UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

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

Exchange Act of 1934 (Amendment No.     )

 

Filed by the Registrant  þ

 

Filed by a Party other than the 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))

þ   Definitive Proxy Statement

o   Definitive Additional Materials

o   Soliciting Material Pursuant to §240.14a-12

 

BROWN SHOE COMPANY, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

þ   No fee required.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 11, 2008

 

To Brown Shoe Shareholders:

 

 

You are cordially invited to attend the Annual Meeting of Shareholders of Brown Shoe Company, Inc. to be held at our headquarters at 8300 Maryland Avenue, St. Louis, Missouri, in the Conference Center, on Thursday, May 22, 2008, at 11:00 a.m., Central Daylight Time. The formal Notice of the Annual Meeting, the Proxy Statement and a proxy card accompany this letter. Our Annual Report for fiscal year 2007 is also enclosed.

 

I hope you will be present at the meeting. Whether or not you plan to attend, please cast your vote by telephone or on the Internet, or complete, sign and return the enclosed proxy card in the postage-prepaid envelope, also enclosed. The prompt execution of your proxy will be greatly appreciated.

 

Sincerely yours,

 

Ronald A. Fromm

Chairman of the Board and

Chief Executive Officer

 

Brown Shoe Company, Inc.

8300 Maryland Avenue, St. Louis, Missouri 63105-3693

 

TABLE OF CONTENTS

 

PROXY STATEMENT

FOR THE BROWN SHOE COMPANY, INC.

2008 ANNUAL MEETING OF SHAREHOLDERS

 

Why am I receiving these proxy materials?

 

Your board of directors is soliciting proxies to be voted at the 2008 Annual Meeting of Shareholders. This proxy statement includes information about the issues to be voted upon at the meeting.

 

On April 11, 2008, we began distributing these proxy materials to all shareholders of record at the close of business on April 3, 2008. There were 42,316,555 shares of our common stock issued and outstanding on April 3, 2008.

 

Where and when is the annual meeting?

 

The Annual Meeting of Shareholders will take place on May 22, 2008 in the Conference Center at our headquarters, located at 8300 Maryland Avenue, St. Louis, Missouri 63105. The meeting will begin at 11:00 a.m., Central Daylight Time.

 

What am I voting on?

 

We are aware of three proposals to be voted on by shareholders at the annual meeting:

 

 

How many votes do I have?

 

You have one vote for each share of our common stock that you owned at the close of business on April 3, 2008, the record date. These shares include:

 

 

What is the difference between holding shares as a “shareholder of record” and as a “beneficial owner”?

 

If your shares are registered directly in your name with our transfer agent, Mellon Investor Services, LLC, you are considered the “shareholder of record” with respect to those shares. The Notice of Annual Meeting, Proxy Statement, 2007 Annual Report and proxy card have been sent directly to you by the Company.

 

If your shares are held in a stock brokerage account or by a bank or other holder of record, you are considered the “beneficial owner” of the shares held in street name. The Notice of Annual Meeting, Proxy Statement, 2007 Annual Report and proxy card or voting instruction card have been forwarded to you by your broker, bank or other holder of record who is considered, with respect to those shares, the shareholder of record. As the beneficial owner, you have the right to direct your broker, bank or other holder of record on how to vote your shares by using the voting instruction card included in the mailing or by following their instructions for voting by telephone or the Internet.

 

If I am a shareholder of record, how can I vote my shares?

 

You can vote by proxy or in person.

How do I vote by proxy?

 

If you are a shareholder of record, you may vote your proxy by telephone, Internet or mail. Our telephone and Internet voting procedures are designed to authenticate shareholders by using individual control numbers that can be found on the proxy card. Voting by telephone or Internet will help us reduce costs. If you vote promptly, you can save us the expense of a second mailing.

 

 

In the U.S. and Canada, you can vote your shares by telephone by calling the toll-free telephone number on your proxy card. Telephone voting is available 24 hours a day, 7 days a week until 11:59 pm Eastern Time on the day before the meeting. Easy-to-follow voice prompts allow you to vote your shares and confirm that your instructions have been properly recorded. If you vote by telephone, you do not need to return your proxy card.

 

 

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

 

 

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

 

If you vote by proxy using any of these three methods, the persons named on the card (your “proxies”) will vote your shares in the manner you indicate. You may specify whether your shares should be voted for all, some or none of the nominees for director and for or against any other proposals properly brought before the annual meeting. If you vote by telephone or Internet and choose to vote with the recommendation of your board of directors, or if you vote by mail, sign your proxy card, and do not indicate specific choices, your shares will be voted “FOR” the election of all nominees for director, “FOR” the ratification of the Company’s independent public accountants, and “FOR” the Incentive and Stock Compensation Plan of 2002, as Amended and Restated. If any other matter is properly brought before the meeting, your proxies will vote in accordance with their best judgment. At the time this proxy statement went to press, we knew of no matter that is required to be acted on at the annual meeting other than those discussed in this proxy statement.

 

If you wish to give a proxy to someone other than the persons named on the enclosed proxy card, you may strike out the names appearing on the card and write in the name of any other person, sign the proxy, and deliver it to the person whose name has been substituted.

 

May I revoke my proxy?

 

If you give a proxy, you may revoke it in any one of three ways:

 

 

How do I vote in person?

 

If you are a shareholder of record, you may cast your vote in person at the annual meeting.

 

If I hold shares in street name, how can I vote my shares?

 

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

What shares are included on the proxy card?

 

If you are a shareholder of record you will receive only one proxy card for all the shares you hold. This includes shares in certificate form as well as shares in book-entry form.

 

Is my vote confidential?

 

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

 

What is a “quorum” for the meeting?

 

In order to have a valid shareholder vote, a quorum must exist at the annual meeting. Under the New York Business Corporation Law and our bylaws, a quorum will exist when shareholders holding a majority of the outstanding shares of our stock are present or represented at the meeting. For these purposes, shares that are present or represented by proxy at the annual meeting will be counted towards a quorum, regardless of whether the holder of the shares or proxy fails to vote on a particular matter or whether a broker with discretionary voting authority fails to exercise such authority with respect to any particular matter.

 

What vote is required to approve each proposal?

 

 

If a broker indicates on its proxy that it does not have authority to vote certain shares held in “street name” on a particular proposal, the shares not voted are referred to as “broker non-votes.” Broker non-votes occur when brokers do not have discretionary voting authority on certain proposals under the rules of the New York Stock Exchange (“NYSE”) and the “beneficial owner” has not instructed the broker how to vote on these proposals. If you are a beneficial owner, your bank, broker or other holder of record is permitted to vote your shares on the election of directors and ratification of the appointment of independent registered public accountants, even if the holder does not receive voting instructions from you.

 

Shares represented by proxies that are marked vote “withheld” with respect to the election of any person to serve on the board of directors will not be considered in determining whether such a person has received the affirmative vote of a plurality of the shares. Shares represented by proxies that are marked “abstain” with respect to any other

proposal, including Proposals 2 and 3, will not be considered in determining whether such proposal has received the affirmative vote of a majority of the shares and such proxies will not have the effect of a “no” vote. Shares represented by proxies that deny the proxy-holder discretionary authority to vote on such other proposal (broker non-votes) will not be considered in determining whether such proposal has received the affirmative vote of a majority of the shares and such proxies will not have the effect of a “no” vote. For Proposal 3, the NYSE rules require an additional level of shareholder approval — a majority of the votes cast must be in favor, and the total number of votes cast must be more than 50% of all shares entitled to vote on the proposal.

 

Can I access the Notice of Annual Meeting, Proxy Statement and 2007 Annual Report to Shareholders on the Internet?

 

The Notice of Annual Meeting and Proxy Statement are accessible on the Internet as a single document identified as “2008 Proxy Statement,” and the 2007 Annual Report is also available, on our website at www.brownshoe.com/investor.

 

Shareholders of Record:   If you vote on the Internet at www.proxyvoting.com/bws , simply follow the prompts for enrolling in the electronic proxy delivery service.

 

Beneficial Owners:   If you hold your shares in a brokerage account, you also may have the opportunity to receive copies of these documents electronically. Please check the information provided in the proxy materials mailed to you by your broker, bank or other holder of record regarding the availability of this service.

 

What are the costs of soliciting these proxies?

 

We are paying the cost of preparing, printing, and mailing these proxy materials. We will reimburse banks, brokerage firms, and others for their reasonable expenses in forwarding proxy materials to beneficial owners and obtaining their instructions.

 

Proxies will be solicited by mail and also may be solicited by our executive officers and other employees personally, by telephone or by electronic means, but such persons will not be specifically compensated for such services. It is contemplated that brokerage houses, custodians, nominees and fiduciaries will be requested to forward the soliciting material to the beneficial owners of stock held of record by such persons and we will reimburse them for their reasonable expenses incurred. If we decide to retain a proxy solicitor, we will pay the fees charged by the proxy solicitor.

 

Where can I find the voting results of the meeting?

 

We intend to announce preliminary voting results at the meeting. We will publish the final results in our Report on Form 10-Q for the first quarter of 2008, which we expect to file on or before June 12, 2008. You can obtain a copy of the Form 10-Q on our website at www.brownshoe.com/secfilings , by calling the Securities and Exchange Commission (“SEC”) at (800) SEC-0330 for the location of the nearest public reference room, or through the EDGAR system at www.sec.gov. Information on our website does not constitute part of this proxy statement.

 

How can I reduce the number of copies of proxy materials delivered to my household?

 

Securities and Exchange Commission rules allow delivery of a single annual report and proxy statement to households at which two or more shareholders reside. Accordingly, shareholders sharing an address who have been previously notified by their broker or its intermediary will receive only one copy of the annual report and proxy statement, unless the shareholder has provided contrary instructions. Individual proxy cards or voting instruction forms (or electronic voting facilities) will, however, continue to be provided for each shareholder account. This procedure, referred to as “householding,” reduces the volume of duplicate information you receive, as well as our expenses. If your family has multiple accounts, you may have received householding notification from your broker earlier this year and, consequently, you may receive only one proxy statement and annual report. If you prefer to receive separate copies of our proxy statement or annual report, either now or in the future, we will promptly deliver, upon your written or oral request, a separate copy of the proxy statement or annual report, as requested, to any shareholder at your address to which a single copy was delivered. Notice should be given to us by mail at 8300

Maryland Avenue, St. Louis, Missouri 63105, attention: Senior Vice President, General Counsel and Corporate Secretary, or by telephone at (314) 854-4000. If you are currently a shareholder sharing an address with another shareholder and wish to have only one proxy statement and annual report delivered to the household in the future, please contact us at the same address or telephone number.

 

Since 1878, we have been guided by a value system that emphasizes integrity and trust at all levels of our organization. We have longstanding policies and practices to promote the management of our Company with integrity and in our shareholders’ best interests. The board has adopted and adheres to Corporate Governance Guidelines that the board and senior management believe represent sound practices. The corporate governance guidelines are available on our website at www.brownshoe.com/governance. The board periodically reviews these guidelines, New York law (the state in which we are incorporated), the rules and listing standards of the New York Stock Exchange, and SEC regulations, as well as best practices suggested by recognized governance authorities. The guidelines reflect the board’s policy that all directors are expected to attend the annual meeting of shareholders. The charters for the board’s Executive, Audit, Compensation and Governance and Nominating Committees are also available on our website at www.brownshoe.com/governance , and copies of these charters, our Corporate Governance Guidelines, as well as our Code of Business Conduct and Code of Ethics will be provided to shareholders, upon written or oral request to our Senior Vice President, General Counsel and Corporate Secretary, 8300 Maryland Avenue, St. Louis, Missouri 63105, or by telephone at (314) 854-4000. Information on our website shall not be deemed to constitute part of this proxy statement.

 

Currently, of the thirteen members of the board of directors, eleven meet the New York Stock Exchange standards for independence. A director is considered to be an independent director only if the director does not have a material relationship with the Company, as determined by the board. The board has adopted standards for independence to assist it in making this determination. These standards are described in the Company’s Corporate Governance Guidelines, available on our website at www.brownshoe.com/governance. As of the date of this proxy statement, Ronald A. Fromm and Diane M. Sullivan are both directors and executive officers and are not independent directors. The board has determined that each of the other members of the board of directors is independent, including Mr. Baeza, Mr. Bower, Ms. Esrey, Ms. Hendra, Mr. Klein, Mr. Korn, Ms. McGinnis, Mr. McGinnis, Mr. Neidorff, Mr. Upbin and Mr. Wright. In making its determination of independence, the board considered that Ms. Hendra is affiliated with OgilvyOne LLC and that Mr. Wright is affiliated with Heidrick & Struggles, each of which provided services to the Company in fiscal 2007. The board determined that the amounts paid by the Company to each of these director-affiliated entities were not material to the Company or to such director-affiliated entity. With our board comprised of eleven independent directors out of thirteen, we are in compliance with our goal, as set forth in the Corporate Governance Guidelines, that two-thirds of the directors will be independent under the New York Stock Exchange standards.

 

The independent (non-management) members of the board meet regularly without any members of management present. In accordance with our Corporate Governance Guidelines, Mr. Bower, as chair of the Executive Committee, usually presides at such executive sessions, and if he is absent, then another director who is a member of the Executive Committee presides in his place. Only independent directors serve on our Audit, Compensation, and Governance and Nominating Committees.

 

We have a Code of Business Conduct that is applicable to all directors, officers and employees of the Company. We have an additional Code of Ethics that is applicable to the principal executive officer, principal financial officer and principal accounting officer. Both the Code of Business Conduct and the Code of Ethics are available on the Company’s website at www.brownshoe.com/governance, and copies of these codes will be provided to shareholders,

upon written or oral request to our Senior Vice President, General Counsel and Corporate Secretary, 8300 Maryland Avenue, St. Louis, Missouri 63105, or by telephone at (314) 854-4000. We intend to post amendments to or waivers from (to the extent applicable to an executive officer of the Company) either code on our website.

 

Shareholders and other parties interested in communicating directly with an individual director or with the non-management directors as a group may write to the individual director or group, c/o Corporate Secretary, Brown Shoe Company, Inc., 8300 Maryland Avenue, St. Louis, Missouri 63105 or by sending an e-mail to directors@brownshoe.com. The board approved a process for handling communications received by the Company and addressed to non-management members of the board. Under that process, the Corporate Secretary of the Company reviews all such correspondence and regularly forwards to the board a summary of all such correspondence and copies of all correspondence that, in the opinion of the Corporate Secretary, deals with the functions of the board or its committees or that he otherwise determines requires their attention. Directors may at any time review a log of all correspondence received by the Company and which is addressed to members of the board, and may request copies of any such correspondence. Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of the Company’s internal audit department and handled in accordance with procedures established by the Audit Committee with respect to such matters.

 

The board has the following four committees: Audit, Compensation, Executive, and Governance and Nominating. The table below indicates the current membership of each committee and how many times the board and each committee met in fiscal 2007. Each director attended at least 75 percent of the total number of meetings of the board and of the committees on which he or she serves, except for Carla Hendra, who attended 67 percent of the meetings of the board and of the committee on which she serves. All but one of our 2006 directors continuing through 2007 attended the 2007 annual meeting. As Messrs. Baeza and Wright joined the board on March 6, 2008, they did not attend board meetings or serve on committees during 2007.

 

 

 

 

 

The Audit Committee’s primary responsibilities are to monitor (a) the integrity of the Company’s consolidated financial statements; (b) the financial reporting process and system of internal accounting and financial controls; (c) compliance with ethics policies, legal and regulatory requirements, and the Company’s independent registered public accountants’ qualifications and independence; and (d) the performance of the Company’s internal audit function and independent registered public accountants. The Audit Committee is directly responsible for the appointment, compensation and oversight of the work of the independent registered public accountants. The board has determined, in its judgment, that the Audit Committee is composed solely of independent directors as defined in the NYSE listing standards and Rule 10A-3 of the Exchange Act and operates under a written charter adopted by the entire board. The board has determined, in its judgment, that Mr. Upbin qualifies as a “financial expert.” The board, through the Corporate Governance Guidelines, has established the policy that no member of the Audit Committee may serve on the audit committees of more than three public companies (including our Audit Committee). Also see “Audit Committee Report.”

 

The Compensation Committee’s primary responsibility is to establish the executive officers’ compensation. The committee also reviews changes in the compensation of other key management employees; reviews and approves or makes recommendations to the board concerning incentive compensation plans, equity-based plans and other executive benefit plans; approves the participation of executives and other key management employees in the various compensation plans and makes awards to participants; reviews our compensation programs; and monitors our promotion and management development practices. The committee meets several times each year, and committee agendas are established in consultation between the committee chair and management. The Company, through its Total Rewards department, has retained Hewitt Associates LLC as its compensation consultant, including preparing a peer group market report and having the consultant meet with the committee in connection with 2007 compensation. In setting annual compensation, the committee receives the performance assessment, internal ranking and compensation recommendation for each of the named executive officers other than the Chief Executive Officer, along with variance to the median peer group data for the principal compensation elements. The committee meets in executive session when discussing compensation for the Chief Executive Officer. The role of the compensation consultant and management are also discussed in the Compensation Discussion and Analysis.

 

The board has determined, in its judgment, that the Compensation Committee is composed solely of independent directors as defined in the NYSE listing standards and operates under a written charter adopted by the entire board.

 

The Executive Committee may exercise all of the powers and duties of the board in the direction of the management of our business and affairs during the intervals between board meetings that may lawfully be delegated to it by the board of directors. However, certain categories of matters have been expressly reserved to the full board. The Executive Committee operates under a written charter adopted by the entire board.

 

The Governance and Nominating Committee develops criteria for membership on the board, recommends candidates for membership on the board and its committees, evaluates the structure and composition of the board, reviews and recommends compensation of non-employee directors, oversees the evaluation of executive management, and reviews the effectiveness of board governance. A candidate must possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of shareholders. In evaluating the suitability of individual nominees, the Governance and Nominating Committee will also take into account, among other things, the nominee’s personal and professional attributes, ability to provide necessary stewardship

over business strategies and programs adopted to ensure the coordination of interests among employees, management and shareholders, ability to respect and maintain adherence to the Code of Business Conduct, and ability to balance short-term goals and long-term goals of the Company and its shareholders. The Governance and Nominating Committee will consider a candidate for director proposed by a shareholder, provided that the proposing shareholder submits the information by the specified deadline, and provides appropriate information, as discussed in more detail in the section “Shareholder Proposals for the 2009 Annual Meeting.” A shareholder seeking to propose a candidate for the committee’s consideration should forward the candidate’s name and information about the candidate’s qualifications to our Corporate Secretary. In accordance with the Corporate Governance Guidelines, the Governance and Nominating Committee will not recommend election of any individual as a director for a term extending beyond the annual shareholders’ meeting following the end of the calendar year during which such individual turns 70. The board has determined, in its judgment, that the Governance and Nominating Committee is composed solely of independent directors as defined in the NYSE listing standards and operates under a written charter adopted by the entire board.

Compensation of Non-Employee Directors

 

Directors’ compensation is established by the board of directors upon the recommendation of the Governance and Nominating Committee. For fiscal 2007, commencing with the 2007 Annual Meeting on May 24, 2007, the following compensation guidelines were in effect for non-employee directors, with cash retainers payable quarterly in arrears:

 

 

The grant of RSUs to directors as part of their annual compensation is intended to align directors’ interests with those of shareholders. During the portion of fiscal 2007 prior to last year’s annual meeting, the director compensation approved in May 2006 was in effect, and provided for the same cash compensation payments to non-employee directors.

 

We also carry liability insurance and travel accident insurance that covers our directors. We do not maintain a directors’ retirement plan or a directors’ legacy or charitable giving plan, although non-employee directors are permitted to participate in our employee matching gift program on terms similar to those offered to employees, thereby providing a match for charitable giving to institutions of higher education and arts and cultural organizations aggregating up to $5,000 per year per individual. Non-employee directors do not participate in the retirement plans available to employees, nor do they participate in the annual or long-term equity incentive programs that have been developed for employees.

 

A director who is an employee does not receive payment for service as a director.

 

The following table provides information on all compensation granted to non-employee directors during fiscal 2007, including (i) cash compensation, both paid and deferred, and (ii) the compensation expense recognized in our financial statements for outstanding stock awards. In fiscal 2007, no stock options were granted, nor did the Company have stock option expense for non-employee directors. Additional information regarding stock and option awards granted to directors during fiscal 2007 and outstanding at fiscal 2007 year-end is provided under the heading “Non-Employee Director Equity Awards.”

 

 

 

 

Non-Employee Director Equity Awards

 

The following table shows stock options and other stock awards (restricted stock units and phantom stock units) granted to non-employee directors during fiscal 2007 and stock options and other stock awards held by non-employee directors at the end of fiscal 2007 (February 2, 2008). As Messrs. Baeza and Wright were not members of the board during fiscal 2007 and received no director compensation in fiscal 2007, they are not included in this table.

 

 

 

 

In December 2007, the Governance and Nominating Committee recommended that the annual equity award to directors include a choice between restricted stock and restricted stock units (a cash-equivalent interest that mirrors the stock), with both to have a one year vesting requirement. In March 2008, the Governance and Nominating Committee recommended that compensation for non-employee directors remain the same for the year following the annual meeting, including an approximate market value for the annual equity grant of $40,000; accordingly, the number of shares of restricted stock or restricted stock units granted for the year will be based on a more current stock price. As of the date of this proxy statement, no determination has been made with respect to a 2008 grant of restricted stock or restricted stock units to non-employee directors, although this matter is expected to be considered by the board prior to the annual meeting.

 

The restricted stock units granted to non-employee directors are the economic equivalent of a grant of restricted stock; however, no actual shares of stock are issued at the time of grant or upon payment. Rather, the award entitles the non-employee director to receive cash, at a future date, equal to the future market value of one share of our common stock for each restricted stock unit, subject to satisfaction of a one-year vesting requirement. For each grant, the board establishes an approximate aggregate cash value for the grant, and then determines the exact number of restricted stock units (or shares of restricted stock commencing this year) granted to each non-employee director by dividing the aggregate value of the award by the fair market value of the common stock on a date prior to the board meeting. The units or shares vest in full one year after the date of grant, and the payout will be on the date that service as director terminates or such earlier date as a director may elect. Dividend equivalents are paid on restricted stock units at the same rate as dividends on the Company’s common stock, and are automatically re-invested in additional restricted stock units as of the payment date for the dividend.

 

In 1999, the board adopted a deferred compensation plan for non-employee directors. Under the plan, we credit each participating director’s account with the number of “phantom units” that is equal to the number of shares of our stock which the participant could purchase or receive with the amount of the deferred compensation, based upon the fair market value (calculated as the average of the high and low price) of our stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on phantom stock units at the same rate as dividends on the Company’s common stock, and are re-invested in additional phantom stock units at the next fiscal quarter-end. When the participating director terminates his or her service as a director, we will pay the cash value of the deferred compensation to the director (or to the designated beneficiary in the event of death) in annual installments over a five-year or ten-year period, or in a lump sum, at the director’s election. The cash amount payable will be based on the number of phantom stock units credited to the participating director’s account, valued on the basis of the fair market value at fiscal quarter-end on or following termination of the director’s service, and calculated based on the average of the high and low price of an equivalent number of shares of our stock on the last trading day of the fiscal quarter. The plan also provides for earlier payment of a participating director’s account if the board determines that the participant has a demonstrated financial hardship.

 

In March 2008, the board adopted stock ownership guidelines for non-employee directors. The purpose of these guidelines is to encourage long-term share ownership by our directors and better align the interests of non-employee directors with shareholders. The guidelines provide that all non-employee directors will hold shares of our stock or stock equivalents with a value at least equal to five times the annual cash retainer paid to them. For purposes of these guidelines, the following stock interests qualify under the guidelines: stock beneficially owned outside of Company-sponsored plans, stock held in any Company-sponsored stock-based plan, common stock units held in any Company-sponsored non-qualified deferred compensation plan and restricted stock units. Non-employee directors are expected to achieve the required holdings by the fifth anniversary of becoming subject to the guidelines.

 

Our related party transaction policy provides for the board to review all transactions expected to exceed $100,000 in which a related party has a material interest, or for such a transaction continuing into a subsequent fiscal year that is expected to extend beyond six months or exceed $100,000 in the subsequent year. For purposes of this policy, related parties include the Company’s executive officers, directors or nominees, or 5% beneficial owners of the Company’s common stock, as well as any immediate family member of any of the foregoing, or entity controlled by them or in which they have a 10% beneficial interest. In making its determination whether to approve a related party transaction, the board shall consider such factors as the extent of the person’s interest in the transaction, the aggregate value, the availability of other sources of comparable products or services, whether the terms of the transaction are no less favorable than terms generally available in unaffiliated transaction under like circumstances, and the benefit to the Company.

 

The Company’s employee matching gift program generally provides a match for charitable giving to institutions of higher education and arts and cultural organizations aggregating up to $5,000 per year per individual. In 2006, the board approved a special match for a charitable gift commitment made by Mr. Fromm to Barnes-Jewish Hospital Foundation, in an aggregate amount of $250,000 over seven years, and $35,000 of this amount was paid in fiscal 2007. Mr. Fromm does not have a direct, material interest in this matching gift.

 

During fiscal 2007, the Company engaged OgilvyOne LLC (“Ogilvy”) to provide certain marketing and consulting services. One of our directors, Ms. Hendra, is Co-Chief Executive Officer of Ogilvy North America and president of OgilvyOne N.A., both of which are affiliates of Ogilvy. During fiscal 2007, the Company incurred $1,041,733 of fees related to services provided by Ogilvy. Prior to Mr. Wright’s election to the board in March 2008, Heidrick & Struggles, an executive search firm in which Mr. Wright is a partner, provided services to the Company from time to time. The Company paid less than $15,000 to Heidrick & Struggles in fiscal 2007. Unless and until we expect our payments to Heidrick & Struggles will exceed $100,000 in connection with any single transaction or series of related transactions, those payments would not be deemed a “related party transaction” within the meaning of our policy such that board approval of the transaction would be required. However, the board did consider the Company’s relationship with Heidrick & Struggles prior to concluding that Mr. Wright was an “independent” director and does not have a material relationship with the Company, as more fully described in the section Corporate Governance under the subheading “Independent Directors.”

 

In fiscal 2007, there were no other material transactions between the Company and its executive officers and directors, or their immediate family members, or principal shareholders.

 

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and any persons beneficially owning more than ten percent of our common stock to report their ownership of stock and any changes in ownership to the Securities and Exchange Commission, New York Stock Exchange and Chicago Stock Exchange. The SEC has established specific due dates for these reports, and we are required to report in this proxy statement any failure to file by these dates. We file Section 16(a) reports on behalf of our directors and executive officers to report their initial and subsequent changes in beneficial ownership of our common stock. To our knowledge, based solely on a review of the reports we filed on behalf of our directors and executive officers and written representations from these persons that no other reports were required, we believe that all such reports of our executive officers and directors were filed on a timely basis.

 

The following table shows the amount of our common stock beneficially owned as of April 3, 2008, by each director and nominee, each of the named executive officers listed in the Summary Compensation Table, all current directors and executive officers as a group, and all persons or entities that we know to beneficially own more than 5% of our common stock on April 3, 2008 (based on filings made with the Securities and Exchange Commission). In general, “beneficial ownership” includes those shares for which a person has or shares the power to vote or the power to dispose, and takes into account shares that may be acquired within 60 days (such as by exercising vest stock options). Thus, the table shows the number of employee and director stock options to purchase shares of our stock that are exercisable, either immediately or by June 2, 2008 (60 days after April 3, 2008). For our non-employee directors, the table shows the total number of share units held, as these units have an investment value that mirrors the value of our common stock.

 

 

 

 

 

PROPOSAL 1 — Election of Directors

 

Our certificate of incorporation and bylaws provide for a board of directors that is divided into three classes as equal in size as possible. This classified board structure was adopted on November 2, 1954. Each of the classes has a three-year term, and the term of one class expires each year in rotation at that year’s annual meeting. We may change the size of the board by amending our bylaws. Persons elected by a majority of the remaining directors may fill vacancies on the board. A director elected by the board to fill a vacancy, or a new directorship created by an increase in the size of the board, serves until the next annual meeting of shareholders. Although there is no mandatory retirement policy for directors, our Corporate Governance Guidelines limit the Board from filling a vacancy with an individual over 70 years of age, and preclude recommending an individual for election as a director for a term extending beyond the annual shareholders’ meeting following the end of the calendar year during which the individual turns 70.

 

Effective March 6, 2008, your board amended the bylaws to increase the number of directors from eleven to thirteen, thereby creating two vacancies on the board, and elected Mario L. Baeza and Harold B. Wright to fill the these vacancies until the upcoming 2008 annual meeting. Based on the limitation in our Corporate Governance Guidelines that director nominees not be older than 70 years of age during the proposed term, three of our current directors are expected to retire from board service in the next two years and the Governance and Nominating Committee has been actively considering adding new directors to our board. In searching for new directors, Mr. Bower, as the Chair of the Governance and Nominating Committee, compiled a list of possible candidates and solicited input from all directors. Mr. Baeza was introduced as a potential nominee by Mr. Fromm, who was introduced to Mr. Baeza in connection with the Company’s activities for a charitable foundation. Mr. Wright was recommended as a nominee by our director Ms. Esrey, but was also known to several members of our senior management team as a result of executive search services that he provided to the Company. In conducting its review of these potential candidates, the Governance and Nominating Committee considered, amongst other things, the relevant criteria for directors specified in our Corporate Governance Guidelines and the Governance and Nominating Committee’s charter, such as: the person’s personal and professional attributes; ability to provide necessary stewardship over business strategies and programs adopted to insure the coordination of interests among employees, management and shareholders; ability to respect and maintain adherence to the Code of Business Conduct; ability to balance short-term goals and long-term goals of the Company and its shareholders; and the

nature of and time involved in a director’s service on other boards. Mr. Bower then contacted each of Mr. Baeza and Mr. Wright to initiate discussions about joining the board, and each met with several of the independent directors. Upon the recommendation of the Governance and Nominating Committee, the board elected both Mr. Baeza and Mr. Wright as directors. There have been no nominees recommended by shareholders and the Governance and Nominating Committee did not use a professional search service to find additional directors.

 

With a thirteen person Board, the class of directors whose term will expire in 2009 has five members; the class whose term will expire in 2010 has four members; and the class whose term will expire in 2011 has four members. Your board of directors has nominated four individuals, Ronald A. Fromm, Steven W. Korn, Patricia G. McGinnis and Harold B. Wright for election as directors for a three-year term at the 2008 Annual Meeting. Your board of directors also has nominated another current director, Mario L. Baeza, for a one-year term to expire in 2009. Each of these nominees currently serves on the board for a term expiring at the 2008 Annual Meeting.

 

There are no family relationships between any of our directors, nominees and executive officers.

 

Your board is not aware that any nominee named in this proxy statement is unwilling or unable to serve as a director. If, however, a nominee is unavailable for election, your proxy authorizes the proxies to vote for a replacement nominee if the board names one. As an alternative, the board may reduce the number of directors to be elected at the meeting. Proxies may not be voted for a greater number of persons than the nominees identified below.

NOMINEES FOR A THREE-YEAR TERM THAT WILL EXPIRE IN 2011:

 

 

Your Board of Directors recommends a vote “FOR” these nominees.  

NOMINEE FOR A ONE-YEAR TERM THAT WILL EXPIRE IN 2009:

 

 

Your Board of Directors recommends a vote “FOR” this nominee.  

CONTINUING DIRECTORS WHOSE TERMS WILL EXPIRE IN 2009:

 

CONTINUING DIRECTORS WHOSE TERMS WILL EXPIRE IN 2010:

 

PROPOSAL 2 — Ratification of Independent Registered Public Accountants

 

The Audit Committee has appointed Ernst & Young LLP as the independent registered public accountants to audit the Company’s consolidated financial statements for the fiscal year ending January 31, 2009. The Audit Committee and the board are requesting that shareholders ratify this appointment as a means of soliciting shareholders’ opinions and as a matter of good corporate practice. If the shareholders do not ratify the selection of Ernst & Young LLP, the Audit Committee will consider any information submitted by the shareholders in connection with the selection of the independent registered public accountants for the next fiscal year. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of different independent registered public accountants at any time during the fiscal year if the Audit Committee believes such a change would be in the best interest of the Company and its shareholders.

 

Representatives of Ernst & Young LLP do not plan to make a formal statement at the annual meeting. However, we expect that they will attend the meeting and be available to respond to appropriate questions.

 

 

Fees Paid to Independent Registered Public Accountants

 

During fiscal 2007 and fiscal 2006, Ernst & Young LLP were our independent registered public accountants and charged fees for services rendered to us as follows:

 

 

 

 

In fiscal 2007, all of the audit, audit-related and tax services were pre-approved in accordance with the Audit Committee’s audit and non-audit services pre-approval policy that requires the committee, or the chair of the committee to pre-approve services to be provided by the Company’s independent registered public accountants. Pursuant to this policy, the committee will consider whether the services to be provided by the independent registered public accountants are prohibited by the SEC and consistent with the SEC’s rules on auditor independence and whether the independent registered public accountants are best positioned to provide the most effective and efficient services. The committee is mindful of the relationship between fees for audit and non-audit services in deciding whether to pre-approve such services. The committee has delegated to the chair of the committee pre-approval authority between committee meetings and the chair must report any pre-approval decisions to the committee at the next scheduled committee meeting.

Audit Committee Report

 

The Audit Committee oversees the Company’s financial reporting process on behalf of your board of directors. Management is primarily responsible for the financial statements and reporting processes including the systems of internal controls, while the independent registered public accountants are responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with auditing standards generally accepted in the United States, and expressing an opinion on the conformity of those consolidated financial statements with accounting principles generally accepted in the United States.

 

In this context, the committee has met and held discussions with management and the internal auditors and independent registered public accountants. The committee discussed with the Company’s internal and independent registered public accountants the overall scopes and plans for their respective audits. The committee met, at least quarterly, with the internal and independent registered public accountants, with and without management present, and discussed the results of their examinations, their evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. Management represented to the committee that the Company’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. The committee has reviewed and discussed the consolidated financial statements with management and the independent registered public accountants, including their judgments as to the quality, not just the acceptability, of the Company’s accounting principles; the reasonableness of significant judgments and clarity of disclosures; and such other matters as are required to be discussed with the committee under auditing standards generally accepted in the United States.

 

The Company’s independent registered public accountants also provided to the committee the written disclosures required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the committee discussed with the independent registered public accountants that firm’s independence, including

those matters required to be discussed by Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standards No. 90. The Audit Committee considered whether the provision by Ernst & Young, LLP of non-audit services, including tax services, was compatible with their independence.

 

In reliance on the reviews and discussions referred to above, the committee recommended to the board of directors and the board approved including the audited consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended February 2, 2008 for filing with the Securities and Exchange Commission. The committee has retained Ernst & Young LLP as the Company’s independent registered public accountants for fiscal 2008.

 

While the committee has the responsibilities and powers set forth in its charter, it is not the duty of the committee to plan or conduct audits or to determine that the Company’s consolidated financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent registered public accountants. In addition, it is not the duty of the committee to conduct investigations or to assure compliance with laws and regulations and the Company’s business conduct policies.

 

Audit Committee

Hal J. Upbin, Chair

Steven W. Korn

W. Patrick McGinnis

 

Our Incentive and Stock Compensation Plan of 2002, as Amended and Restated (which we refer to as the 2002 Plan), is the only benefit plan that the Company currently uses to grant stock options, restricted stock, performance shares, performance units, stock appreciation rights and cash-based awards to directors and employees. Although we have two other incentive plans still in effect, no further grants will be made under those plans, and the committee has determined not to make any further grants under the 2002 Plan between the record date and the annual meeting date.

 

We believe that incentives and share-based awards focus employees on the objective of creating shareholder value and promoting the Company’s success. To maintain our ability to continue to grant share-based awards and to have flexibility as to the types of awards granted, the Compensation Committee recently approved an amendment and restatement of the 2002 Plan to implement the following changes:

 

 

The 2002 Plan, as proposed by the committee, is attached as Exhibit A to this proxy statement and will be effective following your approval. By approving the 2002 Plan, shareholders will be also be approving the performance measures for grants of the various incentive awards that are designed to qualify for the performance-based exception of Section 162(m) of the Internal Revenue Code of 1986, as amended. The performance measures are set forth in Article 9 of the 2002 Plan and are identified below under the subheading “Performance Units, Performance Shares and Cash-Based Awards.”

 

We use incentive awards to attract, motivate and retain leadership talent as well as to align our executives’ interests with those of our shareholders, as described more fully in the Compensation Discussion and Analysis. The committee approved the proposed amendment on the belief that the additional shares will allow the Company to continue awarding the equity incentives important to our compensation program for at least two more years, while resulting in a reasonable amount of potential equity dilution.

 

As of April 3, 2008, under all of our incentive plans there were a total of 3,107,160 shares potentially issuable pursuant to outstanding awards under all of our plans. After setting aside shares for outstanding awards, at April 3, 2008, the 2002 Plan (without giving effect to the proposed amendment to increase shares) had only 249,555 shares remaining available for future award grants, which would allow us to grant awards for no more than 118,836 full value shares. The committee believes that it is in the best interests of the Company to allow for more full value share awards, and if the 2002 Plan, as amended, is approved, we would have available 2,049,555 shares for future

awards, all of which could be issued as full value share awards. Thus, if the 2002 Plan is approved, there would be a total of 5,156,715 shares covered by all of our plans as follows: 3,107,160 shares potentially issuable pursuant to outstanding awards and 2,049,555 shares available for future grant under the 2002 Plan. The actual number of shares potentially issuable pursuant to the 2002 Plan will be less, as certain outstanding awards have been made pursuant to a different plan.

 

The outstanding awards held by our named executive officers at fiscal 2007 year-end are identified in “Executive Compensation -Outstanding Equity Awards at Fiscal Year-End,” and awards granted to these individuals subsequent to fiscal 2007 year-end are indicated in “Compensation Discussion and Analysis — Long-Term Awards.”

 

The principal features of the 2002 Plan, as proposed to be amended, are described below. This description is subject to and qualified in its entirety by the full text of the 2002 Plan attached as Exhibit A to this proxy statement.

 

Purpose.   The objectives of the 2002 Plan are to optimize our profitability and growth through annual and long-term incentives that:

 

 

The 2002 Plan is further intended to provide us with flexibility in our ability to motivate, attract, and retain the services of participants who make significant contributions to our success and to allow participants to share in our success.

 

Administration.   The 2002 Plan is administered by your board of directors, and the board has delegated administration of the 2002 Plan to the Compensation Committee, in part in order to meet the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended. (When used in this description of the 2002 Plan, “board of directors” or “board” includes the Compensation Committee when acting pursuant to the board’s delegation of authority.) Also, the Chief Executive Officer has been delegated the authority to make grants of awards representing no more than 50,000 shares per year to non-executive officer employees, although since 2006, he has chosen not to rely on that authorization.

 

Your board of directors has full power to:   (1) select the employees and directors who are to participate in the 2002 Plan, (2) determine the sizes and types of awards, (3) determine the terms and conditions of awards in a manner consistent with the 2002 Plan, (4) interpret the 2002 Plan and any agreement or instrument entered into under the 2002 Plan, (5) establish, amend or waive rules and regulations for the 2002 Plan’s administration, (6) amend the terms and conditions of any outstanding award as provided in the 2002 Plan, and (7) make all other determinations that may be necessary or advisable for the administration of the 2002 Plan. No awards may be made under the 2002 Plan after May 22, 2012.

 

As of April 3, 2008, eleven non-employee directors and approximately 13,100 employees were eligible to participate in the 2002 Plan and 163 individuals had awards outstanding under the 2002 Plan.

 

Limits on Awards.   The 2002 Plan limits the grants of awards to a single participant in any fiscal year as follows:

 

 

 

Shares Available under the 2002 Plan.   As of April 3, 2008, the 2002 Plan was our only plan with shares available for future award grants. Under the amended 2002 Plan, shares subject to an award shall only be counted as used to the extent they are actually issued; and upon issuance, shall reduce the number of shares available under the 2002 Plan. Shares of restricted stock subject to an award that is forfeited or cancelled shall be added back to, and again become available under the 2002 Plan. If any award expires, is forfeited or lapses prior to any shares being issued pursuant to that award, there is no effect on shares available. Also, if any award is exercised, settled or paid with less than the full number of shares initially subject to the award’s terms, or is settled in cash in lieu of shares, the number of shares available under the 2002 Plan shall reduced only if, and to the extent, shares are actually issued. In addition, if the exercise price of any stock option granted under the 2002 Plan or the tax withholding requirements with respect to any award granted under the 2002 Plan are satisfied by tendering shares of common stock to the Company, or if a stock appreciation right is exercised, or there is a cashless exercise of a option, only the number of shares issued, net of any Shares tendered will reduce the number of shares available under the 2002 Plan. Any shares that might become available under our 1999 incentive plan (still in effect) due to forfeiture, termination or cancellation of awards outstanding as of April 3, 2008, will increase the number of shares authorized for issuance and available under the 2002 Plan; shares subject to awards under the 1999 plan are included in the outstanding award share counts provided in this disclosure.

 

In the event of any change in corporate capitalization, such as a stock split, or a corporate transaction such as any merger, consolidation, separation, including a spin-off, or other distribution of our stock or property, any reorganization or any partial or complete liquidation, an adjustment may be made to prevent dilution or enlargement of participants’ rights.

 

Stock Options and Stock Appreciation Rights.   Under the 2002 Plan, a stock option is granted under an award agreement specifying the price, the duration of the stock option, the number of shares of common stock to which the stock option pertains and whether the stock option is an incentive stock option or a nonqualified stock option. Incentive stock option awards under the terms of the 2002 Plan are those that qualify for special tax treatment under Section 422 of the Internal Revenue Code (the “Code”) to the extent such treatment is available, while the nonqualified stock options do not qualify for such special tax treatment. Directors may not be granted incentive stock options but employees may be granted either type of option under the 2002 Plan. The stock option price upon the exercise of any stock option is paid: (1) in cash, (2) by tendering (either actual or by attestation) previously acquired shares having an aggregate fair market value at the time of exercise equal to the total stock option price (provided that, if required by the Board at time of exercise, the shares which are tendered must have been held by the participant for at least six months prior to their tender to satisfy the stock option price) or by net exercise, (3) by a combination of (1) and (2), (4) by cashless exercise as permitted under the Federal Reserve Board’s Regulation T, subject to applicable securities law restrictions, or (5) by any other means that the board determines to be consistent with the 2002 Plan’s purposes and applicable law. For options issued on or after May 22, 2008, the Board may permit a participant to elect to pay all or part of the exercise price of the option by having the Company withhold from the shares of common stock which would otherwise be issued upon exercise of the option a number of shares of common stock having a fair market value equal to the amount of the exercise price.

 

A stock appreciation right is granted under the 2002 Plan pursuant to an award agreement specifying the duration of the stock appreciation right and the number of shares of common stock to which the stock appreciation right pertains. The price of a stock option granted to a participant under the 2002 Plan will be at least 100% of the fair market value of a share of common stock on the date the stock option is granted. The value of a stock appreciation right with respect to a share of common stock as of any given date will be equal to the excess of the fair market value of a share of common stock on such date over an amount equal to at least 100% of the fair market value of a share of common stock on the date the stock appreciation right is granted. A stock appreciation right is payable as specified in the award agreement, and therefore can be in cash or in shares of common stock. The term of a stock option or stock appreciation right is determined by the board at the time that it is granted. Neither stock options nor stock appreciation rights will be allowed to be exercisable later than the tenth anniversary date of their grant. Stock options and stock appreciation rights can be exercised subject to the restrictions and conditions placed upon them by the board, and they need not be the same for each grant or for each participant.

Each participant’s stock option or stock appreciation right award agreement will set forth the extent to which the participant can exercise the stock option or stock appreciation right following the termination of the participant’s employment or directorship with us. Such provisions will be determined in the sole discretion of the board, included in the award agreement entered into with each participant, and need not be uniform among all stock options and stock appreciation rights issued.

 

No stock options or stock appreciation rights may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and that both stock options and stock appreciation rights granted to a participant will be exercisable during the participant’s lifetime only by such participant.

 

Performance Units, Performance Shares, and Cash-Based Awards.   The board sets performance goals that determine the number and/or value of performance units/shares and cash-based awards that may be paid out to a participant. Each cash-based award (including the cash-component of a performance unit) has a value as may be determined by the board. The determination of the board with respect to the form of payout of such awards will be set forth in the award agreement pertaining to the grant of the award. The time period during which the performance goals must be met is called the “performance period.”

 

Performance measure(s) authorized by the 2002 Plan include:

 

 

The board will have the discretion to adjust the determinations of the degree of attainment of the initially established performance goals on a corporation-wide or divisional basis; however, awards that are designed to qualify for the performance-based exception of Section 162(m) of the Code may not be adjusted upward. Shareholder approval of the 2002 Plan will be deemed to include approval of the various performance award measures identified the prior paragraph.

 

If applicable tax and/or securities laws change to permit board discretion to alter the governing performance measures without obtaining shareholder approval of such changes, then the board, in its sole discretion, may make such changes without obtaining shareholder approval. In addition, if the board determines that it is advisable to grant awards that will not qualify for the performance-based exception, then the board may make such grants without satisfying the requirements of Section 162(m) of the Code.

 

The board may pay performance shares, the cash and/or share components of performance units; and cash-based awards in cash or shares of common stock (or any combination) that have an aggregate fair market value equal to the value of the awards earned at the close of the performance period, as specified in the award agreement. Our currently outstanding performance share and performance unit agreements provide for the share-based awards to be paid in shares.

 

At the discretion of the board, participants may be entitled to receive any dividends declared with respect to shares of common stock which have been earned in connection with grants of performance units and/or performance shares, but not yet distributed to participants (such dividends shall be subject to the same accrual, forfeiture, and

payout restrictions that apply to dividends earned with respect to shares of restricted stock). In addition, participants may, at the discretion of the board, be entitled to exercise their voting rights with respect to such shares.

 

Unless determined otherwise by the board and set forth in the participant’s award agreement, in the event the employment or directorship of a participant is terminated by reason of death, disability, early retirement or retirement during a performance period, the participant will receive a payout of the performance units/shares or cash-based awards that is prorated. For purposes of this provision, “retirement” and “early retirement” are determined by reference to our pension plan, and as a result, “early retirement” requires committee approval.

 

Payment of earned performance units or performance shares or cash-based awards will be made at a time specified by the board in its sole discretion and set forth in the participant’s award agreement. Notwithstanding the foregoing, with respect to employees who are “covered employees” as defined in the regulations promulgated under Section 162(m) of the Code and who retire during a performance period, payments may not be made upon retirement, as such payments are made only at the end of the applicable performance period.

 

In the event that a participant’s employment or directorship terminates for any reason other than those reasons set forth above during a performance period, all performance units/shares and cash-based awards are forfeited by the participant unless determined otherwise by the board, or as set forth in the participant’s award agreement.

 

Except as otherwise provided in a participant’s award agreement, performance units/shares and cash-based awards may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution; during the participant’s lifetime, the participant’s rights under the 2002 Plan may be asserted only by the participant or the participant’s legal representative.

 

Subject to the approved criteria for establishing performance measures, future performance awards may be different than those previously issued.

Restricted Stock.   Each restricted stock grant will be stated in a restricted stock award agreement that will specify the period(s) of restriction, the number of shares of restricted stock granted, and such other provisions as deemed necessary by the board.

 

Shares of restricted stock granted may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable period of restriction established by the board and specified in the restricted stock award agreement. All rights with respect to the restricted stock granted to a participant under the 2002 Plan are available only to the participant during his or her lifetime.

 

We are not required to issue a certificate for restricted shares or provide unrestricted book entry title for shares of restricted stock until all conditions and/or restrictions applicable to the shares have been satisfied. Shares of restricted stock covered by each restricted stock grant made under the 2002 Plan become freely transferable by the participant after the last day of the applicable period of restriction. If provided in the restricted stock award agreement, participants holding restricted stock may be granted the right to exercise full voting rights and also may be credited with regular cash dividends paid with respect to the underlying shares while they are so held.

 

Each restricted stock award will set forth the extent to which the participant will have the right to receive unvested restricted shares following termination of the participant’s employment or directorship with us. Such provisions will be determined in the sole discretion of the board and included in the award agreement entered into with each participant. Additionally, these provisions need not be uniform among all shares of restricted stock issued pursuant to the 2002 Plan.

Change In Control.   A “change in control” occurs when:

 

(a) Any natural person, corporation, government, or political subdivision, agency, or instrumentality of a government, or partnership, limited partnership, syndicate, or other group of two or more natural persons (other than those persons in control of us as of May 23, 2002, or other than a trustee or other fiduciary holding securities under one of our employee benefit plans, or a corporation owned directly or indirectly by our shareholders in substantially the same proportions as their ownership of our stock) becomes the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), either directly or indirectly of our securities representing 30% or more of the combined voting power of our then outstanding securities; or

(b) During any period of two consecutive years, individuals who at the beginning of such period constitute the board (and any new director, whose election by our shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was so approved), then cease to constitute a majority of the board; or

 

(c) Our shareholders approve: (i) a plan for our complete liquidation; or (ii) an agreement for the sale or disposition of all or substantially all of our assets; or (iii) our merger, consolidation, or reorganization with or involving any other corporation, other than a merger, consolidation, or reorganization that would result in our voting securities outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 65% of the combined voting power of our voting securities (or such surviving entity) outstanding immediately after such merger, consolidation, or reorganization; or

 

(d) Provided that, in no event shall a “change in control” be deemed to have occurred, with respect to a participant, if the participant is part of a purchasing group that consummates the change in control transaction. A participant shall be deemed “part of a purchasing group” for purposes of the preceding sentence if the participant is an equity participant in the purchasing corporation or group (except for: (i) passive ownership of less than three percent of the stock of the purchasing corporation; or (ii) ownership of equity in the purchasing corporation or group which is otherwise not significant, as determined prior to the change in control by a majority of the non-employee continuing directors).

 

Upon the occurrence of a change in control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges: (1) any and all stock options and stock appreciation rights granted pursuant to the 2002 Plan shall become immediately exercisable; (2) any restriction periods and restrictions imposed on restricted shares that are not performance-based, as set forth in the restricted stock award agreement, shall lapse; (3) the target payout opportunities attainable under all outstanding awards of restricted stock, performance units, performance shares, and cash-based awards shall be deemed to have been fully earned for the entire performance period(s) as of the effective date of the change in control. The vesting of all awards denominated in shares shall be accelerated as of the effective date of the change in control, and there shall be paid out to participants within 30 days following the effective date of the change in control a pro-rata number of shares based upon an assumed achievement of all relevant targeted performance goals and upon the length of time within the performance period that has elapsed prior to the change in control. Awards denominated in cash shall be paid pro rata to participants in cash within 30 days following the effective date of the change in control, with the proration determined as a function of the length of time within the performance period which has elapsed prior to the change in control, and based on an assumed achievement of all relevant targeted performance goals.

 

The above provisions cannot be terminated, amended, or modified on or after the date of a change in control to affect adversely any award previously granted under the 2002 Plan without the prior written consent of the participant with respect to the participant’s outstanding awards. However, the board may terminate, amend or modify the above provisions at any time prior to the date of a change in control.

Repricing Prohibited.   No outstanding options or stock appreciation rights may be repriced, replaced or regranted through cancellation in the event of a decline in stock price without the approval of the Company’s shareholders. The prohibition includes, among other prohibitions:

 

Amendment, Modification, and Termination.   Subject to the terms of the 2002 Plan, the board may at any time, alter, amend, suspend or terminate the 2002 Plan in whole or in part. In addition, the board may make adjustments in the terms and conditions of, and the criteria included in, awards in recognition of unusual or nonrecurring events affecting us or our financial statements or of changes in applicable laws, regulations, or accounting principles, whenever the board determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2002 Plan; provided that, unless the board determines otherwise at the time such adjustment is considered, no such adjustment will be authorized to

the extent that such authority would be inconsistent with the 2002 Plan’s meeting the requirements of Section 162(m) of the Code, as from time to time amended or the requirements of any state law.

 

Without the written consent of the participant holding an award, no termination, amendment, or modification of the 2002 Plan shall adversely affect in any material way any award previously granted under the 2002 Plan. At all times when Code Section 162(m) is applicable, all awards granted under the 2002 Plan shall comply with the requirements of Code Section 162(m) unless the board determines that such compliance is not desired. In addition, in the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any award or awards available under the 2002 Plan, the board may make any adjustments it deems appropriate.

Withholding.   We shall have the power and the right to deduct or withhold, or require a participant to remit to us, an amount sufficient to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of the 2002 Plan. With respect to withholding required upon the exercise of stock options, upon the lapse of restrictions on restricted stock, or upon any other taxable event arising as a result of awards granted pursuant to the 2002 Plan, participants may elect, subject to the approval of the board, to satisfy the withholding requirement, in whole or in part, by having us withhold shares having a fair market value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All such elections shall be irrevocable, made in writing, signed by the participant, and shall be subject to any restrictions or limitations that the board, in its sole discretion, deems appropriate.

 

Under the Internal Revenue Code, as presently in effect, a participant will not be deemed to recognize any income for federal income tax purposes at the time any award is made, nor will we be entitled to a tax deduction at that time. However, when any part of a stock option or stock appreciation right is exercised, when restrictions on restricted stock lapse, or when payments are made under a performance share, performance unit, or cash-based award, the federal income tax consequences may be summarized as follows:

 

1. In the case of an exercise of a stock option (other than an incentive stock option, or ISO) or stock appreciation right, the participant will generally recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the exercise date over the stock option exercise price.

 

2. In the case of payment under a performance share, performance unit, or cash-based award, the participant will generally recognize ordinary income on the payment date in an amount equal to any cash and the fair market value of any unrestricted shares received.

 

3. In the case of an award of restricted stock, the immediate federal income tax effect for the recipient will depend on the nature of the restrictions. Generally, the fair market value of the stock will not be taxable to the recipient as ordinary income until the year in which his or her interest in the stock is freely transferable or is no longer subject to a substantial risk of forfeiture. However, the recipient may elect to recognize taxable income when the stock is received rather than when his or her interest is freely transferable or is no longer subject to a substantial risk of forfeiture. If the recipient makes this election, the amount taxed to the recipient as ordinary income is determined as of the date of receipt of the restricted stock.

 

4. In the case of ISO’s, there is generally no tax liability either at the time of grant or at the time of exercise. However, the excess of the fair market value of the stock on the exercise date over the stock option price is included in the stock optionee’s income for purposes of the alternative minimum tax. If no disposition of the stock is made by the participant before the later of one year from the date of exercise and two years from the date of grant, the participant will realize a capital gain or loss upon a sale of the stock, equal to the difference between the stock option price and the sale price. If the stock is not held for such required period, ordinary income tax treatment will generally apply to an amount equal to the excess of the fair market value of the stock on the date of exercise over the stock option price (or, if less, the amount of gain realized on the disposition of the stock), and the balance of any gain or loss will be treated as capital in nature. In addition, if the stock is not held for the required period, the Company receives a tax deduction (known as a “disqualifying disposition”) in the same amount as the amount recognized as ordinary income by the participant. In order for ISO’s to be treated as described above, the participant must remain employed by us (or a subsidiary in which we hold at least 50 percent of the voting power) from the ISO’s grant date

until three months before the ISO is exercised. The three-month period is extended to one year if the participant’s employment terminates on account of disability. If the participant does not meet the employment requirement, the stock option will be treated for federal income tax purposes as a stock option described in paragraph 1, above.

 

5. Upon the exercise of a stock option other than an ISO, the recognition of income on restricted stock, or the payment under a performance share, performance unit, or stock-based award, we will generally be allowed an income tax deduction equal to the ordinary income recognized by the participant, but in the case of the recognition of income on restricted stock, the deduction will be allowed upon vesting. We will not receive an income tax deduction as a result of the exercise of an ISO, provided that the ISO stock is held for the required period as described above. When a cash payment is made pursuant to an award, the recipient will recognize ordinary income equal to the amount of cash received and we will generally be entitled to a deduction of the same amount.

 

6. Pursuant to Section 162(m) of the Code, we may not deduct compensation of more than $1,000,000 that is paid in a taxable year to an individual who, on the last day of the taxable year is our Chief Executive Officer or among one of its three other highest compensated officers for that year (other than our Chief Financial Officer). The deduction limit, however, does not apply to certain types of compensation, including qualified performance-based compensation. We believe that compensation attributable to stock options granted under the 2002 Plan will be treated as qualified performance-based compensation and therefore will not be subject to the deduction limit. The 2002 Plan also authorizes the grant of performance shares, performance units, and cash-based awards utilizing the performance criteria set forth in the 2002 Plan so that payments under such awards may likewise be treated as qualified performance-based compensation. For restricted stock that provides for time-based, as compared to performance-based, lapse of restrictions, we believe that the taxable compensation will be subject to the deduction limit of 162(m).

 

The foregoing is only a summary of the federal income tax consequences of participation in the 2002 Plan. Each participant is advised to consult his or her own tax adviser for the income tax effects attributable to his or her own participation in the 2002 Plan.

Equity Compensation Plan Information

 

The following table sets forth aggregate information regarding the company’s equity compensation plans as of February 2, 2008, our fiscal 2007 year-end, and as of April 3, 2008, the record date for our annual meeting (with the closing share price on that date being $16.41. This table does not reflect the additional shares proposed to be added to the plan.

 

 

 

 

 

 

 

This table excludes: (a) 496,183 shares restricted stock that are included in our issued and outstanding shares, but are subject to forfeiture; and (b) restricted stock units granted to independent directors and independent directors’ deferred compensation units, which are payable only in cash.

 

 

We believe that the approval of the amended plan is important to our continued success. Our employees are a valuable asset. Awards such as those provided under the 2002 Plan constitute an important incentive for key employees and help us to attract, retain and motivate people whose skill and performance are critical to our success. If the amended plan is not approved by the shareholders, the Company will continue to have the authority to grant awards under the plan within the existing 2002 Plan limits.

 

 

 

 

The Executive Compensation section of this proxy statement discusses the compensation arrangements for our named executive officers for fiscal 2007:

 

Ronald A. Fromm, Chairman of the Board and Chief Executive Officer
Mark E. Hood, Senior Vice President and Chief Financial Officer
Diane M. Sullivan, President and Chief Operating Officer
Joseph M. Wood, President, Brown Shoe Retail and Famous Footwear
Richard M. Ausick, President, Brown Shoe New York Wholesale

 

The principal objective of our executive compensation program is to attract, motivate and retain highly qualified executives. We encourage sustained long-term profitability and increased shareholder value by linking executive compensation to the current and future achievement of financial and operating performance. We use equity award grants and performance incentives that are payable in shares of our stock to align the interests of our executives with those of our shareholders.

 

The elements of the program are:

 

 

These program elements are intended to fulfill our performance, alignment and retention objectives for senior executives with a specific rationale for each element. In determining the type and amount of each executive’s compensation, the committee considers a variety of factors, including the individual’s relative position within our organization, comparative market data and other external market-based factors. The committee uses this information when setting compensation levels to achieve a comprehensive package that emphasizes pay for performance and is competitive in the marketplace. The committee has not retained its own compensation consultant; however, management has engaged Hewitt Associates LLC (Hewitt) for executive compensation matters and Towers Perrin for pension plan matters.

 

The committee has primary responsibility for overseeing the design, development and implementation of the compensation program for our senior executives (16 individuals as of April 3, 2008), including our named executives. Our Governance and Nominating Committee is responsible for evaluating the CEO’s performance.

 

Current compensation level, performance, tenure, long-term career goals, future leadership potential, internal equity and succession planning are relevant factors used to determine appropriate compensation levels for the named executives and other senior executives. There is no quantitative formula for weighting these factors, some of which are intangible and not readily quantifiable. As a group, however, they provide necessary context for determining the relative value of different senior executives to the Company. These factors also are used to assess the significance of comparative market data in a more meaningful way, such as addressing competitive conditions for a particular position or skill set, or determining appropriate variance to peer group data.

The committee makes its annual compensation decisions at its March meeting each year, with a focus on the base salary, annual cash incentive and equity elements and a competitive positioning at the median (50th percentile) of our peer group. The committee emphasizes pay for performance throughout the program, and it selects the compensation elements and determines the mix and amount of those elements with an intent to increase the at-risk portion of compensation in proportion to the increase in scope of job responsibilities.

 

Prior to the March meeting each year, management provides the committee with compensation recommendations for the named executives, other than the CEO, including base salary, annual cash incentive, long-term awards (including performance awards, stock options and restricted stock). Management provides a current market value for each proposed element and for the total targeted value, as well as the median market value for the executive’s peers and variance between the proposed amount and the peer median. The comparative market information is derived primarily from materials provided by our compensation consultant. In addition to the recommendations, management also furnishes to the committee supplemental historical information in tabular form for each of the named executives. For fiscal 2007, this supplemental information included: historical salary and equity award grants, total shares subject to outstanding awards, spread value on unvested options, market value of outstanding restricted stock and current stock ownership and, for each of the named executives other than the CEO, the performance rating from the individual’s supervisor and a relative value ranking for each individual. Each of the senior executives (other than the CEO) participates in a prescribed Company-wide evaluation process. Our CEO, Mr. Fromm, is the supervisor for Ms. Sullivan and Mr. Hood; and Ms. Sullivan is the supervisor for Messrs. Wood and Ausick.

 

Our CEO, in consultation with our Senior Vice President — Human Resources and our Vice President — Total Rewards, develops the recommendations made to the committee. In addition, at the committee’s meeting to discuss compensation of the named executives other than the CEO, our management is present to provide insight and explanation for particular recommendations, individual performance evaluations, comparative ranking, succession planning, market conditions, unique circumstances and impact of compensation trends. Management also discusses how peer group data has affected the recommendations and reasons for variance. While the committee generally gives great weight to management’s recommendations, the committee discusses those recommendations, addresses questions to management present at the meeting, and independently assesses whether to approve or make changes. The named executives do not play a role in their own compensation determination, other than discussing their performance objectives and achievements with their supervisor.

 

Our Governance and Nominating Committee is charged with evaluating the CEO’s performance and carries out this responsibility by using a formal process administered by an outside executive evaluation firm. This performance appraisal considers Mr. Fromm’s performance in the areas of organizational leadership, financial results, and board governance, and includes surveying all members of the board of directors. When evaluating the CEO’s performance, the Governance and Nominating Committee meets in executive session without management present, although other non-management members of the board are invited to participate in that committee’s meeting. Subject to the Governance and Nominating Committee’s evaluation, the Compensation Committee reviews and determines the CEO’s compensation in executive session. The CEO does not interface with the committee with respect to his own compensation, and no other Company executives are involved.

 

Our Total Rewards department uses Hewitt as its compensation consultant to provide information concerning compensation practices, mix of compensation elements, and job-by-job comparative market data (benchmarking) to a peer group of footwear and retail businesses. Our Total Rewards department established the scope of the consultant’s services; the scope requested was similar to the services requested in prior years, including preparation of a report providing information to enable management and the committee to assess and determine appropriate levels of executive compensation relative to the marketplace. The consultant’s market report, prepared in late 2006 for use in setting compensation for 2007, and used again in 2008, was provided to management and includes benchmark data on base salary, annual cash (bonus) incentive (both actual and target), long-term incentive awards (including stock options, restricted stock and long-term performance plans), total compensation, executive benefits and perquisites. The consultant also provided recommended levels for each of the compensation elements on a job level basis, including a projected market increase for determining 2007 amounts based on 2006 data. The consultant’s report was primarily derived from its proprietary database, but also included publicly available proxy

information of twenty-one footwear and retail companies for the named executive officers. The consultant’s report also discussed our compensation practices with respect to the named executives, and confirmed that our compensation elements are generally consistent with market practices.

 

The peer companies in the market report were primarily public companies selected by the Company on the basis of being competitors for customers, investors or executive talent. In determining the appropriateness of the peer companies, we considered both business segment (footwear and retail emphasis); and for particular positions within the comparator companies, whether there was an appropriate job position for comparison. For the selected comparator companies in the report, the footwear and retail sub-group had median net sales of $1.8 billion, assets of $1.2 billion, and 17,000 employees; and the expanded group had median net sales of $2.5 billion, assets of $1.4 billion, and 18,000 employees. At fiscal year-end 2006, the Company had net sales of $2.5 billion, assets of $1.1 billion and approximately 13,000 employees. The selected subgroup of footwear and retail companies is the “peer group” referenced in this CD&A, and became the basis for establishing median compensation values to assess executive pay levels. The data provided on this peer group was then size-adjusted, as appropriate, based on position scope.

 

Of the thirty-five comparator companies, the following twenty-one companies (then publicly owned) with a footwear and retail focus were used for job-level peer group for our named executives:

 

 

The following fourteen companies were also considered as market peers for certain other corporate or division level executive jobs, but not for the named executives:

 

 

This total peer group list for 2007 and 2008, as compared to the peer group that we used to set fiscal 2006 compensation, reflects the addition of: Dick’s Sporting Goods, Sports Authority, Nordstrom, and Phillips Van Heusen; and the deletion of: Reebok International, TruServe Shopko Stores, Duty Free Shoppes (each due to acquisition, non-public status or unavailable information) and Best Buy, CVS, Walgreen’s and Sears (too large). Also, in 2008, both Payless ShoeSource and Stride Rite are part of Collective Brands, Inc.

 

With the consent of the committee’s chairman, we did not request that our compensation consultant prepare a new market study report for 2008. Based on discussions with our consultant concerning compensation trends, market values and compensation mix, and with management able to independently review increasing amounts of publicly available executive compensation data, management believed that an updated report would not provide additional insight or sufficient benefit to justify the expense. Thus, management used the Hewitt market report from 2007 to make recommendations and provide background information to the committee for its March 2008 meeting to set 2008 compensation levels.

 

In addition to the market study, Hewitt’s global practice leader for executive compensation and corporate governance consulting made a presentation at the Committee’s December 2006 meeting and discussed the parameters of the study, executive compensation trends, and the selection of peer companies. However, our consultant did not make a presentation to the Committee with respect to setting executive compensation for 2008.

 

Our Total Rewards department also retained Towers Perrin as a consultant to provide market intelligence on executive retirement benefit trends and advice on qualified and non-qualified retirement plans, as well as actuarial

services for our retirement plans. Towers Perrin consulted on the changes to our Supplemental Executive Retirement Plan (SERP) in early 2008, but is not used as a consultant for general executive compensation practices.

 

We analyze our compensation granted and paid in fiscal 2007 in relation to our three principal compensation objectives — performance, alignment and retention. We make our compensation decisions by associating the various compensation elements with the objective most directly served by the applicable element, even though most of our compensation elements satisfy more than one objective.

 

In analyzing fiscal 2007 decisions, we note certain considerations that influenced many of the decisions. Mr. Hood, our Chief Financial Officer, commenced employment with us in October 2006; therefore, he was a relatively new employee with a series of recent equity grants when the committee made determinations with respect to fiscal 2007 compensation. Also, Mr. Ausick transitioned in 2006 and 2007 from being a senior executive in our Famous Footwear division (revenue of $1.3 billion) to the president of Brown New York, the wholesale division we wanted to grow, as it was a recently acquired business (revenue of less than $200 million). Mr. Ausick replaced the senior executive from the acquired company (Bennett Footwear), and was then charged with both reorganizing and moving the division’s operations. Mr. Ausick was placed in this new position as part of the Company’s plan for leadership continuity, with the intent that he become knowledgeable and gain hands-on experience with our wholesale operations, as well as develop this acquired business along our existing business model. Given Mr. Ausick’s unique situation, both management and the committee determined that the peer group data provided by the consultant for Mr. Ausick’s position, based on a lower volume of division sales, did not reflect his scope of responsibilities or the nature of his position and importance within the Company. Accordingly, that peer group data is not cited in this CD&A.

 

The committee’s decisions are guided by performance, and the committee considers the performance ratings and accomplishments for each of the named executives. The committee’s decisions made in March 2007 were based, in part, on individual performance that was reflected in our strong financial and operating performance in fiscal 2006, as well as the operating and strategic expectations for the full fiscal year. In reviewing fiscal 2006 performance as the basis for fiscal 2007 compensation decisions, the committee considered the following:

 

 

More specifically, for Mr. Fromm, the committee considered both financial and operating accomplishments at the Company-wide and corporate level, organizational development and successful implementation of our key strategic initiatives to enhance earnings. For Ms. Sullivan, as well as Mr. Wood, her direct report responsible for our retail divisions, the committee placed greater emphasis on the performance of our various retail operations. For Ms. Sullivan, the committee also considered improved Company performance. For Mr. Ausick, the committee considered his execution and leadership in moving what is now our Brown New York wholesale division from Boston to New York, combining and increasing our New York operations base, as well as repositioning our Via Spiga brand and transitioning the brands purchased in 2005 to our consumer-driven model.

 

The primary objective of our compensation program is to recognize the achievement of results as well as the scope of the executive’s responsibility.

Total Compensation .   To develop and consider compensation packages for the named executives consistent with the committee’s directives, we separately determine base salary, targeted annual cash incentive, and a net current market value for the long-term elements. By limiting the market valuation to the key variable elements and by using a discounted present value, we follow practices commonly used by compensation professionals, plus we have a methodology that enables us to compare individual elements as well as the composite offering to peer group information provided by our compensation consultant. Our approach is different from that reflected in the Summary Compensation Table primarily because we use a discounted grant date market value for stock options, restricted stock and performance equity rather than the current year’s amortized expense for all outstanding stock awards. Also, we do not consider the increased value of other compensation elements such as pension plans, nor do we assign cash values to perquisites, both of which are included in the Summary Compensation Table. Thus, our overall approach and the market values described in this CD&A do not necessarily correspond to, and are not a substitute for, the values disclosed in the Summary Compensation Table.

 

Based on the valuation method described above, the following table illustrates how we allocate the compensation elements to meet our objectives of performance-based compensation and alignment with shareholders, and how we have increased the percentage of at-risk compensation as well as long-term compensation. This table considers only the components of base salary, annual cash incentive and long-term incentives, and it assumes we will meet our incentive targets. Based on these components, the table shows for both fiscal 2007 and fiscal 2008 the allocation of the total targeted compensation between fixed and performance-based, and between cash and equity-based.

 

 

 

 

Although compensation is approved assuming payout of performance-based compensation at target, an executive’s actual compensation may be more or less than the target amount set by the committee. With no payment made on the 2007 annual cash incentive, as compared to the estimates at time of grant, the relative percentage of base salary to total compensation increased, and the percentage of cash compensation compared to equity compensation decreased. The decrease in our stock price over the course of the year also resulted in a reduction to the now-current estimated value of the equity portion as well. Thus, the value of the package granted, in retrospect,

was much less than originally targeted in March 2007, which is consistent with our objective that executives be aligned with shareholders’ interests.

 

Based on the valuation method described above, the following table illustrates the estimated market value of the total targeted compensation awarded in March 2007 and March 2008, and how those amounts varied from the peer group median market values:

 

Base Salary and Merit Increases .   We intend that an executive’s base salary be commensurate with experience and scope of responsibility, with due consideration for job level median market data. We increase base salary primarily in response to notable achievements, change in scope of responsibilities and to remain competitive in the marketplace. Although we also may increase base salary due to improved Company performance, we intend that base salary represent a decreasing portion of an executive’s compensation as scope of responsibility increases, which effectively increases at-risk pay as a percent of the total. Our annual performance review process occurs in March each year and merit increase changes become effective at the end of the month.

 

For fiscal 2007, Mr. Fromm did not receive any increase in base salary, with the intent that an increasing portion of his compensation should be at-risk and long-term. Also, Mr. Hood received no increase given his start date in October 2006. For the other named executives, the salary increases for 2007 over fiscal 2006 were in the range of average merit increases throughout the Company and were consistent with recommendations in the compensation consultants’ report for the median market level. For fiscal 2007, the base salaries for our named executives officers, exclusive of Mr. Ausick for whom appropriate peer group data was not available, were within a range of 0.7% above to 14.6% below the respective peer group median.

 

For fiscal 2008, the committee approved salary increases for senior executives in March 2008 based on prior year market data supplied to the committee along with the variety of background information previously described. In determining 2008 compensation, the committee considered that the Company did not achieve its 2007 financial objectives, and therefore granted salary increases to only a few of the senior executives. Of the named executives, the committee approved an increase in base salary only for Mr. Hood, who has served as our Chief Financial Officer since October 2006 without an increase and has taken on additional responsibilities for real estate administration. Mr. Hood’s increase brings him to the peer group median level and also reflects internal equity with other senior executives of similar scope of responsibility. For fiscal 2008, the base salaries for our named executives officers, exclusive of Mr. Ausick for whom appropriate peer group data was not available, were within a range of 1.1% to 10.9% above the respective peer group median.

 

The following table provides the salary levels and percentage increases for our named executives from fiscal 2006 through fiscal 2008:

 

Annual Cash Incentive Awards .   We offer annual cash incentive awards with target levels set as a percentage of base salary. These target levels reflect both the individual level of responsibility for contributing to our performance

and overall market competitiveness, and provide another method for escalating the percentage of compensation at-risk for executives with higher levels of responsibility for our overall performance. Mr. Ausick’s increase reflects his change of responsibilities and our intent that at-risk compensation be increased on a relative basis, and no change was made for Mr. Hood due to his October 2006 start date. For fiscal 2007, the net current market values of the target annual cash incentive for our named executives officers exclusive of Mr. Ausick for whom appropriate peer group data was not available, were within a range of 7.7% to 10.4% below the market median value.

 

For fiscal 2008, the committee approved a five percentage point increase to the target annual incentive percentages (as a percent of base salary) for Mr. Fromm, Ms. Sullivan and Mr. Hood after considering internal equity and peer group levels. For fiscal 2008, the net current market value of the target annual cash incentive payment for our named executives officers, exclusive of Mr. Ausick for whom appropriate peer group data was not available, were within a range of 0.6% to 10.4% below the market median value.

 

The table below provides comparative information on the fiscal 2006, 2007 and 2008 annual incentive levels and payouts:

 

 

The committee approves financial goals for our annual cash incentive program based on a presentation by management early in the fiscal year. For several years, the financial metric used for these awards has been diluted earnings per share, with business unit earnings representing a secondary measure for executives at the division level. The committee has selected diluted earnings per share as the metric because it believes that it is the measure most closely followed by shareholders and a good indicator of annual operating performance for our industry. We usually establish the financial performance levels based on budgeted earnings for the new fiscal year, and the target level is within the range of public guidance given by the Company.

 

Each executive has the opportunity to earn 70% of the award from the achievement of a diluted earnings per share target that, for a corporate level executive, is based on consolidated net earnings, and for a division president is based on a weighted combination of division and consolidated net earnings. The remaining 30% of the executive’s award opportunity is based on two or more individual quantitative and/or qualitative goals related to our strategic plan that are developed in the regular course of our performance management process between the executive and his or her supervisor. For our CEO, these individual goals are set by the Governance and Nominating Committee and are based on our strategic plan. These annual awards have a minimum earnings per share threshold for payment as well as a maximum payout. If the minimum earnings per share is not met, then the performance goals will not be met and no payment will be approved for the award. Presuming the threshold minimum earnings per share is achieved, the minimum annual award would be 50% of target and the maximum annual award would be 200% of target. In determining whether the financial metric has been satisfied, the committee exercises its discretion concerning exclusion of special charges and/or recoveries and relies on our senior financial executives in making this determination. The committee also has “negative” discretion to reduce any of the award opportunities based on individual performance or other reasons. The committee does not have discretion to increase the award, as that might eliminate the beneficial tax treatment for performance-based compensation.

 

Our fiscal 2006 annual incentive awards set the Company target level for diluted earnings per share at $1.51; the minimum diluted earnings per share threshold for payout at $1.29; and the maximum diluted net earnings per share at $1.81. After adjustment for costs related to our Earnings Enhancement Program, net environmental insurance recoveries and charges, termination of a license agreement and an early retirement agreement, our diluted earnings per share were $1.64 for fiscal 2006. Based on the committee’s approval, we paid these awards in March 2007 at 145% of target to corporate level executives (including Mr. Fromm, Mr. Hood and Ms. Sullivan, although Mr. Hood’s payment was prorated based on three months of service), with a higher payout level to Mr. Wood (181.8% of target) based on the superior performance of our retail division. For Mr. Ausick, who spent part of the fiscal year in retail

and part in wholesale, the award was based on retail division performance (payout at 189% of target), based on his agreement with the Company that the retail division would be the only division considered for purposes of this award.

 

Our fiscal 2007 annual awards set the Company target level for diluted earnings per share at $1.85; the minimum diluted earnings per share threshold for payout at $1.67; and the maximum diluted earnings per share at $2.13. Based on diluted earnings per share of $1.65, after adjustment for costs related to our Earnings Enhancement Program, the committee did not approve payment of these awards. The committee also determined that, in light of poor performance for fiscal 2007, no discretionary bonuses would be paid to the named executives.

 

Our fiscal 2008 annual awards were established in March 2008 and have similar performance metrics. The target level of diluted earnings per share for this award is based on the range of public guidance disclosed in our press release issued March 5, 2008, and reflects potential adjustments for anticipated non-recurring special charges and/or recoveries. Our annual awards using this performance metric have frequently, but not always, been paid. The target level is believed to be challenging, particularly in light of the current economic environment that might adversely impact retail sales, but achievable.

Long-Term Awards.   We also implement pay-for-performance in the form of long-term awards under our 2002 incentive plan, which is flexible in terms of the types of awards that can be granted and authorizes equity as well as cash-based awards. For awards that are granted in shares, or for which the principal value is the potential increase our share price, our performance objective is supported because we believe that excellent performance should result in an improvement in our share price. Share-based awards are also critical to our objectives of alignment with shareholders and retention, and it is these multiple benefits that makes them such a critical element of compensation for our senior executives. Through fiscal 2007, our long-term awards have been based solely on equity (stock options and restricted stock) or equity plus financial metrics (performance shares), and in March 2008, we introduced a long-term cash component. To determine both the aggregate long-term awards and the mix of those awards for each of the named executives other than the CEO, including ensuring that sufficient equity is included for alignment, we consider the executive’s scope of responsibility, peer group median market data, market competition for the particular position, relative internal equity and leadership continuity positioning.

 

As our award policies must necessarily consider the dilutive impact on shareholders, both management and the committee continue to focus on how to use long-term awards to satisfy our objectives in both an efficient and effective manner. In terms of efficiency, we consider that we have a limited pool of authorized shares in our 2002 incentive plan, and that the grant of “full value” awards such as restricted stock and performance shares, prior to the proposed plan amendment, reduce shares available under the plan by 2.1 shares for every full value share issued. In contrast, the grant of a stock option reduces shares available under the plan on a one-to-one ratio. We also consider how the marketplace values these awards (such as the estimated grant value and discounting) as well as the value perceived by the executive we are seeking to attract or retain. If we offer awards with a lesser value, we will need to issue them in greater quantities. A third consideration is that we receive favorable tax treatment for performance-based compensation. Pursuant to Section 162(m) of the Internal Revenue Code, we are able to deduct for tax purposes the full value our shares issued for long-term performance incentives.

 

Through fiscal 2007, we have used service-based vesting for our stock options and restricted stock, and financial metrics for our performance equity awards; and in March 2008, we introduced a long-term cash component tied to performance (performance units). Notwithstanding our strong preference for equity awards and our intent that performance awards be granted to more than a few select executives, in March 2008 the committee was faced with a devalued stock price and a need to balance our objectives for executive compensation with our concerns that we not cause excessive dilution to shareholders. To reduce the dilutive effect but retain the incentive and performance features of our prior awards, the committee determined to reduce the number of performance shares available under the long-term performance award and to add a cash component. The new performance units are initially based on a target number of shares, and the second component is a cash amount equal to fair market value of the target shares, with the result that there is a 50/50 split between the value of the shares and cash on the grant date. The committee retained the three-year performance period as well as the performance metrics for these new units.

In preparing its recommendations for long-term awards, management used estimated grant date values (discounted based on award type), assuming we will meet our performance incentive targets (applicable to performance shares and performance units). As previously stated, the market values used by management and the committee concerning stock options and stock awards are different from, and unrelated to, the method for reporting compensation in the Summary Compensation Table, and are provided as supplemental information and not as a replacement for the information in that table. The following table provides the estimated market values used by management when information was considered by the committee:

 

 

 

 

For fiscal 2008, consistent with our pay-for performance philosophy, we have increased average long-term compensation for our named executives as a percent of total compensation, and at the same time attempted to come closer to peer group median data for this compensation element. The above table also reflects how the significant decrease in our stock price from March 2007 until March 2008 has resulted in an increased number of shares being awarded, along with a cash component, to achieve a comparable current market value that we believe is necessary to retain our named executives.

 

Our long-term performance and equity grants made in 2007 reflect our increased emphasis on performance-based awards. Particularly for Mr. Fromm, for whom there was no salary increase in 2007, these awards increase the percentage of at-risk pay while simultaneously satisfying the critical concerns of retention, performance and alignment. In making these March 2007 equity grant decisions, the committee considered the relatively recent equity grants made to Mr. Hood upon his commencement of employment, and for Mr. Ausick, recognition of his new job challenges as well as the intent that leadership continuity will be fostered by a strong alignment with shareholders and longer term incentives. Although stock options were granted to Mr. Wood in March 2007 based on his approaching retirement age and the potential benefits of progressive vesting for stock options, the committee has since determined that restricted stock is the preferred equity compensation element for a key senior executive. For the March 2007 meeting of the committee, as previously discussed, management presented its cash and equity award recommendations for the named executives other than the CEO, and provided background information of market value, variance to market, prior award grants, outstanding awards and current stock ownership for all of the named executives. Management considers the information on prior equity grants and outstanding award and stock ownership as being more relevant to determination concerning equity grants than for of other compensation elements.

 

In developing recommendations for the March 2007 performance share grants, our Vice President — Total Rewards first assigned a net current market value for total long-term awards for our CEO, with that value based on the compensation consultant’s recommendation. Next, that aggregate market value of long-term incentives for the CEO was allocated to 50% performance shares and 50% restricted stock, as recommended by our consultant. The exact

number of shares for each element was then determined by using a discounted market value per share (80% for performance shares and 85% for restricted stock). Once the number of performance shares was established for the CEO, the number of performance shares for the other named executives was determined based on internal equity, with our President receiving half as many shares as the CEO, and the Chief Financial Officer and division presidents receiving half as many shares as the President.

Performance Shares and Performance Units.   Since 1999, we have granted annual long-term performance awards that pay out if we reach the targets established for the upcoming three years. Commencing in 2004, we decided to increase the number of executives participating in the performance share plan to extend our “pay for performance” practice, and at 2007 fiscal year-end we had 47 participants in the performance incentive plan. We also use long-term performance awards to encourage executive retention. By issuing these awards each year, our executives have overlapping awards outstanding at any time. In fiscal 2007, we granted performance share awards for a target number of shares, with the maximum payout opportunity being two times the target level of the award, and with the award being payable following the end of the three-year performance period. The ultimate value of this award to the executive at the end of the three-year performance period depends on our actual financial results compared to the previously established targets, and on our share price at the time of payout. In fiscal 2008, we granted performance units comprised of both a target number of shares and a target cash amount, but otherwise similar to the prior awards.

 

Two financial metrics are used for the long-term performance awards, cumulative diluted earnings per share (subject to the committee’s discretion to adjust earnings per share to exclude special charges and/or recoveries) and compound average net sales growth. In addition, there is a minimum cumulative diluted earnings per share level that must be achieved for any payout. The committee selected these metrics because they are key indicators of our financial and operating success, as well as indicators of continued growth of the business, which ultimately drives long-term shareholder value. The committee approved the performance levels for these awards after reviewing with management the prior year’s diluted earnings per share and net sales growth as well as current year estimates. To set the levels for these awards, we estimate earnings for the first (current) year (based within the range of public guidance given in our press release) and then assume an increase of 10% to 15% for the second and third years, depending on the state of the economy and other considerations. For net sales growth, we have consistently used a range of four to nine percent. Provided we achieve the minimum earnings per share at the end of the three-year period, the target share payout can result from different combinations of the performance metrics, with the maximum payment being 200% of the target award. Although our incentive plan allows payment of these awards in shares or at cash equivalent value at the committee’s discretion, our award agreements for 2006-2008 and 2007-2009 have provided for payment in shares only.

 

The performance goals for our long-term incentive awards are difficult and require concentrated focus to improve both earnings and revenue. Based on the fact that only two of the seven performance share awards previously granted have paid out, the minimum diluted earnings per share threshold requirement has proven to be equally challenging.

The following table indicates the performance levels applicable to the 2004-2006 awards considered for a payout determination in March 2007, and for other outstanding performance periods:

 

 

 

 

In March 2007, the committee determined that we did not meet the minimum cumulative earnings per share level for the 2004-2006 performance period, as the level achieved over the three-year period was only $4.30 per share. In making this determination, the committee considered the same adjustments to earnings per share as were used in considering payouts for the annual incentive awards for those years, but also added back stock option expense to the earnings calculation, as those costs were not included in the targets when the award was granted. The share payouts for 2005-2007 were as follows: Mr. Fromm 66,375 shares, Ms. Sullivan 49,781 shares, Mr. Wood 33,188 shares and Mr. Ausick 8,297 shares. The average of the high and low prices of our stock on March 5, 2008 was $15.20.

 

In March 2008, the committee approved payout in shares of the 2005-2007 awards at 147.5% of the target award, based on three-year cumulative earnings per share of $4.99 and three-year compound annual sales growth of 6.7%.

 

In March 2008, the committee granted new performance unit awards for the 2008-2010 period, with each award including a performance share target as well as a cash target, with the two targets having approximately the same market value on the grant date. If the award is earned, the payout on the performance share component will be in shares of our stock and the payout on the cash component will be in cash. These awards also utilize cumulative diluted earnings per share and compound net sales growth as the metrics. As with prior awards, the three-year targets are expected to be difficult to achieve especially given the current state of the economy, and particularly the retail segment.

 

For the other long-term incentive awards outstanding at 2007 fiscal year-end, in preparing our fiscal 2007 consolidated financial statements, management estimated that the 2006-2008 awards will pay out at 75% of target and the 2007-2009 awards will pay out at 50% of the target number of shares at the end of the respective performance period. The estimates for 2006-2008 were lower than previously used when preparing our 2006 consolidated financial statements.

 

A second objective of our compensation program is to ensure that the interests of our executives and the interests of the shareholders are aligned. The compensation elements most directly related to this objective are equity awards in the form of stock options and restricted stock, as well as the equity-based performance awards described above. In addition, we have adopted stock ownership guidelines for our senior executives to ensure the alignment of their interest with those of our shareholders.

Restricted Stock.    Our restricted stock grants place the interests of our executives in close alignment with those of our shareholders, and also provide immediate benefits to executives based on dividends earned and the ability to

vote as a shareholder. In 2006, the committee changed the terms of the restricted stock grants to provide for cliff vesting after four years based on advice from our compensation consultant that the previously utilized eight year vesting schedule was not competitive in the market. The fair value of these awards is established at the date of grant (committee approval date) for financial statement purposes. However, the financial value to the executive is longer term and is realized by the executive based on our stock price when the restrictions lapse. Unlike options, the executive receives the full value of the restricted shares when they vest, regardless of the share price appreciation after the grant date. For fiscal 2007, dividends earned on restricted stock by the named executives was as follows: Mr. Fromm — $17,745, Mr. Hood — $2,730, Ms. Sullivan — $25,725, Mr. Wood — $6,457 and Mr. Ausick — $11,287.

Stock Options.    Although stock options lost some of their appeal as a compensation element after FAS No. 123R imposed a requirement to expense stock options, we still consider them an important element of the suite of equity awards available to our executives, particularly for new hires and promotions. With progressive vesting over four years and a ten year term to take advantage of potential stock price appreciation, options provide unique advantages, particularly for the executive who remains with the Company for a longer period. We generally grant incentive stock options up to the limits allowed by the Internal Revenue Code ($100,000 per year) and issue the balance of the grant amount as non-qualified stock options. By granting the maximum number as incentive stock options, the executive receives favorable tax treatment on the gain, which is not available for either non-qualified options or for restricted stock.

Equity Grant Practices .   We grant equity awards primarily as part of our annual compensation review process, with both equity awards and other compensation elements approved by the committee at its March meeting. In addition, we may issue equity awards when an executive is newly hired, promoted or elevated to a higher scope of responsibility, with such grants made at the first scheduled committee meeting following the hire or change date. For all of these grants, other than for the CEO, our management recommends award amounts to the committee based on peer group, performance and internal equity factors previously discussed with the methodology for these equity grants to the CEO, other named executives described in detail above under the heading “Long-Term Awards”. Although our incentive stock plan specifies that our CEO is authorized to grant individual equity awards up to 50,000 shares in any given year, since 2006, he has chosen not to rely on that authorization and instead has presented all recommended awards to the committee, including new hires and promotions. When the committee grants equity awards, the grant date is the date when the committee meets; thus, the exercise price for stock options and any fair value considerations for other equity awards are based on that date. As directed by our incentive stock plan, the exercise price for stock options is based on the average of the high and low prices for our stock on the grant date. We generally schedule committee meetings at least a year in advance, and therefore have not scheduled meetings for our equity grants based on possession of material non-public information. However, because we have for many years scheduled our March board and committee meetings to be held at approximately the same time as we release our year-end earnings, our annual equity grants have necessarily been granted in close proximity to the release of financial results and earnings guidance. Neither the board nor the committee has adopted a written policy on this matter. Although, our incentive plan already prohibits repricing of stock options, shareholders are being asked to approve an amendment to this provision that would also prohibit a cash payment for cancellation of stock options or stock appreciation rights.

Stock Ownership Guideline.    Our stock ownership guidelines for executives consist of a salary multiple and a retention ratio, both of which vary by position. The salary multiple expects the executive to own, within a four-year period, shares of our stock having a market value at least equal to the specified multiple of salary. Until that minimum market value level is achieved, we expect the individual to retain a specified minimum percentage on the net gain on any equity award. The following table indicates these guidelines:

 

 

The market value guideline is based on the executive’s base salary in effect at time the guidelines became applicable to the executive, and does not increase based on subsequent increases to base salary. The market value of the executive’s ownership is calculated based on current holdings, unvested restricted stock and stock held indirectly in

our 401(k) Savings Plan. We expect executives to comply with the market value requirement within four years of the hire or promotion date when the guidelines become applicable. Mr. Hood, who started in October 2006, is not yet subject to the minimum ownership guideline. Based on our average stock price over the past two years, each of the named executives subject to these guidelines is in compliance with its market value multiple.

 

We encourage executives to remain as employees and contribute their experience, knowledge and understanding to sustaining efforts over a longer period of time. We believe that the benefits we offer may be of great personal and/or financial value to our executives, and therefore important to our compensation objectives. Furthermore, they are offered by many of our competitors for executive talent. However, even for those benefits that are remunerative in nature, such as the Pension Plan, the SERP and the 401(k) Savings Plan, the committee does not consider their market or financial value in making annual executive compensation decisions because these benefits are considered as have been previously earned and not currently payable. However, these benefits make our compensation program competitive in the market and are important as a retentive element.

Equity Awards.    All named executives and certain other executives (approximately 75 in total as of fiscal 2007 year-end) participate in our equity award opportunities, all of which are made pursuant to our incentive stock plans and are described above and elsewhere in this proxy statement. Periodically, we seek approval from shareholders to increase the number of shares available for awards to be granted, and such a proposal is on the agenda for this Annual Meeting. We believe that equity awards serve our retention objective because they provide for vesting over time. By utilizing a combination of these equity awards, we facilitate equity ownership by our executives, our executives benefit from the improvement in share price along with our shareholders, and to the extent that certain awards are service-based rather than performance based, we encourage and reward continued service. Our incentive stock plans also have change in control provisions that accelerate vesting of outstanding stock options and restricted stock, and provide for annual cash incentives and performance shares to be paid at target level. These changes in control provisions apply to all persons holding these awards, not just the named executives. Unlike the change in control provision described below with respect to our Severance Agreements, the incentive plans have “single trigger” provisions that accelerate vesting of outstanding awards upon the event of change in control, even if the employee is not terminated. While the definition of change in control for the incentive stock plan is slightly different from the definition in our Severance Agreements, we believe that the underlying purpose is the same, which is to allow executives to consider objectively all proposals for change in control of the Company and with reference only to the interests of the shareholders.

Retirement Program.    Our broad-based tax-qualified pension plan is available to substantially all employees who have satisfied the plan’s eligibility requirements. Participants who have completed five continuous years of employment with us are vested and earn the right to receive unreduced benefits upon retirement at 65 or later, and a reduced benefit upon retirement between the ages of 55 and 65. We believe that this plan serves to attract and to retain employees for several reasons, including that it is a benefit that is no longer commonly available, it has a five-year vesting requirement to receive any benefits, and the benefits available increase with time, particularly if the participant remains an employee through retirement age. The terms of the Retirement Plan are described in “Executive Compensation — — Retirement Plans” under the sub-heading “Pension Plan,” and the present value of current account balances are included under the sub-heading “Pension Benefits Table.”

Supplemental Executive Retirement Program (SERP ).    The SERP pays eligible employees the difference between the amount payable under the Retirement Plan and the amount they would have received without the application of the compensation and benefit limitations required under the Retirement Plan pursuant to Sections 415 and 401(a)(17) of the Internal Revenue Code. There is a five-year vesting requirement, which is similar to our pension plan, and that requirement supports the retention objective of our program. In fiscal 2007, participation in the SERP was limited to a group of approximately 20 key management employees, including the named executive officers. Of the named executive officers, Messrs. Fromm, Wood and Ausick and Ms. Sullivan participated in the SERP prior to 2006, and based on their earlier enrollment date, they are eligible for enhanced benefits. These enhanced benefits include an increase in the formula for salary in excess of the covered compensation (being 0.64% rather than the 0.60% used for our Pension Plan) an unreduced early retirement benefit at age 60 (if the participant has at least 10 years prior service) and an increased death benefit, as more fully described under the heading “Supplemental

Executive Retirement Plan.” Commencing with calendar year 2006, the committee amended the SERP to eliminate the enhanced benefits for new participants based on an analysis by Towers Perrin, our pension consultants which indicated the enhanced benefits exceeded those provided at peer companies; however, we “grandfathered” then-existing participants. As currently operated for newer participants (that is, without the enhanced benefits), the SERP functions as a restoration plan similar to plans maintained by many other companies. The SERP has change in control provisions that provide for an enhanced benefit, with payout of the present value of the current accrued benefit within 30 days and without regard to vesting restrictions. These provisions are intended to reassure executives that they will receive previously deferred non-qualified compensation that is payable out of general assets and which may be a substantial portion of the executive’s expected retirement.

 

The five year vesting requirement of the SERP serves our retention goals, and the enhanced benefits available to four of our named executives are also significant for that purpose. For many years, the SERP has contained a provision for acceleration of vesting and payment within 30 days following a change in control for the same reasons that we adopted Severance Agreements, which is to keep our executives focused on acting in the shareholders’ best interests rather than be concerned with personal benefit. As indicated above with respect to our Severance Agreements, we believe that change in control provisions are beneficial to the Company and have particular significance for the SERP because it is an unfunded plan and requires a cash payout from the Company’s general assets.

 

In 2008, the committee amended and restated the SERP to change the definition of change in control to be in accord with our severance agreements, to make conforming changes so that cash deferred under the newly adopted Deferred Compensation Plan would be included as compensation earned, and to reflect changes as a result of amendment to Section 409A of the Internal Revenue Code. The terms of the SERP are described in “Executive Compensation — Retirement Plans” in the sub-section entitled “Supplemental Executive Retirement Plan (SERP),” with the present value of the current accrued benefit included under the sub-heading “Pension Benefits Table.”

Severance Agreements .    We do not have employment agreements with any executives, but for certain executives we utilize severance agreements as a means to retain and attract executives in a competitive market for talent. We use different forms of these agreements depending on the executive’s position. In exchange for the severance benefits, the terminated executive agrees to a two-year non-compete agreement post-termination. The committee approved these agreements after comparing the executive compensation consultant’s market analysis of common post-employment pay practices to the existing agreements. Based on that market analysis, the committee determined that the previous agreements provided change in control and general severance benefits that were above market practice and adopted the consultant’s recommendations to make changes that were consistent with the market analysis.

 

Pursuant to the severance agreements with our named executives, in the event of an involuntary termination by the Company without cause, the executive will receive cash severance, payment of the current year’s annual incentive at target, and two years’ accelerated vesting for stock options and restricted stock. We believe these benefits constitute fair severance protection to allow for transition to new employment post-termination. For Mr. Fromm only, these severance benefits are also payable in the event he terminates within ninety days after “good reason.” This additional basis for severance is available to Mr. Fromm because his employment agreement in effect in 2006 included a similar provision. The provisions of these severance agreements are described in detail in “Executive Compensation — Payments on Termination or Change in Control” under the sub-heading “Severance Agreements” and the estimated amounts payable as of fiscal 2007 year-end under various termination scenarios are included in the chart under the sub-heading “Estimate of Payments Upon Termination and Change in Control.”

 

Our severance agreements provide a higher level of severance benefits to the named executives if the termination occurs within two years after a change in control. These change in control benefits are “double trigger” provisions and only apply if, within the two year period following the change in control, the executive is terminated without cause or if the executive terminates for “good reason.” The higher level of benefits is available because the likelihood of termination is increased following a change in control. We believe that these change in control arrangements preserve morale and productivity, provide a long-term commitment to job stability and financial security, and encourage retention in the face of the potential disruptive impact of an actual or potential change in control. Our use of change in control provisions attempt to eliminate personal conflicts of interest, by ensuring that the interests

of our executives will be materially consistent with the interests of our shareholders when considering corporate transactions. We believe that having both single trigger (in our 2002 incentive plan, SERP and Deferred Compensation Plan) and double trigger change in control provisions is consistent with market practices and serves our retention objectives without providing windfall benefits to executives who continue as employees of the acquiring company. We also believe the single and double trigger benefits may be attractive to potential acquiring companies that place significant value on retaining members of our executive team.

 

While we believe that change in control benefits and our severance agreements are important to our overall compensation package, management does not consider these arrangements in making annual recommendations on key compensation elements as these benefits are contingent on circumstances beyond the executive’s control.

401(k) Savings Plan.    Substantially all of our salaried employees, including the named executive officers, are eligible to participate in the Brown Shoe Company, Inc. 401(k) Savings Plan. Although we consider this to be a basic benefit offered to employees, we match employee contributions up to 6% of salary, subject to Internal Revenue Code limits, which serves our retention objective. The Company matching amount is included in the Summary Compensation Table in the column “All Other Compensation,” although the actual amount is not payable until termination or retirement. The terms of the 401(k) Plan are described in “Executive Compensation — Retirement Plans” under the sub-heading “Savings Plan (401(k)).”

Deferred Compensation .    Effective January 1, 2008, the Company is offering a deferred compensation plan for a selected group of employees, and the committee has authorized deferral of up to 50% base salary and 100% of cash incentive compensation. The plan is intended to promote retention by providing a long-term savings opportunity on a tax-deferred basis, and at the same time provide flexibility to the participant in terms of the period of deferral and the form of payout (lump sum or annual payments up to 15 years). Although this plan is an unfunded plan and benefits are subject to forfeiture in the event of bankruptcy or liquidation, we have established a “Rabbi Trust” that allows participants to select investments similar to those offered in our 401(k) Savings plan. This plan was offered in December 2007 to 41 executives, and 11 executives have enrolled (including three of our named executives). The terms of this plan and the salary amounts deferred in January 2008 for the three named executives that participate in this plan, are described in “Executive Compensation — Retirement Plans” under the sub-heading “Non-Qualified Deferred Compensation.” The committee approved this plan because it is a benefit readily available in the marketplace and likely to be of value to the individuals we seek to attract and retain as executives.

Executive Disability.    The executives receive additional disability insurance to supplement the Company-sponsored program that has a maximum of $20,000 per month. The executive disability program provides an additional $4,000 per month and the executive may be entitled to receive a catastrophic benefit of $8,000 a month. The executive pays the cost of this program and the Company reimburses the executive for the cost of the premiums. The Company’s cost to provide this benefit is included in the “All Other Compensation” column of the Summary Compensation Table and note 6 to that table.

 

We provide various perquisites to key executives for a variety of different reasons, including our intent to attract and retain executives with a comprehensive compensation package. The perquisites provided include:

Personal Use of the Company Plane.    Our CEO, Mr. Fromm, and a limited number of key employees approved by Mr. Fromm may use the Company plane for personal use. The ease and convenience of the use of the Company plane balances the amount of time our executives spend on Company business. In accordance with the Internal Revenue Code, we must use a prescribed value for income tax purposes for personal use of the plane, and that amount is included on the executive’s W-2. This prescribed value is known as the “Standard Industry Fare Level” or SIFL rate, which is intended to approximate the cost of a first class airfare on a commercial airline. In the Summary Compensation Table, in the column for “All Other Compensation,” we include the Company’s incremental cost to provide this benefit, and note 6 to that table explains our method of calculating incremental cost, our incremental cost for this benefit for each named executive, and each executive’s taxable income for the receipt of this benefit.

Financial and Tax Planning Services .    Commencing in 2004, we reimburse our named executives for financial and tax planning services. This benefit was initially offered to assist executives with the complexities of the various

equity awards and compliance with our Stock Ownership Guidelines. The Company’s cost for this benefit is included in the “All Other Compensation” column of the Summary Compensation Table, and note 6 to that table.

Club Memberships .    Club memberships for dining clubs and/or country clubs have been provided to a limited number of key executives, including all of the named executives. The intention of the club memberships is to provide access to a facility for more private business and business entertainment meetings. It is expected that the use of the club be at least 90% for business use and that personal use be reimbursed to the Company. The Company’s incremental cost for personal use of club membership is included in the executive’s W-2, and is included in the “All Other Compensation” column of the Summary Compensation Table and note 6 to that table. The Company’s aggregate cost for club memberships and monthly dues for all of the named executives for fiscal 2007 was $36,239.

Executive Physicals.    Certain members of management including the named executive officers are eligible to receive reimbursement of certain out-of-pocket expenses related to periodic physical exams that are not covered by a Company-sponsored medical plan. In fiscal 2007, the Company had no reimbursements for this benefit for the named executives.

 

The information in this discussion and analysis contains statements regarding future Company performance targets and goals. These targets and goals are disclosed in the limited context of the Company’s compensation programs and should not be understood to be statements of management’s expectations or estimates or results or other guidance. The Company specifically cautions investors not to apply these statements to other contexts.

 

The committee’s policy is to establish and maintain a compensation program that maximizes the creation of long-term shareholder value. The committee believes executive compensation programs should serve to achieve that objective, while also minimizing any effect of Section 162(m) of the Internal Revenue Code. Generally, Section 162(m) provides for an annual $1 million limitation on the deduction an employer may claim for compensation of executive officers unless it is performance-based. For fiscal 2007, both Mr. Fromm’s and Ms. Sullivan’s non-performance-based compensation exceeded the annual $1 million limitation, with the result that we were not able to deduct $163,722 of income realized by Mr. Fromm and $141,690 in taxable income realized by Ms. Sullivan. The annual incentive plan payment qualifies as performance-based compensation as defined in Section 162(m) because the 2002 incentive plan, approved by shareholders, is designed to comply with the provisions of 162(m) to ensure tax deductibility. The committee considers it important to retain flexibility to design compensation programs that are in the best interest of the company and the shareholders.

Report of the Compensation Committee

 

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

W. Patrick McGinnis, Chair

Joseph L. Bower

Julie C. Esrey

Patricia G. McGinnis

Michael F. Neidorff

 

The following summary compensation table shows the compensation paid for fiscal 2006 and 2007 to Mr. Fromm, Mr. Hood, and the other three most highly compensated executive officers who were serving as executive officers as of February 2, 2008. The Company has not entered into any employment agreements with any of the named executive officers.

 

The named executive officers were not entitled to receive bonus payments for fiscal 2006 and 2007 other than those described as “Non-Equity Incentive Compensation.”