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Compensation of directors
Effective January 1, 2002, each non-employee director of the Company and Nortel Networks Limited elected to receive all compensation
for services rendered as a member of the board of directors of the Company and Nortel Networks Limited, any committees thereof, and as
board or committee chairperson, in the form of share units, instead of cash, under the Directors’ Deferred Share Compensation Plans
maintained by the Company and Nortel Networks Limited. The share units are settled a specified number of trading days following the release
of the Company’s financial results after the director ceases to be a member of the applicable board, and each share unit entitles the holder to
receive one common share of the Company. Effective January 1, 2004, each non-employee director of the Company and Nortel Networks
Limited was entitled to elect to receive fees in cash, in share units under the Directors’ Deferred Share Compensation Plans or in a combination
of cash and share units.
The compensation of directors is considered on a combined basis in light of the overall governance structure of the Company and Nortel
Networks Limited. Director compensation is set solely on an annual fee basis (paid quarterly in arrears) and fees are not paid for board or
committee meeting attendance. From January 1, 2002 to December 31, 2003, directors of the Company and Nortel Networks Limited, who
were not salaried employees of the Company or any of its subsidiaries, received an annual Nortel Networks Limited board retainer of $50,000,
an annual committee membership retainer of $12,500 (or $6,250 each for membership on the same committee of the boards of the Company
and Nortel Networks Limited) and, except as noted below, an annual committee chairperson fee of $7,500 (or $3,750 each for chairing the
same committee of the boards of the Company and Nortel Networks Limited). Effective July 25, 2002, the fee for the audit committee
chairperson was increased to $17,500 (or $8,750 for each audit committee of the Company and Nortel Networks Limited) in recognition of the
significant responsibilities assumed by the audit committee chairperson.
Annual directors’ fees were initially increased effective January 1, 2004, after having been essentially unchanged for the previous two year
period, as described above. However, in light of the challenges subsequently faced by the Company and Nortel Networks Limited, the boards
of directors in July 2004 decreased the annual directors’ fees back to the fees in effect prior to January 1, 2004. The boards of directors also
determined that the directors’ fees to be paid during the remainder of 2004 would be reduced so that the total amount of the directors’ fees paid
for 2004 would equal the amount of fees that would have been paid under the 2003 directors’ fee schedule. Accordingly, the net effect of these
determinations was that the directors’ fees paid to non-employee directors remain essentially unchanged since January 1, 2002.
Between January 1, 2004 to June 30, 2004, directors of the Company and Nortel Networks Limited, who were not salaried employees of the
Company or any of its subsidiaries, received an annual Nortel Networks Limited board retainer of $60,000 and an annual committee
membership retainer and, except as described below, an annual committee chairperson retainer of $12,500 (or $6,250 each for membership on
or chairing the same committee of the boards of the Company and Nortel Networks Limited). The fee for the audit committee chairperson was
$27,500 or $13,750 for each audit committee, in recognition of the significant responsibilities assumed by the audit committee chairperson.
The Company maintains, at its cost, life insurance for directors, who are not salaried employees of the Company and Nortel Networks
Limited. Such insurance is in an amount of Cdn$100,000 while a director and in an amount of Cdn$75,000 following retirement at or after age
65 or, at any lesser age after ten years of board membership (including Nortel Networks Limited board membership).
Directors entitled to the above remuneration are also reimbursed for reasonable travel and living expenses properly incurred by them in
attending any meetings of the boards of directors of the Company and Nortel Networks Limited or their committees or for performing services
as directors.
Effective January 1, 2004, amended share ownership guidelines adopted by the boards of directors of the Company and Nortel Networks
Limited require each non-chairman director to own, directly or indirectly, common shares of the Company having a fair market value of at
least $300,000 within five years from the earlier of the date he or she was first elected or appointed to the boards of directors of the Company
or Nortel Networks Limited. Share ownership guideline compliance must thereafter be maintained during an individual’s tenure as a director.
The chairman of the board must own, directly or indirectly, common shares of the Company having a fair market value of at least $1,600,000
within five years from the earlier of the date he or she was first appointed as chairman of the boards of directors of the Company or Nortel
Networks Limited. A newly elected director is required to elect to receive at least 50 percent of his or her annual compensation for serving as a
director of the Company and Nortel Networks Limited or, in the case of a newly appointed chairman of the board of directors, at least
50 percent of his or her annual compensation for serving as a director and as
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