Mondelez International, Inc. DEF 14A 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box:
Kraft Foods Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
KRAFT FOODS INC.
Dear Fellow Shareholder:
You are cordially invited to attend the 2008 Annual Meeting of Shareholders of Kraft Foods Inc. We will hold the Annual Meeting at 3:00 p.m. CDT on Tuesday, May 13, 2008, at the North Shore Center for the Performing Arts in Skokie, Illinois. The meeting facilities will open for admittance at 1:30 p.m. CDT.
At the Annual Meeting, shareholders will elect directors, vote on the ratification of the selection of independent auditors, and consider any other business properly presented at the meeting. We will also report on our business and provide time for your questions and comments.
You may vote via the Internet, by telephone, by mailing your properly executed proxy card or voting instruction form, or in person at the Annual Meeting. Instructions about each option are provided in the attached Proxy Statement and on the enclosed proxy card or voting instruction form.
Only shareholders of record at the close of business on March 10, 2008 are entitled to vote at the 2008 Annual Meeting or any postponements or adjournments thereof.
Please register in advance if you would like to attend the Annual Meeting. The pre-registration directions are provided in the attached Proxy Statement.
Your vote is important to us. Whether or not you plan to attend the Annual Meeting, I encourage you to vote promptly.
On behalf of the Board of Directors, thank you for your continued interest and support.
KRAFT FOODS INC.
Three Lakes Drive
Northfield, Illinois 60093
NOTICE OF 2008 ANNUAL MEETING OF SHAREHOLDERS
OF KRAFT FOODS INC.
Carol J. Ward
Vice President and Corporate Secretary
March 25, 2008
TABLE OF CONTENTS
KRAFT FOODS INC.
Three Lakes Drive
Northfield, Illinois 60093
March 25, 2008
FOR 2008 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 13, 2008
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
Kraft Foods Inc. (Kraft) will hold its 2008 Annual Meeting of Shareholders on May 13, 2008 at 3:00 p.m. CDT at the North Shore Center for the Performing Arts in Skokie, 9501 Skokie Boulevard, Skokie, Illinois 60077. The meeting facilities will open for admittance at 1:30 p.m. CDT.
The Board of Directors of Kraft (the Board) is providing you these materials in connection with the Boards solicitation of proxies to be voted at our 2008 Annual Meeting of Shareholders or at any adjournments or postponements thereof (the Annual Meeting). These materials provide information regarding the voting procedures and the matters to be voted on at the Annual Meeting. We began distributing these materials on or around April 2, 2008 to all shareholders entitled to vote at the Annual Meeting.
Copies of the Annual Report to Shareholders and/or this Proxy Statement will be sent free of charge to any shareholder who sends a written request to Wells Fargo Shareowner Services, For Kraft Foods, P.O. Box 64874, St. Paul, Minnesota 55164-0874, or calls 1-866-655-7238 (toll-free from within the U.S.) or 1-651-450-4064 (from outside the U.S.). These materials also are available on the Internet at www.kraft.com/investor.
The Board established March 10, 2008 as the record date (the Record Date) for the Annual Meeting. Shareholders owning our common stock at the close of business on the Record Date are entitled to (a) receive notice of the Annual Meeting, (b) attend the Annual Meeting and (c) vote on all matters that properly come before the Annual Meeting.
At the close of business on the Record Date, 1,522,456,026 shares of our common stock were outstanding and entitled to vote. Each share is entitled to one vote on each matter to be voted upon at the meeting.
Two proposals are scheduled for vote at the Annual Meeting:
ITEM 1. Election of Directors: THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ALL NOMINEES TO THE BOARD, EACH FOR A TERM EXPIRING AT THE 2009 ANNUAL MEETING OF SHAREHOLDERS OR UNTIL HIS OR HER SUCCESSOR HAS BEEN DULY CHOSEN AND QUALIFIED:
You can find information about the Boards nominees, including each of their business backgrounds, under the heading Item 1: Election of Directors in this Proxy Statement.
ITEM 2. Ratification of the Selection of Independent Auditors: THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO RATIFY THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS KRAFTS INDEPENDENT AUDITORS FOR THE YEAR 2008.
You can find information about our relationship with PricewaterhouseCoopers LLP under the headings Audit Committee Matters and Item 2: Ratification of the Selection of Independent Auditors in this Proxy Statement.
Management does not know of any business, other than that described in this Proxy Statement, that may be presented for action at the Annual Meeting. If any other matters properly come before the meeting, the persons named as proxies will vote on them in accordance with their best judgment.
A quorum of shareholders is necessary to validly hold the Annual Meeting. A quorum will be present if at least a majority of Krafts outstanding shares on the Record Date are represented at the Annual Meeting, either in person or by proxy. Your shares will be counted for purposes of determining a quorum if you vote via the Internet, by telephone or by submitting a properly executed proxy card or voting instruction form by mail, or if you vote in person at the Annual Meeting. Abstentions and broker non-votes will be counted for determining whether a quorum is present for the Annual Meeting.
You may vote FOR all nominees, WITHHOLD your vote from all nominees, vote FOR specific nominees, or WITHHOLD your vote from specific nominees.
Directors will be elected by a plurality of the votes cast FOR, which means that the 12 director nominees with the most FOR votes will be elected. WITHHOLD votes will not affect the outcome of the election, but will be counted as present for the purpose of determining a quorum for the Annual Meeting. Broker non-votes are not considered as FOR votes or WITHHOLD votes for the nominees and will not have an effect on the outcome of the voting for directors.
Under our majority voting policy in our Corporate Governance Guidelines, in an uncontested election, any nominee for director who receives a greater number of WITHHOLD votes than FOR votes must tender his or her resignation for consideration by the Nominating and Governance Committee of the Board. For more information about this policy, see our Corporate Governance Guidelines provided under the heading Corporate Governance in this Proxy Statement.
You may vote FOR, AGAINST or ABSTAIN on the ratification of the selection of PricewaterhouseCoopers LLP as our independent auditors.
The selection of independent auditors will be ratified if the votes cast FOR exceed the total of the votes cast AGAINST. Abstentions and broker non-votes are not considered as voting FOR or AGAINST this proposal and will have no effect on the outcome of the proposal to ratify the selection of PricewaterhouseCoopers LLP.
Other than the proposals described in this Proxy Statement, we do not expect any other matters to be presented for a vote at the Annual Meeting. The Chairman of the Annual Meeting may refuse to allow the presentation of a proposal or a nomination for the Board at the Annual Meeting if it is not properly submitted. The requirements for properly submitting proposals and nominations at the 2008 Annual Meeting were described in our 2007 Proxy Statement. They are similar to those described under the heading 2009 Annual Meeting of Shareholders in this Proxy Statement.
If your shares are owned directly in your name with our transfer agent, Wells Fargo Bank, N.A., you are considered a registered shareholder with respect to those shares.
If your shares are held in a brokerage account or by a bank, you hold the shares in street name.
If you are a registered shareholder, you may vote:
If you hold your shares in street name, you may vote:
Yes, you are entitled to vote. For voting purposes, your proxy card includes all shares allocated to your Kraft Stock Fund account(s), shares you may hold at our transfer agent as a registered shareholder as well as shares of restricted stock you may hold. When you submit your proxy, you are directing the plan(s) trustee(s) how to vote the shares allocated to your Kraft Stock Fund account(s) in addition to directing the voting of the other shares included on your proxy card.
In order to direct the plan(s) trustee(s) how to vote the shares held in your Kraft Stock Fund account(s), you must vote the shares by 11:59 p.m. CDT on May 11, 2008. If your voting instructions are not received by that time, the trustee(s) will vote the shares allocated to your account(s) in the same proportion as the respective plan shares for which voting instructions have been received, unless contrary to the Employee Retirement Income Security Act of 1974 (ERISA). Please follow the instructions for registered shareholders under Question 12 to cast your vote. Although you may attend the Annual Meeting, you may not vote shares held in your Kraft Stock Fund account(s) at the meeting.
Yes. If you hold shares of restricted stock, you should follow the instructions for registered shareholders under Question 12 to cast your vote. If you do not vote these shares, they will not be voted. For voting purposes, your proxy card includes these shares of restricted stock, the shares you may hold in a Kraft Stock Fund account(s), as well as shares you may hold at our transfer agent as a registered shareholder.
If you hold shares in the Direct Purchase Plan, you should follow the instructions for registered shareholders under Question 12 to cast your vote. When you vote those shares, you will be voting all the shares you hold at our transfer agent. If you do not vote your shares, they will not be voted.
If you are a registered shareholder and would like to change your vote after submitting your proxy and prior to the Annual Meeting, you may do so by (a) signing and submitting another proxy with a later date, (b) voting again by telephone or the Internet, or (c) voting at the Annual Meeting. Alternatively, if you would like to revoke your proxy, you may provide a written statement of your intention to revoke your proxy to our Corporate Secretary at Kraft Foods Inc., Three Lakes Drive, Northfield, Illinois 60093.
If your shares are held in street name, contact your bank or broker for specific instructions on how to change or revoke your vote. Please refer to Question 12 for additional details about voting.
The persons named on the proxy card must vote your shares as you have instructed. If you do not give a specific instruction on either of the proposals scheduled for vote at the Annual Meeting but you have authorized our proxies generally to vote, they will vote in accordance with the Boards recommendation on that matter. This authorization would exist, for example, if you merely sign and return your proxy card.
Yes. The Internet and telephone voting procedures were designed to authenticate shareholders identities and to confirm that their instructions have been properly recorded.
If you are a registered shareholder or if you hold restricted stock, your shares will not be voted unless you vote in accordance with the instructions in Question 12.
If you hold your shares in street name, under New York Stock Exchange (NYSE) rules, your brokerage firm may vote on your behalf on routine matters if you do not furnish voting instructions. For the Annual Meeting, the election of directors and the ratification of the selection of independent auditors are considered routine matters.
In addition, if you are a current or former employee and had investments in the Kraft Stock Fund(s) of the Kraft Foods Inc. Thrift/TIP 401(k) Plan(s) and/or the Kraft Foods Canada OPP/ESP on the Record Date, you can direct the plan(s) trustee(s) how to vote the shares allocated to your account(s). If your instructions are not received by 11:59 p.m. CDT on May 11, 2008, the trustee(s) will vote the shares allocated to your account(s) in the same proportion as the respective plan shares for which instructions have been received. Please refer to Question 13 for additional details about voting shares held in the Kraft Stock Fund(s).
Kraft bears the cost of soliciting your vote. In addition to mailing these proxy materials, Krafts directors, officers or employees may solicit proxies or votes in person, by telephone or by electronic communication. They will not receive any additional compensation for these solicitation activities.
Kraft will enlist the help of banks and brokerage firms in soliciting proxies from their customers and reimburse the banks and brokerage firms for related out-of-pocket expenses.
Kraft retained D.F. King & Co., Inc. to aid in soliciting votes for a total fee of $20,000 plus reasonable expenses.
Unless you have advised otherwise, if you and other residents at your mailing address share the same last name and own shares of our stock in an account at the same brokerage firm or bank, your proxy materials have been combined for mailing purposes. This method of delivery is known as householding. Householding reduces the number of mailings you receive, as well as our printing and postage costs. Shareholders who participate in householding will continue to receive separate voting instruction forms. If you would like to opt out of this practice or if you would like to participate in householding, please contact your broker or bank. If you are a registered shareholder, your proxy materials have not been combined for mailing purposes. In addition, copies of the Annual Report to Shareholders and/or this Proxy Statement will be sent free of charge to any shareholder who sends a written request to Wells Fargo Shareowner Services, For Kraft Foods, P.O. Box 64874, St. Paul, Minnesota 55164-0874, or calls 1-866-655-7238 (toll-free from within the U.S.) and 1-651-450-4064 (from outside the U.S.).
It means that you have multiple accounts holding our common stock that have not been combined for voting purposes. Please vote all of your shares. We recommend that you consolidate as many accounts as possible under one name and address by contacting our transfer agent, Wells Fargo Bank, N.A., or your broker or bank, as appropriate.
Your votes will not be disclosed to our directors, officers or employees, except (a) as necessary to meet applicable legal requirements and to assert or defend claims for or against us, (b) in the case of a contested proxy solicitation, (c) if you provide a comment with your proxy or otherwise communicate your vote to us, or (d) as necessary to allow the independent inspector of election to certify the results.
As the appointed independent tabulator, Wells Fargo Bank, N.A., will receive and tabulate the proxies. IVS Associates will act as the independent inspector of election and will certify the results.
Kraft will announce preliminary voting results at the Annual Meeting. Final voting results will be included in our second quarter Form 10-Q to be filed with the Securities and Exchange Commission (SEC). The Form 10-Q will be available at www.kraft.com/investor on or before August 11, 2008.
If you would like to attend the Annual Meeting, please pre-register by 11:59 p.m. CDT on May 9, 2008. Due to space limitations, you may bring only one guest. If you wish to bring a guest, you must indicate that when you pre-register. You and your guest, if any, must present valid government-issued photographic identification, such as a drivers license, to be admitted into the Annual Meeting.
If you are a registered shareholder, please indicate that you intend to attend the Annual Meeting by:
If you hold your shares in street name, please notify us in writing that you will attend and whether you intend to bring a guest. In this written notification, please include a proof of ownership of our common stock (such as a letter from your bank or broker, a photocopy of your current account statement, or a copy of your voting instruction form); please also provide a way for us to reach you if there is a problem with your notification. Send your notification by mail, fax or e-mail to:
For your comfort, security and safety, we will not allow any large bags, briefcases, packages or backpacks into the Annual Meeting site. All bags will be subject to search. We also will not allow electronic devices into the Annual Meeting. These include, but are not limited to, cellular and digital phones, cameras, audio and video recorders, laptops and pagers. We will not allow pets, other than assistance animals for the disabled.
A map and directions to the North Shore Center for the Performing Arts in Skokie are provided at the end of this Proxy Statement.
Yes. Shareholders may ask questions and make remarks related to the matters being voted on as they are presented. The Chairman will entertain shareholders questions and comments of a more general nature following the voting.
FOR THE ANNUAL MEETING TO BE HELD ON MAY 13, 2008
The Kraft Foods Inc. 2008 Notice of Annual Meeting and Proxy Statement and 2007 Annual Report to Shareholders are available at www.kraft.com/investor.
Future Materials Election
New rules adopted by the SEC allow companies to send shareholders a Notice of Internet Availability of Proxy Materials (the Notice), rather than mail them full sets of proxy materials. This year, we chose to mail full packages of materials to shareholders, except those who have already elected electronic delivery. However, in the future we may take advantage of this new distribution option. It is environmentally friendly and saves printing and postage costs. If, in the future, we choose to send such Notices, they would contain instructions on how shareholders can access our Notice of Annual Meeting and Proxy Statement, Annual Report to Shareholders, and voting Web site via the Internet. It would also contain instructions on how shareholders could request to receive their materials electronically or in printed form on a one-time or ongoing basis. Accordingly, we encourage you to consider how you would prefer to receive your Kraft proxy materials in future years and to make your election at this time. Most shareholders can elect their preferred delivery method, although the means of making that election vary depending on how you hold your stock.
To elect electronic delivery of proxy materials in the future:
If you have not already elected to receive your proxy materials electronically and would like to do so:
If you choose to receive future proxy materials electronically, as a Kraft shareholder, you will be sent an e-mail message next year with instructions and a link to those materials and the Internet voting site. Your election will remain in effect until you terminate it.
To elect to have printed proxy materials mailed to you in the future:
If you prefer to receive printed materials, we will send them to you if you:
If you choose to receive future proxy materials via mail, as a Kraft shareholder, you will be sent a full set of materials. Your election will remain in effect until you terminate it.
The Board operates under a set of written Corporate Governance Guidelines (the Guidelines) that address our corporate governance philosophy, practices and policies. The Guidelines are included here:
the exercise of sound judgment, using its diversity of experience. In determining whether to recommend a director for re-nomination, the Nominating and Governance Committee also considers the directors attendance at, participation in, and contributions to Board and committee activities.
5. Limitation on Management Directors. The Board generally believes that the Chairman and Chief Executive Officer should be the only member of management to serve as a director. From time to time, the Board may determine that it is appropriate to nominate additional members of management to the Board.
6. Chairman of the Board. The Board generally believes that the Chief Executive Officer should also serve as the Chairman of the Board.
7. Lead Director. The Board selects a Lead Director from among the independent directors. The Lead Director has the following specific duties and responsibilities. In consultation with the independent directors, the Lead Director:
8. Change in Primary Employment. An independent director who retires from or changes his or her primary employment tenders a resignation to the Nominating and Governance Committee. Then, the Nominating and Governance Committee evaluates the appropriateness of continued Board membership under the new circumstances and makes a recommendation to the Board as to whether to accept the resignation.
9. Conflicts of Interest. If a director develops an actual, apparent or potential conflict of interest, the director reports the matter promptly to the Nominating and Governance Committee for evaluation and appropriate resolution. If a director has a direct or indirect personal interest in a matter before the Board, the director discloses the interest to the Board and recuses himself or herself from participation in the deliberations and decisions on the matter. Approval of the matter requires the affirmative vote of a majority of the directors or the appropriate committee members who have no direct or indirect personal interest in the matter.
10. No Specific Limitations on Other Board Service. The Board does not believe that it should prohibit directors from serving on other organizations boards and committees. The Board expects each director to ensure that other commitments do not interfere with his or her duties as a Kraft director. Directors inform the Chairman and the Chair of the Nominating and Governance Committee upon becoming a director or member of the audit committee of any other public company. The Nominating and Governance Committee and the Board will take into account the nature and extent of the directors other commitments when determining whether it is appropriate to nominate that individual for re-election. Service on boards and committees of other organizations should be consistent with Krafts conflict of interest policies. If a member of Krafts Audit Committee serves on more than three public company audit committees, the Board determines whether such simultaneous service impairs the directors ability to serve effectively on Krafts Audit Committee.
11. No Limitations on Terms. The Board does not believe in term limits for directors because they would deprive the Board of the service of directors who have developed, through valuable experience over time, an increasing insight into Kraft and its operations.
12. Retirement Age for Directors. Generally, the Board will not re-nominate an independent director after he or she reaches age 75. From time to time, the Board may do so if it believes that nomination is in the shareholders best interests. An employee director must resign from the Board upon ceasing to be a Kraft officer, and in any event, must resign from the Board upon reaching age 65.
13. Director Orientation and Continuing Education. Kraft provides an orientation process for new directors, including a review of Kraft background materials, a briefing on key issues facing Kraft and meetings with senior management. The Board and its committees receive regular presentations on Krafts strategic and business plans, financial performance, legal and regulatory matters, Code of Conduct and compliance programs, as well as other matters. Periodically, the Board meets with senior management and visits Krafts operating subsidiaries facilities. Directors are encouraged to take advantage of continuing education opportunities that enhance their ability to fulfill their responsibilities. Kraft reimburses directors for reasonable costs incurred in connection with such continuing education.
14. Director Communications with Third Parties. The Board believes that management speaks for Kraft and should communicate about Kraft with shareholders, analysts, the press, media and other constituencies. From time to time, an individual director, usually the Lead Director, may meet with or communicate with various Kraft constituencies, doing so with managements knowledge and, absent unusual circumstances, only at managements request.
15. Shareholder and Interested Party Communications with the Board. Shareholders and other interested parties may write to independent directors at Board of Directors, Kraft Foods Inc., Three Lakes Drive, Northfield, Illinois 60093 or via e-mail at Kraft-Board@kraft.com. The independent directors established procedures for handling such communications and directed the Corporate Secretary to act as their agent in processing such communications. The Corporate Secretary forwards communications relating to matters within the Boards purview to the independent directors, communications relating to matters within a Board committees area of responsibility to the chair of the appropriate committee, and communications relating to ordinary business matters, such as suggestions, inquiries and consumer complaints, to the appropriate Kraft executive. The Corporate Secretary does not forward solicitations, junk mail and obviously frivolous or inappropriate communications, but makes them available to any independent director who requests them.
1. Frequency of Meetings. The Board typically meets seven times a year. Special meetings are held as needed. At the Boards annual organizational meeting, the Board appoints Board committee members and committee chairs as well as Kraft officers.
2. Strategic Plan Review. The Board devotes several days each year to reviewing Krafts strategic plan.
3. Attendance at Meetings. Directors are expected to prepare themselves for and to attend all Board meetings, the Annual Meeting of Shareholders, and all meetings of the committees on which they serve. It is understood that, on occasion, a director may be unable to attend a meeting.
4. Information Flow and Distribution of Meeting Materials. To facilitate active and informed discussion at Board and committee meetings, directors receive background materials in advance of meetings. Through these materials and presentations at meetings, the Board and its committees keep abreast of Krafts performance and businesses, plans (including acquisitions, divestitures and capital expenditures), various issues (including regulatory updates), and new developments. In addition to meeting-related materials, directors receive other regular and special reports throughout the year.
5. Selection of Board Agenda Items. For planning purposes, the Corporate Secretary prepares an annual Board planning calendar covering recurring and special agenda items. In determining the agenda for each Board meeting, the Lead Director and Chairman also take into account input from other directors and senior management.
6. Access to Management and Independent Advisors. Board members have unrestricted access to management. The Board and each Board committee have the authority and funding to retain and utilize independent legal, accounting and other experts and consultants as they may deem appropriate.
7. Executive Sessions. The independent directors meet regularly without any members of management being present. At least once each year, directors qualifying under the NYSEs independence standards meet in executive session. The Lead Director presides over the executive sessions of the independent directors.
1. Committees and Responsibilities. Pursuant to Krafts By-Laws, the Board may establish committees from time to time to assist it in the performance of its responsibilities: There are currently four Board committees:
The committee monitors Krafts financial reporting processes and systems of internal accounting control, the independence and the performance of the independent auditors, and the performance of the internal auditors.
The committee oversees Krafts executive compensation, including determining the compensation of the Chief Executive Officer, producing an annual Compensation Committee report on executive compensation to be included in Krafts Proxy Statement in accordance with applicable rules and regulations of the Securities and Exchange Commission (SEC), and reviewing the succession plans for the Chief Executive Officer and other senior executives.
Nominating and Governance Committee:
The committee is responsible for identifying and vetting individuals qualified to become Board members, recommending a slate of nominees for election at each Annual Meeting of Shareholders, making recommendations to the Board concerning the appropriate size, function, needs and composition of the Board and its committees, developing and recommending to the Board Krafts corporate governance principles and overseeing the evaluation of the Board and its committees and management.
Public Affairs Committee:
The committee oversees Krafts attention to public policy and social trends affecting Kraft; social accountability; business practices of special interest to policy-makers and the public at large; Krafts global communication, media relations and community relations; emergency preparedness and business continuity; Krafts Political Action Committee; the impact of business operations and business practices on communities where Kraft does business; Krafts corporate citizenship programs and activities, including charitable contributions; and shareholder proposals related to public issues.
The committee charters are available at www.kraft.com.
2. Membership and Chairs of Committees. Based upon the Nominating and Governance Committees recommendation, the Board appoints the committee members and chairs. Audit Committee, Compensation Committee, Nominating and Governance Committee and Public Affairs Committee members shall meet NYSEs independence requirements as well as the additional requirements for committee membership established by NYSE and any other applicable laws, rules and regulations and the applicable committee charter. At least one Audit Committee member shall be an audit committee financial expert as defined in the SECs regulations. Generally, the Board does not favor mandatory rotation of committee assignments or chairs, believing that experience and continuity are more important. However, from time to time, as the Board composition changes, the Nominating and Governance Committee may recommend rotation of committee and committee chair assignments.
3. Committee Agendas, Meetings, and Reports to the Board. Each committee chair, in consultation with the other committee members and management, sets meeting agendas and determines the frequency and length of committee meetings. Each committee reports its actions and recommendations to the Board. All directors receive copies of all committee minutes.
1. Annual CEO Evaluation and CEO Compensation. The Compensation Committee establishes annual and long-term financial and strategic goals and objectives for the Chairman and Chief Executive Officer; annually evaluates the Chairman and Chief Executive Officers performance against these goals and objectives; and based on this evaluation,
Code of Business Conduct and Ethics for Directors and Code of Conduct for Compliance and Integrity
Kraft has a Code of Business Conduct and Ethics for Directors (the Ethics Code) and a Code of Conduct for Compliance and Integrity that applies to all Kraft employees. The Ethics Code focuses on areas of ethical risk, provides guidance to help directors recognize and handle ethical issues, provides mechanisms to report unethical conduct, and fosters a culture of honesty and integrity. On our Web site, we file certain amendments to our codes of conduct and disclose any waiver granted to our principal executive officer, principal financial officer, principal accounting officer or controller under our codes of conduct.
Corporate Governance Materials Available at www.kraft.com/investor and from our Corporate Secretary
Shareholders and others can access our corporate governance materials, including the Articles of Incorporation, Amended and Restated By-Laws (our By-Laws), Board committee charters, the Ethics Code and employee code of conduct and other related corporate governance related materials at our Web site at www.kraft.com/investor. Copies of these materials are also available free of charge to any shareholder who sends a written request to our Corporate Secretary at Kraft Foods Inc., Three Lakes Drive, Northfield, Illinois 60093.
The information on our Web site is not, and shall not be deemed to be, a part of this Proxy Statement or incorporated into any other Kraft filings with the SEC.
The Guidelines require that at least 75% of the Board meet the NYSEs listing standards independence requirements. A director is considered independent if the Board makes an affirmative determination after reviewing all relevant information that a director has no material relationship with Kraft. To assist in this determination, the Board has adopted categorical standards of director independence, which conform to the independence criteria specified by the NYSE. These standards are listed on Annex A of the Guidelines, attached to this Proxy Statement as Exhibit A.
After considering these categorical standards and the NYSEs listing standards, the Board determined that the following directors are independent: Ajay Banga, Jan Bennink, Myra M. Hart, Lois D. Juliber, Mark D. Ketchum, Richard A. Lerner, M.D., John C. Pope, Fredric G. Reynolds, Mary L. Schapiro, Deborah C. Wright and Frank G. Zarb. Irene B. Rosenfeld, due to her employment with Kraft, is not considered an independent director.
In making its determination, the Board considered that Mr. Banga is Citigroup Inc.s Chairman and Chief Executive Officer, Global Consumer GroupInternational. We purchase banking services from Citigroup in the ordinary course of business. The Board also considered Mr. Reynolds position as Executive Vice President and Chief Financial Officer of CBS Corporation, a television broadcast company from which we purchase advertising.
Executive Sessions of the Board
The Lead Director, Mary L. Schapiro, presides over executive sessions of the independent directors. These sessions are held at each regular Board meeting. Ms. Schapiro also presides over any Board meeting at which the Chairman is not present.
We expect directors to attend all Board meetings, the Annual Meeting and meetings of the committees on which they serve, but we understand that occasionally a director may be unable to attend a meeting. The Board held 18 meetings in 2007 and acted by unanimous consent once. All nominees who were serving as directors at the time of the 2007 Annual Meeting of Shareholders attended that meeting, except for Jan Bennink, who could not attend because of a previous business commitment. All nominees who served as directors in 2007 attended at least 88% of the aggregate number of meetings of the Board and all committees on which they served.
Communications with the Board
Shareholders and other interested parties can communicate with the Lead Director, the Board or independent directors, individually or as a group, by writing to them in care of our Corporate Secretary at Kraft Foods Inc., Three Lakes Drive, Northfield, Illinois 60093 or by sending an e-mail to Kraft-Board@kraft.com. The Corporate Secretary forwards communications relating to matters within the Boards purview to the independent directors; communications relating to matters within a Board committees area of responsibility to the chair of the appropriate committee; and communications relating to
ordinary business matters, such as suggestions, inquiries and consumer complaints, to the appropriate Kraft executive. The Corporate Secretary does not forward solicitations, junk mail and obviously frivolous or inappropriate communications, but makes them available to any independent director who requests them.
Our Board designates the members and chairs of committees based on the Nominating and Governance Committees recommendation. During 2007, the Board had three standing committees: Audit, Compensation, and Nominating and Governance. Committee membership was:
2007 Committee Membership
In 2007, the Board reassessed its committee structure and decided to establish the Public Affairs Committee. Effective February 2008, the Board has four standing committees: Audit, Compensation, Nominating and Governance, and Public Affairs. Committee membership effective February 2008 is:
Committee Membership Effective February 2008
The Board has adopted a written charter for each committee. The charters define each committees roles and responsibilities. The charters are attached to this Proxy Statement as Exhibits B, C, D and E and are also available at www.kraft.com/investor. We will provide copies of these charters free of charge to any shareholder who sends a written request to the Corporate Secretary at Kraft Foods Inc., Three Lakes Drive, Northfield, Illinois 60093.
PUBLIC AFFAIRS COMMITTEE MATTERS
The Public Affairs Committee was established effective February 2008. The Board has determined that all of the committee members are independent within the meaning of the NYSEs listing standards. The committee is responsible for discharging the Boards responsibilities relating to public policy issues. Its specific responsibilities are set forth in its charter, which is attached to this Proxy Statement as Exhibit B.
NOMINATING AND GOVERNANCE COMMITTEE MATTERS
The Board has determined that all of the Nominating and Governance Committee members are independent within the meaning of the NYSEs listing standards. The committees responsibilities are set forth in its charter, which is attached to this Proxy Statement as Exhibit C.
Process for Nominating Directors
The Nominating and Governance Committee is responsible for identifying and evaluating nominees for director and recommending to the Board nominees for election at the Annual Meeting of Shareholders. The committee relies on nominee suggestions from the directors, shareholders, management and others. From time to time, the committee retains executive search and board advisory consulting firms to assist in identifying and evaluating potential nominees. During 2007, the committee retained London-based MWM Consulting and New York-based Heidrick & Struggles for this purpose.
In evaluating potential nominees for Board membership, the committee may consider many factors, including whether the individual meets the Boards requirements for independence, the individuals understanding of our global businesses and markets, the individuals professional expertise and educational background, and other factors that promote diversity of views and experience. The committee evaluates each individual in the context of the Board as a whole, with the objective of recommending for nomination a group of directors that can best perpetuate our success and represent shareholder interests. In determining whether to recommend a director for re-election, the committee also considers the directors past attendance at meetings and participation in and contributions to Board and committee activities. In evaluating potential nominees, the committee may identify certain skills or attributes (e.g., financial experience, global business experience) as being particularly desirable to help meet specific Board needs.
The committee will consider any candidate suggested for election to the Board who is properly presented by a shareholder. The committee evaluates candidates suggested by shareholders and then will make a recommendation to the Board using the same criteria described above. After the Boards full consideration of a shareholders suggestion for election to the Board, the Corporate Secretary will notify the shareholder of the Boards conclusion.
ITEM 1. ELECTION OF DIRECTORS
The Board currently consists of 12 directors, each subject to annual election. Shareholders elected all of the current directors at the 2007 Annual Meeting, except for Myra M. Hart, Lois D. Juliber, Fredric G. Reynolds and Frank G. Zarb, whom the Board appointed in November and December of 2007.
The Nominating and Governance Committee recommended to the Board, and the Board approved, the nomination of these 12 director nominees, each for a term ending at the 2009 Annual Meeting of Shareholders or until his or her successor has been duly chosen and qualified:
If any of the nominees should be unavailable to serve due to an unanticipated event, the Board may designate another person as a substitute nominee or amend our By-Laws to reduce the number of directors. If the Board substitutes another nominee, your proxy will be voted for the substitute nominee.
On November 7, 2007, we entered into an agreement with one of our shareholders, Trian Fund Management, L.P., certain funds managed by it and certain of its affiliates (collectively, Trian). In the agreement, we confirmed the Boards intention to appoint Ms. Juliber and Mr. Zarb as directors, and to include each of them as nominees at our 2008 and 2009 Annual Meetings. Trian confirmed, among other matters, that they would support the Boards full list of nominees at our 2008 and 2009 Annual Meetings, and agreed to a standstill agreement with us. A copy of the agreement with Trian was included in our Current Report on Form 8-K that we filed with the SEC on November 7, 2007.
Heidrick & Struggles, a third-party executive search firm, suggested Ms. Juliber and Mr. Reynolds, Trian suggested Mr. Zarb, and Ms. Rosenfeld suggested Dr. Hart as potential nominees to the Board. Ms. Schapiro recommended the appointment of each of these four individuals to the Board.
None of the nominees is related to another or to any executive officer of Kraft or its subsidiaries by blood, marriage or adoption.
The following is information regarding each nominee as of March 25, 2008:
The Board recommends a vote FOR the election of each of the nominees.
AUDIT COMMITTEE MATTERS
The Board established the separately standing Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The Board has determined that all members of the Audit Committee are independent within the meaning of the NYSEs listing standards and Rule 10A-3 of the Exchange Act. The Board has also determined that all committee members are financially literate within the meaning of the NYSEs listing standards and that John C. Pope and Fredric G. Reynolds are audit committee financial experts within the meaning of SEC regulations. Because Mr. Pope serves on the audit committees of more than three public companies, the Board reviewed his meeting attendance record and other relevant information and determined that Mr. Popes simultaneous service on these audit committees does not impair his ability to serve effectively on our Audit Committee. No committee member received any payments in 2007 from us other than compensation received as a director.
Under its charter, which is attached to this Proxy Statement as Exhibit D, the Audit Committee is responsible for overseeing our accounting and financial reporting processes and audits of our financial statements. Among other duties, the committee is directly responsible for the appointment and oversight of our principal independent auditors.
The committee has established procedures for the receipt, retention and treatment, on a confidential basis, of complaints received by Kraft. We encourage employees and those outside Kraft to report concerns about our accounting controls, auditing matters or anything else that appears to involve financial or other wrongdoing. To report such matters, you should e-mail us at Kraft-FinancialIntegrity@Kraft.com.
Audit Committee Report for the Year Ended December 31, 2007
Management has primary responsibility for the financial statements and the reporting process, including the systems of internal control over financial reporting. The Audit Committee monitors our financial reporting processes and systems of internal control over financial reporting, the independence and performance of the independent auditors, and the performance of the internal auditors.
Management represented to the Audit Committee that Krafts consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The Audit Committee reviewed and discussed the consolidated financial statements with management and the independent auditors. Management also represented that they assessed the effectiveness of Krafts internal control over financial reporting as of December 31, 2007 and determined that, as of that date, Kraft maintained effective internal control over financial reporting. The Audit Committee reviewed and discussed with management and the independent auditors this assessment of internal control over financial reporting.
The Audit Committee also discussed with the independent auditors both their evaluation of the accounting principles, practices and judgments applied by management, and any items required to be communicated to it by the independent auditors in accordance with regulations promulgated by the SEC and the Public Company Accounting Oversight Board and standards established by the American Institute of Certified Public Accountants and the Independence Standards Board.
The Audit Committee received from the independent auditors a letter describing any relationships with Kraft that may bear on their independence and discussed with the independent auditors the auditors independence from Kraft and its management. The Audit Committee reviewed and approved the audit fees of the independent auditors. The Audit Committee also reviewed non-audit services and fees to assure compliance with regulations prohibiting the independent auditors from performing specified services that might impair their independence, as well as compliance with Krafts and the Audit Committees policies.
The Audit Committee discussed with the internal auditors and independent auditors the overall scope and plans for their respective audits for the year 2008. The Audit Committee met and will meet with the internal auditors and with the independent auditors, separately, with and without management present, to discuss the financial reporting processes and internal accounting controls. The Audit Committee reviewed significant audit findings prepared by the independent auditors and those prepared by the internal auditors, together with managements responses.
Based upon the reports and discussions described in this report and without other independent verification, the Audit Committee recommended to the Board, and the Board approved, that the audited consolidated financial statements be included in Krafts Annual Report on Form 10-K/A for the year ended December 31, 2007, which was filed with the SEC on February 26, 2008.
John C. Pope, Chair
Fredric G. Reynolds
Mary L. Schapiro
Frank G. Zarb
The information contained in the report above shall not be deemed to be soliciting material or filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that Kraft specifically incorporates it by reference in such filing.
The Audit Committees policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other permissible services. Pre-approval is detailed as to the particular service or category of service and is subject to a specific engagement authorization by management within the pre-approved category spending limits. The Audit Committee requires the independent auditors and management to report on the actual fees charged for each category of service at committee meetings throughout the year.
During the year, circumstances may arise when it may become necessary for Kraft to engage the independent auditors for additional services not contemplated in the original pre-approval. In those instances, specific pre-approval of the Audit Committee is required before engaging the independent auditors. The committee delegated pre-approval authority to its chair for those instances when pre-approval is needed prior to a scheduled committee meeting. The chair of the committee must report on such pre-approval decisions at the committees next regular meeting.
The Audit Committee pre-approved all audit and non-audit services provided by the independent auditors during 2007.
Independent Auditors Fees
Aggregate fees for professional services rendered by our independent auditors, PricewaterhouseCoopers LLP, for 2006 and 2007 were:
ITEM 2. RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS
The Audit Committee is responsible for the selection, retention, termination and oversight of our independent auditors. The Audit Committee selected PricewaterhouseCoopers LLP, a registered public accounting firm, as our independent auditors for 2008. PricewaterhouseCoopers LLP has been our independent auditor since 2001. The Audit Committee and the Board are requesting, as a matter of policy, that shareholders ratify the selection of PricewaterhouseCoopers LLP as our independent auditors.
The Board and the Audit Committee are not required to take any action as a result of the outcome of the vote on this proposal. However, if the shareholders do not ratify the selection, the Audit Committee may investigate the reasons for the shareholders rejection and may consider whether to retain PricewaterhouseCoopers LLP or appoint another auditor. Furthermore, even if the selection is ratified, the Audit Committee may direct the appointment of a different independent auditor at any time during 2008 if, in its discretion, it determines that such a change would be in Krafts and its shareholders best interests.
We expect that representatives of PricewaterhouseCoopers LLP will be present at the Annual Meeting and that they will have an opportunity to respond to appropriate questions from shareholders.
The Board recommends a vote FOR the ratification of the selection of PricewaterhouseCoopers LLP as Krafts independent auditors.
OTHER MATTERS THAT MAY BE PRESENTED AT THE ANNUAL MEETING
Management does not know of any business, other than that described in this Proxy Statement, which may be presented for action at the Annual Meeting. If any other matters properly come before the meeting, the persons named as proxies will vote on them in accordance with their best judgment.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists entirely of independent directors who the Board has determined to be independent within the meaning of the NYSEs listing standards. None of the Compensation Committees members:
The Compensation Committees responsibilities are set forth in its charter, which is attached to this Proxy Statement as
Exhibit E. They include, among other duties, the responsibility to:
Processes and Procedures
The Compensation Discussion and Analysis, included in this Proxy Statement, addresses the Compensation Committees primary processes for establishing and overseeing executive compensation. Additional processes and procedures include:
Independence of Compensation Consultant to the Compensation Committee
Hewitt has served as the Compensation Committees independent executive compensation consultant since 2006. During 2007, Hewitt provided the committee advice and services which included, for example, providing competitive market compensation data for executive positions, providing best practices in developing our change-in-control plan, designing our annual and long-term incentive plans, and participating in meetings of the committee at which compensation was an agenda item. For the year ended December 31, 2007, Hewitt billed Kraft $0.5 million for advice and services to the committee.
The committee believes that its consultant should be able to render advice to the committee independent of managements influence. Therefore, the committee has taken numerous steps to satisfy this objective. At the outset, the committee retained Hewitt independent of management. At least annually, the committee reviews the types of advice and services provided by Hewitt and the fees charged for those services. The Hewitt consultants report directly to the committee on all executive compensation matters; meet separately with the committee outside the presence of management at each meeting; and speak separately with the committee chair and other committee members between meetings, as necessary or desired. Interactions between the Hewitt consultants and management are limited to those which Hewitt needs to provide the committee with relevant information and appropriate recommendations. Hewitt has taken its own steps to separate the executive compensation consulting services provided to the committee from other services provided to Kraft. The team of Hewitt executive compensation professionals working with the lead Hewitt consultant does not work on other consulting assignments for Kraft or any of its divisions.
With the committees knowledge and subject to annual or more frequent reviews, Hewitt also provides a range of consulting services to Kraft and its divisions. Those services include consulting and outsourcing services for Kraft retirement plans, consulting services on Kraft talent and organizational design, and employee communications. For these services, Hewitt billed Kraft $4.1 million for the year ended December 31, 2007.
In 2008, the Compensation Committee agreed to adopt an approach for Krafts use of Hewitt for all non-executive compensation related services in the future. The approach will be generally consistent with the Audit Committees management of Krafts relationship with PricewaterhouseCoopers LLP, Krafts independent auditors. The approach will generally include pre-notification to the Compensation Committee of managements use of Hewitts services.
Compensation of Directors
Directors who are full-time Kraft employees receive no compensation for their services as a director. Directors who were full- time employees of Altria Group, Inc. (Altria) prior to the March 30, 2007 spin-off of Kraft Foods Inc. received no compensation for their service as a director. Therefore, Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, all of whom were Kraft employee directors before the spin-off, received no additional compensation for their service as directors. In connection with the spin-off, Messrs. Devitre and Wall resigned from the Board effective March 30, 2007. After the spin-off, at the request of the Board, Mr. Camilleri continued to serve as a director until December 7, 2007, but declined all compensation.
The table below summarizes the cash and equity compensation elements in place during 2007 for our non-employee directors. We modified our director compensation program effective April 1, 2007.
The program changes were based on the results from the annual review of compensation levels of Krafts non-employee directors compared to that of non-employee directors at companies in Krafts Compensation Survey Group (discussed in more detail under the heading Compensation Discussion and Analysis - Our Compensation Program Design - Benchmarking). The review was conducted by Krafts independent compensation advisor, Hewitt. The annual stock grant is still subject to a one-year restriction period.
Directors can defer 25%, 50%, 75% or 100% of their cash retainer and meeting fees into accounts that mirror the funds in the Kraft Thrift 401(k) Plan, pursuant to the 2001 Compensation Plan for Non-Employee Directors. Directors can also defer receipt of their annual stock grant until a future distribution date, pursuant to the 2006 Stock Compensation Plan for Non-Employee Directors. Dividends on deferred stock grants are reinvested in deferred shares until the previously elected distribution date.
In addition to cash payments and stock awards, members of the Board receive $100,000 in term life insurance coverage under the Kraft Foods Global, Inc. Life Insurance Plan.
Non-employee directors may also participate in the Kraft Foods Matching Gift Program upon becoming members of the Board. Generally, Kraft employees must wait a year before they can participate in the program. Other than the waiver of the one-year waiting period, non-employee directors participate in the program on the same terms as our employees. Under the program, Kraft matches up to $15,000 per director per year in contributions to 501(c)(3) non-profit organizations. In 2007, the following directors participated in this program: Myra M. Hart, Mark D. Ketchum, Richard A. Lerner, M.D., John C. Pope, Mary L. Schapiro and Deborah C. Wright.
2007 Director Compensation Table
2007 Non-Employee Director Stock Awards Table
As of December 31, 2007, our fiscal year-end, the number of outstanding shares of restricted or deferred stock held by directors is the same as the number of shares shown in the table above. On December 31, 2007, directors held outstanding Kraft options as follows: Mr. Pope3,995; Ms. Schapiro3,995; and Ms. Wright3,995. None of our other current non-employee directors hold outstanding Kraft stock options.
Compensation Committee Report for the Year Ended December 31, 2007
The Compensation Committee oversees our compensation programs on behalf of the Board. In fulfilling its oversight responsibilities, the committee reviewed and discussed with management the Compensation Discussion and Analysis included in this Proxy Statement.
In reliance on the review and discussion referred to above, the committee recommended to the Board that the Compensation Discussion and Analysis be included in our Proxy Statement to be filed with the SEC in connection with our Annual Meeting and incorporated by reference in Krafts Annual Report on Form 10-K/A for the fiscal year ended December 31, 2007, which was filed with the SEC on February 26, 2008.
Ajay Banga, Chair
Myra M. Hart
Lois D. Juliber
Mark D. Ketchum
John C. Pope
Deborah C. Wright
COMPENSATION DISCUSSION AND ANALYSIS
Our Compensation Discussion and Analysis provides our shareholders with:
Our named executive officers are those individuals who served as Krafts Chief Executive Officer and Chief Financial Officer during 2007, as well as those individuals included in the 2007 Summary Compensation Table under the heading Executive Compensation Tables, as determined under applicable SEC rules. While the named executive officers include James P. Dollive, he concluded his tenure as Executive Vice President and Chief Financial Officer effective October 1, 2007. Mr. Dollive remained with Kraft until his retirement effective March 1, 2008. Timothy R. McLevish has served as our Executive Vice President and Chief Financial Officer since October 1, 2007. In addition, while Franz-Josef Vogelsang is included as a named executive officer, he served as our Executive Vice President, Global Supply Chain until January 1, 2008.
The four primary goals of our compensation program are to:
Our Compensation Program Design
A summary of our executive compensation program appears in this Proxy Statement under Summary of Compensation Program. All named executive officers are eligible to participate in each element of our executive compensation program or an equivalent one, if the executive officer is referenced to a country other than the United States. A more detailed discussion of each element of our executive compensation program can be found under Elements of Executive Compensation. We use each element of compensation to satisfy one or more of our stated compensation goals. Our Compensation Committee (referred to in this Compensation Discussion and Analysis as the Committee) regularly reviews the various elements of compensation to assure that they are aligned with Krafts and the individual executive officers goals. The executive compensation program is designed to achieve Krafts objectives by:
Summary of Compensation Program
This table summarizes the elements and program objectives of our 2007 compensation program for executive officers, including named executive officers.
Composition of the Compensation Survey Group
We annually compare our compensation program with those companies in the Compensation Survey Group. This annual review is designed to: (a) assure that our compensation program and target compensation levels are in line with market practice; and (b) maintain our ability to attract and retain the level of talent we need to drive sustainable superior shareholder returns.
To assure that the Compensation Survey Group includes the most appropriate companies, the Committee considers companies meeting the following criteria:
Based on this, and in consultation with management and with the assistance of Hewitt, the Committee selected these companies for the 2007 Compensation Survey Group:
In determining appropriate compensation levels for the named executive officers, the Committee reviews compensation levels for similarly situated executives at companies in the Compensation Survey Group.
We use data obtained from the Compensation Survey Group through custom surveys administered by Hewitt and through the companies public filings.
Composition and Purpose of the Performance Peer Group
The Committee also reviews financial performance relative to the Performance Peer Group when assessing financial and total shareholder return under our Long-Term Incentive Plan, which is described under Elements of Executive Compensation. For 2007, the Performance Peer Group consists of companies considered by the Committee to be our market competitors, or that have been selected primarily on the basis of industry. There is substantial overlap (11 of the 18 companies) between the Performance Peer Group and the Compensation Survey Group. The major difference between the Performance Peer Group and the Compensation Survey Group is that the Performance Peer Group companies are more heavily focused on the food and beverage industry than the companies in the Compensation Survey Group and are included regardless of revenue size or market capitalization.
With respect to performance measures for our Long-Term Incentive Plan, we believe that it is relevant to compare our financial performance to a group of food and beverage companies as it is likely that our shareholders are comparing our financial performance to a similar group of companies when making investment decisions. We believe that this group is less relevant when comparing compensation levels at various positions within the organization due to Krafts size and complexity relative to several companies included in this group. The Performance Peer Group companies are:
2007 Competitive Positioning
Our compensation philosophy targets total compensation (defined as base salary, annual incentives and long-term cash and stock incentives) at the median, reflecting size-adjusted data, of the Compensation Survey Group. The Committee believes that targeting the size-adjusted median of the Compensation Survey Group will provide an opportunity to attract and retain talented employees. This positioning will also provide the appropriate opportunities for compensation at or above the median when business or shareholder return performance is above our peers, and below the median when business performance or shareholder return performance is below our peers.
Based on our annual revenue relative to the Compensation Survey Group (which is between the 50th and 75th percentile), the Committee believes that using size-adjusted data appropriately accounts for the complexity of Kraft relative to the Compensation Survey Group. Accordingly, the Committee has determined that the size-adjusted median, based on a regression analysis which correlates compensation elements and revenue size, is the appropriate benchmark by which to compare positions across the Compensation Survey Group.
In determining the appropriate mix of cash and equity compensation for our executive officers, the Committee considered the practices of our peers in the Compensation Survey Group. A significant portion of our compensation is variable, meaning it is based either on business and/or individual performance or on the value of the award at the time of vesting or income recognition. Grants of annual and long-term cash incentives, restricted stock and stock options are variable.
Since a significant portion of compensation is variable, we are able to pay above the median of the Compensation Survey Group when superior business and/or individual performance is achieved. Conversely, executive officers may receive total compensation below the median when business and/or individual performance is below that of our peers.
There are no specific pre-established policies or targets for the allocation between either cash and equity or short-term and long-term compensation. However, by design, and as shown in the chart below, a significant portion of compensation is variable or performance based, of which a majority is provided in the form of long-term compensation. This assures that compensation delivered to the named executive officers and other executive officers is aligned with shareholder interests of delivering sustained superior shareholder returns. The Committee reviews competitive information provided by Hewitt. This competitive information is used to compare Krafts pay-mix with the Compensation Survey Group to assure the competitiveness of Krafts compensation package in order to preserve our ability to attract and retain talented executive officers.
This chart shows the total compensation mix, on average, for our named executive officers, based on target awards in 2007, compared against the median of the Compensation Survey Group.
Design Mix of Compensation and Elements
Assessing Individual Performance
Each year, our Chairman and Chief Executive Officer, Ms. Rosenfeld, provides the Committee with an individual performance assessment for each of her executive direct reports, including the named executive officers. She also provides the Committee, for its consideration, her compensation recommendations, including recommendations for annual incentive awards, stock awards and base salary increases for each of her executive direct reports. The Committee reviews and discusses her recommendations, taking into account the various factors noted below, but retains full discretion over all recommended compensation actions. Specifically, in assessing individual performance in the context of making executive compensation decisions, the Committee considers the following:
Stock Ownership Guidelines
Kraft introduced stock ownership guidelines in 2003 to further align the interests of approximately 180 executives, including the named executive officers, with those of our shareholders. Under the guidelines, executives are expected to acquire and hold Kraft common stock in an amount equal to a multiple of their base salaries. Executives are expected to attain their ownership levels within five years of becoming eligible for this program or within three years of being promoted to a higher level within the executive ranks. We monitor stock ownership levels to assure that executives are on track to meet or exceed their stock ownership levels within the specified timeframe. Stock ownership is defined as direct ownership of Kraft common stock, including sole ownership, direct purchase plan shares, restricted shares, and accounts over which the executive has direct or indirect ownership or control. This definition does not include unexercised Kraft stock options. If an executive does not meet the guideline level in the required timeline, the Chairman and Chief Executive Officer has the flexibility to take any further action as deemed appropriate depending on the particular circumstances of the executive officers situation.
For the named executive officers, the guidelines, as a multiple of base salary, are as follows:
These stock ownership guidelines are generally greater than those required by companies within the Compensation Survey Group. The Committee believes that Krafts stock ownership levels will help increase the focus of our executives on improving total shareholder returns over time. As of December 31, 2007, Ms. Rosenfeld and Messrs. Dollive, Searer and Vogelsang had stock ownership levels at or above their respective ownership guidelines. Messrs. McLevish and Khosla joined Kraft in 2007 and are currently below their respective stock ownership level. Consistent with our policy, they each will have five years from their respective employment dates to attain their expected stock ownership levels.
Elements of Executive Compensation
Our executive compensation program consists of:
A description of each of the compensation program elements follows, and individual compensation decisions are discussed under Compensation Paid to Named Executive Officers in 2007.
Base salary is the principal fixed element of executive compensation. Kraft uses base salary to attract, retain and motivate talented executive officers and to fairly compensate them for services rendered during the fiscal year. The Committee considers a number of factors when reviewing and setting base salaries for named executive officers including: Krafts performance; the executive officers individual performance, level of responsibility, tenure and prior experience; and a comparison of base salaries paid for comparable positions at companies in the Compensation Survey Group. The Committee does not assign a particular weight to any factor.
Base salaries are the basis for establishing the target payouts of the annual and long-term incentive plan awards discussed below and for retirement programs, executive group life insurance and certain other benefits available to all employees. Salaries are reviewed on an annual basis, and merit increases are considered for all executive officers and are generally effective April 1.
Annual Cash Incentives
Kraft designs the annual cash incentive award program to motivate and reward participants, including the named executive officers, for their contribution to Kraft achieving its annual financial and strategic goals. Actual potential awards are based primarily on the financial results achieved during the year and the individuals contribution towards achieving those results.
The formula shown below is used to determine actual awards for participants, including the named executive officers. Other than base salary, which is discussed above, each element of this formula is discussed below.
The business unit rating and individual performance assessment help focus our named executive officers on achieving financial results (represented by the business unit rating) and reward individual contributions in achieving those financial results and developing leadership capabilities (represented by the individual performance assessment).
Individual Target Percentage
Each participant in the plan is assigned a target award. The target is a percentage of base salary reflecting his or her role and responsibilities. For participants, including the named executive officers, the Committee sets individual targets that position target annual incentive and target total cash compensation opportunities at approximately the size-adjusted median of the Compensation Survey Group. This assures, in general, that if business and individual goals are met, the participant would be paid an incentive at or near the size-adjusted median for their position relative to the Compensation Survey Group.
The individual targets, as a percentage of base salary, for the named executive officers were, as of December 31, 2007, as follows:
For named executive officers, the Committee may adjust the target award percentages during the year if an executive officers role or responsibilities change.
Business Unit Rating
At or near the beginning of each year, the Committee and management agree on financial and strategic objectives for Kraft and its major business segments. At the conclusion of each year, the Committee assesses actual performance based on these objectives. These objectives are not used in a formulaic or rigid fashion, but rather as guidelines in the Committees exercise of discretion regarding the named executive officers. That is, the annual cash incentive plan is not operated in a manner that if certain goals, whether specific to Kraft, the business unit, or the individual, are attained, the executive officer will automatically receive a specified level of compensation.
In determining 2007 annual cash incentive compensation for named executive officers, the Committee considered, in the manner described above, the key financial metrics and strategic goals discussed below. For Messrs. Searer and Khosla, the Committee also reviewed and considered the financial objectives established for their particular business segments for 2007. The following are the primary Kraft financial and strategic goals that were considered at year end for all of the named executive officers:
The Committee also reviewed additional Kraft financial objectives, such as volume, operating income growth and operating income margin as part of their deliberations.
The Committee also assessed, in the context of the annual incentive plan, progress against the following four strategic goals for 2007: (a) rewiring the organization for growth; (b) reframing our categories to make them more relevant to consumers; (c) exploiting our sales capabilities; and (d) driving down costs without compromising quality. We publicly communicated these
strategies at the beginning of 2007. In addition, the Committee considered the well-executed transition of Kraft to a free-standing company following its spin-off from Altria.
Consistent with the discussion above, the Committee also assessed the financial and strategic objectives for our North America and International business units in determining annual incentive awards for Messrs. Searer and Khosla. Similar to the review of Krafts overall business, review of the business units included the assessment of financial performance in areas such as organic revenue growth, volume, operating income growth, operating income margin, discretionary cash flow and, in the case of Kraft North America, market share.
In 2007, Kraft North America exceeded its revenue growth objectives and essentially met volume growth objectives, however, fell short on operating income growth, operating income margin and market share performance. The shortfall on operating income growth and margin was primarily driven by the unprecedented record-high commodity costs, particularly dairy costs. The degree of difficulty in achieving each of these performance measures is challenging. For example, Kraft North America fell short of its operating income growth and operating income margin objectives in each of the last three years and also fell short of organic revenue expectations in two of the last three years.
Kraft International met or exceeded its revenue, volume, operating income and discretionary cash flow objectives in 2007. However, Kraft International fell short of its operating income margin objective in 2007. Again, the degree of difficulty in achieving these objectives is challenging. For example, Kraft International fell short of its operating income growth expectations in one of the past three years and its operating income margin expectations in each of the past three years.
Based on these assessments, the Committee assigned business unit ratings to the Kraft North America and Kraft International business segments and the entire Kraft organization. In 2007, the business unit ratings were as follows:
Business unit ratings for corporate employees are aligned 100% to the Kraft Foods Inc. rating. The presidents of the business units (Messrs. Searer and Khosla) have 50% of their ratings based on the Kraft Foods Inc. performance rating and 50% of their ratings based on their respective business unit ratings. This alignment is meant to promote both line-of-sight accountability as well as assure collaboration across the enterprise.
Individual Performance Assessment
Individual awards are also determined based on individual contributions. Individual performance can range from 0% to 200% of the target award.
Following our fiscal year-end, the Committee assessed progress against all strategic objectives and other individual performance criteria established for each of the named executive officers. The Committee then reviewed each named executive officers progress against the criteria and determined the level and quality of each named executive officers performance achievement. Based on that assessment, the Committee determined an appropriate incentive award for the Chairman and Chief Executive Officer, and then reviewed and approved the incentive awards that the Chairman and Chief Executive Officer recommended for each of the other named executive officers. Named executive officers that generally met all of the individual performance criteria received an annual incentive award at or near (+/- 10%) their individual target level, adjusted for the applicable business unit rating. Similarly, named executive officers that exceeded their individual performance criteria received an annual incentive award greater than their individual target. Conversely, if a named executive officer did not meet many of his or her individual performance criteria, then the named executive officers annual incentive would be below his or her individual target and would likely be zero.
Additional information regarding the manner in which individual performance was assessed for our Chairman and Chief Executive Officer and other named executive officers in 2007 is provided under Compensation Paid to Named Executive Officers in 2007.
Annual incentive awards paid under this plan satisfied the performance-based requirements for deductible compensation under Section 162(m) of the Internal Revenue Code. Details with respect to tax deductibility of compensation are presented under Policy With Respect To Qualifying Compensation for Tax Deductibility.
Long-Term Cash and Equity Incentives
Long-term incentives are designed to focus our executive officers on long-term operational performance that leads to superior sustainable shareholder returns. Long-term incentive awards have been delivered to executive officers through a combination of
cash-based long-term performance incentive awards (approximately 40% of the total long-term value) and restricted stock (approximately 60% of the total long-term value). We will begin granting stock options as a regular part of our total pay-mix beginning in 2008. Changes to our long-term cash and equity programs are further discussed under Program Changes in 2008. The Committees 2007 grant of a special stock option award to the Chairman and Chief Executive Officer is discussed under Compensation Paid to Named Executive Officers in 2007.
Cash-Based Long-Term Incentive Plan Awards
Long-Term Incentive Plan (LTIP) awards reward executive officers for the achievement of long-term financial and strategic goals during the applicable performance cycle and are primarily designed to reward achievement of top-tier shareholder returns. Historically, Krafts three-year performance cycles ran end-to-end. This meant that a new performance cycle began only after the previous one concluded. Beginning with the 2007 2009 performance cycle, we will run continuous overlapping performance cycles with a new three-year performance cycle beginning each year. This significant change was adopted to allow us to adjust our targets more effectively cycle to cycle as business conditions fluctuate. This approach is most common among the companies in the Compensation Survey Group.
Transitioning from end-to-end, discrete cycles to overlapping cycles means that payout amounts will be appropriately adjusted downward so that payments over any three-year period would be essentially equivalent to the amount paid under the former design. Because the first payment under this program will be three years from the date of this change, a transition multiplier will be applied to this performance cycle. The transition multiplier is designed to assure that compensation levels remain competitive for executive officers who were eligible to participate under the previous end-to-end cycles. Newly eligible executive officers are not eligible for the transition multiplier. The transition multiplier for the 2007 2009 performance cycle is 183.3%.
The formula shown below is used to determine actual awards for participants, including the named executive officers. Other than average base salary, each element of this formula is discussed below.
Individual Target Percentage. Each participant in the plan is assigned a target award as a percentage of the average of year-end base salaries over the three-year performance cycle. Participants who are promoted into an eligible position, from a non-eligible position, are typically eligible to begin participating beginning with the next performance cycle. The target award percentage may be adjusted during the performance cycle if an existing participants role or responsibilities change. The Committee, after receiving recommendations from management, which are based primarily on competitive market information, approves position-specific target award levels based on the size-adjusted median of the Compensation Survey Group.
Target awards levels, as a percentage of average year-end base salaries, for the named executive officers as of December 31, 2007 were:
Actual award amounts can range from 0 200% of this target.
Business Performance Rating. The measures, with specific weightings, considered by the Committee for the 2007 2009 LTIP performance cycle incentive program are corporate-focused for all participants and are as follows:
Target awards will be paid based upon achievement of the performance measures. The objective set for relative total shareholder return is for our total shareholder return between fiscal year 2007 through fiscal year 2009 to be at the median of the Performance Peer Group. The organic revenue growth, ongoing operating income growth and cumulative discretionary cash flow targets were set based on our three-year strategic plan. The degree of difficulty in achieving the internal measures is challenging. For context, we have met or exceeded our revenue growth objectives in only one of the past three years. Operating income growth and discretionary cash flow objectives have not been achieved in any of the past three years.
The Committee may exercise positive or negative discretion in determining a rating, including factoring in a qualitative review of the following unweighted metrics:
The Committee uses equity awards to align the interests of our executive officers with those of our shareholders.
Restricted Stock. Since 2003, the Committee has granted equity awards to the named executive officers in the form of restricted stock. The Committee determined that restricted stock is an appropriate form of equity compensation because it:
During 2007, the Committee awarded grants of restricted stock (or deferred stock units for participants in countries outside of the United States) to eligible employees, including our named executive officers. Restricted stock awards have been granted annually at the Committees first regularly scheduled meeting of the year, which typically takes place in late January or early February. Annual awards are granted on the date of the meeting and are based on the fair market value of Krafts common stock on that date. The fair market value is defined as the average of the high and low traded stock prices on the NYSE on the date of grant.
Award ranges are based on an analysis of competitive market practice, with the goal of providing awards with a value approximately equal to the size-adjusted median of the Compensation Survey Group. The range of award opportunities, expressed in terms of grant value (calculated by multiplying the number of shares at grant by the fair market value of Krafts common stock on the date of the grant), for the named executive officers as of January 29, 2007, the date of the 2007 annual grant, were as follows:
Actual stock awards in 2007 were based on a qualitative review of an executive officers performance during the previous year and an evaluation of each executive officers potential to advance within the organization. All stock awards granted to the named executive officers in 2007 were within the respective ranges presented above.
Actual stock award amounts in 2007 are presented in this Proxy Statement in the Grants of Plan-Based Awards Table.
Stock Options. Prior to 2007, the Committee had not granted new stock options to named executive officers since our initial public offering (the IPO) in June 2001. Stock options granted to named executive officers at the time of the IPO were options to acquire Kraft common stock. Stock options granted prior to the IPO were options to acquire the common stock of our previous parent company, Altria. All outstanding stock options have 10-year expiration periods, and many executive officers continue to hold options to acquire Kraft common stock and Altria common stock.
The Committee granted Ms. Rosenfeld a special stock option award in 2007, which is discussed under Compensation Paid to Named Executive Officers in 2007.
As discussed below, other named executive officers received stock option awards to acquire Kraft common stock as a result of our spin-off from Altria in March 2007, consistent with how all other Kraft employees who held Altria stock options at the time of the spin-off were treated.
Treatment of Stock Option Programs upon Completion of the Kraft Spin-off. Upon the completion of our spin-off from Altria, Kraft and Altria each retained responsibility for our respective employees and compensation plans. At the time of the spin-off, certain named executive officers held outstanding Altria stock options.
The holder of each outstanding option to purchase Altria common stock received the following stock options with an aggregate intrinsic value (the difference between the exercise price of the options and the fair market value of the underlying stock) not greater than the intrinsic value of the original stock option:
The exercise prices for the new Kraft option and the adjusted Altria option were determined based on the closing market prices of Altria and Kraft common stock on March 30, 2007, the effective date of our spin-off.
Our named executive officers receive limited perquisites, including a car allowance, a financial counseling allowance and, for the Chairman and Chief Executive Officer only, personal use of the corporate aircraft. For reasons of security and personal safety, we require Ms. Rosenfeld to use our aircraft for both business and personal travel. Taxes on these perquisites are the sole responsibility of the executive officer.
These perquisites are similar to those provided to named executive officers at many of the companies within the Compensation Survey Group. Accordingly, the Committee believes that they are therefore necessary for retention and recruitment purposes.
The Committee periodically reviews perquisites to assure that they are appropriate in light of Krafts total compensation program and market practice.
Specific executive officer perquisites are listed in the footnotes to the Summary Compensation Table. Other than these perquisites, executive officers receive the same benefits as other Kraft employees.
Post-termination compensation consists of both separation pay and retirement benefits.
Change-in-Control Agreements. We have no individual change-in-control agreements with any of our named executive officers, but we did implement a Change-In-Control Plan (the CIC Plan) for senior executive officers in 2007. Based on our status as an independent public company following our spin-off from Altria on March 30, 2007, the Committee believed that change-in-control arrangements were appropriate for retention of senior executive officers. In addition, we amended our 2005 Performance Incentive Plan to assure that stock awards, including restricted stock and stock options, would not automatically vest upon a change-in-control. Under the amended plan, restricted stock and stock options only vest upon a change-in-control if the participant is terminated without cause or resigns for good reason within two years following the change-in-control or if the acquiring entity does not assume the awards (double trigger). We adopted the double-trigger to help assure that key personnel would be available to assist in the successful transition following a change-in-control.
The provisions in the CIC Plan are consistent with similar plans maintained by companies in the Compensation Survey Group including eligibility, severance benefit levels and treatment of cash and equity incentive compensation. The separation payments are structured to help assure that key personnel, including our named executive officers, would be available to assist in the successful transition following a change-in-control and provide a competitive level of severance protection if the executive officer is involuntarily terminated without cause following a change-in-control. In addition, under the CIC Plan, Kraft will cover any excise taxes that may be triggered by separation payments paid to the Chairman and Chief Executive Officer. However, excise taxes for all other participants will only be paid by Kraft if change-in-control separation payments exceed 110% of the IRS-imposed cap of 2.99 times the base amount. To the extent that compensation does not exceed 110% of the IRS-imposed cap but does trigger excise tax payments, separation payments will be limited to the maximum amount that does not trigger such excise tax amounts. This is done to minimize our expense for separation payments that do not significantly exceed the IRS-imposed cap limit.
The severance arrangements and other benefits provided for under the CIC Plan (as well as the equity treatment upon certain separations in the event of a change-in-control) are described under Executive Compensation Tables Potential Payments Upon Termination or Change-in-Control.
Non-Change-in-Control Severance Agreements. We have no individual severance agreements with any of our actively employed named executive officers. For non-CIC Plan separations, we maintain a severance plan in the United States that provides for certain severance payments in the event of job elimination or a workforce reduction. Similar plans are generally available in other countries where we have employees. The plans facilitate recruitment and retention, as most of the companies in the Compensation Survey Group offer similar benefits to their executives.
From time to time, with Committee approval for named executive officers, we make separation payments to an executive officer if his or her employment is terminated without cause for reasons that may or may not otherwise qualify for severance payments under one of our non-change-in-control severance plans. Typically, no payments or benefits are available or have accrued prior to an executive officers termination, nor do executive officers have rights to severance payments. These discretionary payments and benefits may be similar to or in excess of payments and benefits offered under a non-change-in-control severance plan. These payments benefit Kraft because they are made in consideration for a general release of future claims against Kraft and the signing of non-compete, non-solicitation, non-disparagement and confidentiality agreements by the executive officers.
In 2007, we entered into a retirement agreement with Mr. Dollive. That agreement limited his ability to directly compete or solicit employees prior to March 1, 2009, released all claims against Kraft and assures that Mr. Dollive will keep all material information confidential. As consideration for these restrictive covenants, we replaced his restricted stock awards that were forfeited upon his early retirement with deferred stock award units that vest in accordance with the original vesting schedule of his forfeited restricted stock awards. We provided this agreement to Mr. Dollive because of the significant value represented by his agreement to a contractual non-compete, non-solicit, non-disparagement and confidentiality commitment received in exchange for the benefits provided by Kraft. This agreement is discussed in further detail under Executive Compensation Tables Mr. Dollives Retirement Agreement.
Additional information regarding payments typically made upon termination, including a definition of key terms and a quantification of benefits that would be received by our named executive officers had termination occurred on December 31, 2007, is presented under Executive Compensation Tables Potential Payments Upon Termination or Change-in-Control.
Retirement Benefits. Both tax-qualified and supplemental defined benefit retirement plans are offered to executive officers, including the named executive officers, and vary by country. The Committee believes that these retirement benefits are important for retention and recruitment, as many of the companies in the Compensation Survey Group offer similar programs. Accrued amounts and additional details of each of our defined benefit retirement programs offered to the named executive officers are presented in the 2007 Pension Benefits Table and the accompanying narrative to the table under the heading Executive Compensation Tables.
Ms. Rosenfelds 2006 letter of employment provides her with an enhanced pension benefit that bridges her service for the period of time that she was not employed by Kraft between 2004 and 2006. This enhanced pension benefit was part of a broader incentive program to help encourage her to return to Kraft. Additional details of this enhanced pension benefit are presented in the 2007 Pension Benefits Table and the accompanying narrative to the table under the heading Executive Compensation Tables.
Mr. Vogelsang participates in the Kraft Foods Switzerland Pension Fund. This pension plan is a contributory plan providing benefits related to the participants years of accredited service and final covered compensation. Mr. Vogelsang participates in
the Kraft Foods Switzerland Pension Fund as a Swiss-based employee on an international assignment in the United States. This is the same plan that is generally available to all eligible employees in Switzerland. Accrued amounts and additional details of Mr. Vogelsangs retirement benefit programs are presented in the 2007 Pension Benefits Table and the accompanying narrative to the table under Executive Compensation Tables.
The Committee believes that both the U.S. tax-qualified and Supplemental Defined Contribution plans are integral parts of our overall executive compensation program. The Supplemental Defined Contribution Plan is important because it encourages executive officers, including named executive officers, to save for retirement. The Committee believes that our named executive officers should be able to defer the same percentage of their compensation, and receive the corresponding Kraft match, as all other employees, without regard to the compensation limit established by the Internal Revenue Code for tax-qualified plan contributions. Accrued amounts and additional details of each of the non-qualified deferred compensation programs offered to named executive officers are presented in the 2007 Non-Qualified Deferred Compensation Table and the accompanying narrative to the table under Executive Compensation Tables.
Compensation Paid to Named Executive Officers in 2007
There are no material differences in compensation policies with respect to each named executive officer, with the exception of Mr. Khosla, whose compensation is higher due to benefits received in connection with his relocation and localization from New Zealand to the United States, and Mr. Vogelsang, whose compensation appears higher due to tax equalization payments associated with his international assignment in the United States. We designed each of the named executive officers target compensation levels to be at the Compensation Survey Groups size-adjusted median. Compensation levels for the chief executive officer position at the companies in the Compensation Survey Group generally exceed pay levels for other named executive officers. Similarly, Ms. Rosenfelds compensation also exceeds that of our other named executive officers.
Many of the compensation actions taken in 2007 for the named executive officers were to position target total compensation closer to the size-adjusted median of the Compensation Survey Group. Due to the change in our corporate structure in early 2007, specifically transitioning from a subsidiary of Altria to a free-standing, independent company, the roles of several senior executive officers were expanded. As a result, target total compensation for those senior executive officers was increased.
Based on actual compensation actions taken for each of the named executive officers in 2007, target total compensation for each of them remained slightly below the size-adjusted median for their respective positions. This reflects a combination of these named executive officers being newer in their roles as well as mixed business results in recent years that have a direct impact on base salary increases and annual and long-term incentive awards during that period.
Below are the specific compensation actions for each of the named executive officers in 2007.
Base Salary Increase. In 2007, the Committee approved a base salary increase for Ms. Rosenfeld primarily to recognize her individual performance in 2006 and to better align her salary with the size-adjusted median of the Compensation Survey Group. In 2006, the Committee considered the progress Ms. Rosenfeld made in developing and implementing her long-term strategy to bring Kraft back to sustainable superior performance.
Actual Annual Incentive. In determining Ms. Rosenfelds annual incentive for 2007, the Committee considered her performance relative to her financial and strategic guidelines for the year. Similar to our approach with respect to business unit ratings, individual performance measures are used merely as guidelines in the Committees exercise of discretion regarding Ms. Rosenfelds annual incentive award.
For 2007, the guidelines were as follows:
In addition, the Committee considered operating income margin and market share performance in their assessment. In 2007, Krafts results fell short of these two additional guidelines set by the Committee, which factored into the Committees overall assessment of Ms. Rosenfelds 2007 performance. The shortfall on operating income growth and margin was primarily driven by the unprecedented record-high commodity costs, particularly dairy costs.
In addition, in its assessment of Ms. Rosenfelds 2007 performance, the Committee considered the following key strategic objectives, which were consistent with the goals that she discussed with investors at the beginning of 2007.
As a result of this assessment and the factors identified above, Ms. Rosenfeld was awarded an annual incentive award of $2,625,000, which reflects an amount above her target under the plan.
Stock Awards. Ms. Rosenfeld received two stock award grants in 2007.
As part of the annual stock award program, the Committee granted Ms. Rosenfeld a restricted stock award of 144,280 shares. The grant value of this award was in-line with the size-adjusted median of the Compensation Survey Group. On May 3, 2007, the Committee also granted her a non-qualified, performance-contingent stock option award concurrent with her appointment to the additional position of Chairman. She was granted an option to purchase 300,000 shares of our common stock. The number of shares granted was determined by the Committee based on market-competitive information. The combined grant value of these two awards was between the 50th and 75th percentile of the Compensation Survey Group. This type of award was granted to provide additional incentive for Ms. Rosenfeld to increase shareholder value as the vesting of the award will only occur if certain stock price hurdles are achieved. One-half of the shares under this performance-contingent stock option will vest only if the stock price maintains a trading price of $38.11 for at least 10 trading days. The remaining one-half of the award will vest only if the stock price maintains a trading price of $41.43 for at least 10 trading days.
Actual Annual Incentive. In 2007, in determining Mr. Dollives actual annual incentive award and in connection with his retirement, the Committee completed an initial assessment of Mr. Dollives performance for the 2007 performance year in November and discussed his individual performance relative to goals set at the beginning of 2007. In determining a final award for Mr. Dollive, the Committee considered his exceptional work in managing the financial transition and transformation associated with our March 2007 spin-off from Altria.
Stock Awards. In 2007, Mr. Dollive was granted a restricted stock award. His award was based on individual performance in the prior year, which was primarily focused on preparing for the financial transition and transformation associated with our spin-off from Altria.
Base Salary. In setting Mr. McLevishs base salary as of his employment date, the Committee considered the size-adjusted median of the Compensation Survey Group for his position and internal equity with Ms. Rosenfelds other executive direct reports.
Sign-On Awards. Mr. McLevishs employment began on October 1, 2007. On his employment date, the Committee granted him a sign-on restricted stock award of 43,350 shares, valued at $1,500,344, and a sign-on cash bonus of $500,000. These sign-on amounts were awarded primarily to offset compensation awards from his previous employer that were forfeited when he resigned to accept his position at Kraft.
Actual Annual Incentive. Based on his employment date, no specific performance guidelines were established at the beginning of the year. Mr. McLevishs 2007 annual incentive award was paid on a pro-rata basis, based on his employment date, at target.
Base Salary. In setting Mr. Khoslas base salary as of his employment date, the Committee considered the size-adjusted median of the Compensation Survey Group for his position and internal equity with Ms. Rosenfelds other executive direct reports.
Sign-On Awards. Mr. Khoslas employment began on January 22, 2007. On his employment date, the Committee granted him a sign-on restricted stock award of 20,970 shares, valued at $750,307, and a sign-on cash bonus of $750,000. These sign-on amounts were awarded primarily to offset compensation awards from his previous employer that were forfeited when he resigned to accept his position at Kraft.
Actual Annual Incentive. Mr. Khoslas individual performance guidelines were primarily related to delivering on 2007 business performance at Kraft International and developing a long-term strategy for sustainable growth. Specifically, Kraft International exceeded its organic revenue and discretionary cash flow guidelines, but fell short of its operating income growth and operating income margin guidelines. In addition, the Committee considered other factors such as talent development both internally and externally and the successful acquisition of Groupe Danones global biscuit business. Mr. Khoslas 2007 annual incentive award was paid on a pro-rata basis, based on his employment date.
Stock Awards. In 2007, Mr. Khosla was granted a restricted stock award. His award was equal to the size-adjusted median for his position as he was newly hired as of the date of grant.
Relocation and Localization Benefits. In addition, Mr. Khoslas compensation for 2007 includes one-time relocation expenses associated with moving his family from New Zealand to the United States. These additional benefits were paid in connection with his offer letter and were important in recruiting Mr. Khosla.
Base Salary Increase. In 2007, the Committee approved a base salary increase for Mr. Searer. The increase was primarily to position his salary closer to the size-adjusted median of the Compensation Survey Group.
Actual Annual Incentive. Mr. Searers annual incentive target was increased from 80% to 90%, effective January 31, 2007 and reflects the increased scope of responsibilities he would be assuming following Krafts spin-off from Altria. This increase in his target award increased his target total compensation opportunity to a level near the size-adjusted median of the Compensation Survey Group. This change was also primarily to position his target annual incentive award closer to the size-adjusted median of the Compensation Survey Group. In determining his actual annual incentive award, the Committee considered his performance in delivering on the 2007 plan for Kraft North America and improving marketing capability. Although organic revenue grew faster than expected, operating margin and market share were below expectations. Operating income was affected by unprecedented commodity costs that could not be fully offset by pricing actions. Market share improved during the year as a result of the marketing investments made but still remained below expectations.
Stock Awards. In 2007, Mr. Searer was granted a restricted stock award. His actual award reflected the size-adjusted median of the Compensation Survey Group for his new position and his individual performance in 2006. With regard to his individual performance in 2006, the Committee considered financial results achieved within his scope of responsibility and considered the transition of responsibilities to his successor following his promotion to President Kraft North America in September 2006.
Base Salary Increase. In 2007, the Committee approved a base salary increase for Mr. Vogelsang. Mr. Vogelsangs salary increase was a reflection of his individual performance in 2006 and was consistent with salary increases provided to other similarly situated executives based in Switzerland, his home country.
Actual Annual Incentive. In determining his actual annual incentive award, the Committee considered his performance relative to delivering on productivity and restructuring savings. Specifically, Mr. Vogelsang led the restructuring of the Global Supply Chain function in our efforts to develop strategies that address both the challenges and opportunities of an ever-increasing global supplier base. He aggressively implemented strategies to optimize our total cost structure, while improving service to our customers.
Stock Awards. In 2007, Mr. Vogelsang was granted a restricted stock award. His actual award was based on his individual performance in 2006. Specifically, the Committee primarily considered achievements in supply chain efficiencies and other productivity initiatives led by Mr. Vogelsang in 2006.
Program Changes in 2008
2008 Annual Incentive Plan Changes
Beginning January 1, 2008, several key changes were made to the annual incentive plan. The changes are aimed at aligning the business strategies across the enterprise by implementing a more formulaic approach to determine the business unit ratings. The three quantitative measures that will be measured, on an equal basis, are:
The Committee will still retain some discretion in awarding annual incentive awards; however, this design directly aligns annual incentive awards to the performance related to those measures that will lead to sustainable superior total shareholder returns.
2008 2010 Long-Term Incentive Plan Design Changes
We began a new performance cycle effective January 1, 2008, which is scheduled to conclude on December 31, 2010. The Committee approved several changes relative to the 2007 2009 performance cycle as follows:
These changes were implemented to further align the interests of our executive officers and shareholders by changing from a cash-based program to a performance share-based program and rewarding executive officers on earnings per share growth.
2008 Equity Program Changes
In 2008, the Committee decided to grant equity in the form of both restricted stock and stock options. Restricted stock will now represent one-half of the economic value delivered in equity, and the balance will be delivered in the form of stock options, based on a ratio of stock options to restricted stock of 4 to 1.
The rationale for reintroducing stock options into the long-term pay-mix is to further align executive compensation with shareholder returns. Stock option awards only deliver value to the executive officers if the stock price appreciates from the date of grant and accordingly, executive officers only realize value when shareholders realize value. The combination of restricted stock and stock options balances the retention value of restricted stock with the performance aspect of stock options.
To support the retention aspects of the program, the restricted stock will continue to vest 100% after three years, and the stock options will vest one-third each year over three years.
As a general matter, we do not utilize employment agreements. We did, however, agree to benefits, greater than those generally made available to other employees, for Mr. Dollive upon his retirement from Kraft as consideration for Mr. Dollives agreement to the restrictive covenants described above in Elements of Executive Compensation - Post-Termination Compensation - Non-Change-in-Control Severance Agreements. For further information about Mr. Dollives retirement agreement see Executive Compensation Tables Mr. Dollives Retirement Agreement.
Policy With Respect To Qualifying Compensation for Tax Deductibility
Section 162(m) of the Internal Revenue Code limits our ability to deduct compensation paid to covered employees, including several named executive officers, for tax purposes to $1.0 million annually. Covered employees include the principal executive officer and Krafts next three highest paid executive officers, other than Krafts principal financial officer. This limitation does not apply to performance-based compensation, provided certain conditions are satisfied. For 2007, annual incentive awards and restricted stock grants awarded to covered employees were subject to, and made in accordance with, performance-based compensation arrangements previously implemented, and were tax deductible.
The Committee has taken appropriate actions to preserve the tax deductibility of annual cash incentive and long-term performance awards. The Committee has retained the discretion to authorize payments that may not be tax deductible, if it believes that such payments are in the best interest of shareholders. For example, the Committee decided, based on benchmarking salaries of other chief executive officers in the Compensation Survey Group, to pay Ms. Rosenfeld an annual base salary in excess of $1.0 million. Therefore, a portion of her salary was not tax deductible in 2007. In addition, a portion of each of the other covered employees income exceeded the $1.0 million tax deductibility limit in 2007 because of other elements of their annual compensation. Specifically, compensation in excess of $1.0 million from a combination of base salary, restricted stock vesting proceeds, restricted stock dividends, sign-on bonuses and perquisites were not deductible in 2007.
Policy on Recoupment of Executive Incentive Compensation in the Event of Certain Restatements
The Board or an appropriate committee of the Board may determine that, as a result of a restatement of Krafts financial statements, an executive officer received more compensation than the executive officer would have received absent the incorrect financial statements. Then, the Board or committee, in its discretion, may take such actions as it deems necessary or appropriate to address the events that gave rise to the restatement and to prevent its recurrence. Such actions may include, to the extent permitted by applicable law:
Anti-Hedging Policy and Trading Restrictions
Our current policy limits the timing and types of transactions in Kraft securities by Section 16 officers. Among other restrictions, the policy:
2007 Summary Compensation Table
All data in U.S. Dollars
2007 Kraft Grants of Plan-Based Awards
2007 Kraft Outstanding Equity Awards at Fiscal Year-End
2007 Kraft Stock Option Exercises and Stock Vested
2007 Altria Outstanding Equity Awards at Fiscal Year-End
2007 Altria Stock Option Exercises
2007 Pension Benefits
The assumptions for the Kraft Foods Global, Inc. Retirement Plan and the Kraft Foods Global, Inc. Supplemental Benefits Plans I and II are as follows:
The assumptions for the KF Deutschland Versorgungsordnung (also referred to herein as the Kraft Foods Germany Pension Plan) are as follows:
The assumptions for the Kraft Foods Switzerland Pension Fund are as follows:
Both the qualified and supplemental retirement plans are generally offered to executive officers, including the named executive officers, and vary by country.
Kraft Foods Global, Inc. Retirement Plan
All eligible full-time and part-time U.S. employees, including named executive officers, are covered automatically in a funded non-contributory, tax-qualified defined benefit plan offered by Kraft. Benefits under this plan are payable upon retirement in the form of an annuity or a lump sum (if the employee was hired prior to 2004). Normal retirement under this plan is defined as age 65 with five years of vesting service, at which point participants are eligible to receive an unreduced benefit. Vested participants may elect to receive benefits prior to age 65, but the amount is reduced as benefits are paid over a longer period of time. Participants must have at least five years of service to become vested.
The formula used to calculate a benefit is equal to the following:
Final average pay is defined as the greater of (a) the average of an executive officers salary plus annual bonus during the last 60 consecutive months of service before separation and (b) the five highest consecutive calendar years of salary plus annual bonus out of the last 10 years prior to separation. Social Security covered compensation is an amount equal to the average of the Social Security taxable wage bases for the 35-year period that ends in the year the participant reaches age 65. The Internal Revenue Service has established certain limits on how much employees may receive from this plan.
As of December 31, 2007, Mr. Dollive was eligible for early retirement pension benefits under the Kraft Foods Global, Inc. Retirement Plan and Supplemental Benefits Plan I. Eligibility begins at age 55 with at least 10 years of vesting service. Early retirement benefits are reduced at a rate of 3% per year for each year that a participant elects to retire prior to age 62 with a maximum reduction of 20% at age 55.
Kraft Foods Global, Inc. Supplemental Benefits Plan I
The Internal Revenue Code limits the amount employees may receive from the tax-qualified pension plan. Therefore Kraft offers a Supplemental Defined Benefit Pension Plan and several named executive officers participate in this plan. This is an unfunded plan that provides for the difference between what would have been payable based upon the pension plan formula stated above absent the applicable Internal Revenue Code limits and the amount actually payable from the Kraft Foods Global, Inc. Retirement Plan.
Kraft Foods Global, Inc. Supplemental Benefits Plan IIMs. Rosenfeld
Ms. Rosenfelds 2006 letter of employment provided her with an enhanced pension benefit that provided for credited service during the period she was not working for Kraft between 2004 and 2006. This enhanced pension benefit was part of a broader incentive program designed to encourage Ms. Rosenfeld to return to Kraft. The value of this enhancement at Ms. Rosenfelds current compensation levels is approximately $667,685.
KF Deutschland Versorgungsordnung
All eligible full-time German employees, including named executive officers, are covered automatically in a funded non-contributory, German tax-qualified defined benefit plan offered by Kraft. Benefits under this plan are payable upon retirement in the form of an annuity. Mr. Vogelsang is grandfathered under the plan and is eligible for normal retirement at age 60. Since this is a frozen pension plan for all participants, all benefits under the plan are vested.
As a frozen pension plan, the benefit to be paid to Mr. Vogelsang is based on his 1998 base salary and years of service, up to age 60. The calculation for the annual plan benefit is the sum of:
Kraft Foods Switzerland Pension Fund
The normal retirement pension is calculated with current pensionable income and years of service calculated up to age 65. The benefit is reduced for early commencement of retirement from ages 57 to 62. Employee and employer contributions are 8%. In addition, the employer pays for any additional contributions required over the mandatory 8%.
As of December 31, 2007, Mr. Vogelsang was eligible for early retirement pension benefits under the Switzerland Pension Fund.
The calculation for the annual plan benefit is:
2007 Non-Qualified Deferred Compensation
U.S. Supplemental Defined Contribution Plan
Because the Internal Revenue Code limits the amount that may be contributed to the tax-qualified defined contribution plan on behalf of an employee, Kraft offers a Supplemental Defined Contribution Plan. All of the named executive officers, with the exception of Mr. Vogelsang, participate in the Supplemental Defined Contribution Plan. This is an unfunded plan that allows eligible employees to defer a portion of their annual compensation (base salary and annual incentive awards) and receive corresponding Kraft matching amounts to the extent that their contributions to the tax-qualified defined contribution plan (and the corresponding Kraft matching contributions) are limited by Internal Revenue Code section 401(a)(17) or 415. Executives must defer receipt of the payments until retirement. Executive contributions and employer matching amounts earn the same rate of return as the Interest Income Fund, which is a market rate fund available to employees in the tax-qualified defined contribution plan. The rate of return under this investment fund in 2007 was 4.7%.
Altria Deferred Long-Term Incentive Plan
This plan provided participants in the Altria Long-Term Incentive Plan the opportunity to defer receipt of the cash-based Long-Term Incentive award at the end of each performance cycle. These deferred amounts were and continue to be credited with a fixed rate of return set at the time of deferral. Mr. Dollive is the only named executive officer who participates in the plan. Mr. Dollive deferred until retirement receipt of his 1995 1997 award, which is credited at an annual rate of 6.83%.
General Foods Management Performance Awards Plan
This plan was available to General Foods executives. It allowed for the deferrals of annual performance awards. Deferred amounts are credited with a composite rate that is equal to the average of the interest yield established each year under the U.S. tax-qualified defined contribution plan Interest Income Fund and the rate of prime 90-day commercial paper issued by industrial corporations. In 2007, the rate of return credited to deferred balances was equal to 4.71%. Mr. Dollive is the only named executive officer who participated in the plan. Upon his retirement, Mr. Dollive can elect to receive a lump sum payment or receive annual installment payments for a period of up to 15 years. The lump sum payment or annual installment payments will commence in January 2009.
Germany Bonus Deferral Plan
German employees can defer up to 100% of their annual bonus, and Kraft will match 10% of that years bonus. This is a frozen plan that does not allow for any current or future deferrals. The amounts previously deferred earn an annual interest rate of 6%, according to an actuarial longevity calculation. However, the present value of Mr. Vogelsangs deferred compensation balance decreased in 2007 because:
Mr. Vogelsang elected to defer 25% of his 1996 bonus of 178,952 euros. Mr. Vogelsang can elect to receive a lump sum payment at age 63 or receive annual installment payments for a period of up to 10 years.
Potential Payments Upon Termination or Change-in-Control
The tables and narrative below describe the potential payments to each named executive officer upon termination. In accordance with SEC rules, all information described in this section is presented as if a triggering event occurred on December 31, 2007, with the exception of information about Mr. Dollive. Because he entered into a retirement agreement with Kraft, as described under Mr. Dollives Retirement Agreement, and concluded his tenure as Chief Financial Officer effective October 1, 2007, the following tables exclude Mr. Dollive.
Involuntary Termination without Cause (Non-Change-in-Control Event)
We generally provide separation pay and benefits to our employees, including the named executive officers, in the event of an involuntary termination without cause. Kraft has a separation pay plan that provides employees a payment equal to one month of salary for every year of service.
Under the plan, an involuntary termination without cause is any company-initiated termination for reasons other than:
These separation benefits are generally structured similarly to those benefits available to all other employees. The separation pay and benefits available to all employees are generally contingent upon Kraft receiving a general release of claims from the employee. For executive officers, it is typical to use the separation pay and benefits practices in the applicable country as the basis for the pay and benefits.
On a case-by-case basis, we may provide additional pay and benefits to named executive officers in excess of the amount typically payable upon an involuntary termination without cause. These additional pay and benefits amounts would be compensation for receiving non-competition, non-solicitation, non-disparagement and confidentiality agreements from our named executive officers, in addition to a general release.
The typical elements of separation pay and benefits consist of base salary continuation, health and welfare benefits continuation, and outplacement assistance.
Separation Pay. Separation pay to named executive officers is typically 12 months of base salary, except for the Chief Executive Officer, who typically receives 24 months of base salary. That amount may be increased, at the discretion of management, with the approval of the Committee, in consideration of the restrictive covenants described above. Separation pay amounts are typically paid as salary continuation. In some cases, amounts are paid in a lump sum.
In the event that separation pay is considered deferred compensation, subject to Section 409A of the Internal Revenue Code, payments that would otherwise have been payable are withheld during the six-month period following termination of employment to comply with Section 409A. We then pay the amount, in a lump sum without interest, as soon as permitted under Section 409A.
Health and Welfare Benefits Continuation. Named executive officers typically continue participating in the health and welfare benefits during the period in which they continue to receive a salary. If an executive receives separation pay in a lump sum, then his or her participation in the health and welfare benefits plans ends at the time of the lump sum payment.
Additional Arrangements. In addition to the separation pay and benefits described above, in accordance with Ms. Rosenfelds and Messrs. McLevishs and Khoslas letters of employment, if any of them is involuntarily terminated without cause prior to the vesting of the restricted stock granted upon (re)joining Kraft, his or her individual restricted stock awards will continue to vest on the normal vesting dates.
Potential Payout Upon an Involuntary Termination Without Cause at Fiscal Year-End 2007
We adopted the CIC Plan effective April 24, 2007. The key elements of the CIC Plan are provided in the table below. In addition, we amended our 2005 Performance Incentive Plan, effective April 24, 2007, to modify the treatment of equity awards upon a change-in-control.
The key elements of the CIC Plan and 2005 Performance Incentive Plan amendments are as follows:
Potential Payout Upon an Involuntary Termination Due to a Change-in-Control at Fiscal Year-End 2007
The table below was prepared as though each of the named executive officers had been terminated involuntarily without cause within a two-year period following a change-in-control on December 31, 2007. The assumptions and valuations are noted in the footnotes to the table.
Potential Payout Upon Other Types of Separations
In the event that a named executive officer is terminated from Kraft due to death, disability or normal retirement, all unvested restricted stock would vest in all cases. Ms. Rosenfelds performance-contingent stock options vest in the event of death or disability. In addition, the named executive officer would become eligible for award payments under the annual cash and long-term incentive plans. Such award payments would be prorated based on the number of months the named executive officer participated in the applicable plans.
Other than the types of compensation and benefits described in the above tables or as would be received by all other salaried employees, no other payments are earned by or would be awarded to the named executive officers.
Based on a December 31, 2007 termination due to death, disability or normal retirement, the estimated value of such payments for the named executive officers are as follows: Ms. Rosenfeld$22,943,171; Mr. McLevish$1,652,389; Mr. Khosla$2,312,784; Mr. Searer$5,715,659; and Mr. Vogelsang$4,603,753.
In the event a named executive officer separates due to early retirement, he or she could be considered for partial awards under the annual cash, long-term incentive and/or equity programs, at the discretion of the Committee. The value of the total payments for each named executive officer could range from $0 to an amount no greater than the amounts shown under normal retirement.
Mr. Dollives Retirement Agreement
On November 19, 2007, Mr. Dollive executed a retirement agreement under which he agreed to certain restrictive covenants and to additional benefits proposed by the Compensation Committee. Mr. Dollive retired from his position as Executive Vice President and Chief Financial Officer effective October 1, 2007. Under the terms of the Kraft Foods Inc. Incentive Compensation Plan of 2005, Mr. Dollives unvested restricted stock awards, which were granted in 2006 and 2007, were forfeited upon his retirement. However, if Mr. Dollive complies with all of the restrictive covenants in the retirement agreement, the forfeited restricted stock awards will be replaced with the equivalent value of deferred stock units that vest in accordance with the vesting schedule of the forfeited restricted stock awards.
Mr. Dollives retirement from Kraft was effective March 1, 2008. At that time, consistent with treatment for other retirees and at the discretion of the Committee, he received a prorated 2008 Annual Incentive Plan and a prorated 2007-2009 Long-Term Incentive payout. The total value of those payments plus the estimated value of the deferred stock units, based on the December 31, 2007 closing stock price of $32.63, is $1,693,641.
OWNERSHIP OF EQUITY SECURITIES
The following table shows the number of shares of common stock beneficially owned as of February 11, 2008 by each director and named executive officer, as well as the number of shares beneficially owned by all of our directors and executive officers as a group. The table also provides information regarding each individuals ownership of specified non-voting interests. None of our common stock owned by these individuals is subject to any pledge. Unless otherwise indicated, each of the named individuals has sole voting and investment power with respect to the shares shown.
The following table displays information about persons we know to be the beneficial owner of 5% or more of our issued and outstanding common stock as of December 31, 2007:
Relationship with Altria Group, Inc.
Prior to our IPO, Kraft was a wholly owned subsidiary of Altria. In the first quarter of 2007, Altria spun off its remaining interest in Kraft on a pro-rata basis to Altria stockholders in a tax-free transaction. At the close of business on March 30, 2007, all Kraft shares owned by Altria were distributed to Altrias stockholders, and our separation from Altria was completed (the Distribution). Concurrent with the Distribution, Dinyar S. Devitre and Charles R. Wall resigned from the Board. Louis C. Camilleri, the Chairman and Chief Executive Officer of Altria, continued to serv