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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Harman International Industries, Incorporated

(Name of Registrant as Specified In Its Charter)

 

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

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Dear Harman International Stockholder:

 

You are cordially invited to attend the 2008 Annual Meeting of Stockholders of Harman International Industries, Incorporated. The meeting will be held on Wednesday, December 3, 2008, beginning at 11:00 a.m. at the JPMorgan Chase Building, 270 Park Avenue, New York, New York. Information about the meeting, the nominees for election as directors and other action to be taken is presented in the following Notice of Annual Meeting of Stockholders and Proxy Statement.

 

This Annual Meeting will be an important occasion as we will recognize the contributions of two board members who will retire from the Board following the meeting. Dr. Sidney Harman is the founder of our Company and has served as a member of senior management and the Board of Directors since 1980. Although Dr. Harman will retire as a director, he will continue as Chairman Emeritus. Ms. Shirley Mount Hufstedler has served as a director since 1986. We wish to thank both Dr. Harman and Ms. Hufstedler for their years of outstanding service to our Company.

 

At the meeting, management will also report on the Company’s operations during fiscal 2008 and comment on the Company’s outlook for the current fiscal year. The report will be followed by a question and answer period.

 

Please note that effective October 2008, the Company’s headquarters moved from Washington, DC to Stamford, Connecticut.

 

It is important that your shares be represented at the meeting. To ensure representation of your shares, please sign, date and promptly return the enclosed proxy card or use the telephone or Internet voting procedures described on the proxy card.

 

We look forward to seeing you on December 3rd.

 

Sincerely,

 

 

Dinesh Paliwal
Chairman and Chief Executive Officer

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To be held on December 3, 2008

 

 

 

The 2008 Annual Meeting of Stockholders of Harman International Industries, Incorporated (the “Company”) will be held at the JPMorgan Chase Building, 270 Park Avenue, New York, New York, on December 3, 2008, beginning at 11:00 a.m. The meeting will be held for the following purposes:

 

 

Information concerning the matters to be acted upon at the meeting is set forth in the accompanying Proxy Statement. Stockholders of record as of the close of business on October 6, 2008 are entitled to notice of, and to vote at, the meeting.

 

If you plan to attend the meeting and will need special assistance or accommodation due to a disability, please describe your needs on the enclosed proxy card. Also enclosed is the Company’s Annual Report for fiscal 2008.

 

By Order of the Board of Directors,

 

 

Todd A. Suko

Secretary

 

Stamford, CT

October 21, 2008

 

 

 

 

 

HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED

400 Atlantic Street

Suite 1500

Stamford, CT 06901

 

 

 

 

PROXY STATEMENT

 

 

 

 

This Proxy Statement provides information in connection with the solicitation of proxies by the Board of Directors (the “Board”) of Harman International Industries, Incorporated (the “Company”) for use at the Company’s 2008 Annual Meeting of Stockholders or any postponement or adjournment thereof (the “Meeting”). This Proxy Statement also provides information you will need in order to consider and to act upon the matters specified in the accompanying Notice of Annual Meeting of Stockholders. This Proxy Statement and the enclosed proxy card are being mailed to stockholders on or about October 22, 2008.

 

Holders of record of the Company’s common stock (“Common Stock”) as of the close of business on October 6, 2008 are entitled to vote at the Meeting. Each stockholder of record as of that date is entitled to one vote for each share of Common Stock held. On October 6, 2008, there were 58,530,866 shares of Common Stock outstanding.

 

You cannot vote your shares of Common Stock unless you are present at the Meeting or you have previously given your proxy. You can vote by proxy in one of three convenient ways:

 

 

You may revoke your proxy at any time prior to the vote at the Meeting by:

 

 

All properly executed proxies, unless revoked as described above, will be voted at the Meeting in accordance with your directions on the proxy. With respect to the election of directors, you may vote for both nominees, withhold your vote for both nominees, or withhold your vote as to a specific nominee. If a properly executed proxy does not provide instructions, the shares of Common Stock represented by your proxy will be voted:

 

 

A majority of the outstanding shares of Common Stock must be present, in person or by proxy, to constitute a quorum at the Meeting.

The Company’s majority voting policy requires any director nominee in an uncontested election who receives a greater number of votes “withheld” than votes “for” his or her election to tender his or her resignation promptly following the certification of the election results. The Nominating and Governance Committee of the Board will consider all of the relevant facts and circumstances and make a recommendation to the Board with respect to whether to accept the resignation. Within 90 days, the Board is required to take action with respect to the recommendation and to publicly disclose its decision by issuing a press release. The majority voting policy is more fully described in “The Board, Its Committees and Its Compensation — Majority Voting Policy.”

 

The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Meeting will be required to approve the 2008 Key Executive Officers Bonus Plan and the amendments to the 2002 Stock Option and Incentive Plan. In addition, the New York Stock Exchange rules require that the total votes cast on the approval of the amendments to the 2002 Stock Option and Incentive Plan represent greater than 50% of the shares outstanding as of the record date.

 

Those who fail to return a proxy or attend the Meeting will not count towards determining any required vote or quorum. Stockholders and brokers returning proxies or attending the Meeting who abstain from voting on the election of our directors will count towards determining a quorum. Brokers holding shares of record for customers generally are not entitled to vote on certain matters unless they receive voting instructions from their customers. In the event that a broker does not receive voting instructions for these matters from its customers, a broker may notify us that it lacks voting authority to vote those shares. These broker non-votes refer to votes that could have been cast on the matter in question by brokers with respect to uninstructed shares if the brokers had received their customers’ instructions. These broker non-votes will be included in determining whether a quorum exists. Even if you do not instruct your broker how to vote on the election of directors, your broker may exercise its discretion to vote your shares on this proposal. Your broker may not vote on the approval of the 2008 Key Executive Officers Bonus Plan or the amendments to the 2002 Stock Option and Incentive Plan without your instruction. To be sure your shares are voted in the manner you desire, you should instruct your broker how to vote your shares.

 

The Company is soliciting your proxy and will pay the cost of preparing and mailing this Proxy Statement and the enclosed proxy card. The Company has retained BNY Mellon Shareowner Services LLC (“Mellon”) to assist in the solicitation of proxies for the Meeting. For these services, the Company will pay Mellon a base fee of $7,500 and will reimburse Mellon for out-of-pocket expenses. Additionally, employees of the Company may solicit proxies personally and by telephone. The Company’s employees will receive no compensation for soliciting proxies other than their regular salaries. The Company may request banks, brokers and other custodians, nominees and fiduciaries to forward copies of these proxy materials to their principals and to request authority for the execution of proxies. The Company may reimburse such persons for their expenses in so doing.

 

PROPOSAL NO. 1
ELECTION OF DIRECTORS

 

At the Meeting, two directors will be elected to serve three-year terms expiring at the 2011 Annual Meeting of Stockholders. This section contains information relating to the two director nominees and the directors whose terms of office extend beyond the Meeting. The nominees for election are Brian Carroll, who is currently a director, and Hellene S. Runtagh. Under the Note Purchase Agreement under which we issued our 1.25% Convertible Senior Notes due 2012, Kohlberg Kravis Roberts & Co. (“KKR”) has the right to designate a nominee to the Board so long as KKR continues to have ownership rights as to at least $200 million principal amount of the notes or until the occurrence of other specified events. In October 2007, Mr. Carroll was appointed a director after he was recommended by KKR pursuant to the purchase agreement. See “Certain Relationships and Related Transactions — Certain KKR Relationships” on page 51 of this Proxy Statement. Ms. Runtagh was recommended to the Nominating and Governance Committee by a third-party search firm hired by the committee to provide assistance in finding potential director candidates.

 

The Board expects that the nominees will be available for election at the time of the Meeting. If, for any reason, a nominee should become unavailable for election, the shares of Common Stock voted FOR that nominee by proxy will be voted for a substitute nominee designated by the Board, unless the Board reduces the number of directors or allows that nominee’s director position to remain vacant until a qualified nominee is identified.

 

Dr. Sidney Harman and Ms. Shirley Mount Hufstedler currently serve as directors of the Company. Each of Dr. Harman’s and Ms. Hufstedler’s term expires at the Meeting. As previously announced, Dr. Harman will not stand for re-election, but will continue to serve as Chairman Emeritus. The Nominating and Governance Committee is currently conducting a search for qualified candidates to serve as a director of the Company. Although we expect that there will be a vacancy on the Board immediately after the Meeting, you may not vote for more than two nominees, either in person or by proxy.

 

Under Delaware law and our Bylaws, a plurality of the votes cast is required for the election of directors. This means that the director nominee with the most votes for a particular Board position is elected for that position. You may vote “for” or “withheld” with respect to the election of directors. Only votes “for” or “withheld” are counted in determining whether a plurality has been cast in favor of a director. Abstentions are not counted for purposes of the election of directors.

 

Our majority voting policy requires, in an uncontested election, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” to promptly tender his or her resignation following certification of the election results. The Nominating and Governance Committee will promptly consider the resignation and a range of possible responses based on the circumstances that led stockholders to withhold votes, if known, and make a recommendation to the Board. The Board will act on the committee’s recommendation within 90 days following certification of the results of the election.

 

The Board recommends a vote FOR election of each of the nominees.

Nominees to be Elected at the Meeting

 

Mr. Brian F. Carroll, age 37, has served as a director of the Company since October 2007. Mr. Carroll has been a member of KKR since January 2006 and before that, an executive of KKR since July 1999. In addition, Mr. Carroll was an executive at KKR from 1995 to 1997, at which time he left KKR to attend business school at Stanford University. Prior to joining KKR in 1995, Mr. Carroll was with Donaldson, Lufkin & Jenrette. Mr. Carroll is also a member of the board of directors of Rockwood Specialties Group, Inc. and Sealy Corporation.

 

Hellene S. Runtagh, age 60, served as President and Chief Executive Officer of the Berwind Group, a diversified pharmaceutical services, industrial manufacturing and real estate company, in 2001. From 1998 through 2000, Ms. Runtagh was Executive Vice President of Universal Studios, a media and entertainment company. Prior to joining Universal Studios, Ms. Runtagh spent 27 years at General Electric Company, a diversified industrial company, in a variety of leadership positions. Ms. Runtagh also serves on the board of directors of IKON Office Solutions, Inc., the world’s largest independent channel for document management systems and services, Lincoln Electric Holdings, Inc., a full-line manufacturer and reseller of welding and cutting products, and NeuStar Inc., a provider of clearinghouse services to the communications industry.

 

Directors Whose Terms Extend Beyond the Meeting

 

Dr. Harald Einsmann, age 74, has served as a director of the Company since October 2007. Dr. Einsmann currently serves as an Operating Partner and a member of the Board of Directors/Investment Committee of EQT, a leading European Private Equity Group sponsored by the Wallenberg group of Scandinavia. Dr. Einsmann also serves as a director of Tesco Plc, the Carlson Group, a provider of business and leisure travel, hotel, restaurant, cruise and marketing services, Checkpoint Systems, Inc., a provider of integrated system solutions for retail security, labeling and merchandising, and Rezidor Hotel Group in Scandinavia. Prior to joining EQT, Dr. Einsmann held senior management positions, as well as a seat on the Worldwide Board at The Procter and Gamble Company. His current term as a director expires at the 2010 Annual Meeting of Stockholders.

 

Ann McLaughlin Korologos, age 66, has been a director of the Company since 1995 and has served as Lead Director since May 2008. She served as Secretary of Labor of the United States from 1987 until 1989. Ms. Korologos is a director of AMR Corporation (and its subsidiary, American Airlines, Inc.), Host Hotels & Resorts, Inc., Kellogg Company and Vulcan Materials Company, a provider of construction aggregates. In April 2004, Ms. Korologos was elected Chairman of the RAND Corporation Board of Trustees. She is also a Chairman Emeritus of the Aspen Institute and previously served as a Senior Advisor to Benedetto, Gartland & Company, Inc. from 1996 to 2005. Her current term as a director expires at the 2010 Annual Meeting of Stockholders.

 

Edward H. Meyer, age 81, has been a director of the Company since 1990. Mr. Meyer has served as Chairman, Chief Executive Officer and Chief Investment Officer of Ocean Road Advisors, Inc., an investment management company, since January 2007. Mr. Meyer also served as Chairman, Chief Executive Officer and President of Grey Global Group, Inc., a global advertising and marketing services company, from 1972 to 2006. Mr. Meyer also serves as a director of Ethan Allen Interiors Inc., NRDC Acquisition Corp., a recently organized special purpose acquisition company, and National CineMedia, Inc., an in-theater advertising company. His current term as a director expires at the 2009 Annual Meeting of Stockholders.

Dinesh Paliwal, age 50, has been a director of the Company since August 2007 and has served as Chairman of the Board since July 1, 2008. He has also served as Chief Executive Officer since July 2007 and served as President and Vice Chairman from July 2007 through June 2008. Prior to joining the Company, Mr. Paliwal served as a member of the Group Executive Committee of ABB Ltd from January 2001 until June 2007, a provider of industrial automation, power transmission systems and services. Mr. Paliwal also served as President of Global Markets and Technology of ABB Ltd from January 2006 until June 2007 and simultaneously, he served as Chairman and CEO of ABB North America from January 2004 until June 2007. He was President and CEO of ABB Automation from October 2002 to December 2005. Mr. Paliwal is a director of Embarq Corporation, a provider of telecommunication services. His current term as a director expires at the 2009 Annual Meeting of Stockholders.

 

Kenneth Reiss, age 65, has served as a director of the Company since February 2008. Prior to his retirement in June 2003, Mr. Reiss served with Ernst & Young beginning in 1965 and as a partner since 1977. Mr. Reiss held various leadership positions with Ernst & Young but spent the majority of his time as Coordinating Partner on significant global clients. Mr. Reiss serves on the board of directors of Eddie Bauer Holdings, Inc., a retailer of outerwear and footwear, and The Wet Seal, Inc., a national specialty retailer. His current term as a director expires at the 2010 Annual Meeting of Stockholders.

 

Gary G. Steel, age 55, has served as a director of the Company since December 2007. Mr. Steel has also served since January 2003 as a member of the Group Executive Committee of ABB Ltd, a provider of industrial automation, power transmission systems and services. Prior to joining ABB Ltd, Mr. Steel served in various executive positions with Royal Dutch Shell plc, most recently as Human Resource Director for Global Finance for Shell International B.V., a wholly owned subsidiary of Royal Dutch Shell plc. His current term as a director expires at the 2009 Annual Meeting of Stockholders.

 

PROPOSAL NO. 2
APPROVAL OF AMENDMENTS TO THE 2002 STOCK OPTION AND INCENTIVE PLAN

 

On September 17 and October 21, 2008, the Compensation and Option Committee of the Board adopted, subject to stockholder approval, amendments to our 2002 Stock Option and Incentive Plan (the “Incentive Plan”). The proposed amendments would increase the number of shares of Common Stock available for issuance under the Incentive Plan by 760,000 shares, increase the limits on individual and total grants during any calendar year, expand the list of performance criteria that may be used for awards, change the initial and annual grants to non-management directors to restricted share units, preclude dividend equivalents for stock options and stock appreciation rights, reduce to one year the minimum three-year vesting period for awards of restricted shares and restricted share units, authorize the committee to cancel underwater options in connection with certain transactions, and make changes to comply with Section 409A of the Internal Revenue Code (collectively, the “Incentive Plan Amendments”).

 

The Incentive Plan initially authorized the issuance of 6,000,000 shares of Common Stock (adjusted for our two-for-one stock split in November 2003), of which 2,411,335 shares are available for future awards. All of the shares currently available for future awards under the Incentive Plan may be issued upon the exercise of incentive stock options and 224,229 shares may be issued as non-option awards denominated in shares of Common Stock. The Compensation and Option Committee believes that the increase in the aggregate number of shares available for future grants under the Incentive Plan is appropriate to permit the grant of equity awards at expected levels. The effective date of the Incentive Plan Amendments is September 17, 2008, the first date upon which the Incentive Plan Amendments were adopted and approved by the Compensation and Option Committee. If the Incentive Plan Amendments are not approved by the stockholders, they will be of no effect and the amount of shares available for issuance under the Incentive Plan will remain unchanged.

 

Under all of the Company’s equity-based incentive plans, 2,941,282 shares of Common Stock are issuable under outstanding stock options and 458,681 shares are issuable under non-option awards, specifically restricted share units and restricted shares. The outstanding stock options have a weighted average exercise price of $62.52 and a weighted average remaining life of 7.87 years. In addition, 2,441,335 shares of Common Stock are available for grant under all of the Company’s equity-based incentive plans.

 

The committee believes that equity-based compensation programs are an important element of the Company’s continued financial and operational success. In approving the Incentive Plan Amendments, the committee considered the recent history of the Company’s discretionary equity award grants and grants made under contractual obligations with officers of the Company under the Incentive Plan, the intended purpose of the Incentive Plan and the number of shares that would be reserved for issuance under the Incentive Plan, as amended (representing approximately 9.5% of the outstanding shares of Common Stock assuming all shares available under the Incentive Plan are issued). We believe these changes in the plan reflect best practices in our industry and allow the establishment of a stronger pay-for-performance culture.

 

You are being asked to approve the Incentive Plan Amendments. You should read and understand the terms of the Incentive Plan Amendments and Incentive Plan before you vote. A summary of the Incentive Plan, as it is proposed to be amended, appears below and the full text of the Incentive Plan, marked to show the Incentive Plan Amendments, is attached to this Proxy Statement as Appendix A. The affirmative vote of the holders of a majority of the outstanding shares of Common Stock present in person or by proxy at the Meeting will be required to approve the Incentive Plan Amendments.

 

The Board recommends a vote FOR approval of the Incentive Plan Amendments.

Incentive Plan Summary

 

This summary of the Incentive Plan, as it is proposed to be amended, does not purport to be exhaustive and is expressly qualified in its entirety by reference to the full text of the Incentive Plan, which is attached to this Proxy Statement as Appendix A.

 

Administration

 

The Incentive Plan will continue to be administered by the Compensation and Option Committee, subject to the Board’s discretion, and shall have the authority delegated to it by the Board from time to time.

 

Available Shares; Limitations on Awards

 

Under the Incentive Plan Amendments and subject to adjustments described below, no more than 6,760,000 shares of Common Stock may be issued in the aggregate under the Incentive Plan, of which 3,171,335 shares would be available for future awards. No more than 6,000,000 shares of Common Stock may be issued upon the exercise of incentive stock options granted under the Incentive Plan, of which 3,171,335 shares would be available for future awards. No plan participant may be awarded more than 750,000 options and appreciation rights, in the aggregate, under the Incentive Plan during any calendar year. No more than 2,150,000 shares of Common Stock may be issued as non-option awards denominated in shares of Common Stock under the Incentive Plan, of which 1,671,658 shares would be available for future awards. No plan participant may receive non-option awards denominated in shares of Common Stock of more than 750,000 shares during any calendar year or performance units in any calendar year having an aggregate maximum value as of their grant dates in excess of $2.0 million. The Incentive Plan Amendments would increase the number of options and appreciation rights that may be awarded, in the aggregate, during any calendar year from 600,000 to 750,000, and would increase the number of non-option awards denominated in shares of Common Stock that may be awarded to any participant during any calendar year from 50,000 to 750,000.

 

Eligibility

 

The Compensation and Option Committee may designate any officer, director or key employee of the Company, or any of its subsidiaries, or any other person who has agreed to serve in such capacity within 90 days of the date of a grant, to receive awards under the Incentive Plan; provided that non-management directors are only eligible to receive awards of restricted share units as described below. Currently, the Company has nine executive officers and eight non-management directors who are participants in the Incentive Plan. A total of approximately 350 persons are participants in the Incentive Plan.

 

Descriptions of Awards

 

Option Rights.  Plan participants may receive options to purchase shares of Common Stock for an exercise price fixed on the date of the grant. The exercise price may not be less than the fair market value of the Common Stock on the date of the grant. Grants of option rights under the Incentive Plan may be incentive stock options or non-qualified stock options. An incentive stock option is an option that is intended to qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code. A plan participant may pay the exercise price of an option in cash, by check, by the transfer of shares of unrestricted Common Stock owned for a period of time acceptable to the Compensation and Option Committee and having a value at the time of exercise equal to the exercise price, by any other consideration the committee may deem appropriate, or by a

combination thereof. The committee shall determine the vesting schedule and requirements for continuous service associated with each grant of options and may provide for earlier vesting under specified circumstances. The vesting or exercise of option rights may be subject to the optionee or the Company achieving management objectives. No options shall be exercisable more than 10 years after the date of grant.

 

Appreciation Rights.  Plan participants may also receive stock appreciation rights, which may be “free-standing” or “tandem.” A free-standing stock appreciation right allows the plan participant to receive the increase, if any, in the fair market value of the number of shares of Common Stock underlying the award during the life of the award. A tandem stock appreciation right is granted in connection with an option to purchase Common Stock and allows the participant to receive the spread, if any, between the fair market value of the Common Stock and the exercise price of the underlying option. The Compensation and Option Committee may specify that any amount payable upon the exercise of a stock appreciation right may be paid by the Company to the plan participant in cash, Common Stock or any combination thereof. In addition, awards of stock appreciation rights may be subject to other restrictions, including:

 

 

Restricted Shares.  Plan participants may be awarded shares of Common Stock that are not transferable and are subject to forfeiture until certain restrictions are removed or conditions are satisfied. Removal of restrictions may be contingent on the achievement by the recipient or the Company of specific management objectives, as determined by the Compensation and Option Committee. Unless otherwise determined by the committee, recipients of restricted shares are entitled to vote their restricted shares and to receive the dividends paid on the shares.

 

Restricted Share Units.  A restricted share unit is a right to receive one share of Common Stock or cash equal to the value of one share at the end of a specified period, subject to transfer restrictions and other conditions as determined by the Compensation and Option Committee. Restricted share units generally vest on the basis of the satisfaction of performance conditions established by the committee and/or continuing employment or other service for a specified period of time. The holder of a restricted share unit award has no rights as a stockholder with respect to the underlying shares unless and until the award vests and the award is settled in shares. However, the committee may provide for the payment of dividend equivalents in the form of cash or shares in an amount equal to the dividends that would have been payable if the shares were outstanding.

 

Performance Units.  Plan participants may receive performance units that will become payable upon the achievement of specified management objectives during a “performance period.” The length of the performance period will be specified at the time the grant is made, but will not be less than three years. In addition, performance units may be subject to earlier lapse or other modification in the event of a change in control of the Company.

 

Management Objectives

 

As stated above, awards of performance units will be, and other awards may be, made subject to certain management objectives. These objectives may be based on Company-wide objectives or objectives that are related to the performance of an individual participant, a subsidiary, a division, a department, a region or a function within the Company or its subsidiaries. For awards intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code, the objectives will be based on specified levels of, or growth in, one or more of the following areas:

 

 

The Incentive Plan Amendments would add the last five groups of performance criteria. In addition, the Incentive Plan Amendments restate the first seven groups of performance criteria in order to comply with the requirements of Section 162(m) of the Internal Revenue Code.

 

If the Compensation and Option Committee determines that a change in the business, operations, corporate or capital structure of the Company, the manner in which the Company conducts its business, or other events or circumstances render the management objectives unsuitable, the committee may, in its discretion, modify the management objectives or the related minimum acceptable level of achievement, in whole or in part, as it deems appropriate and equitable, unless such action would result in the loss of the otherwise available exemption of the award under Section 162(m) of the Internal Revenue Code.

 

Awards of Restricted Share Units to Non-Management Directors

 

Under the Incentive Plan Amendments, each person who becomes a non-management director will, on the date such person first becomes a non-management director, receive a grant of restricted share units. The number of restricted share units will be equal to $200,000 divided by the closing price of the Common Stock on the date of grant. After the Meeting, and annually thereafter, each person serving as a non-management director will receive additional grants of restricted share units. An individual who first becomes a non-management director at the Meeting or a subsequent annual meeting will not be entitled to the annual grant until the following annual meeting. The number of restricted share units awarded annually will be equal to $125,000 divided by the closing price of the Common Stock on the date of grant. The restricted share units included in each grant will (a) become exercisable at a rate of one-third on each anniversary of the date of the grant, until fully

vested, (b) become fully exercisable upon the director’s retirement from the Board, provided that the director has attained age 65 and completed 5 years of service as a director, and (c) become fully exercisable upon a change in control of the Company or death or disability of the director.

 

Term

 

The Incentive Plan Amendments will become effective as of September 17, 2008, subject to stockholder approval. No grants of any kind may be made under the Incentive Plan after November 8, 2012. All awards made under the Incentive Plan that remain outstanding subsequent to November 8, 2012 will continue to be governed by the terms of the Incentive Plan.

 

Prohibition on Repricings

 

The Compensation and Option Committee may not lower the exercise price of outstanding option rights without the approval of the Company’s stockholders.

 

Transferability

 

Unless otherwise approved by the Compensation and Option Committee, options, appreciation rights or other derivative securities granted under the Incentive Plan may not be transferred other than by will or the laws of descent and distribution. Under no circumstances may awards be transferred for value.

 

Adjustments

 

The maximum number of shares of Common Stock which may be awarded under the Incentive Plan, and the number of shares and price per share applicable to any outstanding award, are subject to adjustment in the event of stock dividends, stock splits, combinations of shares, recapitalizations, mergers, consolidations or other reorganizations of the Company.

 

Amendments

 

The Compensation and Option Committee may amend the Incentive Plan at any time without the consent of stockholders, unless consent is required by law or the applicable rules of each securities exchange upon which the Common Stock is traded.

 

Compliance with Section 409A of the Internal Revenue Code

 

It is intended that the Incentive Plan and any grants made under the Incentive Plan will comply with the provisions of Section 409A of the Internal Revenue Code, so that plan participants will not be subject to adverse tax consequences under that Code Section.

 

Market Value of Underlying Securities of the Incentive Plan

 

Common Stock underlies all of the options and rights to be awarded under the Incentive Plan. The market value of the Common Stock at the close of trading on September 17, 2008 was $32.14 per share.

 

Federal Income Tax Consequences of the Incentive Plan

 

The following is a summary of certain federal income tax consequences relating to awards under the Incentive Plan, based on federal income tax laws currently in effect. This summary is not intended to and does not describe all of the possible tax consequences that could result from the acquisition, holding, exercise or disposition of an option right or shares of Common Stock purchased or granted pursuant to, or any other award granted under, the Incentive Plan and does not describe any state, local or foreign tax consequences.

Tax Consequences to Participants

 

Incentive Stock Options.  A plan participant will not recognize income upon the grant of an option intended to be an incentive stock option. Furthermore, a plan participant will not recognize ordinary income upon the exercise of an incentive stock option if he or she satisfies certain employment and holding period requirements although the exercise may be subject to alternative minimum tax. To satisfy the employment requirement, a plan participant must exercise the option not later than three months after he or she ceases to be an employee of the Company and its subsidiaries (one year if he or she is disabled). To satisfy the holding period requirement, a plan participant must hold the shares acquired upon exercise of the incentive stock option for more than two years from the grant of the option and more than one year after the shares are transferred to him or her. If these requirements are satisfied, the plan participant will be taxed on the difference between his or her basis in the shares and the net proceeds of the sale at capital gain rates on the sale of the shares.

 

If a plan participant disposes of shares of Common Stock acquired upon the exercise of an incentive stock option without satisfying the holding period requirement, the plan participant will usually recognize ordinary income at the time of disposition equal to the amount of the difference between the fair market value of the stock on the date the option is exercised and the exercise price of the option.

 

Non-Qualified Stock Options.  In general, a plan participant will not recognize income at the time an option is granted. At the time of exercise of the option, he or she will recognize ordinary income if the shares are not subject to a substantial risk of forfeiture (as defined in Section 83 of the Internal Revenue Code). The amount of such income will be equal to the difference between the option exercise price and the fair market value of the shares of Common Stock on the date of exercise. At the time of the sale of the shares of Common Stock acquired pursuant to the exercise of an option, appreciation in value of the shares after the date of exercise will be treated as either short-term or long-term capital gain, and depreciation in value will be treated as short-term or long-term capital loss, depending on how long the shares have been held. Long-term capital gains may be eligible for reduced rates if the participant has satisfied applicable holding period requirements.

 

Appreciation Rights.  A plan participant will not recognize income upon the grant of a stock appreciation right. In general, a participant will recognize ordinary income at the time he or she receives payment on a stock appreciation right in the amount of the payment.

 

Restricted Shares.  In general, a plan participant will not recognize ordinary income upon receipt of restricted shares. The plan participant will recognize ordinary income when the shares are transferable by the plan participant or are no longer subject to a substantial risk of forfeiture, whichever occurs first. At such time, the plan participant will recognize ordinary income in an amount equal to the current fair market value of the shares. A plan participant may, however, elect to recognize ordinary income when the restricted shares are granted in an amount equal to the fair market value of the shares at that time, determined without regard to the restrictions. Any appreciation in the value of the shares after the date the shares become transferable or are no longer subject to substantial risk of forfeiture, or after the participant has made the election referred to in the preceding sentence, if applicable, will be treated as either short-term or long-term capital gain, and any depreciation in value will be treated as either short-term or long-term capital loss, depending upon how long the shares have been held.

 

Restricted Share Units.  A plan participant will not recognize ordinary income upon the grant of restricted share units. In general, a plan participant will recognize ordinary income at the time he or she receives shares with respect to restricted share units in an amount equal to the current fair market value of the shares.

Performance Units.  A plan participant will not recognize income upon the grant of performance units. In general, a plan participant will recognize ordinary income at the time he or she receives payment with respect to performance units in the amount of the payment.

 

Tax Consequences to the Company

 

To the extent that a plan participant recognizes ordinary income as described above, the Company, or its subsidiary for which the plan participant performs services, will be entitled to a corresponding deduction provided that, among other things, the income meets the test of reasonableness, is an ordinary and necessary business expense, is not an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue Code and is not disallowed by the $1,000,000 limitation on certain executive compensation under Section 162(m) of the Internal Revenue Code.

 

Incentive Plan Benefits

 

If the stockholders approve the Incentive Plan Amendments, there will be an annual grant of restricted share units under the Incentive Plan to each non-management director, commencing with the Meeting. In addition, the Incentive Plan Amendments provide for a one-time grant of restricted share units to each person who becomes a non-management director on or after the date of the Meeting, including Ms. Runtagh. An individual who first becomes a non-management director at the Meeting or a subsequent annual meeting will not be entitled to the annual grant until the following annual meeting. For the annual and one-time grants, the number of restricted share units awarded will be equal to $125,000 and $200,000, respectively, divided by the closing price of the Common Stock on the grant date.

 

In September 2008, the Compensation and Option Committee approved awards to Mr. Paliwal representing his annual equity award and an additional award to offset some of the reduction in value of the awards he received under his letter agreement in connection with joining the Company. These earlier awards were compensation for awards Mr. Paliwal forfeited in connection with leaving his former employer to join the Company. Mr. Paliwal’s annual equity award consists of 72,748 stock options and 78,757 restricted share units, of which 28,757 restricted share units are subject to stockholder approval of the Incentive Plan Amendments. The 78,757 restricted share units will vest three years from the date of grant. For each restricted share unit, Mr. Paliwal will be entitled to one share of Common Stock. Under his letter agreement, if the Incentive Plan Amendments are not approved by stockholders, Mr. Paliwal will be entitled to restricted share units of an equal value granted outside the Incentive Plan.

 

Mr. Paliwal’s additional award consists of 73,814 restricted share units, which are subject to approval of the Incentive Plan Amendments. For each of these restricted share units, Mr. Paliwal will be entitled to receive one share of Common Stock. Of the 73,814 restricted share units, 12,913 will vest on December 3, 2009, 32,460 will vest on March 1, 2010, 20,911 will vest on July 1, 2010, 3,765 will vest on July 1, 2011 and 3,765 will vest on July 1, 2012.

 

No other awards have been made subject to approval of the Incentive Plan Amendments. However, the committee is considering approving grants to Mr. Paliwal under the Incentive Plan to replace the special cash bonus he is entitled to under the November 2007 amendment to his letter agreement. The proposed award would be in the form of performance-based restricted share units, which would vest on November 9, 2012. The actual number of restricted share units payable would be subject to adjustment based on the Company’s enterprise value on the vesting date, using the same target, threshold and maximum performance levels approved for the special cash bonus. However, the committee is also considering adjusting the enterprise value performance levels based on a $43 stock price. See “Compensation Discussion and Analysis — Executive Compensation Programs and Policies — Long-Term Incentive Compensation” and “Executive Compensation — Grants of Plan-Based Awards” on pages 26 and 36 of this Proxy Statement for additional information regarding Mr. Paliwal’s special cash bonus.

 

PROPOSAL NO. 3
APPROVAL OF 2008 KEY EXECUTIVE OFFICERS BONUS PLAN

 

In October 2007, the Board unanimously approved, subject to stockholder approval, the 2007 Key Executive Officers Bonus Plan (the “2007 Plan”). The 2007 Plan was subsequently approved by the stockholders at the 2007 Annual Meeting of Stockholders. The 2007 Plan allows cash bonuses paid under it to be considered “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code.

 

In September 2008, the Compensation and Option Committee approved the 2008 Key Executive Officers Bonus Plan (the “2008 Plan”), subject to stockholder approval. The 2008 Plan amends and restates the 2007 Plan. The 2008 Plan will add to the stockholder equity goal performance measures consistent with the Incentive Plan and the Company’s Management Incentive Compensation Plan, which is an annual incentive program for executive officers and other key employees. These amendments will allow us to apply consistent performance measures in granting incentive awards to our senior management, other executive officers and key employees.

 

You are being asked to approve the 2008 Plan. You should read and understand the terms of the 2008 Plan before you vote. A summary of the 2008 Plan appears below and the full text of the 2008 Plan is attached to this Proxy Statement as Appendix B. The affirmative vote of the holders of a majority of the outstanding shares of Common Stock present in person or by proxy at the Meeting will be required to approve the 2008 Plan. If the 2008 Plan is not approved, the 2007 Plan will continue in effect under its current terms.

 

The Board recommends a vote FOR approval of the 2008 Plan.

 

2008 Plan Summary

 

This summary of the 2008 Plan does not purport to be exhaustive and is expressly qualified in its entirety by reference to the full text of the 2008 Plan, which is attached to this Proxy Statement as Appendix B.

 

Administration

 

The 2008 Plan is administered by the Compensation and Option Committee, which has full authority to interpret and oversee the operation of the 2008 Plan. The Board may appoint a new plan committee at its discretion. The plan committee will in any event be comprised of not fewer than two directors, each of whom qualifies as an “outside director” for purposes of Section 162(m) of the Internal Revenue Code and the applicable Treasury regulations.

 

Eligibility

 

As under the 2007 Plan, the Company’s Chief Executive Officer and any other executive officer of the Company designated by the Compensation and Option Committee will be eligible to receive an award under the 2008 Plan. Currently, there are three individuals who are designated as eligible to receive awards under the 2008 Plan.

 

Performance Measures and Awards

 

No later than the 90th day of each fiscal year, the Compensation and Option Committee will meet to establish performance measures for the fiscal year and the maximum cash award payable to each plan participant if these goals are met. As under the 2007 Plan, cash awards paid under the 2008 Plan to a plan participant shall not exceed $3,000,000 during any fiscal year.

 

After the end of each fiscal year, the committee will meet to determine whether the performance measures for the fiscal year were met. If the goals were met, the committee will establish the amount of the cash award to be paid to each plan participant, exercising discretion only to decrease the award amount.

 

Performance Measures

 

The performance measures under the 2008 Plan will be based on specified levels of, or growth in, one or more of the following areas:

 

 

If the Compensation and Option Committee determines that a change in the business, operations, corporate or capital structure of the Company, the manner in which the Company conducts its business, or other events or circumstances render the management objectives unsuitable, the committee may, in its discretion, modify the management objectives or the related minimum acceptable level of achievement, in whole or in part, as it deems appropriate and equitable, unless such action would result in the loss of the otherwise available exemption of the award under Section 162(m) of the Internal Revenue Code.

Change in Control

 

In the event of a change in control of the Company, each plan participant shall be entitled to the award amount for that fiscal year without proration or any other reduction, provided that he or she is employed by the Company at the time of the change in control or, if the plan participant is no longer employed by the Company, the plan participant’s employment is terminated after commencement of discussions that resulted in a change in control of the Company but within 180 days prior to the change in control.

 

Term

 

If the stockholders approve the 2008 Plan, it will become effective as of July 1, 2008 and will remain effective until five years after the date approved by the stockholders.

 

Tax Deductibility of Awards

 

The Company intends for awards made under the 2008 Plan to constitute “performance-based compensation” as defined in Section 162(m) of the Internal Revenue Code. As applicable to the Company, Section 162(m) generally disallows a tax deduction to public companies for compensation over $1,000,000 paid to a corporation’s top executives, but does not include performance-based compensation in determining whether the $1,000,000 threshold has been exceeded.

 

2008 Plan Benefits

 

Under the 2008 Plan, the Compensation and Option Committee will establish performance goals at the beginning of each fiscal year and the maximum amount of a cash award that is payable to each plan participant if the goals are met. At the end of each fiscal year, the committee will determine whether the goals were met and, if so, the amount of the cash award to be paid to each plan participant. Therefore, the dollar value of future awards under the 2008 Plan that will be received by or allocated to any person or group, or in the aggregate, is not determinable.

 

THE BOARD, ITS COMMITTEES AND ITS COMPENSATION

 

The Board of Directors

 

The Board currently consists of nine directors. Seven of the directors are independent directors and two directors are current or former members of the Company’s senior management. Each of the Company’s non-management directors, other than Dr. Harman and the director nominee, meets the qualifications for independence under the listing standards of the New York Stock Exchange. Following the Meeting, the Board will consist of eight members, seven of whom are independent.

 

Director Compensation

 

Fiscal 2008 Compensation

 

For services rendered during fiscal 2008, non-management directors received an annual retainer fee of $60,000, plus $1,500 for each committee meeting attended on a day other than the day of a Board meeting. We do not pay fees to directors who are officers of the Company or its subsidiaries. The Company reimburses all directors for expenses incurred in attending Board and committee meetings.

 

On the date of our 2007 Annual Meeting of Stockholders, each then-current non-management director received an option to purchase 5,000 shares of Common Stock. Each of Mr. Carroll, Mr. Steel, Mr. Reiss and Dr. Einsmann received an option to purchase 8,000 shares of Common Stock upon joining the Board. All of these options were granted under the Incentive Plan. The exercise price of the options was the fair market value of the shares of Common Stock on the date of grant. Each option vests at a rate of 20% per year and expires 10 years after the date of grant.

 

For his service as Non-Executive Chairman during fiscal 2008, Dr. Harman received an annual retainer of $200,000, prorated for his length of service. In addition, Dr. Harman received an option to purchase 8,000 shares of Common Stock upon becoming a non-management director in February 2008. Dr. Harman is a named executive officer for fiscal 2008 and his compensation as a director is included in the Summary Compensation Table on page 33 of this Proxy Statement.

 

The following table sets forth compensation earned by each of our non-management directors, other than Dr. Harman, for his or her service as a director during fiscal 2008.

 

 

 

Changes in Director Compensation for Fiscal 2009

 

In June 2008, the Compensation and Option Committee completed a review of the Company’s non-management director compensation program to determine whether the program was appropriate and competitive with respect to cash and equity components and total compensation. The committee also analyzed how the program compared to practices at comparable companies. As part of its review, the committee received advice from legal counsel and Steven Hall & Partners, which was engaged by the committee earlier in 2008 to review the Company’s non-management director compensation program. As a result of this process, the committee adopted changes to the program, effective July 1, 2008. The changes to equity compensation are subject to stockholder approval as described under the caption “Proposal No. 2 Approval of Amendments to the 2002 Stock Option and Incentive Plan.” The changes approved in June include:

 

 

The committee’s decision to replace the annual grant of stock options with restricted share units was based on a significant decline in the use of stock options as director compensation at comparable companies. The change in meeting fees and additional annual retainer fees for committee chairs and the Lead Director were approved to differentiate compensation based on a director’s responsibilities and time requirements.

 

Corporate Governance

 

The Board and senior management believe that one of their primary responsibilities is to promote a culture of ethical behavior throughout the Company by setting examples and by displaying a sustained commitment to instilling and maintaining deeply ingrained principles of honesty and decency. Consistent with these principles the Company has, among other things, adopted:

 

 

The committee charters, corporate governance guidelines, ethics codes and majority voting policy are available on the Company’s website (www.harman.com) in the Corporate Governance section of the Investor Information page. Copies of these documents are also available upon written request to the Company’s Secretary. The Company will post information regarding any amendment to, or waiver from, its Code of Ethics for Senior Executive and Financial Officers and Directors on its website under the Corporate Governance section of the Investor Information page.

 

The Board periodically reviews its corporate governance policies and practices. Based on these reviews, the Board expects to adopt changes to policies and practices that are in the best interests of the Company and as appropriate to comply with any new requirements of the Commission or the New York Stock Exchange.

 

Director Independence

 

As part of the Company’s Corporate Governance Guidelines, the Board has established a policy requiring a majority of the members of the Board to be independent. The Board has also adopted a policy establishing independence standards to assist the Board in determining the independence of the non-management directors. Those standards reflect, among other things, the requirements under the listing standards of the New York Stock Exchange. The independence standards for non-management directors are attached to this Proxy Statement as Appendix C.

 

The Board has determined that each of Mr. Carroll, Dr. Einsmann, Ms. Hufstedler, Ms. Korologos, Mr. Meyer, Mr. Reiss, Ms. Runtagh and Mr. Steel, is independent of the Company and its management within the meaning of the New York Stock Exchange listing standards and satisfies the Company’s independence standards.

Majority Voting Policy

 

Under our majority voting policy, in an uncontested election of directors, any nominee who receives a greater number of votes “withheld” than votes “for” his or her election will, promptly following the certification of the stockholder vote, tender his or her written resignation to the Board for consideration by the Nominating and Governance Committee. The Nominating and Governance Committee will consider the resignation and will make a recommendation to the Board concerning whether to accept or reject it.

 

In determining its recommendation to the Board, the Nominating and Governance Committee will consider all factors it considers relevant, which may include:

 

 

The Nominating and Governance Committee also will consider a range of possible alternatives concerning the director’s tendered resignation as it deems appropriate, which may include:

 

 

Under our majority voting policy, the Board will take formal action on the recommendation no later than 90 days following the certification of the results of the stockholders’ meeting. In considering the recommendation, the Board will consider the information, factors and alternatives considered by the Nominating and Governance Committee and any additional information that the Board considers relevant. The Company will publicly disclose the Board’s decision promptly after the decision is made in a press release. If applicable, the Board will also disclose the reason or reasons for rejecting the tendered resignation.

 

Communications with the Board

 

Stockholders and other interested parties may communicate with the Board, the non-management directors or specific directors by mail addressed to: Board of Directors, c/o Harman International Industries, Incorporated, 400 Atlantic Street, Suite 1500, Stamford, Connecticut 06901, Attn: General Counsel. The mailing envelope should also clearly indicate whether the communication is intended for the Board, the non-management directors or a specific director. The General Counsel or the Internal Auditor will review all these communications and will, within a reasonable period of time after receiving the communications, forward all communications to the appropriate director or directors, other than those communications that are merely solicitations for products or services or relate to matters that are of a type that are clearly improper or irrelevant to the functioning of the Board or the business and affairs of the Company.

Board Meetings

 

The Board held fifteen meetings during fiscal 2008. Each director attended at least 75% of the total number of meetings of the Board and committees on which he or she served during the period he or she was a director in fiscal 2008.

 

The Board has established a policy that the non-management directors meet in executive session, without members of the Company’s management present, at each regularly scheduled meeting of the full Board. In May 2008, the independent directors designated Ann McLaughlin Korologos as Lead Director. In this role, Ms. Korologos is responsible for chairing executive sessions and other meetings of the Board in the absence of the Chairman. The Board expects to designate the Lead Director on an annual basis.

 

Annual Meetings of Stockholders

 

As part of the Company’s Corporate Governance Guidelines, the Board has adopted a policy that each director is expected to make reasonable efforts to attend stockholders meetings. All Board members who were directors at the time of the meeting attended the Company’s 2007 Annual Meeting of Stockholders.

 

Audit Committee

 

The Audit Committee currently consists of Mr. Reiss (Chairman), Dr. Einsmann, Ms. Hufstedler, Ms. Korologos and Mr. Meyer. During fiscal 2008, the Audit Committee held seven meetings. The Board has determined that each member of the Audit Committee is independent under the New York Stock Exchange listing standards and each is financially literate and experienced in financial matters. The Board has also determined that Mr. Reiss is an “audit committee financial expert” within the meaning of applicable Commission regulations.

 

The Audit Committee assists the Board in its oversight of the Company’s financial reporting, focusing on the integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, the qualifications and independence of the Company’s independent auditor and the performance of the Company’s internal audit function and independent auditor. The Audit Committee’s primary responsibilities include:

 

 

The Audit Committee’s responsibilities and key practices are more fully described in its written charter. A report of the Audit Committee appears on page 57 of this Proxy Statement.

Compensation and Option Committee

 

The Compensation and Option Committee currently consists of Mr. Meyer (Chairman), Mr. Carroll and Ms. Korologos. During fiscal 2008, the Compensation and Option Committee held seven meetings. Each member of the Compensation and Option Committee is independent under the New York Stock Exchange listing standards.

 

The Compensation and Option Committee assists the Board in overseeing executive compensation and administers the Company’s executive bonus, option and incentive, deferred compensation and retirement plans. The Compensation and Option Committee’s primary responsibilities include:

 

 

The Compensation and Option Committee’s responsibilities and key practices are discussed more fully in its charter. A report of the Compensation and Option Committee appears on page 57 of this Proxy Statement.

 

Nominating and Governance Committee

 

The Nominating and Governance Committee currently consists of Ms. Korologos (Chairwoman), Mr. Meyer and Mr. Steel. During fiscal 2008, the Nominating and Governance Committee held seven meetings. Each member of the Nominating and Governance Committee is independent under the New York Stock Exchange listing standards.

 

The Nominating and Governance Committee assists the Board in carrying out its oversight responsibilities relating to the composition of the Board and certain corporate governance matters. The Nominating and Governance Committee’s primary responsibilities include considering and making recommendations to the Board with respect to:

 

 

The Nominating and Governance Committee’s responsibilities and key practices are more fully described in its charter.

Director Nominees

 

The Nominating and Governance Committee utilizes a variety of methods for identifying and evaluating director nominees. The Committee may consider candidates recommended by the Company’s directors, members of management, professional search firms or stockholders. These candidates may be considered at any point during the year.

 

Qualifications

 

In evaluating nominees for election as a director, the Nominating and Governance Committee considers a number of factors, including the following:

 

 

The Nominating and Governance Committee will also consider other criteria for director candidates included in the Company’s Corporate Governance Guidelines or as may be established from time to time by the Board.

 

Stockholder Recommendations

 

The Nominating and Governance Committee will evaluate director candidates recommended by a stockholder in the same manner as candidates otherwise identified by the Nominating and Governance Committee. The Company has never received any recommendations for director candidates from stockholders. In considering director candidates recommended by stockholders, the Nominating and Governance Committee will also take into account such factors as it considers relevant, including the length of time that the submitting stockholder has been a stockholder of the Company and the aggregate amount of the submitting stockholder’s investment in the Company.

Stockholders may recommend candidates at any time, but to be considered by the Nominating and Governance Committee for inclusion in the Company’s proxy statement for the next annual meeting of stockholders, recommendations must be submitted in writing no later than 120 days before the first anniversary of the date the proxy statement was mailed to stockholders in connection with the previous year’s annual meeting. A stockholder’s notice must contain the following:

 

 

The stockholder’s notice must be signed by the stockholder recommending the director candidate for consideration and sent to the following address: Harman International Industries, Incorporated, 400 Atlantic Street, Suite 1500, Stamford, Connecticut 06901, Attn: Corporate Secretary (Nominating and Governance Committee Communication / Director Candidate Recommendation).

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview

 

Decisions with respect to compensation for our executive officers are made by the Compensation and Option Committee of the Board. The following discussion and analysis are focused on the compensation for our executive officers during fiscal 2008, with additional detail provided for our named executive officers listed in the Summary Compensation Table on page 33 of this Proxy Statement.

 

Executive Compensation Program Objectives

 

The Company’s executive compensation program is intended to attract, retain and motivate the key people necessary to lead the Company to achieve its strategic objective of increased stockholder value over the long term, reflecting the Compensation and Option Committee’s belief that executive compensation should seek to align the interests of the Company’s executives with those of our stockholders. In establishing compensation, the committee seeks to provide our executive officers with a competitive total compensation package.

 

Compensation and Option Committee

 

Our executive compensation program is designed and implemented under the direction of our Compensation and Option Committee, which is comprised solely of independent directors. The committee is authorized to retain advisors with respect to compensation matters. The committee periodically consults with outside advisors, and uses survey data provided by compensation consultants, in connection with its decisions with respect to executive compensation matters.

 

Executive Compensation Programs and Policies

 

The components of our executive compensation program provide for a combination of fixed and variable compensation. As described in more detail below, these components are:

 

 

Base Salary

 

The base salary for each of our executive officers represents the fixed portion of their total compensation. Base salaries are determined on the basis of management responsibilities, level of experience and tenure with our Company, as well as internal and market comparisons, including surveys furnished from time to time by outside compensation consulting firms concerning practices of other companies, primarily companies engaged in electronics and manufacturing industries, with revenues comparable to the Company. In setting base salaries for executive officers, the committee seeks to provide a reasonable level of fixed compensation that is competitive with base salaries for comparable positions at similar companies.

At the request of the committee, Mr. Paliwal, our Chief Executive Officer, makes annual recommendations with respect to changes in base salary for our executive officers. Neither Mr. Paliwal nor any other executive officer participates in the committee’s decisions regarding the base salaries of our executive officers.

 

Annual Incentive Compensation

 

The Company maintains annual incentive compensation programs for its executive officers and other key employees that provide for awards in the form of cash bonuses.

 

The Company’s 2007 Key Executive Officers Bonus Plan (the “2007 Plan”) is an annual incentive program for the Company’s most senior executive officers. Awards payable under the 2007 Plan are intended to qualify as “performance-based compensation” for federal income tax purposes. Under the 2007 Plan, the Company’s Chief Executive Officer and any other executive officer designated by the committee are eligible to receive awards. In fiscal 2008, the committee established a return on stockholder equity goal for the fiscal year and a maximum cash award payable to each plan participant if that goal was met. Annual cash awards payable to any plan participant under the 2007 Plan cannot exceed $3 million. The committee maintains discretion under the 2007 Plan to decrease the amount paid to any participant in the 2007 Plan.

 

You are being asked to approve the 2008 Key Executive Officers Bonus Plan (the “2008 Plan”) which amends and restates the 2007 Plan. The 2008 Plan will, among other things, add performance measures that are consistent with those under the Management Incentive Compensation Plan (the “MIC Plan”) as described below. If the 2008 Plan is not approved, no awards under the 2008 Plan will be made and the 2007 Plan will continue in effect under its current terms.

 

The Company also maintains the MIC Plan for executive officers, as well as other key employees. Under the MIC Plan, executive officers are eligible to receive a cash bonus expressed as a percentage of base salary. The bonus award payable to any plan participant can range from zero to 100% of the plan participant’s annual base salary. In order to receive an award under the MIC Plan, the Company or executive’s business unit must achieve preestablished performance targets. Subject to the committee’s discretion, the performance metrics are revenue growth, operating income, free cash flow and a global footprint index comprised of three components based on capital expenditures, full-time equivalent employees and material purchases. The targets for each metric are established by reference to the Company’s internal business plan. Based on the achievement of these targets after completion of the fiscal year, a preliminary value is determined in a range from 50% to 150% of the target award. Plan participants are then evaluated based upon performance against individual objectives. Performance against these objectives results in a multiplier from zero to 120% of the preliminary value determined based on Company or business unit performance. The committee retains the authority to award discretionary cash bonuses to executives who participate in the MIC Plan under circumstances in which the performance targets are not met in a fiscal year.

 

Under Mr. Paliwal’s letter agreement, his target annual incentive award is 150% of his annual base salary, with a maximum award of 200% of his base salary. For fiscal 2008, under his letter agreement Mr. Paliwal was entitled to a minimum award of 150% of his base salary. Beginning in fiscal 2009, the award can range from zero to 200% of his base salary, based on achievement of the same Company-wide performance measures established under the MIC Plan for the applicable fiscal year and Mr. Paliwal’s individual performance.

 

The Compensation and Option Committee believes annual incentive compensation is a key element of the total compensation of each executive officer. The committee also believes that as an executive progresses to greater levels of responsibility within the Company, the annual incentive

award opportunity should represent an increasing portion of the executive’s potential annual compensation. Further, the committee believes that conditioning a significant portion of executive compensation on the Company’s results and individual performance appropriately motivates executives to achieve the Company’s financial and other objectives thereby enhancing stockholder value, and also assists the Company in attracting and retaining executive officers and other key employees.

 

Long-Term Incentive Compensation

 

Under his letter agreement, Mr. Paliwal has the ability to earn a special bonus in November 2012 based on a comparison of the Company’s enterprise value over a five-year period. The amount of the special bonus is up to $75 million. No bonus will be paid if the Company’s enterprise value at the end of the measurement period is less than 1.3 times the Company’s enterprise value on November 9, 2007. The Compensation and Option Committee believed this award was a key element of the total compensation of Mr. Paliwal. The committee also believed the award aligned Mr. Paliwal’s interests with those of our stockholders and created a long-term incentive for future performance. See “Executive Compensation — Grants of Plan-Based Awards” on page 36 of this Proxy Statement for additional information regarding this award.

 

Long-Term Equity Incentive Compensation

 

The Company’s equity incentive plans are administered by the Compensation and Option Committee and are designed to provide incentive compensation to executive officers and other key employees, in the form of stock options, restricted shares and restricted share units. The grants are designed to align the interests of management with those of our stockholders and are intended as a long-term incentive for future performance.

 

Historically, the committee considered equity awards for the Company’s most senior executive officers annually and equity awards to other executive officers and key employees every 18 months. In fiscal 2008, all stock option awards under these equity incentive plans were granted at an exercise price equal to the market price of the Common Stock on the date of grant. The option awards generally vested over five years commencing one year from the date of grant and expire after ten years. In addition, the committee granted performance-based option awards to certain executive officers in February 2008. A substantial majority of the option grants that have been awarded to executive officers under the Company’s equity incentive plans are “non-qualified” stock options, thereby providing the Company with the ability to realize tax benefits upon the exercise of these option awards. Awards of restricted shares and restricted share units granted under the plans are subject to forfeiture for a period of at least three years. The committee views equity awards under the equity incentive plans or outside these plans as an additional means to attract management and to encourage management retention.

 

When making equity-based incentive awards, the committee takes into consideration the dates on which the Company expects to make public announcements regarding earnings as well as other events or circumstances that have not been publicly announced that may be deemed material to the Company, our stockholders and other investors.

 

The committee intends to make appropriate executive compensation decisions so that our executives receive a total compensation package that is competitive and has a significant component that is at risk. The increase in the value of equity awards is directly linked to an increase in stockholder return, subject to continued employment by the executives with respect to unvested equity awards. The committee believes, as a general matter, that this positive result should not negatively impact future compensation decisions.

Severance and Change-in-Control Arrangements

 

Under the terms of the Company’s equity incentive plans and the related award agreements, unvested stock options, restricted shares and restricted share unit awards become fully vested upon a change in control of the Company.

 

The Company has severance agreements with Mr. Paliwal and Herbert Parker, the Company’s Chief Financial Officer. These agreements provide for severance benefits in the event of a termination of employment under specified circumstances following a change in control of the Company. These agreements provide for additional “gross up” payments to these executives for excise taxes, if applicable. The excise tax gross up payments are intended to make these executives whole for any adverse tax consequences they may become subject to under the federal tax laws and to preserve the level of severance deemed to be appropriate under the terms of these agreements and the Company’s other compensation programs. The Company believes that these provisions are a reasonable part of the compensation package for these executives and consistent with the practice of many other public companies.

 

The Company also has employment agreements with Mr. Paliwal, Mr. Parker, Helmut Schinagel and other executive officers. The provisions of the agreements with Mr. Paliwal and Mr. Parker provide, among other things, for severance compensation if the executive officer is terminated without cause or leaves for good reason, whether or not a change in control is involved. Mr. Schinagel is the Company’s Chief Technology Officer and is based in Germany. Employment agreements with executives are customary in Germany and many other countries outside the United States. Among other things, his agreement provides for severance benefits upon termination of employment under certain circumstances.

 

These agreements are described in more detail under the captions “Executive Compensation — Grants of Plan-Based Awards — Employment Agreements” and “Executive Compensation — Severance and Change in Control Benefits — Severance and Employment Agreements” on pages 38 and 43 of this Proxy Statement. The committee believes that these benefits are necessary and appropriate in order to attract and retain qualified senior executives.

 

Employee Benefits

 

The Company provides certain executive officers with supplemental retirement, termination and death benefits under the Company’s Supplemental Executive Retirement Plan. Each of Dr. Geiger and Mr. Schinagel is entitled to pension and related benefits under the terms of his employment agreement. As described above, these differences in retirement benefits derive from their employment in Germany, where substantially all of the Company’s employees participate in a defined benefit pension program. The Company also provides its executive officers employed in the United States with the opportunity to participate in a deferred compensation plan. These plans are described under the captions “Executive Compensation — Pension Benefits — Supplemental Executive Retirement Plan” and “Executive Compensation — Nonqualified Deferred Compensation” on pages 41 and 42 of this Proxy Statement.

 

The Company’s executive officers are also eligible to participate in other company-sponsored benefit plans available to employees generally, including medical and life insurance. Employees, including executive officers, that are employed in the United States are eligible to participate in a company-sponsored 401(k) defined contribution plan.

 

The Compensation and Option Committee believes that these benefits are necessary and appropriate in order to attract and retain qualified executive officers insofar as these benefits are generally made available by similarly situated companies.

Executive Perquisites

 

The Company provides executive officers with certain perquisites that have historically been provided and that the committee believes enhance our ability to attract and retain qualified executives. These perquisites include the use of Company owned or leased cars and reimbursement of car-related expenses. These cars use infotainment systems and other products designed and manufactured by the Company and permit these executives to experience and evaluate these products. In addition, on occasion, the spouses of our executives travel with them to attend business-related functions.

 

The Company has a fractional ownership interest in a corporate aircraft for use by management for business purposes. The committee believes that the use of corporate aircraft enables executives to devote maximum time and attention to the Company’s business and enhances their productivity and availability while traveling. In fiscal 2008, consistent with past practice, the Board also authorized the use of this aircraft for non-business use by the Company’s former Executive Chairman, prior to his retirement. Going forward, the Company will no longer permit non-business use of the aircraft.

 

As Executive Chairman, the Company provided Dr. Harman with an assistant, who also provided him with non-business related services. The Company estimated the portion of those services that were not directly related to Company business and reported that portion of this employee’s salary and benefits as compensation to Dr. Harman. As a result of Dr. Harman’s retirement, the Company ceased providing him with this benefit and did not transfer the benefit to Mr. Paliwal, the current Chairman and Chief Executive Officer.

 

The committee has determined it is appropriate to provide these perquisites in order to attract and retain our executive officers by offering compensation opportunities that are competitive with those offered by similarly situated public companies. In determining the total compensation payable to our executive officers, the committee considers perquisites in the context of the total compensation which our executive officers are eligible to receive. However, given the fact that perquisites represent a relatively small portion of the executive’s total compensation, the availability of these perquisites does not materially influence the decisions made by the committee with respect to other elements of the total compensation to which the Company’s executive officers are entitled or awarded. For a description of the perquisites received by our named executive officers during fiscal 2008, see the information under the caption “Executive Compensation — Summary Compensation Table — All Other Compensation” on page 35 of this Proxy Statement.

 

Stock Ownership Guidelines

 

The Compensation and Option Committee encourages ownership of Common Stock by our executive officers and other key employees, including through awards under our equity incentive compensation plans. The Company does not currently have a policy that requires our executives to own a specific number of shares, or dollar amount, of Common Stock, nor do we require our executives to retain any specific percentage of shares received upon exercise of options or upon vesting of any restricted shares. However, the committee is considering adopting a formal policy regarding the executive officers’ ownership of Common Stock that would take effect in fiscal 2009.

Internal Revenue Code Section 162(m)

 

As applicable to the Company, Section 162(m) of the Internal Revenue Code provides that compensation in excess of $1 million paid to the chief executive officer or to any of the other three most highly compensated executive officers (not including the chief financial officer) of a public company is not deductible for federal income tax purposes unless the compensation qualifies as “performance-based compensation” under Section 162(m). Bonus awards under our 2007 Plan and 2008 Plan and option grants and certain other awards under our equity incentive plans, are intended to qualify as performance-based compensation under Section 162(m). The committee reviews on an annual basis the potential impact of this deduction limitation on executive compensation. The committee intends to continue to evaluate the Company’s potential exposure to this deduction limitation.

 

Fiscal 2008 Compensation

 

Base Salary

 

In September 2007, the Compensation and Option Committee considered changes to the base salaries for our executive officers for fiscal 2008. The base salaries for Mr. Paliwal, Dr. Geiger and Mr. Schinagel were established by the terms of their respective employment agreements with the Company. Mr. Paliwal recommended to the committee that the base salaries of all other named executive officers remain unchanged. The committee accepted this recommendation.

 

In January 2008, upon Mr. Paliwal’s recommendation, the committee reconsidered the base salary of Blake Augsburger, President of the Company’s Professional division, in connection with his appointment to the additional position of U.S. Country Manager. The committee increased Mr. Augsburger’s salary from $395,000 to $425,000. In addition, Mr. Parker’s base salary was set in his employment agreement when he joined the Company.

 

Fiscal 2008 Annual Incentive Compensation Awards

 

For fiscal 2008, the committee designated Mr. Paliwal, Dr. Harman, Mr. Brown and Dr. Geiger as participants in the 2007 Plan, set the return on stockholder equity goal at 10% and set the maximum award for each participant at $2 million. At its meeting in September 2008, the committee determined that the return on stockholder equity goal had not been met. As a result, no awards were paid under the 2007 Plan.

 

In December 2007, the committee approved Mr. Paliwal’s target annual incentive award provided for in his letter agreement and the target awards for the executive officers who are participants in the MIC Plan. The target awards were set at a percentage of base salary. At the same time, the committee approved the performance measures and goals for the awards. The awards were subject to the Company achieving levels of performance for the following metrics:

 

 

 

The following table sets forth the threshold, target and maximum levels of performance, the weights of each performance metric and actual performance for each of these metrics in fiscal 2008.

 

 

The following table sets forth the target awards and actual payouts, each as a percentage of base salary, for Mr. Paliwal and the executive officers who were participants in the MIC Plan for fiscal 2008.

 

 

 

Sandra Robinson resigned from her executive officer position in November 2007. Under a letter agreement, Ms. Robinson’s annual incentive award for fiscal 2008 was fixed at $115,000.

 

Mr. Parker joined the Company in June 2008 and was not eligible for an annual incentive award for fiscal 2008. Dr. Harman retired in December 2007. As a result, he was not eligible to receive an annual incentive award for fiscal 2008.

 

In addition, in fiscal 2008, Mr. Paliwal received a one-time cash bonus of $1,200,000 in connection with his joining the Company and an additional one-time bonus of $350,000 in connection with an amendment to his employment agreement in November 2007.

Fiscal 2008 Equity Awards

 

During fiscal 2008, the Compensation and Option Committee approved equity awards to each of Mr. Paliwal and Mr. Parker in connection with his joining the Company. Mr. Paliwal received grants of stock options, restricted shares and restricted share units under his employment agreement. In addition, the committee approved additional grants to Mr. Paliwal of stock options in October 2007 and restricted share units in January 2008 in connection with an amendment to his employment agreement in November 2007. A portion of his initial awards and the January 2008 awards were intended to compensate Mr. Paliwal for awards he forfeited in connection with leaving his former employer to join the Company. Mr. Parker received grants of stock options and restricted shares.

 

In February 2008, the Compensation and Option Committee approved performance-based stock option grants to Dr. Geiger and Mr. Augsburger along with other key employees. The number of stock options that will vest is determined by performance measures over a three-year period. The committee decided to grant these performance-based awards to align payout with the achievement of long-term performance goals. To determine the number of stock options that will vest, the Company’s total stockholder return (“Company TSR”) will be compared to the total stockholder return of a peer group (“Peer TSR”) over a three-year period beginning on the date of grant (the “Performance Period”). The stock options will be cancelled if the Company TSR over the Performance Period is negative, or if the Company TSR is below the 50th percentile of the Peer TSR. If the Company TSR ranks at the 50th percentile of the Peer TSR, 33% of the stock options will vest. If the Company TSR ranks at or above the 75th percentile of the Peer TSR, 100% of the stock options will vest. If the Company TSR ranks between the 50th percentile and the 75th percentile of the Peer TSR, the number of stock options that vest will be determined by straight-line interpolation between 33% and 100%. See “Proposal No. 2 Approval of Amendments to the 2002 Stock Option and Incentive Plan — Incentive Plan Benefits” on page 12 of this Proxy Statement.

 

The awards made to our named executive officers are described in more detail under the captions “Executive Compensation — Grants of Plan-Based Awards” and “Executive Compensation — Outstanding Equity Awards at Fiscal Year-End” on pages 36 and 39 of this Proxy Statement.

 

For additional information regarding the compensation received by our named executive officers in fiscal 2008, see the information under the caption “Executive Compensation — Summary Compensation Table” on page 33 of this Proxy Statement.

 

Recent Changes in Compensation

 

In July 2008, the committee approved changes to the Company’s executive compensation policies and programs that will take effect in fiscal 2009. The changes were approved after the committee received advice from Executive Compensation Advisors (“ECA”), which was engaged by the committee earlier in 2008 to review the Company’s executive compensation program. In advising the committee, ECA provided a comparative analysis of a peer group of companies for base salary, annual incentive compensation, long-term equity incentive compensation and Mr. Paliwal’s long-term incentive compensation. The changes adopted by the committee include (a) annual incentive awards for executive officers will generally be based on the same performance measures, consistent with the measures currently provided for under the MIC Plan, (b) long-term equity grants that generally consisted of 100% stock options will now consist of 50% stock options, 25% time-vested restricted share units and 25% performance-based restricted share units, (c) stock

options will vest ratably over three years rather than five years and (d) the time period between grants for all executive officers will be 12 months. In addition, the committee is also considering approving grants to Mr. Paliwal under the Incentive Plan to replace the long-term cash incentive award he is entitled to under the November 2007 amendment to his letter agreement. The committee is also considering adjusting the enterprise value performance levels at which the award would be payable, based on a $43 stock price. The committee believes replacing Mr. Paliwal’s cash award with a performance-based equity award will further align Mr. Paliwal’s interests with those of our stockholders, will be more tax efficient and will simplify accounting treatment of the award.

 

The committee approved these changes to ensure the Company’s executive compensation program remains competitive and consistent with current practices at comparable companies. The committee also believes these changes will better align the interests of executive officers with the interests of Company stockholders.

 

In September 2008, the committee approved base salaries, target annual incentive awards and long-term equity grants for the Company’s executive officers. ECA provided the committee with further benchmarking analysis, based on data from independent sources, of base salaries and similar types of awards for executive officers at the Company’s peer group. The committee determined to maintain base salaries for all executive officers at fiscal 2008 levels. The committee also approved the following annual incentive and long-term equity awards, consistent with the changes described above:

 

 

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table discloses all compensation earned for fiscal 2008 by our Chairman and Chief Executive Officer, our former Executive Chairman, the individuals who served as our Chief Financial Officer during fiscal 2008, the three other most highly paid executive officers who were employed by the Company as of June 30, 2008, and a former executive officer. We refer to these individuals as our “named executive officers.”

 

All Other Compensation

 

The following table provides information regarding each component of compensation included in the All Other Compensation column in the Summary Compensation Table.

 

 

 

Grants of Plan-Based Awards

 

The following table shows all plan-based awards granted to the named executive officers in fiscal 2008.

 

 

Employment Agreements

 

Mr. Paliwal serves as Chairman and Chief Executive Officer pursuant to a letter agreement with the Company. The letter agreement provides for an annual base salary of no less than $1,125,000 and a maximum annual incentive award of 200% of his base salary. In addition, Mr. Paliwal is eligible to receive an annual equity grant equal to two times his annual incentive award for the immediately preceding fiscal year. Mr. Paliwal also received a one-time cash bonus of $1,200,000 in connection with joining the Company and an additional one-time cash payment of $350,000 in connection with an amendment to his letter agreement in November 2007 to offset the awards he forfeited in connection with leaving his former employer to join the Company. In connection with this amendment, Mr. Paliwal also received a special bonus, the terms of which are described above in the Grants of Plan-Based Awards table. Mr. Paliwal is also permitted to participate in the Company’s employee benefit plans and programs. For a description of severance compensation payable to Mr. Paliwal under this agreement and his severance agreement, see “— Severance and Change in Control Benefits — Severance and Employment Agreements” on page 43 of this Proxy Statement.

 

Mr. Parker serves as Executive Vice President and Chief Financial Officer pursuant to a letter agreement with the Company. Under the terms of the letter agreement, Mr. Parker is entitled to an annual base salary of no less than $500,000 and will be eligible to earn an annual incentive award up to 90% of his annual base salary. Mr. Parker also is entitled to participate in the Company’s employee benefit plans and programs. For a description of severance compensation payable to Mr. Parker under this agreement and his severance agreement, see “— Severance and Change in Control Benefits — Severance and Employment Agreements” on page 43 of this Proxy Statement.

 

Mr. Schinagel serves as Executive Vice President and Chief Technology Officer pursuant to an employment agreement with the Company. The agreement provides for an annual base salary of €650,000. Additionally, Mr. Schinagel is eligible to earn a target bonus equal to 70% of his base salary and a maximum bonus of 105% of his base salary. Mr. Schinagel is also entitled to a retirement benefit of annual pension payments equal to 12.5% of his average base salary while working for us, subject to a 2.5% annual increase for each year of service Mr. Schinagel has been with us beyond five years, up to a maximum of 30% of his base salary. The pension benefit Mr. Schinagel is entitled to under his employment agreement will be reduced by any pension benefit he is entitled to from previous employers. The employment agreement may be terminated by us or Mr. Schinagel for any reason upon six months’ notice. However, any termination without cause will not be effective until September 30, 2011, and Mr. Schinagel would remain entitled to his base salary and benefits until such time.

 

Prior to his retirement on August 31, 2008, Dr. Geiger served as Executive Vice President, Chief Strategy Officer and Chief Technology Officer pursuant to an employment agreement with the Company. The agreement provided for an annual base salary of $1,000,000 and a target bonus of 100% of his salary based on certain performance parameters established annually by us. The agreement also provided that Dr. Geiger was eligible to participate in our Deferred Compensation Plan and that we would maintain Dr. Geiger’s life insurance policy and provide disability and death benefits to him. Dr. Geiger remains entitled to an annual pension benefit equal to the greater of $988,755 or 50% of the average of his highest five consecutive years of eligible salary and incentive compensation plan bonus (after taking into consideration pension benefits he has earned under a prior employment agreement with a subsidiary of the Company). The employment agreement terminated on August 31, 2008, upon Dr. Geiger’s retirement. On January 15, 2007, we entered into a consulting agreement with Dr. Geiger which became effective upon his retirement and terminates in August 2011. Under this agreement, Dr. Geiger will be entitled to $40,000 for each month he provides consulting services to us.

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table provides information regarding stock options, restricted shares and restricted share units held by the named executive officers that were outstanding at June 30, 2008.

 

 

 

 

Option Exercises and Stock Vested

 

The following table provides information regarding the acquisition of Common Stock by the named executive officers upon the exercise of stock options and vesting of restricted shares and restricted share units during fiscal 2008.

 

 

 

Pension Benefits

 

The following table provides information for the named executive officers regarding the present value of benefits as of June 30, 2008 and payments during fiscal 2008 under our Supplemental Executive Retirement Plan (“Supplemental Plan”), and employment agreements with Dr. Geiger and Mr. Schinagel.

 

 

 

Supplemental Executive Retirement Plan

 

The Supplemental Plan provides supplemental retirement, termination and death benefits to certain executive officers and key employees designated by the Board. Benefits under the Supplemental Plan payable upon termination or death are described under the caption “— Severance and Change in Control Benefits — Supplemental Executive Retirement Plan” on page 46 of this Proxy Statement. The Compensation and Option Committee administers the Supplemental Plan. Each of the named executive officers, other than Mr. Parker, Dr. Geiger and Mr. Schinagel, has been designated as a participant. All Supplemental Plan benefits are subject to deductions for Social Security and federal, state and local taxes.

 

Retirement benefits are based on the average of the participant’s highest cash compensation (base salary and bonus) during any five consecutive years of employment by the Company (“Average Cash Compensation”). Participants retiring at age 65 or older receive an annual retirement benefit equal to either (a) 31/3% of Average Cash Compensation per year of service up to a maximum of 50%, or (b) 2% of Average Cash Compensation per year of service up to a maximum of 30%, as designated by the Company. Each of Mr. Paliwal, Dr. Harman, Mr. Brown and Ms. Robinson has been designated as a participant entitled to receive an annual retirement benefit of up to 50% of Average Cash Compensation, and Mr. Augsburger has been designated as a participant entitled to receive an annual retirement benefit of up to 30% of Average Cash Compensation. Unless another form of payment is approved by the administrative committee for the Supplemental Plan,

benefits are payable monthly in the form of a life annuity. If the participant dies after benefits have commenced but prior to receiving 10 years of benefits, they are paid to the participant’s beneficiary for the remainder of that period.

 

Other Retirement Benefits

 

Dr. Geiger is entitled to receive an annual pension benefit under his former employment agreement with the Company equal to the greater of $988,755 or 50% of the average of his highest five consecutive years of eligible salary and incentive compensation plan bonus (after taking into consideration pension benefits he has earned under a prior employment agreement with a subsidiary of the Company).

 

Mr. Schinagel is entitled to receive an annual pension benefit pursuant to his employment agreement with the Company equal to 12.5% of his average base salary during his time of service with the Company. This benefit will be increased by 2.5% for each year Mr. Schinagel is employed by the Company beyond five years, up to a maximum of 30%. Mr. Schinagel is entitled to this pension benefit once he reaches age 60 and is no longer employed by the Company; provided, however, that if Mr. Schinagel is terminated for good cause as determined by the German Civil Code on or before October 2, 2011, he will not be entitled to any pension benefit from the Company. Mr. Schinagel’s annual pension benefit will be reduced by any other pension benefits he is entitled to from previous employers.

 

Nonqualified Deferred Compensation

 

Our Deferred Compensation Plan provides supplemental retirement benefits for executive officers designated by the Compensation and Option Committee. Prior to the beginning of each fiscal year, each plan participant may elect to defer up to 100% of his or her annual base salary and bonus on a pre-tax basis to a deferral account. These amounts are always fully vested and subject to a 10% penalty on any unscheduled withdrawals. We may decide to make contributions on a pre-tax basis to a plan participant’s account, subject to a vesting schedule. In the event of a change in control of the Company, any unvested amounts vest immediately and the Company indemnifies the plan participant for any expense incurred in enforcing his or her rights under the Deferred Compensation Plan.

 

Plan participants specify that portion of their accounts to be deemed invested in designated benchmark funds. This may be changed once in any calendar month by the plan participant. The Company credits earnings to the accounts based on the rate of return of the designated funds. For fiscal 2008, the designated funds produced returns ranging from (26.54)% to 7.36%. Upon retirement or termination of employment other than due to death, plan participants may receive their account balances in the form of a lump-sum payment or in annual installments. In the event of death prior to the commencement of benefits or during payment of installments, the balances in a plan participant’s vested accounts as of the date of death are payable to the plan participant’s beneficiaries.

The following table provides information for the named executive officers regarding contributions and earnings during fiscal 2008 and balances as of June 30, 2008, for our Deferred Compensation Plan.