55 Glenlake Parkway, N.E., Atlanta, Georgia 30328

Notice of Annual Meeting of Shareowners

May 10, 2007

 

To our Shareowners:

 

United Parcel Service, Inc.’s annual meeting of shareowners will be held at the Hotel du Pont, 11th and Market Streets, Wilmington, Delaware 19801, on May 10, 2007, at 8:00 a.m. The purposes of the meeting are:

 

1.   To elect a board of directors to serve until our 2008 annual meeting of shareowners;

 

2.   To ratify the appointment of Deloitte & Touche LLP as our independent registered public accountants for the year ending December 31, 2007; and

 

3.   To transact any other business as may properly come before the meeting.

 

Our board of directors has fixed the close of business on March 12, 2007 as the record date for determining holders of our common stock entitled to notice of, and to vote at, the annual meeting.

 

Teri P. McClure

Secretary

 

Atlanta, Georgia

March 19, 2007

 

 

Your vote is important. Please vote by using the Internet, by telephone or by signing and returning the enclosed proxy card as soon as possible to ensure your representation at the annual meeting. Your proxy card contains instructions for each of these voting options.

 

TABLE OF CONTENTS

 

 

55 Glenlake Parkway, N.E., Atlanta, Georgia 30328

 

 

This proxy statement and proxy card are furnished in connection with the solicitation of proxies to be voted at our annual meeting of shareowners, which will be held at the Hotel du Pont, 11th and Market Streets, Wilmington, Delaware 19801, on May 10, 2007, at 8:00 a.m. The proxy is solicited by our board of directors. This proxy statement and proxy card are being sent to our shareowners on or about March 19, 2007.

 

Why am I receiving this proxy statement and proxy card?

 

You are receiving this proxy statement and proxy card because you own shares of United Parcel Service, Inc. common stock. This proxy statement describes issues on which we would like you to vote at our annual meeting of shareowners. It also gives you information on these issues so that you can make an informed decision.

 

When you vote by using the Internet, by telephone or by signing and returning the proxy card, you appoint Michael L. Eskew and Teri P. McClure as your representatives at the annual meeting. They will vote your shares at the annual meeting as you have instructed them (or, if an issue that is not on the proxy card comes up for vote, in accordance with their best judgment). This way, your shares will be voted whether or not you attend the annual meeting. Even if you plan to attend the annual meeting, we encourage you to vote by using the Internet, by telephone or by signing and returning your proxy card in advance.

 

Who is entitled to vote?

 

Holders of our class A common stock and our class B common stock at the close of business on March 12, 2007 are entitled to vote. March 12, 2007 is referred to as the record date.

 

In accordance with Delaware law, a list of shareowners entitled to vote at the meeting will be available in electronic form at the place of the annual meeting on May 10, 2007 and will be accessible in electronic form for ten days prior to the meeting at our principal place of business, 55 Glenlake Parkway, N.E., Atlanta, Georgia 30328, and at the offices of Morris, Nichols, Arsht & Tunnell, 1201 North Market Street, Wilmington, Delaware 19899, between the hours of 9:00 a.m. and 5:00 p.m.

 

To how many votes is each share of common stock entitled?

 

Holders of class A common stock are entitled to ten votes per share. Holders of class B common stock are entitled to one vote per share. On the record date, there were 389,330,656 shares of our class A common stock and 674,909,016 shares of our class B common stock outstanding and entitled to vote.

 

The voting rights of any shareowner or shareowners as a group, other than any of our employee benefit plans, who beneficially own shares representing more than 25 percent of our voting power are limited so that the shareowner or group may cast only one one-hundredth of a vote with respect to each vote in excess of 25 percent of the outstanding voting power.

 

How do I vote?

 

Shareowners of record may vote by using the Internet, by telephone or by mail as described below. Shareowners also may attend the meeting and vote in person. If you hold class B shares through a bank or broker, please refer to your proxy card or the information forwarded by your bank or broker to see which options are available to you.

 

 

The method you use to vote will not limit your right to vote at the annual meeting if you decide to attend in person. Written ballots will be passed out to anyone who wants to vote at the annual meeting. If you hold your shares in “street name,” you must obtain a proxy, executed in your favor, from the holder of record to be able to vote in person at the annual meeting.

 

How many votes do you need to hold the annual meeting?

 

The presence, in person or by proxy, of the holders of a majority of the votes entitled to be cast at the annual meeting will constitute a quorum. If a quorum is present, we can hold the annual meeting and conduct business.

 

What if I change my mind after I return my proxy?

 

You may revoke your proxy and change your vote at any time before the polls close at the annual meeting. You may do this by:

 

 

Attendance at the meeting will not by itself revoke a proxy.

 

On what items am I voting?

 

You are being asked to vote on two items:

 

 

No cumulative voting rights are authorized, and dissenters’ rights are not applicable to these matters.

 

How may I vote for the nominees for director, and how many votes must the nominees receive to be elected?

 

With respect to the election of nominees for director, you may:

 

 

 

The 10 nominees receiving the highest number of affirmative votes will be elected as directors. This number is called a plurality.

 

What happens if a nominee is unable to stand for election?

 

If a nominee is unable to stand for election, the board may, by resolution, provide for a lesser number of directors or designate a substitute nominee. If the board designates a substitute nominee, shares represented by proxies voted for the nominee who is unable to stand for election will be voted for the substitute nominee.

 

How may I vote for the ratification of the appointment of our independent registered public accountants, and how many votes must the proposal receive to pass?

 

With respect to the proposal to ratify the appointment of our independent registered public accountants, you may:

 

 

The ratification of the appointment of our independent registered public accountants must receive the affirmative vote of a majority of the votes that could be cast at the annual meeting by the holders who are present in person or by proxy to pass. If you abstain from voting on the proposal, it will have the same effect as a vote against the proposal.

 

How does the board of directors recommend that I vote?

 

The board recommends a vote

 

 

What happens if I sign and return my proxy card but do not provide voting instructions?

 

If you return a signed card but do not provide voting instructions, your shares will be voted FOR all 10 director nominees and FOR the ratification of the appointment of our independent registered public accountants.

 

Will my shares be voted if I do not vote by using the Internet, by telephone or by signing and returning my proxy card?

 

If you own class A shares and you do not vote by using the Internet, by telephone or by signing and returning your proxy card, then your class A shares will not be voted and will not count in deciding the matters presented for shareowner consideration in this proxy statement. If your class A shares are held pursuant to the UPS Qualified Stock Ownership Plan and Trust and you do not vote by using the Internet, by telephone or by signing and returning your proxy card, the trustee will vote your shares for each proposal in the same proportion as the shares held pursuant to that plan for which voting instructions were received.

 

If your class B shares are held in street name through a bank or broker, your bank or broker may vote your class B shares under certain circumstances if you do not provide voting instructions before the annual meeting, in accordance with New York Stock Exchange (“NYSE”) rules that govern the banks and brokers. These circumstances include “routine matters,” such as the election of directors and ratification of the appointment of our independent registered public accountants described in this proxy statement. With respect to these matters,

therefore, if you do not vote your shares, your bank or broker may vote your shares on your behalf or leave your shares unvoted.

 

What do I need to show to attend the annual meeting in person?

 

You will need proof of your share ownership (such as a recent brokerage statement or letter from your broker showing that you owned United Parcel Service Inc.’s stock as of March 12, 2007) and a form of photo identification. If you do not have proof of ownership and valid photo identification, you will not be admitted to the annual meeting. All bags, briefcases and packages will be held at registration and will not be allowed in the meeting.

 

Can I receive future proxy materials and annual reports electronically?

 

Yes. This proxy statement and the 2006 Annual Report to Shareowners are available on the investor relations page of our website located at www.shareholder.com/ups. Instead of receiving paper copies in the mail, shareowners can elect to receive an e-mail that provides a link to our future annual reports and proxy materials on the Internet. Opting to receive your proxy materials on-line will save us the cost of producing and mailing documents to your home or business, and will give you an automatic link to the proxy voting site.

 

If you are a shareowner of record and wish to enroll in the electronic proxy delivery service, you may do so by going to www.icsdelivery.com/ups and following the prompts.

 

There are 10 nominees to our board of directors this year. All directors are elected annually to serve until the next annual meeting and until their respective successors are elected. All of the nominees have served as directors since our last annual meeting.

 

John Beystehner retired from our board on January 2, 2007. In accordance with our Corporate Governance Guidelines, Gary MacDougal, who has served our company as a director since 1973, is not standing for re-election at our annual meeting. We thank John and Gary for their many years of dedicated service to the board and to UPS.

 

The board of directors recommends a vote FOR the election
to the board of each of the following nominees.

 

 

Our board has delegated to the Nominating and Corporate Governance Committee the responsibility for reviewing and recommending to the board nominees for director. Board candidates are evaluated based upon various factors, such as personal character, values and disciplines, ethical standards, diversity, professional background and skills, all in the context of an assessment of the needs of the board at that time. In addition, each director is expected to ensure that other existing and planned future commitments do not materially interfere with his or her responsibilities as a director.

 

Accordingly, the Nominating and Corporate Governance Committee’s objective is to maintain a board of individuals of the highest personal character, integrity and ethical standards, and that reflects a range of professional backgrounds and skills relevant to our business. The Nominating and Corporate Governance Committee identifies new director candidates through a variety of sources.

 

The Nominating and Corporate Governance Committee will consider director candidates proposed by shareowners on the same basis as recommendations from other sources. Any shareowner who wishes to recommend a prospective candidate for the board of directors for consideration by the Nominating and Corporate Governance Committee may do so by submitting the name and qualifications of the prospective candidate in writing to the following address: Corporate Secretary, 55 Glenlake Parkway, N.E., Atlanta, Georgia 30328.

 

Our board of directors held five meetings during 2006. Each of our directors attended at least 75 percent of the total number of meetings of the board and any committees of which he or she was a member. It is the board’s policy that our directors attend the annual meeting. All of the directors who were serving at our 2006 annual meeting of shareowners attended the annual meeting.

 

Our Corporate Governance Guidelines include categorical standards adopted by the board to determine director independence that meet the listing standards set forth by the NYSE. The portion of our Corporate Governance Guidelines addressing director independence is attached to this proxy statement as Annex I.

 

Pursuant to the Corporate Governance Guidelines, the board undertook its annual review of director independence in February 2007. During this review, the Board considered whether there were any transactions or relationships between each director or any member of his or her immediate family and UPS. The board also examined whether there were any transactions or relationships between an organization of which a director is a partner, shareholder or officer and UPS. The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that a director is independent. The board also evaluated the categorical standards that form a part of our Corporate Governance Guidelines.

 

As a result of this review, the board affirmatively determined that the following directors nominated for election at the annual meeting are independent directors: Michael Burns, Stuart Eizenstat, Jim Kelly, Ann Livermore, Vic Pelson, John Thompson, Carol Tomé and Ben Verwaayen. The board also determined that Gary MacDougal is an independent director. The other directors nominated for election at the annual meeting, Mike Eskew and Scott Davis, are not independent directors because they are employed by UPS. In addition, John Beystehner, who served on our board in 2006, was not independent because he was employed by UPS.

 

In determining the independence of Michael Burns, Stuart Eizenstat, Ann Livermore, Vic Pelson, John Thompson, Carol Tomé and Ben Verwaayen, our board considered ordinary course transactions between UPS and the companies that employ these directors.

 

Michael Burns is the Chairman, Chief Executive Officer and President of Dana Corporation. Dana Corporation filed a voluntary petition under Chapter 11 of the federal bankruptcy laws on March 3, 2006.

 

Our non-management directors hold executive sessions without management present as frequently as they deem appropriate, and at least two times each year. The presiding director for these meetings rotates meeting by meeting among the chairpersons of the board committees that are composed entirely of independent directors, currently the Audit, Nominating and Corporate Governance and Compensation Committees. The presiding director determines the agenda for the session and, after the session, acts as a liaison between the non-management directors and the chairman and chief executive officer. The presiding director may invite the chairman and chief executive officer to join the session for certain discussions, as he or she deems appropriate. If the non-management directors include any directors who are not independent directors, then at least once a year there will be an executive session including only the independent directors.

 

Our Corporate Governance Guidelines are available on the governance section of the investor relations page of our website (www.shareholder.com/ups). In addition, the charters that have been adopted for each of the Audit, Compensation and Nominating and Corporate Governance Committees are available on the governance section of the investor relations page of our website.

 

We have a long-standing commitment to conduct our business in accordance with the highest ethical principles. Our Code of Business Conduct is applicable to all the representatives of our enterprise, including our executive officers and all other employees and agents of our company and our subsidiary companies, as well as to our directors. A copy of our code is available on the governance section of the investor relations page of our website.

 

A copy of our Corporate Governance Guidelines, committee charters and Code of Business Conduct may also be obtained without charge upon written request to: Corporate Secretary, 55 Glenlake Parkway, N.E., Atlanta, Georgia 30328.

 

Any shareowners or interested parties who wish to communicate directly with our board of directors, with our non-management directors as a group or with the presiding director of our non-management directors may do so by writing to Corporate Secretary, 55 Glenlake Parkway, N.E., Atlanta, Georgia 30328. Please specify to whom your letter should be directed. Once the communication is received by the corporate secretary, the corporate secretary reviews the communication. Communications that comprise advertisements, solicitations for business, requests for employment, requests for contributions or other inappropriate material will not be forwarded to our directors. Other communications are promptly forwarded to the addressee.

 

Our board of directors has four committees: the Audit Committee, the Compensation Committee, the Nominating and Corporate Governance Committee and the Executive Committee. The following table shows the current members of each committee.

 

 

X= current committee member; * = chair

 

Audit Committee.  The primary responsibilities of our Audit Committee include:

 

 

In 2006, the Audit Committee held eight meetings. Each member of our Audit Committee meets the independence requirements of the NYSE and SEC rules and regulations, and each is financially literate. Our board has determined that Carol Tomé is an audit committee financial expert as defined by the SEC.

 

Compensation Committee.  The primary responsibilities of our Compensation Committee include:

 

 

 

In 2006, the Compensation Committee held four meetings. Each member of our Compensation Committee meets the independence requirements of the NYSE and is an outside director under Section 162(m) of the Internal Revenue Code. For additional information about the Compensation Committee’s processes and the role of executive officers and compensation consultants in determining compensation, see “Compensation Discussion and Analysis.”

 

Nominating and Corporate Governance Committee.  The primary responsibilities of our Nominating and Corporate Governance Committee include:

 

 

In 2006, the Nominating and Corporate Governance Committee held four meetings. Each member of our Nominating and Corporate Governance Committee meets the independence requirements of the NYSE.

 

Executive Committee.  The Executive Committee may exercise all powers of the board of directors in the management of our business and affairs, except for those powers expressly reserved to the board under Delaware law. In 2006, the Executive Committee held no meetings.

 

The following table describes the beneficial ownership of our common stock as of February 1, 2007 by

 

 

 

 

 

 

 

In addition to the beneficial ownership of our common stock discussed above, our directors and executive officers also hold equity instruments that are not reported in the beneficial ownership table but represent additional financial interests that are subject to the same market risk as ownership of our common stock. The number of shares of stock to which these stock units are equivalent as of February 1, 2007 is as follows.

 

 

 

Restricted stock units are bookkeeping units, the value of each of which corresponds to one share of UPS class A common stock. RSUs vest in approximately twenty percent increments on each October 15th during the five-year vesting period if the grantee remains an employee of UPS or one of its subsidiaries. In addition, RSUs will vest if the grantee’s employment terminates by reason of death. In the event of termination due to disability or retirement as defined by the plan, RSUs will vest immediately, but will continue to be paid out in approximately twenty percent increments each year until the end of the five-year cycle. The awards are eligible for dividend equivalents, which are deemed to be automatically reinvested into additional RSUs. At each October vesting event during the five-year vesting period, the individual receives shares of UPS class A common stock.

 

Phantom stock units are bookkeeping units, the value of each of which corresponds to one share of UPS common stock. Dividends paid on UPS common stock automatically are deemed to be reinvested in additional phantom stock units. Upon termination of the individual’s service as a director, amounts represented by phantom stock units will be distributed in cash.

 

Restricted performance units (“RPUs”) are bookkeeping units, the value of each of which corresponds to one share of class A UPS common stock. RPUs vest on the fifth anniversary date of their grant if the grantee remains an employee or director of UPS or one of its subsidiaries. In addition, the RPUs will vest if the grantee’s employment terminates by reason of death, disability or retirement. Dividends paid on UPS common stock automatically are deemed to be reinvested in additional RPUs. The number of RPUs granted to each individual will increase by 10 percent if we attain certain performance measures for each five-year performance period. Upon vesting of RPUs, the individual receives shares of UPS class A common stock.

 

Stock option deferral shares are shares held for the individual in a rabbi trust within the UPS Deferred Compensation Plan. Each individual elected to defer the receipt of these shares rather than acquiring them directly upon the exercise of a stock option.

 

Other Deferred Compensation Plan balances are amounts within the UPS Deferred Compensation Plan allocated to UPS common stock.

 

Overview

 

The Link Between UPS Philosophy and Compensation

 

UPS founder Jim Casey once said that good management is the ability to make people feel that you and they are the company — not merely employees of it. The idea of management by partnership, and Jim’s belief that determined people working together can do anything are two of many basic principles that have allowed UPS to grow and reinvent itself for more than 99 years. The management philosophy Jim expressed in the early years of operation grew into a culture based on integrity, honesty and trust in each other. Our practices, including compensation programs, reflect an early understanding that continued success was not only dependent on our innovative service, but also on the development and well-being of the UPS team. UPS leaders will consistently point to three practices, above all others, which have contributed to our sustained growth:

 

 

We reflect these principles in our compensation programs by rewarding ownership, performance and long-term commitment to the organization. UPS career development and succession planning programs strengthen the partnership by offering rotational assignments within and across UPS business units, through internal and external education, by identification of future career paths and by encouraging individual responsibility for self-development.

 

Career Opportunities Have Grown Along with the Growth of the Organization

 

The UPS management team, including the Named Executive Officers (“NEOs”), is comprised mainly of employees who have spent virtually their entire careers with us, and many would say they have had the good fortune of having more than one career at UPS due to the variety of assignments and advancement opportunities available across business units, functions and geographies. UPS has grown to include small package delivery; supply chain management; financial services; information management; freight transportation and delivery; consolidated mail services; and the operation of one of the largest airlines in the world. Our growth has resulted in greater career opportunities available to our best employees.

 

We believe the opportunity for career development and advancement within UPS builds loyalty, reinforces our strong corporate culture and reduces training and recruiting expenses. Ultimately these attributes provide a greater return to our shareowners. However, the high quality of our management team would not preclude looking outside UPS to fill an executive position if it was in the best interest of UPS and its shareowners.

 

Compensation Committee Members, Independence and Responsibilities

 

Our executive compensation program is administered by the Compensation Committee of the board of directors. The Compensation Committee is comprised solely of non-employee directors who meet the independence requirements of the NYSE, and currently includes Vic Pelson (Chair), Stuart Eizenstat and John Thompson.

 

In regard to the compensation of the NEOs, the Compensation Committee is responsible for:

 

 

Role of Compensation Consultant

 

The Compensation Committee has sole authority to engage and terminate outside advisors or consultants to assist in carrying out its responsibilities. Consultants are selected by the Compensation Committee and report directly to the Chair of the Compensation Committee. For 2006, the Compensation Committee retained the services of Mercer Human Resource Consulting as its independent compensation consultant. In 2006, Mercer provided the following services:

 

 

In addition to these services, Mercer provided limited services in the area of healthcare and benefits consulting to UPS management.

 

Compensation Philosophy and Principles

 

The Compensation Committee is responsible for establishing the principles that underlie and guide the design and administration of our executive compensation programs. The following compensation principles are designed to drive company performance, create long-term value for our shareowners and attract, retain and motivate key talent.

 

Compensation is managed using a fact based approach that incorporates external benchmarks, cost implications and internal relationships

 

Each year, we review compensation survey data from several independent sources such as Towers Perrin, Hewitt Associates or Mercer, to ensure our compensation programs and compensation levels are appropriate relative to the market and aligned with company performance. In addition, internal comparisons are made between the executive positions and their direct reports to ensure an appropriate division of pay based on level of responsibility, market data and operational objectives.

 

With respect to cash compensation, the Compensation Committee reviews data concerning compensation for comparable positions at companies that have similar revenues and characteristics. Our long-term incentive programs are strongly aligned with shareowners’ interests and company performance, and new grants are determined on an annual basis. Generally, historical long-term incentive gains or accumulated values do not impact future grants.

 

The Compensation Committee, using data provided by an independent consultant, reviews an annual benchmark assessment of compensation levels for our top executives using both peer group comparisons as well as blended survey data. The companies used for executive compensation comparisons are not limited to the companies that comprise the S&P 500 Index and the Dow Jones Transport Average used in the shareowner return performance graph contained in our Annual Report on Form 10-K.

 

In 2006, the salary survey data used for analysis was provided by Towers Perrin for companies with more than $10 billion in revenue. The survey data was used to review base salary, short-term and long-term incentives and perquisites to determine how our compensation compares to other large companies. In addition, for the CEO and our directors, we analyzed compensation at the following companies: 3M Co., AT&T Corp., BellSouth Corp., Boeing Co., Caterpillar Inc., The Coca-Cola Company, COSTCO Wholesale Corp, Dell Inc., Dow Chemical Co., FedEx Corp., Hewlett-Packard Co., Intel Corp., International Business Machines Corp., Johnson & Johnson, Lockheed Martin Corp., Motorola Inc., Pepsico Inc., Pfizer Inc., Procter & Gamble Co., Target Corp., United Technologies Corp., Walgreen Co., and Xerox Corp.

 

In 2006, the Compensation Committee made the following changes to the compensation program to maintain reasonable market positioning based on absolute and relative performance:

 

 

The Compensation Committee believes these changes will further strengthen the performance incentive and competitive talent retention objectives of our executive compensation program.

 

Compensation is related to performance and reinforces our business objectives and alignment with shareowners

 

Compensation for the NEO group is linked to individual performance, experience and leadership, company performance and, for equity-based awards, share price performance. Measurement of performance is made against financial and non-financial objectives. Our compensation programs provide NEOs with a pay opportunity that is internally equitable when compared to other jobs in the organization and reflective of the UPS legacy of ownership.

 

The weight placed on internal equity has kept total compensation levels for executives below the median of other large organizations. The Compensation Committee added the LTIP in 2006 to improve the executives’ total compensation package relative to the market. However, even with the addition of the LTIP award, NEO total compensation is closer to the 25th percentile of the market than the market median, based on data provided by Towers Perrin.

 

The Compensation Committee believes that when either our performance or individual achievements exceed the objectives set for the performance period, employees should receive additional compensation. When the performance does not meet expectations, overall pay should reflect actual performance.

 

Long-term incentives are designed to align pay with shareowner return, drive performance and encourage long-term ownership and commitment to UPS. In addition to the design of long-term incentives, we utilize performance metrics which strongly correlate to enhanced shareowner value over time.

 

Total compensation relative to market is directly correlated to performance

 

Total compensation for our senior executives is guided by the belief that internal equity should have greater emphasis than comparisons to market data. Total compensation for executives, including the value of annual and long-term incentive components, is generally lower than the market median. The Compensation Committee, however, is mindful of the need to maintain a reasonable position to the market to retain current and future leaders. The actual payout for annual and long-term incentive programs is ultimately determined by company performance against pre-established objectives and individual contribution.

 

Manager-Owner concept plays a central role in the success of UPS

 

Until 1999, we were owned by our employees and managed by our owners. Since going public in 1999, our employees still maintain a significant ownership in our company. To achieve our objective of stock ownership by management employees, four compensation programs were authorized under the UPS Incentive Compensation Plan — the UPS Management Incentive Awards Program (“MIP”), which is comprised of both short-term and long-term incentives, the UPS Ownership Incentive Award, the UPS Long-Term Incentive Program (“LTI”) and the LTIP. An overview of these programs is provided in “Elements of UPS Compensation,” and material information about the plan designs is included in the narrative and footnotes accompanying the compensation tables below.

 

Because our compensation programs are designed to foster long-term stock ownership by managers, each executive officer has accumulated a meaningful number of shares of our common stock. As a result, the interests of shareowners and our executive officers are closely aligned, and the executive officers have strong incentives to provide for effective management. Additionally, executive officers and directors are expected to acquire and hold a significant amount of UPS stock as described under “Stock Ownership Guidelines” below.

 

Long-term incentive compensation will comprise a greater portion of compensation for senior positions

 

The proportion of an executive’s compensation package that varies based on individual and corporate performance objectives increases as the level of the individual’s responsibilities increases. Long-term incentives

granted in 2006 in the form of stock options, RSUs and RPUs constituted approximately 66 percent of total cash and long-term incentives for the four NEOs other than the CEO, and 71 percent for the CEO. The values are based on a comparison of grant date fair value of the long-term awards to cash awards.

 

 

 

The cash award amounts above include base salary, Half-Month Bonus and the cash portion of the 2006 MIP. The long-term incentive amounts reflect the grant date fair value of the stock options and RPUs granted under the 2006 LTI, the RSUs granted under the 2006 LTIP and the RSUs granted under the 2006 MIP.

 

A majority of total compensation is “at risk,” subject to individual and company performance

 

In addition to looking at the percent of pay linked to long-term incentives, the Compensation Committee also believes that a majority of total compensation that could be earned by our officers should be “at risk” and subject to short-term and long-term performance goals, individual and company performance and stock price performance. The 2006 compensation elements with “at risk” components comprised approximately 63 percent of the 2006 target compensation opportunity for the NEOs. The Compensation Committee believes that this ratio is appropriate. The compensation elements with an “at risk” component include the annual merit increase to base salary, the MIP award (both cash and RSUs), the stock options granted under the LTI and the RSUs granted under the LTIP.

 

Performance elements vary by program, and actual compensation paid will be affected by individual performance, short-term and long-term company performance and stock price appreciation.

 

Incentive compensation plans will provide an appropriate mix among short-term and longer-term company and individual performance

 

Our compensation plans are designed to emphasize strong annual performance and foster long-term operational performance and success. Although the compensation elements and type of compensation may vary each year based on competitive market requirements and strategic business needs, the overall compensation package will provide an appropriate mix between annual and long-term compensation elements.

 

Consistent with this belief, compensation for executive officers is structured to place significance on long-term objectives and share price appreciation. The percentage of target pay linked to long-term performance objectives was approximately 84 percent of the CEO’s targeted 2006 compensation opportunity, and an average of 80 percent for the other NEOs. The percentages are based on the targeted long-term values of the awards, not the grant date fair value of the awards. The compensation elements defined as long-term incentives include the RSUs awarded under the MIP with five-year vesting; the stock options and RPUs awarded under the LTI program with five-year vesting; and the RSUs awarded under the LTIP with three-year vesting. The actual amounts paid are tied to company short and long-term performance and stock price appreciation. The Compensation Committee believes that these percentages are appropriate.

 

Compensation levels will provide an appropriate balance of cash compensation versus equity incentive awards

 

Consistent with the UPS Manager-Owner philosophy described above, the Compensation Committee believes that a significant portion of an executive officer’s total compensation should be provided in the form of equity or equity-based incentives. Equity grants are issued under the UPS Incentive Compensation Plan, which was approved by shareowners in 1999. A detailed discussion of our equity programs is provided in the “Elements of Compensation” section below.

 

In 2006, the proportion of targeted cash compensation to targeted non-cash compensation was approximately 16 percent cash to 84 percent non-cash for the CEO, and an average target of 20 percent cash to 80 percent non-cash for the other NEOs. Elements of cash compensation include base salary, Half-Month Bonus and the cash portion of the MIP. The non-cash compensation includes only long-term incentives, therefore the percentage of non-cash targets is the same as the percentage of long-term incentive targets reported above. The Compensation Committee, with input from its compensation consultant, evaluates this ratio each year against emerging trends and compensation survey data to ensure that we maintain programs reasonably positioned relative to the market.

 

Compensation should reflect good corporate governance and high ethical standards

 

Our compensation and benefit programs reflect a philosophy of providing fair, equitable and appropriate rewards that support our operating environment; attract and retain a diverse and highly skilled workforce; and when appropriate, are flexible enough to respond to changing market conditions.

 

 

In 2006, the Compensation Committee adopted a recoupment policy with respect to equity awards to our executive officers. Pursuant to this policy, if financial results used to determine the amount of an award are materially restated and an executive engaged in fraud or intentional misconduct, we will seek repayment or recovery of the award, as appropriate.

 

 

Since equity award programs can have a dilutive impact on shareowner value, we evaluate the current overhang rate (outstanding grants plus shares available for grants divided by common shares outstanding) when designing new programs or granting new awards. Our 2006 overhang rate is 7.84 percent. Shares and units included in the overhang calculation include outstanding stock options, RPUs and RSUs, as well as the number of shares set aside for future grants.

 

Another indicator of dilutive impact to shareowner value is the grant rate (total shares or units granted in a year divided by common shares outstanding). In 2006, our grant rate for shares and units was 0.67 percent of common shares outstanding. While we are attentive to these measures, we believe that the low values indicate that dilution is not a current issue for our equity plans.

 

Additional Compensation Policies

 

In addition to establishing the compensation principles described above, we have adopted a number of policies to further the goals of the executive compensation program, particularly with respect to strengthening the alignment of our executive officers’ interests with shareowner long-term interests.

 

Stock Ownership Guidelines

 

The board has adopted stock ownership guidelines which extend to all levels of management and to members of our board of directors. The guidelines are consistent with our core philosophy that managers should also be owners of our company. The guidelines are based on our expectation that each member of our management team and board maintains a significant level of investment in our stock.

 

Shares owned outright, deferred units and RSUs are regarded as owned for purposes of calculating ownership. Existing executives and directors have five years from the adoption of the guidelines in 2003 to accumulate the required shares. The guidelines and each NEO’s ownership on the most recent measurement date of October 20, 2006 are as follows:

 

 

 

 

The Compensation Committee reviews the guidelines annually and monitors the executive officers’ progress toward meeting the guidelines. Target ownership for all members of the Management Committee, except the CEO, is six times annual salary. The target for non-employee directors is three times their annual retainer.

 

Employment Agreements

 

None of our executive officers is currently subject to a written or verbal employment agreement.

 

Change in Control Agreements

 

None of our executive officers is currently subject to a separate change in control or severance agreement.

 

The UPS Incentive Compensation Plan includes a provision for an automatic acceleration of unvested awards in the event of a change in control. In the Compensation Committee’s view, the accelerated vesting of all outstanding equity awards following a change in control is a customary and reasonable component of an equity incentive program. The Compensation Committee believes that the equity awards granted to the executive officers have been reasonable in amount, and a substantial part of the value that would be received by them in the event of a change in control would result from the increase in the price of our common stock over the years.

 

The estimated payments and benefits to the NEOs assuming a change of control and a qualifying termination of employment as of December 31, 2006 are described in “Potential Payments on Termination or Change In Control” below.

 

Equity Grant Practices

 

Grants for all equity programs under the UPS Incentive Compensation Plan are approved by the Compensation Committee. The Compensation Committee has also determined that grant dates will be set for all plan participants so that they occur during the middle of the fiscal quarter and do not fall within the period 30 days prior to the release of company earnings.

 

In light of the recent publicity concerning the back-dating of stock options, management reviewed our option grant history and grant procedures, and reaffirmed that our historical and current stock option practices are appropriate.

Annual Compensation and Performance Review

 

Each year, typically in November, the Compensation Committee conducts a compensation review for the executive officers. The review evaluates all elements of compensation against competitive market data, emerging trends and other UPS positions.

 

The performance of the CEO is reviewed by the Compensation Committee on an annual basis. The Compensation Committee is responsible for reviewing the achievement of individual goals and objectives, evaluating performance and setting compensation based on this evaluation. In addition, the full board meets in executive session each year to review the CEO’s performance. The session is conducted without the CEO present.

 

The Compensation Committee uses specified criteria to help assess the performance of the CEO in addition to our financial results and performance against annual objectives. Among other things, the Compensation Committee evaluates strategic vision and leadership, our business and operational results, the ability of the CEO to make long-term decisions that create competitive advantage and position us as the premier enabler of global commerce and his overall effectiveness as a leader and role model.

 

2006 was a year of progress and accomplishment across a number of critical areas for UPS. Under Mike Eskew’s leadership, we completed the integration of strategic acquisitions made in previous years to grow our Supply Chain and Freight businesses, experienced strong growth in global markets and achieved significant business and financial results. The Compensation Committee did not assign particular weights to these factors.

 

In addition, the CEO provides the Compensation Committee an evaluation of and compensation recommendations for each of the other executive officers. The Compensation Committee then reviews and approves compensation amounts for each executive officer with respect to each of the elements in our executive compensation program, as described in more detail below.

 

Elements of UPS Compensation

 

The four components of the UPS executive compensation program are:

 

 

Each of these components is discussed below.

 

Base Salary

 

During the annual compensation review, the Compensation Committee develops salary recommendations based on the individual’s scope of responsibilities, experience, sustained performance and contributions to UPS. A significant factor in determining annual increases is the Compensation Committee’s strong desire to keep the base salary levels of executive officers reasonable in comparison with the base salaries of other executives with similar responsibilities at comparable companies, and in comparison to the salaries of other UPS management positions. We participate in and purchase surveys annually to monitor market trends. Internal equity comparisons, performance, leadership and market data are all considered when determining annual salary adjustments for our senior officers.

 

For 2006, base salary increases for the NEOs averaged 4.5 percent compared to an average increase of 4.1 percent for the other Management Committee members. The base salaries for the NEOs for 2006 are shown in the Summary Compensation Table below.

 

Annual Incentives

 

The MIP is designed to align pay with annual company performance as well as individual achievements and performance. Executive officers have the opportunity to earn an annual incentive award when we meet target performance objectives. Incentives paid above target are possible only if we exceed our performance objectives. The Compensation Committee exercises its judgment on the level of incentive payments based on considerations including overall responsibilities and the importance of these responsibilities to our success.

 

If targeted objectives are not met, our executive officers receive no award or a less than target award reduced as appropriate based on the actual performance results. Annual MIP incentives are issued under the UPS Incentive Compensation Plan, which was approved by shareowners in 1999, and are intended to satisfy the requirements for performance-based compensation as defined in Section 162(m) of the Internal Revenue Code.

 

 

Prior to 2005, the MIP awards were made solely in shares of class A common stock. In 2005, we redesigned the methodology for determining MIP awards to better align management and shareowner interests, and better reflect our performance in relation to established corporate objectives. Currently, one half of the MIP award is paid as an annual incentive in cash (or the equivalent cash value in shares of UPS class A stock, at the participant’s election). The other half of the MIP award is a long-term incentive and awarded in RSUs that vest over five years.

 

The level of participation for the CEO and other executive officers is the same as for approximately 11,000 participating employees at or above the mid-manager level.

 

The redesigned MIP program establishes target award levels for eligible participants expressed as multiples of monthly salary. The target awards are then multiplied by a factor, as approved by the Compensation Committee, which represents our success in achieving business element goals. The actual MIP awards granted to participants can be higher or lower than target depending on achievement of the business element goals.

 

 

The Compensation Committee, considering recommendations from the CEO and CFO, sets the company performance objectives and target amounts payable. The 2006 target opportunity for the cash portion of the MIP for each NEO is shown in the Grants of Plan-Based Awards Table below.

 

MIP is designed to incorporate performance criteria which support our annual operating plan and business strategy. For the 2006 MIP fiscal year, goals were established for the following six business elements:

 

1. Growth in consolidated package volume

2. Growth in consolidated revenue

3. Growth in consolidated, as adjusted, net income

4. Non-operating cost as a percent of revenue

5. Package flow technology implementation

6. Successful integration of acquisitions

 

Executives are also evaluated on personal criteria including leadership, managerial skills and talent, business knowledge and execution of UPS’s overall business strategy, and adherence to company values.

 

The goals for the six business elements were based on our confidential business plans established at the beginning of the 2006 MIP fiscal year. These goals were consistent with other publicly disclosed financial targets for 2006, and were designed to be challenging yet achievable. After evaluating our performance against these goals, the Compensation Committee determined that the 2006 MIP award to be paid to all recommended managers, including the NEOs, would be reduced from the targeted award amount by 20 percent due to below plan performance with respect to certain of these business elements. The annual incentive bonuses paid to the NEOs during 2006 are shown in the Summary Compensation Table below.

 

 

To reward management employees for maintaining an ownership stake in UPS, all participants in the MIP are eligible for an additional incentive up to the equivalent of one month’s salary. Ownership levels for the 2006 awards were determined by totaling the number of UPS shares in the participant’s family group accounts and the

participant’s unvested restricted stock units and deferred compensation shares, and then multiplying the sum by the closing price of a class B share on the NYSE on October 20, 2006.

 

The amount of the award is a percent of monthly salary equal to the participant’s percent of ownership relative to their target. For example, if the participant’s 2006 ownership equaled 80 percent of their ownership target, their Ownership Incentive Award had a value equal to 80 percent of their monthly salary. If ownership is at or above the target level, an award equivalent to one month’s base salary is awarded.

 

 

The Half-Month Bonus, equal to one half of one month’s salary, is awarded in December. It is designed to reward employees for their extra efforts during peak season and throughout the year.

 

Long-Term Incentives

 

Our long-term incentive programs provide participants with grants of equity-based incentives that are intended to reward performance over a period of more than one year. Grants are made pursuant to the UPS Incentive Compensation Plan and delivered in the form of class A shares at vesting. Awards are based on longer-term operational performance and long-term stock price appreciation. The Compensation Committee believes equity-based compensation performs an essential role in retaining and motivating our executive officers by providing them incentives which are linked to our long-term success and maximizing shareowner value.

 

The long-term incentive component of our executive compensation package is delivered in three separate programs under the UPS Incentive Compensation Plan:

 

 

Award values are based on general survey data regarding total compensation packages and the value of long-term incentive awards at peer companies. The Compensation Committee also considers factors such as market conditions, company performance, employee ownership levels and the dilution level to shareowners.

 

 

Stock options have been a major portion of executive compensation since 1981. The Compensation Committee believes that stock option awards provide a significant link to company performance and maximize shareowner value. Stock options will have value only if the market value of our common stock increases above the exercise price of the option and the option-holder does not terminate employment for reasons other than retirement, death or disability during the vesting period.

 

Stock option awards are granted to employees annually, typically in May of each year. Stock options are issued at fair market value on the date of grant, vest five years from the date of grant and expire ten years from the date of grant. Grants do not include dividend equivalents or any reload grant features. During 2006, a total of 2,434,629 options (0.22 percent of common shares outstanding) were issued to 3,333 employees.

 

Those non-qualified or incentive stock options which vested prior to December 31, 2004 which remain unexercised and for which an election was made to defer the gain into the UPS Deferred Compensation Plan will be deferred into the UPS Deferred Compensation Plan at the time of exercise. The shares received upon exercise of these options are deferred into a rabbi trust. The shares held in this trust are classified as treasury stock, and the liability to participating employees is classified as “deferred compensation obligations” in the shareowners’ equity section of the balance sheet. As a result of the requirements applicable to non-qualified deferred compensation arrangements under Section 409A of the Internal Revenue Code and related guidance, deferral of stock options is no longer offered under the UPS Deferred Compensation Plan for options that vest after December 31, 2004.

 

 

Beginning in 2003, employees in key leadership positions were entitled to receive awards of RPUs as part of the LTI program under the UPS Incentive Compensation Plan. The decision to use RPUs was based on two goals for the award:

 

 

 

RPUs are delivered at 100 percent of the value of a UPS class A share at vesting. The awards are eligible for dividend equivalents, which are deemed to be automatically reinvested into additional restricted performance units. In 2006, 990,861 RPUs were granted to 3,333 employees.

 

At the end of the five-year restriction period, the number of RPUs granted to each individual can increase by 10 percent if certain company-wide performance measures are attained. Upon vesting of RPUs, the individual receives a distribution in the form of shares of class A common stock, less the required tax withholding.

 

 

As described above, we modified the MIP program in 2005 to provide that half of the annual award be made in RSUs, with certain exceptions for first-time MIP recipients. The RSUs generally vest over a five-year period. RSUs are eligible for dividend equivalents, which are deemed to be automatically reinvested into additional RSUs. At the end of each annual vesting period, the individual receives shares of class A common stock. During 2006, approximately 3.7 million RSUs were issued to approximately 32,000 employees.

 

 

In 2006, UPS adopted the 2006 LTIP under the UPS Incentive Compensation Plan. The program has a three year award cycle, from 2006 through 2008. Under the LTIP, target RSUs were granted to executive officers, officers and certain other eligible managers. As mentioned earlier, the Compensation Committee approved the LTIP in the belief that it would further strengthen the performance component of our executive compensation package, and enhance our retention of key talent.

 

Target RSU grants range from 50 percent to 250 percent of annual salary. For executive officers, the range is from 225 percent to 250 percent of annual salary. Of the total target award, 90 percent is divided into three substantially equal tranches, one for each calendar year in the three-year award cycle from 2006 through 2008. The remaining 10 percent of the total target award is based upon achievement of an adjusted net income target for 2008.

 

Specific performance measures and targets for each such tranche are set by the Compensation Committee. The number of RSUs earned each year will be the target number adjusted for the percentage achievement of the performance criteria targets for the year. The Compensation Committee may provide for payment of a percentage less than or more than 100 percent of target RSUs for each tranche based on achievement of performance criteria.

 

The award, if earned, will vest on January 31, 2009, provided the participant remains employed as of the vesting date. Special vesting rules apply to terminations by reason of death, disability or retirement. A participant’s earned restricted stock units account will be adjusted quarterly for dividends paid on class A common stock. The restricted stock unit awards that vest will be distributed in the form of class A shares. During 2006, a total of 623 employees received a target grant of approximately 1.18 million RSUs.

 

The performance criteria approved by the Compensation Committee for 2006 were growth in consolidated revenue and consolidated operating return on invested capital. The goals for these criteria were based on our confidential business plans and were consistent with other publicly disclosed financial targets for 2006. At their meeting on February 7, 2007, the Compensation Committee determined that 85 percent of the target award for the 2006 tranche was earned.

 

The Compensation Committee believes that the specific performance targets for the 2006 period incorporated an appropriate level of difficulty and expectations for on-going performance improvements. The goals for 2007 are also being established with a similar intent.

 

Benefits and Perquisites

 

Consistent with our culture, the benefits and perquisites offered to the NEO group are the same or similar to programs offered to the rest of the UPS management team, with the exception of a financial planning service. These programs include: matching contributions to the UPS Qualified Stock Ownership Plan that are paid in shares of class A common stock; qualified and non-qualified pension plans; life insurance premiums paid by UPS; the Discounted Employee Stock Purchase Plan; and a financial planning service.

 

To ensure the Compensation Committee has current data regarding total compensation practices at similar organizations, we participate in surveys sponsored by outside consulting firms. In 2006, we participated in surveys sponsored by Hewitt Associates and Towers Perrin.

 

The Compensation Committee has reviewed the details of the benefits and perquisites provided to each of the executive officers in 2006 and determined that they were in line with competitive practices. Additional information on these benefits can be found in the program descriptions below.

 

 

The QSOP provides a matching contribution (generally up to a maximum of 3 percent of each participant’s eligible compensation) to those employees of UPS who make elective deferrals under the UPS Savings Plan and invests that matching contribution entirely in class A common stock. The UPS Savings Plan is a 401(k) plan offered to all U.S. based employees who are not subject to a collective bargaining agreement, and who are not eligible to participate in another plan sponsored by UPS or one of its subsidiaries.

 

 

UPS executives participate in our qualified retirement program, the UPS Retirement Plan, on the same terms as all other participants. Benefits payable under the plan are subject to the maximum compensation limits and the annual benefit limits for a tax-qualified defined benefit plan as prescribed and adjusted from time to time by the Internal Revenue Service. Amounts exceeding these limits are paid pursuant to the UPS Excess Coordinating Benefit Plan, which is a non-qualified restoration plan designed to replace the amount of benefits limited under the tax-qualified plan. Without the Excess Coordinating Benefit Plan, UPS executives would receive a lower benefit as a percent of final average earnings than the benefit received by other participants in the UPS Retirement Plan.

 

 

To foster our Manager-Owner philosophy, we have a Discounted Employee Stock Purchase Plan. The plan provides all U.S. based employees, including executive officers, and some internationally-based employees, with the opportunity to purchase at a discount up to $10,000 in company stock annually. The plan has been designed to comply with Section 423 of the Internal Revenue Code. The purchase price at which our common stock may be acquired under the plan is equal to 90 percent of the lesser of (a) the fair market value of the shares on the first day of the calendar quarter or (b) the fair market value of the shares on the last day of each calendar quarter. Share purchases are made on a quarterly basis.

 

 

The NEOs and all other Management Committee members are eligible for financial planning services provided by the Ayco Company. Only a portion of the NEOs utilized the benefit in 2006. The value of this benefit is shown in the footnotes to the Summary Compensation Table below.

 

Although this benefit is not offered to other management employees, we offer a separate financial counseling service through PricewaterhouseCoopers to all U.S. and Puerto Rico based employees who are not subject to a collective bargaining agreement.

 

Tax Implications of Executive Compensation

 

Section 162(m) of the Internal Revenue Code makes compensation paid to certain executives in amounts in excess of $1 million not deductible unless the compensation is paid under a predetermined objective performance plan meeting certain requirements, or satisfies one of various other exemptions.

 

The Compensation Committee believes that the interests of our shareowners are best served by not restricting the Compensation Committee’s discretion and flexibility in crafting compensation plans and arrangements. While the Compensation Committee intends to structure awards to comply with Section 162(m), the Compensation Committee may approve elements of compensation for certain executive officers that are not fully deductible, and reserves the right to do so in the future in appropriate circumstances.

 

The following table shows the compensation for each of the Named Executive Officers for 2006.

 

 

 

(1) This column represents the Half-Month Bonus awarded annually in December. Eligibility varies by business unit; however, the majority of the UPS management group, including the NEOs, are eligible for the award.

 

(2) The values for equity-based awards in this column represent the cost recognized for financial statement reporting purposes for 2006, in accordance with FAS 123R. However, pursuant to SEC rules these values are not reduced by an estimate for the probability of forfeiture. Current and prior year awards with compensation expense recognized in 2006 include:

 

 

The assumptions used to value these awards can be found in Note 11 “Stock-Based Compensation” in our 2006 Form 10-K, except for our 2003 RPUs, which can be found in Note 1 “Summary of Accounting Policies” and Note 11 “Capital Stock and Stock-Based Compensation” in our 2003 Form 10-K.

 

The grant date fair value of the awards can be found in the Grants of Plan-Based Awards Table below.  An overview of the features of each program can be found in the “Elements of UPS Compensation” section above, and in the narrative following the Grants of Plan-Based Awards Table.

 

(3) The values for stock option awards in this column represent the cost recognized for financial statement reporting purposes for 2006, in accordance with FAS 123R. However, pursuant to SEC rules these values are not reduced by an estimate for the probability of forfeiture. Current and prior year awards with compensation expense recognized in 2006 include the grants made in 2003, 2004, 2005 and 2006 under the LTI program.

 

The assumptions used to value these awards can be found in Note 11 “Stock-Based Compensation” in our 2006 Form 10-K, except for our 2003 stock option awards, which can be found in Note 1 “Summary of Accounting Policies” and Note 11 “Capital Stock and Stock-Based Compensation” in our 2003 Form 10-K.

 

The grant date fair value of the awards can be found in the Grants of Plan-Based Awards Table below. An overview of the features of the program can be found in the “Elements of UPS Compensation” section above, and in the narrative following the Grants of Plan-Based Awards table below.

 

(4) This column shows the cash portion (representing 50 percent) of the MIP award and the Ownership Incentive award, which were paid in 2006. As more fully described in the “Elements of UPS Compensation” section above, the 2006 MIP award was paid at 80 percent of target due to below plan performance. The Ownership Incentive award was paid at 100 percent of target (one month’s salary) since each NEO exceeded his target ownership level.

 

(5) This column represents an estimate of the increase in the actuarial present value of the NEO’s accrued benefit under our retirement plans from September 30, 2005 to September 30, 2006, assuming a retirement age of 60. See the Pension Benefits Table below for additional information, including the present value assumptions used in this calculation. There are no above market or preferential earnings for the UPS Deferred Compensation Plan.

 

(6) Amounts reported in this column include 401(k) matching contributions in the amount of $6,600 for each NEO. Also includes imputed income of life insurance premiums for the NEOs in the following amounts: Eskew — $4,840, Davis — $2,322, Abney — $919, Beystehner — $2,518 and Winestock — $1,553. Also includes imputed income on the Restoration Plan Rollover Option discussed in the 2006 Pension Benefits table below as follows: Eskew — $10,522, Davis — $4,867 and Winestock — $3,633. The NEOs did not receive any perquisites, except for financial planning services as follows: Eskew — $11,175 and Davis — $12,214.

 

The following table provides information about awards granted in 2006 to each of the NEOs.

 

 

 

 

 

In 2006 we made four grants of equity incentive awards under the UPS Incentive Compensation Plan, which represent four separate programs within that plan. In order, as shown on the table, the four grants represent:

 

 

The following table shows the number of shares covered by exercisable and unexercisable options and unvested RSUs and RPUs held by the NEOs on December 31, 2006.