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.     )

Filed by the Registrant þ

Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

BROWN SHOE COMPANY, INC.

(Name of Registrant as Specified In Its Charter)

 

April 13, 2010

 

To Brown Shoe Shareholders:

 

 

You are cordially invited to attend the Annual Meeting of Shareholders of Brown Shoe Company, Inc. to be held at our headquarters at 8300 Maryland Avenue, St. Louis, Missouri, in the Conference Center, on Thursday, May 27, 2010, at 11:00 a.m., Central Daylight Time.

 

We are using the Internet to provide our 2010 proxy materials to shareholders. We believe electronic delivery will expedite the receipt of materials and reduce the environmental impact of our annual meeting by minimizing the printing and mailing of full sets of materials. On April 13, 2010, we are commencing mailing to our shareholders a Notice containing instructions on how to access our Proxy Statement and 2009 Annual Report online. If you receive a Notice by mail, you will not receive a printed copy of the materials unless you specifically request one. The Notice contains instructions on how to receive a paper copy of the materials.

 

In the following pages, we provide a formal notice of the meeting and the Proxy Statement. Our 2009 Annual Report to Shareholders, which provides detailed information relating to our activities and operating performance, is available at www.brownshoe.com/annualmeeting. If you have requested paper copies of these materials, a proxy card will also be enclosed.

 

On behalf of your board of directors and management, we look forward to seeing you at the meeting.

 

Sincerely yours,

 

Ronald A. Fromm

Chairman of the Board and

Chief Executive Officer

 

Brown Shoe Company, Inc.

8300 Maryland Avenue, St. Louis, Missouri 63105-3693

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

 

Matters to be voted on:

 

1. Election of five directors

 

2. Ratification of Ernst & Young LLP as the Company’s independent registered public accountants

 

3. Any other matters if properly raised

 

YOUR VOTE IS VERY IMPORTANT.  Whether or not you plan to attend the Annual Meeting of Shareholders, we urge you to vote and submit your proxy by the Internet, telephone or mail in order to ensure the presence of a quorum. Any proxy may be revoked at any time prior to its exercise at the meeting.

 

Registered holders may vote:

 

1. By Internet: go to http://www.proxyvote.com,

 

2. By toll-free telephone: call 1-800-690-6903, or

 

 

Beneficial holders.  If your shares are held in the name of a broker, bank or other holder of record, follow the voting instructions you receive from your holder of record to vote your shares. It is important that you provide voting instructions because beginning this year, brokers and other nominees no longer have the authority to vote your shares for the election of directors without instructions from you.

 

It is our policy that all proxies, ballots and vote tabulations that identify the vote of any shareholder will be kept strictly confidential until after a final vote is tabulated and announced, except in extremely limited circumstances. Such limited circumstances include contested solicitation of proxies, when disclosure is required by law, to defend a claim against us or to assert a claim by us, and when a shareholder’s written comments appear on a proxy or other voting material.

 

Michael I. Oberlander
Senior Vice President, General Counsel and
Corporate Secretary

 

April 13, 2010

TABLE OF CONTENTS

 

PROXY STATEMENT — 2010 ANNUAL MEETING OF SHAREHOLDERS

 

 

PROXY STATEMENT
FOR THE BROWN SHOE COMPANY, INC.
2010 ANNUAL MEETING OF SHAREHOLDERS

 

Why have these proxy materials been made available?

 

Your board of directors is soliciting proxies to be voted at the 2010 Annual Meeting of Shareholders. This proxy statement includes information about the issues to be voted upon at the meeting.

 

The record date for shareholders entitled to vote at the meeting is March 31, 2010. There were 43,420,621 shares of our common stock issued and outstanding on March 31, 2010.

 

On April 13, 2010, we commenced mailing to our shareholders of record a Notice containing instructions on how to access this proxy statement and our Annual Report online, and we began mailing these proxy materials to shareholders who requested paper copies.

 

Where and when is the annual meeting?

 

The Annual Meeting of Shareholders will take place on May 27, 2010 in the Conference Center at our headquarters, located at 8300 Maryland Avenue, St. Louis, Missouri 63105. The meeting will begin at 11:00 a.m., Central Daylight Time.

 

What am I voting on?

 

We are aware of two proposals to be voted on by shareholders at the annual meeting:

 

Carla Hendra, Ward M. Klein, W. Patrick McGinnis and Diane M. Sullivan, each for a three-year term; and Hal J. Upbin, for a two-year term; and

 

 

Why haven’t I received a printed copy of the proxy or Annual Report?

 

The Securities and Exchange Commission’s (“SEC”) rules allow us to furnish proxy materials to you via the Internet. We believe electronic delivery will expedite the receipt of materials and reduce the environmental impact of our annual meeting by minimizing the printing and mailing of full sets of materials. On April 13, 2010, we commenced mailing to our shareholders a Notice containing instructions on how to access our proxy statement and 2009 Annual Report online. If you hold your shares through a broker or bank, the Notice will be sent to you by your broker or bank. If you receive a Notice by mail, you will not receive a printed copy of the materials unless you specifically request one. The Notice contains instructions on how to receive a paper copy of the materials.

 

Is the proxy statement available on the Internet?

 

Yes. You can view both the proxy statement and Annual Report on the Internet by accessing our website at www.brownshoe.com/annualmeeting. Information on our website does not constitute part of the proxy statement.

 

How can I get paper copies of the proxy materials?

 

The Notice you received describes how to receive paper copies of the proxy materials.

 

How can I vote my shares?

 

Most shareholders have a choice of voting in one of four ways:

 

 

 

Please read the instructions on the Notice, proxy card or the information sent by your broker or bank.

 

Beneficial holders of shares held in broker accounts should be aware of a change in voting rules, effective January 1, 2010, that will affect whether their shares will be voted in the election of directors. Under Rule 452 of the New York Stock Exchange (“NYSE”), which relates to the discretionary voting of proxies by brokers, brokers will no longer be permitted to vote shares with respect to the election of directors without instructions from the beneficial owner. However, brokers will still be able to vote shares held in broker accounts with respect to the approval of the independent registered public accountants, even if they do not receive instructions from the beneficial owner. Therefore, beneficial holders of shares held in broker accounts are advised that if they do not timely provide instructions to their broker, their shares will not be voted in connection with the election of directors.

 

If I am a registered holder, how do I vote by proxy?

 

Our telephone and Internet voting procedures are designed to authenticate shareholders by using individual control numbers that can be found on the Notice. Voting by telephone or Internet will help us reduce costs. If you vote promptly, you can save us the expense of a second mailing.

 

 

The website for Internet voting is http://www.proxyvote.com. Internet voting is available 24 hours a day, 7 days a week until 11:59 P.M. Eastern Time, on the day before the meeting.

 

 

In the U.S. and Canada, you can vote your shares by telephone by calling the toll-free telephone number: 800-690-6903. Telephone voting is available 24 hours a day, 7 days a week until 11:59 P.M. Eastern Time, on the day before the meeting. Easy-to-follow voice prompts allow you to vote your shares and confirm that your instructions have been properly recorded.

 

 

If you have requested printed proxy materials and received a proxy card, you can vote by mail. Simply mark your proxy card, date and sign it, and return it in the postage-paid envelope provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. Even if you have a proxy card, you can still vote by Internet or telephone.

 

If you vote by proxy using any of these three methods, your shares will be voted in the manner you indicate. You may specify whether your shares should be voted for all, some or none of the nominees for director and for or against any other proposals properly brought before the annual meeting. If you vote by telephone or Internet and choose to vote with the recommendation of your board, or if you vote by mail, sign your proxy card, and do not indicate specific choices, your shares will be voted “FOR” the election of all nominees for director and “FOR” the ratification of Ernst & Young LLP as the Company’s independent public accountants. If any other matter is properly brought before the meeting, your proxies will vote in accordance with their best judgment. At the time this proxy statement was filed with the SEC, we knew of no matter that is required to be acted on at the annual meeting other than those discussed in this proxy statement.

 

If you wish to give a proxy to someone other than the persons named on the enclosed proxy card, you may strike out the names appearing on the card and write in the name of any other person, sign the proxy, and deliver it to the person whose name has been substituted.

 

What should I do if I hold my shares through a broker or bank?

 

If your shares are held in “street name” by a broker or bank as your nominee, your nominee will send you separate instructions describing the procedures for voting your shares. You should follow the instructions provided by your nominee.

How many votes do I have?

 

You have one vote for each share of our stock that you owned at the close of business on March 31, 2010, the record date. These shares include:

 

 

If you are a shareholder of record, you will receive only one Notice for all the shares you held as of the record date, March 31, 2010, and the name and address section on the Notice will indicate the number of shares you hold. This includes shares in certificate form as well as shares in book-entry form.

 

What is the difference between holding shares as a “shareholder of record” or “registered holder,” versus being a “beneficial owner”?

 

If your shares are registered directly in your name with our transfer agent, BNY Mellon Shareowner Services, you are considered the “shareholder of record” or a “registered holder” with respect to those shares. The Notice has been sent to you directly by the Company.

 

If your shares are held in “street name,” such as through a broker or bank, you are considered the “beneficial owner” of the shares held in street name. As a beneficial owner, you have the right to direct your broker or bank on how to vote your shares by following the instructions provided by your broker or bank.

 

The Notice concerning our annual meeting and the availability of our proxy statement and 2009 Annual Report have been forwarded to you by your broker, bank or other holder of record who is considered, with respect to those shares, the shareholder of record.

 

May I revoke my proxy?

 

If you give a proxy, you may revoke it in any one of three ways:

 

 

The method by which you vote will in no way limit your right to vote at the meeting if you decide to attend in person.

 

How do I vote in person?

 

If you are a shareholder of record, you may cast your vote in person at the annual meeting. If your shares are held in the name of a broker or bank, you must obtain a proxy, executed in your favor, from the broker or bank, to be able to vote at the meeting.

 

Is my vote confidential?

 

Yes. Voting tabulations are confidential, except in extremely limited circumstances. Such limited circumstances include contested solicitation of proxies, when disclosure is required by law, to defend a claim against us or to assert a claim by us, and when a shareholder’s written comments appear on a proxy or other voting material.

 

What is a “quorum” for the meeting?

 

In order to have a valid shareholder vote, a quorum must exist at the annual meeting. Under the New York Business Corporation Law and our bylaws, a quorum will exist when shareholders holding a majority of the outstanding shares of our stock are present or represented at the meeting. For these purposes, shares that are present or represented by proxy at the annual meeting will be counted towards a quorum, regardless of whether the holder of the shares or proxy fails to vote on a particular matter or whether a broker with discretionary voting authority fails to exercise such authority with respect to any particular matter.

What vote is required to approve each proposal?

 

 

If a broker indicates on its proxy that it does not have authority to vote certain shares held in “street name” on a particular proposal, the shares not voted are referred to as “broker non-votes.” Under the rules of the NYSE, brokers cannot vote for the election of directors or for certain other matters for which they do not have discretionary voting authority. As to these proposals, broker non-votes occur when the “beneficial owner” has not instructed the broker how to vote on these proposals. If you are a beneficial owner, your bank or broker is permitted to vote your shares on the ratification of the appointment of independent registered public accountants, even if you have not provided voting instructions, but cannot vote on the election of directors absent voting instructions.

 

Shares represented by proxies that are marked vote “withheld” with respect to the election of any person to serve on the board will not be considered in determining whether such a person has received the affirmative vote of a plurality of the shares. Shares represented by proxies that are marked “abstain” with respect to Proposal 2 or any new proposal raised at the meeting, will not be considered in determining whether such proposal has received the affirmative vote of a majority of the shares voted and such proxies will not have the effect of a “no” vote.

 

What are the costs of soliciting these proxies?

 

We are paying the cost of preparing, printing, and mailing these proxy materials. We will reimburse banks, brokers, and others for their reasonable expenses in forwarding proxy materials to beneficial owners and obtaining their instructions.

 

Proxies will be solicited by mail and also may be solicited by our executive officers and other employees personally, by telephone or by electronic means, but such persons will not be specifically compensated for such services. It is contemplated that brokers, custodians, nominees and fiduciaries will be requested to forward the soliciting material to the beneficial owners of stock held of record by such persons and we will reimburse them for their reasonable expenses incurred. While we do not currently plan to retain a proxy solicitor, we estimate that the fees for such assistance would be approximately $7,500 should we determine that such assistance is needed.

 

Where can I find the voting results of the meeting?

 

We intend to announce preliminary voting results at the meeting. We will publish the final results in a Report on Form 8-K, which we will file with the SEC on or before June 3, 2010. You can obtain a copy of the Form 8-K on our website at www.brownshoe.com/secfilings, by calling the SEC at (800) SEC-0330 for the location of the nearest public reference room, or through the EDGAR system at www.sec.gov. Information on our website does not constitute part of this proxy statement.

How can I reduce the number of Notices delivered to my household?

 

SEC rules allow delivery of a single Notice or a single Annual Report and proxy statement to households at which two or more shareholders reside. Accordingly, shareholders sharing an address who have been previously notified by their broker or its intermediary will receive only one copy of the Notice and other materials, unless the shareholder has provided contrary instructions. Individual proxy cards or voting instruction forms (or electronic voting facilities) will, however, continue to be provided for each shareholder account. This procedure, referred to as “householding,” reduces the volume of duplicate information you receive, as well as our expenses. If your family has multiple accounts, you may have received a householding notification from your broker earlier this year and, consequently, you may receive only one Notice or other materials. If you prefer to receive separate copies of the Notice and other materials, either now or in the future, we will promptly deliver, upon your written or oral request, separate copies, as requested, to any shareholder at your address to which a single copy was delivered. Notice should be given to us by mail at 8300 Maryland Avenue, St. Louis, Missouri 63105, attention: Senior Vice President, General Counsel and Corporate Secretary, or by telephone at (314) 854-4000. If you are currently a shareholder sharing an address with another shareholder and wish to have only one Notice or other shareholder materials delivered to the household in the future, please contact us at the same address or telephone number.

 

Since 1878, we have been guided by a value system that emphasizes integrity and trust at all levels of our organization. We have longstanding policies and practices to promote the management of our Company with integrity and in our shareholders’ best interests. The board has adopted and adheres to Corporate Governance Guidelines that the board and senior management believe represent sound practices. The Corporate Governance Guidelines are available on our website at www.brownshoe.com/governance. The board periodically reviews these guidelines, New York law (the state in which we are incorporated), the NYSE’s rules and listing standards, the SEC rules and regulations, as well as best practices suggested by recognized governance authorities. The guidelines reflect the board’s policy that all directors are expected to attend the annual meeting. The charters for the board’s Executive, Audit, Compensation and Governance and Nominating Committees are also available on our website at www.brownshoe.com/governance. Information on our website shall not be deemed to constitute part of this proxy statement.

 

Currently, of the thirteen members of the board, eleven meet the NYSE standards for independence. A director is considered to be an independent director only if the director does not have a material relationship with the Company, as determined by the board. The board has adopted standards for independence to assist it in making this determination. These standards are described in the Company’s Corporate Governance Guidelines. As of the date of this proxy statement, Ronald A. Fromm and Diane M. Sullivan are both directors and executive officers and are not independent directors. The board has determined that each of the other members of the board is independent, including Mr. Baeza, Dr. Bower, Ms. Esrey, Ms. Hendra, Mr. Klein, Mr. Korn, Ms. McGinnis, Mr. McGinnis, Mr. Neidorff, Mr. Upbin and Mr. Wright. With our board comprised of eleven independent directors out of thirteen, we are in compliance with our goal, as set forth in the Corporate Governance Guidelines, that two-thirds of the directors will be independent under the NYSE standards.

 

The independent (non-management) members of the board meet regularly without any members of management present. Dr. Bower, as lead director and chair of the Executive Committee, presides at such executive sessions (and if he is absent, then another director who is a member of the Executive Committee presides in his place). Only independent directors serve on our Audit, Compensation, and Governance and Nominating Committees.

 

We have a Code of Business Conduct that is applicable to all directors, officers and employees of the Company. We have an additional Code of Ethics that is applicable to the principal executive officer, principal financial officer and

principal accounting officer. Both the Code of Business Conduct and the Code of Ethics are available on the Company’s website at www.brownshoe.com/governance. We intend to post amendments to or waivers from (to the extent applicable to an executive officer of the Company) either code on our website.

 

Shareholders and other parties interested in communicating directly with an individual director, with the non-management directors as a group, or with all directors may write to the individual director or group, c/o Office of the Corporate Secretary, Brown Shoe Company, Inc., 8300 Maryland Avenue, St. Louis, Missouri 63105 or by sending an e-mail to directors@brownshoe.com. This method of communicating with non-management directors is also posted on the Company’s website. The board approved a process for handling communications received by the Company and addressed to non-management members of the board. Under that process, a staff member assisting the Company’s Corporate Secretary reviews all such correspondence and regularly forwards to the board a summary of all such correspondence and copies of all correspondence that, in the opinion of the staff member, deals with the functions of the board or its committees or that the staff member otherwise determines requires their attention. Directors may at any time review a log of all correspondence received by the Company and which is addressed to members of the board, and may request copies of any such correspondence. Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of the Company’s internal audit department and handled in accordance with procedures established by the Audit Committee with respect to such matters.

 

We have been operating for over 25 years using the traditional U.S. board leadership structure, under which our Chief Executive Officer also serves as Chairman of the Board. Over this period, we have had two individuals serve as Chief Executive Officer and Chairman of the Board. Our current Chief Executive Officer, Mr. Fromm, has served as both our Chairman of the Board and Chief Executive Officer since 1999. As a result, Mr. Fromm has a unique depth of knowledge about us and the opportunities and challenges we face.

 

We believe that our Company, like many U.S. companies, has been well-served by this structure. We believe that our current Board leadership structure is appropriate because it provides for more effective leadership and recognizes that in many cases one person should speak for and lead both the Company and the Board. We feel that this structure demonstrates for our employees, customers and other business partners that we are under strong leadership. It also eliminates the potential for confusion or duplication of efforts.

 

In March 2010, upon the recommendation of the Governance and Nominating Committee, the board adopted a charter for a lead director and appointed Joseph L. Bower to fulfill that role. The charter provides that the lead director shall: preside at executive sessions of the board and at other board meetings when the Chairman is not present, be authorized to call meetings of the independent directors, serve as liaison on board-wide issues between the independent directors and the Chairman, and be authorized to retain advisors and counsel to report to the board. By having a lead independent director, coupled with other oversight functions delegated to various board committees comprised of independent directors, our governance structure provides ample opportunity for effective oversight.

 

The board has general oversight responsibility for our affairs, including risk management, pursuant to the New York Business Corporation Law, our Restated Certificate of Incorporation and our Bylaws, while management is responsible for our day-to-day operations. We believe this division of responsibilities is the most effective approach for addressing the risks facing the Company. In order to assist the board in overseeing our risk management, executive management reviews with the board our approach to risk management and involves the board, managers and other personnel in an effort to identify, assess and manage risks that may affect our ability to execute on our corporate strategy and fulfill our business objectives. These activities entail the identification, prioritization and assessment of a broad range of risks (e.g., financial, operational, business, reputational, governance and managerial), and the formulation of plans to manage these risks or mitigate their effects. The board also manages risk through

the oversight responsibilities of its committees. The Compensation Committee reviews executive compensation programs, which tend to be more likely than broad-based programs to pose a higher risk level; and in March 2010, management presented to the Compensation Committee its analysis of risk related to pay and other compensation as to all employees and its determination that the risks arising from the Company’s compensation practices and policies are not reasonably likely to have a material adverse effect on the Company. The Audit Committee regularly reviews risks related to our consolidated financial statements and internal controls; and the Company’s Director of Internal Audit reports directly to the Audit Committee. Additionally, in accordance with NYSE requirements that our Audit Committee discuss policies regarding risk assessment and management’s actions to monitor and control risk, our General Counsel and Chief Financial Officer update our Audit Committee quarterly with respect to the Company’s major financial risk exposures and discuss the steps taken to monitor and control such exposures.

 

On a regular basis, the board discusses with management the appropriate level of risk that we are willing to accept in pursuit of our corporate strategy and business objectives and reviews with management our existing risk management processes and their effectiveness.

 

For membership on our board, a candidate must possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of shareholders. Each board member is expected to provide necessary stewardship over business strategies and programs adopted to ensure the coordination of interests among employees, management and shareholders; be able to balance short-term goals and long-term goals of the Company and its shareholders; and at all times respect and maintain adherence to the Code of Business Conduct.

 

In evaluating the composition of the board and anticipated vacancies, the Governance and Nominating Committee seeks and considers candidates that will serve the Board’s long-term needs, with the intent that the board, at any time, be comprised of a group of individuals who bring a complement of skills, values and expertise that will benefit the Company and its shareholders. The committee believes that all directors must possess a considerable amount of business management or leadership experience and will take into account, among other things, the nominee’s personal attributes, education, professional experience, conflicts of interest, knowledge of the Company’s business, accomplishments, commitment to active participation on the board, and reputation. In this effort, the committee seeks diversity of background, culture, experience and talent among its members, although the board does not have a written policy that requires such diversity.

 

With respect to nomination of continuing directors, the Governance and Nominating Committee also considers an individual’s contribution to the board. If the committee believes that qualified members from the existing board membership are suitable candidates for re-election, it will not seek outside candidates unless a larger board size is deemed advisable. In proposing membership on board committees, the committee ensures that each committee of the board includes members with appropriate skills and knowledge, and also will consider a director’s interest in serving on a particular committee and providing directors with opportunities to become more knowledgeable about different aspects of the Company’s business.

 

The process followed by the Governance and Nominating Committee to identify and evaluate candidates includes requesting recommendations from board members and others, meetings to evaluate information about potential candidates, and interviewing selected potential candidates by members of the committee and the board. Assuming that appropriate biographical and background material is provided for candidates recommended by shareholders on a timely basis, the committee will evaluate potential candidates recommended by shareholders by following substantially the same process and applying substantially the same criteria as it follows for potential candidates submitted by board members or others. From among a group of potential candidates who are qualified for a board position and meet the independence standards required by our corporate governance guidelines, the committee will select the candidate believed to best satisfy the board’s needs and will vote to recommend nomination of such candidate to the board.

 

The biographies of each of the nominees and continuing directors in the section “Proposal 1 - Election of Directors” contains information regarding each individual’s experience and qualifications considered by the Governance and Nominating Committee and the board when director nominations have been made.

A shareholder seeking to propose a director candidate for the committee’s consideration should forward the candidate’s name and information about the candidate’s qualifications to our Corporate Secretary, as discussed in more detail in the section “Shareholder Proposals for the 2011 Annual Meeting.”

 

The board has the following four committees: Audit, Compensation, Executive, and Governance and Nominating. The table below indicates the current membership of each committee and how many times the board and each committee met in fiscal 2009 (“2009”). Each director is expected to attend the annual meeting and all of our directors attended at least 75% of the total number of meetings of the board and of the committees on which he or she serves. All of our directors attended the 2009 annual meeting except one individual who was called away for a pressing matter.

 

 

 

 

The Audit Committee’s primary responsibilities are to monitor (a) the integrity of the Company’s consolidated financial statements; (b) the financial reporting process and system of internal accounting and financial controls; (c) compliance with ethics policies, legal and regulatory requirements, and the Company’s independent registered public accountants’ qualifications and independence; and (d) the performance of the Company’s internal audit function and independent registered public accountants. The Audit Committee is directly responsible for the appointment, compensation and oversight of the work of the independent registered public accountants. The board has determined, in its judgment, that the Audit Committee is comprised solely of independent directors as defined in the NYSE listing standards and Rule 10A-3 of the Securities Exchange Act of 1934. The Audit Committee operates under a written charter adopted by the entire board. The board has determined, in its judgment, that Mr. Upbin qualifies as an “audit committee financial expert” and is independent within the meanings of the rules of the SEC and NYSE. The board, through the Corporate Governance Guidelines, has established the policy that no member of the Audit Committee may serve on the audit committees of more than three public companies (including our Audit Committee). Also see “Audit Committee Report.”

 

The Compensation Committee (the “Committee”) has primary responsibility for establishing the executive officers’ compensation, including the compensation for each of the executive officers named in the Summary Compensation Table herein (“NEOs”). The Committee also reviews changes in the compensation of other key management employees; reviews and approves or makes recommendations to the board concerning incentive compensation plans, equity-based plans and other executive benefit plans; approves the participation of executives and other key management employees in the various compensation plans and makes awards to participants; reviews our compensation programs; monitors our promotion and management development practices; and approves the inclusion of the Compensation Discussion and Analysis (“CD&A”) in this proxy statement. The Committee meets several times each year, and Committee agendas are established in consultation between the Committee chair and management. In setting annual compensation, the Committee receives from our Chief Executive Officer the performance assessment, internal ranking and compensation recommendation for each of the other NEOs, along with percentage variance to the median peer group data for the principal compensation elements. The Committee meets in executive session when discussing compensation for the Chief Executive Officer. The role of the Company’s compensation consultant and management are also discussed in the CD&A.

 

Prior to 2010, the Committee had not retained an independent consultant, although it periodically consulted with Hewitt, the Company’s compensation consultant. For 2010, the Committee decided to retain Meridian Partners LLC (“Meridian”) as its compensation consultant for executive compensation so that it will be able to benefit from Meridian’s independent advice. Meridian is expected to assist the Committee in the compensation review and decision-making process and the review of plans and programs for executives. Also, Meridian will be able to advise the Committee on market trends, provide comparative market data and, if requested, provide compensation recommendations. Meridian was formed in early 2010 following a decision by Hewitt Associates LLC (“Hewitt”) to spin-off its executive compensation consulting division. As a result, the individual consultant who previously represented Hewitt and provided consulting services to the Company and to the Committee in 2009, will continue as the principal advisor for the Committee in 2010 as a representative of Meridian. Hewitt also may continue to provide services to management.

 

During 2009, the Company, through its Total Rewards department, retained Hewitt for executive compensation advice. Hewitt provided these services upon request from our Vice President — Total Rewards, primarily for matters related to the Committee’s activities. Hewitt also was used to calculate certain tax-related data included in the 2009 proxy statement. The Company also retains Towers Watson (formerly known as “Towers Perrin”) for pension-related computation and consulting services, which includes both the broad-based pension plan and the Supplemental Executive Retirement Plan (SERP) (available to a limited group of executives).

 

The board has determined, in its judgment, that the Compensation Committee is comprised solely of independent directors as defined in the NYSE listing standards. The Compensation Committee operates under a written charter adopted by the entire board.

 

The Executive Committee may exercise all of the powers and duties of the board in the direction of the management of our business and affairs during the intervals between board meetings that may lawfully be delegated to it by the board. However, certain categories of matters have been expressly reserved for consideration by the full board. The Executive Committee operates under a written charter adopted by the entire board. The Executive Committee did not meet during 2009.

 

The Governance and Nominating Committee develops criteria for membership on the board, recommends candidates for membership on the board and its committees, evaluates the structure and composition of the board, reviews and recommends compensation of non-employee directors, oversees the evaluation of executive management, and reviews the effectiveness of board governance. In making its recommendation for compensation of non-employee directors for 2009, the Governance and Nominating Committee was provided with comparative peer group data in February 2009 by Hewitt (discussed in the section entitled “Compensation of Non-Employee Directors — Fiscal

2009 Director Compensation”), but a representative of Hewitt did not discuss the data with the committee or participate in the fee-setting process.

 

The Governance and Nominating Committee utilizes a process for selecting directors and nominees, which is described in detail in the section entitled “Corporate Governance — Selection of Directors.” The board has determined, in its judgment, that the Governance and Nominating Committee is comprised solely of independent directors as defined in the NYSE listing standards. The Governance and Nominating Committee operates under a written charter adopted by the entire board.

 

In accordance with our written related party transaction policy, the board reviews all transactions expected to exceed $120,000 in which a related party has a material interest. For purposes of this policy, related parties include the Company’s executive officers, directors or nominees, or 5% beneficial owners of the Company’s stock, as well as any immediate family member of any of the foregoing, or entity controlled by them or in which they have a 10% or greater beneficial interest. In making its determination whether to approve a related party transaction, the board considers such factors as the extent of the person’s interest in the transaction, the aggregate value, the availability of other sources of comparable products or services, whether the terms of the transaction are no less favorable than terms generally available in unaffiliated transactions under like circumstances, and the benefit to the Company.

 

In 2009, there were no material transactions between the Company and its executive officers and directors, nominees or principal shareholders, or their immediate family members or entities controlled by them.

 

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and any persons beneficially owning more than 10% of our stock to report their ownership of stock and any changes in ownership to the SEC, NYSE and Chicago Stock Exchange. The SEC has established specific due dates for these reports, and we are required to report in this proxy statement any failure to file by these dates. We file Section 16(a) reports on behalf of our directors and executive officers to report their initial and subsequent changes in beneficial ownership of our stock. To our knowledge, based solely on a review of the reports we filed on behalf of our directors and executive officers and written representations from these persons that no other reports were required, we believe that all such reports of our executive officers and directors were filed on a timely basis in 2009.

 

The members of the Compensation Committee for 2009 were those indicated in the table under the heading “Board Meetings and Committees.” None of the members of the Compensation Committee has been an officer or employee of ours or has had any relationship with the Company required to be disclosed under Item 404(a) of SEC Regulation S-K. No executive officer of the Company has served on the board of directors or compensation committee of any other entity that has or has had one or more executive officers serving as a member of the Company’s board.

 

Non-employee directors’ compensation is established by the board upon the recommendation of the Governance and Nominating Committee. For 2009, commencing with the 2009 annual meeting on May 28, 2009, the following compensation guidelines were in effect for non-employee directors, with cash retainers payable quarterly in arrears:

 

 

 

The grant of either restricted stock or RSUs to directors as part of their annual compensation is intended to align directors’ interests with those of shareholders. During the portion of 2009 prior to last year’s annual meeting, the director compensation approved in May 2008 was in effect, and provided for the same schedule of cash meeting fees and retainer payments to non-employee directors as was approved by the board in May 2009. In setting compensation levels for non-employee directors elected in 2009, the Governance and Nominating Committee was provided with median level data for a peer group of 18 companies (most of which were also used for executive compensation peer data). As compared to the peer median in this study, our non-employee director compensation levels were 5% below peer median for the aggregate annual board retainer and meeting fees and 39% below peer median for equity granted, resulting in total annual director compensation that was 19% below peer median. Notwithstanding these peer comparisons, the board determined that no increase should be made as to the amount of compensation for 2009-2010 board service.

 

As part of the board’s commitment to increasing shareholder value, the board, in 2009, determined it prudent to further invest in leadership development and future succession planning. Given Dr. Bower’s recognized expertise in succession planning, the board asked him to take the lead on these matters. The board decided to pay Dr. Bower an additional retainer with a value of $25,000 for each of 2009 and 2010 to recognize his additional services to the board and management in connection with such matters. This additional retainer for 2009 was paid in the form of 2,600 shares of restricted stock issued in October 2009. It is expected that Dr. Bower will receive an additional restricted stock grant in May 2010.

 

We carry liability insurance and travel accident insurance that covers our directors. We do not maintain a directors’ retirement plan or a directors’ legacy or charitable giving plan. Although non-employee directors are permitted to participate in our matching gift program on the same terms offered to employees (match for charitable giving to institutions of higher education and arts and cultural organizations aggregating up to $5,000 per year per individual), SEC rules require that the Company match amount for directors be disclosed as compensation. Non-employee directors do not participate in the retirement plans available to employees, nor do they participate in the annual or long-term equity incentive programs that have been developed for employees. A director who is an employee does not receive payment for service as a director.

 

The following table provides information on all cash, equity-based, and other compensation granted to non-employee directors during 2009. During 2009, no directors deferred fees through the non-employee directors deferred compensation plan.

 

Non-Employee Director Compensation Table

 

 

 

 

The board makes an annual equity-based grant to non-employee directors in the form of either restricted stock or cash-equivalent RSUs, based on a target aggregate cash value for the grant, divided by the per share value of the Company’s common stock at the time of grant. While our historical practice has been to determine the number of restricted shares or RSUs by using current fair market value (average of high and low prices), in May 2009 the board used a per share value of $10.07, which represented the six-month average stock price used in March 2009 by the Compensation Committee in connection with the grant of employee equity awards. This approach is discussed in more detail in the CD&A under the heading “Long-Term Compensation — Change in Market Valuation Methodology for Share Awards.” The restricted stock awards vest after one year and, commencing with the grant date, earn cash dividends. The RSUs are subject to a one-year vesting requirement, earn dividend equivalent units, and are payable in cash on the date the director terminates service or such earlier date as a director may elect (provided that the selected payout date is at least two years after the grant date for the award), based on the Company’s stock’s then-current market value. Dividend equivalents are paid on RSUs at the same rate as dividends on the Company’s common stock, and are automatically re-invested in additional RSUs as of the payment date for the dividend.

 

Non-employee directors are eligible to participate in a deferred compensation plan, with deferred amounts valued as if invested in our common stock through the use of PSUs. Under the plan, we credit each participating director’s account with the number of “phantom units” that is equal to the number of shares of our stock which the participant could purchase or receive with the amount of the deferred compensation, based upon the fair market value (average of the high and low prices) of our stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock, and are re-invested in additional PSUs at the next fiscal quarter-end. When the participating director terminates his or her service as a director, we will pay the cash value of the deferred compensation to the director (or to the designated beneficiary in the event of death) in annual installments over a five-year or ten-year period, or in a lump sum, at the director’s election. The cash amount payable will be based on the number of PSUs credited to the participating director’s account, valued on the basis of the fair market value at fiscal quarter-end on or following termination of the director’s service, and calculated based on the mean of the high and low price of an equivalent number of shares of our stock on the last trading day of the fiscal quarter. The plan also provides for earlier payment of a participating director’s account if the board determines that the participant has a demonstrated financial hardship. The accounts of prior participants continue to earn dividend equivalents on the account balance.

 

Commencing in January 2009, our non-employee directors were eligible to participate in the Director Share Plan, which allows the participating director to receive retainer and meeting fees in shares of the Company’s stock in lieu of cash, with the number of shares issuable determined based on the average of the high and low price of our stock, determined as of the first business day following the meeting or following the payment date for a retainer.

 

In March 2008, the board adopted stock ownership guidelines for non-employee directors. The purpose of these guidelines is to encourage long-term share ownership by our directors and better align the interests of non-employee directors with shareholders. The guidelines provide that all non-employee directors will hold shares of our stock or stock equivalents with a value at least equal to five times the annual cash retainer paid to them. For purposes of these guidelines, the following stock interests qualify under the guidelines: stock beneficially owned outside of Company-sponsored plans, stock held in any Company-sponsored stock-based plan, Company stock units held in any Company-sponsored non-qualified deferred compensation plan and RSUs. Non-employee directors are expected to achieve the required holdings by the fifth anniversary of the adoption of the guidelines or upon commencement of board service, whichever is later. All of the directors met the guidelines as of the end of 2009.

 

 

The following table shows the amount of our common stock beneficially owned as of March 31, 2010, by each director and nominee, each of the named executive officers listed in the Summary Compensation Table (NEOs), all current directors and executive officers as a group, and all persons or entities that we know to beneficially own more than 5% of our stock on March 31, 2010 (based on filings made with the SEC). In general, “beneficial ownership” includes those shares for which a person has or shares the power to vote or the power to dispose, and takes into account shares that may be acquired within 60 days (such as by exercising vested stock options). Thus, the table shows the number of employee and director stock options to purchase shares of our stock that are exercisable, either immediately or by May 30, 2010 (60 days after March 31, 2010). For our non-employee directors, the table shows the total number of share units held, as these units have an investment value that mirrors the value of our stock.

 

 

 

 

Our certificate of incorporation and bylaws provide for a board of directors that is divided into three classes as equal in size as possible. This classified board structure was adopted on November 2, 1954. Each of the classes has a three-year term, and the term of one class expires each year in rotation at that year’s annual meeting. We may change the size of the board by amending our bylaws. Persons elected by a majority of the remaining directors may fill vacancies on the board. A director elected by the board to fill a vacancy, or a new directorship created by an increase in the size of the board, serves until the next annual meeting of shareholders. Although there is no mandatory retirement policy for directors, our Corporate Governance Guidelines limit the board from filling a vacancy with an individual over 72 years of age and precludes recommending an individual for election as a director for a term extending beyond the annual shareholders’ meeting following the end of the calendar year during which the individual turns 72.

 

Based on the age limit for nominees specified in our Corporate Governance Guidelines, the board may nominate Hal J. Upbin, whose current term expires at the 2010 annual meeting, only for a two-year term. In order to accommodate Mr. Upbin in the class of directors whose terms expire at the 2012 annual meeting, one member of that class must move to another in order for our director classes to be as equal as possible. Therefore, the board has nominated Carla Hendra, who was elected by shareholders at the 2009 annual meeting for a three-year term ending in 2012, to a new three-year term expiring in 2013. Assuming the election of the proposed nominees for the terms proposed, the class of directors whose term will expire in 2013 will have four members; the class whose term will expire in 2012 will have four members, including the one nominee (Mr. Upbin) who will be in that class; and the class whose term will expire in 2011 will have five members. Your board has nominated for election as directors at the 2010 Annual Meeting five individuals, Carla Hendra, Ward M. Klein, W. Patrick McGinnis and Diane M. Sullivan, each for a three-year term; and one individual, Hal J. Upbin, for a two-year term.

 

There are no family relationships between any of our directors, nominees, and executive officers.

 

Your board is not aware that any nominee named in this proxy statement is unwilling or unable to serve as a director. If, however, a nominee is unavailable for election, your proxy authorizes the proxies to vote for a replacement nominee if the board names one. As an alternative, the board may reduce the number of directors to be elected at the meeting. Proxies may not be voted for a greater number of persons than the nominees identified below.

 

 

 

Your Board of Directors recommends a vote “FOR” these nominees.

 

 

 

 

The Audit Committee has appointed Ernst & Young LLP as the independent registered public accountants to audit the Company’s consolidated financial statements for the fiscal year ending January 29, 2011. The Audit Committee and the board are requesting that shareholders ratify this appointment as a means of soliciting shareholders’ opinions and as a matter of good corporate practice. If the shareholders do not ratify the selection of Ernst & Young LLP, the Audit Committee will consider any information submitted by the shareholders in connection with the selection of the independent registered public accountants for the next fiscal year. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of different independent registered public accountants at any time during the fiscal year if the Audit Committee believes such a change would be in the best interest of the Company and its shareholders.

 

Representatives of Ernst & Young LLP do not plan to make a formal statement at the annual meeting. However, we expect that they will attend the meeting and be available to respond to appropriate questions.

 

 

 

During 2009 and 2008, Ernst & Young LLP were our independent registered public accountants and charged fees for services rendered to us as follows:

 

 

 

 

In 2009, all of the audit, audit-related and tax services were pre-approved in accordance with the Audit Committee’s audit and non-audit services pre-approval policy that requires the committee, or the chair of the committee to pre-approve services to be provided by the Company’s independent registered public accountants. Pursuant to this policy, the committee will consider whether the services to be provided by the independent registered public accountants are prohibited by the SEC and consistent with the SEC’s rules on auditor independence and whether the independent registered public accountants are best positioned to provide the most effective and efficient services. The committee is mindful of the relationship between fees for audit and non-audit services in deciding whether to pre-approve such services. The committee has delegated to the chair of the committee pre-approval authority between committee meetings and the chair must report any pre-approval decisions to the committee at the next scheduled committee meeting.

 

The Audit Committee oversees the Company’s financial reporting process on behalf of the board. Management is primarily responsible for the consolidated financial statements and reporting processes including the systems of internal controls, while the independent registered public accountants are responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with auditing standards generally accepted in the United States, and expressing an opinion on the conformity of those consolidated financial statements with accounting principles generally accepted in the United States.

 

In this context, the committee has met and held discussions with management and the internal auditors and independent registered public accountants. The committee discussed with the Company’s internal and independent registered public accountants the overall scopes and plans for their respective audits. The committee met, at least quarterly, with the internal and independent registered public accountants, with and without management present, and discussed the results of their examinations, their evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. Management represented to the committee that the Company’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. The committee has reviewed and discussed the consolidated financial statements with management and the independent registered public accountants, including their judgments as to the quality, not just the acceptability, of the Company’s accounting principles; the reasonableness of significant judgments and clarity of disclosures; and such other matters as are required to be discussed with the committee under auditing standards generally accepted in the United States.

 

The Company’s independent registered public accountants also provided to the committee the written disclosures required by the Public Company Accounting Oversight Board Ethics and Independence Rule 3526, Communication With Audit Committees Concerning Independence. The committee discussed with the independent registered public accountants that firm’s independence, including those matters required to be discussed by Statement on Auditing Standards No. 61, as amended and as adopted by the Public Company Accounting oversight Board in Rule 3200T, among other things. The committee considered whether the provision by Ernst & Young, LLP of non-audit services, including tax services, was compatible with their independence.

 

In reliance on the reviews and discussions referred to above, the committee recommended to the board and the board approved including the audited consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended January 30, 2010 for filing with the Securities and Exchange Commission. The committee has retained Ernst & Young LLP as the Company’s independent registered public accountants for 2010.

 

While the committee has the responsibilities and powers set forth in its charter, it is not the duty of the committee to plan or conduct audits or to determine that the Company’s consolidated financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent registered public accountants. In addition, it is not the duty of the committee to conduct investigations or to ensure compliance with laws and regulations and the Company’s business conduct policies.

 

Audit Committee

Hal J. Upbin, Chair

Mario L. Baeza

Ward M. Klein

Steven W. Korn

W. Patrick McGinnis

 

Executive Summary

 

Fiscal 2009 commenced with great concern about the economy and significant challenges to meeting the goals of our executive compensation program. When the Compensation Committee met in early March 2009 for its annual review and approval of 2009 executive compensation, management had already announced a 1.5% salary reduction for all headquarters employees (which included all of our NEOs). Also, both the 2008 annual incentive and the 2006-2008 long-term incentive were not payable due to the threshold levels of Adjusted Earnings Per Share (“EPS”) not having been achieved. Management’s expectation was, likewise, that the minimum thresholds for payout on the 2007-2009 and 2008-2010 long-term incentives would not be met. In addition, the substantial decline in the price of our stock during 2008 and early 2009 resulted in all stock options held by the NEOs as of early March 2009 being “underwater,” as the option exercise price exceeded the then-current market price of our stock.

 

In the course of the 2009 executive compensation review, the Committee considered the need to retain executives familiar with the industry and our business during this difficult economic cycle, but remained steadfast in its commitment to long-term incentive horizons and to pay for demonstrated performance. While the Committee reaffirmed its emphasis on equity-based compensation that is intended to align executive and shareholder interests, it sought to manage potential shareholder dilution by determining the size of equity grants using a trailing average price that better reflected what management and the Committee believed was more representative of the stock’s economic value. The Committee also approved the following actions in March 2009:

 

 

While 2009 proved to be a difficult year overall, the second half included improved earnings, primarily in our Famous Footwear division. Based on 2009 results, payouts on our annual incentives, which were dependent upon Company performance (as well as division performance, if applicable), as well as achievement of personal objectives, ranged from 0% to a maximum of 103.3% of target level.

 

In November 2009, two of our senior executives, Mr. Joseph W. Wood (then-President of Brown Shoe Retail) and Mr. Gary M. Rich (then-President of Brown Wholesale), announced their anticipated retirements in 2010. As a result, Mr. Richard M. Ausick assumed a new role as Division President — Famous Footwear; and Mr. Mark D. Lardie assumed the position of Division President — Wholesale and became an executive officer of the Company. Thus, while Mr. Wood is one of our NEOs in this proxy statement as a result of his position during 2009, he is no longer an executive officer of the Company.

 

What is the Committee’s philosophy for compensating our leadership?

 

The Committee oversees the design, development and implementation of our executive compensation program. The Committee’s philosophical approach is to attract and retain executive talent by setting compensation at a level that is competitive with a similarly-sized industry peer group, encourage and reward superior performance with opportunities for additional compensation, and facilitate equity ownership so that executives will be invested as shareholders in creating and maintaining the Company’s long-term value.

 

What are the objectives of our executive compensation program?

 

The principle objectives of our executive compensation program are to sustain our talent pool by:

 

 

What are the key elements of our executive compensation program?

 

The key elements for our NEOs’ compensation, including those elements that are set annually [noted with asterisk (*)] as to each NEO, are indicated in the following table; and each of these elements is discussed in more detail in this CD&A. Additional discussion and related compensation amounts for these elements are included in other tables in the Executive Compensation section of this proxy statement, with the related table identified in the right-hand column below:

 

 

Does the Committee use a compensation consultant?

 

During 2009, the Committee did not engage its own compensation consultant. However, the Company engaged Hewitt Associates, which provided information to our Vice President — Total Rewards, who then used that information for materials provided to the Committee. A representative of Hewitt met with the Committee in December 2008 and again in December 2009 to discuss new trends and developments expected to affect the compensation practices in the upcoming year.

 

In December 2009, the Committee decided to retain an independent compensation consultant rather than receive advisory services from a compensation consultant retained by management. Effective at the beginning of 2010, the Committee engaged Meridian Compensation Partners, LLC to fulfill this role. Meridian was established in early 2010 as a result of a spin-off by Hewitt, and the Company’s principal advisor from Hewitt joined Meridian at that time and continues to serve as the principal advisor to the Committee.

During 2009, when Hewitt served as the Company’s consultant for executive compensation advice, our Vice President — Total Rewards was the Company’s principal contact for services from Hewitt, primarily to support the Committee in carrying out its responsibilities throughout the year. To provide this support, particularly as to the development of compensation programs and establishing appropriate compensation levels for our most senior executives, our Total Rewards department used Hewitt for executive compensation advice in 2009 concerning:

 

 

What is the role of management in determining compensation?

 

Mr. Fromm, our Chairman and Chief Executive Officer (“CEO”), assists the Committee by making compensation recommendations for a group of senior executives, including the other NEOs, after discussion with our Vice President — Total Rewards and our Senior Vice President — Chief Talent Officer. Recommended levels for base salary, equity grants and annual and long-term incentive awards are provided to the Committee, along with the CEO’s relative value ranking for the other NEOs, the individual performance rating levels in connection with the prescribed Company-wide evaluation process, and median market values provided by the Company’s compensation consultant. Both our CEO and Senior Vice President — Chief Talent Officer are present at the Committee’s March meeting to discuss individual performance and contributions, how the Committee’s determinations can support strategic goals, and other issues of concern to the Committee.

 

In addition, based on our business plan and prior year performance, management develops the performance metrics, plan goal and range of performance and payout levels to be used for our annual and long-term incentive awards and provides this to the Committee for its review.

 

The Committee generally gives considerable weight to management’s recommendations, but exercises its independent discretion to accept, reject or modify these recommendations. In March 2009, the Committee discussed these recommendations with the CEO and also met in executive session. While the Committee accepted many of management’s recommendations, the Committee provided more specific guidance on the redesign of the annual and long-term incentives.

 

Who evaluates the CEO’s performance?

 

Our Governance and Nominating Committee is responsible for evaluating our CEO’s performance, and utilizes a formal process administered by an outside human resources consulting firm for that purpose. This performance appraisal considers Mr. Fromm’s performance in the areas of organizational leadership, financial results, and board governance, and includes surveying all members of the board. When evaluating the CEO’s performance, the Governance and Nominating Committee meets in executive session without management present, although other non-management members of the board are invited to participate in that committee’s meeting. Subject to the Governance and Nominating Committee’s evaluation, the Compensation Committee reviews and determines the CEO’s compensation in executive session. Neither the CEO nor other member of management discusses the CEO’s compensation with the Governance and Nominating Committee or the Compensation Committee.

 

What is the Committee’s process for setting executive compensation?

 

The Committee sets annual levels of the key compensation elements for the NEOs early in the fiscal year, at the March meeting when prior year financial results are known. However, consideration of peer practices and trend

development, analysis of our programs and outcomes, and discussion of possible program changes begin several months earlier. Also, throughout the year, the Committee reviews overall structure and elements of compensation.

 

The Committee utilizes a variety of information resources in fulfilling its responsibilities to determine executive compensation, with most information provided by the Company’s Vice President — Total Rewards. As requested by the Committee or as otherwise deemed appropriate to support the Committee in carrying out its responsibilities, the Committee also receives advice from the compensation consultant (Hewitt through 2009, and now Meridian) and also utilizes other published compensation data. In connection with the March meeting, management furnishes to the Committee supplemental historical information in tabular form for each of the NEOs, including: historical salary and equity award grants, total shares subject to outstanding awards, spread value on unvested options, market value of outstanding restricted stock and current stock ownership. Peer group median data and the variance of recommended compensation from peer group median are also provided.

 

The Committee generally considers the following factors when establishing the annual levels for the compensation elements:

 

 

In considering these factors, the Committee’s deliberations are necessarily fact specific and situational. There is no established formula for weighting these factors, some of which are intangible and not readily quantifiable. Nor does the Committee use a pre-established priority of these factors. Depending on the year or the individual, the Committee may find certain factors more significant than others. As a group, however, they provide necessary context and perspective for determining the relative value of different senior executives to the Company and for developing a compensation program that will meet program objectives and provide the right performance incentives.

 

For performance-based compensation elements such as our annual and long-term incentive awards, the Committee reviews the performance metrics to be used as well as the plan goal and minimum and maximum levels used to establish the range of potential payouts. Although the Committee considers the performance goal levels within management’s operating plan, its focus in approving incentive compensation plans is to set performance levels that it believes promote Company growth without sacrificing quality of earnings. The Committee also considers that both the metrics selected and plan goal levels to be significant as a measure of executive efforts in managing the business consistent with the business strategy and operating plans, and in the best interests of shareholders.

Notwithstanding this general approach used by the Committee, the March 2009 compensation review was predominantly influenced by the economic downturn and how it affected and might continue to affect our business, financial performance and stock price, and our ability to attract, retain and incent executive talent. Also, while the Committee was provided with peer group data from the recently prepared market survey, Hewitt advised the Committee that this peer group data had limited relevance due the recent economic changes, and that alternative market valuation approaches (such as average price per share) were becoming increasingly common.

 

How did the Committee set the NEOs’ compensation for 2009?

 

2009 Total Compensation Opportunity.  To develop compensation packages for the NEOs for 2009, the Committee separately considered current and long-term compensation, and used a market-value approach to review those elements that change annually, including base salary, targeted annual cash incentive, long-term incentive, and equity awards. Due to the dramatic decline in the Company’s share price in early 2009, the Committee changed it methodology for valuing equity awards from that used in prior years by determining the current market value for equity awards to be granted based on a six month average share price ($10.07) rather than a current share price ($3.33, $2.92 and $3.07 actual average prices on the three dates of the Committee’s discussion and approval). This difference in the per share price, plus the discount factor customarily applied by the Committee for long-term awards, resulted in the Committee’s grant date market valuation for these awards being different from the stock award values shown in the Summary Compensation Table (which are based on the actual grant date average of the high and low prices). Also, while the Committee was provided with peer group median data prepared in 2008, Hewitt advised the Committee that the subsequent economic downturn had rendered such data a less reliable benchmark than in the past. To facilitate the Committee’s discussion, Hewitt and the Vice President — Total Rewards provided supplemental information on emerging incentive compensation practices and the overall direction of market valuation compared to the prior year.

 

Fiscal 2009 Grant Date Market Analysis.  The Committee used a market valuation analysis to enable comparison with peer group data and to assess relative compensation levels among key executives. The March 2009 market valuation, summarized in the table below, shows base salary at the approved annual level and the assumed market value of other elements. These market values assume that target level performance will be achieved during the performance period and that current market value for long-term performance and equity awards should reflect a discount from the potential value of such elements. Additional information on the elements of long-term compensation is included in the table entitled “Total Long-Term Compensation Opportunity — Fiscal 2009 Compared to Fiscal 2008” in this CD&A.

 

Fiscal 2009 Grant Date Market Analysis

 

 

 

 

Compensation Mix 2009.  Based on the target market valuations used by the Committee and set forth in the preceding table, the following graphs show percentage allocations for each NEO based on the particular compensation element. These charts facilitate a quick review of whether the allocations are consistent with the Committee’s objectives, such as by considering the annual/short-term versus long-term allocation, cash versus equity split, and fixed (salary) versus variable or “at risk” (because it is market-based or performance-based), with the partial black outline indicating the at-risk segments. This data also reflects that the most senior executives with the greatest scope of job responsibilities have a higher proportion of their compensation tied to long-term versus short-term performance and that an increasing percentage of compensation is performance-based rather than fixed. The charts also indicate that base salary represents no more than 40% of the assumed total target compensation opportunity for any NEO:

 

 

 

Base Salary.  At the time of the March 2009 meeting, management had already responded to the adverse economic factors by increasing the days our headquarters was closed, which effectively reduced all salary levels by

1.5% for 2009 compared to 2008. When setting salaries for 2009, the Committee determined not to grant salary increases to five of the NEOs (whose 2008 salary levels were between 11.8% above and 13.4% below the 2009 peer group median level) after considering that the Company had not met its financial goals for 2008. For Mr. Lardie, however, the Committee approved a $50,000 base salary increase as a market adjustment, which represented a 14.7% increase before considering the additional headquarters office day closures; with this salary adjustment for 2009, Mr. Lardie’s 2008 salary level of $390,000 was 3.8% below the 2009 peer median.

 

In December 2009, following the announcement of expected executive retirements in early to mid-2010, and the intended promotion of Mr. Ausick and Mr. Lardie to their current positions, the Committee approved a new base salary of $500,000 for Mr. Ausick (a 5% increase over then-current actual), and a new base salary of $415,000 for Mr. Lardie (an 8% increase over then-current actual), each to be effective as of mid-November 2009.

 

Annual Incentive.  For 2009, the Committee made no change to the target annual incentive award for any of the NEOs. The target annual incentive award is the percent of salary that could be earned if 2009 performance were to result in a 100% payout of such award. In approving these percentages, the Committee was provided with peer data indicating that the annual incentive percentages of salary for the NEOs were within a range of 2,290 basis points below to 1,220 basis points above the peer median percentage of salary. As to the comparability of the 2009 target cash payout for our NEOs based on the annual incentive percentages awarded, the market values shown in the Fiscal 2009 Grant Date Market Analysis above were within a range of 34.0% below to 31.9% above the peer median market value. In setting these percentages, the Committee focused on the peer median percentage of salary, as distinguished from the peer median cash market value for annual incentives. The annual incentive target percentages and the cash payout amounts based on meeting plan performance are set forth in the Fiscal 2009 Grant Date Market Analysis table above.

 

The Committee decided to continue to use Adjusted EPS (which is defined as consolidated diluted earning per share, as adjusted for special charges and recoveries as determined by the Committee) as the primary metric for all annual incentives, with the addition of a second metric that varies depending on the particular plan. Adjusted EPS was continued as the primary metric because it is the performance measure that is both most closely followed by shareholders and a good indicator of annual operating performance for our industry. By allowing adjustments for special charges and recoveries, the Committee recognized that certain items that are not indicative of the Company’s core operating results should be excluded for purposes of determining compensation. The second metric, in most cases, is either net-sales for the divisional plans or a capital efficiency metric for the corporate and governance plan (which included our NEOs at that date). The capital efficiency metric selected for the corporate and governance plans was Adjusted EBITDA as a Percentage of Average Net Assets. For purposes of the second metric, EBITDA (defined as Earnings Before Interest, Taxes, Depreciation and Amortization for the period) would be subject to adjustment to exclude special charges and recoveries. Average Net Assets was to be calculated as the average of each month-end balance for Net Assets during the period, with Net Assets being calculated as the sum of working capital, property and equipment, net and capitalized software, net. This second metric is referred to herein as “EBITDA/Net Assets” and was selected because it is a commonly used metric for profitability that is closely associated with cash management, and therefore captures whether the Company is improving earnings by using capital efficiently.

 

The Committee set the performance goals for this award after considering the business plan for the year. Our annual incentive awards are earned based on the achievement of business performance goals that are designed to deliver business results that are challenging. The 2009 corporate and governance plan goal levels of Adjusted EPS and EBITDA/Net Assets were based on the Company’s operating budget for the year. The divisional plans included the same level of Adjusted EPS and a division level performance measure (net sales) based primarily on the Company’s operating budget for the year. The Committee also identified a minimum level of both Adjusted EPS and division net sales that must be met in order to generate any payout, as well as a performance level for each that, if achieved, results in the maximum potential payout. We use interpolation to determine the exact payout percentage; as a result, there are multiple combinations of the metrics that could result in payment of 100% of the target award. In addition, the Committee approved the addition of a forfeiture condition, which provides that the annual incentive will be forfeitable prior to payment, if the Committee determines that the NEO has violated our Code of Conduct or engaged in gross misconduct. In addition to Company or division financial performance, any payout is based, in part, on achievement of individual goals established in the regular course of our performance review

process and the Committee has retained negative discretion to reduce any award payout based on individual performance or other reasons, including the quality of earnings.

 

The following table provides information about the range of performance levels and the potential payouts for the annual corporate and governance group incentive awards approved by the Committee in March 2009:

 

Annual Corporate and Governance Incentive 2009

 

 

In March 2010, management presented its calculation of 2009 Adjusted EPS and EBITDA/Net Assets, both of which excluded costs related to our information technology initiatives and organizational changes and recoveries in connection with our headquarters consolidation. Based on these adjustments, Adjusted EPS for 2009 was $0.40 and EBITDA/Net Assets for 2009 was 20.4%. Based on the levels achieved, the Committee determined that the 2009 annual incentive award for the corporate and governance group (which applied to all NEOs except Mr. Lardie) would be payable at 85.6% of the target award.

 

Mr. Lardie was a participant in the Famous Footwear division annual incentive for 2009, as he did not become an executive officer until January 2010. For the Famous Footwear division annual incentive, the second metric was division net sales, with the plan goal level for net sales of $1.31 billion. With 2009 results of Adjusted EPS of $0.40 and Famous Footwear net sales of $1.36 billion, the approved payout percentage on the Famous Footwear annual incentive was 86.4% of the target award.

 

Long-Term Compensation.

 

Change in Market Valuation Methodology for Share Awards.  In preparing its recommendations to the Committee for equity award levels, management considered various alternative methodologies for establishing equity award levels given that our stock price decline in early calendar 2009 was believed to be temporary and expected to again rise with market recovery. Management considered that share award levels, if based on the unusually low then-current share price, might result in an excessive upside opportunity to award recipients if the share price recovered to be more in line with share price levels prior to the third quarter of 2008. Also, management was concerned that if it were to recommend equity award levels based on historical calculation methodologies, grant levels would utilize a significant percentage of the shares available in our 2002 incentive plan as well as increase dilution to shareholders compared to prior years’ award levels. After consultation with Hewitt as to alternative valuation practices, management recommended to the Committee that a six-month average stock price be utilized as the market value rather than a current quoted price to determine the size of stock awards, and suggested that this alternate valuation be used for other stock-related determinations. Thus, for purposes of determining compliance by executives for stock ownership guidelines and to determine award levels of all proposed share-based awards, the Committee used a $10.07 per share value (being the rounded six-month average of high and low price over the period of August 11, 2008 to February 10, 2009) rather than the average trading price in March 2009 on the Committee dates of approval (which ranged from $2.92 to $3.33). See section captioned “Change in Market Valuation Methodology for Share Awards” in this CD&A for more information.

 

Process for Calculating Share Award Levels.  In preparing its recommendations regarding share awards, consistent with past practice, management focused first on setting a target current market value for the aggregate long-term compensation for each of the CEO and the President, and then allocated approximately 50% to be issued as service-

vested restricted stock and 50% to be issued as performance shares. The next step was to divide the proposed market value by a discounted per share value to determine the number of restricted and performance shares to be granted to the CEO and President. The share award levels were then set for other senior executives as a percentage of the levels granted to the CEO, with consideration to maintaining internal equity.

 

In developing these recommendations, consistent with past practice, management considered the peer median market values for total long-term compensation for the CEO and President, as there is usually adequate comparative market information for those job levels. However, based on Hewitt’s advice, management recognized that these peer values were unlikely to reflect current practices, especially if share award numbers were then determined based on current per share values. After Hewitt described alternate methodologies being adopted in the marketplace, management considered using an average share value and ultimately determined that it would recommend to the Committee that a six-month average share price be used. See section captioned “Change in Market Valuation Methodology for Share Awards” in this CD&A for more information.

 

Share Award Levels and Long-Term Market Value.  The following table shows how the total long-term compensation amount for 2009 compared to the 2009 peer group medians as well as the Committee’s fiscal 2008 market value estimates, with additional detail on these amounts provided in the “Fiscal 2009 Grant Date Market Analysis” table and notes within this CD&A.

 

Total Long-Term Compensation Opportunity - Fiscal 2009 Compared to Fiscal 2008

 

 

 

 

Long-Term Performance Incentive.  The Committee determined that the long-term incentive would continue to be based on a three-year performance period, and use cumulative Adjusted EPS as the primary metric. As in prior years, a three-year performance period was used so that the NEOs would have overlapping performance awards. In

an effort to further enhance alignment with shareholders, the Committee determined that long-term performance awards would be payable in shares rather than split between shares and cash. In addition, based on the reasons stated in the subsection captioned “Annual Incentive” regarding the corporate and governance annual incentive award, the Committee determined that the second metric should be changed to EBITDA/Net Assets rather than continue the prior years’ practice of measuring Compound Annual Net Sales Growth.

 

In recognition of the difficulty of forecasting long-term in the then-current uncertain environment, and in an attempt to allow these awards to keep their incentive value for the full performance period, the Committee approved a payout range providing a payout opportunity if the Company’s three-year cumulative Adjusted EPS performance is within a range of 70% to 120% of the established goal for Adjusted EPS and also reduced the maximum payout level from 200% to 150% of the target award. Subject to meeting the minimum cumulative Adjusted EPS and depending on EBITDA/Net Assets performance, the payout could be as low as 10% of the target award and as high as 150% of the target award.

 

When these goals were set, the Committee believed they would be difficult and require concentrated and sustained focus by the NEOs to improve earnings and manage the Company’s capital investments, especially in the near-term. The Committee set the performance goal levels for this award after considering, and primarily based upon, the Company’s multi-year business plan. The Committee also identified a minimum level of performance that must be met in order to generate any payout, as well as a performance level that, if achieved, results in the maximum potential payout. We use interpolation to determine the exact payout percentage; as a result, there are multiple combinations of the metrics that could result in payment of 10% (the minimum) or 150% (the maximum) of the target award. The Committee also approved adding clawback provisions as a risk mitigator, providing that the Committee may require that any holder of a long-term incentive award whose malfeasance contributed to a restatement shall return any proceeds from the award. The Committee also retained the right to exercise negative discretion to reduce any award payout based on the quality of the Company’s earnings.

 

The following table provides information about the potential payouts for the long-term incentive awards approved by the Committee in March 2009, with all references to “Adjusted EPS” and “EBITDA” for the long-term incentive being cumulative over the performance period:

 

Long-Term Performance Incentive 2009-2011

 

 

Restricted Stock and Option Awards.  In March 2009, we granted restricted stock awards to our NEOs with service-based cliff-vesting at the end of the fourth year. Prior to vesting, the holder receives dividends and has voting rights. We have limited the use of stock options for our most senior executives because they are less valued in the marketplace than restricted share issuance, and therefore a less efficient use of a limited pool of shares in our shareholder-approved incentive plan. The Committee approved restricted share grants for the NEOs in 2009 in amounts that had a current market value that was approximately equal to 50% of the total long-term compensation opportunity granted. For Mr. Lardie (who was not an executive officer at the time of grant), stock options were also granted as an additional means to foster leadership continuity by a strong alignment with shareholders and provide a variety of longer term incentives. Whereas most stock options granted by the Committee have had a four-year vesting period based on service, the option grant made in March 2009 to Mr. Lardie provided for a nine-year vesting period based on service and a ten-year term. All of our NEOs have outstanding stock options in connection with prior grants (see table of Outstanding Equity Awards at Fiscal Year-End).

Was there a payout on the long-term incentive award for the performance period ending with 2009?

 

The long-term incentive for the performance period of 2007-2009 used cumulative Adjusted EPS as the primary metric and Compound Annual Net Sales Growth as the second metric. The minimum Adjusted EPS for any payout was set at $5.70, with interpolation to be used based on a range of Compound Annual Sales Growth of between 4% and 9%. As the Company’s cumulative Adjusted EPS for the three-year period was less than $5.70, there was no payout on this award.

 

For the 2007-2009 awards, as well as for the 2008-2010 awards, in early 2009, the Committee considered that payment of both of these awards was not probable. In an effort to keep shares available for awards with future incentive potential, the Committee approved amending those awards to provide for payment in cash based on the cash equivalent value of any shares that might otherwise be earned under these awards.

 

What benefit plans does the Company maintain to provide NEOs with post-retirement income replacement?

 

To attract and retain employees, the Company maintains several plans that provide post-employment benefits:

 

Pension Plan.  We offer a broad-based tax-qualified defined benefit pension plan to substantially all employees. Participants who have completed five continuous years of employment with us are vested and earn the right to receive unreduced benefits upon retirement at age 65 or later, and a reduced benefit upon retirement between the ages of 55 and 65. The benefit available increases with service and age.

 

Supplemental Executive Retirement Plan.  All of our NEOs participate in our Supplemental Executive Retirement Program (“SERP”), which is an excess retirement plan so that the participant can receive retirement benefits on the full amount of his or her income, including the portion of income that exceeds the benefit limitations in the Internal Revenue Code for tax-qualified defined benefit pension plans. The five-year vesting requirement supports the retention objective of our program. The SERP has change in control provisions that provide for an enhanced benefit, with payout of the present value of the current accrued benefit within 30 days of a change in control, without regard to vesting restrictions. These provisions are intended to reassure executives that they will receive expected amounts of non-qualified deferred compensation that are payable out of general assets and which may be a substantial portion of the executive’s expected retirement income. We believe that change in control provisions are beneficial because they keep the executive focused, and have particular significance for the SERP because it is an unfunded plan. For SERP participants with less than five years service participation, the single trigger for the change in control provision results in an acceleration of benefits that otherwise would vest only after five years of service; for certain long-term participants who are also eligible for retirement or early retirement, the single trigger change-in-control provision also results in an enhanced retirement benefit.

 

401(k) Savings Plan.  Substantially all of our salaried employees are eligible to participate in the Brown Shoe Company, Inc. 401(k) Plan and we consider this to be a basic benefit. The Company partially matches employee contributions up to 6% of salary; and this matching contribution is not available to the employee until termination or retirement.

 

Deferred Compensation Plan.  The Company offers a non-qualified deferred compensation plan for a select group of employees, and the Committee has authorized deferral of up to 50% of base salary and 100% of annual incentive award compensation. The Company does not match or contribute to this plan, which essentially operates as an unfunded, tax-deferred personal savings account administered by the Company. The Committee approved this plan because it is a benefit readily available in the marketplace.

 

Do we provide severance or change in control benefits to the NEOs?

 

For a limited group of executives, including our NEOs, we utilize executive severance agreements as a means to retain and attract executives in a competitive market for talent. In exchange for the right to receive these benefits following a change in control, the executive agrees to a non-compete agreement for up to two years following any termination of employment. In December 2009, all executive severance agreements were amended to avoid adverse tax consequences under Internal Revenue Code sections 409(a) and 162(m). These executive severance agreements provide that in the event of an involuntary termination by the Company without cause, the NEO will receive payment of the current year’s annual incentive based on satisfaction of plan performance goals, to be paid following

completion of the performance period and pro-rated based on period of service; a cash severance payment of up to two times salary and the target annual incentive award; up to two years’ accelerated vesting for stock options and restricted stock; and medical and outplacement benefits. We believe these benefits constitute fair severance protection to allow for transition to new employment post-termination, as it is expected that executives generally need a significant amount of time to locate comparable positions elsewhere. For Mr. Fromm only, these severance benefits are also payable in the event he terminates his employment within ninety days after “good reason.” This additional basis for severance is available to Mr. Fromm as a result of his integral role as both Chairman and CEO.

 

Our executive severance agreements provide a higher level of severance benefits if the termination occurs within two years after a change in control, with the cash severance payment being up to a three times salary plus the target annual incentive, vesting of all stock options and restricted stock, and SERP benefits become fully vested and up to three years of additional service will be credited in calculating the amount payable. The principal purpose for use of change in control provisions is to eliminate personal conflicts of interest by ensuring that the interests of our executives will be materially consistent with the interests of our shareholders when considering corporate transactions. These arrangements are also intended to encourage retention when a potential change in control or major transaction is presented, so that the executives can guide the Company through completion of the transaction or still serve the Company should the transaction not be completed. The change in control benefits in the NEOs’ executive severance agreements are “double trigger” provisions and only apply if, within the two year period following the change in control, the NEO is terminated without cause or if the executive terminates for “good reason.” The higher level of benefits is available because the likelihood of termination is increased following a change in control. A modified tax reimbursement and gross-up is payable in the event of severance by the Company following a change in control because the terminated executive is subject to excise taxes following such termination which are in addition to regular payroll and income taxes, and the modified reimbursement allows the executive to recognize the full intended economic benefit of the agreement if the excise tax is significant.

 

While we believe that change in control benefits and our executive severance agreements are important to our overall compensation package, the Committee does not consider these arrangements in making annual recommendations on key compensation elements as these benefits are contingent on circumstances beyond the executive’s control.

 

What perquisites do the NEOs receive?

 

Various perquisites are provided to key executives including NEOs. These perquisites are limited in number, participation and scope. The aggregate incremental cost of these perquisites is included in the “All Other Compensation” column of the Summary Compensation Table and detailed in Note 7 to that table. The perquisites used by our NEO’s and which are not otherwise available to all employees include:

 

 

We provide relocation assistance to employees who are required to move to join the Company or are requested to move by the Company. All relocated employees receive assistance under the terms of standard plans administered by a relocation consultant; and these plans include limited increased benefits for higher job levels. In late 2008, Mr. Lardie relocated from Madison, Wisconsin to St. Louis as part of the relocation of our Famous Footwear headquarters and received move-related benefits as well as an incentive payment in 2009 pursuant to a special relocation plan for moving our Madison employees.

 

What market or peer group data was used to determine 2009 compensation?

 

The Total Rewards department has commissioned Hewitt every few years to prepare a market study with peer group information, selective job-by-job comparative market data to a peer group of footwear and retail businesses of similar size and net sales, and with which the Company competes for talent, customers and investors. At the Company’s request, Hewitt prepared a market study dated November 2008 to be used in the consideration of 2009 compensation for the NEOs. This market study included data on 28 comparator companies and was completed in November 2008. A representative of Hewitt attended the Committee’s meeting in December 2008 to present the study and review compensation trends and developments, including new trends and significant changes then being considered by other companies and discussed by compensation professionals.

 

Based on ongoing discussions with Hewitt, our Vice President — Total Rewards determined that over the course of just a few months between November 2008 and March 2009, the economic factors were so significantly changed that the market study results no longer accurately reflected current market practices, and therefore no longer served as a reliable benchmark. Furthermore, such drastic economic changes required a highly customized approach and analysis. Thus, although peer group median data for each compensation element was provided to the Committee in connection with its 2009 compensation-setting process, in discussing 2009 compensation levels, the Committee recognized that the peer data was of limited use as a source of current comparative information. In lieu of peer group data or specific company comparisons, management did rely upon, and conveyed to the Committee, advice from Hewitt as to changing approaches to compensation being utilized in the first few months of 2009, and in particular, alternative valuation methods to determine long-term and equity award values and amounts. The Committee’s determination to use a six month average stock price for valuing long-term awards was based on one of the suggestions made by Hewitt and conveyed to the Committee. See section captioned “Change in Market Valuation Methodology for Share Awards” in this CD&A for more information.

 

We consider our peers to include primarily public companies that are competitors for customers, investors or executive talent. In determining the appropriateness of the peer companies, we considered both business segment (footwear and retail emphasis); and for particular positions within the comparator companies, whether there was an appropriate job position for comparison. The peer group used for the November 2008 study was proposed by management and reviewed by Hewitt. The November 2008 peer group for comparison purposes included 28 similarly sized footwear and retail companies (median sales of $1.9 billion, market value of $578.7 million, total assets of $565.8 million, and 14,300 employees) and was prepared using information from early 2008. The November 2008 peers included:

 

American Eagle Outfitters Inc.*		Gap, Inc.*		Nordstrom Inc.*
Charming Shoppes Inc.*		Genesco Inc.		Phillips-Van Heusen Corp.*
Chicos FAS Inc.*		Jones Apparel Group Inc.		Pier 1 Imports, Inc.
Collective Brands, Inc.*		K-Swiss Inc.*		Retail Ventures Inc.
Dillard’s Inc.		Kohl’s Corporation		Ross Stores Inc.
Dress Barn Inc.		L.L. Bean, Inc.*		Shoe Carnival Inc.
DSW, Inc.*		Limited Brands Inc.*		Skechers USA Inc.*
The Finish Line Inc.		Liz Claiborne Inc.		Stage Stores Inc.*
Foot Locker Inc.		Madden Steven, Ltd.*		Timberland Company
				Wolverine World Wide, Inc.

 

 

 

The above table indicates 14 companies that were added to the November 2008 comparator group (for use in 2009) since the last completed Hewitt study completed in late 2006 for use in 2007. In addition, the following companies were deleted from the 2006 group when the November 2008 study was completed because data was not available or because they no longer fit our size parameters: Casual Male Retail, Goody’s Family Clothing, J.C. Penney, Nike and Russell Corporation.

 

Do we have stock ownership requirements for our NEOs?

 

The Committee implemented stock ownership guidelines for certain executives, including our NEOs, consisting of a salary multiple and an ownership ratio, both of which vary by position. Within a five-year period from adoption of the guidelines or commencement of employment, or within three years after an executive subject to these guidelines is promoted with a resulting change of guideline level, the executive is expected to own Company shares having a market value at least equal to the multiple of salary specified in the following table:

 

 

The market value of the executive’s ownership is calculated based on current holdings, unvested restricted stock and stock held indirectly in our 401(k) Plan. Mr. Hood, who started in October 2006, is not yet subject to the minimum ownership guidelines, and Mr. Lardie will not be subject to the minimum ownership guidelines for his current position until January 2013. Based on a 30-day average stock price of $12.25 (also used to determine 2010 equity award levels and described in Note 2 to the “Fiscal 2010 Grant Date Market Analysis” in this CD&A), each of the NEOs subject to the minimum ownership guidelines is in compliance with the guidelines.

 

What is the Committee’s practice for making equity grants?

 

The Committee grants equity awards primarily as part of its annual compensation review process, with both equity awards and other compensation elements approved at its March meetings. In addition, we may issue equity awards when an executive is newly hired, promoted or elevated to a higher scope of responsibility, with such grants generally made at the first scheduled Committee meeting following the hire or change date. Although our incentive stock plan specifies that our CEO is authorized to grant individual equity awards up to 50,000 shares in any given year, since 2006, he has chosen not to rely on that authorization and instead has presented all recommended awards to the Committee, including new hires and promotions. When the Committee grants equity awards, the grant date is the date when the Committee approves the award, unless the Committee specifies that a particular award shall be granted at a future date (such as when a new employee commences employment), in which case the grant date is deemed to be the date when the future condition is met. The exercise price for stock options is the fair market value of our stock (average of high and low prices) on the grant date. We generally schedule Committee meetings at least a year in advance, and therefore have not scheduled meetings for our equity grants based on possession of material non-public information. However, because we have for many years scheduled our March board and Committee meetings to be held at approximately the same time as we release our year-end earnings, our annual equity grants have necessarily been granted in close proximity to the release of financial results and earnings guidance. Neither the board nor the Committee has adopted a written policy on this matter. Our incentive plan prohibits repricing of stock options.

 

What are the compensation levels for Fiscal 2010?

 

The following table indicates the target compensation levels for the NEOs who will be continuing in their positions for 2010 and certain additional comparative information between 2009 and 2010. The compensation amounts shown in these tables represent a market analysis as of the date of grant, with long-term elements discounted to determine a current market value. The 2010 market analysis values performance shares and restricted stock granted based on a 30-day average price per share of $12.25 before discounting. The 30-day average share price was

calculated over the period from January 14, 2010 to February 15, 2010. On the date of the Committee’s approval of awards, March 4, 2010, the average of the high and low prices for our stock was $13.99. The compensation amounts in this table reflect that fixed compensation (base salary) as a percent of total market value ranges from a low of 28.0% to a high of 40.1%; that performance-based compensation (annual plus long-term incentives) as a percent of total market value ranges from a low of 60% to a high of 72%; and that aggregate long-term compensation as a percent of Total Market Value from a low of 32.3% to a high of 46.7%.

 

Fiscal 2010 Grant Date Market Analysis

 

 

 

 

What is the Committee’s policy on deductibility of compensation?

 

The Committee’s policy is to establish and maintain a compensation program that maximizes the creation of long-term shareholder value. The Committee believes executive compensation programs should serve to achieve that objective, while also minimizing any effect of Section 162(m) of the Internal Revenue Code. Generally, Section 162(m) provides for an annual $1,000,000 limitation on the deduction an employer may claim for compensation of

executive officers unless it is performance-based. Both the annual incentive plan and the long-term incentive plan awards are designed to use performance measures identified in our 2002 incentive plan, which has been approved by shareholders. In connection with the Committee’s approval of the incentive awards granted in 2009, the Committee selected metrics identified in the 2002 incentive plan approved by our shareholders so that the issuance of shares or cash pursuant to those plans would come within the Section 162(m) exception for performance-based compensation; and also reserved its right to exercise negative discretion and reduce awards based on individual performance and quality of earnings as allowed by the Section 162(m) exemption. To remain in compliance with the exception for performance-based compensation, all outstanding executive severance agreements with our NEOs were amended in 2009 to provide that following an involuntary or good reason termination, other than in connection with a change in control, any payout of the annual incentive award for the year of termination would be payable based on the degree of achievement and delayed until the Committee determines whether the award has been earned and is payable. For 2009, Mr. Fromm’s non-performance-based compensation exceeded the annual $1,000,000 limitation under Section 162(m) by less than $2,400 so that we were not able to deduct that excess amount for tax purposes. The Committee considers it important to retain flexibility to design compensation programs that are in the best interest of the Company and the shareholders.

 

Report of the Compensation Committee

 

The Compensation Committee of the Company has reviewed and discussed the CD&A required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the board that the CD&A be included in this proxy statement and the Company’s Annual Report on Form 10-K.

 

Compensation Committee

W. Patrick McGinnis, Chair

Julie C. Esrey

Patricia G. McGinnis

Michael F. Neidorff

Harold B. Wright

 

The following summary compensation table shows the compensation paid for 2009 to Mr. Fromm, Mr. Hood, the other three most highly-compensated executive officers who were serving as executive officers as of January 30, 2010, and one additional officer (Mr. Wood), for whom disclosures would be required but for the fact that he was not serving as an executive officer as of January 30, 2010 (our “Named Executives” or “NEOs”). Additional information for 2007 and 2008 is provided for individuals who were named executives for those years. The Company has entered into an executive severance agreement with each NEO, which provides for payments upon certain termination events and includes a non-compete covenant by the NEO. These agreements and the potential payments thereunder are described in the section entitled “Estimate of Payments Upon Termination and Change in Control.”