UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
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CUMMINS INC. | ||||||||
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500 JACKSON STREET, BOX 3005, COLUMBUS, INDIANA 47202-3005
NOTICE OF 2011 ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
NOTICE IS HEREBY GIVEN that the 2011 Annual Meeting of the Shareholders of Cummins Inc. will be held at the Company'sour Columbus Engine Plant located at 500 Central Avenue, Columbus, Indiana, on Tuesday, May 13, 2008,10, 2011, at 11:00 a.m. Eastern Daylight SavingsSaving Time, for the following purposes:
Only shareholders of our Common Stock of the Company of record at the close of business on March 24, 200814, 2011 are entitled to notice of and to vote at the meeting.
Shareholders of Common Stock whoIf you do not expect to be present in person at the meeting, you are urged to vote theiryour shares by telephone, via the Internet, or by completing, signing and dating the enclosed proxy card and returning it promptly in the envelope provided.
TheYou may revoke your proxy may be revoked by the shareholder giving itcard at any time before the voting. Except with respect to shares attributable to accounts held in the Cummins Inc. and Affiliates Retirement and Savings Plans, any shareholders entitled to vote at the annual meeting who attend the meeting will be entitled to cast their votes in person.
MARYA M. ROSE, Secretary | |||||
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY
MATERIALS FOR THE 2011 ANNUAL SHAREHOLDER MEETING TO BE HELD
ON MAY 13, 2008:10, 2011: the Annual Report and Proxy Statement
are available at www.ematerials.com/cmi
CUMMINS INC.500 JACKSON STREET, BOX 3005, COLUMBUS, INDIANA 47202-3005
PROXY STATEMENT FOR 2011 ANNUAL SHAREHOLDERS MEETING
ThisWe are furnishing this proxy statement is being furnished in connection with the solicitation by theour Board of Directors of Cummins Inc. (the "Company" or "Cummins") of proxies to be voted at theour 2011 Annual Meeting of Shareholders to be held on Tuesday, May 13, 2008,10, 2011, and at any adjournment thereof, (thewhich we refer to as our "Annual Meeting").Meeting." This proxy statement, together with the enclosed proxy card, is first being mailedmade available to theour shareholders of the Company on or about April 4, 2008.March 23, 2011.
Holders of the Company'sour Common Stock of record at the close of business on March 24, 200814, 2011 are entitled to vote at the Annual Meeting. On that date there were issued and outstanding 203,215,953196,819,134 shares of Common Stock, each of which is entitled to one vote.vote on each matter submitted to a shareholder vote at the Annual Meeting.
Each share of Common Stock represented by a properly executed and delivered proxy card will be voted at the Annual Meeting in accordance with the instructions indicated on that proxy card, unless such proxy card has been previously revoked. If no instructions are indicated on a signed proxy card, the shares represented by such proxy card will be voted as recommended by the Board of Directors.our Board.
A shareholder may revoke thehis or her proxy card at any time before it is votedthe Annual Meeting by delivering to theour Secretary of the Company written notice of such revocation. This notice must include the number of shares for which the proxy card had been given and the name of the shareholder of such shares as it appears on the stock certificate(s), or in book entry form on the records of the Company'sour stock transfer agent and registrar, Wells Fargo Shareowner Services, evidencing ownership of such shares. In addition, except with respect to shares attributable to accounts held in the Cummins Inc. and Affiliates Retirement and Savings Plans, any shareholder who has executed a proxy card but is present at the Annual Meeting will be entitled to cast his or her vote in person instead of by proxy card, thereby canceling the previously executed proxy.
proxy card.
The following table identifies those shareholders knownIMPORTANT: If you hold your shares in a brokerage account, you should be aware that, due to New York Stock Exchange, or NYSE, rule changes, your broker will not be permitted to vote your shares for the Company to beelection of directors or on the beneficial ownersadvisory vote on the compensation of more than five percentour named executive officers or on the frequency of the Common Stock of the Company and shows asadvisory vote on executive compensation if you do not affirmatively instruct your broker how to each such shareholder as of December 31, 2007, on an adjusted basis reflecting a subsequent two-for-one split on January 2, 2008, (i) the number of shares beneficially owned by such shareholder(s) and the nature of such beneficial ownership and (ii) the percentage of the entire class of Common Stock so beneficially owned:
| Amount & Nature of Beneficial Ownership | Percent of Class | |||
---|---|---|---|---|---|
State Street Bank and Trust Company One Lincoln Street Boston, MA 02111 | 21,059,718 | (1) | 10.36 | % | |
FMR LLC. 82 Devonshire Street Boston, MA 02109 | 17,823,056 | (2) | 8.77 | % |
ELECTION OF DIRECTORS(Items 1 through 9 on the Proxy Card)
Nine directors are to be elected at the Annual Meeting to hold office until the next annual meeting of shareholders and until their successors are elected and qualified. The accompanying proxy will be voted in favor of the nominees named below to serve as directors unless the shareholder indicates to the contrary on the proxy. All of the nominees are current directors.
Nominee Robert K. Herdman was elected by the Board of Directors on February 12, 2008 upon recommendation of its Governance and Nominating Committee to serve as a director until theour Annual Meeting. Mr. Herdman was recommended by the Committee and elected by the Board following a review of his qualifications under the standards of the Company's Corporate Governance Principles referenced on page 7 of this Proxy Statement and a review of his independence. The Corporate Governance Principles are available on the Company's website http://www.cummins.com and are otherwise available in printTherefore, you must affirmatively take action to any shareholder who requests them.
Effective last year, the Company changed the method by which directors are elected by amending its By-Laws. The changed procedures apply to an uncontested election, which is one in which the number of nominees doesvote your shares at our Annual Meeting. If you do not exceed the number of directors to be elected. In an uncontested election, any nominee who does not receive a majority of the share votes cast shall promptly offer his or her resignation to the Board following certification of the shareholder vote. Aaffirmatively vote of the majority of share votes cast means that the number ofyour shares, voted "for" exceeds the number of votes "against" that director. Under the amended By-Laws, abstentions and broker non-votes are not counted as a vote "for" or "against" a director. The Governance and Nominating Committee of the Board of Directors will promptly consider the resignation offer and make a recommendation to the Board. The Board will act on the Governance and Nominating Committee's recommendation within 90 days following certification of the shareholder vote. Thereafter, the Board will promptly disclose its decision whether to accept the director's resignation offer. The director who tenders his or her resignation pursuant to this provisionyour shares will not participate in the Governance and Nominating Committee's recommendation or Board decision whether to accept his or her resignation offer.
The Board of Directors expects that each of the nominees will be available for election, but if any of them is unable to serve at the time the election occurs, the proxy will be voted for the election of another nominee to be designated bydirectors or on the Boardadvisory vote on the compensation of Directors, unlessour named executive officers or on the Board of Directors decides to reduce the number of directors.
The namesfrequency of the nominees for directors, together with certain information regarding them, are set forth in the following table. Biographical sketches of these nominees, which include their business experience during the past five years and directorships of other corporations, are providedadvisory vote on pages 45 through 47 of this Proxy Statement.executive compensation.
Name and Occupation | Age | First Year Elected a Director | Amount and Nature of Beneficial Ownership as of March 24, 2008 (1) | Percent of Class | Stock Units Held as of March 24, 2008 (2) | Total | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Robert J. Darnall Retired Chairman and Chief Executive Officer of Inland Steel Industries, basic steel manufacturer, processor and distributor | 70 | 1989 | 37,013 | * | 13,793 | 50,806 | ||||||
Robert K. Herdman Managing Director of Kalorama Partners LLC, independent consulting firm | 59 | 2008 | 0 | * | 0 | 0 | ||||||
Alexis M. Herman Chairman and Chief Executive Officer of New Ventures, independent consulting firm | 60 | 2001 | 22,769 | * | 0 | 22,769 | ||||||
F. Joseph Loughrey President and Chief Operating Officer of Cummins | 58 | 2005 | 392,922 | * | 0 | 392,922 | ||||||
William I. Miller Chairman and Chief Executive Officer of Irwin Financial Corporation, financial services company | 51 | 1989 | 85,174 | * | 3,436 | 88,610 | ||||||
Georgia R. Nelson President and Chief Executive Officer of PTI Resources, LLC, independent consulting firm | 58 | 2004 | 12,213 | * | 0 | 12,213 | ||||||
Theodore M. Solso Chairman and Chief Executive Officer of Cummins | 61 | 1994 | 642,863 | (3) | * | 0 | 642,863 | |||||
Carl Ware Retired Executive Vice President, Public Affairs and Administration, The Coca-Cola Company | 64 | 2004 | 10,220 | * | 0 | 10,220 | ||||||
J. Lawrence Wilson Retired Chairman and Chief Executive Officer, Rohm and Haas Company, specialty chemical manufacturing | 72 | 1990 | 69,387 | * | 14,648 | 84,035 |
The Company has We have long believed that good corporate governance is important in ensuring that it iswe are managed for the long-term benefit of itsour shareholders. ItWe continuously reviews thereview our Board's structure, policies and practices and comparescompare them to those suggested by various authorities in corporate governance and to the practices of other public companies. Our corporate governance principles, charters for each of our Board's Audit, Compensation and Governance and Nominating Committees, our code of conduct and our by-laws, along with certain other corporate governance documents, are available on our website,www.cummins.com, and are otherwise available in print to any shareholder who requests them from our Secretary.
Independence
TheOur Board is composed of a substantial majority of directors who qualify as independent directors ("Independent Directors") pursuant to the rules adopted by the Securities and Exchange Commission, ("SEC")or SEC, applicable to the corporate governance standards for companies listed on the New York Stock Exchange.NYSE.
In determining independence, each year Pursuant to the Board affirmatively determines whether directors have no "material relationship" with the Company. When assessing the "materiality" of a director's relationship with the Company, the Board considers all relevant facts and circumstances, not merely from the director's standpoint, but from thatrequirements of the personsNYSE, our Board has adopted independence standards that meet or organizations with whichexceed the director has an affiliation, and the frequency or regularityindependence standards of the services, whether the services are being carried out at arm's length in the ordinary course of business and whether the services are being provided substantially on the same termsNYSE, including categorical standards to the Company as those prevailing at the time from unrelated parties for comparable transactions. Material relationships can include commercial, banking, industrial, consulting, legal, accounting, charitable and familial relationships. Independence means (1) not being an employee of the Company within the past five years; (2) not personally receiving or having an immediate family member who receives more than $100,000 per year in direct compensation from the Company other than director and committee fees and pension or other forms of deferred compensation; (3) not being employed, or having an immediate family member employed as an executive officer of another company where any current executive officer of Cummins Inc. serves on that company's compensation committee; (4) not being employed by or affiliated with or having an immediate family member employed by or affiliated with a present or former internal or external auditor of the Company within the three previous years; and (5) not being a director who is an executive officer or employee, or whose immediate family member is an executive officer of a company that makes payments to, or receives payments from, the Company for property or services in an amount which exceeds the greater of $1 million, or 2% of the other company's consolidated gross revenues.
In February 2008, the Secretary of the Company reviewed withassist the Governance and Nominating Committee directors responses to a questionnaire asking about their relationships withand our Board in evaluating the Company (and thoseindependence of their immediate family members) and other potential conflicts of interest, as well as material provided by management or otherwise known to the Secretary related to transactions, relationships, or arrangements between the Company and the directors or parties related to the directors.each director. The categorical standards are included in our corporate governance principles, which are available on our website atwww.cummins.com. A copy also may be obtained upon written request.
Following a discussion and applying the standards referenced above, the Governance and Nominating Committee of our Board determined that all directors standing for election, except Mr. Solso, our Chief Executive Officer, and Mr. Loughrey,Linebarger, our President and Chief Operating Officer, qualified as independent. Based on the recommendation of the Company, qualifyCommittee, our full Board approved this conclusion.
Leadership Structure and Risk Oversight
Our corporate governance principles describe in detail how our Board must conduct its oversight responsibilities in representing and protecting our company's stakeholders. As stated in the principles, our Board does not have a policy on whether or not the roles of our Chief Executive Officer and Chairman should be separate, and, if they are to be separate, whether the Chairman should be selected from our non-employee directors or be an employee director. Currently, our Board believes it is in the best interests of our company for the roles of our Chairman and Chief Executive Officer to be combined and to appoint a Lead Director from among our independent directors. Our Board believes that this leadership structure currently assists our Board in creating a unified vision for our company, streamlines accountability for our performance and facilitates our Board's efficient and effective functioning. Further, our Board believes that Mr. Solso, our Chief Executive Officer, is the person best qualified to serve as independent. The Committee recommendedour Chairman given his long history with our company and his skills and experience in the industries in which we operate. Alexis M. Herman is our Lead Director. Ms. Herman was selected for this conclusionposition because of her service on our Board since 2001, her experience as the U.S. Secretary of Labor and her other experiences in leadership positions in the private and public sectors.
Our Lead Director's responsibilities include:
Our Board and this conclusion was adoptedits committees are involved on an ongoing basis in the oversight of our material enterprise-related risks. Our senior management, led by our Chief Risk Officer in conjunction with other appropriate officers, undergoes a process that identifies, categorizes and analyzes the full Board.relative severity and likelihood of the various different types of risks to which we are or may be subject. Depending upon the type of the material identified risks, our Board, Audit Committee, Finance Committee, Compensation Committee and/or Safety, Environment and Technology Committee then receive periodic reports and information directly from our senior management members who have functional responsibility for the management of such risks. These reports identify and assess the different types of enterprise-related risks and address mitigation strategies and plans implemented or proposed for each key risk. Based on the further input of our Chief Executive Officer and/or President, Chief Operating Officer, or Chief Risk Officer as necessary or appropriate, our Board and/or its respective appropriate committee then reviews such information, proposed mitigation strategies and plans, and monitors our progress on mitigating such risks. Our Board and its committees' roles in the oversight process of our identified material risks have not impacted our Board's leadership structure.
Board of Directors and Committees
TheOur Board of Directors held five (5) meetings during 2007.2010. All of the directors attended 75% or more of the aggregate number of meetings of theour Board and Committeesthe committees on which they served that were held during the periods in which they served. The non-employee members of theour Board also met in executive session without management present as part of each regular meeting. J. Lawrence Wilson, the Company'sAlexis M. Herman, our Lead Director, presided over these sessions.
Under the Company's Corporate Governance Principles, which are available on the Company's website <http://www.cummins.com> and are otherwise available in print to any shareholder who requests them, theour corporate governance principles, our Board of Directors has established sevensix standing committees. These Principles describe in detail howCertain of the Board must conduct its oversight responsibilities in representing and protecting the
Company's stakeholders. Theprincipal functions performed by certain of these committees and the members of theour Board of Directors currently serving on these committees are as follows:
Audit Committee. The current members of theour Audit Committee are R. K. Herdman (Chairman), R. J. Darnall (Chairman),Bernhard, F. R. Chang-Diaz, S. B. Dobbs, A. M. Herman and G. R. Nelson, C. Ware and J. L. Wilson.Nelson. All members are Independent Directors.independent directors as defined under our independence criteria, NYSE listing standards and SEC rules. The Audit Committee met nine times during 2010. Our Board of Directors has determined that Mr. Darnall and Mr. Wilson areHerdman is an "audit committee financial experts"expert" for purposes of the SEC's rules. The Audit Committee reviews theour accounting and auditing principles and procedures of the Company.procedures. The Audit Committee reviews the scope, timing and fees for theour annual audit and the results of audit examinations performed by theour internal auditors and independent public accountants, including theirany recommendations to further improve theour system of accounting and internal controls. It also monitors the independence and performance of theour external and internal auditors. The Audit Committee met seven (7) times in person or telephonically during 2007. The current Charter of the Audit Committee, as adopted by the Board of Directors, is available on the Company's website, and is otherwise available in print to any shareholder who requests it.
Compensation Committee. The current members of theour Compensation Committee are G. R. Nelson (Chairman), R. K. Herdman, A. M. Herman, (Chairman), R. J. Darnall, G. R. NelsonW. I. Miller and J. L. Wilson.C. Ware. All members are Independent Directors.independent directors as defined under our independence criteria, NYSE listing standards and SEC rules. The Compensation Committee met six times during 2010. The Compensation Committee administers and determines eligibility for, and makes awards under, the Company'sour stock incentive plans. The Committee also reviews and evaluates the Company'sour executive compensation standards and practices, including salaries, bonus distributions, deferred compensation practices and participation in stock purchase plans. It annually establishes and approves the compensation of theour Chief Executive Officer following a review of the CEO'shis performance, including input from all of the other Independent Directorsindependent directors as reported to it by the Governance and Nominating Committee.
TheIn reviewing our compensation arrangements, the Committee engaged Meridian Compensation Partners LLC, or Meridian, as a compensation consultant to provide input and advice to the Committee. Meridian was instructed to provide market data and advice to the Committee in connection with the Committee's annual review of officer compensation, as well as specific selected peer group executive compensation data. Meridian does not provide any other services to our company and was therefore determined by our Committee to be an independent compensation advisor. Meridian's role in establishing the compensation of our Named Executive Officers, to the extent material, is addressed under "Executive Compensation—Compensation Discussion and Analysis."
Our Compensation Committee maintains a formal process to ensure the independence of the input received fromany executive compensation consultants withconsultant engaged by the Committee, including consideration of the following stipulations regarding any engagements the Committee enters into with executive compensation consultants.
The Committee:factors relevant to independence:
The Committee also:
The Compensation Committee met five (5) times during 2007. The current Charter of the Compensation Committee, as adopted by the Board of Directors, is available on the Company's website and is also available in print to any shareholder who requests it.
Governance and Nominating Committee. The current members of theour Governance and Nominating Committee are J. L. WilsonA. M. Herman (Chairman), R. J. Darnall, A. M. Herman,Bernhard, F. R. Chang-Diaz, S. B. Dobbs, R. K. Herdman, W. I. Miller, G. R. Nelson and C. Ware. All members are Independent Directors.independent directors as defined under our independence criteria, NYSE listing standards and SEC rules. The Governance and Nominating Committee met five times during 2010. The Governance and Nominating Committee reviews
and makes recommendations to theour Board with respect to its membership, size, composition, procedures and organization of the Board of Directors.organization. The Committee uses its network of contacts to identify potential director candidates, but may also engage, if it deems appropriate, a professional search firm. This Committee will also consider properly submitted shareholders' recommendations of nominees for election to the Board of Directors.our Board. Shareholder recommendations, including biographical information as to the proposed candidate and a statement from the shareholder as to the qualifications and willingness of such person to serve on the Company'sour Board, of Directors, must be submitted in writing to the Secretary of the Companyour Secretary. No such qualifying recommendations were received in accordance with the procedures established in the Company's By-Laws. The Committee has not rejected a candidate recommended by any shareholder during the preceding year.2010.
As required by the Corporateour corporate governance principles, our Governance Principles, theand Nominating Committee must recommend directorsdirector nominees such that theour Board is comprised of a substantial majority of Independent Directors
independent directors and possesses a variety of experience and background, including those who have substantial experience in the business community, those who have substantial experience outside the business community such as public, academic or scientific experience, and those who will represent the stakeholders as a whole rather than special interest groups or individual constituencies. In particular, as it considers possible directors the Committee will seek out candidates who represent the diverse perspectives of all people. EachAs discussed in the principles, each director will benominee is chosen without regard to gender, race, religion, national origin or sexual orientation. The Committee will only consider potential directors who demonstrate the attributes of the Company'sour core values: integrity, corporate responsibility, diversity, global involvement, innovation and delivering superior results. Each year the Committee reviews the backgrounds of current and prospective directors to assess the effectiveness of our commitment to ensuring that the Board has the diverse experiences necessary to lead our company and advises the full Board on its progress. As a result, we believe that our Board has been effective in assembling a diverse body of individuals as measured by the criteria of gender, race and professional experience.
Each candidate should have sufficient time available to devote to theour affairs of the Company and be free of any conflict of interest that would violate any applicable law or regulation, or interfere with the proper performance of his or her responsibilities and should also possess substantial and significant experience that would be of particular importance to the Companyus in the performance of his or her duties as a director. The Committee does not intend to alter the manner in which it evaluates candidates, including the foregoing criteria, based on whether the candidate was recommended by a shareholder or not.
Any shareholder entitled to vote for the election of directors at a meeting may nominate a person or persons for election as directors only if written notice of such shareholder's intent to make such nominations is given, either by personal delivery or by mail, postage prepaid, to the Secretary of our company not later than 160 days in advance of the originally scheduled date of such meeting (provided, however, that if the originally scheduled date of such meeting is earlier than the anniversary of the date of the previous year's annual meeting, such written notice may be so given and received not later than the close of business on the 10th day following the date of the first public disclosure, which may include any public filing by us with the SEC, of the originally scheduled date of such meeting).
Each notice required by our by-laws must be signed manually or by facsimile by the shareholder of record and must set forth the information required by our by-laws, including (i) the name and address, as they appear on our books, of the shareholder who intends to make the nomination and of any beneficial owner or owners on whose behalf the nomination is made; (ii) a representation that the shareholder is a holder of record of shares of our Common Stock entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) certain other information regarding the shareholder and its interests in our company; (iv) the name, age, business address and residential address of each nominee proposed in such notice; (v) the principal occupation or employment of each such nominee; (vi) the number of shares of our capital stock that are owned of record or beneficially by each such nominee; (vii) with respect to each nominee for election or reelection to our Board, a completed and signed questionnaire, representation and agreement described in our by-laws; (viii) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had each nominee been nominated, or intended to be nominated, by our Board; (ix) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, including all arrangements or understandings pursuant to which the nominations are being made, between or among such shareholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or any other person or persons (naming such person or persons), on the other hand; and (x) the written consent of each nominee to serve as a director if so elected.
The deadline for written notice of a shareholder's intent to make a nomination with respect to the Annual Meeting was the close of business on December 1, 2010, which was 160 days in advance of the Annual Meeting (which is typically held on the second Tuesday of each May). We received no such qualifying nominations before this deadline with respect to the Annual Meeting.
Committee members annually review the performance of theour Chief Executive Officer based upon performance against a work plan, considering both quantitative and qualitative measures. The Committee reports the results of such review to the Compensation Committee. The Committee also monitors meeting attendance of Board members.
The Governance and Nominating Committee met five (5) times during 2007. The current By-Laws and Charter of the Governance and Nominating Committee, as adopted by the Board of Directors, are available on the Company's website. A copy of the charter of the Governance and Nominating Committee is also available in print to any shareholder who requests it. The Company also maintains a Code of Business Conduct which is available on its website and is also available in print to any shareholder who requests it.
Executive Committee. The members of theour Executive Committee are T. M. Solso (Chairman), W. I. Miller and J. L. Wilson. TheA. M. Herman. Our Executive Committee is authorized to exercise the powers of theour Board of Directors in the management and direction of theour business and affairs of the Company during the intervals between meetings of the Board of Directors.our Board. It also acts upon matters specifically delegated to it by the full Board of Directors. TheOur Executive Committee did not meetmet one time during 2007.2010.
Other Committees.Finance Committee. In addition to the Committees described above, the BoardThe members of Directors has established the following committees:our Finance Committee (W.are W. I. Miller (Chairman), R. J. Darnall, J. M. Deutch,Bernhard, F. R. Chang-Diaz, S. B. Dobbs, R. K. Herdman and C. WareWare. Our Finance Committee is authorized to review and J. L. Wilson); Proxyadvise the company on our financial strategy pertaining to capital structure, creditworthiness, dividend policy, share repurchase policy, and financing requirements. Our Finance Committee (W. I Miller (Chairman) and R. J Darnall);met three times during 2010.
Safety, Environment and Technology Committee. The members at our Safety, Environment and EnvironmentTechnology Committee (J. M. Deutchare R. J. Bernhard (Chairman), A. M. Herman,F. R. Chang-Diaz, S. B. Dobbs, W. I. Miller, G. R. Nelson and C. Ware). The current Charters of the Finance and Technology and Environment Committees, as adopted byWare. This Committee is authorized to assist the Board of Directors are also available on the Company's website.in its oversight of safety policies, review environmental and technological strategies, compliance programs and major projects and review public policy developments, strategies and positions taken by us with respect to safety, environmental and technological matters that significantly impact us or our products. It met four times in 2010.
Communication with the Board of Directors. Shareholders and other interested parties may communicate with theour Board, of Directors, including theour Lead Director and other non-management directors, by sending written communication to the directors c/o the Company'sour Secretary, 500 Jackson Street, Mail Code 60903, Columbus, Indiana 47201. All such communications will be reviewed by the Secretary or her designee to determine which communications willare appropriate to be forwarded to the directors. All communications will be forwarded except those that are related to Companyour products and services, are solicitations or otherwise relate to improper or irrelevant topics as determined in the sole discretion of the Secretary or her designate.designee.
TheOur Secretary shall maintainmaintains and provideprovides copies of all such communications, received and determined to be forwarded, to the Governance and Nominating Committee in advance of each of its meetings and reportreports to the Committee on the number and nature of communications that were not determined to be forwarded.
The Company has a practiceWe require all of requiring all directorsour director nominees standing for election at an Annual Meetingannual meeting of Shareholdersshareholders to attend such meeting. All directorsdirector nominees standing for election at our 2010 Annual Meeting of Shareholders were present in person. We currently expect all director nominees standing for election at the 2007 Annual Meeting of Shareholders were present.
The table on the following page sets forth information regarding the directors' compensation during the Company's last completed fiscal year.to be present in person.
DIRECTOR COMPENSATIONELECTION OF DIRECTORS
(Items 1 through 10 on the Proxy Card)
| (1) | (2) | | | (3) | (4) | | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non Qualified Deferred Compensation Earnings | All Other Compensation | Total | ||||||||||||||
R. J. Darnall | $ | 88,000 | $ | 75,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 163,000 | |||||||
J. M. Deutch | $ | 80,000 | $ | 75,000 | $ | 0 | $ | 0 | $ | 0 | $ | 111,140 | $ | 266,140 | |||||||
A. M. Herman | $ | 85,500 | $ | 75,000 | $ | 0 | $ | 0 | $ | 11,014 | $ | 0 | $ | 171,514 | |||||||
W. I. Miller | $ | 81,000 | $ | 75,000 | $ | 0 | $ | 0 | $ | 28,466 | $ | 0 | $ | 184,466 | |||||||
G. R. Nelson | $ | 77,000 | $ | 75,000 | $ | 0 | $ | 0 | $ | 3,718 | $ | 0 | $ | 155,718 | |||||||
C. Ware | $ | 77,000 | $ | 75,000 | $ | 0 | $ | 0 | $ | 2,382 | $ | 0 | $ | 154,382 | |||||||
J. L. Wilson | $ | 89,500 | $ | 75,000 | $ | 0 | $ | 0 | $ | 31,659 | $ | 0 | $ | 196,159 |
EachAll ten of our directors are to be elected at the Annual Meeting to hold office until our 2012 annual meeting of shareholders and until their successors are elected and qualified. Any submitted proxy will be voted in favor of the nominees named below to serve as directors unless the shareholder indicates to the contrary on his or her proxy.
Nominee Stephen B. Dobbs was elected by our Board of Directors on October 1, 2010 upon the recommendation of our Governance and Nominating Committee to serve as a director until the Annual Meeting. Mr. Dobbs was recommended by the Committee and elected by the Board following a review of his qualifications under the standards of our corporate governance principles and a review of his independence. All other nominees have been previously elected to our Board by our shareholders and have served continuously since the date indicated below.
Since it is currently anticipated that the Board's nominees for director at the Annual Meeting will be uncontested, the term of any nominee who does not receive a majority of the votes cast by shareholders will expire no later than 90 days after the Annual Meeting. Receipt by a nominee of the majority of votes cast means that the number of shares voted "for" exceeds the number of votes "against" that nominee. Abstentions and broker non-votes are not counted as a vote either "for" or "against" a nominee. In the event one or more of the nominees named below fails to receive a majority of the votes cast for his or her election, then our Governance and Nominating Committee will promptly consider how to fill such a resulting vacancy on our Board and make a recommendation to our Board. Such recommendation may include the potential reappointment to our Board of the director who was not an officer of the Company was paidfailed to receive a $150,000 annual fee, $75,000 of which was paid in cashmajority vote if our Governance and $75,000 of which was paidNominating Committee believes that such a reappointment is in the formbest interests of restricted Common Stock. The Stock Awards cannot be sold for three years. The Chairmen of the Finance Committee,our company and our shareholders. Our Board will then act on the Governance and Nominating CommitteeCommittee's recommendation and thereafter disclose its decision regarding how it has decided to fill such vacancy. Any director who has his or her term shortened as a result of not receiving a majority pursuant to this provision will not participate in the TechnologyGovernance and Environment Committee receive an additional annual fee of $5,000. The Audit Committee Chairman receives an additional $10,000 annual fee and the Compensation Committee Chairman receives an additional $7,500 annual fee. The Lead Director receives an additional annual fee of $7,500. Committee members also receive $1,000 for attending a Committee meeting (other than a meetingNominating Committee's recommendation or our Board's decision.
Our Board expects that each of the Executive Committee) that is not held in connection with a regular or special meeting of the Board of Directors.
As part of the Company's overall support of charitable and educational institutions the Company has established the Cummins Inc. Charitable Bequest Program in which directors first elected priornominees will be able to 2004 are eligible to participate. Following the death of a director, the Company will donate ten equal annual installments of $100,000 to one or more qualifying institutions designated by such director. The Company has purchased life insurance policies on each participating director, the proceeds of which fund donations under the program. Directors will not receive any financial benefit from the program since all charitable deductions accrue to the Company.
The Company has a Deferred Compensation Plan for Non-Employee Directors, pursuant to which directors may elect to defer receipt of all or any portion of their compensation while they serve as a director if so elected at the Annual Meeting, but if any of them is unable to serve at the Company. Upon ceasingtime the election occurs, proxies received that have been voted for such nominee, for all nominees or containing no voting instructions will be voted for the election of another nominee to be a directordesignated by our Board, unless our Board decides to reduce the deferred compensation, plus accrued interest, is paid to the director or the director's beneficiary in a lump sum or in annual installments, not to exceed fifteen, as specified by the director. Upon a change in controlnumber of the Company, such deferred compensation and interest is paid in cash to the director in one lump sum. Accounts are credited with earnings based on each participant's selection among three alternatives: Standard & Poor's 500 Index, Lehman Bond Index or 10 Year Treasury Bill + 4%. The latter option was revised to be 10-Year Treasury Bill + 2% effective January 1, 2006.
Each non-employee director will be required to maintain direct ownership of shares of Common Stock equal to or greater in value to three (3) times his or her annual retainer fee. This ownership requirement must be achieved by 2010 for directors who were first elected prior to 2004. Directors first elected after 2003 must comply with the requirement within six (6) years of becoming a member of the Board.
When future accruals under a retirement plan for non-employee directors were terminated several years ago, directors with vested benefits were given an option to have their accrued benefits retained in the plan for future payment or to convert the present value (using the same actuarial assumptions as are applicable to the payment of pension benefits to the Company's employees) of their accrued benefits into phantom units of Common Stock. The stock units, including additional stock units credited thereon asour directors.
NOMINEES FOR BOARD OF DIRECTORS
dividend equivalents, are evidenced by bookkeeping entries. Recipients have no voting or investment power with respect to the stock units. The value of each director's stock units will be payable only in cash after the director ceases to be a membernames of the nominees for directors, together with biographical sketches, including their business experience during the past five years, directorships of other public corporations and their qualifications to serve on our Board or upon a changeare set forth below. Our nominees are listed below in controlorder of the Company. The total numbertheir length of units credited to each director as a result of retirement plan benefit conversion electionsservice on our Board, beginning first with our employee directors and dividend equivalent credits is listed in the director nominee table on page 4.then followed by our independent directors.
(1) Fees Earned or Paid in Cash were as follows: OUR BOARD RECOMMENDS THAT SHAREHOLDERS VOTEFOR EACH OF THE NOMINEES SET FORTH BELOW.
Director | Board Retainer | Special Meeting Fees | Lead Director Fee | Committee Chaired | Committee Chair Fees | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
R. J. Darnall | $ | 75,000 | $ | 3,000 | Audit | $ | 10,000 | $ | 88,000 | ||||||||
J. M. Deutch | $ | 75,000 | Technology & Environment | $ | 5,000 | $ | 80,000 | ||||||||||
A. M. Herman | $ | 75,000 | $ | 3,000 | Compensation | $ | 7,500 | $ | 85,500 | ||||||||
W. I. Miller | $ | 75,000 | $ | 1,000 | Finance | $ | 5,000 | $ | 81,000 | ||||||||
G. R. Nelson | $ | 75,000 | $ | 2,000 | $ | 77,000 | |||||||||||
C. Ware | $ | 75,000 | $ | 2,000 | $ | 77,000 | |||||||||||
J. L. Wilson | $ | 75,000 | $ | 2,000 | $ | 7,500 | Governance & Nominating | $ | 5,000 | $ | 89,500 |
(2) 908 (1,816 on a split-adjusted basis) shares of restricted stock were awarded to each director, comprising one-half the value of the annual retainer fee. The shares were granted assuming a market value of $82.61 ($41.305 on a split-adjusted basis) per share, which was the preceding twenty-day average of closing prices of the Corporation's Common Stock on the NYSE on May 8, 2007.
As of year-end 2007, the total outstanding shares of restricted stock on an adjusted basis reflecting the subsequent 2:1 split on January 2, 2008, by director, was:
THEODORE M. SOLSO – Chairman of the Board and Chief Executive Officer, Cummins Inc. Director since 1994; Age—64 Mr. Solso was elected our Chairman of the Board and Chief Executive Officer in 2000 after serving as our President from 1995 to 2000, Chief Operating Officer from 1994 to 1995 and Executive Vice President—Operations from 1992 to 1994. From 1988 to 1992, he was our Vice President and General Manager—Engine Business after serving in various other executive positions with us. He has been a director of Ball Corp., Inc. since 2003 and Ashland Inc. since 1999. He also was a director of Irwin Financial Corporation from 1993 through 2006. Mr. Solso is a director of the American Transportation Research Institute, a member of the Business Roundtable and the Indiana Academy, and is a Principal of the American Energy Innovation Council. In addition, Mr. Solso is the U.S. Chairman of the U.S.- Brazil CEO Forum and serves on the Board of the Initiative of Global Development, Earth University and the Earth University Foundation. In 2011, Mr. Solso was appointed by President Barack Obama to the President's Management Advisory Board. We believe that Mr. Solso is well qualified to be a director of our company because of his experience in our industry and in leadership positions with our company. |
Director since 2009; Age—48 Mr. Linebarger became our President and Chief Operating Officer in August 2008 after serving as Executive Vice President and President, Power Generation Business from 2003 to 2008 and as Vice President, Chief Financial Officer from 2000 to 2003. From 1998 to 2000 he was our Vice-President, Supply Chain Management after holding various other positions with us. Mr. Linebarger received a B.S. from Stanford University and a B.A. from Claremont McKenna College in 1986 and M.S. and M.B.A. degrees from Stanford in 1993. He has been a director of Harley-Davidson, Inc. since 2008 and also served as a director of Pactiv Corporation from 2005 to 2010. We believe that Mr. Linebarger is well qualified to be a director of our company because of his experience in various senior management positions with our company and his familiarity with our company and our industry. | ||
WILLIAM I. MILLER – Chairman and CEO of Irwin Management Company Director since 1989; Age—54 Will Miller is the Chairman of Irwin Management Company, a Columbus, Indiana private investment firm. From 1990 to 2009, he was Chairman and CEO of Irwin Financial Corporation, a diversified financial services company. On September 18, 2009, Irwin Financial Corporation filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code before the United States Bankruptcy Court for the Southern District of Indiana. Mr. Miller is also Chairman of the Board of Tipton Lakes Company (a real estate development firm). Mr. Miller is a director or trustee of the New Perspective Fund, Inc., the New World Fund, Inc. and EuroPacific Growth Fund (all three are in the same mutual fund family). Mr. Miller also is a Trustee of Yale University and The John D. and Catherine T. MacArthur Foundation. We believe that Mr. Miller is well qualified to be a director of our company because of his leadership experience, his experience in business and financial matters, and his 20 years of service as a director of our company. |
Director since 2001; Age—63 Ms. Herman serves as Chair and Chief Executive Officer of New Ventures LLC, a corporate consulting company, and has held these positions since 2001. She serves as Chair of the Business Advisory Board of Sodexho, Inc., an integrated food and facilities management services company, and as Chair of Toyota Motor Corporation's North American Diversity Advisory Board. From 1997 to 2001, she served as U.S. Secretary of Labor. She has also been a director of The Coca Cola Company since 2007, Entergy Corporation since 2003, and MGM Mirage since 2002. Her non-profit board affiliations include Trustee of the National Urban League and George Meany National Labor College. In addition, Ms. Herman is a member of the board of directors of the Clinton Bush Haiti Fund. We believe that Ms. Herman is well qualified to be a director of our company and our Lead Director because of her experience as the U.S. Secretary of Labor and her other experiences in leadership positions in the private and public sectors. | ||
GEORGIA R. NELSON – President and CEO of PTI Resources, LLC Director since 2004; Age—61 Ms. Nelson became President and CEO of PTI Resources, LLC, an independent consulting firm, in 2005. Prior to this role, Ms. Nelson retired in 2005 from Edison International, where she had been President of Midwest Generation EME, LLC since 1999 and General Manager of Edison Mission Energy Americas since 2002. Her business responsibilities have included management of regulated and unregulated power operations and a large energy trading subsidiary as well as the construction and operation of power generation projects worldwide. She has had extensive experience in international business negotiations, environmental policy matters and human resources. She has served as a director of Ball Corp., Inc. since 2006, Nicor Inc. since 2005, and CH2M Hill since May 2010. She was a director of Tower Automotive from 2001 to 2007. She has been a member of the Executive Committee of the National Coal Council since 2000 and served as Chairman from 2006-2008. She serves on the advisory committee of the Center for Executive Women at Northwestern University. Ms. Nelson is also a frequent lecturer at Northwestern University's Kellogg Graduate School of Management on topics related to sustainability, energy policy, leadership and corporate governance. We believe that Ms. Nelson is well qualified to be a director of our company because of her leadership roles in the power generation business and her experience in general operations, human resources and environmental and technical matters. |
Director since 2004; Age—67 Mr. Ware retired from The Coca-Cola Company in 2003 as Executive Vice President, Public Affairs and Administration following a 28-year career holding positions of increasing responsibility. From 1993 to 2000, Mr. Ware served as President and Chief Operating Officer of Coke's Africa Group. He was elected to the Atlanta City Council in 1973 and served as President of the City Council until 1979. From 1970 to 1973, he served the Atlanta Housing Authority as Director of Family and Community Services and Deputy Director of Urban Redevelopment. He has served as a director of Chevron Corporation since 2001 and also serves as a director of Coca-Cola Bottling Co. Consolidated, PGA Tour Golf Course Properties, and the Atlanta Falcons. We believe that Mr. Ware is well qualified to be a director of our company because of his experience in leadership roles in publicly traded companies and the public sector and his international business experience. | ||
ROBERT K. HERDMAN – Managing Director of Kalorama Partners LLC Director since 2008; Age—62 Mr. Herdman has been Managing Director of Kalorama Partners LLC, a Washington, D.C. consulting firm specializing in providing advice regarding corporate governance, risk assessment, crisis management and related matters since 2004. He was the Chief Accountant of the SEC from October 2001 to November 2002 prior to joining Kalorama. Prior to joining the SEC, he was Ernst & Young's Vice Chairman of Professional Practice for its Assurance and Advisory Business Services (AABS) practice in the Americas and the Global Director of AABS Professional Practice for Ernst & Young International. He has been a member of the Board of Directors and currently chairs the Audit Committee of HSBC Finance Corporation (formerly Household International, Inc.) since 2004, of HSBC North America Holdings, Inc. since 2005 and of HSBC US, Inc. since 2010. Mr. Herdman also served as a director of Westwood One, Inc. from 2005 to 2006. We believe that Mr. Herdman is well qualified to be a director of our company because of his background as the Chief Accountant of the SEC and his professional experiences and accomplishments. |
Director since 2008; Age—58 Mr. Bernhard has been Vice President for Research and Professor in the Department of Aerospace and Mechanical Engineering at the University of Notre Dame since 2007. Prior to that, he was Associate Vice President for Research at Purdue University from 2004 to 2007. He also held Assistant, Associate and full Professor positions at Purdue University, where he remains an Adjunct Professor. He was Director of the Ray W. Herrick Laboratories at Purdue's School of Mechanical Engineering from 1994 to 2005. Mr. Bernhard is also a Professional Engineer and earned a B.S.M.E. and Ph.D., E.M. from Iowa State University in 1973 and 1982, and an M.S.M.E. from the University of Maryland in 1976. He is currently Secretary General of the International Institute of Noise Control Engineering (I-INCE), and is also a member of the Board of Directors of the INCE Foundation. We believe that Mr. Bernhard is well qualified to be a director of our company because of his experience and expertise as a mechanical engineer, teacher and researcher in the field of mechanical engineering, which is integral to our industry, and his international experience with technology and research. |
Director since 2009; Age—61 Dr. Chang-Diaz is Chairman and CEO of Ad Astra Rocket Company, a U.S. spaceflight engineering company based in Houston, Texas and dedicated to the development of advanced plasma rocket propulsion technology. Dr. Chang-Diaz founded Ad Astra in 2005 following his retirement from NASA after a 25-year career during which he flew seven space missions and logged over 1,600 hours in space. In 1994, Dr. Chang-Diaz founded and directed NASA's Advanced Space Propulsion Laboratory at the Johnson Space Center where he managed a multicenter research team developing new plasma rocket technology. Dr. Chang-Diaz is a dual citizen of Costa Rica and the United States. As part of his involvement in Costa Rica's development, Dr. Chang-Diaz currently leads the implementation of the "Strategy for the XXI Century," a plan to transform Costa Rica into a fully developed nation by the year 2050. Dr. Chang-Diaz received the Liberty Medal in 1986 from President Ronald Reagan and is a four time recipient of NASA's Distinguished Service Medal, the agency's highest honor. Dr. Chang-Diaz also serves as an Adjunct Professor of Physics at Rice University and the University of Houston. We believe that Dr. Chang-Diaz is well qualified to be a director of our company because of his scientific accomplishments, his leadership of an engineering company, his professional and personal achievements and his knowledge of Latin America. |
Director since 2010; Age—54 Mr. Dobbs is Senior Group President over Fluor Corporation's Industrial & Infrastructure and Global Services business groups. Mr. Dobbs was previously group president of Industrial & Infrastructure, responsible for a wide diversity of the markets Fluor serves, including Infrastructure, Telecommunications, Mining, Transportation, Life Sciences, Heavy Manufacturing, Advanced Technology, Microelectronics, Commercial, Institutional, Health Care, Water, and Alternative Power. Mr. Dobbs has served Fluor since 1980 in numerous U.S. and international locations including Southern Africa, Europe and China. He is recognized for his work on project finance in Europe and the United States, particularly public private partnerships and private finance initiatives. He has served as an advisor on these issues to the Ministry of Finance of the Netherlands. Dobbs earned his doctorate in engineering from Texas A&M University and holds an undergraduate degree in nuclear engineering, also from Texas A&M. He serves on the World Economic Forum's Global Agenda Council on Geopolitical Risk as well as the Governor's Business Council for the state of Texas. We believe that Mr. Dobbs is well qualified to be a director of our company because of his experience in leadership roles at Fluor, his technical background and his international business experience. |
(3) These amounts represent "Above Market" earnings in the Deferred Compensation Plan, as described above. "Above-market" is defined as the amount of earnings that exceeded 120% of the applicable federal long-term rate published by the U.S. Internal Revenue Service.
(4) Dr. John Deutch, who is not standing for re-election, served as Chairman of the Technology and Environment Committee. In this capacity he spent at least one day per quarter with the Company's senior technical managers to exercise Board oversight and collaborate with them on the Company's technical research, development and application strategies. He also served as Chairman of the Company's Science and Technology Advisory Council, consisting of distinguished academic, research and other members of the scientific community, who regularly advise senior executive management and the full Board on the direction and implications of developments in science, technology and environmental issues that may have applicability to the Company's current and future business goals and objectives. For these services, as Chairman of the Technology and Environment Committee, Mr. Deutch was paid $66,500 during 2007, consisting of $30,000 for such technical oversight and collaboration and $36,500 for his services on the Council.
In addition, premiums totaling $44,640 were paid on life insurance policies in connection with Mr. Deutch's participation in the Cummins Inc. Charitable Bequest Program, as described above. Policies for all other non-employee directors who participate in the program are fully paid and, therefore, no premiums were payable in 2007.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
Our Compensation Discussion and Analysis, or CD&A, provides detailed information about compensation programs for our Chairman and Chief Executive Officer, our President and Chief Operating Officer, our Vice President and President—Engine Business, our Vice President and President—Distribution Business and our Vice President and Chief Financial Officer, whom we refer to as our "Named Executive Officers."
The sections of this CD&A that immediately follow focus principally on the 2010 compensation matters. Thereafter we have included a separate section of this CD&A that focuses on key decisions and changes made with respect to 2011 and subsequent period compensation matters.
We have designed our executive compensation programs to support our overall performance goals. Our compensation programs are based on the principle of pay for performance.
The Compensation Committee reviews our executive compensation programs on a regular basis, and has structured executive compensation programs to consist of three principal elements: base salary, annual bonus and longer-term compensation. We also provide to our officers, as part of a competitive compensation package, limited post-employment benefits and perquisites, and we have implemented mandatory stock ownership requirements to further align the interests of our officers with the interests of our shareholders. We generally target all of our base compensation elements at the median level of a large group of U.S. manufacturing companies.
Objectives and Principles of Cumminsour Executive Compensation Program
The Company'sWe have designed our executive compensation program is designed to attract, motivate and retain people with the skills required to achieve the Company'sour performance goals in thea competitive global business environment. TheOur intention is for the program is designed to reflect theeach individual's relative contribution and theto performance, of the Company, while striking an appropriate balance between short-term and longer-term corporate performance.
The Company is committed to the concept of pay for sustained performance. The Company evaluates performance over several periods of time. While the specific elements of executive compensation vary from time to time, the program focusesour executive compensation program's overriding focus is on this centralthe principle of pay for performance, both in program design and in the specific awards.
In addition, to pay for performance the Companywe and the Compensation Committee of theour Board of Directors (the "Compensation Committee" or "Committee") consider the following principles when designing and implementing compensation programs for the Company'sour officers:
Executive Compensation Decisions in Response to the 2009 and 2010 Economic Situation
As a result of the impact of the recessionary economic environment that started in late 2008, we took several actions that directly affected our executives and directors, including implementing a 10% base salary reduction for 2009 affecting all of our officers, including our Named Executive Officers. In addition, all non-employee directors agreed to waive 10% of the cash portion of their base director retainer fee for 2009. This reduction took effect in May 2009 when directors received their annual retainer fees. As economic conditions began to improve in early 2010, we reinstated pre-2009 salary levels for our officers, together with merit-based increases, and we reinstated the pre-2009 cash retainer amount for our non-employee directors.
Achieving the Performance-Based Principle
Our program strongly supports pay for performance. The more senior the position, the more pay should be "at risk", dependent on Company performance.
To illustrate how theour executive compensation program achieves thesethe objectives followingdescribed above, set forth below are the percentages for each of the three elements that make up the target total direct compensation opportunity (excluding benefits and perquisites) provided to the CEOour Chief Executive Officer and theour other Named Executive Officers as a group in 2007 (excluding2010.
| | At Risk Based on Performance: | ||||
---|---|---|---|---|---|---|
| Base Salary | Target Annual Bonus | Target Longer-Term Grants | |||
T. M. Solso | 16% | 21% | 63% | |||
Other Named Executive Officers as a Group | 27% – 35% | 18% – 25% | 44% – 55% |
Our executive compensation aligned well with the objectives of our programs and our corporate performance in 2010, driven by these factors:
The following graphs show the strong direct relationship between our corporate financial performance and our executive compensation levels by comparing the relationship over the past five years of our (i) total shareholder return (on a dividend reinvested basis), or TSR; (ii) return on average net assets, or ROANA; (iii) return on equity, or ROE; and (iv) average annual total compensation for our Named Executive Officers, or Avg TC:
Link Between Financial Performance and Executive Compensation
Other Highlights of Our Executive Compensation Programs
We continually review best practices in the area of executive compensation and have revised our compensation policies and practices in recent years to:
Our executive compensation arrangements have also long included other elements considered best practices, such as the following:
| Base Salary | Target Annual Bonus | Target Longer term Grants | |||
---|---|---|---|---|---|---|
T. M. Solso | 17.2% | 17.2% | 65.6% | |||
Other Named Executive Officers | 23.7% – 31.0% | 17.0% – 18.6% | 50.4% – 58.4% |
Overview of How our Executive Compensation is Determined
Senior Management (the management Our Compensation Committee regularly reviews all elements of our executive compensation program and makes changes it deems appropriate from time to time. These reviews include general comparisons against market data and analysis prepared by the Compensation Committee's executive compensation consultant, Meridian, including the following market practices:
(including members of The Compensation Committee has the Executive Committee). These recommendationsflexibility to establish performance measures annually that are based on assessments of individual performance and potential to assume greater responsibility, as well as market dataappropriate for each position.our financial goals. The CEO discussesCompensation Committee periodically benchmarks the recommendations andannual operating plan targets against the performance of other similar companies. The Compensation Committee may also determine to exclude the officers witheffects of certain operating performance measures which result from decisions made at the Committee. As part of its review process, the Committee has access to input of an independent consultant, Hewitt Associates, retained by the Committee (the role of the independent consultant is described in more detailcorporate level, such as acquisitions, divestitures, or joint venture formations in the "Corporate Governance" sectioninitial year, if such events were not anticipated at the time targets were established, pension plan contributions above required levels, and convertible debt. Certain corporate expense allocations may also be excluded from the individual operating segment performance calculations. No adjustments were made for such events in determining 2010 executive compensation amounts.
Determination of this proxy). The Committee reviews the recommendations, may make modifications, and makes the final decisions regarding each officer's compensation.Our Chief Executive Officer's Compensation
The CEO, onOn an annual basis, our Chief Executive Officer discusses in detail his priorities and objectives with theour Governance and Nominating Committee (the members and responsibilities of the Governance and Nominating Committee are described beginning on page 6 of this Proxy Statement).Committee. The Governance and Nominating Committee formally reviews the CEO'sour Chief Executive Officer's performance annually. This review is based on how well the CEO performedour Chief Executive Officer's performance against specific objectives, which includesinclude the progress made by the Companyour company in implementing its business strategy and achieving its business objectives, both short-term and long-term. This review, which is reported in detail to the Compensation Committee, considers both quantitative and qualitative performance matters and is a key factor that the Compensation Committee uses in setting our Chief Executive Officer's compensation for the CEO's compensation.coming year. Specific business objectives and goals that were part of the CEO'sour Chief Executive Officer's performance review for 2007 include2010 included the financial performance of the Company,our company, progress towards achieving the Company'sour company's long-term strategic objectives and the development of key leadership talent.
The Compensation Committee meets in executive session to determine the compensation of the CEO.our Chief Executive Officer. In this discussion, the Compensation Committee has access to data and advice from its Consultant.consultant. No recommendations are made by any members of management regarding the compensation of our Chief Executive Officer. The Compensation Committee Chair presents its decisions to the CEO.Governance and Nominating Committee for its information.
Role of Our Officers in Setting Pay for Other Officers
Members of our senior management, including our Named Executive Officers, recommend compensation actions to our Chief Executive Officer for officers in the areas for which they are responsible (but not with respect to their own compensation). Taking these recommendations into consideration, our Chief Executive Officer then makes recommendations to our Compensation Committee regarding each officer. Our senior management and our Chief Executive Officer base these recommendations on assessments of individual performance and potential to assume greater responsibility, as well as market survey data for each position. Our Chief Executive Officer discusses the recommendations and performance of the officers with the Compensation Committee. The Compensation Committee reviews our Chief Executive Officer's recommendations, may make modifications based on the market data and a discussion of individual and Company performance, and then makes the final decisions regarding the CEO's compensation.
The Committee regularly reviews alleach officer's total targeted compensation, and its respective elements, of the executive compensation program and makes changes it deems appropriate. The reviews include comparisons against a broad group of U.S. manufacturing companies prepared by the Consultant, including selected market practices, for the following:
Theits review process, the Compensation Committee has determined that if anyaccess to the advice and input of the Company's financial statements are required to be materially restated resulting from the fraudulent actions of an officer, the Committee may direct that the Company recover all or a portion of an Award or any past or futureits independent compensation from any such officer with respect to any fiscal year of the Company for which the Company's financial results are adversely affected by such restatement.consultant, Meridian.
Tax Considerations
Section 162(m) of the Internal Revenue Code ("Section 162(m)") limits the corporate tax deduction to one$1 million dollars for compensation paid annually to any one of theour Named Executive Officers (other than our Chief Financial Officer), unless the compensation meets certain requirements. The Committee adopted changes to the compensation program, approved by shareholders in 1995,We believe that qualify payments under theour Senior Executive Bonus Plan and Senior Executive Longer-Term Performance Plan qualify for tax deductibility under Section 162(m). Payments, although grants of stock options under the Senior Executive Bonusour 2003 Stock Incentive Plan and the Senior Executive Longer-Term Performance Plan (formerly named the "Senior Executive Medium Term Performance Plan") each year are certified by the Committee and the Committee's discretion to adjust the plans' payouts upward is eliminated.
Therefore, that portion of the CEO's Base Salary that exceeded one million dollars in 2007 willdo not qualify for tax deductibility under Section 162(m). because they are not performance based.
As explained below, the Base Salariesbase salaries of theour Named Executive Officers are set at the median of the range of the salaries of individuals with similar positions insimilarly situated executives at companies among a broad group of major U.S. manufacturing companies where the data have been size-adjusted using statistical techniques to reflect Cumminsour relative size. The Compensation Committee has indicated that it intends to continue this policy notwithstanding the provisions of Section 162(m). As a result of the foregoing, the portion of our Chief Executive Officer's base salary that exceeded $1 million in 2010 will not qualify for tax deductibility under Section 162(m).
Compensation Program Elements
The Company'sOur executive compensation program consists of three principal elements: Base Salary, Annual Bonusbase salary, annual bonus and Longer-termlonger-term compensation. In total, theythese elements are designed to fulfill the Company'sour basic goals of linking pay to financial performance and paying competitively. All officers participate in each element of the program.program, but in varying degrees.
The CompanyIn determining compensation for 2010, we and the Compensation Committee have used survey data provided by the ConsultantAonHewitt to determine competitive levels of pay. TheThis aggregated survey information includes one hundred seventy-eightincluded 186 U.S. manufacturing corporations, andcorporations. The companies in the Company has chosen notdatabase had annual sales volumes ranging from $420 million to create a more specific compensation peer group.$265 billion, with average sales of $13 billion.
EachWe compared each of our officer positions is compared to the same job using regression analysis to calculate median levels of Base Salary, target Annual Bonus participation and Longer-term grant target value for the scope of responsibility for each of oursimilar positions among U.S. manufacturing companies in the Consultant'sAonHewitt's survey database.database using regression analysis to calculate and target median levels of base salary, targeted annual bonus participation, and targeted longer-term grant value for scope of responsibility for each position.
The one hundred seventy-eight U.S. manufacturing companies in the database cross nineteen industry classifications and have annual sales volumes ranging from $350 million to $207 billion, with average sales of $13.8 billion.
The CompanyIn determining compensation for 2010, we and the Compensation Committee believebelieved that the broader survey base of major U.S. manufacturing companies providesprovided a reasonable and more useful measure of market compensation and allows moreallowed consistent year-to-year market comparison than would a smaller peer group of companies.comparison. The survey's statistical tools calculatecalculated market compensation for the specific levels of responsibility for each position. For example, thewe use our total sales of the Company are used to calculate the market median compensation levels for officers who have overall responsibility for the Corporation;relating to our entire company, while we use the sales volume for an operating segment would be used for officers responsible for that business.
As stated earlier, the CEO makes compensation recommendations to the Committee in its February meeting for each officer, including the Named Executive Officers, excluding himself. The recommendations are based on individual performance and potential to assume greater responsibility, as well as market data for each position. The Committee makes the final compensation determinations based on the market data and a discussion of individual and Company performance. The officer compensation review occurs annually at the February Compensation Committee meeting since this is the first Committee meeting after year-end and provides the earliest opportunity to review and assess performance for the previous year.
During the February meeting, the Committee also meets in executive session to determine compensation for the CEO based on performance assessment and market data.
Each element of pay described below is intended to provide total compensation for each position at the median of the amounts companies of similar size in the survey would pay the same position.
1. Base Salary
Base Salary is reviewedWe review the base salary of our officers annually. It is the only fixed portion of the executive's compensation. Base Salary is normally set inHistorically, we targeted our officers' base salary to be at the median range of base salaries of individualssimilarly situated executives of similarly sized U.S. manufacturing companies.
The Compensation Committee considers other factors beyond market and peer group data when determining salaries. These factors include experience, tenure, potential, internal equity and performance. This may result in an individual's base salary being set above or below the median range. In certain cases where we set an officer's base salary below the median level, we may then develop a plan to ensure that the employee is at or near the median in a reasonable amount of time, usually two to three years, assuming acceptable levels of performance are met. This is currently the situation with similar positionsour Chief Financial Officer, P. J. Ward, who is below the market median due to his short tenure in this position. Other than Mr. Ward's base salary, none of the individual Named Executive Officers' base salaries differed materially from the
median range of base salaries of similarly situated executives of similarly sized U.S. manufacturing companies, of similar sizeor at our peer group.
In 2010, the only adjustment to the Company.
Individual performance, assessmentsbase salaries of each officer's capabilityour Named Executive Officers, along with all other officers, was the restoration to assume larger rolesthe levels provided prior to the 10% decrease in 2009 described above in response to economic conditions, and market data for each position are prime factors considered by the Committee each year in determining the amount of Base Salary increase, if any, to be provided.market- and merit-based increases, consistent with our Company guidelines.
2. Annual Bonus
This element is designedWe design annual bonus opportunities for our executives to link executive pay to our annual financial performance. Annual bonus payouts are equal to an executive's annual base salary, multiplied by the participation percentage of base salary assigned to the executive's position and then further multiplied by a payout factor based on our company's actual financial performance against our annual operating plan for that year. There is no discretionary element to computing annual bonuses.
For example:
$550,000 | Annual Base Salary | |
× 60% | Participation Percentage | |
× 0.8 | Payout Factor based on Company performance for the year | |
$264,000 | Annual Bonus |
Each participant's participation rate is set as a percentage of his or her annual base salary. Participation rates are based on the same survey group data as base salaries and are set at the median of the Company.range for similarly situated executives at similarly sized companies. The Payout Factorparticipation rates for 2010, expressed as a percentage of their 2010 base salary for our Named Executive Officers were:
T. M. Solso | 125 | % | ||
T. Linebarger | 90 | % | ||
P. J. Ward | 65 | % | ||
R. J. Freeland | 65 | % | ||
P. Carter | 60 | % |
The payout factor is calculated based on a formula annually approved by the Compensation Committee. Each participant is assigned a participation rate as a percent of salary. For purposes of this plan, Companythe payout factor, we measure our corporate performance is measured bybased on our annual Return On Average Net Assets, (ROANA)or ROANA. We have selected ROANA as defined by the plan.sole performance measure under our annual bonus program because we believe it appropriately balances our profitability and the management of our assets.
ROANA for compensation purposes is calculated as follows:
The numerator is Segment Earnings Before Interest and Tax, or EBIT, which for compensation purposes is defined as each respective operating segment's direct earnings before interest expense, provisions for income taxes and minoritynon-controlling interests in earnings of consolidated subsidiaries and before consideration of any corporate expense allocations. The denominator is Average Net Assets, which areis derived directly from theour consolidated balance sheet and excludeexcludes debt and related financing accounts, deferred tax amounts and certain pension and post retirement liability accounts. Average Net Assets are then allocated to the appropriate operating segment.
Payout Factorsfactors are determined using actual ROANA measuresresults compared to plan target ranges.
ranges as described below. The Annual Bonus is calculated as follows:
(Annual Bonus) equals (Annual Base Salary) times (participation percentage assigned to each job) times (Payout Factor)
For example:
Participation rates are based on the same survey data as base salaries and are set at the median of the rangepayout factor for like positions in similarly-sized companies.
The participation rates for 2007, expressed as a percentage of Base Salary paid, were:
For officers working outside theour consolidated corporate staff, 50% of their Annual Bonus is based upon the performance of their specific operating unit and 50% of the bonus is based upon the consolidated Corporate Plan. The definition ofROANA performance is equal to the same for both the operating and corporate elementsweighted average of the plans. We believe that the measure of performance needs to balance both profit and stewardship of the Company's assets. As such, we use a defined ROANA measure as described above on which to determine the payout factors in thefrom each of our four operating plans.segments.
In setting the financialannual ROANA targets for the Annual Bonus eachpurpose of determining our executives' annual bonus opportunity for that year, the Compensation Committee reviews the levels of difficulty of the annual operating plan, or AOP, for each unit,operating segment, considering the markets involved and the current economic environment. The Compensation Committee then establishes appropriate stretch targetsthe 1.0 payout factor at the ROANA amount reflected in achieving our AOP. The payout factors range from 0 to receive a 1.0 payout. The consolidated Company (Corporate) performancemaximum of 2.0 in increments of 0.1. Payouts start at 0.1 resulting from meeting 60% of AOP, while 120% of AOP is the weighted averagerequired to earn a 2.0 payout of the operating unit measures.factor. Setting the targets with appropriate levels of difficulty underscores the importance of achieving or exceeding the AOP performance commitments each operating segment establishes annually. This approach requires increasingly difficult targets during economic upturns, and realistic goals that maximize performance during cyclical downturns. The Compensation Committee periodically benchmarks these annual operating plan targets against the performance of other similar companies. As evidence of the difficulty of the targets, over the last ten years the 1.0 target level has been achieved or exceeded 50%only 40% of the time.
The Annual BonusesROANA performance targets established for T. M. Solso, F. J. Loughrey, and J. S. Blackwell wereour 2010 annual bonus plan reflected 1.0 payout factors set at achieving our 2010 AOP, as approved by our Board. For the 2010 annual bonus plan, target ROANA was based on sales and EBIT levels that would have been relatively flat when compared to 2009 levels. At the Corporate weighted average formula.time the targets were set, in February 2010, we expected lower demand for engine and component products in the U.S. to pressure our operating margins in 2010. The Annual Bonuses for T. Linebarger and J. D. Kelly were based one-half on the Corporate weighted average formula and one-half on the performance of the Power Generation Operating Segment for Mr. Linebarger and one-half on the performance of the Engine Operating Segment for Mr. Kelly.
The Payout Factortargets for the Corporate2010 annual bonus plan were established taking into consideration these factors. A 1.0 payout factor required us to perform at higher EBIT margins than we had experienced in prior downturns on relatively flat sales compared to 2009.
Based on our actual corporate performance during 2010 as measured against AOP, the payout factor for the corporate weighted average formula was 2.0. For R. J. Freeland and P. Carter, who each have responsibility for supervising the operations of one of our operating segments, 50% of their 2010 annual bonus was based upon the ROANA performance of their respective specific operating unit and 50% of their bonus was based upon the payout factor for our consolidated corporate performance. The Payout Factorpayout factor for the portion of Ms. Carter's 2010 annual bonus determined by the Distribution Business was 1.8, resulting in an overall payout factor of 1.9. The payout factor for the portion of Mr. Linebarger's Annual Bonus determined by the Power Generation Operating Segment performance was 2.0; the Payout Factor for the portion of Mr. Kelly's Annual BonusFreeland's annual bonus determined by the Engine Operating Segment performanceBusiness was 1.8.2.0, resulting in an overall payout factor of 2.0. The 2010 annual bonuses for T. M. Solso, T. Linebarger and P. J. Ward were based solely on the payout factor for our consolidated corporate performance.
The Committee has the flexibility to establish performance measures annually that are appropriate for the Company's financial goals, underscoring the principle of pay for performance. The Committee also determines certain exclusions fromPerformance varied by operating performance measures which result from decisions made at the Corporate level, such as acquisitions, divestitures, or joint venture formationssegment, resulting in the initial year if they were not anticipated at the time targets were established, pension plan contributions above required levels, and convertible debt. Certain Corporate expense allocations are also excluded from the individual operating unit performance calculations. In 2007, the ROANA calculations excluded the impact of assets and liabilities associated with corporate hedging programs, pension contributions above required levels and the impact of acquisitions or divestitures not contemplated at the time the performance measures were established.
By achieving performance approximately 16% greater than the target levels, the Payout Factor2010 payout factor for each of the Named Executive Officers variedvarying between 1.9 and 2.0.
Operating Segment | ROANA for 1.0 Payout Factor | Weightings for Calculating Corporate Bonus | |||
---|---|---|---|---|---|
Engine Business | 43.02 | % | 47.5 | % | |
Power Generation Business | 32.34 | % | 23.2 | % | |
Distribution Business | 26.71 | % | 13.5 | % | |
Components Group | 14.67 | % | 15.8 | % | |
100 | % |
Operating Segment | ROANA Target for 1.0 Payout Factor | Weightings for Calculating Corporate Bonus | |||||
---|---|---|---|---|---|---|---|
Engine Business | 28.19 | % | 36.1 | % | |||
Power Generation Business | 27.56 | % | 21.3 | % | |||
Distribution Business | 29.46 | % | 25.4 | % | |||
Components Group | 21.43 | % | 17.2 | % | |||
100 | % |
The Components Group Segmentcomponents group segment ROANA represents the weighted average performance targets for the businesses within that segment.
Performance targets established for the Annual Bonus Plan for 2008 are well within the targeted ranges for the Company, and will require one of the best years in the Company's history. These targets are appropriately difficult in light of the current uncertain U.S. economic environment and will require improved performance from prior record years.
In order to earn a 1.0 target Payout Factor for 2007, the targets set in the operating plan would have required a level of earnings before interest and taxes ("EBIT") as a percentage of Sales greater than achieved in nine out of the last ten years of the Company's performance, while prudently managing the Company's assets (EBIT is the numerator in calculating the ROANA performance measure). The Payout Factors are capped at 2.0. Performance required for the maximum payouts in 2007 represent levels that significantly exceed the target levels, 16% greater than the 1.0 level cumulatively. The threshold payout of .1 (10% of the Target Payout) would have required performance that was 56% of the 1.0 level.
In addition to the financial measures used to determine the Payout Factor,payout factor, minimum levels of consolidated corporate performance, called Performance Hurdles"performance hurdles," are required, ensuring that certain cash flow and other commitments are met. Regardlessmet as a condition to annual bonus payouts being made regardless of our ROANA performance. For 2010, the financial performance with respect to the operating measures described above, the Performance Hurdles must be achieved in order for any Annual Bonus to be paid. For 2007, the Performance Hurdles requiredhurdles were: (1) that the Corporation's Net Income,our net income, including the
bonus payout expense, must be greater than zero; that the Corporation's Free Cash Flow, defined as cash flow from operations less capital, software and joint venture investments, must be equal to or greater than the Corporation's projected dividend payments; and(2) that all payouts were subject to reviewbe reviewed by the Corporation'sour Chief Financial Officer to ensureconfirm that such payments willwould not cause any company metric to be less than the credit metrics required for an investment grade credit rating or constitute a violation of any applicable loan covenants or other financial restrictions in existence. The Performance Hurdle is the same for 2008.
In order to comply with the requirements of Section 162(m), designated officers (the Chief Executive Officer and six other senior officers in 2007) are compensated under a modified version of the Annual Bonus Plan called the Senior Executive Bonus Plan. The Senior Executive Bonus Plan differs from the Annual Bonus Plan in that the Compensation Committee has no discretion to increase the payouts once it establishes the performance measures each year. All of the Named Executive Officers participate in this plan.
3. Longer-Term Compensation
The Company's Longer-termOur longer-term compensation program consists of performance cash awards and stock based grants.
For our stock-based grants. Theawards, the Compensation Committee believes that the combination of performance shares and stock options provides an equal payout opportunityappropriate balance in how we pay for longer-term performance, recognizing that performance shares provide value to participants for achieving financial targets, even if our stock price declines from each typethe grant date, while stock options have value only if our stock price increases after the grant date and promote a longer-term focus on stock price growth—potentially up to their full 10-year term. The Compensation Committee believes that a blended approach of awardgranting both performance shares and stock options balances pay for performance, provides appropriate incentives for participants, and strengthens the linkage of the interests of our Named Executive Officers with the interests of our shareholders.
In 2010, our longer-term grants were divided equally in target value between cash awards and stock-based grants with the target value of our stock-based grants also equally divided between performance shares and stock options.
Longer-Term Grant Methodology
In determining the appropriate grant sizes, the Compensation Committee uses a valuation methodology developed by its consultant to compare the targeted value of the grants to the market. This method calculates a market-based economic value for the targeted amount of the annual grants of performance cash, performance shares and stock options. A six-month average price of our stock is used in determining the number of performance shares for market comparisons. We believe the six-month average is most appropriate as it eliminates any unforeseen gains or losses in value associated with a temporary stock price spike or drop. The number of stock options are determined using the Black-Scholes model. In 2010, the projected value of the longer-term grants was evenly divided between cash and grantsstock awards. Under our valuation model for the stock options, the ratio of stock options to performance shares awarded in 2010 was approximately 1.9:1.
Grant amounts under the longer-term plan have been made accordingly.set to provide an "at target" total longer-term compensation opportunity at the median of the comparable level of longer-term incentive compensation provided by similarly sized U.S. manufacturing companies for similar positions and scope. The Compensation Committee reviews the proportion of total longer-term compensation that is dependent on our financial performance in determining the allocation of the compensation opportunity among each of the elements for each position. More senior positions have a larger proportion of total longer-term compensation opportunity dependent on our performance than do less senior positions.
Return on Equity, or ROE, as described below, has been the measure on which performance cash and performance shares are earned because we believe that it provides a meaningful measure of profitability relative to our shareholders' stake over the performance period, because it is a more meaningful measure of actions under the control of management than stock price, and because historical data have indicated a strong, positive correlation between our ROE and our stock price growth.
We believe that our grants of performance shares forge a strong linkage of interests between our management and our shareholders since the value participants actually receive is determined by both our financial performance relative to our pre-established financial goal, as well as our stock price.
Performance Cash Awards
Performance cash awards are granted as Target Awardstarget awards expressed as a dollar amount for each participant. Multiples of the Target Award aretarget award may be earned, and paid in cash, ranging from zero to two times the Target Award,target award, based on how well the Company achieveswe achieve or exceed performance measures established by the Compensation Committee over a specified measurement period. Performance cash awards are granted under the Longer-Term Performance Plan and the Senior Executive Longer-Term Performance Plan.
Annually, the Compensation Committee makes Target Awardsgrants target awards to be earned based on Companyour performance over a period of time called the "Award Cycle"."award cycle." Since 2003, the Award Cyclesaward cycles have been overlapping two-year periods, and the performance measure determining the actual payouts has been our consolidated and reported Returnreturn on Equity (ROE). These Target Awards are expressed as a dollar amount, each reflecting one year of grant value.equity, or ROE.
The Target Awardtarget amounts of the performance cash award will be paid in cash if we achieve target ROE for the Company achievesaward cycle. Target ROE for the levelaward cycle is the average of Return on Equity provided by achieving a target setthe ROE for the two-year award cycle period based on (a) the Company's Annual Operating Plan(1) our AOP for the first year and (b)(2) an
agreed target level for the second year of the Award Cycle, measured cumulatively for the two-year period.award cycle.
The ROE for each Award Cycleaward cycle is calculated as the cumulative Net Incomenet income for the two-year period divided by the Average Equityaverage equity for the two-year period, divided by two. The Average Equityaverage equity for the two-year award cycles is calculated using nine points: the beginning of the first year of the Award Cycleaward cycle and each of the eight quarter-endingquarter ending values. The numerator is Profitprofit after Tax (PAT)tax, or PAT, for the two-year period. The equity calculation is adjusted for changes to equity related to unrecognized Pensionpension and Other Post Employment Benefit (OPEB)other post employment benefit, or OPEB, amounts and equity transactions not built into the Operating Planoperating plan such as Common Stock share repurchases. The Compensation Committee has the discretion to adjust the payouts downward, but not upward, once it establishes the performance measures each year.
The overall degree of difficulty for achieving the 2010 Annual Operating Plan (AOP) was discussed as part of the Compensation Committee's annual bonus discussion. The Compensation Committee considered the performance of other industrial companies, including those in the Annual Bonus discussion.our peer group, in setting these targets. As an indication of the difficulty of the awards cycle targets, the Payout Factorspayout factors have averaged .7850.91 over the last ten years.15 years, and have met or exceeded the 1.0 target less than 50% of the time.
The table below summarizes the ROE targets and performance cash payouts made in 2007 were for the 2005 - 2006 Award Cycle. Aaward cycles from 2008–2009 through 2010–2011.
Award Cycle (Performance Period) | ROE Target for 1.0 Payout | Actual ROE Achieved | Payout Factor | |||||||
---|---|---|---|---|---|---|---|---|---|---|
2008–2009 | 20.83 | % | 14.69 | % | 0.3 | |||||
2009–2010 | 15.38 | % | 16.05 | % | 1.2 | |||||
2010–2011 | 11.69 | % | ROE calculated at the end of the performance period for payout in 2012 | TBD |
For all award cycles, 2.0 Payout Factor for that Award Cycle requiredpayout factor requires performance equal to 139%120% of the target performance level. The Target Award was set at 18% ROE. Actual performance for 2005 - 2006 was 26.0% ROE.This is the maximum payout achievable.
For the 2007 - 2008 Award Cycle, withThe threshold payout in 2009, the Target Award requires an ROE of 17.87% for the two-year period, reflecting the impact of U.S. emissions regulations changes in 2007. The maximum that can be paid is 200%10% of the Target Award for performance that represents significant improvement above the 1.0 target level;award requires performance equal to 130%60% of the target performance level would be required forresulting in a 2.0 Payout Factor.0.1 payout factor.
Stock and Option Awards
The Threshold Payout is 10%target grant value of the Target Award; performance equal to 70% of the target performance level would be required for a .1 Payout Factor.
As is the case with respect to the Annual Bonus Plan, the CEO and six other senior officersstock-based grants made in 2007 are compensated under a modified version of the Longer-Term Performance Plan, called the Senior Executive Longer-Term Performance Plan. The plans are identical except that the Committee's discretion to adjust payments upward is eliminated in the Senior Executive Longer-Term Performance Plan. All of the Named Executive Officers participate in this plan.
Stock Awards
In 2003 shareholders approved the 2003 Stock Incentive Plan. Annual grants awarded since 2004 have been2010 was comprised solely of Target Awardsequally of performance shares. Noshares and stock options have been awarded to any of the Named Executive Officers since 2003.options.
The Target Awardtarget award of performance shares granted to each participant in 2007 for the 2007 - 2008 Award Cycle is expressed as a number of shares of the Corporation'sour Common Stock. A percentage of the Target Awardtarget award number of shares willmay be earned, ranging from zero to 200% of the Target Award,, based on the same Return on EquityROE performance measures over the awards cycle and, therefore, the same payout factor as theour performance cash grants previously discussed. Anyawards. However, any performance shares from our 2010
grant that are earned willafter the two-year awards cycle remain restricted for one additional year, until March 2010. Theyear. Any earned performance shares wouldfrom our 2010 grant will be forfeited if the participant ceasedceases to be an employee of the Company during the restriction period, unless an exception wereis approved by the Compensation Committee. Such exceptions are rarely made, except in the instance of retirement.
Officers are prohibited from engaging in forms of hedging or monetization transactions involving the establishment of a short position in the Company's securities, such as zero-cost collars and forward sale contracts.
Longer-term Grant Methodology
Longer-term grants have been made at the February meetings since 1997. The practice has been to make compensation decisions at the earliest Compensation Committee meeting after the endWe granted non-qualified stock options representing approximately half of the year,target value of stock based on assessments of each officer's performance and abilitygrants with an exercise price per share equal to assume additional responsibility, and a review of market data for each position.
When stock options were components of the Longer-term grants (prior to 2004), they were priced as the average of the Highhigh and Lowlow trading priceprices of a share of our Common Stock on the grant date. The stock options vest and become exercisable with respect to all of the Company's stockunderlying shares of our Common Stock on the datesecond anniversary of the Committee made the grants at their February meeting. The regular annual grant date, removed any subjectivity regardingor upon the current market price ofrecipient's earlier retirement, death or disability, so long as the Company's stock during the period when stock options were part of the grants.
In determining the appropriate market levels for Longer-term grants, the Company usesrecipient is continuously employed by us or a valuation methodology developed by the Consultant to compare the value of the grants to the market. This method calculates a present value for the performance cash and performance shares. A six-month average price of the Company's stock is used in calculating the present value of the performance shares for market comparisons. The projected value of the Longer-term grants is evenly divided between performance cash and performance shares, each providing one-half.
Grant amounts under the Longer-term plan elements have been set to provide "at target" total compensation opportunity at the median of that provided by similarly-sized U.S. manufacturing companies in the survey base for similar positions and scope. The Committee reviews the proportion of total compensation that is dependent on Company performance in determining the allocation of the compensation opportunity among each of the elements for each position. More senior positions have a larger proportion of total compensation opportunity dependent on Company performance than do less senior positions.
ROE has been the measure on which Longer-term grants are earned because we believe that it provides a measure of profitability relative to the shareholder's stake in the Company over the performance period, and historical data have indicated a strong, positive correlation between ROE and Stock Price growth at the Company.
We believe that the performance shares forge a strong linkage of interests between management and shareholders since the value participants actually receive is determined by both performance relative to the pre-established financial goal, as well as our stock price. We believe that a two-year performance measurement period provides the ability to set targets that are focused and more accurately planned than could be done for longer timeframes. Furthermore, the additional year of restriction for earned performance shares beyond the two-year performance period provides a longer retention time-frame for the participants, and ensures continued focus on stock price growth for that period.subsidiary until such date or event.
Stock Ownership Requirements
The Compensation Committee believes that the Company'sour officers should own significant amounts of the Company's stock.our stock in order to further link their economic interests to those of our shareholders. To underscore this, we have adopted formal stock ownership guidelines requiring our officers to own the Company'ssuch number of shares of our Common Stock with their shares'having a total value equal to the following multiples of their respective base salary as follows: CEO,salary: Chief Executive Officer, five times base salary; other designated officers (including all of the Named Executive Officers other than the CEO)Chief Executive Officer), three times base salary; all other officers, one times base salary.
TheBecause our stock value may vary, these ownership requirements are expressed as a set number of shares for defined bands of salary. The numbers of shares required are reviewed periodicallyannually and established by the Compensation Committee based on the average market price of the Company'sour stock over a three-year period.
Officers have five years from the date of their initial appointments to meet their requirement. An officer whose salary increases to the level of a new salary band (and higher stock ownership requirement) will have three years from the date of such increase to achieve the new higher level. Officers may not sell any of our shares until they reach their stock ownership guideline, and then they may only sell our shares to the extent they would not drop below their ownership threshold.
All of theour Named Executive Officers have metare in compliance with their stock ownership requirement or still have time to meet their ownership requirement.
WeAs described under "Director Compensation," we have also adopted formal stock ownership guidelines for non-employee members of our Board.
Officers and directors are prohibited from engaging in forms of hedging or monetization transactions involving the Boardestablishment of Directors, requiring Cummins stock ownership equal to three times the amount of their annual retainer fee.a short position in our securities, such as zero-cost collars and forward sale contracts.
Benefits and Perquisites
The Company'sOur officers, including our Named Executive Officers, participate in the full range of health, welfare and retirement benefits and are covered by the same plans as other exempt employees. The Company targets itsWe target our total benefit package to be at the median of the market for U.S. manufacturingour survey group of companies.
In addition to these benefits, the Company'sour officers, including our Named Executive Officers, participate in theour Supplemental Life Insurance and Deferred Income Program. TheThis program is provided to attract and retain key leadership talent in senior positions. This program provides additional life insurance equal to three times base salary while the officer is an active employee, and additional retirement payments, which are offset by and coordinate with payments from the Company'sour regular retirement plans. The supplemental retirement provision "tops up" the pension available from the Company'sour regular pension plans to provide a total benefit based on a percentage of the officer's highest average consecutive sixty-month60 month (five years) Base Salary base salary
and Annual Bonusannual bonus received during the last ten10 years of employment. The total replacement formula is 2% for each of the first twenty20 years and 1% for each of the next ten10 years, with a maximum 50% total after thirty30 years of service. The two highest compensated two Named Executive Officers (Messrs. Solso and Loughrey)Linebarger) receive an additional benefit, exceeding the benefit for other participants by 10%. For some officers who joined the Company mid-career, including Ms. Blackwell among the Named Executive Officers, retirement benefits under this program are accumulated at an accelerated rate: 4% for each of the first ten years, 2% for each of the next five years, with a maximum 50% total after fifteen years of service. Market data have indicated that this program provides competitive levels of life insurance and retirement benefits for these positions.
The Company'sOur officers, including theour Named Executive Officers, are eligible to participate in the Company'sour non-qualified Deferred Compensation Plan,deferred compensation plan, as are all exempt U.S. employees whose salaries equal or exceed $100,000. This program is designed to provide opportunities for capital accumulation on a tax-deferred basis and financial planning, and to meet competitive market practice.
Perquisites
Perquisites do not comprise a major element in our Executive Compensation Program.executive compensation program.
The Company providesWe provide support to our officers, including our Named Executive Officers for the services of a financial counselor. The financial counselor provides estate planning and tax planning advice and tax return preparation. The fee amountsfees for these services are detailed in the Summary Compensation Table. This program assists executives in making prudentSince these financial planning for their future. It permits officers the support of financial planners whocounselors are familiar with the Company'sour compensation and retirement plans, improving the accuracy of theour Named Executive Officers' financial planning and tax return preparation.preparation are enhanced, thereby providing a benefit to our company and our Named Executive Officers.
CompanyOur officers, including our Named Executive Officers, may use Companyour aircraft for reasonable personal use, following a prescribed approval process. The Compensation Committee reviews the level of usage annually. AbilityWe believe that our officers' ability to use a Companycompany plane for limited personal use saves time and provides additional security for executives.them, thereby benefiting our company. The value reportableaggregate incremental cost to the Securities and Exchange Commissionus of such personal use by our Named Executive Officers is detailed in the Summary Compensation Table.
Executive Physical Examinationsphysical examinations are available for all officers.officers, including our Named Executive Officers. The Compensation Committee considers this practice to be good corporate governance.governance and a direct benefit to our company.
2011 Executive Compensation Matters
Executive Compensation Program Changes Starting in 2011
Beginning in 2011, we made the following changes to our executive compensation programs:
1. Increased the length of the performance period for our longer-term incentive performance cash and performance shares from two years to three years to incentivize sustained corporate financial performance over a longer period. We continue to use ROE as the performance measure.
2. Increased the equity component of our longer-term incentive elements. Previously, cash and equity were split equally. The new mix of elements is performance cash (34%), performance shares (33%), and stock options (33%). This increase in equity more closely aligns our program with the interests of our shareholders. We made these changes to our longer-term incentive plan to better reflect our longer-term focus. We believed it was appropriate to change our longer-term incentive compensation plan for leaders so that their interests remain aligned with our strategy and the interests of our shareholders who want us to achieve both our short-term targets and deliver sustainable profitable growth in the long term. We believe these changes provide a good balance between rewards for achievement of our annual ROANA-based plan and our longer-term three-year ROE-based plan.
Post-Employment Compensation:2011 Peer Group
For purposes of determining various 2011 executive compensation levels for our Named Executive Officers, we compared base salaries, annual bonus targets and longer-term incentive targets against the median levels of such compensation elements at a selected peer group of 17 similarly situated companies, as well as against broad manufacturing industry survey data. Following are the companies included in our custom 2011 peer group:
Borg Warner Incorporated
Caterpillar Incorporated
Daimler AG
Danaher Corporation
Deere and Company
Donaldson Company Incorporated
Eaton Corporation
Emerson Electric Company
Grainger (W W) Incorporated
Honeywell International Incorporated
Illinois Tool Works
Ingersoll-Rand PLC
Navistar International Corporation
Paccar Incorporated
Parker-Hannifin Corporation
Textron Incorporated
Volvo AB
This 2011 peer group was selected based on industry, reputation, revenue size, investor comparisons, and competition for customers and talent.
Severance ArrangementsBenchmarking Compensation Elements for 2011
In determining compensation for 2011, we and the Compensation Committee used both survey data provided by AonHewitt, as well as selected 2011 peer group data, to determine competitive levels of pay. This aggregated survey information included 207 U.S. manufacturing corporations. The companies in the database had annual sales volumes ranging from $266 million to $156 billion, with average sales of $11 billion. The methodology used to compare each officer position was consistent with the methodology used in 2010.
In determining compensation for 2011, we and the Compensation Committee believed that using both a broader survey base of major U.S. manufacturing companies, as well as our selected 2011 peer group, provided a reasonable and useful measure of market compensation. The market compensation data reflected the specific scope, mainly revenue responsibility for each position. For example, we used our total sales to calculate the market median compensation levels for officers who have overall responsibility relating to our entire company, while we used the sales for an operating segment for officers responsible for that business.
Annual Bonus
ROANA performance targets established for our 2011 annual bonus plan reflect targets set in our 2011 AOP, as approved by our Board. For the 2011 annual bonus plan, target ROANA is based on sales and EBIT levels that are at least 20% higher than 2010 levels. The Compensation Committee considered the performance of other industrial companies, including those in our 2011 peer group, in setting these targets.
Longer-Term Compensation
Beginning with grants for 2011, the Compensation Committee decided that our longer-term grants should be equally balanced among each of the three elements of our longer-term grants. As a result, for 2011, two-thirds of the targeted value of our longer-term grants was stock based, with the remaining one-third in performance-based cash awards. Our Committee believed this reallocation for 2011 would help to further increase the linkage of the compensation of our Named Executive Officers to our share performance over time.
Historically, the performance cash and performance share elements of our longer-term compensation grants were tied to two-year performance cycles. However, beginning in 2011, our longer-term grants are being transitioned to three-year performance cycles. Our Compensation Committee made this change in order to further link our longer-term incentive compensation to a longer sustained period of our corporate performance and to further incentivize our officers to make decisions that benefit our company and its shareholders over a longer-term horizon. We believe these changes are consistent with evolving best practices, including the practices of many of our 2011 peer group companies.
For 2011, our Named Executive Officers received a transition cash award based on our two-year ROE performance in addition to their longer-term grant. This award was designed to ensure consistency of award levels during the transition from a two-year to three-year performance period.
The Company doestable below summarizes the ROE targets and performance for the 2011–2012 transition award and 2011–2013 award cycle.
Award Cycle (Performance Period) | ROE Target for 1.0 Payout | Actual ROE Achieved | Payout Factor | ||||||
---|---|---|---|---|---|---|---|---|---|
2011–2012 Transition Award | 21.65 | % | ROE calculated at the end of the performance period for payout in 2013 | TBD | |||||
2011–2013 | 21.10 | % | ROE calculated at the end of the performance period for payout in 2014 | TBD |
In 2011, the relative targeted value of our stock-based grants compared to the targeted value of our performance cash grants increased from 50% in 2010 to 66%. The stock-based grants are split 50/50 between performance shares and stock options. Our Compensation Committee believes this 50/50 split provides a balanced time horizon of from two to 10 years to realize value from our stock-based compensation.
Effective with the 2011–2013 longer-term grants of performance shares, the one-year restriction period on vested performance shares will no longer be required because the performance period is now three years.
Post-Employment Compensation and Change in Control Protections
We do not have formal severance agreements with any of theour Named Executive Officers.
All aspectsOfficers, but we have a policy of paying severance forunder certain circumstances to officers whose employment terminatesis terminated, and certain of our plans provide for other than by standard retirement are reviewed withbenefits upon certain change in control events and approved byterminations of employment, each as described in detail under "Payments Upon a Qualified Termination Following a Change in Control." The Compensation Committee believes the Committee.
The Committee has establishedchange in control and termination benefits that any of thewe provide our Named Executive Officers if terminatedare consistent with the Compensation Committee's overall objectives and are similar to benefits offered to executives of comparable companies. The purposes of these benefits are to permit our key executives to concentrate on taking actions that are in the best interests of our shareholders without regard to whether such action may ultimately have an adverse impact on their job security and to enable them to give objective advice on any potential change in control of our company without undue concern regarding its potential impact on their personal financial security and
future. The Compensation Committee selected the triggering events for change in control and termination benefits to our Named Executive Officers based on its judgment that these events would likely result in the job security distractions and retention concerns described above.
Our change in control compensation protection plans require the occurrence of two events to trigger payments: (1) a "change in control", and (2) termination without "cause" by the company or termination by the officer for "good reason" within two years of the change in control.
Upon the occurrence of both triggering events, certain benefits would be provided to all of our Named Executive Officers plus five other than for Cause,senior officers, including a severance payment equal to three years' base salary plus three annual bonus payments calculated at a 1.0 payout factor. We would receive twelve months Base Salary as severance, paid as salary continuation; pro-rated portion of Annual Bonusalso provide for the portionfull vesting of certain insurance and retirement benefits and the continuation for the three-year severance period of certain other benefits.
In addition to the severance provisions of our executive retention plan, there are provisions within our longer-term compensation plans that provide payment of outstanding awards in the event of a change in control, without requiring constructive termination of the year prior to termination, payable atofficer.
Because of the normal timeapplication of the "golden parachute" excise tax provisions of Internal Revenue Code Sections 280G and using4999, we have, under our long-standing executive retention plan, provided our Named Executive Officers with a gross-up payment if necessary so that the executive will receive the same payout factorseconomic terms as for all other participants; vestingif there were no excise tax. The effects of any outstanding restricted stock, ifSections 280G and 4999 generally are unpredictable and can have different impacts on the vesting date occurs duringexecutive based on his or her personal compensation history. To provide an equal and predictable level of benefits across individuals, the periodCompensation Committee has determined it is appropriate and consistent with competitive pay packages to pay the cost of severance. All of these elements would require a signed Release of Claims Agreement.the excise tax plus an amount needed to pay income taxes due on such additional payment.
Confidentiality and Non-Compete Agreements
Each officer, including each of our Named Executive Officers, has signed an Agreement neitheragreement not to disclose the Company's Confidential Information norour confidential information or to accept employment with certain competitors during, and for twelve12 months subsequent to, the time the officer is employed by the Company.us.
Change in Control Compensation Protection Provisions
The Company's Change in Control Compensation Protection Plans require the occurrence of two events to trigger payments: (1) a Change in Control of the Corporation, and (2) termination or reduction in responsibilities and circumstances of the officer within two years of the Change in Control.
In the event of a Change in Control, certain benefits would be provided to officers whose employment is terminated, or whose responsibilities and position are reduced, within two years of the event. Such officers would receive severance equal to one year's salary and Annual Bonus at a 1.0 Payout Factor. The Company would also provide for the full vesting of certain insurance and retirement benefits and the continuation for the one-year severance period of certain other employee benefits.
All of the Named Executive Officers (the five officers listed in the compensation tables in this proxy) plus five other senior officers are Designated Officers under the Change in Control Compensation Plan. As such, they would receive severance and benefit continuation equal to three years' salary and Annual Bonus at a 1.0 Payout Factor, rather than for the one year described above for all other officers.
In addition to the severance provisions of the Change in Control Compensation Protection Plans, there are provisions within the Longer-term compensation plans that provide payment of outstanding awards in the event of a Change in Control, without requiring constructive termination of the officer.
The Senior Executive Longer-Term Performance Plan would provide immediate pro-rated payouts for all grants outstanding. The amount would be calculated as (Target Dollar Award) × (1.0 Payout Factor) × (Pro-Rata Factor). The Pro-Rata Factor would be calculated as the percentage of the years of the Award Cycle that had commenced when the Change in Control occurred. For example, if the Award Cycle was for 2007 - 2008, and a Change in Control took place in 2007, the Pro-Rata Factor would be one-half.
The 2003 Stock Incentive Plan provides that, in the event of a Change in Control, outstanding awards become immediately vested or exercisable.
We hope this general discussion and the following tables and graphs help you understand the Company's executive compensation philosophy and program.
The Compensation Committee of the Board of Directors has reviewed and discussed the preceding Compensation Discussion and Analysis with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement for incorporation by reference into the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007.2010.
Respectfully submitted, | ||
GEORGIA R. NELSON, CHAIR ROBERT K. HERDMAN ALEXIS M. HERMAN |
Summary Compensation Table and Supplemental Tables
A summary compensation table and supplemental tables on the following pages disclose compensation information for theour Named Executive Officers during our last three completed fiscal years (or such shorter period for which the Company'sNamed Executive Officer was a Named Executive Officer) and our last completed fiscal year.year, respectively.
2010 SUMMARY COMPENSATION TABLE
AND SUPPLEMENTAL TABLES
Name and Principal Position | Year | Annual Salary | (1) Bonus | (2) Stock Awards | (3) Option Awards | (4) Non-Equity Incentive Plan Compensation | (5) Change in Pension Value and Non-Qualified Deferred Compensation Earnings | (6) All Other Compensation | Total Compensation | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
T. M. Solso, Chairman and CEO | 2010 | $ | 1,285,000 | $ | 0 | $ | 1,615,960 | $ | 1,383,674 | $ | 4,094,800 | $ | 620,078 | $ | 112,215 | $ | 9,111,727 | ||||||||||||
2009 | $ | 1,139,250 | $ | 0 | $ | 610,447 | $ | 642,637 | $ | 4,452,000 | $ | 1,489,788 | $ | 96,215 | $ | 8,430,337 | |||||||||||||
2008 | $ | 1,210,000 | $ | 0 | $ | 2,338,881 | $ | 0 | $ | 5,390,800 | $ | 3,078,182 | $ | 168,907 | $ | 12,186,770 | |||||||||||||
T. Linebarger, President and | 2010 | $ | 787,500 | $ | 0 | $ | 484,788 | $ | 415,204 | $ | 1,682,100 | $ | 631,544 | $ | 27,922 | $ | 4,029,058 | ||||||||||||
Chief Operating Officer | 2009 | $ | 678,125 | $ | 0 | $ | 183,152 | $ | 192,830 | $ | 1,236,800 | $ | 2,134,478 | $ | 21,195 | $ | 4,446,580 | ||||||||||||
2008 | $ | 695,000 | $ | 0 | $ | 784,022 | $ | 0 | $ | 1,473,400 | $ | 745,281 | $ | 22,107 | $ | 3,719,810 | |||||||||||||
P. J. Ward, Vice President and | 2010 | $ | 450,000 | $ | 0 | $ | 323,192 | $ | 276,633 | $ | 673,200 | $ | 413,101 | $ | 15,504 | $ | 2,151,630 | ||||||||||||
Chief Financial Officer | 2009 | $ | 361,667 | $ | 0 | $ | 91,576 | $ | 96,376 | $ | 329,200 | $ | 468,359 | $ | 19,776 | $ | 1,366,954 | ||||||||||||
2008 | $ | 351,667 | $ | 0 | $ | 234,035 | $ | 0 | $ | 289,492 | $ | 329,886 | $ | 21,745 | $ | 1,226,825 | |||||||||||||
R. J. Freeland, Vice President and | 2010 | $ | 551,667 | $ | 0 | $ | 323,192 | $ | 276,633 | $ | 862,667 | $ | 192,356 | $ | 20,904 | $ | 2,227,419 | ||||||||||||
President—Engine Business | 2009 | $ | 461,125 | $ | 0 | $ | 100,679 | $ | 106,006 | $ | 854,600 | $ | 950,095 | $ | 19,860 | $ | 2,492,365 | ||||||||||||
P. Carter, Vice President and | 2010 | $ | 485,000 | $ | 0 | $ | 201,995 | $ | 173,086 | $ | 663,300 | $ | 194,214 | $ | 84,334 | $ | 1,801,929 | ||||||||||||
President—Distribution Business |
| T. M. Solso | J. S. Blackwell | F. J. Loughrey | T. Linebarger | J. D. Kelly | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Executive Target Bonus Plan | $ | 2,220,000 | $ | 747,500 | $ | 1,218,750 | $ | 738,000 | $ | 592,800 | |||||
Senior Executive Longer-Term Performance Plan | $ | 4,054,000 | $ | 1,082,000 | $ | 1,622,000 | $ | 1,082,000 | $ | 974,000 | |||||
TOTAL | $ | 6,274,000 | $ | 1,829,500 | $ | 2,840,750 | $ | 1,820,000 | $ | 1,566,800 |
(3)
| T. M. Solso | T. Linebarger | P. J. Ward | R. J. Freeland | P. Carter | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Executive Target Bonus Plan | $ | 3,212,500 | $ | 1,417,500 | $ | 585,000 | $ | 717,167 | $ | 552,900 | |||||||
Senior Executive Longer-Term Performance Plan | $ | 882,300 | $ | 264,600 | $ | 88,200 | $ | 145,500 | $ | 110,400 | |||||||
TOTAL | $ | 4,094,800 | $ | 1,682,100 | $ | 673,200 | $ | 862,667 | $ | 663,300 |
| T. M. Solso | J. S. Blackwell | F. J. Loughrey | T. Linebarger | J. D. Kelly | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cummins Inc., Pension Plan A (Qualified) | $ | 12,782 | $ | 20,714 | $ | 49,487 | $ | 7,374 | $ | 25,593 | ||||||
Cummins Excess Benefit Plan (Non-qualified) | $ | 530,063 | $ | 72,189 | $ | 299,799 | $ | 127,385 | $ | 91,978 | ||||||
Supplemental Life Insurance and Deferred Income Program (Non-qualified) | $ | 2,648,212 | $ | 544,134 | $ | 1,935,863 | $ | 446,678 | $ | 809,919 | ||||||
Total | $ | 3,191,057 | $ | 637,037 | $ | 2,285,149 | $ | 581,437 | $ | 927,490 | ||||||
Above-market earnings on non-qualified deferred compensation: | $ | 149,164 | $ | 120,898 | $ | 96,881 | $ | 19,848 | $ | 76,889 |
| T. M. Solso | T. Linebarger | P. J. Ward | R. J. Freeland | P. Carter | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cummins Inc. Pension Plan A (Qualified) | $ | 79,491 | $ | 31,212 | $ | 47,004 | $ | 28,990 | $ | 23,834 | |||||||
Cummins Excess Benefit Plan (Non-qualified) | $ | 354,849 | $ | 91,611 | $ | 27,216 | $ | 65,664 | $ | 46,070 | |||||||
Supplemental Life Insurance and Deferred Income Program (Non-qualified) | $ | 0 | $ | 483,068 | $ | 334,984 | $ | 50,044 | $ | 123,730 | |||||||
Sub-total | $ | 434,340 | $ | 605,891 | $ | 409,204 | $ | 144,698 | $ | 193,634 | |||||||
Above-market earnings on non-qualified deferred compensation: | $ | 185,738 | $ | 25,653 | $ | 3,897 | $ | 47,658 | $ | 580 | |||||||
TOTAL | $ | 620,078 | $ | 631,544 | $ | 413,101 | $ | 192,356 | $ | 194,214 |
"Above-market" is defined as the amount of earnings that exceeded 120% of the applicable federal long-term rate.
(4)
| T. M. Solso | J. S. Blackwell | F. J. Loughrey | T. Linebarger | J. D. Kelly | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financial Counseling | $ | 7,117 | $ | 6,766 | $ | 12,680 | $ | 7,763 | $ | 12,680 | |||||
Personal use of Company Aircraft | $ | 118,626 | $ | 107,019 | $ | 55,010 | $ | 10,211 | $ | 0 | |||||
Life Insurance Premiums | $ | 15,416 | $ | 4,025 | $ | 8,328 | $ | 2,218 | $ | 4,184 | |||||
Company Match in the Retirement and Savings Plan | $ | 7,250 | $ | 7,250 | $ | 7,250 | $ | 7,250 | $ | 7,250 | |||||
TOTAL | $ | 148,409 | $ | 125,060 | $ | 83,268 | $ | 27,442 | $ | 24,114 |
The Financial Counseling amounts include gross-ups to offset a portion of the taxable amount.
| T. M. Solso | T. Linebarger | P. J. Ward | R. J. Freeland | P. Carter | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financial Counseling | $ | 9,999 | $ | 9,861 | $ | 5,500 | $ | 9,545 | $ | 10,245 | |||||||
Personal use of Company Aircraft | $ | 75,593 | $ | 6,953 | $ | 0 | $ | 0 | $ | 62,043 | |||||||
Life Insurance Premiums | $ | 18,048 | $ | 2,533 | $ | 1,429 | $ | 2,784 | $ | 3,471 | |||||||
Company Match in the Retirement and Savings Plan | $ | 8,575 | $ | 8,575 | $ | 8,575 | $ | 8,575 | $ | 8,575 | |||||||
TOTAL | $ | 112,215 | $ | 27,922 | $ | 15,504 | $ | 20,904 | $ | 84,334 |
Personal Use of Company Aircraft was calculated using an average indicated hourly cost of $2,326$1,782.85 which is the incremental cost incurred by the Company. This cost is calculated based on the Company's annual average fuel cost and other expenses derived from published industry averages.
The following table complements the disclosures set forth in columns captioned Stock Awards and Option Awards of the Summary Compensation Table.
GRANTS OF PLAN-BASED AWARDS
IN 2010
| | | | | | | | | | | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) | Estimated Future Payouts Under Equity Incentive Plan Awards (2)(3) | | | (4) | ||||||||||||||||||
| | | | Grant Date Fair Value of Stock and Option Awards | ||||||||||||||||||||
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | All Other Stock Awards: Number of Shares or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | |||||||||||||||
T.M. Solso | 2/20/07 | $ | 238,800 | $ | 2,388,000 | $ | 4,776,000 | 8,632 | 86,320 | 172,660 | 0 | 0 | $ | 3,097,593 | ||||||||||
J.S. Blackwell | 2/20/07 | $ | 70,200 | $ | 702,000 | $ | 1,404,000 | 2,540 | 25,400 | 50,860 | 0 | 0 | $ | 911,479 | ||||||||||
F.J. Loughrey | 2/20/07 | $ | 112,400 | $ | 1,124,000 | $ | 2,248,000 | 4,060 | 40,600 | 81,260 | 0 | 0 | $ | 1,456,931 | ||||||||||
T. Linebarger | 2/20/07 | $ | 56,200 | $ | 562,000 | $ | 1,124,000 | 2,032 | 20,320 | 40,660 | 0 | 0 | $ | 729,183 | ||||||||||
J.D. Kelly | 2/20/07 | $ | 50,600 | $ | 506,000 | $ | 1,012,000 | 1,828 | 18,280 | 36,560 | 0 | 0 | $ | 655,978 |
| | | | | | | | | | | (5) | (6) | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares or Units (#) | All Other Option Awards Number of Securities Underlying Options (#) | |||||||||||||||||||||||||||||||
| | | Exercise or Base Price of Option Awards ($) | Grant Date Fair Value of Stock and Option Awards | |||||||||||||||||||||||||||||||||
Name | Grant Date | Date of Committee Action | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | |||||||||||||||||||||||||||||
T. M. Solso | 2/8/10 | 2/8/10(1) | $ | 160,625 | $ | 1,606,250 | $ | 3,212,500 | |||||||||||||||||||||||||||||
2/8/10 | 2/8/10(2) | $ | 274,700 | $ | 2,747,000 | $ | 5,494,000 | ||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(3) | 2,840 | 28,400 | 56,800 | $ | 1,615,960 | |||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(4) | 0 | 54,520 | 58.115 | $ | 1,383,674 | |||||||||||||||||||||||||||||||
T. Linebarger | 2/8/10 | 2/8/10(1) | $ | 70,875 | $ | 708,750 | $ | 1,417,500 | |||||||||||||||||||||||||||||
2/8/10 | 2/8/10(2) | $ | 82,400 | $ | 824,000 | $ | 1,648,000 | ||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(3) | 852 | 8,520 | 17,040 | $ | 484,788 | |||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(4) | 0 | 16,360 | 58.115 | $ | 415,204 | |||||||||||||||||||||||||||||||
P. J. Ward | 2/8/10 | 2/8/10(1) | $ | 29,250 | $ | 292,500 | $ | 585,000 | |||||||||||||||||||||||||||||
2/8/10 | 2/8/10(2) | $ | 54,900 | $ | 549,000 | $ | 1,098,000 | ||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(3) | 568 | 5,680 | 11,360 | $ | 323,192 | |||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(4) | 0 | 10,900 | 58.115 | 276,633 | ||||||||||||||||||||||||||||||||
R. J. Freeland | 2/8/10 | 2/8/10(1) | $ | 35,858 | $ | 358,584 | $ | 717,167 | |||||||||||||||||||||||||||||
2/8/10 | 2/8/10(2) | $ | 54,900 | $ | 549,000 | $ | 1,098,000 | ||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(3) | 568 | 5,680 | 11,360 | $ | 323,192 | |||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(4) | 0 | 10,900 | 58.115 | $ | 276,633 | |||||||||||||||||||||||||||||||
P. Carter | 2/8/10 | 2/8/10(1) | $ | 29,100 | $ | 291,000 | $ | 582,000 | |||||||||||||||||||||||||||||
2/8/10 | 2/8/10(2) | $ | 34,300 | $ | 343,000 | $ | 686,000 | ||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(3) | 355 | 3,550 | 7,100 | $ | 201,995 | |||||||||||||||||||||||||||||||
3/1/10 | 2/8/10(4) | 0 | 6,820 | 58.115 | $ | 173,086 |
In addition to these grants of plan-based awards, each Named Executive Officer participatesOfficers participate in the Annual Bonus Plan, as described in the Compensation Discussion and Analysis. The Annual Bonus is designed to link executive pay to the annual performance of the Company. The payout is calculated based on a formula approved by the Compensation Committee annually. Each participant is assigned a participation rate as a percent of salary. For purposes of this Plan, Company performance is measured by Return on Average Net AssetsROANA as defined by the Plan. The Annual Bonus is calculated as follows.
(Annual(Annual Bonus) equals (Annual Base Salary)Salary Paid for calendar year) times (participation percentage assigned to each job)position) times (Payout Factor)
The Payout Factors could range from zero to 2.0, in increments of .1.0.1.
The following two tables are intended to enhance understanding of equity compensation that has been previously awarded and remains outstanding, including amounts realized on equity compensation during the last fiscal year as a result of the vesting or exercise of equity awards.
OUTSTANDING EQUITY AWARDS AT FISCAL2010 YEAR-END
| Option Awards | Stock Awards | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | (1)(2) Number of Shares or Units of Stock That Have Not Vested (#) | (4) Market Value of Shares or Units of Stock That Have Not Vested ($) | (1)(3) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | (4) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||||||
T.M. Solso | 0 | 0 | 0 | N/A | N/A | 113,600 | $ | 7,234,616 | 187,840 | $ | 11,962,590 | |||||||||
J.S. Blackwell | 0 | 0 | 0 | N/A | N/A | 30,320 | $ | 1,930,929 | 57,120 | $ | 3,637,687 | |||||||||
F.J. Loughrey | 0 | 0 | 0 | N/A | N/A | 45,480 | $ | 2,896,394 | 85,000 | $ | 5,413,225 | |||||||||
T. Linebarger | 0 | 0 | 0 | N/A | N/A | 70,320 | $ | 4,478,329 | 45,720 | $ | 2,911,678 | |||||||||
J.D. Kelly | 0 | 0 | 0 | N/A | N/A | 67,280 | $ | 4,284,727 | 41,120 | $ | 2,618,727 |
| Option Awards | Stock Awards | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||||||||||||
T. M. Solso | 0 | 54,520 | (1) | $ | 58.115 | 3/1/2020 | 14,301 | (2) | $ | 1,573,253 | (3) | 61,930 | (4) | $ | 6,812,919 | (3) | |||||||||
0 | 82,750 | (5) | $ | 19.42 | 3/2/2019 | ||||||||||||||||||||
T. Linebarger | 0 | 16,360 | (1) | $ | 58.115 | 3/1/2020 | 4,290 | (2) | $ | 471,943 | (3) | 18,580 | (4) | $ | 2,043,986 | (3) | |||||||||
0 | 24,830 | (5) | $ | 19.42 | 3/2/2019 | ||||||||||||||||||||
P. J. Ward | 0 | 10,900 | (1) | $ | 58.115 | 3/1/2020 | 1,431 | (2) | $ | 157,424 | (3) | 10,710 | (4) | $ | 1,178,207 | (3) | |||||||||
0 | 12,410 | (5) | $ | 19.42 | 3/2/2019 | ||||||||||||||||||||
R. J. Freeland | 0 | 10,900 | (1) | $ | 58.115 | 3/1/2020 | 2,361 | (2) | $ | 259,734 | (3) | 11,210 | (4) | $ | 1,233,212 | (3) | |||||||||
0 | 13,650 | (5) | $ | 19.42 | 3/2/2019 | ||||||||||||||||||||
P. Carter | 0 | 6,820 | (1) | $ | 58.115 | 3/1/2020 | 1,788 | (2) | $ | 196,698 | (3) | 7,740 | (4) | $ | 851,477 | (3) | |||||||||
0 | 10,340 | (5) | $ | 19.42 | 3/2/2019 |
The outstanding Target Awards, on a split-adjusted basis,target awards of performance shares as of 12/31/2007December 31, 2010 for the 2006-20072009-2010 and 2007-2008 Award Cycles:2010-2011 awards cycles:
Name | Grant Year | Number of Units of Performance Shares | Date Earned and Converted to Restricted Stock | Vesting Date for Shares of Restricted Stock | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
T. M. Solso | 2009 | 33,530 | 3/2/2011 | 3/1/2012 | |||||||||
2010 | 28,400 | 3/2/2012 | 3/1/2013 | ||||||||||
T. Linebarger | 2009 | 10,060 | 3/2/2011 | 3/1/2012 | |||||||||
2010 | 8,502 | 3/2/2012 | 3/1/2013 | ||||||||||
P. J. Ward | 2009 | 5,030 | 3/2/2011 | 3/1/2012 | |||||||||
2010 | 5,680 | 3/2/2012 | 3/1/2013 | ||||||||||
R. J. Freeland | 2009 | 5,530 | 3/2/2011 | 3/1/2012 | |||||||||
2010 | 5,680 | 3/2/2012 | 3/1/2013 | ||||||||||
P. Carter | 2009 | 4,190 | 3/2/2011 | 3/1/2012 | |||||||||
2010 | 3,550 | 3/2/2012 | 3/1/2013 |
OPTION EXERCISES AND STOCK VESTED IN 2010
| Option Awards | | (1) Stock Awards | (2) | ||||||
---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||
T. M. Solso | 0 | $ | 0 | 168,000 | $ | 5,691,000 | ||||
J. S. Blackwell | 0 | $ | 0 | 43,200 | $ | 1,463,400 | ||||
F. J. Loughrey | 0 | $ | 0 | 57,600 | $ | 1,951,200 | ||||
T. Linebarger | 0 | $ | 0 | 43,200 | $ | 1,463,400 | ||||
J. D. Kelly | 0 | $ | 0 | 28,800 | $ | 975,600 |
| Option Awards | Stock Awards | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#)(1) | Value Realized on Vesting ($)(2) | |||||||||
T. M. Solso | 0 | $ | 0 | 120,848 | $ | 7,125,198 | |||||||
T. Linebarger | 0 | $ | 0 | 28,448 | $ | 1,677,294 | |||||||
13,333 | $ | 802,247 | |||||||||||
P. J. Ward | 0 | $ | 0 | 4,984 | $ | 293,857 | |||||||
R. J. Freeland | 0 | $ | 0 | 21,336 | $ | 1,257,971 | |||||||
13,333 | $ | 802,247 | |||||||||||
P. Carter | 0 | $ | 0 | 15,624 | $ | 921,191 |
The following three (3) tables disclose retirement benefits and other post-termination compensation for the Company's Named Executive Officers.
Name | Plan Name | Number of Years Credited Service (#) | Present Value of Accumulated Benefit ($) | Payments During Last Fiscal Year ($) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
T. M. Solso | Cummins Inc. and Affiliates Pension Plan A (Qualified) | 39 | $ | 1,147,082 | $ | 0 | ||||||
Excess Benefit Plan (Non-qualified) | $ | 4,892,918 | $ | 0 | ||||||||
Supplemental Life Insurance and Deferred Income Plan (Non-qualified) | $ | 15,663,280 | $ | 0 | ||||||||
T. Linebarger | Cummins Inc. and Affiliates Pension Plan A (Qualified) | 18 | $ | 275,208 | $ | 0 | ||||||
Excess Benefit Plan (Non-qualified) | $ | 557,345 | $ | 0 | ||||||||
Supplemental Life Insurance and Deferred Income Plan (Non-qualified) | $ | 4,841,976 | $ | 0 | ||||||||
P. J. Ward | Cummins Inc. and Affiliates Pension Plan A (Qualified) | 23 | $ | 235,121 | $ | 0 | ||||||
Excess Benefit Plan (Non-qualified) | $ | 86,169 | $ | 0 | ||||||||
Supplemental Life Insurance and Deferred Income Plan (Non-qualified) | $ | 1,723,644 | $ | 0 | ||||||||
R. J. Freeland | Cummins Inc. and Affiliates Pension Plan A (Qualified) | 32 | $ | 642,166 | $ | 0 | ||||||
Excess Benefit Plan (Non-qualified) | $ | 338,834 | $ | 0 | ||||||||
Supplemental Life Insurance and Deferred Income Plan (Non-qualified) | $ | 5,277,130 | $ | 0 | ||||||||
P. Carter | Cummins Inc. and Affiliates Pension Plan A (Qualified) | 13 | $ | 209,000 | $ | 0 | ||||||
Excess Benefit Plan (Non-qualified) | $ | 329,000 | $ | 0 | ||||||||
Supplemental Life Insurance and Deferred Income Plan (Non-qualified) | $ | 4,232,342 | $ | 0 |
The Cummins Inc. and Affiliates Pension Plan A is a Cash Balance Pension Plan ("Plan A"). Participants receive Pay Creditspay credits equal to 6% of Total Monthly Pay,total monthly pay, defined as Base Salarybase salary and Annual Bonusannual bonus payments. Individual accounts are maintained for each participant. The accounts receive Interest Creditsinterest credits equal to Thirty-Year30-year Treasury Bondbond rate plus 1%. Participants are 100% vested in the Plan A benefit upon attaining five years of service.
The Excess Benefit Plan provides non-qualified pension benefits in excess of limitations imposed by the Internal Revenue Code on the benefits provided by the Plan A formula. It preserves the total benefit payable under the Plan A formula.
The Supplemental Life Insurance and Deferred Income Plan provides a Supplemental Executive Retirement Plan ("SERP") Life Annuity benefit to our officers of the Corporation who participate in the U.S. Plan A.
The SERP benefit is based on a percentage of the highest five consecutive years of Total Compensationtotal compensation during the final ten10 years of the participant's career (referred to hereafter as "Five Year Average Pay").career. Total Compensation for calculation of Five Year Average Payfive year average pay is defined as Base Salarybase salary and Annual Bonusannual bonus payments.
The percentage is calculated as 2% of the participant's Five Year Average Payfive year average pay for each of the first twenty20 years of service plus 1% of the participant's Five Year Average Payfive year average pay for each of the next ten 10��years of service. The maximum is a 50% benefit after thirty30 years of service, except that an officer who is among the Company'sour two highest paid Named Executive Officers at the time of retirement will receive an annual benefit equal to an additional 10%.
The retirement benefit calculated by this formula is offset by the highest combined annuity available from Plan A and the Excess Benefit Plan, thus topping up the benefits available from those plans to total the target retirement benefit.
Officers whose service and age total eighty80 (minimums of age 55 and 20 years service), or who were participants in the plan prior to 1997 and have at least thirty30 years of service, regardless of age, would qualify for immediate unreduced commencement of Life Annuitylife annuity benefits. Therefore, Messrs. Solso Loughrey, and KellyFreeland qualify for immediate commencement of unreduced benefits.
Otherwise, after retirement or termination of employment, unreduced benefits may be commenced at age 60. Retired or terminated vested employees who do not qualify for unreduced benefits under the age and service conditions described in the previous paragraph may commence benefits as early as age 55, but the Life Annuitylife annuity benefit would be reduced by .333% for each month the participant's age at commencement preceded 60.
Vesting for the SERP benefit is 25% after five years service, increasing in 15% annual increments, with 100% vesting after 10 years service.
The Life Annuity Benefitlife annuity benefit has a fifteen-year15-year certain payment, with a 50% benefit for surviving spouse or domestic partner.
The SERP benefit accrued for service prior to 2005 may be elected as a Lump Sumlump sum payment. Benefits accrued after 2005 are subject to the provisions of Internal Revenue Code 409(A),409A, which preclude lump sum distributions of such benefits.
The actuarial table and discount rates used to calculate a lump sum payment under the SERP are the same as those used to make such calculations under the qualified Plan A.
Accelerated Formula for Executives Hired Mid-Career
For some officers who joined the Company mid-career, including Ms. Blackwell,Carter, the SERP benefit is calculated at an accelerated rate, requiring one-half the service necessary for other participants.
The Accelerated Formulaaccelerated formula provides a target benefit based on 4% for the first ten10 years and 2% for the next five years of Service,service, with a maximum of 50% of Five Year Average Pay after fifteen years of service. Eligibility for immediate commencement of unreduced benefits is achieved when Age and Service total seventy (minimums of Age70 (minimum age 58 and 10 years of Service)service). Otherwise, for participants who are no longer employees of the Corporation,Company, unreduced benefits may commence at Age 60 or as early as Age 55, but reduced .333% for each month age at commencement precedes Age 60.
Full vesting occurs upon five years of service.
NON-QUALIFIED DEFERRED COMPENSATION IN 2010
Name | Executive Contributions in Last Fiscal Year | Registrant Contributions in Last Fiscal Year ($) | (1) Aggregate Earnings in Last Fiscal Year ($) | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance at Last Fiscal Year End ($) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
T. M. Solso | $ | 0 | $ | 0 | $ | 436,369 | $ | 0 | $ | 5,493,879 | |||||
J. S. Blackwell | $ | 1,056,153 | $ | 0 | $ | 353,678 | $ | 0 | $ | 4,637,547 | |||||
F. J. Loughrey | $ | 480,000 | $ | 0 | $ | 301,642 | $ | 0 | $ | 4,162,088 | |||||
T. Linebarger | $ | 200,000 | $ | 0 | $ | 65,658 | $ | 0 | $ | 978,476 | |||||
J. D. Kelly | $ | 369,750 | $ | 0 | $ | 241,223 | $ | (41,686 | ) | $ | 3,246,032 |
Name | (1) Executive Contributions in Last Fiscal Year | Registrant Contributions in Last Fiscal Year ($) | (1) Aggregate Earnings in Last Fiscal Year ($) | Aggregate Withdrawals/ Distributions ($) | (2) Aggregate Balance at Last Fiscal Year End ($) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
T. M. Solso | $ | 0 | $ | 0 | $ | 454,520 | $ | 0 | $ | 6,795,408 | ||||||
T. Linebarger | $ | 0 | $ | 0 | $ | 72,951 | $ | 0 | $ | 1,188,810 | ||||||
P. J. Ward | $ | 60,000 | $ | 0 | $ | 9,536 | $ | 70,379 | $ | 194,233 | ||||||
R. J. Freeland | $ | 0 | $ | 0 | $ | 163,397 | $ | 203,709 | $ | 2,856,518 | ||||||
P. Carter | $ | 0 | $ | 0 | $ | 1,418 | $ | 0 | $ | 21,207 |
The Company'sOur 1994 Deferred Compensation Plan permits deferral of up to 100% of Base Salary, Annual Bonus,base salary, annual bonus, and/or payments from the Senior Executive Longer-Term Performance Plan.
Accounts are credited with earnings based on each participant's selection among three alternatives: Standard & Poor's 500 Index, LehmanBarclays Capital Aggregate Bond Index, or 10 Year Treasury Bill + 4%. The latter option was revised to be 10-Year Treasury Bill + 2% effective January 1, 2006., which had annual returns in 2010 of 12.78%,6.99%, and 5.17%, respectively.
Crediting options may be changed annually. At the time of the election to defer, the participant chooses the time and the form of distribution. Choices for taking distribution are lump sum or annual installments, up to fifteen.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Payments Upon a Change in Control Without a Qualified Termination or Upon a Qualified Termination Following a Change in Control of the Corporation
In the event of change in control, as generally defined below, in certain cases, and in the event of a change in control and upon a termination of employment under certain circumstances within two years subsequent to a Changechange in Control of the Company, as defined below, the Companycontrol, we will provide benefits to certain executives, including theour Named Executive Officers. Certain specified officers, including
Upon a change in control, outstanding awards under our 2003 Stock Incentive Plan would become immediately vested and exercisable.
Upon a termination of employment without "cause" by the company or for "good reason" by the officer following a change in control, our Named Executive Officers would be entitled to three year'syears' salary plus three Annual Bonusannual bonus payments calculated using a 1.0 Payout Factor.
The Companypayout factor. We would also provide for the full vesting of certain insurance and retirement benefits. Stock options previously grantedAdditionally, the Named Executive Officers would become fully exercisable.receive a payment equal in value to three years' additional participation under qualified and nonqualified pension as well as three years' continued participation in other employee benefit plans.
Outstanding awards of performance cash would be paid on a pro-rated basis, calculated as the percentage of days of each respective Award Cycleawards cycle that had elapsed as of the date of the Changechange in Control,control, and assuming a 1.0 Payout Factor.
The 2003 Stock Incentive Plan provides that, in the event of a Change in Control, outstanding awards become immediately vested or exercisable.
payout factor. The value of supplemental and excess retirement (non-qualified) benefits will also be paid in cash.
All amounts of compensation deferred under the Company'sour Deferred Compensation Plan will be paid in cash.
Definition of Change As described in Control:
The occurrence of anyour "Compensation Discussion and Analysis—Post-Employment Compensation," we would provide our executives with a gross-up payment, if necessary, due to application of the following: (i) there shall be consummated (A) any"golden parachute" excise tax provisions of Internal Revenue Code Sections 280G and 4999.
"Change in control" is generally defined as a consolidation or merger of the Company in which the Company iswe are not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted in whole or in part into cash, other securities or other property, other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (B) anyour shares are converted; a sale, lease, exchange or transfer (in one transfer or a series of related transactions) of all or substantially all the assets of the Company; or (ii) the stockholdersour assets; approval by our shareholders of the Company shall approve anya plan or proposal forto liquidate or dissolve our company; the liquidation or dissolutionacquisition by a person of the Company; or (iii) any "person" (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company or a subsidiary thereof or any employee benefit plan sponsored by the Company or a subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13d 3 under the Exchange Act) of securities of the Company representing 25% or more of our voting power; or a majority change in the combined voting powercomposition of our Board in a two-year period under specified circumstances where the nomination or election of the Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election ofnew directors as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise; or (iv) at any time during a period of two consecutive years, individuals who, at the beginning of such period constituted the Board, shall cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by the Company's stockholders of each new director during such two-year period wasis not approved by a vote of at least two-thirdssupermajority of the directors then stillprior to the change.
Termination for "cause" means a termination of the officer's employment by us due to the officer's willful and continued failure to perform his or her duties with us (after notice and an opportunity to cure), other than due to incapacity due to illness, or due to the officer's conviction of a felony.
Termination for "good reason" generally means a termination by the officer within 90 days following specified adverse changes in office who were directors at the beginningofficer's employment circumstances such as the assignment of such two-year period;duties not consistent with the officer's position, certain relocations of the location of employment or (v) any other event shall occur thatreductions in compensation.
would be required to be reported in response to Item 6(e) (or any successor provision) of Schedule 14A of Regulation 14A promulgated under the Exchange Act.
The payments to each of theour Named Executive Officers, assuming that all triggering events occurred on December 31, 2010, are estimated to bein the following:
Payments Upon a Qualified Termination Following a Change in Controltable below. Amounts actually received, should any of the Corporation
triggering events occur may vary.
Payments | | T. M. Solso | T. Linebarger | P. J. Ward | R.J. Freeland | P. Carter | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Severance | (1) | $ | 8,748.750 | $ | 4,601,250 | $ | 2,377,500 | $ | 2,755,753 | $ | 2,373,000 | |||||||
Unvested Stock Option Spread | *(2) | $ | 10,325,638 | $ | 3,098,352 | $ | 1,689,877 | $ | 1,802,209 | $ | 1,290,625 | |||||||
Unvested Restricted Stock | *(3) | $ | 1,573,253 | $ | 471,943 | $ | 157,424 | $ | 259,734 | $ | 196,698 | |||||||
LTI Plan Payment | *(4) | $ | 9,516,419 | $ | 2,854,986 | $ | 1,652,207 | $ | 1,727,212 | $ | 1,188,977 | |||||||
Retirement Benefit Payment | (5) | $ | 0 | $ | 1,481,071 | $ | 1,323,600 | $ | 264,958 | $ | 613,715 | |||||||
Welfare Benefit Values | (6) | $ | 29,187 | $ | 29,187 | $ | 29,187 | $ | 29,187 | $ | 29,187 | |||||||
Financial Advisory and 401(k) Benefit | $ | 55,725 | $ | 55,725 | $ | 55,725 | $ | 55,725 | $ | 55,725 | ||||||||
Excise Tax & Gross-Up | (7) | $ | 0 | $ | 0 | $ | 2,558,523 | $ | 0 | $ | 0 | |||||||
Aggregate Payments | $ | 30,248,972 | $ | 12,592,514 | $ | 9,844,043 | $ | 6,894,778 | $ | 5,747,927 |
Payments | | T. M. Solso | J. S. Blackwell | F. J. Loughrey | T. Linebarger | J. D. Kelly | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Severance | (1) | $ | 6,960,000 | $ | 2,970,000 | $ | 4,462,500 | $ | 3,072,000 | $ | 2,592,000 | |||||
Unvested Stock Option Spread | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||
Unvested Restricted Stock | *(2) | $ | 7,234,616 | $ | 1,930,929 | $ | 2,896,394 | $ | 4,478,329 | $ | 4,284,727 | |||||
Long Term Incentive Plan Payment | *(3) | $ | 15,319,590 | $ | 4,664,687 | $ | 6,921,255 | $ | 3,733,678 | $ | 3,358,727 | |||||
Retirement Benefit Payment | (4) | $ | 1,730,390 | $ | 861,256 | $ | 1,521,226 | $ | 858,499 | $ | 993,824 | |||||
Welfare Benefit Values | (5) | $ | 23,334 | $ | 23,334 | $ | 23,334 | $ | 23,334 | $ | 23,334 | |||||
Financial Counseling | $ | 37,500 | $ | 37,500 | $ | 37,500 | $ | 37,500 | $ | 37,500 | ||||||
401(K) Benefit | $ | 21,750 | $ | 21,750 | $ | 21,750 | $ | 21,750 | $ | 21,750 | ||||||
Excise Tax & Gross-Up | (6) | $ | 8,349,811 | $ | 3,613,911 | $ | 4,736,494 | $ | 3,170,960 | $ | 3,078,050 | |||||
Aggregate Payments | $ | 39,676,991 | $ | 14,123,367 | $ | 20,620,423 | $ | 15,396,050 | $ | 14,389,912 |
Potential Payments upon Termination of Employment Other than Following a Change in Control
The following tables summarize the estimated payments to be made to Named Executive Officers under provisions of plans or established practice in the event of termination of employment including resignation, involuntary termination, involuntary termination for Cause,cause, retirement, death and disability.disability other than following a change in control.
Termination for Causecause includes, but is not limited to: violation of our Treatment of Others Policy, violation of the Code of Conduct, theft or other acts of dishonesty, willful destruction of Companyour property, refusal to obey a supervisor's reasonable instructions, conduct endangering the safety of employees or co-workers, falsification of Companyour documents, or violation of our other Company rules or policies.
We only report amounts where vesting requirements are waived and/or time of payment is accelerated, or benefits that are not generally available to our other exempt employees. Also, information is not repeated that is disclosed previously under the Pension Benefits Table, the Deferred Compensation Table, or the Outstanding Equity Awards Table, except to the extent that the amounts payable to the Named Executive Officer would be enhanced by the termination event described.
The amounts shown assume the terminating event occurred on the last business day of 2007,2010, and that the price per share of the Company'sour common stock is the closing price as of that date, $127.37 ($63.685 on a split-adjusted basis).$110.01.
Severance
NoneWe do not have formal severance agreements with any of our Named Executive Officers. However, the Committee has established a policy that any of our Named Executive Officers, has an employment agreement. However,if terminated by the Compensation Committee has established the practicecompany other than for cause, will generally be entitled to receive up to 12 months' base salary as severance, paid as salary continuation, and a pro-rated portion of providing twelve months of severance for officers whose employment is terminated. It is Company policy not to provide severance in the event of termination for Cause.
Payment of Annual Bonus
Annual Bonus is payablehis or her annual bonus for the portion of the year prior to termination, payable at the normal time and using the same payout factors as for all other participants. All of these elements would require a participant is an employee, except in casessigned release of termination for Cause. No amounts are shown in the tables for Annual Bonus since there would be no special treatment or acceleration of the payment to the Named Executive Officers.claims agreement.
Accelerated Vesting of Longer-term Grants
As described elsewhere in this proxy statement, currently we provide annual Target Awardtarget award grants of performance cash, performance shares and performance shares.stock options.
The Plan provides that ifIf a participant's employment with the Company terminates during the first year of an Award Cycle,awards cycle, other than by reason of retirement, death or disability, the participant will not receive any payout for that Award Cycle.awards cycle. If a participant's employment terminates during subsequent yearsthe second year of an Award Cycle,awards cycle, the Compensation Committee, in its discretion, shallmay determine whether the Participantparticipant will receive a proportionate payout of any payment with respect to the Award Cycleawards cycle based on the period of employment during the cycle.
If a participant retires, dies or becomes disabled during an Award Cycle,awards cycle, the participant or such participant's estate, as the case may be, shallwill receive a proportionate share of any payment with respect to the Award Cycleawards cycle based on the period of employment during the cycle, regardless of the length of time of such employment.
2006-2007 Award2009-2010 Awards Cycle grants:grants since
Since the entire Award Cycle had been2009-2010 awards cycle was completed atas of the timeassumed December 31, 2010 date of the termination, all participants would behave been entitled to the payment at the normal time in February 2008. ThereMarch 2011. Since there would be no special acceleration; therefore,acceleration, the amounts of these payments are not shown on the tables.
2007-2008 Award2010-2011 Awards Cycle grants:grants
Since the termination event is assumed to occur aton December 31, 2010, which was the end of the first year of the Award Cycle,2010-2011 awards cycle, the Committee has the discretion to award one-half of the Target Awardtarget award for the 2007-2008 Award Cycle.2010-2011 awards cycle. For purposes of this table, one-half of the Target Awards,target awards for the 2010-2011 awards cycle, assuming a Payout Factorpayout factor of 1.0, is shown as payable under Retirement, Death, and Disability.
In cases of retirement or termination without Cause,cause, the Committee has the discretion to continue awards in effect, or to accelerate vesting of outstanding awards.
After the death or disability of a participant, the Committee may in its sole discretion at any time (i)(1) terminate restrictions regarding awards; (ii)(2) accelerate any or all installments and rights; and (iii)(3) instruct the Companyus to pay the total of any accelerated payments in a single sum to the participant, the participant's estate, beneficiaries or representative. Assumptions below are based on historic practice.
2005-2006 Award2008-2009 Awards Cycle grants
Target Awardsawards of shares were earned based on Companyour performance during 2005-20062008-2009 and converted to restricted stock in February 2007.March 2010. The shares would have become vested in February 2008,March 1, 2011, so it is assumed that the Committee would accelerate the vesting of these shares in all of the termination events, except voluntary termination and termination for Cause.cause.
2006-2007 Award2009-2010 Awards Cycle grants
Performance shares would have been earned based on Companyour performance during 2006-20072009-2010 and converted to restricted stock in February 2008,March 2011, and remainedremain restricted until February 2009.March 1, 2012. No shares would be payable in the event of termination for Causecause or voluntary termination. However thetermination as of December 31, 2010. The Committee would have the discretion to accelerate payment in the event of involuntary termination without Cause,cause, retirement, disability or death.
2007-2008 Award2010-2011 Awards Cycle grants
Performance shares would become earned based on Companyour performance during 2007-20082010-2011 and converted to restricted stock in February 2009,March 2012, and would remain restricted until March 2010.1, 2013. Since the shares were not earned, it is assumed no payments were accelerated.
2009-2010 Awards Cycle grants
Messrs. LinebargerStock options were granted on March 2, 2009 and Kelly received 10,000 shares of restricted stock in 2006 (40,000 shares on a split-adjusted basis). The first one-third of these grants wouldwill vest and become vested in March 2008. It is assumed that these grants would be forfeited underexercisable with respect to all of the termination events shownunderlying shares of our Common Stock on the tables.second anniversary of the grant date, or March 2, 2011, or upon the recipient's earlier retirement, death or disability, so long as the recipient is continuously employed by us or a subsidiary until such date or event. Accordingly, the value of the accelerated vesting is shown only in the columns relating to a termination for retirement, death or disability.
2010-2011 Awards Cycle grants
Stock options were granted on March 1, 2010 and will vest and become exercisable with respect to all of the underlying shares of our Common Stock on the second anniversary of the grant date, or March 1, 2012, or upon the recipient's earlier retirement, death or disability, so long as the recipient is continuously employed by us or a subsidiary until such date or event. Accordingly, the value of the accelerated vesting is shown only in the columns relating to a termination for retirement, death or disability.
Executive Life Insurance
Each of the Named Executive Officers participates in the Supplemental Life Insurance and Deferred Income Program, whereby Officersofficers are eligible for life insurance equal to three times base salary. Since this
is a program not participated in by non-Officernon-officer employees, the values of this incremental coverage isare shown in the table.
| Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
T. M. Solso | |||||||||||||||||||
Severance | $ | 0 | $ | 1,160,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Accelerated Vesting of Longer-term Grants: | |||||||||||||||||||
Performance Cash 2007-2008 Award Cycle | $ | 0 | $ | 0 | $ | 0 | $ | 1,194,000 | $ | 1,194,000 | $ | 1,194,000 | |||||||
Performance Shares 2005-2006 Award Cycle | $ | 0 | $ | 7,234,616 | $ | 0 | $ | 7,234,616 | $ | 7,234,616 | $ | 7,234,616 | |||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Welfare Benefits | $ | 0 | $ | 7,800 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Financial Counseling | $ | 0 | $ | 12,500 | $ | 0 | $ | 12,500 | $ | 12,500 | $ | 12,500 | |||||||
Life Insurance (Supplemental Life Insurance Program only) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 3,480,000 | $ | 0 |
Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
J. S. Blackwell | |||||||||||||||||||
Severance | $ | 0 | $ | 600,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Accelerated Vesting of Longer-term Grants: | |||||||||||||||||||
Performance Cash 2007-2008 Award Cycle | $ | 0 | $ | 0 | $ | 0 | $ | 351,000 | $ | 351,000 | $ | 351,000 | |||||||
Performance Shares 2005-2006 Award Cycle | $ | 0 | $ | 1,930,929 | $ | 0 | $ | 1,930,929 | $ | 1,930,929 | $ | 1,930,929 | |||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Welfare Benefits | $ | 0 | $ | 7,800 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Financial Counseling | $ | 0 | $ | 12,500 | $ | 0 | $ | 12,500 | $ | 12,500 | $ | 12,500 | |||||||
Life Insurance (Supplemental Life Insurance Program only) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1,800,000 | $ | 0 |
Outplacement, Welfare Benefits, and Financial Counseling
Outplacement assistance and welfare benefits will be provided only in the case of involuntary not-for-cause termination. Financial counseling support will not be provided in cases of voluntary termination and termination for cause.
The payments to each of our Named Executive Officers, assuming that the triggering event occurred on December 31, 2010, are estimated in the table below. Amounts actually received should any of the triggering events occur may vary.
| Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
T. M. Solso | |||||||||||||||||||||
Severance | $ | 0 | $ | 1,310,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Accelerated Vesting of longer-term Grants: | |||||||||||||||||||||
Performance Cash | $ | 0 | $ | 0 | $ | 0 | $ | 1,373,500 | $ | 1,373,500 | $ | 1,373,500 | |||||||||
Performance Shares | $ | 0 | $ | 1,573,253 | $ | 0 | $ | 1,573,253 | $ | 1,573,253 | $ | 1,573,253 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 7,496,323 | $ | 7,496,323 | $ | 7,496,323 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 2,829,315 | $ | 2,829,315 | $ | 2,829,315 | |||||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Welfare Benefits | $ | 0 | $ | 9,729 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Financial Counseling | $ | 0 | $ | 10,000 | $ | 0 | $ | 10,000 | $ | 10,000 | $ | 10,000 | |||||||||
Life Insurance | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 3,930,000 | $ | 0 | |||||||||
Aggregate Payments | $ | 0 | $ | 2,914,982 | $ | 0 | $ | 13,282,391 | $ | 17,212,391 | $ | 13,282,391 |
Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
F. J. Loughrey | |||||||||||||||||||
Severance | $ | 0 | $ | 850,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Accelerated Vesting of Longer-term Grants: | |||||||||||||||||||
Performance Cash 2007-2008 Award Cycle | $ | 0 | $ | 0 | $ | 0 | $ | 562,000 | $ | 562,000 | $ | 562,000 | |||||||
Performance Shares 2005-2006 Award Cycle | $ | 0 | $ | 2,896,394 | $ | 0 | $ | 2,896,394 | $ | 2,896,394 | $ | 2,896,394 | |||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Welfare Benefits | $ | 0 | $ | 7,800 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Financial Counseling | $ | 0 | $ | 12,500 | $ | 0 | $ | 12,500 | $ | 12,500 | $ | 12,500 | |||||||
Life Insurance (Supplemental Life Insurance Program only) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 2,550,000 | $ | 0 |
Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
T. Linebarger | |||||||||||||||||||
Severance | $ | 0 | $ | 640,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Accelerated Vesting of Longer-term Grants: | |||||||||||||||||||
Performance Cash 2007-2008 Award Cycle | $ | 0 | $ | 0 | $ | 0 | $ | 281,000 | $ | 281,000 | $ | 281,000 | |||||||
Performance Shares 2005-2006 Award Cycle | $ | 0 | $ | 1,930,929 | $ | 0 | $ | 1,930,929 | $ | 1,930,929 | $ | 1,930,929 | |||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Welfare Benefits | $ | 0 | $ | 7,800 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Financial Counseling | $ | 0 | $ | 12,500 | $ | 0 | $ | 12,500 | $ | 12,500 | $ | 12,500 | |||||||
Life Insurance (Supplemental Life Insurance Program only) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1,920,000 | $ | 0 |
Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
J. D. Kelly | |||||||||||||||||||
Severance | $ | 0 | $ | 540,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Accelerated Vesting of Longer-term Grants: | |||||||||||||||||||
Performance Cash 2007-2008 Award Cycle | $ | 0 | $ | 0 | $ | 0 | $ | 253,000 | $ | 253,000 | $ | 253,000 | |||||||
Performance Shares 2005-2006 Award Cycle | $ | 0 | $ | 1,737,327 | $ | 0 | $ | 1,737,327 | $ | 1,737,327 | $ | 1,737,327 | |||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Welfare Benefits | $ | 0 | $ | 7,800 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||
Financial Counseling | $ | 0 | $ | 12,500 | $ | 0 | $ | 12,500 | $ | 12,500 | $ | 12,500 | |||||||
Life Insurance (Supplemental Life Insurance Program only) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1,620,000 | $ | 0 |
| Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
T. Linebarger | |||||||||||||||||||||
Severance | $ | 0 | $ | 825,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Accelerated Vesting of longer-term Grants: | |||||||||||||||||||||
Performance Cash | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 412,000 | $ | 412,000 | |||||||||
Performance Shares | $ | 0 | $ | 471,943 | $ | 0 | $ | 0 | $ | 471,943 | $ | 471,943 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 2,249,350 | $ | 2,249,350 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 849,002 | $ | 849,002 | |||||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Welfare Benefits | $ | 0 | $ | 9,729 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Financial Counseling | $ | 0 | $ | 10,000 | $ | 0 | $ | 0 | $ | 10,000 | $ | 10,000 | |||||||||
Life Insurance | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 2,475,000 | $ | 0 | |||||||||
Aggregate Payments | $ | 0 | $ | 1,328,672 | $ | 0 | $ | 0 | $ | 6,467,295 | $ | 3,992,295 |
| Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
P. J. Ward | |||||||||||||||||||||
Severance | $ | 0 | $ | 500,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Accelerated Vesting of longer-term Grants: | |||||||||||||||||||||
Performance Cash | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 274,500 | $ | 274,500 | |||||||||
Performance Shares | $ | 0 | $ | 157,424 | $ | 0 | $ | 0 | $ | 157,424 | $ | 157,424 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1,124,222 | $ | 1,124,222 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 565,656 | $ | 565,656 | |||||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Welfare Benefits | $ | 0 | $ | 9,729 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Financial Counseling | $ | 0 | $ | 10,000 | $ | 0 | $ | 0 | $ | 10,000 | $ | 10,000 | |||||||||
Life Insurance | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1,500,000 | $ | 0 | |||||||||
Aggregate Payments | $ | 0 | $ | 689,153 | $ | 0 | $ | 0 | $ | 3,631,802 | $ | 2,131,802 |
| Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
R. J. Freeland | |||||||||||||||||||||
Severance | $ | 0 | $ | 560,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Accelerated Vesting of longer-term Grants: | |||||||||||||||||||||
Performance Cash | $ | 0 | $ | 0 | $ | 0 | $ | 274,500 | $ | 274,500 | $ | 274,500 | |||||||||
Performance Shares | $ | 0 | $ | 259,734 | $ | 0 | $ | 259,734 | $ | 259,734 | $ | 259,734 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 1,236,554 | $ | 1,236,554 | $ | 1,236,554 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 565,656 | $ | 565,656 | $ | 565,656 | |||||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Welfare Benefits | $ | 0 | $ | 9,729 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Financial Counseling | $ | 0 | $ | 10,000 | $ | 0 | $ | 10,000 | $ | 10,000 | $ | 10,000 | |||||||||
Life Insurance | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1,680,000 | $ | 0 | |||||||||
Aggregate Payments | $ | 0 | $ | 851,463 | $ | 0 | $ | 2,346,444 | $ | 4,026,444 | $ | 2,346,444 |
| Voluntary Termination | Involuntary Not-for-Cause Termination | Termination for Cause | Retirement | Death | Disability | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
P. Carter | |||||||||||||||||||||
Severance | $ | 0 | $ | 500,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Accelerated Vesting of longer-term Grants: | |||||||||||||||||||||
Performance Cash | $ | 0 | $ | 0 | $ | 0 | $ | 171,500 | $ | 171,500 | $ | 171,500 | |||||||||
Performance Shares | $ | 0 | $ | 196,698 | $ | 0 | $ | 196,698 | $ | 196,698 | $ | 196,698 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 936,701 | $ | 936,701 | $ | 936,701 | |||||||||
Stock Options | $ | 0 | $ | 0 | $ | 0 | $ | 353,924 | $ | 353,924 | $ | 353,924 | |||||||||
Outplacement | $ | 0 | $ | 12,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Welfare Benefits | $ | 0 | $ | 9,729 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Financial Counseling | $ | 0 | $ | 10,000 | $ | 0 | $ | 10,000 | $ | 10,000 | $ | 10,000 | |||||||||
Life Insurance | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1,500,000 | $ | 0 | |||||||||
Aggregate Payments | $ | 0 | $ | 728,427 | $ | 0 | $ | 1,668,823 | $ | 3,168,823 | $ | 1,668,823 |
In February 2011, our Compensation Committee conducted its annual risk assessment of our compensation policies and practices. After categorizing our material compensation arrangements according to an assessment of potential risks, our Compensation Committee evaluated the levels of risk-taking that could be potentially encouraged by each arrangement, taking into account the arrangements' risk-mitigation features, to determine whether they are appropriate in the context of our strategic plan and annual budget, our overall compensation arrangements, our objectives for our compensation arrangements and our risk profile. Risk-mitigation features identified by our Compensation Committee included the following:
As a result of its review, our Compensation Committee did not believe that our compensation policies and practices, taken as a whole and including their various risk mitigation features, encourage excessive or unnecessary risk-taking in light of our strategic plan, business objectives and enterprise risk profile. We believe that risks arising from our compensation policies and practices are not reasonably likely to have a material adverse effect on our company.
ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
(Item 11 on the Proxy Card)
As indicated by the preceding discussion, executive compensation is an important matter both to us and to our shareholders. In addition, Section 14A of the Securities Exchange Act of 1934 requires that we provide shareholders with a non-binding advisory vote on compensation of a company's named executive officers beginning in 2011. Accordingly, we are seeking input from our shareholders through this advisory vote on the compensation of our Named Executive Officers as disclosed in the Compensation Discussion and Analysis section and the accompanying compensation tables and narratives contained in this proxy statement.
We have designed our executive compensation program to attract, motivate and retain people with the skills required to achieve our performance goals in a competitive global business environment, and to support our overall performance goals. Our compensation programs are based on the principle of pay for performance. Our intention is for our executive compensation programs to reflect the level of our officers' individual contributions and our corporate performance, while striking an appropriate balance between short-term and longer-term corporate performance. We evaluate performance over several periods of time, and while the specific elements of executive compensation vary from time to time, our executive compensation programs focus on the principle of pay for performance, both in program design and in the specific awards.
In addition, we and the Compensation Committee of our Board consider the following principles when designing and implementing compensation programs for our officers:
We believe that our existing compensation programs have been effective at motivating our key executive officers, including our Named Executive Officers, to achieve superior performance and results for our company, effectively aligning compensation with performance results, giving our executives an ownership interest in our company so their interests are aligned with our shareholders, and enabling us to attract and retain talented executive officers whose services are in key demand in our industry and market sectors.
The following graphs show the strong direct relationship between our corporate financial performance and our executive compensation levels by comparing the relationship over the past five years of our (i) total shareholder return (on a dividend reinvested basis), or TSR; (ii) return on average net assets, or
ROANA; (iii) return on equity, or ROE; and (iv) average annual total compensation for our Named Executive Officers, or Avg TC:
Link Between Financial Performance and Executive Compensation
Our Board would like the support of our shareholders for the compensation of our Named Executive Officers as disclosed in the Compensation Discussion and Analysis section and the accompanying compensation tables and narratives in this proxy statement. Accordingly, for the reasons we discuss above, our Board unanimously recommends that shareholders vote in favor of the following resolution:
"RESOLVED, that the shareholders approve, on an advisory basis, the compensation of the Named Executive Officers as disclosed in the Compensation Discussion and Analysis section, compensation tables, and accompanying narratives contained in this proxy statement."
The compensation of the Named Executive Officers as disclosed in the Compensation Discussion and Analysis section and compensation tables and narratives contained in this proxy statement will be
approved if the votes cast in favor of the proposal exceed those cast against the proposal. Abstentions and broker non-votes will not affect the voting results for this proposal.
As this is an advisory vote, the results of the vote will not be binding on our Board, although our Compensation Committee will consider the outcome of the vote when evaluating the effectiveness of our compensation principles and practices and our Compensation Committee and our Board will review and consider the outcome of the vote when making future compensation decisions for our Named Executive Officers. We believe our company benefits from constructive dialogue with our shareholders on these important matters, and while we continue to reach out to our shareholders on these and other issues, we also encourage our shareholders to contact us if they would like to communicate their views on our executive compensation programs. Shareholders who wish to communicate with our non-management directors concerning our executive compensation programs should refer to the section above entitled "Corporate Governance—Board of Directors and Committees—Communication with the Board of Directors."
THE BOARD OF DIRECTORS RECOMMENDS A VOTEFOR THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THE COMPENSATION DISCUSSION AND ANALYSIS SECTION AND ACCOMPANYING COMPENSATION TABLES AND NARRATIVES IN THIS PROXY STATEMENT.
ADVISORY VOTE ON THE FREQUENCY OF THE ADVISORY
VOTE ON EXECUTIVE COMPENSATION
(Item 12 on the Proxy Card)
Section 14A of the Securities Exchange Act of 1934 requires that we provide shareholders with a vote on how frequently the company will submit the non-binding advisory vote on compensation of its named executive officers to its shareholders. Accordingly, we are asking our shareholders whether the advisory vote on executive compensation should occur every year, every two years or every three years.
Our Board recommends that shareholders approve an advisory vote on executive compensation every year (an annual vote) because we believe that an annual vote will promote best governance practices and facilitate our Compensation Committee's and our senior management's consideration of the views of our shareholders in structuring our compensation programs for our named executive officers. We believe that an annual vote will provide our Compensation Committee and our senior management with more direct input on, and reactions to, our current compensation practices, and better allow our Compensation Committee and our senior management to measure how they have responded to the prior year's vote.
For the reasons discussed above, our Board recommends that shareholders vote in favor of holding an advisory vote on executive compensation at our annual meeting of shareholders every year. In voting on this advisory vote on the frequency of the advisory vote on executive compensation, shareholders should be aware that they are not voting "for" or "against" the Board's recommendation to vote for a frequency of every year for future advisory votes on executive compensation. Rather, shareholders will be casting votes to recommend an advisory vote on executive compensation which may be every year, two years, or three years, or they may abstain entirely from voting on the proposal.
The frequency of the advisory vote on executive compensation receiving the greatest number of votes cast in favor of such frequency, whether every year, every two years or every three years, will be the frequency of the advisory vote on executive compensation that shareholders are deemed to have approved. Abstentions and broker non-votes do not constitute a vote for any particular frequency.
Additionally, although the outcome of this advisory vote on the frequency of the advisory vote on executive compensation is non-binding, our Board will review and consider the outcome of this vote when making determinations as to when the advisory vote on executive compensation will again be submitted to shareholders for approval at an annual meeting of shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE ADVISORY VOTE ON EXECUTIVE COMPENSATION BE SUBMITTED TO SHAREHOLDERS EVERY YEAR.
Security Ownership of ManagementDIRECTOR COMPENSATION
Set forth below is information asEach of March 24, 2008, regardingour non-employee directors had 2010 targeted compensation of $150,000, with one-half delivered in cash and one-half represented by a stock award. We also provide additional cash fees to the beneficial ownershipchairmen of Common Stockour various committees. The Chairman of our Finance Committee receives an additional cash retainer of $7,500, the Chairman of the Company byGovernance and Nominating Committee receives an additional cash retainer of $10,000, the Chief Executive Officer, eachChairman of the otherSafety, Environment and Technology Committee receives an additional annual cash retainer fee of $8,000, the Audit Committee Chairman receives an additional $15,000 annual cash retainer and the Compensation Committee Chairman receives an additional $10,000 annual cash retainer. The Lead Director receives an additional annual cash retainer fee of $20,000. Committee members also receive $1,000 for attending a committee meeting (other than a meeting of the Executive Committee) that is not held in connection with a regular or special meeting of our Board.
In response to then-worsening economic conditions and similar compensation limitations placed on all officers, including our Named Executive Officers, for 2007 and theour directors and executive officersagreed to waive 10% of the Companycash portion of their base director retainer fee for 2009. We returned to the regular payment in May 2010. Based on general industry and peer group market data, beginning in May 2011, the annual retainer fee will increase to $200,000, $90,000 of which will be paid in cash and $110,000 of which will be paid in the form of our Common Stock.
We also have a Deferred Compensation Plan for non-employee directors, pursuant to which directors may elect to defer receipt of all or any portion of their compensation while they serve as a group. None ofdirector. Upon ceasing to be a director, the shares beneficially owned are pledged as security and none of the directors and executive officers currently have the right to acquire additional beneficial ownership through the exercise of options.
| Amount and Nature of Beneficial Ownership | Percent of Class | ||
---|---|---|---|---|
T. M. Solso | 642,863 | (1) | * | |
F. J. Loughrey | 392,922 | * | ||
T. Linebarger | 205,663 | * | ||
J. S. Blackwell | 118,116 | * | ||
J. D. Kelly | 84,435 | * | ||
All directors and executive officers as a group, a total of 20 persons | 2,276,441 | 1.12 |
Review, Approval or Ratification of Related-Party Transactions
Cummins, with its subsidiaries and affiliates, is a global company with extensive operations in the U.S. and many foreign countries. It has thousands of employees with widespread authority to purchase goods and services. Because of these far-reaching activities, the Company encounters transactions and business arrangements with persons, businesses and other organizations in which one of its directors, executive officers or nominees for director, significant investors or their immediate families, may also be a director, executive officer, or have some other direct or indirect material interest. Such related-party transactions have the potential to create actual or perceived conflicts of interest.
As a result, the Audit Committee of the Board of Directors has established and the Board has approved a written policy and procedures for review, approval or ratification of related-party transactions or proposed transactions where the amount involved in any fiscal year exceeds or will exceed $120,000. These require that in deciding whether to approve such a related-party transaction involving a director, director nominee, executive officer, significant investor or their immediate family members, the Audit Committee must consider, among other factors:
To receive Audit Committee approval a related party transaction must be on terms that are fair and reasonable to the Company, and which are as favorable to the Company asinterest would be available from non-related entitiespaid in a comparable transaction. The policy requires that there be a business or corporate interest supporting the transaction and that the transaction meets the same Company standards that apply to comparable transactions with unaffiliated entities.
Based on its review of responsescash to the director questionnaires submitted in connectionone lump sum. Accounts are credited with determiningearnings based on each participant's selection among three alternatives: Standard & Poor's 500 Index, Barclays Capital Aggregate Bond Index or 10-Year Treasury Bill + 2%.
Each non-employee director independence, information provided by management,is required to maintain direct ownership of shares of our Common Stock (including stock awards) equal to or greater in value to three times his or her annual total retainer fee. This ownership requirement was first required to be met in 2010 for non-employee directors who were first elected prior to 2004. Non-employee directors first elected after 2003 must comply with the requirement within six years of becoming a member of our Board. Non-employee directors are not allowed to sell our shares until they reach their stock ownership guideline, and other information otherwise knownthen may not sell shares to the Company, it believes thereextent their ownership level would be less than the guideline amount. As of December 31, 2010, all of our non-employee directors had either satisfied this requirement or had additional time to do so.
Name | (1) Fees Earned or Paid in Cash ($) | (2) Stock Awards ($) | (3) Change in Pension Value and Non Qualified Deferred Compensation Earnings | All Other Compensation | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
R. J. Bernhard | $ | 86,061 | $ | 77,501 | $ | 0 | $ | 0 | $ | 163,562 | ||||||
F. R. Chang-Diaz | $ | 78,061 | $ | 77,501 | $ | 0 | $ | 0 | $ | 155,562 | ||||||
S. B. Dobbs | $ | 51,000 | $ | 53,051 | $ | 0 | $ | 0 | $ | 104,051 | ||||||
R. K. Herdman | $ | 96,061 | $ | 77,501 | $ | 0 | $ | 0 | $ | 173,562 | ||||||
A. M. Herman(4) | $ | 111,061 | $ | 77,501 | $ | 13,956 | $ | 0 | $ | 202,518 | ||||||
W. I. Miller(4) | $ | 84,561 | $ | 77,501 | $ | 35,491 | $ | 0 | $ | 197,553 | ||||||
G. R. Nelson | $ | 91,061 | $ | 77,501 | $ | 6,651 | $ | 0 | $ | 175,213 | ||||||
C. Ware | $ | 78,061 | $ | 77,501 | $ | 11,951 | $ | 0 | $ | 167,513 | ||||||
R. J. Darnall(5) | $ | 4,000 | $ | 0 | $ | 8,775 | $ | 0 | $ | 12,775 |
| Director | Board Retainer | Special Meeting Fees | Lead Director Fee | Committee Chaired | Committee Chair Fees | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
R. J. Bernhard | $ | 75,061 | $ | 3,000 | $ | 0 | Safety, Environment & Technology | $ | 8,000 | $ | 86,061 | |||||||||
F. R. Chang-Diaz | $ | 75,061 | $ | 3,000 | $ | 0 | $ | 0 | $ | 78,061 | ||||||||||
S. B. Dobbs | $ | 50,000 | $ | 1,000 | $ | 0 | $ | 0 | $ | 51,000 | ||||||||||
R. K. Herdman | $ | 75,061 | $ | 6,000 | $ | 0 | Audit | $ | 15,000 | $ | 96,061 | |||||||||
A. M. Herman | $ | 75,061 | $ | 6,000 | $ | 20,000 | Governance & Nominating | $ | 10,000 | $ | 111,061 | |||||||||
W. I. Miller | $ | 75,061 | $ | 2,000 | $ | 0 | Finance | $ | 7,500 | $ | 84,561 | |||||||||
G. R. Nelson | $ | 75,061 | $ | 6,000 | $ | 0 | Compensation | $ | 10,000 | $ | 91,061 | |||||||||
C. Ware | $ | 75,061 | $ | 3,000 | $ | 0 | $ | 0 | $ | 78,061 | ||||||||||
R. J. Darnall | $ | 0 | $ | 4,000 | $ | 0 | $ | 0 | $ | 4,000 |
The stock value represents fifty percent of the Company'sannual retainer. The number of shares is calculated by dividing the target value by the preceding 20-day average closing price of our Common Stock oron the NYSE on the grant date, rounded down to the nearest whole share. The value of any memberfractional share and the balance of the immediate familyannual retainer are paid in cash as shown above. Each director was awarded 1,080 shares of anystock, except for Mr. Dobbs, who received 581 shares. Because Mr. Dobbs' term began October 1, 2010, he was compensated for a pro rata portion of a term. Mr. Dobbs' shares were granted assuming a value of $86.03, the preceding 20-day average of closing prices of our Common Stock on the NYSE on the grant date of October 1, 2010. The shares for all other directors were granted assuming a value of $69.39, the preceding 20-day average of closing prices of our Common Stock on the NYSE on the grant date of May 11, 2010.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors, and persons who beneficially own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership of such securities with the Securities and Exchange Commission and the New York Stock Exchange. Copies of these reports must also be furnished to the Company. Based solely upon a review of the copies of the forms filed under Section 16(a) and furnished to the Company, written representations from reporting persons after inquiry, and forms filed by the Company on the reporting person's behalf, the Company believes that all filing requirements applicable to its executive officers and directors were complied with during 2007.
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
(Item 1013 on the Proxy Card)
The Audit Committee of the Company'sour Board of Directors has voted to appoint PricewaterhouseCoopers LLP, ("PwC")or PwC, as the firm of independent public accountants to audit the accounts of the Companyour financial statements for the year 2008.2011. Although the selection and appointment of independent public accountants is not required to be submitted to a vote of theour shareholders, theour Board of Directors has decided, as in the past, to ask the Company'sour shareholders to ratify this appointment. Such ratification does not limit the appointment.Audit Committee's ability to make subsequent changes to our auditors that it thinks appropriate. A representative of PwC will be present at the Annual Meeting of Shareholders,and will not have the opportunity to make a statement but will be available to answer appropriate questions. A report of the Audit Committee of the Company's Board of Directors in connection with its independence, the independence of the auditors and certain other matters follows theour Board's recommendation on this Item below.
AllWe believe that all services rendered to the Companyus by PwC are permissible under applicable laws and regulations, and arehave been pre-approved by or on behalf of the Audit Committee pursuant to the policy described below. Fees paid to PwC for services are disclosed in the table below under the categories listed therein.
These services are actively monitored (both spending level and work content) by or on behalf of the Audit Committee to maintain the appropriate objectivity and independence in PwC's core work, which is the audit of the Company'sour consolidated financial statements.
OUR BOARD RECOMMENDS THAT SHAREHOLDERS VOTEFOR THIS PROPOSAL TO RATIFY THE APPOINTMENT OF PwC. Appointment of PwC as auditors will be ratified if the votes cast in favor of the proposal exceed those cast against the proposal. Abstentions and broker non-votes will not affect the voting results for the ratification of PwC.
Audit and Non-Audit Fees
The following table presents fees for professional audit services rendered by PwC for the audit of the Company'sour annual financial statements for the years ended December 31, 20072010 and December 31, 2006,2009, and fees billed for other services rendered by PwC during those periods.
(dollar figures shown in millions)
| 2007 | 2006 | ||
---|---|---|---|---|
Audit fees:(1) | 7.6 | 7.1 | ||
Audit related fees: | 0 | 0 | ||
Tax fees:(2) | 0.4 | 0.3 | ||
Subtotal | 8.0 | 7.4 | ||
All other fees:(3) | .0 | 0.1 | ||
Total | 8.0 | 7.5 |
| 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
| (dollars in millions) | ||||||
Audit fees:(1) | 7.8 | 7.7 | |||||
Audit related fees:(2) | 0 | 0 | |||||
Tax fees:(3) | 0.5 | 0.4 | |||||
All other fees:(4) | 0 | 0 | |||||
Total | 8.3 | 8.2 |
Audit Committee Pre-Approval Policy
The Sarbanes-Oxley Act of 2002 and rules of the Securities and Exchange CommissionSEC prohibit the Company'sour independent accountant from providing certain types of non-audit services to the Company.us. They also require that all audit, review or attest engagements required under the securities laws and permitted non-audit services provided to the Companyus by itsour independent accountant be pre-approved by the Audit Committee or one of its members to whom the Audit Committee has delegated authority.
Under Companyour policy and procedures, when considering whether to approve non-audit services to be provided by the Company'sour independent accountant, the Audit Committee must consider whether the
provision of the service would adversely affect the independence of the independent accountant. Specifically, the Audit Committee must consider whether the provision of the service would (i)(1) place the accountant in the position of auditing his or her own work; (ii)(2) result in the accountant acting as management or an employee of theour company; or (iii)(3) place the accountant in the position of being an advocate for the Company.us. Any proposed non-audit service that the Audit Committee determines would adversely affect the independence of theour independent accountant shallwill not be approved.
The Audit Committee is solely responsible for pre-approving all audit and non-audit services. The Audit Committee has delegated to its Chairman authority to pre-approve audit and permitted non-audit services to be provided by the Company'sour independent accountant, provided that such services are permissible under theour foregoing policy and procedures and do not exceed $100,000 in the aggregate. Decisions of the Chairman must be reported to the full Audit Committee at its next scheduled meeting, and documented in a format required by the policy.
The Board of Directors recommends that shareholders voteFOR this proposal to ratify the appointment of PwC. Appointment of PwC as auditors will be ratified if the votes cast in favor of the proposal exceed those cast against the proposal.
The role of theour Audit Committee is to assist theour Board of Directors in fulfilling its oversight responsibilities as they relate to the Company'sour accounting policies, internal control over financial reporting, financial reporting practices and legal and regulatory compliance. Each member of the Committee is independent as defined under the New York Stock ExchangeNYSE listing standards. The Committee operates under a written charter that ishas been adopted by theour Board of Directors and reviewed by the Committee on a periodic basis. The Committee's current charter as adopted by the Board of Directors on December 12, 2006, can be viewed on the Company'sour website.
The Committee fulfills its responsibilities through periodic meetings with the Company'sour independent registered public accounting firm, internal auditors and management. During fiscal 2007,2010, the Committee met seven (7)10 times. The Committee schedules its meetings with a view to ensuring that it devotes appropriate attention to all of its tasks. The Committee, or the Committee Chair as representative of the Committee, discussed the interim financial information contained in each quarterly earnings announcement with the chief financial officer, controllerChief Financial Officer, Controller and the independent auditors, prior to public release. The Committee also met with the independent auditors to discuss the results of their reviews of the interim financial statements. The committee periodically meets in executive session.
Throughout the year, the Audit Committee monitors matters related to the independence of PricewaterhouseCoopers, the Company'sPwC, our independent registered public accounting firm. As part of its monitoring activities, the Committee obtained a letter from PwC containing a description of all relationships between PwC and the Company.us. After reviewing the letter and discussing it with our management, the Committee discussed with PwC its overall relationship with the Companyus and any of those relationships described in the letter that could impact PwC's objectivity and independence. Based on its continued monitoring activities and year-end review, the Committee satisfied itself as to PwC's independence. PwC also has confirmed in its letter that, in its professional judgment, it is independent of the Companyour company within the meaning of the Federalfederal securities laws and within the requirements of Ethics and Independence Standard Board (ISB) Standard No. 1,Rule 3526,Independence DiscussionCommunication with Audit Committees Concerning Independence.
The Committee reviewed with both the Company'sour independent and internal auditors their respective audit plans, audit scope, and identification of audit risks. Further, the Committee reviewed and discussed with our management and the independent auditor the Company'sPwC our audited financial statements and management's and the independent auditor'sPwC's evaluations of the Company'sour internal control over financial reporting, as reported in the Company's 2007our 2010 Annual Report on Form 10-K. Management has the responsibility for the preparation and integrity of the Company'sour financial statements and its internal
control over financial reporting and the independent auditorPwC has the responsibility for the examinations thereof.
The Committee discussed and reviewed with the independent auditorsPwC all matters required by auditing standards generally accepted in the United States of America, including those described in Statement on Auditing Standards No. 61, as amended, "Communication with Audit Committees.114, "The Auditor's Communication With Those Charged With Governance." With and without management present, the Committee discussed and reviewed the results of the independent auditors'PwC's examination of the Company'sour financial statements and internal control over financial reporting, as well as management's report on internal control over financial reporting. The Committee also discussed the results of internal audit examinations.
Based on the above-mentioned reviews and discussions with management, internal audit and the independent auditors,PwC, the Committee recommended to theour Board of Directors that the Company'sour audited financial statements and management's report on internal control over financial reporting be included in the Company'sour Annual Report on Form 10-K for the fiscal year ended December 31, 2007,2010, for filing with the Securities and Exchange Commission.SEC. The Committee also reappointed PwC as the Company'sour independent auditors for 2008.2011.
Respectfully submitted, | |||||
ROBERT K. HERDMAN, CHAIR ROBERT J. | |||||
BERNHARD FRANKLIN CHANG-DIAZ STEPHEN B. DOBBS ALEXIS M. HERMAN | |||||
GEORGIA R. NELSON | |||||
AMENDMENT TO THE RESTATED ARTICLESSTOCK OWNERSHIP OF INCORPORATION(Item 11 on the Proxy Card)DIRECTORS, MANAGEMENT AND OTHERS
On January 2, 2008, additionalThe following table sets forth information with respect to the beneficial ownership of our common stock as of March 14, 2011 by:
Beneficial ownership is determined in accordance with the rules of the SEC and includes any shares over which a person exercises sole or shared voting or investment power. Under these rules, beneficial ownership also includes any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days of March 14, 2011 through the exercise of any stock option or other right. Shares subject to stock options or other rights are deemed to be outstanding for the purpose of computing the ownership percentage of the person beneficially holding these stock option or other rights, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person.
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FMR LLC | 22,545,145 | (2) | 11.39 | % | ||||
82 Devonshire Street Boston, MA 02109 | ||||||||
State Street Corporation | 14,031,757 | (3) | 7.1 | % | ||||
One Lincoln Street Boston, MA 02111 | ||||||||
BlackRock, Inc. | 11,732,130 | (4) | 5.93 | % | ||||
40 East 52nd Street New York, NY 10055 | ||||||||
Robert J. Bernhard | 5,122 | * | ||||||
Pamela F. Carter | 51,082 | * | ||||||
Franklin R. Chang-Diaz | 1,889 | * | ||||||
Stephen B. Dobbs | 581 | * | ||||||
Richard J. Freeland | 53,496 | * | ||||||
Robert K. Herdman | 4,687 | * | ||||||
Alexis M. Herman | 28,482 | * | ||||||
N. Thomas Linebarger | 179,757 | * | ||||||
William I. Miller | 34,633 | (5) | * | |||||
Georgia R. Nelson | 13,875 | (6) | * | |||||
Theodore M. Solso | 564,871 | (7) | * | |||||
Pat J. Ward | 39,736 | (8) | * | |||||
Carl Ware | 15,334 | * | ||||||
All directors and executive officers as a group, a total of 21 persons | 1,301,633 | (9) | * |
Under Indiana law, shareholders must approve an amendment to the Company's Restated Articles of Incorporation. If the proposed amendment is approved, Section 4.1 of Article IV thereof will be amended to read in its entirety as follows:
"The total number of shares which the Corporation has authority to issue shall be 502,000,000 shares, consisting of 500,000,000 shares of common stock ("Common Stock"), 1,000,000 shares of preference stock ("Preference Stock") and 1,000,000 shares of preferred stock ("Preferred Stock"). The shares of Common Stock have a par value of $2.50 per share. The shares of Preference and Preferred Stock do not have any par or stated value, except that, solely for the purpose of any statute or regulation imposing any tax or fee based upon the capitalization of the Corporation, each of the Corporation's shares of Preference Stock and Preferred Stock shall be deemed to have a par value of $1.00 per share."
If approved, this amendment will become effective upon the filing with the Secretary of State of Indiana of Articles of Amendment of the Articles of Incorporation. The Company would make such a filing promptly after the Annual Meeting.
The Board of Directors believes that the proposed increase in the number of shares of Common Stock authorized for issuance is in the best interests of the Company and its shareholders. An increase in the number of authorized shares will give the Board of Directors the authority to issue shares to implement future capital structure and other transactions which are, in the best judgment of the Board, advantageous to the Company and its shareholders, regaining the capacity and flexibility it had for such transactions prior to the two-for-one stock split. As of March 24, 2008, there were 203,215,953 shares of Common Stock outstanding and 18,321,572 shares issued and held by the Company as treasury shares, aggregating 221,537,525 shares issued. No shares of Preference or Preferred Stock are currently issued and outstanding.
The Board of Directors recommends a voteFOR the proposal to amend the Restated Articles of Incorporation to increase the number of authorized shares of Common Stock. This Item will be approved if the number of votes cast in favor of the Item exceeds the number of votes cast against the Item.
SHAREHOLDER PROPOSAL REGARDING ADOPTIONOF INTERNATIONAL LABOR ORGANIZATION STANDARDS(Item 12 on the Proxy Card)
The following Shareholder Proposal has been submitted by Domini Social Investments, 536 Broadway, 7th Floor, New York, NY 10012-3915 ("Domini"), SEIU Master Trust, 11 Dupont Circle, N.W., Ste 900, Washington, D.C. 20036 ("SEIU"); and Harrington Investments, 1001 2nd Street, Suite 325, Napa, CA 94559 ("Harrington"), each of which is a beneficial owner of the requisite number of shares of Common Stock to make the proposal.
"WHEREAS: Cummins' reputation as a socially responsible company is a valuable asset to the Company. Cummins has been named to the "Best Corporate Citizen" list by CRO Magazine (formerlyBusiness Ethics Magazine) for eight consecutive years.
RESOLVED: Shareholders request the Board of Directors to:
SUPPORTING STATEMENT
Proponents recommendMr. Solso's spouse and 97,348 shares that the requested report be based onare held in a means of assessment determinedgrantor retained annuity trust. Also includes 110,216 shares pledged as security by the Board, subject to independent verification, and that it includeMr. Solso in connection with a discussion of any deficiencies that could result in non-compliance with ILO Conventions 87, 98 and 135, described briefly below:
Position of the Board of Directors
The Company recommends aNO vote on the proposal.
The Company is committed to fair and equitable treatment of all employees and other stakeholders. This proposal is based on information that is not current and calls for control measures that already are in place, and are effective and transparent. We support the workplace human rights principles and standards advocated by the proponent, and our existing Codes of Conduct, policies and procedures effectively address these issues.
We stand by our workers' rights record and believe our Code of Business Conduct already embodies the intent of the ILO standards being proposed by the proponent. For nearly 90 years, we have made it a priority to ensure that our employees have a safe and healthy work environment. Our Code of Business Conduct articulates this commitment and helps ensure that our standards are applied evenly and consistently throughout the Company. We conduct a regular review of our Code given the ever-changing nature of the Company and the workplace. Our Code was recently revised in January 2008, and outlines our commitment to ethical behavior and serves as a guide for the behavior of every one of our employees. It can be easily accessed by our workers on our intranet and by the public from the home page of our Web site, www.cummins.com.
The Code of Business Conduct includes many provisions that specifically protect the rights of workers and are in alignment with ILO Conventions 87, 98 and 135. These include the following:
The proposal references a "report" written last year about workers at Cummins distributors. The International Brotherhood of Teamsters—which represents no Cummins Inc. employees and represents only about 300 of the approximately 8,000 workers of Cummins' North American distributors—paid Mr. Compa to write this report, which he completed without contacting Cummins to check the facts or obtain the Company's response.
Cummins investigated the allegations in this report and found them to be without merit. The Company's investigation also confirmed that our distributors had not violated any laws or Company policies. Today there are no allegations of wrongdoing in the Cummins distribution network, employee-
ratified collective bargaining agreements are in effect at all union locations and no union or employee group anywhere in the world has echoed the allegations made in the Teamsters-funded "report."
Nonetheless, we are taking additional steps to ensure that our joint venture entities and distributors treat their employees in a fair and equitable fashion. By the end of the year, we will have completed an audit of our joint venture partners, including our North American distributors, to ensure that they have either adopted our Code of Business Conduct or a have a substantially similar code in place that embodies the same principles.
Since 2005, we have had a Supplier Code of Conduct in place that requires our suppliers to follow all local laws (including laws protecting freedom of association), refrain from using forced or child labor and provide a safe workplace where employees are treated with dignity and respect. We believe that adopting a Supplier Code of Conduct was a significant step towards protecting workers' rights because we can now reach beyond the limits of the Company and help protect workers' rights throughout the supply chain. We have introduced our Supplier Code to over 95% of our supply base and we will continue this rollout in 2008. We also are developing processes to confirm compliance with the Supplier Code and currently are updating the Supplier Code to better align it with the Company Code of Business Conduct. The Supplier Code can be found in the "Global Citizenship" section of Cummins web site.
The Company Code of Business Conduct and Supplier Code of Conduct, while important statements of behavioral norms, are meaningless unless they are enforced appropriately and discussed openly. We believe that the Codes are only important if people know about them, so we have placed both Codes on our website to allow our employees and the public to easily access them. We annually publish a Sustainability Report that includes a discussion of the Codes and the steps we have taken to comply with them, and this year we have enhanced our discussion regarding the Codes and our training of employees to show how we thoughtfully address issues of concern. We have taken other steps to ensure that both Codes are followed:
Information about these processes can be found in our most current Sustainability Report, available online at the home page and the "Investors and Media" section of www.cummins.com.
The proponents' proposal would be difficult, if not impossible, to implement and enforce and would likely be a drain on Company resources. The ILO standards were developed as international standards on which countries could establish workers' rights laws. They were never intended to be directly adopted by companies. We believe that the proposal is duplicative of the many steps that the Company has already taken to ensure that its employees' rights are protected, and adopting this proposal will impose unnecessary costs on the Company.
We stand by our record in regards to workers' rights and believe we have adequately addressed the matters raised in the proposal. This proposal, while well-intentioned, is burdensome and unnecessary in light of our proven commitment to our employees and other stakeholders. The Board of Directors, therefore, recommends a voteAGAINST the proposal. The proposal will be adopted if the number of votes cast in favor of the proposal exceeds the number of votes cast against the proposal. An abstention will have the same effect as a vote against the proposal. Broker non-votes will have no effect on the proposal.
TheOur Board of Directors does not know of any business to be presented for action at the meetingAnnual Meeting other than that set forth in the Notice of Annual Meeting of Shareholders as reflected in Items 1 through 1213 on the Proxy Card,proxy card, and as referenced in this Proxy Statement. However, if otherproxy statement. Under the terms of our by-laws, moreover, since the deadline for notice of additional business properly comes beforehas passed, no additional business may be presented for action at the Meeting, the members of the Proxy Committee will vote the returned proxies as the Board of Directors recommends.Annual Meeting.
OTHER INFORMATION
Related-Party Transactions
Our company, together with our subsidiaries and affiliates, is a global company with extensive operations in the U.S. and many foreign countries. We have thousands of employees with widespread authority to purchase goods and services. Because of these far-reaching activities, we encounter transactions and business arrangements with persons, businesses and other organizations in which one of our directors, executive officers or nominees for director, significant investors or their immediate families, may also be a director, executive officer, or have some other direct or indirect material interest. Such transactions and arrangements, which we refer to as related-party transactions, have the potential to create actual or perceived conflicts of interest.
As a result, the Audit Committee of our Board has established, and our Board has approved, a written policy and procedures for review, approval or ratification of any related-party transactions or proposed
transactions where the amount involved in any year exceeds or will exceed $120,000. These procedures require that, in deciding whether to approve such a related-party transaction involving a director, director nominee, executive officer, holder of more than five percent of our Common Stock or their immediate family members, the Audit Committee must consider, among other factors:
To receive Audit Committee approval a related party transaction must be on terms that are fair and reasonable to us, and which are as favorable to us as would be available from non-related entities in a comparable transaction. Our policy requires that there be a business or corporate interest supporting the transaction and that the transaction meets the same company standards that apply to comparable transactions with unaffiliated entities.
Based on information known to us, we believe there were no transactions during 2010 in which we were or are to be a participant in which the amount involved exceeded or will exceed $120,000, and in which any director, director nominee, executive officer, holder of more than five percent of our Common Stock at the time of the transaction or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest. Therefore, no transactions were required to be reviewed, approved or ratified by our Audit Committee under our related-party transactions policy and procedures and disclosed in this proxy statement in accordance with rules of the SEC.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who beneficially own more than 10% of our Common Stock, to file reports of ownership and changes in ownership of such securities with the SEC and the NYSE. Copies of these reports must also be furnished to us. Based solely upon a review of the copies of the forms filed under Section 16(a) and furnished to us, written representations from reporting persons after inquiry, and forms filed by us on the reporting person's behalf, we believe that all filing requirements under Section 16(a) applicable to our executive officers and directors were complied with during 2010.
Shareholders may submit proposals to be considered for shareholder action at the 2009our 2012 Annual Meeting of Shareholders and inclusion in the Company's Proxy Statementour proxy statement and proxy formcard if they do so in accordance with the appropriate regulations of the Securities and Exchange Commission.SEC. For such proposals to be considered for inclusion in the Proxy Statementour proxy statement and form of proxy card for the 2009our 2012 Annual Meeting of Shareholders, proposalsthey must be received by theour Secretary of the Company no later than December 4, 2008.November 23, 2011.
If a shareholder desires to bring proper business before an annual meeting of shareholders which is not the subject of a proposal timely submitted for inclusion in the Company's Proxy Statementour proxy statement and form of proxy as described above, the shareholder must follow procedures outlined in the Company's By-Laws.our by-laws. Pursuant to the Company's By-Laws,our by-laws, a shareholder may proposebring business to be considered at the annual meeting, provided that the shareholder (a)(1) is a shareholder of record at the time of giving notice to the Companyus of the proposalof the business and is entitled to vote at the annual meeting where the proposalbusiness will be considered, and (b)(2) complies with the applicable notice procedures of Article I of the Company's By-Laws.set forth in our by-laws. That Article provides that, in the proposingcase of business other than the election of directors, the shareholder bringing the business must deliver written notice of the proposalbusiness to the Company's
our Secretary no later than 90 days preceding the first Tuesday of May ofdate the meeting year,is scheduled to occur in the notice of such meeting first given to shareholders, which we refer to as the "originally scheduled date," unless the Board of Directors establishes ansuch date is earlier date than the first Tuesdayanniversary of Maythe date set forth in our first mailed definitive proxy materials for the prior year's annual meeting, in which case written notice of the proposal must be delivered not later than the close of business on the 10th10th day following the first public disclosure of the earlier date. The
Each required notice must contain certain information, including information about the shareholder, as prescribed by the By-Laws.by-laws.
The cost of this proxy solicitation will be borne by us. We will solicit proxies by mailing proxy materials to certain shareholders and a Notice of Internet Availability of Proxy Materials to all other shareholders; for shareholders that do not receive the Company.full proxy materials, printed copies will be sent upon request as provided below and as provided in the Notice of Internet Availability of Proxy Materials.
We have retained Morrow & Co., Inc.LLC., 470 West Avenue, Stamford, Connecticut 06902, has been retained to assist us in the solicitation of proxies and will receivefor a fee not to exceed $8,000$8,500 plus expenses. Proxies may also be solicited by mail, telephone, e-mail or fax by our directors, officers and employees of the Company at no additional cost.who will not be separately compensated for such services. Banks, brokerage houses and other institutions, nominees or fiduciaries will be requested to forward the proxy materials to the beneficial owners of the Common Stock and will be reimbursed for their reasonable expenses incurred in forwarding such materials.
April 3, 2008
proxy materials to the beneficial owners of our Common Stock upon request.
NOMINEES FOR BOARD OF DIRECTORSDelivery of Proxy Materials to Households
Pursuant to the rules of the SEC, services that deliver our communications to shareholders that hold their stock through a bank, broker or other holder of record may deliver to multiple shareholders sharing the same address a single copy of our Notice of Internet availability of Proxy Materials and, as applicable, a printed version of our annual report to shareholders and this proxy statement. Upon oral or written request, we will promptly deliver a separate copy of the Notice of Internet Availability of Proxy Materials, annual report to shareholders and/or proxy statement to any shareholder at a shared address to which a single copy of the document was delivered.
Shareholders sharing an address may also request delivery in the future of a single copy of a Notice of Internet Availability of Proxy Materials, annual report to shareholders and/or proxy statement if they are currently receiving multiple copies of such documents. Shareholders may notify us of their requests by calling or writing to our Corporate Secretary at (812) 377-5000 or Cummins Inc., Mail Code 60903, 500 Jackson Street, Columbus, Indiana 47201.
March 23, 2011
We will furnish to any shareholder, without charge, a copy of our Annual Report on Form 10-K. You may also obtain a copy of the Form 10-K by writing to Marya M. Rose, Corporate Secretary, Cummins Inc., Mail Code 60903, 500 Jackson Street, Columbus, Indiana 47201 or on our website at www.cummins.com.
CUMMINS ANNUAL SHAREHOLDER MEETING
May 13, 2008—10, 2011—11:00 A.M. (Eastern Daylight SavingsSaving Time)
COLUMBUS ENGINE PLANT
500 CENTRAL AVENUE
CUMMINS INC.
ANNUAL MEETING OF SHAREHOLDERS
Tuesday, May 13, 2008
11:00 a.m. Eastern Daylight Savings Time
COLUMBUS ENGINE PLANT
500 Central Avenue
Columbus, Indiana
If you consented to access your proxy information electronically, you may view it by going to the Cummins Inc. website. You can get there by typing in the following address: www.ematerials.com/cmi
If you would like to access the proxy materials electronically next year, go to the following Consent site address: www.ematerial.com/cmi
CUMMINS INC. 2011 ANNUAL MEETING OF SHAREHOLDERS Tuesday, May 10, 2011 11:00 a.m. Eastern Daylight Saving Time COLUMBUS ENGINE PLANT 500 Central Avenue Columbus, Indiana Directions to the Cummins Inc. | Indiana on Tuesday, May 10, 2011 at 11:00 a.m. Eastern Daylight Saving Time. This communication presents only an overview of the more complete proxy |
This proxy is solicited by the Board of Directors for use at the Annual Meeting on May 13, 2008.
If no choice is specified, the proxy will be voted “FOR” Items 1 through 11 and “AGAINST” Item 12.
By signing the proxy, you revoke all prior proxies and appoint Robert J. Darnall and William I. Miller, and each of them acting in the absence of the other, with full power of substitution, to vote your shares on the matters shown on the reverse side and any other matters which may come before the Annual Meeting and all adjournments.
This card also constitutes voting instructions to the trustees or administrators, as applicable, of the Cummins Inc. and Affiliates Retirement and Savings Plans to vote shares attributable to accounts the undersigned may hold under such plans as indicated on the reverse of this card. If no voting instructions are provided, shares held in these accounts will be voted in the same manner and proportion as shares with respect to which valid voting instructions were received.
See reverse for voting instructions.
There are three ways to vote your Proxy
materials that are available to you on the Internet. We encourage you to access and review all of the important information contained in the proxy materials before voting. The Annual Report, Notice, and Proxy Statement are available at www.ematerials.com/cmi If you want to receive a paper copy or an e-mail with links to the electronic materials, you must request one. There is no charge to you for requesting a copy. Please make your request for a copy as instructed on the reverse side of this notice on or before April 30, 2011 to facilitate timely delivery. Matters intended to be acted upon at the meeting are listed below. The Board of Directors recommends that you vote FOR Items 1 through 11, 1 YEAR for proposal 12, and FOR Item 13: Election of Directors 1. Theodore M. Solso 6. Carl Ware 2. N. Thomas Linebarger 7. Robert K. Herdman 3. William I. Miller 8. Robert J. Bernhard 4. Alexis M. Herman 9. Dr. Franklin R. Chang-Diaz 5. Georgia R. Nelson 10. Stephen B. Dobbs Advisory Votes on Executive Compensation 11. Advisory vote to approve the compensation of the named executive officers as disclosed in the proxy statement. 12. Advisory vote on the frequency of the advisory vote to approve the compensation of the named executive officers. Ratification of Auditors 13. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as auditors for the year 2011. THIS IS NOT A FORM FOR VOTING You may immediately vote your proxy on the Internet at: www.eproxy.com/cmi • Use the Internet to vote your proxy 24 hours a day, 7 days a week, until 12:00 a.m. (midnight) (CT) on May 9, 2011. For shares held in the Cummins Inc. and Affiliates Retirement and Savings Plans, the deadline is 12:00 a.m. (midnight) (CT) on May 8, 2011. • Please have this Notice and the last four digits of your Social Security Number or Tax Identification Number available. Follow the instructions to vote your proxy. Your |
| To request paper copies of the proxy materials, which include the proxy card, proxy statement and annual report, please contact us via: Internet – Access the Internet and go to www.ematerials.com/cmi . Follow the instructions to log in, and order copies. Telephone – Call us free of charge at 866-697-9377 in the U.S. or Canada, using a touch-tone phone, and follow the instructions to log in and order copies. Email – Send us an email at ep@ematerials.com with “CMI Materials Request” in the subject line. The email must include: • The 3-digit company # and the 11-digit control # located in the box in the upper right hand corner on the front of this notice. • Your preference to receive printed materials via mail -or- to receive an email with links to the electronic materials. • If you choose email delivery you must include the email address. • If you would like this election to apply to delivery of material for all future meetings, write the word “Permanent” and include the last 4 digits of your Tax ID number in the email. |
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VOTE BY PHONE — TOLL FREE — 1-800-560-1965 — QUICK EASY IMMEDIATE
· Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week, until 12:00 p.m. (CT) on May 12, 2008. For shares held in the Cummins Inc. and Affiliates Retirement and Savings Plans, the deadline is 12:00 p.m. (noon) (CT) on May 11, 2008.
· Please have your proxy card and the last four digits of your Social Security Number or Tax Identification Number available. Follow the simple instructions the voice provides you.
VOTE BY INTERNET — www.eproxy.com/cmi — QUICK EASY IMMEDIATE
· Use the Internet to vote your proxy 24 hours a day, 7 days a week, until 12:00 p.m. (noon) (CT) on May 12, 2008. For shares held in the Cummins Inc. and Affiliates Retirement and Savings Plans, the deadline is 12:00 p.m. (noon) (CT) on May 11, 2008.
· Please have your proxy card and the last four digits of your Social Security Number or Tax Identification Number available. Follow the simple instructions to obtain your records and create an electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope we’ve provided or return it to Cummins Inc., c/o Shareowner ServicesY, P.O. Box 64873, St. Paul, MN 55164-0873.
If you vote by Phone or Internet, please do not mail your Proxy Card
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10. | Stephen B. Dobbs 11. Advisory vote to approve the compensation of the named executive officers as disclosed in the proxy statement. For Against Abstain The Board of Directors recommends you vote 1 year on the following proposal: 12. Advisory vote on the frequency of the advisory vote to approve the compensation of the named executive officers. 1 Year 2 Years 3 Years Abstain The Board of Directors recommends you vote FOR the following proposal: 13. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as |
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2011. For Against Abstain THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED FOR ITEMS 1 THROUGH 11, FOR 1 YEAR FOR ITEM 12 AND | ||||||||||||||||
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CUMMINS INC. 2011 ANNUAL MEETING OF SHAREHOLDERS Tuesday, May 10, 2011 11:00 a.m. Eastern Daylight Saving Time COLUMBUS ENGINE PLANT 500 Central Avenue Columbus, Indiana Important Notice Regarding the Availability of Proxy Materials for the 2011 Annual Shareholder Meeting to be held on May 10, 2011: The Annual Report and Notice and Proxy Statement are available at www.ematerials.com/cmi If you consented to access your proxy information electronically, you may view it by going to the following address: www.ematerials.com/cmi If you would like to access the proxy materials electronically next year, go to the following Consent site address: www.ematerials.com/cmi Cummins Inc. 500 Jackson Street Columbus, IN 47201 proxy This proxy is solicited by the Board of Directors for use at the Annual Meeting on May 10, 2011. If no choice is specified, the proxy will be voted “FOR” Items 1 through 11, “1 Year” for Item 12 and “FOR” Item 13. By signing the proxy, you revoke all prior proxies and appoint Theodore M. Solso and N. Thomas Linebarger, and each of them acting in the absence of the other, with full power of substitution, to vote your shares on (i) the matters shown on the reverse side and (ii) any other matters which may come before the Annual Meeting and all adjournments. Please note that the authorization provided under clause (ii) above does not apply to shares held in the Cummins Inc. and Affiliates Retirement and Savings Plans. This card also constitutes voting instructions to the trustee of the Cummins Inc. and Affiliates Retirement and Savings Plans to vote shares attributable to accounts the undersigned may hold under such plans. If no voting instructions are provided, shares held in these accounts will be voted in the same manner and proportion as shares with respect to which valid voting instructions were received. Any instructions received by the trustee from participants regarding their vote shall be confidential. Plan participants are invited to attend the annual meeting, however cannot vote their shares at the annual meeting. Vote by Internet, Telephone or Mail 24 Hours a Day, 7 Days a Week Your phone or Internet vote authorizes the named proxies to vote your shares in the same manner as if you marked, signed and returned your proxy card. INTERNET PHONE MAIL www.eproxy.com/cmi 1-800-560-1965 Mark, sign and date Use the Internet to vote your proxy Use any touch-tone telephone to vote your your proxy card and return 24 hours a day, 7 days a week, until proxy 24 hours a day, 7 days a week, until it in the postage-paid 12:00 a.m. (midnight) (CT) on May 9, 2011. 12:00 a.m. (midnight) (CT) on May 9, 2011. envelope provided. For shares held in the Cummins Inc. For shares held in the Cummins Inc. and Affiliates Retirement and Savings and Affiliates Retirement and Savings Plans, the deadline is 12:00 a.m. Plans, the deadline is 12:00 a.m. (midnight) (CT) on May 8, 2011. (midnight) (CT) on May 8, 2011. If you vote your proxy by Internet or by Telephone, you do NOT need to mail back your Proxy Card. | ||||||||||||||||