EATON CORPORATION DEF 14A
SCHEDULE 14A
(Rule 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. )
Filed by the
Registrant x
Filed by a Party other than the
Registrant o
Check the appropriate box:
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o Preliminary
Proxy Statement
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o Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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þ Definitive
Proxy Statement
o Definitive
Additional Materials
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o Soliciting
Material Pursuant to §240.14a-11(c) or §240.14a-12
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EATON CORPORATION
(Name of Registrant as Specified
in its Charter)
XXXXXXXXXXXXXXXX
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
o Fee
computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which
transaction
applies:
(2) Aggregate number of securities to which
transaction
applies:
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(3) |
Per unit price or other underlying value of transaction computed
pursuant to Exchange Act
Rule 0-11
(Set forth the amount on which the filing fee is calculated and
state how it was
determined):
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(4) Proposed maximum aggregate value of
transaction:
(5) Total fee
paid:
o Fee
paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
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(1) Amount Previously
Paid:
(2) Form, Schedule or Registration Statement
No.:
(3) Filing
Party:
(4) Date
Filed:
NOTICE OF
MEETING
The 2008 annual meeting of Eaton Corporation shareholders will
be held Wednesday, April 23, at 10:30 a.m. local time at
Eaton Center, 1111 Superior Avenue, Cleveland, Ohio, for
the purpose of:
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1.
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Electing four directors;
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2.
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Approving a proposed increase in the authorized number of common
shares;
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3.
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Approving a proposal to adopt majority voting in director
elections;
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4.
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Approving a proposal to authorize the Board of Directors to
amend the Amended Regulations;
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5.
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Approving a proposed 2008 Stock Plan;
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6. Approving a proposed Senior Executive Incentive
Compensation Plan;
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7.
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Approving a proposed Executive Strategic Incentive Plan;
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8.
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Ratifying the appointment of Ernst & Young LLP as
independent auditor for 2008; and
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9.
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Considering reports and such other business as may properly come
before the meeting.
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These matters are more fully described in the following pages.
The record date for the meeting has been fixed by the Board of
Directors as the close of business on February 25, 2008.
Shareholders of record at that time are entitled to vote at the
meeting.
By order of the Board of Directors
Earl R. Franklin
Vice President and Secretary
March 14, 2008
Your Vote Is Important
You may vote your shares by using a toll-free telephone number
or electronically on the Internet, as described on the proxy
form. We encourage you to file your proxy using either of these
options if they are available to you. Alternatively, you may
mark, sign, date and mail your proxy form in the postage-paid
envelope provided. The method by which you vote will not limit
your right to vote in person at the annual meeting.
Important Notice Regarding the Availability of Proxy
Materials for the Annual Meeting of Shareholders to be held on
April 23, 2008: This proxy statement and the
Companys 2007 Annual Report to Shareholders are available
on Eatons website at www.eaton.com/proxy and
www.eaton.com/annualreport, respectively.
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Page
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Proxy Solicitation
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3
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Voting at the Meeting
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3
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Majority Voting Policy
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4
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Election of Directors
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4
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Director Nomination Process
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8
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Security Holder Recommendations of Director Candidates
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8
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Director Independence
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8
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Review of Related Person Transactions
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10
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Board Committees
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10
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Committee Charters and Policies
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12
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Audit Committee Report
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12
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Board of Directors Governance Policies
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13
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Executive Sessions of the Non-Management Directors
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13
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Security Holder Communications to the Board
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14
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Director Attendance at Annual Meetings
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14
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Code of Ethics
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14
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Executive Compensation
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15
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Compensation Discussion and Analysis
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15
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Introduction
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15
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An Overview of Executive Compensation Philosophy
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15
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Use of Compensation Consultants
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15
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Competitive Analysis and Benchmarking Processes
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16
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Use of Tally Sheets
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17
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The Components of Executive Compensation and Benefits
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18
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Other Key Executive Compensation Principles
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26
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Policy on Incentive Compensation, Stock Options and Other Equity
Grants Upon the Restatement of Financial Results
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27
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Chairman and Chief Executive Officer Compensation in 2007
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28
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Compensation and Organization Committee Report
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29
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Summary Compensation Table
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30
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Grants of Plan-Based Awards
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33
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Outstanding Equity Awards at Fiscal Year-End
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34
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Option Exercises and Stock Vested
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35
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Pension Benefits
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36
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Nonqualified Deferred Compensation
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38
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Potential Payments Upon Termination
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40
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Director Compensation
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45
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Proposal to Approve an Amendment of the Amended Articles of
Incorporation to Increase the Authorized Number of Common Shares
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48
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Proposal to Adopt Majority Voting in Director Elections
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48
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Proposal to Authorize the Board of Directors to Make Future
Amendments to the Amended Regulations
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49
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Proposal to Approve the 2008 Stock Plan
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50
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Proposal to Approve the Senior Executive Incentive Compensation
Plan
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55
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Proposal to Approve the Executive Strategic Incentive Plan
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57
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Ratification of Appointment of Independent Auditor
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58
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Other Business
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58
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Share Ownership Tables
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59
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Section 16(a) Beneficial Ownership Reporting Compliance
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60
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Future Shareholder Proposals
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60
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APPENDICES
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Appendix A:
Board of Directors Policy on Majority Voting
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60
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Appendix B:
Charter of Governance Committee
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60
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Appendix C:
Board of Directors Governance Policies
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62
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Appendix D:
Board of Directors Independence Criteria
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65
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Board of Directors Policy on Company-Paid Transportation of
Outside Directors
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67
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Appendix E:
Charter of Audit Committee
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67
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Appendix F:
Charter of Compensation and Organization Committee
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70
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Appendix G:
Charter of Finance Committee
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72
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Appendix H:
Code of Ethics
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73
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Appendix I:
2008 Stock Plan
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75
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Appendix J:
Senior Executive Incentive Compensation Plan
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80
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Appendix K:
Executive Strategic Incentive Plan
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82
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PROXY STATEMENT
Eaton Corporation
1111 Superior Avenue
Cleveland, Ohio 44114-2584
216-523-5000
This proxy statement, the accompanying proxy form and
Eatons annual report for the year ended December 31,
2007 are scheduled to be sent to shareholders on or about
March 14, 2008.
Proxy Solicitation
Eatons Board of Directors solicits your proxy, in the form
enclosed, for use at the 2008 annual meeting of shareholders and
any adjournments thereof. The individuals named in the enclosed
form of proxy have advised the Board of their intention to vote
at the meeting in compliance with instructions on all forms of
proxy tendered by shareholders and, where no contrary
instruction is indicated on the proxy form, for the election of
the individuals nominated to serve as directors; for the
proposed increase in the authorized number of common shares; for
the proposal to adopt majority voting in director elections; for
the proposal to authorize the Board of Directors to amend the
Amended Regulations; for the proposed 2008 Stock Plan; for the
proposed Senior Executive Incentive Compensation Plan; for the
proposed Executive Strategic Incentive Plan; and for
ratification of the appointment of Ernst & Young LLP as
independent auditor for 2008.
Any shareholder giving a proxy may revoke it by giving Eaton
notice in writing or by fax, email or other verifiable
communication before the meeting or by revoking it at the
meeting. All properly executed or transmitted proxies not
revoked will be voted at the meeting.
In addition to soliciting proxies through the mail, certain
employees may solicit proxies in person or by telephone or fax.
Eaton has retained The Proxy Advisory Group, LLC, 18 East
41st
Street, Suite 2000, New York, New York 10017, to
assist in the solicitation of proxies, primarily from brokers,
banks and other nominees, for a fee of $21,000, plus reasonable
out-of-pocket expenses. Brokerage firms, nominees, custodians
and fiduciaries may be asked to forward proxy soliciting
material to the beneficial shareholders. All reasonable
soliciting costs will be borne by Eaton.
Voting at the
Meeting
Each Eaton shareholder of record at the close of business on
February 25, 2008 is entitled to one vote for each share
then held. On February 25, 146,643,407 Eaton common
shares (par value, 50¢ each) were outstanding and entitled
to vote.
At the 2008 annual meeting, the inspector of election appointed
by the Board of Directors for the meeting will determine the
presence of a quorum and tabulate the results of shareholder
voting. As provided by Ohio law and Eatons Amended
Regulations, Eaton shareholders present in person or by proxy at
the meeting will constitute a quorum. The inspector of election
intends to treat as present for these purposes
shareholders who have submitted properly executed or transmitted
proxies that are marked abstain. The inspector will
also treat as present shares held in street
name by brokers that are voted on at least one proposal to
come before the meeting.
Director nominees receiving the greatest number of votes will be
elected directors. Votes withheld in respect of the election of
directors will not be counted in determining the outcome of the
election. (However, please see Majority Voting
Policy on page 4.) Adoption of all other proposals to
come before the meeting will require the affirmative vote of the
holders of a majority of the outstanding Eaton common shares,
consistent with the general vote requirement in Eatons
Amended Articles of Incorporation. The practical effect of this
vote requirement will be that abstentions and shares held in
street name by brokers that are not voted in respect
of those proposals will be treated the same as votes cast
against those proposals.
As provided by Ohio law, each shareholder is entitled to
cumulative voting rights in the election of directors if any
shareholder gives
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written notice to the President or a Vice President or the
Secretary of Eaton at least 48 hours before the time fixed for
the meeting, requesting cumulative voting, and if an
announcement of that notice is made at the beginning of the
meeting by the Chairman or Secretary, or by or on behalf of the
shareholder who gave the notice. If cumulative voting is in
effect with respect to the election of directors, each
shareholder has the right to cumulate his or her voting power by
giving one nominee that number of votes which equals the number
of directors to be elected multiplied by the number of the
shareholders shares, or by distributing his or her votes
on the same principle among two or more nominees, as the
shareholder sees fit. If cumulative voting is in effect with
respect to the election of directors, and if the shareholder has
not given contrary voting instructions, the individuals named in
the proxy will vote the shares cumulatively for those nominees
that they may determine in their discretion.
Majority Voting Policy Ohio law provides
that, in director elections, the nominees receiving the greatest
number of votes are elected unless the Articles of Incorporation
provide for a different voting standard. The Companys
Board of Directors has adopted a written policy to assure that,
in an uncontested election, a director who fails to receive a
majority of shareholder votes cast will not continue to serve,
except with the express consent of the Board.
The Board policy provides that, in an uncontested election, a
director nominee who receives more withhold votes
than for votes will promptly offer to resign from
the Board. With advice from the Governance Committee, the Board
will decide, within 90 days after the voting results are
certified, whether to accept the resignation offer, and the
Company will promptly disclose the Boards decision in a
press release. If the Board decides to reject the resignation
offer, the press release will indicate the reasons for that
decision. The Majority Voting Policy is included in this proxy
statement as Appendix A and is available on the Companys
website (www.eaton.com). Under Company Quick
Links click on Corporate Responsibility, then
Corporate Governance.
The Company is seeking shareholder approval of an amendment to
the Amended Articles of Incorporation adopting majority voting
as now permitted under Ohio law along with a related amendment
to the Amended Regulations. If these amendments are approved by
the shareholders, majority voting will apply to uncontested
director elections occurring after the 2008 Annual Meeting.
Please see page 48 for a description of the proposal.
1. ELECTION
OF DIRECTORS
Our Board of Directors is presently composed of eleven members.
The terms of four directors will expire in April 2008, and those
directors have been nominated for re-election. Each of those
nominees was elected at the 2005 annual meeting. (See
page 5.)
If any of the nominees become unable or decline to serve, the
individuals named as proxies in the enclosed proxy form will
have the authority to appoint substitute nominees. Eatons
management, however, has no reason to believe that this will
occur.
Following is biographical information about each nominee and
each director.
4
Nominees for election to terms ending in April 2011 or when a
successor is elected and has qualified:
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Ned C. Lautenbach, 64, is a partner at Clayton, Dubilier & Rice, Inc., a private equity investment firm specializing in management buyouts. Before joining Clayton, Dubilier, Mr. Lautenbach was associated with IBM from 1968 until his retirement in 1998. At IBM, he held several executive positions and was a member of
IBMs Corporate Executive Committee. From 1999 to 2002, Mr. Lautenbach served as Chief Executive Officer of Acterna Corporation, a global provider of communications test equipment, software and services. He also served from 2000 to 2004 as Co-Chairman of Covansys, Inc., a global provider of business and technology solutions. Mr. Lautenbach
is Lead Director of the Independent Board of Trustees of Fidelity Investments.
Director since 1997
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John R. Miller, 70, is Chairman of the Board of SIRVA, Inc., a provider of moving and relocation services, and Chairman of the Board of Graphic Packaging Corporation, a leading provider of paperboard packaging solutions to consumer products companies. He is also a Director of Cambrex Corporation. Mr. Miller was formerly President,
Chief Operating Officer and a director of The Standard Oil Company from 1980 to 1986. He was a member of the Board of the Federal Reserve Bank of Cleveland from 1986 to 1993, serving as its Chairman during the last two of those years. From 2002 to 2003 he was Chairman, President and Chief Executive Officer of Petroleum Partners, Inc., a provider of outsourcing services to the petroleum industry.
Director since 1985
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Gregory R. Page, 56, is Chairman and Chief Executive Officer of Cargill, Incorporated, an international marketer, processor and distributor of agricultural, food, financial and industrial products and services. He was named Corporate Vice President & Sector President, Financial Markets and Red Meat Group of Cargill in 1998,
Corporate Executive Vice President, Financial Markets and Red Meat Group in 1999, President and Chief Operating Officer in 2000 and became Chairman and Chief Executive Officer in 2007. Mr. Page is a director of Cargill, Incorporated.
Director since 2003
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Victor A. Pelson, 70, is the retired Chairman of Global Operations for AT&T. Mr. Pelson was an employee of AT&T from 1959 to 1996, where he held a number of executive positions including Group Executive and President responsible for the Communications Services Group, Executive Vice President and member of the Management
Executive Committee. Mr. Pelson was also a member of the Board of Directors of AT&T. Mr. Pelson was a Senior Advisor to UBS Securities LLC and its predecessor investment banking companies from 1996 to 2007. Mr. Pelson is a director of Dun & Bradstreet and United Parcel Service.
Director since 1994
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Directors whose present terms continue until April 2009:
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Alexander M. Cutler, 56, is Chairman, Chief Executive Officer and President of Eaton Corporation. Mr. Cutler joined Cutler-Hammer, Inc. in 1975, which was subsequently acquired by Eaton, and became President of Eatons Industrial Group in 1986 and President of the Controls Group in 1989. He advanced to Executive Vice President Operations in 1991, was elected Executive Vice
President and Chief Operating Officer Controls in 1993, President and Chief Operating Officer in 1995, and assumed his present position in 2000. Mr. Cutler is also a director of KeyCorp.
Director since 1993
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Deborah L. McCoy, 53, is an independent aviation safety consultant. She retired from Continental Airlines, Inc. in 2005, where she had served as Senior Vice President, Flight Operations since 1999. During part of 2005, Ms. McCoy also briefly served as the Chief Executive Officer of DJ Air Group, a start-up commercial airline company.
Director since 2000
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Gary L. Tooker, 68, is an independent consultant and former Chairman of the Board, Chief Executive Officer and Director of Motorola, Inc., a manufacturer of electronics equipment. Mr. Tooker became Motorolas President in 1990, Vice Chairman and Chief Executive Officer in 1993 and Chairman in 1997. He retired from Motorola in 1999. Mr. Tooker is a director of Avnet, Inc.
Director since 1992
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Directors whose present terms continue until April 2010:
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Christopher M. Connor, 51, is Chairman and Chief Executive Officer of The Sherwin-Williams Company, a manufacturer of paint, architectural coatings, industrial finishes and associated supplies. Mr. Connor has held a number of executive positions at Sherwin-Williams since 1983. He became Vice Chairman and Chief Executive Officer in 1999, Chairman and Chief Executive Officer in 2000, and
Chairman, President and Chief Executive Officer in 2005. He relinquished the title of President in 2006. Mr. Connor is also a director of National City Corporation.
Director since 2006
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Michael J. Critelli, 59, is Executive Chairman of Pitney Bowes Inc., a provider of mailstream solutions.
Director since 1998
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Charles E. Golden, 61, served as Executive Vice President and Chief Financial Officer and a director of Eli Lilly and Company, an international developer, manufacturer and seller of pharmaceutical products, from 1996 until his retirement in 2006. Prior to joining Eli Lilly, he had been associated with General Motors Corporation since 1970, where he held a number of positions, including Corporate
Vice President, Chairman and Managing Director of the Vauxhall Motors subsidiary and Corporate Treasurer. Mr. Golden is currently on the boards of Hillenbrand Industries and Unilever NV/PLC. He also serves as non-executive Chairman of Park Tudor School Trust.
Director since 2007
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Ernie Green, 69, is founder, President and Chief Executive Officer of Ernie Green Industries, Inc., a manufacturer of automotive components. He is also President of Florida Production Engineering, Inc., a subsidiary of Ernie Green Industries. He is a director of Pitney Bowes Inc. and Amantea Nonwovens LLC, and non-executive Chairman of the Foundation Board of Central State University.
Director since 1995
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Director Nomination Process The Governance
Committee of the Board, comprised entirely of directors who meet
the independence standards of the Board of Directors and the New
York Stock Exchange, is responsible for overseeing the process
of nominating individuals to stand for election as directors.
The Governance Committee charter is included in this proxy
statement as Appendix B and is available on the
Companys website (www.eaton.com). Under
Company Quick Links click on Corporate
Responsibility, then Corporate Governance.
Printed copies will also be provided free of charge upon
request. Requests for printed copies should be directed to the
Companys Investor Relations Office, Eaton Corporation,
1111 Superior Avenue, Cleveland, Ohio 44114-2584.
Any director candidates recommended by the Companys
security holders are given consideration by the Governance
Committee, consistent with the process used for all candidates.
Security holders may submit recommendations in the manner
described on this page under the heading Security Holder
Recommendations of Director Candidates.
All potential director candidates are reviewed by the Governance
Committee in consultation with the Chairman and Chief Executive
Officer, typically with the assistance of a professional search
firm retained by the Committee. The Committee decides whether to
recommend one or more candidates to the Board of Directors for
nomination. Candidates who are ultimately nominated by the Board
stand for election by the shareholders at the annual meeting.
Between annual meetings, nominees may also be elected by the
Board itself.
In order to be recommended by the Governance Committee, a
candidate must have the following minimum qualifications, as
described in the Board of Directors Governance Policies:
personal ability, integrity, intelligence, relevant business
background, independence, expertise in areas of importance to
the Companys objectives, and a sensitivity to the
Companys corporate responsibilities. In addition, the
Governance Committee from time to time looks for individuals
with specific qualifications so that the Board as a whole may
maintain an appropriate mix of experience, background, expertise
and skills, and of age, gender, ethnic and racial diversity.
These specific qualifications may vary from one year to another,
depending upon the composition of the Board at that time.
The Board of Directors Governance Policies are included in this
proxy statement as Appendix C and are available on the
Companys website (www.eaton.com). Under
Company Quick Links click on Corporate
Responsibility, then Corporate Governance.
Printed copies will also be provided free of charge upon
request. Requests for printed copies should be directed to the
Companys Investor Relations Office, Eaton Corporation,
1111 Superior Avenue, Cleveland, Ohio 44114-2584.
Security Holder Recommendations of Director Candidates
The Governance Committee will consider individuals for
nomination to stand for election as directors who are
recommended to it in writing by any Eaton security holder. Any
security holder wishing to recommend an individual as a nominee
for election at the annual meeting of shareholders to be held in
2009 should send a signed letter of recommendation, to be
received before November 7, 2008, to the following address:
Eaton Corporation, 1111 Superior Avenue, Cleveland, Ohio
44114-2584, attention Corporate Secretary. Recommendation
letters must state the reasons for the recommendation and
contain the full name and address of each proposed nominee as
well as a brief biographical history setting forth past and
present directorships, employments, occupations and civic
activities. Any such recommendation should be accompanied by a
written statement from the proposed nominee consenting to be
nominated and, if nominated and elected, consenting to serve as
a director.
Director Independence The Board of Directors
Governance Policies provide that all of the Companys
outside directors should be independent. These Policies are
attached as Appendix C to this proxy statement and are
available on the Companys website (www.eaton.com).
Under Company Quick Links click on Corporate
Responsibility, then Corporate Governance.
Printed copies will also be provided free of charge upon
request. Requests for printed copies should be directed to the
Companys Investor Relations Office,
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Eaton Corporation, 1111 Superior Avenue, Cleveland, Ohio
44114-2584. The listing standards of the New York Stock Exchange
state that no director can qualify as independent unless the
Board of Directors affirmatively determines that the director
has no material relationship with the Company, and the
Boards determination in that regard, along with the basis
for that determination, is disclosed in the Companys
annual proxy statement. Additional, and more stringent,
standards of independence are required of Audit Committee
members. The Companys annual proxy statement discloses the
Boards determination as to the independence of the Audit
Committee members as well as its determination as to all outside
directors.
As permitted by the New York Stock Exchange listing standards,
the Board of Directors has determined that certain relationships
between an outside director and the Company will be treated as
categorically immaterial for purposes of determining a
directors independence. These categorical standards are
included in the Board of Directors independence criteria.
The independence criteria for outside directors and members of
the Audit Committee are included in this proxy statement as
Appendix D and are available on the Companys website
(www.eaton.com). Under Company Quick Links
click on Corporate Responsibility, then
Corporate Governance. Printed copies will also be
provided free of charge upon request. Requests for printed
copies should be directed to the Companys Investor
Relations Office, Eaton Corporation, 1111 Superior Avenue,
Cleveland, Ohio 44114-2584.
Since directors independence might be influenced by their
use of Company planes and other Company-paid transportation, the
Board has adopted a policy on this subject. This policy is
included in Appendix D to this proxy statement and is
available on the Companys website (www.eaton.com).
Under Company Quick Links click on Corporate
Responsibility, then Corporate Governance.
In their review of director independence, the Board of Directors
and its Governance Committee have considered the following
circumstances:
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1.
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Directors C. M. Connor, M. J. Critelli, E. Green,
D. L. McCoy, G. R. Page and V. A. Pelson are
officers, employees, partners or advisors with firms that have
had purchases and/or sales of property or services with the
Company within the past three years or have occupied such
positions within that
three-year
period. In all cases, the amounts of the purchases and sales
were substantially less than the Boards categorical
standard for immateriality, i.e., less than the greater of
$1 million or 2% of the annual consolidated gross revenues
of the directors firm.
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2.
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A sister of Mr. Connor has been employed by the Company in
a non-officer position since 2000, preceding
Mr. Connors election to the Board in 2006. Her
aggregate cash compensation for 2007 was less than $190,000, and
she received benefits and participated in programs provided to
similarly situated Company employees. Her compensation is
comparable to that of her peers.
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3.
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Directors C. E. Golden, N. C. Lautenbach,
J. R. Miller and G. L. Tooker have had no
reportable relationships at all with the Company for the past
three years, other than as directors and shareholders.
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4.
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The use of Company planes and other Company-paid transportation
by all outside directors is consistent with the Board policy on
that subject.
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After reviewing the circumstances described above (which are the
only relevant circumstances known to the Board of Directors),
the Board has affirmatively determined that none of the
Companys outside directors has a material relationship
with the Company and that each of the following directors
qualifies as independent under the Boards independence
criteria and the New York Stock Exchange standards: C. M.
Connor, M. J. Critelli,
C. E. Golden, E. Green, N. C. Lautenbach,
D. L. McCoy, J. R. Miller,
G. R. Page, V. A. Pelson and
G. L. Tooker. The basis of the Boards
independence determination was that each of these directors had
either no
9
relationship at all with the Company for the past three years
(other than as a director and shareholder) or that none of their
relationships with the Company would likely be sufficient to
compromise their independence as directors.
The Board has also affirmatively determined that each member of
the Audit Committee, i.e., C. E. Golden, E. Green,
N. C. Lautenbach, V.A. Pelson and G. L.
Tooker, meets the special standards of independence required of
them under the criteria of the New York Stock Exchange, the
Sarbanes-Oxley Act of 2002 and rules adopted thereunder by the
Securities and Exchange Commission, and the Companys Board
of Directors.
Review of Related Person Transactions Our Board of
Directors has adopted a written policy to identify and evaluate
related person transactions, that is, transactions
between the Company and any of our executive officers,
directors, director nominees, 5%-plus security-holders or
members of their immediate families, or
organizations where they or their family members serve as
officers or employees. The Board policy calls for the
disinterested members of the Boards Governance Committee
to conduct an annual review of all such transactions. At the
Committees direction, a survey is made annually of all
transactions involving related persons, and the results are
reviewed by the Committee in January of each year. As to any
such transaction, the Committee is responsible to determine
whether (i) it poses a significant risk of impairing, or
appearing to impair, the judgment or objectivity of the
individuals involved; (ii) it poses a significant risk of
impairing, or appearing to impair, the independence of an
outside director or director nominee; or (iii) its terms
are less favorable to the Company than those generally available
in the marketplace. Depending upon the Committees
assessment of these risks, the Committee will respond
appropriately. In addition, as required by the rules of the
Securities and Exchange Commission, any transactions that are
determined to be material to the Company or a related person are
disclosed in the Companys proxy statement.
In January 2008, the Governance Committee conducted an annual
survey and found that the only related person transactions were
those described under the heading Director
Independence beginning on page 8 and that none of the
Companys executive officers engaged in any such
transactions. The Committee also concluded that none of the
related person transactions posed risks to the Company in any of
the areas described in items (i), (ii) or (iii) above.
Board Committees The Board of Directors has the
following standing committees: Audit, Compensation and
Organization, Executive, Finance and Governance.
Audit Committee. The functions of the Audit Committee
include assisting the Board in overseeing the integrity of the
Companys financial statements and its systems of internal
accounting and financial controls; the independence,
qualifications and performance of the Companys independent
auditor; the performance of the internal auditors; and the
Companys compliance with legal and regulatory
requirements. The Audit Committee exercises sole authority to
appoint, compensate and terminate the independent auditor and
pre-approves all auditing services and permitted non-audit
services to be performed for the Company by the independent
auditor. Among its other responsibilities, the Committee meets
regularly with the Companys Chief Financial Officer, Vice
President Internal Audit, independent auditor,
General Counsel, and Director Global Ethics in
separate executive sessions; prepares the Committees
report to be included in the Companys annual proxy
statement; assures that performance evaluations of the Audit
Committee are conducted annually; and establishes procedures for
the proper handling of complaints concerning accounting or
auditing matters.
Each Committee member meets the independence requirements, and
all Committee members collectively meet the other requirements,
of the New York Stock Exchange, the Sarbanes-Oxley Act of 2002
and rules adopted thereunder by the Securities and Exchange
Commission. Further, Committee members are prohibited from
serving on more than two other public company audit committees.
The Board of Directors has determined that each member of the
Audit Committee is financially literate and that
C. E. Golden qualifies as an audit committee financial
expert (as defined in Item 407(d)(5)(ii) of Regulation
S-K under
the Securities
10
Exchange Act of 1934) and that all members of the Audit
Committee have accounting or related financial management
expertise. The Audit Committee held eleven meetings in 2007.
Present members are Messrs. Golden (Chair),
Green, Lautenbach, Pelson and Tooker.
Compensation and Organization Committee. The functions of
the Compensation and Organization Committee include reviewing
proposed organization or responsibility changes at the officer
level; with input from all outside directors, evaluating the
performance of the Chief Executive Officer and reviewing the
performance evaluations of the other senior officers; reviewing
succession planning for key officer positions including the
position of Chairman and Chief Executive Officer, and reviewing
the Companys practices for the recruitment and development
of a diverse talent pool. The Committee is also responsible for
annually determining the salary of each senior officer of the
Company; establishing performance objectives under the
Companys short-term and long-term incentive compensation
plans and determining the attainment of such performance
objectives; annually determining the aggregate amount of awards
to be made under the Companys
short-term
incentive compensation plan (the Executive Incentive
Compensation Plan) and adjusting that amount as the Committee
deems appropriate within the terms of that plan; annually
determining the awards to be made to the Companys senior
officers under the Companys short-term and
long-term
incentive compensation plans; administering stock plans;
reviewing compensation practices as they relate to key employees
to confirm that those plans remain equitable and competitive, as
well as reviewing significant new employee benefit plans or
significant changes in such plans or changes with a
disproportionate effect on the Companys officers or
primarily benefiting key employees; and preparing an annual
report for the Companys proxy statement regarding
executive compensation. Additional information on the
Committees processes and procedures is contained in the
Compensation Discussion and Analysis under Executive
Compensation beginning on page 15. The Compensation
and Organization Committee held eight meetings in 2007. Present
members are Ms. McCoy and Messrs. Connor, Critelli
(Chair), Miller and Page.
Executive Committee. The functions of the Executive
Committee include all of the functions of the Board of Directors
other than the filling of vacancies in the Board of Directors or
in any of its committees. The Executive Committee acts upon
matters requiring Board action during the intervals between
Board meetings. The Executive Committee held two meetings during
2007. Mr. Cutler is a member of the Committee for the full
twelve-month term and serves as Committee Chair. Each of the
non-employee directors serves a four-month term.
Finance Committee. The functions of the Finance Committee
include the periodic review of the Companys financial
condition and the recommendation of financial policies to the
Board; analyzing Company policy regarding its debt-to-equity
relationship; reviewing and making recommendations to the Board
regarding the Companys dividend policy; reviewing the
Companys cash flow, proposals for long- and short-term
debt financing and the risk management program; meeting with and
reviewing the performance of management pension committees and
any other fiduciaries appointed by the Board for pension and
profit-sharing retirement plans; and reviewing the key
assumptions used to calculate annual pension expense. The
Finance Committee held four meetings in 2007. Present members
are Ms. McCoy and Messrs. Critelli, Golden, Green and
Page (Chair).
Governance Committee. The responsibilities of the
Governance Committee include recommending to the Board
improvements in the Companys corporate governance
processes and any changes in the Board Governance Policies;
advising the Board on changes in the size and composition of the
Board; making recommendations to the Board regarding the
structure and responsibilities of Board committees; and annually
submitting to the Board candidates for members and chairs of
each standing Board committee. The Governance Committee, in
consultation with the Chief Executive Officer, identifies and
recommends to the Board candidates for Board membership, reviews
the nomination of directors for re-election; oversees the
orientation of new directors and the ongoing education of the
Board; recommends to the Board compensation of non-employee
directors; administers the
11
Boards policy on director retirements and resignations;
administers the directors stock ownership guidelines; and
recommends to the Board guidelines and procedures to be used by
the directors to evaluate the Boards performance. The
responsibilities of the Governance Committee also include
providing oversight regarding significant public policy issues
with respect to the Companys relationships with
shareholders, employees, customers, competitors, suppliers and
the communities in which the Company operates, including such
areas as ethics compliance, environmental, health and safety
issues, community relations, government relations, charitable
contributions, shareholder relations and the Eaton
Philosophy Excellence through People. The Governance
Committee held six meetings in 2007. Present members are Messrs.
Connor, Lautenbach (Chair), Miller, Pelson and Tooker.
Committee Charters and Policies The Board of
Directors most recently revised the charter of the Governance
Committee in September 2007 (attached as Appendix B), the
charter of the Audit Committee in January 2008 (attached as
Appendix E), the charter of the Compensation and
Organization Committee in October 2007 (attached as
Appendix F), and the charter of the Finance Committee in
October 2007 (attached as Appendix G). These charters also
are available on the Companys website
(www.eaton.com). Under Company Quick Links
click on Corporate Responsibility, then
Corporate Governance. Printed copies will also be
provided free of charge upon request. Requests for printed
copies should be directed to the Companys Investor
Relations Office, Eaton Corporation, 1111 Superior Avenue,
Cleveland,
Ohio 44114-2584.
In addition to the Board of Directors Governance Policies,
certain other policies relating to corporate governance matters
are adopted from time to time by Board Committees, or by the
Board itself upon the Committees recommendation.
The Board of Directors held nine meetings in 2007. Each of the
directors attended at least 93% of the meetings of the Board and
its committees. The average rate of attendance for all directors
was 98%.
Audit Committee Report The Audit Committee of
the Board of Directors is responsible to assist the Board in
overseeing (1) the integrity of the Companys
financial statements and its systems of internal accounting and
financial controls, (2) the independence, qualifications
and performance of the Companys independent auditor,
(3) the performance of the Companys internal auditors
and (4) the Companys compliance with legal and
regulatory requirements. The Committees specific
responsibilities, as described in its charter, include the sole
authority to appoint, terminate and compensate the
Companys independent auditor, and to pre-approve all audit
services and other services to be provided to the Company by the
independent auditor. The Committee is comprised of five
Directors, all of whom are independent under the Sarbanes-Oxley
Act of 2002, the rules of the Securities and Exchange Commission
and the Board of Directors own independence criteria.
The Board of Directors amended the Committees charter most
recently on January 21, 2008. A copy of the charter is
attached as Appendix E to this proxy statement.
In carrying out its responsibilities, the Audit Committee has
reviewed, and has discussed with the Companys management
and independent auditor, Ernst & Young LLP, the
Companys 2007 audited financial statements and the
assessment of the Companys internal control over financial
reporting.
The Committee has also discussed with Ernst & Young
the matters required to be discussed by Statement on Auditing
Standards No. 114 (The Auditors Communication
with Those Charged with Governance).
The Committee has received the written disclosures from
Ernst & Young regarding their independence from the
Company that are required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit
Committees), has discussed with Ernst & Young
their independence and has considered whether their provision of
non-audit services to the Company is compatible with their
independence.
12
For 2006 and 2007, Ernst & Youngs fees for
various types of services to the Company were as follows:
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2007
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2006
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Audit Fees
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$
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13.7 million
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$
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13.9 million
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Includes Sarbanes-Oxley
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Section 404 attest services
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Audit-Related Fees
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0.5 million
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0.7 million
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Includes employee benefit
plan audits and business
acquisitions and divestitures
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Tax Fees
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5.9 million
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7.5 million
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Tax compliance services
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3.7 million
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5.7 million
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Tax advisory services
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2.2 million
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1.8 million
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All Other Fees
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0.0 million
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0.4 million
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Includes expatriate
administrative services
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The Audit Committee did not approve any of the services shown in
the above four categories through the use of the de
minimis exception permitted by Securities and Exchange
Commission rules.
The Audit Committee has adopted the following procedure for
pre-approving audit services and other services to be provided
by the Companys independent auditor: specific services are
pre-approved from time to time by the Committee or by the
Committee Chair on its behalf. As to any services approved by
the Committee Chair, the approval is made in writing and is
reported to the Committee at the following meeting of the
Committee.
Based upon the Committees reviews and discussions referred
to above, and in reliance upon them, the Committee has
recommended to the Board of Directors that the Companys
audited financial statements for 2007 be included in the
Companys Annual Report on
Form 10-K,
and the Board has approved their inclusion.
Respectfully submitted to the Companys shareholders by the
Audit Committee of the Board of Directors.
Charles E. Golden, Chair
Ernie Green
Ned C. Lautenbach
Victor A. Pelson
Gary L. Tooker
Board of Directors Governance Policies The
Board of Directors revised the Governance Policies most recently
in September 2007, as recommended by the Governance
Committee of the Board. The revised Governance Policies are
included in this proxy statement as Appendix C and are
available on the Companys website (www.eaton.com).
Under Company Quick Links click on Corporate
Responsibility, then Corporate Governance.
Printed copies will also be provided free of charge upon
request. Requests for printed copies should be directed to the
Companys Investor Relations Office, Eaton Corporation,
1111 Superior Avenue, Cleveland, Ohio
44114-2584.
Executive Sessions of the Non-Management
Directors The policy of the Board of Directors
is that the non-management directors meet in Executive Session
at each regular Board meeting, without the Chairman and Chief
Executive Officer or other members of management present, to
discuss whatever topics they may deem appropriate. The
non-management directors who chair the Audit Committee,
Compensation and Organization Committee, Finance Committee and
Governance Committee chair the Executive Sessions on a rotating
basis. Shown below are the months when Board meetings are held
and the non-management director who chairs each Executive
Session:
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January
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Chair of the Compensation and Organization Committee
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February
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Chair of the Audit Committee
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April
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Chair of the Governance Committee
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July
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Chair of the Finance Committee
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September
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Chair of the Audit Committee
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October
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Chair of the Compensation and Organization Committee
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The policy of the Board of Directors is that at least one such
Executive Session is held every year attended only by directors
who meet the independence criteria of the Board of Directors and
of the New York Stock Exchange. At the present time, all
non-management directors meet these criteria.
At each meeting of the Audit, Compensation and Organization,
Finance and Governance Committees, an Executive Session is held
at
13
which only the Committee members (all of whom qualify as
independent) are in attendance, without any members of the
Companys management present, to discuss whatever topics
they may deem appropriate.
Security Holder Communications to the Board
The Board of Directors provides the following process for
security holders and other interested parties to send
communications to the Board or outside directors:
Security holders and other interested parties may send such
communications by mail or courier delivery addressed as follows:
Corporate Secretary
Eaton Corporation
1111 Superior Avenue
Cleveland, Ohio 44114-2584
In general, the Corporate Secretary forwards all such
communications to the Chair of the Governance Committee. The
Governance Committee Chair in turn determines whether the
communications should be forwarded to other members of the Board
and, if so, forwards them accordingly. However, for
communications addressed to a particular member of the Board
(e.g., the director who will chair a particular Executive
Session), the Chair of a particular Board Committee or the
outside directors as a group, the Corporate Secretary forwards
those communications directly to those individuals.
Director Attendance at Annual Meetings The
policy of the Board of Directors is that all directors should
attend annual meetings, and all outside directors are
compensated for their attendance. At the Companys 2007
annual meeting, held April 25, 2007, all members of the
Board were in attendance.
Code of Ethics The Company has a Code of
Ethics that was approved by the Board of Directors. The Company
provides training globally for all employees on its Code of
Ethics. Eaton requires that all directors, officers and
employees of Eaton, its subsidiaries and affiliates abide by the
Companys Code of Ethics, which is included in this proxy
statement as Appendix H and is available on the
Companys website (www.eaton.com). Under
Company Quick Links click on Corporate
Responsibility, then Corporate Governance.
Printed copies will be provided free of charge upon request.
Requests for printed copies should be directed to the
Companys Investor Relations Office, Eaton Corporation,
1111 Superior Avenue, Cleveland, Ohio 44114-2584.
14
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Introduction
The Compensation and Organization Committee of the Board of
Directors (the Committee) determines the
compensation for our executive officers, and reviews, approves
and oversees the administration of all of our executive
compensation plans and programs. The Committee consists of five
independent non-employee directors and is supported by the
Companys Human Resources Department as well as one or more
independent executive compensation consultants retained and
directed by the Committee. The Compensation and Organization
Committees charter and key responsibilities are included
in this proxy statement as Appendix F and are available on the
Companys website (www.eaton.com). Under
Company Quick Links click on Corporate
Responsibility, then Corporate Governance.
Please note that the use of the terms we,
us or our throughout this Compensation
Discussion and Analysis refers to the Company
and/or its
management.
An Overview of
Our Executive Compensation Philosophy
Under our executive compensation philosophy, which was last
reviewed and updated by the Committee in 2007, we design our
executive compensation plans and programs to help us attract,
motivate, reward and retain highly qualified executives, to
align well with the interests of shareholders and to fairly
reflect, in the judgment of the Committee, our performance, and
the responsibilities and personal performance of individual
executives.
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Pay for Performance Our executive
compensation program reflects the belief that executive
compensation must, to a significant extent, be at risk where the
amount earned depends on achieving rigorous Company, business
unit and individual performance objectives designed to enhance
shareholder value. Accordingly, our incentive compensation plans
and programs are designed to pay larger amounts if we achieve
superior performance and smaller amounts if we do not achieve
target performance.
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Market Competitiveness Under our executive
compensation program, we target total compensation, which, for
this purpose, includes base salary, a target annual cash
incentive opportunity, a target long-term cash incentive
opportunity, and equity-based incentives, to be within the
median range of compensation paid by similarly-sized industrial
companies. Nonetheless, we also continuously monitor and assess
the competitive and recruiting pressures for executive talent in
our industries and regional market. To ensure that these
pressures do not jeopardize our ability to retain our key
executives, the Committee retains and has, from time to time,
exercised its discretion to adjust compensation levels as
necessary and appropriate to address these risks.
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Use of
Compensation Consultants
As warranted, we employ a variety of outside compensation,
benefit and actuarial consultants to support various types of
technical and administrative work in these disciplines.
Typically, this includes data analysis, broad-based employee
compensation and benefit plan benchmarking and design, actuarial
work, drafting selected employee communications, business
process and administrative recordkeeping services, and
assistance with acquisition and divestiture due diligence. We
choose firms for individual consulting and service assignments
based upon their specific project capabilities and the proposed
price for their work. To support our market analysis of
professional, managerial, operating and senior executive
positions, we have, for many years, participated in and used the
annual surveys sponsored by three separate national compensation
consulting firms: Hewitt Associates, Towers Perrin and Hay
Associates. Each survey provides comprehensive compensation data
covering hundreds of companies across a range of industries. In
the analysis that we prepare for the Committee, we focus on the
median and mean data reported in the surveys for
similarly-sized industrial companies, which the
Committee currently defines as companies with annual sales of
$5 billion to $20 billion.
15
The Committee also selects and retains the services of an
independent executive compensation consultant when it deems it
appropriate to support its oversight and management of our
executive compensation program. The Committee validates our
executive compensation plans and programs by periodic
comprehensive studies conducted with the assistance of the
consultant retained by the Committee. To support the annual
process of conducting a performance evaluation for our Chairman
and Chief Executive Officer, the Committee has engaged
Dr. David Hofrichter, a senior consultant with Hewitt
Associates (see the section entitled Other Key Executive
Compensation Principles below for further details on this
process). The Committee has also selected Peter Egan, a senior
consultant with Hewitt Associates, as its primary advisor and to
assist the Committee in its review of our executive compensation
policies, programs and processes. In 2007, Mr. Egan
performed the following assignments for the Committee:
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reviewed all Company-prepared materials in advance of each
Committee meeting,
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assisted the Committee in its review and discussions of all
material agenda items throughout the year,
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provided the Committee with his independent review and
confirmation of the Companys analytical work,
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provided insights and advice to the Committee and management in
connection with possible design changes to our incentive
plans, and
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provided the Committee feedback regarding the appropriateness of
individual executive total compensation plans.
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To ensure the Committees continued access to qualified
independent advice on executive compensation and governance
matters, we will first obtain the Committees review and
approval prior to awarding any material consulting assignment to
any firm that has already been engaged by the Committee. In
2007, the Committee reviewed a report of the consulting work
performed for the Committee by Hewitt Associates compared to the
total annual consulting work on compensation, benefits and
actuarial matters performed for the Company and has determined
that each of their senior consultants may provide independent
advice to the Committee.
Competitive
Analysis and Benchmarking Processes
To support the Committee in overseeing our executive
compensation plans and programs, we have for many years employed
two primary analytical processes, which follow separate, but
complementary, approaches. The first is our Total Compensation
Analysis and Planning Process and the second is our Peer Group
Pay and Performance Analysis Process.
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Total Compensation Analysis and Planning Process
Each year, we provide the Committee with an
analysis of the total compensation provided to each executive
officer. For purposes of this analysis, total compensation
includes base salary, annual bonus and long-term incentive
compensation (including both cash and equity-based elements). We
prepare a planning worksheet which also sets forth the median
and mean data for each compensation element for each executive
officers position, along with the average of the median
and mean data points as reported in the Hewitt, Towers Perrin
and Hay surveys for comparable positions in
similarly-sized industrial companies. If the surveys
do not report reasonably equivalent data for a specific
executive officers position, each compensation element for
that position is extrapolated from the available survey data.
The Committee uses these worksheets as it assesses each
executives total compensation and in establishing an
updated annual total compensation plan. Consequently, as the
Committee establishes base salary levels, target cash incentive
opportunities, and equity-based incentive awards for the next
fiscal year, it is able to base these decisions on an accurate
and up-to-date understanding of how each executive
officers resulting total compensation plan will compare to
current market practices in similarly-sized industrial
companies. The worksheet also is provided to the
Committees compensation consultant, who reviews our
results and methodology.
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As a key part of this process, each year our Chairman and Chief
Executive Officer prepares a proposed total compensation plan
(consisting of base salary, the target annual cash incentive
16
opportunity, the target long-term cash incentive opportunity and
equity-based incentive awards (consisting of stock options,
restricted shares or both) for each executive officer (except
with respect to his own compensation). Initially, he meets
individually with his senior management team to discuss the
performance assessment for each of their respective executive
officer direct reports and to formulate initial recommendations
as to an appropriate total compensation plan for each executive.
After considering this input, and following a subsequent review
with the Vice President Human Resources, our
Chairman and Chief Executive Officer decides upon and submits to
the Committee a draft total compensation plan for each executive
officer (other than with respect to his own compensation). He
then meets with the Committee to discuss the performance of each
executive officer and highlights the rationale for recommending
any compensation element for any executive officer that is
significantly higher or lower than the reported survey median
(if any) for the executives position.
Following this discussion, the Committee decides upon and
establishes a total compensation plan for each executive
officer. The Committee also meets in executive session (with no
members of our management in attendance) to review the same
comprehensive market data for our Chairman and Chief Executive
Officers position and to establish a total compensation
plan for him. In 2007, the Committee reviewed and discussed the
proposed total compensation plans for the Companys
executive officers with its compensation consultant prior to
finalizing these plans.
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Peer Group Pay and Performance
Analysis This process encompasses a
comprehensive annual analysis comparing the publicly-available
financial results and executive compensation data for a group of
publicly-held diversified industrial peer companies (the
Peer Group) with similar data reported for the
Company. This Peer Group consists of the following organizations:
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Crane
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Danaher
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Dover
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Emerson Electric
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General Electric
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Honeywell
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Illinois Tool Works
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Ingersoll Rand
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ITT Industries
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Parker Hannifin
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SPX
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Textron
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Thermo Electron
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Tyco International
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United Technologies
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This analysis is conducted to provide the Committee with the
relevant compensation data reported by each Peer Group company
for its chairman and chief executive officer, its chief
financial officer and, to the extent available, for its chief
legal officer and any positions equivalent to our Group
President position. The analysis compares our performance with
that of the Peer Group over one-year, three-year and five-year
time periods using a wide range of performance metrics. This
provides the Committee with insight into how each of the Peer
Group companies has actually rewarded its executive officers in
the form of base salaries, short-term and long-term incentive
awards and annual equity-based awards in light of the returns
that it has produced for its investors. Prior to reviewing this
data with the Committee, the Committees compensation
consultant reviews the analysis and provides the Committee with
his views and commentary. The Committee has indicated that it
finds this insight to be very valuable in helping them to assess
whether our pay for performance profile is appropriate and
aligned with industry and peer group practices. In addition,
management and the Committee use this comprehensive peer group
financial analysis each year to support the process of reviewing
and establishing short-term and long-term incentive plan goals
intended to drive and reward top quartile performance by the
Company.
Use
of Tally Sheets
In February of each year, prior to making decisions about the
compensation of our Chairman and Chief Executive Officer and the
other Named Executive Officers, we provide the Committee with a
comprehensive tally sheet for each executive officer that sets
forth
17
the dollar amount of all components of his or her current
compensation, including base salary, annual incentive
compensation, long-term incentive compensation, retirement and
savings programs, health and welfare programs and the cost of
personal executive benefits. In reviewing these tally sheets,
the Committee also reviews potential compensation payments to
our Chairman and Chief Executive Officer and the other Named
Executive Officers under various termination of employment
scenarios, including in the event of a change of control of the
Company. This process includes a review of potential severance
payment obligations, the potential values of vested and unvested
restricted stock and stock options, and accumulated balances and
projected payment obligations in connection with our retirement
and savings programs, including our deferred compensation and
limited service supplement and restoration retirement income
plans. Based upon this review, in 2007 the Committee determined
the total compensation, in the aggregate (including the total
payments of accrued benefits and separation payments that would
be made under the various termination scenarios), for our
Chairman and Chief Executive Officer and the other Named
Executive Officers to be competitive, reasonable and not
excessive. This analysis did not suggest the need for any
material changes to the Companys executive compensation
program or its administration and it did not prompt the
Committee to make any substantive changes to any compensation
elements for any of the Named Executive Officers.
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The Components of
Executive Compensation and Benefits
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We use the following balanced components to achieve our
objectives relating to hiring, motivating, retaining and
rewarding executive officers:
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Base Salary We pay a competitive base salary
to our executive officers in recognition of their day-to-day job
responsibilities. In setting executive officer salaries each
year, the Committee first reviews each executives current
base salary compared to the median salary as determined under
the annual Total Compensation Analysis and Planning Process. In
general, the Committee sets base salaries at approximately the
median of market practice. The Committee may establish a base
salary level in excess of the reported market median. In making
salary adjustments, the Committee typically considers such
factors as individual performance against business plans,
initiative and leadership, time in position, experience,
knowledge and success in building organizational capability.
Consistently effective individual performance is a threshold
requirement for any base salary increase. In Executive Session,
the Committee uses this same process to establish the base
salary for our Chairman and Chief Executive Officer.
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Short-Term Incentives We establish a
competitive annual cash incentive compensation opportunity for
participants in our Executive Incentive Compensation Plan (the
EIC Plan). Eligible participants include each
executive officer and approximately 1,500 other members of
mid-level and executive-level management. Typically, the
Committee establishes target incentive opportunities under the
EIC Plan at approximately the median of market practice. The EIC
Plan is designed to reward executives when they succeed in
meeting demanding Company and individual performance objectives.
In setting annual performance goals, the Committee took into
consideration the Board of Directors approved annual profit
plan, the consensus operating earnings per share
(EPS) estimates for the Company as projected by the
sell-side analysts who follow and report on the
Company. For 2007, the Committee set performance goals such that
incentive awards at 100% of the participants incentive
targets would only be paid if the Company performed at or above
the markets consensus EPS expectations.
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Payouts are not strictly formulaic but are based upon the
consideration of both objective and subjective factors. As in
past years, we based the annual cash incentive awards paid to
the executive officers for 2007 on individual target
opportunities expressed as a percentage of the
participants base salary, the level of our achievement of
pre-established stretch financial goals set by the
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Committee and individual performance ratings that reflected a
discretionary assessment by the Committee of each
executives contributions during the year (which are
discussed in greater detail below). In 2007, we based
performance goals on our operating EPS, which exclude
acquisition integration charges, and cash flow return on gross
capital employed in the business (CFR), weighted
equally, in addition to individual and business unit performance
objectives. We use these goals because, over time, they bear a
statistical correlation to the market trading price of our
shares. We do not make payouts under the EIC Plan unless we
achieve a predetermined minimum level of CFR (except for the
possible discretionary award described below). If we achieve the
predetermined minimum level of CFR, but do not achieve the
predetermined minimum level of EPS, payouts are limited to the
minimum level, which is an amount equal to 25% of the incentive
target. In setting demanding annual EPS and CFR goals under the
EIC Plan, the Committee reviews market analyses, our annual
profit plan as approved by the Board of Directors, and external
research reports and comparative analyses of our Peer Group
companies (as shown above). The Committee, in its sole
discretion, may increase or decrease the total amount available
for payout under the EIC Plan by up to 20%, based upon its
assessment of our performance against other financial and
non-financial factors. The Committee did not exercise this
discretion for the 2007 plan year. The EIC Plan also gives the
Committee the discretion to pay up to 20% of the target
incentive fund to recognize contributions to the Company in a
year when awards would not otherwise be payable, which was not
the case for 2007. We also base awards on individual performance
ratings. In setting individual performance ratings, the
Committee reviews a recommendation from our Chairman and Chief
Executive Officer for each executive officer (other than
himself). Individual ratings may result in payouts ranging from
zero to 150% of the amount otherwise payable to any given
participant, except that the total awards payable to all
eligible participants cannot exceed 100% of the EPS and CFR
performance adjusted incentive fund. Under the EIC Plan terms,
the incentive fund does not include any award to an
employee director (currently limited to our Chairman
and Chief Executive Officer) for purposes of this
zero-sum calculation. In executive session, the
Committee establishes an individual EIC Plan rating for our
Chairman and Chief Executive Officer for each year after
discussing the results of the Board of Directors annual
appraisal of his or her performance. We describe this process in
more detail below under Other Key Executive Compensation
Principles Chairman and Chief Executive Officer
Annual Appraisal.
In 2007 each Named Executive Officers target award
opportunity was multiplied by 175% to reflect the Companys
actual performance compared against the Committee-established
EPS and CFR goals. The executives adjusted target award
opportunity was then multiplied by the executives
individual performance rating for the year to determine the
amount of the final incentive award payout.
In establishing the 2007 individual performance ratings for each
Named Executive Officer, the Committee took into consideration a
variety of objective and subjective factors as described in the
process outlined below.
In preparing the recommended individual performance ratings for
each Named Executive Officer who reports to him, our Chairman
and Chief Executive Officer reviewed each individual Senior Vice
President and Group Presidents performance in four basic
operations-oriented goal categories (which impacts approximately
75% of the final recommended performance rating):
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Success in achieving the annual financial plan for each
of their individual businesses.
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Success in achieving specific growth goals which,
depending upon the executives specific businesses could
include such measures as (a) outgrowing the end markets by
a targeted percentage, (b) accelerating the pace and
effectiveness of new product and technology development,
(c) achieving a
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targeted level of sales increases from new bookings with
identified growth accounts, (d) increasing aftermarket and
service revenues, (e) growing sales in selected regions and
(f) increasing incremental sales by a targeted dollar level
from new acquisitions
and/or joint
ventures.
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Success in achieving specific operational excellence goals
which, depending upon the executives specific
businesses could include such measures as (a) utilizing
value management tools to achieve improved profitability for key
products, (b) achieving a targeted percentage reduction in
our supplier base and reducing logistics costs,
(c) achieving a stipulated dollar level of additional
global material sourcing, (d) achieving a targeted level of
improvement in supplier productivity, (e) driving lean
manufacturing system achievement in facilities,
(f) achieving targeted deployment of the Eaton Quality
Process, (g) achieving stipulated percentage improvements
in safety performance and greenhouse gas emissions,
(h) achieving the time phased integration plans for
acquisitions and joint ventures, (i) achieving
profitability increase targets in selected regions and
(j) meeting the implementation schedule for the Eaton
Business Excellence Assessment process.
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Success in building organizational capacity which
includes such objectives as (a) reinforcing Eatons
ethical standards and overall Doing Business Right
philosophy through stronger prevention and training,
(b) insuring that all eligible employees in his business
units received a full performance appraisal using the
Companys standard process, (c) completing the annual
Section 404 assessment and compliance requirements,
(d) insuring their business units have assessed and
implemented effective action plans targeted at the top issues
highlighted in the previous annual global employee survey,
(e) achieving progress on diversity objectives and
(f) increasing the leadership capability of the Company by
demonstrated progress on talent upgrades, implementing more
effective organization structures and succession management
plans.
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In addition to these operating goals, three of our four Senior
Vice President and Group Presidents (Messrs. Arnold, Carson
and Sweetnam) also have one or more corporate staff
responsibilities. Performance against goals set for these staff
functions impact approximately 25% of their final recommended
performance rating. For 2007, these included:
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Corporate Marketing goals such as (a) achieving targeted
bookings with identified growth accounts, (b) completion of
the Customer Relations Assessment survey and
(c) success in recruiting key leaders in Asia and Europe.
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Corporate technology goals such as (a) completing the
ramp-up of
the India Engineering Center and (b) meeting new technology
program timetables.
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Environmental, Health and Safety goals such as
(a) improving overall corporate safety results by a
targeted percentage, (b) overall reduction in the
Companys greenhouse gases, and (c) the implementation
of the Companys standard environmental health and safety
standards process.
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Asia Pacific Regional Management goals such as (a) targeted
growth in Asia Pacific revenues, (b) establishment and
leadership of a Company steering committee in India,
(c) completion of the new India headquarters facility and
(d) completion of a key site selection process in China.
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Europe Regional Management goals such as (a) completion of
the European headquarters startup and staffing plans and
(b) completion of a study exploring further Eastern Europe
and Russian business opportunities.
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Latin America Management goals such as (a) success in
opening a new Latin American headquarters in Mexico City and
(b) management support for the Excel 07 and acquisition
integration relocations.
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In preparing the recommended individual performance rating for
Mr. Fearon, our
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Executive Vice President and Chief Financial and Planning
Officer, our Chairman and Chief Executive Officer took into
consideration the following:
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Success in achieving the annual financial plan.
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Success in helping to drive value creating growth through
identifying and completing significant acquisition and joint
venture projects.
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Success in achieving operational excellence goals which
include such objectives as (a) achieving improved
efficiency and effectiveness in the Companys information
technology function, (b) completing a new data center
strategy, (c) improving efficiency in certain identified
financial reporting and control processes, (d) instituting
risk-based and continuous internal audit processes,
(e) optimal management of the Companys balance sheet,
(f) leadership of the Companys tax strategy and
compliance and (g) completion of targeted financing and
leasing programs.
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Success in building organizational capacity including
(a) upgrading the financial personnel development and
recruiting programs and (b) achieving a targeted percentage
improvement in the Finance functions employee engagement
scores on the annual global employee survey.
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In developing his recommended performance ratings for the Named
Executive Officers, our Chairman and Chief Executive Officer
does not follow a formulaic approach but develops a recommended
rating based upon his subjective view of each executives
overall performance against this wide range of both objective
and subjective goals for the year. While reviewing and
discussing each executives performance and recommended
performance rating with the Committee, he and the Committee also
discuss an assessment of additional subjective factors which
includes each executives:
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Ability to think and act strategically (how the executive uses
his business acumen, vision and intellectual rigor in shaping
his function or business),
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Ability to get results (the executives drive, change
management skills, adaptability and how he leverages resources
in building his function or business), and
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Ability to demonstrate a strong leadership style (his
interpersonal communication skills and professional presence).
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The actual individual performance ratings for the Named
Executive Officers ranged from 110% to 130% for purposes of the
2007 EIC Plan awards which, when combined with the 175%
adjustment related to the Companys EPS and CFR
performance, resulted in final incentive awards that ranged from
193% to 228% of the executives original target incentive
opportunities.
Executive officers may defer payment of their annual cash
incentive payments under a plan described in more detail in the
narrative accompanying the Nonqualified Deferred Compensation
table on pages 38 and 39 of this proxy statement.
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Stock Options In 2007, we continued our
long-standing practice of providing long-term incentive
compensation awards to executive officers in two components:
approximately 50% in stock options and 50% in a four-year
performance-based cash incentive compensation award (described
in more detail under Long-Term Cash Incentive Plan
beginning on page 23). We believe that this portfolio
approach to structuring long-term incentives provides an
appropriate balance for focusing executives on both an external
measure of our success (via equity awards) and on internal
performance metrics (via the four-year cash incentive plan).
This strategic approach is reviewed annually by the Committee
with the assistance of its compensation consultant who confirmed
the appropriateness of this approach. Under the strategy, the
intent is to continue to drive executive performance, while
being sensitive to executive retention risks, by using a
balanced portfolio of long-term incentive compensation
components.
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We believe that stock options are effective in aligning the
interests of our executives with those of our shareholders by
having a significant component of executive compensation tied
directly to changes in the
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value of our common shares. Stock options also aid executive
retention because they are earned over a period of several years.
For a number of years and again in 2007, we established our
annual stock option grant guidelines by first determining the
Black-Scholes value (or a value set by a comparable market
pricing model) of a share of our common stock as reported in the
Hewitt, Towers Perrin and Hay surveys for our most recently
completed annual stock option grant (February 2006). This value
is compared to the fair market value on this same grant date to
determine a percentage. This percentage is then multiplied by
the average price for a share of our common stock over the last
90 trading days of 2006. The resulting dollar value is then
divided into the median long-term incentive compensation values,
as determined by the surveys, to establish our recommended
median grant sizes for the February 2007 grant.
Starting with this basis for determining appropriate median
stock option grant levels, as part of the annual Total
Compensation Analysis and Planning Process, the Committee then
reviews our Chairman and Chief Executive Officers
recommended stock option grants for each Named Executive
Officer. Based on individual factors such as the level of
sustained personal performance, long-term career potential, and
competitive market conditions, the Committee may adjust an
individual executives stock option grant, if any, to a
level that is at, above or below median market practice. Using
this same process, in executive session the Committee determines
the size of the annual stock option grant, if any, that it will
make to our Chairman and Chief Executive Officer.
In 2007, the Committee approved stock option grants for the
Named Executive Officers which were at approximately 50% of the
median long-term grant values provided to similar positions as
reported in the most recent data for similarly-sized industrial
companies in the Hewitt, Towers Perrin and Hay annual surveys.
Grants at this level were deemed by the Committee to be
appropriate when considered in the aggregate with the other
compensation elements approved for these executives.
We set the strike price for all stock option grants at the fair
market value of our common shares on the date of the grant
(using the process described below). We have never selected
strike prices or otherwise timed the grant of stock options to
enable executives to profit from an artificially low strike
price.
Our grant recommendation and approval processes have always been
disciplined, straightforward, and consistent. In 1995, under a
stock plan approved by the shareholders, we added annual grants
of stock options to the compensation provided to non-employee
directors, and the process for making these grants is set forth
in the stock plan document and is described below.
Under the various Company stock plans, all of which have been
approved by the shareholders, a committee of independent
directors has exclusive authority to fix the date and all terms
and conditions of equity grants to executive officers.
Currently, the Committee has this responsibility.
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Employee Stock
Option Grant Practices
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In the case of annual stock option grants to executives, our
grant practices have not changed materially since we began
granting options. We grant stock options at the same time each
year, except in the case of newly hired executives, as described
below. We set the strike price for all stock options at the fair
market value of our common shares on the date of grant,
determined as described below.
Key stock option grant practices are as follows:
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As noted above, we set the strike price for all of our stock
options at the fair market value of our common shares on the
date of grant. Our shareholder-approved stock plans define
fair market value as the mean of the high and low
prices of our common shares as quoted on the New York Stock
Exchange. This long-standing plan definition of fair market
value may result in stock option strike prices that differ from
our closing share price on the date of grant.
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The Committee has delegated authority to our Chairman and Chief
Executive Officer to make individual stock option
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grants
and/or
restricted stock awards in order to recruit new executives. In
2007, the Committee updated this delegated authority by
(a) approving an initial pool of 50,000 shares for use
by our Chairman and Chief Executive Officer for making periodic
grants to newly recruited executives and (b) establishing
that the grant date for such new hire award would be
the first trading day of the next month following the date of
employment commencement for each newly recruited executive. In
each regularly scheduled meeting of the Committee, we provide an
update on the year-to-date new hire grants approved by our
Chairman and Chief Executive Officer under this authority and
the balance of the authorized shares that have not been granted.
In the event that the grants of stock options to newly recruited
executives exhausts this initial pool of authorized shares, we
would seek Committee approval for an allocation of additional
shares for these recruiting purposes. New hire grants in 2007
did not exceed the 50,000 share pool.
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In addition, the Committee has on rare occasions approved
mid-year special stock option grants to executives who join the
Company as the result of a business acquisition. The Committee
reviews and approves awards to these executives at a regularly
scheduled Committee meeting.
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The Committee did not make any mid-year grants to newly acquired
executives in 2007.
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Long-Term Cash Incentive Plan As noted above,
a cash bonus opportunity under the Executive Strategic Incentive
Plan I (the ESIP) provides the remaining portion of
each executive officers annual total long-term
compensation. Awards cover four-year performance periods. We set
the target incentive opportunity for each executive officer at
approximately 50% of the median of the reported long-term
incentive opportunity as determined under our annual Total
Compensation Analysis and Planning Process. We base awards under
the ESIP on our success in achieving aggressive growth in EPS
and CFR goals (weighted equally) over a four-year period. As
with the EIC Plan, the ESIP calculation process is not
formulaic. Rather the Committee takes into consideration both
objective and subjective factors when determining final award
payouts. The Committee establishes performance goals at the
beginning of each four-year award period based on a
comprehensive analysis prepared by management that includes:
(a) a comparison of our past performance across a range of
performance metrics to that reported for our Peer Group,
(b) our estimated financial results and those for each of
our Peer Group companies as projected by financial analysts who
follow these companies (generally covering two or three year
periods into the future) and (c) a review of our strategic
objectives and annual business plans for the four-year
performance period.
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Absent any unusual circumstances, the Committee typically sets
performance hurdles for each four-year award period such that:
(a) payment at approximately 100% of the target incentive
opportunity would be made if our performance over the four-year
period is at or above the projected median of the performance of
our Peer Group and (b) payment at or above 150% of the
target incentive opportunity would be made if our performance
over the four-year period is at or above the projected
75th percentile of the performance of our Peer Group. Prior
to the
2005-2008
performance period, we expressed these incentive awards in the
form of contingent share units. Contingent share units aligned
the interests of the executives with those of the shareholders
because the units reflected appreciation or depreciation and
earnings on our common shares during the performance period.
Beginning with awards for the
2005-2008
performance period, the Committee amended the plan to provide
that incentive awards would not be expressed in the form of
contingent share units. The Committee made this change at that
time because it felt that the executive compensation portfolio
was overly-weighted in favor of equity-based compensation. The
Committee annually reviews this element of the design of the
ESIP to ensure that it aligns
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well with competitive practice and provides an effective
long-term incentive structure.
For the 20042007 performance period, each Named Executive
Officers target contingent share award opportunity was
multiplied by 200% to reflect the fact that the Companys
actual performance exceeded the maximum EPS and CFR goals
established by the Committee at the start of this four-year
period. The executives adjusted contingent share award
opportunity was then multiplied by his or her individual
performance rating for the four-year period to determine his or
her actual ESIP award payout. As in prior years, the individual
performance ratings established by the Committee for each Named
Executive Officer were set at approximately the average of their
individual annual EIC Plan performance ratings for each of the
four years in this performance cycle. Actual individual ratings
ranged from 110% to 120%. When combined with the 200% adjustment
related to the Companys EPS and CFR performance, the final
adjusted contingent share awards ranged from 220% to 240% of the
executives original target incentive opportunities.
Executive officers may defer payment of their ESIP award payouts
under a plan described in more detail in the narrative
accompanying the Nonqualified Deferred Compensation Table on
pages 38 and 39.
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Restricted Stock In limited circumstances, we
grant restricted stock to our executives, including the Named
Executive Officers. Typically, these awards are approved by the
Committee for retention purposes. An executive receiving such an
award would, in the year of the award, have total compensation
(including the value of the award) above the median of market
practice. Retention-based restricted stock grants generally vest
over four or five years.
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After reviewing the 2007 Peer Group Pay and Performance Analysis
(described on page 17), the Committee determined that,
despite the fact that the competitive position of the
Companys total compensation for its key executives was at
or near the median of market practices as reported for
similarly-sized industrial companies in the Hewitt, Towers
Perrin and Hay surveys, our executives total compensation
was not competitive with the median total compensation reported
for our Peer Group. In response, the Committee approved
additional restricted stock grants for key executives with such
awards having shorter vesting schedules than the Committee has
typically approved for previous restricted stock awards.
Additional details about the Companys stock plan and these
restricted stock awards to the Named Executive Officers may be
found in the table and footnotes for the Outstanding Equity
Awards at Fiscal Year-End Table on pages 34 and 35.
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Stock Ownership Guidelines We expect all of
our executive officers and, depending on their level in the
Company, certain other key executives to hold a number of our
common shares with a value equal to a pre-determined multiple of
their base salary. These multiples range from one times base
salary in the case of our General Managers and key non-officer
staff executives to three to five times base salary for our
Chairman and Chief Executive Officer. The Committee annually
reviews the progress of individual executive officers toward
these ownership levels and our Chairman and Chief Executive
Officer annually reviews the progress of other non-officer
executives. On December 31, 2007, our Chairman and Chief
Executive Officer and the other Named Executive Officers owned
shares of the Companys common stock with values well in
excess of their individual ownership guidelines.
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Our executives do not engage in financial hedging of their
investment risk in shares of the Companys common stock and
the Company actively and strongly discourages and does not
provide executives with any advice or assistance related to such
practices.
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Health and Welfare Benefits and Retirement Income Plans
With certain exceptions described below, we
provide our executive officers with the same health and welfare
and retirement income benefit programs that we provide to our
other salaried employees. In place of typical Company-paid group
term life insurance, we provide all executive officers and
certain other executives an executive-owned individual whole
life policy
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which is in addition to $50,000 of group term life insurance.
The value of the Company-paid premium for the whole life policy
is imputed as taxable income to each covered executive.
Collectively, the group term insurance and the whole life policy
provide these executives with a level of coverage in reference
to base salary that is comparable to the other salaried
employees. We decided to provide this executive life insurance
arrangement to allow each executive to have a paid up policy at
retirement that would mirror the Company-provided
post-retirement group term life insurance but with less
post-retirement tax complexity for both the executive and the
Company.
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The tax-qualified pension plans that we maintain for our
U.S. salaried and non-union employees define the term
compensation to include base salary, overtime pay,
pay premiums and awards under any annual variable pay or
incentive compensation pay (including amounts deferred for
receipt at a later date). We use this same definition for
calculating pension benefits under the non-qualified retirement
income arrangements described below.
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Other Retirement and Compensation Arrangements
Certain provisions of the Internal Revenue Code,
as amended, limit the annual benefits that may be paid from a
tax-qualified retirement plan. As permitted under the Code, and
to align with competitive practices, the Board of Directors has
authorized restoration plans under which payment from our
general funds will be made for any benefits calculated under the
provisions of the applicable tax-qualified retirement plan which
may exceed those limits. The present value of these benefits
accrued prior to January 1, 2005 will be paid in a single
installment upon a proposed change of control of the Company
unless otherwise determined by the Board of Directors.
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In response to typical market practices and to enhance our
ability to attract and retain key executives, the Board of
Directors also has adopted plans which provide supplemental
annual retirement income to certain executives who are hired in
mid-career and would therefore not have the opportunity to
accumulate significant credited service with us under our
tax-qualified retirement income or non-qualified restoration
plans, provided that they either retire at age 55 or older
and have at least 10 years of service with us or retire at
age 65 or older regardless of the years of service.
Additional details on our retirement income programs can be
found in the narrative discussion and footnotes accompanying the
Pension Benefits Table on pages 36 and 37.
These qualified and non-qualified retirement income plans are
the only compensation or benefit plans or programs that we
provide to executive officers which take into consideration the
amounts realized by the executive from prior compensation
awards. For example, any previously-paid awards under annual or
long-term incentive plans and any gains realized upon the
exercise of employee stock options do not affect the amounts
payable as a future award under any other of our compensation
plans or programs. Moreover, we do not take these past payouts
or stock gains into consideration when we set the level of any
future incentive targets or equity award opportunities.
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Employment Contracts and Change of Control Agreements
We do not provide our executive officers with
employment contracts. As with all other U.S. salaried
employees, our executive officers are at will
employees. We do, however, enter into standard change of control
agreements with each executive officer. We believe that such
agreements are in our best interests and that of our
shareholders because they ensure that we will have the continued
dedication and focus of key executives notwithstanding the
possibility of a change of control of the Company. Providing
these agreements to our executive officers also aligns with
competitive practices. In 2007, the Committee and the Board of
Directors amended these standard change of control agreements
with each of our executive officers, including the Named
Executive Officers, to conform to the final regulations under
Internal Revenue Code Section 409A which covers
non-qualified deferred compensation arrangements. Details on our
change of control agreements may be found in the narrative
discussion
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accompanying the Potential Payments Upon Termination section
beginning on page 40.
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Deferral Plans We provide our executives with
opportunities to defer the receipt of their earned and otherwise
payable awards under our annual and long-term cash incentive
plans. We offer these plans in order to (a) provide
executives with a competitive opportunity to accumulate
additional retirement assets, (b) provide a means for
acquiring common shares in order to meet our share ownership
guidelines and (c) provide an additional form of retention.
Despite the fact that they are quite common across our industry,
we do not currently provide our executives with a non-qualified
defined contribution plan that enables them to defer base salary
amounts in excess of the IRS limits that impact the amount of
personal savings that they can elect to contribute to our
tax-qualified defined contribution Section 401(k) plan.
Details on our deferral programs may be found in the narrative
discussion and footnotes accompanying the Non-qualified Deferred
Compensation Table beginning on page 38.
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Personal Benefits In order to align with
competitive practice in our industry, we also provide our
executive officers with a limited amount of personal benefits,
some of which is treated as taxable income to the executive.
These benefits are described in more detail in the footnotes
accompanying the Summary Compensation Table on pages 30-32.
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Use of Our Aircraft We operate and maintain
company aircraft to enhance our executive officers ability
to effectively conduct our business. This principle guides how
these aircraft are scheduled and used. Our stringent aircraft
use policy ensures that the primary use of this mode of
transportation is to satisfy business needs and that all
aircraft use is accounted for at all times and in accordance
with applicable tax laws.
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To ensure his personal security and enhance his productivity,
the Board of Directors has directed that our Chairman and Chief
Executive Officer use our aircraft for all business and personal
travel whenever feasible. The Board of Directors also has
directed that we provide full tax protection to him with respect
to the imputed income attributable to the personal use of such
aircraft. In addition, it is our policy that our aircraft not to
be used for personal travel by other executives except with the
express approval of our Chairman and Chief Executive Officer.
Other Key
Executive Compensation Principles
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Chairman and Chief Executive Officer Annual Appraisal
The Committee thoroughly assesses the
performance of our Chairman and Chief Executive Officer
annually. Dr. David Hofrichter, an independent consultant
from Hewitt Associates selected by the Committee, supports this
process and, independent of management, collects and compiles
input concerning the performance of the Chairman and Chief
Executive Officer from each non-employee Director. After
reviewing a comprehensive annual goal report and self-evaluation
provided by our Chairman and Chief Executive Officer, each
Director provides his or her independent ratings
recommendations, comments and performance improvement
suggestions for performance areas that include:
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our operations and financial results,
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long-term strategy development and progress,
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success in building organizational depth, capability and
diversity,
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personal leadership style,
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community and industry involvement,
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Board support and development and
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execution of corporate governance practices.
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The Director inputs on these performance areas, along with any
narrative commentary, are compiled anonymously by the
consultant, who then prepares a draft consensus evaluation for
review and approval by the Committee. This evaluation is also
reviewed in an executive session of the Board of Directors and
shared with our Chairman and Chief Executive Officer prior to a
performance evaluation discussion with the Chair of the
Committee. The Committee uses this appraisal as a factor to
determine, with respect to our Chairman and Chief Executive
26
Officers compensation, the payouts under our short-term
and long-term incentive plans together with, and as part of the
Total Compensation Analysis and Planning Process, any increase
in base salary, new short and long term incentive targets and
equity awards.
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Tax and Accounting Considerations We
carefully monitor and comply with any changes in the tax laws
and regulations and accounting standards and related
interpretive guidance that impact our executive compensation
plans and programs. Tax and accounting considerations, however,
have never played a central role in the process of determining
the compensation or benefit plans and programs that are to be
provided to our executives. Instead, the Committee has
consistently structured our executive compensation program in a
manner intended to ensure that it is (a) competitive in the
marketplace for executive talent and (b) provides
incentives and rewards that focus executives on reaching desired
internal and external performance levels. Once the appropriate
programs and plans are identified, we administer and account for
them in accordance with applicable requirements.
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$1 Million Tax Deduction
Limit Historically the Committee felt that
it was important and in the shareholders interest to
maintain a significant amount of discretion over the
administration of our short-term and long-term incentive plans,
including the discretion to establish individual performance
ratings for each executive which reflect both objective and
subjective factors. Because the Committee has retained this
discretion, the annual and long-term incentive plans have not
qualified as performance-based compensation under
Internal Revenue Code Section 162(m). Under this law, any
remuneration in excess of $1 million paid to our Chairman
and Chief Executive Officer and the three other most highly
compensated executive officers of the Company (other than the
Chief Financial Officer) in a given year is not tax deductible
unless paid pursuant to formula-driven, performance-based
arrangements that preclude Committee discretion to adjust
compensation upward after the beginning of the period in which
the compensation is earned.
|
In 2007, the Committee again reviewed the short- and long-term
incentive plans in light of Section 162(m) and determined
that a new Senior Executive Compensation Incentive Plan (an
annual incentive plan) and an amended Executive Strategic
Incentive Plan (a multi-year incentive plan), both of which
would be intended to qualify incentive payments under the Plans
as deductible compensation under Section 162(m), should be
submitted for shareholder approval at the 2008 Annual Meeting.
These proposed plans are included in this proxy statement.
Policy on Incentive Compensation, Stock Options and Other
Equity Grants Upon the Restatement of Financial Results
In 2007, our Audit and Compensation and
Organization Committees, along with the Board of Directors,
thoroughly reviewed current market practices and the issues
related to compensation recovery practices in the event of a
material restatement of financial results due to executive
misconduct. Following these deliberations, the Board of
Directors adopted a formal policy stating that, if the Board
determines that an Executive engaged in any fraud, misconduct or
other bad-faith action that, directly or indirectly, caused or
partially caused the need for a material accounting restatement
for any period as to which a Performance-based Award was paid or
credited to the Executive during the twelve month period
following the first public issuance of the incorrect financial
statement, such award shall be subject to reduction,
cancellation or reimbursement to the Company at the discretion
of the Board. As used in this Policy, the term
Executive means any Eaton executive who participates
in either the Executive Strategic Incentive Plan I or the
Executive Strategic Incentive Plan II, or both, or any successor
plans. Our incentive compensation plans, stock plans and
deferral plans will be amended during 2008 to include provisions
reflecting this policy. Additional details regarding this policy
and related processes may be found on our website
(www.eaton.com). Under Company Quick Links
click on Corporate Responsibility, then
Corporate Governance.
27
Chairman and
Chief Executive Officer Compensation in 2007
As part of its annual Total Compensation Analysis and Planning
Process in February 2007, and its review of the
December 31, 2006 tally sheet, the Committee reviewed all
components of our Chairman and Chief Executive Officers
compensation, including base salary, target annual cash
incentive opportunity, long-term cash incentive opportunity and
equity based incentives. Based upon these reviews, the Committee
concluded that our Chairman and Chief Executive Officers
total compensation (including compensation payable upon
employment termination whether in connection with a change of
control of the Company or otherwise) in the aggregate was
reasonable and not excessive.
The Committee confirmed that the 2007 compensation for our
Chairman and Chief Executive Officer was earned pursuant to the
procedures, policies and factors described in earlier sections
of this Compensation Discussion and Analysis. Following the
completion of the 2007 performance evaluation, the Committee
Chair advised our Chairman and Chief Executive Officer that the
Board of Directors had given him a very favorable overall
performance evaluation and that, as in past years, this overall
performance appraisal was a key factor used by the Committee in
reviewing and approving his annual and long-term incentive
awards that were determined at year-end and that it would be one
element considered by the Committee when it reviews and approves
any future annual compensation adjustments, awards and grants
under the Committees Total Compensation Analysis and
Planning Process.
In the February 2007 Total Compensation Analysis and Planning
Process, the Committee increased our Chairman and Chief
Executive Officers annual base salary by 3.9% effective
April 1, 2007 in order to better align his base salary with
market practices. This was the first base salary adjustment for
him since March 2005 and, following this adjustment, his base
salary approximated the median annual salary level as reported
in the Hewitt, Towers Perrin and Hay surveys for similarly-sized
industrial companies.
The Committee confirmed that it had maintained our Chairman and
Chief Executive Officers 2007 annual cash incentive target
opportunity at 105% of his base salary (unchanged from his 2005
and 2006 target incentive opportunities) and that this incentive
opportunity was positioned at approximately the market median
reported in the Hewitt, Towers Perrin and Hay surveys for
similarly-sized industrial companies. It also reported that his
actual 2007 annual cash incentive award was based on our actual
reported EPS and CFR results compared to the targets set by the
Committee for 2007, along with the Committees evaluation
of his individual performance. In establishing our Chairman and
Chief Executive Officers individual performance rating,
the Committee reported that it took into account the results of
the annual Chairman and Chief Executive Officer Performance
Appraisal process and such factors as:
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continuing leadership in expanding and driving important
initiatives such as the use of the Eaton Business System,
successful acquisition integrations, development of an
outstanding leadership team, the successful on-time and
better-than-budget implementation of the previously announced
Excel 07 initiatives, our diversity profile and the continued
success of the annual global employee engagement survey and
follow-up
action planning process that has firmly established Eaton as an
industry benchmark company for such processes;
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success in identifying, negotiating and closing a number of
value-creating strategic acquisitions that continue to provide
growth for us as a premier diversified industrial company;
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exceeding the 2007 profit plan sales, EPS and CFR goals and in
strengthening the balance sheet despite continued pressure from
ongoing increases in commodity prices that impacted operations;
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the successful expansion of our initiatives to further our
philosophy of Doing Business Right which included
further global expansion of our ethics and ombudsman programs;
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continuing the implementation of our initiatives in moving
toward a lower capital intensity business model; and
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28
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continuing success in driving and communicating our vision and
commitment to be a sustained top quartile performer within our
Peer Group.
|
The Committee noted that, for 2007, our Chairman and Chief
Executive Officer earned 228% of his target annual cash
incentive opportunity, which is based on the product of 175%
(the 2007 EPS and CFR performance adjusted incentive fund
factor), and an individual performance multiplier of 130%
established by the Committee following the Board of
Directors 2007 Performance Appraisal process. This
percentage, when applied to his 2007 approved incentive target
opportunity of 105% of his base salary, resulted in a bonus
payout of 239% of his base salary.
As part of the Total Compensation Analysis and Planning Process
in February 2007, the Committee established our Chairman and
Chief Executive Officers target long-term cash incentive
opportunity at 169% of base salary for the
2007-2010
performance period which, together with his Committee-approved
stock option grant (which will vest in equal installments over a
four-year period), positioned the value of the total long-term
incentive compensation elements at approximately the market
median as reported in the Hewitt, Towers Perrin and Hay surveys
for similarly-sized industrial companies. The Committee also
approved a restricted stock grant for 17,000 shares for our
Chairman and Chief Executive Officer in 2007 which will vest in
equal installments over a two-year period. While we use
restricted stock awards from time to time to provide an
additional level of retention, the Committee also noted that, in
addition to retention, it wanted this award to better align our
Chairman and Chief Executive Officers total compensation
to that which is paid to similar executives in the
Companys diversified industrial peer group.
At year-end 2007, the Committee reported that our Chairman and
Chief Executive Officer earned a long-term performance plan
award for the
2004-2007
performance period based upon our EPS and CFR performance as
described above and his Committee-approved individual rating.
Our Chairman and Chief Executive Officer earned contingent share
units equal to 240% of his target share unit opportunity. This
percentage was based upon actual cumulative CFR results and our
EPS growth over the
2004-2007
period, which exceeded the maximum pre-established EPS growth
and cumulative CFR goals for the period, thus generating an
initial 200% contingent share unit adjustment and the individual
performance rating of 120% established by the Committee. The
Committee also noted that this individual performance rating
percentage was approximately equal to his average individual
performance rating for each of the four annual incentive plan
years in this award period and that it appropriately reflected
his sustained individual performance over this period. The final
cash value of the contingent share units also reflected the
sustained growth in the market value of our common shares over
this period.
As a result of the Committees decisions with respect to
our Chairman and Chief Executive Officers compensation,
his total compensation is significantly higher than any of the
other Named Executive Officers. This reflects the accumulated
difference found in competitive market practices for chief
executive officers of large industrial organizations and the
very different relative job responsibilities of this position as
compared to the job responsibilities and pay practices for other
executive positions, as well as increases in the value of his
accumulated pension benefits (which are driven by his pay
history and long tenure with us).
Compensation and Organization Committee
Report The Compensation and Organization
Committee of the Board of Directors has reviewed and discussed
with the Companys management the Compensation Discussion
and Analysis required by Item 402(b) of
Regulation S-K
and, based on this review and discussion, the Compensation and
Organization Committee recommended to the Board that the
Compensation Discussion and Analysis be included in this proxy
statement.
COMPENSATION AND
ORGANIZATION COMMITTEE
Michael J. Critelli, Chair
Christopher M. Connor
Deborah L. McCoy
John R. Miller
Gregory R. Page
29
SUMMARY COMPENSATION
TABLE
The following table sets forth the total compensation of our
Chairman and Chief Executive Officer, our Executive Vice
PresidentChief Financial and Planning Officer and the
three other of our most highly compensated executive officers in
2007 (the Named Executive Officers). We have not
entered into any employment agreements with any of the Named
Executive Officers, other than the change of control agreements
described beginning on page 43. Prior to setting total
compensation for each of the Named Executive Officers, the
Committee reviews tally sheets which show the executives
current compensation, including equity and non-equity based
compensation. Salary, as shown in column (c),
consists of base salary, which accounted for approximately 13%
of the total cash compensation of the Named Executive Officers.
The Named Executive Officers were not entitled to receive
Bonus payments under column (d) for 2007
(Bonus payments are defined under the disclosure
rules as discretionary payments that are not based on any
performance criteria). The Non-Equity Incentive
Compensation provided by us, as shown in column (g), is
performance-based and accounted for approximately 87% of the
total cash compensation of the Named Executive Officers. Column
(e), Stock Awards, consists of the amount recognized
for financial statement reporting purposes with respect to
grants of restricted shares under our stock plans. Column (f),
Option Awards, consists of the amount recognized for
financial statement reporting purposes with respect to grants of
stock options under our stock plans. Column (g),
Non-Equity Incentive Plan Compensation, is comprised
of two cash components that do not involve any share-based
payment for financial reporting purposes. One component is
the amount paid as annual executive incentive compensation for
2007. The other component is the amount paid under the four-year
executive incentive plan for the
2004-2007
award period. These payments were approved by the Committee at
its January 22, 2008 meeting and, to the extent not
deferred by the executive, will be paid on March 15, 2008.
Column (h), Change in Pension Value and Nonqualified
Deferred Compensation Earnings, contains two distinct
components. Change in Pension Value represents the
total change in the actuarial present value of each Named
Executive Officers accumulated benefit under all of our
defined benefit pension plans (both tax qualified and
non-qualified)
from the measurement date used for financial reporting purposes.
Nonqualified Deferred Compensation Earnings include
earnings on deferred compensation that exceed 120% of a
specified rate of interest for long-term debt instruments
established by the Internal Revenue Service. Column (i),
All Other Compensation, consists of compensation
that does not fit within any of the foregoing definitions of
compensation. This compensation includes personal benefits, tax
gross-up
payments, our contributions to defined contribution plans, the
value of insurance premiums, and the value of any dividends paid
on restricted shares since they are not factored into the grant
date fair values reported in columns (e) or (f).
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Change in
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Pension
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Value and
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Nonqualified
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Non-Equity
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Deferred
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Total
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Name and Principal Position
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Year
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Salary
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Bonus
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Awards(1)
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Awards
(1)
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Compensation
(2)
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Earnings
(3)
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Compensation
(4)
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Compensation
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(a)
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(b)
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(c)
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(d)
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(e)
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(f)
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(g)
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(h)
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(i)
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(j)
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A. M.
Cutler(5)
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2007
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$
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1,069,305
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$
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0
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$
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1,020,767
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$
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2,526,899
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$
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9,520,197
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$
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1,341,315
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$
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224,778
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$
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15,703,261
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Chairman, Chief Executive
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2006
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$
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1,024,620
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$
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0
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$
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809,922
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$
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1,995,959
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$
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8,162,063
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$
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1,995,424
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$
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139,961
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$
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14,127,949
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Officer and President
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R. H.
Fearon(6)
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2007
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$
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511,695
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$
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0
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$
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681,750
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$
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549,357
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$
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2,894,807
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$
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243,751
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$
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80,839
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$
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4,962,199
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Executive Vice President -
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2006
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$
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478,140
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$
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0
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$
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430,919
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$
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544,295
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$
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2,896,824
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$
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246,194
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$
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50,885
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$
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4,647,257
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Chief Financial and Planning Officer
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C.
Arnold(7)
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2007
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$
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480,885
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$
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0
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$
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386,981
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$
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539,485
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$
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2,480,998
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$
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157,330
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$
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80,911
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$
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4,126,590
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Senior Vice President
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2006
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$
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451,920
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$
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0
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$
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181,419
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$
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544,295
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$
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2,376,170
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$
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218,097
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$
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46,375
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$
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3,818,276
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and President - Fluid Power Group
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R. W.
Carson(8)
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2007
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$
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483,105
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$
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0
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$
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386,981
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$
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539,485
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$
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2,514,737
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$
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448,252
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$
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91,098
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$
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4,463,658
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Senior Vice President
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2006
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$
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457,380
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$
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0
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$
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181,419
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$
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544,295
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$
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2,382,432
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$
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552,451
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$
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94,829
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$
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4,212,806
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and President - Electrical Group
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J. E.
Sweetnam(9)
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2007
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$
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457,650
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$
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0
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$
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302,803
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$
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524,677
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$
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2,135,571
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$
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363,665
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$
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75,830
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$
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3,860,196
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Senior Vice President
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2006
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$
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429,540
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$
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0
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$
|
181,419
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$
|
544,295
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$
|
2,309,309
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$
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511,385
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$
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75,573
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$
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4,051,521
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and President - Truck Group
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(1) |
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These columns show the amount recognized for financial statement
reporting purposes for 2006 and 2007 in accordance with
SFAS 123(R) with respect to restricted stock and stock
option awards to the Named Executive Officers. It may include
amounts from awards granted in 2007 and earlier years. There
were no forfeitures of awards by any Named Executive Officer
during 2006 and 2007. The assumptions used in connection with
this valuation are further described in the Note
Shareholders Equity appearing on page 39
of the Companys Annual Report to Shareholders for 2007.
The actual amounts realized by individual Named |
30
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Executive Officers likely will vary based on a number of
factors, including the market performance of the Companys
shares and timing of option exercises. |
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(2) |
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Non-Equity Incentive Plan Compensation reported in Column
(g) includes payments under the annual incentive plan for
2006 or 2007 and payments under the four-year incentive plan.
The material features of these incentive plans are described in
the Compensation Discussion and Analysis, above. The amounts
payable under each plan for each Named Executive Officer are set
forth in the footnotes to the Summary Compensation Table, below. |
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(3) |
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Reported in column (h) is the aggregate change in the
actuarial present value of the accumulated benefit under all
defined benefit pension plans of the Company, both qualified and
non-qualified, and above market earnings on non-qualified
deferred compensation. Under the disclosure rules, earnings on
deferred compensation are considered to be above
market if they exceed a rate of interest established by
the Internal Revenue Service on the date the interest rate or
formula used to calculate the interest rate is established under
the plan pursuant to which the receipt of compensation is
deferred. The only Named Executive Officer to receive above
market earnings during 2006 or 2007 was Mr. Cutler and this
amount is set forth in footnote (5) to the Summary
Compensation Table, below. |
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(4) |
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Reported in All Other Compensation (column (i)) are amounts
representing the aggregate incremental cost incurred by the
Company for certain executive personal benefits. The amounts of
these benefits in excess of disclosure levels for each Named
Executive Officer are set forth in the notes to the Summary
Compensation Table, below. The calculation of incremental cost
for personal use of Company-owned or chartered aircraft includes
only those variable costs incurred as a result of personal
flight activity and excludes non-variable costs which would have
been incurred regardless of whether there was any personal use
of the aircraft. To enhance his productivity and personal
security, the Board of Directors has directed Mr. Cutler to
use the Company-owned aircraft for his business and personal
travel when feasible. The Board of Directors also has directed
that we provide full tax protection to him with respect to the
imputed income attributable to personal use of such aircraft.
Other than for business related travel and the Chairman and
Chief Executive Officers personal use as noted below, the
Companys aircraft policy does not permit any personal use
of Company-owned aircraft without the advance approval of the
Chairman and Chief Executive Officer. |
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Column (i) also includes the amount of Company
contributions on behalf of the Named Executive Officers to the
Eaton Savings Plan (the ESP). The ESP permits an
employee to contribute from 1% to 5% of his or her salary to the
matching portion of the ESP, subject to limits imposed under the
Internal Revenue Code. Eaton makes a matching contribution which
equals $1.00 for each dollar contributed by the participating
employee with respect to the first 3% of his or her salary
contributed to the ESP and $.50 for each dollar contributed by
the participating employee with respect to the next 2% of his or
her salary contributed to the ESP. The Company contributed
$9,000 during 2007 to the ESP account of each of the Named
Executive Officers in the form of matching 401(K) contributions.
The Company also provides certain executives, including the
Named Executive Officers, with the opportunity to acquire
individual whole-life insurance. The annual premium paid by the
Company during 2007 for each of the Named Executive Officers is
set forth in the notes to the Summary Compensation Table, below.
Each executive officer is responsible for paying individual
income taxes due with respect to the Companys insurance
program. |
|
(5) |
|
With respect to Mr. Cutler, the amount shown in column
(g) consists of an annual incentive compensation payment
for 2007 of $2,548,000 and a long-term incentive compensation
award for the
2004-2007
award period of $6,972,197. Column (h) consists of the
following values: (i) change in pension value (qualified
plans) $47,689; (ii) change in pension value (non-qualified
plans) of $1,290,388; and (iii) above market earnings on
non-qualified deferred compensation of $3,238. All Other
Compensation, as shown in column (i), consists of the following
executive benefits: a car allowance of $18,000; estate planning,
financial counseling and tax return preparation of $18,900;
aggregate incremental cost to the Company of $76,778 for
personal use of Company-owned or chartered aircraft;
reimbursement of taxes on imputed income associated with the
personal use of Company-owned or chartered aircraft of $10,332;
and the annual premium for Company-purchased life insurance of
$12,003. Also reflected in this column is $79,765 in dividends
on restricted shares as well as the Companys matching
contribution to his ESP account totaling $9,000. |
|
(6) |
|
With respect to Mr. Fearon, the amount shown in column
(g) consists of an annual incentive compensation payment
for 2007 of $853,777 and a long-term incentive compensation
award for the
2004-2007
award |
31
|
|
|
|
|
period of $2,041,030. Column (h) consists of the following
values: (i) change in pension value (qualified plans)
$8,514; and (ii) change in pension values (non-qualified
plans) $235,237. There were not any above market earnings on
non-qualified deferred compensation. All Other Compensation, as
shown in column (i), consists of the following executive
benefits: a car allowance of $18,000; estate planning, financial
counseling and tax return preparation of $3,400; and the annual
premium for Company-purchased life insurance of $4,446.
Mr. Fearon did not have any personal use of the
Company-owned aircraft in 2007. Also reflected in this column is
$45,992 in dividends on restricted shares as well as the
Companys matching contribution to his ESP account totaling
$9,000. |
|
(7) |
|
With respect to Mr. Arnold, the amount shown in column
(g) consists of an annual incentive compensation payment
for 2007 of $703,387 and a long-term incentive compensation
award for the
2004-2007
award period of $1,777,611. Column (h) consists of the
following values: (i) change in pension value (qualified
plans) $16,764; and (ii) change in pension values
(non-qualified plans) $140,566. There were not any above market
earnings on non-qualified deferred compensation. All Other
Compensation, as shown in column (i), consists of the following
executive benefits: a car allowance of $18,000; estate planning,
financial counseling and tax return preparation of $27,115; and
the annual premium for Company-purchased life insurance of
$3,534. Mr. Arnold did not have any personal use of the
Company-owned aircraft in 2007. Also reflected in this column is
$23,263 in dividends on restricted shares as well as the
Companys matching contribution to his ESP account totaling
$9,000. |
|
(8) |
|
With respect to Mr. Carson, the amount shown in column
(g) consists of an annual incentive compensation payment
for 2007 of $737,126 and a long-term incentive compensation
award for the
2004-2007
award period of $1,777,611. Column (h) consists of the
following values: (i) change in pension value (qualified
plans) of $38,606; and (ii) change in pension value
(non-qualified plans) of $409,646. There were not any above
market earnings on non-qualified deferred compensation. All
Other Compensation, as shown in column (i), consists of the
following executive benefits: a car allowance of $18,000; estate
planning, financial counseling and tax return preparation of
$3,100; aggregate incremental cost to the Company of $26,600 for
personal use of Company-owned aircraft; reimbursement of taxes
on imputed income associated with the personal use of
Company-owned aircraft of $3,569; and the annual premium for
Company-purchased life insurance of $7,566. Also reflected in
this column is $23,263 in dividends on restricted shares as well
as the Companys matching contribution to his ESP account
totaling $9,000. |
|
(9) |
|
With respect to Mr. Sweetnam, the amount shown in column
(g) consists of an annual incentive compensation for 2007
of $625,115 and a long-term incentive compensation award for the
2004-2007
award period of $1,510,456 Column (h) consists of the
following values: (i) change in pension value (qualified
plans) of $33,637; and (ii) change in pension values
(non-qualified plans) of $330,028. There were not any above
market earnings on non-qualified deferred compensation. All
Other Compensation, as shown in column (i), consists of the
following executive benefits: a car allowance of $18,000; estate
planning, financial counseling and tax return preparation of
$19,560; aggregate incremental cost to the Company of $4,000 for
personal use of Company-owned aircraft; reimbursement of taxes
on imputed income associated with the personal use of
Company-owned aircraft of $365; and the annual premium for
Company purchased life insurance of $4,866. Also reflected in
this column is $20,038 in dividends on restricted shares as well
as the Companys matching contribution to his ESP account
totaling $9,000. |
32
GRANTS OF PLAN-BASED
AWARDS
The following table summarizes the potential awards payable to
the Named Executive Officers with respect to the short-term and
long-term incentive award opportunities granted in 2007.
|
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All Other
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All Other
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Stock
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Option
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Awards:
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Awards:
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Exercise or
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Grant Date
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Number of
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Number of
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Base Price of
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Closing
|
|
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Fair Value
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Estimated Future Payout under Non-Equity
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Estimated Future Payout under Equity
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Shares of
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Securities
|
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Option
|
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Market
|
|
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of Stock &
|
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|
|
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Incentive Plan Awards
|
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|
Incentive Plan Awards
|
|
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Stock or Units
|
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Underlying
|
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Awards
|
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Price on
|
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Option
|
|
Name
|
|
Grant Date
|
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Threshold ($)
|
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Target ($)
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Maximum ($)
|
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Threshold (#)
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Target (#)
|
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Maximum (#)
|
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(#)
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Options (#)
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($/Share)(3)
|
|
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Grant Date
(3)
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|
|
Awards
(4)
|
|
(a)
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(b)
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|
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(c)
|
|
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(d)
|
|
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(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
|
(k)
|
|
|
(l)
|
|
|
(m)
|
|
|
A. M. Cutler
|
|
|
2/27/2007
|
(1)
|
|
$
|
559,125
|
|
|
$
|
1,118,250
|
|
|
$
|
2,236,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
(2)
|
|
$
|
900,000
|
|
|
$
|
1,800,000
|
|
|
$
|
3,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,373,770
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,000
|
|
|
$
|
80.81
|
|
|
$
|
80.01
|
|
|
$
|
2,487,800
|
|
R. H. Fearon
|
|
|
2/27/2007
|
(1)
|
|
$
|
195,149
|
|
|
$
|
390,298
|
|
|
$
|
780,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
(2)
|
|
$
|
275,000
|
|
|
$
|
550,000
|
|
|
$
|
1,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,389,932
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,000
|
|
|
$
|
80.81
|
|
|
$
|
80.01
|
|
|
$
|
568,640
|
|
C. Arnold
|
|
|
2/27/2007
|
(1)
|
|
$
|
182,698
|
|
|
$
|
365,396
|
|
|
$
|
730,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
(2)
|
|
$
|
243,750
|
|
|
$
|
487,500
|
|
|
$
|
975,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
864,667
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
$
|
80.81
|
|
|
$
|
80.01
|
|
|
$
|
533,100
|
|
R. W. Carson
|
|
|
2/27/2007
|
(1)
|
|
$
|
183,137
|
|
|
$
|
366,274
|
|
|
$
|
732,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
(2)
|
|
$
|
243,750
|
|
|
$
|
487,500
|
|
|
$
|
975,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
864,667
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
$
|
80.81
|
|
|
$
|
80.01
|
|
|
$
|
533,100
|
|
J. E. Sweetnam
|
|
|
2/27/2007
|
(1)
|
|
$
|
162,367
|
|
|
$
|
324,734
|
|
|
$
|
649,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
(2)
|
|
$
|
186,250
|
|
|
$
|
372,500
|
|
|
$
|
745,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
662,642
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,000
|
|
|
$
|
80.81
|
|
|
$
|
80.01
|
|
|
$
|
479,790
|
|
|
|
|
(1) |
|
The amounts shown represent potential payments under the
Companys Executive Incentive Compensation Plan.
Threshold, Target and
Maximum payouts assume achievement of 50%, 100%, and
200% of target, respectively. Targets are based on earnings per
share and cash flow return on gross capital goals. Payouts are
determined by business performance toward the goals and
individual performance appraisals. The amounts shown are based
on the individuals annualized base salary as of
April 1, 2007 and individual performance ratings of 100%
for each payout level. Actual individual performance ratings may
be higher or lower. Payments for 2007 under the Executive
Incentive Compensation Plan for each Named Executive Officer are
included in the column entitled Non-equity Incentive Plan
Compensation (column (g)) of the Summary Compensation
Table. |
|
(2) |
|
The amounts shown represent potential payments under the
four-year Executive Strategic Incentive Plan for the 2007-2010
award period. Threshold, Target and
Maximum equal payments of 50%, 100%, and 200% of
target, respectively. The amounts shown are based on the
individuals approved incentive target and individual
performance ratings of 100% for each payout level. Actual
individual performance ratings may be higher or lower. The
payouts for the
2004-2007
award period under the Executive Strategic Incentive Plan are
included in the column entitled Non-Equity Incentive Plan
Compensation (column (g)) of the Summary Compensation
Table. |
|
(3) |
|
All of the Companys plans that authorize the granting of
stock options require that the exercise price be the fair
market value on the date of grant. Fair market value is
defined in the plans as the mean of the high and low market
prices of the Companys shares on the date of grant. As a
result, the exercise price differs slightly from the closing
market price of the shares on February 27, 2007, which is
the date the options were granted. |
|
(4) |
|
The amounts in this column are the Black-Scholes values of all
stock options granted in 2007 and the Grant Date Fair Market
Value of Restricted Shares granted in 2007 to the Named
Executive Officers. |
33
OUTSTANDING EQUITY
AWARDS AT FISCAL YEAR-END
The following table summarizes the outstanding equity awards
held by the named executive officers at year-end 2007. The
closing price of our shares on the last trading day in 2007
($96.95) was used to determine the market value of unvested
restricted shares shown in column (h).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
|
Plan Awards: No.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Awards: No.
|
|
Plan Awards:
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
of Securities
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market Value
|
|
|
of
|
|
Market
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
of Shares or
|
|
|
Unearned Shares,
|
|
or Payout Value of
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Unexercised
|
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
Units or
|
|
Unearned Shares,
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unearned
|
|
Option
|
|
|
Option
|
|
|
|
|
Stock That
|
|
|
Stock That
|
|
|
Other
|
|
Units or Other
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Options
|
|
Exercise
|
|
|
Expiration
|
|
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Rights That Have
|
|
Rights That Have
|
Name
|
|
Grant
|
|
(#) Exercisable
|
|
|
(#) Unexercisable
|
|
|
(#)
|
|
Price ($)
|
|
|
Date
|
|
|
|
|
Vested (#)
|
|
|
Vested ($)
|
|
|
Not Vested (#)
|
|
Not Vested ($)
|
(a)
|
|
Date
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
(e)
|
|
|
(f)
|
|
|
Grant Date
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
(j)
|
A. M. Cutler
|
|
1/27/1998
|
|
|
|
|
|
|
41,821
|
(1)
|
|
|
|
$
|
38.05
|
|
|
1/27/2008
|
|
|
2/24/2004
|
|
|
16,200(11
|
)
|
|
$
|
1,570,590
|
|
|
|
|
|
|
|
1/26/1999
|
|
|
124,254
|
|
|
|
|
|
|
|
|
$
|
30.74
|
|
|
1/26/2009
|
|
|
2/22/2005
|
|
|
12,000(12
|
)
|
|
$
|
1,163,400
|
|
|
|
|
|
|
|
1/25/2000
|
|
|
116,170
|
|
|
|
|
|
|
|
|
$
|
30.76
|
|
|
1/25/2010
|
|
|
2/27/2007
|
|
|
17,000(13
|
)
|
|
$
|
1,648,150
|
|
|
|
|
|
|
|
8/1/2000
|
|
|
92,936
|
|
|
|
|
|
|
|
|
$
|
29.81
|
|
|
8/1/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2001
|
|
|
180,000
|
|
|
|
|
|
|
|
|
$
|
36.47
|
|
|
2/27/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/26/2002
|
|
|
224,000
|
|
|
|
|
|
|
|
|
$
|
40.60
|
|
|
2/26/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/25/2003
|
|
|
242,000
|
|
|
|
|
|
|
|
|
$
|
34.65
|
|
|
2/25/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/24/2004
|
|
|
145,200
|
|
|
|
96,800
|
(2)
|
|
|
|
$
|
59.07
|
|
|
2/24/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/22/2005
|
|
|
80,400
|
|
|
|
120,600
|
(3)
|
|
|
|
$
|
68.22
|
|
|
2/22/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/21/2006
|
|
|
41,250
|
|
|
|
123,750
|
(4)
|
|
|
|
$
|
68.62
|
|
|
2/21/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
140,000
|
(5)
|
|
|
|
$
|
80.81
|
|
|
2/27/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. H. Fearon
|
|
4/23/2002
|
|
|
27,896
|
|
|
|
|
|
|
|
|
$
|
42.21
|
|
|
4/23/2012
|
|
|
2/24/2004
|
|
|
2,000(14
|
)
|
|
$
|
193,900
|
|
|
|
|
|
|
|
2/25/2003
|
|
|
12,000
|
|
|
|
|
|
|
|
|
$
|
34.65
|
|
|
2/25/2013
|
|
|
2/22/2005
|
|
|
9,660(15
|
)
|
|
$
|
936,537
|
|
|
|
|
|
|
|
2/24/2004
|
|
|
44,000
|
|
|
|
|
|
|
|
|
$
|
59.07
|
|
|
2/24/2014
|
|
|
2/27/2007
|
|
|
3,400(16
|
)
|
|
$
|
329,630
|
|
|
|
|
|
|
|
2/22/2005
|
|
|
22,572
|
|
|
|
11,628
|
(6)
|
|
|
|
$
|
68.22
|
|
|
2/22/2015
|
|
|
2/27/2007
|
|
|
13,800(17
|
)
|
|
$
|
1,337,910
|
|
|
|
|
|
|
|
2/21/2006
|
|
|
9,900
|
|
|
|
20,100
|
(7)
|
|
|
|
$
|
68.62
|
|
|
2/21/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
32,000
|
(8)
|
|
|
|
$
|
80.81
|
|
|
2/27/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Arnold
|
|
2/26/2002
|
|
|
9,202
|
|
|
|
|
|
|
|
|
$
|
40.60
|
|
|
2/26/2012
|
|
|
2/22/2005
|
|
|
4,500(18
|
)
|
|
$
|
436,275
|
|
|
|
|
|
|
|
2/24/2004
|
|
|
44,000
|
|
|
|
|
|
|
|
|
$
|
59.07
|
|
|
2/24/2014
|
|
|
2/27/2007
|
|
|
3,700(16
|
)
|
|
$
|
358,715
|
|
|
|
|
|
|
|
2/22/2005
|
|
|
22,572
|
|
|
|
11,628
|
(6)
|
|
|
|
$
|
68.22
|
|
|
2/22/2015
|
|
|
2/27/2007
|
|
|
7,000(19
|
)
|
|
$
|
678,650
|
|
|
|
|
|
|
|
2/21/2006
|
|
|
9,900
|
|
|
|
20,100
|
(7)
|
|
|
|
$
|
68.62
|
|
|
2/21/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
30,000
|
(9)
|
|
|
|
$
|
80.81
|
|
|
2/27/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. W. Carson
|
|
2/26/2002
|
|
|
3,000
|
|
|
|
|
|
|
|
|
$
|
40.60
|
|
|
2/26/2012
|
|
|
2/22/2005
|
|
|
4,500(18
|
)
|
|
$
|
436,275
|
|
|
|
|
|
|
|
2/25/2003
|
|
|
44,000
|
|
|
|
|
|
|
|
|
$
|
34.65
|
|
|
2/25/2013
|
|
|
2/27/2007
|
|
|
3,700(16
|
)
|
|
$
|
358,715
|
|
|
|
|
|
|
|
2/24/2004
|
|
|
44,000
|
|
|
|
|
|
|
|
|
$
|
59.07
|
|
|
2/24/2014
|
|
|
2/27/2007
|
|
|
7,000(19
|
)
|
|
$
|
678,650
|
|
|
|
|
|
|
|
2/22/2005
|
|
|
22,572
|
|
|
|
11,628
|
(6)
|
|
|
|
$
|
68.22
|
|
|
2/22/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/21/2006
|
|
|
9,900
|
|
|
|
20,100
|
(7)
|
|
|
|
$
|
68.62
|
|
|
2/21/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
30,000
|
(9)
|
|
|
|
$
|
80.81
|
|
|
2/27/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. E. Sweetnam
|
|
2/24/2004
|
|
|
44,000
|
|
|
|
|
|
|
|
|
$
|
59.07
|
|
|
2/24/2014
|
|
|
2/22/2005
|
|
|
4,500(18
|
)
|
|
$
|
436,275
|
|
|
|
|
|
|
|
2/22/2005
|
|
|
22,572
|
|
|
|
11,628
|
(6)
|
|
|
|
$
|
68.22
|
|
|
2/22/2015
|
|
|
2/27/2007
|
|
|
1,200(16
|
)
|
|
$
|
116,340
|
|
|
|
|
|
|
|
2/21/2006
|
|
|
9,900
|
|
|
|
20,100
|
(7)
|
|
|
|
$
|
68.62
|
|
|
2/21/2016
|
|
|
2/27/2007
|
|
|
7,000(19
|
)
|
|
$
|
678,650
|
|
|
|
|
|
|
|
2/27/2007
|
|
|
|
|
|
|
27,000
|
(10)
|
|
|
|
$
|
80.81
|
|
|
2/27/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These are performance-based options
granted on 1/27/1998, 50% of which vest upon the satisfaction of
a specified stock price performance criterion, and the remaining
50% vest upon the attainment of specified earnings per share.
Any unvested options are to vest 10 days before the
expiration date of the options. The specified stock price
criterion was reached in 2004, and 41,821 of the options vested
at that time. The remaining 41,821 of the options vested
automatically in accordance with their terms on 1/17/2008
(10 days prior to the expiration date of the options).
|
|
(2)
|
|
Mr. Cutler was granted 242,000
options on 2/24/2004, of which 48,400 vested on each of
2/24/2005, 2/24/2006 and
2/24/2007
and 48,400 will vest on each of 2/24/2008 and 2/24/2009.
|
|
(3)
|
|
Mr. Cutler was granted 201,000
options on 2/22/2005, of which 40,200 vested on each of
2/22/2006 and 2/22/2007 and 40,200 will vest on each of
2/22/2008, 2/22/2009 and 2/22/2010.
|
|
(4)
|
|
Mr. Cutler was granted 165,000
options on 2/21/2006, of which 41,250 vested on 2/21/2007 and
41,250 will vest on each of 2/21/2008, 2/21/2009, 2/21/2010.
|
|
(5)
|
|
Mr. Cutler was granted 140,000
options on 2/27/2007, of which 35,000 vests on each of
2/27/2008, 2/27/2009,
2/27/2010
and 2/27/2011.
|
|
(6)
|
|
Messrs. Fearon, Arnold,
Carson, and Sweetnam were each granted 34,200 options on
2/22/2005, of which 11,286 vested on each of 2/22/2006 and
2/22/2007 and 11,628 will vest on 2/22/2008.
|
|
(7)
|
|
Messrs. Fearon, Arnold,
Carson, and Sweetnam were each granted 30,000 options on
2/21/2006, of which 9,900 vested on 2/21/2007, 9,900 will vest
on 2/21/2008 and 10,200 will vest on 2/21/2009.
|
|
(8)
|
|
Mr. Fearon was granted 32,000
options on 2/27/2007, of which 10,560 will vest on each of
2/27/2008 and 2/27/2009 and 10,880 will vest on 2/27/2010.
|
|
(9)
|
|
Messrs. Arnold and Carson were
each granted 30,000 options on 2/27/2007, of which 9,900 will
vest on each of
2/27/2008
and 2/27/2009 and 10,200 will vest on 2/27/2010.
|
34
|
|
|
(10)
|
|
Mr. Sweetnam was granted
27,000 options on 2/27/2007, of which 8,910 will vest on each of
2/27/2008 and
2/27/2009 and
9,180 will vest on 2/27/2010.
|
|
(11)
|
|
Mr. Cutler was granted 27,000
restricted shares on 2/24/2004, of which 5,400 vested on each of
2/24/2006 and
2/24/2007
and 8,100 will vest on each of 2/24/2008 and 2/24/2009.
|
|
(12)
|
|
Mr. Cutler was granted 15,000
restricted shares on 2/22/2005, of which 3,000 vested on
2/22/2007, 3,000 will vest on
2/22/2008
and 4,500 will vest on each of 2/22/2009 and 2/22/2010.
|
|
(13)
|
|
Mr. Cutler was granted 17,000
restricted shares on 2/27/2007, of which 8,500 will vest on each
of 2/27/2008 and
2/27/2009.
|
|
(14)
|
|
Mr. Fearon was granted 5,000
restricted shares on 2/24/2004, of which 1,000 vested on each of
2/24/2005,
2/24/2006 and
2/24/2007 and 2,000 will vest on 2/24/2008.
|
|
(15)
|
|
Mr. Fearon was granted 16,100
restricted shares on 2/22/2005, of which 3,220 vested on each of
2/22/2006 and
2/22/2007,
3,220 will vest on 2/22/2008 and 6,440 will vest on 2/22/2009.
|
|
(16)
|
|
Mr. Fearon was granted 3,400
restricted shares, Messrs. Arnold and Carson were each
granted 3,700 restricted shares, and Mr. Sweetnam was
granted 1,200 restricted shares, all of which were granted on
2/27/2007. Each of these grants will vest on 2/27/2009.
|
|
(17)
|
|
Mr. Fearon was granted 13,800
restricted shares on 2/27/2007, of which 4,140 will vest on each
of 2/27/2009 and
2/27/2010
and 5,520 will vest on 2/27/2011.
|
|
(18)
|
|
Messrs. Arnold, Carson, and
Sweetnam were each granted 7,500 restricted shares on 2/22/2005,
of which 1,500 vested on each of 2/22/2006 and 2/22/2007, 1,500
will vest on 2/22/2008, and 3,000 will vest on 2/22/2009.
|
|
(19)
|
|
Messrs. Arnold, Carson, and
Sweetnam were each granted 7,000 restricted shares on 2/27/2007,
of which 2,100 will vest on each of 2/27/2009 and 2/27/2010 and
2,800 will vest on 2/27/2011.
|
OPTION EXERCISES AND
STOCK VESTED
The following table provides information regarding exercises of
stock options and vesting of restricted shares during the year
ended December 31, 2007 with respect to the Named Executive
Officers. The values reflect (a) in the case of exercised stock
options, the difference between the aggregate option exercise
price and the market price of the applicable number of our
common shares on the date of exercise, and (b) in the case of
any stock award that vested during 2007, the per share closing
price of our common shares on the vesting date multiplied by the
number of shares that vested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards:
|
|
|
|
Stock Awards:
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
Acquired on
|
|
|
Realized on
|
|
|
|
Acquired on
|
|
|
Realized on
|
|
Name
|
|
Exercise (#)
|
|
|
Exercise
($)(1)
|
|
|
|
Vesting (#)
|
|
|
Vesting
($)(1)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
|
(d)
|
|
|
(e)
|
|
A. M. Cutler
|
|
|
253,296
|
|
|
$
|
11,910,433
|
|
|
|
|
21,700
|
|
|
$
|
1,820,803
|
|
R. H. Fearon
|
|
|
48,104
|
|
|
$
|
3,088,390
|
|
|
|
|
8,720
|
|
|
$
|
734,708
|
|
C. Arnold
|
|
|
78,798
|
|
|
$
|
5,100,873
|
|
|
|
|
4,000
|
|
|
$
|
333,700
|
|
R. W. Carson
|
|
|
41,000
|
|
|
$
|
2,496,900
|
|
|
|
|
4,000
|
|
|
$
|
333,700
|
|
J. E. Sweetnam
|
|
|
46,468
|
|
|
$
|
2,219,286
|
|
|
|
|
4,000
|
|
|
$
|
333,700
|
|
|
|
|
(1) |
|
No shares acquired or amounts realized upon the exercise of
options or on the vesting of stock awards are subject to the
deferral of receipt. |
35
PENSION BENEFITS
The following table shows the estimated present value of the
benefits payable under each of our retirement income plans to
each Named Executive Officer. We maintain three basic types of
retirement income plans for our U.S. salaried employees:
(a) a tax-qualified defined benefit pension plan (referred
to as the Pension Plan for Eaton Corporation Employees in the
Pension Benefits table) that has two separate benefit formulas:
a final average pay formula and a cash balance formula,
(b) two defined benefit restoration plans (collectively
referred to as the DB Restoration Plan in the Pension Benefits
table) and (c) a plan that allows us to supplement the
pension benefits earned under our qualified pension plan and
non-qualified DB Restoration Plan to executives who are
recruited by us in mid-career (referred to as the Limited
Service Supplemental Plan in the Pension Benefits table).
Tax-qualified Retirement Income Plans
Effective January 1, 2003, employees who were then earning
benefits under the Average Final Annual Compensation
benefit formula (the AFAC benefit formula) under the
Pension Plan for Eaton Corporation Employees were given the
option to either: (a) continue earning benefits under the
AFAC benefit formula; or (b) commence earning benefits in
an Eaton Personal Benefits Account under the cash
balance formula (the EPPA benefit formula). Salaried
employees hired on or after January 1, 2002 automatically
earn benefits under the EPPA benefit formula upon becoming
eligible for participation in the retirement plan. Under the
AFAC benefit formula, annual normal retirement benefits are
computed at the rate of 1% of average final annual compensation
up to the applicable Social Security integration level ($48,816
for 2007 retirements) plus
11/2%
of average final annual compensation in excess of the Social
Security integration level, multiplied by the employees
years of credited service. In addition, the employee receives a
supplement equal to
1/2%
of average final annual compensation up to the applicable Social
Security integration level payable until the Social Security
Normal Retirement Age. Finally, the employee receives an
additional $26 per month starting at age 65. An
employees average final annual compensation is the average
annual amount of his or her eligible compensation (consisting of
salary plus annual executive incentive compensation for service
during the five consecutive years within the last 10 years
of employment for which the employees total compensation
was the greatest). Years of credited service includes the number
of years of employment between age 21 and retirement, with
a maximum of 44 years. Corporate policies require that
Named Executive Officers retire at age 65. Under the EPPA
benefit formula, a participants single sum retirement
benefit is accumulated throughout his or her career with us.
This single sum amount is represented as a notional account
balance to which is regularly added credits equal to a
percentage of his or her eligible compensation (consisting of
salary plus annual executive incentive compensation) plus
interest at a specified rate. The percentage of eligible
compensation credited to the participants notional account
balance varies over his or her career based on the sum of the
participants age and service with us. For any period when
that sum is less than 50, 5.0% of compensation is credited. For
any period when the sum is between 50 and 59 (inclusive), 6.0%
of eligible compensation is credited. When the sum is between 60
and 69 (inclusive), 7.0% of compensation is credited. When the
sum is 70 or greater, 8.0% of compensation in credited. Upon
termination of employment, the notional account balance is
available as a single sum or may be converted to one of several
annuity forms. As with the AFAC benefit formula, under the
standard post-retirement surviving spouse option, the
participant receives a reduced pension, and a pension equal to
50% of the reduced pension is payable to his or her surviving
spouse. For example, the benefit for an employee electing that
option at age 65 whose spouse is five years younger would
be approximately 11.5% less than the amount of the
participants annual benefit. This information assumes that
the EPPA benefit formula in the retirement plan will be
continued in its present form.
Non-Qualified Defined Benefit Retirement
Plans Certain provisions of the Internal Revenue
Code, as amended, limit the annual benefits that may be paid
from a tax-qualified retirement plan (including a limitation on
the amount of annual compensation that may be taken into account
in calculating a participants benefit under a qualified
retirement plan ($225,000 in 2007)). As permitted under the
Code, the Board of Directors has authorized the payment from our
general funds of any benefits calculated under the provisions of
the applicable retirement plan which may exceed those limits to
any participant, including the Named Executive Officers, whose
benefits are impacted by these provisions.
Limited Eaton Service Supplemental Retirement Income Plan
The Board of Directors has adopted a plan which
provides supplemental annual retirement income to certain
executives who do not have the opportunity to accumulate
significant credited service with us under our tax-qualified
retirement income plans, provided that
36
they either retire at age 55 or older and have at least
10 years of service with us or retire at age 65 or
older regardless of the years of service. The amount of the
annual supplement is generally equal to the amount by which a
percentage (described below) of the executives average
final annual compensation exceeds his or her earned retirement
income (which includes amounts receivable pursuant to the
retirement plans described above). The percentage of average
final annual compensation used for this purpose depends upon an
executives age and years of service at retirement. The
percentage ranges from 25% (for retirements at age 55 with
less than 15 years of service) to 50% (for retirements at
age 62 or older with 15 years or more of service).
Benefits accrued and vested before January 1, 2005 under
either the non-qualified or the limited service plans (described
above) generally are paid in one of the forms available under
our qualified pension plans as elected by the participant.
Benefits earned after 2004 are paid as single lump sum. With
respect to all benefits, regardless of when accrued, the present
value of the benefit will be paid in a single installment upon a
change of control of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Payments
|
|
|
|
|
|
Years of
|
|
|
Accumulated
|
|
|
During
|
|
|
|
|
|
Credited
|
|
|
Benefit
|
|
|
Last Fiscal
|
|
|
|
Plan Name
|
|
Service (#)
|
|
|
($)
|
|
|
Year ($)
|
|
Name(a)
|
|
(b)
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
A. M. Cutler
|
|
Pension Plan for Eaton Corporation Employees
|
|
|
32.250
|
|
|
$
|
945,082
|
|
|
$
|
0
|
|
|
|
DB Restoration Plan
|
|
|
32.250
|
|
|
$
|
11,897,344
|
|
|
$
|
0
|
|
|
|
Limited Service Supplemental Plan
|
|
|
32.250
|
|
|
$
|
0
|
|
|
$
|
0
|
|
R. H. Fearon
|
|
Pension Plan for Eaton Corporation Employees
|
|
|
5.667
|
|
|
$
|
76,884
|
|
|
$
|
0
|
|
|
|
DB Restoration Plan
|
|
|
5.667
|
|
|
$
|
256,661
|
|
|
$
|
0
|
|
|
|
Limited Service Supplemental Plan
|
|
|
5.667
|
|
|
$
|
869,822
|
|
|
$
|
0
|
|
C. Arnold
|
|
Pension Plan for Eaton Corporation Employees
|
|
|
7.167
|
|
|
$
|
124,984
|
|
|
$
|
0
|
|
|
|
DB Restoration Plan
|
|
|
7.167
|
|
|
$
|
481,793
|
|
|
$
|
0
|
|
|
|
Limited Service Supplemental Plan
|
|
|
7.167
|
|
|
$
|
286,053
|
|
|
$
|
0
|
|
R. W. Carson
|
|
Pension Plan for Eaton Corporation Employees
|
|
|
8.833
|
|
|
$
|
275,561
|
|
|
$
|
0
|
|
|
|
DB Restoration Plan
|
|
|
8.833
|
|
|
$
|
1,098,687
|
|
|
$
|
0
|
|
|
|
Limited Service Supplemental Plan
|
|
|
8.833
|
|
|
$
|
1,274,937
|
|
|
$
|
0
|
|
J. E. Sweetnam
|
|
Pension Plan for Eaton Corporation Employees
|
|
|
10.000
|
|
|
$
|
273,388
|
|
|
$
|
0
|
|
|
|
DB Restoration Plan
|
|
|
10.000
|
|
|
$
|
970,432
|
|
|
$
|
0
|
|
|
|
Limited Service Supplemental Plan
|
|
|
10.000
|
|
|
$
|
1,086,387
|
|
|
$
|
0
|
|
37
NONQUALIFIED
DEFERRED COMPENSATION
We provide our executives with opportunities to defer the
receipt of their earned and otherwise payable awards under our
annual and long-term cash incentive plans. We offer these plans
in order to (a) provide executives with a competitive
opportunity to accumulate additional retirement assets,
(b) provide a means for acquiring our shares in order to
meet our share ownership guidelines and (c) provide an
additional form of employment retention. Despite their
popularity across our industry, we do not currently provide our
executives with a non-qualified defined contribution plan that
enables them to defer base salary amounts in excess of Internal
Revenue Code limits that restrict such deferrals under our
tax-qualified defined contribution plan. The table below
includes not only amounts contributed, earned and distributed as
deferred compensation in the last fiscal year, but also includes
compensation that the Named Executive Officer elected to defer
in all prior years. Therefore, the Aggregate Balance at Last
Fiscal Year-End (column (f)) contains the total of all
contributions and earnings since the Named Executive Officer
began deferring compensation. The year in which the Named
Executive Officer began deferring compensation is stated in the
table immediately below the officers name. The plans
covered by the Nonqualified Deferred Compensation table are as
follows:
|
|
|
|
|
the Deferred Incentive Compensation Plan (the DIC
Plan),
|
|
|
|
the Deferred Incentive Compensation Plan II (the DIC
Plan II),
|
|
|
|
the Incentive Compensation Deferral Plan (the IC Deferral
Plan), and
|
|
|
|
the Incentive Compensation Deferral Plan II (the IC
Deferral Plan II).
|
Annual incentive compensation earned after December 31,
2004 is not eligible for deferral under the DIC Plan. Instead,
the DIC Plan II is available for the deferral of this
compensation. Incentive compensation earned in 2005 through 2007
and that was deferred under the DIC Plan II was credited
with earnings in the same manner as the DIC Plan, as described
below. However, participants under the DIC Plan II, prior to the
beginning of each calendar year, must elect the method and
timing of payment with respect to the incentive compensation to
be earned in the year that is subject to the deferral election.
The creation of the DIC Plan II and the exclusion of
deferrals under the prior plan of incentive awards earned after
2004 were implemented to satisfy the requirements of new
Internal Revenue Code Section 409A under the American Jobs
Creation Act of 2004 (the Act). Similarly, long-term
incentive compensation earned after December 31, 2004 is
not eligible for deferral under the IC Deferral Plan. Instead,
the IC Deferral Plan II is available for the deferral of
all or part of this compensation (subject to a minimum deferral
requirement). Participants under the IC Deferral Plan II, prior
to the beginning of any award period for which an award may be
earned, or later if permitted by us in the case of
performance-based compensation (as defined in the final
regulations under the Act), must elect the method and timing of
payment with respect to the incentive compensation to be earned
during that award period and that is subject to the deferral
election. As was the case with respect to the plans providing
for the deferral of annual incentive compensation, these actions
taken regarding the deferral of long-term incentive compensation
were in response to satisfying the requirements of the Act.
In October 2007, our Board of Directors approved amendments to
our deferral plans that are subject to the Act in order to
comply with the final regulations under the Act and to remove
the Quarterly Treasury Bill basis as an alternative investment
measure for crediting earnings to retirement deferral accounts
under the DIC Plan and the DIC Plan II. As a result of these
amendments, annual incentive compensation awards earned before
2008 will have appreciation and earnings accrued solely on a
phantom share basis (as if the deferred amount were invested in
actual Eaton shares with earned dividends re-invested in shares)
and, following retirement, account balances will be paid in
actual Eaton shares. Beginning with deferrals of annual
incentive compensation earned during 2008 and after for payment
following retirement, each executive will have a choice of
deferring up to 100% of his or her annual incentive compensation
into either or both of (a) an account tracked on a phantom
Eaton share basis and paid out in actual Eaton shares or
(b) an account that earns interest equal to that paid on
Ten-year Treasury Notes plus 300 basis points. Executives
may also defer compensation under the DIC Plan II on a
short-term basis for payment within 5 years or less
(short-term deferrals were also available under the DIC Plan for
compensation earned prior to 2005).
When an executive elects to defer a long-term incentive award
under the IC Deferral Plan II for payment following his or
her retirement, earnings on a minimum of 50% of the deferred
amount must be tracked on a
38
phantom share basis. The remainder of the amount deferred to
retirement earns interest equivalents equal to that paid on
Ten-year Treasury Notes plus 300 basis points. At
retirement, the portion of the executives account that is
deferred into phantom shares is paid out in actual Eaton shares.
In amending its deferral plans to comply with the final
regulations under the Act and taking into account the transition
relief offered under the final regulations, our Board of
Directors approved amendments to those of our deferral plans
that are subject to the Act that would provide executives in
2007 a one-time opportunity to change the time of payment on any
or all deferral elections made by them for incentive
compensation earned from 2005 through 2007. As a result of these
elections, any payments made to the Named Executive Officers
beginning in 2008 or later will be shown in the Nonqualified
Deferred Compensation Table for the respective years in which
they are paid out.
Incentive compensation deferred pursuant to our deferral plans
is unsecured, subject to the claims of our creditors and is
exposed to the risk of our non-payment. As of December 2007,
certain grantor trusts that we have established hold
approximately $626,723 of marketable securities and 607,992 of
our shares, in order to provide for a portion of our deferred
compensation obligations with respect to deferred incentive
compensation earned prior to 2005. The trust assets, which are
subject to the claims of our creditors, will be used to pay
those obligations in proportion to trust funding. The trust
terms call for us to provide full funding upon a change of
control of the Company and for accelerated lump sum or
installment payments upon a failure by us to pay amounts due
under the plans or upon a termination of employment in the
context of a change of control. No comparable trust arrangements
currently are in place with respect to deferred incentive
compensation earned after 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Executive
|
|
|
Registrant
|
|
|
Earnings in
|
|
|
Aggregate
|
|
|
Balance at
|
|
|
|
|
|
Contributions in
|
|
|
Contributions in
|
|
|
Last Fiscal
|
|
|
Withdrawals/
|
|
|
Last Fiscal
|
|
Name
|
|
|
|
Last Fiscal Year
(1)
|
|
|
Last Fiscal Year
|
|
|
Year
(2)
|
|
|
Distributions
|
|
|
Year End
|
|
(a)
|
|
Plan Name
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
A. M. Cutler
|
|
DIC Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,869,262
|
|
|
$
|
0
|
|
|
$
|
19,844,940
|
|
(First year of deferral: 1983)
|
|
IC Deferral Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,290,425
|
|
|
$
|
0
|
|
|
$
|
22,257,909
|
|
|
|
DIC Plan II
|
|
$
|
717,808
|
|
|
$
|
0
|
|
|
$
|
431,059
|
|
|
$
|
0
|
|
|
$
|
2,133,508
|
|
|
|
IC Deferral Plan II
|
|
$
|
6,367,544
|
|
|
$
|
0
|
|
|
$
|
2,278,440
|
|
|
$
|
0
|
|
|
$
|
15,838,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
7,085,352
|
|
|
$
|
0
|
|
|
$
|
9,869,186
|
|
|
$
|
0
|
|
|
$
|
60,074,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. H. Fearon
|
|
DIC Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
426,098
|
|
|
$
|
0
|
|
|
$
|
2,164,446
|
|
(First year of deferral: 2002)
|
|
IC Deferral Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
307,518
|
|
|
$
|
0
|
|
|
$
|
2,175,793
|
|
|
|
DIC Plan II
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
IC Deferral Plan II
|
|
$
|
2,348,517
|
|
|
$
|
0
|
|
|
$
|
747,370
|
|
|
$
|
0
|
|
|
$
|
5,186,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
2,348,517
|
|
|
$
|
0
|
|
|
$
|
1,480,986
|
|
|
$
|
0
|
|
|
$
|
9,526,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Arnold
|
|
DIC Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
458,059
|
|
|
$
|
0
|
|
|
$
|
2,326,801
|
|
(First year of deferral: 2001)
|
|
IC Deferral Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
237,779
|
|
|
$
|
0
|
|
|
$
|
1,612,910
|
|
|
|
DIC Plan II
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
IC Deferral Plan II
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
695,838
|
|
|
$
|
0
|
|
|
$
|
3,939,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. W. Carson
|
|
DIC Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
822,854
|
|
|
$
|
0
|
|
|
$
|
4,179,847
|
|
(First year of deferral: 2000)
|
|
IC Deferral Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
344,023
|
|
|
$
|
0
|
|
|
$
|
2,328,030
|
|
|
|
DIC Plan II
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
IC Deferral Plan II
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,166,877
|
|
|
$
|
0
|
|
|
$
|
6,507,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. E. Sweetnam
|
|
DIC Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
178,374
|
|
|
$
|
0
|
|
|
$
|
906,087
|
|
(First year of deferral: 1998)
|
|
IC Deferral Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
31,066
|
|
|
$
|
0
|
|
|
$
|
201,081
|
|
|
|
DIC Plan II
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
IC Deferral Plan II
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
209,440
|
|
|
$
|
0
|
|
|
$
|
1,107,168
|
|
|
|
|
(1) |
|
All of the amounts set forth in the Executive Contributions in
Last Fiscal Year column are also reported in column (g) of
the Summary Compensation Table. |
|
(2) |
|
The amounts reported in the Aggregate Earnings in Last Fiscal
Year are also reported in column (h) of the Summary
Compensation Table, to the extent such earnings exceed 120% of
the applicable federal rate. |
39
POTENTIAL PAYMENTS
UPON TERMINATION
A Named Executive Officer may experience a termination of
employment under several possible situations. In each of these
circumstances, certain plans, agreements, arrangements or
typical practices would provide compensation in varying amounts
to the executive. We do not provide employment contracts to our
executives (other than the change of control agreements
described below) and do not have plans or arrangements (other
than standard form of severance benefits available to employees
generally and the change of control agreements) that would
require any payment to a Named Executive Officer in the event of
a termination of his or her employment. Instead, the
Compensation and Organization Committee of the Board of
Directors exercises the sole discretion to decide what, if any,
additional severance payments or benefits will be offered to an
executive in the case of a termination of employment. In
exercising this discretion, the Committee takes a number of
factors into consideration, including the reasons for the
termination and the individual executives personal
circumstances. The Committee believes that it is in the interest
of the Company and our shareholders to insure that a departing
executive is treated fairly and in a manner that will help us to
secure appropriate confidentiality, non-compete,
non-disparagement and general release agreements. Moreover,
providing fair and reasonable employment termination
compensation is consistent with our overall philosophy for
compensating all employees. These practices are consistent with
similar companies, and are a competitive necessity if we are to
maintain our longstanding policy of not providing individual
employment contracts to our executives.
For each of the termination of employment scenarios described
below, the estimated potential payments and benefits that might
be received by each Named Executive Officer are displayed in the
Table that immediately follows the description.
Background and
Basic Assumptions:
In the sections below, we have identified six termination of
employment scenarios which include: (a) Normal and Early
Retirement, (b) Voluntary Resignation (not retirement
eligible), (c) Involuntary Termination (not for cause),
(d) Involuntary Termination (for cause), (e) Death or
Disability, and (f) termination in connection with a change
of control of the Company. The following key principles and
assumptions apply to these disclosures:
|
|
|
|
|
We have assumed that each of the Named Executive Officers
terminated employment with us under each of the scenarios on
December 31, 2007, and that each officer was eligible for
the severance payments and benefit arrangements based on his or
her compensation and years of service as of that date. As an
example, only two of the Named Executive Officers
(Messrs. Cutler and Sweetnam) would have the age and
Company service necessary for early retirement.
Therefore, in the termination scenarios where we would typically
extend retiree treatment to the executive, a
projected benefit is shown only for these two officers.
|
|
|
|
Assuming an executive terminated employment with us on
December 31, 2007, he or she would be eligible for a full
award under the annual incentive plan for the year ending
December 31, 2007 and a full award under the long-term
incentive plan for the four-year period ending December 31,
2007. We would calculate and pay any such earned awards in
accordance with the normal operation of the plans. We have not
included these awards in the following sections since they do
not represent a severance or other payment that is triggered by
employment termination.
|
|
|
|
We maintain a Severance Benefit Plan in which each of the Named
Executive Officers participates along with all of Eatons
United States salaried and non-union employees. We pay benefits
under this Plan generally only in the case of an involuntary
termination of employment. We calculate these benefits based on
the length of Company service. The maximum severance payment
equals one (1) year of base salary plus continuation of
health and welfare benefits for six (6) months. Currently,
Mr. Cutler is the only Named Executive Officer who has
sufficient service to be eligible for severance at this maximum
level. However, the severance payment that we would expect to
provide to a Named Executive Officer under the scenarios
described below would be made in lieu of any benefit under these
standard severance arrangements.
|
|
|
|
To the extent the Committee would decide to make a terminating
executive eligible for pro-rated participation in one or more of
the open four-year award periods under our long-term incentive
plan, the estimated pro-rated awards shown below reflect
(a) credit for the total number of months of Company
service from the start of an eligible award period through the
executives assumed termination date as a
|
40
|
|
|
|
|
percentage of the total
48-month
award period multiplied by (b) the officers target
award for each open award period. Although we show the aggregate
amount of these estimated payments for the Named Executive
Officers below as a lump sum amount, except in the case of a
payment with respect to a termination in connection with a
change of control, our actual practice would be to make the
pro-rated payments to executives at the end of each of the
four-year award periods once actual performance under the plan
is known.
|
|
|
|
|
|
Under the terms of our standard form of stock option and
restricted stock grant agreements, in the case of a change of
control of the Company, vesting of all of the executives
outstanding unvested equity grants would be accelerated. In
connection with employment termination other than in the context
of a change of control of the Company, the Committee has the
discretion to determine whether or not to accelerate vesting for
these awards. To the extent the Committee would decide to
accelerate the vesting dates of any unvested stock options or
restricted shares for a terminating executive under any of the
other scenarios described below, the accelerated stock option
would be valued at an amount per share equal to the difference
between $96.95 (which is the closing price per share for an
Eaton common share on the last trading day in 2007) and the
exercise price per share for each affected option grant and the
affected restricted shares would be valued at this same
$96.95 share value.
|
|
|
|
Except under very unusual circumstances, the Committee would not
provide any increases, payment acceleration or other
enhancements with respect to the benefits previously earned or
credited under our benefit plans or programs in connection with
any of the termination scenarios described below. These plans
and programs would include (a) all retirement income plans
(including defined benefit, defined contribution and
non-qualified retirement income plans), (b) health and
welfare plans (including post-retirement medical and life
insurance coverage), (c) any vested and accrued vacation,
and (d) any amounts credited to the executives
accounts under our non-qualified deferred compensation plans.
Payments of earned and vested amounts under these plans and
programs are not included in the scenarios described below.
|
|
|
|
In the selected termination scenarios described below, it would
be expected that the Committee would provide the executive with
continued reimbursement for the cost of income tax return
preparation and estate and financial planning services for a
period of time which would include the year following the year
of his or her termination of employment. These reimbursements to
the executives would be reported as imputed income and would be
subject to ordinary income tax treatment. The estimated expense
reimbursements shown in the scenarios below are representative
examples of the cost of this benefit in that they reflect the
amounts reimbursed to each Named Executive Officer during 2007.
|
Termination of
Employment Scenarios:
|
|
|
|
|
Normal and Early Retirement:
|
Each Named Executive Officer is subject to mandatory retirement
at age 65 and is eligible to elect voluntary retirement
after having attained age 55 with ten or more years of
service. In the event we involuntarily terminate an officer
after the officer attained age 50 with ten or more years of
service, he or she would also be treated as a retiree under the
programs described below. Only two of the Named Executive
Officers (Messrs. Cutler and Sweetnam) would have the age
and Company service necessary for retirement. Therefore, in this
termination scenario a projected termination benefit is shown
only for these two officers. In this scenario, it is likely that
the Committee would exercise its discretion to provide the
retiring executive with the following:
|
|
|
|
-
|
pro-rated eligibility (as described above) in the open four-year
award periods under our long-term incentive plan;
|
|
|
-
|
accelerated vesting of the then-unvested stock options and (if
applicable) restricted shares that would have otherwise vested
in the year following the year in which the executive terminated.
|
|
|
-
|
reimbursement for the costs of income tax return preparation and
estate and financial planning assistance for a period that
includes the year following the year in which the executive
retires.
|
41
These amounts are shown for each Named Executive Officer in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Scenario and
|
|
A. M.
|
|
|
R. H.
|
|
|
C.
|
|
|
R. W.
|
|
|
J. E.
|
|
Elements (as described above)
|
|
Cutler
|
|
|
Fearon
|
|
|
Arnold
|
|
|
Carson
|
|
|
Sweetnam
|
|
|
Normal or Early Retirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-rated Long-term Incentives
|
|
$
|
2,660,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
624,375
|
|
Accelerated equity
values(1)
|
|
$
|
9,085,327
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
903,772
|
|
Tax Preparation and Financial
Counseling
|
|
$
|
18,900
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
19,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scenario Total
|
|
$
|
11,764,227
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,547,707
|
|
|
|
|
|
|
Involuntary Termination Not for Cause:
|
In the event of an involuntary termination (not for cause), the
Committee would typically provide a Named Executive Officer with
the following:
|
|
|
|
-
|
two times the total of his or her base salary and target
incentive award under the annual incentive plan,
|
|
|
-
|
pro-rated eligibility (as described above) in any open four-year
awards under the long-term incentive plan in which the officer
had participated for twenty-four (24) months or longer as
of the termination date, and
|
|
|
-
|
executive outplacement benefits.
|
In the case of the involuntary termination of an officer who is
in a position below the level of a direct report to the Chairman
and Chief Executive Officer, the officer would receive, if
approved by the Committee in its discretion, the total of his or
her base salary and target incentive award under the annual
incentive plan as the basic severance amount along with
pro-rated eligibility in any open awards under the long-term
incentive plan and outplacement benefits. These amounts are
shown for each Named Executive Officer in the following table.
An officer who is involuntarily terminated after having reached
eligibility for early retirement generally would receive, in
addition to the severance payment noted in this paragraph, the
other pay and benefits outlined under Normal and Early
Retirement, above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Scenario and
|
|
A. M.
|
|
|
R. H.
|
|
|
C.
|
|
|
R. W
|
|
|
J. E.
|
|
Elements (as described above)
|
|
Cutler
|
|
|
Fearon
|
|
|
Arnold
|
|
|
Carson
|
|
|
Sweetnam
|
|
|
Involuntary Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base and IC Severance
|
|
$
|
4,425,540
|
|
|
$
|
1,836,835
|
|
|
$
|
1,722,352
|
|
|
$
|
1,726,387
|
|
|
$
|
1,592,789
|
|
Pro-rated Long-term Incentives
|
|
$
|
2,250,000
|
|
|
$
|
687,500
|
|
|
$
|
625,000
|
|
|
$
|
625,000
|
|
|
$
|
531,250
|
|
Accelerated equity
values(1)
|
|
$
|
9,085,327
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
903,772
|
|
Outplacement, Tax Preparation and
Financial Counseling
|
|
$
|
36,900
|
|
|
$
|
18,000
|
|
|
$
|
18,000
|
|
|
$
|
18,000
|
|
|
$
|
37,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scenario Total
|
|
$
|
15,797,767
|
|
|
$
|
2,542,335
|
|
|
$
|
2,365,352
|
|
|
$
|
2,369,387
|
|
|
$
|
3,065,371
|
|
In the event of the death or disability of a Named Executive
Officer, it would be expected that the Committee would use its
discretion to provide the executive or the estate, whichever is
appropriate, with pro-rated payments for the open four-year
award periods under the long-term incentive plan. These amounts
are shown for each Named Executive Officer in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Scenario and
|
|
A. M.
|
|
|
R. H.
|
|
|
C.
|
|
|
R. W.
|
|
|
J. E.
|
|
Elements (as described above)
|
|
Cutler
|
|
|
Fearon
|
|
|
Arnold
|
|
|
Carson
|
|
|
Sweetnam
|
|
|
Death or Disability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-rated Long-term Incentives
|
|
$
|
2,660,000
|
|
|
$
|
825,000
|
|
|
$
|
746,875
|
|
|
$
|
746,875
|
|
|
$
|
624,375
|
|
Scenario Total
|
|
$
|
2,660,000
|
|
|
$
|
825,000
|
|
|
$
|
746,875
|
|
|
$
|
746,875
|
|
|
$
|
624,375
|
|
|
|
|
|
|
Voluntary Resignation or a Termination for Cause:
|
When an executive voluntarily chooses to leave our employ, and
he or she is not yet eligible for retirement, or if the
executives employment with us is terminated for cause, the
executive is not entitled to receive any additional forms of
compensation or benefits other than any accrued and vested
vacation, deferral account values and vested qualified and
non-qualified retirement income benefits.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Scenario and
|
|
A. M.
|
|
|
R. H.
|
|
|
C.
|
|
|
R. W.
|
|
|
J. E.
|
|
Elements (as described above)
|
|
Cutler
|
|
|
Fearon
|
|
|
Arnold
|
|
|
Carson
|
|
|
Sweetnam
|
|
|
Voluntary Resignation or
Termination For Cause
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Additional Termination Payments
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Scenario Total
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Another scenario under which a Named Executive Officer may leave
our employ is through a qualifying termination in connection
with a change of control of the Company. We have entered into
agreements with each of our officers, including the Named
Executive Officers, that provide for payments and benefits in
the event of a termination of employment in the context of a
change of control of the Company. In addition, as noted above in
Background and Basic Assumptions, under the terms of
our standard form of stock option and restricted stock grant
agreements, in the case of a change of control of the Company,
vesting of all of the executives outstanding unvested
equity grants would be accelerated.
In 2007, the Committee and the Board of Directors amended the
change of control agreements to conform with the regulations
under Internal Revenue Code Section 409A which covers
non-qualified deferred compensation arrangements. As amended,
the change of control agreements that we have with our officers
contain the following key provisions:
|
|
|
|
|
The agreement first becomes effective upon a change of control
of the Company.
|
|
|
|
For an employment period of three years following the change of
control, the agreement protects the executive officer from
certain changes to his or her employment, position, duties,
compensation and benefits.
|
|
|
|
If, during this three-year employment period, the successor
company terminates the executive officers employment other
than for Cause or Disability or the
executive terminates his or her employment for Good
Reason (as these terms are defined in the agreements), the
executive would receive:
|
|
|
|
|
-
|
A lump sum cash payment equal to the aggregate of (a) any
earned but as yet unpaid base salary and annual and four-year
incentive awards for completed incentive award periods,
(b) a prorated portion of his or her target incentive
opportunity for any open award periods under the four-year plan
and (c) the lesser of three years or the number of years
remaining until the executives 65th birthday
multiplied by the executives annual base salary and target
incentive opportunity under the annual plan; and
|
|
|
-
|
Continued health and welfare benefits as if the executives
employment had not been terminated for a period equal to the
lesser of two years or the number of years remaining until the
executives 65th birthday.
|
|
|
|
|
|
To the extent that any payments under the agreements are
deferred compensation and the executive is a specified
employee within the meaning of Section 409A and the
regulations thereunder (determined in accordance with the
methodology established by us as in effect as of the date of
termination of employment), such payments or other benefits will
not be paid provided before the first business day that is six
months after the date of termination of employment.
|
|
|
|
As is common practice with such agreements, these payments and
benefits would not be subject to any requirement that the
officer seek other employment or any other form of mitigation.
|
|
|
|
We would pay the officers legal fees if the officer needed
to take action to enforce the provisions of the agreement or
defend the agreements terms if contested by us.
|
|
|
|
In the event that any payment or distribution by us under the
agreement would be subject to any excise tax under Internal
Revenue Service regulations, we would pay the officer a
gross-up
payment (as described below) that would cover the excise tax
obligation and any related interest and penalties.
|
U.S. tax law imposes a 20% excise tax on certain
compensation that is contingent on a change of control of the
Company (an excess parachute payment). Although each
executive is personally responsible for federal, state and local
income tax and FICA obligations on this compensation, as is
common practice
43
with such agreements, we have agreed to provide the Named
Executive Officers and other officers with full tax protection
from liability for the 20% excise tax.
An excess parachute payment is triggered if contingent
compensation exceeds 300% of the officers average
annualized
Form W-2
compensation for the five-year period preceding the year of the
change of control. If an excess parachute payment results, the
excise tax applies to the contingent compensation that exceeds
100% of the officers five year average compensation as
described above.
If the excise tax applies, the amount of tax protection is
calculated using a gross up formula that computes a
total payment to the officer that (1) reimburses the excise
tax liability on the initial excess parachute payment, and
(2) reimburses any additional income, FICA, and excise tax
liability on the gross up amount. The effect of the
tax protection payment is to ensure that the affected officer
receives the same after-tax payments and benefit values that the
officer would have received had there been no excise tax.
The calculation of the tax protection payment to each Named
Executive Officer in the following table is based on the
following assumptions:
|
|
|
|
|
the officers employment is terminated on December 31,
2007 (1) by us for reasons other than cause
(i.e., willful and continued failure to perform executive
duties, or willful illegal conduct or gross misconduct
materially injurious to us), or (2) by the officer for
good reason (i.e., a change in the officers
responsibility or status, a reduction in salary or benefits, or
certain mandatory relocations);
|
|
|
|
all stock options and restricted stock are cashed out at a value
per share of $96.95 (the closing price of an Eaton common share
on the last trading day of 2007);
|
|
|
|
the tax rates applicable to the officer are: Internal Revenue
Code Section 4999 excise tax rate of 20%, FICA (Medicare)
tax rate of 1.45%, marginal federal income tax rate of 35% and
the top marginal state and local income tax rates (net of
federal tax effects) in force at the location of the Named
Executive Officers principal place of employment on
December 31, 2007;
|
|
|
|
the discount rates used to compute the present value of
accelerated payouts or accelerated vesting are determined by the
Internal Revenue Service (120% of the applicable federal rates
compounded semi-annually for December 2007 as referenced in
Table 1 of Revenue Ruling
2007-70); and
|
|
|
|
potential exceptions that may apply in calculating the excess
parachute payment are not taken into account, such as amounts
attributed to (1) reasonable compensation, or (2) the
execution by the officer of a non-competition agreement.
|
Based on the foregoing assumptions, the estimated amounts
payable to each Named Executive Officer upon a termination of
employment in connection with a change of control of the Company
are shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Scenario and
|
|
A. M.
|
|
|
R. H.
|
|
|
C.
|
|
|
R. W.
|
|
|
J. E.
|
|
Elements (as described above)
|
|
Cutler
|
|
|
Fearon
|
|
|
Arnold
|
|
|
Carson
|
|
|
Sweetnam
|
|
|
Change of Control
Pro-rated Long-term Incentives
|
|
$
|
2,660,000
|
|
|
$
|
825,000
|
|
|
$
|
746,875
|
|
|
$
|
746,875
|
|
|
$
|
624,375
|
|
Base and IC Severance
|
|
$
|
7,386,334
|
|
|
$
|
2,959,017
|
|
|
$
|
2,662,201
|
|
|
$
|
2,702,235
|
|
|
$
|
2,489,196
|
|
Accelerated equity
values(1)
|
|
$
|
19,742,456
|
|
|
$
|
4,217,962
|
|
|
$
|
2,861,345
|
|
|
$
|
2,861,345
|
|
|
$
|
2,570,550
|
|
Outplacement, Tax Preparation and
Financial Counseling and Extended Medical
|
|
$
|
90,972
|
|
|
$
|
61,762
|
|
|
$
|
74,492
|
|
|
$
|
55,524
|
|
|
$
|
86,368
|
|
Tax Protection
(2)
|
|
$
|
0
|
|
|
$
|
1,943,935
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scenario Total
|
|
$
|
29,879,762
|
|
|
$
|
10,007,676
|
|
|
$
|
6,344,913
|
|
|
$
|
6,365,979
|
|
|
$
|
5,770,489
|
|
|
|
|
(1) |
|
Included in the amounts shown in this line item for
Mr. Cutler is the value of long-standing performance-based
stock option grants which equals $2,463,257. |
|
(2) |
|
With the exception of Mr. Fearon, no cost of tax protection
is shown for the Named Executive Officers since no portion of
the total payments and benefit values attributable to an assumed
December 31, 2007 change of control constitutes an excess
parachute payment. The tax protection amount for Mr. Fearon
results primarily from his limited years of service with the
Company and the effect of his deferred compensation elections. |
44
DIRECTOR COMPENSATION
Compensation of Directors Employee directors
are not compensated for their services as directors.
Non-employee directors receive an annual retainer of $60,000.
The Chairs of Board Committees each receive an additional annual
retainer as follows: Audit Committee, $15,000; Compensation and
Organization Committee, $15,000; Finance Committee, $5,000; and
Governance Committee, $10,000. Non-employee directors also
receive a fee of $2,000 for each Board, Board Committee or
shareholder meeting attended and for attending any special
presentation on days when the Board does not meet.
Non-employee directors first elected before 1996 may defer
payment of their annual fees, not to exceed $30,000 per year, at
a rate of interest specified in their deferred compensation
agreements. The rate of interest is based upon the number of
years from the directors initial election until the first
annual meeting to be held following his or her
68th birthday and is higher than prevailing market rates.
Under a separate deferral plan, all non-employee directors may
defer payment of their fees at a rate of return which varies,
depending on whether the director defers the fees as retirement
compensation or as short-term compensation. At least 50% of
retirement compensation, or any greater portion which the
director elects, is converted to share units and earns share
price appreciation and dividend equivalents. The balance of
retirement compensation earns
10-year
Treasury Note returns plus 300 basis points. Short-term
compensation earns 13-week Treasury Bill returns. These
arrangements provide for accelerated lump sum or installment
payments upon termination of service in the context of a change
of control of the Company and, with respect to amounts deferred
prior to January 1, 2005 under certain of these
arrangements, upon a failure by the Company to pay.
Under our Stock Plans, as approved by our shareholders, each
newly-elected non-employee director automatically is granted a
stock option for 10,000 shares upon the date of his or her
election. So long as each non-employee director continues to
serve in that capacity, beginning in the year after the director
receives his or her initial grant, he or she is automatically
granted an option for a number of shares equal to the quotient
resulting from dividing (i) four times the annual retainer
for each non-employee director in effect on the granting date,
by (ii) the closing price of an Eaton common share on the
New York Stock Exchange on the last business day immediately
preceding the granting date. The granting date is the Tuesday
immediately before the fourth Wednesday of each January. Options
granted to non-employee directors have an exercise price equal
to the fair market value of the shares on the date of the grant,
vest in six months, and expire ten years after the date of
grant. Upon the approval by our shareholders of the 2008 Stock
Plan (described on pages 50 to 55), no additional stock
options or other awards will be granted to our non-employee
directors pursuant to any of our other Stock Plans.
Upon leaving the Board, non-employee directors who were first
elected to the Board prior to 1996 are eligible to receive an
annual benefit, as described below. For Board service of at
least five years, eligible directors receive an annual benefit
equal to the annual retainer in effect at the time the directors
leave the Board. The annual benefit is paid for the lesser of
ten years or life. The present value of payments under this plan
will be paid in a lump sum upon a proposed change in
control of the Company, unless otherwise determined by a
committee of the Board. Directors who are first elected in 1996
or later are not eligible to receive the annual benefit.
Former non-employee directors retain these benefits in
retirement: (i) group term life insurance, with coverage
reduced to $33,333; (ii) eligibility for medical (but not
dental) coverage; and depending upon length of Board service and
age at retirement (iii) the right to exercise stock options
until the tenth anniversary of their grant dates. Current and
retired non-employee directors are entitled to participate in
our gift matching program that is available to all current and
retired employees. Under this program contributions to qualified
charitable organizations by these persons are matched
dollar-for-dollar by us up to a maximum in any calender year of
$5,000.
45
The following table sets out the compensation and benefit
programs applicable to our current non-employee directors for
2007. All of our directors in 2007 qualify as independent under
the criteria adopted by the Board and the New York Stock
Exchange with the exception of Mr. Cutler, who is the only
inside director. As an employee, Mr. Cutler does not
participate in any of the following compensation and benefit
arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
|
|
|
|
Non-Equity
|
|
Deferred
|
|
|
|
|
|
|
|
Paid
|
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
Compensation
|
|
|
All Other
|
|
|
Name
|
|
in Cash
(1)
|
|
|
Awards
|
|
Awards
(2)
|
|
Compensation
|
|
Earnings
(3)
|
|
|
Compensation
(5)
|
|
Total
|
(a)
|
|
(b)
|
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
|
(g)
|
|
(h)
|
|
Christopher M. Connor
|
|
$
|
110,000
|
|
|
$0
|
|
$55,121
|
|
$0
|
|
$
|
0
|
|
|
$2,006
|
|
$167,127
|
Michael J. Critelli
|
|
$
|
123,000
|
|
|
$0
|
|
$55,121
|
|
$0
|
|
$
|
0
|
|
|
$2,006
|
|
$180,127
|
Charles E. Golden
|
|
$
|
112,250
|
|
|
$0
|
|
$171,000
|
|
$0
|
|
$
|
0
|
|
|
$1,839
|
|
$285,089
|
Ernie
Green(4)
|
|
$
|
114,000
|
|
|
$0
|
|
$55,121
|
|
$0
|
|
$
|
12,081
|
|
|
$2,006
|
|
$178,625
|
Ned C. Lautenbach
|
|
$
|
118,667
|
|
|
$0
|
|
$55,121
|
|
$0
|
|
$
|
0
|
|
|
$2,006
|
|
$175,794
|
Deborah L. McCoy
|
|
$
|
110,000
|
|
|
$0
|
|
$55,121
|
|
$0
|
|
$
|
0
|
|
|
$2,006
|
|
$167,127
|
John R.
Miller(4)
|
|
$
|
119,333
|
|
|
$0
|
|
$55,121
|
|
$0
|
|
$
|
18,894
|
|
|
$2,006
|
|
$195,354
|
Gregory R. Page
|
|
$
|
115,000
|
|
|
$0
|
|
$55,121
|
|
$0
|
|
$
|
2,346
|
|
|
$2,006
|
|
$173,426
|
Victor A.
Pelson(4)
|
|
$
|
122,750
|
|
|
$0
|
|
$55,121
|
|
$0
|
|
$
|
6,786
|
|
|
$5,006
|
|
$187,565
|
Gary L.
Tooker(4)
|
|
$
|
118,000
|
|
|
$0
|
|
$55,121
|
|
$0
|
|
$
|
6,120
|
|
|
$2,006
|
|
$180,567
|
|
|
|
(1) |
|
Reported in the Fees Earned or Paid in Cash column (b) is
the total of the annual retainer, the Committee chair retainer,
if applicable, and meeting attendance fees for attendance at
meetings of the Board, Board Committees and shareholders and at
special presentations to the directors on days when the Board
does not meet. The annual retainer for all non-employee
directors is $60,000 per year. Mr.Critelli received $15,000 for
his service as Compensation and Organization Committee chair and
Mr. Page received $5,000 for his service as Finance
Committee chair. The remaining two Committee chairs changed over
during the year and therefore each chair received only a
proportionate amount of the total fee. Mr. Pelson received
$8,750 and Mr. Golden received $6,250 for their service as
Audit Committee chair. Mr. Miller received $3,333 and
Mr. Lautenbach received $6,667 for their service as
Governance Committee chair. |
|
(2) |
|
Reported in the Option Awards column (d) is the
SFAS 123(R) value of 3,252 stock options granted to each
non-employee Board member on January 23, 2007, except
Mr. Golden who received a grant of 10,000 options on
January 24, 2007 upon his election to the Board. As of
year-end 2007, the following directors held the aggregate number
of options set forth after their names: C.M. Connor (13,252);
M.J. Critelli (28,388); E. Green (39,392); N.C. Lautenbach
(39,392); D.L. McCoy (40,038); J.R. Miller (39,392); G.R. Page
(24,470); V.A. Pelson (35,530); and G.L. Tooker (14,470). |
|
(3) |
|
Amounts reported in the Change in Pension Value and Nonqualified
Deferred Compensation Earnings column (f) are reflective
only of the latter. There is no pension plan currently in place
for non-employee directors with the exception of a flat annual
pension benefit for certain grandfathered directors
as described in footnote (4) below. Non-employee directors
first elected before 1996 may defer payment of their annual
fees, up to $30,000 per year, at an interest rate specified in
their deferred compensation agreements. The rate of interest is
based upon the number of years from the date of the
directors initial election until the first annual meeting
to be held following the directors 68th birthday and is
higher than prevailing market rates. Under a separate deferral
plan, all non-employee directors may defer payment of their fees
at a rate of return which varies, depending on whether the
director defers the fees as retirement compensation or as
short-term compensation. At least 50% of retirement
compensation, or any greater portion that the director elects,
is converted to share units and earns share price appreciation
and dividend equivalents. The balance of retirement compensation
earns
10-year
Treasury Note returns plus 300 basis points. Short-term
compensation earns 13-week Treasury Bill returns. |
46
|
|
|
(4) |
|
Upon leaving the Board, these non-employee directors, having
been elected to the Board prior to 1996, are eligible to receive
an annual benefit equal to the annual retainer in effect at the
time the directors leave the Board, which will be payable for
the lesser of ten years or life. |
|
(5) |
|
For non-employee directors who were initially elected to the
Board before 2007, we provide the directors with access to
certain health and welfare benefit arrangements, which include
$100,000 of group term life insurance and participation in
medical and dental coverage in plans designed to mirror the
benefits provided to our employees or (as applicable) retirees.
In 2007, Mr. Pelson was the only director who participated
in the medical and dental plans at a cost to the Company of
$3,000. The cost of Company contributions in 2007 for the group
term life insurance and travel accident insurance for the loss
of life or limb while traveling on Company business for each
director was $2,006 with the exception of Mr. Golden who
only received coverage 11 out of 12 months at a cost to the
Company of $1,839. |
47
|
|
2.
|
PROPOSAL TO
APPROVE AN AMENDMENT OF THE AMENDED ARTICLES OF
INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF COMMON
SHARES
|
Our Board of Directors recommends an amendment to the Amended
Articles of Incorporation to increase the number of authorized
Eaton common shares with a par value of $.50 each from
300 million to 500 million.
At December 31, 2007, there was a total of 194,415,073
common shares outstanding, in Eatons treasury, and
reserved for issuance under stock options. At December 31,
2007, Eaton therefore had 105,584,927 authorized, unissued and
unreserved common shares.
Although no decision to issue substantial numbers of additional
common shares has been made, increasing the number of authorized
common shares at this time will enable the Board to effect a
two-for-one stock split when the Board deems market conditions
appropriate for such action, although not yet imminent.
This proposal would be implemented by deleting
Article FOURTH A and B of the Amended Articles of
Incorporation and by inserting the following in lieu thereof:
FOURTH: The authorized number of shares of the
Corporation is Five Hundred Fourteen Million One Hundred Six
Thousand Three Hundred Ninety-Four (514,106,394) classified and
designated as follows:
A. Serial Preferred Shares: Fourteen Million One Hundred
Six Thousand Three Hundred Ninety-Four (14,106,394) shares are
classified and designated as Serial Preferred Shares without par
value and are herein called the Serial Preferred
Shares; and
B. Common Shares: Five Hundred Million (500,000,000) shares
are classified and designated as Common Shares with a par value
of Fifty Cents ($.50) each and are herein called the
Common Shares.
Upon the issuance of common shares, no Eaton shareholder is
entitled, as such, as a matter of right to subscribe for or
purchase any part of such issue.
Adoption of the amendment of the Amended Articles of
Incorporation requires the affirmative vote of a majority of our
outstanding common shares.
The Board of Directors recommends a vote FOR the amendment
of the Amended Articles of Incorporation.
|
|
3.
|
PROPOSAL TO
ADOPT MAJORITY VOTING IN DIRECTOR ELECTIONS
|
Our Board of Directors recommends that the shareholders approve
an amendment to the Amended Articles of Incorporation requiring
a majority vote for the election of directors in uncontested
elections. The Board also recommends that the shareholders
approve an amendment to the Amended Regulations to delete a
provision mandating that, in all elections of directors, the
candidate receiving the greatest number of votes, a plurality
vote, shall be elected. The Amended Articles currently do not
specify the voting standard for the election of directors.
Consequently, the Amended Regulations provision currently
governs the Companys director election process.
Shareholder approval is required for the adoption of the
proposed amendments to the Amended Articles and Amended
Regulations.
In July 2006, our Board of Directors adopted a policy to assure
that, in an uncontested election, a director who fails to
receive a majority of shareholder votes cast would not continue
to serve, except with the express consent of the Board. The
Policy on Majority Voting is included in this proxy statement as
Appendix A and is available on the Companys website
(www.eaton.com). Under Company Quick Links
click on Corporate Responsibility, then
Corporate Governance. At the time the policy was
adopted, Ohio law provided that, in all director elections, the
nominee receiving the greatest number of votes is elected. Under
this policy, directors continue to be elected by a plurality
vote, but in an uncontested election a director nominee who
receives a greater number of withheld votes than
for votes must promptly offer to resign from the
Board. The Board then decides, with the advice of the Governance
Committee, within 90 days after the voting results are
certified, whether to accept the resignation offer, and the
Boards decision is
48
promptly disclosed in a press release. If the decision is to
reject the offer of resignation, the press release will indicate
the reason for that decision.
Subsequent to the adoption of the Boards majority vote
policy, Ohio law was amended, effective January 1, 2008, to
provide that the articles of incorporation may set forth
alternative election standards, and, if no alternative is
specified in the articles, plurality voting would apply.
The proposed amendments to the Amended Articles and Amended
Regulations would insert a majority voting standard into the
Companys Amended Articles which could not be further
amended without shareholder approval and delete the requirement
for plurality voting from the Amended Regulations. If the
proposed amendments are adopted, an affirmative majority of the
total number of votes cast with respect to the election of a
director nominee will be required for election in an uncontested
election. Abstentions will have no effect in determining whether
the required affirmative majority vote has been obtained. For
contested elections, plurality voting will be in effect.
If this proposal is approved by the shareholders, the following
new provision will be added to the Amended Articles:
In order for a nominee to be elected a director of the
corporation in an uncontested election, the nominee must receive
a greater number of votes cast for his or her
election than against his or her election. In a
contested election, the nominee receiving the greatest number of
votes shall be elected. An election shall be considered
contested if, as of the record date, there are more nominees for
election than director positions to be filled in that election.
And the following provision of the Amended Regulations
(Article I, Section 7) will be deleted:
At all elections of directors the candidates receiving the
greatest number of votes shall be elected.
If the shareholders approve this proposal, the current Board
majority voting policy would remain in effect only to the extent
needed to address holdover terms for any incumbent
directors who fail to be re-elected under majority voting. Under
Ohio law, an incumbent director who is not re-elected may remain
in office until his or her successor is elected and qualified,
continuing as a holdover director. The combination
of the new provision in the Amended Articles and the
Boards majority voting policy is commonly called the
Intel Model.
Adoption of the amendments of the Amended Articles of
Incorporation and Amended Regulations requires the affirmative
vote of a majority of our outstanding common shares.
The Board of Directors recommends a vote FOR the proposal
to amend the Amended Articles of Incorporation and Amended
Regulations to approve majority voting in uncontested director
elections.
|
|
4.
|
PROPOSAL TO
AUTHORIZE THE BOARD OF DIRECTORS TO MAKE FUTURE AMENDMENTS TO
THE AMENDED REGULATIONS
|
Our Board of Directors recommends that the Amended Regulations
be amended by adding a provision authorizing the Board to make
future amendments to the Amended Regulations, to the extent
permitted by the Ohio General Corporation Law. For Ohio
corporations, the Regulations are the equivalent of By-Laws for
other corporations.
Article VIII, Section 1, of the Amended Regulations
provides that an amendment of the Amended Regulations requires
the affirmative vote of shareholders holding at least a majority
of the voting power of the Company. The Board of Directors is
not currently permitted to amend the Amended Regulations. In
this respect, the Amended Regulations track the traditional law
of Ohio.
The Ohio General Corporation Law was amended in October 2006 to
allow the Board of Directors to amend the Regulations without
shareholder approval, within certain statutory limitations, thus
bringing Ohio law into line with the law of most other states.
However, the Ohio statute requires shareholder approval for the
Board to make future amendments to the Regulations.
Under the Ohio General Corporation Law, the Board is not
permitted to amend the Regulations in various areas that are
deemed to
49
impact fundamental shareholder rights. Specifically, the Board
may not amend the Regulations to do any of the following:
(1) change the authority of the shareholders themselves;
(2) establish or change the percentage of shares that must
be held by shareholders in order to call a shareholders meeting
or change the time period required for notice of a shareholders
meeting; (3) establish or change the quorum requirements at
shareholder meetings; (4) prohibit the shareholders or
directors from taking action by written consent without a
meeting; (5) change directors terms of office or
provide for the classification of directors; (6) require
more than a majority vote of shareholders to remove directors
without cause; (7) change the quorum or voting requirements
at directors meetings; or (8) remove the requirement that a
control share acquisition of an issuing public
corporation must be approved by the shareholders of the
corporation to be acquired. Nor is the Board permitted to
delegate to a Board Committee the authority to amend the
Regulations. This proposal does not seek to change in any way
these limitations placed on the Board under the Ohio General
Corporation Law with respect to amendments of the Regulations.
Under Ohio law, the shareholders can always override amendments
made by the Board, and the Regulations may never divest the
shareholders of the power to adopt, amend or repeal the
Regulations.
The Board of Directors recommends that the first sentence of
Article VIII, Section 1, of the Amended Regulations be
amended to add the following underscored language:
The Regulations of the Corporation may be amended or added to
by the Board of Directors (to the extent permitted by the
Ohio General Corporation Law) or by the affirmative vote of
the shareholders of record entitled to exercise a majority of
the voting power on such proposal or, without a meeting, by the
written consent of the shareholders of record entitled to
exercise
662/3%
of the voting power on such proposal.
Adoption of the amendment of the Amended Regulations requires
the affirmative vote of a majority of our outstanding common
shares.
The Board of Directors recommends a vote FOR the amendment
of the Amended Regulations to authorize the Board of Directors
to make future amendments to the Amended
Regulations.
|
|
5.
|
PROPOSAL TO
APPROVE THE 2008 STOCK PLAN
|
General
Our Board of Directors believes that share-based incentives are
important factors in attracting and retaining highly qualified
executives, and that they help to align the interests of those
executives with the interests of our shareholders. It believes
that the shareholder-approved 2004 Stock Plan has been
instrumental in producing our strong financial performance. As
of December 31, 2007, 2,640,470 common shares remained
available for additional awards under the 2004 Stock Plan. Our
Board is therefore submitting to our shareholders for their
approval a new share-based plan, called the 2008 Stock Plan (the
Plan). Upon approval by the shareholders of the 2008
Stock Plan, the Company will not grant any new awards under any
of our existing Stock Plans.
Our Board believes that the potential dilutive effect of the
issuance of stock options has been mitigated by periodic share
repurchase programs over the last several years. From
January 1, 2006 through December 31, 2007, we
repurchased 9,378,000 of our shares, largely offsetting grants
of stock options and restricted shares made in recent years.
Under our share repurchase program authorized in January 2007 we
have remaining authority to purchase up to 5,907,000 additional
shares although we have no present plans to repurchase our
shares.
The Plan will authorize the granting of restricted shares to
non-employee directors, and the granting of stock options and
other share-based awards to salaried employees selected by the
Boards Compensation and Organization Committee (the
Committee) or an officer to whom granting authority
is delegated. The purpose of the Plan is to continue to provide
long-term incentives to executives for outstanding service to us
and our shareholders and to assist in recruiting and retaining
highly qualified individuals as executives or directors. A
50
copy of the Plan is included as Appendix I to this proxy
statement, and the following summary is qualified in its
entirety by the provisions of the Plan.
Summary of the
Plan
Administration. The Committee, which is
comprised of non-employee directors, will administer employee
awards. The Governance Committee of the Board, which is also
comprised of non-employee directors, will administer
non-employee director restricted shares.
Shares Available. Subject to adjustments for
stock splits, stock dividends and other similar events, the
total number of our common shares with a par value of $.50 each
(shares) that may be delivered under the Plan will
not exceed 2.7 million, and the total number of shares or
share units underlying options or related to other equity awards
that may be granted to any employee during any period of three
consecutive calendar years will not exceed 1,200,000. The number
of shares available for options or stock appreciation rights
will be reduced by 2.47 for each performance share, performance
share unit, restricted share, restricted share unit or other
share-based awards denominated in full shares. To the extent
that any award is forfeited, or any option or stock appreciation
right terminates, expires or lapses without being exercised, the
shares subject to such awards not delivered as a result thereof
shall again be available for awards under the Plan. Upon
approval of the 2008 Plan, the Company will not grant any new
awards under any of our existing Stock Plans.
Employee Stock Options. Exercise of
Options. Each option will be exercisable at such
times and for such number of shares as determined by the
Committee on the date of grant. Grants to executive officers
will not be exercisable for at least six months after those
options are granted. Although the Plan does not impose any
similar time requirements on grants to non-executive officer
employees, such grants historically have become exercisable as
follows: after one year as to 33% of the shares covered by the
grant, after the second year as to another 33%, and after the
third year as to the remaining 34%. The Committee may accelerate
or otherwise change the times when an option may be exercised,
and the Management Compensation Committee (comprised of Company
officers) may do likewise for employees who are not executive
officers. The Committee may grant employee options which are
intended to qualify as incentive stock options (Incentive
Stock Options) under the Internal Revenue Code.
Term. The term of each option will be ten
years from the date of grant.
Price. The option price will be the fair
market value of the shares subject to the option on the date of
grant. The fair market value shall be the closing price as
quoted on the New York Stock Exchange unless the Committee
specifies a different method to determine fair market value. The
closing price of a share as of February 29, 2008 on the New
York Stock Exchange was $80.63.
Payment. The exercise price will be payable in
cash or, if permitted by the terms of the option, by other
consideration, including Company shares.
Non-Employee Director Restricted
Shares. Subject to approval of the Plan by our
shareholders at the 2008 annual meeting, each person who on the
grant date (as defined below) is serving as a non-employee
director automatically will be granted a number of restricted
shares equal to the quotient resulting from dividing
(i) the annual retainer in effect on the grant date, by
(ii) the closing price of a share on the New York Stock
Exchange on the Monday immediately prior to the grant date, or
if that date is not a trading day on the New York Stock
Exchange, the trading day immediately preceding that Monday. The
grant date is the fourth Wednesday of each January, beginning
January of 2009. Non-employee director restricted shares shall
vest and be subject to other terms and conditions as determined
by the Governance Committee.
Performance Shares and Performance Share
Units. The Committee may grant performance shares
and performance share units for no cash consideration, if
permitted by applicable law, or for such consideration as may be
determined by the Committee. No grantee may receive a long-term
incentive award in any performance period of more than
200,000 share equivalent units, subject to adjustment for
certain events as
51
specified in the Plan. The Committee will establish award
periods and the number of performance shares or units to be
earned if the performance objectives are met during the award
periods. The performance objectives for performance share or
performance share unit grants approved by the Committee will be
set forth in the related Award Agreement and will consist of
objective tests based on one or more of the following: the
Companys earnings, cash flow, cash flow return on gross
capital, revenues, financial return ratios, market performance,
shareholder return
and/or
value, operating profits, net profits, earnings per share,
profit returns and margins, share price, working capital, and
changes between years or periods, or returns over years or
periods that are determined with respect to any of the
above-listed performance criteria. If performance shares are not
earned, they will be available for future grants. The provisions
of the Plan are intended to ensure that all options, performance
shares and performance share units granted under the Plan to any
individual who is or may be a covered employee
(within the meaning of Section 162(m)(3) of the Internal
Revenue Code) qualify for the Section 162(m) exception for
performance-based compensation. Section 162(m) generally
imposes a compensation cap on deductibility for income tax
purposes equal to $1 million with respect to covered
employees.
Other Awards. We have not granted stock
appreciation rights for many years, primarily because of their
adverse accounting consequences. However, in some countries
stock appreciation rights are more advantageous to the
recipients than conventional stock options. Therefore, the Plan
permits their use at the discretion of the Committee. Stock
appreciation rights entitle the holder to receive a number of
shares or cash equal to the increase in the fair market value of
the designated number of shares from the date of grant to the
date of exercise. Stock appreciation rights may be exercised as
determined by the Committee, however, the term of any stock
appreciation right will be no longer than ten years from the
date of grant. The Committee may grant employees other
share-based awards, including restricted shares which are in
addition to the restricted shares automatically granted to
non-employee directors, for no cash consideration, or for such
consideration as may be determined by the Committee. Subject to
the provisions discussed under Shares Available
above, the Committee will determine the criteria or periods for
payment or vesting and the extent to which those criteria or
periods have been met. Any such grants shall have such other
terms and conditions as determined by the Committee.
Change of Control. The Plan provides the
Committee with the discretionary authority to determine the
terms of awards granted to employees consistent with the
provisions of the Plan, and provides such authority to the
Governance Committee with respect to awards granted to
non-employee directors. In the past, the agreements setting
forth the terms of the share awards have contained provisions
pursuant to which the awards would fully vest upon a change of
control of the Company. It is expected that agreements for
awards under the Plan would contain similar provisions under
which a change of control generally would mean:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act)) (a Person) of beneficial ownership
(within the meaning of
Rule 13d-3
promulgated under the Exchange Act) of 25% or more of either
(i) the then outstanding shares of the Company (the
Outstanding Company Common Shares) or (ii) the
combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of
directors (the Outstanding Company Voting
Securities); or
(b) Individuals who, as of the date hereof, constitute the
Board (the Incumbent Board) cease for any reason to
constitute at least a majority of the Board; unless any
individual becoming a director subsequent to the date of the
agreement whose election, or nomination for election by the
Companys shareholders, was approved by a vote of at least
two-thirds of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of
52
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a person
other than the Board; or
(c) Consummation by the Company of a reorganization, merger
or consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the
acquisition of assets of another corporation (a Business
Combination), in each case, unless, following such
Business Combination, (i) all or substantially all of the
individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly,
more than 55% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the
Companys assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership immediately prior to such Business Combination of the
Outstanding Company Common Shares and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding
any employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 25% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities
of such corporation except to the extent that such ownership
existed prior to the Business Combination and (iii) at
least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing
for such Business Combination; or
(d) Approval by our shareholders of a complete liquidation
or dissolution of the Company.
A Change of Control would not be deemed to have
occurred with respect to certain
executive-initiated
transactions.
Other Matters. Awards granted under the Plan
are subject to a policy, adopted by our Board of Directors, that
provides if the Board determines that an executive engaged in
any fraud, misconduct or other bad-faith action that, directly
or indirectly, caused or partially caused the need for a
material accounting restatement for any period as to which a
performance-based award was paid or credited to the executive,
the performance-based award is subject to reduction,
cancellation or reimbursement at the discretion of the Board.
Please see page 27 for further information concerning the
policy. Shares available for awards may consist, in whole or in
part, of authorized and unissued shares or treasury shares.
The Board of Directors may, without shareholder approval, amend
or terminate the Plan, except in any respect as to which
shareholder approval is required by law, regulation or the rules
of the New York Stock Exchange. In all cases, the Plan may not
be amended without shareholder approval to (i) materially
increase the aggregate number of shares which may be issued
under the Plan, (ii) increase the maximum number of shares
which may be granted to any employee, or (iii) grant
options or stock appreciation rights at a purchase price below
fair market value on the date of grant.
The Board of Directors is presently comprised of
ten non-employee directors and one employee director. The
number of employees to whom employee stock options or restricted
shares are typically granted is approximately 670.
The benefits that will be received by employees under the Plan
or which would have been
53
received under the Plan if it had been in effect in 2007 are not
currently determinable, because awards will be made at the
discretion of the Committee.
Equity Compensation Plans.
The following table summarizes information, as of
December 31, 2007, relating to equity compensation plans of
the Company pursuant to which grants of options, restricted
stock, deferred compensation units or other rights to acquire
our common shares may be granted from time to time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
|
(B)
|
|
|
(C)
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
|
|
|
|
|
|
|
for Future
|
|
|
|
Number of
|
|
|
|
|
|
Issuance
|
|
|
|
Securities to be
|
|
|
Weighted-
|
|
|
Under Equity
|
|
|
|
Issued Upon
|
|
|
Average
|
|
|
Compensation
|
|
|
|
Exercise of
|
|
|
Exercise Price
|
|
|
Plans
|
|
|
|
Outstanding
|
|
|
of Outstanding
|
|
|
(Excluding
|
|
|
|
Options,
|
|
|
Options,
|
|
|
Securities
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Reflected in
|
|
Plan category
|
|
and Rights
|
|
|
and Rights
|
|
|
Column (A))
|
|
|
Equity compensation plans approved by security
holders(1)
|
|
|
11,950,641
|
(3)
|
|
$
|
56.83
|
(5)
|
|
|
3,206,386
|
|
Equity compensation plans not approved by security
holders(2)
|
|
|
1,866,205
|
(4)
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
|
|
|
13,816,846
|
|
|
$
|
56.83
|
(5)
|
|
|
3,206,386
|
|
|
|
|
(1)
|
|
These plans are the Companys
2004 Stock Plan, 2002 Stock Plan, 1998 Stock Plan, 1995 Stock
Plan, and the Incentive Compensation Deferral Plan.
|
|
(2)
|
|
These plans are the 2005
Non-Employee Director Fee Deferral Plan, the 1996 Non-Employee
Director Fee Deferral Plan, the Deferred Incentive Compensation
Plan, the Deferred Incentive Compensation Plan II and the
Incentive Compensation Deferral Plan II which are not
considered equity compensation plans requiring
shareholder approval under the rules of the New York Stock
Exchange. For a description of these plans, please see
Nonqualified Deferred Compensation beginning on
page 38 and Director Compensation beginning on
page 45.
|
|
(3)
|
|
Includes an aggregate of
11,158,468 stock options with a weighted average price of
$56.83 and a weighted average remaining life of 5.99 years.
In addition, includes an aggregate of 358,371 restricted
shares and 433,802 shares underlying stock units, payable
on a one-for-one basis, credited to accounts as of
December 31, 2007 under the Incentive Compensation Deferral
Plan.
|
|
(4)
|
|
Represents shares underlying stock
units, payable on a one-for-one basis, credited to accounts as
of December 31, 2007 under the deferral plans listed in
footnote 2 above.
|
|
(5)
|
|
The weighted average exercise price
of outstanding stock options excludes restricted shares and
deferred compensation share units because they have no exercise
price.
|
Federal Income Tax Implications.
General. As discussed above, the Plan has
been designed to meet the requirements in Section 162(m) of
the Internal Revenue Code for stock options, stock appreciation
rights and performance shares and performance share units.
Stock Options. Employees may be granted
Incentive Stock Options or nonqualified options. Under present
federal income tax law and regulations, no tax is imposed as a
result of the grant or exercise of an Incentive Stock Option.
The amount by which the fair market value of the shares received
upon exercise exceeds the option price is an item of tax
preference and may be subject to the alternative minimum tax. If
the shares received upon the exercise of an Incentive Stock
Option are not disposed of within two years from the date the
option was granted and within one year after the date the shares
are transferred to the holder, upon the sale of shares, the
difference between the amount realized on the sale and the
option price will be taxed as long-term capital gain or loss and
the Company will not be entitled to a tax deduction. If these
holding period rules are not met, the holder will realize
ordinary income upon disposition equal to the amount by which
the fair market value of the shares at the time of exercise (or,
if lower, the proceeds of sale) exceeds the option price and the
Company will be entitled to a tax deduction equal to the
ordinary income realized by the holder. Any gain in excess of
the amount taxed as ordinary income will be taxed as short-term
capital gain.
A person granted a non-qualified stock option will not be taxed
upon the grant of the option, and the Company will not be
entitled to a tax deduction by reason of the grant. The option
holder will realize taxable income upon exercise of the option
in the amount by which the fair market value of the shares
received exceeds the option price. The Company will be entitled
to a tax deduction equal to the ordinary income to the employee.
54
Performance Shares and Performance Share
Units. Performance shares and performance share
units will not result in taxable income to the recipient or a
tax deduction for Eaton during any period that the
recipients rights to shares under the award are contingent
on Eatons attainment of performance goals, continuing
service requirements or other conditions. At the time the
Committee certifies that the Companys performance goal has
been met or the continuing service requirements or other
conditions are met, the recipient will realize taxable ordinary
income equal to the fair market value of the shares or the
amount of any cash received at that time. The Company will be
entitled to a tax deduction in the same amount.
Restricted Shares and Restricted Share
Units. Restricted shares and restricted share
units will not be taxable to the recipient, or deductible by the
Company, upon receipt of the shares or during the period the
shares are restricted, unless the recipient makes an election
under Section 83(b) of the Internal Revenue Code within
30 days of receipt of the shares. An election under
Section 83(b) of the Internal Revenue Code allows the
recipient to realize taxable ordinary income, and allows Eaton a
tax deduction, equal to the fair market value of the shares at
the time of their receipt. Absent a Section 83(b) election,
the recipient will realize taxable ordinary income, and the
Company will take a tax deduction equal to the fair market value
of the shares (less the amount paid, if any, by the recipient
for the shares) at the time their restriction lapses.
The amount of the tax deduction taken by the Company, either at
the time of receipt in the case of a Section 83(b) election
or at the time of lapse absent a Section 83(b) election by
the recipient, may be subject to the provisions of
Section 162(m) of the Internal Revenue Code.
Vote
Required
The Boards adoption of the Plan is conditioned upon the
proposal to adopt the Plan receiving the approval of holders of
the majority of our outstanding common shares.
The Board of
Directors recommends a vote FOR approval of the 2008 Stock
Plan.
|
|
6.
|
PROPOSAL TO
APPROVE THE SENIOR EXECUTIVE INCENTIVE COMPENSATION
PLAN
|
General
We have continued to study the impact of Section 162(m) of
the Internal Revenue Code on our executive compensation plans.
Under Section 162(m) publicly held companies may not obtain
tax deductions for compensation in excess of $1 million
paid in any year to the principal executive officer or to any
other employee whose total compensation must be disclosed in the
proxy statement because they are one of the three highest
compensated officers (other than the principal financial
officer). An exception to the limit on deductions is for
performance-based compensation. One of the
requirements for compensation to be performance-based is that
the shareholders must approve the plan pursuant to which the
compensation is paid.
On January 23, 2008 our Board of Directors approved the
Senior Executive Incentive Compensation Plan (the Senior
EIC Plan), subject to approval of the plan by the
shareholders. The purposes of the Senior EIC Plan are to promote
profitable Company growth by providing rewards for achieving
specified performance goals, recognizing corporate, business
unit and individual performance and achievements, and
attracting, motivating and retaining superior executive talent.
The Senior EIC Plan is intended to meet the requirements of
Section 162(m) for performance-based compensation.
Summary of the
Plan
The following summary describes the principal terms of the
proposed plan. The description of the Senior EIC Plan is
qualified by reference to the full text of the plan, which is
included as Appendix J to this proxy statement.
Administration. The Senior EIC Plan
will be administered by the Compensation and Organization
Committee of the Board of Directors (the Committee).
In administering the Senior EIC Plan, the Committee will approve
the goals, eligibility to participate, target bonus awards,
actual bonus awards, timing of payments and other actions
necessary for the administration of the Senior EIC Plan.
55
Eligibility. The individuals eligible
to participate in the Senior EIC Plan would consist of the Chief
Executive Officer and any of our officers reporting directly to
the Chief Executive Officer (currently consisting of eight
individuals). Employees who participate in the Senior EIC Plan
will not participate in our long-established annual Executive
Incentive Compensation Plan.
Establishment of Incentive
Opportunities. On or before March 30 of each
year, the Committee will establish in writing objective
performance goals to be used in determining the total bonus
pool available under the Senior EIC Plan. The bonus
pool will be a dollar amount calculated by reference to
specified levels of, or growth in, any one or more of the
following corporate performance goals: earnings per
share, operating earnings per share, total return to
shareholders, total revenue, net income, net income before tax,
return on equity, return on assets, cash flow return, or cash
flow return on gross capital.
On or before March 30 of each performance year, the Committee
will also assign a percentage share of the bonus pool to each
participant in the Senior EIC Plan which will be the maximum
amount that a participant can receive under the Senior EIC Plan
for that year. No participant will be assigned a percentage
share worth more than $7,500,000.
Each year the Committee will also establish performance goals
for each participant, which may contain corporate, business unit
and individual performance objectives. Whether or not a
participant will receive all or any part of the percentage share
assigned to him or her will be based on the achievement of the
individual goals and the corporate and business unit financial
and strategic objectives established for that year.
Award Determinations. After the end of
each performance year, the Committee will certify in writing
whether and to what extent the goals have been achieved. The
Committee will determine the total bonus pool and each
participants bonus based on the level of achievement under
the corporate performance goals. At that time, the Committee
will also assess each participants performance against the
individual goals established for that participant. Based on this
assessment, the Committee will determine whether or not to award
the entire bonus or a lesser amount with respect to each
participant. In no event will the bonus be greater than the
portion of the bonus pool allocated to the participant.
Other Matters. Awards granted under the
Senior EIC Plan are subject to a policy, adopted by our Board of
Directors, that provides if the Board determines that an
executive engaged in any fraud, misconduct or other bad-faith
action that, directly or indirectly, caused or partially caused
the need for a material accounting restatement for any period as
to which a performance-based award was paid or credited to the
executive, the performance-based award is subject to reduction,
cancellation or reimbursement at the discretion of the Board.
Please see page 27 for further information concerning the
policy.
Payments. Awards under the Senior EIC
Plan will be paid in cash not later than March 15 of the year
following the performance year, but the awards may be
voluntarily deferred by the participant under our Deferred
Incentive Compensation Plan II.
Federal Income
Tax
Consequences.
Under
present federal income tax law, a participant in the Senior EIC
Plan will be taxed at ordinary income rates on the amount of any
payment received pursuant to the Senior EIC Plan. Generally, and
subject to the provisions of Section 162(m), we will
receive a federal income tax deduction corresponding to the
amount of income recognized by a participant in the Senior EIC
Plan.
Vote
Required
The affirmative vote of the holders of a majority of our
outstanding common shares is required to approve the Senior EIC
Plan. If the Senior EIC Plan is not approved by the
shareholders, no awards will be paid under the plan.
The Board of Directors recommends a vote FOR the approval
of the Senior Executive Incentive Compensation
Plan.
56
|
|
7.
|
PROPOSAL TO
APPROVE THE EXECUTIVE STRATEGIC INCENTIVE PLAN
|
General
On January 23, 2008 our Board of Directors approved
amendments to the Executive Strategic Incentive Compensation
Plan (ESIP), subject to approval of the plan by the
shareholders. The Company has maintained ESIP for many years in
order to provide key senior executives with incentives to
achieve demanding long-term corporate objectives and in order to
attract and retain executives of outstanding ability. The
purpose of the amendments to ESIP and for seeking shareholder
approval of the plan, as amended, is to meet the requirements of
Section 162(m) of the Internal Revenue Code for
performance-based compensation.
Under Section 162(m) publicly held companies may not obtain
tax deductions for compensation in excess of $1 million
paid in any year to the principal executive officer or to any
other employee whose total compensation must be disclosed in the
proxy statement because they are one of the three highest
compensated officers (other than the principal financial
officer). An exception to the limit on deductions is for
performance-based compensation. One requirement for
compensation to qualify as
performance-based
is that our shareholders must approve the plan pursuant to which
the compensation is paid.
ESIP is also being amended to provide that awards will be
granted in the form of Phantom Share Units that reflect
appreciation or depreciation and earnings on our common shares
during the performance period. Prior to the
2005-2008
Award Period, ESIP incentive awards were granted in the form of
Phantom Share Units. Beginning with awards for the
2005-2008
Award Period, the Compensation and Organization Committee (the
Committee) amended the plan to provide that
incentive awards would not be expressed in the form of Phantom
Share Units.
The amendments, along with the material terms of ESIP, are
summarized below.
Summary of the
Plan
The following summary describes the principal terms of ESIP as
amended. The description of the plan is qualified by reference
to the full text of the amended and restated plan, which is
included as Appendix K to this proxy statement.
Administration. ESIP is administered by
the Committee. In administering ESIP, the Committee approves the
goals, eligibility to participate, target awards, actual awards,
timing of payments and other actions necessary for the
administration of the plan.
Eligibility. The individuals eligible
to participate in ESIP consist of the Chief Executive Officer
and other senior executives as selected by the Committee
(currently, a total of approximately 100 individuals).
Establishment of Incentive
Opportunities. If ESIP is amended as approved
by our shareholders, with respect to Award Periods beginning on
or after January 1, 2008, participant incentive targets
will be expressed in the form of Phantom Share Units which will
be determined by: (a) first establishing in writing an
individual incentive amount in cash for each participant within
the first 90 days of each Award Period and (b) then
dividing the individual incentive amount by the average mean of
the high and low prices for our common shares for the first
twenty trading days of each Award Period. No participant may
receive an award for more than 200,000 Phantom Share Units for
any Award Period.
On or before March 30 of each year, the Committee will establish
in writing threshold, target, and maximum performance objectives
for the Award Period that begins on January 1st of
that year. The performance objectives will consist of objective
tests based on one or more of the following: the Companys
earnings, cash flow, cash flow return on gross capital,
financial return ratios, market performance, shareholder return
and/or
value, operating profits, net profits, earnings per share,
operating earnings per share, profit returns and margins, share
price, working capital, and changes between years or periods, or
returns over years or periods that are determined with respect
to any of the specified performance criteria.
Award Determinations. For each Award
Period, final individual Phantom Share Unit
57
Awards may range from 0% to 200% of the number of Phantom Share
Units initially awarded to the participant based on the level of
achievement under the performance objectives. The final Award
will be converted to cash at a market value of our common shares
using the average mean of the high and low prices for the common
shares for the final twenty trading days of the Award Period.
Each participant will be credited with a dividend equivalent
amount equal to the aggregate dividends paid during the Award
Period on a number of Company shares equal to the number of
Phantom Share Units finally awarded to the participant for that
Award Period. The dividend equivalent amount will be paid to the
participant in cash at the time the Award is paid.
Payments. Awards under ESIP will be
paid in cash not later than March 15th following each
Award Period, but the award may be voluntarily deferred by the
participant under one of our applicable deferral plans.
Pro-rata Payments. Awards will be
contingent on the participants continued employment by the
Company during each Award Period, except for termination of
employment by reason of death or disability (as determined by
the Committee). In the event of termination of employment under
the foregoing exceptions, awards will be prorated for the length
of service during each Award Period with the prorated amount
calculated as described above under Award
Determinations and paid as described above under
Payments.
Other Matters. Awards granted under
ESIP are subject to a policy, adopted by our Board of Directors,
that provides if the Board determines that an executive engaged
in any fraud, misconduct or other bad-faith action that,
directly or indirectly, caused or partially caused the need for
a material accounting restatement for any period as to which a
performance-based award was paid or credited to the executive,
the performance-based award is subject to reduction,
cancellation or reimbursement at the discretion of the Board.
Please see page 27 for further information concerning the
policy.
Vote
Required
The affirmative vote of holders of a majority of our outstanding
common shares will be required to approve ESIP. If ESIP is not
approved by the shareholders, no awards will be paid under the
plan.
The Board of
Directors recommends a vote FOR the approval of the Executive
Strategic Incentive Plan.
|
|
8.
|
RATIFICATION OF
APPOINTMENT OF INDEPENDENT AUDITOR
|
The Audit Committee of the Board of Directors has appointed the
accounting firm of Ernst & Young LLP as Eatons
independent auditor to conduct the annual audit of Eatons
books and records for 2008. The submittal of this matter to the
shareholders at the annual meeting is not required by law or by
Eatons Amended Regulations. This matter is nevertheless
being submitted to the shareholders to ascertain their views. If
this proposal is not approved at the annual meeting by the
affirmative vote of holders of a majority of the outstanding
shares, the Audit Committee intends to reconsider its
appointment of Ernst & Young LLP as independent auditor.
A representative of Ernst & Young LLP will be present at
the annual meeting to answer any questions concerning the
independent auditors areas of responsibility, and will
have an opportunity to make a statement if he or she desires to
do so.
The Board of Directors recommends a vote FOR ratification
of the appointment of Ernst & Young LLP.
9. OTHER
BUSINESS
Management does not know of any other matters requiring
shareholder action that may come before the meeting; but, if any
are properly presented, the individuals named in the enclosed
form of proxy will vote on those matters according to their best
judgment.
Share Ownership
Tables
Set forth below is certain information concerning persons who
are known by the Company to have reported owning beneficially
more than 5% of the Companys common shares as of the most
recent practicable date.
|
|
|
|
|
|
|
|
|
Name and Address of
|
|
Number of
|
|
|
Percent
|
|
Beneficial Owner
|
|
Common Shares
|
|
|
of Class
|
|
|
|
|
AXA Financial, Inc.
|
|
|
9,784,726(1
|
)
|
|
|
6.7
|
%
|
1290 Avenue of the Americas
New York, NY 10104
|
|
|
|
|
|
|
|
|
Barclays Global Investors, NA
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14,525,022(2
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)
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9.96
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%
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45 Fremont Street
San Francisco, CA 94105
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(1)
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AXA Financial, Inc. has filed with
the Securities and Exchange Commission a Schedule 13G dated
February 14, 2008, which reports the beneficial ownership in the
aggregate of 9,784,726 shares. As reported in the Schedule 13G,
AXA Financial, Inc. and its affiliated entities have sole voting
power with regard to 7,009,898 shares, shared voting power with
regard to 800,462 shares, and sole dispositive power with regard
to 9,784,726 shares.
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(2)
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Barclays Global Investors, NA. has
filed with the Securities and Exchange Commission a
Schedule 13G dated January 10, 2008, which reports the
beneficial ownership in the aggregate of 14,525,022 shares.
As reported in the Schedule 13G, Barclays Global Investors,
NA. and its affiliated entities have sole voting power with
regard to 12,571,409 shares and sole dispositive power with
regard to 14,525,022 shares.
|
The following table shows the beneficial ownership, reported to
the Company as of December 31, 2007, of Company common
shares by each director, each Named Executive Officer and all
directors and executive officers as a group, and also sets forth
the number of share units held under various deferred
compensation plans.
TITLE OF
CLASS: COMMON SHARES
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Name of
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Percent
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Deferred
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Total Number of
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Beneficial
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Number of
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of
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Share
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Shares and Deferred
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Owner
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Shares
Owned(1,2)
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Class(3)
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Units(4)
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Share Units
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C. Arnold
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121,504
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(5)
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35,312
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156,816
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R. W. Carson
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156,883
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(5)
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59,832
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216,715
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C.M. Connor
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13,752
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2,352
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15,604
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M. J. Critelli
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51,388
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0
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51,388
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A. M. Cutler
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1,474,083
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(5,6)
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467,450
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1,941,533
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R. H. Fearon
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167,385
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66,499
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233,884
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C.E. Golden
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10,500
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432
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10,932
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E. Green
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58,982
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7,366
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66,348
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N. C. Lautenbach
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57,504
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20,627
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78,131
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D. L. McCoy
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43,438
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15,283
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58,721
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J. R. Miller
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48,392
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0
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48,392
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G. R. Page
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25,470
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2,339
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27,809
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V. A. Pelson
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35,530
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13,013
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48,543
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J. E. Sweetnam
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112,755
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(5)
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18,492
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131,247
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G. L. Tooker
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14,470
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(6)
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8,351
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22,821
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All Directors and Executive Officers as a Group
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2,926,421
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2.0
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%
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908,202
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3,834,623
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(1)
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Each person has sole voting and
investment power with respect to the shares listed, unless
otherwise indicated.
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(2)
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Includes shares which the person
has the right to acquire within 60 days after
December 31, 2007 upon the exercise of outstanding stock
options as follows: C. Arnold, 85,674; R. W. Carson, 123,473;
A.M. Cutler, 1,246,210; R. H. Fearon, 116,368; J.E.
Sweetnam, 76,472 and all directors and executive officers as a
group, 2,313,950 shares.
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(3)
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Each of the individuals listed
holds less than 1% of outstanding common shares.
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(4)
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For a description of these units,
see page 45 (under Director Compensation) and
pages 38-39
(under Nonqualified Deferred Compensation).
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(5)
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Includes shares held under the
Eaton Savings Plan as of December 31, 2007.
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(6)
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Includes shares held jointly or in
other capacities, such as by trust.
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59
Employee benefit plans of the Company and its subsidiaries on
December 31, 2007 held 7,754,792.98 common shares for
the benefit of participating employees, or approximately 5.30%
of common shares outstanding.
Section 16(a) Beneficial Ownership Reporting
Compliance Section 16(a) of the Securities
Exchange Act of 1934 requires the Companys directors and
executive officers to file reports of holdings and transactions
in the Companys equity securities with the Securities and
Exchange Commission. The Company assists its directors and
executive officers by completing and filing these reports
electronically on their behalf. The Company believes that its
directors and executive officers timely complied with all such
filing requirements with respect to 2007.
Future Shareholder Proposals Shareholders who wish
to submit proposals for inclusion in the proxy statement and for
consideration at the annual meeting must do so on a timely
basis. In order to be included in the proxy statement for the
2009 annual meeting, proposals must relate to proper subjects
and must be received by the Corporate Secretary, Eaton
Corporation, 1111 Superior Avenue, Cleveland, Ohio
44114-2584,
by November 14, 2008.
By order of the Board of Directors
Earl R. Franklin
Vice President and
Secretary
March 14, 2008
APPENDIX A
BOARD OF
DIRECTORS POLICY ON
MAJORITY VOTING
In an uncontested election, any nominee for Director who
receives a greater number of votes Withheld from his
or her election than votes for such election (a
Majority Withheld Vote) shall submit a written offer
to resign as a Director promptly following certification of the
shareholder vote.
The Governance Committee of the Board shall consider the
resignation offer and recommend to the Board whether to accept
it. The Board will act on the Governance Committees
recommendation within 90 days following certification of
the shareholder vote. As soon as practicable thereafter, the
Board will disclose its decision (citing the reasons for
rejecting the resignation offer, if applicable) in a press
release to be disseminated in the manner Company press releases
are typically disseminated.
Any Director who submits a written offer to resign as a Director
pursuant to this provision shall not participate in the
Governance Committee recommendation or Board action regarding
whether to accept the resignation offer.
However, if each member of the Governance Committee received a
Majority Withheld Vote at the same election, then the
independent Directors who did not receive a Majority Withheld
Vote shall appoint a special committee comprised exclusively of
independent Directors to consider the resignation offers and
recommend to the Board whether to accept them. Further, if the
only Directors who did not receive a Majority Withheld Vote in
the same election constitute three or fewer Directors, all
Directors may participate in the Board action regarding whether
to accept the resignation offers.
APPENDIX B
CHARTER OF THE
GOVERNANCE COMMITTEE
The Governance Committee shall be comprised of at least three
Directors, all of whom meet the independence requirements of the
New York Stock Exchange and the Board of Directors. The
Committee members shall be appointed by the Board upon the
recommendation of the
60
Governance Committee or a majority of the independent members of
the Board. Committee members may be removed by the Board at any
time upon the recommendation of the Governance Committee or a
majority of the independent members of the Board.
The Governance Committee shall have the following
responsibilities:
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1.
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Recommend to the Board improvements in the Companys
processes of corporate governance, including proposed changes in
the Board Governance Policies.
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2.
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Advise the Board on changes in the size and composition of the
Board.
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3.
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Make recommendations to the Board regarding the structure and
responsibilities of Board Committees, recommend one year in
advance a member of each standing Board Committee to be
appointed Chair of the Committee, and annually submit to the
Board candidates to be appointed members and Chair of each
standing Committee.
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4.
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In consultation with the Chairman and Chief Executive Officer,
identify new Director candidates, and evaluate candidates
identified by shareholders, based on the criteria for Board
membership listed in the Board Governance Policies and such
other criteria as the Committee may deem appropriate. Taking
into account input from all Directors, the Committee shall then
consider recommending to the Board the nomination of one or more
such candidates for election to the Board.
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5.
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Recommend to the Board incumbent Directors who should be
nominated for re-election, following the process described in
the Board Governance Policies.
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6.
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Oversee the orientation of new Directors and review the
continuing education needs of the Directors relating to their
roles and responsibilities as members of the Board and its
Committees.
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7.
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Recommend to the Board compensation of non-employee Directors.
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8.
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Administer the Boards policy on Director retirements and
resignations.
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9.
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Administer the Directors stock ownership guidelines.
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10.
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Establish guidelines, procedures and minimum requirements to be
used by the Directors to evaluate the performance of the Board,
the Audit Committee, Compensation and Organization Committee,
Finance Committee and Governance Committee.
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11.
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Provide oversight regarding significant public policy issues
with respect to the Companys relationships with
shareholders, employees, customers, competitors, suppliers and
the communities in which it operates, including the following
areas:
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(a)
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Ethics compliance
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(b)
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Environmental, health and safety issues
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(c)
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Community relations
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(d)
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Government relations
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(e)
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Charitable contributions
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(f)
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Shareholder relations, including recommended responses to
shareholder proposals
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(g)
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Eaton Philosophy of Excellence through People
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12.
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Review the Companys Code of Ethics, including its programs
to promote ethical and legal conduct, to facilitate anonymous
reporting of violations and to assure protection of employees
who report violations in good faith, and from time to time
recommend the amendment of the Code of Ethics.
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13.
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Periodically report to the Board concerning the Committees
actions, conclusions and recommendations.
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14.
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Assure that self-assessments of the Governance Committee are
conducted annually.
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15.
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Review and reassess the adequacy of this charter at least
annually and recommend any proposed changes to the Board for
approval.
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The Governance Committee shall have the authority to retain and
terminate consultants and other advisors to advise the Committee
in the performance of its responsibilities, including search
firms to be used to identify Director candidates and
compensation consultants to assist in the evaluation of Director
compensation. The Committee shall exercise sole authority to
approve the fees and other
61
retention terms for such consultants and other advisors, who
will report directly to the Committee.
APPENDIX C
BOARD OF
DIRECTORS GOVERNANCE POLICIES
I. BOARD
ORGANIZATION AND COMPOSITION
A. Size and Structure of Board. The size of the
Board should be in the range of 8-15. Only one Director should
be an employee of the Company. The Board believes that it is
desirable for the Companys Board to be divided into three
approximately equal classes, one of which is elected each year,
since this structure assures continuity and has worked well
historically.
B. Director Independence. Except for any Director
who is a Company employee, all Directors should be independent.
A Director will be considered independent if the Director meets
the criteria set forth in the independence standards of the New
York Stock Exchange and the independence criteria adopted by the
Companys Board of Directors.
C. Director Tenure. Each Director is normally
elected for a three-year term. Toward the end of a
Directors term, the Board of Directors, with the advice of
the Governance Committee, reviews the Directors candidacy
for re-election. In advising the Board, the Governance Committee
considers, among other things, (i) the results of a peer
review of the Directors performance by all other outside
Directors, (ii) self-evaluation by the Director,
(iii) input by the Chairman and Chief Executive Officer
relating to the Directors performance, (iv) input by
the Chair of each Board Committee on which the Director serves
and (v) the Governance Committees assessment of the
Directors skills, talents, competencies and experience in
comparison with the Companys strategy and the anticipated
needs of the Board. There is no limit to the number of terms a
Director may serve. However, the Companys retirement
policy calls for each outside Director to retire at the Annual
Shareholders Meeting following the Directors
72nd birthday and for the Chairman and Chief Executive
Officer to retire from the Board when he or she retires as an
employee, no later than the end of the month in which he or she
reaches age 65. Directors who retire from their employment,
change their employment or occupation, or otherwise make a
material change in their non-Eaton responsibilities should
tender their resignation from the Board of Directors. The Board,
with the advice of the Governance Committee, will then decide
whether to accept the resignation.
D. Membership on Other Boards. Each Director is
responsible to notify the Chair of the Governance Committee
before accepting invitations to join other Boards of Directors.
The Governance Committee then determines whether there would be
any potential concerns with the Directors doing so. One
purpose of this policy is to avoid actual or potential conflicts
of interest or the appearance of conflicts of interest.
Appropriate legal advice will be obtained as necessary. Another
purpose of this policy is to insure that Directors do not have
an excessive number of Board assignments that would put the
Directors effectiveness at risk. Directors who are Chief
Executive Officers of publicly-held companies may serve on a
maximum of three public company Boards, including the
Companys Board. Other Directors may serve on a maximum of
six public company Boards, including the Companys Board.
E. New Directors. Director candidates will be
selected on the basis of their ability to make contributions to
the Board of Directors and to the Companys governance
activities. Among the most salient strengths to be considered
are personal ability, integrity, intelligence, relevant business
background, independence, expertise in areas of importance to
the Companys objectives, and a sensitivity to the
Companys corporate responsibilities. In deciding upon
Director candidates to recommend to the Board, the Governance
Committee compares each candidates skills, talents,
competencies and experience to the Companys strategy and
the anticipated needs of the Board. The Committee takes into
account input from all Directors in the review of Director
candidates. The initial screening of Director candidates is
conducted by the Chair of the Governance Committee in
consultation with the Chairman and Chief Executive Officer. The
Governance Committee then identifies the recommended candidate
for possible approval by the Board of Directors.
62
F. Combining the Positions of Chairman and Chief
Executive Officer. It is the Boards policy that the
positions of Chairman of the Board and Chief Executive Officer
should be held by the same person. The Board believes that this
practice provides the most efficient and effective leadership
model for the Company.
G. No Lead Director. The Board believes that
designating a lead Director is not necessary or appropriate for
the best interests of the Company and its shareholders unless
the Chairman and Chief Executive Officer is absent, and then
only for the duration of his or her absence.
II. COMMITTEE
COMPOSITION AND LEADERSHIP
A. Membership of Committees. All Board Committees
are comprised entirely of outside independent Directors, except
for the Executive Committee, which is chaired by the Chairman
and Chief Executive Officer.
B. Rotation of Committee Memberships and Chairs. In
order to assure that each Director has a broad exposure to the
work of the various Board Committees, and at the same time to
provide for continuity in the membership of each Committee, the
Board has adopted the practice of rotating each outside
Directors Committee assignments approximately every four
to six years, except that, for continuity, Committee Chairs
normally continue on their Committees for up to ten years. The
Director who will become the Chair of a Committee should be
selected from among the current members of the Committee and
should be designated at least one year in advance in order to
permit adequate preparation time and a smooth transition.
C. Committee Descriptions. There are five standing
Committees of the Board: the Audit Committee, Compensation and
Organization Committee, Executive Committee, Finance Committee
and Governance Committee. The responsibilities and membership of
these Committees are described in their charters, which are
published in the Companys annual proxy statement and
posted on its website.
III. PERFORMANCE
ASSESSMENT AND SUCCESSION PLANNING
A. Board and Committee Assessments. Performance
self-assessments are conducted annually by the Board and the
Audit, Compensation and Organization, Finance and Governance
Committees.
B. Chairman and Chief Executive Officer Performance
Assessment. The performance of the Chairman and Chief
Executive Officer is thoroughly assessed annually by the
Compensation and Organization Committee, taking into account
input from all outside Directors. Key performance and leadership
categories are established. As to each category, each outside
Director answers a set of specific questions, provides written
comments, suggests opportunities for improvement, and comments
on individual strengths. An external third party consolidates
the feedback and provides a summary report to the Chair of the
Compensation and Organization Committee who, in turn, reviews it
with the outside Directors. The Chair of the Committee then
reviews the report with the Chairman and Chief Executive Officer.
C. Senior Management Performance Assessment. One of
the most important responsibilities of the Board is to assure
that the Companys senior management is well qualified to
conduct the Companys business affairs. The Boards
process begins with an assessment by the Chairman and Chief
Executive Officer of all officers on the senior management team.
The Chairman and Chief Executive Officer, then, reports annually
to the Board, giving his or her assessment of each
officers performance and his or her thoughts on succession
planning. The Board of Directors takes these thoughts into
account in its evaluation and direction of succession planning,
especially in regard to the position of Chief Executive Officer.
D. Chief Executive Officer Succession Planning. It
is the policy of the Board to be adequately prepared to deal
with Chief Executive Officer succession, should the need arise,
whether via emergency, resignation or retirement. The Board has
established several processes that work together to achieve this
result. The Chief Executive Officer annually leads a formal
discussion with the Board to review all key executives,
including each executives
63
performance, leadership attributes and readiness to assume
additional responsibility. The Board also utilizes the annual
review to discuss short- and long-term succession planning and
emergency succession issues. By focusing on both the short and
the long term, the Board identifies specific individual
development needs, that are then communicated to each executive
by the Chief Executive Officer in annual performance reviews and
ongoing coaching sessions. In addition to the annual review, the
Board feels it is important for each Director to interact
personally and frequently with the key executives. For this
purpose, the Board has established a formal process for each
Director to meet with key executives individually so that all
Directors are able to evaluate first-hand the executives
readiness and potential to assume greater responsibility within
the Company or to step into the Chief Executive Officer role, if
needed.
IV. OPERATION
OF THE BOARD AND COMMITTEES
A. Director Responsibilities. The Board expects all
Directors to fulfill the following basic responsibilities:
(1) attend all meetings of the Board, relevant Board
Committees and Annual Shareholders Meetings,
(2) participate actively in meetings of the Board and
relevant Board Committees after review of materials that are
provided to the Directors in advance of meetings, (3) act
in a manner consistent with the best interests of the Company
and its shareholders (avoiding conflicts of interest that would
interfere with their doing so) and (4) exercise proper
diligence and business judgment in performing their duties as
members of the Board and its Committees.
B. Agendas and Background Information. A proposed
Agenda for each meeting of a Board Committee is drafted on the
basis of the Committees annual calendar, approved by the
Committee Chair and sent to the Committee members in advance of
the meeting, along with background information on important
subjects and advance copies of presentation materials.
Similarly, a proposed Agenda for each meeting of the Board is
drafted, approved by the Chairman and Chief Executive Officer
and sent to the Director who will chair the Executive Session
and to all other Directors in advance of the meeting, along with
background information on important subjects and advance copies
of presentation materials. Any Board or Committee member may ask
for additions or changes in the Agenda.
C. Access to Management and Independent Advisors.
Directors should request from management, or any other
sources they may desire, information that they consider helpful
in the performance of their duties. The Board and each Board
Committee may retain independent legal counsel, consultants or
other advisors as the Board or such Committee deems necessary
and appropriate, the cost of which is borne by the Company.
D. Executive Sessions. At each Board meeting, the
Board holds an executive session, in which only the Directors
are present. The outside Directors also meet in executive
session at each Board meeting, without the inside Director
present, to discuss whatever topics they may deem appropriate.
These executive sessions are chaired on a rotating basis by the
outside Directors who chair the Audit, Compensation and
Organization, Finance and Governance Committees. At least one
such executive session is held every year attended only by
Directors who meet the independence criteria of the Board of
Directors and of the New York Stock Exchange. In addition, at
each meeting of the Audit, Compensation and Organization,
Finance and Governance Committees, an executive session is held,
which is attended only by the Committee members, all of whom are
independent Directors, without any members of the Companys
management present, to discuss whatever topics they may deem
appropriate.
E. Board Meetings on Strategic Planning. The Board
devotes one extended meeting per year to strategic planning,
along with portions of additional meetings throughout the year.
Company performance is to be measured in terms of the
Companys strategic objectives and its relative performance
among its peers.
F. Concurrent Committee Meetings. Because of
scheduling constraints, certain meetings of Board Committees are
held concurrently, although doing so requires the inside
Director to be absent from certain Committee meetings.
G. Minutes. Minutes of all Committee meetings are
sent to all Directors for their information in advance of the
following Board meeting,
64
together with the minutes of the prior Board meeting.
H. Company Spokesperson. The Board of Directors has
delegated to the Chairman and Chief Executive Officer, or his or
her designees, the responsibility to serve as Company
spokesperson.
I. Orientation for New Directors. An orientation
process has been developed for new Directors, including
background briefings by the Chairman and Chief Executive
Officer, other senior officers and the Secretary, and
information relating to the Board Committees that the Director
will join.
J. Continuing Education for Directors. The
Governance Committee reviews the continuing education needs of
the Directors relating to their roles and responsibilities as
members of the Board and its Committees. All Directors are
expected to attend such courses periodically in order to stay
well informed on relevant issues and to maximize their
effectiveness.
V. COMPENSATION
OF OUTSIDE DIRECTORS
A. Director Compensation. The Board of Directors
with the advice of its Governance Committee determines the
compensation of the outside Directors. The form and amount of
Director compensation are intended to be competitive with
Director compensation at peer companies, appropriate to the time
and energy required of the Directors (as members of the Board
and as members or Chairs of Board Committees) and consistent
with the Directors independence from the Company and its
management.
B. Regular Reviews of Compensation. Regularly
scheduled reviews of outside Director compensation are conducted
by the Governance Committee to assure that the compensation
remains competitive and appropriate.
C. Pensions. In 1996, the Companys pension
plan for outside Directors was discontinued as to newly-elected
outside Directors. Those first elected in 1996 or later are not
eligible to receive pension payments after retiring from the
Board. However, each of the Directors is encouraged to take
advantage of the opportunity under the 2005 Non-Employee
Director Fee Deferral Plan to defer Director fees for payment
following retirement from the Board, in the form of shares, the
cash equivalent, or a combination of shares and cash, as
previously elected by the Director.
D. Stock Options. When each outside Director is
first elected to the Board, the Director receives an initial
grant of stock options, exercisable at the market price of the
shares on the date of grant. Thereafter, each outside Director
annually receives stock options for a number of additional
shares, with a market value on the date of grant equal to four
times the outside Directors annual retainer. These options
also are exercisable at the market price of the shares on the
date of grant.
E. Share Ownership Guidelines. The Board has adopted
guidelines calling for each outside Director to acquire within
five years a number of Company shares with a market value equal
to three times the amount of the outside Directors annual
retainer.
VI. GENERAL
These Policies will be reviewed by the Governance Committee
annually and may be amended by the Board of Directors from time
to time.
APPENDIX D
BOARD OF
DIRECTORS
INDEPENDENCE CRITERIA
For an Eaton Corporation Director to be considered independent,
the Board of Directors must affirmatively determine that the
Director has no
material(1)
relationship (whether financial, business, personal or
otherwise) with Eaton Corporation or any of its subsidiaries or
(1) Materiality is
to be considered from the standpoint of the Director and that of
each person or organization with which the Director is
affiliated, including organizations of which the Director is a
partner, shareholder or officer. The determination that, as to
each Director individually, there is no material relationship
(whether financial, business, personal or otherwise) will be
made by the Board of Directors after consideration of the
recommendation of its Governance Committee, based upon
information provided by the Director and any other information
that may be known to the Board. The purpose is ultimately to
determine whether a Director has any relationship with Eaton
Corporation that may interfere with the exercise of the
Directors independence from Eaton Corporation and its
management.
65
affiliates, either directly or as a partner, shareholder or
officer of an organization which in turn has a relationship with
them. In making this determination, the Board may consider the
Director independent either (A) because the Director has no
relationships whatsoever with Eaton Corporation or any of its
subsidiaries or affiliates (other than as a Director and
shareholder) or (B) because the Director has only
immaterial relationships with them. A Directors
relationships will be deemed immaterial so long as the following
categorical standards are met:
|
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1. |
The Director is not, and has not been within the previous three
years, an employee of Eaton Corporation or any of its
subsidiaries or affiliates. No member of the Directors
immediate
family(2)
is, or has been within the previous three years, an executive
officer of Eaton Corporation or any of its subsidiaries or
affiliates.
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2. |
Neither the Director nor any member of his or her immediate
family(2)
has received, during any twelve-month period within the previous
three years, more than $100,000 in direct compensation from
Eaton Corporation or any of its subsidiaries or affiliates
(including, without limitation, any consulting, advisory or
other compensatory fees) except (a) fees which Eaton
Corporation pays to its Directors for their services as members
of the Board and members or Chairs of Board Committees and
(b) fixed amounts of deferred compensation for prior
service, which is not contingent in any way on continued
service; provided that compensation paid to an immediate
family(2)
member for service as an employee other than an executive
officer will not be considered in determining the
Directors independence so long as the compensation is
comparable to the compensation paid to other similarly situated
employees
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3.
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The Director is not a partner or an employee with a firm that is
the internal or external auditor for Eaton Corporation or any of
its subsidiaries or affiliates; nor is any member of the
Directors immediate
family(2)
a partner with such a firm or an employee who participates in
the firms audit, assurance or tax compliance practice
(excluding its tax planning practice); nor has the Director or
any member of the Directors immediate
family(2)
within the previous three years been a partner or employee with
such a firm who within that time has personally worked on the
audit of Eaton Corporation or any of its subsidiaries or
affiliates.
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4.
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Neither the Director nor any member of his or her immediate
family(2)
is employed, or has been employed within the previous three
years, as an executive officer of any company whose compensation
committee at the same time included an individual who currently
serves as an executive officer of Eaton Corporation or any of
its subsidiaries or affiliates.
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5.
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The Director is not an employee, nor is any member of his or her
immediate
family(2)
an executive officer, of another company as to which payments by
Eaton Corporation to that company, or from that company to Eaton
Corporation, including their respective subsidiaries and
affiliates, for property or services have exceeded the greater
of $1 million or 2% of the other companys
consolidated gross revenues, in any of the other companys
past three fiscal years.
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However, notwithstanding anything to the contrary in categorical
standards #1 through #5 above, the Board will not
treat as categorically immaterial, but instead will discuss case
by case and will disclose, (i) any relationship between a
Director and Eaton Corporation or any of its subsidiaries or
affiliates that is required to be disclosed under Item 404
of Securities and Exchange Commission
Regulation S-K
(pertaining to related party transactions) and (ii) any
contributions made by Eaton Corporation or any of its
subsidiaries or affiliates to any tax-exempt organization of
which a Director serves as an executive officer if, within the
preceding three years, such contributions in any single fiscal
year exceeded
(2) Immediate
family means a Directors spouse, parents,
stepparents, children, stepchildren, siblings, mothers- and
fathers-in-law,
sons- and
daughters-in-law,
brothers- and
sisters-in-law,
and any person (other than a tenant or employee) who shares the
Directors household.
66
the greater of $1 million or 2% of the tax-exempt
organizations consolidated gross revenues.
An Eaton Director will be deemed to meet the special
independence standards required of Audit Committee members if
the Board of Directors determines that the Director qualifies as
independent under the above-described standards and that the
Director meets the following additional criteria:
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A.
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The Director has received no direct compensation from Eaton
Corporation or any of its subsidiaries or affiliates (including,
without limitation, any consulting, advisory or other
compensatory fees) except (a) fees which Eaton Corporation
pays to its Directors for their services as members of the Board
and members or Chairs of Board Committees and (b) fixed
amounts of deferred compensation for prior service, which are
not contingent in any way on continued service.
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B.
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The Director is not an affiliate of Eaton Corporation (i.e., not
controlling, controlled by, or under common control with, Eaton
Corporation), such as a 10%-plus shareholder.
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The Board of Directors has determined that simultaneous service
by any Audit Committee member on a maximum of three public
company audit committees, including the Eaton Corporation Audit
Committee, does not impair his or her ability to effectively
serve on the Eaton Corporation Audit Committee.
Directors and members of Eaton Corporations management are
encouraged to bring questions or concerns regarding Director
independence or these criteria promptly to the attention of the
Governance Committee Chair for guidance.
BOARD OF
DIRECTORS POLICY ON COMPANY-PAID TRANSPORTATION OF OUTSIDE
DIRECTORS
Since directors independence might be influenced by
their use of Company planes and other Company-paid
transportation, the Board of Directors has adopted a policy on
this subject, as follows:
The Board of Directors believes that the Company should provide
transportation to facilitate Director attendance at meetings of
the Board and Board Committees, Annual Shareholders Meetings,
Board visits to Company facilities and other Company events.
Transportation may be provided through the use of Company planes
and cars or through Company-paid commercial transportation. At
the same time, the Board believes it is important that the
independence of the outside Directors not be compromised, or
appear to be compromised, by their accepting transportation from
the Company for personal purposes.
Therefore, the Board of Directors has adopted the following
policy relating to Company-paid transportation of outside
Directors:
1. Outside Directors may be transported on Company planes
and cars or on Company-paid commercial transportation to
facilitate their attending meetings of the Board and Board
Committees, Annual Shareholders Meetings, Board visits to
Company facilities and other Company events. This policy
contemplates transportation to and from Directors homes,
places of business or other locations, and may include
transportation to and from Directors other business
commitments, unrelated to the Company, if necessary to
facilitate the Directors attending Company events.
However, in no event may outside Directors be transported on
Company planes and cars or on Company-paid commercial
transportation for personal purposes.
2. Company planes and cars or Company-paid commercial
transportation may not be used to transport spouses of the
outside Directors except to attend Company events to which they
are invited at the request of the Board.
3. The Governance Committee of the Board is authorized to
interpret this policy and provide guidance on its application.
APPENDIX E
CHARTER OF AUDIT
COMMITTEE
The Audit Committee shall be responsible to assist the Board of
Directors in overseeing (1) the integrity of the
Companys financial statements and its systems of internal
accounting and financial controls, (2) the independence,
qualifications and performance of the Companys independent
auditor, (3) the performance of the Companys internal
auditors
67
and (4) the Companys compliance with legal and
regulatory requirements.
The Audit Committee shall be comprised of at least three
Directors recommended by the Governance Committee or by a
majority of the independent members of the Board and appointed
by the Board. Each Committee member shall meet the independence
requirements, and all Committee members collectively shall meet
the other requirements, of the New York Stock Exchange, the
Sarbanes-Oxley Act of 2002, and rules adopted thereunder by the
Securities and Exchange Commission. No Committee member shall
concurrently serve on the audit committees of more than two
other publicly-held companies. Members of the Audit Committee
may be removed at any time by the Board of Directors upon the
recommendation of the Governance Committee or a majority of the
independent members of the Board.
The Committee shall exercise sole authority to appoint,
terminate and compensate the independent auditor, which shall
report directly to the Committee.
To provide for the independence of the Internal Audit function,
its personnel shall report to the Vice President
Internal Audit, who in turn shall report functionally to the
Audit Committee and administratively to the Executive Vice
President Chief Financial and Planning Officer. The
Vice President Internal Audit shall have open and
unrestricted access to the Committee.
The Audit Committee shall have the authority to retain and
terminate special legal, accounting or other consultants to
advise the Committee. The Committee shall exercise sole
authority to approve the fees and other retention terms for such
consultants, who will report directly to the Committee. The
Audit Committee may request any officer or employee of the
Company or the Companys outside counsel or independent
auditor to attend a meeting of the Committee or to meet with any
members of, or consultants to, the Committee.
The Company shall provide appropriate funding to the Audit
Committee, as determined by the Committee, to compensate the
auditors and any advisors to the Committee, in addition to
funding the ordinary administrative expenses of the Committee.
The Audit Committee shall establish procedures for the receipt,
retention and treatment of complaints received by the Company
regarding accounting, internal accounting controls or auditing
matters, and the confidential, anonymous submission by employees
of concerns regarding questionable accounting or auditing
matters.
The Audit Committee shall make regular reports to the Board
concerning the Committees actions, conclusions and
recommendations. The Audit Committee shall:
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1.
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Review and reassess the adequacy of this Charter at least
annually and recommend any proposed changes to the Board for
approval.
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2.
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Pre-approve all auditing services and permitted non-audit
services (including the fees and terms thereof) to be performed
for the Company by the independent auditor. Non-audit
engagements with the independent auditor shall exclude in any
event non-audit services prohibited by law.
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3.
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Resolve any disagreements between the independent auditor and
the Companys management.
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4.
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At least annually, obtain and review a report by the independent
auditor delineating all relationships between the independent
auditor and the Company, consider the compatibility of the
independent auditors non-audit services (if any) with its
independence and take appropriate action to satisfy itself of
the independence of the independent auditor.
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5.
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At least annually, obtain and review a report by the independent
auditor describing the following: (a) the independent
auditors internal quality-control procedures and
(b) any material issues raised by the most recent internal
quality-control review, or peer review, of the independent
auditor, or by any inquiry or investigation by governmental or
professional authorities, within the preceding five years,
respecting one or more independent audits carried out by the
independent auditor, and any steps taken to deal with any such
issues.
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6.
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Evaluate the performance of the independent auditor and, if so
determined by the Audit Committee, replace the
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68
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independent auditor. The evaluation shall include a review and
evaluation of the performance of the independent auditors
lead partner. The lead partner and the audit partner responsible
for reviewing the Companys audit shall be rotated off the
Companys audit at least once every five years. The
Committee also shall consider whether, in order to assure
continuing auditor independence, it is appropriate to rotate the
independent auditor.
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7.
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Set clear hiring policies for employees or former employees of
the independent auditor that comply with the requirements of the
Sarbanes-Oxley Act of 2002 and the listing standards of the New
York Stock Exchange.
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8.
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Meet to review and discuss with management and the independent
auditor the Companys quarterly and annual earnings press
releases prior to publication.
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9.
|
Meet to review and discuss with management and the independent
auditor the Companys annual audited financial statements
prior to the filing of each
Form 10-K
report. This review will include a discussion of major issues
regarding accounting principles, financial statement
presentations or the adequacy of internal controls that could
significantly affect the financial statements. This review also
will include a discussion of the specific disclosures to be made
by the Company under Managements Discussion and
Analysis of Financial Condition and Results of Operations
in the
Form 10-K
report. The Committee will then recommend to the Board whether
the financial statements should be included in the annual report
to shareholders and the annual report on
Form 10-K.
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10.
|
Review analyses prepared by management and the independent
auditor of significant financial reporting issues and judgments
made in connection with the preparation of the Companys
annual financial statements.
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11.
|
Meet to review and discuss with management and the independent
auditor the Companys quarterly financial statements and
Form 10-Q
report prior to filing. This review will include a discussion of
the specific disclosures to be made under
Managements Discussion and Analysis of Financial
Condition and Results of Operations in the Form
10-Q report.
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12.
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Review and discuss quarterly reports by the independent auditor
on:
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(a)
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all critical accounting policies and practices to be used;
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(b)
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all alternative treatments of financial information within
generally accepted accounting principles that have been
discussed with management, ramifications of the use of such
alternative disclosures and treatments, and the treatment
preferred by the independent auditor;
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(c)
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other material written communications between the independent
auditor and the Companys management, such as a management
letter or schedule of unadjusted differences.
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13.
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Review material changes to the Companys auditing and
accounting principles and practices as suggested by the
independent auditor, internal auditors or management.
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14.
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Discuss with the independent auditor any matters raised by the
independent auditor under generally accepted auditing standards
relating to the conduct of the Companys annual audit and
quarterly reviews, including the independent auditors
judgment about the quality of the Companys accounting
principles as applied in its financial reporting.
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15.
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Review with the independent auditor any problems or difficulties
the independent auditor may have encountered in the annual audit.
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16.
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Review with the Companys General Counsel legal matters
that may have a material impact on the Companys financial
statements.
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17.
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Meet periodically with management to review the Companys
material financial risk exposures and the steps management has
taken to monitor and control such exposures.
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18.
|
Receive quarterly reports by the
Director Global Ethics of any issues relating
to the Companys accounting,
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69
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financial reporting, financial integrity or similar matters.
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19.
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Review and approve the Companys annual internal audit plan.
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20.
|
Annually review the Companys assessment of the
effectiveness of the Companys internal control structure
and procedures, including the attestation of the independent
auditor concerning that assessment.
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21.
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Review the report of the Vice
President Internal Audit on internal controls
and internal audit results.
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22.
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Annually review and approve the compensation of the
Companys Vice President Internal Audit.
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23.
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Review and approve the appointment and any replacement of the
Companys Vice President Internal Audit.
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24.
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Meet with the Vice President Internal Audit and
independent auditor prior to the Companys annual audit to
review the scope, planning and staffing of the audit.
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25.
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Review disclosures by the chief executive officer and chief
financial officer during their certification process for
Form 10-K
and
Form 10-Q
reports in regard to any significant deficiencies in the design
or operation of internal controls or material weaknesses therein
and any fraud involving management or other employees who have a
significant role in the Companys internal controls.
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26.
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Discuss the types of information to be disclosed in earnings
guidance to analysts and others, and the type of presentation
made to rating agencies, with the understanding that the
Committee need not discuss in advance each instance in which the
Company may provide earnings guidance.
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27.
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Meet several times per year with the Companys chief
financial officer, Vice President Internal Audit,
independent auditor, General Counsel and
Director Global Ethics in separate executive
sessions.
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28.
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Prepare the report required by the rules of the Securities and
Exchange Commission to be included in the Companys annual
proxy statement.
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29.
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Assure that performance evaluations of the Audit Committee are
conducted annually.
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While the Audit Committee shall have the responsibilities and
powers set forth in this Charter, it shall not be the duty of
the Committee to plan or conduct audits or to determine that the
Companys financial statements and disclosures are complete
and accurate and in accordance with generally accepted
accounting principles and applicable rules and regulations.
These instead shall be the responsibility of management and the
independent auditor.
APPENDIX F
CHARTER OF
COMPENSATION AND ORGANIZATION COMMITTEE
The Compensation and Organization Committee shall be comprised
of at least three Directors, all of whom meet the independence
requirements of the New York Stock Exchange and the Board of
Directors. The Committee members shall be appointed by the Board
of Directors upon the recommendation of the Governance Committee
or a majority of the independent members of the Board. Committee
members may be removed by the Board of Directors at any time
upon the recommendation of the Governance Committee or a
majority of the independent members of the Board.
The Compensation and Organization Committee shall have the
following responsibilities:
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1.
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With input from all outside Directors, annually evaluate the
performance of the Chairman and Chief Executive Officer and
review the performance evaluations of the other senior officers
of the Company;
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2.
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Maintain and periodically review with the Board of Directors a
succession plan for key officer positions of the Company,
including the position of Chairman and Chief Executive Officer;
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3.
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Conduct periodic reviews of the Companys processes,
policies and practices that support the recruitment and
development of an appropriately diverse pool of technical,
professional, managerial and executive talent on a global basis;
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70
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4.
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Annually review the aggregate amount of awards to be made under
the Executive Incentive Compensation Plan and adjust that amount
as the Committee deems appropriate within the terms of the Plan;
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5.
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Establish performance objectives under the Companys
short-term and long-term incentive compensation plans and
determine the attainment of such performance objectives;
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6.
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Annually determine the salary of each senior officer of the
Company;
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7.
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Annually determine the awards to be made to the senior officers
under the Executive Incentive Compensation Plan;
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8.
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Annually determine the awards to be made to the senior officers
under the Companys long-term incentive compensation plans;
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9.
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Administer the Companys stock plans and periodically
approve grants of stock options and other equity-based awards to
Company employees;
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10.
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In determining the compensation of the Chairman and Chief
Executive Officer, the Committee shall (a) review and
approve corporate goals and objectives that the Committee deems
to be relevant to Chairman and Chief Executive Officer
compensation, (b) evaluate the Chairman and Chief Executive
Officers performance in light of those goals and
objectives and (c) set the Chairman and Chief Executive
Officers compensation level based on that evaluation;
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11.
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Review the compensation and benefits for senior officers in
connection with their retirement or other separation from the
Company;
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12.
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Review proposed organization or responsibility changes at the
officer level;
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13.
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Establish such share ownership retention guidelines for Company
officers and other executives as the Committee may deem
appropriate and monitor the administration of those guidelines;
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14.
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Review (a) proposed new employee benefit plans for very
large employee populations, (b) material changes to the
basic conceptual direction of any such existing plans,
(c) changes to such plans that would substantially increase
or decrease benefits for officers in any manner that is not
generally similar for all participants and is therefore
disproportionate, (d) proposed new employee benefit plans
that are material and primarily for the benefit of employees who
are key to the Companys business, (e) equity
compensation plans which, under the New York Stock Exchange
listing standards, are subject to shareholder approval and
(f) changes to any such existing plans that would
substantially increase or decrease the benefits provided by
those plans;
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15.
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Annually review comprehensive tally sheets for each of the
Companys most senior officers, displaying total
compensation (base, short-term and long-term), accrued
retirement income and other executive benefit values, and
deferral account balances, together with the expected severance
compensation and benefits that would be payable under several
different termination scenarios. Based upon this review, insure
that the Companys compensation and benefit policies,
programs and practices for those officers remain equitable,
competitive and consistent with the Companys compensation
philosophy;
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16.
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Periodically review all of the Companys compensation and
benefit policies, programs and practices for officers and other
employees who are key to the Companys business to confirm
that they remain equitable, competitive and consistent with the
Companys compensation philosophy;
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17.
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Prepare an annual report for the Companys proxy statement
regarding executive compensation, as required by the rules of
the Securities and Exchange Commission and the New York Stock
Exchange, in which the Committee confirms that it has reviewed
and discussed with the Companys management the
Compensation Discussion and Analysis to be included in the proxy
statement;
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18.
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Periodically report to the Board concerning the Committees
actions, conclusions and recommendations;
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71
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19.
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Assure that performance evaluations of the Committee are
conducted annually; and
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20.
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Review and reassess the adequacy of this charter at least
annually and recommend any proposed changes to the Board for
approval.
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The Compensation and Organization Committee shall have the
authority to retain and terminate compensation consultants and
other advisors to advise the Committee in the evaluation of
compensation for the Chairman and Chief Executive Officer and
other officers or on other matters. The Committee shall exercise
sole authority to approve the fees and other retention terms for
such consultants or other advisors, who will be directly
responsible to the Committee.
APPENDIX G
CHARTER OF
FINANCE COMMITTEE
The Finance Committee shall be comprised of at least three
Directors, all of whom qualify as independent under
the standards adopted by the New York Stock Exchange and the
Board of Directors. The Committee members shall be appointed by
the Board upon the recommendation of the Governance Committee or
a majority of the independent members of the Board. Committee
members may be removed by the Board at any time upon the
recommendation of the Governance Committee or a majority of the
independent members of the Board.
The Finance Committee shall have the following responsibilities:
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1.
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Periodically review the financial condition of the Company,
including its total financial resources, strengths and
capabilities, and recommend financial policies to the Board of
Directors;
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2.
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Analyze Company policy with respect to its debt-equity
relationship and make recommendations to the Board with respect
thereto;
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3.
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Review the Companys dividend policy and make
recommendations to the Board with respect thereto;
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4.
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Review the Companys cash flow, including its total capital
expenditure program, working capital changes and other current
and anticipated financial requirements;
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5.
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Review proposals for share issuances and repurchases and make
recommendations to the Board with respect thereto;
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6.
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Review proposals for long- and short-term debt financing and
make recommendations to the Board with respect thereto;
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7.
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Review the Companys risk management program and its
adequacy to safeguard the Company against extraordinary
liabilities and losses;
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8.
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Periodically meet with, and review the performance of, the
Pension Investment Committee, the Pension Administration
Committee and any other fiduciaries that the Board may appoint
with respect to the Companys pension and other retirement
income plans (including employee share purchase or similar
plans);
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9.
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Annually review the key assumptions used to calculate annual
pension expense, including the assumed long-term return on
pension plan assets and the discount rate used to determine the
present value of pension plan liabilities;
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10.
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Periodically report to the Board concerning the Committees
actions, conclusions and recommendations;
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11.
|
Assure that performance evaluations of the Finance Committee are
conducted annually;
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12.
|
Review and reassess the adequacy of this charter at least
annually and recommend any proposed changes to the Board for
approval.
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The Finance Committee shall have the authority to retain and
terminate consultants and other advisors to advise the Committee
in the performance of its responsibilities. The Committee shall
exercise sole authority to approve the fees and other retention
terms for such consultants and other advisors, who will report
directly to the Committee.
72
APPENDIX H
CODE OF
ETHICS
Eaton Corporation requires that all directors, officers and
employees of Eaton, its subsidiaries and affiliates
(Eaton), abide by the fundamental principles of
ethical behavior listed here in performing their duties.
Obeying the Law We respect and obey the laws,
rules and regulations applying to our businesses around the
world.
Integrity of Recording and Reporting our Financial
Results We properly maintain accurate and
complete financial and other business records, and communicate
full, fair, accurate, timely and understandable financial
results. In addition, we recognize that various officers and
employees of Eaton must meet these requirements for the content
of reports to the U.S. Securities and Exchange Commission,
or similar agencies in other countries, and for the content of
other public communications made by Eaton.
Respecting Human Rights We respect human
rights and require our suppliers to do the same.
Delivering Quality We are committed to
producing quality products and services. Our business records
and communications involving our products and services are
truthful and accurate.
Competing Ethically We gain competitive
advantage through superior performance. We do not engage in
unethical or illegal trade practices.
Respecting Diversity and Fair Employment
Practices Throughout the world we are committed
to respecting a culturally diverse workforce through practices
that provide equal access and fair treatment to all employees on
the basis of merit. We do not tolerate harassment or
discrimination in the workplace.
Avoiding Conflicts of Interest We avoid
relationships or conduct that might compromise judgment or
create actual or apparent conflicts between our personal
interests and our loyalty to Eaton. We do not use our position
with Eaton to obtain improper benefits for others or ourselves.
We do not compete with Eaton.
Protecting Our Assets We use Eaton property,
information and opportunities for Eatons business purposes
and not for unauthorized use. We properly maintain the
confidentiality of information entrusted to us by Eaton or
others.
Offering/Accepting Gifts, Entertainment, Bribes or
Kickbacks We do not offer or accept gifts or
entertainment of substantial value. We do not offer or accept
bribes or kickbacks.
Selling to Governments We comply with the
special laws, rules and regulations that relate to government
contracts and relationships with government personnel.
Political Contributions We do not make
contributions on behalf of Eaton to political candidates or
parties even where lawful.
Reporting Ethical, Legal or Financial Integrity
Concerns Any person may openly or anonymously
report any ethical concern or any potential or actual legal or
financial violation, including any fraud, accounting, auditing,
tax or record-keeping matter, to the DirectorGlobal Ethics
of Eaton. For reports that are not made anonymously,
confidentiality will be maintained to the extent possible while
permitting an appropriate investigation.
Reports may be made openly or anonymously by regular mail to
DirectorGlobal Ethics, Eaton Corporation, Eaton Center,
Cleveland, Ohio 44114. Reports may also be made to the office of
the DirectorGlobal Ethics by e-mail or telephone through
Eatons Ethics and Financial Integrity Help Line:
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E-mail |
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Access the Ethics and Financial Integrity Help Line through the
Employee Services tab on Eatons intranet. The message will
be anonymous unless the sender identifies himself or herself.
Alternatively, send a regular Outlook e-mail, which will not be
anonymous, to Ethics@eaton.com. |
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Telephone |
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From the U.S. and Canada, dial toll free
1-800-433-2774.
This call will be anonymous unless the caller identifies himself
or herself. |
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From all other countries, dial your countrys AT&T
access code (found on e-net), and then dial toll free
1-800-433-2774.
This call will be anonymous unless the caller identifies himself
or herself. |
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Non-English |
|
If you are not comfortable making your report in English through
the Ethics and Financial Integrity Help Line, please use your
native language to
e-mail or
write your concern to the address above, and we will translate
your letter or
e-mail. |
Eaton will not permit any retaliation against any employee who
reports an ethical, legal or financial concern nor will it
discipline any employee for making a report in good faith.
Personal
Responsibility
Every officer, director and employee has the personal
responsibility to read, know and comply with the principles
contained in this Code of Ethics. Compliance with these
principles is a condition of employment, and failure to comply
will result in discipline up to and including termination.
The Board of Directors shall determine, or designate appropriate
management personnel to determine, the actions to be taken in
the event of violations of the Code of Ethics. Such actions
shall be reasonably designed to deter wrongdoing and to promote
accountability for adherence to the Code of Ethics.
Every officer, director and employee has the duty to bring to
the attention of a supervisor or another member of management,
or the Director Global Ethics, or the Chairs of the
Audit or Governance Committees of the Board of Directors, or
directly to the full Board of Directors, any activity that in
his or her judgment would violate these principles. Potential
violations may be reported to the Board or relevant Committee
Chair by mail in care of the Director-Global Ethics, at the
above address. The Director will forward it unopened to the
addressee(s).
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APPENDIX I
2008 STOCK
PLAN
The Plan enables non-employee directors and professional and
management employees who contribute significantly to the success
of Eaton Corporation (the Company) to participate in
its future prosperity and growth and to identify their interests
with those of the shareholders. The purpose of the Plan is to
provide long-term incentive through outstanding service to the
Company and its shareholders and to assist in recruiting and
retaining people of outstanding ability and initiative in
non-employee director, professional and management positions.
(A) Employee Awards
With respect to employee awards, the Plan shall be administered
by the Compensation and Organization Committee of the Board of
Directors (the Committee).
(B) Non-Employee Director Awards
With respect to non-employee director awards, the Plan shall be
administered by the Governance Committee of the Board of
Directors.
(C) Authority of Committees
With respect only to those awards for which it has
administrative responsibility, the Committee and the Governance
Committee shall each have complete authority(except as otherwise
provided herein)to interpret all provisions of the Plan and any
award consistent with law, to determine the type and terms of
awards consistent with the provisions of the Plan, to prescribe
the form of instruments evidencing awards, to adopt, amend and
rescind general and special rules and regulations for its
administration, and to make all other determinations necessary
or advisable for its administration of the Plan. The
determinations of the each committee shall be final and
conclusive. Each committee may act by resolution or in any other
manner permitted by law.
The Committee may delegate its authority to one or more officers
of the Company (a Delegate) with respect to the
granting of awards to employees who are not officers or
directors of the Company who are subject to Section 16(b)
of the Securities Exchange Act of 1934, as amended (Section
16b).
The aggregate of (a) the number of Eaton common shares
(shares) delivered by the Company in payment and
upon exercise of awards to employees and non-employee directors
and (b) the number of shares subject to outstanding awards
to employees and non-employee directors shall not exceed
2.7 million at any one time, subject to adjustments as
authorized herein. Any shares available for options or stock
appreciation rights will be reduced by 2.47 for each performance
share, performance share unit, restricted share, restricted
share unit or other share-based awards denominated in full
shares. To the extent that any award is forfeited, or any option
or stock appreciation right terminates, expires or lapses
without being exercised, the shares subject to such awards not
delivered as a result thereof shall again be available for
awards under the Plan. Shares tendered or withheld to pay the
exercise price of a stock option or to pay tax withholding will
count against the foregoing limitations and will not be added
back to the shares available under the Plan. When a stock
appreciation right that may be settled for shares is exercised,
the number of shares subject to the grant agreement shall be
counted against the number of shares available for issuance
under the Plan as one (1) share for every share subject
thereto, regardless of the number of shares used to settle the
stock appreciation right upon exercise. Shares available for
awards may consist, in whole or in part, of authorized and
unissued shares or treasury shares.
The maximum aggregate number of shares or share units underlying
options or related to other awards that may be granted to any
employee during any three consecutive calendar year period is
1,200,000. In addition, no more than 5% of the total number of
shares authorized for delivery under the Plan may be granted as
performance shares, restricted shares, stock appreciation rights
or other share-based awards (other than stock options) which
vest within less than one year after the date of grant. With
respect to such awards in excess of
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5% of the total number of such authorized number of shares, the
vesting period must exceed one year, with no more than one third
of shares becoming vested at the end of each of the twelve-month
periods following the date of grant.
Awards may be made under the Plan at any time after approval of
the Plan by shareholders at the 2008 annual meeting until
December 31, 2018. Awards under the Plan shall be evidenced
by a written agreement, contract, or other instrument or
document, including an electronic communication, as may from
time to time be designated by the Company (an Award
Agreement).
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4.
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Eligibility for
Awards
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Any salaried employee (including officers) of the Company or any
of its subsidiaries occupying a professional or management
position may be granted an award. The Committee (or a Delegate)
(a) will designate employees to whom grants are to be made,
(b) will specify the number of options, stock appreciation
rights, performance shares, performance share units, restricted
shares, restricted share units or other share-based awards
subject to each grant, and (c) subject to
Section 5(B), will specify the price of the award, if
applicable. Non-employee directors are eligible to receive
restricted shares as provided under Section 6.
(A) Grants.
The Committee may grant to eligible employees (i) options
which are intended to qualify as incentive stock options
(Incentive Stock Options) under the Internal Revenue
Code, or (ii) options which are not intended to qualify as
Incentive Stock Options. Each option will give the employee the
right to purchase a designated number of shares. The aggregate
fair market value (at the time of grant) of shares for Incentive
Stock Options under all plans of the Company which become
initially exercisable by an employee during any calendar year
shall not exceed $100,000 (or such other amount as may be
provided by the Internal Revenue Code or the regulations
thereunder).
(B) Exercise.
Each option shall be exercisable on such date or dates, during
such period and for such number of shares, as shall be
determined by the Committee on the date of grant and set forth
in the applicable Award Agreement; provided, however, grants to
employees subject to 16b shall not be exercisable for at least
six months after those options are granted. The Committee may,
in its sole discretion, accelerate or extend (but not beyond the
ten-year term of the option) the times when an option may be
exercised and the Management Compensation Committee (comprised
of Company officers) may do likewise for employees who are not
subject to Section 16b.
(C) Price.
Each Award Agreement for stock options shall state the number of
shares to which it pertains and the option price. The option
price shall be the fair market value of the shares subject to
the option on the date of grant. The fair market value of a
share shall be the closing price of a share as quoted on the New
York Stock Exchange, unless the Committee specifies the use of a
different method to determine the fair market value. In no event
may any option granted under the Plan be amended, other than
pursuant to Section 10, to decrease the exercise price
thereof, be cancelled in conjunction with the grant of any new
option with a lower exercise price, or otherwise be subject to
any action that would be treated, for accounting purposes, as a
repricing of such option, unless such amendment,
cancellation or action is approved by the Companys
shareholders.
(D) Payment.
The Committee shall establish in the applicable Award Agreement
the time or times when an option may be exercised in whole or in
part, and the method or methods by which, and the form or forms,
including, without limitation, cash, shares or other awards, or
any combination thereof, having a fair market value on the
exercise date equal to the exercise price in which payment of
the exercise price may be made. The Committee shall determine
acceptable methods of tendering shares or other consideration.
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6.
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Non-employee
Director Restricted Shares
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Subject to approval of the Plan by shareholders at the 2008
annual meeting, each person who on the grant date (as defined
below in this Section 6) is serving as a non-employee
director automatically shall be granted a
76
number of restricted shares equal to the quotient resulting from
dividing (i) the annual retainer in effect on the grant
date, by (ii) the closing price of a share on the New York
Stock Exchange on the Monday immediately prior to the grant date
or if that date is not a trading day on the New York Stock
Exchange, the trading day immediately preceding that Monday. The
grant date is the fourth Wednesday of each January, beginning
with January of 2009. Notwithstanding anything to the contrary
herein, no non-employee director shall receive any award under
the Plan for a particular year if that director receives such a
grant under any other stock plan of the Company. Restricted
shares are actual shares issued to the non-employee directors
which are subject to the terms and conditions set forth in the
Award Agreement as approved by the Governance Committee.
(A) Grants.
The Committee may grant performance shares or performance share
units to any eligible employee for no cash consideration, if
permitted by applicable law, or for such consideration as may be
determined by the Committee and specified in the grant. The
Committee shall establish award periods and shall establish in
writing within the first 90 days of each award period the number
of performance shares or units to be earned and the Company
performance objectives (as defined below) to be met. A
performance share unit is equal in value to one share and
subject to vesting on the basis of the achievement of specified
performance objectives. Upon vesting, performance share units
will be settled by delivery of shares to the holder of the units
equal to the number of vested performance share units, less a
sufficient number of shares to satisfy tax withholding
requirements.
No grantee may receive a long-term incentive award in any
performance period of more than 200,000 share equivalent
units, subject to adjustment pursuant to Section 10.
The Award Agreement shall specify if the grantee shall be
entitled to receive current or deferred payments of cash in
respect of vested performance units corresponding to the
dividends payable on shares.
(B) Performance Objectives.
(1) The performance objectives for performance share or
performance share unit grants shall be set forth in the related
Award Agreement and shall consist of objective tests based on
one or more of the following: the Companys earnings, cash
flow, cash flow return on gross capital, revenues, financial
return ratios, market performance, shareholder return
and/or
value, operating profits, net profits, earnings per share,
operating earnings per share, profit returns and margins, share
price, working capital, and changes between years or periods, or
returns over years or periods that are determined with respect
to any of the above-listed performance criteria.
(2) The performance period may extend over two to five
calendar years, and may overlap one another, although no two
performance periods may consist solely of the same calendar
years. Performance Objectives may be measured solely on a
corporate, subsidiary or business unit basis, or a combination
thereof. Further, Performance Objectives may reflect absolute
entity performance or a relative comparison of entity
performance to the performance of a peer group of entities or
other external measure of the selected Performance Objectives.
(3) When the Performance Objectives for an award period are
established, the formula for any such award may include or
exclude items to measure specific objectives, such as losses
from discontinued operations, extraordinary gains or losses, the
cumulative effect of accounting changes, acquisitions or
divestitures, foreign exchange impacts and any unusual,
nonrecurring gain or loss, and will be based on accounting rules
and related Company accounting policies and practices in effect
on the date of the award.
(4) After performance shares or units have been granted and
performance objectives have been established, the initial
performance share or unit target award may be increased or
decreased based only upon the performance level achieved within
a performance period.
In limited circumstances where the Committee determines that the
use of stock options is inadvisable for tax or other regulatory
reasons, it may grant stock appreciation rights to eligible
employees. Stock appreciation rights entitle the holder, upon
exercise, to receive a number of shares or cash, as the
Committee may determine, equal to the increase in fair market
value of a number of shares designated by such rights from the
date of grant to the
77
date of exercise. The number of shares subject to a stock
appreciation right shall be counted against the individual limit
on the maximum number of shares that may be awarded to any
employee during any three consecutive calendar year period, and
against the maximum number of shares which may be delivered
under the Plan. The exercise price per share of a stock
appreciation right shall not be less than the fair market value
of a share on the grant date and the term of a stock
appreciation right may be no longer than ten years. The fair
market value of a share shall be the closing price of a share as
quoted on the New York Stock Exchange, unless the Committee
specifies the use of a different method to determine fair market
value. In no event may any stock appreciation right granted
under the Plan be amended, other than pursuant to
Section 10, to decrease the exercise price thereof, be
cancelled in conjunction with the grant of any new stock
appreciation right with a lower exercise price, or otherwise be
subject to any action that would be treated, for accounting
purposes, as a repricing of such stock appreciation
right, unless such amendment, cancellation or action is approved
by the Companys shareholders.
The Committee may grant other share-based awards to any eligible
employee for no cash consideration, if permitted by applicable
law, or for such consideration as may be determined by the
Committee and specified in the grant. Such grants may include
restricted shares or restricted share units. The Committee may
specify such criteria or periods for payment as it shall
determine and the extent to which such criteria or periods have
been met shall be conclusively determined by the Committee and
set forth in the Award Agreement. Other share-based grants may
be paid in shares or other consideration related to shares, as
specified by the grant, and shall have such terms and conditions
as shall be determined by the Committee and set forth in the
Award Agreement.
Except as otherwise provided by the Committee, awards under the
Plan are not transferable other than by will or the laws of
descent and distribution. A transferred award may be exercised
by the transferee only to the extent that the grantee would have
been entitled to exercise the award had the award not been
transferred.
Notwithstanding anything herein to the contrary, the transfer of
Incentive Stock Options shall be limited as required by the
Internal Revenue Code and applicable regulations.
In the event of a reorganization, merger, consolidation,
reclassification, recapitalization, combination or exchange of
shares, stock split, stock dividend, rights offering or similar
event affecting shares of the Company, the following shall be
equitably adjusted (a) the number and class of shares
(i) reserved under the Plan, (ii) for which awards may
be granted to an individual, and (iii) covered by
outstanding awards denominated in shares or share units,
(b) the prices relating to outstanding awards, and
(c) the appropriate fair market value and other price
determinations for such awards.
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11.
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Qualified
Performance-Based Awards
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(A) The provisions of the Plan are intended to ensure that
all options, performance shares and performance share units
granted hereunder to any individual who is or may be a
covered employee (within the meaning of
Section 162(m)(3) of the Internal Revenue Code) qualify for
the Section 162(m) exception (the Section 162(m)
Exception) for performance-based compensation (a
Qualified Performance-Based Award), and all of the
awards specified in this Section 11(A) and the Plan shall
be interpreted and operated consistent with that intention.
(B) Each Qualified Performance-Based Award (other than an
option or stock appreciation right) shall be earned, vested and
payable (as applicable) only upon the achievement of one or more
Performance Objectives, together with the satisfaction of any
other conditions, such as continued employment, as the Committee
may determine to be appropriate. Qualified Performance-Based
Awards may not be amended, nor may the Committee exercise
discretionary authority in any manner that would cause the
Qualified Performance-Based Award to cease to qualify for the
Section 162(m) Exception. Awards shall be contingent on
continued employment by the Company during each performance
period; provided, however, that this requirement will not apply
in the event of termination of employment by reason of death or
disability (as determined by the Committee). In the event of
termination of employment of a participant for these reasons
during any incomplete performance periods, awards for such
performance periods shall be prorated for the amount of service
by the participant during the
78
performance period. The prorated awards shall be payable to the
participant (or to his or her estate) at the same time as awards
for such performance periods are paid to the other participants
and shall be subject to the same requirements for attainment of
the specified Performance Objectives as apply to such other
participants awards.
(C) The Committee shall certify in writing as to the
measurement of performance by the Company and the business units
relative to Performance Objectives and the resulting earned
performance awards. The Committee shall rely on such financial
information and other materials as it deems necessary and
appropriate to enable it to certify to the percentage of
achievement of Performance Objectives. The Committee shall make
its determination not later than March 15 following the end
of the performance measurement period.
(A) Awards granted under the Plan are subject to the
Companys policy, adopted by the Board of Directors, that
provides that, if the Board determines that an executive engaged
in any fraud, misconduct or other bad-faith action that,
directly or indirectly, caused or partially caused the need for
a material accounting restatement for any period as to which a
performance-based award was paid or credited to the executive,
the performance-based award is subject to reduction,
cancellation or reimbursement at the discretion of the Board.
(B) The Company shall have the right to deduct from any
cash payment made under the Plan any taxes required by law to be
withheld. It shall be a condition to the obligation of the
Company to deliver shares that the participant pay the Company
such amount as it may request for the purpose of satisfying any
such tax liability. Any award under the Plan may provide that
the participant may elect, in accordance with any Committee
regulations, to pay the amount of such withholding taxes in
shares.
(C) No person, estate or other entity shall have any of the
rights of a shareholder with reference to shares subject to an
award until a certificate or certificates for the shares have
been delivered to that person, estate or other entity. The Plan
shall not confer upon any non-employee director or employee any
right to continue in that capacity.
(D) The Plan and all determinations made and actions taken
pursuant hereto, to the extent not governed by the laws of the
United States, shall be governed by the laws of Ohio.
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13.
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Amendment and
Termination
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The Board of Directors of the Company may alter, amend or
terminate the Plan from time to time, except that the Plan may
not be materially amended without shareholder approval if
shareholder approval is required by law, regulation or an
applicable stock exchange; provided that the Plan may not be
amended without shareholder approval to (i) increase the
aggregate number of shares which may be issued under the
Plan,(ii) increase the maximum number of shares which may be
granted to any employee, or (iii) grant options or stock
appreciation rights at a purchase price below fair market value
on the date of grant.
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14.
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Effective and
Termination Dates
|
The Plan will become effective if and when approved by
shareholders holding a majority of the Companys
outstanding common shares entitled to vote at the 2008 annual
meeting of shareholders. No new awards shall be granted to any
employee or non-employee Director under any other previously
approved Company stock plan after the Plan becomes effective.
No awards shall be granted under the Plan after
December 31, 2018. Awards granted before that date shall
remain valid thereafter in accordance with their terms.
79
APPENDIX J
SENIOR EXECUTIVE
INCENTIVE COMPENSATION PLAN
1. Purpose. This document sets forth the annual incentive
plan applicable to employees of Eaton Corporation (the
Company) who are executive officers of the Company,
including those whose annual incentive compensation for any
taxable year of the Company commencing on or after
January 1, 2008 the Committee (hereafter defined)
anticipates would not be deductible due to Section 162(m)
of the Internal Revenue Code of 1986, as amended (the
Code). This plan is hereinafter referred to as the
Plan.
The Plan is designed to promote the profitable growth of the
Company by:
a. Providing rewards for achieving specified performance
goals.
b. Recognizing corporate, business unit and individual
performance and achievement.
c. Attracting, motivating and retaining superior executive
talent.
2. Administration. The Plan shall be administered by the
Compensation and Organization Committee of the Board of
Directors (the Board), or by any other committee of
the Board to whom this authority is delegated by the Board (the
Committee). The Committee shall be comprised
exclusively of three or more directors who are not employees and
who are outside directors within the meaning of
Section 162(m)(4)(C) of the Code. The Committee will
approve the goals, participation, target bonus awards, actual
bonus awards, timing of payment and other actions necessary to
the administration of the Plan. Any determination by the
Committee pursuant to the Plan shall be final, binding and
conclusive on all employees and participants and anyone claiming
under or through any of them. The provisions of the Plan are
intended to ensure that all awards granted hereunder to any
individual who is or may be a covered employee
(within the meaning of Section 162(m)(3) of the Code)
qualify for the Section 162(m) exception for
performance-based compensation, and all awards and the Plan
shall be interpreted and operated consistent with that intention.
3. Participation. The participant group will consist of the
Chief Executive Officer and any Officer reporting directly to
the Chief Executive Officer. An employee participating in the
Plan shall not participate in the Companys Executive
Incentive Compensation Plan.
4. Establishment of Incentive Opportunities.
a. On or before March 30 of each year, the Committee shall
establish in writing performance goals (the Corporate
Performance Goals) to be used in determining an aggregate
amount to be distributed under the Plan (the Aggregate
Incentive Opportunity). The Aggregate Incentive
Opportunity will be a dollar amount calculated by reference to
specified levels of, growth in, or ratios involving, the
Corporate Performance Goals, which may include any one or more
of the following: the Companys earnings per share,
operating earnings per share, total return to shareholders, cash
flow return, cash flow return on gross capital, net income, net
income before tax, return on equity, or return on assets. The
Corporate Performance Goals may be described in terms of
Company-wide objectives or objectives that are related to the
performance of any subsidiary, division, department, or region
of, or function in, the Company. The Corporate Performance Goals
may be made relative to the performance of other corporations.
b. On or before March 30 of each year, the Committee will
establish in writing a percentage share of the Aggregate
Incentive Opportunity to each participant (the Individual
Incentive Opportunity). The sum of all Individual
Incentive Opportunities will not exceed 100% of the Aggregate
Incentive Opportunity. No participant will be assigned an
Individual Incentive Opportunity greater than $7,500,000.
c. The method to determine the Aggregate and Individual
Incentive Opportunities shall be stated in terms of objective
formulas that preclude discretion to increase the amount of the
award that would otherwise be due upon attainment of the goals.
No provision of the Plan shall preclude the Committee from
exercising negative discretion to reduce any award hereunder.
d. A participants Individual Incentive Opportunity in
any year is the maximum amount that the participant may receive
under the Plan in that year. Whether or not a participant will
receive all or any portion of his or her Individual Incentive
Opportunity will be based on the achievement of corporate and
business unit financial and strategic objectives established for
the year (which may be based on the
80
Corporate Performance Goals selected for the year, any of the
other performance goals listed above) and on the achievement of
individual goals (collectively, the Individual Performance
Goals).
5. Award Determination.
a. At the end of each year, the Committee will determine
the Aggregate Incentive Opportunity based on the results of the
Corporate Performance Goals. The Committee will certify in
writing whether and to what extent the goals have been achieved.
b. At the end of each calendar year, the Committee will
assess each participants performance against the
Individual Performance Goals established for each participant.
Based on this assessment, the Committee will determine whether
or not to award the entire Individual Incentive Opportunity or a
lesser amount. In no event will the Individual Incentive
Opportunity be greater than the portion of the Aggregate
Incentive Opportunity allocated to the participant.
c. Awards shall be paid under the Plan for any year solely
on account of the attainment of the performance goals
established by the Committee for the entire year. Awards shall
also be contingent on continued employment by the Company during
the entire year. Exceptions to the requirement of continued
employment will apply in the event of termination of employment
by reason of death or disability (as determined by the
Committee). In the event of termination of employment for these
reasons, awards for any incomplete performance year shall be
prorated for the amount of service by the participant during the
performance year and shall be payable to the participant (or his
or her estate) at the same time as awards for such performance
year are paid to the other participants and shall be subject to
the same requirements for achievement of the specified
performance goals as apply to such other participants
awards.
6. Bonus Payments. Awards under the Plan will be paid
annually in cash not later than March 15 of the year following
the performance year, provided that awards or portions thereof
may be deferred under the Companys Deferred Incentive
Compensation Plan II. Awards granted under the Plan are subject
to the Companys policy, adopted by the Board, that
provides that, if the Board determines that an executive engaged
in any fraud, misconduct or other bad-faith action that,
directly or indirectly, caused or partially caused the need for
a material accounting restatement for any period as to which a
performance-based award was paid or credited to the executive,
the performance-based award is subject to reduction,
cancellation or reimbursement at the discretion of the Board.
7. Shareholder Approval and Committee Certification
Contingencies; Payment of Awards. Payment of any awards under
the Plan shall be contingent upon the affirmative vote of the
shareholders of at least a majority of the votes cast (including
abstentions) at the annual meeting of the shareholders held in
2008. Unless and until such shareholder approval is obtained, no
award shall be paid pursuant to the Plan. Subject to the
provisions of Paragraph 5 above, payment of any award under
the Plan shall also be contingent upon the Committees
certifying in writing that the performance goals and any other
material terms applicable to such award were in fact satisfied,
in accordance with applicable regulations under
Section 162(m) of the Code. Unless and until the Committee
so certifies, such award shall not be paid. Unless the Committee
provides otherwise, (a) earned awards shall be paid
promptly following such certification, and (b) such payment
shall be made in cash (subject to any payroll tax withholding
the Company may determine applies).
To the extent necessary for purposes of Section 162(m) of
the Code, the Plan shall be resubmitted to shareholders for
their reapproval in 2013 with respect to awards payable for the
tax year commencing on and after January 1, 2014.
8. If the Companys shareholders do not approve the
Plan, payments that would have been made pursuant to awards that
were made contingent upon obtaining such approval will not be
made. No provision of the Plan shall prevent the Committee from
making any payments or granting any awards outside of the Plan
whether or not such payments or awards qualify for tax
deductibility under Section 162(m) of the Code.
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APPENDIX K
EXECUTIVE
STRATEGIC INCENTIVE PLAN
This document sets forth the Executive Strategic Incentive Plan
applicable to employees of Eaton Corporation (the
Company) who are executives of the Company,
including those whose long-term incentive compensation for any
taxable year of the Company commencing on or after
January 1, 2008 the Committee (as hereinafter defined)
anticipates would not be deductible due to Section 162(m)
of the Internal Revenue Code of 1986, as amended (the
Code). This plan, as amended and restated, is
hereinafter referred to as the Plan.
The purpose of the Plan is to promote the growth and
profitability of the Company through the granting of incentives
intended to motivate executives of the Company to achieve
demanding long-term corporate objectives and to attract and
retain executives of outstanding ability.
The Plan shall be administered by the Compensation and
Organization Committee (the Committee) of the Board
of Directors (the Board). The Committee shall be
comprised exclusively of three or more directors selected by the
Board who are not employees and who are outside
directors within the meaning of Section 162(m)(4)(C)
of the Code. The Committee will approve the goals, participation
eligibility, target bonus awards, actual bonus awards, timing of
payments and other actions necessary to the administration of
the Plan. Any determination by the Committee pursuant to the
Plan shall be final, binding and conclusive on all employees and
participants and anyone claiming under or through any of them.
Any executive of the Company designated by the Committee in its
sole discretion shall be eligible to participate in the Plan.
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4.
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Incentive
Targets, Maximum Awards, Award Periods, Objectives and
Payments
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(A)
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Establishment of
Incentive Targets and Conversion to Phantom Share
Units
|
Individual Incentive Targets for each participant with respect
to each Plan Award Period (as defined below) shall be
established in writing by the Committee within the first 90 days
of the Award Period. With respect to Award Periods beginning on
or after January 1, 2008, participant incentive targets
will be expressed in the form of Phantom Share Units (with one
unit being equal to one common share of the Company) which will
be determined by: (a) first establishing the Individual
Incentive Target in cash for each participant with respect to
each Award Period and (b) then dividing such Individual
Incentive Target by the average of the mean prices for the
Companys common shares for the first twenty(20) trading
days of each Award Period. In all cases, the resulting Phantom
Share Units shall be rounded up to the nearest 50 whole units.
For purposes of the Plan, mean price shall be the
mean of the highest and lowest selling prices for Company common
shares quoted on the New York Stock Exchange on the relevant
trading day. Notwithstanding the foregoing provisions of this
Section 4(A), the Committee may, in its sole discretion,
use a different method for valuing Phantom Share Units or for
establishing incentive targets for participants under the Plan,
but in no event may the final award be greater than the maximum
specified in Section 4(B).
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(B)
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Maximum Number of
Phantom Share Units
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No employee may receive an award in any Plan Award Period of
more than 200,000 Phantom Share Units, subject to adjustment
pursuant to Section 6.
Each Award Period shall be the four-calendar year period
commencing as of the first day of the calendar year in which the
performance objectives are established for the Award Period as
described in Sections 4(D) and (E). A new Award Period
shall commence as of the first day of each calendar year, unless
otherwise specified by the Committee.
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(D)
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Establishment of
Company Performance Objectives
|
No later than March 30 of the first year of each Award Period,
threshold, target, and maximum Company performance objectives
for such Award Period shall be established in writing by the
Committee.
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(E)
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Performance
Objectives
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(i) The performance objectives shall consist of objective
tests based on one or more of the following: the Companys
earnings, cash flow, cash flow return on gross capital,
revenues, financial return ratios, market performance,
shareholder return
and/or
value, operating profits, net profits, earnings per share,
operating earnings per share, profit returns and margins, share
price, working capital, and changes between years or periods, or
returns over years or periods that are determined with respect
to any of the above-listed performance criteria.
(ii) Award Periods may overlap one another, although no two
performance periods may consist solely of the same calendar
years. Performance objectives may be measured solely on a
corporate, subsidiary or business unit basis, or a combination
thereof. Further, performance objectives may reflect absolute
entity performance or a relative comparison of entity
performance to the performance of a peer group of entities or
other external measure of the selected performance objectives.
(iii) When the Performance Objectives for any Award are
established, the formula for any award may include or exclude
items to measure specific objectives, such as losses from
discontinued operations, extraordinary gains or losses, the
cumulative effect of accounting changes, acquisitions or
divestitures, foreign exchange impacts and any unusual,
nonrecurring gain or loss, and will be based on accounting rules
and related Company accounting policies and practices in effect
on the date of the award.
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(F)
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Determination of
Payments
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For each Award Period, Final Individual Phantom Share Unit
Awards may range from 0% to 200% of the Phantom Share Units
credited under Section 4(A), depending upon achievement of
the applicable performance objectives and other conditions as
described in Section 7. The Final Individual Phantom Common
Share Unit Award shall be converted to cash at a market value of
Company common shares as determined by the average of the mean
prices for the Companys common shares for the final twenty
(20) trading days of the Award Period, and distributed to
the participant no later than March 15 of the year following the
award period, unless the participant has made an irrevocable
election to defer all or part of the amount of his or her award
pursuant to any applicable long term incentive compensation
deferral plan adopted by the Committee or the Company. Each
participant will be credited with a dividend equivalent amount
equal to the aggregate dividends paid during the Award Period on
a number of Company shares equal to the number of Phantom Share
Units finally awarded to the participant for that Award Period.
The dividend equivalent amount will be paid to the participant
in cash at the time the Award is paid.
Awards shall be paid under the Plan for any Award Period solely
on account of the attainment of the performance objectives
established by the Committee with respect to such Award Period.
The method to determine the Award shall be stated in terms of
objective formulas that preclude discretion to increase the
amount of the award that would otherwise be due upon attainment
of the goal. No provision of the Plan shall preclude the
Committee from exercising negative discretion to reduce the
amount of any award hereunder.
Awards shall be contingent on continued employment by the
Company during each Award Period; provided, however, that this
requirement will not apply in the event of termination of
employment by reason of death or disability (as determined by
the Committee), but only if and to the extent it will not
prevent any award payable hereunder from qualifying as
performance-based compensation under
Section 162(m) of the Code. In the event of termination of
employment of a participant for the reasons stated in this
Section 5 during any incomplete Award Periods, awards for
such Awards Periods shall be prorated for the amount of service
during each Award Period and shall be payable to the participant
(or his or her estate) at the same time as awards for such Award
Periods are paid to all other participants and subject to the
same requirements for attainment of the specified Performance
Objectives as apply to such other participants awards.
83
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(A)
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Adjustments upon
Certain Changes
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In the event of a reorganization, merger, consolidation,
reclassification, recapitalization, combination or exchange of
shares, stock split, stock dividend, rights offering or similar
event affecting shares of the Company, the following shall be
equitably adjusted: (a) the number of outstanding awards
denominated in Phantom Share Units, (b) the prices relating
to outstanding awards, and (c) the appropriate fair market
value and other price determinations for such awards.
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(B)
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Change of Control
Defined
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For purposes of the Plan, a Change of Control of the Company
shall mean:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act)) (a Person) of beneficial ownership
(within the meaning of
Rule 13d-3
promulgated under the Exchange Act) of 25% or more of either
(x) the then outstanding common shares of the Company (the
Outstanding Company Common Shares) or (y) the
combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of
directors (the Outstanding Company Voting
Securities); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute
a Change of Control: (x) any acquisition directly from the
Company, (y) any acquisition by the Company, or
(z) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any
corporation controlled by the Company; or
(ii) Individuals who, as of the date hereof, constitute the
Board (the Incumbent Board) cease for any reason to
constitute at least a majority of the Board; provided, however,
that any individual becoming a director subsequent to the date
hereof whose election, or nomination for election by the
Companys shareholders, was approved by a vote of at least
two-thirds of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board; or
(iii) Consummation by the Company of a reorganization,
merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the
acquisition of assets of another corporation (a Business
Combination), in each case, unless, following such
Business Combination, (x) all or substantially all of the
individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Shares and
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly,
more than 55% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the
Companys assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Shares and Outstanding Company Voting
Securities, as the case may be, (y) no Person (excluding
any employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 25% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities
of such corporation except to the extent that such ownership
existed prior to the Business Combination and (z) at least
a majority of the members of the board of directors of the
corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing
for such Business Combination; or
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
84
No right to payment under the Plan shall be subject to debts,
contract liabilities, engagements or torts of the participant,
nor to transfer, anticipation, alienation, sale, assignment,
pledge or encumbrance by the participant except by will or the
law of descent and distribution or pursuant to a qualified
domestic relations order.
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(D)
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Compliance with
Law and Approval of Regulatory Bodies
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No payment shall be made under the Plan except in compliance
with all applicable federal and state laws and regulations
including, without limitation, compliance with tax requirements.
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(E)
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No Right to
Employment
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Neither the adoption of the Plan nor its operation, nor any
document describing or referring to the Plan, or any part
thereof, shall confer upon any participant under the Plan any
right to continue in the employ of the Company or any
subsidiary, or shall in any way affect the right and power of
the Company or any subsidiary to terminate the employment of any
participant under the Plan at any time with or without assigning
a reason therefore, to the same extent as the Company might have
done if the Plan had not been adopted.
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(F)
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Interpretation of
the Plan
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Headings are given to the sections of the Plan solely as a
convenience to facilitate reference; such headings, numbering
and paragraphing shall not in any case be deemed in any way
material or relevant to the construction of the Plan or any
provisions thereof. The use of the masculine gender shall also
include within its meaning the feminine. The use of the singular
shall also include within its meaning the plural and vice versa.
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(G)
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Amendment and
Termination
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The Committee may at any time suspend, amend or terminate the
Plan. Notwithstanding the foregoing, upon the occurrence of a
Change of Control, no amendment, suspension or termination of
the Plan shall, without the consent of the participant, alter or
impair any rights or obligations under the Plan with respect to
such participant.
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7.
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Qualified
Performance-Based Awards
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(A) The provisions of the Plan are intended to ensure that
all awards granted hereunder to any individual who is or may be
a covered employee (within the meaning of
Section 162(m)(3) of the Code) qualify for the
Section 162(m) exception (the Section 162(m)
Exception) for performance-based compensation (a
Qualified Performance-Based Award), and all awards
and the Plan shall be interpreted and operated consistent with
that intention.
(B) Each Qualified Performance-Based Award shall be earned,
vested and payable (as applicable) only upon the achievement of
one or more performance objectives, together with the
satisfaction of any other conditions, such as continued
employment, as the Committee may determine to be appropriate.
Qualified Performance-Based Awards may not be amended, nor may
the Committee exercise discretionary authority in any manner
that would cause the Qualified Performance-Based Award to cease
to qualify for the Section 162(m) Exception.
(C) The Committee shall certify in writing as to the
measurement of performance by the Company and the business units
relative to Performance Objectives and the resulting number of
earned Phantom Share Units. The Committee shall rely on such
financial information and other materials as it deems necessary
and appropriate to enable it to certify to the achievement of
Performance Objectives. The Committee shall make its
determination not later than March 15 following the end of
the Award Period.
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8.
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Effective Dates
of the Plan
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The Plan was originally adopted by the Board on April 24,
1991 but with an effective date of January 1, 1991. The
Plan was amended and restated as of June 21, 1994,
July 25, 1995, April 21, 1998, April 1, 1999 and
January 1, 2001 (which includes changes which affect Awards
granted on or after January 1, 1998). This Amendment and
Restatement of the Plan was adopted by the Board of Directors on
January 22, 2008 and is subject to the approval by the
Shareholders of the Company.
85
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9.
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Shareholder
Approval and Committee Certification Contingencies; Payment of
Awards.
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Awards and payment of any awards under the Plan shall be
contingent upon the affirmative vote of the shareholders of at
least a majority of the votes cast (including abstentions) at
the annual meeting of the shareholders held in 2008. Unless and
until such shareholder approval is obtained, no award shall be
paid pursuant to the Plan. Payment of any award under the Plan
shall also be contingent upon the Committees certifying in
writing that the performance objectives and any other material
terms applicable to such award were in fact satisfied, in
accordance with applicable regulations under Section 162(m)
of the Code. Unless and until the Committee so certifies, such
award shall not be paid.
To the extent necessary for purposes of Section 162(m) of
the Code, the Plan shall be resubmitted to shareholders for
their reapproval in 2013 with respect to awards payable for the
tax year commencing on and after January 1, 2014.
If the shareholders do not approve the Plan, payments that would
have been made pursuant to any awards granted by the Committee
that were contingent upon receipt of such approval will not be
made. Nothing in the Plan shall preclude the Committee from
making any payments or granting any awards outside the Plan
whether or not such payments or awards qualify for tax
deductibility under Section 162(m) of the Code.
86
c/o Corporate Election Services
P. O. Box 1150
Pittsburgh, PA
15230
V o t e b y T e l e p h o n e
Please have your voting instruction form available when you call the
toll-free number 1-888-693-8683 using a touch-tone telephone and follow the simple directions that will be presented to you.
V o t e b y I n t e r n e t
Please have your voting instruction form available when you access
the website www.cesvote.com and follow the simple directions that will be presented to you.
V o t e b y M a i l
Please mark, sign and date your voting instruction form and return it in the postage-paid envelope
provided or return it to: Corporate Election Services, P.O. Box 1150, Pittsburgh, PA 15230.
Vote by Telephone
Call toll free using a
touch-tone telephone:
1-888-693-8683
Vote by Internet
Access the website and
cast your vote:
www.cesvote.com
Vote by Mail
Return your completed voting
instruction form in the postage-
paid envelope provided
Vote 24 hours a day, 7 days a week!
Your telephone or Internet vote must be received by 6:00 a.m. local time
on April 21, 2008 in order to be counted in the final tabulation.
ê
Please fold and detach this form at perforation before mailing. ê
your
vote is solicited on behalf of
the Board of Directors
for the
Annual
Meeting of
Shareholders to be held on April 23, 2008.
The undersigned, as a participant in the Eaton Electrical de Puerto Rico, Inc. Retirement Savings Plan, hereby directs the
Trustee, Banco Popular de Puerto Rico, to vote all common shares of Eaton Corporation credited to the account of the
undersigned under the Plan on February 25, 2008, in the manner indicated on the reverse side of this form, at the Annual Meeting
of Shareholders to be held at Eaton Center, 1111 Superior Avenue, Cleveland, Ohio, on April 23, 2008, at 10:30 a.m. local time and at any
adjournments thereof. If the Trustee does not receive a signed voting instruction form by 6:00 a.m. local time on April 21, 2008 instructing the
Trustee how to vote the Eaton shares in the account of the undersigned, the Trustee will vote those shares in the same proportion, on each issue, as
it votes other Eaton shares according to
instructions received from other participants in the Plan.
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Signature |
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Date: |
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, 2008 |
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Please sign exactly as your name appears to the left. |
Y
o u r v o t e i s i m p o r t a n t !
If you do not vote by telephone or Internet, please sign and date this
voting instruction form and return it in the enclosed postage-paid envelope to Corporate Election Services,
P.O. Box 1150, Pittsburgh, PA 15230. In order for your vote to be counted at Eaton Corporations 2008 Annual Meeting,
this form must be received by Corporate Election Services by 6:00 a.m. local time on April 21, 2008. If you vote by
telephone or Internet, it is not necessary to return this voting instruction form.
ê Please fold and detach this form at perforation before mailing.ê
This voting instruction form when properly executed will cause your shares to
be voted as directed. If no direction is indicated on your executed form, your shares will be voted FOR the election of the
following director nominees and FOR Proposals 2, 3, 4, 5, 6, 7 and 8.
The
Board of Directors recommends a Vote FOR the Listed Nominees.
1. Election of 4 Directors: (1) Ned C. Lautenbach (2) John R. Miller (3) Gregory R. Page (4) Victor A. Pelson
o FOR all nominees listed above
(except as marked to the contrary below)
o WITHHOLD authority to vote for
all nominees listed above
To withhold authority to vote for any individual nominee, please write that nominees name or number on the line below.
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The
Board of Directors recommends a vote FOR Proposals 2, 3, 4, 5, 6, 7 and 8. |
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FOR |
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AGAINST |
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ABSTAIN |
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2.
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Approve the proposed increase in the authorized number of common shares
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o
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o
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o |
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3.
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Approve the proposal to adopt majority voting in director elections
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o
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o
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o |
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4.
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Approve the proposal to authorize the Board of Directors to amend the Amended Regulations
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o
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o
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o |
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5.
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Approve the proposed 2008 Stock Plan
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o
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o
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o |
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6.
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Approve the proposed Senior Executive Incentive Compensation Plan
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o
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o
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o |
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7.
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Approve the proposed Executive Strategic Incentive Plan
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o
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o
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o |
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8.
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Ratify the appointment of Ernst & Young LLP as independent auditor for 2008
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o
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o
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o |
IN THEIR DISCRETION, THE PROXIES TO BE APPOINTED BY THE TRUSTEE ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
THIS FORM MUST BE SIGNED AND DATED ON THE REVERSE SIDE
c/o Corporate Election Services
P. O. Box 1150
Pittsburgh, PA 15230
V o t e b y T e l e p h o n e
Please have your voting instruction form available when you call the
toll-free number 1-888-693-8683
using a touch-tone telephone and follow the simple directions that will be presented to you.
V o t e b y I n t e r n e t
Please have your voting instruction form available when you access the website
www.cesvote.com and follow the simple directions that will be presented to you.
V o t e b y M a i l
Please mark, sign and date your voting instruction form and return it in the
postage-paid envelope provided or return it to: Corporate Election Services, P.O. Box 1150, Pittsburgh, PA 15230.
Vote by Telephone
Call toll free using a
touch-tone telephone:
1-888-693-8683
Vote by Internet
Access the website and
cast your vote:
www.cesvote.com
Vote by Mail
Return your completed voting
instruction form in the postage-
paid envelope provided
Vote 24 hours a day, 7 days a week!
Your telephone or Internet vote must be received by 6:00 a.m. local time
on April 21, 2008 in order to be counted in the final tabulation.
ê
Please fold and detach this form at perforation before mailing. ê
your
vote is solicited on behalf of the Board of Directors
for the Annual Meeting of Shareholders to be held on April 23, 2008.
The undersigned, as a participant in the (a) Eaton Savings Plan or (b) Eaton Personal Investment Plan
[(a) and (b) collectively called the Plans], hereby directs the Trustee, Fidelity Management Trust
Company, to vote all common shares of Eaton Corporation credited to the account of the undersigned
under the Plans on February 25, 2008, in the manner indicated on the reverse side of this form, at the
Annual Meeting of Shareholders to be held at Eaton Center, 1111 Superior Avenue, Cleveland, Ohio,
on April 23, 2008, at 10:30 a.m. local time and at any adjournments thereof. Under each of the Plans,
if the Trustee does not receive a signed voting instruction form by 6:00 a.m. local time on April 21,
2008 instructing the Trustee how to vote the Eaton shares in the account of the undersigned, the
Trustee will vote those shares in the same proportion, on each issue, as it votes other Eaton shares
according to instructions received from other participants in that plan.
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Signature |
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Date: |
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, 2008 |
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Please sign exactly as your name appears to the left. |
Y
o u r v o t e i s i m p o r t a n t !
If you do not vote by telephone or Internet, please
sign and date this voting instruction form and return it in the enclosed postage-paid
envelope to Corporate Election Services, P.O. Box 1150, Pittsburgh, PA 15230.
In order for your vote to be counted at Eaton Corporations 2008
Annual Meeting, this form must be received by Corporate Election
Services by 6:00 a.m. local time on April 21, 2008. If you vote by telephone or
Internet, it is not necessary to return this voting instruction form.
ê
Please fold and detach this form at perforation before mailing. ê
This voting instruction form when properly executed will cause your shares to be voted as directed. If no direction is indicated
on your executed form, your shares will be voted FOR the election of the following director nominees and FOR Proposals 2, 3, 4, 5, 6, 7 and 8.
The
Board of Directors recommends a vote FOR the listed
Nominees.
1. Election of 4 Directors: (1) Ned C. Lautenbach (2) John R. Miller (3) Gregory R. Page (4) Victor A. Pelson
o FOR all nominees listed above
(except as marked to the contrary below)
o WITHHOLD authority to vote for
all nominees listed above
To withhold authority to vote for any individual nominee, please write that nominees name or number on the line below.