Assurant DEF 14A 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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April 12, 2007
You are cordially invited to attend the Annual Meeting of Stockholders (the Annual Meeting) of Assurant, Inc. (Assurant). The meeting will be held on May 17, 2007 at 9:30 a.m. in the Chelsea Room at the Millenium Hilton located at 55 Church Street, New York, NY 10007. The formal notice and proxy statement for this meeting are attached to this letter.
We hope you attend the Annual Meeting. Even if you currently plan to attend the meeting, however, it is important that you sign, date and return your enclosed proxy card or vote by telephone or Internet, in the manner described on the proxy card, as soon as possible. You may still vote in person at the Annual Meeting if you desire by withdrawing your proxy, but returning your proxy card or voting by telephone or Internet now will assure that your vote is counted if your plans change and you become unable to attend.
Your vote is important, regardless of the number of shares you own. Please promptly submit your vote by telephone, Internet or mail. We urge you to indicate your approval by voting FOR each of the matters indicated in the notice and described in the proxy statement.
On behalf of the Board of Directors, we thank you for your assistance.
Robert B. Pollock
President and Chief Executive Officer
One Chase Manhattan Plaza
New York, NY 10005
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 17, 2007
To the Stockholders of ASSURANT, INC.:
Notice is hereby given that the Annual Meeting of Stockholders (the Annual Meeting) of Assurant, Inc. (Assurant) will be held in the Chelsea Room at the Millenium Hilton, 55 Church Street, New York, NY 10007 on May 17, 2007 at 9:30 a.m., local time, for the following purposes:
1. To elect four persons to our Board of Directors;
2. To ratify the appointment of PricewaterhouseCoopers LLP as Assurants Independent Registered Public Accounting Firm for the year ending December 31, 2007; and
3. To transact such other business as may properly come before the meeting or any adjournment thereof.
The proposals described above are more fully described in the accompanying proxy statement, which forms a part of this notice.
If you plan to attend the Annual Meeting, please notify the undersigned at the address set forth above so that appropriate preparations can be made.
The Board of Directors has fixed March 30, 2007 as the record date for the Annual Meeting. Only stockholders of record at the close of business on that date will be entitled to notice of and to vote at the Annual Meeting or any adjournments or postponements thereof. A list of those stockholders will be available for inspection at the offices of Assurant located at One Chase Manhattan Plaza, 41st Floor, New York, NY 10005 commencing at least ten days before the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, please sign, date and return the enclosed proxy card or submit your vote by telephone or Internet, in the manner described on the enclosed proxy card. If you choose to return the enclosed proxy card via United States mail, a return envelope that requires no postage for mailing in the United States is enclosed for this purpose. If you are present at the Annual Meeting you may, if you wish, withdraw your proxy and vote in person. Thank you for your interest in and consideration of the proposals listed above.
By Order of the Board of Directors
Senior Vice President,
General Counsel and Secretary
April 12, 2007
EACH VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE PROMPTLY SUBMIT YOUR VOTE BY TELEPHONE, INTERNET OR MAIL, AS DESCRIBED ON THE ENCLOSED PROXY CARD.
TABLE OF CONTENTS
One Chase Manhattan Plaza
New York, NY 10005
ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 17, 2007
This proxy statement is furnished to stockholders of Assurant, Inc. (which we sometimes refer to in this proxy statement as Assurant or the Company) in connection with the solicitation by the Board of Directors of Assurant of proxies to be voted at the 2007 Annual Meeting of Stockholders (the Annual Meeting) to be held in the Chelsea Room of the Millenium Hilton, 55 Church Street, New York, NY 10007 on May 17, 2007, at 9:30 a.m. or at any adjournment or postponement thereof. We expect to mail the proxy solicitation materials for the Annual Meeting on or about April 12, 2007.
The solicitation of proxies for the Annual Meeting is being made by telephone, Internet and mail. Officers, directors and employees of Assurant, none of whom will receive additional compensation therefor, may also solicit proxies by telephone or other personal or electronic contact. We have retained Mellon Investor Services LLC to assist in the solicitation of proxies for an estimated fee of $3,750 plus reimbursement of expenses. We will bear the cost of the solicitation of proxies, including postage, printing and handling, and will reimburse brokerage firms and other record holders of shares beneficially owned by others for their reasonable expenses incurred in forwarding solicitation material to beneficial owners of shares.
A stockholder may revoke his or her proxy at any time before it is voted by delivering a later dated, signed proxy or other written notice of revocation to the Corporate Secretary of Assurant. Any record holder of shares present at the Annual Meeting may also withdraw his or her proxy and vote in person on each matter brought before the Annual Meeting. All shares represented by properly signed and returned proxies in the accompanying form or those submitted by telephone or Internet, unless revoked, will be voted in accordance with the instructions given thereon. If no instructions are given, the shares will be voted in favor of Proposals One and Two described in this proxy statement.
Only stockholders of record at the close of business on March 30, 2007, the record date for the Annual Meeting, will be entitled to notice of and to vote at the Annual Meeting or at any postponement or adjournment thereof. As of the close of business on that date, 121,658,211 shares of our common stock, par value $0.01 per share (the Common Stock), were outstanding. Stockholders will each be entitled to one vote per share of Common Stock held by them. In addition, on the record date, we had 22,160 shares of Preferred Stock, par value $1.00 per share (the Preferred Stock), outstanding and entitled to vote on all matters to be voted upon at the Annual Meeting. All shares of Preferred Stock are held of record by Robert S. DeLue and Rita DeLue, as trustees of The Robert S. and Rita DeLue 1995 Revocable Family Trust. The holders of Preferred Stock are entitled to one vote per share of Preferred Stock held by them and vote with the holders of Common Stock as a single class, and not as a separate class.
Votes cast in person or by proxy at the Annual Meeting will be tabulated by the inspector of elections appointed for the meeting. Pursuant to Assurants Bylaws and the Delaware General Corporation Law (the DGCL), the presence of the holders of shares representing a majority of the outstanding shares of Common Stock entitled to vote at the Annual Meeting, whether in person or by proxy, is necessary to constitute a quorum for the transaction of business at the Annual Meeting. Under the DGCL, abstentions and broker non-votes will be treated as present for purposes of determining the presence of a quorum. Broker non-votes are proxies from brokers or nominees as to which such persons have not received instructions from the beneficial owners or other persons entitled to vote with respect to a matter on which the brokers or nominees do not have the discretionary power to vote.
The election of each of the director nominees under Proposal One requires that each director be elected by the holders of a plurality of the voting power present in person or represented by proxy and entitled to vote at the Annual Meeting. The approval of Proposal Two requires the affirmative vote of the holders of a majority in voting power of the stock present in person or represented by proxy and entitled to vote on the proposal at the Annual Meeting. Abstentions are not considered votes cast, so they will be disregarded when calculating the votes cast for and against Proposal One, and therefore, will have no legal effect with respect to the vote on Proposal One. For purposes of determining approval of Proposal Two, abstentions will be deemed present and entitled to vote and will, therefore, have the same legal effect as a vote against Proposal Two.
A broker non-vote will be deemed not entitled to vote on the proposal for which the non-vote is indicated and will, therefore, have no legal effect on the voting for Proposal One and Proposal Two.
The table below sets forth certain information, as of April 12, 2007, concerning each person deemed to be an executive officer of the Company. There are no arrangements or understandings between any executive officer and any other person pursuant to which the officer was selected.
Robert B. Pollock, President, Chief Executive Officer and Director. Biography available in the section entitled DIRECTORSDirectors Continuing in Office.
Philip Bruce Camacho, Executive Vice President and Chief Financial Officer. Mr. Camacho has been our Executive Vice President and Chief Financial Officer since July 2005. Prior to that, Mr. Camacho served as President of Assurant Solutions (which at the time included Assurant Specialty Property) from August 2000 to July 2005 and Chief Executive Officer of Assurant Solutions from January 2003 to July 2005. Prior to his appointment as President of Assurant Solutions, Mr. Camacho served as Executive Vice President for Sales and Marketing of Assurant Group (the predecessor of Assurant Solutions). Mr. Camacho joined American Bankers Insurance Group, a subsidiary of the Company, in 1990 as Vice President of Information Systems and held various positions between 1990 and 1999. At the time of the Companys acquisition of American Bankers, he was Executive Vice President, Investor Relations, with responsibility for investor relations, legal and regulatory affairs, marketing services, licensing, state filings and client administration. A certified public accountant, before joining American Bankers, Mr. Camacho worked as an accountant with PricewaterhouseCoopers LLP, specializing in insurance in the United States, United Kingdom and the Caribbean.
Lesley Silvester, Executive Vice President. Ms. Silvester has been our Executive Vice President since January 2001. From 1996 to 1999, she served as Director, Group Management Development for the Fortis Group (the group of companies owned and/or jointly controlled by our former parent companies, Fortis N.A. and Fortis SA/NV) in Brussels. Since returning to the United States in 1999, Ms. Silvester has had responsibility for Human Resources for the Company and between 2001 and 2005, assumed Executive Management Committee responsibility for Assurant PreNeed (now a part of Assurant Solutions). Ms. Silvesters professional career spans
more than three decades, much of which has been in the insurance industry in human resources management, organization development and strategy. Ms. Silvesters experience includes 20 years in different parts of the Company in the United States and with Fortis in Europe, focusing recently on world-wide senior management development, company learning, human resources strategy and post-merger integration. Ms. Silvester is a Graduate Member of the Institute of Personnel Management in the United Kingdom and holds both her F.L.M.I. and American Compensation Association Certification.
Jerome A. Atkinson, Executive Vice President and Chief Compliance Officer. Mr. Atkinson has been Executive Vice President and Chief Compliance Officer of Assurant since July 2005. From June 2001 to July 2005, he served as Executive Vice President, General Counsel and Chief Compliance Officer of Assurant Solutions. Prior to that, he served as Senior Vice President, General Counsel and Secretary of Assurant from June 1996 to June 2001. Mr. Atkinson began his career with the Company in 1988 with American Security Group (a predecessor of Assurant Solutions) as Assistant Vice President and Senior Staff Attorney before being promoted to Senior Vice President, General Counsel and Secretary. A member of the Washington, D.C., Georgia, Michigan and New York bars, Mr. Atkinson began his legal career in the Ford White House, first as a Staff Attorney and then as Deputy General Counsel for the Special Assistant to the President for Consumer Affairs. Mr. Atkinson has served on the Boards of Avado Brands, Inc., Acme Continental Credit Union, the Consumer Credit Insurance Association and the executive committee of the Alliance for Consumer Credit Insurance Education. He currently serves as a trustee of the Georgia Tech Foundation, Inc. and has previously served as a member of the Georgia Tech College of Management Advisory Board.
Donald Hamm, Executive Vice President; President and Chief Executive Officer, Assurant Health. Mr. Hamm has been President and Chief Executive Officer of Assurant Health since January 2003. Mr. Hamm first joined Assurant Health in 1982, holding several executive positions until 1993. He then worked as a principal with William M. Mercer, as a consultant with Tillinghast-Towers Perrin and as Vice President of the Southeast Region for Blue Cross/Blue Shield of Wisconsin prior to rejoining Assurant Health in 1999 as Chief Financial Officer. Mr. Hamm is a Fellow in the Society of Actuaries, a member of the American Academy of Actuaries and a Fellow of the Life Management Institute.
John B. Owen, Executive Vice President; President and Chief Executive Officer, Assurant Specialty Property. Mr. Owen has been Assurant Specialty Propertys President and Chief Executive Officer since July 2005. From 2003 to 2005, Mr. Owen served as Executive Vice President and Chief Operating Officer for Assurant Solutions specialty property business line and previously served as the Companys Chief Information Officer. He joined Assurant in November 1998 as Senior Vice President, Information Technology. Before joining Assurant, Mr. Owen served as Vice President, Global Systems Development, with Citicorp Credit services where he was responsible for developing and implementing systems and operations plans for Citicorps global credit services.
Michael J. Peninger, Executive Vice President; President and Chief Executive Officer, Assurant Employee Benefits. Mr. Peninger has been President and Chief Executive Officer of Assurant Employee Benefits since January 1999. Mr. Peninger began his career at Northwestern National Life in 1977 as an actuary. He then joined Assurant Employee Benefits in 1985 as a corporate actuary and held various positions within the Company. In 1991, Mr. Peninger was appointed Senior Vice President and Chief Financial Officer and in 1993 he became Senior Vice President of Finance and Claims of Assurant Employee Benefits. In 1998, Mr. Peninger was appointed Executive Vice President. Mr. Peninger is a Fellow of the Society of Actuaries and a member of the American Academy of Actuaries.
S. Craig Lemasters, Executive Vice President; President and Chief Executive Officer, Assurant Solutions. Mr. Lemasters has been Assurant Solutions President and Chief Executive Officer since July 2005. From 2003 to 2005, Mr. Lemasters served as Executive Vice President and Chief Operating Officer for the consumer protection business line of Assurant Solutions. Between 1987 and 1998, he served as a Channel Executive and Marketing Manager for various American Bankers Insurance Group (predecessor to Assurant
Solutions) businesses. After two years as Executive Vice President of Reliance Integramark, Mr. Lemasters rejoined Assurant in August 2000 as Group Senior Vice President, International Channel and was promoted to Executive Vice President and Chief Marketing Officer in June 2001.
Katherine Greenzang, Senior Vice President, General Counsel and Secretary. Ms. Greenzang has been Senior Vice President, General Counsel and Secretary since June 2001. Ms. Greenzang joined the Company in August 1994 as Corporate Counsel. She was named Assistant Vice President and Corporate Counsel in 1995 and Vice President, Corporate Counsel in 1996 before assuming her current position. Prior to joining the Company, Ms. Greenzang worked as an associate at Dewey Ballantine LLP. She is a member of the American Bar Association, the New York State Bar Association and the Association of Corporate Counsel.
Christopher Pagano, Senior Vice President; President and Chief Investment Officer, Assurant Asset Management. Mr. Pagano has been President and Chief Investment Officer of Assurant Asset Management, a division of the Company, since January 2005. Mr. Pagano joined the Company in 1996 and served as Vice President Portfolio Manager of the Fortis Advisers division until 2001. He then served as Executive Vice President of Assurant Asset Management until January 2005. Prior to joining Assurant, Mr. Pagano served as Vice President at Merrill Lynch, where his last role was as government strategist in Global Fixed Income Research.
John A. Sondej, Senior Vice President, Controller and Principal Accounting Officer. Mr. Sondej has been Senior Vice President and Controller of the Company since January 2005. He is currently responsible for managing several functional departments at the Company, including SEC Reporting and Compliance, Sarbanes-Oxley Section 404 Compliance, Accounting Policies & Procedures, Investment Accounting, Budgeting & Analysis, and Corporate Accounting. Mr. Sondej joined Assurant in 1998 as Assistant Vice President & Assistant Controller. He was named Vice President & Assistant Controller in January 2001 and Controller in April 2001. Prior to joining Assurant, Mr. Sondej worked for Reliance Insurance Group as Assistant Vice President & Director of Financial Audit from 1994 to 1997. He previously worked at KPMG from 1987 to 1994, where he held the position of Senior Audit Manager. Mr. Sondej is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants.
The Management Committee of Assurant consists of the President and Chief Executive Officer, all of the Executive Vice Presidents of the Company and the Chief Executive Officers of each of Assurants operating segments. The Management Committee is ultimately responsible for setting the policies, strategy and direction of the Company, subject to the overall discretion and supervision of the Board of Directors.
We currently have twelve directors. Eight of our directors, listed below, are continuing in office. The four directors nominated for re-election as directors at the Annual Meeting to serve until the 2010 annual meeting are listed in PROPOSAL ONE ELECTION OF DIRECTORS.
Directors Continuing in Office
The following persons serve in Class I and their term as directors of Assurant will expire in 2008:
John Michael Palms, PhD., D.Sc., (Hon), LHD, (Hon), Chairman of the Board. Dr. Palms, age 71, has been a member of our Board of Directors since March 1990 and became Chairman in October 2003. Dr. Palms is a Distinguished University Professor and Distinguished President Emeritus at the University of South Carolina. He served as the President of the University of South Carolina from 1991 until his retirement in 2002. Earlier in his career, Dr. Palms served as President of Georgia State University and held the Charles Howard Candler Professor of Physics Chair at Emory University where he also served as its Vice President for Academic Affairs. Dr. Palms currently serves on the Boards of the Computer Task Group, The GEO Group, Inc., Simcom International, Maroon Biotechnology, and is the Chair of Exelon Corporations audit committee. He is also Chairman of the Board of the Institute for Defense Analyses. In the past, Dr. Palms has been a member of various additional company committees and boards including the University of South Carolinas Educational and Development Foundation Boards, Spoleto Festival Board, NationsBank of the Carolinas audit committee, the audit committee of the Board of Directors of Carolina First Bank, the Mynd Corporations compensation committee, and Chair of PECO Energys nuclear committee.
Dr. Robert J. Blendon, Sc.D., Director. Dr. Blendon, age 64, has been a member of our Board of Directors since March 1993. Dr. Blendon has been a professor of Health Policy at Harvard Universitys School of Public Health and a professor of Political Analysis at Harvard Universitys Kennedy School of Government since 1987. Previously, he served as Vice President of The Robert Wood Johnson Foundation.
Beth L. Bronner, Director. Ms. Bronner, age 55, has been a member of our Board of Directors since January 1994. Ms. Bronner served as Senior Vice President and Chief Marketing Officer of Jim Beam Brands, a division of Fortune Brands from 2003 to July 2006. Prior to joining Jim Beam Brands, Ms. Bronner was a Partner at LERA Consulting in Chicago. Prior to joining LERA Consulting in 2002, Ms. Bronner was the President and Chief Operating Officer of ADVO, Inc., the nations largest full-service targeted direct mail marketing company. Before joining ADVO, Inc. in 2000, Ms. Bronner was President of the Health Division at Sunbeam Corporation. She has also served as Senior Vice President and Director of Marketing of North American Consumer Banking at Citibank, N.A. and Vice-President of Emerging Markets for AT&T Company. Since 1993, she has been a member of the Board of Directors of The Hain-Celestial Group Inc., and has chaired its compensation committee. Ms. Bronner also served on the Board of Directors of Cool Brands, Inc, a Canadian company until November 2006. Additionally, Ms. Bronner is a member of the boards of several charitable organizations such as the Cradle Foundation and the Board of Trustees of the Goodman Theater in Chicago. She is a former trustee of the New School in New York City.
David B. Kelso, Director. Mr. Kelso, age 54, was elected to our Board of Directors effective March 12, 2007. Mr. Kelso is a financial advisor for Kelso Advisory Services, a company he started in 2003 following two years with Aetna, Inc. where he served as Executive Vice President, Strategy and Finance. From 1996 to 2001, Mr. Kelso was Executive Vice President, Chief Financial Officer and Managing Director of Chubb Corporation. Prior to joining Chubb, he served as Executive Vice President, Chief Financial Officer and personal segment leader for retail and small business banking for First Commerce Corporation, a company he joined in 1992. From 1982 to 1992, Mr. Kelso worked for Gemini Consulting Group where he was partner in the North American banking practice. Mr. Kelso began his professional career in 1974 as an associate with Chemical Bank.
The following persons serve in Class II and their term as directors of Assurant will expire in 2009:
Charles John Koch, Director. Mr. Koch, age 60, was elected to our Board of Directors in August 2005. Mr. Koch is Vice Chairman of the Board of Citizens Financial Group, and on the Board of Directors of The Royal Bank of Scotland. Mr. Koch was Chairman, President and Chief Executive Officer of Charter One Financial, Inc. prior to its sale to The Royal Bank of Scotland. He was elected President and Chief Operating Officer in 1980, President and Chief Executive Officer in 1988 and Chairman, President and Chief Executive Officer in 1995. Mr. Koch is currently Chairman of the Board of Directors of John Carroll University and a trustee of Case Western Reserve University.
H. Carroll Mackin, Director. Mr. Mackin, age 66, is the former Executive Vice President and Treasurer of the Company, where he served from 1980 until his retirement in 1997. Mr. Mackin has been a member of our Board of Directors since October 1996 and is also a director of Union Security Life Insurance Company of New York, a wholly owned subsidiary of the Company. Mr. Mackin served as a consultant to the Company in 1979. He was the Companys fourth employee and initiated many of the Companys early activities, including consolidating its investment departments and its first treasury function. Before joining the Company, he was Director of Investments at Forstmann, Leff. He is currently principal owner of Great Northern Manufacturing, LLC, a Louisville, Kentucky based manufacturer of specialty nails.
Michele Coleman Mayes, Director. Ms. Mayes, age 57, was elected to our Board of Directors in October 2004. Ms. Mayes currently serves as Senior Vice President, General Counsel of Pitney Bowes Inc. Prior to joining Pitney Bowes in 2003, Ms. Mayes held legal and management positions at Colgate-Palmolive Company, including Vice President-Legal, Assistant Secretary, and Corporate Officer from 2001 to 2003. Prior to joining Colgate-Palmolive in 1992, Ms. Mayes worked at Unisys Corporation and was Staff Vice President and Associate General Counsel from 1987 to 1992. Previously, Ms. Mayes served in the United States Department of Justice in the Eastern District of Michigan and New York. Ms. Mayes served as the Chief of the Civil Division for the Eastern District of Michigan. Ms. Mayes is a member of the Boards of Legal Momentum, the Business Council of Southwestern Connecticut, and the American Arbitration Association.
Robert B. Pollock, President, Chief Executive Officer and Director. Mr. Pollock, age 52, has been serving as a director and as our President and Chief Executive Officer since March 2006. He served as our President and Chief Operating Officer between July 2005 and March 2006. Previously, he served as Executive Vice President and Chief Financial Officer starting in January 1999. From 1993 to 1999, he served as President and Chief Executive Officer of Assurant Employee Benefits. Mr. Pollock began his career as an actuary at CUNA Mutual Insurance Group in 1974. He then joined the Company as a staff actuary at Assurant Employee Benefits in 1981. In July 1992, Mr. Pollock was appointed Senior Vice President, Group Life and Disability at Assurant Employee Benefits. In July 1993, he was appointed President and Chief Executive Officer of Assurant Employee Benefits. He is a Fellow of the Society of Actuaries and a member of the American Academy of Actuaries. Previously, Mr. Pollock was the Chairman of the Disability Insurance Committee for the Health Insurance Association of America (HIAA) for three years.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table provides, with respect to each person or entity known by Assurant to be the beneficial owner of more than 5% of Assurants outstanding Common Stock as of February 15, 2007, (a) the number of shares of Common Stock owned (based upon the most recently reported number of shares outstanding as of the date the entity filed a Schedule 13G with the Securities and Exchange Commission (the SEC)), and (b) the percentage of all outstanding shares represented by such ownership as of February 15, 2007 (based on an outstanding share amount of 122,346,154 as of that date).
SECURITY OWNERSHIP OF MANAGEMENT
The following table provides information concerning the beneficial ownership of Common Stock by each director, Assurants Chief Executive Officer, former Chief Executive Officer, Chief Financial Officer, each of Assurants other three most highly compensated executive officers, whom we refer to in this proxy statement as the named executive officers or (NEOs), and all executive officers and directors as a group, as of February 15, 2007. We had 122,346,154 outstanding shares of Common Stock as of that date. Except as otherwise indicated, all persons listed below have sole voting power and dispositive power with respect to their shares, except to the extent that authority is shared by their spouses, and have record and beneficial ownership of their shares.
The following Compensation Discussion and Analysis (the CD&A) describes the material elements of the compensation awarded to, earned by and paid to our named executive officers (NEOs): Messrs. Pollock, Camacho, Clayton, Hamm, Lemasters, and Ms. Silvester.
II. Assurant, Inc. Executive Compensation Philosophy
The Companys executive compensation strategy is designed to provide executives with incentives to focus on achieving sustained growth and increasing stockholder value. We attempt to strike the right balance between achieving short term results in each operating segment and creating long term value for the Company as a whole. This strategy is regarded as a significant tool in building a high performance culture that both drives and rewards value creation for the entire enterprise. Each of our operating segment chief executive officers is eligible to receive incentive-based compensation based partly on operating segment performance and partly on Company-wide performance, thereby encouraging strong business performance and cooperation across all of our operating segments.
A. Guiding Principles
The guiding principles of our executive compensation philosophy are as follows:
B. Compensation Levels
In determining compensation levels, the Compensation Committee of the Board of Directors (which we refer to as the Committee) regularly reviews the forms and amounts of compensation provided to similarly situated officers in the insurance and financial services industry and other publicly held corporations with whom we compete for management talent. To emphasize the relationship between pay and performance, the Committee also monitors available data on four external performance measures: total stockholder returns, earnings per share growth, revenue growth, and return on equity. The objective of analyzing both peer group and our own performance in determining the compensation of our executives is to design compensation programs that provide competitive compensation levels while recognizing and rewarding the achievement of performance goals. This enables us to balance two key goals: attracting and retaining key talent and paying for performance.
C. Forms of Compensation
Our executive compensation programs are viewed holistically. The Committee does not evaluate and change any single component of pay independent of the other components. The NEOs total compensation consists of
three principal components: base salary, short term incentives, and long term incentives. The NEOs also receive certain benefits and are eligible to participate in a deferred compensation plan. The Company gives particular attention to the proportion of the pay mix that is at risk and fixed. At risk components include both short term and long term incentives. Short term incentives are tied to clearly defined annual performance goals. Long term incentives, including stock appreciation rights (which we refer to as SARs) and restricted stock, are directly tied to our stock price and the number of shares granted are based on the achievement of specified performance goals. The fixed component is comprised of annual base salary. We balance cash-based compensation in the form of annual base salary and short term incentives with equity-based compensation in the form of SARs and restricted stock.
D. Competitive Positioning of Executive Compensation: Peer Groups, Survey Data and Benchmarking
New Public Company and Importance of Benchmarking. As a relatively new public company, the Committee believes that the best way to attract and retain top talent while reducing the risk of paying excessive compensation is to design compensation programs that provide compensation to our NEOs at levels and on terms consistent with those of our publicly traded peers. Therefore, we generally target the total compensation of our NEOs to the median compensation of our peer group. A NEOs actual compensation may be higher or lower than the targeted compensation based on actual performance against predetermined metrics and based on the performance of our stock. Performance is reviewed each year by the Committee to determine payout levels above or below the target performance level, and the intention is that above average compensation will be provided for above-average performance. In determining the percentage of compensation allocated among base salary, short term incentive and long term incentive pay for the NEOs, we generally aim to follow the practices of our peer group of public companies. Immediately following our initial public offering, our NEOs held relatively small amounts of Company stock. However, more recently, we have made a concerted effort to allocate a higher percentage of total compensation to long term incentive awards in order to align the interests of NEOs with our stockholders.
Peer Group and Survey Data. Given the specialty niche and diverse business lines among our four operating segments, it has been difficult to find an exact peer group. While we face competition in each of our businesses, we do not believe that any single competitor competes with us in all of our business lines. Additionally, the business lines in which we operate are generally characterized by a limited number of competitors. Accordingly, we have revised the peer group that we use for purposes of benchmarking NEO compensation several times in the past few years. In early 2006, the Committee reviewed and updated our peer group to reflect (1) our re-examination of the previous selection criteria for choosing our peer group, (2) consolidation in our industry, and (3) changes in our businesses. We also looked at notable competitors in each of our primary business lines and companies cited as competitors in a variety of investor analyst reports. Our current peer group is a collection of 17 comparable companies that reflect our best matches from the insurance or financial services sector, including companies with similar product lines, services and business models and companies with similar revenues and assets. Although our position may change from year to year, we currently fall in the middle of the peer group when measured by revenue and assets.
In addition to peer group analysis, the Committee uses competitive surveys of the compensation of NEOs from a large range of companies with similar revenues and assets that are not included in our peer group. The survey data reports median values of base salary, short term incentive and long term incentive pay and analyzes the variance between each NEOs compensation and the median of the companies surveyed. Survey data is used by the Committee to supplement the information derived from the peer group analysis.
Our Pay vs. Peer Group and Survey Data. In 2006, Mercer Human Resources Consulting, Inc. (Mercer) conducted a competitive analysis of each element of total compensation (including base salary, short term incentive, and long term incentive pay) of the NEOs, as compared to available compensation data from proxy statements of our peer group and survey-based data described above. Mercer and our CEO presented the data to the Committee for its discussion and consideration in November 2006. Based on that data, the Committee
determined that our NEOs were either at or below the median compensation level as compared to the peer group, and approximated the median level or were slightly above it as compared to the survey-based data. Based on these studies and Committee discussion in December 2006, total compensation for 2007 for four of the NEOs was set. The Committee met in January 2007 to approve Mr. Pollocks 2007 total compensation.
III. Major Components and Key Features of Total Compensation
The following section describes the major components of total compensation that are awarded to the NEOs. Each component is approved by the Committee.
A. Base Salary
Objectives. The objective of providing base salary is to compensate employees on a regular basis consistent with market practice and to provide a level of income to employees commensurate with their skills and responsibilities. Base salary is based upon the following factors:
Base salaries are reviewed and approved annually by the Committee based on our NEOs total compensation targets, recommendations from our CEO and receipt of data from and discussion with Mercer based on the factors described above. Generally, we set base salaries in line with our peers and general market trends as part of an overall strategy of awarding total compensation in line with our public company peers. Base salary adjustments beyond market increases are typically driven by significant changes in position, responsibility, and performance as well as the Companys internal business priorities.
2006 Base Salaries of NEOs. The 2006 base salaries for the NEOs reflect a uniform 2% increase from 2005. However, Mr. Pollock was promoted to CEO in March and received an increase in April from $765,000 to $800,000 per year to reflect his new peer group of CEOs. The 2% increase for the other NEOs was lower than the 4% base salary increase that Mercers market studies determined to be standard market practice for public companies in 2006. The lower increase was given because the peer group analysis completed by Mercer demonstrated that the NEOs were receiving a higher weighting of base salary and a lower weighting of long term incentive pay in their total compensation as compared to their peers. As a result, our CEO recommended that the Company pursue a compensation strategy of awarding total compensation in line with its public company peers in terms of the allocation between base salary and long term incentives.
2007 Base Salaries of NEOs. In November 2006, Mercer presented data to the Committee on annual base salaries of NEOs in our peer group. Additionally, Mercer reported that the overall market increases for general industry NEOs were approximately 3.9%. In December 2006, the Committee met to set the 2007 base salary for four of our NEOs based on this data and the other factors described above.
In January 2007, the Committee approved an increase to Mr. Pollocks base salary. His base salary increase was part of an overall increase to his total compensation primarily based upon two factors: the Committees and the Nominating and Corporate Governance Committees positive assessment of his performance and continuing leadership as it impacted the Companys strong performance in 2006 and the Committees view that
Mr. Pollocks total compensation should better approximate the median total compensation of other CEOs, based on its analysis of survey data presented by Mercer.
The Committee approved the following 2007 base salary increases:
B. Short Term Incentive Program
Objectives. Generally, the objective of our short term incentive program is to align managements goals with our strategic goals. The short term incentive program (which we refer to as STIP) is intended to:
The short term incentive program is an annual opportunity for participants to earn up to twice their STIP Target Award Percentage (as described below) for contributing to the attainment of superior results. It is designed to pay nothing if targeted performance levels are not achieved.
Overview of Short Term Incentive Program. Short term incentive awards are paid pursuant to our Executive Management Incentive Plan (the EMIP), which provides senior officers with cash-based awards (which we refer to as STIP Awards) equal to a percentage of their base salary (which we refer to as STIP Target Award Percentage) times a multiplier which is based upon the achievement of certain pre-established performance goals. Each NEO is given a STIP Target Award Percentage amount which is determined by matching their position against market information for comparable jobs and a multiplier that may be earned at various performance levels above and below target, based upon the level of achievement of performance goals.
Performance goals may be based on one or more performance criteria expressed in terms of Company-wide objectives or in terms of objectives that relate to the performance of an operating segment or a division, department, region or function within the Company or operating segment. Performance goals are weighted to reinforce our strategic goals. The goal of the STIP is to reward executives for results and to reduce their target compensation if results are not achieved. To ensure that this basic purpose is achieved, performance goals are based upon a number of factors, including prior year performance, industry-specific factors affecting our operating segments and market expectations. The Committee may designate certain exclusions from results. These exclusions are items that are not reflective of true operational performance and could influence results either positively or negatively. Until the annual meeting of stockholders in 2008 or until one of the Companys incentive plans is materially amended, if earlier, awards issued under the Companys incentive plans are exempt from the deduction limits of Section 162(m) of the Internal Revenue Code.
Actual payouts of STIP Awards can range from 0 to 2 times the STIP Target Award Percentage based upon actual performance. The multiplier of 2 times the STIP Target Award Percentage represents a cap on the annual short term incentive. Performance against the criteria is measured on a five-point scale, as follows.
Early each year, our CEO recommends performance goals to the Committee.
2006 STIP Target Award Percentages. In December 2005, the Committee approved the 2006 STIP Target Award Percentages for the NEOs. The STIP Target Award Percentages for Messrs. Pollock (100%), Camacho (100%), and Hamm (75%), and Ms. Silvester (85%) remained unchanged. The STIP Target Award Percentage for Mr. Lemasters was increased from 60% to 75%, reflecting his promotion to CEO of Assurant Solutions. No increase was provided to Mr. Pollock despite the fact that he received a promotion to CEO because the Committee believed that his STIP Target Award Percentage was appropriate.
2006 Performance Goals. The Committee determined that STIP Awards for 2006 would be conditioned upon four factors and percentages weighted as follows:
These are results to which the Company attaches metrics because we believe they are key drivers of achieving sustainable success. We define sustainable success as both annual results and the long term development of organizational capacity.
We set the metrics or targets for each performance goal at a level that represents movement toward achieving and maintaining top quartile performance in the insurance sector. For example, we strive to maintain ROE in the top quartile of our sector as measured annually based on external indices. In 2006, top quartile ROE was 15% or better. In order to achieve top quartile ROE and earnings per share, selected growth components of our businesses are reinforced through our performance goals. We select and prioritize certain business lines that are likely to drive top quartile performance and build and sustain stockholder value. Our quantitative targets for growth are set at levels that will incent movement towards top quartile growth in revenues. Growth performance and compliance goals are intended to reinforce strategic imperatives and balance results with investments that are necessary for longer term sustainable success.
Our performance goals present a significant challenge because in setting the targets, we assign the same weight to revenue growth as we assign to profit growth. By placing a 40% weight on growth performance (based on new sales measures and GAAP revenue), we aim to motivate NEOs to increase sales and to grow selected
businesses. At the same time, we place a combined 40% weight on earnings per share and ROE to provide incentives for profitability. Accordingly, the NEOs will receive maximum STIP Awards only if the Company has both revenue growth and good growth in profits. The other targets (weighted at 20%) focus on areas that protect the Company from reputational risk to ensure the sustainability of revenue and profit growth. The insurance sector faces the continuing challenge of maintaining the underwriting discipline and cost control necessary for profitability while also taking on the increased policyholder risk and expense of developing new business necessary to grow revenues. Often profit growth may be achieved at the expense of revenue growth or vice versa. Our short term targets are set at levels that provide a maximum award to NEOs if they can balance both elements while protecting the Company from reputational risk. We believe that the STIP Awards are performance based and are linked to goals that should create stockholder value over the long term, if achieved.
In February 2007, the Committee met to review the Companys performance against the target levels set for the 2006 STIP performance goals. The Committee acknowledged the Companys excellent financial results in 2006. With respect to profits, the Company in 2006 increased its earnings per share to $5.57 per diluted share and delivered a top quartile operating ROE of 16.7%. With respect to revenues, the Company seized opportunities to grow sales, as reflected in increased premiums and fee income in prioritized business lines. Additionally, the Company successfully enhanced its enterprise risk management, compliance and fraud deterrence programs and internal controls to maximize protection from reputational risk. The Committee also evaluated the individual performance of the Health and Solutions operating segments against these metrics. As specified when the 2006 performance goals were set, the Committee normalized net operating income for the effect of acquisitions and divestitures. As a result, the Committee approved the following multipliers related to the performance of the Company (and Assurant Health and Assurant Solutions for Messrs. Hamm and Lemasters, respectively) relative to the target levels set for 2006:
The actual dollar amount of each NEOs 2006 STIP Award appears in column (g) of the Summary Compensation Table on p. 22.
2007 STIP Target Award Percentages. In December 2006, the Committee met to approve changes to STIP Target Award Percentages for four of the NEOs. Based upon survey data, each NEOs progression in his or her position, and tenure in his or her role, Messrs. Hamm and Lemasters received a five percent increase to their STIP Target Award Percentages, bringing each of them to 80%. Based upon survey data, Mr. Camacho and Ms. Silvester did not receive an increase; their STIP Target Award Percentages remained the same at 100% and 85%, respectively. Similarly, Mr. Pollock did not receive an increase in his 2007 STIP Target Award Percentage after the Committee met in January 2007. His STIP Target Award Percentage remained at 100%.
C. Long Term Incentive Program
Objectives. Long term incentive compensation is awarded to key employees who have the potential to significantly influence our financial results and sustainable performance over time. The goals of our long term incentive program are to reward long-term value creation in the enterprise and to encourage stock ownership. In contrast to the short term incentive program which may be more focused on specific operating segment goals, long term incentive compensation focuses on enterprise-wide results. For example, the short term incentive program would reward an operating segment CEO for the performance of his or her operating segment whereas the long term incentive program would provide rewards for his or her contribution to Assurants overall performance. The actual amount of the long term incentive award may vary based on Company or operating segment prior year performance.
Long term incentive awards provide forward-looking incentives that focus on:
Overview. The Committee adopted the Assurant Long Term Incentive Plan (the ALTIP), a sub-plan created under the Assurant, Inc. 2004 Long Term Incentive Plan in 2005. The ALTIP provides key employees with awards of restricted stock and SARs (which we refer to as ALTIP Awards). The ALTIP Award is expressed as a target percentage of a participants base salary (which we refer to as the ALTIP Target Award Percentage) and is determined based on competitive data. The resulting award consists of 25% restricted stock and 75% SARs. Historically, restricted stock was valued based on the closing price of our Common Stock on the trading day preceding the date of grant. However, as described below, the Committee adopted an equity grant policy for 2007, which provides that the value of the restricted stock will be valued based on the closing price of our Common Stock on the date of grant. The number of SARs awarded is computed using a valuation methodology described in more detail in the Narrative to the Summary Compensation and Grants of Plan-Based Awards Tables. The underlying goal is to deliver an aggregate value in SARs and restricted stock equal to the ALTIP Target Award Percentage.
The Committee establishes the size and other terms of awards by considering data from Mercer and recommendations from our CEO based upon long term compensation reported by peer companies in the insurance and financial services industry. In determining the allocation among base salary, short term incentive and long term incentive pay for our NEOs, we generally aim to follow the practices of peer group companies.
Shares of restricted stock issued to executives vest in three annual installments (1/3 each year) on each of the first three anniversaries of the date of grant. SAR awards issued under the ALTIP historically became vested at the end of the second calendar year following the year in which the SARs were granted. However, in order to streamline the vesting schedule and make it easier for participants to understand, commencing with awards granted in 2007, SARs will become vested on the third anniversary of the date of grant. The three year vesting schedule is designed to ensure that the awards fulfill their intended purpose of ensuring the NEOs only receive compensation if they remain employed with us for the long-term. However, these awards are subject to accelerated vesting upon a change in control of the Company or the relevant operating segment. We have elected to provide such acceleration because we believe that the principal purpose of providing executives with equity incentives is to align their interests with the stockholders and that this alignment should be enhanced, not weakened, in the change in control context. In addition, we believe that the vesting provision will best enable us to retain our executives through the closing of a change in control transaction and to deliver to an acquirer an intact management team. Both restricted stock and SARs vest on a pro-rata basis upon death or disability because the Committee feels that such vesting is appropriate, if through no fault of the executive, the executive is unable to fulfill his or her job duties. Prior to 2007, awards had also vested on a pro-rata basis upon retirement, but after reviewing its equity compensation practices, the Committee amended the award agreements starting in 2007 to eliminate mandatory vesting of awards upon retirement and to instead make such vesting discretionary. The Committee feels that such discretion will enable it to accelerate vesting of awards if and when such vesting is appropriate.
Reasons for Paying with Restricted Stock and SARs. We compensate our executives with a mix of SARs and restricted stock because we believe that each form of equity compensation provides us with different benefits. As executives only derive value from SARs if the stock price increases from the date of grant, SARs provide our executives with incentives to increase our stock price, with a secondary retentive benefit derived from vesting conditions imposed on the SARs. Restricted stock, on the other hand, will generally provide value to the executives on the date of grant regardless of whether stock price increases. For this reason, a primary motivation
in providing our executives with restricted stock is retention, with a secondary benefit derived from the fact that the value of the shares increases with the price of our stock. We believe the mix of providing 25% restricted stock and 75% SARs provides our executives with the appropriate balance between focus on stock price and long-term performance of the business.
SAR Premium/Discount. The Committee may apply a premium or discount of up to 25% to the SARs component of the target ALTIP Award based on prior year achievement of the performance goals under our short term incentive program. For example, if a NEO received a STIP Award with a multiplier of 2.0 for the prior year, the Committee could elect to apply a premium of 25% to the target SAR award. On the other end of the range, if a NEO received a STIP Award with a multiplier of .8 for the prior year, the Committee could elect to apply a discount of 25% to the target SAR award. There is a sliding scale between both ends of this premium/discount range. In March 2006, the Committee for the first time approved a premium to the SARs awarded to the NEOs based on the level of achievement of their respective operating segment or Assurant against STIP performance goals.
2006 ALTIP Awards. The value of restricted stock and SARs granted to the NEOs for 2006 is reported in the Stock Awards and Option Awards columns respectively of the Summary Compensation Table.
2006 ALTIP Target Award Percentages. As described in the previous section entitled Base Salary2006 Base Salaries of NEOs, based upon data produced by Mercer and our CEOs recommendation, in 2006 the Committee began pursuing a strategy of increasing the long term component of NEO total compensation. This was done in order to better mirror the total compensation of our public company peers and to build stock ownership in a way that was not possible before we became a publicly traded Company. This strategy resulted in an increase in the ALTIP Target Award Percentage amounts for each of the NEOs in 2006. Mr. Claytons ALTIP Target Award Percentage amount increased from 175% to 200%. Each of Messrs. Pollock (130% to 140%), Camacho (100% to 110%), and Hamm (90% to 100%), and Ms. Silvester (105% to 115%) also received increases in their ALTIP Target Award Percentage amounts. Mr. Lemasters received an incrementally higher ALTIP Target Award Percentage amount increase (from 60% to 85%), to reflect his promotion to CEO of Assurant Solutions. After announcing his retirement from the Company, Mr. Clayton chose to forego any pro-rated 2006 ALTIP Awards to which he was entitled.
As described above in the section entitled Base Salary, the Committee asked Mercer to conduct a study in early 2006 of Mr. Pollocks total compensation as compared to other CEOs. The study demonstrated that Mr. Pollocks long term incentive component was slightly below the 25th percentile of the CEO market data. The Committee therefore approved an increase in Mr. Pollocks long term incentive component of total compensation from 140% to 160%. This is part of a long term process to correlate his long term incentive component to a level closer to the median of the peer group.
2006 SARs Premium. In 2006, based on the solid performance of the Company and its operating segments in 2005, the NEOs received the following premiums applied to their SAR awards based on their 2005 STIP Award multipliers:
Given the strong 2005 operating results of Assurant Solutions (where Mr. Camacho served as President and CEO for part of the year), Messrs. Camacho and Lemasters received higher premiums than the other NEOs.
2007 ALTIP Target Award Percentages. In December 2006, the Committee met to approve changes to ALTIP Target Award Percentages for four of the NEOs. ALTIP Target Award Percentages were analyzed in conjunction with the short term incentive and base salary elements of compensation. The survey data reflected that the allocation of compensation elements remained low with respect to long term incentives. In January, the Committee approved an increase in Mr. Pollocks ALTIP Target Award Percentage based on the factors discussed in the section above entitled Base Salary2007 Base Salaries of NEOs. Accordingly, the following ALTIP Target Award Percentages were approved:
When these approved target percentages are converted into SARs and restricted stock, a premium or discount may be applied to the SARs (as described above) based upon 2006 short term incentive program performance.
Equity Grant Policy. Prior to December 2006, we followed a general practice of granting ALTIP Awards to NEOs once a year after a Committee meeting. Additional grants may have been made at other times in connection with promotions after receiving Committee approval.
In December 2006, the Committee adopted the Assurant, Inc. Equity Grant Policy (the Equity Grant Policy) in order to provide guidelines and uniformity in connection with the grant of SARs, restricted stock and any other equity-based compensation awards.
With respect to the equity awards granted under the ALTIP, the policy requires that all grants to NEOs will be approved by the Committee at an in-person or telephonic meeting. The Equity Grant Policy states that all ALTIP Awards will be granted on the second Thursday in March each year. If the Committee decides that a second grant in the same calendar year is necessary for, among other reasons, salary adjustments, promotions or new hires, a second grant of ALTIP Awards will be approved by the Committee and will be granted on the second Thursday in November.
The Equity Grant Policy requires that all equity awards granted after December 2006 will be valued at the closing price of our Common Stock on the grant date. The base price for SARs will equal this price. The number of shares of Common Stock underlying an equity award that is expressed as a dollar amount will be determined as of the applicable grant date based on the relevant price and the other applicable valuation factors as of such grant date.
In addition to the three principal components of total compensation discussed above, the NEOs also receive certain benefits.
Change in Control Severance Agreements. We have entered into change in control severance agreements (or CIC Agreements) with each of our NEOs. Our change in control severance agreements are intended to aid the Company in attracting and retaining executives by reducing the personal uncertainty and anxiety arising from a business combination. In our view, the severance multiple of three times base salary and bonus that each NEO receives is appropriate as it is the current standard for senior executives in many U.S. industries. The CIC Agreements also incorporate provisions to deal with the impact of the federal excise tax on excess parachute
payments. The so-called golden parachute tax rules subject excess parachute payments to a dual penalty: the imposition of a 20% excise tax upon the recipient and non-deductibility of such payments by the paying corporation. While the excise tax is seemingly evenhanded, the excise tax can discriminate against long-serving employees in favor of new hires, against individuals who do not exercise options in favor of those who do and against those who elect to defer compensation in favor of those who do not. For these reasons, we may provide an excise tax gross-up in the change in control agreements. For more detailed information on the Change in Control Severance Agreements, please see the section entitled Narrative to Potential Payments Upon Termination or Change in Control TableChange in Control Severance Agreements on p. 46.
Retirement Plans. We maintain the Supplemental Executive Retirement Plan (the SERP), the Executive Pension and 401(k) Plan (the pension portion is referred to as the Executive Pension Plan and the 401(k) portion is referred to as the Executive 401(k) Plan), and the Assurant Pension Plan (the Pension Plan). The goals of these retirement plans are to provide our NEOs with competitive levels of income replacement upon retirement as compared to the marketplace and to provide a package that will both attract and retain key talent in the Company. The Executive Pension Plan is designed to replace income levels capped under the Pension Plan by the compensation limit of IRC Section 401(a)(17) ($220,000 for 2006). The SERP is designed to supplement the other Company retirement plans noted above and Social Security so that total income replacement from these programs will equal 50% of the NEOs pre-retirement income. For further details on these plans, please see the Narratives to the Pension Benefits and Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans Tables.
Executive Long Term Disability Plan. As part of our general benefits program, Assurant provides Long Term Disability (LTD) coverage for all benefits-eligible employees under a group policy. LTD benefits replace 60% of employees monthly plan pay (which is generally defined as base salary plus the STIP Target Award Percentage amount), up to a maximum monthly benefit of $15,000. As an additional benefit, all participants in the SERP (including the NEOs) are eligible for Executive LTD coverage. Executive LTD goes beyond the LTD plan maximum to replace 60% of plan pay, up to a total (group + Executive LTD) maximum benefit per month of $25,000. This coverage is provided through the purchase of individual policies on a bi-annual basis and is fully paid for by Assurant.
E. Deferred Compensation Plans
Currently, each of the NEOs is eligible to participate in the Assurant Deferred Compensation Plan (the ADC Plan). The ADC Plan provides key employees the ability to defer a portion of their eligible compensation which is then invested in a variety of mutual funds. Deferrals and withdrawals under the ADC Plan are intended to be fully compliant with the American Jobs Creation Act of 2004s (Jobs Act) definition of eligible compensation and distribution requirements. For further details on the ADC Plan, please see the Narrative to the Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans Table.
Prior to the adoption of the Jobs Act and the establishment of the ADC Plan in 2005, the NEOs were eligible to participate in the Assurant Investment Plan (the AIP). However, since the Jobs Act became effective, it was no longer efficient from a tax planning perspective to maintain the AIP. Therefore, the AIP has been frozen and currently only withdrawals may be made.
IV. Management Committee Stock Ownership
In 2004, our former parent company Fortis sold the majority of its ownership stake in Assurant through an initial public offering. At that point, the Committee sought to align management with stockholder interests. Therefore, we pursued a strategy to encourage the Management Committee to take ownership positions in our stock. The plan design of the ALTIP and the adoption of our Stock Ownership Guidelines are two examples of how the Committee has executed this strategy.
The ALTIP Awards consist of a 25% restricted stock component that vests 1/3 per year over a three year period. This feature was designed to promptly deliver restricted stock to the Management Committee. Similarly, the 75% SARs component of the ALTIP Awards have a relatively short exercise period of approximately two years after vesting. This feature was also designed with near-term Management Committee stock ownership in mind.
In January 2006, the Board of Directors adopted the following Stock Ownership Guidelines for Non-Employee Directors and the Management Committee:
Individuals have five years from the effective date of July 1, 2006, or five years from their appointment to a specified position (if appointed later), to acquire the required holdings. Eligible sources of shares include personal holdings, restricted stock, 401(k) holdings, and Employee Stock Purchase Plan (ESPP) shares. Until an individual meets these guidelines in the specified time, the individual would be prohibited from selling any shares that were the subject of an award granted after January 13, 2006.
The following table sets forth the cash and other compensation paid by the Company to the NEOs, or earned by the NEOs, for all services in all capacities during 2006.
Summary Compensation Table for Fiscal Year 2006
The SARs amounts reported in column (f) are consistent with the amount recognized for financial statement reporting purposes except for the application of a forfeiture rate. The fair value of each outstanding SAR was estimated on the date of grant using a Black-Scholes option-pricing model and expense is amortized over the applicable vesting period. Please see Footnote 17 Incentive PlansStock Appreciation Rights of the Companys Annual Report on Form 10K for the fiscal year ending December 31, 2006 for a discussion of the Black-Scholes option-pricing model and the assumptions used in this valuation.
In connection with Mr. Claytons retirement, he forfeited 31,762 SARs awarded in 2004 and 83,696 SARs awarded in 2005. He also forfeited 5,314 shares of restricted stock awarded in 2004 and 5,957 shares of restricted stock awarded in 2005. None of the other NEOs forfeited SARs or restricted stock.
There is also a reversed expense related to forfeitures included in the Option Awards column. However, it did not exceed the SARs award expense booked for Mr. Clayton during 2006. The primary reason the Stock Awards column amount is negative while the Option Awards column amount is positive is due to the different amortization expense schedules used for graded vesting (restricted stock) versus cliff vesting (SARs). The amortization expense schedule used for graded vesting is more accelerated than the straight line approach of cliff vesting.
Grants of Plan-Based Awards
The table below sets forth individual grants of awards made to each NEO during 2006.
Grants of Plan-Based Awards Table for Fiscal Year 2006
The grant date fair value of each outstanding SAR award was computed in accordance with FAS 123R using a Black-Scholes option-pricing model. Please see Footnote 17 Incentive PlansStock Appreciation Rights of the Companys Annual Report on Form 10K for the fiscal year ending December 31, 2006 for a discussion of the Black-Scholes option-pricing model.
Narrative to the Summary Compensation and Grants of Plan-Based Awards Tables
The following is a brief description of the information disclosed in the above referenced tables. For details on our executive compensation program and the plans under which awards were granted, please see the CD&A.
Salary, Bonus and Non-Equity Incentive Plan Arrangements
The NEOs do not have written employment agreements. Instead, salary and non-equity incentive plan opportunities are established by the Committee on an annual basis. As noted in the section entitled CD&A2006 Base Salaries of NEOs, the 2006 salaries for the NEOs (except Mr. Pollock) reflect a uniform 2% increase from 2005. To recognize the fact that Mr. Pollock would be taking on new responsibilities as CEO, the Committee increased Mr. Pollocks base salary to $800,000 effective April 1, 2006. The 2006 salary amount reported for Mr. Pollock in the Summary Compensation Table is $791,250 (not $800,000) because his base salary was $765,000 for 3 months of 2006. For further details on his base salary increase, please see the above referenced section.
The Company awarded Messrs. Camacho and Lemasters cash bonuses for their outstanding work in obtaining a favorable litigation settlement in December 2006.
STIP Awards earned by the NEOs for 2006 are equal to the product of the NEOs base salary, his or her STIP Target Award Percentage and a multiplier set by the Committee with respect to Assurant, Inc. or the NEOs operating segment. Please see the section entitled CD&AShort Term Incentive Program starting on p. 14 for further details.
Perquisites and Other Compensation
The amounts reported in column (i) of the Summary Compensation Table include premiums paid for Executive LTD Insurance during 2006; Company contributions to the Executive 401(k) Plan; Company contributions to the Assurant 401(k) Plan; perquisites and other personal benefits; and gross up payments for taxes paid on reimbursements of conference expenses.
As part of our general benefits program, the Company provides LTD coverage for all benefits-eligible employees under a group policy. LTD benefits replace 60% of employees monthly plan pay (which is generally defined as base salary plus STIP Target Award Percentage amount), up to a maximum monthly benefit per month of $15,000. As an additional benefit, all participants in the SERP (including the NEOs) are eligible for Executive LTD coverage. Executive LTD goes beyond the LTD plan maximum to replace 60% of plan pay, up to a total (group + Executive LTD) maximum benefit per month of $25,000. This coverage is provided through the purchase of individual policies on a bi-annual basis and is fully paid for by the Company.
The Company makes an annual contribution for each participant in the Executive 401(k) Plan equal to 7% of eligible compensation in excess of the IRC Section 401(a)(17) limit (which was $220,000 for 2006). The participant must be employed on the last regularly scheduled work day of the year in order to receive the contribution unless the participant retires, becomes disabled, or dies.
The Company also makes an annual contribution to employees participating in the Assurant 401(k) Plan. On or after the first day of the month following the completion of one year of eligibility service, the Company matches a percentage of pre-tax contributions deducted from eligible pay. Participants must be actively employed on the last regularly scheduled workday of the calendar year to be eligible for the Company contribution unless they retire, become disabled, or die during the year.
The Company provides gross up payments for taxes paid on reimbursements of conference expenses. Additionally, the Company pays for financial and tax planning services with a firm that is selected by the Company. The Company pays the full cost ($13,000 in 2006) of one initial comprehensive financial planning session and up to $10,000 over 5 years for ongoing financial planning sessions thereafter.
Restricted stock granted on April 1, 2006 vests 1/3 each year on the anniversary of the grant over a three year period, subject to full acceleration upon a change in control of the Company or the relevant operating segment (as defined in the ALTIP) and subject to pro-rata acceleration upon the death, disability or retirement of the executive. The 2006 restricted stock awards were determined by multiplying the ALTIP Target Award Percentage amount, approved by the Committee, by the NEOs base compensation on January 1, 2006 to come up with a target ALTIP Award value. Restricted stock awards represent 25% of the total target award value divided by the closing stock price of Assurant, Inc. Common Stock on the trading day preceding the date of grant. Restricted stock award recipients, as beneficial owners of the shares, have full voting and dividend rights with respect to the shares during and after the restricted period. Dividends are paid in cash and are not eligible for reinvestment during the restricted period. The applicable dividend rate during 2006 was $0.10 per share.
SAR awards granted on April 1, 2006 vest on December 31, 2008, subject to full acceleration upon a change in control of the Company or the relevant operating segment (as defined in the ALTIP), or pro-rata acceleration upon the participants retirement, death, or disability and have an expiration date of April 1, 2011. To the extent not previously exercised, all rights issued to executives in 2006 will automatically be exercised on the earliest of (i) the fifth anniversary of the date of grant, (ii) the second anniversary of the participants retirement, death or disability, (iii) the date the Company or relevant operating segment undergoes a change in control or (iv) ninety days following the participants termination of employment. SAR awards represent 75% of the total target award value divided by a Black-Scholes fair value. A SAR premium/discount may be applied to determine the final SAR awards. SAR award recipients do not have voting or dividend rights on the shares issuable under their SARs until the SAR is vested and exercised. For more information regarding the ALTIP and the premiums awarded to each NEO, please see the section entitled CD&A SAR Premium/Discount on p. 18.
Both restricted stock and SARs are payable solely in shares and are delivered to the participant net of basic taxes, although the participant does have the right to request to pay all taxes in cash to receive all the shares.
Outstanding Equity Awards at Fiscal Year End
The table below provides information concerning unexercised options and stock that has not vested for each NEO outstanding as of December 31, 2006.
Outstanding Equity Awards Table for Fiscal Year 2006
Until June 29, 2005, the Company maintained the Assurant Appreciation Incentive Rights Plan (AAIR Plan), which provided for the issuance of Assurant, Inc. and operating segment cash settled appreciation rights (AAIR Plan rights). In 2005, the Company decided it no longer wished to issue operating segment rights or cash settled appreciation rights. The ALTIP was adopted to provide for the payment of appreciation to participants in the form of Assurant, Inc. Common Stock. As a result of the adoption of the ALTIP, the AAIR Plan rights were converted into SARs on June 30, 2005. The intrinsic value of the converted SARs did not change from that of the AAIR Plan rights. Converted SARs refers to the AAIR Plan rights (granted over several years prior to our initial public offering) that were converted to SARs on June 30, 2005. In delivering equivalent intrinsic value to the converted SARs, differing base prices may have resulted. Therefore, certain converted SARs with the same expiration date may have differing base prices in the table above.
Option Exercises and Stock Vested in Last Fiscal Year
The following table provides information regarding all of the SARs that were exercised by the NEOs during 2006, and all of the shares of restricted stock held by the NEOs that became vested during 2006 on an aggregated basis.
Option Exercises and Stock Vested Table for Fiscal Year 2006
The Company maintains three defined benefit pension plans. Two are nonqualified executive defined benefit pension plans, the Supplemental Executive Retirement Plan (the SERP) and the pension portion of the Executive Pension and 401(k) Plan1 (the Executive Pension Plan), and the other is our broad-based, tax qualified, defined benefit pension plan, the Assurant Pension Plan (the Pension Plan).
The table below describes each plan that provides for pension payments to the NEOs.
Pension Benefits Table for Fiscal Year 2006
Narrative to the Pension Benefits Table
The following is a brief description of the plans and information reported in the Pension Benefits Table.
The Pension Plan
Eligible employees may generally participate in the Assurant Pension Plan on January 1st or July 1st after completing one year of service with the Company. Credited service for determining a participants benefit begins after he or she participates in the plan and has no limit. Eligible compensation under this plan is limited by Internal Revenue Code (IRC) Section 401(a)(17) (which was $220,000 for 2006) and generally includes recurring payments such as base salary, STIP Awards, and sales commission, if applicable. Eligible compensation also includes amounts deferred under the Assurant Deferred Compensation Plan in the year deferred.
Each active plan participant on December 31, 2000 was given the choice of continuing to have his or her benefits calculated under the applicable prior plan formula or to have his or her benefits determined under the current pension formula. Anyone joining (or rejoining) the plan after December 31, 2000 will have his or her benefits determined under the current pension formula.
Messrs. Pollock and Hamm and Ms. Silvester are covered under the prior plan formula. Messrs. Camacho and Lemasters are covered under the current plan formula.
Under the current plan formula, the lump sum value of the benefit is based on the participants accumulated annual accrual credits multiplied by their final average earnings. Final average earnings (for both the current and prior plan formula) is defined as the highest average annual compensation for five consecutive complete calendar years of employment during the ten consecutive complete calendar years immediately before the participants termination of employment. Annual accrual credits are measured in percentages and increase as participants reach certain credited service milestones. For years 1 through 10, the credit is 3%; for years 11 through 20, it is 6%; for years 21 through 30 it is 9%; and for years over 30, it is 12%.
The prior plan benefit is calculated by taking (a) 0.9% multiplied by final average earnings up to Social Security covered compensation multiplied by years of credited service (up to 35 years) plus (b) 1.3% multiplied by final average earnings in excess of Social Security covered compensation multiplied by years of credited service (up to 35 years) plus (c) 1.3% multiplied by final average earnings multiplied by years of credited service in excess of 35.
The Normal Retirement Age for the Assurant Pension Plan is 65. Benefits are actuarially reduced for any payment prior to age 65. A participant covered under the prior plan formula may elect to commence his or her benefit immediately following termination of employment if the lump sum value of the benefit is under $15,000. Otherwise, the participant can commence his or her benefit at age 55, providing he or she has ten years of service, or at age 65. Participants covered under the current plan formula may immediately commence their benefit at termination of employment or they may elect to defer the commencement up to age 65.
A participant becomes 100% vested in the benefits under the current plan formula after three years of vesting service. If the participant elected to participate in the prior plan formula, the benefits will become vested after five years of vesting service. All NEOs are 100% vested.
If the participant is married, the normal form of payment is a joint and 50% survivor annuity. If the participant is not married, the normal form of payment is a life annuity. In addition to the normal forms of payment described above, there are other optional forms of payment (lump sum and annuity) all of which are actuarially equivalent to the life annuity.
For Messrs. Camacho and Lemasters, benefits are determined under the current plan formula. Under the current plan formula, the present value of accumulated benefits at December 31, 2006 is determined as the lump sum value of the benefit based on the participants accumulated annual accrual credits and final average earnings (which is limited by IRC Section 401(a)(17)) at December 31, 2006, but not less than the present value of accrued benefits under the prior plan formula. For Messrs. Pollock and Hamm and Ms. Silvester, benefits are determined under the prior plan formula. Under the prior plan formula, the present value of accumulated benefits at December 31, 2006 is determined based on the accrued plan benefit at that date and assumes the following: (1) the executives will retire from Assurant at age 65, which is the plans Normal Retirement Age; (2) the executives will receive their payments in the form of an annuity; and (3) the present value of annuity benefits is based on an interest rate assumption of 5.89% and the RP 2000 generational mortality table.
The Executive Pension Plan
Eligible employees may generally begin participating in the Executive Pension Plan on January 1st or July 1st after completing one year of service with the Company and when their eligible compensation exceeds the compensation limit under IRC Section 401(a)(17) (which was $220,000 for 2006). Eligible compensation under this plan generally includes recurring payments such as base salary, STIP Awards, and sales commission, if applicable. Eligible compensation also includes amounts deferred under the Assurant Deferred Compensation Plan in the year deferred.
For participants who are covered under a prior plan formula, eligible compensation was capped for 2006 at $345,000 and this cap is adjusted annually for inflation. Eligible compensation for participants covered under the current plan formula is not capped. With respect to the plan formula to determine benefits, the elections made under the Assurant Pension Plan on December 31, 2000 also apply to the Executive Pension Plan.
Messrs. Pollock and Hamm and Ms. Silvester are covered under the prior plan formula. Messrs. Camacho and Lemasters are covered under the current plan formula.
A participants benefit under the Executive Pension Plan is equal to the benefit he or she would have received under the Pension Plan at Normal Retirement Age (age 65), recognizing all eligible compensation (not subject to the IRC Section 401(a)(17) limit) reduced by the benefit payable under the Pension Plan (which is subject to the IRC Section 401(a)(17) limit). The benefits under the Executive Pension Plan are payable only in a lump sum following termination of employment. Payments will be made following termination of employment and are subject to the restrictions under IRC Section 409A. Service covered under each of these formulas begins with participation in the Executive Pension Plan and has no limit.
A participant becomes vested in the benefits under the Executive Pension Plan after three years of service, if the participant has elected to participate in the current plan formula, and after five years of service, if the participant has elected to participate in the prior plan formula. All of the NEOs are currently 100% vested in their Executive Pension Plan benefit.
The present value of the accumulated benefits under this plan used the same assumptions and methodologies as the Assurant Pension Plan described above, except, under the prior plan formula the pension is only paid as a lump sum rather than an annuity. For current plan formula participants, the present value of accumulated benefits at December 31, 2006 is determined as the lump sum value of the benefit based on the participants accumulated annual accrual credits and unlimited final average earnings as of December 31, 2006 offset by the Assurant Pension Plan Benefits. For prior plan benefits, the present value of accumulated benefits at December 31, 2006 is based on the benefit produced under the prior plans formula converted to a lump sum payment at Normal Retirement Age 65. The lump sum conversion basis at retirement consists of (1) an interest rate assumption derived from a segmented yield curve (5.32% during the first 5 years, 5.70% for the next 15 years and 6.07% thereafter) as of December 31, 2006 and (2) the RP 2000 Mortality table with projection. The present value of the lump sum payment is determined using a pre-retirement interest rate of 5.89%.
To participate in the SERP, an executive is nominated by the Company and approved by the Compensation Committee. Under the SERP, when a participant terminates employment, he or she is entitled to a benefit equal to the Target Benefit that is offset by the participants benefit payable from the Pension Plan, the Executive Pension Plan and the participants estimated Social Security benefit. Mr. Camacho has an additional offset which is actuarially equal to the payment he will receive from his Severance Agreement with American Bankers Insurance Group. The Target Benefit is equal to 50% of the participants eligible compensation multiplied by a fraction, not to exceed 1.0, whose numerator is equal to the number of months of credited service at termination, and whose denominator is equal to 240. After 20 years of credited service and attainment of the plans Normal Retirement Age, a participant will earn a full 50% benefit under the SERP payable as a life annuity. Eligible compensation under the SERP includes the participants most recent base salary plus the target STIP Award approved by the Compensation Committee. Generally, credited service is based on the participants years of service with the Company. If a participant was formerly employed by an acquired company, then service with that company may be recognized under the SERP at the discretion of the Compensation Committee.
In 2006, based on a study of the market practice, the Compensation Committee approved a change to the Normal Retirement Age from age 60 to age 62. This change will be effective only for participants joining the SERP during 2007 or later. Since Mr. Lemasters was approved for participation in the SERP effective January 1, 2007, the change in Normal Retirement Age applies to him.
A participant is not vested in any of his or her benefits under the SERP until the second anniversary of the date he or she commences participation in the plan. On the second anniversary of participation, the participant vests in the SERP benefit at the rate of 3% for each month of employment thereafter with the Company. A participant will become 100% vested in his or her SERP benefit in the event of death or disability. If a participant is terminated for cause, as defined in the SERP, or commits a material breach of certain covenants regarding non-competition, confidentiality, non-solicitation of employees or non-solicitation of customers, then the participant will forfeit any remaining SERP benefits.
The participant may commence his or her vested SERP benefit at any time following termination as elected by the participant in his or her Joinder Agreement. If the participant commences his or her benefit prior to Normal Retirement Age then the SERP benefit will be reduced on an actuarially equivalent basis from Normal Retirement Age to the date the benefit actually commences.
The default form of payment under the SERP is a single lump payment that is the actuarial equivalent of the SERP benefit payable as a life annuity. The participant may also elect to have his or her SERP benefit paid in any optional benefit form permitted under the Pension Plan. Similar to the lump sum payment, each of these optional forms are the actuarial equivalent of the SERP benefit. A participant may elect to change the date on which the SERP benefit will commence up until one year prior to the participants termination date. Payments made following termination of employment are subject to the restrictions of IRC Section 409A.
Mr. Pollock and Ms. Silvester are 100% vested in their SERP benefit. Mr. Hamm is 36% vested in his SERP benefit and Mr. Camacho is 72% vested in his SERP benefit. Mr. Pollock and Ms. Silvester have 20 years of credited service and therefore will only continue to accrue benefits under the SERP due to increases in eligible compensation (as defined in the SERP). None of the NEOs have attained Normal Retirement Age as of fiscal year end 2006; therefore, if they terminate employment and according to their Joinder agreements elected to receive plan benefits immediately, their SERP benefit would be actuarially reduced to their respective ages. Mr. Clayton remained an employee of the Company until the end of April 2006 and has started receiving his benefit in which he was fully vested and had attained the full 20 years of credited service. His benefit is based on his 2006 salary rate of $890,970 and his pre-retirement 2006 STIP Target Award Percentage of 110%.
The present value of the accumulated benefits at December 31, 2006 was determined based on the December 31, 2006 accrued benefit using the base salary, target STIP Award and credited service at
December 31, 2006. For Mr. Camacho, the present value of his accumulated benefits reflects an additional offset of the retirement payment he will receive from his Severance Agreement with American Bankers Insurance Group. The present value of the accumulated benefits at December 31, 2006 is determined assuming the following: (1) the executives will retire from Assurant at the plans Normal Retirement Age, (2) the executives will receive their benefits in accordance with their current form of payment elections stated in their Joinder agreements (Messrs. Clayton, Pollock and Camacho have elected annuity forms of payment; Mr. Hamm and Ms. Silvester have elected single lump sum form of payment), (3) the present value of annuity benefits are determined using an interest rate of 5.89% and the RP 2000 generational mortality table, (4) the present value of single lump sum benefits are determined using an interest rate of 5.89% to the retirement date and a lump sum conversion factor at retirement, and (5) the lump sum conversion basis at retirement for Ms. Silvester is based on an interest rate of 4.75% and the 1994 Group Annuity Mortality Table; for Mr. Hamm, this is based on a segmented yield curve (5.32% during the first 5 years, 5.70% for the next 15 years and 6.07% thereafter) and the RP 2000 Mortality table with projection.
Number of Years of Credited Service
The number of years of credited service varies between plans for the following reasons. Eligibility for the Pension and Executive Pension Plan is based on a one year waiting period from date of hire and results in the same amount of credited service under both plans. Eligibility under the SERP generally recognizes all service with the Company; however, if a participant was formerly employed by an acquired company, then service with that company may or may not be recognized under the SERP at the discretion of the Committee. Messrs. Clayton, Pollock, Camacho and Lemasters all have prior service that was not recognized.
For purposes of determining the amount of benefits payable under the SERP, the credited service is capped at 20 years. Actual years of service with the Company may be greater.
Payments During Last Fiscal Year
Only Mr. Clayton, who retired in 2006, received payments during the last fiscal year. Mr. Clayton elected to commence his annual Pension Plan benefit on May 1, 2006 in the form of a Joint and 100% Survivor Annuity. As previously elected in his Joinder Agreement, Mr. Clayton elected to commence his SERP benefit on May 1, 2006 in the form of a Joint and 100% Survivor Annuity (totaling $526,799 for the eight months he was retired in 2006). In addition, Mr. Clayton received two separate lump sum payments in 2006 (July 1, 2006 and November 1, 2006) totaling $441,846 from the Executive Pension Plan in accordance with IRC Section 409A.
Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans
The table below sets forth, for each NEO, information with respect to each defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified. The Company currently maintains the Assurant Deferred Compensation Plan (the ADC Plan), which provides for the deferral of compensation on a basis that is not tax-qualified. The Assurant Investment Plan (the AIP), which was frozen in December 2004, was a predecessor of the ADC Plan in which NEOs still have balances that can be withdrawn. The 401(k) portion of the Executive Pension and 401(k) Plan1 (the Executive 401(k)) is a defined contribution plan.
Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans Table
for Fiscal Year 2006
Narrative to the Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans Table
The following is a brief description of the plans and information reported in the Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans Table.
The ADC Plan
The ADC Plan allows its participants to defer current compensation on a pre-tax basis. Contributions to the ADC Plan are eligible to receive tax deferred earnings. The plan is a nonqualified plan that is not subject to the IRC limitations that apply to tax qualified plans. Participation in the ADC Plan is restricted to a select group of management or highly compensated employees of the Company. The ADC Plan is offered to employees who earn at least $125,000 in annual base salary or are reasonably expected to have a total annual compensation (base salary, commissions, and bonuses) of at least $200,000 and to all members of the Board of Directors.
Under the terms of the ADC Plan, deferral elections can be made once a year with respect to base salary, incentive payments or (with respect to the Board of Directors) director fees to be earned in the following year. Incentive payments include the annual STIP Awards paid under the EMIP and any other non-base salary cash compensation paid to participants under any other incentive plan or bonus arrangement of the Company relating to services performed during any calendar year, including but not limited to, commissions, special incentives or bonuses, lump sum change in control payments and eligible severance payments. Long term incentive awards are not eligible for deferral.
The ADC Plan requires a minimum annual deferral of $2,000 per type of compensation (i.e. base salary, incentive payments or director fees). Participants may defer no more than 50% of annual base salary and may defer up to a 100% of annual incentive payments and director fees. A participant is at all times 100% vested in his or her deferral account.
The participants select among various publicly available mutual funds in which to invest the deferred compensation on a tax deferred basis. Each deferral amount is credited to an account on the books of the Company. That account is then credited with earnings and losses based on the performance of the mutual funds.
Participants have the ability to change their investment elections. Currently, the Company does not provide any above market earnings or preferential earnings to the participants.
Each deferral must remain in the plan for at least one full calendar year, until July 1 of the next year or until the earlier of termination, disability or death. Deferrals cannot be changed or revoked during the plan year, except as permitted by applicable law. In order to make withdrawals from the ADC Plan, the participant, at the time of election of deferrals, must irrevocably elect to receive a future fixed date payout. This provides for deferrals to be made payable within 60 days of July 1 of the plan year specified. Each fixed date payout will be a lump sum payment in an amount that is equal to the selected portion of that years deferral amount. Participants also have the choice to divide their plan year deferrals into 25% increments and to make different fixed date payout elections for each such portion. At the time of deferral, the participant may irrevocably elect to receive payments subject to the fixed date payout election at the earlier of the specified July 1 fixed date payout date or his or her termination, or, instead to receive such amounts at the specified July 1 fixed date payout date regardless of any intervening termination.
Upon voluntary or involuntary termination (including retirement) or disability, participants can withdraw their account balances from the ADC Plan in a lump sum or in annual installments over five, ten or fifteen years or other agreed upon installment schedule between the participant and an administrator. Payments are made as soon as practicable following the close of the calendar quarter in which the termination takes place. As a result of IRC Section 409A, certain key employees (including the NEOs) are subject to a six-month waiting period for distributions following termination.
Prior to the establishment of the ADC Plan in 2005, the NEOs were eligible to participate in the AIP. The AIP provided key employees the ability to exchange a portion of their compensation for options to purchase certain third-party mutual funds. The Company did not provide any above market earnings or preferential earnings to the participants. The AIP was frozen in December 2004. Since then, participants have been able to withdraw from the AIP and have the ability to change their investment elections but any new deferrals of compensation have been made through the ADC Plan.
After termination, each of the NEOs has five or ten years to withdraw his or her money from the AIP. If the participant did not sign a non-competition and non-solicitation provision, he or she has up to two years to withdraw money from the AIP if he or she terminates employment or five years in the case of death, disability or retirement. If the participant did sign a non-competition and non-solicitation provision, he or she has up to five years to withdraw in the case of termination, or ten years in the case of death, disability or retirement.
The Executive 401(k) Plan
Eligible employees may generally participate in this plan after completing one year of service with the Company and when their eligible compensation exceeds the compensation limit under IRC Section 401(a)(17). Eligible compensation under this plan generally includes recurring payments such as base salary, STIP Awards, sales commission and amounts deferred under the ADC Plan in the year deferred.
The Company makes an annual contribution for each participant in this plan equal to 7% of eligible compensation in excess of the IRC Section 401(a)(17) limit (which was $220,000 for 2006). The participant must be employed on the last regularly scheduled work day of the year in order to receive the contribution unless the participant dies, becomes disabled, or retires. The participants select among various publicly available mutual funds in which the contributions are deemed to be invested on a tax deferred basis. These contributions are credited with earnings and losses based on the performance of the mutual funds. Currently, the Company does not provide any above market earnings or preferential earnings to the participants.
Eligibility for retirement is defined as age 55 and completion of ten years of service. Ms. Silvester is the only NEO who meets the retirement criteria under this plan. Please see footnote 5 of the Summary Compensation Table for quantification of Company contributions to the Executive 401(k) Plan in 2006.
The benefits under the Executive 401(k) Plan are payable only in a lump sum following termination of employment. The lump sum represents the accumulated value of Company contributions and deemed earnings and losses. Payments made following termination of employment are subject to the restrictions of IRC Section 409A.
A participant becomes vested in the benefits under the Executive 401(k) Plan after three years of service. All of the NEOs are currently 100% vested in their Executive 401(k) Plan benefit.
Potential Payments upon Termination or Change in Control
The following section sets forth for each NEO, an estimate of potential payments the NEO would receive at, following, or in connection with termination of employment under the circumstances enumerated below on December 31, 2006.
Potential Payments upon Termination or Change in Control Table