UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
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Genuine Parts Company

 

(Name of Registrant as Specified in Its Charter)

 

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GENUINE PARTS COMPANY
2999 Circle 75 Parkway
Atlanta, Georgia 30339

 

 

 

 

NOTICE OF 2010 ANNUAL MEETING OF SHAREHOLDERS

 

April 19, 2010

 

 

 

 

TO THE SHAREHOLDERS OF GENUINE PARTS COMPANY:

 

The 2010 Annual Meeting of Shareholders of Genuine Parts Company, a Georgia corporation, will be held at the Company’s headquarters, 2999 Circle 75 Parkway, Atlanta, Georgia, on Monday, the 19th day of April 2010, at 10:00 a.m., for the following purposes:

 

(1) To elect as directors the eleven nominees named in the attached proxy statement;

 

(2) To ratify the selection of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending December 31, 2010;

 

(3) To act upon such other matters as may properly come before the meeting or any reconvened meeting following any adjournment thereof.

 

Information relevant to these matters is set forth in the attached proxy statement. Only holders of record of Common Stock at the close of business on February 11, 2010 will be entitled to vote at the meeting.

 

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on April 19, 2010.

 

The Proxy Statement and the 2009 Annual Report to Shareholders are available at
http://www.proxydocs.com/gpc

 

By Order of the Board of Directors,

 

 

CAROL B. YANCEY
Senior Vice President — Finance and
Corporate Secretary

 

Atlanta, Georgia

February 26, 2010

 

YOUR VOTE IS IMPORTANT!

 

WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING IN PERSON, PLEASE VOTE, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED BUSINESS REPLY ENVELOPE, OR YOU CAN VOTE BY TELEPHONE OR INTERNET PURSUANT TO THE INSTRUCTIONS ON THE ENCLOSED PROXY CARD. IF YOU DO ATTEND THE MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.

 

TABLE OF CONTENTS

 

GENUINE PARTS COMPANY
2999 Circle 75 Parkway
Atlanta, Georgia 30339

 

PROXY STATEMENT

 

This proxy statement is being furnished to the shareholders of Genuine Parts Company in connection with the solicitation of proxies by the Board of Directors of the Company for use at the Company’s 2010 Annual Meeting of Shareholders to be held on Monday, April 19, 2010, at 10:00 a.m. local time and at any reconvened meeting following any adjournment thereof. The Annual Meeting will be held at the Company’s headquarters, 2999 Circle 75 Parkway, Atlanta, Georgia.

 

This proxy statement and the accompanying proxy card are first being mailed to shareholders on or about February 26, 2010. The Company’s 2009 annual report to the shareholders, including consolidated financial statements for the year ended December 31, 2009, is enclosed.

 

Shareholders of record can simplify their voting and reduce the Company’s costs by voting their shares via telephone or the Internet. Instructions for voting via telephone or the Internet are set forth on the enclosed proxy card. The telephone and Internet voting procedures are designed to authenticate votes cast by use of a personal identification number. These procedures enable shareholders to appoint a proxy to vote their shares and to confirm that their instructions have been properly recorded. If your shares are held in the name of a bank or broker (the availability of telephone and Internet voting will depend on the voting processes of the applicable bank or broker in “street name”); therefore, it is recommended that you follow the voting instructions on the form you receive. If you do not choose to vote by telephone or the Internet, please mark your choices on the enclosed proxy card and then date, sign and return the proxy card at your earliest opportunity.

 

All proxies properly voted by telephone or the Internet and all properly executed written proxy cards that are delivered to the Company (and not later revoked) will be voted in accordance with instructions given in the proxy. When voting for director nominees, you may (1) vote FOR all nominees listed in this proxy statement, (2) WITHHOLD AUTHORITY to vote for all nominees, or (3) WITHHOLD AUTHORITY to vote for one or more nominees but vote FOR the other nominees. To ratify the selection of independent auditors, you may vote FOR or AGAINST the proposal or you may ABSTAIN from voting.

 

If a signed proxy card is received which does not specify a vote or an abstention, the shares represented by that proxy card will be voted FOR all nominees to the Board of Directors listed in this proxy statement and FOR the ratification of the selection of independent auditors for the fiscal year ending December 31, 2010. The Company is not aware, as of the date hereof, of any matters to be voted upon at the Annual Meeting other than those stated in this proxy statement and the accompanying Notice of 2010 Annual Meeting of Shareholders. If any other matters are properly brought before the Annual Meeting, the enclosed proxy card gives discretionary authority to the persons named as proxies to vote the shares represented thereby in their discretion.

 

If you hold your shares in street name and you do not instruct your bank or brokerage firm how to vote your shares at least ten days before the date of the Annual Meeting, your bank or brokerage firm cannot vote your shares without instructions on “Proposal 1 — Election of Directors,” which will have the same effect as a withhold vote. However, your bank or brokerage firm may vote your shares in its discretion on “Proposal 2 — Ratification of Selection of Independent Auditors.”

 

A shareholder of record who submits a proxy pursuant to this solicitation may revoke it at any time prior to its exercise at the Annual Meeting. Such revocation may be by delivery of written notice to the Corporate Secretary of the Company at the Company’s address shown above, by delivery of a proxy bearing a later date, or by voting in person at the Annual Meeting. Street name holders may revoke their proxies prior to the Annual Meeting by following the procedures specified by their bank or brokerage firm.

Only holders of record of the Company’s Common Stock at the close of business on the record date for the Annual Meeting, which is February 11, 2010, are entitled to vote at the Annual Meeting. Persons who hold shares of Common Stock in street name as of the record date may vote at the Annual Meeting only if they hold a valid proxy from their bank or brokerage firm. At the close of business on February 11, 2010, the Company had outstanding and entitled to vote at the Annual Meeting 158,703,873 shares of Common Stock.

 

On each proposal presented for a vote at the Annual Meeting, each shareholder is entitled to one vote per share of Common Stock held as of the record date. A quorum for the purposes of all matters to be voted on shall consist of shareholders representing, in person or by proxy, a majority of the outstanding shares of Common Stock entitled to vote at the Annual Meeting. Shares represented at the Annual Meeting that are abstained or withheld from voting will be considered present for purposes of determining a quorum at the Annual Meeting. If less than a majority of the outstanding shares of Common Stock are represented at the Annual Meeting, a majority of the shares so represented may adjourn the Annual Meeting to another date, time or place.

 

The vote required for the election of directors and the ratification of the selection of independent auditors is a majority of the shares of Common Stock outstanding and entitled to vote which are represented at the Annual Meeting. Because votes withheld and abstentions will be considered as present and entitled to vote at the Annual Meeting but will not be voted, they will have the same effect as votes “against” both proposals.

 

The Board of Directors of the Company currently consists of eleven directorships. The Board of Directors, based on the recommendation of its Compensation, Nominating and Governance Committee, has nominated the eleven directors named below to serve until the 2011 Annual Meeting and the election and qualification of their successors.

 

In the event that any nominee is unable to serve (which is not anticipated), the Board of Directors may:

 

 

If any incumbent director nominee in an uncontested election should fail to receive the required affirmative vote of the holders of a majority of the shares present or represented at the Annual Meeting, under Georgia law, the director remains in office as a “holdover” director until his or her successor is elected and qualified or until his or her earlier resignation, retirement, disqualification, removal from office or death. In the event of a holdover director, the Board of Directors in its discretion may request the director to resign from the Board. If the director resigns, the Board of Directors may:

 

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE ELECTION OF ALL OF THE NOMINEES. ALL VALID PROXIES RECEIVED WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.

 

Set forth below is certain information about each of the eleven nominees for director. For additional information about the nominees, including the experience, qualifications, attributes and skills that our Board believes makes them well qualified to serve as directors, as well as information about our director independence requirements, our director nominating process, our board leadership structure and other corporate governance matters, see “Corporate Governance” below.

NOMINEES FOR DIRECTOR

 

 

Independent Directors

 

The Company’s Common Stock is listed on the New York Stock Exchange. The NYSE requires that a majority of the directors, and all of the members of certain committees of the board of directors be “independent directors,” as defined in the NYSE corporate governance standards. Generally, a director does not qualify as an independent director if the director (or in some cases, members of the director’s immediate family) has, or in the past three years has had, certain material relationships or affiliations with the Company, its external or internal auditors, or other companies that do business with the Company. The Board has affirmatively determined that seven of the Company’s eleven current directors have no other direct or indirect relationships with the Company and therefore are independent directors on the basis of the NYSE corporate governance standards and an analysis of all facts specific to each director. The independent directors are Mary B. Bullock, George C. “Jack” Guynn, John D. Johns, Michael M. E. Johns, M.D., J. Hicks Lanier, Wendy B. Needham and Gary W. Rollins.

 

Corporate Governance Guidelines

 

The Board of Directors has adopted Corporate Governance Guidelines that give effect to the NYSE’s requirements related to corporate governance and various other corporate governance matters. The Company’s Corporate Governance Guidelines, as well as the charters of the Compensation, Nominating and Governance Committee and the Audit Committee, are available on the Company’s website at www.genpt.com.

 

Non-Management Director Meetings and Presiding Independent Director

 

Pursuant to the Company’s Corporate Governance Guidelines, the Company’s non-management directors meet separately from the other directors in regularly scheduled executive sessions at least annually and at such other times as may be scheduled by the Chairman of the Board or by the presiding independent director or as may be requested by any non-management director.

 

The independent directors serving on the Company’s Board of Directors have appointed J. Hicks Lanier to serve as the Board’s presiding independent director. As the presiding independent director, Mr. Lanier presides at all meetings of non-management and independent directors and serves as a liaison between the Chief Executive Officer and the non-management and independent directors. During 2009, the independent directors held four meetings without management. Mr. Lanier presided over all of these meetings.

 

Board Leadership Structure

 

As is common practice among public companies in the United States, the Board has appointed the Company’s Chief Executive Officer to serve as Chairman of the Board. In his position as CEO, Mr. Gallagher has primary responsibility for the day-to-day operations of the Company and provides consistent leadership on the Company’s key strategic objectives. In his role as Chairman of the Board, he sets the strategic priorities for the Board (with input from the presiding independent director), presides over its meetings and communicates its strategic findings and guidance to management. The Board believes that the combination of these two roles provides more consistent communication and coordination throughout the organization, which results in a more effective and efficient implementation of corporate strategy and is important in unifying the Company’s strategy behind a single vision. In addition, we have found that our CEO is the most knowledgeable member of the Board regarding risks the Company may be facing and, in his role as Chairman, is able to facilitate the Board’s oversight of such risks.

As noted earlier, the independent directors have appointed a presiding independent director, which provides balance to the Board’s structure. With a supermajority of independent directors, an Audit Committee and a Compensation, Nominating and Governance Committee each comprised entirely of independent directors, and a presiding independent director to oversee all meetings of the non-management directors, the Company’s Board of Directors is comfortable that its existing leadership structure provides for an appropriate balance that best serves the Company and its shareholders. The Board of Directors periodically reviews its leadership structure to ensure that it remains the optimal structure for our Company and our shareholders.

 

Director Nominating Process

 

Shareholders may recommend a director nominee by writing to the Corporate Secretary specifying the nominee’s name and the other required information set forth in the Company’s Corporate Governance Guidelines, which are available on the Company’s website at www.genpt.com. All recommendations should include the written consent of the nominee to be nominated for election to the Company’s Board of Directors. To be considered, recommendations must be received by the Company at least 120 calendar days prior to the date of the Company’s proxy statement for the prior year’s Annual Meeting of Shareholders and include all required information to be considered. In the case of the 2011 Annual Meeting of Shareholders, this deadline is October 29, 2010. All recommendations will be brought to the attention of the Compensation, Nominating and Governance Committee.

 

The Company’s Board of Directors has established the following process for the identification and selection of candidates for director. The Compensation, Nominating and Governance Committee, in consultation with the Chairman of the Board, annually reviews the appropriate experience, skills and characteristics required of Board members in the context of the current membership of the Board to determine whether the Board would better be enhanced by the addition of one or more directors. This review includes, among other relevant factors in the context of the perceived needs of the Board at that time, issues of experience, reputation, judgment, diversity and skills. The Compensation, Nominating and Governance Committee, when considering diversity, gives strong consideration to a wide range of diversity factors as a matter of practice.

 

If the Compensation, Nominating and Governance Committee determines that adding a new director is advisable, the Committee initiates a search, working with other directors, management and, if it deems appropriate or necessary, a search firm retained to assist in the search. The Compensation, Nominating and Governance Committee considers all appropriate candidates proposed by management, directors and shareholders. Information regarding potential candidates is presented to the Compensation, Nominating and Governance Committee, and the Committee evaluates the candidates based on the needs of the Board at that time. Potential candidates are evaluated according to the same criteria, regardless of whether the candidate was recommended by shareholders, the Compensation, Nominating and Governance Committee, another director, Company management, a search firm or another third party. The Compensation, Nominating and Governance Committee then submits any recommended candidate(s) to the full Board of Directors for approval and recommendation to the shareholders.

 

The Company’s Board of Directors is comprised of individuals with diverse experience at policy-making levels in a variety of businesses, as well as in education and non-profit organizations in areas that are relevant to the Company’s activities. Each director was nominated on the basis of the unique experience, qualifications, attributes and skills that he or she brings to the Board, as well as how those factors blend with those of the others on the Board as a whole. On an individual basis:

 

 

 

Communications with the Board

 

The Company’s Corporate Governance Guidelines provide for a process by which shareholders or other interested parties may communicate with the Board, a Board committee, the presiding independent director, the non-management directors as a group, or individual directors. Shareholders or other interested parties who wish to communicate with the Board, a Board committee or any such other individual director or directors may do so by sending written communications addressed to the Board of Directors, a Board committee or such individual director or directors, c/o Corporate Secretary, Genuine Parts Company, 2999 Circle 75 Parkway, Atlanta, Georgia 30339. This information is also available on the Company’s website at www.genpt.com. All communications will be compiled by the Secretary of the Company and forwarded to the members of the Board to whom the communication is directed or, if the communication is not directed to any particular member(s) of the Board, the communication shall be forwarded to all members of the Board of Directors.

 

Annual Performance Evaluations

 

The Company’s Corporate Governance Guidelines provide that the Board of Directors shall conduct an annual evaluation to determine, among other matters, whether the Board and the Committees are functioning effectively. The Audit Committee and the Compensation, Nominating and Governance Committee are also required to each

conduct an annual self-evaluation. The Compensation, Nominating and Governance Committee is responsible for overseeing this self-evaluation process. The Board, Audit Committee and Compensation, Nominating and Governance Committee each conducted an annual self-evaluation process during 2009.

 

Board Oversight of Risk

 

The Company’s Board of Directors recognizes that, although risk management is primarily the responsibility of the Company’s management team, the Board plays a critical role in the oversight of risk. The Board believes that an important part of its responsibilities is to assess the major risks the Company faces and review the Company’s options for monitoring and controlling these risks. The Board assumes responsibility for the Company’s overall risk assessment. The Audit Committee has specific responsibility for oversight of risks associated with financial accounting and audits, as well as internal control over financial reporting. This includes the Company’s risk assessment and management policies, the Company’s major financial risk exposure and the steps taken by management to monitor and mitigate such exposure. The Compensation, Nominating and Governance Committee oversees the risks relating to the Company’s compensation policies and practices as well as management development and leadership succession in the Company’s various business units. The Board as a whole examines specific business risks in its regular reviews of the individual business units and also on a company-wide basis as part of its regular strategic reviews.

 

In addition to periodic reports from the two committees about risks, the Board receives presentations throughout the year from various business units that include discussion of significant risks specific to their business unit as necessary. Periodically, at Board meetings, management discusses matters of particular importance or concern, including any significant areas of risk requiring Board attention.

 

Code of Conduct and Ethics

 

The Board of Directors has adopted a Code of Conduct and Ethics for Employees, Contract and/or Temporary Workers, Officers and Directors and a Code of Conduct and Ethics for Senior Financial Officers, both of which are available on the Company’s website at www.genpt.com. These Codes of Conduct and Ethics comply with NYSE and Securities and Exchange Commission (the “SEC”) requirements, including procedures for the confidential, anonymous submission by employees or others of any complaints or concerns about the Company or its accounting, internal accounting controls or auditing matters. The Company will post any amendments to or waivers from the Code of Conduct and Ethics (to the extent applicable to the Company’s executive officers and directors) on its website.

 

Board Attendance

 

The Company’s Corporate Governance Guidelines provide that all directors are expected to attend all meetings of the Board and committees on which they serve and are also expected to attend the Annual Meeting of Shareholders. During 2009, the Board of Directors held five meetings. All of the directors attended all of the Board of Directors meetings and meetings of committees of the Board on which they served. All of the Company’s directors were in attendance at the Company’s 2009 Annual Meeting.

 

Board Committees

 

The Board presently has three standing committees. Information regarding the functions of the Board’s committees, their present membership and the number of meetings held by each committee during 2009 is set forth below:

 

Executive Committee.  The Executive Committee is authorized, to the extent permitted by law, to act on behalf of the Board of Directors on all matters that may arise between regular meetings of the Board upon which the Board of Directors would be authorized to act. The current members of the Executive Committee are Larry L. Prince (Chair), Thomas C. Gallagher, J. Hicks Lanier and Gary W. Rollins. During 2009, this committee held five meetings.

Audit Committee.  The Audit Committee’s main role is to assist the Board of Directors with oversight of (1) the integrity of the Company’s financial statements, (2) the Company’s compliance with legal and regulatory requirements, (3) the independent auditor’s qualifications and independence and (4) the performance of the Company’s internal audit function and independent auditors. As part of its duties, the Audit Committee assists in the oversight of (a) management’s assessment of, and reporting on, the effectiveness of internal control over financial reporting, (b) the independent auditor’s integrated audit, which includes expressing an opinion on the conformity of the Company’s audited financial statements with United States generally accepted accounting principles, (c) the independent auditor’s audit of the Company’s internal control over financial reporting which includes expressing an opinion on the effectiveness of the Company’s internal control over financial reporting and (d) the Company’s risk assessment and risk management. The Audit Committee oversees the Company’s accounting and financial reporting process and has the authority and responsibility for the appointment, retention and oversight of the Company’s independent auditors, including pre-approval of all audit and non-audit services to be performed by the independent auditors. The Audit Committee annually reviews and approves the firm to be engaged as independent auditors for the Company for the next fiscal year, reviews with the independent auditors the plan and results of the audit engagement, reviews the scope and results of the Company’s procedures for internal auditing and monitors the design and maintenance of the Company’s internal accounting controls. The Audit Committee Report appears later in this proxy statement. A current copy of the written charter of the Audit Committee is available on the Company’s website at www.genpt.com.

 

The current members of the Audit Committee are Wendy B. Needham (Chair), Mary B. Bullock, George C. Guynn and Michael M.E. Johns. All members of the Audit Committee are independent of the Company and management, as required by section 303A.06 of the New York Stock Exchange listing standards and SEC Rule 10A-3. The Board has determined that all members of the Audit Committee meet the financial literacy requirements of the NYSE corporate governance listing standards. During 2009, the Audit Committee held five meetings.

 

The Board of Directors has determined that Mr. Guynn and Ms. Needham meet the requirements adopted by the SEC for qualification as an “audit committee financial expert.” Mr. Guynn retired in 2006 as President and CEO of the Federal Reserve Bank of Atlanta, where he worked his entire career. In such capacity, Mr. Guynn has experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions and other relevant experience. Ms. Needham was formerly Managing Director, Global Automotive Research for Credit Suisse First Boston from August 2000 to June 2003. Prior to that, Ms. Needham was a Principal, Automotive Research for Donaldson, Lufkin & Jenrette for six years. In both of these positions, Ms. Needham actively reviewed financial statements and prepared various financial analyses and evaluations of such financial statements and related business operations.

 

Compensation, Nominating and Governance Committee.  The Compensation, Nominating and Governance Committee is responsible for (a) determining and evaluating the compensation of the Chief Executive Officer and other executive officers and key employees and approving and monitoring our executive compensation plans, policies, and programs, (b) identifying and evaluating potential nominees for election to the Board and recommending candidates for consideration by the Board and shareholders, (c) developing and recommending to the Board a set of Corporate Governance Guidelines, as well as periodically reevaluating those Corporate Governance Guidelines, and (d) overseeing the evaluation of the Board of Directors and management. The Committee also periodically reviews and evaluates the risk involved in the Company’s compensation policies and practices and the relationship of such policies and practices to the Company’s overall risk and management of that risk. The Committee has and may exercise the authority of the Board of Directors as specified by the Board and to the extent permitted under the Georgia Business Corporation Code, and the Committee has the authority to delegate its duties and responsibilities to subcommittees as it deems necessary and advisable. A description of the Committee’s policy regarding director candidates nominated by shareholders appears in “Director Nominating Process” above.

 

The Committee independently retains a compensation consultant, Hewitt Associates, to assist the Committee in its deliberations regarding executive compensation. The mandate of the consultant is to serve

the Company and work for the Committee in its review of executive compensation practices, including the competitiveness of pay levels, design issues, market trends and technical considerations. Hewitt Associates has assisted the Committee with the development of competitive market data and a related assessment of the Company’s executive compensation levels, design of long-term incentive grants and reporting of executive compensation under the SEC’s proxy disclosure rules. Our Chairman, President and Chief Executive Officer, with input from our Senior Vice President — Human Resources and Hewitt Associates, recommends to the Committee base salary, target bonus levels, actual bonus payouts and long-term incentive grants for our senior executives. The Committee considers, discusses, modifies as appropriate, and takes action on such proposals.

 

The Company’s management also retained Hewitt Associates for record-keeping services related to the Company’s employee benefit plans. Neither the Board nor the Compensation, Nominating and Governance Committee was involved in management’s decision to retain Hewitt Associates for these record-keeping services when such services began in April 2005. During 2009, the Company paid Hewitt Associates approximately $170,000 for executive compensation consulting services, and $3.5 million for fees related to benefits plans.

 

The current members of the Compensation, Nominating and Governance Committee are J. Hicks Lanier (Chair), John D. Johns, Michael M.E. Johns, M.D. and Gary W. Rollins. All members of the Compensation, Nominating and Governance Committee are independent of the Company and management, as required by Sections 303A.04 and 303A.05 of the NYSE listing standards. During 2009, the Compensation, Nominating and Governance Committee held three meetings. A current copy of the written charter of the Compensation, Nominating and Governance Committee is available on the Company’s website at www.genpt.com.

 

The following table sets forth information as of February 11, 2010, as to all persons or groups known to the Company to be beneficial owners of more than five percent of the outstanding Common Stock of the Company.

 

 

 

 

Based on information provided to the Company by the named persons, set forth in the table below is information regarding the beneficial ownership of Common Stock of the Company held by the Company’s directors and nominees for director, the named executive officers (as defined in “Executive Compensation” below) and all directors, nominees for director and executive officers of the Company as a group as of February 11, 2010:

 

 

 

 

In this section, we will give an overview and analysis of our executive compensation program and policies, the material compensation decisions we have made under those programs and policies, and the material factors that we considered in making those decisions. Later in this proxy statement under the heading “Additional Information Regarding Executive Compensation” you will find a series of tables containing specific information about the compensation earned or paid in 2009 to the following individuals, whom we refer to as our named executive officers:

 

 

The discussion below is intended to help you understand the detailed information provided in those tables and put that information into context within our overall compensation program.

 

Compensation Philosophy and Objectives

 

Our overall goal in compensating executive officers is to attract, retain and motivate key executives of superior ability who are critical to our future success. We believe that both short-term and long-term incentive compensation opportunities provided to executive officers should be directly aligned with our performance, and that compensation should be structured to ensure that a significant portion of executives’ compensation opportunities is directly related to achievement of financial and operational goals and other factors that impact shareholder value.

 

Our compensation decisions with respect to executive officer salaries, annual incentives, and long-term incentive compensation opportunities are influenced by (a) the executive’s level of responsibility and function

within the Company, (b) the overall performance and profitability of the Company, (c) our assessment of the competitive marketplace, including other peer companies and, in 2009, (d) the economic environment. Our philosophy is to focus on total direct compensation opportunities through a mix of base salary, annual cash bonus and long-term incentives, including stock-based awards, although we did not grant any long-term incentive awards during 2009.

 

We also believe that the best way to directly align the interests of our executives with the interests of our shareholders is to make sure that our executives acquire and retain a significant level of stock ownership throughout their tenure with us. Our compensation program pursues this objective in two ways: through our equity-based long-term incentive awards and our stock ownership guidelines for our senior executives, as described in more detail below.

 

Overview of Executive Compensation Components

 

The Company’s executive compensation program consists of several compensation elements, as described in the table below.

 

 

The use of these programs enables us to reinforce our pay for performance philosophy, as well as strengthen our ability to attract and retain highly qualified executives. We believe that this combination of programs provides

an appropriate mix of fixed and variable pay, balances short-term operational performance with long-term shareholder value and encourages executive recruitment and retention.

 

Determination of Appropriate Pay Levels

 

Pay Philosophy and Competitive Standing

 

In general, we seek to provide competitive pay by targeting at or under the 50th percentile relative to a peer group for total direct compensation opportunities, including salary, target annual bonus, and long-term incentives. To achieve the 50th percentile positioning for the annual cash compensation component, we provide somewhat conservative base salaries and higher-than-average target bonus opportunities, to focus less on fixed pay and more on performance-based opportunities.

 

With the assistance of the Committee’s compensation consultant, Hewitt Associates, we collected and analyzed competitive market data to be used as background for 2009 pay decisions. This data was referenced when targeting the 50th percentile positioning for annual cash compensation discussed above. Data sources included public company proxy statements, published compensation surveys from Mercer and Watson Wyatt, and a private total compensation database maintained by Hewitt Associates. We compared compensation opportunities for our named executive officers with pay opportunities available to executive officers in comparable positions at similar companies (our “Comparison Group”). During 2009 the Comparison Group included companies from three industry segments in which we compete: automotive parts, industrial parts and office products. The study group includes companies that make up the Dow Jones Auto Parts and Equipment Index (with respect to the automotive parts segment as the Company is a member of such industry group), Applied Industrial Technologies, Inc. and Kaman Corporation (with respect to the industrial parts segment), and United Stationers Inc. (with respect to the office products segment). Competitive data was adjusted based on the Company’s and/or relevant business unit’s revenue size using regression analysis. This adjustment allowed for more accurate comparisons to be made. Hewitt Associates also provided us with competitive pay information for a separate reference group of companies consisting of both local and industry competitors (either at the corporate or subsidiary level). While this information was helpful in assessing our competitive position among similar companies in the marketplace, we did not use this information to benchmark our targeted pay at the desired range relative to our peers.

 

During 2009, Hewitt Associates provided competitive data that allowed the Company and the Committee to make decisions regarding the setting of total compensation opportunities for each named executive.

 

2009 Base Salary

 

Our base salary levels reflect a combination of factors, including competitive pay levels relative to the peer groups discussed above, the executive’s experience and tenure, our overall annual budget for both merit increases and pre-tax profit, the executive’s individual performance and changes in responsibility. We review salary levels annually to recognize these factors. We do not target base salary at any particular percent of total compensation.

 

As noted above, our compensation philosophy targets base salaries that are somewhat below market for comparable positions. The base salaries of our named executive officers compared to competitive benchmarking reflect our conservative philosophy. No executives received a base salary increase for 2009; however, effective July 1, 2009, Mr. Donahue assumed the responsibilities of President of the U.S. Automotive Parts Group. As a result, the Compensation, Nominating and Governance Committee of the Board of Directors approved a 7.1% increase (on an annualized basis) in base salary for Mr. Donahue.

 

2009 Annual Incentive Plan

 

Our Annual Incentive Plan (the “Annual Incentive Plan”) provides our executive officers with an opportunity to earn annual cash bonuses based on our achievement of certain pre-established performance goals. As in setting base salaries, we consider a combination of factors in establishing the annual target bonus opportunities for our named executive officers. Budgeted pre-tax profit is the primary factor, as target bonus opportunities are adjusted annually when we set our pre-tax profit goals for the year. We do not target annual bonus opportunities at any particular percentage of total compensation.

As mentioned above, we set higher than average target bonus opportunities relative to our Comparison Group so that, when combined with conservative salary levels, the targeted annual cash compensation of our executive officers is near the 50th percentile relative to our Comparison Group based on competitive benchmarking by Hewitt Associates. Actual cash compensation levels may be above or below the 50th percentile to the extent actual performance exceeds or does not meet our annual performance goals.

 

We set the profit goals for 2009 bonus opportunities at levels that are intended to be challenging, yet achievable, and reflect better than average growth within our competitive industry. Once performance goals have been set and approved, the Compensation, Nominating and Governance Committee then sets a range of bonus opportunities for each named executive officer based on achievement of such goals. Target bonus opportunities for 2009 were set as a percentage of each named executive officer’s base salary, as follows: Mr. Gallagher, 119%; Mr. Nix, 84%; Mr. Susor, 56%; Mr. Donahue, 67% and Mr. Clayton 54%. These targets continue to reflect the Company’s philosophy of providing the opportunity to earn an increase over prior year actual total cash compensation if goals are achieved.

 

The performance goals set for each executive officer, along with any base salary increase that may be granted, allow the calculation of target bonus opportunities to occur. After the Company’s profit goals are determined, total cash compensation targets are set to establish a correlation with the Company’s profit and performance goals. The executive’s base salary is then compared to their target total cash compensation. The difference between base salary and target total cash compensation is typically established as the executive’s target bonus opportunity. This methodology directly reinforces the Company’s pay-for-performance philosophy. No base salary increases were granted in 2009 to any of the named executive offers except Mr. Donahue, as described above.

 

For Messrs. Gallagher, Nix and Clayton we set annual bonus opportunities for 2009 based on achievement of performance goals relating to pre-tax profits of the Company, which we believe has a strong correlation with shareholder value. The profit goals for the Company are determined by aggregating profit goals for the Company’s subsidiaries, which are each set based upon (i) prior year performance by store, branch, or distribution center; (ii) the overall economic outlook of the region served by a particular store, branch, or distribution center; and (iii) specific market conditions.

 

Actual bonus amounts for 2009 were determined based on relative achievement of the performance goals. Messrs. Gallagher, Nix, and Clayton were eligible to earn from 45% of their target bonus amount (if the Company achieved 75% of its pre-tax profits goal) to 150% of their target bonus amount (if the Company achieved 110% of its pre-tax profits goal). No bonus is earned if performance falls below 75% of the pre-tax profit goal. See the table below.

 

 

Straight-line interpolation is used between data points.

 

Mr. Donahue’s annual bonus opportunity for 2009 was based upon a minimum guarantee of $300,000 due to his promotion to President — U.S. Automotive Parts Group effective July 1, 2009. The bonus amount was determined by considering Mr. Donahue’s bonus opportunity in his previous position compared to the duties and responsibilities of his new position, along with appropriate pay alignment with other executives in the Company.

 

For Mr. Donahue, the performance range for our Automotive Parts Group (“APG”) profit versus quota was 75% to 110%. The performance range for the sum of the profits of Altrom, Rayloc, and Balkamp (“Automotive”) versus quota was 75% to 118%. Each of the two bonus opportunities was weighted 50%. For the Automotive portion of his bonus, he was eligible to earn no less than 45% of his target bonus amount (if the percent of pre-tax profit achieved was 75% or lower) to 150% of his target bonus amount (if 118% of pre-tax profit was achieved). For the APG portion of his bonus, he was eligible to earn no less than 45% of his target bonus amount (if the percent of pre-

tax profit achieved was 75% or lower) to 150% of his target bonus amount (if 110% of the Company pre-tax profit was achieved). See the table below. In recognition of Mr. Donahue’s new responsibilities as President, U.S. Automotive Parts Group, effective July 1, 2009, his total combined bonus for 2009 was approved by the Compensation, Nominating and Governance Committee to be no less than $300,000.

 

 

Straight-line interpolation is used between data points.

 

Mr. Susor’s annual bonus opportunity for 2009 was based on our Automotive Parts Group’s goals relating to: (i) pre-tax profit; (ii) sales; (iii) inventory growth versus sales growth; (iv) accounts receivable growth versus sales growth; and (v) expense growth versus gross profit growth. The bonus opportunities were weighted as follows: pre-tax profit, 45%; sales, 25%; year-end inventory growth versus sales growth, 10%; year-end accounts receivable growth versus sales growth, 10%; and full-year expense growth versus gross profit growth, 10%.

 

For Mr. Susor, the performance range for APG profit versus quota was 75% to 110%, and for sales versus quota was 95% to 105%. The corresponding bonus opportunity as a percentage of target ranged from 45% to 150% for the profit performance measure, and from 15% to 150% for the sales performance measure — each depending on actual achievement level. No bonus is earned if performance falls below the minimum requirement for any performance measure. See the table below. Additionally, bonus opportunity was provided for attainment of inventory, accounts receivable, and expense control goals, with a goal of 1% improvement versus the prior year. Additional bonus opportunity is earned if the inventory, accounts receivable and expense control goal of 1% improvement is exceeded.

 

 

Straight-line interpolation is used between data points for bonus calculations pertaining to pre-tax profit and sales.

 

The bonus formulas under the Annual Incentive Plan are applied strictly. The Committee did not, in 2009, exercise discretion to increase bonus payments for the named executive officers (although it could exercise discretion to reduce the actual bonus amounts).

 

For 2009, the Company’s pre-tax profit was below the target level set for executive officer incentive bonuses, resulting in bonus payments equal to 78% of the target bonus opportunity for Messrs. Gallagher, Nix, and Clayton. Mr. Donahue’s program resulted in a bonus payment equal to 106% of the target opportunity, and Mr. Susor’s program produced a bonus payment equal to 55% of target. Mr. Samuelson retired from the Company effective May 1, 2009 and did not receive an annual incentive plan or payment for 2009.

 

For additional information about the Annual Incentive Plan, please refer to the “Grants of Plan-Based Awards” table, which shows the threshold, target and maximum bonus amounts payable under the plan for 2009, and the Summary Compensation Table, which shows the actual amount of bonuses paid under the plan to our named executive officers for 2009.

2009 Long-Term Incentives

 

During 2009, the Compensation, Nominating and Governance Committee did not grant long-term equity-based incentive compensation due to the overall business climate, economic uncertainty and the expense associated with a grant.

 

Change in Control Arrangements

 

The Company believes that severance protections, particularly in the context of a change in control transaction, can play a valuable role in attracting and retaining key executive officers. Accordingly, the Company has entered into change in control agreements with each of the named executive officers. Information regarding these agreements and the benefits they provide is included in the Post Termination Payments and Benefits section of this Proxy Statement.

 

The Compensation Committee evaluates the level of severance benefits to each such officer on a case-by-case basis, and in general, we consider these severance protections an important part of our executives’ compensation and consistent with competitive practices.

 

We believe that the potential occurrence of a change in control transaction would create uncertainty regarding the continued employment of our executive officers. This uncertainty results from the fact that many change in control transactions result in significant organizational changes, particularly at the senior executive level. In order to encourage our senior executive officers to remain employed with the Company during an important time when their prospects for continued employment are often uncertain, we provide our executive officers with severance benefits if the executive’s employment is terminated by the Company without cause or by the executive for “good reason” in connection with a change in control. Because we believe that a termination by the executive for good reason may be conceptually the same as a termination by the Company without cause, and because we believe that in the context of a change in control, potential acquirors would otherwise have an incentive to constructively terminate the executive’s employment to avoid paying severance, we believe it is appropriate to provide severance benefits in these circumstances.

 

Factors Considered in Decisions to Materially Increase or Decrease Compensation

 

Market data, individual performance, retention needs and internal pay equity have been the primary factors considered in decisions to adjust compensation materially. We do not target any particular weight for base salary, annual bonus and long-term incentive as a percent of total direct compensation. We tend to follow market practice in allocating between the various forms of compensation, but with greater emphasis on performance-based incentive bonus opportunities. We use an approximate 60/40 mix with regard to SAR and PRSU grant value, to balance retention and performance.

 

Timing of Compensation

 

At the March 13, 2009 meeting of the Compensation, Nominating and Governance Committee, annual incentive plans were reviewed and approved. There were no adjustments made to base salaries and neither SARs nor PRSUs were granted.

 

Stock Ownership Guidelines

 

We have adopted stock ownership guidelines for the named executive officers identified above and for other key executives designated by the Compensation, Nominating and Governance Committee. The ownership guidelines are reviewed at least annually by the Compensation, Nominating and Governance Committee, which also has the authority to evaluate whether exceptions should be made for any executive on whom the guidelines would impose a financial hardship. The current guidelines as determined by the Committee include: (i) CEO — ownership equal to seven times prior year’s salary; and (ii) other covered executives — ownership equal to one to three times prior year’s salary.

 

The covered executives have a period of five years in which to satisfy the guidelines, either from the date of adoption of the policy in November 2006, or the date of appointment to a qualifying position, whichever is later. Shares counted toward this requirement will be based on shares beneficially owned by such executive (as beneficial ownership is defined by the SEC’s rules and regulations) including PRSUs, but excluding unexercised options and measured against the average year-end stock price for the preceding three fiscal years. The guidelines also call for the covered executive to retain 50% of the net shares obtained through the exercise of options or when a restricted

stock award vests for at least six months. The covered executives are encouraged to retain stock ownership per the guidelines for a period of six months following the date of retirement.

 

Impact of Accounting and Tax Treatments of Compensation

 

The accounting and tax treatment of compensation generally has not been a factor in determining the amounts of compensation for our executive officers. However, the Committee and management have considered the accounting and tax impact of various program designs to balance the potential cost to the Company with the benefit/value to the executive.

 

With regard to Code Section 162(m), it is the Committee’s intent to maximize deductibility of executive compensation while retaining some discretion needed to compensate executives in a manner commensurate with performance and the competitive landscape for executive talent. The Annual Incentive Plan has been approved by shareholders and is designed to qualify as “performance-based” to be fully deductible by the Company. The 2006 Long-Term Incentive Plan is approved by shareholders and permits the award of stock options, SARs and other performance-based equity awards that are fully deductible under Code Section 162(m).

 

Role of Executive Officers in Determining Compensation

 

Our Chairman, President and Chief Executive Officer, with input from our Senior Vice President — Human Resources, recommends to the Committee base salary, target bonus levels, actual bonus payouts and long-term incentive grants for our senior officer group (other than himself). Mr. Gallagher makes these recommendations to the Committee based on data and analysis provided by our independent compensation consultant and qualitative judgments regarding individual performance. Mr. Gallagher is not involved with any aspect of determining his own compensation.

 

 

 

 

2009 GRANTS OF PLAN-BASED AWARDS

 

 

 

 

2009 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END