Polaris Industries Inc.

2100 Highway 55

Medina, Minnesota 55340

763-542-0500

Fax: 763-542-0599

 

March 10, 2011

 

Dear Fellow Shareholder:

 

The Board of Directors of Polaris Industries Inc. joins me in extending a cordial invitation to attend our 2011 Annual Meeting of Shareholders which will be held at our corporate headquarters, 2100 Highway 55, Medina, Minnesota, 55340, on Thursday, April 28, 2011 at 9:00 a.m. local time.

 

In addition to voting on the matters described in the accompanying Notice of Annual Meeting and Proxy Statement, we will review Polaris’ 2010 business and discuss our direction for the coming years. There will also be an opportunity, after conclusion of the formal business of the meeting, to discuss other matters of interest to you as a shareholder.

 

Again this year, we will be using the “Notice and Access” method of furnishing proxy materials to you over the Internet. We believe that this process will provide you with a convenient and quick way to access your proxy materials and vote your shares, while allowing us to reduce the environmental impact of our annual meeting and the costs of printing and distributing the proxy materials. On or about March 10, 2011 we will mail to many of our shareholders a Notice of Internet Availability of Proxy Materials containing instructions on how to access our proxy statement and annual report and vote electronically over the Internet. The Notice also contains instructions on how to receive a paper copy of your proxy materials. We will not be mailing the Notice to shareholders who previously elected to receive paper copies of the proxy materials, but rather will mail them a full set of the proxy materials.

 

It is important that your shares be represented at the meeting whether or not you plan to attend in person. Please vote electronically over the Internet or, if you receive a paper copy of the proxy card by mail, by telephone or by returning your signed proxy card in the envelope provided. If you do attend the meeting and desire to vote in person, you may do so by following the procedures described in the Proxy Statement even though you have previously sent a proxy.

 

We hope that you will be able to attend the meeting and we look forward to seeing you.

 

Sincerely,

 

 

Gregory R. Palen
Chairman of the Board

 

Enclosures

 

POLARIS INDUSTRIES INC.
2100 Highway 55
Medina, Minnesota 55340
March 10, 2011

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

Polaris Industries Inc. will hold its 2011 Annual Meeting of Shareholders at its corporate headquarters located at 2100 Highway 55, Medina, Minnesota, 55340, on Thursday, April 28, 2011. The meeting will begin at 9:00 a.m. local time. The proxy materials were either made available to you over the Internet or mailed to you beginning on or about March 10, 2011. At the meeting, our shareholders will:

 

1. Elect four Class II directors for three-year terms ending in 2014.

 

2. Vote on the approval of the Amended and Restated 2007 Omnibus Incentive Plan.

 

3. Vote on the approval of the material terms of the Amended Long Term Incentive Plan.

 

4. Vote on ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2011.

 

5. Submit an advisory vote on approval of the compensation of our Named Executive Officers (as defined in the accompanying Proxy Statement).

 

6. Submit an advisory vote on whether future votes to approve the compensation of our Named Executive Officers should occur every one, two or three years.

 

7. Act on any other matters that may properly come before the meeting.

 

The Board recommends that shareholders vote FOR each of the following:

 

1. The director nominees named in the accompanying Proxy Statement.

 

2. The approval of the Amended and Restated 2007 Omnibus Incentive Plan.

 

3. The approval of the material terms of the Amended Long Term Incentive Plan.

 

4. The ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2011.

 

5. The advisory vote to approve the compensation of our Named Executive Officers.

 

The Board recommends that shareholders vote that future votes to approve the compensation of our Named Executive Officers should occur every three years; however, shareholders are not voting to approve or disapprove the Board’s recommendation on this matter and may vote for any of the available choices on the matter.

 

Only shareholders of record at the close of business on February 28, 2011 may vote at the Annual Meeting or any adjournment thereof.

 

By Order of the Board of Directors

 

Stacy L. Bogart
Vice President-General Counsel and Secretary

 

YOUR VOTE IS IMPORTANT

 

Whether or not you plan to attend the meeting, we urge you to vote as soon as possible via the Internet as described in the Notice. If you received a copy of the proxy card by mail, you may vote by Internet or telephone as instructed on the proxy card, or you may sign, date and mail the proxy card in the envelope provided.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2011 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 28, 2011.

 

Our Proxy Statement for the 2011 Annual Meeting of Shareholders, our Annual Report to Shareholders for the fiscal year ended December 31, 2010 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 are available at www.proxydocs.com/pii.

 

TABLE OF CONTENTS

 

 

POLARIS INDUSTRIES INC.
2100 Highway 55
Medina, Minnesota 55340

PROXY STATEMENT

 

 

 

 

 

 

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of February 16, 2011 by each person known to us who then beneficially owned more than 5% of the outstanding shares of common stock, each director, each nominee for director, each Named Executive Officer named in the Summary Compensation Table appearing below and all current executive officers and directors as a group. As of February 16, 2011, there were 34,097,865 shares of common stock outstanding. Except as otherwise indicated, the named beneficial owner has sole voting and investment powers with respect to the shares held by such beneficial owner. The table also includes information with respect to common stock equivalents credited as of February 16, 2011 to the accounts of each director under our Deferred Compensation Plan for Directors that is described in this Proxy Statement under the heading “Director Compensation.”

 

 

 

 

 

Since 2002, when Mr. Palen was elected Chairman, we have separated the roles of Chairman of the Board and Chief Executive Officer (the “CEO”) of our company. Although the separation of roles has been appropriate for the company during that time period, in the view of the Board, the advisability of the separation of these roles depends upon the specific circumstances and dynamics of our leadership. Separation of the two offices is not mandated by our Corporate Governance Guidelines.

 

As non-executive Chairman of the Board, Mr. Palen serves as the primary liaison between the CEO and the independent directors and provides strategic input and counseling to the CEO. With input from other members of the Board, committee chairs and management, he develops the agenda for Board meetings, sets meeting schedules of the Board and presides over meetings of the Board and executive sessions of the independent directors. Mr. Palen directs the Board and CEO evaluation processes. As a Board member for over 15 years, Mr. Palen has developed an extensive knowledge of our company, its challenges and opportunities and has a productive working relationship with our senior management team.

 

The Board, as a unified body and through committee participation, organizes the execution of its monitoring and oversight roles and does not expect the Chairman to organize those functions. Our primary rationale for separating the positions of Board Chairman and the CEO is the recognition of the time commitments and activities required to function effectively as Chairman and as the CEO of a company with a relatively flat management structure. The separation of roles has also permitted the Board to recruit senior executives into the CEO position with skills and experience that meet the Board’s planning for the position who may not have extensive public company board experience.

 

Our Audit Committee is primarily responsible for reviewing and discussing with management on a regular basis our major financial risk exposures and the steps management has taken to monitor and control such exposures, including management’s guidelines and policies with respect to risk assessment and risk management. In some instances, when the Board deems it appropriate, responsibility of oversight of a specific risk is assigned to another of the Board’s committees.

 

We engage in an Enterprise Risk Management (“ERM”) process. The ERM process consists of periodic risk assessments performed by various functional management groups during the year. Executive management reviews the risk assessments and presents these assessments to the Audit Committee at least twice per year to ensure completeness of the process, appropriate oversight and review of the risks and risk assessments. In addition, the Audit Committee reports regularly to the full Board, which also considers our risk profile. While our management is responsible for day-to-day risk management identification and mitigation, the Board, directly and through its committees, oversees the execution of such process. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.

 

In consultation with other members of Board, the Corporate Governance and Nominating Committee is responsible for identifying individuals who it considers qualified to become Board members. In considering whether to recommend an individual for election to the Board, the Corporate Governance and Nominating Committee considers, as required by its charter, the Board’s overall balance of diversity of perspectives, backgrounds and experiences, although it does not have a formal policy regarding the consideration of diversity of Board members. The Corporate Governance and Nominating Committee views diversity expansively and considers among other things, functional areas of experience, educational background, employment experience and leadership performance as well as those intangible factors that it deems appropriate to develop a heterogeneous and cohesive Board such as integrity, achievements, judgment, intelligence, personal character, the interplay of the candidate’s relevant experience with the experience of other Board members, the willingness of the candidate to

devote adequate time to Board duties, and likelihood that he or she will be willing and able to serve on the Board for a sustained period.

 

Our Board and each of its committees engage in an annual self-evaluation process. As part of that process, directors, including the CEO, provide feedback on, among other things, whether the Board is meeting its diversity objectives and how the composition of the Board should be changed or supplemented in order to enhance its value to our company and shareholders.

 

Our Board has adopted Corporate Governance Guidelines, which may be viewed online on our website at www.polarisindustries.com. Under our Corporate Governance Guidelines, which adopt the current standards for “independence” established by the New York Stock Exchange (“NYSE”), a majority of the members of the Board must be independent as determined by the Board. In making its determination of independence, among other things, the Board must have determined that the director has no material relationship with the company either directly or indirectly as a partner, shareholder or officer of an organization that has a relationship with us. The Board of Directors has determined that Ms. Clayton and Messrs. Caulk, Hendrickson, Kessler, Menard, Palen, Schreck, Van Dyke and Wiehoff are independent. Mr. Wine, our CEO, is the only director who is not independent.

 

The Board based its independence determinations, in part, upon a review by the Corporate Governance and Nominating Committee and the Board of certain transactions between the company and companies with which certain of our directors or director nominee have relationships, each of which was made in the ordinary course of business, at arm’s length, at prices and on terms customarily available to unrelated third party vendors or customers generally, in amounts that are not material to our business or the business of such unaffiliated corporation, and in which the director had no direct or indirect personal interest, nor received any personal benefit. Specifically, such transactions reviewed by the Corporate Governance and Nominating Committee and the Board included: (a) ordinary course of business purchases by us from C. H. Robinson Worldwide, where Mr. Wiehoff is, and during fiscal 2010 was, the CEO, in the aggregate amount of approximately $42,000; (b) ordinary course of business purchases by us from Dell Marketing, a subsidiary of Dell Inc., where Ms. Clayton is, and during fiscal 2010 was, an officer, in the aggregate amount of approximately $283,000; (c) ordinary course of business purchases by us from Donaldson Company Inc., where Mr. Wiehoff is, and during fiscal 2010 was, a director, in the aggregate amount of approximately $75,000; (d) ordinary course of business purchases by us from The Valspar Corporation, where Mr. Palen is, and during fiscal 2010 was, a director, and where Mr. Hendrickson is, and during fiscal 2010 was, an executive officer, in the aggregate amount of approximately $151,000; and (e) tuition payments by us on behalf of certain employees to Carlson School of Management of the University of Minnesota, where Mr. Van Dyke is, and during fiscal 2010 was, a member of the Board of Overseers, in the aggregate amount of approximately $53,000. In all cases, the payments were less than the greater of $1,000,000 or 2% of the recipients’ gross revenues. Accordingly, a majority of our Board is considered to be independent. Additionally, all current members of our Audit, Compensation and Corporate Governance and Nominating Committees are considered to be independent.

 

We have adopted a Code of Business Conduct and Ethics applicable to all employees, including our CEO, our Chief Financial Officer (“CFO”) and all other executive officers, and the Board. A copy of the Polaris Code of Business Conduct and Ethics is available on our website at www.polarisindustries.com.

 

Under our Corporate Governance Guidelines, a process has been established by which shareholders and other interested parties may communicate with members of the Board. Any shareholder or other interested party who desires to communicate with the Board, individually or as a group, may do so by writing to the intended member or members of the Board, c/o Corporate Secretary, Polaris Industries Inc., 2100 Highway 55, Medina, Minnesota, 55340.

 

All communications received in accordance with these procedures will be reviewed initially by the office of our Corporate Secretary to determine that the communication is a message to one or more of our directors and will

be relayed to the appropriate director or directors unless the Corporate Secretary determines that the communication is an advertisement or other promotional material. The director or directors who receive any such communication will have discretion to determine whether the subject matter of the communication should be brought to the attention of the full Board or one or more of its committees and whether any response to the person sending the communication is appropriate.

 

During 2010, the full Board met four times in person. Each of the in-person meetings was preceded and/or followed by an executive session of the Board without management in attendance, chaired by Mr. Palen. Each of our directors attended at least 75% percent of the meetings of the Board and any committee on which they served in 2010. The Board also took action in writing seven times in 2010. We do not maintain a formal policy regarding the Board’s attendance at annual shareholder meetings; however, Board members are expected to regularly attend all Board meetings and meetings of the committees on which they serve as well as the annual shareholder meetings. All members of the Board attended our 2010 Annual Meeting.

 

The Board has designated four standing committees. The Audit Committee, the Compensation Committee, the Corporate Governance and Nominating Committee and the Technology Committee each operate under a written charter which is available on our website at www.polarisindustries.com. The current membership of each committee and its principal functions, as well as the number of times it met during fiscal 2010, are described below.

 

Audit Committee

 

 

Compensation Committee

 

Corporate Governance and Nominating Committee

 

 

Technology Committee

 

 

During 2010, we did not engage in any transactions with related persons that are required to be described in this Proxy Statement pursuant to applicable SEC regulations.

 

Our written Related-Person Transactions Policy, which is applicable to all of our directors, nominees for directors, executive officers and five-percent shareholders and their respective immediate family members,

prohibits “related-person transactions” unless approved or ratified by the Corporate Governance and Nominating Committee.

 

Matters considered to be a related-person transaction subject to the policy include any transaction in which we are directly or indirectly a participant and the amount involved exceeds or reasonably can be expected to exceed $120,000, and in which a director, nominee for director, executive officer or five-percent shareholder, or any of their respective family members, has or will have a direct or indirect material interest.

 

Any potential related-person transaction that is raised will be analyzed by the General Counsel, in consultation with management and with outside counsel, as appropriate, to determine whether the transaction or relationship constitutes a related-person transaction requiring compliance with the policy. The potential related-person transaction and the General Counsel’s conclusion and the analysis thereof is also to be reported to the chair of the Corporate Governance and Nominating Committee.

 

The Corporate Governance and Nominating Committee shall review the material facts of all related-person transactions that require the committee’s approval and either approve or disapprove of the related person transaction. If advance committee approval of a related-person transaction is not feasible, then the related-person transaction shall be considered and, if the committee determines it to be appropriate, ratified at the committee’s next regularly scheduled meeting. Any related-person transaction that is not approved or ratified, as the case may be, shall be voided, terminated or amended, or such other actions shall be taken, in each case as determined by the committee, so as to avoid or otherwise address any resulting conflict of interest.

 

All current members of the Compensation Committee are considered independent under our Corporate Governance Guidelines. During fiscal year 2010, none of our executive officers served on the compensation committee (or its equivalent) or board of directors of another entity whose executive officers served on our Compensation Committee or Board.

 

Section 16(a) of the Securities Exchange Act, requires our directors and executive officers to file initial reports of ownership and reports of changes of ownership of our common stock with the SEC. Executive officers and directors are required to furnish us with copies of all Section 16(a) reports that they file. To our knowledge, based solely upon a review of the reports filed by the executive officers and directors during 2010 and written representations that no other reports were required, we believe that, during the year ended December 31, 2010, all filing requirements applicable to its directors, executive officers and 10% beneficial owners, if any, were complied with.

 

The Board is divided into three classes. The members of one class are elected at each annual meeting of shareholders to serve three-year terms. The Class II directors currently serving on the Board, whose terms expire at the 2011 Annual Meeting, are Messrs. John R. Menard, R. M. (Mark) Schreck and William Grant Van Dyke.

 

Upon the recommendation of the Corporate Governance and Nominating Committee of the Board, the Board proposes that the following nominees be elected as Class II directors for three-year terms expiring in 2014:

 

Gary E. Hendrickson
John R. Menard
R. M. (Mark) Schreck
William Grant Van Dyke

 

Each of the nominees currently serves as a member of the Board, except Mr. Hendrickson who is a nominee standing for election to the Board. The persons named in the proxy intend to vote your proxy for the election of each of the four nominees, unless you indicate on the proxy that your vote should be withheld from any or all of the nominees. If you are voting by telephone or on the Internet, you will be told how to withhold your vote from some or all of the nominees. Each nominee elected as a director will continue in office until his or her successor has been elected, or until his or her death, resignation or retirement.

 

We expect each nominee standing for election as a Class II director to be able to serve if elected. If any nominee is not able to serve, proxies will be voted in favor of the remainder of those nominated and may be voted for substitute nominees designated by the Board, unless an instruction to the contrary is indicated on the proxy. There are no family relationships between or among any of our executive officers, directors or director nominees.

 

The Board, upon recommendation of the Corporate Governance and Nominating Committee, unanimously recommends a vote FOR the election of these nominees as directors.

 

Our directors bring a broad range of leadership and experience to the boardroom and regularly contribute to the dialogue involved in effectively overseeing and guiding our business and affairs. Other than our CEO, all of the members of the Board are independent. Though the members of the Board have been selected to provide a wide range of viewpoints, the atmosphere of our Board is collegial. Preparation, engagement and participation are expected from our directors. We insist on high personal and professional ethics, integrity and values. All of our current directors and the director nominees satisfy such requirements. The Board has adopted Corporate Governance Guidelines which are observed by all directors. With a diverse mix of experience, backgrounds and skill sets, the Board believes it is well positioned to represent the best interests of the shareholders. The principal occupation, specific experience, qualifications, attributes or skills and certain other information about the nominees and other directors whose terms of office continue after the Annual Meeting are set forth on the following pages.

 

In January 2011, the Board determined to increase the size of the Board effective as of the date of the Annual Meeting. Mr. Hendrickson is included in the group of nominees for election by our shareholders at the 2011 Annual Meeting of the Shareholders as a Class II director. The Corporate Governance and Nominating Committee led the process for selecting the director nominee and recommending the selected nominees to the Board. Based upon the composition and qualifications of the current Board members, the Corporate Governance and Nominating Committee focused on individuals who have experience in global expansion and mergers and acquisitions, have proven strategic leadership with a large public company, and have operational and manufacturing experience. A slate of candidates was identified including Mr. Gary E. Hendrickson who was specifically identified by a current independent director. Mr. Hendrickson was subsequently interviewed by the Chair of the Corporate Governance and Nominating Committee and certain other Board members including our CEO.

 

If a shareholder wishes to have the Corporate Governance and Nominating Committee consider a candidate for nomination as a director, the shareholder’s notice must include the information specified in our bylaws, including the shareholder’s name and address, the information required to be disclosed by the SEC’s proxy rules, a written consent of the candidate to be named in the proxy statement and to serve as a director if elected, specified information regarding the shareholder’s interests in our capital stock, and the representations specified in our bylaws. The Corporate Governance and Nominating Committee will evaluate recommended nominees based on the factors identified in the Corporate Governance and Nominating Committee Charter, a copy of which is available on our website at www.polarisindustries.com.  Alternatively, shareholders may directly nominate a person for election to our Board by complying with the procedures set forth in our bylaws, any applicable rules and regulations of the SEC and any applicable laws.

 

 

The following discussion and analysis describes our compensation objectives and policies and the compensation awarded to the following executive officers (the “Named Executive Officers”) during 2010:

 

 

Our overall performance during 2010 was outstanding, exceeding the expectations we set for ourselves at the beginning of the year. After a very challenging 2009, we entered 2010 expecting that consumer spending would remain weak, and would limit sales and earnings growth. In January 2010 we announced 2010 performance expectations of net income per diluted share in the range of $3.15 to $3.30 per share. The Compensation Committee’s decisions regarding performance goals and compensation opportunities for our senior management were shaped by the economic outlook at the beginning of 2010, as well as its underlying philosophy of paying for superior performance. Consistent with that philosophy, our 2010 executive compensation program included financial performance objectives that were considered challenging to achieve at the time they were established.

 

The Compensation Committee intends that our executive compensation program be market competitive, fairly reflect our performance over time and align the interests of our executive officers with the interests of our shareholders. Consistent with these principles, the Compensation Committee targets base salaries for our executive officers at the market median, and targets annual and long-term incentive compensation between the market median and 75th percentile, with the target within that range each year determined in part by our performance during the previous year. The amount actually paid upon the completion of the performance period may be higher or lower than the target based on actual performance over the specified performance period.

 

In approving compensation payments and awards based on our actual 2010 financial and operating performance, the Compensation Committee took into account a number of factors, including the following:

 

 

Based upon the assessment of our overall performance, combined with a review of the economic environment, competitive trends and our internal operating plans, the Compensation Committee made the following decisions regarding compensation for our Named Executive Officers:

 

 

 

During 2010, the Compensation Committee made no significant design changes to the executive compensation program, but the Board did adopt a “clawback” policy that requires reimbursement or cancellation of cash incentive compensation awarded to any of our executive officers if we are required to restate our financials due to material noncompliance with any financial reporting requirement. We also modified our stock ownership guidelines to express the ownership requirement for each executive officer in terms of a specified number of shares, rather than as a dollar value of shares, to eliminate the possibility that stock price fluctuations could determine whether or not the guidelines have been met.

 

Our executive compensation philosophy aligns executive compensation decisions with our desired business direction, strategy and performance. The primary objectives and priorities of the compensation program for our Named Executive Officers are the following:

 

 

To achieve these objectives, we have designed an executive compensation program that places increased emphasis on performance-based compensation as a percentage of total direct compensation (base salary and annual and long-term incentives) as the level of authority of the executive officer’s position increases. The Compensation Committee believes that the compensation of those with the greatest overall responsibility for our performance should be subject to greater variability in compensation based on that performance. We do not, however, have specific policies governing the allocation of the total direct compensation opportunity among its various

components. The following table illustrates the percentage of target total direct compensation opportunity for each Named Executive Officer for 2010 represented by each compensation component:

 

 

 

 

The components of our Named Executive Officers’ compensation are summarized in the following table. All of the components, individually and collectively, are provided for the general purpose of providing a competitive compensation program that will enable us to meet our objective of attracting and retaining the highly qualified executives critical to our success. The more specific reasons for providing each component and each component’s key features are summarized in the table.

 

 

The Process Followed by the Compensation Committee

 

The practice of the Compensation Committee is to meet in January of each year to: (i) establish the annual base salary and annual incentive compensation opportunity for each of the executive officers for the current year; (ii) determine the annual incentive compensation to be paid to each executive officer for services provided during the prior year; (iii) establish plan targets and performance measures for the three-year performance period beginning on January 1 of the current year for LTIP participants; (iv) determine the payout, if any, to be made under the LTIP for the three-year performance period ended on the immediately preceding December 31st; and (v) determine stock option awards and any other equity-based awards to be granted to executive officers.

 

When making individual compensation decisions for the executive officers, the Compensation Committee takes many factors into account. These factors include subjective and objective considerations of each individual’s skills, performance and level of contribution towards desired business objectives, our overall performance, retention concerns, the individual’s tenure and experience with our company and in his or her current position, the recommendations of management, the individual’s current and historical compensation, the Compensation Committee’s compensation philosophy, and comparisons to other comparably situated executive officers (both those of the company and those of the peer group companies). The Compensation Committee’s process utilizes input, analysis and review from a number of sources, including our management, other independent directors of the Board, the Compensation Committee’s independent compensation consultant, Delves, and market studies and other comparative compensation information as discussed below.

 

The Compensation Committee uses this information in conjunction with its own review of the various components of our executive compensation program to determine the base salary and annual and long-term incentive targets and opportunities of the executive officers as a group and individually.

Role of Executive Officers in Determining Compensation

 

The Compensation Committee meets with our CEO annually to review the performance of our other executive officers. The meeting includes an in-depth review of the performance of each executive officer, achievement of individual performance objectives established at the beginning of the year and individual contributions towards achievement of our business goals. A summary of the performance review is presented to the full Board each year.

 

The Compensation Committee considers input from our CEO, President and COO, CFO, and the Vice President—Human Resources (“VP—HR”) when developing and selecting metrics and performance objectives for our Senior Executive Plan and LTIP, and evaluating performance against such pre-established metrics and objectives. The Compensation Committee also receives recommendations from our CEO, with the assistance of our VP—HR (for executive officers other than himself), regarding base salary amounts, annual and long-term incentive award amounts and equity-based incentive awards for our other executive officers. In determining the CEO’s compensation, the Compensation Committee considers comparative compensation information and input from Delves and our VP—HR.

 

Role of the Compensation Consultant

 

Delves provides the Compensation Committee with an annual compensation market analysis for the executive officers and directors; makes recommendations on the executive pay programs; reviews, participates and comments on executive and board compensation matters; and provides updates on legal and other developments and trends in executive compensation.

 

Market Competitiveness Review

 

The Compensation Committee annually reviews competitive executive compensation data based upon a report compiled by Delves. The Delves report utilized in connection with 2010 compensation actions included compensation data from a proprietary survey, two national compensation surveys, and a peer group of sixteen companies primarily engaged in the manufacturing industry with fiscal 2009 annual sales ranging from $0.4 billion to $6 billion. Companies in the peer group are selected based on size, complexity and business model relative to our company. We believe that these criteria are effective in identifying a group of companies comparable to our company. Our annual sales approximate the 42nd percentile and our market capitalization approximates the 46th percentile of the peer group companies. The companies comprising the peer group used to establish the 2010 compensation opportunities of the executive officers are listed below:

 

 

With the assistance of Delves, the Compensation Committee reviews the composition of the peer group annually. In October 2010, the Compensation Committee removed Stanley Black & Decker, Inc. (formerly The Stanley Works) from the peer group due to its size after its merger with Black & Decker in September 2010.

 

The Delves report provides the Compensation Committee with market information at the 25th, median and 75th percentiles for each executive officer position and pay component, and for total direct compensation, and compares the actual and target compensation provided and intended to be provided to each executive officer to the market amounts. This market information is an important element reviewed by the Compensation Committee, which generally intends to target base salaries for our executive officers at the market median for comparable positions as set forth in the report. However, for an executive officer who is new in his or her position and job-level, the Compensation Committee’s philosophy is to set a base salary below the market median, and to increase it to the

median over a period of several years, assuming performance warrants such increases. Annual and long-term incentive elements of total direct compensation are generally targeted between the median and 75th percentiles for each component, with the positioning within that range each year determined in part by our performance during the previous year. The Compensation Committee can and does, however, use discretion to adjust a component of pay, or total direct compensation generally, above or below these ranges to recognize the specific circumstances of individual executive officers.

 

2010 Base Salaries

 

The Summary Compensation Table on page 35 sets forth the actual base salary earned by each of our Named Executive Officers during 2010. The following table summarizes their annualized base salaries as established by the Compensation Committee in January 2010 (March 2010 for Mr. Wine), and the percentage change from their previous base salary levels.

 

 

 

 

In determining the salary increase for Mr. Wine, the Compensation Committee noted that his base salary had been set well below the market median when he was hired as CEO in 2008 because he had not previously served in that capacity for a public company, and that his base salary had remained well below the market median for 2009. After considering Mr. Wine’s strong individual performance during 2009, and reflecting the Compensation Committee’s intention to progressively move his base salary toward the market median as performance warrants, the Compensation Committee approved the increase in Mr. Wine’s base salary effective April 1, 2010. Even with this increase, Mr. Wine’s base salary remained significantly lower than market median for CEOs in our peer group.

 

The Compensation Committee approved the 6% increase in Mr. Morgan’s base salary to bring him closer to the market median for positions comparable to his and to recognize his increasing experience and individual performance. The increases to Messrs. Malone and Corness were intended to maintain their relative positions to the market median.

 

2010 Annual Incentive Compensation

 

Our Named Executive Officers and other members of senior management selected by the Compensation Committee are eligible to earn annual cash incentive compensation under our Senior Executive Plan, rather than under our broad-based annual profit sharing plan. Cash incentives to participants in the Senior Executive Plan are payable only if and to the degree we achieve an annual performance objective determined by the Compensation Committee.

 

Cash incentives to our Named Executive Officers under the Senior Executive Plan are structured to be qualified performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code (“Section 162(m)”). For that purpose, the Compensation Committee establishes maximum payouts that may be made under the Senior Executive Plan to our Named Executive Officers. These maximum Section 162(m) payouts are determined by the degree to which the company achieves the same annual performance objective generally applicable to all Senior Executive Plan participants.

The Compensation Committee has the discretion to pay incentive amounts to the Named Executive Officers that are less than the maximum Section 162(m) payouts. In determining whether and to what degree to exercise its discretion to approve payments that are less than the maximum Section 162(m) payouts that could be made, the Compensation Committee gives primary consideration to the annual incentive amount that would be payable to the Named Executive Officers based on the application of a performance matrix described below that is utilized to determine payouts to Senior Executive Plan participants other than the Named Executive Officers. The Compensation Committee may also consider factors such as (i) corporate performance against specific strategic priorities established for the year, (ii) corporate performance relative to competitors, (iii) performance of the business unit or department for which the executive is responsible or to which the executive is assigned, and (iv) individual achievement of pre-established objectives and contributions to strengthening our business.

 

For 2010, as in previous years, the Compensation Committee selected earnings from continuing operations per diluted share as the performance metric to be used for purposes of the Senior Executive Plan because (i) it is a well-understood financial measure that is communicated in our audited financial statements, (ii) it is the same metric used for purposes of determining payouts under our broad-based annual profit sharing plan, and (iii) the Compensation Committee believes that this financial measure significantly influences our stock price performance and its use effectively aligns the interests of executive officers and shareholders.

 

The performance matrix utilized by the Compensation Committee for purposes of the Senior Executive Plan establishes recommended threshold, target and maximum payout amounts that correspond to various levels of earnings from continuing operations per diluted share that we might achieve during the annual performance period. To determine the range of earnings from continuing operations per diluted share to be used in 2010 in the performance matrix and for purposes of determining the maximum Section 162(m) payouts, the Compensation Committee reviewed the market for the products we sell, the general economic environment and our internal operating plan for the upcoming year. Consistent with our pay-for-performance philosophy, the Compensation Committee sets challenging objectives in order to focus executive officers on delivering a high level of performance. For 2010, the target level of performance as specified in the performance matrix required the company to achieve earnings from continuing operations per diluted share of $3.34, an amount that exceeded both the $3.05 amount we achieved in 2009 and the $3.30 upper-end of the guidance range provided to shareholders in January 2010. Threshold and maximum level performance objectives were also specified at amounts equal to 80% and 120%, respectively, of the target level performance objective.

 

The 2010 annual incentive opportunities in the performance matrix and the maximum Section 162(m) payouts were expressed in terms of a percentage of a participant’s annualized base salary. The percentages utilized for any participant for these purposes were based on the respective executive’s level of responsibility, expected level of contribution and the Compensation Committee’s general intention to target annual incentive compensation between the market median and 75th percentile levels for comparable positions when financial targets are achieved. For 2010, threshold payouts were established at 20% of each Named Executive Officer’s base salary; target payouts were established at 100% of base salary for Messrs. Wine and Morgan, 80% of base salary for Messrs. Malone and Corness and 65% of base salary for Mr. Krishna.

 

Because our actual earnings from continuing operations per diluted share for 2010 of $4.28 per share exceeded the maximum level performance in the performance matrix, the maximum Section 162(m) payouts that the Compensation Committee was authorized to approve for the Named Executive Officers were 175% of base salary for Messrs. Wine and Morgan, 140% of base salary for Messrs. Malone and Corness, and 113% of base salary for Mr. Krishna. For purposes of assessing whether to pay less than these maximum Section 162(m) payout amounts, the Compensation Committee considered several factors, including the payout amounts suggested by the performance matrix for the Named Executive Officers, the degree to which our financial performance had exceeded the maximum contemplated by the performance matrix, our financial performance and total shareholder return relative to our peer group companies, Mr. Wine’s assessment of the individual performance of the other Named Executive Officers, and the Compensation Committee’s own assessment of Mr. Wine’s individual performance. The Compensation Committee concluded that the amounts to be paid to Messrs. Wine and Morgan should be equal to their maximum Section 162(m) payout amounts, and that the amounts payable to Messrs. Malone, Corness and Krishna

should be between their maximum Section 162(m) payout amounts and the amounts suggested by the performance matrix, as shown in the following table:

 

 

 

 

2010 Long-Term Compensation

 

Long-term compensation awarded by the company includes both long-term cash-based incentive awards under the LTIP and equity-based awards under the Omnibus Plan. In 2010 as in previous years, annual long-term incentive awards to our Named Executive Officers have included stock options in addition to awards under the LTIP. The Compensation Committee believes that stock options effectively align the financial interest of our executive officers with those of our shareholders because stock options provide value only to the extent that the price of our common stock has appreciated over the option term. The Compensation Committee generally expects to provide approximately 60% of the target value of long-term compensation opportunities to Named Executive Officers in the form of stock options, calculated using the grant date fair value of the stock options, and the remaining approximately 40% in the form of LTIP awards, based on the target level payout for such awards. These ratios may vary depending on individual circumstances, as discussed below.

 

We also make awards of performance-based restricted stock from time to time on a selective and limited basis under the Omnibus Plan, generally in connection with promotions, individual outstanding performance, hiring of new executives and extensions of existing employment arrangements. During 2010, the only Named Executive Officer to receive a performance-based restricted stock award was Mr. Krishna, who received a 12,000 share award with a grant date fair value of $623,760 in connection with his commencement of employment as Vice President—Supply Chain and Integration. The award was made in consideration of Mr. Krishna’s surrender of unvested equity-based compensation from his previous employer and may vest on either March 31, 2013 or March 31, 2014 if we have satisfied the specified net income and operating income as a percentage of sales performance objectives as of either date.

 

Long Term Incentive Plan.  Each of the current Named Executive Officers participates in the LTIP. Payouts under the LTIP are made at the beginning of the year following a three consecutive fiscal year performance period, based on the level of achievement of performance objectives specified at the beginning of the performance period. In determining the performance objectives for the LTIP, the Compensation Committee evaluates the external economic environment, the anticipated demand for the products we sell and our long-term business plan. The Compensation Committee, when determining whether we meet our performance goals, may take into account certain unusual events including acquisitions, disposals, and/or restructurings, subject to the maximum amount established under the LTIP for the three year performance period. All payouts under the LTIP are made in cash.

 

Any participant in the LTIP may elect, at the beginning of a performance period, to have the amount of the cash payout he or she would otherwise receive with respect to a LTIP award adjusted to reflect the change in the market price of our common stock over the course of the performance period. If such an election is made, amounts potentially payable under LTIP awards are effectively converted into stock units, and the amount ultimately payable will be subject to both the upside potential and the downside risk of our stock price movement. Each of the Named Executive Officers have, since the LTIP was introduced in 2004, elected to tie their payout cash values to our common stock price movement over the applicable performance period, further aligning their interests with those of our shareholders.

The Compensation Committee approves an LTIP target payout in January of each year for each Named Executive Officer expressed as a percentage of that individual’s then current annual base salary. For 2010, as in previous years, the Compensation Committee decided to use the same percentage of a Named Executive Officer’s base salary for setting LTIP target level payouts as was used for setting target payouts under the performance matrix of the Senior Executive Plan, for the same reasons as discussed in connection with the Senior Executive Plan. For LTIP awards made during 2010, the following table summarizes the approved LTIP threshold, target and maximum payouts for each Named Executive Officer expressed as an amount of cash and in stock units (calculated using a share price of $49.89 for Messrs. Wine, Malone, Morgan and Corness, and $51.98 for Mr. Krishna, respectively, the closing market price on the specified measurement date).

 

LTIP Performance Period 2010-2012

 

 

 

 

For 2010 LTIP awards, the Compensation Committee determined that the performance objectives should be based on four financial metrics that emphasize sustained growth in revenue as well as profitability over the three-year performance period. Before any payouts can be made with respect to 2010 LTIP awards, we must achieve at least a 15% return on invested capital during 2012, the final year of the three-year performance period. For these purposes, return on invested capital is calculated by dividing the company’s net income from continuing operations by the company’s total assets minus cash minus current liabilities. If this minimum condition is satisfied, the payouts under the 2010 LTIP awards are a function of the level of Polaris’ 2012 revenue, net income from continuing operations, and operating profit expressed as a percentage of sales. The financial objectives established by the Compensation Committee for the final year of the 2010-2012 performance period are set forth in the following table, and reflect substantial growth in each financial measure as compared to 2009 revenue of $1,565.9 million, net income from continuing operations of $101.0 million, and operating profit as a percentage of sales of 10.5%. The relative weightings of the various financial objectives for purposes of calculating payout amounts are also included in the table.

 

 

 

 

As an example of how an LTIP payout would be calculated, assume that the 2012 return on invested capital is greater than 15%, that net income from continuing operations in 2012 is $142 million, operating profit as a percentage of sales in 2012 is 11.0% and sales in 2012 is $1,900 million. The LTIP payout for an executive officer whose target LTIP payout is 80% of a base salary at award date of $400,000 would be determined as follows:

 

(80% x $400,000) x (50% + 12.5% + 25%) = $280,000

As an example of how an LTIP would be calculated if the executive officer elected to tie the amount of the LTIP payout to the stock price over the three year performance period, and the stock is priced at the market price on the last day of the performance period (December 31, 2012), assume the stock price on the last day of the performance period is $75.00. The LTIP payout is determined as follows:

 

 

Because all Named Executive Officers have, since the LTIP was first implemented in 2004, elected to have their LTIP payouts adjusted to reflect our stock price performance, the awards have been considered share based payment transactions and have been treated as equity incentive awards for the tables included in this proxy. As such, the grant date fair value of each award is reported in the Summary Compensation Table and the Grants of Plan-Based Awards in 2010 table in the year in which the award is granted, and the amount ultimately paid out, if any, is reported in the Option Exercises and Stock Vested in 2010 table for the final year of the performance period.

 

No LTIP award payouts were made for the three-year performance periods that ended in 2008 and 2009 because the threshold performance criteria were not achieved. Payouts to the Named Executive Officers for the 2008 LTIP grant for the three year performance period that ended December 31, 2010 are summarized in the Options Exercises and Stock Vested in 2010 table on page 44.

 

2010 Stock Option Awards.  Annual stock options awards were granted to Messrs. Wine, Malone, Morgan, and Corness in February 2010, and to Mr. Krishna in March 2010 when he joined our company. The number of shares subject to each stock option award is based on the Compensation Committee’s assessment of our operating performance and each individual’s retention risk and performance, considering the same factors described on page 24 in connection with the determination of annual incentive compensation, and on competitive market data provided by Delves as discussed earlier. The stock options granted have a ten-year life, vest in two equal installments on the second and fourth anniversaries of the grant date (except for the stock options granted to Mr. Krishna in connection with his commencement of employment, which will cliff vest on the third anniversary of the grant date), and have an exercise price at the fair market value of a share of our common stock on the date of the grant. The number of shares subject to each Named Executive Officer’s 2010 stock option award was as follows:

 

 

Our stock option grant practices are designed to ensure that stock option awards approved by the Compensation Committee will be granted subsequent to any release of material non-public information. For example, annual grants are approved by the Compensation Committee at its regularly scheduled January meeting, with a later effective grant date occurring after our release of year-end financial results. We do not engage in the backdating, cancellation or re-pricing of stock options and have not engaged in such practices in the past.

 

In January 2011, our Compensation Committee determined the components, design and performance objectives of our 2011 executive compensation program.

2011 Base Salaries

 

The Compensation Committee approved the following annualized base salaries for the Named Executive Officers for 2011, which adjustments will be made at various dates during 2011:

 

 

The base salary increase for Mr. Wine brings his base salary to the market median and is intended to reward him for his role in our performance during 2010. The salary increase for Mr. Morgan brings his salary closer to the market median, while the increases for Messrs. Malone and Krishna maintain their positions with respect to the market median.

 

On January 20, 2011, we entered into a letter agreement with Mr. Corness which provides that he will transition from his current position of VP—HR on or prior to April 1, 2011 to a position in which he will provide advice, counsel and support to our Board and the Compensation Committee for a two-year period prior to his retirement. Mr. Corness will be paid an annual base salary of $100,000 for the first year and $50,000 for the second year during this period. Other terms of this agreement are described on page 38 under the caption “Letter Agreements.”

 

2011 Annual Incentive Compensation

 

The Senior Executive Plan for 2011 will be structured in a manner similar to that in place for 2010. Earnings from continuing operations per diluted share was again designated as the financial metric to be used for purposes of the performance matrix and establishing the maximum Section 162(m) payout amounts, and the earnings performance to be achieved for a target-level payout was set at a level appreciably higher than our 2010 performance. In determining whether we meet our performance goals, the Compensation Committee may take into account certain unusual events including acquisitions, disposals, and/or restructurings, subject to the maximum amount established under the Senior Executive Plan for the performance period. Threshold level payouts of 20% of base salary under the performance matrix were again set at 80% of target-level earnings performance, but a maximum payout level of 200% of target-level payouts was established at 140% of target-level earnings performance. For purposes of maintaining deductibility of annual incentive compensation under Section 162(m), the maximum Section 162(m) payout amounts for “covered employees” were set at 200% of base salary if a specified level of earnings from continuing operations per diluted share objective were achieved. As in the past, the performance matrix is expected to be used by the Compensation Committee to guide the exercise of its discretion as to whether and to what degree it will reduce annual incentive payouts below the level of the maximum Section 162(m) payout amounts.

 

2011 Long-Term Compensation

 

The 2011 LTIP awards for the 2011-2013 performance period will also be structured in a manner similar to that in place for the 2010-2012 performance period. Achievement of at least a 15% return on invested capital during the final year of the performance period is again a condition to the payment of any amount under the LTIP. Actual payouts will again be a function of the degree to which goals involving our sales, operating income as a percentage of sales, and net income for the last year of the performance period are achieved. The target payouts for the 2011 LTIP awards for the 2011-2013 performance period expressed as a percentage of base salary remain the same for each Named Executive Officer. In determining whether we meet our performance goals, the Compensation Committee may take into account certain unusual events including acquisitions, disposals, and/or restructurings, subject to the maximum amount established under the LTIP for the three year performance period.

 

The Compensation Committee also awarded stock options to Messrs. Wine, Malone, Morgan and Krishna effective January 31, 2010, two days following our earnings release for fiscal year 2010. The stock options granted

have a ten-year life, vest in two equal installments on the second and fourth anniversaries of the date of grant, and have an exercise price of $76.92 per share, the fair market value of a share of our common stock on the date of the grant. The number of shares subject to the stock options granted was as follows:

 

 

The Compensation Committee also awarded Mr. Wine 30,000 shares of restricted stock effective January 31, 2011, which vest with respect to 20% of the shares subject to the award on the anniversary of the date of grant for each of the next five years. The Compensation Committee decided to split the value of the long-term compensation equity grants to be provided to Mr. Wine between stock options and restricted stock, rather than providing it solely in the form of stock options, to facilitate his compliance with our stock ownership guidelines. The grant date fair value of the 2011 equity awards provided to the Messrs. Wine, Morgan, Malone and Krishna was intended to position the target value of each individual’s total 2011 long-term incentive compensation at or near the market 75th percentile, in recognition of our performance during 2010.

 

Health, Welfare and Retirement Benefits

 

We provide a full range of benefits to our Named Executive Officers, including the standard medical, dental and disability benefits available to our employees generally. We also sponsor a qualified 401(k) Plan in which our Named Executive Officers may participate on the same basis as our employees generally, and which allows participants to make plan contributions on a pre-tax basis and to which we make company-matching contributions dollar-for-dollar with employee contributions up to 5% of covered compensation.

 

Because the application of the annual compensation limit under Section 401(a)(17) of the Internal Revenue Code prevents our senior executives from fully contributing to the 401(k) Plan and receiving the full Company match, we have adopted a Supplemental Retirement/Savings Plan (“SERP”) intended to restore contributions lost because of the application of this annual compensation limit. The SERP provides executives who participate in the 401(k) Plan, including the Named Executive Officers, with the opportunity to defer up to 50% of their base salary and up to 100% of amounts payable under the Senior Executive Plan and the LTIP by making contributions to the SERP. Typically, base salary and Senior Executive Plan deferral contributions are matched by the company as if they had been made under the 401(k) Plan on a dollar-for-dollar basis up to 5% of covered compensation. Company matching contributions to the SERP were suspended in April 2009 as a cost savings measure, but were resumed in January 2010. The SERP is provided to assist executives in accumulating funds on a tax-advantaged basis for retirement and is consistent with observed competitive practices of similarly situated companies.

 

We do not maintain a defined benefit pension plan or a defined benefit supplemental pension plan for the our executive officers.

 

Perquisites

 

We provide a limited number of perquisites to our executive officers, generally in an effort to remain competitive with similarly situated companies. We eliminated tax gross-ups for any club dues and any tax, estate, and financial planning fee reimbursements effective July 2009. These perquisites consist of:

 

 

 

Severance Arrangements

 

We have entered into severance arrangements with the executive officers, which provide for certain benefits in the event an executive officer is involuntarily terminated without cause, terminated in connection with a change in control or, in the case of our CEO, if he terminates his employment for good reason. The severance arrangements with our CEO were established as part of the negotiations of his initial employment terms. The severance arrangements are intended to:

 

 

The benefits provided under the severance arrangements were determined by reference to common market practices based on a 2007 survey completed by our former compensation consultant, Hewitt Associates, Inc. Although we believe that our current severance arrangements are less generous than the prevailing arrangements for much of our peer group, the Compensation Committee has determined to maintain such arrangements at current levels. The design and structure of the severance arrangements do not have any impact on the other elements of compensation provided to the executive officers.

 

The severance arrangements are described in more detail beginning on page 46 under the caption entitled “Potential Payments Upon Termination or Change-in-Control.”

 

Letter Agreements

 

Although we do not typically enter into formal employment agreements with our executives, we are a party to letter agreements with our CEO, Scott W. Wine, our President and COO, Bennett J. Morgan and Vice President—Global Operations and Integration, Suresh Krishna. The agreement with Mr. Wine was entered into when he joined our company in 2008, the agreement with Mr. Morgan was entered into upon his promotion to his current position and the agreement with Mr. Krishna was entered into when he joined our company in March 2010. We believe that these agreements were and are important to secure the leadership of these key management individuals. In January 2011, we also entered into a letter agreement with its VP—HR, John B. Corness, setting out the terms under which he will transition out of that position. These agreements are described in more detail on page 38 under the caption “Letter Agreements.”

 

Clawback Policy

 

During 2010, we adopted a “clawback” policy that requires reimbursement or cancellation of cash incentive compensation awarded to any of our executive officers subject to Section 16 of the Securities Exchange Act if we are required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement, and if the award or payout was predicated upon the achievement of financial results that were restated. The policy applies to awards and payouts received during the three-year period prior to the date we are required to prepare the restatement and requires reimbursement or cancellation of the amount of the award or payout, net of taxes, in excess of what would have been granted or paid based on the actual results. The Compensation Committee has authority to reduce the amount subject to clawback as it deems appropriate.

Deductibility of Compensation

 

Section 162(m) generally does not allow a publicly held company to take a tax deduction for compensation of more than $1 million paid in any taxable year to certain “covered employees” unless such compensation is considered “performance-based.” For purposes of Section 162(m), the group of “covered employees” consists of a company’s chief executive officer and its three other most highly compensated executive officers, other than the chief financial officer. The Compensation Committee generally intends to comply with the requirements of Section 162(m) with respect to compensation in excess of $1 million paid under the Senior Executive Plan, the LTIP and the Omnibus Plan in order to qualify such compensation as “performance-based” and therefore deductible under Section 162(m). Although the Compensation Committee may elect to provide compensation that is not deductible under Section 162(m) when necessary to achieve its compensation objectives, it believes that all compensation paid to our Named Executive Officers for 2008 through 2010 is deductible for federal income tax purposes.

 

Stock Ownership Guidelines

 

The Compensation Committee believes that an important means of aligning the interests of our executive officers, including our Named Executive Officers, with the interests of our shareholders is to ensure that they own significant amounts of our common stock. As a result, we have adopted stock ownership guidelines which were modified in October 2010 to provide that each executive officer is expected to own, directly or indirectly, a specified number of shares of common stock (which may include unvested shares subject to restricted stock awards). The requirement for our CEO is 60,000 shares, for our COO and our CFO, 30,000 shares, and for each other executive officer 15,000 shares. Each executive officer is expected to satisfy the stock ownership guidelines within four years following the date he or she becomes an executive officer or the adoption of the guidelines, whichever is later. Until the applicable guideline is met, an executive officer is required to retain 50% of the shares (net of taxes) received as the result of a stock option exercise or a restricted stock vesting. The following chart sets forth the stock ownership of each of our Named Executive Officers as of December 31, 2010 relative to the stock ownership guidelines:

 

 

 

 

The following table shows, for the fiscal years ended December 31, 2008, 2009 and 2010, the annual compensation paid to or earned by our CEO, CFO and our three other most highly compensation executive officers.

 

 

 

 

 

The following table provides additional information on the amounts reported in the All Other Compensation column of the Summary Compensation Table for 2010.

 

 

 

 

The following table summarizes each grant of an equity or non-equity incentive award during 2010 to each of our Named Executive Officers.

 

 

 

 

 

The following additional information is provided regarding various plans and agreements that affect the compensation information disclosed in the Summary Compensation Table and the Grants of Plan-Based Awards in 2010 table above.

 

Letter Agreements

 

We entered into letter agreements with Messrs. Wine and Krishna in connection with their initial offers of employment with the company, and with Mr. Morgan in connection with his promotion to President and COO. The 2008 letter agreement with Mr. Wine generally provides that he will serve as our CEO at an annual salary $575,000, subject to annual review and potential increase, have the opportunity to earn a target annual cash incentive and a target LTIP payout each equal to 100% of his base salary, participate in our equity-based compensation and benefit plans, and receive the perquisites made available to our executive officers as described above. The letter agreement also called for Mr. Wine to receive a one-time cash bonus and stock option and performance-based restricted stock awards upon beginning his employment.

 

The 2005 letter agreement with Mr. Morgan provides he will receive an annual base salary of $350,000, subject to annual review, and generally provides for his ongoing participation in incentive compensation, equity-based compensation and benefit plans on terms comparable to those described for Mr. Wine. The letter agreement also called for Mr. Morgan to receive two stock option awards in connection with his promotion.

 

The 2010 letter agreement with Mr. Krishna generally provides that he will receive an initial annual salary of $250,000 increasing to $257,500 after six months, subject to annual review, have the opportunity to earn a target annual cash incentive and a target LTIP payout each equal to 65% of his base salary, participate in our equity-based compensation and benefit plans, and receive the perquisites made available to our executive officers as described above. The letter agreement also called for Mr. Krishna to receive a one-time cash bonus and stock option and performance-based restricted stock awards upon beginning his employment.

 

On January 20, 2011, we entered into a letter agreement with Mr. Corness which provides that he will transition from his current position of VP—HR on or prior to April 1, 2011, but continue to be employed until April 5, 2013, or an earlier retirement date agreed upon by the parties (the period from when he resigns as VP—HR to the date his employment ends is referred to as the “Transition Period”). During the Transition Period, Mr. Corness will provide advice, counsel and support on Board and Compensation Committee matters, employment issues, international expansion, acquisition integration and other matters as may be requested by our CEO at no less than 25% of his normal work week. Mr. Corness will be paid an annual base salary of $100,000 for the first year and $50,000 for the second year during the Transition Period. When Mr. Corness’ employment ends in accordance with the letter agreement, he will receive payments in the aggregate amount of his annual base salary as of December 31, 2010 plus the amount of his cash incentive paid in March 2011 under the Senior Executive Plan. Mr. Corness is also eligible to

participate in our benefit and annual bonus programs made available to management level employees during the Transition Period, but will not be eligible to participate in the LTIP beginning with the 2011-2013 performance period. Mr. Corness also agreed to execute a general waiver and release at the end of the Transition Period. Mr. Corness has agreed not to engage in competitive activities or solicit employees for a period of one year following the end of his employment.

 

Incentive Plan Awards

 

Senior Executive Plan.  Annual cash incentive compensation awards are made to each of our Named Executive Officers and other eligible employees pursuant to the shareholder-approved Senior Executive Plan. The Senior Executive Plan provides for the payment of awards to participants selected by the Compensation Committee to the degree we, or any subsidiary, business unit or geographic region thereof, achieves performance objectives specified by the Compensation Committee at the beginning of a calendar year performance period. The performance objectives are to be based on one or more shareholder-approved business criteria specified in the Senior Executive Plan. In determining whether we meet our performance goals, the Compensation Committee may take into account certain unusual events including acquisitions, disposals, and/or restructurings, subject to the maximum amount established under the Senior Executive Plan for the performance period. Although all awards are payable in cash, they may be denominated in cash and/or in units with a value equivalent to a share of our common stock. The maximum amount payable to any participant under the Senior Executive Plan for any one-year performance period is $2,500,000. The Senior Executive Plan is to be administered by the Compensation Committee in a manner intended to qualify awards as “performance-based compensation” for purposes of Section 162(m).

 

Additional information about Senior Incentive Plan awards made in 2010 to our Named Executive Officers, including the performance objectives established by the Compensation Committee and the determination of amounts to be paid, is provided under the caption “2010 Annual Incentive Compensation” on page 26. The estimated threshold, target and maximum payments under the Senior Executive Plan for 2010 are reflected in the “Estimated Potential Payouts Under Non-Equity Incentive Plan Awards” columns in the Grants of Plan-Based Awards in 2010 table above. The amounts actually paid in connection with Senior Executive Plan awards during each of the years 2008-2010 are set forth in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table above.

 

LTIP.  Long-term cash incentive compensation awards are made to each of our Named Executive Officers and other eligible employees pursuant to the shareholder-approved LTIP. The LTIP is to be administered by the Compensation Committee in a manner intended to qualify awards as “performance-based compensation” for purposes of Section 162(m). The LTIP provides for the payment of awards to participants selected by the Compensation Committee to the degree the we, or any subsidiary, business unit or geographic region thereof, achieves performance objectives specified by the Compensation Committee at the beginning of a three consecutive calendar year performance period. The performance objectives are to be based on one or more shareholder-approved business criteria specified in the LTIP. In determining whether we meet our performance goals, the Compensation Committee may take into account certain unusual events including acquisitions, disposals, and/or restructurings, subject to the maximum amount established under the LTIP for the three year performance period. Although all LTIP awards are payable in cash, a participant may elect at the beginning of a performance period to have the amount payable adjusted to reflect the change in the market price of our common stock over the applicable performance period. A participant who makes this election effectively chooses to convert the cash amounts that would otherwise be payable at various levels of performance under the LTIP to stock units, each of which has a value equal to one share of our common stock. The number of stock units that may be earned at each performance level is determined by dividing the cash amount of the award that would be payable at that level of performance by the closing market price of a share of our common stock as of a specified measurement date within the first 90 days of the applicable performance period. If such an election is made, the number of stock units that are earned will be based on the degree to which performance objectives are attained, and will be valued using the closing market price of a share of our common stock on the last day of the performance period. All of our Named Executive Officers have elected this payment adjustment feature for LTIP awards made since the inception of the LTIP in 2004.

 

The maximum amount payable under the LTIP to any participant with respect to a LTIP award made in any calendar year is 200% of the participant’s base salary on the applicable measurement date (up to a maximum base

salary of $1,000,000). Pursuant to an amendment to the LTIP approved by the Board on January 20, 2011, for any participant who has elected the payout adjustment feature described above, this maximum payment limit will be adjusted to reflect any increase in the market price of our common stock during the applicable performance period, subject to an overall maximum amount payable equal to the value of a number of stock units determined by dividing 200% of the participant’s base salary as of the applicable measurement date (subject to the $1,000,000 maximum) by the closing market price of a share of our common stock on that same date. Our shareholders are being asked at the Annual Meeting to reapprove the material terms of the LTIP as amended in order to continue to qualify payouts under the LTIP as performance-based compensation for purposes of Section 162(m) (see “Proposal 3 — Approval of the Material Terms of the Amended Long Term Incentive Plan” on page 65. If our shareholders do not reapprove the material terms of the LTIP as amended, then the Board will further modify the LTIP so as to expressly exclude participants who are Section 162(m) covered employees from the benefits of this amendment.

 

Additional information about LTIP awards made in 2010 to our Named Executive Officers for the 2010-2012 performance period, including the performance objectives established by the Compensation Committee, is provided under the caption “2010 Long-Term Compensation” on page 28. The estimated threshold, target and maximum payments under the LTIP for the 2010-2012 performance period and the grant date fair value of such awards are shown in the “Estimated Future Payouts Under Equity Incentive Plan Awards” columns in the Grants of Plan-Based Awards in 2010 table above.

 

Potential payouts for LTIP awards made to our Named Executive Officers in 2009 for the 2009-2011 performance period will depend on the degree to which three performance objectives are achieved. Potential payments will also depend on our stock price performance during the performance period, since our Named Executive Officers all elected to tie their payouts to our stock price, which was $19.63 on the measurement date used at the time the LTIP awards were granted. No awards will be payable unless we achieve in 2011 at least a 15% return on invested capital and at least $120 million of net income for 2011. If these two minimum conditions are satisfied, the LTIP award payouts for the 2009-2011 performance period will be a function of the level of our 2011 net income from continuing operations expressed as a percentage of sales (net margin percentage), as summarized for our Named Executive Officers (other than Mr. Krishna) in the following table: