UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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SLM Corporation

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12061 Bluemont Way
Reston, Virginia 20190

 

April 7, 2009

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

OF SLM CORPORATION

To Be Held On May 22, 2009

 

 

To our Shareholders:

 

The 2009 Annual Meeting of Shareholders of SLM Corporation will be held at the Corporation’s offices, 12061 Bluemont Way, Reston, Virginia 20190 on Friday, May 22, 2009 beginning at 11:00 a.m., local time. At the meeting, holders of the Corporation’s common stock will consider and vote on the following matters:

 

 

All record holders of shares of SLM Corporation common stock at the close of business on March 23, 2009 are entitled to vote at the meeting. If you wish to attend the meeting in person, you must bring evidence of your ownership as of March 23, 2009, or a valid proxy showing that you are representing a shareholder.

 

Your participation in the Annual Meeting is important. We urge you to take the time to read carefully the proposals described in the proxy statement and vote your proxy at your earliest convenience. You may vote by telephone, Internet or, if you request that proxy materials be mailed to you, by completing and signing the proxy card enclosed with those materials and returning it in the envelope provided. If you plan to attend the Annual Meeting, please advise the Corporate Secretary, Mary Eure, directly at (703) 984-6785.

 

Thank you for your investment in Sallie Mae.

 

Sincerely,

 

Anthony P. Terracciano
Chairman of the Board of Directors

 

PROXY STATEMENT
Important Notice Regarding the Availability of Proxy Materials For the
Annual Meeting of Shareholders to be Held on May 22, 2009

 

The proxy statement and annual report on Form 10-K
are available at http://www.salliemae.com/investors/annualreports

 

The Board of Directors of SLM Corporation (the “Corporation” or “SLM”) solicits your proxy to conduct business at the Corporation’s Annual Meeting to be held at the Corporation’s offices, 12061 Bluemont Way, Reston, Virginia 20190 on Friday, May 22, 2009 at 11:00 a.m., local time.

 

This proxy statement includes information about the Corporation’s:

 

 

PROPOSAL 1—ELECTION OF DIRECTORS

 

At the 2009 Annual Meeting, 16 directors are to be elected to hold office until the 2010 Annual Meeting and until their successors have been elected or appointed. The 16 persons nominated by the Board for election at the 2009 Annual Meeting are listed below, with brief biographies. All of the 16 nominees are currently serving as SLM directors. Mr. J. Terry Strange was recommended for nomination by the Chief Executive Officer and Vice Chairman of the Board, Albert L. Lord.

 

We do not know of any reason why any of the nominees would be unable to serve. However, if any of the nominees should become unavailable to serve as a director, the Board may designate a substitute nominee or reduce the size of the Board. If the Board designates a substitute nominee, persons named as proxies will vote “FOR” that substitute nominee.

 

Required Vote

 

This election is an uncontested election because the number of nominees for election to the Board equals the number of directors to be elected. Accordingly, as set forth in the Corporation’s By-laws, each nominee must receive more “FOR” votes than “AGAINST” votes to be elected to the Board.

 

As part of the nominations process, each nominee agreed to tender his or her resignation to the Board in the event the nominee fails to receive a majority of votes cast “FOR” his or her election. If any of the 16 nominees fails to receive a majority of the votes cast “FOR” his or her election, the Nominations and Governance Committee of the Board of Directors will make a recommendation to the Board on whether to accept or reject the nominee’s resignation, which will be automatically tendered upon the certification of the election results. The Board will act on the Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results.

You may cumulate your vote and cast all your votes “FOR” one nominee or you may distribute your votes among the nominees in any manner. The persons named as proxies by the Corporation will not exercise discretion to cumulate votes unless another shareholder cumulates its shares when voting for directors.

 

Unless marked to the contrary, proxies received will be voted “FOR” the nominees named in this proxy statement in order to elect all of the nominees or the maximum number possible.

 

Board Recommendation

 

The Board of Directors recommends a vote “FOR” the election of the 16 nominees named below. Proxies will be so voted unless shareholders specify a contrary choice in giving their proxies.

 

 

 

 

CORPORATE GOVERNANCE

 

Role and Responsibilities of the Board of Directors

 

The role of the Board of Directors is to promote sustainable, long-term growth of the Corporation in the interest of its shareholders. The primary responsibilities of the Board are to:

 

 

Board Governance Guidelines

 

The Board’s governance guidelines are published at www.salliemae.com under the tab “Investors, Corporate Governance” and a written copy may be obtained by contacting the Corporate Secretary. Among the Corporation’s governance practices are the following:

 

 

Director Independence

 

For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with the Corporation. The Board’s governance guidelines include the standards for determining director independence. These guidelines conform

with and in some cases are more stringent than the independence requirements of the New York Stock Exchange (“NYSE”) listing standards. The Corporation’s director independence standards are included within the Board’s Governance Guidelines described above and published at www.salliemae.com under “Investors, Corporate Governance” and they are also listed below.

 

The Board has determined that the following individuals (that is, all of the individuals who served as a director during 2008, including Charles L. Daley and Benjamin J. Lambert III who both resigned from the Board in March 2008, and all nominees standing for election at the 2009 Annual Meeting, other than Mr. Lord) are independent of the Corporation because the nominees have no material relationships with the Corporation: Mses. Bates and Gilleland and Messrs. Daley, Diefenderfer, Goode, Hunt, Lambert, Martin, Munitz, Newman, Porter, Puleo, Schoellkopf, Shapiro, Strange, Terracciano and Williams. The Board made this determination based on the following:

 

 

In making its determination regarding independence, the Board took into account the following relationships: Mr. Hunt was an executive officer of the predecessor of the Corporation until 1990; Messrs. Goode, Hunt, Porter and Shapiro serve as board members or trustees of charitable organizations that received charitable gifts under the Corporation’s charitable gift program described in this proxy statement. None of these individuals, or their spouses, are employed by the organizations and the gifts were well below the thresholds in the Board’s independence standards. Mr. Lord is not independent because of his employment relationship with the Corporation.

 

Board Meetings

 

During 2008, the Board of Directors met 14 times. Each of the incumbent directors attended at least 75 percent of the total number of meetings of the Board and committees on which they served. Directors are expected to attend the Annual Meeting and all members of the Board, other than Mr. Strange, who was first appointed to the Board on July 31, 2008, attended the Annual Meeting in May 2008.

Board Committees

 

The Board has established the following committees (the “Core Standing Committees”) to assist in its oversight responsibilities:

 

 

Each committee has a Board-approved written charter, which sets forth the respective committee’s functions and responsibilities. Committee charters are published at www.salliemae.com under “Investors, Corporate Governance.” Shareholders may obtain a written copy of a committee charter by contacting the Corporate Secretary.

 

An annual work plan is created from the charters of each Core Standing Committee so that responsibilities of the committees are addressed at appropriate times throughout the year. Agendas for meetings are based on each committee’s annual work plan and any other current matter the Committee Chair or management believes should be addressed at the meeting. The work of each committee is regularly reported to the full Board by the Committee Chair.

 

The current membership of the Core Standing Committees and the number of meetings held in 2008 are as follows:

 

 

 

A description of the function of each committee follows.

 

Audit Committee.  The Audit Committee assists the Board in fulfilling its responsibilities by providing oversight relating to: (1) the integrity of the Corporation’s financial reporting; (2) the Corporation’s system of disclosure controls and system of internal controls regarding financial, accounting, legal compliance and ethics; (3) the independent accountant’s qualifications, independence and performance; (4) the performance of the Corporation’s internal audit function; (5) the Corporation’s compliance with legal and regulatory requirements; (6) the review of related persons transactions; (7) the Corporation’s overall corporate risk assessment polices and risk management practices; and (8) the preparation of the report of the Committee for the Corporation’s annual proxy statement, as required by the Securities and Exchange Commission (“SEC”).

 

The Board has determined that all the members of the Audit Committee are independent under the Corporation’s governance guidelines and that all members of the Audit Committee also satisfy the heightened independence standards for audit committee members under the NYSE listing standards. In addition, the Board has determined that Ms. Bates and Messrs. Strange and Williams qualify as audit committee financial experts within the meaning of the SEC regulations. Except as described in the next sentence, none of the Committee members serves on the audit committee of more than three public companies. In addition to his service on the Audit Committee of the Corporation, Mr. Strange also serves on the audit committees of four other public companies. The Board has determined,

however, that such simultaneous service does not impair Mr. Strange’s ability to serve on the Corporation’s Audit Committee.

 

Compensation and Personnel Committee.  The Compensation and Personnel Committee (or the “Compensation Committee”): (1) assists the Board in fulfilling its responsibilities relating to human resources, compensation and benefit matters concerning the Corporation; (2) discharges the Board’s responsibilities relating to compensation of the Corporation’s executives; (3) considers and makes recommendations to the Board with respect to its own compensation; and (4) prepares the report of the Committee for the Corporation’s annual proxy statement, as required by the SEC.

 

The Board of Directors has determined that all Committee members are independent under the Corporation’s governance guidelines and NYSE listing standards.

 

The Compensation Committee considers executive and director compensation on an annual basis, culminating in decisions in January of each year. Throughout the year, the Committee considers executive compensation as warranted by personnel changes.

 

The Board sets compensation for directors. The Compensation Committee sets compensation for officers at the level of Senior Vice President and above. The Chief Executive Officer or his delegates set pay for all other employees. See the Compensation Discussion and Analysis section of this proxy statement for more information regarding the Compensation Committee’s processes.

 

The Compensation Committee retains a compensation consultant to advise it. The Compensation Committee’s consultant for 2008 was Semler Brossy Consulting Group LLC. The Committee directed Semler Brossy to: (1) recommend a peer group of companies that may be used for benchmarking executive and director compensation (the “Peer Group”); (2) inform the Committee about the marketplace for the amount and form of director and executive compensation; (3) inform the Committee of trends in executive and director compensation; (4) update the Committee on legislative and regulatory changes that affect director and executive compensation; and (5) provide its views on the reasonableness of amounts and forms of director and executive compensation. At the request of the Committee, Semler Brossy was available to management to assist in determining how the Corporation’s pay philosophy and program should apply to the Vice President level and below. For 2009, the Compensation Committee’s consultant will be Hewitt Associates, LLC.

 

The processes to consider compensation for executive officers and directors are as follows:

 

Annual Executive Compensation:  The process for the annual review of executive compensation is discussed beginning on page 12 of this proxy statement.

 

Annual Director Compensation:  The Compensation Committee annually reviews director compensation of the Peer Group. After discussion with the Committee’s consultant and management, the Committee recommends director compensation to the Board.

 

Promotions/New Hires:  Throughout the year, as the Corporation’s executive talent needs change, promotions and/or new hires at the level of Senior Vice President and above may occur. In these cases, the Compensation Committee meets to consider the appropriate amount and form of compensation for each individual. Management recommends an arrangement to the Committee for its consideration. The Committee’s consultant may give its input on the proposed arrangement to management and the Committee Chair.

 

Nominations and Governance Committee.  The Nominations and Governance Committee assists the Board in establishing appropriate standards for the governance of the Corporation, the operations of the Board and the qualifications of directors. The Committee also identifies individuals qualified to become Board members and recommends to the Board the director nominees for each Annual Meeting of shareholders.

The Board has determined that all of the members of the Nominations and Governance Committee are independent under the Corporation’s governance guidelines and NYSE listing standards.

 

Finance and Operations Committee.  The Finance and Operations Committee assists the Board in fulfilling its responsibilities and providing oversight relating to capital management, financing strategy and the general operations of the business.

 

Nominations Process

 

The Nominations and Governance Committee considers director candidates recommended in good faith by shareholders. The Committee also receives suggestions for candidates from Board members. Candidates are evaluated based on the needs of the Board and the Corporation at that time, given the then-current mix of Board members. When evaluating a candidate, factors that the Nominations and Governance Committee looks for and considers, include, but are not limited to, a nominee’s:

 

 

To recommend a candidate, shareholders should send, in writing, the candidate’s name, credentials, contact information, and his or her consent to be considered as a candidate to the Chairman of the Nominations and Governance Committee, in care of the Corporate Secretary at SLM Corporation, 12061 Bluemont Way, Reston, VA 20190. The shareholder should also include his or her contact information and a statement of his or her share ownership. The Nominations and Governance Committee considers and evaluates candidates recommended by shareholders in the same manner that it considers and evaluates other director candidates. In order to have been timely for consideration at the 2009 Annual Meeting, a nomination must have been received by the Corporation on or after January 8, 2009 and on or before March 9, 2009. The Committee did not receive any such recommendations for director candidates for the 2009 Annual Meeting.

 

Shareholder Communications with the Board

 

Shareholders and other interested parties may submit communications to the Board of Directors, the non-management directors as a group, the Lead Independent Director, the Chairman of the Board, or any other individual member of the Board by contacting the Chairman of the Board or the Lead Independent Director in writing at the following address: Office of the Chairman of the Board or Office of the Lead Independent Director, SLM Corporation, 12061 Bluemont Way, Reston, VA 20190. The Corporate Secretary will review all communications from our shareholders. Communications relevant to our business and operations, as determined by the Corporate Secretary, will be forwarded to the Board or individual members, as appropriate.

Related Persons Transactions

 

Review and Approval of Related Persons Transactions.  The Corporation has a written policy regarding review and approval of related persons transactions. The policy is published at www.salliemae.com under “Investors, Corporate Governance.”

 

Transactions covered by the policy are transactions involving the Corporation in excess of $120,000 in any year in which any director, nominee, executive officer, or greater-than-five percent beneficial owner of the Corporation, or any of their respective immediate family members, has or had a direct or indirect interest, other than as a director or less-than-ten percent owner of an entity involved in the transaction (“Related Persons Transaction”). Transactions that are considered routine are “pre-approved” under the policy. For example, certain loans made in the ordinary course of our business to executive officers, directors and their family members are considered Related Persons Transactions and may require proxy disclosure, but are pre-approved under the policy.

 

The policy provides that the Audit Committee initially review a proposed Related Persons Transaction and make a recommendation to the full Board regarding whether to approve the transaction. In considering a transaction, the Audit Committee takes into account whether a transaction would be on terms generally available to an unaffiliated third party under the same or similar circumstances.

 

Transactions.  Since the beginning of 2008, no Related Persons Transactions have been entered into and none are currently proposed.

 

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee has reviewed and discussed with management and the Corporation’s independent accountant, PricewaterhouseCoopers LLP, the Corporation’s audited financial statements as of and for the year ended December 31, 2008. The Committee also discussed with PricewaterhouseCoopers LLP, the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T, and with and without management present, discussed and reviewed the results of the independent accountant’s examination of the financial statements.

 

The Committee received and reviewed the written disclosures and the letter from PricewaterhouseCoopers LLP required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the Committee concerning independence and has discussed with PricewaterhouseCoopers LLP the accountant’s independence, including relationships that may have an impact on the accountant’s objectivity and independence.

 

Following the reviews and discussions referred to above, the Committee recommended to the Board of Directors that the financial statements referred to above be included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 for filing with the SEC.

 

Audit Committee

Ann Torre Bates, Chairman

Barry A. Munitz

Frank C. Puleo

J. Terry Strange

Barry L. Williams

 

EXECUTIVE AND DIRECTOR COMPENSATION

 

Compensation Discussion and Analysis

 

Introduction

 

Management’s Compensation Discussion and Analysis begins with a brief review of the Corporation’s business results for 2008 and Board and executive management changes that occurred during the year. These events set the stage for the Compensation and Personnel Committee’s decisions about 2008 bonus awards, terms and conditions for 2009 equity awards, and the 2009 bonus plan.

 

Review of 2008

 

The year 2008 was extraordinary for the Corporation and the financial services sector as a whole. Disruption in the credit markets and legislative changes in the economics of the federal student loan program resulted in challenges for the Corporation to fund new loans at positive spreads and to re-finance our existing portfolio. Because federally sponsored liquidity and funding programs became available, the Corporation was able to meet the demand for federal student loan originations for the 2008-2009 academic year. Our 2008 goal for federal student loan originations was $15.3 billion; we originated $17.9 billion. Our earnings on these and existing loans were less than expected under our business plan due primarily to a widening of the spread between interest rates on our earning assets, which are tied to market commercial paper rates, and interest rates on which our debt payments are based, which are tied to LIBOR.

 

Growth in our private credit lending business fell below our business plan due to funding constraints, including constraints in the asset-backed securitization market, and our implementation of higher credit standards for lending. The deteriorating economy led to higher default rates, which required us to make higher than expected provisions for loan losses.

 

During the year, we decided to exit our purchased paper businesses because they no longer offered the opportunity for expected synergies between these businesses and our traditional student loan collections business. Our decision to exit these businesses and further asset value deterioration led to impairment charges.

 

In response to changes in the economics of the federal student loan program and in order to position ourselves for the future, the Corporation underwent a restructuring program during the year, known internally as Project Pace, to improve efficiencies in our operations and reduce operating costs. During 2008, we reduced our operating expenses by over 20 percent in the fourth quarter of 2008 compared to the fourth quarter of 2007, after adjusting for restructuring costs, growth and other investments.

 

For the year, we reported positive “core earnings”¹ net income of $526 million, a decrease from $560 million in 2007.

 

Board and Management Changes

 

The Board of Directors made significant changes in its composition and that of executive management during 2008. Mr. Terracciano joined the Board as Chairman in January 2008. Messrs. Martin, Newman, Puleo and Strange joined shortly thereafter, adding credit markets, legal and risk management expertise to the Board.

 

Mr. Lord was re-appointed as Chief Executive Officer at the end of 2007. Mr. Lord recruited Mr. Remondi to rejoin the Corporation as Vice Chairman and Chief Financial Officer in January 2008. Mr. Remondi played a critical role during the year in creating liquidity and funding solutions in difficult market conditions. Mr. Lord recruited Mr. Hewes in March 2008, who quickly assembled a senior team to restructure the private credit lending and collection business.

 

 

¹  A description of “core earnings” treatment and a full reconciliation to the GAAP income statement can be found in the Company’s Annual Report on Form 10-K at the Company’s website as referenced on the first page of this proxy statement.

Overview of Key 2009 Compensation Decisions

 

In January 2009, the key decisions that faced the Compensation Committee were to: determine 2008 bonuses; grant equity awards; and establish the 2009 bonus plan. As the Committee’s decision-making process began, Mr. Lord suggested that, in light of the Corporation’s earnings performance and sharply lower shareholder returns, top executives forgo cash bonus compensation for the year. He also suggested that other executives receive cash bonus compensation at levels significantly reduced from prior years. The Committee concurred with Mr. Lord’s recommendation and Messrs. Lord, Remondi and Hewes did not receive cash bonus compensation for 2008. Messrs. Autor and Feierstein’s cash bonuses were reduced 75 percent and 71 percent, respectively, from 2007. For senior officers as a group, including the top five highest paid executives and 24 Senior Vice Presidents, 2008 cash bonus compensation in aggregate was one third of the target award level.

 

The Committee introduced new performance measures for 2009 equity awards. In the past, stock options vested upon a stated increase in the Corporation’s share price, subject to a minimum one-year service period. Acting upon a desire to more closely tie management’s compensation to sustained corporate performance — not over a single year, but over several years — the Committee provided that no more than one-third of stock options granted in 2009 will vest each year, depending on the extent to which “core earnings” net income under the annual business plan as established in each year is achieved. Likewise, performance stock granted in 2009 vests under this three-year schedule. Equity awards are subject to clawback in the event of a material inaccuracy in financial statements or performance metric criteria or a material violation of company compliance and control policies. These terms apply to officers at the level of Senior Vice President and above. As a group, senior officers received less than half (46 percent) of the equity awards granted in 2009. These grants will be reported in next year’s proxy statement.

 

The Committee set terms for the 2009 bonus plan. The extent to which bonuses are awarded will be based, in part, on the level of achievement of five targets: “core earnings” earnings per share; capital adequacy; asset quality; productivity; and liquidity. These targets were selected because they are key drivers of the Corporation’s success and shareholder returns. Sixty percent of awarded bonuses will be paid in cash; the remaining 40 percent will be paid in the Corporation’s common stock, which will be subject to forfeiture for 12 months. The payment of a significant amount of bonus in the form of SLM stock and the requirement to hold the stock for 12 months emphasizes the requirement of sustained corporate performance beyond the year in which bonuses are earned. Bonuses are subject to the same clawback provisions that apply to 2009 equity awards. These awards will be reported in next year’s proxy.

 

The remainder of this report further explains decisions made about compensation reported in this proxy statement, which are, generally, salaries paid and equity awards granted in 2008 and bonuses earned in 2008 and awarded in January 2009. The report provides context and perspective for the numerical information contained in the compensation tables that follow.

 

Compensation Reported in 2008: Process and Decisions Made

 

Process

 

With the exceptions noted below, the process for determining compensation reported in the tables that follow began in January 2008. At a meeting of the Compensation Committee in mid-January, the Committee heard a report from its consultant, Semler Brossy, about executive pay at other companies, using data from a custom selected group, the Peer Group,² and a financial services

 

 

²  Fourteen companies comprise the Corporation’s Peer Group. These companies are: Affiliated Computer Services, BB&T Corp., Capital One, Charles Schwab Corp., CIT Group Inc., Comerica, Discover Financial Services, Fifth Third Bancorp, KeyCorp, Nationwide Financial Services, PNC Financial Services Group Inc., Regions Financial Corp., State Street Corporation and Sun Trust Banks, Inc. The companies are in the financial services and data processing sectors with revenues, assets, net income, market value and workforce size that are within a range of the Corporation’s. The executive and director compensation data of the Peer Group is generally as reported in proxy statements filed in 2007, reporting pay for 2006. Semler Brossy makes adjustments and updates to the data as appropriate in their judgment.

industry survey, the Survey Group.³ (The nature and scope of Semler Brossy’s role as a consultant and the material elements of the direction provided to Semler Brossy are disclosed in the “Board Committees” section of this proxy statement.) The data were used to inform the Committee about the marketplace for executive pay and to determine if pay at the Corporation is fair and reasonable. The data were not used to set pay at the Corporation at a particular percentile relative to executive pay reported in the Peer Group or Survey Group.

 

After reviewing the consultant’s report and the Corporation’s performance for 2007, a discussion regarding the performance of each member of the executive management team occurred between members of the Committee, the CEO and the Senior Vice President for Administration. With the exceptions noted herein, the CEO made recommendations to the Committee for base salaries, equity awards and performance bonuses for other Named Executive Officers (the “NEOs”). As a result of this process, base salaries and equity awards for 2008, which are reported in the tables that follow, were set. (Bonuses awarded in January 2008 were earned in 2007 and were reported in last year’s proxy statement.) Mr. Lord and Mr. Remondi’s salaries are fixed by the terms of their employment agreements. Likewise, Mr. Remondi’s equity grant was fixed by his employment agreement and Mr. Lord’s was fixed in May.

 

At the time 2008 equity awards were made, the Corporation was experiencing a fundamental shift in its business. The merger agreement with the J.C. Flowers investor group was ending. The impact of pending legislative changes, which significantly reduced the profitability of the Corporation’s core lending business, became clear. The credit markets were deteriorating. The Corporation’s share price dropped from a high of $57.98 on July 9, 2007, to $21.50 on the date of grant of the awards. Substantially all outstanding stock options were significantly below their grant prices, or “underwater.” Historically, the Corporation has emphasized stock options as a way to motivate and reward employees for performance. The share price drop affected morale and raised concerns about retention of key personnel. These factors led the Committee to make larger equity grants than in prior years, engaging the management team and employees to face new challenges.

 

The Committee established equity grant guidelines that would re-stake the management team’s investment in the new future of the Corporation. At the Executive Vice President level, grant guidelines were set at 200,000 stock options and a range of 7,500 to 10,000 shares of performance stock, amounts that would provide meaningful opportunity in the future success of the Corporation. As described in the notes to the Grants of Plan-Based Awards table on page 24, vesting of these stock option awards is tied to an increase in the Corporation’s share price and vesting of performance stock awards is tied to achieving the Corporation’s “core earnings” net income business plan target. So that the Corporation may use the Black-Scholes valuation methodology for accounting purposes, the options also vest upon the eighth anniversary of their grant date.

 

The Committee established the 2008 performance bonus plan (the “2008 Bonus Plan”), in conjunction with the Board of Directors’ approval of the 2008 annual business plan. The 2008 Bonus Plan was established under the shareholder-approved SLM Corporation Incentive Plan.⁴ All members of management, approximately 950 employees, were eligible to participate in the 2008 Bonus Plan.

 

 

³  Sixty-six companies in the financial services industry with assets greater than $50 billion comprise the Survey Group, which is a Towers Perrin executive compensation database. These companies include banks, insurance companies, payment processors, federally chartered financial institutions and money managers. The Corporation purchases this survey data from Towers Perrin and Towers Perrin is not retained by the Corporation as a compensation consultant.

⁴  In order to allow for tax deductibility of bonuses paid to the NEOs, the 2008 Bonus Plan set the achievement of positive core earnings net income as the measure to determine the maximum bonus that may be earned by any individual in a given year. The maximum individual bonus is the lesser of $5 million and one percent of the Corporation’s “core earnings” net income for the year ($560 million for 2007). The Committee then used its discretion and paid bonuses less than that amount. This tax-planning tool has been used since 1997 and frees the Committee to make decisions that it believes are appropriate from a business perspective, rather than decisions that are constrained or limited by the tax code.

Key measures for corporate success, which were adopted as performance targets for the 2008 Bonus Plan, were:

 

 

Management reported these and other business drivers at the conclusion of each calendar quarter in the Corporation’s earnings releases. Year-to-date performance as measured against the 2008 Bonus Plan was presented to the officers of the Corporation at semi-annual meetings and to the Compensation Committee throughout the year.

 

The purposes of establishing the 2008 Bonus Plan and communicating results against the Plan were to; (1) inform all management employees about the performance of the Corporation as a whole; (2) unite the workforce around common goals; and (3) set expectations about the level of bonus compensation that might be made at year end. As with past years, the 2008 Bonus Plan was not used to determine individual bonuses, but instead to establish the context in which individual bonuses would be determined based primarily on individual performance, in the context of the extent to which the 2008 Bonus Plan targets for corporate performance were met.

 

Throughout the year, directors had contact with members of the executive management team at one-on-one meetings to prepare for Board and Committee meetings, at Board and Committee meetings themselves, at investor conferences and other corporate events, and on an ad hoc basis, at which time directors sought information from or gave guidance to members of management. This contact enabled directors to observe firsthand the communication, analytical and leadership skills of the management team. Also, each regularly scheduled Board meeting included a session with the CEO during which time the CEO discussed the challenges of the business and how members of the management team were addressing the challenges. These sessions were followed by executive sessions of the independent directors, during which independent Board members discussed among themselves the CEO’s performance. These interactions served to inform the Compensation Committee when it approached individual pay decisions in January 2008 and in January 2009.

 

Consistent with the Committee’s recent practice, two Compensation Committee meetings were held in January 2009. At the first meeting in mid-January, the Committee heard a report from its consultant on executive pay for the Peer Group and Survey Group. Final year end results against the 2008 Bonus Plan were reported and discussed. A discussion occurred between the Committee, the CEO and the Senior Vice President for Administration regarding individual performance. The Chairman of the Board attended this meeting and presented his performance review of Messrs. Lord, Remondi and Hewes. A second meeting was held 10 days later, at which time the Committee, among other things, determined bonuses for 2008, which are reported in the tables that follow.

 

Decisions Made

 

Key considerations of each NEO’s individual performance and how that performance resulted in pay decisions are as follows.

 

Mr. Lord.  Mr. Lord rebuilt the executive management team in 2008 by recruiting Messrs. Remondi and Hewes into key roles within the Corporation. He guided management through the liquidity and funding crisis that threatened the continuation of the Corporation’s core business, originating federally guaranteed student loans. He took steps to position the Corporation for future growth in private credit lending. Recognizing the importance of risk management and compliance, Mr. Lord recruited a Chief Credit Officer who continually evaluates the effectiveness of our private credit lending policies. He also recruited a Chief Compliance Officer and supported a staff increase in this area to enhance the Corporation’s compliance program.

At the time he returned from retirement to manage the Corporation, Mr. Lord’s annual base salary was set at $1.25 million. The Committee maintained this salary in 2008 in recognition of Mr. Lord’s leadership and the risks and responsibilities of the CEO position at this time.

 

After strong support for Mr. Lord was indicated by the Corporation’s shareholders upon his re-election to the Board, the Committee addressed Mr. Lord’s equity compensation. The Committee determined the size of the equity awards by first establishing Mr. Lord’s total potential annual pay at $10 million (including the grant date fair value of long-term equity awards), using the median target CEO pay of the Peer Group as a guideline. Total potential cash compensation was set at $3.75 million; the $1.25 million annual base salary plus a target bonus of two times salary, $2.5 million. The remainder of the potential pay package, $6.3 million, was made in equity awards. The Committee granted Mr. Lord 100,000 shares of performance stock, the maximum number of full-value shares that may be granted under the Incentive Plan, and 530,000 options. Using the valuation methodology set forth below⁵, Mr. Lord’s actual pay for 2008 was $3.8 million. Using the intrinsic value of his equity awards at year end, Mr. Lord’s actual pay was $2.14 million.

 

As stated earlier, Mr. Lord did not receive a cash bonus for 2008; his cash compensation was limited to his salary.

 

Mr. Remondi.  Mr. Remondi returned to the Corporation at a critical time. The Corporation had just terminated its merger agreement with the J.C. Flowers investor group and completed a public equity offering. Mr. Remondi immediately set about shoring up the Corporation’s liquidity by re-negotiating an asset-based commercial paper (“ABCP”) facility to provide a source of financing for the Corporation’s lending business. As the credit markets deteriorated, Mr. Remondi began discussions with federal officials. These discussions resulted in federally sponsored liquidity and funding programs that enabled the Corporation to meet the demand for originating federal student loans. Most recently, Mr. Remondi negotiated the extension of the ABCP facility, which is a continuing source of liquidity for the Corporation’s business.

 

Mr. Remondi’s compensation for 2008 was as set forth in the employment agreement entered into in January 2008. He received an annual base salary of $1.0 million and 2 million stock options. While this compensation is higher than historical levels for this position, the Committee believed this level of compensation necessary to obtain Mr. Remondi’s knowledge, experience and expertise at an extraordinary time in the life of the Corporation. As discussed above, Mr. Remondi did not receive an annual cash bonus. At year end, Mr. Remondi’s options had no intrinsic value.

 

Mr. Hewes.  Mr. Hewes joined the Corporation initially as Chief Credit Officer. Shortly after joining the Corporation, he was appointed Chief Lending Officer, responsible for private credit loan originations. Soon thereafter, he assumed operational responsibilities for the debt collection businesses, the Sallie Mae Bank, and wind-downing the purchased paper businesses.

 

Mr. Hewes’s compensation for 2008 was set at the time of his initial hire in March. His grant of 200,000 options was consistent with the 2008 grant guidelines for Executive Vice Presidents with roles and responsibilities similar to Mr. Hewes’s at that time. His annual base salary of $400,000 was predicated upon Mr. Hewes’s depth of experience in the financial services sector and was slightly higher than that of other Executive Vice Presidents. As discussed above, Mr. Hewes did not receive an annual cash bonus and his options had no intrinsic value at year end.

 

Mr. Autor.  In 2008, Mr. Autor played a critical role in spear-heading Project Pace, the Corporation’s operational efficiency and cost-reduction program. He continued to be responsible for management of the information technology division, loan originations and repayment operations and call centers, and guarantor servicing line of business.

 

 

⁵  The Committee valued Mr. Lord’s performance stock award in May 2008 based on a fair market value of $22.15 per share (the actual closing market price on May 7, 2008). His stock option award was valued at $7.75 per share, or 35% of the fair market value. Using this same methodology, Mr. Lord’s performance stock and stock option awards at December 31, 2008, are valued at $8.90 and $3.12, respectively.

Mr. Autor’s annual base salary in 2008 was the same as in 2007: $350,000. He was awarded a bonus of $100,000 for 2008, a 75 percent reduction from the prior year. The decision to reduce his bonus compensation was not made on the basis of Mr. Autor’s performance. The decision was made in light of the Corporation’s earnings performance and sharply lower shareholder returns. Mr. Autor received equity awards consistent with the grant guidelines for Executive Vice Presidents. His options had no intrinsic value at year end.

 

Mr. Feierstein.  Upon the departure of several executives in December 2007, Mr. Feierstein was appointed to lead the sales and marketing functions of the Corporation. Under his guidance, the Corporation maintained clients and increased loan volume in very uncertain times.

 

In recognition of his increased responsibilities and contributions, Mr. Feierstein was promoted to Executive Vice President in January 2008, at which time his annual base salary was increased from $235,000 to $350,000. He was awarded a bonus of $100,000, a 71 percent reduction from the prior year. The decision to reduce his bonus compensation was not made on the basis of Mr. Feierstein’s performance. The decision was made in light of the Corporation’s earnings performance and sharply lower shareholder returns. Mr. Feierstein received equity awards consistent with the grant guidelines for Executive Vice Presidents. His options had no intrinsic value at year end.

 

Mr. Andrews.  Mr. Andrews served as President through September 19, 2008, at an annual base salary of $750,000, an amount unchanged since May 2007, when he was appointed Chief Executive Officer. His 2008 equity awards granted in January, at which time he was Executive Vice President, were slightly higher than the grant guidelines for Executive Vice Presidents, reflecting his larger role and responsibilities at that time.

 

Mr. Andrews served a key leadership role at the Corporation through 2007, particularly after the departure of Thomas J. Fitzpatrick as Chief Executive Officer and during the unsettling times of the pending J.C. Flowers investor group transaction. He kept the workforce focused on driving the business and, at the request of the Board, fully cooperated with the investor group. Shortly after the return of Mr. Lord as CEO and Mr. Remondi as Vice Chairman and CFO, Mr. Andrews’s responsibilities at the Corporation diminished. By the third quarter, Mr. Andrews and the Board reached the conclusion that his services were no longer needed.

 

For year-to-date achievement of individual performance goals, including enhancing the Corporation’s compliance program and winding down the purchased paper businesses, the Committee awarded him a bonus of $500,000 for services in 2008. In recognition of his five-year career and the disruption in his career caused by the Board changing the direction of the Corporation and its management, the Committee awarded him a severance payment of $2.5 million and vested his outstanding unvested performance stock awards valued at $267,938 on his last day of employment, September 30, 2008. Mr. Andrews also received subsidized medical insurance valued at $9,967.

 

Mr. Franke.  Mr. Franke voluntarily resigned his position as Executive Vice President, Corporate Finance in September and left the Corporation at year end. His annual base salary was $350,000, an amount commensurate with his responsibilities and tenure at the Corporation, and other Executive Vice Presidents. In recognition of the key role that he played in managing the corporate finance department and debt investor relationships during turbulent times, the Committee awarded him a bonus of $600,000 and vested his outstanding and unvested performance stock awards valued at $83,900 on his last day of employment, December 31, 2008. Mr. Franke also received subsidized medical insurance valued at $9,431.

 

Mr. Lavet.  In early 2008, Mr. Lavet and management reached the conclusion that his services were no longer needed. Mr. Lavet’s position ended on January 31, 2008. In recognition of Mr. Lavet’s 16-year career and his services to the Corporation through the uncertainty of the J.C. Flowers investor group transaction, the Committee awarded him a severance payment of $2.1 million and vested his

outstanding and unvested performance stock awards valued at $262,881 as of January 31, 2008, his last day of employment. Mr. Lavet agreed to provide consulting services for 12 months following his termination of employment for $16,500 per month. Mr. Lavet also received subsidized medical insurance valued at $16,943.

 

Other Information

 

The following information outlines the objectives of the Corporation’s executive compensation program and the individual elements of compensation that comprise the program.

 

Objectives of the Corporation’s Executive Compensation Program

 

The primary objective of the Corporation’s executive compensation program is to drive and sustain corporate performance. Other objectives of the program are to: align the interests of executives with shareholders; attract and retain talented executives; offer competitive levels of total compensation; and recognize length of service with the Corporation.

 

The program rewards individual performance, in the context of the extent to which the goals of the annual performance bonus plan are achieved and share price performance is sustained.

 

Elements of Compensation

 

The executive compensation program includes seven elements of pay. The objective of each element, the reason the Corporation pays the element, the role of those elements in the Corporation’s overall compensation structure and the relationship between the elements and the overall structure are discussed below.

 

 

 

⁶  The Corporation’s defined contribution savings program provides for contributions to tax-deferred, savings-style accounts from both the Corporation and employees. A tax-qualified plan and a non-qualified plan comprise the program. The investment risk of the program is borne by employees.

⁷  The Corporation’s defined benefit retirement program is funded solely by corporate contributions. A tax-qualified plan and a non-qualified plan comprise the program which will cease to accrue benefits past June 30, 2009. The Corporation bears the investment risk of this program.

 

 

The Corporation also provides benefit programs that are available to all full-time employees on the same terms and conditions, such as medical and dental benefits, life insurance, disability insurance and an employee stock purchase plan. Because these benefits are not a component of our

executive compensation program, these benefits are not described in this Compensation Discussion and Analysis.

 

Change in Control Severance Benefits

 

The Change in Control Severance Plan, which was adopted in 2006, applies to officers at the level of Senior Vice President and above. The plan is designed to reduce the possibility that executives might preemptively seek jobs at other corporations in anticipation of a potential change in control and to retain executives through the finalization and integration of any change in ownership of the Corporation, providing for continuity of management. As noted above, the Corporation considers this plan to have been important in allowing the Corporation to maintain operations while the proposed merger with the J.C. Flowers investor group was pending and to quickly reorient itself following termination of the merger agreement.

 

If termination of employment for reasons defined in the plan occurs within 24 months of a change in control of the Corporation, the participant is entitled to receive a lump sum cash payment equal to two times the sum of his or her base salary and average, annual performance bonus. A participant will also be entitled to receive a pro-rated portion of his or her target annual performance bonus for the year in which the termination occurs, as well as continuation of medical insurance benefits for a two-year period. The plan provides for tax gross-up payments in the event that benefits exceed amounts determined under the Internal Revenue Code of 1986, as amended (the “Tax Code”).

 

The Committee amended the Change in Control Severance Plan effective January 1, 2009 to eliminate vesting that is triggered solely by a change in control, as defined in the plan. As amended, for equity awards granted after January 1, 2009, unvested equity awards become vested and non-forfeitable in connection with a change in control only if the participant’s employment is terminated or if the acquiring or surviving entity does not assume the awards. Awards made before January 1, 2009 vest upon a change in control, regardless of whether the participant’s employment terminates.

 

Share Ownership Guidelines

 

The Corporation has maintained share ownership guidelines for officers at the level of Senior Vice President and above for over nine years. Due to the fundamental shifts in the Corporation’s business and the significant drop in the Corporation’s share price over the past 12 months, the Compensation Committee has determined to suspend the application of the ownership guidelines at this time. The Committee will revisit the guidelines and will report new guidelines to shareholders no later than the third quarter.

 

Equity Grant Practices in 2008

 

The Corporation grants stock options upon the following circumstances: annually, on a performance basis to eligible officers and employees (“Annual Option Grants”); upon initial hire; officer promotions; and acquisitions (“Event Driven Option Grants”).

 

 

Documentation of Option Grants:  The Compensation Committee has authority to grant options. In certain cases, the Committee has delegated grant-making authority to a Plan

Subcommittee. The Plan Subcommittee is currently composed of Mr. Lord in his role as Vice Chairman of the Board. An explanation of the types of grants made by the Compensation Committee and the Plan Subcommittee and the documentation process for each follows.

 

 

Performance Stock Awards:  The Committee typically awards performance stock at a regularly scheduled January Committee meeting in conjunction with annual performance evaluations of the management team. Performance stock is granted based on the Corporation’s closing stock price on the date of the applicable meeting.

 

Compensation and Personnel Committee Report

 

The Compensation and Personnel Committee of the Board of Directors has reviewed the Compensation Discussion and Analysis and discussed that Analysis with management. Based on its review and discussions with management, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Corporation’s Annual Report on Form 10-K for 2008 and the Corporation’s 2009 proxy statement.

 

Compensation and Personnel Committee

Wolfgang Schoellkopf, Chairman

Diane Suitt Gilleland

A. Alexander Porter, Jr.

Steven L. Shapiro

 

SUMMARY COMPENSATION TABLE

 

The table below summarizes certain compensation paid or awarded to or earned by each of the NEOs for the fiscal year ended December 31, 2008. NEOs for 2008 are:

 

Mr. Lord, who served as Principal Executive Officer for the entire year;

 

Mr. Remondi, who served as Principal Financial Officer from January 7, 2008 through the end of the year;

 

Messrs. Autor, Feierstein and Hewes, who were serving as executive officers at year end and were the most highly paid executive officers other than Messrs. Lord and Remondi;

 

Mr. Andrews, who served as Principal Financial Officer through January 6, 2008; and

 

Messrs. Franke and Lavet, who would have been among the highest paid executive officers had they been serving as executive officers at year end.

 

For this purpose, “compensation” means the amount disclosed in the “Total” column of the Summary Compensation table in this proxy statement less the amounts disclosed in the Change in Pension Value column of that same table.

For those individuals who were also NEOs in 2007 and 2006, compensation information for the years ended December 31, 2007 and December 31, 2006 is included.

 

 

 

 

 

 

 

 

 

 

The combination of both plans provides NEOs with an employer contribution of up to two percent and a matching contribution of up to six percent of base salary and annual performance bonus up to $730,000 of total covered compensation, except for Messrs. Lord and Autor, whose total covered compensation is not limited.

 

 

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS

 

 

 

NARRATIVE DISCUSSION OF COMPENSATION ARRANGEMENTS

 

Individually negotiated compensation arrangements were in force during 2008 for two NEOs: Messrs. Lord and Remondi. A summary of each of these arrangements follows:

 

Mr. Lord.  In May 2007, Mr. Lord and the Corporation entered into an employment agreement, which ends on December 31, 2010, for Mr. Lord’s services as Chief Executive Officer. Under the agreement, Mr. Lord is paid an annual base salary of $1.25 million.

 

The agreement establishes payment terms in the event Mr. Lord’s employment ends for certain reasons. If the Corporation terminates Mr. Lord’s employment “without cause” or Mr. Lord ends his employment for good reason, Mr. Lord is entitled to receive a cash payment equal to: (1) the number of months remaining in the term of the agreement divided by 12, but not less than one; times (2) his base salary plus his target annual bonus for the year.

 

Termination for cause generally means a determination by the Board of Directors that there has been a failure by Mr. Lord to perform his responsibilities and such failure remains uncured, or that Mr. Lord has committed an act of misconduct, which means (i) embezzlement, fraud, commission of a felony, breach of fiduciary duty or deliberate disregard of material Corporation policies; (ii) personal dishonesty materially injurious to the Corporation; (iii) unauthorized disclosure of any proprietary information; or (iv) competing with the Corporation while employed or within at least a two-year period (or in some instances longer) after termination of employment.

 

Termination for good reason generally means (i) a material reduction in Mr. Lord’s position; (ii) a reduction in his base salary or a material reduction in his compensation arrangements or benefits (except that variability in the value of stock-based compensation or in incentive compensation will not be considered a reduction); or (iii) a forced relocation of the Corporation’s executive offices.

 

In the event of termination of employment following a change in control of the Corporation, Mr. Lord’s benefits are determined under the terms of his employment agreement as set forth above and not the Change in Control Severance Plan.

 

Mr. Remondi.  In January 2008, Mr. Remondi and the Corporation entered into a three-year employment agreement, which ends on January 8, 2011, for Mr. Remondi’s services as Chief Financial Officer and Vice Chairman. Under the agreement, Mr. Remondi received 3 million options to purchase the Corporation’s common stock, is paid an annual base salary of $1 million and is eligible to receive a maximum annual performance bonus of three times his salary.

 

Two million of the options were granted on January 8, 2008 at a grant price of $17.30, the closing price of the Corporation’s stock on that day. These options vested on January 8, 2009, after meeting price and time vesting requirements. (The price vesting requirement was that the Corporation’s stock price close at or above $20.76 for five consecutive trading days.) One million of the options were granted on January 8, 2009 at a grant price of $10.17, the closing price of the Corporation’s stock on that day. These options vest and are exercisable when the share price trades at $24.22 for five consecutive days (a 40 percent increase over $17.30, the grant price for the first two million options), but no earlier than January 8, 2010. If these options do not vest under the price-vesting target, they vest on January 8, 2014. Once vested, options may be exercised during the remainder of their 10-year term, unless Mr. Remondi’s employment ends. Once his employment ends, Mr. Remondi must exercise vested options within 3 months of his last day of employment, except in the case of death or disability. If Mr. Remondi’s employment ends due to death or disability, unvested options vest immediately and are exercisable for one year following his death or disability and his family will receive company-sponsored medical benefits for one year.

 

The agreement establishes payment terms in the event Mr. Remondi’s employment ends for certain reasons. If the Corporation terminates Mr. Remondi’s employment “without cause” or Mr. Remondi ends his employment for good reason, Mr. Remondi is entitled to receive a target bonus plus a cash payment equal to six months of “pay” (the average of base salary and annual bonus since employment) for each year of service, up to a maximum of three years of “pay.” Termination of

employment by the Corporation without cause and termination of employment by Mr. Remondi for good reason have the same meanings as in Mr. Lord’s agreement described above.

 

For up to a two-year period, Mr. Remondi is provided with housing in Reston, Virginia and an allowance of $200,000 for personal use of corporate aircraft.

 

OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR END

 

The table below sets forth information regarding options and stock awards that were outstanding as of December 31, 2008.

 

 

OPTION EXERCISES AND STOCK VESTED

 

The table below sets forth information regarding amounts realized from options that were exercised and stock awards that vested during the 2008 fiscal year.

 

 

PENSION BENEFITS

 

The table below provides information about the present value as of December 31, 2008 of the NEOs’ accumulated pension benefits under the Corporation’s tax-qualified pension plan and a non-qualified supplemental pension plan (the “Pension Plans”), based on the assumptions described in footnote (1) below.

 

Effective July 1, 2004, the Pension Plans were frozen for new entrants; employees as of July 1, 2004 with less than five years of service and employees hired on and after July 1, 2004 do not receive benefits under the Pension Plans. Effective July 1, 2006, the Pension Plans were frozen for employees as of June 30, 2004 with five to nine years of service. No benefits accrue with respect to these participants under the Pension Plans, other than interest accruals. Employees as of June 30, 2004 with ten or more years of service accrue benefits under the Pension Plans through June 30, 2009. Of the NEOs, Messrs. Lord, Autor, Franke and Lavet accrued benefits under the Pension Plans during 2008.

Benefits under the Pension Plans are credited using a cash balance formula. Under the formula, each participant has an account, for record keeping purposes only, to which credits are allocated each payroll period based on a percentage of the participant’s compensation (base salary and annual performance bonus) for the current pay period (“Pay Credits”). The applicable Pay Credit percentage is determined by a participant’s years of service with the Corporation. The Pay Credit percentages are as follows: four percent for 0-4 years of service; five percent for 5-9 years of service; six percent for 10-13 years of service; seven percent for 14-16 years of service; eight percent for 17-19 years of service; nine percent for 20-24 years of service; and ten percent for 25 and more years of service. In addition to Pay Credits, participants’ accounts are credited quarterly with an interest amount that is based on the interest rate on 30-year U.S. Treasury securities.

 

A participant’s benefit is payable upon termination of employment and is paid in a lump sum or one of several monthly annuity options. The normal retirement age is 62.

 

If an individual participated in the Corporation’s prior pension plan as of September 30, 1999 and met certain age and service criteria, the participant (“grandfathered participant”) receives the greater of the benefits calculated under the prior plan, which uses a final average compensation formula, or under the cash balance formula. Messrs. Lord and Franke are the only NEOs who are “grandfathered participants”.

 

The Corporation’s non-qualified pension plan assures that designated participants receive the full amount of benefits to which they would have been entitled under the tax-qualified pension plan but for limits on compensation and benefit levels imposed by the Tax Code. The non-qualified plan does not provide any other benefits.

An individually negotiated retirement benefit was in force in 2008 for Mr. Andrews. Under this agreement, Mr. Andrews is entitled to a retirement benefit of a single life annuity of $56,500 beginning March 30, 2009, offset by any amounts paid under the Pension Plans.

 

 

 

NON-QUALIFIED DEFERRED COMPENSATION FOR FISCAL YEAR 2008

 

The table below provides information about the non-qualified deferred compensation of the NEOs in 2008.

 

Under the plan, which is available to key employees, eligible employees may elect to defer up to 100 percent of their annual performance bonus, 100 percent of performance stock, and up to 85 percent of their base salary. Amounts deferred by plan participants are credited to record-keeping accounts; participants are general creditors of the Corporation with regard to their accounts.

 

The Corporation makes contributions to the plan only if, and to the extent, a participant’s deferral under this plan reduces the corporate contribution that would have been made under the Corporation’s tax-qualified defined contribution plan. No such contributions were made for any NEO for 2008.

 

Participants’ accounts are credited with earnings based on the investment performance of underlying investment funds, as selected by participants. The Corporation’s stock is one of the available investment funds. Earnings credited do not constitute an “above-market interest rate” as defined by the SEC. Earnings are credited daily.

 

Participants elect the time and form of payment of their accounts. Except as described herein, accounts may be paid either 12 months following separation of service or by January 31 following an age elected by the participant and at least 12 months following separation of service. (NEOs who have elected to have their account “invested” in the Corporation’s stock will receive their account six months following separation from service.) Accounts may be distributed either in a lump sum, annual installments, or a formula acceptable to the Corporation. The timing of the payment of accounts may be changed, but the change must delay distribution for at least five years beyond the original distribution date, must be made at least 12 months before the original distribution date, and will not be effective until 12 months after the subsequent election is made. Accounts may also be paid while a participant is “in service.” A one-time special election to receive a lump sum distribution no earlier than July 1, 2008 was made available to participants through December 31, 2007.

 

 

 

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

 

The tables below reflect the amount of compensation that would have been payable to the NEOs who were employed as executive officers on December 31, 2008 if such NEOs’ employment had terminated and/or a change in control had occurred on December 31, 2008, given the NEOs’ compensation and service levels as of December 31, 2008 and based on the Corporation’s closing stock price on that date of $8.90. The compensation and benefits disclosed in the tables are in addition to: (1) compensation and benefits available prior to the occurrence of a termination of employment, such as vested stock options; (2) compensation and benefits disclosed in the “Pension Benefits at 2008 Fiscal Year End” and the “Non-Qualified Deferred Compensation for Fiscal Year 2008” tables; and (3) compensation and benefits available generally to all employees, such as distributions under the Corporation’s defined contribution retirement program, disability plans and accrued vacation pay.

The actual amounts that would be paid upon an NEO’s termination of employment or a change in control can be determined only at the time of any such event. Due to the number of factors that affect the nature and amount of any compensation or benefits provided upon the events discussed below, any actual amounts paid or distributed may be higher or lower than reported below. Factors that could affect these amounts include the timing during the year of any such event, the Corporation’s stock price and the executive’s age.

 

Descriptions of Existing Plans and Arrangements

 

The following arrangements were effective for the NEOs who were employed as executive officers on December 31, 2008: (1) the Change in Control Severance Plan; and (2) employment agreements for Messrs. Lord and Remondi, which are summarized in the “Narrative Discussion of Compensation Arrangements” section.

 

Change in Control Severance Plan.  Upon a change in control of the Corporation, all outstanding and unvested equity awards granted prior to 2009 become vested and non-forfeitable. Outstanding and unvested equity awards granted on and after January 1, 2009 vest upon a change in control only in the event the acquiring or surviving entity does not assume the awards. Upon a change in control of the Corporation and a termination of a participant’s employment by the Corporation without cause or by the participant for good reason within 24 months of the change in control, the participant is entitled to receive a lump sum cash payment equal to two times the sum of his or her base salary and annual performance bonus. A participant will also be entitled to receive a pro-rated portion of his or her target annual performance bonus for the year in which the termination occurs, as well as continuation of medical insurance benefits for a two-year period. Also, if as a result of benefits provided under the plan a participant becomes subject to excise taxes under section 4999 of the Tax Code, the Corporation will make certain “gross up” payments for the excise taxes payable by the participant and for taxes payable on the grossed-up amount.

 

Receipt of cash benefits is conditioned on the eligible participant’s agreeing to non-competition and non-solicitation agreements and a general release of claims against the Corporation.

 

Change in control generally means the occurrence of any of the following events: (i) any person unrelated to the Corporation acquires more than 50 percent of the then outstanding voting stock; (ii) a majority of the Board of Directors is replaced within a 12-month period other than in specific circumstances; (iii) the consummation of a merger or consolidation of the Corporation that results in the shareholders of the Corporation immediately before the merger or consolidation owning immediately following such merger or consolidation less than 50 percent of the combined voting power of the corporation that survives the transaction; or (iv) a sale of all or substantially all of the assets of the Corporation.

 

Termination for cause generally means a determination by the Board of Directors that there has been a failure by the executive officer to perform his or her responsibilities and such failure remains uncured, or that the executive officer has committed an act of misconduct, which means (i) embezzlement, fraud, commission of a felony, breach of fiduciary duty or deliberate disregard of material Corporation policies; (ii) personal dishonesty materially injurious to the Corporation; (iii) unauthorized disclosure of any proprietary information; or (iv) competing with the Corporation while employed or within at least a two-year period (or in some instances longer) after termination of employment.

 

Termination for good reason generally means (i) a material reduction in the executive officer’s position; (ii) a reduction in the executive officer’s base salary or a material reduction in his compensation arrangements or benefits (except that variability in the value of stock-based compensation or in incentive compensation will not be considered a reduction); or (iii) a forced relocation of the Corporation’s executive offices.