March 12, 2009

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of PACCAR Inc, which will be held at the Meydenbauer Center, 11100 N.E. 6th Street, Bellevue, Washington, at 10:30 a.m. on April 28, 2009.

 

The principal business of the Annual Meeting is stated on the attached Notice of Annual Meeting of Stockholders. We will also provide an update on the Company’s activities. The Board of Directors recommends a vote FOR Item 1 and AGAINST Items 2 and 3.

 

Your VOTE is important. Whether or not you plan to attend the Annual Meeting, please vote your proxy either by mail, telephone or over the Internet.

 

Sincerely,

 

Mark C. Pigott

Chairman of the Board and

Chief Executive Officer

 

 

 

The Annual Meeting of Stockholders of PACCAR Inc will be held at 10:30 a.m. on Tuesday, April 28, 2009, at the Meydenbauer Center, 11100 N.E. 6th Street, Bellevue, Washington, for these purposes:

 

 

Stockholders entitled to vote at this meeting are those of record as of the close of business on
March 2, 2009.

 

IMPORTANT: The vote of each stockholder is important regardless of the number of shares held. Whether or not you plan to attend the meeting, please complete and return your proxy form.

 

Directions to the Meydenbauer Center can be found on the back cover of the attached Proxy Statement.

 

By order of the Board of Directors

 

J. M. D’Amato

Secretary

Bellevue, Washington

March 12, 2009

 

TABLE OF CONTENTS

 

 

PROXY STATEMENT

 

 

The Board of Directors of PACCAR Inc issues this proxy statement to solicit proxies for use at the Annual Meeting of Stockholders at 10:30 a.m. on April 28, 2009, at the Meydenbauer Center in Bellevue, Washington. This proxy statement includes information about the business matters that will be voted upon at the meeting. The proxy statement and proxy form were first sent to stockholders on or about March 12, 2009.

 

Stockholders eligible to vote at the meeting are those identified as owners at the close of business on the record date, March 2, 2009. Each outstanding share of common stock is entitled to one vote on all items presented at the meeting. At the close of business on March 2, 2009, the Company had 363,167,129 shares of common stock outstanding and entitled to vote.

 

Stockholders may vote in person at the meeting or by proxy. Execution of a proxy does not affect the right of a stockholder to attend the meeting. The Board recommends that stockholders exercise their right to vote by promptly completing and returning the proxy form either by mail, telephone or the Internet.

 

Mark C. Pigott and John M. Fluke, Jr., are designated proxy holders to vote shares on behalf of stockholders at the 2009 Annual Meeting. The proxy holders are authorized to:

 

 

The Trustee for the PACCAR Inc Savings Investment Plan (the SIP) votes shares held in the SIP according to each member’s instructions on the proxy form. If the proxy form is not returned or is returned without voting instructions, the Trustee will vote the shares in direct proportion to the shares for which it has received timely voting instructions, as provided in the SIP.

 

The proxy form allows registered stockholders to vote in one of three ways:

 

Mail.  Stockholders may complete, sign, date and return the proxy form in the pre-addressed, postage-paid envelope provided.

 

Telephone.  Stockholders may call the toll-free number listed on the proxy form and follow the voting instructions given.

 

Internet.  Stockholders may access the Internet address listed on the proxy form and follow the voting instructions given.

 

Telephone and Internet voting procedures authenticate each stockholder by using a control number. The voting procedures will confirm that your instructions have been properly recorded. Stockholders who vote by telephone or Internet should not return the proxy form.

Stockholders who hold shares through a broker or agent should follow the voting instructions received from that broker or agent.

 

Revoking Proxy Voting Instructions.  A proxy may be revoked by a later-dated proxy or by written notice to the Secretary of the Company at any time before it is voted. Stockholders who hold shares through a broker should contact the broker or other agent if they wish to change their vote after executing the proxy.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held at 10:30 a.m. on April 28, 2009, at Meydenbauer Center, Bellevue, Washington. The 2009 proxy statement and the 2008 Annual Report to stockholders are available on the Company’s Website at www.paccar.com/2009annualmeeting/.

 

Stockholders who hold shares in a bank or brokerage account who previously elected to receive the annual meeting materials electronically and now wish to change their election and receive paper copies may contact their bank or broker to change their election.

 

Stockholders who receive annual meeting materials electronically will receive a notice when the proxy materials become available with instructions on how to access them over the Internet.

 

Registered stockholders at a shared address who would like to discontinue receipt of multiple copies of the annual report and proxy statement in the future should contact Wells Fargo Shareowner Services at 1.877.602.7615 or P.O. Box 64854, St. Paul, Minnesota 55164-0854. Street name stockholders at a shared address who would like to discontinue receipt of multiple copies of the annual report and proxy statement in the future should contact their bank or broker.

 

Some street name stockholders elected to receive one copy of the 2008 Annual Report and 2009 Proxy Statement at a shared address prior to the 2009 Annual Meeting. If those stockholders now wish to change that election, they may do so by contacting their bank, broker, or PACCAR at 425.468.7520 or P.O. Box 1518, Bellevue, Washington 98009.

 

The presence at the Annual Meeting, in person or by duly authorized proxy, of a majority of all the stock issued and outstanding and having voting power shall constitute a quorum for the transaction of business.

 

 

Directors are elected by a plurality of the votes cast for the election of directors. If a stockholder does not vote for the election of directors because the authority to vote is withheld, because the proxy is not returned, because the broker holding the shares does not vote or because of some other reason, the shares will not count in determining the total number of votes for each nominee. The Company’s Certificate of Incorporation does not provide for cumulative voting. Proxies signed and returned unmarked will be voted FOR the nominees for Class II Director.

 

If any nominee is unable to act as director because of an unexpected occurrence, the proxy holders may vote the proxies for another person or the Board of Directors may reduce the number of directors to be elected.

 

To be approved, each item must receive the affirmative vote of a majority of shares present in person or by proxy and entitled to vote at the Annual Meeting. Abstentions will count as a vote against each item. Broker nonvotes do not affect the voting calculations. Proxies that are signed and returned unmarked will be voted AGAINST Items 2 and 3.

 

The following persons are known to the Company to be the beneficial owners of more than five percent of the Company’s common stock as of December 31, 2008 (amounts shown are rounded to whole shares):

 

 

 

 

The following list shows the shares of common stock beneficially owned by (1) each director and director nominee, (2) the Chief Executive Officer and the other four most highly compensated executive officers (collectively the “Named Executive Officers”), and (3) by all directors and executive officers as a group as of March 2, 2009 (amounts shown are rounded to whole share amounts):

 

 

 

*Does not exceed one percent.

 

 

Expenses for solicitation of proxies will be paid by the Company. Solicitation will be by mail, except for any electronic, telephone or personal solicitation by directors, officers and employees of the Company, which will be made without additional compensation. The Company has retained Laurel Hill Advisory Group to aid in the solicitation of stockholders for a fee of approximately $8,000 plus reimbursement of expenses. The Company will request banks and brokers to solicit proxies from their customers and will reimburse those banks and brokers reasonable out-of-pocket costs for this solicitation.

 

 

Four Class II directors are to be elected at the meeting. The persons named below have been designated by the Board as nominees for election as Class II directors for a term expiring at the Annual Meeting of Stockholders in 2012. All of the nominees are currently serving as directors of the Company.

 

BOARD NOMINEES FOR CLASS II DIRECTORS
(TERMS EXPIRE AT THE 2012 ANNUAL MEETING)

 

MARK C. PIGOTT, age 55, is Chairman and Chief Executive Officer of the Company and has held that position since January 1997. He was a Vice Chairman of the Company from January 1995 to December 31, 1996, Executive Vice President from December 1993 to January 1995, Senior Vice President from January 1990 to December 1993 and Vice President from October 1988 to December 1989. He is the nephew of retiring director James C. Pigott and the brother of director John M. Pigott. He has served as a director of the Company since 1994.

 

WILLIAM G. REED, JR., age 70, was chairman of Simpson Investment Company, a forest products holding company and the parent of Simpson Timber Company, from 1971 through June 1996. He served as chairman of the board of Safeco Corporation from January 2001 through December 2002 and as lead independent director from 2000 to 2004. He has served as a director of the Company since 1998.

 

WARREN R. STALEY, age 66, served as chairman and chief executive officer of Cargill, Incorporated, an international marketer, processor and distributor of agricultural, food, financial and industrial products, from 2000 until his retirement in 2007. He joined Cargill in 1969 and was elected president and chief operating officer in 1998, chief executive officer in 1999 and chairman in 2000. He has served as a director of the Company since 2008.

 

CHARLES R. WILLIAMSON, age 60, was chairman and chief executive officer of Unocal Corporation, the California-based energy company, from 2001 until Unocal merged with Chevron Corporation in August 2005. He served as executive vice president of Chevron from August 2005 until his retirement in December 2005. He served as a director of Unocal from 2000 to 2005. He held a variety of technical and management positions with Unocal around the world. Mr. Williamson was the chairman of the US-ASEAN Business Council from 2002 to 2005. He is a director of the Weyerhaeuser Company and Talisman Energy Inc. He has served as a director of the Company since 2006.

 

Retiring Class II Director

 

JAMES C. PIGOTT, age 72, is president of Pigott Enterprises, Inc., a private investment company, and has held that position since 1983. He was chairman and chief executive officer of Management Reports and Services, Inc., a provider of business services, from 1986 until December 1999. He is the uncle of Mark C. Pigott and John M. Pigott, both directors of the Company. He has served as a director of the Company since 1972 and is retiring from the Board of Directors effective April 27, 2009.

 

CLASS III DIRECTORS (TERMS EXPIRE AT THE 2010 ANNUAL MEETING)

 

ALISON J. CARNWATH, age 56, is chairman of MF Global Limited, a Bermuda-based financial services firm. She is also Chairman of Land Securities plc, the largest property company listed on the London Stock Exchange, an adviser to Lexicon Partners, an independent corporate finance advisory firm, and chairman of the management board and investment committee at ISIS Equity Partners, LLP, a private equity firm, both based in the United Kingdom. She was chairman of Vitec Group plc, a British supplier of products and services to the broadcast and media industries, from April 1999 to October 2004 and was its chief executive officer during 2001. She is a director of the Man Group plc, a FTSE 100 Index member. She has served as a director of the Company since 2005.

ROBERT T. PARRY, age 69, was president and chief executive officer of the Federal Reserve Bank of San Francisco from 1986 until his retirement in June 2004. In that position, he served on the Federal Open Market Committee of the Federal Reserve System, the governmental body that sets monetary policy and interest rates. He is also a director of the Janus Capital Group Inc. He has served as a director of the Company since 2004.

 

JOHN M. PIGOTT, age 45, is a partner in Beta Business Ventures, LLC, a private investment company formed in 2008, and was a partner in the predecessor company Beta Capital Group, LLC since 2003. He previously served in various management positions within PACCAR from 1992 to 2003. He is the brother of Mark C. Pigott and the nephew of James C. Pigott, both directors of the Company. He was elected by the Board to serve as a director of the Company, effective April 27, 2009.

 

GREGORY M. E. SPIERKEL, age 52, is chief executive officer of Ingram Micro Inc., a leading California-based technology distributor, and has held that position since June 2005. He previously served as president from March 2004 to June 2005. During his eleven year tenure with the company he held other senior positions including executive vice president. He is also a director of Ingram Micro. He has served as a director of the Company since 2008.

 

CLASS I DIRECTORS (TERMS EXPIRE AT THE 2011 ANNUAL MEETING)

 

JOHN M. FLUKE, JR., age 66, is chairman of Fluke Capital Management, L.P., a private investment company, and has held that position since 1990. He is a director of Tully’s Coffee Corporation. He has served as a director of the Company since 1984.

 

KIRK S. HACHIGIAN, age 49, is chairman, president and chief executive officer of Cooper Industries Ltd., manufacturer of electrical products and tools. He was named chairman in February 2006, president and chief executive officer in May 2005 and president and chief operating officer in August 2004. He is a director of Cooper Industries Ltd. He has served as a director of the Company since 2008.

 

STEPHEN F. PAGE, age 69, served as vice chairman and chief financial officer and a director of United Technologies Corporation (UTC), a provider of high-technology products and services to the building systems and aerospace industries, from 2002 until his retirement in April 2004. From 1997 to 2002 he was president and chief executive officer of Otis Elevator Co., a subsidiary of UTC. He is also a director of Lowe’s Companies, Inc., and Liberty Mutual Holding Company Inc. He has served as a director of the Company since 2004.

 

THOMAS E. PLIMPTON, age 59, is Vice Chairman of the Company and has held that position since September 2008. He also serves as the Company’s principal financial officer. He was President from January 2003 to September 2008, Executive Vice President from August 1998 to January 2003 and Senior Vice President from August 1996 to August 1998. He was elected by the Board to serve for the remainder of Michael A. Tembreull’s term as a Class I director, effective January 2, 2009.

 

THE BOARD RECOMMENDS A VOTE FOR EACH OF THE NOMINEES.

 

The Board of Directors has determined that the following persons are independent directors as defined by NASDAQ Rule 4200: Alison J. Carnwath, John M. Fluke, Jr., Kirk S. Hachigian, Stephen F. Page, Robert T. Parry, James C. Pigott, William G. Reed, Jr., Gregory M. E. Spierkel, Warren R. Staley, Harold A. Wagner and Charles R. Williamson.

 

The Board of Directors maintains a corporate governance section on its Website which includes key information about its governance practices. The Company’s Corporate Governance Guidelines, its Board committee charters and its Code of Business Conduct and Code of Ethics for Senior Financial Officers are located at www.paccar.com/company/corporateresponsibility/boardofdirectors.asp.

 

Stockholders may contact the Board of Directors by writing to: The Board of Directors, PACCAR Inc, 11th Floor, P.O. Box 1518, Bellevue, WA 98009, or by e-mailing PACCAR.Board@paccar.com. The Corporate Secretary will receive, process and acknowledge receipt of all written stockholder communications. Suggestions or concerns involving accounting, internal controls or auditing matters will be directed to the Audit Committee chairman. Concerns regarding other matters will be directed to the individual director or committee named in the correspondence. If no identification is made, the matter will be directed to the Executive Committee of the Board.

 

The Board of Directors met four times during 2008. Each member attended at least 75 percent of the combined total of meetings of the Board of Directors and the committees of the Board on which each served. All Company directors are expected to attend each annual stockholder meeting. All directors attended the annual stockholder meeting in April 2008.

 

The Board has four standing committees. The members of each committee are listed below with the chairman of each committee listed first:

 

 

Audit Committee

 

The Audit Committee has responsibility for the selection, evaluation and compensation of the independent auditors and approval of all services they provide. The Committee reviews the Company’s annual and quarterly financial statements, monitors the integrity and effectiveness of the audit process, and reviews the corporate compliance programs. It monitors the Company’s system of internal controls over financial reporting and oversees the internal audit function. The Audit Committee charter describes the Committee’s responsibilities. It is posted at www.paccar.com/company/corporateresponsibility/auditcommittee.asp. All four members of the Audit Committee meet the independence and financial literacy requirements of the SEC and NASDAQ rules. The Board of Directors designated independent director John M. Fluke, Jr., as Audit Committee financial expert. The Committee met five times in 2008.

 

Compensation Committee

 

The Compensation Committee has responsibility for reviewing and approving salaries and other compensation matters for executive officers. It administers the LTIP, the Senior Executive Yearly Incentive Compensation Plan and the DC Plan. The Committee establishes base salaries, and annual and long-term performance goals for executive officers. It also evaluates the CEO’s performance annually in executive session. It approves the attainment of annual and long-term goals by the executive officers. The Committee has authority to

employ a compensation consultant to assist in the evaluation of the compensation of the Company’s CEO or other executive officers. The Committee does not retain a compensation consultant on an annual basis and did not retain one in 2008. The Compensation Committee charter describes the Committee’s responsibilities. It is posted at www.paccar.com/company/corporateresponsibility/compensationcommittee.asp. All five members of the Compensation Committee meet the director independence requirements of the NASDAQ rules and the “outside director” requirements of Section 162(m) of the Internal Revenue Code. The Committee met five times in 2008.

 

Nominating and Governance Committee

 

The Nominating and Governance Committee is responsible for evaluating director candidates and selecting nominees for approval by the independent members of the Board of Directors. It also makes recommendations to the Board on corporate governance matters including director compensation.

 

The Committee has established written criteria for the selection of new directors, which is available at www.paccar.com/company/corporateresponsibility/boardguidelines.asp. To be a qualified director candidate, a person must have achieved significant success in business, education or public service, must not have a conflict of interest and must be committed to representing the long-term interests of the stockholders. In addition, the candidate must have the following attributes:

 

 

The Committee considers the names of director candidates submitted by management and members of the Board of Directors. It also considers recommendations by stockholders submitted in writing to: Chairman, Nominating and Governance Committee, PACCAR Inc, 11th Floor, P.O. Box 1518, Bellevue, WA 98009. Nominations by stockholders must comply with the Company Bylaws requiring advance notice and meet the requirements described in the section on Stockholder Proposals and Director Nominations of this proxy statement. The Committee engages the services of a private search firm from time to time to assist in identifying and screening director candidates. The Committee evaluates qualified director candidates and selects nominees for approval by the independent members of the Board of Directors. Mr. Charles R. Williamson and Mr. Warren R. Staley are directors and nominees for election in this proxy statement and were recommended to the Committee by a third-party search firm.

 

The Nominating and Governance Committee charter describes the Committee’s responsibilities. It is posted at www.paccar.com/company/corporateresponsibility/nominatingcommittee.asp. Each of the five Committee members meets the independence requirements of the NASDAQ rules. The Committee met four times in 2008.

 

Executive Committee

 

The Executive Committee acts on routine Board matters when the Board is not in session. The Committee took action twice in 2008.

 

The following table provides information on compensation for non-employee directors who served during the fiscal year ending December 31, 2008:

 

Summary Compensation

 

 

 

 

Narrative to Director Compensation Table

 

On the first business day of the year, each non-employee director receives $90,000 in restricted stock or restricted stock units under the RSDC Plan. The number of shares received is determined by dividing $90,000 by the closing price of a share of Company stock on the first business day of the year. Non-employee directors elected during the calendar year receive a prorated award to reflect the number of calendar quarters the director will serve in the year of election. Restricted shares vest three years after the date of grant or upon mandatory retirement after age 72, death or disability. Directors receive dividends and voting rights on all shares during the vesting period. Effective January 1, 2008, the RSDC Plan was amended to allow non-employee directors to elect to receive a credit to the stock unit account in lieu of a grant of restricted stock. The account is credited with the number of shares otherwise applicable to the grant of restricted stock and subject to the same vesting conditions. Thereafter dividends earned are treated as if they were reinvested at the closing price of Company stock on the date the dividend is payable.

 

Non-employee directors may elect to defer all or a part of their cash retainer and fees to an income account or to a stock unit account under the RSDC Plan. The income account accrues interest at a rate equal to the simple combined average of the monthly Aa Industrial Bond yield averages for the immediately preceding quarter and is compounded quarterly. Stock unit accounts are credited with the number of shares of Company common stock that could have been purchased at the closing price on the date the cash compensation is payable. Thereafter dividends earned are treated as if they were reinvested at the closing price of Company stock on the date the dividend is payable. The balances in a director’s deferred accounts are paid out at or after retirement or termination in accordance with the director’s deferred account election. The balance in the stock unit account is distributed in shares of the Company’s common stock.

 

The Company provides transportation for or reimburses non-employee directors for travel and out-of-pocket expenses incurred in connection with their services. It also pays or reimburses directors for expenses incurred to participate in continuing education programs.

 

Stock Ownership Guidelines for Non-Employee Directors

 

All non-employee directors are expected to hold at least $200,000 worth of Company stock, and/or deferred stock units while serving as a director. Directors have three years from date of appointment to attain this ownership threshold. All non-employee directors with three or more years of service meet the stock ownership guidelines.

 

Under its Charter, the Audit Committee of the Board of Directors is responsible for reviewing and approving related person transactions as set forth in Item 404 of the Securities and Exchange Commission Regulation S-K. The Committee will consider whether such transactions are in the best interests of the Company and its stockholders. The Company has written procedures designed to bring such transactions to the attention of management. Management is responsible for presenting related person transactions to the Audit Committee for review and approval.

 

Compensation Program Objectives and Structure

 

PACCAR’s compensation programs are designed to attract and retain high-quality executives, link incentives to the Company’s superior performance results and align the interests of management with those of stockholders. These programs offer compensation that is competitive with companies that operate in the same industries globally. PACCAR’s goal is to achieve superior performance measured against its industry peers. Under the supervision of the Compensation Committee of the Board of Directors (the “Committee”), composed exclusively of independent directors, the Company compensation objectives utilize programs that have delivered 70 consecutive years of net income, yearly dividends since 1941 and excellent stockholder returns. The compensation framework has these components:

 

Short-term performance compensation:

 

 

Long-term performance compensation:

 

 

The Committee believes that this combination of salary, cash incentives and equity-based compensation provides appropriate incentives for executives to deliver superior short and long-term business performance and stockholder returns.

 

The Named Executive Officers and all U.S. salaried employees participate in the Company’s retirement programs. The Named Executive Officers also participate in the Company’s unfunded Supplemental Retirement Plan described on page 23, which provides a retirement benefit to those employees affected by the maximum benefit limitations permitted for qualified plans by the Internal Revenue Code and other qualified plan benefit limitations. The Company does not provide any other significant perquisites or executive benefits to its Named Executive Officers.

 

Executive Compensation Criteria

 

The Compensation Committee considers a number of important factors when reviewing and determining executive compensation, including Company performance, individual performance and compensation for executives among peer organizations. The Committee also considers the opinion of the Chief Executive Officer when determining compensation for the executives that report to him.

 

Role of Compensation Consultant.  The Committee does not retain a compensation consultant on an annual basis and it did not retain one in 2008.

 

Industry Compensation Comparison Groups.  The Compensation Committee periodically utilizes information from industry-published compensation surveys as well as compensation data from peer companies to determine if compensation for the Chief Executive Officer and other executive officers is competitive with the market. The Committee believes that comparative compensation information should be used in its deliberations, but it does not specify a “target” compensation level for any given executive but rather a range of compensation. The Committee has discretion to determine the nature and extent to which it will use comparative compensation data.

 

Compensation of the Named Executive Officers reflects the Committee’s consideration of comparative data and analysis from a 2006 survey of 86 companies with median revenues of $11.3 billion conducted by

Hewitt Associates (“Hewitt”). The companies in that survey are listed on page 11 of the Company’s 2008 proxy statement. Hewitt did not advise the Committee or make any recommendations regarding the data it supplied nor did it provide any other executive compensation services. The Committee assessed 2006 pay levels for the Named Executive Officers based in part on the data provided by Hewitt and a comparison of Company compensation levels against the 50th percentile of the surveyed companies. The total direct compensation of each Named Executive Officer was within the competitive range of survey data.

 

Peer Companies.  As part of its analysis of comparative data, the Committee includes compensation data from Peer Companies that comprise the index used in the stock performance graph set forth in the Company’s Annual Report on Form 10-K and page 28 of this proxy statement. In particular, the Company measures its financial performance against Peer Companies when evaluating achievement of the cash portion of the LTIP Company performance goal and applicable goals under the restricted stock share match program. The nine Peer Companies for the LTIP 2006-2008 and 2007-2009 cycles are:

 

 

As discussed in the 2008 proxy statement, effective with the LTIP cycle beginning January 2008-2010, the following are the Peer Companies for purposes of the Company performance goal in the LTIP cash program and the applicable goals under the share match program.

 

 

Elements of Total Compensation

 

The Company’s executive compensation program is comprised of base salaries, annual cash incentives, and long-term incentives consisting of cash, stock options and restricted stock. The Committee made no significant changes to the elements of the compensation program for the Named Executive Officers for 2008.

 

Compensation Mix.  The Company’s executive compensation program structure includes a balance of annual and long-term incentives, cash and Company equity. At higher levels of responsibility within the Company, the senior executives have a larger percentage of total compensation at risk based on Company performance incentive programs. For 2008, the Committee approved target allocations as displayed below. The Company believes these allocations promote its objectives of profitable growth and superior long-term results.

 

 

 

Base Salary.  Base salary provides a fixed, baseline level of compensation that is not contingent upon Company performance. It is important that base salaries are competitive with industry peer companies to attract and retain high-caliber executives. The midpoints of the base salary ranges are set at approximately the market median of the 2006 Hewitt survey, with minimums at 70 percent of the midpoint and maximums at 130 percent of the midpoint and were not changed in 2008. An executive officer’s actual salary relative to this salary range reflects his or her responsibility, experience and individual performance.

 

The Committee reviews base salaries every 12 to 18 months and may or may not approve changes. Consistent with this practice, the Committee reviewed the salary of each Named Executive Officer and approved increases in 2008. On January 1, 2008, the Chief Executive Officer received a 3.8 percent increase over his May 1, 2006 base salary (2.3 percent annualized). The annualized increase for the other Named Executive Officers ranged from 1.7 to 4.5 percent and occurred 15 to 18 months from their previous salary increase. During the fall of 2008, Mr. Plimpton, Mr. Cardillo and Mr. Sobic were promoted to their current positions. Accordingly, each received a salary increase to reflect their additional responsibilities. Their average salary increase was 15.2 percent.

 

The Committee made its salary decisions after considering the Company’s excellent performance, the compensation guidelines and internal equity. The Chief Executive Officer was not involved in discussions regarding his salary. He suggested salary recommendations to the Committee for the other Named Executive Officers. All salary increases were consistent with the Company’s overall compensation guidelines. The Committee believes that the base salary of each of the Named Executive Officers is appropriate based on scope of responsibility, tenure with the Company, individual performance and competitive pay practices.

 

Annual Incentive Cash Compensation (“IC”).  This program provides yearly cash incentives for the Named Executive Officers to achieve annual Company profit and business unit goals. The Committee sets annual performance goals and a threshold, target and maximum award for each Named Executive Officer, expressed as a percentage of base salary. Awards are measured on a sliding scale as follows:

 

 

A hallmark of the annual cash incentive program has been a consistent and rigorous focus on achieving the Company’s annual net profit goal. The Committee has chosen net profit, not EBITDA or operating profit, as the chief financial metric for this program because it is the primary indicator of corporate performance to stockholders. When setting incentive compensation goals for the Named Executive Officers, the Committee believes that corporate performance is an appropriate measure of individual performance. Accordingly, the

2008 award for each Named Executive Officer is based upon Company performance relative to an overall net profit goal proposed by Company management and approved by the Committee within the first 90 days of each year. The target level represents an amount of net profit that the Committee determines is attainable with outstanding performance under expected economic conditions. The Committee assesses annual goal achievement and approves awards for the Named Executive Officers.

 

IC Awards for the Named Executive Officers are subject to the terms of the Senior Executive Yearly Incentive Compensation Plan (the “IC Plan”) approved by the stockholders as required by Section 162(m) of the Internal Revenue Code. The maximum annual incentive cash award under the Plan is $4,000,000. The Committee, in its sole discretion, may reduce or eliminate (but not increase) any award earned by the Named Executive Officers based on an assessment of individual performance.

 

For 2008, the Company’s net profit target was $1.1 billion and actual net profit was $1.02 billion, an excellent result considering the difficult recession. The Committee approved payouts of 85 percent of each Named Executive Officer’s target award, which corresponds with achievement of 92.5 percent of the net profit goal. The Committee approved payments consistent with the calculated goal achievement for each Named Executive Officer and did not exercise discretion to reduce or modify any payment. The following table outlines the 2008 goals and incentive awards achieved for each Named Executive Officer.

 

The Committee notes that M. C. Pigott generously declined his 2008 annual incentive payment of $1,147,500 that he earned, in recognition of the challenging economic recession and the negative effect upon the Company’s employees and stockholders. The Committee accepted his decision. Therefore, the Summary Compensation Table on page 19 indicates that his 2008 non-equity incentive plan compensation was zero.

 

 

 

Long-Term Incentive Compensation (LTIP).  The Company’s long-term incentive program is based on a multi-year performance period and provides annual grants of stock options, restricted stock and cash incentive awards. The LTIP aligns the interests of stockholders with those of executives to focus on long-term growth in stockholder value. The 2008 target for each element of the long-term compensation program for each Named Executive Officer is calculated as a percentage of base salary as indicated in the table below. These targets were unchanged from 2007.

 

Long-term incentive compensation cash award.  This program focuses on long-term growth in stockholder value by providing an incentive for superior Company performance that is measured against Peer Companies performance over a three-year period. Company performance is measured by three-year compound growth in net income, return on sales and return on capital (weighted equally) as compared to the Peer Companies (“Company Performance Goal”). Named Executive Officers and all executive officers are eligible for a long-term incentive cash award based upon three-year performance goals approved by the Committee with a new performance period beginning every calendar year.

 

For the 2008-2010 cycle, the Committee approved the following goals:

 

 

The Committee believes that three-year compound growth in net income, return on sales and return on capital are excellent indicators of the Company’s performance against the Peer Companies. The Company has used this rigorous comparison goal for over ten years. During that period the Company has demonstrated extraordinary performance against the Peer Companies and provided superior returns to stockholders. The target amount will be earned if the Company’s financial performance ranks above at least half of the Peer Companies. The maximum cash award amount will be earned if the Company’s financial performance ranks above all of the Peer Companies. No award will be earned if the Company’s financial performance ranks in the bottom 25 percent of the Peer Companies.

 

The remaining portion of the award for certain of the Named Executive Officers is based upon individual business unit goals determined by the Chief Executive Officer similar to those described above for the annual incentive plan, measured over a three-year performance cycle. The Committee assesses goal achievement for the prior three-year period in the April following completion of the applicable cycle and approves awards for the Named Executive Officers at such time. Long-term incentive cash awards are measured on a sliding scale as indicated below:

 

 

In April 2008, the Committee determined the cash awards for the three-year period 2005-2007 ending December 31, 2007. One hundred percent of the cash award for M. C. Pigott, M. A. Tembreull and T. E. Plimpton was based on the Company Performance Goal. For the 2005-2007 LTIP cycle, the Company achieved superior results and tied for second among all of Peer Companies that reported earnings. The Committee approved a payout of 162.5 percent of target on the Company Performance Goal for each Named Executive Officer reflecting excellent goal achievement and did not exercise discretion to reduce or modify payment. The remaining fifty percent of the award for J. G. Cardillo was based on business unit profit. A maximum payout was approved based on that goal achievement which resulted in an overall payout of 181.3 percent of target reflecting excellent goal achievement. The remaining sixty percent of the award for D. D. Sobic was based on business unit profit (forty percent) and individual performance (twenty percent). The Committee determined that D. D. Sobic exceeded each goal and approved an overall payout of 181 percent of target reflecting excellent goal achievement. The long-term cash awards for 2006-2008 LTIP cycle have not been determined as of the date of this proxy statement.

The maximum amount that may be paid to any eligible participant in any year under this program is $6,000,000. The award is also subject to the conditions of payment set forth in the Long Term Incentive Plan, as required by Section 162(m) of the Internal Revenue Code. The Committee, in its sole discretion, may reduce or eliminate (but not increase) any award earned by the Named Executive Officers based on an assessment of individual performance.

 

Stock options.  The Committee includes stock options in its compensation program because stock options link the interests of executives directly with stockholders’ interests through increased individual stock ownership. Stock options are granted by the Committee once each year on a predetermined date after the fourth-quarter earnings release, and are not repriced. They become exercisable at the end of a three-year vesting period and expire ten years after the date of grant.

 

The Compensation Committee granted stock options on January 30, 2008. The number of options was determined by multiplying the executive’s base salary on January 30, 2008, by a target award percentage and dividing by the average closing price of the Company’s stock on the first five trading days of the year. The exercise price of stock options is the closing price of the Company’s stock on the date of grant, January 30, 2008. All stock options granted in 2008 vest and become exercisable on January 1, 2011, and remain exercisable until January 30, 2018 unless the participant’s employment terminates for reasons other than retirement at age 65, or the participant is demoted to an ineligible position. Vesting may be accelerated in the event of a change in control.

 

Annual restricted stock program.  Performance-based restricted stock is included in the program because it provides an opportunity for executives to earn Company equity with performance-based compensation deductible under Section 162(m) of the Internal Revenue Code. The Committee sets a Company performance goal during the first 90 days of the year and restricted stock grants are made in the following year if the Committee determines that the performance goal is achieved. The restricted stock vests 25 percent per year over a four-year period beginning in the year following the grant. Unvested shares are forfeited upon termination unless termination is by reason of death, disability or retirement. All shares vest immediately upon a change in control. Each Named Executive Officer has the same rights as all other stockholders to vote the shares and receive cash dividends.

 

The Named Executive Officers received a grant of performance-based restricted stock on January 30, 2008, after the Committee determined that the performance goal of four percent return on 2007 sales was exceeded. The number of restricted shares granted was determined by multiplying the executive’s annual base salary by a target award percentage and dividing by the average closing price of the Company’s stock for the first five trading days of 2008. All awards were consistent with the target award percentage and the Committee did not exercise discretion to make any material adjustments. Twenty-five percent of the shares vested on January 1, 2009, and 25 percent of shares will vest on each successive January 1 through January 1, 2012.

 

Compensation of the Chief Executive Officer

 

The Committee applies the same compensation philosophy, policies and comparative data analysis to the Chairman and Chief Executive Officer as it applies to the other Named Executive Officers. The Chief Executive Officer is the only officer with overall responsibility for all corporate functions and, as a result has a greater percentage of his total compensation based on the overall financial performance of the Company. Under his leadership, the Company has significantly outperformed both its Peer Companies and the S&P 500 Index for the ten-year period ending December 31, 2008.

 

In addition to the change to base salary discussed above, in 2008 the Committee approved a grant of 150,000 restricted shares to match an equal number of shares the Chief Executive Officer personally purchased through the exercise of stock options. Under this share match program, if the Chief Executive Officer purchases Company stock either by exercising stock options or through open market purchases, he may receive a matching award of restricted stock if rigorous performance goals are met. The program provides for a maximum of 562,500 restricted shares and an annual limit of 150,000 shares. Restricted match shares vest after five years if the Company’s earnings per share growth over the same five-year period meets or exceeds at least fifty percent of the Peer Companies. The Chief Executive Officer has the same rights as all other

stockholders to vote the shares and receive cash dividends. With certain exceptions, all restricted match shares will be forfeited if the performance threshold is not achieved or if the Chief Executive Officer terminates employment with the Company during the vesting period. If the purchased shares are sold before the vesting period, an equal number of restricted match shares will be forfeited.

 

Deferral of Annual and Long-Term Performance Awards

 

The Committee administers a DC Plan described on page 23 which allows eligible employees to defer cash incentive awards into an income account or a stock unit account. Both accounts are unfunded and unsecured. This program provides tax and retirement planning benefits to participants and market-based returns on amounts deferred. Certain deferrals are subject to Internal Revenue Code Section 409A. Payouts from the income account are made in cash either in a lump sum or in a maximum of 15 annual installments in accordance with the executive’s payment election. Stock units credited under the Deferred Compensation Plan are disbursed in a one-time payment of Company shares. Participation in the DC Plan is voluntary.

 

Stock Ownership Guidelines

 

Effective January 1, 2008, the Board of Directors approved stock ownership guidelines for the Company’s executive officers and directors to link their long-term economic interest directly to that of the Company stockholders. The Chief Executive Officer is expected to hold five times his base salary in Company stock and/or deferred stock units. Other executive officers are expected to hold one times their base salary in Company stock, vested stock options and/or deferred stock units. Executive officers have three years to attain this ownership threshold. All executive officers are in compliance as of January 1, 2009.

 

Changes Approved for 2009

 

Due to the challenging business environment in 2009, the Committee approved the following reductions to the annual and long-term compensation programs for all participants including the Named Executive Officers for the 2009 cycle only.

 

 

 

 

 

Effect of Post-Termination Events

 

The Company has no written employment agreement with its Chief Executive Officer or with any Named Executive Officer. Executive compensation programs provide full benefits only if a Named Executive Officer remains with the Company until normal retirement at age 65. In general, upon a termination without cause a Named Executive Officer retains vested benefits but receives no enhancements or severance. In a termination for cause, the executive forfeits all benefits except those provided under a qualified pension plan. Annual and long-term cash incentives are prorated upon retirement or death and are awarded at the maximum level upon a change in control. The annual restricted stock grants become fully vested at retirement, death or a change in control. The Company believes that the benefits described in this section help it attract and retain its executive officers by providing financial security in the event of certain qualifying terminations of employment or a change of control of the Company. The fact that the Company provides these benefits does not materially affect other decisions that the Company makes regarding compensation. The Company maintains a separation pay plan for all U.S. salaried employees that provides a single payment of up to six months of base salary in the event of job elimination in a business restructuring or reduction in the workforce. The Named Executive Officers are eligible for the benefit on the same terms as any other eligible U.S. salaried employee.

 

Effect of Accounting or Tax Treatment

 

Company policy is to structure compensation arrangements that preserve tax deductions for executive compensation under Section 162(m) of the Internal Revenue Code. Cash awards paid to Named Executive Officers under the IC Plan and under the LTIP are subject to certain conditions of payment intended to preserve deductibility imposed under Section 162(m). The Committee establishes a yearly funding plan limit equal to a percentage of the Company’s net income and assigns each Named Executive Officer a percentage of each fund. In 2008, the funding limit for the Named Executive Officers under the IC Plan equaled two percent of Company’s net income and the limit for the LTIP equaled three quarters of one percent of the Company’s cumulative net income for the 2008-2010 performance cycle. The Committee can exercise discretion to reduce or eliminate any award earned by the Named Executive Officers based on an assessment of individual performance against preapproved goals. The cash incentive awards to the Named Executive Officers under both plans are subject to the pre-established funding and plan limits even if some or all of the executive’s performance goals have been exceeded. The Committee retains the flexibility to pay compensation that is not fully deductible within the limitations of Section 162(m) if it determines that such action is in the best interests of the Company and its stockholders in order to attract, retain and reward outstanding executives. The Company offers compensation programs that are intended to be tax efficient for the Company and for the executive officers.

 

Conclusion

 

The Company’s compensation programs are designed and administered in a manner consistent with its executive compensation philosophy and guiding principles. The programs emphasize the retention of key executives and appropriate rewards for excellent results. The Committee monitors these programs in recognition of the dynamic marketplace in which the Company competes for talent. The Company will continue to emphasize pay-for-performance and equity-based incentive programs that compensate executives for results that are consistent with generating outstanding performance for its stockholders.

 

The Committee reviewed and discussed the Compensation Discussion and Analysis Section (CD&A) for 2008 with management. Based on the Committee’s review and its discussions with management, the Committee recommends to the Board of Directors that the Compensation Discussion and Analysis Section be included in the Company’s proxy statement for the 2009 Annual Meeting.

 

THE COMPENSATION COMMITTEE

 

C. R. Williamson, Chairman
A. J. Carnwath
K. S. Hachigian
R. T. Parry
G. M. E. Spierkel

 

The following table provides information on compensation for the Named Executive Officers for the last three fiscal years ended December 31, 2008:

 

 

 

 

The following table shows all plan-based awards granted to the Named Executive Officers during 2008:

 

 

 

 

The following table shows all outstanding stock option and restricted stock awards held by the Named Executive Officers on December 31, 2008:

 

 

 

 

 

The following table shows all stock options exercised and restricted stock awards that vested during 2008 for the Named Executive Officers and the value realized upon exercise or vesting: