SONOCO PRODUCTS COMPANY

 

1 NORTH SECOND STREET
HARTSVILLE, SOUTH CAROLINA 29550 USA

 

March 12, 2009

 

To Our Shareholders:

 

You are cordially invited to attend our Annual Shareholders’ Meeting to be held at the Center Theater, 212 North Fifth Street, Hartsville, South Carolina, on Wednesday, April 15, 2009, at 11:00 a.m. (Eastern time).

 

We have enclosed a Notice of 2009 Annual Meeting of Shareholders and Proxy Statement that cover the details of matters to be presented at the meeting.

 

In addition to acting on the matters listed in the Notice of Annual Meeting of Shareholders, we will discuss the Company’s progress, and you will be given an opportunity to ask questions of general interest to all shareholders.

 

We have also enclosed a copy of our 2008 Annual Report, which reviews the Company’s events of the past year, and discusses strategy and the outlook for the future (or we delivered one copy of the Annual Report for all shareholders at your address).

 

We hope that you will come to the 2009 Annual Meeting of Shareholders in person; however, even if you plan to attend, we strongly encourage you to complete the enclosed proxy card or brokers’ voting instruction form and return it in the enclosed business reply envelope. If you are a shareholder of record, you can also vote by telephone (if you live in the United States or Canada) or via the Internet. Instructions are shown on your proxy card. If you are a shareholder of record and for any reason you desire to revoke your proxy, you can do so at any time before the voting. Your vote is important and will be greatly appreciated.

 

 

Harris E. DeLoach, Jr.
Chairman, President &
Chief Executive Officer

 

NOTICE OF 2009 ANNUAL

MEETING OF SHAREHOLDERS

and

PROXY STATEMENT

 

 

TABLE OF CONTENTS

 

SONOCO PRODUCTS COMPANY

 

1 NORTH SECOND STREET

HARTSVILLE, SOUTH CAROLINA 29550 USA

 

 

 

By order of the Board of Directors,

 

Ritchie L. Bond
Secretary

 

March 12, 2009

 

SONOCO PRODUCTS COMPANY

 

1 NORTH SECOND STREET
HARTSVILLE, SOUTH CAROLINA 29550 USA

 

 

 

We are sending you these proxy materials in connection with the solicitation by the Board of Directors of Sonoco Products Company of proxies to be used at the Annual Meeting of Shareholders (“Annual Meeting”) to be held on Wednesday, April 15, 2009, at 11:00 a.m. (Eastern time) at The Center Theater, 212 North Fifth Street, Hartsville, S.C., and at any adjournment or postponement of the meeting. The terms “we,” “our,” “us,” “Sonoco” and “the Company” all refer to Sonoco Products Company. The proxy materials are first being mailed on or about March 12, 2009.

 

Who May Vote

 

You will only be entitled to vote at the Annual Meeting if our records show that you were a record shareholder on February 20, 2009. At the close of business on February 20, 2009, a total of 99,789,952 shares of our common stock were outstanding and entitled to vote. Each share of common stock has one vote.

 

Voting

 

If your shares are held in street name by a broker, bank or other nominee, it will send you instructions that you must follow to have your shares voted at the Annual Meeting. If you hold your shares in your own name as a record shareholder, you may instruct the proxy agents how to vote your shares by completing, signing, dating and mailing the proxy card in the enclosed postage-paid envelope; by dialing the toll-free telephone number shown on your proxy card (if you live in the United States or Canada); or by accessing the Web site shown on your proxy card. Of course, if you are a record shareholder, you can always attend the meeting and vote your shares in person.

 

If you wish to attend the meeting in person, you may obtain directions to our office at our Web site: www.sonoco.com/sonoco/Home/About+Us/cor_directions.htm. The site of the annual meeting is only a short distance from the Sonoco office and directions from the office to the annual meeting site may be obtained at the reception desk.

 

The proxy agents will vote your shares as you instruct. If you are a record shareholder and you sign and return your proxy card without giving instructions, the proxy agents will vote your shares FOR each person named in this Proxy Statement as a nominee for election to the Board of Directors and FOR ratification of the selection of PricewaterhouseCoopers LLP (“PwC”) as our independent registered public accounting firm for the fiscal year ending December 31, 2009. The proxy agents will vote according to their best judgment on any other matter that properly comes before the Annual Meeting. At present, the Board of Directors does not know of any other such matters.

How to Revoke Your Proxy

 

You may revoke your proxy at any time before it is voted. If you hold your shares in your own name as a record shareholder, you may revoke your proxy in any of the following ways:

 

 

Subsequent voting by telephone or via the Internet cancels your previous vote. If you are a shareholder of record, you may also attend the meeting and vote in person, in which case your proxy vote will not be used.

 

If your shares are held in street name by a broker, bank or other nominee, you may revoke your voting instructions by submitting new voting instructions to the broker or other nominee who holds your shares.

 

How Votes Will Be Counted

 

The Annual Meeting will be held if a majority of the outstanding shares of common stock entitled to vote (a “quorum”) is represented at the meeting. If you have submitted valid proxy instructions or are a record shareholder and attend the meeting in person, your shares will be counted for the purpose of determining whether there is a quorum, even if you wish to abstain from voting on some or all matters introduced. “Broker non-votes” also count in determining whether a quorum is present. A “broker non-vote” occurs when a broker, bank or nominee who holds shares for a beneficial owner attends the meeting in person or by proxy but does not vote on a particular proposal because the broker, bank or nominee does not have discretionary voting power for that proposal and has not received voting instructions from the beneficial owner.

 

If your shares are held in street name by a broker, the broker is permitted to vote your shares on the election of directors and the ratification of PWC as our independent auditor even if the broker does not receive voting instructions from you.

 

If a quorum is present at the Annual Meeting, directors will be elected by a plurality of the votes cast by shares present and entitled to vote at the Annual Meeting. “Plurality” means that, if there were more nominees than positions to be filled, the persons who received the largest number of votes would be elected. Because there are the same number of nominees as positions to be filled, we expect all nominees to be elected. Votes that are withheld or that are not voted in the election of directors will have no effect on the outcome of the election. Cumulative voting is not permitted.

 

Any other matter, including ratification of the selection of PWC as our independent registered public accounting firm, that may be brought before the meeting will be approved if the votes cast in favor of the matter exceed the votes cast against the matter. Votes that are withheld or shares that are not voted will have no effect on the outcome of such matters.

 

Cost of this Proxy Solicitation

 

We will pay the cost of this proxy solicitation. In addition to soliciting proxies by mail, we expect that some of our officers and regular employees will solicit proxies by telephone, fax, email or personal contact. None of these officers or employees will receive any additional or special compensation for doing this.

 

The Board of Directors has fixed the number of directors of the Company at 12. At our Annual Meeting, five directors will be elected. Dr. P.L. Davies and Messrs. H.E. DeLoach, Jr., E.H. Lawton III, and J.E. Linville have been nominated to hold office for the next three years, their terms expiring at the Annual Shareholders’ Meeting in 2012, or when their successors are duly elected and qualify to serve. Mr. J.M. Micali has been nominated to hold office for the next two years, his term expiring at the Annual Shareholders’ Meeting in 2011, or when his successor is duly elected and qualifies to serve. Mr. Micali is nominated for a two year term in order to equalize the size of the Board classes as required by our bylaws. The proxy agents intend to vote FOR the election of the five persons named above unless you withhold authority to vote for any or all of the nominees. The Board of Directors recommends that you vote FOR each nominee.

 

 

Members of the Board of Directors whose terms of office will continue until our Annual Shareholders’ Meeting in 2010 are:

 

Members of the Board of Directors whose terms of office will continue until our Annual Shareholders’ Meeting in 2011 are:

 

 

Our listing agreement with the New York Stock Exchange requires that at least a majority of the members of our Board of Directors be independent. Under the Exchange’s standards, “independent” means that a director has been determined by the Board to have no material relationship with us (either directly, or indirectly through an immediate family member or as a partner, shareholder or officer of an organization that has a relationship with us). To assist us in making these determinations we have adopted the following guidelines, which are also the guidelines set forth in the New York Stock Exchange Listing Standards.

 

A director will not be considered independent if:

 

 

The following relationships will not be considered to be material relationships that would impair a director’s independence:

 

 

Based on these criteria, our Board of Directors has determined that the following directors, who constitute a majority of the Board, are independent:

 

J.L. Coker, P.L. Davies, C.C. Fort, E.H. Lawton, III, J.E. Linville, J.M. Micali, J.H. Mullin, III, L.W. Newton, M.D. Oken, P.R. Rollier and T.E. Whiddon. C.J. Bradshaw, who retired from the Board of Directors on July 15, 2008, was also independent.

 

Our non-management directors meet at regularly scheduled executive sessions without management present. Four such meetings were held during 2008. The presiding director for each meeting is elected by those directors in attendance at that meeting. Shareholders and other interested parties may communicate with the non-management (or independent) directors by writing to Non-Management (or Independent) Directors, c/o Corporate Secretary, Sonoco Products Company, 1 North Second Street, Hartsville, SC 29550 USA or by email to CorporateSecretary@sonoco.com.

 

We have adopted Corporate Governance Guidelines and a Code of Business Conduct and Ethics for our directors, officers and employees. Copies of these Governance Guidelines and the Code of Business Conduct are available through our Web site at www.sonoco.com. Printed versions are available to our shareholders on request to the Corporate Secretary, Sonoco Products Company, 1 North Second Street, Hartsville, SC 29550 USA or through email to CorporateSecretary@sonoco.com.

 

Our Corporate Governance and Nominating Committee recommends to our Board of Directors nominees to fill vacancies on the Board of Directors as they occur, and recommends candidates for election as directors at Annual Meetings of Shareholders. Such candidates are routinely identified through personal and business relationships and contacts of the directors and executive officers.

 

In recommending candidates, the Corporate Governance and Nominating Committee evaluates such factors as it deems appropriate based on our current needs. These factors may include diversity, age, skills such as understanding of appropriate technologies and general finance, decision-making ability, interpersonal skills, experience with businesses and other organizations of comparable size, and the inter-relationship between the candidate’s experience and business background and other Board members’ experience and business background. Additionally, candidates for director should possess the highest personal and professional ethics, and they should be committed to the long-term interests of the shareholders.

 

The Corporate Governance and Nominating Committee will consider director candidates recommended by shareholders, if the shareholders comply with the following requirements. If you wish to recommend a director candidate to the Corporate Governance and Nominating Committee for consideration as a Board of Directors’ nominee, you must submit in writing to the Corporate Governance and Nominating Committee your recommended candidate’s name, a brief resume setting forth the recommended candidate’s business and educational background and qualifications for service, and a notarized consent signed by the recommended

candidate stating the recommended candidate’s willingness to be nominated and to serve. This information must be delivered to the Chair of the Corporate Governance and Nominating Committee at the Company’s address and must be received no later than January 5 in any year to be considered by the Committee as a potential Board of Directors’ nominee. The Corporate Governance and Nominating Committee may request further information if it determines a potential candidate may be an appropriate nominee. Director candidates recommended by shareholders that comply with these requirements will receive the same consideration that the Committee’s other candidates receive.

 

Director candidates recommended by shareholders will not be considered by the Corporate Governance and Nominating Committee for election at an annual meeting unless the shareholder recommendations are received no later than January 5 of the year of the meeting. In addition to making such recommendations, shareholders have the right to nominate candidates for election as directors at an annual meeting if they make a written nomination at least 60 days prior to the meeting. Any such nomination should be submitted to our Corporate Secretary at 1 North Second Street, Hartsville, SC 29550 USA. No such nominations have been made for this Annual Meeting.

 

Any shareholder or other interested person who wishes to send communications to any member of the Board of Directors should mail such communications addressed to the intended recipient by name or position in care of: Corporate Secretary, Sonoco Products Company, 1 North Second Street, Hartsville, SC 29550 USA or by email to CorporateSecretary@sonoco.com. Upon receipt of any such communications, the Corporate Secretary will determine the identity of the intended recipient and whether the communication is an appropriate shareholder communication. The Corporate Secretary will send all appropriate shareholder communications to the intended recipient. An “appropriate shareholder communication” is a communication from a person claiming to be a shareholder in the communication the subject of which relates solely to the sender’s interest as a shareholder and not to any other personal or business interest.

 

In the case of communications addressed to the Board of Directors, the Corporate Secretary will send appropriate shareholder communications to the Chair of the Corporate Governance and Nominating Committee. In the case of communications addressed to the independent or non-management directors, the Corporate Secretary will send appropriate shareholder communications to the Chair of the Corporate Governance and Nominating Committee. In the case of communications addressed to committees of the Board, the Corporate Secretary will send appropriate shareholder communications to the Chair of such committee.

 

The Corporate Secretary is required to maintain a record of all communications received that were addressed to one or more directors, including those determined not to be appropriate shareholder communications. Such record will include the name of the addressee, the disposition by the Corporate Secretary and, in the case of communications determined not to be appropriate, a brief description of the nature of the communication. The Corporate Secretary is required to provide a copy of any additions to the record to the Chair of the Corporate Governance and Nominating Committee quarterly.

 

During 2008, our Board of Directors held four regularly scheduled meetings and four special meetings to review significant developments affecting us and to act on matters requiring the Board of Directors’ approval. During 2008, all directors attended 75% or more of the aggregate number of meetings of the Board of Directors and committees of which they were members.

 

We encourage, but do not require, our directors to attend the Annual Meeting of Shareholders. In 2008, all thirteen directors attended the Annual Meeting.

 

To assist it in performing its duties, the Board of Directors has established the six committees discussed below. All committees operate pursuant to written charters. The charters are available to shareholders through the Investor Relations page of our Web site at www.sonoco.com. These charters are also available in print to any shareholder upon request to the Corporate Secretary, Sonoco Products Company, 1 North Second Street, Hartsville, SC 29550 USA or through email to CorporateSecretary@sonoco.com. The Board of Directors has determined that each member of the Audit, Corporate Governance and Nominating, and Executive Compensation committees is independent, as defined in the New York Stock Exchange’s listing standards.

 

 

The Executive Compensation Committee oversees administration of our executive officer compensation programs and sets compensation for the CEO, CFO and other executive officers. Its specific functions are described above.

 

Executive Compensation Committee Processes and Procedures

 

The Executive Compensation Committee does not delegate its decision-making authority relating to executive compensation. Except for the CEO, the role of executive officers in determining executive compensation is primarily advisory in nature, especially with regard to the structure and composition of the compensation program. Each executive officer may make recommendations with regard to the size of awards for persons who report directly to him or her, but the CEO makes the final decision as to recommendations submitted to the Committee for their consideration. The CEO attends Committee meetings, but is not present when his own compensation is discussed. The Committee has sole responsibility for determining the compensation for the CEO and for approving all other executive compensation.

 

The Committee has sole authority to hire and dismiss a compensation consultant to act as its advisor. Information about the Committee’s compensation consultant, its role in advising the Committee, and its relationship with management and executive officers is set forth under the captions “Management Compensation — Compensation Discussion and Analysis — Relationship with Executive Compensation Consultant” and “— Role of Executive Officers in Determining Executive Compensation” on Page 36.

 

Members of the Executive Compensation Committee during the year ended December 31, 2008 were C.J. Bradshaw, P.L. Davies, C.C. Fort, J.M. Micali, J.H. Mullin, III, and M.D. Oken.

 

Mr. Micali was the Chairman and President of Michelin North America until his retirement in August 2008. In addition, the brother of our Director P.R. Rollier is the Managing General Partner of Michelin Group, the owner of Michelin North America. Sonoco sold $321,000 in products and services to Michelin North America during 2008. All transactions were handled on a competitive basis.

 

Please see the disclosures about Messrs. Micali and Rollier under the caption “Compensation Committee Interlocks and Insider Participation”. Our management believes the prices and terms of the transactions reported above were comparable to those we could have obtained from other sources. We anticipate engaging in similar business transactions in 2009. The Board of Directors considered these relationships when making its determinations of independence.

 

George S. Hartley, our Assistant Treasurer, is married to Cynthia A. Hartley who is a Senior Vice President. Mr. Hartley had 2008 earnings of $163,000, and he received the usual employee benefits available to all employees at his level.

 

Related Party Transaction Approval Policy

 

The Board has adopted a written policy that any transaction or series of transactions in which Sonoco is a participant, for which the amount involved exceeds $120,000, and in which any related person will have a direct or indirect material interest must be approved by the Corporate Governance and Nominating Committee. The Board recognizes that such transactions may or may not be in the best interest of Sonoco and, as a result, empowers the Corporate Governance and Nominating Committee to evaluate all such related party transactions or series of transactions. The Committee is to approve only those transactions that it determines provide net economic value to us or where it is demonstrated to the satisfaction of the Committee that price, quality, service and other terms have been negotiated on an arms-length basis and are comparable to those available from unrelated third parties.

 

Our officers are required to notify the Committee of the proposed and ongoing related party transactions prior to each meeting of the Committee and provide the Committee with all relevant information necessary for the Committee’s consideration, including any information requested by the Committee.

 

For purposes of this policy, a “related party” is (1) any executive officer or director, (2) any nominee for director, (3) a beneficial owner of more than 5% of our voting securities, or (4) any immediate family member of an officer, director, nominee for director or greater than 5% beneficial owner. An “immediate family member” means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, or any person (other than a tenant or employee) sharing the household of an executive officer, director, nominee or greater than 5% beneficial owner.

 

We also require that each executive officer, director and director nominee complete an annual questionnaire and report all transactions with us in which such persons (or their immediate family members) had or will have a direct or indirect material interest (except for salaries, directors’ fees and dividends on our stock).

Management reviews responses to the questionnaires and, if any such transactions are disclosed, they are reviewed by the Corporate Governance and Nominating Committee as to directors and director nominees, or by the Audit Committee as to executive officers. Directors’ responses to the questionnaires are also reviewed annually by the Corporate Governance and Nominating Committee for the purpose of assessing independence under our Corporate Governance Guidelines and the New York Stock Exchange Listing Standards.

 

The types of transactions that have been reviewed in the past include the purchase and sale of goods and services from companies for which our directors serve as executive officers or directors, the purchase of financial services and access to lines of credit from banks for which our directors serve as executive officers or directors, and the employment of family members of executive officers or directors.

 

The following table shows information as of December 31, 2008, about persons known to us to be the beneficial owners of more than 5% of our common shares. This information was obtained from a Schedule 13G filed with the Securities and Exchange Commission by the entity named below, and we have not independently verified it.

 

 

 

 

Our directors and executive officers are required to file reports with the Securities and Exchange Commission and the New York Stock Exchange showing the number of shares of any class of our equity securities they owned when they became a director or executive officer, and, after that, any changes in their ownership of our securities. These reports are required by Section 16(a) of the Securities Exchange Act of 1934.

 

Based on a review of Section 16(a) reports and any written representations made to us, it appears that all such filings for 2008 were made in a timely manner with the following exceptions: one Form 4 each for Vice Presidents V.B. Arthur, J.M. Colyer, Jr., and B.L. Saunders relating to grants of restricted share units was filed late due to an interpretive error regarding the due date for the filings; and one Form 4 for Chairman H.E. DeLoach, Jr. was filed one day late due to an administrative error, which was immediately corrected when discovered.

 

The following table shows the number of shares of our common stock beneficially owned as of February 10, 2009, directly or indirectly, by each director and by each executive officer named in the Summary Compensation Table.

 

 

 

 

 

On April 15, 2003, the Board of Directors adopted a resolution establishing stock ownership guidelines for outside directors. The guidelines establish a target level of ownership of our common stock based on years of service as a director from the date the guidelines were established. The guidelines are as follows: 3,000 shares, 5,000 shares and 8,000 shares after two, four and six years of service, respectively. Compensation deferred into Sonoco stock equivalent units are included in determining whether these guidelines have been met. All of our directors have met these guidelines.

 

The first part of this discussion provides an overview of the compensation program for our executive officers, the material principles underlying our compensation policies and decisions and a description of each compensation element, how these elements fit together and how they further our goals.

 

The second part of the discussion describes and explains the specific actions taken with regard to compensation for executive officers in 2008. This discussion and analysis and the tables that follow focus on all aspects of compensation for our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and the three other most highly compensated officers. These five individuals are referred to as the Named Executive Officers (“NEOs”).

 

OVERVIEW, PRINCIPLES AND COMPENSATION ELEMENTS

 

The Role of the Executive Compensation Committee

 

The Executive Compensation Committee oversees administration of our executive officer compensation programs and sets compensation for the CEO, CFO and other executive officers. Information about the purposes of the Committee and its processes and procedures for consideration and determination of executive officer compensation is outlined under the caption “Board Meetings and Committees of the Board — Executive Compensation Committee” on page 17 of this Proxy Statement. The Executive Compensation Committee does not delegate its decision-making authority relating to executive compensation.

 

Overall Compensation Objectives

 

The primary objectives of our executive compensation program are as follows:

 

 

Each aspect of the overall program is designed to support these objectives to various degrees with the overarching goal of maximizing shareholder value.

 

As discussed below, the executive compensation program has three components:

 

 

 

Direct Compensation Elements

 

The direct compensation elements of the executive compensation program consist of base salary, annual cash incentive compensation, and long-term incentive compensation comprised of stock-settled stock appreciation rights (“SSARs”) and performance contingent restricted stock units (“PCSUs”). With the exception of base salary, all elements of direct compensation are variable and are contingent on achieving performance targets based on one or more of the following key company performance indicators: base earnings per share, revenue, return on net assets employed, and working capital management.

 

In constructing the direct compensation package for the NEOs and the other executive officers, the Committee adheres to the following principles:

 

The charts below show the use of these three principles in the weightings the Committee has assigned to the direct compensation components at target, based on an average for years 2006, 2007 and 2008. For annual cash incentives, “target” is equal to budget performance. For long-term incentives, “target” is equal to the grant date value of the shares. Stock-settled stock appreciation rights vest in one year. Performance contingent restricted stock units will vest in three years assuming performance results are achieved as explained in more detail on pages 30 and 31.

 

Determining Competitive Benchmarks — Total Direct Compensation

 

Our salary ranges and incentive compensation for all salaried positions, including the CEO, CFO and other executive officers, are based on the combination of (1) a structured job evaluation system to provide for internal pay equity, and (2) a market pricing system that matches individual jobs to independent salary surveys to provide for external competitiveness.

 

In order to determine competitive compensation levels, we annually participate in three national surveys conducted by the independent consulting firms of the Hay Group (over 600 participants), Hewitt Associates (over 400 participants) and Towers Perrin (over 800 participants). Collectively these surveys have over 1,000 participating companies, although some companies like us participate in more than one survey. These surveys cover a large number of similar corporate officer positions across United States industry. In most cases, we match our corporate officer positions to survey data from companies with sales in the $1 billion to $5 billion range. Likewise, we match division officer positions to similar positions in the survey data for comparable division revenue ranges. From these surveys, we develop executive compensation levels for base salaries, total cash compensation (base salary plus annual target incentive compensation), and total direct compensation (total cash compensation plus long-term incentives). In addition to these broad surveys, periodically the Committee’s consultant prepares customized compensation studies with respect to our NEOs in comparison to the NEOs of the fourteen peer packaging companies which have median sales, assets and market capitalization similar to that of Sonoco.

 

Our fourteen peer packaging companies were reviewed by the Committee in early 2008 to ensure they were appropriate peer comparisons, with revenue between 50% and 200% of Sonoco’s revenue. Based on the Committee’s review, we replaced Caraustar Industries and Chesapeake Corporation with Mead Westvaco and Packaging Corporation of America. Our current peer packaging companies are:

 

Aptar Group Incorporated
Avery Dennison Corporation
Ball Corporation
Bemis Company Incorporated
Crown Holdings Incorporated
Mead Westvaco
Owens-Illinois Incorporated Packaging Corporation of America
Pactiv Corporation
Rock-Tenn Company
Sealed Air Corporation
Silgan Holdings
Smurfit-Stone Container
Temple-Inland Incorporated

 

The Committee uses information from the broader industry data to set specific compensation levels, but cross checks these levels against the more specific peer company data. In most cases the data from both sources are very comparable.

 

The Committee sets the market rate or competitive benchmark for base salary for each position at the median (50th percentile) of the survey data. This means that on average half of the surveyed companies are likely to pay a higher base salary than we pay for a similar executive position and half will pay less. The Committee believes that targeting base pay at the median of the market is appropriate because base pay is fixed and does not vary each year based on company performance.

The Committee then sets and generally maintains individual base salaries at no less than 80% or more than 120% of the market median based on the overall level of each officer’s management expertise, experience, time in position and performance.

 

For annual cash incentives and total direct compensation (total cash compensation plus long-term incentives), the Committee sets competitive benchmarks between the median and the 75th percentile of the survey data. The Committee believes that if the executives meet challenging goals, they should have the opportunity to earn compensation above the market median. Likewise, if the executives do not fully meet goals, they should earn compensation below the market median. For both annual incentives and the PCSU portion of long-term equity incentives, the Committee also sets minimum levels of performance. If these minimums are not achieved, then no compensation is earned for that element. Similarly, the actual value of SSARs varies depending on the increase or decrease in the price of Sonoco stock. If the stock price does not increase above the grant price, the executive realizes no value from the award.

 

The Committee believes that placing the majority of each executive’s total compensation at risk, with variable levels of payout possible, provides a strong incentive to achieve both short-term and long-term financial goals.

 

For annual cash incentives, we have established maximum annual incentive compensation levels as a percent of base salary for each executive officer position. Normally, officers will earn 50% of this maximum (which 50% approximates the competitive benchmark described above) at budget for each element in the plan, though the Committee can make adjustments to pay 50% of maximum above or below budget depending on the expected degree of difficulty in achieving budget in any one year. Discretion under the plan is very limited and cannot exceed an amount equal to 20% of the maximum incentive of all executive officers. In most years no discretionary payments to any officer have been awarded.

 

Our 2008 long-term incentive awards consisted of SSARs and PCSUs, which were awarded pursuant to our 1991 Key Employee Stock Plan. To determine the target number of award shares in either case for each officer, the Committee uses the total direct compensation competitive benchmark (comprised of base salary, annual cash incentives and long-term equity incentives) for each officer position. The base salary competitive benchmark midpoint or actual base salary (whichever is greater) and the target (50% of the maximum incentive) for annual incentive compensation are subtracted from the total direct compensation competitive benchmark to arrive at the competitive benchmark dollars available for the long-term component of the compensation plan. These dollars are then converted to SSARs and PCSUs and each officer receives a mix of 75% PCSUs and 25% SSARs.

 

Providing this mix of 75% PCSUs and 25% SSARs is in line with the Committee’s philosophy of strongly encouraging long-term stock ownership among the officer group, while still providing some opportunity for the greater leverage inherent in SSARs which are similar to stock options.

 

The Committee may further adjust the size of the award of PCSUs or SSARs above or below target based on its assessment of individual officer performance at the time of grant. The actual value of the award for any individual officer is ultimately based on the Company’s achieving long term financial targets or increase in stock price. By adjusting actual award size based on individual performance, the Committee can also reward personal achievements and contributions or address other variations in individual performance.

Each year, the Committee establishes the three-year performance targets for each element in the PCSU portion of the long-term incentive plan. These are based on an analysis of our prior performance, the economic environment and business outlook, and our forecasted growth potential. Incentive scales for vesting PCSUs are established for meeting threshold, target, and maximum goals, which in the judgment of the Committee represent achievement of acceptable, superior, and outstanding performance levels, respectively. If we do not achieve at least the “acceptable” performance level, no award is earned at the end of the performance period.

 

We do not pay any current dividends or credit any dividend equivalents on unvested PCSUs in our long-term incentive plans. Dividend equivalents are accumulated from the time of vesting until the issuance of actual shares for any PCSUs that vest but are deferred until after separation from service by an individual executive officer. Upon consummation of a change in control that meets the criteria specified under Internal Revenue Code (“IRC”) Section 409A and the related regulations, all unvested PCSUs will vest at target on a prorata basis if the change in control occurs during the three-year performance period or at threshold on a prorata basis if the change in control occurs during the time-vesting period in year four or five. A lump sum payment equal to the aggregate fair market value of the PCSUs will be issued to the participant within 30 days following the change in control unless the PCSUs were subject to a deferral election or mandatory deferral under IRC Section 162(m).

 

Executive Benefit Elements

 

We have two benefit programs that apply only to executive officers: an Executive Life Insurance Program and a Supplemental Executive Retirement Plan benefit (“SERP”). The SERP is one of the components in our Omnibus Benefit Restoration Plan, which is discussed under “Pension Benefits” beginning on page 51.

 

As stated earlier, the Committee has designed the overall compensation program to balance the attraction/retention objective against the performance oriented objectives. The annual incentive and long-term incentive programs are weighted more toward performance objectives, while the Executive Life Insurance Plan and the SERP are weighted more toward the attraction/retention objective.

 

Executive Life Insurance

 

The life insurance benefit for executive officers elected for the first time after April 20, 2004, is equal to three times base salary, and is provided in the form of term life insurance. The current limit on company paid life insurance for most other active employees is $100,000. The Executive Term Life insurance program allows us to provide new executive officers with a benefit in line with the industry median.

 

Prior to 2005, the Executive Life Insurance Program consisted primarily of split-dollar life insurance. Under tax regulations in effect at the time, the cost to us was modest, consisting primarily of the time value of the money we used to pay the premiums. These types of life insurance programs were designed to allow companies to provide a significant benefit that served to enhance the retention of executives until normal retirement age. However, since 2004, regulatory changes have made this form of executive life insurance no longer viable or cost effective.

 

In response to these regulatory changes, in 2004, we took actions to convert split-dollar agreements entered into after 1995 for executive officers into permanent life insurance policies in order to meet our

commitments to the executive officers under the old contracts. The amounts of those new replacement life insurance policies (“Replacement Executive Life”) are fixed. Split-dollar agreements entered into prior to 1996 (“Pre-1996 Frozen Split-Dollar Life”) were maintained and those policies are also fixed, with no further premiums due. Additional amounts of insurance are provided in the form of term life insurance (“Executive Term Life”).

 

The current CEO and other NEOs were elected for the first time as officers prior to April 20, 2004, and have the following aggregate amounts of life insurance benefits consisting of Pre-1996 Frozen Split-Dollar Life, Replacement Executive Life and Executive Term Life:

 

CEO — Five times base salary and target annual incentive compensation

 

Other NEOs — Three times base salary and target annual incentive compensation

 

The formula above is rounded down to the next $250,000 increment, but any increases in coverage must be equal to or exceed $500,000 before new term life policies are purchased.

 

In addition, with respect to the Replacement Executive Life policies only, NEOs receive a “tax gross-up” payment in an amount sufficient to equal their tax liability on the insurance premiums attributed to them as income for tax purposes and on the gross-up amount. No gross-up is provided on the premiums for Executive Term Life coverage.

 

Supplemental Executive Retirement Plan Benefit

 

Historically, we have had two reasons for providing a SERP to our executive officers:

 

 

Our corporate offices are located in a small town setting which provides challenges in attracting and retaining the type of executives we need to operate a global enterprise of our size and complexity. The SERP benefit is a critical component in meeting these challenges. In short, the SERP is designed to meet our unique attraction and retention needs and is an effective complement to the short-term and long-term incentive plans that are designed to motivate our executives to perform at the highest level.

 

Persons elected to an executive officer position after January 1, 2008, will continue to receive the basic Company retirement benefit provided to all employees (including the “restoration” benefit under the Omnibus Benefit Restoration Plan that is provided to employees whose wages or benefit accruals exceed the annual qualified retirement plan limits). In addition the officer will receive an annual nonqualified plan contribution (equal to 10% of the prior year’s salary and earned bonus). Seventy-five percent (75%) of the annual contribution will be invested in a fixed interest account based on 120% of the IRS applicable long-term rate and 25% will be issued in Sonoco restricted stock units. The benefit vests at age 55 with at least five years of service as an executive officer.

After retirement, an officer’s defined contribution SERP “account” will be paid in three installments, with the first installment payable six months after an officer’s retirement date, the second installment payable in January of the next year following the first installment, and the third installment payable in January of the year following the second installment.

 

For executive officers elected before January 1, 2008, which includes the current NEOs, the retirement benefit includes the Company’s basic retirement plan benefit and the “restoration” benefit under the Omnibus Benefit Restoration Plan, which is provided to those employees whose wages or benefit accruals exceed the annual qualified retirement plan limits. In addition, a separate SERP benefit is provided which when combined with the basic retirement benefit, the restoration benefit and full Social Security benefits, equals 60% of the executive officer’s final average cash earnings, assuming age 65 retirement with at least fifteen years of Company service. The calculation excludes long term compensation in any form.

 

This additional SERP benefit will be paid in three equal installments after retirement, with the first installment payable six months after an officer’s retirement date, the second installment payable six months after payment of the first installment, and the third installment payable 12 months after the payment of the second installment. The payment of the installments may be extended if needed to eliminate adverse accounting treatment to Sonoco.

 

A more detailed description of the SERP benefit, restoration benefit and the qualified pension plan benefit is set forth under the caption “Pension Restoration Benefit and SERP Benefit in the Restoration Plan” on page 53 of this proxy statement.

 

Executive Perquisites

 

In support of our pay-for-performance philosophy, executive perquisites are very limited. Executive officers are permitted limited, occasional use of the company aircraft for personal travel or family emergencies. The CEO’s usage of the corporate aircraft is modest and helps minimize time involved in commercial travel that could otherwise be directed to our business. For other officers, use of the aircraft is minimal, is reviewed on a case by case basis, and is permitted only under circumstances where there is direct benefit to us to minimize time spent on personal travel or in the case of family emergencies.

 

Only eight officers remain in the Replacement Executive Life insurance plan (described under the section titled “Executive Life Insurance” on page 31) and receive very limited “tax gross-ups” that are not provided for the other officers or employees. These are restricted to the taxable income imputed to the officers because of the Replacement Executive Life insurance premiums we pay as described above. These gross-up amounts are reflected in the “All Other Compensation” column in the “Summary Compensation Table” on page 44.

 

Some of the more common perquisites that we do not provide to our executive officers include country club memberships, company cars or drivers, metropolitan city apartments, vacation retreats, executive dining services, or reserved parking. We believe most of these benefits are not closely linked to our overall compensation objectives and would have only marginal impact on either the performance or the attraction/retention objectives of our compensation program.

Other Considerations

 

Employment Contracts and Potential Payments Upon Termination or Change in Control

 

We have a long standing practice of not providing employment contracts, severance agreements, change in control agreements, or other such financial security arrangements for our executive officers. Executive officers are covered by the normal severance compensation policy applicable to our salaried U.S. employees.

 

With some exceptions that do not apply to the NEOs, employees who are involuntarily terminated from the company are eligible for severance payments in the amount of two weeks’ compensation. Qualifying employees with at least three complete years of service who agree to sign and be bound by an agreement releasing us from all liabilities arising from the employment relationship, may receive up to 11 additional weeks’ severance. Compensation for years three through 13 may be paid on the basis of one week’s compensation for each complete year of service. Accordingly, the maximum standard severance payment to which a qualifying employee, including an NEO, could be entitled is 13 weeks’ compensation.

 

We may, however, from time to time negotiate individual severance compensation arrangements linked to non-compete agreements at the time of separation of an executive as circumstances warrant.

 

Our long-term equity incentive plans also contain provisions for prorated or accelerated vesting of equity awards in the event of retirement, death, or disability, and in certain cases, change in control. See “Potential Benefits Payable Immediately Upon Certain Separation Events.” These provisions apply similarly to all plan participants, including those below the executive officer level.

 

Review of Overall Compensation Components and Aggregate Awards

 

To evaluate the overall competitiveness of the executive compensation program, each year at its April meeting, the Committee reviews the total compensation package for each executive officer. This includes review of a summary sheet showing a history of base salary adjustments, annual incentive awards and total cash compensation for the last ten years (or term as an executive officer, if less), stock options or SSARs outstanding and the option price, unvested PCSUs (projected at threshold, target and maximum), unvested restricted stock units, projected annual pension at age 65, and the amount of executive life insurance coverage.

 

The Committee also reviews a tally sheet for each executive officer showing each element of the total amount of compensation awarded and realized during the prior year. The Committee uses tally sheets to assess total executive compensation, to determine where total executive compensation falls in relation to peer companies, and to assess how the Company’s overall compensation programs operate. From this assessment, the Committee makes changes in overall plans or individual elements if it determines they are appropriate to meet overall compensation objectives. As a result of this review in 2008 no changes were made to the executive compensation programs.

 

The Committee does not have a practice of adjusting the size of current and future compensation awards or compensation program components to reflect amounts realized or unrealized by an individual from prior equity grants. In other words, awards are not increased to compensate for prior performance below target, nor are they decreased because of performance above target. Likewise, since earnings on equity compensation are

not included in any pension calculation formula, any gains, or lack thereof, from prior awards are not considered in setting or earning retirement benefits.

 

Tax and Accounting Treatment of Compensation

 

Deductibility of Compensation

 

The Committee has taken, and it intends to continue to take, reasonable steps necessary to assure our ability to deduct for federal tax purposes compensation provided to senior executives. However, such steps may not always be practical or consistent with the Committee’s compensation objectives. Given that the earnings limit for deductibility has remained fixed since 1993, and the value of some compensation elements cannot be determined until year-end, there are circumstances in which some executive compensation may not meet tax deductibility requirements. We can deduct all but $311,363 of the compensation shown in the Summary Compensation Table for 2008, excluding the value of equity-based awards which are subject to taxation in a later period.

 

Nonqualified Deferred Compensation

 

Certain of our nonqualified compensation and benefits arrangements, incentive programs, and corporate practices (such as severance, relocation, and expense reimbursements) are considered nonqualified deferred compensation and subject to IRC Section 409A and the related regulations. In general, Code Section 409A, restricts the timing and manner of payment (as well as the timing of participant elections) under these types of taxable compensation programs. We have amended these arrangements, programs and practices to cause them to be in compliance with the statutory and regulatory provisions. The changes have no financial impact on the Company nor any material impact on the way in which we compensate our NEOs.

 

Accounting for Stock-Based Compensation

 

We account for stock-based compensation in accordance with the requirements of FAS 123R, which requires us to expense the estimated value of certain stock-based compensation.

 

Stock Ownership Guidelines

 

To emphasize the importance of linking executive and shareholder interests, the Board of Directors has adopted stock ownership guidelines for executive officers. The target level of ownership of common stock (or Common Stock Equivalents) is established as a fixed number of shares. The target level for the CEO is 140,000 shares. The target for Executive and Senior Vice Presidents is 33,000 and 24,000 shares respectively, and the target for other officers is 7,000 shares. Each executive subject to the guidelines is expected to achieve the ownership target within five years from the date on which he or she became subject to the guidelines. Common stock held in the Sonoco Savings Plan, stock equivalents earned through nonqualified deferred compensation programs, vested restricted stock units, and any other beneficially owned shares of common stock are included in determining compliance with the guidelines. Shares that executives have the right to acquire through the exercise of stock options or stock-settled stock appreciation rights are not included in the

calculation of stock ownership for guideline purposes. As of February 10, 2009, the CEO, CFO, and all other officers with more than two years in their current position met the above ownership guidelines.

 

We currently do not have a policy with respect to hedging the economic risks of stock ownership.

 

Relationship with Executive Compensation Consultant

 

Mr. Daniel J. Ryterband, of Frederic W. Cook and Company, has been hired by the Committee to serve as the Committee’s executive compensation consultant. Neither he nor other members of his firm provide services to us in any area other than executive compensation. The Committee has the sole authority to retain and dismiss the consultant.

 

Mr. Ryterband is expected to assist the Committee and work on its behalf on matters related to the Committee’s purposes and responsibilities as set forth in the Committee charter summarized under the caption “Corporate Governance — Board Meetings and Committees of the Board — Executive Compensation Committee” on page 17. He advises the Committee as to trends in executive compensation and provides specialized studies or expert advice as requested with respect to executive compensation issues. Mr. Ryterband meets in private session with the Committee at least once per year and attends regular Committee meetings in person or by phone as requested. He also provides advice with respect to director compensation.

 

Management contacts with the consultant are limited primarily to the Senior Vice President of Human Resources and the Corporate Director of Compensation, who utilize the firm’s advice in the areas of compensation plan design and corporate governance issues. The CEO, CFO, and other executive officers may have incidental contact with the consultant.

 

The Committee believes this arrangement is appropriate and cost effective in meeting its responsibilities to shareholders and the needs of management for expert guidance and advice.

 

On a routine basis, members of management use consultants from other firms in areas where it is felt their expertise in specific executive compensation matters would be beneficial in developing proposals for the Committee to consider.

 

Role of Executive Officers in Determining Executive Compensation

 

Except for the CEO, the role of executive officers in determining executive compensation is primarily advisory in nature, especially with regard to the structure and composition of the compensation program. Each executive officer may make recommendations with regard to the size of awards for persons who report directly to him or her, but the CEO makes the final decision as to recommendations submitted to the Committee for its consideration.

 

The CEO attends Committee meetings, but is not present when his own compensation is discussed. He may have incidental contact with the Committee’s compensation consultant. In practice, this means that the CEO may from time to time attend meetings at which the Committee’s consultant is present or at which the consultant makes a presentation, and he may from time to time participate in group conference calls with the Committee’s consultant. He does not, however, engage in one-on-one communications with the consultant and does not attempt to exercise any influence over the consultant’s recommendations to the Committee. The

Committee has sole responsibility for determining the compensation for the CEO and for approving all other executive compensation.

 

Timing of Equity Grants

 

For many years it has been our practice to grant stock options, SSARs, PCSUs, or other equity awards on the date of the first regular Board of Directors meeting in the calendar year, which is the first Wednesday in February. The option or SSAR exercise price is based on the closing price of our stock on that date. The recipients and the corresponding number of shares of equity awards, including stock options or SSARs and PCSUs, are approved by the Committee at its regular meeting on the day prior to the Board of Directors meeting.

 

We occasionally make special stock option or SSAR awards to new employees. In such case, the exercise price is based on the closing price of our stock on the recipient’s first day of regular employment.

 

We also occasionally make stock option or SSAR awards or grants of restricted stock units to a corporate officer in recognition of a promotion or a change in position status. The effective date of these awards is the day following approval by the Committee.

 

Grants of Restricted Stock Units

 

We have a practice of making a special one-time grant of time vesting restricted stock units (“RSUs”) to individuals when they are first elected a corporate officer in recognition of this one-time event and the individual’s increased responsibility. The number of shares granted is based on position. The shares are credited with dividend equivalents, which are not paid out until the shares vest. The shares vest in three equal increments on the third, fourth, and fifth anniversary of the grant. If the executive officer leaves the company for any reason before the shares vest, with the exception of a change in control as described below, the unvested shares are forfeited. The restricted stock units do not have voting rights.

 

Upon consummation of a change in control that meets the criteria of IRC Section 409A and the related regulations, all unvested RSUs will vest on a prorata basis. A lump sum payment equal to the aggregate fair market value of the vested RSUs will be issued to the participant within 30 days following the change in control unless the RSUs were subject to a deferral election or mandatory deferral under Section 162(m).

 

In February of 2008, three new officers were elected and awarded the special one-time grant referenced above.

 

Restatement or Adjustment of Performance Measures

 

The Committee has elected not to adopt a formal policy for adjustment or recovery of bonus awards or payments in the event that the performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment. The Committee prefers to retain the flexibility to address each such situation on its merits and determine the proper and appropriate course of action in fairness to shareholders and award recipients.

2008 COMPENSATION ACTIONS BY THE COMMITTEE

 

The following sections of this report include a discussion of the specific actions the Committee has taken with regard to 2008 compensation awarded to the NEOs and the rationale for those actions. The tables, accompanying narrative and footnotes which follow this report, reflect the decisions covered by the discussion below.

 

Base Salary

 

Each year at its April meeting, the Committee reviews the base salary of all senior executives, including the CEO, the CFO and the other NEOs. The total amount of merit increases for the executive officer group as a whole takes into account market survey data as to the projected salary movement for executive positions at the surveyed companies during the calendar year, the average wage increase being given to other levels of our employees, and the current economic environment in which we are operating. Individual merit increase awards are based on each executive’s performance in his or her position during the past year, and the relationship of his or her current salary to his or her position’s base salary competitive benchmark midpoint.

 

At its April, 2008 meeting, Mr. DeLoach recommended that the officers of Sonoco not receive a merit increase for 2008. Even though all other US salaried employees were eligible for a merit increase in 2008, Mr. DeLoach considered the effect of a slowing economy and wanted to set the tone for cost containment by not receiving or granting a base pay increase to the officers in 2008.

 

The average merit increase awarded to all of our other United States salaried employees was 2.9%, and individual awards in the overall salaried population ranged from 0% to 6.0%.

 

Annual Cash Incentive Awards

 

In 2000, the Board of Directors adopted, and the shareholders approved, the Performance-Based Annual Incentive Plan for Executive Officers. Under the terms of this plan, an annual maximum of 2.75% of income from operations, as defined in the plan, was established as an incentive pool for the CEO and the other NEOs. The total amount of annual incentive awards paid to these individuals cannot exceed this maximum. For 2008, this maximum incentive pool was $9,614,908, which exceeded the amount of actual incentive awards made by the Committee to these participants.

 

Set forth below are the performance elements, and their respective weightings as a percentage of annual incentive compensation, the Committee used to arrive at actual 2008 annual incentive awards. The Committee’s philosophy is that annual incentive plan elements should be limited to three or fewer to maximize concentration on those most critical to the success of our business in the forthcoming year. Base earnings per share, revenue growth and working capital management are all considered to be key performance variables essential to maximizing shareholder value.

 

Base earnings per share is defined as earnings per share excluding the impact of restructuring charges and certain non-recurring, infrequent or unusual items and is used to place primary focus on year over year operating results. Revenue growth excludes revenue from acquisitions completed during the year.

 

We believe that in most years, base earnings per share will be the most critical measure in driving share price and, in turn, shareholder value. Consequently, the Committee felt that a 60% weighting on this element was appropriate. Revenue growth was weighted at 20%. This is an important Company objective, but profitable revenue growth is of greater importance, hence the lower weighting than that for base earnings per share. Working capital improvement, which the Committee first included as a performance element in 2006 to encourage the pursuit of the opportunity to increase cash flow through reduction in our working capital requirements, was also weighted at 20%.

 

2008 Annual Incentive Plan Performance Targets

 

For 2008, the Committee established the following corporate performance measures for awarding annual incentive compensation. Based on year over year comparisons, the Committee believed these measures provided for reasonable growth and improvement, which, if achieved, would produce performance necessary to deliver consistent results for shareholders.

 

 

The Committee also established an annual incentive compensation threshold, target and maximum payout expressed as a percentage of base salary for each NEO, as follows:

 

These weightings are determined as described under the section titled “Determining Competitive Benchmarks — Total Direct Compensation” on page 29.

 

On February 3, 2009, the Committee reviewed and approved the 2008 annual incentive compensation awards for executive officers based on the predetermined financial measures and the calculations for actual performance against target shown in the tables above.

 

At the end of 2008, our base earnings per share fell short of our threshold goal. As a result, no award was made to any NEO for annual incentive compensation on the base earnings per share measure.

 

Growth in corporate revenue for 2008 (excluding acquisitions made in the year) was 2% above our 2007 revenue level. Therefore, all of the NEOs earned 98% of target annual incentive compensation earnings on this measure of performance.

 

Due to general economic conditions and the sharp decline in business activity late in 2008, the committee approved a change in the calculation of working capital days to better reflect the true economic impact of the Company’s working capital management program on the Company for the full year. Previously, annual performance was based on a comparison of average net working capital days during the current year’s fourth quarter compared with that of the previous year’s fourth quarter. The revised formula is based on a twelve-month average comprised of each month’s net working capital days compared with that of the prior year. Based on a twelve-month average, net working capital days in 2008 were 3.8 days less than 2007, which resulted in maximum payout on this annual incentive compensation measure. The 2009 goal has been established based on the same monthly year-over-year comparison as used in 2008. No other changes were made to the formula.

 

The following table shows the dollar amount of annual incentive compensation awarded to each of the NEOs for 2008 based on our 2008 performance discussed above and the percentage change in annual incentive compensation earnings from the prior year.

 

 

These results reflect the severe decline in the economy that occurred in the last quarter of the year.

 

2008 Long-Term Incentive Program

 

As described above under the caption “Determining Competitive Benchmarks — Total Direct Compensation” on page 29, the 2008 long-term incentive program consists of two elements: SSARs and PCSUs, which were previously awarded pursuant to the shareholder approved 1991 Key Employee Stock Plan. As explained in that section, the base salary midpoint or actual base salary (whichever is greater) and the target (50% of the

maximum incentive) for annual incentive compensation are subtracted from total direct compensation to arrive at the target dollars available for long-term compensation for each executive officer, and that target is converted 25% to SSARs and 75% to PCSUs.

 

For SSARs and PCSUs, awards were granted above, at or below the competitive benchmark depending on performance. For 2008, the NEOs who received shares above the competitive benchmark exceeded the targets in their financial or strategic objectives for the past year and demonstrated above average performance. Likewise, the NEOs who received shares at or below the competitive benchmark met all or most targets in their financial or strategic objectives and demonstrated acceptable performance for the year.

 

In 2008, our shareholders approved the 2008 Long-Term Incentive Plan pursuant to which we may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other share-based awards. This plan replaced the 1991 Key Employee Stock Plan, which has been terminated. Although awards remain outstanding under the 1991 Plan and may still be exercised until they terminate according to their terms, no further awards may be granted under the 1991 Plan.

 

Stock-Settled Stock Appreciation Rights

 

On February 5, 2008 (the day prior to the full Board of Directors meeting), the Committee approved SSAR grants to 555 key employees, including the NEOs. The SSARs have a one-year vesting period and the grant price was set at $29.30 per share, the closing market price of our common stock on the date of grant (February 6, 2008). Accordingly, these SSARs will be valuable to the recipients only if the market price of our stock increases. The Statement of Financial Accounting Standards (“SFAS”) 123R grant date fair values and the number of SSARs granted to each of the NEOs are included in the “Grants of Plan-Based Awards” table on page 47. Target grants were calculated as described under the caption “Determining Competitive Benchmarks — Total Direct Compensation” on page 29.

 

Based on individual performance factors, the Committee can adjust the actual number of shares granted under the plan either above or below the previously described competitive benchmark number. The Committee awarded to Mr. DeLoach a grant of 111,000 shares, which represents the competitive benchmark.

 

The awards to the other NEOs ranged from no increase above the competitive benchmark to 11,000 shares above the competitive benchmark based on the performance factors described above.

 

Performance-Contingent Restricted Stock Units

 

On February 5, 2008, the Committee also approved PCSU grants to 223 key employees, including the NEOs. The SFAS 123R grant date fair values of PCSUs and the number of shares available at threshold, target, and maximum are shown in the “Grants of Plan-Based Awards” table on page 47. The number of PCSUs granted to each individual was based on their target awards as described under the caption “Determining Competitive Benchmarks — Total Direct Compensation” on page 29, and adjusted upward or downward from target based on the Committee’s judgment of the individual’s performance. In this regard, the Committee increased the award of PCSUs to Mr. DeLoach by 8,000 shares above his target for a total of 75,000 shares, which reflects our exceeding 2007 budgeted earnings and working capital targets, as well as Mr. DeLoach’s strong leadership in defining strategy and achieving significant progress in long term growth

objectives. The awards for the other NEOs ranged from no increase in shares above the competitive benchmark to 8,500 shares above the competitive benchmark.

 

The number of these PCSUs that will vest after three years is dependent on our achieving the specified performance levels set forth in the table below of cumulative increases in base earnings per share of $2.30, net of year to year changes in pension expense (“BEPS”), and average return on net assets employed (“RONAE”) for the three-year performance period. The Committee feels that both elements are critical drivers of long-term shareholder returns and has weighted them equally in the plan.

 

 

 

 

To encourage continued employment, the plan provides that if less than the number of threshold shares vest at the end of the three-year performance period, the remainder of the threshold shares will time vest in equal amounts in the fourth and fifth years of the plan, subject to the participant’s continued employment for that period. Except for death, disability, or retirement, termination of a participant’s employment prior to vesting will result in forfeiture of any unvested award. If officers elect to accept shares in settlement of PCSUs when they vest, they must hold those PCSUs, net of taxes, for one year from the vesting date. However, officers who do not meet our stock ownership guidelines for their positions may not dispose of any shares received upon settlement of PCSUs that vest until such guidelines are met.

 

The plan does not permit the use of discretion if performance targets are not met. Performance goals will not be adjusted for sales, divestitures, or acquisitions of businesses.

 

Earned PCSU Awards in 2008

 

On January 31, 2006, the Committee granted PCSUs to 28 executives, including the NEOs as well as 177 key managers. The vesting of these shares was dependent on achieving pre-determined levels of cumulative BEPS and average RONAE for the three-year performance period from January 1, 2006 through December 31, 2008.

 

Target performance over the three-year period was set at $6.26 cumulative BEPS as previously described, which equated to an annual growth rate of 4%, 6% and 6% for 2006, 2007 and 2008 respectively, and from 9% to 10% average three-year RONAE, depending on money spent on acquisitions. Actual performance was $6.53 cumulative BEPS which was 121.4% of the target cumulative BEPS goal, and 9.88% average RONAE which was 88% of the target RONAE goal. Each element was weighted at 50%. As a result, the overall

vesting was 104.7% of the target shares. The value of the shares vesting under this plan for the NEOs is shown in the “Option Exercises and Stock Vested” table on page 50.

 

As provided for under the plan, corporate officers including the NEOs, must defer receipt of all vested shares that are not deductible under IRC Section 162(m). Whether required or not, all of the NEOs have elected to defer receipt of these shares until at least six months after separation from service with the Company.

 

Value of Perquisites in 2008

 

Seven executive officers used our aircraft for personal travel in 2008. This use is valued at the “aggregate incremental cost” to us, and was $62,266 in 2008 for the officer group as a whole. Included in this amount was Mr. DeLoach’s and Mr. Sanders’ personal use of the aircraft which was valued at $27,584 and $13,665 respectively.

 

Tax gross-ups are provided to eight officers remaining in the Replacement Executive Life program described under the section titled “Executive Life Insurance” on page 31. The tax gross-up is restricted to the taxable income imputed to the officer for company paid insurance premiums which are not provided to the other officers or employees. The value of the gross-up was $99,350 for Mr. DeLoach, $13,591 for Mr. Hupfer, $57,323 for Mr. Sullivan, $16,277 for Mr. Sanders and $33,273 for Mr. Bowen. These gross-up amounts are reflected in the “All Other Compensation” column of the “Summary Compensation Table” on page 44.

 

 

The Executive Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” included in this Proxy Statement with management. Based on that review and discussion, the Executive Compensation Committee recommended to our Board of Directors that the “Compensation Discussion and Analysis” be included in our Annual Report on Form 10-K for the year ended December 31, 2008, and in this Proxy Statement.

 

J.H. Mullin, III (Chair)  C.J. Bradshaw (retired 7/15/08)  P.L. Davies
C.C. Fort  J.M. Micali  M.D. Oken

 

 

 

 

 

 

None of the remaining NEOs received perquisites in excess of $10,000.