Norfolk, VA - April 21, 1995
Ms. Magda A. Ratajski
Vice President-Public Relations
If an inquiry from the press is received as a result of
distribution or publication of the attached (draft) Institutional
Shareholder Services, Inc. (ISS) analysis of Norfolk Southern's
Proxy Statement in which a recommendation against ratification of
the Corporation's Long-Term Incentive Plan is made, we should
respond orally by making the following points:
1. This proposal merely extends a plan, the principal features
of which have been approved twice before by NS shareholders,
that has helped generate an above-average return to our
shareholders.
2. The proposal would reserve less than 4% of the fully diluted
shares for incentive use which we believe is consistent with
both accepted corporate practice and prudent corporate
governance.
3. ISS's analysis of the proposal's potential "Wealth Transfer"
or cost is inflated and potentially misleading because it
assumes that in the future this plan would be administered
inconsistently with it's past administration. In the past,
two-thirds of the shares distributed under this plan were in
the form of stock options upon the exercise of which the
executive must pay the corporation the fair market value of
the shares at the time of award. ISS assumes that no future
awards would be in the form of fair market value options,
but instead would be in other forms which would require the
corporation to bear the full cost. This incorrect
assumption makes the proposal appear almost twice as costly
as it would be under the plan's past practice.
As additional background information, I have also included a copy
of our response to ISS. If you have any questions, please call.
The response may not be shared with third parties, nor should any
written follow-up to an inquiry be made, without first consulting
with the Finance and Law Departments.
/s/ William J. Romig
William J. Romig
Attachment
WJR/s
cc: J. S. Shannon
H. C. Wolf
D. M. Martin
J. G. Lane
W. A. Noell, Jr.
<PAGE>
April 19, 1995
Via Facsimile Transmission (301-718-2252)
Institutional Shareholder Services, Inc.
7200 Wisconsin Avenue, Suite 1001
Bethesda, Maryland 20814
Attention: Mr. Peter R. Gleason, Senior Analyst
Dear Mr. Gleason:
This refers to the facsimile copy of your letter and draft
analysis of certain information in the 1995 Proxy Statement of
Norfolk Southern Corporation. You indicate that, on the basis of
that analysis, ISS expects to recommend that its clients vote
against adoption of the proposed amendment of the Norfolk
Southern Corporation Long-Term Incentive Plan (Plan).
Although we disagree with ISS' recommendation concerning the
Plan, we appreciate your advising us of your position and
affording us an opportunity to respond generally to some parts of
the related portion of your letter; unfortunately, the deadline
you specified and the lack of detail concerning the methodology
employed by ISS did not provide us with an opportunity to
consider fully all of your analysis or other materials.
As a general proposition - and as pointed out in the Report of
the Compensation and Nominating Committee contained in the Proxy
Statement - we believe that a properly administered stock-based
management compensation program, such as the Plan, aligns the
interests of officers and other key employees with those of
stockholders generally; for instance, the Plan provides certain
incentives for optionees to hold options (rather than exercising
them early), and in certain cases officers enter into share
retention agreements pursuant to which they may not sell or
otherwise alienate shares of stock acquired under the Plan for a
period of up to 60 months. We believe it is inappropriate to
include these options, previously issued under a stockholder-
approved plan, in an analysis of the amendments.
In addition, such compensation programs have as one of their
principal purposes increasing total stockholder return - a goal
that is encouraged by managers' ownership of equity. Moreover,
as you note on page 9 of your analysis, total stockholder return
(compared with the total return of stocks in the S&P 500 Index)
is proposed to be one of three criteria for earnouts under the
performance-share feature of the Plan (a criterion that
incidentally would be defeated if the ISS recommendation is
followed).
Realizing such essentially stockholder-oriented objectives
requires the occasional infusion into the Plan of additional
shares of stock. We understand ISS' specific objection to the
proposed amendment to be the potentially dilutive effect of
adding the number of shares recommended by the Board. In that
connection, you point out on page 8 of your analysis that the
number of shares proposed to be reserved under the amendment is
less than 4% of fully diluted shares. We understand from our
compensation consultant that this 4% figure is well within the
mid-range of normative practice, using conventional and generally
accepted methodology.
However, of far more concern is the method by which you
apparently computed the cost to stockholders of the addition of
these shares to the Plan (roughly $62.00 per share). In the
fourth paragraph of your cover letter, you make the assumption
that shares will be issued in the most "costly" way (in the case
of our Plan, as performance shares or as restricted shares,
rather than as options). This assumption is repeated in
different words in the second full paragraph on page 9 of the ISS
analysis.
Our proxy statements make clear that this assumption is not
warranted - and even may be misleading - in Norfolk Southern's
case. First, we have not issued restricted shares to Plan
participants. Second, by far the largest number of Plan shares
have been awarded subject to options, the exercise price of which
is 100% of market on the date of grant.
Historically (from your letter, we understand ISS does not take
past grant patterns, even under the same Plan, into consideration
- - a procedure with which we do not agree) the number of
performance share units granted, i.e., the maximum number that
can be earned at the conclusion of a performance cycle in which
all performance standards under each criterion are met -
something that has not occurred since the inception of the
program - has been substantially less than the number of shares
subject to options.
Accordingly, it is difficult to credit what seems to be a pivotal
assumption of the ISS analysis. Even granting your assumptions,
however, the methodology used to calculate the "Potential Share-
holder Wealth Transfer" and the "Potential Voting Power Dilution"
appears to exaggerate the impact of the Plan. Your results are
inconsistent with Norfolk Southern's present market value in
excess of $8.5 billion.
Again, we appreciate the opportunity to comment.
Sincerely,
/s/ Dezora M. Martin
