5875 LANDERBROOK DRIVE

CLEVELAND, OHIO 44124-4017

 

NOTICE OF ANNUAL MEETING

 

The Annual Meeting of stockholders of NACCO Industries, Inc., which is referred to as the Company, will be held on Wednesday, May 9, 2007 at 9:00 A.M., at 5875 Landerbrook Drive, Cleveland, Ohio, for the following purposes:

 

 

The Board of Directors has fixed the close of business on March 16, 2007 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Annual Meeting or any adjournment thereof. The Proxy Statement and related form of proxy are being mailed to stockholders commencing on or about March 21, 2007.

 

Charles A. Bittenbender

Secretary

 

March 21, 2007

 

 

5875 LANDERBROOK DRIVE

CLEVELAND, OHIO 44124-4017

 

PROXY STATEMENT — March 21, 2007

 

This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of NACCO Industries, Inc., a Delaware corporation which is referred to as the Company, of proxies to be used at the annual meeting of stockholders of the Company to be held on May 9, 2007, which is referred to as the Annual Meeting. This Proxy Statement and the related form of proxy are being mailed to stockholders commencing on or about March 21, 2007.

 

If the enclosed form of proxy is executed, dated and returned, the shares represented by the proxy will be voted as directed on all matters properly coming before the Annual Meeting for a vote. Proxies that are properly signed without any indication of voting instructions will be voted for the election of each director nominee, for the confirmation of the appointment of the independent registered public accounting firm, and as recommended by the Board of Directors with regard to any other matters or, if no recommendation is given, in the proxy holders’ own discretion. The proxies may be revoked at any time prior to their exercise by giving notice to the Company in writing or by executing and delivering a later dated proxy. Attendance at the Annual Meeting will not automatically revoke a proxy, but a stockholder attending the Annual Meeting may request a ballot and vote in person, thereby revoking a previously granted proxy.

 

Stockholders of record at the close of business on March 16, 2007 will be entitled to notice of, and to vote at, the Annual Meeting. On that date, the Company had outstanding and entitled to vote 6,656,465 shares of Class A Common Stock, par value $1.00 per share, which is referred to as the Class A Common, and 1,609,341 shares of Class B Common Stock, par value $1.00 per share, which is referred to as the Class B Common. Each share of Class A Common is entitled to one vote for a nominee for each of the ten directorships to be filled and one vote on each other matter properly brought before the Annual Meeting. Each share of Class B Common is entitled to ten votes for each such nominee and ten votes on each other matter properly brought before the Annual Meeting.

 

At the Annual Meeting, in accordance with Delaware law and the Company’s Bylaws, the inspectors of election appointed by the Board of Directors for the Annual Meeting will determine the presence of a quorum and will tabulate the results of stockholder voting. As provided by Delaware law and the Company’s Bylaws, the holders of a majority of the Company’s stock, issued and outstanding, and entitled to vote at the Annual Meeting and present in person or by proxy at the Annual Meeting, will constitute a quorum for the Annual Meeting. The inspectors of election intend to treat properly executed proxies marked “abstain” as “present” for purposes of determining whether a quorum has been achieved at the Annual Meeting. The inspectors will also treat proxies held in “street name” by brokers that are voted on at least one, but not voted on all, of the proposals to come before the Annual Meeting, which are referred to as broker non-votes, as “present” for purposes of determining whether a quorum has been achieved at the Annual Meeting.

 

Class A Common and Class B Common will vote as a single class on all matters anticipated to be brought before the Annual Meeting. In accordance with Delaware law, the ten director nominees receiving the greatest number of votes will be elected directors. In accordance with Delaware law and the Company’s Bylaws, the holders of a majority of the voting power of the Company’s stock which is present in person or by proxy, and which is actually voted, will decide any other proposal which is brought before the Annual Meeting. As a result, abstentions in respect of any proposal and broker non-votes will not be counted for purposes of determining whether a proposal has received the requisite approval by the Company’s stockholders.

 

In accordance with Delaware law and the Company’s Bylaws, the Company may, by a vote of the stockholders, in person or by proxy, adjourn the Annual Meeting to a later date or dates, without changing the record date. If the Company were to determine that an adjournment were desirable, the appointed proxies would use the discretionary authority granted pursuant to the proxy cards to vote in favor of such an adjournment.

(This page intentionally left blank)

 

BUSINESS TO BE TRANSACTED

 

 

Director Nominee Information

 

It is intended that shares represented by proxies in the enclosed form will be voted for the election of the nominees named in the following table to serve as directors for a term of one year and until their successors are elected, unless contrary instructions are received. All of the nominees listed below presently serve as directors of the Company and were elected at the Company’s 2006 annual meeting of stockholders. Robert M. Gates, who was a director of the Company since 1993, resigned his position as a director on December 18, 2006. If an unexpected occurrence should make it necessary, in the judgment of the proxy holders, to substitute some other person for any of the nominees, shares represented by proxies will be voted for such other person as the proxy holders may select.

 

Beneficial Ownership of Class A Common and Class B Common

 

Set forth in the following tables is the indicated information as of February 16, 2007 (except as otherwise indicated) with respect to (i) each person who is known to the Company to be the beneficial owner of more than five percent of the Class A Common, (ii) each person who is known to the Company to be the beneficial owner of more than five percent of the Class B Common and (iii) the beneficial ownership of Class A Common and Class B Common by the directors, the Company’s principal executive officer, principal financial officer and the three other most highly compensated executive officers of the Company and its subsidiaries during 2006, which are referred to as the Named Executive Officers, and all executive officers and directors as a group. Beneficial ownership of Class A Common and Class B Common has been determined for this purpose in accordance with Rules 13d-3 and 13d-5 of the Securities and Exchange Commission, which is referred to as the SEC, under the Securities Exchange Act of 1934, which is referred to as the Exchange Act. Accordingly, the amounts shown in the tables do not purport to represent beneficial ownership for any purpose other than compliance with SEC reporting requirements. Further, beneficial ownership as determined in this manner does not necessarily bear on the economic incidence of ownership of Class A Common or Class B Common.

 

Holders of shares of Class A Common and Class B Common are entitled to different voting rights with respect to each class of stock. Each share of Class A Common is entitled to one vote per share. Each share of Class B Common is entitled to ten votes per share. Holders of Class A Common and holders of Class B Common generally vote together as a single class on matters submitted to a vote of the Company’s stockholders.

AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP

 

CLASS A COMMON STOCK

 

 

 

 

CLASS B COMMON STOCK

 

 

 

 

 

Thomas E. Taplin is Clara Taplin Rankin’s brother. Britton T. Taplin is the son of Thomas E. Taplin, and David F. Taplin is a nephew of Thomas E. Taplin and Clara Taplin Rankin. Clara Taplin Rankin is the mother of Alfred M. Rankin, Jr. J.C. Butler, Jr., an executive officer of the Company, is the son-in-law of Alfred M. Rankin, Jr. The combined beneficial ownership of such persons shown in the foregoing tables equals 1,238,588 shares, or 18.69%, of the Class A Common and 1,146,034 shares, or 71.21%, of the Class B Common outstanding on February 16, 2007. The combined beneficial ownership of all directors of the Company, together with Clara Taplin Rankin, Thomas E. Taplin and all of the executive officers of the Company whose beneficial ownership of Class A Common and Class B Common must be disclosed in the foregoing tables in accordance with Rule 13d-3 under the Exchange Act, equals 1,288,092 shares, or 19.43%, of the Class A Common and 1,148,009 shares, or 71.33%, of the Class B Common outstanding on February 16, 2007. Such shares of Class A Common and Class B Common together represent 56.19% of the combined voting power of all Class A Common and Class B Common outstanding on such date.

 

There exists no arrangement or understanding between any director and any other person pursuant to which such director was elected. Each director and executive officer serves until his successor is elected and qualified.

 

Directors’ Meetings and Committees

 

The Board of Directors has an Audit Review Committee, a Compensation Committee, a Finance Committee, an Executive Committee and a Nominating and Corporate Governance Committee. During 2006, the members of such committees were as follows:

 

 

Nominating and Corporate Governance Committee
Robert M. Gates (through December 18, 2006)
Dennis W. LaBarre
Richard de J. Osborne
Michael E. Shannon (Chairman)
David F. Taplin
John F. Turben

 

The Audit Review Committee held nine meetings in 2006. The Audit Review Committee has the responsibilities set forth in its charter with respect to:

 

 

The Board of Directors has determined that Michael E. Shannon, the Chairman of the Audit Review Committee, qualifies as an audit committee financial expert as defined in Section 407(d) of Regulation S-K under the Exchange Act. Mr. Shannon is independent, as such term is defined in Section 303A.02 of the New York Stock Exchange’s listing standards and Rule 10A-3(b)(1) under the Exchange Act. The Board of Directors believes that, in keeping with the high standards of the Company, all members of the Audit Review Committee should have a high level of financial knowledge. Accordingly, the Board of Directors has reviewed the membership of the Audit Review Committee and determined that each member of the Committee is independent as defined in Section 303A.02 of the New York Stock Exchange’s listing standards and Rule 10A-3(b)(1) under the Exchange Act, is financially literate as defined in Section 303A.07(a) of the New York Stock Exchange’s listing standards, has accounting or related financial management expertise as defined in Section 303A.07(a) of the New York Stock Exchange’s listing standards, and may qualify as an audit committee financial expert. No members of the Audit Review Committee serve on more than three public company audit committees.

 

The Compensation Committee held three meetings in 2006. The Compensation Committee has the responsibilities set forth in its charter with respect to the administration of the Company’s policies, programs and procedures for compensating its employees, including its executive officers, and the directors. Among other things, the Compensation Committee’s direct responsibilities include:

 

 

The Compensation Committee retains and receives assistance in the performance of its responsibilities from an internationally recognized compensation consulting firm. Each member of the Compensation Committee is independent, as independence is defined in the listing standards of the New York Stock Exchange.

 

The Nominating and Corporate Governance Committee held two meetings in 2006. The Nominating and Corporate Governance Committee has the responsibilities set forth in its charter. Among other things, the Nominating and Corporate Governance Committee’s responsibilities include:

 

 

The Nominating and Corporate Governance Committee will consider director candidates recommended by the Company’s stockholders. See “Procedures for Submission and Consideration of Director Candidates” on page 47. In addition to the foregoing responsibilities, the Nominating and Corporate Governance Committee is responsible for reviewing the Company’s Corporate Governance Guidelines and recommending changes to the Corporate Governance Guidelines, as appropriate; overseeing evaluations of the Board’s effectiveness; and annually reporting to the Board of Directors the Nominating and Corporate Governance Committee’s assessment of the Board’s performance. Each member of the Nominating and Corporate Governance Committee is independent, as independence is defined in the listing standards of the New York Stock Exchange. However, the Nominating and Corporate Governance Committee may, from time to time, consult with certain other members of the Taplin and Rankin families, including Alfred M. Rankin, Jr., regarding the composition of the Board of Directors.

 

The Finance Committee held three meetings in 2006. The Finance Committee reviews the financing and risk management strategies of the Company and its principal subsidiaries and makes recommendations to the Board of Directors on all matters concerning finance.

 

The Executive Committee held three meetings in 2006. The Executive Committee may exercise all of the powers of the Board of Directors over the management and control of the business of the Company during the intervals between meetings of the Board of Directors.

 

The Board of Directors held eleven meetings in 2006. In 2006, all of the directors attended at least 75 percent of the total meetings held by the Board of Directors and by the committees on which they served during their tenure.

 

The Board of Directors has determined that, based primarily on the ownership of Class A Common and Class B Common by the members of the Taplin and Rankin families and their voting history, the Company has the characteristics of a “controlled company,” as that term is defined in Section 303A of the listing standards of the New York Stock Exchange. Accordingly, the Board of Directors has determined that the Company should be characterized as a “controlled company.” However, the Board of Directors has elected not to make use at the present time of any of the exceptions to the requirements of the listing standards of the New York Stock Exchange that are available to controlled companies. Accordingly, at least a majority of the members of the Board of Directors is independent, as independence is defined in the listing standards of the New York Stock Exchange. In making a determination as to the independence of its directors, the Company considered the “Independence Standards for Directors” set forth in Appendix A attached hereto and broadly considered the materiality of each director’s relationship with the Company. Based upon the foregoing criteria, the Board of Directors has determined that the following directors are independent: Owsley Brown II, Dennis W. LaBarre, Richard de J. Osborne, Ian M. Ross, Michael E. Shannon, Britton T. Taplin, David F. Taplin, John F. Turben and Eugene Wong.

 

In accordance with the rules of the New York Stock Exchange, the non-management directors of the Company are scheduled to meet in executive session, without management, in February of each year. The most recent such meeting occurred in February of 2007. The Chairman of the Compensation Committee presides at such meetings. Additional meetings of the non-management directors may be scheduled from time to time when the non-management directors believe such meetings are desirable. The determination of the director who should preside at such additional meetings will be made based upon the principal subject matter to be discussed at the meeting.

 

The Company holds a regularly scheduled meeting of its Board of Directors in conjunction with its Annual Meeting of Stockholders. Directors are expected to attend the Annual Meeting absent an appropriate excuse. All of the incumbent members of the Board of Directors attended the Company’s 2006 Annual Meeting of Stockholders.

 

The Company has adopted a code of ethics applicable to all Company personnel, including the principal executive officer, principal financial officer, principal accounting officer or controller, or other persons performing similar functions. Waivers of the Company’s code of ethics, entitled “Code of Corporate Conduct,” for directors or executive officers of the Company, if any, will be disclosed on the Company’s website. The Company has also adopted Corporate Governance Guidelines, which provide a framework for the conduct of the Board of Directors’ business. The Code of Corporate Conduct, the Corporate Governance Guidelines, as well as each of the charters of the Audit Review Committee, Compensation Committee and Nominating and Corporate Governance Committee, are posted on the Company’s website at http://www.nacco.com under the heading “Corporate Governance.” The Company will provide a copy of any of these documents, without charge, to any stockholder upon request. The information contained on the Company’s website is not incorporated by reference into this Proxy Statement, and you should not consider information contained on the Company’s website as part of this Proxy Statement.

 

The Audit Review Committee reviews all relationships and transactions in which the Company and its directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. The Company’s legal department is primarily responsible for the development and implementation of processes and controls to obtain information from the directors and executive officers with respect to related person transactions in order to enable the Audit Review Committee to determine, based on the facts and circumstances, whether the Company or a related person has a direct or indirect material interest in the transaction. As set forth in the Audit Review Committee’s charter, in the course of the review of a potentially material related person transaction, the Audit Review Committee considers:

 

 

Based on this review, the Audit Review Committee will determine whether to approve or ratify any transaction which is directly or indirectly material to the Company or a related person.

 

Any member of the Audit Review Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote with respect to the approval or ratification of the transaction; however, such director may be counted in determining the presence of a quorum at a meeting of the Audit Review Committee that considers the transaction.

 

Certain Business Relationships

 

Dennis W. LaBarre, a director of the Company and its principal subsidiaries, is a partner in the law firm of Jones Day. Such firm provided legal services on behalf of the Company and its principal subsidiaries during 2006 on a variety of matters, and it is anticipated that such firm will provide such services in 2007. The fees for the legal services rendered to the Company by Jones Day approximated $6.6 million for the year ended December 31, 2006. A significant portion of these fees were primarily as a result of legal fees incurred in connection with a transaction in 2006 involving Hamilton Beach/Proctor-Silex. The fees for the legal services rendered to the Company by Jones Day were substantially less than 2% of Jones Day’s annual gross revenues for 2006. Mr. LaBarre does not receive any direct compensation from legal fees paid by the Company to Jones Day and these legal fees do not provide any material indirect compensation to Mr. LaBarre.

 

J.C. Butler, Jr., an executive officer of the Company, is the son-in-law of Alfred M. Rankin, Jr. In 2006, Mr. Butler received total compensation from the Company of $556,017, which includes annual compensation, long-term compensation and all other compensation.

 

Report of the Audit Review Committee

 

The Board of Directors adopted a written Audit Review Committee Charter in 2000. An amended and restated Audit Review Committee Charter was adopted in 2007.

 

The Audit Review Committee has reviewed and discussed with the Company’s management and Ernst & Young LLP, the Company’s independent registered public accounting firm for 2006, the audited financial statements of the Company contained in the Company’s Annual Report to Stockholders for the year ended December 31, 2006. The Audit Review Committee has also discussed with the Company’s independent registered public accounting firm the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1 AU Section 380), as adopted by the Public Company Accounting and Oversight Board in Rule 3200T.

 

The Audit Review Committee has received and reviewed the written disclosures and the letter from Ernst & Young LLP required by Independence Standards Board Standard No. 1 (titled, “Independence Discussions with Audit Committees”), as adopted by the Public Company Accounting and Oversight Board in Rule 3600T, and has discussed with Ernst & Young LLP its independence.

 

Based on the review and discussions referred to above, the Audit Review 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 the fiscal year ended December 31, 2006, filed with the SEC.

 

Director Compensation

 

The following table sets forth all compensation of each director for services as directors to the Company and its subsidiaries for 2006, other than Alfred M. Rankin, Jr. In addition to being a director, Mr. Rankin is also the President and Chief Executive Officer of the Company. Mr. Rankin does not receive any compensation for his services as a director. Mr. Rankin’s compensation for services as an officer of the Company is shown in the Summary Compensation Table on page 31.

 

DIRECTOR COMPENSATION
For Fiscal Year Ended December 31, 2006

 

 

 

 

 

Description of Material Factors Relating to the Director Compensation Table

 

During 2006, each director who was not an officer of the Company or its subsidiaries received the following compensation for service on the Board of Directors and on subsidiary boards of directors:

 

 

The retainers are paid quarterly in arrears and the meeting fees are paid following each meeting. Each director is also reimbursed for expenses incurred as a result of attendance at meetings. The Company also occasionally makes its aircraft available to directors for attendance at meetings of the Company and subsidiary boards of directors.

 

Under the Non-Employee Directors’ Plan, each director who was not an officer of the Company or its subsidiaries received $30,000 of his annual retainer in shares of Class A Common, although any fractional shares were paid in cash. The actual number of shares of Class A Common issued to a director is determined by taking the dollar value of the portion of the $30,000 retainer that was earned by the director each quarter and dividing it by the average closing price of shares of Class A Common on the New York Stock Exchange for each week during such quarter. These shares are fully vested on the date of grant and the director is entitled to all rights of a stockholder, including the right to vote and receive dividends. However, the shares cannot be assigned, pledged, hypothecated or otherwise transferred by the director, voluntarily or involuntarily, other than:

 

 

The foregoing restrictions on transfer lapse upon the earliest to occur of:

 

 

In addition, each director has the right under the Non-Employee Directors’ Plan to receive shares of Class A Common in lieu of cash for up to 100% of the balance of his annual retainer, meeting attendance fees, annual committee member fees and any committee chairman’s fee. The number of shares issued is determined under the same formula stated above. However, these Voluntary Shares are not subject to the foregoing transfer restrictions.

 

Executive Compensation

 

Compensation Discussion and Analysis

 

The following describes the material elements of the compensation objectives and policies for the Company and its principal subsidiaries, NACCO Materials Handling Group, Inc., which is referred to as NMHG, Hamilton Beach/Proctor-Silex, Inc., which is referred to as Hamilton Beach/Proctor-Silex, and The North American Coal Corporation, which is referred to as North American Coal, and the application of these compensation objectives and policies to the Company’s executive officers, including those individuals named in the Summary Compensation Table on page 31. This discussion and analysis of the Company’s compensation program should be read in conjunction with the accompanying tables and text disclosing the compensation awarded to, earned by or paid to the Named Executive Officers. The rules regarding disclosure of executive compensation in the Company’s proxy statement were significantly revised by the SEC in 2006. In addition to new and different tables, greater emphasis is placed on providing discussion and analysis of the Company’s compensation practices. The content of the Company’s Compensation Committee Report also has been revised. Accordingly, the information in this Proxy Statement is not directly comparable to that in the Company’s 2006 proxy statement.

 

Executive Compensation Governance

 

The Compensation Committee of the Board of Directors and the Compensation Committees of the Company’s principal subsidiary boards of directors, which are referred to collectively as the Compensation Committee unless the context requires otherwise, establish and oversee the administration of the Company’s policies, programs and procedures for compensating its employees, including its executive officers. The Compensation Committee of the Board of Directors consists solely of independent non-employee directors. The Compensation Committee of each of the Company’s principal subsidiaries consists of the members of the Compensation Committee of the Board of Directors as well as Dennis W. LaBarre and Alfred M. Rankin, Jr. The Compensation Committee’s direct responsibilities include the review and approval of corporate goals and objectives relevant to compensation for the Chief Executive Officer and other executive officers, evaluation of the performance of the Chief Executive Officer and other executive officers in light of these performance goals and objectives, and determination and approval of the compensation levels of the Chief Executive Officer and other executive officers based on this evaluation. It also makes recommendations to the Board of Directors, where appropriate or required, and takes other actions with respect to all other compensation matters, including incentive compensation plans and equity-based plans.

 

The Compensation Committee receives assistance and advice from The Hay Group, an internationally-recognized compensation consulting firm. These consultants report to the Compensation Committee, although they also provide advice and discuss compensation issues directly with management.

 

Executive Compensation Policies and Objectives

 

The guiding principle of the executive compensation program of the Company and its subsidiaries has been the maintenance of a strong link between a Named Executive Officer’s compensation and individual performance and the performance of the Company or the subsidiary for which the Named Executive Officer has responsibility. Comprehensively defined “target total compensation” is established for each Named Executive Officer following rigorous evaluation standards to ensure internal equity. Such total compensation is targeted explicitly in dollar terms as the sum of base salary plus perquisites, short-term incentives and long-term incentives. It also includes qualified and nonqualified retirement benefits that are designed to provide a competitive rate of income during retirement with the opportunity for additional income if the Company attains superior results. While the Company offers opportunities for its Named Executive Officers to earn truly superior compensation for outstanding results, this link also includes significantly reduced compensation for weak results.

 

The primary objective of the Company’s compensation program is to reward Named Executive Officers with competitive total compensation for achievement of specific corporate and individual goals, while at the same time

making them long-term stakeholders in the Company. In years when the Company has weaker financial results, payouts under the incentive components of the Company’s compensation plans will be lower. In years when the Company has stronger financial results, payouts under the incentive components of the Company’s compensation plans will be greater. The Company believes that over time, the program will encourage Named Executive Officers to earn incentive pay significantly greater than 100% of target by delivering outstanding managerial performance.

 

Executive Compensation Methodologies

 

The Company seeks to achieve the foregoing policies and objectives through a mix of base salaries and incentive plans such that base salaries are at levels appropriate to allow the incentive plans to serve as significant motivating factors. The Compensation Committee carefully reviews each of these components in relation to the performance of the Company and its subsidiaries. Incentive-based compensation plans are designed to provide significant rewards for achieving or surpassing annual operating and financial performance objectives, as well as to align the compensation interests of the executive officers, including the Named Executive Officers, with the long-term interests of the Company’s stockholders by basing a substantial portion of the incentive compensation package upon return on total capital employed performance and book value appreciation rather than on cyclical movements in the Company’s stock price.

 

The Compensation Committee views the various components of compensation as related but distinct. While a significant percentage of total compensation is allocated to incentive compensation as a result of the philosophy discussed above, there is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. The Compensation Committee does not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. Rather, the Compensation Committee reviews information provided by The Hay Group to determine the appropriate level and mix of incentive compensation. Generally, and in fiscal 2006, the Compensation Committee granted a majority of total compensation to the Named Executive Officers in the form of incentive compensation.

 

Finally, in addition to providing other limited perquisites, target levels of perquisites for the executive officers are converted into fixed dollar amounts and paid in cash ratably throughout the year, an approach that recognizes that perquisites are largely just another form of compensation, albeit separate and distinct from salary and incentive compensation.

 

Components of the Named Executive Officers’ Compensation

 

The major portion of the Named Executive Officers’ compensation, the so-called “target total compensation,” includes the following components:

 

 

Retirement benefits, which consist mainly of the qualified plans and restoration nonqualified deferred compensation arrangements described below, and other benefits, such as health and welfare benefits, supplement target total compensation. In addition, from time to time, the Compensation Committee may award discretionary cash bonuses to executive officers.

 

The Compensation Committee reviews and takes into account all elements of executive compensation in setting policies and determining compensation levels. In this process, the Compensation Committee reviews “tally sheets” with respect to target total compensation for the Named Executive Officers and certain other executive officers, as well as other reported analyses regarding compensation of executive officers, in addition to consulting with The Hay Group. The Compensation Committee also takes into consideration additional factors, including the Named Executive Officer’s past performance relative to the performance targets that were set for each Named Executive Officer as well as general budget considerations impacting each subsidiary.

 

Base Salary

 

The Compensation Committee fixes an annual base salary intended to be competitive with the marketplace to aid in the recruitment and retention of talented executive officers. To assist the Compensation Committee in fixing base salary levels that are at adequately competitive levels, the Compensation Committee utilizes The Hay Group to analyze a survey of a broad group of domestic industrial organizations from all segments of industry ranging in size from under $150 million to over $5 billion in annual revenues. Organizations participate in the survey based upon their voluntary submission of data to the consultant, as well as their ability to pass the consultant’s quality assurance controls. For 2006, participants in The Hay Group’s All Industrials survey, which is used by the Compensation Committee as the principal comparator for purposes of setting target compensation, included 247 parent organizations and 335 independent operating units representing almost all areas of industry, including the light and heavy manufacturing, consumer products and mining segments.

 

Comparing positions of similar scope and complexity, the consultant derives a median salary level, which is referred to as the salary midpoint, for each executive officer position in the Company and its principal subsidiaries, including positions occupied by the Named Executive Officers. All information is analyzed on an industry-wide basis because the Compensation Committee has determined that there is no true peer group of companies that competes directly with the Company in all of its three principal businesses and that an industry-wide comparison provides for internal consistency across the subsidiaries. Using the salary midpoint information, the Compensation Committee approves for each executive officer, including the Named Executive Officers, (i) a salary midpoint, (ii) a salary range and (iii) a base salary based on the executive officer’s performance over the prior year and the executive officer’s prior year base salary relative to his/her salary midpoint.

 

The following table sets forth the salary midpoint, salary range and base salary for each Named Executive Officer for 2006:

 

 

 

 

Because the Company does not provide its executive officers, including the Named Executive Officers, with the perquisites commonly provided to executives in other companies, the Compensation Committee approves a target level of perquisites for each executive officer position, including those positions occupied by the Named Executive Officers, based on a percentage of salary midpoint for the position determined by The Hay Group to represent a reasonable competitive level of perquisites for the position. The Hay Group’s determinations were based on a study they conducted to determine, on average, the relationship between the value of an executive officer’s perquisites and the salary midpoint for the position. The table below sets forth the percentages of salary midpoints recommended by The Hay Group and adopted by the Compensation Committee for each of the Named Executive Officers. These amounts were paid in cash ratably throughout the year. This approach satisfied the Company’s

objective of providing competitive total compensation to its Named Executive Officers while recognizing that many perquisites are largely just another form of compensation.

 

 

 

 

Short-Term Incentive Compensation

 

The Company uses short-term cash incentives to provide awards for achieving annual operating and financial performance objectives. All of the short-term incentive plans for the Company and its subsidiaries follow the same basic pattern for award determination. Each short-term plan has a one-year performance period. A portion of the short-term award is based on performance against a target rate of return on total capital employed or economic value income and a portion is based on performance against specific business objectives in the annual operating plans of the subsidiaries.

 

At the beginning of 2006, the Compensation Committee adopted performance criteria and target performance levels for the Company and its subsidiaries upon which the short-term awards were based. The performance criteria and target performance levels were established within the Compensation Committee’s discretion, and generally were based upon management’s recommendations as to the performance objectives of the particular business for the year. For 2006, the performance criteria adopted under the short-term plans were as follows:

 

Performance against the ROTCE targets established by the Compensation Committee for the Company and each of the subsidiaries (excluding North American Coal) comprised a significant portion of the short-term plans for 2006. The ROTCE performance targets were not based on the Company’s or subsidiary’s annual operating plan, but instead reflected the Compensation Committee’s belief that the Company’s stockholders are entitled to a certain rate of return on total capital employed and that, as a measure of stockholder protection, performance against that rate of return should determine the payouts for a significant portion of the short-term incentive. North American Coal used economic value income as its performance criteria based on the Compensation Committee’s determination that it is a more accurate reflection of the rate of return in North American Coal’s business. The remaining portion of each short-term plan was based on performance criteria other than ROTCE adopted by the Compensation Committee after review of the key factors for each subsidiary’s business for 2006 as well as its long-term objectives. The subsidiaries’ performance on these criteria make up the remaining portion of the Company’s short-term plan. The Named Executive Officers could receive the maximum amount of their potential payouts under the short-term incentive plans only if the Company and/or the respective subsidiary met both their ROTCE and non-ROTCE performance targets. If the ROTCE performance targets were not met, the Named Executive Officers could still receive payouts if the other performance criteria, which are based on the subsidiary’s operating plans, were satisfied.

 

Target awards under the short-term incentive compensation plans for executive officers are established at specified percentages of each individual’s salary midpoint. For 2006, the short-term incentive plans were designed to provide target compensation to the Named Executive Officers of between 40% and 90% of salary midpoint, depending on the Named Executive Officer’s position. Generally, short-term incentive plan payments will not exceed 150% of the target amount.

 

Final awards for the Named Executive Officers under the short-term incentive plans are determined by adjusting the individual’s target award for performance by the business unit against the established targets and for performance by the individual against individual goals. The Compensation Committee, in its discretion, may also increase or decrease awards under the plans and may approve the payment of awards where business unit performance would otherwise not meet the minimum criteria set for payment of awards. Under the NACCO Industries, Inc. Supplemental Annual Incentive Compensation Plan, which is referred to as the NACCO Supplemental Short-Term Plan, however, there are no individual performance goals and the awards that are payable to the Named Executive Officers may only be decreased. The payments under all of the short-term incentive plans are calculated after the end of each year and are paid annually in cash. They are immediately vested when paid.

 

For 2006, payments were calculated in accordance with a formula that is based on the pre-established performance goals, which, as in prior years, excludes certain nonrecurring special charges, gains and other amounts. Pursuant to the terms of the short-term incentive compensation plans, the Compensation Committee is authorized to use negative discretion to reduce the amount of the awards that would otherwise be payable. In 2006, the Compensation Committee did use negative discretion to reduce the amount of the awards to the participants in the NACCO Industries, Inc. 2006 Annual Incentive Compensation Plan, which is referred to as the NACCO Short-Term Plan, as a result of a negative adjustment to a subsidiary performance measure.

 

The following table shows the short-term incentive plan target as a percentage of salary midpoint for each Named Executive Officer for 2006 as well as the actual short-term incentive plan payout as a percentage of salary midpoint for 2006.

 

 

 

 

Discretionary Cash Bonuses

 

The Compensation Committee has the authority to grant, and has from time to time granted, discretionary cash bonuses to the executive officers, including the Named Executive Officers, in addition to the short-term incentive plan compensation described above. The Compensation Committee uses discretionary cash bonuses to reward substantial achievement or superior service to the Company, particularly when such achievement or service cannot be reflected in the performance criteria. For 2006, the Compensation Committee granted discretionary bonuses to certain executive officers at Hamilton Beach/Proctor-Silex for superior service in connection with the Applica transaction; however, no Named Executive Officer received a discretionary cash bonus for 2006.

 

Long-Term Incentive Compensation

 

The purpose of the Company’s long-term incentive compensation plans is to enable executive officers to accumulate capital through future managerial performance, which the Compensation Committee believes contributes to the future success of the Company’s businesses. The long-term incentive plans at the Company and its subsidiaries generally require long-term commitment on the part of the Company’s executive officers, and cash withdrawals or stock sales are generally not permitted for a number of years. Rather, the awarded amount is effectively invested in the Company for an extended period to strengthen the tie between stockholders’ and the Named Executive Officers’ long-term interests.

 

The Compensation Committee believes that awards under the Company’s long-term incentive compensation plans promote a long-term focus on the profitability of the Company due to the five or ten year holding periods under the plans. Under the Company’s equity-based long-term incentive plans, although a recipient may receive a payout after the end of a base period and each consistent performance period (or after the award year under the supplemental long-term bonus plan), the recipient is effectively required to invest the non-cash portion of the payout in the Company for up to ten years. This is because, for example, for the Company’s long-term incentive plans, the shares distributed may not be transferred for ten years following the last day of the base period or award year, as applicable. During the restriction period, the ultimate value of a payout is subject to change based upon the value of the shares of Class A Common. The value of the award is enhanced as the value of the shares of Class A Common appreciates or is decreased as the value of the shares of Class A Common depreciates, and thus such awards provide the recipient with an incentive over the ten-year period to increase the value of the Company, to be reflected in the

increased value of the shares of Class A Common. As described below, awards under the subsidiary long-term incentive plans have holding periods of between five and ten years.

 

Long-Term Incentive Compensation for Employees of the Company.  The long-term incentive compensation plan for the Company, the NACCO Industries, Inc. Executive Long-Term Incentive Compensation Plan, which is referred to as the NACCO Long-Term Plan, uses the Company’s consolidated ROTCE as the performance criteria for payout under the plan. The consolidated ROTCE target is established by the Compensation Committee and is set at a level believed to provide an appropriate measure of stockholder protection. In general, each year participants are granted dollar-denominated target base period awards based on a performance period of one or more years and the potential opportunity to receive consistent performance award payouts based on performance periods of five years. Target base period awards are set based on a percentage of each participating executive officer’s salary midpoint and are adjusted as of the end of the base period based upon the Company’s consolidated ROTCE performance. Consistent performance awards are intended to supplement the base period awards paid to participants if the average consolidated ROTCE performance for the five-year period exceeds the consolidated ROTCE target. No consistent performance award is payable if the Company’s average consolidated ROTCE performance for the relevant five-year performance period is at or below the ROTCE target. The Compensation Committee has the authority under the NACCO Long-Term Plan to decrease awards to the Named Executive Officers and to adjust the incentive compensation measures and percentage allocation between the cash and stock portions of the awards in a manner that is permitted under Internal Revenue Code Section 162(m).

 

The following two types of awards were provided in 2006 under the NACCO Long-Term Plan:

 

 

Base Period Awards.  Participants are granted dollar-denominated target base period awards each year. Target base period awards are based on a percentage of the participating executive officer’s, including the participating Named Executive Officer’s, salary midpoint. For 2006, base period awards under the NACCO Long-Term Plan were designed to provide target compensation for each of Alfred M. Rankin, Jr. and Kenneth C. Schilling, the participating Named Executive Officers, of 205% and 30% of salary midpoint, respectively. The Compensation Committee based this target long-term incentive compensation on recommendations made by The Hay Group. These amounts are then adjusted by the Compensation Committee to 235.75% and 34.5%, respectively, to account for the immediately taxable nature of the distributions under the NACCO Long-Term Plan. Generally, base period award payments will not exceed 150% of the target base period award. However, in conjunction with a special long-term program adopted at NMHG, for 2006 the Compensation Committee adopted a special performance formula that provided for a payout of up to 250% of the target base period awards to participants in the NACCO Long-Term Plan upon the achievement of certain consolidated ROTCE thresholds. This increase in the potential awards under the NACCO Long-Term Plan was designed to provide an additional incentive for the Company to help NMHG meet its performance objectives.

 

Final base period awards for each individual are determined by adjusting the target award based on the Company’s actual performance against the established consolidated ROTCE target for the year. The final dollar-denominated base period award is paid to the executive officer in a combination of shares of Class A Common and cash, with the cash amount approximating the income tax withholding obligations of the executive officers on the shares. Approximately 60% to 65% of all of the awards are distributed in shares of Class A Common.

 

The actual number of shares of Class A Common issued to a participant is determined by taking the dollar value of the stock component of the base period award and dividing it by the average share price. For this purpose, the average share price is the lesser of:

 

 

The shares of Class A Common that are issued are subject to transfer restrictions, generally for a period of ten years. However, they are fully vested when granted and the executive officers have all of the rights of a stockholder, including the right to vote, upon receipt of the shares. The executive officers also have the right to receive dividends that are declared and paid after they receive the shares of Class A Common. The full amount of each final award, including the fair market value of the shares of Class A Common on the date of grant, is fully taxable to the participant.

 

For 2006, payments were calculated in accordance with a formula that is based on the pre-established performance goals, which, as in prior years, excludes certain nonrecurring special charges, gains and other amounts. Pursuant to the terms of the NACCO Long-Term Plan, the Compensation Committee is authorized to use negative discretion to reduce the amount of the awards that would otherwise be payable. In 2006, the Compensation Committee did not use negative discretion to reduce the amount of the awards.

 

Consistent Performance Awards.  If the Company’s average consolidated ROTCE performance for a five-year performance period exceeds the consolidated ROTCE target set at the beginning of the performance period, participants in the NACCO Long-Term Plan may receive a consistent performance award payout. The amount of any such consistent performance award payout would be determined under a formula established at the beginning of the five-year performance period that multiplies the participant’s base period award by a consistent performance factor of up to 50%, based on the amount that the Company’s average consolidated ROTCE performance over the five-year performance period exceeds the consolidated ROTCE target for the period. This amount would then be adjusted by a factor to adjust for inflation over the performance period. Consistent performance award payouts, if any, are paid in the same combination of cash and shares of Class A Common as described above for base period awards. However, the average share price for this purpose is equal to the average closing price on the New York Stock Exchange at the end of each week during the last year of the five-year performance period. No consistent performance award payouts have been paid under the NACCO Long-Term Plan since 2001 because the Company’s average consolidated ROTCE performance for the respective five-year periods has not exceeded the consolidated ROTCE target for such periods.

 

Additional Long-Term Compensation.  The Supplemental Long-Term Bonus Plan gives the Compensation Committee the flexibility to provide additional compensation to its executive officers for truly outstanding results and extraordinary personal effort. The amount of an award, if any, granted under the Supplemental Long-Term Bonus Plan is at the discretion of the Compensation Committee. Once the amount of an award is determined, the award will be paid partially in shares of Class A Common, the transfer of which is restricted for ten years, and partially in cash, based on the same formula used under the NACCO Long-Term Plan. Since the establishment of the Supplemental Long-Term Bonus Plan in 2006, no awards have been granted under the Supplemental Long-Term Bonus Plan.

 

Long-Term Incentive Compensation for Employees of the Company’s Subsidiaries.  The subsidiaries’ long-term incentive compensation plans are linked to future performance of the particular business unit. All awards under the long-term incentive compensation plans of the Company’s subsidiaries are paid in cash from the general assets of the applicable subsidiary.

 

HB/PS Long-Term Plan and NMHG Long-Term Plan.  Each of the Hamilton Beach/Proctor-Silex, Inc. Long-Term Incentive Compensation Plan, which is referred to as the HB/PS Long-Term Plan, and the NACCO Materials Handling Group, Inc. Long-Term Incentive Compensation Plan, which is referred to as the NMHG Long-Term Plan, has a one-year performance period. At the beginning of each year, each subsidiary’s Compensation Committee adopts performance criteria upon which awards under its long-term incentive compensation plan are based. For 2006, the performance criteria adopted under the long-term plans were as follows:

 

 

Participants are granted dollar-denominated target awards each year. Target awards are based on a percentage of each participating executive officer’s, including the participating Named Executive Officer’s, salary midpoint. For 2006, target awards were designed to provide target compensation for Michael J. Morecroft and

Michael P. Brogan of 105% of salary midpoint for 2006 under the HB/PS Long-Term Plan and 105% of salary midpoint for 2006 under the NMHG Long-Term Plan, respectively. The Compensation Committee based these percentages on recommendations made by The Hay Group. Generally, award payments will not exceed 150% of the executive officer’s target award. However, for 2006 the Compensation Committee adopted a special performance formula at NMHG that provided for a payout of up to 250% of target awards to participants in the NMHG Long-Term Plan upon the achievement of certain ROTCE thresholds. This increase in the potential awards under the NMHG Long-Term Plan was designed to provide an additional incentive for NMHG to meet its performance objectives.

 

Final awards for each individual are determined by adjusting the target award based on the applicable subsidiary’s actual performance against the established ROTCE target for the year. The Compensation Committee, in its discretion, may also increase or decrease awards under the plans and may approve the payment of awards where business unit performance would otherwise not meet the minimum criteria set for payment of awards.

 

For 2006, payments were calculated in accordance with a formula that is based on the pre-established performance goals, which, as in prior years, excludes certain nonrecurring special charges, gains and other amounts. Pursuant to the terms of the HB/PS Long-Term Plan and the NMHG Long-Term Plan, the Compensation Committee is authorized to use negative discretion to reduce the amount of the awards that would otherwise be payable under those plans. In 2006, the Compensation Committee did not use negative discretion to reduce the amount of the awards under these plans.

 

The final dollar-denominated awards are then converted to “book value units” by dividing the cash value of the award by the book value per nominal share of the applicable subsidiary on the grant date of the award. The book value units are credited to participants’ accounts under the plans and must generally be held for a period of five years. Book value units are fully vested when granted. The book value units are paid out, in cash, at the earlier of the five-year maturity date, retirement, death or disability. The payout amount is based on the book value of the subsidiary at the time of payment, except for certain participants whose book value is frozen as of the date of a termination of employment prior to retirement, death or disability. Subject to certain timing restrictions and other limitations, however, participants may elect to defer payment of book value units issued on or after January 1, 2005 until ten years after the grant date. Other deferral rules apply to book value units that were issued before that date. Payments for deferred book value units are generally based on the book value of the subsidiary at the time of payment, except for certain participants whose book value is frozen as of the date of a termination of employment prior to retirement, death or disability. Due to the nature of the NMHG Long-Term Plan and the HB/PS Long-Term Plan, the book value units awarded under the plans are described in both the Grants of Plan-Based Awards Table on page 34 and the Nonqualified Deferred Compensation Table on page 38.

 

NA Coal Long-Term Plan.  The North American Coal Value Appreciation Plan for Years 2006 to 2015, which is referred to as the NA Coal Long-Term Plan, was adopted effective as of January 1, 2006. The plan has a ten-year term and will be in effect from 2006 through 2015. The North American Coal Compensation Committee established net income appreciation goals that are based upon achieving year by year targets for each year during the ten-year term of the NA Coal Long-Term Plan. These goals are adjusted each year for inflation and to take into account any “new projects” initiated during the ten-year period. Once a calendar year is completed, the actual adjusted net income less a charge for the capital employed during that year is measured against the adjusted net income less a charge for the capital employed goal for that year to determine the annual net income appreciation of current and new projects, which is referred to as the Annual Factor. Also, actual cumulative adjusted net income less a charge for the capital employed for the term of the plan to date is measured against the cumulative adjusted net income less a charge for the capital employed goals to date to determine the cumulative net income appreciation of current and new projects, which is referred to as the Cumulative Factor, against the ten year target. The North American Coal Compensation Committee also sets a goal for the cumulative net income appreciation due to new projects over the ten-year term of the plan. At the end of each calendar year, the present value of expected cumulative net income appreciation of all new projects initiated during that year is measured against the cumulative new project goal to determine the net income appreciation due to the acquisition of new projects, which is referred to as the New Project

Factor. Finally, if it is determined in any year, which is referred to as an Adjustment Year, that a new project has provided significantly less net income appreciation than originally expected, then the amount of any prior award previously attributed to that project as the result of a prior year’s New Project Factor will reduce the New Project Factor in the Adjustment Year, which is referred to as the New Project Adjustment. If the New Project Adjustment is large enough, it is possible for participants to receive negative awards in a given year.

 

At the start of each year during the ten-year term of the NA Coal Long-Term Plan, participants are granted dollar denominated target awards. Target awards are based on a percentage of each participating executive officer’s, including the participating Named Executive Officer’s, salary midpoint. For 2006, the target award was designed to provide target compensation for Robert L. Benson of 45% of his salary midpoint and subsequently increased to 80% of his new salary midpoint on a prorata basis upon his promotion to President and Chief Executive Officer on March 1, 2006. The Compensation Committee based these percentages on recommendations made by The Hay Group.

 

Following the end of the year, final awards for each participant are determined by adjusting the target award by the Annual Factor, the Cumulative Factor and the New Project Factor. In addition, the New Project Adjustment is made, if applicable. The North American Coal Compensation Committee, in its discretion, may also increase or decrease awards under the plan and may approve the payment of awards where business unit performance would otherwise not meet the minimum criteria set for payment of awards.

 

For 2006, payments were calculated in accordance with a formula that is based on the pre-established performance goals, which, as in prior years, excludes certain nonrecurring special charges, gains and other amounts. Pursuant to the terms of the NA Coal Long-Term Plan, the Compensation Committee is authorized to use negative discretion to reduce the amount of the awards that would otherwise be payable. In 2006, the Compensation Committee did not use negative discretion to reduce the amount of the awards under the NA Coal Long-Term Plan.

 

The final awards are then credited to participants’ accounts under the NA Coal Long-Term Plan. Account balances are credited with interest based on the average monthly rate of ten-year U.S. Treasury Bonds. Participants become vested in their accounts at the rate of 20% per year, commencing with the first year in which they receive an award. However, participants are automatically 100% vested on the earliest of December 31, 2015 or termination of employment on account of death, disability or retirement at or after age 65 or retirement at or after age 55 with at least ten years of service. Vested amounts are payable in cash on the earlier of December 31, 2015 or the participant’s death, disability or retirement. Due to the nature of the NA Coal Long-Term Plan, the awards are described in both the Grants of Plan-Based Awards Table on page 34 and the Nonqualified Deferred Compensation Table on page 38.

 

Comparison of Long-Term Incentive Plan Targets and Payouts.  The following table shows the target award under the applicable long-term incentive plan as a percentage of salary midpoint for each Named Executive Officer for the performance period ending in 2006 as well as the corresponding actual payout of the award under the applicable long-term incentive plan as a percentage of salary midpoint for the performance period ending in 2006.

 

 

 

 

Retirement Plans

 

The material terms of the various retirement plans are described in the narratives following the Pension Benefits Table and the Nonqualified Deferred Compensation Table.

 

Defined Benefit Pension Plans.  The Company no longer provides any defined benefit pensions to the Named Executive Officers, although some of the previously frozen defined benefit pensions are currently increased by annual cost-of-living adjustments, which are referred to as COLAs.

 

Defined Contribution Plans.  The Company and its subsidiaries provide the Named Executive Officers and most other employees in the U.S. with defined contribution retirement benefits. Mandatory employer contributions under the defined contribution retirement plans are calculated under various formulas that are designed to provide employees with competitive retirement income. The Compensation Committee believes that this level of retirement benefits gives the Company and its subsidiaries the opportunity to attract and retain talented management employees at the senior executive level and below. Additional employer contributions may be made, depending on the performance of the Company and/or its subsidiaries. In general, if the Company and/or its subsidiaries perform well, the amount of the employees’ retirement income increases.

 

With the exception of a portion of the retirement benefits that are provided to Mr. Rankin and Mr. Brogan, the Named Executive Officers and other executive officers receive the same retirement benefits as all other similarly-situated employees. However, the benefits that are provided to the Named Executive Officers and other executive officers are provided under a combination of qualified and nonqualified defined contribution plans, while the benefits that are provided to other employees are provided generally under qualified retirement plans. The nonqualified defined contribution plans generally provide the executive officers with the retirement benefits that would have been provided under the qualified plans, but that cannot be provided due to various Internal Revenue Service regulations and limits.

 

The defined contribution retirement benefits generally consist of a combination of employee deferrals, employer matching contributions on the employee deferrals, minimum employer retirement contributions and additional employer profit sharing contributions that are made only if the Company and/or the subsidiaries meet certain pre-established performance criteria.

 

Each of the Company plans, NMHG plans and North American Coal plans contains the following three types of benefits: (i) 401(k) benefits, (ii) matching benefits and (iii) profit sharing benefits. The Hamilton Beach/Proctor-Silex plans contain 401(k) benefits and profit sharing benefits. However, matching benefits under the
Hamilton Beach/Proctor-Silex plans were frozen effective December 31, 2004 and replaced with an automatic non-elective employer 401(k) contribution when the Hamilton Beach/Proctor-Silex qualified plan became a “safe harbor” plan in 2005.

 

The “compensation” that is taken into account under the plans generally includes base salary and annual incentive payments and excludes most other forms of compensation, including long-term incentive compensation. However, for all benefits under the Hamilton Beach/Proctor-Silex plans, other than profit sharing benefits, annual incentive payments are also excluded.

 

Under the 401(k) portions of the plans, eligible employees may elect to defer up to 25% of compensation. Under the matching portion of the plans, eligible employees receive employer matching contributions on their deferrals in accordance with the following applicable matching contribution formula:

 

 

Under the profit sharing portion of the plans, eligible employees receive a profit sharing contribution equal to a specified percentage of compensation. The percentage varies, based on a formula that takes into account the employee’s age and compensation and, for all plans other than the North American Coal plans, the ROTCE of the Company and/or its subsidiaries. As applied to the Named Executive Officers in 2006, the range of profit sharing contributions under each applicable formula was:

 

 

All employees, including the Named Executive Officers, receive additional profit sharing contributions for compensation earned in excess of the Federal Social Security wage base, which was $94,200 in 2006, up to the applicable Internal Revenue Code limit of 5.7% of compensation.

 

The Named Executive Officers are 100% vested in their deferrals and in all matching contributions. They are also 100% vested in all benefits that are provided under the nonqualified plans. However, they become vested in their profit sharing contributions under the qualified plans at the rate of 20% for each year of service. All of the Named Executive Officers are 100% vested in all profit sharing benefits because each Named Executive Officer has been employed for at least five years.

 

Benefits under the qualified plans are generally payable at any time following a termination of employment. Participants have the right to invest their account balances among various investment options that are offered by the plans’ trustee. Participants can elect various forms of payment including lump sum distributions and installments.

 

Participants’ account balances in the nonqualified plans are credited with earnings during the year based on the rate of return of the NACCO Stable Asset Fund, which is one of the investment funds under the qualified plans. Following the end of the year, certain sub-accounts of participants who remain actively employed may be credited with additional earnings, based on a pre-determined formula that takes into account the ROTCE of the Company and/or its subsidiaries. The maximum earnings rate for this purpose is 14%.

 

Participants must generally elect a payment date for their nonqualified account balances when they first become a participant. In general, they can elect termination of employment or the date on which they attain a specified age. The nonqualified profit sharing benefits are generally payable at termination of employment. Each plan contains other specific withdrawal and distribution rules, as described in the narrative accompanying the Nonqualified Deferred Compensation Table on page 38. Most plans allow early distribution in the event of a hardship of the participant and, for certain sub-accounts, an in-service withdrawal, subject to a 10% penalty, for amounts credited before January 1, 2005. Different rules apply for amounts that are credited to the sub-accounts on or after January 1, 2005. For example, there is generally a six-month delay in payments made to “key employees” on account of a termination of employment for amounts credited after January 1, 2005.

 

Other Benefits

 

All salaried U.S. employees, including the Named Executive Officers, participate in a variety of health and welfare benefit plans that are designed to enable the Company to attract and retain its workforce in a competitive marketplace.

 

Perquisites and Other Personal Benefits

 

Although the Company provides limited perquisites and other personal benefits to certain executive officers, the Company does not believe these perquisites and other personal benefits constitute a material component of the executive officer’s compensation package.

 

Changes to Executive Compensation Program for 2006

 

No significant modifications were made to the executive compensation program during 2006 other than the following:

 

 

Tax and Accounting Implications

 

Deductibility of Executive Compensation

 

As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1 million that is paid to certain individuals. The NACCO Supplemental Short-Term Plan and the NACCO Long-Term Plan have been and will be used so that, together with steps taken by the Compensation Committee in the administration of these plans, payouts on awards made under these plans should not count towards the $1 million cap, which the law imposes for purposes of federal income tax deductibility. While the Compensation Committee intends generally to preserve the deductibility of compensation payable to the Company’s executive officers, as appropriate, deductibility will be only one among a number of factors considered in determining appropriate levels or modes of compensation. The Company intends to maintain the flexibility to compensate executive officers based upon an overall determination of what it believes is in the best interests of the Company and its stockholders.

 

Nonqualified Deferred Compensation

 

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. While the final regulations have not become effective yet, the Company believes it is operating in good faith compliance with the statutory provisions which were effective January 1, 2005.

 

Accounting for Stock-Based Compensation

 

Beginning on January 1, 2006, the Company began accounting for stock-based payments in accordance with the requirements of SFAS No. 123R. See Note 2 of the Company’s audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 for more information regarding the valuation of the Company’s equity awards in accordance with SFAS No. 123R.

Stock Ownership Guidelines

 

While the Company encourages the executive officers to own shares of Class A Common, it does not have any formal policy requiring the executive officers to own any specified amount of Class A Common. However, the shares of Class A Common granted to the Company’s executive officers under the NACCO Long-Term Plan generally must be held for a period of ten years. Executive officers of the subsidiaries do not have a similar requirement as they are compensated based on the performance of their own businesses and not on the performance of the Company.

 

Role of Executive Officers in Compensation Decisions

 

The Company’s management, in particular the Chief Executive Officer of the Company and the Chief Executive Officer of each subsidiary, reviews the Company’s goals and objectives relevant to the compensation of the Company’s executive officers. The Chief Executive Officer annually reviews the performance of each executive officer (other than the Chief Executive Officer, whose performance is reviewed by the Compensation Committee) and makes recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, to the Compensation Committee. In addition to the Chief Executive Officer’s recommendations, the Compensation Committee considers recommendations made by the Company’s independent outside compensation consultant, which bases its recommendations upon an analysis of similar positions at a broad range of domestic industries, as well as an understanding of the Company’s policies and objectives, as described above. The Compensation Committee can exercise its discretion in modifying any recommended adjustments or awards to executive officers. After considering these recommendations, the Compensation Committee determines the base salary and incentive compensation levels for the executive officers, including each Named Executive Officer.

 

2007 Compensation Program for Named Executive Officers

 

The Company’s compensation program for senior executives for 2007 will be structured in a manner similar to the 2006 program. Principal changes to be considered include any appropriate modifications to the survey of industrial organizations, the Company’s target direct remuneration structure and retirement programs in view of internal considerations as well as marketplace practice as reflected in analyses and general industry survey data.

 

Compensation Committee Interlocks and Insider Participation

 

Alfred M. Rankin, Jr., a director of the Company and its principal subsidiaries and a member of the compensation committees of the principal subsidiaries of the Company (but not of the Company), is Chairman, President and Chief Executive Officer of the Company.

 

Dennis W. LaBarre, a director of the Company and its principal subsidiaries and a member of the compensation committees of the principal subsidiaries of the Company (but not of the Company), is a partner in the law firm of Jones Day, which provides legal services to the Company and its subsidiaries. See “Certain Business Relationships” on page 12 for additional information.

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with the Company’s management. Based on the review and discussions referred to above, the Compensation Committee recommended to the 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.

 

Summary Compensation Table

 

The following table sets forth the compensation for services of the Named Executive Officers of the Company in all capacities to the Company and its principal subsidiaries, NMHG, Hamilton Beach/Proctor-Silex and North American Coal.

 

SUMMARY COMPENSATION TABLE
For Fiscal Year Ended December 31, 2006

 

 

 

 

 

 

The Company does not provide Mr. Rankin with any defined benefit pension benefits. Of the $571,030 in other compensation shown above for Mr. Rankin, $520,648 represents defined contribution retirement benefits earned in 2006. These benefits combined with the $995,961 in earnings shown in the Nonqualified Deferred Compensation Table on page 38 provided Mr. Rankin with total retirement benefits of $1,516,609 for 2006.

 

The $31,588 listed for Mr. Rankin’s perquisites and other personal benefits is the aggregate incremental cost to the Company of his personal use of the corporate aircraft to attend board meetings of other non-related for-profit companies. The Compensation Committee has determined that it is in the best interest of the Company and its stockholders that Mr. Rankin serve on these boards. The aggregate incremental cost is determined on a per flight basis and includes the cost of actual fuel used, the hourly cost of aircraft maintenance for the applicable number of flight hours, landing fees, trip related hanger and parking costs and crew expenses and other variable costs specifically incurred.

 

Mr. Benson’s perquisites and other personal benefits include spousal travel and meal expenses as well as transfer fees and monthly capital improvement fees for a country club membership that belongs to North American Coal and is utilized by Mr. Benson.

 

Amounts listed in the “Other” row include the annual employer-paid premiums paid for personal excess liability insurance and executive travel accident insurance, employer “flex credits,” non-discriminatory service awards and tax gross-ups on non-discriminatory benefits.

 

 

 

Grants of Plan-Based Awards

 

The following table sets forth information concerning awards granted to the Named Executive Officers for fiscal year 2006, and estimated payouts in the future, under the incentive compensation plans of the Company and its principal subsidiaries.

 

GRANTS OF PLAN-BASED AWARDS
For Fiscal Year Ended December 31, 2006

 

 

 

 

Description of Material Factors Relating to the Summary Compensation Table and Grants of Plan-Based Awards Table

 

None of the Named Executive Officers is a party to any written or unwritten employment agreement or arrangement.

 

The compensation of the Named Executive Officers consists of various components, including base salary, which includes a fixed dollar amount of cash in lieu of perquisites, short-term cash incentives and long-term equity incentives for employees of the Company or non-equity long-term incentives for employees of the Company’s subsidiaries. The Named Executive Officers also receive various retirement benefits. Each of these components is described in detail in the Compensation Discussion and Analysis which begins on page 16. Additional details of certain components are provided below.

 

Equity Compensation

 

NACCO Long-Term Plan

 

Certain executive officers of the Company participate in the NACCO Long-Term Plan. As described in more detail in the Compensation Discussion and Analysis beginning on page 22, two types of awards are provided under the plan: (1) base period awards that are based on a one-year performance period and (2) consistent performance awards that are based on a five-year performance period. The only equity awards that remain outstanding at the end of the fiscal year for purposes of this table are the potential consistent performance awards, which would not vest until payment after the end of the applicable performance period. The following table includes information relating to potential consistent performance awards that were previously communicated to the Named Executive Officers and that remain outstanding for purposes of this table at the end of 2006:

 

OUTSTANDING EQUITY AWARDS
At Fiscal Year Ended December 31, 2006

 

 

 

Base period awards under the NACCO Long-Term Plan are also paid partially in cash and partially in the form of fully vested shares of Class A Common. While the stock is fully vested at the time of grant, it is subject to transfer restrictions for a period of ten years from the date of grant. Refer to the Compensation Discussion and Analysis beginning on page 23 for a description of the transfer restrictions applicable to the shares of Class A Common issued under the NACCO Long-Term Plan. The following table reflects the actual vested base period awards that were granted and paid for in 2006:

 

STOCK VESTED

As of Fiscal Year Ended December 31, 2006

 

 

Stock Options

 

The Company did not grant any stock options under the Company’s 1975 Stock Option Plan or 1981 Stock Option Plan during the fiscal year ended December 31, 2006 to any person, including the Named Executive Officers. The Company has not granted stock options since 1989 in the belief that the likely value realized is unclear both in amount and in its relationship to performance. At December 31, 2006, there were no outstanding options to purchase shares of Class A Common or Class B Common.

 

Severance and Change in Control Arrangements

 

There are no written or unwritten arrangements that provide for payments at, following or in connection with the resignation, severance, retirement or other termination of any Named Executive Officer, a change in responsibilities or a change in control of the Company or any of its subsidiaries, other than (i) severance pay and continuation of certain health benefits provided under severance pay plans that are generally available to all salaried employees of the Company and its subsidiaries and (ii) benefits that are provided under the retirement plans, incentive compensation plans and nonqualified deferred compensation plans at termination of employment that are described elsewhere in this document. Those benefits are not increased, accelerated or changed in any way on account of any resignation, retirement or other termination of the Named Executive Officer or any change in control.

 

Nonqualified Deferred Compensation Benefits

 

The following table sets forth information concerning benefits earned by, and paid to, the Named Executive Officers under the nonqualified defined contribution, deferred compensation plans of the Company and its subsidiaries.

 

NONQUALIFIED DEFERRED COMPENSATION
For Fiscal Year Ended December 31, 2006

 

 

 

 

 

General Description of Nonqualified Deferred Compensation Plans

 

Refer to the “Retirement Plans” portion of the Compensation Discussion and Analysis beginning on page 27 for a detailed discussion of the terms of the nonqualified deferred compensation plans of the Company and its subsidiaries.

 

Specific Nonqualified Deferred Compensation Plan Rules

 

The following is a summary of special rules that apply under each nonqualified deferred compensation plan.

 

NACCO Unfunded Plan

 

The original payment date election for participants’ excess 401(k) and matching sub-accounts is irrevocable. Participants may elect to receive their excess 401(k) and matching sub-accounts in the form of a lump sum or ten or fewer annual installments. The form of payment election may be changed, subject to timing and other restrictions. Excess profit sharing benefits are automatically paid in the form of a lump sum payment at termination of employment.

 

Rankin Retirement Plan

 

In addition to the restoration profit sharing benefits described in the Compensation Discussion and Analysis, the Rankin Retirement Plan also provides a transitional benefit. The transitional benefit is a specified dollar amount that is credited annually to Mr. Rankin’s account. The amount of the benefit was $34,900 in 1994 and is increased each year by 4% over the amount contributed for the prior year. For 2006, the amount of the transitional benefit was $55,874.

 

Amounts that were credited to Mr. Rankin’s account under the Rankin Retirement Plan before January 1, 2005 are payable in the form of ten annual installments beginning the January 1st after the earlier of the year he terminates employment or reaches age 70. He may change the form of payment to a lump sum or nine or fewer annual installments, subject to timing and other restrictions. He may also elect to withdraw all or part of the amounts credited to his account before January 1, 2005 at any time, subject to a 10% penalty.

 

Amounts that are credited to Mr. Rankin’s account on or after January 1, 2005 are payable in the form of ten annual installments beginning the January 1st following the year he reaches age 70. He may change the form of payment to a lump sum or nine or fewer annual installments, subject to timing and other restrictions.

 

NMHG Unfunded Plan

 

From August 1, 1999 through September 20, 2002, Mr. Brogan was not eligible to participate in a qualified 401(k) plan. Instead, he deferred a portion of his salary and bonus under the NMHG Unfunded Plan. Effective October 1, 2002, Mr. Brogan became a participant in the qualified 401(k) plan and became eligible for excess 401(k), excess matching and excess profit sharing benefits under the NMHG Unfunded Plan.

 

The original payment date election for participants’ excess deferral, excess 401(k) and matching sub-accounts is irrevocable. Participants may elect to receive these sub-accounts in the form of a lump sum or ten or fewer annual installments. The form of payment election may be changed by the participants, subject to timing and other restrictions.

 

Participants were required to make an irrevocable payment election for excess profit sharing benefits credited before 2005. Those amounts must either be paid in a lump sum at termination of employment or at the same time and in the same form as the pre-2005 excess 401(k) and matching benefits. Excess profit sharing benefits that are credited to the account on or after January 1, 2005 are automatically paid in a lump sum at termination of employment.

 

Under the NMHG Unfunded Plan, participants are also permitted to contribute the value of pre-2005 awards under the NMHG Long-Term Plan (and predecessor plans) that have been held in those plans for a period of ten years (or until retirement, if earlier). These amounts are credited to a separate sub-account under the NMHG nonqualified plan and are credited with interest using the ten-year U.S. Treasury Bond rate plus 2%. This sub-account is subject to the same payment rules described above for excess 401(k) benefits.

 

HB/PS Unfunded Plan

 

Effective January 1, 2005, the frozen excess matching portion of the HB/PS Unfunded Plan was replaced with an excess retirement portion. Eligible employees receive a contribution from Hamilton Beach/Proctor-Silex equal to 3% of compensation, less the amount that is permitted to be contributed under the qualified Hamilton Beach/Proctor-Silex plan under IRS regulations.

 

Participants must elect a payment date for their excess 401(k), frozen matching and excess retirement sub-accounts when they first become a participant. In general, they can elect termination of employment or the date on which they attain a specified age. Once made, the payment date election can be changed by the participants in limited circumstances, subject to timing and other restrictions. Participants may elect to receive their benefits in the form of a lump sum or ten or fewer annual installments. The form of payment election may be changed by the participants, subject to timing and other restrictions.

 

In general, pre-2005 excess profit sharing benefits are automatically paid in the form of a lump sum payment at the same time that the qualified profit sharing benefits are paid and post-2004 excess profit sharing benefits are automatically paid in the form of a lump sum payment at termination of employment.

 

NA Coal Unfunded Plan

 

The original payment date election for participants’ excess 401(k) and matching sub-accounts is irrevocable. Participants may elect to receive their excess 401(k) and matching sub-accounts in the form of a lump sum or ten or fewer annual installments. The form of payment election may be changed by the participants, subject to timing and other restrictions.

 

Excess profit sharing benefits are automatically paid in the form of a lump sum payment. Pre-2005 amounts are paid at the same time the qualified profit sharing benefits are paid. Participants may irrevocably elect to receive post-2004 amount at termination of employment or upon the attainment of a specified age.

 

NA Coal Frozen Long-Term Plan

 

Certain employees of North American Coal are also eligible to participate in the NA Coal Frozen Long-Term Plan. All account balances were frozen as of January 1, 2006, except for continued interest credits. Interest is

calculated using the ten-year U.S. Treasury Bond rate and is credited to the frozen accounts as of the end of each calendar year.

 

The accounts vest at the rate of 20% for each year of service starting with the year in which a participant receives an initial target award under the plan. However, participants become 100% vested in the event of (i) death or disability while employed; (ii) remaining in the employment of employers until December 31, 2009; or (iii) retirement, which for this purpose is defined as termination of employment at or after age 55 with at least ten years of service or termination at or after age 65. Mr. Benson is 100% vested in his account balance. In general, the account balances are automatically paid in the form of a lump sum on the earliest to occur of December 31, 2009 or termination of employment on account of death, disability or retirement (with a six-month delay for certain key employees).

 

Defined Benefit Pension Plans

 

The following table sets forth information concerning defined benefit pension benefits earned by, and paid to, the Named Executive Officers under the qualified and nonqualified pension plans of the Company and its subsidiaries.

 

PENSION BENEFITS
As of Fiscal Year Ended December 31, 2006

 

 

 

 

All Pension Plans

 

The Company and its subsidiaries no longer provide defined benefit pension benefits for most employees, other than certain non-executive employees of the project mining subsidiaries of North American Coal, collectively bargained employees of NMHG in the U.S., employees of NMHG in the U.K. who were hired before 1994 and employees of a Canadian subsidiary of Hamilton Beach/Proctor-Silex. The pension benefits of all other employees were frozen at various times from 1993 to 2004. Certain groups of employees currently receive cost-of-living adjustments or COLAs on their frozen pension benefits. The COLAs for U.S. employees end at termination of employment (or, if earlier, when the applicable plan is amended or terminated).

 

Pensions under the U.S. plans are based on the executives’ earnings, which generally include only base salary and annual incentive compensation payments and which exclude all other forms of compensation, including severance payments, relocation allowances and other similar fringe benefits.

 

Pension benefits under most of the plans are 100% vested after 5 years of service. However, (i) cash balance benefits provided to certain NMHG employees vest at the rate of 20% per year of service, (ii) benefits under the UK Plan vest after 2 years of service and (iii) benefits under the nonqualified pension plan for U.S. employees of the Company and North American Coal, which is referred to as the SERP, and the UK Excess Plan are immediately 100% vested.

 

The normal form of payment under all U.S. plans is a single life annuity for unmarried participants and a 50% joint and survivor annuity for married participants. Other forms of annuity payments are also available. If a participant elects a joint and survivor annuity form of benefit, the amount of the benefit is reduced to reflect the survivorship protection. Lump sum benefit payments are available for (i) cash balance benefits offered by NMHG and Hamilton Beach/Proctor-Silex, (ii) a frozen prior plan benefit offered to certain salaried employees of NMHG and (iii) benefits under the UK Plan and the UK Excess Plan. Lump sum benefits are calculated using legally or contractually required interest rates and mortality assumptions.

 

The amounts shown above were determined as of September 30, 2006, which is the measurement date for pension benefits that is used in the Company’s financial statements. In determining the present value of the pension benefits for the U.S. plans and the UK Excess Plan in the Pension Table shown above, the following material assumptions were used: