Wal-Mart DEF 14A 2008
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 ¨
Check the appropriate box:
Wal-Mart Stores, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
702 Southwest 8th Street
Bentonville, Arkansas 72716-0215
NOTICE OF 2008 ANNUAL SHAREHOLDERS MEETING
To Be Held June 6, 2008
Please join us for the 2008 Annual Shareholders Meeting of Wal-Mart Stores, Inc. The meeting will be held on Friday, June 6, 2008, at 7:00 a.m. in Bud Walton Arena, University of Arkansas, Fayetteville, Arkansas.
The purposes of the 2008 Annual Shareholders Meeting are:
You must be the holder of record of shares of Wal-Mart Stores, Inc. common stock at the close of business on April 10, 2008, to vote at the 2008 Annual Shareholders Meeting. If you plan to attend, please bring the Admittance Slip on the back cover and picture identification. Regardless of whether you will attend, please vote as described on page 5 of the proxy statement. Voting in any of the ways described will not prevent you from attending the 2008 Annual Shareholders Meeting.
By Order of the Board of Directors
Thomas D. Hyde
April 22, 2008
Admittance Requirements on Back Cover
702 Southwest 8th Street
Bentonville, Arkansas 72716-0215
This proxy statement and accompanying proxy card are being mailed beginning April 22, 2008, in connection with the solicitation of proxies by the Board of Directors of Wal-Mart Stores, Inc., a Delaware corporation, for use at the 2008 Annual Shareholders Meeting. The meeting will be held in Bud Walton Arena, University of Arkansas, Fayetteville, Arkansas, on Friday, June 6, 2008, at 7:00 a.m.
TABLE OF CONTENTS
TABLE OF ABBREVIATIONS
The following abbreviations are used for terms that appear in more than one section of this proxy statement:
2005 Stock Incentive Plan: Wal-Mart Stores, Inc. Stock Incentive Plan of 2005, as it amended and restated the Wal-Mart Stores, Inc. Stock Incentive Plan of 1998
Annual Report to Shareholders: the Wal-Mart 2008 Annual Report to Shareholders
Associate: an employee of Wal-Mart or one of its subsidiaries
Board: the Board of Directors of Wal-Mart
CNGC: Compensation, Nominating and Governance Committee
SOC: Stock Option Committee
SPFC: Strategic Planning and Finance Committee
Bylaws: the amended and restated Bylaws of Wal-Mart, effective as of September 21, 2006
Categorical Standards: standards adopted by the Board that describe types of relationships that a director might have with Wal-Mart or its subsidiaries that the Board believes are per se immaterial to a directors independence, as permitted by the NYSE Listed Company Manual
CD&A: the Compensation Discussion and Analysis, located in this proxy statement
CEO: the Chief Executive Officer
CFO: the Chief Financial Officer
Chairman: the Chairman of a board of directors
Computershare: Computershare Trust Company, N.A., Wal-Marts transfer agent
Deferred Compensation Plan: the Wal-Mart Stores, Inc. Officer Deferred Compensation Plan, as amended and restated effective January 1, 2005
Director Compensation Plan: the Wal-Mart Stores, Inc. Director Compensation Plan, as amended and restated effective January 1, 2005
E&Y: Ernst & Young LLP, Wal-Marts independent registered public accounting firm
Exchange Act: the Securities Exchange Act of 1934, as amended
Executive Officers: certain senior officers designated by the Board and as defined by Rule 3b-7 under the Exchange Act that have certain disclosure obligations and who also must report certain transactions in equity securities of the Company under Section 16
Fiscal 2006, fiscal 2007, fiscal 2008, and fiscal 2009: Wal-Marts fiscal years ending January 31, 2006, 2007, 2008, and 2009, respectively
Independent Directors: the directors whom the Board has determined have no material relationships with the Company pursuant to the standards set forth in the NYSE Listed Company Manual and, as to members of the Audit Committee, who meet the requirements of Section 10A of the Exchange Act and Rule 10A-3 under the Exchange Act
Management Incentive Plan or MIP: the Wal-Mart Stores, Inc. Management Incentive Plan, as amended and restated effective February 1, 2008
Named Executive Officers or NEOs: the Companys President and CEO, CFO, and the next three most highly compensated Executive Officers
Non-Management Directors: the members of the Board who do not hold another position with Wal-Mart or one of its subsidiaries
NYSE: the New York Stock Exchange
NYSE Listed Company Manual: the manual of the NYSE that sets forth policies, practices, and procedures for companies with securities listed for trading on the NYSE
Profit Sharing/401(k) Plan: the Wal-Mart Profit Sharing and 401(k) Plan, as restated effective October 31, 2003, and subsequently amended
SEC: the Securities and Exchange Commission
Section 16: Section 16 of the Exchange Act
SERP: the Wal-Mart Stores, Inc. Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2005
Share or Shares: a share or shares of Wal-Mart common stock, $0.10 par value per share
SOX: the Sarbanes-Oxley Act of 2002
Stock Purchase Plan: the Wal-Mart Stores, Inc. 2004 Associate Stock Purchase Plan, as restated effective February 1, 2004, and subsequently amended
Wal-Mart, the Company, we, our or us: Wal-Mart Stores, Inc.
Your proxy is solicited by the Board. The Company pays the cost of soliciting your proxy and reimburses brokers and others for forwarding to you the proxy statement, proxy card, and Annual Report to Shareholders.
Who may vote? You may vote if you were the holder of record of Shares at the close of business on April 10, 2008. You are entitled to one vote on each matter presented at the 2008 Annual Shareholders Meeting for each Share you owned on that date. If your Shares are held in street name through a bank, broker, or other nominee, you must obtain a proxy, executed in your favor, from the holder of record as of the close of business on April 10, 2008, to be able to vote at the meeting. As of April 10, 2008, Wal-Mart had 3,950,091,346 Shares outstanding.
What am I voting on? You are voting on:
Who counts the votes? Computershare will count the votes. The Board has appointed two employees of Computershare as the inspectors of the election.
Is my vote confidential? Yes, your proxy card or ballot and voting records will not be disclosed unless the law requires disclosure, you request disclosure, or your vote is cast in a contested election. If you write comments on your proxy card or ballot, your comments will be provided to Wal-Mart, but how you voted will remain confidential.
What is the quorum requirement for holding the 2008 Annual Shareholders Meeting? The holders of a majority of the Shares outstanding as of the record date for the meeting must be present in person or represented by proxy for the meeting to be held.
What vote is required to elect a director at the 2008 Annual Shareholders Meeting? In an uncontested election of directors, to be elected, a director nominee must receive affirmative votes representing a majority of the votes cast by the holders of Shares present in person or represented by proxy at the 2008 Annual Shareholders Meeting and entitled to vote on the election of directors (a majority vote). In a contested election of directors, to be elected, a director nominee must receive a plurality of the votes of the holders of Shares present in person or represented by proxy at the 2008 Annual Shareholders Meeting and entitled to vote on the election of directors. Under the Bylaws, an uncontested election is an election in which the number of nominees for director is not greater than the number to be elected and a contested election is an election in which the number of nominees for director is greater than the number to be elected.
What happens if a director nominee does not receive a majority vote in an uncontested election at the 2008 Annual Shareholders Meeting? A director nominee who is not an incumbent Board member and who does not receive a majority vote will not be elected as a director and a vacancy will be left on the Board.
Any incumbent director who is a director nominee and who does not receive a majority vote must promptly tender his or her offer of resignation as a director for consideration by the Board. Each incumbent director standing for re-election at the 2008 Annual Shareholders Meeting has agreed to resign, upon acceptance of such resignation by the Board, if he or she does not receive a majority vote. The Board must accept or reject such resignation within 90 days following certification of the shareholder vote in accordance with the procedures established by the Bylaws.
If a directors resignation offer is not accepted by the Board, that director will continue to serve until the Companys next annual shareholders meeting and his or her successor is duly elected and qualified or until the directors earlier death, resignation, or removal. The Board, in its sole discretion, may either fill a vacancy resulting from a director nominee not receiving a majority vote pursuant to the Bylaws or decrease the size of the Board to eliminate the vacancy.
What vote is required to pass the other proposals at the 2008 Annual Shareholders Meeting? The affirmative vote of the holders of a majority of the Shares present in person or represented by proxy at the meeting and entitled to vote is required for ratification of the appointment of E&Y as Wal-Marts independent accountants, for approval of the Management Incentive Plan, and for each of the shareholder proposals.
What is the effect of an abstention or withhold vote on the proposals to be voted on at the 2008 Annual Shareholders Meeting? A Share voted abstain with respect to any proposal is considered as present and entitled to vote with respect to that proposal, but is not considered a vote cast with respect to that proposal. Therefore, an abstention will not have any effect on the election of directors. Because each of the other proposals requires the affirmative vote of the holders of a majority of the Shares present and entitled to vote on each such proposal in order to pass, an abstention will have the effect of a vote against each of the other proposals. A withhold vote with respect to any director nominee will have the effect of a vote against such nominee.
What is the effect of a broker non-vote on the proposals to be voted on at the 2008 Annual Shareholders Meeting? A broker non-vote occurs if your Shares are not registered in your name and you do not provide the record holder of your Shares (usually a bank, broker, or other nominee) with voting instructions on a matter and the record holder is not permitted to vote on the matter without instructions from you under applicable NYSE rules. A broker non-vote is considered present for purposes of determining whether a quorum exists, but is not considered a vote cast or entitled to vote with respect to such matter. Therefore, broker non-votes will not have any effect on any of the matters to be voted on at the 2008 Annual Shareholders Meeting.
Under NYSE rules, the eight shareholder proposals described in this proxy statement are not considered discretionary items. Therefore, if you do not provide instructions to the record holder of your Shares with respect to these proposals, a broker non-vote will result with respect to these proposals. The election of directors, the ratification of appointment of independent accountants, and the approval of the Management Incentive Plan are routine items under NYSE rules. As a result, brokers who do not receive instructions as to how to vote on these matters generally may vote on these matters in their discretion.
How do I vote? The process for voting your Shares depends on how your Shares are held. Generally, you may hold Shares in your name as a record holder or in street name (that is, through a nominee, such as a broker or bank).
If you are a record holder, you may vote by proxy or you may vote in person at the 2008 Annual Shareholders Meeting. If you are a record holder and would like to vote your Shares by proxy prior to the 2008 Annual Shareholders Meeting, there are three ways for you to vote:
Please note that telephone and internet voting will close at 11:00 p.m. (CT) on June 5, 2008.
If you plan to attend the 2008 Annual Shareholders Meeting and wish to vote in person, you will be given a ballot at the 2008 Annual Shareholders Meeting. Please note that you may vote by proxy prior to June 6, 2008 and still attend the 2008 Annual Shareholders Meeting.
If your Shares are held in the name of a broker, bank, or other nominee, you should receive separate instructions from the holder of your Shares describing how to vote. Nonetheless, if your Shares are held in the name of a broker, bank, or other nominee and you want to vote in person, you will need to obtain (and bring with you to the 2008 Annual Shareholders Meeting) a legal proxy from the record holder of your Shares (who must have been the record holder of your Shares as of the close of business on April 10, 2008) indicating that you were a beneficial owner of Shares as of the close of business on April 10, 2008, as well as the number of Shares of which you were the beneficial owner on the record date.
If your Shares are held through the Profit Sharing/401(k) Plan or the Wal-Mart Puerto Rico Profit Sharing and 401(k) Plan and you do not vote your Shares in one of the methods described above, your Shares will be voted by the Retirement Plans Committee of the Company in accordance with the rules of the applicable plan.
What if I do not specify a choice for a matter when returning a proxy? Unless you indicate otherwise, the persons named as proxies on the proxy card will vote your Shares: FOR all of the nominees for director named in this proxy statement; FOR the ratification of E&Y as Wal-Marts independent accountants; FOR approval of the Management Incentive Plan; and AGAINST each of the eight shareholder proposals.
Can I revoke my proxy? Yes, you can revoke your proxy if you are a record holder by:
If your Shares are held in street name through a broker, bank, or other nominee, you need to contact the holder of your Shares regarding how to revoke your proxy.
INFORMATION ABOUT THE BOARD
Wal-Marts directors are elected at each annual shareholders meeting and hold office until the next election. All nominees for election to the Board are presently directors of Wal-Mart, except for Gregory B. Penner and Arne M. Sorenson, who are standing for election as directors for the first time. Assuming shareholders elect all the director nominees named in this proxy statement at the 2008 Annual Shareholders Meeting, Wal-Mart will continue to have 15 directors. The Board has authority under the Bylaws to fill vacancies and to increase or, upon the occurrence of a vacancy, decrease the Boards size between annual shareholders meetings.
Your proxy holder will vote your Shares for the Boards nominees unless you instruct otherwise. If a nominee is unable to serve as a director, your proxy holder may vote for any substitute nominee proposed by the Board.
ELECTION OF DIRECTORS
The following candidates are nominated by the Board based on the recommendation of the CNGC. They have held the positions shown for at least five years unless otherwise noted. They were selected on the basis of outstanding achievement in their professional careers; broad experience; wisdom; personal and professional integrity; ability to make independent, analytical inquiries; experience with and understanding of the business environment; and willingness to devote adequate time to Board duties. The Board is committed to a diverse membership. In selecting nominees, the Board does not discriminate on the basis of race, color, national origin, gender, religion, disability, or sexual preference.
The Board recommends that the shareholders vote FOR all of the nominees named above for election to the Board.
Pursuant to the NYSEs requirements for listed companies, Wal-Mart must have a majority of independent directors on its Board. In addition, the Audit Committee and the CNGC must be composed solely of independent directors. The NYSE Listed Company Manual defines specific relationships that disqualify directors from being independent under the NYSEs requirements and further requires that for a director to qualify as independent the Board must affirmatively determine that the director has no material relationship with Wal-Mart.
As permitted by the NYSEs requirements and policies, the Board has determined categorically that any relationship that is within one or more of the Categorical Standards described below will not be considered to be a material relationship that impairs a directors independence:
(1) the director, an entity with which a director is affiliated, or one or more members of the directors immediate family, purchased property or services from Wal-Mart in retail transactions on terms generally available to Associates during Wal-Marts last fiscal year;
(2) the director or one or more members of the directors immediate family owns or has owned during the entitys last fiscal year, directly or indirectly, five percent or less of an entity that has a business relationship with Wal-Mart;
(3) the director or one or more members of the directors immediate family owns or has owned during the entitys last fiscal year, directly or indirectly, more than five percent of an entity that has a business relationship with Wal-Mart so long as the amount paid to or received from Wal-Mart during the entitys last fiscal year accounts for less than $1,000,000 or, if greater, less than one percent of the entitys consolidated gross revenues for that entitys last fiscal year;
(4) the director or one or more members of the directors immediate family is a director or trustee or was a director or trustee of an entity during the entitys last fiscal year that has a business or charitable relationship with Wal-Mart and that made payments to, or received payments from, Wal-Mart during the entitys last fiscal year in an amount representing less than $5,000,000 or, if greater, less than five percent of the entitys consolidated gross revenues for that entitys last fiscal year;
(5) Wal-Mart paid to, employed, or retained one or more members of the directors immediate family for compensation not exceeding $60,000 during Wal-Marts last fiscal year;
(6) the director or a member of the directors immediate family is, or has been during the entitys last fiscal year, an executive officer or employee of an entity that made payments to, or received payments from, Wal-Mart during the entitys last fiscal year that account for less than $1,000,000 or, if greater, less than one percent of the entitys consolidated gross revenues for that entitys last fiscal year; or
(7) the director or one or more members of the directors immediate family received from Wal-Mart, during Wal-Marts last fiscal year, personal benefits having an aggregate value of less than $5,000, other than as compensation for Board service.
In developing the Categorical Standards, the Board considered that: (1) directors (or their immediate family members) regularly purchase items at Wal-Marts stores, Neighborhood Markets, and Sams Clubs; (2) directors (or their immediate family members) may hold minor investments in companies that do business with Wal-Mart; (3) directors (or their immediate family members) may hold more than a minor investment in companies that do business with Wal-Mart, but the amount of business done with Wal-Mart is immaterial; (4) directors (or their immediate family members) may serve on the board of commercial or charitable entities with immaterial relationships with Wal-Mart; (5) directors may have immediate family members employed by Wal-Mart in positions earning $60,000 per year or less; (6) directors (or their immediate family members) may be officers or employees of companies that
receive payments from Wal-Mart or its affiliates that account for less than $1,000,000 or, if greater, less than 1 percent of such companys consolidated gross revenues for its last fiscal year; and (7) that former officers who are directors (or their immediate family members) may continue to receive from Wal-Mart certain residual benefits from their service with Wal-Mart.
Our Board has determined that the following current directors nominated for reelection are independent directors under the independence standards set forth by the NYSE Listed Company Manual: Aida M. Alvarez; James W. Breyer; M. Michele Burns; James I. Cash, Jr.; Roger C. Corbett; Douglas N. Daft; Allen I. Questrom; Christopher J. Williams; and Linda S. Wolf. Furthermore, the Board determined that Arne M. Sorenson, a nominee for election as director who is not currently a director, is independent under the NYSE Listed Company Manual independence standards. The Board has also determined that Roland A. Hernandez and Jack C. Shewmaker, who are currently directors, but who will not stand for reelection at the 2008 Annual Shareholders Meeting, are independent under the NYSE Listed Company Manual independence standards.
In making these determinations, the Board found that the current Independent Directors who are standing for election and Mr. Sorenson do not have a material or other disqualifying relationship with Wal-Mart. The Board also found that Messrs. Hernandez and Shewmaker have not had since the commencement of fiscal 2008 any material or other disqualifying relationships with Wal-Mart. In making these determinations, the Board considered all transactions exceeding the Categorical Standards and any relationships and arrangements described below under Related-Party Transactions.
Annual Director Compensation
The base compensation for Non-Management Directors upon their election to the Board on June 1, 2007 consisted of a Share award and an annual retainer. H. Lee Scott, Jr. and S. Robson Walton received compensation only for their services as Executive Officers of the Company and not in their capacities as directors.
Upon election to the Board at the 2007 Annual Shareholders Meeting on June 1, 2007, each Non-Management Director received an annual equity award of Shares with a market value of $140,000 on the date of grant for the Board term ending at the 2008 Annual Shareholders Meeting. This annual equity award was paid directly in Shares or deferred in stock units under the Director Compensation Plan, as elected by each Non-Management Director. In addition, each Non-Management Director elected to the Board at the 2007 Annual Shareholders Meeting was entitled to receive an annual retainer of $60,000, payable in arrears in equal quarterly installments for the Board term ending at the 2008 Annual Shareholders Meeting. This annual retainer could be taken in cash, Shares, deferred in stock units under the Director Compensation Plan, or deferred to an interest-credited account under the Director Compensation Plan, as elected by the director.
The Non-Management Director Board committee chairs also received a chair retainer for the additional time required for Board committee business. For the Board term commencing at the 2007 Annual Shareholders Meeting, the retainer for the Audit Committee chair was $25,000, the retainer for the CNGC chair was $15,000, and the retainer for the SPFC chair was $15,000. In addition, Christopher J. Williams received a retainer of $15,000 for his service on the Executive Committee because he serves on more than one Board committee. These additional retainers were payable in arrears in equal quarterly installments, and could be taken in cash, Shares, deferred in stock units under the Director Compensation Plan, or deferred in an interest-credited account under the Director Compensation Plan, as elected by the director.
Pursuant to the CNGC charter, director compensation for the Non-Management Directors is reviewed annually by the CNGC, which recommends to the Board the annual compensation for those directors. The compensation paid to the Directors during fiscal 2008 is described in the table below.
DIRECTOR COMPENSATION FOR FISCAL 2008 (1)
The following directors held outstanding stock options at the end of fiscal 2008, as shown below. These options were issued in previous fiscal years as part of the compensation paid to these directors:
Director Stock Ownership Guidelines
On June 5, 2003, the Board adopted stock ownership guidelines for the Non-Management Directors. Each Non-Management Director must own, within five years of his or her initial election or appointment to the Board, an amount of Shares, restricted stock, or stock units having a value equal to five times the annual retainer component of the Non-Management Directors compensation approved by the Board in the year the director was initially elected or appointed. Non-Management Directors who began serving prior to June 5, 2003, are required to own, no later than June 5, 2008, $300,000 worth of Shares, restricted stock, or stock units. All directors who will be subject to these guidelines as of June 5, 2008 currently own enough Shares to satisfy the guidelines.
The Board held a total of six meetings (four regular meetings and two telephonic meetings) during fiscal 2008 to review significant developments affecting the Company, engage in strategic planning, and act on matters requiring Board approval. During fiscal 2008, each director attended at least 75 percent of the aggregate of the number of Board meetings and the number of meetings of Board committees on which he or she served. The Non-Management Directors and Independent Directors meet regularly in executive sessions.
BOARD AND COMMITTEE GOVERNING DOCUMENTS
The Board has adopted Corporate Governance Guidelines and charters for the Audit Committee, the CNGC, the Executive Committee, the SOC, and the SPFC. You may review each of these documents on our corporate website at www.walmartstores.com by clicking on Investors and then Corporate Governance. In addition, these documents are available in print at no charge to any shareholder who requests a copy from our Investor Relations Department by submitting a request through the Investors page of our website or by writing to our Investor Relations Department at: Wal-Mart Stores, Inc., Investor Relations Department, 702 Southwest 8th Street, Bentonville, Arkansas 72716-0100.
COMMUNICATIONS WITH THE BOARD
The Board welcomes communications from shareholders and other interested parties. Shareholders and other interested parties may write to the Board at:
Wal-Mart Stores, Inc. Board of Directors
c/o J. Michael Bradshaw, Senior Liaison to the Board of Directors
702 Southwest 8th Street
Bentonville, Arkansas 72716-0215
Shareholders and other interested parties also may e-mail: the Board at email@example.com, the Independent Directors at firstname.lastname@example.org; the Non-Management Directors at email@example.com; and any individual director, including the presiding director, at the full name of the director as listed in this proxy statement followed by @wal-mart.com. For example, shareholders may e-mail S. Robson Walton, Chairman, by e-mailing firstname.lastname@example.org.
A company of our size receives a large number of inquiries regarding a wide range of subjects each day. As a result, the Independent Directors, Non-Management Directors, and individual directors are not able to respond to all inquiries directly. Therefore, our directors, in consultation with Wal-Mart, have developed a process to assist in managing inquiries directed to the Board.
Letters and e-mails directed to the Board, the Independent Directors, the Non-Management Directors, and individual directors are reviewed by Wal-Mart to determine whether a response on behalf of the Board is appropriate. While the Board oversees management, it does not participate in day-to-day management functions or business operations and is not normally in the best position to respond to inquiries relating to those matters. Thus, we will direct those types of inquiries to the appropriate Associate for a response. Responses to letters and e-mails by Wal-Mart on behalf of the Board, Independent Directors, Non-Management Directors, or individual directors are maintained by Wal-Mart and are available for any directors review.
If a response on behalf of the Board, Independent Directors, Non-Management Directors, or individual directors is appropriate, Wal-Mart gathers any information and documentation necessary for answering the inquiry and provides the information and documentation, as well as a proposed response, to the appropriate director. Wal-Mart also may attempt to communicate with the shareholder or interested party for any necessary clarification. S. Robson Walton, Wal-Marts Chairman, reviews and approves responses on behalf of the Board, and James W. Breyer, Wal-Marts presiding director, reviews and approves the responses on behalf of the Independent Directors and Non-Management Directors. In certain situations, Mr. Walton or Mr. Breyer may respond directly to a shareholders inquiry.
For inquiries forwarded to individual directors, each director has provided instructions for responding to those inquiries. Currently, all directors have requested that Wal-Mart review letters and e-mails, gather any information or documentation necessary to respond to the inquiry, and propose a response. The director will review the proposed response and either direct Wal-Mart to send such response on behalf of the director, or the director may choose to respond directly to the shareholder.
Certain circumstances may require that the Board depart from the procedures described above, such as the receipt of threatening letters or e-mails or voluminous inquiries with respect to the same subject matter. The Board, nevertheless, does consider shareholder questions and comments important and endeavors to respond promptly and appropriately.
James W. Breyer currently serves as the presiding director of executive sessions of the Non-Management Directors and Independent Directors.
NOMINATION PROCESS FOR DIRECTOR CANDIDATES
The CNGC is, among other things, responsible for identifying and evaluating potential candidates and recommending candidates to the Board for nomination for election to the Board. The CNGC is governed by a written charter, a copy of which can be found in the Corporate Governance section of the Investors page of our corporate website at www.walmartstores.com.
The CNGC regularly reviews the composition of the Board and the Board committees and considers whether the addition of directors with particular experiences, skills, or characteristics would make the Board and one or more Board committees more effective. When a need arises to fill a vacancy or it is determined that a director candidate possessing particular experiences, skills, or characteristics would make the Board more effective, the CNGC initiates a search. As a part of the search process, the CNGC may consult with other directors and senior officers and may hire a search firm to assist in identifying and evaluating potential candidates.
SpencerStuart serves as the Companys director candidate search consultant. In that capacity, SpencerStuart seeks out candidates who have the experiences, skills, and characteristics that the CNGC has determined are necessary to serve as a member of the Board. SpencerStuart researches the background of all candidates, conducts extensive interviews with candidates and their references, and then presents the most qualified candidates to the CNGC and the Companys management.
When considering a candidate, the CNGC reviews the candidates experiences, skills, and characteristics. The Committee also considers whether a potential candidate will otherwise qualify for membership on the Board, and whether the potential candidate would likely satisfy the independence requirements of the NYSE.
Candidates are selected on the basis of outstanding achievement in their professional careers; broad experience; wisdom; personal and professional integrity; their ability to make independent, analytical inquiries; and their experience with and understanding of the business environment. With respect to the minimum experiences, skills, or characteristics necessary to serve on the Board, the CNGC will only consider candidates who:
In addition, at least a majority of the Board must be independent as determined by the Board under the guidelines of the NYSE Listed Company Manual, and at least one member of the Board should have the qualifications and skills necessary to be considered an Audit Committee Financial Expert as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated by the SEC.
Potential candidates are generally interviewed by our Chairman, our CEO, and the chair of the CNGC, and may be interviewed by other directors and senior officers as desired and as schedules permit. The CNGC then meets to consider and approve the final candidates, and either makes its recommendation to the Board to fill a vacancy or add an additional member, or recommends to the Board a slate of candidates for nomination for election to the Board. The selection process for candidates is intended to be flexible, and the CNGC, in the exercise of its discretion, may deviate from the selection process when particular circumstances warrant a different approach.
Director nominees Gregory B. Penner and Arne M. Sorenson do not currently serve on the Board. Messrs. Penner and Sorenson have been nominated for election to the Board at the 2008 Annual Shareholders Meeting and were recommended to the CNGC by our Chairman, our CEO, certain Non-Management Directors, and other Executive Officers.
S. Robson Walton and Jim C. Walton are members of a group that beneficially owns more than five percent of the outstanding Shares. Any participation by them in the nomination process was considered to be in their capacities as members of the Board and not as recommendations from security holders that beneficially own more than five percent of the outstanding Shares.
Shareholders may recommend candidates to the Board by writing to:
Wal-Mart Stores, Inc. Board of Directors
c/o J. Michael Bradshaw, Senior Liaison to the Board of Directors
702 Southwest 8th Street
Bentonville, Arkansas 72716-0215
The recommendation must include the following information:
All candidates recommended to the Board for nomination by a shareholder pursuant to the requirements above will be submitted to the CNGC for its review, which may include an analysis of the candidates qualifications prepared by the Companys management.
AUDIT COMMITTEE REPORT
The Audit Committee consists of four directors, each of whom has been determined by the Board to be independent as defined by the current listing standards of the NYSE and the applicable rules of the SEC. The members of the Audit Committee are Aida M. Alvarez; James I. Cash, Jr.; Roland A. Hernandez, the chair of the Audit Committee; and Christopher J. Williams. Ms. Alvarez was appointed to the Audit Committee effective June 1, 2007. The Audit Committee is governed by a written charter adopted by the Board. A copy of the current Audit Committee charter is available in the Corporate Governance section of the Investors page of our corporate website at www.walmartstores.com. In addition, the Audit Committee charter is available in print at no charge to any shareholder who requests a copy from our Investor Relations department by submitting a request through the Investors page of our website or by writing to our Investor Relations department at: Wal-Mart Stores, Inc., Investor Relations Department, 702 Southwest 8th Street, Bentonville, Arkansas 72716-0100.
Wal-Marts management is responsible for Wal-Marts internal control over financial reporting, including the preparation of Wal-Marts consolidated financial statements. Wal-Marts independent accountants are responsible for auditing Wal-Marts annual consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board. The independent accountants are also responsible for issuing a report on those financial statements and a report on Wal-Marts internal control over financial reporting. The Audit Committee monitors and oversees these processes. The Audit Committee is responsible for selecting, engaging, and overseeing Wal-Marts independent accountants.
As part of the oversight processes, the Audit Committee regularly meets with management of the Company, the Companys independent accountants, and the Companys internal auditors. The Audit Committee often meets with each of these groups separately in closed sessions. Throughout the year, the Audit Committee had full access to management and the independent accountants and internal auditors for the Company. To fulfill its responsibilities, the Audit Committee did, among other things, the following:
The Audit Committee submits this report:
Aida M. Alvarez
James I. Cash, Jr.
Roland A. Hernandez, Chair
Christopher J. Williams
AUDIT COMMITTEE FINANCIAL EXPERTS
The Board has determined that James I. Cash, Jr.; Roland A. Hernandez; and Christopher J. Williams are Audit Committee Financial Experts as that term is defined in Item 407(d)(5)(ii) of Regulation S-K, promulgated by the SEC, and are independent under Section 10A(m)(3) of the Exchange Act and the requirements set forth in the NYSE Listed Company Manual.
AUDIT COMMITTEE SERVICE
Roland A. Hernandez, who is the chair of the Audit Committee, currently serves on the audit committees of three other public companies and serves as the chairman of one such other public companys audit committee. The Board has determined that such service does not impair the ability of Mr. Hernandez to serve effectively on the Audit Committee.
AUDIT COMMITTEE PRE-APPROVAL POLICY
To ensure the independence of our Companys independent accountants and to comply with applicable securities laws, NYSE listing standards, and the Audit Committee charter, the Audit Committee is responsible for reviewing, deliberating and, if appropriate, pre-approving all audit, audit-related, and non-audit services to be performed by the independent accountants. For that purpose, the Audit Committee has established a policy and related procedures regarding the pre-approval of all audit, audit-related, and non-audit services to be performed by our Companys independent accountants (the Pre-Approval Policy).
The Pre-Approval Policy provides that our Companys independent accountants may not perform any audit, audit-related, or non-audit service for Wal-Mart, subject to those exceptions that may be permitted by applicable law, unless: (1) the service has been pre-approved by the Audit Committee; or (2) Wal-Mart engaged the independent accountants to perform the service pursuant to the pre-approval provisions of the Pre-Approval Policy. In addition, the Pre-Approval Policy prohibits the Audit Committee from pre-approving certain non-audit services that are prohibited from being performed by the Companys independent accountants by applicable securities laws. The Pre-Approval Policy also provides that Wal-Marts corporate controller will periodically update the Audit Committee as to services provided by the independent accountants. With respect to each such service, the independent accountants provide detailed back-up documentation to the Audit Committee and to the corporate controller.
Pursuant to its Pre-Approval Policy, the Audit Committee has pre-approved certain categories of services to be performed by the independent accountants and a maximum amount of fees for each category. The Audit Committee annually re-assesses these service categories and the associated fees. Individual projects within the approved service categories have been pre-approved only to the extent that the fees for each individual project do not exceed a specified dollar limit, which amount is re-assessed annually. Projects within a pre-approved service category with fees in excess of the specified fee limit for individual projects may not proceed without the specific prior approval of the Audit Committee (or a member to whom pre-approval authority has been delegated). In addition, no project within a pre-approved service category will be considered to have been pre-approved by the Audit Committee if the project causes the maximum amount of fees for the service category to be exceeded, and the project may only proceed with the prior approval of the Audit Committee (or a member to whom pre-approval authority has been delegated) to increase the aggregate amount of fees for the service category.
At least annually, the Audit Committee designates a member of the Audit Committee to whom it delegates its pre-approval responsibilities. That member has the authority to approve interim requests as set forth above within the defined, pre-approved service categories, as well as interim requests to engage Wal-Marts independent accountants for services outside the Audit Committees pre-approved service categories. The member has the authority to pre-approve any audit, audit-related, or non-audit service that falls outside the pre-approved service categories, provided that the member determines that the service would not compromise the independent accountants independence and the member informs the Audit Committee of his or her decision at the Audit Committees next regular meeting.
COMPENSATION, NOMINATING AND GOVERNANCE COMMITTEE
The CNGC is charged with discharging the Boards responsibilities relating to the compensation of the Companys directors, Executive Officers, and Associates. With respect to its compensation functions, the CNGC is responsible, pursuant to its charter, for annually:
The CNGC may delegate its functions to a subcommittee, to the extent such delegation is consistent with the NYSE Listed Company Manual and applicable laws and regulations. However, the CNGC may not delegate its authority over the evaluation and approval of Executive Officer compensation. The CNGC met 9 times in fiscal 2008. Meeting agendas are determined in consultation with the chair of the CNGC.
COMPENSATION COMMITTEE REPORT
The CNGC has reviewed and discussed with the Companys management the CD&A included in this proxy statement and, based on such review and discussions, the CNGC recommended to the Board that the CD&A be included in this proxy statement.
The CNGC submits this report:
Douglas N. Daft
Allen I. Questrom
Linda S. Wolf, Chair
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members who served on the CNGC at any time during fiscal 2008 were officers or Associates of Wal-Mart or were formerly officers of Wal-Mart. Except for M. Michele Burns, who served on the CNGC until the 2007 Annual Shareholders Meeting on June 1, 2007, none of the members who served on the CNGC at any time during fiscal 2008 had any relationship with the Company requiring disclosure under the section of this proxy statement entitled Related-Party Transactions. Finally, no Executive Officer serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving on Wal-Marts Board or the CNGC.
TRANSACTION REVIEW POLICY
The Board has adopted a written policy (the Transaction Review Policy) applicable to all Wal-Mart officers who are Executive Vice Presidents or above; to all directors and director nominees; to all shareholders beneficially owning more than five percent of Wal-Marts Shares; and to the immediate family members of each of the preceding persons (collectively, the Covered Persons). Any entity in which a Covered Person has a direct or indirect material financial interest or of which a Covered Person is an officer or holds a significant management position (each a Covered Entity) is also covered by the policy. The Transaction Review Policy applies to any transaction or series of similar or related transactions in which a Covered Person or Covered Entity has a direct or indirect material financial interest in which the Company is a participant (each a Covered Transaction).
Under the Transaction Review Policy, each Covered Person is responsible for reporting to Wal-Marts Chief Audit Executive any Covered Transactions of which he or she has knowledge. Our Chief Audit Executive, with the assistance of other appropriate Company personnel, reviews each Covered Transaction and submits the results of such review to the Audit Committee. The Audit Committee reviews each Covered Transaction and either approves or disapproves the transaction. To approve a Covered Transaction, the Audit Committee must find that:
In addition, on an annual basis and as requested, the Chief Audit Executive provides a summary of all reported Covered Transactions to the Audit Committee.
The Audit Committee may also ratify a Covered Transaction if prior approval and review is not sought if the Audit Committee determines that the transaction meets the criteria above and the failure to obtain pre-approval was unintentional, inadvertent, or due to a lack of knowledge.
The following categories of transactions are exempt from review and approval under the Transaction Review Policy:
CODE OF ETHICS FOR THE CEO AND SENIOR FINANCIAL OFFICERS
You may review Wal-Marts Code of Ethics for the CEO and Senior Financial Officers in the Corporate Governance section of the Investors page of our corporate website at www.walmartstores.com. Wal-Marts Code of Ethics for the CEO and Senior Financial Officers supplements Wal-Marts Statement of Ethics, which is applicable to all directors, Executive Officers, and Associates and is also available in the Corporate Governance section of the Investors page of our corporate website. A description of any substantive amendment or waiver of Wal-Marts Code of Ethics for the CEO and Senior Financial Officers or Wal-Marts Statement of Ethics will be disclosed in the Corporate Governance section of the Investors page of our corporate website at www.walmartstores.com for a period of 12 months after the amendment or waiver. Copies of Wal-Marts Code of Ethics for the CEO and Senior Financial Officers and of Wal-Marts Statement of Ethics are also available in print at no charge to any shareholder who requests a copy from our Investor Relations department by submitting a request through the Investors page of our website or by writing to the Investor Relations Department at: Wal-Mart Stores, Inc., Investor Relations Department, 702 Southwest 8th Street, Bentonville, Arkansas 72716-0100.
BOARD ATTENDANCE AT ANNUAL SHAREHOLDERS MEETINGS
The Board has adopted a policy stating that all directors are expected to attend annual shareholders meetings. While the Board understands that there may be situations that prevent a director from attending an annual shareholders meeting, the Board strongly encourages all directors to make attendance at all annual shareholders meetings a priority. All directors nominated by the Board for election to the Board in 2007 attended the 2007 Annual Shareholders Meeting.
SUBMISSION OF SHAREHOLDER PROPOSALS
If you want to present a proposal for possible inclusion in our 2009 proxy statement pursuant to the SECs rules, send the proposal to Gordon Y. Allison, Vice President and General Counsel, Corporate Division, 702 Southwest 8th Street, Bentonville, Arkansas 72716-0215, by registered, certified, or express mail. Shareholder proposals for inclusion in our proxy statement for the 2009 Annual Shareholders Meeting must be received on or before December 23, 2008.
Shareholders who want to bring business before the 2009 Annual Shareholders Meeting other than through a shareholder proposal pursuant to the SECs rules must notify the Corporate Secretary of the Company in writing and provide the information required by the provision of the Bylaws dealing with shareholder proposals. The notice must be delivered to or mailed and received at Wal-Marts principal executive offices not less than 75 nor more than 100 days prior to the date of the 2009 Annual Shareholders Meeting, unless less than 85 days notice or public disclosure of that date is given or made, in which case the shareholders notice must be received by the close of business on the tenth day after the notice or public disclosure of the date of the 2009 Annual Shareholders Meeting is made or given. The requirements for such notice are set forth in the Bylaws, a copy of which can be found in the Corporate Governance section of the Investors page of our corporate website at www.walmartstores.com. In addition, the Bylaws were filed as an exhibit to the Companys Current Report on Form 8-K dated September 25, 2006.
The Company is not aware of any matters that will be considered at the 2008 Annual Shareholders Meeting other than the matters described herein. If any other matters are properly brought before the 2008 Annual Shareholders Meeting, the proxy holders will vote the Shares as to which they hold proxies in their discretion.
In the following pages, we discuss how our CEO, CFO, and three other most highly compensated Executive Officers (our Named Executive Officers or NEOs) were compensated in fiscal 2008, and describe how this compensation fits within our executive compensation philosophy. We also describe certain changes to our executive compensation programs for fiscal 2009.
Under our companys leadership team, our company performed well in fiscal 2008, with record sales and earnings, despite the fact that our customers faced higher energy prices and other economic challenges, particularly in the U.S. In this environment, our company emphasized price leadership, better inventory management and operational improvements. We also focused on customer service and enhancing our customers experience in our stores and clubs. In addition, we undertook groundbreaking initiatives in healthcare, such as expanding our $4 prescription program, and we advanced our sustainability efforts by building energy efficient stores and reducing packaging in the products we sell. Our company also returned more than $11 billion to our shareholders in the form of share repurchases and dividends. Our stock price increased moderately during fiscal 2008. These accomplishments and other criteria were considered by the CNGC when establishing the compensation of our NEOs.
Our Compensation Program Emphasizes Performance
We design our NEO compensation with an emphasis on performance. Base salary typically comprises less than 15 percent of each NEOs total annual compensation opportunity, and a substantial majority of each NEOs annual compensation is performance-based in ways that we believe relate meaningfully to shareholder value. For fiscal 2008, the performance-based portion of NEO compensation consisted of performance shares and a cash incentive opportunity, and was contingent on meeting certain goals for pre-tax profit growth, diversity, return on investment, and total company revenue growth. For fiscal 2008, our NEOs did not receive any payout for performance shares, but did receive a cash incentive payment.
Our company does not maintain a defined benefit pension plan for our NEOs. All of our NEOs are employed on an at will basis.
Compensation Established by a Committee of Independent Directors
The CNGC oversees the programs used to determine our executives compensation. These compensation programs are designed to provide our NEOs with compensation that is fair and competitive in light of individual job responsibilities, individual performance, and contributions to our overall performance.
In early 2007, the CNGC retained Watson Wyatt & Company (Watson Wyatt) as its independent consultant to advise the CNGC on executive compensation matters. Watson Wyatt reports directly and exclusively to the CNGC, and the CNGC has sole authority to retain, terminate, and approve the fees of Watson Wyatt. Under the terms of this engagement, Watson Wyatt may not be engaged to provide any additional consulting services to our company without the approval of the CNGC. Watson Wyatt advised the CNGC regarding the compensation of our NEOs for fiscal 2008 and 2009 and regarding changes to our compensation programs for fiscal 2009.
In view of the size and complexity of our company, the CNGC reviewed data from three different peer groups to determine how our NEOs compensation compared to the compensation paid to executives at other companies. Because our company is significantly larger than most companies in our peer groups, our CNGC generally sets compensation so that our NEOs have the opportunity to earn total compensation in the top quartile of the total compensation earned by executive officers who hold comparable positions in each of our peer groups. In addition, when establishing NEO compensation, the CNGC considered the nature of each NEOs responsibilities and experience, the need to retain and motivate our executives, and each NEOs contributions to our overall performance and, where applicable, to the performance of each NEOs operating division.
Changes for Fiscal 2009 to Further Emphasize Pay for Performance
Between September 2007 and March 2008, the CNGC undertook a full review of our compensation programs for NEOs and other members of management. As a result of this review, the CNGC approved changes to our executive compensation program for
fiscal 2009 in an effort to more closely tie executive compensation to measures of our performance that can be influenced by our executives and that we believe are likely to impact shareholder value. For fiscal 2009, 75% of the target value of annual equity awards is subject to performance goals, up from two-thirds in fiscal 2008. The CNGC also reviewed the performance metrics used in our executive compensation program to ensure that the metrics used are metrics that the CNGC believes are likely to drive shareholder value. As a result of this review, beginning in fiscal 2009, in addition to the existing return on investment and pre-tax profit metrics, a portion of each NEOs compensation will be based on our domestic comparable store sales and/or international revenue growth, depending on each NEOs role with our company.
Executive Compensation Overview
Who are our NEOs?
For fiscal 2008, our NEOs were:
What are the primary components of our executive compensation program?
The annual compensation of our NEOs consists of three main components:
For purposes of setting NEO compensation, the CNGC considers the amount that each NEO could earn from these three components, assuming maximum performance goals are achieved and all time-vesting equity awards vest, as that NEOs total direct compensation, or TDC. We discuss each of these components of TDC in greater detail below.
Our NEOs also receive other benefits generally available to our Associates, such as participation in our Profit Sharing/401(k) Plan, our Stock Purchase Plan, and other plans available to our officers, such as our Deferred Compensation Plan. Our NEOs also receive certain perquisites and supplemental benefits.
Fiscal 2008 Compensation
What was the TDC for each of our NEOs in fiscal 2007 and fiscal 2008, respectively?
When setting NEO compensation, the CNGC established a TDC amount for each NEO and then allocated that TDC among the various components of compensation. TDC represents the compensation opportunity available to an NEO for a given fiscal year if maximum performance goals are achieved. As such, TDC is designed to represent the amounts that our NEOs will receive only in the event of exceptional performance.
The Summary Compensation table that appears on page 34 provides specific compensation information for fiscal 2007 and fiscal 2008 for each of our NEOs in the manner required by SEC regulations. The amounts in the Summary Compensation table do not reflect the compensation opportunities approved by the CNGC, nor do they necessarily provide insight into the compensation actually earned by each NEO upon satisfaction of applicable performance conditions. For example, the CNGC views an equity award as part of the TDC for the fiscal year for which it is granted. The Summary Compensation table, however, requires us to report stock-based compensation based on the amounts expensed for financial reporting purposes in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), so that the expense relating to portions of an equity award granted to one of our NEOs generally will appear on the Summary Compensation table over a period of years.
The following table shows the TDC established for each NEO for fiscal 2007 and 2008. Inclusion of this information is not designed to replace the Summary Compensation table, but rather to provide insight into the CNGCs decision-making process when establishing NEO compensation.
TDC, for purposes of the table below, is defined as the sum of:
Because TDC is established through a benchmarking process, as described below, TDC does not include any one-time or special awards, as these types of awards are generally not reflected in the benchmarking data that is available for our peer group companies.
In both fiscal 2007 and fiscal 2008, a significant percentage of TDC consisted of performance shares. For fiscal 2008, approximately 59% of our CEOs TDC consisted of performance shares, and at least 50% of each NEOs TDC consisted of performance shares. As described in more detail below, during both fiscal 2007 and fiscal 2008, our NEOs did not receive any payout for performance shares. Therefore, the actual amounts realized by our NEOs during fiscal 2007 and fiscal 2008 were significantly less than the TDC amounts shown above.
The differences in TDC among our NEOs are due to many factors that the CNGC considers in establishing NEO compensation. These factors include the CNGCs review of peer group compensation information through benchmarking, which is described in more detail below; differences in job scope and responsibilities among our NEOs; expertise and years of experience; historical compensation levels; retention and succession considerations; and individual and divisional performance. The TDC levels set forth in the table above represent the CNGCs judgment as to the appropriate compensation opportunities in light of these factors, and are not the result of any specific policy or formula.
How did the CNGC allocate fiscal 2008 TDC among the various elements of compensation?
After the CNGC establishes TDC for each NEO, it allocates the TDC among base salary, annual cash incentive opportunity, and equity awards. For fiscal 2008, the CNGC allocated more than two-thirds of each NEOs TDC to performance-based elements of compensation, as follows:
Base Salary. In keeping with our philosophy that a substantial majority of NEO compensation should be performance-based, the CNGC typically allocates no more than 15% of TDC to base salary, with smaller percentages generally allocated to base salary for more senior executives. For fiscal 2008, our NEOs base salaries were as follows:
In allocating a portion of TDC to base salary, the CNGC also benchmarks the proposed base salaries for our NEOs against base salaries within our peer groups to ensure that our NEO base salaries are appropriately competitive. The CNGC typically seeks to set base salaries near the median of our peer groups, but will set base salaries higher if necessary to result in TDCs in the top quartile of our peer groups. The benchmarking process for fiscal 2008 is described in more detail below.
Cash Incentive. Under our Management Incentive Plan, most salaried management Associates, including our NEOs, are eligible to earn an annual cash incentive payment. Whether an incentive payment is earned and the amount of any payment depends, however, on whether we achieve pre-established performance goals. For fiscal 2008, these goals were based on growth in pre-tax profit for the total company, and on growth in operating income for each of the companys divisions. Incentive payments are also based on achieving diversity goals. The performance metrics and performance goals used under our cash incentive plan are described in more detail below.
For purposes of allocating TDC among components of compensation, the CNGC valued the cash incentive payment in terms of the executive target maximum incentive payment that could be earned, as described in more detail below. We express these payout levels as a percentage of the NEOs salary for that fiscal year. For fiscal 2008, the specific threshold, maximum and actual cash incentive payouts for each of our NEOs, as a percentage of base salary, are described below.
Equity Awards. The balance of TDC is then allocated between various forms of equity compensation. The CNGC believes equity awards align the interests of our NEOs with the interests of our shareholders. Consistent with our philosophy of tying compensation to performance, for fiscal 2008, the CNGC allocated approximately two-thirds of the equity portion of TDC to performance shares and the remainder to stock options.
Performance Shares. We first granted performance shares to our NEOs in fiscal 2006. A performance share award gives the officer receiving it the right to receive a number of Shares (or, at the NEOs option, the equivalent cash value at the time of payout) if we meet certain performance goals during a specified performance period. If a recipient of performance shares ceases to be employed by us before the end of the applicable performance period, the performance shares do not vest and the recipient receives no payout. For purposes of the TDC amounts set forth above, the dollar amount of TDC allocated to performance shares represents the maximum number of performance shares that may vest multiplied by the Share price on the date of grant.
For fiscal 2008, we granted performance shares with a three-year performance period. Performance shares granted in January 2007 as part of fiscal 2008 compensation have a three-year performance period ending January 31, 2010. For these and prior performance share awards, the applicable performance metrics for fiscal 2008 were: (i) return on investment; and (ii) revenue growth. Of the performance shares granted as part of fiscal 2008 compensation, 60 percent were subject to a return on investment goal, and 40 percent were subject to a revenue growth goal. As described below under Fiscal 2009, the CNGC made certain changes to the performance metrics that will apply to performance shares granted as part of fiscal 2009 compensation. These performance metrics and the reasons for selecting these metrics are described below.
Stock Options. For fiscal 2008 compensation, the CNGC allocated the remainder of TDC to stock options. These stock options vest and become exercisable in five equal annual installments over the five years following the date of grant. The CNGC determined the number of stock options to issue by multiplying the dollar value allocated to stock options by three, and then divided this number by the Share price on the date of grant. This calculation has historically resulted in a rough equivalent to the number of options that would be granted using a fair market valuation model such as Black-Scholes-Merton. However, for fiscal 2008, this calculation resulted in fewer stock options being granted to our NEOs than if a Black-Scholes-Merton valuation model had been used.
What performance metrics applied to our NEOs compensation awarded for fiscal 2008?
Each fiscal year, the CNGC selects the performance metrics that will apply to the elements of compensation that are contingent on performance. For fiscal 2008, the CNGC selected the following performance metrics:
The CNGC chose these performance metrics for fiscal 2008 because it believed that good performance relative to these metrics was likely to have a positive effect on our overall financial performance and shareholder returns. Our NEOs are also subject to diversity goals under our cash incentive program.
What were the specific performance goals for fiscal 2008, and how did our company perform relative to those goals?
Cash Incentive Payment Goals. The CNGC generally attempts to set performance goals applicable to our cash incentive plan so that a consistent level of expected difficulty in achieving these goals is maintained from year to year. The goals applicable to the cash incentive payment are expressed in terms of a percentage increase over our prior year performance. As described below, the cash incentive payment of some of our NEOs is based in part on the performance of one of our operating divisions. For fiscal 2008, the threshold and maximum performance goals under our cash incentive plan, and our actual performance, were as follows:
These goals were established in light of the operating plans for our company and each of its divisions. Because various expenses related to company-wide support functions are allocated to the total company, the total companys maximum performance goal was lower than the Wal-Mart Stores Division. The performance goals for our International Division reflected our strategic growth plans for our international operations, including market conditions and the level of capital investment required for growth in the international markets in which we operate.
In determining actual performance for purposes of our cash incentive plan, the CNGC made certain positive and negative adjustments to the pre-tax profit results of our total company and operating income results for each of our operating divisions, as required by the terms of the plan. The purpose of these adjustments is to ensure that results for a particular fiscal year are computed on a comparable basis as the prior year. For fiscal 2008, adjustments to pre-tax profit included matters related to acquisitions, dispositions, currency exchange rate fluctuations, and certain litigation accruals.
A portion of each NEOs cash incentive payment is also subject to meeting diversity goals. For fiscal 2008, these goals consist of two components: placement goals and good faith efforts goals. For fiscal 2008, each NEOs cash incentive payment could have been reduced by up to 15% if he did not achieve his diversity goals for the year. No NEOs incentive payment was reduced because of a failure to achieve diversity goals for fiscal 2008.
Cash Incentive Weightings. For fiscal 2008, if the threshold pre-tax profit goal for the total company had not been reached, then no payment would have been made to any participant in our cash incentive plan, including our NEOs. Because our total company pre-tax profit performance fell between the threshold goal and the maximum goal, and because the cash incentive payment of each of our NEOs is based in whole or in part on our total company performance, each of our NEOs received a cash incentive payment that was less than the maximum cash incentive that he could have earned for fiscal 2008, as follows:
Cash Incentive Opportunity. The cash incentive amounts that our NEOs may earn are expressed as a percentage of each NEOs base salary. For fiscal 2008, the CNGC approved a larger cash incentive opportunity for our NEOs than in prior years. Despite our relatively strong operating performance during fiscal 2007, our NEOs failed to realize a substantial portion of their performance-based compensation for that year. As a result, the CNGC determined that the compensation realized by our NEOs during fiscal 2007 was not consistent with their level of performance for the fiscal year, and that this discrepancy gave rise to retention risks. After multiple meetings at which the CNGC considered various alternatives, the CNGC decided to address this discrepancy by increasing the maximum cash incentive opportunity for each of our NEOs for fiscal 2008, as set forth on the table below. The executive target amounts represent the incentive percentages that, absent the performance and retention considerations described above, our NEOs would normally receive under our cash incentive plan. The plan opportunity amounts represent the increased cash incentive opportunities approved by the CNGC for fiscal 2008 only.
At the end of fiscal 2008, the CNGC approved actual incentive payouts as shown on the table below. For some of our NEOs, the CNGC exercised negative discretion to reduce the actual payout approved below the plan opportunity payout that resulting from the application of the payout percentages described above.
In exercising its discretion to approve the actual incentive payouts shown above, the CNGC considered the following factors:
In considering these factors, the CNGC consulted with our CEO regarding how each of these factors applied to each of the other NEOs. In applying these factors to our CEO, the CNGC consulted with our Chairman. The CNGC concluded that in retrospect, the corporate and division performance goals for fiscal 2008 were difficult to achieve, and that due to rising fuel prices and other economic challenges facing our customers, the business environment during fiscal 2008 increased the difficulty of achieving these goals. The CNGC also considered the recommendations of Watson Wyatt with respect to the appropriate incentive payout for each NEO.
Performance Shares. Goals for performance shares are expressed in terms of average performance over the performance period. All performance shares granted prior to January 2007 vested only if we achieved the threshold goals for all applicable performance measures. For example, the performance shares with a performance period ending January 31, 2008 would vest only if both our average revenue growth and our average return on investment exceeded the threshold goals for those metrics. The following table shows the performance goals applicable to the performance shares with a performance period ending January 31, 2008:
Because we failed to satisfy the threshold average revenue growth goal for the performance cycle ended January 31, 2008, all of the performance shares held by our NEOs for that performance cycle failed to vest and were cancelled.
Beginning with the performance shares granted in January 2007 as part of fiscal 2008 compensation, we linked the vesting of a portion of the performance shares to the achievement of our goals under one performance measure and the vesting of the balance of the performance shares to the achievement of our goals under the other performance measure. We made this change to link more directly the achievement of a particular performance measure with compensation. Of the performance shares awarded in January 2007 as part of fiscal 2008 compensation, 40 percent were tied to revenue growth targets. The remaining 60 percent were dependent on our performance against return on investment targets.
What perquisites and other benefits do our NEOs receive?
Our NEOs receive a limited number of perquisites and supplemental benefits. We cover the cost of annual physical examinations. We provide each NEO with personal use of our aircraft for a specified number of hours each year. Certain NEOs receive monitoring and maintenance of home security systems. Our NEOs also receive company-paid life and accidental death and dismemberment insurance. Our NEOs also are entitled to benefits available to Associates generally, including a Wal-Mart discount card, a limited 15 percent match of purchases of our common stock through our Stock Purchase Plan, medical benefits, and foreign business travel insurance. We provide these perquisites and supplemental benefits to attract and retain talented executives to our company and to retain our current executives.
What types of retirement benefits are our NEOs eligible for?
Our NEOs are eligible for the same retirement benefits as our officers generally, such as participation in our Deferred Compensation Plan. They may also take advantage of other benefits available more broadly to our Associates, such as our Profit Sharing/401(k) Plan, and our SERP, which is a non-qualified, non-defined benefit plan in which all of our Associates participate to the extent the Internal Revenue Code limits the amounts we would ordinarily contribute for their benefit under our Profit Sharing/401(k) Plan.
Process for Establishing NEO Compensation
What is the CNGCs role in determining NEO compensation?
Under its charter, the CNGC is responsible for establishing and approving annually the compensation of our CEO and, in consultation with the CEO, our other Executive Officers, including our other NEOs. More information regarding the members of the CNGC and their responsibilities is described under Board Committees beginning on page 12.
The CNGC meets numerous times each year as part of the process of establishing NEO compensation. The CNGC met twice in January 2007, prior to the start of our fiscal 2008, to consider and approve the total compensation for our NEOs for fiscal 2008 and to select the performance metrics that would apply to that compensation. The Committee had three additional meetings in February and March of 2007 to consider and establish the specific performance goals applicable to the performance-based elements of NEO compensation for fiscal 2008. The CNGC reviewed and certified our fiscal 2008 results for the performance-based elements of fiscal 2008 NEO compensation in March 2008. The CNGC also met eight times in late fiscal 2008 and early fiscal 2009 to approve changes to the design of our executive compensation program and to approve NEO compensation for fiscal 2009.
Given the importance of executive compensation decisions, we have an extensive agenda planning and review process. Each regularly scheduled CNGC meeting agenda is reviewed in advance by our Corporate Secretary, the Executive Vice President of our People Division, the CEO, our Chairman, and the chair of the CNGC to ensure that the appropriate matters are considered at each meeting, that appropriate time is allocated to each agenda item, and that CNGC members have appropriate input into, and information regarding, each agenda item.
What is the role of management and compensation consultants with respect to NEO compensation?
When evaluating, establishing and approving the compensation of our NEOs other than the CEO, the CNGC considers the performance evaluations provided by our CEO and the recommendations provided by our Chairman, our People Division, and our CEO. With respect to the compensation of our CEO, our Chairman, with support from our People Division, makes recommendations to the CNGC. As part of this process, our CEO reviews his annual performance evaluations of the other NEOs with the CNGC.
Our People Division engages compensation consultants to assist it in formulating its recommendations to the CNGC regarding NEO compensation. In analyzing the appropriate level of compensation for our NEOs for fiscal 2008, our People Division relied on benchmarking data and a benchmarking system developed by the Hay Group, Inc. regarding executive pay at peer companies, as described below. The Hay Group generally only advises management on compensation matters but in the past has been and, in the future, may be engaged to assist our company with non-compensation-related services. Representatives of the Hay Group are available to meet with the CNGC independently at the CNGCs request.
In early 2007, following an extensive selection and interview process conducted by members of the CNGC, the CNGC engaged Watson Wyatt as its independent consultant to advise the CNGC on executive compensation matters and assist in assessing and establishing the compensation of Executive Officers, including our NEOs. Watson Wyatt reports directly and exclusively to the CNGC, and Watson Wyatts role in establishing NEO compensation is determined solely by the CNGC. The CNGC calls on Watson Wyatt when it deems necessary or advisable to obtain Watson Wyatts advice or recommendations. During fiscal 2008, representatives of Watson Wyatt attended all CNGC meetings at which NEO compensation was an agenda item and consulted frequently with members of the CNGC independently of management. Watson Wyatt also made recommendations to the CNGC regarding the compensation of our CEO. Watson Wyatt assisted the CNGC in evaluating the appropriateness of the compensation to be provided to our NEOs for fiscal 2008 and fiscal 2009 and the changes to our executive compensation program for fiscal 2009. In this role, representatives of Watson Wyatt attended portions of CNGC meetings during which executive compensation matters were considered, and met with and advised members of the CNGC on executive compensation matters, including the proposed compensation of our NEOs, outside of CNGC meetings.
The CNGC has sole authority to retain, terminate, and approve the fees of Watson Wyatt. Prior to its engagement as independent consultant to the CNGC, Watson Wyatt has, from time to time, been engaged by our company on various matters. As a result, Watson Wyatt has provided immaterial amounts of services to our company unrelated to the executive compensation consulting services provided to the CNGC. Under the terms of its engagement by the CNGC, Watson Wyatt may not be engaged by Wal-Mart for additional consulting services unless such services are approved by the CNGC. The CNGC has not approved any such additional services since its engagement of Watson Wyatt. The CNGC is confident that Watson Wyatt provides it with independent and objective advice on executive compensation matters.
No other consultants played a role in establishing NEO compensation for fiscal 2008. Prior to beginning the process of establishing NEO compensation for fiscal 2009, our People Division hired Mercer LLC to assist it in conducting a review of our executive compensation programs. Our People Division and Mercer evaluated our existing executive compensation programs and interviewed our Chairman, our CEO, our other NEOs, other members of our senior management, and members of the CNGC regarding those programs. Based in part on Mercers review, our People Division recommended changes to the design and composition of the compensation granted to our Executive Officers beginning in fiscal 2009, as described below. During this process, Watson Wyatt reviewed the reports of Mercer prepared in connection with this review and assisted the CNGC in evaluating the reports and recommendations of the People Division. Representatives of Mercer attended one meeting of the CNGC
during fiscal 2008 and were available to meet with the CNGC independently at the CNGCs request. We have engaged Mercer or its affiliates to perform other services unrelated to executive compensation. These services include advice regarding non-executive compensation, healthcare, and insurance consulting services. M. Michele Burns, a member of our Board who does not serve on the CNGC, is Chairman and Chief Executive Officer of Mercer. Ms. Burns did not participate in the consulting services provided to us by Mercer. Additionally, the services provided by Mercer were reviewed by our Internal Audit department and approved by the Audit Committee under the terms of Wal-Marts Transaction Review Policy.
How does the CNGC set TDC?
The process of setting TDC is a dynamic one. In setting TDC for fiscal 2008, the CNGC considered, among other things:
We do not have any predetermined formula that determines which of these factors is more or less important in setting TDC, and the importance of specific factors may vary from NEO to NEO. The CNGC considers the individual circumstances of each NEO and the needs of our company when determining the importance of these factors in setting TDC for each NEO.
In evaluating individual performance, the CNGC relied on annual performance evaluations and, for each NEO other than the CEO, on discussions with our CEO regarding such NEOs performance during the fiscal year. In assessing our CEOs performance, the CNGC also relied on an evaluation of our CEOs performance conducted by our Chairman and by the chair of the CNGC and on discussions with our Chairman regarding our CEOs performance.
As a result of this process, the CNGC set TDCs for fiscal 2008 that provided our NEOs with the opportunity to earn total compensation in the top quartile of the total compensation earned by executive officers who hold comparable positions in each of our peer groups. Within this quartile, the CNGC did not attempt to establish TDCs at a specific percentile of any peer group. Rather, the CNGC viewed the benchmarking process as a general guide as to the reasonableness and competitiveness of compensation opportunities for our NEOs.
Because a significant majority of each of our NEOs TDC is tied to performance, and because we did not achieve our maximum performance targets applicable to the performance-based elements of compensation, our NEOs generally realized compensation for fiscal 2008 well below their TDC amounts.
How is benchmarking data used by the CNGC?
During the compensation setting process for fiscal 2008, the CNGC considered benchmarking data in several ways. First, benchmarking data was used to help determine the fiscal 2008 TDC amounts for each NEO. In benchmarking our NEOs against executives at peer group companies, the CNGC relied on comparative data and analyses provided to our People Division by the Hay Group to determine which positions at peer companies are most comparable to those our NEOs. Through this process, the Hay Group analyzes positions at our company and at peer group companies and sizes each job using a consistent methodology to represent the relative scope and difficulty of these jobs. This results in a point score for each job that is intended to provide for more accurate comparisons by referencing jobs of similar size. Our People Division and the CNGC relied on these comparisons to determine those positions at peer group companies that are most comparable, in terms of job scope and responsibilities, to the positions and job responsibilities of our NEOs. Using this data does not produce comparable positions at all of our peer group companies for all of our NEOs.
The CNGC also used benchmarking data when allocating each NEOs TDC among the various elements of compensation as a general guide to ensure that the value of each element was set at an appropriately competitive level consistent with our emphasis on performance-based compensation.
What peer groups do we benchmark the compensation of our NEOs against?
Our company is the worlds largest retailer by a wide margin and has significantly more extensive international operations than most publicly traded U.S.-based retailers. As a result, the CNGC believes that simply benchmarking NEO compensation against a retail industry index would not provide the CNGC with sufficient information with which to determine the appropriate compensation of our NEOs. Therefore, when setting NEO compensation for fiscal 2008, we reviewed publicly-available information for three peer groups to determine how our NEOs compensation compared to the compensation paid to executives in comparable positions at other companies. Since information regarding positions comparable to those of some of our NEOs is not available for many of the companies in our peer groups, using three peer groups also resulted in a larger number of positions to which our NEOs compensation could be benchmarked. Data regarding each of these peer groups was compiled by our People Division with the assistance of the Hay Group based on publicly available information.
Retail Industry Survey. This survey allowed us to compare our NEO compensation to that of our primary competitors in the retail industry. For fiscal 2008, the Retail Industry Survey included all publicly traded U.S. retail companies with annual revenues exceeding approximately $9 billion, which were:
Top 50. At the time of our benchmarking for fiscal 2008, we were approximately 15 times larger in terms of annual revenue, and approximately ten times larger in terms of market capitalization, than the Retail Industry Survey at the median. To take into account this size discrepancy and the corresponding complexity of our NEOs job responsibilities, we also benchmarked our NEO pay against the fifty largest public companies (including Wal-Mart) in terms of market capitalization at the time of the review:
Select Fortune 100. Finally, we benchmarked our NEO compensation against a select group of companies within the Fortune 100. This group, which we refer to as the Select Fortune 100, was chosen from among the Fortune 100 by the People Division with the assistance of the Hay Group. The Select Fortune 100 includes companies whose primary business is not retailing, but that are similar to us in one or more ways, such as global operations, business model, and size. We excluded retailers from this group, since those companies were already represented in the Retail Industry Survey. We also excluded companies with business models that are broadly divergent from ours, such as financial institutions and energy companies. The 37 companies included in the Select Fortune 100 Survey used to determine fiscal 2008 compensation were:
We did not attempt to quantify or otherwise assign any relative weightings to any of these peer groups or to any particular members of a peer group when benchmarking against them.
What other information does the CNGC consider when establishing TDC?
The CNGC also reviews other information in the process of setting TDC, although the CNGC generally considers these factors to be less significant than the factors described above.
Realized Compensation. The CNGC also reviews an estimate of the realized compensation of each of our NEOs for the prior fiscal year. The CNGC reviews this information in order to understand the compensation actually earned by each NEO and to determine whether such realized compensation is consistent with its view of the performance of each NEO. No specific quantitative criteria is used in performing this analysis; rather, the CNGC views this information as helpful in making a subjective determination as to the appropriateness and reasonableness of each NEOs compensation and of the effectiveness of our compensation programs in achieving our objectives.
Tally Sheets. Beginning with the fiscal 2009 NEO compensation process, the CNGC also reviewed tally sheets prepared by Watson Wyatt. These tally sheets summarized the total value of the compensation received by each NEO during fiscal 2008 and quantified the value of each element of that compensation, including perquisites and other benefits. They also quantified the amounts that would be owed to each NEO upon retirement or separation from our company.
Fiscal 2009 Compensation
What are the significant changes to our executive compensation program for fiscal 2009?
Prior to setting compensation for fiscal 2009, the CNGC undertook a comprehensive review and analysis of our executive compensation program to determine if any improvements could be made to more closely tie executive compensation with performance that can be impacted by our executives, and to align our executive compensation program with shareholder interests. This process began with Mercers review of our existing program and included the review and recommendations from our People Division and advice to the CNGC regarding these recommendations from Watson Wyatt. As a result of this review, the CNGC approved changes to our executive compensation program for fiscal 2009, including:
These changes are discussed in more detail below.
Cash Incentive Plan. For fiscal 2009, the CNGC set target pre-tax profit and operating income goals, in addition to the threshold and maximum goals set in prior years. Upon achieving target goals, our NEOs would receive an incentive payout equal to 80% of the incentive payout that would be received if maximum performance goals are achieved. The CNGC generally seeks to set maximum and threshold pre-tax profit and operating income goals such that the relative difficulty of achieving these goals, based on the information available at the time the goals are set, is consistent from year to year. The CNGC set target performance goals for fiscal 2009 to be achievable if we perform well and in line with our expectations.
In addition, for fiscal 2009, the CNGC approved an individual performance component to the cash incentive plan. Under the plan as revised, the CNGC may, at its discretion, increase or decrease the amount of any individual NEOs cash incentive payment by up to 20% of the target payout. Any such increase or decrease would be based on the CNGCs subjective evaluation of an NEOs individual performance.
For fiscal 2009, the threshold, target and maximum cash incentive payments for each of our continuing NEOs, as a percentage of base salary, are as follows:
In addition, each NEO will continue to have diversity goals. If an NEO does not achieve these diversity goals, his incentive payment could be reduced by up to 15 percent.
Equity Mix. Over the past several years, an increasingly greater portion of equity-based compensation has been tied to our performance through the use of performance shares. For fiscal 2009, performance shares constitute approximately 75% of the total value of each NEOs total annual equity award, up from approximately two-thirds for the prior year.
Restricted Stock. For fiscal 2008 and for prior fiscal years, our NEOs received stock options as the time-based component of their annual compensation. For fiscal 2009, our NEOs received restricted stock instead of stock options, which constituted approximately 25% of the total value of each NEOs total annual equity award. The CNGC viewed the time-based component of annual equity awards as primarily serving a retention function and determined that restricted stock would be a more effective tool for this purpose. As with stock options, the recipient must remain employed by us for a period of time before the restricted stock vests, and the value of the restricted stock will fluctuate along with any increases or decreases in the price of our common stock.
Performance Share Metrics. For the performance shares granted as part of fiscal 2009 compensation, the CNGC retained return on investment as one of the performance metrics. However, the CNGC replaced the average revenue growth metric used in prior years with a domestic comparable store sales improvement metric and a growth in International Division revenue. For our continuing NEOs, the weighting of these metrics for fiscal 2009 is as follows:
The CNGC chose domestic comparable store sales as a performance metric because it believes it is a key driver of shareholder returns, and because investors look to comparable store sales as an important measure of performance in the retail industry.3 Since officers with primary responsibility for our international operations have little control over our domestic comparable store sales, the CNGC instead established total revenue growth in our International operations as a performance share metric for these officers.
Performance Share Goals. As a result of its review of the performance share awards and how well they served their intended purpose, for the fiscal 2009 awards, the CNGC also changed the manner in which performance goals are set and measured. Previously, performance goals were set at the beginning of the three-year vesting period for the entire three-year period. After several years of experience with performance shares, we determined that, as a practical matter, setting goals at the beginning of a three-year period for the entire period could result in performance goals that were either not realistically achievable or could prove to be too easy to achieve. In either instance, performance shares would cease to be an effective tool in motivating performance. The performance shares granted in January 2008 will continue to have a three-year vesting period and will continue to be based on performance over that three-year period. However, the CNGC will set the goals for each fiscal year within the three-year performance cycle early in that fiscal year. At the end of each year, the CNGC will determine our performance as a percentage of our target performance goal for that year. At the end of the full three-year performance cycle, we will calculate the average of these performance percentages for the three years to determine whether any performance shares will vest and, if so, how many. This change should give the CNGC the ability to set more effective performance goals based on more current information and over a more realistic time frame.
For fiscal 2009, the CNGC set performance goals applicable to performance shares at levels which, if we perform well and in line with expectations, target performance goals should be achievable. Our company must perform at an extraordinary level in order to achieve maximum performance goals for 2009.
General Executive Compensation Matters
What are our practices for granting stock options and other equity awards?
Option Exercise Prices. While stock options are not a part of our annual compensation for fiscal 2009, we may still grant stock options in special circumstances. We grant stock options with an exercise price equal to the fair market value of our common stock on the date of grant.
Timing of Equity Awards. The CNGC meets each January to approve and grant annual equity awards to our NEOs for the upcoming fiscal year beginning February 1. Because of the timing of these meetings, equity grants awarded for an upcoming fiscal year are reported in the executive compensation tables appearing in this proxy as granted during the prior fiscal year. The CNGC meets again each March to establish the performance goals applicable to the performance shares and any other performance-based equity granted at the January meeting. Any special equity grants to Executive Officers during the year are approved by the CNGC at a meeting or by unanimous written consent.
Does the CNGC take tax consequences into account when designing executive compensation?
Yes. Section 162(m) of the Internal Revenue Code provides that compensation in excess of $1 million paid to certain of our NEOs is generally not deductible unless it is performance-based. A significant portion of the compensation awarded to our NEOs satisfies the requirements for deductibility under Section 162(m). When designing NEO compensation, the CNGC considers whether particular elements of that compensation will be deductible for federal income tax purposes. The CNGC retains the ability to evaluate the performance of our NEOs and to pay appropriate compensation, even if some compensation will not be deductible under federal tax laws. Because the CNGC exercised negative discretion with respect to cash incentive payments for fiscal 2008, the CNGC believes that the full amounts of the cash incentive payments made to our NEOs for fiscal 2008 will meet the deductibility requirements under Section 162(m). With the exception of any portion of the cash incentive payment attributable to individual performance, the CNGC believes that any cash incentive payments made to our NEOs for fiscal 2009 will also meet these deductibility requirements.
Do we have employment agreements with our NEOs?
We do not have employment agreements with any of our NEOs. All NEOs are employed on an at-will basis.
Do we have severance agreements with our NEOs?
We have entered into a post-termination and non-competition agreement with each NEO. Each agreement provides that, if we terminate the NEOs employment for any reason other than his violation of company policy, we will generally pay the NEO an amount equal to two times the NEOs base salary, one-fourth of which is paid upon termination of employment and the balance of which is paid in installments commencing six months after separation. The amount payable may be reduced by the amount of any earnings that the NEO receives from other employment during that period.
Under these agreements, each NEO agrees that for a two-year period following his termination of employment, he will not participate in a business that competes with us and will not solicit our Associates for employment. In this context, competing business means any retail, wholesale, or merchandising business that sells products of the type sold by us, is located in a country in which we have a store or in which the executive knows we expect to have a store within the next two years, and has annual retail sales revenue of at least $2 billion. These agreements reduce the risk that any of our former NEOs would use the skills and knowledge they gained while with us for the benefit of one of our competitors during a reasonable period after leaving our company. For more information regarding payments that we may be required to make to our NEOs upon termination of employment, see the disclosure below entitled Potential Payments Upon Termination or Change in Control.
In January 2008, Mr. Menzer announced that he would retire from the Company effective March 1, 2008. After negotiation, we entered into a separation agreement with Mr. Menzer in connection with his retirement. This agreement superseded the post-termination and non-competition agreement to which he was a party. Under the terms of the separation agreement, Mr. Menzer agreed not to compete with us for a period of three years from the date of his departure and is subject to confidentiality, cooperation, non-disclosure and non-solicitation obligations. Pursuant to this separation agreement, Mr. Menzer will receive transition payments totaling $6,710,916 over the two-year period following his departure, subject to his compliance with the obligations described above. This agreement also accelerated the vesting of 222,404 Shares of restricted stock held by Mr. Menzer to his departure date.
Does our compensation program contain any provisions addressing the recovery or nonpayment of compensation in the event of misconduct?
Yes. Our cash incentive plan provides that, in order to be eligible to receive an incentive payment, the participant must have complied with our policies, including our Statement of Ethics, at all times. It further provides that if the CNGC determines, within twelve months following the payment of an incentive award, that prior to the payment of the award, a participant has violated any of our policies or otherwise committed acts inimical to the best interests of our company, the recipient must repay the incentive award upon demand. Similarly, our 2005 Stock Incentive Plan provides that if the CNGC determines that an Associate has committed any act inimical to the best interests of our company, he or she will forfeit all unexercised options and unvested Shares of restricted stock and performance shares.
Are our NEOs subject to any minimum requirements regarding ownership of our stock?
To further align the long-term interests of our NEOs and our shareholders, our Board has approved the following stock ownership guidelines:
The Board or CNGC can modify these guidelines in the event of dramatic and unexpected changes in the market value of our Shares, or in other circumstances that the Board or CNGC deem appropriate. These guidelines will become effective June 2008 for each NEO with the exception of Eduardo Castro-Wright, for whom the guidelines will become effective February 2010.
Are there any restrictions on the ability of NEOs to engage in speculative transactions involving company stock?
Yes. Our Insider Trading Policy allows NEOs to trade in our stock only during open window periods and only after they have pre-cleared transactions. Moreover, NEOs may not at any time engage in any short selling, buy or sell exchange-traded puts or calls, or otherwise engage in any transaction in derivative securities that reflect speculation about the price of our stock or that may place their financial interest against the financial interests of our company.
This table shows the compensation for fiscal 2008 and fiscal 2007 for each of the Companys NEOs.
The expense relating to restricted stock awards to the NEOs is recognized ratably in monthly increments over the vesting period of the award. Restricted stock awards vest on a number of different schedules. Certain restricted stock awards vest in installments of 25 percent of the Shares of restricted stock awarded on the third and fifth anniversaries of the grant date, with the remaining 50 percent vesting on the seventh anniversary of the grant date. Other restricted stock vests only upon the retirement on or after age 65 of the recipient.
Restricted stock granted to the NEOs on January 21, 2008 will vest in three equal installments on the second, fourth and fifth anniversaries of the grant date. Mr. Castro-Wright also received a second grant that will vest in equal installments on the third and fifth anniversaries of the grant date. During fiscal 2008, unvested restricted stock awards held by Mr. Schoewe as to
46,744 Shares that were originally scheduled to vest upon his retirement on or after age 65 were modified so that the restricted stock will vest on the following dates: 26,572 Shares on January 21, 2011; 9,592 Shares on January 5, 2012; and 10,580 Shares on January 3, 2013.
As to awards of restricted stock made prior to January 2008, within thirty days of receiving a restricted stock award, a recipient may elect to defer payment of the restricted stock in the form of cash or Shares once the restricted stock vests. Awards as to which the recipients have elected to defer the restricted stock award in cash or have not yet made an election are treated as a liability of the Company, which is marked-to-market monthly through expense using the closing Share price on the last business day of the month, which was $50.74 on January 31, 2008 and $47.69 on January 31, 2007. Where recipients elect to have awards paid or deferred in Shares, the award is treated as an equity award, and the expense is calculated using the closing Share price on the last business day of the month of election. The awards of restricted stock made on or after January 21, 2008 may be paid or deferred only in Shares. The amounts reflected in this column include both cash and Share settled awards.
Performance share award expense is recognized ratably in monthly increments over the vesting period of the award, generally three years, taking into account the likelihood of the Company achieving the performance goals set by the CNGC for each award. The following assumptions were made as of January 31, 2008 and 2007, regarding the likelihood of the Company achieving the performance goals for awards for which an amount is reflected in this column for each fiscal year shown:
Recipients of performance share awards scheduled to vest on January 31, 2009 or January 31, 2010 may receive payment in cash or Shares at vesting and must elect the form of payment no later than six months before the end of the performance period. For those awards made to recipients who have elected to receive the award in cash or have not yet made an election, the award is treated as a liability, which is marked-to-market monthly through expense, using the closing Share price on the last business day of the month, which was $50.74 on January 31, 2008 and $47.69 on January 31, 2007. For awards to be paid or deferred in Shares, the award is treated as an equity award, and the expense is calculated using the closing Share price on the last business day of the month of election. Awards made during or after January 2008 may be paid or deferred solely in Shares. Because awards made during January 2008 were not communicated to the recipients until after the end of fiscal 2008, no expense related to these performance shares was recognized during fiscal 2008. The amounts shown in this column include both cash and Share settled awards.
During fiscal 2008 and fiscal 2007, no forfeitures of restricted stock or performance-based restricted stock awards occurred. On March 5, 2008, the CNGC determined that the threshold performance goals for the three-year performance period ending January 31, 2008 applicable to performance shares granted to the NEOs and certain other senior executives and scheduled to vest on January 31, 2008 had not been satisfied. On March 7, 2007, the CNGC determined that the threshold performance goals for the two-year performance period ending January 31, 2007 applicable to performance shares granted to the NEOs and certain other senior executives and scheduled to vest on January 31, 2007 had not been satisfied. As a result, the performance shares awarded to the NEOs that had been scheduled to vest on January 31, 2007 and January 31, 2008 were cancelled, as follows:
Because these performance shares did not vest, the cumulative expense recognized for the performance shares that would have vested on January 31, 2008 and that would have vested on January 31, 2007 was reversed during fiscal 2008 or fiscal 2007, as applicable. As a result, the amounts reflected in this column including the following credits:
The value shown for personal use of Company aircraft is the incremental cost to the Company of such use, which is calculated based on the variable operating costs to the Company per hour of operation, which include fuel costs, maintenance, and associated travel costs for the crew. Fixed costs that do not change based on usage, such as pilot salaries, depreciation, insurance, and rent, were not included.
All other compensation for each NEO in fiscal 2008 and fiscal 2007 also includes Company contributions to the Profit Sharing/401(k) Plan and term life insurance premiums paid by Wal-Mart for the benefit of each officer for those fiscal years.
This amount also includes the Companys cost for a senior executive physical for Messrs. Scott, Duke and Castro-Wright in fiscal 2008 and fiscal 2007 and for Mr. Menzer in fiscal 2008. This amount also includes monitoring and maintenance costs for home security equipment for Messrs. Scott, Menzer and Duke in fiscal 2008 and fiscal 2007 and for Mr. Schoewe in fiscal 2007. For Mr. Menzer, the amount for fiscal 2008 includes costs for Company-paid telephone service. For Mr. Castro-Wright, the amount for fiscal 2008 includes the costs of tax preparation services, and for fiscal 2007 includes certain tax equalization payments related to his former expatriate assignment as president and CEO of Wal-Mart de Mexico, S.A. de C.V. In addition, the amounts for fiscal 2008 for each NEO included the amounts of certain other tax gross-up payments. The values of these personal benefits are based on the incremental aggregate cost to the Company and are not individually quantified because none of them individually exceed the greater of $25,000 or 10% of the total amount of perquisites and personal benefits for such NEO.
Other than post-termination agreements containing covenants not to compete (as described below under Potential Payments upon Termination or Change in Control), the Company does not have employment agreements with its NEOs. The CNGC reviews and approves at least annually the compensation package of all Executive Officers, consisting of base salary, annual cash incentive payments, equity awards, and perquisites. The various incentive and equity compensation plans and types of awards available under the Companys plans are described more fully in the CD&A and more detail regarding the specific incentive and equity awards granted to NEOs during the Companys fiscal 2007 and fiscal 2008 are set forth in the Grants of Plan-Based Awards table and accompanying notes.
After serving as President and CEO of Wal-Mart de Mexico, S.A. de C.V., Eduardo Castro-Wright accepted an offer of employment from Wal-Mart Stores, Inc. on December 20, 2004, which set forth his base salary, annual incentive payment, certain bonus payments related to his expatriate assignment with Wal-Mart de Mexico, S.A. de C.V., an annual stock option award, an initial restricted stock award, and the benefits to which Associates of the Company are generally entitled (e.g., health insurance and participation in the Stock Purchase Plan and the Profit Sharing/401(k) Plan). That offer was made in connection with Mr. Castro-Wright assuming the position of Executive Vice President and Chief Operating Officer of the Wal-Mart Stores Division.
GRANTS OF PLAN-BASED AWARDS
The CNGC must certify that the performance goals were attained prior to the vesting of any performance shares. Holders of performance shares do not earn dividends or enjoy other rights of shareholders with respect to such performance shares until such performance shares have vested. These performance shares will vest, if at all, upon certification of performance relative to the performance goals for the three-year period ending January 31, 2011. The CD&A provides additional information regarding the performance shares and the performance metrics used to determine if performance shares will vest and, if so, the number of Shares to vest.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The numbers in this column also include Shares of performance-based restricted stock for which the performance conditions have been satisfied, but which remain subject to service-based vesting requirements. These Shares of performance-based restricted stock held by the NEOs are scheduled to vest in amounts and on the dates shown in the following table:
OPTION EXERCISES AND STOCK VESTED
NONQUALIFIED DEFERRED COMPENSATION
The table below reflects the year in which each Named Executive Officer first made contributions to the Deferred Compensation Plan:
Under the Deferred Compensation Plan, all officers may defer up to 100 percent of their base salary and annual incentive awards under the Management Incentive Plan. Interest accrues on amounts deferred at an interest rate set annually by the CNGC, which is typically based on the ten-year Treasury note rate plus 2.70 percent. For the 2007 Deferred Compensation Plan year, the interest rate was 7.07 percent. The interest rate for the 2008 Deferred Compensation Plan year, which began on April 1, 2007, and ended on March 31, 2008, was 7.36 percent. The interest rate was the ten-year Treasury note rate determined as of the first business day of January 2007, plus 2.70 percent.
The Deferred Compensation Plan provides an incentive payment to reward participants who have remained with the Company ten or more consecutive full years beginning with the year the participant first made a deferral under the Deferred Compensation Plan. Specifically:
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Most of the Companys plans and programs, including its deferred compensation plans, contain provisions specifying the consequences of a termination of employment. These provisions are described below. Other than the non-competition agreements described below, the Company does not have any employment agreements with its NEOs. The Company does not have any pension plans or other defined benefit retirement plans in which the NEOs participate.
Non-competition agreements. The Company has entered into an agreement with each of the NEOs that contains a covenant of such NEO not to compete with the Company and that provides for certain post-termination payments to be made to such NEO. Each agreement prohibits the NEO, for a period of two years following his termination of employment with the Company for any reason, from participating in a business that competes with the Company and from soliciting the Companys Associates for employment. For purposes of the agreements, a competing business includes any retail, wholesale, or merchandising business that sells products of the type sold by the Company at retail, is located in a country in which the Company has a store or in which the NEO knows the Company expects to have a store within the next two years, and has annual retail sales revenue of at least $2 billion. No amounts are payable to an NEO in the future with respect to such covenant not to compete. Each agreement also provides that, if the NEOs employment is terminated by the Company for any reason other than his violation of Company policy, the Company will continue to pay his base salary in effect immediately prior to his termination for two years following termination of employment, less any earnings the NEO receives from other employment. Using each executive officers base salary for fiscal 2009, the maximum total payments by the Company to each continuing NEO under such termination circumstances would be as follows:
Equity awards. The notice of award applicable to each of the types of equity awards granted to NEOs generally includes provisions specifying the treatment of the award in the event of termination under various circumstances, as follows:
In addition, the CNGC has discretion to accelerate the vesting of any equity awards and to make other payments or grant other benefits upon a severance from the Company.
The NEOs also participate in the Companys deferred compensation plans, the general terms of which are described in the CD&A. See Nonqualified Deferred Compensation above for information regarding the aggregate total compensation deferred by each NEO as of January 31, 2008.
Mr. Menzer retired from the Company on March 1, 2008. On January 21, 2008, the Company entered into a separation agreement with Mr. Menzer. Under this agreement, which was reviewed and approved by the CNGC, Mr. Menzer is entitled to certain conditional benefits following his departure from the Company. The agreement supersedes a post-termination agreement and covenant not to compete to which the Company and Mr. Menzer were previously parties.
Under the terms of the agreement, Mr. Menzer is obligated not to compete with the Company for a period of three years from his retirement. Mr. Menzer is also subject to certain confidentiality, cooperation, non-disclosure and non-solicitation obligations. Pursuant to the agreement, Mr. Menzer will receive transition payments totaling $6,710,916 over the two-year period following the date of his retirement, subject to his compliance with the obligations described above. Also under the agreement, the vesting of 222,404 Shares of restricted stock held by Mr. Menzer was accelerated to March 1, 2008.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information as of the end of fiscal 2008 with respect to Shares that may be issued under the Companys existing equity compensation plans.
The following tables set forth ownership of Shares by major shareholders, directors, director nominees, and Executive Officers of the Company.
HOLDINGS OF MAJOR SHAREHOLDERS
There were 3,952,259,534 Shares outstanding on March 31, 2008. The following table lists the beneficial owners of five percent or more of the Shares as of March 31, 2008.
HOLDINGS OF OFFICERS AND DIRECTORS
This table shows the number of Shares held by each director, director nominee, and the Named Executive Officers on March 31, 2008. It also shows the Shares held by all of Wal-Marts directors, director nominees, and Executive Officers as a group on that date.