UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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JOHNSON CONTROLS, INC.

(Name of Registrant as Specified In Its Charter)

 

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Johnson Controls, Inc.

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, Wisconsin 53201-0591

 

 

Notice of 2009

Annual Meeting

and Proxy Statement

 

 

Date of Notice: December 5, 2008

NOTICE OF THE 2009
ANNUAL MEETING OF SHAREHOLDERS

 

Johnson Controls, Inc. will hold the Annual Meeting of Shareholders on Wednesday, January 21, 2009, at 1:00 P.M. CST, at Discovery World at Pier Wisconsin, 500 N. Harbor Drive, Milwaukee, Wisconsin. The purposes of the Annual Meeting are as follows:

 

Dennis W. Archer
Richard Goodman
Southwood J. Morcott

 

 

The Board of Directors recommends a vote FOR items 1 and 2 and AGAINST item 3. The persons named as proxies will use their discretion to vote on other matters that may properly arise at the Annual Meeting.

 

If you were a shareholder of record at the close of business on November 20, 2008, you are entitled to vote at the Annual Meeting.

 

If you have any questions about the Annual Meeting, please contact:

 

Johnson Controls, Inc.

Shareholder Services X-76

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, WI 53201-0591

(414) 524-2363

(800) 524-6220

 

By Order of the Board of Directors

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON JANUARY 21, 2009.

 

Our proxy statement and our 2008 annual report to shareholders are available at http://www.johnsoncontrols.com/proxy.

Johnson Controls, Inc.

5757 North Green Bay Avenue

Post Office Box 591

Milwaukee, WI

53201-0591

 

 

December 5, 2008

 

 

Dear Shareholder:

 

The Johnson Controls Annual Shareholders’ Meeting will convene on Wednesday, January 21, 2009, at 1:00 P.M. CST at Discovery World at Pier Wisconsin, 500 N. Harbor Drive, Milwaukee, Wisconsin. We are mailing our proxy statement, which details the business we will conduct at the Annual Shareholders’ Meeting, to shareholders on or about December 5, 2008, together with the Company’s Annual Report on Form 10-K for fiscal year 2008. Shareholders are not to regard the Annual Report on Form 10-K, which contains our audited financial statements, as proxy solicitation material.

 

We are pleased to once again offer multiple options for voting your shares. As detailed in the “Questions and Answers” section of this proxy statement, you can vote your shares via the Internet, by telephone, by mail or by written ballot at the Annual Meeting. We encourage you to use the Internet to vote your shares as it is the most cost-effective method.

 

Thank you for your continued support of Johnson Controls.

 

Sincerely,

 

JOHNSON CONTROLS, INC.

 

Stephen A. Roell

Chairman and Chief Executive Officer

Table of Contents

 

 

 

 

 

           Dennis W. Archer
           Richard Goodman
           Southwood J. Morcott

 

 

 

 

 

 

 

 

 We encourage you to vote this way as it is the most cost-effective method;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If shares you own are registered in your name and you are entitled to vote at the Annual Meeting, then you may nominate any person for director by writing to Mr. Okarma. Your letter must include all the information required by our By-Laws including, but not limited to, your intention to nominate a person as a director, the candidate’s name, biographical data, and qualifications, as well as the written consent of the person to be named in our proxy statement as a nominee and to serve as a director. Under our current By-Laws, to nominate a person as a director for the 2010 Annual Meeting, a shareholder must send written notice not less than 90 days and not more than 120 days prior to the first anniversary of the 2009 Annual Meeting. Therefore, because the 2009 Annual Meeting will take place on January 21, 2009, we must receive notice of shareholder intent to nominate a person as a director no sooner than September 23, 2009, and no later than October 23, 2009. A copy of the Corporate Governance Guidelines is provided at our website at http://www.johnsoncontrols.com/governance, or you may request a copy of these materials by contacting Shareholder Services at the address or phone number provided in the Questions and Answers section of this Proxy Statement and they will be mailed to you at no cost.

 

 

 

 

 

If the notice is received after October 23, 2009, then the notice will be considered untimely and we are not required to present the shareholder information at the 2010 Annual Meeting. If the Board of Directors chooses to present any information submitted after October 23, 2009, other than pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, at the 2010 Annual Meeting, then the persons named in proxies solicited by the Board of Directors for the 2010 Annual Meeting may exercise discretionary voting power with respect to such information.

 

 

 

The Ethics Policy is applicable to the members of the Board of Directors and to all of our employees, including, but not limited to, the principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing similar functions. Any amendments to, or waivers of, the Ethics Policy that the Board of Directors approves will be disclosed on our website. We are not including the information contained on our website as part of, or incorporating it by reference into, this Proxy Statement.

 

 

Johnson Controls, Inc.

Attn: Shareholder Services X-76

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, WI 53201-0591

 

 

 

 

Johnson Controls, Inc.

Attn: Shareholder Services X-76

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, WI 53201-0591

 

 

 

 

 

PLEASE VOTE. YOUR VOTE IS VERY IMPORTANT.

 

Promptly returning your proxy card or voting via telephone or the Internet
will help to reduce the cost of this solicitation.

 

 

BOARD NOMINEES

 

At the Annual Meeting, three directors will be elected for terms expiring in 2012. The Corporate Governance Committee has recommended and the Board of Directors has selected the following nominees for election: Dennis W. Archer, Richard Goodman, and Southwood J. Morcott, all of whom are current directors of our company. Each person that shareholders elect as a director will serve until the Annual Meeting of Shareholders in 2012, or until his or her successor has been duly qualified and elected. Brief biographies of the director nominees and continuing directors as of September 30, 2008 follow.

 

The Board recommends that you vote FOR the election of Dennis W. Archer,
Richard Goodman, and Southwood J. Morcott.

 

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” EACH OF ITS NOMINEES.

CONTINUING DIRECTORS

 

Terms Expire at the 2010 Annual Meeting:

 

Terms Expire at the 2011 Annual Meeting:

 

 

We ask that you ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for fiscal year 2009.

 

PricewaterhouseCoopers LLP has audited our accounts for many years. The Audit Committee appointed them as the Company’s independent registered public accounting firm for fiscal year 2009.

 

Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting with the opportunity to make a statement if they so desire and to be available to respond to appropriate questions.

 

If the appointment is not ratified, the adverse vote will be considered as an indication to the Audit Committee that it should consider selecting another independent registered public accounting firm for the following fiscal year. Even if the selection is ratified, the Audit Committee, in its discretion, may select a new independent registered public accounting firm at any time during the year if it believes that such a change would be in our best interest.

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2009.

 

 

Amalgamated Bank, 275 Seventh Avenue, New York, New York 10001, has informed us that it intends to present the proposal set forth below at our annual meeting. Amalgamated Bank states that it is the beneficial owner of 167,383 shares of our Common Stock.

 

PROPOSAL

 

RESOLVED:  The shareholders of Johnson Controls, Inc. (the “Company”) hereby request the board of directors to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the Company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This policy would not affect compensation that the executive chooses to defer during his or her lifetime. “Future severance agreements” include employment agreements containing severance provisions; retirement agreements; change in control agreements; and agreements renewing, modifying or extending any such agreements in effect on the date this Article is adopted.

 

SUPPORTING STATEMENT

 

As shareholders, we support a compensation philosophy that provides sufficient remuneration to motivate and retain talented executives and that ties their pay to the

long-term performance of the Company. We believe that such a “pay for performance” approach is needed to align the interests of executives with those of shareholders.

 

“Golden coffin” agreements, which can require a company to make significant payments or awards after an executive’s death, are in our view inconsistent with that approach. Senior executives should have ample opportunities while they are alive to contribute to a pension fund, purchase life insurance, voluntarily defer compensation or engage in other estate planning strategies suitable to their needs. We see no reason to saddle shareholders with payments or awards when shareholders receive no services in return.

 

The problem is well illustrated at Johnson Controls. According to the December 2007 proxy statement, the company would be obliged to pay out $36.3 million worth of annual and long-term bonuses, stock options, and restricted stock upon the death of John M. Barth, the chairman and chief executive officer. Additionally, the Company would be obliged to pay his base salary for ten years at an estimated cost of $14.2 million, for a total of $50.5 million. The value of similar packages for other senior executives ranges from $12 million to $24.5 million per executive.

 

These potential payments can cost shareholders significantly. Consequently, we request that the Company adopt a policy of providing shareholders with a vote on agreements and other corporate policies that could provide payments or awards after a senior executive’s death that are unrelated to services actually being rendered to the Company.

 

We believe that the existence of such a shareholder approval requirement may induce restraint when parties negotiate such agreements. The proposal does not require prior shareholder approval, which may not always be practical to obtain, and the proposal leaves flexibility to seek approval after material terms of an agreement are agreed upon.

 

We urge shareholder to vote FOR this proposal.

 

RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THE PROPOSAL

 

After reviewing and considering carefully this proposal, our Board and the Compensation Committee have determined that the proposal is not in the best interests of our shareholders and oppose the proposal for the following reasons.

 

1. Our Board and the Compensation Committee recognize the need to attract and retain talented executives. This must be done in the context of the competitive environment in which the Company exists. The Company’s current compensation practices have been determined to be competitive, and particularly with respect to benefits payable upon an executive’s death.

 

2. The majority of the current plans under which executives are entitled to benefits upon death, including a restricted stock plan, a stock option plan, an annual bonus plan and a long-term bonus plan, have already been approved by the Company’s shareholders. As a result, the intent of this shareholder proposal has already been largely realized, since shareholder oversight and approval have been obtained. It is important to note that, since last year’s proxy disclosure, the Board has taken action to reduce the executive survivor death benefit payable upon an executive’s death. Also, the death benefits which are the subject of the resolution do not continue once an executive has retired from the Company.

3. The Board and the Compensation Committee are best positioned, with access to independent experts, to exercise discretion and to make decisions with respect to executive compensation that are in the best interests of the Company and its shareholders.

 

As mentioned above, to attract and retain a qualified and effective global management team in the marketplace for executive talent, it is vital that we offer compensation and benefits that are competitive with those that our peer companies offer. Staying competitive in many cases requires us to adapt rapidly to fast-moving trends in the marketplace and to the circumstances of individual executive officers or officer candidates. Putting decisions to a shareholder vote is a slow and costly process, and requiring shareholder approval of employment agreements and policies that provide for benefits following the death of a senior executive officer could therefore impair our ability to fill critical executive positions by impeding our ability to negotiate agreements or implement policies that address the competitive market, the needs of our company and the nature of the particular situation. The ability to seek approval after material terms of an arrangement are agreed upon, as the proposal contemplates, is little (if any) consolation, because executive officers and officer candidates will not want to negotiate or otherwise commit to employment arrangements that remain subject to shareholder approval.

 

We believe the benefits we have offered and currently offer upon the death of an executive officer to his or her survivors are reasonable within the overall structure of our compensation programs. Many of the provisions that give our executives rights on death are within plans that shareholders have already approved. These plans include a restricted stock plan and stock option plan that provide for accelerated vesting of equity awards and an annual bonus plan and long-term bonus plan that provide for pro rata incentive awards. We have offered the remaining benefit — the executive survivor benefit — in lieu of group term life insurance to senior executives since 1982. We believe all of these elements are integral parts of a compensation package for our executive officers that is competitive but not excessive. In this regard, we recently reduced the amount of the executive survivor benefit in response to a report that the Compensation Committee’s outside expert provided. The report indicated that the benefit we were providing was based on a higher multiple of pay than were similar benefits that our peer companies provided to their executive officers. As a result of this change and other factors, the benefits our executive officers would have received upon a termination of employment as a result of death as of September 30. 2008 are lower than the corresponding benefits as of September 30, 2007, which we reported in our 2007 proxy statement and which the proposal’s supporting statement cites. As we discuss in “Executive Compensation — Compensation Discussion and Analysis”, the Compensation Committee, which is comprised solely of independent directors, generally targets the total direct compensation opportunity for our executive officers at the 50th percentile of a peer group consisting of companies that are in our industry or of similar size or against which we compete for talent.

 

Our Board and the Compensation Committee, to which our Board has delegated the authority to approve and monitor compensation and benefit programs for our executive officers, believe that we need flexible compensation policies and procedures to permit us to achieve these objectives. In contrast, by requiring shareholder approval of a specific term of compensation arrangements, the proposal would not allow for the exercise by the Compensation Committee of the discretion and judgment necessary to establish appropriate executive compensation. Fixing individual compensation terms involves a host of factors and judgments. Because of this inherent complexity, our Board believes that individual compensation decisions are best made by the Compensation Committee, which consists of experienced, independent directors who dedicate substantial time and attention to compensation decisions and who receive advice from

an outside expert who answers directly to the Compensation Committee rather than to management.

 

We agree with the proposal’s supporting statement that “a ‘pay for performance’ approach is needed,” but we believe that our executive compensation programs already embody a pay for performance approach and that our corporate performance bears this out. A central objective of our executive compensation programs, as we discuss in “Executive Compensation — Compensation Discussion and Analysis,” is to focus our executive officers on continuing to deliver strong results for our shareholders by placing primary emphasis on performance-based variable compensation. Our programs demonstrably emphasize performance-based pay. We have a long history of strong results, and we believe our practice of linking compensation with corporate performance has contributed significantly to our track record.

 

In summary, our Board believes that our compensation practices have been and will continue to be a key factor in our ability to deliver strong results. Our Board believes the requirements of the proposal would place us at a competitive disadvantage in recruiting and retaining executive talent and that it is in the best interests of our company and our shareholders to retain flexibility in structuring our executive compensation programs. Our Compensation Committee is best positioned to exercise that judgment, and the spirit of the shareholder proposal has already been substantially met, since shareholders have already approved many of the provisions which make up the Company’s approach to providing benefits upon an executive’s death.

 

THE BOARD RECOMMENDS THAT YOU VOTE AGAINST THIS PROPOSAL. PROXIES SOLICITED BY THE BOARD WILL BE VOTED AGAINST THIS PROPOSAL UNLESS OTHERWISE INSTRUCTED.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this proxy statement with management. Based on this review, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in our proxy statement relating to the 2009 Annual Meeting of Shareholders.

 

Southwood J. Morcott, Chairman
Dennis W. Archer
Eugenio Clariond Reyes-Retana
Jeffrey A. Joerres
William H. Lacy
Members, Compensation Committee

 

As we discuss on page 20, the Compensation Committee (the “Committee”) of our Board of Directors (the “Board”) has the sole authority, delegated by our Board, to approve and monitor all compensation and benefit programs (other than broad-based welfare benefit programs) for our executive officers including the officers we name in the Summary Compensation Table (“named executive officers”). The Committee seeks to ensure that our compensation policies and practices are consistent with our values and support the successful recruitment, development, and retention of executive talent so we can achieve our business objectives and optimize our long-term financial returns. The Committee reports its actions and decisions to the Board.

We have a long history of strong results, and we believe our practice of linking compensation with corporate performance has contributed significantly to our track record. Over the past 10 years, we have grown net sales at an average annualized growth rate of 12% and have grown earnings at an average annualized growth rate of 15%. Our operations are located in more than 60 countries throughout the world, and we generate over 50% of our net sales outside of the United States.

 

What are the objectives of our executive compensation programs?

 

The main objectives of our executive compensation programs are to:

 

 

What are the elements of our executive compensation program?

 

Our executive compensation program consists of the following elements:

 

 

The following sections discuss each element individually and in more detail.

 

We define total direct compensation as the executive’s base salary, annual incentive performance award, long-term incentive performance award, stock options, and restricted stock. Our pay mix (the proportion of one compensation element of direct compensation compared to the total of all elements of direct compensation) is heavily weighted toward a strong relationship between our corporate or business unit performance and the executive’s pay. The elements of compensation that are based on

corporate or business unit performance include annual cash incentive, long-term cash incentive, and equity incentives. In general, as an executive’s level or responsibility within our organization increases, so does the percentage of total compensation that we link to corporate or business unit performance.

 

What process does the Committee use to review our executive compensation programs and determine compensation?

 

The Committee is responsible for approving and monitoring the compensation and benefits we offer to our executive officers. The Committee evaluates executive pay each year, seeking to ensure that our compensation policies and practices are consistent with our philosophy. In evaluating the compensation of our Chief Executive Officer’s direct reports, the Committee also considers the Chief Executive Officer’s recommendations to the Committee. This includes the compensation of the other named executive officers, based on his review of their performance, job responsibilities, importance to our overall business strategy, and our compensation philosophy (including market practice). Our Chief Executive Officer does not make a recommendation to the Committee regarding his own compensation.

 

The Committee will generally determine an executive officer’s compensation based upon a desire to link compensation to the objectives of our executive compensation programs that we describe above under “What are the objectives of our executive compensation programs?” The Committee considers these factors collectively and ultimately uses its subjective judgment in making final decisions concerning compensation.

 

To support its annual review of our executive compensation and benefit programs for fiscal year 2008, the Committee engaged Towers Perrin, an independent compensation consultant, to conduct a marketplace review of the compensation we pay to our executive officers. Towers Perrin provided the Committee with relevant market data and alternatives to consider when making compensation decisions for the executive officers.

 

Towers Perrin benchmarked our compensation against a group of publicly-traded companies, which we refer to as the “Compensation Peer Group.” In benchmarking our compensation, Towers Perrin used regression analysis to adjust the data based on the revenue sizes of the companies in the Compensation Peer Group to match our revenue size. The Compensation Peer Group, which the Committee annually reviews and updates, consists of companies against which we believe we compete for talent, that are in our industry or a similar industry, have similar market capitalization, or that are similar in size based on revenue. For purposes of the Committee’s annual review of fiscal year 2008 compensation and benefit programs, the following companies comprised the Compensation Peer Group:

 

 

During fiscal year 2008, for purposes relating to fiscal year 2009 compensation, we changed the Compensation Peer Group slightly from the peer group above. We removed Delphi Corp. and Visteon Corp, which continue to experience low market capitalization, and added International Paper, an international manufacturing company with a market capitalization more similar to ours.

When the Compensation Peer Group gives us inadequate data for a particular executive officer due to insufficient sample size, Towers Perrin uses data concerning compensation that companies that Towers Perrin classifies as general industrial companies provide to their executives. Towers Perrin also uses regression analysis to adjust the data based on the revenue sizes of these companies to match our revenue size. When determining fiscal year 2008 compensation, the Committee did not, however, require the use of general industrial data to make any specific compensation decisions for the named executive officers. Towers Perrin did not provide the Committee with, and the Committee was not aware of, the identities of the companies that participated in the survey of general industrial companies.

 

We generally set the total direct compensation opportunity based on the 50th percentile of the Compensation Peer Group. Our approach results in some pay difference among our named executive officers, which is consistent with the survey data. As we discuss above, final decisions concerning compensation reflect performance achievements at a company and business unit level and our views regarding an executive officer’s leadership abilities, scope of responsibilities, experience, effectiveness and individual performance achievements.

 

To determine the amount of compensation under each component of total direct compensation, we start by setting a target for total annual cash compensation (base salary and a target payout percentage) according to market, again typically based on the 50th percentile of market comparables. We also consider other factors as we describe above.

 

After we determine base salary and an annual incentive award target amount for an executive officer, we subtract the total of those amounts from the target total direct compensation for the executive officer and arrive at a target value for long-term incentive awards. We then break this value (which we refer to as the “annualized expected value of long-term incentive award opportunities”) into three parts: a target long-term cash incentive award value, which we determine by evaluating market pay mix data and internal equity considerations; a stock option grant value; and a restricted stock grant value.

 

In allocating equity compensation between stock options and restricted stock grants, we first determine the amount of restricted stock grants, based on an assessment of the executive officer’s individual performance and contributions to our company. We then allocate the difference between the executive officer’s target total direct compensation and the target annual cash compensation, target long-term cash incentive award value and restricted stock grant value to stock options.

 

How do we determine base salaries for executive officers?

 

We pay our named executive officers and other employees a base salary as part of a competitive compensation package and to provide a stable source of income. We typically consider salary levels as part of our annual compensation review process or upon a promotion. When we establish base salaries for executives, we consider salaries that companies in the Compensation Peer Group or general executive compensation industry survey pay for similar positions. When inadequate data is available from the companies in the Compensation Peer Group, we consider salaries that companies in the general executive compensation industry survey pay for similar positions. We generally attempt to set base salary at approximately the 50th percentile of the Compensation Peer Group subject to other variables as we describe above under “What process does the Committee use to review our executive compensation programs and determine compensation?”

 

Salary changes are effective October 1 of each year to correspond with the beginning of the new fiscal year.

How do we determine annual incentive performance awards?

 

We offer annual incentive performance awards to give our executives incentives to achieve our fiscal year business and financial objectives, and we establish the award opportunities and related performance goals accordingly. We believe achieving these annual business and financial objectives is important to executing our business strategy and delivering long-term value to shareholders.

 

For each fiscal year, the Committee approves a target payout (which we measure as a percentage of base salary) for each executive officer, as well as the potential payout percentages for maximum and threshold performance. For fiscal year 2008, the target payout percentages for the named executive officers ranged from 100% to 156% of base salaries. For each executive officer, the actual payout potentially could range from zero to two times the target payout percentage, depending on achievement of goals, with payments increasing as performance improved (though not above two times the target payout percentage). We sought to set the target payout percentages at approximately the 50th percentile of the Compensation Peer Group. In measuring whether the target payout percentages were approximately equal to the 50th percentile of the Compensation Peer Group, we excluded the portion of the target payout that is subject to discretionary adjustment based on individual performance as we describe below. We have the discretion to decrease the size of the bonus payout based in part on an assessment of the executive officer’s individual performance. The Committee makes this assessment for our Chief Executive Officer based on its subjective evaluation of performance relative to strategic, financial and leadership objectives that the Committee or the Board of Directors has approved and has discretion to decrease the amount of the incentive award that the Chief Executive Officer would otherwise receive. Our Chief Executive Officer makes this assessment for the other executive officers based on his subjective evaluation of performance relative to strategic, financial and leadership objectives that he has approved and has the authority to decrease the amount of the incentive award that the executive officer would otherwise receive. Beginning with fiscal year 2009, we are granting awards under this program at the beginning of the fiscal year. Following past practice, we granted the fiscal year 2008 awards in September 2007, prior to the beginning of the 2008 fiscal year, and we disclosed the awards in the “Grants of Plan-Based Awards” table in the proxy statement for our 2008 annual meeting of shareholders. We are disclosing the threshold, target and maximum award potential for these awards again in the “Grants of Plan-Based Awards” in this proxy statement to provide a more complete picture of the non-equity incentive awards that impacted our named executive officers’ compensation for fiscal year 2008.

 

We set the performance targets for fiscal year 2008 for Messrs. Barth, Roell, Wandell, McDonald and, with respect to 30% of their awards, Mr. Myers and Dr. Bolzenius using objectives for pre-tax earnings and pre-tax return on equity (“ROE”). We define pre-tax earnings as income from continuing operations, adjusted for incentive plan expense and certain significant non-recurring items that impact comparability, such as gain or loss on divestitures, restructuring expense (for example, we incurred a restructuring expense in fiscal year 2008), and the adoption of new accounting pronouncements, all as reflected in our audited financial statements that appear in our Annual Report on Form 10-K. We define ROE as pre-tax earnings divided by total shareholders’ equity at the beginning of the fiscal year (as reported in our Annual Report on Form 10-K). For fiscal year 2008, we set the pre-tax earnings target at $1.82 billion and the ROE target at 23.3%.

 

The Committee approved potential payouts ranging from zero to 200% of the target payout percentages for Messrs. Barth, Roell, Wandell, and McDonald (which we discuss below) for various levels of performance against these performance targets. The Committee approved potential payouts ranging from zero to 200% with respect to 30% of the target payout percentages for Mr. Myers and Dr. Bolzenius (which we discuss

below) for the same level of performance against these targets. An executive officer would not have received an annual incentive payout if our fiscal year 2008 pre-tax earnings were less than $1.45 billion. If our fiscal year pre-tax earnings were at least $1.45 billion, the minimum potential payout an officer would receive was 45% of the target incentive payout, and the payout amount could have increased if ROE exceeded 17.5%. An officer would have been eligible to receive the maximum potential payout if our performance met or exceeded 23.3% ROE and $2.08 billion of pre-tax earnings.

 

For fiscal year 2008, the Committee based 70% of Mr. Myers’ incentive award on the performance of the Building Efficiency Group, using objectives for earnings before interest and tax (which we refer to as “EBIT”) and net cash from operations as a percent of revenue. We define EBIT for this purpose as business unit operating earnings, adjusted for incentive plan expenses and certain non-recurring items that impact comparability, all as reflected in our audited financial statements that appear in our Annual Report on Form 10-K. We define net cash from operations as trade working capital (defined as the sum of net accounts receivable, inventory, and net customer tooling less accounts payable). We may adjust net cash from operations and revenue for certain non-recurring items that impact comparability, such as acquisitions and divestitures. The targets were $1.03 billion in EBIT and 10% improvement over fiscal year 2007 in net cash from operations as a percent of revenue.

 

The Committee approved potential payouts for Mr. Myers ranging from zero to two times the target payout percentages (which we discuss below) for various levels of Building Efficiency Group performance against these Building Efficiency Group performance targets. Mr. Myers would not have received any payout if fiscal year 2008 Building Efficiency Group EBIT was less than $823.20 million. If fiscal year 2008 Building Efficiency Group EBIT was at least $823.20 million, he would have received a minimum potential payout of 45% of the target incentive payout, and the payout amount could have increased as change in net cash from operations as a percent of revenue improved beyond -15%. Mr. Myers would have been eligible to receive the maximum potential payout if the Building Efficiency Group met or exceeded 35% improvement in net cash from operations and $1.09 billion EBIT.

 

For fiscal year 2008, the Committee based 70% of Dr. Bolzenius’ incentive award on the performance of the Automotive Experience Group, again using objectives for EBIT and net cash from operations as a percent of revenue (defined above). The targets were $666.51 million in EBIT and 10% improvement over fiscal year 2007 in net cash from operations as a percent of revenue.

 

The Committee approved potential payouts for Dr. Bolzenius ranging from zero to two times the target payout percentages (as we discuss below) for various levels of Automotive Experience Group performance against these Automotive Experience Group financial targets. Dr. Bolzenius would not have received any payout if fiscal year 2008 Automotive Experience Group EBIT was less than $530.62 million. If fiscal year 2008 Automotive Experience Group EBIT was at least $530.62 million, he would have received a minimum potential payout of 45% of the target incentive payout, and the payout amount could have increased as change in net cash from operations as a percent of revenue improved beyond -15%. Dr. Bolzenius would have been eligible to receive the maximum potential payout if the Automotive Experience Group met or exceeded 35% improvement in net cash from operations and $705.34 million EBIT.

 

For fiscal year 2008, our actual financial results for the performance goals were 22.3% ROE and 1.99 billion in pre-tax earnings; 6.0% improvement in Building Efficiency Group net cash from operations and $1.02 billion in Building Efficiency Group EBIT; 26.7% improvement in the Automotive Experience Group net cash from operations and $753.6 million Automotive Experience Group EBIT.

Based on this performance and after reflecting the exercise of discretion that we discuss above, the annual performance bonus that each named executive earned was above the target payout percentage level, as shown in the chart below.

 

 

 

 

How do we determine long-term cash incentive performance awards?

 

We tie the value of awards under our long-term cash incentive program to our long-term performance over a three-year period, and the program therefore serves to ensure that an executive’s pay under this program depends upon the extent to which we achieve our long-term financial objectives. By using a mix of stock options, restricted stock, and the long-term cash incentive, we are able to compensate executives for both sustained increases in our stock performance, as well as the achievement of key long-term financial objectives. We base the long-term incentive on achieving business plans that our Board approves. Beginning with fiscal year 2009, we are granting awards under this program at the beginning of the first fiscal year of the three-year performance period. Following past practice, we granted the fiscal year 2008 award in September 2007, prior to the beginning of our 2008 fiscal year, and we disclosed the awards in the “Grants of Plan-Based Awards” table in the proxy statement for our 2008 annual meeting of shareholders. We are disclosing the threshold, target and maximum award potential for these awards again in the “Grants of Plan-Based Awards” in this proxy statement to provide a more complete picture of the non-equity incentive awards that impacted our named executive officers’ compensation for fiscal year 2008.

 

At the end of each performance period, the Committee applies the objective-based formula that it approved in advance to determine each executive’s award for the performance period.

 

For the 2008-2010 three-year cycle, we have based each executive officer’s long-term cash incentive performance award opportunity on annual objectives for corporate pre-tax earnings and pre-tax return on invested capital (“ROIC”). We have established targets of $1.64 billion pre-tax earnings and 16.7% ROIC for fiscal year 2008. We define pre-tax earnings as income from continuing operations, adjusted for certain significant non-recurring items, such as gain or loss on divestitures, restructuring expense (for example, we incurred a restructuring expense in fiscal year 2008), and the adoption of new accounting pronouncements, all as reflected in our audited

financial statements that appear in our Annual Report on Form 10-K. We define ROIC as pre-tax earnings adjusted by total financing costs, divided by invested capital. Invested capital is defined as the monthly weighted-average sum of shareholders equity plus total debt, less cash. We base the ROIC target each year on meeting the amounts set forth in the financial plan for that year. The Board reviews and approves the financial plan each year. An executive officer would not receive a long-term incentive payout with respect to fiscal year 2008 under the 2008-2010 award if our pre-tax earnings were less than $1.50 billion. An executive officer would receive the maximum potential payout with respect to fiscal year 2008 under the 2008-2010 award if our performance met or exceeded 18.0% ROIC and $1.79 billion pre-tax earnings.

 

To calculate the payment an executive officer will receive under a long-term incentive award, we determine the performance results for each year in the three-year cycle, and calculate a weighted average for the three-year cycle based on the following: weighted 1/6 for the first year in performance cycle, weighted 2/6 for the second year in performance cycle, and weighted 3/6 for the third year in the performance cycle.

 

Executive officers were eligible in fiscal year 2008 for a payout under the three-year performance cycle of 2006-2008. For this cycle, the payout target percentages ranged from 65% to 130% of base salary for the named executive officers. The two financial measures for this cycle were pre-tax earnings and pre-tax ROIC. Our pre-tax earnings results were $1.29 billion, $1.60 billion, and $1.79 billion for 2006, 2007, and 2008, respectively, and our pre-tax ROIC results were 14.4%, 15.2%, and 15.4% for 2006, 2007, and 2008, respectively. This performance resulted in payout percentages of 178.2%, 194.7%, and 150.9% of target for 2006, 2007 and 2008, respectively. The Committee approved the payout percentage that executive officers earned under the program as shown in the chart below. We show the amount (combined with the annual cash bonus incentive that our named executive officers received for performance in fiscal year 2008) in the Summary Compensation Table under the column heading “Non-Equity Incentive Plan Compensation.”

 

 

 

 

How do we determine stock option awards?

 

We award stock options to executives to:

 

 

Our executives, including our named executive officers, must earn the options through continued service. The options will vest 50% two years after the date of grant and 50% three years after the date of grant, subject to continued employment (with earlier vesting on retirement), and have a ten-year exercise term.

 

We made all of our stock option grants to the executives in fiscal year 2008 pursuant to our 2007 Stock Option Plan, which shareholders approved in January 2007. The exercise price of fiscal year 2008 stock options is equal to the New York Stock Exchange closing price of our common stock on the date of the grant. We do not engage in or permit “backdating” or repricing of stock options, and our equity compensation plans prohibit these practices.

 

We provide the fiscal year 2008 stock option grant details for each named executive officer in the “Grant of Plan-Based Awards” table and related footnotes. We determine stock option awards based on the value of the executive officer’s total direct compensation that we intend to deliver less the value of all other elements of direct compensation. Towers Perrin values the options using a binomial valuation methodology.

 

Our policy on granting equity awards states that our annual stock option grant occurs and is effective on the first business day of our fiscal year and that any subsequent stock option grants occur and are effective on the date of a regularly scheduled Compensation Committee meeting. Executive officers do not have a role in the timing of option grants. We do not choose the time for making option grants based in any way on any pending release to the public of material information.

 

How do we determine restricted stock awards?

 

We generally award restricted stock to our executive officers in alternating years. At the beginning of fiscal year 2008, the Compensation Committee approved a restricted stock grant. We intend our restricted stock awards to:

 

 

We provide the fiscal year 2008 restricted stock grant details for each named executive officer in the “Grant of Plan-Based Awards” table and related footnotes. We determine restricted stock awards by subtracting from the value of the executive officer’s total direct compensation that we intend to deliver the value of all other elements of direct compensation and allocating a portion of the resulting difference to restricted stock awards. We determine the portion allocable to restricted stock awards based on an

assessment of the executive officer’s individual performance, contribution to our company, and retention objectives. The Committee makes the assessment regarding individual performance and contributions for our Chief Executive Officer based on its subjective evaluation relative to strategic, financial and leadership objectives that the Committee or the Board of Directors has approved. Our Chief Executive Officer makes this assessment for the other executive officers based on his subjective evaluation relative to strategic, financial and leadership objectives that he has approved. Because we generally award restricted stock in alternating years, we treat half of the value of the award as attributable to the year of grant, which is fiscal 2008 in this case. (We allocate the remaining portion of total direct compensation to stock option awards as we describe above under “How do we determine stock option awards?”). Towers Perrin values the restricted stock awards using a binomial valuation methodology.

 

How do we determine retirement and other benefits?

 

We evaluate retirement and other benefits based on market practice of the Compensation Peer Group and general executive compensation industry data. We have a long history of providing retirement benefits to our U.S. salaried employees. We provide our retirement benefits through the following plans:

 

 

We provide these retirement benefits to our executive officers to help them prepare for a financially secure retirement, to provide an incentive to stay with us by recognizing tenure, and to offer what we believe is a competitive compensation package.

 

We have summarized the various retirement plans in which our named executive officers may participate in greater detail in the narrative following the “Pension Benefits” table.

 

Our named executive officers also participate in the Executive Deferred Compensation Plan, under which we permit all senior leaders required to own equity in our company to elect to defer receipt of all or any part of the compensation they would receive under the Annual and Long-Term Incentive Performance Plan or, historically, the 2001 Restricted Stock Plan, until certain pre-determined payment dates. However, in January 2008, we amended the 2001 Restricted Stock Plan to remove the option for deferral. Therefore, any restricted stock grants made after January 2008 will not be subject to the Executive Deferred Compensation Plan. We provide the Executive Deferred Compensation Plan as a vehicle to assist participants in saving for a secure future by allowing participants to defer compensation and associated taxes until retirement or other termination of employment. We discuss the Executive Deferred Compensation Plan in further detail in the narrative following the “Nonqualified Deferred Compensation” table.

 

We maintain an Executive Survivor Benefits Plan for executive officers as an element of what we believe is a competitive compensation package. Under this plan, if a participating executive officer dies while he or she is an employee, then we will make certain payments to his or her beneficiary. We offer this benefit to executive officers, and coverage is in lieu of our regular group life insurance coverage and any other executive life insurance policy. We amended this plan during 2008 so that its benefits are more consistent with those that our Compensation Peer Group provides. All benefits under our Executive Survivor Benefits Plan cease upon retirement or other termination of employment.

 

Do we provide perquisites to our executive officers?

 

According to our compensation philosophy, we limit perquisites to our executive officers. We maintain a written formal policy regarding eligibility and use of perquisites, and we do not allow exceptions outside of the written policy. In general, we intend the perquisites we provide to help executive officers be more productive and efficient, or to protect us and the individual executive officer from certain business risks and potential threats. In fiscal year 2008, our named executive officers received perquisites of the following types: assistance with financial planning, personal use of a company airplane (personal use of airplane is minimal, and the cumulative fiscal year 2008 value of the personal use for all named executive officers was less than $10,000), and club dues. The Committee periodically reviews competitive market data to ensure that the perquisites we provide to executive officers are reasonable and within market practice. The Committee annually reviews use of perquisites to ensure compliance with our formal policy.

 

Separate from the perquisites policy, we have a company vehicle policy that provides personal use of a vehicle to all senior leadership, including our executive officers (the type of vehicle varies by leadership level and is limited to vehicles that use our

automotive seating and interiors products so that executives can experience the effectiveness of our products).

 

Do we have stock ownership requirements?

 

We have stock ownership requirements because we believe material stock ownership by executives plays a role in effectively aligning the interests of these employees with those of our shareholders and strongly motivates executives to build long-term shareholder value. We therefore maintain an executive stock ownership policy that requires our executives to hold significant amounts of our stock. The following forms of stock ownership count toward the ownership requirement under the policy:

 

 

Each executive officer named below that has been an employee of our company for three years or more has exceeded his respective guideline as of September 30, 2008. Executives failing to meet their required ownership level within a five-year period after becoming an executive officer will not receive future equity grants until their ownership requirement is met.

 

The guidelines for executive officer stock ownership under our Executive Stock Ownership Policy are as follows:

 

 

 

 

We also maintain the 2001 Common Stock Purchase Plan for Executives, or the CSPPE, which facilitates our executives’ acquisition of our common stock. Participants in the CSPPE may deduct from their pay up to $2,500 per month to purchase shares of our common stock. Participants pay a nominal brokerage fee or commission, and

the price of each share is 100% of the average price of shares purchased by Wells Fargo Bank, N.A., as agent for the participants.

 

Does the Committee consider the impact of tax and accounting rules and regulations?

 

Section 162(m) of the Internal Revenue Code limits us from deducting compensation that we pay in any year to our principal executive officer or other three most highly-compensated officers (other than our principal financial officer) in excess of $1 million, unless that compensation meets the requirements under Section 162(m) for “qualifying performance-based” compensation (i.e., compensation that we pay only if the individual’s performance meets objective goals that the Committee has established in advance based on performance criteria that shareholders have approved). The Committee continues to emphasize performance-based compensation for executives, thus minimizing the consequences to us of Section 162(m) limits. However, the Committee believes that its primary responsibility is to provide a compensation program that attracts, retains, and rewards the executive talent necessary for our success. Consequently, in any year, the Committee may authorize compensation that is not fully deductible under Section 162(m) if it believes such compensation is necessary to achieve our compensation objectives and protect the interests of our shareholders.

 

Do we utilize employment and change of control contracts?

 

As we discuss more fully on page 43, we have entered into employment agreements with all of our executive officers. The employment agreements protect us from certain business risks (threats from competitors, loss of confidentiality or trade secrets, disparagement, solicitation of customers and employees) and define our right to terminate the employment relationship. The employment agreements also protect our executive officers from certain risks, such as death or disability, by providing for payment and benefits in the event of certain terminations of employment. Our agreements provide for the events triggering benefits under the employment agreements, which we describe under “Potential Payments and Benefits upon Termination or Change of Control,” because we believe, based solely on the subjective judgments and experiences of the members of the Committee, that the terminations of employment that trigger benefits are likely to involve circumstances in which it is customary and appropriate to offer the protections embodied in the employment agreements.

 

In addition to employment agreements, as we discuss more fully on page 48, we have entered into change of control agreements with our executive officers. The agreements provide that our named executive officers may be eligible to receive payments and other benefits if there is a change of control of our company. In addition, our executive officers may receive benefits under our equity and bonus plans if there is a change of control of our company. We intend the change of control benefits to provide some economic stability to our executive officers to enable them to focus on the performance of their duties and the best interests of our company and our shareholders without undue concern over their personal circumstances if there is a potential change of control of our company. We provide for acceleration of equity and incentive awards, in particular, to protect our executive officers’ opportunities to earn the awards if a change of control occurs.

 

Annually, the Corporate Governance Committee reviews employment and change of control arrangements and reports its findings and recommendations to the Board. Based on our annual review, we determined that the amounts payable under the arrangements on certain triggering events, as we describe under “Potential Payments and Benefits upon Termination or Change of Control,” were consistent with market competitive practices.

SUMMARY COMPENSATION TABLE FOR FISCAL YEARS 2008 AND 2007

 

The following table summarizes the compensation earned in the fiscal years noted by our chief executive officer, our chief financial officer, our three other most highly compensated executive officers who were officers as of the end of the fiscal year ended September 30, 2008 and Mr. Barth. We refer to these officers as our “named executive officers”.

 

 

 

 

GRANTS OF PLAN BASED AWARDS DURING FISCAL YEAR 2008

 

The following table contains information concerning the plan-based equity and non-equity awards that we granted to our named executive officers in fiscal year 2008. Numbers of shares, exercise prices per share and closing prices on date of grant that we include in this table reflect the three-for-one split of our Common Stock effective October 2, 2007.

 

 

 

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR 2008 YEAR-END

 

The following table contains information concerning equity awards held by our named executive officers that were outstanding as of September 30, 2008. Numbers of shares and price per share that we include in the table and footnotes reflect the three-for-one split of our stock effective October 2, 2007.

 

 

 

 

STOCK VESTED DURING FISCAL YEAR 2008

 

The following table provides information about stock awards that vested in fiscal year 2008.

 

 

 

 

PENSION BENEFITS AS OF SEPTEMBER 30, 2008

 

The following table sets forth certain information with respect to the potential benefits to our named executive officers under our qualified pension and supplemental executive retirement plans as of September 30, 2008.

 

 

 

Johnson Controls Pension Plan — The Johnson Controls Pension Plan is a defined benefit pension plan that provides benefits for most of our non-union U.S. employees, including our named executive officers. Our Pension Plan has two components: (1) a component that covers Johnson Controls employees hired prior to January 1, 2006, other than York employees, and (2) a component that covers York employees who were participants in the York International Pension Plan Number One, which was merged into the Pension Plan effective December 31, 2006.

 

Employees we hired prior to January 1, 2006 (other than York employees) automatically became participants in our Pension Plan in the month in which they were hired. Employees hired on or after January 1, 2006, are not eligible to participate in the Pension Plan.

 

Subject to certain limitations that the Internal Revenue Code imposes, the monthly retirement benefit payable under our Pension Plan to participants other than the York employees, at normal retirement age in a single life annuity, is determined as follows:

 

 

For purposes of this formula, “final average monthly compensation” means a participant’s gross compensation, excluding certain unusual or non-recurring items of compensation, such as severance or moving expenses, for the highest five consecutive years of the last ten consecutive years of employment. “Social Security covered compensation” means the average of the Social Security wage base for the 35 years preceding a participant’s normal retirement age. Normal retirement age for Johnson Controls participants is age 65. The benefits of all of our named executive officers, except Mr. Myers and Dr. Bolzenius, are calculated using this formula.

For York employees, including Mr. Myers, participating in our Pension Plan, the monthly benefit payable at normal retirement age in a single life annuity is $25 times years of service, or if greater, an amount equal to 1/12^th of the following:

 

 

For purposes of this formula, compensation means the participant’s taxable compensation, plus contributions to a 401(k) plan and 50% of the amount that the participant deferred under a nonqualified deferred compensation plan, for the highest five consecutive years of the last ten consecutive years of employment. Service after December 31, 2003, does not count as benefit service in this formula. Normal retirement age for York participants is age 65. Mr. Myers is the only named executive officer whose benefits are calculated using this formula.

 

Participants in our Pension Plan generally become vested in their pension benefits upon completion of 5 years of service. Our Pension Plan does not pay full pension benefits until after a participant terminates employment and reaches normal retirement age. However, a participant who terminates employment may elect to receive benefits at a reduced level at any time after age 55, as follows:

 

 

Messrs. Roell and Wandell are currently eligible for early retirement under the Pension Plan. Mr. Barth retired as of December 31, 2007 based on the early retirement provisions under the Pension Plan.

 

German Pension Arrangement — We have entered into a supplemental agreement with Dr. Bolzenius that provides for retirement benefits. We refer to the supplemental agreement as the “German Pension Arrangement.” The German Pension Arrangement entitles Dr. Bolzenius to credit for one pension “unit” for each year since November 2, 2004 that he has been an employee of our subsidiary, Johnson Controls GmbH. The values of the pension units range between €28,282 (or $37,340 using a conversion of Euros into US Dollars using an exchange rate as of January 1, 2007, of 1.32027 US Dollars to 1.00 Euro) and €10,857 (or $14,334 using a conversion of Euros into US Dollars using an exchange rate as of January 1, 2007, of 1.32027 US Dollars to 1.00 Euro) depending on Dr. Bolzenius’ age. The annual pension benefit, paid monthly, under the German Pension Arrangement is given by the sum of all pension units credited until the time of the termination of Dr. Bolzenius’ employment.

 

Dr. Bolzenius’ German Pension Arrangement provides for full benefits only if his employment terminates after age 65, but permits him to receive reduced benefits upon an eligible early retirement (age 63). Upon an early retirement, Dr. Bolzenius’ benefits based on the acquired pension unit total would be reduced by 0.5% for each month the early retirement occurred prior to age 65. Dr. Bolzenius is not currently eligible for early retirement.

In calculating the amounts shown in the column titled “Present Value of Accumulated Benefit” in the table above, we used the following valuation method and material assumptions: We calculated the amounts reflected for Dr. Bolzenius in accordance with SFAS No. 87 — Employers’ Accounting for Pensions using the following assumptions: A calculation date of September 30, 2008, a 6.75% discount rate, retirement occurring at age 65, and applicability of the RT-2005 G by K. Heubeck Mortality Tables.

 

Retirement Restoration Plan — Our Retirement Restoration Plan is an unfunded, nonqualified plan that provides retirement benefits above the payments that an employee, other than a York employee, will receive from our Pension Plan in those cases in which the Code’s qualified plan limits restrict the employee’s benefits. The Retirement Restoration Plan provides a benefit equal to the difference between the actual pension benefit payable under our Pension Plan and what such pension benefit would have been without regard to any Code limitation on either the amount of benefits or the amount of compensation that the benefit formula can take into account. Because Mr. Myers was a York employee, he is not eligible under the Retirement Restoration Plan for a benefit with respect to the Pension Plan. Dr. Bolzenius is also not eligible under the Retirement Restoration Plan for a benefit with respect to the Pension Plan because he is not a participant in the Johnson Controls Pension Plan.

 

A participant is vested in his or her Retirement Restoration Plan benefits only if vested in his or her benefits under our Pension Plan. Benefits under the Retirement Restoration Plan are payable as an annuity at the later of the participant’s termination of employment or attainment of age 55.

 

NONQUALIFIED DEFERRED COMPENSATION DURING FISCAL YEAR 2008

 

The following table sets forth certain information with respect to participation in our nonqualified Executive Deferred Compensation Plan by our named executive officers during the fiscal year ended September 30, 2008.

 

 

 

 

We maintain the following two nonqualified deferred compensation plans under which executives, including our named executive officers, may elect to defer their compensation. Dr. Bolzenius does not participate in the Retirement Restoration Plan because he is not a participant in the Johnson Controls Pension Plan.

 

 

Under both plans, a participant may elect to have his or her cash deferrals credited to a common stock unit account or one or more investment accounts that are the same

as those available under our 401(k) plan, which serve to measure the earnings that we will credit on the participant’s deferrals. Restricted stock deferrals under the Executive Deferred Compensation Plan are automatically credited to the common stock unit account until vested, after which the participant may reallocate deferrals to another investment account. Amounts allocated to the common stock unit account are credited with dividend equivalents, which are treated as if reinvested in additional common stock units.

 

Under both plans, deferred amounts are paid upon a participant’s termination of employment in a lump sum or up to ten year annual installments, as the participant elects.

 

Dividends paid on restricted stock awards that a participant has elected not to defer are also accumulated within the Executive Deferred Compensation Plan, deemed reinvested in common stock units, and paid to a participant in a lump sum when the related shares of restricted stock vest.

 

The following table provides information about the compensation that our directors earned during fiscal year 2008 and their holdings of equity awards as of September 30, 2008. The table does not include Mr. Roell, who is our Chairman of the Board and Chief Executive Officer and received no additional compensation for his service as a director. The numbers of shares and price per share that we include in the footnotes to the table and the accompanying narrative reflect the three-for-one split of our stock effective October 2, 2007.

 

 

 

 

For fiscal year 2008, we paid each non-employee director $200,000 (pro rated for partial year service) in the form of an annual retainer, paid half in cash and half in shares of Common Stock at the then current market price, which shares we issued under the 2003 Director Stock Plan. We pay the cash portion of the retainer quarterly in October, January, April and July. We issue the stock annually using the market closing price as of the date of the Annual Meeting. We also reimburse non-employee directors for any expenses relating to their service as directors.

 

New non-employee directors receive a one-time grant of 2,400 shares of Common Stock upon election or appointment. We issue the stock on the first business day of the month following the start of the director’s term. Additionally, we pay the Chairpersons of the Audit, Compensation, Corporate Governance and Finance Committees an annual retainer of $25,000, each in cash.

 

We maintain a director stock ownership policy that requires our directors to hold significant amounts of our stock. Our current stock ownership policy requires our directors to hold five times the value of the Common Stock portion of their retainer by November 15, 2012, which is five years from the effective date of the policy. All of our directors comply with the stock ownership policy guidelines.

 

We permit non-employee directors to defer all or any part of their retainer under the Deferred Compensation Plan for Certain Directors. A director may elect to treat any amount deferred as if invested in any of the investment funds that are available under our tax-qualified Savings and Investment Plan or into share units. We pay the deferred amount as adjusted for earnings, losses, gains and dividends, as applicable, to the director after the director retires or otherwise ceases service on the Board, in a lump sum or up to ten year annual installments, as the director elects. Prior to October 1, 2006, under the Director Share Unit Plan, we credited stock units annually into each non-employee director’s account. Directors may now elect to treat the value of existing units as if invested in any of the accounts available under the Savings and Investment Plan.

 

The following is a discussion of the nature and estimated value of payments and benefits that each of our named executive officers would receive in the event of termination of the executive’s employment or upon a change of control. We based the estimated value of the payments and benefits that we would provide on an assumption

that the termination of employment or the change of control, or both, as applicable, occurred on September 30, 2008, the last business day of our fiscal year 2008. We can only determine the actual amounts of payments and benefits that an executive officer would receive upon his termination or upon a change of control at the actual time of such event.

 

Employment Agreements

 

We have entered into an employment agreement with each of our executive officers, including each of our named executive officers, but Mr. Barth relinquished his agreement upon his retirement. On December 31, 2007, after 38 years of service to the company, Mr. Barth retired as an employee of our company (although he remains on our board of directors). Accordingly, Mr. Barth became entitled to receive payments and distributions relating to the retirement benefits that he had been accruing during his service as an officer of our company. These included distribution of any vested benefits under the supplemental Retirement Restoration Plan and normal payouts under the Pension Plan (see the Pension Benefits Table), as well as a distribution of any vested benefits under the nonqualified Executive Deferred Compensation Plan (see the Nonqualified Deferred Compensation Table). Mr. Barth is also entitled to receive, at the end of the applicable performance period for each of his annual and long-term bonus awards outstanding under our Annual and Long-Term Incentive Performance Plans, a pro-rata portion of the award amount he would have earned had he remained employed through the end of each such performance period. For the performance periods ending in fiscal year 2008, the pro-rata amounts are indicated in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

At the time of his retirement, Mr. Barth retained his shares of restricted stock that had not vested prior to or at the time of retirement, and these shares will continue to vest on the normal vesting schedule as reflected in the footnotes to the “Outstanding Equity Awards at Fiscal Year 2008 Year End” table. The award agreement provides that Mr. Barth will not earn the restricted stock if he engages in conduct harmful to the best interests of our company. In addition, vesting for all outstanding option awards that we granted to Mr. Barth under the 2000 Stock Option Plan prior to March 23, 2005 accelerated so that all of these options became exercisable in full. All outstanding options that we granted to Mr. Barth under the 2000 Stock Option Plan on and after March 23, 2005, and vesting for all stock options that we granted to Mr. Barth under the 2007 Option Plan, that had been outstanding for at least full calendar year after the date of grant accelerated so that all of these options became exercisable in full. Those outstanding options are reflected in the “Outstanding Equity Awards at Fiscal Year 2008 Year End” table.

 

Each employment agreement contains substantially similar terms except for individual salary amounts and benefits. In addition to setting forth the terms and conditions of each named executive officer’s employment and the amounts payable upon the executive’s termination of employment, the employment agreements contain terms that protect the company from certain business risks, including:

 

 

 

Summary of the Payments and Benefits Upon Each Termination Scenario

 

The following summarizes the types of payments and benefits to which each of our named executive officers (other than Mr. Barth) would have been entitled if he had terminated employment on September 30, 2008, under various scenarios. These payments and benefits are generally based on the terms of the employment agreements and our relevant compensation and benefit plans, such as our Annual and Long-Term Incentive Performance Plans, stock option plans, 2001 Restricted Stock Plan, Retirement Restoration Plan, nonqualified Executive Deferred Compensation Plan, Executive Survivor Benefits Plan and the severance plan for our U.S. salaried employees.

 

For each termination scenario, we have not separately quantified any amounts that a named executive officer would receive under plans generally available to all management employees that do not discriminate in favor of the named executive officers. These include distributions under our pension plan and 401(k) savings plan, disability benefits, vesting of stock option and restricted stock awards under equity plans, any salary or bonus awards due to the employee through the date of termination, pro-rated bonus awards relating to outstanding bonus awards and accrued vacation.

 

Voluntary Termination:  A named executive officer may terminate his employment with us at any time. In general, upon the executive’s voluntary termination:

 

 

The executive will be entitled to a distribution of his vested benefits under the supplemental Retirement Restoration Plan (see the Pension Benefits Table on page 36) and the nonqualified Executive Deferred Compensation Plan (see the Nonqualified Deferred Compensation Table on page 39).

 

Retirement and Early Retirement:  None of our named executive officers whom we employed on September 30, 2008 was eligible for full retirement on that date, although Mr. Roell and Mr. Wandell were eligible for early retirement (which our Pension Plan defines as reaching age 55 and having 10 or more years of service). For an estimate of the value of the pension benefit for a named executive officer upon retirement, please see the Pension Benefits Table on page 36. In addition to such pension benefit, upon the executive’s full or early retirement:

 

 

 

 

 

The executive also will be entitled to a distribution of any vested benefits under the supplemental Retirement Restoration Plan (see the Pension Benefits Table on page 36) and the nonqualified Executive Deferred Compensation Plan (see Nonqualified Deferred Compensation Table on page 39).

 

Termination for “Cause”:  We may terminate the employment of a named executive officer for “cause” under the terms of the employment agreements. A termination for “cause” generally means a termination for theft, dishonesty, fraudulent misconduct, violation of certain provisions of the employment agreement, gross dereliction of duty, grave misconduct injurious to our company, and serious violation of the law or our policies on employee conduct. A named executive officer will not receive any special payments or benefits if we terminate his employment for “cause.” On the executive’s termination date, all of his outstanding unvested stock options will immediately terminate, and we will cancel any pending option exercises. In addition, the executive will forfeit all unvested shares of restricted stock and restricted stock units. The executive will be entitled to a distribution of his vested benefits under the supplemental Retirement Restoration Plan (see the Pension Benefits Table on page 36) and the nonqualified Executive Deferred Compensation Plan (see Nonqualified Deferred Compensation Table on page 39).

 

Termination without “Cause”:  If we terminate the employment of a named executive officer and the termination is not for “cause,” then:

 

 

 

The executive also will be entitled to a distribution of any vested benefits under the supplemental Retirement Restoration Plan (see the Pension Benefits Table on page 36) and the nonqualified Executive Deferred Compensation Plan (see Nonqualified Deferred Compensation Table on page 39).

 

The following is an estimate of the severance that each named executive officer would receive assuming the termination without “cause” occurred on September 30, 2008:

 

 

Termination due to Disability:  If a total and permanent disability causes a named executive officer’s termination, then:

 

 

In the case of termination as a result of total and permanent disability, the executive also will be entitled to distribution of any vested benefits under the supplemental Retirement Restoration Plan (see the Pension Benefits table on page 36) and the nonqualified Executive Deferred Compensation Plan (see the Nonqualified Deferred Compensation Plan table on page 39).

The following is an estimate of the supplemental retirement benefit that arises from vesting that accelerates due to disability that each named executive officer would receive assuming the disability termination occurred on September 30, 2008:

 

 

Termination due to Death:  If a named executive officer dies while he is our employee, then:

 

 

In the case of termination as a result of death, the executive or the executive’s beneficiaries also will be entitled to a distribution of the executive’s vested benefits under the supplemental Retirement Restoration Plan (see the Pension Benefits Table on page 36) and the nonqualified Executive Deferred Compensation Plan (see the Nonqualified Deferred Compensation Table on page 39).

 

The following is an estimate of the supplemental retirement benefit that arises from vesting that accelerates due to death and the Executive Survivor Benefits Plan value that each named executive officer would receive assuming the death occurred on September 30, 2008:

 

 

 

Change of Control Agreements

 

We have entered into change of control agreements with each of our executive officers, including each of our named executive officers, but Mr. Barth relinquished his agreement upon his retirement on December 31, 2007. Upon a change of control of our company, the change of control agreements supersede the employment agreements. The change of control agreements generally entitle each named executive officer to continued employment with our company or our successor for two years following the change of control, with a base salary, bonus and other benefits at least equal to the base salary, bonus and benefits we paid or provided prior to the change of control. The change of control agreements also provide for a severance payment and continued welfare and medical benefits upon termination of the executive’s employment under certain circumstances during the two year employment period that begins on the date of the change of control, as we explain in more detail under “Termination Upon or Following a Change of Control” below. The agreement defines a change of control as:

 

 

Summary of the Payments and Benefits Upon a Change of Control

 

The following summarizes the types of payments and benefits to which each of our named executive officers would have been entitled if a change of control had occurred or if both a change of control and a termination of employment had occurred, on September 30, 2008. These payments and benefits are generally based on the terms of our change of control agreements, and our relevant compensation and benefit plans, such as our Annual and Long-Term Incentive Performance Plans, stock option plans, 2001 Restricted Stock Plan, Retirement Restoration Plan, and nonqualified Executive Deferred Compensation Plan.

 

For each change of control scenario, we have not separately quantified any amounts that a named executive officer would receive under plans generally available to all management employees that do not discriminate in favor of the named executive officers (such as vesting of stock option and restricted stock awards under equity plans and payments of pro-rated bonus awards relating to outstanding bonus awards).

 

Change of Control:  In the event of a change of control of our company, which each relevant compensation and bonus plan generally defines in the same manner as under the change of control employment agreement we discuss above, the following will

occur as of the time of the change of control whether or not the named executive officer’s employment terminates:

 

 

The payments and the value of benefits under the change of control agreements or under any of our other plans and programs in connection with a change of control may exceed limitations that Section 280G of the Internal Revenue Code establishes, which would cause the executive officer to pay additional federal taxes. The change of control agreement provides that we will pay the executive officer an additional amount, called a “gross-up payment,” necessary to offset any taxes of this type that the Internal Revenue Service imposes on the executive officer and any additional taxes on this payment.

 

The following is an estimate of the supplemental retirement benefit that arises from vesting that accelerates due to the change of control and the excise tax gross up that each named executive officer would receive assuming the change of control (no termination) occurred on September 30, 2008: