OM GROUP, INC.

127 Public Square
1500 Key Tower
Cleveland, Ohio 44114-1221

 

Notice of Annual Meeting of Stockholders
to be Held May 13, 2008

 

The Annual Meeting of Stockholders of OM Group, Inc. will be held in the 27th Floor Conference Center Auditorium at Key Tower, 127 Public Square, Cleveland, Ohio 44114, on Tuesday, May 13, 2008, at 10:00 a.m., for the following purposes:

 

1. To elect two directors to serve for terms expiring at our annual meeting in 2011;

 

2. To consider and act upon a proposal to amend our Amended and Restated Certificate of Incorporation to increase the authorized number of shares of common stock from 60 million to 90 million;

 

3. To confirm the appointment of Ernst & Young LLP as our independent registered public accountant; and

 

4. To consider any other business that is properly brought before the meeting or any adjournment.

 

Stockholders of record at the close of business on March 21, 2008 are entitled to notice of and to vote at the meeting. This proxy statement and the accompanying proxy will be mailed to stockholders on or about April 1, 2008.

 

We cordially invite you to attend the meeting. To ensure your representation at the meeting, please vote promptly by mail, telephone or the Internet by following the instructions on the enclosed proxy or voting instruction card, even if you plan to attend the meeting. Mailing your completed proxy or voting instruction card, or using our telephone or Internet voting systems, will not prevent you from voting in person at the meeting if you wish to do so.

 

By Order of the Board of Directors

 

Valerie Gentile Sachs, Secretary

 

Cleveland, Ohio

April 1, 2008

PROXY STATEMENT
for
ANNUAL MEETING OF STOCKHOLDERS
of
OM GROUP, INC.

 

 

TABLE OF CONTENTS

 

 

What is the purpose of the annual meeting?

 

At our annual meeting, you will be asked to:

 

 

In addition, we will transact any other business that properly comes before the meeting.

 

Who is entitled to vote?

 

Holders of record of our common stock as of the close of business on March 21, 2008 are entitled to vote at the annual meeting. At that time, we had 30,529,956 outstanding shares of common stock. We have no other outstanding classes of stock that are entitled to vote at the annual meeting. Voting stockholders are entitled to one vote per share.

 

How do I vote?

 

You may vote in person at the meeting or through a proxy or voting instruction card. To vote by proxy or voting instruction card, you should sign and date each proxy card or voting instruction card you receive and return it in the prepaid envelope. If you are a registered stockholder, you may vote by telephone or electronically through the Internet by following the instructions included on your proxy card or voting instruction card.

 

What if I hold shares indirectly?

 

If you hold shares in a stock brokerage account or through a bank or other nominee, you are considered to be the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by your broker or nominee. As the beneficial owner you have the right to direct your broker how to vote. Under the New York Stock Exchange rules, your broker is permitted to vote your shares on the election of directors and the appointment of our independent registered public accountant, even if you do not furnish voting instructions. However, your broker may not vote on the proposal relating to the amendment of our Certificate of Incorporation to increase the authorized number of shares of common stock without instructions from you. If you do not provide instructions on this issue, a broker non-vote will occur.

 

If your shares are held in “street name,” your broker or other nominee may have procedures that will permit you to vote by telephone or electronically through the Internet.

 

Can I change my vote?

 

You have the right to change your vote at any time before votes are counted at the meeting by:

 

 

What are the requirements and procedures for a quorum, abstentions and broker non-votes?

 

Your shares are counted as present at the meeting if you attend the meeting or if you properly return a proxy by mail or vote by telephone or through the Internet. In order for us to vote on matters at the meeting, a majority of our outstanding shares of common stock as of March 21, 2008 must be present in person or by proxy at the meeting, which includes shares that have been voted by telephone or through the Internet. This is referred to as a quorum. Abstentions will be counted for purposes of establishing a quorum at the meeting and will be counted as voting (but not for or against) on the affected proposal. Broker non-votes will be counted for purposes of establishing a quorum but will not be counted as voting. If a quorum is not present, the meeting will be adjourned until a quorum is present.

 

How many votes are needed to elect directors and approve the other proposals?

 

The nominees who receive the greatest number of “for” votes will be elected to the director positions being filled. Shares not voted will have no impact on the election of directors. If you sign and return a proxy card or use the telephone or Internet procedures but do not give voting instructions, your shares will be voted “for” the candidates nominated by the Nominating and Governance Committee and approved by the Board. Approval of the amendment to our Certificate of Incorporation to increase the authorized number of shares of common stock requires the affirmative vote of a majority of the outstanding shares of our common stock. Approval of the proposal to confirm the appointment of Ernst & Young LLP requires the affirmative vote of a majority of shares represented at the meeting.

 

How will voting on any other business be conducted?

 

We currently do not know of any business to be considered at the meeting other than the three proposals described in this proxy statement. If any other business is properly presented at the meeting, your signed proxy card or use of the telephone or Internet procedures gives authority to the named proxies to vote your shares on such matters in their discretion.

 

Who will count the vote?

 

Representatives of National City Bank will tabulate the votes and act as inspectors of election.

 

 

 

 

 

 

Our authorized number of directors is presently fixed at eight, divided into three classes, with two classes having three members and one class having two members. Our directors are elected to serve three-year terms, so that the term of office of one class of directors expires at each annual meeting.

 

 

The Nominating and Governance Committee has recommended, and the Board of Directors has approved, the nomination of the following individuals, each of whom is currently a director, for election as directors for terms expiring at our annual meeting in 2011:

 

 

 

If either of these nominees becomes unavailable for election, the accompanying proxy may be voted for a substitute, or in favor of holding a vacancy to be filled by the directors. We have no reason to believe that either nominee will be unavailable. The accompanying proxy may be voted for up to the number of nominees named and the nominees receiving the largest number of “for” votes will be elected to the director positions to be filled.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR BOTH NOMINEES.

 

The following information is provided regarding each nominee for election as a director and the continuing directors.

 

Nominee for Election as Directors for Terms Expiring in 2011

 

William J. Reidy, age 67, has been a director since 2002. Mr. Reidy, a CPA, was the managing partner of the Northeast Ohio practice of PricewaterhouseCoopers LLP. He retired from PricewaterhouseCoopers in 1999 after a 35-year career with the firm. Mr. Reidy is a member of the Board of Trustees of The Cleveland Clinic Foundation, a provider of health care services, and he currently serves on the boards of several community organizations including Cleveland Clinic Western Region and the Gateway Economic Development Corporation.

 

Joseph M. Scaminace, age 54, has been a director and our Chief Executive Officer since June 2005 and Chairman of our Board since August 2005. From 1999 to June 2005, Mr. Scaminace was the President, Chief Operating Officer and a board member of The Sherwin-Williams Company, a manufacturer and distributor of coatings. Mr. Scaminace currently is a member of several boards of directors, including Parker-Hannifin Corporation (NYSE:PH), a global producer of fluid power systems, electromechanical controls and related components; Boler Company, a privately held company that makes truck and trailer suspension systems and auxiliary axles systems for the commercial heavy-duty vehicle market; and The Cleveland Clinic Foundation, a provider of health care services.

 

Continuing Directors Whose Term of Office Expires in 2010

 

Katharine L. Plourde, age 56, has been a director since 2002. Ms. Plourde was a Principal and analyst at the investment banking firm of Donaldson, Lufkin & Jenrette, Inc., New York, New York, until November 1997. Since that time she has engaged in private investing. Ms. Plourde is a director of Pall Corporation (NYSE:PLL), a global producer of filtration and separation products and systems and also serves as a director of a private corporation.

 

David L. Pugh, age 59, was appointed as a director on January 9, 2007. Mr. Pugh has served as Chairman of Applied Industrial Technologies Inc. (“Applied”), an industrial product distributor, since October 2000, and as Applied’s Chief Executive Officer since January 2000. He was President of Applied from 1999 to October 2000. Prior to joining Applied, Mr. Pugh was Senior Vice President of Rockwell Automation and general

manager of Rockwell’s Industrial Control Group. Mr. Pugh is a director of Hexcel Corporation (NYSE:HXL), a plastics materials manufacturer, and of R.W. Becket Corp., a private company.

 

Continuing Directors Whose Term of Office Expires in 2009

 

Richard W. Blackburn, age 65, has been a director since August 2005. Mr. Blackburn retired from Duke Energy Corporation in 2004 after seven years as Executive Vice President and General Counsel, the last year of which he was also Chief Administrative Officer. Mr. Blackburn is a director of Enesco Group, Inc., a producer of giftware and home and garden decor products, and is a Trustee of the Massachusetts Eye and Ear Infirmary and George Washington University.

 

Steven J. Demetriou, age 49, has been a director since November 2005. Mr. Demetriou has been the Chairman of the Board and Chief Executive Officer of Aleris International, Inc., an international aluminum company, since December 2004 following the merger of Commonwealth Industries, Inc. and IMCO Recycling, Inc. Mr. Demetriou served as President and Chief Executive Officer of Commonwealth from June 2004 and served as a director of Commonwealth from 2002 until the merger. Mr. Demetriou was President and Chief Executive Officer of privately held Noveon, Inc., a global producer of advanced specialty chemicals for consumer and industrial applications, from 2001 until June 2004, at which time he led the sale of Noveon to The Lubrizol Corporation. From 1999 to 2001, he was Executive Vice President of IMC Global Inc., a producer and distributor of crop nutrients and animal feed ingredients. Mr. Demetriou also serves on the boards of Foster Wheeler Ltd. (NASDAQ: FWLT) and of privately held Kraton Polymers. He serves on the boards of several community organizations including the United Way of Greater Cleveland, Cuyahoga Community College Foundation and the Cleveland Zoological Society.

 

Gordon A. Ulsh, age 62, was appointed as a director on February 16, 2007. Mr. Ulsh has served as President, Chief Executive Officer and a director of Exide Technologies (“Exide”), a company specializing in stored electrical energy products and services for industrial and transportation applications around the world since April 2005. From 2001 until March 2005, Mr. Ulsh was Chairman, President and Chief Executive Officer of FleetPride Inc., the nation’s largest independent aftermarket distributor of heavy-duty truck parts. Prior to joining FleetPride in 2001, Mr. Ulsh worked with Ripplewood Equity Partners, providing analysis of automotive industry segments for investment opportunities. Earlier, he served as President and Chief Operating Officer of Federal-Mogul Corporation in 1999 and as head of its Worldwide Aftermarket Division in 1998. Prior to Federal-Mogul, he held a number of leadership positions with Cooper Industries, Inc., including Executive Vice President of its automotive products segment. Mr. Ulsh joined Cooper’s Wagner Brake and Lighting in 1983 as Vice President of Operations (which company was acquired by Cooper Industries, Inc. in 1985), following 16 years in manufacturing and engineering management at Ford Motor Company.

 

The Board of Directors has unanimously approved and is submitting for stockholder approval an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 60 million shares to 90 million shares. No change is being proposed in the authorized number of shares of our preferred stock.

 

Of the 60 million currently authorized shares of common stock, as of March 21, 2008, the record date for this annual meeting, there were 30,529,956 shares of our common stock issued and outstanding (not including 61,541 shares held as treasury shares). In addition, as of that date, 3,666,190 shares of common stock were reserved for issuance upon the exercise of outstanding stock options and for future awards under our 2007 Incentive Compensation Plan.

 

The Board of Directors believes the availability of the additional shares will provide us with the flexibility to meet business needs as they arise and take advantage of favorable market conditions and opportunities without the delay and expense associated with holding a special meeting of stockholders. The additional authorized shares of common stock will be available from time to time for corporate purposes,

including raising additional capital, acquisitions of other companies, products, technologies or businesses, stock dividends, stock splits and other distributions. We do not have any present intention or plan to issue shares of common stock for any purpose, except for the issuance of shares of common stock upon the exercise of outstanding stock options and future issuances under our 2007 Incentive Compensation Plan to the extent deemed appropriate by the Compensation Committee of our Board of Directors.

 

Authorized but unissued shares of our common stock may be issued from time to time upon authorization by the Board of Directors, at such times, to such persons and for such consideration as the Board may determine in its discretion, except as may be required for a particular transaction by applicable law, regulation or the rules of the New York Stock Exchange. When and if such shares are issued, they would have the same voting and other rights and privileges as the currently issued and outstanding shares of common stock.

 

The authorization of the additional shares would not, by itself, have any effect on the rights of stockholders. However, holders of common stock have no preemptive rights to acquire additional shares of common stock, such that the issuance of additional shares could have a dilutive effect on earnings per share and the voting power of existing stockholders at the time of the issuance. The issuance of additional shares, or the perception that additional shares may be issued, may also adversely affect the market price of our common stock.

 

The Board of Directors does not believe an increase in the number of authorized shares of our common stock would significantly affect the ability of a third party to attempt to gain control of us. However, it is possible that an increase in authorized shares could render more difficult under certain circumstances or discourage an attempt by a third party to obtain control of us by allowing the issuance of shares that would dilute the share ownership of a person attempting to obtain control or otherwise make it difficult to obtain any required stockholder approval for a proposed transaction for control. The Board of Directors has no current intention to authorize the issuance of additional shares for such purposes and is not aware of any present attempt to obtain control of us or otherwise accumulate our common stock.

 

We will file the certificate of amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware at such time as the Board of Directors determines the appropriate effective time for the increase in authorized shares. The certificate of amendment would provide that Article FOURTH (a) of our Amended and Restated Certificate of Incorporation be amended to read as follows:

 

FOURTH: (a) The aggregate number of shares of stock which the Corporation shall have authority to issue is Ninety-Two Million (92,000,000) shares, consisting of Two Million (2,000,000) shares of Preferred Stock with a par value of One Cent ($.01) per share and Ninety Million (90,000,000) shares of Common Stock with a par value of One Cent ($.01) per share.

 

This amendment requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSED
AMENDMENT TO OUR CERTIFICATE OF INCORPORATION.

 

The Audit Committee has appointed Ernst & Young LLP to serve as our independent registered public accountant for the year 2008 and requests that stockholders confirm such appointment. Ernst & Young audited our consolidated financial statements and management’s report on internal control over financial reporting for 2007. Representatives of Ernst & Young will be present at the annual meeting and will have an opportunity to make a statement if they so desire and to respond to appropriate questions by stockholders. If our stockholders do not confirm Ernst & Young as our independent registered public accountant, the Audit Committee will reconsider the appointment of our independent registered public accountant.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU CONFIRM THE APPOINTMENT OF
ERNST & YOUNG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANT FOR 2008.

 

Our Board of Directors has four regularly scheduled meetings per year. These meetings are usually held in our headquarters in Cleveland, Ohio. The Board met nine times in 2007. Directors are expected to attend Board meetings, our annual stockholders’ meeting, and the meetings of the committees on which he or she serves. During 2007, each director attended at least 75% of the meetings of the Board and those committees on which he or she served. Each director attended our annual meeting of stockholders held in May 2007 except for Mr. Ulsh. When Mr. Ulsh was appointed to the Board in February 2007, we were aware that he had a previously scheduled commitment on the day of the annual meeting.

 

Our independent directors meet in executive session during each Board meeting. Our lead independent director, Richard W. Blackburn, presides at those executive sessions.

 

In addition to the independence criteria under the NYSE listing standards, our Board of Directors has adopted additional standards to determine director independence. These standards are located in our CG Principles for Board of Directors, which can be found in the “Corporate Governance” portion of our website (www.omgi.com).

 

The Board has affirmatively determined that Richard W. Blackburn, Steven J. Demetriou, Katharine L. Plourde, David L. Pugh, William J. Reidy and Gordon A. Ulsh meet these standards of independence. In assessing Ms. Plourde’s independence, the Board considered her position as a director of one of our suppliers, Pall Corporation. The Board determined that the supply relationship between Pall and us did not impact Ms. Plourde’s independence or affect her ability to exercise independent judgment as our director. In assessing Mr. Reidy’s independence, the Board considered that Mr. Reidy’s daughter is employed by PricewaterhouseCoopers, which provides some of our internal audit and global tax services. Mr. Reidy’s daughter has had no involvement in our account and the Board determined that the relationship did not impact Mr. Reidy’s independence or affect his ability to exercise independent judgment as our director. In assessing Mr. Demetriou’s independence, the Board considered his position as a director of Kraton Polymers, which has an affiliate that is one of our suppliers. The Board also considered Mr. Demetriou’s position as chairman of the board and chief executive officer of Aleris International, Inc., which also is one of our suppliers. The Board determined that these supply relationships did not impact Mr. Demetriou’s independence or affect his ability to exercise independent judgment as our director.

 

The Board has a standing Audit Committee, Compensation Committee, and Nominating and Governance Committee, each composed solely of independent directors as defined by the NYSE listing standards and our corporate governance principles. Each Committee has a charter that can be found in the “Corporate Governance” portion of our website (www.omgi.com).

 

The Audit Committee, currently composed of Ms. Plourde and Messrs. Blackburn, Reidy and Ulsh, met nine times in 2007. Mr. Reidy is the committee chairman. The Audit Committee is responsible for:

 

 

In performing its functions, the Audit Committee acts in an oversight capacity for our management processes and systems, internal control structure, financial reporting and risk management. It is not responsible for preparing or assuring the accuracy of our financial statements or filings, or conducting audits of financial statements. The Board has determined that each member of the Audit Committee is “independent” as defined by Rule 10A-3 of the Securities Exchange Act of 1934. The Board also has determined that each Audit Committee member is financially literate and has designated Mr. Reidy and Ms. Plourde as the Audit Committee financial experts. The Audit Committee’s report can be found under “Report of the Audit Committee” in this proxy statement.

 

The Nominating and Governance Committee, currently composed of Ms. Plourde and Messrs. Demetriou, Pugh and Reidy, met four times in 2007. Ms. Plourde is the committee chair. The Nominating and Governance Committee is responsible for:

 

 

The process followed by the Nominating and Governance Committee for selecting and nominating directors is explained below under “Process for Selecting and Nominating Directors.”

 

The Compensation Committee, currently composed of Messrs. Blackburn, Demetriou, Pugh and Ulsh, met five times in 2007. Mr. Demetriou is the committee chairman. The Compensation Committee is responsible for:

 

 

Each member of the Compensation Committee qualifies as a “non-employee director” under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, an “outside director” under Section 162(m) of the Internal Revenue Code, and an “independent director” as such term is defined in the NYSE listing standards and under our corporate governance principles. The Compensation Committee has issued a report regarding the “Compensation Discussion and Analysis” portion of this proxy statement, which report can be found immediately following “Executive Compensation” in this proxy statement.

 

None of our directors who served on our Compensation Committee during 2007 was a current or former officer or an employee of ours or had any relationship with us that would be required to be disclosed by us

under applicable related party requirements. There are no interlocking relationships between our executive officers or directors and the board or compensation committee of another entity.

 

In its role as the nominating body for the Board, the Nominating and Governance Committee reviews the credentials of potential director candidates (including potential candidates recommended by stockholders, current directors or management) and conducts interviews and makes formal recommendations to the Board for the annual and any interim election of directors. In making its recommendations, the Nominating and Governance Committee considers a variety of factors, including skills, diversity, experience with business and other organizations of comparable size, the interplay of the candidate’s experience with the familiarity and background of other Board members, the extent to which the candidate would be a desirable addition to the Board and any committees of the Board, and such other factors as it deems appropriate and in the best interests of us and our stockholders. In addition, the Nominating and Governance Committee has established the following minimum criteria for Board membership: Director candidates must have demonstrated integrity and ethics both personally and professionally and have a record of professional accomplishment. Each candidate must be objective, inquisitive, practical, and possess mature judgment, as well as be prepared to represent the long-term interests of all our stockholders. Directors are required to fully participate in Board and committee meetings. Each candidate should not serve on more than three public company boards (including ours) and should not be an executive of a company on which one of our executives is a board member. Further, each candidate (or immediate family member, affiliate or associate) shall not have any material personal, financial or professional interest in any present or potential competitor of ours. Pursuant to our director retirement policy, each director must resign from our Board upon his or her 72nd birthday or, in the discretion of the Board, prior to the next annual meeting of our stockholders.

 

As part of the settlement of the shareholder derivative lawsuits that were brought in connection with the decline in our stock price after the third-quarter 2002 earnings announcement, we have established a procedure for the appointment of two stockholder-nominated directors. Under that procedure, a designee appointed by the derivative plaintiffs may work in coordination with our chairman or lead independent director to identify potential director candidates. The derivative plaintiffs’ designee did not choose to assist in identifying director nominees in connection with this annual meeting.

 

The Nominating and Governance Committee will consider candidates for director who are recommended by stockholders. Stockholder recommendations should be submitted in writing to: Chair of the Nominating and Governance Committee, OM Group, Inc., 127 Public Square, 1500 Key Tower, Cleveland, Ohio 44114-1221 USA. The recommendation letter shall include the candidate’s name, age, business address, residence address, and principal occupation, as well as the number of shares of our common stock owned by the candidate. The recommendation letter should provide all of the information that would need to be disclosed in the solicitation of proxies for the election of directors under federal securities laws. Finally, the stockholder should also submit the recommended candidate’s written consent to be elected and commitment to serve if elected. The Nominating and Governance Committee may also require a candidate to furnish additional information regarding his or her eligibility and qualifications. A complete copy of our Policies and Procedures for Stockholders to Propose Candidates for Directors is available by writing to our Nominating and Governance Committee Chair.

 

You may contact the Board, the lead independent director or the independent directors as a group by sending a letter marked “Confidential” and addressed to Lead Independent Director, OM Group, Inc., c/o Valerie Gentile Sachs, Secretary, 127 Public Square, 1500 Key Tower, Cleveland, Ohio 44114-1221 USA.

 

Our Code of Ethics applies to all of our employees, including our chief executive officer, our chief financial officer and our controller. The Code of Ethics, our corporate governance principles and all committee

charters are posted in the “Corporate Governance” portion of our website (www.omgi.com). A copy of any of these documents is available in print free of charge to any stockholder who requests a copy by writing to OM Group, Inc., 127 Public Square, 1500 Key Tower, Cleveland, Ohio 44114-1221 USA, Attention: Troy Dewar, Director of Investor Relations.

 

There were no transactions between us and our officers, directors or any person related to our officers or directors, or with any holder of more than 5% of our common stock, either during 2007 or up to the date of this proxy statement.

 

We review all transactions between us and any of our officers and directors. Our Code of Ethics, which applies to all employees, emphasizes the importance of avoiding situations or transactions in which personal interests interfere with the best interests of us or our stockholders. In addition, our corporate governance principles include procedures for discussing and assessing relationships, including business, financial, familial and nonprofit, among us and our officers and directors. The Board reviews any transaction with a director to determine, on a case-by-case basis, whether a conflict of interest exists. The Board ensures that all directors voting on such a matter have no interest in the matter and discusses the transaction with counsel as necessary. The Board has delegated the task of discussing, reviewing and approving transactions between us and any of our officers to the Audit Committee.

 

To further align the interests of our executive officers and non-employee directors with our stockholders, the Board has determined to establish stock ownership guidelines. Each executive officer and non-employee director will be required to own shares of our common stock at a specified level within a certain time period from the date of adoption of the guidelines or subsequent appointment or election as an executive officer or non-employee director. The Board expects to finalize and implement the stock ownership guidelines before the end of 2008.

 

The following table sets forth information concerning the number of shares of our common stock beneficially owned by our current directors, the named executive officers included in the summary compensation table in this proxy statement, and all our directors and executive officers as a group as of January 31, 2008. As of that date, Mr. Scaminace beneficially owned approximately 1.5% of our outstanding shares of common stock and all directors and executive officers as a group beneficially owned approximately 2.1% of our outstanding shares of common stock.

 

The totals shown below for each person and for the group include shares held personally and shares acquirable within 60 days of January 31, 2008 by the exercise of stock options granted under equity compensation plans. Each person has sole voting and investment power with respect to all shares shown.

Amount and Nature of Beneficial Ownership
as of January 31, 2008

 

 

The following table sets forth information concerning each person known to us to be the beneficial owner of more than 5% of our outstanding common stock as of December 31, 2007, which is the latest date for which we know such information.

 

 

 

 

 

This compensation discussion and analysis describes the following aspects of our compensation system as it applies to our executives:

 

 

We have established an articulated compensation philosophy with the following primary objectives:

 

 

Targeted Total Direct Compensation

 

Our primary focus in compensating executives is “targeted total direct compensation,” which is comprised of base salary, annual bonus and the estimated value of long-term stock-based incentives.

 

In order to establish targeted total direct compensation for our senior management, we collected competitive data for base salaries, annual bonuses and long-term stock-based incentive awards. Because our market for executive talent is national, competitive data reflected the compensation of executives at companies of comparable size and complexity on a nationwide basis. In addition, the information collected related to both metal companies and specialty chemical companies, since there were no companies operating at the beginning of 2007 in both of our business segments at that time, nickel and cobalt-based specialty chemicals. Most of the companies reviewed were publicly traded in the United States and had annual sales that ranged from approximately one-half to twice our sales for 2007, a range that we find acceptable for officer compensation comparisons. While the group includes some companies outside this range, the majority of

companies fall within these guidelines. The median company in the group has sales comparable to ours. The companies comprising the group reviewed are:

 

 

In addition to data derived from the public documents of peer companies, we review data obtained from nationally recognized compensation surveys for a broad range of companies of comparable size and similar revenues. This additional information helps confirm peer results and represents the broader market in which we compete for senior executives.

 

We used this competitive data as a benchmark for analyzing the targeted total direct compensation for each executive position. In addition, we took into consideration the facts that our chief executive officer and our general counsel were hired in 2005 and our chief financial officer was hired in early 2006, and that each of them had agreed upon individual competitive compensation packages at the times of hire. For our senior executives, we established targeted total direct compensation for 2007 following a review of competitive data, commitments made to them upon hiring and their actual responsibilities without regard to titles. The amounts established approximate the applicable market medians, except as explained below regarding our chief executive officer. We believe an approximate market median result is appropriate for our executives because we expected to achieve at least median performance and that result balances the cost of the compensation program with the expected performance.

 

While we target total direct compensation at the market median, an executive’s actual total direct compensation could vary significantly depending upon the relationship between our actual performance and target results. If our results are well above target performance, executives have the opportunity to earn compensation that is well above the relevant market median. Conversely, executives may earn compensation that is well below the relevant market median if our performance is well below target levels.

 

The exception to this market median result is our chief executive officer. His targeted total direct compensation level generally is in the competitive top quartile. This reflects his recruitment in 2005 and his resulting employment agreement with us. His base salary, annual bonus and target stock-based compensation levels were required to attract him to us. They were also intended to replace the opportunities he received as president and chief operating officer of The Sherwin-Williams Company, a company that was several times larger than us. Our chief executive officer’s recruitment package reflected our Board’s desire to retain a person with significant operational expertise and a reputation for integrity who had the leadership skills to lead our business transformation. Our chief executive officer’s target total direct compensation for 2007 was derived from his initial compensation levels established at the time of his employment with us in 2005.

 

In early 2008, we created a new group of peer companies for purposes of executive compensation comparisons. We did so in light of the ongoing strategic transformation of our business, which thus far has included the sale in March 2007 of our nickel business and our subsequent business acquisitions. This new group of peer companies, which is more consistent with the nature of our current businesses and our overall

size than the prior grouping, was used as a benchmark for analyzing executive compensation to be paid in 2008. The companies comprising this new peer group are:

 

 

Compensation Mix

 

We compensate our executives through a combination of base salary, annual bonus and long-term stock-based incentive awards. We balance the targeted total direct compensation of our executives among fixed and variable compensation, short- and long-term compensation, and cash as well as stock-based compensation. The satisfaction of performance targets is part of the determination of an executive’s annual bonus and long-term incentive compensation.

 

The amount of targeted total direct compensation of executives is allocated among the various types of compensation in a manner designed to achieve our overall compensation objectives. Our resulting targeted compensation mix for the various executive levels for 2007 was approximately as follows:

 

 

 

 

The total direct compensation earned in 2007 by our named executive officers is set forth below under “Elements of Direct Compensation — 2007 Actual Total Direct Compensation.”

 

Elements of Direct Compensation

 

Base Salary

 

We use base salaries to provide a predictable level of current income. Our base salaries are designed to assist in attracting and retaining qualified executives. The amount of each executive’s annual base salary is based on that executive’s position, responsibilities, skills and experience, individual performance and the salaries of executives in comparable positions and responsibilities at peer companies. It may also reflect an executive’s compensation level prior to joining us. In addition, since there also is competition for executives on a local basis across varying industries, we also review local conditions to confirm the competitiveness of our base salaries. When establishing base salaries for our executives, we do not take into account any awards previously made, including the results of equity-based awards under our long-term incentive plans. In the case of our chief executive officer, the Compensation Committee assesses his performance and determines his base salary level. For other executives, our chief executive officer assesses their performance and makes recommendations of base salary levels for consideration by the Compensation Committee.

 

A number of our senior executives have joined us recently and have base salaries that are derived from amounts agreed upon at the time of commencement of their employment. For Mr. Scaminace, our chief executive officer, we agreed to a base salary at the time of his employment in mid-2005 that took into

consideration his compensation at The Sherwin-Williams Company, where he had been the president and chief operating officer, as well as his operational expertise, integrity and leadership skills. In early 2008, Mr. Scaminace’s annual base salary was increased to $917,600, based upon his achievement of performance goals and objectives established at the beginning of 2007, including the achievement of certain financial targets and refinement and execution of the strategic plan, as well as a review of the base salary levels for chief executive officers of companies within our peer group. Mr. Scaminace’s employment agreement with us has a term ending on May 31, 2008.

 

Similarly, the 2007 base salaries of Mr. Haber, who became chief financial officer in March 2006, and Ms. Sachs, who joined us as general counsel in September 2005, were derived from the base salaries agreed upon at the respective times of hire. Their initial base salaries took into consideration their respective compensation at previous employers and the requirements of their respective positions with us. In early 2008, the annual base salaries of Mr. Haber and Ms. Sachs were increased to $354,270 and $350,896, respectively, based upon an assessment of their individual skills and competencies, including their respective level of achievement of specific objectives that were established at the beginning of 2007 relating to their operational responsibilities, and upon increases in the base salary level for executives in those positions with companies within our peer group.

 

Mr. Dunmead, who is the general manager of our Specialties business segments, had a base salary for 2007 that was set early in 2007, based on a determination of the requirements of his position, his skills and experience, and his performance in 2006. In early 2008, Mr. Dunmead’s annual base salary was increased to $375,170, based upon an assessment of his individual skills and competencies, including his level of achievement of specific objectives that were established at the beginning of 2007 relating to his operational responsibilities, and upon increases in the base salary level for executives in similar positions with companies within our peer group.

 

Mr. Griffith, who is our vice president of strategic planning, development and investor relations, had a base salary for 2007 that was set early in 2007, based on a determination of the requirements of his position, his skills and experience, and his performance in 2006. In early 2008, Mr. Griffith’s annual base salary was increased to $270,400, based upon an assessment of his individual skills and competencies, including his level of achievement of specific objectives that were established at the beginning of 2007 relating to his operational responsibilities, and upon increases in the base salary level for executives in similar positions with companies within our peer group.

 

Mr. Bak was the vice president and general manager of our nickel business, which we sold to a third party on March 1, 2007. Mr. Bak’s employment with us terminated on March 31, 2007, and his base salary during 2007 remained at the same rate as his 2006 base salary. In connection with the sale of the nickel business, we paid Mr. Bak a retention bonus and agreed to make certain severance and other payments, which are described under “Potential Payments upon Termination or Change in Control — Payments to Mr. Bak in connection with the Sale of the Nickel Business” in this proxy statement.

 

Annual Bonus

 

We maintain an annual bonus program to provide employees, including executives, with the opportunity to be rewarded based upon our financial performance above established goals. Our annual bonus program is intended to provide incentives for executives to endeavor to achieve targeted annual goals and receive rewards when those goals are met or exceeded. When combined with base salaries, annual bonus opportunities for our executives generally are set to provide competitive total cash compensation when target performance goals are met.

 

Under our annual bonus program, an overall bonus pool is funded based upon corporate results as measured by our consolidated operating profit. We selected this measure because of its direct correlation with the interests of our stockholders — to drive consistency in our profit performance. We calculate operating profit by deducting from our net sales the cost of products sold (including depreciation and amortization) and selling, general and administrative expenses of our total business. The overall bonus pool may be funded at a threshold level, a target level or a maximum level, depending upon our actual performance. These levels are

designed to reflect operating profit that ranges from an acceptable return to stockholders (threshold), to a more demanding but achievable result (target) and finally to a stretch objective that normally would be achieved only periodically (maximum). Under the annual bonus program, all bonuses are calculated on a linear basis between these threshold and maximum levels. No bonuses are paid if our operating profit is not at least at the established threshold level, and no additional bonuses are earned if our operating profit exceeds the established maximum level.

 

For our 2007 bonus plan, we established the following operating profit objectives: threshold of $75.8 million, target of $101.1 million and maximum of $126.4 million. The target objective was based upon our budgeted operating profit for 2007 (excluding discontinued operations) and the threshold and maximum objectives were set to reflect potential variances from our budgeted operating profit taking into account historical volatility of operating results. Bonuses are self-funded in the sense that the threshold, target and maximum operating profit objectives are net of the aggregate amount that would be payable as bonuses at each level. Our actual operating profit for 2007 (excluding discontinued operations) was $196.2 million and thus the overall bonus pool for 2007 was funded at the maximum level. In 2007, our business model was primarily based on commodity metal pricing, which experienced significant price volatility during 2007. This volatility resulted in exceptional and unpredictable earnings for the year. However, under the terms of the program, no additional executive bonuses were earned as a result of our 2007 operating profit being in excess of the $126.4 million maximum established by the Compensation Committee.

 

Annual bonuses are paid in cash based upon varying factors established for each executive level. As more fully described below, some executive bonuses are based upon corporate performance, some are based upon a combination of corporate performance and satisfaction of individual goals, and some are based upon a combination of corporate performance, satisfaction of business segment or unit goals, and satisfaction of individual goals. These factors are weighted and based upon specific bonus opportunities that are established for various executive levels as described below. We selected these weightings and bonus opportunities based upon competitive criteria and after obtaining the advice of our human resources consultant, and they also reflect our subjective determination of appropriate threshold, target and maximum goals. Our chief executive officer has the discretion to recognize extraordinary individual contributions separately from application of the applicable objective factors and pay individuals who are not executive officers at above the levels described. In addition, notwithstanding the performance criteria established for bonuses, the Compensation Committee reviews the proposed bonus compensation for our executives following the availability of operating profit information for a completed year and in light of the individual performance reviews for executives eligible to receive bonuses, and it has the authority to exercise discretion in approving the amount of any bonus.

 

For 2007, the sole performance criteria for Mr. Scaminace was operating profit. We established the target bonus level for Mr. Scaminace in a fashion that implemented our approach of balancing compensation among fixed and variable compensation, short- and long-term compensation and cash as well as stock-based compensation. In addition, his target and maximum bonus levels have been established in a fashion that is consistent with the compensation levels we negotiated to attract Mr. Scaminace as our chief executive officer.

 

For senior executives who do not have responsibility for a business operation, 80% of their annual bonus opportunity for 2007 was based on operating profit and 20% was based on individual objectives determined at the start of the year. Their respective bonus opportunities were established to implement our approach described above to balance the mix of compensation. Mr. Haber, Ms. Sachs and Mr. Griffith are included in this group of senior executives for 2007.

 

For senior executives with responsibility for a business segment or unit, their performance goals are weighted toward the operational performance of the business segment or unit that they influence. We believe this increases the effectiveness of our bonus program because it rewards individuals for results that they have some immediate ability to control and influence. For these executives, 40-80% of their bonus for 2007 was based upon operating profit, up to 40% was based upon their respective business segment or unit performance and 20% was based upon their individual objectives determined at the start of the year. Their respective bonus opportunities were established to implement our approach described above to balance the mix of compensation. Mr. Dunmead is included in this group of senior executives for 2007.

The following table sets forth information regarding the various bonus opportunities that were established for 2007 for named executive officers under our annual bonus program and the actual bonuses earned for 2007 by those executives. No discretion was exercised by either our chief executive officer or our Compensation Committee to modify the amounts of bonuses otherwise earned by these executives.

 

 

 

Mr. Bak received a prorated bonus for 2007 of $87,035 under the terms of his retention agreement, as described under “Potential Payments upon Termination or Change in Control — Payments to Mr. Bak in connection with the Sale of the Nickel Business” in this proxy statement.

 

Recently Modified Annual Bonus Program

 

We have modified our annual bonus program for 2008 by adding free cash flow as an additional corporate performance criterion. We selected this criterion because it reflects management’s ability to manage our capital for current operations and generate cash for future operations and expansion and also balances the operating profit performance criterion, which is more affected by metal price volatility. Under the modified program, our senior executives will have an annual bonus opportunity based 75% upon our consolidated operating profit, 10% upon free cash flow and 15% upon individual objectives determined at the start of the year. The Compensation Committee will retain discretion with respect to the appropriate calculation of consolidated operating profit, based upon all relevant factors.

We also modified our annual bonus program in connection with recent amendments made to the contribution formula under our qualified defined contribution plan that is available generally to all of our U.S. employees. Commencing with bonuses for 2008, each of our U.S. employees, including our senior executives, will be eligible to receive a high-performance bonus up to a maximum of 7.5% of that employee’s base salary and annual bonus (without regard to the high-performance bonus). This high-performance bonus opportunity replaces a portion of the contribution formula under our defined contribution plan that was eliminated effective January 1, 2008. It is intended to provide an additional incentive for our employees to endeavor to achieve the established maximum performance level and have the opportunity to be rewarded when above-target levels are achieved.

 

The 2008 high-performance bonus for our senior executives will be based upon the achievement of corporate results as measured by our consolidated operating profit and free cash flow for 2008, but only to the extent such criteria exceed the target performance levels established for 2008 for our annual bonus plan. The maximum high-performance bonus will be earned only if the maximum performance level is achieved, with the bonus calculated on a linear basis between the target and maximum levels. All 2008 high-performance bonuses will be paid in cash, except with respect to Mr. Scaminace. He will receive one-half of any earned high-performance bonus in stock options and one-half of such bonus in time-based restricted stock with a vesting period of one year. We determined that any high-performance bonus earned by Mr. Scaminace should be paid in stock options and restricted stock rather than in cash in order to more effectively reinforce the focus upon the importance of long-term results and to implement our approach of having a larger portion of Mr. Scaminace’s compensation be stock-based compensation based upon our corporate results.

 

Long-Term Stock-Based Compensation

 

We have determined that a combination of stock options, time-based restricted stock and performance-based restricted stock provides a package of incentive compensation that most effectively motivates executives, reinforces the need for strong long-term financial results, continues to align the interests of our executives with the interests of our stockholders, builds executive stock ownership among a new management team, retains executives in a cyclical business engaged in a significant transformation and balances the cost of the incentives with the targeted results. We have established targeted long-term stock-based compensation opportunities by salary range for senior management based upon executive position and competitive market information. The target is expressed as a monetary value that is derived from a percentage of an executive’s base salary and is intended to equal median levels for executives in comparable positions at similar size companies and peer organizations. The targeted long-term stock-based compensation value is balanced among stock options (50%), time-based restricted stock (20%) and performance-based restricted stock (30%). The stock options are designed to maintain a strong tie between the interests of our executives and our stockholders because options produce rewards to executives only if our stock price increases. Time-based restricted stock is designed to retain the management team and build equity ownership among the executives. Performance-based restricted stock is designed to provide incentives and rewards for achieving specified longer-term financial results as well as increasing our common stock price. The mix between reward elements emphasizes performance rewards (80% of the total delivered as options and performance-based restricted stock) more than service-based rewards (20% in the form of time-based restricted stock). Moreover, it strikes what we consider a reasonable balance between stock price appreciation awards (50% of the total as options) and those based on sustained long-term financial results (30% as performance-based restricted stock).

 

The Compensation Committee also grants awards under our long-term incentive compensation plans to employees who are not included in our senior executive group. Awards to these participants historically have been in the form of stock options. For tax reasons, awards made to executives and other participants who are not U.S. residents generally are made in the form of stock options.

 

In 2007, we established target grant guidelines for each award element for each executive. They were based on several factors, including our historical stock price performance, the estimated present value associated with each award element, an executive’s relative level of responsibility, the monetary value of an executive’s target long-term stock-based compensation and the targeted mix of long-term incentive opportunities. Target grants are generally awarded to all eligible participants, although the chief executive officer may

make recommendations to the Compensation Committee to adjust an individual’s awards based on the individual’s performance, responsibilities or involvement in strategic initiatives. This discretion was not exercised for 2007, except with respect to the special recognition bonuses described below under “Other Compensation Elements — Special Recognition Bonus.”

 

To reinforce the commitment to long-term results and retain executives, our long-term awards fully vest in three years. Our stock options become exercisable in equal increments over a three-year period. Time-based restricted stock awards vest three years after their grant date. Performance-based restricted stock awards are earned only upon satisfaction of performance targets relating to a three-year performance period. No performance-based restricted stock awards were granted subject to performance for the three-year period ended December 31, 2007.

 

We award performance-based restricted stock at the maximum value, which is double the target value, shortly after the start of each performance period. In order for performance-based restricted stock to be earned, we must achieve specified performance goals for the three-year performance period covered by the award. We established two performance criteria for the performance-based restricted stock awards made in 2007: total operating profit and average return on net assets, in each case for the three-year period ending on December 31, 2009. Both of these measures are based on consolidated results, with no weights given to business unit or individual performance. This approach emphasizes the need for our senior executives to focus on the overall company performance that will ultimately create value for stockholders. We believe that these measures are important in terms of achieving desired profitability and effectively managing our assets, key financial measures of our long-term success. These performance criteria are weighted equally and each will determine vesting of up to 50% of the total performance-based restricted shares. Based on our actual operating profit over the three-year performance period, between 0% and 50% of the total performance-based restricted shares will vest. Based on our actual return on net assets over the three-year performance period, between 0% and 50% of the total performance-based restricted shares will vest. No shares will be earned if total operating profit for the three-year period is not above the established threshold level, regardless of the average return on net assets for the period. Shares will be earned on a linear basis between the established threshold and maximum levels. These performance criteria are among those approved by our stockholders, with the result that we expect the value of any earned performance-based restricted stock to be tax-deductible by us.

 

Our established performance levels are designed to reflect reasonable performance that would be minimally acceptable to stockholders and achieved fairly frequently (threshold), performance that is more demanding and should be achieved approximately one-half of the time (target), and outstanding performance that would be met relatively infrequently (maximum). However, our business historically has been and currently remains significantly exposed to metal price volatility, which has caused material variations in our results from year to year. This reality must be taken into account when considering the likelihood of achieving established performance measures during a future three-year performance period. In addition, the recent sale of our nickel business and our related strategic transformation plan make any prediction of such likelihood even more uncertain as regards performance periods that include future years.

 

Named executive officers received the following equity-based awards for 2007:

 

 

 

 

In establishing award levels, we have available for consideration all information we believe is relevant to the compensation of our executives, including information contained on “tally sheets” reviewed by our Compensation Committee. This information is intended to reflect the value of an executive’s overall compensation, including base salary, bonus, long-term incentive awards, other annual compensation information such as health, welfare and retirement benefits, compensation previously paid, and prior stock-based awards. In addition, the Compensation Committee has available for review information regarding equity ownership levels and change-in-control and severance payment opportunities applicable to our executives. Our primary focus is to retain executives in light of prevailing competitive conditions and to motivate executives in ways that support our strategic direction. Accordingly, we will take into account such equity ownership, prior compensation, stock-based award opportunities and other compensation opportunities only if we believe it would be consistent with our corporate interests. For example, when establishing equity award levels in 2007, we considered the effect of the recent rapid increase in the price of our common stock, as well as the relatively high stock price at that time, upon the intended motivational purpose of the awards.

 

Our current and intended future practice is to make long-term stock-based awards at the first Compensation Committee meeting held following the availability of preliminary financial results for the previous fiscal year and availability of the current year operating plan. This meeting customarily is held in February in conjunction with our regularly scheduled Board meeting, and this practice permits us to consider the preliminary prior-year results and future expectations when making new grants. From time to time, we also may grant awards in connection with new hires and promotions, at the time of those events. We grant stock options only with an exercise price equal to or greater than the market price of our common stock on the grant date. We do not attempt to time the grant of stock-based awards to the release of material nonpublic information. Our practice is to publicly release financial results for completed annual and quarterly periods at approximately the same time we file the required annual or quarterly report with the SEC.

 

2007 Actual Total Direct Compensation

 

The table below summarizes the actual total direct compensation earned by named executive officers and the respective percentage that each compensation element bears to each officer’s total direct compensation for 2007. The targeted total direct compensation mix for our various executive levels is set forth above under “Means of Achieving Our Compensation Objectives — Compensation Mix.”

 

 

 

 

 

Other Compensation Elements

 

Special Recognition Bonus

 

On February 7, 2007, the Compensation Committee provided special recognition bonuses to several members of our senior management group. One-half of the bonus was paid in cash in February 2007, and one-half of the bonus was paid in performance-based restricted stock. The performance-based restricted stock is subject to achievement of an established earnings target for our Specialties business segment during any one of the years in the three-year period ending December 31, 2009. The Compensation Committee awarded these bonuses to acknowledge the substantial time and effort spent by each of these individuals in the sale of the nickel business and to motivate these key executives to continue our transformation by growing our Specialties business through organic growth and strategic acquisitions. The bonuses were as follows:

 

 

Perquisites

 

Subsequent to March 31, 2007, in lieu of receiving any specific perquisites or personal benefits, each of our senior executive officers other than Mr. Scaminace receives an annual payment of $25,000. This annual payment replaced our previously existing practice of providing an annual car allowance and dues for one club for our senior executives. The perquisites provided through March 31, 2007 to our named executive officers and the cash payments made in lieu of perquisites are included in the “All Other Compensation” column of the Summary Compensation Table in this proxy statement. Mr. Scaminace did not receive this annual payment as he did not receive any perquisites under our previously existing practice.

 

Executives are not permitted to use our corporate jet for personal travel. We have season tickets to Cleveland-based professional basketball, baseball and football games and from time to time have tickets to musical, theatrical, dance and other performing arts events. These tickets are primarily intended to be used to entertain customers and suppliers. On those occasions when tickets are not used for business-related entertainment, they may be used by a wide range of our employees, including our executives, through a lottery process or on an invited basis.

 

Retirement Plans

 

Our senior executives participate in our qualified defined contribution plan that is available generally to all of our employees and also participate in our benefit restoration plan, which is a nonqualified “excess” plan available to selected employees with base salaries in excess of certain limits imposed by the Internal Revenue Code for qualified plans ($225,000 for 2007). These plans are designed to encourage savings for retirement, as we do not maintain a defined benefit plan that provides a specified level of income following retirement. Our contributions and credits to these plans for our named executive officers are included in the “All Other Compensation” column of the Summary Compensation Table in this proxy statement. Our benefit restoration plan is discussed below under “Nonqualified Deferred Compensation” in this proxy statement.

 

Change in Control Agreements and Severance Agreements

 

We have entered into change in control agreements with all of our senior executives. We believe that the change in control agreements serve to protect us against the loss of key executives in the context of the current uncertainty in our business model and our transformation to a more customer-focused, value-added business.

We also have severance agreements with all of our senior executives, which are designed to protect our executives in the context of the rapid rate of strategic change occurring in our business. These agreements are discussed under “Potential Payments upon Termination or Change in Control” in this proxy statement.

 

Tax Deductibility of Executive Compensation

 

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to publicly held companies for compensation in excess of $1 million in any taxable year paid to the chief executive officer or the three next most highly compensated executive officers (excluding the chief financial officer). However, compensation in excess of $1 million is deductible if it meets the criteria for being “performance based” within the meaning of Section 162(m). Our stock option and performance-based restricted stock awards satisfy the conditions for being “performance based” under Section 162(m). Time-based restricted stock awards and some bonuses paid under our annual bonus plan do not currently satisfy the Section 162(m) “performance-based” conditions.

 

We generally endeavor to award compensation in a manner that satisfies the conditions for tax deductibility. However, we will not necessarily limit executive compensation to amounts deductible under Section 162(m), but rather intend to maintain the flexibility to structure our compensation programs so as to best promote our interests and the interests of our stockholders. For instance, we have established Mr. Scaminace’s targeted total direct compensation at the level described above, even though it may not be fully deductible, because we believe such compensation is appropriate under relevant market conditions and is consistent with the objectives of our executive compensation program as applied to Mr. Scaminace.

 

Described below is a summary of the provisions of the employment agreements that we have with certain named executive officers and the restricted stock and stock option programs that are part of our compensation strategy, together with a summary of the 2007 and 2006 total compensation of each named executive officer.

 

Employment Agreements

 

On May 26, 2005, we entered into an employment agreement with Mr. Scaminace that provides for Mr. Scaminace’s employment as our chief executive officer for a term beginning on June 13, 2005 and continuing until May 31, 2008. Under the terms of his employment agreement, Mr. Scaminace received an initial annual base salary of $850,000 and is eligible for an annual bonus. His employment agreement also provided for the grant of an award of 166,194 shares of our restricted common stock that will vest on May 31, 2008 if Mr. Scaminace remains employed by us on that date. In addition, the agreement provided for the grant of options to purchase 254,996 shares of our common stock, of which options for 80,001 shares vested on May 31, 2006, options for 85,050 shares vested on May 31, 2007 and options for 89,945 shares will vest on May 31, 2008, if Mr. Scaminace remains employed by us on that date. The options that vested in 2006 have an exercise price equal to the market price for common stock on the date of the grant ($24.89 per share) and the options that vested in 2007 have an exercise price of $28.67 per share. The remaining options vesting in 2008 have an exercise price of $33.67 per share.

 

On September 7, 2005, we entered into an employment agreement with Ms. Sachs that provided for Ms. Sachs’s employment as vice president, general counsel and corporate secretary beginning on September 26, 2005. Under the terms of her employment agreement, Ms. Sachs received an initial annual base salary of $325,000 and is eligible for an annual bonus. Her employment agreement also provided for the grant of options to purchase 50,000 shares of common stock, one-third of which vested on each of September 26, 2006 and 2007, and the remaining one-third of which will vest on September 26, 2008, if Ms. Sachs remains employed by us on that date. The options had an exercise price equal to the market price for common stock on the date of the grant ($20.86 per share).

 

On March 6, 2006, we entered into an employment agreement with Mr. Haber that provided for his employment as our chief financial officer. Under the terms of his employment agreement, Mr. Haber received an initial base salary of $325,000 and is eligible for an annual bonus.

The benefits that Messrs. Scaminace and Haber, Ms. Sachs and the other named executive officers will receive upon a termination of their employment or a change in control are discussed below under “Potential Payments upon Termination and Change in Control.”

 

Restricted Stock and Stock Option Programs

 

On February 7, 2007, our Board approved the 2007 Incentive Compensation Plan, which was approved by our stockholders on May 8, 2007. The 2007 Plan superseded and replaced our 1998 Long-Term Incentive Compensation Plan and our 2002 Stock Incentive Plan, both of which terminated upon stockholder approval of the 2007 Plan. The termination of our 1998 Plan and our 2002 Plan did not affect awards outstanding under either plan.

 

Under the 2007 Plan, the Compensation Committee may grant stock options, stock appreciation rights, restricted stock awards, and phantom stock and restricted stock unit awards to our employees and our non-employee directors. Prior to May 8, 2007, under our 1998 Plan and our 2002 Plan, we previously awarded stock options to our employees and our directors and time-based and performance-based restricted stock to our employees. Our Compensation Committee administers outstanding awards under all of our plans.

 

Under these plans, the option exercise price of stock options may not be less than the per share fair market value of our common stock on the grant date. Our historical practice under these plans has been to grant stock options at an exercise price equal to the average of the high and low prices of our common stock on the NYSE on the date the option is granted. As a result, we may grant stock options at an exercise price that is greater or less than the closing price of our common stock on the NYSE on the grant date. As described above, we also have granted stock options to our chief executive officer at exercise prices above the market price on the date of grant. We do not price stock options on a date other than the grant date. The stock options we grant are exercisable in equal increments over a three-year period from the grant date and no option may be exercised prior to one year from the date of grant, except in event of a change in control, death, disability or retirement. If an employee’s employment ceases due to a change in control, death, disability or retirement, all unvested stock options become immediately exercisable. If employment ceases for any reason other than a change in control, death, disability or retirement, unvested stock options are forfeited and any vested but unexercised options may be exercised within three months of cessation of employment. All outstanding stock options expire ten years after their grant date.

 

Our time-based restricted stock granted under these plans vests three years after the grant date, and our performance-based restricted stock granted under these plans is earned upon satisfaction of performance targets relating to a three-year period. If an employee’s employment ceases for any reason other than a change in control, death or disability, all unvested restricted stock awards are forfeited. If an employee’s employment ceases due to a change in control, all unvested time-based restricted stock granted under these plans vests, and all unvested performance-based restricted stock granted under these plans vests at the target performance level. In the event of an employee’s death or disability, a pro rata portion (as determined by the number of days from the date of grant as compared to the full three-year period) of unvested time-based restricted stock granted under these plans will vest, and the employee will remain eligible to receive a pro rata portion (determined in the same manner) of unvested performance-based restricted stock granted under these plans, as determined at the end of the performance period. Employees who receive restricted stock awards have voting rights and the right to receive any dividends that are declared, even before that restricted stock is vested or earned.

 

The table below summarizes the total compensation paid to or earned by each named executive officer for the fiscal years ended December 31, 2007 and 2006.

 

 

 

		Employee Benefit				Auto								Payment in lieu of
		Plans(a)				Allowance(b)				Club Dues(b)				Perquisites(b)
J. Scaminace			$268,298				—				—				—
K. Haber			39,938				$4,500				—				$20,500
S. Dunmead			72,140				4,500				$5,967				14,533
V. Sachs			78,563				4,500				2,100				18,400
G. Griffith			44,730				4,500				—				20,500

 

(a)		These amounts reflect contributions by us to our qualified defined contribution plan and credits by us to our unfunded nonqualified deferred compensation plan, allocated to the accounts of the named executives. These amounts have not been received by the executives.
(b)		During 2007, we modified our practice regarding perquisites and personal benefits. Subsequent to March 31, 2007, in lieu of receiving any perquisites or personal benefits, each of our executive officers other than Mr. Scaminace receives an annual payment of $25,000. The amounts shown reflect the incremental cost of the perquisites paid to each named executive prior to March 31, 2007 and a cash payment made to each executive for the balance of the $25,000 annual payment in lieu of perquisites.

(5)		Mr. Haber was appointed as our chief financial officer on March 6, 2006.

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Our Benefit Restoration Plan (the “BRP”) is a nonqualified, unfunded deferred compensation plan that provides retirement benefits to select key management employees who are designated as BRP participants by our Board of Directors and whose benefits under our tax-qualified defined contribution plan are subject to certain limitations under the Internal Revenue Code. Participants are fully vested in their BRP accounts and, subject to any applicable provisions of Internal Revenue Code Section 409A, will receive their BRP account balances in a lump sum upon separation from service or a change in control, unless they have elected to receive such balance in annual installments for up to a five-year period.

 

Each participating executive’s account under the BRP is credited annually with the amount that would have been allocated to his or her account under our tax-qualified plan, assuming that no Internal Revenue Code limitations were applicable, less the actual benefit allocated to his or her qualified plan account and also less an amount equal to the percentage of the tax-qualified plan contribution attributable to any cash election made by the executive. Earnings on BRP accounts are calculated by multiplying to the balance of each participating executive’s account at the beginning of the year by the five-year rolling average annual composite yield on Moody’s Corporate Bond Yield Index for the immediate preceding five years. The amounts shown below as contributed by us were credited to the indicated executive accounts as of January 1, 2007.

 

 

 

 

We maintain employment agreements, severance agreements and change in control agreements with certain of our named executive officers, who also participate in our long-term incentive compensation plans. The following summaries describe and quantify the payments that each named executive officer would receive if his or her employment with us were terminated or if we had a change in control and such executive officer’s employment were terminated following the change in control. The summaries assume that the termination and/or change in control occurred on December 31, 2007 and that the relevant stock price is the closing market price of our common stock on the NYSE on December 31, 2007, which was $57.54. Since Mr. Bak’s employment with us terminated on March 31, 2007, payments made and to be made to him are described in a separate discussion following the summaries.

 

Payments Pursuant to Employment Agreement with Chief Executive Officer

 

We have entered into an employment agreement with Mr. Scaminace, our chief executive officer. If we terminate Mr. Scaminace’s employment for cause, we will not be obligated to make any payments to him other than salary earned but not yet paid as of the termination date. As defined in the employment agreement, “cause” means (a) commission of a felony, (b) fraud, embezzlement or misappropriation of our funds or acts of dishonesty that are materially inimical to our best interest, (c) violation of the noncompetition provision contained in the employment agreement or (d) abandonment of or consistent failure to perform duties, other than for reason of disability.

 

If we terminate Mr. Scaminace’s employment without cause, Mr. Scaminace will receive a lump-sum payment that consists of (a) his base salary earned but unpaid through the date of termination, (b) an amount reflecting his accrued but unused vacation days and (c) two times the total of his “average annual base salary” and “average bonus amount.” His average annual base salary is determined by adding (x) his annual base salary rate in effect immediately before the termination and (y) if his base salary rate has been increased at least once during the term of the employment agreement, the base salary rate in effect before the most recent increase, and dividing that sum by two. His average bonus amount is equal to the greater of (A) the aggregate bonuses received during the term of the employment agreement prior to termination divided by the number of bonuses received or (B) $950,000. The lump-sum payment must be made within ten days of termination pursuant to normal payroll practices.

 

If Mr. Scaminace suffers from a disability, defined as a condition that renders him unable to perform his duties by reason of illness or injury for a period of more than six consecutive months, we have the right to terminate his employment. If terminated for reason of disability, Mr. Scaminace will receive (a) his base salary through the month in which his employment terminates, payable as soon as practicable, and (b) an amount equal to two times the sum of his average annual base salary and his average bonus amount, both as defined above, payable in 24 equal monthly installments. These payments will be offset by any payments or benefits received by him from any disability plan maintained by us at the time of the disability.

 

If Mr. Scaminace dies, we will pay his beneficiary or estate the same payments as described above for a termination without cause, as well as any payments or benefits provided by any insurance program maintained by us in which he participated at the time of death.

 

Mr. Scaminace’s employment agreement requires that he comply with certain covenants and requirements upon termination. Mr. Scaminace must maintain the confidentiality of all of our information, must not solicit present or prospective employees, customers or suppliers for a period of two years following termination, must not compete with us for a period of two years following termination, and must not disparage us, our employees, stockholders, officers or directors.

The payments that would have been made to Mr. Scaminace pursuant to his employment agreement, assuming a termination of his employment as of December 31, 2007, are as follows:

 

 

 

 

Payments Pursuant to Severance Agreements

 

We have entered into severance agreements with Messrs. Haber, Dunmead and Griffith and with Ms. Sachs. Each of Messrs. Haber, Dunmead and Griffith and Ms. Sachs is entitled to certain payments in the event of termination during the term of the severance agreement. “Termination” means (a) termination for any reason other than death, disability, or cause (which includes commission of a felony; fraud, embezzlement or misappropriation of our funds; acts of dishonesty in the course of employment that are materially inimical to our best interests; and the failure to perform duties other than due to disability) and (b) the assignment of duties that are materially inconsistent with the executive’s position, authority, duties and responsibilities or results in the material diminution of the executive’s position. Ms. Sachs’s severance agreement also defines “termination” to include a material change in her reporting structure. In the event of a termination under a severance agreement, each executive is entitled to a lump-sum payment equal to 1.5 times his or her respective annual base salary then in effect plus any base salary earned through the termination date and bonus for the prior fiscal year, to the extent not otherwise paid. The payment must be made within ten days of termination pursuant to our normal payroll practices.

 

In order to receive the payments outlined above, each executive must provide us with an agreement that contains a general release from future liability or suit, a nonsolicitation and nondisparagement provision, a waiver of continued participation in our employee benefit and welfare plans, a requirement to maintain the confidentiality of our information and a six-month noncompetition provision.

 

The payments that would have been made to each executive, assuming a termination as of December 31, 2007, are indicated below.

 

 

Payments in the Event of Death, Disability or Retirement

 

If any named executive officer retires, dies or becomes disabled while employed by us, any unvested options held by that executive officer will become exercisable immediately. If any named executive officer dies or becomes disabled, a pro rata portion (determined by the number of days from the date of grant as compared to the full three-year period) of unvested time-based restricted stock will vest, and the executive will remain eligible to receive a pro rata portion (determined in the same manner) of unvested performance-based restricted stock, as determined at the end of the performance period. In accordance with the terms of our Benefit Restoration Plan, discussed above under “Nonqualified Deferred Compensation,” each named executive

officer’s benefits accumulated under such plan will be distributed over a 15-year period in the event of retirement, death or disability, unless we decide to make a lump-sum payment. In addition, if Mr. Scaminace’s employment ceases by reason of death or disability, he will receive those payments described above under “Payments Pursuant to Employment Agreement with Chief Executive Officer.”

 

The table below sets forth payments that would have been made in the event of death, disability or retirement, assuming that such event had occurred on December 31, 2007 and based upon the closing market price of our common stock on the NYSE on that date ($57.54 per share). The “death or disability” column includes payments under the Benefit Restoration Plan, the value of unvested options that would have become exercisable upon death or disability, and the value of time-based restricted stock that would vest upon such an event. The “retirement” column includes only payments under the Benefit Restoration Plan and the value of unvested options that would have become exercisable upon retirement, as unvested restricted stock awards do not vest upon retirement. No amount is included in the table for performance-based restricted stock awards since the value of such awards is determinable only at the end of the performance period.

 

 

Payments in Event of a Change in Control

 

We have entered into a change in control agreement with each of our named executive officers. In the event that payments are made pursuant to these agreements, the payments and covenants required under these agreements supersede any other agreement between us and the named executive officer. For example, if Mr. Scaminace is terminated following a change in control and receives the benefits outlined below, he will not receive any of the payments or benefits under his employment agreement or any other agreement with us.

 

Under each change in control agreement, two events must take place before an executive receives payment. First, a change in control must occur. A “change in control” is defined as any of the following: (a) the acquisition by an individual, group or entity of beneficial ownership of 33% or more of our outstanding voting shares (not including any acquisition from us, by us or by our employee benefit plan), (b) the members of the board of directors in place at the time of the agreement cease to constitute a majority of the board (for reasons other than death or disability), subject to certain circumstances, or (c) the consummation of a reorganization, merger or consolidation or sale of all or substantially all of our assets, subject to certain limitations and conditions set forth in the agreement.

 

Second, the executive’s employment must be terminated, either by us “without cause” or by the executive for “good reason,” during the term of the change in control agreement. Termination “without cause” means termination for any reason other than death, retirement, disability or cause, as each term is defined in the agreement. Termination for “good reason” includes: (a) the assignment of duties inconsistent with the executive’s position or any other action that results in the diminution in such position, authority, duties or responsibilities, (b) the failure to provide the executive with salary and benefits equal to or greater than those in effect prior to a change in control, (c) the requirement that the executive work from a location that is more than 50 miles from the location from which he or she worked prior to the change in control, or a requirement that the executive travel on business to a substantially greater extent than prior to the change in control, or (d) the failure to require any successor to our business to assume and agree to the change in control agreement. In addition to the above, Mr. Scaminace’s agreement includes the following additional “good reason” termination provisions: (i) a reduction in his salary from the highest level in effect for the year prior to the change in control, (ii) the aggregate compensatory opportunities provided to him after a change in control are reduced below the levels provided prior to a change in control, subject to certain limitations, (iii) after the change in control, he is not permitted to participate in the compensatory programs generally

available to executives of the surviving entity, (iv) the surviving entity has headquarters outside of the Cleveland metropolitan area, (v) he determines in good faith that he is unable to fulfill his duties as chief executive officer after the change in control or that the company’s strategic plan varies materially from the plan that was in place prior to the change in control, or (vi) he ceases to be a member of the board of directors of the surviving entity for reasons other than death, disability or voluntary resignation.

 

In the event that both triggering events occur, each named executive officer will be entitled to the following payments:

 

 

If an executive receives payment under these agreements, then the executive agrees not to compete with our successor for a period of one year from the termination date. The executive also agrees to maintain the confidentiality of our and our successor’s information and to not disparage us or our successor or our respective directors, partners, officers or employees. The executive also must provide a general release of all claims and causes of action against us arising from or relating to the executive’s employment with us.

The payments that would have been made to each of our named executive officers, assuming a change in control and related termination had occurred on December 31, 2007 and based upon the closing market price of our common stock on the NYSE on that date ($57.54 per share), are as follows: