March 12, 2008

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of PACCAR Inc, which will be held at the Meydenbauer Center, 11100 N.E. 6th Street, Bellevue, Washington, at 10:30 a.m. on April 22, 2008.

 

The principal business of the Annual Meeting is stated on the attached Notice of Annual Meeting of Stockholders. We will also provide an update on the Company’s activities. The Board of Directors recommends a vote FOR Items 1 and 2 and AGAINST Items 3 and 4.

 

Your VOTE is important. Whether or not you plan to attend the Annual Meeting, please vote your proxy either by mail, telephone or over the Internet.

 

Sincerely,

 

Mark C. Pigott

Chairman of the Board and

Chief Executive Officer

 

 

 

The Annual Meeting of Stockholders of PACCAR Inc will be held at 10:30 a.m. on Tuesday, April 22, 2008, at the Meydenbauer Center, 11100 N.E. 6th Street, Bellevue, Washington, for these purposes:

 

 

Stockholders entitled to vote at this meeting are those of record as of the close of business on
February 26, 2008.

 

IMPORTANT: The vote of each stockholder is important regardless of the number of shares held. Whether or not you plan to attend the meeting, please complete and return your proxy form.

 

Directions to the Meydenbauer Center can be found on the back cover of the attached Proxy Statement.

 

By order of the Board of Directors

 

J. M. D’Amato

Secretary

Bellevue, Washington

March 12, 2008

 

TABLE OF CONTENTS

 

 

PROXY STATEMENT

 

 

The Board of Directors of PACCAR Inc issues this proxy statement to solicit proxies for use at the Annual Meeting of Stockholders at 10:30 a.m. on April 22, 2008, at the Meydenbauer Center in Bellevue, Washington. This proxy statement includes information about the business matters that will be voted upon at the meeting. The proxy statement and proxy form were first sent to stockholders on or about March 12, 2008.

 

Stockholders eligible to vote at the meeting are those identified as owners at the close of business on the record date, February 26, 2008. Each outstanding share of common stock is entitled to one vote on all items presented at the meeting. At the close of business on February 26, 2008, the Company had 366,436,503 shares of common stock outstanding and entitled to vote.

 

Stockholders may vote in person at the meeting or by proxy. Execution of a proxy does not affect the right of a stockholder to attend the meeting. The Board recommends that stockholders exercise their right to vote by promptly completing and returning the proxy form either by mail, telephone or the Internet.

 

Mark C. Pigott and John M. Fluke, Jr., are designated proxy holders to vote shares on behalf of stockholders at the 2008 Annual Meeting. The proxy holders are authorized to:

 

 

The Trustee for the PACCAR Inc Savings Investment Plan (the SIP) votes shares held in the SIP according to each member’s instructions on the proxy form. If the proxy form is not returned or is returned without voting instructions, the Trustee will vote the shares in direct proportion to the shares for which it has received timely voting instructions, as provided for in the SIP.

 

The proxy form allows registered stockholders to vote in one of three ways:

 

Mail.  Stockholders may complete, sign, date and return the proxy form in the pre-addressed, postage-paid envelope provided.

 

Telephone.  Stockholders may call the toll-free number listed on the proxy form and follow the voting instructions given.

 

Internet.  Stockholders may access the Internet address listed on the proxy form and follow the voting instructions given.

 

Telephone and Internet voting procedures authenticate each stockholder by using a control number. The voting procedures will confirm that your instructions have been properly recorded. Stockholders who vote by telephone or Internet should not return the proxy form.

Stockholders who hold shares through a broker or agent should follow the voting instructions received from that broker or agent.

 

Revoking Proxy Voting Instructions.  A proxy may be revoked by a later-dated proxy or by written notice to the Secretary of the Company at any time before it is voted. Stockholders who hold shares through a broker should contact the broker or other agent if they wish to change their vote after executing the proxy.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held at 10:30 a.m. on April 22, 2008 at Meydenbauer Center, Bellevue, Washington. The 2008 proxy statement and the 2007 Annual Report to stockholders are available on the Company’s Website at www.paccar.com/2008annualmeeting/.

 

Stockholders who hold shares in a bank or brokerage account who previously elected to receive the annual meeting materials electronically and now wish to change their election and receive paper copies may contact their bank or broker to change their election.

 

Stockholders who receive annual meeting materials electronically will receive a notice when the proxy materials become available with instructions on how to access them over the Internet.

 

Registered stockholders at a shared address who would like to discontinue receipt of multiple copies of the annual report and proxy statement in the future should contact Wells Fargo Shareowner Services at 1.877.602.7615 or P.O. Box 64854, St. Paul, Minnesota 55164-0854. Street name stockholders at a shared address who would like to discontinue receipt of multiple copies of the annual report and proxy statement in the future should contact their bank or broker.

 

Some street name stockholders elected to receive one copy of the 2007 Annual Report and 2008 Proxy Statement at a shared address prior to the 2008 Annual Meeting. If those stockholders now wish to change that election, they may do so by contacting their bank, broker, or PACCAR at 425.468.7520 or P.O. Box 1518, Bellevue, Washington 98009.

 

The presence at the Annual Meeting, in person or by duly authorized proxy, of a majority of all the stock issued and outstanding and having voting power shall constitute a quorum for the transaction of business.

 

 

Directors are elected by a plurality of the votes cast for the election of directors. If a stockholder does not vote for the election of directors because the authority to vote is withheld, because the proxy is not returned, because the broker holding the shares does not vote or because of some other reason, the shares will not count in determining the total number of votes for each nominee. The Company’s Certificate of Incorporation does not provide for cumulative voting. Proxies signed and returned unmarked will be voted FOR the nominees for Class I Director.

 

If any nominee is unable to act as director because of an unexpected occurrence, the proxy holders may vote the proxies for another person or the Board of Directors may reduce the number of directors to be elected.

 

 

The affirmative vote of two-thirds (2/3) of the shares outstanding is required for the adoption of an amendment of the Certificate of Incorporation to increase the authorized number of common shares. If the “abstain” box on the proxy is checked, it will count as a vote against the proposal. Proxies that are signed and returned unmarked will be voted FOR the proposal. Brokers who hold shares in accounts for their clients and

are not given instructions on how to vote on this proposal do not have discretion to vote and should return the proxy unmarked on Item 2 (a “broker nonvote”). Broker nonvotes will count as a vote against the proposal.

 

To be approved, each item must receive the affirmative vote of a majority of shares present in person or by proxy and entitled to vote at the Annual Meeting. Abstentions will count as a vote against each item. Broker nonvotes do not affect the voting calculations. Proxies that are signed and returned unmarked will be voted AGAINST Items 3 and 4.

 

Expenses for solicitation of proxies will be paid by the Company. Solicitation will be by mail, except for any electronic, telephone, or personal solicitation by directors, officers and employees of the Company, which will be made without additional compensation. The Company has retained Georgeson Inc. to aid in the solicitation of stockholders for a fee of approximately $8,500 plus reimbursement of expenses. The Company will request banks and brokers to solicit proxies from their customers and will reimburse those banks and brokers for reasonable out-of-pocket costs for this solicitation.

 

The following person is known to the Company to be the beneficial owner of more than five percent of the Company’s common stock as of December 31, 2007 (amounts shown are rounded to whole shares):

 

 

The following list shows the shares of common stock beneficially owned by (1) each director, (2) the Chief Executive Officer and the other four most highly compensated executive officers (collectively the “Named Officers”), and (3) by all directors and executive officers as a group as of February 26, 2008 (amounts shown are rounded to whole share amounts):

 

 

*Does not exceed one percent

 

 

 

Three Class I Directors are to be elected at the meeting. The persons named below have been designated by the Board as nominees for election as Class I Directors for a term expiring at the Annual Meeting of Stockholders in 2011. All of the nominees are currently serving as Directors of the Company.

 

BOARD NOMINEES FOR CLASS I DIRECTORS
(TERMS EXPIRE AT THE 2011 ANNUAL MEETING)

 

JOHN M. FLUKE, JR., age 65, is chairman of Fluke Capital Management, L.P., a private investment company, and has held that position since 1990. He is a director of Tully’s Coffee Corporation. He has served as a director of the Company since 1984.

 

STEPHEN F. PAGE, age 68, served as vice chairman and chief financial officer and a director of United Technologies Corporation (UTC), a provider of high-technology products and services to the building systems and aerospace industries, from 2002 until his retirement in April 2004. From 1997 to 2002 he was president and chief executive officer of Otis Elevator Co., a subsidiary of UTC. He is also a director of Lowe’s Companies, Inc., and Liberty Mutual Holding Company Inc. He has served as a director of the Company since 2004.

 

MICHAEL A. TEMBREULL, age 61, is Vice Chairman of the Company and has held that position since January 1995. He also serves as the Company’s principal financial officer. He was Executive Vice President from January 1992 to January 1995 and Senior Vice President from September 1990 to January 1992. He has served as a director of the Company since 1994.

CLASS II DIRECTORS (TERMS EXPIRE AT THE 2009 ANNUAL MEETING)

 

JAMES C. PIGOTT, age 71, is president of Pigott Enterprises, Inc., a private investment company, and has held that position since 1983. He was chairman and chief executive officer of Management Reports and Services, Inc., a provider of business services, from 1986 until December 1999. He is the uncle of Mark C. Pigott, a director of the Company. He has served as a director of the Company since 1972.

 

MARK C. PIGOTT, age 54, is Chairman and Chief Executive Officer of the Company and has held that position since January 1997. He was a Vice Chairman of the Company from January 1995 to December 31, 1996, Executive Vice President from December 1993 to January 1995, Senior Vice President from January 1990 to December 1993 and Vice President from October 1988 to December 1989. He is the nephew of James C. Pigott, a director of the Company. He has served as a director of the Company since 1994.

 

WILLIAM G. REED, JR., age 69, was chairman of Simpson Investment Company, a forest products holding company and the parent of Simpson Timber Company, from 1971 through June 1996. He served as chairman of the board of Safeco Corporation from January 2001 through December 2002 and as lead independent director from 2000 to 2004. He is a director of Safeco Corporation, The Seattle Times Company and Washington Mutual, Inc. He has served as a director of the Company since 1998.

 

CHARLES R. WILLIAMSON, age 59, was chairman and chief executive officer of Unocal Corporation, the California-based energy company, from 2001 until Unocal merged with Chevron Corporation in August 2005. He served as executive vice president of Chevron from August 2005 until his retirement in December 2005. He served as a director of Unocal from 2000 to 2005. He held a variety of technical and management positions with Unocal around the world. Mr. Williamson was the chairman of the US-ASEAN Business Council from 2002 to 2005. He is a director of the Weyerhaeuser Company and Talisman Energy Inc. He has served as a director of the Company since 2006.

 

CLASS III DIRECTORS (TERMS EXPIRE AT THE 2010 ANNUAL MEETING)

 

ALISON J. CARNWATH, age 55, is non-executive chairman of MF Global Ltd., a Bermuda-based financial services firm. She is also a senior adviser to Lexicon Partners, an independent corporate finance advisory firm, and chairman of the management board and investment committees at ISIS Equity Partners, LLP, a private equity firm, both based in the United Kingdom. She was chairman of The Vitec Group plc, a British supplier of products and services to the broadcast and media industries, from April 1999 to October 2004 and was its chief executive officer during 2001. She was a managing director of Donaldson Lufkin & Jenrette, Inc., a New York based investment bank, from 1997 to 2000. She is a director of Friends Provident plc, Land Securities Group plc and Man Group plc, all United Kingdom listed companies. She has served as a director of the Company since 2005.

 

ROBERT T. PARRY, age 68, was president and chief executive officer of the Federal Reserve Bank of San Francisco from 1986 until his retirement in June 2004. In that position, he served on the Federal Open Market Committee of the Federal Reserve System, the governmental body that sets monetary policy and interest rates. He is also a director of Countrywide Financial Corporation, Countrywide Bank and Janus Capital Group Inc. He has served as a director of the Company since 2004.

 

Retiring Class III Director

 

HAROLD A. WAGNER, age 72, was non-executive chairman of Agere Systems Inc., a provider of communications components from 2001 until its acquisition by LSI, Inc in 2007. He served as chairman and chief executive officer of Air Products and Chemicals, Inc., a supplier of industrial gases, related equipment and chemicals, from 1992 to 2000, and as its chairman, chief executive officer and president from 1992 to 1998. He is a director of CIGNA Corporation, Maersk Inc. and United Technologies Corporation. Mr. Wagner also serves on the Business Advisory Council of A. P. Moller, Inc. He has served as a director of the Company since 1999 and is retiring from the Board of Directors effective April 21, 2008.

Incoming Class III Director

 

GREGORY M.E. SPIERKEL, 51, is chief executive officer of Ingram Micro Inc., a leading California-based technology distributor, and has held that position since June 2005. He previously served as president from March 2004 to June 2005. During his ten year tenure with the company he held other senior positions including executive vice president. He was elected by the Board to serve for the remainder of Harold. A. Wagner’s term as a Class III director.

 

THE BOARD RECOMMENDS A VOTE FOR EACH OF THE NOMINEES.

 

 

It is recommended that the stockholders adopt an amendment to the Fourth Article of the Certificate of Incorporation to increase the authorized number of shares of common stock of the Company from four hundred million (400,000,000) to one billion two hundred million (1,200,000,000). The full text of the paragraph including the proposed amendment is set forth as Appendix A to this proxy statement. On February 26, 2008, the Company had issued and outstanding 366,436,503 shares of common stock, 2,428,900 shares of common stock held in treasury and 19.5 million shares of common stock reserved for issuance under Company benefit plans.

 

The additional shares of common stock to be authorized by the proposed amendment will, if issued, be identical to the shares of common stock now authorized and outstanding. Shares of common stock of the Company do not carry any preemptive rights. The increase in authorized common stock will not affect the terms or the rights of holders of existing shares of common stock.

 

As a result of prior stock dividends, the Company is approaching the limit of its authorized common stock. Accordingly, the Board of Directors has proposed to increase the number of authorized shares of common stock as described above. This increase will provide the Company with flexibility in the future by assuring availability of sufficient authorized but unissued common stock for possible stock splits, stock dividends, acquisitions, financing requirements and other corporate purposes without the necessity of further stockholder action (except as may be required by applicable law, regulation or stock exchange rules). Other than the issuance of shares of common stock in the ordinary course under Company benefit plans, the Company has no plan, commitment, arrangement, understanding or agreement, either written or oral, regarding the issuance of common stock subsequent to the increase in the number of authorized shares. The issuance of additional common stock may result in some dilution of the stock ownership of existing stockholders. The proposed amendment could permit the Board of Directors to issue shares of common stock in transactions that could make a takeover of the Company more difficult.

 

Stockholders have approved an increase in authorized shares twice since 1996. These approvals have enabled the Company to declare four 50 percent stock dividends since 2002. On each occasion, Company stockholders received one additional share for every two shares held. A stockholder who paid $7,171 for 100 shares of Company stock on February 26, 2002 has 506 shares on February 26, 2008 with an approximate value of $23,000, an appreciation of 300 percent.

 

The affirmative vote by the holders of two-thirds (2/3) of the shares of common stock outstanding is required for the adoption of an amendment of the Certificate of Incorporation to increase the number of authorized shares of common stock. The Board of Directors believes that it is in the best interests of the Company and its stockholders to authorize the additional shares of common stock.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 2.

 

The Board of Directors has determined that the following persons are independent directors as defined by NASDAQ Rule 4200: Alison J. Carnwath, John M. Fluke, Jr., Stephen F. Page, Robert T. Parry, James C. Pigott, William G. Reed, Jr., Gregory M.E. Spierkel, Harold A. Wagner and Charles R. Williamson.

 

The Board of Directors maintains a corporate governance section on its Website which includes key information about its governance practices. The Company’s Corporate Governance Guidelines, its Board committee charters and its Code of Business Conduct are located at www.paccar.com/company/corporateresponsibility/boardofdirectors.asp. Stockholders may contact the Board of Directors by writing to: The Board of Directors, PACCAR Inc, 11th Floor, P. O. Box 1518, Bellevue, WA 98009, or by e-mailing PACCAR.Board@paccar.com. The Corporate Secretary will receive, process and acknowledge receipt of all written stockholder communications. Suggestions or concerns involving accounting, internal controls or auditing matters will be directed to the Audit Committee chairman. Concerns regarding other matters will be directed to the individual director or committee named in the correspondence. If no identification is made, the matter will be directed to the Executive Committee of the Board.

 

The Board of Directors met four times during 2007. Each member attended at least 75 percent of the combined total of meetings of the Board of Directors and the committees of the Board on which each served. All Company directors are expected to attend each annual stockholder meeting. All directors attended the annual stockholder meeting in April 2007.

 

The Board has four standing committees. The members of each committee are listed below with the chairman of each committee listed first:

 

 

Audit Committee

 

The Audit Committee has responsibility for the selection, evaluation and compensation of the independent auditors and approval of all services they provide. The Committee reviews the annual and quarterly financial statements, monitors the integrity and effectiveness of the audit process, and reviews the corporate compliance programs. It monitors the Company’s system of internal controls over financial reporting and oversees the internal audit function. The Audit Committee charter describes the Committee’s responsibilities. It is posted at www.paccar.com/company/corporateresponsibility/auditcommittee.asp. All four members of the Audit Committee meet the independence and financial literacy requirements of the SEC and NASDAQ rules. The Board of Directors designated John M. Fluke, Jr., as Audit Committee financial expert. The Committee met six times in 2007.

 

Compensation Committee

 

The Compensation Committee has responsibility for reviewing and approving salaries and other compensation matters for executive officers. It administers the LTIP, the Senior Executive Yearly Incentive Compensation Plan and the Deferred Compensation Plan. The Committee establishes annual and long-term performance goals for executive officers. It also evaluates the CEO’s performance annually and approves the attainment of individual goals by the executive officers. The Committee has authority to employ a compensation consultant to assist in the evaluation of the compensation of the Company’s CEO or other executive officers. The Compensation Committee charter describes the Committee’s responsibilities. It is posted at www.paccar.com/company/corporateresponsibility/compensationcommittee.asp. All four members of the Compensation Committee meet the director independence requirements of the NASDAQ rules and the

‘‘outside director” requirements of Section 162(m) of the Internal Revenue Code. The Committee met five times in 2007.

 

Nominating and Governance Committee

 

The Nominating and Governance Committee is responsible for evaluating director candidates and selecting nominees for approval by the independent members of the Board of Directors. It also makes recommendations to the Board on corporate governance matters including director compensation.

 

The Committee has established written criteria for the selection of new directors, which is available at www.paccar.com/company/corporateresponsibility/boardguidelines.asp. To be a qualified director candidate, a person must have achieved significant success in business, education or public service, must not have a conflict of interest and must be committed to representing the long-term interests of the stockholders. In addition, the candidate must have the following attributes:

 

 

The Committee considers the names of director candidates submitted by management and members of the Board of Directors. It also considers recommendations by stockholders submitted in writing to: Chairman, Nominating and Governance Committee, PACCAR Inc, 11th Floor, P.O. Box 1518, Bellevue, WA 98009. The Committee engages the services of a private search firm from time to time to assist in identifying and screening director candidates. The Committee evaluates qualified director candidates and selects nominees for approval by the independent members of the Board of Directors.

 

The Nominating and Governance Committee charter describes the Committee’s responsibilities. It is posted at www.paccar.com/company/corporateresponsibility/nominatingcommittee.asp. Each of the three Committee members meets the independence requirements of the NASDAQ rules. The Committee met four times in 2007.

 

Executive Committee

 

The Executive Committee acts on routine Board matters when the Board is not in session. The Committee took action three times in 2007.

 

The non-employee directors reported the following compensation for the fiscal year ending December 31, 2007:

 

Summary Compensation

 

 

 

 

Narrative to Director Compensation Table

 

On the first business day of the year, each non-employee director receives $90,000 in restricted stock under the Restricted Stock and Deferred Compensation Plan for Non-Employee Directors (RSDC Plan). The number of shares received is determined by dividing $90,000 by the closing price of a share of Company stock on the first business day of the year. Non-employee directors elected during the calendar year receive a

prorated award to reflect the number of calendar quarters the director will serve in the year of election. Restricted shares vest three years after the date of grant or upon mandatory retirement after age 72, death or disability. Directors receive dividends and voting rights on all shares during the vesting period. Effective January 1, 2008, the RSDC Plan was amended to allow directors to elect to receive a credit to the stock unit account in lieu of a grant of restricted stock. The account is credited with the number of shares otherwise applicable to the grant of restricted stock and subject to the same vesting conditions.

 

Non-employee directors may elect to defer all or a part of their cash retainer and fees to an income account or to a stock unit account under the RSDC Plan. The income account accrues interest at a rate equal to the simple combined average of the monthly Aa Industrial Bond yield averages for the immediately preceding quarter and is compounded quarterly. Stock unit accounts are credited with the number of shares of common stock that could have been purchased at the closing price of Company stock on the date the cash compensation is payable. Thereafter dividends earned are treated as if they were reinvested at the closing price of Company stock on the date the dividend is payable. The balances in a director’s deferred accounts are paid out at or after retirement or termination in accordance with the director’s deferred account election. The balance in the stock unit account is distributed in shares of the Company’s common stock.

 

The Company provides transportation for or reimburses non-employee directors for travel and out-of-pocket expenses incurred in connection with their services. It also pays or reimburses directors for expenses incurred to participate in continuing education programs.

 

Compensation Program Objectives and Structure

 

PACCAR’s compensation programs are designed to attract and retain high-quality executives, link incentives to the Company’s superior performance results and align the interests of management with those of stockholders. These programs offer compensation that is competitive with companies that operate in the same industries globally. PACCAR’s goal is to achieve superior performance measured against its industry peers. Under the supervision of the Compensation Committee of the Board of Directors (the “Committee”), composed exclusively of independent directors, the Company compensation objectives utilize programs that have delivered 69 consecutive years of net income, yearly dividends since 1941 and excellent stockholder returns. The compensation framework has these components:

 

 

The Committee believes that this combination of salary, cash incentives and equity-based compensation provides appropriate incentives for executives to deliver superior business performance and stockholder returns.

 

The Named Executive Officers and all salaried employees participate in the Company’s retirement programs. The Named Executive Officers also participate in the Company’s unfunded Supplemental Retirement Plan described on page 21, which provides a retirement benefit to those employees affected by the maximum benefit limitations permitted for qualified plans by the Internal Revenue Code and other qualified plan benefit limitations. The Company does not provide any other significant perquisites or executive benefits to its Named Executive Officers.

Executive Compensation Criteria

 

The Compensation Committee considers a number of important factors when reviewing and determining executive compensation, including Company performance, individual performance and compensation for executives among peer organizations. The Committee also considers the opinion of the Chief Executive Officer when determining compensation for the executives that report to him.

 

Role of Compensation Consultant.  The Committee does not retain a compensation consultant on an annual basis and it did not retain one in 2007. In 2006, the Company retained Hewitt Associates (“Hewitt”) to provide comprehensive market survey and analyses regarding base salary, annual incentives and long-term incentives. Hewitt did not advise the Committee or make any recommendations regarding the data it supplied nor did it provide any other executive compensation services.

 

Industry Compensation Comparison Groups.  The Compensation Committee periodically utilizes information from industry-published compensation surveys as well as surveys conducted by outside consultants to determine if compensation for the Chief Executive Officer and other executive officers is competitive with the market. The Committee believes that comparative compensation information should be used in its deliberations, but it does not specify a “target” compensation level for any given executive but rather a range of compensation. The Committee has discretion to determine the nature and extent to which it will use comparative compensation data.

 

Compensation of the Named Executive Officers reflects the Committee’s consideration of comparative data and analysis from a Hewitt survey conducted in 2006 of 86 companies with median revenues of $11.3 billion. The Committee assessed 2006 pay levels for the Named Executive Officers based in part on the data provided by Hewitt and a comparison of Company compensation levels against the 50th percentile of the surveyed companies. That survey data indicated that the total direct compensation of each of the Named Executive Officers was within the competitive range. The Committee did not change the base salary or compensation levels for the Named Executive Officers in 2007. The 86 companies in the Hewitt survey included:

 

Peer Companies.  As part of its analysis of comparative data, the Committee includes compensation data from Peer Companies that comprise the index used in the stock performance graph set forth in the Company’s Annual Report on Form 10-K and page 27 of this proxy statement. In particular, the Company measures its financial performance against Peer Companies when evaluating achievement of the cash portion of the LTIP Company performance goal and applicable goals under the restricted stock share match program. The nine Peer Companies for the LTIP 2007-2009 cycle are:

 

 

In 2007, the Committee reviewed the Peer Companies in terms of financial performance. It ranked the peers on how closely they matched the Company on the following criteria: industrial comparability, revenues and return on sales. The Committee concluded that four of the Peer Companies no longer met one or more of the criteria and they were removed. Six new companies that met the criteria were added as Peer Companies. The Committee believes that the revised Peer Companies provide Company executives with a challenging and competitive group against which to compare their financial performance. Effective with the LTIP cycle beginning January 2008-2010, the following companies will be used as the Peer Companies for purposes of the share match program and for the company performance goal in the LTIP cash program.

 

 

Elements of Total Compensation

 

The Company’s executive compensation program is comprised of: base salaries, annual cash incentives, and long-term incentives consisting of cash, stock options and restricted stock. The Committee made no significant changes to the compensation program for the Named Executive Officers during 2007.

 

Compensation Mix.  The Company’s executive compensation program structure includes a balance of annual and long-term incentives, cash and Company equity. At higher levels of responsibility within the Company, the senior executives have a larger percentage of total compensation at risk based on Company performance incentive programs. For 2007, the Committee approved a target allocation for the Chief Executive Officer of approximately 17 percent base salary, 17 percent annual cash incentives and 66 percent long-term incentives. The long-term incentives include over 40 percent of total compensation as equity awards. For the other Named Executive Officers, the target allocation as a group averaged 27 percent base salary, 18 percent annual cash incentives and 55 percent long-term incentives. The long-term incentives include approximately 31 percent of their total compensation as equity awards. The Company believes these allocations promote its objectives of profitable growth and superior long-term results.

 

Base Salary.  Base salary provides a fixed, baseline level of compensation that is not contingent upon Company performance. It is important that base salaries are competitive with industry peer companies to attract and retain executives. The midpoints of the base salary ranges are set at approximately the market median of the 2006 Hewitt survey, with minimums at 70 percent of the midpoint and maximums at 130 percent of the midpoint. An executive officer’s actual salary relative to this salary range reflects his or her responsibility, experience and individual performance.

 

The Committee reviews base salaries every 12 to 18 months and may or may not approve changes. In 2007, there were no adjustments to the base salaries of any of the Named Executive Officers. The Committee believes that the base salary of each of the Named Executive Officers is appropriate based on scope of responsibility, tenure with the Company, individual performance and competitive pay practices.

 

Annual Incentive Cash Compensation.  This program provides yearly cash incentives for the Named Executive Officers to achieve annual Company profit and business unit goals. The Committee sets annual performance goals and a threshold, target and maximum award for each Named Executive Officer, expressed as a percentage of base salary. Awards are measured on a scale and can range from $0 if less than 70 percent

of the goal is achieved; a threshold of 40 percent of the target award if 70 percent of the goal is achieved and a maximum of 200 percent of the executive’s target award if achievement meets or exceeds 140 percent of goal.

 

A hallmark of the annual cash incentive program has been a consistent and rigorous focus on achieving the Company’s annual net profit goal. The Committee has chosen net profit, not EBITDA or operating profit, as the chief financial metric for this program because it is the primary indicator of corporate performance to stockholders. When setting incentive compensation goals for the Named Executive Officers, the Committee believes that corporate performance is an appropriate measure of individual performance. Accordingly, a substantial portion of the award for each Named Executive Officer is based upon Company performance relative to an overall net profit goal proposed by Company management and approved by the Committee in January of each year. The target level represents an amount of net profit that the Committee determines is attainable with outstanding performance under expected economic conditions. The remaining portion of the award for certain of the Named Executive Officers is based upon individual business unit performance goals determined by the Chief Executive Officer. The target for those performance goals is set to reward outstanding performance and to provide a challenging yet attainable goal. The Committee assesses annual goal achievement and approves awards for the Named Executive Officers.

 

Awards for the Named Executive Officers are subject to the terms of the Senior Executive Yearly Incentive Compensation Plan (the “Plan”) approved by the stockholders as required by Section 162(m) of the Internal Revenue Code. The maximum annual incentive cash award under the Plan is $4,000,000. The Committee, in its sole discretion, may reduce or eliminate (but not increase) any award earned by the Named Executive Officers based on an assessment of individual performance.

 

For 2007, the Company’s net profit was $1.227 billion which exceeded the target of $950 million. The Committee approved payouts of 158.4 percent of goal, which corresponds with achievement of 129.2 percent of the net profit target. The Committee approved payments consistent with the calculated goal achievement for each Named Executive Officer and did not exercise discretion to reduce or modify any payment. With respect to Mr. Cardillo, the Committee concluded that he exceeded the leadership goal after determining that targets on cost control, project completion and product testing were achieved. The Committee reviewed actions Mr. Gangl implemented to grow financial services revenue and expand the business. The finance company purchased the largest private leasing company in Germany and also set a new record for yearly pretax profit. As a result, the Committee concluded that both the business unit profit and growth targets were exceeded. The following table outlines the 2007 goals and incentive awards achieved for each Named Executive Officer.

 

 

Long-Term Incentive Compensation (LTI Plan).  The Company’s long-term incentive program is based on a multi-year performance period and provides annual grants of stock options, restricted stock and cash incentive awards. The LTI Plan aligns the interests of stockholders with those of executives to focus on long-term growth in stockholder value. The 2007 target for each element of the long-term compensation

program for each Named Executive Officer is calculated as a percentage of base salary as indicated in the table below. These targets were evaluated in 2006 in the Hewitt survey and were not changed in 2007.

 

 

Long-term incentive compensation cash award.  This program focuses on long-term growth in stockholder value by providing an incentive for superior Company performance that is measured against Peer Company performance over a three-year period. Company performance is measured by three-year compound growth in net income, return on sales and return on capital (weighted equally) as compared to the Peer Companies (“Company Performance Goal”). Named Executive Officers and all executive officers are eligible for a long-term incentive cash award based upon three-year performance goals approved by the Committee with a new performance period beginning every calendar year.

 

For the 2007-2009 cycle, the Committee approved the following goals:

 

 

The Committee believes that three-year compound growth in net income, return on sales and return on capital are excellent indicators of the Company’s performance against the Peer Companies. The Company has used this rigorous comparison goal for over 10 years. During that period the Company demonstrated extraordinary performance against its peers and provided superior returns to stockholders. The target amount will be earned if the Company’s financial performance ranks above at least half of the Peer Companies. The maximum cash award amount will be earned if the Company’s financial performance ranks above all of the Peer Companies. No award will be earned if the Company’s financial performance ranks in the bottom 25 percent of the Peer Companies.

 

The remaining portion of the award for certain of the Named Executive Officers is based upon individual business unit goals determined by the Chief Executive Officer similar to those described above for the annual incentive plan, measured over a three-year performance cycle. The target amount will be earned if performance is 100 percent of goal and the maximum will be earned if performance is at least 150 percent of goal. No award will be earned if performance is below 75 percent of goal. The Committee assesses goal achievement for the prior three-year period in the April following completion of the applicable cycle and approves awards for the Named Executive Officers at such time.

 

In April 2007, the Committee determined the cash awards for the three-year period ending in 2006. One hundred percent of the award for Messrs. Pigott, Tembreull and Plimpton and fifty percent of the award for Messrs. Cardillo and Gangl was based on the Company Performance Goal. For the 2004-2006 LTIP cycle, the Company achieved superior results and ranked above all Peer Companies that reported earnings. The Committee approved the maximum payout of 200 percent of goal reflecting superior goal achievement for each Named Executive Officer and did not exercise discretion to reduce or modify any payment. The

remaining 50 percent of the award for Mr. Cardillo was based on business unit profit. The goal was exceeded and the maximum payout was approved. Fifty percent of the award for Mr. Gangl was based on business unit profit and growth. A payout of 170 percent of goal was awarded. The long-term cash awards for 2005-2007 LTIP cycle had not been determined as of the date of this proxy statement.

 

The maximum amount that may be paid to any eligible participant in any year under this program is $6,000,000. The award is also subject to the conditions of payment set forth in the Long Term Incentive Plan, as required by Section 162(m) of the Internal Revenue Code. The Committee, in its sole discretion, may reduce or eliminate (but not increase) any award earned by the Named Executive Officers based on an assessment of individual performance.

 

Stock options.  The Committee includes stock options in its compensation program because stock options link the interests of executives directly with stockholders’ interests through increased individual stock ownership. Stock options are granted by the Committee once each year on a predetermined date after the fourth-quarter earnings release, and are not repriced. They become exercisable at the end of a three-year vesting period and expire ten years after the date of grant.

 

The Compensation Committee granted stock options on January 31, 2007. The number of options was determined by multiplying the executive’s base salary on January 1, 2007, by a target award percentage and dividing by the average closing price of the Company’s stock on the first five trading days of the year. The exercise price of stock options is the closing price of the Company’s stock on the date of grant, January 31, 2007. All stock options granted in 2007 vest and become exercisable on January 1, 2010, and remain exercisable until January 2017 unless the participant’s employment terminates for reasons other than retirement at age 65, or the participant is demoted to an ineligible position. Vesting may be accelerated in the event of a change of control.

 

Annual restricted stock program.  Performance-based restricted stock is included in the program because it provides an opportunity for executives to earn Company equity with performance-based compensation deductible under Section 162(m) of the Internal Revenue Code. The Committee sets a Company performance goal each January and restricted stock grants are made in the following year if the Committee determines that the performance goal is achieved. The restricted stock vests 25 percent per year over a four-year period beginning in the year following the grant. Unvested shares are forfeited upon termination unless termination is by reason of death, disability or retirement. All shares vest immediately upon a change in control. Each Named Executive Officer has the same rights as all other stockholders to vote the shares and receive cash dividends.

 

The Named Executive Officers received a grant of performance-based restricted stock on January 31, 2007, after the Committee determined that the performance goal of four percent return on 2006 sales was exceeded. The number of restricted shares granted was determined by multiplying the executive’s annual base salary by a target award percentage and dividing by the average closing price of the Company’s stock for the first five trading days of 2007. All awards were consistent with the target award percentage and the Committee did not exercise discretion to make any material adjustments. Twenty-five percent of the shares vested on January 1, 2008, and 25 percent of shares will vest on each successive January 1 through January 1, 2011.

 

Compensation of the Chief Executive Officer

 

The Committee applies the same compensation philosophy, policies and comparative data analysis to the Chairman and Chief Executive Officer as it applies to the other Named Executive Officers. The CEO is the only officer with overall responsibility for all corporate functions and, as a result has a greater percentage of his total compensation based on the overall financial performance of the Company. Under his leadership, the Company has significantly outperformed both its Peer Companies and the S&P 500 index for over ten years.

 

The Company has consistently generated excellent financial performance and the Committee approved a restricted stock match program for the Chairman and Chief Executive Officer in 2005 to allow increased equity ownership. Under the program, if the Chief Executive Officer purchases Company stock either by exercising stock options or through open market purchases, he may receive a matching award of restricted stock if rigorous performance goals are met. The program provides for a maximum of 562,500 restricted shares and an annual limit of 150,000 shares. In 2007, 37,500 shares were granted under the program to match

an equal number of shares purchased through the exercise of stock options. Restricted match shares vest after five years if the Company’s earnings per share growth over the same five-year period meets or exceeds at least 50 percent of the Peer Companies. The Chief Executive Officer has the same rights as all other stockholders to vote the shares and receive cash dividends. With certain exceptions, all restricted match shares will be forfeited if the performance threshold is not achieved or if the Chief Executive Officer terminates employment with the Company during the vesting period. If the purchased shares are sold before the vesting period, an equal number of restricted match shares will be forfeited.

 

Deferral of Annual and Long-Term Performance Awards

 

The Committee administers a Deferred Compensation Plan which allows eligible employees to defer cash incentive awards into an income account or a stock unit account. Both accounts are unfunded and unsecured. This program provides tax and retirement planning benefits to participants and market-based returns on amounts deferred. Certain deferrals are subject to Internal Revenue Code Section 409A. Payouts from the income account are made in cash either in a lump sum or in a maximum of 15 annual installments in accordance with the executive’s payment election. Stock units credited under the Deferred Compensation Plan are disbursed in a one-time payment of Company shares. Participation in the Deferred Compensation Plan is voluntary. The Plan is described on page 22 of this proxy statement.

 

Effect of Post-Termination Events

 

The Company has no written employment agreement with its Chief Executive Officer, and it has no agreement to pay severance to any Named Executive Officer upon termination. Executive compensation programs provide full benefits only if a Named Executive Officer remains with the Company until normal retirement at age 65. In general, upon a termination without cause a Named Executive Officer retains vested benefits but receives no enhancements or severance. In a termination for cause, the executive forfeits all benefits except those provided under a qualified pension plan. Annual and long-term cash incentives are prorated upon retirement or death and are awarded at the maximum level upon a change in control. The annual restricted stock grants become fully vested at retirement, death or a change in control. The Company believes that the benefits described in this section help it to attract and retain its executive officers by providing financial security in the event of certain qualifying terminations of employment or a change of control of the Company. The fact that the Company provides these benefits does not materially affect other decisions that the Company makes regarding compensation. The Company maintains a separation pay plan for all U.S. salaried employees that provides a single payment of up to six months of base salary in the event of job elimination in a business restructuring or reduction in force. The Named Executive Officers are eligible for the benefit on the same terms as any other eligible U.S. salaried employee.

 

Effect of Accounting or Tax Treatment

 

Company policy is to structure compensation arrangements that preserve tax deductions for executive compensation under Section 162(m) of the Internal Revenue Code. Cash awards paid to Named Executive Officers under the Senior Executive Yearly Incentive Compensation Plan and under the LTIP are subject to certain conditions of payment intended to preserve deductibility imposed under Section 162(m). The Committee establishes a yearly funding plan limit equal to a percentage of the Company’s net income and assigns each Named Executive Officer a percentage of each fund. In 2007, the funding limit for the Named Executive Officers under the Senior Executive Yearly Incentive Compensation Plan equaled three percent of Company’s net income and the limit for the LTIP equaled three quarters of one percent of the Company’s cumulative net income for the 2007-2009 performance cycle. The Committee can exercise discretion to reduce or eliminate any award earned by the Named Executive Officers based on an assessment of individual performance against preapproved goals. The cash incentive awards to the Named Executive Officers under both plans are subject to the preestablished funding and plan limits even if some or all of the executive’s performance goals have been exceeded. The Committee retains the flexibility to pay compensation that is not fully deductible within the limitations of Section 162(m) if it determines that such action is in the best interests of the Company and its stockholders in order to attract, retain and reward outstanding executives. The

Company offers compensation programs that are intended to be tax efficient for the Company and for the executive officers.

 

Conclusion

 

The Company’s compensation programs are designed and administered in a manner consistent with its executive compensation philosophy and guiding principles. The programs emphasize the retention of key executives and appropriate rewards for excellent results. The Committee monitors these programs in recognition of the dynamic marketplace in which the Company competes for talent. The Company will continue to emphasize pay-for-performance and equity-based incentive programs that compensate executives for results that are consistent with generating outstanding performance for its stockholders.

 

The Committee reviewed and discussed the Compensation Discussion and Analysis Section (CD&A) for 2007 with management. Based on the Committee’s review and its discussions with management, the Committee recommends to the Board of Directors that the Compensation Discussion and Analysis Section be included in the Company’s proxy statement for the 2008 Annual Meeting.

 

THE COMPENSATION COMMITTEE

 

J. M. Fluke, Jr., Chairman

A. J. Carnwath

R. T. Parry

C. R. Williamson

 

The Named Executive Officers reported the following compensation for the last two fiscal years ended December 31, 2007.

 

 

 

The following table shows all plan-based awards granted to the Named Executive Officers during 2007.

 

 

 

 

The following table shows all outstanding stock option and restricted stock awards held by the Named Executive Officers on December 31, 2007.

 

 

 

 

 

 

The following table shows all stock options exercised and restricted stock awards that vested during 2007 for the Named Executive Officers and the value realized upon exercise or vesting. The number of shares reflects the 50 percent stock dividend effective October 9, 2007.

 

 

The following table shows the present value of the retirement benefit payable to the Named Executive Officers under the Company’s noncontributory retirement plan and Supplemental Retirement Plan as of December 31, 2007:

 

 

The Company’s qualified noncontributory retirement plan has been in effect since 1947. The Named Executive Officers participate in this plan on the same basis as other salaried employees. Employees are eligible to become a member in the plan after completion of 12 months of employment with at least 1,000 hours of service. The plan provides benefits based on years of service and salary. Participants are vested in their retirement benefits after five years of service.

 

The benefit for each year of service, up to a maximum of 35 years, is equal to one percent of highest average salary plus 0.5 percent of highest average salary in excess of the Social-Security-covered compensation level. Highest average salary is defined as the average of the highest 60 consecutive months of an employee’s cash compensation, which includes base salary and annual incentive cash compensation but it excludes compensation under the Long Term Incentive Plan. The benefits are not subject to any deduction for Social Security or other offset amounts. Benefits from the plan are paid as a monthly single-life annuity, or if married, actuarially-equivalent 50 percent joint and survivor annuity and 100 percent joint and survivor annuity

options are also available. Survivor benefits based on the 50 percent joint and survivor option will be paid to an eligible spouse if the employee is a vested member in the plan and dies before retirement.

 

The Company’s unfunded Supplemental Retirement Plan (SRP) provides a retirement benefit to those affected by the maximum benefit limitations permitted for qualified plans by the Internal Revenue Code and to those deferring incentive compensation bonuses. The benefit is equal to the amount of normal pension benefit reduction resulting from the application of maximum benefit and salary limitations and the exclusion of deferred incentive compensation bonuses from the retirement plan benefit formula. Benefits from the plan are paid as a lifetime monthly annuity or a single lump sum distribution at the executive’s election and will be made at the later of: (1) termination of employment; (2) age 55 with 15 years of service or age 65, whichever occurs first; or (3) twelve months from the date the payment election is made. If the participant dies before the Supplemental Benefit commencement date, the participant’s surviving spouse will be eligible to receive a survivor pension for the amount by which the total survivor pension benefit exceeds the surviving spouse’s retirement plan benefit.

 

Normal retirement age under both plans is 65 and participants may retire early between ages 55 and 65 if they have 15 years of service. For retirement at ages 55 through 61 with 15 years of service, pension benefits are reduced four percent per year from age 65. For retirement at or after age 62 with 15 years of service, there is no reduction in retirement benefits. As of December 31, 2007, M. A. Tembreull, T. E. Plimpton and J. G. Cardillo were eligible for a reduced early retirement benefit. Mr. K. R. Gangl is eligible for age 62 unreduced early retirement benefit under the terms of his hiring agreement.

 

The Pension Plan table shows the present value of the accrued retirement benefits for the Named Executive Officers under the Company’s retirement plan and Supplemental Retirement Plan based on highest average salary and service as of December 31, 2007. The retirement benefits were calculated using the assumptions found in the Notes for Consolidated Financial Statements under Note L of the Company’s 2007 Annual Report on Form 10-K. Depending on executive recruitment considerations, additional years of service may be offered to new executives.

 

The following table provides information about the deferred compensation accounts of the Named Executive Officers as of December 31, 2007. Amounts deferred reflect cash awards payable in prior years but voluntarily deferred by the executive:

 

 

 

 

The Company’s Deferred Compensation Plan provides all eligible employees including the Named Executive Officers an opportunity to voluntarily defer all or part of the cash awards earned and payable under the Long Term Incentive Plan and the Senior Executive Yearly Incentive Compensation Plan. The Company makes no contributions to the Plan.

 

A portion of the amount in the 2007 Aggregate Earnings column is reported in the Summary Compensation Table for the Named Executive Officers as follows: M. C. Pigott $212; M. A. Tembreull $4,519; T. E. Plimpton $4,044; J. G. Cardillo $2,694; K. R. Gangl $0.

 

All amounts reported reflect cash awards deferred prior to January 1, 2007. The Named Executive Officers have elected to defer into an income account, a stock unit account or any combination of each. Deferral elections were made in the year before the award was payable. Cash awards were credited to the income account as of January in the year the award was payable and interest is compounded quarterly on the account balance based on the simple combined average of monthly Aa Industrial Bond Yield averages for the previous quarter. The Named Executive Officer may elect to be paid out the balance in the income account in a lump sum or in up to 15 substantially equal annual installments. Cash awards credited to the stock unit account are based on the average closing price of a share of the Company’s common stock on the first five trading days in January of the year the cash award is payable. Dividend equivalents are credited to the stock unit account based on the closing price of the Company’s common stock on the date the dividend is paid to stockholders. The stock unit account is paid out in a single distribution of whole shares of the Company’s common stock.

 

The Named Executive Officers do not have severance or change-in-control agreements with the Company. The information below describes certain compensation that would become payable under existing plans if each Named Executive’s employment terminated or a change-in-control occurred on December 31, 2007. These payments are in addition to deferred compensation balances and the present value of accumulated Supplemental Retirement Plan benefits reported in the “Nonqualified Deferred Compensation” and “Pension Benefits” tables.