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Components of Compensation

Base Salary

Base salaries for executives are determined based upon job responsibilities, level of experience, individual performance, comparisons to the salaries of executives in similar positions obtained from market surveys, internal comparisons, and competitive data obtained from consultants and staff research. The goal for the base salary component is to compensate executives at a level which approximates the median salaries of individuals in comparable positions and markets. The Compensation Committee approves all salary increases for executive officers. No base salary increases for 2003 were approved for Messrs. Priory, Fowler, Brace, Osborne or Blackburn or for Dr. Shaw. Mr. Priory received a base salary increase effective February 1, 2002, and, in connection with his election as President and Chief Operating Officer, Mr. Fowler received a base salary increase effective December 1, 2002, both as reflected in the proxy statement for the 2003 annual meeting, resulting in total base salary in 2003 for each of Messrs. Priory and Fowler being greater than their respective total base salary in 2002. Mr. Anderson does not receive a base salary.

Annual Incentives

Annual cash incentives are provided to executives to promote the achievement of performance objectives of Duke Energy and the executive's particular business unit. In 2003, the Compensation Committee administered the Duke Energy Corporation Executive Short-Term Incentive Plan that permitted the award of annual cash incentives to executive officers, including the Named Executive Officers set forth in the Summary Compensation Table under "Compensation" below. Target incentive opportunities for executives under the plan are established as a percentage of base salary, using survey data for individuals in comparable positions and markets and internal comparisons. Incentive amounts are intended to provide competitive incentive amounts for individuals in comparable positions and markets when target performance is achieved. Incentive amounts may equal up to 200% of target when outstanding financial results are achieved.

Awards under the Executive Short-Term Incentive Plan to Named Executive Officers, except for the award to Dr. Shaw, were calculated based upon Duke Energy's earnings per share (EPS) and cash flow before dividends and asset sales (Cash Flow) results. Dr. Shaw's award was calculated based upon Duke Energy's EPS and Cash Flow and Duke Power's earnings before interest and taxes (EBIT) and economic profit (EP) results. The Compensation Committee established minimum, target and maximum performance levels for each performance goal during the first quarter of 2003, and Named Executive Officers could receive up to 200% of their short-term incentive targets. Target payment opportunities for each performance goal were equally weighted. No payment associated with the EPS goal was made to the Named Executive Officers based on 2003 EPS performance. Cash Flow performance for 2003 resulted in payments of 100% of bonus targets to the Named Executive Officers, except for Dr. Shaw. In determining the bonuses for Named Executive Officers, the Compensation Committee excluded certain transactions with respect to the EPS and Cash Flow goals that were in the best interests of Duke Energy, its employees and its shareholders. However, since exclusion of these transactions had no impact on the performance results or bonus payments made to Named Executive Officers with respect to these goals, such action by the Compensation Committee resulted in no loss of a tax deduction under Section 162(m) of the Internal Revenue Code. Performance for 2003 for the combination of EPS, Cash Flow, and Duke Power EBIT and EP goals resulted in a payment of 64% of bonus target to Dr. Shaw. In determining Dr. Shaw's bonus, the Compensation Committee excluded certain transactions with respect to the Duke Power EP goal, which resulted in a payment for this goal which otherwise would not have been made if the transactions had been included, in order to achieve internal alignment with other employees who had Duke Power EP as a performance goal and for whom such transactions were excluded for purposes of determining incentive payments. It is not expected that this action by the Compensation Committee will result in the loss of a tax deduction under Section 162(m) of the Internal Revenue Code. Mr. Anderson does not have an annual cash incentive opportunity.

Awards under the Executive Short-Term Incentive Plan to executive officers, other than the Named Executive Officers, were determined on the basis of a combination of: (1) EPS measures, (2) Cash Flow measures, (3) EBIT (earnings before interest and taxes) equivalent measures unique to individual business groups and (4) individual objectives. EPS measures, Cash Flow measures, EBIT equivalent measures unique to individual business groups, if applicable, and individual objectives determined, on average, 0%, 37%, 39% and 24%, respectively, of each executive officer's bonus.

Long-Term Incentive Compensation

The Compensation Committee has structured long-term incentive compensation to provide for an appropriate balance between rewarding performance and encouraging employee retention and stock ownership.

On February 25, 2003, following completion of a comprehensive review of Duke Energy's executive compensation programs by its independent compensation consultant, the Compensation Committee awarded the annualized value of each executive officer's long-term incentive value as fifty percent (50%) each in the form of non-qualified stock options and performance shares. For 2002 and 2001, executives could elect to receive up to 30% and 20%, respectively, of the annualized value of their long-term incentive compensation in the form of phantom stock, with the remainder being provided in the form of stock options. All awards of non-qualified stock options, performance shares and phantom stock were granted under the Duke Energy 1998 Long-Term Incentive Plan.

The purpose of stock options, performance shares and phantom stock is to align compensation directly with increases in shareholder value. The number of options granted is determined by reviewing survey data to determine the annualized value of long-term incentive compensation made to other executives and management employees in comparable positions and markets (target value) and then dividing the portion of target value awarded in the form of stock options by an expected present value of the option, as determined by using the Black-Scholes option pricing model. The number of performance shares and phantom stock units granted is determined by dividing the portion of target value awarded to executives in the form of performance shares and phantom stock units by the fair market value of a share of Duke Energy Common Stock on the date of grant. Because the grant of 2003 long-term incentive awards was deferred from December 19, 2002, pending completion of the executive compensation program review, the Compensation Committee used the higher fair market value of a share of Duke Energy Common Stock on that date, rather than the fair market value on the grant date of February 25, 2003, to determine the number of non-qualified stock options and performance shares awarded.

In determining the number of options, performance shares and phantom stock units to be awarded, the Compensation Committee, or, in some cases, its designee, also considers the grant recipient's qualitative and quantitative performance, the size of stock option and other stock based awards in the past, and expectations of the grant recipient's future performance.

Executives could elect to receive stock options in lieu of up to 50% of their annual cash bonus for 2002 and 2001 performance under the Short-Term Incentive Exchange Program. Under this program, participants received a non-qualified stock option whose present value on the grant date was two times the amount of cash bonus exchanged. The exercise price was equal to the fair market value of Duke Energy Common Stock on the grant date. Because executives elected to forego cash compensation to receive options under the program, the options vested 100% at grant. This program was discontinued effective with the 2003 performance year.

Messrs. Fowler, Brace and Osborne earned no incentives in 2002 (as shown in the Summary Compensation Table under "Compensation" below) and consequently received no awards of non-qualified stock options under this program pursuant to their election to exchange 30%, 50% and 40%, respectively, of their incentives for a stock option. An award of non-qualified stock options under this program to an executive officer who was not a Named Executive Officer, for incentives earned in 2002, was made in early 2003 under the Duke Energy 1998 Long-Term Incentive Plan.