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)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

þ  No fee required.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 16, 2007

 

To Brown Shoe Shareholders:

 

 

You are cordially invited to attend the Annual Meeting of Shareholders of Brown Shoe Company, Inc. to be held at our headquarters at 8300 Maryland Avenue, St. Louis, Missouri, in the Conference Center, on Thursday, May 24, 2007, at 11:00 a.m., St. Louis time. The formal Notice of the Annual Meeting, the Proxy Statement and a proxy card accompany this letter. Our Annual Report for fiscal year 2006 is also enclosed.

 

I hope you will be present at the meeting. Whether or not you plan to attend, please cast your vote by telephone or on the Internet, or complete, sign and return the enclosed proxy card in the postage-prepaid envelope, also enclosed. The prompt execution of your proxy will be greatly appreciated.

 

Sincerely yours,

 

Ronald A. Fromm

Chairman of the Board and

Chief Executive Officer

 

Brown Shoe Company, Inc.

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

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

 

Matters to be voted on:

 

 

Only shareholders of record at the close of business on April 9, 2007 may vote at the meeting. Your vote is important. Whether you plan to attend the annual meeting or not, please cast your vote by phone or on the Internet, or complete, date and sign your proxy card and return it in the envelope provided. If you attend the meeting and prefer to vote in person, you may do so even if you have previously submitted a proxy.

 

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 16, 2007

 

TABLE OF CONTENTS

 

PROXY STATEMENT — 2007 ANNUAL MEETING OF SHAREHOLDERS

 

PROXY STATEMENT
FOR THE BROWN SHOE COMPANY, INC.
2007 ANNUAL MEETING OF SHAREHOLDERS

 

Why am I receiving these proxy materials?

 

Your board of directors is soliciting proxies to be voted at the 2007 Annual Meeting of Shareholders. This proxy statement includes information about the issues to be voted upon at the meeting.

 

On April 16, 2007, we began distributing these proxy materials to all shareholders of record at the close of business on April 9, 2007. There were 44,008,979 shares of our common stock issued and outstanding on April 9, 2007, including shares issued for our 3-for-2 stock split paid on April 2, 2007.

 

Where and when is the annual meeting?

 

The Annual Meeting of Shareholders will take place on May 24, 2007 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., St. Louis time.

 

What am I voting on?

 

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

 

 

How many votes do I have?

 

You have one vote for each share of our common stock that you owned at the close of business on April 9, 2007, the record date. These shares include:

 

 

What is the difference between holding shares as a “shareholder of record” and as a “beneficial owner”?

 

If your shares are registered directly in your name with our transfer agent, Mellon Investor Services, LLC, you are considered the “shareholder of record” with respect to those shares. The Notice of Annual Meeting, Proxy Statement, 2006 Annual Report and proxy card have been sent directly to you by the Company.

 

If your shares are held in a stock brokerage account or by a bank or other holder of record, you are considered the “beneficial owner” of the shares held in street name. The Notice of Annual Meeting, Proxy Statement, 2006 Annual Report and proxy card or voting instruction card 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. As the beneficial owner, you have the right to direct your broker, bank or other holder of record on how to vote your shares by using the voting instruction card included in the mailing or by following their instructions for voting by telephone or the Internet.

 

If I am a shareholder of record, how can I vote my shares?

 

You can vote by proxy or in person.

 

How do I vote by proxy?

 

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

 

 

In the U.S. and Canada, you can vote your shares by telephone by calling the toll-free telephone number on your proxy card. Telephone voting is available 24 hours a day, 7 days a week until 11:59 pm Eastern Time on the day before the meeting. Easy-to-follow voice prompts allow you to vote your shares and confirm that your instructions have been properly recorded. If you vote by telephone, you do not need to return your proxy card.

 

 

You can also choose to vote via the Internet. The web site for Internet voting is on your proxy card. Internet voting is available 24 hours a day, 7 days a week until 11:59 pm Eastern Time on the day before the meeting. If you vote via the Internet, you do not need to return your proxy card.

 

 

If you choose to vote by mail, simply mark your proxy card, date and sign it, and return it in the postage-paid envelope provided.

 

If you vote by proxy using any of these three methods, the persons named on the card (your “proxies”) will vote your shares 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 of directors, 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 reduction in par value per share, and “FOR” the ratification of the Company’s registered independent public accountants. If any other matter is properly brought before the meeting, your proxies will vote in accordance with their best judgment. At the time this proxy statement went to press, 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.

 

May I revoke my proxy?

 

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

 

 

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 I hold shares in street name, how can I vote my shares?

 

You can submit voting instructions to your broker, bank or nominee. In most instances, you will be able to do this over the Internet, by telephone, or by mail. Please refer to the voting instruction card provided by your broker, bank or nominee with these materials.

 

What shares are included on the proxy card?

 

If you are a shareholder of record you will receive only one proxy card for all the shares you hold. This includes shares in certificate form as well as shares in book-entry form.

 

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.” Broker non-votes occur when brokers do not have discretionary voting authority on certain proposals under the rules of the New York Stock Exchange (“NYSE”) and the “beneficial owner” has not instructed the broker how to vote on these proposals. If you are a beneficial owner, your bank, broker or other holder of record is permitted to vote your shares on the election of directors and ratification of appointment of independent registered public accountants, even if the holder does not receive voting instructions from you. Your bank, broker or other holder of record may not vote on the amendment to our Certificate of Incorporation to reduce the par value of our common stock absent instructions from you; therefore, without your voting instructions, a broker non-vote will occur on that proposal.

 

Shares represented by proxies that are marked vote “withheld” with respect to the election of any person to serve on the board of directors, 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” or shares represented by

proxies that deny the proxy-holder discretionary authority to vote on Proposal 2 will have the effect of a “no” vote. Shares represented by proxies that are marked “abstain” with respect to any other proposal, including Proposal 3, will not be considered in determining whether such proposal has received the affirmative vote of a majority of the shares and such proxies will not have the effect of a “no” vote. Shares represented by proxies that deny the proxy-holder discretionary authority to vote on such other proposal (broker non-votes) will not be considered in determining whether such proposal has received the affirmative vote of a majority of the shares and such proxies will not have the effect of a “no” vote.

 

Can I access the Notice of Annual Meeting, Proxy Statement and 2006 Annual Report to Shareholders on the Internet?

 

The Notice of Annual Meeting and Proxy Statement are accessible on the Internet as a single document identified as “2007 Proxy Statement,” and the 2006 Annual Report is also available, on our website at www.brownshoe.com/investor.

 

Shareholders of Record:  If you vote on the Internet at www.proxyvoting.com/bws, simply follow the prompts for enrolling in the electronic proxy delivery service.

 

Beneficial Owners:  If you hold your shares in a brokerage account, you also may have the opportunity to receive copies of these documents electronically. Please check the information provided in the proxy materials mailed to you by your broker, bank or other holder of record regarding the availability of this service.

 

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, brokerage firms, 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 brokerage houses, 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. If we decide to retain a proxy solicitor, we will pay the fees charged by the proxy solicitor.

 

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 our Report on Form 10-Q for the first quarter of 2007, which we expect to file on or before June 14, 2007. You can obtain a copy of the Form 10-Q on our website at www.brownshoe.com/secfilings, by calling the Securities and Exchange Commission (“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 copies of proxy materials delivered to my household?

 

Securities and Exchange Commission rules allow delivery of 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 annual report and proxy statement, 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 householding notification from your broker earlier this year and, consequently, you may receive only one proxy statement and annual report. If you prefer to receive separate copies of our proxy statement or annual report, either now or in the future, we will promptly deliver, upon your written or oral request, a separate copy of the proxy statement or annual report, as requested, to any shareholder at your address to which a single copy was delivered. Notice should be given to us by mail at

8300 Maryland Avenue, St. Louis, Missouri 63105, attention: Senior Vice President, General Counsel and Corporate Secretary, or by telephone at (314) 854-4000. If you are currently a shareholder sharing an address with another shareholder and wish to have only one proxy statement and annual report 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 rules and listing standards of the New York Stock Exchange, and SEC 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 of shareholders and all of them attended last year’s 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, and copies of these charters will be provided to shareholders, upon written or oral request to our Senior Vice President, General Counsel and Corporate Secretary, 8300 Maryland Avenue, St. Louis, Missouri 63105, or by telephone at (314) 854-4000. Information on our website shall not be deemed to constitute part of this proxy statement.

 

Currently, of the ten members of the board of directors, nine meet the New York Stock Exchange 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, available on our website at www.brownshoe.com/governance. As of the date of this proxy statement, the board has determined that, except for our Chairman and Chief Executive Officer, Ronald A. Fromm, each of the other members of the board of directors is independent, including Mr. Bower, Ms. Esrey, Ms. Hendra, Mr. Klein, Mr. Korn, Ms. McGinnis, Mr. McGinnis, Mr. Neidorff and Mr. Upbin. In making its determination of independence, the board considered that Ms. Hendra is affiliated with OgilvyOne LLC, which provided services to the Company in fiscal 2006. The board determined that the amount paid by the Company to Ogilvy was not material to the Company or to Ogilvy. Nominee Diane M. Sullivan, who serves as the Company’s President and Chief Operating Officer, would not be independent. Assuming all nominees are elected as directors, there will be 9 independent directors out of 11, which satisfies the Company’s goal, as set forth in the Corporate Governance Guidelines, that two-thirds of the directors will be independent under the New York Stock Exchange standards.

 

The independent members of the board meet regularly without any members of management present. In accordance with our Corporate Governance Guidelines, Mr. Bower, as chair of the Executive Committee, usually presides at such executive sessions, and if he is absent, then another director who is a member of the Executive Committee presides in his place. Only independent directors serve on our Audit, Compensation, and Governance and Nominating Committees.

 

We have a Code of Business Conduct that is applicable to all directors, officers and employees of the Company. We have an additional Code of Ethics that is applicable to the principal executive officer, principal financial officer and principal accounting officer. Both the Code of Business Conduct and the Code of Ethics are available on the Company’s website at www.brownshoe.com/governance. We intend to post amendments to or waivers from (to the extent applicable to an executive officer of the Company) either code on our website.

 

Shareholders and other parties interested in communicating directly with an individual director or with the non-management directors as a group may write to the individual director or group, c/o Corporate Secretary, Brown Shoe Company, Inc., 8300 Maryland Avenue, St. Louis, Missouri 63105 or by sending an e-mail to directors@brownshoe.com. The board approved a process for handling communications received by the Company and addressed to non-management members of the board. Under that process, the Corporate Secretary of the Company 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 Corporate Secretary, deals with the functions of the board or its committees or that he 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.

 

Meetings

 

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 2006. Each director attended at least 75 percent of the total number of meetings of the board and of the committees on which he or she serves, during his or her term.

 

 

 

 

The Audit Committee’s primary responsibilities are to monitor (a) the integrity of the Company’s financial statements; (b) the financial reporting process and systems 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 composed solely of independent directors as defined in the NYSE listing standards and Rule 10A-3 of the Exchange Act and 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.” The board, in the Corporate Governance Guidelines, has established the policy that no member of the Audit Committee may serve on the audit committees of more than three public companies (including our Audit Committee). Also see “Audit Committee Report.”

 

The Compensation Committee’s primary responsibility is to establish the executive officers’ compensation. The committee also reviews changes in the compensation of other key management employees, approves the participation of executives and other key management employees in the various compensation plans, reviews our compensation programs, and monitors our promotion and management development practices. The committee meets several times each year, and committee agendas are established in consultation between the committee chair and the Company’s Chief Talent Officer. The Company, through its human resources department and the committee, has retained Hewitt Associates as its independent compensation consultant to assist in evaluating executive compensation programs and in setting executive officers’ compensation. The consultant usually prepares a benchmarking report for the committee’s use in setting executive compensation and makes a presentation to the committee concerning compensation trends and best practices, plan design and the reasonableness of individual compensation awards. As requested by the committee from time to time, the consultant prepares specific compensation recommendations for the committee’s consideration. The Company’s Chief Executive Officer gives the committee a performance assessment and compensation recommendation for each of the other named executive officers. Those recommendations are then considered by the committee with the assistance of the Company’s Chief Talent Officer. The Chief Executive Officer, Chief Talent Officer and Vice President, Total Rewards generally attend committee meetings, but the committee meets in executive session when discussing compensation for the Chief Executive Officer.

 

The board has determined, in its judgment, that the Compensation Committee is composed solely of independent directors as defined in the NYSE listing standards and operates under a written charter adopted by the entire board. Also see “Report of the Compensation Committee.”

 

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 of directors. However, certain categories of matters have been expressly reserved to 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. A candidate should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of shareholders. In evaluating the suitability of individual nominees, the Governance and Nominating Committee will also take into account, among other things, the nominee’s personal and professional attributes, ability to provide necessary stewardship

over business strategies and programs adopted to ensure the coordination of interests among employees, management and shareholders, ability to respect and maintain adherence to the Code of Business Conduct, and ability to balance short-term goals and long-term goals of the Company and its shareholders. The Governance and Nominating Committee will consider a candidate for director proposed by a shareholder, provided that the proposing shareholder submits the information by the specified deadline, and provides appropriate information, as discussed in more detail in the section “Shareholder Proposals for the 2007 Annual Meeting.” A shareholder seeking to propose a candidate for the committee’s consideration should forward the candidate’s name and information about the candidate’s qualifications to our Corporate Secretary. The board has determined, in its judgment, that the Governance and Nominating Committee is composed solely of independent directors as defined in the NYSE listing standards and operates under a written charter adopted by the entire board.

 

A director who is an employee does not receive payment for service as a director. The following table summarizes compensation paid to non-employee directors during fiscal 2006:

 

Director Compensation for Fiscal 2006

 

 

 

 

 

The following table shows stock options and other stock awards (restricted stock units and phantom stock units) granted to directors during fiscal 2006 and those held by directors at the end of fiscal 2006 (February 3, 2007). All unit and stock option numbers have been adjusted for the recent stock split. For our directors who retired in fiscal 2006, no equity awards were granted during fiscal 2006 or were outstanding at our fiscal year-end.

 

 

 

For fiscal 2006, commencing with the 2006 Annual Meeting on May 25, 2006, the following compensation guidelines were in effect for non-employee directors, with cash retainers payable quarterly in arrears:

 

 

During the portion of fiscal 2006 prior to last year’s annual meeting, the director compensation approved in May 2005 was in effect, and provided for substantially the same cash compensation payments to non-employee directors.

 

We also 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 employee matching gift program on the same terms as employees, thereby providing a match for charitable giving to institutions of higher education and arts and cultural organizations aggregating up to $5,000 per year per individual. Non-employee directors do not participate in the Company’s pension plan, Supplemental Executive Retirement Plan (SERP), annual cash incentive plan or performance share plan.

 

Directors’ compensation is established by the board of directors upon the recommendation of the Governance and Nominating Committee. In March 2007, the Governance and Nominating Committee recommended that compensation for non-employee directors remain the same for the year following the annual meeting, except to adjust the number of restricted stock units granted for the year. As of the date of this proxy statement, no determination has

been made with respect to a 2007 grant of restricted stock units to non-employee directors, although this matter is expected to be considered by the board prior to the annual meeting.

 

A director who is an employee does not receive payment for service as a director.

 

To align the directors’ interests with those of our shareholders, in connection with the annual meeting of shareholders, the board has approved an equity-based grant to non-employee directors, as recommended by the Governance and Nominating Committee, with grants made in the board’s discretion at other times only for new directors appointed between annual meetings.

 

The restricted stock units granted to non-employee directors are the economic equivalent of a grant of restricted stock; however, no actual shares of stock are issued at the time of grant or upon payment. Rather, the award entitles the non-employee director to receive cash, at a future date, equal to the future market value of one share of our common stock for each restricted stock unit, subject to satisfaction of a one-year vesting requirement. For this grant, the Governance and Nominating Committee has established an approximate aggregate cash value for the grant, and then determined the exact number of restricted stock units granted to each non-employee director by dividing the aggregate value of the award by the fair market value of the common stock on the date of grant (average of the high and low prices). The units vest in full one year after the date of grant, and the payout will be on the date that service as director terminates or such earlier date as a non-employee director may elect. Dividend equivalents are paid on restricted stock units at the same rate as dividends on the Company’s common stock, and are automatically re-invested in additional restricted stock units as of the payment date for the dividend.

 

In 1999, the board adopted a deferred compensation plan for non-employee directors. 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 (calculated as the average of the high and low price) of our stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on phantom stock units at the same rate as dividends on the Company’s common stock, and are re-invested in additional phantom stock units 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 units of deferred compensation 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 average 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 board recently adopted a written related party transaction policy that provides for the board to review all transactions expected to exceed $100,000 in which a related party has a material interest, or for such a transaction continuing into a subsequent fiscal year that is expected to extend beyond six months or exceed $100,000 in the subsequent year. For purposes of this policy, related parties include the Company’s executive officers, directors or nominees, or 5% beneficial owner of the Company’s common 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% beneficial interest. In making its determination whether to approve a related party transaction, the board shall consider 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 transaction under like circumstances, and the benefit to the Company.

 

The Company’s employee matching gift program generally provides a match for charitable giving to institutions of higher education and arts and cultural organizations aggregating up to $5,000 per year per individual. In 2006, the board approved a special match for a charitable gift commitment made by Mr. Fromm to Barnes-Jewish Hospital Foundation, in an aggregate amount of $250,000 over seven years. For fiscal 2006, the Company’s special matching contribution was $35,000. Mr. Fromm does not have a direct, material interest in this matching gift.

 

During fiscal 2006, the Company engaged OgilvyOne LLC (“Ogilvy”) to provide certain marketing and consulting services. One of our directors, Carla Hendra, is Co-Chief Executive Officer of Ogilvy North America and president of OgilvyOne N.A., both of which are affiliates of Ogilvy. During fiscal 2006, the Company incurred $655,500 of fees related to services provided by Ogilvy. Although this transaction with Ogilvy was entered into by the Company prior to the board’s adoption of a written policy on related party transactions, the transaction was ratified following the adoption of such written policy.

 

In fiscal 2006, there were no other material transactions between the Company and its executive officers, directors or principal shareholders.

 

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and any persons beneficially owning more than ten percent of our common stock to report their ownership of stock and any changes in ownership to the Securities and Exchange Commission, New York Stock Exchange 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. Based solely on a review of the copies of the reports furnished to us and written representations that no other such statements were required, we believe that all such other reports of our executive officers and directors were filed on a timely basis.

 

The following table shows the amount of our common stock beneficially owned as of April 4, 2007, by each director and nominee, each of the named executive officers listed in the Summary Compensation Table, and all current directors and executive officers as a group. In general, “beneficial ownership” includes those shares for which a person has or shares the power to vote, or the power to dispose. The table also shows the number of options to purchase shares of our stock that are exercisable, either immediately or by June 3, 2007. 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 common stock. All share, unit and option numbers have been adjusted for the recent stock split.

 

 

 

 

 

PROPOSAL 1- Election of Directors

 

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. Our bylaws can be amended by a majority of shareholders acting at a meeting of shareholders or by a majority of the board.

 

On March 8, 2007, your board amended the bylaws to increase the number of directors from nine to ten, thereby creating one vacancy on the board, and appointed Ward M. Klein to fill the vacancy until the upcoming 2007 annual meeting. In searching for a new director, Mr. Bower, as the Chair of the Governance and Nominating Committee, compiled a list of possible candidates and solicited input from all directors. The Governance and Nominating Committee reviewed and considered potential candidates. Mr. Klein was recommended as a nominee by former directors Jerry E. Ritter and Richard A. Liddy. Mr. Bower then contacted Mr. Klein to initiate discussions about joining the board, and Mr. Klein met with several of the independent directors. Upon the recommendation of the Governance and Nominating Committee, the board appointed Mr. Klein as a director.

 

On April 11, 2007, in contemplation of having shareholders elect directors at the 2007 annual meeting, your board amended the bylaws to increase the number of directors from ten to eleven, thereby creating a vacancy for a director with a three-year term to expire in 2010. Diane M. Sullivan, who is our President and Chief Operating Officer, is known to all directors and was proposed as a nominee by the Governance and Nominating Committee based on input from all directors.

 

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

 

With an eleven person Board, the class of directors whose term will expire in 2008 will have three members; the class whose term will expire in 2009 will have four members; and the class whose term will expire in 2010 will have four members. Your board of directors has nominated four individuals, Ward M. Klein, W. Patrick McGinnis, Diane M. Sullivan and Hal J. Upbin for election as directors for a three-year term at the 2007 Annual Meeting. Your board of directors also has nominated another current director, Julie C. Esrey, for a two-year term. Each of these nominees, other than Ms. Sullivan, currently serves on the Board for a term expiring at the 2007 Annual Meeting.

 

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. 

CONTINUING DIRECTORS WHOSE TERMS WILL EXPIRE IN 2008:

 

CONTINUING DIRECTORS WHOSE TERMS WILL EXPIRE IN 2009:

 

 

Your board has approved, and recommends the adoption by shareholders of, an amendment to the Company’s Restated Certificate of Incorporation to reduce the par value of the common stock to $.01 per share. The Restated Certificate of Incorporation currently authorizes the issuance of shares of common stock with a par value of $3.75 per share. Your board believes it is in the best interests of shareholders to amend the Certificate of Incorporation to reduce the par value of the common stock to $.01 per share to provide flexibility for future dividends.

 

Historically, the concept of par value served to protect creditors and senior security holders by ensuring that a company received at least the par value as consideration for issuance of stock. Over time, the concept of par value has lost its significance for the most part. Many companies that incorporate today use a nominal par value or have no par value.

 

The reduction in the par value of the common stock would result in a reduction in the capital stock account (approximately $165 million as of April 4, 2007) on the Company’s balance sheet and a corresponding increase in the additional paid-in capital (or surplus) account. The reduction in the par value would reduce the amount required to be carried by the Company as capital, thereby potentially increasing the Company’s surplus capital available for dividends and other distributions and for other corporate purposes. Your board has not proposed the reduction in the par value with the intention of declaring special or additional dividends on the common stock.

 

The reduction in the par value should have no effect on the rights of the holders of the common stock except for the minimum amount per share the Company may receive upon the issuance of authorized but unissued shares and added dividend flexibility. The reduction in the par value would not change the number of authorized shares of common stock. Also, no change to the par value is proposed with respect to the authorized preferred stock, none of which is issued and outstanding.

 

If this proposal is approved, the fourth article of the Restated Certificate of Incorporation will be amended and restated to read as follows:

 

“FOURTH: The aggregate number of shares which the Corporation shall have the authority to issue is 101,000,000 of which 100,000,000 shares shall be Common Stock having a par value of $.01 per share and 1,000,000 shares shall be Preferred Stock having a par value of $1.00 per share.”

 

The amendment to the Restated Certificate of Incorporation will become effective upon the filing of such amendment with the Secretary of State for the State of New York.

 

If this proposal is approved, certificates representing shares of common stock, $3.75 par value per share, issued and outstanding prior to the effective date of filing of the amendment to the Restated Certificate of Incorporation, will be changed to represent the same number of shares of the common stock, $.01 par value per share, as they did prior to such effective date. Existing certificates will not be exchanged for new certificates. Please do not return any certificates to the Company or its transfer agent.

 

 

 

 

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 February 2, 2008. 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 fiscal 2006 and fiscal 2005, Ernst & Young LLP were our independent registered public accountants and charged fees for services rendered to us as follows:

 

 

 

 

In 2006, 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 your board of directors. Management is primarily responsible for the 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 financial statements with accounting principles generally accepted in the United States.

 

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

 

The Company’s independent registered public accountants also provided to the committee the written disclosures required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and 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 by Statement on Auditing Standards No. 90. The Audit 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 of Directors and the board approved including the audited financial statements in the Annual Report on Form 10-K for the fiscal year ended February 3, 2007 for filing with the Securities and Exchange Commission. The committee has retained Ernst & Young LLP as the Company’s independent registered public accountants for fiscal 2007.

 

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 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 assure compliance with laws and regulations and the Company’s business conduct policies.

 

Audit Committee

Hal J. Upbin, Chair
Steven W. Korn
W. Patrick McGinnis

 

The following discussion and analysis contains statements regarding future Company performance targets and goals. These targets and goals are disclosed in the limited context of the Company’s compensation programs and should not be understood to be statements of management’s expectations or estimates or results or other guidance. The Company specifically cautions investors not to apply these statements to other contexts.

 

As appropriate, all award share numbers and target amounts have been adjusted for the recent stock split.

 

Overview

 

The Compensation Committee of the Board of Directors provides leadership and direction to drive corporate goals and objectives through executive compensation programs and the performance of each executive. There are five outside directors on the committee including: W. Patrick McGinnis, who chairs the committee, Joseph Bower, Julie Esrey, Patricia McGinnis and Michael Neidorff. Other members of the board are invited to attend the committee meetings. Typical attendance at the Compensation committee also includes the Chief Executive Officer, Chief Talent Officer and the Vice President, Total Rewards.

 

The Compensation Committee meets regularly throughout the year and typically has five meetings per year. Most regularly scheduled meetings are held prior to the quarterly board meetings. During fiscal 2006, the committee approved, among other things, the annual compensation changes for the executives, performance targets for the annual incentive plan and three-year performance share plan, an amendment for the Incentive and Stock Compensation Plan of 2002 to increase the number of shares available for grant, revised severance agreements, early retirement compensation for Andrew M. Rosen, executive promotions and executive new hires. The actions of the Compensation Committee are supplemented by the Governance and Nominating Committee, which meets in executive session to review the performance of the Chief Executive Officer.

 

The Compensation Committee reviews executive compensation trends and market research with our executive compensation consultants, Hewitt Associates (“Hewitt”). This year, the Company, through its human resources department and the Compensation Committee, engaged Hewitt to analyze the total compensation of key executives compared to a group of retail and footwear companies of similar size and revenue, and with which the Company

competes for talent, customers and investors. The market values were developed using Hewitt’s database and were adjusted based on position scope. The comparator companies in the database are listed below:

 

 

Hewitt’s market analysis includes data on base pay, target bonus levels, actual bonus awards, long-term incentive awards, total compensation, executive benefits and perquisites. The committee targets the median market value when comparing the data to the executives’ current compensation. The committee also considers data from private companies not included in the survey; however, private company data was not included in Hewitt’s data and its determination of the median market value.

 

Compensation Program Objectives and Policies

 

The primary objective of the executive compensation program is to attract, motivate and retain highly qualified executives to enhance long-term profitability and increase shareholder value by linking significant elements of their compensation to the operating and financial performance of the Company and applicable business units.

 

The committee emphasizes pay for performance and believes that when the Company exceeds performance goals, the executive compensation programs should reflect the exceptional performance. Conversely, when the Company does not meet the targeted business goals, executive compensation should reflect the under-performance.

 

We seek to drive results through cash and equity incentive compensation. The key financial measure for the annual cash incentive plan is net earnings. For the three-year performance share plan, the measures are cumulative diluted earnings per share and compound annual sales growth. The committee receives recommendations from the Chief Executive Officer, the President, the Chief Financial Officer and the Chief Talent Officer on plan design, performance targets and individual awards related to the annual incentive plan.

 

The performance of the executives and their contribution to the Company’s success provides the basis for decisions related to the compensation award process. The Company has a formal performance management program, which measures the executive’s performance on the accountabilities of the position and the achievement of individually-based annual incentive plan objectives tied to the Company’s strategic initiatives. The executive’s base pay increases are linked to the performance management system through the position accountabilities and an annual talent review process.

 

Compensation Design and Elements

 

The executive compensation program consists of base pay, annual incentives, long-term incentives, executive benefits, perquisites, severance agreements and stock ownership guidelines. Each element is specific in its purpose and relevance to meeting the objectives of the total executive compensation program.

 

The program is designed to compensate the executive for job knowledge, individual expertise and increasing shareholder value through the achievement of short-term and long-term performance goals. The committee emphasizes pay for performance in the design elements and utilizes the annual incentive plan and equity awards to reward and compensate the executive for organizational performance that directly affects shareholders.

 

In return for the executive’s contributions to the success of the Company, the compensation program provides financial stability, opportunities for higher pay levels tied to performance, recognition of individual success and alignment with shareholder interests through equity based awards.

 

The target pay mix used by the committee for fiscal 2006 for the major compensation elements was 40% base pay, 25% annual incentive and 35% long-term incentives, and was based on comparator company information provided by Hewitt. The actual distribution for fiscal 2006 the group of executives in the study was 38% base pay, 31% annual incentive and 31% long-term incentives.

 

Base Salary

 

The base salary program is designed to compensate the executive for the job knowledge, industry or technical expertise and individual competencies that the Company needs to enhance performance.

 

The amount of base pay an executive earns is determined primarily by individual competencies, position accountabilities, and performance tied to annual objectives and the overall performance of the Company or business unit. External market data on base salary levels is provided to the committee by Hewitt, as part of the peer group analysis. The committee reviews the information as part of the annual evaluation process and considers the data in relation to the other compensation elements, the performance of the executive and the comparability of the data to our job. The data provided in Hewitt’s peer group analysis indicated that base pay levels for fiscal 2006 for the executive officers named in the Summary Compensation Table were within a range of 15% above and below the median market value.

 

We place significant emphasis on talent management and understand that our competitive advantage lies in the unique skills and competencies of our employees. When approving base salary levels, the committee considers each person’s value based on his or her contributions to the organization that cannot be measured solely by the peer group analysis. In early 2007, after the evaluation of the data and each executive’s performance, the committee increased the total amount of base salaries of the named executive officers by 1.4%. For fiscal 2007, the base salary for each of the named executive officers is as follows: Mr. Fromm — $850,000, Mr. Hood — $360,000, Ms. Sullivan — $735,000, Mr. Wood — $532,000 and Mr. Rich — $510,000. Mr. Hood did not receive a base salary increase as he was recently hired; and Mr. Fromm did not receive a base salary increase consistent with the philosophy to have increased reliance on performance incentives.

 

Annual Incentive Plan

 

The annual incentive plan is a cash-based program designed to reward executives for achievement based on a range of financial measures and individual initiatives. The program enables the Company to meet the pay for performance objective of the compensation program and to reward successful attainment of annual goals and financial objectives. Net earnings targets are used as the key financial measure to drive annual results. Each executive earns 70% of the award from the achievement of a net earnings target that, for a corporate level executive is based on consolidated net earnings, and for a division president, is based on a combination of division and consolidated net earnings. The remaining 30% of the executive’s award is based on two or three individual objectives that drive the performance of the Company or the division, as appropriate. There is a minimum earnings per share performance threshold for payment as well as a maximum payout, and if the threshold minimum earnings level is not met, then the terms of the award provide that no payment shall be made under the award. Therefore, if the pre-determined performance goals are not met, a cash award would be payable solely at the discretion of the committee.

 

At the beginning of each fiscal year, the committee reviews performance targets for the current year’s annual incentive plan as recommended by management. The recommendations for the performance targets are generally established based on prior year earnings performance and budgeted earnings for the next fiscal year. For corporate executives, the targets are based on the consolidated results. For fiscal 2006, the target level for diluted consolidated earnings per share was $1.51; the minimum diluted consolidated earnings per share threshold for payout was $1.29; and the maximum (200% of the target level) was payable for diluted consolidated earnings per share of $1.81. For operating division executives, the target, minimum and maximum levels were based on a blend of division and consolidated results. The committee exercises its discretion to exclude special charges and/or recoveries included in the earnings calculation. The committee also has the discretion to reduce any of the calculated awards. The table

below lists each named executive officer’s base salary, incentive target as a percent of base salary and the annual incentive earned for fiscal 2006.

 

 

Mr. Fromm, Ms. Sullivan and Mr. Hood were awarded annual incentive payouts of 145% of target based on the Company’s consolidated results, excluding special charges and recoveries, with Mr. Hood’s award being prorated based on period of service. For Mr. Wood, whose incentive award also reflects the performance of our Famous Footwear division, the payout on his annual incentive award was 181.8% of target based on a 34% increase over prior year’s operating results for the division, and reflected higher results in same store sales, gross margin rates and strong inventory management for the division. Mr. Rich’s annual incentive award reflected the success of the wholesale division, and paid out at 152.1% of target based on strong results from the Naturalizer, Women’s Private Label and Dr. Scholl’s divisions.

 

In setting the annual incentive awards, the committee considers the benchmark data provided by Hewitt, recommendations provided by Hewitt for each executive’s target percentage and the impact on total compensation for the individual. For the fiscal 2006 annual awards, based on Hewitt’s peer group analysis presented to the committee in December 2006, the fiscal 2006 target bonus percentages for the executives reviewed by the committee were within 10% of the median peer group value. For Mr. Fromm, Ms. Sullivan and Mr. Wood, the target bonus percentages were 9% below the median peer group value.

 

In granting annual incentive awards for fiscal 2007, after considering Hewitt’s benchmark data and recommendations, the committee approved an increase of 5% in the annual incentive target as a percentage of base salary for Mr. Fromm, Ms. Sullivan and Mr. Wood. For each of the named executive officers, the target percentage for the fiscal 2007 annual incentive award, and the potential payout of that award if the target performance levels are achieved, is as follows:

 

 

Creating compensation opportunities based on the performance of the Company is the preferred form of pay delivery. This element of the compensation program is most closely aligned with the external market data with additional consideration given for internal equity, individual performance and the impact on total compensation.

 

Long-Term Incentives

 

Equity awards are the primary incentive used to align the interests of the executives with those of the shareholders. Long-term incentives are awarded in the form of restricted stock, stock options and performance shares. The committee believes that long-term equity awards provide the best link between the interests of the executive and the shareholder, as well as meet the motivation and retention objectives of the compensation program.

 

In fiscal 2006, the committee utilized performance shares and restricted stock as the primary forms of equity awards. Stock options were not a key element in the long-term incentive awards granted in fiscal 2006, whereas in the prior year, they were 50% of the total long-term incentive award and the additional 50% was in the form of performance shares. The key drivers for making a change to the mix of long-term incentive awards included the increased emphasis on “full value” shares based on recommendations from the executive compensation consultant, and the financial statement impact of stock option expensing as required by FAS 123R. Ms. Sullivan, who had been with the Company for only two years, received stock options in 2006 to provide her with additional ownership and retention opportunities. Mr. Hood received stock options as part of his new hire compensation package to provide a mix of equity awards and shorter-term ownership opportunities.

 

The committee uses performance shares to motivate executives to improve earnings and sales growth over a longer term. The program measures cumulative diluted earnings per share and sales growth over a three-year performance period. Each year the committee approves a performance share program for the next three-year period. For purposes of these awards, earnings per share may be adjusted at the discretion of the committee to exclude special charges and/or recoveries. The targets for the performance share program are established by reviewing the diluted earnings per share and sales growth for the prior year, using forecasted earnings for the first year, and adding a 10% to 15% increase in earnings the second and third years.

 

In early 2006, the committee determined that the earnings per share targets were not met for the 2003-2005 plan, and in early 2007, determined that the earnings per share targets were not met for the 2004-2006 plan, with the result that no performance share payouts were made to executives in 2006 or 2007. The 2005-2007 performance share program, assuming exclusion of special charges and/or recoveries, is currently projected to pay out at the maximum level of 200% based on the projected achievement of $5.18 in cumulative diluted earnings per share compared to a target of $4.27, coupled with projected achievement of 11.4% compound annual sales growth compared to a sales growth target range of 7% to 9%. For the 2006-2008 performance share program, the minimum level of cumulative diluted earnings per share is $4.62 and the target level is $5.00, assuming the exclusion of special charges and/or recoveries; and the executive can earn up to 200% of the target award if cumulative diluted earnings per share exceeds $5.62 and sales growth is greater than 9%.

 

Restricted stock provides alignment with shareholders and an element of retention. Restricted shares are used to reward executives for individual performance and are designed to retain executives based on the assessment of their future value to the organization. Dividends are paid to the executive on the unvested shares of restricted stock. The awards made in 2006 cliff vest four years after the date of the award; and awards made prior to 2006 vested over eight years. The change to a shorter vesting period was based on a recommendation from the consultant and a change in the Company’s retention needs. When the Company was not performing, the need to provide compensation that was highly retentive was critical. As the Company continues to perform and executives are rewarded based on the performance, we are able to reduce the need for service-based compensation.

 

Starting in 2006, stock options as an incentive were reduced for the named executive officers, but are still provided as a means of aligning the interests of the executives with those of the shareholders. When stock options are granted on a select basis, they are typically awarded during the annual executive compensation process in March or granted at the time of a promotion or when an executive is newly hired. Stock options vest 25% per year at the end of each of the first four years following the date of the grant. Pursuant to the terms of our current incentive plan, the option exercise price is based on the average of the high and low price of the stock on the New York Stock Exchange on the grant date.

 

Long-term incentive awards are part of the annual compensation review process conducted by the committee. As with the other elements of the program, the executive compensation consultant reviews the external market and provides benchmark data from the group of comparator companies. The median market value indicated by Hewitt for each job is used by the committee to establish a baseline for the total value of the long-term incentives that an executive receives each year. For fiscal 2006, 50% of the baseline value was awarded in restricted stock and 50% in performance shares to provide a balance of equity awards that are performance-based and retention-oriented, while increasing the opportunity for Company ownership. Stock options were also awarded for our more recent executive appointments.

 

Each type of long-term incentive award is assigned a value to determine the number of shares or size of the award. The restricted stock and performance share valuations prepared by the executive compensation consultant generally equal the market price of the Company’s common stock over a multi-day period. The consultant also provides initial recommendations as to the number of shares subject to each type of award to be granted to each executive based on the market valuation, and additional input is solicited from the President, division presidents, the Chief Talent Officer and the Vice President, Total Rewards. Based on these inputs, suggested initial award levels are developed and then reviewed by Mr. Fromm. Mr. Fromm considers the individual’s performance, long-term value to the Company, current outstanding equity awards and stock ownership before he provides his recommendations to the committee. The committee reviews Mr. Fromm’s recommendation and makes appropriate adjustments before approving the awards as part of the total compensation review process.

 

Benefits

 

Our benefit programs offer financial security and protection to all eligible employees and are provided as part of a competitive total compensation package. The executives participate in the same benefit programs offered to all employees, and are also provided with additional benefits in the form of executive disability insurance and the nonqualified Supplemental Executive Retirement Plan (SERP). These additional benefits are provided because the Company’s standard programs limit benefits based on pay.

 

The executives receive additional disability insurance to supplement the Company-sponsored program that has a maximum of $20,000 per month. The executive disability program provides an additional $4,000 per month and the executive may be entitled to receive a catastrophic benefit of $8,000 a month. The executive pays the cost of this program and the Company reimburses the executive for the cost of the premiums.

 

The SERP provides pension benefits in excess of the qualified plan limits. As an element of the executive compensation program, the SERP provides retirement income that is otherwise limited by Sections 415 and 401(a)(17) of the Internal Revenue Code of 1986 and is intended to help retain key management. As originally adopted, the SERP provided benefits based on higher salary levels and also enhanced an executive’s benefits by allowing benefits based on a higher percentage of salary and an early retirement benefit (by providing a full retirement benefits at age 60 whereas the Company’s Retirement Plan provided for full benefits at age 65). Effective for 2006, the committee amended the SERP for new participants to eliminate the enhancement features, but “grandfathered” the existing SERP participants in the prior program so that existing benefits would not be lost. All of the named executive officers, with the exception of Mr. Hood, participate in the grandfathered SERP. Mr. Hood will participate in the revised SERP. The SERP is unfunded and all payments to the participants are made from the general assets of the Company.

 

Perquisites

 

Key executives also receive a limited number of commonly provided perquisites as part of the total compensation program. Personal use of corporate aircraft, financial and tax planning services, and club memberships are ongoing perquisites included in the executive compensation program.

 

The Company provides personal use of the corporate aircraft to the Chief Executive Officer and a limited number of key employees designated by the Chief Executive Officer. Since the demands of the executive level positions create limited opportunities for the executive to spend time on personal matters, we believe the ease and convenience provided by the corporate aircraft for personal use helps balance the amount of time the executive spends on Company business. The incremental value of the executive’s personal use of the aircraft is calculated by taking the variable cost of operating the aircraft per passenger mile and multiplying it by the executive’s total personal miles to determine the total cost of the personal trips. In addition, the calculation includes the Company’s lost tax deduction for the named executive officer’s personal use of the aircraft. Based on this calculation, the total value to the six executive officers who had personal use of the Company aircraft was $399,580.

 

Financial and tax planning services were added to the executive compensation program in 2004, when the committee adopted stock ownership guidelines for key executives. The committee recognized that the new requirement to own a specified amount of Company stock would create personal financial challenges for the

executive and decided to offer this benefit to those executives affected by the policy to assist with the complexities involved with the increased ownership levels.

 

Club memberships are limited to the Chief Executive Officer, President and certain division presidents, to provide them access to a peer group of executives in the community, as well as the opportunity to meet on business issues in a social setting. A club membership was also provided in fiscal 2006 for Mr. Rosen.

 

Severance Agreements

 

Key executives are provided severance agreements as a means to ensure that a proposal for any change in control of the Company will be considered by executives objectively and with reference only to the business interests of the Company and the shareholders. The severance agreements provide reasonable security against altered employment conditions resulting from the change in control. In addition, the agreements provide general severance benefits if the Company, for any reason other than for “cause,” terminates the executive, and for Mr. Fromm only, if he terminated voluntarily for “good reason.” Severance agreements are a means to retain and attract executives in a competitive market for talent. The Company provides general severance benefits at all levels of the organization based on position and service.

 

During fiscal 2006, we entered into new severance agreements with Messrs. Fromm, Rich, Rosen and Wood and Ms. Sullivan. These agreements replaced the pre-existing employment agreement for Mr. Fromm and severance agreements for each of the other officers. Mr. Hood signed a severance agreement upon commencement of his employment on October 30, 2006.

 

The committee approved the new agreements after comparing the executive compensation consultant’s market analysis of common post-employment pay practices to the existing agreements. Based on that market analysis, the committee determined that the previous agreements provided change in control and general severance benefits that were above market practice and adopted the consultant’s recommendations to make changes that were consistent with the market analysis.

 

Stock Ownership Guidelines

 

One of the key objectives of the executive compensation program is to align the interests of executives with those of the shareholders through stock incentives. In addition to receiving stock incentives, the executives are required to retain Company stock to reinforce and strengthen the alignment with shareholders.

 

The Company’s stock ownership guidelines consist of a salary multiple and a retention ratio, both of which vary by position. The Chief Executive Officer is required to retain five times his annual salary in Company stock. The President, division presidents, Chief Financial Officer and Chief Talent Officer are required to retain three times their annual salary and Senior Vice Presidents have a salary multiple of two times their annual salary.

 

The guidelines also require the executive to retain 50% of the net gain on any stock awards until they meet the salary multiple. The Chief Executive Officer, President, Chief Financial Officer and division presidents must also retain 25% of the net gain on any stock awards until termination.

 

The value of the executive’s ownership is calculated based on current holdings, unvested restricted stock and stock held indirectly in the Company’s 401(k) plan. Executives have four years to achieve the guideline and a newly hired executive does not start the four-year requirement until he or she has completed four years of service with the Company. At the end of the fiscal 2006, each of Messrs. Fromm, Rich and Wood and Ms. Sullivan had met the stock ownership guidelines.

 

Early Retirement Agreement

 

Andrew M. Rosen, our former Chief Financial Officer, retired on October 28, 2006 and entered into an Early Retirement Agreement with the Company. The retirement agreement provides for Mr. Rosen’s continued service to the Company over a two-year period (as described below), and includes additional credit under the SERP based on this service. In addition, Mr. Rosen has agreed to a two-year non-compete. The need to leverage Mr. Rosen’s

experience and expertise, especially related to the investment strategy of the Company’s pension plan and his 32 years of service with the Company contributed to the committee’s decision to enter into the agreement.

 

Until January 31, 2009, the Company may request that Mr. Rosen provide services to the Company from time to time to advise the Company’s Investment Committee, assist in the defense of any litigation against the Company, participate in the preparation of the annual report, proxy, financial statements and other documents relating to the Company’s fiscal year ending February 3, 2007 and provide financial and investor relations consulting as required. Mr. Rosen agreed to be available to provide these services for either (i) up to a total of 100 days or (ii) eight days per month during each such 12-month period during the advisory period. Mr. Rosen’s agreement also provided that he would receive his annual incentive award for fiscal 2006 as if he had remained an employee for the full year. The target level payout for that award was set by the Compensation Committee at 65% of base salary, and based on corporate performance was paid out at 145% of target, for a payout amount of $471,300. The terms of Mr. Rosen’s agreement are described under the heading “Payments on Termination or Change in Control — Early Retirement Agreement with Andrew M. Rosen.”

 

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 million limitation on the deduction an employer may claim for compensation of executive officers unless it is performance-based. The annual incentive plan payment qualifies as performance-based compensation as defined in Section 162(m) because the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan of 2002 and amendments thereto, as approved by shareholders, is designed to comply with the provisions of 162(m) to ensure tax deductibility. The committee considers it important to retain flexibility to design compensation programs that are in the best interests of the company and the shareholders.

 

Conclusion

 

The executive compensation program is a critical element in driving the performance and continued success of the organization. Motivation, attraction, retention and the executive’s alignment with the interests of the shareholders are the key objectives of the program. The continued improvement in business results and increased shareholder value are driven by the performance of highly motivated executives. The ongoing analysis of the effectiveness and competitiveness of the programs along with the monitoring of the executive’s performance against key performance measures ensures the appropriate levels of compensation.

 

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis 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 Compensation Discussion and Analysis be included in this Proxy Statement.

 

Compensation Committee

W. Patrick McGinnis, Chair
Joseph L. Bower
Julie C. Esrey
Patricia G. McGinnis
Michael F. Neidorff

 

The following summary compensation table shows the compensation paid during fiscal 2006 to Mr. Fromm, Mr. Hood, the other three most highly compensated executive officers who were serving as executive officers as of February 3, 2007, and Mr. Rosen, who also served as the Company’s Chief Financial Officer during fiscal 2006. The

amounts listed in “All Other Compensation” column below include amounts paid or accrued pursuant to an Early Retirement Agreement between the Company and Mr. Rosen.

 

The Company has not entered into any employment agreements with any of the named executive officers.

 

The named executive officers were not entitled to receive bonus payments for fiscal 2006 other than those described as “Non-Equity Incentive Compensation.” Amounts listed as “Non-Equity Incentive Plan Compensation,” were approved by the Compensation Committee at its March 7, 2007 meeting and were paid out shortly thereafter.

 

Summary Compensation Table for Fiscal 2006

 

 

 

 

Pursuant to our Incentive and Stock Compensation Plan of 2002, as amended (“2002 Incentive Plan”), we granted both cash and equity incentive awards. The cash incentive awards are granted as an annual incentive, subject to a minimum performance threshold. The performance share awards cover a three-year performance period, so that there are three overlapping performance share awards outstanding at any time. Performance share awards are payable in stock, although the Company has the option to pay the cash equivalent amount. In fiscal 2006, restricted stock awards were granted to each of the named executive officers, and certain executive officers were also granted stock options. The Compensation Committee administers these awards and generally grants stock and other incentive awards at the committee’s first regularly scheduled quarterly meeting in connection with its review of

executives’ performance during the previous year; for new hires and promotions, mid-year grants are generally made at the next following meeting of the Compensation Committee. Options are granted as of the date of committee approval unless a later date is specified by the committee.

 

The following table shows information with respect to awards granted to the named executive officers during the past fiscal year under the 2002 Incentive Plan, with option exercise price, closing stock price and grant date fair value adjusted for the recent stock split:

 

Grants of Plan-Based Awards

 

 

 

 

 

The following table shows information with respect to the unexercised options and other equity-based awards held by the named executive officers as of February 3, 2007, our fiscal year-end, all as adjusted for the recent stock split.

 

Outstanding Equity Awards at Fiscal Year-End