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 15, 2011

 

To Brown Shoe Shareholders:

 

 

You are cordially invited to attend the 2011 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 26, 2011, at 11:00 a.m., Central Daylight Time.

 

We are using the Internet to provide our 2011 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 15, 2011, we are commencing mailing to our shareholders a notice containing instructions on how to access our Proxy Statement and 2010 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 2010 Annual Report to Shareholders, which provides detailed information relating to our activities and operating performance, is available on the Internet 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

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

 

Matters to be voted on:

 

1. Election of three directors,

 

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

 

3. Approval of the Incentive and Stock Compensation Plan of 2011,

 

4. Advisory vote regarding executive compensation,

 

5. Advisory vote regarding the frequency of future advisory votes regarding executive compensation, and

 

6. 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,

 

 

4. In person at the Annual Meeting of Shareholders.

 

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 brokers and other nominees do not 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 15, 2011

 

TABLE OF CONTENTS

 

PROXY STATEMENT — 2011 ANNUAL MEETING OF SHAREHOLDERS

 

 

PROXY STATEMENT
FOR THE BROWN SHOE COMPANY, INC.
2011 ANNUAL MEETING OF SHAREHOLDERS

 

Why have these proxy materials been made available?

 

Your board of directors is soliciting proxies to be voted at the 2011 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, 2011. There were 44,344,037 shares of our common stock issued and outstanding on March 31, 2011.

 

On April 15, 2011, we are commencing 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 26, 2011 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 five proposals to be voted on by shareholders at the annual meeting:

 

 

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 15, 2011, we are commencing mailing to our shareholders a notice containing instructions on how to access our proxy statement and 2010 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.

 

Under Rule 452 of the New York Stock Exchange (“NYSE”) listing standards, which relate to the discretionary voting of proxies by brokers, brokers are not permitted to vote shares with respect to the election of directors and other non-routine matters 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 and other non-routine matters.

 

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.

 

 

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, “FOR” the ratification of Ernst & Young LLP as the Company’s independent public accountants, “FOR” approval of the Incentive and Stock Compensation Plan of 2011, “FOR” approval of the advisory resolution regarding executive compensation and “FOR” future advisory votes regarding executive compensation to be held on an annual basis. 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, 2011, 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, 2011, 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 2010 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 other non-routine 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 other proposals absent voting instructions. If a broker indicates on

the proxy that it does not have discretionary authority as to certain shares to vote on a particular matter, those shares will not be considered as present and entitled to vote with respect to that matter.

 

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” and broker non-votes with respect to Proposals 2, 4, and 5, 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 any effect on such vote. With respect to Proposal 3, broker non-votes will be counted as “entitled to vote” pursuant to the rules of the NYSE. As a result, shares that are represented by proxies marked “abstain” and broker non-votes will have the same effect as a vote “against” Proposal 3, unless holders of more than 50% of all shares entitled to vote on Proposal 3 cast votes, in which event a broker non-vote will not have any effect on the result of the 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. We have retained Georgeson Inc. to serve as our proxy solicitor and the fees for such assistance will be approximately $7,500, plus expenses.

 

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 Current Report on Form 8-K, which we will file with the SEC on or before June 1, 2011. 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: 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. Following retirement of two independent directors after our 2011 Annual Meeting of Shareholders (and assuming the election of all directors nominated), nine of our eleven board members will 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 (and nine of eleven following the annual meeting), we are in (and will continue to be 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. Only independent directors serve on our Audit, Compensation, and Governance and Nominating Committees.

 

The 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). Following our 2011 Annual Meeting of Shareholders, we will no longer have a lead director, as Mr. Fromm is relinquishing his position as our Chief Executive Officer effective immediately following the annual meeting. The independent members of the board will continue to meet regularly without any members of management present, with the chair of the Governance and Nominating Committee presiding at such sessions.

 

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 board of directors should retain the flexibility to appoint the appropriate person to the position of Chairman of the Board, whether that person be our Chief Executive Officer or not. Following our 2011 Annual Meeting of Shareholders, Mr. Fromm will continue to serve as the Chairman of the Board of Directors, but Diane M. Sullivan will assume the position of our Chief Executive Officer and President.

 

Since March 2010 Joseph L. Bower has served as the board’s lead director, having the authority to: preside at executive sessions of the board and at other board meetings when the Chairman is not present, call meetings of the independent directors, serve as liaison on board-wide issues between the independent directors and the Chairman, and retain advisors and counsel to report to the board. Because the roles of Chairman of the Board and Chief Executive Officer will be separate following our 2011 Annual Meeting of Shareholders, the board will no longer have a lead director. The chair of the Governance and Nominating Committee will continue to lead sessions of the board when no members of management are present and has the authority to call meetings of the independent directors.

 

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 (with advice from its compensation advisor) reviews executive compensation programs, which tend to be more likely to pose a higher risk level than broad-based programs; and in March 2011, 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, meeting 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.

 

Following the 2011 Annual Meeting of Shareholders, there will be two vacancies on the board and the board is expected to amend the bylaws to reduce the number of directors to eleven so that no vacancies will exist. The board will continue to work with the Governance and Nominating Committee to identify suitable candidates should the board determine to fill one or both vacancies or increase the size of the board in the future.

 

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

 

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 2012 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 2010 (“2010”). 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. Other than Messrs. Baeza and Neidorff, all of our directors attended the 2010 annual meeting.

 

 

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” below.

 

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 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.

 

Beginning in 2010, the Committee retained Meridian Compensation Partners LLC (“Meridian”) as its compensation consultant for executive compensation so that it will be able to benefit from Meridian’s independent advice. Meridian assists the Committee in the compensation review and decision-making process and the review of plans and programs for executives. Also, Meridian advises the Committee on market trends, provides comparative market data and, if requested, provides compensation recommendations. Meridian was formed in early 2010 following a decision by Hewitt Associates LLC (“Hewitt”) to spin-off a significant portion of its executive compensation consulting practice. During 2010, 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 2010 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 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 2010, the Governance and Nominating Committee was provided with comparative peer group data in May 2010 by Meridian (discussed in the section entitled “Compensation of Non-Employee Directors — Fiscal 2010 Director Compensation”), and a representative of Meridian attended the committee meeting in which such compensation was discussed.

 

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 2010, 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 2010.

 

The members of the Compensation Committee for 2010 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 fiscal 2010, commencing with the 2010 annual meeting on May 27, 2010, 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 our shareholders. During the portion of 2010 prior to last year’s annual meeting, the director compensation approved in May 2009 was in effect. In setting compensation levels for non-employee directors elected in 2010, the Governance and Nominating Committee was provided with median level data for a peer group of 20 companies (similar to the peer group used for executive compensation comparisons). In consultation with Meridian, the committee analyzed the peer group data and determined that it was appropriate to set the Company’s director compensation at a level below the median for the peer group, reflecting the smaller size of the Company as compared to other members of such group.

 

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 2010 was paid in the form of 1,514 shares of restricted stock issued on May 27, 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 2010. During 2010, 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. The number of restricted shares or RSUs is based on the current fair market value (average of high and low prices) on the date of grant (i.e., $16.63 on May 27, 2010). 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 then-current market value of the Company’s stock. 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.

 

Our non-employee directors are 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.

 

The board has adopted stock ownership guidelines for non-employee directors, the purpose of which 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 three 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 who were required to do so met the guidelines as of the end of 2010.

 

 

The following table shows the amount of our common stock beneficially owned as of March 31, 2011, 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, 2011 (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, 2011 (60 days after March 31, 2011). 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. As such, both Joseph L. Bower and Julie C. Esrey are retiring from the board immediately following the 2011 Annual Meeting of Shareholders.

 

Your board has nominated for election as directors at the annual meeting three individuals, Ronald A. Fromm, Steven W. Korn and Patricia G. McGinnis, each for a three-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.

 

 

 

 

We thank Dr. Bower and Ms. Esrey for their years of dedicated service to the board, our company and our shareholders.

 

 

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 28, 2012. 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 2010 and 2009, Ernst & Young LLP were our independent registered public accountants and charged fees for services rendered to us as follows:

 

 

 

 

In 2010, 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 auditors and independent registered public accountants the overall scopes and plans for their respective audits. The committee met, at least quarterly, with the internal auditors 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 29, 2011 for filing with the SEC. The committee has retained Ernst & Young LLP as the Company’s independent registered public accountants for 2011.

 

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

 

Background

 

On March 3, 2011, the compensation committee of our board of directors (the “Committee”) adopted the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan of 2011 (the “2011 Plan”), and on March 3, 2011 our board of directors directed that the 2011 Plan be submitted for shareholder approval, which we are now seeking. The 2011 Plan is similar in purpose and design to our Incentive and Stock Compensation Plan of 2002, as amended (the “2002 Plan”), which was most recently approved by our shareholders at our 2008 annual meeting.

 

As of April 15, 2011, the 2002 Plan and the Brown Shoe Company, Inc. Non-Employee Director Share Plan (2009) (the “Director Plan”) are the only benefit plans that the Company currently uses to grant stock options, restricted stock, performance shares, performance units, stock appreciation rights, other share-based awards and cash-based awards to directors and employees. The Director Plan allows a non-employee director to receive retainer and meeting fees in shares of common stock in lieu of cash. Only 30,000 shares were authorized under the Director Plan and 8,997 remain available for issuance thereunder as of March 31, 2011. Upon approval of the 2011 Plan, no additional awards would be issued under the Director Plan after December 31, 2011.

 

Effective May 22, 2008, the Company’s shareholders approved a 1,800,000 share increase in the number of shares available under the 2002 Plan, providing a total of 2,049,555 shares available for issuance at that time. Additionally, 3,817,799 shares were returned to the 2002 Plan from forfeitures, cancellations and lapses in grants. As of March 31, 2011:

 

 

Thus, as of March 31, 2011, there were 749,572 shares remaining available for grant under the 2002 Plan. In accordance with the terms of the 2002 Plan, such shares must be granted on or before May 22, 2012. Upon approval of the 2011 Plan, no additional awards would be issued under the 2002 Plan.

 

Given the limited number of shares available for issuance under the 2002 Plan and the fact that no such shares can be issued after May 22, 2012, the Company is requesting approval of the 2011 Plan.

 

We use incentive awards to attract, motivate and retain leadership talent as well as to align our executives’ interests with those of our shareholders, as described more fully in the Compensation Discussion and Analysis. The board of directors and the Committee approved the proposed 2011 Plan on the belief that the shares authorized by the 2011 Plan will allow the Company to award the equity incentives important to our compensation program for the foreseeable future, while resulting in a reasonable amount of potential equity dilution.

 

Description of the 2011 Plan

 

The principal features of the 2011 Plan are described below. This description is subject to and qualified in its entirety by the full text of the 2011 Plan attached as Exhibit A to this proxy statement.

 

Purpose.  The objectives of the 2011 Plan are to:

 

 

The 2011 Plan is further intended to provide us with flexibility in our ability to motivate, attract, and retain the services of participants who make significant contributions to our success and to allow participants to share in our success.

 

Administration.  The 2011 Plan is administered by the board of directors, and the board has delegated administration of the 2011 Plan to the Committee, in part in order to meet the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). (When used in this description of the 2011 Plan, “board of directors” or “board” includes the Committee when acting pursuant to the board’s delegation of authority.) Also, the Chief Executive Officer has been delegated the authority to make grants of awards representing no more than 50,000 shares per year to non-executive officer employees.

 

Your board of directors has full power to:

 

 

Eligibility.  All employees and directors of the Company and its subsidiaries and affiliates are eligible to participate in the 2011 Plan. There are currently approximately 16,500 employees and directors eligible to participate in the 2011 Plan. The ability of such employees and directors to participate in the 2011 Plan is subject to the approval of the board of directors.

 

Limits on Awards.  The 2011 Plan limits the grants of awards to a single participant in any fiscal year as follows:

 

 

No awards may be made under the 2011 Plan after May 26, 2021.

 

Shares Available under the 2011 Plan.  As of April 15, 2011, the 2002 Plan and the Director Plan were our only plans with shares available for future award grants. Upon approval of the 2011 Plan, no additional awards would be issued under the 2002 Plan and no additional awards would be issued under the Director Plan after December 31, 2011. Under the 2011 Plan, we have the ability to grant awards for up to the number of shares equal to the sum of:

 

 

Shares subject to an award shall only be counted as used to the extent they are actually issued. Upon issuance, such issued shares shall reduce the number of shares available under the 2011 Plan. Shares subject to an outstanding stock-based award that are cancelled, terminate, expires or lapse shall be added back to, and again become available under the 2011 Plan. If any award expires, is forfeited or lapses prior to any shares being issued pursuant to that award, there is no effect on shares available. Also, if any award is exercised, settled or paid with less than the full number of shares initially subject to the award’s terms, or is settled in cash in lieu of shares, the number of shares available under the 2011 Plan shall be reduced only if, and to the extent, shares are actually issued. In addition, if the exercise price of any stock option granted under the 2011 Plan or the tax withholding requirements with respect to any award granted under the 2011 Plan are satisfied by tendering shares of common stock to the Company, or if a stock appreciation right is exercised, or there is a cashless exercise of a option, only the number of shares issued, net of any shares tendered will reduce the number of shares available under the 2011 Plan.

 

In the event of any change in corporate capitalization, such as a stock split, or a corporate transaction such as any merger, consolidation, separation, including a spin-off, or other distribution of our stock or property, any reorganization or any partial or complete liquidation, an adjustment may be made to prevent dilution or enlargement of participants’ rights.

 

Stock Options and Stock Appreciation Rights.  Under the 2011 Plan, a stock option is granted under an award agreement specifying the price, the duration of the stock option, the number of shares of common stock to which the stock option pertains and whether the stock option is an incentive stock option or a nonqualified stock option. Incentive stock option awards under the terms of the 2011 Plan are those that qualify for special tax treatment under Code Section 422 to the extent such treatment is available, while the nonqualified stock options do not qualify for such special tax treatment. Directors may not be granted incentive stock options but employees may be granted either type of option under the 2011 Plan. The stock option price upon the exercise of any stock option is paid:

 

 

The board may permit a participant to elect to pay all or part of the exercise price of the option by having the Company withhold from the shares of common stock which would otherwise be issued upon exercise of the option a number of shares of common stock having a fair market value equal to the amount of the exercise price. The price of a stock option granted to a participant under the 2011 Plan will be at least 100% of the fair market value of a share of common stock on the date the stock option is granted.

 

A stock appreciation right is granted under the 2011 Plan pursuant to an award agreement specifying the duration of the stock appreciation right and the number of shares of common stock to which the stock appreciation right pertains. The value of a stock appreciation right with respect to a share of common stock as of any given date will be equal to the excess of the fair market value of a share of common stock on such date over an amount equal to at least 100% of the fair market value of a share of common stock on the date the stock appreciation right is granted. A stock appreciation right is payable as specified in the award agreement, and therefore can be in cash or in shares of common stock.

 

The term of a stock option or stock appreciation right is determined by the board at the time that it is granted. Neither stock options nor stock appreciation rights will be allowed to be exercisable later than the tenth anniversary

date of their grant. Stock options and stock appreciation rights can be exercised subject to the restrictions and conditions placed upon them by the board, and they need not be the same for each grant or for each participant.

 

Each participant’s stock option or stock appreciation right award agreement will set forth the extent to which the participant can exercise the stock option or stock appreciation right following the termination of the participant’s employment or directorship with the Company. Such provisions will be determined in the sole discretion of the board, will be included in the award agreement entered into with each participant, and need not be uniform among all stock options and stock appreciation rights issued.

 

Unless otherwise determined by the board and set forth in a participant’s award agreement, no stock options or stock appreciation rights may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and both stock options and stock appreciation rights granted to a participant will be exercisable during the participant’s lifetime only by such participant.

 

Performance Units, Performance Shares, and Cash-Based Awards.  The board sets performance goals that determine the number and/or value of performance units/shares and cash-based awards that may be paid out to a participant. Each cash-based award (including the cash-component of a performance unit) has a value as may be determined by the board. The determination of the board with respect to the form of payout of such awards will be set forth in the award agreement pertaining to the grant of the award. The time period during which the performance goals must be met is called the “performance period.”

 

Performance measures authorized by the 2011 Plan include:

 

 

Attainment of such measures may be on an absolute or relative basis. Performance measures may vary from performance period to performance period and from participant to participant and may be established on a stand-alone basis, in tandem or in the alternative. The board will have the discretion to adjust the amount payable on a corporation-wide or divisional basis or to reflect individual performance and/or unanticipated factors; however, awards that are designed to meet the performance-based criteria of Code Section 162(m) may not be adjusted upward. Shareholder approval of the 2011 Plan will be deemed to include approval of the various performance award measures identified in the prior paragraph.

 

If applicable tax and/or securities laws change to permit board discretion to alter the governing performance measures without obtaining shareholder approval of such changes, then the board, in its sole discretion, may make such changes without obtaining shareholder approval. In addition, if the board determines that it is advisable to grant awards that will not meet the performance-based criteria, then the board may make such grants without satisfying the requirements of Code Section 162(m).

The board may pay performance shares, the cash and/or share components of performance units; and cash-based awards in cash or shares of common stock (or any combination thereof) that have an aggregate fair market value equal to the value of the awards earned at the close of the performance period, as specified in the award agreement.

 

At the discretion of the board, participants may be entitled to receive any dividends declared with respect to shares of common stock which have been earned in connection with grants of performance units and/or performance shares, but not yet distributed to participants (such dividends shall be subject to the same accrual, forfeiture, and payout restrictions that apply to dividends earned with respect to stock-based awards). In addition, participants may, at the discretion of the board, be entitled to exercise their voting rights with respect to such shares.

 

Unless determined otherwise by the board and set forth in the participant’s award agreement, in the event the employment or directorship of a participant is terminated by reason of death, disability, early retirement or retirement during a performance period, the participant will receive a payout of the performance units/shares or cash-based awards that is prorated. For purposes of this provision, “retirement” and “early retirement” are determined by reference to our pension plan, and as a result, “early retirement” requires committee approval.

 

Payment of earned performance units or performance shares or cash-based awards will be made at a time specified by the board in its sole discretion and set forth in the participant’s award agreement.

 

In the event that a participant’s employment or directorship terminates for any reason other than those reasons set forth above during a performance period, all performance units/shares and cash-based awards are forfeited by the participant unless determined otherwise by the board or as set forth in the participant’s award agreement.

 

Except as otherwise provided in a participant’s award agreement, performance units/shares and cash-based awards may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution; during the participant’s lifetime, the participant’s rights under the 2011 Plan may be asserted only by the participant or the participant’s legal representative.

 

Subject to the approved criteria for establishing performance measures, future performance awards may be different than those previously issued.

 

Stock-Based Awards.  Each grant of a stock-based award will be stated in an award agreement that will specify the period(s) of restriction (if applicable), the number of shares of stock granted, and such other provisions as deemed necessary by the board. Such awards may include restricted stock, restricted stock units, and unrestricted stock grants.

 

Shares related to stock-based awards may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable period of restriction (if any) established by the board and specified in the stock-based award agreement. All rights with respect to the stock related to stock-based awards granted to a participant under the 2011 Plan are available only to the participant during his or her lifetime.

 

We are not required to issue a certificate for stock related to stock-based awards or provide unrestricted book entry title for shares related to stock-based awards until all conditions and/or restrictions applicable to the shares have been satisfied. Shares related to stock-based awards covered by a restricted stock grant made under the 2011 Plan become freely transferable by the participant after the last day of the applicable period of restriction. If provided in the award agreement, participants holding stock related to stock- based awards may be granted the right to exercise full voting rights and also may be credited with regular cash dividends paid with respect to the underlying shares while they are so held.

 

The award agreement for stock-based awards may set forth the extent to which the participant will have the right to receive unvested restricted shares following termination of the participant’s employment or directorship with the Company. Such provisions will be determined in the sole discretion of the board and included in the applicable award agreement entered into with each participant. Additionally, these provisions need not be uniform among all stock-based awards issued pursuant to the 2011 Plan.

Change in Control.  A “change in control” occurs when:

 

 

Provided that, in no event shall a “change in control” be deemed to have occurred, with respect to a participant, if the participant is part of a purchasing group that consummates the change in control transaction. A participant shall be deemed “part of a purchasing group” for purposes of the preceding sentence if the participant is an equity participant in the purchasing corporation or group (except for: passive ownership of less than three percent of the stock of the purchasing corporation; or ownership of equity in the purchasing corporation or group which is otherwise not significant, as determined prior to the change in control by a majority of the non-employee continuing directors).

 

Upon the occurrence of a change in control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges:

 

 

The vesting of all awards denominated in shares shall be accelerated as of the effective date of the change in control, and there shall be paid out to participants within 30 days following the effective date of the change in control a pro-rata number of shares based upon an assumed achievement of all relevant targeted performance goals and upon the length of time within the performance period that has elapsed prior to the change in control. Awards denominated in cash shall be paid pro rata to participants in cash within 30 days following the effective date of the change in control, with the proration determined as a function of the length of time within the performance period which has elapsed prior to the change in control, and based on an assumed achievement of all relevant targeted performance goals.

 

The above provisions cannot be terminated, amended, or modified on or after the date of a change in control to affect adversely any award previously granted under the 2011 Plan without the prior written consent of the participant with respect to the participant’s outstanding awards. However, the board may terminate, amend or modify the above provisions at any time prior to the date of a change in control.

Repricing Prohibited.  No outstanding options or stock appreciation rights may be repriced, replaced or regranted through cancellation in the event of a decline in stock price without the approval of the Company’s shareholders. The prohibition includes, among other prohibitions:

 

 

Amendment, Modification, and Termination.  Subject to the terms of the 2011 Plan, the board may at any time, alter, amend, suspend or terminate the 2011 Plan in whole or in part. In addition, the board may make adjustments in the terms and conditions of, and the criteria included in, awards in recognition of unusual or nonrecurring events affecting us or our financial statements or of changes in applicable laws, regulations, or accounting principles, whenever the board determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2011 Plan; provided that, unless the board determines otherwise, at the time such adjustment is considered, no such adjustment will be authorized to the extent that such authority would be inconsistent with the 2011 Plan’s meeting the requirements of Code Section 162(m), as from time to time amended or the requirements of any state law.

 

Without the written consent of the participant holding an award, no termination, amendment, or modification of the 2011 Plan shall adversely affect in any material way any award previously granted under the 2011 Plan. However, to the extent the 2011 Plan or an award granted thereunder is subject to Code Section 409A, any termination of the 2011 Plan or such award which results in the distribution or acceleration of vested accrued benefits may be made by the board, without consent from affected participants, in accordance with regulations promulgated under Code Section 409A. At all times when Code Section 162(m) is applicable, all awards granted under the 2011 Plan shall comply with the requirements of Code Section 162(m) unless the board determines that such compliance is not desired. In addition, in the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any award or awards available under the 2011 Plan, the board may make any adjustments it deems appropriate.

 

Withholding.  We shall have the power and the right to deduct or withhold, or require a participant to remit to us, an amount sufficient to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of the 2011 Plan. With respect to withholding required upon the exercise of stock options, upon the lapse of restrictions on restricted stock, or upon any other taxable event arising as a result of awards granted pursuant to the 2011 Plan, participants may elect, subject to the approval of the board, to satisfy the withholding requirement, in whole or in part, by having us withhold shares having a fair market value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All such elections shall be irrevocable, made in writing, signed by the participant, and shall be subject to any restrictions or limitations that the board, in its sole discretion, deems appropriate.

 

Federal Income Tax Consequences

 

Under the Code, as presently in effect, a participant will not be deemed to recognize any income for federal income tax purposes at the time any award is made, nor will we be entitled to a tax deduction at that time. However, when any part of a stock option or stock appreciation right is exercised, when restrictions on restricted stock lapse, or when payments are made under a performance share, performance unit, or cash-based award, the federal income tax consequences may be summarized as follows:

 

 

 

The foregoing is only a summary of the federal income tax consequences of participation in the 2011 Plan. Each participant is advised to consult his or her own tax adviser for the income tax effects attributable to his or her own participation in the 2011 Plan.

Issuances under the 2011 Plan

 

The board of directors has discretionary authority to approve awards under the 2011 Plan. For this reason, the benefits that will be received by or allocated to any person or group of persons under the 2011 Plan in future periods is not presently determinable. No awards have been approved by the board to be granted under the 2011 Plan subject to stockholder approval at our 2011 annual meeting.

 

Equity Compensation Plan Information

 

The following table sets forth aggregate information regarding the company’s equity compensation plans as of January 29, 2011, our fiscal 2010 year-end, and as of March 31, 2011, the record date for our annual meeting (with the closing share price on that date being $12.22). This table does not reflect the additional shares proposed to be added pursuant to the adoption of the 2011 Plan.

 

 

 

 

(i) 1,835,142 outstanding options; and

 

 

but excludes: (a) 1,502,244 shares restricted stock that are included in our issued and outstanding shares, but are subject to forfeiture; and (b) restricted stock units granted to independent directors and independent directors’ deferred compensation units, which are payable only in cash.

 

 

(i) 1,836,881 outstanding options;

 

 

but excludes: (a) 1,824,960 shares restricted stock that are included in our issued and outstanding shares, but are subject to forfeiture; and (b) restricted stock units granted to independent directors and independent directors’ deferred compensation units, which are payable only in cash.

 

 

We believe that the approval of the amended plan is important to our continued success. Our employees are a valuable asset. Awards such as those provided under the 2011 Plan constitute an important incentive for key employees and help us to attract, retain and motivate people whose skill and performance are critical to our success.

 

 

This Compensation Disclosure and Analysis (“CD&A”) describes the material elements of the compensation programs offered to our Named Executive Officers (“NEOs”) who are identified below:

 

 

Executive Summary

 

As the Compensation Committee (which is referred to as the “Committee”) conducted its fiscal 2010 (“2010”) executive compensation review in March 2010, it believed 2010 was an appropriate time for the beginning of a return to a “new normal” of compensation practices and levels of compensation as compared to the Company’s executive compensation policies for the previous two fiscal years. The Committee approved the following actions in 2010:

 

 

Fiscal 2010 turned out to be a strong financial year for the Company with consolidated net sales increasing 11.7% and earnings per share increasing by approximately four times. Robust performance across our retail businesses was broad-based across categories and geographies. Our Famous Footwear segment in particular saw a 10.5% increase in same-store sales, and operating profit improvement of $45.8 million, or 102.7%, versus 2009.

 

Approximately 98% of our management earned payouts from our annual incentive plan based on 2010 fiscal year results. These payouts were dependent upon Company performance (and division performance), as well as achievement of personal objectives, and such payouts ranged from 0% to 164% of target level. The Company did not achieve the minimum threshold for payment to management pursuant to either our 2007 — 2009 or 2008 — 2010 long term incentive plans, marking the third year in a row the LTIP financial objectives were not met. The Company continues to set challenging performance goals for its executives.

 

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. 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?

 

Effective at the beginning of 2010, the Committee engaged Meridian Compensation Partners, LLC (“Meridian”) to serve as the Committee’s independent compensation consultant. Meridian was established in early 2010 as a result of a spin-off by Hewitt Associates (“Hewitt”). Thus, with respect to 2010 compensation, the Committee received advice from both Meridian and Hewitt. A representative of Meridian attended five of the Committee’s six meetings. Among other matters, Meridian advised the Committee regarding:

 

 

What is the role of management in determining compensation?

 

For 2010, Ronald A. Fromm, our Chairman and Chief Executive Officer (“CEO”), assisted 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 2010, the Committee discussed these recommendations with the CEO and also met in executive session. The Committee accepted management’s recommendations, with a slight variation in the payout of 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 the CEO’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.

 

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 appropriate 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 its compensation consultant 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 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 both the metrics selected and plan goal levels as significant measures of executive efforts in managing the Company consistent with its business strategy and operating plans, and in the best interests of shareholders.

How did the Committee set the NEOs’ compensation for 2010?

 

2010 Total Compensation Opportunity.  To develop compensation packages for the NEOs for 2010, the Committee considered current and long-term compensation, and used a market-value approach to review those elements that it reviews annually, including base salary, targeted annual cash incentive, long-term incentive, and equity awards. The Committee determined a total market value for the long-term elements for the CEO and the President after considering peer group median data, and then granted restricted stock for approximately half of the total long-term value and granted performance awards for the remaining amount of the award. Additionally, Ms. Sullivan received a stock option grant that was meant to emphasize the Company’s interest in retaining her as a key leader in the organization. The Committee then determined grant levels for the other NEOs equal to approximately one-fourth of the CEO’s grant level.

 

Due to the dramatic decline in the Company’s share price in early 2009, in 2009 the Committee based the amount of equity awards granted on a six-month average share price rather than a current share price at the time of grant. For 2010, the Committee reverted back to the more traditional methodology (as reflected in the Committee’s practice prior to 2009) and based the value of equity awards granted on a one-month average share price. Also, while the Committee was provided with peer group median data prepared in late 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. As the 2010 economic situation evolved, research conducted by Hewitt established that the executive pay climate was also experiencing a change and beginning to return to a “new normal.” As a result of these findings, the Company determined to provide an average merit increase of 2.5% to our executives and our employees in North America. Additionally, the Committee approved an increase in Annual Incentive Plan payout “targets,” with such targets increasing to pre-2009 levels.

 

While neither management’s recommendations nor the Committee’s determinations are based on a specified pay mix allocation, the final pay mix approved for an individual executive and for the group can be evaluated for consistency with our objectives. To the extent the Committee considered peer group data when setting 2010 compensation, the Committee reviewed the data available for comparable positions at such peer companies for each of the NEOs.

 

Fiscal 2010 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 2010 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. The current market value for long-term performance and equity awards reflects an appropriate discount from the potential value of such elements. The general principle behind the valuation method used was to arrive at a figure that corresponds as closely as possible to the economic annualized value of the award on the date of the grant. Additional information on the elements of long-term compensation is included in the table entitled “Total Long-Term Compensation Opportunity — Fiscal 2010 Compared to Fiscal 2009” in this CD&A.

Fiscal 2010 Grant Date Market Analysis

 

 

 

 

Compensation Mix 2010.  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 an increasing percentage of compensation that 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.  In December 2009, the Compensation Committee determined that the NEOs and other executive officers of the Company would receive average merit increase of 2.5% for 2010. This increase was consistent with base salary increases throughout the Company.

 

Annual Incentive.  For 2010, the Committee made no change to the target annual incentive award (stated as a percentage of base salary) for any of the NEOs. The target annual incentive award is the percent of salary that could be earned if 2010 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 23.3% below to 18% above the peer median percentage of salary. As to the comparability of the 2010 target cash payout for our NEOs based on the annual incentive percentages awarded, the market values shown in the Fiscal 2010 Grant Date Market Analysis above were within a range of 1.1% below to 28.7% 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 2010 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. The Committee continues to use Adjusted EPS as the primary metric because it is the performance measure most closely followed by shareholders and is 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 is either net sales for the divisional plans or a capital efficiency metric for the corporate and governance plan

(applicable to 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.

 

Our annual incentive awards are earned based on the achievement of challenging business performance goals. The 2010 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. Additionally, the Committee again included 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 2010:

 

Annual Corporate and Governance Incentive 2010

 

 

 

 

In March 2011, management presented its calculation of 2010 Adjusted EPS and Adjusted EBITDA/Average Net Assets, both of which excluded costs related to our information technology initiatives, transaction costs associated with the Company’s recently announced acquisition of American Sporting Goods Corporation, and certain other adjustments. Based on these adjustments, for bonus calculation purposes, Adjusted EPS for 2010 was $0.94 and Adjusted EBITDA/Average Net Assets for 2010 was 26.7%. Based on the levels achieved, the Committee determined that the 2010 annual incentive award for the corporate and governance group (which applied to all NEOs) would be payable at 164% of the target award. This amount was adjusted downward for certain NEOs who did not meet individual annual incentive award objectives.

Long-Term Compensation.

 

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 units (with potential payouts of such performance units being approximately half in cash and half in shares of Company stock). The next step was to divide the proposed market value by a discounted per share value to determine the number of restricted and performance units to be granted to the CEO and President. Additionally, Ms. Sullivan received a stock option grant that was meant to emphasize the Company’s interest in retaining her as a key leader in the organization. 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 pay equity among this group.

 

Share Award Levels and Long-Term Market Value.  The following table shows how the total long-term compensation amount for 2010 compared to the 2010 peer group medians as well as the Committee’s fiscal 2009 market value estimates, with additional detail on these amounts provided in the “Fiscal 2010 Grant Date Market Analysis” table and notes within this CD&A.

 

Total Long-Term Compensation Opportunity — Fiscal 2010 Compared to Fiscal 2009

 

 

 

 

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 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. 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 150% (the maximum) of the target award. The awards include a clawback provision 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 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 2010, with all references to “Adjusted EPS” and “EBITDA” for the long-term incentive being cumulative over the performance period:

 

Long-Term Performance Incentive 2010-2012

 

 

Restricted Stock and Option Awards.  In March 2010, 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. The Committee approved restricted stock grants for the NEOs in 2010 in amounts that had a current market value that was approximately equal to 50% of the total long-term compensation opportunity granted. We have limited the use of stock options for our most senior executives, however, as described above, Ms. Sullivan was granted stock options in March 2010 because of the Company’s interest in retaining her as a key leader in the organization. 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 2010?

 

No. The long-term incentive for the performance period of 2008-2010 used cumulative Adjusted EPS as the primary metric and Compound Annual Net Sales Growth Rate as the second metric. The minimum Adjusted EPS for any payout was set at $4.77, with different payout rates based on a range of Compound Annual Sales Growth of between 4% and 9%. For this performance period, the Company’s Adjusted EPS was below threshold and therefore no payouts were made.

 

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

 

To attract and retain employees, including NEOs, 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 of service, 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 and enhanced retirement benefits. For further details on the SERP see page 56.

 

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. 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 and as such, these additional severance benefits will not be available to Mr. Fromm following the 2011 Annual Meeting of Shareholders when Mr. Fromm will relinquish the title of Chief Executive Officer.

 

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.

 

What market or peer group data was used to determine 2010 compensation?

 

The Total Rewards department has historically commissioned Hewitt (and now Meridian) 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 and Meridian prepared a market study to be used in the consideration of 2010 compensation for the NEOs. This market study included data on 28 comparator companies. A representative of Hewitt attended the Committee’s meeting in December 2009 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.

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 2010 study was proposed by management and reviewed by Meridian. The 2010 peer group for comparison purposes included 28 similarly sized footwear and retail companies (median sales of $1.66 billion, market value of $1.15 billion, total assets of $806.8 million, and 13,513 employees) and was prepared using information from publicly available data. The 2010 study included:

 

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

 

 

 

The above table was used by the Committee for compensation decisions for 2010 and 2011 and includes two companies that were added to the comparator group since the last completed study completed in late 2008.

 

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. Based on a stock price of $12.25 (which was used to determine 2010 equity award levels), 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 Mr. Fromm 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. Our incentive plan prohibits repricing of stock options.

 

What are the compensation levels for Fiscal 2011?

 

The following table indicates the target compensation levels for the NEOs who will be continuing in their positions for 2011 and certain additional comparative information between 2010 and 2011. 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 2011 market analysis values performance units and restricted stock granted based on a price per share of $15.20 (the average of the high and low prices for our stock on the date of grant) before discounting. The compensation amounts in this table reflect that fixed compensation (base salary) as a percent of total market value ranges from a low of 21.6% to a high of 13.7%; that performance-based compensation (annual plus long-term incentives) as a percent of total market value ranges from a low of 35.7% to a high of 37.9%; and that aggregate long-term compensation as a percent of Total Market Value from a low of 40.2% to a high of 60.0%.

 

Fiscal 2011 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 2010, 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 2010 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. With respect to restricted stock, the Company is able to take a deduction when the restriction for the applicable shares lapses. For 2010, Mr. Fromm’s and Ms. Sullivan’s non-performance-based compensation exceeded the annual $1,000,000 limitation under Section 162(m) by $482,639 and $343,134 respectively; as such, the Company was 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 2010 to Mr. Fromm, Mr. Hood, the other three most highly-compensated executive officers who were serving as executive officers as of January 29, 2011 (our “Named Executives” or “NEOs”). Additional information for 2008 and 2009 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.”

 

Summary Compensation Table