P.O. Box 1167 l Dayton, OH 45401

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

OF THE STANDARD REGISTER COMPANY

 

To All Shareholders:

 

The annual meeting of shareholders of The Standard Register Company, an Ohio corporation, will be held at our corporate headquarters located at 600 Albany Street, Dayton, Ohio 45417, on Thursday, April 29, 2010, at 11:00 a.m. Eastern Daylight Savings Time, for the following purposes:

 

(1) To set the number of directors at eight and to elect a board of directors;

 

 

(3) To transact such other business as may properly come before the annual meeting.

 

The board of directors has fixed the close of business on March 1, 2010, as the record date for determining the shareholders of Standard Register entitled to vote at the annual meeting.

 

A copy of Standard Register’s annual report for its fiscal year ended January 3, 2010, accompanies this notice. Although it is not a part of the official proxy soliciting material, we want each shareholder to have a copy of the annual report. If you have not received a copy of the annual report, please call us at 937.221.1506.

 

Gerard D. Sowar

Vice President, General Counsel

& Secretary

 

Dayton, Ohio

March 17, 2010

 

 

THE STANDARD REGISTER COMPANY

 

 

PROXY STATEMENT

 

FOR

 

ANNUAL MEETING

 

OF

 

SHAREHOLDERS

 

 

PRINCIPAL EXECUTIVE OFFICES:

600 Albany Street

Dayton, Ohio 45417

(937) 221-1000

 

 

The annual meeting will be held at our corporate headquarters, 600 Albany Street, Dayton, Ohio 45417, on Thursday, April 29, 2010, at 11:00 a.m. Eastern Daylight Savings Time. The record date fixed to determine shareholders entitled to receive notice of and to vote at the meeting is the close of business on March 1, 2010. We had outstanding, on the record date, 24,278,134 shares of common stock (each share having one vote) and 4,725,000 shares of class A stock (each share having five votes).

 

Notice of Electronic Availability of Proxy Statement and Annual Report

 

As permitted by the rules adopted by the United States Securities and Exchange Commission, Standard Register is making this proxy statement and its annual report available to its shareholders electronically via the Internet. This reduces the amount of paper necessary to produce these materials, as well as the costs associated with mailing these materials to all shareholders. On or about March 17, 2010, we will mail to our shareholders of record as of March 1, 2010, a notice of Internet availability of proxy materials (the “Notice”) and post our proxy materials on the website referenced in the Notice (www.proxyvote.com). The Notice contains instructions on how to access and review this proxy statement and our annual report. As more fully described in the Notice, all shareholders may choose to access our proxy materials on the website referred to in the Notice or may request to receive a printed set of our proxy materials. In addition, the Notice and the website provide information regarding how you may request to receive proxy materials in printed form or electronically by e-mail on an ongoing basis.

 

The proxies are solicited on behalf of our board of directors.

 

At the annual meeting, the shareholders will: (1) set the number of directors at eight and elect a board of directors; (2) vote on a proposal to ratify the appointment of Battelle & Battelle LLP, Certified Public Accountants, as Standard Register’s independent auditors for the year 2010; and (3) transact such other business as may properly come before the annual meeting.

VOTING YOUR SHARES

 

Most shareholders can vote by proxy in one of three ways:

 

 

All shareholder votes, properly cast in person or by proxy and not revoked, will be counted in voting on the proposals at the annual meeting or any adjournment of the annual meeting. Your proxy will be voted in accordance with your instructions. If you do not specify how you wish your shares to be voted, they will be voted as recommended by the board of directors. Your proxy includes the authority to vote shares cumulatively for the election of directors. Cumulative voting is explained in the section dealing with Proposal 1. Your proxy also includes the authority for the persons serving as proxies to use their best judgment to vote on any other matters that may be properly presented at the annual meeting, including, among other things, a motion to adjourn the meeting to a future time.

 

You may revoke your proxy at any time before its exercise in two ways: (1) by timely delivery to us of a later-dated proxy, or (2) by notifying us of your revocation of proxy either in writing or in person at the annual meeting. Your presence at the meeting will not, by itself, serve to revoke your proxy.

 

PROPOSALS

 

PROPOSAL 1: Election of Directors

 

The board of directors is currently set at eight, and the board recommends maintaining that number of directors.

 

The eight persons named in this section are nominated by the board of directors to be elected as directors and to serve until either the next annual election or until their successors are elected and qualified.

 

The board of directors does not expect that any of the nominees will be unavailable for election. However, if any of them are unavailable, the persons voting your proxy will use their best judgment to vote for substitute nominees.

 

Cumulative voting is permitted by the laws of Ohio in voting for the election of directors. In the event a shareholder wishes to vote his or her shares cumulatively, the shareholder must give notice in writing to the President, a Vice President or Secretary of Standard Register not less than 48 hours before the time scheduled for the annual meeting. Once any shareholder has given notice of intent to vote cumulatively, then all shareholders present at the annual meeting and the persons voting the proxies shall have full discretion and authority to cumulate the voting power they possess. This means they can give one candidate as many votes as the number of directors to be elected multiplied by the number of votes which the shareholder or proxy is entitled to cast, or to distribute such votes on the same principle among two or more candidates, as they determine in their judgment.

 

Nominees receiving the highest number of votes cast for the positions to be filled will be elected. Abstentions and shares not voted by brokers and other entities holding shares on behalf of beneficial owners will not be counted and will have no effect on the outcome of the election.

 

The board of directors recommends that you vote FOR setting the number of directors at eight and FOR each of the following named nominees to serve as directors of Standard Register:

 

Nominees

 

All nominees recommended by the board of directors for election were previously elected as directors by the shareholders. Information concerning each nominee follows:

 

 

 

VOTING SECURITIES AND PRINCIPAL HOLDERS

 

Owners of More than 5% of the Common and Class A Stock of Standard Register

 

This table gives information regarding all of the persons known by us to own, in their name or beneficially, 5% or more of the outstanding class A stock and common stock of Standard Register as of January 3, 2010.

 

Security Ownership Of Directors And Executive Officers

 

Each director and executive officer listed below and all directors and executive officers as a group own, in their own name or beneficially, class A stock and common stock of Standard Register on January 3, 2010, as follows:

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires directors, executive officers, and holders of 10% or more of our common stock to report certain transactions in the common stock to the Securities and Exchange Commission. Based on our records, we believe all Securities and Exchange Commission filings with respect to directors, executive officers, and holders of 10% or more of our common stock have been made in a timely manner except in the case of one long-time employee of the Company, David Williams, who became subject to Section 16(a) upon his appointment as Controller in March 2009. Throughout his employment Mr. Williams was a continuous participant in the Company’s Dividend Reinvestment and Stock Purchase Plan through which he regularly purchased shares of the Company’s common stock funded by payroll withholding. The automatic monthly stock purchases should have been reported on Form 4 filings with the Securities and Exchange Commission after Mr. Williams was appointed Controller but inadvertently were not. When this error was discovered, corrective filings were promptly made, but a total of ten monthly reports during 2009, relating to ten purchase transactions, were not timely.

 

CORPORATE GOVERNANCE

 

Corporate Governance Guidelines

 

The board has adopted Corporate Governance Guidelines to provide principles for the Company’s governance processes. These Guidelines address, among other topics, director selection and qualifications, director responsibilities, and board and committee structure. The Corporate Governance Guidelines are reviewed periodically and updated as deemed appropriate.

 

Code of Ethics

 

The board has adopted a Code of Ethics and emphasized that directors, and all Company employees, including principal executive officers and senior financial officers, are subject to the letter and spirit of the Code. The Code of Ethics covers such topics as conflicts of interest, confidentiality, compliance with legal requirements, and other business ethics subjects. It has been distributed to all employees and is made available on the Company’s website, www.standardregister.com by clicking on “Company”, then “About Standard Register” and following the link to “Code of Ethics”. Printed copies of the Code of Ethics are available by contacting the Corporate Secretary’s office, The Standard Register Company, 600 Albany Street, Dayton, Ohio 45417.

 

Director Independence

 

The board, assisted by the Corporate Governance and Nominating Committee, annually assesses the independence status of all directors for purposes of board and committee memberships. Using the “Independence Criteria” adopted by the board in conformity with New York Stock Exchange Listing Standards, as amended, the board adopted findings with respect to the independence of each director. Directors David P. Bailis, Roy W. Begley, Jr., F. David Clarke, III, Michael E. Kohlsdorf, R. Eric McCarthey, John J. Schiff, Jr., and John Q. Sherman, II, were determined to be independent. Joseph P. Morgan, Jr. is not considered independent since he is an employee of the Company.

 

All members of the Audit, Compensation, and Corporate Governance and Nominating Committees are independent directors.

 

The Corporate Governance and Nominating Committee and board also considered commercial ordinary-course transactions with respect to several directors, and director nominees as it assessed independence status, and concluded these transactions did not impair director independence. The transactions examined were:

 

 

 

The Independence Criteria used by the Corporate Governance and Nominating Committee and full board is available on the Company’s website, www.standardregister.com, by clicking on “Company”, then “About Standard Register” and following the link to “Director Independence Criteria”.

 

Related Party Transaction Policy

 

The Company is required to report certain related party transactions between the Company and certain related parties, including directors, executive officers, nominees for the board, beneficial owners of 5% or more of any class of the Company’s voting securities, and any of the foregoing person’s immediate family members. The board, assisted by the Corporate Governance and Nominating Committee, has adopted a written policy which establishes an approval process for related party transactions. The policy prohibits all related party transactions unless the Company’s Audit Committee determines in advance of the Company entering into any such related party transaction that the transaction is conducted on terms that are fair to the Company. In order for the Audit Committee to approve a related party transaction, the Audit Committee must be satisfied that it has been fully informed as to the direct and indirect interests, relationships and conflicts or potential conflicts present in the proposed transaction. The Audit Committee must determine that, being fully apprised of the proposed transaction, it believes that the transaction is fair to the Company and, if necessary, the Company has developed an appropriate plan to manage any conflicts or potential conflicts of interest. In the event an Audit Committee member or his or her immediate family member is a related person with respect to a transaction presented to the Audit Committee, such Audit Committee member will not participate in the determination whether to approve the transaction.

 

In the event that the Company enters into a related party transaction that has not received approval by the Audit Committee, or a transaction that was not originally a related party transaction becomes a related party transaction, the Audit Committee must review such transaction promptly, and may ratify such transaction, provided that, in such case, unless there is otherwise a compelling business or legal reason for the Company to continue with the transaction, the Audit Committee may only ratify the transaction if it determines that (i) the transaction is fair to the Company, and (ii) any failure to comply with the policy was not due to fraud or deceit. The General Counsel of the Company is responsible for ensuring that the Policy is distributed to all officers, directors, nominees for the board, and beneficial owners of 5% or more of any class of the Company’s voting securities. Such officers, directors, nominees for the board, and beneficial owners are responsible for informing their immediate family members of the Policy. The General Counsel is also responsible for requiring that any proposed transaction be presented to the Audit Committee for consideration before the Company enters into any such transactions.

 

Certain Transactions

 

The Fifth Third Bank’s trust department holds shares in the Company as disclosed in the “Voting Securities and Principal Holders” table and, as such, beneficially owns more than 5% of the outstanding class A stock and common stock of the Company. The Company provides a broad range of services to Fifth Third Bank including purchasing, inventory management, fulfillment, distribution and other services and also sells Fifth Third Bank printed products and banking documents, all in the ordinary course of business and on terms and conditions similar to those offered to other Company customers. The revenue received by the Company from Fifth Third Bank in 2009 in connection with providing these products and services was approximately $11.7 million.

Board Meetings and Director Attendance at Annual Meeting of Shareholders

 

In 2009, the board met eleven times. All incumbent directors attended at least 75% of the board meetings, and the meetings of committees on which each director served.

 

Directors all stand for election or reelection at each annual meeting of shareholders. Directors make every effort to attend the annual meetings. While the board does not have a formal “policy” in this regard, its clear practice is for directors to be present at the annual meeting of shareholders.

 

Board and Committee Structure

 

The board has three standing committees: Corporate Governance and Nominating, Compensation, and Audit. In addition, in 2009, as in other years as deemed desirable, the board authorized formation of an Executive Committee.

 

Board Leadership and Risk Oversight

 

The Company’s Chairman of the Board is F. David Clarke, III and the Company’s Chief Executive Officer is Joseph P. Morgan, Jr. Mr. Morgan is also a member of the board of directors. While the board of directors believes it is desirable to have its Chief Executive Officer be a member of the board of directors, it has historically had two separate individuals serve as Chairman of the Board and Chief Executive Officer. The board believes that this separation of roles generally provides for a more independent board and enhances the board’s ability to independently assess the performance of the Chief Executive Officer and the Company.

 

The board’s structure and governance processes provide a substantial business risk management component through the role of the Audit Committee, the Corporate Governance and Nominating Committee, the Company’s internal audit processes, and the Company’s code of ethics, on-line ethics training, and several channels for employees to provide information to the board of inappropriate business risks or violations of company policies (e.g., “whistle-blower” opportunities).

 

Although the board oversees the overall risk management of the Company, its committees have the most in depth contact with the Company’s operations, and thus serve as corporate channels through which potential business risks are dealt with or raised to the entire board. The Audit Committee is in charge of reviewing and assessing the Company’s business risk management process, including the adequacy of the Company’s overall control environment and controls in selected areas representing significant financial and business risk. It meets periodically throughout the year to review and monitor activities related to the above, and can appoint, replace or dismiss the head of the Internal Audit Department. In accordance with its charter, it discusses with management and the Company’s independent auditors significant financial reporting issues and judgments, accounting issues, and other sources of credit, liquidity and operational risk in the Company. In addition, under its charter, it has the authority to investigate, at its discretion, any issues within the parameters of its responsibilities.

 

In addition, the Corporate Governance and Nominating Committee annually reviews the Company’s code of ethics, and is tasked with minimizing risk through proposing and overseeing corporate governance practices adopted for the Company. The committee helps to mitigate operational risk by establishing and maintaining the process by which the board conducts succession planning for the Company’s management.

 

Our risk assessment process also extends to our compensation programs and policies. In 2009, management carried out a review of all of the Company’s compensation programs and policies to assess their potential for fostering excessive risk-taking. This included a review of each plan’s design characteristics that could encourage unintended risky behaviors, mechanisms in place to mitigate these risks, and the materiality of any adverse impact on the Company that might arise out of such programs. These compensation program characteristics and mitigating factors were reviewed with the Compensation Committee. We believe that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on the Company. Going forward, management plans to carry out such a review each year.

 

Corporate Governance and Nominating Committee

 

The Corporate Governance and Nominating Committee met five times in 2009. All current members of the Committee attended all of the Committee meetings held in 2009 during the period for which they served on the Committee. The Committee is chaired by John Q. Sherman, II. Other Committee members are David P. Bailis, Roy W. Begley, Jr., and R. Eric McCarthey. All members of the Committee are independent.

 

The board has adopted a Charter for this Committee. It is reviewed annually and updated as appropriate. It is available on the Company’s website, www.standardregister.com, by clicking on “Company”, then “About Standard Register” and following the link to “Board Charters.”

The Corporate Governance and Nominating Committee assists the board in defining board roles and developing processes to optimize board functioning. It also studies and recommends adoption by the board of directors of corporate governance processes intended to comply with applicable legal, regulatory, and listing standard requirements. In addition, the Committee oversees the Company’s succession planning process and director nomination process. The Committee provides leadership to the board of directors and other committees in performing annual self-assessments. These self-assessments give the board and Committees insight into how they are performing their roles in the corporate governance process. The Corporate Governance and Nominating Committee conducted an assessment of its own performance as part of this process.

 

Director Nominating Process

 

The Corporate Governance and Nominating Committee and the board, in performing their director-nomination function, identify director candidates from a range of sources. Historically, these have included recommendations from current directors and major shareholders.

 

Director candidates are generally evaluated by reference to criteria such as integrity, candor, judgment, skills and experience with respect to the industry in which the Company operates, leadership, strategic understanding, and independence. These factors are considered in the context of the current composition of the board. A candidate is evaluated against these criteria regardless of the source of the recommendation. There are no “minimum requirements” as such, although integrity and judgment are considered absolute requirements. Rather, the board examines all capabilities, skills, and experience in evaluating director candidates. The Committee does not have an express policy with regard to consideration of diversity in identifying director nominees. However, the Committee does consider issues of diversity in evaluating director candidates and the board and the Committee believe it is important that the board members represent diverse skills, personal and professional experience and viewpoints.

 

The policy of the Committee and board is to consider recommendations for director candidates from any interested party, especially shareholders. Shareholders and other interested persons who wish to recommend a director candidate should submit the recommendation in writing addressed to The Standard Register Company Corporate Governance and Nominating Committee, in care of the Corporate Secretary, The Standard Register Company, 600 Albany Street, Dayton, Ohio 45417. The communication should state the name of the candidate, his or her qualifications, and contact information for the shareholder or interested party, and the candidate. Such candidates will be evaluated using the same criteria as candidates proposed from other sources. There have been no material changes to the process by which shareholders and interested parties may recommend nominees to the board.

 

All eight of the nominees recommended by the board for election at the 2010 Annual Meeting of Shareholders were previously elected as directors by the shareholders.

 

Audit Committee

 

The board has established a separately-designated standing Audit Committee for purposes of overseeing the accounting and financial reporting processes of the Company and audits of its financial statements.

 

The Audit Committee met four times in 2009. All current members of the Committee attended at least 75% of the Committee meetings held in 2009 during the period for which they served on the Committee. Michael E. Kohlsdorf is Chair of the Audit Committee. The others members of the Committee are F. David Clarke, III, R. Eric McCarthey, and John J. Schiff, Jr. The board has determined that all members of the Committee are independent directors and meet the financial literacy requirements of the New York Stock Exchange.

 

The board adopted an Audit Committee Charter in April 2000. It is reviewed annually and updated as appropriate. It is available on the Company’s website, www.standardregister.com, by clicking on “Company”, then “About Standard Register” and following the link to “Board Charters.”

 

The Audit Committee is responsible for monitoring and assuring the integrity of the Company’s financial reporting process. It accomplishes this function by assessing the internal accounting and auditing practices of the Company, and the independent auditor’s fulfillment of its role in the financial reporting process. The Committee has sole authority for appointing and assessing the independent auditors, and setting their fees. Additionally, the Committee administers compliance with the Company’s Code of Ethics. To that end, the Committee has established procedures for the receipt, retention and investigation of complaints regarding accounting, internal accounting controls or auditing matters. Any interested person may contact the Audit Committee directly through the Company’s external website by clicking on “Company” as more fully described in the later section “Contact Information.” Company employees may contact the Audit Committee, anonymously if they wish, through a toll-free telephone number linked to a third party who will record complaints related to accounting and auditing matters and forward such complaints directly to the Audit Committee.

The board has determined that independent directors Michael E. Kohlsdorf and R. Eric McCarthey each satisfy the “Audit Committee financial expert” qualifications contained in regulations issued pursuant to the Sarbanes-Oxley Act of 2002. Specifically, the board has concluded that Mr. Kohlsdorf’s previous experience as a chief financial officer of two different publicly traded companies qualifies him as an “Audit Committee financial expert” and that Mr. McCarthey’s previous experience as Chairman of the audit committee of a publicly traded company following the enactment of Sarbanes-Oxley Act qualifies him as an “Audit Committee financial expert.” With respect to both Mr. Kohlsdorf and Mr. McCarthey, their experience with respect to audits of financial statements of publicly held companies, internal controls, application of generally accepted accounting principles, and audit committee functions, and their independence as board members, meet the criteria for “Audit Committee financial expert.”

 

Compensation Committee

 

The Compensation Committee met nine times in 2009. All current members attended at least 75% of the Committee meetings held in 2009 during the period for which they served on the Committee. The Committee is chaired by Roy W. Begley, Jr. Other members are David P. Bailis, Michael E. Kohlsdorf, and John Q. Sherman, II. All members of the Committee are independent directors.

 

The board has adopted a Charter for the Compensation Committee. It is reviewed annually and updated as appropriate. It is available on the Company’s website, www.standardregister.com, by clicking on “Company”, then “About Standard Register” and following the link to “Board Charters.”

 

The Compensation Committee has sole responsibility for determining compensation for the Chief Executive Officer, and it recommends compensation for other executive officers to the board for approval. The Committee administers the equity and other compensation plans described in the executive compensation disclosures included in this proxy statement. It is responsible for reviewing and recommending to the board the annual retainer and other fees and grants for directors in connection with service on the board and Committees.

 

The Compensation Committee is authorized to establish and review the compensation strategy of the Company in order to align organizational strategies, goals, and performance with appropriate compensation rewards to executive officers and directors. It accomplishes this by evaluating components of total compensation and assessing performance against goals, market competitive data, and other appropriate factors. The Committee also has authority to make grants of stock awards to executive officers and senior management. It may recommend to the board, and to shareholders, new equity incentive plans or amendments to existing plans. The Committee has sole authority to select and retain independent experts and consultants in the field of executive compensation, to advise with respect to market data, competitive information, executive compensation trends, and other matters as requested.

 

In most years, the Committee has established a discretionary pool of equity awards and delegated to the Chief Executive Officer and General Counsel the granting of such awards for purposes of new hire incentives, spot awards and recognition, and the like. The General Counsel provides the Committee with an accounting of any discretionary grants made during the year. In 2009, the Chief Executive Officer and General Counsel made no discretionary grants.

 

The Committee has not delegated any other of its accountabilities to any persons.

 

Executive officers work with the Committee and its independent compensation consultant to propose compensation features that provide appropriate incentives to meet Company goals and reward performance. The primary role of executive officers in this regard is to identify and discuss components of the Company’s business plan that are critical to execution. Further, executive officers provide context regarding the degree of difficulty in attaining certain goals. The Chief Executive Officer discusses with the Committee his evaluation of the performance of each executive officer, which the Committee takes into account in recommending compensation for executive officers other than the CEO. Executive officers participate and give input into the work valuation analysis undertaken by the Committee with respect to each executive officer role. For 2009, there were no salary increases for the executive officers except for Mr. Ginnan in connection with his appointment as Vice President, Treasurer and Chief Financial Officer, for Mr. Morgan in connection with his appointment as Chief Executive Officer and for Mr. Sowar in connection with his appointment as Vice President, General Counsel & Secretary.

 

The Committee has directly retained an independent compensation consultant, Semler Brossy Consulting Group, LLC to assist in its duties. Semler Brossy is retained for a number of purposes, including: to perform an annual competitive assessment of compensation programs and practices, construct an appropriate peer group, provide market competitive compensation data, recommend appropriate mix of compensation elements, assist the Committee in performing the Chief Executive Officer performance evaluation, review and comment on management recommendations such as proposed grants of stock awards to non-officer management, and update the Committee on emerging trends. A Semler Brossy representative attends all Committee meetings. Management, with the approval of the Committee, also engaged

Semler Brossy to assist in the drafting of the Compensation Discussion and Analysis. Semler Brossy is not engaged to perform any other consulting work for the Company.

 

Compensation Committee Interlocks and Insider Participation

 

The Compensation Committee of the board is composed solely of independent directors named above. None of the current members of the Compensation Committee have any interlocking relationships with the Company that are subject to disclosure. None of the current committee members are, or was during 2009, a current or former executive officer or employee of the Company.

 

Executive Committee

 

The Executive Committee has the authority to act on behalf of the board of directors during the time between meetings, in all matters except for filling vacancies on the board of directors or any of its committees. The Executive Committee met four times in 2009. F. David Clarke, III is Chairman of the Executive Committee, and Mr. Bailis and Mr. Morgan are the other members. The Committee has no separate charter, but its authority is established by resolution of the board of directors. Of the Executive Committee members, Messrs. Clarke and Bailis are considered independent, and Mr. Morgan was not considered independent.

 

Contact Information and Corporate Governance Document Availability

 

The board and its committees have established processes for shareholders and interested parties to contact the Presiding Director, Audit Committee, and board. Director John Q. Sherman, II, has been selected to preside at the meetings of non-management directors of the board of directors to be held in 2010.

 

Shareholders and interested parties may communicate with Mr. Sherman and with the Audit Committee through the Company’s website, www.standardregister.com, by clicking on “Company”, then “Investor Center” and following the link to “Contacts.” Communications for the board, the Presiding Director and the Audit Committee may also be sent to the Corporate Secretary, The Standard Register Company, 600 Albany Street, Dayton, Ohio 45417. All communications to the board, the presiding director, and the Audit Committee will be forwarded by the Corporate Secretary to the appropriate director(s).

 

The Charters of all board committees, the Corporate Governance Guidelines, the Code of Ethics, and the Independence Criteria, may be accessed on the Company’s website, www.standardregister.com by clicking on “Company”, then “About Standard Register”. Printed copies of these documents are available on request by contacting the Corporate Secretary’s office at the address noted above.

 

AUDIT COMMITTEE REPORT

 

During 2009, the Audit Committee reviewed interim quarterly financial statements with management and the independent auditors. This review was conducted prior to the filing of the Company’s 10-Q reports containing the respective interim quarterly financial statements. In addition, the Committee reviewed and discussed the 2009 year-end audited financial statements with executive management, including the chief financial officer and the independent auditors. This review took place prior to publication of the audited financial statements in the 10-K filing and annual report to shareholders. Each review was conducted with the understanding that management is responsible for preparing the Company’s financial statements and the independent auditors are responsible for examining the statements.

 

In further discharge of its responsibilities, the Audit Committee met with the independent auditors, both in the presence of management and privately. The Committee and independent auditors discussed those matters described in Statement of Auditing Standards No. 61, “Communication with Audit Committee.” These discussions included review of the scope of the audit performed with respect to the Company’s financial statements. The Company’s internal auditor also met with the Committee, both in the presence of management and privately, in order to review the effectiveness of the Company’s internal controls and the internal auditor’s responsibilities in that regard and other compliance and audit matters. The Company has maintained an internal audit function for many years. In addition, the Committee conducted regular private meetings with General Counsel, and with management, including the chief financial officer and corporate controller.

 

The Audit Committee received and discussed periodic reports of management and the internal auditor, with respect to design and assessment of the Company’s internal controls over the financial reporting process. The Committee further received and discussed the report of the independent auditors with respect to their audit of internal controls over financial reporting performed by the independent auditors in conjunction with the audit of the Company’s financial statements, as set forth in Public Company Accounting Oversight Board Auditing Standard No. 5.

The Audit Committee received the independent auditor’s written statement required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence. This written statement described any relationships between the independent auditors and the Company that may reasonably be thought to bear on independence. Following receipt of this written statement and discussions of the matters described in it, the Committee was satisfied as to the auditor’s independence.

 

Based on the foregoing, the Audit Committee recommended to the board of directors that the audited financial statements be included in the Company’s annual report on Form 10-K, for fiscal year ending January 3, 2010, for filing with the Securities and Exchange Commission.

 

Michael E. Kohlsdorf, Chairman

F. David Clarke, III

R. Eric McCarthey

John J. Schiff, Jr.

 

Independent Registered Public Accounting Firm Information

 

With respect to the 2008 and 2009 fiscal years, the Company paid fees to Battelle & Battelle, LLP, its independent auditors, as follows:

 

 

The Audit Committee has adopted a procedure for pre-approval of all fees charged by Battelle & Battelle. Under the procedure, the Audit Committee approves the engagement letter with respect to audit and review services noted on the table above. Audit-related, tax and other fees are subject to pre-approval by the entire Committee, or, in the period between meetings, by a designated member of the Audit Committee. Any such approval by the designated member is disclosed to the entire Audit Committee at the next meeting. All audit-related fees paid to Battelle & Battelle, LLP, with respect to the 2009 audit year were approved by the Audit Committee.

 

The category of audit fees includes the audit of the Company’s annual consolidated financial statements, the audit of internal control over financial reporting, the review of financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by Battelle & Battelle, LLP, in connection with statutory and regulatory filings or engagements. Battelle & Battelle LLP has advised the Company that permanent full-time employees and partners of Battelle & Battelle LLP performed substantially all of the work done in conjunction with its audits of the Company’s financial statements for the years ended January 3, 2010 and December 28, 2008.

 

Audit-related fees consist of assurance and related services provided by Battelle & Battelle, LLP, that were reasonably related to the performance of the audit or review of our financial statements. It included fees billed in 2009 and 2008 for the audit of our benefit plans and accounting consultation regarding accounting literature. The audit-related fees are for services generally required to be performed by Battelle & Battelle, LLP, because they follow upon and are linked to Battelle & Battelle, LLP’s audit of the Company’s consolidated financial statements.

 

The Audit Committee has determined that the provision of audit-related services by Battelle & Battelle, LLP, is compatible with maintaining such firm’s independence.

 

Named Executive Officers

 

This section provides information concerning each of the executive officers of the Company as of March 17, 2010 with the exception of Mr. Morgan, who is a nominee for director. Similar information regarding Mr. Morgan may be found in the section dealing with Proposal 1. This section also provides information regarding Jerrold A. Beigel, who was named President, Commercial Business Unit in October 2009.

 

 

EXECUTIVE COMPENSATION

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The following summary of our executive compensation policies and practices provides information and analysis of decisions we made concerning the compensation of our executive officers. This discussion and analysis should be read in conjunction with the tables and narratives that follow and includes a discussion of:

 

 

Compensation Committee Overview and General Philosophy

 

Our Compensation Committee is composed solely of independent directors. They have the overall responsibility for establishing and implementing our compensation program for executive officers, including approval and monitoring of compensation program design, performance goals, and compensation levels. Neither our Chief Executive Officer nor any other member of management votes on matters before the Compensation Committee; however, the Compensation

Committee may request the views of our Chief Executive Officer on compensation matters, particularly as they relate to compensation of the other named executive officers and establishing incentive performance goals.

 

Our Compensation Committee has the authority under its charter to engage the services of outside advisors and currently uses an independent consulting firm, Semler Brossy Consulting Group LLC, to advise them on matters related to executive compensation. As independent consultants, they assist our Compensation Committee in determining the relevant competitive market value for our executive officers by providing market data and analysis to consider when making compensation decisions. Management, with the approval of the Compensation Committee, engaged Semler Brossy to assist in the drafting of the Compensation Discussion and Analysis. Semler Brossy does not perform any other consulting work for the Company.

 

Our fundamental objective is to create shareholder value through both stock price appreciation and dividend payments to our shareholders. Our executive compensation program is designed to achieve this objective by aligning management incentives with the interests of our shareholders. The philosophy of our Compensation Committee is that the design of our executive compensation program should:

 

 

Our Compensation Committee used the following guiding principles to analyze and establish executive officer compensation and incentives for 2009:

 

 

Executive Compensation Decision-Making Process

 

Our Compensation Committee used the following multi-step approach in setting executive officer compensation for 2009:

 

 

Benchmarking — For competitive market value comparisons, we benchmark against a subset of manufacturing companies in a Mercer HRC survey of general industry companies (broad cross section of U.S. companies) to identify and make comparisons of the market values of each executive officer’s total direct compensation and individual components of pay. We utilize this information in establishing base salary, annual cash incentives, and long-term equity-based compensation. For 2009, we adjusted the 2008 survey salary data by 2.8% to reflect expectations around competitive annual pay increases for 2009.

Mercer HRC Survey — Manufacturing Companies

 

 

Note: Corporate level companies and divisions are listed below.¹

 

For 2009, we discontinued the use of a peer group for competitive pay assessments because there were very few stand-alone, publicly-traded industry peers that were comparable in size to Standard Register.

 

Target Positioning — For 2009, we changed the target compensation positioning from a process based on an internal “Work Valuation” rating system to a philosophy where the target positioning of total direct compensation (TDC) for each named executive officer starts at the competitive market median. Under this new positioning philosophy, the individual executive’s positioning is then adjusted downwards or upwards, depending on the executive’s experience, performance, and skill in the position. While we review competitive percentile data to compare each component of total direct compensation to the market, we do not have a specific target positioning for each component.

 

Under the previous work valuation system, the degree of importance of each executive role was evaluated in relation to various strategic factors, which resulted in a starting target positioning of certain named executive officer roles at the 75th percentile and others at the median. The Committee and management decided to discontinue this approach in 2009 due to recent turnover and shorter tenure of many of the named executive officers.

 

The competitive market median is intended to be reached over time. Currently, target total direct compensation for Messrs. Morgan, Ginnan, Sowar, Furey, and Cates is below the median due to the short tenure in their current positions, while target total direct compensation positioning for Ms. Lamme (before the adjustments discussed below) was above the median due to her long tenure and experience as the Company’s General Counsel.

 

For 2009, at management’s recommendation, the target total direct compensation was adjusted downward. Due to budget constraints, the Compensation Committee agreed to reduce their target annual cash incentive award level by fifteen percentage points for the Chief Executive Officer (CEO) and five percentage points for the other named executive officers. The Committee also agreed to forego granting a portion of their performance-based restricted stock (approximately 50% of their long-term incentive opportunity) due to: (1) the difficulty of setting realistic long-term performance goals for a new business strategy adopted during a very uncertain economic period; and, (2) management’s perspective that the options granted earlier in 2009 were sufficient in light of Company budget constraints.

 

 

 

 ¹ Corporate level companies: ADTRAN, Inc.; Brady Corporation; Callaway Golf Company; Carpenter Technology Corporation; Ceradyne, Inc.; Coca-Cola Bottling Co. Consolidated; Cubic Corporation; Curtiss-Wright Corporation; Deluxe Corp; Edwards Lifesciences, LLC; Elizabeth Arden, Inc.; FEI Company; Fender Musical Instruments; Fenwal, Inc.; First Solar; GenCorp, Inc.; Graco Inc.; Greenheck Fan Corporation; Hatfield Quality Meats; Jockey International, Inc.; Lance, Inc.; Medrad, Inc.; NCH Corporation; Newly Weds Foods; Ocean Spray Cranberries, Inc.; Orbital Sciences ; Panduit Corporation; Pharmaceutical Product Development, Inc.; Plexus Corporation; Polaris Industries, Inc.; Powerwave Technologies, Inc.; Reichhold, Inc; Sensata Technologies, Inc.; Solo Cup Company; Texas Industries, Inc.; The NORDAM Group; The Toro Company; The W.C. Bradley Co.; The Yankee Candle Company, Inc.; Ventura Foods, LLC; Verso Paper Corp.; Wells’ Dairy, Inc.; Zebra Technologies Corporation.

Divisions: AZZ Inc. (8 divisions); Bausch & Lomb, Inc. (3 divisions); Callaway Golf Company (1 division); Ceradyne, Inc. (2 divisions); Cinetic (2 divisions); Cox Target Media (1 division); Cubic Corporation (1 division); Curtiss-Wright Corporation (2 divisions); Danfoss US (2 divisions); Dresser-Rand Company (1 division); Elster (3 divisions); Federal-Mogul Corporation (1 division); Fiskars Brands, Inc. (1 division); Gardner Denver (2 divisions); Graco Inc. (2 divisions); HNI Corporation (7 divisions); Henkel of America (1 division); Johnson Outdoors, Inc. (3 divisions); Kao Specialties Americas LLC (1 division); Kellogg Company (1 division); Kohler Company (6 divisions); MTS Systems Corporation (2 divisions); Molex (1 division); Nestlé USA, Inc. (1 division); Novartis US (1 division); Nutricia North America (1 division); OSI Industries, LLC (2 divisions); Oil States Industries, Inc.- Arlington (1 division); PACCAR (3 divisions); Phillips-Van Heusen Corporation (4 divisions); Ralcorp Holdings, Inc. (4 divisions); Rich Products Corporation (12 divisions); Scholle Corporation (2 divisions); Solutia Inc. (1 division); Teknion LLC (1 division); The Valspar Corporation (4 divisions); The W.C. Bradley Co. (1 division); Uponor, Inc. (1 division); Verso Paper Corp. (3 divisions); Videojet Technologies, Inc. (1 division); Vulcan Materials Company (6 divisions); Watson Pharmaceuticals, Inc.- Brand Mfg/R&D/Sales (1 division).

 

 

Performance Evaluations — Our Chief Executive Officer evaluates each executive officer’s performance taking into account the following factors: performance relative to job responsibilities, key financial achievements, contributions to the leadership team, overall leadership, and retention risk. Based upon these factors, he rates each officer as one of the following: “Exceeds”, “Meets”, or “Does not Meet”. These ratings are used in conjunction with each officer’s positioning relative to the market to determine recommendations for compensation increases. There is no specific formula used to weigh these two inputs. Generally, “exceeds” performers who are currently much less than the median will receive larger than typical annual market increases, “meets” performers who are at the median will receive market median increases (and potentially more where performance and skills so warrant), and “does not meet” performers receive lower increases, if any.

 

In determining the Chief Executive Officer’s compensation, our Compensation Committee considers the performance of the Company relative to the annual cash incentive plan’s goals, the achievement of individual goals, and an annual assessment of management and leadership skills completed by board members. In 2009, the annual cash incentive plan measure was based on adjusted EPS. The management and leadership assessment included contributions to strategic planning and execution, financial acumen in running the business, board relations, overall leadership, management development, and management of operations.

 

Changes in Executive Management

 

2009 was a transitional year for us in terms of our executive management personnel.

 

 

Compensation Objectives and Material Components

 

We compensate our executive officers through a mix of base salary and incentive compensation designed to be externally competitive and linked to achievement of our business strategy and financial goals. We believe that compensation of our executive officers should be influenced by competitive market levels, but most significantly determined by performance. The annual and long-term incentive portions of an executive’s compensation are linked to specific financial performance goals that are designed to benefit our shareholders. As a result, executives are provided the opportunity to earn a higher level of compensation during years of excellent financial performance, and conversely, in

years of lower financial performance, compensation is limited to their base compensation. Our pay for performance philosophy was evident in 2009 as illustrated below:

 

 

Three components comprise total direct compensation opportunities for our executive officers: base salary, annual cash incentive awards, and long-term equity-based awards. We do not have a targeted mix of compensation components; however, total direct compensation is weighted more towards performance-based components. The actual mix of components is the result of our financial and stock price performance and compensation decisions that have been made over time separately for each individual element of compensation.

 

The following two tables illustrate the mix of target compensation opportunities and target total direct compensation positioning provided to our named executive officers in 2009 (before adjustments), and adjusted to reflect a temporarily reduced annual cash incentive and a reduction in long-term equity. We do not have a specific target mix; however, our approach results in more than half of the compensation being incentive-based under either the target compensation (before adjustments) or the target compensation, as adjusted for 2009. The only exceptions are for the Vice President, General Counsel and Secretary (Mr. Sowar) and the Presidents of our Industrial and Healthcare Business Units (Messrs. Furey and Cates), who have about 45% incentive compensation after taking into account the 2009 adjustments to target compensation.

 

2009 Target Total Direct Compensation & Pay Mix — Before Adjustments

 

 

 

2009 Target Total Direct Compensation & Pay Mix — As Adjusted

 

 

 

Compensation Objectives

 

The objective of each compensation component is summarized below.

 

 

Base Salary

 

Our Compensation Committee reviews and approves executive officer base salaries annually. In setting base salaries for each executive officer, the Compensation Committee considers the results of our:

 

 

In general, there are three situations that may result in an adjustment to base salary: annual merit increases, promotions or changes in executive roles, and market adjustments.

 

Potential merit increases are reviewed in December and increases, if any, are usually effective the beginning of our fiscal year. Annual merit increases are not guaranteed and are determined on an individual basis. For named executive officers other than the Chief Executive Officer, the Compensation Committee also takes into account the recommendations from our Chief Executive Officer.

 

An executive officer may also receive a base salary increase as a result of a change in responsibilities or the executive’s role, or a promotion to a new position. While we use the results of our benchmarking and target positioning process, we also carefully consider past experience when making such salary changes.

 

Market adjustments can be made when we recognize a significant gap between the competitive market value and an executive’s base salary. These gaps can be driven by inflation, a limited supply of talent for a particular role, or a higher value for the position.

 

The base salary of the named executive officers was increased for 2009 as follows:

 

 

Mr. Morgan’s base salary was increased to $600,000 in connection with his promotion to President and Chief Executive Officer. Mr. Ginnan’s base salary was increased to $300,000 in connection with his promotion to Vice President, Treasurer and Chief Financial Officer. Mr. Sowar’s base salary was increased to $250,000 in connection with his promotion to Vice President, General Counsel and Secretary. Base salaries for the remaining executive officers were not increased in light of Company budget constraints.

 

Annual Cash Incentive Awards

 

Annual cash incentive awards are based on a percentage of base salary (award level) for all executive officers. The target award level for Mr. Morgan was increased to 75% upon his promotion to President & Chief Executive Officer. The target award level for Mr. Ginnan was increased to 65% of base salary upon his promotion to Vice President, Treasurer and Chief Financial Officer. The target award level for Mr. Sowar was increased to 50% in connection with his promotion to Vice President, General Counsel and Secretary.

The table below shows the target award level for each named executive officer expressed as a percentage of salary, and the target award after the temporary reduction for 2009.

 

 

Our practice is to award annual cash incentive awards to executive officers under our Management Incentive Compensation Plan (Incentive Plan) based upon objective business performance goals approved by the Compensation Committee. Goals are established each year, depending on the relevant business focus of the Company for the year. In 2009, the business performance goal established was an adjusted pre-tax earnings from continuing operations amount (adjusted earnings from operations). The calculation begins with pre-tax earnings from continuing operations and is adjusted to eliminate (1) the annual cash incentive award amount, and (2) asset impairments, restructuring and other exit costs, amortization of net actuarial pension losses, and pension settlement charges, due to the non-operational nature of these items. The Compensation Committee can, at its discretion, exclude other items from the calculation or approve awards in the event that the established goal is not achieved. No such discretion was used in 2009.

 

We do not believe that an “all or nothing” approach is appropriate for the annual cash incentive awards. Rather, the performance goal is scaled so that the executive officer can receive part of an award in the event that acceptable, but not the desired, financial results are achieved. As shown in the table below, a threshold level of adjusted earnings from operations must be attained in order for executive officers to earn any annual cash incentive award (Minimum). For 2009, the Company’s budgeted financial performance constituted the target and would pay out 100% of the annual cash incentive award. This level of financial performance would be equivalent to approximately $1.07 per share, after payout of the award is factored into the calculation. The 2009 target was 10% higher than the 2008 target financial performance and was designed to exceed the annual dividend amount at the time the performance goals were approved. Performance goals are also established for higher payout rates, up to 200%, if actual performance significantly exceeds the target. The table below shows the approximate potential payout levels, stated as a percentage of the award level.

 

At the end of the fiscal year, we assess our actual financial performance against the performance goal, and an overall payout percentage amount is calculated. In 2009, our financial performance was less than the threshold amount and no annual cash incentive awards were earned.

 

2009 Annual Cash Incentive Goal

 

 

In 2008, our Compensation Committee also approved an additional incentive plan to reward the development of a transformation plan to position the Company for growth in 2009 and beyond, and to focus management on the achievement of several short-term goals in the initial stages of this plan. The first part was completed and paid out at the end of December 31, 2008. The second part and final payment was made in February 2009, and was earned by completing the following objectives on or before April 1, 2009:

 

 

For the second part, Mr. Morgan was eligible for and received a payment totaling $130,000, and each of the remaining named executive officers except Mr. Sowar was eligible for and received a payment totaling $15,000.

 

We have not implemented any clawback provisions that would adjust or attempt to recover incentive compensation paid to any or all of our executive officers if the performance objectives upon which such compensation were based were to be restated or otherwise adjusted in a manner that would have the effect of reducing the amounts payable or paid.

However, in accordance with Section 304 of the Sarbanes-Oxley Act of 2002, if we are required to restate our financial statements due to any material noncompliance with any financial reporting requirement under the federal securities laws, as a result of misconduct, our Chief Executive Officer and Chief Financial Officer are legally required to reimburse us for any bonus or other incentive-based or equity-based compensation he or they receive from us during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission of the financial document embodying such financial reporting requirement, as well as any profits they realize from the sale of our securities during this 12-month period.

 

Changes in Annual Cash Incentives Awards for 2010

 

For 2010, the annual cash incentive awards will be based on the following factors:

 

2010 Annual Cash Incentive Performance Measures, Weightings, and Measurement Level

 

 

 

 

Long-Term Equity Compensation

 

Our Compensation Committee administers the 2002 Equity Incentive Plan and approves all equity-based awards. We believe providing long-term equity compensation opportunities further focuses the executive officers’ efforts on the Company’s financial goals and aligns executive and shareholder interests. We may grant a mix of stock options and performance-based restricted stock awards to attract, retain, motivate, and reward our executive officers, and to encourage their ownership of an equity interest in the Company. We encourage stock ownership by executives, but do not have any formal stock ownership guidelines.

 

In 2008, our Compensation Committee approved the 2008-2009 Officer Long-Term Incentive Compensation Program. Awards were made under the 2002 Equity Incentive Plan, and the value of the awards was split 70%/30% between a grant in 2008 of performance-based restricted stock (equivalent to two times an annual performance restricted stock award), and annual stock option grants to be awarded in 2008 and 2009. The performance restricted stock awards had a two-year performance period (2008-2009). This split allowed the Compensation Committee to adjust for changes in individual performance and contributions.

 

In 2009, our Compensation Committee approved a new intended weighting of annual equity compensation at 50% performance restricted stock and 50% options to reinforce the importance of increasing stock price over the long-term and to provide significant upside opportunity to executives under the new business strategy. The value of the performance-based restricted stock grants, taken together with the expected value of the annual stock option awards, was intended to provide each executive officer with a target grant that was consistent with our competitive benchmarking. In addition, the target grant was intended to take into account internal strategic value, retention risk, and individual performance. All of these factors influenced individual grants, which varied from officer to officer.

 

For Mr. Morgan, the size of his target long-term equity incentive was set just below the competitive median. For Ms. Lamme, the size of her target long-term equity incentive was set between the median and 75^th percentile. For the other named executive officers, the size of their target long-term equity incentives was set between the 25^th percentile and median.

 

In 2009, the stock options were granted, but the performance restricted stock portion of the long-term incentive award was not granted at management’s recommendation and the Compensation Committee’s approval, due to: (1) the

difficulty of setting realistic long-term performance goals for a new business strategy during a very uncertain economic period; and, (2) management’s perspective that the option grants provided an initial staking that was sufficient.

 

Stock Options — We believe stock options are inherently performance-based because the exercise price is equal to the closing market value of our common stock on the date the option is granted. Therefore, the stock option has value only if the market value of our common stock increases over time.

 

Stock options are generally awarded annually, and in 2009, we granted stock options primarily to executive officers and members of the executive leadership team. It is our policy to time stock option grants after release of financial results and any other material inside information. With the exception of discretionary awards, grants of stock options are generally approved by the Compensation Committee annually after the announcement of year-end results in late February. If the Compensation Committee is in possession of material information, the granting of stock option awards is delayed until the information has become public. An additional consideration for 2009 grants was that the increase in the proportion of options in the 2009 long-term equity incentive mix required that we obtain shareholder approval to increase the number of options that could be granted to any one individual in any year. As a result, part of the 2009 options were granted in February during our normal grant time, and part in April following shareholder approval of a higher individual annual limit.

 

If authority to make grants to non-executives is delegated to management in the case of significant promotions, new hires, and other discretionary awards, the Compensation Committee approves in advance the overall terms of such grants, the specific limits of delegated authority, and the specific requirements for reporting to the Compensation Committee. Discretionary awards, of which there were none in 2009, are generally made on the second and fourth Fridays of each month.

 

Performance-Based Restricted Shares — For the 2008-2009 performance period, the financial performance goal was cumulative and assumed that the 2008 financial goal for the annual cash incentive award would be achieved and then increased by 10% in the second year. The adjusted earnings per share calculation also excluded asset impairments, restructuring and other exit costs, amortization of net actuarial pension losses, and pension settlement charges from the calculation due to the non-operational nature of these items.

 

Threshold, target, and maximum performance goals were established to determine vesting of some or all of the target awards granted and possible grants of additional shares. The amount of shares that ultimately could have vested ranged from 50% to 150% of the target-level grant. If the actual performance achieved was below the threshold level, all of the shares previously granted would be forfeited. If the actual performance achieved was above the target level, additional shares would have been granted and immediately vested.

 

In February 2010, upon certification of our financial results for the 2008-2009 performance period, all of the previously issued performance-based restricted stock awards were forfeited by the named executive officers because the performance goal was not met by the end of 2009. As a result, the named executive officers received no value from the awards except for the dividends received during the performance period (note that for performance-based restricted stock grants made after 2008, dividends will be earned and paid out only if and when underlying shares vest).

 

2008-2009 Cumulative Long-Term Incentive Goals

 

 

Changes in Long-Term Equity Compensation for 2010

 

For 2010, the Company plans to make long-term incentive awards consisting of 50% options and 50% performance-based restricted stock.

 

 

 

Perquisites

 

Executive officers participate in healthcare and other benefit programs on the same terms as other employees.

 

Retirement Plans

 

Executive officers participate in the same defined benefit pension and defined contribution 401(k) plans as do other salaried employees of the Company, dependent upon their dates of hire. Because the Internal Revenue Code limits the amount of compensation used in determining the benefits earned by our executive officers under our tax-qualified defined benefit plan, we maintain various supplemental retirement benefit plans for our executive officers to provide them with additional retirement benefits. The supplemental retirement opportunities are also benchmarked to provide provisions generally consistent with industry practices.

 

A description of these plans and the executive officers that participate in each plan are covered under the Pension Benefits Table. We provide these retirement benefits to our executive officers in order to remain competitive, attract key personnel, and retain existing executive officers. The supplemental plans focus on rewarding long-service officers who have made important contributions to the Company over time. This is accomplished through a 10-year cliff vesting provision that only rewards those who have remained as an officer with the Company for that time.

 

Deferred Compensation Plan

 

We also provide executive officers the ability to defer a portion of their base salary and annual cash incentive awards on a tax-deferred basis. There is no provision for any matching contribution to this plan.

 

Change in Control

 

We do not have a defined policy for severance benefits to executives under a change in control; however, our practice with respect to non-change in control terminations (as stated below under “Termination and Severance Agreements”) would also be applicable under a change in control. Historically, equity awards granted prior to 2009 become exercisable upon a change in control (“single trigger”). In 2009, the 2002 Equity Incentive Plan was amended to require a “double trigger” for accelerated vesting of equity awards granted in 2009 or later. The “double trigger” requires that a termination (wrongful termination or “good reason” termination) take place within 24 months after the change in control. See more detail under “Potential Payments upon a Termination or Change in Control.”

 

Termination and Severance Agreements

 

We do not have a defined policy or program for executive terminations without a change in control. Our normal severance policy provides for separation benefits equal to one week of base salary for each year of service up to a maximum of 26 weeks. For executive officers, our practice has been to grant separation benefits that are generally equal to one year of base compensation at their current base salaries; however, this benefit above the normal severance policy is not guaranteed.

 

In recognition of Mr. Brown’s and Ms. Lamme’s valued service, the Board provided both executive officers with a departure arrangement equal to one year of base compensation to be paid out over the year following their retirement. Mr. Brown will also receive an additional $50,000 to be paid one year after his retirement. Mr. Brown’s unvested outstanding options were cancelled upon retirement and his unexercised vested outstanding stock options were cancelled 90 days after retirement. Ms. Lamme’s outstanding stock options will continue to vest and be exercisable per their original terms as set forth in the 2002 Equity Incentive Plan.

 

We have no employment agreements with the named executive officers.

 

Tax and Accounting Implications for Compensation

 

An important factor considered when designing our compensation program is the cost of the various components of compensation. We are required to expense the fair value of all share-based payments under equity accounting rules related to stock options and other stock awards. The accounting treatment is taken into consideration in the design of our long-term equity compensation awards.

 

Section 162(m) of the Internal Revenue Code (the “Code”) limits the tax deduction for compensation paid to our Chief Executive Officer and certain other executives (“Covered Employees”) to $1 million per year. The limitation does not apply to compensation that qualifies as “performance-based.” Our annual cash incentive awards and performance-based restricted stock awards are made under shareholder-approved plans. We believe these awards qualify as

performance-based compensation under the Code. Our Compensation Committee considers the effect of section 162(m) in designing our compensation program and in making compensation decisions.

 

Base salary is expensed when earned and is not tax deductible over $1 million for Covered Employees.

 

Annual cash incentive awards are expensed during the year when it is probable that the financial performance goal will be met. The amounts paid meet the requirements of Section 162(m) of the Code and are tax deductible.

 

Stock options are expensed in accordance with equity accounting rules, which is generally over the vesting period, unless the individual has reached “retirement-eligible age.” Amounts realized are tax deductible upon exercise of the options.

 

Performance-based restricted stock is expensed in accordance with equity accounting rules, which is generally over the performance period if it is probable that the performance goal will be met. Awards are tax deductible when the shares vest and are released.

 

Summary Compensation Table

 

The following table and footnotes contain information regarding compensation earned in or with respect to 2009 by:

 

 

We refer to these officers collectively as our named executive officers.

 

 

 

 

 

 

As reflected in the summary compensation table, the salary and bonus received by each of our named executive officers as a percentage of their total compensation for 2009 was as follows: Mr. Morgan 42.8%; Mr. Ginnan 58.5%; Mr. Sowar 80.5%; Mr. Furey 63.3%; Mr. Cates 61.2%; Mr. Brown 13.9%; and Ms. Lamme 32.7%.

Grants of Plan-Based Awards in 2009

 

The following table contains information related to:

 

 

 

 

Outstanding Equity Awards

 

The following table contains information related to unexercised stock option awards and nonvested restricted stock awards held by each of our named executive officers at January 3, 2010.