UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

 

Filed by the Registrant  x

Filed by a Party other than Registrant  o

 

Check the appropriate box:

o   Preliminary Proxy Statement

 

o   Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x   Definitive Proxy Statement

 

o   Definitive Additional Materials

 

o   Soliciting Material Pursuant to § 240.14a-12

 

CRANE CO.
(Name of Registrant as Specified in Its Charter)

 

Not Applicable
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

x   No fee required

 

o   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

 

 

o   Fee paid previously with preliminary materials:

 

 

TABLE OF CONTENTS

CRANE CO. 100 FIRST STAMFORD PLACE STAMFORD, CONNECTICUT 06902

 

March 6, 2009

 

DEAR CRANE CO. SHAREHOLDER:

 

Crane Co. cordially invites you to attend the Annual Meeting of the Shareholders of Crane Co., at 10:00 a.m. Eastern Daylight Time on Monday, April 20, 2009 in the Elm Meeting Room at the Hilton Stamford Hotel, One First Stamford Place, Stamford, Connecticut.

 

The Notice of Meeting and Proxy Statement on the following pages describe the matters to be presented at the meeting. Management will report on current operations, and there will be an opportunity for discussion of Crane Co. and its activities. Our 2008 Annual Report accompanies this Proxy Statement.

 

It is important that your shares be represented at the meeting regardless of the size of your holdings. If you are unable to attend in person, we urge you to participate by voting your shares by proxy. You may do so by filling out and returning the enclosed proxy card, or by using the Internet address or the toll-free telephone number on the proxy card.

 

Sincerely,

 

 

R.S. EVANS

Chairman of the Board

 

CRANE CO.
100 FIRST STAMFORD PLACE
STAMFORD, CONNECTICUT 06902

 

 

CRANE CO.
100 FIRST STAMFORD PLACE STAMFORD, CONNECTICUT 06902

 

 

 

 

auditors. Broker non-votes do not count as votes cast for or against the question, and therefore will not affect the outcome of the voting at the meeting.

 

ELECTION OF DIRECTORS

 

The Board of Directors currently consists of twelve members divided into three classes.

 

At the Annual Meeting, Gen. Donald G. Cook (Ret.), Mr. Robert S. Evans, Mr. Eric C. Fast and Mr. Dorsey R. Gardner have been nominated for election by shareholders to hold office for three-year terms until the Annual Meeting in 2012 and until their successors are elected and qualified.

 

The Nominating and Governance Committee has proposed, and the Board of Directors recommends, that each of the four nominees (all of whom are current members of the Board) be elected to the Board. If, before the meeting, any nominee becomes unavailable for election as a director, the persons named in the enclosed form of proxy will vote for whichever nominee, if any, the Board of Directors recommends to fill the vacancy, or the Board of Directors may reduce the number of directors to eliminate the vacancy.

 

Shown below for each of the nominees for election and for each of those directors whose terms will continue are the individual’s age, position with Crane Co. if any, period of service as a Crane Co. director, business experience during at least the past five years and directorships in other public companies. Holdings of Crane Co. stock as of February 27, 2009, are also shown, determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, which includes shares subject to stock options exercisable within 60 days. No director except Mr. E. C. Fast beneficially owns more than 1% of the outstanding shares of Common Stock. For more information on shareholdings of directors and officers, please see Beneficial Ownership of Common Stock by Directors and Management, page 10.

 

 

Corporate Governance Matters

 

The Board of Directors has adopted Corporate Governance Guidelines which reflect the Board’s commitment to monitor the effectiveness of policy and decision-making both at the Board and management level, with a view to enhancing long-term shareholder value. The Corporate Governance Guidelines are available on our website at www.craneco.com/governance . Copies are also available in print free of charge upon request to the Corporate Secretary at 100 First Stamford Place, Stamford, CT 06902.

 

Conflicts of Interest; Transactions with Related Persons.   Crane Co. has established a Conflict of Interest Policy, CP-103, to which all directors, officers and salaried employees are subject. Those subject to the policy are required to disclose to the General Counsel in writing each outside relationship, activity and interest that creates a potential conflict of interest, including prior disclosure of transactions with third parties. All directors, executive officers and other salaried employees are required to certify in writing each year whether they are personally in compliance with CP-103 and whether they have knowledge of any other person’s failure to comply. In addition, each director and executive officer is required to complete an annual questionnaire which calls for disclosure of any transactions above a stated amount in which Crane Co. or a Crane Co. affiliate is or is to be a participant on the one hand, and in which the director or officer or any member of his or her family has a direct or indirect material interest on the other. The Board of Directors is of the opinion that these procedures in the aggregate are sufficient to allow for the review, approval or ratification of any “Transactions with Related Persons” that would be required to be disclosed under applicable SEC rules.

 

Attendance.   The Board of Directors met eight times during 2008. Each director attended over 85% of the Board and Committee meetings held in the period during which he or she was a director and Committee member. In addition, it is Crane Co.’s policy that each of our directors attend the Annual Meeting; all directors were in attendance at the 2008 Annual Meeting.

 

Executive Sessions of Non-Management Directors.   Four of the meetings of the Board during 2008 included executive sessions without management present, presided over by R. S. Evans, Chairman of the Board. Crane’s Corporate Governance Guidelines require our non-management directors to meet in executive session without management on a regularly scheduled basis, but not less than two times a year. The Chairman of the Board presides at executive sessions, unless he is a member of management, in which case the presiding person at executive sessions rotates on an annual basis among the Chairs of the Nominating and Governance Committee, the Audit Committee and the Management Organization and Compensation Committee. If the designated person is not available to chair an executive session, then the non-management directors select a person to preside.

 

Share Ownership Guidelines for Directors.   The Board of Directors has adopted share ownership guidelines which require each director to hold shares of Crane Co. stock having a fair market value not less than five times the director’s annual retainer. A director must have attained this ownership level by the fifth anniversary of his or her first election as a director. As of December 31, 2007, all directors who had attained their fifth anniversary of service

were in compliance with this ownership guideline. As of December 31, 2008, however, the sharp decline in the Company’s stock price had caused five directors to fall out of compliance with the guideline. The Board of Directors has determined that each such director shall have a reasonable time to reestablish compliance with the ownership guideline.

 

Shareholder Communications with Directors.   The Board has established a process to receive communications from shareholders and other interested parties. Shareholders and other interested parties may contact any member (or all members) of the Board, any Board committee or any Chair of any such committee by mail or electronically. To communicate with the Board of Directors, any individual director or any group or committee of directors, correspondence should be addressed to the Board of Directors or any individual director or group or committee of directors by either name or title. All such correspondence should be sent to Crane Co., c/o Corporate Secretary, 100 First Stamford Place, Stamford, CT 06902. To communicate with any of our directors electronically, shareholders should use the following e-mail address: adupont@craneco.com.

 

All communications received as set forth in the preceding paragraph will be opened by the office of the Corporate Secretary for the sole purpose of determining whether the contents represent a message to our directors. Any contents will be forwarded promptly to the addressee unless they are in the nature of advertising or promotion of a product or service, or are patently offensive or irrelevant. To the extent that the communication involves a request for information, such as an inquiry about Crane Co. or stock-related matters, the Corporate Secretary’s office may handle the inquiry directly. In the case of communications to the Board or any group or committee of directors, the Corporate Secretary’s office will make sufficient copies of the contents to send to each director who is a member of the group or committee to which the envelope or e-mail is addressed.

 

Independent Status of Directors

 

Standards for Director Independence.   No director qualifies as independent unless the Board affirmatively determines that the director has no material relationship with Crane Co. The Board has adopted the standards set forth below in order to assist the Nominating and Governance Committee and the Board itself in making determinations of director independence pursuant to the guidelines and requirements set forth by the NYSE. Any of the following relationships would preclude a director from qualifying as an independent director:

 

 

 

The existence of any relationship of the type referred to above, but at a level lower than the thresholds referred to, does not, if entered into in the ordinary course of business, preclude a director from being independent. The Nominating and Governance Committee and the Board review all relevant facts and circumstances before concluding that a relationship is not material or that a director is independent.

 

Crane Co.’s Standards for Director Independence, along with its Corporate Governance Guidelines and Code of Ethics, which applies to Crane Co.’s directors and to all officers and other employees, are available on our website at www.craneco.com/governance . Copies are also available in print free of charge upon request to the Corporate Secretary at 100 First Stamford Place, Stamford, CT 06902.

 

Independence of Directors.   The Nominating and Governance Committee has reviewed whether any of the directors or nominees for director, other than Mr. Fast and Mr. Evans, has any relationship that, in the opinion of the Committee, (i) is material (either directly or as a partner, shareholder or officer of an organization that has a relationship with Crane Co.) and, as such, reasonably likely to interfere with the exercise by such person of independent judgment in carrying out the responsibilities of a director or (ii) would otherwise cause such person not to qualify as an “independent” director under the rules of the NYSE and, in the case of members of the Audit Committee, the additional requirements under Section 10A of the Securities Exchange Act of 1934 and the associated rules. The Nominating and Governance Committee determined that all of Crane Co.’s directors, other than Mr. Fast and Mr. Evans, are independent in accordance with the foregoing standards, and the Board of Directors has reviewed and approved the determinations of the Nominating and Governance Committee. Mr. Evans serves as non-executive Chairman of the Board pursuant to an employment agreement under which he receives cash compensation of $100,000 per year and medical and dental insurance benefits comparable to those available to the Company’s employees generally, maintains an office and secretarial support at Crane Co.’s principal executive office and is permitted to use the corporate aircraft for personal travel. See “Other Agreements and Information” below. Mr. Fast is President and Chief Executive Officer of Crane Co.

 

In reaching their determinations regarding the independence of the other directors, the Committee and the Board applied the Standards for Director Independence described above, noted among other things the matters described under the caption “Other Transactions and Relationships” on page 35, and determined that the amount and nature of such transactions were not likely to affect the independence of those directors’ judgment.

Committees of the Board; Charters.   The Board of Directors has established an Audit Committee, a Nominating and Governance Committee and a Management Organization and Compensation Committee. Copies of the charters of all three committees are available on our website at www.craneco.com/governance . Copies are also available in print free of charge upon request to Crane Co., addressed to the Corporate Secretary at 100 First Stamford Place, Stamford, CT 06902. The Board of Directors has also established an Executive Committee, which meets when a quorum of the full Board of Directors cannot be readily obtained. The memberships of these committees during 2008 were as follows:

 

 

Audit Committee.   The Audit Committee is the Board’s principal agent in fulfilling legal and fiduciary obligations with respect to matters involving Crane Co.’s accounting, auditing, financial reporting, internal control and legal compliance functions. The Audit Committee has the authority and responsibility for the appointment, retention, compensation and oversight of our independent auditors. The Audit Committee met ten times in 2008, including four meetings by conference telephone to review quarterly financial information, with Crane Co.’s management, internal auditors and independent accountants to review matters relating to the quality of financial reporting and internal accounting controls and the nature, extent and results of audits. The Audit Committee’s report appears on page 36.

 

Audit Committee—Qualifications.   All members of the Audit Committee meet the independence and expertise requirements of the New York Stock Exchange, and all qualify as “independent” under the provisions of Securities and Exchange Commission Rule 10A-3. In addition, the Board of Directors has determined that Ms. Dykstra is an “audit committee financial expert” as defined in regulations of the Securities and Exchange Commission.

 

Nominating and Governance Committee.   The duties of the Nominating and Governance Committee include developing criteria for selection of and identifying potential candidates for service as directors, policies regarding tenure of service and retirement for members of the Board of Directors and responsibility for and oversight of corporate governance matters. The Nominating and Governance Committee met four times in 2008.

 

Management Organization and Compensation Committee.   The duties of the Management Organization and Compensation Committee include:

 

 

 

The Management Organization and Compensation Committee met five times in 2008. The Management Organization and Compensation Committee’s report appears on page 22.

 

Independence of Committee Members.   As noted above, each of the members of the Audit Committee, the Nominating and Governance Committee and the Management Organization and Compensation Committee is independent under applicable rules of the NYSE and in the case of members of the Audit Committee, the additional requirements under Section 10A of the Securities Exchange Act of 1934 and the associated rules.

 

Executive Committee.   The Board of Directors has also established an Executive Committee, which meets when a quorum of the full Board of Directors cannot be readily obtained. The Executive Committee may exercise any of the powers of the Board of Directors, except for (i) approving an amendment of the Certificate of Incorporation or By-Laws, (ii) adopting an agreement of merger or sale of all or substantially all of Crane Co.’s assets or dissolution of Crane Co., (iii) filling vacancies on the Board or any committee thereof or (iv) electing or removing officers. The Executive Committee met three times during 2008.

 

Director Nominating Procedures.   Our Corporate Governance Guidelines provide that the Board should generally have from nine to twelve directors, a substantial majority of whom must qualify as independent directors under the listing standards of the NYSE.

 

Criteria for Board Membership.   Criteria for Board membership take into account skills, expertise, integrity, diversity and other qualities which are expected to enhance the Board’s ability to manage and direct Crane Co.’s business and affairs. In general, nominees for director should have an understanding of the workings of large business organizations such as Crane Co., and senior level executive experience as well as the ability to make independent, analytical judgments, the ability to be an effective communicator and the ability and willingness to devote the time and effort to be an effective and contributing member of the Board. A director who serves as our Chief Executive Officer should not serve on more than two public company boards in addition to our Board, and other directors should not sit on more than four public company boards in addition to our Board. The members of the Audit Committee should not serve on more than two other audit committees of public companies.

 

The Nominating and Governance Committee will, from time to time, seek to identify potential candidates for director to sustain and enhance the composition of the Board with the appropriate balance of knowledge, experience, skills, expertise and diversity. In this process, the Committee will consider potential candidates proposed by other members of the Board, by management or by shareholders, and the Committee has the sole authority to retain a search firm to assist in this process, at Crane Co.’s expense.

 

Nominations by Shareholders.   In considering candidates submitted by shareholders, the Nominating and Governance Committee will take into consideration the needs of the Board and the qualifications of the candidate. To have a candidate considered by the Committee, a shareholder must submit the recommendation in writing and must supply the following information:

 

 

 

Any shareholder recommendation for next year’s Annual Meeting, together with the information described above, must be sent to the Corporate Secretary at 100 First Stamford Place, Stamford, CT 06902 and, in order to allow for timely consideration, must be received by the Corporate Secretary no earlier than December 21, 2009, and no later than January 20, 2010.

 

Once a person has been identified by the Nominating and Governance Committee as a potential candidate, the Committee, as an initial matter, may collect and review publicly available information regarding the person to assess whether the person should be considered further. Generally, if the person expresses a willingness to be considered and to serve on the Board, and the Committee believes that the candidate has the potential to be a good candidate, the Committee would seek to gather information from or about the candidate, review the person’s accomplishments and qualifications in light of any other candidates that the Committee might be considering, and, as appropriate, conduct one or more interviews with the candidate. In certain instances, Committee members may contact one or more references provided by the candidate or may contact other members of the business community or other persons that may have greater first-hand knowledge of the candidate’s accomplishments. The Committee’s evaluation process does not vary based on whether or not a candidate is recommended by a shareholder, although, as stated above, the Board may take into consideration the number of shares held by the recommending shareholder and the length of time that such shares have been held.

 

Majority Voting for Directors and Resignation Policy.   On January 26, 2009, the Board of Directors adopted an amendment to the By-Laws providing that directors running for re-election to the Board without opposition must receive a majority of votes cast. Any Director who fails to receive the required number of votes for re-election is required by Crane Co. policy to tender his or her written resignation to the Chairman of the Board for consideration by the Nominating and Governance Committee. The Committee will consider such tendered resignation and make a recommendation to the Board concerning the acceptance or rejection of the resignation. In determining its recommendation to the Board, the Committee will consider all factors deemed relevant by the members of the Committee including, without limitation, the stated reason or reasons why shareholders voted against such Director’s re-election, the qualifications of the Director (including, for example, whether the Director serves on the Audit Committee of the Board as an “audit committee financial expert” and whether there are one or more other Directors qualified, eligible and available to serve on the Audit Committee in such capacity), and whether the Director’s resignation from the Board would be in the best interests of the Company and its shareholders.

 

BENEFICIAL OWNERSHIP OF COMMON STOCK
BY DIRECTORS AND MANAGEMENT

 

Crane Co. believes that officers and other key employees, in order to focus their attention on growth in shareholder value, should have a significant equity stake in the Company. We therefore encourage our officers and key employees to increase their ownership of and to hold Crane Co. stock through the Stock Incentive Plan and the Savings and Investment Plan, as discussed in the Compensation Discussion and Analysis on page 12. Directors also receive 50% of their annual retainer, and may elect to receive the entire retainer, in the form of Deferred Stock Units issued under the 2007 Non-Employee Director Compensation Plan. Beneficial ownership of stock by the non-executive directors, the executive officers named in the Summary Compensation Table, all other executive officers as a group and all directors and executive officers of Crane Co. as a group as of February 27, 2009 is as follows:

 

 

 

 

PRINCIPAL SHAREHOLDERS OF CRANE CO.

 

The following table sets forth the ownership by each person who owned of record or was known by Crane Co. to own beneficially more than 5% of our common stock on February 27, 2009.

 

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

The following discussion and analysis explains Crane Co.’s compensation program as it applies to the executive officers named in the Summary Compensation Table on page 23. This discussion and analysis should be read in conjunction with the Summary Compensation Table, its accompanying footnotes and the additional tabular and narrative disclosure that follows the Summary Compensation Table.

 

Overview of 2008

 

The Company’s operating performance in 2008 was comprised of a record first half, with operating profit and earnings per share up 15.3% and 21.2%, respectively, over the first half of 2007, followed by a rapidly deteriorating second half, with operating profit and earnings per share down 29.0% and 29.3%, respectively, from the second half of 2007, excluding special items in 2007 and 2008. The worldwide economic crisis that struck in the third and fourth quarter clearly impacted the Company’s operating performance, and the record stock market decline had an even greater negative effect on the Company’s stock price. During the first half of 2008, the Company’s stock traded in the range of $33.54 to $46.30. During the second half of 2008, the Company’s stock traded as low as $10.87, closing at $17.24 on December 31, 2008.

 

These conditions have had a significant impact on the compensation of the Company’s executive officers and other employees, as well as the Company’s directors. For example, under the Corporate EVA Incentive Compensation Plan based on principles of economic value added (“EVA”), the aggregate corporate EVA bonus pool for 2008, determined in January 2009, was a negative $827,000, compared to a positive $6,548,000 for 2007. Under these circumstances, the EVA Plan provides that bonuses may be paid out of awards from previous years that were not paid out currently but were set aside in “bank accounts” for participating executives. Even with these bank accounts, however, the total bonus payment to Corporate EVA participants declined 37 percent from the prior year. After these payments and the application of the negative award, the Corporate EVA bank accounts were substantially reduced and certain executives had zero balances. The Committee determined that, given the impact of these economic conditions on the EVA calculation and the negative EVA awards for 2008 received by all participants in the Corporate EVA Plan and certain operating group EVA plans, any resulting negative balances would be reset to zero. See “Design and Operation of Executive Compensation Program — EVA” on page 15.

 

The decline of the Company’s stock price in September, October and November left the stock trading in a range that was below the strike price of virtually all outstanding stock options. The weighted average exercise price for stock options outstanding at December 31, 2008 was $31.83 per share, compared to the year end closing price of $17.24. For a number of key executives hired within the past three years, who have not yet been able to exercise many options or accumulate shares of restricted stock (which itself has declined substantially in value), previously granted equity awards have virtually no retention value, and very little incentive value. While the awards granted in January 2009 have begun to address this problem, the Committee believes that additional action is required in this regard. However, there are certain constraints imposed by the number of shares available under the 2007 Stock Incentive Plan, as well as the Board’s commitment to shareholders in the 2007 proxy statement not to exceed a “burn rate” of 2.57 percent over the three year period 2007-2009.

 

Significant Committee Actions in 2008

 

The Committee met five times in 2008. In January the Committee reviewed executive officer salaries, approved the calculation of EVA incentive compensation bonuses for executive officers, approved grants of stock options and restricted stock to executive officers and other key employees, approved grants of restricted stock to certain executive officers to restore pension benefits limited by federal tax regulations and approved the Benefit Equalization Plan on a going forward basis to restore such pension benefits upon retirement rather than via grants of restricted stock. See “Adoption of Benefit Equalization Plan” on page 19.

 

In February 2008, the Committee approved the cost of equity and certain other parameters under the EVA Plan for the 2008 Plan year, as well as an amendment of the EVA Plan for operating units to permit the payout of up to one-half of the bank balance after application of the current year award, at the discretion of the Chief Executive Officer, rather than the fixed formula of one-third of such balance. The Committee also reviewed tally sheets for

each executive officer, compiling 2007 compensation and wealth accumulation from stock option exercises and restricted stock vesting in the past three years, as well as potential payments upon termination of employment, including in connection with a change in control. The Committee also reviewed and approved the Compensation Discussion and Analysis set forth in the proxy statement for the annual meeting of shareholders in April 2008.

 

In July 2008, with the assistance of its independent compensation consultant, Hewitt Associates, the Committee reviewed the Company’s compensation peer group established in 2006 and determined to modify the peer group incrementally to maintain appropriate alignment in terms of size and business characteristics, adding four companies and deleting four companies. The Committee received a report from Hewitt on executive compensation trends and corporate governance, including discussion of clawback policies for recovery of compensation from management in the event of restatement of the financial statements due to misconduct; such a policy was adopted at the October meeting. The Committee also received a report from Hewitt analyzing the Company’s severance and change in control provisions in comparison to the peer group. See “Role of Peer Group Analysis” on page 14.

 

In October 2008, the Committee reviewed a report from Hewitt on the relationship of realized pay and performance for the Company in comparison to the peer group companies. The Committee approved a clawback policy and reviewed a proposal from management to include an alternative retirement provision, based on age 62 with 10 years of service rather than age 65 only, in future grants of stock options and restricted stock and Benefit Equalization Plan benefits. The Committee also reviewed reports from management regarding share usage under the 2007 Stock Incentive Plan and the need for additional share authorization in 2009. See “Adoption of Clawback Policy” on page 20.

 

In December 2008, the Committee received the annual report from the Vice President-Human Resources on the Company’s intellectual capital, including discussion of the strengths and weaknesses of key leaders and appropriate development plans, as well as succession planning for the Chief Executive Officer and other senior leadership positions. The Committee reviewed and approved a revised proposal from management regarding alternative retirement provisions for future grants of stock options, restricted share units to replace restricted stock and retirement benefits under the Benefit Equalization Plan. The Committee also reviewed the year-end compensation outlook for EVA bonus awards and available shares under the Stock Incentive Plan, taking note of the severe economic downturn and dramatic stock price decline in the latter part of the year as noted above. See “Stock-Based Compensation — Alternative Retirement Provisions” on page 18.

 

Objectives of the Executive Compensation Program

 

Crane Co.’s executive compensation program is designed and operated with the following objectives:

 

 

In pursuit of these objectives, our executive compensation program includes the following elements, each of which is more thoroughly described in this Compensation Discussion and Analysis:

 

Short-Term:   Crane Co. endeavors to pay its executives annual base salary at competitive levels, generally targeting the 50 ^th  percentile of pay scales for similar positions at companies within our peer group (see the discussion below captioned “Role of Peer Group Analysis”). Certain perquisites that have been judged to be reasonable and competitive elements of compensation are provided to senior executives as well.

 

Short- to Medium-Term:   The principal means of short- to medium-term compensation are the corporate and operating group economic value added (EVA) plans, which are described below. For senior executives who participate in the corporate or operating group EVA plans, including all the named executive officers, this amount is contingent on firm wide or group financial performance as well as on individual performance. These plans are designed to allow executives to share directly in the economic value added to the business during the year, but

contain features for target bonuses and deferred payment to encourage retention as well as to buffer individuals against year-to-year variations in the results of the business.

 

Long-Term:   Long-term compensation, which consists primarily of grants of stock options and restricted stock, is granted in order to focus the attention and efforts of executives and other key employees on shareholder return; for retention purposes, these grants typically vest over a period of years. Prior to 2007, Crane Co. granted options to purchase Crane Co. stock which vest 50% after one year, 75% after two years and in full after three years; however, beginning with the grants made in January 2007, stock options vest 25% per year over four years. We changed the term of stock options from 10 years to six years in 2004. We also make annual grants of restricted stock, which, before 2007, generally vested one-third after one year, two-thirds after two years and fully after three years; beginning in 2007, restricted stock grants vest 25% per year over four years.

 

Crane provides a 401(k) plan for substantially all its U.S. employees, and matches 50% of employee contributions up to six percent subject to Internal Revenue Code limitations; such matching contributions are paid in shares of Crane Co. stock and are fully vested when an employee has five years of service. The named executive officers other than Mr. MacCarrick also participate in a defined benefit pension plan, and certain executive officers previously received additional grants of restricted stock, and now participate in the BEP, to restore pension benefits limited by federal tax regulations, as described below under “Retirement Shares” and “Adoption of Benefit Equalization Plan.”

 

Role of Peer Group Analysis

 

In late 2005 and 2006, the Compensation Committee developed the following group of companies to serve as a peer group for compensation purposes: Ametek, Inc., Carlisle Companies Inc., Diebold, Inc., Flowserve Corporation, Goodrich Corporation, Graco, Inc., Harsco Corporation, IDEX Corporation, Pall Corporation, Pentair, Inc., Precision Castparts Corp., Roper Industries, Inc., SPX Corporation, Teleflex Inc., and Trinity Industries, Inc. The Committee developed this peer group in collaboration with management and with the assistance of its independent compensation consultant, Hewitt Associates. Although Crane Co. pays the fees and expenses of Hewitt Associates, the firm is retained by the Compensation Committee and does not perform any other services for Crane Co.

 

For 2008, Hewitt Associates provided the Compensation Committee with comparative compensation data on the peer companies from publicly available sources. In addition, Hewitt Associates provided the Committee with comparative compensation data compiled from a broad group of industrial companies with revenues ranging from $1.0 billion to $5.0 billion, using regression analysis to determine market values for companies of comparable size to the Company. This data included base salary, bonus compensation and stock-based equity compensation for the five named executive officers, as well as the 50 ^th  and 75 ^th  percentiles for each category. Hewitt Associates also presented comparable salary, bonus and equity compensation data for Mr. Fast and the other named executive officers. For Messrs. Mitchell and Ellis, the industry comparative data was compiled from a Hewitt Associates survey of compensation data for group presidents of comparably sized businesses. The Committee used this comparative data to calibrate the proposed salary increases, EVA bonus payments and aggregate stock option and restricted stock grant values for the named executive officers, with the view that base salary (which is based primarily on competitive market data) should generally be at approximately the 50 ^th  percentile of the peer group while bonus payouts and stock-based compensation (which are performance-based) should target the 75 ^th  percentile of the peer group subject to Committee review for overall performance results and extraordinary items.

 

During 2008, the Committee reviewed and updated the composition of the peer group first established in late 2005 and early 2006. This peer group review was comprised of two screening processes, one to examine the current peer group of companies for comparability to the Company in terms of revenues and market capitalization, nature of business and complexity of operations, and a second process to identify, without reference to the current peer group, a somewhat larger group of diversified industrial manufacturing companies based on similar metrics of size and business characteristics. The second screening process yielded a list with many of the same companies as the Company’s original peer group, and so the Committee determined to make a limited, incremental change in the peer group by deleting four companies whose revenues or market capitalization was greater or smaller than the general range of companies in the peer group and adding four companies with better fit under these metrics. The resulting list of peer companies is as follows: Ametek, Inc., Carlisle Companies Inc., Curtiss-Wright Corp. (new), Dover Corp. (new), Esterline Corp. (new), Flowserve Corporation, Harsco Corporation, IDEX Corporation, Pall

Corporation, Pentair, Inc., Roper Industries, Inc., SPX Corporation, Teledyne Technologies, Inc. (new), Teleflex Inc., and Trinity Industries, Inc. The four companies deleted from the peer group were: Diebold, Inc., Goodrich Corporation, Graco, Inc. and Precision Castparts Corp.

 

Design and Operation of Executive Compensation Program

 

Base Salary

 

Base salaries for executive officers are established at the date of hire based on competitive market data (see the discussion of “Role of Peer Group Analysis” above), current salary levels within Crane Co. and the bargaining process needed to attract the particular executive. Mr. Fast has an employment agreement, executed in January 2001 in connection with his promotion to Chief Executive Officer, which provides for an annual salary not less than $650,000. His salary was reviewed by the Compensation Committee in January 2008 by reference to peer group data and other relevant competitive market data compiled for the Committee by Hewitt Associates. On the recommendation of the Compensation Committee, targeting the 50th percentile of the peer group data, the Board of Directors determined to leave Mr. Fast’s $950,000 annual salary unchanged for 2008. Salaries for other named executive officers are reviewed in a similar manner but are determined by the Chief Executive Officer and then reviewed with the Compensation Committee. Increases in base salary for 2008 for the named executive officers other than Mr. Fast ranged from 0% to 5%. For perquisites and other items of short-term compensation, please see below under “Other Compensation.”

 

EVA

 

Executive officers and other senior corporate executives, as well as members of senior management of individual business units, participate in non-equity incentive compensation plans based on economic value added (EVA), which is generally defined as the amount by which net operating profit after tax exceeds cost of capital. These plans are designed to reward executives for sustained, continuous improvement in operating profit in relation to the invested capital employed in the business. The Board of Directors believes that, compared to such common performance measures as return on capital, return on equity, growth in earnings per share and growth in cash flow, EVA has the highest correlation with the creation of value for shareholders over the long term.

 

The EVA plans do not involve pre-established goals, as such. Rather, the aggregate EVA of Crane Co. or of the relevant unit for the year, together with the increase or decrease in EVA compared to the prior year, forms the basis for any incentive compensation award, thereby motivating executives to focus on continuous value improvement.

 

Cash payments to eligible participants are based on either or both of the aggregate EVA for the relevant unit and the growth of EVA over the prior year, as determined by the Compensation Committee, as well as a participation percentage for each individual. The participation percentage of the Chief Executive Officer is set by the Compensation Committee, while the percentages of the other participants are recommended by the Chief Executive Officer and approved by the Committee, subject to maximum participation percentages set by the Committee. Messrs. Fast, MacCarrick and duPont participate in the Crane Co. Corporate EVA Incentive Compensation Plan (the “Corporate EVA Plan”), which is based on the results of the Company as a whole, while Mr. Mitchell participates in the EVA Plan for the Fluid Handling Group and Mr. Ellis participates in the EVA Plan for the Merchandising Systems Group.

 

EVA — Corporate EVA Plan.

 

Calculation of EVA; Establishment of EVA Bonus Pool.   The cost of capital used in the Corporate EVA Plan is comprised of two components, a cost of equity fixed in advance by the Compensation Committee and a cost of debt which is Crane Co.’s actual interest cost. At the beginning of each year the Compensation Committee determines the cost of equity component of the cost of capital; in 2008, after reviewing the cost of equity used for the Corporate EVA Plan over the past 10 years and a calculation of the cost of equity based upon several alternative methodologies, the Committee fixed the cost of equity for the Corporate EVA Plan at 11.10%. This cost of equity was then blended on a monthly weighted average basis with the actual cost of debt to determine the overall cost of capital for the Corporate EVA Plan, which was 8.97% for 2008.

The bonus pool, which may be positive or negative, is then determined using a methodology set forth in the plan; if the prior year’s EVA was positive, 6% of current year positive EVA plus 10% of the change from the prior year’s EVA; if the prior year’s EVA was negative, 15% of the change from the prior year’s EVA; provided that the Compensation Committee may determine, in its discretion, to fix different percentages and combinations of current EVA and change from the prior year. Under the terms of the Corporate EVA Plan, provisions relating to Crane Co.’s asbestos and Superfund liabilities, which are regarded as being legacy liabilities largely outside the control of management and for which current management should not be held accountable, are excluded from the calculation of EVA. To the extent permitted by the requirements of Section 162(m) of the Internal Revenue Code, the Compensation Committee may also exclude other significant non-budgeted or non-controllable gains or losses in order to properly measure executive performance. In February 2008, the Committee reviewed and approved the cost of equity component of the cost of capital calculation for 2008, and in January 2009, the Committee reviewed and approved the final determination of the aggregate Corporate EVA bonus pool for 2008, which was a negative $827,000.

 

Participation Percentages and Payouts.   At the beginning of each year, the Compensation Committee establishes a maximum participation percentage for executive officers; for 2008, the participation percentages were fixed at 30% for Mr. Fast and a maximum of 15% for any other executive officer named in the Summary Compensation Table, subject to determination of the final participation percentage after the end of the year. In January 2009, the Compensation Committee approved the participation percentages of the participants in the Corporate EVA Plan, including Messrs. Fast (30%), MacCarrick (10%) and duPont (9.5%), based on competitive market analysis, prior participation percentages and relative performance of all participants in the Corporate EVA Plan. This amount, together with 6% interest on the portion of EVA awards earned but not paid out in previous years, appears in the Summary Compensation Table in the column headed “Non-Equity Incentive Plan Compensation,” and in the Grants of Plan-Based Awards Table in the column headed “Estimated Future Payouts under Non-Equity Incentive Plan Awards — Target.” (For years in which the EVA award is negative, as it was for participants in the Corporate EVA Plan for 2008, the Summary Compensation Table indicates zero compensation in this category.)

 

If the EVA award in a particular year is negative, an executive may still receive a cash payment from his or her bank account up to the target bonus, before the negative EVA award is applied to the bank account. If the bank account balance is negative, the executive receives no incentive compensation payment the following year unless the EVA award is positive. Each year, Crane Co. adds interest to a positive balance at six percent. The EVA bank account is subject to forfeiture in the event an executive leaves Crane Co. by reason of termination or resignation, but is paid in full if the executive dies, becomes disabled or retires at age 65 (or earlier at the discretion of the Committee) or upon a change in control of Crane Co. As discussed above, the Committee determined in January 2009 that, given the impact of volatile economic conditions on the EVA calculation, any resulting negative balances would be reset to zero.

 

Under the terms of the Corporate EVA Plan, each of such executives (other than Mr. MacCarrick) received a cash payout in February 2009 equal to the sum of (i) the executive’s target bonus as a percentage of base salary (90% for Mr. Fast and 70% for Mr. duPont) and (ii) one-third of the executive’s “bank account” which is comprised of the unpaid portion of previous awards plus interest, less the negative award for 2008. Mr. MacCarrick received a guaranteed EVA payout of $200,000 pursuant to terms of employment negotiated in connection with his hiring on July 28, 2008.

 

EVA — Operating Groups

 

Senior business unit management, including Mr. Mitchell and Mr. Ellis, participate in EVA Plans based upon the performance of their own business units, which are similar in general structure to the Corporate EVA Plan but have certain significant differences. It should be noted that because of these differences, the sum of the EVA bonus pools for all of our operating units does not equal the Corporate EVA bonus pool.

 

Calculation of EVA; Establishment of EVA Bonus Pool .   Because the capital structure of our business units is subject to many factors outside the control of management of the particular unit, the operating group EVA Plans use a fixed cost of capital of 9.5%. Aggregate EVA is calculated for each unit in the same manner as for the Corporate EVA Plan, but in certain cases the percentage of aggregate EVA and/or the percentage of the improvement from

prior year are adjusted by the Chief Executive Officer and reviewed by the Committee to reflect the particular circumstances, goals and objectives of the units. In 2008 the aggregate EVA award pool for the Fluid Handling Group was $5,120,631, and the aggregate EVA award pool for the Merchandising Systems Group was $1,249,805.

 

Participation Percentages and Payouts .   Participation percentages for the business unit EVA pools are established by the Chief Executive Officer and reviewed by the Compensation Committee. For 2008, Mr. Mitchell’s participation percentage was 13% of Fluid Handling Group EVA, and Mr. Ellis’ participation percentage was 20% of Merchandising Systems Group EVA. The awards for 2008 to Messrs. Mitchell and Ellis, plus 6% interest on the portion of EVA awards earned but not paid out in previous years, are shown in the Summary Compensation Table in the column headed “Non-Equity Incentive Plan Compensation,” and in the Grants of Plan-Based Awards Table in the column headed “Estimated Future Payouts under Non-Equity Incentive Plan Awards — Target.”

 

Under the terms of the operating group EVA Plans, participating executives generally receive a cash payment equal to one-third of the sum of (i) the award for the current year and (ii) the unpaid bank balance from the prior year plus interest at six percent, except that in the case of new participants the payment is 70% of such sum in the first year, 50% in the second year and one-third each year thereafter. As noted above, during 2008 the Committee approved an amendment to the EVA Plan for Operating Groups to permit payouts up to 50% of the foregoing sum total, in the discretion of the Chief Executive Officer.

 

Activity for each of the named executive officers in the EVA plans for 2008 was as follows:

 

 

 

 

Stock-Based Compensation

 

The Stock Incentive Plan is used to provide long-term incentive compensation through stock options as well as retention of highly regarded executives through restricted stock with time-based vesting. We believe that executive officers approach their responsibilities more like owners as their holdings of and potential to own stock increase. Under the Stock Incentive Plan, stock options must be granted at no less than fair market value on the date of grant and vest and become exercisable 25% per year over four years (prior to 2007, the vesting schedule was 50% on the first anniversary of the date of grant, 75% on the second anniversary and 100% on the third anniversary). Accordingly, executives can realize a gain only if the share price increases from the date of grant, directly linking this incentive compensation to increases in shareholder value. Although broad market dynamics can strongly influence our share price, the Board of Directors believes that with stock options executives are motivated to take actions that improve the share price, such as profitable sales growth through internal growth as well as acquisitions, improvement in operating margins to generate increased operating profit and drive higher multiple valuations and prudent use of free cash flow through capital expenditures, dividends, acquisitions and stock repurchases.

The Stock Incentive Plan also authorizes the Board of Directors, acting through the Compensation Committee, to grant restricted stock subject to such terms and conditions as the Committee may deem appropriate. In 2008, as in previous years, the Committee granted shares of restricted stock having time-based vesting conditions, for purposes of retaining highly regarded executives. The vesting conditions for the restricted stock granted to the named executive officers in 2008 were 25% per year over four years; grants prior to 2007 generally vested one-third on the first anniversary of the date of grant, one-third on the second anniversary and one-third on the third anniversary.

 

In determining the size of the stock option and restricted stock grants in 2008, the Compensation Committee referred to the peer group data compiled by Hewitt Associates, as well as our historical grant practices including the number of shares, as well as fair market value of the stock and, for stock options, Black-Scholes values on the dates of grant. The Committee also reviewed tally sheets for Messrs. Fast, Mitchell, duPont and Ellis which set forth all annual compensation as well as retirement program balances, accumulated holdings of stock options, restricted stock and other Crane Co. stock owned by the executive. The Committee used these reference points in order to reach a judgment as to the appropriate proportions of stock options and restricted stock for the named executive officers as well as to size the aggregate grants for all employees.

 

In January 2008, the Committee granted an aggregate of 942,800 stock options, of which 130,000 or 13.8% were granted to Mr. Fast and an aggregate of 90,000 or 9.5% were granted to Messrs. Mitchell, duPont and Ellis. In January 2008, the Committee also granted an aggregate of 208,250 shares of time-based restricted stock, of which 80,000 or 38.4% were granted to Mr. Fast and 16,000 or 7.7% were granted to Messrs. Mitchell, duPont and Ellis. The Committee granted 25,000 stock options and 6,000 shares of restricted stock to Mr. MacCarrick as part of the terms negotiated in connection with his hiring on July 28, 2008. The grant date fair value of each such grant of options and time-based restricted stock is presented in the Grants of Plan-Based Awards Table under the caption “Grant Date Fair Value of Stock and Option Awards.” For more information regarding the number of unexercised stock options and unvested shares of restricted stock held by each of our named executive officers as of December 31, 2008, please see the 2008 Outstanding Equity Awards at Fiscal Year-End table on page 27.

 

During the balance of 2008, the Committee granted an additional 39,000 stock options and 24,500 shares of restricted stock under the Stock Incentive Plan, none of which were granted to any named executive officer.

 

Policies with Respect to Timing of Stock-Based Awards and Exercise Price of Stock Options .   Since 2000, annual grants of stock options and restricted stock to executive officers have been made at the Compensation Committee’s January meeting, when all annual executive compensation decisions are made, except for 2004 when the stock grants were deferred until shareholders approved a new plan in April of that year. The Committee also grants stock options and restricted stock at other dates to newly hired or promoted executives. The exercise price of stock options under the 2009 Stock Incentive Plan (like the 2007 Plan) is equal to the fair market value at the date of grant, determined on the basis of the closing price on the date of grant. For grants under plans prior to 2007, the exercise price of stock options was defined as the average of the high and low market prices of the stock over the ten trading days ending on the date of grant.

 

Alternative Retirement Provisions .   At the request of the Committee, Hewitt analyzed the retirement provisions of stock option and restricted stock awards under the Company’s Stock Incentive Plan, as well as the benefits to participating executives under the Benefit Equalization Plan. The Committee was assisted in this review by the Company’s pension actuary, Buck Consultants. After comparing these retirement provisions against plans disclosed by the Company’s peer group companies, and based on its general experience as a compensation consultant, Hewitt advised the Committee that the Company’s retirement provisions were restrictive in relation to market practice and could be adjusted to achieve the Committee’s objective of enhancing the incentive aspects of stock grants as executives approach eligibility for retirement, aligning the interests of the executive with the Company for a reasonable additional period after retirement and maintaining a consistent approach to retirement under the Benefit Equalization Plan. After further review, discussion and analysis, the Committee approved the following alternative retirement provisions under these plans:

 

 

 

These provisions were approved on December 8, 2008 and are applicable to grants and awards after that date, except that the provisions regarding stock options will be applicable only to grants made under the 2009 Stock Incentive Plan if it is approved by shareholders. Outstanding stock options and restricted stock awards are not affected by these new terms.

 

Retirement Shares .   From 1995 to 2008, the Committee administered a program using grants of restricted stock to make up the shortfall in executive officer and key employee pension benefits imposed by certain federal tax policies which limit the amount of compensation that can be considered in determining benefits under tax-qualified pension plans. Under this program, the Committee granted from time to time, to certain executive officers, including certain of the named executive officers, and to certain other key employees who were impacted by such tax limitations, amounts of restricted stock calculated by our actuaries to make up that portion of the retirement benefit at normal retirement (age 65) lost by reason of the tax limitations. For Mr. Fast, the retirement-based restricted shares vest upon early retirement (before age 65) provided he has at least 10 years of service from his hire date of September 27, 1999. If Mr. Fast chooses to take early retirement before he has ten years of service, a pro-rated portion of such shares would vest on his 60th birthday (i.e. July 10, 2009). No shares were granted under this program in 2007. In January 2008, the Committee granted retirement shares to participating executives in respect of retirement benefits accrued for service during 2006 and 2007: Mr. Fast, 28,500 shares; Mr. duPont, 6,900 shares; Mr. Ellis, 800 shares; and three other executive officers, an aggregate of 21,800 shares. In each case, based upon calculations by Buck Consultants, slightly more than one-half of such shares were attributable to retirement benefits accrued for service during 2007; for Mr. Fast, 15,105 shares (or 53%) were attributable to 2007 service and 13,395 shares (or 47%) were attributable to 2006 service.

 

Adoption of Benefit Equalization Plan

 

In January 2008, at the recommendation of the Committee, the Board of Directors adopted the Benefit Equalization Plan in lieu of the Retirement Shares plan discussed in the preceding paragraph, under which participating executives will receive a retirement benefit intended to restore the portion of the retirement benefit under the Company’s pension plan that is not payable due to certain federal tax policies that limit the amount of compensation that can be considered in determining benefits under tax-qualified pension plans. The Benefit Equalization Plan is designed only to restore retirement benefits under the Company’s regular pension plan that are limited by the tax code; there is no supplemental benefit based on deemed service or enhanced compensation formulas. As discussed above, these shortfall amounts were previously addressed by periodic, discretionary awards of restricted stock calculated by the Company’s actuaries to make up that portion of the retirement benefit at normal retirement (age 65) lost by reason of the tax limitations. The original grant value of all prior grants of so-called “Retirement Shares” is deducted in determining the benefit payable under the Benefit Equalization Plan. Benefits accrued under this plan are not funded or set aside in any manner. The Benefit Equalization Plan was amended and restated effective December 8, 2008 to incorporate the alternative retirement provisions described above. The executives currently participating in this plan are Messrs. Fast, duPont, Ellis and three other executive officers.

 

Stock Ownership Guidelines

 

Crane Co. has established stock ownership guidelines for executive officers and business unit presidents. The ownership guidelines for executive officers are expressed as a multiple of base salary:

 

 

The policy permits executives to sell up to 50% of the net shares realized upon an option exercise or vesting of restricted stock (i.e., the total shares covered by the option exercised or the restricted share grant vesting less the number of shares surrendered to satisfy tax withholding obligations), while retaining at least 50% of such net shares in order to meet the stock ownership guidelines. Shares which count toward the satisfaction of the guidelines are (i) shares owned by the executive, (ii) shares held in the executive’s 401(k) account and (iii) restricted stock and Restricted Share Units held by the executive. Once such guidelines are met, the policy permits executives to sell any shares held above the required ownership guidelines. Executives are expected to reach the applicable minimum ownership level by the fifth anniversary of their date of hire or first date in the relevant executive position. All executive officers who had attained their fifth anniversary of service were in compliance with these stock ownership guidelines at the Record Date, February 27, 2009.

 

Adoption of Clawback Policy

 

On October 27, 2008 after review of materials provided by Hewitt and discussion with management, the Compensation Committee recommended, and the Board of Directors approved, a “clawback” policy providing that the Company may recoup from the Chief Executive Officer, the Chief Financial Officer, the General Counsel, and other executive officers (including all the named executive officers) the EVA bonuses and amounts realized from stock option exercises and vesting of restricted stock based upon financial statements that are subsequently restated, as a result of fraud or similar misconduct by such executives. The Compensation Committee administers this policy and has the discretion to determine when it is to be applied, to whom and to which compensation.

 

Impact of Internal Revenue Code Section 162(m)

 

Section 162(m) of the Internal Revenue Code limits to $1 million per employee the deductibility of compensation paid to the named executive officers unless the compensation meets certain specific requirements. The Corporate and operating group EVA incentive compensation plans are intended to constitute performance-based plans meeting the criteria for continued deductibility set out in the applicable regulations. In addition, we believe that all stock options granted to date under our stock incentive plans meet the requirements of Section 162(m) for deductibility. The shares of time-based restricted stock granted in 2008, as well as retirement shares granted to offset the impact of the tax limitations on pension benefits as described above, do not satisfy the performance-based criteria of Section 162(m), and accordingly compensation expense in respect of income recognized by the executive officer upon lapse of the restrictions is not deductible to the extent that such income, together with all other compensation in such year that did not satisfy the criteria of Section 162(m), exceeded $1 million. In 2008, approximately $3.1 million of compensation received by Mr. Fast, principally due to the vesting of restricted stock granted in previous years, was not deductible under Section 162(m). As a matter of policy, the Committee intends to develop and administer compensation programs which will maintain deductibility under Section 162(m) for all executive compensation, except in the limited circumstance when the materiality of the deduction is in the judgment of the Committee significantly outweighed by the incentive or retention value of the compensation.

 

Other Compensation

 

The “All Other Compensation” and “Change in Pension Value and Nonqualified Deferred Compensation Earnings” columns of the Summary Compensation Table and the accompanying footnote set forth the details of other compensation received by the named executive officers. In certain cases, such as the Crane Co. contributions to defined contribution plans and the increase in actuarial value of the defined benefit pension, such compensation is determined on the same basis as that used for all other employees. In other cases, such as automobile allowances, executive health exams and other personal benefits, the compensation is provided to certain key employees but not

to all employees and we have determined it to be reasonable and competitive compensation for the named executive officers in relation to general industry practices.

 

In the case of personal use of the corporate aircraft, this benefit is restricted to the Chief Executive Officer and the Chairman of the Board (our former chief executive officer). Each of them has an agreement with Crane Co. (as described under the caption “Other Agreements and Information” on page 34) pursuant to which they reimburse the Company for a portion of the costs of such personal use based upon Treasury regulations establishing the fair market value of such personal use for tax purposes, and the net incremental cost to Crane Co. above the reimbursed amount is included in the “All Other Compensation” column of the Summary Compensation Table. Under applicable Treasury regulations, Crane also loses a portion of the federal income tax deduction for the costs of operating or leasing employer-provided aircraft to the extent the costs attributable for personal use (as determined pursuant to such regulations) exceed the amount reimbursed. For 2008, the disallowed deduction was approximately $2.5 million. The Board of Directors has approved this personal use of the aircraft for Mr. Fast because the Board believes that such personal use of the aircraft permits the most efficient use of time by Mr. Fast and thereby benefits Crane Co.; for R.S. Evans, our former chief executive officer, the Board of Directors has approved this use in recognition of his long service and substantial contributions to Crane Co. as well as his continued service as Chairman of the Board. For more information regarding the use of the Company aircraft, see the section captioned “Use of Company Aircraft” on page 35.

 

Change in Control Provisions

 

Certain executive officers have an agreement which, in the event of a change in control of Crane Co., provides for continued employment for a period of years following the change in control (three for Messrs. Fast, MacCarrick, Mitchell, duPont and Ellis). Upon termination within such employment period after a change in control, either by the employer without cause or by the executive with “Good Reason” (as defined in the agreement to include the executive’s ability to terminate such employment for any reason within the 30-day period commencing on the first anniversary of the change in control), the executive is entitled to receive a multiple of base salary and average annual bonus payments based on the number of years in the employment period, and certain other benefits. The EVA plans, stock options and restricted stock grants contain similar features which accelerate vesting in the event of a change in control. The change in control agreements obligate Crane Co. to make additional payments to the employee such that after payment of all taxes including any excise tax under section 4999 of the Internal Revenue Code resulting from such payments and the accelerated vesting of EVA bank balances, stock options and restricted stock, the employee will retain an amount sufficient to pay the excise tax on all such payments. As set forth below under “Potential Payments upon Termination or Change in Control,” the aggregate payments to the named executive officers would range from $1,654,698 for Mr. MacCarrick to $7,705,257 for Mr. Fast. The corresponding additional payments in respect of excise taxes would range from nil to $1,337,904. The Board of Directors has approved these agreements and other provisions to assure the continuity of management in the event of a change in control and considers these agreements and provisions to be competitive with terms offered by other companies with which we compete for executive talent.

 

Management Organization and Compensation Committee Report

 

The Management Organization and Compensation Committee of the Board of Directors has submitted the following report for inclusion in this Proxy Statement:

 

The Committee has reviewed and discussed with management the foregoing Compensation Discussion and Analysis. Based on our review and discussions with management, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement, and incorporated by reference in Crane Co.’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

Submitted by:

 

The Management Organization and Compensation Committee of the Board of Directors of Crane Co.

 

E. Thayer Bigelow, Chair
Donald G. Cook
William E. Lipner
Ronald F. McKenna
James L. L. Tullis

 

Summary Compensation Table

 

The table below summarizes the compensation for 2006, 2007 and 2008 earned by Crane Co.’s Chief Executive Officer; its Chief Financial Officer (whose employment began as of July 28, 2008); and each of the three other most highly paid executive officers who were serving as executive officers at December 31, 2008. These individuals are sometimes referred to in this Proxy Statement as the “named executive officers.” Amounts shown in the columns headed “Stock Awards” and “Option Awards” relate to grants made in January of the indicated year (in the case of Mr. MacCarrick, in July 2008). Amounts shown in the column headed “Non-Equity Incentive Plan Compensation” relate to EVA awards made, on the basis of performance during the indicted year, in January of the year following.

 

 

 

 

 

 

 

 

 

 

 

Annual Compensation of the Named Executive Officers

 

Base Salary —The base annual salary of the Chief Executive Officer is determined by the terms of his employment agreement, subject to annual increases as recommended by the Management Organization and Compensation Committee and approved by the Board of Directors. The base annual salary of each of the named executive officers other than the Chief Executive Officer is determined by the Chief Executive Officer and reviewed by the Committee. Based on the base salaries of the named executive officers, as well as the fair value of equity awards and non-equity incentive plan awards granted to them in 2008, base salary accounted for approximately 23% of the total compensation of the named executive officers.

 

EVA —Messrs. Fast, MacCarrick and duPont each received negative awards under the Crane Co. Corporate EVA Incentive Compensation Plan, calculated with reference to Crane Co.’s financial results for 2008, which will reduce future benefits received under that Plan. Mr. Mitchell received an award under the Fluid Handling Group EVA Plan, and Mr. Ellis received an award under the Merchandising Systems Group EVA Plan, in each case including both cash compensation and grants of potential future benefits. Grants relating to 2008 performance were not fixed until the first meeting of the Compensation Committee and the Board of Directors in 2009. The operation of the EVA plans is described in detail beginning on page 15 in the Compensation Discussion and Analysis.

 

Stock Options and Restricted Stock —In 2008, consistent with previous practice, Crane Co. made annual grants of stock options and restricted stock to executives and other key employees, including Messrs. Fast, Mitchell, duPont and Ellis, at the January 28 meeting of the Board of Directors. A grant of stock options and restricted stock was made to Mr. MacCarrick on July 28, 2008 in connection with his appointment at Vice President, Chief Financial Officer.

 

Options granted prior to 2007 become exercisable 50% one year, 75% two years and 100% three years after the grant date. Options expire, unless exercised, six years (ten years for options granted prior to 2004) after grant. Options granted in 2007 and thereafter become exercisable 25% per year over four years. The exercise price of the options granted on January 28, 2008 was $36.46, and the exercise price of the options granted on July 28, 2008 was $36.82, which in each case was the fair market value of Crane Co. stock on the date of grant, calculated in accordance with the terms of the 2007 Stock Incentive Plan by taking the closing price on the grant date. From 1998 through April 23, 2007, when the 2007 Stock Incentive Plan became effective upon being approved by our shareholders at the Annual Meeting, the fair market value was calculated by taking the average of the high and low market prices of the stock over the last ten trading days including the date of grant.

 

The exercise price may be paid by delivery of shares owned for more than six months, and income tax obligations related to the exercise may be satisfied by surrender of shares received upon exercise, subject to certain conditions.

 

The restricted shares vest as to one-fourth of the award on the first, second, third and fourth anniversaries of the date of grant, or upon the participant’s earlier death, permanent disability or normal retirement at age 65, or upon a change in control of Crane Co. Grants prior to 2007 generally vested as to one-third of the award on the first, second and third anniversaries of the date of grant.

 

Retirement Shares —Certain provisions of the Internal Revenue Code limit the amount of compensation that can be considered in determining benefits under a tax-qualified defined benefit plan. From 1995 to 2008, the Committee administered a retirement plan for selected executive officers and other key employees using grants of restricted stock to make up the shortfall in pension benefits imposed by this tax limitation. Such grants vest on the earlier of the executive’s normal retirement date at age 65 or the tenth anniversary of the date of grant, except in the case of Mr. Fast, whose shares would also vest in the event of his early retirement. Grants were made under this program in 2008 to Messrs. Fast, duPont and Ellis.

 

Other Compensation —The amounts appearing in the Summary Compensation Table under the caption “All Other Compensation” are disaggregated in footnote 5 to the table.

 

 

 

 

Retirement-based restricted shares will vest according to the following schedule:

 

 

Retirement-based restricted shares will also vest fully, in the cases of Mr. duPont and Mr. Ellis, upon normal retirement at age 65. For Mr. Fast, retirement-based shares vest fully upon early retirement if after the tenth anniversary of his date of hire (September 27, 2009), or on a prorated basis if he retires earlier than that date.

 

 

2008 Option Exercises and Stock Vested

 

The following table provides information on each exercise of stock options, and each vesting of restricted stock, for each of the named executive officers during 2008. The value realized on exercise of options is computed by multiplying the number of shares acquired upon exercise by the difference between the market price of the shares on the applicable exercise date (calculated as the average of the high and low trading prices on that date), and the exercise price of the options. The value realized on vesting of restricted stock is computed by multiplying the number of shares by the market price on the applicable vesting date (calculated as the average of the high and low trading prices on that date).

 

 

RETIREMENT BENEFITS

 

All officers of Crane Co. hired before January 1, 2006, including Messrs. Fast, Mitchell, duPont and Ellis, are participants in Crane Co.’s pension plan for all eligible employees. Directors who are not employees do not participate in the plan. Eligibility for retirement benefits is subject to certain vesting requirements, which include completion of five years of service where employment is terminated prior to normal or other retirement or death, as determined by applicable law and the plan. Benefit accruals continue for years of service after age 65.

 

The annual pension benefits payable under the pension plan are equal to 1 2 / 3 % per year of service of the participant’s average annual compensation during the five highest compensated consecutive years of the 10 years of service immediately preceding retirement less 1 2 / 3 % per year of service of the participant’s Social Security benefit, up to a maximum deduction of 50% of the Social Security benefit. Compensation for purposes of the pension plan is defined as total W-2 compensation plus employee contributions made under salary reduction plans less (i) reimbursements or other expense allowances; (ii) cash and noncash fringe benefits (including automobile allowances); (iii) moving expenses (including “home allowances”); (iv) deferred compensation; (v) welfare benefits; (vi) severance pay; (vii) amounts realized from the exercise of a non-qualified stock option or the sale, exchange or other disposition of stock acquired under a qualified stock option; and (viii) amounts realized when restricted stock (or property) held by the employee is recognized in the employee’s taxable income under Section 83 of the Internal Revenue Code. In general, such covered compensation for any year would be equivalent to the sum of the salary set forth in the Summary Compensation Table for such years plus any payout under the non-equity incentive plan compensation for the immediately preceding year. However, the tax code limits the total compensation taken into account for any participant under the pension plan. That limit was $230,000 for 2008 and is subject to adjustment in future years.

 

In January 2008, at the recommendation of the Compensation Committee, the Board of Directors adopted a Benefit Equalization Plan under which participating executives will receive a retirement benefit intended to restore the portion of the retirement benefit under the Company’s pension plan that is not payable due to the tax code limit on the amount of compensation that can be considered in determining benefits under tax-qualified pension plans. The Benefit Equalization Plan is designed only to restore retirement benefits under the Company’s regular pension plan that are limited by the tax code; there is no supplemental benefit based on deemed service or enhanced compensation formulas. As discussed above, these shortfall amounts were previously addressed by periodic, discretionary awards of restricted stock calculated by the Company’s actuaries to make up that portion of the retirement benefit at normal retirement (age 65) lost by reason of the tax limitations. The original grant value of all prior grants of so-called “Retirement Shares” is deducted in determining the benefit payable under the Benefit Equalization Plan. Benefits accrued under this plan are not funded or set aside in any manner. The Benefit

Equalization Plan was amended and restated effective December 8, 2008 to incorporate the alternative retirement provisions described in the Compensation Discussion and Analysis beginning on page 18 above. The executives currently participating in this plan are Messrs. Fast, duPont, Ellis and three other executive officers.

 

For employees hired on or after January 1, 2006, Crane Co. provides a retirement benefit equal to two percent of covered compensation as described above, which amount is invested in the Crane Co. Savings and Investment Plan (401(k) plan) at the direction of the employee. Mr. MacCarrick and three other executive officers are covered by this retirement benefit.

 

The table below sets forth the number of years of credited service and the present value at December 31, 2008 of the accumulated benefit under the Pension Plan and the Benefit Equalization Plan for each of the named executive officers covered by those plans.

 

 

 

 

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

 

The following discussion describes and quantifies the payments that would be made to each of the named executive officers under a variety of circumstances, assuming that each had taken place on December 31, 2008: (1) the executive resigns voluntarily; (2) the executive is involuntarily terminated, either directly or constructively; (3) the executive retires; (4) the executive dies or becomes permanently disabled while employed, (5) a change in control of Crane Co. takes place, and (6) the executive is terminated following a change in control of Crane Co.

 

Payments or other benefits would be due to the named executive officers, under the described circumstance, under the following plans and agreements:

 

Change in Control Agreements.   Each of the named executive officers (and certain other executive officers) has an agreement which, in the event of a change in control of Crane Co., provides for the continuation of the employee’s then current base salary, bonus plan and benefits for the three-year period following the change in control. The agreements are for a three-year period, but are automatically extended annually by an additional year unless Crane Co. gives notice that the period shall not be extended.

Upon termination within three years after a change in control, by Crane Co. without “Cause” or by the employee with “Good Reason” (as defined in the agreement), the employee is immediately entitled to a proportionate amount of the greater of the last year’s bonus or the average bonus paid in the three prior years, plus three times the sum of his or her annual salary and the greater of the last year’s bonus or the average of the previous three years’ bonuses, and all accrued deferred compensation and vacation pay; plus the amount in the EVA “bank” as shown below under the caption “EVA Plans”; employee benefits, medical coverage and other benefits also continue for three years after termination. If a change in control had taken place on December 31, 2008, and employment had terminated immediately thereafter, each of the named executive officers having change in control agreements would have become entitled to benefits under this provision in the following amounts: Mr. Fast, $7,705,257; Mr. MacCarrick, $1,654,698; Mr. Mitchell, $3,536,891; Mr. duPont, $2,719,143; and Mr. Ellis, $1,926,404.

 

“Cause” under the change in control agreements generally includes, among other things, personal dishonesty or certain breaches of fiduciary duty; repeated, willful and deliberate failure to perform the executive’s specified duties; the commission of a criminal act related to the performance of duties; distributing proprietary confidential information about the Company; habitual intoxication by alcohol or other drugs during work hours; or conviction of a felony.

 

“Good Reason” under the change in control agreements includes, among other things, any action by Crane Co. which results in a diminution in the position, authority, duties or responsibilities of the employee. The agreements also provide that the employee may terminate his or her employment for any reason during the 30 day period immediately following the first year after the change of control, which shall be deemed “Good Reason” under the agreement.

 

If it is determined that any economic benefit or payment or distribution by Crane Co. to the individual, pursuant to the agreement or otherwise (including, but not limited to, any economic benefit received by the employee by reason of the acceleration of rights under the stock option and restricted stock plans of Crane Co.) (“Payment”), is subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, the change in control agreements provide that Crane Co. shall make additional cash payments to the employee such that after payment of all taxes including any excise tax imposed on such additional payments, the employee will retain an amount sufficient to pay the excise tax on all the Payments. If a change in control had taken place on December 31, 2008, and employment had terminated immediately thereafter, the named executive officers would have become entitled to the following payment under this provision: Mr. MacCarrick, $560,568; and Mr. Mitchell, $1,337,904.

 

EVA Plans.   Under the terms of the Crane Co. EVA Plan and the divisional EVA plans, the EVA “bank” account is forfeited if a participant resigns voluntarily or is terminated, but is paid in full in the event of retirement at age 65 (or earlier at the discretion of the Compensation Committee), death or disability, or upon a change in control. The EVA bank accounts of the named executive officers at December 31, 2008, taking into account the grants of awards based on 2008 results and the related payouts, which took place in the first quarter of 2009, stood as follows: Mr. Fast, $116,810; Mr. MacCarrick, nil; Mr. Mitchell, $635,148; Mr. duPont, $167,021; and Mr. Ellis, $280,312.

 

Restricted Stock.   Under the terms of the Stock Incentive Plan, any unvested shares of restricted stock are forfeited in the event of resignation or termination, but vest immediately upon a change in control. The Compensation Committee may, in its sole discretion, waive the forfeiture period and allow shares of restricted stock to vest in the event of retirement, death or disability. If the then unvested restricted stock owned by each of the named executive officers had become vested as of December 31, 2008, and assuming the value of Crane Co. stock to be $17.24 per share, the closing price on the last trading day of 2008, the aggregate value to each of the named executive officers would have been as follows: Mr. Fast, $3,617,038; Mr. MacCarrick, $103,440; Mr. Mitchell, $227,016; Mr. duPont, $475,790; and Mr. Ellis, $282,943.

 

Stock Options.   Under the terms of the existing stock option grants under the Stock Incentive Plans, any options previously granted but not exercisable at the time of termination are cancelled in the event of voluntary or involuntary termination of employment, but unvested options become exercisable in the event of retirement, death or permanent disability, or termination following a change in control. If the then unvested stock options of each of the named executive officers had become exercisable as of December 31, 2008, and assuming the value of Crane Co. stock to be $17.24 per share, the closing price on the last trading day of 2008, the aggregate value to each of the named executive officers of exercising the options on that date would have been nil, as the exercise prices of all outstanding unvested stock options held by the named executive officers were in excess of $17.24.

Employment Agreement—Mr. Fast.   On January 22, 2001, Crane Co. entered into an employment agreement with Mr. Fast pursuant to which Mr. Fast agreed to serve as President and Chief Executive Officer of Crane Co. commencing on the date of the 2001 Annual Meeting, April 23, 2001. The employment agreement is renewable each year for one additional year unless either party gives written notice to the other, and provides for the following compensation: (i) an annual salary of no less than $650,000; (ii) participation in the EVA Incentive Compensation Plan; (iii) the grant of certain stock options in 2001 and 2002; and (iv) the grant of certain shares of restricted stock in 2001. The employment agreement also contains certain covenants of Mr. Fast concerning confidentiality, non-competition and non-solicitation of employees after termination of employment.

 

If Crane Co. terminates Mr. Fast’s employment other than for Cause, Mr. Fast would be entitled to receive a lump sum cash payment equal to two times his annual base salary plus the higher of his current EVA bank account or two times his highest EVA bonus payment in the preceding five years. If Crane had terminated Mr. Fast’s employment as of December 31, 2008, such cash payment would have been $4,815,768. In addition, all of Mr. Fast’s stock options would become fully vested and exercisable and all of his restricted stock would become fully vested, yielding the values set forth in the preceding paragraphs captioned “Restricted Stock” and “Stock Options.”

 

Severance Pay.   Crane Co.’s stated severance policy is to pay salaried employees one week per year of service upon termination for the convenience of Crane Co.; however, Crane Co.’s prevailing practice on severance in the case of executive officers is to pay the executive an amount equal to one year’s base salary, either in a lump sum or by continuation of biweekly payroll distributions, at the election of the executive, with medical, dental and other welfare benefits and pension benefits continuing during such period. In the case of Mr. Fast, this severance policy would be superseded by the terms of his employment agreement, discussed in the preceding paragraph. Under this practice, if each of the other named executive officers had been terminated as of December 31, 2008, the severance to which they would have been entitled would have been as follows: Mr. MacCarrick, $391,566; Mr. Mitchell, $330,379; Mr. duPont, $340,106; and Mr. Ellis, $284,704.

 

The table below reflects the estimated aggregate compensation that each of the named executive officers would receive in the event of such executive’s voluntary resignation, involuntary termination, normal retirement, death or disability, change in control and termination following a change of control. The amounts shown assume that such termination was effective as of December 31, 2008, and include amounts earned through that date. They are therefore not equivalent to the amount that would be paid out to the executive upon termination at another time.

 

 

In addition, under the 2007 Non-Employee Director Compensation Plan an option to purchase 2,000 shares of Common Stock is granted to each non-employee director as of the date of each Annual Meeting of shareholders. Each such option has an exercise price equal to the fair market value at the date of grant, has a term of 10 years and vests 25% after one year, 50% after two years, 75% after three years and 100% after four years from the date of grant. On April 21, 2008 each non-employee director other than Mr. Queenan received an option to purchase 2,000 shares at an exercise price of $43.49 per share. Mr. Queenan elected to continue to participate in the Crane Co. Retirement Plan for Non-Employee Directors (see description below), and therefore does not receive any stock option grants under the Non-Employee Director Stock Compensation Plan.

 

Non-employee directors also receive $2,000 for each Board meeting attended. Non-employee members of the Executive Committee receive a supplemental annual retainer of $2,000. Members of other committees receive $2,000 for each committee meeting attended, and committee chairmen receive a supplemental annual retainer of $10,000 for the Audit Committee and $7,500 for the Management Organization and Compensation Committee and the Nominating and Governance Committee.

 

The Crane Co. Retirement Plan for Non-Employee Directors (terminated as to active directors other than Mr. Queenan in 2000) provides for a benefit upon retirement at or after age 65 equal to the participant’s annual retainer in effect at the time service terminates, payable for a period of time equal to the number of years the participant has served on the Board and not as an employee. After two years of service, participants are 50% vested in benefits payable, and after each full year of service thereafter, participants are vested in an additional 10%. In the event of death, disability or change in control, participants are automatically 100% vested and, in the case of a change in control, a minimum of seven years of retirement benefits is payable. Additionally, a participant leaving the Board after a change in control would be entitled to receive, in lieu of installment payments, a lump sum cash payment such that the participant will retain, after all applicable taxes, the actuarial equivalent of the benefits payable under the plan. A former director may receive his benefits prior to age 65 on an actuarially reduced basis. The plan is unfunded and benefits thereunder are payable from Crane Co.’s general assets, either in the form of a joint and survivor annuity or, if the director so elects upon reaching age 55, in the form of a survivor annuity should the director die while in service. The Retirement Plan for Non-Employee Directors was terminated as to active directors when the Non-Employee Director Stock Compensation Plan was approved by shareholders in April 2000, but Mr. Queenan has elected to continue his participation in the Retirement Plan in lieu of any option grants under the Stock Compensation Plan. Certain former Crane Co. directors continue to receive their retirement benefits under the Retirement Plan.