One Dauch Drive

Detroit, Michigan 48211-1198

www.aam.com

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

April 30, 2009

 

American Axle & Manufacturing Holdings, Inc. (AAM)

 

 

 

By Order of the Board of Directors,

 

Patrick S. Lancaster

Vice President, Chief Administrative Officer & Secretary

March 19, 2009

 

2009 ANNUAL MEETING OF STOCKHOLDERS

 

PROXY STATEMENT

 

TABLE OF CONTENTS

 

PROXY STATEMENT

 

Annual Meeting of Stockholders

To Be Held April 30, 2009

 

INTERNET AVAILABILITY OF PROXY MATERIALS

 

As permitted by SEC rules, American Axle & Manufacturing Holdings, Inc. (AAM or the Company) is providing the proxy materials for our 2009 annual meeting of stockholders electronically via the Internet. On March 19, 2009, we initiated delivery of proxy materials to our stockholders of record as of the close of business on March 3, 2009 via (1) a notice containing instructions on how to access proxy materials online, (2) paper copy mailing or (3) e-mail distribution.

 

If you received a notice by mail, you will not receive a printed copy of the proxy materials in the mail. Instead, the notice we sent provides instructions on how to access and review all of the information contained in the proxy materials. The notice also provides instructions on how you may submit your proxy over the Internet or by telephone. If you received a notice by mail and would like to receive a printed copy of proxy materials or elect to receive them via e-mail in the future, please follow the instructions included in the notice. If you received a printed copy of proxy materials by mail and would like to register to receive a notice of Internet availability of proxy materials or an e-mail regarding availability of proxy materials in the future, you can do so by accessing the Internet at www.envisionreports.com/AXL.

 

Why am I receiving this proxy statement?

 

You received these proxy materials because you owned shares of AAM common stock on March 3, 2009 (record date). AAM’s Board of Directors (Board) is soliciting your proxy to vote your shares at the annual meeting. By use of a proxy, you can vote whether or not you attend the meeting. This proxy statement includes information that we are required to provide to you under SEC rules and is designed to assist you in voting your shares.

 

Who is entitled to vote?

 

Holders of AAM common stock on the record date are entitled to one vote per share. You are a holder of record if your shares are held directly in your name with AAM’s transfer agent, Computershare Trust Company, N.A. If your shares are held in the name of a broker, bank, trustee or other record holder, or through one of the AAM 401(k) plans, you are a street name holder. If you hold shares in more than one account, you must vote for each notice, proxy and/or voting instruction card you receive that has a unique control number to ensure that all shares that you own are voted.

 

How do I vote?

 

You may vote by any of the following methods:

 

 

If you vote by telephone or via the Internet, have your notice card or proxy and/or voting instruction card available. The control number on your card is necessary to process your vote. A telephone or Internet vote authorizes the named proxies in the same manner as if you marked, signed and returned the card by mail. If you hold shares in street name, refer to the voting instructions provided by your broker, bank, trustee or other record holder.

How many shares may vote at the meeting?

 

As of March 3, 2009, we had 55,477,525 shares of common stock outstanding and entitled to vote. Under AAM’s by-laws, a majority of these shares must be present in person or by proxy to hold the annual meeting and take any action during the meeting.

 

Can I change my vote?

 

You may change your vote at any time before the annual meeting by:

 

 

What are the Board’s recommendations on how I should vote my shares?

 

The Board recommends that you vote your shares as follows:

 

 

What are my choices when voting?

 

Proposal 1 — You may vote for or withhold your vote on one or more of the nominees.

 

Proposal 2 — You may vote for or against the proposal, or you may abstain from voting your shares.

 

What vote is required to approve each proposal?

 

 

Proposal 2 — Requires the affirmative vote of a majority of the shares voted in person or by proxy.

 

Votes withheld and abstentions will be counted as present for purposes of determining whether a majority of shares is present to hold the annual meeting. Abstentions will not be counted in the tally of votes FOR or AGAINST a proposal. A WITHHELD vote has the same effect as an abstention.

 

Who will count the votes be counted?

 

Representatives of Computershare Trust Company, N.A., AAM’s transfer agent, will count the votes and serve as our inspector of election. The inspector of election will attend the annual meeting.

 

What if I do not vote and do not attend the annual meeting?

 

If you are a holder of record and you do not vote your shares, your shares will not be voted. If you sign your proxy card without giving specific instructions, your shares will be voted as the Board recommends.

 

If you hold shares in street name and you do not give your broker, bank, trustee or other record holder specific voting instructions, the rules of the New York Stock Exchange (NYSE) permit your record holder to vote your shares on the election of directors and on the ratification of the appointment of the independent registered public accounting firm. If you do not give your record holder specific voting instructions and your record holder does not vote, the votes will be broker non-votes. Broker non-votes will have no effect on the outcome of the election of directors and the other proposal. Broker non-votes will be counted as present for purposes of determining whether enough votes are present to hold the annual meeting.

 

The Board proposes that nominee Salvatore J. Bonanno, Sr. be elected as a Class II director for a term expiring at the annual meeting in 2010. Mr. Bonanno was nominated to fill the vacancy resulting from the February 10, 2009 resignation of John A. Casesa, whose term of office would have expired in 2010.

 

The Board proposes that the three directors standing for re-election as Class I directors, Forest J. Farmer, Richard C. Lappin and Thomas K. Walker, be elected to the Board for terms expiring at the annual meeting in 2012.

 

The Board proposes that nominee David C. Dauch be elected as a Class I director for a term expiring at the annual meeting in 2012.

 

The Board unanimously approved these nominations based on the outstanding achievements, special competencies and integrity of each nominee. A biographical summary of the principal occupation, professional background and experience of each nominee and returning director is provided.

 

Your Board unanimously recommends a vote FOR each of the nominees.

 

Class II — Director to hold office until the 2010 Annual Meeting of Stockholders

 

 

Class I — Directors to hold office until the 2012 Annual Meeting of Stockholders

 

 

 

Class II — Directors to hold office until 2010 Annual Meeting of Stockholders

 

Class I — Directors to hold office until 2011 Annual Meeting of Stockholders

 

 

Corporate Governance Guidelines

 

The Board has adopted Corporate Governance Guidelines that meet or exceed the requirements of the NYSE listing standards. AAM’s Corporate Governance Guidelines are available on our website at http://www.aam.com/investors/corporategovernance.

 

Board Structure and Self-Evaluation

 

The Board is divided into three classes. Directors serve for staggered three-year terms. In January 2009, the size of the Board was increased from nine to ten members. As a result, Class I consists of four positions and Class II and Class III each consist of three positions. The Board believes that the staggered election of directors helps to maintain continuity and ensures that a majority of directors at any given time will have in-depth knowledge of the Company. The Board and the Audit Committee, Compensation Committee, Nominating/Corporate Governance Committee and the Technology Committee each conduct an annual self-evaluation in order to monitor and continuously improve the effectiveness of the Board and its committees.

 

Director Independence

 

AAM’s Corporate Governance Guidelines provide that at least a majority of the members of the Board and each member of the Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee meet the independence criteria of the NYSE listing standards. In addition, the Board has established Director Independence Guidelines to assist in determining the independence of our directors. No director qualifies as independent unless the Board determines that the director has no direct or indirect material relationship with the Company. The Board considers all relevant facts and circumstances of which it is aware in making an independence determination. The Director Independence Guidelines are included in AAM’s Corporate Governance Guidelines, which are available on our website at http://www.aam.com/investors/corporategovernance.

 

Based on the independence criteria of the NYSE listing standards and our Director Independence Guidelines, the Board affirmatively determined that each of the following directors and nominees are independent: Salvatore J. Bonanno, Sr., Elizabeth A. (Beth) Chappell, Forest J. Farmer, Richard C. Lappin, William P. Miller II, Larry K. Switzer, Thomas K. Walker and Dr. Henry T. Yang. Richard E. Dauch, Co-Founder, Chairman of the Board & CEO, and David C. Dauch, President & COO, are not independent due to their employment with AAM. Mr. D.C. Dauch is the son of Mr. R.E. Dauch.

 

Of the eight directors and nominees who qualify as independent, one director and one nominee each has a relationship that the Board found to be immaterial under the independence standards. Each has a relationship with an entity that was reviewed by the Board under the independence standards covering payments for properties or services exceeding the greater of $1 million or two percent of the annual consolidated gross revenues of the outside entity. The director is an officer of a non-profit organization that received sponsorship fees from AAM that were significantly less than these amounts. The nominee has a minority interest in a supplier that receives annual payments from AAM that also were significantly less than the amounts set forth in the independence standards. The Board determined that each of the relationships was immaterial and does not impair the director’s or nominee’s independence.

 

Executive Sessions of Non-Management and Independent Directors

 

Non-management directors, all of whom are independent, meet in executive session without AAM management present at the end of each scheduled Board meeting. Thomas K. Walker, an independent director, has been selected by the Board to preside at each executive session.

Stockholder Communication with the Board

 

Stockholders or other interested parties may communicate with the Board through the Secretary of AAM by mail at One Dauch Drive, Detroit, Michigan 48211-1198 or by e-mail at AAMBoardofDirectors@aam.com.

 

The Board has instructed the Secretary to review all such communications and to exercise his discretion not to forward correspondence to the Board that is inappropriate, such as business solicitations, frivolous communications and advertising, routine business matters and personal grievances. However, any director may at any time request the Secretary to forward any communication received by the Secretary.

 

Code of Business Conduct

 

AAM has adopted a Code of Business Conduct that is designed to assist all AAM associates, executive officers and members of the Board in conducting AAM’s business with the highest standards of ethics and integrity. AAM has also adopted a Code of Ethics for our CEO, CAO, CFO and other Senior Financial Officers. The Board annually reviews the Code of Business Conduct and updates the Code as appropriate. AAM’s Code of Business Conduct and Code of Ethics for our CEO, CAO, CFO and other Senior Financial Officers are available on our website at http://www.aam.com/investors/corporategovernance. A written copy also may be obtained by any stockholder without charge upon request to the AAM Investor Relations Department.

 

Related Person Transactions Policy

 

The Board adopted a policy and procedure for the review, approval and ratification of transactions involving AAM and “related persons” as defined in the policy. This policy supplements AAM’s other conflict of interest policies as set forth in AAM’s Code of Business Conduct. The Board has delegated to the Audit Committee the responsibility for reviewing, approving and ratifying all related person transactions in accordance with the policy.

 

Transactions covered by the policy include any financial transaction, arrangement or relationship or series of similar transactions, arrangements or relationships in which:

 

 

A transaction between AAM and a related person is not subject to this policy if the transaction:

 

 

A related person includes directors and executive officers and their immediate family members, stockholders owning more than five percent of the Company’s outstanding common stock as of the last completed fiscal year, and any entity owned or controlled by any one of these persons.

 

A related person transaction will be permitted only if the transaction is approved by the Audit Committee and is on terms comparable to those available to unrelated third parties. Any related person transaction involving a member of the Audit Committee must be presented to disinterested members of the full Board for review.

 

In considering a transaction, the Audit Committee and/or the Board may consider the following factors, as applicable:

 

 

Every director and executive officer is required to report any existing or contemplated related person transaction to AAM’s Vice President, Chief Administrative Officer & Secretary. In addition, AAM’s directors and executive officers complete annual questionnaires designed to elicit information about potential related person transactions. As of the date of this Proxy Statement, no existing or contemplated related person transaction has been brought to the attention of the Secretary, the Audit Committee or the Board.

 

Board Committee Composition

 

The Board held four regularly scheduled meetings and one special meeting during 2008. Directors are expected to attend all Board meetings, meetings of the committees on which they serve and stockholder meetings. During 2008, all directors attended 100 percent of the meetings of the Board and the committees on which they served, with the exception of one director who attended 85 percent of the Board and committee meetings. All directors attended the 2008 annual meeting of stockholders. The following table shows the membership of the Board’s committees during 2008 and the number of committee meetings held during 2008.

 

COMMITTEE MEMBERSHIP IN 2008

 

 

 

 

Audit Committee

 

The Audit Committee provides assistance to the Board with respect to: the quality and integrity of our financial statements, our compliance with legal and regulatory requirements, our independent auditor’s qualifications and independence, and the performance of our internal audit function and independent auditors. The Audit Committee operates under a written charter that is available on AAM’s website at http://www.aam.com/investors/corporategovernance.

The Board has determined that all Audit Committee members serving during 2008 are independent and financially literate under applicable NYSE listing standards. Mr. Miller and Mr. Switzer also qualify as audit committee financial experts as defined by SEC rules.

 

Compensation Committee

 

The Compensation Committee is responsible for the following:

 

 

The Compensation Committee operates under a written charter that is available on our website at http://www.aam.com/investors/corporategovernance. In accordance with our Corporate Governance Guidelines, the Compensation Committee is also responsible for recommending non-employee director compensation and benefits for approval by the Board.

 

Role of Management in Compensation Decisions

 

The Compensation Committee is responsible for making compensation decisions relative to executive officers. However, in making its decisions, the Committee seeks and considers input from senior management. Since management has direct involvement with and in-depth knowledge of the business strategy, goals and performance of the Company, certain executive officers play an important role in the executive compensation decision-making process. Senior management participates in the Committee’s activities in the following specific respects:

 

 

Role of Compensation Consultant

 

In performing its duties, the Compensation Committee retains an independent compensation consultant. In July 2008, the Committee retained the services of Hewitt Associates LLC (Hewitt) to provide independent advice and ongoing recommendations compensation matters related to the CEO, other executive officers and non-employee directors, including:

 

 

During 2008, Hewitt attended two Compensation Committee meetings. In the course of fulfilling its responsibilities, Hewitt communicates directly with the Chairman prior to Compensation Committee meetings. Hewitt also meets with the management team to gather information, prepare materials, and review proposals to be made to the Compensation Committee. Towers Perrin served as the independent compensation consultant prior to the retention of Hewitt.

 

Nominating/Corporate Governance Committee

 

The Nominating/Corporate Governance Committee’s primary responsibilities are to:

 

 

The Nominating/Corporate Governance Committee operates under a written charter that is available on our website at http://www.aam.com/investors/corporategovernance.

 

Selection Process for Director Nominees.  In consultation with the Chairman of the Board, the Nominating/Corporate Governance Committee identifies, evaluates and recommends potential candidates for membership on the Board. The Nominating/Corporate Governance Committee conducts all necessary and appropriate inquiries into the backgrounds and qualifications of the candidates and considers questions of independence and possible conflicts of interest. Based on the Nominating/Corporate Governance Committee’s evaluation, candidates who meet the Board’s criteria may receive further consideration, which may include interviews with the Nominating/Corporate Governance Committee and other directors. The Nominating/Corporate Governance Committee then submits its recommendations for nominees for the Board’s approval.

 

Before the Board nominates an incumbent director for re-election by our stockholders, the incumbent director may be evaluated by the Nominating/Corporate Governance Committee and/or the Board. This evaluation is based on, among other things, the incumbent director’s meeting attendance record and contributions to the activities of the Board.

 

The Nominating/Corporate Governance Committee considers recommendations of potential candidates from the current directors of our Board, our CEO and our stockholders. Mr. R.E. Dauch referred current nominee Salvatore J. Bonanno, Sr. for consideration by the Nominating/Corporate Governance Committee and the Board based upon Mr. Bonanno’s knowledge of and experience in the automotive industry.

 

Director Qualifications.  AAM’s Corporate Governance Guidelines provide the qualifications for Board membership. Candidates for director nominees to the AAM Board are reviewed in consideration of the current composition of the Board, the operating requirements of the Company and the

interests of stockholders. Although specific qualifications may vary from time to time, desired qualities and characteristics include:

 

 

For director candidates recommended by stockholders, the Nominating/Corporate Governance Committee follows the procedures described below in Other Matters, Stockholder Proposals for 2010 Annual Meeting. The Nominating/Corporate Governance Committee will evaluate candidates recommended by stockholders using substantially the same criteria as it uses in evaluating director candidates recommended by our Board members or CEO.

 

Executive Committee

 

The Executive Committee exercises the authority of the Board during the intervals between Board meetings and does not meet on a regular basis. Its members are identified in the Committee Membership in 2008 table.

 

Technology Committee

 

The Technology Committee oversees and provides advice to AAM regarding AAM’s product, process and systems technology. Its members are identified in the Committee Membership in 2008 table.

 

Executive Summary

 

The year 2008 was a challenging and transformational year for AAM. It was a year of unprecedented crisis for the automotive industry, which suffered a severe drop in volumes by the end of 2008. Deteriorating global economic conditions, unstable credit markets, sharply declining consumer confidence and volatile fuel prices, among other things, precipitated a massive restructuring of the U.S. domestic OEMs and many of their suppliers. AAM also experienced a costly and disruptive 87 day strike called by the International UAW at the original U.S. locations during the first half of the year. AAM’s restructuring, resizing and recovery plan was accelerated in 2008 with a permanent and structural transformation of our workforce, plant locations and installed capacity.

 

Our strong executive leadership is critical to our progress relating to these restructuring efforts and to the continued execution of our operational and strategic objectives in coming years. Our compensation programs for these executives, designed to attract and retain executive talent and leadership, were reviewed and modified during 2008.

 

In anticipation of AAM’s 1999 Stock Incentive Plan expiration on January 8, 2009, the Company submitted the 2008 American Axle & Manufacturing Long-Term Incentive Plan (the “2008 LTIP”) to shareholders for approval in April 2008. However, the 2008 LTIP did not receive a sufficient number of votes for shareholder approval. As a result, AAM will not have equity available to make compensation-related grants to employees and non-employee directors for the next few years. The lack of an equity compensation program prompted the Compensation Committee to retain an independent compensation consultant in July 2008 to conduct a detailed review of the executive compensation program structure to meet the objectives of our compensation philosophy. Based on a comprehensive market study of executive compensation programs at companies in a peer group approved by the Committee (as described below), the consultant recommended that the Company adopt an externally competitive compensation structure that would include a change to the mix of base salaries, target annual incentive opportunities and long-term incentives for executive officers. The result was the approval, in February 2009, of a redesigned executive compensation program that is more in line with the market recommendations of the consultant.

 

Separate from this redesigned executive compensation program, AAM implemented a comprehensive restructuring plan to address the business conditions described above. In connection with the plan, the Committee approved a proposal by management to reduce base salaries of executive officers by 10 percent in 2009 and cancel the payment of the annual bonus for fiscal 2009 and 2008 to executive officers, including the named executive officers (NEOs).

 

Executive Compensation Philosophy and Objectives

 

The Committee is responsible for establishing and reviewing the overall compensation philosophy of the Company. The Committee believes that the compensation paid to executives should be structured to provide AAM executives with meaningful rewards, while maintaining alignment with stockholder interests, corporate values and management initiatives.

 

In accordance with this philosophy, the Committee believes that the executive compensation program should consist of a mix of base salary, annual incentive compensation, long-term incentive compensation (that may include equity or cash, as applicable), perquisites and other personal benefits.

 

As discussed above, the Company retained an independent compensation consultant, Hewitt Associates LLC (Hewitt) in 2008 to conduct a review of the executive compensation program structure. Based on Hewitt’s review, the Committee determined that formally stated target percentile goals should be incorporated into the overall compensation philosophy of the Company. Therefore, in an effort to more closely align the objectives of the philosophy to market competitive practices, the Committee approved

stated target percentile goals for each component of pay. The following pay percentile goals will be used as a guide to help set compensation levels for the NEOs, excluding the CEO (whose compensation is determined under his employment agreement, as described below), going forward:

 

 

These percentile goals were established based on the Committee’s objective that base salaries be consistent with average market salaries, which are represented by the 50^th percentile. The percentile goals for annual incentives and long-term incentives were set above the average 50^th percentile to enable the Company to reward executive performance at a rate slightly above average in order to compete for executive talent. These new pay percentile goals will be implemented over a two-year period beginning in fiscal year 2009.

 

Compensation Objectives.  The following principles were considered in setting the compensation programs and pay levels for 2008 and 2009 compensation.

 

 

Market Analysis and Benchmarking

 

In July 2008, AAM, along with its compensation consultant, Hewitt, updated the peer group on which market analysis and benchmarking was conducted. To help assess the competitive levels of pay and to provide data for 2009 pay decisions, Hewitt identified an updated peer group of 38 broad industrial manufacturing companies, including 10 automotive suppliers, from Hewitt’s 2008 Total Compensation Measurement^tm (TCM^tm) database, for consideration by the Committee. The peer group was selected to be representative of a broad industrial sector in which AAM competes for executive talent. The criteria used to assess the market and to select the updated peer group included:

 

 

The following companies met some or all of these criteria and were approved by the Committee for 2009 pay decisions:

 

 

 

 

In July 2007, with input from management, Towers Perrin identified a comparison group of 35 broad industrial manufacturing companies, including seven automotive suppliers, from Tower Perrin’s 2007 Executive Compensation Database, for consideration by the Committee. The comparison group was

selected to be representative of a broad industrial sector in which AAM competes for executive talent. The following companies were included in the peer group for 2008 pay decisions:

 

 

 

ü Included in the 2008 peer group but not in the 2009 peer group.

 

Tally Sheets

 

In October 2008 and October 2007, the Committee reviewed compensation tally sheets for each executive officer, including the NEOs. The tally sheets, which are prepared by management, provide a summary of the current amounts of each component of pay, including a historical review of prior long-term incentive grants. The tally sheets also provide a summary of the potential payouts and benefits upon various termination events. The elements and calculations reviewed are substantially similar to the information provided for each named executive officer in Potential Payments Upon Termination or Change in Control below. The Committee did not change the NEOs’ compensation based on its review of this information and continues to believe that the amounts payable in the event of a change in control are appropriate.

 

The Committee expects to review updated tally sheets on an annual basis.

 

Elements of the AAM Compensation Program

 

Overview and Analysis

 

The primary components of AAM’s executive compensation program are base salary, annual incentives, long-term incentives (collectively, “direct compensation”), and benefits and perquisites. The Committee reviews competitive market data compiled by the compensation consultant when making compensation-related decisions.

 

Based on the new pay percentile goals and to more closely align the pay programs with a market-based competitive level, the Committee approved a new compensation pay structure in February 2009. This new structure sets forth the base salary, annual incentive and long-term incentive opportunities for executive officers, excluding the CEO. For each executive, the target annual incentive and long-term incentive opportunity will be stated as a percentage of base salary, with the

potential for payouts above or below target level. No payment will be made if performance is below a stated threshold level.

 

For 2008, data compiled by Towers Perrin was used to set pay levels for executive officers. In setting pay levels, there was no particular target proportion among the components or between equity and nonequity awards. However, a significant portion of direct compensation was performance-based and therefore at risk. Performance-based awards, whether in the form of equity or cash, were tied to achievement of goals that are intended to enhance shareholder value.

 

The discussion below of the elements of compensation applies to the NEOs, other than Mr. R. E. Dauch, our CEO. Mr. R. E. Dauch’s compensation is discussed separately in Compensation of Chief Executive Officer below.

 

Components of Compensation Program

 

Base Salary.  In February 2009, in connection with AAM’s comprehensive restructuring plan, the Committee approved a management proposal resulting in a 10 percent reduction in the NEO’s base salary from the peer group data base salary levels established by the Committee. As indicated above, for 2009, the Committee based its salary determinations for the NEOs by reference to the 50th percentile of our peer group. The NEO base salaries were also based on the recommendation of the CEO and President & COO. Those recommendations were based on experience, time in position, professional development, contribution to the Company, individual performance and other factors. The following base salaries, reflecting the 10 percent salary reduction, were approved by the Committee for 2009:

 

 

In February 2009, in support of AAM’s restructuring plan, the Committee suspended the merit program for executive officers.

 

Under the merit program, the Committee reviews and adjusts executive officers’ base salaries in conjunction with the annual review process, changes in responsibilities, and changes in competitive market trends. Salary increases for executive officers are included in the budget for the annual merit program for all U.S. salaried associates. The Committee establishes an average merit percentage for base salary in the fourth quarter of each year to pay merit salary increases for U.S. salaried associates in the following year. In determining the average merit percentage for the upcoming year, the Committee considers compensation surveys by recognized independent consultants and professional organizations that project salary budget increases for salaried employees at comparable companies, including members of AAM’s peer group. The average merit percentage serves as a framework for determining the individual base salary adjustment for the relevant year.

 

As previously disclosed, in June 2008, the Committee approved the 2008 base salary increases for executive officers. Specifically, the Committee approved increases in the annual base salaries for Mr. Simonte, Mr. Rahangdale and Mr. Lancaster ranging from 4 to 6 percent, based on the recommendation of Mr. R. E. Dauch. The increases spanned the upper half of the range established by AAM’s merit program. The Committee approved a 15 percent increase in Mr. D. C. Dauch’s base salary, in consideration of his promotion to President & COO and the greater duties and responsibilities associated with his new position.

Annual Incentive Compensation.  Annual incentive compensation is designed to align executive officer pay with AAM’s annual performance, measured by our achievement of financial targets established under AAM’s Incentive Compensation Plan for Executive Officers. Cash incentive awards are permitted to the extent the Company meets or exceeds performance goals set annually by the Committee. Individual awards may be adjusted by the Committee, based on the CEO’s recommendation and other factors described in the plan.

 

AAM’s executive officers agreed to forego bonuses under the annual cash incentive plan for 2009. For future years, the amount of the target level opportunity for each executive officer has been adjusted based on the new compensation structure. The annual target opportunity for the NEOs has been reduced to be more aligned with the new pay percentile goals.

 

The following table summarizes the approved target annual bonus opportunities for the NEOs beginning in 2010 (stated as a percentage of base salary):

 

 

2008 Awards.  In support of AAM’s restructuring plan, the Committee cancelled the payment of the 2008 annual bonus to executive officers, including the NEOs. The threshold, target and maximum levels of performance set by the Committee for the 2008 performance period are shown in the following table:

 

 

Apart from the Committee’s decision to pay no bonuses for 2008, bonuses were not earned for 2008 under the performance factors described above.

 

2007 Awards.  The Committee postponed consideration of the 2007 annual bonus payments for executive officers until the conclusion of negotiations with the UAW. Taking into account the successful resolution of AAM’s negotiations with the UAW, the executives’ individual contributions, and the recommendations of the CEO, the Committee approved annual bonus payments to Mr. Simonte, Mr. Rahangdale, Mr. D.C. Dauch and Mr. Lancaster, ranging from 140 to 155 percent of the annual bonus payments that would have been paid if calculated solely based on financial performance. Based solely on the Company’s financial performance in 2007, annual bonus payments to the NEOs would have been 104 percent of target. The annual bonus payments were paid in June 2008.

 

Long-Term Incentives.  Long-term incentive compensation at AAM is designed to:

 

The Committee approved changes to the long-term incentive program for executive officers beginning in 2009 that impact both (1) the level of opportunity to be provided and (2) the types of vehicles to be used. This new long-term incentive approach was approved by the Committee in October 2008. In developing this new program, a number of factors were considered including the following:

 

 

Timing of Equity Grants.  AAM makes grants to its executive officers and other executives on an annual basis, subject to the approval of the Committee. Generally, grants are made in the first quarter of each year to coincide with the communication to executive officers of their annual cash incentive awards for the previous year’s performance.

 

AAM does not and has never permitted backdating, spring loading or other timing of option grants with the release of material, non-public information.

 

2009 Cash-Based Long-Term Incentive Plan.  In February 2009, the Committee approved a cash-based long-term incentive program, the AAM 2009 Long-Term Incentive Plan (AAM LTIP), which will provide the entire long-term incentive opportunity for executive officers in 2009. Initial grants were made in March 2009, and are anticipated to be made annually thereafter. Under the AAM LTIP, each participant received a target award value, stated as a dollar amount, based on a percentage of base salary. Award payouts can range from 0 percent to 200 percent of the target value based on the level of performance over the three-year period from January 1, 2009 through December 31, 2011.

 

2009 Awards.  The following table summarizes the target award values granted to the NEOs in March 2009:

 

 

Financial Measures.  For 2009 grants under the AAM LTIP, the actual cash payouts will be determined based on the level of performance against two performance metrics approved by the Committee. One-half of the target award amount will be earned based on the cumulative amount of earnings before interest, taxes, depreciation and amortization (EBITDA) over the three-year performance period. In calculating this award, the plan gives the Committee discretion to exclude certain special items from EBITDA. The remaining one-half of the target award amount will be earned based on a total shareholder return (TSR) measure that compares the Company’s TSR over the three-year performance period relative to the TSR of AAM’s competitor peer group as shown in AAM’s 2008 annual report. Share price appreciation and dividends paid will be measured over the performance period to determine TSR. The following tables illustrate the threshold, target and maximum performance levels for determining award payouts for each performance measure.

EBITDA Performance Measure

 

 

TSR Performance Measure

 

 

2008 Equity Awards under Prior Incentive Plan.  Under the long-term incentive grant program in effect for 2008, executive officers received equity awards with a total award value established by the Committee. In determining these awards, the Committee considered, among other things, recommendations of the CEO, level of responsibility and performance of each executive officer, market practices and trends, and the shares available under our Stock Incentive Plan.

 

The annual target award value for Mr. Simonte, Mr. D. C. Dauch and Mr. Lancaster was 150 percent of each NEO’s 2007 base salary. The annual target award value for Mr. Rahangdale was 300 percent of his 2007 base salary (consistent with the value of long-term incentive awards granted to him in prior years). In June 2008, following the ratification of new labor agreements with the UAW, the Committee awarded long-term incentives with a total award value, determined as a percentage of base salary, as follows:

 

 

Executive officers received a combination of restricted stock, performance awards and stock options with a total award value established prior to the time of grant as described in the Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table. Executives age 60 and over at the time of grant received, in lieu of a grant of performance awards, an equivalent value in restricted stock.

 

The Committee awarded the NEOs their total award values as follows:

 

 

Other Compensation Components

 

Benefits.  Our executive officers participate in the full range of benefits and retirement plans provided to U.S. salaried associates. A group of approximately 50 senior executives, including executive officers, also receive supplemental life, supplemental disability, umbrella liability, and travel accident insurance benefits.

 

Executive officers are eligible to participate in AAM’s qualified and nonqualified defined benefit pension plans and defined contribution plan. They are also eligible to participate in a nonqualified deferred compensation plan that permits deferrals of a portion of base salary and/or annual cash incentive compensation on a pretax basis. These plans are described in the Pension Benefits and Nonqualified Deferred Compensation sections below.

 

Perquisites.  AAM provides a limited number of perquisites for senior executives, including executive officers, which are described in the footnotes to the Summary Compensation Table. The most significant perquisite provided is the use of a Company-provided vehicle that has substantial AAM content. This perquisite is common among automotive suppliers. AAM has never owned a corporate aircraft and does not provide leased aircrafts for personal use. AAM does not pay for country club memberships.

 

Compensation of Chief Executive Officer

 

Mr. R. E. Dauch’s compensation is governed by an employment agreement that is described in the Narrative to Summary Compensation and Grants of Plan-Based Awards Table below. The CEO’s compensation arrangements are structured in consideration of the breadth of responsibilities for the entire Company, his experience in the automotive industry and his leadership and service to AAM since he co-founded the Company in 1994.

 

Similar to AAM’s other executive officers, the primary elements of the CEO’s compensation are: (1) base salary; (2) annual cash bonus; (3) long-term equity-based incentives; and (4) benefits and perquisites.

 

Base Salary.  Base salary is determined by the Committee as part of the annual compensation review process. Annual adjustments to base salary are made at the discretion of the Committee in consideration of Company performance and Mr. R. E. Dauch’s achievements as CEO. The specific factors considered may differ from year to year.

 

In February 2009, in connection with AAM’s comprehensive restructuring plan, the Committee approved a management proposal resulting in a 10 percent reduction in the CEO’s base salary for 2009. In recognition of Mr. R. E. Dauch’s unique role and the value of the services he provides to AAM, the Committee approved an increase in his 2008 salary of 10 percent. Base salary for 2008, 2007 and 2006 is shown in the Summary Compensation Table.

 

Annual Cash Bonus.  Mr. R. E. Dauch is eligible for an annual cash bonus as described in his employment agreement. See Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table below. The annual cash bonus is based on the Committee’s assessment of Company performance as compared to that of the competitor peer group. Under his employment agreement, Mr. R. E. Dauch is entitled to receive an annual bonus payment in the amount of three times his annual salary if AAM outperforms its competitor peer group by greater than the historical amount. The Committee may use discretion and consider other factors. which may differ from year to year, in determining Mr. R. E. Dauch’s annual cash award.

 

2009 and 2008 Annual Bonus.  The CEO agreed to forego bonuses for 2009 and 2008 in support of the Company’s restructuring plan.

 

2007 Annual Bonus.  Taking into account AAM’s financial performance in 2007, the structural transformation achieved under our new labor agreements with the UAW, and Mr. R. E. Dauch’s leadership role in these negotiations, in June 2008, the Committee approved a cash bonus for

Mr. R. E. Dauch of $8,500,000. The annual cash bonus earned in 2007 and 2006 is shown in the Summary Compensation Table.

 

Long-term Incentives.  Mr. R. E. Dauch’s employment agreement was amended in January 2008 to change the form of his annual equity award from stock options to a mix of stock options and restricted stock. Mr. R. E. Dauch is entitled to receive an annual award of 150,000 stock options and an award of restricted shares of equivalent value. The terms of these awards are described in the Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table.

 

Under his employment agreement, Mr. R. E. Dauch was granted 150,000 stock options and 59,638 shares of restricted stock in January 2009. This represents the long-term incentive award for Mr. R. E. Dauch for 2009.

 

Mr. R. E. Dauch was awarded 150,000 stock options and 59,192 shares of restricted stock at the conclusion of the UAW negotiations in June 2008. The number of shares awarded as restricted stock was calculated based on the average stock price for the 30-day period ending on February 20, 2008, the period that would have been used had the awards been made in March 2008. The awards vest over a period of approximately three years ending on March 14, 2011.

 

Benefits and Perquisites.  Mr. R. E. Dauch participates in the same benefit programs provided for other executive officers. In addition, under his employment agreement, AAM provides Mr. R. E. Dauch with the use of an additional Company vehicle and reimburses him for premiums under a $5,000,000 life insurance policy. The Company will also provide postretirement health care benefits upon expiration of his employment agreement. Perquisites provided to the CEO in 2008, 2007 and 2006 are reported in the Summary Compensation Table.

 

Management’s Stock Ownership Requirements

 

The Committee established stock ownership requirements for executive officers in October 2004. These stock ownership requirements were determined as a multiple of each executive officer’s base salary and the market value of AAM’s common stock. The expiration of the 1999 Stock Plan will prohibit future grants of equity to executives for the next few years. To address this issue, the Committee suspended these stock ownership requirements and replaced them with the following provisional stock ownership policy based on a set number of shares effective in October 2008.

 

Fixed Share Requirement for Executive Officers

 

 

The provisional stock ownership requirements must be attained within five years from the effective date or, for newly appointed executive officers, within five years of such appointment. All of the NEOs currently meet or exceed these requirements.

Federal Income Tax Considerations

 

Deductibility of Executive Compensation.  In general, the compensation awarded to the NEOs will be taxable to the executive and will give rise to a corresponding corporate deduction at the time the compensation is paid. Section 162(m) of the Internal Revenue Code (Code) denies a federal income tax deduction for certain compensation in excess of $1 million per year paid to the CEO or to any of the other NEOs other than the CFO. The portion of the compensation in excess $1 million that we paid to our CEO in 2008 was not deductible for federal income tax purposes. Section 162(m) did not affect our ability to take a tax deduction for compensation paid to any of our other NEOs in 2008.

 

Although deductibility of compensation is preferred, tax deductibility is not a primary objective of the Company’s compensation programs. The Committee believes that achieving the compensation objectives set forth above is more important than the benefit of tax deductibility. The Company reserves the right to maintain flexibility in how executive officers are compensated, which may result in limiting the deductibility of amounts of compensation from time to time.

 

Section 280G.  Under continuity agreements with NEOs, discussed below, they are entitled to a gross-up payment for excise tax resulting from a change in control under Section 4999 of the Code. This is to ensure that the NEO receives the same net after-tax payment that he would have received had no excise tax been imposed, subject to certain limitations. If an NEO’s change-in-control benefits exceed the safe harbor amount (i.e., three times the historical five-year Form W-2 average) by greater than 10 percent, he will be entitled to a gross-up payment for the additional excise tax. If, however, the change-in-control benefits are less than or equal to 10 percent of the safe harbor amount, then the named executive officer’s benefit will be reduced until the sum of the payments equals the maximum amount that may be paid to him without the imposition of the excise tax.

 

Change-in-Control Payments and Benefits

 

Primarily as a protection for senior management, and in order that they may remain focused on the management of the Company’s business in the event of a pending change in control, the Company has entered into continuity agreements with each of the executive officers, including the NEOs. These continuity agreements are described in Potential Payments Upon Termination or Change in Control below. Generally, the agreements provide enhanced severance benefits for executives if their employment is terminated under specific circumstances following a change in control. Additionally, stock options and other equity awards granted to the executive officers vest upon the occurrence of a change in control, further aligning the executive officers with shareholders.

 

REPORT OF THE COMPENSATION COMMITTEE

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K, and based on such review and discussions, recommended to the Board of Directors that such Compensation Discussion and Analysis be included in this proxy statement.

 

Compensation Committee of the Board of Directors

 

Forest J. Farmer, Chairman

Elizabeth A. Chappell

Thomas K. Walker

 

 

The following table summarizes the compensation of our named executive officers (Richard E. Dauch, Co-Founder, Chairman of the Board & Chief Executive Officer, Michael K. Simonte, Group Vice President — Finance & Chief Financial Officer, Yogendra N. Rahangdale, Vice Chairman & Chief Technology Officer, David C. Dauch, President & Chief Operating Officer and Patrick S. Lancaster, Vice President, Chief Administrative Officer & Secretary) for the fiscal years ended December 31, 2008, December 31, 2007 and December 31, 2006.

 

 

 

 

Long-term incentive awards granted in 2008 to the named executive officers are shown in the following table. The long-term incentive compensation programs are described in Compensation Discussion and Analysis and following the table below.

 

 

 

Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table

 

CEO Employment Agreement

 

Our employment agreement with Mr. R.E. Dauch, as amended, provides for the following compensation and benefits during the term of the agreement:

 

 

The current term continues through December 31, 2009 and may be automatically extended for successive one-year terms, unless either party gives notice of termination at least 60 days prior to the end of the applicable term. The potential payments and benefits upon termination of Mr. R.E. Dauch’s employment are described in Potential Payments Upon Termination or Change in Control.

 

Equity Awards

 

Stock Options.  Options vest in three approximately equal installments on the first, second and third anniversaries of the grant date. Generally, vesting may accelerate upon termination of employment due to death, disability, retirement or upon a change in control. The award is forfeited if employment is terminated for any other reason prior to vesting. Vested options expire ten years after the grant date and may be exercised any time before the earliest of: (1) the expiration of the grant, (2) five years following termination of employment (one year following termination for options granted before 2002) due to death, disability, retirement or a change in control, (3) 90 days following termination of employment without cause and (4) termination of employment for cause.

 

Restricted Stock.  Restricted stock awarded to executives under age 60 vests on the third anniversary of the grant date. The delay in the grant date of the 2008 awards resulted in a slightly reduced vesting period ending on March 14, 2011. Restricted stock awarded to executives age 60 and over vests in three approximately equal annual installments through March 14, 2011. Vesting accelerates upon death, disability, termination of employment by the Company pursuant to a reduction in force or similar program approved by the CEO, or upon a change in control.

Performance Accelerated Restricted Stock (PARS) and Performance Accelerated Restricted Stock Units (RSUs).  PARS and RSUs vest on the fifth anniversary of the grant date unless vesting is accelerated on the third or fourth anniversaries of the grant date based on our total shareholder return. Vesting may also accelerate upon termination of employment due to death, disability or upon a change in control. If the named executive officer’s employment is terminated for any other reason, he will forfeit his unvested PARS and RSUs.

 

Vesting is accelerated on the third anniversary of the grant date if AAM’s total shareholder return for the preceding three-year period meets or exceeds the 66th percentile of our competitor peer group. If vesting is not accelerated on the third anniversary, then vesting is accelerated on the fourth anniversary of the grant date if shareholder return exceeds the 66th percentile of our competitor peer group for the preceding four years. Total shareholder return is defined as the cumulative appreciation (assuming reinvestment of dividends) of an investment in common stock. Vesting will not accelerate unless AAM has positive total stockholder return.

 

PARS consist of issued and outstanding shares of AAM common stock, subject to forfeiture and transfer restrictions prior to vesting of the awards, and carry voting and dividend rights from the date of grant. RSUs consist of the right to receive, upon vesting of the award, an amount in cash equal to the fair market value of the number of shares of common stock covered by the award. RSUs carry the right to receive dividend equivalent payments from the date of grant, payable in the calendar quarter when dividends are paid on our common stock.

 

2008 Performance Awards.  Twenty-five percent of the executive officers’ award value would generally be in the form of performance awards, representing the right to a payment in cash based on AAM’s total shareholder return (TSR), relative to the competitor peer group, over a performance period of approximately three years. Performance awards are designed to tie long-term incentive pay of executive officers more directly with long-term Company performance. The Committee chose relative TSR as the measure of Company performance in order to motivate the executive officers to build long-term value for shareholders above that of the competitor peer group. In addition, these awards emphasize retention, as they require continued service with AAM during the performance period. Performance awards also are payable in cash rather than shares minimizing the dilution of stockholder interests. Executives age 60 and over at the time of grant would receive, in lieu of a grant of performance awards, an equivalent value in restricted stock.

 

The actual value realized under performance awards is equal to a percentage of the target payout based on relative TSR during the performance period. Following are the threshold, target and maximum levels of performance attainment and the related target level payouts:

 

 

Payout levels are linearly interpolated between percentiles. No performance awards may be earned unless relative TSR is at or above the threshold level of performance. If the Company’s TSR is negative over the three-year performance period, the maximum earned award would be 100% of the target award. TSR is measured for the Company and for each of the competitor peer group companies over the performance period and is defined as the cumulative appreciation (assuming reinvestment of dividends) of an investment in common stock.

 

 

The following table shows the value of the benefits accumulated by the NEOs and their years of credited service under AAM’s Salaried Retirement Program and the SERP. The years of credited service are through December 31, 2008, AAM’s fiscal year-end measurement date used for financial statement reporting purposes. The values shown are based on unreduced benefits deferred to the earliest age at which unreduced benefits are payable. The assumptions used to calculate the actuarial present value of accumulated benefits are the same assumptions used in our audited consolidated financial statements for the fiscal year ended December 31, 2008, except that the values in the table do not reflect assumptions for future compensation increases or future service credits and assume continued service until unreduced retirement age is attained.