Pitney Bowes (PBI)

Description of and Reason for the 2006 Amendments

Performance-Based Compensation Requirements. Under Section 162(m) of the Code, no deduction is allowed for annual compensation in excess of $1 million paid by a publicly-traded corporation to its chief executive officer and the four other most highly-compensated officers (“Covered Employees”). Under this Code provision, however, there is no limitation on the deductibility of “performance-based” compensation. In general, to qualify as “performance-based” compensation (i) the compensation must be paid solely on account of the attainment of one or more pre-established objective performance goals; (ii) the performance goals under which compensation is paid must be established by a compensation committee comprised solely of two or more directors who qualify as “outside directors” for purposes of the exception; (iii) the material terms under which the compensation is to be paid must be disclosed to and subsequently approved by stockholders of the corporation; and (iv) the compensation committee must certify in writing before payment of the compensation that the performance goals and any other material terms were in fact satisfied. Regulations issued under Section 162(m) require that criteria used to establish business performance goals and the maximum payouts under a plan be determined and disclosed to stockholders as part of the plan approval process.

As a result of its review of the KEIP, the board concluded that the limitations established in 1996 did not reflect changes in competitive levels of compensation or changes in the company’s compensation design and structure since that time. Following this review, the board approved the 2006 Amendments to adjust the limits and maximum payouts under the KEIP and modify the criteria upon which performance-based objectives may be established. With the 2006 Amendments, the maximum annual payout a Covered Employee could receive under Annual Incentives was increased to $4,000,000 and the maximum payout a participant can receive for a cycle with respect to any CIU award was raised to $8,000,000. The Executive Compensation Committee may apply “negative discretion” to reduce awards under the KEIP, but may not increase awards above this maximum. Previously, the maximum amount payable to a Covered Employee for any fiscal year of the company for all grants under the KEIP was $5,000,000.

With the 2006 Amendments, “Performance Goals” under the KEIP are one or more objective performance goals, established by the Executive Compensation Committee at the time a grant is made, relating to the attainment of targets for one or any combination of the following criteria: operating income, income from continuing operations, revenues, return on stockholder equity, total stockholder return, stock price, return on operating assets, earnings per share, achievement of cost control, or free cash flow of the company or the subsidiary, division or department of the company for or within which the participant is primarily employed. Performance Goals also may consist of attainment of specified levels of company performance based upon one or more of the criteria described above relative to prior periods or the performance by other corporations. Performance Goals are set by the committee within the time period prescribed by Section 162(m) of the Code. The 2006 Amendments include all of the previous Performance Goals approved by stockholders and add “income from continuing operations” and “total stockholder return” to the permitted criteria upon which targets may be based.

The 2006 Amendments amend the change of control section of the KEIP to provide that grants under the KEIP will be subject to vesting upon a change of control but payments will be made in accordance with the provisions of the Senior Executive Severance Policy. Previously, upon a change of control, grants under the KEIP were vested whether or not the employee was terminated (a “single trigger” right to payment). By referencing the change of control provisions found in the Senior Executive Severance Policy, the 2006 Amendments provide that, upon a change of control, grants under the KEIP will be paid only upon a termination of employment without cause or a voluntary termination for good reason (a “double trigger” right to payment). In addition, the 2006 Amendments make appropriate changes to the plan in accordance with the requirements of Section 409A of the Code.

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