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Xerox DEF 14A 2008 Documents found in this filing:SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section
14(a) of the Filed by the Registrant
[x] Xerox Corporation
(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): 1) Title of each class of
securities to which transaction applies:
April 11, 2008 Dear Shareholders: You are cordially invited to attend the 2008 Annual Meeting of Shareholders of Xerox Corporation to be held on Thursday, May 22, 2008, at the Hyatt Regency Greenwich, 1800 East Putnam Avenue, Greenwich, Connecticut. Your Board of Directors and management look forward to greeting in person those shareholders able to attend. At the Annual Meeting of Shareholders you will be asked to vote upon the election of ten directors, to ratify the selection of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2008 and to approve an amendment to the Company’s certificate of incorporation requiring majority voting in non-contested director elections. The Board of Directors unanimously recommends that you vote in favor of each of these proposals. There will also be one shareholder proposal submitted for shareholder vote. Your Board believes that adopting this shareholder proposal is not in the best interest of the Company and its shareholders, and unanimously recommends a vote against this proposal. After 18 years of dedicated service, Ralph Larsen is retiring from the Board of Directors. We are deeply grateful for his contributions to the Company. The remaining members of the Board of Directors are standing for reelection. The proposed slate of directors includes eight independent directors and two employee directors. It is important that your shares be represented and voted at the Annual Meeting of Shareholders, regardless of whether or not you plan to attend in person. Therefore, you are urged to vote your shares using one of the methods described in the following pages. Voting instructions are detailed in the accompanying voting instruction and proxy card. For the Board of Directors,  Anne M. Mulcahy Chairman and Chief Executive Officer Notice of 2008 Annual Meeting of Shareholders
Important Notice Regarding the
Availability of Proxy Materials for the The Proxy Statement and 2007 Annual
Report are available
at By order of the Board of Directors,
April 11, 2008 1 TABLE OF CONTENTS
2
3 PROXY STATEMENT GENERAL The Meeting The Board of Directors of Xerox Corporation (Company) is requesting your proxy for the 2008 Annual Meeting of Shareholders to be held on May 22, 2008, beginning at 9:00 a.m., and any adjournments that follow. The meeting will be held at the Hyatt Regency Greenwich, 1800 East Putnam Avenue, Greenwich, Connecticut. Shares Entitled to Vote Holders of record of the Company’s Common Stock, par value $1 per share (Common Stock), as of the close of business on March 24, 2008, are entitled to vote. On that date there were 899,072,236 shares of Common Stock outstanding. At the meeting each share of Common Stock is entitled to one vote on each proposal. Proxy Voting and Quorum If you attend the meeting, you may vote by ballot. If you do not attend the meeting, your shares can be voted only when represented by a properly submitted proxy. Shareholders of record may vote their proxies by telephone, Internet or mail. By using your proxy to vote in one of these ways, you authorize the three directors, whose names are listed on the front of the proxy card accompanying this Proxy Statement, to represent you and vote your shares. Holders of a majority of the shares entitled to vote at the meeting must be present in person or represented by proxy to constitute a quorum. You may revoke or change your proxy at any time before it is exercised, either in writing addressed to the Secretary of the Company, through the Internet or by telephone voting. Choices in Voting You have several choices in completing your voting:
ESOP Voting Instruction Beneficial owners of the shares of Common Stock held in their accounts in the Company’s Employee Stock Ownership Plan (ESOP) can instruct State Street Bank and Trust Company, as ESOP Trustee (ESOP Trustee), by telephone, Internet or mail, how to vote. No matter which method is used, the instructions are confidential and will not be disclosed to the Company. By using the voting instruction in one of these ways, you instruct the ESOP Trustee to vote the shares allocated to your ESOP account. You also authorize the ESOP Trustee to vote a proportion of the shares of Common Stock held in the ESOP trust for which no instructions have been received. Required Vote A plurality of the votes cast is currently required for the election of directors. According to the law of the State of New York, the Company’s state of incorporation, only votes cast “for” the election of directors will be counted in determining whether a nominee for director has been elected. However, in an uncontested election any nominee for director who receives a greater number of votes “withheld” for his or her election than votes “for” such election shall tender his or her 4 resignation promptly after such election. The independent directors shall then evaluate and determine, based on the relevant facts and circumstances, whether to accept or reject the resignation. Any director who so tenders a resignation shall not participate in the decision of the Board of Directors. Within 90 days following certification of the results of the election, the Board will promptly disclose its decision and the basis for that decision in a filing with the Securities and Exchange Commission (SEC). In this Proxy Statement, the Company is seeking approval of shareholders to amend to its certificate of incorporation requiring a majority vote for the election of directors in non-contested elections. If shareholders approve the amendment to the certificate of incorporation, the Company will also amend its by-laws to conform its director resignation policy to the majority vote standard, so that an incumbent who did not receive the requisite affirmative majority of the votes cast for his or her reelection would be required to tender his or her resignation to the Board. For further information on the Company proposal, see page 44 of this Proxy Statement. The affirmative vote of a majority of the votes cast is required to ratify the selection of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2008, to approve the Company proposal to amend its certificate of incorporation to require majority voting in non-contested elections and to approve the shareholder proposal. Under the law of New York, only votes cast “for” or “against” the selection of PwC, the Company proposal and the shareholder proposal will be counted in determining whether the selection of PwC has been ratified or such Company or shareholder proposal has been approved. Abstentions, broker non-votes and votes withheld are not treated as votes cast at the meeting for such purposes. PROPOSAL 1 — ELECTION OF DIRECTORS Shareholders annually elect directors to serve for one year and until their successors have been elected and shall have qualified. The ten persons whose biographies appear beginning on page 11 have been proposed by the Board of Directors to serve as directors based on the recommendation of the Corporate Governance Committee. All ten nominees bring to us valuable experience from a variety of fields. The Board of Directors has determined that each of the nominees (other than Anne M. Mulcahy, Chairman and CEO of the Company, and Ursula M. Burns, President of the Company) are independent under the New York Stock Exchange Corporate Governance Rules and the Company’s more stringent independence standards. If for any reason, which the Board of Directors does not expect, a nominee is unable to serve, the proxies may use their discretion to vote for a substitute proposed by the Board of Directors. The Board of Directors
recommends a vote Corporate Governance Xerox is committed to the highest standards of business integrity and corporate governance. All of our directors, executives and employees must act ethically. In addition, our directors must act in accordance with our Code of Business Conduct and Ethics for Members of the Board of Directors; our principal executive officer, principal financial officer and principal accounting officer, among others, must act in accordance with our Finance Code of Conduct; and all of our executives and employees must act in accordance with our Employee Code of Conduct. Each of these codes of conduct, as well as our Corporate Governance Guidelines and the charters of our Corporate Governance, Audit, Compensation and Finance Committees can be found on our website at www.xerox.com/corporategovernance. They are also available to any shareholder who requests them in writing addressed to Xerox Corporation, 45 Glover Avenue, P.O. Box 4505, Norwalk, Connecticut 06856-4505, Attention: Corporate Secretary. The Board and each of the Committees of the Board periodically review and reassess the adequacy of our overall corporate governance, Corporate Governance Guidelines and committee charters. Under our Corporate Governance Guidelines, each regularly scheduled Board meeting must include an executive session of all directors including the CEO and a separate executive session attended only by the independent directors. The Chairmen of the Corporate Governance Committee and the Compensation Committee rotate responsibility to preside over the non-management executive sessions and are responsible for providing appropriate feedback to the CEO. 5 Director Independence A director is not considered independent unless the Board determines that he or she has no material relationship with the Company. The Board has adopted categorical standards to assist its determination and the Corporate Governance Committee’s recommendation as to each director’s independence. Under these categorical standards, a director will be presumed not to have a material relationship with the Company if:
Our Board has determined that all of the nominees for election as directors have satisfied the foregoing categorical standards and are independent under the NYSE Corporate Governance Rules, with the exception of Anne M. Mulcahy, our Chairman and Chief Executive Officer, and Ursula M. Burns, our President. In addition, the Corporate Governance Committee reviews relationships involving members of the Board, their immediate family members and affiliates and transactions in which members of the Board, their immediate family members and their affiliates have a direct or indirect interest in which the Company is a participant to determine whether such relationship or transaction is material and could impair a director’s independence. In making independence determinations, the Board considers all relevant facts and circumstances from the point of view of both the director and the persons or organizations with which the director has relationships. See “Certain Relationships and Related Person Transactions.” As a result of the aforementioned review, 80% of our nominees for election as directors are deemed to be independent. Certain Relationships and Related Person Transactions Related Person Transactions Policy The Board has adopted a policy addressing the Company’s procedures with respect to the review, approval and ratification of “related person transactions” that are required to be disclosed pursuant to Item 404(a) of Regulation S-K. The policy provides that any transaction, arrangement or relationship, or series of similar transactions, in which the Company will participate or has participated and a “related person” (as defined in Item 404(a) of Regulation S-K) has or will have a direct or indirect material interest, and which exceeds $120,000 in the aggregate, is subject to review by the Corporate Governance Committee (each such transaction, a “Related Person Transaction”). In its review of Related Person Transactions, the Corporate Governance Committee reviews the material facts and circumstances of the transaction and takes into account certain factors, where appropriate, based on the particular facts and circumstances, including (i) the nature of the “related person’s” interest in the transaction; (ii) the significance of the transaction to the Company and to the “related person;” and (iii) whether the transaction is likely to impair the judgment of the “related person” to act in the best interest of the Company. No member of the Corporate Governance Committee may participate in the review, approval or ratification of a transaction with respect to which he or she is a “related person,” provided that such member can be counted for purposes of a quorum and provides such information with respect to the transaction as may be reasonably requested by other members of the committee or the Board. Certain Employment Arrangements We actively recruit qualified candidates for our employment needs. Relatives of our executive officers and other employees are eligible for hire. We currently have two employees who receive more than $120,000 in annual compensation and are related to our named executive officers. These individuals have entered into routine employment arrangements in the ordinary course of business and their compensation is commensurate with that of their peers. None of our named executive 6 officers have a material interest in these employment arrangements. One of those employees is Thomas J. Dolan, Senior Vice President, who has been with the Company for 37 years, is a corporate officer and is a sibling of Anne M. Mulcahy, Chairman and Chief Executive Officer. The Compensation Committee of the Board makes compensation decisions involving Mr. Dolan. As determined by the Compensation Committee, Mr. Dolan was paid $822,166 in base salary and bonus compensation for 2007 and was granted 49,900 performance shares during fiscal year 2007. The other employee, related to another named executive officer, is a non-executive employee and had annual compensation for 2007 that was less than $200,000. Committee Functions, Membership and Meetings Our Board of Directors has four standing committees: Audit, Corporate Governance, Compensation and Finance. Set forth below is a list of the committees of our Board, a summary of the responsibilities of each committee, the number of committee meetings held during 2007 and the members of each committee: Audit Committee (12 meetings) A copy of the charter of the Audit Committee is posted on the Company’s website at www.xerox.com/corporategovernance. The responsibilities of the Audit Committee are:
The Audit Committee is also responsible for the preparation of the audit committee report that is included in this Proxy Statement on page 44. Members: Glenn A. Britt; Richard J. Harrington; William Curt Hunter; and Robert A. McDonald. Chairman: Mr. Harrington The Board has determined that each of the members of the Audit Committee is independent under the Company’s Corporate Governance Guidelines and under the applicable SEC and NYSE Corporate Governance Rules. In addition, the Board has determined that the following members of the Audit Committee are “audit committee financial experts,” as defined in the applicable SEC rules, and are financially literate: Glenn A. Britt; Richard J. Harrington; William Curt Hunter; and Robert A. McDonald. The SEC has determined that the designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit Committee and the Board of Directors in the absence of such designation or identification. Compensation Committee (8 meetings) A copy of the charter of the Compensation Committee (Committee) is posted on the Company’s website as described above. The responsibilities of the Committee are:
7 The Committee is also responsible for reviewing and discussing the Compensation Discussion and Analysis (CD&A) with management, and has recommended to the Board its inclusion in the Company’s Proxy Statement (beginning on page 16) and in the Company’s Annual Report on Form 10-K. The CD&A discusses the material aspects of the Company’s compensation objectives, policies, and practices. The Committee’s report appears on page 29 of this Proxy Statement. The Committee has not delegated its authority for officer compensation. The Committee has, however, delegated all of its authority under the Company’s equity plan to the Chief Executive Officer so that she can grant equity awards to employees below the officer level. Officer compensation decisions are made by the Committee after discussing recommendations with the Chief Executive Officer and the Vice President of Human Resources. The Chief Financial Officer signs-off on the financial results for the Committee. He may attend Committee meetings to discuss financial targets and results for the Annual Performance Incentive Plan and the Executive Long-Term Incentive Program as described in the CD&A. The Committee meets in executive session to review and approve compensation actions for the Chief Executive Officer. The Committee has retained Frederic W. Cook & Co., Inc. as an independent consultant to the Committee. The consultant’s responsibilities are discussed on page 17 of this Proxy Statement. Members: Vernon E. Jordan, Jr.; Ralph S. Larsen; Robert A. McDonald; and N. J. Nicholas, Jr. Chairman: Mr. Nicholas Hilmar Kopper served on the Committee until May 2007. Mr. Kopper did not stand for reelection at the 2007 Annual Meeting. The Board has determined that all of the members of the Committee are independent under the Company’s Corporate Governance Guidelines and the NYSE Corporate Governance Rules. Compensation Committee Interlocks and Insider Participation No member of the Committee was or is an officer or employee of the Company or any of its subsidiaries. In addition, during the last fiscal year, no officer of the Company had an “interlock” relationship, as that term is defined by the SEC, to report. Corporate Governance Committee (5 meetings) A copy of the charter of the Corporate Governance Committee is posted on the Company’s website as described above. The responsibilities of the Corporate Governance Committee are:
The Corporate Governance Committee recommends to the Board nominees for election as directors of the Company and considers the performance of incumbent directors in determining whether to recommend their nomination. Members: William Curt Hunter; Vernon E. Jordan, Jr.; Ralph S. Larsen; and Ann N. Reese. Chairman: Mr. Jordan The Board has determined that all of the members of the Corporate Governance Committee are independent under the Company’s Corporate Governance Guidelines and the NYSE Corporate Governance Rules. Finance Committee (4 meetings) A copy of the charter of the Finance Committee is posted on the Company’s website as described above. The responsibilities of the Finance Committee are:
Members: Glenn A. Britt; N. J. Nicholas, Jr.; Ann N. Reese; and Mary Agnes Wilderotter. 8 Chairman: Ms. Reese The Board has determined that all of the members of the Finance Committee are independent under the Company’s Corporate Governance Guidelines and the NYSE Corporate Governance Rules. Attendance and Compensation of Directors Attendance: 11 meetings of the Board of Directors and 29 meetings of the Board committees were held in 2007. All incumbent directors attended at least 75 percent of the total number of meetings of the Board and Board committees on which they served. The Company’s policy generally is for all members of the Board of Directors to attend the Annual Meeting of Shareholders. All nominees who served as directors last year attended the 2007 Annual Meeting of Shareholders. We believe that attendance at meetings is only one means by which directors may contribute to the effective management of the Company and that the contributions of all directors have been substantial and are highly valued. Summary of Director Annual Compensation Compensation for our directors was determined by the Corporate Governance Committee and approved by the Board of Directors. Directors receive a retainer payable semi-annually in advance for service on the Board of Directors, with additional retainers for serving on the Audit Committee or for serving as a committee chairman. All retainers are paid 50% in cash and 50% in the form of Deferred Stock Units (DSUs). For the cash portion of their compensation, directors have the option to receive cash on a current basis, defer receipt under the existing Deferred Compensation Plan for Directors, or receive additional DSUs in lieu of cash. DSUs are a bookkeeping entry that represents the right to receive one share of the Company’s common stock at a future date, currently at the earlier of one year after termination of Board service or the date of death. DSUs include the right to receive dividend equivalents, which are credited in the form of additional DSUs, at the same time and in approximately the same amounts that an equivalent number of shares of common stock would be entitled to receive dividends. The DSUs are issued under the 2004 Equity Compensation Plan for Non-Employee Directors (2004 Director Plan), a plan that was approved by the Xerox shareholders at the 2004 Annual Meeting. During fiscal year 2007, the annual retainer for all of our directors was $130,000; Audit Committee members received an additional $10,000; the chairman of the Audit Committee received an additional $30,000; the chairman of the Compensation Committee received an additional $20,000; and the chairmen of the Corporate Governance and the Finance Committees received an additional $15,000. Directors also receive reimbursement for out-of-pocket expenses incurred in connection with their service on the Board. Each non-employee director is required to maintain a meaningful ownership requirement in the Company, equivalent to five times the annual cash fees that such director receives for service on the Board of Directors, other than committee related fees. Newly appointed directors have up to five years to reach this ownership threshold. Directors who are our employees receive no compensation for service as a director. 9 Individually, the compensation for each director during fiscal year 2007 was as follows:
For information on compensation for directors who are officers, see the executive compensation tables beginning on page 30. 10 Terms Used in Biographies To help you consider the nominees, we provide summary biographical information. Certain terms used in the biographies may be unfamiliar to you, so we are defining them here. Xerox securities owned means the Company’s common stock, including restricted shares of common stock issued under the Restricted Stock Plan For Directors, which plan was terminated upon shareholder approval of the 2004 Directors Plan at the 2004 Annual Meeting, DSUs issued under the 2004 Directors Plan and common stock owned through the individual’s ESOP account. None of the nominees owns any of the Company’s other securities. Immediate family means the spouse, the minor children and any relatives sharing the same home as the nominee. Biographies Unless otherwise noted, all Xerox securities held are owned beneficially by the nominee. This means he or she has or shares voting power and/or investment power with respect to the securities, even though another name (that of a broker, for example) appears in the Company’s records. All ownership figures are as of February 29, 2008.
11
12
13
Ownership of Company Securities We are not aware of any person who, or group which, owns beneficially more than 5% of any class of the Company’s equity securities as of December 31, 2007, except as set forth below(1).
14 ____________________
Shares of Common Stock of the Company owned beneficially by its directors and nominees for director, each of the current executive officers named in the Summary Compensation Table and all directors and current executive officers as a group, as of February 29, 2008, were as follows:
15 Percent Owned by Directors and Executive Officers: Less than 1% of the aggregate number of shares of common stock outstanding at February 29, 2008 is owned by any director or executive officer. The amount beneficially owned by all directors and executive officers as a group amounted to approximately 1%. Amount Beneficially Owned: The numbers shown are the shares of common stock considered beneficially owned by the directors and executive officers in accordance with SEC rules. Shares of common stock which executive officers and directors had a right, within 60 days, to acquire upon the exercise of options or rights are included. Shares held in a GRAT or by family members, shares held in the Xerox Corporation Employee Stock Ownership Plan accounts and vested restricted shares, the receipt of which have been deferred under one or more equity compensation plans, are also included. All these are counted as outstanding for purposes of computing the percentage of Common Stock outstanding and beneficially owned. Total Stock Interest: The numbers shown include the amount shown in the Amount Beneficially Owned column plus options held by directors and executive officers not exercisable within 60 days, deferred stock units, performance shares and restricted shares. The numbers also include the interests of executive officers and directors in the Xerox Stock Fund under the Xerox Corporation Savings Plan and the Deferred Compensation Plans. COMPENSATION DISCUSSION AND ANALYSIS Shareholder value is delivered through a world-class management team. Our executive compensation program plays an important role in attracting, retaining, and rewarding people with the ability, drive, and vision to manage our business and ensure our long-term success. Our executive compensation program is a significant component of our ability to create an advantage for Xerox in an increasingly competitive global market. The named executive officers (CEO, CFO and three most highly compensated executive officers other than the CEO and CFO) in the 2008 Proxy Statement are:
Our compensation objectives are to:
Our executive compensation program is designed to develop and motivate the collective and individual abilities of our management team. We consider business performance and the competitive marketplace in the design, delivery, and funding of our total compensation program. We use a variety of compensation elements to achieve these objectives, including base salary, short-term incentive opportunities, and long-term incentives. Each element of our executive compensation program provides a framework for governing our overall employee compensation program and affects all employees by setting general standards of performance and helping to create an environment of goals, expectations and rewards linked to performance. OVERSIGHT OF THE EXECUTIVE COMPENSATION PROGRAM The Committee administers the executive compensation program on behalf of the Board and our shareholders. The members of the Committee are Vernon E. Jordan, Jr., Ralph S. Larsen, Robert A. McDonald, and N.J. Nicholas, Jr., and Mr. Nicholas serves as the Committee chair. Mr. Larsen will not stand for reelection at the 2008 Annual Meeting. The Committee is composed entirely of independent members of the Board, consistent with the listing requirements of the NYSE. 16 The Committee’s responsibilities are discussed on page 7 of this Proxy Statement, and a complete description of its responsibilities and functions is set forth in its charter, which can be found on the Company’s website at www.xerox.com/corporategovernance. For additional information on the members of the Committee, see “Biographies.” The Committee has retained the services of an independent compensation consulting firm, Frederic W. Cook & Co., Inc., to assist with its responsibilities. This consultant works only for the Committee and has performed no work for the Company since being retained as an independent consultant to the Committee. As provided in its charter, the Committee has the authority to determine the scope of the consultant’s services and may terminate the consultant’s engagement at any time. The consultant reports to the Committee chair and is an independent resource if the Committee has any questions or wishes to discuss issues. During fiscal 2007, the consultant provided the following services:
OUR EXECUTIVE COMPENSATION PRINCIPLES The following core principles reflect the compensation philosophy of the Company with respect to the named executive officers, as established and refined from time to time by the Committee: 1. Compensation should reinforce the Company’s business objectives and values. 2. Compensation should be performance-related. 3. There should be flexibility in allocating the various compensation elements. 4. Compensation opportunities should be competitive. 5. Incentive compensation should balance short-term and long-term performance. 6. Named executive officers should have financial risk and reward tied to their business decisions. These principles are intended to motivate the named executive officers to improve the Company’s financial performance; to be personally accountable for the performance of the business units, divisions, or functions for which they are responsible; and to collectively make decisions about the Company’s business that will deliver shareholder value. Here is how we put these principles into practice: 1.
Compensation should reinforce the Company’s business objectives and
values. 2.
Compensation should be performance-related. 17 In 2007, base salary on average was less than 25% of the total annual target compensation for our named executive officers. Total target compensation includes base salary, target annual short-term cash incentives, and target annual long-term equity incentive awards. The Committee also evaluates the Company’s performance and total shareholder return in relation to the peer group (defined below) to ensure that the Company delivers total compensation commensurate with growth in shareholder value. 3.
There should be flexibility in allocating the various compensation
elements. 4.
Compensation opportunities should be competitive. Peer
Group
Establishing Compensation Ranges
5.
Incentive compensation should balance short-term and long-term
performance. 6.
Named executive officers should have financial risk and reward tied to their
business decisions. 18 We require each named executive officer as a participant in the Executive Long-Term Incentive Program (E-LTIP) to build and maintain a meaningful level of stock ownership. (A description of the E-LTIP can be found in the section on “Long-Term Incentives.”) Awards under the E-LTIP are subject to a mandatory holding requirement. As determined by the Committee, named executive officers must retain at least 50% of the shares acquired through the vesting of awards, net of taxes and fees, until they achieve their required level of ownership. Ownership Requirements for Named Executive
Officers
PERFORMANCE OBJECTIVES The Committee sets individual performance measures for the CEO. The CEO sets individual performance measures for the other named executive officers. Named executive officer objectives align with those of the CEO. The CEO’s performance objectives include:
The Committee expects a high level of collaborative and individual performance and contributions, consistent with our named executive officer level of responsibility. The Committee discusses and evaluates the quality of the overall performance of the CEO after considering the CEO’s self assessment and Company performance. The CEO in turn uses a similar process when reviewing performance of the other named executive officers. COMPONENTS OF THE EXECUTIVE COMPENSATION PROGRAM The primary elements of our executive compensation program for our named executive officers are:
Each year, we provide the Committee with a comparison of the compensation of the named executive officers with that of the named executive officers of the Company’s peer group. The Committee reviews compensation against the midpoint of named executive officer compensation ranges as a competitive reference point. (These compensation ranges are established based on peer group data as described under “Our Executive Compensation Principles”.) Mrs. Mulcahy presents her evaluation of the management team to the Committee, including a review of contribution and performance over the past year, and recommends compensation actions. Following this presentation, the Committee makes its own assessments and formulates compensation amounts for each named executive officer for base salary, short-term and long-term incentives. For each named executive officer (and for each component of compensation), when determining pay, the Committee assesses past 19 contributions, expected future contributions, succession planning objectives, retention objectives and internal equity with respect to each named executive officer’s compensation compared to other officers within the Company. For long-term incentive compensation, the Committee also considers affordability. Once all components of compensation are established, the Committee balances this assessment against competitive pay practices and verifies that the total compensation is appropriate, competitive and consistent with the named executive officer’s total compensation range. Mrs. Mulcahy’s compensation is based on a review of CEO peer group data and takes into account overall Company performance and her role leading Xerox. Mrs. Mulcahy’s compensation is higher than that of our other named executive officers but her compensation is competitive with the compensation of her CEO peer group and is determined under the same programs and policies as other Xerox named executive officers. 2007
Total Target Compensation
For additional information, see the Summary Compensation Table on page 30. The Committee also reviews named executive officer compensation under various termination scenarios similar to the information provided in the table on Potential Payments upon Termination or Change in Control (tally sheet). The Committee uses this information as a reference point to understand compensation, but it is not a material driver of compensation decisions. This assessment is completed with the input of the Committee’s consultant and includes a review of evolving market practices in the office equipment/technology industry and other industries, external regulatory and other developments, the market for executive talent, and the Committee’s and Company’s executive compensation philosophy. 1. Base
Salary The Committee also reviews named executive officer salaries when there is a specific change, such as a promotion or achievement of an extraordinary level of performance. Salary increases are determined based on a review of peer group proxy data to ensure that pay is competitive, that any increases are consistent with Company succession planning objectives, and that there is internal equity to differentiate pay among named executive officers. The Committee typically approves base salary increases each February, which are effective in April of that year. 2007
Base Salary Actions 2.
Short-Term Incentives 20 The process begins after the close of the previous fiscal year (December 31) when the financial results of the Company have been made available to the Board of Directors. The Board then reviews and approves the Company’s annual operating plan for the new fiscal year. At that time, the Committee:
Bonuses are paid at the beginning of each year for the previous fiscal year’s performance. Bonuses for named executive officers are based on both the CEO’s and the Committee’s assessment of actual Company-wide performance against pre-established Company performance objectives. Bonus Performance
Measures Performance measures and weightings
2008 APIP performance target ranges
Our performance goals are expected to be difficult to obtain as all targets are set with the expectation that consistent improvements are necessary to achieve our goals. We operate in a very mature and competitive industry with constant pricing pressures that makes it challenging to continue increasing revenue growth. Our future profitability and cash flow are also subject to many risk factors, all of which are detailed in our 2007 Form 10-K Report (see Risk Factors section), and contribute to our position that incentive performance goals are challenging to obtain. Some of these challenges include:
Bonus Target and
Opportunity The annual bonus targets for the named executive officers are as follows (and unchanged from the previous year except as noted):
The Committee reduced the maximum bonus payout opportunity from three times target to two times target, starting with the 2007 performance year, consistent with actual bonus payout practices. 21 Determining Bonus
Awards Subject to the Committee’s review and approval, any material unusual charges or gains that occur during the plan year can be excluded from bonus calculations. Furthermore, the Committee retains the sole discretion to grant a lower bonus than the calculated incentive payout or no bonus at all, based on appropriate circumstances. The Committee does not use discretion to grant a higher bonus. After the end of the fiscal year, the CEO reviews the Company’s actual performance against each of the financial performance objectives established at the beginning of the year. Each performance measure (revenue, earnings per share and core cash flow from operations) is assessed and calculated independently. The results of each are added together to determine overall performance results. The payout opportunity varies based on performance as follows:
2007
Performance
For 2007 bonus payments, the Committee accepted management’s recommendation and exercised its discretion to ensure that named executive officer bonuses would be equal to the average of the bonus payment to the operating units. Considering the Company’s overall 2007 financial results, the Committee approved incentive awards for 2007 for named executive officers that were 110% of the target. The Committee believes that the fiscal 2007 incentive bonus payments are consistent with our strategy of rewarding named executive officers for the achievement of important, challenging business goals. These incentive payments are driven by achievement of business results against quantitative measures set in advance by the Committee. In view of the Company’s 2007 results, the Committee believes that the annual incentive bonus calculations resulted in reasonable and appropriate performance-related bonus payments to the Company’s named executive officers. The annual bonuses paid to the named executive officers for fiscal year 2007 are shown in the Summary Compensation Table. Additional information about the bonus opportunities is shown in the Grants of Plan-Based Awards table. 3.
Long-Term Incentives Executive Long-Term
Incentive Program Performance shares may be earned based on achieving annual performance targets and based on achieving three-year cumulative performance between threshold and maximum. The earn-out range for named executive officer performance shares is between 0% and 150% of the original award amount based on cumulative performance. If threshold performance is not achieved, none of the performance shares will vest. If three-year cumulative performance is achieved at maximum, named executive officers will receive an additional 50% of their original award amount. Performance shares that have been earned vest three years from the grant date and following Committee certification of the performance results for 22 the applicable three-year period. Once vested, performance shares are paid out in the form of shares of the Company’s common stock. Named executive officers who retire or are involuntarily terminated, other than for cause, before the end of the three-year period, will vest in a pro-rata portion of earned performance shares. Vesting will occur on the original vesting date. Performance shares are forfeited if the named executive officer voluntarily terminates employment before the shares vest. Performance shares fully vest upon death. Although equity awards are generally granted on a regular cycle, the Committee occasionally grants off-cycle equity awards to named executive officers for special purposes, such as new hires, promotions, recognition, and retention. Long-Term Incentive
Performance Measures E-LTIP performance measures and weightings
The definitions of these performance measures are listed below: Earnings Per
Share
Core Cash Flow from
Operations
Any other items approved for adjustment of earnings per share or core cash flow from operations will be considered a modification of the award. 23 Determining E-LTIP Award
Value When analyzing the value of our annual long-term incentive awards, we include the entire performance share award value. Special retention restricted stock unit awards are calculated over a three-year period and include only 1/3 of the award value each year. This approach is consistent with how we analyze peer group data. 2007
E-LTIP Actions
Additional information on the 2007 awards can be found in the Grants of Plan-Based Awards table. 2008 E-LTIP Performance Target Ranges Our 2008 E-LTIP will follow the same basic principles as 2007. The only change is that we will determine the number of shares granted, based on approved values using the closing price on the grant date of July 1, 2008. The 2008-2010 E-LTIP performance target ranges are as follows:
These goals are expected to be difficult to obtain for the same reasons as outlined above under the section entitled “Short-Term Incentives”. The 2008 E-LTIP awards are in a footnote to the Outstanding Equity Awards table. 4.
Pension Plans
U.S. Qualified Pension
Plan 24 U.S. Non-Qualified Pension
Plans Unfunded Supplemental Executive
Retirement Plan Mrs. Mulcahy is retirement eligible and would commence her SERP benefits upon retirement. Mr. Zimmerman is also retirement eligible and upon retirement would commence his SERP benefits. He has been credited with two years of benefit service for each year of actual Xerox service. His service was accelerated to mitigate the pension impact of joining Xerox later in his career. The other named executive officers covered by SERP (Ms. Burns and Mr. Firestone) are eligible for benefits at age 60 with 10 years of service. For named executive officers who do not meet the requirements of SERP when they leave Xerox, all non-qualified benefits would come from Unfunded RIGP. Some SERP executives who do not otherwise meet the age 60 vesting requirement have received their accrued SERP benefits as provided under their separation packages. SERP includes a mid-career hire benefit that applies to a small group of executives including Mr. Zimmerman. This benefit is equal to 150% of the SERP accrual and is designed to mitigate the loss in retirement benefits from a mid-career change in employment. Xerox International Pension
Plan For additional information on the actuarial present value of the accumulated pension benefits for the named executive officers, see the Pension Benefits table. 5.
401(k) Savings Plan 6.
Perquisites and Personal Benefits Life
Insurance 25 Perquisites
Other perquisites and personal benefits include:
The total costs to the Company for providing perquisites and personal benefits to the named executive officers during fiscal 2007 are shown in the Summary Compensation Table. 7.
Change-in-Control Severance Agreements and Plan
Provisions Change-in-control severance payments are not conditioned on non-compete, non-solicitation, or other negative covenants. These agreements provide specified severance benefits if, within two years following a change in control of the Company, employment is terminated either:
Voluntarily for good reason includes:
26 These severance benefits include:
In addition to the benefits above, when the change in control occurs, regardless of whether a termination occurs, participating executives are immediately entitled to the following benefits:
Each change-in-control severance agreement provides that the executive will remain an employee of the Company for nine months following a potential change in control, or, on the date which the named executive officer is first entitled to receive the benefits described above if earlier. Generally, for purposes of the severance agreements, a change in control is deemed to have occurred, subject to specific exceptions, if:
The Committee believes that it is in the best interests of the Company and its shareholders to offer such change-in-control arrangements to its named executive officers. The Company competes for executive talent in a highly competitive market in which companies offer similar benefits to senior employees. The Committee periodically reviews change-in-control severance payment amounts against benchmark data to ensure that amounts are consistent with market practices. In 2007, the Committee reviewed benchmark practices of other Fortune 350 companies. In 2007, the Company terminated grantor trusts that had been established to pay amounts due under some deferred compensation plans and the change-in-control severance agreements described above. All non-qualified options under the 1991 Long-Term Incentive Plan and the 1998 Employee Stock Option Plan are accompanied by option surrender rights. If there is a change in control, all rights that are in the money become payable in cash as soon as practical. The amount of the estimated payments and benefits payable to the named executive officers assuming a change of control of the Company and a qualifying termination of employment as of the last day of fiscal 2007 are shown in the table showing Potential Payments Upon Termination or Change in Control. 27 NON-QUALIFIED DEFERRED COMPENSATION The Deferred Compensation Plan for Executives was frozen in 2002. The amount in this plan for each participant represents balances from deferrals made before 2002. Details regarding the above-market interest credited in 2007 to non-qualified deferred compensation balances from compensation that was deferred prior to 2002 and for aggregate account balances as of fiscal year-end 2007 are provided in the Summary Compensation Table and the Non-Qualified Deferred Compensation table. The Committee views the amount of above-market interest as immaterial. EMPLOYMENT AND SEPARATION AGREEMENTS The Company does not generally enter into employment agreements with its named executive officers. As a result, these named executive officers serve at the will of the Board of Directors. This policy enables the Company to remove a named executive officer before retirement whenever it is in the best interest of the Company, with full discretion to decide on a severance package for that individual (excluding vested benefits). When a named executive officer is removed from his or her position, the Committee exercises its business judgment in considering whether or not to approve an appropriate severance arrangement for the individual in light of all relevant circumstances, including but not limited to his or her term of employment, past accomplishments, and reasons for separation from the Company. The Company’s policy generally provides severance for management level salaried employees, including named executive officers, who are separated from the Company involuntarily only if the individual signs a release of claims against the Company, which includes a non-engagement in detrimental activity agreement. For separations due to a reduction in force, the amount of severance provided by the policy is equal to the greater of 26 weeks of base pay or the number of weeks of base pay identified in the severance schedule based on years of service. For involuntary separations other than a reduction in force, severance payments are generally equal to three months of base pay. COMPENSATION RECOVERY POLICY In addition to the compensation recovery provisions contained in our separation agreements noted above, which include a provision for rescission of the severance payments for engagement in detrimental activity against the Company, the following plans also provide for compensation recovery. Under the 2004 Performance Incentive Plan, if the Committee or its authorized delegate deems an employee or former employee, including a named executive officer, to have engaged in detrimental activity against the Company, it will cancel any awards granted on or after January 1, 2006 to the employee or former employee. In addition, the Committee may rescind any payment or delivery of an equity or annual cash incentive award within six months before the detrimental activity. In the event of any rescission, the named executive officer will pay the Company the amount of any gain realized or payment received in a manner the Committee or its delegate requires. If the Committee or its delegate determines that the employee or former employee engaged in detrimental activity, it will only result in a cancellation or rescission of an award if the determination is made before a change in control of the Company. Under the Unfunded Retirement Income Guarantee Plan and the Unfunded Supplemental Executive Retirement Plan, if an employee or former employee, including a named executive officer, of the Company or a surviving beneficiary of a participant is deemed by the Plan Administrator, prior to a change in control of the Company, to have engaged in detrimental activity against the Company, they will not be eligible to receive benefits under these plans. TAX IMPLICATIONS OF EXECUTIVE COMPENSATION Section 162(m) of the Internal Revenue Code limits to $1 million per year the federal income tax deduction to public corporations for compensation paid for any fiscal year to the corporation’s Chief Executive Officer and certain other named executive officers (excluding the CFO) included in the Summary Compensation Table in the Company’s Proxy Statement. This limitation does not apply to qualifying “performance-based compensation.” The Company can deduct annual incentive bonuses paid to named executive officers who are subject to Section 162(m) as performance-based compensation. The Committee paid bonuses to the named executive officers for 2007 from a bonus pool established early in 2007 under the 2004 Performance Incentive Plan. The pool was funded by 2% of the Performance Profit achieved during the year. The purpose of the bonus pool was to ensure that bonuses paid to named executive officers and other executive officers were performance-based and provided under a shareholder approved plan, and therefore fully tax deductible. The Committee defined Performance Profit as income from continuing operations before income taxes, equity income, discontinued operations, extraordinary items, and cumulative effect of change in accounting principles, but excluding restructuring charges as identified in the audited financial statements. 28 It is the Company’s goal to have compensation paid to its top officers qualify as tax deductible for federal tax purposes under Section 162(m) of the Internal Revenue Code. However, we believe it is appropriate to provide competitive compensation opportunities even though all compensation paid may not be fully tax deductible in any given year. Some compensation paid to named executive officers in 2007 does not meet the requirements of Section 162(m), most notably the value of restricted stock unit awards that vested in 2007 and salary, to the extent that non-performance based compensation exceeds $1 million for a named executive officer. Some perquisite compensation, such as personal use of aircraft, may not be fully tax deductible. We expect vested E-LTIP performance share awards will be fully tax-deductible compensation. ACCOUNTING IMPLICATIONS OF EXECUTIVE COMPENSATION Base salaries and the short-term incentive bonuses are expensed over the period in which they are earned. As such, the 2007 short-term incentive bonus, which was earned during 2007, and paid in early 2008, is recorded during fiscal year 2007. The long-term incentives used to reward named executive officers are primarily comprised of equity-based performance shares. These performance shares are recorded according to Statement of Financial Accounting Standards (FAS) No. 123(R), “Share-Based Payments,” which states that the performance shares should be measured at fair value on the date of grant and expensed during the requisite service period for those performance shares that are expected to vest. During 2007, the fair value was calculated as the closing price of the Company’s common stock on the date of grant. The requisite service period for these performance shares matches the vesting period and is three years from the date of grant. At each reporting date, the Company evaluates the total number of performance shares that it expects to vest, including those awarded to named executive officers, taking into account estimated forfeitures and the probability of achieving or exceeding the stated performance targets associated with the grant. Compensation expense is recorded for those shares expected to vest over the vesting period. If the number of shares expected to vest changes, a cumulative adjustment is recorded at the time, taking into account the service period already elapsed. Restricted stock units are measured at fair value (the closing trading price of the Company’s common stock) on the date of grant and expensed over the requisite service period, which ranges from three to five years. The classification of the expense associated with these performance shares and restricted stock units in the Statement of Income follows the same classification of the salary and short-term incentive bonus for the executives. The expense associated with these shares is not capitalized and is primarily classified within Selling, Administrative and General Expense. Our qualified and non-qualified pension plans are accounted for according to FAS No. 87, “Employers’ Accounting for Pensions” and FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” The interest credited on non-qualified deferred compensation balances is expensed as incurred. These costs are primarily classified as Selling, Administrative and General Expenses in our consolidated financial statements. REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with the management of the Company. Based upon its review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s annual report on Form 10-K for the year ended December 31, 2007 and the Proxy Statement for the 2008 Annual Meeting of Shareholders. N.J. Nicholas, Jr.,
Chairman 29 Summary Compensation Table The Summary Compensation Table below provides compensation information for the Chief Executive Officer, the Chief Financial Officer and the next three most highly compensated executive officers (collectively referred to as named executive officers) serving at the end of the fiscal year December 31, 2007, for services rendered in all capacities during the fiscal year ended December 31, 2007. The table includes the dollar value of base salary earned, stock and option awards, non-equity incentive plan compensation earned, change in pension value and non-qualified deferred compensation (NQDC) earnings and all other compensation, whether paid or deferred. SUMMARY COMPENSATION TABLE
Compensation reported in this table is in U.S. dollars and rounded to the nearest dollar. For Jean-Noel Machon, the compensation reported was paid in euros and British pounds (excluding stock awards) but has been converted to U.S. dollars for purposes of reporting amounts herein. The conversion from euros and British pounds to dollars for 2007 is based on the average quarterly exchange rate of 1.36799 dollars per euro and 2.0004 dollars per British pound.
30
31
For further information on the components of the executive compensation program, see the “Compensation Discussion and Analysis.” 32 Grants of Plan-Based Awards in 2007 The following table provides additional detail for each of the named executive officers on potential amounts payable under the non-equity incentive plan (APIP) and the equity incentive plan (E-LTIP) as presented in the Summary Compensation Table. Threshold, target and maximum award opportunities are provided. GRANTS OF PLAN-BASED AWARDS IN 2007
Performance shares under the E-LTIP can be earned by achieving annual performance targets or three-year cumulative performance between threshold and maximum. The performance period is January 1, 2007 through December 31, 2009. Performance shares, that have been earned, vest on July 1, 2010. The performance measures are earnings per share (weighted at 60%) and core cash flow from operations (weighted at 40%). Threshold is based on the minimum number of performance shares earned if three-year cumulative performance is achieved at the threshold level for core cash flow from operations. If threshold performance is not achieved on any of the performance measures, no performance shares will be earned. Target reflects the number of performance shares earned if target performance is achieved on all performance measures. Maximum describes the greatest number of performance shares that can be earned if “maximum” or higher performance is achieved on all performance measures. The number of performance shares earned would be interpolated in the event that the Company’s cumulative performance varied between threshold and maximum, as determined by the Committee. 33 Outstanding Equity Awards at 2007 Fiscal Year-End The following table displays outstanding option awards and unvested stock awards held by each of the named executive officers at the end of fiscal year 2007. Included is the number of shares underlying exercisable options, the exercise price for all outstanding option awards and the market value for all unvested stock incentive awards. OUTSTANDING EQUITY AWARDS AT 2007 FISCAL YEAR-END
34 ____________________
Option Exercises and Stock Vested in 2007 The Option Exercises and Stock Vested table shows amounts realized by the named executive officers on options that were exercised and stock awards that vested during 2007. OPTION EXERCISES AND STOCK VESTED IN 2007
35
Pension Benefits for the 2007 Fiscal Year The Pension Benefits table below reflects the actuarial present value for the named executive officer’s total accumulated benefit as of year end under the pension plans in which they participate. Jean-Noel Machon’s benefit is based on a September 30 measurement date and a conversion from euros to dollars at an exchange rate on December 31, 2007 of 1.47189 dollars per euro. See the Pension Plans section of the “Compensation Discussion and Analysis” for a description of the U.S. and International pension plans. PENSION BENEFITS FOR THE 2007 FISCAL YEAR
36 The benefit formulas and assumptions used to calculate these estimates are as follows: U.S. Pension Plans The pay used to calculate the RIGP, Unfunded RIGP and SERP benefits is base pay plus actual bonus (bonus is considered for the calendar year in which it is paid). The present value of the accumulated benefit is the present value of the benefit payable at the earliest unreduced retirement age (current age for Anne M. Mulcahy and Lawrence A. Zimmerman as they are both eligible to retire with unreduced benefits, and age 60 for Ursula M. Burns and James A. Firestone) based on the following assumptions: all participants are assumed to elect a lump sum from RIGP; SERP benefits which are not available as lump sums are assumed to be paid as 50% Joint and Survivor annuities; pre-retirement FAS 87 discount rate of 6.40%; no pre-retirement mortality or turnover assumed; post retirement FAS 87 discount rate of 6.40% for SERP and 6.15% for RIGP (due to RIGP lump sum); post-retirement mortality is based on the 2008 Applicable Mortality table, as defined for lump sum calculations under section 417(e) of the Code, with five years of projection for future improvement in mortality (i.e. longer life expectancies than based on the Applicable Mortality table without adjustments). RIGP benefits are determined as the greater of a Highest Average Pay formula benefit (1.4% of highest five-year average pay multiplied by benefit service of up to 30 years), a Cash Balance Retirement Account (CBRA) and a profit sharing account that was transferred to RIGP in 1990. Early retirement benefits under RIGP are available for employees who leave Xerox at age 55 with 10 years of service or later and the Highest Average Pay formula is reduced from age 65 (age 62 with 30 years of service) at 5% per year. The RIGP benefits are generally based on total pay, subject to IRS limits on the compensation that can be reflected in a qualified plan. Unfunded RIGP benefits are generally determined under the same terms as the RIGP benefit except the pay used in the Highest Average Pay formula is not subject to IRS limits and in years in which pay was deferred under the Deferred Compensation Plan for Executives, this deferred compensation was included for the year it was deferred. Unfunded RIGP also provides for an Unfunded RIGP Cash Balance Retirement Account (CBRA). This Unfunded RIGP CBRA provides pay credits on pay in excess of the IRS limits for years 2003 and later and interest on these pay credits while the Highest Average Pay formula reflects all years of service. The purpose of Unfunded RIGP is to replace benefits that cannot be provided in RIGP due to IRS compensation limits. SERP benefits are determined under a different formula than RIGP and with the same pay used for Unfunded RIGP. The accrual rate and age at which SERP is available can vary. SERP benefits reflect base pay plus bonus (not subject to any limits) and are determined under a formula that provides a benefit of 1-2/3% of five-year Highest Average Pay less 1-2/3% of Social Security multiplied by benefit service of up to 30 years. This basic formula is subject to the following adjustments: SERP participants (those who are not mid-career hires – see explanation below) are entitled to a minimum benefit of 25% of Highest Average Pay less 25% of Social Security. A total benefit is determined by the SERP formula. The total benefit is offset by the RIGP benefit and the remaining benefit is paid from the SERP and referred to as the SERP benefit. The SERP includes a mid-career hire benefit that applies to a small group of executives including Lawrence A. Zimmerman. The accrual for a mid-career hire is 150% of the regular SERP accrual for a maximum of 20 years. However, there is no minimum SERP benefit for mid-career hires. The mid-career hire retirement eligibility is age 60 with 5 years of service. Lawrence A. Zimmerman mid-career accrual and 2 for 1 benefit service credit accounts for $2,324,000 of the present value noted in the table above. Anne M. Mulcahy and Lawrence A. Zimmerman are retirement eligible, as noted above, and upon retirement, would receive their SERP benefit as a 50% Joint and Survivor annuity subject to a 6 month delay to comply with section 409A of the Internal Revenue Code. The other named executives covered by the SERP are eligible to commence SERP benefits upon retirement (with a 6 month delay) on or after the attainment of age 60 with 10 years of service. SERP benefits that commence at these ages are not reduced for early commencement. The SERP was originally designed to permit executive officers to retire with unreduced benefits at age 60 (instead of the age 62 with 30 years of service or age 65 provisions in RIGP). The SERP, through the mid-career benefit, also provides a means to mitigate the loss in retirement benefits from a mid-career change in employment for an executive joining Xerox. These features of the SERP support the attraction and retention of our senior leaders. 37 International Pension Plan Assumptions used for the Xerox International Pension Plan include a pre-retirement discount rate of 5.1% per annum; no pre-retirement mortality or turnover assumed. Retirement is assumed to be at the earliest age the individual is eligible for full benefits, that is age 55. The conversion terms at retirement for Jean-Noel Machon are fixed and therefore no post-retirement assumptions are required. The pay used to calculate the Xerox International Pension Plan benefits for Jean-Noel Machon is base pay plus 2/3 of target bonus (not actual bonus) in force at his retirement date. The plan formula targets a total retirement income of 50% pay when combined with French social security and other mandatory French pension plans. Xerox is committed to providing the value of this income using a fixed conversion factor at age 55 of 21.7 (for converting between pension and lump sum), or the plan assets if greater. His French pension plans are taken into account in the calculations. If Mr. Machon leaves Xerox employment for any reason before age 55, he will receive the vested plan assets only which as of December 31, 2007 are $12,408,616. Non-Qualified Deferred Compensation The Non-Qualified Deferred Compensation table discloses named executive officer withdrawals and earnings and fiscal year end balances under the Xerox Corporation Deferred Compensation Plan for Executives. NON-QUALIFIED DEFERRED COMPENSATION FOR THE 2007 FISCAL YEAR
Previously, the plan allowed for the deferral of base salary (up to 50%) and bonus and performance units (up to 100%) as long as the compensation would have been payable in cash if not deferred. Participants were required to elect the percentage to be deferred, the investment applicable to the amount deferred and the method of payment. Payments to Anne M. Mulcahy and Ursula M. Burns, based on their elections, will commence in the year of retirement (or year following if retirement is after July 1) and will be paid annually for 10 years and 5 years respectively. Under this plan, there is also an opportunity for in-service hardship withdrawals if approved by the Chief Executive Officer (or by the Board of Directors in the case of a request by the Chief Executive Officer). In the event of a Change in Control, deferred compensation balances will be paid out in a lump sum. 38 Potential Payments upon Termination or Change in Control The Company has entered into certain agreements and maintains certain plans that will require the Company to provide compensation to named executive officers in the event of a termination of employment or a change in control. The amount of compensation payable to each named executive officer in each situation effective December 31, 2007 is listed in the table below. The equity awards presented in this table reflect grants not vested as of December 31, 2007 and are based on the December 31, 2007 closing market price of $16.19. For Jean-Noel Machon, the conversion to dollars is based on an exchange rate on December 31, 2007 of 1.47189 dollars per euro and 1.9964 dollars per British pound.
39
40 Termination Following Disability Assuming termination following disability on December 31, 2007, all named executive officers would be eligible for prorated performance shares based on the number of full months of service from the date of grant, their deferred compensation balance, if any, and vested pension benefits as shown for “Voluntary Termination/Retirement.” Jean-Noel Machon would be entitled to receive 4.5 times his previous 12 months earnings which would include base salary ($3,646,941), bonus based on previous year’s bonus payment ($2,808,142), car allowance ($177,390) and housing allowance ($759,134), for a total disability payment of $7,391,607. Involuntary Termination for Cause Assuming involuntary termination for cause due to engagement in detrimental activity against the Company, there would be no payments to Anne M. Mulcahy, Lawrence A. Zimmerman, Ursula M. Burns and James A. Firestone other than their deferred compensation balance, if any, and vested qualified pension benefits as shown for “Voluntary Termination/Retirement.” Jean-Noel Machon would be entitled to the same payments provided to him in the event of his involuntary termination not for cause except he would not receive prorated performance shares. All unvested shares and non-qualified pension benefits would be immediately cancelled upon termination for cause for all named executive officers. See Compensation Recovery Policy section of the “Compensation Discussion & Analysis” for additional information. Non-Qualified Pension Benefit In the event of a change in control, the non-qualified pension amounts shown in the table above for Anne M. Mulcahy, Lawrence A. Zimmerman, Ursula M. Burns and James A. Firestone represent the lump sum payments that would be paid for all non-qualified pension benefits. These amounts were calculated as specified in the Unfunded Supplemental Executive Retirement Plan based on the present value of future benefits using the minimum required interest rate and mortality for qualified plan lump sum payments. These benefits would not be paid as a lump sum without the occurrence of a change in control that conformed with deferred compensation tax regulations. The present value of the benefits payable upon an event other than a change in control represents the present value of the accumulated benefits for each participant. Since these amounts are not paid as lump sums, and for change in control purposes, this present value is already determined using the required section 280G assumptions, these assumptions have been used for this purpose as well to express these benefits as a present value. These present values are based on assumed termination of employment on December 31, 2007. Upon termination, the annual non-qualified benefits for recipients not yet age 55 would be payable at age 65 as a single life annuity. Other Payments Similar to other employees of the Company, only U.S. executives who are retirement eligible, based on age and actual years of service, would receive retiree health care benefits. Anne M. Mulcahy and Lawrence A. Zimmerman would be eligible for retiree health care benefits if they separated from Xerox on December 31, 2007. Also, like other employees, the named executive officers would be eligible for payment of all earned and accrued but unused vacation due as of the date of the separation (or last day worked prior to salary continuance) under the terms of the Company’s vacation policy. 41 Equity Compensation Plan Information The Equity Compensation Plan Information table provides information as of December 31, 2007, with respect to shares of Xerox common stock that may be issued under our existing equity compensation plans, including the Xerox Corporation 2004 Performance Incentive Plan (2004 Plan); the Xerox Corporation 2004 Equity Compensation Plan for Non-Employee Directors (2004 Directors Plan); the Xerox Corporation Long-Term Incentive Plan (1991 Plan); the Xerox Corporation 1996 Non-Employee Director Stock Option Plan (1996 Plan); the Xerox Corporation 1998 Employee Stock Option Plan (1998 Plan); the Xerox Mexicana, S.A. de C.V. Executive Rights Plan (Mexico Plan); and the Xerox Canada Inc. Executive Rights Plan (Canada Plan). EQUITY COMPENSATION PLAN INFORMATION
Xerox Mexicana, S.A. de C.V. Executive Rights Plan The Mexico Plan, which was discontinued in May 2004 following shareholder approval of the 2004 Plan, provided for the granting of stock rights for the purpose of advancing the interests of Xerox Corporation and shareholders by providing the General Director or Executive Director and other employees with a proprietary interest in the growth and performance of the Company and incentives for continued service. Xerox Canada Inc. Executive Rights Plan The Canada Plan, which was discontinued in May 2004 following shareholder approval of the 2004 Plan, provided for the granting of stock rights and other related vehicles for the purpose of advancing the interests of Xerox Corporation and shareholders by providing the President or a Vice President of Xerox Canada Inc. and other employees with a proprietary interest in the growth and performance of the Company and incentives for continued service. 42 Indemnification Actions The Company’s by-laws provide for indemnification of officers and directors to the full extent permitted by New York law. Consistent with these by-laws, in connection with Miller, et al. v. Allaire, et al; In re Xerox Corporation Securities Litigation; Carlson v. Xerox Corporation, et al.; In re Xerox Corp. ERISA Litigation; Florida State Board of Administration, et al. v. Xerox Corporation, et al., National Union Fire Insurance Company v. Xerox Corporation, et al.; and Miron v. Microsoft Corporation, et al.; the Company has advanced counsel fees and other reasonable fees and expenses, actually and necessarily incurred by the present and former directors and officers who are involved, and the Company has advanced, since the previous report to shareholders as to these fees and expenses, an aggregate of approximately $3,191,059. Each of the individuals is required, in accordance with the requirements of the Business Corporation Law of the State of New York (BCL), to execute an undertaking to repay such expenses if they are finally found not to be entitled to indemnification under the Company’s by-laws and the BCL. Directors and Officers Liability Insurance and Indemnity On August 18, 2007, the Company renewed its policies for directors and officers liability insurance. The policies are issued by Federal Insurance Company, XL Specialty Insurance Company, St. Paul Mercury Insurance Company, Twin City Fire Insurance Company, U.S. Specialty Insurance Company, Arch Specialty Insurance Company and ACE American Insurance Company, Allied World Assurance Company and Axis Reinsurance Company. The policies expire August 18, 2008, and the total annual premium is $4,888,242. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the 1934 Act requires the Company’s directors, executive officers, and persons who own more than ten percent of the common stock of the Company, to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of common stock of the Company. Directors, officers and greater than ten percent shareholders are required by the regulations of the SEC to furnish the Company with copies of all Section 16(a) reports they file. Based solely on review of the copies of such reports furnished to the Company or written representations that no other reports were required to be filed with the SEC, the Company believes that all reports for the Company’s directors and executive officers that were required to be filed under Section 16 of the Securities Exchange Act of 1934 during the fiscal year ended December 31, 2007 were timely filed except as follows: Ms. Burns, Mr. Firestone, Leslie Varon, and Don Liu were each late filing one Form 4 reporting one transaction; and Quincy Allen, Willem Appelo, Stephen Cronin and Russell Peacock were each late filing an initial report of beneficial ownership on Form 3. PROPOSAL 2 — RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Audit Committee has selected PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, to act as independent auditors of the Company for 2008. Representatives of the firm are expected to be at the meeting to respond to appropriate questions and to make a statement, if they wish. Principal Auditor Fees and Services Aggregate fees for professional services rendered for the Company by PwC for the years ended December 31, 2007 and 2006, were ($ in millions):
Audit fees for the years ended December 31, 2007 and 2006, were for professional services rendered for the audits of the consolidated financial statements of the Company in accordance with standards of the Public Company Accounting Oversight Board, statutory and subsidiary audits, assistance with review of documents filed with the SEC, consents, comfort letters, international filings and other services required to be performed by our independent auditors. 43 Audit Related fees for the years ended December 31, 2007 and 2006, were for assurance and related services associated with employee benefit plan audits, information systems control reviews, due diligence reviews, special reports pursuant to agreed upon procedures and other attest services. Tax fees for the years ended December 31, 2007 and 2006, were primarily for services related to tax compliance. All Other fees were primarily associated with attendance at accounting seminars, benchmarking services and research materials. In accordance with the Audit Committee Charter, all of the foregoing audit and non-audit fees paid to, and the related service provided by, PwC were pre-approved by the Audit Committee. Audit Committee Report The responsibilities of the Audit Committee are discussed under “Committee Functions, Membership and Meetings” on page 7 and can also be found on our website at www.xerox.com/corporategovernance. Management is responsible for the Company’s internal controls and the financial reporting process. The independent registered public accounting firm is responsible for performing an audit of the Company’s consolidated financial statements and the effectiveness of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States) and to issue a report thereon. The Audit Committee’s responsibility is to monitor and oversee these processes. Consistent with the foregoing, the Audit Committee has:
Based upon the foregoing review and discussions, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s 2007 Annual Report to Shareholders and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 for filing by the Company with the SEC. Richard J. Harrington, Chairman
The Board of Directors
recommends a vote PROPOSAL 3 — PROPOSAL TO AMEND THE COMPANY’S CERTIFICATE OF INCORPORATION TO REQUIRE MAJORITY VOTING FOR THE ELECTION OF DIRECTORS IN NON-CONTESTED ELECTIONS The Board of Directors recommends that shareholders approve an amendment to the Company’s certificate of incorporation requiring a majority vote for the election of directors in non-contested elections. Background Xerox is a New York Corporation. New York business corporation law provides that, unless otherwise specified in a Company’s certificate of incorporation, a director is elected by a plurality of the votes cast. Xerox’s certificate of incorporation does not specify the voting standard required in director elections, so Xerox directors are currently elected by a plurality vote; that is, a director nominee who receives the highest number of “for” votes cast is elected, whether or not such votes constitute a majority of all votes cast, including “withheld” votes. 44 In 2006, Xerox adopted as Xerox policy a form of majority voting for non-contested director elections, implementing this policy through an amendment to the Corporate Governance Guidelines. Under this policy, directors continue to be elected by a plurality vote, but the Corporate Governance Guidelines require that a director nominee who receives a greater number of “withheld” votes than “for” votes must immediately tender his or her resignation from the Board. The Board then would decide, based on the relevant facts and circumstances, whether to accept the resignation. The director tendering his or her resignation under this provision would not be permitted to participate in the Board’s decision. The Board’s explanation of its decision would be promptly disclosed in a Form 8-K Report filed with the Securities and Exchange Commission. Majority Vote Amendment to the Company’s Certificate of Incorporation To further strengthen this majority voting approach, the Board has authorized, and recommends that shareholders approve, an amendment to Xerox’s certificate of incorporation that would require that director nominees in a non-contested election must be elected by shareholders by a majority vote, which will further enhance the accountability of each director to Xerox’s shareholders. Under this provision, each vote is specifically counted “for” or “against” the director’s election. An affirmative majority of the total number of votes cast “for” or “against” a director nominee will be required for election of each director. Shareholders will also be entitled to abstain with respect to the election of a director. In accordance with New York law, abstentions will have no effect in determining whether the required affirmative majority vote has been obtained. Under New York law, shareholders must approve an amendment to the Company’s certificate of incorporation to change the voting standard in director elections. If the proposed amendment is approved, a new paragraph will be added to Article SEVENTH of Xerox’s certificate of incorporation that reads as follows: Unless the election is contested, each director shall be elected by the affirmative vote of a majority of the votes cast for or against the director at any meeting for the election of directors at which a quorum is present. In a contested election, directors shall be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. An election shall be considered contested if as of the record date there are more nominees for election than positions on the board of directors to be filled by election at the meeting. If approved by shareholders, this amendment will become effective upon the filing with the New York Department of State of a certificate of amendment of Xerox’s certificate of incorporation. Xerox would make such a filing promptly after the Annual Meeting of Shareholders. Upon approval of this proposal and the filing of the certificate of amendment, the Board will amend Xerox’s by-laws to incorporate the director resignation policy currently contained in the Corporate Governance Guidelines and conform this director resignation policy to the majority vote standard so that an incumbent director who did not receive the requisite affirmative majority of the votes cast for his or her reelection would be required to tender his or her resignation to the Board. Under New York law, an incumbent director who is not re-elected may remain in office until his or her successor is elected and qualified, continuing as a “holdover” director until his or her position is filled by a subsequent shareholder vote or his or her earlier resignation or removal by a shareholder vote. The Board will adopt the holdover director resignation policy to address the continuation in office of a director that would result from application of the holdover director provision. Under the holdover director resignation policy, the Board will decide whether to accept the resignation in a process similar to the one the board currently uses pursuant to the existing majority vote policy. The Board of Directors
recommends a vote 45 PROPOSAL 4 — SHAREHOLDER PROPOSAL RELATING TO REPORTING OF COMPLIANCE WITH THE VENDOR CODE OF CONDUCT Domini Social Investments, 536 Broadway, New York, NY 10012-3915 (Domini), As You Sow, 311 California Street, San Francisco, CA 94104, as representative of shareholder Thomas Van Dyck (Van Dyck), and New York City, Office of the Comptroller, 1 Centre Street, New York, NY 10007-2341, as representative of the shareholder New York City Employees’ Retirement System (NYCERS), who have advised the Company that Domini, Van Dyck and NYCERS are each the beneficial owner of the Company’s Common Stock representing more than $2,000, have submitted the following proposal: Whereas: Reports of human rights violations in the overseas subsidiaries and suppliers of some U.S. - based corporations has increased public awareness of the problems of child labor, sweatshop conditions and the denial of basic labor rights. Reports by the International Labor Organization, CAFOD, a Catholic relief agency, CEREAL (Centro de Reflexion y Accion Laboral), a Mexican religious organization, and F&C Asset Management, a leading UK-based money manager, highlighted serious labor problems in the global electronics supply chain. According to business school Professor S. Prakash Sethi, an expert in supply chain labor conditions, “overtime abuse is just as bad in the high-tech industry as it is in the garment industry, and the hazardous-materials issue is even worse.” Human rights violations in the workplace can damage our company’s reputation, lead to the loss of brand value, impact product quality or result in costly litigation. Our company is exposed to these risks through the external vendors that assemble and manufacture portions of our company’s products around the world. A number of our company’s competitors have adopted codes of conduct for vendors, addressing such issues as child labor, forced labor and freedom of association. Xerox has announced that it has joined an industry coalition to address supply chain labor conditions, and has adopted its code of conduct. To date, Xerox has published minimal information on its efforts to monitor its supply chain and enforce the provisions of its code. Shareholders currently have no means to adequately assess these efforts, and to fully evaluate the risks to shareholder value imposed by labor conditions in Xerox’s manufacturing supply chain. We believe that a credible code compliance program includes independent monitoring, a transparent verification process and regular public reporting of monitoring results. Without such a report, shareholders cannot be assured about the overall progress the company is making on compliance with its code. Several leading companies, including Gap, Nike, Hewlett Packard and Apple have published public reports detailing working conditions in supplier facilities, and company efforts to address code of conduct violations. Specific quantitative goals for vendor compliance should be established. Rather than terminating contracts when code violations are found, our company should establish incentives to encourage its suppliers and vendors to improve working conditions. Resolved: Shareholders request the Board of Directors to prepare a report at reasonable expense, omitting proprietary information, on its code of conduct and compliance mechanisms for its vendors, subcontractors and buying agents in the countries where it sources. The report should be made available to shareholders by November 2008. Supporting Statement We recommend that report be prepared on an annual basis and disclose the number of facilities audited and frequency of audits, the audit pass/fail rate; primary reasons for facility audit failure, and a discussion of the most pervasive problems and progress made towards their resolution. BOARD OF DIRECTORS’ RECOMMENDATION The Company’s Board of Directors does not believe that it is in the best interest of our shareholders to implement the proposal for the following reasons and recommends a vote “against” this proposal. Xerox strongly supports the protection of basic human rights throughout our supply chain. To assure the protection of those human rights, we have taken extensive action, as discussed below, to adopt a code of conduct that is properly tailored both to the electronics industry and to Xerox’s business model. Once Electronic Industry Citizenship Coalition (EICC) industry wide standards become formalized and finalized, Xerox will develop a process to incorporate them into our code of conduct for 46 suppliers. In the interim, we have implemented many initiatives to ensure that our objectives are being realized. We conduct numerous compliance assessments with our suppliers to ensure that they fulfill our quality, cost, delivery, human rights and ethical expectations. In 2006, we joined the EICC, which provides our industry with a common code of conduct to be reflected throughout our industry’s overall supply chains. While prioritizing its focus on the electronics industry, the EICC code of conduct is based on recognized standards and principles, such as the International Labour Organization’s (ILO) Declaration on Fundamental Principles and Rights at Work and the United Nations Universal Declaration of Human Rights. We have adopted the EICC code of conduct to set standards for our key vendors and have communicated it as such to these direct suppliers. Many of our largest suppliers are also members of EICC. In addition, our supply chain and business partner Fuji Xerox as well as many of our large suppliers are participants in the United Nations Global Compact. The UN Global Compact and EICC codes of conduct are both based on ILO standards and commit their members to compliance with highly ethical means of conducting business around the world. We are also updating our standard supplier contracts to require our vendors to comply with the EICC code of conduct. As an EICC member, we have adopted the common audit standards and joint audit assessments for the overall supply chain. In addition, we currently have our own supply chain assessment methodologies and processes, as do several other EICC-member companies. The Xerox supplier assessment process includes on-site reviews by Xerox employees of our top 38 direct suppliers and self-assessments completed by about 1,500 vendors. Before our primary suppliers are permitted to do business with us, we make on-site visits. We then conduct on-site reviews every one to three years, depending on the scope of our relationship with these suppliers. In the past two years, we have transferred the vast majority of our production purchasing operation to the Asia-Pacific area, and we now have Xerox Global Purchasing representatives in Hong Kong, China, Malaysia, Singapore, Korea, Japan and India. This allows for more direct interaction between Xerox and its suppliers. Our purchasing representatives conduct quarterly, and in some cases more frequent, on-site reviews to assess the quality, cost and delivery of the vendor’s products and to ensure that the business is run with the highest ethical standards in accordance with Xerox’s Human Rights policy statement (available at www.xerox.com/citizenship). Our membership in the EICC will enable an enhanced process for monitoring supplier code of conduct compliance, which addresses the very same concerns raised in this shareholder proposal. Industry-wide standards on these compliance assessments are now being formalized by the EICC. The EICC assessment process will provide consistent metrics for ongoing code of conduct compliance reviews as well as comparisons with other companies in the industry, driving a more consistent review system throughout the electronics industry. As this assessment system is finalized and adapted by the EICC, we will review opportunities to disclose more results and related corrective action plans. Xerox believes its well defined and disciplined approach to supplier assessment continues to help ensure that we are doing business only with suppliers that comply with international standards of ethics and human rights. Therefore, the Board believes the concerns raised by this proposal are already being effectively addressed and believes the interest of the Xerox shareholders would be better served by continuing to focus on our existing initiatives. Moreover, we use our annual Report on Global Citizenship to provide shareholders with information about our practices related to supplier relations, human rights, ethics, governance and many other topics. A copy of our 2007 Report on Global Citizenship is available at www.xerox.com/citizenship. The Board of Directors
recommends a vote 47 OTHER MATTERS Other Actions at Meeting The Board of Directors does not intend to present any other matters at this meeting. The Board has not been informed that any other person intends to present any other matter for action at this meeting. If any other matters properly come before the meeting, the persons named in the accompanying proxy intend to vote the proxies in accordance with their best judgment. Information About this Solicitation of Proxies In addition to the solicitation of proxies by mail, certain of our employees may solicit proxies without extra remuneration. We also will request brokerage houses, nominees, custodians and fiduciaries to forward soliciting material to the beneficial owners of stock held of record and will reimburse such person for the cost of forwarding the material. We have engaged D.F. King & Co., Inc. to handle the distribution of soliciting material to, and the collection of proxies from, such entities. We will pay D.F. King & Co., Inc. a fee of $14,000 plus reimbursement of out-of-pocket expenses for this service. We will bear the cost of all proxy solicitation. Confidential Voting As a matter of policy, we keep confidential proxies, ballots and voting tabulations that identify individual shareholders. Such documents are available for examination only by the inspector of election and certain of our employees and our transfer agent who are associated with processing proxy cards and tabulating the vote. The vote of any shareholder is not disclosed except in a contested proxy solicitation or as may be necessary to meet legal requirements. Communication With Non-Management Directors by Interested Parties Under the Corporate Governance Guidelines, the Company provides a process for interested parties to send communications to the Board of Directors. The Corporate Governance Guidelines provide that interested parties desiring to communicate with the non-management Directors regarding the Company may directly contact the Chairman of the Corporate Governance Committee, Mr. Vernon E. Jordan, Jr., Senior Managing Director, Lazard Freres & Co., LLC, 30 Rockefeller Center, New York, New York 10020. Multiple Shareholders Having the Same Address If you and other residents at your mailing address own shares of common stock through a broker, you may have received a notice from the broker notifying you that your household will be sent only one Annual Report and Proxy Statement. If you did not return the “opt-out” card attached to such notice you were deemed to have consented to such process. The broker or other holder of record will send at least one copy of the Annual Report and Proxy Statement to your address. You may revoke your consent at any time by calling (800) 542-1061. The revocation will be effective 48 hours after receiving your telephone notification. In any event, the Company will send a copy of the Annual Report and Proxy Statement to you if you address your written request to Xerox Corporation, Shareholder Services, P.O. Box 4505, Norwalk, CT 06856-4505 or call Shareholder Services at (203) 849-2315. If you are receiving multiple copies of annual reports and proxy statements at your address and would like to receive only one copy in your household, please contact us at this same address and telephone number. Availability of Additional Information Copies of the 2007 Annual Report of the Company have been distributed to shareholders (unless you have consented to electronic delivery). Additional copies and additional information, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (Form 10-K) filed with the SEC are available without charge from Xerox Corporation, P.O. Box 4505, Norwalk, Connecticut 06856-4505, Attention: Corporate Secretary. The Annual Report, Proxy Statement and Form 10-K are also available on the Company’s website at www.xerox.com/corporategovernance or http://ww3.ics.adp.com/streetlink/xrx. Shareholders can receive proxy statements, annual reports, and other shareholder materials via electronic delivery. Registered shareholders (if you have your stock in certificate form) can sign up for electronic delivery at http://www.eTree.com/Xerox. Beneficial shareholders (if you hold your shares through a broker or financial institution) can sign up for electronic delivery at http://enroll.icsdelivery.com/xrx. 48 REQUIREMENTS FOR SUBMISSION OF PROXY PROPOSALS, NOMINATION OF DIRECTORS AND OTHER BUSINESS Shareholder Proposals for 2009 Meeting We expect to hold our 2009 Annual Meeting of Shareholders during the second half of May and to issue our Proxy Statement for that meeting during the first half of April. Under the SEC proxy rules, if a shareholder wants us to include a proposal in our Proxy Statement and form of proxy for the 2009 Annual Meeting of Shareholders, the proposal must be received by us at P.O. Box 4505, Norwalk, Connecticut 06856-4505, Attention: Corporate Secretary, no later than December 12, 2008. Under our by-laws, any shareholder wishing to make a nomination for director or wishing to introduce any business, at the 2009 Annual Meeting of Shareholders must give the Company advance notice as described in the by-laws. To be timely, we must receive your notice for the 2009 Annual Meeting at our offices mentioned above no earlier than November 12, 2008 and no later than December 12, 2008. Nominations for director must be accompanied by written consent to being named in the Proxy Statement as a nominee and to serving as a director if elected. Corporate Governance Committee – Director Nomination Process The Corporate Governance Committee considers candidates for Board membership recommended by its members and other Board members, as well as by management, shareholders (see below) or others. There are no specific minimum qualifications that the Corporate Governance Committee believes must be met by candidates. The Corporate Governance Guidelines require that a substantial majority of the Board should consist of independent directors. Any management representation should be limited to top Company management. Nominees are to be selected on the basis of, among other things, broad perspective, integrity, independence of judgment, experience, expertise, diversity, ability to make independent analytical inquiries, understanding of the Company’s business environment and willingness to devote adequate time and effort to Board responsibilities. Members should represent a predominance of business backgrounds and bring a variety of experiences and perspectives to the Board. The Corporate Governance Committee evaluates nominations by shareholders in the same manner as nominations received from any of the other sources described above. Shareholders who wish to recommend individuals for consideration by the Corporate Governance Committee may do so by submitting a written recommendation to the Secretary of the Company, P.O. Box 4505, Norwalk, Connecticut 06856-4505. Submissions must include sufficient biographical information concerning the recommended individual, including age, employment and board memberships (if any), for the Corporate Governance Committee to consider. The submission must be accompanied by a written consent by the nominee to stand for election if nominated by the Board and to serve if elected by the shareholders. Recommendations received by December 12, 2008, will be considered for nomination at the 2009 Annual Meeting of Shareholders. Recommendations received after December 12, 2008, will be considered for nomination at the 2010 Annual Meeting of Shareholders. By order of the Board of Directors,
49 002CS-61283
Annual Meeting of Shareholders Proxy Card
Proxy — Xerox Corporation ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS The undersigned appoints ROBERT A. MCDONALD, ANNE M. MULCAHY and N.J. NICHOLAS, JR., and each of them (or if more than one are present, a majority of those present), as proxies for the undersigned, with full power of substitution, to represent the undersigned and to vote the shares of Common Stock of Xerox Corporation which the undersigned is entitled to vote at the above annual meeting and at all adjournments thereof, (a) in accordance with the following ballot, and (b) in accordance with their best judgment in connection with such other business as may come before the meeting. SIGNED PROXIES RETURNED WITHOUT SPECIFIC VOTING DIRECTIONS WILL BE VOTED IN ACCORDANCE WITH THE BOARD OF DIRECTORS’ RECOMMENDATIONS. NOTICE TO PARTICIPANTS IN THE
EMPLOYEE STOCK OWNERSHIP PLAN
This card also constitutes
voting instructions for participants in the Xerox Corporation Employee Stock
Ownership Plan. A Participant who signs on the reverse side hereby instructs
State Street Bank & Trust Company, Trustee, to vote all the shares of Common
Stock of Xerox Corporation allocated to his or her Stock Account and a
proportion of the shares of such Common Stock held in the ESOP Trust for which
no instructions have been received in accordance with the following direction.
ESOP participants must vote by 9:00 a.m., Central Time, Tuesday, May 20,
2008.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF
PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON 05/22/08 FOR XEROX
CORPORATION
THE FOLLOWING MATERIAL IS AVAILABLE AT WWW.PROXYVOTE.COM - ANNUAL REPORT - PROXY STATEMENT
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