UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

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JOHNSON CONTROLS, INC.

(Name of Registrant as Specified In Its Charter)

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

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Johnson Controls, Inc.

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, Wisconsin 53201-0591

 

 

Notice of 2011

Annual Meeting

and Proxy Statement

 

 

Date of Notice: December 10, 2010

NOTICE OF THE 2011
ANNUAL MEETING OF SHAREHOLDERS

 

Johnson Controls, Inc. will hold the Annual Meeting of Shareholders on Wednesday, January 26, 2011, at 1:00 P.M. CST at the Grand Hyatt Hotel, 600 East Market Street, San Antonio, Texas. The purposes of the Annual Meeting are as follows:

 

Natalie A. Black

Robert A. Cornog

William H. Lacy

Stephen A. Roell

 

 

and to transact such other business as may properly come before the Annual Meeting or any adjournment thereof.

 

The Board of Directors recommends a vote FOR items 1, 2, 3, 4, 5 and 6, and a vote of “THREE YEARS” for item 7. The persons named as proxies will use their discretion to vote on other matters that may properly arise at the Annual Meeting.

 

If you were a shareholder of record at the close of business on November 18, 2010, you are entitled to vote at the Annual Meeting.

 

If you have any questions about the Annual Meeting, please contact:

 

Johnson Controls, Inc.

Shareholder Services X-76

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, WI 53201-0591

(414) 524-2363

(800) 524-6220

 

By Order of the Board of Directors

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE SHAREHOLDER MEETING TO BE HELD ON JANUARY 26, 2011.

 

Our proxy statement and our 2010 annual report to shareholders on Form 10-K
are available at http://www.johnsoncontrols.com/proxy.

Johnson Controls, Inc.

5757 North Green Bay Avenue

Post Office Box 591

Milwaukee, WI

53201-0591

 

 

December 10, 2010

 

 

Dear Shareholder:

 

The Johnson Controls Annual Shareholders Meeting will convene on Wednesday, January 26, 2011, at 1:00 P.M. CST at the Grand Hyatt Hotel, 600 East Market Street, San Antonio, Texas. We are mailing to shareholders on or about December 10, 2010 our proxy statement, which details the business we will conduct at the Annual Shareholders Meeting and the Company’s Annual Report on Form 10-K for fiscal year 2010. Shareholders should not regard the Annual Report on Form 10-K, which contains our audited financial statements, as proxy solicitation materials. If you have elected not to receive printed proxy materials, you may access them at http://www.johnsoncontrols.com/proxy.

 

We are pleased to once again offer multiple options for voting your shares. As detailed in the “Questions and Answers” section of this proxy statement, you can vote your shares via the Internet, by telephone, by mail or by written ballot at the Annual Meeting. We encourage you to use the Internet to vote your shares as it is the most cost-effective method.

 

To ensure that you have a say in the governance of Johnson Controls and the compensation of its executive officers, it is important that you vote your shares. Please review the proxy materials and follow the instructions on the proxy card to vote your shares. We hope you will exercise your rights as a shareholder and participate in the future of the Company.

 

Thank you for your continued support of Johnson Controls.

 

Sincerely,

 

JOHNSON CONTROLS, INC.

 

Stephen A. Roell

Chairman and Chief Executive Officer

 

Table of Contents

 

 

 

 

 

           Natalie A. Black

           Robert A. Cornog

           William H. Lacy

           Stephen A. Roell

 

 

 

 

 

 

 

Q: How do I vote?

 

 

 

 

 

 

 

 

 

 

If you do not vote, your shares may not be represented at the Annual Meeting. This may result in matters not receiving the number of votes necessary for their approval. This holds especially true this year due to recent rule changes. The Securities and Exchange Commission (SEC) recently amended a rule to re-categorize director elections and votes on executive compensation as “non-routine” matters. This rule change prohibits your broker from voting your shares in director elections without your direction. For all proposals that shareholders will consider at the Annual Meeting other than Proposal Two, if you own shares in “street name” and do not direct your broker how to vote your shares on the proposals, the result is a “broker non-vote.” The effect of a “broker non-vote” varies by proposal, as we discuss below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q: How much did this proxy solicitation cost?

 

 

Q: How do I recommend or nominate someone to be considered as a director for the 2012 Annual Meeting?

 

 

If shares you own are registered in your name and you are entitled to vote at the Annual Meeting, then you may nominate any person for director by writing to Mr. Okarma. Your letter must include all of the information required by our By-Laws including, but not limited to, your intention to nominate a person as a director, the candidate’s name, biographical data, and qualifications, as well as the written consent of the person to be named in our proxy statement as a nominee and to serve as a director. Under our current By-laws, to nominate a person as a director for the 2012 Annual Meeting, a shareholder must send written notice not less than 90 days and not more than 120 days prior to the first anniversary of the 2011 Annual Meeting. Therefore, because the 2011 Annual Meeting will take place on January 26, 2011, we must receive notice of shareholder intent to nominate a person as a director no sooner than September 28, 2011 and no later than October 28, 2011. A copy of the Corporate Governance Guidelines is provided at our website at http://www.johnsoncontrols.com/governance, or you may request a copy of these materials by contacting Shareholder Services at the address or phone number provided in the Questions and Answers section of this proxy statement and these materials will be mailed to you at no cost.

 

Q: When are shareholder proposals due for the 2012 Annual Meeting?

 

 

Q: What are the requirements for proposing business other than by a shareholder proposal at the 2012 Annual Meeting?

 

 

If the notice is received after October 28, 2011, then the notice will be considered untimely and we are not required to present the shareholder information at the 2012 Annual Meeting. If the Board of Directors chooses to present any information submitted after October 28, 2011, other than pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, at the 2012 Annual Meeting, then the persons named in proxies solicited by the Board of Directors for the 2012 Annual Meeting may exercise discretionary voting power with respect to such information.

­ ­

 

Q: Where can I find Corporate Governance materials for Johnson Controls?

 

 

The Ethics Policy is applicable to the members of the Board of Directors and to all of our employees, including, but not limited to, the principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing similar functions. Any amendments to or waivers of the Ethics Policy that the Board of Directors approves will be disclosed on our website. We are not including the information contained on our website as part of or incorporating it by reference into this Proxy Statement.

 

Q: How can I obtain Corporate Governance materials for Johnson Controls if I do not have access to the Internet?

 

Johnson Controls, Inc.

Attn: Shareholder Services X-76

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, WI 53201-0591

 

 

 

 

Johnson Controls, Inc.

Attn: Shareholder Services X-76

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, WI 53201-0591

 

 

 

 

 

PLEASE VOTE. YOUR VOTE IS VERY IMPORTANT.

 

Promptly return your proxy card or choose to vote via telephone or the Internet, which will help to reduce the cost of this solicitation.

 

At the Annual Meeting, four directors will be elected for terms expiring in 2014. The Corporate Governance Committee has recommended, and the Board of Directors has selected, the following nominees for election: Natalie A. Black, Robert A. Cornog, William H. Lacy, and Stephen A. Roell, all of whom are current directors of our company. Each person whom shareholders elect as a director will serve until the Annual Meeting of Shareholders in 2014, or until his or her successor has been duly qualified and elected.

 

The Board believes that the directors of Johnson Controls collectively have backgrounds and skills important for Johnson Controls’ business. The follow biographies summarize the experiences, qualifications, attributes, and skills that qualify our nominees and continuing directors to serve as directors of the Company. They do not include personal traits such as candor, integrity, time commitment or collegiately that are essential for directors, nor do they contemplate independence issues, which are evaluated separately.

 

The Board recommends that you vote FOR the election of
Natalie A. Black, Robert A. Cornog, William H. Lacy, and Stephen A. Roell.

 

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” EACH OF ITS NOMINEES.

CONTINUING DIRECTORS

 

Terms Expire at the 2012 Annual Meeting:

 

Terms Expire at the 2013 Annual Meeting:

 

 

BOARD COMMITTEE MEMBERSHIP

 

 

* Chair of Committee

 

ü Committee Member

 

 

 

Board Meetings

 

In fiscal year 2010, the Board held a total of six regular meetings. During fiscal year 2010, each Director attended 100% of Board meetings and at least 86% of Board committee meetings for the committees on which the director served. The Board amended its Corporate Governance Guidelines in July 2010 to provide for a lead director position; previously, the Board had a presiding director. The lead director is an independent director who is appointed by the affirmative vote of a majority of non-management directors. In addition, the Board requires executive sessions of the non-management directors at least twice annually. During these executive sessions, the lead director has the responsibility, among other things, to lead the meeting, set the agenda, and determine the information to be provided. When the Chairperson is unavailable for regular Board meetings, the lead director has the same responsibilities for regular Board meetings.

 

Board Independence

 

The Board of Directors annually determines the independence of each director and nominee for election as a director. The Board makes these determinations in accordance with the NYSE’s listing standards for the independence of directors. The Board has established categorical standards of independence to assist it in making determinations of director independence, which we have set forth in the Company’s Corporate Governance Guidelines and posted on our website (at http://www.johnsoncontrols.com/governance).

Under these standards, we will not consider the following relationships that currently exist or that have existed, including during the preceding three years, to be material relationships that would impair a director’s independence:

 

 

 

 

 

 

 

 

 

The Board has affirmatively determined by resolution that each of Ms. Black and Messrs. Abney, Archer, Barnett, Clariond Reyes-Retana, Cornog, Goodman, Joerres, Lacy, and Morcott is independent. Based on the NYSE’s listing standards and our Corporate Governance Guidelines, the Board affirmatively determined that Mr. Roell is not independent. The Board is comprised of greater than two-thirds independent directors.

 

When making its director independence determinations, based on the information provided by the directors, the executive officers, and a survey by the Company’s legal and finance departments, the Board of Directors was aware of the following:

 

 

All the business relationships noted above were entered into on standard pricing and terms as arose in the ordinary course of the Company’s business. The amounts involved in each relationship did not exceed the greater of $1 million or 2% of either company’s revenue. As a result, each qualified under a categorical standard of independence that the Board previously approved (paragraph (e) in the listing above), and therefore, none of the relationships was a material relationship that impaired the director’s independence.

 

Related Person Transactions

 

Our Board of Directors has adopted written policies and procedures regarding related person transactions. For purposes of these policies and procedures:

 

 

 

Under our policies, each of our executive officers, directors or nominees for director is required to disclose to the Audit Committee certain information relating to related person transactions for review, approval or ratification by the Audit Committee. Disclosure to the Audit Committee should occur before, if possible, or as soon as practicable after the related person transaction is effected, but in any event as soon as practicable after the executive officer, director or nominee for director becomes aware of the related person transaction. In addition, the questionnaire we send annually to directors and executive officers solicits information regarding related person transactions that are currently proposed or that occurred since the beginning of our last fiscal year. The Audit Committee’s decision whether or not to approve or ratify a related person transaction is to be made in light of the Audit Committee’s determination that consummation of the transaction is not or was not contrary to the Company’s best interests. Any related person transaction must also be disclosed to the full Board of Directors.

 

The Board and Audit Committee reviewed and approved the following transactions completed in the prior fiscal year with directors and executive officers pursuant to our policies:

 

 

Board Succession Plan

 

We designed the Board Succession Plan to maintain effective shareholder representation. The plan has three important elements. First, the Plan sets the mandatory retirement age for directors as the last day of the calendar year in which a director reaches his or her 72nd birthday. Second, the Plan states that no director may serve as a committee chair of the same committee for more than five consecutive years or of any committee after the last day of the calendar year in which the director reaches his or her 70th birthday. Before a committee chair reaches his or her 70th birthday, we will implement a transition process in which the new chair will work collaboratively with the retiring chair as they transition duties and responsibilities. Third, the Plan requires that at the time a Chief Executive Officer either resigns or retires from our company, he or she must resign and retire from the Board as well, following a transition period upon which the Chief Executive Officer and the Compensation Committee mutually agree.

 

We provide the Corporate Governance Guidelines and Corporate Governance Committee Charter on our website at http://www.johnsoncontrols.com/governance, or

you may request a copy of these materials by contacting Shareholder Services at the address or phone number that we provide in the “Questions and Answers” section of this proxy statement.

 

Board Evaluation

 

Each year, the Board conducts an evaluation of the nominees, the committees, and the Board to determine their effectiveness. The Corporate Governance Committee annually determines the manner of these evaluations to ensure that the Board receives accurate and insightful information. During fiscal year 2010, each nominee underwent a performance review, and each director provided an evaluation of each nominee, to determine each nominee’s effectiveness. Based on that input, areas were identified where each nominee could make an enhanced contribution to the Board. As a result of the quality of the information gained through these evaluation processes, the Board was able to objectively evaluate its processes and to enhance its procedures to ensure greater director, committee and Board effectiveness.

 

Board Oversight of Risk

 

Johnson Controls has a comprehensive risk management program. Directors are involved in the program in the following ways:

 

 

 

Accordingly, while each of the four committees contributes to the risk management oversight function by assisting the Board in the manner outlined above, the Board itself remains responsible for the oversight of the Company’s overall Enterprise Risk Management program.

 

Shareholders who are interested can learn more about the program in section 1.2 of the current GRI Report at http://www.johnsoncontrols.com/publish/us/en/sustainability/reporting/GRI_report.html. However, neither the program nor the other contents of the website are incorporated in or made a part of this proxy statement.

 

Board Committees

 

Executive Committee:  The primary functions of the committee are to exercise all the powers of the Board when the Board is not in session, as the law permits. The Executive Committee held two meetings last year.

 

Audit Committee:  The primary functions of the committee are to:

 

 

 

The Audit Committee held nine regular meetings last year. All members are independent as defined by the New York Stock Exchange listing standards and the Corporate Governance Guidelines.

 

Compensation Committee:  The primary functions of the committee are to:

 

 

 

The Compensation Committee held five meetings last year. All members are independent as defined by the New York Stock Exchange listing standards and the Corporate Governance Guidelines. In addition, no member of the Compensation Committee has served as one of our officers or employees at any time. The committee exercises the Board’s powers regarding compensation of our executive officers. None of our executive officers serves as a member of the board of directors or compensation committee of any other company that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee.

 

Corporate Governance Committee:  The primary functions of the committee are to:

 

 

The Corporate Governance Committee held six meetings last year. All members are independent as defined by the New York Stock Exchange listing standards and the Corporate Governance Guidelines.

 

Finance Committee:  The primary functions of the committee are to:

 

 

 

The Finance Committee held five meetings last year. All members of the Finance Committee are independent as defined by the New York Stock Exchange listing standards and the Corporate Governance Guidelines.

 

We ask that you ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for fiscal year 2011.

 

PricewaterhouseCoopers LLP has audited our financial statements for many years. The Audit Committee appointed them as the Company’s independent registered public accounting firm for fiscal year 2011.

 

Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting with the opportunity to make a statement if they so desire and to be available to respond to appropriate questions.

 

If the appointment is not ratified, the adverse vote will be considered as an indication to the Audit Committee that it should consider selecting another independent registered public accounting firm for the following fiscal year. Even if the selection is ratified, the Audit Committee, in its discretion, may select a new independent registered public accounting firm at any time during the year if it believes that such a change would be in our best interest.

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF
THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE
COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2011.

 

The Audit Committee operates under a written charter that the Board of Directors has adopted. The Audit Committee, which reviews the charter at least annually, amended it in November 2010. The charter is available on our website at http://www.johnsoncontrols.com/governance. Each member of our Audit Committee meets our independence requirements and the New York Stock Exchange’s independence requirements and the Corporate Governance Guidelines. The Board of Directors has determined that Messrs. Abney, Barnett, Cornog, and Goodman are Audit Committee financial experts as defined by the rules of the Securities and Exchange Commission.

 

The Board of Directors has the ultimate authority for effective corporate governance, including the role of oversight of the management of our company. The Audit Committee’s purpose is to assist the Board of Directors in fulfilling its responsibilities by overseeing our accounting and financial reporting processes, the audits of our consolidated financial statements and internal control over financial reporting, the qualifications and performance of the independent registered public accounting firm engaged as our independent auditor, and the performance of our internal auditors.

 

The Committee relies on the expertise and knowledge of management, the internal auditors and the independent auditor in carrying out its oversight responsibilities. Management is responsible for the preparation, presentation, and integrity of our consolidated financial statements, accounting and financial reporting principles, internal control over financial reporting and disclosure controls, and procedures designed to ensure compliance with accounting standards, applicable laws, and regulations. Management is responsible for objectively reviewing and evaluating the adequacy, effectiveness, and quality of our system of internal control. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, is responsible for performing an independent audit of the consolidated financial statements and for expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States of America. Our independent registered public accounting firm is also responsible for expressing an opinion on the effectiveness of our internal control over financial reporting.

 

During fiscal year 2010, the Audit Committee fulfilled its duties and responsibilities generally as outlined in the charter. The Audit Committee held nine meetings. Specifically, the Committee, among other actions:

 

 

The Audit Committee has reviewed and discussed our audited consolidated financial statements and related footnotes for the fiscal year ended September 30, 2010, and the independent auditor’s report on those financial statements, with our management and independent auditor. Management represented to the Audit Committee that our financial statements were prepared in accordance with generally accepted accounting principles. PricewaterhouseCoopers LLP presented the matters required to be discussed with the Audit Committee by Statement on Auditing Standards 61, as amended, “The Auditor’s Communication with those charged with governance” and SEC Regulation S-X, Rule 2-07 “Communication with Audit Committees.” This review included a discussion with management and the independent auditor about the quality (not merely the acceptability) of our accounting principles, the reasonableness of significant estimates and judgments, and the disclosures in our financial statements, including the disclosures relating to critical accounting policies.

 

RELATIONSHIP WITH INDEPENDENT AUDITORS

 

The Audit Committee selects our independent registered public accounting firm for each fiscal year. During the fiscal year ended September 30, 2010, PricewaterhouseCoopers LLP was employed principally to perform the annual audit and to render other services. Fees we paid to PricewaterhouseCoopers LLP for each of the last two fiscal years are listed in the following table.

 

 

Audit fees include fees for services performed to comply with audit standards of the Public Company Accounting Oversight Board (United States), including the recurring audit of our consolidated financial statements, issuance of consents and the audit of our internal control over financial reporting for fiscal year 2010. This category also includes fees for audits provided in connection with statutory filings or services that generally only the principal auditor reasonably can provide to a client, such as procedures related to audit of income tax provisions, and related reserves and assistance with and review of documents filed with the SEC.

 

Audit-related fees include fees associated with assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. This category includes fees related to assistance in financial due diligence related to mergers and acquisitions, consultations regarding accounting principles generally accepted in the U.S., reviews and evaluations of the impact of new regulatory pronouncements, general assistance with implementation of SEC and Sarbanes-Oxley Act requirements, audits of pension and other employee benefit plans, and audit services not required by statute or regulation.

 

Tax fees primarily include fees associated with tax audits, tax compliance, tax consulting, as well as domestic and international tax planning. This category also includes tax planning on mergers and acquisitions and restructurings, as well as other services related to tax disclosure and filing requirements.

 

All other fees primarily include fees associated with training seminars related to accounting, finance and tax matters.

The Audit Committee has adopted procedures for pre-approving all audit and non-audit services provided by the independent registered public accounting firm, and it pre-approved 100% of all such services in fiscal year 2010. These procedures include reviewing a budget for audit and permitted non-audit services. The budget includes a description of and a budgeted amount for particular categories of non-audit services that are recurring in nature and, therefore, anticipated at the time the budget is submitted. Audit Committee approval is required to exceed the budget amount for a particular category of non-audit services and to engage the independent registered public accounting firm for any non-audit services not included in the budget. For both types of pre-approval, the Audit Committee considers whether such services are consistent with the SEC’s rules on registered public accounting firm independence. The Audit Committee also considers whether the independent registered public accounting firm is best positioned to provide the most effective and efficient service, for reasons such as its familiarity with our business, people, culture, accounting systems, risk profile, and whether the services enhance the company’s ability to manage or control risks and improve audit quality. The Audit Committee may delegate pre-approval authority to one or more members of the Audit Committee. The Audit Committee periodically monitors the services rendered and actual fees paid to the independent registered public accounting firm to ensure that such services are within the parameters approved by the Audit Committee. Based on its review of the discussion referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K.

 

Robert A. Cornog, Chairman
David P. Abney
Robert L. Barnett
Richard Goodman
Members, Audit Committee

 

The Company is asking shareholders to approve a proposed amendment to the Company’s Restated Articles of Incorporation (the “Articles”) to allow for a majority voting standard for uncontested elections of directors. The Board of Directors of the Company has approved amendments to the Company’s By-Laws that will implement a majority voting standard if shareholders approve the Articles amendment. Following is a supporting statement, a summary of the proposed amendment and the text of the proposed amendment. The summary is qualified in its entirety by reference to the full text of the proposed Articles amendment. If shareholders approve the Articles amendment at this meeting, a majority voting standard will apply to uncontested elections of directors at future shareholders meetings of the Company.

 

Supporting Statement and Summary:  The Wisconsin Business Corporation Law requires that, unless otherwise provided in a company’s articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote at a meeting. In this context, “plurality” means that the nominees for election as directors with the largest number of votes are elected as directors up to the maximum number of directors to be chosen at the election, assuming a quorum is present. The Articles are currently silent as to the voting standard for election of directors. As a result, implementing a majority voting standard for director nominees running in an uncontested election requires that the shareholders approve an amendment to the Articles adopted by the Board of Directors. The proposed amendment to the Articles would allow the Company’s By-Laws to provide for a majority vote standard, and the Board of Directors has approved amendments to the Company’s By-Laws that will provide for a majority voting standard if shareholders approve the Articles amendment. Under the proposed majority voting standard, for an individual to be elected to the Board of Directors in an “uncontested election” the number of votes cast favoring the individual’s election must exceed 50% of the number of votes cast with respect to the individual’s election. Abstentions and broker non-votes would not be considered votes cast. In addition to votes against an individual, directions to withhold authority would be considered votes cast and would have the same effect as votes against an individual. An uncontested election would generally be defined as any election of directors in which the number of candidates for election as directors does not exceed the number of directors to be elected.

 

The majority voting provisions would not apply to vacancies on the Board of Directors (including a vacancy resulting from an increase in the number of directors) filled by a vote of the Board of Directors. In a contested election, a plurality voting standard would continue to apply.

 

Proposed Amendment of the Company’s Restated Articles of Incorporation:  At its July 28, 2010 meeting, the Board of Directors approved the adoption of a majority voting standard for uncontested elections of directors through the addition of a new paragraph (B) to Article IV, Board of Directors, of the Articles. The effectiveness of the additional paragraph, which reads as follows, is subject to shareholder approval of the amendment:

“(B) The By-laws of the Corporation may provide that, to the extent provided in such By-laws, an individual shall be elected a director of the Corporation by the shareholders if, and only if, the number of votes cast favoring that individual’s election exceeds the number of votes cast opposing that individual’s election at any meeting for the election of directors at which a quorum is present, subject to the terms and conditions set forth within such By-laws. For purposes of clarity, the provisions of the foregoing sentence do not apply to vacancies on the Board of Directors (including a vacancy resulting from an increase in the number of directors) filled by a vote of the Board of Directors.”

 

Potential Amendments of the Company’s By-Laws:  At the same meeting, the Board of Directors also approved amendments to the Company’s By-Laws in connection with the Articles amendment to permit a change in the voting standard applicable to elections of directors. The effectiveness of these By-Laws amendments is subject to shareholder approval of the proposed Articles amendment.

 

If shareholders approve the proposal to amend the Articles, the Articles amendment will become effective upon the filing of articles of amendment of the Articles with the Wisconsin Department of Financial Institutions. The Company would make that filing promptly after the annual meeting.

 

If the proposal is not approved, no amendment will be made to the Articles. In addition, the amendments to the Company’s By-Laws will not become effective, and the existing plurality voting standard will remain in place in all elections of directors.

 

Approval and Ratification of the proposed amendment to the Restated Articles of Incorporation: The affirmative vote of the holders of not less than two-thirds of the outstanding shares of Common Stock entitled to vote at the annual meeting is required to approve the Articles amendment. Abstentions and broker non-votes will have the effect of votes against approval of the Articles amendment.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE AMENDMENT TO THE COMPANY’S RESTATED ARTICLES OF INCORPORATION TO ALLOW FOR A MAJORITY VOTING STANDARD FOR UNCONTESTED ELECTIONS OF DIRECTORS.

 

The Company is asking shareholders to approve the Johnson Controls, Inc. Annual Incentive Performance Plan (the “AIPP”). The AIPP was previously reviewed and approved by shareholders in 2006, and was last amended and restated effective as of January 1, 2008. This annual incentive plan is a very important component of our overall compensation strategy. The incentive plan enables the Company to motivate and focus our employees on our financial and strategic objectives for the year. These financial and strategic objectives are important to executing our business strategy, delivering long-term value to shareholders, and sustaining our credibility with investors.

 

We use a high level of corporate governance standards to successfully manage the incentive plan. The Compensation Committee of our Board of Directors is responsible for administering this plan, and at the start of each year it reviews and approves the performance objectives and incentive opportunity for plan participants. Before any incentive payments are made for a year, the Compensation Committee will review the plan, will review the results for each of the performance objectives under the plan, and will certify the calculation of the incentive payment for each of the Company’s officers. The financial objectives that are set each year under the plan are tied directly to the Company’s financial plan, which serves as the roadmap for the Company and is discussed in detail with the full Board of Directors. In addition, the Company has adopted an Executive Compensation Incentive Recoupment Policy covering executive officers of the Company. We disclose all of the details of the annual incentive plan in the executive compensation section of our proxy statement. We strive for transparency, so that shareholders can readily understand the terms of the plan and the formula used to calculate incentive payments to our officers.

 

The AIPP enables the Company to pay compensation as “qualified performance-based compensation” for tax purposes pursuant to Section 162(m) of the Internal Revenue Code (“Section 162(m)”). The following summary description is qualified by reference to the full text of the AIPP, which is attached to this proxy statement as Appendix A.

 

Summary of Proposal.  The Company provides an annual incentive opportunity to certain employees, the payment of which is dependent upon achieving defined performance objectives.

 

The purpose of the AIPP is to motivate key employees to achieve outstanding performance based on performance measures that are aligned with the Company’s strategic goals. Under the AIPP, the Company establishes potential awards and pertinent performance criteria at the beginning of each performance period. After the end of each performance period, the amount payable to a participant will be determined based upon actual performance.

 

Key Terms of the AIPP.

 

Administration.  The Compensation Committee administers the AIPP with respect to executive officers, and the Chief Executive Officer of the Company administers the AIPP with respect to all other participants. The Committee and the Chief Executive Officer are referred to in this section as the “Administrator.”’ The Administrator may delegate some or all of its authority to officers of the Company, except that the Committee may not delegate authority with respect to awards that are intended to comply with Section 162(m).

 

Eligibility.  In general, all employees of the Company and of its affiliates are eligible to participate in the AIPP. As of October 1, 2010, the number of eligible individuals was

approximately 2,500. The Administrator selects, in its sole discretion, the eligible employee participants in the AIPP. Although participants are generally selected prior to or during the first 90 days of a performance period, the Administrator may select a key employee to become a participant during a performance period, such as when a key employee is hired or promoted into an eligible position.

 

Grant of awards.  Annual awards which have a performance period of no more than one fiscal year may be granted under the AIPP. The fiscal year may be that of the Company or any affiliate, as determined by the Administrator. At the time it selects a participant, the Administrator will determine whether to grant an annual award to such participant.

 

At the time it makes an award, the Administrator specifies the performance period, the potential amount that may be earned under the award and the performance goals that must be met for an amount to be paid. The AIPP provides that the Administrator may use any one or more of the following financial performance measures for purposes of establishing the performance goals:

 

 

The performance categories described above may be determined for the Company, for an affiliate, or for any business unit or division as the Administrator determines. In addition, with respect to awards that are not intended to comply with Section 162(m), the Administrator may designate other categories, including categories involving individual performance and subjective targets, not listed above. As to each performance measure that the Administrator selects, the Administrator also establishes specific performance goals and a performance scale that will be used to measure performance and determine the amount payable.

 

The AIPP permits the Administrator to grant prorated awards or additional awards after the beginning of a performance period to provide appropriate incentives to newly-hired or newly-eligible key employees. The Administrator may also adjust an award to reflect a participant’s demotion or promotion, or transfer of employment among the Company and its affiliates. The Administrator may also generally cancel an award at any time.

 

Following the end of each performance period, the Administrator will certify the extent to which the performance goals established for that period and any other material terms of the award have been achieved. Based on this result, the Administrator will calculate the performance award amount for each participant. The Administrator has discretion to adjust the annual performance award amount up or down by 20% based

on the participant’s individual performance and attainment of the performance goals. However, for participants subject to Section 162(m), the Administrator may only adjust the award amount downward.

 

Payment of the performance awards is made in cash. Certain participants may be permitted to defer the payment of their performance awards under the Company’s Executive Deferred Compensation Plan.

 

Other Limitations.  The AIPP provides that the Company may not pay amounts in excess of $6 million to any one participant under any and all annual awards granted to the participant with performance periods that end in the same fiscal year of the Company.

 

Transferability Restrictions.  Participants generally may not transfer performance awards or subject them in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge.

 

Termination of Employment.  A participant whose employment terminates prior to the end of a performance period for reasons other than death, disability or retirement generally is not entitled to receive a payment under any performance award for that performance period. If termination is due to death, disability or retirement, unless the Administrator determines otherwise, payment of the award amount will be made at the end of the performance period, but the amount will be prorated to reflect the participant’s period of actual employment during the performance period.

 

Change of Control.  In connection with a Change of Control (as defined in the AIPP), participants will receive an immediate payment of the maximum amount that could be paid under the performance awards, but prorated to reflect the length of time that has elapsed since the first day of the performance period.

 

Termination of or Change to the AIPP.  The Committee may from time to time or at any time suspend or terminate the AIPP or amend the AIPP in any manner without obtaining further shareholder approval. However, if the Committee amends the AIPP to increase the maximum amount that can be paid to a participant for any annual award or to change the financial performance categories or to increase the class of employees eligible to participate in the AIPP, then further shareholder approval would be required to retain the benefits afforded by shareholder approval of the AIPP under Section 162(m) in respect of awards to which such changes apply. In addition, the Employee Benefits Policy Committee of the Company may make ministerial or administrative amendments to the AIPP, or changes required for the AIPP to comply with any applicable law.

 

Effect on Outstanding Awards Under the AIPP.  If the shareholders do not approve the AIPP, all previously granted outstanding awards under the AIPP will still continue to be in effect.

 

Recent AIPP Changes.  As we noted above, shareholders previously reviewed and approved the AIPP as recently as 2006. The performance measures that we list above include four measures that shareholders have not previously approved. On September 21, 2010, the Compensation Committee amended the AIPP to expand or modify the performance measures to include earnings before interest, taxes, depreciation and amortization (EBITDA); trade working capital; return on sales; quality; and free cash flow.

 

Approval and Ratification of the AIPP.  An affirmative vote of the majority of votes cast by the shareholders is required to approve and to ratify the proposed Johnson Controls, Inc. Annual Incentive Performance Plan.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE JOHNSON CONTROLS, INC. ANNUAL INCENTIVE PERFORMANCE PLAN.

 

The Company is asking shareholders to approve the Johnson Controls, Inc. Long-Term Incentive Performance Plan (the “LTIPP”’). The LTIPP was previously reviewed and approved by shareholders in 2006, and was last amended and restated effective as of January 1, 2008. It provides for cash bonuses as an incentive for selected employees to achieve specified performance goals with a view toward enhancing shareholder value. The LTIPP enables the Company to pay compensation as “qualified performance-based compensation” for tax purposes pursuant to Section 162(m) of the Internal Revenue Code (“Section 162(m)”). In order to maintain Section 162(m) status, shareholders must approve the plan at least every five years. The following summary description is qualified in its entirety by reference to the full text of the LTIPP, which is attached to this proxy statement as Appendix B.

 

Summary of Proposal.  The Company provides a total compensation opportunity for its key employees that includes cash incentive compensation, the payment of which is dependent upon achieving performance objectives. The Company has historically provided this incentive compensation opportunity through its LTIPP and the Johnson Controls, Inc. Annual Incentive Performance Plan (the “AIPP”). The amounts that the Company has paid under the AIPP and LTIPP plans in each of the past three years to the five named executive officers are included in bonus amounts and long-term incentive payouts amounts, respectively, set forth in the Summary Compensation Table.

 

The purpose of the LTIPP is to motivate key employees to achieve outstanding performance based on performance measures that are aligned with the Company’s strategic goals. Under the LTIPP, the plan administrator establishes potential awards and pertinent performance criteria at the beginning of each performance period. After the end of each performance period, the amount payable to a participant will be determined based upon actual performance.

 

The effectiveness of all of the new awards under the LTIPP are contingent on shareholder approval of the LTIPP at the 2011 Annual Meeting.

 

Key Terms of the LTIPP.

 

Administration.  The Committee administers the LTIPP with respect to executive officers, and the Chief Executive Officer of the Company administers the LTIPP with respect to all other participants. The Committee and the Chief Executive Officer are referred to in this section as the “Administrator.”’ The Administrator may delegate some or all of its authority to officers of the Company, except that the Committee may not delegate authority with respect to awards that are intended to comply with Section 162(m).

 

Eligibility.  In general, all key employees of the Company and of its affiliates that the Administrator designates are eligible to participate in the LTIPP. As of October 1, 2010, the number of eligible individuals was approximately 80. The Administrator selects, in its sole discretion, the eligible employee participants in the LTIPP. Although participants are generally selected prior to or during the first 90 days of a performance period, the Administrator may select a key employee to become a participant during a

performance period, such as when a key employee is hired or promoted into an eligible position.

 

Grant of Awards.  Long-term awards, which have a performance period of more than one fiscal year may be granted under the LTIPP. The fiscal year may be that of the Company or any affiliate, as determined by the Administrator. At the time it selects a participant, the Administrator will determine whether to grant a long-term award to such participant.

 

At the time it makes an award, the Administrator specifies the performance period, the potential amount that may be earned under the award and the performance goals that must be met for an amount to be paid. The LTIPP provides that the Administrator may use any one or more of the following financial performance measures for purposes of establishing the performance goals:

 

 

The performance categories described above may be determined for the Company, for an affiliate, or for any business unit or division as the Administrator determines. In addition, with respect to awards that are not intended to comply with Section 162(m), the Administrator may designate other categories, including categories involving individual performance and subjective targets, not listed above.

 

The LTIPP does not specify target performance for the performance measures. Rather, as to each performance measure that the Administrator selects, the Administrator also establishes specific performance goals and a performance scale that will be used to measure performance and determine the amount payable.

 

The LTIPP permits the Administrator to grant prorated awards or additional awards after the beginning of a performance period to provide appropriate incentives to newly-hired or newly-eligible key employees. The Administrator may also adjust an award to reflect a participant’s demotion or promotion, or transfer of employment among the Company and its affiliates. The Administrator may also generally cancel an award at any time.

 

Following the end of each performance period, the Administrator will certify the extent to which the performance goals established for that period and any other material terms of the award have been achieved. Based on this result, the Administrator (or its delegee) will calculate the performance award amount for each participant.

Payment of the performance awards is made in cash. Certain participants may be permitted to defer the payment of their performance awards under the Company’s Executive Deferred Compensation Plan.

 

Other Limitations.  The LTIPP provides that the Company may not pay amounts in excess of $6 million to any one participant under any and all long-term awards granted to the participant with performance periods that end in the same fiscal year of the Company.

 

Transferability Restrictions.  Participants generally may not transfer performance awards or subject them in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge.

 

Termination of Employment.  A participant whose employment terminates prior to the end of a performance period for reasons other than death, disability or retirement generally is not entitled to receive a payment under any performance award for that performance period. If termination is due to death, disability or retirement, unless the Administrator determines otherwise, payment of the award amount will be made at the end of the performance period, but the amount will be prorated to reflect the participant’s period of actual employment during the performance period.

 

Change of Control.  In connection with a Change of Control (as defined in the LTIPP), participants will receive an immediate payment of the maximum amount that could be paid under the performance awards, but prorated to reflect the length of time that has elapsed since the first day of the performance period.

 

Termination of or Change to the LTIPP.  The Committee may from time to time or at any time suspend or terminate the LTIPP or amend the LTIPP in any manner without obtaining further shareholder approval. However, if the Committee amends the LTIPP to increase the maximum amount that can be paid to a participant for any annual or long-term award or to change the financial performance categories or to increase the class of employees eligible to participate in the LTIPP, then further shareholder approval would be required to retain the benefits afforded by shareholder approval of the LTIPP under Section 162(m) in respect of awards to which such changes apply. In addition, the Employee Benefits Policy Committee of the Company may make ministerial or administrative amendments to the LTIPP, or changes required for the LTIPP to comply with any applicable law.

 

Effect on Outstanding Awards Under the LTIPP.  If the shareholders do not re-approve the LTIPP, all previously granted outstanding awards under the LTIPP still will continue to be in effect.

 

Recent LTIPP Plan Changes.  As we noted above, shareholders previously reviewed and approved the LTIPP as recently as 2006. The performance measures that we list above include four measures that shareholders have not previously approved. On September 21, 2010, the Compensation Committee amended the LTIPP to expand or modify the performance measures to include earnings before interest, taxes, depreciation and amortization (EBITDA); trade working capital; return on sales; quality; and free cash flow.

 

Approval and Ratification of the LTIPP.  An affirmative vote of the majority of votes cast by the shareholders is required to approve and to ratify the proposed Johnson Controls, Inc. Long-Term Incentive Performance Plan.

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE JOHNSON CONTROLS, INC. LONG-TERM INCENTIVE PERFORMANCE PLAN.

 

The Company seeks your advisory vote on our executive compensation programs. The Company asks that you support the compensation of our named executive officers as disclosed in the Compensation Discussion and Analysis section and the accompanying tables contained in this Proxy Statement. Because your vote is advisory, it will not be binding on the Board or the Company. However, the Board will review the voting results and take them into consideration when making future decisions regarding executive compensation.

 

The Company has in the past sought approval from shareholders regarding the incentive plans that we use to motivate, retain, and reward our executives. Those incentive plans, including the Annual Incentive Performance Plan, Long-Term Incentive Performance Plan, Stock Option Plan, and Restricted Stock Plan make up a majority of the pay that the Company provides to our executives. Over the years, the Company has made a number of changes to its disclosures concerning executive compensation, as well as to its executive compensation programs, in response to shareholder input, including a number of enhancements mentioned in this proxy statement.

 

Our company has had a long-standing tradition of delivering performance results for our shareholders, customers, and the community. We are one of the largest 100 companies in the United States (based on revenue) with operations in more than 60 countries throughout the world, and we generate over 60% of our net sales outside of the United States. The executive compensation programs have played a material role in our ability to drive strong financial results and attract and retain a highly experienced, successful team to manage our company. Until the global economy experienced the dramatic financial downturn, our company achieved 62 consecutive years of sales growth and 18 consecutive years of earnings growth, and 33 consecutive years of dividend increases.

 

Our executive team has successfully managed our company through the recent dramatic economic downturn. For the fiscal year ending September 30, 2010, we grew our revenues by over 20% and our earnings by over 300%, resulting in the second most profitable year in terms of operating income in the history of the Company. Our company is again poised to continue its long-standing tradition of excellence and delivering performance results for our shareholders, our customers, and the communities we operate in and to provide a diverse and engaged workforce.

 

We believe that our executive compensation programs are structured in the best manner possible to support our company and our business objectives, as well as to support our culture and traditions that have been around for over 125 years.

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE
COMPANY’S COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS AS
DISCLOSED IN THE COMPENSATION DISCUSSION AND ANALYSIS SECTION
AND THE ACCOMPANYING COMPENSATION TABLES CONTAINED IN THIS PROXY STATEMENT.

 

The Company would also like to seek your input with regard to the frequency of future shareholder advisory votes on our executive compensation programs. In particular, we are asking whether the advisory vote should occur every three years, every two years or every year. The Company asks that you support a frequency period of every three years (a triennial vote) for future non-binding shareholder votes on compensation of our named executive officers.

 

A shareholder advisory vote on executive compensation is very important to the Company. We appreciate the past approval of our incentive pay programs by our shareholders, which have historically occurred every five years. This has served both our company and our shareholders well, ensuring a direct alignment between executive compensation and financial performance results. Setting a three year period for holding this shareholder vote will enhance shareholder communication by providing a clear, simple means for the Company to obtain information on investor sentiment about our executive compensation philosophy. An advisory vote every three years will be the most effective timeframe for the Company to respond to shareholders’ feedback and provide the Company with sufficient time to engage with shareholders to understand and respond to the vote results. The Company also believes a triennial vote would align more closely with the multi-year performance measurement cycle the Company uses to reward long-term performance. Our executive compensation programs are based on our long-term business strategy, which is more appropriately reflected with a three year timeframe.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR A FREQUENCY OF “THREE YEARS” FOR FUTURE NON-BINDING SHAREHOLDER VOTES ON
COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this proxy statement with management. Based on this review, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in our proxy statement relating to the 2011 Annual Meeting of Shareholders.

 

Jeffrey A. Joerres, Chairman
Dennis W. Archer
Eugenio Clariond Reyes-Retana
William H. Lacy
Southwood J. Morcott
Members, Compensation Committee

 

Johnson Controls has had a long-standing tradition of delivering performance results for our shareholders, customers, and the community. We are one of the largest 100 companies in the United States (based on revenue) with operations in more than 60 countries throughout the world, and we generate over 60% of our net sales outside of the United States. The executive pay programs described herein and in the accompanying tables have played a material role in our ability to drive strong financial results and attract and retain a highly experienced, successful team to manage our company. Until the global economy experienced the dramatic financial downturn, our company achieved 62 consecutive years of consistent sales growth, 18 consecutive years of earnings growth, and 33 consecutive years of dividend increases.

 

Our executive team has successfully managed our company through the recent dramatic economic downturn. For the fiscal year ending September 30, 2010, we grew our revenues by over 20% and earnings by over 300%, resulting in the second most profitable year in terms of operating income in company history. Our company is again poised to continue its long-standing tradition of excellence and delivering performance results for our shareholders, our customers, and the communities we operate in.

 

As our shareholders read through this Compensation Discussion and Analysis and the accompanying tables, we believe that our executive compensation programs are structured in the best manner possible to support our company and our business objectives, as well as to support our culture and traditions that have guided us for over 125 years.

 

 

 

 

 

 

 

 

Objectives of Our Executive Compensation Programs

 

Our decisions regarding executive compensation elements, incentive plan design, and award levels are guided by a series of objectives. Pay for performance is an essential element of our executive compensation philosophy, and performance based pay is the most significant part of the pay we report in the Summary Compensation Table. The main objectives of our executive compensation programs are to:

 

 

Elements of and Allocation of Executive Compensation

 

Our executive compensation program consists of the following elements:

 

 

Our target pay mix supports our desire for a strong relationship between our corporate and business unit performance and the executive’s pay. The compensation elements based on corporate or business unit performance include our annual cash incentive, long-term cash incentive, and equity incentives. The largest element of pay is delivered through equity awards with multi-year vesting schedule to align our executive officers to the long-term interests of the Company and shareholders. In general, as an executive’s level or responsibility within our organization increases, so does the percentage of total compensation that we link to corporate or business unit performance.

 

 

 

 

We designed our executive compensation programs to discourage excessive risk-taking by our named executive officers by emphasizing long-term compensation and financial performance metrics aligned with shareholder value. As shown in the chart above, on average 80% of the target compensation of our named executive officers is linked to short-term and long-term performance based incentives. For our named executive officers, over 75% of our performance based compensation is linked to long-term incentives. Our long-term cash incentive focuses on financial performance over a three-year period and aims to reward sustainable performance over the longer term. Further, the focus on equity-based compensation, in combination with executive stock ownership requirements, reflects the program’s goals of risk assumption and aligning interests between executives and shareholders.

Executive Compensation Governance

 

We periodically review our compensation philosophy and make adjustments that are believed to be in the best interests of the Company and our shareholders. Some of the improvements made and actions taken include the following:

 

 

 

The amount the Committee requires to be reimbursed is equal to the excess of the gross incentive payment made over the gross payment that would have been made if the original payment had been determined based on the restated financial results. Further, following a material restatement of our financial statements, we will seek to recover any compensation received by our Chief Executive Officer and Chief Financial Officer that is required to be reimbursed under Section 304 of the Sarbanes-Oxley Act of 2002.

 

 

Reviewing Our Executive Compensation Programs and Establishing Compensation Levels

 

The Committee of our Board of Directors (the “Board”) has the sole authority, delegated by our Board, to approve and monitor all compensation and benefit programs (other than broad-based welfare benefit programs) for our executive officers including the officers we name in the Summary Compensation Table (“named executive officers”). The Committee works with our executive management to ensure that our compensation policies and practices are consistent with our values and support the successful recruitment, development, and retention of executive talent so we can achieve our business objectives and optimize our long-term financial returns. Mr. Roell, in his role as Chairman and Chief Executive Officer, provided input regarding executive compensation levels and changes to our compensation programs by making recommendations to our Committee. Although our Committee considers the recommendations of our Chairman and Chief Executive Officer, our Committee exercises its discretion when making compensation decisions and may modify the recommendations. Our Chairman and Chief Executive Officer does not make recommendations to our compensation committee with respect to his own compensation. The Committee reports its actions and decisions to our Board.

 

The Committee evaluates executive pay each year, ensuring that our compensation policies and practices are consistent with our philosophy. In evaluating the compensation of our Chief Executive Officer’s direct reports, the Committee also considers the Chief Executive Officer’s recommendations to the Committee. This includes the compensation of the other named executive officers, based on his review of their performance, job responsibilities, importance to our overall business strategy, and our compensation philosophy (including market practice). As noted, our Chief Executive Officer does not make a recommendation to the Committee regarding his own compensation.

 

The Committee will generally determine an executive officer’s compensation based upon a desire to link compensation to the objectives of our executive compensation programs that we describe above under the “Objectives of Our Executive Compensation Programs.” In addition, when determining the overall compensation of our named executive officers, including base salaries and annual and long-term incentive amounts, our Committee considers a number of factors it deems important, including:

 

 

The Committee considers these factors collectively and ultimately uses its judgment in making final decisions concerning compensation.

 

To support its annual review of our executive compensation and benefit programs for fiscal year 2010, the Committee engaged Towers Watson, an independent compensation consultant, to conduct a marketplace review of the compensation we pay to our executive officers. The Committee has the sole authority to approve the independent compensation consultant’s fees and terms of engagement. Towers Watson received

$236,000 for executive compensation consulting services provided to the Committee during fiscal year 2010.

 

Towers Watson provided the Committee with relevant market data and alternatives to consider when making compensation decisions for the executive officers. Towers Watson benchmarked our compensation against a group of publicly-traded companies, which we refer to as the “Compensation Peer Group.” Towers Watson also provided market data from general industry as an additional reference. In benchmarking our compensation, Towers Watson used regression analysis to adjust the data based on the revenue sizes of the companies in the Compensation Peer Group and general industry survey to match our revenue size. The Compensation Peer Group, which the Committee annually reviews and updates, consists of companies against which we believe we compete for talent, that are in our industry or a similar industry, have similar market capitalization, or that are similar in size based on revenue. For purposes of the Committee’s annual review of fiscal year 2010 compensation and benefit programs, the following companies comprised the Compensation Peer Group:

 

 

The average revenue (as of the latest fiscal year end) of the Compensation Peer Group is $26.2 billion, and the average net income is $1.3 billion. When the Compensation Peer Group gives us inadequate data for a particular executive officer due to insufficient sample size, Towers Watson uses the general industry company data from its annual executive compensation survey. When determining fiscal year 2010 compensation, the Committee did not, however, require the use of general industry data to make any specific compensation decisions for the named executive officers.

 

In general, we set the total direct compensation opportunity for our executive officers using the 50th percentile of the Compensation Peer Group or general industry survey as an initial guideline. Generally, this results in pay differences among our named executive officers based on position, which is consistent with the survey data. The total target direct compensation opportunity for our executive officers ranges from the 50th to the 75th percentile of survey data based on the executive officer’s experience, knowledge, skills, level of responsibility, potential to impact our performance and future success, and the need to retain and motivate strategic talent.

 

Base Salary

 

We pay our named executive officers and other employees a base salary as part of a competitive compensation package and to provide a stable source of income. We typically consider salary levels as part of our annual compensation review process or upon a promotion. When we establish base salaries for executive officers, we consider salaries that companies in the Compensation Peer Group or general industry pay for similar positions. When inadequate data is available from the companies in the Compensation Peer Group, we consider salaries that companies in general industry pay for similar positions. We use the 50th percentile of the Compensation Peer Group as a guideline for setting salaries subject to other variables as we describe above under “Reviewing our Executive Compensation Programs and Establishing Compensation Levels.”

Salary changes are generally effective October 1 of each year to correspond with the beginning of the new fiscal year. Salary changes may occur at other times, particularly on the occurrence of a promotion or other type of job change.

 

Annual Performance Incentive

 

Our annual cash-based performance incentive focuses participants on our fiscal year business and financial objectives. We believe that achieving our annual business and financial objectives are important to executing our business strategy, delivering long-term value to shareholders, and sustaining our credibility with investors. At the beginning of each fiscal year, the Committee approves the fiscal year performance objectives and a target incentive opportunity (which we measure as a percentage of base salary) for each executive officer, as well as the potential incentive opportunity percentages for maximum and threshold performance. No annual incentive payments are payable to a named executive officer if the pre-established, minimum performance levels are not met. In addition, the financial based performance measures under the plan are based on our annual financial statements (Form 10-K), which are subject to an independent audit by our outside auditing firm, PricewaterhouseCoopers. This provides us and shareholders with an independent check on the calculation of incentive payouts under the annual incentive plan.

 

Fiscal Year 2010 Performance Goals and Results:  Performance measures are based on either overall corporate performance or performance at the relevant business unit.

 

For fiscal year 2010, the objectives and actual results based on the above measures are shown in the chart below. The Company uses interpolation to determine the specific amount of the payout for each named executive officer with respect to the achievement of financial goals between the various levels.

 

 

We selected Planned ROE as a performance measure because we wanted to focus on achieving an appropriate rate of return on shareholder investment. The EBIT measure was selected because the level of EBIT we achieve reflects our operating strength and efficiency. Net Cash From Operating Activities as a Percent of Revenue was selected because it measures our achievement in efficiently managing our trade working capital as well as our ability to manage the balance sheet. All three of these measures have significant impact on long-term stock price and on meeting the investing community’s expectations. We feel that the performance measures used for our annual incentives, together with the equity-based incentives and stock retention requirements, provide a high level of transparency and a good balance that focuses our executive officers on achieving short-term goals while not encouraging behavior that could be detrimental to sustainable, long-term value.

 

Fiscal Year 2010 Target Incentive Opportunity and Payout for the Named Executive Officers:  For each fiscal year, the Committee approves a target incentive opportunity (which we measure as a percentage of base salary) for each executive officer; as well as the potential incentive opportunity percentages for maximum and threshold performance. For fiscal year 2010, the target incentive opportunity percentages for the named executive officers ranged from 100% to 156% of base salaries. For each executive officer, the actual payout potentially could range from zero to two times the target payout percentage, depending on achievement of goals, with potential payments increasing as performance improves (though not above two times the target payout percentage). The Committee has the discretion to decrease the size of the bonus payout based in part on an assessment of the executive officer’s individual performance. The Committee makes this assessment for our Chief Executive Officer based on its subjective evaluation of performance relative to strategic, financial and leadership objectives that the Committee or our Board has approved and has discretion to decrease the amount of the incentive award that our Chief Executive Officer would otherwise receive. Our Chief Executive Officer makes this assessment for the other executive officers based on his subjective evaluation of performance relative to strategic, financial and leadership objectives that he has approved and has the authority to decrease the amount of the incentive award that the executive officer would otherwise receive, subject to Committee approval. We establish the annual performance incentive during the first quarter of the fiscal year to which the award relates.

 

Based on the fiscal year 2010 performance results, producing the second most profitable year in the Company’s history, and after reflecting the exercise of discretion that we discuss above, the table below provides additional information regarding the bonus payout calculation.

 

 

The “Grants of Plan-Based Awards” table sets out the threshold, target, and maximum award potential for each named executive officer and actual payouts are shown in the Summary Compensation Table.

 

Long-Term Cash Performance Incentive

 

We tie the value of awards under our long-term cash incentive program to our long-term performance over a three-year period, and the program therefore serves to ensure that an executive’s pay under this program depends upon the extent to which we achieve our long-term financial objectives. By using a mix of stock options, restricted stock, and the long-term cash incentive, we are able to compensate executives for both sustained increases in our stock performance, as well as the achievement of key long-term financial objectives. We base the long-term incentive on achieving business plans that our Board approves. We grant long-term performance incentive awards under this program at the beginning of the three-year performance period to which the award relates. At the end of each performance period, the Committee applies the objective-based formula that it approved in advance to determine each executive’s award for the performance period. In addition, the financial based performance measures under the plan are based on our annual financial statements (form 10-K), which are subject to an independent audit by our outside auditing firm, PricewaterhouseCoopers. This provides us and shareholders with an independent check on the calculation of incentive payouts under the long-term cash incentive plan.

 

The 2010 Grant:  The “Grants of Plan-Based Awards” table sets out the threshold, target, and maximum award potential for the long-term incentive performance awards we granted in fiscal year 2010 to each named executive officer for the performance period covering fiscal years 2010, 2011, and 2012.

 

We based each executive officer’s long-term cash incentive performance award opportunity for this performance period on annual objectives for corporate pre-tax earnings and pre-tax return on invested capital (“ROIC”). We have established targets of $414.8 million pre-tax earnings and 10.5% ROIC for fiscal year 2010. We define pre-tax earnings as income before income taxes, adjusted for certain significant non-recurring items, such as gain or loss on divestitures, restructuring expense, and the adoption of new accounting pronouncements, all as reflected in our audited financial statements that appear in our Annual Report on Form 10-K. We define ROIC as income before income taxes adjusted by total financing costs and certain significant non-recurring items, such as gain or loss on divestitures, restructuring expense, and the adoption of new accounting pronouncements, divided by invested capital. Invested capital is defined as the monthly weighted-average sum of shareholders equity plus total debt, less cash. We base the ROIC target each year on meeting the amounts set forth in the financial plan for that year. Our Board reviews and approves the financial plan each year. An executive officer would not receive a long-term incentive payout with respect to fiscal year 2010 under the 2010-2012 award if our pre-tax earnings were less than $378.5 million. An executive officer would receive the maximum potential payout with respect to fiscal year 2010 under the 2010-2012 award if our performance met or exceeded 11.3% ROIC and $451 million pre-tax earnings.

To calculate the payment an executive officer will receive under a long-term incentive award, we determine the performance results for each year in the three-year cycle, and calculate a weighted average for the three-year cycle based on the following: weighted 1/6 for the first year in performance cycle, weighted 2/6 for the second year in performance cycle, and weighted 3/6 for the third year in the performance cycle.

 

The Payout for the 2008 to 2010 Performance Period:  Executive officers were eligible in fiscal year 2010 for a payout under the three-year performance cycle of 2008-2010. For this cycle, the payout target percentages ranged from 70% to 130% of base salary for the named executive officers. The two financial measures for this cycle were pre-tax earnings and pre-tax ROIC. Our pre-tax earnings results were $1.79 billion, $402.7 million, and $1.67 billion for 2008, 2009, and 2010, respectively, and our pre-tax ROIC results were 15.4%, 4.5%, and 15.2% for 2008, 2009, and 2010, respectively. This performance resulted in payout percentages of 150.9%, 0%, and 200% of target for 2008, 2009 and 2010, respectively. Based on the performance that we discuss above, the Committee approved a payout percentage of 125.2%, payable to executives in the program, including the named executive officers. We show the amount in the Summary Compensation Table under the column heading “Non-Equity Incentive Plan Compensation.”

 

Stock Option Awards

 

We award stock options to executives to:

 

 

We made all of our stock option grants to executives in fiscal year 2010 pursuant to our 2007 Stock Option Plan, which shareholders approved in January 2007. The exercise price of fiscal year 2010 stock options is equal to the New York Stock Exchange closing price of our common stock on the date of the grant. We do not engage in or permit “backdating” or repricing of stock options, and our equity compensation plans prohibit these practices.

 

Our executives, including our named executive officers, must earn the options through continued service. The options will vest 50% two years after the date of grant and 50% three years after the date of grant, subject to continued employment (with earlier vesting on retirement), and have a ten-year exercise term.

 

We provide the fiscal year 2010 stock option grant details for each named executive officer in the “Grant of Plan-Based Awards” table and related footnotes. We determine stock option awards based on the value of the executive officer’s total target compensation that we intend to deliver less the value of all other elements of total compensation.

 

Our policy on granting equity awards states that our annual stock option grant occurs and is effective on the first business day of our fiscal year and that any subsequent stock option grants occur and are effective on the date of a regularly scheduled Compensation Committee meeting. Executive officers do not have a role in the timing of option grants. We do not choose the time for making option grants based in any way on any pending release to the public of material information.

Restricted Stock Awards

 

We intend our restricted stock awards to:

 

 

During fiscal year 2009, the Compensation Committee approved a change to grant restricted stock annually beginning in fiscal year 2010. We believe this change better reinforces our commitment to ensuring a strong linkage between company performance and pay.

 

We provide the fiscal year 2010 restricted stock grant details for each named executive officer in the “Grant of Plan-Based Awards” table and related footnotes. We determine restricted stock awards by subtracting from the value of the executive’s total target compensation the value of all other elements of direct compensation and allocating a portion of the resulting difference to restricted stock awards. We determine the portion allocable to restricted stock awards based on the factors summarized in “Reviewing Our Executive Compensation Programs and Establishing Compensation Levels.”

 

Retirement and Other Benefits

 

We evaluate retirement and other benefits based on market practice of the Compensation Peer Group and general industry data. We have a long history of providing retirement benefits to our U.S. salaried employees. We provide our retirement benefits through the following plans:

 

 

 

We provide these retirement benefits to our employees and our executive officers to help them prepare financially for retirement, to provide an incentive to stay with us by recognizing tenure, and to offer what we believe is a competitive compensation package.

 

We have summarized the various retirement plans in which our named executive officers may participate in greater detail in the narrative following the “Pension Benefits” table.

 

Other Benefits

 

According to our compensation philosophy, we limit the amount of executive perquisites that we provide to our executive officers. We maintain a policy regarding eligibility and use of executive perquisites, and we do not allow exceptions outside of the policy. In

general, we intend the perquisites we provide to help executive officers be more productive and efficient, or to protect us and the individual executive officer from certain business risks and potential threats. In fiscal year 2010, our named executive officers received perquisites of the following types: assistance with financial planning, personal use of a company airplane (personal use of airplane is minimal, and the cumulative fiscal year 2010 value of the personal use for all named executive officers was less than $10,000), and club dues. The Committee periodically reviews competitive market data to ensure that the perquisites we provide to executive officers are reasonable and within market practice. During fiscal year 2009, the Committee eliminated the payment of tax gross-ups on perquisites to executive officers effective January 1, 2010. The Committee annually reviews use of perquisites to ensure compliance with our policy.

 

Separate from the perquisites policy, we have (1) a company vehicle policy that provides personal use of a vehicle to all senior leadership, including our executive officers (the type of vehicle varies by leadership level and is limited to vehicles that use our automotive seating and interiors products so that executives can experience the effectiveness of our products); and (2) an executive physical examination program that offers executive officers an annual comprehensive physical examination within a compressed time period.

 

Stock Ownership Requirements

 

We have stock ownership requirements because we believe material stock ownership by executives plays a role in effectively aligning the interests of these employees with those of our shareholders and strongly motivates executives to build long-term shareholder value. We therefore maintain an executive stock ownership policy that requires our executives to hold significant amounts of our stock. The following forms of stock ownership count toward the ownership requirement under the policy:

 

 

Each executive officer named below that has been an officer of our company for more than four years has exceeded his respective guideline as of September 30, 2010.

The guidelines for executive officer stock ownership under our Executive Stock Ownership Policy are as follows:

 

 

 

 

Tax and Accounting Rules and Regulations

 

We review the impact of executive compensation on our financial statements. We also review the effect that our compensation programs will have on our standards for corporate governance.

 

Section 162(m) of the Internal Revenue Code limits us from deducting compensation that we pay in any year to our principal executive officer or to our other three most highly-compensated officers (other than our principal financial officer) in excess of $1 million, unless that compensation meets the requirements under Section 162(m) for “qualifying performance-based” compensation (i.e., compensation that we pay only if the individual’s performance meets objective goals that the Committee has established in advance based on performance criteria that shareholders have approved). The Committee continues to emphasize performance-based compensation for executives, thus minimizing the consequences to us of Section 162(m) limits. However, the Committee believes that its primary responsibility is to provide a compensation program that attracts, retains, and rewards the executive talent necessary for our success. Consequently, in any year, the Committee may authorize compensation that is not fully deductible under Section 162(m) if it believes such compensation is necessary to achieve our compensation objectives and protect the interests of our shareholders.

 

Employment and Change of Control Contracts

 

As we discuss more fully on page 68, we have entered into employment agreements and change of control agreements with all of our executive officers. The employment agreements protect us from certain business risks (threats from competitors, loss of confidentiality or trade secrets, disparagement, solicitation of customers and employees) and define our right to terminate the employment relationship. The employment agreements also protect our executive officers from certain risks, such as death or disability, by providing for payment and benefits in the event of certain terminations of employment. The employment agreements define the events that will trigger benefits, and the amount of such benefits, in the event of a termination of employment. We

believe that the benefits the employment agreements provide upon a termination of employment are customary and appropriate.

 

The change of control agreements provide that our named executive officers may be eligible to receive payments and other benefits if there is a change of control of our company. In addition, our executive officers may receive benefits under our equity and bonus plans if there is a change of control of our company. We intend the change of control benefits to provide some economic stability to our executive officers to enable them to focus on the performance of their duties and the best interests of our company and our shareholders without undue concern over their personal circumstances if there is a potential change of control of our company. We provide for acceleration of equity and incentive awards, in particular, to protect our executive officers’ opportunities to earn the awards if a change of control occurs.

 

We determined that the amounts payable under the remaining arrangements on certain triggering events, as we describe under “Potential Payments and Benefits upon Termination or Change of Control,” were consistent with market competitive practices.

 

Discussion of our Incentive Compensation Policies and Practices as They Relate to Risk Management

 

We reviewed our incentive compensation policies and practices for all employees, including our named executive officers, and determined that our incentive compensation programs are not reasonably likely to have a material adverse effect on our company. To conduct this review, the Company completed an inventory of its executive and non-executive incentive compensation plans and policies globally. This evaluation covered a wide range of practices and policies including: the balanced mix between pay elements, caps on incentives, use of multiple performance measures, discretion on individual awards, use of stock ownership guidelines, use and provisions in severance/change of control policies, use of perquisites, adoption and provisions of clawback/recoupment policy, and Compensation Committee oversight. During our review, we noted several of the practices of our incentive plans (executive and broad-based) that mitigate risk, including the use of multiple measures in our annual and long-term incentive plans, use of performance measures that are based on our Annual Report and Form 10-K filing (which are reviewed by our independent auditors), Compensation Committee discretion in payment of incentives in the executive plans, use of multiple types of long-term incentives, payment caps, significant stock ownership guidelines, and our recoupment policy.

SUMMARY COMPENSATION TABLE FOR FISCAL YEARS 2010, 2009 AND 2008

 

The following table summarizes the compensation earned in the fiscal years noted by our chief executive officer, our chief financial officer, our three other most highly compensated executive officers who were officers as of the end of the fiscal year ended September 30, 2010. We refer to these officers as our “named executive officers.”

 

 

 

 

 

 

 

GRANTS OF PLAN BASED AWARDS DURING FISCAL YEAR 2010

 

The following table contains information concerning the plan-based equity and non-equity awards that we granted to our named executive officers in fiscal year 2010.

 

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR 2010 YEAR-END

 

The following table contains information concerning equity awards held by our named executive officers that were outstanding as of September 30, 2010.