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Paying for Performance

9/29/2006 8:00 PM Eastern

After weathering criticism for reaping lavish pay packages while its stock languished, Viacom Inc. said last Monday that it has revised chairman Sumner Redstone’s compensation agreement to one that more accurately reflects its stock performance.

The new agreement is similar to ones given to Viacom’s newest executives — CEO Philippe Dauman and senior vice president Thomas Dooley, who replaced former CEO Tom Freston earlier this month.

BIG PAY IN 2005

The move comes after Redstone and several other Viacom executives were criticized for their lavish compensation agreements in a year when the stock price fell more than 17%. In 2005, Redstone received total compensation of about $17.4 million from Viacom, including $5.8 million in salary and a $7.125 million bonus. Redstone also received a $7.125 million bonus from CBS that same year — Viacom split into two separate companies in January — pushing his total compensation above $24 million.

At the time, executives from both Viacom and CBS were criticized for their pay packages as well. In 2005, former Viacom CEO Tom Freston, who Redstone fired last month, received about $22.7 million in salary, bonuses and options. His counterpart at CBS, Les Moonves, received a similar package of $22.8 million.

Redstone’s biggest payday came in 2004, when he reaped about $56 million in a year when Viacom stock was down about 18%. Freston and Moonves each got about $52 million that year.

The new agreement comes after Dauman insisted on a compensation package that would be tied more closely to Viacom’s stock price. Viacom’s stock is down about 7% this year and its poor performance was one of the reasons for Freston’s departure.

At the Goldman Sachs Communacopia conference on Sept. 19, Dauman said that he and Dooley’s compensation is more performance-based than equity-based and has a lesser cash component than his predecessors’. According to both men’s five-year employment agreements, Dauman will receive $2 million in salary and a $7 million bonus, based on his ability to reach certain performance targets. Dauman will also receive stock options valued at about $12 million over eight years and performance-share units (PSUs) of $6 million annually — beginning in 2007 — also tied to Viacom’s stock-price performance. Dooley will receive an annual salary of $1.6 million, a bonus of $5.6 million (again based on performance targets) and $9.6 million in options that will vest over eight years.

SALARY TO DIP

According to the new arrangement, Redstone will see his annual salary drop to $1 million per year from its current $1.75 million and $1.3 million in deferred compensation will be eliminated.

Redstone’s target cash bonus under Viacom’s short-term incentive plan will be reduced from $6.1 million to $3.5 million per year. He will receive annual stock-option awards with a grant-date value of $3 million. In addition, Redstone will also receive PSUs with a grant date target value of $3 million, but the value of those units will depend on the total shareholder return of Viacom stock versus that of the Standard & Poor’s 500 Index.

Redstone also agreed to convert, effective Sept. 27, about $9.4 million in deferred compensation to stock options with a value of about $9.4 million. Those options will have a value equal to Viacom’s closing price on the conversion date and will vest over four years.

September