PROPOSAL 1
ELECTION OF DIRECTORS
NOMINEES AND OTHER DIRECTORS
The number of directors of our Company is set at a maximum of nine; there
are currently nine directors. The directors are divided into three classes, each class
being as equal in number as reasonably possible. Vacancies may be filled by a majority vote
of the directors then in office, though less than a quorum, and directors so chosen are
subject to election by the shareholders at the next annual meeting of shareholders.
Directors elected at an annual meeting of shareholders to succeed directors whose terms
expire are elected for three-year terms. Our Board policy states that no director may
continue to serve on the Board after the last day of the month of his or her
72
nd
birthday. At the Meeting, three persons will be nominated for election to
our Board of Directors.
Upon recommendation of the Governance Committee, which acts as the
nominating committee of the Board, the Board has nominated Patrick J. McHale, Lee R. Mitau
and Marti Morfitt, for three-year terms expiring in the year 2011. Mr. Mitau and Ms.
Morfitt, whose current terms expire at the Meeting, have previously been elected by the
shareholders as directors of our Company. Mr. McHale, the Company’s President and
Chief Executive Officer, was elected a director by the Board in June 2007.
Unless otherwise instructed not to vote for the election of directors,
proxies will be voted to elect the nominees. A director nominee must receive the vote of a
plurality of the voting power of shares present at the Meeting in order to be elected.
Unless the Board reduces the number of directors, the enclosed proxy will be voted to elect
the replacement nominee designated by the Board in the event that a nominee is unable or
unwilling to serve.
The following information is given as of February 25, 2008, with respect
to the three nominees for election and the other six directors whose terms of office will
continue after the Meeting. Except as noted below, each of the nominees and directors has
held the same position, or another executive position with the same employer, for the past
five years.
Nominees for election at this Meeting to terms expiring in
2011:
Patrick J. McHale
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Mr. McHale, 46, is President and Chief Executive
Officer of Graco Inc., a position he has held since June 2007. He served as Vice
President and General Manager, Lubrication Equipment Division of Graco from June
2003 until June 2007. He was Vice President of Manufacturing and Distribution
Operations from April 2001 until June 2003. He served as Vice President, Contractor
Equipment Division from February 2000 to March 2001. Prior to becoming Vice
President, Lubrication Equipment Division in September 1999, he held various
manufacturing management positions in Minneapolis, Minnesota; Plymouth, Michigan;
and Sioux Falls, South Dakota. Mr. McHale joined the company in December
1989.
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Lee R. Mitau
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Mr. Mitau, 59, is the Executive Vice President and
General Counsel of U.S. Bancorp, a regional bank holding company. He assumed this
position in 1995. Mr. Mitau has been a director of Graco since May 1990. He served
as Chairman of the Board of the Company from May 2002 until April 2006 and has been
serving as the Chairman of the Board of the Company since June 2007. He also serves
as Chairman of the Board of H.B. Fuller Company.
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Marti Morfitt
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Ms. Morfitt, 50, is the former President and Chief
Executive Officer of CNS, Inc., a manufacturer and marketer of consumer products,
including the Breathe Right® nasal strip. She held this position from 2001
through March 2007. From 1998 to 2001, she was Chief Operating Officer of CNS, Inc.
Ms. Morfitt left her position at CNS, Inc. effective March 2007 as a result of the
acquisition of CNS, Inc. by GlaxoSmithKline plc in December 2006. Ms. Morfitt has
been a director of Graco since October 1995 and is also a director of Thermage
Inc.
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Directors whose terms continue until 2009:
William J. Carroll
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Mr. Carroll, 63, is a principal of Highland Jebco
L.L.C., which provides advisory and consulting services to the automotive parts
industry. He assumed this position in May 2006. He was the Director of Economic and
Community Development for the city of Toledo, Ohio, a position he held from
September 2004 until January 2006. From September 2003 to March 2004, Mr. Carroll
was the President and Chief Operating Officer of Dana Corporation. Dana Corporation
engineers, manufactures and distributes components and systems for vehicular and
industrial manufacturers worldwide. From 1997 to March 2004, Mr. Carroll was the
President – Automotive Systems Group of Dana Corporation. Mr. Carroll has
been a director of Graco since June 1999.
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Jack W. Eugster
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Mr. Eugster, 62, was the Chairman, President and
Chief Executive Officer of Musicland Stores, Inc., a retail music and home video
company, from 1980 until his retirement in January 2001. Mr. Eugster has been a
director of Graco since February 2004, and is also a director of Donaldson Company,
Inc. and Black Hills Corporation.
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R. William Van Sant
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Mr. Van Sant, 69, is an operating partner of Stone
Arch Capital, a private equity firm. He assumed this position in January 2008. From
August 2006 through December 2007, he was the President and Chief Executive Officer
of Paladin, a Dover Corporation company, which manufactures attachments for
construction equipment. From 2003 until August 2006, Mr. Van Sant was Chairman of
Paladin L.L.C, and from 2003 until November 2005, Mr. Van Sant was Chairman and
Chief Executive Officer of Paladin. He was an Operating Partner with Norwest Equity
Partners, a leading private equity firm, from 2001 through 2006. Mr. Van Sant has
been a director of Graco since February 2004 and is also a director of H.B. Fuller
Company.
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Directors whose terms continue until 2010:
J. Kevin Gilligan
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Mr. Gilligan, 53, is the President and Chief
Executive Officer of United Subcontractors, Inc., a national construction services
company. He assumed this position in October 2004. He was President and Chief
Executive Officer, Automation and Control Solutions, Honeywell International, Inc.,
a diversified technology and manufacturing company, from 2001 until January 2004.
Mr. Gilligan has been a director of Graco since February 2001 and is also a
director of ADC Telecommunications, Inc.
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Mark H. Rauenhorst
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Mr. Rauenhorst, 55, is the Chairman and Chief
Executive Officer of Opus Corporation, which is engaged in design, construction and
real estate development activities. He assumed this position in June 2007. He
served as President and Chief Executive Officer of Opus Corporation from and after
1999 and 2000, respectively. Beginning in 1996, he was President and Chief
Executive Officer of Opus Northwest L.L.C. Mr. Rauenhorst has been a director of
Graco since September 2000 and is also a director of Opus Corporation.
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William G. Van Dyke
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Mr. Van Dyke, 62, was Chairman of the Board of
Donaldson Company, Inc., a diversified manufacturer of air and liquid filtration
products from August 2004 until his retirement in August 2005. He was Chief
Executive Officer and President of Donaldson Company, Inc. from 1996 to August
2004. Mr. Van Dyke has been a director of Graco since May 1995. Mr. Van Dyke is
also a director of Polaris Industries, Inc. and Alliant Techsystems Inc.
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The Board of Directors, upon recommendation of the Governance Committee,
recommends that shareholders vote FOR all nominees for election at the Meeting to terms
expiring in 2011.
DIRECTOR INDEPENDENCE
Our Board of Directors has determined that Mr. Carroll, Mr. Eugster, Mr.
Gilligan, Mr. Mitau, Ms. Morfitt, Mr. Rauenhorst, Mr. Van Dyke and Mr. Van Sant are
independent directors. The independent directors constitute a majority of the Board, and
the only director who is not independent is Mr. McHale, the Company’s President and
Chief Executive Officer. In making its determination regarding the independence of the
directors, our Board noted that each independent director meets the standards for
independence set out in Section 303A.02 of the New York Stock Exchange Corporate Governance
Rules, and that there is no material business relationship between our Company and any
independent director, including any business entity with which any independent director is
affiliated.
In making its determination, our Board reviewed information provided by
each of the directors and information gathered by our management, and determined that none
of the directors, other than Mr. Mitau and Mr. Rauenhorst, have any relationship with the
Company other than as a director and/or shareholder. Some of our nonemployee directors are
or were during the previous three fiscal years a non-management director of another company
that did business with us during these years, and/or a non-executive director of one or
more charitable organizations to which our Company’s charitable foundation made a
contribution during those years. The Board specifically considered that Mr. Mitau serves as
Executive Vice President and General Counsel of U.S. Bancorp, to which our Company paid
approximately $1,380,000 in 2007 for interest expense, trust services, revolver and credit
line services and banking services including but not limited to fees for cash management
and credit card processing. The Board specifically considered that Mr. Rauenhorst serves as
Chairman and Chief Executive Officer of Opus Corporation and Chairman of Opus Northwest
LLC, a wholly owned subsidiary of Opus Corporation, to which the Company paid approximately
$610,000 in 2007 for the construction of an addition to the Company’s Sioux Falls
manufacturing facility. The Board determined that neither the nature of the relationship
between Opus Corporation or U.S. Bancorp on the one hand, and our Company, on the other
hand, nor the amount of payments, was material to any one of the entities. Moreover, our
Board concluded that Messrs. Mitau and Rauenhorst do not have material interests in the
foregoing transactions because they were not directly involved in the transactions, they do
not derive any special benefits related to the transactions, and the transactions with each
of Opus Corporation and U.S. Bancorp were the result of a competitive bidding process and
arm’s-length negotiations.
MEETINGS OF THE BOARD OF DIRECTORS
During 2007, our Board of Directors met eight times. Attendance of our
directors at all Board and Committee meetings averaged 91.8 percent. During 2007, every
current director attended at least 75 percent of the aggregate number of meetings of the
Board and all committees of the Board on which he or she served. Our Corporate Governance
Guidelines require that each director make all reasonable efforts to attend the
Company’s Annual Meeting of Shareholders. In 2007, all but two of the directors
attended the Annual Meeting of Shareholders. Each regularly scheduled meeting of the Board
includes an executive session of only non-management directors. Mr. Mitau, Chairman of the
Board, presides at the executive sessions.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee, a Governance Committee,
and a Management Organization and Compensation Committee. Membership as of February 25,
2008, the record date, was as follows:
Audit
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Governance
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Management
Organization
and Compensation
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R. William Van Sant,
Chair
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Lee R. Mitau,
Chair
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Jack W. Eugster,
Chair
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William J.
Carroll
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William J.
Carroll
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J. Kevin
Gilligan
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Jack W. Eugster
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Marti Morfitt
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Lee R. Mitau
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J. Kevin
Gilligan
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William G. Van
Dyke
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Marti Morfitt
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Mark H.
Rauenhorst
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R. William Van
Sant
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Mark H.
Rauenhorst
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William G. Van
Dyke
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Audit Committee
(7 meetings in fiscal
2007)
The Audit Committee is composed entirely of directors who meet the
independence requirements of Rule 10A-3(b) under the Securities Exchange Act of 1934. All
of the Audit Committee members are, in the judgment of the Board, financially literate. Our
Board has determined that Mr. Carroll, Mr. Van Dyke and Mr. Van Sant are audit committee
financial experts.
The Audit Committee assists the Board in its oversight of the integrity
of our financial statements, our compliance with legal and regulatory requirements, the
qualification and independence of the independent auditor, and the performance of the
internal audit function and independent auditors.
The responsibilities of the Audit Committee are set forth in a written
charter. The Audit Committee has reviewed and reassessed the adequacy of its charter and
concluded that the charter satisfactorily states the responsibilities of the Audit
Committee. The Audit Committee Charter was most recently approved by the Board on April 20,
2007.
Governance Committee
(3 meetings in fiscal 2007)
The Governance Committee has the following functions:
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Sets criteria for the selection of prospective Board
members, identifies and recruits suitable candidates, and presents director
nominees to the Board;
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Periodically evaluates our Company’s
shareholder value protections, board structure, and business continuity provisions,
and recommends any changes to the Board; and
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Recommends to the Board requirements for Board
membership, including minimum qualifications and retirement policies; the
appropriate number of directors; the compensation, benefits and retirement programs
for directors; the committee structure, charters, chairs and membership; the number
and schedule of Board meetings; a set of Corporate Governance Guidelines; and the
appropriate person(s) to hold the positions of Chair of the Board and Chief
Executive Officer.
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The responsibilities of the Governance Committee are fully set forth in
its written charter, which was most recently approved by the Board on February 17,
2006.
Management Organization and Compensation Committee
(3 meetings in
fiscal 2007)
The Management Organization and Compensation Committee has the following
functions:
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Develops our Company's philosophy and structure for
executive compensation;
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Determines the compensation of the Chief Executive
Officer and approves the compensation of the executive officers;
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Reviews and discusses with management, and
recommends to the Board the inclusion of, the Compensation Discussion and Analysis
in our Company’s annual proxy statement;
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Reviews the individual performance of the Chief
Executive Officer based on goals and objectives, and communicates to the CEO
regarding its assessment of the CEO’s performance on an annual
basis;
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Administers our Company’s stock option and
other stock-based compensation plans; and
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Reviews and makes recommendations on executive
management organization and succession plans.
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The responsibilities of the Management Organization and Compensation
Committee are fully set forth in its written charter, which was most recently approved by
the Board on February 16, 2007.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Executive Compensation Philosophy
The Management Organization and Compensation Committee (for purposes of
this Executive Compensation section, the “Committee”) is responsible for
establishing our executive compensation philosophy. The Committee believes that our total
compensation program should:
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Globally source, attract and retain highly qualified
executives;
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Motivate executives to improve our financial
position and increase shareholder value;
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Provide total compensation that is competitive with
other manufacturing companies of comparable sales volume and financial performance,
and that may adjust above or below the market median as a result of our financial
performance;
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Align pay to balance our short- and long-term
objectives;
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Maintain a strong link between pay and performance
by placing a substantial portion of the total pay at risk;
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Promote collaboration and teamwork across our
organization; and
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Provide a total compensation pay mix that includes
both fixed and variable, cash and non-cash, and short-term and long-term
components.
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The Committee applies these philosophies in selecting compensation
elements. Additionally, the Committee reviews competitive market and trend data, peer
company performance and market data, internal equity among executive officers, individual
and company performance, cost, and named executive officer tally sheets (as described
below) when determining levels of compensation.
Executive Officer Compensation Processes
The Committee uses the following resources, processes and procedures to
help it effectively perform its responsibilities:
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Executive sessions without management present to
discuss various compensation matters, including the compensation of our President
and Chief Executive Officer (“CEO”);
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An independent executive compensation consultant who
advises the Committee from time to time on compensation matters;
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An annual review of all executive compensation and
benefit programs for competitiveness, reasonableness and
cost-effectiveness;
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Program design and competitive market data
benchmarked for each component of total compensation using an industry peer group
and a larger group of similarly sized manufacturing companies; and
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An annual review of each named executive
officer’s tally sheet before setting the annual compensation program for the
next performance year.
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Executive Compensation Consultant
The Committee has the authority under its Charter to engage the services
of outside consultants, to determine the scope of the consultants’ services and to
terminate such consultants’ engagement. In 2007, the Committee continued its
engagement of Hewitt Associates (“Hewitt”) as its independent outside executive
compensation consultant to advise the Committee on certain matters related to executive
compensation including:
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A competitive compensation review of the CEO and
other executive officer positions;
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Executive compensation trend data; and
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A market review and analysis of our executive
severance and change of control provisions.
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Every other year, Hewitt conducts a manufacturing peer group financial
performance review and a named executive officer compensation market analysis of our twenty
peer companies. This peer analysis was last completed in 2006 and was used by the Committee
when determining 2007 compensation for the CEO and other executive officers.
The Governance Committee of our Board of Directors engaged Hewitt in 2007
to conduct a market review and analysis of board of director compensation. Additionally, a
Hewitt affiliate in Shanghai, China provided limited consulting services related to market
pricing for certain positions of our subsidiary, Graco Fluid Equipment (Shanghai) Co., Ltd.
Other than in connection with these services which cost approximately $18,000, and advising
the Committee on executive compensation as described above, Hewitt did not receive any
other compensation from us in 2007.
Role of Management in Executive Compensation
Decisions
Our management is involved in the following executive compensation
processes:
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The Chief Administrative Officer (“CAO”)
and Compensation Manager develop or oversee the creation of written background and
supporting materials for distribution to the Committee prior to its
meetings;
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The CEO, CAO, Vice President, General Counsel and
Secretary, and Compensation Manager all attend the Committee’s meetings, but
leave during the non-employee director executive sessions;
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The CEO, CAO, and Compensation Manager review
executive officer compensation competitive analyses (excluding the CEO) and
annually present and make recommendations to the Committee relating to bonus and
long-term incentive plan designs and changes, if warranted;
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The CEO annually recommends to the Committee base
salary adjustments and long-term incentive awards in the form of stock-based grants
for all executive officers, excluding the CEO; and
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Immediately following the Committee’s
executive sessions, the Chair of the Committee provides the CAO with a summary of
the executive session decisions, actions and underlying rationale for
implementation as appropriate.
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Benchmarking
The Committee annually reviews general market benchmarking data,
consisting of total compensation and each of its three elements: base salary, annual
incentives, and long-term incentives. The Committee targets base salaries to be at the
median of manufacturers with similar sales volume. In determining the 2007 and 2008
executive compensation, the Committee used a survey compiled by Hewitt to benchmark the
competitiveness of each element of total compensation for the Company’s named
executive officers (the “Hewitt Survey”). The Committee selected the Hewitt
Survey because it provides standard survey data that is based exclusively on U.S.
manufacturing companies and is regressed using applicable revenues. Hewitt uses a
statistical technique, known as regression analysis that is used for modeling the
relationship between variables. In this case, it enables Hewitt to estimate market levels
of compensation that relate closely to a Company’s revenue size. Hewitt uses this
technique to adjust compensation data based on differences in revenue size of companies in
their database.
Survey benchmark positions were selected by the Committee to determine
salary range midpoints based on market medians. The named executive officer benchmark
positions include those of CEO, CFO, top manufacturing executive, business unit executive,
and regional general manager. For the corporate benchmark positions, the data gathered from
the Hewitt Survey reflected manufacturing companies with similar levels of revenue.
Individual midpoints were created for our CEO, CFO, and Europe region executive based on
median market data. A single midpoint was also established among our four U.S. business
unit executives, our Asia Pacific region executive, who is a U.S. expatriate, and our top
manufacturing executive (the “Business Unit Benchmark”). The individual
revenues of the four business units and the Asia Pacific region were averaged and this
average revenue was used when establishing median market data for the Business Unit
Benchmark. This method was established to provide better internal equity and flexibility in
position rotations. The midpoint for our Europe region executive was established by the
Committee reviewing Hewitt market data based on Belgian companies (the “Hewitt
Belgian Survey”) for a regional general manager benchmark based on our European
revenues.
In addition, the Committee requests that Hewitt conduct a peer group
comparison of named executive officer positions every other year (the “Peer Group
Survey”). This data is reviewed to ensure that our compensation practices are not out
of alignment with what the industry views as competitive pay for named executive officers.
Levels of short- and long-term incentive compensation may be adjusted above or below median
commensurate with our financial performance compared to our peer group. The peer companies
selected are based on industry, size, and location. Approximately twenty companies comprise
the peer group. Graco’s Peer Group Survey companies include Actuant Corporation, A.O.
Smith Corporation, Arctic Cat Inc., Briggs & Stratton Corporation, CIRCOR International
Inc., Donaldson Company, Inc., Flowserve Corporation, Franklin Electric Co., Inc., Gardner
Denver Inc., IDEX Corporation, MTS Systems Corporation, Nordson Corporation, Pentair Inc.,
Regal-Beloit Corporation, Robbins & Myers Inc., Roper Industries Inc., Tecumseh
Products Company, Tennant Company, The Toro Company, and Watts Water Technologies Inc. In
comparing financial performance, the Committee reviews three-year sales growth, three-year
earnings per share growth, operating margin, three-year total shareholder return, and
market capitalization. Hewitt’s 2006 executive compensation summary report that was
used for determining 2007 compensation included an analysis of our peer companies. This
analysis showed that our financial results exceeded the median of the foregoing financial
performance metrics of the twenty companies comprising our peer group.
Components of the Executive Compensation
Programs
The primary components of the Company’s executive compensation
programs are:
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Benefits and perquisites; and
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Severance and change of control
agreements.
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When the Committee reviews competitive market data for each of the
benchmark executive positions each year, the Committee reviews total compensation in
addition to reviewing each component (base pay, annual cash incentive and long-term
incentives). The Committee examines tally sheets for our named executive officers showing
their current total compensation and potential accumulation of wealth. Specifically, the
tally sheets reviewed by the Committee in September 2007 provided 2006 actual and 2007
target annual compensation, retirement balances as of December 31, 2006 projected to age
65, deferred compensation balances, and the projected value of stock awards based on
assumptions regarding stock price appreciation. After analysis of market and tally sheet
data and discussion among the Committee members, the Committee reviews the dollar
allocation among each of the three components. Although the Committee has not established
specific ratios for each of the compensation components, it strives to maintain a
reasonable and competitive balance between the fixed and variable elements. The
compensation program is designed to reward recent results and motivate long-term
performance through the use of the three total compensation components. The Committee
believes that the compensation mix and amount paid to each of our named executive officers
is reasonable and appropriate.
Base Salary
The Committee provides base salaries to executives to attract and retain
talent, provide competitive compensation for the performance of the executives’ basic
job duties and recognize individual contributions to our financial performance. Base
salaries may be adjusted at the discretion of the Committee. The Committee generally
targets base salary levels at the median of the benchmarked positions in the Hewitt Survey
and the Hewitt Belgian Survey. Adjusting base salaries to achieve or approach median is
consistent with the Committee’s philosophy of providing competitive base
salaries.
In December of each year, the CEO provides the Committee with an
evaluation of each executive officer’s performance, other than his own, covering the
prior twelve months and his recommendation for base salary adjustments. The base salary
adjustments are based on several considerations, which include individual performance,
scope and complexity of the individual’s role, salary comparison to market data,
market projection for executive base salary adjustments, experience, internal pay
relationships, and retention considerations. The Committee reviews the competitive market
data and base salary adjustments recommended by the CEO. All executive officer base
salaries for the next calendar year are approved by the Committee at its December meeting,
and become effective January 1. In addition, an executive session is held at the
Committee’s December meeting to determine the base salary adjustment for the CEO.
Management does not provide a CEO base salary adjustment recommendation to the Committee.
During this session the Committee considers input from the Board members on the CEO’s
performance over the past year. It also considers the CEO’s expertise, market
knowledge, decision-making, and other leadership capabilities. Additionally, the Committee
evaluates the CEO’s performance against annual objectives established at the
beginning of the year. The Committee also reviews the CEO’s base salary in comparison
to the Hewitt Survey market data for CEOs of manufacturing companies with similar sales
volume, and our Peer Group Survey on an every other year basis. Following discussion, the
Committee approves the CEO’s base salary for the next calendar year, which becomes
effective January 1.
On January 1, 2007, Mr. Roberts, our former Chairman, President and CEO,
received a 6 percent increase in base salary, bringing his base salary to $654,100. He
received a 6 percent increase because he successfully completed several strategic
initiatives, we achieved record financial performance, and his 2006 base salary fell below
the median of the competitive market data. The other named executive officers received
increases ranging from 4 percent to 6 percent. The adjustments were based on criteria
including individual performance, scope and complexity of the individual’s role,
salary comparison to the Hewitt Survey and Hewitt Belgian Survey market data, market
projection for executive base salary adjustments, experience, internal pay relationships,
and retention considerations. The increases that these executives received were in line
with the market projection for executive base salary adjustments published by Mercer,
Hewitt, World at Work, and The Conference Board (the “Market Projection
Surveys”).
Mr. Roberts resigned from his positions of Chairman, President, and CEO
effective June 11, 2007 and Mr. Patrick McHale was immediately promoted to and elected
President and CEO. As a result of his promotion, the Committee increased his base salary
from $240,786 to $500,000 effective July 1, 2007. Although his new base salary fell
significantly below the competitive median market data, the Committee believed that Mr.
McHale’s base salary was reflective of his tenure and experience in this new role at
that time.
In December 2007, the Committee increased Mr. McHale’s base salary
to $620,000 effective January 1, 2008. He received this increase because his base salary
was below the competitive market median data and he had demonstrated strong leadership in
his new role as CEO. The other named executive officers received increases ranging from 3
percent to 5 percent except for Mr. Paulis. Mr. Paulis, who is employed by Graco N.V., our
wholly owned subsidiary, received a 15 percent increase as Graco N.V. had strong financial
results in 2007 and his base salary was below competitive market data. The increases that
Messrs. Rescorla, Johnson, and Graner received were in line with the Market Projection
Surveys. The base salary increases, approved for the foregoing named executive officers,
became effective January 1, 2008 and were based on the criteria identified
above.
Annual Cash Incentive
At the beginning of each year the Committee establishes an annual
incentive opportunity for the CEO and the other designated executive officers. A separate
bonus plan (the “Executive Officer Annual Incentive Bonus Plan”) has been
created for those most highly paid and designated by the Committee, including the CEO, to
qualify the participant’s annual cash incentive as performance-based to ensure 162(m)
deductibility under the Internal Revenue Code. A separate annual incentive plan (the
“Executive Officer Bonus Plan”) applies to the other designated executive
officers. The Executive Officer Annual Incentive Bonus Plan and the Executive Officer Bonus
Plan, together, are referred to as the “Annual Incentive Plans”. The Annual
Incentive Plans are designed to motivate our executives to increase our sales, earnings and
other financial metrics by offering an incentive that rewards year-over-year growth.
Potential payout under the Annual Incentive Plans is expressed as a percent of base salary.
The Committee reviews market data for the annual incentive element before determining the
relationship between performance targets and the bonus payout range. A specific financial
performance threshold must be attained in order to earn an incentive. If specified
performance levels are not achieved or exceeded, there is no payout. The annual incentives,
to the extent earned, are paid in cash in March following the calendar year-end and are
based upon the Committee’s determination of actual performance against
pre-established targets.
At its Committee meeting in February 2007, the Committee approved
participation of the CEO and other executive officers in their respective Annual Incentive
Plans for 2007. Mr. Roberts was the only person designated as a participant in the
Executive Officer Annual Incentive Bonus Plan at that time. The maximum payout levels for
2007 were 150 percent of base salary for the CEO and 105 percent of the base salaries for
the other executive officers who report to the CEO and serve on the executive management
team (the “Management Executives”). The target payout levels for 2007 were 100
percent of base salary for the CEO and 70 percent of the base salaries for the Management
Executives. In 2008 the target and maximum payout levels will remain the same. The
Committee established two financial measures for these plans, consisting of net sales and
net earnings growth over the prior year
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The measures were equally weighted.
Increases in net sales and net earnings growth were selected as the metrics against which
to measure the officers’ performance for the annual incentive plan because the
Committee desires to motivate the officers to achieve profitable business growth consistent
with our aggressive long-term financial objectives.
The 2007 incentive award payouts were set based upon the achievement of
specified levels of growth in net sales and net earnings. Potential annual incentive
payouts are based on various levels of growth over the previous year. In setting these
growth percentages, the committee selects amounts that are approximately equal to various
multiples of forecasted real Gross Domestic Product (“GDP”) growth. The target
sales growth was approximately two times forecasted GDP growth and the maximum sales growth
was approximately four times forecasted GDP growth. The target earnings growth was
approximately three times forecasted GDP growth and the maximum earnings growth was
approximately six times forecasted GDP growth. The minimum, target and maximum sales growth
targets established for 2007 were growth exceeding 100 percent, 105 percent and 110 percent
of prior year, respectively. The minimum, target and maximum earnings growth targets
established were growth exceeding 95 percent, 107 percent and 115 percent of prior year,
respectively. Net sales of $841.3 million in 2007 represents an increase in net sales of 3
percent over 2006, and net earnings of $152.8 million in 2007 represents an increase in net
earnings of 2 percent from 2006, which, together, led to the amounts paid out under the
incentive plans. The Committee has the authority to make adjustments to the incentive
payout award based on unanticipated or special circumstances. At its February 2008 meeting,
the Committee awarded an additional amount to each executive officer which amount generally
reflected an adjustment made to net earnings taking into consideration the impact of
interest expense and income arising from our 2007 share repurchase program.
Due to his promotion to President and CEO, Mr. McHale’s 2007 bonus
was based on six months of his participation in the Executive Officer Bonus Plan with a
minimum payout of 0 percent and a maximum payout of 105 percent. As of July 2007, Mr.
McHale was designated as a participant in the Executive Officer Annual Incentive Bonus
Plan. His 2007 bonus was therefore also based on six months of his participation in the
Executive Officer Annual Incentive Bonus Plan with a minimum payout of 0 percent and a
maximum payout of 150 percent. For 2007, Mr. McHale received a bonus that was 58 percent of
his 2007 base salary earnings.
At its February 2008 meeting, the Committee approved net sales growth and
earnings per share growth as the 2008 performance metrics. The earnings per share metric
replaced the net earnings metric because the Committee believes that it more closely aligns
management with shareholders’ interests, it is a visible metric that is easy to
communicate, and it is a commonly used profit metric. Each of the measures will be weighted
equally. Both metrics will be set with reference to multiples of forecasted GDP growth. In
2008, Mr. McHale will participate in the Executive Officer Annual Incentive Bonus Plan with
a minimum payout of 0 percent, a target payout of 100 percent, and a maximum payout of 150
percent of base salary to be paid. Management Executives will participate in the Executive
Officer Bonus Plan with a minimum payout of 0 percent, a target payout of 70 percent, and a
maximum payout of 105 percent of base salary to be paid.
CEO Awards
Under this program, individual discretionary awards, in an aggregate
amount not to exceed $200,000, may be made each year to recognize the significant
contributions of selected employees, including executive officers. The CEO, based on input
from his management team, determines the recipients of these monetary awards. In February
2007, Mr. Roberts granted CEO Awards to fourteen employees, two of whom are named executive
officers. At its February 16, 2007 meeting the Committee approved an award to Mr. Rescorla
in the amount of $10,000 for significant contributions made by him during the 2006 fiscal
year. In February 2008, Mr. McHale granted CEO Awards to eight employees, one of whom is a
named executive officer. The Committee approved an award to Mr. Paulis in the amount of
$30,000 at its February 15, 2008 meeting for significant contributions made by him during
the 2007 fiscal year.
Stock-based Awards
The Company’s executive long-term incentive program rewards our
executive officers through stock-based awards for performance over a period of time,
typically exceeding three years. This long-term incentive program (the “LTI
Program”) is structured to align the financial interests of the executive officers
with those of our shareholders. The Committee believes that equity-based compensation
ensures that the executives have a continuing stake in our long-term success.
The 2007 LTI Program consisted of stock options and restricted stock
granted to executive officers under the Graco Inc. Amended and Restated Stock Incentive
Plan (2006) (the “Stock Incentive Plan”). The stock option grant feature of the
LTI Program is designed to promote the growth of our stock price by offering officers a
financial stake in the Company. As is the case with our shareholders, the options create
value for executives only to the extent Graco’s stock price increases. The Committee
believes that executive officers having a financial stake will be motivated to put forth
sustained effort on behalf of the Company’s shareholders to support the continued
growth of the Company’s share price. The LTI Program also promotes the interests of
the Company and its shareholders through the attraction and retention of experienced and
capable leaders.
The Committee typically grants stock-based awards to each executive
officer at its regularly scheduled February meeting. The Board sets the February meeting
date several months in advance. Under the terms of the Stock Incentive Plan, the Committee
must approve all stock option grants to officers. In February 2007, executive officers were
awarded non-qualified stock options with an exercise price equal to the fair market value
of our common stock on the grant date, defined in the Stock Incentive Plan as the closing
price of the stock on the day immediately preceding the grant date. Each option has a
10-year term and becomes exercisable in equal installments over four years, beginning with
the first anniversary of the grant date. Additionally, our plan prohibits the repricing of
stock options.
The number of shares covered by the stock options granted in 2007 to each
executive officer was determined by reviewing competitive long-term incentive market data
for each of the benchmarked executive officer positions in addition to considering the
current exercise price. The Committee granted the same number of shares to each of the
Management Executives given its determination that each of such officers significantly
impacts our performance. The Committee considers, except in the case of the award to the
CEO, the recommendation of the CEO for such awards. Other factors considered by the
Committee in determining the number of stock options granted to each executive officer
include the number of shares granted in previous years, our previous year’s financial
performance, the dilutive effect on our shareholders, and the allocation of overall share
usage attributed to executive officers.
In February 2007, Mr. Roberts, the former CEO, was granted an option for
140,000 shares, which was the same number of shares that was granted to him in 2006. The
number of shares granted was due to the Committee’s assessment of the Company’s
superior financial performance in 2006 and Mr. Roberts’ achievement of key strategic
initiatives. Mr. Roberts’ unvested shares were forfeited upon his termination of
employment. The other Management Executives were each granted an option for 22,500 shares
because they all significantly impacted our financial results. The grant date fair market
value of the options awarded was $12.05 per share.
In June 2007, Mr. McHale was granted an option for 75,000 shares when he
was promoted to and elected President and CEO. The option vests in four equal installments
on each annual anniversary of the date of grant. In February 2007, he was granted an option
for 22,500 shares along with the other Management Executives. The value of the aggregate
number of shares he was awarded in 2007 is below the competitive median market data for
long-term incentives for the CEO position, which the Committee believes reflected his
tenure during 2007.
In December 2007, the Committee granted a long-term incentive award to
some of our named executive officers in the form of restricted stock. These shares will
vest in three years and are not subject to accelerated vesting upon retirement. The
Committee determined that it was in the best interest of our Company to award restricted
stock to motivate executive officers to contribute to our growth and to continue their
service with our Company. Messrs. Johnson and Paulis were granted 4,000 shares each, and
Mr. Rescorla was granted 2,500 shares. The number of shares granted to each named executive
officer was determined by the Committee based on its consideration of the named executive
officer’s individual responsibilities and ability to significantly impact key company
initiatives.
In February 2008, the Committee granted Mr. McHale a stock option for
150,000 shares. Each of the other Management Executives, except Mr. Graner, was granted an
option for 30,000 shares. The Committee granted options for the same number of shares to
each of the other Management Executives due to their overall contributions to our
performance in 2007. Mr. Graner was granted an option for an additional 9,000 shares for
his contributions as Chief Financial Officer.
Benefits and Perquisites
In an effort to attract and retain talented employees, we offer
retirement, health and welfare programs competitive within our local markets (the
“Benefit Programs”). The only Benefit Programs offered to our U.S. executive
officers, either exclusively or with terms different from those offered to other eligible
employees, include the following:
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•
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Supplemental Retirement Benefit. This unfunded
supplemental retirement benefit arrangement provides certain U.S. executives with a
benefit of $10,000 per year payable for ten (10) years in monthly installments
commencing upon retirement. If an eligible participant elects to retire and receive
this benefit prior to reaching age sixty five (65), the benefit amount will be
reduced by one-half of one percent (0.5 percent) for each month by which the
participant’s retirement precedes his or her sixty-fifth (65th) birthday. Mr.
Graner is the only active executive officer eligible for this benefit.
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•
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Restoration Plan. Since the Internal Revenue Code
limits the pension benefits that can be accrued under a tax-qualified defined
benefit pension plan, we have established the Graco Inc. Restoration Plan. This
plan is a nonqualified excess benefit plan designed to provide retirement benefits
to eligible participants in the United States as a replacement for those retirement
benefits reduced under the Graco Employee Retirement Plan by operation of Section
415 and Section 401(a)(17) of the Code. On February 16, 2007, the Committee
approved an arrangement by which Mr. Roberts, effective January 1, 2007, was
credited with one and one-half years of service under the Restoration Plan for each
year worked until retirement. This decision was based upon the Committee’s
review of benchmarking data and its desire to provide Mr. Roberts with retirement
benefits closer to the market median.
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•
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Supplemental Long-term Disability Program. Each U.S.
executive officer is enrolled in an individual executive long-term disability plan.
We pay the premiums. Each plan provides the executive with a monthly disability
benefit of up to $21,800 in the event of long-term disability.
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•
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Other Perquisites. We provide few other perquisites
to our executive officers. We reimburse our U.S. Management Executives for certain
financial planning expenses to encourage the executives to maximize the value of
their compensation and benefit programs. In 2007, the maximum amount reimbursable
for financial planning was $10,000 for the CEO and $7,000 for all other U.S.
Management Executives. In order to motivate the executives to receive appropriate
preventative medical care to support their continued health and productivity, we
offer executive officers in the United States an executive physical examination
program through the Mayo Clinic. This program provides a physical examination every
other year for executives from age 40 through 49, and every year for executives age
50 and older. Executives may be reimbursed and/or receive a tax gross-up for
certain limited spousal travel and entertainment events. Mr. Paulis, our named
executive officer employed by Graco N.V., is also eligible for benefits and
perquisites consistent with those offered to other Graco N.V. management
employees.
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Severance and Change of Control
Arrangements
We have entered into key employee agreements with the CEO and each of the
named executive officers, the terms of which are described below under “Change of
Control and Post Termination Payments.” The Committee believes that it is in the best
interests of our Company and its shareholders to design compensation programs that assist
our Company in attracting and retaining qualified executive officers, assure that our
Company will have the continued dedication of our Company’s executive officers in the
event of a pending, threatened or actual change of control, provide certainty about the
consequences of terminating certain executive officers’ employment, protect our
Company by obtaining non-compete covenants from certain executive officers that continue
after their termination of employment not involving a change of control and to obtain a
release of any claims from those former executive officers. Accordingly, the agreements
generally provide for certain benefits if the executive officer’s employment or
executive officer’s service is terminated involuntarily by our Company without cause
prior to a change of control or if, within two years after a change of control, the
executive officer’s employment or service is terminated involuntarily by the Company
without cause or the executive officer resigns for good reason. The current form of key
employee agreement was approved by the Committee in December 2007 after reviewing the key
employee agreements previously in effect and current market practices related to severance
arrangements and benefit levels related thereto. In particular, the Committee reviewed
Hewitt’s most recent “Executive Severance Arrangements Not Related to a Change
in Control” and “Executive Change of Control Arrangements” surveys
regarding the form and amount of benefits and severance terms provided by companies to
their executive officers. Additionally, the Committee reviewed information collected from
publicly available information about severance practices at companies in Graco’s peer
group.
The Committee believes it is imperative to diminish any potential
distraction of the executive officers by the personal uncertainties and risks created by a
pending or threatened change of control. By offering an agreement that will financially
protect the executive officer in the event his or her employment or service is
involuntarily terminated or terminated by the executive officer for good reason following a
change of control, the Committee believes each executive officer’s full attention and
dedication to our Company will be enhanced to assist in the evaluation of a proposed change
of control, and complete a change of control transaction and facilitate an orderly
transition in the event of a change of control. In the event of a change of control of our
Company, the agreements provide benefits only if the executive officer’s employment
or service is terminated involuntarily without cause or if the executive officer resigns
for good reason, including by reason of material demotion, decrease in compensation,
relocation or increased travel, within two years after the change of control. The Committee
believes this “double-trigger” approach is most consistent with the objectives
described above. The Committee believes that a termination by an executive officer for good
reason may be conceptually the same as termination by our Company without cause, and that a
potential acquirer would otherwise have an incentive to constructively terminate the
executive’s employment to avoid paying severance benefits, so the key employee
agreements provide severance benefits in the case of resignation for good reason following
a change of control.
The Committee believes that it is important to attract and retain certain
executive officers by agreeing to provide certain benefits if the executive officer’s
employment or service is terminated without cause prior to a change of control. In
addition, the Committee believes that these benefits are appropriate to compensate these
executive officers for agreeing not to work with competitors for a specified period of time
following termination of employment, and that compensation enhances the enforceability of
these non-compete covenants. The Committee also believes that we benefit from obtaining a
release of any claims from these former executive officers and the severance payments
provide consideration for obtaining the release. Our equity awards for executive officers
and certain key managers provide for accelerated vesting, or lapse of restrictions, upon a
change of control. The Committee believes that acceleration upon a change of control is
appropriate to minimize the risk that executive officers might favor a transaction based on
the likely impact on the executive officer’s equity awards, to increase the
likelihood that the employees will remain with us after becoming aware of a pending or
threatened change of control, and due to the increased likelihood that employees may be
terminated by a successor through no fault of their own.
Tax Implications of Executive Compensation
Section 162(m) of the Internal Revenue Code places a limit of $1 million
in compensation per year on the amount that we may deduct with respect to each of our named
executive officers. This limitation does not apply to compensation that qualifies as
“performance-based compensation.” Annual cash incentives meeting certain
conditions and stock option awards constitute performance-based compensation and will
generally be fully deductible. The Committee believes that all incentive compensation paid
to the executive officers for fiscal year 2007 will be deductible for federal income tax
purposes. However, the Committee reserves the flexibility to approve elements of
compensation for specific officers in the future that may not be fully deductible when the
Committee deems the compensation appropriate in light of its philosophies.
Report of the Management Organization and Compensation
Committee
The Management Organization and Compensation Committee of the Company has
reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K with management, and based on such review and discussions, the Management
Organization and Compensation Committee recommended to the Board that the Compensation
Discussion and Analysis be included in this Proxy Statement.
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The Members of
the Management Organization and Compensation Committee
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Mr. Jack W. Eugster,
Chair
1
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Mr. J. Kevin
Gilligan
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Mr. Lee R.
Mitau
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Ms. Marti
Morfitt
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Mr. Mark H.
Rauenhorst
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1
Mr. Eugster became Chair of the Management Organization and Compensation Committee
effective immediately following the Committee’s meeting on February 15, 2008
(the “Meeting”), although he served as a member of the Committee
throughout 2007. Ms. Morfitt served as Chair of the Committee from May 4, 1999
through the Meeting.
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Summary Compensation Table
The table below summarizes the total compensation paid to or earned by
all persons who served as our chief executive officer (“CEO”), chief financial
officer (“CFO”) and our three other most highly compensated executive officers
(collectively “Named Executive Officers” or “NEOs”; individually a
“Named Executive Officer” or “NEO”), based on total compensation
(excluding changes in pension value and nonqualified deferred compensation earnings) during
the fiscal years ended December 29, 2006 and December 28, 2007.
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Name and Principal
Position
|
Year
|
Salary(1)
($)
|
Bonus(2)
($)
|
Stock
Awards(3)
($)
|
Option
Awards(4)
($)
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Non-Equity
Incentive Plan
Compensation(1,5)
($)
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Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
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All Other
Compensation
($)
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Total
($)
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Patrick J.
McHale
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2007
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370,393
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—
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—
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347,547
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216,021
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(6)
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91,000
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(8)
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11,643
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(10)
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1,036,604
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President and Chief
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Executive Officer
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David A.
Roberts
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2007
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407,328
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—
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—
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639,330
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—
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196,000
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(8)
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39,600
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(10)
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1,282,258
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Former Chairman,
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2006
|
942,080
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—
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—
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942,080
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914,318
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170,000
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19,867
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2,663,365
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President and Chief
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Executive Officer
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James A.
Graner
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2007
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330,750
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—
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—
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335,735
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111,446
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(7)
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356,000
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(9)
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18,125
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(10)
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1,151,756
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Chief Financial
Officer
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2006
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238,500
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|
—
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—
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373,034
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242,692
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283,000
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26,026
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1,163,252
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and Treasurer
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Dale D.
Johnson
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2007
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289,047
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—
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4,384
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271,965
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130,755
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(7)
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185,000
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(8)
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19,117
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(10)
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900,232
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Vice President and
General
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2006
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277,930
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—
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—
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199,461
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288,254
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97,000
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17,988
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880,633
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Manager, Contractor
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Equipment Division
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Charles L.
Rescorla
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2007
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245,670
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—
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2,717
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368,054
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111,133
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(7)
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117,000
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(8)
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16,335
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(10)
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860,909
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Vice President,
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2006
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236,221
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10,000
|
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—
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416,769
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244,996
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82,000
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26,283
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1,016,269
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Manufacturing and
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Distribution
Operations
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Simon J. W.
Paulis
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2007
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254,681
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(11)
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30,000
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4,348
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236,112
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108,853
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(7,11)
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67,645
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(9)
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85,495
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(11,12)
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787,137
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(11)
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Vice President and
General
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Manager, Europe
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(1)
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Amounts of compensation deferred are included in
Salary and Non-Equity Incentive Plan Compensation in the year earned.
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(2)
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Bonus includes any awards made under the CEO Award
Program.
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(3)
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The amounts reported in the Stock Awards Column are
the same as the compensation cost recognized pursuant to SFAS No.123(R) in our
Company's financial statements for restricted unit grants made under the Stock
Incentive Plan, unreduced by the estimated service-based forfeitures. Information
concerning these amounts may be found in Item 8, Financial Statements and
Supplementary Data, and Note G to the Consolidated Financial Statements in our
Company's 2007 Annual Report on Form 10-K.
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(4)
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The amounts reported in the Option Awards Column are
the same as the compensation cost recognized pursuant to SFAS No.123(R) in our
Company's financial statements for option grants made under the Stock Incentive
Plan, unreduced by the estimated service-based forfeitures. Information concerning
these amounts may be found in Item 8, Financial Statements and Supplementary Data,
and Note A to the Consolidated Financial Statements in the Company's 2007 Annual
Report on Form 10-K. The option awards reflected in the calculation of this cost
are identified in the Supplemental Table to the Options Awards Column found on page
20 immediately following this Summary Compensation Table.
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(5)
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The amounts represent awards under the Executive
Officer Annual Incentive Bonus Plan or the Executive Officer Bonus Plan, as
applicable. The Executive Officer Annual Incentive Bonus Plan has a 100% target
payout and a 150% maximum payout. The Executive Officer Bonus Plan has a 70% target
payout and a 105% maximum payout. See narrative preceding the Grants of Plan-Based
Awards table found on page 21.
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(6)
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As a result of his promotion to President and CEO,
Mr. McHale's 2007 bonus was based on six months of participation in the Executive
Officer Bonus Plan and six months of participation in the Executive Officer Annual
Incentive Bonus Plan. At its February 15, 2008 meeting, the Committee certified
that Mr. McHale was entitled to 43% of maximum payout opportunity under the
Executive Officer Annual Incentive Bonus Plan, which was 64.5% (150% x 43% = 64.5%)
of his 2007 prorated established base salary. The incentive payment for Mr. McHale
under the Executive Officer Bonus Plan follows the same calculation method noted in
footnote 7.
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(7)
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In February 2007, the Committee selected the NEOs
for participation in the Executive Officer Bonus Plan and at its February 15, 2008
meeting, certified that such NEOs were entitled to a payout at 43% of maximum
payout opportunity. They each received a bonus equal to 45% (105% x 43% = 45%) of
their established base salary paid in 2007.
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(8)
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The amount shown in the Change in Pension Value and
Nonqualified Deferred Compensation Earnings column reflects the aggregate change in
the actuarial present value of the NEO's accumulated benefit under the qualified
Graco Employee Retirement Plan, nonqualified excess benefits plan known as the
Graco Inc. Restoration Plan, and the Supplemental Executive Retirement Plan
("SERP") as follows: Mr. McHale: $9,000 (qualified pension) and $82,000
(nonqualified restoration); Mr. Roberts: $12,000 (qualified pension) and $184,000
(nonqualified restoration); Mr. Graner: $4,000 (qualified pension), $350,000
(nonqualified restoration), and $2,000 (SERP); Mr. Johnson: $27,000 (qualified
pension) and $158,000 (nonqualified restoration); Mr. Rescorla: $18,000 (qualified
pension) and $99,000 (nonqualified restoration).
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(9)
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The amount shown for Mr. Paulis reflects the change
in present value of the fully insured and sector pensions available to Mr. Paulis.
$66,401 is attributable to the fully insured pension through Swiss Life and $1,244
is attributable to the sector pension plan.
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(10)
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The amounts shown in the All Other Compensation
column for 2007 reflect the following for each NEO: Mr. McHale: $786 for spousal
travel, $382 for gross-up payments on travel expenses, $3,725 in incremental cost
for long term disability coverage, and $6,750 for a matching contribution to the
Employee Investment Plan; Mr. Roberts: $2,905 for an executive physical, $19,080
for financial planning (as a result of certain eligible fees incurred in 2006 that
were paid in 2007), $4,219 for spousal travel, $3,143 for gross-up payments on
travel expenses, $3,503 in incremental cost for long term disability coverage, and
$6,750 for a matching contribution to the Employee Investment Plan; Mr. Graner:
$7,000 for financial planning, $4,375 in incremental cost for long term disability
coverage and a $6,750 for a matching contribution to the Employee Investment Plan;
Mr. Johnson: $4,233 for an executive physical, $2,434 for spousal travel, $1,182
for gross-up payments on travel expenses, $4,518 in incremental cost for long term
disability coverage and $6,750 for a matching contribution to the Employee
Investment Plan; Mr. Rescorla: $1,823 for an executive physical, $510 for financial
planning, $2,193 for spousal travel, $1,064 for gross-up payments on travel
expenses, $3,995 in incremental cost for long term disability coverage and $6,750
for a matching contribution to the Employee Investment Plan; Mr. Paulis: $1,772 for
spousal travel, $7,100 for car related expenses (i.e. maintenance, wash, insurance,
road tax, and fuel for Company-provided vehicle), $5,099 for miscellaneous expense,
$8,299 in incremental cost for long term disability coverage, $62,160 representing
Graco's contribution of the premium paid to the insurance company for pension,
medical, disability and life insurance benefits, and $1,068 representing Graco's
contributions to the retirement plan mandated by the metal sector in which Graco is
classified. Benefits provided to Belgium employees are very different than those
provided to employees based in the United States; however Mr. Paulis receives
similar benefits to those provided to all other Belgium employees.
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(11)
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All compensation and benefit calculations for Mr.
Paulis, except for stock and option awards and CEO award, reflect an average
exchange rate of 1.37 dollar-to-euro for 2007.
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Supplemental Table to the Option Awards Column for Fiscal Year Ended
December 28, 2007
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Name
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Grant
Date
|
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Shares
Granted
(#)
|
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Expense
Recorded
in 2007
($)
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Patrick J.
McHale
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2/21/2003
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22,500
|
|
|
3,755
|
|
|
|
2/20/2004
|
|
27,000
|
|
|
45,810
|
|
|
|
2/18/2005
|
|
22,500
|
|
|
46,640
|
|
|
|
2/17/2006
|
|
22,500
|
|
|
71,796
|
|
|
|
2/16/2007
|
|
22,500
|
|
|
58,450
|
|
|
|
6/14/2007
|
|
75,000
|
|
|
121,096
|
|
|
|
|
Total
|
|
|
|
|
|
|
347,547
|
|
|
|
|
|
|
|
|
|
|
David A. Roberts
|
|
2/21/2003
|
|
108,000
|
|
|
18,022
|
|
|
|
2/20/2004
|
|
120,000
|
|
|
101,601
|
|
|
|
2/18/2005
|
|
100,000
|
|
|
104,288
|
|
|
|
2/17/2006
|
|
140,000
|
|
|
223,728
|
|
|
|
2/16/2007
|
|
140,000
|
|
|
191,691
|
|
|
|
|
Total
|
|
|
|
|
|
|
639,330
|
|
|
|
|
|
|
|
|
|
|
James A. Graner
|
|
2/21/2003
|
|
18,000
|
|
|
3,004
|
|
|
|
2/20/2004
|
|
18,000
|
|
|
30,540
|
|
|
|
2/18/2005
|
|
15,000
|
|
|
31,093
|
|
|
|
2/17/2006
|
|
22,500
|
|
|
—
|
(1)
|
|
|
2/16/2007
|
|
22,500
|
|
|
271,098
|
(1)
|
|
|
|
Total
|
|
|
|
|
|
|
335,735
|
|
|
|
|
|
|
|
|
|
|
Dale D. Johnson
|
|
2/21/2003
|
|
27,000
|
|
|
4,506
|
|
|
|
2/20/2004
|
|
27,000
|
|
|
45,810
|
|
|
|
2/18/2005
|
|
22,500
|
|
|
46,640
|
|
|
|
2/17/2006
|
|
22,500
|
|
|
81,884
|
(2)
|
|
|
2/16/2007
|
|
22,500
|
|
|
93,125
|
(2)
|
|
|
|
Total
|
|
|
|
|
|
|
271,965
|
|
|
|
|
|
|
|
|
|
|
Charles L.
Rescorla
|
|
2/21/2003
|
|
27,000
|
|
|
4,506
|
|
|
|
2/20/2004
|
|
27,000
|
|
|
45,810
|
|
|
|
2/18/2005
|
|
22,500
|
|
|
46,640
|
|
|
|
2/17/2006
|
|
22,500
|
|
|
—
|
(1)
|
|
|
2/16/2007
|
|
22,500
|
|
|
271,098
|
(1)
|
|
|
|
Total
|
|
|
|
|
|
|
368,054
|
|
|
|
|
|
|
|
|
|
|
Simon J. W.
Paulis
|
|
2/20/2004
|
|
6,750
|
|
|
11,453
|
|
|
|
2/17/2006
|
|
22,500
|
|
|
99,994
|
(2)
|
|
|
2/16/2007
|
|
22,500
|
|
|
124,665
|
(2)
|
|
|
|
Total
|
|
|
|
|
|
|
236,112
|
|
|
(1)
|
All options granted to Mr. Graner and Mr. Rescorla
in 2006 were fully expensed in 2006 because they were eligible for retirement, and
under the plan, all options granted to them would vest upon retirement. Similarly,
all options granted in 2007 were expensed in 2007.
|
(2)
|
Mr. Johnson and Mr. Paulis will be retirement
eligible in 2009, so outstanding unvested options will be fully expensed at that
time. Options granted in 2006 and 2007 are being expensed over the requisite
service period, beginning on the date of grant and ending on the respective
retirement-eligible date.
|
Grants of Plan-Based Awards in 2007
On February 16, 2007, the Committee awarded a non-qualified stock option
to each executive officer, including the NEOs, under the Stock Incentive Plan. The amounts
shown in the column entitled “All Other Option Awards: Number of Securities
Underlying Options” reflect the number of common shares covered by the stock option
granted to each NEO. Each option has a 10-year term and becomes exercisable in equal
installments over four years, beginning with the first anniversary of the grant date. The
Stock Incentive Plan requires the exercise price of an option to be the fair market value
of the shares on the date of the grant. The fair market value of the shares is defined as
the last sale price on the day preceding the date of grant, unless otherwise determined by
the Committee. The Committee has not changed this definition.
On December 7, 2007, the Management Organization and Compensation
Committee awarded restricted shares to Messrs. Johnson, Rescorla, and Paulis under the
Stock Incentive Plan. The amounts shown in the column entitled “All Other Stock
Awards: Number of Shares of Stock or Units” reflect the number of restricted shares
granted to each NEO. Each restricted stock grant becomes fully vested three years after the
date of the grant and earns dividends.
Under the Executive Officer Annual Incentive Bonus Plan, the payout to
Mr. McHale, upon achievement of applicable financial measures, ranges from a minimum of 0
percent to a maximum of 150 percent of his earned base salary.
Under the Executive Officer Bonus Plan, the payout to the NEOs, upon
achievement of applicable financial measures, ranges from a minimum of 0 percent to a
maximum of 105 percent of their earned base salary.
Grants of Plan-Based Awards for Fiscal Year Ended December
28, 2007
|
|
|
Estimated
Future Payouts Under
Non-Equity Incentive Plan
Awards
|
All Other
Stock
Awards:
Number of
|
All Other
Option
Awards:
Number of
|
Exercise
or
|
Closing
Market
Price of
|
|
Name
|
Grant Date
|
Minimum
($)
|
Target
($)
|
Maximum
($)
|
Shares of
Stock or
Units
(#)
(1)
|
Securities
Underlying
Options
(#)
|
Base Price
of Option
Awards
($/sh)
|
Common
Stock on
Grant Date
($/sh)
|
Grant Date
Fair Value of
Stock or Option
Award ($)
|
|
Patrick J. McHale
|
|
2/16/2007
|
|
|
|
|
|
|
|
|
|
22,500
|
|
41.36
|
|
41.26
|
|
271,098
|
(4)
|
|
|
6/14/2007
|
|
|
|
|
|
|
|
|
|
75,000
|
|
40.53
|
|
40.83
|
|
898,080
|
(5)
|
|
|
|
|
0
|
|
84,275
|
(2)
|
126,413
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
250,000
|
(3)
|
375,000
|
(3)
|
|
|
|
|
|
|
|
|
|
|
David A. Roberts
|
|
2/16/2007
|
|
|
|
|
|
|
|
|
|
140,000
|
|
41.36
|
|
41.26
|
|
1,686,832
|
(4)
|
|
|
|
|
0
|
|
654,100
|
|
981,150
|
|
|
|
|
|
|
|
|
|
|
|
James A. Graner
|
|
2/16/2007
|
|
|
|
|
|
|
|
|
|
22,500
|
|
41.36
|
|
41.26
|
|
271,098
|
(4)
|
|
|
|
|
0
|
|
171,990
|
|
257,985
|
|
|
|
|
|
|
|
|
|
|
|
Dale D. Johnson
|
|
2/16/2007
|
|
|
|
|
|
|
|
|
|
22,500
|
|
41.36
|
|
41.26
|
|
271,098
|
(4)
|
|
|
12/7/2007
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
156,520
|
(6)
|
|
|
|
|
0
|
|
202,333
|
|
303,499
|
|
|
|
|
|
|
|
|
|
|
|
Charles L. Rescorla
|
|
2/16/2007
|
|
|
|
|
|
|
|
|
|
22,500
|
|
41.36
|
|
41.26
|
|
271,098
|
(4)
|
|
|
12/7/2007
|
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
97,825
|
(6)
|
|
|
|
|
0
|
|
171,969
|
|
257,953
|
|
|
|
|
|
|
|
|
|
|
|
Simon J.W. Paulis
|
|
2/16/2007
|
|
|
|
|
|
|
|
|
|
22,500
|
|
41.36
|
|
41.26
|
|
271,098
|
(4)
|
|
|
12/7/2007
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
156,520
|
(6)
|
|
|
|
|
0
|
|
168,441
|
(7)
|
252,662
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents awards of restricted stock granted in
December 2007 under the Stock Incentive Plan. Additional details regarding such
awards can be found at page 16 of this Proxy Statement.
|
(2)
|
Target and maximum awards for Mr. McHale based on
the Executive Officer Bonus Plan prorated for period from January 2007 through June
2007.
|
(3)
|
Target and maximum awards for Mr. McHale based on
the Executive Officer Annual Incentive Bonus Plan prorated for period from July
2007 through December 2007.
|
(4)
|
The grant date fair market value was $12.05 per
share. Fair value of the award was determined by multiplying by the number of
shares by grant date present value.
|
(5)
|
The grant date fair market value was $11.97 per
share. Fair value of the award was determined by multiplying by the number of
shares by grant date present value.
|
(6)
|
Grant date fair value of restricted units is based
on the closing market value of $39.13 per share of common stock on the date of the
grant.
|
(7)
|
The established base salary used in the computation
reflects a mid-year Belgian inflationary adjustment and an average exchange rate of
1.37 dollar-to-euro for 2007.
|
Outstanding Equity Awards at Fiscal Year Ended December 28,
2007
The following table summarizes the outstanding equity awards held by each
Named Executive Officer at fiscal year ended December 28, 2007.
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
Number of
Securities Underlying
Unexercised Options
(1)
|
Option
Exercise
|
Option
|
|
Number
of
|
Market Value
of
|
Name
|
Grant
Date
|
(#)
Exercisable
|
(#)
Unexercisable
|
Price
($)
|
Expiration
Date
|
|
Shares of
Unvested
Restricted Stock
|
Unvested
Restricted Stock
|
|
Patrick J.
McHale
|
|
6/14/2007
|
(2)
|
—
|
|
75,000
|
|
|
40.53
|
|
6/14/2017
|
|
|
|
|
|
|
|
2/16/2007
|
(2)
|
—
|
|
22,500
|
|
|
41.36
|
|
2/16/2017
|
|
|
|
|
|
|
|
2/17/2006
|
(2)
|
5,625
|
|
16,875
|
|
|
40.68
|
|
2/17/2016
|
|
|
|
|
|
|
|
2/18/2005
|
(2)
|
11,250
|
|
11,250
|
|
|
38.13
|
|
2/18/2015
|
|
|
|
|
|
|
|
2/20/2004
|
(2)
|
20,250
|
|
6,750
|
|
|
27.91
|
|
2/20/2014
|
|
|
|
|
|
|
|
2/21/2003
|
(2)
|
22,500
|
|
—
|
|
|
17.34
|
|
2/21/2013
|
|
|
|
|
|
|
|
2/22/2002
|
(2)
|
12,656
|
|
—
|
|
|
18.39
|
|
2/22/2012
|
|
|
|
|
|
|
|
2/23/2001
|
(2)
|
8,436
|
|
—
|
|
|
11.71
|
|
2/23/2011
|
|
|
|
|
|
|
|
2/24/2000
|
(2)
|
6,327
|
|
—
|
|
|
9.09
|
|
2/24/2010
|
|
|
|
|
|
David A.
Roberts
(5)
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
James A.
Graner
|
|
2/16/2007
|
(2)
|
—
|
|
22,500
|
|
|
41.36
|
|
2/16/2017
|
|
|
|
|
|
|
|
2/17/2006
|
(2)
|
5,625
|
|
16,875
|
|
|
40.68
|
|
2/17/2016
|
|
|
|
|
|
|
|
2/18/2005
|
(2)
|
7,500
|
|
7,500
|
|
|
38.13
|
|
2/18/2015
|
|
|
|
|
|
|
|
2/20/2004
|
(2)
|
13,500
|
|
4,500
|
|
|
27.91
|
|
2/20/2014
|
|
|
|
|
|
|
|
2/21/2003
|
(2)
|
18,000
|
|
—
|
|
|
17.34
|
|
2/21/2013
|
|
|
|
|
|
|
|
2/22/2002
|
(2)
|
11,250
|
|
—
|
|
|
18.39
|
|
2/22/2012
|
|
|
|
|
|
|
|
2/23/2001
|
(2)
|
11,250
|
|
—
|
|
|
11.71
|
|
2/23/2011
|
|
|
|
|
|
Dale D.
Johnson
|
|
2/16/2007
|
(2)
|
—
|
|
22,500
|
|
|
41.36
|
|
2/16/2017
|
|
|
|
|
|
|
|
2/17/2006
|
(2)
|
5,625
|
|
16,875
|
|
|
40.68
|
|
2/17/2016
|
|
|
|
|
|
|
|
2/18/2005
|
(2)
|
11,250
|
|
11,250
|
|
|
38.13
|
|
2/18/2015
|
|
|
|
|
|
|
|
2/20/2004
|
(2)
|
20,250
|
|
6,750
|
|
|
27.91
|
|
2/20/2014
|
|
|
|
|
|
|
|
2/21/2003
|
(2)
|
27,000
|
|
—
|
|
|
17.34
|
|
2/21/2013
|
|
|
|
|
|
|
|
2/22/2002
|
(2)
|
22,500
|
|
—
|
|
|
18.39
|
|
2/22/2012
|
|
|
|
|
|
|
|
2/23/2001
|
(2)
|
45,000
|
|
—
|
|
|
11.71
|
|
2/23/2011
|
|
|
|
|
|
|
|
2/09/2000
|
(3)
|
67,500
|
|
—
|
|
|
9.09
|
|
2/09/2010
|
|
|
|
|
|
|
|
2/22/1999
|
(2)
|
8,438
|
|
—
|
|
|
6.37
|
|
2/22/2009
|
|
|
|
|
|
|
|
12/07/2007
|
(4)
|
|
|
|
|
|
|
|
|
|
4,000
|
|
150,200
|
(6)
|
Charles L.
Rescorla
|
|
2/16/2007
|
(2)
|
—
|
|
22,500
|
|
|
41.36
|
|
2/16/2017
|
|
|
|
|
|
|
|
2/17/2006
|
(2)
|
5,625
|
|
16,875
|
|
|
40.68
|
|
2/17/2016
|
|
|
|
|
|
|
|
2/18/2005
|
(2)
|
11,250
|
|
11,250
|
|
|
38.13
|
|
2/18/2015
|
|
|
|
|
|
|
|
2/20/2004
|
(2)
|
20,250
|
|
6,750
|
|
|
27.91
|
|
2/20/2014
|
|
|
|
|
|
|
|
2/21/2003
|
(2)
|
27,000
|
|
—
|
|
|
17.34
|
|
2/21/2013
|
|
|
|
|
|
|
|
2/22/2002
|
(2)
|
22,500
|
|
—
|
|
|
18.39
|
|
2/22/2012
|
|
|
|
|
|
|
|
2/23/2001
|
(2)
|
22,500
|
|
—
|
|
|
11.71
|
|
2/23/2011
|
|
|
|
|
|
|
|
2/24/2000
|
(2)
|
12,656
|
|
—
|
|
|
9.09
|
|
2/24/2010
|
|
|
|
|
|
|
|
12/07/2007
|
(4)
|
|
|
|
|
|
|
|
|
|
2,500
|
|
93,875
|
(6)
|
Simon J. W.
Paulis
|
|
2/16/2007
|
(2)
|
—
|
|
22,500
|
|
|
41.36
|
|
2/16/2017
|
|
|
|
|
|
|
|
2/17/2006
|
(2)
|
5,625
|
|
16,875
|
|
|
40.68
|
|
2/17/2016
|
|
|
|
|
|
|
|
2/20/2004
|
(2)
|
5,063
|
|
1,687
|
|
|
27.91
|
|
2/20/2014
|
|
|
|
|
|
|
|
12/07/2007
|
(4)
|
|
|
|
|
|
|
|
|
|
4,000
|
|
150,200
|
(6)
|
|
(1)
|
All data reflect the three-for-two stock splits
distributed on June 6, 2002 and March 30, 2004.
|
(2)
|
These options have a 10-year term and become
exercisable in equal installments over four years, beginning with the first
anniversary of the grant date.
|
(3)
|
These options have a 10-year term and become
exercisable in equal installments over five years, beginning with the second
anniversary of the grant date.
|
(4)
|
Each stock grant has a 3-year term and becomes fully
vested on the date that is three years after the grant.
|
(5)
|
Mr. Roberts resigned from his position as Chairman,
President and Chief Executive Officer on June 11, 2007. All outstanding vested
options were exercised within thirty days from June 15, 2007, the date of the
termination of his employment. All outstanding unvested options were forfeited upon
termination.
|
(6)
|
Market value determined using the closing market
price of $37.55 per share of common stock on the last day of the fiscal
year.
|
Option Exercises and Stock Vested in 2007
The following table summarizes the options exercised by each Named
Executive Officer in 2007.
|
|
Option
Awards
|
|
|
Name
|
Number of Shares
Acquired on Exercise
(#)
|
Value Realized
on Exercise
($)
|
|
Patrick J.
McHale
|
—
|
—
|
David A.
Roberts
|
485,500
|
8,844,389
|
James A.
Graner
|
—
|
—
|
Dale D.
Johnson
|
—
|
—
|
Charles L.
Rescorla
|
12,656
|
431,306
|
Simon J. W.
Paulis
|
6,750
|
153,008
|
|
Change of Control and Post-Termination Payments
As described above under “Compensation Discussion and Analysis
– Severance and Change of Control Arrangements,” the Committee approved a new
form of key employee agreement in December 2007.
Summary of Revisions from Prior
Arrangements
The new agreement replaces the form of key employee agreement and
severance arrangements previously in effect for executive officers. The primary differences
between the new Key Employee Agreements and the prior arrangements include:
|
•
|
Confirmation of the details of severance for
Management Executives who are terminated without cause before any change of
control. Previously, the Company had similar severance practices that were not
reflected in a written plan or agreement.
|
|
•
|
Modification of the change of control triggers to
include those events that are generally considered changes of control and to
exclude those that would generally not be regarded as changes of control.
|
|
•
|
Provide severance benefits to Management Executives
that comply with (or, where possible, are structured to fall outside the coverage
of) the requirements of Section 409A of the Internal Revenue Code.
|
|
•
|
Require that Management Executives not compete with
the Company and not solicit employees for a specified period of time after leaving
employment (except in the case where, within two years after a change of control,
the executive officer’s employment terminates involuntarily without cause or
voluntarily for good reason).
|
Summary of New Key Employee Agreement
The Key Employee Agreement provides for payment of the following benefits
if the employment of a Management Executive is terminated involuntarily by the Company
without Cause (as defined below) prior to a Change of Control (as defined
below):
|
•
|
Pro-rata bonus for year of termination based on
actual performance;
|
|
•
|
Severance pay equal to one times (two times for CEO)
base salary plus bonus based on the target level of performance for the year of
termination, payable over the severance period;
|
|
•
|
Continued medical, dental and life insurance for the
severance period;
|
|
•
|
Outplacement services; and
|
|
•
|
Reimbursement of reasonable legal fees incurred to
enforce the agreement.
|
The Key Employee Agreement provides for payment of the following benefits
if, within two years after a change of control, an executive officer’s employment is
terminated involuntarily by the Company without cause or if the executive officer resigns
for good reason:
|
•
|
Pro-rata bonus for year of termination based on
performance at the target level;
|
|
•
|
Severance pay equal to two times (three times for
CEO) the sum of base salary plus bonus based on the target level of performance for
the year of termination, payable in a lump sum six months after the termination
date or over the severance period (if the change of control does not conform to the
requirements of Internal Revenue Code Section 409A);
|
|
•
|
Continued medical, dental and life insurance for the
severance period;
|
|
•
|
Attribution of two years (three years for CEO)
service credit for purposes of nonqualified excess benefit pension plan;
|
|
•
|
Reimbursement of reasonable legal fees incurred to
enforce the agreement; and
|
|
•
|
Gross-up of income taxes, and excise taxes related
to such gross-up payment, due under the “excess parachute” provisions
of the Internal Revenue Code, subject to a reduction of benefits of up to $25,000
to avoid such taxes.
|
The definition of “Change of Control” in the Key Employee
Agreements generally includes: (i) acquisition of beneficial ownership by a person or group
which results in aggregate beneficial ownership of 30 percent or more of voting power or
common stock, subject to certain exceptions; (ii) change of 50 percent or more of the Board
members, without Board approval; and (iii) consummation of a merger or other business
combination unless our Company’s shareholders own a majority of the voting power and
common stock of the surviving corporation and other conditions are satisfied.
As used in the Key Employee Agreement, “Cause” means: (i)
conviction of, or guilty or no contest plea to, any felony or other criminal act involving
moral turpitude; (ii) gross misconduct or any act of fraud, disloyalty or dishonesty
related to or connected with the executive officer’s employment or otherwise likely
to cause material harm to our Company or its reputation; (iii) a willful and material
violation of our Company’s written policies or codes of conduct; (iv) wrongful
appropriation of our Company’s funds or property or other material breach of the
executive officer’s fiduciary duties to our Company; or (v) the willful and material
breach of the Key Employee Agreement by the executive officer.
As used in the Key Employee Agreement, “Good Reason” means:
(i) assignment of duties materially inconsistent with, or other material diminution of, the
executive officer’s position, duties or responsibilities as in effect immediately
prior to the change of control; (ii) material reduction, in the aggregate, to the
compensation and benefit plans, programs and perquisites applicable to the executive
officer in effect immediately prior to the change of control; (iii) relocation of the
executive officer to a location more than 50 miles from where the executive officer was
based immediately prior to the change of control, or requiring the executive to travel to a
substantially greater extent; or (iv) failure by our Company to assign the Key Employee
Agreement to a successor.
Under the Key Employee Agreement, the Management Executive officers agree
to protect our Company’s confidential information, and not to compete with our
Company or solicit employees for two years after termination of employment (or, if the
executive officer’s employment is terminated involuntarily other than for Cause prior
to a change of control, the non-compete covenant may expire after the executive officer is
no longer receiving severance payments). The non-compete restriction does not apply if the
executive officer’s employment is terminated involuntarily without Cause or
voluntarily for Good Reason within two years after a change of control. In order to receive
severance, the executive officer must sign a release of claims in favor of our Company and
be in compliance with the terms of the Key Employee Agreement. The term of the Key Employee
Agreement is three years, followed by automatic annual renewals, unless either party gives
six months notice of non-renewal.
Except as indicated above with respect to the CEO, the same form of
agreement was provided to all executive officers, except that (i) an executive officer who
is a resident of a foreign country will receive a version of the agreement that has been
modified as necessary to take into account local laws and prevent the duplication of any
benefits and (ii) an executive officer who does not report directly to the CEO nor serves
on the executive management team will only be entitled to the foregoing severance benefits
upon termination following a change of control, as described above, and will not be
required to agree to the form of non-competition and non-solicitation provisions applicable
to other executive officers, but will be required to sign our Company’s standard
employee confidentiality and intellectual property agreement.
Severance Agreement with Former Chief Executive
Officer
Our Company was a party to a severance agreement with Mr. Roberts, our
Company’s former President and CEO, whose employment terminated on June 15, 2007. The
agreement, which was described in our Company’s proxy statements for previous
years’ annual meetings, would have provided benefits to Mr. Roberts if he had been
terminated involuntarily for other than gross and willful misconduct or if his employment
terminated due to death or disability. Because Mr. Roberts voluntarily resigned his
employment, he was not entitled to any benefits under his severance agreement.
Other Compensation and Benefits Payable Upon a Change of
Control or Certain Terminations
Each named executive officer is eligible for the benefits described in
this section as part of our Company’s standard practice or policy; however, the
benefits are not triggered by any specific termination reason. Incremental amounts for each
of these benefits are disclosed in the Summary Compensation Table, Potential Payments Upon
Termination or Following a Change of Control Table, or Pension Benefits table.
Pursuant to the Executive Officer Annual Incentive Bonus Plan and the
Executive Officer Bonus Plan, each participant is eligible to receive a prorated bonus
based on the amount of base salary earned during the fiscal year and the bonus percentage
actually paid for that year for a termination due to death, disability or retirement.
Vesting of unvested stock option awards provided to any executive officer will
automatically accelerate and the options will become fully vested in the event of a change
of control of our Company or if the employee is terminated due to death, disability or
retirement. All unvested restricted stock provided to any executive officer will
automatically be accelerated and fully vested in the event of a change of control of our
Company or if the employee is terminated due to death or disability.
Participants in the Graco Employee Retirement Plan, the Graco Inc.
Restoration Plan and the Supplemental Executive Retirement Plan are entitled to receive the
accumulated pension benefits over their lifetime, a specific defined time or at the time of
their retirement. These amounts are reflected in the Present Value of Accumulated Benefit
column of the Pension Benefits table.
Upon any termination of employment, all employees are eligible to receive
payment for any credited but unused vacation time. Each named executive officer would
receive reimbursement for any miscellaneous travel and spousal travel perquisites and
associated tax gross-up payments when incurred during the fiscal year.
The following Table discloses the potential payments and benefits, other
than those available generally on a nondiscriminatory basis to all salaried employees,
provided upon a change of control or termination of employment for each of the named
executive officers calculated as if the change of control or termination of employment had
occurred on December 28, 2007. No information is provided for Mr. Roberts since his
employment terminated during 2007, and he was not entitled to any payments or benefits
under his severance agreement.
Potential Payments Upon Termination or Following a Change
of Control at December 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
Involuntary (Not for Cause) or
Good Reason Termination
Following Change of Control
($)
(1,2,3,8)
|
Involuntary (Not for
Cause) Termination
($)
(4)
|
Retirement
($)
|
Death
($)
|
Disability
($)
(5)
|
|
Patrick J. McHale
|
|
4,920,721
|
|
2,077,363
|
|
54,600
|
|
54,600
|
|
361,200
|
|
David A. Roberts
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
James A. Graner
|
|
891,241
|
(7)
|
522,170
|
|
103,200
|
(6)
|
103,200
|
(6)
|
395,800
|
|
Dale D. Johnson
|
|
1,248,893
|
|
631,661
|
|
128,900
|
|
279,100
|
|
540,700
|
|
Charles L. Rescorla
|
|
968,899
|
(7)
|
483,312
|
|
54,400
|
|
148,275
|
|
409,875
|
|
Simon J. W. Paulis
|
|
1,117,300
|
(9,10,11)
|
440,358
|
(9,11)
|
744,409
|
(9,12)
|
1,241,103
|
(9,13)
|
744,512
|
(9,14)
|
|
(1)
|
Actuarial present value of the accumulated benefit
and the accompanying valuation method and assumptions applied for the qualified
Graco Employee Retirement Plan, the nonqualified Graco Inc. Restoration Plan and
the SERP may be found in the Pension Benefits Table and the accompanying narrative
on page 28.
|
(2)
|
The incremental benefit amount using additional pay
and earnings based on December 28, 2007 base pay and target bonus amounts. Upon a
change of control, Mr. McHale is entitled to 3 times his base salary and target
annual bonus and the other NEOs are entitled to 2 times their base salary and
target annual bonus. This represents the intrinsic value of the stock options and
restricted stock awards whose exercisability would be accelerated if a change in
control occurred on December 28, 2007. The value of restricted stock awards is
determined by multiplying that closing market price of $37.55 per share of common
stock by the number of restricted shares, and the value of accelerated stock
options is determined by multiplying the number of unvested options by the
difference between that closing share price and the option exercise price.
|
(3)
|
Assuming December 28, 2007 termination date, current
year bonus would be paid in accordance with the Annual Incentive Plans. See
Non-Equity Incentive Plan Compensation column and accompanying footnotes in the
Summary Compensation Table on page 19.
|
(4)
|
Reflects two years of base salary and target annual
bonus for Mr. McHale; 12 months of base salary and target annual bonus for the
other NEOs. Should our Company elect to extend the non-compete duration beyond 12
months, the payment amount for the NEOs, except for Mr. McHale, would
increase.
|
(5)
|
Assumes NEO is not age 65 and disabled for a full
calendar year. Benefit reflects an annualized amount that would be paid on a
monthly basis and would cease if NEO reaches their social security normal
retirement age or is no longer disabled. In the event Mr. Graner becomes disabled
prior to reaching age 65, he is eligible for an annual benefit of $5,000 for every
year he is disabled up to age 65, death, or when he ceases to be disabled,
whichever occurs first.
|
(6)
|
Mr. Graner is eligible for an annual benefit upon
his retirement or death, paid in monthly payments to him or his beneficiary for a
period of 10 years starting with his retirement or the 1st month following the
month of death.
|
(7)
|
The value of Mr. Graner's and Mr. Rescorla's
respective unvested options have not been included in this table because vesting
will occur whether the termination is the result of a change of control or
otherwise (so long as such termination is not for cause) because they have
satisfied all requirements for retirement eligibility (age 55 and 10 years of
service or upon reaching age 65).
|
(8)
|
The present value of the change of control
retirement benefit amount providing for additional years of service credit is
calculated as of the earliest possible benefit commencement date.
|
(9)
|
The amounts for Mr. Paulis reflect an average
exchange rate of 1.37 dollar-to-euro for 2007.
|
(10)
|
The health and dental, life, and retirement values
represent 18 months of premiums that will be provided to Mr. Paulis upon a change
of control event. Mr. Paulis is expected to continue his coverage through the
insurer using these payments to pay the premium.
|
(11)
|
Under Belgium law, Mr. Paulis may be entitled to
certain monetary payments and/or benefits as a result of his termination of
employment. To the extent that he is entitled to severance and the value of the
local obligation is less than what he would receive under his U.S. Key Employee
Agreement (KEA) such value will be set off against the payment obligations of his
KEA. This condition holds true regardless of whether the termination follows a
change of control or involuntary (not for cause) termination. The provisions of his
KEA have been followed to calculate the amounts shown in the Table.
|
(12)
|
The amount reflects the lump sum payable to Mr.
Paulis upon his normal retirement date. $735,588 is attributable to the fully
insured benefit provided to him by Swiss Life Insurance Company and $8,821 is
attributable to the sector pension plan.
|
(13)
|
The insured pension for Mr. Paulis provides a
specific benefit in the event of death before retirement, which is different from
and in lieu of the normal retirement benefit. The benefit amount in event of death
before retirement is four times annual salary and is paid instead of the amount
payable at normal retirement age, not in addition to any retirement benefit. This
benefit formula is used for all Belgian employees covered under this policy.
|
(14)
|
This number reflects the lump sum payable from the
pension plan due to disability of $441,115, plus the annual disability benefit
payable through the disability contract of $153,197.
|
Retirement Benefits
Graco Employee Retirement Plan (1991
Restatement)
The Graco Employee Retirement Plan (The “Retirement Plan”) is
a funded defined benefit plan designed to coordinate with Social Security benefits to
provide a basic level of retirement benefits for all eligible employees. Eligible executive
officers participate in our tax-qualified defined benefit pension plan on the same terms as
the rest of our eligible employees. Each of the U.S. named executive officers is eligible
for benefits under the Retirement Plan.
Benefits for those eligible under the Retirement Plan consist of a fixed
benefit, which is designed to provide retirement income at age 65 of 43.5 percent of a
participant’s average monthly compensation, less 18 percent of Social
Security-covered compensation (calculated in a life annuity option) for an employee with 30
years of service. Average monthly compensation is defined as the average of the five
consecutive highest years’ cash compensation during the last ten years of service,
divided by sixty. The Retirement Plan defines eligible cash compensation as base salary,
holiday pay, income earned outside of the United States but paid in the United States,
annual bonus, CEO award, sales incentive, area differential, short-term disability
payments, vacation pay, paid out accrued vacation, deferrals made under a cash or deferred
agreement under Code Section 401(k), contributions to a plan established under Code Section
125, and transit and parking reimbursements made under Code Section 132. Benefits under the
Retirement Plan vest upon five years of benefit service.
Normal retirement age is defined as age 65 or age 62 with at least 30
years of service. Early retirement is available to participants age 55 with 5 years of
vesting service. The monthly amount of a participant’s benefit when retiring prior to
age 65, or age 62 with less than 30 years of benefit service, will be reduced by one-half
of one percent (0.5%) for each month by which a participant’s pension benefit is to
begin prior to the participant turning age 65.
The default form of pension benefit is a single life annuity that
provides a monthly benefit for the life of the participant. A participant may elect an
optional form of payment. The optional forms available are survivor annuity form or a term
certain form. A survivor annuity form is an annuity that is payable monthly to and for the
lifetime of the participant with a survivor annuity that is payable monthly after the
participant dies to and for the lifetime of a participant’s designated joint
annuitant in an amount equal to 50 percent or 66 2/3 percent or 100 percent (as elected by
the participant) of the amount payable during the joint lives of the participant and the
designated joint annuitant. The value of the amounts payable in the survivor annuity form
shall be actuarially equivalent to the value of the amounts payable in the single life
annuity form. Term certain form is a form of annuity that is payable monthly to and for the
lifetime of the participant or, if longer, for 120 or 180 months, as elected by the
participant before his pension is to begin.
Effective January 1, 2008, the Plan was amended to include an actuarially
equivalent survivor annuity form in the amount of 75 percent.
Graco Inc. Restoration Plan (2005
Statement)
Because the Internal Revenue Code (“Code”) limits the pension
benefits that can be accrued under a tax-qualified defined benefit pension plan, we have
established the Graco Inc. Restoration Plan (the “Restoration Plan”). This plan
is a nonqualified unfunded excess benefit plan designed to provide retirement benefits to
eligible executives as a replacement for the retirement benefits limited under the
Retirement Plan by operation of Section 415 and Section 401(a)(17) of the Code. The
Restoration Plan provides comparable level retirement benefits as a percentage of
compensation as those provided to other employees.
An employee that is a participant in the Retirement Plan, and has
experienced a legislative reduction in benefits under the Graco Employee Retirement Plan
due to limitations imposed by Section 415 of the Code, Section 401(a)(17) of the Code, or
who has experienced a reduction in benefits due to participant contributions to the Graco
Deferred Compensation Plan (2005 Restatement), and is selected for participation, is
eligible to participate in the Plan.
Benefits under the Restoration Plan supplement the benefit under the
Retirement Plan. The Restoration Plan will pay to a participant as a benefit the amount by
which the benefit under the Retirement Plan is exceeded by the benefit to which the
participant would have been entitled under the Retirement Plan if the benefit limitations
under Section 415 of the Internal Revenue Code and the compensation limitations of Section
401(a)(17) of the Internal Revenue Code did not apply. The Restoration Plan provides for
the following default forms of distribution. If the participant is single at the time
distribution of a participant’s benefit is to commence, the participant’s
benefit is to be paid in a single life annuity. If the participant is married at the time
distribution of a participant’s benefit is to commence, a participant’s benefit
is to be paid in the form of a joint and survivor annuity. The joint and survivor annuity
will be paid over the life of the participant and the participant’s spouse, with a
reduced annuity paid to the survivor after the death of the participant or the
participant’s spouse. Optional forms of distribution were added to the Restoration
Plan in 2007. These optional forms of distribution are the distribution options available
under the Graco Employee Retirement Plan, plus a lump sum option. A participant may elect
to change the form of distribution to one of the optional forms of distribution. If the
participant’s form of payment prior to electing one of the alternate forms is an
annuity and the alternate form elected is an actuarially equivalent annuity, the benefit
will commence on the same date that the benefit would have been paid but for the election
to change the form. If a participant wishes to elect the lump sum option or any option
which does not meet the conditions listed above, the election will not take effect until
the date that is twelve months after the date on which the participant made the election
and the distribution will be delayed for at least five years after the distribution would
have otherwise been made absent the election.
A participant’s benefit will commence on the first day of the month
after the later of (i) the date the participant attains age 62, or (ii) the participant
separates from service. In the case of a distribution to a specified employee (as defined
in Section 409A of the Internal Revenue Code), where commencement is based on the specified
employee’s separation from service, the date that the distribution will commence will
be the first day of the month following the date that is six months after the specified
employee’s separation from service.
If the value of a participant’s benefit under the Restoration Plan
is $10,000 or less as of the date the benefit of the participant is to commence, the
benefit will be paid in a single lump sum.
In 2006, the Committee approved an increase to the Restoration
Plan’s maximum benefit cap. The cap previously in effect limited the aggregate annual
retirement benefits from the Graco Employee Retirement Plan (1991 Restatement) and the
Graco Inc. Restoration Plan (2005 Restatement) combined to a maximum of $170,000. The
maximum was removed to provide a comparable level of retirement benefits as a percentage of
compensation as those provided to other employees. This decision was based on competitive
benchmarking data provided by an outside consultant. The increase in the cap had no
negative impact on the financial statements.
On February 16, 2007, the Committee approved an arrangement by which Mr.
Roberts, effective January 1, 2007, was credited with one-and-one-half years of service
under the Restoration Plan for each year worked until retirement. The portion of Mr.
Robert’s accrued Restoration Plan benefit attributable to the enhanced service
accruals was approximately $4,000. The present value of the benefit enhancement as of
December 28, 2007 was $31,000.
The actuarial present values of accumulated benefits as of December 28,
2007, for both the Retirement Plan (1991 Restatement) and Restoration Plan (2005
Restatement) are reflected in the Present Value of Accumulated Benefit Column of the
Pension Benefits for 2007 table below. The actuarial present values are based on the
valuation method and the assumptions applied in the calculations.
Benefits reflected in the following Pension Benefits table are based on
either age 65 or the earliest date the NEO would receive unreduced benefits. Messrs. Graner
and Johnson are eligible for unreduced benefits upon reaching age 62.
Supplemental Executive Retirement Plan
The Company desires to retain the services of Mr. Graner and realizes
that if he were to enter into competition with our Company, it may suffer a financial loss.
Therefore, our Company entered into an agreement with Mr. Graner to provide him one
additional unfunded supplemental retirement benefit of $10,000 per year guaranteed payable
for ten years via 120 monthly installments. The agreement acknowledges that Mr. Graner may
retire on the first of any month coincident with or following the completion of five years
of service and attainment of age 55. If Mr. Graner elects to retire prior to the age of 65,
the benefit amount will be reduced by one-half of one percent for each month by which his
retirement precedes age 65. Mr. Graner agrees that, as long as he continues to receive
monthly payments, he will not directly or indirectly enter into or in any manner take part
in any business, profession or other endeavor either as an employee, agent, independent
contractor, owner or otherwise which in the opinion of our board of directors would be in
competition with the business of our Company.
Belgium
The Company provides all employees with Group Insurance/Benefits Plan for
the benefit of Graco N.V. Each employee of Graco N.V. is provided with a group insurance
benefit that provides retirement, life and disability benefits.
The pension benefit provides for a retirement benefit payable the first
of the month following the employee’s 65
th
birthday. The employee has
three payment options: a lump sum, an annuity in life only form, or conversion to another
product offered by the insurance company. The employee pays one-third of the premium and
Graco N.V. pays two-thirds of the premium.
The life insurance benefit provides a payout of four times annual salary
in the event of death prior to retirement. The premium for this benefit is paid by Graco
N.V.
The disability coverage consists of an insured annual benefit equal to 10
percent of the annual salary limited to the AMI-Benefits ceiling, plus 70 percent of the
excess. In case of occupational accident, the employee will be entitled to an annual
disability benefit, equal to 70 percent of the part of the annual salary that exceeds the
ceiling. Mr. Paulis’ disability benefit is approximately U.S. $150,000. The premium
is paid by Graco N.V.
All Graco N.V. employees have a sector retirement plan known as Sector
Pension Plan Agoria. Graco N.V. is part of “the metal sector”. This additional
retirement plan provides for retirement beginning the first day of the month following the
employee’s 65
th
birthday. The retirement benefit will be paid as a
one-time lump sum. Graco N.V. pays the monthly premium.
Pension Benefits at Fiscal Year Ended December 28,
2007
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Plan
Name
|
|
Years Credited Service
(#)
|
Present Value of
Accumulated Benefit(1)
($)
|
Payments During Last
Fiscal Year
($)
|
|
Patrick J.
McHale
|
|
Graco Employee
Retirement
|
|
18.1
|
|
226,000
|
|
—
|
|
|
|
Plan (1991
Restatement)
|
|
|
|
|
|
|
|
|
|
Graco Inc.
Restoration Plan
|
|
18.1
|
|
242,000
|
|
—
|
|
|
|
(2005
Statement)
|
|
|
|
|
|
|
|
David A.
Roberts
(3)
|
|
Graco Employee
Retirement
|
|
6.1
|
|
129,000
|
|
—
|
|
|
|
Plan (1991
Restatement)
|
|
|
|
Graco Inc.
Restoration Plan
|
|
6.1
|
|
660,000
|
|
—
|
|
|
|
(2005
Statement)
|
|
James A.
Graner
(2)
|
|
Graco Employee
Retirement
|
|
33.8
|
|
1,034,000
|
|
—
|
|
|
|
Plan (1991
Restatement)
|
|
|
|
|
|
|
|
|
|
Graco Inc.
Restoration Plan
|
|
33.8
|
|
1,019,000
|
|
—
|
|
|
|
(2005
Statement)
|
|
|
|
|
|
|
|
|
|
Supplemental
Executive
|
|
N/A
|
|
67,000
|
|
—
|
|
|
|
Retirement
Plan
|
|
|
|
|
|
|
|
Dale D.
Johnson
|
|
Graco Employee
Retirement
|
|
31.9
|
|
595,000
|
|
—
|
|
|
|
Plan (1991
Restatement)
|
|
|
|
Graco Inc.
Restoration Plan
|
|
31.9
|
|
852,000
|
|
—
|
|
|
|
(2005
Statement)
|
|
Charles L.
Rescorla
(2)
|
|
Graco Employee
Retirement
|
|
19.6
|
|
341,000
|
|
—
|
|
|
|
Plan (1991
Restatement)
|
|
|
|
|
|
|
|
|
|
Graco Inc.
Restoration Plan
|
|
19.6
|
|
342,000
|
|
—
|
|
|
|
(2005
Statement)
|
|
|
|
|
|
|
|
Simon J. W.
Paulis
(4)
|
|
Group
Insurance/Benefit
|
|
N/A
|
(5)
|
334,695
|
|
—
|
|
|
|
Plan for the
benefit of Graco
|
|
|
|
N.V.
|
|
|
|
Sector Pension
Plan Agoria
|
|
N/A
|
(5)
|
6,323
|
|
—
|
|
|
(1)
|
For details regarding the assumptions, please refer
to the Graco Inc. 2007 Annual Report on Form 10-K, Part II, Item 8 Financial
Statements and Supplementary Data.
|
(2)
|
Mr. Graner is eligible for early retirement benefits
under the Retirement Plan, Restoration Plan and Supplemental Executive Retirement
Plan. Mr. Rescorla is eligible for early retirement benefits under the Retirement
Plan and Restoration Plan.
|
(3)
|
The portion of Mr. Roberts' accrued Restoration Plan
benefit attributable to the enhanced service accruals was approximately $4,000. The
present value of the benefit enhancement as of December 28, 2007 was
$31,000.
|
(4)
|
The pension benefits provided to Mr. Paulis are
provided by insured contracts through Swisslife N.V.
|
(5)
|
Both the Group Insurance Benefit Plan and Sector
Pension Plan are insurance contracts funded by premium contributions; as such,
years of credited service are not a factor in determining the benefit
amount.
|
Nonqualified Deferred Compensation
The Graco Deferred Compensation Plan (2005 Statement) (the
“Deferred Compensation Plan”) is a nonqualified, unfunded, deferred
compensation plan intended to meet the requirements of Section 409A of the Internal Revenue
Code. This plan was adopted following the freezing of the Graco Inc. Deferred Compensation
Plan (1992 Restatement) effective December 31, 2004. Only a select group of management and
highly compensated employees are eligible for the current Deferred Compensation
Plan.
A participant in the Deferred Compensation Plan may elect to defer one
percent to 50 percent of his or her base salary or advance sales incentive and/or one
percent to 100 percent of his or her annual bonus and year-end sales incentive award. The
Deferred Compensation Plan uses measurement funds to value the performance of the
participants’ accounts. Participants can select one or more measurement funds and
allocate their accounts in whole percentages. Participants have the ability to change their
measurement funds on a daily basis. Participants are fully vested in the funds credited to
their account at all times.
Upon enrollment in the Plan, the participant elects the year
distributions are to begin and the form of distribution. The participant may elect a
one-time change to the year in which the distribution is to begin. A change will delay the
first distribution date for at least five years after the date the distributions would have
begun under the original election. Participants have the ability to select between the
following distribution forms: lump sum or annual installments for five, ten or fifteen
years. In the event of a separation from service, the account will be distributed as soon
as administratively possible on the January next following the date of separation from
service. For a specified employee (as defined by Code Section 409A) distributions where the
timing of the distribution is based on a separation from service, the date of distribution
will be the first of the month following the date that is six months after the date the
specified employee separated from service.
Effective December 31, 2004, Graco froze the Graco Inc. Deferred
Compensation Plan (1992 Restatement). A participant in the Graco Inc. Deferred Compensation
Plan (1992 Restatement) could have deferred one percent to 25 percent of his or her base
salary or advance sales incentive and/or one percent to 50 percent of his or her annual
bonus and year-end sales incentive award. The Graco Inc. Deferred Compensation Plan (1992
Restatement) provided a guaranteed interest rate equal to the ten-year United States
Treasury Note rate in effect on the last business day of November preceding the new
calendar year. Participants are fully vested in the funds credited to their account at all
times.
A participant in the Graco Inc. Deferred Compensation Plan (1992
Restatement) is eligible for distribution upon his or her retirement on or after the date
the participant attains age 55 and completes at least five years of service. The monthly
amount of a participant’s benefit will be determined by dividing their account
balance by the number of months of the payout period that was irrevocably selected by the
participant upon enrollment or the number of months necessary to provide a minimum monthly
payment of $1,000.
As of December 28, 2007, no executive officers were contributing to the
Deferred Compensation Plan. Mr. Roberts while employed was the only eligible named
executive officer to contribute to the Deferred Compensation Plan during 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
Executive Contributions
in Last Fiscal Year
(1)
($)
|
Registrant Contributions
in Last Fiscal Year
($)
|
Aggregate Earnings
in Last Fiscal Year
(2)
($)
|
Aggregate
Withdrawals/Distributions
($)
|
Aggregate Balance at
Last Fiscal Year End
($)
|
|
David A. Roberts
|
|
28,513
|
|
—
|
|
7,361
|
|
—
|
|
144,729
|
(3)
|
James A. Graner
|
|
0
|
(4)
|
—
|
|
15,481
|
|
—
|
|
234,995
|
(5)
|
|
(1)
|
The executive contributions have been included in
the Salary column of the Summary Compensation Table.
|
(2)
|
The measurement funds available under the Graco
Deferred Compensation Plan (2005 Statement), and their annualized returns as of
December 31, 2007, were as follows:
|
|
|
|
Fund
|
Asset Category
|
Ticker
|
Rate of Return (%)
|
|
|
|
Columbia Acorn USA Z
|
Small Growth
|
AUSAX
|
3.46
|
|
Wells Fargo Stable Return G
|
Stable Value
|
DSRF1
|
4.99
|
|
AIM Basic Value A
|
Large Blend
|
GTVLX
|
|
|
American Funds EuroPacific Gr R4
|
Foreign Large Blend
|
REREX
|
18.87
|
|
American Funds Grth Fund of Amer
R5
|
Large Growth
|
RGAFX
|
11.26
|
|
Davis Opportunity A
|
Mid-Cap Blend
|
RPEAX
|
-1.42
|
|
Vanguard Institutional
Index
|
Large Blend
|
VINIX
|
5.47
|
|
Western Asset Core Plus Bond Instl
|
Intermediate Bond
|
WACPX
|
2.57
|
|
Hotchis & Wiley Core
Value
|
Large Blend
|
HWCIX
|
-11.10
|
|
|
(3)
|
Mr. Roberts’ aggregate balance includes his
balance in the Graco Inc. Deferred Compensation Plan (1992 Restatement) and his
balance in the Graco Deferred Compensation Plan (2005 Statement). Mr. Roberts'
aggregate balance as of December 31, 2006 for these two plans was $108,855.
Includes $24,684 that was included in the Salary Column of the Summary Compensation
Table for 2006.
|
(4)
|
Mr. Graner did not contribute to the Graco Deferred
Compensation Plan (2005 Statement) during 2007.
|
(5)
|
Mr. Graner is a participant in the Graco Inc.
Deferred Compensation Plan (1992 Restatement) only. Mr. Graner's balance as of
December 31, 2006 was $219,514.
|
DIRECTOR COMPENSATION
During 2007, the annual retainer for each non-employee director of our
Company, except the non-employee Chairman, was $32,000. The non-employee Chairman was paid
at the rate of $75,000 per annum commencing June 11, 2007. At the Board meeting held on
April 21, 2006, David A. Roberts, President and CEO, was elected Chairman, a position for
which he received no compensation. Mr. Roberts held this position through June 11, 2007,
when Mr. Roberts resigned as Chairman, President and CEO of the Company. Lee R. Mitau was
elected Chairman on June 11, 2007, a position he held previously from May 7, 2002 through
April 21, 2006. We also pay annual retainers of $5,000 for the chair of the Governance
Committee and $7,500 for the chair of the Audit Committee. The annual retainer for the
chair of the Management Organization and Compensation Committee increased from $5,000 to
$7,500 effective May 1, 2007. The non-employee directors received a meeting fee of $1,500
for each Board meeting attended. From January through April 2007, the meeting fee for
Governance Committee and Management Organization and Compensation Committee attendance was
$1,000 per meeting. From May through December 2007, the meeting fee for these committees
increased to $1,200. The meeting fee for the Audit Committee is $1,200 per meeting.
Attendance by telephone at any Board or Committee meeting is one-half of the fee for
in-person attendance. All retainer and meeting fees are paid in arrears.
A non-employee director may elect to receive shares of our common stock
instead of cash for all or part of the director’s annual retainer (including
committee chair retainer) and meeting fees. A director may choose to receive the shares
currently or defer receipt until the director leaves the Board, at which time the director
may receive the shares in a lump sum or installments. Payments, whether in a lump sum or by
installments, will be made in shares of common stock, plus cash in lieu of any fractional
share. When our Board declares a dividend, the director’s deferred stock account is
credited with additional shares of stock in an account held by a trustee in the name of the
non-employee director equivalent to the number of shares that could be purchased with the
dividends at the current fair market value of the shares.
Under the Stock Incentive Plan, non-employee directors receive an annual
option grant. In 2007, non-employee directors received an annual option grant of 3,600
shares on the date of the Company’s annual meeting of shareholders. Upon first
joining the Board, non-employee directors were also eligible to receive an initial option
grant of 3,600. There were no first-time non-employee director appointments in 2007.
Options granted under the Plan are non-statutory, have a 10-year duration and become
exercisable in equal installments over four years, beginning with the first anniversary
date of the grant. The option exercise price is the fair market value of the stock on the
date of grant, as defined in the Plan. The Plan defines “fair market value” as
the last sale price of the stock as reported by the New York Stock Exchange on the date
immediately prior to the date of grant.
At its February 2007 meeting, the Board, upon recommendation by our
Governance Committee, approved an increase in the annual option and initial option grant
from 3,600 to 8,600 shares. In reaching its decision to increase the grant amount, our
Board confirmed its philosophy of targeting retainer and meeting fee compensation at the
median of the market, and targeting equity compensation in the form of stock options above
the median of the market, in order to attract and retain capable board members and to
strengthen the link between our director compensation program and the interest of our
shareholders in Graco stock performance. Our Governance Committee retained Hewitt
Associates to conduct a peer group comparison of director compensation and present such
data at its February 2008 meeting. The peer companies selected were identical to those
listed on Page 13 of this Proxy Statement for executive compensation. In reviewing the peer
group comparison, the Governance Committee concluded that its current retainer and meeting
fee compensation, in the aggregate, is approximately at the median of the peer group, so no
changes were proposed. Equity compensation, however, fell below the peer group median
target. As a result, the Committee recommended to our Board, and the Board approved, an
annual option and initial option grant adjustment, bringing the new option grant amount to
8,600 shares, which is approximately at the 75
th
percentile of the peer group.
In addition to the foregoing, our Board, upon recommendation by the Governance Committee,
approved implementation of share ownership guidelines for our directors. Such guidelines
would require each of our non-employee directors to own a minimum of approximately five
times the total value of their annual retainer and meeting fees in Company stock. All of
our directors exceed this ownership requirement. Future directors will have five years from
their initial date of appointment to reach the minimum ownership level.
In February 2001, our Board terminated the retirement benefit for
non-employee directors, which provided that, upon cessation of service, non-employee
directors who have served for five full years will receive payments for five years at a
rate equal to the director’s annual retainer, including any committee chair retainer
fees, in effect on the director’s last day of service on the Board. Such payments
will be prorated and made quarterly. Payments will be made in accordance with this
retirement benefit to Mr. Mitau, Ms. Morfitt and Mr. Van Dyke upon their respective
retirements.
Director Compensation for Fiscal Year Ended December 28,
2007
The following table summarizes the total compensation paid to or earned
by the members of our Board of Directors during the fiscal year ended December 28,
2007.
|
Name
|
Fees Earned
or Paid in
Cash
(1)
($)
|
Stock
Awards
(2)
($)
|
Option
Awards
(3)
($)
|
Change in Pension Value and
Nonqualified Deferred
Compensation Earnings
(4,5,6)
($)
|
Total
($)
|
|
Robert G. Bohn
(7)
|
154
|
44,246
|
55,983
|
—
|
100,383
|
William J. Carroll
|
51,550
|
—
|
55,983
|
—
|
107,533
|
Jack W. Eugster
|
8,000
|
41,800
|
56,347
|
—
|
106,147
|
J. Kevin Gilligan
|
—
|
51,150
|
55,983
|
—
|
107,133
|
Lee R. Mitau
|
—
|
76,642
|
55,983
|
121,000
|
253,625
|
Marti Morfitt
|
—
|
53,517
|
55,983
|
27,000
|
136,500
|
Mark H. Rauenhorst
|
205
|
47,645
|
55,983
|
—
|
103,833
|
William G. Van Dyke
|
—
|
50,800
|
55,983
|
—
|
106,783
|
R. William Van Sant
|
—
|
58,450
|
56,347
|
—
|
114,797
|
|
(1)
|
Mr. Carroll elected to receive all his retainer and
meeting fees in cash. Mr. Bohn and Mr. Rauenhorst elected to receive all of their
retainer and meeting fees in shares of stock plus cash in lieu of any fractional
share. Mr. Eugster elected to receive 25% of his retainer in cash and 75% in
deferred stock.
|
(2)
|
During all or a portion of their service on the
Board, Messrs. Carroll, Eugster, Gilligan, Mitau, Rauenhorst, Van Dyke, Van Sant
and Ms. Morfitt have elected to defer the receipt of stock. The amounts in the
Stock Awards column reflect the sum of the fair market value of the stock for each
of the four calendar quarters. Fair market value is based on the closing price of
the stock on the last trading day of the calendar quarter. The Deferred Stock
Account balances as of December 28, 2007 are as follows: Mr. Carroll - 12,193
shares; Mr. Eugster - 4,041 shares; Mr. Gilligan - 10,189 shares; Mr. Mitau -
26,697 shares; Ms. Morfitt - 16,191 shares; Mr. Rauenhorst - 8,158 shares; Mr. Van
Dyke - 21,296 shares; and Mr. Van Sant - 5,095 shares.
|
(3)
|
Each non-employee director received an annual option
grant of 3,600 shares on April 20, 2007, the date of the annual meeting of
shareholders. The grant date fair market value of the options issued to the
non-employee directors in 2007 was $11.52 per share. The amounts reported in the
Option Awards column are the same as the compensation cost recognized pursuant to
SFAS No. 123(R) in our financial statements for option grants made under the Stock
Incentive Plan, unreduced by estimated service-based forfeitures. Information
concerning these amounts may be found in Item 8, Financial Statements and
Supplementary Data, and Note A to the Consolidated Financial Statements in the
Company's 2007 Annual Report on Form 10-K. The option awards reflected in the
calculation of this cost are identified in the Supplemental Table to the Director
Options Awards column found on Page 32 immediately following the Director
Compensation Table. The assumptions used in calculating these amounts are discussed
in Note A to the Consolidated Financial Statements in our 2007 Form 10-K, filed
with the Securities and Exchange Commission on February 19, 2008. Aggregate number
of outstanding option grants at December 28, 2007 are as follows: Mr. Bohn - 8,850
unvested shares, 37,668 exercisable shares; Mr. Carroll - 8,850 unvested shares,
14,325 exercisable shares; Mr. Eugster - 9,975 unvested shares, 8,325 exercisable
shares; Mr. Gilligan - 8,850 unvested shares, 26,700 exercisable shares; Mr. Mitau
- 8,850 unvested shares, 42,729 exercisable shares; Ms. Morfitt - 8,850 unvested
shares, 37,729 exercisable shares; Mr. Rauenhorst - 8,850 unvested shares, 30,075
exercisable shares; Mr. Van Dyke - 8,850 unvested shares, 42,729 exercisable
shares; and Mr. Van Sant - 9,975 unvested shares, 8,325 exercisable shares.
|
(4)
|
Prior to February 2001, non-employee directors who
served five full years on the Board were eligible for a retirement benefit when
they left the Board. In February 2001, the Board terminated this retirement benefit
for those non-employee directors who had not met the five-year service level. Mr.
Mitau, Ms. Morfitt and Mr. Van Dyke, who satisfied the service requirement in 2001,
will receive this retirement benefit when they leave the Board.
|
(5)
|
The assumptions that were made in calculating the
aggregate change in the actuarial present value of the accumulated benefit are as
follows:
|
|
•
|
Discount rate: 6.25% as of December 31, 2007
|
|
•
|
Retainer fee increases: 10.00% per year
|
|
•
|
Retirement age: The Plan does not have a specified
normal retirement age. Therefore the values reflect the increase in present value
of the accrued benefit as of December 31, 2007.
|
|
•
|
Form of payment: Five-year certain (payable
quarterly)
|
(6)
|
The change in the present value of the accrued
benefit from the 2006 calendar year to the 2007 calendar year for Mr. Van Dyke was
a negative $2,000. This was due to a change in the discount rate and no change to
the retainer fee.
|
(7)
|
Mr. Bohn resigned from the Board effective January
1, 2008. Mr. Bohn was elected to the Board effective June 1, 1999. At the time of
his resignation, all of his stock options became immediately exercisable because he
had completed more than five full years of service. The options granted in 1999 and
2000 will expire on the 10 year anniversary of the grant. The options granted from
2001 through 2006 will expire on the third anniversary of the date of resignation.
The option granted in 2007 will expire on April 20, 2017.
|
Supplemental Table to the Director Option Awards Column for
Fiscal Year Ended December 28, 2007
|
|
|
|
|
Name
|
Grant Date
|
Shares Granted
(#)
|
Expense Recorded
($)
|
|
Robert G. Bohn
|
5/5/2003
|
3,750
|
1,679
|
|
4/22/2004
|
3,000
|
5,411
|
|
4/22/2005
|
3,600
|
7,435
|
|
4/21/2006
|
3,600
|
0
|
|
4/20/2007
|
3,600
|
41,458
|
|
|
Total
|
|
|
55,983
|
|
|
|
|
William J.
Carroll
|
5/5/2003
|
3,750
|
1,679
|
|
4/22/2004
|
3,000
|
5,411
|
|
4/22/2005
|
3,600
|
7,435
|
|
4/21/2006
|
3,600
|
0
|
|
4/20/2007
|
3,600
|
41,458
|
|
|
Total
|
|
|
55,983
|
|
|
|
|
Jack W. Eugster
|
2/19/2004
|
4,500
|
7,635
|
|
4/22/2004
|
3,000
|
5,411
|
|
4/22/2005
|
3,600
|
7,435
|
|
4/21/2006
|
3,600
|
20,319
|
|
4/20/2007
|
3,600
|
15,547
|
|
|
Total
|
|
|
56,347
|
|
|
|
|
J. Kevin
Gilligan
|
5/5/2003
|
3,750
|
1,679
|
|
4/22/2004
|
3,000
|
5,411
|
|
4/22/2005
|
3,600
|
7,435
|
|
4/21/2006
|
3,600
|
0
|
|
4/20/2007
|
3,600
|
41,458
|
|
|
Total
|
|
|
55,983
|
|
|
|
|
Lee R. Mitau
|
5/5/2003
|
3,750
|
1,679
|
|
4/22/2004
|
3,000
|
5,411
|
|
4/22/2005
|
3,600
|
7,435
|
|
4/21/2006
|
3,600
|
0
|
|
4/20/2007
|
3,600
|
41,458
|
|
|
Total
|
|
|
55,983
|
|
|
|
|
Marti Morfitt
|
5/5/2003
|
3,750
|
1,679
|
|
4/22/2004
|
3,000
|
5,411
|
|
4/22/2005
|
3,600
|
7,435
|
|
4/21/2006
|
3,600
|
0
|
|
4/20/2007
|
3,600
|
41,458
|
|
|
Total
|
|
|
55,983
|
|
|
|
|
Mark H.
Rauenhorst
|
5/5/2003
|
3,750
|
1,679
|
|
4/22/2004
|
3,000
|
5,411
|
|
4/22/2005
|
3,600
|
7,435
|
|
4/21/2006
|
3,600
|
0
|
|
4/20/2007
|
3,600
|
41,458
|
|
|
Total
|
|
|
55,983
|
|
|
|
|
William G. Van
Dyke
|
5/5/2003
|
3,750
|
1,679
|
|
4/22/2004
|
3,000
|
5,411
|
|
4/22/2005
|
3,600
|
7,435
|
|
4/21/2006
|
3,600
|
0
|
|
4/20/2007
|
3,600
|
41,458
|
|
|
Total
|
|
|
55,983
|
|
|
|
|
R. William Van
Sant
|
2/19/2004
|
4,500
|
7,635
|
|
4/22/2004
|
3,000
|
5,411
|
|
4/22/2005
|
3,600
|
7,435
|
|
4/21/2006
|
3,600
|
20,319
|
|
4/20/2007
|
3,600
|
15,547
|
|
|
Total
|
|
|
56,347
|
|
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about shares that may be issued
under our Company’s various stock option and purchase plans as of December 28,
2007.
|
|
(a)
|
(b)
|
(c)
|
|
Plan Category
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
Weighted average exercise
price of outstanding
options, warrants and
rights
|
Number of securities
remaining available for
future issuance under equity
compensation plans
[excluding securities
reflected in column (a)]
|
|
Equity compensation plans approved by security
holders
|
3,040,106
|
$28.06
|
5,860,665
|
Equity compensation plans not approved by security
holders
(1)
|
738,906
|
31.01
|
—
|
|
Total
|
3,779,012
|
$28.63
|
5,860,665
|
|
(1)
|
The Company maintained one plan that did not require
approval by shareholders. The Employee Stock Incentive Plan ("ESIP") is a
broad-based plan designed to offer employees who are not officers of the Company
the opportunity to acquire Graco stock. Under this plan, the option price is the
market price on the date of the grant. Options become exercisable at such time and
in such installments as the Company shall determine, and expire ten years from the
date of the grant. Authorized shares remaining under the ESIP were cancelled as of
April 21, 2006, with future grants to be made under the Amended and Restated Stock
Incentive Plan (2006).
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CERTAIN BUSINESS RELATIONSHIPS
Mr. Roberts, our former Chairman,
President and Chief Executive Officer who resigned in June 2007, is the brother-in-law of
Gary Tepas, the Chairman of EmKay, Inc. On June 17, 2002, we entered into an agreement with
EmKay, Inc. for the lease and maintenance of approximately 164 vehicles and trailers. This
agreement and the ongoing business relationship between the Company and EmKay Leasing was
discussed and approved at a meeting of the Board of Directors on September 27, 2002. On
April 21, 2006, the Audit Committee of the Board of Directors reviewed the terms and
conditions proposed by several fleet managers, whose proposals were presented to us
pursuant to a bidding process. One of the fleet managers was EmKay, Inc. The Audit
Committee determined that the EmKay, Inc. terms were fair and in the best interests of our
Company, and authorized the management of our Company to enter into certain lease and
maintenance arrangements with EmKay Leasing and/or its affiliated entities
(“EmKay”). The amount paid to EmKay for the fiscal year ended December 28,
2007, was approximately $4,400,000.
RELATED PERSON TRANSACTION APPROVAL POLICY
In February 2007, our Board of Directors adopted a written related person
transaction approval policy, which sets forth our Company’s policies and procedures
for the review, approval or ratification of any transaction required to be reported in our
filings with the Securities and Exchange Commission. Our policy applies to any transaction,
arrangement or relationship or any series of similar transactions, arrangements or
relationships in which our Company is a participant and in which a related person has a
direct or indirect interest, other than the following:
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Payment of compensation by our Company to a related
person for the related person’s service to our Company in the capacity or
capacities that give rise to the person’s status as a “related
person;” and
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Transactions generally available to all employees or
all shareholders of our Company on the same terms.
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The Audit Committee of our Board of Directors must approve any related
person transaction subject to this policy before commencement of the related person
transaction or, if it is not practicable to approve the transaction before commencement,
the transaction will be submitted to the Audit Committee or chair of the Audit Committee
for ratification as soon as possible. The Audit Committee or its Chair will analyze the
following factors, in addition to any other factors the Audit Committee deems appropriate,
in determining whether to approve a related person transaction:
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The benefits to our Company;
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The impact on a director's independence;
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The availability of other sources for comparable
products or services;
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The terms of the transaction and whether they are
fair to our Company;
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The terms available to unrelated third parties or to
employees generally; and
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Whether the transaction is material to the
Company.
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The Audit Committee or its Chair may, in its or his sole discretion,
approve or deny any related person transaction. Approval of a related person transaction
may be conditioned upon our Company and the related person following certain procedures
designated by the Audit Committee or its Chair.