United Parcel Service DEF 14A 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant x
Filed by a Party other than the Registrant o
Check the appropriate box:
United Parcel Service, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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May 7, 2009
To our Shareowners:
United Parcel Service, Inc.s annual meeting of shareowners will be held at the Hotel du Pont, 11th and Market Streets, Wilmington, Delaware 19801, on May 7, 2009, at 8:00 a.m. The purposes of the meeting are:
1. To elect ten directors nominated by the board of directors to serve until our 2010 annual meeting of shareowners;
2. To ratify the appointment of Deloitte & Touche LLP as our independent registered public accountants for the year ending December 31, 2009;
3. To approve the United Parcel Service, Inc. 2009 Omnibus Incentive Compensation Plan; and
4. To transact any other business as may properly come before the meeting.
Our board of directors has fixed the close of business on March 9, 2009 as the record date for determining holders of our common stock entitled to notice of, and to vote at, the annual meeting.
For a second year, we are pleased to take advantage of the Securities and Exchange Commission rule allowing companies to furnish proxy materials to shareowners over the Internet. We believe that this e-proxy process expedites shareowners receipt of proxy materials, while also lowering the costs and reducing the environmental impact of our annual meeting. On March 16, 2009, we began mailing to certain shareowners a Notice of Internet Availability of Proxy Materials containing instructions on how to access our 2009 proxy statement and annual report and vote online. All other shareowners will receive the proxy statement and annual report by mail.
Teri P. McClure
March 16, 2009
Your vote is important. Please vote as soon as possible by using the Internet or by telephone or, if you received a paper copy of the proxy card by mail, by signing and returning the enclosed proxy card. Instructions for your voting options are described on the Notice or proxy card.
Important Notice Regarding the Availability of Proxy Materials for the Shareowner Meeting to be Held on May 7, 2009 The proxy statement and annual report are available at www.proxyvote.com
55 Glenlake Parkway, N.E., Atlanta, Georgia 30328
2009 ANNUAL MEETING OF SHAREOWNERS
This proxy statement and proxy card are furnished in connection with the solicitation of proxies to be voted at our annual meeting of shareowners, which will be held at the Hotel du Pont, 11th and Market Streets, Wilmington, Delaware 19801, on May 7, 2009, at 8:00 a.m. On March 16, 2009, we began mailing to shareowners of record either a Notice of Internet Availability of Proxy Materials (Notice) or this proxy statement and proxy card.
You have received these proxy materials because our board of directors is soliciting your proxy to vote your shares at the annual meeting. This proxy statement describes issues on which we would like you to vote at our annual meeting of shareowners. It also gives you information on these issues so that you can make an informed decision.
Our board of directors has made this proxy statement and proxy card available to you on the Internet because you own shares of United Parcel Service, Inc. common stock, in addition to delivering printed versions of this proxy statement and proxy card to certain shareowners by mail.
When you vote by using the Internet, by telephone or (if you received your proxy card by mail) by signing and returning the proxy card, you appoint D. Scott Davis and Teri P. McClure as your representatives at the annual meeting. They will vote your shares at the annual meeting as you have instructed them or, if an issue that is not on the proxy card comes up for vote, in accordance with their best judgment. This way, your shares will be voted whether or not you attend the annual meeting. Even if you plan to attend the annual meeting, we encourage you to vote in advance by using the Internet, by telephone or (if you received your proxy card by mail) by signing and returning your proxy card.
Why did I receive a Notice of Internet Availability of Proxy Materials in the mail instead of a printed set of proxy materials?
Pursuant to rules adopted by the Securities and Exchange Commission, we are permitted to furnish our proxy materials over the Internet to our shareowners by delivering a Notice in the mail. We are sending the Notice to certain record shareowners. If you received a Notice by mail, you will not receive a printed copy of the proxy materials in the mail. Instead, the Notice instructs you on how to access and review the proxy statement and annual report over the Internet at www.proxyvote.com. The Notice also instructs you on how you may submit your proxy over the Internet. If you received a Notice by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting these materials contained on the Notice.
Shareowners who receive a printed set of proxy materials will not receive the Notice, but may still access our proxy materials and submit their proxies over the Internet at www.proxyvote.com.
Holders of our class A common stock and our class B common stock at the close of business on March 9, 2009 are entitled to vote. March 9, 2009 is referred to as the record date.
In accordance with Delaware law, a list of shareowners entitled to vote at the meeting will be available in electronic form at the place of the annual meeting on May 7, 2009 and will be accessible in electronic form for ten days prior to the meeting at our principal place of business, 55 Glenlake Parkway, N.E., Atlanta, Georgia 30328, and at the offices of Morris, Nichols, Arsht & Tunnell, 1201 North Market Street, Wilmington, Delaware 19899, between the hours of 9:00 a.m. and 5:00 p.m.
Holders of class A common stock are entitled to ten votes per share. Holders of class B common stock are entitled to one vote per share. On the record date, there were 303,071,610 shares of our class A common stock and 691,743,730 shares of our class B common stock outstanding and entitled to vote.
The voting rights of any shareowner or shareowners as a group, other than any of our employee benefit plans, who beneficially own shares representing more than 25% of our voting power are limited so that the shareowner or group may cast only one one-hundredth of a vote with respect to each vote in excess of 25% of the outstanding voting power.
Shareowners of record may vote by using the Internet, by telephone or (if you received a proxy card by mail) by mail as described below. Shareowners also may attend the meeting and vote in person. If you hold class B shares through a bank or broker, please refer to your proxy card, Notice or other information forwarded by your bank or broker to see which voting options are available to you.
The method you use to vote will not limit your right to vote at the annual meeting if you decide to attend in person. Written ballots will be passed out to anyone who wants to vote at the annual meeting. If you hold your shares in street name, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote in person at the annual meeting.
The presence, in person or by proxy, of the holders of a majority of the votes entitled to be cast at the annual meeting will constitute a quorum. If a quorum is present, we can hold the annual meeting and conduct business.
You may revoke your proxy and change your vote at any time before the polls close at the annual meeting. You may do this by:
Attendance at the meeting will not by itself revoke a proxy.
You are being asked to vote on three items:
No cumulative voting rights are authorized, and dissenters rights are not applicable to these matters.
How may I vote for the nominees for director, and how many votes must the nominees receive to be elected?
With respect to the election of nominees for director, you may:
The ten nominees receiving the highest number of affirmative votes will be elected as directors. This number is called a plurality.
If a nominee is unable to stand for election, the board may either:
If the board designates a substitute nominee, shares represented by proxies voted for the nominee who is unable to stand for election will be voted for the substitute nominee.
How may I vote for the ratification of the appointment of our independent registered public accountants, and how many votes must the proposal receive to pass?
With respect to the proposal to ratify the appointment of our independent registered public accountants, you may:
The ratification of the appointment of our independent registered public accountants must receive the affirmative vote of a majority of the votes that could be cast at the annual meeting by the holders who are present
in person or by proxy to pass. If you abstain from voting on the proposal, it will have the same effect as a vote against the proposal.
How may I vote for the approval of the 2009 Plan, and how many votes must the proposal receive to pass?
With respect to the proposal to approve the 2009 Plan, you may:
The approval of the 2009 Plan must receive the affirmative vote of a majority of the votes that could be cast at the annual meeting by the holders who are present in person or by proxy to pass. If you abstain from voting on the proposal, it will have the same effect as a vote against the proposal.
In addition, New York Stock Exchange (NYSE) rules require that the total votes cast on the proposal to approve the 2009 Plan must represent a majority of the shares entitled to vote on the proposal.
The board recommends a vote
If you return a signed card but do not provide voting instructions, your shares will be voted FOR all ten director nominees, FOR the ratification of the appointment of our independent registered public accountants, and FOR the approval of the 2009 Plan.
Will my shares be voted if I do not vote by using the Internet, by telephone or by signing and returning my proxy card?
If you own class A shares and you do not vote by using the Internet, by telephone or (if you received a proxy card by mail) by signing and returning your proxy card, then your class A shares will not be voted and will not count in deciding the matters presented for shareowner consideration at the annual meeting. If your class A shares are held pursuant to The UPS Stock Fund in the UPS Savings Plan and you do not vote by using the Internet, by telephone or by signing and returning your proxy card, the trustee will vote your shares for each proposal in the same proportion as the shares held pursuant to that plan for which voting instructions were received.
If your class B shares are held in street name through a bank or broker, your bank or broker may vote your class B shares under certain circumstances if you do not provide voting instructions before the annual meeting, in accordance with NYSE rules that govern the banks and brokers. These circumstances include voting your shares on routine matters, such as the election of directors and ratification of the appointment of our independent registered public accountants described in this proxy statement. With respect to these matters, therefore, if you do not vote your shares, your bank or broker may vote your shares on your behalf or leave your shares unvoted.
The approval of the 2009 Plan is not considered a routine matter under NYSE rules relating to voting by banks and brokers. When a proposal is not a routine matter and the brokerage firm has not received voting instructions from the beneficial owner of the shares with respect to that proposal, the brokerage firm cannot vote the shares on that proposal. This is called a broker non-vote. Broker non-votes that are represented at the annual meeting will be counted for purposes of establishing a quorum, but not for determining the number of shares voted for or against the non-routine matter.
We encourage you to provide instructions to your bank or brokerage firm by voting your proxy. This action ensures your shares will be voted at the meeting in accordance with your wishes.
You will need proof of your share ownership (such as a recent brokerage statement or letter from your broker showing that you owned shares of United Parcel Service, Inc. common stock as of March 9, 2009) and a form of photo identification. If you do not have proof of ownership and valid photo identification, you may not be admitted to the annual meeting. All bags, briefcases and packages will be held at registration and will not be allowed in the meeting.
Yes. This proxy statement and the 2008 Annual Report to Shareowners are available on our investor relations website located at http://investor.shareholder.com/ups. Instead of receiving paper copies in the mail, shareowners can elect to receive an email that provides a link to our future annual reports and proxy materials on the Internet. Opting to receive your proxy materials electronically will save us the cost of producing and mailing documents to your home or business and will reduce the environmental impact of our annual meetings, and will give you an automatic link to the proxy voting site.
If you are a shareowner of record and wish to enroll in the electronic proxy delivery service, you may do so by going to www.icsdelivery.com/ups and following the prompts.
There are ten nominees to our board of directors this year. All directors are elected annually to serve until the next annual meeting and until their respective successors are elected. Nine of the nominees have served as directors since our last annual meeting. William Johnson joined the board in February 2009.
The board of directors recommends a vote FOR the election
to the board of each of the following nominees.
Ben Verwayaan also served as a director in 2008 and continues to serve in 2009. His term will expire at the annual meeting. We thank him for his contributions to the board.
Our board has delegated to the Nominating and Corporate Governance Committee the responsibility for reviewing and recommending to the board nominees for director. Board candidates are evaluated based upon various factors, such as personal character, values and disciplines, ethical standards, diversity, professional background and skills, all in the context of an assessment of the needs of the board at that time. In addition, each director is expected to ensure that other existing and planned future commitments do not materially interfere with his or her responsibilities as a director.
Accordingly, the Nominating and Corporate Governance Committees objective is to maintain a board of individuals of the highest personal character, integrity and ethical standards, and that reflects a range of professional backgrounds and skills relevant to our business. The Nominating and Corporate Governance Committee identifies new director candidates through a variety of sources, including third party search firms. Bill Johnson, who first joined the board in February 2009, was recommended by a third party search firm.
The Nominating and Corporate Governance Committee will consider director candidates proposed by shareowners on the same basis as recommendations from other sources. Any shareowner who wishes to recommend a prospective candidate for the board of directors for consideration by the Nominating and Corporate Governance Committee may do so by submitting the name and qualifications of the prospective candidate in writing to the following address: Corporate Secretary, 55 Glenlake Parkway, N.E., Atlanta, Georgia 30328.
Our board of directors held seven meetings during 2008. Each of our directors attended at least 75% of the total number of meetings of the board and any committees of which he or she was a member. It is the boards policy that our directors attend the annual meeting. All but one of the directors who were serving on the board at our 2008 annual meeting attended the meeting.
Our Corporate Governance Guidelines include categorical standards adopted by the board to determine director independence that meet the listing standards set forth by the NYSE. The portion of our Corporate Governance Guidelines addressing director independence is attached to this proxy statement as Annex I.
Pursuant to the Corporate Governance Guidelines, the board undertook its annual review of director independence in February 2009. As part of this review, the Board considered whether there were any transactions or relationships between each director or any member of his or her immediate family and UPS. The board also
examined whether there were any transactions or relationships between an organization of which a director is a partner, shareholder or officer and UPS. The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that a director is independent. The board also evaluated the categorical standards that form a part of our Corporate Governance Guidelines.
As a result of this review, the board affirmatively determined that the following directors are independent directors: Duane Ackerman, Michael Burns, Stu Eizenstat, Bill Johnson, Ann Livermore, Rudy Markham, John Thompson, Carol Tomé and Ben Verwaayen. Scott Davis and Mike Eskew are not independent directors because they were employed by UPS in 2008.
In determining the independence of Stu Eizenstat, Bill Johnson, Ann Livermore, Rudy Markham, John Thompson, Carol Tomé and Ben Verwaayen, our board considered ordinary course transactions between UPS and the companies that employed these directors during 2008.
Michael Burns is the former Chairman, Chief Executive Officer and President of Dana Corporation. Dana Corporation filed a voluntary petition under Chapter 11 of the federal bankruptcy laws on March 3, 2006. On January 31, 2008, Dana Corporation emerged from Chapter 11.
Our non-management directors hold executive sessions without management present as frequently as they deem appropriate, and at least two times each year. The presiding director for these meetings rotates meeting by meeting among the chairpersons of the board committees that are composed entirely of independent directors, currently the Audit, Compensation and Nominating and Corporate Governance Committees. The presiding director determines the agenda for the session and, after the session, acts as a liaison between the non-management directors and the chairman and chief executive officer. The presiding director may invite the chairman and chief executive officer to join the session for certain discussions, as he or she deems appropriate. If the non-management directors include any directors who are not independent directors, then at least once a year there will be an executive session including only the independent directors.
Our Corporate Governance Guidelines are available on the governance section of our investor relations website at http://investor.shareholder.com/ups. The charters that have been adopted for each of the Audit, Compensation and Nominating and Corporate Governance Committees also are available on our investor relations website.
We have a long-standing commitment to conduct our business in accordance with the highest ethical principles. Our Code of Business Conduct is applicable to all the representatives of our enterprise, including our executive officers and all other employees and agents of our company and our subsidiary companies, as well as to our directors. A copy of our code is available on the governance section of the investor relations website.
A copy of our Corporate Governance Guidelines, committee charters and Code of Business Conduct may also be obtained without charge upon written request to: Corporate Secretary, 55 Glenlake Parkway, N.E., Atlanta, Georgia 30328.
Any shareowners or interested parties who wish to communicate directly with our board of directors, with our non-management directors as a group or with the presiding director of our non-management directors may do so by writing to Corporate Secretary, 55 Glenlake Parkway, N.E., Atlanta, Georgia 30328. Please specify to whom your letter should be directed. Once the communication is received by the Corporate Secretary, the Corporate Secretary reviews the communication. Communications that comprise advertisements, solicitations for business, requests for employment, requests for contributions or other inappropriate material will not be forwarded to our directors. Other communications are promptly forwarded to the addressee.
Committees of the Board of Directors
Our board of directors has four committees: the Audit Committee, the Compensation Committee, the Nominating and Corporate Governance Committee and the Executive Committee. The following table shows the current members of each committee.
X= current committee member; * = chair
Audit Committee. The primary responsibilities of our Audit Committee include:
In 2008, the Audit Committee held nine meetings. Each member of our Audit Committee meets the independence requirements of the NYSE and SEC rules and regulations, and each is financially literate. Our board has determined that Carol Tomé is an audit committee financial expert as defined by the SEC.
Compensation Committee. The primary responsibilities of our Compensation Committee include:
In 2008, the Compensation Committee held seven meetings. Each member of our Compensation Committee meets the independence requirements of the NYSE and is an outside director under Section 162(m) of the Internal
Revenue Code. For additional information about the Compensation Committees processes and the role of executive officers and compensation consultants in determining compensation, see Compensation Discussion and Analysis.
Nominating and Corporate Governance Committee. The primary responsibilities of our Nominating and Corporate Governance Committee include:
In 2008, the Nominating and Corporate Governance Committee held five meetings. Each member of our Nominating and Corporate Governance Committee meets the independence requirements of the NYSE.
Executive Committee. The Executive Committee may exercise all powers of the board of directors in the management of our business and affairs, except for those powers expressly reserved to the board under Delaware law. In 2008, the Executive Committee held no meetings.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table describes the beneficial ownership of our common stock as of February 1, 2009 by:
In addition to the beneficial ownership of our common stock shown above, our directors and executive officers also hold equity instruments that are not reported in the beneficial ownership table but represent additional financial interests that are subject to the same market risk as ownership of our common stock. The number of shares of stock to which these stock units are equivalent as of February 1, 2009 is as follows.
Restricted stock units (RSUs) are bookkeeping units, the value of each of which corresponds to one share of UPS class A common stock. We grant RSUs under two programs, the Management Incentive Program and the Long-term Incentive Performance Award Program, described in more detail in the Compensation Discussion and Analysis.
Phantom stock units are bookkeeping units, the value of each of which corresponds to one share of UPS class A common stock. Dividends paid on UPS common stock are added to the directors phantom stock unit balance. Upon termination of the individuals service as a director, amounts represented by phantom stock units will be distributed in cash.
Restricted performance units (RPUs) are bookkeeping units, the value of each of which corresponds to one share of UPS class A common stock. We grant RPUs under the Long-term Incentive Award Program, described in more detail in the Compensation Discussion and Analysis.
Stock option deferral shares are shares held for the individual in a rabbi trust within the UPS Deferred Compensation Plan. Each individual elected to defer the receipt of these shares rather than acquiring them directly upon the exercise of a stock option.
Other Deferred Compensation Plan shares are amounts within the UPS Deferred Compensation Plan allocated to UPS common stock. The plan is described in more detail in the narrative following the Non-Qualified Deferred Compensation table under Compensation of Executive Officers.
COMPENSATION DISCUSSION AND ANALYSIS
UPS founder Jim Casey once said that good management is the ability to make people feel that you and they are the company not merely employees. The idea of management by partnership, and Jims belief that determined people working together can do anything, are two of many basic principles that have allowed UPS to grow and reinvent itself for more than 100 years. The management philosophy Jim expressed in the early years of operation grew into a culture based on integrity, honesty and trust in each other. Our practices, including compensation programs, reflect an early understanding that continued success was not only dependent on our innovative service, but also on the development and well-being of the UPS team. UPS leaders will consistently point to three practices, above all others, which have contributed to our sustained long-term growth:
UPS reflects these principles in our compensation programs by rewarding ownership, performance and long-term commitment to the organization. UPS career development and succession planning programs strengthen the partnership by offering rotational assignments within and across UPS business units, through internal and external education, by identification of future career paths and by encouraging individual responsibility for self-development.
At the beginning of 2008, economists forecasted slow but growing U.S. gross domestic product and industrial production. Few predicted that the U.S. economic environment would severely deteriorate throughout the year. Conditions worsened significantly in the second half of the year, as the economic weakness spread globally. As a result of the difficult economic environment, performance in 2008 did not meet our plans or expectations set out in the beginning of the year. Although our revenue, operating profit and earnings per share were down for the year, we believe the UPS management team performed well under such trying circumstances. Our U.S. operations team continued to adjust the network throughout 2008, as package volume deteriorated. In our international business, export volume per day increased in 2008 as we benefitted from our balanced global network. The supply chain and freight segment improved its operating margin in 2008. We continued to generate strong cash flow during the year, and ended 2008 with an industry-leading small package operating margin.
We continue to anticipate a challenging worldwide economic environment in 2009. Our management team is making the difficult decisions necessary to ensure that we remain a strong company throughout the downturn and will be well-positioned when global markets begin to recover. We are putting the necessary plans in place to manage our costs while ensuring that we maintain high quality service to our customers.
While the UPS executive compensation programs are designed to fairly compensate our team for the work they perform on behalf of the company, UPS realized long ago that the dollar value of our programs was only one element considered by executives when choosing to stay with the organization. Working in a satisfying, challenging environment with a team committed to each other and the company is an intangible but key benefit that has been a cornerstone of our success. Unlike many of our peers, our executive compensation program does not target total compensation at a particular percentile or market level. Instead, we believe that if we offer reasonable pay and benefits to our executives, along with a culture and work environment that encourages innovation, supports diverse ideas and recognizes individual contributions, they will choose to stay for the long-term.
The UPS executive compensation program is designed to:
The UPS Management Committee, comprised of all of our executive officers, is made up mainly of employees who have spent virtually their entire careers with UPS. Many members of our Management Committee have had wide-ranging opportunities at UPS due to the variety of assignments and advancement opportunities available across business units, functions and geographies. These opportunities provide extensive career development and build loyalty, which reinforces our strong corporate culture. Ultimately these attributes provide a greater return to our shareowners. However, the high quality of our Management Committee would not preclude looking outside UPS to fill an executive position if it was in the best interest of UPS and its shareowners.
The UPS executive compensation program is administered by the Compensation Committee of the board of directors. The Compensation Committee is comprised solely of non-employee directors who meet the independence requirements of the NYSE, and currently includes John Thompson (Chair), Duane Ackerman and Stu Eizenstat. For a description of the Compensation Committee Charter and Committee responsibilities, see Committees of the Board of Directors.
The Compensation Committee has sole authority to engage and terminate outside advisors and consultants to assist the Compensation Committee in carrying out its responsibilities. If engaged, the consultant reports directly to the Chair of the Compensation Committee. In 2008, the Committee worked with Frederic W. Cook & Co. (Cook). The consultant serves as a resource for market data on pay practices and trends, provides advice to the Compensation Committee, provides competitive analysis and advice related to outside director compensation, reviews the Committees Compensation Discussion and Analysis, and attends committee meetings as requested. Cook provides no additional services to UPS.
The chief executive officer provides the Compensation Committee with his assessments of the members of the Management Committee, including the other named executive officers. He makes compensation recommendations to the Compensation Committee for the other named executive officers with respect to base salary. The chief executive officer and the chief financial officer also make recommendations with respect to setting performance goals under our incentive compensation plans and provide their analysis as to whether the performance goals were achieved at the end of the performance period. The recommendations of the chief executive officer, the chief financial officer and the senior vice president of human resources are the basis of discussion by the Compensation Committee. Other members of the Management Committee assist from time to time in providing data and recommendations as to compensation structure.
Meetings of the Compensation Committee are regularly attended by the chief executive officer and the senior vice president of human resources. Other members of the Management Committee are in attendance from time to time. Management Committee members are not present when the Compensation Committee goes into executive session, or when decisions about their own compensation are discussed.
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.
In making compensation decisions, the Compensation Committee considers the companys 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 Committees 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.
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:
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.
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 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 Committees 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.
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.
Each year the Compensation Committee conducts a compensation review for the Management Committee, including the named executive officers. As part of this review, the chief executive officer provides the Compensation Committee with a subjective assessment of the Management Committee members and compensation recommendations with respect to annual base salary increases.
In setting compensation of the chief executive officer, the Compensation Committee undertakes a comprehensive review each year of the chief executive officers performance. The full board also meets in executive session each year to review the chief executive officers performance. Factors considered include the boards assessment of the performance of the chief executive officer, his strategic vision and leadership, his ability to execute and achieve the companys business strategy, his ability to make and drive long-term decisions that create competitive advantage and his overall effectiveness as a leader and role model.
In making compensation decisions, the Compensation Committee also considers our compensation philosophies. The Compensation Committee does not assign particular weights to any of these factors in making compensation decisions.
The components of the compensation program for our Management Committee, described in more detail below, are:
Annual and long-term incentive compensation is structured similarly across much of our management team that is comprised of approximately 37,000 employees. Target award levels are generally structured as a multiple of annual or monthly base salary, with the applicable multiple reflecting the level of job responsibility. This structure generally has been in place for a number of years and reflects our historical practices.
The Compensation Committee considers a number of factors in determining annual base salary adjustments of Management Committee members. While company performance is the most important factor, scope of responsibility, leadership, internal equity comparisons and market data are all considered by the Compensation Committee when determining annual salary adjustments for Management Committee members.
The following table shows annual base salaries for the named executive officers in 2007 and 2008 and the overall percentage increase.
In 2008, UPS approved an average base salary increase of 3.5% for all management employees other than members of the Management Committee based upon company performance in 2007. The Compensation Committee generally makes annual salary determinations for members of the Management Committee at its first meeting of the year, and (unless otherwise specified) the new salaries are effective as of March 1 of that year.
At its February 2008 meeting, the Compensation Committee considered the general management salary increase, 2007 company performance, scope of responsibility and leadership, as well as market data showing that the named executive officers were generally well below the median with respect to base salary levels at other companies. Based on these considerations, the Compensation Committee approved base salary increases effective March 1, 2008, except that the base salary increase for Scott Davis was effective as of January 1, 2008. In determining to grant base salary increases to named executive officers that exceeded the general management salary increase, the Compensation Committee noted the following:
The following table provides an overview of our annual incentive award programs. Each is described in more detail below.
There are two parts of the MIP program: MIP Award and MIP Ownership Incentive Award.
The MIP award is designed to align pay with annual company performance. The program is an annual plan, and for historical reasons the performance period is from October 1 of one year through September 30 of the following year. MIP awards are granted under the 1999 Plan. Participants in the plan, who include approximately 37,000 of our management employees at all levels, have the opportunity to earn an annual incentive award when we meet target performance objectives. Incentives paid above target are possible if we exceed our performance objectives. The Compensation Committee exercises its judgment on the payout level for the plan based on considerations including company performance relative to target objectives, the general economic environment, and performance trends.
The award is structured one-half in cash (or the equivalent cash value in shares of UPS stock, at the participants election) and one-half in restricted stock units. For approximately 11,000 of the more senior managers among the plan participants, including the Management Committee, the target award level for the overall Management Incentive Program is four months base salary, plus the ownership incentive award described below. For the remaining plan participants, the overall target award level ranges from one to three months base salary, plus the ownership incentive award.
The target amount that can be earned by our named executive officers under MIP, equal to four months of base salary, is significantly lower than comparative annual target incentive award levels based on market data. However, we continue to believe that the structure of the Management Incentive Program that treats similarly all 11,000 of our employees eligible for an award equal to four months of base salary is consistent with our overall compensation strategy.
In October of each year we set the annual performance objectives under the MIP, which we call business elements. At the end of the MIP fiscal year of September 30, we evaluate our achievement of the business elements and approve the MIP factor, which represents our success in achieving business element goals. The MIP factor is multiplied by the target award to determine the actual award earned by the participant.
The final awards are reviewed and approved by the Compensation Committee. If performance objectives are not met, participants may receive a reduced award based on actual performance results. Similarly, if performance objectives are exceeded, participants can receive an award greater than 100% of the targeted award. The MIP factor is applied equally to all 37,000 participants in the program. Individual performance of the named executive officers or any other members of management is not considered in determining the annual award factor. Rather, the award is based solely on overall company achievement of the business elements and our assessment of company performance in light of the business environment and competitive market in which we operated during the award year.
The Management Incentive Program is designed to incorporate performance criteria which support our annual operating plan and business strategy. The 2008 performance goals were based on our business plans established at the beginning of the 2008 Management Incentive Program fiscal year, from October 1, 2007 through September 30, 2008. Performance targets and results, as communicated to MIP participants, were as follows:
Some of the business elements have a greater impact than others on UPS financial results and our long-term success. We do not assign a specific weight to each business element when determining award payouts; rather, we use the achievement of these goals to judge our success in implementing our overall business strategy. In addition to evaluating results for these business elements when setting award amounts, we also consider our assessment of the challenges of the economic and competitive market in which UPS operated during the award year.
After evaluating actual company performance against the business elements and these other factors, we determined, and the Compensation Committee approved, that the 2008 award to be paid to all participants would be at 70% of the targeted award amount. This award was less than the award made in 2007 of 90% of target, and below the average of the previous five years (2003 to 2007) of 102%.
To reward management employees for maintaining significant ownership of UPS stock, all 37,000 participants in the Management Incentive Program are eligible for an additional incentive award up to the equivalent of one months salary. This portion of the MIP award is also provided one-half in cash, UPS stock or deferred into the participants 401(k) or related savings program at the participants election, and one-half in restricted stock units. The target level of one months salary is the same for all 37,000 participants in the program.
Ownership levels for the 2008 awards were determined by totaling the number of UPS shares in the participants family group accounts and the participants unvested MIP restricted stock units and deferred compensation shares, and then multiplying the sum by the closing price of a class B share on the NYSE on October 17, 2008.
The amount of the award is equal to the participants percent of ownership relative to their target, multiplied by one months salary. For example, if the participants 2008 ownership equaled 80% of their ownership target, their ownership incentive award had a value equal to 80% of one months salary. The maximum award that can be granted is one months salary.
The Half-Month Bonus, equal to one-half of one months salary, is a discretionary cash bonus awarded in the fourth quarter to eligible salaried employees in the U.S., including the Management Committee. Approximately 60,000 employees are eligible to receive the Half-Month Bonus, which is awarded in recognition of all participants contributions to the business throughout the year, and in particular during our peak operating period in the fourth quarter. Each year, management determines whether company-wide performance merits payment of the bonus. If earned, the bonus is paid to all participants in the program. We determined that the half-month bonus was earned in 2008.
The named executive officers earned the following amounts of cash incentive awards for 2008.
Our long-term incentive programs provide participants with grants of equity-based incentives that are intended to reward performance over a period of more than one year. Grants are made pursuant to the shareowner approved 1999 Plan. We grant long-term equity awards in the form of stock options, restricted performance units and restricted stock units that are delivered in the form of class A shares at vesting. Programs are based on longer-term operational and financial performance goals and long-term stock price appreciation. The Compensation Committee believes equity-based compensation performs an essential role in retaining and motivating our managers by providing them incentives which are linked to our long-term success and maximizing shareowner value.
Target award levels vary based on level of responsibility. At the Management Committee level, the Compensation Committee has approved a differential in target long-term incentive award levels for certain key positions, including chief executive officer, chief financial officer and chief operating officer, to acknowledge the additional responsibilities of those positions and competitive market practice.
The following table provides an overview of our long-term incentive award programs. Each award type and program is described in more detail below.
The Compensation Committee believes that stock options provide a significant link to company performance and maximize shareowner value, as the option holder receives value only if our stock price increases. Stock options also have retention value, as the option holder will not receive value from the options unless he or she remains our employee during the vesting period for the award (except in the case of retirement, death or disability during the vesting period).
Stock options are granted with an exercise price equal to the closing market price on the NYSE on the date of grant. Historically, stock options vested five years from the date of grant and expired ten years from the date of grant. In 2008 we changed the vesting schedule, so that stock options granted in 2008 vest 20% per year over five years. The change was made to bring the vesting schedule in line with market practice. The options continue to expire ten years from the date of grant. Grants do not include dividend equivalents or any reload grant features.
Restricted performance units are bookkeeping units, the value of which corresponds to one share of class A common stock. The decision by the Compensation Committee to use restricted performance units is based on two goals for the award:
Historically, restricted performance units vested on the fifth anniversary date of their grant. In 2008 we changed the vesting schedule of the award, so that restricted performance units granted in 2008 vest 20% per year over five years. The change was made to bring the vesting schedule in line with market practice. Upon vesting of restricted performance units, the individual receives shares of UPS class A common stock. When dividends are paid on UPS common stock, an equivalent value is automatically credited to the participants bookkeeping account in additional restricted performance units.
Restricted stock units are bookkeeping units, the value of which corresponds to one share of class A common stock. The Compensation Committee believes that restricted stock units provide a retention incentive and enhance executive stock ownership and shareholder linkage. Restricted stock units vest 20% per year over five years. Upon vesting of restricted stock units, the individual receives shares of UPS class A common stock. When dividends are paid on UPS common stock, an equivalent value is automatically credited to the participants bookkeeping account in additional restricted stock units.
Our Long-Term Incentive program historically has been comprised of two parts: stock option awards and restricted performance units. Grants are made annually, typically in May of each year. Approximately 3,100 members of our management team participate in this program.
In 2008, the LTI plan was modified from that of previous years. Management team members at the region manager level and above, including the named executive officers, continued to receive their awards in the form of both stock options and restricted performance units. All other eligible management team members now receive their awards solely in the form of restricted performance units. The change was made to better align our compensation expense with the value received by our employees.
The restricted performance units granted under the Long-Term Incentive program prior to 2008 provided that the number of restricted performance units ultimately earned would increase by 10% if we attain a performance measure, such as adjusted diluted earnings per share, for the five-year performance period. Beginning in 2008, the
restricted performance units no longer include a performance measure that could result in an increase of 10% of the number of restricted performance units ultimately earned.
The total target award value at grant for the Long-Term Incentive awards are set at 175% of base salary for the chief executive officer and 125% of base salary for the other members of the Management Committee. For other management employees, target award values ranges from 25% to 75% of base salary.
2008 Long-Term Incentive awards for the named executive officers were granted 25% in stock options and 75% in restricted performance units. The number of stock options granted is determined by dividing 25% of the target award value by the Black-Scholes value of a UPS share on the date of grant. The number of restricted performance units granted is determined by dividing 75% of the target award value by the NYSE closing price of UPS stock on the date of grant. The number of stock options and restricted performance units granted to the named executive officers on May 7, 2008 is shown in the Grants of Plan-Based Awards for 2008 table below.
For the restricted performance units issued in 2004, an adjusted earnings per share goal of $4.50 per diluted share for 2008 was established. Because the adjusted diluted earnings per share goal was not met in 2008, the potential 10% increase in restricted performance units will not be earned for the 2004 awards that will vest in May 2009.
As described above under Management Incentive Program, one-half of the award earned under the MIP and the MIP ownership incentive award is paid in restricted stock units. The number of restricted stock units granted is determined by calculating the dollar value of the MIP award allocated to restricted stock units and dividing by the closing price of our class B stock on the NYSE on or about the last Friday in October. The restricted stock units vest 20% per year over five years on October 15 of each year. The number of restricted stock units granted to the named executive officers on December 5, 2008 is shown in the Grants of Plan Based Awards for 2008 table below.
The LTIP award program began in 2006. The Compensation Committee approved the program to further strengthen the performance component of our executive compensation package and enhance our retention of key talent. The award was also designed to increase total compensation of senior management to be closer to the compensation of comparable positions at similarly sized companies. Approximately 600 of our senior management team received awards under this program in 2008.
The program has a three-year award cycle.
Under the program, a target award of restricted stock units is granted to members of the Management Committee and certain other eligible managers at the beginning of the three-year period. Of the total target award, 90% is divided into three substantially equal tranches, one for each calendar year in the three-year award cycle. The remaining 10% of the total target award is based upon achievement of a net income or diluted earnings per share target for the third year. Performance measures, such as revenue growth, operating return on invested capital (ROIC), net income or diluted earnings per share, are set by the Compensation Committee at the beginning of each calendar year in the three-year award cycle.
The actual number of restricted stock units that the management employee will receive is determined once the payment percentage for a particular tranche has been approved by the Compensation Committee, based on achievement of performance goals for the applicable calendar year.
In March 2008, the Compensation Committee approved 2008 target award values for the three-year 2008 LTIP awards at 250% of annual salary for the chief executive officer and 225% of annual salary for the other Management Committee members. For other management employees, target award values range from 50% to 200% of base salary. Target award values are based on internal pay equity considerations and market data regarding total compensation of comparable positions at similarly sized companies. Differences in the target award values are based on increasing levels of responsibility on the management team.
Over the last several years, with the assistance of its independent compensation consultant, the Compensation Committee has undertaken a comprehensive review of the positioning of the total direct compensation of key UPS executive officers in comparison to the market data described above. These reviews showed that the total direct compensation for certain key executives, including the chief executive officer, chief operating officer and chief financial officer, was in the lowest quartile compared to the market data. In the third quarter of 2008, the Compensation Committee determined that it was appropriate to consider a multi-year strategy to supplement compensation as a means of ensuring that their total direct compensation was more consistent with comparable positions at similarly sized companies, while reinforcing the link between compensation and company performance, increasing the retention incentive for these individuals and further aligning the interests of these executives with our shareowners.
The Compensation Committee determined that the most effective manner of achieving these goals was to supplement the target award to these key executives under the existing LTIP in an effort to move them closer to the top of the lowest quartile of the companys peer group. The following table shows previous years target grant values and the Compensation Committees expected target LTIP award values for the current year and 2010 for these key executives, based on a percentage of annual base salary. Each target amount covers a three-year performance period.
Consistent with the strategy set forth above, the Compensation Committee granted additional three-year 2008 LTIP awards in September 2008, covering the period from 2008 through 2010, to the chief executive officer, chief operating officer and chief financial officer. The additional awards were designed to increase the 2008 LTIP target award values to a total of 475% of annual salary for the chief executive officer, 450% of annual salary for the chief operating officer and 250% of annual salary for the chief financial officer. The differential in award level for the chief executive officer and the chief operating officer is to acknowledge the added responsibilities of the positions. The September 2008 LTIP grants have the same performance goals, terms and conditions as the March 2008 grants.
The threshold, target and maximum number of restricted stock units that can be earned by the named executive officers under the 2008 LTIP, including both the March 2008 and September 2008 grants, is shown in the Grants of Plan-Based Awards for 2008 table.
In the first quarter of 2009, the Compensation Committee granted three-year 2009 LTIP awards to LTIP participants covering the period from 2009 through 2011. The 2009 LTIP target awards made to the chief executive officer, chief operating officer and chief financial officer were made in accordance with the table above. While it expects to continue to monitor the effect of global economic conditions on the Company, the Compensation Committee is committed to the implementation of its plan to increase the total compensation of these three executive officer positions through increasing LTIP target award values, with the increase in compensation earned by these executives, subject to meeting the performance targets over the three-year performance period.
Performance targets and actual results for the various performance periods are described below. Where the three-year LTIP cycles overlap, the performance goals for individual years are the same. Pursuant to the terms of the LTIP award, the underlying restricted stock units are earned based on actual performance as compared to pre-established performance criteria for each period over the three-year cycle of the award.
For 2008, the performance targets to earn 100% of the LTIP tranche were revenue growth of 7.0% and operating ROIC of 23.0%. Actual results for 2008 were revenue growth of 3.6% and operating ROIC, as adjusted, of 18.7%. Based on actual performance, 65% of the LTIP tranche was earned. The LTIP payout for 2008 was at 65% of target. The restricted stock units for 2008 are now fixed, meaning the amount of the award for the 2008 performance period has been determined. The restricted stock units for the three-year award cycle will not vest until the January 31 following the third year, provided the participant remains employed as of the vesting date. For example, the 2008 LTIP award, if earned, will not vest until January 31, 2011. Special vesting rules apply to terminations by reason of death, disability or retirement. A participants earned restricted stock units account will be adjusted quarterly for dividends paid on class A common stock. The restricted stock unit awards that vest will be distributed in the form of class A common stock.
Consistent with our culture, the benefits and perquisites offered to members of the Management Committee are the same or similar to programs offered to the rest of the UPS management team, with the exception of a
financial planning service. These programs include matching contributions to the UPS Stock Fund in the UPS Savings Plan that are paid in shares of class A common stock; qualified and non-qualified pension plans; life insurance premiums paid by UPS; the Discounted Employee Stock Purchase Plan; a charitable gift matching program and a financial planning service.
The Compensation Committee has reviewed the details of the benefits and perquisites provided to members of the Management Committee in 2008 and determined that they were in line with competitive practices. Additional information on these benefits can be found in the program descriptions below.
The UPS Savings Plan is a 401(k) plan offered to all U.S.-based employees who are not subject to a collective bargaining agreement and who are not eligible to participate in another savings plan sponsored by UPS or one of its subsidiaries. We have generally provided a matching contribution (generally up to a maximum of 3% of each participants eligible compensation) to those UPS employees who make elective deferrals to the UPS Savings Plan. Matching contributions are made to the UPS Stock Fund, an investment election under the UPS Savings Plan, which is composed entirely of shares of our class A common stock. Prior to January 1, 2009, the matching contributions were made to the UPS Qualified Stock Ownership Plan (QSOP). The QSOP was merged with the UPS Savings Plan on January 1, 2009.
Management Committee members participate in our qualified retirement program, the UPS Retirement Plan, on the same terms as all other participants. Benefits payable under the plan are subject to the maximum compensation limits and the annual benefit limits for a tax-qualified defined benefit plan as prescribed and adjusted from time to time by the Internal Revenue Service. Amounts exceeding these limits are paid pursuant to the UPS Excess Coordinating Benefit Plan, which is a non-qualified restoration plan designed to replace the amount of benefits limited under the tax-qualified plan. Without the Excess Coordinating Benefit Plan, Management Committee members would receive a lower benefit as a percent of final average earnings than the benefit received by other participants in the UPS Retirement Plan.
To foster our manager-owner philosophy, we have a Discounted Employee Stock Purchase Plan. The plan provides all U.S.-based employees, including Management Committee members, and some internationally based employees, with the opportunity to purchase up to $10,000 in our class A common stock annually at a discount to the market price of our stock. The plan has been designed to comply with Section 423 of the Internal Revenue Code. The purchase price at which our class A common stock may be acquired under the plan is equal to 95% of the fair market value of the shares on the last day of each calendar quarter. Share purchases are made on a quarterly basis. In past years, the plan permitted purchases at a 10% discount.
In past years, the UPS Foundation matched charitable contributions made by all active employees with 12 months of service, including members of the Management Committee, up to a maximum of $3,000 per year.
The Management Committee members are eligible for financial planning services provided by the Ayco Company. Scott Davis, Kurt Kuehn and Bob Stoffel utilized the benefit in 2008. Although this financial planning service benefit is not offered to other management employees, we offer a separate financial counseling service through PricewaterhouseCoopers to all U.S. and Puerto Rico-based employees who are not subject to a collective bargaining agreement.
UPS anticipates a challenging worldwide economic environment in 2009. Base salaries for our management team, including the named executive officers, generally have been frozen at 2008 levels. In February 2009, we announced that we will suspend our matching contributions to our 401(k) plan for all participants, including the named executive officers. We also have suspended the UPS Gift Matching Program. In addition, we announced that we will reduce the Discounted Employee Stock Purchase Plan share purchase price discount from 10% to 5% off of the closing stock price on the last day of the applicable quarter for all participants, including the named executive officers. The company and the Compensation Committee will continue to monitor the changing economic environment in making compensation decisions through the course of 2009.
The board has adopted stock ownership guidelines which extend to most levels of management and to members of our board of directors. The guidelines are consistent with our core philosophy that managers should also be owners of our company. The guidelines are based on our expectation that each member of our management team and board will maintain a significant level of investment in our stock.
Target ownership for the chief executive officer is ten times annual salary, and for the other members of the Management Committee is six times annual salary. The target for our non-employee directors is three times their annual retainer. Shares owned outright, deferred units and RSUs are considered as owned for purposes of calculating ownership. Managers and directors have five years to accumulate the required shares.
As of October 17, 2008, the most recent measurement date for compliance with the guidelines, each named executive officer met the applicable guidelines except for Scott Davis. Scott Davis target increased from six times annual salary to ten times annual salary as a result of his promotion to chief executive officer. The value of his stock ownership exceeded six times his annual salary, and he has five years to achieve the target of ten times annual salary.
Grants for all equity programs under the 1999 Plan are approved by the Compensation Committee. The Compensation Committee has determined that grant dates will be set for all plan participants so that they occur during the middle of a fiscal quarter and do not fall within the period 30 days prior to the release of company earnings.
Section 162(m) of the Internal Revenue Code makes compensation paid to certain executives in amounts in excess of $1 million not deductible unless the compensation is paid under a predetermined objective performance plan meeting certain requirements, or satisfies one of various other exemptions. The Compensation Committee believes that the interests of our shareowners are best served by not restricting the Compensation Committees discretion and flexibility in crafting compensation plans and arrangements. While the Compensation Committee intends to structure awards to comply with Section 162(m), the Compensation Committee may approve elements of compensation for certain executive officers that are not fully deductible, and reserves the right to do so in the future in appropriate circumstances.
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table for 2008
The following table shows the compensation for each of the Named Executive Officers.
Grants of Plan-Based Awards for 2008
The following table provides information about awards granted in 2008 to each of the named executive officers.
Outstanding Equity Awards at Fiscal Year-End 2008
The following table shows the number of shares covered by exercisable and unexercisable options and unvested RSUs and RPUs held by the named executive officers on December 31, 2008.
The following table sets forth the number and corresponding value realized during 2008 with respect to restricted stock units that vested for each named executive officer.
2008 Pension Benefits
The following table quantifies the pension benefits expected to be paid to each of the named executive officers from the UPS Retirement Plan, the Restoration Plan Rollover Option (RPRO) and the UPS Excess Coordinating Plan. The terms of each are described below.
The UPS Retirement Plan is a qualified defined benefit plan provided to executives and other UPS employees who generally are not covered by a collective bargaining agreement and who are not participating in another UPS-sponsored plan at a subsidiary company. UPS also sponsors a non-qualified defined benefit plan, the UPS Excess Coordinating Benefit Plan, for non-union employees whose pay and benefits in the qualified plan are limited by the Internal Revenue Service.
The Compensation Committee believes that the retirement, deferred compensation and/or savings plans offered at UPS are important for the long-term economic well-being of our employees, and are important elements of attracting and retaining the key talent necessary to compete. The UPS Retirement Plan and UPS Excess Coordinating Plan provide monthly lifetime benefits to participants and their eligible beneficiaries based on final average compensation at retirement, service with UPS and age at retirement. Participants may choose to receive a reduced benefit payable in an optional form of annuity that is equivalent to the single lifetime benefit.
The plans provide monthly benefits based on the greatest result from up to four benefit formulas. Participants receive the largest benefit from the applicable benefit formulas. For all executives except Jim Winestock, the formula that results in the largest benefit is called the grandfathered integrated formula. This formula provides retirement income equal to 58.33% of final average compensation offset by a portion of the Social Security benefit. A participant with less than 35 years of benefit service receives a proportionately lesser amount. For Jim Winestock, the formula that results in the largest benefit is called the RPA integrated account formula. This formula provides
retirement income equal to 1.2% of final average compensation plus 0.4% of final average compensation in excess of the Social Security wage base all multiplied by years of benefit service at the time of termination or retirement.
Participants earn benefit service for the time they work as an eligible UPS employee. For purposes of the formulas, compensation includes salary, the cash and RSU portions of the MIP award and the Half-Month Bonus. The average final compensation for each participant in the plans is the average covered compensation of the participant during the five highest consecutive years out of the last ten full calendar years of service.
Benefits payable under the UPS Retirement Plan are subject to the maximum compensation limits and the annual benefit limits for a tax-qualified defined benefit plan as prescribed and adjusted from time to time by the Internal Revenue Service. Eligible amounts exceeding these limits will be paid from the UPS Excess Coordinating Benefit Plan. Under this plan, participants receive the benefit in the form of a life annuity. From 1999 through 2002, certain executives were eligible for the RPRO, which allowed them to receive their benefit in excess of the Retirement Plan in a combination of life annuity and cash lump sum. Under this option, the cash lump sum is based on a projected benefit under the Excess Coordinating Benefit Plan using projected pay and service through the date the executive would have reached age 57, which is the reason for the differences in years of credited service in the 2008 Pension Benefits table.
The plans permit participants with 25 or more years of benefit service to retire as early as age 55 with only a limited reduction in the amount of their monthly benefits. Each of the named executives would be eligible to retire at age 60 and receive unreduced benefits from the plans. In addition, the plans allow participants with ten years or more of service to retire at age 55 with a larger reduction in the amount of their benefit. As of December 31, 2008, Mr. Davis and Mr. Winestock were eligible for early retirement with reduced benefits. If they had retired on December 31, 2008, their benefits would be reduced by 24% and 7%, respectively.
2008 Non-Qualified Deferred Compensation
The following table shows the executive contributions, earnings and account balances for the named executive officers in the UPS Deferred Compensation Plan for 2008.
There are three deferred compensation vehicles in the UPS Deferred Compensation Plan, and not all of the named executive officers participate in each feature of the UPS Deferred Compensation Plan.
We do not make any company contributions to any of the three features of the UPS Deferred Compensation Plan. The aggregate balances shown in the table above represent amounts that the named executive officers have earned but elected to defer, plus earnings (or less losses). There are no above-market or preferential earnings in the UPS Deferred Compensation Plan. The investment options mirror those in the UPS Savings Plan, our 401(k) plan. Dividends earned on shares of our stock in the UPS Deferred Compensation Plan are earned at the same rate as all other class A and class B shares of common stock. Dividends are added to the participants deferred compensation balance. Deferral elections made under the UPS Deferred Compensation Plan are irrevocable.
We have not entered into any employment agreements with our named executive officers that provide for severance or change in control benefits, nor do we have separate severance or change in control agreements or arrangements with our named executive officers. As described earlier, our Compensation Committee believes that the UPS promotion from within policy has created a culture where long tenure for executives is the norm. As a result, the named executive officers serve without employment contracts, as do most of our other U.S.-based non-union employees.
The equity-based awards that we grant to our named executive officers are made pursuant to the 1999 Plan. Awards under the 1999 Plan generally can be granted to any of our employees, employees of our subsidiaries and affiliates, directors and certain consultants. The 1999 Plan and the related award certificates contain provisions that affect outstanding awards to all plan participants, including the named executive officers, under certain circumstances, including a change in control of the company (as defined below) and a participants retirement, death or disability. Pursuant to the terms of the 1999 Plan and the related award certificates, upon a change in control or a participants retirement, death or disability:
In addition, the 1999 Plan provides for tax gross-up payments to plan participants upon a change in control if the plan participants would be subject to certain excise taxes imposed as a result of the amounts paid to the participant pursuant to the treatment of the awards as a result of the event. The tax gross-ups are payable as an additional lump sum cash payment. The 2009 Plan that we are asking our shareowners to approve does not contain a similar provision.
The following table shows the potential payments to the named executive officers upon a termination of employment under various circumstances. In preparing the table, we assumed the termination occurred on December 31, 2008. The closing price per share of our common stock on December 31, 2008 was $55.16. With
respect to the tax gross-ups, we assumed an excise tax rate under 280G of the Internal Revenue Code of 20%, a 35% federal income tax rate, a 1.45% Medicare tax rate and a 6% state income tax rate.
The tables above do not include payments and benefits to the extent they are generally provided on a non-discriminatory basis to salaried employees not subject to a collective bargaining agreement upon termination of employment. These include:
The tables above also do not include amounts to which the executives would be entitled to receive that are already described in the compensation tables that appear earlier in this proxy statement, including:
Under the terms of the 1999 Plan, a change in control is deemed to have occurred as a result of any one of the following events:
We provide both cash and equity awards to our non-employee directors. Our employee directors do not receive any compensation for service as a director. Directors are reimbursed for their expenses related to board membership.
In 2008, our non-employee directors received an annual cash retainer of $75,000. The chairs of the Compensation and Nominating and Corporate Governance Committees received an additional annual cash retainer of $10,000, and the chair of the Audit Committee received an additional annual cash retainer of $20,000. Cash retainers are paid on a quarterly basis. Under the UPS Deferred Compensation Plan, non-employee directors may defer retainer fees quarterly, but we do not make any company contributions under this plan. There are no preferential or above-market earnings in the UPS Deferred Compensation Plan.
In addition, in 2008 non-employee directors received an annual restricted stock grant of class A common stock in the amount of $110,000. Upon joining the board, new non-employee directors received a restricted stock grant of class A common stock in the amount of $25,000.
Effective January 1, 2009, the cash retainer paid to non-employee directors will increase to $90,000, and the additional cash retainers paid to the chairs of the Compensation and Nominating and Corporate Governance Committees will increase to $15,000. The non-employee directors also will receive an annual grant of restricted stock units in the amount of $130,000. The cash retainers and annual equity grant will be prorated based on the portion of the year that a director serves on the board. There is no additional equity award for new non-employee directors who join the board.
2008 Director Compensation
The following table sets forth the compensation paid to our non-employee directors in 2008.
The aggregate number of stock awards and option awards outstanding as of December 31, 2008 for each of our non-employee directors are set forth below.
The Compensation Committee is responsible for, among other things, reviewing and approving compensation for the executive officers, establishing the performance goals on which the compensation plans are based and setting the overall compensation principles that guide the committees decision-making. The Compensation Committee has reviewed the Compensation Discussion and Analysis (CD&A) and discussed it with management. Based on the review and the discussions with management, the Compensation Committee recommended to the board of directors that the CD&A be included in the 2008 proxy statement and incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission.
The Compensation Committee
John W. Thompson, Chair
F. Duane Ackerman
Stuart E. Eizenstat
Duane Ackerman, Stu Eizenstat, Vic Pelson and John Thompson were members of the Compensation Committee of our board of directors during 2008. None of these directors are employees or former employees of UPS. None of the members of the Compensation Committee has any direct or indirect material interest in or relationship with us outside of his position as a non-employee director. None of our executive officers serves as a member of a board of directors or compensation committee of any entity that has one or more executive officers who serves on our board of directors or Compensation Committee.
In accordance with our Audit Committee charter, our Audit Committee is responsible for overseeing our Code of Business Conduct, which includes policies relating to conflicts of interest. The Code requires that all of our employees and directors avoid conflicts of interest, defined as situations where the persons private interests conflict, or even appear to conflict, with the interests of UPS as a whole.
At least annually, each director and executive officer completes a detailed questionnaire that asks questions about any business relationship that may give rise to a conflict of interest and all transactions in which UPS is involved and in which the executive officer, a director or a related person has a direct or indirect material interest. We also conduct a review, at least annually, of our financial systems to determine whether a director, or a company employing a director, engaged in transactions with us during the fiscal year.
The Nominating and Corporate Governance Committee, which is composed of independent directors, conducts an annual review of the information from the questionnaire and financial systems review, evaluates related party transactions (if any) involving the directors and their related persons and makes recommendations to the board of directors regarding the independence of each board member.
If a transaction arises during the year that may require disclosure as a related person transaction, information about the transaction would be provided to the Audit Committee and the Nominating and Corporate Governance Committee, as applicable, for review, approval or ratification of the transaction.
We have not entered into any related person transactions that meet the requirements for disclosure in this proxy statement.
We have purchase, finance and other transactions and relationships in the normal course of business with companies with which our directors are associated, but which are not sufficiently material to be reportable. The Nominating and Corporate Governance Committee has reviewed these transactions and relationships and believes they were entered into on terms that are both reasonable and competitive. Additional transactions and relationships of this nature may be expected to take place in the ordinary course of business in the future.
The Audit Committee of our board of directors is responsible for, among other things, reviewing with Deloitte & Touche LLP, our independent registered public accountants, the scope and results of their audit engagement. In connection with the 2008 audit, the Audit Committee has:
Based on the review and the discussions described in the preceding bullet points, the Audit Committee recommended to the board of directors that the audited financial statements and managements report on internal controls over financial reporting be included in our Annual Report on Form 10-K for the year ended December 31, 2008 for filing with the Securities and Exchange Commission.
The Audit Committee has adopted a charter and a process for pre-approving services to be provided by Deloitte & Touche.
The members of the Audit Committee have been determined to be independent in accordance with the requirements of Section 303.01 (B)(2)(a) and (3) of the New York Stock Exchange listing standards.
The Audit Committee
Carol B. Tomé, Chair
Michael J. Burns
Our Audit Committee has appointed Deloitte & Touche LLP, independent registered public accountants, to audit our consolidated financial statements for the year ending December 31, 2008 and to prepare a report on this audit, subject to ratification by our shareowners. A representative of Deloitte & Touche will be present at the annual meeting of shareowners, will have the opportunity to make a statement and will be available to respond to appropriate questions by shareowners.
The board of directors recommends that shareowners vote FOR the ratification
of the appointment of Deloitte & Touche LLP as our independent registered public accountants.
Aggregate fees billed to us for the fiscal years ended December 31, 2008 and 2007 by our independent registered public accountants, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates were:
The Audit Committee has considered whether the provision of audit-related and other non-audit services by Deloitte & Touche is compatible with maintaining Deloitte & Touches independence.
Our Audit Committee has established a policy requiring the pre-approval of all audit and non-audit services provided to us by Deloitte & Touche. The policy provides for pre-approval of audit, audit-related and tax services specifically described by the Audit Committee. The Audit Committee has delegated to its chair authority to pre-approve permitted services between the Audit Committees regularly scheduled meetings, and the chair must report any pre-approval decisions to the Audit Committee at its next scheduled meeting for review by the Audit Committee. The policy prohibits the Audit Committee from delegating to management the Audit Committees responsibility to pre-approve permitted services of our independent registered public accountants.
The board of directors has adopted, and recommends that the shareowners approve, the United Parcel Service, Inc. 2009 Omnibus Incentive Compensation Plan. The 2009 Plan permits the grant of options, stock appreciation rights, restricted stock, restricted stock units, restricted performance shares, restricted performance units, management incentive awards and other cash awards (collectively, awards). Shareowner approval of the 2009 Plan is required by NYSE rules and is intended to permit the performance-based awards discussed below to qualify for deductibility under Section 162(m) of the Internal Revenue Code. If we receive shareowner approval, the 2009 Plan will become effective on May 7, 2009. If we do not receive shareowner approval, the 2009 Plan will not go into effect.
A summary of the material terms of the 2009 Plan is provided below, but is qualified in its entirety by reference to the full text of the 2009 Plan that is included as Annex II to this proxy statement.
The shares issuable pursuant to awards granted under the 2009 Plan will be shares of class A common stock. The maximum number of shares that may be issued pursuant to awards granted under the 2009 Plan (the share reserve) is 80,000,000, which includes 28,108,557 unissued shares that were previously authorized for issuance under the 1999 Plan and 51,891,443 newly authorized shares. The share reserve is subject to adjustment as described below. The maximum number of shares that can be issued upon the exercise of incentive stock options is 80,000,000.
Each share issued pursuant to an option, and each share subject to the exercised portion of a stock appreciation right (regardless of the form of payment of the stock appreciation right), will reduce the share reserve by one share. Each share issued pursuant to restricted stock, a restricted stock unit, a restricted performance share or a restricted performance unit will reduce the share reserve by 2.76 shares. To the extent that a distribution pursuant to an award is made in cash, the share reserve will be reduced by the number of shares (if any) subject to the exercised or distributed portion of the award.
If any award granted under the 2009 Plan is forfeited or otherwise expires, terminates or is cancelled without the issuance of the shares in full, the shares covered by such awards again will be available for use under the 2009 Plan.
Unless the Compensation Committee determines that an award will not be performance-based compensation as discussed below, no participant may be granted in any one calendar year
The award limits are subject to the adjustment provisions discussed below.
The 2009 Plan is administered by the Compensation Committee, except that the Board administers the 2009 Plan with respect to non-employee directors of UPS. The Board also may at any time take on the powers, authority
and duties of the Compensation Committee. The Committee generally may delegate its power, authority and duties under the 2009 Plan, except as prohibited by law.
The Compensation Committee determines who among those eligible to participate in the 2009 Plan will be granted awards, determines the amounts and types of awards to be granted, determines the terms and conditions of all awards, and construes and interprets the terms of the 2009 Plan. Determinations of the Committee are final, binding, and conclusive.
Individuals eligible to receive awards under the 2009 Plan include employees of UPS or a subsidiary or affiliate of UPS, consultants, agents or other service providers to UPS or a subsidiary or affiliate of UPS, and directors of UPS. As of February 1, 2009, there were 10 directors and approximately 37,000 employees who are eligible to receive awards under the 2009 Plan.
Stock options may be either nonqualified stock options or incentive stock options. The exercise price of any stock option must be equal to or greater than the fair market value of a share on the date the option is granted. The term of a stock option cannot exceed ten years.
A stock options terms and conditions, including the number of shares to which the option pertains, exercise price, vesting and expiration of the option, are determined by the Compensation Committee and set forth in an award document.
Payment for shares purchased upon exercise of a stock option must be made in full at the time of purchase. The exercise price may be paid (a) in cash or its equivalent, (b) by tendering previously acquired shares having an aggregate value at the time of exercise equal to the total exercise price, (c) through a reduction in the number of shares received through the exercise of the option, or (d) by a combination of (a), (b) and (c).
Freestanding and tandem SARs, or any combination of these forms of SAR, may be granted to participants. A freestanding SAR means a SAR that is granted independently of any stock options. A tandem SAR means a SAR that is granted in connection with a related option, the exercise of which requires forfeiture of the right to purchase a share under the related option (and when a share is purchased under the option, the tandem SAR similarly is canceled). Each SAR grant will be set forth in an award document that will specify the grant price, the term of the SAR and such other provisions as the Compensation Committee determines. The term of a SAR cannot exceed ten years.
The grant price of a freestanding SAR will equal the fair market value of a share on the date of grant. The grant price of a tandem SAR will equal the exercise price of the related stock option.
Upon exercise of a SAR, a participant will be entitled to receive payment in an amount determined by multiplying the difference between the fair market value of a share on the date of exercise over the grant price, by the number of shares with respect to which the SAR is exercised. At the discretion of the Compensation Committee, the payment upon SAR exercise may be in cash, in shares of equivalent value, or in some combination of cash and shares.
Each grant of restricted stock or RSUs will be evidenced by an award document that will specify the period of restriction on transferability, the number of shares (or units tied to the value of shares) granted, and such other provisions as the Compensation Committee will determine, including restrictions based upon the achievement of specific performance goals and time-based restrictions on vesting following the attainment of the performance goals. Restricted stock or RSUs will be forfeited to the extent that a participant fails to satisfy the applicable conditions or restrictions during the period of restriction.
Generally, shares of restricted stock will become freely transferable by the participant after the last day of the applicable period of restriction, and RSUs will be paid in a single lump sum following the close of the applicable period of restriction in the form of cash or in shares (or in a combination of cash and shares) as determined by the Compensation Committee.
Participants holding restricted stock generally have the right to vote the shares during the period of restriction and, unless otherwise provided in the award document, will be credited with and will be paid regular cash dividends paid with respect to the underlying shares, but not stock dividends. Participants awarded RSUs are not entitled to similar voting rights or dividends (unless, with respect to dividends, otherwise provided in the award document).
Each RPU will have an initial value established by the Compensation Committee at the time of grant. Each RPS will have an initial value equal to the fair market value of a share on the date of grant. The Compensation Committee will set performance goals. Achievement of the performance goals will determine the number and/or value of RPUs and RPSs that are paid to the participant. RPUs and RPSs will be forfeited to the extent that the applicable performance goals are not satisfied during the performance period.
Unless otherwise provided in an award document, payment of earned RPUs or RPSs will be made in a single lump sum following the close of the applicable performance period in the form of cash or in shares (or in a combination thereof), with an aggregate fair market value equal to the value of the earned RPUs or RPSs at the close of the performance period. At the discretion of the Compensation Committee, participants may be entitled to receive dividends or dividend equivalents declared with respect to shares payable with respect to RPUs or RPSs not yet distributed to participants and be entitled to exercise voting rights with respect to RPSs.
The Compensation Committee will select those participants (if any) who will receive management incentive awards for a given year, based upon the recommendations of district, regional and corporate group managers. Each management incentive award will consist of shares, cash, RSUs or other awards at the discretion of the Compensation Committee. The aggregate amount of the awards will be determined by the Compensation Committee and will be divided among those participants who have been selected to receive management incentive awards in such manner and amount as the Committee determines. A participant receiving a management incentive award may (in the discretion of the Compensation Committee) also receive, as a part of the award, an additional amount not to exceed one months salary of the participant.
Pursuant to Section 162(m) of the Internal Revenue Code, UPS ordinarily may not deduct compensation of more than $1 million that is paid to certain covered employees (i.e., any individual who, on the last day of the taxable year, is either UPSs principal executive officer or an employee whose total compensation for the tax year is required to be reported to shareowners because he or she is among the three highest compensated officers for the tax year, other than the principal executive officer or principal financial officer). The limitation on deductions does not apply, however, to qualified performance-based compensation. Certain awards under the 2009 Plan may constitute qualified performance-based compensation and, as such, would be exempt from the $1 million limitation on deductible compensation.
Under the 2009 Plan, any performance goals applicable to awards, other than options and SARs, intended to qualify as performance-based compensation under Section 162(m) will be based on one or more of the following measures:
The Compensation Committee has discretion to adjust the determinations of the degree of attainment of the pre-established performance goals, except that awards which are intended to qualify as performance-based compensation may not be adjusted upward.
In the event of a change in control in UPS, if the successor company continues, assumes or substitutes other grants for outstanding awards and within two years following the change in control (as defined in the 2009 Plan), the participant is terminated by the successor without cause or resigns for good reason (as defined in the 2009 Plan), then
In the event of a change in control in UPS, if the successor company does not continue, assume or substitute other grants for outstanding awards, or in the case of a dissolution or liquidation of UPS, then options and SARs will be fully vested and exercisable and the Compensation Committee will either give a participant a reasonable opportunity to exercise the option and SAR before the transaction resulting in the change in control or pay the participant the difference between the exercise price for the option or SAR and the consideration provided to other similarly situated shareholders. Other outstanding awards will vest and be paid generally as described in the bullet points above (except, where applicable, timing of payment generally will be tied to such change in control, rather than termination or resignation).
If an award has been paid to an executive officer or to his or her spouse or beneficiary, and the Compensation Committee later determines that financial results used to determine the amount of that award are materially restated and that the executive officer engaged in fraud or intentional misconduct, UPS will seek repayment or recovery of the award.
The Compensation Committee has the right to amend or terminate the 2009 Plan at any time; provided that except for an amendment or termination of the provisions related to change in control, no amendment or termination of the 2009 Plan may adversely affect in any material way any award previously granted without the award holders consent, and the provisions related to change in control may not be amended after a change in control. In addition, without the prior approval of our shareowners, the 2009 Plan may not be materially amended if shareowner approval is required by law or applicable stock exchange listing requirement, or if the amendment would increase the number of shares available for awards under the 2009 Plan, or permit options, SARs or similar awards to be repriced, replaced, or regranted through cancellation, or by lowering the exercise or purchase price of a previously granted award (except for certain adjustments and award substitutions authorized under other provisions of the 2009 Plan). In any event, no awards may be granted under the 2009 Plan on or after May 7, 2019.
If UPS effects a subdivision or consolidation of shares of stock or other capital adjustment, the maximum number and class of shares that may be awarded under the 2009 Plan, the number and class of and/or price of shares subject to outstanding awards, and the annual award limits will be adjusted in the same manner and to the same extent as all other shares.
If there are material changes in the capital structure of UPS resulting from the payment of a special dividend, a spin-off, the sale of a substantial portion of UPSs assets; a merger or consolidation in which UPS is not the surviving entity, or other extraordinary non-recurring event affecting the capital structure and the value of shares, the Compensation Committee will make equitable adjustments in the maximum number and class of shares that may be awarded under the 2009 Plan, the number and class of and/or price of shares subject to outstanding awards, and the annual award limits, to prevent the dilution or enlargement of the rights of award recipients.
The rules concerning the federal income tax consequences with respect to awards made pursuant to the 2009 Plan are technical, and reasonable persons may differ on the proper interpretation of the rules. Moreover, the applicable statutory and regulatory provisions are subject to change, as are their interpretations and applications, which may vary in individual circumstances. The following discussion is designed to provide only a brief, general summary description of the federal income tax consequences associated with the awards, based on a good faith interpretation of the current federal income tax laws, regulations (including applicable proposed regulations) and judicial and administrative interpretations. The following discussion does not set forth any federal tax consequences other than income tax consequences or any state, local or foreign tax consequences that may apply.
Incentive Stock Options (ISOs). An optionee does not recognize taxable income upon the grant or upon the exercise of an ISO (although the exercise of an ISO may in some cases trigger liability for the alternative minimum tax). Upon the sale of ISO shares, the optionee recognizes income in an amount equal to the excess, if any, of the fair market value of those shares on the date of sale over the exercise price of the ISO shares. The income is taxed at the long-term capital gains rate if the optionee has not disposed of the stock within two years after the date of the grant of the ISO and has held the shares for at least one year after the date of exercise, and we are not entitled to a federal income tax deduction. ISO holding period requirements are waived when an optionee dies.
If an optionee sells ISO shares before having held them for at least one year after the date of exercise and two years after the date of grant, the optionee recognizes ordinary income to the extent of the lesser of: (a) the gain realized upon the sale; or (b) the excess of the fair market value of the shares on the date of exercise over the exercise
price. Any additional gain is treated as long-term or short-term capital gain depending upon how long the optionee has held the ISO shares prior to disposition. In the year of any such disposition, we will receive a federal income tax deduction in an amount equal to the ordinary income that the optionee recognizes, if any, as a result of the disposition.
Nonqualified Stock Options (NQSOs). An optionee does not recognize taxable income upon the grant of an NQSO. Upon the exercise of such a stock option, the optionee recognizes ordinary income to the extent the fair market value of the shares received upon exercise of the NQSO on the date of exercise exceeds the exercise price. We will receive an income tax deduction in an amount equal to the ordinary income that the optionee recognizes upon the exercise of the stock option.
Restricted Stock. A participant who receives an award of restricted stock does not generally recognize taxable income at the time of the award. Instead, the participant recognizes ordinary income in the first taxable year in which his or her interest in the shares becomes either: (a) freely transferable; or (b) no longer subject to substantial risk of forfeiture. The amount of taxable income is equal to the fair market value of the shares less the cash, if any, paid for the shares.
A participant may elect to recognize income at the time of grant of restricted stock in an amount equal to the fair market value of the restricted stock (less any cash paid for the shares) on the date of the award.
We will receive a compensation expense deduction in an amount equal to the ordinary income recognized by the participant in the taxable year in which restrictions lapse (or in the taxable year of the award if, at that time, the participant had filed a timely election to accelerate recognition of income).
SARs. A participant who exercises a SAR will recognize ordinary income upon the exercise equal to the amount of cash and the fair market value of any shares received on as a result of the exercise. We will receive an income tax deduction in an amount equal to the ordinary income that the participant recognizes upon the exercise of the SAR.
Other Awards. In the case of an award of RSUs, RPUs, RPSs, or cash, the participant would generally recognize ordinary income in an amount equal to any cash received and the fair market value of any shares received on the date of payment. In that taxable year, we would receive a federal income tax deduction in an amount equal to the ordinary income that the participant has recognized.
Section 409A. Section 409A of the Internal Revenue Code provides special tax rules applicable to programs that provide for a deferral of compensation. Failure to comply with those requirements will result in accelerated recognition of income for tax purposes along with an additional tax equal to 20% of the amount included in income, and interest on deemed underpayments in certain circumstances. While certain awards under the 2009 plan could be subject to Section 409A, the 2009 plan has been drafted to comply with the requirements of Section 409A, where applicable.
Because benefits under the 2009 Plan will depend on the Compensation Committees actions and the fair market value of the shares at various future dates, it is not possible to determine the benefits that will be received by directors, executive officers and other employees if the 2009 Plan is approved by the shareowners.
The board of directors recommends that shareowners vote FOR approval of the 2009 Plan.