Gardner Denver DEF 14A 2012
Documents found in this filing:
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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GARDNER DENVER, INC.
(Name of Registrant as Specified In Its Charter)
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March 15, 2012
TO OUR SHAREHOLDERS:
You are cordially invited to attend the 2012 Annual Meeting of Shareholders on May 1, 2012 at 1:30 p.m. Eastern Daylight Time, at the Embassy Suites Philadelphia-Valley Forge, 888 Chesterbrook Boulevard, Wayne, PA 19087.
After the transaction of formal business, a question and answer period will follow.
The Notice of Annual Meeting and Proxy Statement for the annual meeting are being made available to our shareholders on or about March 15, 2012 on the Internet, electronically by email for shareholders who have previously consented to delivery or who have requested to receive the proxy materials by email or, upon request, in printed form by mail.
We look forward to a significant vote of our common stock, either in person or by proxy. We are offering three convenient ways to vote your shares: over the Internet, by toll-free telephone or by mailing a proxy card. Voting via the Internet, by telephone or by written proxy will ensure your representation at the annual meeting if you do not attend in person. Please review the instructions you received regarding these three voting options.
Voting over the Internet or by telephone is fast and convenient and your vote is immediately tabulated. By using the Internet or telephone, you help Gardner Denver reduce the cost of postage and proxy tabulations. Regardless of your method of voting, you may revoke your proxy as provided in the Proxy Statement.
Your support is appreciated, and we hope that you will be able to join us at the May 1st meeting.
GARDNER DENVER, INC.
1500 Liberty Ridge Drive, Suite 3000
Wayne, Pennsylvania 19087
NOTICE OF 2012 ANNUAL MEETING OF SHAREHOLDERS
The 2012 Annual Meeting of Shareholders of Gardner Denver, Inc. (the Company) will be held at the Embassy Suites Philadelphia-Valley Forge, 888 Chesterbrook Boulevard, Wayne, PA 19087 on May 1, 2012 at 1:30 p.m. Eastern Daylight Time for the following purposes:
1. To elect Michael C. Arnold, Barry L. Pennypacker, and Richard L. Thompson, each of whom has been nominated by the Board of Directors, to serve a three-year term expiring at the Companys annual meeting of shareholders to be held in 2015;
2. To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2012;
3. To approve the amendment and restatement of the Gardner Denver, Inc. Long-Term Incentive Plan;
4. To cast an advisory vote to approve executive compensation; and
5. To transact such other business as may properly come before the annual meeting or any adjournments or postponements thereof.
The Notice of Annual Meeting and Proxy Statement for the annual meeting are being made available to our shareholders on or about March 15, 2012 on the Internet, electronically by email for shareholders who have previously consented to electronic delivery or who have requested to receive the proxy materials by email or, upon request, in printed form by mail.
Shareholders of record at the close of business on March 2, 2012 are entitled to notice of, and to vote at, the annual meeting and any adjournments or postponements thereof. If you are the beneficial owner of shares of our common stock held in street name, you will receive voting instructions from your broker, bank or other nominee (the shareholder of record). The voting instructions will provide details regarding how to vote these shares. Additionally, you may vote these shares in person at the annual meeting if you have requested and received a legal proxy from your broker, bank or other nominee giving you the right to vote the shares at the annual meeting, and you complete the legal proxy and present it to us at the annual meeting. Shareholders of record may vote over the Internet, by telephone, by mail if you received a printed set of proxy materials or in person at the annual meeting.
Pursuant to the New York Stock Exchange rules, if you hold your shares in street name, nominees will not have discretion to vote these shares on the election of directors, the amendment and restatement of the equity incentive plan, or the advisory vote to approve executive compensation. Accordingly, if your shares are held in street name and you do not submit voting instructions to your broker, bank or other nominee, these shares will not be counted in determining the outcome on Proposals 1, 3 and 4 set forth in this proxy statement at the annual meeting. We encourage you to provide voting instructions to your broker, bank or other nominee if you hold your shares in street name so that your voice is heard on these proposals.
March 15, 2012
TABLE OF CONTENTS
1500 Liberty Ridge Drive, Suite 3000
Wayne, Pennsylvania 19087
This proxy statement and related proxy materials are being made available to our shareholders on or about March 15, 2012 on the Internet, electronically by email for shareholders who have previously consented to electronic delivery or who have requested to receive our proxy materials by email or, upon request, in printed form by mail.
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING
The Company is not aware of any other matter that will be presented at the annual meeting for action on the part of the shareholders. However, if any other matters are properly brought before the annual meeting, your proxy or voting instructions gives authority to the proxy holders, Michael M. Larsen and Brent A. Walters, to vote on those other matters in accordance with the Boards recommendation.
PART ONE: CORPORATE GOVERNANCE
Our Corporate Governance Policy, Board committee charters, Director Independence Standards, Related Party Transactions Policy, Code of Ethics and Business Conduct and Environmental and Safety Policy provide the framework for our corporate governance and are designed to ensure that the Company is managed for the long-term benefit of our shareholders. We routinely evaluate our corporate governance policies, standards and practices to ensure that they comply with SEC rules and regulations and the corporate governance listing standards of the NYSE, the exchange on which our common stock is currently listed.
Our Corporate Governance Policy, Audit and Finance Committee Charter, Management Development and Compensation Committee Charter and Nominating and Corporate Governance Committee Charter, Director Independence Standards, Related Party Transactions Policy, Code of Ethics and Business Conduct and Environmental and Safety Policy are available on our website at www.gardnerdenver.com. Information on our website does not constitute a part of this proxy statement.
Corporate Governance Policy
Our Board has adopted a policy regarding corporate governance. The objective of this policy is to help ensure that our Board maintains its independence, objectivity and effectiveness in fulfilling its responsibilities to our shareholders. The policy establishes the criteria and requirements for:
The policy provides that a substantial majority of our Board should be independent based on the independence standards of the NYSE with varied and complementary backgrounds. Directors may serve on the boards of directors of no more than four for-profit organizations, including the Company, and members of our Audit and Finance Committee (the Audit Committee) may serve on the audit committees of no more than three for-profit organizations, including the Company. The policy specifies that a director who has a material change in his or her primary employment or professional responsibilities must submit a letter of resignation, which the Board may accept or reject.
Directors who are employees of the Company must retire as a director at the next regular Board meeting following termination of employment. In addition, the policy also specifies that at the regularly scheduled Board meeting prior to a nonemployee directors 70th birthday and each year thereafter, nonemployee directors will submit their resignation to our Nominating and Corporate Governance Committee (the Governance
Committee). The Governance Committee will make an evaluation and recommendation for a decision by the full Board as to whether to accept or reject the directors resignation based on the directors contributions and the Boards needs at the time. A nonemployee director must retire as a director at the next regularly scheduled meeting of the Board following the date he or she attains 75 years of age. A nonemployee director is also eligible to retire at the end of any elected term or at the discretion of the Board following review by the Governance Committee. The policy also requires that at any one time, at least 50% of the number of nonemployee directors must be actively engaged in business as an employee, consultant, director (other than for the Company) or in a similar capacity for a minimum of 250 hours per year.
For 2011, all of our directors, including the director nominees seeking re-election, have complied with our Corporate Governance Policy. In accordance with the policy, Mr. Thompson tendered his resignation to the Board on October 24, 2011. Among other factors, the Board considered Mr. Thompsons key expertise in compensation committee matters and his significant contribution to our Management Development and Compensation Committee (the Compensation Committee), of which he has served as Chairperson since 2000. As such, the Board determined that accepting Mr. Thompsons resignation would not be in the best interests of the Company or its shareholders and declined such resignation on November 16, 2011.
Composition of the Board of Directors
Our Board currently consists of nine directors and is divided into three classes. One class is elected at each annual meeting to serve for a three-year term. With the exception of our Chief Executive Officer (CEO), all of our Board members, including our Chairperson of the Board, are independent as determined in accordance with the NYSE listing standards as described under the Director Independence section of this proxy statement set forth below. There are no family relationships among any of the Companys executive officers, directors or director nominees. The current composition of our Board is as follows:
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
Terms Expiring at the 2012 Annual Meeting of Shareholders
DIRECTORS WHOSE TERMS OF OFFICE WILL CONTINUE AFTER THE ANNUAL MEETING
Terms Expiring at the 2013 Annual Meeting of Shareholders
Terms Expiring at the 2014 Annual Meeting of Shareholders
Meetings of the Board of Directors
Our Board held five meetings during 2011. Our nonemployee directors met in executive session without any management directors or employees four times during 2011. Mr. Hansen, our former independent Chairperson, presided over all of these meetings before his retirement in November 2011. In addition to our full Board meetings, directors attended meetings of the committees on which they serve. Pursuant to our Corporate Governance Policy, each director is expected to attend our annual shareholder meeting. Each director attended at least 75% of the aggregate of the Board meetings and the meetings of committees of which he or she was a member.
Committees of the Board of Directors
Our Board has three standing committees composed exclusively of independent, nonemployee directors: the Audit Committee, the Compensation Committee and the Governance Committee. Each of the standing committees operates under a written charter adopted by the Board. All of the committee charters are available on our website at www.gardnerdenver.com. Our committees have the authority to retain outside advisors to assist each committee in meeting its obligations, as necessary and appropriate, and to ensure that we provide appropriate funding to pay the fees and expenses of such advisors.
The Audit and Finance Committee. Our Audit Committee held 11 meetings during 2011, including 7 telephonic meetings. Our Audit Committee assists our Board (with particular emphasis on the tone at the top of the Company) in fulfilling its oversight responsibilities with respect to the integrity of our financial statements and financial information provided to shareholders and others, our compliance with legal and regulatory requirements including our compliance policies and procedures, and the effectiveness of our internal and external audit processes. The Audit Committee is directly responsible for ensuring the independence and qualifications of our independent registered public accounting firm (sometimes referred to herein as our independent auditor). The committee performs these functions by: (i) overseeing our financial reporting process; (ii) selecting and overseeing our independent auditor; (iii) reviewing the scope of audits performed by our independent and internal auditors, as well as the results of such audits; (iv) monitoring our disclosure and internal controls; (v) overseeing our compliance program; and (vi) overseeing our risk assessment and management practices. Our Board has determined that all of the members of our Audit Committee meet the independence and other requirements for audit committee membership of the NYSE listing standards and SEC requirements. The Board has also determined that Donald G. Barger, Jr. and Charles L. Szews are both audit committee financial experts, as that term is defined in the SEC rules. The Audit Committees report is set forth below.
The Management Development and Compensation Committee. Our Compensation Committee held five meetings during 2011. Our Compensation Committee assists our Board in fulfilling its oversight responsibilities with respect to executive selection, retention and compensation and succession planning. The committee performs this function by: (i) evaluating our executive officers performance, including our CEO, and establishing and reviewing their compensation, including incentive equity and cash compensation, other benefits, and corporate goals relevant to executive compensation; (ii) administering our compensation plans for all eligible employees; (iii) reviewing and consulting with our CEO concerning the selection of executive officers, management succession planning, executive performance, organizational structure and matters related thereto; (iv) recruiting candidates for CEO in the event that position becomes vacant; (v) monitoring executive stock ownership in accordance with the Companys stock ownership guidelines, and (vi) reviewing compensation risk to determine whether compensation policies and practices for employees are reasonably likely to have a material adverse effect on the Company. Pursuant to its charter, the Compensation Committee may delegate to a subcommittee all or such portion of its power and authority as the Compensation Committee deems appropriate. Our Board has determined that all of the members of our Compensation Committee meet the independence requirements of the NYSE listing standards. The Compensation Committees report is set forth below.
The Nominating and Corporate Governance Committee. The Governance Committee held three meetings during 2011. The Governance Committee assists our Board in fulfilling its oversight responsibilities with respect to the selection of director nominees for the Board, the overall effectiveness of the Board and its practices and corporate governance practices and principles. The committee performs this function by: (i) reviewing and evaluating the overall effectiveness of the organization of our Board, including our Chairperson of the Board, our incumbent directors, the Boards size and composition, committee membership, and the conduct of its business, and making appropriate recommendations to our Board with regard thereto; (ii) establishing and reviewing director compensation; (iii) reviewing criteria and process for identifying and recruiting of Board nominees; (iv) identifying, recruiting, and recommending qualified Board nominees; (v) developing, recommending and reviewing corporate governance principles applicable to the Company; and (vi) reviewing and assessing related person transactions and the independence of our directors. Our Governance Committee reviews with our Board, on at least an annual basis, the requisite qualifications, independence, skills and characteristics of Board candidates, Board members and our Board as a whole. Our Board has determined that all of the members of our Governance Committee meet the independence requirements of the NYSE listing standards.
Boards Role in Risk Oversight
Our Board is responsible for the Companys risk-oversight function. The Board, with the assistance of its standing committees and our CEO, Chief Financial Officer, General Counsel, and Director of Internal Audit, identifies, evaluates and discusses the material enterprise risks that could impact the Companys operations and tactical and strategic decisions. These enterprise risks include operational, financial, legal, regulatory, market and reputational risks. In 2009, our Board implemented an enhanced enterprise risk management process (the ERM Process) to assist the Board in identifying and evaluating the Companys material enterprise risks. As part of the ERM Process, the Board periodically surveys Board members and senior management requesting independent evaluations and opinions of the Companys material enterprise risks, together with a description of any mitigation strategies associated with such risks. The evaluations are then reported to the Board where they are considered, weighted and prioritized by the Board and senior management. Highly weighted or prioritized risks may be specifically assigned to a risk manager within the Company who is responsible for the management and reporting of that risk, including the development of mitigation strategies. The ERM Process is designed, in part, to (i) inform the Board of the Companys material enterprise risks, (ii) inform the Board how Company management addresses such risks, and (iii) permit the Board to discuss and evaluate how these risks interrelate and affect the Companys ongoing operations and tactical and strategic decisions, so that the Board is able to fulfill its oversight obligations. In 2011, our management conducted a survey of the Board and the management team, with input from the Companys insurance broker, to re-evaluate key risks faced by the Company. This survey was consistent with managements assessment of the Companys material risks. Our management and Board will continue to monitor these risks and assess potential risks on an on-going basis. We believe our Board leadership structure promotes the ERM Process as further described below.
In addition to the ERM Process, the Boards standing committees routinely monitor the various risks that fall under their respective purview as set forth in each Board committees charter. Each Board committee routinely reports its actions to the full Board, enabling the Board and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.
Independent Chairperson of the Board
Our Board has been led by a non-executive, independent Chairperson since May 2008. Mrs. Schumacher was appointed Chairperson of the Board effective as of November 2011 and has been an independent director of Gardner Denver since August 2000.
Separation of the roles of Chairperson and CEO allows our CEO, Mr. Pennypacker, to focus on the management and day-to-day operations of the Company and allows our independent Chairperson to focus on the Boards oversight responsibilities and the long-term sustainability of the Company. Our Chairperson works to
develop a high-performing Board by working with Company management to ensure the Board has timely and adequate information, supporting and mentoring the CEO and ensuring effective shareholder communications.
Among the duties and responsibilities of our independent Chairperson are the following:
In accordance with the NYSE listing standards and applicable SEC rules and guidelines, our Board assesses the independence of its members from time to time. As part of this assessment, the following steps are taken:
Applying the applicable NYSE listing standards and SEC rules for independence, our Board determined that each of Michael C. Arnold, Donald G. Barger, Jr., John D. Craig, Raymond R. Hipp, David D. Petratis, Diane K. Schumacher, Charles L. Szews and Richard L. Thompson is independent. Mr. Pennypacker is not independent due to his employment relationship with the Company.
Relationships and Transactions
Our Board has adopted a written policy governing the approval of related person transactions for directors and executive officers. Pursuant to this policy, our Governance Committee reviews and approves relationships and transactions between the Company and our directors and executive officers, or their immediate family members, to determine whether such persons have a direct or indirect material interest therein.
Prior to entering into a potential related person transaction, the related person must notify our General Counsel of the relevant facts and circumstances, including the related persons interest in the transaction and the value of the proposed transaction. Our General Counsel will confer with the relevant business unit leader to confirm and supplement the information in the notice, and determine whether the transaction is subject to this policy. If the transaction is subject to our policy and involves an aggregate amount in excess of $120,000 (over the entire term of the transaction), the transaction will be submitted to the Governance Committee for consideration at a committee meeting.
The Governance Committee reviews all relevant facts and circumstances available and approves only those transactions with related persons that it determines in good faith to be in, or to not be inconsistent with, the best interests of the Company and our shareholders. The Governance Committee considers, among other things, the following in evaluating such proposed transactions:
Transactions are approved or denied in our Governance Committees sole discretion. The Governance Committee retains the flexibility to condition any approval upon requiring additional actions or non-actions by the Company or the related person. Conditions will be considered on a case by case basis with a focus on the aspects of the transaction that give rise to a conflict of interest or otherwise cause the transaction not to be in the best interest of the Company. Conditions may include limiting the duration of the transaction, limiting the monetary amount of the transaction, modifying other material terms of the transaction, requiring periodic reporting, and appointing an independent Company representative to monitor various aspects of the transaction.
We are not aware of any relationships or related person transactions that require disclosure under the proxy rules and regulations promulgated by the SEC.
Code of Ethics and Business Conduct
We have adopted a Code of Ethics and Business Conduct (Code of Ethics) that applies to all members of our Board and all executive officers and employees of the Company. In addition, under the charter of our Audit Committee, the CEO and Chief Financial Officer, among others, are required to certify annually their adherence to our Code of Ethics. We intend to satisfy the SECs disclosure requirement regarding amendments to or waivers of our Code of Ethics by posting such information on our website at www.gardnerdenver.com.
Communications with Directors
Our Board has adopted the following procedures for our shareholders and all other interested parties to send communications to our entire Board, non-management or independent directors, Board committees or individual directors.
Shareholders and other interested persons seeking to communicate with our directors should submit their written comments to our Corporate Secretary at 1500 Liberty Ridge Drive, Suite 3000, Wayne, Pennsylvania 19087. Such persons who prefer to communicate by e-mail should send their comments to firstname.lastname@example.org. Our Corporate Secretary will then forward all such communications (excluding routine advertisements and business solicitations) to each member of our Board, or the applicable individual director(s) and/or committee chairperson(s). Our Chairperson of the Board will receive copies of all appropriate shareholder communications, including those addressed to individual directors and/or committee chairpersons, unless such communications address allegations of misconduct or mismanagement on the part of the Chairperson of the Board. In such event, our Corporate Secretary will first consult with and receive the approval of our Audit Committee Chairperson before disclosing or otherwise discussing the communication with our Chairperson of the Board.
If a shareholder communication is addressed exclusively to our nonemployee directors, our Corporate Secretary will consult with and receive the approval of the Chairperson of our Governance Committee before disclosing or otherwise discussing the communication with directors who are members of management.
We reserve the right to screen materials sent to our directors for potential security risks and/or harassment purposes.
Shareholders also have an opportunity to communicate with our Board at our annual meeting of shareholders. Pursuant to our Corporate Governance Policy, each director is expected to attend the annual meeting in person and be available to address questions or concerns raised by shareholders, subject to occasional excused absences due to illness or unavoidable conflicts.
Process for Nominating Directors
The Governance Committee periodically assesses the appropriate size and composition of the Board, and whether any vacancies on the Board are expected. In the event that vacancies are anticipated or otherwise arise, the Governance Committee will review and assess potential director candidates. The Governance Committee utilizes various methods for identifying and evaluating candidates for director. Candidates may come to the attention of the Governance Committee through recommendations of Board members, management, shareholders or professional search firms.
When identifying and evaluating candidates for Board membership, our Governance Committee considers individuals from various and diverse backgrounds. Although we do not have a formal diversity policy in place for the Board nomination process, an important factor in our Governance Committees consideration and assessment of a candidate is the diversity of the candidates background, viewpoints, training, professional experience, education and skill set. While the selection of qualified directors is a complex and subjective process that requires consideration of many intangible factors, our Governance Committee believes that candidates generally should, at a minimum, possess the following criteria:
In evaluating candidates, the Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board.
Our Governance Committee will consider shareholder recommendations for candidates for our Board, provided such candidates meet the minimum criteria stated above. Any shareholder wishing to submit a candidate for our Governance Committees consideration should send the following information to the Corporate Secretary at 1500 Liberty Ridge Drive, Suite 3000, Wayne, Pennsylvania 19087:
Our Corporate Secretary will promptly forward director nominations by shareholders to Mrs. Schumacher, the Chairperson of our Governance Committee and the Chairperson of the Board. The same criteria apply with respect to our Governance Committees evaluation of all candidates for membership to our Board, including candidates recommended by shareholders. However, separate procedures will apply, as provided in our Bylaws, if a shareholder wishes to submit at an annual meeting a director candidate who is not approved by our Governance Committee or our Board.
Shareholder Proposals for 2013 Annual Meeting
Shareholder proposals intended to be included in our proxy materials for the 2013 Annual Meeting of Shareholders must be received by us at our principal executive offices (Attention: Corporate Secretary) on or before November 15, 2012. Such proposals must comply with SEC regulations under Rule 14a-8 of the Exchange Act of 1934 (the Exchange Act) regarding the inclusion of shareholder proposals in Company-sponsored proxy materials.
Any shareholder desiring to nominate a director or propose other business at our 2013 Annual Meeting of Shareholders without including the shareholders nomination or other business in our proxy materials for that meeting must provide timely notice to the Company of the nomination or other business in the form provided by our Bylaws. Please refer to our Bylaws for a description of the required form and content of this notice. To be
timely, the notice must ordinarily be delivered to our principal executive offices (Attention: Corporate Secretary) not later than the close of business on the 90th day, and not earlier than the 120th day, prior to the first anniversary date of the preceding years annual shareholder meeting (i.e., shareholder proposals or nominations for director for inclusion in the 2013 Annual Meeting must be delivered to our principal executive offices no earlier than January 1, 2013 and no later than January 31, 2013), or such proposal will be considered untimely. However, in the event that the date of the annual meeting of shareholders is more than 30 days before or more than 60 days after the first anniversary of the previous years annual meeting of shareholders, then the notice must be delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to the date of such annual meeting or the 10th day following the day on which public announcement of the date of such annual meeting is first made by the Company.
AUDIT COMMITTEE MATTERS
Report of Our Audit Committee
Management of the Company is responsible for our internal controls and the financial reporting process. KPMG LLP (KPMG), our independent registered public accounting firm for the fiscal year ended December 31, 2011, was responsible for performing an independent audit of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (the PCAOB) and issuing a report thereon. Our Audit Committees responsibility is to monitor and oversee these processes with a particular emphasis on the tone at the top of the Company and report its findings to the Board. Our Audit Committees function is more fully described in its charter, which has been approved by our Board and is available on our website at www.gardnerdenver.com. Our Audit Committee reviews its charter on an annual basis.
In this context, our Audit Committee has met and held discussions with management and KPMG. Management represented to our Audit Committee that our consolidated financial statements for the fiscal year ended December 31, 2011 were prepared in accordance with U.S. generally accepted accounting principles. Our Audit Committee has reviewed and discussed the audited consolidated financial statements with management and with KPMG. Our Audit Committee has discussed with KPMG the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1 AU section 380), as adopted by the PCAOB in Rule 3200T.
The Audit Committee has received the written disclosures and letter required by applicable requirements of the PCAOB regarding KPMGs communications with the Audit Committee concerning independence, and has discussed with KPMG its independence.
While members of our Audit Committee perform their own diligence, they are not professionally engaged in the practice of auditing or accounting and are not experts with respect to auditor independence. Therefore, they must rely substantially on the information provided to them and on the representations made by management and KPMG. Accordingly, our Audit Committees considerations and discussions referred to above do not assure that the audit of our financial statements has been carried out in accordance with the standards of the PCAOB, that the financial statements are presented in accordance with U.S. generally accepted accounting principles or that our auditors are in fact independent.
Based on its review and discussions with the Companys management and KPMG, our Audit Committee recommended to our Board that the audited financial statements be included in our Annual Report on Form 10-K for the period ended December 31, 2011 for filing with the SEC.
Audit and Finance Committee
Donald G. Barger, Jr., Chairperson
John D. Craig
Raymond R. Hipp
Charles L. Szews
The information above in the Report of Our Audit Committee shall not be deemed to be soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Exchange Act, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 (the Securities Act) or the Exchange Act, except to the extent that the Company specifically requests that the information be treated as soliciting material or specifically incorporates the information by reference.
In accordance with its charter, our Audit Committee appointed KPMG to serve as our independent registered public accounting firm and audit our consolidated financial statements for fiscal years 2011 and 2010. Pursuant to our Audit and Finance Committee Services Approval Policy, our Audit Committee approved all the audit and non-audit services performed by KPMG in 2011 and 2010. The following summarizes the aggregate fees KPMG billed to the Company for services relating to the years ended December 31, 2011 and December 31, 2010.
Audit Fees. $3,065,000 (for the fiscal year ended December 31, 2011) and $3,274,000 (for the fiscal year ended December 31, 2010) for professional services rendered for the audit of our annual financial statements included in our Form 10-K and review of quarterly financial statements included in our Forms 10-Q or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.
Audit-Related Fees. $0 (for the fiscal year ended December 31, 2011) and $0 (for the fiscal year ended December 31, 2010) for acquisition due diligence, employee benefit plan audits, and other audit services that are reasonably related to the performance of the audit or review of our financial statements, but which are not included under Audit Fees above.
Tax Fees. $300,000 (for the fiscal year ended December 31, 2011) and $355,000 (for the fiscal year ended December 31, 2010) for tax compliance, tax advice and tax planning services.
All Other Fees. $0 (for the fiscal year ended December 31, 2011) and $0 (for the fiscal year ended December 31, 2010) for all products and services provided by KPMG other than those described above.
Policies and Procedures for Pre-Approval of Audit and Non-Audit Services
Pursuant to the Audit Committees Services Approval Policy, the Audit Committee is required to approve all audit and non-audit services performed by the Companys independent registered public accounting firm in order to assure that the provision of any services does not impair the registered accounting firms independence. With limited exception for non-audit services under certain conditions, services require either general or specific pre-approval.
The Audit Committee has generally pre-approved audit, audit-related, tax and other services that are specifically identified in the Services Approval Policy. The Audit Committee periodically revises the list of pre-approved services specified in this policy, based on subsequent determinations. The term of any general
pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. Unless a type of service to be provided by the independent registered public accounting firm has received general pre-approval, it requires specific pre-approval by the Audit Committee. Services that require specific pre-approval include, but are not limited to, the annual audit services engagement terms and fees, certain tax services and non-routine or non-recurring services.
The fee levels for all pre-approved services are established periodically by the Audit Committee. Any proposed service that may exceed the pre-approved fee levels requires specific approval by the Audit Committee.
The Audit Committee does not delegate to management its responsibilities to approve services performed by the independent registered public accounting firm. However, it may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated must report any pre-approval decisions to the Audit Committee at its next scheduled meeting.
During fiscal 2011, all services by KPMG were approved by the Audit Committee in accordance with this policy.
Change in Independent Auditor
In accordance with its charter, our Audit Committee annually selects its independent registered public accounting firm for each fiscal year. In addition to considering extending KPMGs engagement, during 2011 the Audit Committee undertook a competitive request for proposals, and as a result of this process and following careful deliberation, on December 22, 2011, the Audit Committee approved the engagement of E&Y as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2012. KPMG continued to serve as the Companys independent registered public accounting firm until the completion of their audit of the Companys consolidated financial statements as of and for the fiscal year ending December 31, 2011 and the effectiveness of internal control over financial reporting as of December 31, 2011, and the issuance of their reports thereon. KPMG issued such reports on February 24, 2012.
KPMGs audit reports on the Companys consolidated financial statements as of and for the fiscal years ended December 31, 2011 and 2010 did not contain any adverse opinions or disclaimers of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The audit reports of KPMG on the effectiveness of internal control over financial reporting as of December 31, 2011 and 2010 did not contain any adverse opinions or disclaimers of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except with respect to Robuschi S.p.A. (Robuschi), which the Company acquired in the fourth quarter of fiscal 2011, as described below. KPMGs report dated February 27, 2012, on the effectiveness of internal control over financial reporting as of December 31, 2011, contains an explanatory paragraph that states that the Company acquired Robuschi in December 2011, and management excluded from its assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2011, Robuschis internal control over financial reporting associated with 11% and less than 1% of the Companys total assets and total revenues, respectively. Consistent with managements assessment, KPMGs audit of internal control over financial reporting of the Company also excluded an evaluation of Robuschis internal control over financial reporting associated with 11% and less than 1% of the Companys total assets and total revenues, respectively, included in the consolidated financial statements of the Company as of and for the year ended December 31, 2011.
During the fiscal years ended December 31, 2011 and 2010, and the subsequent interim period through February 24, 2012, there were (i) no disagreements between the Company and KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the subject matter of the disagreement in their reports on the Companys consolidated financial statements for such years, and (ii) no reportable events as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
The Company provided KPMG with a copy of its Current Report on Form 8-K and its Current Report on 8-K/A (the Reports), in which the Company disclosed the above information prior to the time the Reports were filed with the SEC and requested that KPMG furnish letters addressed to the SEC stating whether it agrees with the statements made therein. These letters, dated December 29, 2011 and February 27, 2012, are filed as Exhibit 16.1 to the Reports filed on December 29, 2011 and February 27, 2012, respectively, and are incorporated herein by reference.
On December 22, 2011, the Audit Committee approved the engagement of E&Y to serve as the Companys independent registered public accounting firm for the Companys fiscal year ending December 31, 2012. During fiscal years 2010 and 2011, respectively, the Company did not consult with E&Y regarding either:
A representative of E&Y and a representative of KPMG are expected to be present at the annual meeting to respond to appropriate questions and will have the opportunity to make a statement if such representative desires to do so.
COMPENSATION COMMITTEE MATTERS
Report of Our Compensation Committee
The purpose of our Compensation Committee is to assist our Board in discharging its responsibilities relating to executive selection, retention and compensation and succession planning. Our Compensation Committees function is more fully described in its charter, which has been approved by our Board and is available at our website at www.gardnerdenver.com. Our Compensation Committee reviews its charter on an annual basis.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on its review and discussion with management, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement, filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended.
Management Development and Compensation Committee
Richard L. Thompson, Chairperson
Michael C. Arnold
David D. Petratis
Diane K. Schumacher
The information above in the Report of Our Compensation Committee shall not be deemed to be soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Exchange Act, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically requests that the information be treated as soliciting material or specifically incorporates the information by reference.
Compensation Committee Interlocks and Insider Participation
None of the members of our Compensation Committee or Governance Committee is or has been an officer or employee of the Company or any of our subsidiaries. In addition, none of the members of our Compensation Committee or Governance Committee has or had any relationships with the Company or any other entity that would require disclosure under Item 404 of Regulation S-K. During fiscal 2011, none of our executive officers served on the compensation committee (or equivalent) or board of another entity whose executive officers served on our Compensation Committee, Governance Committee, or Board.
Risk-Related Compensation Policies and Practices
In February 2012, the Compensation Committee undertook an assessment of the risk profile of its executive and non-executive compensation programs. As a result of this assessment, the Compensation Committee believes that the Companys compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company.
Security Ownership Requirements
The Company maintains stock ownership requirements for its nonemployee directors, executive officers and other key employees. Under these requirements, each nonemployee director is expected to maintain an equity interest in the Company equal to five times his or her annual cash compensation, including compensation for Board and Committee meeting attendance, but excluding the value of equity compensation granted pursuant to the Incentive Plan or amounts we contributed on behalf of such director to our Phantom Stock Plan. The director ownership requirements are to be achieved by the end of the directors first three years of service. These requirements also require that the CEO maintain an equity interest equal to five times his annual base salary and each executive officer and corporate vice president maintain an equity interest in the Company equal to three times their annual base salary. The management ownership requirements are to be achieved by the fifth anniversary of each individuals appointment as an officer. Common stock held directly by the director or officer or their respective immediate family members, and indirectly for the benefit of the director or officer in an IRA account, a family trust, the Retirement Savings Plan and/or the related Excess Contribution Plan, are considered in determining compliance with these requirements. In the case of nonemployee directors, phantom stock units acquired through the directors deferral of cash compensation are also considered in determining compliance with our stock ownership requirement. Failure to meet these requirements within the allotted time will be taken into consideration when evaluating the individuals commitment to a continuing relationship with the Company.
The Companys securities law policy prohibits officers and directors of the Company from hedging the economic risk of their ownership of our common stock, which includes purchasing or selling derivative securities relating to our common stock and purchasing financial instruments that are designed to hedge or offset any decrease in the market value of our common stock.
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth information, as of March 2, 2012, with respect to the beneficial ownership of our common stock by: (a) each of our directors and director nominees; (b) each of our other named executive officers set forth in the Summary Compensation Table below; and (c) all of our current directors and executive officers as a group.
The following table lists all persons known to be the beneficial owner of more than 5% of our outstanding common stock as of December 31, 2011.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities of the Company. Our insiders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file, including Forms 3, 4 and 5. As a practical matter, we assist our directors and executive officers by monitoring transactions and completing and filing Section 16(a) forms on their behalf. We believe that, except as described below, all reports required to be filed by insiders during the fiscal year ended December 31, 2011, were filed in a timely manner. Mr. Morgan inadvertently did not file a Form 5 in 2011 to timely report one transaction in December 2010 that changed the nature of his ownership of certain shares of our common stock from direct ownership to indirect ownership by a gift to a revocable living trust for which Mr. Morgan and his spouse are the trustees and beneficiaries. Mr. Morgans total ownership of our common stock has been correctly reported in all previously filed Forms 4, and a Form 5 noting the change from direct to indirect ownership was filed with the SEC on February 14, 2012. In addition, on March 7, 2012, Mr. Craigs original Form 3 was amended to include indirect ownership of shares of our common stock that were not initially reported.
PART TWO: PROPOSALS TO BE VOTED ON AT THE 2012 ANNUAL MEETING
PROPOSAL 1 ELECTION OF DIRECTORS
The Board has nominated each of Michael C. Arnold, Barry L. Pennypacker, and Richard L. Thompson as directors to serve for a three-year term expiring in 2015. Our Board believes Messrs. Arnold, Pennypacker and Thompson are experienced, well-qualified incumbent directors who have the expertise to direct and oversee our business and will continue to represent the long-term interests of our shareholders. Biographical information on each of these nominees is set forth above.
Each of the nominees has agreed to be named in this proxy statement and serve as a director of the Company, if elected. If any one of the nominees becomes unavailable or unwilling to stand for election or serve as a director before the annual meeting, the accompanying proxy will be voted for the election of such other person, if any, as shall be nominated by the Board, unless the Board resolves to reduce the number of directors to serve on the Board and thereby reduce the number of directors to be elected at the annual meeting. The Company has no reason to believe that any nominee will be unavailable or unwilling to stand for election or serve as a director.
The Board believes that the election of these director nominees is in the best interests of our shareholders and, accordingly, recommends a vote FOR the election of these nominees.
PROPOSAL 2 RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed E&Y as our independent registered public accounting firm for the 2012 fiscal year. Although the Company is not required to seek ratification of the Audit Committees appointment of E&Y as our independent registered public accounting firm for the 2012 fiscal year, the Board seeks ratification from our shareholders for the appointment of E&Y as a matter of good corporate governance.
No relationship between the Company and E&Y exists other than the usual relationship between independent auditor and client. A representative of E&Y is expected to be present at the annual meeting to respond to appropriate questions and will have the opportunity to make a statement if the representative desires to do so.
If E&Ys appointment is not ratified by our shareholders, the Audit Committee will consider whether it is appropriate to select another independent registered public accounting firm for the 2013 fiscal year. Additionally, even if the appointment is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the 2012 fiscal year if it determines that such a change would be in the best interests of the Company and our shareholders.
The Board believes that the ratification of E&Y as our independent registered public accounting firm is in the best interests of our shareholders and, accordingly, recommends a vote FOR this proposal.
PROPOSAL 3 AMENDMENT AND RESTATEMENT OF THE LONG-TERM INCENTIVE PLAN
We are asking shareholders to approve the Incentive Plan, as amended and restated. The Incentive Plan was originally adopted in 1993, and subsequently approved and amended by our shareholders in May 1996, May 1999, May 2001, May 2004, and May 2007. The Board approved the Incentive Plan, as amended and restated, in February 2012, subject to the approval of our shareholders. The following summary of the Incentive Plan and the amendments to the Incentive Plan should be read in conjunction with, and is qualified by reference to, the full text of the Incentive Plan, as amended and restated, which is included in this proxy statement as Appendix A.
Awards authorized under the Incentive Plan for our employees consist of stock options, stock appreciation rights (SARs), restricted stock units (RSUs), performance shares, and long-term cash bonuses. Nonemployee directors are eligible for stock options, SARs, restricted stock and RSUs. As described in the Compensation Discussion and Analysis section of this proxy statement, the Incentive Plan currently provides our primary form of long-term compensation, in the form of stock options, RSUs and long-term cash bonuses, to our executive officers.
Description of the Amendments
As described below in more detail, among other things, the Incentive Plan would be amended to:
In approving the amended and restated Incentive Plan, shareholders also will be reapproving the performance goals and terms of the Incentive Plan for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (Code), as described below.
Awards granted prior to shareholder approval are subject to the Incentive Plan in effect prior to the amendments. Awards granted on or after the date of shareholder approval are subject to the Incentive Plan as amended. If the shareholders do not approve the Incentive Plan, the amendments will be null and void.
Summary of Material Terms of the Incentive Plan
Purpose and Administration
The Incentive Plan was established to promote the long-term financial interests of our Company, including its growth and performance, by encouraging our employees to acquire an ownership interest in our Company, to enhance our ability to attract and retain employees of outstanding ability and to align employees interests with those of our shareholders.
The Incentive Plan is administered by the Compensation Committee. The Compensation Committee has plenary authority to determine who may participate in the Incentive Plan, the number and types of awards to be made to each participant and the terms, conditions and limitations applicable to each award, as set forth in an award agreement. The Compensation Committee may interpret the Incentive Plan and award agreements and establish, amend, rescind and waive rules and make other determinations in connection with the Incentive Plan. The Compensation Committee designates participants from those employees who have demonstrated significant management potential or who have the capacity for a substantial contribution to the successful performance of our Company. The Compensation Committee may delegate to the CEO its authority to make certain awards, other than with respect to employees who are subject to reporting requirements under Section 16 of the Exchange Act. We are unable to determine the number of individuals who are likely to participate in the Incentive Plan. As of March 1, 2012, stock option awards and RSUs relating to a total of 1,069,463 shares were outstanding under the Incentive Plan and there were approximately 107 plan participants.
Shares Subject to the Incentive Plan; Limitations
Prior to amendment, the Incentive Plan authorized the issuance of up to 10,000,000 shares, subject to anti-dilution adjustments. As of March 1, 2012, only 1,072,866 shares remained available for grants. The proposed amendments would increase the number of shares available for grant by 2,250,000, which number would be added to the number of shares remaining available for grant on the date immediately prior to the 2012 Annual Meeting of Shareholders. Shares available may be authorized and unissued shares or treasury shares. The closing price of our common stock as quoted on the NYSE on March 1, 2012 was $69.19.
Shares of common stock subject to an award that expires unexercised, is forfeited, terminated or canceled, or paid in cash in lieu of common stock, are added back as available for grant under the Incentive Plan. The amendments clarify that shares withheld for taxes and shares tendered to purchase options are added back as authorized shares. However, any shares that are repurchased will not be added back as shares available under the Incentive Plan.
Awards under the Incentive Plan are subject to additional limits, subject to anti-dilution adjustments, as follows.
Performance shares and long-term cash bonuses (and certain restricted stock and RSU awards) may be subject to the achievement of performance targets. Performance targets are specified goals established by the Compensation Committee based on one or any combination of the business criteria.
The Incentive Plan amendments expand the list of business criteria under the Incentive Plan to increase the flexibility of the Compensation Committee. The business criteria include the following criteria (whether singly or in combination) with respect to the Company (or any of its segments, groups, divisions or affiliates): (i) gross or net revenues; (ii) gross or operating income; (iii) net income; (iv) earnings per share; (v) earnings before or after either, or any combination of, interest, taxes, depreciation, or amortization (including EBIT or EBITDA); (vi) return measures (including return on assets, return on equity, return on investment, return on capital, return on invested capital, gross profit return on investment, and gross margin return on investment); (vii) cash flow (including funds from operations); (viii) shareholder total return; (ix) book value; (x) economic value added; (xi) expenses or costs; (xii) gross or net operating margins; (xiii) market share; (xiv) operational performance measures; (xv) profitability ratios; (xvi) share price (including growth in share price and total shareholder return); (xvii) strategic business objectives (including objective project milestones); (xviii) transaction costs relating to acquisitions or divestitures; and (xix) working capital.
The Compensation Committee may make adjustments when determining the attainment of performance targets to reflect extraordinary, unusual, or nonrecurring items or events, or unusual nonrecurring items identified in the Companys financial statements.
Although the Incentive Plan provides for multiple types of awards, recently we have only issued stock options, RSUs and long-term cash bonuses to our executive officers and employees. We typically issue options and RSUs to our nonemployee directors.
Stock Options. Under the Incentive Plan, stock options may be incentive stock options or nonqualified stock options and are generally intended to qualify as qualified performance-based compensation for purposes of Section 162(m) under the Code. Options are exercisable at such times and in such installments as are determined by the Compensation Committee. The maximum option term is ten years after the date of grant (five years for incentive stock options for 10% shareholders). Under the Incentive Plan, repricing of stock options (or SARs) by any method, including cancellation and reissuance or repurchase, is not permitted.
The Compensation Committee has discretion to determine the extent to which an option will be exercisable in the event of death, disability (as defined in the Incentive Plan), retirement (as defined in the Incentive Plan or an award agreement), or other termination of employment. Although the Compensation Committee has discretion to set the vesting terms, recent stock option awards issued to our employees vest in installments over a three-year period, have a term of seven years and are generally forfeitable on termination, except that vesting generally is accelerated in the event of death or disability, and, in the event of retirement, may be accelerated, or continue to vest, as determined by the Compensation Committee and set forth in the award agreement. Amendments to the Incentive Plan clarify that if an employee terminates employment (other than by reason of death, disability, or retirement), an option will continue to be exercisable to the extent that it was exercisable at termination, subject to the original term, for a period of 90 days after termination, unless the termination is for cause (as determined by the Compensation Committee as set forth in an award agreement).
The option exercise price is established by the Compensation Committee, but cannot be less than 100% of the fair market value (110% for incentive stock options for 10% shareholders) on the date of grant. Generally, the fair market value is based on the NYSE closing price. Payment of the option exercise price is made at the time of exercise and may be in cash, shares of common stock or a combination thereof, or such other consideration as the Compensation Committee deems appropriate. The Compensation Committee may condition the vesting of stock options on the achievement of financial performance criteria established by the Compensation Committee at the time of grant.
Stock options issued in the form of incentive stock options may be granted only to our full-time employees and are required to comply with Section 422 of the Code. The aggregate fair market value (as of the date of grant) of shares covered by incentive stock options which are exercisable for the first time by an individual during any calendar year may not exceed $100,000 (as adjusted by Section 422).
Restricted Stock and RSUs. We typically grant RSUs to our executive officers and employees and our nonemployee directors. We have not recently made any awards of restricted stock and no such awards are outstanding. Restricted stock and RSUs granted under the Incentive Plan are subject to forfeiture under such conditions and for such period of time as the Compensation Committee may establish. Such conditions may include restrictions on transferability, requirements of continued employment and the individual or Company performance and may not be less than 12 months. To the extent restricted stock awards or RSUs are subject to our performance criteria, it is intended that all such awards granted to participants subject to Section 162(m) of the Code will qualify as qualified performance-based compensation.
Although the Compensation Committee has discretion to set the vesting terms, recent RSUs issued to our employees have had a restriction period which cliff vests in three years. Under these awards, if the employee
terminates employment prior to vesting, generally, the award is forfeited, subject to Compensation Committee discretion to waive or reduce the restriction (except if the termination is for cause and in any case to not to less than 12 months). Typically, these RSUs automatically vest on death, or disability, and, in the case of retirement, may be automatically vested or continue to vest, as determined by the Compensation Committee.
During the period in which any restricted stock is subject to forfeiture restrictions, the Compensation Committee may grant to the participant all or any of the rights of a shareholder with respect to such stock, including voting and dividend rights. RSUs represent a right to receive shares of common stock in the future and do not include voting rights; however, the Compensation Committee may provide for dividend equivalents for RSUs. In recent awards, the Compensation Committee has allowed RSUs to accrue dividends, but they do not vest and are not paid out until the RSUs vest.
Performance Shares. We have not recently issued any performance shares. Performance share awards may be granted in the form of shares of common stock that are earned only after the attainment of specified performance targets during a performance period established by the Compensation Committee. At the end of the performance period, any performance shares earned are converted into common stock, cash or a combination of both. A performance target will be established by the Compensation Committee at the beginning of each performance period and based upon one or any combination of goals or business criteria, as provided in the Incentive Plan.
Awards of performance shares made to participants subject to Section 162(m) of the Code are intended to qualify under Section 162(m). The Compensation Committee may also determine the manner of payment of awards of performance shares and other terms, conditions or restrictions, if any, on any award of performance shares. Amendments to the Incentive Plan clarify that during a performance period, additional performance shares may be awarded, in the discretion of the Compensation Committee, to new participants with respect to that performance period, subject to the Compensation Committees discretion to reduce, on a pro rata basis, a participants award of performance shares to reflect the proportion of time served within the applicable performance period.
SARs. We have not recently issued SARs and have no plans to do so. SARs granted under the Incentive Plan entitle the participant to receive a cash payment equal to the increase in the fair market value of a number of shares of common stock over the option or base price stated in an award agreement. Awards of SARs made to participants subject to Section 162(m) of the Code are intended to qualify as qualified performance-based compensation. Amendments to the Incentive Plan clarify that all SARs granted must be freestanding over a term of up to 10 years and may not be in tandem with a stock option award. The base price of an SAR is determined by the Compensation Committee and may not be less than the fair market value on the date of grant. The Compensation Committee may establish such other terms, conditions or restrictions, if any, on SARs. The Compensation Committee may provide that a SAR shall be deemed to be exercised at the close of business at expiration, if at such time the SAR, if so exercised, would result in a payment to the participant. Amendments clarify that all SARs are settled in cash.
Dividends or Dividend Equivalents. If an award is granted in the form of restricted stock, RSUs or performance shares, the Compensation Committee may choose to include an entitlement to receive dividends or dividend equivalents, payable as determined by the Compensation Committee, but no dividends or dividend equivalents may be paid or accrue for performance shares before the shares are earned.
Nonemployee Director Awards
Our nonemployee directors are eligible to receive nonqualified stock options, SARs, restricted stock and RSUs on generally the same terms as awards to employees. Recently, our practice has been to award nonqualified stock options and RSUs to our nonemployee directors in conjunction with our Annual Meeting of Shareholders. The amendments allow us to make such awards at other times. Prior to amendment, the Incentive
Plan provided specific terms for stock option awards for directors, including vesting over one year, a five-year term, acceleration of vesting in the event of death, disability or retirement, and a minimum of 90 days to exercise options, to the extent otherwise exercisable (subject to the original term), in the event of other terminations. The revised Incentive Plan provides the Compensation Committee with flexibility to determine the terms, conditions, and restrictions on awards to nonemployee directors. The Incentive Plan specifies that stock options granted to our nonemployee directors terminate after no more than ten years. The Compensation Committee may determine the terms of exercise upon a nonemployee directors death, disability, or retirement, as set forth in the applicable award agreement. However, if an option is exercisable when a director ceases to be a director other than by reason of death, disability, or retirement, the option remains exercisable (subject to the original term) for up to 90 days, unless terminated for cause or as otherwise specified in the applicable award agreement.
Long-Term Cash Bonus
Under the Incentive Plan, the Compensation Committee may also grant long-term cash bonus awards to our CEO, President, any Executive Vice President, any Senior Vice President, any senior officer reporting directly to the CEO, any other Vice President or senior executive or officer designated by the CEO. The amendments also allow other employees chosen by the Compensation Committee to receive long-term cash bonuses under the Incentive Plan. Long-Term cash bonus awards are intended to qualify as performance-based compensation under Section 162(m) of the Code.
Under the Incentive Plan, participants are eligible to receive a long-term cash bonus based on the achievement of certain Company performance targets over a pre-determined performance period. The Compensation Committee is responsible for determining the performance period, the participants, the applicable business criteria, establishing performance targets, setting base salary factors (or percentages or multiples) for each participant, and, at the end of each performance period, determining the extent to which the performance targets have been achieved and the resulting long-term cash bonuses payable.
Our performance targets may be based on any one, or a combination, of the business criteria available for performance share awards, as described above. The Compensation Committee must establish the performance targets with respect to the business criteria selected for a given performance period while the performance relative to the target remains substantially uncertain within the meaning of Section 162(m) of the Code.
As described in the Compensation Discussion and Analysis section of this proxy statement, our recent long-term cash bonus awards to executive officers generally cover a three-year performance period, with payouts in cash based on a percentage of the participants base salary, depending on the level of performance (e.g., threshold, target and maximum). Under those awards, if a participant terminates employment (other than for death, disability or retirement), generally, the award is forfeited unless the Compensation Committee exercises its discretion otherwise. Under those awards, a prorated payment is typically made in the event of death, disability or retirement prior to the end of the performance period.
Under the Incentive Plan, not later than 90 days after commencement of a performance period, the Compensation Committee must select the award participants and establish an objective formula or standard for calculating the maximum long-term cash bonus payable to each participant. The revised Incentive Plan increases the maximum payment in respect of a performance period from the lesser of $3 million or three times salary to the lesser of $6 million or five times salary in any calendar year. All long-term cash bonuses are to be denominated in cash or restricted stock awards, as determined by the Compensation Committee and subject to the remaining provisions of the Incentive Plan.
Notwithstanding the attainment of the performance targets, long-term cash bonuses may be denied or adjusted by the Compensation Committee, in its sole judgment, based on its assessment of the participants performance. However, no upward adjustment may be made to a long-term cash bonus if Section 162(m) of the Code would limit the deduction we may claim for that participants compensation. Except as otherwise
determined by the Compensation Committee, in its discretion, each participant selected by the Compensation Committee as eligible to receive a long-term cash bonus with respect to a particular performance period must continue to be employed by our Company on the last day of such performance period to continue to be eligible to receive the long-term cash bonus.
Amendments to the Incentive Plan provide that during a performance period, additional awards of long-term cash bonuses may be granted, in the discretion of the Compensation Committee, to participants who first become eligible during that performance period, subject to potential reduction to reflect the portion of time served within the applicable performance period.
Change in Control
The Incentive Plan provides for the acceleration of certain benefits in the event of a change in control. A summary of these effects follows:
The Incentive Plan generally defines change in control as:
A change in control does not occur if a person acquires 20% or more of the securities entitled to vote in the election of directors as a result of the Companys purchase of securities which reduced the total number of securities outstanding.
Termination of Employment
The Compensation Committee may adopt policies to determine if participants who terminate employment or cease to be a director due to death, disability, retirement, or otherwise (including on account of cause) are entitled to their awards. These policies may be adopted in award agreements or otherwise and may vary by award or participant and may differ from those described in this proxy statement with respect to recent awards. The Incentive Plan provides that distributions made upon termination of employment will be made only upon a separation from service, as determined under Section 409A of the Code. If a participant gives notice of intent to terminate employment or the Company gives notice of its intent to terminate the participants employment in the future, the Compensation Committee will have discretion to determine the date of termination under the Incentive Plan for purposes of vesting and payout (and similar Incentive Plan provisions).
Although the Incentive Plan does not require us to do so, we often include forfeiture provisions in award agreements. Such provisions may require forfeiture of certain awards or amounts in one or more of the following events: a participant violates a requirement to arbitrate disputes or otherwise materially breaches the award agreement, a participant engages in specified misconduct, a participant violates our non-competition or confidentiality policies, or in other circumstances.
Subject to earlier termination, the Incentive Plan terminates on December 31, 2017. Outstanding awards will not be affected by such termination. The Board may amend, suspend or terminate the Incentive Plan or any portion thereof at any time, provided that no amendment may be made that would impair the rights of a participant under an outstanding award without the participants consent, and no amendment may be made without shareholder approval if such approval is necessary in order to preserve the applicability of any exemption under Rule 16b-3 under the Exchange Act or the qualification of any awards as performance-based compensation under Section 162(m) of the Code. Unless first approved by our shareholders, no amendment will be effective that would increase the maximum amount payable to a participant, change the business criteria or modify eligibility requirements for participants.
The rights of a participant in any award granted under the Incentive Plan may not be transferred except, in the event of the death of a participant, by will or the laws of descent and distribution. However, the Compensation Committee may, in its discretion, allow nonqualified stock options to be transferred for estate planning purposes to specified family members or entities that are sufficiently family-related or that meet certain criteria approved by the Compensation Committee.
In the event of any change in the outstanding shares of common stock by reason of a reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure or shares of our Company, the maximum aggregate number and class of shares as to which awards may be granted under the Incentive Plan, including any limitations upon individual participants or regarding director stock options, as well as the number and class of shares issuable, pursuant to then outstanding awards, shall be appropriately adjusted by the Compensation Committee, whose determination shall be final.
We may withhold, or require a participant to remit to us, an amount sufficient to satisfy any withholding tax requirements associated with awards under the Incentive Plan. The Compensation Committee may permit a participant to elect to satisfy such withholding obligation by having the Company retain the number of shares of common stock whose fair market value equals the amount required to be withheld. Any participant who is a reporting person under Section 16(a) of the Exchange Act is entitled to elect to satisfy such withholding obligations by having the Company withhold shares of our common stock from the award.
The Compensation Committee may permit participants to elect to defer the issuance of shares or the settlement of awards in cash in accordance with its policies. It may also provide that deferred settlements include interest on the deferral amounts or dividend equivalents on deferred settlements denominated in shares. Notwithstanding the foregoing, if a participant subject to Section 162(m) of the Code elects to defer an award, the Compensation Committee will ensure that any increase in the award is based on actual returns, including any decrease or increase in the value of the investment(s).
In order to enable participants who are foreign nationals or employed outside the United States, or both, to receive awards under the Incentive Plan, the Compensation Committee may adopt such amendments, administrative policies, subplans or alternative forms of awards agreements and the like as are necessary or advisable, in the opinion of the Compensation Committee, to effectuate the purposes of the Incentive Plan.
Federal Income Tax Consequences
The following is a brief summary of the U.S. federal income tax consequences that generally will arise with respect to awards granted under the Incentive Plan, based upon the provisions of the Code and regulations promulgated thereunder. Changes in the law may modify this discussion, and in some cases the changes may be retroactive. This summary is not intended to be a complete discussion of all the federal income tax consequences associated with the Incentive Plan. For precise advice as to any specific transaction or set of circumstances, participants should consult with their own tax and legal advisors. Participants should also consult with their own tax and legal advisors regarding the application of any state, local and foreign taxes and any federal gift, estate and inheritance taxes.
Stock Options. In general, the grant of a stock option will not be a taxable event to a recipient and it will not result in a deduction to our Company. The tax consequences associated with the exercise of a stock option, and the subsequent disposition of our common stock acquired on exercise of such an option, depend in part on whether the option is an incentive stock option or a nonqualified stock option.
Upon the exercise of a nonqualified stock option, the participant will recognize ordinary compensation income equal to the excess of the fair market value of our common stock received upon exercise over the exercise price. We will be able to claim a deduction in an equivalent amount, provided federal income tax withholding requirements are satisfied and we are not otherwise precluded from taking a deduction because of the Section 162(m) deduction limitations described below. The ordinary income the participant recognizes will be subject to applicable tax withholding. Any gain or loss upon a subsequent sale or exchange of our common stock will be capital gain or loss, long-term or short-term, depending on the holding period for the common stock.
Generally, a participant will not recognize ordinary income at the time of exercise of an incentive stock option and no deduction will be available to us, provided the option is exercised while the participant is an employee or, in certain circumstances, for a limited period of time thereafter. However, the difference between the option price and the fair market value of the stock on the date of exercise is treated as an item of adjustment for purposes of the alternative minimum tax. If the sale of shares acquired under an incentive stock option does not occur within two years after the date of grant and within one year after the date of exercise, any gain or loss realized will be treated as a long-term capital gain or loss.
If a disposition of shares acquired under an incentive stock option occurs prior to the expiration of these one-year or two-year holding periods, the participant recognizes ordinary income at the time of disposition, and we will be entitled to a deduction, in an amount equal to the excess of the fair market value of the common stock at the date of exercise (or the fair market value of the common stock on the disposition date, if lower) over the exercise price. In addition, the participant must recognize as short-term or long-term capital gain, depending on whether the holding period for the shares exceeds one year, any amount that the holder realizes upon disposition of those shares which exceeds the fair market value of those shares on the date the participant exercised the option. The participant will recognize a short-term or long-term capital loss, depending on whether the holding
period for the shares exceeds one year, to the extent the basis in the shares exceeds the amount realized upon disposition of those shares.
SARs. Generally, a participant will not recognize taxable income upon the grant of a SAR. When a participant receives payment with respect to a SAR, the amount of cash and the fair market value of our common stock received will be ordinary compensation income to such participant and we will be entitled to a corresponding deduction, subject to the Section 162(m) deduction limitations described below. The ordinary income the participant recognizes will be subject to applicable tax withholding. Upon selling any common stock received by a participant in payment of an amount due under a SAR, the participant generally will recognize a capital gain or loss in an amount equal to the difference between the sale price of the stock and the participants tax basis in the stock.
Restricted Stock. A participant who receives shares of restricted stock generally will recognize ordinary compensation income at the time the forfeiture or transferability restrictions lapse, based on the fair market value of the common stock at that time. The amount recognized will be equal to the difference between the fair market value of the shares at such time and the original purchase price paid for the shares, if any. Subject to the Section 162(m) deduction limitations described below, this amount is deductible for federal income tax purposes by us. The ordinary income recognized by a participant will be subject to applicable tax withholding. Dividends paid with respect to common stock that is subject to forfeiture and nontransferable will be ordinary compensation income to the participant and generally deductible by us.
Alternatively, a participant may elect, pursuant to Section 83(b) of the Code, immediate recognition of income at the time of receipt of restricted stock (but not RSUs). If the election is made within 30 days of the date of grant, the participant will recognize the difference between the fair market value of the restricted stock at the time of grant of the restricted stock and the purchase price paid for the restricted stock, if any, as income, and we will be entitled to a corresponding deduction. Any change in the value of the shares after the date of grant will be taxed as a capital gain or loss only if and when the shares are disposed of by the participant. Dividends paid with respect to these shares will not be deductible by us.
A Section 83(b) election is irrevocable. If this tax treatment is elected, and the restricted stock is subsequently forfeited, the participant will not be entitled to any offsetting tax deduction.
RSUs. A participant does not recognize taxable income on the grant of RSUs, but does recognize ordinary income when shares are delivered in settlement of the units. The amount of this ordinary income will be the fair market value of the shares on that date of any shares delivered, plus the amount of cash paid. Any dividends paid on the RSUs are also taxable as compensation income upon receipt. Subject to the deduction limitations of Section 162(m) described below, our Company will ordinarily be entitled to a deduction at the same time and in the same amounts as the compensation income recognized by the recipient of a grant of RSUs.
Performance Shares. Generally, a participant will not recognize taxable income upon the grant of performance shares. When performance shares are earned and stock or cash is issued, a participant will generally realize ordinary income equal to the fair market value of the stock and cash issued with respect to the performance shares. If a participant is subject to the provisions of Section 16(b) of the Exchange Act regarding short-swing purchases and sales, the participant may not be required to recognize income upon receipt of stock issued with respect to performance shares, but generally may recognize ordinary income six months thereafter in an amount equal to the fair market value of stock issued with respect to performance shares at that time. Subject to the Section 162(m) deduction limitations described below, we generally will be entitled to a deduction equal to the ordinary income recognized by the participant in the same taxable year in which the participant recognizes ordinary income with respect to the performance shares.
Long-Term Cash Bonuses. Generally, a participant will recognize ordinary income upon the receipt of a long-term cash bonus equal to the aggregate amount of cash received. Subject to the Section 162(m) deduction limitations described below, our Company generally will be entitled to a corresponding tax deduction equal to the amount of cash bonus includible in the participants income.
Potential Limitation on Company Deductions. Section 162(m) of the Code denies a deduction to any publicly-held corporation for compensation paid to certain covered employees in a taxable year to the extent that compensation to such covered employee exceeds $1 million. It is possible that compensation attributable to awards, when combined with all other types of compensation received by a covered employee from our Company, may cause this limitation to be exceeded in any particular year. However, certain kinds of compensation, including qualified performance-based compensation, are disregarded for purposes of the Code Section 162(m) deduction limitation. The Incentive Plan is structured so that awards (e.g., stock options, performance-based restricted stock, stock appreciation rights, performance shares and long-term cash bonuses) granted to covered employees under the Incentive Plan should qualify as qualified performance-based compensation under Section 162(m). Shareholder approval of the material terms of the performance goals with respect to such awards is required, however, in order for the awards to constitute qualified performance-based compensation. The material terms include (i) the class of employees eligible for such award, (ii) the business criteria on which the performance goal is based, and (iii) the maximum amount, or the formula used to calculate the amount payable, upon attainment of the performance goal (except that, in the case of a formula based, in whole or in part, on a percentage of salary or base pay, the maximum dollar amount of compensation that could be paid to the employee must be disclosed). Such terms are disclosed above in the section entitled Summary of Material Terms of the Incentive Plan.
Section 409A. Section 409A of the Code regulates the time and form of payment of nonqualified deferred compensation. Certain awards provided under the Incentive Plan could be viewed as deferring income for participants and may, therefore, be subject to Section 409A. While it is our current intent to have awards either be exempt from or comply with the requirements of Section 409A, there can be no assurance that awards made under the Incentive Plan will satisfy those requirements. In the event that an award made under the Incentive Plan is subject to Section 409A, but does not satisfy the requirements of Section 409A, then the affected participant may be subject to immediate income inclusion of the deferred amounts, an additional 20% tax on amounts deferred, as well as interest on such amounts from the date when such amounts became vested.
Sections 280G and 4999. In the event that certain compensation payments or other benefits received by disqualified individuals (as defined in Section 280G of the Code) under the Incentive Plan cause or result in excess parachute payments (as defined in Section 280G of the Code and the regulations promulgated thereunder) then, pursuant to Section 280G of the Code, any amount that constitutes an excess parachute payment is not deductible by our Company. In addition, Section 4999 of the Code generally imposes a 20% excise tax on the amount of any such excess parachute payment received by such a disqualified individual.
Benefits or amounts under the Incentive Plan are not determinable. In addition, awards are dependent upon a number of factors, including the value of our common stock on future dates and exercise decisions made by participants. As a result, the benefits that might be received by participants receiving discretionary grants in the future are not determinable. Please see the 2011 Grants of Plan-Based Awards table on page 61 for information about awards made to our named executive officers in the last year, including awards made under the Incentive Plan, prior to amendment.
In accordance with SEC rules, the following table lists stock option, RSU and long-term cash bonus awards granted to the individuals and groups set forth below in the last fiscal year. Certain of these awards include awards identified in the Outstanding Equity Awards at Fiscal Year-End table on page 63.
The Board of Directors believes that the adoption of the amended and restated Incentive Plan will be in the best interests of the shareholders and, accordingly, recommends a vote FOR this proposal, which is Item 3 on the proxy card. Our directors and executive officers receive compensation under our Incentive Plan and may be deemed to have a substantial interest in an affirmative vote for this proposal.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2011, with respect to shares of our common stock that may be issued under the Incentive Plan.
You should also refer to information on the Incentive Plan set forth in Note 15 of the Notes to Consolidated Financial Statements of the 2011 Annual Report, which is hereby incorporated by reference.
PROPOSAL 4 ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION
At our last Annual Meeting of Shareholders on May 3, 2011 (the 2011 Annual Meeting), pursuant to Section 14A of the Exchange Act, the Company submitted a proposal seeking non-binding advisory votes from our shareholders to approve the compensation paid to our named executive officers (an Advisory Vote on Compensation) and to recommend the frequency for which the Company would hold future Advisory Votes on Compensation. At the 2011 Annual Meeting, our shareholders supported an annual Advisory Vote on Compensation, and our Board has determined that it will submit such vote to our shareholders every year at our annual meeting. As a result, we will submit an Advisory Vote on Compensation to our shareholders at each annual meeting until we are required to submit to our shareholders another proposal on the frequency of such vote within the next five years.
As described under the Compensation Discussion and Analysis section of this proxy statement, our executive compensation programs are designed to attract, motivate, and retain our named executive officers, who are critical to our long-term success. Please read the Compensation Discussion and Analysis section of this proxy statement beginning on page 42 for additional details about our executive compensation programs, including information about the 2011 compensation of our named executive officers.
Gardner Denver is a performance-driven company that has a track record of delivering increased shareholder value. Rigorous execution of our business plan and a commitment to the Gardner Denver Way are pillars of our management team and management process. As a result, we have achieved the following total shareholder return over the past five years:
Our executive compensation program, with its pay-for-performance philosophy, is a part of our consistent and rigorous management process. We believe it has effectively motivated and rewarded our named executive officers to meet the challenges of our global business, embrace the Gardner Denver Way and deliver shareholder value.
We believe a significant amount of total compensation should be in the form of short-term and long-term incentive awards to align compensation with our financial and operational performance goals as well as individual performance goals; and we continually evaluate the individual elements of our executive compensation program in light of market conditions and governance requirements and make changes where appropriate for Gardner Denvers business. We believe that the core of our executive compensation program provides opportunities to reward superior individual and Company performance and drives the creation of sustainable shareholder value.
You have the opportunity to vote FOR or AGAINST or to ABSTAIN from voting on the following non-binding resolution relating to executive compensation:
Resolved, that the shareholders approve, on a non-binding, advisory basis, the compensation paid to Gardner Denvers named executive officers as disclosed in Gardner Denvers proxy statement for the 2012 Annual Meeting of Shareholders pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, the compensation tables, and the narrative discussion.
In deciding how to vote on this proposal, you are encouraged to consider the Companys executive compensation philosophy and objectives and the elements of the Companys executive compensation program as contained in the Compensation Discussion and Analysis section below.
The Compensation Committee, which is responsible for determining the compensation of our executive officers, is comprised solely of outside directors who satisfy the independence requirements of the NYSE and will continue to emphasize responsible compensation arrangements that attract, retain, and motivate high caliber executive officers to achieve the Companys business strategies and objectives.
While your vote on this proposal is advisory and will not be binding on the Compensation Committee, or the Board, the Compensation Committee values the opinions of Gardner Denvers shareholders on executive compensation matters and will take the results of this advisory vote into consideration when making future decisions regarding Gardner Denvers executive compensation program.
The Board believes that the approval of Gardner Denvers executive compensation program is in the best interests of our shareholders and, accordingly, recommends a vote FOR this proposal.
PART THREE: COMPENSATION MATTERS
COMPENSATION OF DIRECTORS
The Governance Committee annually reviews and recommends to our Board for approval the nonemployee directors compensation. In 2011, the Governance Committee retained Meridian Compensation Partners, LLC (Meridian), an independent compensation consultant, to evaluate the appropriateness of the nonemployee directors compensation program, including the mix of annual cash retainers, meeting fees and equity compensation to ensure that the program compensates the nonemployee directors for the level of responsibility the Board has assumed in todays corporate governance environment and to remain competitive relative to our custom peer group (as further discussed in the Compensation Discussion and Analysis section of this proxy statement).
The Companys nonemployee directors compensation program remained unchanged in 2011. Accordingly, the Companys 2011 nonemployee directors compensation program included the following components:
Members of the Board who also serve as an officer or employee of the Company do not receive additional compensation for their service on the Board. The only officer or employee of the Company who served as a director during 2011 was Mr. Pennypacker.
Phantom Stock Plan
The Phantom Stock Plan for nonemployee directors, which is an unfunded plan, was originally established in 1996. Prior to 2010, we annually credited each nonemployee director $7,000 in phantom stock units under the Phantom Stock Plan, in equal quarterly amounts. Beginning in May 2010, we eliminated the annual phantom stock awards to simplify the director compensation program and align it with the Companys peer group.
Each nonemployee director may continue to elect to defer all or a portion of his or her annual retainers and meeting fees into phantom stock units under the Phantom Stock Plan. Upon election, the phantom stock units are credited to the nonemployee directors account in equal quarterly amounts based on the average closing price per share of our common stock during the 30 trading days immediately preceding (but not including) the last business day of the fiscal quarter as reported on the composite tape of the NYSE. Dividend equivalents are credited to the nonemployee directors account on the dividend record date as dividends are declared by the Board. Each phantom stock unit represents the right to receive the fair market value of one share of our common stock.
The fair market value of a nonemployee directors account will be distributed as a cash payment to the nonemployee director, or his or her beneficiary, on the first business day of the month following the month in which the nonemployee director ceases to be a director for any reason. Alternatively, a nonemployee director may elect to have the fair market value of his or her account distributed in twelve or fewer equal monthly installments, or in a single payment on a predetermined date within one year after he or she ceases to be a director, but without interest on the deferred payments. The fair market value of a nonemployee directors account is determined by reference to the average closing price of our common stock during the 30-trading days immediately preceding the date he or she ceases to be a director.
The following table summarizes the aggregate number of phantom stock units credited to each nonemployee directors account as of March 2, 2012.
Long-Term Incentive Plan
For 2011, each of the nonemployee directors, except for Mr. Craig, received equity incentives consisting of 1,500 stock options and 600 RSUs on the day following the 2011 Annual Shareholders Meeting. Mr. Craigs stock options and RSUs were prorated based upon the time he served as a director of the Company during the annual grant cycle. Accordingly, in November 2011, Mr. Craig received 840 stock options and 330 RSUs.
The directors stock options were granted at the closing price of our common stock on the date of grant, become exercisable on the one-year anniversary of the date of grant, and terminate on the five-year anniversary
of the date of grant. If a person ceases to be a nonemployee director by virtue of disability or retirement, after having completed at least one three-year term, outstanding options generally remain exercisable for a period of five years but not later than the expiration date of the options. If a person ceases to be a nonemployee director by virtue of death or dies during the five-year exercise period after disability or retirement described above, outstanding options generally remain exercisable for a period of one year but not later than the expiration date of the options. If a nonemployee directors service terminates for any other reason, options not then exercisable are canceled and options that are exercisable may be exercised at any time within 90 days after such termination but not later than the expiration date of the options.
The director RSUs vest three years from the date of grant; provided that the nonemployee director continues to serve as a member of our Board on such date and has continuously served on our Board since the date of grant. Except as provided below, all RSUs (and any shares of restricted stock held by a nonemployee director) that have not previously vested will be forfeited on the date that the nonemployee directors service to the Company terminates. However, if a person ceases to be a nonemployee director by virtue of death, disability or retirement, the RSUs (and any restricted stock) will vest immediately and become free of all transfer restrictions.
Upon the occurrence of a change in control, as defined in the Incentive Plan, (a) options granted to nonemployee directors will be canceled in exchange for a cash payment equal to the appreciation in value of the options over their respective exercise price and (b) restricted stock and RSUs will be deemed fully vested. For a further description of the change in control provision under the Incentive Plan, please see the Potential Payments Upon Termination or Change in Control section of this proxy statement set forth below.
2011 DIRECTOR COMPENSATION TABLE
The following table presents compensation earned by each nonemployee director for 2011. Compensation information for Mr. Pennypacker is contained in the Summary Compensation Table set forth below. Mr. Pennypacker did not receive any compensation for service on the Board.
2012 Nonemployee Director Compensation
In February 2012, the Governance Committee reviewed our nonemployee director compensation program and determined that it was appropriate to modify the 2011 compensation levels for 2012 to better align our nonemployee director compensation with that of our peer group. The changes implemented by the Governance committee include (i) eliminating the use of per-meeting fees for Board and Committee meetings; (ii) increasing each directors cash retainer fee, equity compensation and committee chair retainer fees in return for foregoing per-meeting fees; and (iii) using RSUs as the only form of director equity compensation.
COMPENSATION DISCUSSION AND ANALYSIS
The following information contains statements regarding future individual and Company performance measures, targets and other goals. These goals are disclosed in the limited context of the Companys executive compensation program and should not be understood to be statements of managements expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts.
Gardner Denver is a performance-driven company that has a track record of delivering increased shareholder value. Rigorous execution of our business plan and a commitment to the Gardner Denver Way are pillars of our management team and management process. As a result, we have achieved the following total shareholder return over the past five years:
The Compensation Committee believes that our executive compensation program has played a significant role in our ability to drive strong financial results, which is demonstrated by the accomplishments of our executive team over the last fiscal year. During 2011, our named executive officers successfully managed the Company during a challenging economy by delivering strong financial performance and shareholder return for the year, including:
Our executive compensation program, with its pay-for-performance philosophy, is a part of our consistent and rigorous management process. We believe it has effectively motivated and rewarded Gardner Denver executives to meet the challenges of our global business, embrace the Gardner Denver Way and deliver shareholder value.
We continually evaluate the individual elements of our executive compensation program in light of market conditions and governance requirements and make changes where appropriate for Gardner Denvers business. We believe that the core of our executive compensation program provides opportunities to reward superior individual and Company performance and drives the creation of sustainable shareholder value.
Our executive compensation program is designed to meet three principal objectives:
We believe these objectives collectively link compensation to overall Company performance, which helps to ensure that the interests of our executive officers are aligned with the interests of our shareholders.
2011 Voting Results and Executive Compensation in 2012
The Compensation Committee has reviewed the voting results with respect to the Companys 2011 advisory vote to approve executive compensation. Based upon the Inspector of Elections report, the advisory vote to approve executive compensation received the favorable support of 73% of the votes cast on such proposal in 2011.
In light of the voting results on last years advisory vote to approve executive compensation, the Company reached out to a number of large shareholders to determine how the Companys executive compensation program could be improved. In order to better align the Companys general compensation program with market practices and based on investor feedback, in May 2011 the Compensation Committee (i) discontinued the use of its breakthrough goals bonus, which was a bonus award based upon the achievement of individual performance goals and (ii) no longer offers tax assistance in connection with the Companys relocation assistance program. In lieu of the breakthrough goals bonus, the Compensation Committee adopted a cash bonus opportunity based upon the achievement of specified target levels of adjusted net income, adjusted operating cash flow, and adjusted operating earnings of the Company and/or its operating segments.
The Compensation Committee believes that the 2011 executive compensation program has been tailored to the Companys business objectives, aligns pay with performance and reflects good governance practices regarding executive compensation.
Executive Management Changes in 2011
Barry L. Pennypacker, Michael M. Larsen, Brent A. Walters, Christopher R. Celtruda and T. Duane Morgan, who are all listed in the Summary Compensation Table set forth below, were our named executive officers for 2011.
Christopher R. Celtruda joined the Company as Vice President and President, Industrial Products Group in April 2011. In February 2012, Mr. Celtruda resigned from the Company.
Compensation Philosophy and Elements
The fundamental philosophy underlying our executive compensation program is to:
Our executive compensation program includes incentive arrangements that align participants objectives with the Companys critical business values, strategies and performance objectives, and are clear and simple to understand. This understanding focuses the executives efforts on the performance objectives that drive Gardner Denvers success and encourages them to make long-term commitments to the Company.
The program offers a balanced approach to compensation and consists of the following primary elements:
Role of Compensation Consultants
For 2011, the Compensation Committee renewed its agreement with Meridian to evaluate and provide independent advice and consultation regarding our executive compensation program. At the Compensation Committees direction and with their assistance, Meridian:
In 2011, Meridian did not provide any services to the Company, or receive any payments from the Company, other than in their capacity as a consultant to the Compensation Committee and the Nominating and Corporate Governance Committee. See Compensation of Directors above for a description of the services provided by Meridian to the Nominating and Corporate Governance Committee.
Competitive Pay Analysis
In 2011, the Compensation Committee engaged Meridian to assist it in evaluating our executive compensation program. In determining the compensation for our CEO and our other named executive officers, the Compensation Committee reviewed competitive market data prepared by Meridian. The review included the value of the following components of compensation: (a) base salary; (b) target annual cash bonuses; (c) target long-term incentives and (d) target total direct compensation (i.e., base salary, target annual cash compensation and target long-term incentives).
Meridian compiled the competitive market data from a custom peer group. For 2011, the custom peer group was comprised of the following companies:
The companies in the custom peer group are either direct business competitors, capital markets competitors or labor market competitors, and have similarities to the Company in terms of revenues, industry sector, and market capitalization. The companies comprising the custom peer group had median annual revenues of $2.1 billion, as compared to the Companys 2011 revenues of $2.4 billion.
The composition of the custom peer group changed for 2011 with the addition of 17 new companies (i.e., Actuant Corporation, AMETEK, Inc., Barnes Group, Inc., Cameron International Group, Crane Co, Danaher
Corporation, Dresser-Rand Group Inc., Eaton Corporation, EnPro Industries, Inc., Graco, Inc., Graham Corporation, Harsco Corporation, IDEX Corporation, Pall Corporation, Robbins & Meyers, Inc., SPX Corporation and Teleflex Incorporated) and the removal of 13 companies (i.e., A.O. Smith, Borg Warner Inc., Briggs & Stratton Corporation, Cooper Industries, Ltd., Federal Signal Corporation, FMC Technologies, Inc., ITT Industries, Inc., Joy Global Inc., Pactiv Corporation, Roper Industries, Inc., Sauer-Danfoss Inc., Steelcase Inc. and Westinghouse Air Brake Technologies Corporation). The Compensation Committee believes that the composition of the 2011 custom peer group better reflects the global complexity, size and industries of companies for which the Company competes for executive talent.
In assessing the competitiveness of our executive compensation program, Meridian provided the Compensation Committee with competitive market data that was size-adjusted, using a regression analysis, for the 50th and 65th percentile of the custom peer group. Regression analysis in this context was a statistical technique used to estimate market compensation levels based on the relationship between compensation and revenue size for the underlying competitive market data.
For 2011, the Compensation Committee generally aimed to set each named executive officers base salary, target annual cash bonus, target annual cash compensation (i.e., base salary and target annual cash bonus), target long-term incentives and target total direct compensation (i.e., target annual cash compensation and target long-term incentives) at the 50th percentile of the size-adjusted, competitive market data.
In setting the compensation of our named executive officers, a number of factors can, from time to time, affect levels of executive compensation, including, without limitation, individual performance, Company performance, scope of responsibilities, tenure with the Company, time in position and desired pay mix. Based upon one or more of these other factors, base salary, target annual cash bonus, target annual cash compensation, target long-term incentives and/or target total direct compensation of each named executive officer could be +/-15% of the 50th percentile of the size-adjusted, competitive market data.
Role of Management
In 2011, the Compensation Committee worked with the CEO, Chief Financial Officer, Vice President of Human Resources, and General Counsel to, among other things, help the Compensation Committee formulate the specific plan and award designs, performance goals, and performance levels (i.e., threshold, target, and maximum) necessary to align the Companys executive compensation program with the Companys business strategies and goals.
In 2011, the Compensation Committee held private discussions with Mr. Pennypacker, our CEO, concerning the other named executive officers individual performance. The Compensation Committee considered Mr. Pennypackers evaluations of the other named executive officers, together with its own evaluations of the executive officers performance based on its frequent interactions with the executive officers, when setting their compensation in 2011. The Compensation Committee conducted its own performance evaluation of the CEO and no management recommendation was made with regards to his compensation.
All final decisions regarding the compensation of the named executive officers were made by the Compensation Committee. While members of management attended the Compensation Committees meetings upon invitation, they did not attend either executive sessions or portions of any other meetings of the Compensation Committee where executive compensation determinations were made by the Compensation Committee.
Assessment of Individual Performance
The named executive officers compensation was impacted by individual performance. The assessment of the named executive officers individual performance was a subjective assessment of accomplishment and contribution to the Company. In approving the compensation of the named executive officers in February 2011, the Compensation Committee considered the following accomplishments and contributions:
In light of Mr. Celtruda joining the Company in April 2011, the Compensation Committee did not, for purposes of setting Mr. Celtrudas compensation in 2011, perform a traditional performance evaluation of Mr. Celtruda.
2011 Executive Compensation Decisions
The Compensation Committee reviews and considers each pay component before making any executive compensation decisions. Each year as the Compensation Committee determines executive compensation, it reviews tally sheets prepared for each of the named executive officers. The tally sheets detail each component of executive compensation on a current and historical basis, including base salary, target annual cash bonuses, target long-term incentives, retirement benefits and other perquisites. The tally sheets also reflect the current value of all outstanding equity awards. The Compensation Committee uses the tally sheets to (a) understand all obligations for present and future compensation; (b) confirm that compensation is consistent with the philosophy and objectives of the Companys executive compensation program; and (c) understand the total value of the Companys compensation and benefit programs when considering changes in compensation components, program design and pay mix. In 2011, the Compensation Committee did not make any specific adjustments to the named executive officers compensation as a result of its review of tally sheets.
The Compensation Committee made its annual pay decisions for each of the compensation components as outlined below.
Annual Cash Compensation.
Base Salary. We provide the named executive officers with a base level of income for the expertise, skills, knowledge and experience they offer to the Companys management team.
In 2011, our named executive officers received the following base salary increases:
Mr. Pennypacker received a base salary increase of 12.5% in recognition of his individual performance, his growth in the role of Chief Executive Officer of the Company, the competitive pay data and the Companys performance in delivering increased shareholder value in 2010 and 2011, as reflected in the total shareholder return graph set forth above.
Mr. Walters received a base salary increase of 6.2% in recognition of his individual performance and to closer align his base salary with the 50th percentile of the competitive market data compiled by Meridian. Messrs. Larsen and Morgan each received a merit increase in their base salary of 1.9% and 3%, respectively, in recognition of their respective individual performance.
For 2011, each of Messrs. Pennypackers and Larsens base salary was slightly above the 50th percentile of the size-adjusted, competitive pay data. The Compensation Committee deemed this appropriate in light of their strong individual performance. Each of Messrs. Walters, Celtrudas and Morgans base salary was below the 50th percentile of the size-adjusted, competitive market data. The Compensation Committee deemed this appropriate in light of each of these named executive officers time in their current position with the Company.
Annual Cash Bonus. For 2011, the Compensation Committee established annual cash bonus opportunities to focus the named executive officers on the achievement of critical, short-term financial goals that are intended to drive sustainable shareholder value over time. The annual cash bonus opportunities are comprised of (a) a cash bonus based upon the achievement of certain performance goals of the Company under our Executive Annual Bonus Plan (the Plan Bonus), which bonus is intended to comply with Section 162(m) of the Code regarding performance-based pay and (b) a cash bonus based upon the achievement of certain performance goals of the Company under a new bonus arrangement (the Performance Bonus).
In 2009 and 2010, the Compensation Committee created a bonus opportunity based on achievement of breakthrough goals of individual performance, which was a bonus award based upon the achievement of individual performance goals (the Breakthrough Goals Bonus). As previously discussed above in the section titled 2011 Voting Results and Executive Compensation in 2012, in order to better align the Companys executive compensation program with market practices and based on shareholder feedback, in May 2011 the Compensation Committee discontinued the Breakthrough Goals Bonus. In replacement of the Breakthrough Goals Bonus, the Compensation Committee established the Performance Bonus, which is based upon the Companys achievement of the same performance goals that apply to the Plan Bonus, as further discussed below.
With respect to the total cash payout for 2011 for the Plan Bonus and the Performance Bonus, the Compensation Committee established the following target percentages of base salary for the named executive officers:
Executive Annual Plan Bonus.
In February 2011, the Compensation Committee established the performance goals and the maximum, target and threshold achievement levels for each of the named executive officers under the Executive Annual Bonus Plan. Messrs. Pennypackers, Larsens and Walters performance goals were based on the Companys 2011 Company Adjusted Net Income (weighted at 48%) and Company Adjusted Operating Cash Flow (weighted at 32%), as both terms are defined below. Messrs. Celtrudas and Morgans performance goals were based on their respective groups Group Adjusted Operating Earnings (weighted at 50%) and Group Adjusted Operating Cash Flow (weighted at 10%), as both terms are defined below, as well as Company Adjusted Net Income and Company Adjusted Operating Cash Flow (weighted at 12% and 8%, respectively).
Company Adjusted Net Income is defined as the Companys income before taxes, excluding impairment charges and restructuring charges in excess of budget, less taxes which exclude the tax effect of the excluded items and non-recurring tax-related adjustments.
Company Adjusted Operating Cash Flow is defined as the Companys net cash provided by operating activities, excluding excess tax benefits from stock-based compensation.
Group Adjusted Operating Earnings is defined as the respective groups operating earnings, excluding impairment charges, corporate allocations, other non-operational items and restructuring charges in excess of budget.
Group Adjusted Operating Cash Flow is defined as the respective groups net income adjusted for impairment charges, restructuring charges in excess of budget and the transfer of certain business units, plus the groups depreciation and amortization and the cash effect of changes in receivables, advance payments and inventories.
Adjusted net income was set as a performance goal to reflect the effect of managements performance on shareholder return. Adjusted operating cash flow was set as a performance goal to reflect the continued importance of cash flow in providing funds to pursue our growth strategies, accelerate our debt repayment, and maintain our dividend policy. Adjustments to the financial measurements were made by the Compensation Committee to avoid volatility, inflation or deflation of the cash bonus due to either unusual items in the performance period or items that are not indicative of the core operating performance of the Company or group, as applicable.
In establishing the performance goals for Messrs. Celtruda and Morgan, the Compensation Committee included both Company and group performance goals to provide incentives for operational performance over which Messrs. Celtruda and Morgan each exert the greatest degree of short-term control, while ensuring overall accountability to corporate performance. The Compensation Committee believes this incentive helps solidify our corporate culture and ensure our business units are working for the greater good of the Company and our shareholders.
Under the terms of the Executive Annual Bonus Plan, the Compensation Committee may, in its discretion, reduce or eliminate entirely the amount of any Plan Bonus payable to any named executive officer upon attainment of the performance goals, but any such reduction may not increase the awards of another named executive officer.
In May 2011, the Compensation Committee established the Performance Bonus, based upon the achievement of the same performance goals as the Plan Bonus. Accordingly, the performance goals under the Performance Bonus were: Company Adjusted Net Income, Company Adjusted Operating Cash Flow, Group Adjusted Operating Earnings, and Group Adjusted Operating Cash Flow, with each such performance goal weighted proportionately to the weighting used for the Plan Bonus.
Set forth below are the 2011 annual cash bonus opportunities for Messrs. Pennypacker, Larsen and Walters with respect to the Plan Bonus and the Performance Bonus.
Set forth below are the 2011 annual cash bonus opportunities for Messrs. Celtruda and Morgan with respect to the Plan Bonus and the Performance Bonus.
Set forth below is the Companys actual performance in 2011 under the performance goals established for the Plan Bonus and the Performance Bonus.
In February 2012, the Compensation Committee evaluated and determined the degree to which the performance goals under the Plan Bonus and the Performance Bonus for 2011 had been met. To the extent the Companys actual performance fell between the threshold, target, and maximum achievement levels, the cash bonus was linearly interpolated. Pursuant to the terms of the Executive Annual Bonus Plan, a participant who was employed as of the last day of the performance period is eligible to receive payment of the Plan Bonus even though the participant is no longer an employee of the Company at the time the Plan Bonuses are paid; provided, however, that the Compensation Committee retains the right to deny or downward adjust any Plan Bonuses, in its sole judgment, based on its assessment of the participants performance. The Compensation Committee exercised its discretion to decrease the Plan Bonuses payable to Messrs. Celtruda and Morgan. In addition, Mr. Celtrudas Plan Bonus was prorated based upon his April 2011 start date.
Accordingly, the Compensation Committee awarded Messrs. Pennypacker, Larsen, Walters, Celtruda and Morgan a Plan Bonus of $1,440,000, $440,316, $240,000, $186,966 and $283,414, respectively, and a Performance Bonus of $360,000, $110,080, $60,000, $46,741 and $70,854, respectively.
For 2011, the total cash payout for both the Plan Bonus and the Performance Bonus to Messrs. Pennypacker, Larsen, Walters, Celtruda and Morgan was $1,800,000, $550,396, $300,000, $233,707 and $354,268, respectively.
In 2011, each of the named executive officers target annual cash bonus, as well as their annual cash compensation (i.e., base salary and target annual cash bonus) fell below the 50th percentile of the size-adjusted, competitive market data. The Compensation Committee deemed this appropriate in light of each named executive officers time in their current position with the Company.
In connection with Mr. Celtrudas employment as Vice President & President, Industrial Products Group of the Company in April 2011, he received a sign-on bonus of $800,000, paid in lump sum. All of the sign-on bonus was subject to a clawback provision requiring full repayment to the Company if Mr. Celtrudas employment was terminated either by his resignation or by the Company for cause within 36 months of his hire date. In connection with Mr. Celtrudas resignation from the Company in February 2012, the Compensation Committee waived the clawback as part of a waiver and release agreement with Mr. Celtruda.
Long-Term Incentive Compensation.
Under the Incentive Plan, the named executive officers are eligible to receive awards in the form of stock options, RSUs and a long-term cash bonus. Generally, these awards are granted annually at our February Compensation Committee meeting, which occurs after the presentation of our annual financial results. The purpose of these awards is to be competitive with market practices, provide retention and promote the Companys long-term financial interests by encouraging the named executive officers to have an ownership position in the Company.
In general, the allocation of the 2011 target long-term incentives for the named executive officers (other than Mr. Celtruda) was as follows:
This allocation is based on the target long-term cash bonus opportunity and the grant date fair value of the stock options and RSUs granted to Messrs. Pennypacker, Larsen, Walters and Morgan in February 2011. In formulating this allocation, the Compensation Committee initially conducted an assessment of the competitive market data to develop an aggregate value for long-term incentive awards. The Compensation Committee then considered the allocation of the aggregate value among the three types of awards, balancing the short, medium and long-term goals of the Company. The Committee determined that the long-term incentive compensation consisting of cash bonus, stock options and RSUs be proportioned one-third each.
Long-Term Equity Incentives. In 2011, our named executive officers received long-term equity incentives consisting of stock options and RSUs.
Stock options are designed to encourage the named executive officers to increase shareholder value as stock options only have value when the price of our common stock increases over the stock options exercise price. RSUs are designed to encourage retention of the named executive officers as they are contractual rights to receive a specified number of shares of our common stock in the future. Generally, (i) stock options have an exercise price equal to the closing sale price of our common stock on the date of grant and become exercisable in one-third annual increments commencing on the one-year anniversary of the options grant date and (ii) RSUs vest at one time, three years from the date of grant.
The Compensation Committee believes that an equal combination of stock options and RSUs offer the named executive officers a competitive level of equity-based compensation, while balancing the retention value of RSUs with the performance aspect of stock options.
As part of the general executive compensation program, the Compensation Committee awarded the following equity incentive awards to the named executive officers in February 2011:
In formulating the target economic value of stock option and RSU awards for Messrs. Pennypacker, Larsen, Walters and Morgan, the Compensation Committee first allocated the aggregate value of long-term incentive awards one-third to stock options and one-third to RSUs. The Compensation Committee then converted such proportioned amounts into a number of stock options and RSUs based on the grant date fair value of such awards.
Additionally, in approving the 2011 long-term equity awards for Messrs. Pennypacker, Larsen, Walters and Morgan, the Compensation Committee considered the individual accomplishments and contributions discussed above, the scope of such named executive officers responsibilities, and tenure with the Company. In particular, with respect to Mr. Pennypacker, the Compensation Committee attributes Mr. Pennypacker with the vision and leadership of directing the Company during the continuing difficult economic environment and delivering strong financial performance and shareholder returns for the last three years.
Michael M. Larsens Retention RSU Award.
The Company hired Mr. Larsen as Vice President and Chief Financial Officer (CFO) in October 2010. In 2011, as a result of strong Company performance, significant contributions by Mr. Larsen and market demand for individuals with proven CFO skills, which raised retention concerns, the Compensation Committee decided to re-evaluate Mr. Larsens compensation. As a result, in addition to the custom peer group market data provided by Meridian, the Compensation Committee also requested Meridian to provide competitive market data (the CFO Competitive Market Data) on the compensation arrangements of newly hired CFOs for the Compensation Committee to use as an additional reference point in considering the appropriate level of compensation for Mr. Larsen. The CFO Competitive Market Data was compiled from 22 public companies, all of which had median revenues of $2.5 billion and had recently hired a CFO.
The Compensation Committee, with the assistance of Meridian, determined that it was in the best interests of the Company and its shareholders to grant Mr. Larsen a long-term retention equity award in the form of RSUs in the amount of $700,000, which represented 8,724 RSUs that cliff vest on November 16, 2014. The Compensation Committee believes the retention bonus was consistent with the CFO Competitive Market Data and was reasonable and appropriate under the circumstances to further retain Mr. Larsen as CFO and strengthen his alignment with shareholders and the long-term interests of the Company.
Long-Term Cash Bonus Awards. Under the Incentive Plan, the Compensation Committee may also grant long-term cash bonus awards to the named executive officers. Long-term cash bonuses are tied to the achievement of Company performance targets over a predetermined performance period, which historically has been three years.
The long-term cash bonus awards are based on any one or more of the following performance measures:
The Compensation Committee believes that the long-term cash bonus awards provide a strong incentive for the named executive officers to achieve the Companys long-term strategic and financial goals that ultimately drive the creation of sustainable shareholder value. The Incentive Plan permits the long-term cash bonus awards to be denominated in either cash or restricted stock awards. Historically, the Compensation Committee has paid these awards in cash to appropriately balance the named executive officers long-term compensation opportunities between cash and equity. These awards also encourage retention among the named executive officers.
In February 2011, the Compensation Committee granted a long-term cash bonus award tied to a compound growth rate of EBT for the Company during the three-year performance period beginning January 1, 2011 through December 31, 2013. The threshold, target and maximum achievement levels that must be met by the end of the performance period are based upon the following compound growth rates of the Companys EBT over the performance period.
The calculation of EBT under the long-term cash bonus award is subject to being adjusted for extraordinary or nonrecurring items or events, or unusual nonrecurring gains or losses identified in the Companys financial statements during the three-year performance period, as long as any such adjustments are made in a manner consistent with Section 162(m) of the Code, to the extent applicable.
The specific performance targets for EBT for the three-year performance period beginning January 1, 2011 through December 31, 2013 are considered competitively sensitive information and disclosure thereof would reveal the Companys tactical operations, sales and marketing initiatives resulting in a significant disadvantage for the Company in the marketplace.
The Compensation Committee believes the specific performance targets for EBT are appropriately challenging and consistent with achieving the Companys long-term growth and profitability goals. In particular, the threshold, target and maximum achievement levels are set so that the relative difficulty of meeting the target level is believed to be consistent from year to year. Since the Compensation Committee began granting long-term cash bonus award opportunities in 2001, the Company has achieved performance in excess of the maximum level six times and did not achieve threshold performance three times.
Assuming that at least the threshold achievement level is met, the long-term cash bonus award is calculated by using the following formula:
With respect to the 2011 long-term cash bonus award that is payable in 2014, if earned, the Compensation Committee established the following long-term target bonus opportunity for the named executive officers:
The Compensation Committee determined the above long-term target bonus opportunities based on market reference points provided from Meridian and with the intention that such percentages would result in a long-term cash bonus opportunity equaling approximately one-third of each respective named executive officers target long-term incentives.
The Compensation Committee believes the performance goal of EBT provides an appropriate and objective measure of the Companys long-term performance because it is closely tied to the creation and retention of shareholder value.
In February 2012, the Compensation Committee evaluated and determined the degree to which the criteria for the long-term cash bonus award granted in 2009 to the eligible named executive officers (i.e., Messrs. Pennypacker, Larsen, Walters and Morgan) under the Incentive Plan (the 2009 L-T Bonus) had been met. The criteria for the 2009 L-T Bonus was tied to the compound growth rate of EBT (as may be adjusted) for our industrial businesses, which excluded petroleum products, during the period January 1, 2009 through December 31, 2011. Based on its analysis of the Companys performance, the Compensation Committee determined that the maximum level of growth in EBT was achieved and each of Messrs. Pennypacker, Larsen, Walters and Morgan were entitled to a 2009 L-T Bonus of $2,700,000, $168,176, $320,016, and $710,800, respectively. Messrs. Larsens and Walters 2009 L-T Bonus was prorated based upon their time of service with the Company.
In 2011, each of Messrs. Pennypackers, Walters and Morgans target long-term incentive was slightly above the 50th percentile of the size-adjusted, competitive market data. Mr. Larsens target long-term incentive, together with the retention RSU award discussed above, was also slightly above the 50th percentile of the size-adjusted, competitive market data. The Compensation Committee subjectively determined this to be appropriate to retain such named executive officers and strengthen each officers alignment with shareholders and the long-term interests of the Company.
In 2011, Mr. Pennypackers target total direct compensation (i.e., base salary, target annual cash bonus and target long-term incentives) was slightly above the 50th percentile of the size-adjusted, competitive market data. The Compensation Committee deemed this appropriate in light of Mr. Pennypackers direction of the Company during the continuing difficult economic environment and the resulting strong financial performance and shareholder return. Each of Messrs. Larsens, Walters and Morgans target total direct compensation fell below the 50th percentile of the size-adjusted, competitive market data. The Compensation Committee deemed this to be appropriate in light of each such named executive officers time in his current position with the Company.
The Company provides its eligible employees, including the named executive officers, with various retirement benefits. The retirement plans are designed to assist employees, including the named executive officers, in planning for retirement and securing appropriate levels of income during retirement. The purpose of the retirement plans is to attract and retain quality employees, as these types of benefits are typically offered by the Companys competitors.
Pension Plan. The Company maintains the Gardner Denver Pension Plan and previously maintained the Gardner Denver Supplemental Excess Defined Benefit Plan for the benefit of certain employees. Effective November 1, 2006, the Company implemented certain revisions to the Pension Plan, and future service credits under the Pension Plan ceased effective October 31, 2006. Also at that time, the Supplemental Excess Defined Benefit Plan was merged into the Gardner Denver Supplemental Excess Defined Contribution Plan. Mr. Morgan is fully vested in the Pension Plan and has earned a benefit under the Supplemental Excess Defined Benefit Plan. Messrs. Pennypacker, Larsen, Walters and Celtruda joined the Company after November 1, 2006 and will not receive any benefits under the Pension Plan or the former Supplemental Excess Defined Benefit Plan.
Retirement Savings Plan. The Gardner Denver Retirement Savings Plan is a tax-qualified retirement savings plan. Eligible salaried and hourly U.S. employees, including the named executive officers, are eligible to participate in the Retirement Savings Plan. Eligible employees may contribute from 1% to 100% of annual compensation on a tax-deferred basis to the plan, up to the applicable IRS annual limit. Gardner Denver matches each participating employees tax-deferred savings with Company matching contributions. The Company match consists of $1 for each $1 contributed by a participant, up to the first 3% of a participants annual compensation, and $0.50 for each $1 contributed by a participant between 3% and 6% of a participants annual compensation. Participants may choose to invest the Company match in Gardner Denver stock or any other investment funds within the lineup. Participants may transfer amounts out of Gardner Denver stock and into other investment funds at any time. Beginning November 1, 2006, eligible employees at certain eligible locations also receive a nonelective Company contribution, which is designed to equal service credits that would have accrued under the Pension Plan. The nonelective Company contribution is equal to 4% of total compensation paid, up to the Social Security wage base for the year, plus 8% of total compensation paid in excess of the Social Security wage base up to the IRS annual compensation limit. For purposes of the nonelective Company contribution, total compensation is cash remuneration paid during the year by the Company to or for the benefit of a participant, including base salary for the current year, annual cash bonus earned during the prior year but paid in the current year for our named executive officers and the long-term cash bonus opportunity earned over the prior three-year period but paid in 2011. All employee and Company matching contributions are fully vested immediately and the nonelective Company contribution becomes fully vested after three years of employment.
Messrs. Pennypacker and Morgan are fully vested in the nonelective Company contribution portion of the Retirement Savings Plan, and Messrs. Larsen and Walters will fully vest on the third anniversary of their employment with the Company.
Supplemental Excess Defined Contribution Plan. In addition to the Retirement Savings Plan, employees receiving a base pay of $110,000 or higher, including the named executive officers, are eligible to participate in the Supplemental Excess Defined Contribution Plan, which is funded through a Rabbi Trust. This plan provides participants with a similar level of benefits afforded to all other eligible employees who are not subject to the limitations imposed by the IRS on our tax-qualified Retirement Savings Plan.
Eligible Employees may contribute to the Supplemental Excess Defined Contribution Plan when they exceed the annual IRS pre-tax contribution limits and the annual catch-up contribution limit for participants age 50 or over. The Company matches each participants contributions with Company matching contributions of $1 for each $1 contributed by a participant, up to the first 3% of a participants annual compensation, and $0.50 for each $1 contributed by a participant between 3% and 6% of a participants annual compensation. Company matching contributions under the Supplemental Excess Defined Contribution Plan are contributed in the form of cash rather than our common stock. All employee and Company matching contributions are fully vested immediately.
The named executive officers are also credited with a nonelective Company contribution of 12% of recognized compensation in excess of the IRS annual limit. The Company nonelective contributions are also contributed in cash. The nonelective Company contribution becomes fully vested after three years of employment. Messrs. Pennypacker and Morgan are fully vested in the nonelective Company contribution portion of the Supplemental Excess Defined Contribution Plan, and Messrs. Larsen and Walters will fully vest on the third anniversary of their employment with the Company.
Standard Employee Benefits. In addition to the compensation and retirement plans listed above, all of the Companys U.S. employees, including the named executive officers, are eligible to receive health, dental, disability and life insurance coverage. Additionally, all employees are entitled to vacation, sick leave and other paid holidays. The commitment to provide employees with these benefits recognizes the Compensation Committees belief that the health and well-being of the Companys employees directly impacts its overall success.
Perquisites. The Compensation Committee believes that the perquisites it provides are in line with market practice and assist in recruiting and retaining key executives. The cumulative values of such perquisites that are deemed to be compensation are included in the All Other Compensation column of the Summary Compensation Table set forth below and are individually accounted for in the All Other Compensation Table set forth below.
The following perquisites are offered to the named executive officers:
The Company offers tax assistance for tax expenses incurred by the named executive officers for tax and estate planning services. The counseling and planning perquisites assist the named executive officers in managing their long-term financial viability and optimizing the value of the Companys other compensation plans that ultimately benefits the Company.
Long-term disability insurance for all of the Companys salaried, U.S. employees contains a benefit of 66 2/3% of covered compensation up to a monthly maximum of $7,000. The named executive officers are offered this same benefit with a monthly maximum of $15,000. The increased monthly maximum is more commensurate with the named executive officers salaries than our standard employee monthly maximum. The additional long-term disability insurance is designed to achieve the replacement of an equivalent level of income should an unforeseeable injury or disability occur.
The long-term care insurance offered to the named executive officers is paid for over a ten-year period, provided the executive remains employed by the Company. The benefits under this policy include medical care at home and at a variety of healthcare facilities. The daily benefit is currently $300 per day and will compound at 5% per year for the life of the policy.
The Company has a tradition of supporting charitable organizations in areas where its employees are located. To encourage the named executive officers to support charitable organizations, which best serve the educational, health, welfare, cultural, civic and social needs of the community, the Company developed an Executive Matching Gift Program. We match charitable donations made by the named executive officers, up to $2,500 annually, that are made to eligible organizations under the policy. However, there is no limit on the matching donations made by the CEO. Historically, the total matching contributions made by the Company on behalf of Mr. Pennypacker, during any calendar year, has not been more than $2,000.
In September 2010, the Company announced that it was relocating its global corporate headquarters to the greater Philadelphia, Pennsylvania area. At that time, the Company had over 6,000 employees on six continents and approximately two-thirds of its annual revenues were to customers located outside of the United States. In order to improve accessibility to global customers, its international operations, investors and a broader pool of professional human resources, management and the Board of Directors concluded that relocating the Company to a major metropolitan area was necessary for the long-term growth of the Company. In connection with relocating its global corporate headquarters, the Company provided relocation assistance to certain executive officers and other key employees, covering most of their reasonable costs and expenses incurred during the move. Reasonable costs and expenses included items such as temporary living, trips between their prior home and the relocation city, costs associated with purchasing a new home, assistance with the sale of their current residence, moving costs, a miscellaneous allowance of one months salary, a guaranteed home buyout, loss on sale protection (if necessary), tax assistance for certain relocation benefits (which tax assistance was discontinued in 2011) and other approved reasonable expenses. Upon consideration of shareholder feedback following last years Annual Meeting of Shareholders, the Compensation Committee no longer offers tax assistance in connection with the Companys relocation assistance program. The tax assistance provided in connection with relocation expenses during 2011 was committed prior to last years Annual Meeting of Shareholders.
During 2011, Messrs. Pennypacker and Walters received relocation assistance of $276,720 and $407,743, respectively, which included tax assistance to cover certain tax expenses related to the relocation benefits. For Mr. Walters, the amount shown is for two separate relocations. The first was to Quincy, Illinois and the second to the greater Philadelphia metropolitan area. With respect to both relocations, a relocation company purchased Mr. Walters home directly from him for a purchase price based on two independent appraisals used to establish fair market value. The difference between the cost of each home to Mr. Walters and the average appraisal is included in the All Other Compensation Table for 2011. In addition, we incurred a total cost of $286,694 associated with the ultimate sale of both homes by the relocation company. We do not consider the ultimate loss on sale of these homes to be compensation to Mr. Walters. Therefore, we have not included these amounts in the Summary Compensation Table or the All Other Compensation Table.
In connection with Mr. Celtrudas employment as Vice President & President, Industrial Products Group of the Company in April 2011, he received the Companys standard relocation benefits described above. However, the Company did not provide Mr. Celtruda assistance with the sale of his current residence, loss on sale protection or a guaranteed home buyout. The Compensation Committee believed the relocation benefits were consistent with market practices and were reasonable and appropriate under the circumstances to attract Mr. Celtruda to the Company. During 2011, Mr. Celtruda received relocation assistance of $94,917, which did not include tax assistance. All of Mr. Celtrudas relocation expenses were subject to a clawback provision requiring full repayment to the Company if Mr. Celtrudas employment was terminated either by his resignation or by the Company for cause within 36 months of his hire date. The clawback was waived by the Compensation Committee as part of a waiver and release agreement with Mr. Celtruda that was executed in connection with his resignation in February 2012.
The Compensation Committee has determined to offer the above-described perquisites in order to attract and retain the named executive officers by offering compensation opportunities that are competitive with the Companys competitors. The Compensation Committee believes these benefits and perquisites provide a more tangible incentive than an equivalent amount of cash compensation.
Section 162(m) of the Code limits the deductibility by public corporations of certain non-performance based compensation paid to specified executive officers. The Compensation Committee endeavors to maximize deductibility of compensation by qualifying for exemption from the Section 162(m) limitations to the extent practicable, subject, however, to maintaining competitive compensation. However, the Compensation Committee does not strictly limit executive compensation to that which is exempt from the deduction limitations of Section 162(m) and has not adopted a policy requiring all compensation to be so exempt. The Compensation Committee believes that adopting such a policy would limit its ability to maintain flexibility in compensating the named executive officers.
SUMMARY COMPENSATION TABLE
The following table presents compensation paid to or earned by each of our named executive officers for the fiscal years ended 2011, 2010 and 2009.
ALL OTHER COMPENSATION TABLE
2011 GRANTS OF PLAN-BASED AWARDS
The following table presents grants of plan-based awards granted during the fiscal year ended on December 31, 2011.
Based on his April 2011 start date, Mr. Celtruda was granted a one-third participation right in the 2010 LTCBA. The amounts listed as estimated future payouts are based on Mr. Celtrudas 2011 base salary while the actual payout would have been based on his 2012 base salary. For further discussion of these awards, see the Long-Term Incentive Compensation section of the Compensation Discussion and Analysis set forth above.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The named executive officers have been previously granted equity awards in the form of stock options, and RSUs pursuant to our Incentive Plan. The following table presents information regarding outstanding stock options, restricted stock awards and RSUs as of December 31, 2011.
2011 OPTION EXERCISES AND STOCK VESTED
The following table presents the amounts each named executive officer received upon exercise of options and the value realized upon the vesting of RSU awards in 2011. The value realized on the exercise of options and vesting of RSUs does not account for the personal tax liability incurred by the named executive officers.