UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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KEITHLEY INSTRUMENTS, INC.

(Name of Registrant as Specified In Its Charter)

 

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

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December 28, 2007

 

 

TO THE SHAREHOLDERS OF KEITHLEY INSTRUMENTS, INC.

 

This year’s Annual Meeting of Shareholders of Keithley Instruments, Inc. will be held at 12:00 Noon (EST), Saturday, February 9, 2008, at our corporate headquarters, 28775 Aurora Road, Cleveland, Ohio.

 

In addition to acting on the matters outlined in the Proxy Statement, we look forward to reviewing with you the results of the first quarter, which will end on December 31, 2007. As in the past, there will be an informal presentation on the Company’s business.

 

We hope that you are planning to attend the Annual Meeting personally, and we look forward to seeing you. Whether or not you expect to attend in person, the return of the enclosed proxy as soon as possible would be greatly appreciated and will ensure that your shares will be represented at the Annual Meeting. If you do attend the Annual Meeting, you may revoke your proxy should you wish to vote in person.

 

On behalf of the Directors and management of Keithley Instruments, Inc., we would like to thank you for your continued support and confidence in the Company.

 

Sincerely yours,

 

Joseph P. Keithley

Chairman, President and Chief Executive Officer

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Keithley Instruments, Inc. will be held at the Company’s corporate headquarters, 28775 Aurora Road, Cleveland, Ohio, on Saturday, February 9, 2008, at 12:00 Noon (EST), for the following purposes:

 

(1) To elect ten members of the Board of Directors to serve until the next annual meeting of shareholders and until their successors have been duly elected and qualified;

 

(2) To approve the amendments to the Amended Code of Regulations of Keithley Instruments, Inc. relating to:

 

(a) modernization and clarification of existing Code;

 

(b) notice of shareholder proposals;

 

(c) permitting the Board to fix the number of directors and to amend the Code to the extent permitted by law; and

 

(d) a new NYSE requirement regarding uncertificated shares; and

 

(3) To transact such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof.

 

Only holders of Common Shares and Class B Common Shares of record at the close of business on Tuesday, December 11, 2007, are entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof.

 

 

By Order of the Board of Directors,

 

Suzanne Schulze Taylor

Secretary

 

December 28, 2007

 

Please sign, date and return the enclosed proxy promptly.

A return envelope is enclosed for your convenience.

 

KEITHLEY INSTRUMENTS, INC.

 

28775 Aurora Road

Cleveland, Ohio 44139

 

PROXY STATEMENT

 

 

ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON FEBRUARY 9, 2008

 

GENERAL INFORMATION

 

This Proxy Statement is furnished in connection with the solicitation of proxies by and on behalf of the Board of Directors of Keithley Instruments, Inc. (the “Company”) for use at the Annual Meeting of Shareholders of the Company to be held on February 9, 2008, and any adjournment or postponement thereof. The time, place and purposes of the Annual Meeting are stated in the Notice of Annual Meeting of Shareholders which accompanies this Proxy Statement.

 

The solicitation of proxies is made by and on behalf of the Board of Directors. The expense of soliciting proxies, including the cost of preparing, assembling and mailing the proxy materials, will be borne by the Company. In addition to solicitation of proxies by mail, solicitation may be made personally and by telephone, and the Company may pay persons holding shares for others their expenses for sending proxy materials to their principals. No solicitation will be made other than by Directors, officers and employees of the Company.

 

The presence of a shareholder at the Annual Meeting will not operate to revoke the shareholder’s proxy. Any shareholder giving a proxy pursuant to this solicitation may revoke it by giving notice to the Company in writing or in open meeting. All properly executed proxies received by the Board of Directors of the Company pursuant to this solicitation will be voted at the Annual Meeting, in accordance with the directions contained in such proxies. If no directions are given, properly executed proxies will be voted FOR the election of the nominees named in this Proxy Statement and FOR the proposals set forth in the Notice, with discretionary authority to vote on all other matters that may properly come before the Annual Meeting or any adjournment or postponement thereof.

 

The close of business on December 11, 2007 has been fixed as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting. This Proxy Statement and the accompanying President’s letter, notice and proxy, together with the Company’s annual report to shareholders for the fiscal year ended September 30, 2007, are first being sent to shareholders on or about December 28, 2007.

 

VOTING RIGHTS

 

As of the close of business on December 11, 2007, there were outstanding 13,XXX,XXX Common Shares, without par value, of the Company (“Common Shares”) and 2,150,502 Class B Common Shares, without par value, of the Company (“Class B Common Shares”). The holders of outstanding Common Shares on that date will be entitled to one vote for each share held, and the holders of outstanding Class B Common Shares on that date will be entitled to ten votes for each share held. Proxies received by the Company but marked as abstentions or broker non-votes will not count in favor of, or against, election of a nominee for Director; however, abstentions and broker non-votes will have the effect of a vote against approval of the proposals relating to the Code of Regulations.

 

The Ohio Revised Code, as it applies to the Company, provides that if notice in writing is given by any shareholder to the President, a Vice President or the Secretary of the Company not less than 48 hours before the time fixed for holding the meeting that such shareholder desires the voting to elect Directors to be cumulative, and if an announcement of the giving of such notice is made upon the convening of the meeting by the Chairman or the Secretary or by or on behalf of the shareholder giving such notice, then each shareholder shall have cumulative voting rights in the election of Directors, enabling such shareholder to give one nominee for Director as many votes as is equal to the number of Directors to be elected multiplied by the number of shares in respect of which such shareholder is voting, or to distribute votes on the same principle among two or more nominees, as such shareholder sees fit. If cumulative voting is in effect, the persons named in the proxy will vote shares represented thereby so as to elect as many of the ten nominees named herein as possible.

 

PRINCIPAL SHAREHOLDERS

 

Security Ownership of Certain Beneficial Owners

 

The following persons are known to the Company to be the beneficial owners of more than 5% of the voting securities of the Company as of December 11, 2007:

 

 

 

 

The business address of Mr. Keithley is 28775 Aurora Road, Cleveland, Ohio 44139. The address for NWQ Investment Management Company, LLC is 2049 Century Park East, 16th Floor, Los Angeles, California 90067. The address for Bank of America Corporation is 100 North Tryon Street, Floor 25, Bank of America Corporate Center, Charlotte, North Carolina 28255. The address for The TCW Group is 865 South Figueroa Street, Los Angeles, California 90017.

Security Ownership of Management

 

The beneficial ownership of Common Shares and Class B Common Shares by each of the Company’s Directors and executive officers named in the Summary Compensation Table and by all executive officers and Directors of the Company as a group on December 11, 2007, is set forth in the table below:

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires Keithley’s executive officers, Directors and persons who own more than 10% of Keithley’s common shares to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). These persons are required to provide the Company with copies of all Section 16(a) forms that they file. Based solely on the Company’s review of these forms and written representations from the executive officers and Directors, the Company believes that all Section 16(a) filing requirements were met during fiscal year 2007.

 

PROPOSAL ONE: ELECTION OF DIRECTORS

 

At the Annual Meeting, or any adjournment or postponement thereof, Common Shares and Class B Common Shares represented by proxies, unless otherwise specified, will be voted for the election as Directors of the ten persons named below who have been nominated by the Board of Directors following the recommendation of the Board’s Nominating and Corporate Governance Committee.

 

Each of the Directors to be elected at the meeting is to serve until the next Annual Meeting and until his or her successor shall have been duly elected and qualified. Pursuant to the Company’s Amended Articles of Incorporation, one-fourth (calculated to the nearest whole number) of the number of authorized Directors, which equals three Directors, is entitled to be elected by the Common Shares voting separately as a class. Messrs. Bachman, Jackman and Reddy have been nominated as the Directors to be so elected by the holders of the Common Shares of the Company. The remaining seven nominees are to be elected by the holders of the Common Shares and the Class B Common Shares voting together. The three nominees receiving the greatest number of votes of the Common Shares voting separately as a class, and the seven other nominees receiving the greatest number of votes of the Common Shares and the Class B Common Shares voting together without regard to class, will be elected as Directors.

 

Each of the nominees is presently a member of the Board of Directors and each has indicated his or her willingness to serve as a Director, if elected. If any nominee at the time of election is unable or unwilling to serve or is otherwise unavailable for election (which contingency is not now contemplated or foreseen), it is intended that the shares represented by proxies will be voted for the election of any substitute nominee that may be named by the Board of Directors.

 

Nominees for Election

 

Set forth below is certain information, as of December 11, 2007, with respect to each person nominated for election as a Director.

 

 

 

 

CORPORATE GOVERNANCE

 

The Board of Directors held seven meetings during the fiscal year ended September 30, 2007. During that fiscal year no Director attended fewer than 75% of the aggregate of meetings of the Board and committees on which he or she served.

 

The Company has not established a formal policy regarding director attendance at the Company’s annual meeting of shareholders. However, the annual meeting has generally been scheduled on the same day as a regular board meeting. All of the Company’s Directors attended the 2007 annual shareholders’ meeting.

 

The Company has five standing committees: the Executive Committee, the Audit Committee, the Compensation and Human Resources Committee, the Strategy Committee, and the Nominating and Corporate Governance Committee. Each of these committees has a written charter approved by the Board of Directors. The Board of Directors has also adopted Corporate Governance Guidelines. A copy of the charters for the Audit Committee, Compensation and Human Resources Committee and Nominating and Corporate Governance Committee and the Corporate Governance Guidelines can be found under the “Investor Relations” section of our website at www.keithley.com and are also available in print to any shareholder who submits a request to the Company c/o Marcia Miller, Keithley Instruments, Inc., 28775 Aurora Road, Cleveland, Ohio 44139. Set forth below is the current membership of each standing committee of the Board, with the number of meetings held during the fiscal year ended September 30, 2007, in parentheses.

 

 

The Board has determined that all of the Directors, except for Mr. Keithley, are independent directors within the meaning of New York Stock Exchange listing standards. All of the members of the Board’s Audit Committee, Compensation and Human Resources Committee and Nominating and Corporate Governance Committee are independent directors.

 

The non-management directors meet in executive session without management during each board meeting. The non-management directors have appointed Brian J. Jackman to serve as the lead outside director, who presides over these executive sessions. Shareholders and other interested parties may communicate with the outside directors of the Board through the lead outside director by sending a letter marked “Confidential” and addressed to:

 

Lead Director, Keithley Instruments, Inc. Board of Directors
c/o Rosanne Sharrone
Keithley Instruments, Inc.
28775 Aurora Road
Cleveland, Ohio 44139

 

You may also send an email to the lead outside director through Keithley Instruments, Inc., Office of the President at rsharrone@keithley.com by indicating “Lead Director” in the subject line. The email will be forwarded to the lead outside director.

The Executive Committee is authorized to exercise all of the powers of the Board of Directors between meetings of the Board of Directors. All actions of the Executive Committee are reported to the Board of Directors at its first meeting following such action or actions.

 

The Audit Committee is responsible for assisting the Board in overseeing (i) the integrity of the financial statements of the Company, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the Company’s independent registered public accounting firm’s qualifications and independence, and (iv) the performance of the Company’s internal audit function and independent registered public accounting firm. The Board has determined that Mr. White, Mr. Bartlett and Ms. Scherer are the audit committee financial experts within the meaning of Item 407 of Regulation S-K under the federal securities laws. Pursuant to its charter, the Audit Committee reviews transactions between the Company and its directors and others, and with firms that employ directors, and any other material related party transactions.

 

The Compensation and Human Resources Committee (the “Compensation Committee”) responsibilities are to review and approve the goals and objectives relevant to the compensation of the Company’s Chief Executive Officer, other executive officers and other employees who report to the Company’s Chief Executive Officer, and to amend these goals and objectives if the Compensation Committee deems it appropriate. Toward that end, the Compensation Committee oversees all compensation, equity and employee benefit plans and payments. The Compensation Committee is also responsible for periodically evaluating compensation for members of the Board of Directors and its committees and to review and approve changes in compensation and plans relating to director compensation. These responsibilities are detailed in the Compensation Committee Charter adopted December 4, 2003, a copy of which can be found on the Corporate Governance page of the Keithley website at www.keithley.com. Members of the Compensation Committee are independent directors under the listing standards of the New York Stock Exchange, “non-employee directors” within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended.

 

The Compensation Committee has retained Radford Survey + Consulting, a human resources consulting firm, to provide assistance and advice with respect to executive compensation. The consultants report directly to the Chairperson of the Compensation Committee, although they also provide advice and discuss compensation issues directly with management. Over the past year, the consultant has, at the direction of the Compensation Committee, provided information and advice on a range of subjects as described under the caption “Executive Compensation and Related Information — Compensation Discussion and Analysis.”

 

The Chief Executive Officer, Chief Operating Officer and Vice President, Human Resources, attend Compensation Committee meeting by invitation to provide input with respect to compensation and performance assessments of executive officers. Consistent with the equity award grant policy adopted by the Board of Directors, the Compensation Committee delegates to the Chief Executive Officer authority to grant a limited number of equity awards as further described under “Executive Compensation and Related Information — Compensation Discussion and Analysis — Equity Award Granting Practices.”

 

The Strategy Committee is responsible for ensuring that management has in place strategies and action plans as well as useful planning and control systems to enable the Company to meet its objectives.

 

The Nominating and Corporate Governance Committee is responsible for assisting the Board of Directors in identifying individuals qualified to become Board members; to recommend board committee structure, membership and operations; to develop and recommend to the Board a set of effective corporate governance policies and procedures; and to lead the Board in its annual review of the Board’s performance.

 

The charter of the Nominating and Corporate Governance Committee provides that the Committee shall make recommendations to the Board regarding director nominations, including director candidates recommended by shareholders. If a shareholders wishes to recommend a candidate, they should send their recommendation, with a description of the candidate’s qualifications, to: Chairman, Nominating and Corporate Governance Committee, c/o Marcia Miller, Keithley Instruments, Inc., 28775 Aurora Road, Cleveland, Ohio 44139. The Committee has not established specific minimum qualifications a candidate must have in order to be recommended by the Committee. However, in determining qualifications for new directors, the Committee will periodically establish and review Board succession plans, establish the experience and attributes needed to fulfill its responsibilities and work with

the Chief Executive Officer to identify management’s needs for advice and counsel. A director candidate pool will be established from recommendations from shareholders and the Board of Directors. Additionally, the Nominating and Governance Committee may retain a board search consultant to identify and recruit potential directors.

 

DIRECTOR COMPENSATION

 

In 2005, the Compensation Committee undertook a reassessment of the Board’s director compensation practices in recognition of the increased expectations and responsibilities faced by directors of public companies following adoption of the Sarbanes-Oxley Act, new regulatory and stock exchange requirements and director compensation trends at comparable high-technology public companies. In determining director compensation, the Compensation Committee reviewed data of 21 peer companies as well as other broad-based industry survey data. Based on their research and advice of the consultants retained by and reporting to the Compensation Committee, the Compensation Committee recommended, and the Board of Directors approved, a revised director compensation program, which began to take effect in fiscal year 2006.

 

For fiscal year 2007, Directors who are not employees of the Company received an annual fee of $20,000 paid in four installments. Directors received an additional $1,000 for each board meeting attended and each committee meeting attended, except for Audit Committee meetings for which each Director received $1,500 for his or her attendance. The Audit Committee Chairman received an additional annual fee of $10,000 paid in four installments, while the Compensation and Human Resources Committee Chairman, the Strategy Committee Chairman, and the Nominating and Corporate Governance Committee Chairmen each received an additional annual fee of $5,000 paid in four installments. Additionally, in August 2006, the Board of Directors appointed a Special Committee of the Board to investigate the Company’s stock option practices. In February 2007, the Board of Directors approved fees to be paid to committee members of $1,500 per meeting for all past and future meetings, and a one-time retainer fee of $10,000 to be paid to the Chair of the Special Committee.

 

Directors may defer their fees under the Keithley Instruments, Inc. 1996 Outside Directors Deferred Stock Plan. Under the terms of that Plan, the fees are invested in Common Shares, the total number of which are included in Security Ownership of Management table found on page 3, and will be paid out in cash or Common Shares on a specified date or upon retirement from the Board of Directors per the election of the recipient. In addition, Directors may defer fees under the Keithley Instruments, Inc. Deferred Compensation Plan. Under this Plan, the amounts deferred earn interest based on a prime rate formula specified in the Plan.

 

Along with shifting employee compensation from a focus on stock options to full-value shares, the equity compensation of the Board has also been modified. Each non-employee Director will receive a restricted stock award worth $75,000, rounded to whole shares, upon his or her initial appointment to the Board. The shares will vest over a 3-year period. Additionally, each non-employee Director receives an annual Common Share grant equal to approximately $58,000 issued in four installments. The shares are issued pursuant to the Keithley Instruments Inc. 2002 Stock Incentive Plan. Effective October 1, 2005, the Board of Directors established a policy requiring Directors to own $100,000 of Common Shares in the Company (including shares held in the deferred compensation plan). It is expected that the Company’s Directors achieve this ownership level within four years of the establishment of the policy, or in the case of new Directors, within four year’s of their election. With the exception of one director elected less than four years ago, all of the directors have met this policy.

The following table summarizes the compensation received by each Director during fiscal year 2007:

 

Director Compensation for Fiscal Year 2007

 

 

 

 

The Company reimburses Directors for their reasonable expenses associated with attending Board meetings and provides them with liability insurance coverage for their activities as Directors.

 

Under the Company’s Articles of Incorporation and Code of Regulations, the Directors are entitled to indemnification from Keithley to the fullest extent permitted by Ohio corporate law. The Company has entered into indemnification agreements with each of the Directors. The agreements to not increase or decrease the scope of the indemnification provided by set forth processes and procedures for indemnification claims.

 

Beginning in fiscal year 2008, non-employee Directors’ fees will be paid solely on a retainer-based structure versus a combination of retainer and meeting attendance fees. While the structure has changed, it is anticipated that there will be no material increase to the total compensation that an individual Director shall receive. This change was implemented so that fees would not limit Board of Director involvement in important corporate matters.

 

CODE OF ETHICS

 

The Company has a Code of Ethics that applies to all employees, executive officers and Directors of the Company, including the Company’s principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics includes provisions covering compliance with laws and regulations, insider trading practices, conflicts of interest, confidentiality, protection and proper use of Company assets, accounting and recordkeeping, fair competition and fair dealing, business gifts and entertainment, payments to government personnel, and the reporting of illegal or unethical behavior. The Code of Ethics is posted on the Company’s website and is available in print to any shareholder submitting a request to the Company c/o Marcia Miller, Keithley Instruments, Inc., 28775 Aurora Road, Cleveland, Ohio 44139. Any waiver of any provision of the code granted to an executive officer or Director may only be made by the Board of Directors or a Committee of the Board authorized to do so and will be promptly disclosed on the Company’s website at www.keithley.com.

 

EXECUTIVE COMPENSATION AND RELATED INFORMATION

 

Compensation Discussion and Analysis

 

The following describes the material elements of the Company’s compensation objectives and policies and the application of these objectives and policies to the Company’s executive officers, particularly the individuals named in the Summary Compensation Table on page 20. The rules regarding disclosure of executive compensation in proxy statements were modified significantly in 2006. This is our first proxy statement to which the new rules apply. Accordingly, the information in this proxy statement is not directly comparable to the information disclosed in prior years.

 

Executive Compensation Governance

 

The Compensation and Human Resources Committee (the “Committee”) of the Board of Directors is responsible for reviewing and approving executive management compensation and for evaluating the Chief Executive Officer’s performance. These responsibilities and other governance matters concerning the Committee are described under the caption “Corporate Governance.”

 

The Committee receives assistance and advice from its executive compensation consultants, Radford Survey + Consulting (“Radford”), a human resources consulting firm. Radford reports directly to the Chairperson of the Committee, although its representatives also provide advice and discuss executive compensation issues directly with management. In the past year, Radford has, at the direction of the Committee, provided information and advice on a range of subjects, including peer group definition, market data, compensation levels for officers and the Board of Directors, equity grants (both amount and grant terms) and stock ownership guidelines. The Committee has available to it relevant data and information regarding all elements of compensation as it makes its decisions regarding each element of compensation for the named executive officers.

 

Executive Compensation Philosophy

 

The goal of Keithley’s compensation program is to attract highly qualified individuals, and to retain and motivate them to achieve superior financial results for the Company in both the short-term and long-term. The compensation program is designed to reward the achievement of sales growth, quality of earnings and appreciation of the Company’s share price. The Committee believes that our compensation program and specific compensation decisions regarding our executive officers must meet two standards. First, our compensation program must be competitive with companies that are our direct competitors in test and measurement as well as a broader group of electronics companies with whom we compete for employees. Second, our compensation program and decisions must be designed to lead to the creation of shareholder value through future share appreciation. In addition, compensation decisions regarding specific individuals are impacted by individual job performance, Company performance, and significant changes in the competitive landscape for individuals possessing the skills we require.

 

Our executive compensation program has four main components: base salary, annual cash bonus, long-term incentive awards in the form of stock compensation, and health and welfare benefits which are discussed in more detail below. All four components are targeted at median levels for the executive’s position based on a survey of peer group companies and two-broadly-based compensation surveys as described more fully below. The Committee targets our executives’ compensation at the market median because it believes the median ensures that our compensation program is sufficiently competitive to attract and retain talented executives and maintain external pay equity. However, the Company’s incentive award programs are designed to pay above the median for above target performance and below the median for performance that is low relative to peers.

 

The Committee allocates total compensation between currently paid cash compensation and long-term compensation. The allocation between currently paid cash compensation and long-term compensation for Mr. Keithley, our Chief Executive Officer, and for Ms. Rae, our Chief Operating Officer, is targeted at approximately a 50/50 split. The allocation for other executive officers is targeted between 60/40 and 70/30. These allocations are based on market competitiveness and the Committee’s assessment of the impact that it believes each executive officer has on execution of the Company’s long-term strategy.

Executive Compensation Methodologies

 

The Committee assembles, with the assistance of Radford, competitive market information about executive compensation from an annual review of companies included in a peer group, other competitive market compensation information, executive compensation trends, our business needs, and our financial performance compared to peers. The Committee reviews this competitive information together with performance assessments of our executives and recommendations provided by the CEO and COO (with the exception of Mr. Keithley for which no recommendation is made and Ms. Rae whose recommendation is made solely by the CEO). Generally, the Committee sets executive officers’ salary to fall within a range of +/- 20% of the median of surveyed companies, target bonus (as a percentage of salary) at approximately median, long-term compensation award value is targeted at median, but actual target awards are constrained by corporate burn rate as well, so that based on the Company’s valuation relative to peers, periodically long-term compensation target awards are below median. If the Company has exceptional performance, it is possible that actual total compensation could exceed the median for total compensation for the surveyed companies in a given year. For fiscal 2007, based on Company performance, total compensation for all of the named executive officers was at or below the market median.

 

In determining what it believes to be market median for executive positions, the Committee obtains information from Radford regarding competitive market compensation data available from the proxy statements of peer group companies selected by the Committee and from two broad-based electronics industry surveys. The peer group for 2007 consists of 21 publicly traded corporations that are headquartered in the United States with whom we compete for employees with similar skills. The Committee reviews the peer group each year to ensure that it continues to be comprised of companies appropriate for purposes of comparison. As compensation was set in the Fall of 2006, the following companies comprised this peer group:

 

 

In addition, Radford supplemented the peer group data with data from two broad-based surveys covering companies in the electronics industry with revenue generally between $50 and $250 million to calculate a median consisting of a blended average of the two broad-based surveys and data from the peer group. The Committee uses the blended average to minimize the impact of any outlaying data points and because, in certain circumstances, the companies in the peer group do not have proxy data for similarly situated executive positions that can be used for comparison to one or more of our executives.

 

Our management works with Radford to make specific recommendations to the Committee with regard to compensation based upon the market data and management’s assessment of the performance of each individual executive officer (other than the CEO). For the CEO, the Committee conducts the performance assessment. Compensation amounts realized from past years and prior year equity awards are generally not considered in the current year’s determination of each individual’s compensation package. The impacts of tax or accounting treatments for particular forms of compensation also are generally not considered, except to the extent they reflect industry norms.

 

All salary changes for executive officers are made effective each January 1. Base pay levels and long-term incentive awards are generally determined and approved near the end of the calendar year at a regularly scheduled Committee meeting. The date is determined well in advance and generally occurs at the same time each year (in November) in connection with regularly scheduled Board and Committee meetings. For fiscal year 2007, annual bonus targets were set at the regularly scheduled August 2006 Committee meeting and payout amounts for the annual cash bonus were determined in October 2007 after the fiscal year-end financial results were available. Beginning with fiscal year 2008, preliminary annual bonus targets were reviewed at the regularly scheduled Committee meeting held in August 2007, and final annual bonus targets were reviewed and approved at a regularly scheduled telephonic September meeting. To date,

the Committee has not been required to make any final payout determinations with respect to long-term incentive awards because no applicable performance period has been completed.

 

Elements of Executive Compensation

 

The Company’s executive compensation program provides the Named Executive Officers with the elements of compensation described below.

 

Base Salary

 

Executive officers’ base salaries are benchmarked against the market median of the proxy data and the surveys discussed above. In general, for those executive officers who are not new to their positions and who are performing well, their salaries are targeted to the market median. All executive officers’ salaries are within a range of plus or minus twenty percent of the market median based on individual experience and performance. With the exception of Mr. Keithley and Mr. Plush, all named executive officers received salary increases during fiscal year 2007 ranging from 3.8% to 4.4% based upon individual performances and to ensure the Company’s compensation remained competitive with market movements for individuals with similar skills and experience in similar industries. Because of the costs and management time incurred by the Company in connection with the stock options investigation in 2006, the Committee determined not to increase the base salary of Mr. Keithley or Mr. Plush for fiscal year 2007.

 

The following table sets forth the base salary and the percentage increase for each named executive officer for fiscal 2007.

 

 

Annual Bonus Program

 

The Committee determines target bonus awards, which are expressed as a percentage of base salary, for each executive officer based on the blended average market median discussed above determined by Radford for similar positions. For each executive, the Committee establishes a performance threshold and target and a level at which the executive’s maximum bonus is earned. Awards under the plan are paid based upon actual performance against the pre-established performance objectives for the year approved by the Compensation Committee. No bonus is earned at or below threshold performance. If Company performance is above threshold, payouts are based on a linear progression up to a maximum of three times the target bonus amount established for each executive.

 

The target bonus amounts are determined by the Committee, but are generally based upon the CEO’s recommendations (other than with respect to his own bonus). For 2007, the Committee established pre-tax ROA and Sales Growth as the two quantitative performance measures for the Annual Bonus Plan, except for Mr. Pesec for whom Order Growth was substituted for Sales Growth in order to maximize his focus on obtaining new orders. Each measure was given equal weighting:

 

 

 

 

 

The Committee evaluates the performance factors and targets for the Annual Bonus Plan each year. The Committee does not necessarily establish the performance targets based on management’s operating plan, but rather on performance levels that the Committee believes promotes Company growth without sacrificing quality of earnings.

 

The payments under the Annual Bonus Plan are calculated at the end of each fiscal year and are paid annually in cash unless the employee has made an election to defer. Because the Company’s performance in 2007 was below the thresholds established for the year, no named executive officer received a payout under the Annual Bonus Plan.

 

The following table shows the Annual Bonus Plan target both as a percentage of salary and as a dollar amount for each named executive officer for 2007; as noted above no payouts were received by any named executive officer in 2007.

 

 

Long Term Compensation Program

 

The purpose of the Company’s long-term incentive compensation plan is provide a substantial equity incentive for our executive officers to manage the business for the long-term, complementing the annual bonus that rewards performance in a particular year, and to reward them for the performance of the Company and its common shares over multi-year periods. The Committee awards long-term compensation in the form of annual non-qualified stock option grants, and beginning in fiscal year 2006, performance award units (“PAUs”). The Committee has not established any long-term incentive programs that are settled in cash because the Committee believes that stock settled programs offer better alignment between the interests of our executive officers and our shareholders. The Committee as a general practice does not award restricted stock or restricted stock units to executive officers because they may provide substantial value even if our share price declines. However, the Company uses restricted stock award units selectively for non-officer employees, primarily for retention purposes.

 

Radford establishes a median dollar value for competitive long-term pay for each executive officer position based on the blended average market median described above. The Committee awards a mix of non-qualified stock options and performance share units with targeted value at or near the market median for each position.

The following table shows the median total dollar amount of the long-term compensation as determined by Radford for each executive officer, the actual number of stock options and performance units awarded to each named executive officer in 2007, and the total dollar value of long-term awards granted for fiscal 2007. As noted previously, Mr. Keithley and Mr. Plush did not receive stock options or performance units for fiscal year 2007:

 

 

 

 

The long-term incentive awards shown in the foregoing table were granted in January of 2007. The Committee awards a mix of options and performance units that reflects the executives’ ability to impact the Company’s execution of its long-term plans. Mr. Keithley and Ms. Rae generally receive a 50-50 split between options and performance units and the other executive officers generally receive a 40-60 split of options and performance units.

 

Performance units are expressed as a number of shares and are earned over a three-year period, with payout dependent upon:

 

 

 

 

 

 

 

 

The Committee has established performance metrics of sales growth and ROA/ROIC because the Committee believes these measures are the drivers of the Company’s growth while maintaining high quality earnings.

 

Equity Award Granting Practices

 

The Committee’s practice has been to grant long-term incentive awards (options, performance shares and restricted shares) at its November meeting held during the Company’s first fiscal quarter. The Board of Directors adopted a formal policy regarding the granting of equity awards in December 2006, which provides for the following:

 

 

In addition, all long-term equity incentive awards are subject to forfeiture, set off and recoupment for any claim that the Company have against an Optionee. These claims include:

 

(i) direct or indirect disclosure of trade secret or confidential information;

 

(ii) use of confidential information within the three (3) years preceding Optionee’s termination from employment with the Company;

 

(iii) any material violation by Optionee of the terms of any written agreement between the Optionee and the Company;

 

(iv) Any action taken in direct or indirect competition with the Company; or

 

(v) Any attempt to induce any Company employee or any consultant of the Company to terminate his or her employment or other contractual relationship with the Company.

 

These rights of forfeiture, set off and recoupment extend to any gain, profit and income Optionee has realized from the exercise of options granted in 2007 or later, net of amounts withheld by the Company in connection with said exercise(s).

 

Health and Welfare

 

The Committee has provided named executive officers with the same health and welfare benefits it provides all its other US-based employees; including medical, dental and vision coverage, life and disability insurance, a defined benefit pension plan, a defined contribution plan and an employee stock purchase plan. The named executive officers also have the option to participate in the Company’s Deferred Compensation Plan. In addition, the Company provides each employee with term life insurance with death benefits equal to two times base salary, although executive officers, at their option, may receive whole life insurance rather than term life insurance.

 

Other Compensation Plans and Perquisites

 

Retirement Plans

 

The Company provides opportunities for all employees to save for retirement in three benefit plans: a voluntary defined contribution plan (401(k)), a company funded defined benefit pension plan, an employee stock purchase plan. A deferred compensation plan is also made available to named executive officers and certain other management who meet certain minimum salary requirements as set forth in the Plan. These plans are designed to provide competitive retirement benefits.

 

401(k)

 

The Company maintains a defined contribution retirement plan for all its eligible employees in the United States under Section 401(k) of the Internal Revenue Code (the “401(k)”) Plan.

 

The 401(k) Plan offers the named executive officers and all other employees the opportunity to defer income. In addition, the Company makes a mandatory matching contribution to each employee equal to 25% of up to 6% compensation deferred by the employee, and an additional discretionary match up to 6% of compensation deferred. The rules of the Internal Revenue Code limit the compensation that may be used in applying any deferral election or matching contribution. In 2007, that limit was $225,000 the (“IRS Cap”). In addition, the 401(k) Plan limits contributions to 25% of an employee’s base pay or the IRS Cap, whichever is less. The Company does not provide a tax-deferred non-qualified plan which would allow employees in excess of the IRS Cap to defer and receive a match on that portion of their compensation that does not qualify for the 401(k) Plan.

 

Defined Benefit Pension Plan

 

The Company’s United States pension plan provides retirement benefits to eligible participants who terminate employment at or after age 65, or who terminate employment before age 65 with at least five years of service. Benefits commence after termination of employment, but generally not before age 55. Retirement benefits are computed on the basis of pension credits for each year of the employee’s service. Generally, an employee’s pension credits will be equal to the sum of (i) 0.9% of the employee’s high five-year average annual compensation, not in

excess of the employee’s Social Security “covered compensation” (as defined by Section 401(I)(5)(E) of the Internal Revenue Code) as of September 30, 1999, plus 1.5% of such average annual compensation in excess of “covered compensation,” with such sum multiplied by the employee’s years of credited service (up to 30 years) through September 30, 1999; plus (ii) 1.2% of the employee’s annual compensation for each plan year beginning on or after October 1, 1999. The employee’s annual retirement benefit, when paid as a life annuity commencing at age 65, will equal the total of the pension credits he or she has earned. The Company does not maintain any Supplemental Retirement plans in which any named executive officer participates.

 

Employee Stock Purchase Plan

 

The Company provides an Employee Stock Purchase Plan to all eligible employees, including named executive officers. The plan provides that an employee may defer up to $25,000 per calendar year into the plan. The plan purchases shares with monies deferred once a year giving each plan participant a 5% discount on the share price. The share price is determined by the closing share price on the last day of the plan year which is June 30.

 

Deferred Compensation Plan

 

The Deferred Compensation Plan provides Executive Officers and other key employees the opportunity to defer receipt of cash compensation. The Company does not contribute to this plan. Participants may elect to defer all or part of their cash compensation (base salary and annual bonus) for a specified period of years or until retirement. Participants can select from a variety of investment funds from which the earnings on their deferred cash compensation account will be determined. Participants in the Deferred Compensation Plan are considered unsecured creditors of the Company.

 

Perquisites

 

The Company provides executive officers with a Company car, a cell phone, whole life insurance equal to two times their annual salary, access to financial planning services, and access to a health club membership. In addition, to assist the Company in conducting business meetings and/or entertainment, the Company pays the cost of certain club dues for some officers. Although these officers may derive some personal benefit for their use, club memberships are used extensively for business purposes and all personal expenses are born entirely by the executive.

 

Change in Control and Other Severance Arrangements

 

Upon a change in control as defined in the Keithley Instruments, Inc. 2002 Stock Incentive Plan, all stock options and any outstanding stock appreciation rights granted under the Plan shall become immediately exercisable in full and all restricted stock grants, including performance units, become immediately vested and any applicable restrictions lapse. Performance units vest at target levels. The Company does not have a formal severance policy, and the Committee must review and approve the severance of any officer. With the exception of Mr. Plush, no executive officer has a separate agreement providing change in control benefits, other than with respect to their equity awards.

 

Company Stock Ownership Guidelines

 

While the Company encourages its executive officers to own Common Shares, it does not have a formal policy requiring specified levels of share ownership. The Committee believes that its current compensation structure has properly aligned the named executive officers with shareholder interest and, therefore, a formal policy is not necessary.

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with the Company’s management. Based on the review and discussions referred to above, the Compensation Committee recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007.

 

Compensation and Human Resources Committee

Brian R. Bachman, Chairman

Leon J. Hendrix

Barbara V. Scherer

Thomas A. Saponas

 

SUMMARY COMPENSATION TABLE

 

The following table sets forth information concerning the compensation for our Chief Executive Officer and Chief Financial Officer, as well as the four next highest paid executive officers of the Company as of September 30, 2007.

 

 

 

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS FOR FISCAL YEAR 2007

 

 

 

 

OUTSTANDING EQUITY AWARDS AT SEPTEMBER 30, 2007

 

 

 

 

 

OPTION EXERCISES AND STOCK VESTED FOR FISCAL YEAR 2007

 

 

 

 

PENSION BENEFITS AT SEPTEMBER 30, 2007

 

 

 

 

NONQUALIFIED DEFERRED COMPENSATION FOR FISCAL YEAR 2007