Allstate (ALL)

Other Principles of Executive Compensation

Expensing stock options

        Allstate began expensing stock options under the rules of the Statement of Financial Accounting Standard No. 123 effective with the awards first granted in 2003 using the Black-Scholes valuation model. Beginning with stock option awards made in 2005, the Company changed to a binomial lattice valuation model for expense recognition. A binomial lattice model is a widely used framework for calculating the fair value of an option using discounted cash flows with a flexible, iterative approach designed to capture the valuation impact of the unique aspects of employee stock options. The Company recognizes compensation cost associated with equity awards over the respective vesting periods of the awards, which is generally three or four years.

Discontinuation of Reload Options

        In 2004, we eliminated the reload provision as a feature for inclusion in stock option awards to executives for all future option awards, based in part on a recommendation from our outside compensation consultant. Reload provisions provide for the grant of a new option in an amount equal to the number of shares tendered in payment of the exercise price of an option. Reload options have an exercise price equal to the fair market value of Allstate common stock on grant date of the reload option, which is the date the original option is exercised. Reload options are subject to the same vesting terms and expiration date as the original option, however, the vesting schedule for the reload option commences one year after the date of grant. Option awards granted after 2003 do not include a reload provision.

Prohibition on repricing stock options

        Since Allstate's inception as a public company in 1993, we have never allowed the repricing of stock options. We formalized this practice in our 2001 Equity Incentive Plan which received shareholder approval in 2001 and which is being presented for re-approval at the 2006 annual meeting of shareholders. This is the only plan under which equity awards are currently made to employees.

Stock ownership requirement

        Because we believe strongly in linking the interests of management with those of our shareholders, we first instituted stock ownership goals in 1996 for executives at the vice president level and above. These goals were increased in 2004 to require these executives to own, within five years of the date the executive position is assumed, common stock worth a multiple of base salary:

Existing executives were given three years to reach the new levels of ownership.

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Deferred compensation plan

        The Company's Deferred Compensation Plan allows employees whose annual compensation exceeds the compensation limit under section 401(a)(17) of the Internal Revenue Code to defer all or part of their salary and/or annual incentive bonus award that exceeds that limit. In addition, the annual incentive bonus plan and the long-term incentive bonus plan contain maximum individual award opportunity limits. If an individual's award exceeds a limit, the amount in excess of the limit is automatically deferred under the Deferred Compensation Plan.

        Deferrals under the plan are credited with earnings, or are subject to losses, based on the results of the investment option or options selected by the participants. The investment options available under the Deferred Compensation Plan are the same options available under the Company's qualified defined contribution (401k) plan, except that Allstate stock is not an available option under the Deferred Compensation Plan. The available investment options include stable value, indexed bond, S&P 500, international equity and Russell 2000 funds. Under the Deferred Compensation Plan, deferrals are not actually invested in these funds, but instead are credited with earnings or losses based on the funds' investment experience, including the funds' netting of administration and investment expenses. The Deferred Compensation Plan is unfunded. All deferrals are part of the general funds of the Company and are subject to all of the risks of Allstate's business.

Limit on tax deductible compensation

        Under Section 162(m) of the Internal Revenue Code, Allstate cannot deduct compensation paid to any of the named executive officers in excess of $1,000,000 in any year if it is not performance-based as that term is defined in the Code. While we believe that performance-based compensation for our executives should always be emphasized, we balance this emphasis with our stated executive compensation goals to provide a program that attracts, retains and rewards the executive talent necessary for Allstate's success. Consequently, in any year we may authorize compensation in excess of $1,000,000 that does not meet the Section 162(m) requirement and may result in the loss of a tax deduction.

Tax gross up payments to executives

        As a general matter, we do not provide for tax gross up payments on personal benefits provided to executives. We have however, provided for tax gross up payments in the following limited circumstances. The first relates to the personal income tax preparation perquisite provided as part of the personal benefits paid to the Company's senior management. The total amount of the gross up payment made to executives on their personal income tax preparation benefit has been approximately $500 to $1,000 per year. The tax gross up preserves the value of this benefit for the executives. Second, we provided tax gross up payments to each of Messrs. Hale and Simonson in connection with their joining Allstate. Each received gross up payments on their relocation expenses and Mr. Hale received a gross up payment on his signing bonus. Absent these tax reimbursement payments, Messrs. Hale and Simonson would have incurred significant expenses in connection with their joining Allstate. Lastly, the Change of Control agreements provide for reimbursement on an after-tax basis of any excise taxes resulting from severance benefits paid under those agreements.

Personal benefits

        The types of personal benefits we provide to officers and named executive officers of Allstate are listed in a footnote to the "Other Annual Compensation" column of the Summary Compensation Table. In addition to the perquisites disclosed, other benefits are made available to officers and named executive officers in the same form as those offered to all employees without regard to their specific positions. We do not provide officers or executives with separate dining or other facilities, country club memberships,

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special medical or disability insurance coverage or individually owned life insurance policies, nor do we maintain real property for the exclusive use or enjoyment by officers or executives.

Other Principles of Executive Compensation

Expensing stock options

        Allstate began expensing stock options under the rules of the Statement of Financial Accounting Standard No. 123 effective with the awards first granted in 2003 using the Black-Scholes valuation model. Beginning with stock option awards made in 2005, the Company began using a lattice valuation model for expense recognition.

Prohibition on repricing stock options

        Since Allstate's inception as a public company in 1993, we have never allowed the repricing of stock options. We formalized this practice in our 2001 Equity Incentive Plan which received shareholder approval in 2001. This is the only plan under which equity awards to employees are currently made.

Stock ownership requirement

        Because we believe strongly in linking the interests of management with those of our shareholders, we first instituted stock ownership goals in 1996 for executives at the vice president level and above. These goals were revised in 2004 to require these executives to own, within five years of the date the executive position is assumed, common stock worth a multiple of base salary:

        Existing executives were given three years to reach the new levels of ownership.

Deferred compensation plan

        The Company's Deferred Compensation Plan allows employees whose annual compensation exceeds the compensation limit under section 401(a)(17) of the Internal Revenue Code to defer all or part of their salary and/or annual incentive bonus award that exceeds that limit. Deferrals are credited with interest based on the investment option or options selected by the participants. The investment options available under the Deferred Compensation Plan mirror the options available under the Company's qualified defined contribution plan, except that Allstate stock is not an available investment option under the Deferred Compensation Plan. The Plan is unfunded. All deferrals are part of the general funds of the Company and are subject to all of the risks of Allstate's business.

Limit on tax deductible compensation

        Under Section 162(m) of the Internal Revenue Code, Allstate cannot deduct compensation paid to any of the named executive officers in any year in excess of $1,000,000 if it is not performance-based as that term is defined in the Code. While we believe that performance-based compensation for our executives should always be emphasized, we balance this emphasis with our stated executive compensation goals to provide a program that attracts, retains and rewards the executive talent necessary for Allstate's success. Consequently, in any year we may authorize compensation in excess of $1,000,000 that does not meet the Section 162(m) requirement and may result in the loss of a tax deduction.

Personal benefits

        The types of personal benefits we provide to officers and named executive officers of Allstate are listed in a footnote to the "Other Annual Compensation" column of the Summary Compensation Table. In addition to the perquisites disclosed, other benefits are made available to officers and named executive

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officers in the same form as those offered to all employees without regard to their specific positions. We do not provide officers or executives with separate dining or other facilities, country club memberships, special medical or disability insurance coverage or individually-owned life insurance policies, nor do we maintain real property for the exclusive use or enjoyment by officers or executives.