AK Steel Holding (AKS)

Equity Awards

Another key component of an NEO’s annual compensation package is the grant of equity awards under the Company’s Stock Plan. Such grants may be in the form of stock option awards, restricted stock awards and/or performance-based equity awards in the form of performance shares.

A principal purpose of equity grants under the Company’s Stock Plan is to enhance the commonality of interests between management and the Company’s stockholders by linking executive compensation to the Company’s performance and to appreciation in the market price of the Company’s common stock. Equity grants also are intended to encourage executives to remain in the employ of the Company, as discussed below.

Equity Awards

Another key component of an NEO’s annual compensation package is the grant of equity awards under the Company’s Stock Plan. Until 2005, all such grants were in the form of stock options and/or restricted stock awards. In January 2005 the Board approved, upon the recommendation of the Committee and subject to the approval of the Company’s shareholders, a proposal to modify the Company’s Stock Plan to authorize the grant of performance-based equity awards in the form of performance shares. This proposed modification to the Stock Plan was submitted to and approved by the Company’s shareholders at the Company’s annual meeting held on May 17, 2005.

A principal purpose of equity grants under the Company’s Stock Plan is to enhance the commonality of interests between management and the Company’s stockholders by linking executive compensation to the Company’s performance and to appreciation in the market price of the Company’s common stock. Equity grants also are intended to encourage executives to remain in the employ of the Company, as discussed below.

Stock option awards

Stock options serve the purposes of the Stock Plan because they generally have a value for an Executive Officer only if the officer remains in the Company’s employment for the period required for the option to become exercisable, and then only if the market price of the Company’s stock increases above its price on the date the option was granted. This provides an incentive for the officer to remain employed by the Company and

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to take actions which, over time, are intended to enhance the value of the Company’s stock. The Company grants options only to key management employees, including the NEOs. The Committee typically determines and approves equity awards, including stock options, each year at its regularly-scheduled January meeting. For each NEO, this is part of the determination of the NEO’s overall compensation package for that year. All options granted to employees under the Stock Plan, including the NEOs, vest in three equal installments on the first, second and third anniversary of the grant date. Each option must be exercised within a ten-year period of its grant date. The Company has not had, and does not have, a policy or a practice of reloading options granted to its NEOs which have expired or been exercised.

Under the terms of the Stock Plan, the exercise price for a share of the Company’s common stock underlying an option may not be less than the fair market value of the Company’s stock on the date on which such option was granted. It has been the uniform practice of the Committee to establish an option exercise price equal to the fair market value of the underlying common stock. Under the terms of the Stock Plan, that fair market value is the average of the highest and lowest sales price for the Company’s common stock on the grant date (or if there were no sales of the Company’s common stock on the grant date, then the weighted average of the mean between the highest and lowest sales price for the Company’s common stock on the nearest preceding trading day during which there were sales of such stock). It is both the policy and practice of the Committee to only grant options to its employees, including its NEOs, as of the date of the meeting at which the grants were made. As noted above, this typically occurs at the regularly-scheduled January Board meeting. Generally, the Committee only grants options at a meeting other than the January meeting in a situation in which an employee is being promoted (e.g., to a new or higher key management position) or is first hired. Under those circumstances, the grant may occur at a meeting other than the regularly-scheduled January Board meeting and the grant date for the options still would be the date of the meeting at which the grant was approved. The exercise price for such options also still would be the fair market value of the Company’s common stock determined as described above under the terms of the Stock Plan. The Company has not had, and does not have, a policy or practice of backdating stock options. Neither the selection of Committee meeting dates nor option grant dates is timed in any way to try to maximize gain or manipulate the price of an option. Management does not have a role in determining the timing of option grants.

Restricted stock awards

The Committee typically determines and approves restricted stock grants each year at its regularly-scheduled January meeting. As in the case of options noted above, the exception to this standard award schedule would involve grants of restricted stock to someone promoted or hired during the year. Restricted stock generally has a value for an NEO only if the NEO remains in the Company’s employment for the period required for the stock to vest, thus providing an incentive for the NEO to remain in the Company’s employment.

Stock option and restricted stock award vesting

Historically, the restrictions on grants of common stock to the Company’s employees have lapsed over a five-year period, with 25% lapsing on the second anniversary of the grant date and an additional 25% lapsing on the third, fourth and fifth anniversaries of the grant date. All restricted stock grants to the NEOs in 2006 have such a vesting schedule. In July 2006, however, the Committee requested, as part of a routine review of compensation elements, that Mr. Johnston, the Committee’s executive compensation consultant, evaluate the vesting schedule for both options and restricted stock to determine if they were competitive and appropriate relative to the compensation programs of other similarly-situated companies. Mr. Johnston performed that evaluation and at the Committee’s October 2006 meeting provided comparative data of the vesting periods of other similarly-situated companies, including direct competitors of the Company. Based upon that comparative data, the Committee concluded that the vesting schedule for the Company’s option grants was competitive and appropriate and, therefore, should not be changed. With respect to the vesting schedule for the Company’s restricted stock grants, however, the Committee concluded that it would be more competitive and appropriate to shorten the vesting schedule. The Committee therefore recommended to the Board, and the Board approved at its

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October 19, 2006 meeting, that the vesting schedule for the Company’s restricted stock grants be changed starting with grants made in January 2007 to a three-year step period, vesting ratably on the first, second and third anniversaries of the grant. Therefore, pursuant to this action by the Board, the restricted stock grants made to the Company’s employees, including its NEOs, in January 2007 shall lapse with respect to one-third of the shares on the first anniversary of the date of the award, and with respect to an additional one-third of the shares on each of the second and third anniversaries of the date of the award. Absent further action by the Board, this vesting schedule also will be used in future years.

Performance shares awards

Performance share grants also are an important element of an NEO’s annual compensation package because they closely align the interests of the NEOs and the Company’s stockholders by directly linking how many shares, if any, ultimately are earned by an NEO to the performance of the Company. Each grant of performance shares is expressed as a target number of restricted shares of the Company’s common stock. The number of performance shares, if any, actually earned by and issued to the NEO under an award will be based upon the performance of the Company over a three-year performance period (the “Performance Period”). By way of example, the Performance Period applicable to the performance shares granted in January 2005 started on January 1, 2005 and will end on December 31, 2007. Depending upon the Company’s performance with reference to the performance categories described below, an NEO ultimately may earn from 0% to 150% of the target number of shares granted. The performance categories used to determine how many performance shares ultimately will be earned and issued are:

One half of the total target number of shares awarded may be earned based on the relative total shareholder return performance and the other half may be earned based on the Growth Rate performance. For each performance category, levels have been established to provide threshold, target and maximum payouts as follows:

If the threshold performance level is not achieved in a performance category as of the end of the Performance Period, then none of the target shares related to that category will be earned or issued. If at least the threshold is achieved in a performance category, then shares will be earned and issued in an amount equal to the number of the award’s target shares related to that category, multiplied by a percentage determined by a straight-line interpolation between the actual level of the Company’s performance and the above-stated payout percentages.

2006 Equity Grants to NEOs

The specific grants of stock options, restricted stock and performance shares made during 2006 to each of the NEOs are set forth in the Grants of Plan-Based Award Table beginning on page 37 of this Proxy Statement.

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