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THECHARLESSCHWABCORPORATION 2008PROXYSTATEMENT
2009 Proxy Statement
March 28, 2008
30, 2009
Dear Fellow Stockholders,
We cordially invite you to attend our 20082009 Annual Meeting of Stockholders. The meeting will be held on Thursday, May 15, 2008,14, 2009, at 2:00 p.m., Pacific Time,Time. The live webcast of the annual meeting will be at the Westin Hotel, 50 Thirdwww.schwabevents.com, or you may attend in person at 211 Main Street, San Francisco, California.
If you plan to attend the meeting in person, please follow the advance registration instructions as outlined in this proxy statement.
At the meeting we will:
| · | elect |
| · | vote on |
| · | consider any other business properly coming before the meeting. |
We also will report on our corporate performance in 20072008 and answer your questions.
We are pleased to offer you the convenience of viewing our annual meeting by webcast atwww.schwabevents.com. If you prefer to attend the meeting in person, please follow the advance registration instructions as outlined in this proxy statement. We look forward to your participation.
Sincerely,
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| CHARLES R. SCHWAB | WALTER W. BETTINGER II | |
| CHAIRMAN | PRESIDENT AND CHIEF EXECUTIVE OFFICER | |
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TABLE OF CONTENTS
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NOTICE OF 20082009 ANNUAL MEETING OF STOCKHOLDERS
The 20082009 Annual Meeting of Stockholders of The Charles Schwab Corporation will be held on Thursday, May 15, 2008,14, 2009, at 2:00 p.m., Pacific Time, at the Westin Hotel, 50 Third211 Main Street, San Francisco, California, to conduct the following items of business:
| · | elect |
| · | vote on |
| · | consider any other business properly coming before the meeting. |
Stockholders who owned shares of our common stock at the close of business on March 17, 200816, 2009 are entitled to attend and vote at the meeting and any adjournment or postponement of the meeting. A complete list of registered stockholders will be available prior to the meeting at our principal executive offices at 120 Kearny Street, San Francisco, California 94108.
By Order of the Board of Directors,
CARRIE E. DWYER
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND
CORPORATE SECRETARY
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PROPOSAL FOR WHICH WE REQUEST YOUR VOTE
This proxy statement describes the proposals on which you may vote as a stockholder of The Charles Schwab Corporation. We, the company’s Board of Directors areis sending these proxy materials to you on or about March 28, 2008.
30, 2009. Stockholders who owned the company’s common stock at the close of business on March 17, 200816, 2009 may attend and vote at the annual meeting. Each share is entitled to one vote. There were 1,146,948,6451,158,323,238 shares of common stock outstanding on March 17, 2008.
16, 2009.
PROPOSAL FOR WHICH WE REQUEST YOUR VOTE
We recommend that you voteforthe election of fivethree directors for three-year terms.
There are also two stockholder proposals that we recommend that you vote against. Those proposals are described in the section “Stockholder Proposals.”
Nominees for directors this year are:
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Each nominee is presently a director of the company and has consented to serve a three-year term. Biographical information about each of the nominees is contained in the following section.
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THE BOARDTHEBOARD OF DIRECTORS
MEMBERS OF THE BOARD OF DIRECTORS
WILLIAM F. ALDINGER III
DIRECTOR SINCE 2005
Mr. Aldinger, age 60, is61, served as Chairman, President and Chief Executive Officer of Capmark Financial Group Inc., a financial services company, and a member of its board of directors.from 2006 until December 2008. Prior to joining Capmark, he was the Chairman and Chief Executive Officer of HSBC North America Inc., a financial services company, from 2003 until 2005. Mr. Aldinger also served as Chairman and Chief Executive Officer of Household International, Inc. (now HSBC Finance Corporation) from 1994 until 2005. Mr. Aldinger is a director of Illinois Tool Works, Inc., a developer and processor of engineered components, industrial systems and consumables; AT&T Inc., a voice, video and data communications company; and KKR Financial Corp., a specialty finance company. Mr. Aldinger’s term expires in 2010.
NANCY H. BECHTLE
DIRECTOR SINCE 1992
Ms. Bechtle, age 70,71, served as President and Chief Executive Officer of the San Francisco Symphony from 1987 until 2001 and has served as a member of the San Francisco Symphony Board of Governors since 1984. She was a director and Chief Financial Officer of J.R. Bechtle & Co., an international consulting firm, from 1979 to 1998. Ms. Bechtle has served as Chairman and a director of Sugar Bowl Ski Corporation since 1998. She was appointed a director of the Presidio Trust in January 2008. She also served as a director of the National Park Foundation from 2002 until January 2008 and was its Vice Chairman from 2005 until 2008. Ms. Bechtle’s term expiresBechtle is a nominee for election this year.
WALTER W. BETTINGER II
DIRECTOR SINCE 2008
Mr. Bettinger, age 48, was named President and Chief Executive Officer of The Charles Schwab Corporation and a member of the Board of Directors effective October 2008. He also serves on the Board of Directors of Charles Schwab & Co., Inc. and Charles Schwab Bank, and as a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios, all registered investment companies. Prior to assuming his current role, he served as President and Chief Operating Officer of the company. He also served as Executive Vice President and President – Schwab Investor Services from 2005 until 2007, Executive Vice President and Chief Operating Officer – Individual Investor Enterprise from 2004 until 2005, and Executive Vice President – Corporate Services from 2002 until 2004. Mr. Bettinger joined the company in 2009.
1995. He is a nominee for election this year.
C. PRESTON BUTCHER
DIRECTOR SINCE 1988
Mr. Butcher, age 69,70, has been Chairman and Chief Executive Officer of Legacy Partners (formerly Lincoln Property Company N.C., Inc.), a real estate development and management firm, since 1998. Mr. Butcher served as President, Chief Executive Officer and Regional Partner of Lincoln Property Company N.C., Inc. from 1967 until 1998. He is a director of Northstar Realty Finance Corp. Mr. Butcher’s term expires in 2009.
Butcher is a nominee for election this year.
DONALD G. FISHER
DIRECTOR SINCE 1988
Mr. Fisher, age 79,80, is the founder of Gap Inc., an international specialty retail clothing chain. He is Chairman Emeritus and a director of Gap Inc. He also was Chief Executive Officer of Gap Inc. from 1969 to 1995. Mr. Fisher is a member of the California State Board of Education. His term expires in 2010.
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THE BOARD OF DIRECTORS
FRANK C. HERRINGER
DIRECTOR SINCE 1996
Mr. Herringer, age 65,66, has been Chairman of the Board of Transamerica Corporation, a financial services company, since 1996. He served as Chief Executive Officer of Transamerica from 1991 to 1999 and President from 1986 to 1999, when Transamerica was acquired by AEGON N.V. From the date of the acquisition until 2000, Mr. Herringer served on the Executive Board of AEGON N.V. and as Chairman of the Board of AEGON USA, Inc. Mr. Herringer is also a director of AEGON U.S. Corporation, the holding company for AEGON N.V.’s operations in the United States; Amgen Inc., a biotechnology company; Safeway, Inc., a food and drug retailer; Mirapoint, Inc., an Internet message infrastructure equipment developer; and Cardax Pharmaceuticals, a biotechnology company. Mr. Herringer is a nominee for election this year.
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THE BOARD OF DIRECTORS
MARJORIE MAGNER
DIRECTOR SINCE 2006
Ms. Magner, age 58, is a founding partner of Brysam Global Partners, a private equity firm. She served as Chairman and Chief Executive Officer of the Global Consumer Group for Citigroup, Inc., a financial services company, from 2003 until 2005. Ms. Magner joined Commercial Credit, a predecessor company to Citigroup, in 1987. She served as Chief Administrative Officer and Senior Executive Vice President, Global Consumer Group from 2000 until 2002, and Chief Operating Officer, Global Consumer Group from 2002 until 2003. Ms. Magner is a director of Gannett Company, Inc., a publishing company, and Accenture Ltd, a management consulting and technology services company. She also serves as Chairman of the Brooklyn College Foundation Board of Trustees and is a member of the Dean’s Advisory Council of the Krannert School of Management at Purdue University. Ms. Magner’sHerringer’s term expires in 2009.
2011.
STEPHEN T. MCLIN
DIRECTOR SINCE 1988
Mr. McLin, age 61,62, has been Chairman and Chief Executive Officer of STM Holdings LLC, which offers merger and acquisition advice, since 1998. From 1987 until 1998, he was President and Chief Executive Officer of America First Financial Corporation, a finance and investment banking firm, and parent of EurekaBank. Before that, he was an Executive Vice President of Bank of America. Mr. McLin is an advisory director of Headwaters MB, a merchant bank, and Financial Technology Ventures, a private equity fund. Mr. McLin is a nominee for election this year.McLin’s term expires in 2011.
CHARLES R. SCHWAB
DIRECTOR SINCE 1986
Mr. Schwab, age 70,71, has been Chairman and a director of The Charles Schwab Corporation since its incorporation in 1986. Mr. Schwab was re-appointedserved as Chief Executive Officer of the company in 2004.from 1986 to 1997 and from 2004 until October 2008. He served as Co-Chief Executive Officer of the company from 1998 to 2003, and Chief Executive Officer of the company from 1986 to 1997.2003. Mr. Schwab was a founder of Charles Schwab & Co., Inc. in 1971, has been its Chairman since 1978, and served as its Chief Executive Officer since 2004.from 2004 until October 2008. Mr. Schwab is Chairman of Charles Schwab Bank and Chairman and trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios, all registered investment companies. Mr. Schwab is a nominee for election this year.
Schwab’s term expires in 2011.
PAULA A. SNEED
DIRECTOR SINCE 2002
Ms. Sneed, age 60,61, is Chairman and Chief Executive Officer of Phelps Prescott Group, LLC, a strategy and management consulting firm. She served as Executive Vice President, Global Marketing Resources and Initiatives, of Kraft Foods, Inc., a global food and beverage company from 2005 until her retirement in 2006; Senior Vice President, Global Marketing Resources and Initiatives from 2004 to 2005; and Group Vice President and President of E-Commerce and Marketing Services for Kraft Foods North America, part of Kraft Foods, Inc., from 2000 until 2004. She joined General Foods Corporation (which later merged with Kraft Foods) in 1977 and held a variety of management positions. Ms. Sneed is a director of Airgas, Inc., a national distributor of industrial, medical and specialty gases and related equipment, and Tyco Electronics, a manufacturer of engineered electronic components, network solutions, wireless systems and telecommunications systems. Ms. Sneed’s term expires in 2010.
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THE BOARD OF DIRECTORS
ROGER O. WALTHER
DIRECTOR SINCE 1989
Mr. Walther, age 72,73, has served as Chairman and Chief Executive Officer of Tusker Corporation, a real estate and business management company, since 1997. He served as Chairman and Chief Executive Officer of ELS Educational Services, Inc., a provider in the United States and internationally of courses in English as a second language, between 1992 and 1997. Mr. Walther was President, Chief Executive Officer and a director of AIFS, Inc., which designs and markets educational and cultural programs internationally, from 1964 to 1993. Mr. Walther served as Chairman and a director of First Republic Bank from 1985 until November 2007.Mr. Walther is a nominee for election this year.
Walther’s term expires in 2011.
ROBERT N. WILSON
DIRECTOR SINCE 2003
Mr. Wilson, age 67,68, is Chairman of Still River Systems, a medical device company. Mr. Wilson was Chairman of Caxton Health Holdings, LLC, a healthcare-focusedinvestmenthealthcare-focused investment firm, from 2004 through 2007, and was Vice Chairman of the board of directors of Johnson & Johnson, a manufacturer of health care products, from 1989 until 2003. Mr. Wilson joined Johnson & Johnson in 1964. Mr. Wilson is also a director of Hess Corporation, an integrated oil and gas company, and Synta Pharmaceuticals Corporation, a bio-pharmaceutical company. Mr. Wilson is a nominee for election this year.
The authorized number of directors is currently eleven and the company has eleven directors. Five directors are nominees for election this year and six directors will continue to serve the terms describedWilson’s term expires in their biographies.
Our directors currently serve staggered terms. Each director who is elected at an annual meeting of stockholders serves a three-year term, and the directors are divided into three classes.
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THE BOARD OF DIRECTORS
The board held seven regular meetings and two special meetings in 2007. Each director attended at least 75% of all board and applicable committee meetings during 2007. Non-management directors meet regularly in executive session. The chairman of the Nominating and Corporate Governance Committee presides over the executive sessions of non-management directors. As provided in our Corporate Governance Guidelines, we expect directors to attend the annual meeting of stockholders. In 2007, eleven directors attended the annual meeting.
This table describes the board’s standing committees.
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THE BOARD OF DIRECTORS
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THE BOARD OF DIRECTORS
2011.
We have considered the independence of each member of the board in accordance with the Nasdaq Stock Market corporate governance rules. We have determined that the following directors are independent: William F. Aldinger III, Nancy H. Bechtle, C. Preston Butcher, Donald G. Fisher, Frank C. Herringer, Marjorie Magner, Stephen T. McLin, Paula A. Sneed, Roger O. Walther, and Robert N. Wilson. All of the members of the Audit, Compensation and Nominating and Corporate Governance Committees are independent as determined in accordance with the listing standards of the Nasdaq Stock Market.
In determining independence, the Board of Directors considers broadly all relevant facts and circumstances
regarding a director’s relationships with the company. All non-employee directors receive compensation from the company for their service as a director, as disclosed in the section “Compensation Information – Director Compensation,” and are entitled to receive reimbursement for their expenses in traveling to and participating in board meetings. As disclosed in the “Transactions with Related Persons” section of this proxy statement, some directors and entities with which they are affiliated have credit transactions with the company’s banking and brokerage subsidiaries, such as mortgage loans, revolving lines of credit, or other extensions of credit. These transactions with directors and their affiliates are made in the ordinary course of business and to the extent permitted by the Sarbanes-Oxley Act of 2002. Such transactions are on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the lender and do not involve more than the normal risk of collectibilitycollectability or present other unfavorable features.
In addition to the relationships outlined above, the board considered the following types of relationships for the following directors:
William F. Aldinger | III: The director serves as a director of another company that provided telecommunications services to the company in the ordinary course of business through usual trade terms or competitive bids. | |
| Nancy H. Bechtle: The director serves as a director of a nonprofit organization to which the company, its affiliates or its charitable foundation have made donations. | |
| Donald G. Fisher: The director serves as a director of | |
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Stephen T. | McLin: The director’s son is employed by the company in a non-executive officer, non-managerial capacity. |
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THE BOARD OF DIRECTORS
CORPORATE GOVERNANCE INFORMATION
The authorized number of directors is currently eleven and the company has eleven directors. Three directors are nominees for election this year and eight directors will continue to serve the terms described in their biographies.
Directors currently serve staggered terms. Each director who is elected at an annual meeting of stockholders serves a three-year term, and the directors are divided into three classes.
The board held seven regular meetings in 2008. Each director attended at least 75% of all board and applicable committee meetings during 2008. Non-management directors meet regularly in executive session. The chairman of the Nominating and Corporate Governance Committee presides over the executive sessions of non-management directors. As provided in our Corporate Governance Guidelines, we expect directors to attend the annual meeting of stockholders. In 2008, ten directors attended the annual meeting.
We have an Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Each of these committees is composed entirely of “independent directors” as determined by the Board of Directors in accordance with Nasdaq Stock Market listing standards. In addition to those standing committees, the board may from time to time establishad hoc committees to assist in various matters.
The Audit Committee held nine meetings in 2008 and is composed of the following members: Stephen T. McLin (Chairman), William F. Aldinger III, C. Preston Butcher, and Donald G. Fisher. None of the directors on the Audit Committee is or has been an employee of The Charles Schwab Corporation or any of its subsidiaries. None of the Audit Committee members simultaneously serves on the audit committees of more than three public companies, including ours. All of the members of the Audit Committee are able to read and understand
fundamental financial statements, including the company’s balance sheet, income statement, and cash flow statement. The board has determined that William F. Aldinger III and Stephen T. McLin are Audit Committee financial experts.
The Audit Committee:
| · | reviews and discusses with management and the independent auditors the company’s annual and quarterly financial statements and the integrity of the financial reporting process, |
| · | reviews the qualifications and independence of the independent auditors and performance of the company’s internal and independent auditors, |
| · | reviews reports from management regarding major risk exposures and steps management has taken to address such exposures, and |
| · | reviews compliance with legal and regulatory requirements. |
The Compensation Committee held six meetings in 2008 and is composed of the following members: Roger O. Walther (Chairman), Nancy H. Bechtle, Frank C. Herringer, Paula A. Sneed, and Robert N. Wilson. The Compensation Committee:
| · | annually reviews and approves corporate goals and objectives relating to compensation of executive officers and other senior officers, |
| · | evaluates the performance of executive officers and other senior officers and determines their compensation levels, |
| · | reviews and approves compensatory arrangements for executive officers and other senior officers, and |
| · | approves long-term awards for executive officers and other senior officers. |
The Nominating and Corporate Governance Committee held two meetings in 2008 and is composed of the following members: Frank C. Herringer (Chairman), William F. Aldinger III, Nancy H. Bechtle, C. Preston
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THE BOARD OF DIRECTORS
Butcher, Donald G. Fisher, Stephen T. McLin, Paula A. Sneed, Roger O. Walther, and Robert N. Wilson. The Nominating and Corporate Governance Committee:
| · | identifies and evaluates individuals qualified to serve on the board, |
| · | recommends nominees to fill vacancies on the board and each board committee and recommends a slate of nominees for election or re-election as directors by the stockholders, |
| · | makes recommendations regarding succession planning for the Chief Executive Officer and executive management, and |
| · | assesses the performance of the board and its committees and recommends corporate governance principles for adoption by the board. |
The Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee have written charters. You may find a copy of these charters, as well as our Corporate Governance Guidelines and Code of Business Conduct and Ethics, on the company’s website atwww.aboutschwab.com/governance. You also may obtain a paper copy of these items, without charge, from:
Assistant Corporate Secretary
The Charles Schwab Corporation
Mailstop SF120KNY-04
101 Montgomery Street
San Francisco, California 94104
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or has been an officer or employee of the company or any of its subsidiaries. There were no Compensation Committee interlocks as defined under Securities and Exchange Commission rules during 2007.2008.
The Nominating and Corporate Governance Committee is composed entirely of “independent directors” as determined by the Board of Directors in accordance with the Nasdaq Stock Market listing standards.
The Board of Directors has adopted a written Nominating and Corporate Governance Committee charter. The charter is available on our website atwww.aboutschwab.com/governance. One of the committee’s responsibilities is to recommend candidates for nomination to the board.
The Nominating and Corporate Governance Committee recommended all of the nominees for election included in this year’s proxy statement. All nominees have been previously elected by stockholders as directors.
The Nominating and Corporate Governance Committee has a policy to consider candidates recommended by stockholders. The policy provides that stockholder recommendations must be in writing and include the following information: (i) the name, address and contact information of the recommending stockholder; (ii) proof of the stockholder’s share ownership; (iii) a resume or statement of the candidate’s qualifications; and (iv) a statement of the stockholder’s relationship with the proposed candidate or interest in the proposed candidacy. The written recommendation must be addressed to the Assistant Corporate Secretary at the address provided in the “Corporate Governance Information” section of this proxy statement.
Director Qualifications
The qualifications for directors are described in our Corporate Governance Guidelines, which are available on the company’s website. In addition, the committee believes that the following specific, minimum qualifications must be met by a nominee for the position of director:
| · | the ability to work together with other directors, with full and open discussion and debate as an effective group, |
| · | current knowledge and experience in the company’s business or operations, or contacts in the community in which the company does business and in the industries relevant to the company’s business, or substantial business, financial or industry-related experience, and |
| · | the willingness and ability to devote adequate time to the company’s business. |
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THE BOARD OF DIRECTORS
The committee also considers the following qualities and skills when making its determination whether a nominee is qualified for the position of director:
| · | relationships that may affect the independence of the director or conflicts of interest that may affect the director’s ability to discharge his or her duties, |
| · | diversity of experience and background, including the need for financial, business, academic, public sector and other expertise on the board or board committees, and |
| · | the fit of the individual’s skills and experience with those of the other directors and potential directors in comparison to the needs of the company. |
When evaluating a candidate for nomination, the committee does not assign specific weight to any of these factors or believe that all of the criteria necessarily apply to every candidate.
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THE BOARD OF DIRECTORS
Identifying and Evaluating Candidates for Director
The Nominating and Corporate Governance Committee reviews the appropriate skills and characteristics required of board members in the context of the current composition of the board. Candidates considered for nomination to the Board of Directors may come from several sources, including current and former directors, professional search firms and stockholder recommendations. Nominees for director are evaluated, in consultation with the company’s Chairman, by the committee, which may retain the services of a professional search firm to assist it in identifying or evaluating potential candidates.
COMMUNICATIONS WITH THE BOARD OF DIRECTORS
If you wish to communicate with the board, the chairman of the Nominating and Corporate Governance Committee, or with the independent directors as a group, you may send your communication in writing to the Assistant Corporate Secretary at the address provided in the “Corporate Governance Information”
section of this proxy statement. You must include your name and address in the written communication and indicate whether you are a stockholder of the company.
The Assistant Corporate Secretary will compile all communications, summarize lengthy, repetitive or duplicative communications and forward them to the appropriate director or directors. The Assistant Corporate Secretary will not forward non-substantive communications or communications that pertain to personal grievances, but instead will forward them to the appropriate department within the company for resolution. If this is the case,In such cases, the Assistant Corporate Secretary will retain a copy of such communication for review by any director upon his or her request.
CORPORATE GOVERNANCE INFORMATION
You may find our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters for the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee on the company’s website atwww.aboutschwab.com/governance. You also may obtain a paper copy of these items, without charge, from:
Assistant Corporate Secretary
The Charles Schwab Corporation
Mailstop SF120KNY-04
101 Montgomery Street
San Francisco, California 94104
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The Audit Committee is composed entirely of “independent directors” as determined by the Board of Directors in accordance with the listing standards of the Nasdaq Stock Market. None of the directors on this committee is or has been an employee of The Charles Schwab Corporation or any of its subsidiaries. None of the committee members simultaneously serves on the audit committees of more than three public companies, including ours. All of the members of our committee are able to read and understand fundamental financial statements, including the company’s balance sheet, income statement, and cash flow statement. The board has determined that William F. Aldinger III and Stephen T. McLin are Audit Committee financial experts.
The Board of Directors has adopted a written Audit Committee charter. The charter is available on our website atwww.aboutschwab.com/governance.
The committee has met and held discussions with management and the company’s independent registered public accounting firm. As part of this process, the committee has:
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Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, for filing with the SEC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Stephen T. McLin, Chairman
William F. Aldinger III
C. Preston Butcher
Donald G. Fisher
Marjorie Magner
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AUDIT INFORMATION
Auditor Selection
The Audit Committee has selected Deloitte & Touche LLP and the member firms of Deloitte Touche Tohmatsu (collectively referred to as Deloitte) as the company’s independent registered public accounting firm for the 20082009 fiscal year. Deloitte has served in this capacity since the company’s inception. We expect representatives of Deloitte to attend the annual meeting of stockholders, where they will respond to appropriate questions from stockholders and have the opportunity to make a statement.
Audit Fees
The aggregate fees for professional services billed by Deloitte in connection with their audits of the consolidated annual financial statements and management’s assessment of the effectiveness of internal control over financial reporting, and reviews of the consolidated financial statements included in quarterly reports on Form 10-Q were:
| Fiscal year ended December 31: | |||
2008 | $ | 4.5 million | |
2007 | $ | 4.6 million | |
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THE BOARD OF DIRECTORS
Audit-Related Fees
“Audit-Related” fees include assurance and related services, such as reports on internal controls, review of Securities and Exchange Commission filings, merger and acquisition due diligence and related services. The aggregate fees billed by Deloitte for such services were:
| Fiscal year ended December 31: | |||
2008 | $ | 1.4 million | |
2007 | $ | 1.3 million | |
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Tax Fees
The Audit Committee has limited tax services by Deloitte to tax return review, preparation andcompliance.and compliance. The aggregate fees billed by Deloitte for these services were:
| Fiscal year ended December 31: | |||
| $ | 0.1 million | |
| $ | 0.1 million | |
All Other Fees
All other services represent fees not included in “audit fees,” “audit-related fees,” and “tax fees.” The aggregate fees billed by Deloitte for these services were:
| Fiscal year ended December 31: | ||
| None | |
| None | |
In addition to the services listed above, Deloitte provides audit services to certain unconsolidated affiliated mutual funds and foundations. The fees for such audit services are included in the expenses of the mutual funds and foundations and borne by the stockholders of the mutual funds and foundations. Amounts billed by Deloitte for these services were $0.1 million and $0.2 million in 2008 and $2.0 million in 2007, and 2006, respectively. These amounts are not included in the expenses of The Charles Schwab Corporation.
Non-Audit Services Policies and Procedures
The Audit Committee has adopted a policy regarding non-audit services performed by Deloitte. The Audit Committee’s policy prohibits engaging Deloitte to perform the following non-audit services:
| · | any contingent fee arrangement, |
| · | bookkeeping or other services relating to accounting records or financial statements, |
| · | broker-dealer services, |
| · | actuarial services, |
| · | management and human resource functions, including executive search services, |
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AUDIT INFORMATION
| · | legal services and expert services unrelated to the audit, |
| · | appraisal and valuation services, fairness opinions or contribution-in-kind reports, |
| · | internal audit outsourcing, |
| · | financial information systems design and implementation, |
| · | tax consulting or advice or a tax opinion on an “aggressive” tax position or on a “listed transaction” or a “confidential transaction” as defined by U.S. Department of Treasury regulations, and |
| · | tax services to employees who have a financial reporting oversight role. |
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THE BOARD OF DIRECTORS
The policy requires the pre-approval of the Audit Committee for other non-audit services performed by Deloitte. The policy divides non-audit services into three separate categories, which the Audit Committee has pre-approved subject to an annual aggregate dollar limit for each category. Once the dollar limit in each of these three categories is reached, the Audit Committee will decide whether to establish an additional spending limit for the category or specifically pre-approve each additional service in the category for the remainder of the year. The three categories are:
| · | accounting theory consultation (includes services such as guidance on the application of |
| · | assurance and due diligence (includes services such as certain reports on internal controls, review of Securities and Exchange Commission filings, merger and acquisition due diligence, employee benefit plan audits, and foreign statutory audits and regulatory reports), and |
| · | tax return review, preparation and compliance. |
Services not subject to pre-approval limits in one of the three categories above require specific pre-approval from the Audit Committee. Fees related to services requiring specific pre-approval are limited, on an annual basis, to 50% of the combination of audit fees, audit-related fees and tax fees.
The policy permits the Audit Committee to delegate pre-approval authority to one or more members of the Audit Committee, provided that the member or members report to the entire Audit Committee pre-approval actions taken since the last Audit Committee meeting. The policy expressly prohibits delegation of pre-approval authority to management.
In fiscal years 20062008 and 2007, the Audit Committee pre-approved 100% of the services performed by Deloitte relating to “audit-related fees” and “tax fees.”
The Audit Committee has met and held discussions with management and the company’s independent registered public accounting firm. As part of this process, the committee has: · reviewed and discussed the audited financial statements with management, · discussed with the independent registered public accounting firm the matters required to be discussed by the statement on Auditing Standards No. 114, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T, and · received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with the independent registered public accounting firm its independence. Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, for filing with the SEC. AUDIT COMMITTEE OF THE BOARD OF DIRECTORS Stephen T. McLin, Chairman William F. Aldinger III C. Preston Butcher Donald G. Fisher |
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COMPENSATION DISCUSSION AND ANALYSIS
COMPENSATION PHILOSOPHY AND OBJECTIVES
As approved by theThe Compensation Committee, the company’s executiveCommittee’s compensation programsphilosophy and objectives are designed to:
| · | attract, motivate and retain |
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| · | link executive pay with performance. |
These objectives are achieved primarily through a combination of base salary, annual cash incentive and long-term incentive awards. TheHow Compensation Committee believes that paying competitive executive compensation is critical to attracting, motivating and retaining key executives. Accordingly, in setting compensation, the Compensation Committee reviews competitive compensation data for the peer group companies, including data for base salary, annual cash and long-term incentive compensation.
The Compensation Committee views annual cash incentives and long-term incentives as important tools not only for attracting, retaining and motivating employees, but also for aligning executive officer and stockholder interests. The Compensation Committee ties annual cash incentives and long-term incentives to performance criteria based on revenue growth and profit margin to focus executive officers on making disciplined investments that will lead to sustained profitability, and ultimately drive stockholder returns. Specifically, executive officers only receive annual cash incentive bonuses and vesting on their performance-based restricted stock when the company achieves the associated performance goals for revenue growth and profit margin. In addition, executive officers only realize gain from their premium-priced options when the stockprice rises above a premium threshold, ensuring a minimum level of stockholder return before executive officers benefit.
The Compensation Committee also sets executive compensation to link pay with individual performance and the company’s financial performance. The Compensation Committee considers individual performance based on performance evaluations, job responsibilities and roles within the company as factors in determining base salary, individual cash incentive targets and long-term incentive awards. The Compensation Committee has structured annual cash and long-term incentives to reward sustained financial performance that results in stock price increases, and so that executive officers’ compensation opportunity increases with the company’s financial performance.
COMPENSATION PROCESS
Role of the Compensation Committee and ManagementDecisions Were Made
The Compensation Committee reviews and approves compensation for the Chairman, andthe Chief Executive Officer, executive officers, other senior officers, and directors. The Compensation Committee oversees compensation programs for these officers to ensure consistency with the compensation objectives it sets. For these officers, the Compensation Committee:
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The Compensation Committee, as a committee, or together with the other independent directors, evaluates the performance and determines the compensation of the Chairman and Chief Executive Officer. The Compensation Committee also considers recommendations from the Chairman and the Chief
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Executive Officer regarding compensation for the other executive officers and performance criteria for annual and long-term incentives. These recommendations are developed in consultation with the President and Chief Operating Officer, the Executive Vice President – Human Resources and Employee Services and, with respect to performance criteria for annual and long-term incentives, the Chief Financial Officer. While the Compensation Committee considers these recommendations, it does not delegate authority to management for compensation decisions.
Role of Compensation Consultants
The Compensation Committee has sole authority to retainset compensation consultants to advise the committee and sole authority to approve fees and other terms related to their retention. The Compensation Committee directly engages Hewitt Associates to provide consulting services for executive compensation decisions. In 2007, the Compensation Committee directed Hewitt Associates to provide competitive pay assessments for the Chairman and Chief Executive Officer and all executive vice presidents, an analysis of the peer group used for compensation benchmarking, and advice and counsel regarding management recommendations, market trends and technical developments throughout the year. Hewitt Associates did not provide the company with any other ongoing consulting or administrative services in 2007.
Process for Determining Compensation
When setting executive compensation, the Compensation Committee reviewed pay history information, base salary, annual cash and long-term incentive data and competitive data. It also considered the2008 based on each executive’s experience, role, past and expected future performance, and pay relative to internal peers in making individual compensation decisions. To give the committee a guideline to compare the competitiveness of compensation,similar role and external peers. It engaged Hewitt Associates as its compensation consultant to provide benchmarking data on external peers and general advice and counsel with respect to management programs, market practices and trends. The Compensation Committee also reviewed reports prepared competitiveby the company’s Human Resources
Department on pay assessments.history, total 2007 compensation, projected 2008 compensation, the value and vesting schedule of outstanding long-term awards (including equity awards and long-term cash awards), 401(k) balances, deferred compensation balances, each component of pay as a percentage of total compensation, and earnings from long-term compensation. The Compensation Committee did not use a formula or assign a weighting to thevarious factors considered in setting compensation. TheCompensation Committee awards a significant amount of total compensation in annual and long-term incentive compensation, but it doesIt did not target a specific percentage mix between cash compensation and long-term equity nor does it targetor any specific percentage of total compensation for each compensation component.
The Compensation Committee also reviewed a report of total 2006 compensation and projected 2007 compensation prepared by the company’s Human Resources Department. This report showed dollar valuesbenchmarking data for base salary, annual incentive awards, perquisite allowances, relocation benefits, restricted stock dividends, miscellaneous items reported as all other compensation, and long-term incentive awards of equity (including both vested and unvested awards).
When appropriate, the Compensation Committee reviewed and approved individual contracts and the other components of the compensation program, including retirement benefits, perquisites, termination and change-in-control benefits, and other plans.
Selection of Peer Group and Benchmarking
The Compensation Committee reviews competitive informationexecutive officers based on title (where available) and ranking among named executive officers, and when available,(based on individual role or title (e.g., the Chairman and Chief Executive Officer, Chief Financial Officer and Chief Operating Officer)proxy disclosures). The Compensation Committee also reviews benchmarkbenchmarking data for executive officerswas used as a group. In 2007, the Compensation Committee used this information as a reference pointpoints to assess the competitiveness of compensation rather thanbut was not used as a specific factortarget to set compensation. In 2008, Hewitt Associates provided benchmarking data on each component of compensation for each named executive officer and on total direct compensation, which includes salary, bonus and long-term incentives valued at grant, excluding any promotional awards. For total direct compensation, the Compensation Committee used the 50th and the 75th percentiles of total direct compensation as market reference points.
The companies in setting individual compensation.
In 2007, the peer group for compensation benchmarking was:
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The Compensation Committee also used the McLagan Partners’Investment Management Survey when reviewing executive compensation for officers of U.S. Trust because the peer group above is not directly applicable to U.S. Trust’s wealth management business.
The peer group above was established in 2004 taking into account industry (financial services), size, performance, leadership status in the industry, and the extent to which each company may compete with the company for executive talent. In 2007, the Compensation Committee directed Hewitt Associates to prepare a comprehensive analysis of the peer group and recommend changes. This analysis included a review ofwere selected based on quantitative factors includingsuch as revenue, market capitalization and number of employees and qualitative factors includingsuch as business model, geographical coverage, mergers and acquisitions, and competition for business and for employees. BasedIn 2008, the peer group was: AG Edwards, Inc.; Ameriprise Financial, Inc.; Comerica, Inc.; E*Trade Financial Corp.; Fidelity Investments; Fifth Third Bancorp; Franklin Resources Inc.; Janus Capital Group Inc.; KeyCorp; Legg Mason Inc.; Northern Trust Corp.; PNC Financial Services Group Inc.; Raymond James Financial Corp.; State Street Corp.; TD Ameritrade Holding Co.; and T. Rowe Price Group, Inc.
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The Compensation Committee believes that it is generally in the best interests of stockholders to structure compensation plans so that compensation is performance based and therefore deductible under Section 162(m) of the Internal Revenue Code. However, depending on this analysis,business needs, the Compensation Committee approvedmay use its discretion to approve compensatory arrangements that are not deductible under Section 162(m). In 2008, compensation of the named executive officers was deductible under Section 162(m) except for vesting of past equity awards that are not considered performance based such as time-vested restricted stock, bonus amounts awarded outside of the Corporate Executive Bonus Plan due to promotions, and cash payments in lieu of in-kind perquisites or dividends on restricted stock that may cause the overall compensation of a new peer group in December 2007, adding Ameriprise Financial Inc., Comerica Inc., Fifth Third Bancorp, KeyCorpnamed executive officer to exceed $1 million.
What Compensation Was Awarded and Raymond James Financial Corp, and removing Bear Stearns Companies, Capital One Financial Corp., Lehman Brothers Holdings Inc., MBNA Corp., Mellon Financial Corp., Toronto-DominionBank, and U.S. Bancorp. Why
The Compensation Committee used this revised peer groupbelieves that base salary, annual cash incentives and long-term incentive awards are the key elements of compensation to benchmarkachieve its compensation after December 2007.
COMPONENTS OF COMPENSATION
objectives.
Base Salary
Base salary provides executive officers with a minimum level of income. The Compensation Committee annually reviewsbelieves that base salary is a key element to attract, motivate and retain executive officers’ base salaries and makes appropriate adjustments based onofficers. In 2008, after reviewing the executive’sofficer’s experience, role, past and expected future performance, and pay relative to internal peers.peers in a similar role and external peers, the Compensation Committee increased base salaries for Mr. Schwab, Mr. Bettinger, Mr. Martinetto, and Mr. McCool. Subsequently, the Compensation Committee increased Mr. Bettinger’s base salary and reduced Mr. Schwab’s base salary upon Mr. Bettinger’s promotion to Chief Executive Officer effective October 1, 2008 to reflect changes in their respective leadership roles and scope of responsibility. The company uses the market medianCompensation Committee increased Mr. McCool’s base salary upon his promotion to Executive Vice President –
Institutional Services. The amounts and percentages of the peer group as its benchmark reference for base salaries.
salary adjustments are contained in the narrative to the Summary Compensation Table.
Annual Cash Incentives
The Compensation Committee believes that annual cash incentives align the executive officers with the interests of the company and its stockholders and link executive pay with performance. Generally, annual cash incentive awards of the Chairman and Chief Executive Officer andin 2008 for the named executive officers who are executive vice presidents when performance targets are set, arewere made pursuant to the Corporate Executive Bonus Plan. Payouts under this plan are based on company and business unit performance relative to financial goals and target awards established by the Compensation Committee for each executive officer. In the first quarter of the year, the Compensation Committee sets matrices with financialset performance goals and a target award for each executive officer, expressed as a percentage of base salary. The target award isperformance goals were based on overall corporate financial performance measured by revenue growth and pre-tax profit margin and were set forth in a matrix approved by the executive officer’s role and pay relative to internal peers.Compensation Committee. In 2007,2008, award payouts could range from 0% to 200% of the target award.
Executive officers promotedIn the first quarter of 2008, after reviewing each officer’s role and pay relative to market practices and to emphasize variable pay for performance, the performance criteriaCompensation Committee increased target awards as a percentage of base salary for the named executive officers. The percentage increases and target awards expressed as a percentage of base salary are setcontained in the first 90 daysnarrative to the Summary Compensation Table. Upon Mr. Bettinger’s promotion to Chief Executive Officer, the Compensation Committee increased his target award for the remainder of the year are not eligiblefrom 300% to receive an375% of base salary and reduced Mr. Schwab’s target award underfor the annual plan cycle. In that case, promoted officers may receive a bonusremainder of the year from 400% to 250% of base salary. Bonus amounts attributable to the increase in Mr. Bettinger’s target award were awarded outside of the plan.Corporate Executive Bonus Plan.
The Compensation Committee approved performance criteria of revenue growth and pre-tax profit margin to focus executives on earnings growth and the creation of stockholder value. The goals set by the Compensation
Long-Term Incentives
Annually the Compensation Committee reviews the long-term incentive strategy to determine the
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appropriate mix betweenCommittee (assuming awards would be paid at 100% of target), as well as the actual results achieved, are as follows:
Target Revenue Growth | 11.5% | |
Actual Revenue Growth | 3.1% | |
Target Pre-tax Profit Margin | 39.6% | |
Actual Pre-tax Profit Margin | 39.4% |
The Compensation Committee reserves discretion to reduce payouts below the levels supported by the matrix for revenue growth and pre-tax profit margin. The Compensation Committee did not exercise this discretion other than to round down the payout percentage to a whole number.
At the end of the year, the Compensation Committee reviewed individual performance and the company’s financial performance against the performance goals established at the beginning of the year. It determined that the formula-based matrix supported award payouts of 76.4% of target amounts. No adjustments were made for individual performance. The Compensation Committee approved award payouts of 76.0% for each of the named executive officers.
In the first quarter of 2009, the Compensation Committee selected performance criteria for 2009 annual cash and equity and between various types of equity awards. Individual grantsincentive awards under the Corporate Executive Bonus Plan. The performance criteria are determined based on overall corporate performance as measured by revenue and pre-tax profit margin.
Long-Term Incentives
The Compensation Committee believes that long-term incentives help achieve the executive’sthree objectives of the executive compensation program. In 2008, it granted equity awards of stock options, restricted stock and performance-based restricted stock based on its review of each officer’s experience, role, past and expected future performance, and pay relative to internal peers in a similar role and external peers. The Compensation
Committee granted long-term incentivesequity awards of 80% stock options and 20% performance-based restricted stock to the named executive officers, except Mr. Schwab and Mr. Bettinger. The stock options vest 25% annually over four years and the performance-based restricted stock vests if annual performance goals for pre-tax adjusted income divided by revenue (“pre-tax contribution margin”) and revenue growth are achieved. The Compensation Committee selected revenue growth and pre-tax contribution margin to focus executives on earnings growth and creating stockholder value. The performance goals are based on a matrix that includes the primary vehiclefollowing points at which the performance shares will vest: revenue growth of 1% and pre-tax contribution margin of 29.5%, and revenue growth of 4.0% and pre-tax contribution margin of 28.0%.
Mr. Schwab, who stepped down as Chief Executive Officer as of October 1, 2008, did not receive an equity grant in 2008.
The Compensation Committee also granted equity awards to Mr. Bettinger and Mr. McCool upon their promotions. Upon his promotion to Chief Executive Officer, Mr. Bettinger received a grant of stock options with a grant date value of $7 million as his long-term incentive award for 2008 and restricted stock with a grant date value of $3 million in recognition of his promotion. The Compensation Committee reviewed Mr. Bettinger’s outstanding equity awards and modified the standard vesting schedule (25% vesting annually over four years) to emphasize the importance of long-term capital accumulation, including retirement.financial performance. Mr. Bettinger’s stock options vest 15% on each of the first, second, third and fourth anniversaries of the grant date and 40% on the fifth anniversary of the grant date. Mr. Bettinger’s restricted stock vests 25% on the third anniversary of the grant date and 75% on the fourth anniversary of the grant date.
The Compensation Committee granted Mr. McCool additional stock options with a grant date value of $200,000 and restricted stock with a grant date value of
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$50,000 upon his promotion to Executive Vice President – Institutional Services. Mr. McCool’s awards vest 25% annually over four years.
In 2004, the Board of Directors adopted stock ownership guidelines to promote significant equity ownership by executives and 2005,further align their long-term financial interests with that of other stockholders. To further this objective, in 2008 the Compensation Committee recommended, and the Board of Directors approved, amendments to the guidelines to express the target ownership levels as a percentage of salary and to provide for penalties if the target ownership levels are not met within five years. Under the guidelines, the Chief Executive Officer is expected to maintain an investment position in company designated a portion of its long-term incentives asstock equal to at least five times base salary. All other executive officers are expected to maintain an investment position equal to at least three times base salary. Shares owned directly, beneficially owned under company benefit plans, restricted stock, restricted stock units, and deferred stock units are included in determining ownership levels, but stock options are not.
In addition to the equity compensation granted in 2008, the Compensation Committee approved cash awardspayouts to the named executive officers under the Long Term Incentive Plan. With respect toPlan in connection with awards granted in 2005. The 2005 grant under the 2004 grant, the Compensation Committee selected a performance criterion of cumulative earnings per share andLong Term Incentive Plan had a performance period beginning July 1, 20042005 and ending December 31, 2007. These awards were designed to reinforce the company’s philosophy of placing a significant amount of officer pay “at risk” and aligning pay with company performance as measured by financial results and stock price appreciation. The Compensation Committee approved a performance schedule for these awards2008. Amounts earned under which the amount earned over the performance periodschedule could range from $0.50 per unit based on cumulative earnings per share of at least $1.25,$2.22, up to a maximum of $4.00 per unit based on cumulative earnings per share equal to or greater than $2.70.$3.42. At the end of the performance period, the company had cumulative earnings per share of $3.11 (excluding the gain on the sale of U.S. Trust and the related tax benefit, the gain on the resolution of a legal matter, and a $15 million tax benefit resulting from the payment of a special dividend in August 2007). Based on the previously approved performance schedule, the Compensation Committee certified the performance
Equity
goals had been met and approved a payout of $2.76 per unit for the performance period. The Compensation Committee no longer grants awards a significant amount of total compensation in long-term equity awards, although it does not apply a specific weighting or formula tounder the allocation. The mix of equity awards is based on a risk/reward analysis for the role of each named executive officer, so that executives with greater responsibility for business results have more pay at risk. Accordingly, some named executive officers receive all of their awards in options, which have value only to the extent that the company’s stock price increases above the exercise price, and therefore entail greater risk than restricted stock. The Compensation Committee generally uses time-vested options and restricted stockfor promotional grants, and premium-priced options and performance-based restricted stock for annual long-term incentives to executive officers to ensure that executive officers only benefit after strategic financial performance goals are achieved and stockholders have realized a gain. The long-term equity awards are granted pursuant to the 2004 StockLong Term Incentive Plan that was approved by stockholders.
The Compensation Committee reviewed retirement provisions for equity awards for companies in the peer group and surveys on equity practices and changed the definition of retirement for all equity awards granted on or after October 18, 2007 to age 55 with 10 years of service, from the prior definition of age 50 with 7 years of service. Upon retirement as defined above, options granted more than two years prior to the retirement date receive accelerated vesting and a post-termination exercise period of up to two years. In addition, the Compensation Committee determined that performance-based restricted stock granted more than two years prior to retirement would not receive accelerated vesting but rather would continue to vest as scheduled, to avoid providing retirees with an advantage over continuing employees.
Plan.
Guidelines for Equity Granting PolicyAwards
The company has no program, plan or practice to time the grant of stock-based awards relative to the release of material non-public information or other corporate events. All equity grants to directors and executive officers are approved by the Compensation Committee or the independent directors at regularly scheduled meetings or, in limited cases involving key recruits or promotions, by a special meeting or unanimous written consent. If an equity award is made at a meeting, theThe grant date is the meeting date or a fixed, future date specified at the time of the grant. If an equity award is approved by unanimous written consent, the grant date is a fixed, future date on or after the date the consent is effective under applicable corporate law. Under the terms of the company’s stock incentive plan, the exercise
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price of options cannot be less than the closing price of company stock on the date of grant. In the event of securities law violations, the Compensation Committee reserves the right to reduce or cause the executive to forfeit equity awards and to require disgorgement of any profit realized from equity awards.
Stock Ownership GuidelinesOther Compensation
The Board of Directors adopted stock ownership guidelines in 2004 to promote significant equity ownership in the company and align executive officers’ interests with stockholders. Under the stock ownership guidelines, the Chairman and Chief Executive Officer is expected to maintain an investment position in company stock equal to at least $5 million. All other executive officers on the Management Committee are expected to maintain an investment position in company stock equal to at least $1.5 million. Shares owned directly, shares beneficially owned under company benefit plans, restricted stock units, deferred stock units, and restricted stock are included in determining ownership levels. These ownership levels should be attained within five to seven years after the later of (i) establishment of the guidelines or (ii) the date the officer becomes an executive officer. Each executive officer also is expected to hold for a minimum of one year at least 50% of the net after-tax value of company stock acquired through the exercise of options or the vesting of restricted shares. While the guidelines do not contain mandatory enforcement provisions, the Board of Directors expects that executive officers will comply with the ownership guidelines.
Perquisites
The Compensation Committee approves perquisites for the Chairman and Chief Executive Officer, the executive officers, and other senior officers of the company. While the Compensation Committee does not believe that perquisites are or should be a significant portion of compensation, the Compensation Committeeit recognizes that perquisites may help attract and retain key executive officers.
In January 2005, the company replaced its car and parking allowance, financial planning reimbursement and executive medical benefit with a perquisite allowance to give officers flexibility in determining how to spend their perquisite dollars and to reduce administrative costs. The company reviewed the annual average cost of providing those programs and determined the appropriate amount for the annual perquisite allowance for executive vice presidents to be $36,000.allowance. The allowance is not a reimbursement for perquisites. Instead, executive officers receiveperquisites but is simply a cash payments of $36,000 annually (paid semi-monthly) in lieu of in-kind perquisites. Theypayment. Executives are not required to spend the cash paymentspayment or report on how the amounts are used. In 2008, the named executive officers, other than Mr. Bettinger and Mr. Schwab, received a perquisite allowance in the amount of $36,000.
The ChairmanIn connection with his promotion to President and Chief Executive Officer, does not receive a perquisite allowance. As of January 1, 2008, the President and Chief Operating Officer also does not receive a perquisite allowance.Compensation Committee
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The
approved certain benefits for Mr. Bettinger, including a car service for commuting purposes and use of fractionally-owned aircraft consistent with company may from timepolicies.
In connection with his promotion to time incur other costs that result in a personal benefit to an executive officer. For example,Executive Vice President – Institutional Services, the Compensation Committee has determinedapproved certain benefits for Mr. McCool to assist with his relocation to the San Francisco Bay Area, including relocation benefits and a special, one-time cash payment of $800,000 in lieu of in-kind perquisites to compensate him for expenses that it is appropriatehe will incur for a period of time, including rental housing and family travel expenses.
Pursuant to a security study performed by an independent, third-party consulting firm, the company incurs costs for a driver and for the company to permit spouses to accompany executive officers to certain business functions with the approvalmaintenance of security systems and equipment for Mr. Schwab that are necessary for his protection as the company’s Chief Financial Officer.founder and its Chairman.
Executive officers may participate in the company’s 401(k) plan and employee stock purchase plan available to all eligible employees subject to Internal Revenue Service limits, and a deferred compensation plan available to officers and other key employees. The costs of these travel-related expenses are treated as income to the executive officer and may be grossed upcompany offers no defined benefit plan, special retirement plan for tax purposes.executives or other nonqualified excess plans.
Termination and Change-in-Control Arrangements
All employees, including executive officers other than Mr. Schwab, are eligible to receive severance benefits under the company’s Severance Pay Plan, which is described in the narrative following the Termination and Change in Control Benefits Table. Benefits are available under this plan only in the event of termination of employment on account of job elimination. To receiveAfter a review of market data on severance benefits in 2008, the severance payments and accelerated vesting of long-term awards, an employee must execute a severance agreement that contains, among other provisions, a general release and
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waiver of all claims. In cases not covered byCompensation Committee amended the Severance Pay Plan to reduce severance benefits for officers effective April 1, 2009. Under the Compensation Committee may consideramended program, executive vice presidents will be eligible to receive 15 days of base salary for each year of service with a minimum of seven months and a maximum of 12 months of severance arrangements for executive officers on a case by case basis.
Severance benefits may be provided pursuant to employment agreements. For example,pay. Mr. Schwab is eligible forentitled to severance benefits underpursuant to his employment agreement described in the narrative to the Summary Compensation Table. In addition, Mr. Scaturro was entitled to receive certain benefits under his offer letter. These arrangements are described in the narrative to the Summary Compensation Table.
The company does not maintain any other severance or change in control plans for executive officers. The Compensation Committee, however, considers the avoidance of loss and distraction of employees as a result of an actual or contemplated change in control to be essential to protecting and enhancing stockholder value. Accordingly, all employees, including executive officers, may be entitled to full vesting of their stock-based incentives and cash incentives (under the Long Term Incentive Plan) in the event of a change in control of The Charles Schwab Corporation.
Other Components
In addition to the components of executive compensation discussed above, executive officers may participate in programs available to all employees, including the 401(k) plan and an employee stock purchase program, which allows employees to purchase shares at a 15% discount to increase their ownership of company stock. The company also offers a deferred compensation program to officers and other key employees. The Compensation Committee does not consider these programs when setting executive compensation.
When setting the components of compensation, the Compensation Committee does not consider deferredcompensation and past equity awards because doing so would be inconsistent with the pay-for-performance philosophy. The Compensation Committee views the deferred compensation program, which is described in the narrative to the Nonqualified Deferred Compensation table, as a savings vehicle with account balances that are a function of personal investment choices and market-based earnings. With respect to past equity awards, the Compensation Committee recognizes the benefit of appreciation from previously granted unvested equity awards from a retention perspective, but does not consider appreciation of prior awards in setting compensation.
2007 COMPENSATION
Base Salary
In 2007, after reviewing each named executive officer’s experience, role, past and expected future performance, and pay relative to internal peers, the Compensation Committee increased base salary for Ms. Dwyer, $10,000; Mr. Goldman, $16,000; and Ms. McWhinney, $25,000. It also raised base salary in recognition of promotions: Mr. Bettinger from $600,000 to $700,000 upon his promotion to President and Chief Operating Officer, Mr. Martinetto from $339,000 to $410,000 upon his promotion to Chief Financial Officer, and Mr. Goldman from $416,000 to $450,000 upon his promotion to Executive Vice President- Schwab Institutional. The Compensation Committee recommended an increase in base salary for Mr. Schwab, which he declined. The competitive pay assessment completed by Hewitt Associates generally found that base salary was above the median of the peer group for the named executive officers. The Compensation Committee’s objective is to have base salaries of executive officers approximate the median base salaries of peer companies over time. The Compensation Committee determined that the promotions and increased job responsibilities merited the salary increases.
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Annual Cash Incentive Awards
For 2007, after reviewing each executive officer’s role and pay relative to internal peers, the Compensation Committee increased target awards for Ms. Dwyer, 5%; and Ms. McWhinney, 25%. The target awards for the named executive officers as a percentage of base salary were: 350% for Mr. Schwab, 140% for Mr. Dodds, 250% for Mr. Bettinger, 130% for Ms. Dwyer, 100% for Mr. Goldman, 400% for Mr. Scaturro, and 150% for Ms. McWhinney. In recognition of their promotions, the Compensation Committee set Mr. Martinetto’s target award at 100% upon his promotion to Chief Financial Officer and increased Mr. Goldman’s target award to 110% upon his promotion to Executive Vice President – Schwab Institutional. The target awards set in recognition of these promotions were outside of the Corporate Executive Bonus Plan because they were established after the first 90 days of the annual performance period.
The Compensation Committee set target awards for certain executive officers based solely on overall corporate performance, while the awards for executive officers who lead business units were based on both overall corporate performance and the performance of their business units. For the named executive officers, the funding mix approved by the Compensation Committee in 2007 was 100% on overall corporate performance for Mr. Schwab, Mr. Dodds, Mr. Bettinger, Mr. Martinetto, and Ms. Dwyer, and 40% on overall corporate performance and 60% on the performance of the Schwab Institutional segment for Mr. Goldman and Ms. McWhinney. The Compensation Committee approved separate performance criteria for Mr. Scaturro and U.S. Trust executive officers.
For 2007, the Compensation Committee approved performance criteria of revenue growth and pre-tax profit margin. The Compensation Committee chose revenue growth and profit margin because they drive earnings growth and create stockholder value. The Compensation Committee believes these measures are appropriate for a growth company. The goals for revenue growth and profit margin (assuming awardswould be paid at 100% of target), as well as the actual results achieved, are as follows:
| Matrix | Target Revenue Growth | Actual Revenue Growth | Target Profit Margin | Actual Profit Margin | ||||||||
Overall Corporate | 12.0 | % | 15.9 | % | 36.8 | % | 37.1 | % | ||||
Schwab Institutional | 11.8 | % | 16.0 | % | 41.6 | % | 42.7 | % | ||||
The Compensation Committee reserves discretion to reduce funding below the levels indicated in the matrices; however, it did not exercise negative discretion in determining individual awards for the named executive officers in 2007. The Compensation Committee generally rounds down when determining the funding percentage and followed this practice for 2007. Using the approved performance measures, the formula-based matrices supported award payouts of 117.6% for corporate performance and 128.7% for Schwab Institutional performance. The Compensation Committee authorized actual 2007 annual cash incentive awards of 117% of target for Mr. Schwab, Mr. Bettinger, and Ms. Dwyer based on overall corporate performance under the Corporate Executive Bonus Plan.
For Mr. Goldman, the formula based matrices and the blended percentages of 40% on overall corporate performance and 60% on the performance of Schwab Institutional supported an award payout of 123.6% of target. The Compensation Committee authorized a 2007 award of 123.6% for Mr. Goldman. Mr. Goldman received $535,394 under the Corporate Executive Bonus Plan and $53,539 outside of the plan. The additional amount received outside the plan reflects the 10% increase in Mr. Goldman’s target bonus as a result of his promotion to Executive Vice President – Schwab Institutional in July 2007.
Mr. Martinetto did not receive an annual incentive bonus under the Corporate Executive Bonus Plan because he was promoted to executive vice president after the Compensation Committee determined the performance criteria and goals for 2007. The Compensation Committee awarded Mr. Martinetto a bonus outside the plan at 117% of his target award.
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Mr. Dodds, Ms. McWhinney and Mr. Scaturro did not receive a cash incentive award because they were no longer employees at the end of the performance period (December
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the company’s annual report on Form 10-K for the fiscal year ended December 31,
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Roger O. Walther, Chairman Nancy H. Bechtle Frank C. Herringer Paula A. Sneed Robert N. Wilson
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COMPENSATION INFORMATION
The following tables show compensation information for Charles R. Schwab, the company’s Chairman and, for a portion of 2008, its Chief Executive Officer, Walter W. Bettinger II, President and Chief Executive Officer, Joseph R. Martinetto, the company’s Chief Financial Officer, and the next three most highly compensated executive officers as of December 31, 2008. We refer to each of these officers as a “named executive officer.”
2008 Summary Compensation Table
| NAME AND PRINCIPAL POSITION | YEAR | SALARY ($) | BONUS(1) ($) | STOCK AWARDS(2) ($) | OPTION AWARDS(3) ($) | NON-EQUITY INCENTIVE PLAN COMPEN- SATION(4) ($) | ALL OTHER COMPEN- SATION(5) ($) | TOTAL ($) | |||||||||||||||
Charles R. Schwab(6) CHAIRMAN | 2008 | 858,333 | — | — | 3,083,346 | 2,466,833 | 65,240 | 6,473,752 | |||||||||||||||
| 2007 | 900,000 | — | — | 1,907,679 | 3,685,500 | 77,365 | 6,570,544 | ||||||||||||||||
| 2006 | 900,000 | — | — | 274,912 | 4,252,500 | 200,845 | 5,628,257 | ||||||||||||||||
Walter W. Bettinger II PRESIDENT AND CHIEF EXECUTIVE OFFICER | 2008 | 793,750 | 128,250 | (7) | 1,816,470 | 2,907,230 | 4,348,950 | 119,890 | 10,114,540 | ||||||||||||||
| 2007 | 683,333 | — | 1,561,419 | 1,889,843 | 7,052,500 | 1,953,026 | 13,140,121 | ||||||||||||||||
| 2006 | 587,500 | — | 352,296 | 172,858 | 1,658,354 | 68,162 | 2,839,170 | ||||||||||||||||
Joseph R. Martinetto CHIEF FINANCIAL OFFICER | 2008 | 443,333 | — | 191,723 | 313,048 | 884,899 | 55,474 | 1,888,477 | |||||||||||||||
| 2007 | 381,210 | 409,465 | 117,228 | 122,066 | 427,625 | 71,071 | 1,528,665 | ||||||||||||||||
Carrie E. Dwyer EXECUTIVE VICE PRESIDENT, | 2008 | 500,000 | — | 512,349 | 570,751 | 2,474,399 | 63,699 | 4,121,198 | |||||||||||||||
| 2007 | 498,333 | — | 629,880 | 292,353 | 2,701,715 | 205,757 | 4,328,038 | ||||||||||||||||
| 2006 | 490,000 | — | 559,471 | 165,015 | 1,276,875 | 70,592 | 2,561,953 | ||||||||||||||||
James D. McCool EXECUTIVE VICE PRESIDENT – | 2008 | 435,833 | — | 308,706 | 349,255 | 910,850 | 861,828 | 2,866,472 | |||||||||||||||
Rebecca Saeger EXECUTIVE VICE PRESIDENT | 2008 | 425,000 | — | 162,332 | 267,696 | 2,308,149 | 54,926 | 3,218,103 | |||||||||||||||
| (1) | The amounts shown in this column represent bonuses paid outside of the Corporate Executive Bonus Plan, a non-equity incentive plan, for officers who received promotions after the beginning of the performance period. |
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COMPENSATION INFORMATION
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