Pitney Bowes 10-K 2006
Documents found in this filing:
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
COMMISSION FILE NUMBER 1-3579
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: 4% Convertible Cumulative Preferred Stock ($50 par value) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2005, the aggregate market value of the registrants common stock held by non-affiliates of the registrant was $9,997,092,204 based on the closing sale price as reported on the New York Stock Exchange. Number of shares of common stock, $1 par value, outstanding as of close of business on February 10, 2006: 226,982,727 shares.
Portions of the registrants proxy statement filed with the Commission on March 23, 2006 and delivered to stockholders in connection with the 2006 Annual Meeting of Stockholders held on May 8, 2006, are incorporated by reference in Part III of the original filing (as defined below).
Pitney Bowes is filing this Amendment No. 1 on Form 10-K/A (Amendment No. 1) to include required disclosure regarding the compensation and company stock ownership of Johnna G. Torsone, the companys Senior Vice President and Chief Human Resources Officer. Ms. Torsone is the executive officer who should have been included as one of the five named executive officers, replacing Patrick J. Keddy, Executive Vice President and President, Mailstream International. In addition, this Amendment No. 1 corrects the following numerical errors: This filing corrects an error in the amount disclosed for the annual pension benefit to which Michael J. Critelli, Murray D. Martin and Bruce P. Nolop would have been entitled had they retired on December 31, 2005, expressed as a life annuity beginning at age 65. The correct amounts are $953,544, rather than the previously reported amount of $913,811 for Mr. Critelli, $244,833 rather than $243,082 for Mr. Martin; and $40,188 rather than $40,267 for Mr. Nolop. In addition, the amount included in the Summary Compensation Table for Michele Coleman Mayes annual incentive for 2005 was increased to reflect the $75,000 employment bonus she received.
The information in this Amendment No. 1 serves to replace the information previously reported in the Proxy Statement for the 2006 Annual Meeting of Stockholders which was originally filed on March 23, 2006 and was incorporated by reference into the Pitney Bowes Inc. Annual Report on Form 10-K for the year ended December 31, 2005 (originally filed on March 13, 2006) (the Original Filing).
The following Items of the Original Filing are amended by this Amendment No. 1:
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 15. Exhibits and Financial Statement Schedules
Unaffected items have not been repeated in this Amendment No. 1.
Item. 11 Executive Compensation
Executive Officer Compensation
The Executive Compensation Committee (the Committee), which is composed of four independent directors, oversees the companys executive compensation programs and establishes its executive compensation policies. The Committee reports on executive compensation to all of the independent directors of the board and makes recommendations to them regarding those executive compensation matters with respect to which the independent directors have final approval. (See Report of the Executive Compensation Committee beginning on page 9.)
Summary Compensation Table. The following table (Table I) shows all compensation paid or granted, during or with respect to the 2005 fiscal year and the two previous fiscal years, to the chief executive officer and to the four other highest paid executive officers for services rendered to the company and its subsidiaries. (Persons in this group are referred to herein individually as a Named Executive Officer and collectively as the Named Executive Officers and, unless otherwise noted, the titles listed are the titles held as of the end of the 2005 fiscal year.)
SUMMARY COMPENSATION TABLE
Shown in Table II below is information regarding options granted in 2005 to the Named Executive Officers.
OPTIONS EXERCISED IN 2005 AND 2005 YEAR-END OPTION VALUES
2005 LONG-TERM INCENTIVE GRANTS
The company has not entered into employment agreements with its Named Executive Officers and, therefore, such officers are at will employees of the company.
Severance and Change of Control Arrangements
Set forth below is a summary of certain severance and Change of Control arrangements maintained by the company. Under the companys Change of Control arrangements, a Change of Control is defined as the acquisition of 20 percent or more of the companys common stock or 20 percent or more of the combined voting power of the companys voting securities by an individual, entity or group; the replacement of a majority of the board other than by approval of the incumbent board; the consummation of a reorganization, merger, or consolidation; or the approval by stockholders of the liquidation or dissolution of the company.
The Pitney Bowes Severance Pay Plan, as amended and restated January 1, 1999 (the Severance Plan), provides for the payment of severance to full-time employees whose employment is terminated under certain business circumstances (other than a Change of Control). Upon termination of employment, severance will consist of a minimum of one weeks pay for each full year of service (a fraction thereof for a partial year of service), with a minimum of two weeks pay. However, the company reserves the right to use a different severance benefit formula as business conditions may warrant. In addition, no severance benefits will be paid if a covered employee is terminated for cause. Each of the Named Executive Officers is eligible for severance payments under the Severance Plan.
The Senior Executive Severance Policy, originally adopted by the board of directors in December 1995, and amended and restated as of January 1, 2000 (the Severance Policy), provides for the payment of separation benefits to certain senior executive employees, including the Named Executive Officers, whose employment with the company is terminated within two years after a Change of Control. The Severance Policy provides that a covered employee whose employment is terminated, whose position, authority, duties, responsibilities, pay or benefits are diminished, or who is relocated within two years after a Change of Control, will be entitled to: a) severance pay in an amount equal to a multiple of the sum of the employees annual base salary and highest Annual Incentive received in any of the three years preceding termination, and b) the continuation of certain retirement, health, welfare and other benefits for a period of time following termination of employment. (The policy provides for a multiple of three for certain senior executive employees covered by the Severance Policy, including the Named Executive Officers. The Severance Policy provides for a multiple of two for all other executives covered by the Severance Policy.) The executive also has the right, exercisable during the 30-day period following the first anniversary of a Change of Control, to terminate his or her employment for any reason and still receive the severance payments and benefits.
If any of these benefits, either alone or together with any other payments or benefits provided to covered senior executive employees, including a Named Executive Officer, would constitute an excess parachute payment subject to the 20 percent excise tax under certain provisions of the Code, each of the Severance Plan and the Severance Policy provides that an additional payment would be made to each affected covered employee so that such excise tax is reimbursed to the employee on a net after-tax basis.
The Pitney Bowes Stock Plan (the Stock Plan) provides that, in the event of a Change of Control, outstanding options will become immediately and fully exercisable without regard to any vesting schedule. The Stock Plan also provides that, in the event of a Change of Control, all restrictions applicable to outstanding shares of restricted stock and other stock-based awards will terminate and be fully satisfied (other than transfer restrictions, if any, required for exempt treatment under Section 16 of the Securities Exchange Act of 1934 or any other applicable law); provided that, for awards conditioned on financial performance goals, the Committee will determine the amount payable under such awards based on the actual and anticipated levels of performance prior to the Change of Control applying a discount factor in the amount of the prime rate in effect as of the date of the Change of Control.
The terms of the KEIP provide in the event of a Change of Control that the executives will have a vested right to receive annual incentive compensation with respect to the year completed prior to the Change of Control (if not paid prior to the Change of Control) as well as the year in which such Change of Control occurs (in prorated amounts to be determined as specified in the plan on the basis of relevant past performance of the individual executive, his or her division, and the company). With respect to CIUs outstanding on the date of a Change of Control, the Executive Compensation Committee will determine the value of all units maturing upon the end of any stated performance period that had been awarded and not yet paid to executives who had received notice of such award. Certain amendments to the KEIP have been approved by the Pitney Bowes board of directors and submitted to the stockholders for approval at the upcoming annual meeting, which amendments provide that grants under the KEIP will be subject to vesting upon a Change of Control but payments will be made only upon a termination of employment without cause or a voluntary termination for good reason. (A description of the double trigger right to payment under the KEIPs 2006 plan amendments is provided on page 21 of the Proxy Statement for the 2006 Annual Meeting of Stockholders in the section entitled Proposal 3: Approval of Amended and Restated Key Employees Incentive Plan.)
Such Annual Incentive compensation and CIU payments will be made as expeditiously as possible after a Change of Control, discounted to present value at the prime rate then in effect. Payments made to executives who reside outside the United States will be made in such currencies and such exchange rates that are consistent with the patterns and practices under the KEIP.
U.S. Pension Plan
Each of Messrs. Critelli, Martin and Nolop and Mses. Mayes and Torsone participate in the U.S. Pension Plan. Effective September 1,1997, the company revised the U.S. Pension Plan such that the benefit payable under the plan is no longer a function solely of years of service and final average earnings. Under the revised formula, employees receive annual credits of a percentage of their earnings. The annual percentage ranges from 2% to 10%, plus an additional 2% to 6% of such earnings in excess of the social security wage base, and increases as the sum of age and years of service increases. Earnings for purposes of the plan, means the average of the five highest consecutive annual pay amounts (base salary plus annual incentive) during a participants service with the company. An employee will be 100% vested in his U.S. Pension Plan account after five years of service.
In connection with the adoption of the revisions to the U.S. Pension Plan, all participants who qualified under a prescribed formula, including certain of the Named Executive Officers, are eligible for certain grandfather and transition provisions that are intended to avoid undue impairment of any participants pension as a result of the new formula. Certain long-service participants may be entitled to receive their benefit computed under the old formula, if such amount is greater than that computed under the new formula.
Under the qualified U.S. Pension Plan, employees receive retirement benefits each year based on compensation up to a maximum of $210,000 for 2005. The Named Executive Officers who participate in the U.S. Pension Plan are also eligible to accrue supplemental pension benefits, which vest after five years of service. Pension amounts for compensation above $210,000 are accrued under the nonqualified Supplemental Pension Plan based on the same formula used under the qualified plan for other employees. The aggregate benefits payable to an executive officer under both the qualified U.S. Pension Plan and the nonqualified Supplemental Pension Plan are subject to the following general limit: years of credited service multiplied by 16.5% of five-year average pay. Neither the Executive Compensation Committee nor the board has granted any special credits to any of the Named Executive Officers under the Supplemental Pension Plan, and all payout obligations are based solely upon the actual periods of service to the company of the respective Named Executive Officers. The annual pension benefit to which each of the Named Executive Officers participating in the U.S. pension plans would be entitled had he or she retired on December 31, 2005 (disregarding any limitation on vesting), expressed as a life annuity beginning at age 65 is as follows: $953,544 for Mr. Critelli; $244,833 for Mr. Martin; $40,188 for Mr. Nolop; $14,715 for Ms. Mayes; and $107,433 for Ms. Torsone. Other than Ms. Mayes, who joined the company in 2003, all of the Named Executive Officers are fully vested in their pension benefit.
Executive Stock Ownership Policy
The executive stock ownership policy was most recently amended as of October 25, 2005. Under the revised policy, executives who are reporting officers under Section 16 of the Securities Exchange Act of 1934 (the Covered Executives) are expected to accumulate shares of company stock toward target ownership levels that are based on a multiple of salary and a retention ratio for shares acquired upon exercise or vesting of stock awards. Ownership status for the Covered Executives will be reported to the Executive Compensation Committee on an annual basis. Under the companys Corporate Policy on Insider Trading, Covered Executives are prohibited from engaging in short-term, speculative (in and out) trading in Pitney Bowes securities, as well as hedging and other derivative transactions, including short sales, put or call options, swaps and collars, with respect to Pitney Bowes securities (other than transactions in employee stock options).
The multiple of salary component is as follows:
The number of shares targeted for retention by a Covered Executive is equal to annual base salary times the multiple of salary requirement divided by the average closing price of Pitney Bowes common stock over the five days preceding the measurement date.
The retention ratio is 75% of net profit shares. The Covered Executives are expected to hold 75% of the shares remaining after payment of the option price and taxes owed upon exercise and/or hold 75% of newly vested shares of restricted stock after the payment of applicable taxes until the multiple of salary requirement is met. Under the policy, restricted stock, as well as shares underlying unexercised stock options, will not be counted as shares owned by an executive prior to vesting of the restricted stock or exercise of the stock options. After the multiple of salary requirement is met, a Covered Executive may sell shares acquired previously in the market as well as shares acquired through the exercise of stock options or the vesting of restricted stock awards.Directors Compensation
Directors Fees. During 2005, each director who was not an employee of the company received an annual fee of $45,000 and a meeting fee of $1,500 for each board and committee meeting attended. Committee chairs (except for the Audit Committee chair) receive an additional $1,500 for each committee meeting that they chair, and the Audit Committee chair receives an additional $2,000 for each Audit Committee meeting chaired.
All directors are reimbursed for their out-of-pocket expenses incurred in attending board and committee meetings.
The board of directors maintains directors stock ownership guidelines, requiring, among other things, that each director accumulate and retain a minimum of 7,500 shares of company common stock within five years of becoming a director of Pitney Bowes.
The directors stock ownership guidelines are available on the companys website at www.pb.com under the caption Our Company - Corporate Governance.
Directors Stock Plan. Under the Directors Stock Plan, each director who is not an employee of the company receives an annual award of 1,400 shares of restricted stock. The shares carry full voting and dividend rights but, unless certain conditions are met, may not be transferred or alienated until the later of (i) termination of service as a director, or, if earlier, the date of a change of control, and (ii) the expiration of the six-month period following the grant of such shares. The Directors Stock Plan permits certain dispositions of stock granted under the restricted stock program provided that the director effecting the disposition had accumulated and will retain 7,500 shares of common stock. Permitted dispositions are limited to (i) transfer to a family member or family trust or partnership, and (ii) donations to charity after the expiration of six months from date of grant. The original restrictions would continue to apply to the donee except that a charitable donee would not be bound by the restriction relating to termination of service from the board.
Since the approval of the Directors Stock Plan by stockholders in 1991, the common stock of the company has twice undergone a two-for-one split, in 1992 and 1997, respectively. In addition, the annual grant was increased in 1997 in connection with the discontinuation of the Directors Retirement Plan, as described below. On May 9, 2005, an aggregate of 12,600 restricted shares was awarded, with each of the nine non-employee directors then serving receiving 1,400 shares of restricted common stock. Ms. Fuchs received a grant of restricted stock prorated to reflect the number of months of service as a director for the twelve-month period ending May 8, 2006. Ms. Fuchs was granted 963 shares of restricted stock as of September 1, 2005. Regular quarterly dividends or dividend equivalents are paid with respect to these shares. Ownership of shares granted under the Directors Stock Plan is reflected in the table on page 15 showing security ownership of directors and executive officers.
Directors Deferred Incentive Savings Plan. The company maintains a Directors Deferred Incentive Savings Plan under which directors may defer all or part of the cash portion of their compensation. Deferred amounts will be notionally invested in any combination of several institutional investment funds. Deferral elections made with respect to plan years prior to 2004 also included as an investment choice the ability to invest in options to purchase common stock of the company. The number of options granted was calculated by dividing the cash amount deferred by the individual director by the fair market value of the shares on the date of the option grant, and multiplying that quotient by two.
Stock options selected by directors as an investment vehicle for deferred compensation were granted through the Directors Stock Plan. The Directors Stock Plan permits the exercise of stock options granted after October 11, 1999 during the full remaining term of the option by directors who have terminated service on the board, provided that service on the board is terminated (i) after ten years of service on the board, or (ii) due to directors death or disability, or (iii) due to the director having attained mandatory directors retirement age. The Directors Stock Plan also permits the donation of vested stock options, regardless of the date of grant, to family members and family trusts or partnerships.
Directors Retirement Plan. The companys Directors Retirement Plan was discontinued, and the benefits previously earned by directors were frozen as of May 12, 1997. Under this plan, there is no benefit paid to a director who served for less than five years as of May 12, 1997. A director who had met the five-year minimum vesting requirement as of May 12, 1997 will receive an annual retirement benefit calculated as 50 percent of the directors retainer in effect as of May 12, 1997, and a director with more than five years of service at retirement will receive an additional 10 percent of such retainer for each year of service over five, to a maximum of 100 percent of such retainer for ten or more years of service. The annual retainer fee in effect as of May 12, 1997, was $30,000. The annual retirement benefit is paid for life.
The chart below reflects total compensation paid to each non-employee director, including the value of the restricted stock grant, for 2005.
*Committee Chair (receives additional $1,500 fee per meeting chaired; Audit Chair receives additional $2,000 per meeting chaired)
(1)Represents the fair market value of 1,400 shares of Restricted Stock as of May 9, 2005, except that the fair market value of Ms. Fuchs grant of 963 shares of Restricted Stock is as of September 1, 2005.
Report of the Executive Compensation Committee
The Executive Compensation Committee (the Committee) of the board of directors is responsible for the companys executive compensation policies and programs. The Committee consists entirely of independent directors who are not officers or employees of the company. The Committee recommends policies, programs and specific actions regarding the compensation of the chief executive officer and the chief operating officer to all of the independent directors for final approval, and approves the same for direct reports to the CEO (the Key Executives). For executives other than Key Executives, the Committee establishes the compensation policies and programs, and approves equity grants, in accordance with the delegation of authority from the board. The Committees charter, which was last amended in February 2006, is available on the Companys website at www.pb.com under the Our Company Corporate Governance heading and is annexed to the Proxy Statement for the 2006 Annual Meeting of Stockholders.Compensation Philosophy
Our key compensation goals are to hire, motivate, reward and retain executives who create long-term stockholder value. In support of those goals, we seek to establish a compensation program based on the following five main objectives:
We strive to set a target compensation opportunity at the competitive median of compensation paid to similarly situated executives at comparator companies. Actual compensation may be above or below the median based on actual performance, with better performers able to achieve upper quartile compensation. This approach is intended to confirm that a significant portion of executive compensation is based on results and on the companys performance.
Since Pitney Bowes does not operate in an industry with a large group of industry peers, the Committee has historically compared the companys compensation programs to programs from a broad sample principally comprised of Fortune 500 companies with comparable median revenues, market capitalization, net income and number of employees. In 2004, the Committee added an additional reference point for assessing the competitiveness of the companys executive compensation program and the compensation levels of the Named Executive Officers. The Committee established a peer group of sixteen publicly traded companies with comparable revenue, market capitalization, total assets, net income and number of employees. This group consists of industrial, technology and service companies and excludes companies in the financial services, transportation, hotel, energy, natural resources and aviation industries. The company uses this peer group compensation data to compete for talent and utilizes a different peer group for Total Stockholder Return for comparison of stockholder investment. As part of its review, the Committee also considered Towers Perrin compensation survey data for a broader view of compensation at companies with comparable profiles for revenue, market capitalization, total assets, net income and number of employees.
We benchmark the executive compensation program and pay levels using the peer group and survey compensation data and competitive information provided by our independent consultant and additional survey data and competitive information provided by management. This information provides reference points for our evaluation of compensation decisions, but is not the sole basis for determining appropriate compensation design, compensation targets, or individual pay levels. At any point in time compensation targets and individual pay levels may be above or below the median for a variety of reasons. For example, target levels may be affected by the value of the total rewards package, program design and strategic considerations, affordability, changing competitive conditions, or program transition considerations. Our consideration of individual pay levels typically includes factors such as experience in the position, performance, demonstrated leadership, potential to enhance long-term stockholder value, recruiting and retention needs, internal equity, current salary, salary history, prior incentive awards, and previous retention and succession planning awards.
Under Section 162(m) of the Code publicly traded corporations generally are not permitted to deduct compensation in excess of $1 million paid to certain top executives unless the compensation qualifies for an exception as performance-based compensation. We intend to comply with the requirements for full deductibility wherever possible. We will weigh the benefits of compliance with Section 162(m) against the potential burdens of such compliance, and reserve the right to pay compensation that may not be fully deductible if it is determined that it is in the companys best interest to do so.
Stock ownership and equity-related compensation arrangements are considered key elements to focus executives on increasing stockholder value. Therefore, we aim to develop and maintain stock programs that encourage each employee to act like a business owner. A substantial portion of an executives long-term incentive compensation is awarded in the form of equity-based compensation, which along with the CIUs serve as the primary vehicles for aligning the interests of executives with long-term stockholders. Further, as an adjunct to the executive compensation program, we believe the company should maintain a stock ownership policy that encourages executives to own substantial amounts of company stock. During 2005 the Committee reviewed the stock ownership policy and adopted certain changes, which are reflected in the executive stock ownership policy summary on page 7.
Evaluation of Executive Performance in 2005
The Committee does not rely solely on predetermined formulas or a limited set of criteria when it evaluates the performance of the CEO and the companys Key Executives. In 2005, the Committee considered the financial, operational and strategic merits of the achievement by management of short-term and long-term objectives, including:
The Committees decisions regarding an executives performance reflected consideration of, among other things, demonstrated leadership and potential to enhance long-term stockholder value; the nature, scope and impact on the company of the executives responsibilities; and his or her effectiveness in leading initiatives to drive the companys strategic imperatives. In determining performance goals and evaluating performance results of management and the company for purposes of incentive compensation, the Committee used its judgment and discretion to ensure that managements rewards for business performance are commensurate with their contributions to that performance while still holding management accountable for the overall results of the business. The objectives of the Committee are to reward the creation of stockholder value; to balance properly rewarding executives with the interest of stockholders; and to incent management to make good decisions for the long-term success of the enterprise.
In addition, the Committee has reviewed all components of each of the Named Executive Officers compensation, including salary, bonus, equity and long-term incentive compensation, accumulated unrealized stock option and restricted stock gains, the cost to the company of all perquisites and other personal benefits, the earnings and accumulated payout obligations under the companys non-qualified deferred compensation program, and the actual projected payout obligations under certain severance and change of control scenarios. Tally sheets setting forth the above information were prepared for the Committees review and consideration at the meetings convened during the first quarter of 2006. The aggregate amounts and mix of all components, including accumulated unrealized option and restricted stock gains, were taken into consideration by the Committee at those meetings. Based on this review, the Committee finds the total compensation of the CEO and each of the other Named Executive Officers to be appropriate. Actions taken by the Committee with respect to the compensation of the Named Executive Officers are discussed further below, and have been reported by the Company on a Current Report on Form 8-K filed with the Securities Exchange Commission on February 16, 2006.Compensation Components
The companys normal annual executive compensation program is comprised of four key components: Salary, Annual Incentive, Stock Options, and CIUs. These components collectively represent the normal total direct compensation opportunity for executives (excluding benefits). Restricted stock is not granted annually to senior executives but may be granted from time to time.
In 2005, the mix of normal compensation components for the CEO and Key Executives varies by level. At target, the compensation mix ranges from CEO19% base pay/21% annual incentive/60% long-term incentives, to Senior Vice Presidents41% base pay/18% annual incentive/41% long-term incentives.Annual Compensation
Base Salary. In general, the company aligns base pay for executives (including Key Executives) with reference to the competitive market median data for base pay. There is typically a range of pay around the median data that is considered to be competitive. As discussed above, among the factors considered in determining the actual base for each member of this group are the potential impact the individual may make on the company now and in the future, internal equity, level of experience, individual performance compared with annually established financial, strategic, unit or individual objectives, and competitive market salary rates for similar positions. For the Named Executive Officers, increases in base salary are generally established in accordance with the guidelines established for management employees.
Annual Incentive Compensation. In general, the company aligns annual incentives at target with reference to competitive market median data. All executives (including Key Executives) are eligible for annual incentives for achieving challenging financial and strategic objectives that are established at the beginning of each year. For the Named Executive Officers, payments are subject to the company first achieving a threshold Income From Continuing Operations objective, consistent with the requirements for deductibility under Section 162(m) of the Code.
The Committee reviews the annual objectives for alignment with company strategy, financial plans, historical performance, and public statements about company financial and strategic objectives. The financial metrics used by the Committee for the initial determination of the annual incentive pool include revenue growth, earnings before interest and taxes, earnings per share, and adjusted free cash flow. In 2006, the financial objectives will be weighted 100% for the initial determination of the annual incentive pool. The Committee may modify this pool upwards or downwards by 25% based on its assessment of other factors, such as quality of earnings, total stockholder return, progress on strategic objectives, employee engagement, development of the executive talent and leadership pool, and progress on diversity goals.
The annual incentive targets are expressed as a percentage of base salary. The target level annual incentive ranges from 120% for the CEO to 35% for other executives. The maximum annual incentive award for exceptional performance under the program guidelines is generally two times the target award. Individual payouts are tied to the achievement of pre-determined financial and strategic enterprise, business unit and individual performance objectives.
The company currently utilizes two principal types of long-term incentives: CIUs and stock options. The Committee generally targets delivery of long-term incentives using a 50/50 mix of options and CIUs for the companys executive officers. Periodically the Committee may also utilize shares of restricted stock for specific strategic purposes. In general, the Committee aligns long-term incentives with reference to the competitive market median data. The Committee uses these performance-driven components to link executive compensation to longer term internal company performance and to external market performance of the companys stock price. Actual compensation may be above or below the median based on actual performance, with better performers able to achieve upper quartile compensation. Among the factors considered in determining option and CIU award levels for each member of this group are potential impact the individual may make on the company now and in the future, level of experience, individual performance compared with annually established financial, strategic, unit and individual objectives, internal equity, and the competitive market data for similar positions.
Cash Incentive Units. CIUs are granted annually to Key Executives and other executives. The unit value of a CIU is based on the achievement of pre-established financial objectives over a three-year performance period. For the Named Executive Officers, payments are subject to the company first achieving a threshold Income From Continuing Operations (IFCO) objective, consistent with the requirements for deductibility under Section 162(m) of the Code.
As noted in Table IV on page 5, the value of each unit will vary depending on the extent to which pre-established earnings per share and adjusted free cash flow goals are achieved. Earnings per share and adjusted free cash flow are each weighted at 50% in calculating CIU values. The Committee added a Total Stockholder Return (TSR) modifier in the calculation of the CIU value beginning with the 2005-2007 CIU cycle. The unit value based on financial performance will be modified by up to 25%, upwards or downwards, based on Pitney Bowes three-year TSR performance compared to the three-year TSR performance of the S&P 500. The objective of the TSR modifier is to balance the measurement of performance using the internal financial objectives with the measurement of the stockholder value created by meeting these objectives.
For the 2006-2008 CIU cycle, the unit value at target is $1.00. The unit value based on internal financial performance ranges from $0.20 at threshold performance to $1.80 for maximum performance. The unit value based on financial performance will then be modified by up to 25%, upwards or downwards, based on the TSR modifier discussed in the preceding paragraph. The unit value as modified thus ranges from $0.15 at threshold performance to $2.25 at maximum performance.
At its February 2006 meeting, the Committee also determined the CIU payout for the 2003-2005 cycle. The payout was $1.56 per unit, which represents a performance level that is above target.
Stock Options. Stock options are granted at an exercise price equal to the market price of the stock on the date of grant. Options typically have a ten-year exercise period and typically become exercisable ratably over the first four years following the date of grant. Prior to the February 2005 grants, the Committee generally utilized three-year ratable vesting. In determining the number of options in the mix of long-term incentives discussed above, the company currently utilizes the Black-Scholes valuation methodology. Options require stock price appreciation in order for the grantees to realize any benefit, thereby aligning executive and stockholder interests.
Restricted Stock. No awards of restricted stock were made to the Named Executive Officers during 2005. Restricted stock was granted to two of the Named Executive Officers during 2004, and to three of the Named Executive Officers in 2003, as part of the companys management development, succession, and retention planning process. All grants in 2004 were subject to forfeiture if a threshold IFCO level was not achieved in 2004. The 2004 IFCO objective was achieved. The Committee may award restricted stock in the future with different restrictions, performance conditions, and terms as warranted by changing competitive conditions, retention and succession planning needs. In 2006, the company will issue restricted stock units in lieu of stock options to certain employees below the executive level (i.e., employees at the director level and below).
Compensation of the Chief Executive Officer
CEO compensation is based on the same compensation objectives and policies applicable to all executives, and includes base salary, annual incentives, cash incentive units, and stock options. Mr. Critellis annual base salary was increased by 2.8% for 2005. Restricted stock is not granted annually to the CEO but may be granted from time to time under special circumstances.
Prior to conducting its annual compensation review of the CEO, the Committee met in executive session jointly with the Governance Committee in July 2005 to evaluate Mr. Critellis leadership capabilities. The Joint Committees evaluation was discussed with the full board in executive session at its November 2005 meeting. Among other factors the Committee considered in 2005 were Mr. Critellis leadership in driving the companys short and long-term operational and financial performance, its strong governance practices, its strong external stakeholder relations, its talent and leadership development, and its strategy development and implementation.
The Committee met separately in executive session in January 2006 to formulate recommendations for the board regarding the CEOs compensation and evaluation of performance for the fiscal year ended December 31, 2005. The Committee then provided recommendations for compensation actions to the independent directors for their consideration and approval.
In evaluating Mr. Critellis performance for 2005, the Committee considered good progress in achieving the strategic objectives, and significantly improved and positive operating and strategic results achieved during 2005. The Committee believes that Mr. Critellis leadership skills contributed substantially to the results and that he continues to make significant contributions to the overall success of the company. It also recognized his strong influence and leadership in the mailstream industry and his success in driving postal transformation. It also considered that while the companys total stockholder return in 2005 was behind the proxy peer group, the Dow Jones Industrial Average and the Standard & Poors 500 Index, the company was ahead on all indices over a five-year period and the actions taken in 2005 significantly strengthened the companys ability to enhance future stockholder value realization.
The Committee recommended and the independent directors approved the following actions with regard to Mr. Critellis compensation. Mr. Critellis annual incentive payout for 2005 performance was $1,872,100, which represents an above target level of performance. The CIU payout for the 2003-2005 cycle approved for Mr. Critelli totaled $1,560,000 ($1.56 per unit), which represents an above target level of performance.
Consistent with the companys compensation policy, Mr. Critelli was granted stock options in February 2005 to purchase 200,000 shares of company common stock, and he was awarded 1,500,000 CIUs for the 2005-2007 cycle.
Deductibility of Compensation Under Internal Revenue Code Section 162(m)
The company generally intends to comply with the requirements for full deductibility under Section 162(m). Thus, the design and administration of annual incentives, CIUs, and stock option awards for the Named Executive Officers is generally conformed to Section 162(m). The company does, however, weigh the benefits of compliance with Section 162(m) against the potential burdens of such compliance, and reserves the right to pay compensation that may not be fully deductible if it determines that it is in the companys best interest to do so.
By the Executive Compensation Committee of the board of directorsJames H. Keyes, Chair
Colin G. Campbell
Eduardo R. Menascé
Robert E. Weissman
The following graph compares the most recent five-year performance of Pitney Bowes common stock with the Standard & Poors (S&P) 500 Composite Index, and a peer group index at December 31, 2005, over the same five-year period.
The Peer Group is composed of the following companies: Automatic Data Processing, Inc. (ADP), Diebold, Incorporated, R.R. Donnelley & Sons Company, DST Systems, Inc., FedEx Corporation, Hewlett-Packard Company, IKON Office Solutions, Inc., Lexmark International, Inc., Pitney Bowes Inc., United Parcel Service, Inc. (UPS), and Xerox Corporation.
Total return for both the Peer Group and the S&P 500 Composite Index is based on market capitalization, weighted for each year.
All information shown below is based upon data provided to the company by three separate independent organizations, all of which have been licensed by Standard & Poors Corporation to use its official total return calculation.
The graph shows that on a total return basis, assuming reinvestment of all dividends, $100 invested in the companys common stock on December 31, 2000 would have grown to $152 by December 31, 2005. By comparison, $100 invested in the S&P 500 Composite Index would have been worth $103 by December 31, 2005. An investment of $100 in the Peer Group in 2000 would have been worth $125 on December 31, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The only persons or groups known to the company to be the beneficial owners of more than five percent of any class of the companys voting securities are reflected in the chart below. The following information is based solely upon Schedules 13G filed by the entities shown with the Securities and Exchange Commission as of the date appearing below.
The Company has outstanding certain other long-term indebtedness. Such long-term indebtedness does not exceed 10% of the total assets of the Company; therefore, copies of instruments defining the rights of holders of such indebtedness are not included as exhibits. The Company agrees to furnish copies of such instruments to the SEC upon request.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PITNEY BOWES INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.