PROXY STATEMENT
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This proxy statement is furnished to the shareholders of MTS Systems Corporation (the “Company,” “we,” “us,” or “our”) in connection with the solicitation of proxies by the Board of Directors of the Company (the “Board”) to be voted at the annual meeting of shareholders to be held on Wednesday, February 9, 20118, 2012 (the “Annual Meeting”), at 3:00 p.m., Central Standard Time, at the Company’s headquarters located at 14000 Technology Drive, Eden Prairie, Minnesota 55344, or any adjournments or postponements thereof. This proxy statement and the form of proxy, along with the Annual Report for the fiscal year ended October 2, 2010,1, 2011, is being first sent or given to shareholders on or about December 28, 2010.27, 2011.
ABOUT THE ANNUAL MEETING AND PROXY MATERIALS
ABOUT THE ANNUAL MEETING AND PROXY MATERIALS
WhatWhat is the purpose of the AnnualAnnual Meeting?
At the Annual Meeting, shareholders will vote upon (1) the election of eightseven directors, (2) the ratification of the appointment of KPMG LLP as our independent registered public accounting firm (3) approval of the MTS Systems Corporation 2011 Stock Incentive Plan, (4) approval of the MTS Systems Corporationfor fiscal 2012, Employee Stock Purchase Plan, (5)(3) a non-binding, advisory vote regarding the compensation of the Company’s named executive officers, (6) a non-binding, advisory vote regarding the frequency of voting on the compensation of the Company’s named executive officers, and (7)(4) such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof. In addition, our management will report on the performance of the Company and respond to questions from shareholders.
Why did I receive a noticenotice in the mail regarding the Internet availability of proxy materials thisyear instead of a full set of proxy materials?
Pursuant to rules adopted by the Securities and Exchange Commission (the “SEC”), we have elected to provide access to our proxy materials over the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials (the “Notice of Internet Availability”) to our shareholders of record and beneficial owners. All shareholders will have the ability to access the proxy materials on the website referred to in the Notice of Internet Availability or request a printed set of the proxy materials at no cost to the shareholder. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found in the Notice of Internet Availability.
If you do not affirmatively elect to receive printed copies of the proxy materials, you will only be able to view our proxy materials electronically on the Internet. ViewingProviding our proxy materials to shareholders on the Internet saves us the costs ofrather than printing and mailing hard copies saves us these materials.costs. We encourage our shareholdersyou to view our proxy materials on the Internet. Shareholders who have affirmatively elected to receive a printed set of our proxy materials may change their election and elect to view all future proxy materials on the Internet instead of receiving them by mail.
Only shareholders of record at the close of business on December 15, 201014, 2011 (the “Record Date”) will be entitled to vote at the Annual Meeting, or any adjournments or postponements thereof. Each outstanding share of the Company’s common stock, $0.25 par value (the “Common Stock”), entitles its holder to cast one vote on each matter to be voted upon.
Shareholders have cumulative voting rights in the election of directors. If any shareholder gives proper written notice to any officer of the Company before the Annual Meeting, or to the presiding officer at the Annual Meeting, that shareholder may cumulate their votes for the election of directors by multiplying the number of votes to which the shareholder is entitled by the number of directors to be elected and casting all such votes for one nominee or distributing them among any two or more nominees. If such notice is given by any shareholder, votes for directors by all shareholders will be cumulated. For instance, if a shareholder only votes for one nominee, such vote will be automatically cumulated and cast for that nominee. If a shareholder has voted for more than one nominee, the total number of votes that the shareholder is entitled to cast will be divided equally among the nominees for whom the shareholder has voted.
Who can attend the AnnualAnnual Meeting?
All shareholders as of the Record Date, or their duly appointed proxies, may attend the Annual Meeting.
What constitutes a quorum?quorum?
The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the shares of our Common Stock outstanding on the Record Date will constitute a quorum. A quorum is required for business to be conducted at the Annual Meeting. As of the Record Date, 15,318,37815,732,374 shares of our Common Stock were outstanding, so holders of at least 7,659,1907,866,188 shares of our Common Stock must be present, in person or by proxy to have a quorum.
If you vote your proxy electronically through the Internet or by telephone, or submit a properly executed paper proxy card, even if you abstain from voting, you will be considered part of the quorum. Broker non-votes will be counted as present for purposes of determining the existence of a quorum.
You may vote in one of the following ways:
| | 1) | By Internet: You may access the website at www.proxyvote.com to cast your vote 24 hours a day, 7 days a week. You will need your control number found in the Notice of Internet Availability. Follow the instructions provided to obtain your records and create an electronic ballot. |
| | 2) | By telephone: If you reside in the United States or Canada, you may call 1-800-690-6903 by using any touch-tone telephone, 24 hours a day, 7 days a week. Have your Notice of Internet Availability in hand when you call and follow the voice prompts to cast your vote. |
| | 3) | By mail: If you request a paper proxy card, mark, sign and date each proxy card you receive and return it in the postage-paid envelope provided or to the location indicated on the proxy card. |
| | 4) | In person at the Annual Meeting: If you are a shareholder of record, pleaseyou can bring your proxy card to the Annual Meeting to vote your shares in person. If you hold your shares in street name, you must request a legal proxy from your broker or nominee to vote in person at the Annual Meeting. |
Shares represented by proxies submitted through the Internet or by telephone, or those paper proxy cards properly signed, dated and returned, will be voted at the Annual Meeting in accordance with the instructions set forth therein. If a proxy is properly submitted, whether through the Internet, by telephone, or by mail using a paper proxy card, but contains no instructions, the shares represented thereby will be voted FOR all directors in Proposal 1, FOR ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 20112012 in Proposal 2, FOR approval of the M TS Systems Corporation 2011 Stock Incentive Plan in Proposal 3, FOR approval of the MTS Systems Corporation 2012 Employee Stock Purchase Plan in Proposal 4,and FOR approval of the non-binding, advisory vote regarding the compensation of the Company’s named executive officers in Proposal 5, and for approval of the non-binding, advisory vote on a TWO YEAR frequency of voting on the compensation of the Company’s named executive officers in Proposal 6,3, and at the discretion of the proxy holders as to any other matters which may properly come before the Annual Meeting.
The Internet and telephone voting procedures are designed to verify shareholders’ identities, allow them to give voting instructions and confirm that their instructions have been recorded properly. Shareholders voting through the Internet should be aware that they may incur costs to access the Internet charges and that these costs will be at the expense of the shareholder.
If you wish to vote by Internet or telephone, you must do so before 11:59 p.m. Eastern Standard Time on February 8, 2011.7, 2012. After that time, Internet and telephone voting will not be permitted and a shareholder who wantspermitted. If you want to vote after February 7, 2012 or revoke an earlier proxy, you must submit a signed proxy card or vote in person.
Yes. Even after you have voted electronically through the Internet or by telephone or submitted your proxy card, you may change your vote at any time before the proxy is exercised at the Annual Meeting. You may change your vote by:
| | 1) | Returning a later-dated proxy by Internet, telephone or mail; |
| | 2) | Delivering a written notice of revocation to our Assistant Corporate Secretary at 14000 Technology Drive, Eden Prairie, Minnesota 55344; or |
| | 3) | Attending the Annual Meeting and voting in person. A shareholder’sYour attendance at the Annual Meeting will not by itself revoke a proxy given by the shareholder. Personsthat you have previously submitted. Shareholders who hold shares through a broker or other intermediary should consult that party as to the procedures to be used for revoking a vote. |
What does the Board recommend?recommend?
The Board’s recommendations are set forth after the description of the proposals in this proxy statement. In summary, the Board recommends a vote:
| | 1) | FORthe election of each of the nominated directors (see Proposal 1 on page 5); |
| | 2) | FOR the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 20112012 (see Proposal 2 on page 13)14); and |
| | 3) | FOR the approval of the MTS Systems Corporation 2011 Stock Incentive Plan (see Proposal 3 on page 15);
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| 4) | FOR the approval of the MTS Systems Corporation 2012 Employee Stock Purchase Plan (see Proposal 4 on page 21);
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| 5) | FOR the approval of the non-binding, advisory vote regarding the compensation of the Company’s named executive officers (see Proposal 53 on page 45); and |
| 6) | For the approval of the non-binding, advisory vote on a TWO-YEAR frequency of voting on the compensation of the Company’s named executive officers (see Proposal 6 on page 46)40).
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If you return a properly executed proxy card without specific voting instructions, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board.
With respect to any other matter that properly comes before the Annual Meeting, the proxy holders will vote as recommended by the Board or, if no recommendation is given, at their own discretion.
What vote is required to approve each Proposal?
For Proposal 1, the election of directors, each shareholder will be entitled to vote for eightseven nominees, and the eightseven nominees receiving the highest number of “FOR” votes will be elected.
For ProposalProposals 2 and 3, respectively, the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 2012 and the non-binding, advisory vote regarding the compensation of the Company’s named executive officers, each shareholder will beis entitled to one vote for each share of Common Stock held, and the affirmative vote of the holders of a majority of the shares of Common Stock represented in person or by proxy and entitled to vote on the proposal will be required for approval.
For Proposals 3, 4, and 5, respectively, the approval of the MTS Systems Corporation 2011 Stock Incentive Plan, the approval of the MTS Systems Corporation 2012 Employee Stock Purchase Plan, and the non-binding, advisory vote regarding the compensation of the Company’s named executive officers, each shareholder will be entitled to one vote for each share of Common Stock held, and the affirmative vote of the holders of a majority of the shares of Common Stock represented in person or by proxy and entitled to vote on the proposal will be required for approval.
For Proposal 6, the non-binding, advisory vote regarding the frequency of voting on the compensation of the Company’s named executive officers, each shareholder will be entitled to one vote for each share of Common Stock held and the frequency (every one, two or three years) that receives the highest number of votes will be deemed to be the choice of the shareholders.
With respect to any other matter that properly comes before the Annual Meeting, the affirmative vote of the holders of a majority of the shares of Common Stock represented in person or by proxy and entitled to vote on the proposal will be required for approval.
A properly executed proxy marked “ABSTAIN” with respect to Proposals 2, 3, 4, 5, or 6, and any other matter that properly comes before the Annual Meeting, will not be voted, although it will be counted for purposes of determining whether there is a quorum. In Proposals 2, 3, 4 and 5, abstentions will have the same effect as a negative vote.
A “WITHHELD” vote will be counted for purposes of determining whether there is a quorum, but will not be considered to have been voted in favor of the director nominee with respect to whom authority has been withheld.
A properly executed proxy marked “ABSTAIN” with respect to Proposals 2 or 3, and any other matter that properly comes before the Annual Meeting, will not be voted, although it will be counted for purposes of determining whether there is a quorum. In Proposals 2 and 3, abstentions will have the same effect as a negative vote.
If your shares are held in the “street name” of a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to the proposal to be acted upon. If you do not give your broker instructions as to how to vote your shares, your broker has authority under New York Stock Exchange rules to vote those shares for or against “routine” matters, such as the ratification of accounting firms. Brokers cannot vote on their customers’ behalf on “non-routine” proposals such as the election of directors approval of the MTS Systems Corporation 2011 Stock Incentive Plan, approval of the MTS Systems Corporation 2012 Employee Stock Purchase Plan,and approval of the non-binding, advisory vote on the compensation of the Company’s named executive officers, and t he non-binding, advisory vote on the frequency of voting on the compensation of the Company’s named executive officers. These rules apply notwithstanding the fact that shares of our Common Stock are traded on the NASDAQ Global Select Market.
If your brokerage firm votes your shares on “routine” matters only because you do not provide voting instructions, your shares will be counted for purposes of establishing a quorum to conduct business at the Annual Meeting and in determining the number of shares voted for or against the routine matter. If your brokerage firm lacks discretionary voting power with respect to an item that is not a routine matter and you do not provide voting instructions (a “broker non-vote”), your shares will be counted for purposes of establishing a quorum to conduct business at the Annual Meeting, but will not be counted in determining the number of shares voted for or against the non-routine matter.
Broadridge Financial Solutions, Inc. will act as inspector of elections to determine whether or not a quorum is present and tabulate votes cast by proxy or in person at the Annual Meeting.
What does it mean if I receive more than one Notice of Internet Availability?
If your shares are registered in more than one account, you will receive more than one Notice of Internet Availability. To ensure that all your shares are voted, vote electronically through the Internet or by telephone, or sign, date and return a paper proxy card for each Notice of Internet Availability. We encourage you to have all accounts registered in the same name and address (whenever possible). You can accomplish this by contacting Broadridge Financial Solutions, Inc. by telephone at 800-542-1061 or in writing at Broadridge, 51 Mercedes Way, Edgewood, New York 11717.
How will voting on on any other business be conducted?
We do not know of any business to be considered at the Annual Meeting other than the matters described in this proxy statement. However, if any other business is properly presented at the Annual Meeting, your proxy gives authority to each of Laura B. HamiltonDavid J. Anderson and Bruce W. MootyWilliam V. Murray to vote on such matters at their discretion.
In addition to use of the Internet and mail, proxies may be solicited by our officers, directors, and other employees by telephone, through electronic transmission, facsimile transmission, or personal solicitation. No additional compensation will be paid to such individuals.
We may send a single Notice of Internet Availability, as well as other shareholder communications, to any household at which two or more shareholders reside unless we receive other instruction from you. This practice, known as “householding”“householding,” is designed to reduce duplicate mailings and printing and postage costs, and conserve natural resources. If your Notice of Internet Availability is being householded and you wish to receive multiple copies of the Notice of Internet Availability, or if you are receiving multiple copies and would like to receive a single copy, or if you would like to opt out of this practice for future mailings, you may contact Broadridge Financial Solutions, Inc., by telephone at 800-542-1061 or in writing at Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 117 17.11717.
Who pays for the costcost of this proxy solicitation?
We will bear the entire cost of the solicitation of proxies, including the preparation, assembly, printing and mailing of the Notice of Internet Availability, the proxy statement and any additional information furnished to shareholders. We will reimburse banks, brokerage houses, and other custodians, nominees and certain fiduciaries for their reasonable expenses incurred in mailing proxy materials to their principals.
ELECTION OF DIRECTORS
EightSeven directors will be elected at the Annual Meeting. Upon the recommendation of the Governance and Nominating Committee, the Board has nominated for election the eightseven persons named below. Each has consented to being named a nominee and will, if elected, serve until the next annual meeting of shareholders or until a successor is elected. Each nominee listed below is currently a director of the Company, and each with the exception of Ms. Liggett and Mr. Murray, was elected by the shareholders. Ms. Liggett and Mr. Murray were appointed by the Board as directors effective May 15, 2010.
The names of the nominees, their principal occupations for at least the past five years and other information are set forth below:
David J. Anderson – Age 6364 Director since 2009 Chair since August 2011 | Director of Modine Manufacturing Company (developer and manufacturer of thermal management systems and components) and a member of its Corporate Governance and Nominating Committee and Audit Committee since 2010; Director of Schnitzer Steel Industries, Inc. (metals recycler and steel manufacturer) and a memberChair of its Nominating and Corporate Governance Committee and Committee member since 2009; Co-Vice Chairman of Sauer-Danfoss, Inc. (developer and manufacturer of fluid power and electronic components and systems for mobile equipment applications) from 2008 until June 2009; President, Chief Executive Officer and Director of Sauer-Danfoss Inc. from 2002 until he retired in January 2009; held various senior management positions with Sauer-Danfoss Inc. from 1984 to 2008; prior to 1984, held various positions in sales, marketing and applications engine eringengineering within several manufacturing and distribution businesses. Mr. Anderson served on the boards of directors of the National Fluid Power Association and the National Fluid Power Association Education and Technology Foundation, chairing each in 2008 and 2009. Mr. Anderson’s qualifications to sit on our Board and to serve as the Chair of the Board include his 26more than 40 years of industrial business experience and his chief executive officer and operations experience. He also has technology and engineering experience, andthe ability to formulate and execute strategy and financial expertise. |
The Audit Committee of the Board has determined that each current member of the Board other than Ms. HamiltonMr. Murray, who is currently serving as interim Chief Executive Officer, is independent, as defined by the applicable rules for companies listed on the NASDAQ Stock Market. Dr. Chameau, oneIn making this determination with respect to Ms. Samardzich, the Audit Committee considered that the Company sold approximately $2.6 million in vehicle testing goods and services to Ford Motor Company in fiscal 2011. The Audit Committee determined that the aggregate dollar amount of the transactions are below the threshold for the NASDAQ Stock Market independence rules and that the transactions do not present a real, potential or perceived conflict between Ms. Samardzich’s interests and the Company’s interests.
The Audit Committee of the Board, composed of Ms. Steinel (Chair), Dr.Mr. Chameau, and Mr. Anderson, met 7 timeshad 8 regular meetings during fiscal 2010.2011. All members of our Audit Committee satisfy the NASDAQ Stock Market listing standards for Audit Committee membership. The Board has determined that Ms. Steinel and Mr. Anderson each is an “audit committee financial expert” under the Sarbanes-Oxley Act of 2002. Among other duties, the Audit Committee (i) selects our independent registered public accounting firm; (ii) reviews and evaluates significant matters relating to our audit and internal controls; (iii) reviews and approves management’s processes to ensure compliance with laws and regulations; (iv) reviews the scope and results of the audits by, and the recommendations of, our independent registered public accounting firm; and (v) pre-approves, in accordance with its pre-approval policy, all audit and permissible non-audit services and fees provided by our independent registered public accounting firm. The Audit Committee also reviews our audited consolidated financial statements and meets prior to public release of quarterly and annual financial information. The Chair of the Audit Committee or the full Audit Committee meets with our management prior to filing our quarterly and annual reports containing financial statements with the SEC. A report of the Audit Committee is contained in this proxy statement.
Among other duties, the Compensation Committee (i) reviews and makes recommendations to the Board regarding our employment practices and policies; (ii) in executive session, annually reviews and recommends to the independent directors of the full Board the compensation paid to our Chief Executive Officer and evaluates the performance of our Chief Executive Officer; (iii) annually reviews and recommends to the full Board the compensation paid to the other executive officers; (iv) administers and reviews the Company’s retirement plans and approves any amendments related to such plans; (v) administers and grants awards under our stock optionequity incentive and annual incentive plans (the Compensation Committee acts in executive session when granting options to the Chief Executive Officer); (vi) reviews and (vi)approves stock ownership guidelines for executive officers and monitors adherence to such guidelines; and (vii) approves the Compensation Discussion and Analysis for our proxy statement. A report of the Compensation Committee is contained in this proxy statement.
In evaluating director candidates, the Committee believes that all members of the Board should have personal and professional integrity, an absence of conflicts of interest, and an ability to understand and respect the advisory and proactive oversight responsibility of the Board. In addition, all members of the Board should meet independence requirements, comply with director orientation and education guidelines, commit sufficient time to attend Board and committee meetings and fully perform the duties of a director.
In addition to these threshold criteria, the Committee also considers the contributions a candidate can beis expected to make to the collective functioning of the Board. The Committee seeks directors who will contribute to the Board in areas such as strategy and policy development, technology and engineering, human capital development, financial expertise, international business development and best practices, industrial business value creation, and public company chief executive officer perspective.
Candidates are expected to effectively perform the role of a director by demonstrating broad perspective and an inquiring mind, being well prepared for and actively participating in Board and committee meetings, contributing expertise to the Board and committees, listening well, expressing views candidly, applying experience and expertise, being respectful to others and appropriately representing the shareholders.
While it does not have a specific written policy with regard to the consideration of diversity in identifying director nominees, the Committee believes the Board should reflect a variety of opinions, perspectives, personal and professional experiences and backgrounds. Although not part of any formal policy, the goal is to have a balanced and diverse Board, with members whose skills, backgrounds and experiences will enhance the quality of the Board’s deliberations and decisions and cover the spectrum of areas that impact the Company’s business. Each member of the Board should contribute to the overall Board composition, with the goal of creating a diverse Board that can work collaboratively to guide the success of the Company and represent shareholder interests.
The Committee’s policy is to consider qualified candidates for positions on the Board who are recommended in writing by shareholders. Shareholders wishing to recommend candidates for Board membership rather than directly nominating an individual should submit the written recommendations to our Secretary at least 90 days prior to the date corresponding to the previous year’s annual meeting of shareholders, with the submitting shareholder’s name, address, and pertinent information about the proposed nominee.
A shareholder intending to nominate an individual as a director at an annual meeting of shareholders, rather than recommend the individual to the Committee for consideration as a nominee, must comply with the advance notice requirements set forth in our Bylaws. Our Bylaws provide that any shareholder entitled to vote generally in the election of directors may nominate one or more persons for election as directors provided that such shareholder has provided written notice of such intention to our Secretary. Such notice must be given not fewer than 90 days nor more than 120 days prior to the meeting date corresponding to the previous year’s annual meeting of shareholders date, except in certain circumstances, and must contain certain required information about the nominee.
Shareholders wishing to recommend for nomination or nominate a director should contact the Company’s Secretary for a copy of the relevant procedure and the criteria considered by the Committee when evaluating potential new directors or the continued service of existing directors.
Board Leadership Structure.
Our Board leadership structure includes a combined Chair of the Board and Chief Executive Officer together with a Lead Director. The role of our Chair is to run the Board and ensure Board effectiveness in all aspects of its role. This includes working with the Lead Director and others to set the Board agenda, ensure that clear, accurate and timely information is provided to the Board, manage Board meetings to allow time for discussion of complex or difficult issues and promote active participation by all Board members. The role of Lead Director is held by an independent director selected by the Board. The role of the Lead Director includes responsibility for presiding at all executive sessions of the Board, consulting with the Chair and Chief Executive Officer on Board and committee meeting agendas, acting as a liaison facilit ating teamwork and communication between management and the non-management directors, including maintaining frequent contact with the Chair and Chief Executive Officer and advising her on the efficiency and effectiveness of the Board meetings, and conducting annual evaluations of individual Director performance .
Laura B. Hamilton serves as our CEO and Chair of the Board. She is the director most familiar with the Company’s business and industry and most capable of effectively identifying strategic priorities. Dr. Jean-Lou Chameau, serves as Chair of the Governance and Nominating Committee and was selected to serve as the Lead Director for all meetings of the non-management directors held in executive session. The Board believes this leadership structure is efficient and cost effective for the size of our company and enables the Board’s oversight of risk management.
Board Leadership Structure. Our Board leadership structure currently includes a non-executive Chairman of the Board and a separate Chief Executive Officer. These roles were combined until August 2011 when Laura B. Hamilton, who had been serving as the Chair and Chief Executive Officer, resigned from the Company by mutual agreement with the Board. The Board then appointed Mr. Murray as interim Chief Executive Officer and Mr. Anderson as non-executive Chairman of the Board, both of whom had already been serving as directors. The Board is currently engaged in a search for a Chief Executive Officer and intends to maintain the separateness of the Chief Executive Officer and Chairman roles for the time being. However, the Board has not adopted a policy of separateness and will periodically re-evaluate its leadership structure as the Company’s situation changes.
The primary role of our Chief Executive Officer is to manage the business affairs of the Company, and the primary role of our Chair is to preside over all Board activities and ensure Board effectiveness in all aspects of its functioning. This role includes working with the Chief Executive Officer to set the Board agenda, ensuring that clear, accurate and timely information is provided to the Board, managing Board meetings to allow time for discussion of complex or difficult issues, and promoting active participation by all Board members. The Chair may also assist the Chief Executive Officer in managing the Company’s relationships with investors and other external stakeholders.
The Board has determined that the separation of the Chairman and Chief Executive Officer roles is appropriate for the Company at this time because it enables the interim Chief Executive Officer to focus more closely on the day-to-day operations of the Company, which includes expanding the opportunities for growth and profitability, and effectively managing the Company’s exposure to compliance and other risks. The Board also values the increased involvement of Mr. Anderson as a leader and benefits more directly from his extensive industry and executive experience.
Board Role in Risk Oversight
Oversight. Management is responsible for designing and implementing the Company’s day-to-day risk management processes, controls and oversight. The Board, as a whole and through its committees,Committees, has broad responsibility for the oversight of risk management as well as specific risk management accountability for governance, overall risk appetite, executive compensation, CEO succession, and the control environment including financial reporting. In its risk management role, the Board has the responsibility to satisfy itself that the risk management processes and controls are adequate and functioning as designed and that Company business is conducted wisely and in compliance with proper governance and applicable laws and regulations. The Board views risk in the context of major strategic and operational decisions re lativerelative to the anticipated benefits. The Board further recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for the Company to be competitive and to achieve its long termlong-term performance expectations.
The Board believes the Company has stronggood internal processes to identify, manage and mitigate risk.risk and has implemented a new code of conduct as well as process and procedure enhancements during fiscal 2011 that further enhance the risk management oversight. In addition, the Company hired a General Counsel/Chief Compliance Officer who has primary oversight over compliance. Risk management is embedded in the business management system which begins with the Company’s strategy. The key steps of the business management system are the on-going monitoring and assessment of the external environment, the evaluation/validation of the strategic priorities and initiatives, the development of mid-range and annual operating plans, the execution of the annual operating plan and the ongoing monitoring and management of the business. In addition, the Board believes there is an appropriate internal control environment to identify, manage and mitigate risks.
As a critical part of its risk management oversight role, the Board encourages full, open and ongoing communication with management. The Board regularly engages in discussion with management on strategic, operational and governance matters to ensure that risks are identified, managed and mitigated on a timely basis. Senior management attends quarterly Board meetings and the Board also engages with members of the management team to review and discuss specific topics in addition to the quarterly meetings which providesprovide the Board with evidence of risk management in practice.
The Board implements its risk oversight function both as a whole and through committees. Much of the work is delegated to various committees, which meet regularly and report back to the full Board. All committees have significant roles in carrying out the risk oversight and management function. Each committee is comprised entirely of independent directors and is responsible for overseeing risks associated with its respective area of responsibility.
The Audit Committee assists the Board in fulfilling its oversight responsibilities with respect to the accounting and financial reporting principles and policies and internal audit controls and procedures. The Audit Committee oversees the financial statements and the independent audit thereof. It evaluates the performance and independence of outside auditors and selects appropriate outside auditors annually. The Audit Committee is responsible for monitoring risks related to financial assets, accounting, legal and corporate compliance. It fulfills these responsibilities by systematic, regular reviews with support from internal Company personnel and independent auditors and consultants. In addition, the Audit Committee discusses legal and compliance matters and assesses the adequacy of Company risk-related internal controls, and administers the Company’s Code of Business Conduct.controls. The Audit Committee members meet separately with representatives of our independent auditing firm, management in charge of internal assurance,the Internal Assurance leader, and outside legal counsel.
In the spring of 2011, the Board established the Audit Committee/Special Purpose to review compliance and government-related functions and activities and monitor and approve resources, as appropriate. It fulfills these responsibilities by conducting regular reviews with support from Company personnel, independent auditors, consultants and outside legal counsel.
The Compensation Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with our compensation policies and programs. The Compensation Committee is responsible for determining salaries, incentives and other elements of total compensation for our executive officers, and it administers our various compensation and benefit plans to ensure sound pay practices with features that mitigate risk without changing the incentive nature of the compensation. A separate discussion regarding the risk considerations in our compensation programs, including the processes which are put in place by the Compensation Committee and management to identify, manage and mitigate potential risks in compensation, can be found on p age 25page 15 of this proxy statement.
The Governance and Nominating Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with Board organization, membership, and structure. The Governance and Nominating Committee is responsible for recommending director candidates to our Board, overseeing processes for shareholders to nominate director candidates, and evaluating the performance of directors, committees and the Board. The Governance and Nominating Committee is also responsible for developing, periodically reviewing and recommending to the Board a set of corporate governance principles and procedures to the Board, and overseeing director orientation and continuing education. In addition, it is the policy of the Governance and Nominating Com mittee to meet regularly to discuss Chief Executive Officer succession planning.
The Chair of each committee provides a committee report at each Board meeting which enables the Board to fulfill its risk oversight responsibilities. Since risk oversight is an ongoing process and inherent in the Company’s strategic and operational decisions, the Board also discusses risk in relation to specific proposed actions.
During fiscal 2010, the Board appointed a task team comprised of the Chair of the Audit Committee, the Chief Financial Officer, the external general counsel, the Director of Internal Assurance, and the Treasurer to initiate a risk management assessment process. As part of its assessment, the team retained a risk management consulting firm to provide an external perspective on the Company’s risk management processes. The team reported to the Board that it has concluded that risk was appropriately managed. In addition, management will continue to engage with the Board on an ongoing basis to identify, oversee and manage Company risks.
Communications with the Board. The Board provides a process for shareholders to communicate with its members. The manner in which shareholders can send communications to the Board is set forth on our website at www.mts.com (select “Investor Relations” and click on “Corporate Governance”).
Board Evaluation. The Governance and Nominating Committee andleads the Board engages in an annual evaluation of its performance as a board of directors.
Code of Business Conduct. We have in place a code of ethics, known as the “MTS Code of Business Conduct,” which applies to all our directors, officers, employees, and contractors. We believe that theThe Code not only documents our historic good business practices but also sets forth guidelines for ensuring that all of our personnel act with the highest standards of integrity. The MTS Code of Business Conduct, as well as any waivers from and amendments to the Code, are posted on our website at www.mts.com (select “Investor Relations” and click on “Corporate Governance”).
Non-Employee DIndeirependent Directorctor Compensation
Directors who are not otherwise directly or indirectly compensated by the Company are each paid fees in the form of an annual retainer of $40,000, which includes compensation for all Board meetings. In addition, committee members are compensated at a rate of $1,000 per meeting attended. The Chair of the Audit Committee receives an additional $10,000 annually, the ChairsChair of the Compensation Committee receives an additional $6,000 annually, and the Chair of the Governance and Nominating Committee each receivereceives an additional $5,000 annually, andannually. When the Chair of the Board is also an executive officer of the Company, the non-employee directors elect from amongst themselves a Lead Director, who receives an additional $15,000 annually.
The Audit Committee/Special Purpose was formed by the Board in the spring of 2011 as a result of the investigation of the Company by the United States Attorney’s Office and the suspension of the Company by the U.S. Air Force from entering into new federal contracts. This special committee met 44 times during the last half of fiscal 2011, and its members devoted a significant amount of time and effort, both in meetings and outside them, to overseeing the Company’s internal investigation into the matters involving government contracting, certification and import/export practices undertaken in response to the government’s actions.
The Board of Directors, in recognition of the significant contributions by the members of this special committee, determined in November 2011 that two members of the committee should receive compensation in addition to their normal compensation. Mr. Hegarty, who was not a member of the Audit Committee and did not receive normal meeting fees for Audit Committee/Special Purpose meetings, will be paid $44,000 for his services—an amount equal to the normal meeting fees had he been a member of the Audit Committee. Ms. Steinel, who chaired the Audit Committee/Special Purpose and directed the committee’s activities, will be paid $88,000 for her services to the Company in this role, which is in addition to the normal meeting fees for attendance at the special committee meetings.
Upon election or re-election to the Board at each of our annual meetings of shareholders, each non-employee director will receive shares of restricted stock under our 2011 Stock Incentive Plan in an amount determined by the Board; provided, however, the 2011 Stock Incentive Plan is approved by shareholders at this Annual Meeting.Board. Each non-employee director will receive an annual restricted stock award grant with the number of shares (rounded to the next whole share) equal to $80,000 divided by the closing price of our Common Stock on the date of the Annual Meeting. Each such annual restricted stock award is granted on the date the non-employee director is elected or re-elected to serve on the Board and vests as to one-third of the shares on the date of each of the thre ethree regular annual meetings of shareholders following the date of grant, provided such director continues to serve. If a non-employee director is electedappointed to the Board prior to the annual meeting of shareholders, the non-employee director may receive a pro-rated restricted stock award depending upon, among other things, the length of time until the next annual restricted stock award grant. If a non-employee director resigns, retires or otherwise terminates his or her service as a director following ten years of service as a director, all unvested shares of restricted stock will then vest. If a non-employee director retires, resigns or otherwise terminates his or her service as a director after having served fewer than ten years, any restricted shares which have not vested as of the date of termination of service will be forfeited. Non-employee directors are also reimbursed for travel expenses to Board meetings.
Effective upon his appointment as Chairman of the Board on August 25, 2011, Mr. Anderson is receiving annual compensation of $110,000 in cash and $110,000 in restricted stock that will vest ratably over three years, in addition to regular Board and committee meeting fees.
The table below shows cash compensation paid to non-employee directors for fiscal 2010.2011. The table also shows the dollar amounts recognized by us for financial statement reporting purposes during fiscal 20102011 for restricted stock awards.
12
Director Compensation for Fiscal 2011| Name | | Fees earned or paid in cash ($) (1) | | | Stock Awards ($) (2)(3) | | | All Other Compensation ($) (4) | | | Total ($) | |
| David J. Anderson | | | 90,000 | | | | 80,033 | | | | 3,619 | | | | 173,652 | |
| Jean-Lou Chameau | | | 119,000 | | | | 80,033 | | | | 4,009 | | | | 203,042 | |
| Brendan C. Hegarty | | | 93,000 | | | | 80,033 | | | | 4,009 | | | | 177,042 | |
| Emily M. Liggett �� | | | 48,000 | | | | 80,033 | | | | 2,249 | | | | 130,282 | |
William V. Murray (5) | | | 50,000 | | | | 80,033 | | | | 2,249 | | | | 132,282 | |
| Barb J. Samardzich | | | 50,750 | | | | 80,033 | | | | 4,009 | | | | 134,792 | |
| Gail P. Steinel | | | 197,000 | | | | 80,033 | | | | 2,675 | | | | 279,708 | |
Name | | Fees earned or
paid in cash ($) (1) | | | Stock Awards ($) (2)(3) | | | All Other Compensation ($) (4) | | | Total ($) | |
| David J. Anderson | | | 48,000 | | | | 80,014 | | | | 2,446 | | | | 130,460 | |
| Jean-Lou Chameau | | | 73,000 | | | | 80,014 | | | | 3,362 | | | | 156,376 | |
Merlin E. Dewing (5) | | | 3,500 | | | | 0 | | | | 0 | | | | 3,500 | |
| Brendan C. Hegarty | | | 48,000 | | | | 80,014 | | | | 3,362 | | | | 131,376 | |
Emily M. Liggett (6) | | | 21,000 | | | | 60,020 | | | | 307 | | | | 81,327 | |
Lois M. Martin (5) | | | 24,000 | | | | 0 | | | | 749 | | | | 24,749 | |
William V. Murray (6) | | | 22,000 | | | | 60,020 | | | | 301 | | | | 82,321 | |
| Barb J. Samardzich | | | 49,000 | | | | 80,014 | | | | 3,362 | | | | 132,376 | |
| Gail P. Steinel | | | 60,500 | | | | 80,014 | | | | 1,408 | | | | 141,922 | |
_________________________
| (1) | Includes annual retainer and committee meeting fees paid in cash.cash, as well as amounts paid to Mr. Hegarty and Ms. Steinel for their service on the Audit Committee/Special Purpose. |
| (2) | Amounts represent aggregate grant date fair value during fiscal 20102011 under FASB ASC Topic 718, based on the valuation and utilizing the assumptions discussed in Note 2 to our Notes to Consolidated Financial Statements for the fiscal year ended October 2, 2010.1, 2011. Each of Mr. Anderson, Dr.Mr. Chameau, Dr.Mr. Hegarty, Ms. Liggett, Mr. Murray, Ms. Samardzich and Ms. Steinel was awarded 3,1281,866 shares of restricted stock during fiscal year 20102011 with a grant date fair value of $25.58 per share. Each of Ms. Liggett and Mr. Murray was awarded 2,004 shares of restricted stock during fiscal year 2010 with a grant date fair value of $29.95$42.89 per share. |
| (3) | As of October 3, 2009,1, 2011, the named directors held restricted stock awards in the following amounts:number of restricted shares: Mr. Anderson – 5,016; Dr.4,581; Mr. Chameau – 18,773; Dr.4,942; Mr. Hegarty – 11,539; Mr.4,942; Ms. Liggett – 2,004;3,202; Mr. Murray – 2,004;3,202; Ms. Samardzich – 16,323;4,942; and Ms. Steinel – 3,128.3,951. |
| (4) | Reflects cash dividends paid on unvested restricted stock awards in fiscal 2010.2011. |
| (5) | Represents amounts paid to Mr. Dewing and Ms. Martin leftMurray as an independent director prior to his appointment as interim Chief Executive Officer on August 25, 2011. Amounts paid to Mr. Murray as interim Chief Executive Officer in fiscal 2011 are included in the BoardSummary Compensation Table on December 2, 2009 and February 10, 2010, respectively.page 31. |
(6) | Ms. Liggett and Mr. Murray joined the Board on May 15, 2010. |
RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THIS SECTION SHOULD BE READ IN CONJUNCTION
WITH THE “AUDIT COMMITTEE REPORT” BELOW.
KPMG LLP (“KPMG”), an independent registered public accounting firm, has been our independent registered public accounting firm since May 31, 2002. The Audit Committee has selected KPMG to serve as our independent registered public accounting firm and to serve as auditors for the fiscal year ending October 1, 2011.September 29, 2012. Shareholder ratification of the appointment is requested. Consistent with our Audit Committee Charter and the requirements of the Sarbanes Oxley Act of 2002 and applicable rules and regulations of the SEC and the NASDAQ Stock Market, the ratification of the appointment of independent auditors by the shareholders will in no manner impinge upon or detract from the authority and power of the Audit Committee to appoint, retain, oversee and, if necessary, disengage the independent auditors. In the event the appointment of KPMG is not ratified by the shareholders, the Audit Committee will make another appointment to be effective at the earliest feasible time.
Representatives of KPMG are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.
The following table presents aggregate fees for professional services rendered by KPMG in fiscal years 20092010 and 20102011 for the audit of our annual financial statements and for other services.
| | | Fiscal Year | | | Fiscal Year ($000’s) | |
| | | ($000’s) | | | | | | | |
| | | 2009 | | | 2010 | | | 2010 | | | 2011 | |
Audit Fees(1) | | $ | 1,545 | | | $ | 1,192 | | | $ | 1,192 | | | $ | 1,565 | |
Audit-Related Fees(2) | | | 14 | | | | 15 | | | | 15 | | | | 15 | |
Tax Fees(3) | | | 12 | | | | 21 | | | | 21 | | | | 20 | |
| All Other Fees | | | — | | | | — | | | | — | | | | — | |
Total fees | | $ | 1,571 | | | $ | 1,228 | | | $ | 1,228 | | | $ | 1,600 | |
_________________________
| (1) | Includes annual audit of consolidated financial statements and Sarbanes-Oxley Section 404 attestation services. |
| (2) | Audit-related fees consist of fees for audits of our employee benefit plan. |
| (3) | Tax fees consist of fees for tax compliance and tax consultation services. |
The amounts in the table do not include out-of-pocket expenses incurred by KPMG. The Audit Committee pre-approved all non-audit services described in the table. The Audit Committee has determined that the provision of the services identified in the table is compatible with maintaining the independence of KPMG.
The Audit Committee’s current practice on pre-approval of services performed by the independent registered public accounting firm is to require pre-approval of all audit services and permissible non-audit services. The Audit Committee reviews each non-audit service to be provided and assesses the impact of the service on the firm’s independence. In addition, the Audit Committee has delegated authority to grant certain pre-approvals to the Audit Committee Chair. Pre-approvals granted by the Audit Committee Chair are reported to the full Audit Committee at its next regularly scheduled meeting.
Board Voting RecommeRecommendationndation
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE PROPOSAL
TO
RATIFY THE APPOINTMENT OF KPMG LLP.
The Audit Committee is presently composed of three directors who are independent, as defined by the applicable rules for companies listed on the NASDAQ Stock Market. The Audit Committee operates under a written charter adopted by the Board, a copy of which is available to shareholders on our website at www.mts.com (select “Investor Relations” and click on “Corporate Governance”).
Management is responsible for our internal controls over the financial reporting processes. The independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements and internal controls in accordance with auditing standards generally accepted in the United States and for issuing reports on such audit. The Audit Committee’s responsibility is to monitor and oversee these processes.
Management has represented to the Audit Committee that our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States, and the Audit Committee has reviewed and extensively discussed the consolidated financial statements with management and KPMG, our independent registered public accounting firm.
In reviewing our fiscal 20102011 audited consolidated financial statements, the Audit Committee discussed with KPMG matters required to be discussed by Statement on Auditing Standards No. 61. KPMG also provided to the Audit Committee the written disclosures required by Independence Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with KPMG that firm’s independence.
Based upon the Audit Committee’s discussions with management and KPMG and the Audit Committee’s review of the representations of management and the reports of KPMG, the Audit Committee recommended that the Board include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2010,1, 2011, which was filed with the SEC on November 30, 2010.2011.
SUBMITTED BY THE AUDIT COMMITTEE
OF THE COMPANY’S BOARD OF DIRECTORS
| Gail P. Steinel (Chair) | Jean-Lou Chameau | Gail P. Steinel (Chair) Jean-Lou Chameau David J. Anderson | |
APPROVAL OF THE
MTS SYSTEMS CORPORATION 2011 STOCK INCENTIVE PLAN
On November 23, 2010, our Board adopted the MTS Systems Corporation 2011 Stock Incentive Plan (the “2011 Plan”) effective January 31, 2011, subject to shareholder approval. A copy of the 2011 Plan is attached to this proxy statement as Appendix A. The 2011 Plan provides stock incentive awardsRisk Considerations in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other awards in stock and/or cash. The 2011 Plan permits the issuance of up to 1,000,000 shares of our Common Stock.
Immediately prior to the approval by our Board of the 2011 Plan, our only equity compensation plan was our 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan will expire, and no further grants will be permitted, on and after January 31, 2011. As a result of the expiration of the 2006 Plan, approximately 700,000 shares of our Common Stock otherwise remaining available for grant under the 2006 Plan will be forfeited. However, shares underlying awards previously granted under the 2006 Plan that are cancelled or forfeited will be available for awards under the 2011 Plan. We currently expect that approximately 300,000 shares will be recovered over the seven-year term of the 2011 Plan from cancellations and forfeitures of awards under the 2006 Plan.
Our Compensation PurpoProgse of the 2011 Planrams
The purpose of the 2011 Plan is to attract and retain talented and experienced people, closely link employee compensation with performance realized by shareholders, and reward long-term results with long-term compensation. If approved, the 2011 Plan will permit us to grant stock incentive awards to current and new employees, including officers, vendors and members of the Board.
Below is a summary of the key terms of the 2011 Plan, which is qualified in its entirety by reference to the text of the 2011 Plan.
Key Plan Features | | Description |
| | |
Effective Date of Plan | | · | January 31, 2011, provided the 2011 Plan is approved by shareholders |
| | · | If the 2011 Plan is not approved by our shareholders within 12 months of approval by our Board, the 2011 Plan will be terminated and any stock incentives granted under the 2011 Plan will be likewise terminated |
| | | |
Term of Plan | | · | The earlier of January 31, 2018 or the date on which all shares reserved under the 2011 Plan have been issued or are no longer available for use under the 2011 Plan |
| | | |
Eligible Participants | | · | Our employees or employees of any of our subsidiaries in keyDuring fiscal 2010, management and technical positions |
| | · | Non-employee members of the Board |
| | · | Key vendors to us or any of our subsidiaries |
| | |
Key Plan Features | | Description |
| | | |
Total Shares Authorized and Share Counting | | · | 1,000,000 shares of Common Stock for all types of stock incentive awards |
| | · | Shares available under the 2011 Plan are reduced by one share for each share underlying a stock option |
| | · | Shares available under the 2011 Plan are reduced by the aggregate shares exercised pursuant to a stock settled stock appreciation right (rather than the number of shares issued upon exercise) |
| | · | Shares available under the 2011 Plan are reduced by 2.5 shares for each share of restricted stock, performance stock or similar awards |
| | · | Shares withheld by us for taxes, shares tendered to us to pay the exercise price of an option, and shares re-acquired by us with amounts received from exercise of an option will not be added back to the 2011 Plan |
| | · | Shares available under the 2011 Plan will not be reduced for stock incentives settled in cash |
| | | |
Individual Share Limits | | · | Up to 1,000,000 shares for all incentive stock options |
| | · | Up to 60,000 shares per year for all stock incentive awards for non-employee Directors |
| | · | Up to 200,000 shares per person per year under all stock incentives |
| | · | Up to an additional 100,000 shares for stock incentives to a newly hired key employee |
| | | |
Type of Stock Incentive Awards | | · | Incentive stock options and non-qualified stock options with an exercise period no longer than seven years |
| | · | Restricted stock and restricted stock units |
| | · | Stock appreciation rights |
| | · | Performance stock and performance units |
| | · | Other awards in stock or cash |
| | · | Restricted stock awards on the annual election or re-election of non-employee directors, which stock will vest in three equal installments if the director continues to serve through the next three annual meetings of shareholders |
| | | |
Vesting and Exercise | | · | Determined by the Compensation Committee based on service (time vesting) or upon achievement of performance targets (performance vesting) or both |
| | · | All non-performance awards that are not assumed or substituted will vest upon a change in control |
| | · | Objective performance criteria in the 2011 Plan, if approved by shareholders, will permit deductibility of executive officer awards as performance based compensation under Code Section 162(m). The performance criteria are the same as those listed in the Executive Variable Compensation Plan approved by shareholders in February 2010 |
Key Plan Features | | Description |
| | | |
Permissible Features | | · | We may specify that stock incentives are subject to reduction, cancellation, forfeiture or recoupment under certain circumstances |
| | · | We must require our named executive officers to disgorge certain compensation, including incentive or equity based compensation awarded under the 2011 Plan, in certain circumstances. Examples of these circumstances include misconduct leading to non-compliance with the financial reporting requirements under federal securities laws or restatements of our financial information |
| | · | We may hold restricted stock and restricted stock units until restrictions lapse |
| | · | Dividend and dividend equivalents on awards may be paid currently or deferred |
| | · | Options may be exercised with previously acquired shares |
| | | |
Features Not Permitted | | · | Increase the number of shares reserved or any of the limits stated in the 2011 Plan without shareholder approval |
| | · | Extend the term of the 2011 Plan without shareholder approval |
| | · | Re-price stock options or stock appreciation rights |
| | · | Re-grant shares tendered for stock option exercise or payment of taxes |
Who is Eligible for Stock Incentive Awards
Our employees who hold key management and technical positions with us or any subsidiary, the non-employee members of our Board and key service providers to our subsidiaries are eligible to receive awards under the 2011 Plan. The Compensation Committee will determine which employees and other eligible persons will be awarded stock incentives under the 2011 Plan. The 2011 Plan also provides for an annual grant of restricted stock to each non-employee Board member upon election or re-election and shall be determined by the Board in its sole discretion prior to such annual meeting of shareholders, but also permits stock incentives be made to non-employee Board members by the Board in its discretion in addition to the annual grant of restricted stock. Currently, the Company has seven non-employee Board members, approximately 280 employees tha t are eligible to be designated by the Compensation Committee as key management and technical employees and no key service providers.
The Compensation Committee intends to utilize a mix of stock options, stock appreciation rights, restricted stock and performance stock. The Compensation Committee anticipates granting an average of approximately 400,000 shares of Common Stock each fiscal year under the 2011 Plan. The following chart summarizes the past three fiscal year history of restricted stock and option grants by the Compensation Committee. The chart shows the number of shares utilized under the 2006 Plan during the past three fiscal years, and the aggregate shares reserved for outstanding grants plus those available under the 2006 Plan, as a percentage of our outstanding shares (assuming for this calculation that all shares under the 2006 Plan were also outstanding).
| Fiscal Year | | Beginning
Total Shares
Outstanding (000’s) (A) | | Beginning
Total Plan Shares
Reserved and
Available
(000’s) (B) | | Plan Shares (B)
as a Percentage
of Total Shares (A+B) | | New Share
Grants During
Year Under Plan (000’s) (C) | | New Share
Grants (C) as a
Percentage of
Total Shares (A+B) |
| 2010 | | 16,564 | | 1,041 | | 5.9% | | 394 | | 2.2% |
| 2009 | | 16,976 | | 1,079 | | 6.0% | | 443 | | 2.5% |
| 2008 | | 17,704 | | 1,571 | | 8.2% | | 407 | | 2.1% |
Types of Stock Incentives to be Awarded
Subject to the limits under the 2011 Plan, the Compensation Committee has the discretionary authority to determine the size of the award, the type of award, and if it will be tied to meeting performance-based requirements or will vest over time. For named executive officers, the performance-based requirements for vesting in an award may be designed to comply with Section 162(m) of the Internal Revenue Code to permit us to deduct the value of the award for income tax purposes.
For directors who are not employees, the 2011 Plan provides for an automatic grant of a discretionary number of shares of restricted stock on each director’s election and re-election at the annual shareholders meeting, which will vest in three equal installments if the recipient remains a director on each of the next three annual shareholder meetings where directors are elected. Please see the sub-section entitled “New Plan Benefits” below for a description of the award to non-employee directors that will be made in connection with this Annual Meeting if Proposal 3: Approval of the MTS Systems Corporation 2011 Stock Incentive Plan, is approved by shareholders. The Board will determine the number of restricted shares to be granted t o directors under the 2011 Plan each year thereafter. In addition, the Board may from time to time grant additional awards to some or all of the Board as it deems appropriate.
The types of awards that may be made under the 2011 Plan are similar to those under the 2006 Plan and are as follows:
| · | Incentive stock options and non-qualified stock options: the right to purchase shares where value is based on the appreciation in the underlying shares in excess of an exercise price, which right may be exercised by the holder during the term of the option, which is generally five years and may not be more than seven years from the date of grant, unless earlier terminated upon certain events, such as for cause. The exercise price may be paid in cash or in previously owned shares or by other means permitted by the Compensation Committee. The exercise price of stock options granted under the 2011 Plan may not be less than the fair market value of our Common Stock on the date of grant. No option may be repurchased or exchanged for a lower priced option.
|
| · | Stock appreciation rights: a contractual right to the increase in the value of the underlying shares subject to the award that does not require payment based on the fair market value at time of grant, but which pays the appreciation in stock value when elected by the holder in the form of whole shares or cash, or a combination of both. Stock appreciation rights may not be granted at a purchase price less than the fair market value of our Common Stock on the date of grant, and may be exercised by the holder during the term of the stock appreciation right, which may not be more than seven years from the date of grant unless earlier terminated upon certain events, such as for cause.
|
| · | Restricted stock and restricted stock units: awards of stock that do not require purchase, but which are not immediately available to the recipient until certain restrictions lapse, either based on time or upon achievement of performance related criteria. Restricted units may vest earlier than the date the shares are actually paid in exchange for the units, which may result in a deferral of income. The holder of restricted stock is entitled to vote those shares. The Compensation Committee may determine whether, with respect to restricted stock, to pay dividends on those shares to the holder or to defer dividends. Restricted stock units are not outstanding until paid in stock and therefore do not have voting or dividend rights.
|
| · | Performance shares and performance units: awards of restricted or unrestricted stock that are issued to the recipient only upon satisfaction of performance based criteria.
|
| · | Other awards: additional opportunities to reward participants through payment of cash or stock as a bonus, or as deferred compensation, or for other purposes for which stock will provide a meaningful incentive.
|
Adjustments to Stock Incentives for Corporate Transactions
In the event of a stock dividend, recapitalization, stock split, reorganization, merger, spin-off, repurchase or exchange of our Common Stock or similar event effecting our stock, the Compensation Committee may in its discretion adjust the number and kind of shares granted under the 2011 Plan, including the number and exercise price of shares subject to outstanding options or stock appreciation rights, and to adjust restricted stock, restricted stock units, performance stock and performance share units and other awards.
Effect on Termination of Employment on Stock Incentives
Subject to certain exceptions requiring earlier termination, stock options will expire and cannot be exercised 180 days after the termination of a participant’s employment, including upon death, disability or retirement. Prior to that time, only options that have become exercisable under their terms, based on either service based or performance based vesting, may be exercised. The Compensation Committee may, at any time after an award, vest part or all of the unvested options as it deems appropriate. Restricted stock and restricted stock units will be forfeited if not vested when the participant terminates employment, including upon death, disability or retirement. The Compensation Committee may also accelerate vesting at any time after the restricted stock incentive is awarded.
For options and restricted stock, restricted stock units, performance stock and performance units, the Compensation Committee may elect not to accelerate options that would otherwise vest only upon achievement of performance criteria if those targets have not been achieved, or the performance period has not expired.
Effect of a Change in Control on Stock Incentives
Stock options become fully exercisable and restricted stock and restricted stock units automatically become fully vested upon the occurrence of a change in control as defined in the 2011 Plan, except that awards based on performance criteria where the performance period has not yet closed at the time of a change in control will not automatically accelerate. The Compensation Committee may require options or stock appreciation rights be exercised prior to the change in control, may pay cash or other securities to cancel awards in connection with the change in control, or may provide for the successor to substitute its stock for outstanding awards.
Transferability of Stock Incentives
Stock options, restricted stock, restricted stock units, performance stock, and performance units, as well as other awards under the 2011 Plan that are vested at the time of the death of the participant, are transferable only by the participant’s last will and testament or applicable state laws on decent and distribution. Restricted stock, restricted stock units, performance stock and performance units may not be sold, transferred, assigned, pledged or otherwise encumbered or disposed of until the applicable restrictions lapse or the performance targets have been achieved.
The Compensation Committee will administer the 2011 Plan. The Compensation Committee will select employees who shall receive awards, determine the number of shares covered by each award, and establish the other terms and conditions consistent with the limitations contained in the 2011 Plan. The Compensation Committee may also interpret the 2011 Plan, may establish and amend terms of existing stock incentive awards, except that if the participant is adversely affected by the amendment, the participant must also consent. The Board may also exercise any of the authorities granted to the Compensation Committee. To the extent required by law or desired for tax purposes, awards to named executive officers will be made only by persons who qualify as outside directors under securities and tax laws and stock exchange rules. The Compensation Commi ttee may delegate to an named executive officer all or part of its responsibilities to make awards, other than the authority to make awards to other named executive officers, directors or other insiders.
Amendments to the 2011 Plan
The Compensation Committee may amend or suspend the 2011 Plan at any time except that any amendment in one or more of the following categories will not be permitted without the approval of the shareholders to:
| · | increase the number of shares that may be used under the 2011 Plan, or change any other limit on various types of awards; |
| · | permit the re-pricing of outstanding stock options; or |
| · | amend the maximum shares that may be granted as awards to any participant. |
Options. Stock option grants under the 2011 Plan may either be granted as incentive stock options, which are governed by Internal Revenue Code Section 422, as amended, or as non-qualified stock options, which are governed by Internal Revenue Code Section 83, as amended. Generally, no federal income tax is payable by the participant upon the grant of an incentive stock option and no deduction is taken by us. If certain holding periods are met, the exercise of an incentive stock option does not result in taxation to the participant; rather, the participant is taxed only at the time of sale of the shares received upon exercise. If the shares have been held for at least one year after the date of exercise and at least two years from the date of grant of the option, the parti cipant will be taxed on any appreciation in excess of the exercise price as long-term capital gains. In that event, we are not entitled to a deduction for the amount of the capital gains.
Under current tax laws, if a participant exercises a non-qualified stock option, the participant will be taxed on the difference between the fair market value of the stock on the exercise date and the exercise price and, thereafter, the participant would receive capital gains on any appreciation in stock value after the exercise date, depending upon the length of time the participant held the stock after exercise. When the option is exercised, we will be entitled to a corresponding tax deduction.
Restricted and Performance Stock and Units. Awards of restricted stock and restricted stock units, performance stock and performance units under the 2011 Plan generally are not subject to federal income tax when awarded, unless the participant properly elects to accelerate the tax recognition. Restricted stock is generally subject to ordinary income tax at the time the restrictions lapse and performance stock is taxed at the time the performance targets are met. Restricted stock units and performance units are generally subject to ordinary tax at the time of payment, even if vested earlier. We are entitled to a corresponding deduction at the time the participant recognizes taxable income on the restricted or performance stock or units.
Other than as described below, no benefits or amounts have been granted, awarded or received under the 2011 Plan. Because the number or size of the awards that a participant may receive under the 2011 Plan is at the discretion of the Compensation Committee, it is not possible to determine the benefits that will be received by participants if the 2011 Plan were to be approved by the shareholders. Please see the above description regarding the 2011 Plan’s limitations on the size of awards that may be granted to individual participants.
On November 23, 2010, the Compensation Committee and the Board determined that under the 2011 Plan each non-employee director elected or re-elected at this Annual Meeting will receive a restricted stock award with the number of shares (rounded to the next whole share) equal to $80,000 divided by the closing price of our Common Stock on the date of this Annual Meeting. The restricted stock award vests as to one-third of the shares on the date of each of the three regular annual meetings of shareholders following the date of grant provided such director continues to serve through the date of the Annual Meeting. This is the same vesting provision applicable to the restricted stock awards to non-employee directors under the 2006 Plan. By comparison, under the similar provision of the 2006 Plan, each non-employee directo r re-elected at the fiscal 2009 Annual Meeting of Shareholders, held on February 10, 2010, received an award of 3,128 restricted shares, which was the number of shares equal to $80,000 divided by the closing price of our Common Stock on the date of that Annual Meeting.
Accordingly, if shareholder approval is received with respect to Proposal 3 and if elected or re-elected at this Annual Meeting, non-employee directors David J. Anderson, Jean-Lou Chameau, Brendan C. Hegarty, Emily M. Liggett, William V. Murray, Barb J. Samardzich, and Gail P. Steinel will receive the award of restricted stock described above.
If shareholder approval is not received with respect to Proposal 3, no restricted shares described in the previous paragraph will be available or issued to non-employee directors at this Annual Meeting, since the authorization to make such automatic grant under the 2006 Plan will have expired prior to the date of this meeting.
Registration with the Securities and Exchange Commission
If the 2011 Plan is approved by our shareholders, we intend to file a registration statement with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1933, as amended, covering the 1,000,000 shares issuable under the 2011 Plan.
Board Voting Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE
PROPOSAL TO APPROVE THE 2011 STOCK INCENTIVE PLAN.
Other information regarding equity compensation plans
The following table sets forth information regarding our equity compensation plans as of October 2, 2010.
| Plan Category | | Number of Shares of Common Stock to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | | Number of Shares
of Common Stock Remaining Available for Future Issuance under Equity Compensation
Plans (1) | |
| | | | | | | | | | |
| Equity Compensation Plans Approved by Shareholders | | | 1,418,000 | | | $ | 32.37 | | | | 1,216,000 | (2) |
| Equity Compensation Plans Not Approved by Shareholders | | | 0 | | | | N/A | | | | 0 | |
| Total | | | 1,418,000 | | | $ | 32.37 | | | | 1,216,000 | |
(1) | Excludes shares of Common Stock listed in the first column.
|
(2) | Consists of 771,000 shares available for awards under our 2006 Stock Incentive Plan (the “2006 Plan”) and 445,000 shares available for issuance under the 2002 Employee Stock Purchase Plan (the “2002 ESPP”). Effective January 31, 2011, the 2006 Plan will terminate in accordance with its terms, thereby eliminating our authority to grant any new awards under the 2006 Plan. If Proposal 3: Approval of the MTS Systems Corporation 2011 Stock Incentive Plan is approved by shareholders at the Annual Meeting, we will have the authority to make stock grants under that Plan. If Proposal 4: Approval of MTS Systems Corporation 2012 Employee Stock Purchase Plan is approved by shareholders at the Annual Meeting, employees may continue to participate in the 2002 ESPP through its expiration on December 31, 2011. |
Under our shareholder approved equity compensation plans, there is no mandatory holding period for stock acquired upon exercise of options. However, the federal income tax consequences to an employee for immediate disposition of stock acquired upon exercise of incentive stock options may make it more advantageous to the employee to hold such shares for at least one year from the date of exercise and two years from the date of grant. In addition, our named executive officers and directors are subject to stock ownership guidelines that may encourage our named executive officers and directors to hold shares acquired upon exercise of options. See the section of this proxy statement entitled “Executive Compensation – Compensation Discussion and Analysis – Compensation Poli cies – Stock Ownership Guidelines” for more information.
APPROVAL OF THE
MTS SYSTEMS CORPORATION 2012 EMPLOYEE STOCK PURCHASE PLAN
On November 23, 2010, our Board adopted the MTS Systems Corporation 2012 Employee Stock Purchase Plan (the “ESPP”), subject to approval by the shareholders. A copy of the ESPP is attached to this proxy statement as Appendix B.
Our shareholders previously approved our 2002 Employee Stock Purchase Plan (the “2002 ESPP”). The 2002 ESPP expires on December 31, 2011 and approximately 360,000 of the 750,000 shares authorized under the 2002 ESPP will have been issued at the time of its expiration. If the ESPP is approved by shareholders at this Annual Meeting, the ESPP will commence on January 1, 2012, just after the expiration of the 2002 ESPP. In this way, we intend that we will be able to continue the benefits of the 2002 ESPP to us and to our employees through the ESPP.
The purpose of the ESPP is to provide our employees with an opportunity to share in the ownership of the Company by providing them with a convenient and cost-effective means to purchase our Common Stock and by providing them a stronger incentive to work for the continued success of the Company. The ESPP will also enhance our ability to obtain and retain the services of employees. The ESPP is intended to be an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code.
The following is a brief summary of the key terms of the ESPP, which are described in more detail below.
Key Plan Features | | Description |
| | |
Effective Date of Plan and Term of Plan | | · | The ESPP will commence on January 1, 2012 and will terminate on December 31, 2021, or on the date that all the shares reserved for issuance under the ESPP have been purchased, if earlier |
| | · | If the ESPP is not approved by our shareholders within 12 months of approval by our Board, the ESPP will be terminated and all stock options granted under the ESPP will be likewise terminated |
| | | |
Eligible Participants | | · | Any employee of the Company or any participating subsidiary who is customarily employed for more than 20 hours per week, more than 5 months in a calendar year, and has completed 12 or more months of continuous employment service prior to the first day of the applicable phase is eligible to participate in the ESPP |
| | · | Approximately 833 employees are eligible to participate under the ESPP |
| | · | Participation is voluntary |
| | · | A participant enrolled in the 2002 ESPP on the purchase date of the last phase of the 2002 ESPP will be automatically enrolled in the ESPP, unless the participant cancels enrollment prior to the first day of the first phase of the ESPP |
| | | |
Total Shares Authorized | | · | Maximum of 750,000 shares available for issuance under the ESPP |
| | | |
Individual Limits | | · | No participant may be granted an option to purchase shares of Common Stock under the ESPP with an aggregate fair market value in excess of $25,000 in any calendar year or with the number of shares exceeding 10,000 shares in any phase |
| | · | No participant may be granted an option under the ESPP if the participant, immediately after the grant of the option, would own stock (including stock subject to the option) possessing 5% or more of the total combined voting power or value of all classes of our issued and outstanding stock |
Key Plan Features | | Description |
| | |
Options under the ESPP | | · | The ESPP permits participants to purchase shares of our Common Stock with payroll deductions that have accumulated during a specified period, called a “phase” |
| | · | Each phase will generally last for six months. No phase may run concurrently, but a phase may commence immediately after the termination of a preceding phase |
| | · | A participant is granted an option as of the first day of the phase to purchase a number of shares of our Common Stock determined by dividing the participant’s accumulated payroll deductions by the purchase price applicable to that phase |
| | · | The purchase price for shares is equal to the lesser of 85% of the fair market value of our Common Stock on the first date of a phase (the “Subscription Date”) or 85% of the fair market value our Common Stock on the last date of a phase (the “Purchase Date”) |
| | · | A participant’s option for the purchase of shares will be exercised automatically on the last day of a phase and the number of full and fractional shares (rounded to the nearest 1/100th of a share) shares will be purchased as of that date
|
| | | |
Participation by Eligible Employees | | · | Employees make contributions to the ESPP through payroll deductions in whole percentages of 1% to 10% of each employee’s respective pay for the applicable phase of the ESPP. (A dollar amount election will be permitted only if necessary to maximize an employee’s payroll deductions for a Phase.) |
| | · | After the first day of a phase, participants cannot increase or decrease the amount of payroll deductions, but may withdraw from participation during the phase, as described below |
| | · | Eligible employees elect to participate in the ESPP by enrolling by the applicable deadline prior to the date the phase commences |
| | | |
Withdrawal and Termination of Employment | | · | A participant may withdraw from the current phase at any time prior to six weeks before the purchase date, in which case all amounts withheld will be refunded, without interest |
| | · | A participant may withdraw from the next phase at any time within the open enrollment period prior to the beginning of the next phase (generally, the four weeks prior to two weeks before the beginning of the phase) |
| | · | A participant whose employment terminates during the phase will immediately cease to participate in the ESPP and that participant’s payroll deductions during that phase will be refunded, without interest |
| | | |
Rights and Restrictions on Stock Issued under ESPP | | · | Until the later of 12 months after the date of exercise of an option at the end of the phase or 24 months from the date of grant of the option for a phase, the participant may not sell or otherwise transfer the shares acquired through the ESPP during that phase, without the approval of the Compensation Committee. The Compensation Committee may waive this restriction at any time as to shares acquired during a phase and may establish uniform rules for the transfer of stock during the restricted period |
| | · | Participants may elect to have any dividends paid on shares purchased through the ESPP reinvested in our stock in lieu of receiving dividends in cash. Any shares purchased through the reinvestment of dividends will be purchased in the open market under our dividend reinvestment program |
| | | |
Administration | | · | The Compensation Committee will administer the ESPP |
Adjustments to Stock Incentives for Corporate Transactions
The number of shares of Common Stock available for issuance under the ESPP, as well as the price per share of our Common Stock covered by share purchase rights that have not been exercised, will be proportionately adjusted for any increase or decrease in the number of issued shares of our Common Stock resulting from a subdivision or consolidation of shares or the payment of a share dividend or similar events.
Additionally, our Board may elect to accelerate the purchase date of any phase effective on the date specified by the Board in the event of certain mergers involving us, certain sales or transfers of all or substantially all of our assets. If we are involved in any merger or consolidation in which we are not the surviving corporation, and if the Board does not accelerate the purchase date of the phase, each outstanding option under the ESPP will pertain to and apply to the securities or other rights to which a holder of the number of shares subject to the option would have been entitled.
If we dissolve or liquidate, each outstanding option will terminate and immediately prior to such dissolution or liquidation, each participant shall be repaid the payroll deductions credited to the participant’s account, without interest.
Options granted under any phase of the ESPP are not transferrable, except by the laws of descent and distribution. Likewise, payroll deductions and any rights regarding the exercise of any option or the receipt of shares of our Common Stock under the ESPP, may not be assigned, transferred, pledged or otherwise disposed of in any way by a participant.
Amendment to and Termination of the ESPP
The Board may at any time amend the ESPP, except that without shareholder approval no amendment may increase the total number of authorized shares, permit aggregate payroll deductions in excess of 10% of a participant’s compensation as of the first day of a phase, or impair any outstanding option.
The ESPP may be terminated by our Board at any time provided that no such termination will take effect with respect to any options then outstanding except under certain circumstances where our Board has the right to accelerate the purchase date of a phase.
Neither the grant nor the exercise of an option to purchase shares under the ESPP will have any tax consequences to the participants or to us. If a participant holds the shares acquired upon the exercise of his or her options for more than two years from the first day of the phase and one year from last day of the phase (the “holding period”), then amounts realized by the participant on a sale or other disposition of the shares will be ordinary income in the amount equal to the lesser of:
| · | the fair market value of the shares at the date of disposition in excess of the price paid by the participant for the shares, or |
| · | the fair market value of the shares on the first day of the phase in excess of the price paid by the participant for the shares. |
Any gain in excess of the amount described above is treated as long-term capital gain. If a participant holds shares purchased under the ESPP at the time of his or her death, the required holding periods will automatically be deemed to have been satisfied. We are not entitled to any deduction if the holding period requirements are satisfied.
If a participant sells or otherwise disposes of the shares purchased under the ESPP before the holding period requirements are satisfied, the participant will realize as ordinary income the excess of the fair market value of the shares on the last day of the phase over the price paid by the participant for the shares; the difference between the proceeds of sale and the fair market value of the shares on the last day of the phase will be treated as long-term or short-term capital gain or loss, as the case may be. We are entitled to a tax deduction only to the extent the participant realizes ordinary income as a result of the early disposition.
Because the amount of future benefits under the ESPP will depend on which of our employees elect to participate, the amount of their contribution elections, and the fair market value of our Common Stock, it is not possible to determine the benefits that will be received by eligible participants if the ESPP is approved by our shareholders. The closing price of a share of our Common Stock as reported on The Nasdaq Stock Market, Inc. on December 15, 2010 was $38.06.
Registration with the Securities and Exchange Commission
If the ESPP is approved by our shareholders, we intend to file a registration statement with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1933, as amended, covering the 750,000 shares issuable under the ESPP.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE
PROPOSAL TO APPROVE THE 2012 EMPLOYEE STOCK PURCHASE PLAN.
Management recently conducted a thorough risk assessment described below to evaluate the risks associated with the Company’s compensation practices, policies and programs for all employees, including the named executive officers. WithBased on this review and assessment, management and the Compensation Committee concluded at that time that our compensation program does not encourage excessive or inappropriate risk-taking that is reasonably likely to result in a material adverse affect on us.
During fiscal 2011, management revisited this risk assessment by identifying and analyzing any changes in compensation policies and practices that had been made since the fiscal 2010 assessment had been conducted. Management determined that no significant changes had been made and no undue compensation risk was identified. Because no significant changes were made from the prior year, management and the Compensation Committee concluded that risks arising from our compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.
The fiscal 2010 risk assessment was conducted with the assistance of the Compensation Committee’s independent consultant, Towers Watson,Watson. Compensation programs were reviewed broadly, including a qualitative analysis of program designs and corporate governance processes, as well as an analysis of directional alignment of historical pay and performance outcomes.
Members of the Board and senior management were interviewed to gain a variety of perspectives on risk. Questions centered on how the Company currently identifies and measures various types of risk, the roles and responsibilities of players in the risk management process, and the level of risk encouraged or mitigated by the Company’s current compensation plans.
As part of this risk assessment process, management and the Compensation Committee identified several components of our compensation programs that effectively reduced risk. Following the fiscal 2011 review and assessment, we and ouranalysis, the Compensation Committee do not believereaffirmed that these components, set forth below, continue to reflect our position on compensation program encourages excessive or inappropriate risk-taking that is reasonably likely to result in a material adverse affect on us for the following reasons:risk:
| | • | ● | Our use of different types of compensation provides a balance of short-term and long-term incentives with fixed and variable components; |
| | | | |
| • | ● | Our compensation plan design and the governance processes work together to minimize exposure to excessive risk, while creating a focus on operational activities that contribute to long-term shareholder value creation; |
| | | | |
| • | ● | The metrics used to determine the amount of a participant’s bonus under our short-term incentive plans focus on a combination of Company-wide metrics and business unit performance using a balance of profitability and capital efficiency measures; |
| | | | |
| • | ● | Our bonus plans impose threshold and maximum payout levels on bonus awards to limit windfalls; |
| | | | |
| • | ● | Commission-based payments represent a limited component of our historical overall compensation program; |
| | • | ● | Our programs include clawback provisions and allow the use of negative discretion for our named executive officers; |
| | | | |
| • | ● | Our stock ownership guidelines discourage excessive risk taking; and |
| | | | |
| • | ● | Our system of internal controls places a strong focus on avoiding undue financial risk through rigorous review processes. |
CompensationCompensation Discussion and AnalysisAnalysis
Executive Summary
We are a leading global supplier of test systems and industrial position sensors. Our operations are organized and managed in two business segments, the Test segment and the Sensors segment. The Test and Sensors segments representrepresented approximately 80% and 20%, respectively, of our revenue for fiscal 2010.2011. Sales outside of the United States, including export sales from U.S. businesses, accounted for approximately two-thirds70% of our revenue in fiscal 2010.2011.
Our compensation policies and objectives during fiscal 20102011 were influenced by a variety of factors. One key factor was the significantfactors, including uncertainty regarding whether, when andthe extent to what extent thewhich worldwide economic conditions that impactedwould continue to impact our operating results. Our operating results had improved in fiscal 2010 over fiscal 2009, financial results would improvewith particular strengths in increased orders and improved earnings per share, but uncertainty about prospects for 2011 remained. In addition, uncertainty increased during ourthe fiscal 2010. year with the investigation initiated in January 2011 by the U.S. Department of Commerce and the U.S. Attorney’s Office for the District of Minnesota and the related suspension imposed by the U.S. Department of the Air Force, which began in March 2011 and was lifted in September 2011. This temporary suspension barred the Company from U.S. Government contracting and from directly or indirectly receiving the benefits of federal assistance programs during that time.
As a result of this uncertainty related to the economy and how it would impact our industry and our business, and as a reaction to the government investigation and suspension, the Compensation Committee (for purposes of this Compensation Discussion and Analysis, the “Committee”) took a conservative approach to compensation programs in fiscal 2010.
2011, while also focusing on attracting and retaining top talent to manage the Company in challenging circumstances. Highlighted below are some of the key actions and decisions with respect to our executive compensation programs for fiscal 20102011 as approved by the Committee with counsel from its independent compensation consultant, Towers Watson:
| | · | Salary Freeze. Due to the uncertainty of the economic climate, as well as general market trends, the Committee decided in November 2009 to not award base salary increases to the named executive officers in fiscal 2010 as part of a Company-wide restriction on salary increases.
|
| ·● | Strong Performance-Based Compensation Awards and Payouts. Our executive compensation is tightly linked with performance. |
| | ·● | As with past years, we adopted an Executive Variable Compensation (EVC) Plan through which the named executive officers were eligible to earn cash incentive compensation based upon achievement of specific financial objectives for fiscal 20102011 recommended by the Committee and approved by the Board that are designed to challenge the named executive officers to high performance. |
| | ·● | The Committee chose to adjust payouts under the EVC Plan to our named executive officers for fiscal 2011 performance downward from the amounts that would have been payable based only on achievement of the fiscal 2011 financial objectives. The Committee exercised its negative discretion because it believed that, in light of the U.S. Department of Commerce investigation and temporary suspension imposed by the U.S. Department of the Air Force, the Company’s and named executive officers’ performance in fiscal 2011 was not completely captured by reference to the financial objectives alone. |
| ● | As named executive officers assume greater responsibility, a larger portion of their total cash compensation is designed to and does become dependent on Company, business unit, and individual performance. For example, for fiscal 2010, amounts earned by Ms. Hamilton under the EVC Plan based upon achievement of four corporate financial goals represented 49% of her total cash compensation and 31% of her total compensation. |
| | ·● | The Committee targets annual base salaries around the median base salaries of salary survey data, with the EVC Plan designed to allow the named executive officer to earn above target compensation only wherewhen the named executive officer delivers, and as a Company we deliver, performance that is also above our targets. |
| | ·● | The Committee actively consideredconsiders the impact of unusual or one-time events on our financial performance in setting the performance goals under the EVC Plan. In particular,None of the financial objectives were adjusted on this basis in fiscal 2011. |
| ● | Adjustments to Long-Term Incentive Awards. The Committee determineddecided to exclude from the fiscal 2010 performance results the impact of any settlement with an outstanding patent infringement litigation due to its one-time nature and the strategic benefitgrant only stock options to the Companynamed executive officers in obtainingfiscal 2011 instead of a settlement. Further, the Committee believed it was critical during fiscal 2010mix of stock options and restricted stock units so that the named executive officers focus on achievementofficers’ equity ownership results are aligned with our shareholders’ results regardless of the outcome of the U.S. Department of Commerce investigation. |
| ● | Lifting of Salary Freeze. The salary freeze that had been in effect in fiscal 2010 was lifted for fiscal 2011. |
| ● | Appropriate Comparisons. As part of our business goals, given our challengessalary structure analysis, we compare market information, adjusted for revenue size, to current base salaries. |
| ● | In fiscal 2010, we adjusted the market data used to evaluate base salaries by returning to the revenue scope we had used in fiscal 2009.years 2006 to 2008. We maintained those lower revenue scopes in fiscal 2011 since the Committee believed that those levels appropriately reflected our Company’s likely revenue outcomes for fiscal 2011. As in past years, the Committee also conducted a proxy review based on comparator companies and then requested Towers Watson to review management’s processes to set salary ranges for our U.S.-based named executive officers. |
| ● | The base salary for Joachim Hellwig, our named executive officer who resides in Germany, was analyzed in the context of a European salary survey in which our Company participated during fiscal 2010. To maintain its commitment to using appropriate, current comparisons to market demands when establishing base salary ranges, the Committee has adopted the practice of analyzing market data for Mr. Hellwig’s position annually, instead of biannually as had been done in the past. |
| · | Appropriate Comparisons. In fiscal 2010, we adjusted our methodology for comparing the base salaries of the named executive officers.
|
| | ·● | Stock Ownership Expectations. Our compensation programs encourage employees to build and maintain an ownership interest in the Company. We adjusted market data based on annual revenue. For fiscal 2010, we returned tohave established specific stock ownership guidelines for named executive officers, which were reviewed and updated by the revenue adjustments we usedCommittee in fiscal years 20062011 to 2008 since that adjustment was more reflectivereference current base salary and average common stock price in determining the fixed number of our revenue challenge in fiscal 2009shares under the guidelines and our expected challengewill continue to revenue in fiscal 2010.be reviewed annually by the Committee. |
| | · | We adjusted the base pay dataset for its age by a smaller factor in fiscal 2010 than in prior years, resulting in a smaller increase in market medians in fiscal 2010 as compared to fiscal 2009. |
| · | Even where our revised methodology showed that an increase in base pay for the Chief Executive Officer would be consistent with an increase in the median market base pay, the Committee determined not to adjust the median and base pay range that it considered appropriate for the Chief Executive Officer, which remained the same for fiscal 2010 as fiscal 2009. |
| ·● | Continuous Improvement inEmphasis on Quality Compensation Practices. We implementedrenewed our commitment to several new compensation practices in fiscal 2010 and we also maintained several long-standingsignificant compensation practices that we believe contribute to good governance.
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| | ·● | We formalized the process used to evaluate risks associated with our compensation programs. As described under the Risk Considerations in Our Compensation Programs section, the Committee completed a formal review of assessments by management and its compensation consultant relating to compensation risk. The Committee concluded that our compensation policies and practices for fiscal 2010 do not create risks that are reasonably likely to have a material adverse effect on the Company.
|
| · | We added a recoupment or “clawback” provision to the EVC Plan that was approved by shareholders at the fiscal 2009 annual meeting of shareholders held onin February 10, 2010. We also added a similar provision to2010 and the 2011 Stock Incentive Plan that iswas approved by shareholders at the subjectfiscal 2010 annual meeting of shareholder approval at this Annual Meeting.shareholders held in February 2011 both contain a recoupment or “clawback” provision. These clawback provisions require a named executive officer to forfeit and allow us to recoup any payments or benefits received by the named executive officer under the EVC Plan or the 2011 Stock Incentive Plan under certain circumstances, such as certain restatements of our financial statements, termination of employment for cause, and breach of an agreement between us and the named executive officer. |
| | ·● | As described under the Risk Considerations in Our Compensation Programs section, the Committee conducted a review of the Company’s compensation programs encourage employeespolicies and practices for fiscal 2011 and concluded that they do not create risks that are reasonably likely to build and maintain an ownership interest inhave a material adverse effect on the Company. We have established specific stock ownership guidelines for named executive officers.The Committee has identified effective risk management as one of its primary compensation objectives. |
| | ·● | Our compensation consultant is retained directly by and reports to the Committee. Our compensation consultant does not provide any services to management personally and had no prior relationship with any of our named executive officers. |
Named Executive Officers in Fiscal 2011
Our named executive officers for fiscal 2011 consist of the following persons, including the two persons who served as our Chief Executive Officer during the fiscal year, the person who served as our Chief Financial Officer during the fiscal year, and our Company’s two other executive officers:
| ● | Laura B. Hamilton, former Chair and Chief Executive Officer, or any other named executive officer. |
| ● | William V. Murray, interim Chief Executive Officer and President, |
| ● | Susan E. Knight, Chief Financial Officer and Vice President, |
| ● | Joachim Hellwig, Vice President, Sensors Business Unit, and |
| ● | Kathleen M. Staby, Vice President of Human Resources and Strategy. |
Ms. Hamilton resigned from the Company by mutual agreement with the Board of Directors effective August 25, 2011. On that date, the Board of Directors named William V. Murray as interim Chief Executive Officer and David J. Anderson as non-executive Chairman of the Board. Both Messrs. Murray and Anderson were serving as independent directors of the Company at the time.
In consideration for a release of claims, covenants not to compete with the Company or disclose confidential information, and certain other provisions contained in the Separation Agreement, dated as of August 25, 2011, by and between the Company and Ms. Hamilton, we provided Ms. Hamilton with severance benefits described in “Potential Payments Upon Termination or Change in Control.” The compensation being paid to Mr. Murray in his capacity as interim Chief Executive Officer is described under the heading “Interim Chief Executive Officer Compensation” later in this Compensation Discussion and Analysis.
Unless otherwise specified, references in this Compensation Discussion and Analysis to decisions made with respect to our named executive officers refer to decisions that applied to Ms. Hamilton before her separation from service and to Ms. Knight, Mr. Hellwig and Ms. Staby. References to the Chief Executive Officer are to Ms. Hamilton.
Executive Compensation Philosophy and Objectives
Our philosophy for compensating executives is to provide fair total cash compensation consistent with job markets in which we compete and reward performance. Compensation levels for the named executive officers reflect base salary for the executive’s role at our Company, the market value of the position, performance in that position and the opportunity for additional rewards when we either meet or exceed business objectives that are supportive of the business strategy. To attract and retain the best people, we offer meaningful rewards when executives, their business unit, and wethe Company as a whole achieve specific business goals or when successful individual performance is demonstrated. Performance rewards fluctuate based on the results of established objectives and provide executives with the opportunity to earn additional compensation beyond their base salary.
We structure our compensation components to support our overall compensation philosophy and the following executive compensation objectives:
| | •● | to establish and maintain a systematic compensation program whereby executives are compensated in relation to their level of responsibilities and their work performance; |
| | | |
| •● | to maintain a program which will enable us to attract and retain qualified and competent executives; |
| | | |
| •● | to provide flexibility within the compensation program to meet changing competitive and economic conditions; |
| | | |
| •● | to maintain equitable and consistent relationships between positions within the Company; and |
| | ● | to ensure that compensation policies and practices are consistent with effective risk management; and |
| | •● | to align executive and shareholder interests. |
The Committee’s approach to compensation includes efforts to ensure that compensation policies and practices are consistent with effective risk management. We believe our compensation philosophy and objectives reflect a responsible balance of competitive compensation, sound risk management and accountability to shareholders. We have recently formalized the process used to evaluate risks associated with our compensation programs and the Committee’s conclusion regarding risks relating to our compensation policies and practices for fiscal 2010 is stated under the Risk Considerations in Our Compensation Programs section this proxy statement.
Information Used in the Compensation Process
Compensation Consultant
Under the Committee’s charter, the Committee has the authority to select, retain and compensate executive compensation consultants and other experts as it deems necessary to carry out its responsibilities.
For assistance with fiscal 20102011 compensation, the Committee engaged Towers Watson, an executive compensation consultant, to provide it with information regarding compensation of named executive officers, non-executive officers and non-executive officers.directors. Specifically, Towers Watson was asked by the Committee to (1) review the analysis prepared by our management of executive compensation for each cash component of compensation (base salary and short-term incentive compensation) and provide feedback regarding management’s analysis of compensation-related data, (2) provide information regarding competitive compensation values of long-term incentive compensation to assisthelp the Committee in determiningdeliberations related to long-term equity decisions, (3) provide information to aid with the compensation decisions made in conjunction with Ms. Hamilton’s termination of service, Mr. Murray’s appointment to the interim Chief Executive Officer position and the creation of the non-executive Chairman of the Board position, (4) provide data on appropriate compensation to be paid to members of the Audit Committee for their service on the Audit Committee/Special Purpose, (5) provide information and considerations as to the appropriate effect the government investigation and suspension should have on total compensation, and (6) review and provide information on the comparator group used to confirm survey data related to some of our named executive officer positions. The Committee also engaged Towers Watson to conduct a thorough review our EVC Plan, including a market trend analysis and an internally focused review on the program’s effectiveness. This EVC Plan review began in March 2011 and thus did not inform the design of our long-term equity incentive compensation programEVC Plan awards for fiscal 2010, and (3) conduct a risk assessment relating to our c ompensation programs and policies for review by the Committee.2011.
Determining Competitive Compensation
The Committee annually assesses “competitive market” compensation for each component of compensation using a number of sources.
Although the Committee determined not to increase any base salaries for the named executive officers for fiscal 2010, theThe Committee went through much the same process as in prior years reviewing relevant information relating to base salaries. For fiscal 2010,2011, as in past years, our management developed a base salary benchmark tool for the Committee based upon executive salary survey data that was adjusted for better comparability by business, revenue, executive position, and age of data. For fiscal 2011, executive salary survey data for U.S.-based executives was obtained from Towers Watson’s Data Services Survey Report on Top Management Compensation and Mercer’s Executive Compensation Survey. For Mr. Hellwig, who resides in Germany, executive salary survey data was obtained from the Towers Watson CompSource 2011 General Industry Survey for Germany. The results of the benchmark tool were then referenced against proxy compensation data from our comparator group, described below, as a supplemental data source. Towers Watson then reviewed the benchmark tool to give the Committee feedback regarding the reasonableness of the methodology.
For each position, the base sa larysalary benchmark tool produces a median and a competitive salary range, with the minimum and maximum end of the range at approximately 80% and 120% of the median, respectively. The Committee used the benchmark tool to assess the median and range of competitive salaries for fiscal 20102011 and compare these to the base salaries for the named executive officers other than Mr. Hellwig, to determine the need for adjustments.
Our direct competitors are either privately owned companies or business units within much larger public companies. A broad and reliable base of compensation data from these companies is not readily available. Accordingly, the comparator group we use to confirm the base salary data from our benchmark tool consists of durable goods manufacturing companies, most of which do not compete with us directly but several of which compete with us for management talent. Our comparator group is reviewed on an annual basis by the Committee. Our comparator group for fiscal 20102011 consists of the following companies:
| Actuant Corporation | | Hurco Companies Inc. |
| Arctic Cat Inc. | | Keithley InstrumentsMeasurement Specialties Inc. |
| Axcelis Technologies Inc. | | Measurement SpecialtiesMettler-Toledo International Inc. |
| Badger Meter Inc. | | Mettler-Toledo InternationalMKS Instruments Inc. |
| Brooks Automation Inc. | | MKS InstrumentsMoog Inc. |
| Cabot Microelectronics Corp | | Moog Inc.National Instruments Corporation |
| Cohu Inc. | | National Instruments CorporationPerceptron Inc. |
| CyberOptics Corporation | | Perceptron IncRoper Industries Inc. |
| Dionex Corporation | | Roper IndustriesSymmetricom Inc. |
| ESCO Technologies Inc. | | Symmetricom Inc.Tennant Company |
| FARO Technologies Inc. | | Tennant CompanyTeradyne Inc. |
| Graco, Inc. | | Teradyne Inc. |
For short-term cash incentive compensation, which for fiscal 20102011 was delivered to the named executive officers through the EVC Plan, the Committee also reviewed market data and executive salary survey information that had been compiled and adjusted by management and Towers Watson. For each of the named executive officers, other than Mr. Hellwig, the Committee compared the target amounts under the EVC Plan for fiscal 20102011 to the survey information relating to median amount of non-salary cash compensation paid to executive officers as a percentage of base salary.
Additionally, Towers Watson prepares for the Committee an annual analysis of long-term equity incentive compensation. The analysis includes a market review of our equity grant structure, comparing the value of our long-term incentive award guidelines to market data. For fiscal 2010,2011, comparative information was obtained from Towers Perrin’s 2009Watson’s 2010 Executive Compensation Database long-term incentive tables for companies with revenues less than $1 billion. The Committee used this data to establish competitive guideline ranges and median values for equity awards to the named executive officers.
Mr. Hellwig resides in Germany and we have developed a different method
Role of Management
In determining compensation for named executive officers, other than the Chief Executive Officer, the Committee solicits input from the Chief Executive Officer regarding the duties and responsibilities of the other named executive officers and the results of performance evaluations. The Chief Executive Officer also recommends to the Committee the base salary for all named executive officers and, in developing his or her recommendations, may request input from the Vice President of Human Resources and Strategy from time to time relating to base salaries of the named executive officers (other than his or her own). The Chief Executive Officer, Chief Financial Officer and Vice President of Human Resources and Strategy develop recommendations for the Committee regarding the financial performance goals under the EVC Plan and the m inimum,minimum, target and maximum levels of achievement of the performance goals. The Chief Executive Officer and Vice President of Human Resources and Strategy are invited to attend meetings of the Committee from time to time. No named executive officer attends any independent director executive session of the Committee or is present during deliberations or determination of such named executive officer’s compensation.
The Committee makes recommendations to the Board regarding compensation for the named executive officers, other than the Chief Executive Officer. With respect to the Chief Executive Officer, the Committee makes recommendations to the independent directors, which is the full Board except for the Chief Executive Officer who also servesOfficer.
Shareholder Vote
At our last annual meeting of shareholders held on February 9, 2011, we asked our shareholders to approve, by advisory vote, the compensation of our named executive officers as described in the ChairCompensation Discussion and Analysis, the compensation tables, and the related disclosures contained in our proxy statement for that annual meeting. The proposal was approved by our shareholders with 97% of the Board.votes cast being “for” approval and only 3% of the votes cast being “against” approval. In light of the overwhelming approval by our shareholders of our named executive officers’ compensation, the Committee did not make changes in our compensation policies and practices in response to the shareholder vote.
Components of Compensation
During fiscal 2010,2011, the components of our executive compensation programs consisted of base salary, short-term cash incentive, long-term equity incentive, broad-based benefits and other perquisites. The named executive officers were eligible to participate in the same benefit programs as were available to our other employees.
In the following table we have outlined our main objectives regarding:
| | ·● | Why we choose to pay each component; |
| | ·● | The basis for payment of each component or what each component is designed to reward; and |
| | ·● | How we determine the amount for each component. |
| | How Component Was Determined |
Element of Compensation | Why Component is Paid & Basis for Component | How Component Was Determined
forfor Named Executive Officers
for Fiscal 20102011 |
| | | |
Base PaySalary | To provide a fixed level of competitive income, based on: | Within range of competitive pay, targeted to near median of market data |
| ● the individual’s scope of responsibility | |
| | | |
| | · | ● the individual’s scopelevel of responsibilityperformance and experience | In fiscal 2009, we announced cost reduction actions which included a salary freeze for fiscal 2010 for all employees, including the named executive officers |
| | |
| Element of Compensation | | Why Component is Paid & Basis for Component | | | How Component Was Determined for Named Executive Officers for Fiscal 2011 |
| | | | | | |
| | · | the individual’s level of performance and experience |
| | |
| Short-Term Cash Incentive | | To provide focus and rewards for achievement of fiscal year financial goals: | Performance based |
| | |
| · | ● EVC Plan, with Committee determinedCommittee-determined performance goals and minimum/target/maximum levels of achievement for each named executive officer | |
| | | |
| · | ● Performance goals for fiscal 2010 | |
| | | |
| | 2011: — | Earnings Per Share (“EPS”) weighted at 30% | |
| | | | |
| | — | Earnings Before Interest and Taxes as a Rate to(“EBIT”) weighted at 30%— Revenue weighted at 30% | |
| | | | |
| | 25% — | Revenue weighted at 25% | |
| | | | |
| | — | Working Capital as a Rate to Revenue (“WCRR”) weighted at 15% | |
| | | Performance based |
| |
| Long-Term Equity Incentive | | To provide an incentive for delivering long-term shareholder value, to align interests of executives and shareholders, and to retain executives | Value of equity awards designed to be within the range of competitive pay, targeted to near median of market data |
| | | |
| · | ● Value of awards determined with reference to grant guideline ranges | |
| | | |
| · | ● Value based on recipient’s responsibilities, individual performance, previous awards granted and progress toward satisfying the stock ownership guidelines | |
| | | |
| · | One-half delivered● Delivered through stock options, and one-half through restricted stock units (RSUs) | |
| | | |
| · | Stock options and RSUs, or a combination thereof, each vestvesting in equal installments over a 3-year period | | | Value of equity awards designed to be within the range of competitive pay, targeted to median of market data Award consisted of stock options only so that the named executive officers’ equity ownership results will be aligned with the results of our shareholders regardless of the outcome of the U.S. Department of Commerce investigation |
Annually, the Committee makes recommendations to the Board on base salaries for named executive officers, other than the Chief Executive Officer, and makes recommendations to the independent directors of the Board regarding the base salary of the Chief Executive Officer. These recommendations are based upon a number of factors, including competitive salaries and individual performance. The recommendations are made in November of each year, and any resulting adjustments to base salaries take effect in the following January.
As in prior years, the Committee reviewed base salary datasets developed by our management and Towers Watson as the Committee considered adjustments to base salaries for fiscal 2010.2011. These datasets provided the Committee with information regarding median level of base salary for each U.S.named executive officer position and a range of competitive base salaries. The Committee’s review of this informationthe salary surveys used suggested that the range for competitive base salaries had increased and shifted upward by approximately 4.1%1.8% from fiscal 20092010 to fiscal 2010. The Committee also reviewed the information regarding the dataset median base salaries by position. Although the range2011 for base salaries had increased from fiscal 2009 to fiscal 2010, the base salaries of theU.S.-based named executive officersofficer positions other than the Chief Executive Officer and was static for fiscal 2009 continuedthe Chief Executive Officer. The peer group proxy review reflected no significant differences from the survey data.
Additionally, we have a systematic approach for evaluating the performance of our named executive officers, with base salaries affected primarily by the performance evaluation for the prior fiscal year. The process begins by establishing specific, individualized performance goals at the beginning of the fiscal year for each named executive officer, as well as identifying or reaffirming the core competencies of the position. The Chief Executive Officer proposes individual performance goals that are reviewed by the Committee and approved by the independent members of the Board. The Chief Executive Officer works with the other named executive officers to establish appropriate individual performance goals for the other named executive officers. These individual performance goals relate to our customers and our market, organizational improvements, and financial measures.
The Chief Executive Officer regularly provides reports and updates throughout the year regarding his or her progress toward achievement of these individual performance goals. The performance of the named executive officer is assessed by the independent directors of the Board, in the case of the Chief Executive Officer, or by the Chief Executive Officer, in the case of the other named executive officers. As part of this performance review, the independent directors of the Board or the Chief Executive Officer, as the case may be, considers the named executive officer’s demonstration of competencies of that executive’s role and achievement of the individual performance goals established for that fiscal year.
The following table shows the base salaries for the named executive officers for fiscal 2010,2011, as well as the proximity of the fiscal 20102011 base salary to the median of the market data for the same or similar position.
Consistent with its compensation philosophy and the objectives of annual cash incentive programs generally, the Committee implemented the EVC Plan as our performance basedperformance-based short-term cash incentive program.
Under the EVC Plan, the named executive officers were eligible for cash bonuses depending upon our financial performance as compared to four performance goals and market competitive short-term incentive targets appropriate to their position. The four performance goals selected by the Committee and approved by the Board for fiscal 20102011 were the same as were selected for fiscal 2009. 2010, except that the EBIT Rate to Revenue measure used in fiscal 2010 was changed to be EBIT for fiscal 2011, as had been the case in years prior to fiscal 2009, as a result of the increased economic certainty and revenue stabilization the Company has been experiencing. The Committee also weighted the four performance goals for fiscal 2011 in the same manner as fiscal 2010. The minimum, target and maximum amounts selected for each goal, however, were more challenging for fiscal 2011 than they were for fiscal 2010 in recognition of our improved financial outlook at the beginning of fiscal 2011 when the goals were set.
The Committee determined the performance goals under the EVC Plan as part of our annual planning process and selected these four performance goals as critical to our success in fiscal 2010.2011. The Committee believes the combination of performance goals selected for the EVC Plan provide an appropriate balance between income statement and balance sheet management while also focusing on shareholder value. The Committe e also weighted the four performance goals for fiscal 2010 in the same manner as fiscal 2009. The following is a summary of the four performance goals and their relative weighting:
For Ms. Hamilton, Ms. Knight and Ms. Staby, all performance goals were corporatetotal Company measures. For Messrs.Mr. Hellwig, and Richter, the EPS performance goal was a corporatetotal Company measure, but the remaining measures were determined based upon achievement by the Sensors or Test business units, respectively.unit. The Committee established performance goals based on business unit (rather than corporate)total Company) performance for Messrs.Mr. Hellwig and Richter which reflects theirto reflect his accountability for the performance of thethat business unit. The Committee also believes that the leadershipleader of the business unit has a meaningful opportunity to directly impact the achievement of the performance goalgoals through his individual performance as the leader of that business unit.
In addition, since the Committee believes the EPS performance goal provides a strong link between the incentive program and shareholder value, if the ta rgettarget level of EPS achievement was not met, EVC Plan participants would be limited to 100%target payout under the plan regardless of the results of all performance goals. Within this provision of the EVC Plan, if the EPS target is not met an executive may receive a payout in excess of 100% for an individual performance goal so long as the executive’s aggregate payout under the EVC Plan is not in excess of 100%.
The table below shows the bonus amounts as a percentage of their respective base salaries that would be earned by the named executive officers under the EVC Plan upon our achievement of the target and maximum for each performance goal.
