CUMMINS INC.
500 JACKSON STREET, BOX 3005, COLUMBUS, INDIANA 47202-3005
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of Cummins Inc. will be held at the Company’s Technical CenterCompany's Columbus Engine Plant located at 1900 McKinley500 Central Avenue, Columbus, Indiana, on Tuesday, May 9, 2006,13, 2008, at 11:00 a.m., local time, Eastern Daylight Savings Time, for the following purposes:
2008;
Only shareholders of Common Stock of the Company of record at the close of business on March 20, 200624, 2008 are entitled to notice of and to vote at the meeting.
Shareholders of Common Stock who do not expect to be present in person at the meeting are urged to vote their shares by telephone, via the Internet, or by completing, signing and dating the enclosed proxy and returning it promptly in the envelope provided.
The proxy may be revoked by the shareholder giving it at any time before the voting. Except with respect to shares attributable to accounts held in the Cummins Inc. and Affiliates Retirement and Savings Plans, any shareholders entitled to vote at the meeting who attend the meeting will be entitled to cast their votes in person.
| MARYA M. ROSE, | Secretary | ||
| April 3, 2008 |
|
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY
MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD
ON MAY 13, 2008: the Annual Report and Proxy Statement
are available at www.ematerials.com/cmi
April 7, 2006
CUMMINS INC. 500 JACKSON STREET, BOX 3005, COLUMBUS, INDIANA 47202-3005 This proxy statement is being furnished in connection with the solicitation by the Board of Directors of Cummins Inc. (the Holders of the Each share of Common Stock represented by a properly executed proxy will be voted at the Annual Meeting in accordance with the instructions indicated on that proxy, unless such proxy has been previously revoked. If no instructions are indicated on a signed proxy, the shares represented by such proxy will be voted as recommended by the Board of Directors. A shareholder may revoke the proxy at any time before it is voted by delivering to the Secretary of the Company written notice of such revocation. This notice must include the number of shares for which the proxy had been given and the name of the shareholder of such shares as it appears on the stock certificate(s), or in book entry form on the records of the Company's stock transfer agent and registrar, Wells Fargo Shareowner Services, evidencing ownership of such shares. In addition, except with respect to shares attributable to accounts held in the Cummins Inc. and Affiliates Retirement and Savings Plans, any shareholder who has executed a proxy but is present at the Annual Meeting will be entitled to cast The following table identifies those shareholders known to the Company to be the beneficial owners of more than five percent of the Common Stock of the Company and shows as to each such shareholder as of December 31, Amount and Nature Percent of Class State Street Bank and Trust Company 6,318,806 (1) 14.19 % Barclays Global Investors N/A 4,984,629 (2) 11.19 % Lord, Abbett & Co. 3,059,748 (3) 6.87 % FMR Corporation 2,615,281 (4) 5.87 % LVS Asset Management 2,447,732 (5) 5.50 % Capital Research and Management Company 2,413,190 (6) 5.42 % Nominee Robert K. Herdman was elected by the Board of Directors on February 12, 2008 upon recommendation of its Governance and Nominating Committee to serve as a director until the Annual Meeting. Mr. Herdman was recommended by the Committee and elected by the Board following a review of his qualifications under the standards of the Company's Corporate Governance Principles referenced on page 7 of this Proxy Statement and a review of his independence. The Corporate Governance Principles are available on the Company's website http://www.cummins.com and are otherwise available in print to any shareholder who requests them. Effective last year, the Company changed the method by which directors are elected by amending its By-Laws. The changed procedures apply to an uncontested election, which is one in which the number of nominees does not exceed the number of directors to be elected. In an uncontested election, any nominee who does not receive a majority of the share votes cast shall promptly offer his or her resignation to the Board following certification of the shareholder vote. A vote of the majority of share votes cast means that the number of shares voted "for" exceeds the number of votes "against" that director. Under the amended By-Laws, abstentions and broker non-votes are not counted as a vote "for" or "against" a director. The Governance and Nominating Committee of the Board of Directors will promptly consider the resignation offer and make a recommendation to the Board. The Board will act on the Governance and Nominating Committee's recommendation within 90 days following certification of the shareholder vote. Thereafter, the Board will promptly disclose its decision whether to accept the director's resignation offer. The director who tenders his or her resignation pursuant to this provision will not participate in the Governance and Nominating Committee's recommendation or Board decision whether to accept his or her resignation offer. The Board of Directors The names of the nominees for directors, together with certain information regarding them, are set forth in the following table. Biographical sketches of these nominees, which include their business experience during the past five years and directorships of other corporations, are provided on pages Name and Occupation Age First Year Amount and Percent Stock Units Total Robert J. Darnall 68 1989 7,927 * 3,379 11,306 Retired Chairman and Chief Executive Officer of Inland Steel Industries, basic steel manufacturer, processor and distributor John M. Deutch 68 1997 9,679 (3) * 0 9,679 Institute Professor, Massachusetts Institute of Technology Alexis M. Herman 58 2001 4,437 * 0 4,437 Chairman and Chief Executive Officer of New Ventures, independent consulting firm F. Joseph Loughrey 56 2005 79,388 * 0 79,388 President and Chief Operating Officer of Cummins William I. Miller 49 1989 30,036 * 842 30,878 Chairman and Chief Executive Officer of Irwin Financial Corporation, financial services company Georgia R. Nelson 56 2004 1,483 * 0 1,483 President and Chief Executive Officer of PTI Resources, LLC, independent consulting firm Theodore M. Solso 59 1994 168,797 (4) * 0 168,797 Chairman and Chief Executive Officer of Cummins Carl Ware 62 2004 1,363 * 0 1,363 Retired Executive Vice President, Public Affairs and Administration, The Coca-Cola Company J. Lawrence Wilson 70 1990 20,024 * 3,589 23,613 Retired Chairman and Chief Executive Officer, Rohm and Haas Company, specialty chemical manufacturing 9. The Company has long believed that good corporate governance is important in ensuring that it is managed for the long-term benefit of its shareholders. It continuously reviews the Independence The Board is composed of a majority of directors who qualify as independent directors In determining independence, each year the Board affirmatively determines whether directors have no Board of Directors and Committees The Board of Directors held Under the Company's stakeholders. The functions performed by certain of these committees and the members of the Board of Directors currently serving on these committees are as follows: Audit Committee. The members of the Audit Committee are R. J. Darnall (Chairman), A. M. Herman, G. R. Nelson, C. Ware and J. L. Wilson. All members are Independent Directors. The Board of Directors has determined that Mr. Darnall and Mr. Wilson are and procedures of the Company. The Audit Committee reviews the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. It also monitors the independence and performance of the external and internal auditors. The Audit Committee met Compensation Committee. The members of the Compensation Committee are A. M. Herman (Chairman), R. J. Darnall, G. R. Nelson and J. L. Wilson. All members are Independent Directors. The Compensation Committee administers and determines eligibility for, and makes awards under, the The Committee maintains a formal process to ensure the independence of the input received from executive compensation consultants with the following stipulations regarding any engagements the Committee enters into with executive compensation consultants. The Committee: The Compensation Committee met Governance and Nominating Committee. The members of the Governance and Nominating Committee are J. and makes recommendations to the Board with respect to membership, size, composition, procedures and organization of the Board of Directors. The Committee uses its network of contacts to identify potential As required by the Corporate Governance Principles, the Committee must recommend directors such that the Board is comprised of a majority of Committee members The Governance and Nominating Committee met Executive Committee. The members of the Executive Committee are T. M. Solso (Chairman), W. I. Miller and J. L. Wilson. The Executive Committee is authorized to exercise the powers of the Board of Directors in the management and direction of the business and affairs of the Company during the intervals between meetings of the Board of Directors. It also acts upon matters specifically delegated to it by the full Board of Directors. The Executive Committee did not meet during Other Committees. In addition to the Committees described above, the Board of Directors has established the following committees: Finance Committee (W. I. Miller (Chairman), R. J. Darnall, J. M. Deutch, C. Ware and J. L. Wilson); Proxy Committee Communication with the Board of Directors.Shareholders and other interested parties may communicate with the Board of Directors, including the Lead Director and other non-management directors, by sending written communication to the directors c/o the The Secretary shall maintain and provide copies of all such communications, received and determined to be forwarded, to the Governance and Nominating Committee in advance of each of its meetings and report to the Committee on the number and nature of communications that were not determined to be forwarded. The Company has a practice of requiring all directors standing for election at an Annual Meeting of Shareholders to attend such meeting. All The table on the following page sets forth information regarding the directors' compensation during the Company's last completed fiscal year. Each director who As part of the The Company has a Each non-employee director will be required to maintain direct ownership of shares of Common Stock equal to or greater in value to three (3) times his or her annual retainer fee. This ownership requirement must be achieved by 2010 for directors who were first elected prior to 2004. Directors first elected after 2003 must comply with the requirement within six (6) years of becoming a member of the Board. When future accruals under a retirement plan for non-employee directors were terminated several years ago, directors with vested benefits were given an option to have their accrued benefits retained in the plan for future payment or to convert the present value (using the same actuarial assumptions as are applicable to the payment of pension benefits to the dividend equivalents, are evidenced by bookkeeping entries. Recipients have no voting or investment power with respect to the stock units. The value of each (3) These amounts represent "Above Market" earnings in the Deferred Compensation Plan, as described above. "Above-market" is defined as the amount of earnings that exceeded 120% of the In addition, premiums totaling $44,640 were paid on life insurance policies in connection with Mr. Deutch's participation in the Cummins Inc. Charitable Bequest Program, as described above. Policies for all other non-employee directors who Objectives and Principles of Cummins Executive Compensation Program The Company is committed to the concept of pay for sustained In addition to pay for performance the Achieving the Performance-Based Principle Our program strongly supports pay for performance. The more senior the position, the more pay should be "at risk", dependent on Company performance. To illustrate how the program achieves these objectives, following are the percentages for each of the three elements that make up target total direct compensation opportunity provided to the CEO and the other Named Executive Officers in 2007 (excluding benefits and perquisites). Overview of How Compensation is Determined Senior Management (the management Executive Committee) recommends compensation actions to the CEO for officers in the areas for which they are responsible. Taking these recommendations into consideration, the CEO makes recommendations to the Compensation Committee regarding each officer (including members of the Executive Committee). These recommendations are based on assessments of individual performance and potential to assume greater responsibility, as well as market data for each position. The CEO discusses the recommendations and performance of the officers with the Committee. As part of its review process, the Committee has access to input of an independent consultant, Hewitt Associates, retained by the Committee (the role of the independent consultant is described in more detail in the "Corporate Governance" section of this proxy). The Committee reviews the recommendations, may make modifications, and makes the final decisions regarding each officer's compensation. The CEO, on an annual basis, discusses in detail his priorities and objectives with the Governance and Nominating Committee (the members and responsibilities of the Governance and Nominating Committee are described beginning on page 6 of this Proxy Statement). The Governance and Nominating Committee formally reviews the CEO's performance annually. This review is based on how well the CEO performed against specific objectives, which includes the progress made by the Company in implementing its business strategy and achieving its business objectives, both short-term and long-term. This review, which is reported in detail to the Compensation Committee, considers both quantitative and qualitative performance matters and is a key factor in setting the CEO's compensation. Specific business objectives and goals that were part of the CEO's performance review for 2007 include the financial performance of the Company, progress towards achieving the Company's long-term strategic objectives and the development of key leadership talent. The Committee meets in executive session to determine the compensation of the CEO. In this discussion, the Committee has access to data and advice from its Consultant. No recommendations are made by any members of management regarding the compensation of the CEO. The Committee makes the final decisions regarding the CEO's compensation. The Committee regularly reviews all elements of the executive compensation program and makes changes it deems appropriate. The reviews include comparisons against a broad group of U.S. manufacturing companies prepared by the Consultant, including selected market practices, for the following: The Committee has determined that if any of the Company's financial statements are required to be materially restated resulting from the fraudulent actions of an officer, the Committee may direct that the Company recover all or a portion of an Award or any past or future compensation from any such officer with respect to any fiscal year of the Company for which the Company's financial results are adversely affected by such restatement. Tax Considerations Section 162(m) of the Internal Revenue Code Therefore, that portion of the CEO's Base Salary that exceeded one million dollars in 2007 will not qualify for tax deductibility under Section 162(m). As The Each of our officer positions is compared to the same job using regression analysis to calculate median levels of Base Salary, target Annual Bonus participation and Longer-term grant target value for the scope of responsibility for each of our positions among U.S. manufacturing companies in the Consultant's survey database. The one hundred seventy-eight U.S. manufacturing companies in the database cross nineteen industry classifications and have annual sales volumes ranging from $350 million to $207 billion, with average sales of $13.8 billion. The Company and the Committee believe that the broader survey base of major U.S. manufacturing companies provides a reasonable and more useful measure of market compensation and allows more consistent year-to-year market comparison than would a smaller peer group of companies. The survey's statistical tools calculate market compensation for the specific levels of responsibility for each position. For example, the total sales of the Company are used to calculate the market median compensation levels for officers who have responsibility for the Corporation; the sales volume for an operating segment would be used for officers responsible for that business. As stated earlier, the CEO makes compensation recommendations to the Committee in its February meeting for each officer, including the Named Executive Officers, excluding himself. The recommendations are based on individual performance and potential to assume greater responsibility, as well as market data for each position. The Committee makes the final compensation determinations based on the market data and a discussion of individual and Company performance. The officer compensation review occurs annually at the February Compensation Committee meeting since this is the first Committee meeting after year-end and provides the earliest opportunity to review and assess performance for the previous year. During the February meeting, the Committee also meets in executive session to determine compensation for the CEO based on performance assessment and market data. Each element of pay described below is intended to provide total compensation for each position at the median of the amounts companies of similar size in the survey would pay the same position. 1. Base Salary Base Salary is reviewed Individual performance, assessments of each officer's capability to assume larger roles and market data for each position are prime factors considered by the Committee each year in determining the amount of Base Salary increase, if any, to be provided. 2. Annual Bonus This element is designed to link executive pay to the annual performance of the Company. The Payout Factor is calculated based on a formula ROANA is calculated as follows: The numerator is Segment EBIT, which for compensation purposes is defined as Payout Factors are determined using actual ROANA measures compared to plan target ranges. The Annual Bonus is calculated as For example: Participation rates are based on the same survey data as base salaries and are set at the median of the range for like positions in similarly-sized companies. The participation rates for 2007, expressed as a percentage of Base Salary paid, were: For officers working outside the corporate staff, 50% of their Annual Bonus is based upon the performance of their specific operating unit and 50% of the bonus is based upon the consolidated Corporate Plan. The definition of performance is the same for both the operating and corporate elements of the plans. We believe that the measure of performance needs to balance both profit and stewardship of the Company's assets. As such, we use a defined ROANA measure as described above on which to determine the payout factors in the operating plans. In setting the financial targets for the Annual Bonus each year, the Committee reviews the levels of difficulty of the operating plan for each unit, considering the markets involved and the current economic environment. The Committee then establishes appropriate stretch targets to receive a 1.0 payout. The consolidated Company (Corporate) performance is the weighted average payout of the operating unit measures. Setting the targets with appropriate levels of difficulty underscores the importance of achieving or exceeding the performance commitments each operating segment establishes annually. This approach requires increasingly difficult targets during economic upturns, and realistic goals that maximize performance during cyclical downturns. As evidence of the difficulty of the targets, over the last ten years the 1.0 target level has been achieved or exceeded 50% of the time. The Annual Bonuses for T. M. Solso, F. J. Loughrey, and J. S. Blackwell were based on the Corporate weighted average formula. The Annual Bonuses for T. Linebarger and J. D. Kelly were based one-half on the Corporate weighted average formula and one-half on the performance of the Power Generation Operating Segment for Mr. Linebarger and one-half on the performance of the Engine Operating Segment for Mr. Kelly. The Payout Factor for the The Committee has the flexibility to establish performance measures annually that are appropriate for the Company's financial goals, underscoring the principle of pay for performance. The Committee also determines certain exclusions from operating performance measures which result from decisions made at the Corporate level, such as acquisitions, divestitures, or joint venture formations in the initial year if they were not anticipated at the time targets were established, pension plan contributions above required levels, and convertible debt. Certain Corporate expense allocations are also excluded from the individual operating unit performance calculations. In 2007, the ROANA calculations excluded the impact of assets and liabilities associated with corporate hedging programs, pension contributions above required levels and the impact of acquisitions or divestitures not contemplated at the time the performance measures were established. By achieving performance approximately 16% greater than the target levels, the Payout Factor for each of the Named Executive Officers varied between 1.9 and 2.0. The Components Group Segment ROANA represents the weighted average performance targets for the businesses within that segment. Performance targets established for the Annual Bonus Plan for 2008 are well within the targeted ranges for the Company, In order to earn a 1.0 target Payout Factor for 2007, the targets set in the operating plan would have required a level of earnings before interest and taxes ("EBIT") as a percentage of Sales greater than achieved in nine out of the last ten years of the Company's performance, while prudently managing the Company's assets (EBIT is the numerator in calculating the ROANA performance measure). The Payout Factors are capped at 2.0. Performance required for the maximum payouts in 2007 represent levels that significantly exceed the target levels, 16% greater than the 1.0 level cumulatively. The threshold payout of .1 (10% of the Target Payout) would have required performance that was In addition to the In order to comply with the requirements of Section Bonus Plan called the Senior Executive Bonus Plan. The Senior Executive Bonus Plan differs from the Annual Bonus Plan in The Performance cash awards are granted as Target Awards expressed as a dollar amount for each participant. Multiples of the Target Award are earned and paid in cash, ranging from zero to two times the Target Award, based on how well the Company achieves performance measures established by the Committee over a specified measurement period. Performance cash awards are granted under the The Target Award will be paid if the Company achieves the level of Return on Equity provided by achieving a target set based on (a) the agreed target level for the second year of the Award Cycle, measured cumulatively for the two-year period. The ROE for each Award Cycle is calculated as the cumulative Net Income for the two-year period divided by the Average Equity for the two-year period, divided by two. The Average Equity for the two-year award cycles is calculated using nine points: the beginning of the first year of the Award Cycle and each of the eight quarter-ending values. The numerator is Profit after Tax (PAT) for the two-year period. The equity calculation is adjusted for changes to equity related to unrecognized Pension and Other Post Employment Benefit (OPEB) amounts and equity transactions not built into the Operating Plan such as Common Stock share repurchases. The degree of difficulty for achieving the Annual Operating Plan was discussed in the Annual Bonus discussion. As an indication of the difficulty of the targets, the Payout Factors have averaged .785 over the last ten years. The performance cash payouts made in 2007 were for the 2005 - 2006 Award Cycle. A 2.0 Payout Factor for that Award Cycle required performance equal to 139% of the target performance level. The Target Award was set at 18% ROE. Actual performance for 2005 - 2006 was 26.0% ROE. For the 2007 - 2008 Award Cycle, with payout in 2009, the Target Award requires an ROE of 17.87% for the two-year period, reflecting the impact of U.S. emissions regulations changes in 2007. The maximum that can be paid is 200% of the Target Award for performance that As is the case with respect to the Annual Bonus Plan, In 2003 shareholders approved the 2003 Stock Incentive The Target Award of performance shares granted to each participant in Officers are prohibited from engaging in forms of hedging or monetization transactions involving the establishment of a short position in the Company's securities, such as zero-cost collars and forward sale contracts. Longer-term Grant Methodology Longer-term grants have been made at the February meetings since 1997. The practice has been to make compensation decisions at the earliest Compensation Committee meeting after the end of the year, based on assessments of each officer's performance and ability to assume additional responsibility, and a review of market data for each position. When stock options were components of the Longer-term grants (prior to 2004), they were priced as the average of the High and Low trading price of the Company's stock on the date the Committee made the grants at their February meeting. The regular annual grant date removed any subjectivity regarding the current market price of the Company's stock during the period when stock options were part of the grants. In determining the appropriate market levels for Longer-term grants, the Company uses a valuation methodology developed by the Consultant to compare the value of the grants to the market. This method calculates a present value for the performance cash and performance shares. A six-month average price of the Company's stock is used in calculating the present value of the performance shares for market comparisons. The projected value of the Longer-term grants is evenly divided between performance cash and performance shares, each providing one-half. Grant amounts under the Committee reviews the proportion of total compensation that is dependent on Company performance in determining the allocation of the compensation opportunity among each of the ROE has been the measure on which Longer-term grants are earned because we believe that it provides a measure of profitability relative to the shareholder's stake in the Company over the performance period, and historical data have indicated a strong, positive correlation between ROE and Stock Price growth at the Company. We believe that the performance shares forge a strong linkage of interests between management and shareholders since the value participants actually receive is determined by both performance relative to the pre-established financial goal, as well as our stock price. We believe that a two-year performance measurement period provides the ability to set targets that are focused and more accurately planned than could be done for longer timeframes. Furthermore, the additional year of restriction for earned performance shares beyond the two-year performance period provides a longer retention time-frame for the participants, and ensures continued focus on stock price growth for that period. Stock Ownership Requirements The The ownership requirements Officers have five years from the date of their appointments to All of the Named Executive Officers have met their stock ownership requirement. We also adopted formal stock ownership guidelines for members of the Board of Benefits and Perquisites same plans as other exempt employees. The In addition to these benefits, the Company's officers participate in the Supplemental Life Insurance and Deferred Income Program. The program is provided to attract and retain key leadership talent in senior positions. This program provides additional life insurance equal to three times base salary while the officer is an active employee, and additional retirement payments, which are offset by and coordinate with payments from the Company's regular retirement plans. The supplemental retirement provision "tops up" the pension available from the Company's regular pension plans to provide a total benefit based on a percentage of the officer's highest average consecutive sixty-month (five years) Base Salary and Annual Bonus The Company's officers, including the Named Executive Officers, are eligible to participate in the Company's non-qualified Deferred Compensation Plan, as are all exempt U.S. employees whose salaries equal or exceed $100,000. This program is designed to provide opportunities for capital accumulation and financial planning, and to meet competitive market practice. Perquisites do not comprise a major element in our Executive Compensation Program. The Company provides support for the services of a financial counselor. The financial counselor provides estate planning and tax planning advice and tax return preparation. The fee amounts for these services are detailed in the Summary Compensation Table. This program assists executives in making prudent financial planning for their future. It permits officers the support of financial planners who are familiar with the Company's plans, improving the accuracy of the financial planning and tax return preparation. Company officers may use Company aircraft for reasonable personal use, following a prescribed approval process. The Committee reviews the level of usage annually. Ability to use a Company plane for limited personal use saves time and provides additional security for executives. The value reportable to the Securities and Exchange Commission is detailed in the Summary Compensation Table. Executive Physical Examinations are available for all officers. The Committee considers this practice to be good corporate governance. Post-Employment Compensation: Severance Arrangements The Company does not have formal severance agreements with any of the Named Executive Officers. All aspects of severance for officers whose employment terminates other than by standard retirement are reviewed with and approved by the Committee. The Committee has established that any of the Named Executive Officers, if terminated other than for Cause, would receive twelve months Base Salary as severance, paid as salary continuation; pro-rated portion of Annual Bonus for the portion of the year prior to termination, payable at the normal time and using the same payout factors as for all other participants; vesting of any outstanding restricted stock, if the vesting date occurs during the period of severance. All of these elements would require a signed Release of Claims Agreement. Confidentiality and Non-Compete Agreements Each officer has signed an Agreement neither to disclose the Company's Confidential Information nor to accept employment with certain competitors during, and for twelve months subsequent to, the time the officer is employed by the Company. Change in Control Compensation Protection Provisions The Company's Change in Control Compensation Protection Plans require the occurrence of two events to trigger payments: (1) a Change in Control of the Corporation, and (2) termination or reduction in responsibilities and circumstances of the officer within two years of the Change in Control. In the event of a Change in Control, certain benefits would be provided to officers whose employment is terminated, or whose responsibilities and position are reduced, within two years of the event. Such officers would receive severance equal to one year's salary and Annual Bonus at a 1.0 Payout Factor. The Company would also provide for the full vesting of certain insurance and retirement benefits and the continuation for the one-year severance period of certain other employee benefits. All of the Named Executive Officers (the five officers listed in the compensation tables in this In addition to the severance provisions of the Change in Control Compensation Protection Plans, there are provisions within the Longer-term compensation plans that provide payment of outstanding awards in the event of a Change in Control, without requiring constructive termination of the officer. The Senior Executive Longer-Term Performance Plan would provide immediate pro-rated payouts for We hope this general discussion and the following tables and graphs help you understand the The Compensation Committee of the Board of Directors has reviewed and discussed the preceding Compensation Discussion and Analysis 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 for incorporation by reference into the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007. CHAIR Name Annual Compensation Long Term Compensation Awards Payouts (1) (2) (3) Year Salary Bonus Other Restricted Stock Medium- All Other T. M. Solso 2005 $ 985,000 $ 1,970,000 $ 86,484 $ 0 0 $ 2,079,000 $ 118,489 Chairman of the Board and 2004 $ 972,750 $ 1,750,950 $ 0 0 $ 0 $ 113,248 Chief Executive Officer 2003 $ 950,500 $ 760,400 $ 0 30,800 $ 3,003,441 $ 70,387 F. J. Loughrey 2005 $ 701,667 $ 987,000 $ 55,481 $ 0 0 $ 715,000 $ 83,095 President and Chief 2004 $ 640,000 $ 729,600 $ 0 0 $ 0 $ 84,131 Operating Officer 2003 $ 605,000 $ 326,700 $ 0 10,600 $ 1,008,889 $ 52,435 T. Linebarger 2005 $ 520,000 $ 624,000 $ 0 0 $ 539,000 $ 17,384 Executive Vice President 2004 $ 480,000 $ 532,800 $ 0 0 $ 0 $ 13,640 President—Power Generation 2003 $ 455,000 $ 109,200 $ 0 7,900 $ 586,396 $ 8,201 J. S. Blackwell 2005 $ 477,500 $ 573,000 $ 0 0 $ 539,000 $ 51,012 Executive Vice President and 2004 $ 440,000 $ 475,200 $ 0 0 $ 0 $ 32,643 Chief Financial Officer 2003 $ 419,583 $ 201,400 $ 0 7,900 $ 617,127 $ 17,548 J. D. Kelly 2005 $ 425,000 $ 455,000 $ 0 0 $ 352,000 $ 67,441 Vice President 2004 $ 362,500 $ 344,375 $ 0 0 $ 0 $ 62,837 President—Engine Business 2003 $ 340,000 $ 153,000 $ 0 5,300 $ 426,000 $ 39,167 (3) The aggregate changes during 2007 in the actuarial present value of each Named Executive Officer's pension plans are as "Above-market" is defined as the amount of earnings that exceeded 120% of the (4) This column consists of the following: The Financial Counseling amounts include gross-ups to offset a portion of the taxable amount. Personal Use of Company Aircraft was calculated using an average indicated hourly cost of $2,326 which is the incremental cost incurred by the Company. Amount and Percent T. M. Solso 168,797 (1) F. J. Loughrey 79,388 * T. Linebarger 58,847 * J. S. Blackwell 38,260 * J. D. Kelly 25,485 * All directors and executive officers as a group, a total of 20 persons 586,633 1.32 % The following table Individual Grants Potential Realizable Options/SARs % of Total Exercise Expiration Annual Rates of Name Granted (#) Fiscal Year ($/share) Date 5% ($) 10% ($) T. M. Solso 0 N/A N/A N/A 0 0 F. J. Loughrey 0 N/A N/A N/A 0 0 T. Linebarger 0 N/A N/A N/A 0 0 J. S. Blackwell 0 N/A N/A N/A 0 0 J. D. Kelly 0 N/A N/A N/A 0 0 Value of Number of Number of Unexercised Securities Value Unexercised In-the-Money Underlying Realized Options/SARs at Options/SARs at Options/SARs ($) FY-end (#) FY-End ($) Name Exercised Exerciseable Exerciseable Unexercisable Exercisable Unexercisable T.M. Solso 30,800 $ 1,292,060 0 0 $0 $0 F.J. Loughrey 22,100 $ 804,160 0 0 $0 $0 T. Linebarger 12,700 $ 618,987 0 0 $0 $0 J.S. Blackwell 7,900 $ 252,405 0 0 $0 $0 J.D. Kelly 11,300 $ 242,795 0 0 $0 $0 Number of Shares, Period Until Estimated Future Payouts Under Period Until Name Rights(1) Payout Threshold Target Maximum Payout T. M. Solso 28,400 2005-2007 $ 202,700 $ 2,027,000 $ 4,054,000 2005-2006 F. J. Loughrey 11,370 2005-2007 $ 81,100 $ 811,000 $ 1,622,000 2005-2006 T. Linebarger 7,580 2005-2007 $ 54,100 $ 541,000 $ 1,082,000 2005-2006 J. S. Blackwell 7,580 2005-2007 $ 54,100 $ 541,000 $ 1,082,000 2005-2006 J. D. Kelly 5,680 2005-2007 $ 40,600 $ 406,000 $ 812,000 2005-2006 In addition to these grants of plan-based awards, each Named Executive Officer participates in the Annual (Annual Bonus) equals (Annual Base Salary) times (participation percentage assigned to each job) times (Payout Factor) The Payout Factors could range from zero to 2.0, in increments of .1. The following two tables are intended to enhance understanding of equity compensation that has been previously awarded and remains outstanding, including amounts realized on equity compensation during the last fiscal year as a result of the vesting or exercise of equity awards. The following three (3) tables disclose retirement benefits and other post-termination compensation for the Company's Named Executive Officers. The Cummins Inc. and Affiliates Pension Plan The Excess Benefit Plan The Supplemental Life Insurance and Deferred Income The The percentage is calculated as 2% of the The retirement benefit calculated by this formula is offset by the highest combined annuity available from Plan A and the Excess Benefit Plan, thus topping up the benefits available from those plans to total the target retirement benefit. Officers whose service and age total eighty (minimums of age 55 and 20 years service), or who were participants in the plan prior to 1997 and have at least thirty years of service, regardless of age would qualify for immediate unreduced commencement of Life Annuity benefits. Therefore, Messrs. Solso, Loughrey, and Kelly qualify for immediate commencement of unreduced benefits. Otherwise, after retirement or termination of employment, unreduced benefits may be commenced at age 60. Retired or terminated vested employees who do not qualify for unreduced benefits under the age and service conditions described in the previous paragraph may commence benefits as early as age 55, but the Life Annuity benefit would be reduced by .333% for each month the participant's age at commencement preceded 60. Vesting for the SERP benefit is 25% after five years service, increasing in 15% annual increments, with 100% vesting after 10 years service. The Life Annuity Benefit has a fifteen-year certain payment, with a 50% benefit for surviving spouse or domestic partner. The SERP benefit accrued for service prior to 2005 may be elected as a Lump Sum payment. Benefits accrued after 2005 are subject to the provisions of Internal Revenue Code 409(A), which preclude lump sum distributions of such benefits. The actuarial table Accelerated Formula for Executives Hired Mid-Career For some officers who joined the Company mid-career, including The Accelerated Formula provides a target benefit based on 4% for the first ten years and 2% for the next five years of Service, with a maximum of 50% of Five Year Average Pay after fifteen years of service. Eligibility for immediate commencement of unreduced benefits is achieved when Age and Service total seventy (minimums of Age 58 and 10 years of Service). Otherwise, for participants who are no longer employees of the Corporation, unreduced benefits may commence at Age 60, or as early as Age 55, but reduced .333% for each month age at commencement precedes Age 60. Full vesting occurs upon five years of service. Average Total 10 15 20 25 30+ $ 425,000 $ 85,000 $ 127,500 $ 170,000 $ 191,250 $ 212,500 $ 500,000 $ 100,000 $ 150,000 $ 200,000 $ 225,000 $ 250,000 $ 575,000 $ 115,000 $ 172,500 $ 230,000 $ 258,750 $ 287,500 $ 650,000 $ 130,000 $ 195,000 $ 260,000 $ 292,500 $ 325,000 $ 725,000 $ 145,000 $ 217,500 $ 290,000 $ 326,250 $ 362,500 $ 800,000 $ 160,000 $ 240,000 $ 320,000 $ 360,000 $ 400,000 $ 875,000 $ 175,000 $ 262,500 $ 350,000 $ 393,750 $ 437,500 $ 950,000 $ 190,000 $ 285,000 $ 380,000 $ 427,500 $ 475,000 $ 1,025,000 $ 205,000 $ 307,500 $ 410,000 $ 461,250 $ 512,500 $ 1,100,000 $ 220,000 $ 330,000 $ 440,000 $ 495,000 $ 550,000 $ 1,175,000 $ 235,000 $ 352,500 $ 470,000 $ 528,750 $ 587,500 $ 1,250,000 $ 250,000 $ 375,000 $ 500,000 $ 562,500 $ 625,000 $ 1,325,000 $ 265,000 $ 397,500 $ 530,000 $ 596,250 $ 662,500 $ 1,400,000 $ 280,000 $ 420,000 $ 560,000 $ 630,000 $ 700,000 $ 1,475,000 $ 295,000 $ 442,500 $ 590,000 $ 663,750 $ 737,500 $ 1,550,000 $ 310,000 $ 465,000 $ 620,000 $ 697,500 $ 775,000 $ 1,625,000 $ 325,000 $ 487,500 $ 650,000 $ 731,250 $ 812,500 $ 1,700,000 $ 340,000 $ 510,000 $ 680,000 $ 765,000 $ 850,000 $ 1,800,000 $ 360,000 $ 540,000 $ 720,000 $ 810,000 $ 900,000 $ 1,900,000 $ 380,000 $ 570,000 $ 760,000 $ 855,000 $ 950,000 $ 2,000,000 $ 400,000 $ 600,000 $ 800,000 $ 900,000 $ 1,000,000 "Change in NQ Deferred Compensation The Company's 1994 Deferred Compensation Plan permits deferral of up to 100% of Base Salary, Annual Bonus, and/or payments from the Senior Executive Longer-Term Performance Plan. Accounts are credited with earnings based on each participant's selection among three alternatives: Standard & Poor's 500 Index, Lehman Bond Index, or 10 Year Treasury Bill + 4%. The latter option was revised to be 10-Year Treasury Bill + 2% effective January 1, 2006. Crediting options may be changed annually. At the time of the election to defer, the participant chooses the time and Payments Upon a Qualified Termination Following a Change in Control of In the event of termination of employment within two years subsequent to a The Company Outstanding awards The 2003 Stock Incentive Plan provides that, in the event of a Change in Control, outstanding awards become immediately vested or exercisable. The value of supplemental and excess retirement All amounts of Definition of Change in Control: The occurrence of any of the would be required to be reported in response to Item 6(e) (or any successor provision) of Schedule 14A of Regulation 14A promulgated under the Exchange Act. The payments to each of the The following tables summarize the estimated payments to be made to Named Executive Officers under provisions of plans or established practice in the event of termination of employment including resignation, involuntary termination, involuntary termination for Cause, retirement, death and disability. Termination for Cause includes, but is not limited to: violation of Treatment of Others Policy, violation of the Code of Conduct, theft or other acts of dishonesty, willful destruction of Company property, refusal to obey a supervisor's reasonable instructions, conduct endangering the safety of employees or co-workers, falsification of Company documents, or violation of other Company rules or policies. We only report amounts where vesting requirements are waived and/or time of payment is accelerated, or benefits that are not generally available to our other exempt employees. Also, information is not repeated that is disclosed previously under the Pension Benefits Table, the Deferred Compensation Table, or the Outstanding Awards Table, except to the extent that the amounts payable to the The amounts shown assume the terminating event occurred on the last business day of None of the Named Executive Officers has an employment agreement. However, the Compensation Committee has established the practice of providing twelve months of severance for officers whose employment is terminated. It is Company policy not to provide severance in the event of termination for Cause. Payment of Annual Bonus Annual Bonus is payable for the portion of the year a participant is an employee, except in cases of termination for Cause. No amounts are shown in the tables for Annual Bonus since there would be no special treatment or acceleration of the payment to the Accelerated Vesting of Longer-term Grants As described elsewhere in this proxy statement, currently we provide annual Target Award grants of performance cash and performance shares. The Plan provides that if a participant's employment with the Company terminates during the first year of an Award Cycle, other than by reason of retirement, death or disability, the participant will not receive any payout for that Award Cycle. If a participant's employment terminates during subsequent years of an Award Cycle, the Compensation Committee, in its discretion, shall determine whether the Participant will receive a proportionate payout of any payment with respect to the Award Cycle based on the period of employment during the cycle. If a participant retires, dies or becomes disabled during an Award Cycle, the participant or such participant's estate, as the case may be, shall receive a proportionate share of any payment with respect to the Award Cycle based on the period of employment during the cycle, regardless of the length of time of such employment. 2006-2007 Award Cycle grants: since the entire Award Cycle had been completed at the time of the termination, all participants would be entitled to the payment at the normal time in February 2008. There would be no special acceleration; therefore, the amounts of these payments are not shown on the tables. 2007-2008 Award Cycle grants: Since the termination event is assumed to occur at the end of the first year of the Award Cycle, the Committee has the discretion to award one-half of the Target Award for the 2007-2008 Award Cycle. For purposes of this table, one-half of the Target Awards, assuming a Payout Factor of 1.0, is shown as payable under Retirement, Death, and Disability. In cases of retirement or termination without Cause, the Committee has the discretion to continue awards in effect, or to accelerate vesting of outstanding awards. After the death or disability of a participant, the Committee may in its sole discretion at any time (i) terminate restrictions regarding awards; (ii) accelerate any or all installments and rights; and (iii) instruct the Company to pay the total of any accelerated payments in a single sum to the participant, the participant's estate, beneficiaries or representative. Assumptions below are based on historic practice. 2005-2006 Award Cycle grants Target Awards of shares were earned based on Company performance during 2005-2006 and converted to restricted stock in February 2007. The shares would have become vested in February 2008, so it is assumed that the Committee would accelerate the vesting of these shares in all of the termination events, except voluntary termination and termination for Cause. 2006-2007 Award Cycle grants Performance shares would have been earned based on Company performance during 2006-2007 and converted to restricted stock in February 2008, and remained restricted until February 2009. No shares would be payable in the event of termination for Cause or voluntary termination. However the Committee would have the discretion to accelerate payment in the event of involuntary termination without Cause, retirement, disability or death. 2007-2008 Award Cycle grants Performance shares would become earned based on Company performance during 2007-2008 and converted to restricted stock in February 2009, and would remain restricted until March 2010. Since the shares were not earned, it is assumed no payments were accelerated. Messrs. Linebarger and Kelly received 10,000 shares of restricted stock in 2006 (40,000 shares on a split-adjusted basis). The first one-third of these grants would become vested in March 2008. It is assumed that these grants would be forfeited under all of the termination events shown on the tables. Executive Life Insurance Each of the Named Executive Officers participates in the Supplemental Life Insurance and Deferred Income Program, whereby Officers are eligible for life insurance equal to three times base salary. Since this is a program not participated in by non-Officer employees, the values of this incremental coverage is shown in the table. Set forth below is information as of March 24, 2008, regarding the beneficial ownership of Common Stock of the Company Cummins, with its subsidiaries and affiliates, is a global company with extensive operations in the U.S. and many foreign countries. It has thousands of employees with widespread authority to purchase goods and services. Because of these far-reaching activities, the Company encounters transactions and business arrangements with persons, businesses and other organizations in which one of its directors, executive officers or nominees for director, significant investors or their immediate families, may also be a director, executive officer, or have some other direct or indirect material interest. Such related-party transactions have the potential to create actual or perceived conflicts of interest. As a result, the Audit Committee of the Board of Directors has established and the Board has approved a written policy and procedures for review, approval or ratification of related-party transactions or proposed transactions where the amount involved in any fiscal year exceeds or will exceed $120,000. These require that in deciding whether to approve such a related-party transaction involving a director, director nominee, executive officer, significant investor or their immediate family members, the Audit Committee must consider, among other factors: Largest Amount of J.C. Wall $ 297,850 $ 0 To receive Audit Committee approval a related party transaction must be on terms that are fair and reasonable to Based on its review of responses to the director questionnaires submitted in connection with determining director independence, information provided by management, and other information otherwise known to the Company, it believes there were no transactions during fiscal year 2007 in which the Company was a party in which the amount involved exceeded or will exceed $120,000, and in which any director, director nominee, executive officer, holder of more than five percent of the Company's Common Stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest. Therefore, no transactions were required to be reviewed, approved or ratified under the policy and procedures and disclosed in this proxy statement in accordance with rules of the Securities and Exchange Commission. Section 16(a) of the Securities Exchange Act of 1934 requires the The Audit Committee of the All services rendered to the Company by PwC are permissible under applicable laws and regulations, and are pre-approved by the Audit These services are actively monitored (both spending level and work content) by the Audit Committee to maintain the appropriate objectivity and independence in Audit and Non-Audit Fees The following table presents fees for professional audit services rendered by PwC for the audit of the 2004 2005 Audit fees:(1) 9.2 6.9 Audit related fees: 0.4 0 Tax fees: 0.3 0.4 Subtotal 9.9 7.3 All other fees: 0.3 0.1 Total 10.2 7.4 audits. Audit Committee Pre-Approval Policy The Sarbanes-Oxley Act of 2002 and rules of the Securities and Exchange Commission prohibit the Company's independent accountant from providing certain types of non-audit services to the Company. They also require that all audit, review or attest engagements required under the securities laws and permitted non-audit services provided to the Company by its independent accountant be pre-approved by the Audit Committee or one of its members to whom the Audit Committee has delegated authority. Under Company policy and procedures, when considering whether to approve non-audit services to be provided by the Company's independent accountant, the Audit Committee must consider whether the provision of the service would adversely affect the independence of the independent accountant. Specifically, the Audit Committee must consider whether the provision of the service would (i) place the accountant in the position of auditing his or her own work; (ii) result in the accountant acting as management or an employee of the company; or (iii) place the accountant in the position of being an advocate for the Company. Any proposed non-audit service that the Audit Committee determines would adversely affect the independence of the independent accountant shall not be approved. The Audit Committee is solely responsible for pre-approving all audit and non-audit services. The Audit Committee has delegated to its Chairman authority to pre-approve audit and permitted non-audit services to be provided by the Company's independent accountant, provided that such services are permissible under the policy and procedures and do not exceed $100,000 in the aggregate. Decisions of the Chairman must be reported to the full Audit Committee at its next scheduled meeting, and documented in a format required by the policy. The Board of Directors recommends that shareholders voteFOR this The role of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities as they relate to the The Committee fulfills its responsibilities through periodic meetings with the Throughout the year the Audit Committee monitors matters related to the independence of PricewaterhouseCoopers, the The Committee reviewed with both the control over financial reporting and the independent auditor has the responsibility for the examinations thereof. The Committee discussed and reviewed with the independent auditors all matters required by auditing standards generally accepted in the United States of America, including those described in Statement on Auditing Standards No. 61, as amended, Based on the above-mentioned reviews and discussions with management, internal audit and the independent auditors, the Committee recommended to the Board of Directors that the On January 2, 2008, additional shares of Common Stock were distributed to shareholders of record as of December 21, 2007 pursuant to a two-for-one Common Stock split in the form of a stock dividend. As a result of this increase in the number of shares of Common Stock issued and outstanding and for other reasons, the Board of Directors has determined that it is desirable to increase the number of shares of Common Stock that will be authorized for issuance under the Company's Restated Articles of Incorporation. Accordingly, the Board has proposed to amend Section 4.1 of Article IV of the Restated Articles of Incorporation, as amended, the effect of which will be to increase the number authorized from 300,000,000 to 500,000,000. No other changes are proposed to be made to the Articles with respect to any other class of securities authorized for issuance under the Articles. Under Indiana law, shareholders must approve an amendment to the Company's Restated Articles of Incorporation. If the proposed amendment is approved, Section 4.1 of Article IV thereof will be amended to read in its entirety as follows: "The total number of shares which the Corporation has authority to issue shall be 502,000,000 shares, consisting of 500,000,000 shares of common stock ("Common Stock"), 1,000,000 shares of preference stock ("Preference Stock") and 1,000,000 shares of preferred stock ("Preferred Stock"). The shares of Common Stock have a par value of $2.50 per share. The shares of Preference and Preferred Stock do not have any par or stated value, except that, solely for the purpose of any statute or regulation imposing any tax or fee based upon the capitalization of the Corporation, each of the Corporation's shares of Preference Stock and Preferred Stock shall be deemed to have a par value of $1.00 per share." If approved, this amendment will become effective upon the filing with the Secretary of State of Indiana of Articles of Amendment of the Articles of Incorporation. The Company would make such a filing promptly after the Annual Meeting. The Board of Directors believes that the proposed increase in the number of shares of Common Stock authorized for issuance is in the best interests of the Company and its shareholders. An increase in the number of authorized shares will give the Board of Directors the authority to issue shares to implement future capital structure and other transactions which are, in the best judgment of the Board, advantageous to the Company and its shareholders, regaining the capacity and flexibility it had for such transactions prior to the two-for-one stock split. As of March 24, 2008, there were 203,215,953 shares of Common Stock outstanding and 18,321,572 shares issued and held by the Company as treasury shares, aggregating 221,537,525 shares issued. No shares of Preference or Preferred Stock are currently issued and outstanding. The Board of Directors recommends a voteFOR the proposal to amend the Restated Articles of Incorporation to increase the number of authorized shares of Common Stock. This Item will be approved if the number of votes cast in favor of the Item exceeds the number of votes cast against the Item. The following Shareholder Proposal has been submitted by Domini Social Investments, 536 Broadway, 7th Floor, New York, NY 10012-3915 ("Domini"), SEIU Master Trust, 11 Dupont Circle, N.W., Ste 900, Washington, D.C. 20036 ("SEIU"); and Harrington Investments, 1001 2nd Street, Suite 325, Napa, CA 94559 ("Harrington"), each of which is a beneficial owner of the requisite number of shares of Common Stock to make the proposal. "WHEREAS: Cummins' reputation as a socially responsible company is a valuable asset to the Company. Cummins has been named to the "Best Corporate Citizen" list by CRO Magazine (formerlyBusiness Ethics Magazine) for eight consecutive years. RESOLVED: Shareholders request the Board of Directors to: SUPPORTING STATEMENT Proponents recommend that the requested report be based on a means of assessment determined by the Board, subject to independent verification, and that it include a discussion of any deficiencies that could result in non-compliance with ILO Conventions 87, 98 and 135, described briefly below: The Company recommends aNO vote on the proposal. The Company is committed to fair and equitable treatment of all employees and other stakeholders. This proposal is based on information that is not current and calls for control measures that already are in place, and are effective and transparent. We support the workplace human rights principles and standards advocated by the proponent, and our existing Codes of Conduct, policies and procedures effectively address these issues. We stand by our workers' rights record and believe our Code of Business Conduct already embodies the intent of the ILO standards being proposed by the proponent. For nearly 90 years, we have made it a priority to ensure that our employees have a safe and healthy work environment. Our Code of Business Conduct articulates this commitment and helps ensure that our standards are applied evenly and consistently throughout the Company. We conduct a regular review of our Code given the ever-changing nature of the Company and the workplace. Our Code was recently revised in January 2008, and outlines our commitment to ethical behavior and serves as a guide for the behavior of every one of our employees. It can be easily accessed by our workers on our intranet and by the public from the home page of our Web site, www.cummins.com. The Code of Business Conduct includes many provisions that specifically protect the rights of workers and are in alignment with ILO Conventions 87, 98 and 135. These include the following: The proposal references a "report" written last year about workers at Cummins distributors. The International Brotherhood of Teamsters—which represents no Cummins Inc. employees and represents only about 300 of the approximately 8,000 workers of Cummins' North American distributors—paid Mr. Compa to write this report, which he completed without contacting Cummins to check the facts or obtain the Company's response. Cummins investigated the allegations in this report and found them to be without merit. The Company's investigation also confirmed that our distributors had not violated any laws or Company policies. Today there are no allegations of wrongdoing in the Cummins distribution network, employee- ratified collective bargaining agreements are in effect at all union locations and no union or employee group anywhere in the world has echoed the allegations made in the Teamsters-funded "report." Nonetheless, we are taking additional steps to ensure that our joint venture entities and distributors treat their employees in a fair and equitable fashion. By the end of the year, we will have completed an audit of our joint venture partners, including our North American distributors, to ensure that they have either adopted our Code of Business Conduct or a have a substantially similar code in place that embodies the same principles. Since 2005, we have had a Supplier Code of Conduct in place that requires our suppliers to follow all local laws (including laws protecting freedom of association), refrain from using forced or child labor and provide a safe workplace where employees are treated with dignity and respect. We believe that adopting a Supplier Code of Conduct was a significant step towards protecting workers' rights because we can now reach beyond the limits of the Company and help protect workers' rights throughout the supply chain. We have introduced our Supplier Code to over 95% of our supply base and we will continue this rollout in 2008. We also are developing processes to confirm compliance with the Supplier Code and currently are updating the Supplier Code to better align it with the Company Code of Business Conduct. The Supplier Code can be found in the "Global Citizenship" section of Cummins web site. The Company Code of Business Conduct and Supplier Code of Conduct, while important statements of behavioral norms, are meaningless unless they are enforced appropriately and discussed openly. We believe that the Codes are only important if people know about them, so we have placed both Codes on our website to allow our employees and the public to easily access them. We annually publish a Sustainability Report that includes a discussion of the Codes and the steps we have taken to comply with them, and this year we have enhanced our discussion regarding the Codes and our training of employees to show how we thoughtfully address issues of concern. We have taken other steps to ensure that both Codes are followed: Information about these processes can be found in our most current Sustainability Report, available online at the home page and the "Investors and Media" section of www.cummins.com. The proponents' proposal would be difficult, if not impossible, to implement and enforce and would likely be a drain on Company resources. The ILO standards were developed as international standards on which countries could establish workers' rights laws. They were never intended to be directly adopted by companies. We believe that the proposal is duplicative of the many steps that the Company has already taken to ensure that its employees' rights are protected, and adopting this proposal will impose unnecessary costs on the Company. We stand by our record in regards to workers' rights and believe we have adequately addressed the matters raised in the proposal. This proposal, while well-intentioned, is burdensome and unnecessary in light of our proven commitment to our employees and other stakeholders. The Board of Directors, therefore, recommends a voteAGAINST the proposal. The proposal will be adopted if the number of votes cast in favor of the proposal exceeds the number of votes cast against the proposal. An abstention will have the same effect as a vote against the proposal. Broker non-votes will have no effect on the proposal. The Board of Directors does not know of any business to be presented for action at the meeting other than that set forth in Shareholders may submit proposals to be considered for shareholder action at the If a shareholder desires to bring proper business before an annual meeting of shareholders which is not the subject of a proposal timely submitted for inclusion in the The cost of this proxy solicitation will be borne by the Company. Morrow & Co., April Mr. Solso was elected Chairman of the Board and Chief Executive Officer of the Company in 2000 after serving as its President since 1995, Chief Operating Officer since 1994 and Executive Vice President—Operations from 1992 through 1994. From 1988 to 1992 he was Vice President and General Manager—Engine Business after serving in various other executive positions with the Company. Mr. Solso received a B.A. from DePauw University in 1969 and an M.B.A. degree from Harvard University in 1971. He is a Director of Ball Corp., Inc. CUMMINS ANNUAL SHAREHOLDER MEETING CUMMINS INC. ANNUAL MEETING OF SHAREHOLDERS Tuesday, May 11:00 a.m. Eastern Daylight Savings Time Columbus, Indiana If you consented to access your proxy information electronically, you may view it by going to the Cummins Inc. website. You can get there by typing in the following address: If you would like to access the proxy materials electronically next year, go to the following Consent site address: Cummins Inc. proxy This proxy is solicited by the Board of Directors for use at the Annual Meeting on May If no choice is specified, the proxy will be voted “FOR” Items 1 through 11 and By signing the proxy, you revoke all prior proxies and appoint Robert J. This card also constitutes voting instructions to the trustees or administrators, as applicable, of the Cummins Inc. and Affiliates Retirement and Savings Plans to vote shares attributable to accounts the undersigned may hold under such plans as indicated on the reverse of this card. If no voting instructions are provided, shares held in these accounts will be voted in the same manner and proportion as shares with respect to which valid voting instructions were received. See reverse for voting instructions. There are three ways to vote your Proxy Your telephone or Internet vote authorizes the Named Proxies to vote yourshares in the same manner as if you marked, signed and returned your proxycard. COMPANY # VOTE BY PHONE — TOLL FREE — 1-800-560-1965 — QUICK VOTE BY INTERNET — VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we’ve provided or return it to Cummins Inc., c/o Shareowner If you vote by Phone or Internet, please do not mail your Proxy Card The Board of Directors Recommends a Vote FOR Items 1 through 11 and AGAINST Item 12. Election of directors: FOR AGAINST ABSTAIN 1. Robert J. Darnall o o o 2. Robert K. Herdman o o o 3. Alexis M. Herman o o o 4. F. Joseph Loughrey o o o FOR AGAINST ABSTAIN 5. William I. Miller o o o 6. Georgia R. Nelson o o o 7. Theodore M. Solso o o o 8. Carl Ware o o o 9. J. Lawrence Wilson o o o 10. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as o FOR o AGAINST o ABSTAIN auditors for the year 2008. 11. Proposal to amend Restated Articles of Incorporation to increase o FOR o AGAINST o ABSTAIN authorized shares. 12. Proposal to adopt International Labor Organization standards. o FOR o AGAINST o ABSTAIN 13. To transact any other business that may properly come before the meeting or any adjournment thereof, other than with respect to shares held in the Cummins Inc. and Affiliates Retirement and Savings Plans. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED FOR ITEMS 1 THROUGH 11 AND AGAINST ITEM 12. Address Change? Mark Box o Indicate changes below: Date Signature(s) in Box Please sign exactly as your name(s) appear on Proxy. If held in joint tenancy, all persons should sign. Trustees, administrators, etc., should include title and authority. Corporations should provide full name of corporation and title of authorized officer signing the proxy. The Board of Directors Recommends a Vote FOR Items 1 and 2. 1. ELECTION OF DIRECTORS: 01 Robert J. Darnall 06 Georgia R. Nelson ¨ Vote FOR ¨ Vote WITHHOLD 02 John M. Deutch 07 Theodore M. Solso all nominees from all nominees 03 Alexis M. Herman 08 Carl Ware (except as marked) 04 F. Joseph Loughrey 09 J. Lawrence Wilson 05 William I. Miller (Instructions: To withhold authority to vote for any indicated nominee, write the number(s) of the nominee(s) in the box provided to the right.) 2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as auditors for the year 2006. ¨ For o Against o Abstain 3. To transact any other business that may properly come before the meeting or any adjournment thereof, other than with respect to shares held in the Cummins Inc. and Affiliates Retirement and Savings Plans. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED FOR ITEMS 1 AND 2. Address Change? Mark box o Indicate changes below: Date __________________________ Signature(s) in Box Please sign exactly as your name(s) appear on Proxy. If held in joint tenancy, all persons should sign. Trustees, administrators, etc., should include title and authority. Corporations should provide full name of corporation and title of authorized officer signing the proxy.
PROXY STATEMENT“Company”"Company" or “Cummins”"Cummins") of proxies to be voted at the Annual Meeting of Shareholders to be held on Tuesday, May 9, 2006,13, 2008, and at any adjournment thereof (the “Annual Meeting”"Annual Meeting"). This proxy statement, together with the enclosed proxy, is first being mailed to the shareholders of the Company on or about April 7, 2006.4, 2008.Company’sCompany's Common Stock of record at the close of business on March 20, 200624, 2008 are entitled to vote at the Annual Meeting. On that date there were issued and outstanding 44,529,112203,215,953 shares of Common Stock, each of which is entitled to one vote.itshis vote in person instead of by proxy, thereby canceling the previously executed proxy.20052007, on an adjusted basis reflecting a subsequent two-for-one split on January 2, 2008, (i) the number of shares beneficially owned by such shareholder(s) and the nature of such beneficial ownership and (ii) the percentage of the entire class of Common Stock so beneficially owned:
of Beneficial
Ownership
225 Franklin Street
Boston, MA 02110
45 Freemont Street
San Francisco, CA 94105
90 Hudson St.
Jersey City, NJ 07302
82 Devonshire Street
Boston, MA 02109
1 N. Wacker Drive, Suite 4000
Chicago, IL 60606
333 South Hope Street
Los Angeles, CA 90071 Amount & Nature of Beneficial Ownership Percent of Class State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111 21,059,718 (1) 10.36 %
FMR LLC.
82 Devonshire Street
Boston, MA 02109
17,823,056
(2)
8.77
%13, 200612, 2008 disclosing beneficial ownership by State Street Bank and Trust Company. State Street discloses in its 13G that it has shared investment power for all of the shares, shared voting power for 4,335,16811,599,954 shares, and sole voting power for 1,983,6389,459,764 shares. State Street is the Trustee of certain employee benefit plans sponsored by the Company which are subject to ERISA. Shares of Common Stock are held in trust for the benefit of employees in the plans. As of December 31, 2005,2007, the Trustee held 4,335,16811,599,954 shares of Common Stock on behalf of the plans, some of which had not been allocated to plan participants. The plan Trustee votes unallocated shares and shares allocated to participants’participants' accounts as directed by participants. Shares of Common Stock held by the Trustee on behalf of the plans as to which participants have made no timely voting directions are voted by the plan Trustee in the same proportions as shares for which directions are received (subject to the Trustee’sTrustee's responsibilities under Section 404 of ERISA). The source of this information is a Schedule 13G dated January 31, 2006 disclosing beneficial ownership by Barclays Global Investors N/A. Barclays states in its 13G that it has sole investment power for all of the shares, sole voting power for 4,302,979 shares, and no shared investment or voting power.(3)1, 200613, 2008 disclosing beneficial ownership by Lord, Abbett. TheFMR LLC and its related companies. FMR and its related companies state in the 13G states that Lord, Abbett has sole voting and investment powers with respect to all of the shares.(4) The source of this information is a Schedule 13G/A dated February 14, 2006 disclosing beneficial ownership by FMR. FMR states in its 13G/A that it hasthey have sole investment power for all of the shares and sole voting power for 637,781 shares, and no shared investment or voting power.(5) The source of this information is a Schedule 13G dated February 10, 2006 disclosing beneficial ownership by LVS Asset Management. LVS states in its 13G that it has sole investment power for 2,391,032 of the shares, sole voting power for 1,715,832 shares, and no shared investment or voting power.(6) The source of this information is a Schedule 13G dated February 6, 2006 disclosing beneficial ownership by Capital Research and Management Company. The number of shares reported includes 713,190 shares resulting from the assumed conversion of 678,000 shares of 7% Cummins Capital Trust I Convertible Preferred. The 13G states that Capital has sole investment power for all of the shares, sole voting power for 500,000 shares, and no shared investment or voting power.3
ELECTION OF DIRECTORS
(Items 1 through 9 on the Proxy Card)It is intended that votes will Nine directors are to be cast pursuantelected at the Annual Meeting to hold office until the accompanying proxy for the electionnext annual meeting of the nine nominees listed in the following table, all of whom are presently directors of the Company. All directors will serve for the ensuing yearshareholders and until their respective successors are elected and qualified. A shareholder may withhold authority from such shareholder’sThe accompanying proxy to vote for the election of any or allwill be voted in favor of the nominees.nominees named below to serve as directors unless the shareholder indicates to the contrary on the proxy. All of the nominees are current directors.has no reason to believeexpects that anyeach of the nominees will be available for election, but if any of them is unable to serve if elected. If, for any reason, one or more of such persons should be unable to serve, it is intended that votesat the time the election occurs, the proxy will be castvoted for a substitutethe election of another nominee or nomineesto be designated by the Board of Directors, unless the Board of Directors decides to reduce the number of directors.2645 through 2847 of this proxy statement.Proxy Statement.
Elected a
Director
Nature of Beneficial
Ownership as of
March 20, 2006(1)
of
Class
Held as of
March 20,
2006(2)Name and Occupation Age First Year Elected a Director Amount and Nature of Beneficial Ownership as of March 24, 2008
(1) Percent of Class Stock Units Held as of March 24, 2008
(2) Total Robert J. Darnall
Retired Chairman and Chief Executive Officer of Inland Steel Industries, basic steel manufacturer, processor and distributor 70 1989 37,013 * 13,793 50,806 Robert K. Herdman
Managing Director of Kalorama Partners LLC, independent consulting firm 59 2008 0 * 0 0 Alexis M. Herman
Chairman and Chief Executive Officer of New Ventures, independent consulting firm 60 2001 22,769 * 0 22,769 F. Joseph Loughrey
President and Chief Operating Officer of Cummins 58 2005 392,922 * 0 392,922 William I. Miller
Chairman and Chief Executive Officer of Irwin Financial Corporation, financial services company 51 1989 85,174 * 3,436 88,610 Georgia R. Nelson
President and Chief Executive Officer of PTI Resources, LLC, independent consulting firm 58 2004 12,213 * 0 12,213 Theodore M. Solso
Chairman and Chief Executive Officer of Cummins 61 1994 642,863 (3) * 0 642,863 Carl Ware
Retired Executive Vice President, Public Affairs and Administration, The Coca-Cola Company 64 2004 10,220 * 0 10,220 J. Lawrence Wilson
Retired Chairman and Chief Executive Officer, Rohm and Haas Company, specialty chemical manufacturing 72 1990 69,387 * 14,648 84,035 Company’sCompany's Common Stock. See director retirement plan discussion onbeginning at the bottom of page 8.300329,144 shares that are held by Mr. Deutch’sSolso's spouse.(4)Includes 92,286 shares that are held by Mr. Solso’s spouse.Directors will be elected by a plurality of the votes cast. Votes cast for a nominee and, if no contrary instructions are indicated on a signed proxy, the shares represented by such proxy will be voted for a nominee. Abstentions, broker non-votes and instructions on a signed proxy withholding a vote will result in a nominee receiving fewer votes. However, the number of votes otherwise cast for the nominee will not be affected by such actions.Board’sBoard's structure, policies and practices and compares them to those suggested by various authorities in corporate governance and to the practices of other public companies.(“("Independent Directors”Directors") pursuant to the rules adopted by the Securities and Exchange Commission (“SEC”("SEC") applicable to the corporate governance standards for companies listed on the New York Stock Exchange.“material relationship”"material relationship" with the Company. When assessing the “materiality”"materiality" of a director’sdirector's relationship with the Company, the Board considers all relevant facts and circumstances, not merely from the director’sdirector's standpoint, but from that of the persons or organizations with which the director has an affiliation, and the frequency or regularity of the services, whether the services are being carried out at arm’sarm's length in the ordinary course of business and whether the services are being provided substantially on the same terms to the Company as those prevailing at the time from unrelated parties for comparable transactions. Material relationships can include commercial, banking, industrial, consulting, legal, accounting, charitable and familial relationships. Independence means (1) not being an employee of the Company within the past five years; (2) not personally receiving or having an immediate family member who receives more than $100,000 per year in direct compensation from the Company other than director and committee fees and pension or other forms of deferred compensation; (3) not being employed, or having an immediate family member employed as an executive officer of another company where any current executive officer of Cummins Inc. serves on that company’scompany's compensation committee; (4) not being employed by or affiliated with or having an immediate family member employed by or affiliated with a present or former internal or external auditor of the Company within the three previous years; and (5) not being a director who is an executive officer or employee, or whose immediate family member is an executive officer of a company that makes payments to, or receives payments from, the Company for property or services in an amount which exceeds the greater of $1 million, or 2% of the other company’scompany's consolidated gross revenues.Applying these In February 2008, the Secretary of the Company reviewed with the Governance and Nominating Committee directors responses to a questionnaire asking about their relationships with the Company (and those of their immediate family members) and other potential conflicts of interest, as well as material provided by management or otherwise known to the Secretary related to transactions, relationships, or arrangements between the Company and the directors or parties related to the directors. Following a discussion and applying the standards referenced above the Board hasCommittee determined that all Directors,directors, except Mr. Solso, Chief Executive Officer and Mr. Loughrey, President and Chief Operating Officer of the Company, qualify as independent. The Committee recommended this conclusion to the Board and this conclusion was adopted by the full Board.seven (7)five (5) meetings during 2005.2007. All of the directors attended 75% or more meetings of the Board and Committees on which they served. The non-employee members of the Board also met periodically in executive session without management present as part of theeach regular meetings.meeting. J. Lawrence Wilson, the Company’sCompany's Lead Director, presided over these meetings.sessions.Company’sCompany's Corporate Governance Principles, which are available on the Company’sCompany's website <http://www.cummins.com>, and are otherwise available in print to any shareholder who requests them, the Board of Directors has established seven standing committees. These Principles describe in detail how the Board must conduct its oversight responsibilities in representing and protecting the Company’s“audit"audit committee financial experts”experts" for purposes of the SEC’sSEC's rules. The Audit Committee reviews the accounting and auditing principlesnine (9)seven (7) times in person or telephonically during 2005.2007. The current Charter of the Audit Committee, as adopted by the Board of Directors, is available on the Company’sCompany's website, is attached hereto as Appendix B, and is otherwise available in print to any shareholder who requests it.Company’sCompany's stock incentive plans. The Committee also reviews and evaluates the Company’sCompany's executive compensation standards and practices, including salaries, bonus distributions, deferred compensation practices and participation in stock purchase plans. It annually establishes and approves the compensation of the Chief Executive Officer following a review of the CEO’sCEO's performance, including input from all of the other Independent Directors as reported to it by the Governance and Nominating Committee.six (6)five (5) times during 2005.2007. The current Charter of the Compensation Committee, as adopted by the Board of Directors, is available on the Company’sCompany's website and is also available in print to any shareholder who requests it.LawrenceL. Wilson (Chairman), R. J. Darnall, A. M. Herman, W. I. Miller, G. R. Nelson and C. Ware. All members are Independent Directors. The Governance and Nominating Committee reviewsDirectordirector candidates, but may also engage, if it deems appropriate, a professional search firm. This Committee will also consider shareholders’shareholders' recommendations of nominees for election to the Board of Directors. Shareholder recommendations, including biographical information as to the proposed candidate and a statement from the shareholder as to the qualifications and willingness of such person to serve on the Company’sCompany's Board of Directors, must be submitted in writing to the Secretary of the Company in accordance with the procedures established in the Company’sCompany's By-Laws. The Committee has not rejected a candidate recommended by any shareholder during the preceding year.independent directorsIndependent Directors and possesses a variety of experience and background, including those who have substantial experience in the business community, those who have substantial experience outside the business community such as public, academic or scientific experience, and those who will represent the stakeholders as a whole rather than special interest groups or constituencies. In particular, as it considers possible directors the Committee will seek out candidates who represent the diverse perspectives of all people. Each director will be chosen without regard to gender, race, religion, national origin or sexual orientation. The Committee will consider potential directors who demonstrate the attributes of the Company’sCompany's core values: integrity, corporate responsibility, diversity, global involvement, innovation and delivering superior results. Each candidate should have sufficient time available to devote to the affairs of the Company and be free of any conflict of interest that would violate any applicable law or regulation, or interfere with the proper performance of his or her responsibilities and should also should possess substantial and significant experience that would be of particular importance to the Company in the performance of his or her duties as a director. The Committee does not intend to alter the manner in which it evaluates candidates, including the foregoing criteria, based on whether the candidate was recommended by a shareholder or not.and all other Independent Directors annually review the performance of the Chief Executive Officer based upon performance against a work plan, considering both quantitative and qualitative measures. The Committee reports the results of such review to the Compensation Committee. The Committee also monitors meeting attendance of Board members.four (4)five (5) times during 2005.2007. The current By-Laws and Charter of the Governance and Nominating Committee, as adopted by the Board of Directors, are available on the Company’sCompany's website. A copy of the charter of the Governance and Nominating Committee is also available in print to any shareholder who requests it. The Company also maintains a Code of Business Conduct which is available on its website and is also available in print to any shareholder who requests it.2005.2007.(J. L. Wilson(W. I Miller (Chairman) and W. I. Miller)R. J Darnall); and Technology and Environment Committee (J. M. Deutch (Chairman), A. M. Herman, W. I. Miller, G. R. Nelson and C. Ware). The current Charters of the Finance and Technology and Environment Committees, as adopted by the Board of Directors, are also available on the Company’sCompany's website.Company’sCompany's Secretary, 500 Jackson Street, Mail Code 60903, Columbus, Indiana 47201. All such communications will be reviewed by the Secretary or his or her designee to determine which communications will be forwarded to the directors. All communications will be forwarded except those that are related to Company products and services, are solicitations or otherwise relate to improper or irrelevant topics as determined in the sole discretion of the Secretary or his or her designate.Directorsdirectors standing for election at the 20052007 Annual Meeting of Shareholders were present.Director Compensation and Benefits.
DIRECTOR COMPENSATION (1) (2) (3) (4) Name Fees Earned
or Paid
in Cash
($) Stock Awards
($) Option Awards
($) Non-Equity Incentive Plan Compensation
($) Change in Pension Value and Non Qualified Deferred Compensation Earnings All Other Compensation Total R. J. Darnall $ 88,000 $ 75,000 $ 0 $ 0 $ 0 $ 0 $ 163,000 J. M. Deutch $ 80,000 $ 75,000 $ 0 $ 0 $ 0 $ 111,140 $ 266,140 A. M. Herman $ 85,500 $ 75,000 $ 0 $ 0 $ 11,014 $ 0 $ 171,514 W. I. Miller $ 81,000 $ 75,000 $ 0 $ 0 $ 28,466 $ 0 $ 184,466 G. R. Nelson $ 77,000 $ 75,000 $ 0 $ 0 $ 3,718 $ 0 $ 155,718 C. Ware $ 77,000 $ 75,000 $ 0 $ 0 $ 2,382 $ 0 $ 154,382 J. L. Wilson $ 89,500 $ 75,000 $ 0 $ 0 $ 31,659 $ 0 $ 196,159 iswas not an officer of the Company currently receives anwas paid a $150,000 annual fee, of $94,000, $47,000$75,000 of which iswas paid in cash and $47,000$75,000 of which iswas paid in the form of restricted Common Stock. Each non-officer director also receives $1,000The Stock Awards cannot be sold for each special meeting of the Board of Directors attended.three years. The Chairmen of the Finance Committee, the Governance and Nominating Committee and the Technology and Environment Committee receive an additional annual fee of $5,000. The Audit Committee Chairman receives an additional $10,000 annual fee and the Compensation Committee Chairman receives an additional $7,500 annual fee. The Lead Director receives an additional annual fee of $7,500. Committee members also receive $1,000 for attending a Committee meeting (other than a meeting of the Executive Committee) that is not held in connection with a regular or special meeting of the Board of Directors. The Company’s Lead Director receives an additional annual fee of $7,500.Following the 2006 Annual Meeting of Shareholders, each non-employee director’s annual fee will be increased to $150,000, $75,000 of which will be paid in cash and $75,000 in the form of restricted Common Stock. The increase will align the non-employee directors’ total compensation with the market median for similarly-sized public companies in the U.S.Directors may not dispose of the shares of restricted stock they are awarded in payment of one-half of their annual retainer fees for a specified restriction period. This restriction period will be three years for the shares to be awarded during 2006. Also, each non-employee director will be required to maintain direct ownership of shares of Common Stock equal to or greater in value to three (3) times his or her annual retainer fee. This ownership requirement, to the extent of the annual fee prior to the increase referenced above, must be achieved by 2010 for directors who were first elected prior to 2004. Directors first elected after 2003 must comply with the requirement within six (6) years of becoming a member of the Board. The increased annual fee increases the number of shares each non-employee director must own. This increased ownership requirement must be achieved by 2012 for current directors. Newly-elected directors must comply with this requirement within six (6) years of becoming a member of the Board.As the Director with the greatest technical expertise, the Company believes it is important and appropriate that the Chairperson of the Technology and Environment Committee provide technical consulting services to and spend at least one day per quarter with the Company’s senior technical managers to exercise Board oversight and collaborate with them on the Company’s technical research, development and application strategies. The Chairperson has historically also served as Chairperson of the Company’s Science and Technology Advisory Council consisting of distinguished academic, research and other members of the scientific community, who regularly advise senior executive management and the full Board on the direction and implications of developments in science, technology and environmental issues that may have applicability to the Company’s current and future business goals and objectives. For these services, in addition to Board, Committee and Committee Chair fees as described above, as Chairman of the Technology and Environment Committee, Director nominee J.M. Deutch was paid $68,250 during 2005, consisting of $30,000 for consulting and $38,250 for his services on the Council, including services rendered during 2004.Company’sCompany's overall support of charitable and educational institutions and as an aid in attracting and retaining qualified directors, the Company has established the Cummins Inc. Charitable Bequest Program in which all directors first elected prior to 2004 are eligible to participate. Following the death of a director, the Company will donate ten equal annual installments of $100,000 to one or more qualifying institutions designated by such director, subject to certain vesting requirements based upon years of service as a director. The Company has purchased life insurance policies on each participating director, the proceeds of which fund donations under the program. Directors will not receive any financial benefit from the program since all charitable deductions accrue solely to the Company.deferred compensation planDeferred Compensation Plan for non-employee directors,Non-Employee Directors, pursuant to which such directors may elect to defer receipt of all or any portion of their compensation while they serve as a director of the Company. Upon ceasing to be a director the deferred compensation, plus accrued interest, is paid to the director or the director’sdirector's beneficiary in a lump sum or in annual installments, not to exceed fifteen, as specified by the director. Upon a change ofin control of the Company, (as defined in the plan), such deferred compensation and interest is paid in cash to the director in one lump sum. Accounts are credited with earnings based on each participant's selection among three alternatives: Standard & Poor's 500 Index, Lehman Bond Index or 10 Year Treasury Bill + 4%. The latter option was revised to be 10-Year Treasury Bill + 2% effective January 1, 2006.Company’sCompany's employees) of their accrued benefits into phantom units of Common Stock. The stock units, including additional stock units credited thereon asdirector’sdirector's stock units will be payable only in cash after the director ceases to be a member of the Board or upon a change ofin control of the Company. The total number of units credited to each director as a result of retirement plan benefit conversion elections and dividend equivalent credits is listed in the director nominee table on page 4.8The Compensation Committee Report is organized(1) Fees Earned or Paid in Cash were as follows:Director Board Retainer Special Meeting Fees Lead Director Fee Committee Chaired Committee Chair Fees Total R. J. Darnall $ 75,000 $ 3,000 Audit $ 10,000 $ 88,000 J. M. Deutch $ 75,000 Technology & Environment $ 5,000 $ 80,000 A. M. Herman $ 75,000 $ 3,000 Compensation $ 7,500 $ 85,500 W. I. Miller $ 75,000 $ 1,000 Finance $ 5,000 $ 81,000 G. R. Nelson $ 75,000 $ 2,000 $ 77,000 C. Ware $ 75,000 $ 2,000 $ 77,000 J. L. Wilson $ 75,000 $ 2,000 $ 7,500 Governance & Nominating $ 5,000 $ 89,500 · Role(2) 908 (1,816 on a split-adjusted basis) shares of restricted stock were awarded to each director, comprising one-half the value of the Compensation Committee· Objectives and Principlesannual retainer fee. The shares were granted assuming a market value of Executive Compensation· Compensation Program Elements· Compensation$82.61 ($41.305 on a split-adjusted basis) per share, which was the preceding twenty-day average of closing prices of the Chief Executive OfficerCorporation's Common Stock on the NYSE on May 8, 2007.Role As of year-end 2007, the total outstanding shares of restricted stock on an adjusted basis reflecting the subsequent 2:1 split on January 2, 2008, by director, was:Director Outstanding Restricted Stock Shares R. J. Darnall 10,748 J. M. Deutch 10,748 A. M. Herman 10,748 W. I. Miller 10,748 G. R. Nelson 10,408 C. Ware 9,938 J. L. Wilson 10,748 Compensation Committeeapplicable federal long-term rate published by the U.S. Internal Revenue Service.The Compensation Committee(4) Dr. John Deutch, who is made upnot standing for re-election, served as Chairman of fourthe Technology and Environment Committee. In this capacity he spent at least one day per quarter with the Company's senior technical managers to exercise Board oversight and collaborate with them on the Company's technical research, development and application strategies. He also served as Chairman of the Company's Science and Technology Advisory Council, consisting of distinguished academic, research and other members of the scientific community, who regularly advise senior executive management and the full Board on the direction and implications of Directorsdevelopments in science, technology and environmental issues that may have applicability to the Company's current and future business goals and objectives. For these services, as Chairman of the Company,Technology and Environment Committee, Mr. Deutch was paid $66,500 during 2007, consisting of $30,000 for such technical oversight and collaboration and $36,500 for his services on the Council.are not current or former employees of the Company. The Committee consists solely of Independent Directors of the Corporation, in accordance with the independence requirements of the Company’s Corporate Governance Principles, and all New York Stock Exchange and other regulatory requirements.The Committee has oversight responsibility for the Company’s executive compensation programs and works with management to establish the general compensation philosophy of the Company. It reviews the elements of the compensation program, the specifics of each element, the goals and measurements usedparticipate in the program are fully paid and, the results of the compensation program compared to the philosophy to determine if the compensation program is performing as expected.therefore, no premiums were payable in 2007.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSISIn addition, the Committee reviews individual compensation levels and awards for all officers, including the five most highly paid officers, and takes appropriate action.The Committee has selected an executive compensation consultant who is retained by and reports directly to the Committee. On a regular basis the Committee reviews data regarding the Company’s compensation programs, including stock grant overhang, stock option exercise activity, employee participation in the Company’s compensation programs, the estimated payout levels of compensation programs, executive perquisites, and other data. In setting the measures for performance-based variable compensation plans, the Committee reviews analysis of the financial impact of the performance measures and resulting payments. The Committee meets regularly in executive session to discuss these and other issues. The Committee also reviews its actions with the full Board of Directors.During 2005 the Committee conducted a comprehensive review of all elements of the Company’s executive compensation program, and made changes where appropriate to align the program with competitive practices. The consultant retained by the Committee assisted with this process.Additional information regarding the role of the Compensation Committee is included in the Committee’s Charter, which is posted on the Company’s website: <http://www.cummins.com>.Cummins The Company's executive compensation program is designed to attract, motivate and retain executivespeople with the right skills and leadershiprequired to achieve the Company’sCompany's performance goals in the competitive global business environment. The program is designed to reflect the individual’s responsibilityindividual's contribution and the performance and to be aligned withof the enhancement of value to shareholders. The program attempts to strikeCompany, while striking an appropriate balance between annualshort-term and longer-term performance.performance with an emphasis on financial performance and return to shareholders. We evaluateperformance. The Company evaluates performance over several periods of time. While the specific elements of executive compensation vary from time to time, the Compensation Committeeprogram focuses on thethis central principle of pay for performance.performance, both in program design and the specific awards.Company’s executiveCompany and the Compensation Committee of the Board of Directors (the "Compensation Committee" or "Committee") consider the following principles when designing and implementing compensation program follows several other principles.programs for the Company's officers:·for a competitive compensation opportunity. Theopportunity; the concept of opportunity is important in our program. We believe the executive should have the opportunity to do well if the Company does well and that total compensation should vary in relation to the Company’sCompany's performance.· An individual’s totalindustrialmanufacturing companies with similar sales volumes similar to Cummins, when Cummins financial performance meets certain targets established in the Annual Operating Plan which are approved by the Board of Directors based on their review of the Annual Operating Plan and the committed targets in each Business Segment.·Directors.·person’sperson's position, the more the compensation should be ‘‘at risk’’, i.e., "at risk"—dependent on the performance of the Company.· Companythe management’smanagement's compensation with shareholders’ expectations;shareholders' expectations. As stated above, the greater the level of responsibility of the person, the more the compensation should be stock-based.· Base Salary Target Annual Bonus Target Longer term Grants T. M. Solso 17.2% 17.2% 65.6% Other Named Executive Officers 23.7% – 31.0% 17.0% – 18.6% 50.4% – 58.4% (‘‘("Section 162(m)’’") limits the corporate tax deduction to one million dollars for compensation paid annually to any one of the named executive officers in the proxy,Named Executive Officers, unless the compensation meets certain requirements. The Committee adopted changes to the compensation program, originally approved by shareholders in 1995, that qualify payments under the Senior Executive Bonus Plan and Senior Executive Medium TermLonger-Term Performance Plan for tax deductibility under Section 162(m). These changes were designed to maximize tax deductibility, while retaining the ability to attract, retain and motivate executives to achieve our business objectives. Payments under the Senior Executive Bonus Plan and the Senior Executive Longer-Term Performance Plan (formerly named the "Senior Executive Medium Term Performance Plan in 2005 werePlan") each year are certified by the Compensation Committee.Committee and the Committee's discretion to adjust the plans' payouts upward is eliminated.indicatedexplained below, the Base Salaries of the named executive officersNamed Executive Officers are targeted toset at the median of the range of the salaries of individuals with similar positions in companies among a broad group of similar sizemajor U.S. manufacturing companies where the data have been size-adjusted using statistical techniques to Cummins.reflect Cummins size. The Committee has indicated that it intends to continue this policy notwithstanding the enactmentprovisions of Section 162(m).Company’sCompany's executive compensation program consists of three elements: Base Salary, Annual Bonus and Longer-TermLonger-term compensation. Each was designed to accomplish a somewhat different objective. In total, they wereare designed to fulfill the Company’sCompany's basic goals of linking pay to financial performance and paying competitively. All officers have participatedparticipate in each element of the program.We have determined that a two-year performance cycle is appropriate to measure performance for earning Longer-Term compensation because longer measurement periods do not fit the cycles of our business. The stock component of Longer-Term grantsCompany and the Company’s stock ownership requirements for officers create a longer-term view by our executives that is linked to shareholder value.WeCommittee have used survey data provided by our executive compensation consultantthe Consultant to determine competitive levels of pay. These surveys include over 300The survey information includes one hundred seventy-eight U.S. industrial corporations.manufacturing corporations, and the Company has chosen not to create a more specific compensation peer group.annually, andannually. It is the only fixed portion of the executive's compensation. Base Salary is normally set in the median range of thebase salaries of individuals with similar positions in U.S. manufacturing companies of similar size to Cummins.the Company.establishedannually approved by the Committee and reviewed annually.Committee. Each participant is assigned a participation level thatrate as a percent of salary. For purposes of this plan, Company performance is measured by Return On Average Net Assets (ROANA) as defined by the plan.a percentagedirect earnings before interest expense, provisions for income taxes and minority interests in earnings of salary.consolidated subsidiaries and before consideration of any corporate expense allocations. The denominator is Average Net Assets which are derived directly from the consolidated balance sheet and exclude debt and related financing accounts, deferred tax amounts and certain pension and post retirement liability accounts. Average Net Assets are then allocated to the appropriate operating segment.follows.follows:(Annual (Annual Bonus) equals (Annual Base Salary) times (participation percentage assigned to each job) times (Payout Factor)$550,000 Annual Base Salary paid during the year × 60% Participation Percentage × 1.5 Payout Factor based on Company performance for the year $495,000 Annual Bonus T. M. Solso 100 % F. J. Loughrey 75 % J. S. Blackwell 65 % T. Linebarger 60 % J. D. Kelly 60 % Annual BonusCorporate weighted average formula was set to yield a 1.02.0. The Payout Factor for the portion of Mr. Linebarger's Annual Bonus determined by the Power Generation Operating Segment performance was 2.0; the Payout Factor for the portion of Mr. Kelly's Annual Bonus determined by the Engine Operating Segment performance was 1.8.Operating
Segment ROANA for 1.0
Payout Factor Weightings for Calculating
Corporate Bonus Engine Business 43.02 % 47.5 % Power Generation Business 32.34 % 23.2 % Distribution Business 26.71 % 13.5 % Components Group 14.67 % 15.8 % 100 % financialand will require one of the best years in the Company's history. These targets are appropriately difficult in light of the current uncertain U.S. economic environment and will require improved performance from prior record years.equal to the performance provided by achieving the Company’s Annual Operating Plan. In 2005, Return on Average Net Assets was the measure used to determine Annual Bonus payments. The maximum Payout Factor was 2.0.One-half56% of the bonus for senior executives of the Company’s Business Units has been determined by the financial performance of the Business Units, and one-half has been based on the Company’s performance. The Committee believes this formula provides appropriate balance, compensating for performance measured at the Business Unit level as well as for the total Company. Basing a significant portion of the bonus on total Company results rewards Business Units for working in an integrated way, maximizing our total financial performance. The Business Unit measure emphasizes business results each key manager affects most directly. In 2005, the performance measure for the Business Units’ Annual Bonus plans was Return on Average Net Assets. The Annual Bonus for the Company’s performance was calculated as the weighted average of the Business Units’ Payout Factors; the weighting was based on each Business Unit’s Annual Operating Plan percentage of Earnings Before Interest and Taxes. The entire bonus for Officers with corporate responsibilities was determined based on total Company performance.1.0 level.Return on Average Net Assets performance measure,financial measures used to determine the Payout Factor, minimum levels of consolidated performance called Performance Hurdles were required.are required, ensuring that certain cash flow and other commitments are met. Regardless of the Return on Average Net Assetsfinancial performance with respect to the operating measures described above, the Performance Hurdles must be achieved in order for any Annual Bonus to be paid,paid. For 2007, the Performance Hurdle levels of Profit After Tax andHurdles required that the Corporation's Net Income, including the bonus payout expense, must be greater than zero; that the Corporation's Free Cash Flow, haddefined as cash flow from operations less capital, software and joint venture investments, must be equal to or greater than the Corporation's projected dividend payments; and that all payouts were subject to review by the Corporation's Chief Financial Officer to ensure that such payments will not cause any company metric to be achieved.less than the credit metrics required for an investment grade or constitute a violation of any loan covenants or other financial restrictions in existence. The Performance Hurdle is the same for 2008.162 (m)162(m), designated officers (the Chief Executive Officer and six other senior officers in 2005)2007) are compensated under a modified version of the Annualwhich many employees at all levels of the Company, including all officers, participate, only in that the Compensation Committee has no discretion to increase the payouts once it establishes the performance measures each year. All of the Named Executive Officers participate in this plan.3.Longer-Term3. Longer-Term CompensationCompany’s Longer-TermCompany's Longer-term compensation program consists of performance cash awards and stock-based grants. The Committee believes an equal payout opportunity from each type of award is appropriate, and grants have been made accordingly.Medium TermLonger-Term Performance Plan and the Senior Executive Medium TermLonger-Term Performance Plan.In 2005 Annually the Committee makes Target Awards to be earned based on Company performance over a Targetperiod of time called the "Award Cycle". Since 2003, the Award was granted to each participant forCycles have been overlapping two-year periods, and the 2005 – 2006 Award Cycle.performance measure determining the actual payouts has been consolidated and reported Return on Equity (ROE). These Target Awards are expressed as a dollar amount, each reflecting one year of grant value. Target Awards will be made annually, with overlapping two-year Award Cycles. For the 2005 – 2006 Award Cycle,Company’sCompany's Annual Operating Plans,Plan for the first year and (b) anis 39%represents significant improvement above the 1.0 target level; performance equal to 130% of the target performance level would be required for a 2.0 Payout Factor. The Threshold Payout is 10% of Return on Equity in the Annual Operating Plans.Target Award; performance equal to 70% of the target performance level would be required for a .1 Payout Factor.to comply with the requirements of Section 162(m), designated officers (the Chief Executive OfficerCEO and six other senior officers in 2005)2007 are compensated under a modified version of the Medium TermLonger-Term Performance Plan, called the Senior Executive Medium TermLonger-Term Performance Plan. The plans are identical except that the Committee’sCommittee's discretion to adjust payments upward is eliminated in the Senior Executive Medium TermLonger-Term Performance Plan. All of the Named Executive Officers participate in this plan.Plan, succeeding the 1992 Stock Incentive Plan which expired in 2002. The 2003 Stock Incentive Plan authorizes a pool of 2,500,000 shares for grants.Plan. Annual grants awarded insince 2004 and 2005 werehave been comprised solely of Target Awards of performance shares. No stock options werehave been awarded in 2004 or 2005.to any of the Named Executive Officers since 2003.20052007 for the 2005 – 20062007 - 2008 Award Cycle is expressed as a number of shares of the Corporation’sCorporation's Common Stock. A percentage of the Target Award number of shares will be earned, ranging from zero to 100%200% of the Target Award, based on the same Return on Equity performance measures as the 2005 performance cash grants previously discussed. For the 2005 – 2006 Award Cycle, 100% of the Target Award number of performance shares will be earned if the Company achieves the level of Return on Equity provided for in the Company’s Annual Operating Plans, measured cumulatively for the two-year period. TheAny performance shares that becomeare earned will remain restricted for one additional year, until February 2008.March 2010. The shares would be forfeited if the participant ceased to be an employee of the Company during the restriction period.period, unless an exception were approved by the Committee. Such exceptions are rarely made, except in the instance of retirement.Longer-TermLonger-term plan elements have been set to provide "at target" total compensation opportunity at the median of that provided by similarly-sized U.S. industrialmanufacturing companies in ourthe survey base when combined with Base Salaryfor similar positions and Annual Bonus, assuming the target levels are earned.scope. TheLonger-Term plan elements for each position. More senior positions have a larger proportion of total compensation opportunity dependent on Company performance than do less senior positions.Board of DirectorsCommittee believes that the Company’sCompany's officers should own significant amounts of the Company’sCompany's stock. To underscore this, we have adopted formal stock ownership guidelines requiring officers to own the Company’sCompany's Common Stock with their shares’shares' total value equal to multiples of base salary as follows: CEO, five times base salary; other designated senior officers (including all of the Named Executive Officers other than the CEO), three times base salary; all other officers, one times base salary. In 2003 the stockwere restatedare expressed as a set number of shares for defined bands of salary. The numbers of shares required are reviewed periodically and established by the Committee based on the average market price of the Corporation’s Common Stock, reflecting these multiples of salary, within bands of salary levels. Current officers have until December 31, 2006 to comply; newly-appointed officersCompany's stock over a three-year period.comply. Also in 2003, wemeet their requirement. An officer whose salary increases to the level of a new salary band (and higher stock ownership requirement) will have three years to achieve the new higher level.Directors. Members of the Board of Directors, who are not employees of the Corporation, will be required to own shares of Common Stock of the Corporationrequiring Cummins stock ownership equal in value to three times the Director’samount of their annual Board Retainer fees. Directors will have six years to accumulate these shares.retainer fee.Stock awards, combined with The Company's officers participate in the stock ownership requirements, provide a longer-term performance focus, balancingfull range of benefits and are covered by the Annual Bonus Plan and the rolling two-year measurement period of the performance cash Target Awards.Compensation of the Chief Executive OfficerBase Salary and Annual Bonus participation rate of the CEO are designedCompany targets its total benefit package to be at the median of our survey companies specifically as described under the market for U.S. manufacturing companies.sections appearing earlierreceived during the last ten years of employment. The total replacement formula is 2% for each of the first twenty years and 1% for each of the next ten years, with a maximum 50% total after thirty years of service. The highest compensated two Named Executive Officers (Messrs. Solso and Loughrey) receive an additional benefit, exceeding the benefit for other participants by 10%. For some officers who joined the Company mid-career, including Ms. Blackwell among the Named Executive Officers, retirement benefits under this program are accumulated at an accelerated rate: 4% for each of the first ten years, 2% for each of the next five years, with a maximum 50% total after fifteen years of service. Market data have indicated that this program provides competitive levels of life insurance and retirement benefits for these positions.report. Based on his request,proxy) plus five other senior officers are Designated Officers under the CEO did notChange in Control Compensation Plan. As such, they would receive a Base Salary increase in 2005. As a result, his 2005 Base Salary was slightly below the survey median.The CEO received anseverance and benefit continuation equal to three years' salary and Annual Bonus at a 1.0 Payout Factor, rather than for the one year described above for all other officers.2005 larger thanall grants outstanding. The amount would be calculated as (Target Dollar Award) × (1.0 Payout Factor) × (Pro-Rata Factor). The Pro-Rata Factor would be calculated as the Annual Bonus paidpercentage of the years of the Award Cycle that had commenced when the Change in Control occurred. For example, if the Award Cycle was for 2004 because2007 - 2008, and a Change in Control took place in 2007, the Company exceeded its planned levels of Return on Average Net Assets to a greater extent in 2005 than in 2004.Pro-Rata Factor would be one-half.In 2005, the CEO received a Target Award of 28,400 performance shares under the The 2003 Stock Incentive Plan andprovides that, in the event of a performance cash Target Award of $2,027,000 (payableChange in 2007) under the Senior Executive Medium Term Performance Plan.Control, outstanding awards become immediately vested or exercisable.In determining grant amounts for the CEO, as explained earlier, the Committee set the total of the three elements of the executive compensation program—Base Salary, Annual Bonus, and the Longer-Term Plan—to provide annualized compensation opportunity to the CEO equal to the median of the range of total compensation opportunity provided for CEOs by the survey companies described earlier in this report. This objective was achieved.The CEO, on an annual basis, discusses in detail his priorities and objectives with the Governance and Nominating Committee (the members and responsibilities of the Governance and Nominating Committee are described on page 6 of this Proxy Statement). The Governance and Nominating Committee formally reviews the CEO’s performance annually, based on how well the CEO performed against his workplan, including the progress made by the Company in implementing its business strategy and achieving its business objectives, both short-term and longer-term. This review, which is reported in detail to the Compensation Committee, considers both quantitative and qualitative performance matters, and is a key factor in assisting the Committee in setting the CEO’s compensation.The Committee has reviewed all elements of the Named Executive Officers’ compensation, including Base Salary, Annual Bonus, Longer-Term incentives, Deferred Compensation, Change of Control compensation protection provisions, retirement plan provisions, and perquisites. A tally sheet showing the dollar amounts of these components was reviewed. Based on this review, the Committee’s opinion is that the Named Executive Officers’ total compensation and potential payouts upon change of control or severance are reasonable, reflect competitive practice and levels, and are not excessive.Company’sCompany's executive compensation philosophy and program.Respectfully submitted,
ALEXIS M. HERMAN, CHAIRMAN
ROBERT J. DARNALL
GEORGIA R. NELSON
J. LAWRENCE WILSON
Summary Compensation Table and Supplemental Tables14Shareholder Return Performance PresentationThe following graph compares the cumulative total shareholder return on the Common Stock of the Company for the last five fiscal years with the cumulative total return on the S&P 500 Index and an index of peer companies* selected by the Company. The comparisons in this table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the Company’s stock.COMPARE 5-YEAR CUMULATIVE TOTAL RETURNAMONG CUMMINS INC.,S&P 500 INDEX AND PEER GROUP INDEX
* ArvinMeritor Inc., Caterpillar, Inc., Dana Corporation, Deere & Company, Eaton Corporation, Ingersoll-Rand Company Ltd., Navistar International Corporation and Paccar Inc.Compensation Tables and Other InformationTheA summary compensation table and accompanying notes and other informationsupplemental tables on the following pages include individualdisclose compensation information for the Named Executive Officers during the Company's last threecompleted fiscal years on the Company’s Chairman and Chief Executive Officer and the four other most highly compensated executive officers during 2005. Except for Mr. Solso and Mr. Loughrey in 2005,year.Name and Principal Position Year Annual
SalaryBonus Stock
Awards
(1)Option
AwardsNon-Equity
Incentive Plan
Compensation
(2)Change in
Pension Value
and NQ
Deferred
Compensation
Earnings
(3)All Other
Compensation
(4)Total
CompensationT. M. Solso, Chairman and CEO 2007
2006$
$1,110,000
1,022,500$
$0
0$
$2,506,519
2,271,958$
$0
0$
$6,274,000
5,524,000$
$3,340,221
4,604,073$
$148,409
158,870$
$13,379,150
13,581,401
J. S. Blackwell, Executive Vice President and Chief Financial Officer
2007
2006
$
$
575,000
525,000
$
$
0
0
$
$
729,924
631,211
$
$
0
0
$
$
1,829,500
1,546,000
$
$
757,935
815,585
$
$
125,060
91,296
$
$
4,017,419
3,609,092
F. J. Loughrey, President and COO
2007
2006
$
$
812,500
750,000
$
$
0
0
$
$
1,090,882
887,962
$
$
0
0
$
$
2,840,750
2,234,000
$
$
2,382,030
2,598,194
$
$
83,268
93,360
$
$
7,209,430
6,563,516
T. Linebarger, Executive Vice President and President—Power Generation
2007
2006
$
$
615,000
565,000
$
$
0
0
$
$
896,100
810,930
$
$
0
0
$
$
1,820,000
1,542,400
$
$
601,285
616,336
$
$
27,442
21,021
$
$
3,959,827
3,555,687
J. D. Kelly, Vice President and President—
Engine Business
2007
2006
$
$
520,000
475,000
$
$
0
0
$
$
827,882
701,535
$
$
0
0
$
$
1,566,800
1,093,500
$
$
1,004,379
1,276,473
$
$
24,114
35,403
$
$
3,943,175
3,581,911valueamounts recognized for financial statement reporting purposes for the fiscal year ended December 31, 2007, in accordance with FAS 123R of perquisitesawards pursuant to the 2003 Stock Incentive Plan. Included are the recognized expenses for grants of performance shares made in February 2004, February 2005, February 2006, and other personal benefits forFebruary 2007 to each of the named executive officers was less thanNamed Executive Officers, and for grants of restricted stock made to Messrs. Linebarger and Kelly in March 2006. There were no forfeitures in 2007 regarding any of these grants to the established reporting thresholdNamed Executive Officers. Performance shares are earned and is not included in the table.15
Principal Position
Annual
Comp
($)
Stock
Awards
Options/
SARs
(#)
Term
Performance
Plans
Compensation(1) Amounts reported as “Other Annual Compensation” for 2005 include, respectively, the Company’s incremental cost incurred for personal useconverted to shares of its business aircraft and Company-provided professional financial counseling services as follows: T. M. Solso $78,119 and $8,365; F. J. Loughrey $49,106 and $6,375.(2) Payments were made in 2005 under the Company’s Senior Executive Medium Term Performance Plan and Medium Term Performance Plan for the 2003-2004 Award Cycle. The cash payments wererestricted stock based on the Company’s Return on EquityCompany's performance during 2003-2004, as previously established byover a two-year period. The shares of restricted stock so earned remain restricted for one additional year. Committee for this Award Cycle.There were no Target Awards granted for the 2002-2003 Award Cycle of the Company’s Senior Executive Medium Term PerformanceTarget Bonus Plan for 2007 performance and Medium Term Performance Plan; therefore, there were no(ii) payments in 2004 under these plans.Payments were made in 2003 under the Company’s Senior Executive Medium Term Performance Plan and Medium Term Performance Plan for the 2001-2002 Award Cycle. The cash payments were based on the Company’s Free Cash Flow performance during 2001-2002, as previously established by the Committee for this Award Cycle. However, the Compensation Committee, acting on management’s recommendation, reduced the amounts that were paid from the amounts that otherwise would have been paid based on the Company’s Free Cash Flow performance during 2001-2002 compared to the measures established by the Committee for this Award Cycle.The amount also includes a payment made in 2004 to recognize the transition from the two-year grant method used in 2001 to annual grants beginning in 20032007 for the Senior Executive Medium TermLonger-Term Performance Plan andbased on the Medium Term Performance Plan.2005-2006 Award Cycle. The transition payments were calculatedfor each Named Executive Officer from these sources were: T. M. Solso J. S. Blackwell F. J. Loughrey T. Linebarger J. D. Kelly Senior Executive Target Bonus Plan $ 2,220,000 $ 747,500 $ 1,218,750 $ 738,000 $ 592,800 Senior Executive Longer-Term Performance Plan $ 4,054,000 $ 1,082,000 $ 1,622,000 $ 1,082,000 $ 974,000 TOTAL $ 6,274,000 $ 1,829,500 $ 2,840,750 $ 1,820,000 $ 1,566,800 one-thirdfollows: T. M. Solso J. S. Blackwell F. J. Loughrey T. Linebarger J. D. Kelly Cummins Inc., Pension Plan A (Qualified) $ 12,782 $ 20,714 $ 49,487 $ 7,374 $ 25,593 Cummins Excess Benefit Plan (Non-qualified) $ 530,063 $ 72,189 $ 299,799 $ 127,385 $ 91,978 Supplemental Life Insurance and Deferred Income Program (Non-qualified) $ 2,648,212 $ 544,134 $ 1,935,863 $ 446,678 $ 809,919 Total $ 3,191,057 $ 637,037 $ 2,285,149 $ 581,437 $ 927,490 Above-market earnings on non-qualified deferred compensation: $ 149,164 $ 120,898 $ 96,881 $ 19,848 $ 76,889 Annual Bonus paid based on Return on Average Net Assets performance in 2003.applicable federal long-term rate. T. M. Solso J. S. Blackwell F. J. Loughrey T. Linebarger J. D. Kelly Financial Counseling $ 7,117 $ 6,766 $ 12,680 $ 7,763 $ 12,680 Personal use of Company Aircraft $ 118,626 $ 107,019 $ 55,010 $ 10,211 $ 0 Life Insurance Premiums $ 15,416 $ 4,025 $ 8,328 $ 2,218 $ 4,184 Company Match in the Retirement and Savings Plan $ 7,250 $ 7,250 $ 7,250 $ 7,250 $ 7,250 TOTAL $ 148,409 $ 125,060 $ 83,268 $ 27,442 $ 24,114 (3) Amounts reported as “All Other Compensation” for 2005 include, respectively, matching and other contributions by the Company under the Retirement and Savings Plan and “above market” earnings on previously deferred compensation as follows: T. M. Solso $6,300 and $112,189; F. J. Loughrey $6,300 and $76,795; T. Linebarger $6,300 and $11,084; J. S. Blackwell $6,300 and $44,712; and J. D. Kelly $6,300 and $61,141.Following a comprehensive review of the Company’s executive compensation program, one of the crediting rates available under the Company’s non-qualified deferred compensation plan that resulted in “above market” earnings was reduced for future elections.Security Ownership of ManagementSet forth below is information as of March 20, 2006, regarding the beneficial ownership of Common Stock of the Company by the Chief Executive Officer, each of the other named executive officers for 2005 and the directors and executive officers of the Company as a group.
Nature of
Beneficial
Ownership
of Class* Less than 1%(1) See footnote 4 to the director nominee listing on page 4.discloses, for eachcomplements the disclosures set forth in columns captioned Stock Awards and Option Awards of the named executive officers, information regarding individual grants of stock options and stock appreciation rights made during 2005, and their potential realizable values.Option/SAR Grants in Last Fiscal Year
Value at Assumed
Options/SAR’s
Granted to
Employees in
Price
Stock Price
Appreciation for
Option Terms(1)Stock option and stock appreciation right exercise activity during 2005, on an aggregated basis for each of the named executives, is contained in the following table. Also disclosed are the number and value of options and appreciation rights, on an aggregated basis, held by each named executive as of December 31, 2005.Aggregated Option/SAR Exercises in Last Fiscal Year, and FY-End Option/SAR ValueEstimated benefits payable to each named executive pursuant to long-term incentive plan rights awarded during 2005 are disclosed in the following table.Long-Term Incentive Plan Awards in Last Fiscal Year/SAR Value
Units or other
Non-Stock Price-Based Plans(2)(1) The Company made Target Awards of Performance Shares under its 2003 Stock Incentive Plan in 2005. The awards are expressed as a target number of shares of the Company’s Common Stock. Shares are earned based on the Company’s Return on Equity (ROE) performance during 2005-2006. The number of shares earned can range from zero to 100% of the Target Award number of shares. The Target Award number of shares will be earned if the Company’s ROE for 2005-2006 is equal to the ROE in the Company’s Annual Operating Plan for the period. The shares that are earned based on the Company’s Return on Equity performance for the 2005-2006 period become restricted stock for an additional year, with distribution occurring in February, 2008 if the participant remains an employee of the Corporation. Dividends become payable after they become earned, including the year they are restricted stock.Summary Compensation Table.(2)
GRANTS OF PLAN-BASED AWARDS Estimated Future Payouts Under Non-Equity Incentive Plan Awards
(1) Estimated Future Payouts Under Equity Incentive Plan Awards
(2)(3) (4) Grant Date Fair Value of Stock and Option Awards Name Grant Date Threshold ($) Target
($) Maximum
($) Threshold
(#) Target
(#) Maximum
(#) All Other Stock Awards: Number of Shares or
Units (#) All Other Option Awards: Number of Securities Underlying Options
(#)T.M. Solso 2/20/07 $ 238,800 $ 2,388,000 $ 4,776,000 8,632 86,320 172,660 0 0 $ 3,097,593 J.S. Blackwell 2/20/07 $ 70,200 $ 702,000 $ 1,404,000 2,540 25,400 50,860 0 0 $ 911,479 F.J. Loughrey 2/20/07 $ 112,400 $ 1,124,000 $ 2,248,000 4,060 40,600 81,260 0 0 $ 1,456,931 T. Linebarger 2/20/07 $ 56,200 $ 562,000 $ 1,124,000 2,032 20,320 40,660 0 0 $ 729,183 J.D. Kelly 2/20/07 $ 50,600 $ 506,000 $ 1,012,000 1,828 18,280 36,560 0 0 $ 655,978 Medium TermLonger-Term Performance Plan and Senior Executive Medium TermLonger-Term Performance Plan in 2005.2007. A multiple of the Target Award is earned based on the Company’s ROECompany's Return on Equity (ROE) performance during 2005 - 2006.2007-2008. The amount earned and paid would range from zero to 200% of the Target Award amount. The Target Award will be earned if the Company’sCompany's ROE for 2005 - 20062007-2008 is equal to the targeted ROE level established for that period as described in the Company’s Annual Operating PlansCompensation Discussion and Analysis. The Threshold Payment (10% of the Target Award) will be earned if the Company's ROE is 70% of the targeted ROE for thatthe period. The Maximum Payment (200% of the Target Award) will be earned if the Company’sCompany's ROE is 39%30% above the targeted ROE for the period. The payments would be made in February 2009.Operating PlansBonus Plan, as described in the Compensation Discussion and Analysis. The Annual Bonus is designed to link executive pay to the annual performance of the Company. The payout is calculated based on a formula approved by the Compensation Committee annually. Each participant is assigned a participation rate as a percent of salary. For purposes of this Plan, Company performance is measured by Return on Average Net Assets as defined by the Plan. The Annual Bonus is calculated as follows.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END Option Awards Stock Awards Name Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable Equity Incentive Plan
Awards: Number of
Securities Underlying
Unexercised Unearned
Options (#) Option
Exercise
Price ($) Option
Expiration
Date (1)(2)
Number of
Shares or
Units of Stock
That Have
Not Vested
(#) (4)
Market Value
of Shares or
Units of Stock
That Have
Not Vested
($) (1)(3)
Equity
Incentive Plan Awards:
Number of Unearned
Shares, Units or
Other Rights That
Have Not Vested
(#) (4)
Equity
Incentive Plan Awards:
Market or Payout
Value of Unearned
Shares, Units or
Other Rights That
Have Not Vested
($)T.M. Solso 0 0 0 N/A N/A 113,600 $ 7,234,616 187,840 $ 11,962,590 J.S. Blackwell 0 0 0 N/A N/A 30,320 $ 1,930,929 57,120 $ 3,637,687 F.J. Loughrey 0 0 0 N/A N/A 45,480 $ 2,896,394 85,000 $ 5,413,225 T. Linebarger 0 0 0 N/A N/A 70,320 $ 4,478,329 45,720 $ 2,911,678 J.D. Kelly 0 0 0 N/A N/A 67,280 $ 4,284,727 41,120 $ 2,618,727 period.shares of restricted stock in this column was February 14, 2008. Also, Mr. Linebarger and Mr. Kelly each received a grant of 10,000 shares of restricted stock in 2006 (40,000 on a split-adjusted basis). These shares become vested in one-third annual increments March 17, 2008, March 17, 2009, and March 17, 2010. They are included in the totals in this column, as of year-end 2007.18 The outstanding Target Awards, on a split-adjusted basis, of performance shares as of 12/31/2007 for the 2006-2007 and 2007-2008 Award Cycles:Name Number of Units of Performance Shares Date Earned and Converted to Restricted Stock Vesting Date for Shares of Restricted Stock T. M. Solso 101,520
86,3202/13/2008
2/20/20093/1/2009
3/1/2010J. S. Blackwell 31,720
25,4002/13/2008
2/20/20093/1/2009
3/1/2010F. J. Loughrey 44,400
40,6002/13/2008
2/20/20093/1/2009
3/1/2010T. Linebarger 25,400
20,3202/13/2008
2/20/20093/1/2009
3/1/2010J. D. Kelly 22,840 2/13/2008 3/1/2009 18,280 2/20/2009 3/1/2010
OPTION EXERCISES AND STOCK VESTED Option Awards (1)
Stock Awards (2) Name Number of Shares Acquired on Exercise (#) Value Realized on Exercise ($) Number of Shares Acquired on Vesting (#) Value Realized on Vesting ($) T. M. Solso 0 $ 0 168,000 $ 5,691,000 J. S. Blackwell 0 $ 0 43,200 $ 1,463,400 F. J. Loughrey 0 $ 0 57,600 $ 1,951,200 T. Linebarger 0 $ 0 43,200 $ 1,463,400 J. D. Kelly 0 $ 0 28,800 $ 975,600 Name Plan Name Number of Years Credited Service (#) Present Value of Accumulated Benefit ($) Payments During Last Fiscal Year ($) T. M. Solso Cummins Inc. and Affiliates Pension Plan
Excess Benefit Plan
Supplemental Life Insurance Plan36 $
$
$1,024,350
3,888,227
12,723,112$
$
$0
0
0J. S. Blackwell Cummins Inc. and Affiliates Pension Plan
Excess Benefit Plan
Supplemental Life Insurance Plan11 $
$
$153,714
277,676
2,311,460$
$
$0
0
0F. J. Loughrey Cummins Inc. and Affiliates Pension Plan
Excess Benefit Plan
Supplemental Life Insurance Plan34 $
$
$957,171
1,900,266
7,700,767$
$
$0
0
0T. Linebarger Cummins Inc. and Affiliates Pension Plan
Excess Benefit Plan
Supplemental Life Insurance Plan15 $
$
$194,134
309,030
1,718,103$
$
$0
0
0J. D. Kelly Cummins Inc. and Affiliates Pension Plan
Excess Benefit Plan
Supplemental Life Insurance Plan31 $
$
$814,951
414,594
3,647,352$
$
$0
0
0TableThe Company maintains retirement pension programs for its employees, including the executive officers named in the Summary Compensation Table on page 16. Elements of the program for the executive officers include the Company’sA is a Cash Balance Pension Plan ("Plan A"). Participants receive Pay Credits equal to 6% of Total Monthly Pay, defined as Base Salary and Annual Bonus payments. Individual accounts are maintained for each participant. The accounts receive Interest Credits equal to Thirty-Year Treasury Bond rate plus 1%. Participants are 100% vested in the Plan A benefit upon attaining five years of service.which provides non-qualified pension benefits in excess of limitations imposed by the Internal Revenue Code andon the benefits provided by the Plan A formula. It preserves the total benefit payable under the Plan A formula.Program. Benefits are not offset or otherwise reduced by amounts payable or received under Social Security.Plan provides a Supplemental Executive Retirement Plan ("SERP") Life Annuity benefit to officers of the Corporation who participate in the U.S. Plan A.following table sets forth the estimated maximum annual pension benefits payableSERP benefit is based on a straight life annuity basis underpercentage of the programhighest five consecutive years of Total Compensation during the final ten years of the participant's career (referred to hereafter as "Five Year Average Pay"). Total Compensation for calculation of Five Year Average Pay is defined as Base Salary and Annual Bonus payments.officers in various compensation andparticipant's Five Year Average Pay for each of the first twenty years of service classifications upon retirement at age 60. Anplus 1% of the participant's Five Year Average Pay for each of the next ten years of service. The maximum is a 50% benefit after thirty years of service, except that an officer who is among the Company’sCompany's two highest paid executive officersNamed Executive Officers at the time of retirement will receive an annual benefit greater than amounts reflectedequal to an additional 10%.by an amount equaland discount rates used to 10% ofcalculate a lump sum payment under the officer’s covered compensation.SERP are the same as those used to make such calculations under the qualified Plan A.J. S.Ms. Blackwell, retirement benefits are accumulatedthe SERP benefit is calculated at an accelerated rate; therefore, the benefits for those officers would requirerate, requiring one-half the service indicatednecessary for other participants.
NON-QUALIFIED DEFERRED COMPENSATIONName Executive Contributions in Last
Fiscal Year Registrant Contributions in Last Fiscal
Year ($) (1) Aggregate Earnings in Last Fiscal
Year ($) Aggregate Withdrawals/ Distributions ($) Aggregate Balance at Last Fiscal Year End ($) T. M. Solso $ 0 $ 0 $ 436,369 $ 0 $ 5,493,879 J. S. Blackwell $ 1,056,153 $ 0 $ 353,678 $ 0 $ 4,637,547 F. J. Loughrey $ 480,000 $ 0 $ 301,642 $ 0 $ 4,162,088 T. Linebarger $ 200,000 $ 0 $ 65,658 $ 0 $ 978,476 J. D. Kelly $ 369,750 $ 0 $ 241,223 $ (41,686 ) $ 3,246,032 columnsabove table that were also reported in the table below.Estimated Annual Benefit Upon Retirement
Cash
Compensation
(Base Salary
plus Short-
Term Bonus)
Years
Years
Years
Years
Yearsfor purposes of the pension program is the highest average total cash compensation, including base salary and annual bonus payments, for any consecutive five-year period during the ten years prior to retirement. Covered compensation is disclosed under the “Salary” and “Bonus” columnsEarnings" column of the Summary Compensation Table. Covered compensation and full years of serviceTable as of December 31, 2005"Above-market earnings" for the Company’s ChiefNon-Qualified Deferred Compensation Plan for each Named Executive Officer and the other named executive officers are as follows:are: T. M. Solso $1,922,175, 34 years;$149,164; J. S. Blackwell $120,898; F. J. Loughrey $1,074,330, 31 years;$96,881; T. Linebarger $716,742, 12 years;$19,848; J. D. Kelly $565,775, 28 years;$76,889.J. S. Blackwell $682,603, 8 years.the form of distribution. Choices for taking distribution are lump sum or annual installments, up to fifteen.Control Arrangementsthe Corporationchange of controlChange in Control of the Company, as defined below, the Company will provide benefits to certain executives, including the ChiefNamed Executive Officer and other executiveOfficers. Certain specified officers, named inincluding the Summary Compensation Table on page 16. Certain named executive officers, as designated by the Compensation Committee,Named Executive Officers, would be entitled to three year’syear's salary plus three annual bonusAnnual Bonus payments atcalculated using a 1.0 payout factor.Payout Factor.willwould also provide for the full vesting of certain insurance and retirement benefits and the continuation in effect for a three-year severance period of certain other employee benefits. In addition, the Company’s retirement plans will allocate any actuarial surplus assets to fund increased pension benefits, stockStock options previously granted willwould become fully exercisable, and certain long-term incentive planexercisable.willof performance cash would be paid on a pro-rated basis, calculated as the percentage of days of each respective Award Cycle that had elapsed as of the date of the Change in cash.Control, and assuming a 1.0 Payout Factor.annuity(non-qualified) benefits will also be paid in cash.employee compensation and director annual fees deferred (including the value of deferred shares and stock units), respectively, under the Company’sCompany's Deferred Compensation Plan and Deferred Compensation Plan for Non-Employee Directors will be paid in cash. At an employee’s option, certain amounts deferred underDeferred Compensation Plan willfollowing: (i) there shall be contributed to a grantor trustconsummated (A) any consolidation or merger of the Company in which the Company is grantor. A changenot the continuing or surviving corporation or pursuant to which shares of controlCommon Stock would be converted in whole or in part into cash, other securities or other property, other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (B) any sale, lease, exchange or transfer (in one transfer or a series of related transactions) of all or substantially all the assets of the Company; or (ii) the stockholders of the Company shall approve any plan or proposal for these purposesthe liquidation or dissolution of the Company; or (iii) any "person" (as such term is definedused in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company or a subsidiary thereof or any employee benefit plan sponsored by the Company or a subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13d 3 under the Exchange Act) of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise; or (iv) at any time during a period of two consecutive years, individuals who, at the beginning of such period constituted the Board, shall cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by the Company's stockholders of each new director during such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such two-year period; or (v) any other event shall occur thatvarious plans, programs and arrangements providing these benefits.Named Executive Officers are estimated to be the following:Other Transactions and Agreements With Directors and OfficersIrwin Financial Corporation (“IFC”) ownsPayments Upon a one-eighth interestQualified Termination Following a Change in oneControl of the Company’s business aircraft and has an arrangement withCorporationPayments T. M. Solso J. S. Blackwell F. J. Loughrey T. Linebarger J. D. Kelly Severance (1) $ 6,960,000 $ 2,970,000 $ 4,462,500 $ 3,072,000 $ 2,592,000 Unvested Stock Option Spread $ 0 $ 0 $ 0 $ 0 $ 0 Unvested Restricted Stock *(2) $ 7,234,616 $ 1,930,929 $ 2,896,394 $ 4,478,329 $ 4,284,727 Long Term Incentive Plan Payment *(3) $ 15,319,590 $ 4,664,687 $ 6,921,255 $ 3,733,678 $ 3,358,727 Retirement Benefit Payment (4) $ 1,730,390 $ 861,256 $ 1,521,226 $ 858,499 $ 993,824 Welfare Benefit Values (5) $ 23,334 $ 23,334 $ 23,334 $ 23,334 $ 23,334 Financial Counseling $ 37,500 $ 37,500 $ 37,500 $ 37,500 $ 37,500 401(K) Benefit $ 21,750 $ 21,750 $ 21,750 $ 21,750 $ 21,750 Excise Tax & Gross-Up (6) $ 8,349,811 $ 3,613,911 $ 4,736,494 $ 3,170,960 $ 3,078,050 Aggregate Payments $ 39,676,991 $ 14,123,367 $ 20,620,423 $ 15,396,050 $ 14,389,912 Company to share one-eighthNamed Executive Officer's annual base salary at the time of the fixedtermination, plus three Annual Bonus Payments at a 1.0 Payout Factor.operating expenses relatedperformance share Target Awards for the 2006-2007 and 2007-2008 Award Cycles, at target level, assuming a $127.37 share price for the performance shares.its useretirement for three years of such aircraft. During 2005, $188,910 was paidadditional service.
Potential Payments upon Termination of Employment Other than Following a Change in ControlCompany by IFC under this arrangement. Director nominee William I. Miller is Chairman and ChiefNamed Executive Officer would be enhanced by the termination event described.IFC.2007, and that the price per share of the Company's common stock is the closing price as of that date, $127.37 ($63.685 on a split-adjusted basis).PursuantSeveranceCompany’s Key EmployeeNamed Executive Officers. Investment Plan, certain officers had purchased Voluntary Termination Involuntary Not-for-Cause Termination Termination for Cause Retirement Death Disability T. M. Solso Severance $ 0 $ 1,160,000 $ 0 $ 0 $ 0 $ 0 Accelerated Vesting of Longer-term Grants: Performance Cash
2007-2008 Award Cycle $ 0 $ 0 $ 0 $ 1,194,000 $ 1,194,000 $ 1,194,000 Performance Shares
2005-2006 Award Cycle $ 0 $ 7,234,616 $ 0 $ 7,234,616 $ 7,234,616 $ 7,234,616 Outplacement $ 0 $ 12,000 $ 0 $ 0 $ 0 $ 0 Welfare Benefits $ 0 $ 7,800 $ 0 $ 0 $ 0 $ 0 Financial Counseling $ 0 $ 12,500 $ 0 $ 12,500 $ 12,500 $ 12,500 Life Insurance
(Supplemental Life Insurance Program only) $ 0 $ 0 $ 0 $ 0 $ 3,480,000 $ 0
Voluntary Termination
Involuntary Not-for-Cause Termination
Termination for Cause
Retirement
Death
DisabilityJ. S. Blackwell Severance $ 0 $ 600,000 $ 0 $ 0 $ 0 $ 0 Accelerated Vesting of Longer-term Grants: Performance Cash
2007-2008 Award Cycle $ 0 $ 0 $ 0 $ 351,000 $ 351,000 $ 351,000 Performance Shares
2005-2006 Award Cycle $ 0 $ 1,930,929 $ 0 $ 1,930,929 $ 1,930,929 $ 1,930,929 Outplacement $ 0 $ 12,000 $ 0 $ 0 $ 0 $ 0 Welfare Benefits $ 0 $ 7,800 $ 0 $ 0 $ 0 $ 0 Financial Counseling $ 0 $ 12,500 $ 0 $ 12,500 $ 12,500 $ 12,500 Life Insurance
(Supplemental Life Insurance Program only) $ 0 $ 0 $ 0 $ 0 $ 1,800,000 $ 0
Voluntary Termination
Involuntary Not-for-Cause Termination
Termination for Cause
Retirement
Death
DisabilityF. J. Loughrey Severance $ 0 $ 850,000 $ 0 $ 0 $ 0 $ 0 Accelerated Vesting of Longer-term Grants: Performance Cash
2007-2008 Award Cycle $ 0 $ 0 $ 0 $ 562,000 $ 562,000 $ 562,000 Performance Shares
2005-2006 Award Cycle $ 0 $ 2,896,394 $ 0 $ 2,896,394 $ 2,896,394 $ 2,896,394 Outplacement $ 0 $ 12,000 $ 0 $ 0 $ 0 $ 0 Welfare Benefits $ 0 $ 7,800 $ 0 $ 0 $ 0 $ 0 Financial Counseling $ 0 $ 12,500 $ 0 $ 12,500 $ 12,500 $ 12,500 Life Insurance
(Supplemental Life Insurance Program only) $ 0 $ 0 $ 0 $ 0 $ 2,550,000 $ 0
Voluntary Termination
Involuntary Not-for-Cause Termination
Termination for Cause
Retirement
Death
DisabilityT. Linebarger Severance $ 0 $ 640,000 $ 0 $ 0 $ 0 $ 0 Accelerated Vesting of Longer-term Grants: Performance Cash
2007-2008 Award Cycle $ 0 $ 0 $ 0 $ 281,000 $ 281,000 $ 281,000 Performance Shares
2005-2006 Award Cycle $ 0 $ 1,930,929 $ 0 $ 1,930,929 $ 1,930,929 $ 1,930,929 Outplacement $ 0 $ 12,000 $ 0 $ 0 $ 0 $ 0 Welfare Benefits $ 0 $ 7,800 $ 0 $ 0 $ 0 $ 0 Financial Counseling $ 0 $ 12,500 $ 0 $ 12,500 $ 12,500 $ 12,500 Life Insurance
(Supplemental Life Insurance Program only) $ 0 $ 0 $ 0 $ 0 $ 1,920,000 $ 0
Voluntary Termination
Involuntary Not-for-Cause Termination
Termination for Cause
Retirement
Death
DisabilityJ. D. Kelly Severance $ 0 $ 540,000 $ 0 $ 0 $ 0 $ 0 Accelerated Vesting of Longer-term Grants: Performance Cash
2007-2008 Award Cycle $ 0 $ 0 $ 0 $ 253,000 $ 253,000 $ 253,000 Performance Shares
2005-2006 Award Cycle $ 0 $ 1,737,327 $ 0 $ 1,737,327 $ 1,737,327 $ 1,737,327 Outplacement $ 0 $ 12,000 $ 0 $ 0 $ 0 $ 0 Welfare Benefits $ 0 $ 7,800 $ 0 $ 0 $ 0 $ 0 Financial Counseling $ 0 $ 12,500 $ 0 $ 12,500 $ 12,500 $ 12,500 Life Insurance
(Supplemental Life Insurance Program only) $ 0 $ 0 $ 0 $ 0 $ 1,620,000 $ 0
Security Ownership of Managementon an installment basis. The interest rate on these loans wasby the minimum annual rate permitted underChief Executive Officer, each of the Internal Revenue Code without imputation of income. The following table shows, as to thoseother Named Executive Officers for 2007 and the directors and executive officers and directors of the Company who were indebtedas a group. None of the shares beneficially owned are pledged as security and none of the directors and executive officers currently have the right to acquire additional beneficial ownership through the exercise of options. Amount and Nature of Beneficial Ownership Percent of Class T. M. Solso 642,863 (1) * F. J. Loughrey 392,922 * T. Linebarger 205,663 * J. S. Blackwell 118,116 * J. D. Kelly 84,435 * All directors and executive officers as a group, a total of 20 persons 2,276,441 1.12
Review, Approval or Ratification of Related-Party Transactionsexcess of $60,000 since January 1, 2005, the largest aggregate amount owed for such purchasestransaction; and loans at any time since January 1, 2005, and the amount owed as of December 31, 2005. All such loans were made prior to the effective dateSarbanes-Oxley Act of 2002.
Amount of
Indebtedness
Indebtedness
as of
Dec. 31, 2005The Company has a policy of purchasing from employeessignificance of the Company shares of Common Stock that have been acquired under the Key Employee Stock Investment Plan. The purchase price for such shares is the closing price quoted on the New York Stock Exchange Composite Tape on the date of purchase. During 2005, Mr. Wall was the only executive officer who sold sharestransaction to the Company pursuantand the related party.this policy.the Company, and which are as favorable to the Company as would be available from non-related entities in a comparable transaction. The policy requires that there be a business or corporate interest supporting the transaction and that the transaction meets the same Company standards that apply to comparable transactions with unaffiliated entities.
Section 16(a) Beneficial Ownership Reporting ComplianceCompany’sCompany's executive officers and directors, and persons who beneficially own more than ten percent of a registered class of the Company’sCompany's equity securities, to file reports of ownership and changes in ownership of such securities with the Securities and Exchange Commission and the New York Stock Exchange. Copies of these reports must also be furnished to the Company. Based solely upon a review of the copies of the forms filed under Section 16(a) and furnished to the Company, or written representations from reporting persons after inquiry, and forms filed by the Company on the reporting person's behalf, the Company believes that all filing requirements applicable to its executive officers and directors were complied with during 2005.2007.21
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTSCompany’sCompany's Board of Directors has voted to appoint PricewaterhouseCoopers LLP (“PwC”("PwC") as the firm of independent public accountants to audit the accounts of the Company for the year 2006.2008. Although the selection and appointment of independent public accountants is not required to be submitted to a vote of the shareholders, the Board of Directors has decided, as in the past, to ask the Company’sCompany's shareholders to ratify the appointment. A representative of PwC will be present at the Annual Meeting of Shareholders, will not have the opportunity to make a statement, but will be available to answer appropriate questions. A report of the Audit Committee of the Company’sCompany's Board of Directors in connection with its independence, the independence of the auditors and certain other matters follows the Board’sBoard's recommendation on this Item below.Committee. (The Audit Committee’s pre-approvalCommittee pursuant to the policy with respect to audit and non-audit services is shown as Appendix A to this proxy statement.).described below. Fees paid to PwC for services are disclosed in the table below under the categories listed therein.PwC’sPwC's core work, which is the audit of the Company’sCompany's consolidated financial statements.Company’sCompany's annual financial statements for the years ended December 31, 2005,2007 and December 31, 2004,2006, and fees billed for other services rendered by PwC during those periods.(dollar (dollar figures shown in millions) 2007 2006 7.6 7.1 (2) 0 0 (3)(2) 0.4 0.3
8.0
7.4(4)(3) .0 0.1 8.0 7.5 audits and internal controls assessment. Audit related fees during 2004 were incurred in connection with a Sarbanes-Oxley Section 404 testing pilot program not associated with internal controls assessment work.(3)(4)20042006 and 20052007 were incurred for seminars related to employee training, certain human resource matters,assistance with applications for various government grants and licensing fees for technical research tools.Proposal.proposal to ratify the appointment of PwC. Appointment of PwC as auditors will be ratified if the votes cast in favor of the proposal exceed those cast against the proposal.22Company’sCompany's accounting policies, internal control over financial reporting, financial reporting practices and legal and regulatory compliance. Each member of the Committee is independent as defined under the New York Stock Exchange listing standards. The Committee operates under a written charter that is adopted by the Board of Directors and reviewed by the Committee on a periodic basis. The Committee’sCommittee's current charter, as adopted by the Board of Directors on February 14,December 12, 2006, can be viewed on the Company’s website and is attached as Appendix B to this proxy statement.Company's website.Company’sCompany's independent registered public accounting firm, internal auditors and management. During fiscal 2005,2007, the Committee met 9seven (7) times. The Committee schedules its meetings with a view to ensuring that it devotes appropriate attention to all of its tasks. The Committee, or the Committee Chair as representative of the Committee, discussed the interim financial information contained in each quarterly earnings announcement with the chief financial officer, controller and the independent auditors, prior to public release. The Committee also met with the independent auditors to discuss the results of their reviews of the interim financial statements. The committee periodically meets in executive session.Company’sCompany's independent registered public accounting firm. As part of its monitoring activities, the Committee obtained a letter from PwC containing a description of all relationships between PwC and the Company. After reviewing the letter and discussing it with management, the Committee discussed with PwC its overall relationship with the Company and any of those relationships described in the letter that could impact PwC’sPwC's objectivity and independence. Based on its continued monitoring activities and year-end review, the Committee satisfied itself as to PwC’sPwC's independence. PwC also has confirmed in its letter that, in its professional judgment, it is independent of the Company within the meaning of the Federal securities laws and within the requirements of Independence Standard Board (ISB) Standard No. 1,Independence Discussion with Audit Committees.Company’sCompany's independent and internal auditors their respective audit plans, audit scope, and identification of audit risks. Further, the Committee reviewed and discussed with management and the independent auditor the Company’sCompany's audited financial statements and management’smanagement's and the independent auditor’sauditor's evaluations of the Company’sCompany's internal control over financial reporting, as reported in the Company’s 2005Company's 2007 Annual Report on Form 10-K. Management has the responsibility for the preparation and integrity of the Company’sCompany's financial statements and its internal“Communication"Communication with Audit Committees”.Committees." With and without management present, the Committee discussed and reviewed the results of the independent auditors’auditors' examination of the Company’sCompany's financial statements and internal control over financial reporting, as well as management’smanagement's report on internal control over financial reporting .reporting. The Committee also discussed the results of internal audit examinations.Company’sCompany's audited financial statements and management’smanagement's report on internal control over financial reporting be included in the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended December 31, 2005,2007, for filing with the Securities and Exchange Commission. The Committee also reappointed PwC as the Company’sCompany's independent auditors for 2006.2008.Respectfully submitted,
ROBERT J. DARNALL, CHAIRALEXIS M. HERMAN GEORGIA R. NELSON CARL WARE J. LAWRENCE WILSON 24
AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION
(Item 11 on the Proxy Card)
SHAREHOLDER PROPOSAL REGARDING ADOPTION
OF INTERNATIONAL LABOR ORGANIZATION STANDARDS
(Item 12 on the Proxy Card)
Position of the Board of DirectorsItems 1 and 2 of the Notice of Annual Meeting of Shareholders.Shareholders as reflected in Items 1 through 12 on the Proxy Card, and as referenced in this Proxy Statement. However, if other business properly comes before the Meeting, the members of the Proxy Committee will vote the returned proxies as the Board of Directors recommends.20072009 Annual Meeting of Shareholders and inclusion in the Company’sCompany's Proxy Statement and proxy form if they do so in accordance with the appropriate regulations of the Securities and Exchange Commission. For such proposals to be considered for inclusion in the Proxy Statement and form of proxy for the 20072009 Annual Meeting of Shareholders, proposals must be received by the Secretary of the Company no later than December 8, 2006.4, 2008.Company’sCompany's Proxy Statement and form of proxy as described above, the shareholder must follow procedures outlined in the Company’sCompany's By-Laws. Pursuant to the Company’sCompany's By-Laws, a shareholder may propose business to be considered at the annual meeting, provided that the shareholder (a) is a shareholder of record at the time of giving notice to the Company of the proposal and is entitled to vote at the annual meeting where the proposal will be considered, and (b) complies with the notice procedures of Article I of the Company’sCompany's By-Laws. That Article provides that the proposing shareholder must deliver written notice of the proposal to the Company’sCompany's Secretary no later than 90 days preceding the first Tuesday of AprilMay of the meeting year, unless the Board of Directors establishes an earlier date than the first Tuesday of AprilMay for the annual meeting, in which case written notice of the proposal must be delivered not later than the close of business on the 10th day following the first public disclosure of the earlier date. The required notice must contain certain information, including information about the shareholder, as prescribed by the By-Laws.445 ParkInc., 470 West Avenue, New York, New York 10022,Stamford, Connecticut 06902, has been retained to assist in the solicitation of proxies and will receive a fee not to exceed $6,500$8,000 plus expenses. Proxies may also be solicited by directors, officers and employees of the Company at no additional cost. Banks, brokerage houses and other institutions, nominees or fiduciaries will be requested to forward the proxy materials to the beneficial owners of the Common Stock and will be reimbursed for their reasonable expenses incurred in forwarding such materials.7, 20063, 200825
NOMINEES FOR BOARD OF DIRECTORS
THEODORE M.
SOLSO, Irwin Financial Corporation, and Ashland Inc. and is a member of the boards of The Cummins Foundation and Central Indiana Corporate Partnership, and Heritage Fund of Bartholomew County in Columbus, Indiana.Partnership. He is also a member of the Advisory Board of Trustees, DePauw University, a member of The Indiana Academy, a member of the Indiana Economic Development Commission, a member of the Business Roundtable and The Business Council.
F. JOSEPH LOUGHREY
Mr. Loughrey was elected President and Chief Operating Officer of the Company in 2005 after serving as Executive Vice President, President—Engine Business from 1999, and various other preceding executive positions with the Company. Mr. Loughrey received a B.S. in Economics and African Studies from the University of Notre Dame in 1971. He is a member of the Board of Directors of Tower Automotive, Inc. and of Sauer-Danfoss, Inc., and is a member of the boards of directors of The Cummins Foundation, the Columbus Learning Center Management Corporation and the National Association of Manufacturers (NAM). He is serving as Chairman of the Board of Trustees of the Manufacturing Institute in Washington DC. He is also a member of the Senior Advisory Board of the Tauber Manufacturing Institute at the University of Michigan, and the Advisory Council of the College of Arts and Letters at the University of Notre Dame as well as an International Senior Member of AIESEC-International (Rotterdam, The Netherlands).
ROBERT J.
DARNALL
Mr. Darnall is the retired Chairman and Chief Executive Officer of Inland Steel Industries. Inland was the parent company for Inland Steel Company and Ryerson Tull, Inc. Concluding his 36-year Inland career in late 1998, Mr. Darnall joined Ispat International N.V. as head of North American operations until early 2000. Ispat had acquired Inland Steel Company in July 1998. He served as Chairman of Prime Advantage Corporation for nearly two years until January 2002. He graduated from DePauw University in 1960 with a B.A. in Mathematics. He also earned a B.S. degree in Civil Engineering from Columbia University in 1962, after which he joined Inland. In 1973 he earned an M.B.A. from the University of Chicago. Mr. Darnall is a member of the Board of Directors of HSBC North America Holding Inc., Pactiv Corporation, Sunoco, Inc., and United States Steel Corporation. He is past Chairman of the Board of the American Iron and Steel Institute and the Federal Reserve Bank of Chicago. He also serves on the Board of Trustees of the Museum of Science and Industry, and Rush University Medical Center. He is past chairman and a current director of both the Glenwood School and Junior Achievement of Chicago.
JOHN M.
DEUTCH
ROBERT K. HERDMAN
Mr. Deutch has been an Institute Professor at the Massachusetts Institute of Technology since 1990. He joined the MIT faculty in 1970 and served as Dean of Science from 1982 to 1985 and Provost from 1985 to 1990. Mr. Deutch receivedHerdman is a B.A. in History and Economics from Amherst College in 1961; and a B.S. in Chemical Engineering in 1961 and Ph.D. in Physical Chemistry in 1965, both from MIT. While on leave from his current post at MIT, Mr. Deutch served asManaging Director of Central Intelligence during 1995Kalorama Partners LLC, a Washington, D.C. consulting firm. He is a member of the Board of Directors and 1996. From 1994 through 1995 he was U.S. Deputy Secretarychairs the Audit Committee of DefenseHSBC Finance Corporation (Formerly Household International, Inc.) and also served as Undersecretary of Defense for Acquisition and Technology between 1993 and 1994.HSBC North America Holdings, Inc. He was Director of Energy Research and Undersecretarythe Chief Accountant of the U.S. DepartmentSecurities and Exchange Commission from October 2001 to November 2002 prior to joining Kalorama. Prior to joining the SEC, he was Ernst & Young's Vice Chairman of Energy duringProfessional Practice for its Assurance and Advisory Business Services (AABS) practice in the Carter Administration. HeAmericas and the Global Director of AABS Professional Practice for Ernst & Young International. Mr. Herdman is a Directorgraduate of Citicorp, Raytheon Corporation, and Schlumberger, and is also a Trustee of Resources for the Future, the Urban Institute and the Museum of Fine Arts, Boston.
ALEXIS M.
HERMAN
Ms. Herman is Chairman and Chief Executive Officer of New Ventures. She received a B.A. from Xavier University of Louisiana and currently serves on the University’sUniversity's Board of Trustees. Additionally, Ms. Herman is the Chairwoman of The Coca-Cola Company’s Human Resources Task Force, Chair of Toyota’sToyota's Diversity Advisory Board, and Chair of Sodexho, Inc.’s's Business Advisory Board. She is also a member of the Board of Directors of The Coca-Cola Company, MGM/Mirage Inc., Presidential Life Insurance Corporation, and Entergy Corporation. Her non-profit board affiliations include Trustee of the National Urban League and George Meany National Labor College. In addition, Ms. Herman is Co-Chair of the Bush-Clinton Katrina Fund. From 1977 to 1981, Ms. Herman served in the Carter Administration as Director of the Women’sWomen's Bureau. From 1992 to 1997, she served as Director of Public Liaison for the White House. From 1997 to 2001, Ms. Herman served as the U.S. Secretary of Labor.
WILLIAM I.
MILLER
Mr. Miller is Chairman and CEO of Irwin Financial Corporation. Mr. Miller received a B.A. from Yale University in 1978 and an M.B.A. degree from Stanford University in 1981. He was President of Irwin Management Company, a family investment management company, from 1984 to 1990. Since September, 1990, he has been Chairman of Irwin Financial Corporation, a publicly traded diversified financial services company, of which he has been a Director since 1985. Mr. Miller continues to serve as Chairman of the Board and a Director of Irwin Management Company and as Chairman of the Board of Tipton Lakes Company (a real estate development firm). Mr. Miller is a Director or Trustee and the Independent Chair of the New Perspective Fund, Inc., the New World Fund, Inc. and EuroPacific Growth Fund (all three are mutual funds). Mr. Miller also is a Trustee of Yale University, New Haven, CT, The National Building Museum, Washington, D.C., and The John D. and Catherine T. MacArthur Foundation, Chicago, IL.
GEORGIA R.
NELSON
Ms. Nelson is President and CEO of PTI Resources, LLC, after retiring from Edison International companies in 2005, where she had been President of Midwest Generation EME, LLC since 1999 and General Manager of Edison Mission Energy Americas since 2002. From 1995 to 1999 she was Edison Mission’s Senior Vice President, Worldwide Operations. Previously, Ms. Nelson spent more than 25 years with Southern California Edison, where she was also a senior executive. Ms. Nelson holds an MBA from the University of Southern California and a B.S. from Pepperdine University. She serves as a Director of Tower Automotive,Ball Corp., Inc., and Nicor Inc. She is Chairman of the National Coal Council, and a Trustee of the Peggy Notebaert Nature Museum.
CARL WARE
Mr. Ware retired from The Coca-Cola Company in 2003 as Executive Vice President, Public Affairs and Administration following a 28 year career holding positions of increasing responsibility. From 1993 to 2000, Mr. Ware served as President and Chief Operating Officer of Coke’sCoke's Africa Group. Prior to joining The Coca-Cola Company, he was Director of Housing for the Urban League of Pittsburgh. From 1970 to 1973, he served the Atlanta Housing Authority as Director of Family and Community Services and Deputy Director of Urban Redevelopment. In 1973, he was elected to the Atlanta City Council and served as its President from 1976 to 1979. Mr. Ware holds a bachelor’sbachelor's degree from Clark College (Clark Atlanta University) and a master’smaster's degree in Public Administration from the University of Pittsburgh. He serves as a Director of ChevronTexaco, Coca-Cola Bottler’sBottler's Consolidated, PGA Tour Golf Course Properties, and the Atlanta Falcons.
J. LAWRENCE WILSON
Mr. Wilson is the retired Chairman and Chief Executive Officer of Rohm and Haas Company. Mr. Wilson received a bachelor’sbachelor's degree in mechanical engineering from Vanderbilt University in 1958 and an M.B.A. from Harvard University in 1963. He served as an officer in the U.S. Navy from 1958 to 1961. Mr. Wilson joined Rohm and Haas Company in 1965 as an operations research analyst. He held positions as President of a medical products subsidiary, Director of the European region, Treasurer and Chief Financial Officer, Business Director for the Industrial Chemicals Group, Group Vice President in charge of Administration and Finance and Vice Chairman. Mr. Wilson was a Director of Rohm and Haas Company from 1977 to 1999 and served as Chairman and Chief Executive Officer from 1988 to 1999. Mr. Wilson is a member of the board of Vanderbilt University, The Vanguard Group, MeadWestvaco Corporation and AmerisourceBergen Corporation. He is past Chairman of the Board of the Philadelphia Academies, Inc. and The Chemical Manufacturers Association.28APPENDIX AAUDIT COMMITTEE POLICYPRE-APPROVAL OF AUDITANDNON-AUDIT SERVICESTo ensure that all audit and non-audit services provided by the Company’s principal independent accountant are approved in advance by the Audit Committee of the Board of Directors and that any and all such services are consistent with current laws and regulations.The Sarbanes-Oxley Act of 2002 and rules of the Securities and Exchange Commission prohibit the Company’s independent accountant from providing certain types of non-audit services to the Company. They also require that all audit, review or attest engagements required under the securities laws and permitted non-audit services provided to the Company by its independent accountant be pre-approved by the Audit Committee or one of its members to whom the Audit Committee has delegated authority.Prohibited Non-Audit Services:The Company’s independent accountant may not be hired to perform any of the following services:1. Bookkeeping or other services related to the accounting records or financial statements of the company;2. Financial information systems design and implementation;3. Appraisal or valuation services, fairness opinions, or contribution-in-kind reports;4. Actuarial services;5. Internal audit outsourcing services;6. Management functions;7. Human resources;8. Broker-dealer, investment advisor, or investment banking services;9. Legal services;10. Expert services unrelated to the audit; and11. Any other service that the Public Company Accounting Oversight Board (PCAOB) determines, by regulation, is impermissible.Permitted Audit and Non-Audit Services:In considering whether to approve non-audit services to be provided by the Company’s independent accountant, the Audit Committee must consider whether the provision of the service would adversely affect the independence of the independent accountant. Specifically, the Audit Committee must consider whether the provision of the service would (a) place the accountant in the position of auditing his or her own work; (b) result in the accountant acting as management or an employee of the company; or (c) place the accountant in the position of being an advocate for the company. Any proposed non-audit service thatthe Audit Committee determines would adversely affect the independence of the independent accountant shall not be approved.Examples of permitted audit and non-audit services that may be provided to the company by its independent accountant, if approved in advance by the Audit Committee, include the following:1. Services in connection with the annual audit of the consolidated financial statements;2. Services in connection with reviews of unaudited consolidated quarterly financial statements prior to the filing of Forms 10-Q;3. Consultation on financial accounting and reporting standards;4. Services related to the issuance of comfort letters;5. Services in connection with registration statements and other SEC filings;6. Consultation on accounting for proposed transactions;7. Preparation of tax returns and tax consulting;8. Statutory audits;9. Services in connection with employee benefit plan audits;10. Due diligence related to mergers and acquisitions; and11. Internal control reviews.The above is not a comprehensive list and it may change as the rules of the PCAOB are released. For this reason and because all audit services and permitted non-audit services require pre-approval by the Audit Committee, the Company’s independent accountant may not be engaged without prior communication with the Company’s Corporate Controller and Executive Director, Internal Audit, who will arrange to obtain Audit Committee pre-approval.The Company’s Audit Committee is solely responsible for pre-approving all audit and non-audit services provided to the company. The Audit Committee has delegated to its Chairman authority to pre-approve audit and permitted non-audit services to be provided by the Company’s independent accountant, provided that such services are permissible under these policies and procedures and do not exceed $100,000 in the aggregate. Decisions of the Chairman must be reported to the full Audit Committee at its next scheduled meeting, and should be documented in the form attached hereto as Exhibit A, or an engagement letter that captures the same content.To the extent that a service can be forecasted in advance, approval may be given via the engagement letter or the annual budgeting process. However, it is important to note that the budget will need to be complete and descriptive as to the service. A general line item in the budget for an item such as tax service will not suffice. A detailed description of the scope of the proposed service, location involved and other content required by Exhibit A are minimum requirements for an item to be approved.With respect to a needed service that is identified after the budget is prepared and approved, complete details must be promptly forwarded to the Corporate Controller and the Executive Director,A-2Internal Audit who will arrange to obtain Audit Committee approval either at the next meeting of the Audit Committee, or from the Chairman of the Audit Committee pursuant to delegated authority.Spending Overruns and DeMinimis Exception to Pre-Approval Requirement:The Sarbanes-Oxley Act of 2002 and SEC rules provide only a de minimis exception to the requirement for pre-approval of permitted non-audit services; thus, it is imperative that once a budgeted or unbudgeted item is approved, actual spending is monitored and projected overruns are brought to the attention of the Corporate Controller and the Executive Director, Internal Audit before unauthorized spending occurs. Once informed, the Corporate Controller and the Executive Director, Internal Audit will take the steps necessary to obtain Audit Committee approval.Finance personnel must submit the following reports on audit and non-audit service spending to the Corporate Controller and the Executive Director, Internal Audit. These reports can be utilized for obtaining Audit Committee approvals.Budget of Audit and Non-Audit Services for Forthcoming Year (Exhibit B):This report is due to the Corporate Controller and the Executive Director, Internal Audit as part of preparing each year’s operating plan. The report should detail actual spending for the prior year, a comparison of current estimated spending versus the budget for the current year and a budget estimate for the next year. The report should also include commentary on significant current year variances versus budget and a rationale for significant next year budgeted items. The proposed budget for audit and non-audit services from the outside auditor will be submitted to the Audit Committee when the operating plan is submitted to the Board of Directors. Twice yearly, the company will provide an interim budget report to the Audit Committee highlighting actual and expected spending.Interim Reporting of Current Year Audit and Non-Audit Services Spending (Exhibit C):This interim report is due twice each year. It is an interim view of actual and anticipated spending by service versus the current year budget. For comparison purposes, prior year actual spending is also included. In addition, additional requested services—not yet pre-approved—should be included so that appropriate approvals can be obtained.A-3Exhibit AForm for Chairman Pre-Approval of Outside Auditor ServicesPurposeThis form should be completed to document pre-approval of any audit and permissible non-audit services from the Company’s independent auditors by the Chairman of the Audit Committee in accordance with the Company’s Policies and Procedures for Pre-Approval of Audit and Non-Audit Services. This form is also applicable to the Company’s subsidiaries.Policy for Pre-ApprovalAs permitted by the Sarbanes-Oxley Act of 2002, the Audit Committee has delegated authority to its Chairman to pre-approve audit and permissible non-audit services. Any decision made by the Chairman will be reported at each of the Audit Committee scheduled meetings.Description of Requested Services(Description should be in sufficient detail to illustrate that the service is permissible under the Sarbanes-Oxley Act of 2002. Minimum items to include are primary company and outside auditor contacts, timing of service, location of service, objective/deliverable of service, and an explanation of why proposed service will not adversely affect independence of auditor (i.e., why permissible service.)Approved Fee AmountApproved by:XXXXXX XX XXXXXXXDateAudit Committee Chairman* To obtain approval, forward a description of requested services and expected fee requirements to the Corporate Controller and the Executive Director, Internal Audit for submission to the Audit Committee for approval.A-4Exhibit BBudget of Audit and Non-Audit Services for the Forthcoming Year(dollars in thousands)Division/Entity Name:Prior YearCurrent YearNext YearActualBudgetFull Year EstimateBudgetNote: List all audit and permitted non-audit services with full detail including nature of work, location, timing, and a best estimate of the cost.Additional detail, if requested, should be provided in attached footnotes.If there is a question about whether a service is within the list of permitted services outlined in the Company’s Policies and Procedures for Pre-Approval of Audit and Non-Audit Services, the Executive Director, Internal Audit is to be contacted for a determination.A-5Exhibit CInterim Report of Current Year Audit and Non-Audit Services Spending(dollars in thousands)Division/Entity Name:Prior YearCurrent YearActualBudgetFull Year EstimateNote: List all audit and permitted non-audit services with full detail including nature of work, location, timing, and a best estimate of the cost.Additional detail, if requested, should be provided in attached footnotes.If there is a question about whether a service is within the list of permitted services outlined in the Company’s Policies and Procedures for Pre-Approval of Audit and Non-Audit Services, the Executive Director, Internal Audit is to be contacted for a determination.A-6APPENDIX BCUMMINS INC.AUDIT COMMITTEE CHARTERI. PurposeThe purpose of the Committee is to:A. assist the Board of Directors in its oversight of:· the integrity of the Company’s financial statements, and related financial disclosures and internal control over financial reporting, including information technology security and control; and· the Company’s compliance with ethics policies, and legal and regulatory requirements;B. prepare the report of the Committee required to be included in the Company’s annual proxy statement;C. select, retain, compensate, oversee and evaluate the independent auditor;D. provide assistance to the Board of Directors in its oversight of Company guidelines and policies with respect to business risk management and matters as the Board or the Committee deems appropriate; andE. oversee the performance of the Company’s internal audit function and assure it’s compliance with the Institute of Internal Auditors’ International Standards for the Professional Practice of Internal Auditing.II. MembershipThe Committee shall consist of at least three Directors, including a Chairperson, each of whom shall, as determined by the Board of Directors:A. meet the applicable independence and experience requirements of the Cummins Corporate Governance Principles, the New York Stock Exchange or other relevant listing authority, the federal securities laws (as amended by the Sarbanes-Oxley Act of 2002) and the rules and regulations of the Securities and Exchange Commission (“SEC”);B. be financially literate (or become financially literate within a reasonable period of time after his/her appointment to the Committee); andC. as a general rule, not simultaneously serve on the audit committees of more than two other public companies.At least one member of the Committee will have accounting or related financial expertise, as the Board of Directors interprets such qualification in its business judgment, who will be disclosed as the Committee’s “financial expert” in the Company’s proxy statements as required by the rules and regulations of the SEC.Members of the Audit Committee are appointed by the Board of Directors and may be removed by the Board at any time. The Committee shall meet as often as it determines, but not less frequently than quarterly. The Committee also shall meet periodically with management, with the Company’s ExecutiveB-1Director, Internal Audit and with the independent auditor, in separate executive sessions. The Committee shall make regular reports to the Board on the Committee’s activities.III. Roles and ResponsibilitiesWhile the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to determine that the Company’s financial statements are complete, accurate, and in accordance with accounting principles generally accepted in the United States—these are the responsibilities of the Company’s management. The responsibility of the Company’s independent auditor is to plan and conduct the audit.The Committee may amend this Charter from time to time as it deems appropriate.A. Relationship with Independent Auditor1. Selection and Oversight of Independent AuditorThe Committee shall have the sole authority and responsibility to retain and terminate the Company’s independent auditor. The independent auditor shall report directly to the Committee. The Committee shall resolve disagreements between management and the independent auditor regarding financial reporting, and communicate to the independent auditor that it is ultimately accountable to the Committee. The Company shall provide appropriate funding, as determined by the Committee, to compensate the independent auditor.The Committee shall:(a) review and evaluate the lead audit partner of the independent auditor team;(b) ensure the rotation of the partners of the independent auditor involved in the audit, as required by law and regulation;(c) set clear hiring policies for employees or former employees of the independent auditor, in compliance with SEC regulations and stock exchange listing standards;(d) meet with the independent auditor prior to the audit to discuss the planning and staffing of the audit; and(e) pre-approve all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed by the independent auditor, subject to applicable de minimis exceptions for non-audit services. The Committee may delegate this authority to a subcommittee of one or more Committee members; provided however, that such subcommittee decisions subsequently are presented to the full Committee in a timely manner, but in no event later than the next Committee meeting.2. Assessment of Independence and Quality of Independent AuditorAt least annually, the Committee shall obtain and review a formal written report by the independent auditor describing:(a) the auditing firm’s internal quality-control procedures;B-2(b) any material issues raised by the most recent internal quality-control review, or peer review, of the independent auditor, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the independent auditor, and any steps taken to deal with any such issues; and(c) all relationships between the independent auditor and the Company (in order to assess independence). The Committee will engage in an active dialogue with the independent auditor regarding any disclosed relationships or services that might impact the objectivity and independence of the independent auditor, and take appropriate action in response to the independent auditor’s report to satisfy itself of the independent auditor’s independence.B. Oversight of Financial Disclosure and Internal Controls1. The Committee will review and discuss with management, the Executive Director, Internal Audit and the independent auditor, as appropriate:(a) the Company’s annual audited financial statements and quarterly unaudited financial statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the results of each quarterly review and annual audit by the independent auditor, and other matters required to be discussed with the independent auditor by applicable laws, regulations and auditing standards, including the quality, not just the acceptability, of the accounting principles and underlying estimates used in the audited financial statements. The Committee also will review and discuss each Form 10-Q and Form 10-K with the Chief Executive Officer, the Chief Financial Officer and the General Counsel, prior to filing. The Committee will report to the Board and shareholders whether it recommends to the Board that the most recent year’s audited financial statements be included in the Form 10-K;(b) any other SEC filings as the Committee deems appropriate, prior to filing;(c) earnings press releases (including the use of pro forma or adjusted non-GAAP information) prior to release;(d) financial information and earnings guidance provided to analysts and rating agencies (this discussion may be general, and need not take place prior to each instance in which such information is provided);(e) the integrity of the Company’s accounting and financial reporting processes (both internal and external), including, but not limited to: (i) all critical accounting policies and practices (including accounting estimates) to be used by the Company, including all major issues regarding accounting principles and financial statement presentations, and any significant changes in the Company’s selection or application of accounting principles; (ii) analyses prepared by management and/or the independent auditor setting forth significant financial reporting issues and judgments (including use of estimates) made in connection with the preparation of the financial statements, including anyB-3required analyses of the effects of alternative GAAP methods on the financial statements; (iii) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company; (iv) the results of the activities of the Executive Director, InternalAudit and the independent auditor, including major conclusions, findings and recommendations and related management responses; (v) any material written communications between the independent auditor and management, including any management letters or schedules of unadjusted differences; (vi) matters of audit quality and consistency, including required communications between the audit team and the independent auditor’s national office respecting auditing or accounting issues arising during the engagement; (vii) management’s assertions concerning the effectiveness of: (i) disclosure controls and procedures; and (ii) internal controls, as of the end of the most recent fiscal year; (viii) any disclosures made to the Committee by the Company’s Chief Executive Officer and/or Chief Financial Officer regarding: (i) significant deficiencies in the design or operation of internal controls or any material weaknesses therein; (ii) any fraud, whether or not material, involving management or other employees who have a significant role in the Company’s internal controls; and (iii) any material violation of (1) any law, rule or regulation (including securities laws) applicable to the Company or the operation of its businesses or (2) the Company’s Code of Conduct; and (ix) any special audit steps adopted in light of material control deficiencies.(f) internal audit results, internal audit plans, and any significant changes to internal audit plans.(g) internal audit department staffing and any changes to staffing levels.2. The Committee will review and discuss, with the independent auditor, the matters required to be discussed pursuant to Statement on Auditing Standards No. 61, Communicating with Audit Committees, as currently in effect, including any audit problems or other difficulties encountered by the independent auditor in the course of the audit process, and management’s response, including any:(a) restrictions on the scope of the independent auditor’s activities or on access to requested information;B-4(b) significant disagreements with management (and management’s responses to such matters);(c) accounting adjustments that were noted or proposed by the independent auditor but were passed (as immaterial or otherwise); and(d) management or internal control letter issued, or proposed to be issued, by the independent auditor to the Company.3. Obtain assurance from the independent auditor to the Company that the audit was conducted in a manner consistent with Section 10A(b) of the Securities Exchange Act of 1934.4. The Committee shall review and discuss with the Company’s General Counsel and Executive Director, Internal Audit:(a) material litigation involving the Company that has a material impact on the financial statements;(b) Any reports or inquiries received from regulators, governmental agencies, employees or others that raise material issues regarding the Company’s financial statements, internal control over financial reporting and accounting or compliance policies;(c) the management delegation of authority process; and(d) such other matters as the Board or the Committee considers appropriate.5. The Committee shall review the Company’s guidelines and policies with respect to risk assessment and risk management, including major financial risk exposures and the steps management has taken to monitor and control such exposures.IV. Compliance and InvestigationsThe Committee shall establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Committee shall receive and review corporate attorneys’ reports of evidence of a material violation of any law, rule or regulation (including securities laws or breaches of fiduciary duty) or the Company’s Code of Business Conduct regarding the Company’s financial statements, internal control over financial reporting and accounting or compliance policies. The Committee shall have general oversight responsibility for the Company’s business ethics and Code of Conduct programs. In discharging its oversight role, the Committee is empowered to investigate any matter within the scope of its responsibility, with full access to all books, records, facilities and personnel of the Company. The Committee may request any officer or employee of the Company or the Company’s outside counsel or independent auditor to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee.B-5V. Engagement of Experts and AdvisorsThe Committee will, as it deems appropriate, engage outside legal, accounting or other advisors, without the need for prior approval by the Board of Directors. The Company shall provide appropriate funding, as determined by the Committee, for payment of applicable fees and expenses of these parties.VI. Self-Assessment and EvaluationThe Committee shall perform a review and evaluation, at least annually, of the performance of the Committee and its members, including a review of the Committee’s compliance with this Charter. In addition, the Committee shall review and reassess, at least annually, the adequacy of this Charter and recommend to the Board of Directors any improvements to this Charter that the Committee considers necessary. The Committee shall conduct such evaluations and reviews in such manner as it deems appropriate.B-6
May 9, 2006—13, 2008—11:00 A.M. (E.D.T)(Eastern Daylight Savings Time)CUMMINS TECHNICAL CENTER1900 McKINLEY AVENUE
500 CENTRAL AVENUE
9, 2006
13, 2008(Note: Daylight Savings Time is nowobserved locally.)CUMMINS TECHNICAL CENTERCOLUMBUS ENGINE PLANT1900 McKinley500 Central Avenuehttp://www.cummins.comwww.ematerials.com/cmi http://www.econsent.com/cmi/ www.ematerial.com/cmi------------------------------------------------------------------------------------------------------------------------------------------------------------------
500 Jackson Street, Columbus, IN 472019, 2006.13, 2008.2.“AGAINST” Item 12.Lawrence WilsonDarnall and William I. Miller, and each of them acting in the absence of the others,other, with full power of substitution, to vote your shares on the matters shown on the reverse side and any other matters which may come before the Annual Meeting and all adjournments.COMPANY #Your telephone or Internet vote authorizes the Named Proxies to vote your shares in the same manner as if you marked, signed and returned your Proxy Card.*** 
EASY *** IMMEDIATE•· Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week, until 12:00 p.m. (CT) on May 8, 2006.12, 2008. For shares held in the Cummins Inc. and Affiliates Retirement and Savings Plans, the deadline is 12:00 p.m. (noon) (CT) on May 7, 2006.11, 2008.•· Please have your proxy card and the last four digits of your Social Security Number or Tax Identification Number available. Follow the simple instructions the voice provides you.http://www.eproxy.com/cmi/cmi — QUICK *** EASY *** IMMEDIATE•· Use the Internet to vote your proxy 24 hours a day, 7 days a week, until 12:00 p.m. (noon) (CT) on May 8, 2006.12, 2008. For shares held in the Cummins Inc. and Affiliates Retirement and Savings Plans, the deadline is 12:00 p.m. (noon) (CT) on May 7, 2006.11, 2008.•· Please have your proxy card and the last four digits of your Social Security Number or Tax Identification Number available. Follow the simple instructions to obtain your records and create an electronic ballot.Services™,ServicesY, P.O. Box 64873, St. Paul, MN 55164-0873.
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CUMMINS INC. 500 JACKSON STREET, BOX 3005, COLUMBUS, INDIANA 47202-3005
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 13, 2008: the Annual Report and Proxy Statement are available at www.ematerials.com/cmi
CUMMINS INC. 500 JACKSON STREET, BOX 3005, COLUMBUS, INDIANA 47202-3005 PROXY STATEMENT
PRINCIPAL SECURITY OWNERSHIP
ELECTION OF DIRECTORS (Items 1 through 9 on the Proxy Card)
CORPORATE GOVERNANCE
DIRECTOR COMPENSATION
EXECUTIVE COMPENSATION COMPENSATION DISCUSSION AND ANALYSIS
Compensation Committee Report
Summary Compensation Table and Supplemental Tables
SUMMARY COMPENSATION TABLE
GRANTS OF PLAN-BASED AWARDS
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION EXERCISES AND STOCK VESTED
PENSION BENEFITS
NON-QUALIFIED DEFERRED COMPENSATION
Payments Upon a Qualified Termination Following a Change in Control of the Corporation
Potential Payments upon Termination of Employment Other than Following a Change in Control
Security Ownership of Management
Review, Approval or Ratification of Related-Party Transactions
Section 16(a) Beneficial Ownership Reporting Compliance
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS (Item 10 on the Proxy Card)
Audit Committee Report
AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION (Item 11 on the Proxy Card)
SHAREHOLDER PROPOSAL REGARDING ADOPTION OF INTERNATIONAL LABOR ORGANIZATION STANDARDS (Item 12 on the Proxy Card)
Text of Proposal
Position of the Board of Directors
OTHER BUSINESS
OTHER INFORMATION Shareholder Proposals
Expenses of Solicitation
NOMINEES FOR BOARD OF DIRECTORS