UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

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Exchange Act of 1934 (Amendment No. )

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March 22, 2010

 

Dear fellow stockholder:

 

You are cordially invited to attend our annual meeting of stockholders on Thursday, April 22, 2010. We will hold the meeting at 10:00 a.m., Central Time, in the lower level auditorium at our headquarters located at CityPlace One, One CityPlace Drive, St. Louis, Missouri 63141. You can find maps with directions to our headquarters near the back of the proxy statement that accompanies this letter.

 

In connection with the annual meeting, we have enclosed a notice of the meeting, a proxy statement and a proxy card. We have also enclosed a copy of our annual report for 2009 which contains detailed information about us and our operating and financial performance.

 

I hope that you will be able to attend the meeting, but I know that not every stockholder will be able to do so. Whether or not you plan to attend, I encourage you to vote your shares. You may vote by telephone or on the Internet, or complete, sign and return the enclosed proxy card in the postage-prepaid envelope, also enclosed. The prompt execution of your proxy will be greatly appreciated.

 

Sincerely,

 

Steven F. Leer

Chairman of the Board and Chief Executive Officer

 

 1 CityPlace Drive, Suite 300     St. Louis, Missouri 63141     t: (314) 994-2700

 

One CityPlace Drive, Suite 300
St. Louis, Missouri 63141

 

March 22, 2010

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

The annual meeting of stockholders of Arch Coal, Inc. will be held in the lower level auditorium at our headquarters located at CityPlace One, One CityPlace Drive, St. Louis, Missouri 63141 on Thursday, April 22, 2010 at 10:00 a.m., Central Time. At the annual meeting, stockholders will consider the election of four nominees for director, the ratification of the appointment of our independent registered public accounting firm, the approval of an amendment and restatement of the Arch Coal, Inc. 1997 Stock Incentive Plan, the Section 162(m) approval of Arch Coal’s Incentive Compensation Plan for Executive Officers, and any other business properly introduced at the meeting.

 

By order of the Board of Directors

 

Robert G. Jones

Senior Vice President-Law, General Counsel and

Secretary

 

PROXY STATEMENT

 

TABLE OF CONTENTS

 

 

 

Our board of directors is soliciting proxies for the 2010 annual meeting of stockholders. On or about March 22, 2010, we expect to begin mailing these proxy materials to all stockholders of record at the close of business on February 22, 2010. On the record date, there were 162,474,101 shares of our common stock outstanding.

 

 

We will hold the annual meeting on Thursday, April 22, 2010, at 10:00 a.m., Central Time, in the lower level auditorium at our headquarters located at CityPlace One, One CityPlace Drive, St. Louis, Missouri 63141. You can find maps with directions to our headquarters under “Directions to the Annual Meeting” in this proxy statement.

 

 

We are asking our stockholders to elect the four nominees for director named in this proxy statement, to ratify the appointment of our independent registered public accounting firm, to approve an amendment and restatement of the Arch Coal, Inc. 1997 Stock Incentive Plan and to approve Arch Coal’s Incentive Compensation Plan for Executive Officers for purposes of Section 162(m).

 

 

You have one vote for each share of our common stock that you owned at the close of business on the record date. These shares include:

 

 

 

If your shares are registered directly in your name with our transfer agent, you are considered the “stockholder of record” with respect to those shares. We have sent these proxy materials directly to you.

 

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial owner” of the shares held in street name. Your broker, bank or other nominee who is considered the stockholder of record with respect to those shares has forwarded these proxy materials to you. As the beneficial owner you have the right to direct your broker, bank or other nominee

on how to vote your shares by using the voting instruction card included in the mailing or by following their instructions for voting by telephone or the Internet.

 

 

You can vote by proxy or in person.

 

 

If you are a stockholder of record, you may vote by telephone, Internet, or mail. Our telephone and Internet voting procedures are designed to authenticate stockholders by using individual control numbers that can be found on the proxy card.

 

 

You can vote by calling the toll-free telephone number on your proxy card. Telephone voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on the day before the meeting. If you vote by telephone, you do not need to return your proxy card.

 

 

You can vote via the Internet. The web site for Internet voting is on your proxy card. Internet voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on the day before the meeting. If you vote via the Internet, you do not need to return your proxy card.

 

 

If you choose to vote by mail, simply mark your proxy card, date and sign it, and return it in the postage-paid envelope provided.

 

If you submit your proxy using any of these three methods, Steven F. Leer or Robert G. Jones will vote your shares in the manner you indicate. You may specify whether your shares should be voted for all, some, or none of the nominees for director and for or against any other proposals properly introduced at the annual meeting. If you vote by telephone or Internet and choose to vote with the recommendation of our board of directors, or if you vote by mail, sign your proxy card, and do not indicate specific choices, your shares will be voted “FOR” the election of all four nominees for director and “FOR” ratification of the appointment of our independent registered public accounting firm, the approval of an amendment and restatement of the Arch Coal, Inc. 1997 Stock Incentive Plan and the Section 162(m) approval of Arch Coal’s Incentive Compensation Plan for Executive Officers.

 

If any other matter is presented, your proxy will authorize Steven F. Leer or Robert G. Jones to vote in accordance with their best judgment. At the time this proxy statement was printed, we knew of no matters to be considered at the annual meeting other than those referenced in this proxy statement.

 

If you wish to give a proxy to someone other than Steven F. Leer or Robert G. Jones, you may strike out their names on the proxy card and write in the name of any other person, sign the proxy, and deliver it to the person whose name has been substituted.

 

You may revoke a proxy in any one of the following three ways:

 

 

 

If you are a stockholder of record, you may attend the annual meeting and cast your vote in person.

 

 

You can submit voting instructions to your broker, bank or other nominee. In most instances, you will be able to do this by telephone, over the Internet, or by mail. Please refer to the voting instruction card included with these materials by your broker, bank or other nominee.

 

 

If you participate in our dividend reinvestment plan or our direct stock purchase plan, your proxy will also serve as an instruction to vote the whole shares you hold under those plans in the manner indicated on the proxy. If your proxy is not received, the shares you hold in those plans will not be voted.

 

 

If you are both a registered stockholder and a participant in our employee thrift plan, you will receive a single proxy card that covers shares of our common stock credited to your plan account as well as shares of record registered in exactly the same name. Accordingly, your proxy card also serves as a voting instruction for the trustee of the plan. If your plan account is not carried in exactly the same name as your shares of record, you will receive separate proxy cards for individual and plan holdings. If you own shares through this plan and you do not return your proxy by April 12, 2010, the trustee will vote your shares in the same proportion as the shares that are voted by the other participants in the plan. The trustee will also vote unallocated shares of our common stock held in the plan in direct proportion to the voting of allocated shares in the plan for which voting instructions have been received unless doing so would be inconsistent with the trustee’s duties.

 

 

Yes. Voting tabulations are confidential except in extremely limited circumstances. Such limited circumstances include contested solicitation of proxies, when disclosure is required by law, to defend a claim against us or to assert a claim by us and when a stockholder’s written comments appear on a proxy or other voting material.

 

In order to have a valid stockholder vote, a quorum must exist at the annual meeting. For us, a quorum exists when stockholders holding a majority of the outstanding shares of our common stock are present or represented at a meeting. For these purposes, shares that are present or represented by proxy at the annual meeting will be counted toward a quorum, regardless of whether the holder of the shares or proxy fails to vote on a particular matter or whether a broker with discretionary voting authority fails to exercise such authority with respect to any particular matter.

 

 

 

If a broker indicates on its proxy that it does not have authority to vote certain shares held in “street name,” the shares not voted are referred to as “broker non-votes.” Broker non-votes occur when brokers do not have discretionary voting authority to vote certain shares held in “street name” on particular proposals under the rules of the New York Stock Exchange, and the “beneficial owner” of those shares has not instructed the broker how to vote on those proposals. If you are a beneficial owner, your broker, bank or other nominee is permitted to vote your shares for or against “routine” matters such as the ratification of the appointment of our independent registered public accounting firm, even if the holder does not receive voting instructions from you. Brokers are not permitted to exercise discretionary voting authority to vote your shares for or against “non-routine” matters such as the election of directors, the approval of an amendment and restatement of the Arch Coal, Inc. 1997 Stock Incentive Plan and Section 162(m)

approval of Arch Coal’s Incentive Compensation Plan for Executive Officers if the holder does not receive voting instructions from you. Shares represented by proxies that are marked vote “withheld” with respect to the election of any nominee will not be considered in determining whether such nominee has received the affirmative vote of a plurality of the shares. Shares represented by proxies that are marked “abstain” with respect to any other mater to be voted upon at the annual meeting will have the effect of a negative vote.

 

 

We intend to announce preliminary voting results at the annual meeting. We will publish the final results in a Current Report on Form 8-K, which we expect to file within four business days after the annual meeting is held. You can obtain a copy of the Form 8-K by logging on to our website at archcoal.com, by calling the Securities and Exchange Commission at 800-SEC-0330 for the location of the nearest public reference room, or through the EDGAR system at sec.gov. Information on our website does not constitute part of this proxy statement.

 

 

We are dedicated to being a market-driven global leader in the coal industry and to creating superior long-term stockholder value. It is our policy to conduct our business with integrity and an unrelenting passion for providing the best value to our customers. All of our corporate governance materials, including the corporate governance guidelines, our code of conduct and board committee charters, are published under “Corporate Governance” in the Investors section of our website at archcoal.com. Information on our website does not constitute part of this proxy statement. The board of directors regularly reviews these materials, Delaware law, the rules and listing standards of the New York Stock Exchange and SEC regulations, as well as best practices suggested by recognized governance authorities, and modifies the materials as warranted.

 

 

It is the board of directors’ objective to have an overwhelming majority of directors who are independent. We have adopted in our corporate governance guidelines the criteria established by the New York Stock Exchange for determining whether a director is independent. The board of directors has determined, in its judgment, that ten of the twelve members of the board of directors meet the New York Stock Exchange standards for independence. Other than Steven F. Leer and John W. Eaves, who are executive officers, each member of our board of directors satisfies the independence standards in the corporate governance guidelines. The independent members of the board of directors meet regularly without any members of management present. These sessions are normally held following or in conjunction with regular board meetings. Mr. James R. Boyd, chairman of the Nominating and Corporate Governance Committee and lead director, serves as the presiding director during executive sessions.

 

All members of our Audit, Nominating and Corporate Governance and Personnel and Compensation committees must be independent directors as defined by our corporate governance guidelines. Members of the Audit Committee must also satisfy a separate Securities and Exchange Commission independence requirement, which provides that they may not accept, directly or indirectly, any consulting, advisory or other compensatory fee from us or any of our subsidiaries other than their directors’ compensation.

 

 

All of our employees, including our chief executive officer, our chief financial officer and each of the other executives named in this proxy statement, and directors must act ethically at all times and in accordance with the policies comprising our code of conduct, which is published under “Corporate Governance” in the Investors section of our website at archcoal.com. We intend to post amendments to or waivers from (to the extent applicable to one of our directors or executive officers) the code of conduct on our website.

 

Our code of conduct reflects our policy that all of our employees, including the executives named in this proxy statement, and directors must avoid any activity that creates, or may create, a conflict of interest, that might interfere with the proper performance of their duties or that might be hostile, adverse or competitive with our business. In addition, each of our directors and executive officers is encouraged to notify our board of directors when confronted with any situation that may be perceived as a conflict of interest, even if the person does not believe that the situation would violate our code of conduct or corporate governance guidelines. Our board of directors will then determine, after consultation with counsel, whether a conflict of interest exists. Directors who have a material personal interest in a particular issue may not vote on any matters with respect to that issue.

 

 

The entire board of directors is responsible for oversight of the company’s risk management processes. Our Vice President of Enterprise Risk Management oversees risk management efforts, provides quarterly reports to our audit committee and provides reports to our board of directors at least once per year. In addition, our board of directors and its standing committees periodically request supplemental information or reports as they deem appropriate.

 

 

Our certificate of incorporation and bylaws provide for a board of directors that is divided into three classes as equal in size as possible. The classes have three-year terms, and the term of one class expires each year in rotation at that year’s annual meeting. The size of the board of directors can be changed by a two-thirds vote of its members and is currently set at 12 members. Vacancies on the board of directors may be filled by a majority of the remaining directors. A director elected to fill a vacancy, or a new directorship created by an increase in the size of the board of directors, serves for the remainder of the full term of the class of directors in which the vacancy or newly created directorship occurred. As a matter of policy, the board of directors will submit the nomination of a director elected to fill a vacancy to the vote of our stockholders at the next annual meeting.

 

Mr. Leer has served as both the chairman of our board of directors and our chief executive officer since being appointed as chairman in April 2006. Mr. Boyd served as the chairman of our board of directors from 1998 until April 2006 and has served as our lead director since stepping down as the chairman of our board of directors. The responsibilities of the lead director include consulting with the chairman of the board of directors regarding agendas for board meetings and presiding over meetings of the board of directors during executive sessions of the independent directors.

 

Our board of directors has no fixed policy with respect to the separation of the offices of chairman of the board of directors and chief executive officer. Our board of directors retains the discretion to make this determination on a case-by-case basis from time to time as it deems to be in the best interest of the company and our stockholders at any given time. We believe our current board leadership structure is appropriate because it recognizes that in most cases one person should speak for and lead the company

and the board of directors in order to promote unified leadership and direction. In addition, the board of directors believes that Mr. Leer has served effectively as a liaison between the board of directors and management by serving the company in both capacities. Our governance structure provides effective oversight of the board of directors through a strong and independent lead director, as well as the following:

 

 

 

 

Our corporate governance guidelines provide that our Nominating and Corporate Governance Committee and board of directors will nominate candidates for our board of directors who possess the following principal qualities: strength of character, an inquiring and independent mind, practical wisdom, and mature judgment. In addition to these qualities, the selection criteria for nomination include recognized achievement, an ability to contribute to some aspect of our business, and the willingness to make the commitment of time and effort required of a director.

 

As described in more detail below, our board of directors believes that each of our directors meet such criteria and has attributes and experience that make him or her well qualified to serve on our board of directors. While we do not have a formal diversity policy, in order to find the most valuable talent available to meet these criteria, our board of directors generally considers candidates diverse in geographic origin, gender, ethnic background, and professional experience (private, public, and non-profit), pursuant to our corporate governance guidelines. Our goal is to include board members with the skills and characteristics that taken together will assure a strong board of directors.

 

Our directors have diverse backgrounds and provide experience and expertise in a number of critical areas. The Nominating and Corporate Governance Committee considers the particular experience, attributes, reputation and qualifications of directors standing for re-election and potential nominees for election, as well as the needs of our board of directors as a whole and its individual committees. In nominating candidates for election by our stockholders, both the Nominating and Corporate Governance Committee and the board of directors act pursuant to these guidelines. Both the Nominating and Corporate Governance Committee and the board of directors assess the effectiveness of corporate governance policies, including with respect to diversity, through completion of an annual evaluation process.

 

The Nominating and Corporate Governance Committee has identified nine areas of expertise that are particularly relevant to service on the board of directors and has identified the directors whose key areas of

expertise qualify them for each of the listed categories. The categories identified by the Nominating and Corporate Governance Committee are:

 

CEO/Senior Management — Experience working as a chief executive officer or senior officer of a major public or private company or non-profit entity.

 

Energy — Extensive knowledge and experience in the energy industry, either as a senior executive of an energy company, as a senior executive of a customer of an energy company or through legal or regulatory experience on energy matters.

 

Environmental and Safety — A thorough understanding of safety and environmental issues and energy industry regulations.

 

Finance and Accounting — Senior executive level experience in financial accounting and reporting, auditing, corporate finance and/or internal controls.

 

Governance/Board — Prior or current experience as a board member of a major organization (private, public or non-profit).

 

Government Relations — Experience in or a strong understanding of the workings of government and public policy on a local, state and national level.

 

Human Resources and Compensation — Senior executive level experience or membership on a board compensation committee with an extensive understanding of compensation programs, particularly compensation programs for executive level employees and incentive based compensation programs.

 

Marketing — Senior executive level experience in marketing combined with a strong working knowledge of our markets, customers and strategy.

 

Strategic Planning — Senior executive level experience in strategic planning for a major public, private or non-profit entity.

 

 

The following is a list of our directors, their ages as of February 22, 2010, their occupation during the last five years and certain other biographical information, including the areas of expertise where each director or nominee is most skilled:

 

 

The board of directors has the following five committees: Nominating and Corporate Governance, Finance, Personnel and Compensation, Audit and Energy and Environmental Policy. The table below contains information concerning the membership of each of the committees and the number of times the board of directors and each committee met during 2009. Each director attended at least 75% of the total number of meetings of the board of directors and of the committees on which he or she serves. In addition, all directors are expected to attend the annual meeting of stockholders, and all of them attended last year’s annual meeting.

 

 

 

 

The Nominating and Corporate Governance Committee is responsible for the following items:

 

 

The board of directors has determined, in its judgment, that the Nominating and Corporate Governance Committee is composed entirely of independent directors as defined in the New York Stock Exchange listing standards and operates under a written charter adopted by the board of directors, a copy

of which is published under “Corporate Governance” in the Investors section of our website at archcoal.com.

 

 

The Finance Committee reviews and approves fiscal policies relating to our financial structure, including our debt, cash and risk management policies. The Finance Committee also reviews and recommends to the board of directors appropriate action with respect to significant financial matters, including dividends on our capital stock, major capital expenditures and acquisitions, and funding policies of our employee benefit plans.

 

 

The Personnel and Compensation Committee is responsible for the following items:

 

 

The board of directors has determined, in its judgment, that the Personnel and Compensation Committee is composed entirely of independent directors as defined in the New York Stock Exchange listing standards and operates under a written charter adopted by the entire board of directors, a copy of which is published under “Corporate Governance” in the Investors section of our website at archcoal.com. The report of the Personnel and Compensation Committee can be found under “Personnel and Compensation Committee Report” in this proxy statement.

 

 

The Audit Committee is responsible for the following items:

 

 

The Audit Committee is directly responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm. The board of directors has determined, in its judgment, that the Audit Committee is composed entirely of independent directors as defined in the New York Stock Exchange listing standards and Rule 10A-3 of the Securities Exchange Act of 1934 and operates

under a written charter adopted by the board of directors, a copy of which is published under “Corporate Governance” in the Investors section of our website at archcoal.com.

 

The board of directors has also determined, in its judgment, that Mr. Burke and Mr. Jennings are “audit committee financial experts” and that each member of the Audit Committee is “financially literate.” Our corporate governance guidelines do not currently restrict the number of audit committees of public companies on which members of our Audit Committee may serve. The board of directors has determined that none of the members of the Audit Committee currently serves on the audit committees of more than three public companies. The report of the Audit Committee can be found under “Audit Committee Report” in this proxy statement.

 

 

The Energy and Environmental Policy Committee reviews, assesses and provides advice to the board of directors on current and emerging energy and environmental policy trends and developments that affect or could affect us. In addition, the Energy and Environmental Policy Committee makes recommendations concerning whether and to what extent we should become involved in current and emerging energy and environmental policy issues.

 

 

The identities of the directors who served on the Personnel and Compensation Committee during 2009 are set forth under the report of the Personnel and Compensation Committee under “Personnel and Compensation Committee Report” in this proxy statement. None of the directors who served on the Personnel and Compensation Committee during 2009 has been an officer or employee of ours. None of our executives has served on the board of directors or compensation committee of any other entity that has or has had one or more executives serving as a member of our board of directors or compensation committee.

 

 

The Nominating and Corporate Governance Committee has responsibility for assessing the need for new directors to address specific requirements or to fill a vacancy. The committee initiates a search for a new candidate seeking input from our chairman and from other directors. The committee may retain an executive search firm to identify potential candidates. All candidates must meet the requirements specified in our corporate governance guidelines. Candidates who meet those requirements and otherwise qualify for membership on our board of directors are identified, and the committee initiates contact with preferred candidates. The committee regularly reports to the board of directors on the progress of the committee’s efforts. The committee meets to consider and approve final candidates who are then presented to the board of directors for consideration and approval. Our chairman or the chairman of the Nominating and Corporate Governance Committee may extend an invitation to join the board of directors.

 

Stockholder recommendations should be submitted in writing to Robert G. Jones, our secretary, and should include information regarding nominees required under our bylaws. Individuals recommended by

stockholders will receive the same consideration received by individuals identified to the Nominating and Corporate Governance Committee through other means.

 

 

Our board of directors has established procedures intended to facilitate stockholder communication directly with the board of directors, the non-employee directors or the Audit Committee. Such communications may be confidential or anonymous, and may be reported by phone to our confidential hotline at 866-519-1881 or by writing to the individual directors or group in care of Arch Coal, Inc., One CityPlace Drive, Suite 300, St. Louis, Missouri 63141, Attention: Senior Vice President-Law, General Counsel and Secretary. All such communications are promptly communicated to the chairman of the Audit Committee or our Director of Internal Audit, as appropriate.

 

The terms of four directors (Messrs. Jennings, Leer, Potter and Sands) will expire at the annual meeting. Our board of directors has nominated each of those individuals for re-election for a three-year term that will expire in 2013. The board of directors is not aware that any nominee will be unwilling or unable to serve as a director. All nominees have consented to be named in the proxy statement and to serve if elected. If, however, a nominee is unavailable for election, your proxy authorizes us to vote for a replacement nominee if the board of directors names one. As an alternative, the board of directors may reduce the number of directors to be elected at the meeting.

 

The board of directors recommends a vote “FOR” these nominees.

 

Ernst & Young LLP was our independent registered public accounting firm for 2009. The Audit Committee has appointed Ernst & Young LLP as our independent registered public accounting firm for 2010. The Audit Committee and the board of directors are requesting that stockholders ratify this appointment as a means of soliciting stockholders’ opinions and as a matter of good corporate governance. If the stockholders do not ratify the selection of Ernst & Young LLP, the Audit Committee will consider any information submitted by stockholders in connection with the selection of the independent registered public accounting firm for the next fiscal year. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if the Audit Committee believes such a change would be in our best interests and the best interests of our stockholders.

 

Representatives of Ernst & Young LLP will attend the annual meeting and will have the opportunity to make a statement if they desire to do so and to respond to appropriate questions.

 

During 2009 and 2008, Ernst & Young LLP charged fees for services rendered to us as follows:

 

 

 

The Audit Committee has adopted an audit and non-audit services pre-approval policy that requires the committee, or the chairman of the committee, to pre-approve services to be provided by our independent registered public accounting firm. The Audit Committee will consider whether the services to be provided by the independent registered public accounting firm are prohibited by the SEC’s rules on

auditor independence and whether the independent registered public accounting firm is best positioned to provide the most effective and efficient service. The Audit Committee is mindful of the relationship between fees for audit and non-audit services in deciding whether to pre-approve such services. The Audit Committee has delegated to the chairman of the committee pre-approval authority between committee meetings, and the chairman must report any pre-approval decisions to the committee at the next regularly scheduled committee meeting. All non-audit services performed by Ernst & Young LLP in 2009 and 2008 were pre-approved in accordance with the procedures established by the Audit Committee.

 

The board of directors recommends a vote “FOR” ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm.

 

The Company currently maintains the Arch Coal, Inc. 1997 Stock Incentive Plan, as amended and restated December 5, 2008 (the “Current Plan”). The board of directors believes that the Current Plan has been effective in attracting and retaining highly-qualified employees and that the awards granted under the Current Plan have provided an incentive that aligns the economic interests of plan participants with those of our stockholders. The Personnel and Compensation Committee (the “Committee”), with the assistance of Hewitt Associates, has reviewed the Current Plan to determine whether it remains a flexible and effective source of incentive compensation in terms of the number of shares of stock available for awards and in terms of its design, as well as whether it generally conforms with best practices in today’s business environment.

 

Based on its review, the Committee recommended that the Current Plan be amended and restated to:

 

 

Accordingly, the board of directors approved and recommends that the Company’s stockholders approve the Arch Coal, Inc. 1997 Stock Incentive Plan, as amended and restated effective January 1, 2010 (the “Restated Plan”). Upon approval of the Restated Plan by the Company’s stockholders, the Restated Plan will replace the Current Plan and no new awards will be made under the terms of the Current Plan. However, any outstanding awards previously granted under the Current Plan will continue in effect after approval of the Restated Plan and will not be deemed amended or modified by the adoption and approval of the Restated Plan. If the Restated Plan is not approved by the Company’s stockholders, the Current Plan will remain in effect according to its terms and the Company may continue to grant awards under that plan.

 

Stockholder approval of the Restated Plan also is desired to ensure the tax deductibility by the Company of certain performance-based awards granted under the Restated Plan for purposes of Section 162(m) of the United States Internal Revenue Code of 1986, as amended (the “Code”), and to meet the listing requirements of the New York Stock Exchange.

The material features of the Restated Plan are summarized below. The summary is qualified in its entirety by reference to the specific provisions of the Restated Plan, the full text of which is set forth as Appendix A to this proxy statement.

 

 

The Restated Plan is administered by the Committee. Subject to the express provisions of the Restated Plan, the Committee has the authority, in its discretion, to interpret the Restated Plan, establish rules and regulations for its operation, select employees of the Company and its subsidiaries to receive awards and determine the form and amount and other terms and conditions of such awards.

 

 

Awards under the Restated Plan may include incentive stock options, nonqualified stock options, stock appreciation rights, restricted shares of common stock, restricted stock units, performance share or unit awards and other stock-based awards.

 

 

The Committee may grant to a participant options to purchase Company common stock that qualify as incentive stock options for purposes of Section 422 of the Code (“incentive stock options”), options that do not qualify as incentive stock options (“nonqualified stock options”) or a combination thereof. The terms and conditions of stock option grants, including the quantity, price, vesting periods, and other conditions on exercise will be determined by the Committee.

 

The exercise price for stock options will be determined by the Committee in its discretion, but may not be less than 100% of the fair market value of one share of the Company’s common stock on the date when the stock option is granted. Additionally, in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of stock of the Company on the date of grant, the exercise price may not be less than 110% of the fair market value of one share of common stock on the date the stock option is granted. On February 22, 2010, the market price per share of the Company’s common stock was $22.44 based on the closing price of the common stock on the New York Stock Exchange on such date.

 

Stock options must be exercised within a period fixed by the Committee that may not exceed ten years from the date of grant, except that in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of stock of the Company on the date of grant, the exercise period may not exceed five years. The Restated Plan provides for earlier termination of stock options upon the participant’s termination of service, unless extended by the Committee, but in no event may the options be exercised after the scheduled expiration date of the options.

 

At the Committee’s discretion, payment for shares of common stock on the exercise of stock options may be made in cash, shares of the Company’s common stock held by the participant or in any other

form of consideration acceptable to the Committee (including one or more forms of “cashless” or “net” exercise).

 

 

The Committee may grant to a participant an award of stock appreciation rights, which entitles the participant to receive, upon its exercise, a payment equal to (i) the excess of the fair market value of a share of common stock on the exercise date over the stock appreciation right exercise price, multiplied by (ii) the number of shares of common stock with respect to which the stock appreciation right is exercised.

 

The exercise price for a stock appreciation right will be determined by the Committee in its discretion, but may not be less than 100% of the fair market value of one share of the Company’s common stock on the date when the stock appreciation right is granted. Stock appreciation rights must be exercised within a period fixed by the Committee that may not exceed ten years from the date of grant. Upon exercise of a stock appreciation right, payment may be made in cash, shares of Company stock or a combination of cash and stock.

 

 

The Committee may award to a participant shares of common stock subject to specified restrictions (“restricted shares”). Restricted shares are subject to forfeiture if the participant does not meet certain conditions such as continued employment over a specified forfeiture period and/or the attainment of specified performance targets over the forfeiture period.

 

The Committee also may award to a participant units representing the right to receive shares of common stock in the future subject to the achievement of one or more goals relating to the completion of service by the participant and/or the achievement of performance or other objectives (“restricted units”). The terms and conditions of restricted share and restricted unit awards are determined by the Committee.

 

For participants who are subject to Section 162(m) of the Code, the performance targets described in the preceding two paragraphs may be established by the Committee, in its discretion, based on one or more of the following measures (the “Performance Goals”):

 

 

The Performance Goals may be measured with respect to the Company or any one or more of its subsidiaries, divisions or affiliates, either in absolute terms or as compared to another company or companies, or an index established or designated by the Committee. The above terms will have the same meaning as in the Company’s financial statements, or if the terms are not used in the Company’s financial

statements, either as applied pursuant to generally accepted accounting principles or as used in the industry, as applicable.

 

 

The Committee may grant awards in the form of performance stock or performance units to participants under such terms and conditions as the Committee deems appropriate. A performance award entitles a participant to receive a payment from the Company, the amount of which is based upon the attainment of predetermined performance targets over a specified award period. Performance awards may be paid in cash, shares of common stock or a combination thereof, as determined by the Committee.

 

Award periods will be established at the discretion of the Committee. The performance targets also will be determined by the Committee. With respect to participants subject to Section 162(m) of the Code, the applicable performance targets will be established, in the Committee’s discretion, based on one or more of the Performance Goals described under the section titled “Restricted Shares and Restricted Units.” To the extent that a participant is not subject to Section 162(m) of the Code, when circumstances occur that cause predetermined performance targets to be an inappropriate measure of achievement, the Committee, at its discretion, may adjust the performance targets or the amount or value of the performance award.

 

 

The Committee may grant equity-based or equity-related awards, referred to as “other stock-based awards,” other than options, stock appreciation rights, restricted shares, restricted units, or performance awards. The terms and conditions of each other stock-based award will be determined by the Committee. Payment under any other stock-based awards will be made in common stock or cash, as determined by the Committee.

 

 

In the event of a “change in control” of the Company (as defined in the Restated Plan), all awards of options and stock appreciation rights will become fully vested and exercisable and awards of restricted shares, restricted share units and other stock-based awards (other than performance units) will be deemed fully vested. With respect to performance unit awards, the Committee will determine whether and in what manner those awards will be paid upon a change in control. However, the Committee has the discretion to provide for different vesting, exercisability or other terms in connection with a change in control for specific awards, and those terms will be set forth in the applicable award agreement.

 

 

The Committee may grant awards to any employee or director of the Company or any of its participating subsidiaries. While the selection of participants is within the discretion of the Committee, it is currently expected that participants will be primarily officers and salaried management level employees, as well as non-employee directors of the Company. It is presently contemplated that approximately 60 persons will be eligible to receive awards under the Restated Plan.

The maximum awards that can be granted under the Restated Plan to a single participant in any calendar year are (i) 350,000 shares in the form of options or stock appreciation rights, (ii) 100,000 shares in the form of restricted shares or restricted units, (iii) 200,000 shares in the form of performance stock or performance unit awards, and (iv) 100,000 shares or $3,000,000 in cash value in the form of other stock-based awards.

 

 

The future amounts that will be received by participants under the Restated Plan are not determinable. The stock awards granted to the Company’s named executive officers under the Restated Plan and outstanding as of December 31, 2009 are set forth in the Outstanding Equity Awards at Fiscal Year-End Table found under “Executive and Director Compensation”. As of February 22, 2010, (i) the Company’s executive officers as a group (ten officers) held outstanding stock option grants for 3,263,980 shares, (ii) the Company’s non-employee directors as a group (ten directors) did not hold any outstanding stock option grants, and (iii) our employees other than our executive officers (175 employees) held outstanding stock option grants for 1,421,381 shares.

 

 

The number of shares of the Company’s common stock reserved for issuance with respect to awards under the Current Plan is 18,000,000, of which approximately 2,905,938 shares remain available for new awards. The board of directors has authorized, subject to stockholder approval, an additional 4,500,000 shares of the Company’s common stock to be available for new awards under the Restated Plan, so that the aggregate number of shares reserved for issuance under the Restated Plan is 22,500,000, with approximately 7,405,938 shares being available for new awards.

 

Shares of common stock underlying awards granted under the Restated Plan or the Current Plan that expire or are forfeited or terminated for any reason (as a result, for example, of the lapse of an option or a forfeiture of restricted shares), as well as any shares underlying an award that is settled in cash rather than stock, will be available for future grants under the Restated Plan. In addition, shares of stock that are used as full or partial payment on the exercise of an award will be available for future grants. Shares to be issued under the Restated Plan will be authorized but unissued shares of common stock or shares of stock reacquired by the Company.

 

 

In the event of any reorganization, merger, or consolidation, subdivision or consolidation of shares of stock or other capital readjustment, payment of stock dividend, stock split, spin-off, combination of shares or recapitalization or other increase or reduction of the number of shares of stock outstanding, or any similar event, the Committee shall appropriately adjust (i) the number of shares of stock available under the Restated Plan, (ii) the number of shares of stock available under any individual or other limitations under the Restated Plan, (iii) the number of shares of stock subject to outstanding awards and (iv) the per-share exercise or other purchase price under any outstanding award.

 

 

The board of directors may suspend, terminate, modify or amend the Restated Plan, provided that any amendment that would (i) increase the aggregate number of shares of stock which may be issued under the Restated Plan, (ii) change the method of determining the exercise price of option awards, or (iii) materially modify the eligibility requirements for the Restated Plan, will be subject to the approval of our stockholders, except for modifications or adjustments relating to the anti-dilution protection described above. No suspension, termination, modification or amendment of the Restated Plan may terminate a participant’s existing award or materially and adversely affect a participant’s rights under such award without the participant’s consent. However, these provisions do not limit the board of directors’ authority to amend or revise the Restated Plan to comply with applicable laws or governmental regulations.

 

 

The Restated Plan specifically prohibits the repricing of stock options or stock appreciation rights without stockholder approval. For this purpose, a “repricing” means any of the following (or any other action that has the same effect as any of the following): (i) changing the terms of a stock option or stock appreciation right to lower its exercise price; (ii) any other action that is treated as a “repricing” under generally accepted accounting principles; and (iii) repurchasing for cash or canceling a stock option or stock appreciation right at a time when its exercise price is greater than the fair market value of the underlying stock in exchange for another award, unless the cancellation and exchange occurs in connection with a change in capitalization or similar change. Such cancellation and exchange would be considered a “repricing” regardless of whether it is treated as a “repricing” under generally accepted accounting principles and regardless of whether it is voluntary on the part of the participant.

 

 

The federal income tax consequences of the issuance and exercise of awards under the Restated Plan are as described below. The following information is only a summary of the tax consequences of the awards, and participants should consult with their own tax advisors with respect to the tax consequences inherent in the ownership or exercise of the awards, and the ownership and disposition of any underlying securities.

 

Incentive Stock Options.  A participant who is granted an incentive stock option will not recognize any taxable income for federal income tax purposes on either the grant or exercise of the incentive stock option. If the participant disposes of the shares purchased pursuant to the incentive stock option more than two years after the date of grant and more than one year after the exercise of the option by the participant (the required statutory “holding period”), (i) the participant will recognize long-term capital gain or loss, as the case may be, equal to the difference between the selling price and the exercise price; and (ii) the Company will not be entitled to a deduction with respect to the shares of stock so issued. If the holding period requirements are not met, any gain realized upon disposition will be taxed as ordinary income to the extent of the lesser of (1) the excess of the fair market value of the shares at the time of exercise over the exercise price, and (2) the gain on the sale. Also in that case, the Company will be entitled to a deduction in the year of disposition in an amount equal to the ordinary income recognized by the participant. Any additional gain will be taxed as short-term or long-term capital gain depending upon the holding period for the stock. A sale for less than the exercise price results in a capital loss.

The excess of the fair market value of the shares on the date of exercise over the exercise price is, however, includable in the participant’s income for alternative minimum tax purposes.

 

Nonqualified Stock Options.  A participant who is granted a nonqualified stock option under the Restated Plan will not recognize any income for federal income tax purposes on the grant of the option. Generally, on the exercise of the option, the participant will recognize taxable ordinary income equal to the excess of the fair market value of the shares on the exercise date over the option price for the shares, subject to certain limits on the deductibility of compensation under the Code. The Company generally will be entitled to a deduction on the date of exercise in an amount equal to the ordinary income recognized by the participant. Upon disposition of the shares purchased pursuant to the stock option, the participant will recognize long-term or short-term capital gain or loss, as the case may be, equal to the difference between the amount realized on such disposition and the basis for such shares, which basis includes the amount previously recognized by the participant as ordinary income.

 

Stock Appreciation Rights.  A participant who is granted stock appreciation rights will normally not recognize any taxable income on the receipt of the award. Upon the exercise of a stock appreciation right, (i) the participant will recognize ordinary income equal to the amount received (the increase in the fair market value of one share of our stock from the date of grant of the award to the date of exercise), and (ii) the Company will be entitled to a deduction on the date of exercise in an amount equal to the ordinary income recognized by the participant.

 

Restricted Stock.  A participant will not be taxed at the date of an award of restricted shares, but will be taxed at ordinary income rates on the fair market value of any restricted shares as of the date that the restrictions lapse, unless the participant, within 30 days after transfer of such restricted shares to the participant, elects under Section 83(b) of the Code to include in income the fair market value of the restricted shares as of the date of such transfer. The Company will be entitled to a corresponding deduction, subject to certain limits on the deductibility of compensation under the Code. Any disposition of shares after the restrictions lapse will be subject to the regular rules governing long-term and short-term capital gains and losses, with the basis for this purpose equal to the fair market value of the shares at the end of the restricted period (or on the date of the transfer of the restricted shares, if the employee elects to be taxed on the fair market value upon such transfer). To the extent dividends are payable during the restricted period under the applicable award agreement, any such dividends will be taxable to the participant at ordinary income tax rates and will be deductible by the Company unless the participant has elected to be taxed on the fair market value of the restricted shares upon transfer, in which case they will thereafter be taxable to the participant as dividends and will not be deductible by the Company.

 

Restricted Share Units.  A participant will normally not recognize taxable income upon an award of restricted share units, and the Company will not be entitled to a deduction until the lapse of the applicable restrictions. Upon the lapse of the restrictions and the issuance of the underlying shares, the participant will recognize ordinary taxable income in an amount equal to the fair market value of the common stock received and the Company will be entitled to a deduction in the same amount, subject to certain limits on deductibility of compensation under the Code. Any disposition of shares after restrictions lapse will be subject to the regular rules governing long-term and short-term capital gains and losses, with the basis for this purpose equal to the fair market value of the shares at the end of the restricted period.

Performance Awards and Other Stock-Based Awards.  Normally, a participant will not recognize taxable income upon the grant of performance awards or other stock-based awards under the Restated Plan. Subsequently, when the conditions and requirements for the grants have been satisfied and the payment determined, any cash received and the fair market value of any common stock received will constitute ordinary income to the participant. The Company also will then be entitled to a deduction in the same amount, subject to certain limits on deductibility of compensation under the Code.

 

 

The Restated Plan will be effective as of January 1, 2010, if approved by the stockholders of the Company. If not approved by the stockholders, no awards will be made under the Restated Plan and the Current Plan will continue in effect, subject to its existing terms and conditions.

 

 

The Current Plan, which was approved by our stockholders, is the sole plan under which the Company currently is authorized to issue shares of its common stock to employees. The following table shows the number of shares of common stock to be issued upon vesting of restricted stock units or exercise of options outstanding under the Current Plan at December 31, 2009, the weighted average exercise price of such options, and the number of shares of common stock remaining available for future issuance under the Current Plan at December 31, 2009, excluding shares to be issued upon exercise of outstanding options. No warrants or rights had been issued under the Current Plan as of December 31, 2009.

 

 

 

Approval of the Restated Plan will require the affirmative vote of a majority of the shares present and entitled to vote at the meeting, provided that the total vote cast on the proposal represents over 50% in interest of all of our securities entitled to vote on the proposal and assuming the presence of a quorum. If the stockholders do not approve the Restated Plan, it will not be implemented, but the Company reserves the right to adopt such other compensation plans and programs as it deems appropriate and in the best interests of the Company and its stockholders.

 

The Board of Directors recommends a vote “FOR” the proposal to approve the Restated Plan.

 

Upon the recommendation of the Personnel and Compensation Committee, the board of directors has re-approved, subject to stockholder re-approval, the material terms of the performance goals, including the “Performance Measures” (described below), under the Company’s Incentive Compensation Plan for Executive Officers (the “Executive Incentive Plan”). We are asking our stockholders to re-approve the material performance terms, including the Performance Measures, applicable to performance-based awards under the Executive Incentive Plan to preserve our ability to take a federal tax deduction for certain compensation awards. This summary of the material performance terms of the Executive Incentive Plan is qualified in its entirety by reference to the specific provisions of the Executive Incentive Plan, the full text of which is set forth as Appendix B to this proxy statement.

 

Section 162(m) of the Internal Revenue Code imposes an annual limit of $1.0 million on the tax deduction that is available to public companies for compensation paid to each of the chief executive officer and the other three most highly compensated executive officers, other than the chief financial officer, unless the compensation is performance-based. In order to qualify for this exception, however, the performance-based compensation must be paid based on the achievement of one or more performance objectives that have been disclosed to and approved by the Company’s stockholders within the past five years. The material performance terms, including the Performance Measures, used for performance-based awards under the Executive Incentive Plan were most recently approved by our stockholders at the Annual Meeting in 2005. Therefore, these material performance terms must be re-approved this year in order to maintain our ability to grant awards that are eligible for deduction as compensation expense in the Company’s U.S. federal tax returns.

 

Our board of directors has determined that it would be in the best interests of the Company and its stockholders to re-approve, and the board of directors hereby recommends re-approval of, the material performance terms under the Executive Incentive Plan in order to preserve the tax deductibility of certain performance-based compensation payable by the Company under the Executive Incentive Plan. We are not asking stockholders to re-approve the Executive Incentive Plan itself. If this proposal is not adopted, we will continue to be able to grant performance awards under the Executive Incentive Plan, but certain awards to executive officers may no longer be fully tax deductible by the Company.

 

 

For each calendar year, the Personnel and Compensation Committee of the board of directors (the “Committee”) will establish the applicable performance objectives in writing within ninety (90) days after

the beginning of the calendar year. The performance objectives selected will be relative or absolute measures of any one or more of the following (the “Performance Measures”):

 

 

The above terms have the same meaning as in the Company’s financial statements, or if the terms are not used in the Company’s financial statements, as applied pursuant to generally accepted accounting principles or as used in the industry, as applicable. As determined by the Committee, the Performance Measures may be applied (i) to the Company’s stand-alone performance or performance relative to one or more other companies or indices, or (ii) to a business unit, geographic region, one or more separately incorporated entities, or the Company as a whole.

 

 

Purpose.  The purpose of the Executive Incentive Plan is to provide an opportunity for our executive officers to earn annual cash incentive compensation through the achievement of pre-established performance goals in a manner that will permit the full deduction by the Company of such compensation under the Internal Revenue Code.

 

Selection of Participants.  For each calendar year, the Committee will determine in writing the participants who will be eligible to receive an incentive award under the Executive Incentive Plan for such period. Only senior executive officers of the Company are eligible to participate in the Executive Incentive Plan (ten individuals as of the date of this Proxy Statement). The Committee will make its determination of participants within ninety (90) days after the beginning of the calendar year, or at such other time as required by Section 162(m) of the Internal Revenue Code.

 

Extraordinary or Unusual Events.  The Committee may, in its discretion, disregard the impact of any extraordinary or unusual event in determining whether a performance objective has been attained or may make appropriate adjustments in any performance objective to reflect such extraordinary or unusual event, except to the extent such discretion would not comply with Section 162(m) of the Code.

 

Maximum Incentive Award Payable.  The maximum incentive award payable under the Executive Incentive Plan to any participant for any calendar year is $3,000,000.

 

Discretion to Reduce Rewards.  The Committee, in its sole and absolute discretion, may reduce the amount of any award otherwise payable to a participant.

 

Amendment and Termination of the Executive Incentive Plan.  The Committee may amend or terminate the Executive Incentive Plan at any time, except that no amendment or termination will be

made which would adversely affect any payment of an incentive award previously earned by a participant, unless the participant consents to such amendment or termination.

 

Vote Required

 

The affirmative vote of a majority of the shares present and entitled to vote at the meeting is required for the Section 162(m) approval of the Executive Incentive Plan, provided that the total vote cast on the proposal represents over 50% in interest of all of our securities entitled to vote on the proposal and assuming the presence of a quorum at the Annual Meeting.

 

Board Recommendation

 

The Board of Directors recommends a vote “FOR” the proposal to re-approve the material performance terms under the Executive Incentive Plan.

 

 

 

We believe that our success in creating long-term value for our stockholders depends on our ability to attract, motivate and retain highly talented executives. We encourage sustained long-term profitability and increased stockholder value by linking executive compensation to our achievement of financial and operating performance. We use equity-based awards and other mechanisms to align the long-term interests of our executives with those of our stockholders. We have designed elements of our executive compensation program to increase the likelihood that we will retain key employees.

 

We have determined the type and amount of compensation for each executive after considering a variety of factors, including the executive’s position and level of responsibility within our organization, comparative market data and other external market-based factors. Our Personnel and Compensation Committee (the “Committee”) uses this information when establishing compensation in order to achieve a comprehensive package that emphasizes pay-for-performance and is competitive in the marketplace.

 

 

The Committee believes that an effective executive compensation program should encompass the following fundamental objectives:

 

 

We have designed our executive compensation program around these beliefs.

 

 

The Committee uses current compensation levels, performance, long-term career goals, future leadership potential and succession planning, among other factors, in determining appropriate compensation levels for our executives. The Committee does not use a formula to weight these factors. However, the Committee believes these factors provide context within which to assess the significance of comparative market data and to differentiate the level of compensation among our executives.

 

Annually, the Committee reviews the design of our executive compensation program. In doing so, the Committee assesses whether compensation programs used in prior years have successfully achieved our compensation objectives. The Committee also considers the extent to which our compensation program is designed to achieve our long-term financial and operating goals. The Committee has retained the consultants listed below under “Role of Compensation Consultants” to help analyze certain comparative market data. Certain members of management participate in this process by assembling and summarizing data used by the Committee.

 

After the end of the performance period to which a particular incentive award relates, the Committee reviews our performance relative to the applicable performance targets and recommends payouts based on that performance. The Committee retains discretion to recommend payouts that are above or below actual performance levels for the applicable performance period. For purposes of determining the amount of a payout to recommend, the Committee may also consider infrequent or non-recurring items that are not reflective of ongoing operations or the effects of major corporate transactions or other items that the Committee determines, in its judgment, significantly distort the comparability of our actual performance against the performance targets.

 

 

Our chief executive officer and vice president of human resources provide the Committee with compensation recommendations for our executives, other than the chief executive officer, including base salary, annual cash incentive opportunity and long-term incentive opportunities. Management provides a current market value for each proposed element and for the total targeted value, as well as the median market value for the executive’s peers. Management obtains the comparative market information primarily from materials provided by our compensation consultant. Neither our chief executive officer nor the vice president of human resources recommends his or her own base salary or targeted payouts under our annual or long-term incentive awards.

 

Annually, the Committee reviews the performance of our chief executive officer and makes recommendations to the board of directors regarding his compensation. In doing so, the Committee uses information provided by our compensation consultant and certain historical financial and operating performance data provided by management. Historically, the Committee has not considered accrued pension benefits, deferred compensation, thrift plan amounts or existing stock ownership in makings its recommendations. The Committee believes that the compensation opportunities granted to our chief

executive officer, while higher in the aggregate than compensation granted to our other executives, is appropriate taking into consideration our chief executive officer’s overall leadership responsibilities.

 

 

During 2009, the Committee consulted with Watson Wyatt Company, and the Committee retained Hewitt Associates in September 2009. The compensation consultants provided the Committee with information concerning compensation practices, mix of compensation elements and comparative market data, which the Committee used to assess and determine appropriate levels of executive compensation relative to the marketplace. In doing so, the compensation consultants have provided the Committee with comparative data for a peer group and for the S&P Midcap 400 Index by executive position, along with other relevant industry data.

 

The peer companies included in the information provided by our compensation consultants included those public companies with which we most directly compete on the basis of customers, investors and executive talent. For 2009, those companies included the following:

 

 

The Committee regularly assesses the appropriateness of the peer group used to benchmark our compensation programs.

 

In 2010, Hewitt Associates spun off its executive compensation practice into an independent entity named Meridian Compensation Partners, LLC, and the Committee has retained Meridian as its independent executive compensation consultant.

 

 

We use the following compensation elements to achieve the compensation objectives established by the Committee:

 

 

The Committee believes that a higher percentage of total compensation for those executives with a greater ability to influence the achievement of our financial and operating objectives should be variable and, therefore, subject to greater risk. In general, as the position and amount of responsibility for an executive increase, a greater percentage of that executive’s total compensation will be variable. As a result, executives with the highest level and amount of responsibility generally have the lowest percentage of their

total compensation fixed as base salary and the highest percentage of their total compensation dependent upon short- or long-term incentive awards.

 

The following table shows the allocation of total targeted compensation for each of the executives named in this proxy statement for each of the last three years:

 

 

 

Base Salary — We provide each executive with an annual base salary. Base salaries for our executives depend on the executives’ experience and scope of responsibilities as well as the median market data for comparable job positions. We increase base salary primarily in response to notable achievements or for changes in scope of responsibilities. In addition, we may increase base salary to remain competitive in the marketplace.

 

At the beginning of 2009, upon the recommendation of the Committee, the board of directors approved increases in the annual base salaries for our executives. In making its recommendations, the Committee considered market data provided to the Committee by management and by our compensation consultant.

 

Annual Cash Incentive Program — We provide approximately 275 key employees, including the executives named in this proxy statement, the opportunity to earn additional cash compensation through annual cash incentive awards, either under the Company’s Incentive Compensation Plan for Executive Officers or the Company’s Incentive Compensation Plan for Management Employees. The Committee intends for our annual cash incentive program to focus our organization on meeting certain financial and operating objectives by rewarding those key employees with the greatest ability to influence our results.

 

Early each year the Committee considers whether annual cash incentives should be awarded. If so, the Committee recommends to the board of directors the group of employees eligible to receive an award for that year. Annual cash incentive awards contain various incentive levels based on the participant’s accountability and impact on our performance, with target opportunities established as a percentage of base salary.

The following table shows the target opportunities available to the executives named in this proxy statement as a percentage of their base salaries and the actual payouts as a percentage of their base salaries each of the last three years:

 

 

 

Payouts under our annual cash incentive program depend upon our earnings before interest, taxes, depreciation and amortization (EBITDA), earnings per share, safety and environmental performance and, for some employees, our production costs per ton. Some or all of these performance measures may be used for our other key employees, and the performance measures may differ for various groups or classifications of employees. By identifying meaningful performance measures and by assigning certain measures greater weight, we are able to more closely align compensation to the achievement of those business objectives over which particular employees have the greatest impact.

 

We generally establish the financial performance levels based on budgeted earnings for the upcoming year, and the target levels are generally consistent with the range of earnings that we provide to investors. We generally establish safety and environmental performance targets based on our prior performance history with the objective of promoting improvements in those areas. In order to inspire performance above the targets we set and to acknowledge certain levels of performance below those targets, annual cash incentive awards contain threshold, target and maximum levels for each performance measure. Payouts under the awards depend upon the achievement of our objectives.

 

The following table shows the relative weighting of the performance measures and the threshold, target and maximum levels of performance established for annual incentive awards to the executives named in this proxy statement for the 2009 fiscal year:

 

 

The performance goals are defined and evaluated based on the following:

 

 

If the target level of performance is achieved with respect to a particular performance measure, the applicable payout percentage for that performance measure will equal 100%. Achievement at the threshold performance level results in an applicable payout percentage of 25%, while performance below threshold level results in a payout percentage of 0% for that performance measure. By contrast, achievement at or above the maximum performance level results in an applicable payout percentage of 200%. We may prorate payouts under the annual cash incentive awards for performance levels that fall between the threshold, target and maximum performance levels.

 

In addition, the financial performance measures of adjusted EBITDA, earnings per share and production cost per ton require achievement of at least the threshold level for the adjusted EBITDA goal. Accordingly, for 2009, if adjusted EBITDA of at least $441.7 million was not achieved, the applicable payout percentage for each of adjusted EBITDA, earnings per share and production costs per ton would have been 0%.

 

In early 2010, the Committee evaluated the level of achievement of the various performance measures and made the following determinations:

 

 

Based on the actual performance as set forth above, the Committee determined the amount of each executive officer’s annual cash incentive award and recommend that the board of directors approve the following payouts under the 2009 annual cash incentive awards:

 

 

In addition, the board of directors, upon the recommendation of the Committee, established an annual cash incentive program for 2010 identifying those individuals eligible to participate, the target opportunity for each participant and the performance measures that will be used. The overall design of the 2010 annual cash incentive program is generally consistent with the program approved by the board of directors for 2009.

 

Long-Term Incentive Program — Our long-term incentive program is designed to achieve the compensation objectives established by the Committee. The Committee intends for our long-term incentive program to promote decision-making that creates long-term value for our stockholders. The Committee believes that an effective long-term incentive program should also create strong retention incentives for those key employees who are most likely to influence our long-term performance. In addition, we attempt to align the long-term interests of our executives with those of our stockholders by tying a portion of total compensation to appreciation in the value of our common stock.

 

The Committee has retained flexibility in the types of awards that it may use to implement our long-term incentive program. We have used performance units and performance-contingent phantom stock in order to promote the achievement of our long-term financial and operating performance objectives. In addition, we have used restricted stock, restricted stock units, stock options and other awards tied to the value of our common stock in order to align the long-term interests of our executives and our stockholders and for retention purposes. In determining the aggregate value of long-term awards and the mix of those awards for our executives, the Committee considers the executives’ scope of responsibility, peer group market data, market competition for the particular position, relative internal equity and leadership continuity.

The following table shows the types of awards that we have generally included as a component of our long-term incentive program for each of the last three years and for 2010, and the percentage of targeted long-term compensation associated with each award:

 

 

The following is a description of each of these types of awards:

 

Performance Units — Beginning in 2009, we used performance units as a component of our long-term incentive program in order to motivate our executives to focus on our financial and operating performance over a multi-year period. Performance units generally provide an opportunity for key employees to earn additional compensation upon the successful achievement of our objectives over a three-year period. The Committee has also retained discretion to further align the long-term interests of our stockholders and executives by providing that payouts under performance units may be in the form of cash, stock or a combination of the two.

 

Payouts under the performance units granted will depend upon our achievement of certain financial and operating performance objectives over a three-year period. The board of directors, upon the recommendation of the Committee, determined that our safety and environmental performance remains a critical measure of our long-term success. In redesigning our long-term incentive program for 2009, we evaluated potential performance measures within and outside our industry. Relative total shareholder return has become a preferred long-term performance measure by stockholders because it rewards management for outperforming industry competitors and is directly aligned with stockholder value. As such, to more closely align the interests of our executives and our stockholders, the Committee recommended that the board of directors replace EBITDA as the financial measure historically used by our board of directors with a measure of our total stockholder return relative to a peer group consisting of coal industry competitors. For these purposes, we will determine total stockholder return as the compound total stockholder return assuming reinvestment of dividends over the relevant performance period, and our performance will be assessed on a relative basis versus the external benchmark.

 

Restricted Stock Units and Restricted Stock — Prior to 2007, we used restricted stock units as a component of our long-term incentive program designed to align the long-term interests of our stockholders and our executives and for retention purposes. In addition, from time to time we grant restricted stock and restricted stock units to certain key employees as an additional retention incentive. Restricted stock units and restricted stock can provide a significant retention incentive since they have real, current value that an executive may forfeit if his or her employment terminates before the awards vest. In addition, restricted stock units and restricted stock satisfy our compensation objectives by promoting long-term decision-making that results in appreciation in the value of our common stock. We have historically used restricted stock units rather than restricted stock because recipients could elect to defer receipt of the common stock and the corresponding tax obligation upon vesting.

When awarded in the past, we have generally conditioned receipt of the common stock underlying these awards on the executive’s continued employment. Restricted stock units and restricted stock usually vests ratably over a period of time, generally three or four years. Certain restricted stock awards that we have granted in the past cliff vest at the end of a specified period in order to provide an additional retention incentive. In determining the conditions associated with these types of awards, the Committee considers the market competition for the executive’s position, the ability of the executive to influence our long-term financial and operating performance and succession planning. The Committee has retained discretion whether or not to consider the number of shares of our common stock held by an executive in recommending subsequent awards of restricted stock units or restricted stock.

 

Stock Options — In 2009, the board of directors, upon the recommendation of the Committee, determined to use stock options as 50% of the value of the long-term incentive program. In making its recommendation, the Committee determined that long-term stock price appreciation was reflective of our achievement of the long-term performance objectives established by our board of directors. We used stock options as the sole component of our long-term incentive program for 2007 and 2008.

 

Stock options represent the opportunity to buy shares of our common stock at a fixed price at a future date. Under the terms of our stock incentive plan, the exercise price of stock options cannot be less than the fair market value of a share of our common stock on the date of grant. As such, stock options have value for our executives only if the price of our common stock increases after the date of grant.

 

In the past, our board of directors has generally approved stock options grants in connection with our annual performance assessment and evaluation process. Our policy is to issue stock options on the dates on which the awards are approved and to set the exercise prices of those awards equal to the closing market price of our common stock on that date. In order to provide some retention incentive, our stock options generally vest over a stated period measured from the date of grant. Depending upon the strength of the retention incentive intended by the Committee, stock options may vest over three or four years. As is typical, the stock options we grant expire after ten years, except in limited circumstances.

 

Performance-Contingent Phantom Stock — On occasion, we have used performance-contingent phantom stock in order to provide our executives with an opportunity to receive additional compensation for exceptional long-term financial performance.

 

Perquisites and Other Benefits — We provide various perquisites and other benefits to our executives for a variety of different reasons, including our intent to attract and retain executives with a comprehensive compensation package. Many of these perquisites and other benefits are not tied to any formal performance objectives. We provide the following perquisites to our executives:

 

Financial, Estate and Tax Planning Services — We provide our executives with financial, estate and tax planning services in order to assist them with the complexities of the various compensation arrangements that we maintain, retirement planning and compliance with our stock ownership guidelines.

Club Membership Dues — We provide a limited number of executives with memberships for dining and/or country clubs. We intend for these club memberships to provide access to facilities that our executives may use for more private business and business entertainment meetings.

 

Other Perquisites — We provide certain executives with a number of other perquisites, including limited personal use of our corporate aircraft. For more information about these perquisites, including the incremental cost to us for providing those perquisites, you should see the table included as a footnote to the Summary Compensation Table below.

 

In December 2009, the board of directors, upon the recommendation of the Committee, determined that beginning January 1, 2010, executives will not receive any tax gross up payments on perquisites.

 

Participation in Benefit Plans and Other Compensation Arrangements — Each of our executives is eligible to participate in the same health and welfare plans as our other eligible employees. These plans include medical and dental insurance, life, travel and accidental death and dismemberment insurance, short- and long-term disability coverage and participation in our qualified defined benefit pension plan and qualified defined contribution plan. In addition, each of our executives is eligible to participate in our supplemental retirement plan and non-qualified deferred compensation plan, and each of our executives is subject to an employment agreement.

 

The following is a summary of certain benefit plans and other compensation arrangements available to our executives but for which our other employees may not be eligible:

 

Supplemental Retirement Plan Benefits — We sponsor a tax-qualified defined benefit plan covering all of our eligible employees, including our executives. The Internal Revenue Code limits the amount of qualified retirement benefits we may provide for certain employees. As a result, we sponsor a supplemental retirement plan that provides eligible employees, including the executives named in this proxy statement, with additional retirement benefits that would otherwise be available under our defined benefit pension plan but for the limitations contained in the Internal Revenue Code. For more information about our defined benefit pension plan and our supplemental retirement plan, including the accumulated benefits attributable to the executives named in this proxy statement, you should see “Pension Benefits” below.

 

Non-Qualified Deferred Compensation Plan — We sponsor a tax-qualified defined contribution plan covering all of our eligible employees, including the executives named in this proxy statement. Under this plan, eligible employees may contribute up to 50% of their base salaries to the plan, subject to certain limitations contained in the Internal Revenue Code. We contribute one dollar for each dollar contributed by our employees, up to a maximum of 6% of employees’ base salaries. The Internal Revenue Code limits the amount certain of our employees may contribute to our defined contribution plan in any tax year. As a result, we sponsor a non-qualified deferred compensation plan that allows eligible employees, including the executives named in this proxy statement, to defer receipt of a portion of their base salaries and certain annual and long-term cash incentive awards not subject to these limits. The deferred compensation plan provides higher-paid employees with the full company matching contribution to which they would otherwise be entitled under our defined contribution plan but for the limitations contained in the Internal Revenue Code. For more information about our deferred compensation plan, including information about

amounts attributable to the executives named in this proxy statement, you should see “Non-Qualified Deferred Compensation” below.

 

Employment Agreements — In order to provide certain key employees, including the executives named in this proxy statement, with some financial security in the event their employment with our organization is terminated without cause or under certain circumstances following a change of control, we provide those employees with employment agreements. Those agreements provide for cash payments to the key employees in the event their employment with us is terminated under certain circumstances. We believe that the employment agreements we maintain with our key employees provides a meaningful mechanism by which to retain those individuals who are most capable of affecting our future performance. In December 2009, the board of directors, upon the recommendation of the Committee, determined that no tax gross up provision is to be included in any employment agreement entered into after January 1, 2010. For more information about the employment agreements with the executives named in this proxy statement, you should see “Potential Payments Upon Termination of Employment or Change-in-Control” below.

 

Stock Ownership Guidelines — Our board of directors has adopted stock ownership guidelines that are intended to promote meaningful stock ownership by our executives. These guidelines specify a number of shares of our common stock, including unvested restricted stock, unvested restricted stock units, shares held through our qualified defined contribution plan and hypothetical shares of our common stock held through our non-qualified deferred compensation plan, that our executives must have accumulated by January 1, 2009 or, if elected after January 1, 2004, within five years of becoming an executive. The specific share holding requirements are determined based on a multiple of base salary ranging from one to three times, with the higher multiples applicable to the executives having the highest levels of responsibility. As of December 31, 2009, each of the individuals who has been an executive for at least five years satisfied the stock ownership goal adopted by the board of directors.

 

 

The Internal Revenue Code limits the amount of the tax deduction we are entitled to take for compensation paid to the executives named in this proxy statement for a particular year unless the compensation meets specific standards. We may deduct compensation in excess of $1 million if compensation is “performance-based” and is paid pursuant to a plan that meets certain requirements. In developing, implementing and administering our executive compensation program, the Committee considers the impact of these limits and balances the desire to maximize the deductibility of compensation with the goal of attracting, motivating and retaining highly-talented executives.

 

We generally seek to maximize the tax deductibility of all elements of compensation. However, in light of the need to maintain flexibility in administering our executive compensation program, the Committee retains discretion to recommend to the board of directors compensation in excess of the limits, even if a portion of it may not be deductible.

 

The following table is a summary of compensation information for our chief executive officer, our chief financial officer and each of the other three most highly compensated executives for each of the last three years:

 

 

 

 

 

 

 

 

 

 

The following table shows information relating to the grants of certain equity and non-equity awards made to the executives named in this proxy statement during 2009:

 

 

 

 

The following table shows information relating to the equity awards previously made to the executives named in this proxy statement which remain outstanding at December 31, 2009.