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Mattel DEF 14A 2007 Documents found in this filing:Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
SCHEDULE 14A
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:
Mattel, 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):
Table of Contents
NOTICE OF ANNUAL MEETING and PROXY STATEMENT
Annual Meeting of Stockholders
The Sheraton Gateway Hotel Los Angeles Airport 6101 West Century Boulevard Los Angeles, California 90045 May 18, 2007
Table of ContentsMATTEL, INC. 333 Continental Boulevard El Segundo, California 90245-5012
NOTICE OF THE 2007 ANNUAL MEETING OF STOCKHOLDERS
The 2007 Annual Meeting of Stockholders of Mattel, Inc., will be held on Friday, May 18, 2007, at 9:00 a.m. (Los Angeles time), at the Sheraton Gateway Hotel Los Angeles Airport, 6101 West Century Boulevard, Los Angeles, CA 90045. We will consider and act on the following items of business at the Annual Meeting:
The Proxy Statement accompanying this Notice describes each of the items of business in more detail. The Board of Directors recommends a vote FOR each of the eleven nominees for director named in the Proxy Statement, a vote FOR the proposals described above in items 2 through 4 and a vote AGAINST the proposals described above in items 5 through 8.
If you were a holder of record of Mattel common stock at the close of business on March 30, 2007, you are entitled to notice of and to vote at the Annual Meeting. A list of record holders of Mattel common stock entitled to vote at the Annual Meeting will be available for examination at Mattel’s offices at 333 Continental Boulevard, El Segundo, CA 90245-5012, for any purpose germane to the Annual Meeting, by any stockholder during normal business hours for ten days prior to the Annual Meeting.
The Sheraton Gateway Hotel Los Angeles Airport is accessible to those who require special assistance. If you require special assistance, please call the hotel at 310-642-1111.
El Segundo, California April 12, 2007
Table of ContentsAll stockholders are cordially invited to attend the Annual Meeting in person. If you plan to attend the Annual Meeting in person, please check the appropriate box on the proxy card and bring with you the items that are required pursuant to Mattel’s Admission Policy for the 2007 Annual Meeting. A description of the Admission Policy can be found in the Proxy Statement under the heading “General Information—Admission Policy for Annual Meeting.” The Admission Policy is also printed on the Admission Policy card, which is enclosed with the Proxy Statement.
Whether or not you expect to attend the Annual Meeting, please vote as soon as possible in order that your stock will be represented at the Annual Meeting. You may vote in person or by proxy at the Annual Meeting or you may submit a proxy by mail, by telephone or via the Internet. If you wish to vote by mail, please complete, date, sign and return the enclosed proxy card in the enclosed postage-prepaid envelope as soon as possible. If you wish to vote by telephone or via the Internet, please follow the instructions on the proxy card or voting information form with regard to telephone or Internet voting.
Table of ContentsMATTEL, INC.
333 Continental Boulevard El Segundo, California 90245-5012
PROXY STATEMENT 2007 ANNUAL MEETING OF STOCKHOLDERS To Be Held On May 18, 2007
TABLE OF CONTENTS
Table of ContentsGENERAL INFORMATION
Mattel’s 2007 Annual Meeting of Stockholders will be held on May 18, 2007, at 9:00 a.m. (Los Angeles time), at the Sheraton Gateway Hotel Los Angeles Airport, 6101 West Century Boulevard, Los Angeles, California 90045.
The Board of Directors of Mattel is soliciting proxies to be used at the Annual Meeting. This Proxy Statement and the form of proxy will be mailed or delivered to stockholders beginning on or about April 12, 2007.
Who Is Entitled to Vote
The Board of Directors has fixed March 30, 2007 as the record date for the Annual Meeting. If you were a stockholder at the close of business on the record date, then you are entitled to receive notice of and to vote at the Annual Meeting.
As of the close of business on the record date, there were 394,492,623 outstanding shares of Mattel common stock held by approximately 40,062 holders of record. At the Annual Meeting, each share of common stock will be entitled to one vote.
How to Vote
You may vote by submitting your proxy through the mail, or by telephone or Internet.
If you choose to vote by mail, simply mark your proxy card, date and sign it, and return it in the enclosed postage-prepaid envelope. If the envelope is missing, please mail your completed proxy card to the following address: Proxy Services, c/o Computershare Trust Company, N.A., P.O. Box 43102, Providence, RI 02940.
As an alternative to using your paper proxy card to vote, you may vote by telephone or over the Internet.
To vote by telephone, call the toll-free number on your proxy card.
To vote by Internet, go to the Web address stated on the proxy card.
If a bank, broker or other nominee was the record holder of your stock on the record date, you will be able to vote by following the instructions on the voting information form that you receive from your bank, broker or other nominee.
Quorum; How Votes Are Counted
In order for there to be a vote on any matter at the Annual Meeting, there must be a quorum. In order to have a quorum, the holders of a majority of the voting power of the shares of the stock entitled to vote at the Annual Meeting must be present in person or by properly executed proxy. In determining
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Table of Contentswhether we have a quorum at the Annual Meeting, we will count shares that are voted as well as abstentions and broker “non-votes.” However, on each proposal other than Proposal 3, shares that abstain from voting on a proposal and broker non-votes will not be counted as either “for” or “against” votes on that proposal, and thus will not have any effect as to whether the proposal is approved. By contrast, abstentions and broker non-votes will count as votes “against” Proposal 3.
How the Election of Directors Works; Cumulative Voting
In the election of directors, stockholders are entitled to elect eleven directors, with the eleven candidates who receive the highest number of “for” votes being elected. This is sometimes referred to as “plurality” voting.
In electing directors, you have the right to cumulate your votes and give one candidate the number of votes equal to the number of directors to be elected (eleven) multiplied by the number of votes you are entitled to cast, or to distribute your votes among as many candidates as you see fit. You may cumulate your votes by giving instructions on the enclosed form of proxy as to how the votes are to be cumulated or by voting in person at the Annual Meeting. When you sign your proxy card, you are giving the persons named in the proxy card discretion to vote in favor of any nominees for the Board of Directors and to cumulate votes, unless you give any specific voting instructions to the contrary. You may specifically withhold authority to vote for one or more director nominees, in which case the proxy may be voted only for the other nominees. You may also give instructions on how votes are to be cumulated, which must then be followed. If you hold your shares through a broker and you wish to cumulate your votes or give other specific voting instructions, please follow the directions that your broker sends you or consult with your broker as to how to do so.
As discussed in Proposal 3, the Board of Directors is proposing to eliminate cumulative voting, and, if cumulative voting is eliminated, the Board intends to amend the Bylaws to adopt a majority vote standard. The goal of these changes is that voting for directors will reflect the will of the majority of stockholders. If Proposal 3 is approved, this change will be effective for future annual meetings, but not for the 2007 Annual Meeting.
How Your Proxy Will Be Voted
If you sign and return your proxy card without instructions as to how it is to be voted, the proxy holders identified on the proxy card will vote your shares as follows:
If you indicate voting instructions on your proxy card, the proxy holders will follow your instructions in casting votes.
The Board of Directors does not know of any matters that will come before the Annual Meeting other than those described in the notice of the Annual Meeting. If any other matters are properly presented for consideration at the Annual Meeting, then the proxy holders will have discretion to vote on such matters as they see fit. This includes, among other things, considering any motion to adjourn the Annual Meeting to another time and/or place, including for the purposes of soliciting additional proxies for or against a given proposal.
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Table of ContentsHow to Change Your Vote or Revoke Your Proxy
You may revoke your proxy at any time before it is voted. You may revoke your proxy by:
If you are mailing a written notice of revocation or a later proxy, send it to: Secretary, Mail Stop M1-1516, Mattel, Inc., 333 Continental Boulevard, El Segundo, CA 90245-5012. You may also hand deliver a written notice of revocation or a later proxy to Mattel at the Annual Meeting, at or before the taking of the vote.
If you hold your shares through a broker and have instructed the broker as to how to vote your shares, you must follow directions received from the broker in order to change your vote or to vote at the Annual Meeting.
Broker Voting and Broker Non-Votes
Mattel’s common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “MAT.” The NYSE has rules that govern brokers who have record ownership of listed company stock held in brokerage accounts for their clients who beneficially own the shares. Under these rules, brokers who do not receive voting instructions from their clients have the discretion to vote uninstructed shares on certain matters (“discretionary matters”) but do not have discretion to vote uninstructed shares as to certain other matters (“non-discretionary matters”). Mattel expects that the NYSE will evaluate the proposals to be voted on at the Annual Meeting to determine whether each proposal is a discretionary or non-discretionary matter. A broker may return a proxy card on behalf of a beneficial owner from whom the broker has not received instructions that casts a vote with regard to discretionary matters but expressly states that the broker is not voting as to non-discretionary matters. The broker’s inability to vote with respect to the non-discretionary matters is referred to as a “broker non-vote.” Broker non-votes will be counted for the purpose of determining the presence of a quorum, but will not be counted in determining the number of votes cast as to non-discretionary matters. Thus, on each proposal regarding a non-discretionary matter (other than Proposal 3), broker non-votes will not have any effect as to whether a proposal regarding a non-discretionary matter is approved. Because approval of Proposal 3 requires the majority in voting power of the outstanding shares of common stock, broker non-votes will count as votes “against” Proposal 3.
Admission Policy for Annual Meeting
Mattel restricts admission to the Annual Meeting to stockholders of Mattel, family members accompanying stockholders of Mattel, persons holding executed proxies from stockholders who held Mattel stock as of the close of business on the record date, and invited guests of Mattel.
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Table of ContentsIf you are a stockholder of Mattel, you must bring certain documents with you in order to be admitted to the Annual Meeting and in order to bring family members with you. The purpose of this requirement is to help us verify that you are actually a stockholder of Mattel. Please read the following rules carefully, because they specify the documents that you must bring with you to the Annual Meeting in order to be admitted. The items that you must bring with you differ depending upon whether or not you were a record holder of Mattel stock as of the close of business on March 30, 2007. A “record holder” of stock is someone whose shares of stock are registered in his or her name in the records of Mattel’s transfer agent. Many stockholders are not record holders because their shares of stock are registered in the name of their broker, bank or other nominee, and the broker, bank or other nominee is the record holder instead; this is sometimes referred to as holding shares in “street name.” If you are unsure as to whether you were a record holder of Mattel common stock as of the close of business on March 30, 2007, please call Mattel’s transfer agent, Computershare Trust Company, N.A., at 1-888-909-9922.
If you were a record holder of Mattel common stock as of the close of business on March 30, 2007, then you must bring:
At the Annual Meeting, we will check your name for verification purposes against our list of record holders as of the close of business on March 30, 2007.
If a broker, bank or other nominee was the record holder of your shares of Mattel common stock as of the close of business on March 30, 2007, then you must bring:
Examples of proof of ownership include the following: (1) an original or a copy of the voting information form from your bank or broker with your name on it, (2) a letter from your bank or broker stating that you owned Mattel common stock as of the close of business on March 30, 2007, or (3) a brokerage account statement indicating that you owned Mattel common stock as of the close of business on March 30, 2007.
If you acquired your shares of Mattel common stock at any time after the close of the business on March 30, 2007, you do not have the right to vote at the Annual Meeting, but you may attend it if you bring:
Examples of proof of ownership include the following:
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Table of ContentsIf you are a proxy holder for a stockholder of Mattel who owned shares of Mattel common stock as of the close of business on March 30, 2007, then you must bring:
You may not use cameras, recording equipment or other electronic devices during the Annual Meeting. Shares may be voted at the Annual Meeting only by (a) the record holder as of the close of business on March 30, 2007 or (b) a person holding a valid proxy executed by such record holder.
Single Set of Disclosure Materials; “Householding”
To reduce the expense of delivering duplicate disclosure materials to our stockholders, we are taking advantage of “householding” rules that permit us to deliver a single copy of our annual report, proxy statement and any information statement to any household at which two or more stockholders reside if we believe the stockholders are members of the same family. Each record stockholder will continue to receive a separate notice of meeting and proxy card or voting instruction card. Also, householding will not in any way affect dividend check mailings.
How to Obtain a Separate Set of Materials
If you share an address with another Mattel stockholder and your household received only one set of Mattel’s annual report and proxy statement, you may call Mattel’s transfer agent, Computershare Trust Company, N.A. at 1-888-909-9922, to request a separate copy of these materials at no cost to you. You may also write to Computershare Trust Company, N.A. at P.O. Box 43010, Providence, RI 02940.
How to Change Your “Householding” Status for the Future
If you would like to receive your own additional set of Mattel’s disclosure documents in the future, please follow the instructions given below. Similarly, if you share an address with another Mattel stockholder and together both of you would like to receive only a single set of Mattel’s disclosure documents, please follow these instructions:
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Table of ContentsPRINCIPAL STOCKHOLDERS
As of April 10, 2007, the only persons known by Mattel to own beneficially, or to be deemed to own beneficially, 5% or more of Mattel’s common stock were:
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Table of ContentsSECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial ownership of Mattel common stock as of March 31, 2007, by (1) each director and nominee for director, (2) the Chief Executive Officer, the Chief Financial Officer and each of the three other most highly compensated executive officers of Mattel as of December 31, 2006 and (3) all current directors and executive officers of Mattel as a group.
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Table of ContentsPROPOSALS
We have included eight proposals in this Proxy Statement. The first four proposals are proposals supported by the Board of Directors. The Board of Directors considered all of the proposals on January 26, 2007 and March 27, 2007, and the Board of Directors’ recommendation on each proposal appears after the proposal.
ELECTION OF DIRECTORS
The Board of Directors currently consists of twelve members.
The Board of Directors has nominated eleven nominees for election at the Annual Meeting, to serve until the next annual meeting of stockholders and until their respective successors have been duly elected and qualified. All of the nominees are currently directors except for Mr. Scarborough. The Board of Directors Amended and Restated Guidelines on Corporate Governance provide that, after attaining the age of 72, a director will not stand for re-election to the Board at subsequent meetings of the stockholders. Mr. Beard, who has served as a director since 2000, and Mr. Vogelstein, who has served as a director since 1983, are each over the age of 72, and accordingly they will not stand for re-election to the Board of Directors and will not be candidates for election for the coming term. As a result, the Board of Directors has reduced the size of the Board to eleven members effective as of the election of directors at the Annual Meeting.
If you sign and return your proxy card, unless you give instructions to the contrary, the proxy holders will cast your votes “for” the election of the nominees listed below. Also, unless you give instructions to the contrary, the proxy holders have the right to cumulate votes for directors as they see fit. If, before the Annual Meeting, any nominee becomes unavailable to serve, the Board of Directors may identify a substitute for such nominee and treat votes “for” the unavailable nominee as votes “for” the substitute. We presently believe that each of the nominees named below will be available to serve.
As discussed above in “General Information—How Voting for Directors Works; Cumulative Voting,” the eleven candidates who receive the highest number of “for” votes will be elected.
Mr. Eckert’s employment agreement with Mattel provides that Mr. Eckert shall have the position and title of Chairman of the Board, and Mattel’s Bylaws provide that the Chairman of the Board shall be a director of Mattel. Otherwise, no nominee has any arrangement or understanding with Mattel or, to Mattel’s knowledge, any other person or persons, pursuant to which any nominee was or is to be selected as a director or nominee. None of the nominees has any family relationship to any other nominee or to any executive officer of Mattel.
Information Concerning Nominees to the Board of Directors
The nominees for election as directors are listed below. All of the nominees are currently directors except for Mr. Scarborough. Each nominee has furnished the information as to his or her beneficial ownership of common stock as of March 31, 2007 and the nominee’s principal occupation(s). Each nominee has consented to being named in this Proxy Statement as a nominee for election as director and has agreed to serve as a director if elected.
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Except as described below, each of the directors has served in the principal occupation or position indicated in the above table for at least the past five years.
Mr. Dolan has served as Chairman of America’s Choice, Inc. since October 2004. He served as Executive Vice President and Chief Financial Officer of Viacom Inc. from May 2004 to December 2006. Prior to that, he served as Senior Advisor to Kohlberg Kravis Roberts & Co. from October 2004 to May 2005. Prior to that, he served in the following positions with Young & Rubicam, Inc.: Chairman and Chief Executive Officer (2001 to 2003), Vice Chairman and Chief Operating Officer (2000 to 2001) and Vice Chairman and Chief Financial Officer (1996 to 2000).
Mr. Eckert has been Chairman of the Board of Directors and Chief Executive Officer since May 2000. He was formerly President and Chief Executive Officer of Kraft Foods, Inc., the largest packaged food company in North America, from October 1997 until May 2000. From 1995 to 1997, Mr. Eckert was Group Vice President of Kraft Foods, Inc. From 1993 to 1995, Mr. Eckert was President of the Oscar Mayer foods division of Kraft Foods, Inc. Mr. Eckert worked for Kraft Foods, Inc. for 23 years prior to joining Mattel.
Dr. Fergusson served as President of Vassar College from 1986 to June 2006. Prior to that, she served as Provost and Vice President for Academic Affairs at Bucknell University from 1982 to 1986. Prior to that, she held the following positions with the University of Massachusetts at Boston: Assistant Chancellor (1980 to 1982) and Associate Professor of Art (1975 to 1980).
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Table of ContentsMr. Friedman has served as Chairman and Chief Executive Officer of Friedman Fleischer & Lowe, LLC since April 1997. Prior to that, he was a founding partner of Hellman & Friedman, a private investment firm, for more than five years.
Mr. Ng has served as Chairman, Chief Executive Officer and President of East West Bancorp, Inc. and East West Bank since 1992. Prior to that, Mr. Ng was President of Seyen Investment, Inc. from 1990 to 1992, and prior to that Mr. Ng served for over a decade as a Certified Public Accountant with Deloitte & Touche LLP.
Dr. Rich served as President, Chief Executive Officer and Director of the Los Angeles County Museum of Art (“LACMA”) from 1999 to 2005, and as President and Chief Executive Officer of LACMA from 1995 to 1999. Prior to that, she served as Executive Vice-Chancellor and Chief Operating Officer of the University of California, Los Angeles, from 1991 to 1995.
Mr. Sargent has served as Chairman of Staples, Inc. since March 2005 and as Chief Executive Officer of Staples, Inc. since 2002. He additionally served as President of Staples, Inc. from 1998 to 2005.
Mr. Scarborough has served as President and Chief Executive Officer of Avery Dennison Corporation since May 2005. From 2000 to May 2005, he was President and Chief Operating Officer of Avery Dennison Corporation.
Mr. Sinclair has served as Chairman of Scandent Holdings, a Mauritius-based information technology services company, since May 2002 and has served as Executive Chairman of Cambridge Solutions Corporation Ltd. since November 2005. He also served as a Managing Director of Manticore Partners, LLC, a venture capital advisory firm, from 2001 to 2004. Prior to that, he served as an Operating Partner of Pegasus Capital Advisors, LP, a private equity firm, from 2000 to 2002. Prior to that, he served as Chairman and Chief Executive Officer of Caribiner International, Inc. from 1999 to 2000. Prior to that, he served as President and Chief Executive Officer of Quality Food, Inc., Chairman and Chief Executive Officer of Pepsi-Cola Company and President and Chief Executive Officer of PepsiCo Foods & Beverages International and Pepsi-Cola International for more than five years.
Mr. Sullivan served as Chairman and Chief Executive Officer of The Clorox Company from 1992 to 2003 and retired in 2003 after 32 years with Clorox.
Ms. White founded the Horizon Institute of Technology in 2002. She also has served as President of Rural Sourcing, Inc., an information technology services provider, since 2003. Ms. White served as Executive Vice President, e-business and Chief Information Officer of Cardinal Health, Inc. from 1999 until February 2003. From 1996 to 1999, Ms. White was Senior Vice President and Chief Information Officer for Allegiance Corporation, which merged with Cardinal Health, Inc. in 1999.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE NOMINEES FOR ELECTION AS DIRECTORS NAMED HEREIN.
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Table of ContentsTHE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Board Meetings
During 2006, the Board of Directors held seven meetings. No director attended less than 75% of the aggregate of all Board of Directors meetings and all meetings held by any committee of the Board of Directors on which he or she served.
Mr. Eckert serves as Chairman of the Board and Chief Executive Officer of Mattel. For a description of Mr. Eckert’s compensation, see “Compensation Disclosure,” beginning at page 25. The remuneration of the other directors, who are all non-employee directors, is explained in “Director Compensation,” beginning at page 81.
Non-Employee Director Stock Ownership
The Board of Directors has adopted policies regarding non-employee director stock ownership and retention of shares purchased upon exercise of stock options. These policies state that, within five years after joining the Board, non-employee members of the Board should attain a target minimum level of stock ownership of three times the annual cash retainer (the annual cash retainer is currently $65,000). For this purpose, stock holdings are valued at the greater of actual cost or market value. Directors who have deferred any of their cash compensation into investments in Mattel stock equivalent accounts in any Mattel deferred compensation plan(s) receive credit for such amounts. In addition, during their service on the Board, non-employee members of the Board are generally required:
Board Committees
Audit Committee
Mattel’s Audit Committee is chaired by Mr. Beard and includes Mr. Dolan, Mr. Ng, Mr. Sinclair and Ms. White as members. All of the members of the Committee are independent directors. During 2006, the Audit Committee held 14 meetings.
The purpose of the Audit Committee is to provide assistance to the Board of Directors in fulfilling the Board’s oversight responsibilities regarding:
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The Audit Committee has the sole authority to appoint or replace the independent registered public accounting firm. The Committee is directly responsible for the compensation and oversight of the work of the independent registered public accounting firm for the purpose of preparing or issuing an audit report or related work. The independent registered public accounting firm reports directly to the Committee.
The Audit Committee meets periodically, in separate executive sessions, with management, the senior internal auditing officer and the independent registered public accounting firm. The Committee may request any officer or employee of Mattel or Mattel’s outside counsel or independent registered public accounting firm to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee. The Committee has the authority to retain independent legal, accounting or other advisors, to the extent it deems necessary or appropriate.
Additional duties and responsibilities of the Audit Committee are outlined in the Committee’s charter, and include the following:
Governance and Social Responsibility Committee
Mattel has a Governance and Social Responsibility Committee chaired by Mr. Sullivan that includes Dr. Rich, Mr. Sargent, Mr. Sinclair and Ms. White as members. All of the members of the Committee are independent directors. During 2006, the Governance and Social Responsibility Committee held five meetings.
The primary purposes of the Governance and Social Responsibility Committee are:
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The Committee also works closely with the Chief Executive Officer and other members of Mattel’s management to assure that the company is governed effectively and smoothly, and has additional authority and responsibilities as specified in its charter.
Compensation Committee
Mattel has a Compensation Committee chaired by Mr. Vogelstein that includes Mr. Beard, Mr. Tully Friedman, Dr. Rich and Mr. Sullivan as members. All of the members of the Committee are independent directors, are “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code and are “non-employee directors” within the meaning of the SEC’s rule 16b-3. During 2006, the Compensation Committee held five meetings.
The purpose of the Compensation Committee is to develop, evaluate, and in certain instances approve or determine the compensation plans, polices, and programs of Mattel. The Committee has the authority to undertake and may exercise all of the powers of the Board of Directors with respect to the specific responsibilities listed in the Committee’s charter, including:
The Compensation Committee has access to, and in its discretion may meet with, any officer or other employee of Mattel or its subsidiaries. The Committee meets at least once each calendar year without the Chief Executive Officer present. The Committee may utilize the services of Mattel’s regular corporate legal counsel with respect to legal matters or, in its discretion, retain other legal counsel if it determines that such counsel is necessary or appropriate under the circumstances.
The Compensation Committee may, in its discretion, utilize the services of a compensation consultant or other professional or expert to provide data and advice to the Committee regarding the compensation of executives of Mattel and to assist the Committee in performing its other responsibilities. The retention and, where appropriate, the termination of any such compensation consultant are at the sole discretion of the Committee without the participation of any officer or other member of management of Mattel. The Committee, in its sole discretion, approves the fees to be paid to the compensation consultant and any other terms of the engagement of the compensation consultant.
The Compensation Committee has retained The Hay Group as its independent compensation consultant since 2001. In 2006, the independent compensation consultant assisted the Compensation Committee on the following matters:
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Other Board Committees
Mattel has an Executive Committee (formerly known as the “Executive/Finance Committee”) chaired by Mr. Vogelstein that includes Messrs. Beard and Tully Friedman as members. During 2006, the Executive/Finance Committee held no meetings. The Executive/Finance Committee may exercise all the powers of the Board of Directors, subject to limitations of applicable law, between meetings of the Board of Directors.
Mattel has a Finance Committee (formerly known as the “Capital Allocation Committee”) chaired by Mr. Vogelstein that includes Mr. Beard, Dr. Fergusson, Mr. Tully Friedman and Mr. Sargent as members. During 2006, the Finance Committee held six meetings. The Committee’s primary functions are to advise and make recommendations to the Board of Directors with regard to Mattel’s use of available capital, including but not limited to dividends to stockholders, mergers and acquisitions and stock repurchase programs.
Mattel has an Equity Grant Allocation Committee with Mr. Eckert as the sole member. The Committee’s primary function is to exercise the limited authority delegated to the Committee by the Board of Directors and the Compensation Committee with regard to making grants pursuant to the 2005 Equity Compensation Plan. For more information on this Committee, see “Compensation Discussion and Analysis—Equity Compensation Grant Procedures,” beginning on page 37.
Mattel Children’s Foundation
Until May 2004, the members of Mattel’s Board of Directors also served as the members of the Mattel Children’s Foundation, a charitable organization incorporated as a non-profit public benefit corporation (the “Foundation”), and Mr. Tully Friedman, Ms. White and former Mattel director Ronald M. Loeb served as the Foundation’s Board of Directors. In May 2004, the governance structure of the Foundation was updated so that Mattel itself became the sole member of the Foundation, and nine employees of Mattel, none of whom are Mattel directors, were appointed as the Foundation’s Board of Directors. Thus, since May 2004, none of Mattel’s non-employee directors has served as either a member or a director of the Foundation.
Director Independence
The NYSE requires each NYSE-listed company to have a board of directors with at least a majority of independent directors. Generally, under the NYSE rules a director qualifies as independent
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Table of Contentsif the listed company’s board of directors affirmatively determines that he or she has no material relationship with the company, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company. The NYSE rules specify five categories of relationships between a director and a listed company that would make a director ineligible to be independent. Mattel’s Board of Directors has adopted Corporate Governance Guidelines that include provisions regarding director independence, as set forth in Appendix A to this Proxy Statement. These provisions incorporate the NYSE’s five categories of relationships between a director and a listed company that would make a director ineligible to be independent.
In accordance with NYSE rules and Mattel’s Corporate Governance Guidelines, the Board of Directors has affirmatively determined that each of the following directors, and Mr. Scarborough as a nominee for election as a director, has no material relationship with Mattel (either directly or as a partner, shareholder or officer of an organization that has a relationship with Mattel) and is independent within the meaning of both Mattel’s and the NYSE’s director independence standards, as currently in effect:
Eugene P. Beard Michael J. Dolan Dr. Frances D. Fergusson Tully M. Friedman Dominic Ng Dr. Andrea L. Rich Ronald L. Sargent Dean A. Scarborough Christopher A. Sinclair G. Craig Sullivan John L. Vogelstein Kathy Brittain White
The persons listed above include (a) all of the current directors of Mattel, except the Chairman and Chief Executive Officer, (b) all directors who are standing for election at the 2007 Annual Meeting of Stockholders, except the Chairman and Chief Executive Officer, and (c) Mr. Scarborough, who is not currently a director but is a nominee for election at the 2007 Annual Meeting.
Furthermore, the Board of Directors has determined that each of the members of the Audit Committee, the Compensation Committee and the Governance and Social Responsibility Committee has no material relationship with Mattel (either directly or as a partner, shareholder or officer of an organization that has a relationship with Mattel) and is independent within the meaning of the director independence standards in the Corporate Governance Guidelines and the NYSE director independence standards (and in the case of the Audit Committee, SEC rules) applicable to members of such committees.
In making these determinations, the Board of Directors considered, among other things, the relationships described in the following three paragraphs. The Board of Directors has determined that none of these relationships is material and that none of these relationships impairs the independence of any non-employee director.
The Board considered that, in the ordinary course of business, Mattel and its subsidiaries enter into transactions with Viacom Inc. or its subsidiaries, and Mr. Dolan served as an executive officer of Viacom Inc. through the end of 2006. The amounts paid to or received from Viacom Inc. and its subsidiaries in each of the last three fiscal years were below the threshold of 2% of consolidated gross
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Table of Contentsrevenues as set forth in Mattel’s criteria for director independence. The Board also determined that these transactions were not otherwise material to Viacom Inc. or to Mattel and that Mr. Dolan did not have a material interest in the transactions. The Board therefore determined that these relationships do not impair Mr. Dolan’s independence as a director of Mattel or as a member of the Audit Committee.
The Board also considered that Mr. Eckert in his personal capacity invests in a private equity fund sponsored by Friedman Fleischer & Lowe, LLC (“FFL”), an investment firm in which Mr. Tully Friedman is a principal. The Board concluded that this investment, which does not involve the payment of any material compensation to any director or to FFL and is not material in amount to FFL, does not adversely affect the independence of Mr. Friedman as a director of Mattel or a member of the Governance and Social Responsibility Committee. In addition, the Board considered that one or more directors that are not also officers of Mattel may from time to time invest in funds sponsored by FFL, but that no such investment would impact the independence of Mr. Friedman or any such investing director, because of the absence of any relationship between such investment and any member of management of Mattel.
The Board furthermore considered that, as described above under the heading “Mattel Children’s Foundation,” until May 2004, the members of Mattel’s Board of Directors also served as the members of the Foundation, which is a charitable organization incorporated as a non-profit public benefit corporation, and Mr. Tully Friedman and Ms. White served on the Foundation’s Board of Directors. In May 2004, the governance structure of the Foundation was updated so that Mattel itself became the sole member of the Foundation, and nine employees of Mattel were appointed as the Foundation’s Board of Directors. Since May 2004, none of Mattel’s non-employee directors has served as either a member or a director of the Foundation. Mattel provides all of the funding for the Foundation and contributed approximately $4.5 million, $5.1 million and $5.9 million to the Foundation in 2006, 2005 and 2004, respectively. The Board of Directors concluded that, since the Foundation is sponsored by Mattel, the relationships of Mattel’s non-employee directors with the Foundation are not the type of relationships that would impair their independence as directors of Mattel or as members of the Board’s Audit Committee, Compensation Committee or Governance and Social Responsibility Committee.
Presiding Independent Director at Executive Sessions of the Board
The independent directors of Mattel previously selected John L. Vogelstein as the independent director to preside at executive sessions of the independent members of the Board of Directors, during which no members of management are present. In connection with Mr. Vogelstein’s retirement from the Board, the independent directors have selected Tully M. Friedman as the new presiding independent director, effective upon Mr. Vogelstein’s retirement. The duties of the presiding independent director include all of the following:
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The independent directors meet in executive session at least once every quarter.
Communications with the Board of Directors
The independent directors of Mattel have unanimously approved a process by which stockholders of Mattel and other interested persons may send communications to any of the following: (a) the Board of Directors, (b) any committee of the Board, (c) the presiding independent director or (d) the independent directors. Such communications should be submitted in writing by mailing them to the relevant addressee at the following address:
[Addressee] Mattel, Inc.—Secretary, Mail Stop M1-1516 333 Continental Blvd. El Segundo, CA 90245-5012
Any such communications will be relayed to the Board members that appear as addressees, except that the following categories of communications will not be so relayed (but will be available to Board members upon request):
Policy Regarding Attendance of Directors at the Annual Meeting of Stockholders
Each member of Mattel’s Board of Directors is expected, but not required, to attend Mattel’s annual meeting of stockholders. There were eleven directors at the time of the 2006 Annual Meeting of Stockholders, and ten of them attended the meeting.
Director Nominations Process
Mattel’s Corporate Governance Guidelines sets forth the process of selecting candidates for director positions and the role of the Governance and Social Responsibility Committee in identifying director qualifications and potential candidates.
The Guidelines provide that the full Board of Directors is responsible for selecting candidates for Board membership, and Board members are encouraged to suggest candidates for consideration. The Board delegates the screening process involved to the Chair.
Under the Guidelines, the Governance and Social Responsibility Committee is responsible for reviewing with the Board annually the skills and characteristics required of Board members, given the current make-up of the Board and the perceived needs of the Board at that time. This review includes an assessment of the talents, skills, areas of expertise, experience, diversity and independence of the
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Table of ContentsBoard and its members. Any changes that may have occurred in any director’s responsibilities, as well as such other factors as may be determined by the Committee to be appropriate for review, are also considered.
The Governance and Social Responsibility Committee Charter also sets forth the process for identifying candidates, pursuant to which the Committee actively seeks individuals qualified to become Board members for recommendation to the Board. The Committee, with input from the Board Chair, screens candidates to fill vacancies on the Board; solicits recommendations from Board members as to such candidates; and considers recommendations for Board membership submitted by stockholders as described further below. Candidates whom the Committee expresses interest in pursuing meet personally with at least two members of the Governance and Social Responsibility Committee before they are selected. The Committee recommends to the Board director nominees for each annual meeting of stockholders.
The Governance and Social Responsibility Committee has also adopted a Director Nominations Policy, which appears as Appendix B to this Proxy Statement. The purposes of the Director Nominations Policy are:
The Governance and Social Responsibility Committee intends to review the Director Nominations Policy at least annually, and anticipates that modifications may be necessary from time to time as Mattel’s needs and circumstances evolve, and as applicable legal or listing standards change. The Governance and Social Responsibility Committee may amend the Director Nominations Policy at any time, in which case the most current version will be available in the “Corporate Governance” section of Mattel’s corporate Web site.
Selection of nominee Mr. Scarborough
There is one nominee for election to Mattel’s Board this year who has not previously been elected by the stockholders to serve as a director. This nominee, Mr. Scarborough, was nominated by the Board on March 27, 2007. The Governance and Social Responsibility Committee retained a leading professional search firm, Korn/Ferry International, to help identify, evaluate and review potential nominees, and such firm identified and recommended Mr. Scarborough.
Golden Parachute Policy
In 2005, a stockholder submitted a proposal to Mattel regarding “golden parachute vote provision,” which requested that the Board of Directors seek stockholder approval for future “golden parachute” severance packages for senior executives that exceed 299% of the sum of any executive’s base salary plus bonus. The proposal was included as Proposal 4 in Mattel’s 2005 Notice of Annual Meeting and Proxy Statement, dated April 13, 2005.
In 2006, following consideration of the vote received by the stockholder’s proposal at the 2005 Annual Meeting of Stockholders, and after discussion by the Compensation Committee and the Governance and Social Responsibility Committee, Mattel’s Board of Directors adopted a statement of policy on this topic, which appears as Appendix C to this Proxy Statement.
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Table of ContentsRelated Party Transactions Policy
In 2007, Mattel’s Board of Directors adopted a Related Party Transactions Policy regarding the review, approval and ratification of any transaction required to be reported under Item 404(a) of the SEC’s Regulation S-K. A copy of the Related Party Transactions Policy is attached to this Proxy Statement as Exhibit D.
Corporate Governance Documentation; How to Obtain Copies
Mattel is committed to having solid standards of corporate governance. Current copies of the following materials related to Mattel’s corporate governance standards and practices are available publicly in the “Corporate Governance” section of Mattel’s corporate Web site at http://www.mattel.com:
A copy of any or all of these documents may also be obtained, free of charge, by mailing a request in writing to: Secretary, Mail Stop M1-1516, Mattel, Inc., 333 Continental Boulevard, El Segundo, CA 90245-5012.
Compensation Committee Interlocks and Insider Participation
During 2006, Mr. Beard, Mr. Tully Friedman, Dr. Rich, Mr. Sullivan and Mr. Vogelstein served on the Mattel Compensation Committee. (Mr. Friedman joined the Committee in May 2006.) During 2006, there were no interlocks with other companies within the meaning of the SEC’s proxy rules. None of the members of the Compensation Committee is or has been an officer or employee of Mattel or any of its subsidiaries.
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Table of ContentsREPORT OF THE AUDIT COMMITTEE
To the fullest extent permitted under applicable laws and regulations, the following Report of the Audit Committee shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission (“SEC”) or subject to Regulations 14A or 14C of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or the liabilities of Section 18 of the Exchange Act. To the fullest extent permitted under applicable laws and regulations, the Report of the Audit Committee shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent Mattel specifically incorporates it by reference.
The Audit Committee operates pursuant to a written charter adopted by the Board of Directors. In January 2006, the Board of Directors amended and restated the charter of the Audit Committee, a copy of which and may be found in the “Corporate Governance” section of Mattel’s corporate Web site, http://www.mattel.com. A copy may also be obtained free of charge by mailing a request in writing to: Secretary, Mail Stop M1-1516, Mattel, Inc., 333 Continental Blvd., El Segundo, CA 90245-5012.
The Board of Directors has determined that each of the members of the Audit Committee meets the SEC and New York Stock Exchange (“NYSE”) independence requirements for members of audit committees.
The Board of Directors has further determined in its business judgment that each member of the Audit Committee is “financially literate,” as such term is used in the listing standards of the NYSE; and the Board has determined that Eugene P. Beard, the Chair of the Audit Committee, is an “audit committee financial expert” as such term is defined in Item 401(h) of Regulation S-K promulgated by the SEC. The Board has also determined that Mr. Beard has “accounting or related financial management expertise,” as such term is used in the listing standards of the NYSE. In preparation for Mr. Beard’s retirement from the Board, the Board has also determined that Michael J. Dolan, who is expected to succeed Mr. Beard as the Chair of the Audit Committee, is an “audit committee financial expert” and has “accounting or related financial management expertise,” The Board has additionally determined that each of Dominic Ng and Christopher A. Sinclair is an “audit committee financial expert” and has “accounting or related financial management expertise.”
The Audit Committee’s responsibility is to assist the Board of Directors in its oversight of :
(a) the quality and integrity of Mattel’s financial reports,
(b) the independence, qualifications and performance of Mattel’s independent registered public accounting firm,
(c) the performance of Mattel’s internal audit function and
(d) the compliance by Mattel with legal and regulatory requirements.
Management of Mattel is responsible for Mattel’s consolidated financial statements as well as Mattel’s financial reporting process, disclosure controls and procedures, and internal control over financial reporting.
Mattel’s independent registered public accounting firm is responsible for performing an integrated audit of Mattel’s annual consolidated financial statements and of its internal control over financial reporting.
In this context, the Audit Committee has reviewed and discussed the audited financial statements of Mattel as of and for the year ended December 31, 2006 and Management’s Report on Internal Control over Financial Reporting with management, the senior internal auditing officer of Mattel and
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Table of Contentsthe independent registered public accounting firm. Management has confirmed to the Audit Committee that, as required by Section 404 of the Sarbanes-Oxley Act, management has evaluated the effectiveness of Mattel’s internal control over financial reporting using the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission and concluded that it was effective at December 31, 2006.
Mattel’s independent registered public accounting firm has expressed its opinion that:
(1) Mattel’s consolidated financial statements present fairly, in all material respects, its financial position as of December 31, 2006 and 2005, and its results of operations and cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America;
(2) Mattel has maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by COSO; and
(3) management’s assessment, included in Management’s Report on Internal Control over Financial Reporting, is fairly stated, in all material respects.
In addition, Mattel’s Chief Executive Officer and Chief Financial Officer reviewed with the Audit Committee, prior to filing with the SEC, the certifications that were filed pursuant to the requirements of the Sarbanes-Oxley Act of 2002 and the disclosure controls and procedures management has adopted to support the certifications. The Audit Committee periodically meets in separate executive sessions with management, the senior internal auditing officer and the independent registered public accounting firm. Each of the independent registered public accounting firm, the senior internal auditing officer, the Chief Financial Officer and the General Counsel has unrestricted access to the Audit Committee.
The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended and currently in effect, and Public Company Accounting Oversight Board Auditing Standard No. 2, An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. In addition, the Audit Committee has received written disclosures in a letter from the independent registered public accounting firm regarding their independence from Mattel, as required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, as currently in effect, and the Audit Committee has also discussed with the independent registered public accounting firm their independence from Mattel.
The Audit Committee has also considered whether the independent registered public accounting firm’s provision of non-audit services to Mattel is compatible with maintaining their independence from Mattel.
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Table of ContentsThe members of the Audit Committee are not engaged in the accounting or auditing profession and, consequently, are not experts in matters involving accounting or auditing including in respect of auditor independence. As such, it is not the duty of the Audit Committee to plan or conduct audits or to determine that Mattel’s consolidated financial statements fairly present Mattel’s financial position, results of operations and cash flows and are in conformity with accounting principles generally accepted in the United States of America and applicable laws and regulations. Each member of the Audit Committee is entitled to rely on:
(i) the integrity of those persons within Mattel and of the professionals and experts (such as the independent registered public accounting firm) from which the Audit Committee receives information,
(ii) the accuracy of the financial and other information provided to the Audit Committee by such persons, professionals or experts absent actual knowledge to the contrary, and
(iii) representations made by management or the independent registered public accounting firm as to any information technology services of the type described in Rule 2-01(c)(4)(ii) of Regulation S-X and other non-audit services provided by the independent registered public accounting firm to Mattel.
Based on the reports and discussions described above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in Mattel’s Annual Report on Form 10-K for the year ended December 31, 2006, for filing with the SEC.
AUDIT COMMITTEE
Eugene P. Beard (Chair) Michael J. Dolan Dominic Ng Christopher A. Sinclair Kathy Brittain White
March 26, 2007
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Table of ContentsCOMPENSATION DISCLOSURE
This Proxy Statement is the first one that Mattel has provided under new rules that the Securities and Exchange Commission has issued governing the disclosure of compensation of executives and directors. Therefore, the sections that follow look quite different from the compensation disclosure sections in our 2006 annual proxy statement and earlier proxy statements. The most important differences include the following:
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Table of ContentsREPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee reviewed and discussed Mattel’s Compensation Discussion and Analysis with Mattel’s management. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and Mattel’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
COMPENSATION COMMITTEE
John L. Vogelstein (Chair) Eugene P. Beard Tully M. Friedman Dr. Andrea L. Rich G. Craig Sullivan
March 26, 2007
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Table of ContentsCOMPENSATION DISCUSSION AND ANALYSIS
The compensation and benefits provided to our named executive officers for 2006 are set forth in detail in the Summary Compensation Table and other tables, and the accompanying footnotes and narrative material. This Compensation Discussion and Analysis explains the purposes of our executive compensation and benefits program and explains each element. Our executive compensation and benefits program is designed and administered under the direction and control of the Compensation Committee of our Board of Directors.
Executive Compensation Objectives
Executive Compensation Strategies and Principles: Our executive compensation strategies have the following aims:
In establishing and evaluating the effectiveness of executive compensation programs, the Compensation Committee is guided by three basic principles:
Attraction and Retention of Executive Talent: We have long recognized that a critical component of our business strategy is to build and retain a team of highly talented senior executives, with the right structure for corporate and business unit responsibilities and the right individuals in key jobs. Mattel is a high-profile, successful marketing and manufacturing consumer goods company, and as a consequence, Mattel’s executives have often been targeted by other companies and executive recruiters. The loss of key executives deprives us of their services, forces us to expend time and money to replace them, and, if they join competitors, may allow competitors to take advantage of the executives’ special insight into our business and strategies. We realize the importance of compensation as the primary means by which we compete for and retain talent in a highly competitive marketplace.
We have taken several measures to address these issues, using both incentives to remain with Mattel and disincentives to leave. These include:
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No single compensation arrangement can force an executive to continue working for Mattel or prevent an executive from leaving to work for a competitor. However, we believe that these arrangements, as well as the overall design of our compensation and benefits package, help to strengthen the mutual commitment and loyalty between Mattel and its key executive team.
Overall Compensation Levels: As discussed above, a key factor in our business success is attracting and retaining talented executives. We compete for these executives with other large global consumer companies in various industries. We therefore compare our total compensation levels to those of these other large global consumer companies, with the general intent to fall at or above the market average, while offering competitive pay opportunities. However, we do not target a specific percentile for our overall executive compensation packages, and our actual compensation reflects individual and company performance, reflecting our pay-for-performance philosophy.
We evaluate the overall competitiveness and appropriateness of executive compensation annually, by looking at the total compensation package in deciding base salary, annual incentives, long-term cash incentives, long-term equity plans, benefits and perquisites.
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Table of ContentsEach year the Compensation Committee reviews tally sheets of the compensation and benefits of each member of our Management Committee. These tally sheets show the executives’ total compensation for the most recent two years in detail and in total. They also show, for each executive, the pension benefits payable upon retirement, the severance benefits payable upon a termination of employment without cause, and the benefits payable in connection with a change of control. Finally, the tally sheets include a projection of the value each executive may receive from equity compensation. The Committee discusses the tally sheets with its independent compensation consultant and reviews them with the full Board of Directors.
In addition, the Compensation Committee’s independent compensation consultant annually analyzes and reports to the Compensation Committee on the competitive position of the target and actual compensation of the Management Committee members. In 2006, this report included a review of each executive’s total cash compensation and total direct compensation, showing both the current competitive positioning and the executive’s five-year historical compensation. For our Chief Executive Officer, our Chief Financial Officer and our President, Mattel Brands, each element of compensation was analyzed and compared to the compensation of their counterparts at the companies that make up our current comparator group. Our comparator group is made up of companies that are category leaders in the consumer products, apparel and fashion, foods, retail and recreation industries. The Compensation Committee’s independent consultant reviews the makeup of this group annually and advises the Committee about its appropriateness.
The consultant concluded that the targeted level of pay of most of the Management Committee members is competitive, falling in the third quartile for total direct compensation; and that our Chief Executive Officer’s cash compensation has been and remains competitive, but his equity and total direct compensation has been well below market for several years. After considering all of the information described above and the consultant’s recommendations, the Compensation Committee determined to increase our Chief Executive Officer’s equity grants to a market level, beginning in 2006. Specific information about our Chief Executive Officer’s 2006 equity grants is set forth in the Grants of Plan-Based Awards table and accompanying footnotes and narrative disclosure.
Stock Ownership Guidelines: The Compensation Committee believes that when our executives hold significant equity interests in Mattel, their interests are more closely aligned with those of stockholders. Moreover, a meaningful direct ownership stake by our leaders demonstrates to our investors a strong commitment to the company’s success. We therefore have had stock ownership guidelines for our named executive officers and other members of the Management Committee for more than a decade. The Compensation Committee had its independent compensation consultant review and discuss these guidelines at several meetings in 2006. At the conclusion of this detailed review process, the Compensation Committee determined to modify the guidelines in a number of ways that were recommended by its independent compensation consultant, and in certain respects made them more stringent than the consultant recommended.
The new guidelines are outlined below. The revisions are effective as of January 1, 2007, and Management Committee members have five years—until December 31, 2011—to meet the guidelines as revised. The Compensation Committee monitors executives’ progress towards meeting the guidelines, and will take each executive’s progress into account in determining future equity grants.
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Tax and Accounting Considerations: When it reviews compensation matters, the Compensation Committee considers the anticipated tax treatment of various payments and benefits to Mattel and, when relevant, to its executives.
The Compensation Committee considers the expected impact of Internal Revenue Code Section 162(m) when it makes compensation decisions. Section 162(m) limits to $1,000,000 the amount of compensation to any one of our five top executive officers that Mattel may deduct each year. However, this limit does not apply to compensation that qualifies as “performance-based” or that is paid after the executive is no longer employed by Mattel. The Committee does not necessarily limit executive compensation to the amount deductible under Internal Revenue Code Section 162(m). Rather, it considers the available alternatives and acts to preserve the deductibility of compensation to the extent reasonably practicable and to the extent consistent with its other compensation objectives.
The required adoption of a new accounting standard (Financial Accounting Standard No. 123(R), “Share-Based Payment”) in 2006, under which at-the-money stock options as well as all other forms of equity compensation result in a charge to earnings, was taken into account by the Compensation Committee in determining to take a “portfolio” approach to equity grants, awarding both stock options and restricted stock units, beginning generally in 2006. Further, the Compensation Committee chose to grant restricted stock units, rather than restricted stock, because of the unfavorable foreign tax consequences of restricted stock in some non-U.S. jurisdictions where some of our grantees reside and work.
Elements of Executive Officer Compensation and Benefits
The components of our executive compensation programs are:
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Table of ContentsBase Salary: Base salaries provide for stable compensation to executives and allow us to attract competent executive talent and maintain a stable management team. They also provide a basis upon which executives may be rewarded for individual performance.
Each of our named executives officers has an employment agreement or letter discussed in more detail in the narrative discussion accompanying the compensation tables and in the section entitled “Potential Payments upon Termination or Change of Control.” These arrangements set minimum base salaries that were established by negotiation at the time the executives were first hired or first assumed their present positions.
The Compensation Committee reviews executive officer salaries regularly, usually once every 12 months, and makes adjustments as warranted to reflect continued individual contributions, sustained performance and competitive market factors. Reviews took place at the January 2006 meeting, with adjustments effective as of February 27, 2006, and at the January 2007 meeting, with adjustments effective as of February 26, 2007.
Our human resources staff and the Compensation Committee’s independent compensation consulting firm established our current salary structure using a job evaluation methodology established by the consultant. Jobs were evaluated based on multiple factors, including knowledge and problem-solving requirements and accountability. Positions were categorized by job band and salary structures for minimum, midpoint, and maximum were established for each job band. Individual base salaries are established and periodically adjusted within this framework, and are targeted at or above market levels.
Base salaries for executives are initially determined by evaluating:
Increases to base salaries are driven primarily by individual performance and market competitive factors. Economic indicators such as the Consumer Price Index are also considered. Individual contributions and performance are reviewed against total annual compensation, rather than against base salary alone. The evaluation of individual performance is based on:
The results of this evaluation process are reported to our Chief Executive Officer, who then approves recommendations to the Compensation Committee for salary adjustments (if any) for the members of the Management Committee other than himself. After considering these recommendations, the Compensation Committee determines and approves the base salary amounts. Mr. Stockton, our Executive Vice President, International, was the only one of our named executive officers whose base salary was adjusted as a result of the 2007 review. His annual base salary was increased from $675,000 to $700,000, to recognize his performance and to preserve internal pay equity.
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Table of ContentsOur Chief Executive Officer’s base salary is generally determined by the Compensation Committee after consultation with its independent compensation consultant. However, the Compensation Committee may, in its discretion, make this determination in conjunction with other independent directors of the Board and/or refer its determination to the full Board of Directors for ratification. Our Chief Executive Officer’s base salary remains at the level established when he was hired in 2000.
Annual Incentive: We provide our executive officers and certain other employees with the opportunity to earn annual cash incentive compensation, as an incentive to achieve our business objectives each year and a reward for success in doing so. Annual incentive compensation is a key tool for implementing our “pay-for-performance” approach to executive compensation, which emphasizes variable at-risk compensation that is dependent upon fully meeting specific corporate and individual performance goals.
This element of our incentive compensation program:
The current vehicle for annual cash incentive compensation is the 2002 Mattel Incentive Plan, referred to as the MIP. This plan and the 2006 bonuses under it are described in detail in the Summary Compensation table and Grants of Plan-Based Awards table and the accompanying footnotes and narrative disclosures. In Proposal 4 of this Proxy Statement, we are asking our stockholders to approve the Mattel Incentive Plan, which is substantially similar to the MIP and, if approved, will become the vehicle for annual cash incentive compensation in 2008 and future years.
The performance measures and goals for named executive officers under the MIP are based on objective formulae or standards set by the Compensation Committee, in order to qualify for the exception from Internal Revenue Code Section 162(m) for performance-based compensation. However, the Compensation Committee retains the discretion to reduce the bonus for any named executive officer from the amount determined using the objective measures and goals, based upon any criteria that the Compensation Committee considers to be relevant.
Each year, management recommends specific financial goals that are subject to review, comment and approval by the Compensation Committee. No bonuses are paid to any member of our Management Committee unless the minimum corporate goal approved by the Committee is accomplished. If that goal is achieved, our Management Committee members earn bonuses under the MIP to the extent that financial and corporate strategic goals established by the Compensation Committee are achieved. If performance is below the threshold level, there is no payout. If performance reaches the threshold level, bonuses are paid at 50% of the target levels. If performance achieves the target, bonuses are paid at the target level. Bonuses are paid at 150% of the target level
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Table of Contents(200% for our Chief Executive Officer) if performance reaches or exceeds the maximum level, which is deemed to be significantly in excess of the target. For performance between threshold and target or target and maximum, the bonuses are interpolated accordingly.
The MIP goals for our named executive officers are based on the following performance measures:
In selecting these performance measures for the MIP, we have been guided by these principles:
The performance goals established by the Compensation Committee include threshold, target and maximum levels, generating corresponding payouts based on percentages of base salary, with interpolation between the different levels.
The corporate measure of NOPAT less a capital charge applies to all Management Committee members, and is designed to encourage our entire executive team to achieve efficiencies and better decision-making. This corporate measure is proprietary to Mattel, and is derived from Mattel’s audited financial statements, including both the income statement and the balance sheet. Financial performance measures for an executive’s specific business unit are used when appropriate to encourage a focus on business results that the executive can directly affect. The specific numbers that make up the corporate and business-unit-specific performance goals involve confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm to Mattel.
The performance measures based on objectively measurable corporate strategic initiatives used under the MIP represent Mattel’s strategic direction and key business objectives for the year. They are the same for all Management Committee members, thus serving our team approach to performance. The Compensation Committee establishes precise measures that must be achieved in order to reach the threshold, target and maximum levels. The nature and details of the corporate strategic initiatives, and the goals based on these performance measures, involve confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm to Mattel.
At the time that they are set, all of the goals that the Compensation Committee establishes are substantially uncertain to be achieved. They are all aggressive goals designed to drive performance.
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Table of ContentsThe threshold-level goals can be characterized as “stretch but attainable,” while the target and maximum goals represent increasingly challenging levels of performance.
In determining the performance measures and award levels for each named executive officer under the MIP, the Compensation Committee reviews competitive data regarding total executive compensation, relies upon the advice of the Compensation Committee’s independent compensation consultant and exercises its business judgment. The award levels have remained consistent for the past several years, and are within the range of market practice. Our Chief Executive Officer’s award levels under the MIP have remained unchanged since he was first hired in 2000.
The Audit Committee of our Board of Directors reviews performance results, including the achievement of NOPAT less a capital charge, and the Compensation Committee’s independent compensation consultant reviews the computation of bonus amounts based on those results. The Compensation Committee reviews the results and certifies achievement of the goals before payouts are made. While the Compensation Committee has the discretion under the MIP to decide to pay less than the amounts determined according to the pre-established formula, it has not exercised this discretion to date.
For 2006, all MIP goals were met at the maximum level, resulting in payouts of the maximum amounts. See the Summary Compensation Table for details.
At its March 2007 meeting, the Compensation Committee established the performance measures, goals and potential award levels for participants in the MIP for the calendar year 2007. The performance measures for our named executive officers are similar in nature to the performance measures for calendar year 2006, and the award level amounts for 2007 at the threshold, target and maximum levels, as percentages of each named executive officer’s base salary, are the same as for 2006. See the Summary Compensation Table and the Grants of Plan-Based Awards table below.
Special Bonus: In March of 2006, Mr. Stockton, our Executive Vice President, International, also received a special bonus of $50,000. This bonus was recommended by our Chief Executive Officer, and approved by the Compensation Committee, to recognize and reward Mr. Stockton for his outstanding performance in carrying out the international integration of the consolidated Fisher-Price Brands and Mattel Brands groups, an important strategic objective that was not part of the goals established under the MIP bonus opportunity for 2005.
Long-Term Cash Incentives: We provide our named executive officers and certain other senior executives with the opportunity to earn cash long-term incentive compensation as an incentive to achieve our long-range financial objectives and a reward for success in doing so. We believe that it is crucial to Mattel’s success that executives maintain a long-term focus and be motivated to sustain growth in shareholder value. The long-term incentive component of our compensation program complements the annual incentive compensation component by rewarding growth in stockholder value that is sustained over several years and encouraging participants to focus on longer-term achievement.
The vehicle for cash long-term incentive compensation is the Mattel, Inc. 2003 Long-Term Incentive Plan, referred to as the LTIP. The performance goals for named executive officers under the LTIP are based on objective formulae or standards set by the Compensation Committee, in order to qualify for the exception from Internal Revenue Code Section 162(m) for performance-based
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Table of Contentscompensation. Any awards that are earned are paid in cash in the quarter following the end of the performance period. As discussed above, payments for performance cycles beginning on or after January 1, 2005 are subject to cancellation, reduction and recapture under certain circumstances.
At certain times in the past, we used four-year LTIP performance cycles, with two overlapping cycles outstanding at any given time. However, we have now transitioned to using successive three-year cycles with no overlap, which we find to be more consistent with our business planning. The last four-year cycle was for 2003-2006. Performance under this cycle did not meet the threshold level, and accordingly no payments were made. A single performance cycle, for 2005-2007, is now in effect.
For LTIP performance cycles since 2000, the performance targets have been based on net operating profit after taxes, less a capital charge (referred to as NOPAT less a capital charge). This financial measure is similar to the corporate measure used under the MIP, as described above, but is adjusted to reflect the longer-term focus of the LTIP.
NOPAT less a capital charge takes into account both income statement and balance sheet performance. The capital charge represents the amount required to:
Both equity and debt are included in the performance measures for the LTIP so as to encourage efficiencies and better decision-making, without favoring any one capital deployment alternative over the others: cash accumulation, debt retirement, increased dividends or share repurchase all have an equal effect on capital for these purposes. LTIP participants are rewarded if we are able to realize net operating profit in excess of the capital charge, indicating that we are generating after-tax profits that exceed the rate of return required by debt and equity holders.
In establishing the goals against which the company’s actual NOPAT less a capital charge will be measured, the Compensation Committee reviews in detail the valuation principles and methods proposed by management, and its independent compensation consultant advises about the performance measures. The performance goals are subject to adjustment in the event of certain mergers and acquisitions.
The specific numbers that make up the corporate and business-unit-specific performance goals involve confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm to Mattel. At the time that they are set, the goals that the Compensation Committee establishes are substantially uncertain to be achieved. The threshold-level goals can be characterized as “stretch but attainable,” while the target and maximum goals represent increasingly challenging levels of performance.
The Compensation Committee establishes the level of each executive’s participation at threshold, target and maximum levels of achievement. When awarding long-term incentives, the Compensation Committee considers the executive’s level of responsibility, ability to influence performance, prior experience, and historical award data, as well as market practices. In determining the LTIP performance measures and award levels for each executive, the Compensation Committee reviews competitive data regarding total executive compensation, relies upon the advice of the Compensation Committee’s independent compensation consultant and exercises its business judgment.
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Table of ContentsThe Compensation Committee reviews the performance results and certifies achievement of the goals before payouts are made. In addition, the Compensation Committee reserves the right to reduce the amount payable to any executive, based on whatever factors it deems to be appropriate.
Equity Compensation: Mattel’s equity compensation plans allow the Compensation Committee to make grants and awards of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other stock-based awards. Since August 2006, the Compensation Committee has chosen to use a portfolio approach, granting both stock options and restricted stock units to executives. A specific number of shares for the total equity grant for each position is established based on the total compensation review, described above (see “Overall Compensation Levels”). For our named executive officers, half of this total is granted as stock options and half as restricted stock units, based on a three-to-one ratio—in other words, with restricted stock units being considered to represent the equivalent of an option on three shares.
The Compensation Committee has taken this portfolio approach to equity awards because each type of award serves a somewhat different purpose. With stock options, executives can realize value from increases in our stock price, thus aligning their interests with stockholder interests. Furthermore, if the stock price does increase, vesting over a three-year period helps to retain executives. However, if our stock price does not rise, then the options provide no value to executives. By contrast, while restricted stock units’ value does depend on our stock price, they have some value regardless of whether our stock price increases or decreases. As a result, they help retain executives over the three-year vesting schedule, regardless of whether stock price increases or decreases. Restricted stock units also have the benefit of causing less shareholder dilution than stock options that deliver comparable compensation. The dividend equivalent payments help executives feel like shareholders even before vesting of their units, further aligning executives’ interests with stockholders’ interests in receiving appropriate dividend payments, and helping to retain executives through the anticipation of year-end annual dividend equivalent payments. Thus, while both types of awards link our executives’ pay to shareholder value, options are a particularly good way to put significant value at risk in relation to increases in stockholder value, while restricted stock units are particularly effective as retention tools.
In making equity grants, the Compensation Committee considers the possible effect of Internal Revenue Code Section 162(m), noting that stock options are expected to be exempt from its deduction limits but that restricted stock units are not exempt if no performance conditions are attached to them. Because restricted stock units are considered to be primarily an incentive for executives to remain with Mattel, the Compensation Committee has chosen to make their vesting subject only to continued employment. In doing so, the Compensation Committee recognized that this could result in the loss of some of the income tax deductions that we would otherwise be entitled to take, but determined that this tax consideration was less important than structuring the awards in a way that serves their intended compensatory purpose.
As explained above, after considering a report by its independent compensation consultant on the competitiveness of the total compensation of each member of our Management Committee, the Compensation Committee determined to increase our Chief Executive Officer’s equity grants to a market level, beginning in 2006. The equity grants for our other named executive officers in 2006 remain consistent with our past practice and are within current market range. The specific grants made to our named executive officers in 2006 and their vesting schedules are set forth in the Grants of Plan-Based Awards table and the footnotes and narrative disclosure to that table.
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Table of ContentsEquity Compensation Grant Procedures: Like other public companies, we seek to ensure that our equity compensation grant procedures comply with evolving best practices, taking into account accounting, tax and regulatory requirements and standards. To this end, in 2006, management undertook a thorough review of our practices for regular annual grants as well as “off-cycle” grants, meaning grants other than regular annual grants, such as grants to employees who are newly hired or newly promoted. Based on this review, we adopted revised standards for documentation and record-keeping. Furthermore, management recommended certain enhancements to the process for annual and off-cycle equity grants, and the Compensation Committee and the Board of Directors took action.
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Recommendations for approval by the EGAC of annual and off-cycle equity compensation grants are made in writing to the Senior Vice President, Human Resources and to the EGAC, and the EGAC must give its consent in writing on or before the grant date for any annual or off-cycle grant.
Any annual or off-cycle equity compensation grant that does not fit within the authority delegated by the Compensation Committee to the EGAC must be submitted to the Compensation Committee, and approved by the Compensation Committee, on or before the grant date for such grant.
Severance and Change in Control Provisions: Mattel has entered into an employment agreement or letter with each of the named executive officers. The severance and change in control provisions of these agreements are described in detail in the section entitled “Potential Payments upon Termination or Change of Control.” As noted above, Mattel has entered into these agreements to help us attract and retain the executives. In the case of our Chief Executive Officer, we negotiated and entered into his employment agreement at the time he was first hired. The agreement was critical to inducing him to leave his previous employer to work for Mattel. Similarly, the employment agreement with our Executive Vice President, Worldwide Operations, and the employment letter with our Executive Vice President, International, were entered into when they were hired, as means of attracting them to work for Mattel. The employment agreements with our Chief Financial Officer and our President, Mattel Brands, were entered into as a means of retaining them during a difficult period of management changes and company restructuring.
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Table of ContentsEach agreement or letter establishes the minimum terms and conditions of the executive’s duties, compensation and benefits, and provides that severance benefits appropriate to the executive’s positions will be paid if his employment is terminated prematurely by Mattel without cause, or (in the case of the employment agreements) by the executive in response to a breach of the agreement by Mattel (referred to as “good reason”). In order to be entitled to severance benefits, the executive must execute a general release of Mattel and comply with post-employment covenants to protect our confidential information and not to solicit our employees. We believe that these provisions help us to strengthen the mutual commitment and loyalty of Mattel and these important executives by ensuring that during employment and after it ends (whether at retirement or prematurely), the executives are treated fairly and appropriately. The employment agreements’ evergreen terms – rolling three- or two-year terms—establish the understanding between Mattel and the executives that their employment will continue for the long term. Similarly, the employment letter with our Executive Vice President, International is in effect for an indefinite term.
Under his employment agreement with Mattel, Mr. Friedman would have “Good Reason” to terminate his employment with Mattel if Mattel transferred him outside the greater New York, New York area without his express written consent. In March 2007, Mr. Friedman gave his express written consent for transfer of his principal place of employment to the greater Los Angeles, California area, in exchange for (a) a payment in cash sufficient to provide him with $500,000 after taxes, to be paid to Mr. Friedman not later than 30 days after the close of escrow on his purchase of a residence in the Los Angeles area, and (b) monthly payments sufficient to provide him with $5,000 per month after taxes, to be paid monthly for 36 months beginning when escrow closes on his purchase of a residence in the Los Angeles area. The monthly payments will cease if Mr. Friedman does not remain employed by Mattel with his principal place of employment in the Los Angeles area. In considering this issue, the Compensation Committee received advice from its independent compensation consultant and took into account anticipated expenses associated with Mr. Friedman’s relocation and purchase of a residence in the Los Angeles area.
As discussed in the section entitled “The Board of Directors and Corporate Governance—Golden Parachute Policy” and in Appendix C, Mattel has adopted a Golden Parachute Policy in response to a stockholder proposal in 2005. This policy generally limits severance benefits to senior executives to 299% of base salary and annual bonus, unless the arrangement is submitted to a stockholder vote. This policy does not apply to the employment agreements with our named executive officers, because they were entered into before the policy was adopted.
The employment agreements contain only two change-of-control features: a provision that allows the executive to terminate employment during the 30-day period beginning six months after a change in control and receive the same severance benefits as if he had been terminated without cause; and a provision to make the executives whole for any federal excise tax imposed on change-of-control payments, including severance payable after a change of control. The first feature is designed to provide an incentive for our executives to remain available to render services during the crucial six-month transition period following a change in control: even if their positions and compensation are changed in a way that might give them the right to terminate for good reason, they need not be concerned about whether to invoke that right, since they are assured that after six months, they will be able to resign with severance if they choose, without having to prove the existence of good reason. The second feature is designed to ensure that our executives receive the benefits that we have determined to be appropriate, notwithstanding the possible imposition of the federal excise tax, which can have a disparate impact on similarly situated executives. Examples of this disparate impact include:
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However, recognizing that holding executives harmless against this federal excise tax can be expensive for the company, we have designed our provision to apply only if the value of the change-of-control payments is at least 110% of the amount below which the tax does not apply. See “Potential Payments upon Termination or Change of Control—Termination with Severance Following Change of Control” for more information about this excise tax provision in our employment agreements.
The other change-of-control benefits that are available to our named executive officers are provided by the terms of our various plans, and are available to all plan participants, regardless of whether they have employment agreements. The MIP provides that upon a change in control, the current-year MIP bonuses are paid out immediately at the target level. Similarly, the LTIP provides that payments are made upon a change in control at the target level for all pending cycles. If there is more than one cycle pending, the earliest cycle’s awards are paid in full, and the remainder are pro-rated to reflect the portion of the applicable cycle that has elapsed through the date of the change in control. Both plans allow Mattel to ensure that there is no duplication of these payments by severance payments under the employment agreements. These plan provisions have been put in place because we believe that a change in control would fundamentally affect our financial performance in ways that are unpredictable, but may well distort incentive compensation for periods that are interrupted by the change in control. By closing out these cycles with payment of the awards at the target level, we can ensure that participants receive their incentive compensation for those periods at levels that represent normal performance (neither substandard nor outstanding), while allowing for appropriate and possibly different new incentives to be provided for periods after the change in control.
Our equity compensation plans also contain change-of-control provisions, under which all outstanding unvested options and other awards, including restricted stock and restricted stock units, will vest upon a change in control. In addition, option holders are guaranteed a minimum period of two years to exercise their options if their employment is terminated without cause during the first 18 months after the change in control. As noted above, a principal purpose of providing executives with equity-based compensation is to align their interests with those of stockholders; we believe that this alignment is particularly important in the context of a proposed or actual change in control. Vesting of equity awards upon a change in control, and ensuring that option holders who lose their employment after the change have an adequate opportunity to realize value by exercising them, helps ensure that our employees can realize the same benefits from a change in control as stockholders. Absent these protections, the incentive to create stockholder value provided by equity awards would be diluted in the very circumstance in which it should be the most powerful.
The definition of “change in control” that we use for these purposes is a standard definition. A change in control is defined to include, generally:
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Each of the first three events would result in a significant change in the stockholders or board of directors in charge of our business and employees, and the last would lead to the winding-up of our business. Thus, the occurrence of any of these events would introduce substantial uncertainty for our employees regarding their job security and the potential value of their incentive compensation. We therefore feel that these are appropriate events to trigger the special change-of-control protections discussed above.
Benefits, Programs and Perquisites: Our named executive officers participate in the same broadly based benefit plans as our other U.S. employees. In addition, we provide certain executive benefits to promote tax efficiency, to replace benefit opportunities that are not available to executives because of regulatory limits, and to align our compensation with market practices. These executive benefits are described below.
Our named executive officers and certain other members of our Management Committee are covered by the Mattel, Inc. 2005 Supplemental Executive Retirement Plan, known as the SERP. The SERP provides retirement benefits that are consistent with current competitive practices for senior executives. It was adopted in 2005 on the recommendation of the Compensation Committee’s independent consultant, who found that the retirement benefits then provided for senior executives under the predecessor Supplemental Executive Retirement Plan were well below market. See the Pension Benefits table and the accompanying footnotes and narrative disclosure for details on the SERP and its predecessor plan.
Our executive officers and certain other executives also participate in the Mattel, Inc. Deferred Compensation and PIP Excess Plan, known as the DCPEP. The DCPEP is a non-qualified deferred compensation plan that provides for deferral of compensation in excess of the amounts that are legally permitted to be deferred under the Mattel, Inc. Personal Investment Plan, Mattel’s tax-qualified 401(k) savings plan. The DCPEP is provided because the benefits that Mattel can provide under the PIP are limited by the federal tax laws to a level that is not competitive for highly compensated employees. Together, the tax-qualified savings plan and the DCPEP assist participants to set aside amounts as tax-deferred savings for their retirements. See the Nonqualified Deferred Compensation table and the accompanying footnotes and narrative disclosure for details on the DCPEP.
We also provide the members of our Management Committee and other executives with limited perquisites that we consider to be appropriate in light of market practices. The perquisites provided to our named executive officers in 2006 are set forth in the Summary Compensation Table and the footnotes and narrative disclosure to that table.
As described in the narrative disclosure accompanying the Summary Compensation Table, under his employment agreement, our Chief Executive Officer, Mr. Eckert, is permitted to make personal use of company aircraft for up to 60 hours per year while he serves as Chief Executive Officer, and we make him whole on the income taxes on the imputed income he receives as a result of this benefit. This provision was added to Mr. Eckert’s employment agreement by an amendment approved by the
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Table of ContentsCompensation Committee in early 2005. In deciding to enter into this amendment, the Compensation Committee considered that Mr. Eckert’s salary and annual incentive compensation opportunities had remained unchanged since he was hired in 2000; that Mr. Eckert’s personal travel schedule was extensive and frequent because of ongoing personal family obligations; and that this personal situation was expected to continue. The Compensation Committee reviewed a detailed financial analysis of the out-of-pocket costs and tax consequences to Mattel of providing this benefit, and was advised by its independent compensation consultant regarding the cost and prevalence of this type of perquisite for chief executive officers. The Compensation Committee concluded that providing this benefit as part of Mr. Eckert’s compensation would minimize the disruptions and burdens of his personal travel and provide him with additional flexibility and time to attend to company business notwithstanding his personal travel schedule, and thereby would benefit Mattel and its stockholders.
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Table of ContentsSUMMARY COMPENSATION TABLE
The following table sets forth information concerning total compensation earned or paid to our named executive officers for service in 2006.
Footnotes to Summary Compensation Table:
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In addition, Column (i) includes the following individual perquisites:
The following other items of compensation for each named executive officer are also included in Column (i):
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The dollar amounts for each perquisite and each other item of compensation shown in Column (i), All Other Compensation, and in this footnote 5, represent Mattel’s incremental cost of providing the perquisite to the named executive officer in question, in each case without taking into account the value of any income tax deduction for which Mattel is eligible.
For purposes of calculating the incremental costs to Mattel of Mr. Eckert’s personal use of company aircraft, Mattel includes the hourly occupied charge, fuel surcharges, any applicable ground costs, any applicable catering costs, domestic passenger fees, and federal excise tax charges relating to his personal use of company aircraft. The related tax gross-up represents the amount paid by the company to make Mr. Eckert whole for the taxes he pays on imputed income for his personal use of company aircraft.
The incremental costs for the other items were determined as follows:
Narrative Disclosure to Summary Compensation Table:
Employment Agreements
Some of the compensation reflected in this table is provided pursuant to employment agreements that we have entered into with Messrs. Eckert, Farr, Friedman and Debrowski and an employment letter that we have entered into with Mr. Stockton, in each case at the time the executive was hired or
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Table of Contentspromoted, and which have since been supplemented and amended. These contractual arrangements establish the minimum terms and conditions of the executives’ employment, which are summarized below. In addition, the following special provisions are contained in these individual agreements and letter agreements, as supplemented and amended:
Mr. Eckert’s employment agreement provides for the following terms and conditions of employment:
Pursuant to the employment agreement, which was first entered into in 2000, Mattel also provided Mr. Eckert certain one-time payments, guarantees and benefits to induce him to leave Kraft to serve as our Chief Executive Officer:
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The employment agreements for Mr. Farr, Mr. Friedman and Mr. Debrowski, which were first entered into in 2000, contain the following terms of employment:
We entered into an employment letter with Mr. Stockton in connection with hiring him to serve as Mattel’s Executive Vice President, Worldwide Business Planning and Development. Since February 2003, Mr. Stockton has served as our Executive Vice President, International. The employment letter with Mr. Stockton contains the following terms of employment:
In addition, Mr. Stockton’s employment letter, which was first entered into in 2000, provided for the following one-time benefits in connection with his hiring:
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Equity Awards
The amount and terms of the stock awards and options that were granted in 2006 are described in more detail in the Grants of Plan-Based Awards table and the footnotes and narrative disclosure to that table.
Non-Equity Incentives
Column (g), Non-Equity Incentive Plan Compensation, shows the annual cash incentive payments earned for 2006 and paid in March 2007, under the 2002 Mattel Incentive Plan, known as the MIP. Certain employees of Mattel and its subsidiaries are eligible for annual cash incentive compensation under the MIP. The performance objectives used to determine payments under the MIP may be based on one or more of a variety of different financial business criteria with respect to (1) Mattel, (2) Mattel’s worldwide operations, regional operations, country specific operations and/or subsidiaries, business units, affiliates, corporations, divisions, groups, functions or employees and/or (3) Mattel’s brands, groups of brands or specific brands. In the first quarter of each year, Mattel’s Compensation Committee establishes the performance goals that must be achieved for that year in order for annual incentive payments to be made. The performance goals for our named executive officers are based on objective formulae or standards, as required to qualify for the exception for performance-based compensation from the deduction limitations of Internal Revenue Code Section 162(m). For other employees, the Compensation Committee has the discretion to establish performance goals based on other standards, including individual performance goals and personal contributions to the business. Generally, participants must remain employed with Mattel until the date that MIP bonuses are paid in order to be entitled to receive their bonuses (if any). However, different rules apply in the case of certain terminations of employment under the employment agreements of four of our named executive officers, and upon a change of control of Mattel. See below in the section entitled “Potential Payments Upon Termination or Change of Control” for more information.
On March 15, 2006, the Compensation Committee established performance goals and formulae for 2006 under the MIP. The 2006 MIP bonus opportunities for Mr. Eckert, Mr. Debrowski and Mr. Farr were based 75% on the corporate goal and 25% on the achievement of objectively measurable corporate strategic initiatives. Mr. Friedman’s 2006 opportunity was based on four equally weighted goals: the corporate goal; the financial performance of Mattel Girls and Boys Brands; the financial performance of Fisher-Price Brands; and achievement of objectively measurable corporate strategic initiatives. Mr. Stockton’s 2006 opportunity was based 25% on the corporate goal; 30% on the financial performance of the International division; 10% on the financial performance of Mattel Girls and Boys Brands; 10% on the financial performance of the Fisher-Price Brands; and 25% on the achievement of objectively measurable corporate strategic initiatives. The corporate goal was based on net operating profit, after taxes, less a capital charge (referred to as NOPAT less a capital charge), as more fully discussed in the Compensation Discussion and Analysis. The goals relating to financial performance of the Mattel Girls and Boys Brands business unit and Fisher-Price Brands business unit were each based on the business unit’s U.S. profit less an inventory charge, plus its international operating profit at planned overhead less an inventory charge. The goal relating to the International division was based on the International division’s operating profit less a working capital charge. The specific numbers used with regard to these goals involve confidential trade secrets or confidential
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Table of Contentscommercial or financial information, the disclosure of which would result in competitive harm to Mattel. For the objectively measurable corporate strategic initiatives, the Compensation Committee established precise measures and determined the relative weight to be given to each measure, as well as rules as to how many of the measures needed to be achieved in order to reach threshold, target and maximum levels. The objectively measurable corporate strategic initiatives, and the precise measures and weighting relating to these initiatives, involve confidential trade secrets or confidential commercial or financial information, the disclosure of would result in competitive harm to Mattel.
At the time they were set, all of the 2006 performance goals were substantially uncertain to be achieved. The goals were set at threshold, target and maximum levels. For 2006, the maximum amounts that named executive officers were eligible to receive under the MIP ranged from 90% to 200% of base salary. The actual amounts earned are shown in Column (g), Non-Equity Incentive Plan Compensation, above.
Pension and Deferred Compensation
Column (h), Change in Pension Value and Nonqualified Deferred Compensation Earnings, shows the increase from December 31, 2005, to December 31, 2006, in the present value of the accumulated benefit of each named executive officer under the applicable pension arrangements. These arrangements and benefits, and the methods and assumptions we used to value them for purposes of the table above, are explained below in the Pension Benefits table and the footnotes and narrative disclosure to that table. As explained below, Mr. Eckert’s employment agreement provides for a minimum retirement benefit called the Age 60 Pension; this benefit did not increase from December 31, 2005, to December 31, 2006, resulting in a zero value for Mr. Eckert in Column (h) of the table above.
Column (h) does not show any nonqualified deferred compensation earnings because Mattel’s nonqualified deferred compensation plan does not provide for above-market earnings. The benefits under that plan are shown in the Nonqualified Deferred Compensation Plans table and in the footnotes and narrative disclosure to that table.
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Table of ContentsGRANTS OF PLAN-BASED AWARDS
The following table shows information about the non-equity incentive awards and equity-based awards granted to our named executive officers in 2006.
Footnotes to Grants of Plan-Based Awards Table:
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Narrative Disclosure to Grants of Plan-Based Awards Table:
Non-Equity Incentives
Mattel grants non-equity incentive plan awards under 2002 Mattel Incentive Plan, known as the MIP, and the Mattel, Inc. 2003 Long-Term Incentive Plan, known as the LTIP. The MIP bonus opportunities for 2006 are shown in the left-hand portion of the above table. See the Summary Compensation Table and the narrative disclosure to that table for more detailed information regarding the MIP, including the actual MIP amounts earned for 2006 and the terms and conditions of the 2006 awards. No new awards were made to our named executive officers under the LTIP in 2006.
Equity Awards
Stock awards. The numbers of stock awards granted to our named executive officers in 2006 are shown in Column (i), All Other Stock Awards, the corresponding grant dates are shown in Column (b), Grant Date, and the corresponding grant date fair market values are shown in Column (l), Grant Date Fair Market Value of Stock and Option Awards. The actual value, if any, that an executive may realize from a stock award is contingent upon the satisfaction of the conditions to vesting in that award, and upon the value of Mattel common stock at the time when the executive sells any stock received in settlement of the award. Thus, there is no assurance that the value, if any, eventually realized by the executive will correspond to the amount shown.
These stock awards were granted under the Mattel, Inc. 2005 Equity Compensation Plan, and take the form of restricted stock units with dividend equivalents. Each restricted stock unit represents a conditional right to obtain one share of our common stock. Except as noted below for Mr. Eckert, the terms and conditions of these restricted stock units granted to our named executive officers are the same as those for all other employees who received restricted stock unit grants in 2006, as follows:
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As required by Mr. Eckert’s employment agreement, his restricted stock units have a different provision for termination of employment: all unvested units will vest upon his termination at any time before the third anniversary of the grant date, if the termination occurs because of his death or disability, or is a termination by Mattel without cause, by him for good reason, or by him during the 30-day period beginning six months after a change of control. In addition, the settlement of his units in connection with a termination of employment will be delayed by six months, if required under the federal tax law governing nonqualified deferred compensation.
Option awards. The number of shares underlying the options granted to our named executive officers in 2006 are shown in Column (j), All Other Option Awards, with the corresponding exercise prices shown in Column (k), Exercise or Base Price of Option Awards, and the corresponding grant dates in Column (b), Grant Date. The grant date fair market value of these options is shown in Column (l), Grant Date Fair Market Value of Stock and Option Awards. The actual value, if any, that an executive may realize from an option is contingent upon the satisfaction of the conditions to vesting in that award, and upon the excess of the stock price over the exercise price on the date the option is exercised. Thus, there is no assurance that the value, if any, eventually realized by the executive will correspond to the amount shown.
These options were granted under the Mattel, Inc. 2005 Equity Compensation Plan. The per-share exercise prices of these options represent the closing price of a share of our common stock in the New York Stock Exchange on the date of grant. Except as noted below, the terms and conditions of these options granted to our named executive officers are generally the same as those for all other employees who received option grants in 2006, as follows:
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As required by their employment agreements, the options granted to Messrs. Eckert, Farr, Friedman and Debrowski have different provisions for termination of employment. Mr. Eckert’s options will vest in full, and remain exercisable until the end of their original term, if his employment is terminated as a result of his death or disability, by Mattel without cause, by him for good reason, or by him during the 30-day period beginning six months after a change of control. Mr. Farr’s, Mr. Friedman’s and Mr. Debrowski’s options will vest in full if their employment is terminated by Mattel without cause, by the executive for good reason, or by the Executive during the 30-day period beginning six months after a change of control. In such a case, Mr. Farr’s options will also remain exercisable for a minimum of two years.
Amounts shown are estimates of the grant date fair value of the options calculated using the same method as for our financial reports, which is a variation of the Black-Scholes pricing model based on the following weighted-average assumptions: 5.1 year expected life; 2.8% dividend yield; 4.9% risk-free rate; 28.0% volatility factor; and the exercise price as set forth in the table above. The actual value, if any, that an executive may realize will depend upon the excess of the stock price over the exercise price on the date the option is exercised, so there is no assurance that the value realized by the executive will be at or near the amount shown. Our Compensation Committee approved these grants on May 10, 2006, establishing August 1, 2006 as the grant date. A discussion of our procedures for granting stock options appears in the Compensation Discussion and Analysis.
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Table of ContentsOUTSTANDING EQUITY AWARDS AT 2006 YEAR-END
The following table shows the outstanding equity-based awards that were held by our named executive officers as of December 31, 2006.
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Table of ContentsFootnotes to Outstanding Equity Awards at 2006 Year-End Table:
Narrative Disclosure to Outstanding Equity Awards at 2006 Year-End Table:
As noted above, for the named executive officers other than Mr. Eckert, a portion of the exercisable options shown in Column (b), Number of Shares Underlying Unexercised Options, were vested on an accelerated basis in 2005. As Mattel has previously disclosed, in December 2005, the Compensation Committee approved the acceleration of vesting of all outstanding unvested stock options with an exercise price of $16.09 or greater granted to employees other than Mr. Eckert under
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Table of Contentsthe 1996 Stock Option Plan, the 1999 Stock Option Plan and the 2005 Equity Compensation Plan. Options held by Mr. Eckert and by non-employee members of the Board of Directors were excluded from the acceleration. The effective date of the acceleration was December 28, 2005; on that date, the closing price of Mattel’s common stock on the New York Stock Exchange was $15.95 per share. The primary purpose of the accelerated vesting was to enable Mattel to avoid recognizing future compensation expense associated with the accelerated stock options under the adoption by Mattel in 2006 of FASB Statement No. 123R, “Share-Based Payment.” The number of shares subject to, and exercise prices of, the options as to which vesting was accelerated were not changed.
The vesting schedules of all options shown in Columns (b) and (c) of the Outstanding Equity Awards Table above are shown in the following chart:
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Mattel imposed a holding period on the shares underlying the portion of the options held by the named executive officers and other executive officers reporting directly to the Chief Executive Officer for which vesting was accelerated on December 28, 2005: each named executive officer is required to refrain from selling any shares acquired upon exercise of these options until the earlier of (a) the original vesting date of the exercised option and (b) the date on which the named executive officer ceases to be an executive officer of Mattel.
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Table of ContentsThe following is a chart showing the continuing impact of the holding period restrictions on stock options held by named executive officers.
The stock awards shown in Column (g) of the Outstanding Equity Awards at 2006 Year-End table (Number of Shares or Units of Stock That Have Not Vested) include (1) restricted stock units granted to our named executive officers in 2006, which are also reflected in the Grants of Plan-Based Awards table above, and the narrative that follows that table, and (2) restricted stock units granted to Mr. Neil Friedman in 2005. As explained above, the restricted stock units granted in 2006 have dividend equivalent rights. Mr. Neil Friedman’s 2005 grant of restricted stock units originally provided for dividend equivalent rights to be paid in the form of additional units, but it was amended on May 10, 2006 to provide for dividend equivalent rights to be paid in the form of cash after that date. The other terms and conditions of this 2005 grant to Mr. Friedman are the same as those of the restricted stock units granted to our named executive officers in 2006, except for the vesting provisions. Mr. Friedman’s 2005 grant of restricted stock units will vest (1) on the third anniversary of the grant date, or (2) upon a change of control, if that occurs sooner, in either case so long as Mr. Friedman remains employed on that date. If Mr. Friedman’s employment terminates for any reason before the units vest, they will be forfeited.
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Table of ContentsOPTION EXERCISES AND STOCK VESTED
The following table gives information for (1) options exercised in 2006, and (2) stock awards vesting in 2006, in each case for our named executive officers.
Footnote to Option Exercises and Stock Vested Table:
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Table of ContentsPENSION BENEFITS
The following table shows the lump sum present value of the accumulated benefit of each named executive officer under the applicable pension plans as of December 31, 2006. See also the section below entitled “Potential Payments Upon Termination or Change of Control.”
Footnotes to Pension Benefits Table:
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Table of ContentsNarrative Disclosure to Pension Benefits Table:
All of our named executive officers are eligible for pension benefits under the Mattel, Inc., 2005 Supplemental Executive Retirement Plan, known as the SERP, which is a non-qualified defined benefit pension plan, described below. Mr. Eckert and Mr. Friedman are eligible for other pension benefits, which are also described below.
Description of SERP Benefits
All of our named executive officers are participants in the Mattel, Inc. 2005 Supplemental Executive Retirement Plan (the “SERP”), an unfunded supplemental retirement plan.
The SERP is a successor plan to the Mattel, Inc. Amended and Restated Supplemental Executive Retirement Plan, as amended (the “Prior SERP”), which was originally adopted by Mattel effective May 1, 1996, and amended effective November 4, 1999. In late 2004, the federal income tax law governing non-qualified deferred compensation arrangements was significantly revised. Benefits provided under the Prior SERP that were not considered to have been earned and vested as of December 31, 2004, are subject to the new law. In response to this tax law change, on March 16, 2005, the Compensation Committee approved freezing the Prior SERP as of December 31, 2004, in order to ensure that benefits under the Prior SERP that are not subject to the new tax law continue to be provided under the terms of the Prior SERP as in effect when it was frozen, without adverse tax consequences for the participants. At the same time, the Compensation Committee approved the SERP, which provides for supplemental retirement benefits that are subject to the new tax law, on terms and conditions intended to comply with the new tax law.
The SERP has two purposes: to help retain selected key Mattel executives by providing them with retirement benefits more consistent with current competitive practices than those provided under the Prior SERP; and for SERP participants who are not eligible for these enhanced benefits, to provide continued benefit accruals under the formula of the SERP, but on terms and conditions that comply with the requirements of the new tax law. The latter benefits are referred to as “Part A Benefits” and the enhanced benefits are referred to as “Part B Benefits.”
Upon the adoption of the SERP, all participants in the Prior SERP who were employed with Mattel as of January 1, 2005, including all of our named executive officers, automatically became participants in the SERP. All of our named executive officers have been designated as eligible to receive Part B Benefits, subject in some cases to meeting “Part B Eligibility Requirements” as outlined below. The SERP provides that participants must waive any rights that they may have to benefits under the Prior SERP in order to receive Part B Benefits, and participants who receive Part B Benefits will not receive Part A Benefits.
In addition, the SERP provides that a participant will forfeit all SERP benefits upon a termination of employment for cause. For all of our named executive officers other than Mr. Stockton, “cause” is determined under their employment agreements (see the explanation in the section below entitled “Potential Payments upon Termination or Change of Control”). For Mr. Stockton and other SERP participants whose employment agreement or letter does not define “cause,” or who do not have an employment agreement, “cause” is defined in the SERP as dishonesty, a material violation of the executive’s employment duties, conduct that involves moral turpitude or constitutes a felony, and fraudulent conduct in connection with Mattel’s business. Finally, the SERP provides that Mattel may impose a forfeiture of future SERP benefits and a recapture of SERP benefits previously paid if the participant engages in certain behaviors that are harmful to Mattel during or after employment.
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Table of ContentsPart A Benefits. The Part A Benefits provided by the SERP are computed using the same benefit formula as under the Prior SERP. Under this benefit formula, a vested participant with five or more years of service is entitled to a yearly benefit for his or her lifetime beginning at age 60. The amount of this yearly benefit is:
plus, if the participant has more than 180 months (15 years) of service:
For this purpose, “final average compensation” means the participant’s average annual compensation during the final three years of employment, which generally consists of the participant’s base salary plus annual bonuses. A participant vests in the Part A Benefits and the Prior SERP benefits upon completing five years of service and attaining age 55.
Part B Benefits. The Part B Benefits of our named executive officers under the SERP are computed as a yearly benefit for the participant’s lifetime beginning at age 60 equal to:
times
participant’s credited months of service 180
less
For these purposes, final average compensation includes the participant’s base salary, bonuses paid under the MIP, and special achievement bonuses that the Compensation Committee designates to be taken into account for these purposes, during the 36 consecutive months, out of the last 120 consecutive months of employment, during which these amounts are the highest.
The benefit of a participant whose employment terminates after age 55 but before age 60 is reduced by 0.4167% for each month by which the participant’s age at termination is less than 60. Except as noted below, in order to receive benefits under the SERP, a participant must complete five years of service and attain age 55, except that death and disability benefits are paid if the participant dies or becomes disabled after attaining age 45, subject to offset for long-term disability benefits.
Effect of Change of Control. The SERP provides that upon a change of control, the requirement to complete five years of service and attain age 55 in order to receive any SERP benefits is waived, as are any applicable Part B Eligibility Requirements. In addition, the provision for forfeiture and recapture of SERP benefits described above does not apply following a termination of employment during the 18-month period after a change of control.
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Table of ContentsCalculation of SERP Benefits Shown in Table
The SERP benefits shown in the table above represent the benefits that the executives have earned, based on their service and compensation through December 31, 2006, but assuming that they retire at age 60, the earliest date on which they may retire without reduction in the SERP benefit. None of our named executive officers has reached 60 years of age.
Except as explained below, we used the same assumptions in computing the above amounts as we use for financial reporting purposes, including a discount rate of 5.7% and the 94GAM mortality table. The benefits are calculated in accordance with the SEC’s rules and the provisions of the SERP, as follows:
In order to make the calculation in step 2, we had to project what the overall rate of return on the Stable Value Fund will be from December 31, 2006 through each executive’s 60th birthday. We assumed a rate of return of 5%, which is a conservative long-range rate of return consistent with the performance of the Stable Value Fund during the last ten years.
Mr. Eckert’s Pension Benefits
Mr. Eckert never vested in any Prior SERP benefits, and has no Part B Eligibility Requirements under the SERP.
When we first hired Mr. Eckert to serve as our Chairman and Chief Executive Officer, we negotiated the terms and conditions of his employment agreement, which is described in the narrative disclosure to the Summary Compensation Table above. One key term of this agreement is the Age 60
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Table of ContentsPension. Under this provision, Mr. Eckert is guaranteed to receive total pension benefits equal to the Age 60 Pension amount described below, taking into account his benefits under the SERP. The table above shows his accrued benefit under the SERP as of December 31, 2006, which was less than the amount required under the Age 60 Pension. Accordingly, as of December 31, 2006, he also had an accrued benefit under his Age 60 Pension, which is also shown in the table above.
The basic benefit under the Age 60 Pension is determined as an annual benefit, expressed in the form of a single life annuity beginning at age 60, equal to 35% of the greater of (x) his average annual compensation and (y) $2.5 million.
If Mr. Eckert’s employment is terminated before he reaches age 60, either by Mattel for cause or by his resignation without good reason under his employment agreement, the Age 60 Pension benefit is reduced by 3% for each full year that he falls short of age 60. If Mr. Eckert’s employment terminates before he reaches age 60, he can either start his benefit at age 60, or start his benefit before age 60. If he takes the benefit before age 60, the benefit (calculated using the rules set forth above) is reduced by 3% for each full year of acceleration from age 60. Mr. Eckert may elect to have his Age 60 Pension paid as a single life annuity, a 100% joint and survivor annuity with his spouse, a 50% joint and survivor annuity with his spouse, or in fixed installments over 15 or 10 years.
As noted above, under his employment agreement, to the extent his benefits under the SERP fall short of the required amount described above, the incremental amount is paid under the Age 60 Pension provision.
As of December 31, 2006, Mr. Eckert was 52 years old and had 6.6 years of credited service, all of which represent actual service with Mattel.
Mr. Friedman’s Pension Benefits
Mr. Friedman had vested in his Prior SERP benefit as of December 31, 2004, when that plan was frozen in response to the new tax law. As noted above, he must waive these benefits in order to receive a Part B Benefit under the SERP. Subject to the exception noted below, he must also satisfy a Part B Eligibility Requirement, which is to remain employed with Mattel through August 19, 2007. Because he has not yet satisfied this requirement, Mr. Friedman has not yet waived his Prior SERP benefit.
As explained above, any Part B Benefit that Mr. Friedman may receive will be computed with an offset for his benefits under the Fisher-Price pension plans, which are also reflected in the table above. Mr. Friedman’s benefits under the Fisher-Price pension plans are determined under the applicable plan provisions, based on Mr. Friedman’s compensation and service as of December 31, 2006 and assuming that he retires at age 65, which is the normal retirement date under the plans.
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Table of ContentsThe Fisher-Price Pension Plan is a tax-qualified defined benefit plan under which participants receive benefits based upon a percentage of their eligible pay for each year of their participation in the plan. Eligible compensation includes taxable wages, salary, bonuses under sales and management incentive bonus arrangements, as well as overtime, shift differentials, vacation pay, sick pay, jury duty pay, bereavement pay, and elective deferrals under tax-qualified 401(k) plans such as the Mattel Personal Investment Plan, but eligible compensation may not exceed $200,000 per year. The formula for computing each year’s benefit has varied over time. The current formula is:
After a participant accrues benefits under the Plan for 43 years, the current formula changes to 1.4% of eligible compensation. The average Social Security wage base is the average (without indexing) of the taxable wage bases in effect for each calendar year during the 35-year period ending with the current Plan Year.
Section 415 of the federal income tax law imposes a limit on the amounts that may be accrued under tax-qualified defined benefit plans. Any amounts that would accrue under the Fisher-Price Pension Plan in excess of these limits is instead provided under the Fisher-Price Section 415 Excess Benefit Plan instead.
Mr. Friedman is fully vested in his benefits under the Fisher-Price pension plans. He ceased accruing additional benefits under these plans after the end of 2005, when he transferred to the Mattel payroll. If he retires at or after age 65, he will receive his full benefits; if he retires before age 65, he will be entitled to receive his full benefits beginning at age 65 or an actuarially reduced benefit beginning any time before he reaches age 65. The actuarial reduction is 0.5% for each month between the date he begins to receive the benefits and his 65th birthday. Benefits under the Fisher-Price Pension Plan are payable in one of the following forms, as elected by the participant: a single life annuity; a single life annuity with a minimum of ten years’ payments; or a 50% joint and survivor annuity with the participant’s spouse. Benefits under the Fisher-Price Section 415 Excess Plan are payable in a lump sum only.
Under Mr. Friedman’s employment agreement, which is described in the narrative disclosure to the Summary Compensation Table above, if his employment is terminated by Mattel without cause or by him for good reason, or if he resigns within the 30-day period immediately following the six-month anniversary of a change of control, he will be credited with an additional three years of age and service for purposes of determining his SERP benefit. In addition, the SERP provides that in these circumstances, his Part B Eligibility Requirement will be waived.
Finally, under a letter agreement dated November 14, 2000, if Mr. Friedman’s employment is terminated by Mattel without cause, by Mr. Friedman for good reason or by Mr. Friedman as a result of his retirement after the age of 55, he will be entitled to the greater of an annual benefit of $300,000 or his SERP benefit calculated under the plan as described above.
As of December 31, 2006, Mr. Friedman was 59 years old and, for purposes of the SERP, had 9.8 years of credited service, all of which represent actual service with Mattel and Fisher-Price. Mr. Friedman worked for Tyco before we acquired that company, and his years of credited service for
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Table of Contentspurposes of the Fisher-Price plans, shown in the Pension Benefits table above, include both actual service with Tyco before we acquired it and actual service with Fisher-Price since the acquisition. Mr. Friedman ceased being credited with additional years of service under the Fisher-Price plans after the end of 2005, when he transferred to the Mattel payroll.
SERP Benefits of Other Named Executive Officers
Mr. Farr never vested in any Prior SERP Benefits and has no Part B Eligibility Requirements. Under Mr. Farr’s employment agreement, which is described in the narrative disclosure to the Summary Compensation Table above, if his employment is terminated by Mattel without cause or by him for good reason, or if he resigns within the 30-day period immediately following the six-month anniversary of a change of control, he will be credited with an additional three years of age and service for purposes of determining his SERP benefit. As of December 31, 2006, he was 49 years old and had 15.2 years of credited service, all of which represent actual service with Mattel.
Mr. Debrowski is required to remain employed with Mattel through May 25, 2008; however, this Part B Eligibility Requirement will be waived if his employment is terminated by Mattel without cause or by him for good reason. If such a termination occurs within 18 months after a change of control, he will also be credited with an additional two years of age and service for purposes of determining his SERP benefit. He has waived his rights to any Prior SERP benefits. As of December 31, 2006, he was 56 years old and had 6.1 years of credited service, all of which represent actual service with Mattel.
Mr. Stockton never vested in any Prior SERP Benefits and has no Part B Eligibility Requirements. As of December 31, 2006, he was 53 years old and had 6.2 years of credited service, all of which represent actual service with Mattel.
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Table of ContentsNONQUALIFIED DEFERRED COMPENSATION
The following table shows the benefits accrued by our named executive officers under the Mattel, Inc. Deferred Compensation and PIP Excess Plan, referred to as the DCPEP.
Footnotes to Nonqualified Deferred Compensation Table:
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Table of ContentsNarrative Disclosure to Nonqualified Deferred Compensation Table:
The DCPEP is a non-qualified deferred compensation plan that provides for deferral of compensation in excess of the amounts that are legally permitted to be deferred under the Mattel, Inc. Personal Investment Plan, Mattel’s tax-qualified 401(k) savings plan. All amounts deferred under the plan are reflected in book-keeping accounts. These amounts include:
The amounts deferred under each participant’s DCPEP accounts are deemed to be invested in investments chosen by the participant from a range of choices. Currently, the choices include (i) interest at a rate that is reset annually and is below 120% of the applicable federal long-term rate with compounding; (ii) deemed investment in Mattel common stock (sometimes referred to as “phantom stock”); and (iii) deemed investment in any of ten externally managed institutional funds, including equity and bond mutual funds. The participant and company contributions are credited to book-keeping accounts for the participants, and the balances of these accounts are adjusted to reflect, in the case of participants who choose (i) above, the applicable interest rate, and in the case of participants who choose (ii) or (iii) above, the gains or losses that would have been obtained if the contributions had actually been invested in Mattel common stock or the applicable externally managed institutional fund, respectively. In the case of (ii) and (iii), there is no markup over the market rates of return that would have been obtained on investments in Mattel common stock or the externally managed institutional funds. With regard to the phantom stock, when Mattel pays dividends on its common stock, the phantom stock accounts are not credited at a higher rate than is paid to holders of common stock.
We do set aside funds to cover our obligations under the DCPEP in a trust. However, the assets of the trust belong to Mattel and are subject to the claims of Mattel’s creditors in the event of bankruptcy or insolvency.
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Table of ContentsThe amounts credited to a participant’s DCPEP account are paid to the participant either on a scheduled withdrawal date during employment, or following termination of employment, in up to 15 annual installments depending upon the participant’s elections and upon the applicable circumstances. Participants may also receive accelerated distributions of their accounts in limited circumstances involving unanticipated hardship.
We expect that the DCPEP, including its provisions affecting participant elections and the effect of a change of control, will be amended before the end of 2007 to comply with the new federal income tax law governing deferred compensation described in the narrative disclosure to the Pension Benefits table above.
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Table of ContentsPOTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
As explained above in the narrative disclosure to the Summary Compensation Table, each of our named executive officers has an employment agreement or letter providing for his position, pay and benefits. These arrangements provide for severance payments and benefits to be provided in connection with certain terminations of employment, explained below. In addition, some of our employee compensation and benefits plans contain provisions that apply in the event of a change of control, and our named executive officers would benefit from these provisions. In this section, we summarize these severance and change-of-control arrangements and provide estimated values for the payments and benefits that our named executive officers would have received in connection with a termination of their employment or a change of control, if that event had occurred on December 31, 2006.
Each of our named executive officers other than Mr. Stockton has an employment agreement that provides for severance benefits to be paid if the executive’s employment is terminated under the following circumstances:
In each case, in order to be entitled to severance benefits, the executive must execute a general release of Mattel and comply with post-employment covenants to protect our confidential information and not to solicit our employees.
Mr. Stockton’s employment letter provides that, subject to his execution of a general release of Mattel, he will receive severance benefits if his employment is terminated involuntarily without cause. Those terms are not defined in his employment letter.
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Table of ContentsTermination with Severance, No Change of Control
The following table shows the payments and benefits that would have been provided to each of our named executive officers, if his employment had terminated on December 31, 2006, under circumstances entitling him to severance benefits, but not following a change of control:
Footnotes:
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The enhancements are as follows:
Stock Options. Under Mr. Eckert’s employment agreement, all of his unvested stock options would vest, and each stock option would remain exercisable for its full remaining term. Under Mr. Farr’s employment agreement, all of his unvested stock options would vest; stock options granted on or before March 30, 2000 would remain exercisable for their full remaining term; and stock options granted after that date would remain exercisable for the period provided under the applicable plan (generally 90 days but up to two years in some cases). Mr. Friedman and Mr. Debrowski’s termination under the circumstances illustrated would be treated as a retirement for purposes of their stock options under the provisions of the applicable plans, and accordingly their unvested stock options, other than those granted on August 1, 2006, would vest, and all of their stock options, other than those granted on August 1, 2006, would remain exercisable for the lesser of five years or their remaining term; except that under Mr. Friedman’s employment agreement, his stock options granted on or before March 30, 2000 would remain exercisable for their full remaining term. Mr. Stockton’s stock options would remain exercisable for up to 90 days under the provisions of the applicable plans.
We have assumed in this illustration that all stock options that are not forfeited would be exercised immediately upon termination of employment, because we believe that is likely to occur in this scenario. The values for stock options included in Column (f) therefore represent the excess of the assumed value of the option shares for vesting is accelerated over the exercise price for those option shares. For these purposes, we have assumed that the value of the Mattel common stock on December 31, 2006, was the closing price of Mattel common stock on December 29, 2006, which was $22.66. If the stock options were not immediately exercised, the value realized by the executives from them could differ from that included in Column (f) of this table. However,
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Table of Contentsthis value is not readily ascertainable, since it depends upon a number of unknown factors, such as the date of exercise and the value of the Mattel common stock on that date.
For comparison, if we had included in Column (f) the estimated value of the accelerated options as of December 31, 2006, taking into account their maximum remaining term as described above, and otherwise using the same valuation method as Mattel uses for valuing option grants for financial reporting purposes, the totals shown would have been: for Mr. Eckert, $13,491,001; for Mr. Farr, $1,210,894; for Mr. Friedman, $3,562,160; for Mr. Debrowski, $1,335,810; and for Mr. Stockton, $682,950. (In Mr. Eckert’s case, this total includes the value of the vesting of restricted stock units described below, which is also included in Column (f) of the above table.) For background on our option valuation methodology, see the discussion of expense calculation in Footnotes 1 and 7 to Mattel’s Consolidated Financial Statements for the applicable years.
Restricted Stock Units. Mr. Eckert’s employment agreement provides for vesting of all unvested restricted stock units; the amount shown represents the value of the restricted stock units for which vesting would have been accelerated, had his employment terminated under the assumed circumstances, based on the closing price of Mattel common stock on December 29, 2006, which was $22.66. This value was not reduced to reflect the possibility of forfeiture or recapture under the provisions described in the narrative disclosure to the Grants of Plan-Based Awards table above. None of the other named executive officers is entitled to vesting of any unvested restricted stock units in the scenario illustrated.
Each executive is also entitled to purchase his or her company-provided car for a nominal amount at the end of the period of usage, and the value of this benefit is included in Column (g). Finally, Mattel must transfer the club memberships to the applicable executive for no consideration at the end of the continuation period, and the value of this benefit is included in Column (g) where applicable, that is, for Mr. Eckert, Mr. Farr and Mr. Debrowski.
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Table of ContentsTermination with Severance Following Change of Control
The following table shows the payments and benefits that would have been provided to each of our named executive officers, if a change of control had occurred on December 31, 2006 and his employment had immediately thereafter terminated under circumstances entitling him or her to severance benefits:
Footnotes:
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The enhancements that apply in the change-of-control scenario as compared to the non-change-of-control illustrated in the previous table, are as follows:
Mr. Friedman’s pension is the same in the change-of-control scenario as in the non-change-of-control scenario illustrated in the previous table.
Stock Options. Under the terms of the applicable plans, all unvested stock options vest upon a change of control. We have assumed that all stock options would be cancelled upon a change of control in exchange for a cash payment, in each case equal to the excess of the change-of-control price over the exercise price of the option, and we have included the amounts of these assumed cash payments in Column (g) for those stock options, the vesting of which is accelerated as a
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Table of Contentsresult of the change of control. The change-of-control price is assumed to equal the closing price of Mattel common stock on December 29, 2006, which was $22.66. If a change-of-control transaction occurred in which stock options were not cashed out, but were allowed to remain outstanding either as options on Mattel stock or as options on another security, then under the terms of the applicable plans, all stock options would remain exercisable for a minimum of two years after any termination of employment that occurs within 18 months after the change of control (or such longer period as is described in footnote 5 to Column (f) of the previous table). In such a case, the value of the treatment of stock options could differ from that included in Column (g) of this table. However, this value is not readily ascertainable, since it depends upon a number of unknown factors, such as the structure of the transaction and the identity of the other party.
Restricted Stock Units. Under the terms of the restricted stock units, all unvested units vest and are settled in cash upon a change of control. We have included the amounts of these cash payments in Column (g), assuming a change-of-control price equal to the closing price of Mattel common stock on December 29, 2006, which was $22.66.
The valuation of parachute payments for purposes of the excise tax is not, in all cases, the same as the cash value shown in the above table. The computation of the excise tax is complex, is subject to various questions of interpretation, and depends upon a number of variables that cannot be known at this time.
Mattel engaged Ernst & Young to assist it in preparing the two immediately preceding tables, based upon information that we supplied regarding current and historical compensation and the provisions of our compensation and benefits arrangements.
Voluntary Termination
The circumstances under which each of our named executive officers would receive severance, and the severance and other benefits they would receive in the event of a change of control, are explained in the two sections above. If our named executive officers’ employment had terminated on December 31, 2006, under other circumstances, they would have been entitled to the following pension benefits under the arrangements described in the narrative disclosure to the Pension Benefits table above:
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In addition, in these circumstances, for Mr. Eckert, Mr. Farr and Mr. Stockton, unvested equity awards would have been forfeited, as described in the narrative disclosures to the Grants of Plan-Based Awards table and the Outstanding Equity Awards at 2006 Year-End table above, and any options that had already vested would have remained exercisable for the lesser of 90 days or their remaining term. Mr. Friedman and Mr. Debrowski had attained age 55 and five years of service as of December 31, 2006, and accordingly their unvested stock options, other than those granted on August 1, 2006, would have vested, and all of their stock options, other than those granted on August 1, 2006, would have remained exercisable for the lesser of five years or their remaining term. However, their unvested restricted stock units would have been forfeited. Finally, all of our named executive officers would have been entitled to receive their balances under the Deferred Compensation and PIP Excess Plan as explained in the Nonqualified Deferred Compensation Plan table and the accompanying footnotes and narrative disclosure.
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Table of ContentsDIRECTOR COMPENSATION
The following table shows the compensation of the non-employee members of our Board of Directors for 2006.
Footnotes to Director Compensation Table:
As of December 31, 2006, the following directors held the following numbers of restricted stock units that had not vested: Mr. Beard, 4,118; Mr. Dolan, 4,118; Dr. Fergusson, 2,500; Mr. Friedman, 4,118; Mr. Ng, 4,500; Dr. Rich, 4,118; Mr. Sargent, 4,118; Mr. Sinclair, 4,118;
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Table of ContentsMr. Sullivan, 4,118; Mr. Vogelstein, 4,118; and Ms. White, 4,118. These amounts include the restricted stock units that the directors received in 2005 and 2006 and additional units received in December 2005 and December 2006 pursuant to dividend equivalent rights pertaining to the 2005 restricted stock unit grants.
See the narrative disclosure below for a chart showing the outstanding stock options held by our non-employee directors.
Narrative Disclosure to Director Compensation Table:
Fees and Retainers
Non-employee members of the Board of Directors receive an annual retainer of $50,000 per year. Each non-employee committee chair receives an additional annual retainer, the amount of which differs depending upon the committee, as follows: Audit Committee, $20,000; Compensation Committee, $15,000; and all other committees, $10,000. Non-employee board members receive a fee of $2,000 per Board meeting attended, and non-employee committee members receive a fee per committee meeting attended. For attendance at committee meetings in person or by videoconference, or by telephone at a committee meeting scheduled as telephonic, the fees are: Audit Committee, $3,000; Compensation Committee, $2,000; Governance and Social Responsibility Committee, $2,000; and all other committees, $1,500. Attendance by telephone at any committee meeting not scheduled as telephonic is compensated at a reduced rate of $1,000 per meeting.
Directors may elect to receive either all or a portion of the annual retainer in the form of shares of Mattel common stock. In addition, directors may elect to defer all or part of their directors’ fees under the Mattel, Inc. Deferred Compensation Plan for Non-Employee Directors, which provides for the investment of deferred amounts in Mattel common stock equivalent accounts or in interest-bearing accounts; the distribution of such deferred amounts may be in a lump sum or installments over a period of years commencing after the date the individual ceases to be a director of Mattel.
The chart below shows the components for each non-employee director of the aggregate amounts of retainers and fees shown in Column (b), Fees Earned or Paid in Cash, of the table above. Except where otherwise indicated in the chart, these amounts were paid in cash. If an amount was deferred
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Table of Contentsinto the Interest Accrual Account or Stock Equivalent Account of the Deferred Compensation Plan for Non-Employee Directors, or paid in the form of shares of Mattel Common Stock in lieu of cash, a notation to that effect appears in the chart below.
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Table of ContentsAs of December 31, 2006, the following directors had the following aggregate balances of phantom stock units in the Stock Equivalent Account of the Deferred Compensation Plan for Non-Employee Directors: Mr. Beard, 40,380; Mr. Friedman, 97,346; Mr. Ng, 5,323; Mr. Sullivan, 22,692; and Ms. White, 4,954.
Equity Awards
The Mattel, Inc. 2005 Equity Compensation Plan provides for initial grants of equity awards to new members of our board when they first become non-employee directors, and for annual grants to continuing directors on the date of each annual meeting of stockholders. The amount and type of these grants and their terms and conditions are established by our Compensation Committee, subject to the terms of the plan. Currently, initial grants consist of a non-qualified option for 7,500 shares and 2,500 restricted stock units with dividend equivalent rights; and annual grants consist of a non-qualified option for 6,000 shares and 2,000 restricted stock units, with dividend equivalent rights. See “The Board of Directors and Corporate Governance—Non-Employee Director Stock Ownership” regarding the stock ownership requirements for our directors.
The following table shows the grant date fair market value of the options and restricted stock units granted to each non-employee director in 2006.
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Table of ContentsThe values for options are estimates calculated using the same method as for our financial reports, using a variation of the Black-Scholes pricing model. Under this model, the following weighted-average assumptions apply to all of the options other than the September 15, 2006 option grant to Dr. Fergusson: 4.12% risk-free rate; 4.87 year expected life; 2.4% dividend yield; 27.3% volatility factor; and the exercise price as set forth in the table above. The following weighted-average assumptions apply to the September 15, 2006 option grant to Dr. Fergusson: 4.9% risk-free rate; 5.1 year expected life; 2.8% dividend yield; 28.0% volatility factor; and the exercise price set forth in the table above. For each restricted stock unit, the grant date present value is equal to the closing price of a share of Mattel common stock on the grant date ($17.08 on March 16, 2006, $16.05 on May 11, 2006, and $19.31 on September 15, 2006). The actual value, if any, that a non-employee director may realize from restricted stock units or options is contingent upon the satisfaction of the conditions to vesting in that award, and upon the future value of Mattel common stock. Thus, there is no assurance that the value, if any, eventually realized by the non-employee director will be at or near the amount shown.
The terms and conditions of the restricted stock unit grants reflected in the chart above are as follows. Each unit represents a contingent right to receive one share of Mattel common stock. When the units vest, the non-employee director will receive actual shares of our common stock in settlement of the units. (Mattel reserves the right to settle the units in cash equal to the fair market value of the stock, but does not anticipate doing so.) The units have dividend equivalent rights, meaning that for the period before the units vest or are forfeited, Mattel will pay the holder cash equal to the cash dividends that he or she would have received if the units had been an equivalent number of actual shares of Mattel common stock.
Initial grants of restricted stock units vest 100% on the third anniversary of the date of grant and annual grants of restricted stock units vest 50% on the second anniversary of the date of grant and 50% on the third anniversary of the date of grant. If a non-employee director leaves our Board of Directors, the consequences for the units depend on the circumstances and timing of the severance:
Under the general terms of the 2005 Plan, upon a change of control, these options would vest immediately.
The terms and conditions of the options granted to our non-employee directors in 2006 are as follows. The options have a term of ten years from the date of grant, and have an exercise price equal to the fair market value of Mattel common stock on the date of grant. Initial grants are fully vested on the date of grant. Annual grants vest in three installments (33%, 33% and 34%) on the first, second and third anniversaries of the date of grant. If a non-employee director is removed from our board for cause, all vested and unvested options terminate immediately. When a non-employee director leaves our board under other circumstances, the treatment of his or her options is as follows:
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Under the general terms of the 2005 Plan, upon a change of control, these options would vest immediately.
For each non-employee director, Mattel stock options outstanding as of December 31, 2006 were are follows:
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