UPS » Topics » Compensation Philosophy and Principles

This excerpt taken from the UPS DEF 14A filed Mar 13, 2009.
Compensation Philosophy and Principles
 
The Compensation Committee is responsible for establishing the principles that underlie and guide the design and administration of our executive compensation programs. The following compensation principles are designed to drive company performance, create long-term value for our shareowners and attract, retain and motivate key talent.


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Compensation decisions are informed by a variety of factors
 
In making compensation decisions, the Compensation Committee considers the company’s overall compensation philosophy, the differentials between Management Committee compensation and other UPS positions, the additional responsibilities of the chief executive officer as compared to the other members of the Management Committee, the retention power of the existing compensation programs, market data and the Committee’s own experience and judgment. Internal comparisons are made between executive officers and their direct reports in an effort to ensure that compensation paid to the Management Committee members is reasonable compared to others with whom they work.
 
Market data is only one of the factors considered by the Compensation Committee
 
While the Compensation Committee considers market data in making compensation decisions, it does not target compensation at a particular percentile or within any targeted range based on the data. The data is one of a variety of factors weighed by the Compensation Committee when considering base salary, long-term equity awards and total compensation levels, and is generally considered as a market check.
 
Each year, we purchase and review general compensation survey data from sources such as Cook and Towers Perrin so that we can provide the Compensation Committee with general information about the level of our compensation relative to compensation data from comparable sized companies. In addition we look at pay practices and levels for a peer group that is comprised of companies that typically have global operations, a diversified business and annual sales and market capitalizations comparable to UPS. The 2008 peer group was comprised of the following 20 companies:
 
             
Boeing Co. 
  Dell Inc.   Lowes Companies Inc.   Sysco Corp.
Caterpillar Inc. 
  FedEx Corporation   McDonald’s Corp.   Target Corp.
Coca-Cola Co. 
  Johnson & Johnson   Motorola Inc.   United Technologies Corp.
Coca-Cola Enterprises Inc. 
  Kroger Co.   PepsiCo Inc.   Walgreen Co.
Costco Wholesale Corp. 
  Lockheed Martin   Procter & Gamble   Xerox Corp.
 
A majority of compensation is “at risk”, based on achievement of performance factors that reinforce our business objectives and alignment of management with shareowners
 
A significant portion of compensation for the Management Committee is tied to company performance and, for equity-based awards, share price performance. Measurement of company performance is made against financial and operating goals.
 
Compensation plans are designed to emphasize strong annual performance and foster long-term operational performance and success. We believe that a majority of total compensation (base salary, short-term incentives and long-term incentives) that can be earned by the Management Committee should be “at risk” and subject to short-term and long-term performance goals and stock price performance. The 2008 compensation elements with “at risk” components comprised approximately 68% of the 2008 target compensation opportunity for the named executive officers.
 
Manager-owner concept plays a central role in the success of UPS and aligns the interests of our Management Committee with our shareowners
 
Until 1999, we were owned by our employees and managed by our owners. Since going public in 1999, UPS employees still maintain a significant ownership in the company. Because compensation programs are designed to foster long-term stock ownership by all of our managers, each member of our Management Committee has accumulated a meaningful number of shares of our common stock. As a result, the interests of shareowners and our Management Committee are closely aligned, and they have a strong incentive to provide for effective management. Additionally, Management Committee members and directors are expected to acquire and hold a significant amount of UPS stock as described under “Stock Ownership Guidelines” below.


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Compensation programs reflect good corporate governance and high ethical standards
 
Our compensation and benefit programs reflect a philosophy of providing fair and equitable rewards that support our operating environment, attracting and retaining a diverse and highly skilled workforce. For example, many of our compensation programs apply equally across a wide spectrum of our management employee base and are not limited to senior management. We have also adopted a recoupment policy for equity awards granted to members of our Management Committee, which is described below.
 
Since equity award programs can have a dilutive impact on shareowner value, we evaluate the current overhang rate (defined as shares underlying outstanding equity award grants plus shares available for additional award grants divided by total common shares outstanding) when designing new programs or granting new awards. Our 2008 overhang rate was 6.24%. Included in the overhang calculation are outstanding stock options, RPUs and RSUs, as well as the number of shares set aside for future grants.
 
Another indicator of dilutive impact to shareowner value is the annual grant rate (defined as total shares underlying equity awards granted in one year divided by total common shares outstanding). In 2008, our grant rate was 0.83%. We believe that the low overhang and grant rate percentages demonstrate our objective to effectively and responsibly manage equity usage.
 
We do not have employment agreements or change in control agreements with our executive officers
 
We do not have a written or verbal employment agreement with any member of our Management Committee. In addition, we do not have a separate change in control or severance agreement with any member of our Management Committee.
 
The UPS Incentive Compensation Plan adopted in 1999 (the “1999 Plan”) includes a provision for an automatic acceleration of unvested awards in the event of a change in control. This provision applies equally to all equity awards granted under the 1999 Plan to all participants in the plan, of which there were approximately 37,000 in 2008. In the Compensation Committee’s view, at the time of the adoption of the 1999 Plan, the accelerated vesting of all outstanding equity awards following a change in control was a customary and reasonable component of an equity incentive program. The 2009 Plan that we are asking shareowners to approve at the annual meeting generally requires a “double trigger” for accelerating unvested awards, both a change in control and a termination of employment for the participant.
 
We have adopted a recoupment or “clawback” policy
 
In 2006, the Compensation Committee adopted a recoupment or “clawback” policy with respect to equity awards to members of our Management Committee. Pursuant to this policy, if financial results used to determine the amount of an award are materially restated and an executive engaged in fraud or intentional misconduct, we will seek repayment or recovery of the award, as appropriate. We incorporated this recoupment provision in the 2009 Plan that we are asking shareowners to approve at the annual meeting that is applicable to awards granted under the 2009 Plan.
 
This excerpt taken from the UPS DEF 14A filed Mar 17, 2008.
Compensation Philosophy and Principles
 
The Compensation Committee is responsible for establishing the principles that underlie and guide the design and administration of our executive compensation programs. The following compensation principles are designed to drive company performance, create long-term value for our shareowners and attract, retain and motivate key talent.
 
Compensation decisions are informed by a variety of factors
 
In making compensation decisions, the Committee considers our overall compensation philosophy, the differentials between Management Committee compensation and other UPS positions, the additional responsibilities of our chief executive officer as compared to the other members of our Management Committee, the retention power of our existing compensation programs, market data and their own experience and judgment. Internal comparisons are made between the executives and their direct reports in an effort to ensure that compensation paid to our Management Committee members is reasonable compared to others with whom they work day in and day out. While the Compensation Committee considers market data in making compensation decisions, it does not use benchmarking to target NEO compensation at a particular percentile or quartile or within any targeted range, based on the data. The data is one of a variety of factors weighed by the Compensation Committee when considering base salary and total compensation levels.


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Each year, we purchase and review general compensation survey data from sources such as Towers Perrin, Hewitt Associates or Mercer so that we can provide the Compensation Committee with general information about the level of our compensation relative to the market. For 2007 executive and director compensation, custom 2006 Towers Perrin survey data for a peer group of companies was evaluated. For the custom 2006 peer group data, the Compensation Committee determined that the companies should be selected based on industry leadership, revenue, number of employees, geographic footprint and relevant competitors. Based on those criteria, management identified relevant peer group companies, which were then approved by the Compensation Committee.
 
Compensation reinforces our business objectives and alignment with shareowners, and a majority of compensation is “at risk” and based on achievement of performance factors
 
A significant portion of compensation for the Management Committee is tied to company performance and, for equity-based awards, share price performance. Measurement of company performance is made against financial and operating goals.
 
Our compensation plans are designed to emphasize strong annual performance and foster long-term operational performance and success. We believe that a majority of total compensation (base salary, short-term incentives and long-term incentives) that can be earned by our Management Committee should be “at risk” and subject to short-term and long-term performance goals and stock price performance. The 2007 compensation elements with “at risk” components comprised approximately 63% of the 2007 target compensation opportunity for the NEOs.
 
Manager-owner concept plays a central role in the success of UPS and aligns the interests of our Management Committee with our shareowners
 
Until 1999, we were owned by our employees and managed by our owners. Since going public in 1999, our employees still maintain a significant ownership in our company. Because our compensation programs are designed to foster long-term stock ownership by all of our managers, each member of our Management Committee has accumulated a meaningful number of shares of our common stock. As a result, the interests of shareowners and our Management Committee are closely aligned, and they have a strong incentive to provide for effective management. Additionally, Management Committee members and directors are expected to acquire and hold a significant amount of UPS stock as described under “Stock Ownership Guidelines” below.
 
Compensation programs reflect good corporate governance and high ethical standards
 
Our compensation and benefit programs reflect a philosophy of providing fair and equitable rewards that support our operating environment, attracting and retaining a diverse and highly skilled workforce. For example, many of our compensation programs apply equally across a wide spectrum of our management employee base and are not limited to senior management. We have also adopted a recoupment policy for equity awards granted to members of our Management Committee, which is described under “Additional Compensation Policies” below.
 
Since equity award programs can have a dilutive impact on shareowner value, we evaluate the current overhang rate (defined as shares underlying outstanding equity award grants plus shares available for additional award grants divided by total common shares outstanding) when designing new programs or granting new awards. Our 2007 overhang rate was 7.5%. Included in the overhang calculation are outstanding stock options, RPUs and RSUs, as well as the number of shares set aside for future grants.
 
Another indicator of dilutive impact to shareowner value is the annual grant rate (defined as total shares underlying equity awards granted in one year divided by total common shares outstanding). In 2007, our grant rate was 0.8%. We believe that the low overhang and grant rate percentages demonstrate that dilution is not a current issue for our equity plans.


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