expenses incurred in connection with the
conduct of the Company's business upon presentation of
evidence of such expenditures, including but not limited to
travel expenses incurred by the Executive in the performance
of his duties, security for the Executive, his family, and
principal residence, professional organization dues, and club
initiation fees, dues and expenses.
(g) Any annual incentive award earned by Executive under this
Section 3 shall be paid as soon as reasonably practical after
the end of the Company's fiscal year end; provided, however,
that if any such payment would be nondeductible to the
Company under Internal Revenue Code Section 162(m), then any
nondeductible amounts shall be deferred from year to year
until the payment of such amounts is deductible by the
Company.
4. TERMINATION OF EMPLOYMENT
3
(a) RESIGNATION. Notwithstanding Section 2 hereof, this
Agreement may be terminated by the Executive at any time upon
six (6) months written notice of resignation by the Executive
to the Company, and in such event any payments pursuant to
Section 3 and 4 of this Agreement shall automatically
terminate (except for the Company's obligations relating to
voluntary termination under its compensation and benefit
plans, as specified in the various plan documents, and the
Executive's obligations set forth in Section 5). Subsequent
payments may be made to the Executive as provided pursuant to
Section 6 of this Agreement.
(b) TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE.
Termination of the Executive by the Company other than for
Cause, as defined in Section 4(c) below, shall cause the
Company to make payments to the Executive hereunder pursuant
to the provisions of this Section 4(b). Such a worldtermination
shall require at least sixty (60) business days' prior notice
and must be signed by at least three-fourths (3/4) of smarter inventors (TM)
CharlesSchwab logo appears here
Printedall the
non-employee members of the Board of Directors.
Notwithstanding anything to the contrary contained in the
Stock Option Program or any agreement or document related
thereto, the Executive's total outstanding and unvested
shares and/or options under the Stock Option Plan shall at
the date of termination be deemed to be 100% vested. No
further grants of stock or options shall be made under the
Plan after such termination.
With respect to base salary and annual incentive
compensation, the Company's obligation shall be to pay the
Executive, according to the terms of this Agreement and for a
period of thirty-six (36) months, an amount equal to the
annual salary and incentive paid to the Executive [at the
bonus level for the year prior to which such termination
occurs unless performance of the Company as defined in the
matrix referenced in Section 3(b) is better in the year of
termination, in which event such bonus shall be based on recycled paper. LGL-13902-02the
matrix calculation as described in Section 3(b)], such annual
amounts to be paid in equal monthly installments.
During the 36-month severance payment period, the Executive
shall be entitled to all payments, benefits and perquisites
as provided for in this Agreement, and office space and
secretarial support comparable to that provided to the
Executive during his employment by the Company. The Executive
shall be entitled to all payments and benefits as provided
for in this Section for a period of thirty-six (36) months.
If the Board of Directors fails to reelect the Executive to a
position comparable to that described in Section 1(a) of this
Agreement or, without
4
terminating the Executive's employment, removes the Executive
from his position for reasons other than Cause, substantively
reduces the Executive's duties and responsibilities, reduces
his pay and/or benefits without the written consent of the
Executive, forces relocation, or requires excessive travel,
then the Executive may, by notice to the Company, treat such
action or removal as a termination of the Executive by the
Company pursuant to this Section 4(b).
In the event of the Executive's death before the completion
of the payments pursuant to this Section 4(b), the remaining
payments hereunder shall be made to the beneficiary or
beneficiaries designated by the Executive to the Company in
writing or, absent such a designation, to his estate.
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate the Executive's employment for Cause if the
Executive has committed a felonious act, or the Executive, in
carrying out his duties hereunder has been willfully and
grossly negligent or has committed willful and gross
misconduct resulting, in either case, in material harm to the
Company. An act or omission shall be deemed "willful" only if
done, or omitted to be done, in bad faith and without
reasonable belief that it was in the best interest of the
Company. In the event of termination of the Executive by the
Company for Cause, the Executive shall no longer be entitled
to receive any payments or any other rights or benefits under
this Agreement.
(d) DISABILITY. In the event the Executive's employment
terminates due to total and permanent disability (for the
purposes of this Agreement "disability" shall have the same
meaning as applies under the Company's Long-Term Disability
Plan), he will continue to receive the same base salary and
benefits which he was receiving prior to such disability for
36 months, offset by payments under the Company's Long-Term
Disability Plan. In addition, he shall receive a pro-rated
annual incentive payment for the year in which is employment
is terminated, based on the formula described in Section
3(b).
(e) DEATH. In the event of the death of the Executive during
the term of this Agreement, the rights and benefits under
employee benefit plans and programs of the Company, including
life insurance, will be determined in accordance with the
terms and conditions of such plans and programs as in effect
on his date of death. In such event, the Company shall pay in
a lump sum to the Executive's estate an amount equal to five
times the then current rate of the Executive's base salary,
and no further payments shall be required pursuant to this
Agreement.
5
(f) CHANGE IN CONTROL. In the event of a change in control of
the Company, as set forth below, the Executive may at any
time and in his complete discretion during a 24-month period
following a change in control, elect to terminate his
employment with the Company. For purposes of this Agreement,
a "change in control" shall mean a change in ownership of the
Company that would be required to be reported in response to
Item 1(a) of a Current Report on Form 8-K pursuant to the
Securities and Exchange Act of 1934 ("Exchange Act"), as in
effect on the date hereof, except that any merger,
consolidation or corporate reorganization in which the owners
of the capital stock entitled to vote in the election of
directors of the Employer or the Company ("Voting Stock")
prior to said combination, own 75% or more of the resulting
entity's Voting Stock shall not be considered a change in
control for the purposes of this Agreement; provided that,
without limitation, such a change in control shall be deemed
to have occurred if (i) any "person" (as that term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act), other than
a trustee or other fiduciary holding securities under an
employee benefit plan of the Company is or becomes the
beneficial owners (as that is used in Section 13(d) of the
Exchange Act), directly or indirectly, of 30% or more of the
Voting Stock of the Company or its successor; or (ii) during
any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of
the Company ("Incumbent Board") cease for any reason to
constitute at least a majority thereof; provided, however,
that any person becoming a director of the Company after the
beginning of the period whose election was approved by a vote
of at least three-quarters of the directors comprising the
incumbent Board shall, for the purposes hereof, be considered
as though he were a member of the incumbent Board; or (iii)
there shall occur the sale of all or substantially all of the
assets of the Company. Notwithstanding anything in the
foregoing to the contrary, no change in control of the
Company shall be deemed to have occurred for purposes of this
Agreement by virtue of any transaction which results in the
Executive, or a group of persons which includes the Executive
acquiring, directly or indirectly, more than 30 percent of
the combined voting power of the Company's outstanding
securities. If any of the events constituting a change in
control shall have occurred during the term hereof, the
Executive shall be entitled to the privilege provided in
subparagraph (f) herein to terminate his employment.
Any termination by the Executive pursuant to this Section
shall be communicated by a written "Notice of Termination."
If, following a change in control, the Executive shall for
any reason voluntarily terminate his employment during the
24-month period following a change in control, then the
Company shall pay base salary up
6
to the date of termination and a prorated annual incentive
award based on the calculated bonus for the year in which
termination occurred, as defined in Section 3(b), in a lump
sum on the thirtieth (30th) day following the Date of
Termination.
5. COVENANT NOT TO COMPETE
(a) As a material inducement to the Company's entering into
this Agreement, the Executive agrees that during the term of
this Agreement, he will not become associated with, render
service to or engage in any other business competitive with
any existing or contemplated business of the Company or its
subsidiaries, except that the Executive may serve as a member
of the board of directors of other companies or
organizations, provided that he provides written notice to
the Board of each significant activity, and that he will do
nothing inconsistent with his duties and responsibilities to
the Company.
(b) If the Executive voluntarily resigns from the employ of
the Company prior to the expiration of the term of this
Agreement, he specifically agrees that for a period of five
(5) years commencing with the date of his voluntary
resignation he will not engage in or perform any services
either on a full-time or a part-time or on a consulting or
advisory basis for any business organization that is in
competition with the Company at the time such services are
being performed by Executive, with the exception that this
Section 5(b) shall not apply in the event the Executive
resigns voluntarily following a change in control of the
Company as defined in Section 4(f).
(c) The Executive will not at any time, whether while
employed by the Company or after voluntary or involuntary
termination or after retirement, reveal to any person, firm
or entity any trade or business secrets or confidential,
secret, or privileged information about the business of the
Company or its subsidiaries or affiliates except as shall be
required in the proper conduct of the Company's business.
6. CONSULTING ARRANGEMENT
Following a voluntary termination of employment pursuant to Section
4(a) and 4(f), or an involuntary termination subsequent to a change
in control of the Company, for any reason but during a 24-month
period following a change in control as defined in Section 4(f),
after the Executive ceases to render services as the Chairman, he may
in his sole discretion elect to act as a consultant to the Company
for a period of five (5) years. During this period of consulting
services, the Executive shall, at reasonable times and places, taking
into account any other employment or activities he may then have,
hold himself available to
7
consult with and advise the officers, directors, and other
representatives of the Company. As compensation therefore, the
Executive shall be entitled to receive, and Company shall pay, an
annual amount equal to seventy-five percent (75%) of his annual base
salary rate in effect immediately prior to his termination of
employment, but in no event an annual amount to exceed $1,000,000,
for each year of such period, payable in equal monthly installments.
7. WITHHOLDING
All amounts payable hereunder which are or may become subject to
withholding under pertinent provisions of law or regulation shall be
reduced for applicable income and/or employment taxes required to be
withheld.
8. MISCELLANEOUS
(a) This Agreement supersedes any prior agreements or
understandings, oral or written, with respect to employment
of the Executive and constitutes the entire Agreement with
respect thereto; provided, however, that nothing contained
herein shall supercede that certain Assignment and License
Agreement entered into as of March 31, 1987, as amended. This
Agreement cannot be altered or terminated orally and may be
amended only by a subsequent written agreement executed by
both of the parties hereto or their legal representatives,
and any material amendment must be approved by a majority of
the voting shareholders of the Company.
(b) This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(c) This Agreement shall be binding upon and shall inure to
the benefit of the Company and its successors and assigns. In
that this constitutes a personal service agreement, it may
not be assigned by the Executive and any attempted assignment
by the Executive in violation of this covenant shall be null
and void.
(d) For the purpose of this Agreement, the phrase "designated
beneficiary or beneficiaries" shall include the estates of
such beneficiaries in the event of their death before the
receipt of all payments under this Agreement and shall also
include any alternate or successor beneficiaries designated
in writing to the Company by the Executive.
(e) The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or
enforceability of any other provisions, which shall remain in
full force and effect.
8
(f) The Section and Paragraph headings contained herein are
for reference purposes only and shall not in any way affect
the meanings or interpretation of this Agreement.
(g) Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by
arbitration, conducted before a panel of arbitrators in
accordance with the rules of the American Arbitration
Association then in effect. Judgement may be entered on the
arbitrators award in any court having jurisdiction. The
expense of such arbitration shall be borne by the Company.
(h) Any notices, requests or other communications provided
for by this Agreement shall be sufficient if in writing and
if sent by registered or certified mail to the Executive at
the last address he has filed in writing with the Company or,
in the case of the Company, at its principal offices.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first above written.
Company:
ATTEST THE CHARLES SCHWAB CORPORATION
By: Carrie Dwyer By: Mary McLeod
Corporate Secretary Title: Executive Vice President -
Human Resources
Executive: /s/ CHARLES R. SCHWAB
Charles R. Schwab
9
ATTACHMENT 2
THE CHARLES SCHWAB CORPORATION
2001 STOCK INCENTIVE PLAN
AS AMENDED OCTOBER 23, 2002
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board of Directors on February 28, 2001.
The purpose of this Plan is to promote the long-term success of the Company and
the creation of incremental stockholder value by (a) encouraging Non-Employee
Directors and Key Employees to focus on long-range objectives, (b) encouraging
the attraction and retention of Non-Employee Directors and Key Employees with
exceptional qualifications and (c) linking Non-Employee Directors and Key
Employees directly to stockholder interests. The Plan seeks to achieve this
purpose by providing for Awards in the form of Restricted Shares, Performance
Share Awards or Options, which may constitute incentive stock options or
nonstatutory stock options. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
ARTICLE 2. ADMINISTRATION.
2.1 The Committee.THE COMMITTEE. The Plan shall be administered by the
-------------- Committee. The
Committee shall consist of two or more Directors, who shall be appointed by the
Board.
2.2 Committee Responsibilities.COMMITTEE RESPONSIBILITIES. The Committee shall select the
--------------------------- Key
Employees who are to receive Awards under the Plan, determine the amount,
vesting requirements and other conditions of such Awards, may interpret the
Plan, and make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
ARTICLE 3. LIMITATIONS ON AWARDS.
The aggregate number of Restricted Shares, Performance Share Awards and
Options awarded under the Plan shall not exceed 70,000,000. If any Restricted
Shares, Performance Share Awards or Options are forfeited, or if any Performance
Share Awards terminate for any other reason without the associated Common Shares
being issued, or if any Options terminate for any other reason before being
exercised, then such Restricted Shares, Performance Share Awards or Options
shall again become available for Awards under the Plan.
Subject to the overall limit on the aggregate shares set forth above,
the following limitations shall apply: (a) The maximum number of Common Shares
which may be granted subject to an Option to any one Participant in any one
fiscal year shall be 5,000,000; and (b) The maximum number of Restricted Shares
or Performance Share Awards which may be granted to any one Participant in any
one fiscal year shall be 1,000,000. The limitations set forth in the preceding
sentence shall be subject to adjustment pursuant to Article 10; and
The limitations of this Article 3 shall each be subject to adjustment
pursuant to Article 10. Any Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares.
ARTICLE 4. ELIGIBILITY.
4.1 General Rule.GENERAL RULE. Key Employees and Non-Employee Directors shall
------------ be
eligible for designation as Participants by the Committee.
4.2 Non-Employee Directors.NON-EMPLOYEE DIRECTORS. In addition to any awards pursuant to
----------------------
Section 4.1, Non-Employee Directors shall be entitled to receive the automatic
NQSOs described in this Section 4.2.
(a) Each Non-Employee Director shall receive an NQSO covering a
number of Common Shares for each Award Year with respect to which he
or she serves as a Non-Employee Director on the grant date described
in subsection (b) below, to be calculated by dividing $150,000 by the
Fair Market Value of the Common Shares on the grant date described in
subsection (b) below; and
(b) The NQSO for a particular Award Year shall be granted to each
Non-Employee Director as of May 15 of each Award Year, and if May 15
is not a business day, then the grant shall be made on and as of the
next succeeding business day;
(c) Each NQSO shall be exercisable in full at all times during its
term;
(d) The term of each NQSO shall be 10 years; provided, however, that
any unexercised NQSO shall expire on the earlier of the date 10 years
after the date of grant or three (3) months following the date that
the Optionee ceases to be a Non-Employee Director or a Key Employee
for any reason other than death or disability. If an Optionee ceases
to be a Non-Employee Director or Key Employee on account of death or
disability, any unexercised NQSO shall expire on the earlier of the
date 10 years after the date of grant or one year after the date of
death or disability of such Director; and
(e) The Exercise Price under each NQSO shall be equal to the Fair
Market Value on the date of grant and shall be payable in any of the
forms described in Article 6.
4.3 Ten-Percent Stockholders.TEN-PERCENT STOCKHOLDERS. A Key Employee who owns more than 10
------------------------
percent of the total combined voting power of all classes of outstanding stock
of the Company or any of its Subsidiaries shall not be eligible for the grant of
an ISO unless (a) the Exercise price under such ISO is at least 110 percent of
the Fair Market Value of a Common Share on the date of grant and (b) such ISO by
its terms is not exercisable after the expiration of five years from the date of
grant.
4.4 Attribution Rules.ATTRIBUTION RULES. For purposes of Section 4.3, in determining
-----------------
stock ownership, a Key Employee shall be deemed to own the stock owned, directly
or indirectly, by or for his or 2her
her
brothers, sisters, spouse, ancestors or lineal descendants. Stock owned,
directly or indirectly, by or for a corporation, partnership, estate or trust
shall be deemed to be owned proportionately by or for its stockholders, partners
or beneficiaries. Stock with respect to which the Key Employee holds an option
shall not be counted.
4.5 Outstanding Stock.OUTSTANDING STOCK. For purposes of Section 4.3, "outstanding
----------------- stock"
shall include all stock actually issued and outstanding immediately after the
grant of the ISO to the Key Employee. "Outstanding stock" shall not include
treasury shares or shares authorized for issuance under outstanding options held
by the Key Employee or by any other person.
4.6 Options Issued To Non-Employee Directors In Lieu of Fee
--------------------------------------------------------------
Deferrals.OPTIONS ISSUED TO NON-EMPLOYEE DIRECTORS IN LIEU OF FEE DEFERRALS.
In addition to any awards pursuant to Sections 4.1 and 4.2, a
- --------- Non-Employee
Director who elects to defer the receipt of amounts pursuant to Section 5.1 of
The Charles Schwab Corporation Directors' Deferred Compensation Plan (the
"Directors Deferred Compensation Plan") and elects to receive stock options in
lieu of a Deferral Account balance pursuant to Section 5.4(2) of the Directors
Deferred Compensation Plan, shall be entitled to receive a grant of NQSOs
hereunder on the date the amounts would have been payable to the Non-Employee
Director if the Non-Employee Director had not made such deferral election. Any
NQSOs issued pursuant to this Section shall be issued pursuant to the terms set
forth in subsections (c), (d) and (e) of Section 4.2 hereof.
4.7 Performance Shares Issued To Non-Employee Directors Pursuant
--------------------------------------------------------------
to Fee Deferrals.PERFORMANCE SHARES ISSUED TO NON-EMPLOYEE DIRECTORS PURSUANT TO FEE
DEFERRALS. In addition to any awards pursuant to Sections 4.1 and 4.2, a
- ----------------
Non-Employee Director who elects to defer the receipt of amounts pursuant to
Section 5.1 of The Directors' Deferred Compensation Plan and elects to receive
payment in Shares pursuant to Section 5.4(1) of the Directors Deferred
Compensation Plan, shall be entitled to receive a grant of Performance Shares
hereunder on the date the amounts would have been payable to the Non-Employee
Director if the Non-Employee Director had not made such deferral election. For
purposes of this section, the term Non-Employee Director shall also include
non-employee directors of any Subsidiary, if the Committee has approved
participation in the Directors Deferred Compensation Plan for such Subsidiary's
non-employee directors.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement.STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
----------------------
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan, and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical. The
Committee may designate all or any part of an Option as an ISO (or, in the case
of a Key Employee who is subject to the tax laws of a foreign jurisdiction, as
an option qualifying for favorable tax treatment under the laws of such foreign
jurisdiction), except for Options granted to Non-Employee Directors.
3
5.2 Options Nontransferability.OPTIONS NONTRANSFERABILITY. Subject to the provisions of
--------------------------- Section
14.2, no Option granted under the Plan shall be transferable by the Optionee
other than by will or the laws of descent and distribution. An Option may be
exercised during the lifetime of the Optionee only by him or her. No Option or
interest therein may be transferred, assigned, pledged or hypothecated by the
Optionee during his or her lifetime, whether by operation of law or otherwise,
or be made subject to execution, attachment or similar process.
5.3 Number of Shares.NUMBER OF SHARES. Each Stock Option Agreement shall specify
---------------- the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Each Stock Option
Agreement shall also specify whether the Option is an ISO or an NQSO.
5.4 Exercise Price.EXERCISE PRICE. Each Stock Option Agreement shall specify the
--------------
Exercise Price. The Exercise Price under an Option shall not be less than 100
percent of the Fair Market Value of a Common Share on the date of grant, except
as otherwise provided in Section 4.3. Subject to the preceding sentence, the
Exercise Price under any Option shall be determined by the Committee. The
Exercise Price shall be payable in accordance with Article 6.
5.5 Exercisability and Term.EXERCISABILITY AND TERM. Each Stock Option Agreement shall
----------------------- specify
the date when all or any installment of the Option is to become exercisable. The
Stock Option Agreement shall also specify the term of the Option. The term of an
ISO shall in no event exceed 10 years from the date of grant, and Section 4.3
may require a shorter term. Subject to the preceding sentence, the Committee
shall determine when all or any part of an Option is to become exercisable and
when such Option is to expire; provided that, in appropriate cases, the Company
shall have the discretion to extend the term of an Option or the time within
which, following termination of employment, an Option may be exercised, or to
accelerate the exercisability of an Option. A Stock Option Agreement may provide
for expiration prior to the end of its term in the event of the termination of
the Optionee's employment and shall provide for the suspension of vesting when
an employee is on a leave of absence for a period in excess of six months in
appropriate cases, as determined by the Company; provided that, except to the
extent otherwise specified by the Committee at the time of grant, (i) the
exercisability of Options shall be accelerated in the event of the Participant's
death or Disability; (ii) in the case of Retirement, the exercisability of all
outstanding Options shall be accelerated, other than any Options that had been
granted within two years of the date of the Optionee's Retirement; and (iii)
vesting shall be suspended when an employee is on a leave of absence for a
period in excess of six months in appropriate cases, as determined by the
Company. Except as provided in Section 4.2, NQSOs may also be awarded in
combination with Restricted Shares, and such an Award may provide that the NQSOs
will not be exercisable unless the related Restricted Shares are forfeited. In
addition, NQSOs granted under this Section 5 may be granted subject to
forfeiture provisions which provide for forfeiture of the Option upon the
exercise of tandem awards, the terms of which are established in other programs
of the Company.
5.6 Limitation on Amount of ISOs.LIMITATION ON AMOUNT OF ISOS. The aggregate fair market value
----------------------------
(determined at the time the ISO is granted) of the Common Shares with respect to
which ISOs are exercisable for the first time by the Optionee during any
calendar year (under all incentive stock option plans
4
of the Company) shall not exceed $100,000; provided, however, that all or any
portion of an Option which cannot be exercised as an ISO because of such
limitation shall be treated as an NQSO.
5.7 Effect of Change in Control.EFFECT OF CHANGE IN CONTROL. The Committee (in its sole
------------------------------- discretion)
may determine, at the time of granting an Option, that such Option shall become
fully exercisable as to all Common Shares subject to such Option immediately
preceding any Change in Control with respect to the Company.
5.8 Restrictions on Transfer of Common Shares.RESTRICTIONS ON TRANSFER OF COMMON SHARES. Any Common Shares
----------------------------------------- issued
upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.9 Authorization of Replacement Options.AUTHORIZATION OF REPLACEMENT OPTIONS. Concurrently with the
-------------------------------------- grant
of any Option to a Participant (other than NQSOs granted pursuant to Section
4.2), the Committee may authorize the grant of Replacement Options. If
Replacement Options have been authorized by the Committee with respect to a
particular award of Options (the "Underlying Options"), the Option Agreement
with respect to the Underlying Options shall so state, and the terms and
conditions of the Replacement Options shall be provided therein. The grant of
any Replacement Options shall be effective only upon the exercise of the
Underlying Options through the use of Common Shares pursuant to Section 6.2 or
Section 6.3. The number of Replacement Options shall equal the number of Common
Shares used to exercise the Underlying Options, and, if the Option Agreement so
provides, the number of Common Shares used to satisfy any tax withholding
requirements incident to the exercise of the Underlying Options in accordance
with Section 13.2. Upon the exercise of the Underlying Options, the Replacement
Options shall be evidenced by an amendment to the Underlying Option Agreement.
Notwithstanding the fact that the Underlying Option may be an ISO, a Replacement
Option is not intended to qualify as an ISO. The Exercise Price of a Replacement
Option shall be no less than the Fair Market Value of a Common Share on the date
the grant of the Replacement Option becomes effective. The term of each
Replacement Option shall be equal to the remaining term of the Underlying
Option. No Replacement Options shall be granted to Optionees when Underlying
Options are exercised pursuant to the terms of the Plan and the Underlying
Option Agreement following termination of the Optionee's employment. The
Committee, in its sole discretion, may establish such other terms and conditions
for Replacement Options as it deems appropriate.
5.10 Options Granted to Non-United States Key Employees.OPTIONS GRANTED TO NON-UNITED STATES KEY EMPLOYEES. In the
----------------------------------------------------- case of
Key Employees who are subject to the tax laws of a foreign jurisdiction, the
Company may issue Options to such Key Employees that contain terms required to
conform with any requirements for favorable tax treatment imposed by the laws of
such foreign jurisdiction, or as otherwise may be required by the laws of such
foreign jurisdiction. The terms of any such Options shall be governed by the
Plan, subject to the terms of any Addendum to the Plan specifically applicable
to such Options.
5
5.11 EFFECT OF JOB ELIMINATION. Notwithstanding anything to the
contrary contained in the Plan or in any Stock Option Agreement or Stock Award
Agreement entered into with respect to an Award pursuant to the Plan, in the
case of a Participant who is an Officer, and who becomes entitled to receive
payments with respect to a Severance Period pursuant to the Charles Schwab
Severance Pay Plan (the "Severance Plan") on account of a Job Elimination, the
terms of the Plan and any Stock Option Agreement or Stock Award Agreement
entered into with respect to an Award shall be applied by treating the
Participant as if the Participant had terminated employment on the Participant's
Termination Date. For purposes of applying this Section, the terms Officer,
Severance Period, Termination Date, and Job Elimination shall have the meanings
set forth in the Severance Plan.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule.GENERAL RULE. The entire Exercise Price of Common Shares
------------ issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except that the Company may at any time accept payment
pursuant to Section 6.2 or 6.3.
6.2 Surrender of Stock.SURRENDER OF STOCK. To the extent that this Section 6.2 is
------------------
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company. Such Common Shares shall be
valued at their Fair Market Value on the date when the new Common Shares are
purchased under the Plan. In the event that the Common Shares being surrendered
are Restricted Shares that have not yet become vested, the same restrictions
shall be imposed upon the new Common Shares being purchased.
6.3 Exercise/Sale.EXERCISE/SALE. To the extent this Section 6.3 is applicable,
-------------
payment may be made by the delivery (in a manner prescribed by the Company) of
an irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes.
ARTICLE 7. RESTRICTED SHARES AND PERFORMANCE SHARE AWARDS.
7.1 Time, Amount and Form of Awards.TIME, AMOUNT AND FORM OF AWARDS. The Committee may grant
--------------------------------- Restricted
Shares or Performance Share Awards with respect to an Award Year during such
Award Year or at any time thereafter. Each such Award shall be evidenced by a
Stock Award Agreement between the Award recipient and the Company. The amount of
each Award of Restricted Shares or Performance Share Awards shall be determined
by the Committee. Awards under the Plan may be granted in the form of Restricted
Shares or Performance Share Awards or in any combination thereof, as the
Committee shall determine at its sole discretion at the time of the grant.
Restricted Shares or Performance Share Awards may also be awarded in combination
with NQSOs, and such an Award may provide that the Restricted Shares or
Performance Share Awards will be forfeited in the event that the related NQSOs
are exercised.
7.2 Payment for Restricted Share Awards.PAYMENT FOR RESTRICTED SHARE AWARDS. To the extent that an
----------------------------------- Award is
granted in the form of Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares.
7.3 Vesting or Issuance Conditions.VESTING OR ISSUANCE CONDITIONS. Each Award of Restricted
-------------------------------- Shares
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. Common Shares shall be issued
pursuant to Performance Share Awards in full or in installments upon
satisfaction of the issuance conditions specified in the Stock Award Agreement.
The Committee shall select the vesting conditions in the case of Restricted
Shares, or issuance conditions in the case of Performance Share Awards, which
may be based upon the Participant's service, the Participant's performance, the
Company's performance or such other
6
criteria as the Committee may adopt;
provided that, in the case of an Award of Restricted Shares where vesting is
based entirely on the Participant's service (except to the extent otherwise
specified by the Committee at the time of grant), (i) vesting shall be
accelerated in the event of the Participant's death or Disability; (ii) in the
case of Retirement, vesting shall be accelerated for all Restricted Shares that
had been granted more than two years prior to the date of the Participant's
Retirement; and (iii) vesting shall be suspended when an employee is on a leave
of absence for a period in excess of six months in appropriate cases, as
determined by the Company. The Committee, in its sole discretion, may determine,
at the time of making an Award of Restricted Shares, that such Award shall
become fully vested in the event that a Change in Control occurs with respect to
the Company. The Committee, in its sole discretion, may determine, at the time
of making a Performance Share Award, that the issuance conditions set forth in
such Award shall be waived in the event that a Change in Control occurs with
respect to the Company.
7.4 Form ofFORM OF SETTLEMENT OF PERFORMANCE SHARE AWARDS. Settlement of Performance Share Awards. Settlement of
----------------------------------------------
Performance Share Awards shall only be made in the form of Common Shares. Until
a Performance Share Award is settled, the number of Performance Share Awards
shall be subject to adjustment pursuant to Article 10.
7.5 Death of Recipient.DEATH OF RECIPIENT. Any Common Shares that are to be issued
------------------
pursuant to a Performance Share Award after the recipient's death shall be
delivered or distributed to the recipient's beneficiary or beneficiaries. Each
recipient of a Performance Share Award under the Plan shall designate one or
more beneficiaries for this purpose by filing the prescribed form with the
Company. A beneficiary designation may be changed by filing the prescribed form
with the Company at any time before the Award recipient's death. If no
beneficiary was designated or if no designated beneficiary survives the Award
recipient, then any Common Shares that are to be issued pursuant to a
Performance Share Award after the recipient's death shall be delivered or
distributed to the recipient's estate. The Committee, in its sole discretion,
shall determine the form and time of any distribution(s) to a recipient's
beneficiary or estate.
ARTICLE 8. CLAIMS PROCEDURES.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the disposition
of a claim shall be furnished to the claimant within 90 days after the claim is
filed. If the claim is denied, the notice of disposition shall set forth the
specific reasons for the denial, citations to the pertinent provisions of the
Plan, and, where appropriate, an explanation as to how the claimant can perfect
the claim. If the claimant wishes further consideration of his or her claim, the
claimant may appeal a denied claim to the Committee (or to a person designated
by the Committee) for further review. Such appeal shall be filed in writing with
the Committee on a form supplied by the Committee, together with a written
statement of the claimant's position, no later than 90 days following receipt by
the claimant of written notice of the denial of his or her claim. If the
claimant so requests, the Committee shall schedule a hearing. A decision on
review shall be made after a full and fair review of the claim and shall be
delivered in writing to the claimant no later than 60 days after the Committee's
receipt of the notice of appeal, unless special circumstances (including the
need 7
to hold a hearing) require an extension of time for processing the appeal,
in which case a written decision on review shall be delivered to the claimant as
soon as possible but not later than 120 days after the Committee's receipt of
the appeal notice. The claimant shall be notified in writing of any such
extension of time. The written decision on review shall include specific reasons
for the decision, written in a manner calculated to be understood by the
claimant, and shall specifically refer to the pertinent Plan provisions on which
it is based. All determinations of the Committee shall be final and binding on
Participants and their beneficiaries.
ARTICLE 9. VOTING RIGHTS AND DIVIDENDS.
9.1 Restricted Shares.RESTRICTED SHARES. All holders of Restricted Shares shall have
------------------ the
same voting, dividend, and other rights as the Company's other stockholders.
9.2 Performance Share Awards.PERFORMANCE SHARE AWARDS. The holders of Performance Share
------------------------ Awards
shall have no voting or dividend rights until such time as any Common Shares are
issued pursuant thereto, at which time they shall have the same voting, dividend
and other rights as the Company's other stockholders.
ARTICLE 10. PROTECTION AGAINST DILUTION; ADJUSTMENT OF AWARDS.
10.1 General.GENERAL. In the event of a subdivision of the outstanding
------- Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares, a combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff
or a similar occurrence, the Committee shall make appropriate adjustments in one
or more of (a) the number of Options, Restricted Shares and Performance Share
Awards available for future Awards under Article 3, (b) the maximum number of
Common Shares which may be granted under Article 3 to any one Participant in any
one fiscal year either subject to an Option or as Restricted Shares or
Performance Share Awards, (c) the number of Performance Share Awards included in
any prior Award which has not yet been settled, (d) the number of Common Shares
covered by each outstanding Option or (e) the Exercise Price under each
outstanding Option.
10.2 Reorganizations.REORGANIZATIONS. Subject to the provisions of Section 5.7, in
--------------- the
event that the Company is a party to a merger or other reorganization,
outstanding Options, Restricted Shares and Performance Share Awards shall be
subject to the agreement of merger or reorganization. Such agreement may
provide, without limitation, for the assumption of outstanding Awards by the
surviving corporation or its parent, for their continuation by the Company (if
the Company is a surviving corporation), for accelerated vesting or for
settlement in cash.
10.3 Reservation of Rights.RESERVATION OF RIGHTS. Except as provided in this Article 10,
--------------------- a
Participant shall have no rights by reason of any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class. Any issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be
8
made with respect to, the number or Exercise Price of Common
Shares subject to an Option. The grant of an Award pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
ARTICLE 11. LIMITATION OF RIGHTS.
11.1 Employment Rights.EMPLOYMENT RIGHTS. Neither the Plan nor any Award granted
------------------ under
the Plan shall be deemed to give any individual a right to remain employed by
the Company or any Subsidiary. The Company and its Subsidiaries reserve the
right to terminate the employment of any employee at any time, with or without
cause, subject only to a written employment agreement (if any).
11.2 Stockholders' Rights.STOCKHOLDERS' RIGHTS. A Participant shall have no dividend
-------------------- rights,
voting or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of such Common Shares, whether
by issuance of a certificate, book entry or other procedure. No adjustment shall
be made for cash dividends or other rights for which the record date is prior to
the date when such certificate is issued, except as expressly provided in
Articles 7, 9 and 10.
11.3 Creditors' Rights.CREDITORS' RIGHTS. A holder of Performance Share Awards shall
----------------- have
no rights other than those of a general creditor of the Company. Performance
Share Awards represent unfunded and unsecured obligations of the Company,
subject to the terms and conditions of the applicable Stock Award Agreement.
11.4 Government Regulations.GOVERNMENT REGULATIONS. Any other provision of the Plan
-----------------------
notwithstanding, the obligations of the Company with respect to Common Shares to
be issued pursuant to the Plan shall be subject to all applicable laws, rules
and regulations, and such approvals by any governmental agencies as may be
required. The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating to
the issuance of such Common Shares or to their registration,
qualification or exemption from registration or qualification under
the Securities Act of 1933, as amended, or any applicable state
securities laws; and
(b) Satisfactory assurances have been received that such Common
Shares, when issued, will be duly listed on the New York Stock
Exchange or any other securities exchange on which Common Shares are
then listed.
ARTICLE 12. LIMITATION OF PAYMENTS.
12.1 Basic Rule.BASIC RULE. Any provision of the Plan to the contrary
----------
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors")
9
determine that any payment or transfer in
the nature of compensation to or for the benefit of a Participant, whether paid
or payable (or transferred or transferable) pursuant to the terms of this Plan
or otherwise (a "Payment"), would be nondeductible for federal income tax
purposes because of the provisions concerning "excess parachute payments" in
section 280G of the Code, then the aggregate present value of all Payments shall
be reduced (but not below zero) to the Reduced Amount; provided, however, that
the Committee, at the time of making an Award under this Plan or at any time
thereafter, may specify in writing that such Award shall not be so reduced and
shall not be subject to this Article 12. For purposes of this Article 12, the
"Reduced Amount" shall be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any
Payment to be nondeductible by the Company because of section 280G of the Code.
12.2 Reduction of Payments.REDUCTION OF PAYMENTS. If the Auditors determine that any
--------------------- Payment
would be nondeductible because of section 280G of the Code, then the Company
shall promptly give the Participant notice to that effect and a copy of the
detailed calculation thereof and of the Reduced Amount, and the Participant may
then elect, in his or her sole discretion, which and how much of the Payments
shall be eliminated or reduced (as long as after such election, the aggregate
present value of the Payments equals the Reduced Amount) and shall advise the
Company in writing of his or her election within 10 days of receipt of notice.
If no such election is made by the Participant within such 10-day period, then
the Company may elect which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of the
Payments equals the Reduced Amount) and shall notify the Participant promptly of
such election. For purposes of this Article 12, present value shall be
determined in accordance with section 280G(d)(4) of the Code. All determinations
made by the Auditors under this Article 12 shall be binding upon the Company and
the Participant and shall be made within 60 days of the date when a Payment
becomes payable or transferable. As promptly as practicable following such
determination and the elections hereunder, the Company shall pay or transfer to
or for the benefit of the Participant such amounts as are then due to him or her
under the Plan, and shall promptly pay or transfer to or for the benefit of the
Participant in the future such amounts as become due to him or her under the
Plan.
12.3 Overpayments and Underpayments.OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in
------------------------------ the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company on demand, together with interest at the applicable federal rate
provided in section 7872(f)(2) of the Code; provided, however, that no amount
shall be payable by the Participant to the Company if and to the extent that
such payment would not reduce the amount which is subject to taxation under
section 4999 of the Code. In the event that the Auditors determine that an
Underpayment has occurred, such Underpayment shall promptly be 10
paid or
transferred by the Company to or for the benefit of the Participant, together
with interest at the applicable federal rate provided in section 7872(f)(2) of
the Code.
12.4 Related Corporations.RELATED CORPORATIONS. For purposes of this Article 12, the
--------------------- term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 13. WITHHOLDING TAXES.
13.1 General.GENERAL. To the extent required by applicable federal, state,
-------
local or foreign law, the recipient of any payment or distribution under the
Plan shall make arrangements satisfactory to the Company for the satisfaction of
any withholding tax obligations that arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
13.2 Nonstatutory Options, Restricted Shares or Performance Share
--------------------------------------------------------------
Awards.NONSTATUTORY OPTIONS, RESTRICTED SHARES OR PERFORMANCE SHARE
AWARDS. The Committee may permit an Optionee who exercises NQSOs, or who
- ------
receives Awards of Restricted Shares, or who receives Common Shares pursuant to
the terms of a Performance Share Award, to satisfy all or part of his or her
withholding tax obligations by having the Company withhold a portion of the
Common Shares that otherwise would be issued to him or her under such Awards.
Such Common Shares shall be valued at their Fair Market Value on the date when
taxes otherwise would be withheld in cash. The payment of withholding taxes by
surrendering Common Shares to the Company, if permitted by the Committee, shall
be subject to such restrictions as the Committee may impose, including any
restrictions required by rules of the Securities and Exchange Commission.
ARTICLE 14. ASSIGNMENT OR TRANSFER OF AWARD.
14.1 General Rule.GENERAL RULE. Any Award granted under the Plan shall not be
------------
anticipated, assigned, attached, garnished, optioned, transferred or made
subject to any creditor's process,
whether voluntarily, involuntarily or by operation of law, except to the extent
specifically permitted by Section 14.2.
14.2 Exceptions to General Rule.EXCEPTIONS TO GENERAL RULE. Notwithstanding Section 14.1, this
--------------------------
Plan shall not preclude (i) a Participant from designating a beneficiary to
succeed, after the Participant's death, to those of the Participant's Awards
(including without limitation, the right to exercise any unexercised Options) as
may be determined by the Company from time to time in its sole discretion, (ii)
a transfer of any Award hereunder by will or the laws of descent or
distribution, or (iii) a voluntary transfer of an Award (other than an ISO) to a
trust, partnership or partnershiplimited liability company for the exclusive benefit of one or more
members of the Participant's family, but onlysubject to the prior approval of the
Committee or its designee; provided that, in the case of an Award granted prior
to September 25, 2002, such approval shall not be required for a transfer to a
trust or partnership if the Participant has sole investment control over such
trust or partnership.
11partnership
ARTICLE 15. FUTURE OF PLANS.
15.1 Term of the Plan.TERM OF THE PLAN. The Plan, as set forth herein, shall become
----------------
effective on May 7, 2001. The Plan shall remain in effect until it is terminated
under Section 15.2, except that no ISOs shall be granted after May 6, 2011.
15.2 Amendment or Termination.AMENDMENT OR TERMINATION. The Committee may, at any time and
------------------------ for
any reason, amend or terminate the Plan; provided, however, that any amendment
of the Plan shall be subject to the approval of the Company's stockholders to
the extent required by applicable laws, regulations or rules.
15.3 Effect of Amendment or Termination.EFFECT OF AMENDMENT OR TERMINATION. No Award shall be made
----------------------------------- under
the Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Option, Restricted Share or Performance
Share Award previously granted under the Plan.
ARTICLE 16. DEFINITIONS.
16.1 "Award" means any award of an Option, a Restricted Share or a
Performance Share Award under the Plan.
16.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
16.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
16.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 15.1:
(a) A change in control required to be reported pursuant to Item 6(e)
of Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which
fewer than two-thirds of the incumbent directors are directors who
either (i) had been directors of the Company 24 months prior to such
change or (ii) were elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the directors
who had been directors of the Company 24 months prior to such change
and who were still in office at the time of the election or
nomination;
(c) Any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act) becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 20 percent or
more of the combined voting power of the Company's then outstanding
securities ordinarily (and apart from rights accruing under special
circumstances) having the right to vote at elections of directors
(the "Base Capital
12
Stock"); provided, however, that any change in the relative
beneficial ownership of securities of any person resulting solely
from a reduction in the aggregate number of outstanding shares of
Base Capital Stock, and any decrease thereafter in such person's
ownership of securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such person's
beneficial ownership of any securities of the Company.
16.5 "Code" means the Internal Revenue Code of 1986, as amended.
16.6 "Committee" means the Compensation Committee of the Board, as
constituted from time to time.
16.7 "Common Share" means one share of the common stock of the Company.
16.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
16.9 "Disability" means the inability to engage in any substantial
gainful activity considering the Participant's age, education and work
experience by reason of any medically determined physical or mental impairment
that has continued without interruption for a period of at least six months and
that can be expected to be of long, continued and indefinite duration. All
determinations as to whether a Participant has incurred a Disability shall be
made by the Employee Benefits Administration Committee of the Company, the
findings of which shall be final, binding and conclusive.
16.10 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
16.11 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
16.12 "Exercise Price" means the amount for which one Common Share may
be purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
16.13 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite-transactions report for
such date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by
the NASDAQ system for such date;
13
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the
Fair Market Value shall be equal to the mean between the last
reported representative bid and asked prices quoted by the NASDAQ
system for such date; and
(d) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on
such basis as it deems appropriate.
16.14 "ISO" means an incentive stock option described in section 422
(b)422(b)
of the Code.
16.15 "Key Employee" means (1) a key common-law employee of the Company
or any Subsidiary, as determined by the Committee, or (2) a non-employee
director of any Subsidiary, as determined by the Committee.
16.16 "Named Executive Officer" means a Participant who, as of the date
of vesting of an Award is one of a group of "covered employees," as defined in
the Regulations promulgated under Code Section 162(m), or any successor statute.
16.17 "Non-Employee Director" means a member of the Board who is not a
common-law employee.
16.18 "NQSO" means an employee stock option not described in sections
422 through 424 of the Code.
16.19 "Option" means an ISO or NQSO or, in the case of a Key Employee
who is subject to the tax laws of a foreign jurisdiction, an option qualifying
for favorable tax treatment under the laws of such jurisdiction, including a
Replacement Option, granted under the Plan and entitling the holder to purchase
one Common Share.
16.20 "Optionee" means an individual, or his or her estate, legatee or
heirs at law that holds an Option.
16.21 "Participant" means a Non-Employee Director or Key Employee who
has received an Award.
16.22 "Performance Share Award" means the conditional right to receive
in the future one Common Share, awarded to a Participant under the Plan.
16.23 "Plan" means this 1992 Stock Incentive Plan of The Charles Schwab
Corporation, as it may be amended from time to time.
16.24 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident to
the exercise of an Option.
14
16.25 "Restricted Share" means a Common Share awarded to a Participant
under the Plan.
16.26 "Retirement" shall mean any termination of employment of an
Optionee for any reason other than death at any time after the Optionee has
attained Retirement Age. For this purpose, Retirement Age shall mean age fifty
(50), but only if, at the time of such termination, the Participant has been
credited with at least seven (7) Years of Service under the SchwabPlan
Retirement Savings and Investment Plan; provided, however, that if at the time
of grant of an Option an Optionee is a Participant in a qualified retirement
plan maintained by a Subsidiary (other than the SchwabPlan Retirement Savings
and Investment Plan), then Retirement Age shall have the same meaning as the
Normal Retirement Date as defined in such plan.
16.27 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share or Performance Share Award which
contains the terms, conditions and restrictions pertaining to such Restricted
Share or Performance Share Award.
16.28 "Stock Option Agreement" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her option.
16.29 "Subsidiary" means any corporation or other entity, if the
Company and/or one or more other Subsidiaries own not less than 50 percent of
the total combined voting power of all classes of outstanding stock of such
corporation (or ownership interest of such other entity). A corporation or other
entity that attains the status of a Subsidiary on a date after the adoption of
the Plan shall be considered a Subsidiary commencing as of such date.
15
ADDENDUM
ATHE UNITED KINGDOM 2001 OFFICER SHARE OPTION SCHEME
OF THE CHARLES SCHWAB CORPORATION
This Addendum to The provisions ofCharles Schwab Corporation 2001 Stock Incentive Plan (the
"2001 Plan") shall constitute the Plan, as amended by the terms of this
Addendum A, shall apply to the grant of Approved Options to Key U.K. Employees.
1. For purposes of this Addendum A, the following
definitions shall apply in addition to those set out in section 16 of the Plan:
APPROVED OPTION Means a stock option designed to qualify as an
approved executive share option under the Taxes Act;
INLAND REVENUE means the Board of the Inland Revenue in the
United Kingdom.
KEY U.K. EMPLOYEE means a designated employee of Sharelink
Investment Services plc or any subsidiary (as that term is
defined in the Companies Act 1985rules of the United Kingdom 2001 Officer Share
Option Scheme ("Scheme") of The Charles Schwab Corporation (the "Company"), as
amended)approved by the United Kingdom's Board of which Sharelink Investment Services plc has
control forInland Revenue ("Inland Revenue")
under Schedule 9 to the purposes of section 840 of the Taxes Act;
TAXES ACT means theUnited Kingdom's Income and Corporation Taxes Act 1988
(the "Act").
DEFINITIONS
1 Except as specifically set forth in this Addendum, the terms and
conditions of the 2001 Plan shall apply to the scheme. In addition, the
following definitions will apply to this Scheme:
1.1 References to the "Act" are to the United Kingdom.
2. An ApprovedKingdom's Income and
Corporation Taxes Act 1998.
1.2 The expression "New Option" means an Option may only be granted to a Key U.K.
Employee who:
(i) is employed on a full-time basis; and
(ii) does not fallover shares in the
Acquiring Company (as defined in rule 5.2) or some other company
falling within the provisions of
paragraph 810(b) or 10(c) of Schedule 9 to the Taxes Act.
For purposesAct,
meeting the requirements of this section 2(i)sub-paragraphs 15(3)(a) to (d) of
Addendum A, "full-time"
shall mean an employee who is requiredSchedule 9 to work 20 hours per week, excluding meal
breaks.
3. No Approved Option may bethe Act, granted to a Key U.K. Employee
if it would cause the aggregatein consideration of the exercise pricerelease of
alla subsisting Approved
OptionsOption within the "appropriate period" (as defined by
paragraph 15(2) of Schedule 9 to the Act).
1.3 The expression "Option-holder" means the person to whom an option
has been granted under this Scheme and references to such employee"Optionee "
in the 2001 Plan shall be construed accordingly.
1.4 The expression "Participating Company" means the Company and any
company which is under the Plan, or any other subsisting options
granted to such employee under any other share option scheme approved under
Schedule 9control of the Taxes Act and established by the Company, or an associated
company, to exceed the higher of (a) one hundred thousand pounds sterling and
(b) four times such employee's relevant emoluments for the current or preceding
year of assessment (whichever is greater); but where there were no relevant
emoluments for the previous year of assessment, the limit shall be the higher of
one hundred thousand pounds sterling or four times such employee's relevant
emoluments for the period of twelve months beginning with the first day during
the current year of assessment in respect of which there are relevant
emoluments. For the purpose of this section 3 of Addendum A, "associated
company"
16
means an associated company within the
meaning of section 416840 of the Taxes Act;
"relevant emoluments" has the meaning given by paragraph 28(4) of Schedule 9 to
the Taxes Act, and "year of assessment" means a year beginning on any April 6 and
ending onto which the following April 5.
4. CommonCommittee
shall have resolved that this Scheme shall for the time being
extend.
1.5 References to "Qualifying Shares" in this Addendum are references
to Shares issued pursuant to the exercise of
Approved Options mustwhich satisfy the conditions specified inrequirements of paragraphs 10 to 14 of
Schedule 9 to the Taxes Act.
5. Notwithstanding1.6 References to "Shares" in this addendum are references to shares
or shares of Common Stock in the provisionsCompany.
ELIGIBILITY AND GRANT
2.1 Options may only be granted under the Scheme to a Key Employee who is
an employee (other than one who is a director) or a full-time director of
Section 5.4a Participating Company, and for this purpose a person shall be treated
as a full-time director of a Participating Company if he is obliged to
devote not less than 25 hours a week, excluding meal breaks, to the
performance of the Plan, the exercise priceduties of an Approved Option shall not be less than 100
percent of the closing price ofhis office or employment with that company
(or with that company and any other company which is a Common Share as reportedParticipating
Company). References in the New York Stock
Exchange Composite Index on the date of grant.
6.2001 Plan to "employee" shall be construed
accordingly.
2.2 No Approved OptionOptions under this Scheme may be granted to, or exercised at any time by, a
Key
U.K. Employee when that Key U.K. Employee falls within the provisionsperson who is not eligible to participate by virtue of paragraph 8 of
Schedule 9 to the TaxesAct, as modified by section 187 (3) (a) of the Act.
If2.3 No Option may be granted at a time when the Shares over which it is
granted are not Qualifying Shares.
2.4 For the purposes of Article 5.4 of the 2001 Plan, the Fair Market
Value, as determined by the Committee in respect of any timeOption under this
Scheme, shall be as defined in Article16.13(a) of the 2001 Plan if the
Stock Exchange referred to in that Article is the New York Stock Exchange
and the closing price referred to in that Article is the closing price on
the New York Stock Exchange and in any other case shall be not less than
the market value of the shares on the date of grant(or such earlier date
as may be agreed with the Board of the Inland Revenue) and agreed in
advance with the United Kingdom Inland Revenue Shares Valuation Division.
2.5 Only Options (as defined in the 2001 Plan) shall be granted under
this Scheme and no Replacement Options, Restricted Shares or Performance
Share Awards as outlined in Articles 5.9 and 7 of the 2001 Plan shall be
granted under this Scheme. Articles 5.9, 7, 9 and 12 of the 2001 Plan
shall not apply for the purposes of this Scheme and an Approved Option cease togranted
under the Scheme need not comply with the conditionsrequirement in paragraphs 10the second
sentence of Article 5.3. No Options shall be granted under this Scheme
pursuant to 14Articles 4.6 or 4.7 of the 2001 Plan.
2.6 No Option granted under this Scheme shall be exercisable more than
ten years after the date the Option is granted.
LIMITATION ON AWARDS
3. For the purposes of Article 3 of the 2001 Plan, any Option granted
under this Scheme to any person shall be limited and take effect so that
the sterling equivalent of the amount payable on the exercise of such
Option, when added to the aggregate sterling equivalent of amounts
payable on the exercise of options over Shares which are capable of being
acquired under subsisting rights obtained by the Participant under this
Scheme or any other share option scheme established by the Company or any
associated company (within the meaning contained in section 416 of the
Act) of the Company and approved under Schedule 9 to the Act (but
excluding any rights obtained under a savings related share option
scheme) shall not exceed the limit set out in paragraph 28 of Schedule 9
to the TaxesAct.
For the purposes of this Scheme, the sterling equivalent of any amount
payable on the exercise of an option shall be the amount converted into
pounds sterling at the highest buying rate shown in the day's spread as
published in the Financial Times for the date of grant of such option or
at such other rate as may be agreed from time to time with the United
Kingdom Inland Revenue Shares Valuation Division.
EXERCISE
4.1 No Option may be exercised whilst this Scheme is and is intended to
remain approved by the Inland Revenue unless the Shares which would be
acquired are Qualifying Shares.
4.2 Any terms and conditions imposed by the Committee under Article 5.1 of
the 2001 Plan for the exercise of Options granted under this Scheme shall
be factual and objective and laid down at the time of grant. Any such
terms or conditions shall not be amended or waived after the time of
grant unless they relate to performance targets and event or events have
occurred such that the Committee reasonably believes that the original
conditions as amended or waived will be a fairer measure and would not be
more difficult to satisfy than the original condition. Any other terms
determined by the Company may only be imposed if they otherwise comply
with the requirements set out in Schedule 9 to the Act.
4.3 Notwithstanding Article 5.2 of the 2001 Plan, no Option may be
transferred by will, and on the death of the Option-holder any subsisting
Option may be exercised by his personal representatives not later than
one year after the date of his death. Article 14.2 of the 2001 Plan shall
not apply.
4.4 Article 5.5 of the 2001 Plan shall not apply to this Scheme. Each Stock
Option Agreement shall specify when issued on grant the date when all or
any instalment of the Option is to become exercisable including whether
there shall be any acceleration of vesting on certain events (the vesting
of the Option). The Stock Option Agreement shall also specify the term of
the Option. Any subsisting Options may be exercised by the Participant
or, if deceased, by his personal representatives in whole or in part
(including any unvested part) at the time of or, subject to rule 4.5, at
any time following the occurrence of the earliest of the following
events:
(i) the death of the Participant; and
(ii) upon the Participant ceasing to be a director or employee of a
Participating Company or the Company or any Subsidiary as defined
in Article 16.29 of the 2001 Plan where that cessation was by
reason of Disability or injury (in the latter case on the
production of such evidence as the Committee shall reasonably
require to show the Option-holder has ceased to exercise by reason
of injury and is incapable of exercising that employment and is
likely to remain so incapable for the foreseeable future) or
redundancy as defined in the Employment Rights Act then all Approved Options then outstanding1996 or
Retirement.
4.5 An Option shall lapse and ceasebecome thereafter incapable of exercise on the
earliest of the following events:
(i) the tenth anniversary of the date the Option is granted;
(ii) where a Participant ceases to be exercisablea director or employee of a
Participating Company or the Company or any Subsidiary as defined
in Article 16.29 of the 2001 Plan by reason of death or
Disability, or injury the first anniversary following such
cessation;
(iii) where a Participant ceases to be a director or employee of a
Participating Company or the Company or any Subsidiary as defined
in Article 16.29 of the 2001 Plan by reason of Retirement, the
second anniversary following such cessation; and
(iv) where a Participant ceases to be a director or employee of a
Participating Company or the Company or any Subsidiary as defined
in Article 16.29 of the 2001 Plan for any reason other than those
set out above, including redundancy, three months following such
cessation; and
(v) the end of the period of exercisability determined in accordance
with rule 5.
4.6 Payment for Shares on the exercise of Options granted under this Scheme
shall be in cash and not through the delivery of Shares of Common Stock
or otherwise as described in Articles 6.2 and 6.3 of the 2001 Plan.
4.7 Shares shall be issued and the Option-holder registered as a shareholder
within 30 days of receipt of a valid exercise notice.
4.8 Notwithstanding the provisions of Article 5.8 or 6.2 of the 2001 Plan,
any Shares issued upon the exercise of an Option under this Scheme shall
not be subject to any forfeiture conditions, rights of repurchase, rights
of first refusal or any other transfer restrictions that do not apply to
all holders of Shares.
4.9 Article 13 shall apply so that it is a condition of exercise that the
obligations are satisfied.
4.10 The Company shall keep available sufficient unissued Shares or Shares in
the Treasury to satisfy the exercise in full of all Options granted under
this Scheme and for the time being remaining capable of being exercised.
TAKEOVER, CHANGE OF CONTROL
5.1 If any person obtains control of the Company (within the meaning of
section 840 of the Act) as a result of making:
(i) a general offer to acquire the whole of the issued share capital
of the Company (other than that which is already owned by him)
which is unconditional or which is made on a condition such that
if it is satisfied the person making the offer will have control
of the Company; or
(ii) a general offer to acquire all the shares (other than shares which
are already owned by him) in the Company which are of the same
class as Shares subject to a subsisting Option,
then the Committee shall notify all Participants as soon as is
practicable after the change of control. Any subsisting Option may be
exercised from the date of the sharesreceipt of that notification up to the
expiry of a period ending six months from the time when the person making
the offer has obtained control of the Company and any condition subject
to which the offer is made has been satisfied.
5.2 If as a result of the events specified in rule 5.1 an "Acquiring Company"
(as defined in paragraph 15 of Schedule 9 to the Act) has obtained
control of the Company, the Participant may, if the Acquiring Company so
agrees, release any subsisting Option he holds in consideration for the
grant of a New Option.
5.3 Where the circumstances noted in rule 5.2 apply, New Options may be
granted within the terms of paragraph 15(1) of Schedule 9 to the Act in
consideration for the release of Options previously granted under this
Scheme. Such New Options are deemed to be equivalent to the old Options
and to have been granted within the terms of this Scheme, provided the
New Options satisfy the conditions in paragraph 15(3) of Schedule 9 to
the Act and the release of the Option takes place within six months of
the date the Acquiring Company obtains control of the Company. A New
Option issued in consideration of the release of an Option shall be
evidenced by an option certificate or agreement which shall import the
relevant provisions of this Scheme.
5.4 A New Option shall, for all other purposes of this Scheme, be treated as
having been acquired at the same time as the corresponding released
Option.
5.5 If any person obtains control of the Company other than as a result of
the events specified in rule 5.1, then the Committee shall notify all
Participants as soon as practicable after the change of control. Any
subsisting Option may be exercised from the date of the receipt of that
notification up to the expiry of a period ending six months from the time
when the person obtains control of the Company.
5.6 If, as a result of the events specified in rules 5.1 or 5.3, a company
has obtained control of the Company, the Committee shall be entitled at
any time to require all holders of subsisting Options to exercise those
Options within 30 days by notice in writing to the Participant to this
effect.
5.7 The periods of exercisability under this rule 5 and the date of lapse
under rule 4.5 are those of whichever of the pre-conditions of rules 5.1,
5.3 or 5.4 are first achieved. The subsequent achievement of any other
pre-conditions will not cause a period of exercisability to begin nor a
date of lapse to arise.
5.8 For the purpose of this rule 5 other than rule 5.2, a person shall be
deemed to have obtained control of the Company if he and others acting in
concert with him have together obtained control of it.
5.9 The exercise of an Option pursuant to the preceding provisions of this
rule 5 shall not be subject to any conditions imposed pursuant to Article
5.1 of the 2001 Plan as amended by rule 4.2.
EMPLOYMENT RELATIONSHIP
6. With respect to Options granted pursuant to the Scheme, Article 11
of the 2001 Plan shall be subject to the following: "Any Participant or
Employee shall waive any and all rights to compensation or damages on the
termination of his office or employment with any past or present
Participating Company or Subsidiary for any reason whatsoever insofar as
those rights arise or may arise from his ceasing so to comply,have rights under or
to be entitled to exercise any Option under this Scheme as a result of
the termination. Neither the grant of an Option nor any benefit which may
accrue to a Participant on the exercise of an Option shall form part of
that Participant's remuneration entitlement from his office or
employment, nor shall the grant of an Option create any right or
entitlement on the Participant to have any further Options granted to him
under this Scheme if at all."
PROTECTION AGAINST DILUTION: VARIATION OF SHARE CAPITAL
7.1 With respect to Options granted pursuant to the Scheme, Article 10.1 of
the 2001 Plan shall apply, but (i) with the omission of the following
words and no optioneephrases : "a declaration of a dividend payable in Common
Shares", "a declaration of a dividend payable in a form other than Common
Shares", "a spin-off or similar occurrence;" and (ii) as if the following
words were added "or any other variation of the issued Common Shares"
before the words "the Committee". Adjustments to Options, as described in
Article 10 of the 2001 Plan, shall be at the discretion of the Committee
and shall not be effective under this Scheme until approved by the United
Kingdom Inland Revenue.
7.2 Article 10.2 of the 2001 Plan shall apply for the purposes of this Scheme
with the exclusion of the words "for accelerated vesting or for
settlement in cash".
WITHHOLDING TAXES
7.3 Article 13.1 of the 2001 Plan shall apply for the purposes of this scheme
with the exclusion of the last sentence.
ALTERATION OF SCHEME RULES
8. The Committee may make such alterations to the provisions of this Scheme
as may be permitted by Article 15.2 of the 2001 Plan, provided that any
such alteration made at a time
when this Scheme is to remain approved by the United Kingdom Inland
Revenue shall not have effect unless and until the alteration has the
prior approval in writing of the United Kingdom Inland Revenue.
ATTACHMENT 3
THE CHARLES SCHWAB CORPORATION
LONG TERM INCENTIVE PLAN
SECTION 1. PURPOSE
The Charles Schwab Corporation Long Term Incentive Plan (the "Plan") is intended
to provide financial incentives to selected management employees to contribute
to the long-term success of The Charles Schwab Corporation and its affiliated
companies (collectively the "Company").
SECTION 2. DEFINITIONS
As used in this Plan, the following capitalized terms shall have the meanings
set forth below:
a) "Administrative Committee" means the committee of the Plan, which shall
consist of the individuals occupying the following three offices of the
Corporation:
Chief Executive Officer or President and Co- Chief Executive Officer
Chief Financial Officer
Chief Administrative Officer
b) "Award" means the cash amount payable to a Participant pursuant to the
provisions of this Plan.
c) "Board" means the Board of Directors of The Charles Schwab Corporation.
d) "Change in Control" means the occurrence of any cause of action againstthe following events
after the effective date of the Plan:
(1) A change in control required to be reported pursuant to Item 6(e)
of Schedule 14A of Regulation 14A under the Exchange Act;
(2) A change in the composition of the Board, as a result of which
fewer than two-thirds of the incumbent directors are directors who
either (i) had been directors of the Company Sharelink Investment Services plc24 months prior to such
change or (ii) were elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the directors
who had been directors of the Company 24 months prior to such change
and who were still in office at the time of the election or
nomination;
(3) Any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act) becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 20 percent or
more of the combined voting power of the Company's then outstanding
securities ordinarily (and apart from rights accruing under special
circumstances) having the right to vote at elections of
directors (the "Base Capital Stock"); provided, however, that any
change in the relative beneficial ownership of securities of any
person resulting solely from a reduction in the aggregate number of
outstanding shares of Base Capital Stock, and any decrease thereafter
in such person's ownership of securities, shall be disregarded until
such person increases in any manner, directly or indirectly, such
person's beneficial ownership of any securities of the Company.
e) "Committee" means the Compensation Committee of the Board of Directors of
The Charles Schwab Corporation.
f) "Determination Date" means the date on which the Participants, Performance
Goals and Target Awards are determined for any Performance Period.
g) "Disability" means the inability to engage in any substantial gainful
activity considering the Participant's age, education and work experience
by reason of any medically determined physical or mental impairment that
has continued without interruption for a period of at least six months and
that can be expected to be of long, continued and indefinite duration. All
determinations as to whether a Participant has incurred a Disability shall
be made by the Employee Benefits Administration Committee of the Company,
the findings of which shall be final, binding and conclusive.
h) "Named Executive Officer" means a Participant who, as of the date of
payment of an Award is one of a group of "covered employees," as defined in
the Regulations promulgated under Section 162(m) of the Internal Revenue
Code of 1986, or any subsidiarysuccessor statute.
i) "Participant" means an eligible employee of the Company who has been
designated as a Participant in accordance with section 3 hereof.
j) "Performance Goal" shall mean a measure of corporate performance (such as
cumulative earnings per share), that shall be selected by the Committee to
be used as the basis for determining the amounts payable pursuant to the
Plan for a Performance Period. Performance goals shall be selected from
among the following: revenue growth, net revenue growth, operating revenue
growth, consolidated pretax profit margin, consolidated pretax operating
margin, consolidated after-tax profit margin, consolidated after-tax
operating profit margin, customer net new asset growth, stockholder return,
return on assets, earnings per share, return on equity, and return on
investment.
k) "Performance Period" means a period of four fiscal years of the Company, or
such other period as may be specified by the Committee, which has been
designated by the Committee as a period for which Awards may be paid
pursuant to the Plan. The Committee may authorize more than one Performance
Period to be in effect at any one time.
2
l) "Retirement" shall mean any termination of employment of a Participant for
any reason other than death at any time after the Participant has attained
Retirement Age. For this purpose, Retirement Age shall mean age fifty (50),
but only if, at the time of such termination, the Participant has been
credited with at least seven (7) Years of Service under the SchwabPlan
Retirement Savings and Investment Plan.
m) "Target Award" has the meaning assigned thereto in Section 5 (a) hereof.
SECTION 3. ELIGIBILITY
a) Participation in the Plan is limited to officers (and officer equivalents)
of the Company, as may be selected for participation in the Plan by the
Committee as of each Determination Date.
b) Participants generally shall be selected at the beginning of the
Performance Period. After the Performance Period has commenced, the
Committee shall have the authority to designate additional Eligible
Participants under this Plan, and the amount of the Award payable to such
individuals who become Participants after the Determination Date for that
Performance Period shall be pro-rated to reflect the portion of the
Performance Period during which such Eligible Participant was a Participant
in the Plan.
SECTION 4. PLAN TERM
The Plan shall become effective as of January 1, 2003, and shall continue in
effect until terminated by the Committee.
SECTION 5. PERFORMANCE CRITERIA AND TARGET AWARDS
A) PERFORMANCE PERIOD AND TARGET AWARDS. The length of each Performance Period
shall be the four year period commencing as of any Determination Date, or
such other period as may be specified by the Committee. On the
Determination Date for a Performance Period, the Committee shall determine
for each Participant an amount, which may be expressed in Plan Units, that
shall be payable to the Participant as an Award for that Performance Period
if the Performance Goal for that Performance Period is achieved (the
"Target Award"). The Committee shall have the authority to delegate to the
Company's executive management the authority to issue Target Awards to
Participants, other than executive officers.
B) PERFORMANCE GOALS. As of the Determination Date for a Performance Period,
the Committee shall establish a Performance Goal for the Performance
Period. The Committee may specify that the Performance Goal may include a
threshold level of performance below which no Award shall be payable,
levels of performance at which specified percentages or multiples of the
Target Award shall be payable, and a maximum level of performance above
which no additional Award shall be paid; provided that in calculating the
value of an Award, the maximum multiple shall be 400% of the Target Award.
3
C) EQUITABLE ADJUSTMENT. The Committee shall have the discretion to make
equitable adjustments to Performance Goals in recognition of unusual or
non-recurring events affecting the Company, its financial statements or its
shares, in response to changes in applicable laws or regulations, or to
account for items of gain, loss or expense determined to be extraordinary
or unusual in nature or infrequent in occurrence or related to the
acquisition, disposition or discontinuance of a business or a segment of a
business, or related to a change in accounting principles, or to reflect
capital changes.
D) CERTIFICATION AND RESTRICTIONS ON AMOUNT OF AWARDS. Following the end of
each Performance Period, the Committee shall be required to certify whether
and the extent to which the Performance Goal for the Performance Period was
satisfied before any Award is paid to any Participant.
With respect to any Performance Period, at any time before an Award for
such Performance Period is paid, the Committee may establish a ceiling on
the aggregate amount which may be paid out in Awards for such Performance
Period. In the event that such a limit is established for any Performance
Period, the Awards otherwise payable to all Participants for such
Performance Period shall be reduced pro-rata.
The amount of any Award may be pro-rated for any period of time during
which the Participant was not an active employee of the Company or any of
its Subsidiaries, including leaves of absence and other person in respect thereof.
7. An Approved Option may contain such other terms,
provisions and conditionsperiods as may be
determined by the Company in its discretion.
E) MAXIMUM TARGET AWARD. In no event shall the total amount of Target Awards
granted to any Participant pursuant to the Plan in any calendar year
exceed $3,000,000.
F) DELEGATION TO MANAGEMENT. The Committee consistentshall have the authority to
delegate to the executive officers of the Company the authority to issue
Target Awards to Participants, other than executive officers.
SECTION 6. CALCULATION OF AMOUNT OF AWARDS
The amount of Awards payable for a Performance Period will be calculated as soon
as practicable following the close of each Performance Period, in accordance
with the Plan, provided thatprovisions of Section 8 of this plan.
SECTION 7. VESTING
Subject to the approved option otherwise complies with the
requirements for approved executive option schemes specified in Schedule 9 of
the Taxes Act.
8. In relation to an Approved Option, notwithstanding the
terms of section 10.1remaining provisions of the Plan, no adjustmentand subject to the authority of
the Committee to authorize a different vesting schedule at the time it
authorizes the granting of a Target Award, Awards shall become vested only if
the Participant remains continuously employed with the Company from the date the
Participant receives a Target Award, in accordance with on the following
schedule:
4
Vested Percentage % of
Vesting Date Award (Cumulative)
_______________________________________________________________
1st Anniversary of Target Award 0%
2nd Anniversary of Target Award 25%
3rd Anniversary of Target Award 50%
4th Anniversary of Target Award 100%
SECTION 8. PAYMENT OF AWARDS
Awards will be paid in cash as soon as practicable after the end of a
Performance Period, but not prior to certification of the Company's results by
its independent auditors for all years of the Performance Period. Subject to the
provisions of Section 9, a Participant will be entitled to payment of an Award
only if the Participant has been continuously employed by the Company throughout
the Performance Period and is still in the employ of (and has not delivered
notice of resignation to) the Company on the date of payment of the Award). The
Company will withhold from payments all applicable taxes as may be required by
applicable law.
SECTION 9. TERMINATION OF EMPLOYMENT DURING A PERFORMANCE PERIOD
(a) DEATH OR DISABILITY. If a Participant's employment is terminated as a
result of death or disability at any time after the first two years of a
Performance Period (and before completion of the Performance Period), such
Participant or Participant's estate shall be made pursuantentitled to section 10.1receive the Award
such Participant would have been entitled to receive, pro-rated to reflect
the actual amount of time that such person was a Participant in the Plan
for such Performance Period, valued and payable as determined by the
Administrative Committee as soon as practicable following the end of the
Plan to any outstanding Approved Options withoutcalendar quarter that includes the prior
approvaldate of the Inland Revenue.
9. In relationParticipant's date of death.
(b) RETIREMENT AFTER FIRST TWO YEARS OF A PERFORMANCE PERIOD. If a
Participant's employment is terminated on account of Retirement at any time
after the first two years of a Performance Period (and before completion of
the Performance Period), such Participant shall be entitled to receive the
entire Award such Participant would have been entitled to, based on Company
performance and payable at the time Awards are paid to all other
Participants for such Performance Period.
(c) OTHER TERMINATION OF EMPLOYMENT. If a Participant's employment is
terminated for any reason other than death, disability or Retirement at any
time after the first two years of a Performance Period (and before
completion of the Performance Period), such Participant shall be entitled
to receive the Award such Participant would have been entitled to,
multiplied by the Participant's vested percentage at the time of
termination, based on Company performance and payable at the time Awards
are paid to all other Participants for such Performance Period.
(d) TERMINATION OF EMPLOYMENT AFTER THE END OF A PERFORMANCE PERIOD BUT PRIOR
TO PAYMENT. If, after the completion of a Performance Period and before the
payment of
5
an Approved Option any Key U.K. Employee
shall make arrangements satisfactory to the Company for the satisfaction of any
tax withholding or deduction -- at -- source obligations that ariseAward, a Participant's termination terminates by reason of the
grant to himParticipant's death, Disability or her of such option, or its subsequent exercise.
10. In relation to an Approved Option, in additionRetirement, the Participant shall be
entitled to the provisions set out in section 15.2payment of any Award for such Performance Period. Any Award
payable to a deceased Participant shall be paid to the Participant's
estate.
SECTION 10. AMENDMENTS, MODIFICATIONS, AND TERMINATION OF THE PLAN
The Committee may terminate, modify or amend the Plan at any time, provided that
such action shall not affect the rights of the Plan Participants to awards that
were granted prior to the date of such termination, modification or amendment.
SECTION 11. NO RIGHT TO CONTINUED EMPLOYMENT
The designation of an employee as a Participant for any Performance Period or
the receipt of an award by a Participant shall not give the Participant any
right to continued employment by the Company for any period of time, and the
right to dismiss any employee is specifically reserved by the Company.
SECTION 12. CHANGE IN CONTROL
In the event of a Change in Control, all Awards shall become fully payable as
soon as practicable following such Change in Control, and the value of all
Awards shall be determined by the Committee as soon as practicable following the
end of the calendar quarter immediately preceding the Change in Control.
SECTION 13. GOVERNING LAW
The Plan shall be construed and its provisions enforced and administered in
accordance with the laws of the State of California.
6
ATTACHMENT 4
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is
entered into as of this ___ day of __________, 2002 (the "Effective Date") by
and among The Charles Schwab Corporation, a Delaware corporation ("TCSC"),
Schwab Capital Markets, L.P., a New Jersey limited partnership ("SCM") and Lon
Gorman, an individual ("Executive").
R E C I T A L S
A. Executive commenced employment with TCSC as Executive Vice
President on June 10, 1996 and since then has been serving TCSC
and SCM in various capacities, including but not limited to
serving as Vice Chairman - Enterprise President of SCM (the "SCM
President") since August 1, 1999.
B. Executive desires to continue to serve TCSC and SCM and TCSC and
SCM desire to continue to so employ Executive and secure
Executive's agreement, inter alia, not to compete with TCSC, SCM
and/or their affiliates or subsidiaries for the period and on the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises set
forth herein, and for other good and valuable consideration, the parties hereby
agree as follows:
AGREEMENT
1. EMPLOYMENT. TCSC hereby employs Executive as Vice Chairman and
Executive Vice President and SCM hereby employs Executive as SCM President and
Executive hereby agrees to serve in those positions or in such other comparable
or higher officer position to which he may be appointed or assigned by the
Co-Chief Executive Officers of TCSC during the Employment Term (as defined
below). Executive shall report to the President & Co-Chief Executive Officer of
TCSC, or to such other more senior person or persons within SCM, Charles Schwab
& Co. ("Schwab") or TCSC as may be designated by the Board of Directors of TCSC
("the Board").
2. EMPLOYMENT TERM. The term of Executive's employment under this
Agreement shall be for a period of five (5) years commencing on the Effective
Date, unless earlier terminated pursuant to Section 7 of this Agreement (the
"Employment Term").
3. DUTIES AND RESPONSIBILITIES. During the Employment Term,
Executive shall have responsibilities, duties and authority reasonably accorded
to and expected of a Vice Chairman and Executive Vice President by TCSC and
responsibilities, duties and authority reasonably accorded to and expected of
the SCM President by SCM. During the Employment Term, Executive shall devote all
of his business time, ability, attention, energy, knowledge and skill to
performing all such duties and responsibilities as are reasonably assigned or
delegated to him by the Co-Chief Executive Officers of TCSC, including but not
limited to serving as the chief executive officer of SCM. Executive agrees to
use his best efforts to perform such duties and responsibilities. Executive
further agrees that during the Employment Term he shall not, without the prior
written consent of the Co-Chief Executive Officers of TCSC and the Compliance
Department of TCSC: (i) render to any other person or entity services of any
kind or
engage in any other business activity, whether for compensation or otherwise
(except for services provided to Executive's friends and/or family members or
non-profit, educational, charitable or religious organizations), or (ii) serve
on any board of directors; provided that Executive may serve on the boards of
directors of non-profit, educational, charitable or religious organizations
without such prior written consent, so long as the fact of any such board
service is disclosed by Executive in writing to the Co-Chief Executive Officers
of TCSC and so long as the extent of any such service does not violate any
material SCM, Schwab or TCSC policy applicable to such practices, or materially
interfere with Executive's performance of his duties and responsibilities under
this Agreement, or conflict in any way with the business of SCM, Schwab, TCSC
and/or any of their respective affiliates and subsidiaries.
4. COMPENSATION. For all services rendered by Executive during
the Employment Term in any capacity to SCM, Schwab, TCSC and/or any of their
respective affiliates or subsidiaries, including, without limitation, services
as an officer, director, or member of any committee (including, without
limitation, services as a member of the Executive Committee of TCSC), Executive
shall be compensated as follows:
(a) BASE SALARY. During the Employment Term, Executive shall
receive a gross base salary of $560,000 on an annualized basis to be paid in
equal installments twice every month (or otherwise in accordance with changes to
SCM's payroll practices), from which SCM shall withhold and deduct all
applicable federal and state taxes and authorized deductions as required or
permitted by applicable laws ("Base Salary"). Executive's Base Salary shall be
reviewed and is subject to adjustment annually by the Co-Chief Executive
Officers of TCSC and the Compensation Committee of the Board, in their sole and
absolute discretion, provided that Executive's Base Salary shall not be reduced
below $560,000 except to the extent consistent with adjustments made to the base
salaries of the other current Vice Chair-level members of the Executive
Committee of TCSC.
(b) EXECUTIVE COMMITTEE BONUS. During the Employment Term,
Executive shall be eligible to participate in TCSC's Corporate Executive Bonus
Plan and Annual Individual Incentive Performance Plan (collectively, the
"Executive Committee Bonus Plans"), as such plans may be amended from time to
time by TCSC in its sole and absolute discretion, on a basis comparable to the
other Vice Chair-level members of the Executive Committee of TCSC. Pursuant to
the terms and conditions of the current Executive Committee Bonus Plans, true
and correct copies of which are attached hereto as EXHIBITS A-1 AND A-2,
respectively, Executive shall be eligible to earn an aggregate annual bonus
under such plans with a current target of 125% of his Base Salary, from which
SCM shall withhold and deduct all applicable federal and state taxes and
authorized deductions as required or permitted by applicable laws (the
"Executive Committee Bonus"). The amount of the Executive Committee Bonus, if
any, awarded to Executive for any calendar year during the Employment Term will
be determined by the Co-Chief Executive Officers of TCSC and the Compensation
Committee of the Board, in their sole and absolute discretion, on the basis of:
(A) Executive's performance in managing the non-SCM business units for which he
is responsible and (B) Executive's contribution to the overall management of
TCSC as a member of the Executive Committee. The Executive Committee Bonus paid
to Executive, if any, for any calendar year during the Employment Term will be
paid on or before February 28th of the following year, on the condition
Executive is actively employed with TCSC and SCM on that date, except as
otherwise specifically provided in Section
2
7, below. Executive acknowledges and agrees that nothing in the Executive
Committee Bonus Plans, this Section 4(b) or elsewhere in this Agreement, or in
any other agreement between Executive and SCM, Schwab, TCSC and/or any of their
respective affiliates or subsidiaries is intended to or does guarantee Executive
any minimum Executive Committee Bonus during the Employment Term (except as
otherwise specifically provided in Section 7, below) and nothing in the
Executive Committee Bonus Plans, this Section 4(b) or elsewhere in this
Agreement, or in any other agreement between Executive and SCM, Schwab, TCSC
and/or any of their respective affiliates or subsidiaries is intended to or does
affect the manner in which Executive's Executive Committee Bonus is determined
under the Executive Committee Plans, other than to specify a current target
bonus of 125% of Executive's Base Salary for purposes of the Executive Committee
Bonus Plans. In no amendmentevent shall Executive's target bonus percentage of base
salary be reduced below 125% unless the other current Vice-Chair-level member of
the Executive Committee of TSCS receive comparable reductions.
(c) SCM INCENTIVE. Subject to the TCSC stockholder approval
described in Section 4(f), below, during the Employment Term Executive shall be
eligible to participate in the Schwab Capital Markets Incentive Plan ("SCM
Incentive Plan"), which affectsshall be reviewed on an annual basis and which may be
amended by TCSC with the written consent of Executive, which shall not be
unreasonably withheld, to reflect SCM's current business plan, financial goals
or other business objectives. TCSC agrees to submit the SCM Incentive Plan for
the Employment Term to the 2003 annual meeting of TCSC stockholders for their
approval. Pursuant to the terms and conditions of the current SCM Incentive
Plan, a summary of which is attached hereto as EXHIBIT B, Executive shall be
eligible to earn additional annual incentive compensation based on the financial
performance of SCM and other related capital markets businesses for which
Executive is responsible, from which SCM shall withhold and deduct all
applicable federal and state taxes and authorized deductions as required or
permitted by applicable laws (the "SCM Incentive"). The SCM Incentive, if any,
awarded to Executive in any calendar year during the Employment Term will be
awarded by the Compensation Committee of the Board, currently calculated in the
manner described on EXHIBIT C on the basis of SCM's financial performance as
measured by its Actual Adjusted Pre-Tax Contribution Margin for the combined
performance of all related capital markets businesses for which Executive is
responsible. For purposes of illustration and for calendar year 2002 only (as
baselines necessarily will change, upwards or downwards, as reasonably
determined by the parties hereto, for purposes of calculating Actual Adjusted
Pre-Tax Contribution Margins in subsequent years), an SCM Incentive Illustration
is attached hereto as EXHIBIT C. As set forth more fully on EXHIBIT C,
Executive's current target SCM Incentive is $3 million; PROVIDED, HOWEVER, THAT:
(i) no SCM Incentive will be paid to Executive with respect to any calendar year
in which SCM fails to attain the applicable threshold percentage of its
financial goal (currently, 80% of its Adjusted Pre-Tax Contribution Margin goal
of $138.8 million); (ii) any SCM Incentive paid to Executive shall be pro-rated
by the Compensation Committee of the Board in its sole and absolute discretion
for Actual Adjusted Pre-Tax Contribution Margin between stated levels and for
partial years worked by Executive, except that 2002 shall not be considered a
partial year and should not be pro-rated as a result of this Agreement's
execution date; and, (iii) the maximum gross amount of SCM Incentive payable to
Executive in any calendar year during the Employment Term is $7 million. The SCM
Incentive payable to Executive, if any, with respect to any calendar year during
the Employment Term shall be paid and/or granted on or before February 28th of
the following year, on the condition Executive is actively employed with TCSC
and SCM on that date, except as otherwise
3
specifically provided in Section 7, below. The initial $1 million gross of any
SCM Incentive payable to Executive in any calendar year during the Employment
Term shall be paid entirely in cash; any amount of SCM Incentive payable to
Executive in any calendar year during the Employment Term above $1 million gross
shall be paid 50% in cash and 50% in equivalent grants of restricted shares of
TCSC common stock. The number of restricted shares so granted to Executive, if
any, shall be determined by TCSC on the date of grant by dividing the applicable
gross dollar value of Executive's SCM Incentive by the average of the high and
low price of TCSC common stock on the date of grant. Fifty percent (50%) of the
restricted shares subject to any such grant shall vest on the second anniversary
of the date of the grant and the remaining 50% shall vest on the third
anniversary of the date of the grant, provided in each case that Executive is
actively employed by TCSC and SCM on such date, except as otherwise specifically
provided in Section 7, below. SCM, TSCS and Executive hereby acknowledge and
agree that if SCM's financial performance attains the applicable threshold
percentage of the adjusted pre-tax contribution margin goal specified in the SCM
Incentive Plan, as it may be amended during the Employment Term in accordance
with this Section 4(c), then he shall be entitled to the corresponding SCM
Incentive amount specifically allocated thereto; PROVIDED, HOWEVER, that, except
as provided in this sentence or in Section 7 below, nothing in the SCM Incentive
Plan, this Section 4(c) or elsewhere in this Agreement, or in any other
agreement between Executive and SCM, Schwab, TCSC and/or any of their respective
affiliates or subsidiaries otherwise is intended to or does guarantee him any
minimum SCM Incentive during the Employment Term. Notwithstanding any other
provision of this Agreement, in no event shall the SCM Incentive Plan, the
manner in which the SCM Incentive Bonus is calculated (as described in Exhibit
C), including the threshold percentages listed on Exhibit C, or the Executive's
target SCM Incentive be altered, amended, terminated or changed in any way
without the Executive's written consent (which shall not be unreasonably
withheld).
(d) PARTICIPATION IN THE CHARLES SCHWAB CORPORATION STOCK
PROGRAMS. Subject to the approval of, and on the terms and conditions set out
by, the Compensation Committee of the Board, Executive may be granted options to
purchase common stock of TCSC from time to time during the Employment Term
pursuant to the stock plans, agreements and programs applicable to Executive
Committee members at the same corporate title and grade level. Any such option
granted shall have a ten-year term, an exercise price equal to the closing price
of TCSC common stock on the date of grant, and a vesting schedule consistent
with similar options granted to other Executive Committee members. Any options
granted shall be pursuant to and governed by the terms of the stock plans,
agreements and programs then in effect and applicable to Executive Committee
members at the same corporate title and grade level.
(e) REIMBURSEMENT OF EXPENSES. During the Employment Term,
Executive shall be entitled to receive prompt reimbursement for all properly
documented travel, entertainment and other expenses properly incurred by him in
connection with his employment by TCSC and SCM in accordance with their
policies.
(f) SCM INCENTIVE SUBJECT TO TCSC STOCKHOLDER APPROVAL.
Executive acknowledges and agrees that notwithstanding anything to the contrary
in the SCM Incentive Plan, this Section 4 or elsewhere in this Agreement, or in
any other agreement between Executive and SCM, Schwab, TCSC and/or any of their
respective affiliates or subsidiaries, the Executive's eligibility for and/or
receipt of (and any obligation of SCM, Schwab, TCSC and/or
4
any of their respective affiliates or subsidiaries to pay or otherwise provide
to Executive) any SCM Incentive pursuant to Section 4(c) above with respect to
any calendar year after 2002 is expressly contingent upon the approval by a
majority of TCSC's stockholders at TCSC's 2003 annual meeting, of a proposal to
approve the SCM Incentive Plan and payments for the Employment Term which may
become payable to Executive as described in Section 4(c) above. SCM, TCSC and
Executive also acknowledge and agree that, if a majority of TCSC's stockholders
fails to approve such a proposal at the TCSC 2003 annual meeting, then, other
than with respect to the payments provided in Section 7 below, the SCM Incentive
Plan and Section 4(c), above, shall be null and void and of no further force and
effect with respect to any calendar year after 2002 and that the compensation
(but not the severance) payable to Executive under this Agreement after 2002 for
all services rendered by Executive during the Employment Term in any capacity to
SCM, Schwab, TCSC and/or any of their respective affiliates or subsidiaries
shall be determined without regard to the SCM Incentive Plan or Section 4(c),
above.
5. BENEFITS.
(a) EMPLOYEE BENEFITS AND PERQUISITES. During the Employment
Term, Executive shall be eligible to participate in those employee benefit plans
and perquisites of Schwab or TCSC comparable to those available to other Vice
Chair-level members of the Executive Committee of TCSC, provided that such
benefits and perquisites may be amended, revised or eliminated by Schwab or TCSC
from time to time in its sole and absolute discretion.
(b) VACATION AND SICK LEAVE. During the Employment Term,
Executive shall be entitled to accrue paid vacation and sick leave consistent
with policies of Schwab or TCSC applicable to other Vice Chair-level members of
the Executive Committee of TCSC, provided that such policies may be amended,
revised or eliminated by Schwab or TCSC from time to time in its sole and
absolute discretion.
6. NON-COMPETITION, NON-SOLICITATION, CONFIDENTIALITY AND
ASSIGNMENT OF DEVELOPMENTS. As a material inducement to cause TCSC and SCM to
employ Executive hereunder and in consideration of TCSC's and SCM's employment
of Executive hereunder, Executive hereby covenants and agrees as follows:
(a) At all times during Executive's employment with SCM and/or
TCSC and for a period of one (1) year subsequent to the termination of
Executive's employment with SCM and/or TCSC for any reason, Executive shall not,
directly or indirectly, alone or with others, on his own behalf or on behalf of
another:
(i) enter the employ of or render any services to any
person, joint venture, partnership, firm, corporation, limited liability company
or other entity other than SCM, Schwab, TCSC or any of their respective
affiliates or subsidiaries (each, a "Schwab Entity"; collectively, the "Schwab
Entities"), engaged in the business or businesses of the trading, sales,
research and/or underwriting of equity and/or equity-related instruments,
including without limitation option trading, market-making activities and/or
electronic program trading, and/or fixed income trading, sales and/or
underwriting, including without limitation UIT's and/or exchange-traded funds
("Competitive Business");
5
(ii) engage in, participate in, assist in or otherwise
benefit from any Competitive Business; or
(iii) continue to be or become interested in any
Competitive Business, directly or indirectly, in any capacity
or in any relationship with any other person or entity (other than any Schwab
Entity) whether as an individual, partner, member, shareholder, director,
officer, principal, agent, employee, trustee, or consultant; provided, however,
that nothing contained in this Agreement shall be deemed to prohibit Executive
from acquiring, solely as an investment, shares of capital stock of any
corporation which are publicly traded so long as Executive does not thereby own
more than five percent (5%) of the outstanding shares of such corporation.
(b) At all times during Executive's employment with TCSC
and/or SCM and for a period of one (1) year subsequent to the termination of
Executive's employment with TCSC and/or SCM for any reason, Executive shall not,
directly or indirectly, alone or with others, on his own behalf or on behalf of
another:
(i) contact or solicit any person or entity who at such
time is or, during the twelve (12) months prior to such time was, employed by or
engaged as a consultant under contract to any Schwab Entity for the purpose of
hiring that person or entity on behalf of any person or entity other than a
Schwab Entity, or otherwise encouraging that person or entity to leave the
employment of any Schwab Entity;
(ii) hire on behalf of any person or entity other than a
Schwab Entity any person or entity who at such time is, or during the 12 months
prior to such time was, employed by or engaged as a consultant under contract to
any Schwab Entity; or
(iii) solicit for the benefit or account of any person or
entity other than a Schwab Entity, any person or entity who at such time is, or
during the 12 months prior to such time was, a customer of any Schwab Entity.
(c) During and at all times following the Employment Term,
Executive shall keep secret and retain in the strictest confidence all
confidential matters and information relating to the Schwab Entities and/or any
of their respective customers, including, without limitation, trade secrets,
proprietary information, "know-how", "show-how", customer identities,
information or lists, pricing policies, account and pricing valuation methods,
operating methods or procedures, marketing plans or strategies, product
development techniques or plans, designs or design projects, technical
processes, formulae, source codes, inventions and research projects learned by
him prior to and during his employment with TCSC and/or SCM ("Confidential
Information"). Executive shall not disclose such Confidential Information to
anyone other than authorized personnel of the Schwab Entities, or use such
Confidential Information for his own benefit or for the benefit of any person or
entity other than the Schwab Entities, except as required in the course of
performing his duties as an employee of SCM and/or TCSC or as required by law,
or if such matters become generally available to the public other than by (i)
disclosure by Executive or anyone else owing a duty of confidentiality to any
Schwab Entity, provided Executive has or reasonably should have actual or
constructive knowledge that such disclosure was made in breach of such other
person's duty of confidentiality, or (ii) Executive's
6
failure to put in place adequate protections to prevent disclosure of
Confidential Information. In the event that Executive is ordered to disclose any
Confidential Information, whether in a legal or regulatory proceeding or
otherwise, Executive shall provide TCSC and SCM, to the extent permitted by law,
with prompt notice of such request or order so that TCSC and SCM or any of the
other Schwab Entities may seek to prevent such disclosure. In the case of any
disclosure required by law, Executive shall disclose only that portion of the
Confidential Information he is required to disclose.
(d) Executive agrees that any and all inventions, ideas,
discoveries, improvements, processes, developments, designs, "know-how",
"show-how", data, computer programs, algorithms, formulae, works of authorship,
work modifications, trademarks, trade names, documentation, techniques, designs,
methods, trade secrets, technical specifications, technical data, concepts,
expressions and all other intellectual property rights or other developments
whatsoever (collectively, "Developments"), whether or not patentable or
registrable under copyright, trademark, or similar statutes or subject to
analogous protection, made, authored, discovered, reduced to practice,
conceived, developed or otherwise obtained by Executive (alone or jointly with
others, whether during business hours or otherwise and whether on any Schwab
Entity's premises or otherwise) during his employment with TCSC and/or SCM, and
arising from or relating to such employment or the business of any Schwab
Entity, or made using any Schwab Entity's time, materials or facilities
(including, without limitation, all such information relating to corporate
opportunities, research, financial and sales data, pricing and trading terms,
evaluations, opinions, interpretations, acquisition prospects, the identity of
customers or their requirements, the identity of key contacts within the
customer's organizations or within the organization of acquisition prospects, or
marketing and merchandising techniques, prospective names and marks) shall be
promptly and fully disclosed to TCSC and/or SCM and to no one else and are and
shall be the sole property of TCSC and/or SCM and/or its or their nominees or
assigns as "works made for hire" (as that term is used under U.S. copyright law)
or otherwise, and TCSC and/or SCM and/or its or their nominees or assigns shall
be the sole owner of all patents, copyrights, and other rights in or connected
with such Developments. Executive agrees that all drawings, memoranda, notes,
records, files, correspondence, manuals, models, specifications, computer
programs, maps and all other writings or materials of any type embodying any
Developments are and shall be the sole and exclusive property of TCSC and/or
SCM. To the extent any Developments are not or are deemed not to be works made
for hire, Executive hereby assigns to TCSC and SCM without further compensation
all right, title and interest he has or may have in any Developments at that
time or thereafter and agrees that he shall acquire no rights during the course
of his employment with TCSC and SCM with respect to Developments. During and
after his employment with TCSC and SCM, Executive shall assist TCSC and SCM
and/or their nominees or assigns (without charge but at no expense to Executive)
to obtain and maintain or enforce any patents, copyrights, mask works or other
rights or protections relating to such Developments in all countries. Executive
irrevocably designates and appoints TCSC, SCM and their duly authorized officers
and agents as his agent and attorney-in-fact to execute and file any and all
applications and other necessary documents and to do all other lawfully
permitted acts to further the prosecution, issuance or enforcement of patents,
copyrights, trade secrets and similar protections related to such Developments
with the same legal force and effect as if Executive had executed them himself.
Executive represents and agrees that Exhibit D hereto sets forth all inventions
(whether patentable or not), patents, trade secrets, trademarks, trade names,
copyrights, and other intellectual property owned by Executive
7
before entering into employment with TCSC and SCM hereunder. Executive will not
assert any rights in or to any inventions, patents, trade secrets, trade names,
copyrights and other intellectual property unless they are identified on EXHIBIT
D.
(e) Executive acknowledges and agrees that the restrictions
contained in this Section 6 are material inducements to TCSC's and SCM's
employment of Executive hereunder. Executive further acknowledges that the
restrictions contained in this Section 6 are reasonable in scope and duration,
will not prevent him from earning a livelihood during the applicable period of
restriction, are necessary to protect the legitimate interests of the Schwab
Entities, and that any breach by Executive of any provision contained in this
Section 6 will result in immediate irreparable injury to TCSC, SCM and/or the
other Schwab Entities for which a remedy at law would be inadequate.
Accordingly, Executive acknowledges that TCSC, SCM and/or such other Schwab
Entity, shall be entitled to seek permanent injunctive relief against Executive
in the event of any breach or threatened breach by Executive of the provisions
of this Section 6, in addition to any other remedy that may be available to
TCSC, SCM and/or such other Schwab Entities whether at law or in equity. The
provisions of this Section 6 shall remain unmodified and in full force and
effect following the termination of Executive's employment. It is the intention
of the parties to this Agreement that the covenants and restrictions set forth
in this Section 6 be given the broadest interpretation permitted by law.
7. TERMINATION OF EMPLOYMENT.
(a) EXPIRATION OF THE EMPLOYMENT TERM. Unless earlier
terminated in accordance with this Section 7, the Employment Term shall
automatically terminate on that date which is five (5) years from the Effective
Date. In such event, the sole liability (other than as provided in Section 7(i)
below) of TCSC, SCM and the other Schwab Entities shall be to pay (or, as the
case may be, provide) to Executive: (i) Executive's Base Salary through the last
day of the Employment Term, (ii) any bonuses not yet paid to Executive, if any,
under Sections 4(b) and 4(c), above, in respect of TCSC's fiscal year ended
prior to Executive's termination and any pro-rated bonus payable to Executive
under Sections 4(b) and 4(c), above, as determined by the Compensation Committee
of the Board in a manner consistent with TCSC policies applicable to Executive
Committee members, (iii) all unreimbursed out-of-pocket business expenses of the
type described in Section 4(e) above, properly incurred and documented by
Executive, (iv) all unused vacation days accrued through the last day of the
Employment Term, and (v) any other benefits to which Executive is entitled under
applicable employee benefit plans in which he participated. In addition, if and
only if Executive retires effective as of the last day of the Employment Term
("Retirement Date") AND fully complies with the restrictions and covenants set
forth in Section 6, above, then TCSC and/or SCM shall: (A) continue to pay
Executive his Base Salary in effect on the last day of the Employment Term for a
one-year period following the Retirement Date; (B) pay Executive his annual
target Executive Committee Bonus as soon as practicable after the one year
anniversary of the Retirement Date; and (C) vest all of the then-unvested shares
of restricted stock granted to Executive during the Employment Term pursuant to
Section 4(c), above, if any, effective upon the one year anniversary of the
Retirement Date. (For the avoidance of doubt, all unvested stock options and
equity based awards held by Executive other than the restricted stock granted to
Executive during the Employment Term pursuant to Section 4(c), above, if any,
shall cease to vest effective as of the Retirement Date, unless otherwise
specified in the applicable stock plans, agreements and programs). In the event
8
Executive fails to retire and/or fails to comply in any respect with his
obligations under Section 6, above, then neither TCSC, SCM or any other Schwab
Entity shall have any obligation to make any such additional post-employment
payments or benefits to Executive but rather shall be entitled to reimbursement
by Executive in full for any such additional payments or benefits already made.
All payments and benefits provided to Executive pursuant to this Section 7(a)
shall be in lieu of any and all other compensation, benefits, perquisites and
claims of any kind, excepting only such additional amounts as may be required by
law.
(b) DEATH. The Employment Term shall terminate upon the death
of Executive. In such event, the sole liability (other than as provided in
Section 7(i) below) of TCSC, SCM and the other Schwab Entities shall be to pay
(or, as the case may be, provide) to Executive's estate: (i) Executive's Base
Salary through the last day of the month in which the death of Executive occurs,
(ii) any bonuses not yet paid to Executive, if any, under Sections 4(b) and
4(c), above, in respect of TCSC's fiscal year ended prior to Executive's death
and any pro-rated bonus payable to Executive under Sections 4(b) and 4(c),
above, as determined by the Compensation Committee of the Board in a manner
consistent with TCSC policies applicable to Executive Committee members, (iii)
all unreimbursed out-of-pocket business expenses of the type described in
Section 4(e) above, properly incurred and documented by Executive, (iv) all
unused vacation days accrued to the date of Executive's death, (v) full and
immediate vesting of all then outstanding stock options, restricted stock grants
and other equity-based awards, which, in the case of stock options, shall remain
exercisable by the legal representative of Executive's estate for one (1) year
following the date of Executive's death (but not beyond their original term) or
as otherwise specified in the applicable stock plans, agreements and programs,
and (vi) any other benefits to which Executive, his beneficiaries, or his estate
is entitled under applicable employee benefit plans in which Executive
participated including, but not limited to payments under any plan providing
life insurance benefits to Executive, his beneficiaries or his estate. All
payments and benefits provided to Executive pursuant to this Section 7(b) shall
be in lieu of any and all other compensation, benefits, perquisites and claims
of any kind, excepting only such additional amounts as may be required by law.
(c) DISABILITY. If Executive is deemed to be disabled within
the meaning of The Charles Schwab Disability Plan, then TCSC/SCM and/or
Executive may terminate Executive's employment and their obligations hereunder.
TCSC/SCM and/or Executive shall provide the other written notice of their intent
to terminate Executive's employment pursuant to this Section 7(c) at least
fourteen (14) days before the effective date of such termination. In the event
of such a termination, subject to and in consideration of Executive's execution
of a waiver of liability and general release of all claims against the Schwab
Entities and their respective officers, directors, employees and agents in a
form acceptable to TCSC and SCM, the sole liability (other than as provided in
Section 7(i) below) of TCSC, SCM and the other Schwab Entities shall be to pay
(or, as the case may be, provide) to Executive: (i) Executive's Base Salary
through the effective date of termination, (ii) any bonuses not yet paid to
Executive, if any, under Sections 4(b) and 4(c), above, in respect of TCSC's
fiscal year ended prior to Executive's termination and any pro-rated bonus
payable to Executive under Sections 4(b) and 4(c), above, as determined by the
Compensation Committee of the Board in a manner consistent with TCSC policies
applicable to Executive Committee members, (iii) all unreimbursed out-of-pocket
business expenses of the type described in Section 4(e) above incurred by
Executive prior to the effective date of Executive's termination, (iv) all
unused vacation days accrued up to and
9
including the effective date of Executive's termination, (v) full and immediate
vesting of all then outstanding stock options, restricted stock grants and other
equity-based awards, which, in the case of stock options, shall remain
exercisable by the Executive or the legal representative of Executive for one
(1) year following the date of Executive's termination (but not beyond their
original term) or as otherwise specified in the applicable stock plans,
agreements and programs, and (vi) any other benefits to which Executive is
entitled under applicable employee benefits plans in which he participated
including, but not limited to, payments under any plan providing disability
insurance benefits to Executive. In the event Executive fails to execute the
waiver of liability and general release described above, then neither TCSC, SCM
nor any other Schwab Entity shall have any obligation to make any such
post-employment payments or benefits to Executive, with the exception of those
payments or benefits described in subsections (i), (iii), (iv), (v) and (vi)
herein, but rather shall be entitled to reimbursement by Executive in full for
any such payments or benefits already made. All payments and benefits provided
to Executive pursuant to this Section 7(c) shall be in lieu of any and all other
compensation, benefits, perquisites and claims of any kind, excepting only such
additional amounts as may be required by law.
(d) TERMINATION OF EXECUTIVE FOR CAUSE. TCSC and SCM may
terminate Executive's employment and their obligations hereunder at any time
during the Employment Term for Cause (as defined below), provided that TCSC and
SCM have given Executive written notice of the event or events constituting
Cause and a reasonable opportunity (not to exceed fourteen (14) calendar days)
for Executive to cure such event or events, provided such event or events are
capable of being cured. In the event of such a termination, the sole liability
(other than as provided in Section 7(i) below) of TCSC, SCM and the other Schwab
Entities shall be to pay (or, as the case may be, provide) to Executive: (i)
Executive's Base Salary through the effective date of termination, (ii) payment
of all unreimbursed out-of-pocket business expenses of the type described in
Section 4(e) incurred by Executive prior to the effective date of Executive's
termination, (iii) all unused vacation days accrued up to and including the
effective date of Executive's termination, and (iv) any other benefits to which
Executive is entitled under applicable employee benefit plans in which he
participated. The effect of a termination under this Section 7(d) on Executive's
outstanding stock options, restricted stock grants and other equity-based awards
shall be determined in accordance with the applicable stock plans, agreements
and programs. For purposes of this Agreement, an event or occurrence
constituting "Cause" shall mean any one or more of the following:
(i) Executive's failure or refusal to substantially
perform his duties, responsibilities, agreements or covenants as set forth or
referenced herein, or Executive's continued neglect to perform such duties,
responsibilities, agreements or covenants to the full extent of his abilities
for reasons other than death, physical or mental incapacity;
(ii) Executive's gross negligence or willful misconduct in
the performance of his duties, responsibilities, agreements and covenants as set
forth or referenced herein, or conduct which is materially adverse, monetarily
or otherwise, to SCM or its shareholders;
(iii) A finding by a court or other governmental body that
an act or acts of Executive constituted a felony or other crime involving theft
or fraud under the laws of
10
the United States or any state thereof, or any other event that would operate as
a statutory disqualification under applicable securities laws, rules or
regulations;
(iv) Executive's violation of federal or state laws or
regulations, or Executive's violation of the regulations of any self-regulatory
organization, and a good faith determination by the Co-Chief Executive Officers
of TCSC that the continued employment of Executive would be seriously
detrimental to TCSC, SCM or their respective businesses;
(v) Executive's refusal, unwillingness or failure to
substantially comply with compliance or risk management rules, policies,
directions and/or restrictions of SCM, Schwab or TCSC, or Executive's refusal,
unwillingness or failure to substantially comply with human resources rules,
policies, directions and/or restrictions of SCM, Schwab or TCSC relating to
Approved Optionsharassment and/or discrimination, as such rules, policies, directions and/or
restrictions are and/or may be established by SCM, Schwab or TCSC from time to
time;
(vi) An uncurable loss by Executive of any license or
registration that is necessary for Executive to perform the duties of SCM
President, or the imposition by a self-regulatory organization of special
supervision or other special requirements as prerequisites for maintaining any
license or registration that is necessary for Executive to perform the duties of
SCM President, or the commission of any act or occurrence of any event that
could result in the statutory disqualification of Executive from being employed
or otherwise associated with a broker-dealer; or
(vii) a material breach by Executive of this Agreement.
(e) TERMINATION OF EXECUTIVE WITHOUT CAUSE. TCSC and SCM may
terminate the employment of Executive and their obligations hereunder at any
time during the Employment Term without Cause upon not less than fourteen (14)
days written notice to Executive. In the event of such a termination, subject to
and in consideration of Executive's execution of a waiver of liability and
general release of all claims against the Schwab Entities and their respective
officers, directors, employees and agents in a form acceptable to TCSC and SCM
AND Executive's full compliance with the restrictions and covenants set forth in
Section 6, above, the sole liability (other than as provided in Section 7(i)
below) of TCSC, SCM and the other Schwab Entities shall be to pay (or, as the
case may be, provide) to Executive: (i) Executive's Base Salary for the
three-year period immediately following the effective date of Executive's
termination, payable at TCSC/SCM's option in a lump sum discounted to present
value by a compounded six percent (6%) interest rate or in substantially equal
installments biweekly, from which TCSC/SCM shall withhold and deduct in either
event all applicable federal, state and city income, social security and
disability taxes as required by applicable law, (ii) an additional $10 million,
(iii) any bonuses not yet paid to Executive, if any, under Sections 4(b) and
4(c), above, in respect of TCSC's fiscal year ended prior to Executive's
termination and any pro-rated bonus payable to Executive under Sections 4(b) and
4(c) above, calculated by the Compensation Committee of the Board in a manner
consistent with TCSC policies applicable to Executive Committee members; (iv) an
amount equivalent to three years of bonuses payable to Executive under Section
4(b) above, based on Executive's target bonus levels under the plans described
in Sections 4(b) above, (v) continued vesting of all of Executive's then
outstanding stock options, restricted stock grants and other equity-based awards
for the three-year period commencing
11
on the effective date of Executive's termination (TCSC agrees that
notwithstanding any provision in the applicable stock plans, agreements or
programs to the contrary regarding when a vested stock option may be exercised,
Executive shall be treated as having his employment terminated on the third
anniversary of the date of termination permitting him to exercise any vested
stock options for up to three (3) years and three (3) months following the
effective date of Executive's termination under this Section 7(e), and Executive
acknowledges and agrees that any such exercise by him more than three (3) months
after the effective date of his termination shall preclude the treatment of any
such stock option as an incentive stock option for tax purposes), (vi)
continuation of the medical, dental and life insurance coverage provided to
Executive immediately prior to the effective date of Executive's termination for
the three-year period commencing on the effective date of Executive's
termination, at the end of which period Executive shall be entitled to group
health continuation coverage in accordance with Section 4980B of the Code or
other benefits equivalent thereto; (vii) payment of all unreimbursed
out-of-pocket business expenses of the type described in Section 4(e) incurred
by Executive prior to the effective date of Executive's termination, (viii) all
unused vacation days accrued up to and including the effective date of
Executive's termination, and (ix) any other benefits to which Executive is
entitled under applicable employee benefit plans in which he participated. In
the event Executive fails to execute the waiver of liability and general release
described above and/or fails to comply in any respect with his obligations under
Section 6, above, then neither TCSC, SCM nor any other Schwab Entity shall have
any obligation to make any such post-employment payments or benefits to
Executive, with the exception of those payments or benefits described in
subsections (vii), (viii) and (ix) herein, but rather shall be entitled to
reimbursement by Executive in full for any such payments or benefits already
made. All payments and benefits provided to Executive pursuant to this Section
7(e) shall be in lieu of any and all other compensation, benefits, perquisites
and claims of any kind, excepting only such additional amounts as may be
required by law.
(f) TERMINATION BY EXECUTIVE WITH GOOD REASON. Executive may
resign his employment with TCSC and SCM with Good Reason (as defined below),
provided that Executive has given TCSC and SCM written notice of the event or
events constituting Good Reason and a reasonable opportunity (not to exceed
fourteen (14) calendar days) for TCSC and SCM to cure such event or events,
provided such event or events are capable of being cured. In the event of such a
resignation, subject to and in consideration of Executive's execution of a
waiver of liability and general release of all claims against the Schwab
Entities and their respective officers, directors, employees and agents in a
form acceptable to TCSC and SCM AND Executive's full compliance with the
restrictions and covenants set forth in Section 6, above, the sole liability
(other than as provided in Section 7(i) below) of TCSC, SCM and the other Schwab
Entities shall be to pay (or, as the case may be, provide) to Executive: (i)
Executive's Base Salary for the three-year period immediately following the
effective date of Executive's resignation, payable at TCSC/SCM's option in a
lump sum discounted to present value by a compounded six percent (6%) interest
rate or in substantially equal installments biweekly, from which TCSC/SCM shall
withhold and deduct in either event all applicable federal, state and city
income, social security and disability taxes as required by applicable law, (ii)
an additional $10 million, (iii) any bonuses not yet paid to Executive, if any,
under Sections 4(b) and 4(c), above, in respect of TCSC's fiscal year ended
prior to Executive's resignation and any pro-rated bonus payable to Executive
under Sections 4(b) and 4(c) above, calculated by the Compensation Committee of
the Board in a manner consistent with TCSC policies applicable to Executive
12
Committee members; (iv) an amount equivalent to three years of bonuses payable
to Executive under Section 4(b) above, based on Executive's target bonus levels
under the plans described in Section 4(b) above, (v) continued vesting of all of
Executive's then outstanding stock options, restricted stock grants and other
equity-based awards for the three-year period commencing on the effective date
of Executive's resignation (TCSC agrees that notwithstanding any provision in
the applicable stock plans, agreements or programs to the contrary regarding
when a vested stock option may be exercised, Executive shall be treated as
having his employment terminated on the third anniversary of the date of
termination permitting him to exercise any vested stock options for up to three
(3) years and three (3) months following the effective date of Executive's
termination under this Section 7(f), and Executive acknowledges and agrees that
any such exercise by him more than three (3) months after the effective date of
his termination shall preclude the treatment of any such stock option as an
incentive stock option for tax purposes), (vi) continuation of the medical,
dental and life insurance coverage provided to Executive immediately prior to
the effective date of Executive's resignation for the three-year period
commencing with the effective date of resignation, at the end of which period
Executive shall be entitled to group health continuation coverage in accordance
with Section 4980B of the Code or other benefits equivalent thereto; (vii)
payment of all unreimbursed out-of-pocket business expenses of the type
described in Section 4(e) incurred by Executive prior to the effective date of
Executive's termination, (viii) all unused vacation days accrued up to and
including the effective date of Executive's termination, and (ix) any other
benefits to which Executive is entitled under applicable employee benefit plans
in which he participated. In the event Executive fails to execute the waiver of
liability and general release described above and/or fails to comply in any
respect with his obligations under Section 6, above, then neither TCSC, SCM nor
any other Schwab Entity shall have any obligation to make any such
post-employment payments or benefits to Executive, with the exception of those
payments or benefits described in subsections (vii), (viii) and (ix) herein, but
rather shall be entitled to reimbursement by Executive in full for any such
payments or benefits already made. All payments and benefits provided to
Executive pursuant to this Section 7(f) shall be in lieu of any and all other
compensation, benefits, perquisites and claims of any kind, excepting only such
additional amounts as may be required by law. For purposes of this Agreement, an
event or occurrence constituting "Good Reason" shall mean any one or more of the
following:
(i) a material breach of this Agreement by TCSC or SCM;
(ii) a substantial diminution in the title, duties or
responsibilities of Executive as SCM President, or a substantial diminution in
the titles of Executive as Vice Chairman and/or Executive Vice President of
TCSC;
(iii) the relocation of Executive's principal place of
business to a location more than 25 miles from Jersey City, New Jersey without
his consent, which shall not be unreasonably withheld;
(iv) (A) a reduction in Executive's bonus opportunity as
described in Section 4(c) above, and Exhibits B and C hereto, or (B) the failure
of the Board to recommend for approval the SCM Incentive Plan for the Employment
Term at the 2003 annual meeting of TCSC's stockholders, or the taking of any
action by the Board, after having recommended for approval the SCM Incentive
Plan for the Employment Term at the 2003 annual meeting of
13
TCSC's stockholders, to rescind such recommendation; (C) the failure of the
Board to recommend or present for approval the SCM Incentive Plan for the
Employment Term at the 2003 annual meeting of TCSC's stockholders, or (D) the
failure of a majority of TCSC's stockholders to approve the SCM Incentive Plan
at that 2003 annual meeting;
(v) a reduction in Executive's Base Salary or bonus
opportunity as described in section 4(b), above, and Exhibit A hereto, unless
such reduction similarly affects all other Vice-Chair level members of the
Executive Committee of TCSC; or
(vi) the failure by TCSC or SCM to obtain the express
written assumption of this agreement by an successor to TCSC or SCM.
(g) RESIGNATION BY EXECUTIVE. Executive may resign from his
employment without Good Reason during the Employment Term and effective upon
fourteen (14) days written notice to TCSC and SCM. In the event of such a
resignation, subject to and in consideration of Executive's execution of a
waiver of liability and general release of all claims against the Schwab
Entities and their respective officers, directors, employees and agents in a
form acceptable to TCSC and SCM AND Executive's full compliance with the
restrictions and covenants set forth in Section 6, above, the sole liability
(other than as provided in Section 7(i) below) of TCSC, SCM and the other Schwab
Entities shall be to pay (or, as the case may be, provide) to Executive: (i)
Executive's Base Salary for the one-year period immediately following the
effective date of Executive's resignation, payable at TCSC/SCM's option in a
lump sum discounted to present value by a compounded six percent (6%) interest
rate or in substantially equal installments biweekly, from which TCSC/SCM shall
withhold and deduct in either event all applicable federal, state and city
income, social security and disability taxes as required by applicable law, (ii)
continuation of the medical, dental and life insurance coverage provided to
Executive immediately prior to the date of Executive's resignation for the
one-year period immediately following the effective date of resignation, at the
end of which period Executive shall be entitled to group health continuation
coverage in accordance with Section 4980B of the Code or other benefits
equivalent thereto, (iii) payment of all unreimbursed out-of-pocket business
expenses of the type described in Section 4(e) incurred by Executive prior to
the effective date of Executive's resignation, (iv) all unused vacation days
accrued up to and including the effective date of Executive's resignation; and
(v) any other benefits to which Executive is entitled under applicable employee
benefit plans in which is participated. The effect of a resignation under this
Section 7(g) on Executive's outstanding stock options, restricted stock grants
and other equity-based awards shall be determined in accordance with the
applicable stock plans, agreements and programs. In the event Executive fails to
execute the waiver of liability and general release described above and/or fails
to comply in any respect with his obligations under Section 6, above, then
neither TCSC, SCM nor any other Schwab Entity shall have any obligation to make
any such post-employment payments or benefits to Executive, with the exception
of those payments or benefits described in subsections (iii), (iv) and (v)
herein, but rather shall be entitled to reimbursement by Executive in full for
any such payments or benefits already made. All payments and benefits provided
to Executive pursuant to this Section 7(g) will be in lieu of any and all other
compensation, benefits, perquisites and claims of any kind, excepting only such
additional amounts as may be required by law.
14
(h) RESIGNATION OF POSITIONS. Upon the effective date of any
termination or resignation of Executive's employment for any reason whatsoever,
Executive shall be deemed to have resigned from any and all offices and
directorships then held with SCM, Schwab, TCSC, and/or any of their respective
affiliates or subsidiaries.
(i) RETIREMENT ELIGIBILITY. TCSC acknowledges and agrees that
Executive will have satisfied the requisite criteria for retirement eligibility
under the terms and conditions of the SchwabPlan Retirement Savings and
Investment Plan, the TCSC Deferred Compensation Plan, the TCSC 1992 Stock
Incentive Plan, and the TCSC 2001 Stock Incentive Plan as of June 1, 2002,
because he was actively employed by SCM and TCSC on that date. As a result,
Executive is entitled to have all options granted become fully exercisable and
all restricted shares granted become fully vested, but only if such retirement
occurs at least two (2) years after the date of grant. For purposes of this
retirement eligibility, his "retirement" shall be deemed to be on the date on
which his base salary payments cease, calculated assuming the company does not
elect to pay the Executive in a lump sum. Nothing in this Agreement shall limit
Executive's ability to "retire" for purposes of these plans upon any termination
of his employment and his "retiring" for purposes of these plans shall not
affect his entitlement to any severance resulting from his termination of
employment.
8. EFFECT OF TERMINATION OF EMPLOYMENT. Upon the termination
of Executive's employment, the parties' obligations under this Agreement shall
terminate, except for those rights and obligations set forth in Sections 6, 7,
8, 10, 11, 12, 16, 20 and 23 hereof, which shall survive such termination. The
benefits and payments provided to Executive under Section 7 are expressly in
lieu of any eligibility for or entitlement to severance benefits under any
severance plan or policy of SCM, Schwab, TCSC, or any of their respective
affiliates or subsidiaries.
9. REPRESENTATIONS AND WARRANTIES.
(a) TCSC and SCM represent and warrant that they have the
requisite corporate power to enter into this Agreement and to carry out the
obligations hereunder. The execution and delivery of this Agreement have been
duly authorized by all necessary corporate action on the part of TCSC and SCM.
(b) Executive represents and warrants that he has the
legal capacity to enter into this Agreement, is under no employment contract,
bond, confidentiality agreement, non-competition agreement, or any other
obligation that would violate or be in conflict with the terms and conditions of
this Agreement or encumber his performance of duties assigned to him by SCM or
TCSC. Executive further represents and warrants that he has not signed or
committed to any employment or consultant duties or other obligations that would
divert his full attention or conflict with from the duties assigned to him by
SCM or TCSC under this Agreement.
10. INDEMNIFICATION. Executive shall be indemnified by TCSC
for his acts or omissions occurring during the Employment Term to the same
extent TCSC indemnifies all other employees at the Executive Committee level.
11. GOVERNING LAW/JURISDICTION. Any and all actions arising
out of this Agreement or Executive's employment with TCSC and/or SCM, including,
without limitation, tort and
15
contract claims, shall be governed by and construed in accordance with the laws
of the State of New Jersey, without reference to the choice of law principles
thereof. Subject to Section 12 below, any and all actions arising out of this
Agreement or Executive's employment with TCSC and/or SCM shall be brought only
and heard in the state and federal courts of the State of New Jersey, and
Executive hereby irrevocably submits to the exclusive jurisdiction of such
courts. Executive hereby irrevocably consents to the jurisdiction and proper
venue of any such courts in any such suit, action or proceeding and irrevocably
waives any claim that any such suit, action or proceeding brought in any such
court has been brought in an inconvenient forum. EXECUTIVE AND SCM AND TCSC EACH
HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY.
12. DISPUTE RESOLUTION.
(a) Except as otherwise provided herein, Executive and
TCSC and SCM agree that any and all disputes between Executive and SCM, Schwab,
TCSC and/or any of their respective affiliates or subsidiaries, or their
respective employees, officers, directors, agents or assigns, which relate to,
arise out of or pertain to Executive's employment, separation from employment or
the construction or interpretation of this Agreement shall be submitted to and
resolved by final and binding arbitration. The arbitration shall be instead of
any civil litigation; this means that Executive, SCM and TCSC are each WAIVING
ANY RIGHTS TO A JURY TRIAL. Executive and TCSC and SCM expressly understand and
agree that consistent with the foregoing, no party to this Agreement shall
institute a proceeding in any court or administrative agency to resolve a
dispute arising under or in connection with this Agreement.
(b) Executive and SCM and TCSC expressly understand and
agree that there will be no court or jury trial of disputes between them arising
out of or in connection with this Agreement, Executive's employment or
separation from employment, including, but not limited to, claims under federal,
state or local laws prohibiting employment discrimination. The only disputes not
covered by this agreement to arbitrate are actions for injunctive relief brought
by either the Executive or SCM, Schwab, TCSC and/or any of their respective
affiliates or subsidiaries concerning the rights and obligations set forth in
Section 6 above. Furthermore, claims for unemployment insurance benefits, for
workers' compensation insurance benefits, and for benefits under any
ERISA-governed employee benefit plan(s), shall be resolved pursuant to the
claims procedures under such benefit plans.
(c) All disputes between the parties which are covered by
the agreement to arbitrate and which cannot be resolved within two weeks after a
demand for direct negotiation between the parties shall be settled exclusively
by binding arbitration in Newark, New Jersey under the Commercial Arbitration
Rules of the American Arbitration Association before a panel of three (3)
neutral arbitrators selected under said Rules. The arbitrators shall award the
prevailing party its attorneys fees, arbitration costs, expert fees, and all
other costs and expenses incurred in connection with the arbitration, including
any fees and costs incurred in confirming and enforcing the award. In the event
a dispute concerning or arising out of this Agreement involves regulatory
matters or compliance with applicable securities laws, rules or regulations, SCM
and/or TCSC or Executive at its or his option may elect to pursue arbitration of
all issues between the parties under the arbitration rules of the National
Association of Securities Dealers ("NASD") or the New York Stock Exchange
("NYSE") in accordance with the applicable rules. Executive and SCM and TCSC
expressly understand and agree that any limitations in the NASD
16
or NYSE arbitration rules excluding statutory discrimination from the scope of
the arbitration clause shall not apply and that it is the parties' desire to
include statutory discrimination claims within the scope of arbitration.
Executive and SCM and TCSC knowingly and voluntarily agree to this arbitration
provision. A decision in arbitration shall be final and binding.
(d) Judgment may be entered on the arbitrators' award in
any court having jurisdiction. The arbitration filing fee expenses shall be
borne according to the rules of the NASD or NYSE, as the case may be; provided
that if and only if the arbitration involves statutory discrimination claims,
SCM and/or TCSC shall pay all types of costs that are unique to arbitration,
such as the arbitrator's fees.
13. NONWAIVER OF RIGHTS OF PARTIES. No right or power of any
party under this Agreement shall be deemed to have been waived by any act or
conduct on the part of such party, or by any neglect to exercise that right or
power, or by any delay in so doing; and, except as otherwise provided herein,
every right or power shall continue in full force and effect until specifically
waived or released by an instrument in writing executed by such party.
14. HEADINGS. The headings of the several sections of this
Agreement are inserted for reference only and not intended to affect the meaning
or interpretation of this Agreement.
15. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive, his heirs, executors, administrators,
distributes, devisees and legatees and to the benefit of TCSC, SCM and their
successors and assigns. With respect to the obligations, representations and
warranties of Executive under Sections 6 and 9(b) this Agreement shall also
inure to the benefit of all of the Schwab Entities and their respective
successors and assigns.
16. ASSIGNMENT. This Agreement is a personal contract and the
rights and interests of Executive herein may not be sold, transferred, assigned,
pledged or hypothecated. The rights and obligations of TCSC, SCM and the other
Schwab Entities, as applicable, hereunder shall be binding upon and run in favor
of the successors and permitted assigns of TCSC, SCM and/or the other Schwab
Entities, as applicable. This Agreement may not be assigned by either party
without the prior written consent of the other; except that, without such prior
written consent, TCSC and/or SCM may assign their rights and obligations
hereunder to any entity owned, directly or indirectly, by SCM, Schwab or TCSC on
the condition that TCSC remains liable to perform the obligations of any such
assignee in the event such assignee fails to so perform. TCSC and/or SCM shall
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of its business and/or
assets of TCSC and/or SCM, as the case may be, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that TCSC
and/or SCM is required to perform it.
17. ENTIRE AGREEMENT. This Agreement, together with its
Exhibits, constitutes the entire agreement among the parties hereto with respect
to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties with respect thereto. No amendment, modification or rescission of this
Agreement shall be effective untilunless set forth in writing signed by Executive, on
the one hand, and by the President & Co-Chief Executive Officer of TCSC and the
Executive Vice-President, General Counsel and Corporate Secretary of TCSC on the
other hand.
17
18. NO MITIGATION. Executive shall not be required to mitigate
the amount of any payment provided for under this Agreement by seeking other
employment or otherwise, and compensation earned from such employment or
otherwise shall not reduce the amounts otherwise payable under this Agreement.
19. FURTHER ASSURANCES. Each party hereto shall, whenever and
as often as reasonably requested to do so by any party hereto, do, execute,
acknowledge, and deliver, or cause to be done, executed, acknowledged,
delivered, filed or recorded, all such further acts, deeds, assignments,
transfers, conveyances, powers of attorney, instruments, and assurances as such
other party may reasonably request in order to carry out fully the terms and
provisions of this Agreement.
20. SEVERABILITY AND ENFORCEABILITY. If any one or more of the
provisions contained in this Agreement should be held to be invalid, illegal or
unenforceable as to any party or in any jurisdiction, then such provision or
provisions only shall be deemed invalid, illegal or unenforceable without
affecting or otherwise impairing the enforceability of the remaining provisions
contained herein and without affecting or otherwise impairing the enforceability
of the same provisions in this Agreement with respect to any other party or in
any other jurisdiction. If any of the covenants contained in Sections 6 or 12 of
this Agreement are held to be invalid, illegal or unenforceable for any reason,
the parties agree that the judicial body making such determination shall have
the power to reform that provision only to the limited extent required to make
the provision enforceable, and as reformed, such provision shall then be
enforceable and shall be enforced.
21. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which shall be an original and all of which together shall
constitute one and the same instrument.
22. LEGAL FEES. SCM and/or TCSC shall promptly pay, or if
Executive has already paid such amounts reimburse Executive for all properly
documented attorneys fees and expenses, including disbursements, reasonably
incurred by Executive in connection with the review and negotiation of this
Agreement, subject to a maximum of $25,000.
23. NOTICES. Any notice or other communication to be given
hereunder by any party to another shall be in writing and delivered to the
following addresses personally, by facsimile transmission, by postage prepaid
registered or certified mail, or by a national overnight carrier:
(a) Schwab Capital Markets, L.P. and The Charles Schwab
Corporation:
David S. Pottruck
President & Co-Chief Executive Officer
The Charles Schwab Corporation
120 Kearny Street
San Francisco, Ca 94108
Facsimile No.: (415) 636-5431
18
with copies to:
Carrie E. Dwyer, Esq.
Executive Vice President, General Counsel
and Corporate Secretary
The Charles Schwab Corporation
120 Kearny Street
San Francisco, Ca 94108
Facsimile No.: (415) 667-3596
and
Lawrence B. Rabkin, Esq.
Howard, Rice, Nemerovski, Canady, Falk &
Rabkin, A Professional Corporation
3 Embarcadero Center, 6th Floor
San Francisco, CA 94111
Facsimile: 415/217-5910
Executive: Lon Gorman
____________________________________________
____________________________________________
____________________________________________
Facsimile No.: (___) __________
with a copy to:
Charles J. Conroy, Jr.
Milbank, Tweed, Hadley & McCloy, LLP
1 Chase Manhattan Plaza
New York, NY 10005
Facsimile No.: (212) 530-5219
or such other persons or such other addresses as may be designated in writing by
the parties, by a notice given as aforesaid.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
19
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
Schwab Capital Markets L.P.:
By:
___________________________________________________
Its:
__________________________________________________
The Charles Schwab Corporation:
By:
___________________________________________________
Its:
__________________________________________________
EXECUTIVE:
______________________________________________________
Lon Gorman
20
EXHIBIT A-1
THE CHARLES SCHWAB CORPORATION
CORPORATE EXECUTIVE BONUS PLAN
(AS AMENDED FEBRUARY 27, 2002)
I. PURPOSES
The purposes of this Corporate Executive Bonus Plan (the "Plan") are:
(a) to provide greater incentive for key executives continually to
exert their best efforts on behalf of The Charles Schwab Corporation
(the "Company") by rewarding them for services rendered with
compensation that is in addition to their regular salaries; (b) to
attract and to retain in the employ of the Company persons of
outstanding competence; and (c) to further the identity of interests of
such employees with those of the Company's stockholders through a
strong performance-based reward system.
II. FORM OF AWARDS
1. Incentive compensation awards under this Plan shall be generally
granted in cash, less any applicable withholding taxes; provided
that the Committee may determine, from time to time, that all or
a portion of any award may be paid in the form of an equity based
incentive, including without limitation stock options, restricted
shares, or outright grants of Company stock. The number of shares
and stock options granted in any year, when added to the number
of shares and stock options granted for such year pursuant to the
Company's Annual Executive Individual Performance Plan, shall in
no event exceed .5% of the outstanding shares of the Company.
III. DETERMINATION OF AWARDS
1. Incentive awards for participants other than the President/
Co-Chief Executive Officer shall be determined quarterly
according to a Corporate Performance Payout Matrix that shall be
adopted at the beginning of each year by the Compensation
Committee of the Board of Directors (the "Committee"). The
Executive Committee Corporate Performance Payout Matrix shall be
based on corporate performance criteria to be selected by the
Committee from among the following: revenue growth, operating
revenue growth, consolidated pretax profit margin, consolidated
pretax operating margin, customer net new asset growth,
stockholder return, return on net assets, earnings per share,
return on equity, and return on investment. Awards shall be
defined by reference to a target percentage of base salary
determined, from time to time, by the Committee. Payouts
described in this subsection shall be calculated and paid on a
quarterly basis, based on year-to-date performance compared with
the comparable period in the preceding year.
2. With respect to payments made pursuant to Section III.1, the
amount of base salary included in the computation of incentive
awards shall not exceed 250% of the base salary in effect for the
officer holding the same or substantially similar position on
March 31, 2000. In addition, for all participants other than the
President/Co-Chief Executive Officer, (i) the maximum target
incentive percentage shall be 100% of base salary and (ii) the
maximum award shall be 400% of the participant's target award.
3. Incentive awards for the President/Co-Chief Executive Officer
shall be determined in accordance with a Corporate Performance
Payout Matrix that shall be adopted at the
beginning of each year by the Committee. The Committee shall
determine the President/Co-Chief Executive Officer's award each
year, up to the maximum amount defined by the matrix for a given
level of performance. This matrix may, if the Committee deems
appropriate, differ from that described in Subsection III.1.
However, the performance criteria shall be the same as referred
to above. Payouts for the President/Co-Chief Executive Officer
shall be made on an annual basis, based on the Company's results
for the full year.
4. The maximum award payable for the President/Co-Chief Executive
Officer under this plan shall be no more than 500% of his target
incentive award. The target incentive amount shall be determined
each year by the Committee, but may not exceed 500% of base
salary. The amount of base salary taken into account for purposes
of computing the target incentive award may not exceed 250% of the
President/Co-Chief Executive Officer's base salary as of March 31,
2000.
5. Notwithstanding anything to the contrary contained in this Plan,
the Committee shall have the power, in its sole discretion, to
reduce the amount payable to any Participant (or to determine that
no amount shall be payable to such Participant) with respect to
any award prior to the time the amount otherwise would have become
payable hereunder. In the event of such a reduction, the amount of
such reduction shall not increase the amounts payable to other
participants under the Plan.
IV. ADMINISTRATION
1. Except as otherwise specifically provided, the Plan shall be
administered by the Committee. The Committee members shall be
appointed pursuant to the Bylaws of the Company, and the members
thereof shall be ineligible for awards under this Plan for
services performed while serving on said Committee.
2. The decision of the Committee with respect to any questions
arising as to interpretation of the Plan, including the
severability of any and all of the provisions thereof, shall be,
in its sole and absolute discretion, final, conclusive and
binding.
V. ELIGIBILITY FOR AWARDS
1. Awards under the Plan may be granted by the Committee to those
employees who have contributed the most in a general way to the
Company's success by their ability, efficiency, and loyalty,
consideration being given to ability to succeed in more important
managerial responsibility in the Company. This is intended to
include the President/Co-Chief Executive Officer, Vice Chairmen,
Executive Vice Presidents, and from time to time, certain other
officers having comparable positions.
No award may be granted to a member of the Company's Board of
Directors except for services performed as an employee of the
Company.
2. Except in the event of retirement, death, or disability, to be
eligible for an award an employee shall be employed by the
Company as of the date awards are calculated and approved by the
Inland Revenue,Committee under this Plan.
3. For purposes of this Plan, the term "employee" shall include an
employee of a corporation or other business entity in which this
Company shall directly or indirectly own 50% or more of the
outstanding voting stock or other ownership interest.
VI. AWARDS
1. The Committee shall determine each year the payments, if any, to
be made under the Plan. Awards for any calendar year shall be
granted not later than the end of the first quarter of the
calendar year, and payments pursuant to the Plan shall be made as
soon as practicable after the close of each calendar quarter (or,
in the case of the President/Co-Chief Executive Officer, as soon
as practicable after the close of each calendar year).
2. Upon the granting of awards under this Plan, each participant
shall be informed of his or her award by his or her direct
manager and that such award is subject to the applicable
provisions of this Plan.
VII. DEFERRAL OF AWARDS
1. A participant in this Plan who is also eligible to participate in
The Charles Schwab Corporation Deferred Compensation Plan may
elect to defer payments pursuant to the terms of that plan.
VIII. RECOMMENDATIONS AND GRANTING OF AWARDS
1. Recommendations for awards shall be made to the Committee by the
Co-Chief Executive Officers, except that, with respect to the
President/Co-Chief Executive Officer, recommendations for awards
shall be made solely by the Chairman/Co-Chief Executive Officer.
2. Any award shall be made in the sole discretion of the Committee,
which shall take final action on any such amendment as are requiredaward. No person shall
have a right to obtain and maintainan award under this Plan until final action has
been taken granting such award.
IX. AMENDMENTS AND EXPIRATION DATE
While it is the present intention of the Company to grant awards
annually, the Committee reserves the right to modify this Plan from
time to time or to repeal the Plan entirely, or to direct the
discontinuance of granting awards either temporarily or permanently;
provided, however, that no modification of this plan shall operate to
annul, without the consent of the beneficiary, an award already granted
hereunder; provided, also, that no modification without approval of Inland Revenue pursuant to Schedule 9 to
the
Taxes Act.
17stockholders shall increase the maximum amount which may be awarded as
hereinabove provided.
X. MISCELLANEOUS
All expenses and costs in connection with the operation of this Plan
shall be borne by the Company and no part thereof shall be charged
against the awards anticipated by the Plan. Nothing contained herein
shall be construed as a guarantee of continued employment of any
participant hereunder. This Plan shall be construed and governed in
accordance with the laws of the State of California.
EXHIBIT A-2
THE CHARLES SCHWAB CORPORATION
ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE PLAN
(AMENDED AND RESTATED, EFFECTIVE JANUARY 1, 2001)(AS AMENDED FEBRUARY 27, 2002)
I. PURPOSES
The purposes of this Annual Executive Individual Performance Plan (the
"Plan") are: (a) to provide greater incentive for key executives to
continually exert their best efforts on behalf of The Charles Schwab
Corporation (the "Company") by rewarding them for services rendered
with incentive compensation that is in addition to their regular
salaries; (b) to attract and to retain in the employ of the Company
persons of outstanding competence; and (c) to further align the
interests of such employees with those of the Company's stockholders
through a strong performance-based reward system.
II. FORM OF AWARDS
Incentive compensation awards under this Plan shall be generally
granted in cash, less any applicable withholding taxes; provided that
the Committee may determine, from time to time, that all or a portion
of any award may be paid in the form of an equity based incentive,
including without limitation stock options, restricted shares, or
outright grants of Company stock. The number of shares and stock
options granted in any year, when added to the number of shares and
stock options granted for such year pursuant to the Company's Corporate
Executive Bonus Plan, shall in no event exceed .5% of the outstanding
shares of the Company.
III. DETERMINATION OF AWARDS
1. Incentive awards for participants shall be determined
annually. The participants in the Plan shall be the executive
officers who are selected by the Compensation Committee of the
Board of Directors (the "Committee") to participate in the
Charles Schwab Corporate Executive Bonus Plan (the "CEB Plan"),
except that the President and Co-Chief Executive Officer shall
not be eligible to participate in the Plan. Payouts under the CEB
Plan are defined by reference to a target percentage of base
salary determined, from time to time, by the Committee and
pursuant to a payout matrix, adopted from time to time by the
Committee, that uses netcorporate performance criteria, to be
selected by the Committee from among the following: revenue
growth, andoperating revenue growth, consolidated pretax profit
margin, as the
financial performance criteria to determine awards.consolidated pretax operating margin, customer net new
asset growth, stockholder return, return on net assets, earnings
per share, return on equity, and return on investment. Each
participant shall have a bonus target under the Plan equal to
such Participant's bonus target under the CEB Plan, multiplied by
160%. Payouts described in this subsection shall be calculated
and paid on an annual basis.
2. With respect to payments made pursuant to Section III.1, the
amount of base salary included in the computation of incentive
awards pursuant to the CEB Plan shall not exceed 250% of the base
salary in effect for the officer holding the same or
substantially similar position on March 31, 2000. In addition,
(i) the maximum target incentive percentage pursuant to the CEB
Plan shall be 100% of base salary and (ii) the maximum award
pursuant to the CEB Plan shall be 400% of the participant's
target award.
3. Notwithstanding anything to the contrary contained in this Plan,
the Committee shall have the power, in its sole discretion, to
reduce the amount payable to any Participant (or to determine
that no amount shall be payable to such Participant) with respect
to any award prior to the time the amount otherwise would have
become payable hereunder. In the event of such a reduction, the
amount of such reduction shall not increase the amounts payable
to other participants under the Plan.
IV. ADMINISTRATION
1. Except as otherwise specifically provided, the Plan shall be
administered by the Committee. The Committee members shall be
appointed pursuant to the Bylaws of the Company, and the members
thereof shall be ineligible for awards under this Plan for
services performed while serving on said Committee.
2. The decision of the Committee with respect to any questions
arising as to interpretation of the Plan, including the
severability of any and all of the provisions thereof, shall be,
in its sole and absolute discretion, final, conclusive and
binding.
V. ELIGIBILITY FOR AWARDS
1. Awards under the Plan shall be granted by the Committee to those
employees who are eligible to participate in the CEB Plan. This
is intended to include the Vice Chairmen, Executive Vice
Presidents, and other officers having comparable positions.
No award may be granted to a member of the Company's Board of
Directors except for services performed as an employee of the
Company.
2. Except in the event of retirement, death, or disability, to be
eligible for an award an employee must be employed by the Company
as of the date awards are calculated and approved by the
Committee under this Plan.
3. For purposes of this Plan, the term "employee" shall include an
employee of a corporation or other business entity in which this
Company shall directly or indirectly own 50% or more of the
outstanding voting stock or other ownership interest.
VI. AWARDS
1. The Committee shall determine each year the payments, if any, to
be made under the Plan. Awards for any calendar year shall be
granted not later than the end of the first quarter of the
calendar year, and payments pursuant to the Plan shall be made as
soon as practicable after the close of the calendar year.
2. Upon the granting of awards under this Plan, each participant
shall be informed of his or her award by his or her direct
manager and that such award is subject to the applicable
provisions of this Plan.
VII. DEFERRAL OF AWARDS
1. A participant in this Plan who is also eligible to participate in
The Charles Schwab Corporation Deferred Compensation Plan may
elect to defer payments pursuant to the terms of that plan.
VIII. RECOMMENDATIONS AND GRANTING OF AWARDS
1. Recommendations for awards shall be made to the Committee by the
Co-Chief Executive Officers.
2. Any award shall be made in the sole discretion of the Committee,
which shall take final action on any such award. No person shall
have a right to an award under this Plan until final action has
been taken granting such award.
IX. AMENDMENTS AND EXPIRATION DATE
While it is the present intention of the Company to grant awards
annually, the Committee reserves the right to modify this Plan from
time to time or to repeal the Plan entirely, or to direct the
discontinuance of granting awards either temporarily or permanently;
provided, however, that no modification of this plan shall operate to
annul, without the consent of the beneficiary, an award already granted
hereunder; provided, also, that no modification without approval of the
stockholders shall increase the maximum amount which may be awarded as
hereinabove provided.
X. MISCELLANEOUS
All expenses and costs in connection with the operation of this Plan
shall be borne by the Company and no part thereof shall be charged
against the awards anticipated by the Plan. Nothing contained herein
shall be construed as a guarantee of continued employment of any
participant hereunder. This Plan shall be construed and governed in
accordance with the laws of the State of California.
EXHIBIT B
SUMMARY OF SCM INCENTIVE PLAN
SCHWAB CAPITAL MARKETS INCENTIVE ("SCM INCENTIVE")
As a participant in the SCM Incentive Plan, Mr. Gorman will be eligible for
annual incentive compensation on the basis of the performance of Schwab Capital
Markets and other related capital markets businesses under his authority. The
SCM Incentive will fund on the basis of the financial performance of SCM as
measured by the actual adjusted pretax contribution margin for the combined
performance of all capital markets-related businesses that report to Mr. Gorman.
The target SCM Incentive for Mr. Gorman is $3 million and the maximum SCM
Incentive payable to Mr. Gorman is $7 million. No bonus payment from this plan
will be made unless SCM attains the threshold of 80% of its financial goals and
Mr. Gorman is employed by SCM on the date of payment.
SCM performance vs. plan and the resulting SCM Incentive, if any, will be
pro-rated for performance between levels ( e.g., performance at 110% of goal
would result in a bonus of between $3 million and $4 million, as calculated by
Corporate Finance based on the matrix in Exhibit C (which matrix may be revised
each year as specified in Section 4(c) of the Agreement)) and for partial years
worked by Mr. Gorman.
FORM OF SCM INCENTIVE PAYMENT
The first $1 million in annual SCM Incentive payable under this Plan, if any,
shall be paid entirely in cash. Any amount earned above $1 million will be paid
50% in cash and 50% in restricted shares (e.g., if an SCM Incentive of $3
million is payable, $2 million will be paid in cash and $1 million in restricted
shares).
The restricted share grant amount will be determined by TCSC on the date of
grant, so that the total dollar value of restricted shares is converted into
TCSC shares by dividing the total dollar value by the average of the high and
low price of TCSC stock on the date of grant. E.g., if a $1 million value is to
be granted in restricted shares, an average TCSC stock price of $13 on the date
of grant, would result in a restricted share grant of 76,923 shares (rounded).
Restricted shares grants in lieu of cash incentive will vest following the below
vesting schedule:
TIME ANNUAL CUMULATIVE
PERIOD VESTING % VESTING %
________ _________ __________
1st year 0% 0%
2nd year 50% 50%
3rd year 50% 100%
TIMING OF SCM INCENTIVE PAYMENT
The cash portion of any SCM Incentive will be paid by the end of February of
each year, based on performance for the prior year (e. g., incentive for year
2002 will be paid in February, 2003), unless Mr. Gorman elects to defer the
payment under Schwab's Officer Deferred Compensation Plan. Assuming that the
cash portion of any SCM Incentive is determined prior to the February
Compensation Committee meeting of TCSC Board of Directors, then any restricted
grant portion of the SCM Incentive payable to Mr. Gorman will be granted at the
February meeting of the Committee. In 2002, this meeting was held February 27.
SCM INCENTIVE PLAN SUBJECT TO TCSC STOCKHOLDER APPROVAL IN 2003
The SCM Incentive Plan (and any payments payable to Mr. Gorman under said plan)
with respect to any calendar year after 2002 are expressly contingent upon the
approval by a majority of TCSC's stockholders at TCSC's 2003 annual meeting, of
a proposal to approve the potential SCM Incentive payments which may be payable
to Mr. Gorman under said plan. If a majority of TCSC's stockholders fails to
approve such a proposal at the TCSC 2003 annual meeting the SCM Incentive Plan
shall be null and void and of no further force and effect with respect to any
calendar year after 2002.
EXHIBIT C
SCM INCENTIVE MATRIX ILLUSTRATION
SCM BONUS
BONUS PAID AS:
_______________________________________
IF ACTUAL ADJUSTED PRETAX PAYOUT AS % OF SHARES
CONTRIBUTION MARGIN IS: SCM PERFORMANCE SCM BONUS TARGET BONUS CASH SHARES $ VALUE $13.00*
___________________________________________________________________________________________________________________________
LESS THAN $111.1MM <80% $ 0 0% $ 0 $ 0 0
$111.1 MM 80% $1,000,000 33% $1,000,000 $ 0 0
$124.9 MM 90% $2,000,000 67% $1,500,000 $ 500,000 38,462
$138.8 MM 100% $3,000,000 100% $2,000,000 $1,000,000 76,923
$156.2 MM 112.5% $4,000,000 133% $2,500,000 $1,500,000 115,385
$173.5 MM 125% $5,000,000 167% $3,000,000 $2,000,000 153,846
$190.9 MM 137.5% $6,000,000 200% $3,500,000 $2,500,000 192,308
$208.2 MM 150%** $7,000,000 233% $4,000,000 $3,000,000 230,769
* In this example, the dollar amount represents the number of shares granted by dividing the shares' dollar value by the
appropriate SCH stock price.
**150% or greater; the plan payout is capped at $7 million
The plan is based on a SCM 2002 revenue goal of $437 million and an adjusted
2002 pretax contribution margin goal of $138.8 million, or 31.77%. These figures
do not include AMPS. The adjusted pretax contribution margin goal is derived by
starting with an unadjusted pretax contribution margin of 34.3% and subtracting
the cost of equity applied to the equity capital maintained in SCM and the
equity capital required by the Securities Lending business. At the end of 2001,
SCM's equity capital was $66.9 million and the equity implied in the Securities
Lending business was $7.5 million (i.e., loan balance of $602 million multiplied
by an equity requirement of 1.25%). TCSC's cost of equity at the end of 2001 was
about 15%; thus, the pretax contribution margin has been adjusted down by $11.2
million, or 15% of $74.4 million (i.e., $66.9 million plus $7.5 million).
The adjusted actual pretax contribution margin calculated to determine the
achieved performance measure will also include an adjustment to cover the cost
of equity required to support any acquisition by SCM.
EXHIBIT D
EXECUTIVE'S INVENTIONS
[TO BE INSERTED]
SUPPLEMENTAL AGREEMENT
This Supplemental Agreement (the "Agreement") is entered into as of August 30,
2002 by and among the Charles Schwab Corporation, a Delaware corporation
("TCSC"), Schwab Capital Markets, L.P., a New Jersey Limited partnership ("SCM")
and Lon Gorman, an individual ("Executive").
WHEREAS TCSC, SCM and Executive entered into an Executive Employment Agreement
(the "Employment Agreement") in July, 2002 but inadvertently failed to fill in
the Effective Date for the Employment Agreement when executing it; and
WHEREAS, TCSC, SCM and Executive wish to avoid any misunderstanding and confirm
the Effective Date of the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual premises set forth herein, and
for other good and valuable consideration, the parties hereby agree as follows:
AGREEMENT
1. DEFINED TERMS
Any term used in this Agreement that is defined in the Employment
Agreement shall have the same meaning as set forth in the Employment
Agreement.
2. EFFECTIVE DATE
The parties acknowledge and agree that the Effective Date of the
Employment Agreement is July 16, 2002.
3. NO OTHER ADDITION OR DELETION
Except as set forth herein, no addition or deletion to the Employment
Agreement has been made.
4. OTHER PROVISIONS
Sections 11, 12, 13, 14, 15(other than second sentence), 16, 17, 19,
20(other than reference to Sections 6 and 12) , 21, 22(other than
reference to $25,000) and 23 of the Employment Agreement shall be
deemed to be set forth in this Agreement mutatis mutandis.
IN WITNESS WHEREOF, the parties have executed the Agreement as of the date first
written above.
Schwab Capital Markets, L.P.:
By: _____________________
Its: _____________________
The Charles Schwab Corporation:
By: _____________________
Its: _____________________
By: _____________________
Carrie E. Dwyer
Its: _____________________
Executive Vice-President,
General Counsel and Corporate Secretary
Executive:
__________________________
Lon Gorman
THE CHARLES SCHWAB CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
MONDAY,FRIDAY, MAY 7, 20019, 2003
2:00 P.M. (PST)
THE PALACE HOTEL
2 NEW MONTGOMERYNOB HILL MASONIC CENTER
1111 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA
THE ANNUAL MEETING OF STOCKHOLDERS WILL BE BROADCAST OVER THE INTERNET. FOR
INFORMATION ABOUT THE REAL-TIME WEBCAST, VISIT WWW.SCHWABEVENTS.COM.
- --------------------------------------------------------------------------------
[CHARLES SCHWAB================================================================================
THE CHARLES SCHWAB CORPORATION
LOGO APPEARS 101 MONTGOMERY STREET
HERE]
SAN FRANCISCO, CA 94104 PROXY
- --------------------------------------------------------------------------------________________________________________________________________________________
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
ON MAY 7, 2001.9, 2003.
The shares of stock you hold in your account, as well as any shares you hold
under The Charles Schwab Corporation Dividend Reinvestment and Stock Purchase
Plan, The SchwabPlan Retirement Savings and Invest-ment Plan, the 401(k) Plan
and ESOP of United States Trust Company of New York and Affiliated Companies,
and/or the U.S. Trust Corporation Employee Stock PurchaseInvestment Plan will be voted as you
specify on the reverse side.
IF YOU SIGN AND RETURN YOUR PROXY CARD AND NO CHOICE IS SPECIFIED, YOUR SHARES
WILL BE VOTED "FOR" ITEMS 1, 2 3, 4 AND 4.5, AND "AGAINST" Item 6.
By signing the proxy, you revoke all prior proxies and appoint Charles R.
Schwab and David S. Pottruck, and each of them, with full power of
substitution, to vote your shares on the matters shown on the reverse side and
any other matters which may come before the Annual Meeting and all
adjournments.
SEE REVERSE FOR VOTING INSTRUCTIONS.
COMPANY #
CONTROL #
THERE ARE THREE WAYS TO VOTE YOUR SHARESPROXY
YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR
SHARES IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY
CARD.
VOTE BY TELEPHONEPHONE -- TOLL FREE -- 1-800-240-6326 -- QUICK**QUICK *** EASY*EASY ****IMMEDIATE
o Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week, until 12:00 p.m., Central time,(CT), on May 4, 2001.8, 2003.
o You will be prompted to enter your 3-digit Company Number, and your 7-digit
Control Number which(these numbers are located above.on the proxy card) and the last
4-digits of the U.S. Social Security Number or Tax Identification Number for
this account to obtain your records and create an electronic ballot. If you
do not have a U.S. SSN or TIN please leave blank.
o Follow the simple instructions the voice provides you.
VOTE BY INTERNET -- HTTP://WWW.EPROXY.COM/SCH/ -- QUICK*QUICK *** EASY ***EASY***IMMEDIATE
o Use the Internet to vote your sharesproxy 24 hours a day, 7 days a week, until
12:00 p.m., Central time,(CT) on May 4, 2001.8, 2003.
o You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which(these numbers are located aboveon the proxy card) and the last
4-digits of the U.S. Social Security Number or Tax Identification Number for
this account to obtain your records and create an electronic proxy.
o You willballot. If you
do not have the option to receive all future materials via the Internet.a U.S. SSN or TIN please leave blank.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to The Charles Schwab Corporation, c/o Shareowner
ServicesSM,Services(SM), P.O. Box 64873, St. Paul, MN 55164-0873.
Account Number
__________________________
IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD.
Please detach here________________________________________________________________________________
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3, 4, 5 AND 4.AGAINST
ITEM 6.
1. Election of directors:
01 Donald G. FisherNancy H. Bechtle 02 Anthony M. FrankC. Preston Butcher
03 JeffreyDavid S. MaurerPottruck 04 Arun SarinGeorge P. Shultz
[ ] Vote FOR all nominees (except as marked)
[ ] Vote WITHHELD
(except as marked) from all nominees
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR
ANY INDICATED NOMINEE, ______
WRITE THE NUMBER(S) OF THE ___________________________
NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)|______| [___________________________]
PLEASE FOLD HERE
- --------------------------------------------------------------------------------
2. Approval of AmendmentTo approve an amendment to Certificate of Incorporationthe 2001
Stock Incentive Plan regarding grants
to increase
the number of authorized shares of common stock.non-employee directors. [ ]For] For [ ] Against [ ] Abstain
3. Approval of 2001 StockTo approve the Long-Term Incentive
Plan. [ ]For] For [ ] Against [ ] Abstain
4. ApprovalTo approve the annual bonus provisions
contained in Charles R. Schwab's
amended Employment Agreement. [ ] For [ ] Against [ ] Abstain
5. To approve an incentive plan for
Lon Gorman. [ ] For [ ] Against [ ] Abstain
6. To vote on a stockholder proposal
regarding the expensing of Annual Executive Individual Performance Plan, as amended.stock
options. [ ]For] For [ ] Against [ ] Abstain
WHEN THIS PROXY IS PROPERLY EXECUTED YOUR SHARES WILL BE VOTED: (1) AS DIRECTED;
(2) FOR EACH PROPOSAL IF NO DIRECTION IS GIVEN;GIVEN, FOR PROPOSALS 1, 2, 3, 4 AND 5, AND AGAINST
PROPOSAL 6; AND (3) ACCORDING TO THE BEST JUDGMENT OF CHARLES R. SCHWAB AND
DAVID S. POTTRUCK IF ANY OTHER MATTER COMES BEFORE THE ANNUAL MEETING FOR A
VOTE.
Address Change? Mark Box [ ] Indicate changes below:
Date ------------------------------------------_______________________________________________________
____________________________________________________________
Signature(s) in Box
Please sign exactly as your name(s) appear on the proxy card. If held in joint
tenancy, all persons must sign. Trustees, administrators, etc., should include
title and authority. Corporations should provide full name of corporation and
title of authorized officer signing the proxy.
THE CHARLES SCHWAB CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
FRIDAY, MAY 9, 2003
2:00 P.M. (PST)
NOB HILL MASONIC CENTER
1111 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA
THE ANNUAL MEETING OF STOCKHOLDERS WILL BE BROADCAST OVER THE INTERNET. FOR
INFORMATION ABOUT THE REAL-TIME WEBCAST, VISIT WWW.SCHWABEVENTS.COM.
================================================================================
THE CHARLES SCHWAB CORPORATION
101 MONTGOMERY STREET
SAN FRANCISCO, CA 94104 PROXY
________________________________________________________________________________
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
ON MAY 9, 2003.
The shares of stock you hold in your account, as well as any shares you hold
under the U.S. Trust Corporation 401(k) Plan will be voted as you specify on the
reverse side.
IF YOU SIGN AND RETURN YOUR PROXY CARD AND NO CHOICE IS SPECIFIED, YOUR SHARES
WILL BE VOTED "FOR" ITEMS 1, 2 3, 4 AND 5, AND "AGAINST" Item 6.
By signing the proxy, you revoke all prior proxies and appoint Charles R.
Schwab and David S. Pottruck, and each of them, with full power of
substitution, to vote your shares on the matters shown on the reverse side and
any other matters which may come before the Annual Meeting and all
adjournments.
The voting procedures that apply to shares attributable to your interest in the
U.S. Trust Corporation 401(k) plan are explained in the enclosed materials.
SEE REVERSE FOR VOTING INSTRUCTIONS.
COMPANY #
CONTROL #
THERE ARE THREE WAYS TO VOTE YOUR PROXY
YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR
SHARES IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY
CARD.
VOTE BY PHONE -- TOLL FREE -- 1-800-240-6326 -- QUICK *** EASY *** IMMEDIATE
o Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week, until 12:00 p.m., (CT), on May 8, 2003.
o You will be prompted to enter your 3-digit Company Number, your 7-digit
Control Number (these numbers are located on the proxy card) and the last
4-digits of the U.S. Social Security Number or Tax Identification Number for
this account. If you
do not have a U.S. SSN or TIN please enter 4 zeros.
o Follow the simple instructions the voice provides you.
VOTE BY INTERNET -- HTTP://WWW.EPROXY.COM/SCH-EMPL/ -- QUICK *** EASY ***
IMMEDIATE
o Use the Internet to vote your proxy 24 hours a day, 7 days a week, until
12:00 p.m., (CT) on May 8, 2003.
o You will be prompted to enter your 3-digit Company Number, your 7-digit
Control Number (these numbers are located on the proxy card) and the last
4-digits of the U.S. Social Security Number or Tax Identification Number for
this account to obtain your records and create an electronic ballot. If you
do not have a U.S. SSN or TIN please leave blank.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to The Charles Schwab Corporation, c/o Shareowner
Services(SM), P.O. Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD.
________________________________________________________________________________
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3, 4, 5 AND AGAINST
ITEM 6.
1. Election of directors:
01 Nancy H. Bechtle 02 C. Preston Butcher
03 David S. Pottruck 04 George P. Shultz
[ ] Vote FOR all nominees [ ] Vote WITHHELD
(except as marked) from all nominees
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR
ANY INDICATED NOMINEE, WRITE THE NUMBER(S) OF THE ___________________________
NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) [___________________________]
PLEASE FOLD HERE
- --------------------------------------------------------------------------------
2. To approve an amendment to the 2001
Stock Incentive Plan regarding grants
to non-employee directors. [ ] For [ ] Against [ ] Abstain
3. To approve the Long-Term Incentive
Plan. [ ] For [ ] Against [ ] Abstain
4. To approve the annual bonus provisions
contained in Charles R. Schwab's
amended Employment Agreement. [ ] For [ ] Against [ ] Abstain
5. To approve an incentive plan for
Lon Gorman. [ ] For [ ] Against [ ] Abstain
6. To vote on a stockholder proposal
regarding the expensing of stock
options. [ ] For [ ] Against [ ] Abstain
WHEN THIS PROXY IS PROPERLY EXECUTED YOUR SHARES WILL BE VOTED: (1) AS DIRECTED;
(2) IF NO DIRECTION IS GIVEN, FOR PROPOSALS 1, 2, 3, 4 AND 5, AND AGAINST
PROPOSAL 6; AND (3) ACCORDING TO THE BEST JUDGMENT OF CHARLES R. SCHWAB AND
DAVID S. POTTRUCK IF ANY OTHER MATTER COMES BEFORE THE ANNUAL MEETING FOR A
VOTE.
The proxy also constitutes your voting instructions to the Purchasing Agent
regarding shares held by the U.S. Trust Corporation 401(k) Plan. If you wish,
you may decline to provide any voting instructions for undirected shares by
checking the box immediately below.
[ ] I decline to provide any voting instructions at this time to the Purchasing
Agent regarding any undirected shares under the U.S. Trust Corporation
401(k) Plan. (Check here only if you wish to opt out of having your vote
applied pro rata to shares in the U.S. Trust Corporation 401(k) Plan for
which the Purchasing Agent receives no direction.)
Address Change? Mark Box [ ] Indicate changes below:
Date _______________________________________________________
____________________________________________________________
Signature(s) in Box
Please sign exactly as your name(s) appear on the proxy card. If held in joint
tenancy, all persons must sign. Trustees, administrators, etc., should include
title and authority. Corporations should provide full name of corporation and
title of authorized officer signing the proxy.