Sun Microsystems DEF 14A 2007
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
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Sun Microsystems, Inc.
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SUN MICROSYSTEMS, INC.
4150 Network Circle
Santa Clara, California 95054
NOTICE OF 2007 ANNUAL MEETING OF STOCKHOLDERS
November 8, 2007
10:00 a.m. Pacific Standard Time
You are cordially invited to attend Suns 2007 Annual Meeting of Stockholders, which will be held on Thursday, November 8, 2007 at 10:00 a.m., Pacific Standard Time, at Suns Auditorium, located at the Santa Clara Campus, 4030 George Sellon Circle, Santa Clara, California 95054, for the following purposes:
The foregoing items of business are more fully described in the Proxy Statement accompanying this notice.
Only stockholders of record at the close of business on September 10, 2007 are entitled to vote at the Annual Meeting or any postponement or adjournment of the meeting. A list of those stockholders will be maintained and open for examination by any of our stockholders, for any purpose germane to the Annual Meeting, during regular business hours at the address listed above for ten days prior to the meeting.
We are pleased to be among the first companies to take advantage of new Securities and Exchange Commission rules that allow issuers to furnish proxy materials to their stockholders on the Internet. We believe the new rules will allow us to provide our stockholders with the information they need, while lowering the costs of delivery and reducing the environmental impact of our Annual Meeting.
As owners of Sun, your vote is important. Whether or not you are able to attend the Annual Meeting in person, it is important that your shares be represented. Please vote as soon as possible.
On behalf of our Board of Directors, thank you for your participation in this important annual process.
MICHAEL A. DILLON
Executive Vice President, General Counsel and Secretary
Santa Clara, California
September 25, 2007
TABLE OF CONTENTS
SUN MICROSYSTEMS, INC.
2007 ANNUAL MEETING OF STOCKHOLDERS
Why am I receiving these materials?
Our Board of Directors has made these materials available to you on the Internet or, upon your request, has delivered printed versions of these materials to you by mail, in connection with the Boards solicitation of proxies for use at our 2007 Annual Meeting of Stockholders, which will take place on November 8, 2007. Our stockholders are invited to attend the Annual Meeting and are requested to vote on the proposals described in this proxy statement.
What is included in these materials?
These materials include:
If you requested printed versions of these materials by mail, these materials also include the proxy card for the Annual Meeting.
What items will be voted on at the Annual Meeting?
There are six items that will be voted on at the Annual Meeting:
What are our Board of Directors voting recommendations?
Our Board recommends that you vote your shares FOR each of the nominees to the Board, FOR the ratification of the appointment of Ernst & Young LLP, FOR the approval of our 2007 Omnibus Incentive Plan, FOR the reverse stock split, AGAINST the stockholder proposal regarding an advisory vote on compensation and AGAINST the stockholder proposal regarding a simple majority vote.
Where are Suns principal executive offices located, and what is Suns main telephone number?
Suns principal executive offices are located at 4150 Network Circle, Santa Clara, California 95054. Suns main telephone number is (650) 960-1300.
Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials this year instead of a full set of proxy materials?
Pursuant to the new rules recently adopted by the Securities and Exchange Commission, we have elected to provide access to our proxy materials over the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials (the Notice) to our stockholders of record and beneficial owners. All stockholders will have the ability to access the proxy materials on a website referred to in the Notice or request to receive a printed set of the proxy materials. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found on the Notice. In addition, stockholders may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis.
How can I get electronic access to the proxy materials?
The Notice will provide you with instructions regarding how to:
Choosing to receive your future proxy materials by email will save us the cost of printing and mailing documents to you and will reduce the impact of our annual stockholders meetings on the environment. If you choose to receive future proxy materials by email, you will receive an email next year with instructions containing a link to those materials and a link to the proxy voting site. Your election to receive proxy materials by email will remain in effect until you terminate it.
Who may vote at the Annual Meeting?
If you owned Suns common stock at the close of business on September 10, 2007 (the Record Date), then you may attend and vote at the meeting. At the close of business on the Record Date, we had approximately 3,414,725,566 shares of common stock issued and outstanding, of which 3,414,675,566 were entitled to vote.
What is the difference between holding shares as a stockholder of record and as a beneficial owner of shares held in street name?
Stockholder of Record. If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered the stockholder of record with respect to those shares, and the Notice was sent directly to you by Sun.
Beneficial Owner of Shares Held in Street Name. If your shares are held in an account at a brokerage firm, bank, broker-dealer, or other similar organization, then you are the beneficial owner of shares held in street name, and the Notice was forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct that organization on how to vote the shares held in your account.
What is the quorum requirement for the Annual Meeting?
A majority of Suns outstanding shares on the Record Date must be present at the meeting in order to hold the meeting and conduct business. This is called a quorum. Your shares will be counted for purposes of determining if there is a quorum, whether representing votes for, against, withheld or abstained, or broker non-votes, if you:
If I am a stockholder of record of Suns shares, how do I vote?
If you are a stockholder of record, you may vote in person at the Annual Meeting. We will give you a ballot when you arrive.
If you do not wish to vote in person or if you will not be attending the Annual Meeting, you may vote by proxy. You can vote by proxy over the Internet by following the instructions provided in the Notice, or, if you request printed copies of the proxy materials by mail, you can also vote by mail or by telephone.
If I am a beneficial owner of shares held in street name, how do I vote?
If you are a beneficial owner of shares held in street name and you wish to vote in person at the Annual Meeting, you must obtain a valid proxy from the organization that holds your shares.
If you do not wish to vote in person or you will not be attending the Annual Meeting, you may vote by proxy. You may vote by proxy over the Internet, or if you request printed copies of the proxy materials by mail, you can also vote by mail or by telephone by following the instructions provided in the Notice.
What happens if I do not give specific voting instructions?
Stockholders of Record. If you are a stockholder of record and you:
then the proxy holders will vote your shares in the manner recommended by our Board on all matters presented in this proxy statement and as the proxy holders may determine in their discretion with respect to any other matters properly presented for a vote at the meeting.
Beneficial Owners of Shares Held in Street Name. If you are a beneficial owner of shares held in street name and do not provide the organization that holds your shares with specific voting instructions, under the rules of various national and regional securities exchanges, the organization that holds your shares may generally vote on routine matters but cannot vote on non-routine matters. If the organization that holds your shares does not receive instructions from you on how to vote your shares on a non-routine matter, the organization that holds your shares will inform our Inspector of Election that it does not have the authority to vote on this matter with respect to your shares. This is generally referred to as a broker non-vote. When our Inspector of Election tabulates the votes for any particular matter, broker non-votes will be counted for purposes of determining whether a quorum is present, but will not otherwise be counted. We encourage you to provide voting instructions to the organization that holds your shares by carefully following the instructions provided in the Notice.
Which ballot measures are considered routine or non-routine?
Proposal 1 (election of directors); Proposal 2 (approval of auditors) and Proposal 4 (approval of reverse stock split) involve matters that we believe will be considered routine.
Proposal 3 (approval of Suns 2007 Omnibus Incentive Plan) and Proposals 5 and 6 (the stockholder proposals) involve matters that we believe will be considered non-routine.
How are abstentions treated?
Abstentions are counted for purposes of determining whether a quorum is present. For the purpose of determining whether the stockholders have approved a matter, abstentions are not treated as votes cast affirmatively or negatively, and therefore have no effect on the outcome of any matter being voted on at the Annual Meeting.
What is the voting requirement to approve each of the proposals?
The following table sets forth the voting requirement with respect to each of the proposals:
Can I change my vote after I have voted?
You may revoke your proxy and change your vote at any time before the final vote at the meeting. You may vote again on a later date on the Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the meeting will be counted), or by signing and returning a new proxy card with a later date, or by attending the meeting and voting in person. However, your attendance at the Annual Meeting will not automatically revoke your proxy unless you vote again at the meeting or specifically request in writing that your prior proxy be revoked.
Is cumulative voting permitted for the election of directors?
In the election of directors, you may elect to cumulate your votes. If you choose to cumulate your votes, you will need to notify the Secretary of Sun in writing at the address of Suns principal executive offices prior to the Annual Meeting or notify the chairman of the meeting prior to the commencement of voting at the Annual Meeting of your intent to cumulate your votes. If you hold your shares beneficially in street name and wish to cumulate votes, you should contact the organization that holds your shares prior to the meeting to assist you with this process.
As provided in our Bylaws and Corporate Governance Guidelines, if cumulative voting is invoked, then majority voting will not apply with respect to the election of directors, and the ten director nominees receiving the highest number of votes will be elected. If cumulative voting is invoked, you will have a total number of votes equal to the number of director nominees, multiplied by the number of shares you hold. You may allocate these votes among the director nominees as you see fit. For example, if you hold 1,000 shares of stock, you could allocate 10,000 FOR votes (1,000 times 10 director nominees) among as few or as many of the ten director nominees as you choose.
The proxy holders intend to vote the shares represented by proxies to elect Suns ten director nominees as set forth in Proposal 1. If cumulative voting is in effect at the Annual Meeting, the proxy holders will vote the shares represented by the proxies in order to elect as many of Suns ten director nominees as possible or as they otherwise determine in their discretion. Cumulative voting applies only to the election of directors. For all other matters, each share of common stock outstanding as of the close of business on the Record Date is entitled to one vote.
Is my vote confidential?
Proxy instructions, ballots and voting tabulations that identify individual stockholders are handled in a manner that protects your voting privacy. Your vote will not be disclosed either within Sun or to third parties, except:
Occasionally, stockholders provide written comments on their proxy cards, which may be forwarded to management and our Board of Directors.
Where can I find the voting results of the Annual Meeting?
The preliminary voting results will be announced at the Annual Meeting. The final voting results will be tallied by the Inspector of Election and published in our quarterly report on Form 10-Q for the fiscal quarter ending on December 31, 2007, which we expect to file with the SEC by February 9, 2008.
Who is paying for the cost of this proxy solicitation?
Sun is paying the costs of the solicitation of proxies. We have engaged Morrow & Co., Inc. as our proxy solicitor to help us solicit proxies from brokers, bank nominees and other institutions for a fee of $30,000.00, plus reasonable out-of-pocket expenses. We must also pay brokerage firms and other persons representing beneficial owners of shares held in street name certain fees associated with:
In addition to soliciting proxies by mail, our board members, officers and employees may solicit proxies on our behalf, without additional compensation, personally or by telephone, or we may ask our proxy solicitor to solicit proxies on our behalf by telephone for a fee of $5.00 per phone call, plus reasonable expenses. We will also solicit proxies by email from stockholders who are our employees or who previously requested to receive proxy materials electronically.
What is the deadline to propose actions for consideration at the 2008 annual meeting of stockholders or to nominate individuals to serve as directors?
You may submit proposals, including director nominations, for consideration at future annual meetings of stockholders as follows:
Stockholder Proposals. For a stockholder proposal to be considered for inclusion in Suns proxy statement for our 2008 annual meeting of stockholders, the written proposal must be received by the Secretary of Sun at our principal executive offices no later than May 28, 2008. The proposal will need to comply with Rule 14a-8 of the Securities Exchange Act of 1934 (the Exchange Act), which lists the requirements for the inclusion of stockholder proposals in company-sponsored proxy materials. If you intend to present a proposal at our 2008 annual meeting of stockholders, but you do not intend to have it included in our 2008 proxy statement, your proposal must be delivered to the Secretary of Sun no earlier than June 27, 2008 and no later than July 27, 2008. If the date of our 2008 annual meeting of stockholders is more than 30 calendar days before or after the one-year anniversary of the date of our Annual Meeting, your proposal must be delivered by the close of business on the tenth day following the day we publicly announce the date of the 2008 annual meeting of stockholders.
Nominations of Director Candidates. Stockholders may propose director candidates for consideration by the Boards Corporate Governance and Nominating Committee. Any such recommendations should include the candidates name, home and business contact information, detailed biographical data, relevant qualifications for Board membership, information regarding any relationships between the candidate and Sun within the last three years and a written indication by the recommended candidate of her or his willingness to serve, and should be directed to the Secretary of Sun at the address of our principal executive offices. In addition, our Bylaws permit stockholders to nominate directors for election at an annual meeting of stockholders. If you want to nominate an individual for election to Suns Board at the 2008 annual meeting of stockholders, you must deliver a written notice to the Secretary of Sun by no earlier than June 27, 2008 and no later than July 27, 2008. As set forth in our Bylaws, your notice must state: your name, your address and the number of Sun shares you own; the nominees name, age, business address, principal occupation and the number of Sun shares the nominee owns; and all other information regarding nominees required by Regulation 14A of the Exchange Act.
Bylaw Provisions. The relevant Bylaw provisions regarding the requirements for making stockholder proposals and nominating director candidates are available on our website at www.sun.com/company/cgov/. You may also contact the Secretary of Sun at our principal executive offices to request a copy of the relevant Bylaw provisions.
How can I communicate with the independent directors on Suns Board?
Our Board encourages stockholders who are interested in communicating directly with our independent directors as a group to do so by writing to the independent directors in care of our Corporate Secretary. Stockholders can send communications electronically by clicking on Contact Board of Directors at our corporate governance website located at www.sun.com/company/cgov/ or by mail to: Secretary, Sun Microsystems, Inc., 4150 Network Circle, Santa Clara, California 95054. Stockholder correspondence received addressed to our independent directors will be reviewed by our general counsel or his designee, who will regularly forward to our independent directors all correspondence that, in the opinion of our general counsel, deals with the functions of the Board or committees thereof or that our general counsel otherwise determines requires their attention. Our directors may at any time review a log of all correspondence received by Sun that is addressed to the independent members of the Board and request copies of any such correspondence.
ABOUT OUR BOARD AND ITS COMMITTEES
Our Board and its committees meet throughout the year on a set schedule and also hold special meetings and act by written consent from time to time as appropriate. In addition, at the conclusion of each regularly scheduled, in-person Board meeting, Suns independent directors meet in executive session without employee-directors present.
During fiscal 2007, our Board held nine meetings. Each director attended 75% or more of the aggregate number of meetings of the Board of Directors and meetings of committees on which he or she served during fiscal 2007. We encourage directors to attend our annual meetings of stockholders. All of our directors serving on the Board as of our 2006 annual meeting of stockholders attended that meeting.
Our Board has an Audit Committee, a Leadership Development and Compensation Committee (the LDCC), and a Corporate Governance and Nominating Committee (the CGNC). The CGNC makes recommendations to the Board concerning committee memberships and the appointment of chairpersons for each committee, and the Board appoints the members and chairpersons of the committees. The following table lists the chairpersons and members of each committee as of the Record Date and the number of meetings held by each committee during fiscal 2007:
Audit Committee. The Audit Committee oversees our accounting and financial reporting processes and audits of our financial statements. Among other matters, the Audit Committee:
Each member of the Audit Committee meets the NASDAQ requirements as to independence and financial knowledge and is independent as defined in applicable SEC rules. Our Board has determined that Robert J. Finocchio, Jr. and Michael E. Marks qualify as audit committee financial experts, as that term is defined in Item 401(h) of Regulation S-K of the Exchange Act. The Audit Committee operates under a written charter that complies with applicable SEC and NASDAQ requirements, which was amended and restated effective August 27, 2007. The Audit Committee charter is posted on our website at www.sun.com/company/cgov/bcc.jsp.
LDCC. The LDCC has overall responsibility for approving and evaluating our compensation plans, policies and programs applicable to executive officers. Among other matters, the LDCC:
The LDCC has delegated authority to our CEO to grant equity to employees below the level of Vice President. Please see Executive Compensation Compensation Disclosure and Analysis Other Compensation Policies for more information. The members of the LDCC are all independent directors under applicable NASDAQ rules. The LDCC operates under a written charter, a copy of which can be found on our website at www.sun.com/company/cgov/bcc.jsp.
CGNC. The purpose of the CGNC is to ensure that the Board is properly constituted to meet its fiduciary obligations to stockholders and Sun and that Sun has and follows appropriate governance standards. Among other matters, the CGNC:
The members of the CGNC are all independent directors under applicable NASDAQ rules. The CGNC operates under a written charter, a copy of which can be found on our website at www.sun.com/company/cgov/bcc.jsp.
Consideration of Director Nominees
The CGNC regularly reviews the current composition and size of the Board. The CGNC considers and evaluates any candidates who have been properly recommended by a stockholder, as well as those candidates who have been identified by management, individual members of the Board or, if the CGNC determines, a search firm. This review may, in the CGNCs discretion, be based solely on information provided to the CGNC or may also include discussions with persons familiar with the candidate, an interview with the candidate, the retention of third-party interviewers or other actions. The CGNC Policies and Procedures for Director Candidates can be found on our website at www.sun.com/company/cgov/bcc.jsp.
During fiscal 2007, Sun retained a third-party search firm to assist in identifying and evaluating potential director candidates. Peter L.S. Currie and P. Anthony Ridder were each initially identified and recommended as director candidates by one of our non-employee directors. Michael E. Marks was appointed to the Board in connection with a private placement transaction between Sun and KKR Private Equity Investors, L.P. (KKR) pursuant to which Sun agreed to appoint one person to its Board nominated by KKR. Mr. Marks, who is a senior advisor to KKR, was KKRs nominee.
The CGNC evaluates candidates proposed by stockholders using the same criteria as those used for other candidates. In its evaluation of director candidates, including the members of the Board eligible for re-election, the CGNC considers the following:
The CGNC requires the following minimum qualifications to be satisfied by any candidate for a position on the Board:
For a description of the process for a stockholder to recommend a director candidate for the CGNCs consideration or to nominate directors in accordance with our Bylaws, please see General Information What is the deadline to propose actions for consideration at the 2008 annual meeting of stockholders or to nominate individuals to serve as directors?.
Director Summary Compensation Table for Fiscal 2007
The following table summarizes the total compensation earned or paid by Sun to directors who were not executive officers during fiscal 2007.
Additional Information With Respect to Director Equity Awards
For Fiscal 2007
During fiscal 2007, our non-employee directors were paid an annual cash retainer for serving on the Board generally, plus additional cash retainers based on their committee service. These annual retainers, which are paid in quarterly installments, are:
Neither of our employee-directors received compensation during fiscal 2007 for service as member of our Board.
For Fiscal 2008
In August 2007, the Board, upon the recommendation of the CGNC, approved modifications to the annual retainers paid to non-employee directors. Following the Annual Meeting, non-employees directors will receive the following retainers:
Equity Awards for Non-Employee Directors
For Fiscal 2007
During fiscal 2007, our non-employee directors participated in our 1988 Directors Stock Option Plan (the Directors Plan). Under the Directors Plan:
Options granted under the Directors Plan have an exercise price equal to the closing price of our common stock on the date of grant as reported on NASDAQ. Options granted under the plan expire after five years, vest at a rate of 25% per year and can only be exercised while the optionee is a director, within six months after service as a director terminates due to death or disability, or within 90 days after the optionee ceases to serve as a director for any other reason. If our 2007 Omnibus Incentive Plan is approved at the Annual Meeting, the Directors Plan will be terminated.
For Fiscal 2008
In August 2007, the Board, upon the recommendation of the CGNC, approved modifications to the annual equity grant arrangements for new and re-elected non-employee directors, contingent upon stockholder approval of the 2007 Omnibus Incentive Plan. Beginning with the Annual Meeting:
Restricted stock units granted to non-employee directors will vest at a rate of 20% per year over five years, subject to the directors continued service with Sun. If our 2007 Omnibus Incentive Plan is approved at the Annual Meeting, the awards for re-elected non-employee directors will be granted under that plan.
Potential Payments Upon Termination or Change-in-Control for Mr. McNealy
Mr. McNealy is entitled to certain benefits under Suns U.S. Vice President Severance Plan, U.S. Vice President Involuntary Separation Plan and form of Change of Control Agreement. Please see Executive Compensation Pension Benefits Table and accompanying narrative and Potential Payments Upon Termination or Change-in-Control.
Our business is managed by our employees under the direction and oversight of our Board of Directors. Except for Messrs. Schwartz and McNealy, none of our Board members is an employee of Sun. We keep Board members informed of our business through discussions with management, materials we provide to them, visits to our offices and their participation in Board and Board committee meetings.
We believe transparent, effective, and accountable corporate governance practices are key elements of our relationship with our stockholders. To help our stockholders understand our commitment to this relationship and our governance practices, several of our key governance initiatives are summarized below.
Corporate Governance Guidelines. Our Board has adopted Corporate Governance Guidelines which govern, among other things, Board member criteria, responsibilities, compensation and education, Board committee composition and charters, management succession, and Board self-evaluation. You can access these Corporate Governance Guidelines, along with other materials such as Board committee charters, on our website at www.sun.com/company/cgov/.
Standards of Business Conduct. We have adopted Standards of Business Conduct applicable to all of our Board members and employees, including our Chief Executive Officer, Chief Financial Officer, Corporate Controller and other finance executives. The Standards of Business Conduct constitute a code of ethics as defined by applicable SEC rules and a code of conduct as defined by applicable NASDAQ rules. The Standards of Business Conduct are available on our website at www.sun.com/company/cgov/standards.jsp. You may also request a printed copy of our Standards of Business Conduct by writing to us at:
Sun Microsystems, Inc.
Attn: Investor Relations
4150 Network Circle, UMPK18-229
Santa Clara, California 95054
or by calling us at (650) 960-1300.
Any waiver of the Standards of Business Conduct pertaining to a member of our Board or one of our executive officers will be disclosed on our website at www.sun.com/company/cgov/waivers.jsp.
Majority Vote Standard and Director Resignation Policy. Our Bylaws and Corporate Governance Guidelines provide for a majority voting standard for the election of directors. Under the majority vote standard, each director must be elected by a majority of the votes cast by the shares present in person or represented by proxy and entitled to vote. A majority of the votes cast means that the number of votes cast for a candidate for director must exceed the number of votes withheld from that director. A plurality voting standard will apply instead of a majority voting standard if:
Under Delaware law, if an incumbent nominee for director in an uncontested election does not receive the requisite votes for reelection, the director remains in office as a holdover director until a successor is elected and qualified. Our Bylaws and Corporate Governance Guidelines include post-election procedures in the event an incumbent director becomes a holdover director, as follows:
Performance-Based Stock Awards. In keeping with the commitment to high corporate governance standards, our Board firmly believes in the pay-for-performance philosophy. Accordingly, in addition to variable pay programs, the LDCC has implemented the use of performance-based restricted stock units for senior leaders. These awards represented approximately 50% in value of the total awards granted to our executive officers in fiscal 2007. Please see Executive Compensation for more information.
Policy Regarding Stockholder Rights Plan. In May 2006, our Board terminated Suns stockholder rights plan and adopted a policy that Sun will submit any future stockholder rights plan (also known as a poison pill) to a stockholder vote, subject only to the ability of the Board to act on its own to adopt a rights plan if the Board, exercising its fiduciary duties, determines that under the circumstances then existing, it would be in the best interests of Sun and its stockholders to adopt a poison pill without prior stockholder approval. If the Board adopts such a rights plan, it will expire unless ratified by stockholders within one year of adoption. This policy is contained in our Corporate Governance Guidelines, which are available on our website at www.sun.com/company/cgov/docs/guidelines.jsp.
Stock Ownership Guidelines. Our stock ownership guidelines are designed to align the interests of our executive officers and directors with the interests of our stockholders and further promote our commitment to sound corporate governance. Under the guidelines:
If an executive officer or director does not meet the guidelines by the applicable deadline, he or she will be required to retain 25% of the net shares received as the result of the exercise of Sun stock options or the vesting of restricted stock, restricted stock units or performance-based restricted stock units, until the guidelines are met. Net shares are those shares that remain after shares are sold or netted to pay the exercise price of stock options and withholding taxes. Our stock ownership guidelines can be found on our website at www.sun.com/company/cgov/ownership.jsp. Please see Security Ownership of Certain Beneficial Owners and Management for information regarding the ownership levels of our executive officers and directors as of the Record Date.
Presiding Director. In accordance with the Corporate Governance Guidelines adopted by our Board, beginning in fiscal 2006, the independent members of the Board bi-annually elect a Presiding Director from among those members considered independent under the NASDAQ listing standards. Robert J. Finocchio, Jr. was elected to serve as the Presiding Director for fiscal 2008 and 2009. As Presiding Director, Mr. Finocchios duties include:
These duties are detailed in our Corporate Governance Guidelines, which are described above.
Mandatory Retirement Age. Our Corporate Governance Guidelines provide for a mandatory retirement age of 75 for directors. When a director reaches that age, the CGNC shall review the continued appropriateness of the directors Board membership and recommend to the Board whether it should request the directors resignation.
Separate Chairman and CEO. Although our Board does not have a policy on whether the roles of Chief Executive Officer and Chairman should be separate, the positions did separate in April 2007 upon Jonathan Schwartzs appointment as CEO and Scott McNealys retention as Chairman.
Offer of Director Resignation Upon Job Change. The Corporate Governance Guidelines include a policy that, in the event any director has a principal job change, including retirement, such director shall promptly inform the Board. The CGNC shall review such job change and, after consideration of the continued appropriateness of the directors Board membership under the new circumstances, determine whether to recommend that the Board request that the director tender his or her resignation.
Committee Responsibilities. Sun has three Board committees: the Audit Committee, the LDCC and the CGNC. Each committee meets regularly and has a written charter approved by the Board. In addition, at each regularly scheduled Board meeting, the chairperson or a member of each committee reports on any significant matters addressed by the committee.
Independence. NASDAQ rules require listed companies to have a board of directors with at least a majority of independent directors. Our Board has determined that eight of our ten directors are independent under the NASDAQ listing standards. Our independent directors are: James L. Barksdale, Stephen M. Bennett, Peter L.S. Currie, Robert J. Finocchio, Jr., Michael E. Marks, Patricia E. Mitchell, M. Kenneth Oshman and P. Anthony Ridder. Our Board limits membership on the Audit Committee, the LDCC and the CGNC to directors who are independent under the NASDAQ listing standards.
Executive Sessions. At the conclusion of each regularly scheduled Board meeting, Suns independent directors meet in executive session without employee-directors present. The Presiding Director moderates these meetings.
Outside Advisors. The Board and each of its committees may retain outside advisors and consultants of their choosing at Suns expense. The Board need not obtain managements consent to retain outside advisors.
Board Effectiveness. It is important to Sun that our Board and its committees are performing effectively and in the best interests of Sun and its stockholders. The Board performs an annual self-assessment, led by the Presiding Director, to evaluate its effectiveness in fulfilling its obligations.
Succession Planning. Our Board recognizes the importance of effective executive leadership to Suns success, and meets to discuss executive succession planning at least annually.
Stockholder Communication. Our Board encourages stockholders who are interested in communicating directly with Suns independent directors as a group to do so by writing to them in care of the Secretary of Sun. Stockholders can send communications electronically by clicking on Contact Board of Directors at our corporate governance website located at www.sun.com/company/cgov/ or by mail to: Secretary, Sun Microsystems, Inc., 4150 Network Circle, Santa Clara, California 95054. Correspondence that is addressed to the independent directors will be reviewed by our general counsel or his designee, who will regularly forward to the independent directors all correspondence that, in the opinion of our general counsel, deals with the functions of the Board or committees thereof or that the general counsel otherwise determines requires their attention. Directors may at any time review a log of all correspondence received by Sun that is addressed to the independent members of the Board and request copies of any such correspondence.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of our common stock beneficially owned as of the Record Date by:
Report of the Leadership Development and Compensation Committee
The LDCC, which is composed solely of independent members of the Board of Directors, assists the Board in fulfilling its responsibilities with regard to compensation matters, and is responsible under its charter for determining the compensation of Suns executive officers. The LDCC has reviewed and discussed the Compensation Discussion and Analysis section of this proxy statement with management, including our Chief Executive Officer, Jonathan I. Schwartz and our Chief Financial Officer, Michael E. Lehman. Based on this review and discussion, the LDCC recommended to the Board of Directors that the Compensation Discussion and Analysis section be included in Suns 2007 Annual Report on Form 10-K and in this proxy statement.
Leadership Development and Compensation Committee
Stephen M. Bennett, Chairman
M. Kenneth Oshman
P. Anthony Ridder
Suns executive compensation programs are designed to effectively link the actions of our executives to business outcomes that drive value for stockholders. In designing these programs, we are guided by three principles:
We are committed to transparency and open disclosure. We hope this information provides insight into the process that we follow in designing and implementing our executive compensation programs.
Objectives of Our Compensation Programs
We believe that executive compensation should be directly linked to continuous improvements in corporate performance and increases in stockholder value. Suns executive compensation programs are designed to:
How We Implement and Manage Our Executive Compensation Programs
Role of Compensation Committee. The LDCC sets Suns overall compensation philosophy and reviews and approves our compensation programs, including the specific compensation of our CEO and the members of our executive leadership team, which includes each of our other executive officers named in the Summary Compensation Table for fiscal 2007. The LDCC, which has the authority to retain special counsel and other experts, including compensation consultants, has retained Towers Perrin in recent years to support their responsibilities in determining executive compensation and related programs.
Role of executive officers and consultants in compensation decisions. While the LDCC determines Suns overall compensation philosophy and sets the compensation of our CEO and other executive officers, it looks to its compensation consultant, our CEO, Chief Human Resources Officer, and executive compensation staff to make recommendations with respect to specific compensation decisions. The LDCC, at its own discretion and without management present, meets on occasion with Towers Perrin to review executive compensation matters. As part of the annual personnel review and succession planning process, our CEO also provides the Board and the LDCC with his perspective on the performance of Suns executive officers, as well as an assessment of his own performance.
The LDCC establishes compensation levels for our CEO in consultation with the compensation consultant it retains, and based on the analysis completed by the consultant, as discussed below, and our CEO is not present during any of these discussions. Based upon his own judgment and experience, our CEO recommends to the LDCC specific compensation amounts for executive officers other than himself, and the LDCC considers those recommendations and makes the ultimate compensation decisions, incorporating both the feedback from the consultant and the CEO. Our CEO, Chief Human Resources Officer, and General Counsel regularly attend the LDCCs meetings to provide their perspectives on the competitive landscape and the needs of the business. Members of the LDCC also participate in the Boards annual review of the CEOs performance and its setting of annual performance goals.
Determining the proper mix of different elements of pay. The principal components of our executive compensation programs are:
In determining how we allocate an executives total compensation package among these various components, we emphasize compensation elements that reward performance against measures that correlate closely with increases in stockholder value, which underscores our pay-for-performance philosophy. Accordingly, a significant portion of our executive compensation is at-risk, including the quarterly performance-based bonuses and long-term incentives. Our CEO and other executive officers, including each of the named executive officers, have a higher percentage of at-risk compensation (and thus greater upside potential and downside risk) relative to Suns other employees. We believe this is appropriate because our executive officers have the greatest influence on Suns performance. Equity awards, which for fiscal 2007 consisted primarily of stock options and performance-based restricted stock units, represent the largest component of pay in order to encourage sustained long-term performance and ensure alignment with Suns stockholders.
Determining total compensation. We consider a variety of factors when determining executive compensation, including:
Effect of Individual Performance. While the LDCC takes into consideration subjective elements, such as the executives role at Sun, skill set and individual performance achievements, if any, during the fiscal year, none of our named executive officers individual performance is reviewed by the LDCC in conjunction with set, pre-established individual performance metrics devised by the LDCC, between the LDCC and the respective executive, or otherwise. Instead, as stated above, the LDCC performs this analysis, and our CEO performs a similar analysis and shares his thoughts with the LDCC, based upon their own collective experience and business judgment.
Effect of realized compensation on future pay decisions. We consider actual realized compensation received in determining if our compensation programs are meeting their objectives of pay-for-performance and retention. Adjustments to future awards may be considered based on these results. However, the LDCC generally does not reduce compensation plan targets based on realized compensation, as we do not want to create a disincentive for exceptional performance.
Competitive considerations. We strive to compensate our executive officers competitively relative to industry peers. In order to evaluate Suns competitive position in the industry, the LDCC retained Towers Perrin to conduct an independent executive compensation review. Towers Perrin created a custom comparator group for Sun, which includes companies with comparable revenue in the hardware, software and technical services industries. Sun ranked approximately at the median of the comparator group in terms of annual sales and market capitalization at the time of the review in July 2006 and again when the comparator group was updated in April 2007.
The comparator group companies are as follows:
The companies included in the comparator group differ from those listed in the indices used to prepare Suns stock price performance graph, which can be found in our 2007 Annual Report to Stockholders. The Committee found, based on input from our CEO, our chairman and Towers Perrin, that the companies listed in the comparator group more closely represent the labor markets in which Sun competes for executive talent. The competitive market data for the study included a mix of two widely recognized external compensation surveys, as well as data disclosed in the comparator companies proxy statements.
The following chart summarizes the elements of compensation we utilize, the LDCCs benchmark for the element compared to the peer group, and the reasons we emphasize each form of executive compensation:
Other factors. To further assess the appropriateness of compensation, the LDCC also reviews:
Timing of compensation decisions. Executive compensation is typically reviewed at the LDCCs April and July meetings in an effort to align compensation changes to the fiscal year. Compensation increases are not automatic each year and are largely dependent upon company and individual performance and relative pay rates for the industry.
Results of the 2007 compensation review. Based on the results of the executive compensation review provided by Towers Perrin, the overall compensation levels for the named executive officers relative to the comparator group are generally at or modestly above the median, except for Mr. Lehman, whose overall compensation is below the median as he did not receive an equity award in fiscal 2007. For each compensation component listed above, the compensation levels are generally consistent with the reference points. However, base salaries for the named executive officers, other than the CEO, were above the median of the comparator group, which was determined by the LDCC and the CEO to be appropriate upon considering recent company performance, and the LDCCs and CEOs view of the relative scope of their roles, experience, and skills as compared to the peer groups. The results of the executive compensation review indicated that the base salary for the CEO is at the median of the comparator group.
Elements of Compensation
While the amount of each element of compensation may differ between our named executive officers, the compensation policies and factors affecting the amounts, as considered by the LDCC, are generally the same for each of our named executive officers, including our CEO. In this section, we discuss the LDCCs considerations with respect to each element of compensation paid in 2007. For a discussion of the actual amounts paid to the named executive officers in 2007, see Chief Executive Officer Compensation for Fiscal 2007 and CFO and Other Named Executive Officer Compensation for Fiscal 2007 below, respectively.
Base salary. In setting base salary levels for fiscal 2007, in addition to the executive compensation review, the LDCC considered, in its reasoned business judgment, individual performance, position scope, responsibility, experience, and the need to retain executive talent in a highly competitive marketplace.
Quarterly performance-based cash bonuses. Executive officers, including each of the named executive officers, are eligible to participate in Suns Section 162(m) Executive Officer Performance-Based Bonus Plan (the Bonus Plan). The Bonus Plan links cash incentives to Sun performance on short-term, financial, operational and strategic measures that we believe are drivers of long-term stockholder value.
Financial measures for Bonus Plan. For fiscal 2007, the Bonus Plan funding was based on two key measures:
To drive increased focus on results, the Bonus Plan is measured on a quarterly basis, providing the opportunity for quarterly bonus payments if the funding criteria are met for a particular fiscal quarter. The revenue and operating income goals were derived from Suns internal projections and business plan. The revenue and operating income targets for the Bonus Plan were set equal to Suns business plan, except that the fourth quarter operating income target was set higher than Suns publicly disclosed goal for operating income to incent above-target performance.
Formulas used. The formula for determining the bonus awards was as follows:
For fiscal quarters 1 through 3:
Executives eligible wages
× Executives target bonus percentage
× Percentage of annual funding allocated to the quarter
× Bonus Plan funding percentage, based on achievement of target performance measures
= Quarterly Award
Formula for fiscal quarter 4:
Executives eligible wages
× Executives target bonus percentage
× Percentage of annual funding allocated to the quarter + additional funding for market share goal
× Bonus Plan funding percentage, based on achievement of target performance measures
× Individual performance adjustment (ranging from 0 200% of the funded award)
= Quarterly Award
The target performance measures under the Bonus Plan for fiscal 2007 are disclosed on the following page in the Bonus Plan results for fiscal 2007 table. As an added incentive for the fourth fiscal quarter of fiscal 2007, provided the performance measures were met, there was an additional funding opportunity representing approximately 17% of the quarters targeted funding based upon the achievement of an annual strategic goal related to market share for a particular product. We are not disclosing specific details of the market share goal given its competitively sensitive nature and our concern that disclosure of this goal may provide competitors with insight into our acquisition and technology investment plans. The target level of performance was set at a stretch level, such that the relative difficulty of achieving this goal was estimated at approximately 40-50% probability, and in fact, remained in red or below-target status for most of the fiscal year. In addition to the stretch targets, payment of this additional funding opportunity required that both target revenue and target operating income for our fourth fiscal quarter be met. We ultimately achieved the market share goal through increased focus during the second half of fiscal 2007, however, the target revenue for the fourth fiscal quarter was not met, so the this additional funding opportunity from the market share goal was not provided.
Structure of the Bonus Plan. The Bonus Plan structure is summarized in the table below:
Our CEO was eligible for an annual target bonus of 200% of his base salary. All of Suns executive officers, other than our CEO, were eligible for annual target bonuses ranging from 45% to 100% of their base salary, depending on their positions, with the other named executive officers eligible for annual target bonuses ranging from 85% to 100% of their base salaries. In each case, the annual target bonus is divided into four quarterly bonus targets based on the funding percentages shown above. The target bonus payments were set such that the total target cash compensation (base salary plus on-target bonus amount) for each executive officer was competitive to peers in the industry.
Bonus Plan performance thresholds and payment caps. The threshold performance required for the bonus plan to fund and the level of performance at which the bonus plan funding was capped is as follows:
Bonus Plan results for fiscal 2007. The actual results from the Bonus Plan in fiscal 2007 are as follows:
While the LDCC may exercise discretion regarding cash bonus awards for the fourth quarter, including discretion relating to each executive officers individual performance for the year, all of the executive officers, including the CEO, received cash bonus awards based solely on the formula funding results prescribed by the Operating Income and Revenue performance measures, with no additional discretionary adjustments to ensure compliance with Section 162(m) of the Internal Revenue Code.
Other cash compensation. The LDCC may award discretionary bonuses in order to recognize outstanding individual performance or assist in the retention of key talent. No such awards were made in fiscal 2007.
Options, performance-based restricted stock units and restricted stock units. The LDCC provides our executive officers with long-term incentive awards through grants of stock options, performance-based restricted stock units and restricted stock units. Each of the three equity vehicles serves a particular purpose in supporting Suns long-term compensation strategy:
Determination of grants. The LDCC is responsible for determining who should receive the grants, when the grants should be made, the exercise price per share and the number of shares to be granted (in accordance with Suns policy with respect to the granting of equity compensation described below). The LDCC considers grants of long-term incentive awards to the named executive officers each fiscal year.
Criteria considered in determining amount of stock-based compensation awards. The factors the LDCC uses to determine the amount of equity awards to grant are: market practice, projected business needs, the projected impact of stockholder dilution and the associated compensation expense that will be included in our financial statements. Based on these considerations, the LDCC has progressively reduced the number of shares granted under Suns equity compensation plans, other than the Employee Stock Purchase Plan, from 132 million (representing a 4.2% annual use of shares as a percentage of common shares outstanding) in fiscal 2000 to 58 million (representing 1.89% of common shares outstanding) in fiscal 2007, and we expect to maintain this usage in fiscal 2008.
Equity awards granted in fiscal year 2007. During fiscal year 2007, the number of shares subject to equity awards granted to Suns executive officers was determined by the LDCC in their subjective review based on the executive compensation review and individual and corporate performance. Stock options and PRSUs were the primary long-term incentive vehicles used and were generally comprised of an equal mix of stock options and PRSUs, based upon their estimated fair market value (as determined under the Black-Scholes valuation model). Based on the valuation of our fiscal 2007 long-term incentive grants, a PRSU award of one share was equivalent in value to an option to purchase 2.3 shares.
Performance measures and results for the PRSUs granted in fiscal 2007. The performance measures for the PRSUs granted in fiscal 2007 were annual revenue and fourth quarter GAAP operating income. As noted above, we believe these measures were key determinants of Suns financial performance and capability to build long-term stockholder value. The performance measures were as follows:
The performance target for the annual revenue goal required growth over the previous years revenue by approximately $300 million, and represented the average of the prior years actual revenue result and the current years target revenue goal. Again, if the goal was not achieved, the entire award would be forfeited. It was structured in this manner to serve as both an incentive to improve over the prior fiscal year and a retention vehicle. The fourth quarter GAAP Operating Income performance target corresponded to our publicly announced goal. Since both performance measures were met, 25% of the shares vested in July 2007.
Deferred compensation plan. The 2005 U.S. Non-Qualified Deferred Compensation Plan is a voluntary, non-tax qualified, deferred compensation plan, available to our directors, executive officers, including each of the named executive officers, and other members of our management, and was adopted by Sun to enable these individuals to save for retirement by deferring a portion of their current compensation. Under the plan, compensation may be deferred until termination or other specified dates chosen by the participants, and deferred amounts may be credited with earnings based on investment choices made available by Suns 401(k) Investment Plan Committee for this purpose. Information regarding named executive officer participation in the Non-Qualified Deferred Compensation Plan can be found in the Non-Qualified Deferred Compensation for Fiscal 2007 table and the accompanying narrative.
Severance and related benefits. Executive officers, including each of the named executive officers, are eligible to receive benefits under certain conditions in accordance with Suns Senior Management Change of Control Agreement (the Change of Control Agreement), U.S. Vice President Involuntary Separation Plan (the Separation Plan), and Suns U.S. Vice President Severance Plan (the Severance Plan), or in the case of Mr. Grantham, a U.K. resident, pursuant to the terms of a letter agreement, as described in the sections Pension Benefits for Fiscal 2007 and Potential Payments Upon Termination Change-in-Control. Based on a letter agreement with Mr. Lehman, Mr. Lehman is not eligible for benefits under the Severance Plan until February 22, 2008.
The purpose of the Change of Control Agreements is to support retention and succession planning, support decisions that are in the best interests of stockholders and manage related expense. Should a change of control occur, benefits will be paid after a double trigger event as described in Potential Payments Upon Termination or Change-in-Control. Benefits are capped at the amounts prescribed under Sections 280G and 4999 of the Internal Revenue Code (the Code), and Sun does not provide payments to reimburse its executive officers for additional taxes incurred (gross-ups) in connection with a change of control. Benefit levels have been set to be competitive with comparator group practices.
Benefits under the Separation Plan are intended to provide consideration for the employees service to Sun and expected length of time until subsequent employment is secured if an executive is involuntarily terminated without cause. The Separation Plan also assists in recruiting executives given that executive roles tend to carry higher risks.
The Severance Plan is primarily used for retirement transitioning purposes or when there is mutual agreement between Sun and the employee to discontinue the employment relationship.
To determine the level of benefits to be provided under each form of severance policy, the Committee considered the circumstances of each type of severance, the impact on stockholders, and market practices. All of Suns severance programs provide for a lump-sum payment at the time of the event.
The benefits are triggered upon separation from employment and, solely in the case of the change of control agreement, for Good Reason following a change of control (as described in the sections Pension Benefits for Fiscal 2007 and the related narrative and Potential Payments Upon Termination or Change-in-Control). This assists with recruiting and retaining executives, which in general, whose roles tend to be less secure relative other positions within corporations.
Perquisites. Suns executive officer benefit programs are substantially the same as for all other eligible employees, with the exception of few additional items as noted below:
The CEO is permitted to use corporate leased and/or chartered aircraft for personal use on a reasonable basis. The LDCC believes that given the time requirements of the CEO role, reasonable personal use of aircraft efficiently maximizes the CEOs time with personal matters. The LDCC reviews the usage and expense associated with the CEOs personal use of corporate aircraft on a quarterly basis to ensure usage is appropriate and not exceeding reasonable amounts. Details on the expense associated with the CEOs personal use of aircraft provided in the Summary Compensation Table.
Additionally, the CEO is provided with a driver for commuting to and from the companys office. This allows the CEO to efficiently use what may otherwise be long commute times for conducting business and provides added security.
To ensure the security of the CEO and his family, the company provides a home security system for the CEOs home.
Expenses related to the personal use of aircraft and the installation of the CEOs home security systems are imputed as income to the CEO and the additional tax liabilities are paid by Sun by a gross-up payment.
Each of the named executive officers are provided with reimbursement for an annual physical to help ensure the health and well being of those serving in a corporate leadership capacity.
Lastly, for Mr. Grantham, a UK resident who is required to travel frequently to Suns headquarters in California, we provide a car allowance and per diem expense benefit. The tax liabilities associated with these benefits are paid by Sun by a gross up payment. Details on the expense associated with these benefits are provided in the Summary Compensation Table for the Fiscal 2007.
Chief Executive Officer Compensation for Fiscal 2007
As previously described, the LDCC believes that CEO compensation should be driven by performance and should be largely at-risk. Given this, the majority of our CEOs target cash compensation for 2007 was awarded in the form of quarterly performance-based cash bonuses. With respect to overall compensation, in an effort to encourage sustained long-term performance and alignment with stockholder interests, the significant majority of our CEOs total target compensation is provided through stock option and PRSU grants.
Accomplishments for fiscal 2007 under the leadership of Mr. Schwartz that were considered by the LDCC include:
CEO base salary. In April 2006, Mr. Schwartz was promoted to the role of CEO and President. In recognition of his promotion, Mr. Schwartzs annual base salary was increased by 11% to $1 million to be competitive with the salaries of CEOs in the comparator group. Mr. Schwartzs annual base salary remained at $1 million in fiscal 2007.
CEO bonus payments. Mr. Schwartz was eligible for a target annual cash bonus of 200% of his eligible earnings, which could be increased or decreased depending on the achievement of the performance measures described above in the section Quarterly Performance-Based Cash Bonuses.
Based on Suns financial performance for fiscal 2007, the cash bonus payments earned by Mr. Schwartz were as follows (with no discretion exercised by the Committee to increase or decrease the formula amounts):
CEO long-term incentive awards. Mr. Schwartz received stock options, PRSUs and RSU awards upon his promotion to CEO and President in April 2006. These awards were also intended to serve as the basis of compensation for fiscal 2007, and therefore, no additional long-term incentive awards were provided to Mr. Schwartz in fiscal 2007. (Due to an administrative error involving Mr. Schwartzs acceptance of the PRSU award, the award was cancelled and regranted in September 2006).
The RSU award to Mr. Schwartz in April 2006 was considered a one-time event to recognize his promotion and support his ownership of Suns stock. The number of stock options (2,000,000), PRSUs (800,000) and RSUs (1,500,000) were based upon the comparator groups equity compensation values and mix of compensation components in accordance with an executive compensation review and CEO study (conducted by Towers Perrin at the time of Mr. Schwartzs appointment), as well as the LDCCs estimate of Mr. Schwartzs potential for future contributions to Suns success.
Following the achievement of the performance targets as described above, 25% of Mr. Schwartz PRSUs vested in July 2007.
CFO and Other Named Executive Officer Compensation for Fiscal 2007
CFO compensation. Mr. Lehman was re-hired to the position of CFO and EVP, Corporate Resources in February 2006. At that time, Mr. Lehmans base salary was set at $700,000, his cash bonus target was set at 100% of base salary and he was awarded 500,000 stock options and 350,000 restricted stock units, which vest over a three-year period. Mr. Lehman has not received any additional long-term inventive awards since that time. In April 2007, Mr. Lehmans base salary was increased from $700,000 to $800,000 in recognition of the improvements in Suns financial operations, and in an effort to position his total compensation at a more competitive level. Mr. Lehman received cash bonuses totaling $919,100 under the Bonus Plan for fiscal 2007.
Named Executive Officer Compensation. Upon reviewing the salaries and annual incentive targets for Messrs. Papadopoulos, Grantham and Yen, the LDCC determined that their overall cash compensation was appropriately positioned to market rates, and, therefore, none of these executive officers received a salary or target annual cash bonus increase in fiscal 2007. The salaries for each of Messrs. Papadopoulos, Grantham, and Yen remained at $600,000, $748,673 and $590,000, respectively, while their target annual cash bonuses targets remained at 90%, 100%, and 85% of base salary, respectively. Messrs. Papadopoulos, Grantham and Yen received bonuses totaling $676,890, $938,462, and $628,630, respectively under the Bonus Plan, for fiscal 2007.
Messrs. Papadopoulos and Yen were awarded 500,000 and 400,000 stock options, respectively, granted at fair market value, vesting ratably over five years, and 250,000 and 150,000 PRSUs, respectively, in July 2007. The long-term incentive amounts for each of Messrs. Papadopoulos and Yen were determined after reviewing their respective contributions to Sun, the importance of their roles and relevant market information. Following the achievement of the performance targets as described above, the PRSUs vested as to 25% in July 2007 and will vest as to 25% in each of July 2008, 2009 and 2010, subject to continued employment.
Mr. Grantham participates in a Long-term Sales Incentive Plan under which Mr. Grantham may receive up to 300,000 PRSUs for each of fiscal 2007, 2008 and 2009, based on achievement of specific revenue goals for each of those years. The award was provided to motivate and reward achievement of specified revenue targets and help retain Mr. Grantham. The revenue targets for each year are set by the LDCC at the beginning of the fiscal year and are derived from Suns business plan. None of the yearly grants will be awarded unless the prior years actual level of revenue is achieved. The sales plan structure for fiscal 2007 for Mr. Grantham and the resulting payment is as follows:
Given Suns performance in fiscal 2007, the LDCC believes that the compensation for these officers was appropriate and consistent with our objectives.
Other Compensation Policies
Stock ownership guidelines. The LDCC believes that it is in the best interests of stockholders for Suns executive officers and directors to own Sun stock. See Corporate GovernanceStock Ownership Guidelines for a description of the stock ownership guidelines applicable to Suns executive officers, including the named executive officers and directors.
Hedging. We do not permit any employee, including officers or directors, to enter into any derivative or hedging transaction on Sun stock (including short-sales, market options, equity swaps, etc.).
Suns policy with respect to the granting of equity compensation. Equity awards may be granted by either the LDCC or our CEO. Our CEO only has authority to grant equity to employees below the level of Vice President in an amount not to exceed 50,000 shares per optionee. The Board does not make equity grants, although the Committee regularly reports its activity, including approvals of grants, to the Board.
Timing of grants. Equity grants are typically and predominantly made at regularly scheduled, predetermined meetings of the LDCC. These meeting are usually scheduled shortly after the release of quarterly earnings, in which case, financial performance and potentially other material items have already been disclosed publicly, prior to the granting of the award. On limited occasion, grants may be made occur during an interim meeting of the LDCC, which generally are scheduled for the purpose of approving a compensation package for newly hired or promoted executives. The timing of the interim meetings, if they occur, is driven by the activity driving the need for the meeting, not the stock price. Grants made by the CEO occur on the same dates as the LDCC meetings, except as otherwise required by law with respect to employees outside the U.S., and the CEO does not have discretion to determine grant dates.
Stock option exercise price. The exercise price of a newly granted option (i.e., not an option assumed or granted in relation to an acquisition) is the closing price on NASDAQ on the date of grant, which is the date of the LDCC meeting.
Recovery of compensation for restatements and misconduct. We do not have a general policy regarding the recovery of compensation following a restatement; however, our 2007 Omnibus Incentive Plan, which is subject to approval by our stockholders at the Annual Meeting, provides that:
Additional tax considerations.
IRC Section 162m. The LDCC considers the implications of Section 162(m) of the Code in setting and determining executive compensation. This section precludes a public corporation from taking a tax deduction for individual compensation in excess of $1 million for its chief executive officer or any of its three other highest-paid officers (based upon recent IRS interpretations). This section also provides for certain exemptions to this limitation, specifically compensation that is performance based within the meaning of Section 162(m).
In order to qualify compensation derived by executive officers from stock options as performance-based compensation, amendments to the 1990 Long-Term Equity Incentive Plan were submitted to and approved by our stockholders at our 1994 annual meeting.
Additionally, with respect to bonuses granted by the LDCC to such executive officers, the LDCC approved the Bonus Plan to qualify bonus payments to executives under Section 162(m). Our stockholders approved the plan at our 2001 annual meeting. Periodically, the plan must be re-qualified by submitting it to our stockholders for approval. The plan was submitted for stockholder approval at the 2006 annual meeting and was reapproved.
The Committee, however, reserves the right to award compensation to our executives in the future that may not qualify under Section 162(m) as deductible compensation. The LDCC will, however, continue to consider all elements of the cost to Sun of providing such compensation, including the potential impact of Section 162(m).
IRC Section 409A. Sun has reviewed its compensation programs that are subject to Section 409A of the Code and has, and will continue to, ensure compliance with the tax rule. Compensation programs are structured in accordance with 409A ensuring tax-efficient use of Sun resources.
Summary Compensation Table for Fiscal 2007
The following table provides information regarding the compensation and benefits earned during fiscal 2007 by:
We refer to these five individuals as our named executive officers. For more information, please refer to Compensation Disclosure and Analysis, as well as Narrative Description of Summary Compensation Table and Grants of Plan-Based Awards in Last Fiscal Year.
All Other Compensation Table for Fiscal 2007
The components of the amounts shown in the All Other Compensation column of the Summary Compensation Table for Fiscal 2007 are displayed in detail in the following table.
Grants of Plan-Based Awards in Fiscal 2007
The following table sets forth certain information regarding grants of plan-based awards to each of our named executive officers during fiscal 2007. For more information, please refer to Compensation Disclosure and Analysis.
We have not entered into employment agreements with any of the named executive officers. Each of the named executive officers is an at-will employee.
Performance-Based Vesting Conditions
Please refer to Compensation Disclosure and AnalysisElements of CompensationQuarterly performance-based cash bonuses and Performance metrics and results for the PRSUs granted in fiscal 2007 for a discussion of performance measures applicable to the Bonus Plan and the PRSUs granted during fiscal 2007.
Outstanding Equity Awards At Fiscal 2007 End
The following table provides information on the current holdings of stock options, restricted stock awards, restricted stock units (RSUs) and PRSUs by our named executive officers as of June 30, 2007. This table includes unexercised and unvested stock options, unvested restricted stock awards and RSUs, as well as PRSUs with performance conditions that had not yet been satisfied. The market value of the shares set forth under the Stock Awards column was determined by multiplying the number of unvested or unearned shares by the fair market value of our common stock on June 29, 2007, the last trading day of fiscal 2007.
Option Exercises and Stock Vested for Fiscal 2007
The following table sets forth the number of shares acquired and the value realized upon exercise of stock options and vesting of restricted stock awards, RSUs and PRSUs during fiscal 2007 by each of the named executive officers.
Pension Benefits for Fiscal 2007
The following table provides information concerning retirement plan benefits for each of our named executive officers and Mr. McNealy. For additional information regarding other benefits provided upon retirement of the named executive officers and Mr. McNealy, please refer to Potential Payments Upon Termination or Change-in-Control.
Narrative Disclosure to Pension Benefits Table
Under the Severance Plan, which is not a conventional defined benefit plan, the named executive officers other than Mr. Grantham are entitled to retirement benefits, subject to certain exceptions, when (a) they are at least 55 years of age; (b) they have at least five full years of service; and (c) their age plus their years of service equal at least 65. Benefits are paid in one lump sum six months from the participants termination of service and include:
Additional benefits include fifteen months of option acceleration.
A Year of Service for purposes of the plan means a full or partial year of service at Sun prior to the employment termination date. For rehired employees, prior service at Sun will be counted if the prior service period exceeded the period when the executive was not employed by Sun. Years of Service generally include up to seven years of service credit for service with a predecessor employer that was acquired by Sun.
None of the participating named executive officers or Mr. McNealy were eligible to receive these benefits on June 30, 2007 because:
Non-Qualified Deferred Compensation for Fiscal 2007
The following table sets forth information regarding the participation by the named executive officers in Suns 2005 Non-Qualified Deferred Compensation Plan (the Deferred Compensation Plan) during fiscal 2007 and at fiscal year end.
Narrative Disclosure to Non-Qualified Deferred Compensation Table
The Deferred Compensation Plan allows the participating named executive officers to defer up to 60% of their annual base salary and incentive awards commissions and 75% of their annual cash bonuses.
Upon enrollment, participants select from a number of publicly available investment choices selected by Suns 401(k) Investment Plan Committee for this purpose, and the investment performance of the selected funds, net of fees, is thereafter credited to the participants account. Investment choices may be changed no more than once each month.
Participants can elect upon enrollment to receive up to one pre-retirement distribution per year beginning in the third year of plan participation. Although pre-retirement distributions can subsequently be postponed one time (subject to conditions) or canceled, participants cannot elect any additional pre-retirement distributions after initial enrollment, except in limited circumstances.
Benefits are generally payable to participants upon termination of employment either in a lump sum or in a series of annual payments (over five years, in the case of termination prior to retirement, or up to 15 years, in the case of a termination after retirement) as elected by the participants, subject to any requirements of Section 409A of the Code.
The Deferred Compensation Plan is the successor to an earlier plan that provided substantially similar benefits.
Potential Payments Upon Termination or Change-in-Control
Set forth below is a description of the plans and agreements that could result in potential payments to the named executive officers in the case of their termination of employment and/or a change-in-control of Sun.
U.S. Vice President Severance Plan and U.S. Vice President Separation Plan
The U.S. Vice President Severance Plan (the Severance Plan) and the U.S. Vice President Involuntary Separation Plan (the Separation Plan and, together with the Severance Plan, the Severance Plans) are available to Suns U.S. employees at the level of vice president or above, including each of the named executive officers other than Mr. Grantham. The Severance Plans have a two-tier benefit structure. One set of benefits are available for vice presidents who are not on Suns Executive Leadership Team and another set of benefits for vice presidents and above who are members of our Executive Leadership Team. All of the named executive officers are members of our Executive Leadership Team.
The Severance Plan provides benefits upon an executives retirement or mutual agreement. Mutual agreement means that both the executive and Sun agree that the executives employment should terminate.
The Separation Plan provides benefits upon an executives termination as a result of a workforce reduction or involuntary termination. A workforce reduction means the executives employment is involuntarily terminated because of the elimination or reduction of jobs due to a reorganization or otherwise. Involuntary termination means the executives employment is terminated by Sun for any reason except cause. Cause is defined as misconduct as defined in Suns Misconduct Policy or documented unsatisfactory job performance.
Under the Severance Plans, in the event an executive officers employment is terminated as a result of a workforce reduction, mutual agreement or involuntary termination without cause, the executive will be entitled to receive notification benefits, without being required to work during the notification period, and severance benefits. The notification benefits include:
Under the Severance Plans, in the event an executive officers employment is terminated as a result of mutual agreement or involuntary termination without cause, the executive will also be entitled to receive severance benefits, which include:
Amounts payable to an executive under the Severance Plans will be reduced to the extent the executive receives severance payments under the Worker Adjustment and Retraining Notice Act, or any other plan or agreement, including the Change of Control Agreements described below. In order to receive the severance benefits, other than the career service assistance, the executive must sign a release and waiver agreement. Pursuant to a letter agreement between Mr. Lehman and Sun, Mr. Lehman is not eligible for retirement benefits under the Severance Plans prior to February 22, 2008.
Change of Control Agreements
In October 1990, we approved a form of Change of Control Agreement (the Change of Control Agreement). Each of our named executive officers has executed a Change of Control Agreement with Sun. Mr. McNealy has also signed a Change of Control Agreement.
Under the Change of Control Agreement, each beneficiary is eligible to receive the following benefits, should the beneficiarys employment be terminated without cause within 12 months following a change of control:
The term annual compensation includes:
The Change of Control Agreement defines the term change of control to mean:
Grantham Letter Agreement
Mr. Grantham and Sun entered into a letter agreement on March 29, 2006, which provides Mr. Grantham with certain benefits should his employment be terminated in connection with a workforce reduction, his retirement, mutual agreement, material job change or involuntary termination. Retirement is defined in the same manner under the letter agreement and the Severance Plan. Mr. Grantham is not entitled to any benefits if his employment is terminated for cause. Cause means misconduct as described in Suns Misconduct Policy or documented unsatisfactory job performance.
His benefits under the letter agreement include a lump sum payment upon his termination equal to:
His benefits under the letter agreement also include 24 months post-termination date vesting of unvested stock options, restricted stock awards, RSUs and PSRUs upon his termination.
For each of the named executive officers, except Mr. Grantham, and for Mr. McNealy, the tables below estimate the amount of compensation that would be paid in the event of mutual agreement to terminate, involuntary termination without cause, or retirement, in each case subject to the terms of the Severance Plans, and termination following a change-in-control, subject to the terms of the standard Change of Control Agreement. For Mr. Grantham, the table below estimates the amount of compensation that would be paid in the event of voluntary termination, involuntary termination without cause, material job change, or retirement, in each case subject to Mr. Granthams letter agreement, and termination following a change of control, subject to the terms of the Change of Control Agreement. The amounts shown assume that each of the terminations was effective as of June 30, 2007. Information regarding the amount of pay due upon retirement for each of the named executive officers is also provided in the Pension Benefits Table for Fiscal 2007. None of the participating named executive officers or Mr. McNealy would have been eligible to receive retirement benefits under the Severance Plan had they retired as of June 30, 2007. Health and/or Life Insurance includes:
Career transition assistance is only provided in the event of an involuntary termination without cause.
The price used for determining the value of accelerated equity was the closing price of Suns common stock on NASDAQ on June 29, 2007, the last business day of the fiscal quarter.
Jonathan I. Schwartz
Michael E. Lehman
Donald C. Grantham
Gregory M. Papadopoulos