FedEx DEF 14A 2007
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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o Preliminary Proxy Statement
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þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to §240.14a-12
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To Our Stockholders:
We cordially invite you to attend the 2007 annual meeting of FedExs stockholders. The meeting will take place in the Tennessee Grand Ballroom at the Hilton Hotel, 939 Ridge Lake Boulevard, Memphis, Tennessee 38120, on Monday, September 24, 2007, at 10:00 a.m. local time. We look forward to your attendance either in person or by proxy.
The purpose of the meeting is to:
Only stockholders of record at the close of business on July 30, 2007 may vote at the meeting or any postponements or adjournments of the meeting.
By order of the Board of Directors,
CHRISTINE P. RICHARDS
August 13, 2007
HOW TO VOTE: Please complete, date, sign and return the accompanying proxy card or voting instruction card, or vote electronically via the Internet or by telephone. The enclosed return envelope requires no additional postage if mailed in the United States.
REDUCE MAILING COSTS: If you vote on the Internet, you may elect to have next years proxy statement and annual report to stockholders delivered to you electronically. We strongly encourage you to enroll in electronic delivery. It is a cost-effective way for us to provide you with proxy materials and annual reports.
ANNUAL MEETING ADMISSION: If you attend the annual meeting in person, you will need to present your admission ticket, or an account statement showing your ownership of FedEx common stock as of the record date, and a valid government-issued photo identification. The indicated portion of your proxy card or voting instruction card will serve as your admission ticket. If you are a registered stockholder and receive your proxy materials electronically, you should follow the instructions provided to print a paper admission ticket.
Your vote is very important. Please vote whether or not you plan to attend the meeting.
2007 PROXY STATEMENT
TABLE OF CONTENTS
TABLE OF CONTENTS
942 South Shady Grove Road
Memphis, Tennessee 38120
FedExs Board of Directors is furnishing you this proxy statement in connection with the solicitation of proxies on its behalf for the 2007 Annual Meeting of Stockholders. The meeting will take place in the Tennessee Grand Ballroom at the Hilton Hotel, 939 Ridge Lake Boulevard, Memphis, Tennessee 38120, on Monday, September 24, 2007, at 10:00 a.m. local time. At the meeting, stockholders will vote on the election of fourteen directors, the ratification of FedExs independent registered public accounting firm and, if properly presented at the meeting, four stockholder proposals. Stockholders also will consider any other matters that may properly come before the meeting, although we know of no other business to be presented.
By submitting your proxy (either by signing and returning the enclosed proxy card or by voting electronically on the Internet or by telephone), you authorize Christine P. Richards, FedExs Executive Vice President, General Counsel and Secretary, and Alan B. Graf, Jr., FedExs Executive Vice President and Chief Financial Officer, to represent you and vote your shares at the meeting in accordance with your instructions. They also may vote your shares to adjourn the meeting and will be authorized to vote your shares at any postponements or adjournments of the meeting.
FedExs Annual Report to Stockholders for the fiscal year ended May 31, 2007, which includes FedExs fiscal 2007 audited consolidated financial statements, accompanies this proxy statement. Although the Annual Report is being distributed with this proxy statement, it does not constitute a part of the proxy solicitation materials and is not incorporated by reference into this proxy statement.
We are first sending the proxy statement, form of proxy and accompanying materials to stockholders on or about August 13, 2007.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY VOTE YOUR SHARES EITHER BY MAIL, VIA THE INTERNET OR BY TELEPHONE.
INFORMATION ABOUT THE ANNUAL MEETING
At the annual meeting, the stockholders will be asked to:
Stockholders also will transact any other business that may properly come before the meeting. Members of FedExs management team will be present at the meeting to respond to appropriate questions from stockholders.
The record date for the meeting is July 30, 2007. Only stockholders of record at the close of business on that date are entitled to vote at the meeting. The only class of stock entitled to be voted at the meeting is FedEx common stock. Each outstanding share of common stock is entitled to one vote for all matters before the meeting. At the close of business on the record date there were 309,153,228 shares of FedEx common stock outstanding.
If your shares are held by a bank, brokerage firm or other nominee, you are considered the beneficial owner of shares held in street name. If your shares are held in street name, these proxy materials are being forwarded to you by your bank, brokerage firm or other nominee (the record holder), along with a voting instruction card. As the beneficial owner, you have the right to direct your record holder how to vote your shares, and the record holder is required to vote your shares in accordance with your instructions. If you do not give instructions to your bank, brokerage firm or other nominee, it will nevertheless be entitled to vote your shares in its discretion on the election of directors (Proposal 1) and the ratification of the appointment of the independent registered public accounting firm (Proposal 2). Absent your instructions, the record holder will not be permitted, however, to vote your shares on the adoption of the four stockholder proposals (Proposals 3, 4, 5 and 6) and your shares will be considered broker non-votes on those proposals.
As the beneficial owner of shares, you are invited to attend the annual meeting. If you are a beneficial owner, however, you may not vote your shares in person at the meeting unless you obtain a legal proxy, executed in your favor, from the record holder of your shares.
A quorum must be present at the meeting for any business to be conducted. The presence at the meeting, in person or by proxy, of the holders of a majority of the shares of common stock outstanding on the record date will constitute a quorum. Proxies received but marked as abstentions or treated as broker non-votes will be included in the calculation of the number of shares considered to be present at the meeting.
If a quorum is not present or represented at the meeting, the holders of a majority of the shares entitled to vote at the meeting who are present in person or represented by proxy, or the chairman of the meeting, may adjourn the meeting until a quorum is present or represented. The time and place of
the adjourned meeting will be announced at the time the adjournment is taken, and no other notice will be given.
1. YOU MAY VOTE BY MAIL. If you properly complete, sign and date the accompanying proxy card or voting instruction card and return it in the enclosed envelope, it will be voted in accordance with your instructions. The enclosed envelope requires no additional postage if mailed in the United States.
2. YOU MAY VOTE BY TELEPHONE OR ON THE INTERNET. If you are a registered stockholder (that is, if you hold your stock directly and not in street name), you may vote by telephone or on the Internet by following the instructions included on the proxy card. If you vote by telephone or on the Internet, you do not have to mail in your proxy card. If you wish to attend the meeting in person, however, you will need to bring your admission ticket. Internet and telephone voting are available 24 hours a day. Votes submitted through the Internet or by telephone must be received by 11:59 p.m. Eastern time on September 23, 2007.
If you are the beneficial owner of shares held in street name, you still may be able to vote your shares electronically by telephone or on the Internet. The availability of telephone and Internet voting will depend on the voting process of your bank, brokerage firm or other holder of record. We recommend that you follow the instructions set forth on the voting instruction card provided to you.
NOTE: If you vote on the Internet, you may elect to have next years proxy statement and annual report to stockholders delivered to you electronically. We strongly encourage you to enroll in electronic delivery. It is a cost-effective way for us to provide you with proxy materials and annual reports.
3. YOU MAY VOTE IN PERSON AT THE MEETING. If you are a registered stockholder and attend the meeting, you may deliver your completed proxy card in person. Additionally, we will pass out ballots to registered stockholders who wish to vote in person at the meeting. If you are a beneficial owner of shares held in street name who wishes to vote at the meeting, you will need to obtain a legal proxy from your record holder and bring it with you to the meeting.
If you own shares of FedEx common stock through a FedEx or subsidiary benefit plan, you can direct the trustee or the record holder to vote the shares held in your account in accordance with your instructions by completing the proxy card and returning it in the enclosed envelope or by registering your instructions via the Internet or telephone as directed on the proxy card. If you register your voting instructions by telephone or on the Internet, you do not have to mail in the proxy card. If you wish to attend the meeting in person, however, you will need to bring the admission ticket attached to the proxy card with you. In order to instruct a plan trustee or record holder on the voting of shares held in your account, your instructions must be received by September 19, 2007. If your voting instructions are not received by that date, each plan trustee will vote your shares in the same proportion as the shares for which voting instructions have been received.
Only stockholders eligible to vote or their authorized representatives will be admitted to the meeting. If you plan to attend the meeting, detach and bring with you the stub portion of your proxy card, which is marked Admission Ticket. You also must bring a valid government-issued photo identification, such as a drivers license or a passport. If you received your proxy materials through the Internet, you should follow the instructions provided to print a paper admission ticket.
If your shares are held in street name, you must bring the indicated portion of your voting instruction card. Alternatively, you may bring other proof of ownership, such as a brokerage account statement, which clearly shows your ownership of FedEx common stock as of the record date. In addition, you must bring a valid government-issued photo identification, such as a drivers license or a passport.
Security measures will be in place at the meeting to help ensure the safety of attendees. Metal detectors similar to those used in airports will be located at the entrance to the meeting room and briefcases, handbags and packages will be inspected. No cameras or recording devices of any kind, or signs, placards, banners or similar materials, may be brought into the meeting. Anyone who refuses to comply with these requirements will not be admitted.
Yes, if you are a registered stockholder you may revoke your proxy and change your vote by:
Your attendance at the meeting itself will not revoke your proxy unless you give written notice of revocation to the Secretary before your proxy is voted or you vote in person at the meeting.
If your shares are held in street name, you should contact your bank, brokerage firm or other nominee and follow its procedures for changing your voting instructions. You may also vote in person at the meeting if you obtain a legal proxy from your record holder.
Yes, your vote will be kept confidential and not disclosed to FedEx unless:
FedExs transfer agent, Computershare Trust Company, N.A., will tabulate and certify the votes. A representative of the transfer agent will serve as the inspector of election.
Your Board recommends that you vote:
If you submit a proxy but do not indicate any voting instructions, your shares will be voted:
FedExs Bylaws require stockholders to give advance notice of any proposal intended to be presented at the meeting. The deadline for this notice has passed and we have not received any such notices. If any other matter properly comes before the stockholders for a vote at the meeting, however, the proxy holders will vote your shares in accordance with their best judgment.
A nominee will be elected to the Board of Directors if the number of votes cast for such nominees election exceeds the number of votes cast against such nominees election. See Corporate Governance Matters Majority-Voting Standard for Director Elections on page 14.
A nominee who is not already serving as a director and who fails to receive the required majority vote will not be elected and thus will not serve on the Board of Directors.
Each current director who is standing for reelection at the annual meeting has tendered an irrevocable resignation from the Board that will take effect if the director does not receive the required majority vote and the Board accepts the resignation. If the Board of Directors accepts the resignation, the director will no longer serve on the Board, and if the Board rejects the resignation, the director will continue to serve until his or her successor has been duly elected and qualified or until his or her earlier disqualification, death, resignation or removal. See Corporate Governance Matters Majority-Voting Standard for Director Elections on page 14.
If a nominee is unable to stand for election, the Board of Directors may either reduce the number of directors to be elected or select a substitute nominee. If a substitute nominee is selected, the proxy holders may vote your shares for the substitute nominee.
The ratification of the appointment of Ernst & Young LLP as FedExs independent registered public accounting firm requires the affirmative vote of a majority of the shares present at the meeting in person or by proxy and entitled to vote.
If a stockholder proposal is properly presented at the meeting, approval of the proposal requires the affirmative vote of a majority of the shares present at the meeting in person or by proxy and entitled to vote. Approval of a stockholder proposal would merely serve as a recommendation to the Board to take the necessary steps to implement such proposal.
Abstentions will have no effect on the election of directors (Proposal 1). For all other proposals, abstentions will be treated as shares present for quorum purposes and entitled to vote, so they will have the same practical effect as votes against a proposal.
Broker non-votes will be treated as shares present for quorum purposes, but not entitled to vote. Absent instructions from you, your broker may not vote your shares on the adoption of the four stockholder proposals (Proposals 3, 4, 5 and 6). A broker non-vote with respect to these proposals will not affect their outcome.
Your broker will be entitled to vote your shares in its discretion on the election of directors (Proposal 1) and the ratification of the appointment of the independent registered public accounting firm (Proposal 2), without your voting instructions on these items.
The meeting will be Webcast on September 24, 2007. You are invited to visit the Investor Relations page of our Web site (http://www.fedex.com/us/investorrelations) at 10:00 a.m. Central time on September 24, 2007 to access the live Webcast of the meeting. An archived copy of the Webcast will be available on our Web site for one year. The information on FedExs Web site, however, is not incorporated by reference in, and does not form part of, this proxy statement.
Directors and Executive Officers
The following table sets forth the amount of FedExs common stock beneficially owned by each director or nominee, each named executive officer included in the Summary Compensation Table on page 36 and all directors, nominees and executive officers as a group, as of July 30, 2007. Unless otherwise indicated, beneficial ownership is direct and the person indicated has sole voting and investment power.
Section 16(a) of the Securities Exchange Act of 1934 requires directors and certain officers of FedEx and persons who own more than ten percent of FedExs common stock to file with the Securities and Exchange Commission initial reports of beneficial ownership (Form 3) and reports of subsequent changes in their beneficial ownership (Form 4 or Form 5) of FedExs common stock. Such directors, officers and greater-than-ten-percent stockholders are required to furnish FedEx with copies of the Section 16(a) reports they file. The Securities and Exchange Commission has established specific due dates for these reports, and FedEx is required to disclose in this proxy statement any late filings or failures to file.
Based solely upon a review of the copies of the Section 16(a) reports (and any amendments thereto) furnished to FedEx and written representations from certain reporting persons that no additional reports were required, FedEx believes that its directors, reporting officers and greater-than-ten-percent stockholders complied with all these filing requirements for the fiscal year ended May 31, 2007.
The following table lists certain persons known by FedEx to own beneficially more than five percent of FedExs outstanding shares of common stock as of March 31, 2007.
CORPORATE GOVERNANCE MATTERS
In furtherance of its longstanding goals of providing effective governance of FedExs business and affairs for the long-term benefit of stockholders and promoting a culture and reputation of the highest ethics, integrity and reliability, the Board of Directors has adopted Corporate Governance Guidelines, charters for each of its Board committees and a Code of Business Conduct & Ethics for directors, officers and employees of FedEx. Each of these documents is available, free of charge, in print to any stockholder who requests it and in the corporate governance section of the Investor Relations page of our Web site at http://www.fedex.com/us/investorrelations/corpgov. The information on FedExs Web site, however, is not incorporated by reference in, and does not form part of, this proxy statement.
The Board of Directors has determined that each member of the Audit, Compensation and Nominating & Governance Committees and, with the exception of Frederick W. Smith and J.R. Hyde, III, each of the Boards current members (James L. Barksdale, August A. Busch IV, John A. Edwardson, Judith L. Estrin, J. Kenneth Glass, Philip Greer, Shirley Ann Jackson, Steven R. Loranger, Charles T. Manatt, Joshua I. Smith, Paul S. Walsh and Peter S. Willmott), as well as Gary W. Loveman, is independent and meets the applicable independence requirements of the New York Stock Exchange (including the additional requirements for Audit Committee members) and the Boards more stringent standards for determining director independence. Mr. Smith is FedExs Chairman of the Board, President and Chief Executive Officer. Mr. Hyde has an ownership interest in HOOPS, L.P., with which FedEx has a relationship. For more information, please see Related Person Transactions below.
Under the Boards standards of director independence, which are included in FedExs Corporate Governance Guidelines, a director will be considered independent only if the Board affirmatively determines that the director has no direct or indirect material relationship with FedEx, other than as a director. The standards set forth certain categories or types of transactions, relationships or arrangements with FedEx, as follows, each of which (i) is deemed not to be a material relationship with FedEx, and thus (ii) will not, by itself, prevent a director from being considered independent:
In making its independence determinations, the Board broadly considered all relevant facts and circumstances, including the following immaterial transactions, relationships and arrangements:
The Board of Directors has determined that at least one member of the Audit Committee, John A. Edwardson, is an audit committee financial expert as such term is defined in Item 407(d)(5) of Regulation S-K, promulgated by the Securities and Exchange Commission.
A director must retire immediately before the annual meeting of FedExs stockholders during the calendar year in which he or she attains age 72. There are no directors retiring under this provision at the annual meeting.
In order to encourage significant stock ownership by our directors and senior officers, and to further align their interests with the interests of FedExs stockholders, the Board of Directors has established a goal that (i) within three years after joining the Board, each non-management director own FedEx shares valued at three times his or her annual retainer fee, and (ii) within four years after being appointed to his or her position, each member of senior management own FedEx shares valued at the following multiple of his or her annual base salary:
For purposes of meeting this goal, unvested restricted stock is counted, but unexercised stock options are not. The Board also recommends that each director and senior officer retain shares acquired upon stock option exercises until his or her goal is met. The stock ownership goal is included in FedExs Corporate Governance Guidelines. As of July 30, 2007, each FedEx director who had been on the Board for over three years and each executive officer owned sufficient shares to comply with this goal.
The Board of Directors has adopted a policy requiring stockholder approval for any future poison pill prior to or within twelve months after adoption of the poison pill. (A poison pill is a device used to deter a hostile takeover. Note that FedEx does not currently have, nor have we ever had, a poison pill.) The policy on poison pills is included in FedExs Corporate Governance Guidelines.
Non-management Board members meet without management present at least four times annually at regularly scheduled executive sessions. At least once a year, such meetings include only the independent members of the Board. The Chairman of the Nominating & Governance Committee presides over meetings of the non-employee and independent directors.
You may communicate directly with any member or committee of the Board of Directors by writing to: FedEx Corporation Board of Directors, c/o Corporate Secretary, 942 South Shady Grove Road, Memphis, Tennessee 38120. Please specify to whom your letter should be directed. The Corporate Secretary of FedEx will review all such correspondence and regularly forward to the Board a summary of all such correspondence and copies of all correspondence that, in her opinion, deals with the functions of the Board or its committees or that she otherwise determines requires the attention of any member, group or committee of the Board of Directors. Board members may at any time review a log of all correspondence received by FedEx that is addressed to Board members and request copies of any such correspondence.
The Nominating & Governance Committee will consider director nominees proposed by stockholders. To recommend a prospective director candidate for the Nominating & Governance Committees consideration, stockholders may submit the candidates name, qualifications, including whether the candidate satisfies the requirements set forth below, and other relevant biographical information in writing to: FedEx Corporation Nominating & Governance Committee, c/o Corporate
Secretary, 942 South Shady Grove Road, Memphis, Tennessee 38120. FedExs Bylaws require stockholders to give advance notice of stockholder proposals, including nominations of director candidates. For more information, please see page 77, Additional Information Stockholder Proposals for 2008 Annual Meeting.
The Board is responsible for recommending director candidates for election by the stockholders and for electing directors to fill vacancies or newly created directorships. The Board has delegated the screening and evaluation process for director candidates to the Nominating & Governance Committee, which identifies, evaluates and recruits highly qualified director candidates and recommends them to the Board. The Nominating & Governance Committee considers potential candidates for director, which may come to the attention of the Nominating & Governance Committee through current directors, management, professional search firms, stockholders or other persons. The Nominating & Governance Committee considers and evaluates a director candidate recommended by a stockholder in the same manner as a nominee recommended by a Board member, management or other sources.
If the Nominating & Governance Committee determines that an additional or replacement director is necessary or advisable, the Nominating & Governance Committee may take such measures that it considers appropriate in connection with its evaluation of a potential director candidate, including interviewing the candidate, engaging an outside firm to gather additional information and making inquiries of persons with knowledge of the candidates qualifications and character. In its evaluation of potential director candidates, including the members of the Board of Directors eligible for reelection, the Nominating & Governance Committee considers the current size, composition and needs of the Board of Directors and each of its committees.
Candidates nominated for election or reelection to the Board of Directors must possess the following minimum qualifications:
In addition, it is expected that the following qualities or skills be possessed by one or more of FedExs Board members: transportation industry experience; international experience; financial expertise; marketing expertise; technological expertise; energy expertise; and government experience.
Gary W. Loveman is the only nominee who is not an executive officer of FedEx or a current director standing for reelection. Frederick W. Smith, FedExs Chairman of the Board, President and Chief Executive Officer, and Peter S. Willmott, Chairman of the Nominating & Governance Committee, recommended Mr. Loveman as a nominee for election at the annual meeting.
The Nominating & Governance Committee has engaged a third-party executive search firm to assist in identifying potential board candidates, including Mr. Loveman.
Effective March 12, 2007, the Board of Directors amended FedExs Bylaws to adopt a majority-voting standard in uncontested director elections and a resignation requirement for directors who fail to receive the required majority vote. The amended Bylaws also prohibit the Board from changing back to a plurality-voting standard without the approval of our stockholders. Under the new majority-voting standard, a director nominee must receive more votes cast for than against his or her election in order to be elected to the Board. Previously, our directors were elected under a plurality-voting standard, in which candidates receiving the most votes were elected regardless of whether those votes constituted a majority.
In accordance with this majority-voting standard and resignation requirement, each incumbent director who is standing for reelection at the annual meeting has tendered an irrevocable resignation from the Board of Directors that will take effect if (i) the director does not receive more votes cast for than against his or her election at the annual meeting, and (ii) the Board accepts the resignation. FedExs Bylaws require the Board of Directors, within 90 days after certification of the election results, to accept the directors resignation unless there is a compelling reason not to do so and to promptly disclose its decision (including, if applicable, the reasons for rejecting the resignation) in a filing with the Securities and Exchange Commission.
The Board of Directors has adopted a Policy on Review and Preapproval of Related Person Transactions, which is included in FedExs Corporate Governance Guidelines. The policy requires that all proposed related person transactions (as defined in the policy) and all proposed material changes to existing related person transactions be reviewed and preapproved by the Nominating & Governance Committee. To the extent the related person (as defined in the policy) is a director or immediate family member of a director, the transaction or change must also be reviewed and preapproved by the full Board. The policy provides that a related person transaction or a material change to an existing related person transaction may not be preapproved if it would:
The policy requires the Nominating & Governance Committee to annually (i) review each existing related person transaction that has a remaining term of at least one year or remaining payments of at least $120,000, and (ii) determine, based upon all material facts and circumstances and taking into consideration our contractual obligations, whether it is in the best interests of FedEx and our stockholders to continue, modify or terminate the transaction or relationship.
In accordance with the policy described above, the Nominating & Governance Committee has reviewed the following related person transactions and determined that they remain in the best interests of FedEx and our stockholders:
Messrs. Greer, Barksdale, Busch, Glass, Manatt and Walsh served on FedExs Compensation Committee during fiscal 2007. Mr. Barksdale, who ceased being a member of the Compensation Committee on September 25, 2006, is a former officer of FedEx Express (FedExs predecessor). His employment with FedEx Express ended in 1992.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During fiscal 2007, the Board of Directors held six regular meetings and two special meetings. Each director attended at least 75% of the meetings of the Board and any committees on which he or she served.
The Board of Directors has a standing Audit Committee, Compensation Committee, Information Technology Oversight Committee and Nominating & Governance Committee. Each committees written charter is available on the FedEx Web site at http://ir.fedex.com/governance/committeechar.cfm. Committee memberships are as follows:
The Board of Directors has approved reconstituting the committees so that, immediately following the annual meeting, if all of the director nominees are elected, committee memberships will be as follows:
The Audit Committee, which held ten meetings during fiscal 2007, performs the following functions:
The members of the Audit Committee meet all independence and qualification requirements of the New York Stock Exchange. The Board of Directors has determined that at least one member of the Audit Committee, John A. Edwardson, is an audit committee financial expert.
The Compensation Committee, which held six meetings during fiscal 2007, performs the following functions:
The members of the Compensation Committee meet all independence requirements of the New York Stock Exchange.
The Information Technology Oversight Committee, which held six meetings during fiscal 2007, performs the following functions:
The Nominating & Governance Committee, which held six meetings during fiscal 2007, performs the following functions:
The members of the Nominating & Governance Committee meet all independence requirements of the New York Stock Exchange.
FedEx expects all board members to attend annual meetings of stockholders. Each member of the Board of Directors attended the 2006 annual meeting of stockholders.
The Board of Directors currently consists of fourteen members. All of FedExs directors are elected at each annual meeting of stockholders and hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. Mr. J. Kenneth Glass is retiring as a director at the annual meeting and is not standing for reelection. The Board proposes that each of the current directors, other than Mr. Glass, be reelected to the Board. In addition, the Board of Directors has nominated Gary W. Loveman for election as a director. Each of the directors elected at this annual meeting will hold office until the annual meeting of stockholders to be held in 2008 and until his or her successor is duly elected and qualified.
Each nominee has consented to being named in this proxy statement and has agreed to serve if elected. If a nominee is unable to stand for election, the Board of Directors may either reduce the number of directors to be elected or select a substitute nominee. If a substitute nominee is selected, the proxy holders may vote your shares for the substitute nominee.
Under the new majority-voting standard, each of the fourteen director nominees must receive more votes cast for than against his or her election in order to be elected to the Board. For more information, please see Corporate Governance Guidelines Majority-Voting Standard for Director Elections on page 14.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF EACH OF THE FOURTEEN NOMINEES.
The following table sets forth, with respect to each nominee, his or her name, age, principal occupation and employment during at least the past five years, the year in which he or she first became a director of FedEx (or its predecessor, FedEx Express) and directorships held in other public companies.
NOMINEES FOR ELECTION TO THE BOARD
The Compensation Committee has reviewed and discussed with management the following Compensation Discussion and Analysis. Based on its review and discussions with management, the Compensation Committee recommended to the Board of Directors, and the Board approved, that the Compensation Discussion and Analysis be included in this proxy statement.
Compensation Committee Members
Philip Greer Chairman
August A. Busch IV
J. Kenneth Glass
Charles T. Manatt
Paul S. Walsh
COMPENSATION DISCUSSION AND ANALYSIS
Compensation Philosophy, Objectives and Design
FedExs mission is to produce superior financial returns for shareowners by providing high value-added transportation, supply chain, business and related information services through focused operating companies that compete collectively, operate independently and manage collaboratively. We design our executive compensation program to further FedExs mission by:
We reward our executive officers for contributing to FedExs success for the long-term benefit of shareowners. Our executive compensation program is designed to pay executives in the top quartile of our peer group when we achieve long-term top-quartile results compared to the peer group.
FedExs compensation program for executive officers consists of four key elements:
Executive officers also receive certain other annual compensation, including perquisites and tax reimbursement payments. In addition, while we do not have any employment agreements with our executive officers, the officers are entitled to receive certain post-employment and change-of-control payments and benefits, such as through our pension plans and management retention agreements.
Duty to Retain and Attract. FedEx is widely acknowledged as one of the worlds most admired and respected companies, and it is our people our greatest asset that give us our strong reputation. Because FedEx operates a global enterprise in a highly competitive business environment, we compete for talented management with some of the largest companies in the world in our industry and in others. Our global recognition and reputation for excellence in management and
leadership make our employees attractive targets for other companies, and our key employees are aggressively recruited. Accordingly, we have a duty to our shareowners to ensure that our overall compensation program competes well against all types of companies and continues to retain and attract the right people. Each element of compensation is intended to fulfill this important obligation.
In order to ensure that our compensation remains competitive, we rely on comparison survey information and design our executive compensation program to target the 75th percentile of compensation for comparable positions in the comparison surveys. We target our compensation at the 75th percentile to retain and attract highly qualified and effective executives.
For the fiscal 2007 executive compensation review, we considered data published by two major consulting firms: Towers Perrin and Hewitt Associates. Each consulting firm provided compensation data on all general industry companies in its respective database with annual revenues in excess of $10 billion (over 100 companies from each firm), a majority of which are Fortune 200 companies. The data results provided by each firm are averaged to arrive at blended market compensation data for general industry executives.
We believe that general industry is the appropriate comparison category because our executives are aggressively recruited by and from businesses outside FedExs industry peer group. In addition, we do not have many similarly sized industry peers, so an industry peer group would not produce a meaningful statistical sample. The Compensation Committee of our Board of Directors has reviewed with its outside consultant (Towers Perrin) alternative criteria for selecting companies for our benchmarking survey data and concluded that our use of general industry companies with revenues greater than $10 billion is the most appropriate approach.
When we compare the elements of compensation of our executive officers to the benchmarking survey data, we group the elements into two categories:
The TDC formula is illustrated below:
* Includes related tax reimbursement payments.
Other elements of compensation (such as perquisites and retirement benefits) are not included in our TDC formula because the comparison survey information does not include these items. While these other elements are not benchmarked against survey data, they are reviewed and approved by our Compensation Committee. In addition, we consider other factors besides our benchmarking analysis when determining the appropriate total compensation level for our executive officers, including the tenure, responsibilities and experience levels of the officers, as well as the compensation of the officers relative to one another.
The TCC and TDC of our named executive officers are each targeted at the 75th percentile of the corresponding categories of compensation for comparable positions in the comparison surveys. For
benchmarking purposes, we include target AIC and LTI payouts in the TCC and TDC formulas. Therefore, the actual compensation paid may vary widely from the targeted 75th percentile in the short term because compensation earned under the AIC and LTI programs is variable and commensurate with the level of achievement of aggressive pre-established financial performance goals. When we achieve superior results, we reward our executives accordingly under the terms of these programs. Conversely, when we fall short of our business objectives, payments under these variable programs decrease accordingly.
Pay for Performance. Our executive compensation program is intended not only to retain and attract highly qualified and effective managers, but also to motivate them to substantially contribute to FedExs future success for the long-term benefit of shareowners and reward them for doing so. Accordingly, we believe that there should be a strong relationship between pay and corporate performance (both financial results and stock price), and our executive compensation program reflects this belief. In particular, AIC payments, LTI payments and stock options represent a significant portion of our executive compensation program, and this variable compensation is at risk and directly dependent upon the achievement of pre-established corporate goals or stock price appreciation.
In summary, our philosophy is to (i) closely align the compensation paid to our executives with the performance of the company on both a short-term and long-term basis, and (ii) set aggressive performance goals that support the companys core long-term financial goals of:
Our executive compensation is thus, in large measure, highly variable and directly linked in the planning process to the above goals and increases in the FedEx stock price over time.
The following chart illustrates for each named executive officer the allocation of fiscal 2007 target TDC between base salary and incentive and equity-based compensation elements:
Not only is our executive compensation program weighted towards variable, at-risk pay components, but we emphasize incentives that are dependent upon long-term corporate performance and stock price appreciation. These long-term incentives include LTI cash compensation and equity-based awards (stock options and restricted stock), and they comprise a significant portion of an executive officers total compensation. These incentives are designed to motivate and reward the executive officers for achieving long-term corporate financial performance goals and maximizing long-term shareowner value. These incentives also encourage the retention of the executive officers.
The following chart illustrates for each named executive officer the allocation of fiscal 2007 target TDC between long-term incentives (LTI, stock options and restricted stock, including the related tax reimbursement payment) and short-term components (base salary and AIC):
Align Management and Shareowner Interests. We award stock options and restricted stock to create and maintain a long-term economic stake in the company for the officers, thereby aligning their interests with the interests of our shareowners.
In addition, as discussed below, payout under our LTI compensation program is dependent upon achievement of an aggregate EPS goal for a three-fiscal-year period. EPS was selected as the financial measure for the LTI plan because growth in our EPS strongly correlates to long-term stock price appreciation.
The following chart illustrates the relationship between FedExs EPS growth and stock price appreciation (based on the fiscal year-end stock price and adjusted for stock splits):
In order to encourage significant stock ownership by FedExs senior management, including the named executive officers, and to further align their interests with the interests of our shareowners, the Board of Directors has adopted a stock ownership goal for senior officers, which is included in FedExs Corporate Governance Guidelines. With respect to our executive officers, the goal is that within four years after being appointed to his or her position, each officer own FedEx shares valued at the following multiple of his or her annual base salary:
For purposes of meeting this goal, unvested restricted stock is counted, but unexercised stock options are not. Until the ownership goal is met, the officer is encouraged to retain (but is not required to do so) net profit shares resulting from the exercise of stock options. Net profit shares are the shares remaining after payment of the option exercise price and taxes owed upon the exercise of options.
As of July 30, 2007, each executive officer exceeded the stock ownership goal.
Our Board of Directors is responsible for the compensation of our executive management. The purpose of the Boards Compensation Committee, which is composed solely of independent directors, is to help discharge this responsibility by, among other things:
In furtherance of its responsibility, the Compensation Committee has retained an outside consultant (Towers Perrin) to assist the Committee in evaluating FedExs executive compensation. The consultant reports directly to the Committee, and the Committee has determined the consultant to be independent from FedEx. The consultant attends Committee meetings, reviews Committee materials and provides advice to the Committee upon its request. For example, the consultant updates the Committee on trends and issues in executive compensation and comments on the competitiveness and reasonableness of FedExs executive compensation program. The consultant also assists the Committee in the development and review of FedExs AIC and LTI compensation programs, including commenting on performance measures and the goal-setting process.
The Chairman of the Board, President and Chief Executive Officer, who attends most meetings of the Compensation Committee, assists the Committee in determining the compensation of all other executive officers by, among other things:
The other executive officers do not have a role in determining their own compensation, other than discussing their annual individual performance objectives with the Chairman of the Board, President and Chief Executive Officer.
As discussed above, we believe that a significant portion of executive compensation should be based upon the companys financial and stock price performance that is, at risk. Through our approach to base salary, we attempt to strike an appropriate balance. Accordingly, the annual base salaries of the named executive officers are targeted at the 50th percentile for comparable positions in the two comparison surveys described above. Targeting the median level for base salary allows us to allocate a larger portion of total compensation to variable performance-based compensation elements (since TDC is targeted at the 75th percentile), but still provide enough fixed pay in cash to retain and attract highly marketable executives in a competitive market for executive talent.
The base salary of each named executive officer is reviewed and adjusted at least annually to reflect, among other things:
The independent members of the Board, upon the recommendation of the Compensation Committee, approve any changes to Mr. Smiths base salary. Mr. Smith approves any changes to the base salaries of the other named executive officers within limits established by the Compensation Committee.
Chairman of the Board, President and Chief Executive Officer. Effective June 2006, the independent Board members approved an ad hoc base salary increase of 2% for Mr. Smith based upon CEO compensation market data. Effective July 2006, the independent Board members approved an annual increase of 3.5% to Mr. Smiths base salary.
Other Named Executive Officers. Effective June 2006, Mr. Graf received an ad hoc base salary increase of 8% based upon CFO total compensation market data, and Messrs. Carter and Glenn each received ad hoc base salary increases of 3% based upon their increased responsibilities. Effective July 2006, each non-CEO named executive officer received an annual base salary increase of 3.5%.
Our AIC program provides a cash bonus opportunity to our employees, including the named executive officers, at the conclusion of each fiscal year based upon the achievement of company financial and individual performance objectives established at the beginning of the year, as illustrated below:
The AIC program reflects our belief that a significant portion of an executive officers compensation should be at risk and directly dependent upon the achievement of pre-established performance goals. Target AIC payouts are established as a percentage of the executive officers base
salary. Payouts above target levels are based upon above-target achievement of company financial performance objectives, rather than individual objectives; accordingly, the executive officer receives above-target payouts if and only if the company exceeds its financial performance goals. The maximum AIC payout represents three times the portion of the target payout that is based upon the achievement of company financial performance objectives (plus the portion of the target payout that is based upon the achievement of individual performance objectives).
The company performance factor is a pre-established multiplier that corresponds, on a sliding scale, to the percentage achievement of the applicable company financial performance target objective. The multiplier matrix for company performance factors is designed so that if the financial performance threshold is achieved but is less than target, the multiplier decreases exponentially based on the percentage achievement of the target objective. On the other hand, if the company exceeds its financial performance target objective, the multiplier increases exponentially (up to the maximum, as described above) based on the percentage that such goal is exceeded.
The fiscal 2007 AIC target payouts for the named executive officers, as a percentage of base salary, were as follows:
The following table illustrates for our named executive officers the fiscal 2007 AIC formulas and total AIC payout opportunities (as a percentage of the target payout described above):
Allocation of Goals
Chairman of the Board, President and Chief Executive Officer. Mr. Smiths AIC payout is tied to the achievement of corporate objectives for consolidated pre-tax income for the fiscal year, which are based on the corporate business plan for the year. Mr. Smiths threshold (minimum) AIC payout is zero. His target AIC payout is set as a percentage of his base salary, and his maximum AIC payout is set as a multiple of the target payout. The independent members of the Board of Directors, upon the recommendation of the Compensation Committee, approve these percentages. The actual AIC payout ranges, on a sliding scale, from the threshold to the maximum based upon the performance of the company against the consolidated pre-tax income objectives.
In addition, the independent Board members, upon the recommendation of the Compensation Committee, may adjust this amount upward or downward based on their annual evaluation of Mr. Smiths performance, including the quality and effectiveness of his leadership and the following corporate performance measures:
None of these factors is given any particular weight in determining whether to adjust Mr. Smiths bonus amount.
Non-CEO Named Executive Officers. FedEx Corporation executive vice presidents, including Messrs. Graf, Glenn and Carter, participate in the AIC plan for corporate employees, and presidents and chief executive officers of FedEx operating segments, including Messrs. Bronczek and Sullivan (until his retirement), participate in the AIC plan for their respective segment. Under these plans, the AIC payout is tied to the achievement of (i) individual objectives established at the beginning of the fiscal year for each executive (30% of the target payout), and (ii) company objectives for financial performance for the fiscal year (70% of the target payout). The threshold (minimum) AIC payout is zero. The target AIC payout is set as a percentage of the executives base salary, and the maximum AIC payout is set as a multiple of the target payout (the Compensation Committee approves these percentages). The actual AIC payout ranges, on a sliding scale, from the threshold to the maximum based upon the performance of the individual and the company against the objectives.
The achievement level of each non-CEO named executive officers individual objectives was based on Mr. Smiths evaluation at the conclusion of the fiscal year, which is reviewed by the Compensation Committee. The company objectives for financial performance are based upon the corporate business plan for the year.
Discussion of Individual and Company Objectives. Individual performance objectives for the non-CEO named executive officers vary by management level and by operating segment and include (but are not limited to):
Individual performance objectives are designed to further the companys business objectives. Achievement of individual performance objectives is generally within each officers control or scope of responsibility, and the objectives are intended to be achieved with an appropriate level of effort and effective leadership by the officer.
As an example of our commitment to compete collectively and manage collaboratively, the AIC payout for all named executive officers, including the operating segment CEOs, is tied to the performance of FedEx as a whole consolidated pre-tax income. We use consolidated pre-tax income as the only corporate performance measure for FedEx Corporation employees, including Messrs. Smith, Graf, Glenn and Carter, because corporate employees have broad responsibilities for financing and other non-operating decisions and are held accountable for those decisions.
As an example of our commitment to operate independently, the fiscal 2007 AIC payout for operating segment CEOs, including Messrs. Bronczek and Sullivan, was tied in part to the operating income of their respective operating segments. We measured segment performance against operating income objectives because segment operating income is largely controllable by the segment CEO.
While the fiscal 2007 operating segment AIC plans had both consolidated pre-tax income (40% of the target payout) and the respective segments operating income (30% of the target payout) as
company performance measures, consolidated pre-tax income will be the only company performance measure for all fiscal 2008 AIC plans, including the operating segment plans. This change reflects our desire to focus all of our executives and employees on the performance of FedEx as a whole given our uncertainty about the strength of the economy during fiscal 2008.
AIC objectives for company financial performance are based upon our business plan for the fiscal year, which is reviewed and approved by the Board of Directors. Consistent with our long-term focus, we measure performance against our business plan, rather than a stipulated growth rate or an average of growth rates from prior years, to account for short-term economic and competitive conditions and anticipated strategic investments that may have short-term profit implications. We address year-over-year improvement targets through our LTI compensation plans, as discussed below. Our business planning process is extremely thorough and sets aggressive goals that are intended to result in superior company performance. Accordingly, the AIC program targets strong financial performance.
Fiscal 2007 AIC Performance and Payouts. The following table presents target and actual FedEx consolidated pre-tax income and FedEx Express and FedEx Ground segment operating income for fiscal 2007 (in millions):
Based upon the companys actual performance and each officers achievement of individual performance objectives, payouts to the named executive officers under the fiscal 2007 AIC plans were as follows (compared to the target payouts):
Cash Payments Under Long-Term Incentive Compensation Program
The LTI program provides a long-term cash payment opportunity to members of management, including the named executive officers, based upon achievement of aggregate EPS goals for the preceding three-fiscal-year period. The LTI plan design provides for payouts that correspond to specific EPS goals established by the Board of Directors. The EPS goals represent total growth in EPS (over a base year) for the three-year term of the LTI plan.
The following chart illustrates the relationship between EPS growth and payout:
Over its twelve-year history, the LTI program has paid out at an average of 101% of target. As illustrated by the above chart, the LTI program provides for target payouts if the three-year average annual EPS growth rate is 12.5% and maximum payouts (equal to 150% of the target payouts) if the growth rate is 15% or higher. Our LTI target three-year average annual EPS growth rate has always been 12.5%, which substantially exceeds the average annual EPS growth rate over the past ten years of the companies in the comparison surveys discussed previously. We set an aggressive target growth rate to motivate management to achieve exceptional results. On the other hand, we believe that a compensation program that frequently fails to pay out loses its motivating power. Accordingly, we still make payouts under the LTI program for below-target achievement. No LTI payment is made, however, unless the three-year average annual EPS growth is at least 5%.
Fiscal 2007 LTI Performance and Payouts. In July 2007, maximum payouts were awarded under the LTI program to all eligible participants, including the named executive officers, because FedExs performance significantly exceeded the aggregate EPS target for the three-year period ended May 31, 2007. In particular, aggregate EPS for the period was $17.03, compared to the plans aggregate EPS target of $12.70.
The following table sets forth for each named executive officer the target and actual payouts under the FY2005-2007 LTI plan, which was established by the Board of Directors in 2004:
LTI Payout Opportunities. The Board of Directors has established LTI plans for the three-fiscal-year periods 2006 through 2008 and 2007 through 2009, providing cash payment opportunities for fiscal 2008 and 2009, respectively, if certain EPS goals are achieved with respect to those periods. The following table sets forth the aggregate EPS targets under these two plans:
The following table sets forth the threshold (minimum), target and maximum payouts for the named executive officers under these two plans:
Our equity-based compensation, which is provided in the form of stock options and restricted stock, is intended to align the interests of executive officers with shareowner interests and ensure that the executive officers have a continuing stake in the long-term success of FedEx. The equity awards encourage and facilitate significant ownership of FedEx stock by executive officers, which creates a direct link between compensation and long-term shareowner return.
Amount. We include the total value of all equity-based awards (including tax reimbursement payments for restricted stock awards, as discussed below) in our calculation of TDC, and we target the TDC of the named executive officers at the 75th percentile of the TDC for comparable positions in the comparison surveys. Accordingly, the number of stock options and restricted shares awarded varies from year to year. For example, over the past few years, as our stock price and the value of our stock option awards have increased, the number of options awarded to our executives has decreased.
In determining the number of option shares and shares of restricted stock to award to executive officers each year, the Compensation Committee also considers the officers position and level of responsibility, the total number of shares then available to be granted and potential shareowner dilution. Other factors that the Compensation Committee may consider with respect to stock option and restricted stock awards include the promotion of an officer to a more senior position or the desire to retain a valued executive or recognize a particular officers contributions. None of these factors is given any particular weight and the specific factors used may vary among individual executives.
Timing. In awarding equity-based compensation, we do not consider, nor have we ever considered, the price of FedExs common stock (except to determine the value of the awards when calculating TDC for benchmarking purposes, as discussed above) or the timing of the release of material, non-public information about the company. Stock option and restricted stock awards are generally made on an annual basis to executive officers. For the past two years, the grant date for the annual grant has been the first business day of our fiscal year, which begins in June, and the Compensation Committee approved the annual grant at a regularly scheduled meeting that occurred in late May.
When the Compensation Committee approves a special grant outside of the annual-grant framework, such grants are made at a regularly scheduled meeting and the grant date of the awards is the approval date or the next business day, if the meeting does not fall on a business day. If the grant is made in connection with the promotion of an individual or the election of an officer, the grant date may be the effective date of the individuals promotion or the officers election, if such effective date is after the approval date.
Pricing. The exercise price of stock options granted under our equity incentive plans is equal to the fair market value of FedExs common stock on the date of grant. This design encourages executive officers to focus on the enhancement of long-term shareowner value. Under the terms of our equity incentive plans, the fair market value on the grant date is defined as the average of the high and low trading prices of FedExs stock on the New York Stock Exchange on that day. We believe this methodology is the most equitable method for determining the exercise price of our stock option awards given the intra-day price volatility often shown by our stock.
Vesting. Stock options and restricted stock granted to executive officers generally vest ratably over four years beginning on the first anniversary of the grant date. This four-year vesting period is intended to further encourage the retention of the executive officers, since unvested stock options and restricted stock are forfeited upon termination of the officers employment for any reason other than death, permanent disability or retirement. In addition, unvested stock options granted on or after June 1, 2006 terminate upon the officers retirement.
Tax Reimbursement Payments for Restricted Stock Awards. FedEx pays the taxes resulting from a restricted stock award on behalf of the recipient. This prevents the need for the officer to sell a
portion of a stock award to pay the corresponding tax obligation. As described above, the Compensation Committee considers the amount of this tax gross-up in its determination of the recipients TDC for purposes of our benchmarking analysis. Therefore, absent the provision to gross up the taxes on these awards, the officers would receive a larger number of shares in each award.
Voting and Dividend Rights on Restricted Stock. Holders of restricted shares are entitled to vote and receive any dividends on such shares. The dividend rights are included in the computation of the value of the restricted stock award for purposes of determining the recipients total compensation.
Fiscal 2007 Awards. On June 1, 2006, the named executive officers were granted stock option and restricted stock awards as follows:
As in previous years, at the request of Mr. Smith and in light of his significant stock ownership, the Compensation Committee did not award him any restricted stock. Instead, his equity awards were in the form of stock options, which have value only as the stock price increases from the date of grant.
Perquisites, Tax Reimbursement Payments and Other Annual Compensation. FedExs named executive officers receive certain other annual compensation, including:
The Compensation Committee reviews and approves each of these elements of compensation, and all of the independent directors approve each element as it relates to Mr. Smith. The Committee also reviews and approves FedExs policies and procedures regarding perquisites and other personal benefits and tax reimbursement payments, including:
We believe this other compensation serves the beneficial purpose of retaining and attracting the executives and allowing them to work more productively. The Compensation Committee reviews the type and amount of this other compensation in light of best practices to ensure they remain appropriate and consistent with the overall executive compensation program. As an example, during fiscal 2007 the Committee amended the companys policy on personal use of corporate aircraft to require the officers to reimburse FedEx for substantially all of the incremental cost to FedEx of such usage.
Post-Employment Compensation. While none of FedExs named executive officers has an employment agreement, they are entitled to receive certain payments and benefits upon termination of employment or a change of control of FedEx, including:
The Compensation Committee approves and recommends Board approval of all plans, agreements and arrangements that provide for these payments and benefits and reviews this post-employment compensation in light of best practices to ensure it remains appropriate. We believe this potential compensation serves the beneficial purpose of retaining and attracting the executives by providing them with a measure of financial security and stability. In addition, the MRAs are intended to secure the executives continued services in the event of any threat or occurrence of a change of control, which further aligns their interests with those of our shareowners when evaluating any such potential transaction.
Section 162(m) of the Internal Revenue Code (as recently clarified by IRS Notice 2007-49) limits the income tax deduction by FedEx for compensation paid to the Chief Executive Officer and the three other highest-paid executive officers (other than the Chief Financial Officer) to $1,000,000 per year, unless the compensation is qualified performance-based compensation or qualifies under certain other exceptions.
We do not require all of our compensation programs to be fully deductible under Section 162(m) because doing so would restrict our discretion and flexibility in designing competitive compensation programs to promote varying corporate goals. We believe that our Board of Directors should be free to make compensation decisions to further and promote the best interests of our shareowners, rather than to qualify for corporate tax deductions. In fiscal 2007, we incurred approximately $5 million of additional tax expense as a result of the Section 162(m) deductibility limit for compensation paid to the Chief Executive Officer and the three other highest-paid executive officers (other than Mr. Graf).
In this section we provide certain tabular and narrative information regarding the compensation of our principal executive and financial officers, our three other most highly compensated executive officers and Daniel J. Sullivan (who retired as President and Chief Executive Officer of FedEx Ground on December 31, 2006) for the fiscal year ended May 31, 2007. For additional information regarding compensation of the named executive officers, see Compensation Discussion and Analysis on page 21.
Summary Compensation Table
During fiscal 2007, FedEx provided the following perquisites and other personal benefits to the named executive officers:
GRANTS OF PLAN-BASED AWARDS DURING FISCAL 2007
The following table sets forth information regarding grants of plan-based awards made to the named executive officers during the fiscal year ended May 31, 2007:
OUTSTANDING EQUITY AWARDS AT END OF FISCAL 2007
The following table sets forth for each named executive officer certain information about unexercised stock options and unvested shares of restricted stock held at the end of the fiscal year ended May 31, 2007:
The following table sets forth for each named executive officer certain information about stock options that were exercised and restricted stock that vested during the fiscal year ended May 31, 2007:
FISCAL 2007 PENSION BENEFITS
The following table sets forth for each named executive officer certain information with respect to each plan that provides for payments or other benefits at, following or in connection with retirement, other than our stock option and restricted stock plans. For information regarding benefits triggered by retirement under our stock option and restricted stock plans, see pages 52-53.
FedEx maintains a tax-qualified, defined benefit pension plan called the FedEx Corporation Employees Pension Plan (the Pension Plan). For 2007, the maximum compensation limit under a tax-qualified pension plan is $225,000. The Internal Revenue Code also limits the maximum annual benefits that may be accrued under a tax-qualified, defined benefit pension plan. In order to provide 100% of the benefits that would otherwise be denied certain management-level participants in the Pension Plan due to these limitations, FedEx also maintains a supplemental non-tax-qualified plan called the FedEx Corporation Retirement Parity Pension Plan (the Parity Plan). Benefits under the Parity Plan are general, unsecured obligations of FedEx.
Effective May 31, 2003, FedEx amended the Pension Plan and the Parity Plan to add a cash balance feature, which is called the Portable Pension Account. Eligible employees as of May 31, 2003
had the option to make a one-time election to accrue future pension benefits under either the cash balance formula or the traditional pension benefit formula. In either case, employees retained all benefits previously accrued under the traditional pension benefit formula and continued to receive the benefit of future compensation increases on benefits accrued as of May 31, 2003. All eligible employees hired after May 31, 2003 are only eligible to participate in the Portable Pension Account feature.
In February 2007, the Board of Directors approved changes to the Pension Plan and Parity Plan such that:
The Board also approved changes to FedExs tax-qualified, defined contribution 401(k) retirement savings plans, in which the named executive officers participate. The 401(k) plan changes include increasing the annual matching company contribution from $500 to 3.5% of eligible earnings beginning January 1, 2008. In order to provide 100% of the benefits that would otherwise be denied participants in the tax-qualified 401(k) plans due to certain limitations imposed by the federal tax laws, Parity Plan participants, including the named executive officers (other than Mr. Sullivan), will receive additional Portable Pension Account compensation credits equal to 3.5% of any eligible earnings above the maximum compensation limit for tax-qualified plans ($225,000 for 2007).
Under the traditional pension benefit formula, the Pension Plan and the Parity Plan provide 2% of the average of the five calendar years (three calendar years for the Parity Plan) of highest earnings during employment multiplied by years of credited service for benefit accrual up to 25 years. Covered compensation for the traditional pension benefit under the Pension Plan and the Parity Plan for the named executive officers includes salary and annual incentive compensation.
For employees accruing benefits under the Portable Pension Account, the pension benefit accrued after May 31, 2003 is expressed as a notional cash balance account. For each plan year in which a participant is credited with a year of service, compensation credits are added based on the participants age and years of service as of the end of the prior plan year and the participants eligible compensation for the prior calendar year based on the following table:
On May 31, 2006, the sum of age plus years of service for the three named executive officers who elected the Portable Pension Account feature was as follows: Mr. Smith 95; Mr. Graf 78; and Mr. Bronczek 81. Eligible compensation under the Portable Pension Account feature includes salary and annual incentive compensation.
Interest credits are added to a participants Portable Pension Account benefit at the end of each fiscal quarter (August 31, November 30, February 28 and May 31). The May 31 interest credit is added prior to the May 31 compensation credit. Interest credits are based on the Portable Pension Account notional balance and an annual interest credit rate, which is equal to the greater of (a) the one-year Treasury constant maturities rate for April of the preceding plan year plus 1% and (b) 4%. The annual interest credit rate for each plan year, however, cannot be more than the average 30-year Treasury