Tokyo Electron Limited (TEL) announced that it recently decided to revise its dividend policy and executive compensation system in a manner to link dividend payments and executive compensation more closely to consolidated financial results. The company made the revision in order to further increase its corporate value and improve the transparency of its management.

1. Review of the Dividend Policy

TEL's dividend policy is to link dividend payments to business performance and revenues on an ongoing basis, and (partly because the Japanese Commercial Code stipulates that profits available for dividends shall be calculated on a non-consolidated basis) its basic policy for returning profits to shareholders is to maintain a payout ratio of around 20% based on non-consolidated financial results and to determine the dividend amount by taking consolidated financial results into consideration. However, considering the recent emphasis on consolidated financial results as an indicator of group management, TEL recently reached the conclusion that dividend policy should now be based on consolidated financial results.

Specifically, TEL's new dividend policy will be to aim for a payout ratio of around 20% based on consolidated net income for the current term, and starting with the fiscal year ending March 2006, TEL plans to pay interim and year-end dividends in accordance with its new dividend policy.

* The payout ratio refers to dividend payments as a percentage of net income.

2. Review of the Executive Compensation System

In the past, TEL has actively introduced incentive systems, such as compensation that varies according to business performance, and stock options linked to stock prices. However, TEL recently decided to revise its executive compensation system in order to link executive compensation more closely to consolidated net income and shareholder value and also improve the transparency of its management and enhance its competitive strength.

Under the new executive compensation system, payment of retirement allowances, which constitute part of the fixed compensation, will be abolished. In addition, executive compensation will be more closely linked to consolidated financial results and stock prices by clearly tying the portion of compensation that is linked to business performance to consolidated net income. With this shift, the new executive compensation system will consist of fixed monthly compensation, cash compensation linked to business performance (annual bonus), and stock compensation (discount stock options).

With this change, a greater percentage of compensation will be linked to business performance and stock prices. The executives will share with shareholders not only benefits from better business performance and higher stock prices, but also risks involved in declining business performance and falling stock prices. TEL firmly believes that greater incentives for better business performance and higher stock prices will be given to the executives.

1) Abolition of payment of retirement allowances for corporate directors, statutory auditors, and executive officers

TEL and its subsidiaries (excluding public share offering subsidiaries) have abolished payment of retirement allowances for corporate directors, statutory auditors, and executive officers at the end of the fiscal year ended March 2005. From the fiscal year ending March 2006, they will discontinue retirement allowances according to the term of office for said officers.

With the abolition of the system, for TEL's corporate directors and statutory auditors in office, retirement allowances will be calculated based on their term of office prior to the abolition in accordance with the internal regulations concerning executive retirement allowances. A resolution concerning these retirement allowances will be submitted to the annual general meeting of shareholders to take place in June of this year, and these retirement allowances will be paid upon the retirement of said corporate director or statutory auditor.

2) Tying performance-linked compensation to consolidated net income

TEL and its subsidiaries (excluding public share offering subsidiaries) will determine the total portion of compensation for corporate directors, statutory auditors and executive officers that is linked to business performance with 3% of consolidated net income as its limit, thus clarifying the correlation between the two (see Figure 1). As described above, compensation linked to consolidated performance consists of an annual bonus (not paid to statutory auditors) and discount stock options, and plans call for the ratio of the former to the latter to be approximately 2:1.

The purpose of discount stock options is to introduce restricted stock (free issuance of TEL's restricted stock), which is offered as stock-based incentive compensation in the United States and other countries. Since this is difficult to implement under the current legal system, however, subscription rights that have similar effects will be granted instead. They enable their holder to exercise their rights at 1 yen per share.

Taking into consideration the significance of the new system as a medium- to long-term plan, it is assumed that executives and statutory auditors will be prohibited from exercising their rights for around three years after their issuance.

With the introduction of the new system, a resolution concerning free issuance of subscription rights will be submitted to the annual general meeting of shareholders to take place in June of this year. Details will be announced as soon as they are finalized.