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. )

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FEDERAL SIGNAL CORPORATION

(Name of Registrant as Specified In Its Charter)

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

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1415 West 22nd Street

Oak Brook, Illinois 60523

 

Notice of Annual Meeting of Stockholders

To Be Held on April 27, 2010

 

To the Stockholders of
Federal Signal Corporation:

 

The Annual Meeting of Stockholders of Federal Signal Corporation will be held at the Regency Towers Conference Center, 1515 West 22nd Street, Oak Brook, Illinois 60523 on Tuesday, April 27^th, 2010 at 2:30 p.m. local time, for the following purposes:

 

• To elect two (2) Class II directors;

 

• To consider and vote on a proposal to amend our Restated Certificate of Incorporation to (i) declassify our Board of Directors and (ii) fix the number of directors at no less than six nor more than twelve, as determined solely by the Board of Directors from time to time;

 

• To approve the 2005 Executive Incentive Compensation Plan (2010 Restatement);

 

• To re-approve performance goals under the Executive Incentive Performance Plan, as amended and restated;

 

• To ratify Ernst & Young LLP’s appointment as our independent registered public accounting firm for 2010; and

 

• To transact such other business that may properly come before the meeting or any adjournment(s) or postponement(s) of such meeting.

 

The Board of Directors has fixed the close of business on March 8, 2010 as the record date for the meeting. This means that if you owned shares of our common stock on that date, you are entitled to receive this notice, and to vote at the meeting or any adjournment(s) or postponement(s) of the meeting.

 

The Board of Directors recommends that you vote “FOR” the nominees for director proposed by the Board; “FOR” the proposal to amend our Restated Certificate of Incorporation to declassify our Board of Directors and to fix the number of directors at no less than six nor more than twelve, as determined solely by the Board of Directors from time to time; “FOR” the proposal to approve the 2005 Equity Incentive Compensation Plan (2010 Restatement); “FOR” the proposal to re-approve the performance goals under the Equity Incentive Compensation Plan, as amended and restated; and “FOR” the ratification of Ernst & Young LLP as our independent registered public accounting firm for 2010.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be Held on April 27, 2010
The following materials, also included with this Notice, are available to be viewed, downloaded, and printed, at no charge, by accessing the following Internet address: http://www.federalsignal.com
1. Proxy Statement for the Annual Meeting of Stockholders, and
2. 2009 Annual Report to Stockholders

 

YOUR VOTE IS IMPORTANT! Whether or not you expect to attend the meeting, you are urged to vote as promptly as possible in one of the following ways:

 

 

Instructions for voting are contained on the enclosed proxy card. If you have any questions or need assistance in voting your shares of our common stock, please call the Corporate Secretary at (630) 954-2008 or email us at info@federalsignal.com.

 

By order of the Board of Directors,

 

Jennifer L. Sherman

Corporate Secretary

 

March 25, 2010

 

TABLE OF CONTENTS

 

 

1415 West 22nd Street

Oak Brook, Illinois 60523

 

Proxy Statement for Annual Meeting of Stockholders

To Be Held on April 27, 2010

 

The Board of Directors of Federal Signal Corporation is furnishing this proxy statement to you in order to solicit your proxy for use at the Annual Meeting of Stockholders to be held at the Regency Towers Conference Center, 1515 West 22^nd Street, Oak Brook, Illinois 60523 on Tuesday, April 27, 2010 at 2:30 p.m. local time, and any adjournment(s) or postponement(s) of such meeting. The purpose of the Annual Meeting of Stockholders is:

 

 

The Board of Directors recommends that you vote “FOR” the nominees for director proposed by the Board; “FOR” the proposal to amend our Restated Certificate of Incorporation to declassify our Board of Directors and to fix the number of directors at no less than six nor more than twelve, as determined solely by the Board of Directors from time to time; “FOR” the proposal to approve the 2005 Equity Incentive Compensation Plan (2010 Restatement); “FOR” the proposal to re-approve the performance goals under the Equity Incentive Compensation Plan, as amended and restated; and “FOR” the ratification of Ernst & Young LLP as our independent registered public accounting firm for 2010.

 

This proxy statement and the accompanying proxy card were first mailed to stockholders on or about March 25, 2010.

 

You may vote on the above matters in the following ways:

 

 

You will be entitled to vote at the Annual Meeting only if you held shares of our common stock of record at the close of business on March 8, 2010, the “record date.” You will be entitled to one vote for each share you owned on

the record date for each of the two directorships to be elected and on each other matter presented at the meeting. On the record date, there were 49,900,103 shares of our common stock issued and outstanding.

 

Our By-Laws provide that a majority of the outstanding shares, present in person or by proxy, will constitute a quorum at the Annual Meeting. For purposes of determining if a quorum is present, we will count all proxies designated as “withholding authority” to vote for a nominee or nominees or “abstaining” from any proposal, as well as “broker non-votes,” as shares represented at the Annual Meeting and counted toward establishing the presence of a quorum.

 

You can direct how your shares will be voted at the Annual Meeting by signing, dating and returning the enclosed proxy card. If you return a proxy card, but no specific voting instructions are given with respect to a proposal, your shares will be voted “for” each of the two Class II nominees named on the proxy card; “for” the proposal to amend our Restated Certificate of Incorporation to (i) declassify our Board of Directors and (ii) fix the number of directors at no less than six nor more than twelve, as determined solely by the Board of Directors from time to time; “for” the approval of the 2005 Executive Incentive Compensation Plan (2010 Restatement); “for” the re-approval of the performance goals under the Executive Incentive Performance Plan, as amended and restated; and “for” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2010.

 

If you hold your shares in more than one account, you will receive a proxy card for each account. To ensure that all of your shares are voted, please vote by telephone or Internet for each account, or sign, date and return a proxy card for each account in the postage-paid envelope provided.

 

Under the rules that govern brokers who have record ownership of shares that they hold in street name for clients who beneficially own such shares, a broker may vote such shares in its discretion on “routine” matters if the broker has not received voting instructions from its client, but a broker cannot exercise its own discretion to vote such shares on “non-routine” matters absent voting instructions from its client. When a broker votes a client’s shares on some but not all of the proposals presented at the meeting, each non-routine proposal for which the broker cannot vote because it has not received a voting instruction from the client is referred to as a “broker non-vote.” Proposals 1, 2, 3 and 4 are non-routine matters. Therefore, if your shares are held in street name and you do not provide instructions as to how your shares are to be voted on Proposals 1, 2, 3 and 4, your broker will not be able to vote your shares on these proposals. Please note in particular that this is the first year broker non-votes will not be counted with regard to the election of directors, so your vote is important. We urge you to provide instructions to your broker so that your votes may be counted.

 

Our By-Laws provide that, in an uncontested election, a nominee for director shall be elected to the Board if the votes cast “for” such nominee’s election exceed the “withhold authority” votes cast with respect to such nominee’s election (Proposal 1).

 

The affirmative vote of a majority of the outstanding shares of our common stock is required to amend our Restated Certificate of Incorporation to declassify our Board of Directors and to fix the number of directors at no less than six nor more than twelve, as determined solely by the Board of Directors from time to time (Proposal 2).

 

The affirmative vote of a majority of the shares of our common stock cast at the meeting in person or by proxy is required to approve the 2005 Executive Incentive Compensation Plan (2010 Restatement) (Proposal 3); provided that the number of votes cast represents over 50% of the outstanding shares of our common stock.

 

The affirmative vote of a majority of the shares of our common stock cast at the meeting in person or by proxy is required to (i) re-approve the performance goals under the Executive Incentive Performance Plan, as amended and restated (Proposal 4); and (ii) ratify the appointment of the auditors (Proposal 5).

 

In tabulating the voting result for any particular proposal, shares that constitute broker non-votes are not considered entitled to vote or votes cast on that proposal. Accordingly, broker non-votes and abstentions will not affect the outcome of any matter being voted on at the Annual Meeting.

 

On March 8, 2010, our 401(k) Plan, which is called the Federal Signal Corporation Retirement Savings Plan, held 1,284,658 shares of our common stock in the name of Vanguard Fiduciary Trust Company, as trustee of the

401(k) Plan. If you are a participant in the 401(k) Plan, you may instruct Vanguard how to vote shares of common stock credited to your 401(k) Plan account by indicating your instructions on your proxy card and returning it by April 22, 2010. A properly executed proxy card will be voted by Vanguard as directed. If no proper voting direction is received, Vanguard, in its capacity as the 401(k) Plan Trustee, will vote your shares held in the 401(k) Plan in the same proportion as votes received from other participants in the 401(k) Plan.

 

You may revoke your proxy at any time before it is voted by:

 

 

The Securities and Exchange Commission has adopted rules that permit companies and intermediaries such as brokers to satisfy delivery requirements for annual reports and proxy statements with respect to two or more stockholders sharing the same address by delivering a single annual report and/or proxy statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially provides extra convenience for stockholders and cost savings for companies. We and some brokers may household annual reports and proxy materials, delivering a single annual report and/or proxy statement to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders.

 

Once you have received notice from your broker or us that they or we will be householding materials to your address, householding may continue until you are notified otherwise or until you revoke your consent. You may request to receive at any time a separate copy of our annual report or proxy statement, by sending a written request to Federal Signal Corporation, 1415 West 22nd Street, Suite 1100, Oak Brook, IL 60523, Attn: Corporate Secretary, or call 630-954-2008.

 

If, at any time, you no longer wish to participate in householding and would prefer to receive a separate annual report and/or proxy statement in the future, please notify your broker if your shares are held in a brokerage account or us if you hold registered shares. You can notify us by sending a written request to Federal Signal Corporation, 1415 West 22nd Street, Suite 1100, Oak Brook, IL 60523, Attn: Corporate Secretary, or call the number above. If, at any time, you and another stockholder sharing the same address wish to participate in householding and prefer to receive a single copy of our Annual Report and/or proxy statement please notify your broker if your shares are held in a brokerage account or us if you hold registered shares. You can notify us by sending a written request to Federal Signal Corporation, 1415 West 22nd Street, Suite 1100, Oak Brook, IL 60523, Attn: Corporate Secretary, or call the number above.

 

We will bear the costs of solicitation of proxies for the Annual Meeting. Following the original solicitation of proxies by mail, certain of our directors, officers and employees may solicit proxies by correspondence, telephone, e-mail, or in person, but will not receive any extra compensation for such solicitation work. We will reimburse brokers and other nominee holders for their reasonable expenses incurred in forwarding the proxy materials to the beneficial owners. The Company does not presently intend to retain professional proxy solicitation assistance.

 

If you have any questions about the Annual Meeting or if you need additional copies of this proxy statement or the enclosed proxy card, please contact us by sending a written request to Federal Signal Corporation, 1415 West 22nd Street, Suite 1100, Oak Brook, IL 60523, Attn: Corporate Secretary or call 630-954-2008.

 

The following table sets forth information as of March 8, 2010 with respect to beneficial ownership of our common stock by:

 

 

 

 

 

Our Company’s Board of Directors currently consists of ten directors divided into three classes. Classes I and II each consist of three members and Class III consists of four members. Each class is elected for a term of three years and the classes together are staggered so that one class term expires each year.

 

Richard R. Mudge and Dominic A. Romeo have been nominated by our Board of Directors as Class II directors for election at the Annual Meeting for a term of three years to expire at the 2013 Annual Meeting or until his or her successor is elected and qualified. All of the nominees have been recommended for nomination by the Board of Directors acting on the recommendation of the Nominating and Governance Committee of the Board of Directors, which consists solely of independent members of the Board of Directors. Current Class II directors Robert M. Gerrity, Robert S. Hamada and John McCartney are not standing for reelection at the Annual Meeting.

 

Our Nominating and Governance Committee recommended, and our Board of Directors subsequently determined, that it is in the best interests of our Company to reconstitute the Board of Directors in connection with the Annual Meeting to reduce the number of directors of the Board from ten (10) to nine (9) persons pursuant to Section 3.2 of our Company’s By-Laws. In addition, Section 3.2 of our Company’s By-Laws requires that the number of directors in each class be nearly as equal as possible. Immediately following the Annual Meeting, the

Board will reassign a director from Class III to Class II so that each of the Board’s classes will consist of three directors. The new Class II director, or his or her successor, will stand for re-election at the 2011 Annual Meeting, in addition to the Class III director nominees.

 

Pursuant to our By-Laws, in an uncontested election, a nominee for director shall be elected to the Board if the votes cast “for” such nominee’s election exceed the “withhold authority” votes cast with respect to such nominee’s election. Each of the nominees has consented to being named in this proxy statement and to serve if elected. If any of the nominees should decline or be unable to serve as a director, the persons named as proxies in the accompanying proxy card will vote the proxy for such other person(s) as the Nominating and Governance Committee may nominate as director so as to provide for a full Board.

 

The Board of Directors recommends a vote “FOR” the election of Richard R. Mudge and Dominic A. Romeo as Class II directors.

 

Qualifications of the Board of Directors  When identifying nominees to serve as director, our Nominating and Governance Committee considers candidates with diverse business and professional experience, skills, gender and ethnic background, as appropriate, in light of the current composition and needs of our Board. As part of its evaluation of a candidate’s business and professional experience, the Nominating and Governance Committee considers a variety of characteristics including, but not limited to, core competencies, experience, independence, level of commitment, Board and Company needs and considerations, and personal characteristics. The Nominating and Governance Committee may also engage a third party to assist it in identifying potential director nominees. In 2009, the Nominating and Governance Committee engaged JamesDruryPartners to assist it in selecting director nominees. The Company paid JamesDruryPartners approximately $150,000 plus expenses for these services. The Board also created a temporary Director Search Committee consisting of Mr. Goodwin (Chairman), Ms. Reichelderfer and Mr. Osborne to facilitate the director search process.

 

The composition of our current Board reflects diversity in business and professional experience, skills, gender and ethnic background. When considering whether directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable our Board to satisfy its oversight responsibilities effectively in light of our Company’s business and structure, the Nominating and Governance Committee and the Board focused primarily on the information discussed in each of the individual biographies set forth below. In particular, the Nominating and Governance Committee and the Board considered the following individual attributes:

 

 

In addition, the Nominating and Governance Committee actively seeks directors who provide our Board with a diversity of perspectives and backgrounds.

 

 

 

 

Each of Messrs. Martin and Wright was appointed to the Board in 2008 pursuant to the terms of a Settlement Agreement, dated March 12, 2008, between the Company and certain stockholders of the Company, including RCG Starboard Advisors, LLC, Ramius, LLC and certain entities and individuals affiliated with them (such stockholders collectively, the “Ramius Group”). Pursuant to the Settlement Agreement and as of the date thereof, the Board appointed Mr. Martin as a Class I director to fill the then existing vacancy on the Board. The Company also agreed to increase the size of the Board from nine to ten directors effective as of the date of the Company’s 2008 Annual Meeting of Stockholders. To fill the new position resulting from the increase in the size of the Board, the Company nominated Mr. Martin for election at the 2008 Annual Meeting as a Class III director for a three-year term expiring at the Company’s Annual Meeting of Stockholders in 2011. Following the 2008 Annual Meeting and pursuant to the terms of the Settlement Agreement, the Ramius Group recommended, and on April 23, 2008 the Board appointed, Mr. Wright to fill the vacancy in Class I on the Board resulting from the election of Mr. Martin as a Class III director at the 2008 Annual Meeting. The Settlement Agreement was filed as an exhibit to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on March 13, 2008.

 

The Board of Directors has determined that all of our directors and all of the Board-recommended nominees for director, other than Mr. Osborne, qualify as independent. In making this determination, the Board of Directors considered the rules of the New York Stock Exchange and the Securities and Exchange Commission, and reviewed information provided by the directors and nominees in questionnaires and other certifications concerning the relationships that we may have with each director or nominee (including each director’s immediate family members and other associates), including any charitable contributions that we may have made in the past and/or continue to make to organizations with which such director or nominee is affiliated.

 

We separate the roles of Chief Executive Officer and Chairman of the Board. Separating these positions allows our Chief Executive Officer to focus on our day-to-day leadership and performance of our Company, while allowing the Chairman of the Board to lead the Board in its fundamental role of providing advice to and independent oversight of management. Our Board believes that having separate positions, with an independent outside director serving as Chairman, is the appropriate leadership structure for our Company at this time and demonstrates our commitment to good corporate governance.

Our Board of Directors has responsibility for the oversight of risk management. Our Board of Directors, either as a whole or through its Committees, regularly discusses with management our major risk exposures, their potential impact on our Company, and the steps we take to monitor and control such exposures.

 

While our Board is ultimately responsible for risk oversight at our Company, our Board Committees assist the Board in fulfilling its oversight responsibilities in certain areas of risk. In particular, the Audit Committee focuses on the management of financial and accounting risk exposures. The Nominating and Governance Committee focuses on the management of risks associated with Board organization, membership and structure, and the organizational and governance structure of our Company. The Compensation and Benefits Committee assists our Board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs. Finally, the Finance Committee is responsible for recommending policies with respect to financial risk assessment and management.

 

During 2009, our Board of Directors held a total of ten meetings. The Compensation and Benefits Committee held seven meetings; the Nominating and Governance Committee held eight meetings; the Audit Committee held four meetings; the Executive Committee held no meetings; and the Finance Committee held one meeting. Our Corporate Governance Guidelines require each director to regularly attend meetings of the Board of Directors and all Board Committees upon which the director serves. All directors attended at least 75% of Board and Committee meetings of which he or she was a member.

 

Pursuant to our By-Laws, we have established standing Audit, Nominating and Governance, Compensation and Benefits, and Executive Committees. In addition, in 2009 we established a temporary Finance Committee. The Board may terminate the Finance Committee at any time at its discretion. The Finance Committee has principal oversight responsibility with respect to our Company’s material investment and finance matters including capital investment and funding determinations and the repositioning and/or restructuring of the Company’s business lines and assets. The members of the Finance Committee are James E. Goodwin (Chairman), Charles R. Campbell, Robert S. Hamada, Dennis J. Martin and William H. Osborne.

 

Descriptions of our standing committees follow:

 

Audit Committee  The Audit Committee of the Board of Directors is responsible for monitoring:

 

 

In fulfilling its role, the Audit Committee reviews the design and operation of internal control processes and the manner in which we control our major financial risk exposures. The Audit Committee has direct and regular access to our financial executives, including the Vice President of Internal Audit and the Senior Vice President and Chief Financial Officer. Additionally, the Audit Committee has direct and regular access to the independent registered public accounting firm. The Audit Committee has the sole authority to appoint or replace our independent registered public accounting firm, and is directly responsible for overseeing the work of and determining the appropriate compensation for our independent registered public accounting firm. In addition, the Audit Committee considers and approves the performance of non-audit services by our independent registered public accounting firm, taking into consideration the effect that the performance of these services may have upon the independence of the independent registered public accounting firm.

 

The Board of Directors has determined that all of the members of the Audit Committee are independent as defined under the applicable New York Stock Exchange and Securities and Exchange Commission rules. The members of the Audit Committee are Charles R. Campbell (Chairman), Robert M. Gerrity, Robert S. Hamada and Dennis J. Martin. James E. Goodwin was a member of the Audit Committee until April 30, 2009, when he became Chairman of the Board of Directors. The Board of Directors has determined that Mr. Campbell qualifies as an “audit committee financial expert” as defined by the Securities and Exchange Commission. None of the Audit Committee members serves on more than three public companies’ audit committees (including our Company).

The Board of Directors has adopted a Charter for the Audit Committee to comply with the requirements of the New York Stock Exchange and the Sarbanes-Oxley Act of 2002, a copy of which is available on our website at http://www.federalsignal.com.

 

Nominating and Governance Committee  The Nominating and Governance Committee is responsible for recommending guidelines to the Board of Directors for corporate governance, including the structure and function of our Board of Directors, its Committees and the management of our Company, as well as identification and recommendation to the Board of Directors of candidates to be elected as directors. The Nominating and Governance Committee also advises the Board of Directors as to appropriate compensation for serving as a member of our Board of Directors.

 

Stockholders may recommend individuals for the Nominating and Governance Committee to consider as potential directors by giving written notice to our Corporate Secretary at least 90 days but not more than 120 days prior to the first anniversary of the preceding year’s Annual Meeting, along with the specific information required by our By-Laws, including, but not limited to, the name and address of the nominee; the number of shares of our common stock beneficially owned by the stockholder (including associated persons) nominating such nominee; and a consent by the nominee to serve as a director if elected that would be required for a nominee under the Securities and Exchange Commission rules. If you would like to receive a copy of the provisions of our By-Laws setting forth all of these requirements, you should write to our executive offices, Attn: Corporate Secretary. The Nominating and Governance Committee has not adopted any specific procedures for considering the recommendation of director nominees by stockholders, but will consider stockholder nominees for new directorship on the same basis as other nominees.

 

The Nominating and Governance Committee has set no specific minimum qualification for a nominee to the Board of Directors although under our revised Corporate Governance Guidelines, no person may stand for election as director: (i) after attaining age 72 without a waiver from the Board; (ii) if he or she serves on more than six boards of publicly traded companies; or (iii) if he or she is the chief executive officer of a publicly traded company, he or she may not serve on more than three publicly traded company boards.

 

The Company’s Corporate Governance Guidelines include a director resignation policy that requires each director nominee who is standing for re-election, prior to each election of directors at an annual meeting, to submit to the Board an irrevocable letter of resignation from the Board which will become effective if that director does not receive the necessary votes and the Board determines to accept such resignation. In such circumstances, the Board’s Nominating and Governance Committee will evaluate and make a recommendation to the Board with respect to the submitted resignation. The Board will take action on the recommendation within 180 days following the stockholders’ meeting at which the election occurred. In such circumstances, we will publicly disclose the Board’s decision including, if applicable, the reasons for rejecting a resignation.

 

The Board of Directors has determined that all of the members of our Nominating and Governance Committee are independent as defined under the applicable New York Stock Exchange rules. The members of the Nominating and Governance Committee are Robert S. Hamada (Chairman), Robert M. Gerrity, James E. Goodwin and Brenda L. Reichelderfer. James C. Janning was a member of our Nominating and Governance Committee until April 30, 2009, when his term as a director expired.

 

The Board of Directors has adopted a Charter for the Nominating and Governance Committee to comply with the requirements of the New York Stock Exchange and the Sarbanes-Oxley Act of 2002, a copy of which is available on our website at http://www.federalsignal.com.

 

Compensation and Benefits Committee  The Compensation and Benefits Committee is responsible for the establishment and oversight of our Company’s compensation and benefits philosophy. With respect to our executive officers, the Compensation and Benefits Committee has the authority to establish the objectives of compensation, to determine the components of compensation, and to establish and evaluate performance goals. The functions of the Compensation and Benefits Committee are further described in this proxy statement under the heading “Compensation Discussion and Analysis” beginning at page 17. The Board of Directors has determined that all of the members of our Compensation and Benefits Committee are independent as defined under the applicable New York Stock Exchange rules. The members of the Compensation and Benefits Committee are John McCartney (Chairman), Paul W. Jones, Brenda L. Reichelderfer and Joseph R. Wright. James C. Janning was a member of our Compensation and Benefits Committee until April 30, 2009, when his term as a director expired.

 

The Board of Directors has adopted a Charter for the Compensation and Benefits Committee to comply with the requirements of the New York Stock Exchange and the Sarbanes-Oxley Act of 2002, a copy of which is available on our website at http://www.federalsignal.com.

Executive Committee  The Executive Committee generally exercises the power and authority of the Board in the intervals between full Board meetings. The members of the Executive Committee are James E. Goodwin (Chairman), Charles R. Campbell, Robert S. Hamada, John McCartney and William H. Osborne. Mr. Janning was a member and chaired this Committee until April 30, 2009, when his term as a director expired and Mr. Goodwin was appointed Chairman. Mr. Osborne was appointed to the Executive Committee on April 30, 2009, when he joined the Board of Directors.

 

The following table sets forth information concerning compensation earned by our non-employee directors in fiscal year 2009. Mr. Osborne, our President and Chief Executive Officer, also serves on our Board of Directors although he receives no additional compensation for serving on our Board or any Committees. Mr. Osborne’s compensation is set forth in the Summary Compensation Table on page 30.

 

Non-Employee Director Compensation in Fiscal Year 2009

 

 

 

The Nominating and Governance Committee of our Board of Directors advises our Board on the annual compensation for our non-employee directors. In order to set competitive compensation for our non-employee directors, our Nominating and Governance Committee may consult third party advisors, generally available source material, proxy statements and data from peer companies.

 

Our non-employee directors receive both cash and equity compensation as detailed below. Our Chairman, based on his key role and time commitment, receives additional compensation in cash and equity on a per diem basis for other time spent on Board matters. No additional compensation was provided to the members of the temporary Director Search Committee established by the Board of Directors with respect to our nominees for the Annual Meeting.

 

Pursuant to our director stock ownership program, each non-employee director who does not own shares of our common stock equal in value to at least three times the annual retainer paid to non-employee directors is required to receive at least 50% of annual fees earned in any given year in stock.

 

 

 

Upon appointment or election to our Board, each non-employee director receives an initial stock option grant to purchase 5,000 shares of our common stock, all of which vest on the third anniversary of the date of grant.

 

 

 

The common stock awards for service as a director were made on the date of our 2009 Annual Meeting of Stockholders, April 29, 2009. Pursuant to our Director Compensation Policy, the number of shares of the common stock awarded was determined by dividing the amount of the award by the closing market price of our common stock on the date of grant, which was $7.77 per share. Accordingly, for 2009, each non-employee director (excluding the Chairman) on the date of our Annual Meeting of Stockholders received a common stock award of 7,722 shares and the Chairman received a common stock award of 9,652 shares.

 

We are committed to good corporate governance. We believe that the foundation of our corporate governance is the independence of our directors, the separation of the roles of our Chief Executive Officer and Chairman of the Board, responsible corporate citizenship, and a commitment to the interests of our stockholders. In accordance with the requirements of the New York Stock Exchange and the Sarbanes-Oxley Act of 2002, our Board of Directors has adopted Corporate Governance Guidelines as well as charters for the Nominating and Governance Committee, the Compensation and Benefits Committee and the Audit Committee. These guidelines and charters, as well as our Company Policy for Business Conduct and Policy for Business Conduct-Directors (together, the “Business Conduct Policies”) and a Code of Ethics, which is applicable to our Chief Executive Officer and our senior financial officers, are available for review on our website at http://www.federalsignal.com.

 

The non-employee directors of the Board meet in executive session without management, as appropriate. The Chairman of the Board of Directors presides over executive sessions. Directors may be contacted as a group, by Committee, or individually, and the presiding director or the non-employee directors as a group may be contacted on an anonymous and/or confidential basis by addressing a letter to Federal Signal Corporation, 1415 West 22nd Street, Suite 1100, Oak Brook, IL 60523, Attn: Corporate Secretary. All such letters will be forwarded to the directors. We encourage our directors to attend the 2010 Annual Meeting of Stockholders. Eight of our Board members attended the 2009 Annual Meeting of Stockholders.

 

There were no compensation committee interlocks or insider participation on the part of the members of our Compensation and Benefits Committee. The members and functions of our Compensation and Benefits Committee are set forth above under “Committees of the Board of Directors.”

 

During the year ended December 31, 2009, it was determined that none of our directors, Board-proposed nominees for director, executive officers, stockholders owning more than 5% of our common stock, or immediate family members of any such persons engaged in a transaction with us in which such director, nominee for director, executive officer, stockholder owning more than 5% of our common stock, or immediate family member of such persons had a direct or indirect material interest that required disclosure under applicable Securities and Exchange Commission rules.

 

We maintain various policies and procedures relating to the review, approval or ratification of transactions in which our Company is a participant and in which any of our directors, executive officers, 5% stockholders (if any) or their family members have a direct or indirect material interest. Our Business Conduct Policies, which are available on our website at http://www.federalsignal.com, prohibit our directors and employees, including our executive officers, and in some cases their family members, from engaging in certain activities without prior written consent. These activities typically relate to situations where a director, executive officer or employee, and in some cases an immediate family member, may have significant financial or business interests in another company competing with or doing business with our Company, or who stands to benefit in some way from such a relationship or activity. Specifically, our Business Conduct Policies include certain prohibitions against the following: receiving or giving gifts or prizes above a nominal value from or to customers or suppliers; working for a customer or supplier or engaging in outside profit-making activities in any area of business in which our Company operates; representing any outside commercial interest during normal business hours or when traveling on Company business; lending or borrowing money from individuals affiliated with an entity with whom the Company conducts business; owning any part of any customer’s or supplier’s business (excluding routine investments in publicly traded companies); using Company property, information or positions for improper personal gain or benefit; and engaging in Company business with any entity in which a family member has an executive position or a significant financial interest unless

approved in advance. Since all types of prohibited transactions cannot be listed, we encourage our employees to seek advice before proceeding if there is any doubt regarding the appropriateness of an arrangement under our Business Conduct Policies.

 

Pursuant to our Business Conduct Policies and the Audit Committee Charter, the Chairman, Chief Financial Officer and General Counsel implement our Business Conduct Policies, and the Audit Committee reviews, approves, ratifies and makes recommendations to our Board of Directors regarding related person transactions.

 

Additionally, each year we require our directors and executive officers to complete a questionnaire which identifies, among other things, any transactions or potential transactions with our Company in which a director, an executive officer, or one of their family members or associated entities has an interest. We also require that directors and executive officers notify our Corporate Secretary as soon as possible of any changes during the course of the year to the information provided in the annual questionnaire.

 

We believe that the foregoing policies and procedures collectively ensure that all related person transactions requiring disclosure under applicable Securities and Exchange Commission rules are appropriately reviewed.

 

Presented below is a summary of our 2009 business highlights and recent 2010 developments, which provides context for our 2009 pay actions and changes thus far to our 2010 executive compensation program.

 

2009 Highlights and Recent 2010 Developments

 

The continuing difficult economic environment in 2009, including the persistent weakness in municipal markets, was challenging for our Company as well as many other companies. However, we took significant actions during the 2009 year intended to enable us to reduce our overhead costs and generate strong cash flow.

 

In 2009, our Company continued its strategy of divesting unprofitable operations and investing in growth opportunities in the technology segment. For example, we exited an unprofitable China joint venture to focus on our Chinese Wholly Owned Foreign Enterprise (WOFE) in order to introduce our products into the Asian market.

 

In June 2009, our Company partnered with RMS Technology Solutions, a leading provider of surveillance solutions that fight crime and increase security through video, sensor and mobile technologies, with the intent of jointly marketing their complementary solutions with our Company’s automated license plate recognition technology.

 

In July 2009, our Company sold all of its shares in its European sweeper business, Ravo Holdings B.V., located in the Netherlands, for €8.5 million, or approximately $12.1 million. Proceeds from the sale were used to pay down debt and fund core operations.

 

In July 2009, we began an initiative to consolidate a number of manufacturing and distribution operations into the Company’s University Park, IL plant. This initiative included employment terminations in the fourth quarter of 2009 and the first quarter of 2010, as well as costs associated with closing facilities and relocating operations and personnel.

 

In November 2009, we sold Pauluhn, our industrial lighting manufacturer subsidiary, as part of our ongoing efforts to streamline and focus our business portfolio while enhancing our financial flexibility.

 

In December 2009, our Company acquired Diamond Consulting Services Ltd., which specializes in vehicle classification systems for tolling and other Intelligent Transportation Systems (“ITS”) for $14.6 million, and deferred payments in future years of up to $3.2 million. The combination of Diamond’s technology with our Company’s existing PIPS automated license plate recognition technology broadens our Company’s product line of best-in-class technologies in ITS, and increases our Company’s addressable market.

 

In March 2010, our Company acquired VESystems, LLC for approximately $33 million, which offers complete system operations in electronic toll collection, and Sirit Inc. for approximately $73.4 million, which specializes in radio frequency identification. The addition of VESystems and Sirit, along with Diamond Consulting, further strengthens our presence in the ITS market.

Executive Compensation Program Modifications in 2009

 

A number of actions were taken in 2009 with respect to our compensation and benefits programs, including the following:

 

 

Executive Compensation Program Modifications in 2010

 

For 2010, our Company continues to manage our executive compensation program under difficult market conditions. To date, we have made the following decisions with respect to our executive compensation program:

 

 

 

Our executive compensation and benefits programs are designed to drive and reinforce our business goals and strategies for success in the marketplace and to enable growth, thus motivating management to maximize total stockholder return. As a key component of our executive compensation system, we have adopted a financial performance based philosophy which includes individual objectives designed to develop an efficient culture that emphasizes entrepreneurship, innovation, teamwork, creativity, and rewards employees who think and act like owners. This program also encourages collaboration and the maximization of long-term stockholder value, which in turn supports the attraction, motivation, and retention of the best global talent. Our executive compensation philosophy can be summarized as follows:

 

 

Our Compensation and Benefits Committee establishes and oversees our general compensation and benefits philosophy, and approves compensation and benefits for our executive officers. Specifically, our Compensation and Benefits Committee is charged in its charter with the authority and responsibility to:

 

 

 

The President and Chief Executive Officer annually reviews the performance of each executive officer. Recommendations based on these reviews, including those with respect to base salary adjustments, annual incentives and long-term incentives, are presented to the Compensation and Benefits Committee. The Compensation and Benefits Committee can exercise its discretion in modifying any recommended adjustments or awards to these executive officers. The compensation of the President and Chief Executive Officer is determined by the Compensation and Benefits Committee, meeting in executive session without the President and Chief Executive Officer present.

 

Our Company carefully monitors compensation levels to ensure they reflect an appropriate balance of pay-for-performance within acceptable risk parameters. Based on current and evolving best practices guidance, our Compensation and Benefits Committee conducted a compensation risk assessment of the various elements of our Company’s overall compensation program (including incentive compensation programs). In its analysis, the Compensation and Benefits Committee reviewed, with input from management, our Company’s compensation programs including appropriate internal controls to mitigate or reduce risk. Based on its review, the Compensation and Benefits Committee determined that our Company’s compensation programs and policies do not create excessive and unnecessary risk taking. Our Company and the Compensation and Benefits Committee will continue to monitor and ensure proper policies and procedures are maintained to ensure ongoing risk management and assessment of compensation practices.

 

For fiscal 2009, the Compensation and Benefits Committee engaged Watson Wyatt Worldwide, its outside compensation consultant, to assist in its annual review of our Company’s executive compensation programs. Watson Wyatt reviewed and evaluated the elements of our executive compensation program, including base salaries, target bonus levels and equity ownership, attended certain meetings of the Compensation and Benefits Committee and, upon request, provided its views on proposed actions by the Compensation and Benefits Committee. The Compensation and Benefits Committee believes that Watson Wyatt provided objective advice to the Committee. During 2009, Watson Wyatt and its affiliates did not provide services to our Company or its affiliates in an amount in excess of $120,000. Towers Perrin provided human resources consulting and other services to the Company during 2009. In January 2010, Watson Wyatt and Towers Perrin merged to form Towers Watson & Co.

 

Compensation levels for our executives are compared to the compensation paid to executives at the peer companies specified below. The market for experienced talent is highly competitive. Our objective is to attract and retain the most highly qualified executives to manage our business functions. In doing so, we draw upon a pool of talent that is highly sought after by large and established companies. We draw upon a market that is global in scope.

 

To that end, in October 2009, Watson Wyatt assisted us in updating our comparator group of companies and in collecting relevant market data from those companies. This update was made, in part, to eliminate the large variances in size among the companies comprising our comparator group. We determined that it was more appropriate to limit the revenue ranges among the companies in the comparator group to those with revenues from 0.5 times to 2.5 times our Company’s revenue with a median closer to $1 billion (actual median was $977 million). Secondly, to accommodate our change in business strategy to grow our recent acquisitions, our Company added comparable technology companies to the group.

Accordingly, as of October 2009, the following 23 companies were included in our comparator group:

 

 

For executive compensation decisions made prior to October 2009, data from our prior comparator group was reviewed. This comparator group included the following companies:

 

 

Comparator group data is used by us to determine the appropriate mix of fixed and variable compensation and to link the achievement of key strategic and financial performance measures to short and long-term awards. We also use published survey data to supplement the determination of competitive levels of compensation in the marketplace.

 

Our compensation program consists of five components: base salary, annual cash incentives, long-term equity incentives, retirement and health and welfare benefits, and perquisites and other personal benefits. Our programs balance individual, business unit and Company-wide goals and achievements.

 

Base Salaries

 

Base salary levels for our executive officers, including our President and Chief Executive Officer, are based primarily on external market data and on the individual performance of each executive officer during the previous year. Base salaries are targeted to be at the 50th percentile of competitive market data. In 2009, actual base salaries for named executive officers ranged from 92% to 111% of market midpoint targets. In addition to the executive’s individual performance, the Compensation and Benefits Committee also considers the following factors in setting base salaries and in recommending annual base salary adjustments: the executive’s current base salary relative to the targeted level, the executive’s level of responsibility and performance in the position, the executive’s prior experience and the executive’s breadth of knowledge.

Annual Cash Incentive Payments

 

Short-Term Incentive Bonus Plan

 

Prior to 2009, annual cash bonuses were paid to the named executive officers under the Economic Value program. Beginning in fiscal 2009, annual cash incentive payments will be paid under the Short-Term Incentive Bonus Plan (“STIP”), replacing the Economic Value program. From 2005 through 2008, annual cash incentive payments were based on objective measures of financial performance that related to the year-over-year increase in the net amount of value earned or lost on an investment after deducting the cost of holding that investment (the “Economic Value”) of the Company. Economic Value was calculated by using three key inputs: (i) Cost of Capital, which is the return required to appropriately compensate investors for investing in our Company; (ii) Average Capital Employed, which is the investment made by stockholders and debt holders of our Company in the operations of the business; and (iii) Net Operating Profit after Tax, which is the after-tax operating profit of our Company or a particular operating unit. Economic Value was calculated by subtracting a Capital Charge from Net Operating Profit after Tax. The Capital Charge is derived by multiplying the Cost of Capital by the Average Capital Employed. The underlying rationale for utilizing an Economic Value program for annual cash incentive compensation was to align management and employee interests with the interests of our stockholders. In 2008, the Compensation and Benefits Committee amended the Economic Value program to: (i) provide an opportunity for participants to receive a bonus even if threshold Economic Value goals were not met, in which case participants would still be eligible to receive up to 20% of their target bonuses; and (ii) provide the Compensation and Benefits Committee with the discretion to reduce the amount of bonuses earned by any named executive officer by up to 20%. In order to support the achievement of long-term goals, executives were given the opportunity to carry forward the unmet portion of their maximum annual incentive opportunity. For fiscal 2009, there was no continuing carry forward opportunity remaining under the Economic Value program.

 

The decision to replace the Economic Value program with the STIP was based on number of factors, including the complexity of the Economic Value program, the desire to add individual objectives and competencies to the bonus program, and to establish a program tied, in part, to generally accepted accounting principles. The STIP determines bonuses based upon the achievement of both financial measures and individual objectives. Financial measures are based upon earnings and cash flow at our Company, business group and division levels, depending upon each participant’s position within our Company.

 

Bonus compensation under the STIP links to our Company’s annual operating plan, with 50% based on earnings and 20% based on cash flow measures determined in accordance with generally accepted accounting principles. The remaining 30% is based on individual objectives, with 21% based on performance goal ratings and 9% based on competency ratings as measured by a numeric score received in the annual performance review process. Notwithstanding the foregoing, the Compensation and Benefits Committee can amend the STIP at any time to reduce award amounts to participants. Furthermore, the Compensation and Benefits Committee approves all awards to named executive officers. The STIP limits the total bonus paid (financial and individual performance portions) to an individual participant to twice his or her target bonus opportunity. Typically, annual cash incentive payments are approved in February and paid in a lump sum in March.

 

The STIP focuses on specific milestones as well as individual objectives, which allows us to reward outstanding individuals with a bonus, including in years where our overall financial performance may be low. The Compensation and Benefits Committee believes that rewarding employees upon the successful achievement of individual objectives will increase individual accountability and encourage excellence. The STIP is based upon goals that are easily understood and can be modified each year to reflect our current business plan and market conditions.

 

At the Company level, the 50% earnings component will be based on consolidated income before income taxes. As tax adjustments are largely impacted by external factors outside of the control of the participants, the Compensation and Benefits Committee determined that tax adjustments should not factor into the calculation. Our Company’s cash flow financial measure, weighted at 20%, will be based on consolidated net cash provided from continuing operations. At the business group level, the 50% earnings component will be based on earnings before interest and taxes, thereby excluding taxes and debt, neither of which are generally impacted by participants at this level. The business group cash flow measure, weighted at 20%, will be based on average primary working capital as a percentage of sales (the sum of accounts receivable and inventory less accounts payable and customer deposits divided by net sales for the year).

 

In the beginning of each year, the executive officers agree upon individual objectives with the Chief Executive Officer except with respect to the Chief Executive Officer, whose individual objectives are approved by the Compensation and Benefits Committee. The Compensation and Benefits Committee reviews performance against

these objectives to differentiate among executives and emphasize the link between personal performance and compensation. After the end of the year, the Compensation and Benefits Committee determines the individual performance-based bonus payouts by considering: (i) input from the Chief Executive Officer; (ii) personal observations on performance; and (iii) the achievement of individual objectives. Individual objectives consist of: (i) pre-set competencies that are considered for all executives; and (ii) personal objectives that are specific to each executive. Competencies, include, among others, business acumen, customer focus, ethics and values, and strategic agility. Specific goals may, for example, relate to financial or strategic initiatives such as expense reduction, acquisitions or divestitures, sales targets, or product quality.

 

Based on this criteria, each named executive officer is given a numerical rating as measured by our Company’s Performance Excellence Process (“PEP”). This performance appraisal process has both objective and subjective components, with discretion exercised by our Chief Executive Officer and the Compensation and Benefits Committee. The plan provides that each participant’s individual performance award shall be related to the PEP score received in the annual performance review process. The Compensation and Benefits Committee also has discretion in determining the allocation of the individual performance portion of the bonus in terms of the assessment of the level of performance of the individual participant and the resulting amount of bonus payable to that participant. The Compensation and Benefits Committee has the discretion to further reward executives who consistently demonstrate certain additional competencies outside of the PEP system, including attitude, effort, quality of work and contributions to our Company.

 

The incentive compensation under the STIP for our President and Chief Executive Officer, Senior Vice President and Chief Financial Officer, and Senior Vice President, Human Resources and General Counsel is based 70% on the achievement of our Company financial measures and 30% on individual objectives. The incentive compensation for our other named executive officers is based on the achievement of our Company and business group financial measures weighted 28% for achievement of Company goals, 42% for achievement of applicable business group goals, and 30% for achievement of individual objectives. The Compensation and Benefits Committee believes that this weighting encourages executives to collaborate across business groups and functions in order to achieve business objectives at the enterprise level as well as in their own business group. The incentive compensation for our executives is based on threshold, target and maximum goals for business groups and for our Company as a whole.

 

Subject to the discretion of the Compensation and Benefits Committee, the achievement of the threshold, target and maximum goals results in a cash incentive award equal to a pre-set percentage of the executive’s base salary. The target percentages of base salary to be paid out upon the achievement of various levels of goal achievement are determined based on competitive market data for each executive position. Results that fall in between the threshold, target and maximum goals are extrapolated from those points to determine the actual cash incentive award for the executive. Performance goals under the STIP are generally determined in the first quarter of the year.

 

Payments under the STIP are subject to a “clawback” policy under which our Company will require, to the extent practicable upon the occurrence of specified events, a named executive officer to repay a portion of his or her performance bonus payment plus a reasonable rate of interest. The clawback policy is triggered by: (i) an accounting restatement or a determination by our Board that the performance results were materially inaccurate; and (ii) a determination that the amount of such performance-based bonus would have been less than the amount previously paid to such named executive officer, taking into account the restated financial results or otherwise corrected performance results.

 

Long-Term Equity Incentives

 

Equity ownership plays a key role in aligning the interests of executives with our stockholders. A further purpose of our long-term incentive plan is to provide a means through which our Company may attract the best talent to become our employees, to encourage our employees to engage in the business strategy and success of our Company, and to provide a retention tool through vesting requirements for executives. Accordingly, the Compensation and Benefits Committee has granted equity awards to our executives on an annual basis under our long-term incentive plans. Equity grants are also periodically made to new employees and to existing employees in connection with promotions. In order to ensure continued ownership of the equity granted under the long-term incentive grants, we have instituted stock ownership guidelines for our executive officers as discussed on page 28 under the caption “Stock Ownership Guidelines for Executive Officers.”

Beginning with the 2008 annual awards, the Compensation and Benefits Committee revised the structure of the long-term equity incentive program such that the awards consist of three components: an option to purchase shares of our common stock, restricted stock awards, and performance-based restricted stock units.

 

The Compensation and Benefits Committee believes that this mix of equity awards will further align each executive’s goals with the intermediate and long-term goals of our stockholders. The award provides an incentive to the executive to drive long-term performance over the vesting and payment periods embedded in the award. While the goal is to allocate the overall value of the long-term incentive award one-third to each of the three components, the Compensation and Benefits Committee’s decision to grant the same number of shares in 2009 as in 2008 resulted in an unequal distribution in 2009, with the option to purchase shares of common stock accounting for 10% more of the total grant value than the other two vehicles. The Compensation and Benefits Committee’s decision to grant the same number in 2009 as 2008 was based in part on market conditions and Company performance in 2008.

 

Options vest in equal installments over a three-year period. These options have an exercise price equal to the closing price of our common stock on the date of grant. Restricted stock awards and restricted stock units vest in full on the third anniversary of the date of grant and are valued using the closing price of our common stock on the date of grant. These awards are subject to forfeiture and cancellation if the named executive officer’s employment is terminated prior to vesting.

 

The Compensation and Benefits Committee may grant other equity incentives, on a case-by-case basis, as deemed appropriate. For example, the Compensation and Benefits Committee may award restricted stock units to our employees, international executives in particular, in substitution for one or more components of the standard grant described above to promote long-term performance and employee retention. Award value and type of grant will take into account applicable law, administrative issues and competitive market data for the specific country at issue.

 

The performance-based restricted stock units are tied to the achievement of a pre-determined three-year relative performance metric approved by the Compensation and Benefits Committee based upon relative Total Shareholder Return (“TSR”). The formula to determine TSR follows:

 

TSR = Change in Stock Price plus dividends paid over the performance period

Beginning Stock Price

 

 

At the conclusion of the performance period, our Company’s TSR is calculated for that period and compared to the TSR achieved by the publicly-traded companies included in our comparator group. Our Company’s percentile rank is then assigned based on its relative TSR achievement. At the end of the three-year performance period, each executive officer will be awarded shares, if any, as a percentage of the pre-determined target shares for that executive ranging from 0% to 200% as determined by our percentile rank. For the three-year performance period 2008 to 2010, the TSR achieved for the first performance year, 2008, was negative 0.25, which was in the 75th percentile of the comparator group. The TSR achieved for 2009, the second performance year, was negative 0.42, which was under the 25th percentile of the comparator group.

 

For a general description of the award agreement provisions setting forth certain Company payment obligations with respect to specified termination events including death, disability, retirement and change in control, please see page 36 of this proxy statement in the section titled “Executive Compensation in the Last Fiscal Year” under the heading titled “Other Potential Post-Employment Payments.”

 

Retirement and Health and Welfare Benefits

 

We recognize that our employees are the driving force behind the profitable growth of our Company and that our ability to sustain our success is dependent on each individual’s well being. To that end we offer a competitive package of Company-sponsored health and welfare benefits to all eligible employees, including our executive officers.

 

 

The Retirement Savings Plan is a defined contribution plan that combines a 401(k) plan with a points-weighted Company contribution. Under this plan, executives receive a Company-paid retirement contribution that is based on years of service, age and employee status, and is paid as a percentage between 1% and 4% of their eligible compensation. Generally, executives are eligible to receive a Company-matching contribution of up to 50% of the first 6% of the participant’s compensation that the participant voluntarily determines to contribute to the plan. This Company-matching contribution was suspended in 2009, although it has been reinstituted effective January 1, 2010.

 

Upon a voluntary employee deferral, the non-qualified Savings Restoration Plan restores Company contributions limited under the Internal Revenue Code through a notional Company contribution and notional earnings from investments.

 

For 2007 through 2009, executives who participated in the 401(k) Retirement Plan-Elgin Sweeper or in our now frozen defined benefit plan (FSC Retirement Plan) are eligible to receive a supplemental transitional contribution to the new Retirement Savings Plan and Savings Restoration Plan equal to 1% or 2% of their salary based on age and service as of December 31, 2006.

 

Based upon her age and years of service as of December 31, 2006, Jennifer L. Sherman, Senior Vice President, Human Resources and General Counsel received a supplemental transitional contribution equal to 2% of her eligible compensation in 2009 to both the Retirement Savings Plan and the Savings Restoration Plan. Mark D. Weber, President, Environmental Solution Group, received a supplemental transitional contribution equal to 2% of his eligible compensation for 2009 to the Retirement Savings Plan and 2% of his eligible 2008 bonus compensation to the Savings Restoration Plan.

 

 

Perquisites and Other Personal Benefits

 

We provide executives with perquisites and other personal benefits that the Compensation and Benefits Committee feels are reasonable and consistent with its overall compensation program to better enable us to attract and retain the best talent for key executive positions. The Compensation and Benefits Committee periodically reviews the levels of perquisites provided. Perquisites provided may include:

 

 

The Compensation and Benefits Committee may approve additional perquisites on an individual basis at its discretion.

 

The specific compensation decisions made for each of the named executives for 2009 and year-to-date in 2010 reflect our management’s and our Compensation and Benefits Committee’s assessments of performance against market benchmarks, performance relative to Company and business group financial and operational measurements, and achievement of individual performance objectives. Our compensation actions for our named executive officers are summarized below.

 

With respect to the final compensatory arrangement for Mr. McConnaughey, please also see the section titled “Executive Compensation in the Last Fiscal Year” under the heading “Additional Information about the Compensation Paid to the Named Executive Officers” beginning on page 32 of this proxy statement.

 

Base Salary

 

On September 15, 2008, our Board of Directors appointed William H. Osborne as the President and Chief Executive Officer of our Company. Mr. Osborne’s initial annual base salary was $650,000. Mr. Osborne’s

compensation, including his base salary, was determined by the Compensation and Benefits Committee based upon a report prepared by Hewitt Associates, an outside global human resources consulting firm, in connection with our executive search for a CEO. Due to economic conditions, Mr. Osborne voluntarily elected to take a 5% base pay reduction from $650,000 to $617,500 effective January 1, 2009.

 

Effective December 10, 2008, William G. Barker, III was appointed as our Senior Vice President and Chief Financial Officer. Mr. Barker’s initial base salary, including for 2009, was set at $325,000 per year. Mr. Barker’s base salary was determined based upon a review of his pay history, experience and comparable positions in the comparator group.

 

In determining base salary increases, the Compensation and Benefits Committee reviews performance, level of responsibility and actual salary as compared to the targeted level (50th percentile) of the comparator group. Due to economic conditions, our overall financial position, and as part of a cost savings initiative, our named executive officers did not receive a 2009 base salary increase. The base salary of Mr. Barker remained at $325,000. The base salary of David R. McConnaughey, our former Safety and Securities Systems Group President, remained at $328,000. The base salary of Jennifer L. Sherman, our Senior Vice President, Human Resources and General Counsel, remained at $279,231. The base salary of our Environmental Solutions Group President, Mark D. Weber, remained at $305,784.

 

On March 3, 2010, the Compensation and Benefits Committee approved modest increases in base salaries for the named executive officers for fiscal 2010. Mr. Osborne’s base salary was raised to $663,000, an increase of 2% from his original 2009 base salary of $650,000, which was his base salary prior to the voluntarily elected 5% reduction. Mr. Barker’s base salary was raised to $333,100, an increase of 2.5%. Ms. Sherman’s base salary was raised to $287,931, an increase of 3.1%. Mr. Weber’s base salary was raised to $313,384, an increase of 2.5%. The base salaries of our executive officers were generally set at the 50th percentile or above in 2010, although Ms. Sherman’s 2010 salary is below the 25th percentile when compared to other general counsel positions in the comparator group.

 

Annual Cash Incentive Payments — Short-Term Incentive Bonus Plan

 

Financial-Based Incentive  The STIP targets and results were adjusted for certain divestures in 2009. In addition, the Compensation and Benefits Committee, in its discretion, determined that the restructuring costs associated with the consolidation of certain Company facilities should not negatively impact the calculation of the 2009 bonus payments. For 2009, the earnings component under the STIP at the Company level was based on consolidated income before income taxes. The threshold, target and maximum goals were $27.1 million, $36.1 million and $45.1 million, respectively. The Company’s consolidated income before income taxes in 2009, after taking into account the restructuring costs, was $27.4 million. Our Company’s cash flow threshold, target and maximum goals were $34.0 million, $45.3 million and $56.6 million, respectively. Our Company’s cash flow financial measure was based on consolidated net cash provided from continuing operations. Actual Company cash flow in 2009, after taking into account the restructuring costs, was $60.9 million.

 

At the business group level, the earnings component was based on earnings before interest and taxes. The business group cash flow measure was based on average primary working capital as a percentage of sales (the sum of accounts receivable and inventory less accounts payable and customer deposits divided by net sales for the year). For the Environmental Solutions Group, of which Mr. Weber is the President, the earnings component threshold, target and maximum goals were $18.7 million, $25.0 million, and $31.2 million, respectively. Actual earnings in 2009 for this group were $17.1 million. The threshold, target and maximum goals for the cash flow measure for the Environmental Solutions Group were 22.3%, 19.4% and 16.5%, respectively. The actual percentage of cash flow in 2009 for this group was 20.4%. However, in fiscal 2009, the Board determined that each business group would also be required to show improved primary working capital from year-end 2008 to year-end 2009 as an additional business group financial measure. In 2008 and 2009, primary working capital for the Environmental Solutions Group was $67 million and $51.5 million, respectively. Therefore, because primary work capital improved dollar-for-dollar from 2008 to 2009, a bonus payout was earned by this group under this component.

 

Mr. McConnaughey no longer serves as our Safety and Security Systems Group President, effective December 31, 2009. Mr. McConnaughey received certain severance payments pursuant to an agreement entered into with our Company, as more fully described in the section titled “Executive Compensation in the Last Fiscal Year” under the heading “Additional Information about the Compensation Paid to the Named Executive Officers” beginning on page 32 of this proxy statement.

 

Individual Performance-Based Incentive  For 2009 under the STIP, the Compensation and Benefits Committee, in determining the individual performance-based bonuses for our named executive officers, considered: (i) input from the Chief Executive Officer; (ii) their personal observations on performance; and (iii) the named

executive officers numerical ratings as measured by our Company’s PEP system. The Compensation and Benefits Committee also has the discretion to further reward outstanding contributors who demonstrate certain additional competencies, including attitude, effort, quality of work and contributions to our Company.

 

As set forth below, for fiscal 2009, the target annual bonus opportunity for Mr. Osborne was set at 90% of his base salary and the target opportunities for Messrs. Barker, Weber and McConnaughey were set at 60% of their base salaries. Ms. Sherman’s target annual bonus opportunity was set at 55% of her base salary.

 

2009 Named Executive Officer STIP Targets

 

 

For 2009, the annual incentive bonuses paid to our executive officers for 2009 performance were as follows:

 

2009 Named Executive Officer STIP Payments

 

 

 

 

 

For fiscal 2010, the target annual bonus opportunity for Mr. Osborne was increased to 100% of his base salary. The target annual bonus opportunities for Messrs. Barker and Weber remained the same as 2009 at 60% of their base salaries, and Ms. Sherman’s target annual bonus opportunity remained the same as 2009 at 55% of her base salary.

 

Long-Term Equity Incentives

 

In February 2009, the Compensation and Benefits Committee granted equity incentive awards in the form of 40% stock options, 30% restricted stock and 30% performance-based restricted stock units as specified below. The Compensation and Benefits Committee determined, as a result of the uncertain macroeconomic conditions, to award the same number of options in 2009 as in 2008, resulting in a slightly higher weighting of the mix of options as compared to the 2008 awards which were one-third options, one-third restricted stock and one-third performance-based restricted stock units.

 

 

 

All unvested stock options, restricted stock awards and performance-based restricted stock units held by Mr. McConnaughey were forfeited in connection with his departure. Mr. McConnaughey has until March 31, 2010 to exercise previously vested stock option awards.

 

The Compensation and Benefits Committee has not yet granted equity awards for 2010. The Compensation and Benefits Committee expects to make equity awards in the second quarter of 2010. The Company determined to delay these awards in order to: (i) complete a comprehensive market analysis of our executive officer compensation practices to ensure our equity distributions are aligned with the market; and (ii) explore alternative long-term incentive award programs in order to comply with stockholder advisory group burn rate guidelines. To that end, we are seeking stockholder approval of the 2005 Executive Incentive Compensation Plan (2010 Restatement) as set forth in Proposal 3, see page 45.

 

Perquisites and Other Benefits

 

Vehicle Allowances  In 2009, on an annualized basis, Mr. Osborne received a vehicle allowance totaling $13,800. Each of the other named executive officers received a vehicle allowance of $11,400 in 2009.

 

Financial/Tax Preparation Services  Pursuant to his employment agreement, we reimbursed Mr. Osborne for the services of a financial and estate planning advisor in the amount of $3,235 in 2009.

 

Membership Fees  During 2009, Mr. Osborne received reimbursement for certain membership fees in the aggregate amount of $1,500 and Mr. Weber received reimbursement for certain membership fees in the amount of $400.

 

Miscellaneous Allowances  During 2009, we reimbursed Mr. Osborne for expenses relating to attendance at the Congressional Black Caucus Inaugural Ball and a directors’ educational program at the Tuck School of Business at Dartmouth in the aggregate amount of $14,307. We reimbursed Mr. McConnaughey $300 for certain newspaper subscription fees. See footnote 7 to the Summary Compensation Table on page 31.

 

Our executive officers are required to acquire substantial holdings of our common stock while employed by us. Individual stock ownership targets are based on a multiple of between two and five times the executive’s base salary and executives generally have seven years from the date they become subject to the stock ownership guidelines to comply with the guidelines. Messrs. Osborne, Barker and Weber have not met their respective requirements for stock ownership and have 5.5, 6 and 1.5 years, respectively, to comply. Ms. Sherman has also not met her requirements for stock ownership and has one year to comply.

 

On February 20, 2009, the Board adopted a compensation policy regarding tax gross-up payments and limitations of severance benefits. This compensation policy provides, among other things:

 

 

This compensation policy will not alter the terms of any agreement or compensation or benefit plan in effect on the date of adoption of the policy.

 

Section 162(m) of the Internal Revenue Code provides that compensation in excess of $1 million paid to the chief executive officer and the other most highly compensated executive officers of a public company will generally be nondeductible for federal income tax purposes, subject to certain exceptions. The Compensation and Benefits Committee intends to structure compensation arrangements in a manner that will avoid the deduction limitations imposed by Section 162(m) in appropriate circumstances. However, the Compensation and Benefits Committee believes that it is important and necessary that the Compensation and Benefits Committee retain the right and flexibility to provide and revise compensation arrangements, such as base salary and cash bonus incentive opportunities, that may not qualify under Section 162(m) if, in the Compensation and Benefits Committee’s view, such arrangements are in the best interests of our Company and our stockholders.

 

The responsibilities of the Compensation and Benefits Committee are provided in its charter, which has been approved by our Board of Directors.

 

In fulfilling its oversight responsibilities with respect to the Compensation Disclosure and Analysis included in this Report, the Compensation and Benefits Committee, among other things, has:

 

 

SUBMITTED BY THE COMPENSATION AND BENEFITS COMMITTEE

 

JOHN MCCARTNEY, CHAIRMAN

 

 

Notwithstanding anything set forth in any of our previous filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings, including this proxy statement, in whole or in part, the preceding report shall not be deemed incorporated by reference in any such filings.

 

The following table sets forth information concerning compensation earned during the fiscal years ended December 31, 2007, 2008 and 2009 for William H. Osborne, our President and Chief Executive Officer appointed September 15, 2008, William G. Barker, III, our Senior Vice President and Chief Financial Officer appointed December 10, 2008, and the three other most highly compensated executive officers of our Company. Mr. McConnaughey no longer serves as our Safety and Securities Systems Group President, effective December 31, 2009. Mr. McConnaughey is entitled to certain severance payments pursuant to an agreement entered into with our Company, as more fully described in the section titled “Executive Compensation in the Last Fiscal Year” under the heading “Additional Information about the Compensation Paid to the Named Executive Officers” beginning on page 32 of this proxy statement.

 

Summary Compensation Table for Fiscal Years 2007, 2008 and 2009

 

 

 

 

 

 

 

 

 

 

 

The following table sets forth information concerning grants of plan-based awards earned for the fiscal year ended December 31, 2009 for the named executive officers:

 

Grants of Plan-Based Awards in 2009