SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

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GARDNER DENVER, INC.

(Name of Registrant as Specified In Its Charter)

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

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March 12, 2008

 

TO OUR STOCKHOLDERS:

 

You are cordially invited to attend the 2008 Annual Meeting of Stockholders on Tuesday, May 6, 2008 at 1:30 p.m., at the Quincy Country Club, 2410 State Street, Quincy, Illinois.

 

The attached Notice and Proxy Statement describe the business of the meeting. After the transaction of formal business, a question and answer period will follow.

 

We look forward to a significant vote of the Common Stock, either in person or by proxy. We are again offering three convenient ways to vote your proxy. If you are a stockholder of record, you may use the toll-free telephone number on the proxy card to vote your shares or you may vote your shares via the Internet by following the simple instructions on the proxy card. If you prefer to vote your shares by mail, simply complete, date, sign and return your proxy card in the enclosed stamped and addressed envelope. Regardless of your method of voting, you may revoke your proxy and vote in person if you decide to attend the Annual Meeting.

 

We are again offering you the opportunity to access future stockholder communications (e.g., annual reports, proxy statements, related proxy materials) over the Internet instead of receiving such communications in print. Participation is completely voluntary. If you give your consent, in the future, when our material is available over the Internet, the package you receive containing your proxy voting card will contain the Internet location where the material is available (www.gardnerdenver.com). There is no cost to you for this service other than any charges you may incur from your Internet provider, telephone and/or cable company. Once you give your consent, it will remain in effect until revoked, which you may do at any time by writing to us or our transfer agent, National City Bank. In addition, you may also request paper copies of any such communications at any time by writing to us or our transfer agent.

 

Your support is appreciated, and we hope that you will be able to join us at the May 6th meeting.

 

Cordially,

 

 

Ross J. Centanni

Executive Chairman of the Board

GARDNER DENVER, INC.
1800 Gardner Expressway
Quincy, Illinois 62305

 

NOTICE OF 2008 ANNUAL MEETING OF STOCKHOLDERS

 

The 2008 Annual Meeting of Stockholders of Gardner Denver, Inc. (the “Company”) will be held at the Quincy Country Club, 2410 State Street, Quincy, Illinois on Tuesday, May 6, 2008 at 1:30 p.m., for the following purposes:

 

1. To elect three directors to serve for a three-year term each; and

 

2. To transact such other business as may properly come before the meeting.

 

Stockholders of record at the close of business on March 7, 2008 are entitled to notice of, and to vote at, the meeting and any adjournments thereof. Stockholders of record may vote their proxy by completing the enclosed proxy card, calling the toll-free number indicated on the proxy card, or accessing the Internet website specified in the instructions included on the proxy card. A stockholder may revoke a proxy at any time before it is voted at the meeting by following the procedures described in the attached Proxy Statement.

 

FOR THE BOARD OF DIRECTORS

 

 

Tracy D. Pagliara

Executive Vice President, Administration,

General Counsel and Secretary

 

Quincy, Illinois

March 12, 2008

 

RETURN OF PROXIES REQUESTED

 

GARDNER DENVER, INC.
1800 Gardner Expressway
Quincy, Illinois 62305

 

PROXY STATEMENT

 

GENERAL INFORMATION

 

The accompanying proxy is solicited by the Board of Directors of Gardner Denver, Inc. (the “Company” or “Gardner Denver”) and will be voted in accordance with the instructions given (either in a signed proxy card or voted through the toll-free telephone or Internet procedures described below) and not revoked. A stockholder may revoke a proxy at any time before it is voted by (1) giving notice to the Company in writing, (2) submitting another proxy that is properly signed and later dated, or (3) voting in person at the meeting. Attendance at the meeting will not in and of itself revoke a proxy.

 

This Proxy Statement and the enclosed proxy card are first being mailed to stockholders on or about March 19, 2008. The record date for determining the stockholders entitled to vote at the meeting was the close of business on March 7, 2008 (the “Record Date”). On that date, the outstanding voting securities of the Company were 52,568,944 shares of Common Stock, par value $0.01 (“Common Stock”). Each share of Common Stock is entitled to one vote. A majority of the outstanding shares of Common Stock is required to establish a quorum. Abstentions and “broker non-votes” (as described below) will be considered present at the meeting for purposes of determining a quorum with respect to items brought before the meeting.

 

Brokers holding shares for beneficial owners must vote these shares according to specific instructions received from the owner. If specific instructions are not received, brokers may vote these shares in their discretion on certain routine matters, such as the election of directors. However, the New York Stock Exchange (the “NYSE”) rules preclude brokers from exercising their voting discretion on certain proposals. In these cases, if they have not received specific instructions from the beneficial owner, brokers may not vote on the proposals, resulting in what is known as a “broker non-vote.”

 

The affirmative vote of a majority of the outstanding shares of Common Stock having voting power present at the meeting, in person or by proxy and voting thereon, is required to elect each of the nominees as a director of the Company (Item 1 on the proxy card). For these purposes, abstentions and “broker non-votes” will not be counted as voting for or against the proposal to which it relates.

 

The Company is not aware of any matter that will be presented to the meeting for action on the part of the stockholders other than those stated in the notice. If any other matter is properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote the shares to which the proxy relates in accordance with their best judgment.

 

Stockholders of record may vote using the toll-free number listed on the proxy card or via the Internet or they may complete, sign, date and mail the enclosed proxy card in the postage-paid envelope provided. The telephone and Internet voting procedures are designed to authenticate stockholders’ identities. The procedures allow stockholders to give their voting instructions and confirm that their instructions have been properly recorded. Specific instructions to be followed by any stockholder of record interested in voting by telephone or the Internet are set forth on the enclosed proxy card.

 

Stockholders may vote by telephone or through the Internet 24 hours a day, 7 days a week. Telephone or Internet votes must be received by 11:59 p.m. Eastern Time on May 5, 2008 for all shares of Common Stock other than shares held in the Gardner Denver, Inc. Retirement Savings Plan (the “Savings Plan”) and the related Gardner Denver, Inc. Supplemental Excess Defined Contribution Plan (the “Excess Contribution Plan”).

 

Shares of Common Stock held in the Savings Plan and Excess Contribution Plan will be voted by JPMorgan Chase Bank, N. A. (“JPMorgan”), as trustee of these plans. In the case of participants in these plans, the enclosed proxy card reflects the number of equivalent shares credited to your account. Voting instructions to JPMorgan regarding your shares in the Savings Plan and Excess Contribution Plan must be received by 6:00 a.m. Eastern Time on May 2, 2008. Such voting instructions can be made in the same manner as other shares of Common Stock voted

by proxy (i.e., by returning the proxy card by mail or voting by telephone or through the Internet as described above). A vote by telephone or through the Internet authorizes JPMorgan and the proxies named on the enclosed proxy card to vote your shares in the same manner as if you marked, signed and returned your proxy card. Therefore, if you vote by telephone or Internet, there is no need to return the proxy card.

 

After May 2, 2008, all shares of Common Stock held in the Savings Plan and Excess Contribution Plan for which voting instructions have not been received, and all shares not yet allocated to participants’ accounts, will be voted by JPMorgan, as trustee, as directed by the Company, in the same proportion (for or against) as the shares for which instructions are received from participants in these plans. If you fail to return a proxy properly signed or fail to cast your votes by telephone or via the Internet by May 2, 2008, the equivalent shares of Common Stock credited to your Savings Plan and Excess Contribution Plan accounts will be voted by JPMorgan, as trustee, as directed by the Company, in the same proportion as the shares for which instructions were received from other participants in these plans.

 

The cost of soliciting proxies will be paid by the Company. The Company will, upon request, reimburse brokerage houses, custodians, nominees and others for their out-of-pocket and reasonable clerical expenses incurred in connection with such solicitation. For the purpose of obtaining broad representation at the meeting, Georgeson Inc. has been retained by the Company to assist in the solicitation of proxies at an anticipated cost of approximately $10,000 plus reimbursement of reasonable expenses. Officers and employees of the Company, without being additionally compensated, may also make requests for the return of proxies by letter, telephone or other means or in person.

 

If you are a registered holder of shares, you have the option to access future stockholder communications (e.g., annual reports, proxy statements and related proxy materials) over the Internet instead of receiving those documents in print. Participation is completely voluntary. If you give your consent to receive such material electronically, in the future, when our material is available over the Internet, the package you receive containing your proxy voting card will contain the Internet location where such stockholder communications are available (www.gardnerdenver.com). The material will be presented in PDF format. There is no cost to you for this service other than any charges you may incur from your Internet provider, telephone and/or cable company. Once you give your consent, it will remain in effect until you inform the Company otherwise. You may revoke your consent at any time and/or request paper copies of any of these stockholder communications by writing the Company’s transfer agent, National City Bank, Shareholder Services Operations, Locator 5352, P.O. Box 92301, Cleveland, Ohio 44101-4301, or by writing the Company, Attention: Corporate Secretary. Information on our website does not constitute a part of this proxy statement.

 

To give your consent to receive such material electronically, follow the prompts when you vote by telephone or over the Internet or check the appropriate box located at the bottom of your proxy card when you vote by mail.

 

PROPOSAL I — ELECTION OF DIRECTORS

 

The authorized number of directors of the Company is presently fixed at nine. The directors are divided into three classes, with each class having three members. Directors in each class are elected for three-year terms so that the term of office of one class of directors expires at each annual meeting.

 

For election as directors at the Annual Meeting of Stockholders to be held on May 6, 2008, the Board of Directors has approved the nominations of Donald G. Barger, Jr., Raymond R. Hipp and David D. Petratis, who are currently directors, to serve for three-year terms expiring in 2011. The Board of Directors believes that the election of these nominees will be in the best interests of the stockholders and, accordingly, recommends a vote FOR election of these nominees, which is Item 1 on the proxy card. Proxies received in response to the Board’s solicitation will be voted FOR election of these nominees for director if no specific instructions are included for Item 1, except for shares held in the Savings Plan and Excess Contribution Plan which shall be voted as set forth in the accompanying proxy. See also “General Information”.

 

If any one of the nominees becomes unavailable or unwilling for good reason to stand for election, the accompanying proxy will be voted for the election of such person, if any, as shall be recommended by the Board of

Directors, or will be voted in favor of holding a vacancy to be filled by the directors. The Company has no reason to believe that any nominee will be unavailable or unwilling to stand for election.

 

The following information is provided regarding the nominees for election as a director and each of the other directors who will continue in office after the meeting.

 

NOMINEES FOR ELECTION

 

 

Terms Expiring at the 2011 Annual Meeting of Stockholders

 

DIRECTORS WHOSE TERMS OF OFFICE WILL CONTINUE AFTER THE MEETING

 

Terms Expiring at the 2009 Annual Meeting of Stockholders

 

 

Terms Expiring at the 2010 Annual Meeting of Stockholders

 

 

Retired Director Who Served During 2007*

 

Thomas M. McKenna, age 70, was a director of Gardner Denver, Inc. since its spin-off from Cooper in April 1994 until his retirement from the Board of Directors in February 2008. Mr. McKenna served as the President of United Sugars Corporation, a marketing cooperative which is one of the nation’s largest sugar marketers to both the industrial and retail markets, from December 1998 until his retirement in December 2002. He was President and Chief Executive Officer of Moorman Manufacturing Company, a privately held manufacturer of agricultural supplies, from August 1993 until January 1998. Mr. McKenna has a B.A. degree from St. Mary’s College and an M.B.A. from Loyola University.

 

*Pursuant to our director retirement policy, Mr. McKenna retired from the Board of Directors at the February 2008 Board of Directors’ meeting, which was the first meeting following the date Mr. McKenna attained 70 years of age.

 

BOARD OF DIRECTOR RESPONSIBILITIES, COMPENSATION AND RELATIONSHIPS

 

Our Board of Directors (the “Board”) held six meetings, including two special meetings, during 2007. Pursuant to our Corporate Governance Policy, each director is expected to attend our annual stockholder meeting. Each director attended our annual stockholder meeting and at least 75% of the Board meetings and meetings of committees of which he or she was a member.

 

Director Independence

 

Our Board has adopted categorical standards of independence for its members, a copy of which is attached hereto as Appendix A (“Director Independence Standards”). In accordance with NYSE and Securities and Exchange Commission (“SEC”) rules and guidelines, our Board assesses the independence of its members from time to time. As part of this assessment, the following steps are taken:

 

 

 

 

Our Board has reviewed the commercial and other relationships between our company and its present directors (including all of the nominees presently standing for election) and members of the directors’ immediate family. Our Board has also reviewed the commercial and other relationships between our company and any entity of which a director or an immediate family member of a director serves as an executive officer, general partner or significant equity holder. After taking into account all relevant facts and circumstances, our Board determined that there were no material relationships, whether industrial, banking, consulting, legal, accounting, charitable or familial, which would impair the independence of any of the directors or nominees, other than Messrs. Centanni and Pennypacker, as noted below. In making this determination, our Board considered that in the ordinary course of business, transactions may occur between our company and companies at which one of the directors or his or her family members are or have been an officer. In each case, the amount of transactions with these companies in each of the last three years was determined to be immaterial and did not approach the thresholds set forth in the Director Independence Standards. In particular, our Board considered a business relationship in the ordinary course of business for freight management services between our company and YRC Logistics, an affiliate of YRCW or YRC Logistics. Our Board determined that our relationship with YRC Logistics was a customary relationship that was carried on in the ordinary course of business on an arms-length basis and that such relationship did not impact Mr. Barger’s independent status under the NYSE corporate governance standards or otherwise interfere with his ability to exercise independence as a director or Audit Committee member.

 

On the basis of this assessment and the standards for independence adopted by the NYSE and SEC, our Board determined that all of its members (including all of the nominees presently standing for election), other than Mr. Centanni, our Executive Chairman, and Mr. Pennypacker, our President and Chief Executive Officer, are independent. Messrs. Centanni and Pennypacker are not independent because they are both employees of our company.

 

Board of Directors Committees

 

Our Board has three standing committees composed exclusively of independent nonemployee directors: the Audit and Finance Committee (“Audit Committee”), the Management Development and Compensation Committee (“Compensation Committee”) and the Nominating and Corporate Governance Committee (“Nominating Committee”). Our Board has adopted written charters for each of theses committees, copies of which are available on the our website at www.gardnerdenver.com. Copies of each such charter are also available in print to any stockholder upon request in writing to our Corporate Secretary at 1800 Gardner Expressway, Quincy, Illinois 62305 or by telephone to 217-222-5400. Information on our website does not constitute a part of this proxy statement.

 

The Audit and Finance Committee. Our Audit Committee, currently composed of Donald G. Barger, Jr., Chairperson, Raymond R. Hipp, David D. Petratis and Charles L. Szews, held eleven meetings during 2007, including seven telephonic meetings prior to the release of earnings and regulatory filings. Thomas M. McKenna served on our Audit Committee during 2007 and until February 19, 2008, at which time he retired from our Board.

Our Board has determined that all members of our Audit Committee are independent, pursuant to NYSE listing standards and SEC guidelines. Our Board has also determined that Donald G. Barger, Jr. and Charles L. Szews are both audit committee financial experts, as that term is defined in SEC rules. Our Board adopted a written charter for our Audit Committee, which is available on our website at www.gardnerdenver.com. Information on our website does not constitute a part of this proxy statement.

 

The purpose of our Audit Committee is to assist our Board (with particular emphasis on the tone at the top of the company) in fulfilling its oversight responsibilities with respect to:

 

 

The specific functions of our Audit Committee include, among other things:

 

 

 

Our Audit Committee has authority to retain outside financial and legal advisors to assist it in meeting any of the above obligations, as necessary and appropriate, and to ensure that we provide appropriate funding to pay the fees and expenses of our independent auditors and our Audit Committee’s other outside advisors.

 

The Management Development and Compensation Committee. Our Compensation Committee, currently composed of Richard L. Thompson, Chairperson, Frank J. Hansen and Diane K. Schumacher, held three meetings during 2007. Thomas M. McKenna served on the Compensation Committee during 2007 and until February 19, 2008, at which time he retired from our Board. Our Board has determined that all members of the Compensation Committee are independent, pursuant to NYSE and SEC guidelines. Our Board adopted a written charter for the Compensation Committee, which is available on our website at www.gardnerdenver.com. Information on our website does not constitute a part of this proxy statement.

 

The purpose of our Compensation Committee is to assist our Board in discharging its responsibilities relating to executive selection, retention and compensation and succession planning. The specific functions of our Compensation Committee include, among other things:

 

 

 

 

 

Our Compensation Committee has authority to retain executive compensation consulting firms and other consultants, including outside financial and legal advisors, to assist it in meeting any of the above obligations, as necessary and appropriate, and to ensure that we provide appropriate funding to pay the fees and expenses of such advisors. During 2007, at our Compensation Committee’s direction, we hired Hewitt Associates LLC (“Hewitt”), an independent executive and nonemployee director compensation consultant. Hewitt was retained to evaluate and make recommendations to our Compensation Committee regarding our executive compensation philosophy and practice. Also at our Compensation Committee’s direction, we retained Mercer, LLC an independent executive and nonemployee director compensation consultant, to evaluate and make recommendations to our Compensation Committee regarding the compensation of our Executive Chairman position.

 

The Nominating and Corporate Governance Committee. The Nominating Committee, currently composed of Diane K. Schumacher, Chairperson, Frank J. Hansen and Richard L. Thompson, held three meetings, including one special meeting, during 2007. Our Board has determined that all members of our Nominating Committee are independent, pursuant to NYSE and SEC guidelines. Our Board adopted a written charter for our Nominating Committee, which is available on our website at www.gardnerdenver.com. Information on our website does not constitute a part of this proxy statement.

 

The purpose of our Nominating Committee is to make recommendations to our Board on director nominees, Board practices and corporate governance practices and principles. The specific functions of our Nominating Committee include, among other things:

 

 

Our Nominating Committee has authority to retain independent third-party search firms and outside financial and legal advisors to assist it in meeting any of the above obligations, as necessary and appropriate, and to ensure that we provide appropriate funding to pay the fees and expenses of such advisors. At our Nominating Committee’s direction, we hired Hewitt to evaluate and make recommendations to our Nominating Committee for our 2007 nonemployee director compensation. Also at our Nominating Committee’s direction, we retained Heidrick & Struggles, a senior-level executive search consultant, to assist our Board in the executive search for potential President and Chief Executive Officer candidates.

 

Our Nominating Committee must review with our Board, on at least an annual basis, the requisite qualifications, independence, skills and characteristics of Board candidates, members and our Board as a whole. When assessing potential new directors, our Nominating Committee considers individuals from various and diverse backgrounds. While the selection of qualified directors is a complex and subjective process that requires consideration of many intangible factors, our Nominating Committee believes that candidates generally should, at a minimum, meet the following criteria:

 

 

Our Nominating Committee will consider such candidates if a vacancy arises or if our Board decides to expand its membership, and at such other times as our Nominating Committee deems necessary or appropriate. Our Nominating Committee will consider stockholder recommendations for candidates for our Board, provided such candidates meet the minimum criteria stated above. Any stockholder wishing to submit a candidate for consideration should send the following information to the Corporate Secretary, Gardner Denver, Inc., 1800 Gardner Expressway, Quincy, Illinois 62305:

 

 

Our Corporate Secretary will promptly forward such materials to the Chairperson of our Nominating Committee and to our Executive Chairman of the Board. The same criterion applies with respect to our Nominating Committee’s evaluation of all candidates for membership to our Board, including candidates recommended by

stockholders. However, separate procedures will apply, as provided in our Bylaws, if a stockholder wishes to submit at an annual meeting a director candidate who is not approved by our Nominating Committee or our Board.

 

Compensation of Directors

 

Annually, our Nominating Committee reviews and establishes the compensation of our nonemployee directors and makes a recommendation to our Board. At our Nominating Committee’s direction, we retained Hewitt to evaluate and make recommendations to our Nominating Committee regarding our nonemployee directors’ compensation for 2007. Hewitt reviewed our nonemployee directors’ annual cash and equity compensation to ensure our compensation program was appropriate for the increased level of responsibility our Board has assumed in today’s corporate governance environment and remained competitive relative to our custom peer group. For a list of companies included in our custom peer group, please see the “Benchmarking” discussion on page 20.

 

To determine the competitiveness of our nonemployee director compensation program and the comparator companies, Hewitt measured each component of pay at the current dollar value. Hewitt reviewed our Board retainer and meeting fees, committee meeting fees, equity program (stock options and our Phantom Stock Plan) and the overall net compensation in comparison with our custom peer group. Although, we do not pay our nonemployee directors committee retainer fees, some companies in our custom peer group do, so this was also included in Hewitt’s overall analysis. Hewitt provided a summary of their analysis for each compensation element of compensation paid to our nonemployee directors in comparison with our custom peer group.

 

The Hewitt nonemployee director compensation report found that our total retainer and fees (annual retainer plus Board and committee meeting fees) were substantially below market. Specifically, our cash compensation was forty-two percent (42%) below our custom peer group’s average and thirty-four percent (34%) below the custom peer group median. Hewitt advised that this could be traced primarily to the posture of the annual retainer and committee meeting fee structure. In addition, the Hewitt report noted the increasing prevalence of restricted stock grants for nonemployee directors.

 

Our Nominating Committee evaluated Hewitt’s nonemployee director compensation report and assessed whether the current pay mix levels were appropriate in relation to the increased activity expectations for our nonemployee directors. After fully analyzing the current state of our nonemployee director compensation, our Nominating Committee recommended to our Board the following changes, which were approved and became effective on May 1, 2007:

 

 

Beginning May 2007, our nonemployee directors each received an annual retainer of $40,000. Additionally, nonemployee directors received meeting attendance fees of $1,250 per Board meeting and $1,000 per committee meeting. Members of our Audit Committee received a $500 attendance fee for each quarterly earnings and SEC disclosure teleconference call meeting. Our Lead Nonemployee Director and the Chair of our Audit Committee each received an additional annual retainer of $7,500, and the Chairs of our Compensation Committee and Nominating Committee received an additional annual retainer of $5,000. Directors are also reimbursed for reasonable expenses incurred in connection with attending Board and committee meetings.

 

In recognition of the substantial efforts Mr. Hansen and Mr. Thompson expended during the President and Chief Executive Officer search process, our Board authorized a special one-time committee fee of $20,000 for each Mr. Hansen and Mr. Thompson in December 2007.

 

Our Phantom Stock Plan for Outside Directors, which is an unfunded plan, has been established to more closely align the interests of the nonemployee directors and our stockholders by increasing each nonemployee director’s proprietary interest in our company in the form of “phantom stock units.”

Under our Phantom Stock Plan, we credit the equivalent of $7,000 annually, in equal quarterly amounts, to the phantom stock unit account of each nonemployee director. Phantom stock units are credited in equal quarterly amounts divided by the average closing price per share of our common stock during the 30 trading days immediately preceding (but not including) the last business day of such fiscal quarter as reported on the composite tape of the NYSE. Each nonemployee director may also elect to defer all or some portion of his or her annual director’s fees under the Phantom Stock Plan and have such amount credited on a quarterly basis as phantom stock units, based on the average closing price per share of our common stock during the 30 trading days immediately preceding (but not including) the last business day of such fiscal quarter as reported on the composite tape of the NYSE. If we were to pay dividends, dividend equivalents would be credited to each nonemployee director’s account on the dividend record date.

 

The fair market value of a director’s account will be distributed as a cash payment to the director, or his or her beneficiary, on the first day of the month following the month in which the director ceases to be a director for any reason. Alternatively, a director may elect to have the fair market value of his or her account distributed in twelve or fewer equal monthly installments, or in a single payment on a predetermined date within one year after he or she ceases to be a director, but without interest on the deferred payments. The fair market value of a director’s account is determined by reference to the average closing price per share for our common stock during the 30 trading days immediately preceding the date the director ceases to be a director. The following table summarizes the number of phantom stock units credited to each nonemployee director as of March 7, 2008.

 

 

 

 

Pursuant to the Gardner Denver, Inc. Amended and Restated Long-Term Incentive Plan (the “Incentive Plan”), for 2007, our Board granted each nonemployee director 1,400 shares of restricted stock and options to purchase 3,600 shares of our common stock, on the day following the 2007 Annual Stockholders Meeting.

 

The restricted stock granted in 2007 to our nonemployee directors will vest in three (3) years from the date of grant provided the nonemployee director continues to serve as a member of our Board of Directors on such date, and has continuously served on our Board of Directors since the date of grant.

 

All of the shares of restricted stock which have not previously become transferable by the director shall be forfeited on the date on which the director’s service to our company terminates. The restricted stock awardees are entitled to all dividends and vote the shares of restricted stock while subject to the forfeiture restrictions. If a person ceases to be a nonemployee director by virtue of death, disability or retirement, the restricted stock will vest immediately and become free of all transfer restrictions. Additionally, upon the occurrence of a change of control, as defined in the Incentive Plan, these restricted stock will be deemed fully vested.

 

The exercise price of the 2007 nonemployee director options is the fair market value of our common stock on the date of grant, which is determined by the market close price for our common stock on the date of grant. The exercise price of all options granted prior to May 2, 2007 was the average of the high and low market prices for our common stock on the date of grant. Nonemployee director stock options become exercisable on the first anniversary of the date of grant and terminate upon the expiration of five years from such date. If a person ceases to be a

nonemployee director by virtue of disability or retirement, after having completed at least one three-year term, outstanding options generally remain exercisable for a period of five years but not later than the expiration date of the options. If a person ceases to be a nonemployee director by virtue of death or dies during the five-year exercise period after disability or retirement described above, outstanding options generally remain exercisable for a period of one year but not later than the expiration date of the options. If a nonemployee director’s service terminates for any other reason, options not then exercisable are canceled and options that are exercisable may be exercised at any time within ninety days after such termination but not later than the expiration date of the options. Additionally, upon the occurrence of a change of control, as defined in the Incentive Plan, these options will be canceled in exchange for a cash payment equal to the appreciation in value of the options over the exercise price as set forth in the Incentive Plan. For a further description of the change in control provision under the Incentive Plan, please see the “Potential Payments Upon Termination or Change in Control” discussion on page 41.

 

2008 Nonemployee Director Compensation Plan

 

In February 2008, the Nominating Committee reviewed our Nonemployee Director Compensation Plan and determined that it was appropriate to retain the 2007 compensation levels for 2008, the details of which are discussed above. Based on information provided by Hewitt, our Nominating Committee compared the benefits of restricted stock and restricted stock units and recommended that the nonemployee directors be awarded restricted stock units in 2008 in lieu of restricted stock.

 

DIRECTOR COMPENSATION TABLE

 

The following table presents compensation earned by each nonemployee member of our Board of Directors for 2007.

 

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End Owned by Our Nonemployee Directors

 

Our nonemployee directors have been previously granted equity awards in the form of stock options and restricted stock pursuant to our Incentive Plan. The following table presents information regarding outstanding stock option and restricted stock awards as of December 31, 2007. Each share of common stock is entitled to one vote.

 

 

 

 

 

Stockholder Communication with Directors

 

Our Board has adopted the following procedures for stockholders to send communications to our Board, individual directors and/or committee chairs.

 

Stockholders and other interested persons seeking to communicate with our Board or any individual director should submit their written comments to our Corporate Secretary, Gardner Denver, Inc., 1800 Gardner Expressway, Quincy, Illinois 62305. Such persons who prefer to communicate by e-mail should send their comments to CorporateSecretary@gardnerdenver.com. Our Corporate Secretary will then forward all such communications (excluding routine advertisements and business solicitations) to each member of our Board, or the applicable individual director(s) and/or committee chairperson(s). Subject to the following paragraph, our Executive Chairman of the Board will receive copies of all stockholder communications, including those addressed to individual directors and/or committee chairpersons, unless such communications address allegations of misconduct or mismanagement on the part of the Executive Chairman. In such event, our Corporate Secretary will first consult with and receive the approval of our Audit Committee Chairperson before disclosing or otherwise discussing the communication with our Executive Chairman of the Board.

 

If a stockholder communication is addressed exclusively to our nonemployee directors, our Corporate Secretary will first consult with and receive the approval of the Chairperson of our Nominating Committee before disclosing or otherwise discussing the communication with directors who are members of management.

 

We reserve the right to screen materials sent to our directors for potential security risks and/or harassment purposes.

 

Stockholders also have an opportunity to communicate with our Board of Directors at our annual meeting of stockholders. Pursuant to our Corporate Governance Policy, each director is expected to attend the Annual Meeting in person and be available to address questions or concerns raised by stockholders, subject to occasional excused absences due to illness or unavoidable conflicts.

 

CORPORATE GOVERNANCE

 

Corporate Governance Policy

 

Our Board has adopted a policy regarding Corporate Governance, which is available on our website at www.gardnerdenver.com. Information contained on our website does not constitute a part of this proxy statement. A copy of such policy is available in print to any stockholder upon request in writing to the Corporate Secretary at 1800 Gardner Expressway, Quincy, Illinois 62305 or by telephone to 217-222-5400. The objective of this policy is to ensure that our Board maintains its independence, objectivity and effectiveness in fulfilling its responsibilities to our stockholders. The policy establishes the criteria and requirements for:

 

 

The policy provides that the majority of our Board should be independent based on the independence standards of the NYSE, with varied and complementary backgrounds, and interlocking directorships are prohibited. Directors may serve on the boards of directors of no more than four for-profit organizations, including our company, and

members of our Audit Committee may serve on the audit committees of no more than three for-profit organizations, including our company. The policy specifies that a nonemployee director will retire at the next regular meeting of the Board following the date he or she attains 70 years of age, and that, at any one time, no less than 50% of the number of nonemployee directors shall be actively engaged in business as an employee, consultant, director (other than for our company) or in a similar capacity for a minimum of 250 hours per year.

 

Lead Nonemployee Director

 

On November 12, 2002, our Board appointed Mr. Frank J. Hansen to serve as our Lead Nonemployee Director. In this capacity, Mr. Hansen fulfills the duties of the Executive Chairman of the Board at Board meetings as president pro tem when the Executive Chairman is unavailable, and leads the discussion of independent nonemployee directors during executive sessions of the independent nonemployee directors.

 

Code of Ethics

 

We have adopted a Code of Ethics and Business Conduct Policy or Code of Ethics, which is available on our website at www.gardnerdenver.com that applies to all members of our Board and all executive officers and employees of our company. Information on our website does not constitute a part of this proxy statement. In addition, under the charter of our Audit Committee, the Chief Executive Officer and Chief Financial Officer, among others, are required to certify annually their adherence to our Code of Ethics, which is attached to the Audit and Finance Committee Charter available on our website. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments to or waivers of our Code of Ethics mandated by our Audit Committee by posting such information on our website at www.gardnerdenver.com. A copy of our Code of Ethics and Audit Committee Charter are available in print to any stockholder upon request in writing to the Corporate Secretary at 1800 Gardner Expressway, Quincy, Illinois 62305 or by telephone to 217-222-5400.

 

SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS

 

The following table sets forth information, as of March 7, 2008, with respect to the beneficial ownership of our common stock by (a) each director, (b) our Executive Chairman, (c) our President and Chief Executive Officer, (d) our Chief Financial Officer, (e) each of our other “named executive officers” and (f) all directors and named executive officers as a group.

 

 

 

Beneficial Ownership

 

The following table lists all persons known to be the beneficial owner of more than 5% of our outstanding common stock as of December 31, 2007.

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities of our company. Our insiders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file, including Forms 3, 4 and 5. As a practical matter, we assist our directors and executive officers by monitoring transactions and completing and filing Section 16(a) forms on their behalf. We believe that all reports required to be filed by insiders during the fiscal year ended December 31, 2007 were filed in a timely manner and were accurate in all material respects.

 

COMPENSATION DISCUSSION & ANALYSIS

 

An Overview of our Executive Compensation Philosophy and Program

 

The quality of our senior executives is instrumental to our overall performance and the creation and retention of long-term stockholder value. To attract, retain and motivate high quality executives, we have developed an executive compensation program that strives to provide competitive pay, reward achievement of financial and strategic objectives and align the interests of our executives with those of our stockholders. We compensate our executive officers based on the scope of their responsibilities, the achievement of specific annual objectives and our annual and longer term performance. To achieve these goals, we use a combination of compensation elements, including base salary, annual bonuses, and long-term incentives in the form of stock option grants, restricted stock, restricted stock units and long-term cash bonuses, all of which are discussed in further detail below.

Annually, our Compensation Committee reviews and establishes the compensation and benefits of our executives, including base salaries, annual bonus opportunities and awards under our Incentive Plan. At our Compensation Committee’s direction, we hired Hewitt to evaluate and make recommendations to our Compensation Committee regarding our executive compensation philosophy and practices for 2007. Hewitt reviewed our executive officers’ annual compensation and long-term incentives, for competitiveness with 22 other publicly held industrial manufacturing companies with median annual revenues of $2.4 billion, which we refer to as our custom peer group and discuss in further detail below, and a general industry group.

 

Our executive compensation philosophy serves as a blueprint for the total compensation design and targeted opportunity value to be provided to our executives. Our Compensation Committee periodically reviews the compensation philosophy to ensure that it is aligned with our business strategies and objectives. Before making a final evaluation of our existing compensation program philosophy, our Compensation Committee had extensive discussions regarding the following matters:

 

 

In light of the findings of the Hewitt review and our aggressive growth strategy and historical performance in relation to such strategy, our Compensation Committee elected to modify its existing executive compensation program philosophy. Our new compensation philosophy for 2007, as approved at the November 15, 2006 meeting, is that (a) the target annual cash compensation (base salary and annual bonus) of our executive officers be based on the 50th percentile of the competitive market (as opposed to the 60th percentile in 2006); and (b) the total compensation opportunity for such officers be based on the 60th percentile of the competitive market (as opposed to 70th percentile in 2006).

 

In evaluating the performance of our executive officers, our Compensation Committee considered our overall performance, each individual’s performance and contribution to our overall performance, internal parity and the individual breadth of responsibility. Our Compensation Committee reviews internal compensation parity among our executive officers based on each executive’s level of responsibilities and how their compensation compares to pay relationships in the market data provided by Hewitt. While our Compensation Committee monitors these compensation relationships, it does not target any specific compensation ratios. Annually, our Compensation Committee establishes performance goals and maximum bonus opportunities for executive officers. At our first Compensation Committee meeting after the fiscal year-end, our Compensation Committee reviews the achievement of each performance goal for the previous year and determines the bonus award payments for each executive.

 

In reviewing the performance of our executive officers and determining the compensation for 2007, our Compensation Committee also had private discussions with Mr. Centanni, our Executive Chairman of the Board (who also served as President and Chief Executive Officer until January 2008) concerning the other executive officers’ performance and the strengths and weaknesses of executive management and other key members of management. Our Compensation Committee took into account Mr. Centanni’s assessment of the other executive officers’ performance in determining performance goals and the total compensation package offered to each executive officer.

 

Our Compensation Committee also determined our Chief Executive Officer’s base salary, annual bonus and long-term incentive awards for 2007 in the manner described above. In addition, the Compensation Committee also

considered Mr. Centanni’s individual performance for purposes of the annual bonus. Individual goals agreed upon between our Compensation Committee and Mr. Centanni included:

 

 

In light of these factors, and in view of compensation objectives, our Compensation Committee exercised its discretion in determining the overall compensation for Mr. Centanni rather than assign weights or apply any formula to these factors.

 

Our Compensation Committee has reviewed all components of the compensation for our Chief Executive Officer and the other named executive officers, including annual cash compensation and bonuses, long-term cash and equity incentive compensation, perquisites and other compensation, as well as payouts under various severance or change of control scenarios and considered such in making its compensation decisions.

 

Benchmarking

 

Using the Hewitt report, our Compensation Committee reviewed the compensation practices at competitive companies to evaluate our executive compensation philosophy and compensation programs and awards. Hewitt conducted an external market study of compensation levels for eight senior executive management employees including our named executive officers. The study covered the value and distribution of the following components of compensation: (i) base salary; (ii) annual bonus or short-term incentives (actual and target); and (iii) long-term incentives.

 

For 2007 compensation analysis, our comparator group in the Hewitt report consisted of a custom peer group and general industry group. The primary information source used by Hewitt in its competitive review was their proprietary U.S. Total Compensation Measurement (“TCM”) database. The TCM database was established in 1981 and contains (a) competitive analysis on approximately 800 large industrial, financial and service organizations who participate annually in this compensation database and (b) data on values and program design for all areas of total compensation for more than 300 executive and management positions. The custom peer group consisted of 22 companies with median annual revenues of $2.4 billion. The custom peer group is listed below.

 

 

For benchmarking purposes (comparing our compensation levels to market), Hewitt used a general industry group comprised of approximately 83 companies in their TCM database, exclusive of retail, financial and utility companies, with median revenues of $1.8 billion. The general industry group was provided as a result of a desire to confirm the appropriateness of the custom peer group and to provide a comparison on a general industry basis. The general industry group used for the compensation philosophy analysis consisted of approximately 467 companies in

Hewitt’s TCM database. Hewitt recommended this broader general industry group because it was a more robust sample for gathering data regarding compensation philosophies.

 

We believe both the custom peer group and general industry group to be generally comparable to our company, based on size, revenues and industry. Information from proxy data and private survey data was used to calculate competitive market data, benchmark the compensation practices of our company and develop compensation projections and recommendations for each of our executive officers for 2007.

 

Our Compensation Committee found the Hewitt review to be instructive in terms of evaluating our current compensation program and making future executive compensation decisions, subject to potential adjustments to: (a) recognize individual performance; and (b) bring certain executives closer to benchmark levels with respect to certain or all components of their compensation package.

 

In determining our overall compensation plan for our named executive officers, our Compensation Committee compared the compensation levels for our executive officers against the compensation levels at the companies in our custom peer group and general industry group. Hewitt provided our Compensation Committee with information regarding the compensation levels and programs at the 50th, 60th and 70th percentiles for our custom peer group and general industry group. Hewitt advised our Compensation Committee that it was important in analyzing their results to note that a number of different internal/organizational and external factors determine appropriate levels of compensation. Such adjustment factors include time in position, experience, individual performance, organization ranking/hierarchy, desired pay mix, business impact, internal equity and relative values, affordability, future potential, retention and attraction concerns, and tax, accounting and securities law concerns. In addition, certain of our executive job responsibilities are broader than traditional market reference points. As a result of combining responsibilities, these roles may warrant additional compensation.

 

Executive Management Changes in January 2008

 

In January 2008, Barry L. Pennypacker was appointed as our President and Chief Executive Officer. Mr. Pennypacker succeeds Ross J. Centanni, who has served in these capacities since our incorporation in 1993. Mr. Pennypacker reports to Mr. Centanni, who remains our Executive Chairman of the Board. At our Compensation Committee’s direction, we hired Hewitt to evaluate and make recommendations to our Compensation Committee regarding the compensation levels for Executive Chairman and Chief Executive Officer positions. The Hewitt report assessed the external competitiveness of each component of pay and total competitive compensation package (viewed both from the perspective of relative value and distribution/mix of compensation elements). Due to the limited market information for the Executive Chairman position, at the Compensation Committee’s direction, we also retained Mercer to evaluate and make recommendations to the Compensation Committee regarding the compensation of our Executive Chairman position.

 

In determining whether Mr. Centanni’s compensation should be adjusted due to the changes in his overall responsibilities, our Compensation Committee considered market competitiveness and retention concerns, as well as Mr. Centanni’s experience, tenure and knowledge of our company and industry, scope of responsibilities as compared to our other executives, and his role in strategic transactions. Our Compensation Committee determined that Mr. Centanni’s overall compensation package should remain relatively consistent with his previous compensation level with reductions in his long-term incentives. As with all executive officer compensation, our Compensation Committee will review Mr. Centanni’s compensation on an annual basis to determine the appropriate compensation for his position.

 

In determining Mr. Pennypacker’s compensation, our Compensation Committee considered general factors such as our compensation philosophy and market competitiveness, as well as Mr. Pennypacker’s experience, scope of responsibilities as compared to our other executives and growth opportunities. Mr. Pennypacker’s compensation includes: (1) an annual base salary of $650,000; (2) a target annual cash bonus of 80% of his base annual salary (with a maximum payout of 160%) subject to our achievement of performance goals established by our Compensation Committee each year; (3) eligibility for long-term cash bonuses, restricted stock and options pursuant to our Incentive Plan in accordance with our applicable compensation practices for executives; (4) eligibility to participate in our Excess Contribution Plan; (5) eligibility for company-paid long-term care insurance; (6) eligibility to participate in other executive benefits such as annual tax planning and preparation services, estate

planning services (every 5 years), executive retirement planning, annual executive physical, and executive long-term disability insurance; and (6) other benefits generally available to our employees, such as health insurance and 401(k) matching. Mr. Pennypacker is also eligible for our full relocation program. Our Compensation Committee developed this compensation package to assist us in recruiting, retaining and providing growth incentives for Mr. Pennypacker to pursue our strategic objectives.

 

Components of Executive Officer Compensation

 

To promote a balance between short-term profitability and sustainable long-term financial and operational performance, our compensation plan for our executive officers provides a combination of incentives with varying payouts including:

 

 

The total compensation package for 2007 was comprised of thirty percent (30%) base salary, nineteen percent (19%) target annual cash bonus and fifty-one percent (51%) long-term incentives. The breakdown in the composition of the total compensation package illustrates our emphasis on long-term growth and profitability. In comparison with our custom peer group and general industry group, we place a greater emphasis on long-term incentives than base salary and annual incentive compensation. We believe our emphasis on long-term incentives encourages our executives to act strategically to ensure our sustainable long-term performance and enhance overall stockholder value.

 

In addition, our executive officers are also eligible to receive benefits under our various retirement savings plans, standard employee benefit plans and perquisites.

 

Annual Cash Compensation

 

Beginning in 2007, our target annual cash compensation comprised of our base salary and our annual cash incentive compensation for our named executive officers is targeted at the 50th percentile of competitive market. The following is a summary of the components of our executive annual cash compensation.

 

Base Salary.  In February 2007, our Compensation Committee established a base salary target for each executive officer at approximately the 50th percentile of market levels based on competitive market data. The goal in establishing the base salaries was to position our company for future growth, to increase our compensation program’s competitiveness and to enhance our ability to attract and retain executives. In determining the base salary targets, our Compensation Committee took into account market competitiveness as reported in the Hewitt report, and the individual’s job responsibilities (many of which are broader than their market reference points), experience, actual performance and impact on the business when setting each executive officer’s actual base salary. As a result, our executives received annual salary increases ranging from 3.0% to 7.7% in 2007.

 

Annual Cash Incentive Compensation.  An annual cash bonus opportunity is awarded by our Compensation Committee pursuant to our executive Annual Bonus Plan. Our Annual Bonus Plan furthers our goal of linking executive compensation to our performance and stockholders’ interests as a whole.

 

Pursuant to our Annual Bonus Plan, our Compensation Committee is required to establish, no later than 90 days after the beginning of each year, performance goals for such year based upon one or more of the following performance measures: return on equity, assets, capital or investment; pre-tax or after-tax profit levels expressed in absolute dollars or earnings per share; and operating cash flow or cash flow from operating activities. Performance goals may be identical for all participants or may be different to reflect more appropriate measures of individual performance. Performance goals must include a threshold level below which no award will be payable and a maximum award opportunity for each participant.

Our Compensation Committee is authorized to adjust the method of calculating attainment of performance goals in recognition of:

 

 

In addition, notwithstanding the attainment of the performance goals, annual incentive awards for participants may be denied or adjusted by our Compensation Committee, in its sole judgment, based on its assessment of the participant’s performance. However, no upward adjustment may be made to an award for a participant if our ability to deduct that participant’s compensation would be limited by Section 162(m) of the Internal Revenue Code.

 

In February 2007, our Compensation Committee established the performance goals and maximum bonus opportunities for the Annual Bonus Plan participants for 2007. Except for the Division Vice President and General Managers, the performance goals were based on a weighted average of net income (weighted at 60%) and the level of operating cash flow (weighted at 40%) generated by our company in 2007. For Division Vice President and General Managers, the measures were based on a weighted average of the respective division’s adjusted operating income (weighted at 60%) and net income and operating cash flow of our company (weighted at 24% and 16%, respectively). The division’s adjusted operating income is determined by adjusting the division’s operating income for a working capital charge based on the amounts of accounts receivable and inventories attributable to the division. The target bonus percentage range was 40-100% of participant base salaries for 2007, and can be doubled to a maximum range of 200% for maximum performance. Bonus payments increase as performance levels increase. The maximum bonus payment is 200% of the target bonus opportunity.

 

As noted above, except for the Division Vice President and General Managers, the measures of corporate performance were based on net income and the level of operating cash flow generated by our company in 2007. Net income was included in the benchmark to reflect the effect of management’s performance on stockholder return. Operating cash flow was utilized in the benchmark due to the continued importance of cash flow in providing funds to pursue our growth strategies and accelerate our debt repayment. Operating cash flow was defined as our net cash provided by operating activities, excluding any cash activity related to acquisitions completed in 2007. Division performance for each Vice President and General Manager was assessed based on the respective division’s adjusted operating income. In establishing the performance goals for the Vice President and General Managers, our Compensation Committee included both corporate and division performance goals to provide incentives for divisional performance over which they can exert the greatest degree of short-term control while ensuring overall accountability to corporate performance. This incentive helps solidify our corporate culture and ensure our business units are working for the greater good of our company.

 

Considering the 2007 performance goals under our Annual Bonus Plan, we had to generate net income of $174.5 million and $189.8 million of operating cash flow in 2007 for the maximum payout for these objectives. No payout for the net income objective would result if net income were less than $129.0 million and no payout for the cash flow objective would result if cash flow were less than $140.3 million. Our 2007 actual net income, adjusted to exclude a non-recurring tax benefit resulting from changes in international tax rates, was $196.5 million which was substantially higher than the maximum level performance goal of $174.5 million. Our 2007 actual operating cash flow was $185.0 million, which was less than our maximum level performance goal of $189.8 million, but greater than our target performance goal of $165.0 million.

 

In addition to the above, our Compressor Division had to generate $59.7 million of adjusted operating income in 2007 for Mr. Shull to receive the maximum payout for this objective and no payout for the division objective would result if adjusted operating income was less than $44.1 million. Our Compressor Division’s 2007 actual

adjusted operating income was $55.6 million, which was less than the maximum level performance goal, but greater than the target performance goal of $51.9 million.

 

In addition to the above, our Engineered Products Division had to generate $45.9 million of adjusted operating income in 2007 for Mr. Steber to receive the maximum payout for this objective and no payout for the division objective would result if adjusted operating income was less than $33.9 million. Our Engineered Products Division’s 2007 actual adjusted operating income was $46.5 million, which was greater than the maximum level performance goal.

 

 

 

 

In February 2008, our Compensation Committee evaluated and determined the degree to which the Annual Bonus Plan criteria for 2007 had been met, as well as the performance of individual Annual Bonus Plan participants. Based on this analysis, our Compensation Committee awarded cash bonus payments on average at slightly less than the maximum levels. The actual bonus payments for each of the named executive officers are shown on the Summary Compensation Table on page 31.

 

Change in Control. Our Annual Bonus Plan contains a change in control provision that deems all outstanding bonus awards to be earned at the maximum performance goal level and requires us to make payment to each named executive officer after the effective date of the change in control. For a further description of the potential benefits in case of a change in control, please see the “Potential Payments Upon Termination or Change in Control” discussion on page 41.

 

Long-Term Incentives

 

Under our Incentive Plan, designated employees are eligible from time to time to receive awards in the form of stock options, stock appreciation rights, restricted stocks, restricted stock units, performance shares or long-term bonuses, as determined by our Compensation Committee. Historically, awards granted pursuant to the Incentive Plan are granted annually at our February Board meeting, which occurs after the presentation of our annual financial results. The purpose of these awards is to promote our long-term financial interests by encouraging employees to acquire an ownership position in our company and to provide incentives for specific employee performance. In selecting the recipients and the size and appropriate composition of long-term awards, our Compensation Committee considers each recipient’s opportunity for significant contribution to our future growth and profitability, without regard to his or her existing stock ownership. In 2007, our Compensation Committee granted long-term incentive awards with an economic value opportunity between the 50^th and the 60^th percentile of the competitive market. For further details on the long-term incentives granted to our named executive officers, please refer to the “Grant of Plan Based Awards” table on page 33.

 

Equity Incentives.  Our Compensation Committee decided in February 2006, due to changes in accounting and tax rules regarding stock options, as well as market trends regarding the use of other types of incentive awards, including restricted stock, that it would be in our best interest to award both stock options and restricted stock to our executive officers. The combination of stock options and restricted stock is intended to create a better balance between risk and reward than stock options alone. In 2006 and 2007, the executives’ long-term incentive awards were comprised of 25% in stock options and 25% in restricted stock, compared to 50% in stock options in previous years. Our Compensation Committee believes this change further strengthens retention, reinforces incentives for performance, and encourages an ownership position in our company. The specific number of stock options and restricted shares granted to an executive is determined by our Compensation Committee, with the advice and

counsel of Hewitt and with respect to the other executive officers, the advice and counsel of Mr. Centanni, based upon the individual’s level of responsibility and a subjective judgment by our Compensation Committee of the executive’s contribution to the financial performance of our company.

 

Options granted prior to May 1, 2007 were granted at the average of the high and low market prices for the common stock on the date of grant and have value only if the market price of the underlying common stock appreciates. We chose the average of the high and low market price as our option valuation method because we believed it was a better reflection of our common stock’s value on the date of grant compared to other valuation methods available at the time. In 2007, our Board reviewed our existing option pricing method and determined that we should adjust our existing option pricing method to the closing price of a share of our common stock on the date of grant. Our stockholders agreed and amended our Incentive Plan at our 2007 Annual Meeting of Stockholders. In 2007, our Compensation Committee granted options with seven-year terms. Furthermore, since options become exercisable in cumulative increments of one-third each year over a three-year period, our Compensation Committee believes options provide an appropriate long-term incentive for those receiving grants, as well as stability in the work force.

 

The restricted stock granted in 2007 to the named executive officers will vest in three (3) years from the date of grant provided the executive is still an employee on such date, and has been continuously employed by us since the award was granted. The restricted stock awardees are entitled to all dividends and vote the shares of restricted stock while subject to the forfeiture restrictions. If the named executive officer terminates his or her employment by virtue of death, disability or retirement, the restricted stock will vest immediately and become free of all transfer restrictions. Additionally, upon the occurrence of a change of control, as defined in our Incentive Plan, these restricted stock shares will be deemed fully vested. Furthermore, since restricted stock does not vest until the completion of the three-year vesting period, our Compensation Committee believes restricted stock provides an appropriate long-term incentive for those receiving grants, as well as stability in the work force.

 

In November 2007, our Compensation Committee compared the benefits of restricted stock units and traditional restricted stock awards to determine which type of equity compensation provided us with the best overall compensation tool. In particular, our Compensation Committee considered:

 

 

In February 2008, our Compensation Committee decided to grant restricted stock units to our named executive officers rather than traditional restricted stock awards. Restricted stock units are a contractual right to receive a specified number of shares or the value of a specified number of shares in the future. Because restricted stock unit holders have no ownership rights, they do not have voting or dividend rights. The value of the 2008 grants were consistent with prior year’s restricted stock awards.

 

Long-Term Bonuses. As noted above, under the Incentive Plan, our Compensation Committee may also grant long-term bonus awards to the Executive Chairman, Chief Executive Officer, President, any Executive Vice President, any Senior Vice President, any senior officer reporting directly to the Chief Executive Officer and any other Vice President or senior executive or officer designated by the Chief Executive Officer. Eligibility to receive a long-term bonus is tied to our achievement of certain performance targets over a pre-determined performance period. We structure our long-term bonuses to encourage executives to focus on achieving sustainable, long-term financial performance that is consistent with our strategic plan. In 2006 and 2007, long-term bonuses made up 50% of the executive’s long-term incentive opportunity.

 

Our Compensation Committee is responsible for (i) determining the duration of each performance period; (ii) selecting which executive officers of our company will be eligible to receive a long-term cash bonus for the performance period; (iii) selecting the business criteria to be applicable to the performance period from among those authorized; (iv) establishing our performance targets relative to the business criteria selected; (v) setting a base salary factor for each executive officer eligible to receive a long-term cash bonus for the performance period;

and (vi) at the end of the performance period, determining the extent to which the performance targets have been achieved and the long-term cash bonuses payable to each eligible executive officer. Our performance targets may be based on any one, or a combination, of the following business criteria:

 

 

Concurrently with the selection of performance targets, our Compensation Committee establishes an objective formula or standard for calculating the maximum long-term cash bonus payable to each participating executive officer.

 

We believe our long-term bonuses provide a strong incentive for our executives to concentrate on achieving our long-term strategic and financial performance goals that ultimately increase overall stockholder value. Our Incentive Plan permits long-term bonuses to be denominated in either cash or restricted stock awards. Historically, our Compensation Committee has paid our long-term bonuses in cash because we believe paying these awards in cash appropriately balances the equity and cash components of our long-term compensation opportunities and awards our executives for their successful attainment of our long-term goals. Because our long-term bonuses are subject to forfeiture if the executive’s employment terminates for any reason other than death, disability or retirement before the end of the performance period, these long-term bonuses also encourage retention among our key executives.

 

In February 2007, our Compensation Committee granted a long-term bonus award opportunity to certain executives, including all named executive officers. The long-term bonus percentage for the 2007 awards are tied to the compound growth rate of earnings before taxes (EBT) for our industrial businesses which specifically excludes petroleum products during the period January 1, 2007 through December 31, 2009. The performance targets which must be met by the end of the performance period in order for our executive officers to receive an award are the following percentage increases in the compound growth rate of EBT for our industrial businesses (i.e., excluding petroleum products).

 

 

Our Compensation Committee believes our specific performance targets will be appropriately challenging and consistent with achieving our long-term growth and profitability objectives. In particular, the threshold, target and maximum levels are set so that the relative difficulty of achieving the target level is believed to be consistent from year to year. Our specific objectives are considered competitively sensitive in that they may reveal tactical operations, sales and marketing initiatives that would have a high potential of creating a significant disadvantage in the marketplace if they were to be disclosed. Since we began granting long-term bonus award opportunities in 2001, we have achieved performance in excess of the maximum performance level four times and did not achieve targets for bonus payouts one year.

 

Our Compensation Committee retains discretion over the actual long-term bonus payouts and attempts to ensure that the payouts are paid at a level commensurate with performance against objectives. The utilization of threshold (50%), target (100%) or maximum (200%) percentages will depend upon the achievement of certain compound growth rates of EBT during this period, subject to adjustment as provided under the Incentive Plan. These percentages will be applied to participants’ base salaries multiplied by a base salary factor at the end of 2009 to determine the long-term cash bonus for the period, if any. The base salary factors for our named executive officers

range from 75% to 200%. Our Compensation Committee determined these percentages based on the Hewitt review benchmarks which equate to approximately 50% of each participant’s total long-term incentive.

 

In February 2008, our Compensation Committee evaluated and determined the degree to which the criteria for long-term cash bonus award opportunities granted in 2005 to certain executives under the Incentive Plan (the “2005 L-T Bonus Opportunity Plan”) had been met. The criteria for bonus payouts under the 2005 L-T Bonus Opportunity Plan was tied to the compound growth rate of EBT for our industrial businesses (i.e., excluding petroleum products) during the period January 1, 2005 through December 31, 2007. The utilization of the threshold, target or maximum percentages depends upon the achievement of certain levels of compound growth rate of EBT during this period, subject to adjustment as provided under the Incentive Plan. Based on its analysis of our achievement of the relevant criteria, our Compensation Committee awarded bonus payments in February 2008 to participating executives under the 2005 L-T Bonus Opportunity Plan on average at approximately the maximum levels. The actual long-term cash bonus payments for each of the named executive officers are shown on the Summary Compensation Table on page 31.

 

Change in Control. The Incentive Plan contains a change in control provision that modifies the terms of awards granted under the plan. For a further description of the potential benefits in case of a change in control, please see the “Potential Payments Upon Termination or Change in Control” discussion on page 41.

 

Retirement Plans

 

We also provide our employees, including our named executive officers, with various retirement savings plans. Our retirement savings plans are designed to assist our employees, including our named executive officers in planning for retirement and securing appropriate levels of income during retirement. The purpose of our retirement and insurance plans is to attract and retain quality executives as these types of benefit plans are typically offered by our competitors.

 

Pension Plan. We maintain a Pension Plan and previously maintained a Supplemental Excess Defined Benefit Plan for the benefit of certain employees as defined in the Pension Plan. We also maintain certain other pension plans that our named executive officers are not eligible to participate in.

 

Effective November 1, 2006, we implemented certain revisions to the Pension Plan. Future service credits under the Pension Plan ceased effective October 31, 2006. Benefits under the Pension Plan will not be less than the amount of each participant’s accrued and vested benefits as of such date. If a participant is not fully vested in his or her accrued benefit under the Pension Plan, the participant will continue to earn time toward vesting based on continued service.

 

Our Compensation Committee determined that the changes in the retirement benefits would provide advantages for both our company and our employees. The change enabled us to reduce our long-term unfunded liabilities and gain better control over our retirement expense/cash flow volatility. The changes also provide greater benefits to our employees because they retain the same cash benefit they had with the Pension Plan while gaining control over investment decisions and with the potential of obtaining greater investment growth opportunities. For 2007, employees’ accrued benefit under the Pension Plan was increased with an annual interest credit of 6%.

 

We also maintained the Supplemental Excess Defined Benefit Plan. The Supplemental Excess Defined Benefit Plan was a nonqualified plan providing certain employees, including our named executive officers, Pension Plan benefits that could not be paid from a qualified, defined benefit plan due to provisions of the Internal Revenue Code. The Supplemental Excess Defined Benefit Plan provided our named executive officers with a credit of 12% of annual compensation in excess of the IRS annual compensation limit for 2006 of $220,000. This plan provided executives with a similar level of benefits afforded to all other employees who are not subject to the limitations imposed by the IRS on our tax qualified Pension Plan plus an additional 4% on compensation in excess of the IRS annual compensation limit that can be considered for benefits for a qualified plan. Effective November 1, 2006, the Supplemental Excess Defined Benefit Plan was merged into the Excess Contribution Plan, and funded through a Rabbi Trust. Effective with the merger, the 12% company contribution is made to the Excess Contribution Plan.

Retirement Savings Plan. Our Retirement Savings Plan is a tax-qualified retirement savings plan. All full-time or eligible part-time U.S. employees, including the named executive officers, are eligible to participate in the Retirement Savings Plan. Employees may contribute from 1% to 100% of compensation tax deferred to the Plan up to the applicable IRS limit. We match employee contributions on the first 3% of employee compensation $1 for each $1 and the second 3% of employee compensation $0.50 for each $1. The company match is contributed in the form of our common stock. Participants may transfer out of our common stock to one of twenty investment funds at any time. Beginning November 1, 2006, employees at certain eligible locations also receive a non-elective company contribution equal to the former Pension Plan credits. The non-elective company contribution credits each employee’s account with 4% of total compensation paid, up to the Social Security wage base for the year, plus 8% of total compensation paid in excess of the Social Security wage base up to the IRS annual compensation limit. For purposes of the non-elective company contribution, total compensation is cash remuneration paid during the year by us to or for the benefit of a participant, including base salary for the current year, annual cash bonus earned during the prior year but paid in the current year for our named executive officers and the 2004 long-term cash bonus paid in 2007. All employee and company matching contributions are fully vested immediately and the non-elective company contribution becomes fully vested after 3 years of employment. All named executive officers are fully vested in the non-elective company contribution portion of the Retirement Savings Plan.

 

Supplemental Excess Defined Contribution Plan. In addition to the Retirement Savings Plan, employees receiving a base pay of $110,000 or higher, including our named executive officers, are eligible to participate in the Excess Contribution Plan. This plan provides executives with a similar level of benefits afforded to all other employees who are not subject to the limitations imposed by the IRS on our tax qualified 401(k) plan. Company matching contributions under the Excess Contribution Plan are contributed in the form of cash rather than our common stock. All employee and company matching contributions are fully vested immediately and the non-elective company contribution becomes fully vested after 3 years of employment. All named executive officers are fully vested in the non-elective company contribution portion of the Excess Contribution Plan.

 

Other Benefits

 

Standard Employee Benefits. In addition to the compensation and retirement plans listed above, all of our employees, including our named executive officers, are eligible to receive health, dental, disability and life insurance coverage. Additionally, all employees are entitled to vacation, sick leave and other paid holidays. Our commitment to provide employees with the benefits summarized above recognizes our belief that the health and well-being of our employees is directly related to our overall success.

 

Perquisites. We provide very few perquisites to our executive officers. Our Compensation Committee believes the perquisites provided conform to our overall executive compensation program and assist in recruiting and retaining key executives. Overall, the cost of these benefits constitutes a small portion of our executives’ total compensation and is consistent with the pay practices of our custom peer group. The cumulative value of such perquisites is included in the Summary Compensation Table “All Other Compensation” on page 32 and individually accounted for in the “All Other Compensation Table” on page 32.

 

The following perquisites were offered to our executive officers during 2007:

 

 

The counseling and planning perquisites assist our executives in managing their long-term financial viability and optimizing the value of our other compensation plans which ultimately benefits our company.

 

Long-term disability insurance for all of our employees, as mentioned above, contains a benefit of 662/3 of covered compensation up to a monthly maximum of $7,000. Our named executive officers are offered this same benefit with a monthly maximum of $15,000. The increased monthly maximum is more commensurate with our named executives’ salaries than our standard employee monthly maximum because the monthly maximum on our standard long-term disability insurance would not provide the same percentage of salary benefit to our named executive officers as it does our other employees. The additional long-term disability insurance is designed to achieve the replacement of income as compared to other company employees as a percentage of pay should an unforeseeable injury or disability occur.

 

The Long-Term Care Policy offered to our named executive officers is paid for over a ten year period provided the executive remains employed by our company. The benefits under this policy include medical care at home and at a variety of health care facilities. The daily benefit is $300 per day with a cost of living adjustment.

 

We have long had a tradition of supporting non-profit organizations in areas where our employees are located. To encourage our executive officers to support non-profit organizations which best serve the educational, health, welfare, cultural, civic and social needs of the community, we have developed an Executive Matching Gift Program. We match total charitable donations made by our executive officers up to $2,500 annually, provided they are made to eligible organizations under our policy. However, there is no limit on the matching donations made by the Chief Executive Officer. Historically, the total matching contributions made by our company on behalf of our Chief Executive Officer during any calendar year have been less than $20,000.

 

Security Ownership Requirements

 

We maintain stock ownership requirements for our nonemployee directors, executive officers and other key employees. Under these requirements, each nonemployee director is expected to maintain an equity interest in our company equal to three times his or her annual cash compensation, including compensation for Board and Committee meeting attendance, but excluding the value of equity compensation granted pursuant to the Incentive Plan or amounts we contributed on behalf of such director to our Phantom Stock Plan. These requirements also require that our Executive Chairman and Chief Executive Officer maintain an equity interest equal to five times their annual base salary and each executive officer, corporate vice president and each general manager maintain an equity interest in our company equal to three times their annual base salary. These ownership requirements are to be achieved by the fifth anniversary of each individual’s appointment as a director or executive officer, as appropriate. Common stock held directly by the director or executive officer or their respective immediate family members, and indirectly for the benefit of the director or executive officer in an IRA account, family trust, the Retirement Savings Plan and/or the related Excess Contribution Plan, are considered in determining compliance with these requirements. In the case of nonemployee directors, phantom stock units acquired through the director’s deferral of cash compensation are also considered in determining compliance with our stock ownership requirement. Failure to meet these requirements within the allotted time will be taken into consideration when evaluating the individual’s commitment to a continuing relationship with our company. All directors and named executive officers are in compliance with our security ownership requirements.

 

Stock Repurchase Program for Executive Officers and Nonemployee Directors

 

We have granted stock options under the Incentive Plan to promote our long-term interests, and executive officers have exercised a portion of such stock options in accordance with the Incentive Plan and applicable stock option agreements. The cumulative increase in the market price of our common stock since the grant of some of these stock options resulted in the imposition of significant alternative minimum taxes on these employees. Therefore on July 24, 2007, our Board approved an updated Stock Repurchase Program for the Company’s executive staff and nonemployee directors. This program replaced the program previously approved on May 6, 2003. The purpose of this program is to provide a means for executives and directors to sell our common stock, with a goal of obtaining sufficient funds to meet tax obligations which arise from the exercise, grant or vesting of incentive stock options, restricted stock or performance shares. The program was created to mitigate any potential disruption to an orderly trading market in our common stock, which could result if the executives’ and directors’

trades were affected through securities brokers. The sales price under this program is the market close price of our common stock on the composite tape of the NYSE on the date of the repurchase. The determination to sell shares under this program is final and must be submitted either on the day of the sale or no later than prior to the initiation of trading the following day.

 

The following chart provides a description of the number of share repurchases under our Stock Repurchase Program from January 1, 2007 through March 7, 2008:

 

Repurchases under our Executive and Director Stock Repurchase Plan since January 1, 2007

 

 

 

 

Change in Control Agreements

 

We are party to Change in Control Agreements or CIC Agreements with each of our named executive officers. For an executive to receive benefits under their CIC Agreement, two events must occur: (a) a change in control and (b) termination of the executive officer’s employment other than for cause. This two prong requirement allows us and our executive officers to concentrate on our goals and the potential change in control without incurring any costs unless an executive officer is terminated. The CIC Agreements also prohibit the executive officer from disclosing confidential information and from soliciting our employees, customers or clients.

 

In 2005, our Compensation Committee reviewed the terms and conditions of the CIC Agreements and determined that it was in the best interest of the stockholders to maintain these agreements in light of our executive officers’ knowledge and experience and the need for management continuity during a potential change in control. Our Compensation Committee believes our CIC Agreements encourage each of our executive officers to continue to carry out their officer’s duties in the event of a possible change in control of our company.

 

In 2008, our Compensation Committee retained Hewitt to do a market analysis of our CIC Agreements and is currently reviewing Hewitt’s findings.

 

For a further description of the potential benefits in case of a change in control, please see the “Potential Payments Upon Termination or Change in Control” discussion on page 41.

 

Other

 

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), limits the deductibility by public corporations of non-performance based compensation paid to specified executive officers. Our Compensation Committee endeavors to maximize deductibility of compensation by qualifying certain compensation as performance-based under Section 162(m) to the extent practicable while maintaining competitive compensation. However, our Compensation Committee does not strictly limit executive compensation to that which is deductible under Section 162(m) of the Code and has not adopted a policy requiring all compensation to be deductible. Our Compensation Committee believes that adopting such a policy would limit its ability to maintain flexibility in compensating named executive officers.

 

All compensation for 2007 paid to our executive officers, including the compensation element of shares received under our Incentive Plan, qualified for deduction under the Code, except the restricted stock shares granted to Mr. Centanni. While we currently believe the restricted stock granted to other named executive officers will be deductible upon vesting, we cannot be certain of this since the deductibility depends upon the executive’s compensation in the year of vesting and the value of the shares on the vesting date.

 

EXECUTIVE MANAGEMENT COMPENSATION

 

SUMMARY COMPENSATION TABLE

 

The following table presents compensation paid to or earned by each of our named executive officers for the fiscal year ended December 31, 2007. Our named executive officers are members of our executive management team who are required to be disclosed due to their overall compensation or position in our company. We have not entered into any employment agreements, except the change in control agreements discussed previously and under the “Potential Payment Upon Termination or Change in Control” discussed on page 41, with any of our named executive officers.

 

 

 

 

 

ALL OTHER COMPENSATION TABLE

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS

 

Under our Incentive Plan, designated employees are eligible from time to time to receive awards in the form of stock options, stock appreciation rights, restricted stock grants, restricted stock units, performance shares or long-term bonuses, as determined by our Compensation Committee. Historically, awards granted pursuant to the Incentive Plan are granted annually at the February Board meeting. The following table presents grants of plan-based awards granted pursuant to our Incentive Plan during the fiscal year ended on December 31, 2007. The estimated future payouts under non-equity incentive plan awards are the long-term cash bonus award opportunity granted in 2007. While the actual award will be based on the ending base salaries of our named executive officers for 2009, the estimates provided in this table are calculated using the named executive officers’ current salaries as of December 31, 2007. Each share of common stock is entitled to one vote.

 

 

 

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

Our named executive officers have been previously granted equity awards in the form of stock options and restricted stock pursuant to our Incentive Plan. The following table presents information regarding outstanding stock option and restricted stock awards as of December 31, 2007. Each share of common stock is entitled to one vote.