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 14, 2009

 

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 28, 2009, at 11:00 a.m., Central Daylight Time.

 

This year we have elected to take advantage of the Securities and Exchange Commission’s rule that allows 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 14, 2009, we mailed to our shareholders a Notice containing instructions on how to access our Proxy Statement and 2008 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 2008 Annual Report to Shareholders, which provides detailed information relating to our activities and operating performance, is available at www.brownshoe.com/annualmeeting. If you have requested paper copies of these materials, a proxy card will also be enclosed.

 

Whether or not you plan to attend the Annual Meeting of Shareholders, we encourage you to vote your shares. You may vote:

 

 

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

 

Sincerely yours,

 

Ronald A. Fromm

Chairman of the Board and
Chief Executive Officer

 

Brown Shoe Company, Inc.

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

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

 

Matters to be voted on:

 

1. Election of six directors

 

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

 

3. Any other matters if properly raised

 

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

 

Registered holders may vote:

 

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

 

2. By toll-free telephone: call 1-866-540-5760, or

 

 

Beneficial holders.  If your shares are held in the name of a broker, bank or other holder of record, follow the voting instructions you receive from your holder of record to vote your shares.

 

It is 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 14, 2009

TABLE OF CONTENTS

 

PROXY STATEMENT — 2009 ANNUAL MEETING OF SHAREHOLDERS

 

PROXY STATEMENT
FOR THE BROWN SHOE COMPANY, INC.
2009 ANNUAL MEETING OF SHAREHOLDERS

 

Why have these proxy materials been made available?

 

Your board of directors is soliciting proxies to be voted at the 2009 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 April 3, 2009. There were 42,904,505 shares of our common stock issued and outstanding on April 3, 2009.

 

On April 14, 2009, we mailed 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 28, 2009 in the Conference Center at our headquarters, located at 8300 Maryland Avenue, St. Louis, Missouri 63105. The meeting will begin at 11:00 a.m., Central Daylight Time.

 

What am I voting on?

 

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

 

Mario L. Baeza, Carla Hendra, Michael F. Neidorff and Harold B. Wright, each for a three-year term; and
Joseph L. Bower and Julie C. Esrey, each for a two-year term, and

 

 

Why haven’t I received a printed copy of the proxy or annual report?

 

This year we have elected to take advantage of the Securities and Exchange Commission’s (“SEC”) rule that allows 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 14, 2009, we mailed to our shareholders a Notice containing instructions on how to access our proxy statement and 2008 annual report online. If you hold your shares through a broker or bank, the Notice will be sent to you by your bank or brokerage firm. 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.

 

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

 

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

 

 

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

 

 

In the U.S. and Canada, you can vote your shares by telephone by calling the toll-free telephone number: 866-540-5760. 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 have requested printed proxy materials and received a proxy card, you can vote by mail. Simply mark your proxy card, date and sign it, and return it in the postage-paid envelope provided. Even if you have a proxy card, you can still vote by Internet or telephone.

 

If you vote by proxy using any of these three methods, your shares will be voted in the manner you indicate. You may specify whether your shares should be voted for all, some or none of the nominees for director and for or against any other proposals properly brought before the annual meeting. If you vote by telephone or Internet and choose to vote with the recommendation of your board, or if you vote by mail, sign your proxy card, and do not indicate specific choices, your shares will be voted “FOR” the election of all nominees for director and “FOR” the ratification of Ernst & Young LLP as the Company’s independent registered 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 Notice or 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 bank or brokerage firm as your nominee, your bank or broker will send you a separate package describing the procedures for voting your shares. You should follow the instructions provided by your bank or brokerage firm.

 

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 3, 2009, 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, April 3, 2009, 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 stock 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 2008 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 by a proxy 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 bank or brokerage firm, you must obtain a proxy, executed in your favor, from the bank or broker, 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.” 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 or broker is permitted to vote your shares on the election of directors and ratification of the appointment of independent registered public accountants, even if the holder does not receive voting instructions from you.

 

Shares represented by proxies that are marked vote “withheld” with respect to the election of any person to serve on the board will not be considered in determining whether such a person has received the affirmative vote of a plurality of the shares. Shares represented by proxies that are marked “abstain” with respect to any other proposal, including Proposal 2, 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.

 

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 2009, which we expect to file on or before June 11, 2009. You can obtain a copy of the Form 10-Q 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 householding notification from your broker earlier this year and, consequently, you may receive only one Notice or other materials. If you prefer to receive separate copies of the Notice and other materials, either now or in the future, we will promptly deliver, upon your written or oral request, separate copies, as requested, to any shareholder at your address to which a single copy was delivered. Notice should be given to us by mail at 8300 Maryland Avenue, St. Louis, Missouri 63105, attention: Senior Vice President, General Counsel and Corporate Secretary, or by telephone at (314) 854-4000. If you are currently a shareholder sharing an address with another shareholder and wish to have only one Notice or other shareholder materials delivered to the household in the future, please contact us at the same address or telephone number.

 

Since 1878, we have been guided by a value system that emphasizes integrity and trust at all levels of our organization. We have longstanding policies and practices to promote the management of our Company with integrity and in our shareholders’ best interests. The board has adopted and adheres to Corporate Governance Guidelines that the board and senior management believe represent sound practices. The corporate governance guidelines are available on our website at www.brownshoe.com/governance. The board periodically reviews these guidelines, New York law (the state in which we are incorporated), the rules and listing standards of the NYSE, 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. 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, our Corporate Governance Guidelines, as well as our Code of Business Conduct and Code of Ethics 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 thirteen members of the board, eleven meet the NYSE standards for independence. A director is considered to be an independent director only if the director does not have a material relationship with the Company, as determined by the board. The board has adopted standards for independence to assist it in making this determination. These standards are described in the Company’s Corporate Governance Guidelines, available on our website at www.brownshoe.com/governance. 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. In making its determination of independence, the board was apprised that Ms. Hendra is affiliated with OgilvyOne LLC, to which the Company made payment in fiscal 2008 related to services provided in the prior fiscal year. The board determined that the amounts paid by the Company to this director-affiliated entity in fiscal 2008 were not material to the Company or to such director-affiliated entity. With our board comprised of eleven independent directors out of thirteen, we are in compliance with our goal, as set forth in the Corporate Governance Guidelines, that two-thirds of the directors will be independent under the NYSE standards.

 

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

 

We have a Code of Business Conduct that is applicable to all directors, officers and employees of the Company. We have an additional Code of Ethics that is applicable to the principal executive officer, principal financial officer and principal accounting officer. Both the Code of Business Conduct and the Code of Ethics are available on the Company’s website at www.brownshoe.com/governance, and copies of these codes 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. 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 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. 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.

 

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 2008. Each director attended at least 75% of the total number of meetings of the board and of the committees on which he or she serves. All of our directors except one attended the 2008 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 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 a “financial expert.” The board, through the Corporate Governance Guidelines, has established the policy that no member of the Audit Committee may serve on the audit committees of more than three public companies (including our Audit Committee). Also see “Audit Committee Report.”

 

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

 

The Company, through its Total Rewards department, has retained Hewitt Associates LLC (“Hewitt”) as its compensation consultant for both executive and director compensation. The executive compensation services are provided upon request from our Vice President — Total Rewards and are focused on matters related to the Committee’s activities; as deemed appropriate, the consultant’s work product and advice are communicated to the Committee. In 2008, a separate division of Hewitt was used to advise the Company regarding amendments to our 2002 incentive plan, with a specific focus on maximizing shares to be available under the plan consistent with anticipated investor concerns of dilution and overhang and criteria published by RiskMetrics Group. The Company also retains Towers Perrin for pension-related consulting services. The role of the compensation consultant and management are also discussed in the CD&A. The Committee does not retain an independent compensation consultant to provide information, make compensation recommendations or assist in the compensation review and decision-making process.

 

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.

 

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 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. In making its recommendation for compensation of non-employee directors, the Governance and Nominating Committee is provided with comparative peer group data prepared by Hewitt, the Company’s compensation consultant, but the consultant does not meet with the committee or participate in the fee-setting process. 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. 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 2010 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. In accordance with the Corporate Governance Guidelines, the Governance and Nominating Committee will not recommend election of any individual as a director for a term extending beyond the annual shareholders’ meeting following the end of the calendar year during which such individual turns 72. 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.

 

Our related party transaction policy provides for the board to review all transactions expected to exceed $120,000 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 $120,000 in the subsequent year. For purposes of this policy, related parties include the Company’s executive officers, directors or nominees, or 5% beneficial owners 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 transactions 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, and $35,000 of this amount was paid in fiscal 2008. Mr. Fromm does not have a direct, material interest in this matching gift.

 

In fiscal 2008, there were no material transactions between the Company and its executive officers and directors, or their immediate family members, 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 10% of our common 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 common 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, except for a Form 4 due March 22, 2008 to report a single purchase transaction for Hal J. Upbin.

 

The members of the Compensation Committee for fiscal 2008 were those indicated in the table under the heading “Meetings and Committees.” None of the members of the Compensation Committee has been an officer or employee of ours. 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 2008, commencing with the 2008 annual meeting on May 22, 2008, the following compensation guidelines were in effect for non-employee directors, with cash retainers payable quarterly in arrears:

 

 

 

The grant of either restricted stock or RSUs to directors as part of their annual compensation is intended to align directors’ interests with those of shareholders. During the portion of fiscal 2008 prior to last year’s annual meeting, the director compensation approved in May 2007 was in effect, and provided for the same cash compensation payments to non-employee directors. In setting compensation levels for non-employee directors elected in 2008, the Governance and Nominating Committee was provided median level data for a peer group of 20 companies (most of which were also used for executive compensation peer data), with the data elements including annual retainer, board and committee meeting fees, equity grants and total annual compensation. Although our director compensation levels as compared to the peer median ranged from 16% to 29% below peer median for the annual board retainer, per board meeting fee, total retainer and fees, equity and total compensation, the board determined that no increase should be made as to the amount of compensation for 2008-2009 board service.

 

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 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 fiscal 2008. Although directors became eligible to participate in the Non-Employee Director Share Plan commencing January 1, 2009, this was one month prior to our fiscal year-end and no participants received any shares for services during that one-month period. Also, although non-employee directors may participate in a deferred compensation plan, that plan does not result in above-market earnings; thus, information related to the deferred compensation plan is reflected in Note 2 to the following table.

 

Non-Employee Director Compensation Table

 

 

 

 

Annual awards of restricted stock or RSUs (at the director’s election) were granted on May 22, 2008 as compensation for services during the following year, with vesting at the next annual meeting date (May 28, 2009). The Stock Awards amounts reported in the Non-Employee Director Compensation table have been calculated based on the expense related to these awards recognized for financial statement reporting purposes for fiscal 2008, but the amount shown in the Non-Employee Director Compensation table as loss in value for stock awards has been reduced in accordance with SEC rules (see Note 3 below).

 

The following table shows the component elements for computation of the amount of “Stock Awards” shown in the Non-Employee Director Compensation table, as well as the stock awards granted to directors during fiscal 2008 and the current market value of stock awards held by such directors at fiscal 2008 year-end:

 

Non-Employee Director Stock Awards

 

 

 

 

 

 

 

In March 2009, the Governance and Nominating Committee recommended that compensation levels for non-employee directors remain substantially the same for the year following the annual meeting, with the option to receive restricted stock or cash-settled RSUs as the annual equity grant, and the option to receive the annual retainer payment and/or meeting fees in Company shares instead of cash (based on current market value on the payment date). The exact number of shares for the annual grant of restricted stock or RSUs to non-employee directors will be determined by the board in conjunction with the annual meeting.

 

The RSUs 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 RSU, subject to satisfaction of a one-year vesting requirement. For each grant, the board establishes an approximate aggregate cash value for the grant, and then determines the exact number of RSUs (or shares of restricted stock commencing this year) 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 prior to the board meeting held on the same date as the annual meeting. The units or shares vest in full one year after the date of grant, and the payout of the RSUs’ value will be on the date that service as director terminates 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. The restricted stock will earn dividends at the same rate as other shareholders. 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 on a voluntary basis 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 (calculated as the mean 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 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. For calendar year 2009, none of our non-employee directors have elected to participate in this plan as to deferral of fees earned; however, the accounts of prior participants will continue to earn dividend equivalents on the account balance.

 

In December 2008, the board adopted the Non-Employee Director Share Plan, to be effective January 1, 2009, to allow a non-employee 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 mean of the high and low price of our stock, usually determined as of the first business day following the meeting or following the payment date for a retainer. While participation in this plan is optional, it enables a director to acquire additional shares to satisfy stock ownership guidelines (described below under the heading “Non-Employee Director Stock Ownership”) and to remain aligned with shareholders. Two of our directors began participating in this plan on February 1, 2009.

 

In March 2008, the board adopted stock ownership guidelines for non-employee directors. The purpose of these guidelines is to encourage long-term share ownership by our directors and better align the interests of non-employee directors with shareholders. The guidelines provide that all non-employee directors will hold shares of our stock or stock equivalents with a value at least equal to five times the annual cash retainer paid to them. For purposes of these guidelines, the following stock interests qualify under the guidelines: stock beneficially owned outside of Company-sponsored plans, stock held in any Company-sponsored stock-based plan, common 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 becoming subject to the guidelines.

 

The following table shows the amount of our common stock beneficially owned as of March 31, 2009, by each director and nominee, each of the named executive officers (“NEOs”) listed in the Summary Compensation Table, 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 common stock on March 31, 2009 (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, 2009 (60 days after March 31, 2009). 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.

 

Stock Ownership

 

 

 

 

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 (recently changed from 70 years), and preclude 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.

 

With the recent change to the Corporate Governance Guidelines, the board may nominate Joseph L. Bower and Julie E. Esrey, whose current terms expire at the 2009 annual meeting, only for two-year terms. In order to accommodate Dr. Bower and Ms. Esrey in the class of directors whose terms expire at the 2011 annual meeting, one member of that class must move to another in order for our director classes to be as equal as possible. The board has, therefore, nominated Harold B. Wright, who was elected by shareholders at the 2008 annual meeting to a three-year term ending in 2011, to a new three-year term. Assuming the election of the proposed nominees for the terms proposed, the class of directors whose term will expire in 2012 will have four members; the class whose term will expire in 2011 will have five members, including the two nominees who will be in that class; and, the class whose term will expire in 2010 will have four members. Your board has nominated for election as directors at the 2009 annual meeting four individuals, Mario L. Baeza, Carla Hendra, Michael F. Neidorff and Harold B. Wright, each for a three-year term; and two individuals, Joseph L. Bower and Julie C. Esrey, each for a two-year term.

 

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

 

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

 

 

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

 

 

 

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

 

 

 

 

The Audit Committee has appointed Ernst & Young LLP as the independent registered public accountants to audit the Company’s consolidated financial statements for the fiscal year ending January 30, 2010. 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 2008 and fiscal 2007, Ernst & Young LLP were our independent registered public accountants and charged fees for services rendered to us as follows:

 

 

 

 

In fiscal 2008, 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. Management is primarily responsible for the consolidated financial statements and reporting processes including the systems of internal controls, while the independent registered public accountants are responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with auditing standards generally accepted in the United States, and expressing an opinion on the conformity of those consolidated financial statements with accounting principles generally accepted in the United States.

 

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

 

The Company’s independent registered public accountants also provided to the committee the written disclosures required by the applicable requirement of the Public Company Accounting Oversight Board regarding the independent registered public accountant’s communications with the Audit Committee concerning independence, 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 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 31, 2009 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 2009.

 

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

 

Audit Committee

Hal J. Upbin, Chair

Ward M. Klein

Steven W. Korn

W. Patrick McGinnis

 

Overall, 2008 proved to be one of the most difficult business environments in our history. We reported a loss of $3.21 per diluted share for the year; and after adjustment to exclude special charges and recoveries, we did not meet the threshold performance level of adjusted diluted earnings per share (“EPS”) for the 2008 annual incentive or the 2006-2008 long-term incentive. In addition, management has estimated that we will not meet the minimum performance threshold for payout of our outstanding long-term incentives for the 2007-2009 and the 2008-2010 performance periods. As a result, these awards remain outstanding but no longer have the retentive and incentive value originally contemplated. Our compensation programs have also been affected by the dramatic decline in our stock price since the beginning of fiscal 2008.

 

A continuing difficult economic environment seems likely for 2009 and our Compensation Committee has implemented cost-reduction measures to our executive compensation. However, the Committee remained steadfast in its commitment to long-term incentive horizons, pay for demonstrated performance and an emphasis on equity-based compensation that ensures direct alignment between executive and shareholder interests. In an effort to drive for the best possible outcomes while continuing to build the competencies needed to ensure future growth, the Committee approved the following changes to our 2009 executive compensation program, all of which apply to our executive officers named in the Summary Compensation Table (“NEOs”):

 

 

 

 

 

 

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.

 

The principle objectives of our executive compensation program are:

 

 

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

 

 

The Company has retained Hewitt Associates for executive compensation advice. Our Vice President — Total Rewards serves as the Company’s principal contact with our consultant. As the Committee has found this outside consulting support to be both sufficient and appropriate to serve its needs, the Committee’s chairman has declined to retain a second consultant to report directly and exclusively to the Committee. Thus, no outside consultant advises the Committee directly or participates in its deliberative process regarding individual compensation levels.

 

Our Total Rewards department uses Hewitt as it deems necessary to support the Committee in carrying out its responsibilities throughout the year. To provide this support, particularly as to the development of compensation programs and establishing appropriate compensation levels for our most senior executives, our Total Rewards department used Hewitt for executive compensation advice in 2008 concerning:

 

 

Over the many years that Hewitt has served the Company, a representative of Hewitt has attended occasional meetings of the Committee, such as when a market study of peer group compensation has been conducted. With regard to establishing executive compensation for 2008, a representative of Hewitt did not attend any meeting of the Committee.

 

Our Vice President — Total Rewards provides advance information with recommended levels for the annual compensation elements for a group of senior executives including the NEOs, but not for our CEO. This advance information includes certain information provided by our consultant on CEO compensation as well as the consultant’s recommended level for CEO incentive and equity award levels.

 

Our CEO assists the Committee by making compensation recommendations for the other NEOs, including base salary and annual and long-term incentive awards. Our CEO provides to the Committee his relative value ranking for the other NEOs and the performance ratings in connection with the prescribed Company-wide evaluation process and is present at the Committee’s March meeting, along with our Senior Vice President — Chief Talent Officer, 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 grid 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 great weight to management’s recommendations, but exercises its independent discretion to accept, reject or modify these recommendations. In March 2008, the Committee discussed these recommendations with the CEO and also met in executive session, and determined to implement all of management’s recommendations as to base salary and award levels for the other NEOs for 2008.

 

Our Governance and Nominating Committee is responsible for evaluating the CEO’s performance, and utilizes a formal process administered by an outside human resources consulting firm for that purpose. This performance appraisal considers Mr. Fromm’s performance in the areas of organizational leadership, financial results, and board governance, and includes surveying all members of the board. When evaluating the CEO’s performance, the

Governance and Nominating Committee meets in executive session without management present, although other non-management members of the board are invited to participate in that Committee’s meeting. Subject to the Governance and Nominating Committee’s evaluation, the Compensation Committee reviews and determines the CEO’s compensation in executive session. The CEO does not interface with the Committee with respect to his own compensation, and no other Company executives are involved.

 

The timeframe for setting annual levels of the key compensation elements for the NEOs is conducted early in the fiscal year, at the March meeting when prior year financial results are known. However, information regarding peer practices and trend development, analysis of our programs and outcomes, and discussion of possible program changes begins several months earlier. Also, throughout the year, the Committee considers overall structure and elements of the compensation and updates the types of compensation incentive and/or benefits as deemed appropriate.

 

The Committee utilizes a variety of information resources in fulfilling its responsibilities to determine executive compensation, with most information provided through 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 Company seeks information and advice from Hewitt 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 more judgmental in nature. There is no established formula for weighting these factors, some of which are intangible and not readily quantifiable, nor a pre-established

priority. Depending on the year or the individual, the Committee may find certain factors more significant than others. As a group, however, they provide necessary context and perspective for determining the relative value of different senior executives to the Company and for developing a compensation program that will meet program objectives and providing the right performance incentives.

 

In considering performance-based compensation elements each year, such as the annual incentive and the long-term incentive plan, the Committee evaluates the performance metrics as well as the performance goal levels used to establish the grid of potential payouts. The Committee does not necessarily establish the performance goal levels based on management’s operating plan, but rather on performance levels that the Committee believes promotes Company growth without sacrificing quality of earnings. The Committee also considers that both the metrics and goals be significant as a measure of executive efforts in managing the business consistent with the business plan and operating strategy, and in the bests interests of investors.

 

2008 Total Compensation Opportunity.  To develop compensation packages for the NEOs for 2008, the Committee used a market-value approach and focused its review on those elements that change 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 half of the total long-term value and granted performance awards for the other half. The Committee then determined grant levels for the other NEOs equal to approximately one-fourth of the CEO’s grant level. 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 that the Committee considered peer group data when setting 2008 compensation, there was data available on a job level comparison basis for each of the NEOs except for Mr. Ausick.

 

Grant Date Market Analysis for Fiscal 2008.  The market-value approach for long-term incentives discounts the potential value of long-term elements to determine a current market value as of the date the information is prepared or reviewed. This approach enables a comparison with peer group data available from our compensation consultant as well as other compensation databases. The 2008 market-value analysis for the NEOs prepared in March 2008 is set forth in the following table, and can be compared to the similar market values developed for fiscal 2007 (and which are set forth in the table that follows the 2008 table):

 

Grant Date Market Analysis (March 2008)

 

 

 

 

 

The above table and charts illustrate alternative ways of approaching the adequacy and mix of the compensation elements by NEO and as a group to review whether the allocations are consistent with our objectives, such as by considering the short-term/long-term allocation, cash versus equity split, fixed versus variable and the amount that is performance-based. This data also reflects that the most senior executives with the greatest scope of job responsibilities have a higher proportion of their compensation tied to long-term versus short-term performance and that an increasing percentage of compensation is performance-based rather than fixed. The table data also indicates that base salary represents no more than 43% of the total compensation opportunity for any NEO.

 

The current value approach used by the Committee is quite different from the methodology and assumptions used to determine the compensation amounts reflected in the Summary Compensation Table for fiscal 2008. From the Committee’s perspective, the compensation offered is the sum of the opportunity or potential value to the executive, as considered at the beginning of the year. In contrast, the approach used in the Summary Compensation Table is derived from historical accounting and is based primarily on the Company’s expense for financial reporting purposes. For example, the Summary Compensation Table column for Stock Awards reflects the amortized expense of both current and previously granted equity compensation (such as amortization of prior stock based on the original grant date fair value). In addition, the Committee did not assign a value to compensation elements that do not provide a current year opportunity (such as pension plans), nor did it assign cash values to perquisites, both of which are included in the Summary Compensation Table. Thus, the compensation market values and the Committee’s overall approach described in this CD&A do not correspond to, and are not a substitute for, the values disclosed in the Summary Compensation Table.

 

Target Market Values for Fiscal 2007.  For the compensation elements where the Committee considers current market values, including a year-over-year change, the following table sets forth grant date market values applicable

to the Committee’s determination in March 2007 as for fiscal 2007 compensation, and assumes that both the annual and long-term incentives are paid at their target value:

 

Fiscal 2007 Target Market Value

 

 

 

 

Base Salary 2008.  For fiscal 2008, the Committee considered that the Company did not meet its fiscal 2007 financial objectives, and determined not to grant salary increases to four of the NEOs (whose salaries were between 1.1% and 10.9% above the peer group median level for 2007). The Committee did approve a 4.2% base salary increase for Mr. Hood as a market adjustment, based on peer market value for his job level and internal equity when compared to other Company executives with a similar scope of responsibility. In granting this salary increase to Mr. Hood, the Committee also acknowledged his additional responsibilities for real estate administration. For fiscal 2008, the base salaries for our NEOs were within a range of 4.5% below and 17.1% above the peer group median (exclusive of Mr. Ausick, for whom comparative data was not available).

 

In conjunction with its determinations of base salary, the Committee sought to acknowledge special achievements and encourage retention for Mr. Wood and Mr. Ausick by approving a one-time cash payment in lieu of a merit increase. This is a common practice used by executive compensation practitioners for executives whose base salary is already at an appropriate level compared to peers both within the organization and externally; and has been applied by the Committee to a limited number of other Company executives. For Mr. Wood, the one-time payment of $13,000 (2.4% of prior year base salary) was based on the performance of the retail division in 2007 and the expectation of a challenging retail environment for 2008. For Mr. Ausick, the one-time payment of $13,000 (2.7% of prior year base salary) was based on the operating challenges presented by integrating and developing new brands. These one-time cash payments are included in All Other Compensation in the Summary Compensation Table.

 

Annual Incentive 2008.  The Committee approved “target” levels for the annual incentive as a percentage of base salary. These decisions were based on updated peer group median levels and Hewitt’s recommended percentages for our NEOs, taking into consideration our other proposed compensation elements and overall objectives. 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 Committee approved a five percentage point increase to the annual incentive percentages for Mr. Fromm, Ms. Sullivan and Mr. Hood after considering internal equity and median peer group percentages for annual incentives. The annual incentive target percentages and the cash payout amounts based on meeting plan performance are set forth in the Grant Date Market Analysis (March 2008) table above. As compared to the peer group median for percentage of salary, the annual incentive percentages of salary for the NEOs (excluding Mr. Ausick) were within a range of 0.4 percentage points below to 3.4 percentage points above the peer median percentage of salary. As to the comparability of the 2008 target cash payout for our NEOs (excluding

Mr. Ausick) based on the annual incentive percentages awarded, the market values shown in the Grant Date Market Analysis above were within a range of 5.9% below to 22.3% above the peer median market value.

 

As with prior years, the Committee selected Adjusted EPS as the sole financial metric for the 2008 annual awards for corporate level awards. This metric was selected because it is both the most closely followed by shareholders and a good indicator of annual operating performance for our industry. For divisional executives, a weighted combination of division and consolidated net earnings was utilized as the metric. The Committee believes that by allowing adjustments to EPS to exclude special charges and recoveries, certain items that are not indicative of the Company’s core operating results can be excluded. As a result, Adjusted EPS will serve as a non-GAAP measure of core business performance and reflect underlying trends in the Company’s business. The Committee set the performance goals for this award based on the business plan for the year; and our annual incentive awards are earned based on the achievement of business and individual performance goals that are designed to deliver business results that are challenging. The 2008 goal level of Adjusted EPS was based on planned earnings for the year and an estimated diluted EPS within the range of public guidance given by the Company early in the year. 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 payout. For division level executives, the payout grid was based on division earnings and the same range as a percent of plan goal was used in setting the threshold and maximum.

 

For fiscal 2008, the minimum (threshold), plan goal and maximum performance levels for Adjusted EPS and the corresponding award levels for the corporate level plan were:

 

 

In March 2009, management presented its calculation of 2008 consolidated Adjusted EPS, which included adjustments to exclude costs related to our Madison headquarters relocation, expense and capital containment initiatives, information technology initiatives, and impairment of goodwill and intangible assets, as well as insurance recoveries (net). Based on that calculation, the threshold level of Adjusted EPS for the 2008 incentive awards was not satisfied, and the Committee determined that no payout for the 2008 annual incentive would be made. The Committee did not consider individual level performance that might otherwise be applicable to the exercise of negative discretion regarding these awards.

 

Total Long-Term Compensation.  In approving the long-term compensation to be awarded, the Committee reviewed management’s recommended levels for the incentive and equity awards to be granted, as well as the methodology to determine those levels, each of which was based upon the compensation consultant’s advice. These recommendations were prepared using a grant date market value approach and assumed that we would meet our three-year performance goals, which would result in payout of the long-term incentive awards at target level. Based on the consultant’s advice, the Committee focused on the aggregate current market value for the CEO’s long-term elements (to include all long-term performance awards and equity awards), with the intent that the total long-term market value be considered relative to the peer group median for that job level. Once the total long-term value for the CEO was determined, that market value was then allocated 50% to performance units and 50% to service-vested restricted stock. With a proposed market value for the performance units set for the CEO, and an intended split of 50% of that amount for performance shares and 50% for a performance cash award, the actual number of performance shares awarded was based on a discounted market value for our stock on the date of the Committee’s approval, and the same process was used to determine the number of restricted shares to be granted. After setting the CEO’s grant levels for performance units and restricted stock, to maintain internal equity, the Committee approved award levels for the other NEOs (except for the President) as a percentage of the CEO’s award amount, with each level receiving approximately half as many shares as the level above. For our President, there was

sufficient peer group data available to set the aggregate long-term value for the job level, and the same 50/50 allocation formula was applied between performance units and restricted stock.

 

The Committee considered peer group data when setting total long-term compensation, which is the aggregate value for long-term incentive awards as well as equity grants of stock options and/or restricted stock. For fiscal 2008, the average market value of the NEOs’ long-term opportunity equaled 39% of the total compensation opportunity, representing an increase from an average of 34% for the prior fiscal year. The increase in the long-term opportunity also brought Mr. Hood, Ms. Sullivan and Mr. Wood, who were significantly below peer level in fiscal 2007, closer to the peer group median as well as increased the compensation at risk as a proportion of total compensation. The following table shows how the total long-term compensation elements for 2008 (as included in the above Grant Date Market Analysis (March 2008)) compared to the 2008 peer group medians as well as 2007 levels:

 

Total Long-Term Compensation Opportunity

 

 

Long-Term Incentive for 2008-2010.  The Committee’s determination to offer performance units with a cash component was a change from the prior years’ practice of awarding only performance shares, but was approved after considering that an award payable solely in shares would deplete a significant portion of the shares available under our 2002 incentive plan. The addition of a long-term cash award did not alter the market value of the awards, nor did it reduce the emphasis on at risk compensation or the emphasis on performance incentives. As in prior years, a three-year performance period was used, so that the NEOs would have overlapping performance awards.

 

The Committee continued with its practice of setting challenging performance goals for these awards, which were approved after reviewing the plan design recommended by management and discussing with management the prior year’s EPS and net sales growth as well as current year estimates. To develop the grid of recommended performance levels and potential payouts for the performance units, management estimated earnings for the first year (2008), using the range of public guidance given in our fiscal year earnings release, and then assumed a 10% increase in EPS for each of the second and third years. The two financial metrics used for the 2008-2010 long-term incentive awards were cumulative Adjusted EPS and Compound Annual Net Sales Growth Rate (“Net Sales CAGR”) for the three-year performance period. The Committee approved these performance metrics because it deemed them to be key indicators of our financial and operating success, as well as indicators of continued growth of the business.

 

For the long-term awards, the Committee set a minimum level of cumulative Adjusted EPS that must be achieved for the award to be payable as well as a level at which, depending on the Net Sales CAGR, the maximum payout opportunity (200% of target award) can be achieved. However, there is a range of payout levels for each metric, depending on how well our performance is on the other metric. 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. For the three long-term performance awards that included fiscal 2008 within the performance period, the following table indicates selected performance combinations to illustrate plan performance goals that are at the middle of the payout ranges for both metrics, and all references to “Adjusted EPS” mean “cumulative” Adjusted EPS:

 

Long-Term Incentive Awards

 

 

Equity Awards 2008.  The Committee approved restricted share grants for the NEOs in 2008 in amounts that had a current market value equal to 50% of the total long-term compensation opportunity granted. For Mr. Ausick, a grant of stock options was made as an additional means to foster leadership continuity by a strong alignment with shareholders and a variety of longer term incentives. However, all of our NEOs have outstanding stock options in connection with prior grants (see table of Equity Awards at Fiscal Year End). For fiscal 2008, dividends earned on restricted stock by the NEOs were as follows: Mr. Fromm — $24,439, Mr. Hood — $4,778, Ms. Sullivan — $20,738, Mr. Wood — $8,522 and Mr. Ausick — $9,542.

 

As part of the compensation setting process for 2009, both management and the Committee considered the aggregate compensation earned by the executives in the prior year, and how the amount actually earned compared with the total compensation opportunity that was offered. As described above, the opportunity offered each year included long-term elements that were discounted to a current value, but these elements could not be earned during the year of grant because they had a multi-year performance or vesting period. In considering what was earned in 2008, certain long-term elements granted in prior years were included, and they were deemed “earned” for purposes of this comparison if they vested during the fiscal year, or if the fiscal year at issue was the last year of performance required (even if paid after year-end). The calculation of earned compensation would generally include the following: salary and additional bonus/extra payments received for 2008; any payout on the annual incentive for 2008; any payout on a long-term incentive for which 2008 was the last year of the performance period and with payout following that year (for example, the 2006-2008 incentive); restricted stock vested during the year (valued at the market value of our stock on the vesting date and without consideration of taxes); spread value on stock options vested during the year (spread value was calculated based on the market value of our stock on the vesting date); and dividends earned on restricted stock paid during the year.

The following chart shows for each NEO the total targeted compensation value approved at the beginning of fiscal year 2008, and the total amount earned for fiscal year 2008. The 2008 opportunity amount reflects the market values used to set 2008 compensation, and the 2008 compensation earned reflects: 2008 salary and one time cash adjustments in lieu of increase; market value of restricted stock that vested; the spread between the market price and the option price on stock options that vested during the year; and the value of dividends paid during the year on restricted stock:

 

 

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

 

Pension Plan.  We offer a broad-based tax-qualified defined benefit pension plan to substantially all employees. Participants who have completed five continuous years of employment with us are vested and earn the right to receive unreduced benefits upon retirement at 65 or later, and a reduced benefit upon retirement between the ages of 55 and 65. The benefit available increases with service and age, particularly if the participant remains an employee through retirement 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. As indicated below with respect to our Severance Agreements, 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 and requires a cash payout from the Company’s general assets. The single trigger of change in control provision is, for the most part, merely an

acceleration of vested benefits, and it is only for the relatively new executive that the accelerated vesting will alter the benefit payable.

 

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 selected group of employees, and the Committee has authorized deferral of up to 50% of base salary and 100% of cash incentive 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 and likely to be of value to the individuals we seek to attract and retain as executives.

 

For a limited group of executives, including our NEOs, we utilize severance agreements as a means to retain and attract executives in a competitive market for talent. In exchange for the right to receive these benefits following a change in control, the executive agrees to a non-compete agreement for up to two years following any termination of employment. In the event of an involuntary termination by the Company without cause, the NEO will receive cash severance equal to two times salary and target annual incentive (bonus), payment of the current year’s annual incentive assuming plan performance goals are met and with payout pro-rated to the date of termination; two years’ accelerated vesting for stock options and restricted stock; and medical and outplacement benefits. We believe these benefits constitute fair severance protection to allow for transition to new employment post-termination, as it is expected that executives generally need a significant amount of time to locate comparable positions elsewhere. For Mr. Fromm only, these severance benefits are also payable in the event he terminates his employment within ninety days after “good reason.” This additional basis for severance is available to Mr. Fromm as a result of his integral role as both chairman and CEO.

 

Our 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 a threefold multiple of salary and target annual incentive. 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’ 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.

 

Our incentive stock plans have “single trigger” change in control provisions that accelerate vesting of outstanding stock options and restricted stock, and provide for annual cash incentives and performance shares to be paid at target level. We believe that having both single trigger (in our 2002 incentive plan, SERP and Deferred Compensation Plan) and double trigger change in control provisions is consistent with market practices and serves our retention objectives without providing windfall benefits to executives who continue as employees of the acquiring company. We also believe the single and double trigger benefits may be attractive to potential acquiring companies that place significant value on retaining members of our executive team. While we believe that change in control benefits and our severance agreements are important to our overall compensation package, management 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.

 

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 6 to that table. The perquisites not otherwise available to all employees include:

 

 

We provide relocation assistance to all employees who are required to move to join the Company or are requested to move by the Company. All relocated employees receive assistance under the terms of standard plans administered by a relocation consultant; and these plans include limited increased benefits for higher job levels. In connection with the relocation of our Madison headquarters in 2008, Mr. Wood received relocation assistance pursuant to the Company plan adopted for all Madison employees. The relocation benefits received by Mr. Wood have been deemed to be compensation, including reimbursements and allowances in accordance with the plan, an additional incidentals allowance and loss on sale payment in excess of the plan, and tax gross-up amounts included on Mr. Wood’s W-2; and all of these amounts are reflected in the All Other Compensation column, and Note 6 to the Summary Compensation Table. In addition, as provided by the plan, our relocation services provider purchased Mr. Wood’s personal residence at appraised value. This home purchase has not been treated as compensation to Mr. Wood and has not been included in the Summary Compensation Table because the Company’s cost was limited to standard administrative fees and did not include funding the purchase price. The increased incidentals allowance and additional loss on home sale benefits paid to Mr. Wood are included in the Summary Compensation Table, but were not exclusive to Mr. Wood. These additional benefits, as well as the expected result that relocation benefits might result in Mr. Wood’s taxable income exceeding $1,000,000 and such excess would not be deductible by the Company for tax purposes pursuant to Section 162(m) of the Internal Revenue Code (see section titled “Policy on Deductibility of Compensation”), were approved by the Committee given Mr. Wood’s critical role in accomplishing the headquarters transition.

 

The Total Rewards department has commissioned Hewitt every few years to prepare a market study with peer group information, selective job-by-job comparative market data to a peer group of footwear and retail businesses, and compensation recommendations for select job levels. In late 2006, Hewitt prepared a market study for the Company for use in setting compensation for fiscal 2007. This study included comparative size-adjusted public and proprietary data, on a job level basis and peer median values, for the following compensation elements: base salary, annual incentive (both actual and target), long-term incentive awards (including stock options, restricted stock and long-term performance plans), total compensation, executive benefits and perquisites. A new peer group market study was not prepared for fiscal 2008. This determination was based on discussions between Hewitt and our Vice President — Total Rewards concerning the relatively static industry compensation levels since the prior report, the availability of compensation data in proxy statements filed with the SEC and the consent of the Committee’s chairman to forego the report given the expense involved. However, our Vice President — Total Rewards discussed 2008 peer group selection with Hewitt, and requested updated job level peer data and recommendations for annual incentives as a percent of salary.

 

The 2008 peer group of 19 companies used for job-level review included:

 

 

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. Within the 2007 report, there was a footwear and retail sub-group of 21 companies with median net sales of $1.8 billion, assets of $1.2 billion, and 17,000 employees, and for 2008, we did not compile new statistics on peer group members. However, after Payless ShoeSource became Collective Brands and acquired Stride Rite, separate reporting for these two entities was no longer available and they were deleted. At fiscal year-end 2007, the Company had net sales of $2.4 billion, assets of $1.1 billion and approximately 13,000 employees.

 

Over the course of several meetings from December 2008 through March 2009, the Committee conducted its annual compensation review for the company’s senior executive officers. Based on its review of individual and Company performance for fiscal 2008 and considering the difficult economic environment anticipated for fiscal 2009, including information provided by our compensation consultant as to how other companies are responding to the challenges presented by the current environment, the Committee approved base salaries, equity grants and annual and long-term incentive awards for fiscal 2009. Although management provided information and recommendations to the Committee and was present at certain portions of the Committee’s meetings, the Committee made substantial changes to the incentive plans that were finally adopted as described herein.

 

The Company retained Hewitt to prepare a market study to be used in the consideration of 2009 compensation for the NEOs, and a representative of Hewitt attended the Committee’s meeting in December 2008 to present the study and review compensation trends and developments, including potential significant changes then being considered by other companies and discussed by compensation professionals. The 2009 peer group for comparison purposes included 28 similarly sized footwear and retail companies (median sales of $1.9 billion, assets of $566 million, and 14,300 employees) and was prepared using information from early 2008. Notwithstanding that this market study was prepared relatively recently, management did not rely upon it when preparing its 2009 compensation recommendations for the Committee. With the concurrence of Hewitt, our Vice President — Total Rewards

determined that over the course of just a few months, the market study results no longer reflected current market practices, and therefore no longer served as a reliable benchmark. Although peer group median data for each compensation element was provided to the Committee in connection with its 2009 compensation-setting process, in discussing 2009 compensation levels, the Committee recognized that the peer data was of limited use as a source of current comparative information. In lieu of peer group data or specific company comparisons, management did rely upon, and conveyed to the Committee, advice from Hewitt as to changing approaches to compensation, and in particular, alternative valuation methods to determine long-term award values and amounts. The Committee’s approval of an average stock price value for determining long-term awards was based on one of the suggestions made by Hewitt and conveyed to the Committee.

 

Impact of Adverse Economic Conditions and Decline in Stock Price.  Due to the deterioration in economic conditions and the impact on consumer spending, the assumptions used in previous forecasts of long-term performance are no longer valid as a measure of performance. The dramatic impact on our business highlighted that forecasting, especially over the long-term, is extremely difficult; it also demonstrated that after one year of underperformance within a three-year performance plan, it may be extremely difficult to recover in subsequent years to a level that would result in a payout on the award. In the compensation arena, this was evidenced by there being no payout for the 2008 annual incentive, no payout on the 2006-2008 long-term incentive, and management’s current expectation that we will not meet the minimum thresholds for payment for payout on the 2007-2009 and 2008-2010 long-term incentives. With the long-term awards assumed to be unattainable, these awards not only lost their future incentive value, but also resulted in an NEO’s 2008 targeted compensation opportunity being primarily base salary. In addition, the substantial decline in the price of our stock (73% over the course of fiscal 2008) resulted in all stock options held by the NEOs being underwater (meaning the option exercise prices exceeded the market price of our stock) as of fiscal year-end 2008, coupled with a loss of value for an executive’s restricted stock holdings as well as previously acquired or vested equity. As a result, while our senior leadership experienced first-hand the direct alignment with shareholders’ loss of investment value, the various incentive and equity compensation grants originally intended to provide potential remuneration over a period of many years likewise lost value as a tool to encourage retention. As described in more detail below, in considering the need to retain executives familiar with the industry and our business during this difficult economic cycle, the Committee approved 2009 compensation that includes equity-based incentives to reinforce continued alignment with shareholders and maintained the practice of three-year performance incentives to reward demonstrable achievements and retention.

 

Change in Market Valuation Methodology for Share Awards.  For the equity-based compensation awards granted for fiscal 2009, management considered various alternative methodologies for establishing equity award levels. Given the reduced trading price, following our prior practice of utilizing the mean of the high and low price of our stock at or near the date of the Committee’s March 2009 meeting, and setting aggregate market value award levels for such grants similar to prior years’ levels, would have resulted in exceedingly high share amounts for these awards. Management considered that such potential share amounts would utilize a significant percentage of the shares available in our 2002 incentive plan, and at the same time result in dilution to shareholders in excess of prior year awards. Management also considered that such share grants, based on an unusually low current price, might result in providing an excessive upside opportunity to award recipients if the price recovered more in line with price levels prior to the third quarter of 2008. The Company’s reduced share price was not a unique situation in the marketplace, and after consultation with Hewitt as to alternative valuation practices, management recommended to the Committee that a six-month average stock price be utilized as the market value rather than a current quoted price to determine the size of stock awards, and suggested that this alternate valuation be used across the board for stock-related considerations. Thus, for purposes of determining compliance by executives for stock ownership guidelines and to determine award levels of all proposed share-based awards, the Committee used a $10.07 per share value (being the rounded six-month mean of high and low price over the period of August 11, 2008 to February 10, 2009) rather than the current quoted stock price. On March 4, 2009, the date the Committee approved most grants of restricted stock and long-term performance shares, the mean of the high and low prices was $3.33 per share; it is this grant date mean price that was used as the exercise price for stock options (with none granted to NEOs); and as the fair value for purposes of expensing the awards in our financial statements. The estimated stock value used by the Committee for determining share awards is not intended to reflect a prediction

by either management or the Committee of the value of our stock or the amount that might ultimately be realized by the participants on these awards.

 

Changes to Performance Metrics.  For the 2009 annual incentive awards for corporate employees and the NEOs, the Committee continued to have Adjusted EPS (which is defined as consolidated diluted earning per share, as adjusted for special charges and recoveries) as the primary metric, but added Adjusted EBITDA as a Percentage of Average Net Assets as a secondary metric. For purposes of the second metric, EBITDA (which is defined as Earnings Before Interest, Taxes, Depreciation and Amortization for the period) may be adjusted to exclude special charges and recoveries. Average Net Assets will be calculated as the average of each month-end net assets balance during the period. Net Assets will be 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.” Previously, our annual incentives used Adjusted EPS as the sole metric, and the long-term awards used the Compound Annual Sales Growth Rate (Net Sales CAGR) as the second metric.

 

These incentive plans applicable to our NEOs were redesigned to include an EBITDA-based metric so that performance would be measured against a commonly used metric for profitability that is closely associated with cash management. We believe that using EBITDA/Net Assets captures whether we are managing our earnings by using capital efficiently. In making this change, the Committee considered that the net sales growth metric used in prior years for the long-term incentive reinforced the earnings emphasis, which was already covered by the EPS metric. By changing the second metric to EBITDA/Net Assets, the Committee hopes to achieve a balanced pairing that reflects quality of earnings, encourages sales and promotes reinvestment — but with caution and accountability. The Committee also deemed it appropriate to change to an efficiency metric given the difficult economic climate, when cash management is critical to both business and investors, yet the Company wants to continue to invest for the future.

 

As in prior years, the annual and long-term performance awards are designed to comply with Section 162(m) of the Internal Revenue Code, the metrics to be used are identified in the 2002 incentive plan approved by our shareholders last year. The Committee’s reserved right to exercise negative discretion and reduce awards based on individual performance and quality of earnings is likewise designed to be in compliance.

 

Changes to EPS Performance Range and Payout Range.  In both the annual and long-term incentives, Adjusted EPS serves as the primary metric. The second metric, EBITDA/Net Assets, impacts the payout grid by increasing or reducing the payout percentage at each EPS level. For each award, there is a minimum level of Adjusted EPS that must be achieved in order for the award to have any payout; there is also an Adjusted EPS level at which, depending on EBITDA/Net Assets performance, the maximum payout opportunity can be achieved. We use interpolation to determine the exact payout percentage; as a result, there are multiple combinations of the metrics that could result in payment of 100% of the target award. In addition, the Committee has discretion to reduce the award payout percentage based on quality of earnings, and for the annual awards, individual performance accounts for 30% of the maximum award payout value.

 

For both awards, EBITDA/Net Assets performance can impact the payout level by a reduction of up to 20% and can increase the payout level by up to 10%. The Committee can reduce the payout in its discretion, and if we only achieve the minimum Adjusted EPS on the annual incentive, a discretionary reduction would be likely. Compared to the 2008-2010 long-term incentive previously described, the 2009-2011 incentive provides a somewhat greater payout spread at the low end, in recognition of the difficulty of forecasting long-term in the current uncertain environment, and in an attempt to allow the long-term awards to keep their incentive value for the full three-year performance period. At the same time, the long-term incentives were limited to a payout at 150% of the plan’s EPS goal, likewise based on uncertainty and also as a balance to the extra payout spread at the low end. The Committee believes the performance goals for the long-term awards are 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 following tables provide information about the metric levels and the potential payouts for the incentive awards approved by the Committee in March 2009, with all references to “Adjusted EPS” for the long-term incentive being cumulative over the performance period:

 

 

Long-Term Incentive 2009-2011