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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The Progressive Corporation

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

The Progressive Corporation will hold its Annual Meeting of Shareholders on Friday, April 18, 2008, at 10:00 a.m., local time, at 6671 Beta Drive, Mayfield Village, Ohio, for the following purposes:

 

 

6.  To transact such other business as may properly come before the meeting.

 

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice. Only shareholders of record of The Progressive Corporation (NYSE:PGR) at the close of business on February 19, 2008, will be entitled to receive notice of and to vote at the meeting or any adjournment thereof.

 

Your vote is important. Whether or not you plan to be present at the meeting, please vote by Internet or telephone (following the instructions on the enclosed proxy card), or by completing and returning the proxy card in the enclosed postage-paid envelope. If you later choose to revoke your proxy, you may do so at any time before voting occurs at the Annual Meeting by following the procedures described in the “Questions and Answers about the Annual Meeting and Voting” section in the attached Proxy Statement.

 

By Order of the Board of Directors.

 

Charles E. Jarrett, Secretary

 

March 7, 2008

 

 

The Proxy Statement and the 2007 Annual Report to Shareholders are also available at progressiveproxy.com.

 

The Progressive Corporation

Proxy Statement

Table of Contents

 

 

 

The Board of Directors of The Progressive Corporation provides this Proxy Statement to you to solicit your proxy to act upon the matters outlined in the accompanying Notice of Annual Meeting of Shareholders. These include the election of four directors, amendments to our Amended Articles of Incorporation and Code of Regulations, and the ratification of the appointment of Progressive’s independent registered public accounting firm for 2008, each described in more detail below.

 

The Annual Meeting will take place on Friday, April 18, 2008 at 10:00 a.m., local time, at 6671 Beta Drive, Mayfield Village, Ohio 44143. The proxies also may be voted at any adjournment or postponement of the meeting.

 

The form of proxy (proxy card) and this Proxy Statement, which includes Progressive’s 2007 Annual Report to Shareholders as an Appendix, are being mailed to shareholders beginning on or about March 10, 2008.

 

All properly executed written proxies, and all proxies that are properly completed and submitted by Internet or telephone, will be voted at the meeting in accordance with the directions given by the shareholder, unless the shareholder revokes his or her proxy before voting occurs at the meeting.

 

Only shareholders of record of The Progressive Corporation (NYSE:PGR) at the close of business on February 19, 2008, the record date, will be entitled to receive notice of and to vote at the meeting or any adjournment thereof. Each shareholder on the record date is entitled to one vote for each of our Common Shares, $1.00 par value, held. On the record date, there were 677,988,816 shares of our common stock issued and outstanding.

 

Why did I receive these materials?

 

You received these materials because you are a shareholder of Progressive. We hold a meeting of our shareholders annually. This year’s meeting will be held on Friday, April 18, 2008. At the meeting, shareholders will be asked to vote on several items of business. Since it is not practical or convenient for all shareholders to attend the meeting in person, our Board of Directors is seeking your proxy to vote on these matters.

 

What is a proxy?

 

A proxy is your legal authority for another person to vote the stock you own at our Annual Meeting. The person you designate to vote your shares is referred to as your proxy. If you designate someone as your proxy in a written document, that document is also sometimes referred to as a proxy or proxy card. When you submit a proxy card, the person(s) named as your proxy(ies) on the card are required to vote your shares at the Annual Meeting in the manner you have instructed. By voting via proxy, each shareholder is able to ensure that his or her vote is counted without having to attend the Annual Meeting in person.

 

Who is soliciting my proxy?

 

This solicitation of proxies is made by and on behalf of our Board of Directors. The Board has approved the matters to be acted upon at the Annual Meeting (described in more detail below), subject to approval by shareholders, and recommends that you vote in favor of each director nominee named in this Proxy Statement and for each of the other proposals. However, you control your vote, and the voting instructions that you provide will be followed.

 

What is the purpose of the Annual Meeting?

 

At the Annual Meeting, shareholders will act upon the matters outlined in the Notice of Annual Meeting of Shareholders. These include:

 

 

 

 

 

Also, once the business of the Annual Meeting is concluded, management will briefly comment on the company’s performance and will be available to respond to appropriate questions from shareholders. The Annual Meeting will not be accessible via teleconference or webcast.

 

What is a proxy statement?

 

This document (including the exhibits, but excluding the 2007 Annual Report to Shareholders attached as an appendix) is our Proxy Statement. The proxy statement is a document that Securities and Exchange Commission (SEC) regulations require us to give shareholders when we are soliciting shareholders’ proxies to vote their shares. This Proxy Statement and the Annual Report contain important information about The Progressive Corporation and its subsidiaries, and about the matters that will be voted on at the meeting. Please read these materials carefully so that you have the information you need to make informed decisions.

 

Who is entitled to vote at the Annual Meeting?

 

Anyone who holds our common stock at the close of business on February 19, 2008, the record date, is entitled to receive the Notice of Annual Meeting and this Proxy Statement and to vote his or her shares at the Annual Meeting. As of the record date, there were 677,988,816 shares of our common stock outstanding and entitled to vote. Each share of common stock is entitled to one vote on each matter properly brought before the meeting.

 

What is the difference between a “shareholder of record” and a shareholder who holds stock in “street name”?

 

If you hold Progressive shares directly in your name with our transfer agent, National City Bank, you are a “shareholder of record” (also known as a “registered shareholder”). The Notice of Annual Meeting, Proxy Statement, 2007 Annual Report to Shareholders and proxy card have been sent directly to you by Progressive or our representative.

 

If you own your shares indirectly through a broker, bank or other financial institution, your shares are said to be held in “street name.” Technically, the bank or broker is the shareholder of record with respect to those shares. In this case, the Notice of Annual Meeting, Proxy Statement, Annual Report to Shareholders and a voting instruction form have been forwarded to you by your broker, bank, other financial institution or their designated representative. Through this process, your bank or broker collects the voting instructions from all of their respective customers who hold Progressive shares and then submits those votes to us.

 

What shares are included on the proxy card?

 

If you are a shareholder of record, you will receive only one proxy card for all the shares of common stock you hold as of February 19, 2008:

 

 

Employees and former employees who hold shares in our Retirement Security Program (RSP), our 401(k) plan, will receive separate instructions on the number of shares that are eligible to be voted and how to cast their votes on those shares.

 

If you hold shares in street name, the voting instruction form that you receive from your bank or broker should include a statement of the number of shares that you are entitled to vote. Any questions concerning this information should be directed to your bank or broker.

What methods can I use to vote?

 

By Mail.  All shareholders of record can vote by written proxy card. Please be sure to complete, sign and date the proxy card and return it in the enclosed, prepaid envelope. If you are a street name holder, you will receive a voting form and instructions from your bank or broker.

 

By Telephone or Internet.  All shareholders of record also can vote by touch-tone telephone from the U.S. and Canada, using the toll-free telephone number on the proxy card, or through the Internet using the procedures and instructions described on the proxy card.

 

The availability of telephone and Internet voting for street name holders will depend on the voting processes of your broker, bank or other financial institution. Voting instructions will be included in the materials you receive from them.

 

If you vote by telephone or on the Internet, you do not have to return your proxy card or voting instruction form.

 

In Person.  All shareholders of record may vote in person at the Annual Meeting. Street name holders may vote in person at the Annual Meeting only if they bring a legal proxy from their bank or broker. If you are a street name holder and you plan to vote in person, you must request the legal proxy from your bank or broker well in advance of the meeting date.

 

If you hold shares in our RSP, you will receive voting instructions from our plan administrator. If voting instructions are received by the plan administrator, they will be voted according to the instructions received. If you do not specify your voting instructions in the manner required by the plan administrator, the administrator will not vote your RSP shares. To allow sufficient time for voting by the RSP administrator, your voting instructions must be received by 11:59 p.m., eastern time, on Tuesday, April 15, 2008. You can change your vote at any time prior to this cut-off time; only your last vote will be counted.

 

Whether or not you plan to attend the Annual Meeting, the Board of Directors strongly encourages you to vote your shares by proxy prior to the meeting. Your vote is important. Please follow the voting instructions carefully to make sure that your shares are voted appropriately. You can save us the expense of a second mailing if you vote your shares promptly.

 

If I submit a proxy, may I later change or revoke it?

 

If you are a shareholder of record, you can revoke your proxy before votes are cast at the Annual Meeting by:

 

 

If you are a street name holder of shares, you may submit new voting instructions by contacting your bank, broker or other financial institution. You may also vote in person at the Annual Meeting if you obtain a legal proxy as described in the answer to the previous question.

 

All shares that have been properly voted and not revoked will be voted at the Annual Meeting as instructed.

 

Who counts the votes?

 

Votes will be tabulated by or under the direction of the Inspectors of Election, some of whom may be regular employees of Progressive. The Inspectors of Election will certify the results of the voting at the Annual Meeting.

 

What are my voting choices when voting for director nominees, and what vote is needed to elect directors?

 

When you vote on our nominees for the Board of Directors, you will have the following choices:

 

 

The director nominees who receive the greatest number of affirmative votes will be elected directors. Broker non-votes (discussed below) thus will not affect the results of the election. The Board recommends a vote for each of the nominees.

What are my voting choices when voting on the proposals to amend our Amended Articles of Incorporation or Code of Regulations (Items 2 through 4), and what vote is needed to pass the proposals?

 

For each proposal, you may select from the following choices:

 

 

The proposal to approve majority voting for directors in uncontested elections (Item 2 below) will be adopted if approved by the affirmative vote of a majority of the company’s common shares outstanding as of the record date. As such, abstentions and broker non-votes will have the same effect as votes against the proposal.

 

The proposals to amend the definition of a director’s “term of office” in our Code of Regulations (Item 3 below) and to increase the number of director positions from 12 to 13 and to fix the number of directors at 13 (Item 4 below) will be adopted if approved by the affirmative vote of seventy-five percent (75%) of the company’s common shares outstanding as of the record date. Abstentions and broker non-votes will have the same effect as votes against the proposal. In addition, shareholders’ approval of Item 3 will be deemed effective only if shareholders have also approved the proposal in Item 2 described in the immediately preceding paragraph.

 

The Board recommends a vote FOR each of the proposals.

 

What are my voting choices when voting on the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2008 (Item 5 below), and what vote is needed to ratify their appointment?

 

In the vote on the approval of the appointment of PricewaterhouseCoopers LLC as the company’s independent registered public accounting firm for 2008, shareholders may:

 

 

This proposal will be adopted if approved by the affirmative vote of a majority of the votes cast on this proposal, provided the total number of votes cast represents a majority of the outstanding common shares. Broker non-votes will not be treated as votes cast. Abstentions will be treated as votes cast and, consequently, will have the same effect as votes against the proposal.

 

The Board recommends a vote FOR the ratification.

 

What is a broker non-vote?

 

A broker non-vote occurs when a broker’s or bank’s customer does not provide the broker or bank with voting instructions on “non-routine” matters for shares owned by the customer (sometimes referred to as the “beneficial owner”) but held in the name of the broker or bank. For such matters, the broker or bank cannot vote on behalf of the shareholder and reports the number of such shares as “non-votes.” By contrast, if a proposal is considered “routine,” the broker or bank, in its discretion, may vote any shares as to which it has not received specific instructions from its customer. Whether the proposal is non-routine or routine is governed by the rules of the New York Stock Exchange. Of the proposals included in this Proxy Statement, Item 4 is considered “non-routine” by the NYSE and, therefore, the broker or bank will not be allowed to vote shares with respect to that proposal without specific instructions from the beneficial owner.

 

What if I do not specify a choice for a matter when returning a proxy?

 

Shareholders should specify their choice for each matter on the enclosed proxy card. For shareholders of record, if no specific instructions are given, proxies that are signed and returned will be voted in accordance with the recommendations of the Board of Directors, as follows:

 

 

 

Can I access the Notice of Annual Meeting, Proxy Statement, Annual Report on Form 10-K and the Annual Report to Shareholders on the Internet?

 

The Notice of Annual Meeting, Proxy Statement and 2007 Annual Report to Shareholders are available on a dedicated Web site at progressiveproxy.com. The Annual Report on Form 10-K is available at the Investor Relations section of our Web Site at progressive.com/sec. We will also provide a copy of any of these documents to any shareholder free of charge, upon request by e-mail to investor_relations@progressive.com, by calling toll-free 1-800-542-1061 or by writing to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143.

 

Street Name Holders.  If you hold your shares in a bank or brokerage account, your bank or broker may also provide you copies of these documents electronically. Please check the information provided in the proxy materials mailed to you by your bank or broker regarding the availability of this service.

 

Four of our directors have been nominated for re-election this year. Information about the structure of our Board of Directors and about our individual directors follows.

 

Progressive’s Code of Regulations provides that the number of directors shall be fixed at no fewer than five and no more than 12. The number of directors has been fixed by shareholders at 12, and there are currently 11 directors on the Board and one vacancy. The Code of Regulations also provides that the directors are to be divided into three classes as nearly equal in number as possible and that the classes are to be elected for staggered terms of three years each. Directors of one class are elected annually, except as provided below. At the Annual Meeting, the shares represented by the proxies obtained hereby, unless otherwise specified, will be voted for the election as directors of the four nominees named below, each to serve for a three-year term, and until their respective successors are duly elected and qualified. If, by reason of death or other unexpected occurrence, any one or more of the nominees named below is not available for election, the proxies will be voted for such substitute nominee(s), if any, as the Board of Directors may propose.

 

Based upon a recommendation from the Board’s Nominating and Governance Committee, the Board has nominated the four nominees named below for re-election to the Board. No shareholder nominations for the election of directors have been received within the time period specified by Section 13 of Article II of our Code of Regulations or pursuant to our Shareholder-Proposed Candidate Procedures (discussed below). Proxies cannot be voted at the Annual Meeting for a greater number of persons than the four nominees named in this Proxy Statement.

 

If written notice is given by any shareholder to the President, a Vice President or the Secretary not less than 48 hours before the time fixed for holding the Annual Meeting that he or she desires that the voting for election of directors shall be cumulative, and if an announcement of the giving of such notice is made at the meeting by the Chairman or Secretary or by or on behalf of the shareholder giving such notice, each shareholder shall have the right to cumulate his or her voting power in the election of directors. Under cumulative voting, each shareholder may give one nominee a number of votes equal to the number of directors to be elected multiplied by the number of shares he or she holds, or distribute such number of votes among two or more nominees, as the shareholder sees fit. If the enclosed proxy is executed and returned and voting for the election of directors is cumulative, the persons named in the enclosed proxy will have the authority to cumulate votes and to vote the shares represented by such proxy, and by other proxies held by them, so as to elect as many of the four nominees named below as possible.

 

Pursuant to our Corporate Governance Guidelines, if a nominee for director receives less than a majority of the votes cast in an uncontested election, although the nominee is elected as a director under Ohio law, he or she is expected to tender his or her resignation to the Board. In such an event, the Nominating and Governance Committee will consider the resignation offer and recommend to the Board whether to accept or reject it. The Board will then make the final decision whether to accept or reject the tendered resignation based on all the facts and circumstances then presented. (Note that if shareholders approve the proposals presented in this Proxy Statement as Item 2 (majority voting for directors in uncontested elections) and Item 3 (modifications to the definition of a director’s “term of office”), the Board expects to modify the procedures summarized in this paragraph as appropriate to reflect the amendments to our Amended Articles of Incorporation and Code of Regulations that are approved under those proposals.)

 

The Board currently has one vacancy. Under our Code of Regulations, the Board has the right to elect a new director to fill such a vacancy, but the new director so elected would serve for a term that expires on the date of the next shareholder meeting at which directors are to be elected. No decision has been made to fill the vacancy at this time.

The following information is provided for each person nominated for election as a director and for those directors whose terms will continue after the Annual Meeting. Unless otherwise indicated, each such nominee or director has held the principal occupation indicated for more than the last five years. Each nominee is currently a director of Progressive.

 

 

 

OTHER BOARD OF DIRECTORS INFORMATION

Board of Directors Independence Standards and Determinations

 

The Board of Directors has approved categorical independence standards which, if satisfied by a director, will permit a determination that such director is independent for purposes of the New York Stock Exchange (NYSE) Listing Standards. Under Progressive’s standards, an individual director may be determined to be “independent” only if he or she satisfies each of the following requirements, or if he or she is otherwise determined to be independent by a disinterested majority of the Board as provided below:

 

 

Contributions by Progressive to a charitable or non-profit organization in which a director or his or her spouse serves as a director, trustee or executive officer or in an equivalent position will be deemed immaterial under Progressive’s standards if Progressive’s contributions to such organization in any calendar year do not exceed $25,000 (excluding matching gifts made by The Progressive Insurance Foundation in response to employee contributions to such organization). If Progressive makes

annual contributions in excess of the stated amount to any such organization, the effect, if any, on the director’s independence will be considered on a case-by-case basis.

 

If a director has one or more relationships with Progressive that fall outside of our categorical standards, the materiality of such other relationships will be determined by a disinterested majority of directors on a case-by-case basis. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others. The ownership of even a significant amount of stock, by itself, however, is not a bar to a finding of independence.

 

The Board of Directors has considered the independence of each of the directors under the foregoing standards and, based on such considerations and the recommendations of the Nominating and Governance Committee of the Board of Directors, and after due inquiry into the facts and circumstances of each director’s relationships with Progressive (if any), has determined that each of our current directors, with the exception of Glenn M. Renwick as discussed further below, (i) satisfies Progressive’s independence standards as described above, (ii) has no relationship with Progressive or its subsidiaries or with any charitable organization that received a contribution from Progressive that would require an individual determination as to such director’s independence, and (iii) is independent under the applicable NYSE Listing Standards.

 

Mr. Philip Laskawy, who resigned from our Board in December 2007, had been determined by the Board to be independent in early 2007. Due to his resignation, his independence was not reconsidered in early 2008 along with our current directors, although management is aware of no facts or circumstances that would have changed his status prior to his resignation.

 

Mr. Glenn M. Renwick is not independent by virtue of his position as Progressive’s current President and Chief Executive Officer.

Meetings of the Board of Directors and Attendance

 

The Board of Directors held nine meetings during 2007, two of which were held by conference call.

 

All of the current directors were on the Board throughout 2007. All directors attended more than 75% of their scheduled Board and Committee meetings.

 

Pursuant to Progressive’s Corporate Governance Guidelines, directors are expected to attend Progressive’s Annual Meeting of Shareholders. Normally, a meeting of the Board will be scheduled on the date of the Annual Meeting. Progressive’s 2007 Annual Meeting of Shareholders was attended by 11 out of 12 of its then current directors. A full copy of our Corporate Governance Guidelines can be found on our Web site at progressive.com/governance, or may be requested in print by writing to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143.

Meetings of the Non-Management Directors

 

Pursuant to Progressive’s Corporate Governance Guidelines, our non-management directors meet in executive session at least quarterly. Each such meeting also constitutes a meeting of our independent directors. The Chairman of the Board, provided that he or she is not an executive officer of Progressive, presides at these meetings. In the event that a non-executive Chairman is not available to lead these meetings, the presiding director would be chosen by the non-management directors in attendance. In 2007, the non-management directors met in executive session six times.

Board Committees

 

The Board has named an Executive Committee, an Audit Committee, a Compensation Committee, an Investment and Capital Committee, and a Nominating and Governance Committee, as described below. The complete written charters for each of the Committees (other than the Executive Committee, which does not have a charter) can be found on our Web site at progressive.com/governance, or may be requested in print by writing to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143.

Executive Committee

 

Messrs. Hardis, Kelly, Lewis (Chairman) and Renwick are the current members of the Board’s Executive Committee, which exercises all powers of the Board between Board meetings, except the power to fill vacancies on the Board or its Committees. During 2007, the Executive Committee did not meet, but adopted resolutions by written action pursuant to Ohio corporation law on 13 occasions.

Audit Committee

 

Drs. Healy and Nettles and Mr. Hardis (Chairman) are the current members of the Board’s Audit Committee, which assures that the organizational structure, policies, controls and systems are in place to monitor performance. The Audit Committee monitors the integrity of Progressive’s financial statements, our financial reporting processes and internal control over financial reporting, our compliance with legal and regulatory requirements and the public release of financial information. The Committee also is responsible for confirming the independence of, and the selection, appointment, compensation, retention and oversight of the work of, our independent registered public accounting firm. The Committee provides an independent channel to receive appropriate communications from employees, shareholders, auditors, legal counsel, bankers, consultants and other interested parties. The Board of Directors has determined that each of the members of the Audit Committee is financially literate, has no relationship to Progressive that may interfere with the exercise of his or her independence from management and Progressive, and is independent as defined in the applicable Securities and Exchange Commission (“SEC”) rules and NYSE Listing Standards. During 2007, the Audit Committee met in person seven times and participated in five conference calls to review our financial and operating results.

Audit Committee Financial Expert.  The Board of Directors has determined that Mr. Stephen R. Hardis, the Chairman of the Audit Committee, is an audit committee financial expert, as that term is defined in the applicable SEC regulations, and that he has accounting or related financial management expertise, as required by the NYSE Listing Standards. Mr. Hardis is a former Chairman and Chief Executive Officer of Eaton Corporation, where he served as Chief Financial and Administrative Officer before becoming CEO. He has served on the audit committees of a number of public companies through the years, including as a member of Progressive’s Audit Committee from April 1988 through December 1999. He is currently the chairman of the audit committee of one other public company, where he has also been named the audit committee financial expert. The Board has determined that through appropriate education and experience, Mr. Hardis has demonstrated that he possesses the following attributes:

 

Compensation Committee

 

Messrs. Davis (Chairman) and Matthews and Dr. Sheares are the current members of the Board’s Compensation Committee. During 2007, the Compensation Committee met four times in person and three times by phone, and adopted resolutions by written action pursuant to Ohio corporation law on four occasions.

 

The Committee makes all final determinations regarding executive compensation, including salary, equity (restricted stock awards) and non-equity incentive compensation (cash incentive) targets, and related performance goals, formulae and procedures. The Committee (or in certain circumstances, the full Board of Directors, based on the Committee’s recommendation) also approves the terms of the various compensation and benefit plans in which executive officers and other employees may participate. Committee decisions are made after considering compensation data from comparable companies obtained by Progressive from independent third parties, internal analysis and/or recommendations presented by management. The executive compensation decisions represent the culmination of extensive analysis and discussion, which typically take place over the course of multiple Committee meetings and in meetings between the Committee and management, including our Chief Executive Officer, our Chief Human Resource Officer, members of the Human Resource and Law Departments, and other Progressive personnel. In addition, the Committee frequently consults with the full Board of Directors on executive compensation matters.

 

The Committee’s determinations regarding incentive compensation for executive level employees (for example, performance criteria and standards relating to annual cash bonus determinations) also apply to incentive plans covering non-executive employees. Under this arrangement, executives and non-executives alike are motivated to achieve the same

performance objectives. The Committee has delegated to management, however, the authority to implement such plans, and make other compensation-related decisions (such as salary and restricted stock awards), for non-executive level employees.

 

The Committee has the authority under its Charter to hire its own compensation consultants, at Progressive’s expense. The Committee regularly assesses the need for a consultant, most recently considering the issue at its January 2008 meeting. The Committee decided that a consultant would not be hired at that time, in view of Progressive’s consistent compensation program, the program’s significant performance-based features that have been successfully tested in both good and bad performance years, and the availability of credible market data from independent third parties, among other factors. The Committee has clearly indicated that it remains open to hiring a consultant in the future should circumstances change, and that it will continue to monitor these and other relevant factors and reconsider the issue from time to time. For more information on executive compensation, see the “Compensation Discussion and Analysis” section beginning on page 22.

 

Messrs. Kelly (Chairman), Lewis and Shackelford are the current members of the Board’s Investment and Capital Committee, which monitors and advises Progressive on its investment and capital management policies. During 2007, the Investment and Capital Committee met six times.

 

Messrs. Davis, Hardis and Matthews (Chairman) are the current members of the Board’s Nominating and Governance Committee. The Committee considers the qualifications of individuals who are proposed as possible nominees for election to the Board and makes recommendations to the Board with respect to such potential candidates.

 

The Committee also is responsible for monitoring corporate governance matters as they affect the Board and the company. The Committee regularly reviews Progressive’s Corporate Governance Guidelines and related matters to ensure that they continue to correspond to and support the Board’s governance philosophy. The Committee considers and, where appropriate, recommends to the Board for approval, changes to the Corporate Governance Guidelines based on suggestions from Board members or management. The Committee reviewed the Guidelines in 2007, and proposed several changes including, most significantly, the addition of stock ownership guidelines for the CEO and the executive officers who report directly to him. These changes were adopted by the Board during 2007.

 

In addition, the Nominating and Governance Committee led the Board’s consideration of issues relating to majority voting in uncontested director elections, due to a change in Ohio law on the subject, and proposed amendments to the company’s Amended Articles of Incorporation and Code of Regulations to adopt majority voting in uncontested directors elections and related modifications. These proposals were also adopted by the Board, subject to shareholder approval, and are included in this Proxy Statement as the proposals set forth in Items 2 and 3. Finally, in reviewing the operation of the Board and its flexibility to recruit and attract director candidates, the Committee determined that an increase in the size of the Board by one member would be desirable. The Board again agreed, and this issue is presented for shareholder approval below in Item 4.

 

Until December 2007, the Board had not had a vacancy in approximately 18 months, so an active search for new directors was not ongoing. In the past, a search firm had been retained to assist in such searches, and the Committee has the authority to retain such a firm to assist with the current vacancy, and future vacancies, if it so chooses.

 

During 2007, the Nominating and Governance Committee met four times. The Committee regularly reviews the qualifications of potential candidates for the Board. The Committee recommended the four nominees named above, each of whom is currently a director, for re-election to the Board.

 

Shareholder-Proposed Candidate Procedures.  Pursuant to the Nominating and Governance Committee’s Charter, the Board has adopted a policy of considering director candidates who are recommended by Progressive’s shareholders. In addition, the Committee has adopted Procedures for Shareholders to Propose Candidates for Directors (the “Shareholder-Proposed Candidate Procedures” or “Procedures”).

 

Any shareholder desiring to propose a candidate for election to the Board under these Procedures may do so by mailing to Progressive’s Secretary a written notice identifying the candidate. The written notice must also include the supporting information required by the Shareholder-Proposed Candidate Procedures, the complete text of which can be found on our Web site at progressive.com/governance. The notice and supporting information should be sent to the Secretary at the following address: Charles E. Jarrett, Secretary, The Progressive Corporation, 6300 Wilson Mills Road, Mayfield Village, Ohio 44143. Upon receipt, the Secretary will forward the notice, and the other information provided, to the Committee.

The nominating shareholder may also include any additional information that the shareholder believes is relevant to the Committee’s consideration of the candidate. If a shareholder proposes a candidate without submitting all of the foregoing items, the Committee, in its discretion, may reject the proposed candidate, request more information from the nominating shareholder, or consider the proposed candidate while reserving the right to request more information. In addition, the Committee may further limit each shareholder to one proposed candidate in any calendar year and may refuse to consider any additional candidate(s) proposed by such shareholder or its affiliates during the calendar year.

 

Shareholders may propose candidates to the Committee pursuant to the Shareholder-Proposed Candidate Procedures at any time. However, to be considered by the Committee in connection with Progressive’s next Annual Meeting of Shareholders (held in April of each year), the Secretary must receive the shareholder’s proposal and the information required above on or before November 30th of the year immediately preceding such Annual Meeting.

 

It is the Committee’s policy to review and evaluate each candidate for nomination submitted by shareholders in accordance with the Shareholder-Proposed Candidate Procedures on the same basis as candidates who are suggested by our Board members, executive officers or other sources, which may include professional search firms retained by the Committee. The Committee will give strong preference to candidates who are likely to be deemed independent from Progressive under SEC and NYSE rules. As to shareholder-proposed candidates, the Committee may give more weight to candidates who are unaffiliated with the shareholder proposing their nomination and to candidates who are proposed by long-standing shareholders with significant share ownership (i.e., greater than 1% of Progressive’s common shares that have been owned for more than two years).

 

In considering director nominations, the Committee will consider: the current composition of the Board and how it functions as a group; the talents, personalities, strengths and weaknesses of current Board members; the value of contributions made by individual Board members; the need for a person with specific skills, experiences or background to be added to the Board; any available or anticipated vacancies due to retirement or other reasons; and other factors which may enter into the nomination decision. Upon the expiration of a director’s term on the Board, that director will be given preference for nomination when the director indicates his or her willingness to continue serving and, in the Committee’s judgment, the director has made and is likely to continue to make a significant contribution to the Board and Progressive.

 

When considering an individual candidate’s suitability for the Board, the Committee will evaluate each individual on a case-by-case basis. The Committee does not prescribe minimum qualifications or standards for directors, but instead looks for directors who have demonstrated the ability to satisfy the fundamental criteria set forth in the Committee’s Charter — integrity, judgment, commitment, preparation, participation and contribution. In addition, the Committee will review the extent of the candidate’s demonstrated excellence and success in his or her chosen business, profession or other career and the skills and talents that the candidate would be expected to add to the Board. The Committee may choose, in individual cases, to conduct interviews with the candidate and/or contact references, business associates, other members of boards on which the candidate serves or other appropriate persons to obtain additional information. Such background inquiries may also be conducted, in whole or in part, on the Committee’s behalf by third parties, such as professional search firms. The Committee will make its determinations on whether to nominate an individual candidate based on the Board’s then-current needs, the merits of that candidate and the qualifications of other available candidates. If a candidate is not nominated, the Committee will have the discretion to reconsider his or her candidacy in connection with future vacancies on the Board.

 

The Committee’s decision not to nominate a particular individual for election to the Board will not be publicized by Progressive, unless required by applicable laws or NYSE rules. The Committee will have no obligation to respond to shareholders who propose candidates that the Committee has determined not to nominate for election to the Board, but the Committee may choose to do so in its sole discretion.

 

These Shareholder-Proposed Candidate Procedures are in addition to any rights that a shareholder may have under our Code of Regulations or under any applicable laws or regulations in connection with the nomination of directors for our Board.

 

The Board of Directors has adopted procedures for shareholders to send written communications to the Board as a group. Such communications must be clearly addressed to the Board of Directors and sent to either of the following, at the election of the shareholder:

 

 

In addition, interested parties may contact the non-management directors as a group by sending a written communication to either of the above-named individuals. Such communication must be clearly addressed to the non-management directors.

 

The recipient will promptly forward communications so received to the full Board of Directors or to the non-management directors, as specified by the shareholder.

 

Transactions between The Progressive Corporation or its subsidiaries and any director or executive officer, or any entity in which one or more of our directors or executive officers is a substantial owner, director or executive officer, must be disclosed to and, if appropriate, approved by, our Board of Directors. Our Code of Business Conduct and Ethics prohibits directors and executive officers from having a direct or indirect financial interest in any transaction involving Progressive, unless either: (i) the transaction is disclosed to and approved by a disinterested majority of the Board; or (ii) with respect to a transaction with another publicly held company, the transaction and the Progressive person’s status as a director, officer, consultant or advisor to such other company are known to the Board, a disinterested majority of the Board does not object to the person’s continued service to such other public company, and the annual payments to or from Progressive under the transaction do not exceed the lesser of 1% of Progressive’s or such other company’s consolidated revenues.

 

This policy is carried out by the Law Department as transactions with such persons or entities, or proposals for such transactions, are identified by management or disclosed by members of the Board. As indicated above, the policy applies to all transactions that occur between Progressive and the persons or entities described above. If a transaction with any such person or entity is proposed or entered into during the course of the year, the transaction is presented to the Board for consideration, typically at its next meeting. In addition, all previously approved transactions that are expected to continue into a new year are presented to the Board for review on an annual basis at the Board’s first meeting of the year (in January or February). This procedure further allows the Board to consider these relationships at the same time that it is considering whether directors are independent under applicable rules and regulations.

 

The following discussion sets forth the relationships and transactions known by management at this time to involve Progressive or its subsidiaries and such persons or entities. In each case, pursuant to the policies described above, these transactions have been disclosed to the Board of Directors and a disinterested majority of the Board approved the transaction or, in the case of ongoing relationships that were presented to the Board, permitted the continuation or renewal of the relationship.

 

 

Progressive also has an uncommitted line of credit with NCB in the principal amount of $125 million. We do not incur any commitment fees for this arrangement and no borrowings were outstanding under this line of credit at any time during 2007. A subsidiary of Progressive has $125 million on deposit with NCB. These funds are invested in interest-bearing securities approved by us. This line of credit and the deposit are components of our cash contingency arrangement to ensure the availability of those funds in the event of certain emergencies affecting capital markets and banking operations.

 

We have established a $36 million trust on behalf of the policyholders of a nonconsolidated affiliate of Progressive, with NCB as trustee, in order to maintain the A.M. Best rating of the nonconsolidated affiliate. We incur an annual trustee fee of $15,000 in connection with this trust, which represents NCB’s customary rates.

 

 

During 2007, we also paid $10,796 to a division of Mercer Management Consulting, Inc. (“Mercer”), a subsidiary of Marsh, for compensation and benefits surveys. The fees paid to Mercer were customary rates for the products purchased or services rendered.

 

Messrs. Davis and Matthews and Dr. Sheares served as members of Progressive’s Compensation Committee during 2007. There are no Compensation Committee interlocks.

 

REPORT OF THE AUDIT COMMITTEE

 

This Page Intentionally Left Blank

 

 

 

The following information is set forth with respect to persons known to management to be the beneficial owners, as of December 31, 2007, of more than 5% of Progressive’s Common Shares, $1.00 par value:

 

 

 

The following information summarizes the beneficial ownership of Progressive’s common shares as of December 31, 2007, by each director and nominee for election as a director of Progressive, each of the named executive officers (as identified on page 37) and by all directors and all other individuals who were our executive officers on December 31, 2007, as a group. In addition, to provide a more complete picture of certain individual’s financial interest in Progressive shares, the final two columns include share equivalent units held in our benefit plans that do not technically qualify as “beneficially owned” under the applicable regulations, also as of December 31, 2007.

 

 

*Less than 1% of Progressive’s outstanding common shares.

 

 

 

 

 

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who beneficially own more than 10% of our common shares, if any, to file reports of ownership and changes in ownership of Progressive stock with the Securities and Exchange Commission. Based on our review of Section 16 reports prepared by or furnished to Progressive and representations made by our officers and directors, we believe that all filing requirements were met on a timely basis during 2007.

 

I.  GOALS OF EXECUTIVE COMPENSATION PROGRAM

 

Our compensation program for executives, including the “named executive officers” identified in the Summary Compensation Table on page 37, is designed and implemented under the direction and guidance of the Compensation Committee of the Board of Directors. Broadly stated, we seek to maintain a consistent compensation program with the following objectives:

 

 

 

 

1. The Compensation Committee

 

The Compensation Committee is comprised of three Directors who are independent from management. The Committee makes final executive compensation decisions regarding salary, cash bonus targets, equity awards and related performance goals, as they apply to executive officers. For additional information on Compensation Committee procedures, see the “Compensation Committee” discussion on page 12.

 

2. Primary Elements of Compensation

 

Our executive compensation program has retained the same basic format for more than a decade. We have three primary compensation elements, each of which involves annual decisions made by the Compensation Committee to ensure reasonable, competitive pay for our executives, with a balance of fixed and variable compensation. These elements are:

 

 

Our compensation decisions (for executives and our other employees) are guided by the policies that individual base salaries should generally be within a range that is tied to the 50^th percentile for similar jobs at comparable companies (with variations determined by individual factors, as described in more detail below), and that employees should also have the ability to earn above-average compensation when justified by the individual’s and Progressive’s performance. At executive levels, variable compensation (including annual cash bonus and restricted stock awards) accounts for a much greater portion of total potential compensation, providing tangible incentives to executives to drive business unit and company results and aligning executives’ interests with those of shareholders. As a result, total pay for our executives is heavily weighted in favor of performance-based compensation that is tied directly to the Company’s strategic goals, as well as to the performance of our common shares. These basic elements of our executive compensation program are discussed in greater detail below in Part B, “Elements of Compensation — Annual Decisions or Awards.”

 

Other types of compensation available to executives are comprised of health and welfare benefits, deferred compensation arrangements, severance payments and very limited perquisites. We do not provide a separate pension program, supplemental executive retirement plan or other post-retirement payments to executives, nor do we make tax “gross-up” payments to executives in connection with compensation received. These additional types of compensation are discussed in more detail below in Part C, “Elements of Compensation — Other.”

As a result, the compensation that an executive can expect to earn at Progressive over his or her career will derive predominantly from our three annual compensation components, i.e., salary, cash bonus opportunity and equity awards, and the amount ultimately earned by executives will depend greatly on our operating performance, as well as the performance of our common shares.

 

3. Compensation Comparisons

 

The executive compensation program is market-based and is designed to be competitive with compensation opportunities available to executives in similar positions at comparable companies. If direct job comparisons are not available for an executive, we seek to match the executive with job classifications from comparable companies that most closely resemble the executive’s position and responsibilities.

 

Comparable companies include those from many industries in a revenue range that is comparable to our revenue, as indicated on compensation surveys that we obtain from independent third party vendors. Comparable companies are intentionally not limited to those in the insurance industry. This choice reflects: that there are a limited number of publicly held insurers that focus exclusively, or even primarily, on automobile insurance (and none with comparable revenue or market value characteristics); that we do not generally recruit senior management level talent from other insurance companies; and that our executives have employment opportunities with companies doing business in a variety of industries. As a result, we view the broader range of companies to be a better reflection of the marketplace for the services of our executives. We do not focus on the identity of any individual company, but are interested in the aggregate data and the percentile breakdowns, which are used as a guide (among other factors) in our executive compensation decisions, as discussed further below.

 

4. Internal Pay Equity

 

We do not use “internal pay equity” as a constraint on compensation paid to the Chief Executive Officer or other executives. Such systems typically put a ceiling on part or all of an executive’s compensation based on a specified multiple of compensation awarded to another executive or a class of employees of the company. Management and the Committee do not believe that such arbitrary limitations are an appropriate way to make compensation decisions for our executives. Instead, we rely on the judgment of the Committee, after considering recommendations from management (including the CEO), available market data and evaluations of executive performance.

 

5. No Tax “Gross-Up” Payments

 

We do not provide, and no executive officer is entitled to receive, any tax “gross-up” payments in connection with compensation, severance, perquisites or other benefits provided by Progressive, except that we pay all regular employees, including the named executive officers, 5-year anniversary awards (i.e., at their 5^th, 10^th, 15^th, etc., anniversaries) in amounts not to exceed $300 on a net (after tax) basis. When such amounts are paid to named executive officers, the gross (pre-tax) amount is included in our Summary Compensation Table.

 

B. Elements of Compensation — Annual Decisions or Awards

 

This section summarizes our policies and plans relating to the basic elements of compensation, each of which is determined on an annual basis — salary, annual cash bonus opportunity and restricted stock awards (subsections 1-3 below). In subsection 4 below, we discuss details of the 2007 compensation decisions for the named executive officers¹ and performance results. A number of changes that are being implemented for 2008 are also addressed in more detail at the end of this section (subsection 5 below).

 

1. Salary

 

Executive salaries are designed to attract and retain executive talent and to reward individual performance. As a general matter, executive salaries are set in a range around the 50^th percentile for executives with similar responsibilities at comparable companies. Variations from this general rule can occur on a case-by-case basis for any number of reasons, including the nature of a specific executive’s position and responsibilities, our business needs, the tenure of an executive in his or her current position, individual performance and the executive’s future potential. The salary level for our CEO, Glenn Renwick, which has been maintained well below market at $750,000 per year since February 2002, is an exception to this general approach and is discussed separately below.

 

 

¹ The discussion below excludes Mr. Forrester, other than matters related to his retirement in March 2007. Due to his impending retirement, Mr. Forrester’s salary rate did not change for 2007, and he did not participate in our Gainsharing or restricted stock programs for the year.

Salary amounts then serve as the basis for determining annual cash bonus potential and the value of annual equity awards, as described in more detail in the following sections.

 

2. Cash Bonuses

 

Gainsharing Program.  Each executive has the opportunity to earn an annual, performance-based cash bonus under our 2007 Executive Bonus Plan or other bonus plans. The Executive Bonus Plan operates under the same performance criteria used in our 2007 Gainsharing Plan, which covers all of our non-executive employees (those plans are sometimes referred to together as “Gainsharing,” the “Gainsharing program” or the “Gainsharing plans”). Gainsharing bonuses are determined using the following formula:

 

Paid Salary

X

Target Percentage

X

Performance Factor

=

Annual Bonus

 

For each executive, his or her salary and target percentage are established by the Committee each year during the first calendar quarter. When the participant’s annual salary is multiplied by his or her assigned target percentage, the product is referred to as the participant’s “target bonus” or “target bonus amount” for the year. The performance factor can range from 0.0 to 2.0 each year, depending on the extent to which Progressive’s results, and/or the results of the executive’s assigned business unit, fall short of, meet or exceed the objective performance goals established in advance by the Committee. As a result, each participant can earn an annual cash bonus of between 0.0 and 2.0 times his or her target bonus amount (with an amount equal to 2.0 times an executive’s target bonus thus being the executive’s maximum potential bonus). The payment of the target bonus amount, which would result from a 1.0 performance factor under the plans, is typically expected to put an employee’s annual cash compensation (salary plus bonus) at approximately the 50^th percentile of total cash compensation for similar jobs at comparable companies, although there is more variability at executive levels due to a number of factors, including lack of comparable data and individual factors such as tenure, responsibilities and our business needs. Note that all Gainsharing and other performance-based cash bonus awards for the named executive officers are reported on the Summary Compensation Table below as “Non-Equity Incentive Plan Compensation.”

 

Under the Gainsharing plans, the performance factor is determined after the end of each year based on actual operating performance for that year by our principal business units, when compared with growth and profitability criteria that were established by the Compensation Committee during the first quarter of the plan year. Generally, the performance factors under our Gainsharing plans are determined by reference to either (i) the overall operating performance of our core insurance businesses, excluding investment results (the “Core Business”), or (ii) a combination of the performance of the Core Business and the performance of the respective executive’s assigned business unit. For 2007, the Core Business was defined to include the Agency Auto, Direct Auto, Special Lines and Commercial Auto businesses.

 

The Gainsharing cash bonus is designed to reward executives based on the operating performance of Progressive’s insurance business as a whole and/or an executive’s assigned business unit, as compared with objective performance criteria that are established by the Committee during the first quarter of each year and are not thereafter modified. The purpose of the cash bonus program is to motivate executives to achieve and surpass current performance goals, which over time, should positively impact the returns of long-term shareholders. Additional discussion of the 2007 Gainsharing program, the operating results for the business units comprising the Core Business and the calculation of the Performance Factor for 2007 can be found below under “2007 Compensation Decisions and Results” and under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” on page 39.

 

The Gainsharing performance factor for our Core Business is calculated on a monthly basis, using year-to-date results, and published in our regular, monthly earnings release. In addition, the final performance factor was used by the Company to calculate our annual dividend payment to shareholders for the first time in 2007. The annual dividend of $.1450 per share was paid on January 31, 2008 to shareholders of record on December 31, 2007. The Gainsharing factor and, as a result, the Company’s ongoing operating performance, are therefore monitored and disclosed to the public throughout the course of the year, and are ultimately used to reward both employees and shareholders.

 

Other Bonus Plans.  In 2007, our Chief Information Officer, Mr. Raymond Voelker, participated in The Progressive Corporation 2007 Information Technology Incentive Plan (the “IT Bonus Plan”) for 10% of his potential bonus, along with other employees who worked in this business area. This plan provides cash bonus opportunities to participants for satisfaction of pre-established performance criteria relating to the outage-free availability of certain information technology systems. For more information on Mr. Voelker’s bonus under the IT Bonus Plan, see the discussion below under “2007 Compensation Decision and Results; Cash Bonus — IT Plan.” In addition, the entire 2007 cash bonus for our Chief Investment Officer was determined under our Executive Bonus Plan based on the performance of our fixed-income investment portfolio when compared, on a

risk-adjusted basis, with the performance achieved by a group of comparable money management firms, as determined by a third party vendor. Our equity portfolio is not included in this analysis because this portfolio tracks the Russell 1000 Index and is not actively managed by our investment group.

 

Recent Gainsharing Results.  Outstanding growth and profitability results in each of 2003 and 2004 were rewarded by a Core Business performance factor of 2.0, and the highest possible bonus under our Gainsharing plans, for most executive officers and other employees of Progressive. By contrast, a significant down year in our insurance operations in 2000 resulted in a performance factor of 0.0 for our Core Business, and no annual cash bonus, for most executive officers and employees. Performance factors for 2005, 2006 and 2007 were 1.539, 1.18 and .74, respectively, reflecting strong (but decreasing) profitability, but lagging growth compared to recent experience and our pre-established targets. Throughout the 14-year history of our company-wide Gainsharing program (including 2007), the performance factor for the Core Business has averaged about 1.34. These results confirm that our Gainsharing plans operate not only to reward excellent performance, but also to withhold or temper cash bonuses if our actual performance results fail to achieve pre-defined goals.

 

Effect of Any Future Financial Restatement.  Under the 2007 Executive Bonus Plan, bonuses paid to executives will be subject to recoupment by Progressive if operating or financial results that are used in the bonus calculation are later restated. If an executive engages in fraud or other misconduct leading to the restatement, he or she would be required to repay the entire bonus paid for the year(s) in question, plus interest and the costs of collection, and there is no time limit on our ability to recover such amounts other than limits imposed by law. In addition, we would have the right to require repayment from an executive who does not engage in misconduct, but nonetheless receives a bonus that was artificially high due to the use of incorrect financial results, but only to the extent that the potential recovery would exceed the lesser of 5% of the bonus paid or $20,000 and the restatement occurs within three years after the bonus is paid. Plans covering bonuses paid to executives in prior years do not include such a provision, however, and our ability to recoup any bonuses paid under the prior plans if such a restatement were to occur would depend on the availability of general legal and equitable remedies under state or federal law.

 

 

Restricted Stock Awards.  Our executive compensation program includes long-term incentives through an annual grant of restricted stock awards. Under a restricted stock grant, the executive receives an award of Progressive’s common shares, subject to restrictions on vesting and transferability. Annual awards of restricted stock to executive officers are intended to tie the amount of compensation ultimately earned by the executive to our long-term performance and the market value of our common shares. Until 2002, we issued stock options annually to our executives (and certain other employees), but that program was terminated in 2003 when the restricted stock program was instituted.

 

Each executive officer receives a restricted stock award on an annual basis. All executive officers receive a time-based restricted stock award that will vest in three equal installments in the third, fourth and fifth years after the grant. The value of these awards is based on a percentage of the individual’s salary at the time of the award, which is determined by the Committee on an annual basis. Time-based restricted stock awards align the interests of executives with our shareholders and serve as a strong retention device, encouraging our senior executives to stay with Progressive until future vesting dates occur.

 

In addition, our CEO and the executive officers who report directly to him, each receives an annual award of performance-based restricted stock. The number of shares granted to each executive, and the objective performance criteria that govern if and when the performance shares will vest, are approved each year by the Committee at the time the awards are granted and are not thereafter modified. The performance criteria are established by the Committee each year, with management’s input, based on then-current market conditions and our long-term strategic goals. If the applicable performance conditions are not satisfied within the time frame established by the Committee (typically 10 years), the awards will be forfeited by the executives. Performance-based awards operate as an additional incentive for executives to achieve long-term business objectives, thus further aligning the interests of shareholders and our executives, while also supporting retention of critical employees. In addition, these awards increase the “at risk” nature of our executives’ compensation.

 

Ownership Guidelines for Executives.  Under guidelines recently approved by our Board of Directors, within five years after becoming our CEO and at all times while serving as CEO thereafter, the CEO must acquire and hold Progressive stock (or equivalent vested interests, such as shares held on the CEO’s behalf in our 401(k) or equivalent units held in our executive deferred compensation plan, but excluding unexercised stock options and unvested restricted stock) with a minimum value of five times the CEO’s base salary. Executive officers who report directly to the CEO are expected to hold meaningful amounts of Progressive stock at levels that their respective compensation and financial circumstances permit. To support this goal, each executive’s annual compensation is heavily weighted towards equity compensation, such that 35% or more of the annual potential compensation for each executive is in the form of restricted stock, both time and performance based, typically valued at between 175-225% of the executive’s base salary. As a result, within three years of becoming an executive, each executive

is expected to hold restricted or unrestricted stock with a value of at least three times his or her base salary, and potentially significantly more depending on the performance of the Company’s common shares. Management and the Committee believe that stock holdings under these guidelines, as well as executives’ additional, voluntary holdings in our stock option, 401(k) and deferral plans or in personal accounts, appropriately ensure that the interests of management will be aligned with those of our long-term shareholders.

 

Timing of Awards.  We expect that, consistent with our actions in recent years, annual restricted stock awards will be made in March of each year, unless a legal or plan requirement causes us to adopt a change for a specific year. We believe that the March timing is appropriate because it follows shortly after annual performance evaluations and salary adjustments for executives and other equity eligible employees, thus providing an administratively convenient time to calculate the awards and communicate them to the recipients. Historically, interim awards have been made to executive officers only at the time of his or her appointment to the executive team; any such interim award to an executive officer would require the approval of the Compensation Committee.

 

Qualified Retirement Rights.  Executive officers, along with other equity award recipients, are eligible for “qualified retirement” treatment (sometimes referred to as the “Rule of 70”) under our equity compensation plans. Under this arrangement, executives who leave their employment with Progressive after satisfying certain age and years-of-service requirements, generally (i) are permitted to exercise outstanding stock options (all of which are now vested) at any time prior to their stated expiration date (instead of being required to exercise such options within 60 days of the termination of employment, as is typically the case), (ii) receive 50% of the unvested time-based restricted shares then outstanding (with the remaining 50% being forfeited), and (iii) retain 50% of unvested performance-based restricted stock awards, although such awards will vest, if at all, only upon satisfaction of the performance objectives associated with those awards (and the other 50% of the performance-based shares are forfeited). The Rule of 70 provisions are intended to provide a limited benefit for long-tenured employees who retire from Progressive after satisfying the age and service requirements.

 

The named executive officers participate in these arrangements on the same terms and conditions as are available to other equity award participants, except that if the CEO or one of the executives who directly reports to him provides at least one full year of notice of his or her intention to leave employment after qualifying for a “qualified retirement,” he or she will retain 100% of his or her unvested performance-based restricted stock awards (not just 50% as stated above), although such performance-based shares still will vest only if and when the applicable performance goals are achieved prior to expiration. This advantage is available to executives in order to facilitate a smooth transition of personnel at the senior executive level of the company.

 

None of our current named executive officers was eligible for qualified retirement treatment at year end 2007. Mr. Renwick, our CEO, will become eligible for such treatment if he remains employed through May 2010. Mr. Forrester, our former Chief Financial Officer, retired in March 2007 after qualifying for Rule of 70 benefits and after giving more than one-year’s notice of his intent to leave the company. As a result, upon his retirement: (i) Mr. Forrester retained all of his outstanding stock options (all of which had previously vested and which entitled him to purchase 900,756 shares as of March 2007) through their respective termination dates; (ii) one-half of his time-based restricted shares (33,128 shares) were forfeited and the other half (33,128 shares) vested immediately; and (iii) all of his unvested performance-based restricted shares (74,740 shares) remained outstanding and will vest if the company satisfies the applicable performance criteria for each such award prior to the applicable expiration date for that award.

 

For additional information on the “qualified retirement” provisions, see “Potential Payments upon Termination or Change in Control” beginning on page 45.

 

Effect of Any Future Financial Restatement.  Under our 2003 Incentive Plan, as amended, performance-based restricted stock awards made in or after March 2007 will be subject to recoupment by Progressive in the event of a financial restatement of the operating or financial results which caused those performance-based shares to vest, in certain circumstances. An executive who engages in fraud or other misconduct leading to the restatement would be required to repay all such shares or an equivalent dollar amount, at our election, plus interest and the costs of collection, and there would be no time limit on our ability to recover those amounts other than limits imposed by law. In addition, we would have the right to require repayment from an executive who does not engage in misconduct, but nonetheless has his or her shares vest due to the use of incorrect financial results, but without interest and only if the restatement occurs within three years after the vesting date. Equity awards made prior to March 2007 are not subject to this plan amendment, and our ability to recoup any such awards that vest under similar circumstances would depend on the availability of general legal and equitable remedies under state or federal law.

 

Wealth Accumulation.  The Committee does not review “wealth accumulation” analyses from prior equity awards when making current compensation decisions. Such analyses have been advanced by some commentators as a way to determine when an executive has received “enough” equity compensation from Progressive and to justify limiting or eliminating future

grants. Our focus, however, is to make appropriate executive compensation decisions annually, so that executives are paid at competitive levels with a significant component that is “at risk” and performance based. Given that, in general, at least 35% of each named executive officer’s potential annual compensation consists of equity awards, the elimination of such awards likely would make our current compensation uncompetitive, thus risking the loss of valuable executives or requiring us to make other compensation arrangements with individual executives to retain his or her services, which would be inconsistent with our compensation program and our company culture. If equity awards from prior years increase significantly in value in future years, we do not believe that this positive development, which rewards all of our long-term shareholders, should negatively impact current compensation decisions. Finally, since we do not provide separate pension or retirement benefits in addition to the executives’ annual compensation, we believe that the value of equity awards in many cases will be used by executives to fund their retirement, effectively replacing such benefits that other companies may offer. Under these circumstances, we do not believe that such artificial limitations on compensation levels are appropriate or in the best interests of Progressive or our shareholders.

 

 

Market Comparisons.  In the first quarter of 2007, the Compensation Committee set each named executive’s 2007 salary, bonus opportunity and restricted stock awards. For CEO comparisons, we used a group of 61 public companies with annual revenues from $10 billion to $20 billion, as identified in compensation surveys purchased by the Company from Towers Perrin. Given our 2006 revenue of approximately $14.8 billion, we believe that this range provided appropriate data for comparison purposes. The 2007 comparisons for our other named executive officers were taken from similar compensation surveys produced by Towers Perrin and Mercer Consulting (although the number of companies and revenue ranges varied from position to position based on responsibilities, availability of comparison matches and other factors).

 

The salaries of our named executive officers during 2007 were close to the median (50^th percentile) for their respective comparison group, other than Mr. Renwick, whose situation is discussed in more detail below, and Mr. Domeck, whose salary reflected that he was in the first year of his new role as CFO. With the addition of variable compensation (i.e., the potential for cash bonuses and the possibility of restricted stock vesting in future years), one of our named executive officers had the opportunity to earn total potential compensation that would rank above the 50^th percentile but below the 75^th percentile of the comparison groups, while in three instances the total potential compensation could exceed the 75^th percentile and in one instance it was below the 50^th percentile based on the compensation survey information presented to the Committee when the decisions were made. Variations from the 50^th to 75^th percentile range were caused by a number of factors, including the length of the named executive’s tenure in the specific job, the absence of similar positions at comparable companies, individual performance and expected future contributions, as well as our business needs.

 

It must be emphasized, however, that other than the base salary comparisons, the percentile rankings set forth above assume that the executive would earn the maximum value of their cash bonus and equity awards and, therefore, may be overstated. Maximum cash bonuses have been earned under our Gainsharing program only twice in its 14-year history, and our final Gainsharing score for 2007 was .74 (as discussed in more detail below), or approximately 37% of the potential maximum (other than for 10% of the potential bonus for Mr. Voelker, our Chief Information Officer, which was determined under the IT Bonus Plan, as discussed below). Using this actual bonus data for 2007, Messrs. Domeck and Jarrett each earned total cash compensation (salary plus bonus) that was below the 50^th percentile for their respective comparison group, while Mr. Passell² was slightly above the 50^th percentile, reflecting the company’s performance for the year. In addition, the vesting of the restricted stock awards, which is a large component of potential compensation, is not guaranteed. The named executive officer will receive the entire value of the time-based awards only if he remains with Progressive throughout the three, four and five year vesting periods (and, even then, only if the stock price does not decrease), and the performance-based awards will vest only if Progressive satisfies the performance criteria established by the Committee (which, as discussed below, are very aggressive performance targets). Thus, for each named executive officer, a substantial portion of the compensation used to establish his potential percentile rank will remain “at risk” for years before it is earned by the executive, and some of the restricted stock in fact may never vest.

 

Decisions Regarding CEO’s Compensation.  In the case of Glenn Renwick, our CEO, his salary level has been maintained at $750,000 since February 2002, a level estimated to be $470,000 below the 50^th percentile of $1,220,000 for CEO salaries at comparable companies in 2007. Mr. Renwick’s cash bonus (Gainsharing) potential has also remained at the same level since February 2002. The Compensation Committee has determined that Mr. Renwick should receive, instead of additional cash compensation, a larger proportion of his potential compensation in the form of restricted stock and that his restricted stock awards should be equally weighted between time-based and performance-based shares. In this way, we are able to keep Mr. Renwick’s overall compensation at a competitive level, while further keeping a very high portion of his potential

 

 

² Mr. Passell’s employment with the Company terminated in February 2008.

compensation at risk and dependent on Progressive’s performance, increasing his equity participation and aligning his interests with those of long-term shareholders. The following table shows the development of Mr. Renwick’s compensation since 2001:

 

 

¹Percent of base salary. Actual Gainsharing payouts can vary from 0.0 to 2.0 times the target percentage in each year depending on operating results.

 

 

The result of these determinations for 2007 was that, despite his below median salary and bonus potential, Mr. Renwick’s total potential compensation was ranked above the 50^th percentile and could approach the 75^th percentile of comparable CEO compensation if performance-based compensation were to be maximized. However, with our Core Business achieving a Gainsharing performance score of .74, Mr. Renwick’s actual cash compensation (salary plus bonus) was $1,582,500 for 2007, which represents less than 55% of the average total cash compensation (50^th percentile) of his comparison group based on the comparison data used by the Committee in early 2007. Although his restricted stock award potentially increases his total compensation to near the 50^th percentile level, the ultimate value of the 2007 restricted stock awards will remain at risk for some time.

 

In the Compensation Committee’s and the Board’s view, Mr. Renwick’s performance as CEO clearly has justified the continuation of his pay package in the same format from prior years. Although he has the potential for above-market pay in the aggregate, the below-market base salary combined with the heavy reliance on performance-based bonus potential ties total cash compensation to our operating results, as was demonstrated in 2007. Moreover, the proportionately large restricted stock component, and the 50/50 split between time-based and performance-based restricted stock awards, was determined by the Committee to be an appropriate allocation to balance encouraging Mr. Renwick’s retention, providing incentives to drive company performance and maximizing the extent to which Mr. Renwick’s interests will be aligned with the interests of shareholders. If the aggressive performance growth target for the performance-based restricted stock award is not ultimately achieved, Mr. Renwick’s actual total compensation attributable to 2007 will be well below the median compensation for CEO’s at comparable companies. The Committee believes that this program presents a rational and strongly performance-based pay package for an outstanding CEO.

 

Salary for Other Named Executive Officers.  For the other named executive officers, their 2007 salaries reflected increases of between 3.5% and 6.7% when compared with the end of the prior year. These increases for Messrs. Jarrett and Passell were at the lower end of this range and were consistent with market-based salary increases for our employees as a whole. Mr. Voelker’s increase, which was approximately 6%, also resulted from market-based adjustments, as well as an effort to bring his compensation in a range reflecting the Chief Information Officer’s importance to the organization. Mr. Domeck’s salary increase from year end 2006 was about 6.7% and reflected the increased responsibilities and higher market comparisons for a chief financial officer, the new role he was starting in early 2007. In each case, the salary increases further evidenced continuing satisfactory performance and contribution to the executive team. Salaries were near the 50^th percentile ranking for similarly situated executives at comparable companies, except that Mr. Domeck’s salary was well below the 50^th percentile for CFO’s of comparable companies, due to the fact that 2007 was his first year in that role.

 

Gainsharing Bonuses — Core Business.  For 2007, Gainsharing target percentages for the named executive officers were determined by the Compensation Committee. Mr. Renwick’s target percentage was set at 150%, while each of the other named executive officers had his target set at 100%. In each case, under the Gainsharing plans, the actual bonus could vary from 0.0 to 2.0 times the targeted amount, depending on company performance.

 

The 2007 performance factors were determined using Gainsharing standards approved by the Compensation Committee for our Core Business, consisting of the Agency Auto, Direct Auto, Special Lines and Commercial Auto businesses, as described below under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table,” beginning on page 39. The 2007 growth and performance targets were tied to our companywide strategic goals of growing policies in force as fast as possible at a 96 combined ratio or better. For 2007, we adopted policies in force as the basis to measure growth for each of our businesses (as opposed to net premiums written, which had been used to measure growth in prior years), to better align our Gainsharing program with our companywide strategic goal of growing policies in force as fast as possible at a 96 combined ratio or better. Under these revised standards, a 2007 Gainshare performance factor of 1.0 for the

Core Business as a whole would result from growth and profitability levels that met our expectations for the year, and which we believed were reasonably attainable results when these decisions were made in early 2007, which is consistent with how this program has operated historically.

 

For Messrs. Renwick, Domeck, Passell and Jarrett, as well as most of our other employees, 2007 bonuses were determined solely by the performance of the Core Business. For these executives and employees, the Gainsharing calculation resulted in a performance factor of .74 (out of a possible 2.0). Mr. Voelker’s bonus was determined by a weighted combination of the performance score of the Core Business (90%) and the performance score under the IT Bonus Plan (10%), as discussed in more detail below.

 

The following table presents the overall growth and profitability data for the businesses that comprised our Core Business in 2007. The growth figures were determined by the percentage change in policies in force at year end 2007, as compared with the 2006 year-end policy count for that business unit. Profitability was determined by the underwriting performance of the business unit, as measured by the applicable GAAP combined ratio.

 

 

 

²Includes only Auto policies in force.

 

Based on performance results, we determined the performance score for each business unit comprising the Core Business, and those scores are set forth in the table below. See “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table,” beginning on page 39, for a more detailed discussion of the Gainsharing matrices and the calculation of performance scores.

 

The business unit performance scores were then weighted, based on each business unit’s relative contribution to the overall net earned premium of the Core Business, and the weighted scores were added to determine the final performance factor for the Core Business, as follows:

 

 

As can be seen, our performance in 2007 resulted in a performance factor for our Core Business equal to .74 out of a possible 2.00. Although our profitability remained strong for another year (albeit with increasing combined ratios compared to the prior year), our growth rates failed to meet our goals, particularly in our Agency Auto business. Our performance failed to achieve a combination of growth and profitability that would produce a target 1.0 score, resulting in an overall Gainshare factor of less than 1.0 for the first time since 2000. Most Progressive employees, including the named executive officers (other than the 10% of Mr. Voelker’s bonus that was determined under the IT Bonus Plan, as described in the next section), thus earned a cash bonus equal to approximately 74% of their target bonus amount, in a year where our performance did not match our goals.

 

Cash Bonus — IT Bonus Plan.  For Raymond Voelker, our Chief Information Officer, 90% of his performance factor was determined by the Core Business performance score, as described above, and the remaining 10% was determined under our IT Bonus Plan, as approved by the Compensation Committee in early 2007. The performance score under the IT Bonus

Plan was determined by the outage-free availability of certain significant computer and related systems during the course of the year, under specific rules established by the plan, as compared with performance standards established by the plan. The intent of the IT Bonus Plan was to motivate IT employees, including Mr. Voelker, to keep these systems operational on a 24 x 7 basis, subject to certain events specified in the plan, such as scheduled maintenance time.

 

For 2007, the IT Bonus Plan generated a performance score of 1.01 out of a possible 2.0, reflecting overall performance at the target level. When this result (for 10% of Mr. Voelker’s bonus) is combined with the result he earned under the Core Business Component (for the remaining 90%), his total cash compensation for the year (salary plus bonus) ranked him slightly above the 50^th percentile for comparable positions, based on the comparison data presented to the Committee at the beginning of the year.

 

Restricted Stock Awards.  In 2007, two forms of restricted stock awards were granted to executive officers and certain other senior level employees. Time-based restricted stock awards were granted to all named executive officers and 846 other senior level employees. The time-based restricted stock awards will vest in three equal annual installments, on January 1 of 2010, 2011 and 2012, subject to the vesting and forfeiture provisions in the applicable plan and grant agreement. In addition, the named executive officers and 39 other senior managers received performance-based restricted stock grants, with the vesting date tied to the achievement of specific business results that are defined by our long-term growth and profitability objectives.

 

CEO Glenn Renwick received a time-based restricted stock award with a value equal to 500% of his salary and a performance-based restricted stock award equal in value to 500% of his salary. As indicated above, Mr. Renwick’s equity award was proportionally larger than other executives’ awards due, in part, to the below-market level of his base salary, putting more of his compensation at risk and dependent on Progressive’s operating performance over the next several years.

 

The other named executive officers received in 2007 time-based awards with a value equal to 100% of their respective salaries, and performance-based awards with a value of 100% of salary. Performance-based awards to the executives who report directly to the CEO typically range from 75% to 125% of salary per year. As with the CEO, in recent years we have increased the weighting of performance-based shares that are awarded to other senior executives to provide appropriate performance incentives to these executives. The Committee, after considering the recommendations of and discussions with the CEO and the Chief Human Resource Officer, determines the value of each executive’s performance-based award based on individual factors, such as past performance, skills and competencies and expected future contributions.

 

Performance-based restricted stock awarded in 2007 will vest only if Progressive’s insurance subsidiaries generate net earned premiums of $19.0 billion or more over a period of twelve (12) consecutive months while maintaining an average combined ratio of 96 or less over the same period. If we do not satisfy these criteria prior to December 31, 2016, the performance shares will be forfeited. While the profitability target of this standard is within our recent performance experience, the growth target was very aggressive when made (and remains very aggressive at this time). Our net earned premiums for 2007 were approximately $13.9 billion, and the $19.0 billion target thus represents about a 36.7% increase (or an annual increase of about 3.55%, on a compounded basis, from year-end 2007) from that level. It should be noted, however, that as of year-end 2006, shortly before these decisions were made, we had year-over-year growth of net earned premium of approximately 2.6%, and our net earned premiums decreased by approximately 1.7% in 2007 as compared with 2006. In view of these recent growth levels, therefore, there is a significant risk that the performance-based restricted shares will not vest prior to the end of their 10-year life.

 

5. Changes for 2008

 

Our compensation program for 2008 includes a number of changes from prior years. The changes are summarized as follows:

 

Salary Decisions.  Mr. Renwick’s salary for 2008, as well as his potential bonus and the value of his restricted stock awards, were maintained at the same levels as in 2007. Compensation decisions for the other named executive officers for 2008, other than Mr. Domeck, also have been in line with their historical compensation, with market adjustments. Salaries were increased from 3.4% to 4.3% for Messrs. Jarrett, Passell (whose employment has since terminated) and Voelker. Mr. Domeck’s salary has been increased by approximately 18.75%, reflecting a successful first year as our CFO and an attempt to bring his compensation more in line with CFO’s at comparable companies. Percentage targets for Gainsharing and restricted stock awards were not changed for those executive officers from the targets used in 2007.

 

Shareholders should note that the actual amounts to be paid in salary to the named executive officers (and all other salaried employees of the company) in 2008 will be higher than their respective annual salary figures, because we will issue 27

paychecks in 2008 versus 26 paychecks in most years. Such a 27-paycheck year is a situation that arises in bi-weekly payroll systems, such as ours, about every 10 or 11 years.

 

Gainsharing Decisions.  In 2008, each executive officer will have his or her Gainsharing bonus determined 100% by the performance score of our Core Business (except for our Chief Investment Officer, who will continue to earn his bonus based on the relative performance of our fixed-income portfolio as compared with the designated benchmark). This same change was implemented for virtually all other employees of the company for 2008. In 2007 and recent years, certain executives (and other employees) would earn a bonus from a combination of the respective performance scores generated by the Core Business and by their assigned business units. With our changes to the structure of the Personal Lines group during 2007 and a desire to focus employees on the performance of the business as a whole, management and the Compensation Committee decided that this change would better reflect our current operational focus and our culture. Also for 2008, consistent with this focus on the overall business, we have terminated the IT Bonus Plan, which accounted for 10% of Mr. Voelker’s (and certain other IT employees’) potential bonuses in 2007 and prior years.

 

Additional Gainsharing Matrices.  For 2008, the Gainsharing program was also modified so that each of the business units comprising our Core Business (Agency Auto, Direct Auto, Commercial Auto and Special Lines) will be evaluated separately on their respective “new” and “renewal” businesses. This focus, which represents an extension of the program used in our Direct business in 2007 to the other business units, is intended to support our strategic initiatives to improve retention of current customers, while at the same time maintaining our ability to bring in new customers, which, if successful, would be expected to drive an increase in overall policy-in-force growth rates.

 

 

1. Perquisites

 

We provide limited perquisites to our executives and only do so when the Board or the Compensation Committee determines that such benefits are in the interests of Progressive and our shareholders. We own an aircraft that is used primarily for the CEO’s business travel, to maximize the efficiency of his travel and reduce his unproductive down-time, allow him to manage effectively our many remote locations, and to enhance his personal security and the confidentiality of his travel.

 

At the request of the Board of Directors, the CEO also uses the company aircraft for his personal travel and some of his spouse’s or other guest’s personal travel when they accompany him. Such personal use of the aircraft, which is a perquisite under SEC regulations to the extent of the incremental costs to the company for such travel, is provided to enhance the CEO’s and his family’s personal security and the confidentiality of their travel. Other executives occasionally accompany the CEO on his personal trips, at the CEO’s discretion, and such personal trips would likewise be a perquisite for a named executive officer traveling with the CEO, if we were to incur costs in addition to the costs for the CEO’s travel.

 

In addition, the CEO is provided with a company car and driver for his business needs to facilitate his transportation to and among our headquarters and many other local facilities, and to allow him to use that travel time for work purposes. To the extent that the CEO uses the company car for personal matters, including commuting to and from work, he receives a perquisite.

 

In 2007 and prior years, our directors, the named executive officers and certain other senior executives, and their spouses or guests, were invited to attend a 2-day off-site strategy session, which includes a series of meetings between management and the Board and a regular Board meeting, at an off-site location. Personal travel for the spouses and certain costs for meals and other activities during the retreat constitutes perquisites to the directors and executives who attend.

 

Otherwise, we do not provide perquisites to our executives. The required disclosure of the incremental costs of these perquisites to Progressive is included in the “All Other Compensation” column of the Summary Compensation Table on page 37.

 

2. Retirement

 

We do not provide a pension program, supplemental executive retirement plan or other post-retirement payments or benefits to executives. Executives are eligible to participate in our retirement security program (401(k) plan) on the same terms and conditions as are available to all other regular employees, subject to limitations under applicable law. Executives who satisfy certain age and years-of-service requirements when they retire may be eligible to receive 50% of their unvested time-based restricted stock awards at retirement and to retain rights under certain performance-based restricted stock awards, subject to the satisfaction of the applicable performance criteria, after retirement. These rights are described generally above

under “Qualified Retirement Rights” and in greater detail below under “Potential Payments Upon Termination or Change in Control,” beginning on page 45.

 

3. Deferral Arrangements

 

The named executive officers and certain other senior-level employees are given the opportunity to defer the receipt of annual cash bonus awards and restricted stock awards under our Executive Deferred Compensation Plan (EDCP). This plan is made available to executives in order to keep our executive compensation program competitive and to allow executives to manage their receipt of compensation to better fit their life circumstances, to manage their tax obligations and to allow the executive to arrange for a portion of his or her income to be paid in post-employment years. In addition, to the extent that the top executives elect to defer time-based restricted stock until after they leave Progressive, we may benefit to the extent we otherwise might have lost a tax deduction upon the vesting of those shares under IRC § 162(m) (see related discussion under “Section 162(m) of the Internal Revenue Code” below).

 

These deferral mechanisms operate solely as a vehicle for the executive to delay receipt of bonus income or restricted stock awards that he or she otherwise would have earned as of a specific date under the applicable plan. We do not contribute additional amounts to an executive’s deferral accounts, either in the year of deferral or in future years. We also do not guaranty a specific investment return to executives who elect to participate in the deferral plan. Deferred amounts are deemed invested in specific investments selected by the executive, including an option to invest in Progressive shares (subject to limitations included in the deferral plan), except that deferrals of restricted stock awards made in or after March 2005 are required to be invested in Progressive shares throughout the deferral period. The value of each executive’s deferred account thus varies based on the executive’s investment choices and market factors; these deferred amounts are at risk and may decrease in value if the investments selected by the executive do not perform well during the deferral period. Additional details concerning this plan, including the named executive officers’ respective holdings in the plan, can be found under the “Nonqualified Deferred Compensation” table and related disclosures, beginning on page 44.

 

In March 2007, Mr. Thomas Forrester retired as the company’s CFO. At that time, Mr. Forrester had an EDCP balance of approximately $9,683,000. His retirement triggered the commencement of distributions under the plan and, accordingly, during 2007 he received cash distributions valued at approximately $996,000, plus the in-kind distribution of 2,054 shares of Progressive stock. The remainder of his account will be distributed in installments over the next 9 years in accordance with Mr. Forrester’s prior elections. These deferral arrangements were also affected by the enactment of Section 409A of the Internal Revenue Code and the recent promulgation of regulations under Section 409A by the Internal Revenue Service, as discussed below in more detail under “Related Considerations; Section 409A of the Internal Revenue Code.”

 

4. Severance and Change-in-Control Arrangements

 

Severance and change-in-control arrangements are intended to provide compensation and a fair financial transition for an executive when an adverse change in his or her employment situation is required due to our company needs or results from certain unexpected corporate events, and to recognize past contributions by such executives, who are typically long-tenured employees. These arrangements allow the executive to focus on performance, and not his or her personal financial situation, in the face of uncertain or difficult times or events beyond his or her control. Each of these programs is discussed in more detail immediately below and under “Potential Payments upon Termination or Change in Control” beginning on page 45.

 

Severance.  Our executive separation allowance plan is designed to provide executives with well-defined financial payments if the executive’s employment is terminated for any reason other than resignation (including retirement), death, disability, leave of absence or discharge for cause, if certain conditions are satisfied. For our executives, including the named executive officers, the severance payment would equal three years of the executive’s base salary only at the time of termination, plus medical, dental and vision benefits for up to 18 months at regular employee costs. This same level of benefits is payable to the named executives upon any qualifying separation from Progressive, whether in a change-in-control situation or otherwise.

 

We believe that this level of severance payment (equal to three times the executive’s base salary), whether or not triggered by a change in control, is well below the market averages based on available market data. The severance payments do not take into account the value of cash bonuses or equity-based awards in determining the executive’s severance payment, which substantially limits the amount of the severance payment when compared with severance plans offered by many other companies. In addition, an executive who qualifies for a severance payment under this plan does not receive accelerated vesting of equity awards (although, in a change-in-control scenario, those awards may vest separately under the terms of our equity incentive plans, as discussed immediately below). Finally, the executive will receive no tax “gross-up” payment to compensate him or her for any taxes which he or she may be required to pay in connection with such payment. Management and the Committee accordingly believe that such severance rights provide executives with a fair, but not excessive, financial transition when an executive is asked to leave the company.

Change in Control Benefits under Equity Plans.  Benefits are also provided to named executive officers and other recipients of equity awards under our equity plans upon the occurrence of a “Change in Control” or a “Potential Change in Control,” as defined in those plans (collectively, a “Change in Control”). The Board of Directors has the authority under the plans to “override” the Change in Control benefits, in an appropriate case, if the Board gives its prior approval to a transaction that would have otherwise triggered the benefits to be paid. If the Board’s prior approval is not obtained, our equity plans include provisions providing for the immediate vesting of, and payments to the holders of equity awards in an amount equal to the value of, the outstanding equity awards upon the occurrence of one of the specified triggering events. These provisions apply to both outstanding stock options, which we issued prior to 2003, and unvested restricted stock awards, including both time-based and performance-based awards. The Change in Control benefits would be paid upon the occurrence of a triggering event, even if an executive’s continued employment with the company (or a successor company) is not terminated or threatened. Details concerning these provisions, including the definitions of “Change in Control” and “Potential Change in Control,” are provided beginning on page 46 under ‘‘Change in Control Provisions under Equity Plans.”

 

For restricted stock awards made in March 2007 or thereafter, the Board of Directors has modified our 2003 Incentive Plan (our only equity plan under which awards may currently be made to executives and other eligible employees) to remove from the definition of “Potential Change in Control” the approval by shareholders of an agreement that would give rise to a Change in Control. This change was viewed as appropriate by the Board and management for future awards to avoid a potential scenario in which rights are triggered under the plan, cash payouts are made as required, but the underlying transaction is not consummated as anticipated for some reason. This change was made on a going-forward basis only, and it does not affect rights under outstanding awards, which accrued under the plan before the change was made.

 

These Change in Control provisions have been included in our equity incentive plans since at least 1989. We believe that these provisions are similar to the change-in-control provisions included by many public companies in their equity plans. The provisions of our plans are designed to be triggered when a transaction occurs or is in process, without the prior approval of our Board of Directors that would be expected to result in an actual or effective change in control of the company. The Change in Control provisions are intended to protect the interests of the company if we are faced with such a Change in Control scenario.

 

Any such change, or the impending prospect of such a change, would likely result in a significant alteration of, or at a minimum, cause tremendous uncertainty regarding, the employment situations of the most senior executives in the company. The loss of executive talent at such a critical juncture could be problematic for the company and its shareholders. By removing the additional uncertainty regarding outstanding equity plan benefits, these provisions are designed to enhance retention of executives and keep them focused on their business responsibilities in the face of such uncertain corporate events. Moreover, this process would also avoid executives’ legitimate concerns that, after the Change in Control, they could be subject to adverse employment actions, such as possible job loss or other actions intended to induce the executive to resign and forego benefits under the equity plans. While some of these adverse actions might be readily identifiable, such as a significant decrease in compensation or change in responsibilities, others might be more subtle and difficult to prove, such as exclusion from management meetings and policy decision-making. For these reasons, we believe that Change in Control benefits triggered by the change-in-control event, without requiring prior job loss, is appropriate. If a new controlling person desires to retain the services one or more of the executives, it would be free to attempt to negotiate appropriate terms and conditions for their continuing employment.

 

Finally, it should be noted that although these provisions can operate automatically in a situation where the Change in Control is undertaken unilaterally, the Change in Control benefits may be withdrawn by the Board of Directors, in an appropriate case, if the persons seeking to acquire control of the company were to first come to the Board and negotiate to obtain the Board’s consent to the triggering transaction. In this way, the plan provisions are further intended to foster a consensual process and a more orderly change in control, if such consent is requested and the transaction is approved. The Board believes such a process would inure to the benefit of our shareholders, customers, employees and other interested parties.

 

5. Health and Welfare Benefits

 

Named executive officers are also eligible to participate in our health and welfare plans. These plans are available on the same basis to all of our regular employees who satisfy minimum eligibility requirements.

 

III.  RELATED CONSIDERATIONS

 

 

Section 162(m) of the Internal Revenue Code limits to $1 million per year (“Deduction Limit”) the deduction allowed for Federal income tax purposes for compensation paid to the chief executive officer and the three other most highly compensated executives of a public company other than the chief financial officer (“Covered Executives”). This Deduction Limit does not

apply to compensation paid under a plan that meets certain requirements for “performance-based compensation.” Generally, to qualify for this exception: (a) the compensation must be payable solely on account of the attainment of one or more pre-established objective performance goals; (b) the performance goals must be established by a compensation committee of the board of directors that is comprised solely of two or more “outside directors”; (c) the material terms of the performance goals must be disclosed to and approved by shareholders before payment; and (d) the compensation committee must certify in writing prior to payment that the performance goals and any other material terms have been satisfied.

 

Our policy is to structure incentive compensation programs for Covered Executives to satisfy the requirements for the “performance-based compensation” exception to the Deduction Limit, and, thus, to preserve the deductibility of compensation paid to Covered Executives, to the extent practicable. Our equity incentive plans, as well as the 2004 and 2007 Executive Bonus Plans, have been submitted to and approved by Progressive’s shareholders. The applicable performance criteria (and in the case of cash bonuses, the amount of bonus payouts that would result from various levels of performance when measured against specific performance criteria) are approved in advance by the Committee each year and are thereafter not subject to change by Progressive or the Committee. Thus, performance-based restricted stock awards that vest, and cash bonus awards under the Executive Bonus Plans which are paid out, based on the achievement of such performance criteria are structured to be “performance-based compensation,” and compensation arising from such awards would not be subject to the Deduction Limit, provided that each of the other requirements described above are satisfied.

 

Compensation that is earned by the Covered Executives upon the exercise of stock option awards likewise has been designed to satisfy the requirements for “performance-based compensation,” based on how we implemented our stock option program prior to its termination in 2003.

 

Several elements of our compensation program, however, may give rise to income for a Covered Executive that is not considered “performance-based” and, therefore, subject to the Deduction Limitation, including the following:

 

 

Accordingly, if the total of any Covered Executive’s compensation that does not satisfy the “performance-based compensation” exception exceeds $1 million in any year, Progressive will not be entitled to deduct the amount that exceeds $1 million. Progressive and the Committee will continue to monitor the actual tax impact of such compensation strategies each year and consider such impact in making compensation decisions. We will not necessarily discontinue a compensation plan, however, that has a potential negative tax impact under Section 162(m). If we believe that the program in question (e.g., the use of time-based restricted stock) is appropriate and in the interest of shareholders, we will continue to use that type of compensation even though there are potential tax disadvantages to Progressive.

 

In 2007, the non-performance-based compensation earned by each of the Covered Executives was less than $1 million, except that for the CEO the Deduction Limit was exceeded by an amount currently estimated to total $1,840,000, all of which resulted from the company’s payment of a $2 per share extraordinary dividend in September 2007, which resulted in non-performance-based compensation to executives to the extent that the dividend was paid on unvested restricted stock. Other than this overage, all compensation earned by the Covered Executives was fully deductible for Federal income tax purposes. For 2008, we are currently estimating that the CEO may exceed the $1,000,000 limit by an amount of under $75,000.

 

 

Section 409A of the Internal Revenue Code sets forth requirements for non-qualified deferred compensation arrangements. The new requirements apply to deferrals of compensation earned or vested after 2004. If deferrals do not comply with

the new requirements, the amount deferred is immediately includable in taxable income, subject to an additional 20% tax and interest.

 

Section 409A generally requires that elections to defer compensation must be made no later than the end of the year preceding the year the compensation is earned. Distributions of deferred compensation may be made only upon certain specified events, including death, disability, separation from service, unforeseeable emergency, change in control of the employer and expiration of a fixed deferral period. Section 409A also includes provisions restricting a deferred compensation plan participant’s ability to accelerate, delay or change the form of a scheduled distribution of deferred compensation.

 

Deferred compensation arrangements that meet certain conditions may qualify for an exemption from Section 409A requirements. For example, an arrangement is exempt from Section 409A if it requires all payments to be made to a participant no later than 21/2 months following the end of the year in which the right to the payments was earned and vested. In addition, the arrangement will qualify for exemption if payments under the arrangement do not exceed certain limits and are payable no later than the end of the second year following the year the participant involuntarily separates from service.

 

All of our compensation plans, programs and arrangements either qualify for exemption from Section 409A or have been amended to comply with Section 409A requirements. During 2007, we modified our executive deferred compensation plan and our director deferral plans so that all deferrals of compensation earned or vested after 2004 satisfy Section 409A, and to implement certain features permitted by the regulations with respect to such deferrals. For our executive deferred compensation plan, these changes included the following:

 

 

 

 

The modifications to our director deferral plans involved some of the same topics, including implementation of the new change-in-control definitions, the addition of a change-in-control distribution event to one of the plans, provisions allowing distribution schedules to be changed (at least 12 months in advance with a 5-year or longer delay in distributions) and certain administrative changes.

 

Prior to the effectiveness of these amendments, we had operated our deferral plans in good faith compliance with Section 409A as to all deferrals made after 2004.

 

COMPENSATION COMMITTEE REPORT

 

The following information is set forth with respect to the total compensation of our named executive officers (NEOs) for 2007, who include each person who served as the Chief Executive Officer (CEO) or the Chief Financial Officer (CFO) during the year and our three other most highly compensated executive officers. The titles set forth below reflect positions held at December 31, 2007.

 

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Messrs. Renwick, Forrester and Jarrett, elected to defer the receipt of their 2003 and 2004 restricted stock awards pursuant to The Progressive Corporation Executive Deferred Compensation Plan (“EDCP”), under which such awards are accounted for as liability awards during the period prior to vesting. Under liability award accounting, the amount expensed reflects the fluctuations in the market price during the year, which results in a reduction in expense in years in which the stock price declines, such as in 2006 and 2007.

 

See “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” for a description of the timing and vesting terms of the 2007 restricted stock awards. Also see the “Compensation Discussion and Analysis” beginning on page 22, as well as Note 8 — Employee Benefit Plans in Progressive’s 2007 Annual Report to Shareholders included as an appendix to this Proxy Statement, for further discussion of the restricted stock awards and our recognition of expense relating to such awards.

 

 

2006 amounts were earned under The Progressive Corporation 2004 Executive Bonus Plan (the “2004 Executive Plan”) for Messrs. Renwick, Forrester and Passell; The Progressive Corporation 2006 Gainsharing Plan (“2006 Gainsharing Plan”) for Messrs. Domeck and Jarrett; and The Progressive Corporation 2006 Information Technology Incentive Plan (the “2006 IT Bonus Plan”) and the 2006 Gainsharing Plan for Mr. Voelker under a 90/10 split as described above.

 

Payments under the 2007 Executive Plan and the 2004 Executive Plan were made entirely in the year after the bonus amounts were earned (i.e., amounts earned for 2007 were paid in 2008). For the 2007 IT Bonus Plan, the 2006 IT Bonus Plan and the 2006 Gainsharing Plan, 75% of an estimated amount of the award was paid in the year earned and the balance was paid in the next year. Amounts reported include, if any, non-equity incentive plan compensation that will be deferred under the EDCP in 2008 when the bonuses would otherwise be paid.

 

⁴All Other Compensation is comprised of the following:

 

 

 

 

 

The following table summarizes awards that were eligible to be earned during 2007 under the 2007 Executive Bonus Plan, as well as restricted shares awarded in 2007 under the 2003 Incentive Plan, including both time-based and performance-based awards (equity incentive plan awards).

 

GRANTS OF PLAN-BASED AWARDS IN 2007

 

 

N/A = Grant Date is not applicable to non-equity incentive plan awards.

 

 

²Awards are valued at the closing price on the date of grant, March 15, 2007, of $20.99.

 

³Represents number of shares covered by time-based restricted stock awards.

 

⁴Represents number of shares covered by performance-based restricted stock awards.

 

 

Employment Agreements.  As of December 31, 2007, none of the named executive officers had employment agreements with Progressive.

 

Summary Compensation Comments.  In total, salary and non-equity incentive plan compensation comprised approximately 60% to 70% of total compensation for the named executive officers other than Mr. Renwick, whose salary and non-equity incentive compensation comprised 32% of his total compensation for the year and Mr. Forrester who retired in March 2007. For additional discussion of our compensation policies, 2007 compensation decisions, and non-equity incentive plans and the performance criteria thereunder, see the “Compensation Discussion and Analysis” beginning on page 22.

Non-Equity Incentive Compensation.  Non-equity incentive compensation for the NEOs is available under the company’s 2007 Executive Bonus Plan (except as noted below) and is determined using the following formula:

 

 

For each executive, the salary and the target percentage (as a percent of salary) are established by the Compensation Committee on an annual basis during the first quarter of the year. When the participant’s annual salary is multiplied by his or her assigned target percentage, the product is referred to as the participant’s “target bonus” or “target bonus amount” for the year. For 2007, Mr. Renwick’s target percentage for non-equity incentive compensation was 150% of salary and for Messrs. Domeck, Passell, and Jarrett, the target percentage was 100% of salary. Mr. Voelker’s target percentage was 100% of salary; however, only 90% of his potential bonus was calculated under the 2007 Executive Bonus Plan. The remaining 10% of his potential bonus was calculated under the 2007 IT Bonus Plan.

 

Under the 2007 Executive Bonus Plan, the performance factor is determined for all NEOs after the end of each year based on the actual operating performance of our principal business units for that year, when compared to growth and profitability criteria that were established by the Compensation Committee during the first quarter of the year. The performance factor can range from 0.0 to 2.0 each year, depending on the extent to which Progressive and/or assigned business unit results meet, exceed or fall short of the objective performance goals established by the Committee. As a result, each participant can earn an annual cash bonus of between 0.0 and 2.0 times his or her target bonus amount (with an amount equal to 2.0 times an executive’s target bonus thus being the executive’s maximum potential bonus). The executive’s annual cash bonus would equal the target bonus amount if the applicable performance factor equals a 1.0 for the year.

 

Generally, the performance factors for executives (and most other employees) under our Gainsharing plans, including the 2007 Executive Bonus Plan, are determined by reference to either (i) the overall operating performance of our core insurance businesses, excluding our investment results (the “Core Business”), or (ii) a combination of the performance of the Core Business and the performance of the respective executive’s assigned business unit. For 2007, each of the NEOs earned his bonus under the 2007 Executive Bonus Plan solely under the Core Business calculation (other than that portion of Mr. Voelker’s bonus that was determined under the 2007 IT Bonus Plan, as described below). The Core Business was defined to include the Agency Business, the Direct Business, the Special Lines Business and Commercial Auto Business. The performance factor for the Core Business for 2007 was calculated as follows:

 

 

 

 

In 2007, the performance factor for the Core Business determined according to these criteria was .74, which was used to calculate the annual bonus for Messrs. Renwick, Domeck, Passell and Jarrett.

 

For Mr. Voelker, our Chief Information Officer, 90% of his performance factor was determined by the Core Business performance score (.74 as described above), and the remaining 10% was determined under our 2007 IT Bonus Plan, as approved by the Compensation Committee in early 2007. The performance score under the 2007 IT Bonus Plan was determined by the outage-free availability of certain significant computer and related systems during the course of the year, under specific rules established by the plan, as compared with performance standards established by the plan. System downtime resulted in a lower performance score under this plan. The intent of the 2007 IT Bonus Plan was to motivate IT employees, including Mr. Voelker, to keep these systems operational on a 24x7 basis, subject to certain events specified in the plan, such as scheduled maintenance time.

 

For 2007, the 2007 IT Bonus Plan generated a performance score of 1.01 out of a possible 2.0, reflecting overall performance at about the target level. When this result (for 10% of Mr. Voelker’s potential bonus) was combined with the result he earned under the Core Business Component (for the remaining 90%), Mr. Voelker’s overall performance factor for the year was .77.

 

Equity Incentive Plan Awards.  In 2007, all of the equity incentive plan awards were granted pursuant to the 2003 Incentive Plan. We granted both time-based and performance-based restricted stock awards to the named executive officers. All restricted stock awards for 2007 have voting rights equivalent to those of our other outstanding common shares. Restricted stock awards made in March 2007 and thereafter will not entitle the holder to receive dividend payments at the time those payments are made to other common shareholders. Instead, the dividend payments will be retained by the company and will be paid to the NEOs (and other recipients), with interest, only if and when the restricted shares vest. Awards made prior to March 2007 have dividend and voting rights equivalent to those of our other outstanding common shares.

 

In 2007, we granted time-based restricted stock awards to the named executive officers, based on a percentage of the individual’s salary at the time of grant, as determined by the Compensation Committee. The time-based awards will vest in three equal installments in the third, fourth and fifth years after the date of grant (i.e., January 1, 2010, 2011 and 2012 for awards granted in 2007).

 

We also granted performance-based restricted stock awards to the named executive officers in 2007. The value of the performance-based awards was determined by the Compensation Committee, also based on a percentage of the individual’s annual salary. The performance-based awards will vest upon the satisfaction of objective performance criteria. For 2007 awards, vesting will occur only if Progressive’s insurance subsidiaries generate net premiums earned of $19 billion or more over a period of 12 consecutive months, while maintaining an average combined ratio of 96 or less over the same period. If the objectives are not achieved by December 31, 2016, the awards will be forfeited.

 

All restricted stock awards are made subject to accelerated vesting pursuant to the “qualified retirement” (also known as the Rule of 70) and “change in control” provisions in the 2003 Incentive Plan (see “Potential Payments Upon Termination or Change in Control” beginning on page 45).

 

Further discussion of our compensation strategy and plans can be found in the “Compensation Discussion and Analysis” beginning on page 22.

 

The following table summarizes stock option awards exercisable and outstanding under the 1995 Incentive Plan, as well as the unvested restricted stock awards outstanding under the 2003 Incentive Plan. The value of the stock awards is calculated using $19.16, which represents the closing price of Progressive shares on the last business day of 2007.

 

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2007

 

 

 

 

 

If these objectives are not achieved by December 31, 2013, 2014, 2015 or 2016 for the 2004, 2005, 2006 and 2007 awards, respectively, the awards will be forfeited. The number of performance-based restricted shares awarded to each of the NEOs for such years are as follows:

 

 

 

 

The following table summarizes the exercise of stock options and the vesting of restricted stock awards during 2007. The stock options were exercised at various dates during the year, while all of the restricted stock awards vested on January 1, 2007, at a price of $24.32 per common share, except for Mr. Forrester, who had additional restricted stock awards vest upon his retirement on March 2, 2007 at a price of $22.825.