UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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

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FEDERAL SIGNAL CORPORATION

(Name of Registrant as Specified In Its Charter)

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1415 West 22nd Street

Oak Brook, Illinois 60523

 

Notice of Annual Meeting of Stockholders

 

To Be Held on April 24, 2007

 

To the Stockholders of

Federal Signal Corporation:

 

The Annual Meeting of Stockholders of Federal Signal Corporation for the year 2007 will be held at the Embassy Suites Hotel, 707 E. Butterfield Road, Lombard, Illinois on Tuesday, April 24, 2007, at 3:30 p.m., local time, for the following purposes:

 

 

The Board of Directors has fixed the close of business on February 26, 2007 as the record date for the meeting. This means that if you owned shares of our common stock on that date, you are entitled to receive this notice, and to vote at the meeting or any adjournment(s) of the meeting.

 

A copy of our financial statements, our Annual Report to our stockholders for the year ended December 31, 2006, and a proxy statement and proxy card accompany this notice.

 

YOUR VOTE IS IMPORTANT! You are urged to vote as promptly as possible in one of the following ways:

 

 

Instructions for voting are contained on the enclosed proxy card.

 

By order of the Board of Directors,

 

Jennifer L. Sherman
Corporate Secretary

 

March 23, 2007

 

TABLE OF CONTENTS

 

 

1415 West 22nd Street

Oak Brook, Illinois 60523

 

Proxy Statement for Annual Meeting of Stockholders
To Be Held on April 24, 2007

 

The Board of Directors of Federal Signal Corporation is furnishing this proxy statement to you in order to solicit your proxy for use at the Annual Meeting of Stockholders to be held at the Embassy Suites Hotel, 707 E. Butterfield Road, Lombard, Illinois on Tuesday, April 24, 2007 at 3:30 p.m., local time, and any adjournment(s) of such meeting. The purpose of the Annual Meeting of Stockholders is:

 

 

This proxy statement, the notice of Annual Meeting and the accompanying proxy card were first mailed to stockholders on or about March 23, 2007.

 

By completing the enclosed proxy card, you can direct how your shares are to be voted at the Annual Meeting (for example, you can direct that your shares are to be voted “for” or “withheld” from the vote for each nominee for director). Each proxy will be voted as you direct on the proxy card. If you do not complete the voting directions on the proxy card (or with respect to any particular proposal), the persons named in the proxy card will vote your shares “for” each proposal (or the undirected proposal, as the case may be).

 

Solicitation Costs

 

We will bear the costs of solicitation of proxies for the Annual Meeting. Following the original solicitation of proxies by mail, certain of our officers and regular employees may solicit proxies by correspondence, telephone, e-mail, or in person, but will not receive any extra compensation for such solicitation work. We will reimburse brokers and other nominee holders for their reasonable expenses incurred in forwarding the proxy materials to the beneficial owners.

 

Voting Securities

 

You will be entitled to vote at the meeting only if you held shares of our common stock of record at the close of business on February 26, 2007. You will be entitled to one vote for each share of common stock that you held in your name as of the record date. On the record date, there were 47,964,022 shares of common stock issued and outstanding.

 

A majority of the outstanding shares, present in person or by proxy, will constitute a quorum at the meeting. For purposes of determining if a quorum is present, we will count all proxies designated as “withholding authority” to vote for a nominee or nominees or “abstaining” from any proposal as shares represented at the meeting, but we will not count broker “non-votes” as being present at the meeting. A broker “non-vote” occurs when a nominee (such as

a broker) holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner. We will count abstentions as votes cast, but we will disregard broker non-votes for the purpose of determining whether a proposition has been approved.

 

Our By-Laws require a plurality of the votes cast for the election of directors, which means that in the election of Class II directors the three nominees with the highest vote totals will be elected as Class II directors, and in the election of the Class III director the nominee with the highest vote total will be elected as a Class III director. As a result, designations on your proxy card that you are “withholding authority” for a nominee or nominees, and broker “non-votes” with respect to shares held for your benefit will not have an effect on the results of the vote for the election of directors. The proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2007 will require the affirmative vote of a majority of the votes cast upon this proposal at the Annual Meeting. Because this proposal requires a majority of the votes cast for approval, an abstention will have the effect of a vote cast against the proposal.

 

Revocability of Proxy

 

You may revoke your proxy at any time before it is voted by filing a written notice of revocation or a later-dated proxy card with our Corporate Secretary, or by attending the Annual Meeting and voting your shares in person. Attendance alone at the Annual Meeting will not revoke a proxy.

 

The following table sets forth information as of February 26, 2007 with respect to beneficial ownership of our common stock by:

 

 

 

 

 

Our Company’s Board of Directors consists of nine directors divided into three classes. Each class is elected for a term of three years, and the classes together are staggered so that one class term expires each year. Existing directors are granted the power to fill a vacancy that occurs on the Board, and any director so elected is entitled to serve until the next regularly scheduled annual meeting of stockholders. Brenda L. Reichelderfer was elected to the Board in October 2006 as a Class III director to fill a vacancy on the Board. As such, pursuant to our Company’s Corporate Governance Guidelines, Ms. Reichelderfer is being submitted by the Board of Directors for election at this Annual Meeting, which constitutes the first regularly scheduled annual meeting of stockholders following her appointment to the Board.

 

John F. McCartney, Robert M. Gerrity, and Robert S. Hamada are each nominated as a Class II director for election at this Annual Meeting for a term of three years to expire at the 2010 Annual Meeting or until his successor is elected and qualified. At its December 2006 meeting, the Board of Directors granted a waiver from the age 68 restriction on standing for reelection to Messrs. Gerrity and Hamada due to the desire for continuity and the specialized skill sets and business experiences these individuals contribute to the Board. The Board of Directors recommends a vote for the election of Messrs. McCartney, Gerrity, and Hamada as Class II directors. Ms. Reichelderfer is nominated as a Class III director for election at this Annual Meeting for a term of one year to expire at the 2008 Annual Meeting or until her successor is elected and qualified. The Board of Directors recommends a vote for the election of Ms. Reichelderfer.

 

If on account of death or unforeseen contingencies a nominee is not available for election, the persons named in the proxy will vote the proxy for such other person(s) as the Nominating and Governance Committee may nominate as directors so as to provide a full board. In the election of the three Class II directors, the nominees receiving the highest number of votes cast will be elected as Class II directors. In the election of the Class III director, the nominee receiving the highest number of votes cast will be elected as a Class III director.

 

Information regarding the nominees for election and the directors continuing in office is set forth below:

 

 

 

 

Independence of Members of the Board of Directors

 

The Board of Directors has determined that all of our directors, except Robert D. Welding, qualify as independent directors. In making this determination, the Board of Directors considered the rules of the New York Stock Exchange and the Securities and Exchange Commission, and reviewed information provided by the directors in questionnaires and other certifications concerning the relationships that we may have with each director (including each director’s immediate family members and other associates), including any charitable contributions that we may have made in the past and/or continue to make to organizations with which such director is affiliated.

 

Meetings of the Board of Directors and Committees

 

During 2006, our Board of Directors held a total of seven meetings. The Compensation and Benefits Committee held six meetings; the Nominating and Governance Committee held five meetings; the Audit Committee held eight meetings; and the Executive Committee held one meeting. Our By-Laws require each director to regularly attend meetings of the Board of Directors and of all Board Committees upon which the director serves. Each director attended at least 75 percent of the meetings of the Board and of each Committee of which he or she was a member. In addition, all of our directors attended our 2006 Annual Meeting of Stockholders.

 

Committees of the Board of Directors

 

Pursuant to our By-Laws, we have established standing Audit, Nominating and Governance, Compensation and Benefits, and Executive Committees.

 

Audit Committee.  The Audit Committee of the Board of Directors is responsible for monitoring:

 

 

In fulfilling its role, the Audit Committee reviews the design and operation of internal control processes and the manner in which we control our major financial risk exposures. The Audit Committee has direct and regular access to our financial executives, including the internal auditor, the Chief Financial Officer, and the independent registered public accounting firm. The Audit Committee has the sole authority to appoint or replace our independent registered public accounting firm, and is directly responsible for overseeing the work of and determining the appropriate compensation for our independent registered public accounting firm. In addition, the Audit Committee considers and approves the performance of non-audit services by our independent registered public accounting firm, taking into consideration the effect that the performance of these services may have upon the independence of the independent registered public accounting firm.

 

Our By-Laws prohibit a director who is also an employee of our Company from serving on the Audit Committee. The Board of Directors has determined that all of the members of the Audit Committee are independent as defined under the applicable New York Stock Exchange and Securities and Exchange Commission rules. The members of the Audit Committee are Charles R. Campbell (Chairman), Robert M. Gerrity, James E. Goodwin, and Robert S. Hamada. The Board of Directors has determined that Mr. Campbell qualifies as an “audit committee financial expert” as defined by the Securities and Exchange Commission. None of the Audit Committee members serves on more than three public companies’ audit committees (including our Company).

 

The Board of Directors has adopted a Charter for the Audit Committee to comply with the requirements of the New York Stock Exchange and the Sarbanes-Oxley Act of 2002, a copy of which is available on our website at http://www.federalsignal.com.

 

Nominating and Governance Committee.  The Nominating and Governance Committee is responsible for recommending guidelines to the Board of Directors for corporate governance, including the structure and function of our Board of Directors, its Committees and the management of our Company, as well as identification and recommendation to the Board of Directors of candidates to be elected as directors.

 

Stockholders can nominate candidates for election as directors at stockholder meetings by giving at least 30 days advance written notice to our Corporate Secretary along with the following information with respect to the nominee: name, age, business and residence addresses, principal occupation or employment, the number of shares of our common stock beneficially owned by the stockholder(s) nominating such nominee, and a consent by the nominee to serve as a director if elected that would be required for a nominee under the Securities and Exchange Commission rules. The Committee has not adopted any specific procedures for considering the recommendation of

director nominees by stockholders, but will consider stockholder nominees for new directorship on the same basis as other nominees.

 

The Committee has set no specific minimum qualification for a nominee to the Board of Directors, but in evaluating a candidate the Committee considers the current make-up of the Board of Directors, the skills and business experience of the particular nominee, and the potential value the nominee would add to the Board of Directors. The Board of Directors has determined that all of the members of our Nominating and Governance Committee are independent as defined under the applicable New York Stock Exchange rules. The members of the Nominating and Governance Committee are Robert S. Hamada (Chairman), James C. Janning, Robert M. Gerrity, and Brenda L. Reichelderfer. Ms. Reichelderfer was appointed to the Nominating and Governance Committee effective December 12, 2006.

 

The Board of Directors has adopted a Charter for the Nominating and Governance Committee to comply with the requirements of the New York Stock Exchange and the Sarbanes-Oxley Act of 2002, a copy of which is available on our website at http://www.federalsignal.com.

 

Compensation and Benefits Committee.  The Compensation and Benefits Committee is responsible for the establishment and oversight of our Company’s compensation and benefits philosophy. With respect to our executive officers, the Committee has the authority to establish the objectives of compensation, to determine the components of compensation, and to establish and evaluate performance goals. The Board of Directors has determined that all of the members of our Compensation and Benefits Committee are independent as defined under the applicable New York Stock Exchange rules. The members of the Compensation and Benefits Committee are John F. McCartney (Chairman), Charles R. Campbell, and Paul W. Jones. Mr. Jones resigned the position of Chairman on December 11, 2006, and Mr. McCartney became Chairman on December 12, 2006.

 

Executive Committee.  The Executive Committee generally exercises the power and authority of the Board in the intervals between full Board meetings. The members of the Executive Committee are Robert D. Welding (Chairman), Robert S. Hamada, John F. McCartney, Charles R. Campbell and James C. Janning. Mr. Jones resigned from the Executive Committee on December 12, 2006, and Mr. McCartney joined the Executive Committee on December 12, 2006.

 

The Board of Directors has adopted a Charter for the Compensation and Benefits Committee to comply with the requirements of the New York Stock Exchange and the Sarbanes-Oxley Act of 2002, a copy of which is available on our website at http://www.federalsignal.com.

 

Director Compensation in the Last Fiscal Year

 

The following table sets forth information concerning compensation earned by our non-employee directors in fiscal year 2006. Mr. Welding’s compensation for 2006 is disclosed in the Summary Compensation Table for executive officers because he is a named executive officer for purposes of this proxy statement and does not receive additional compensation for his service as a director:

 

 

 

Additional Information About Director Compensation

 

In 2006, directors (other than the Chairman of the Board) who are not officers of our Company were entitled to receive an annual retainer of $40,000, a $1,000 fee for each Board meeting attended in person and $500 for each Board meeting attended by telephone. Non-employee directors also are entitled to receive the following annual retainers for Committee membership: Audit: Chairman — $12,000, Member — $9,000; Compensation and Benefits: Chairman — $9,000, Member — $6,000; Nominating and Governance: Chairman — $9,000, Member — $6,000; Executive: $2,000. Directors were also reimbursed for their expenses relating to attendance at meetings. Upon election, each non-employee director receives an initial stock option grant to purchase 5,000 shares of our common stock. Pursuant to our director stock ownership program, each non-employee director who does not own shares of our common stock equal in value to at least three times the annual retainer paid to non-employee directors is required to receive at least 50% of annual fees earned in any given year in stock awards.

 

For 2006, the total equity compensation to each non-employee director was comprised of equity awards equivalent to approximately $40,000, which amount was split equally between stock awards and stock options. The stock awards and stock options have a three year pro-rata vesting schedule. Except for Ms. Reichelderfer, the stock award portion of the equity award was awarded on the date of our 2006 Annual Meeting of Stockholders, April 25, 2006, and each award value has been calculated based on the closing price of our common stock on such date, which was $19.05 per share. For 2006, the stock award portion of the equity award to each non-employee director was 1,050 shares of common stock. The stock option portion of the equity award was comprised of a stock option grant of 2,937 shares of common stock having a value of approximately $20,000 based on a Black-Scholes calculated value, in accordance with the requirements of SFAS 123(R). The options have an exercise price equal to $19.05 per share, the closing market price of the common stock on April 25, 2006. Because Ms. Reichelderfer was appointed to the Board in 2006, she received equity awards pro-rata in proportion to the number of days served on the Board during 2006. The awards to Ms. Reichelderfer were made on October 24, 2006 when the closing price of our common stock on such date was $15.50 per share.

 

For his service as Chairman of the Board in 2006, Mr. Janning was entitled to receive an annual retainer of $70,000, a $2,000 meeting fee for each Board meeting attended in person, $500 for each Board meeting attended by telephone, and a per diem fee for the other time spent on Company business of $2,500 (up to a maximum of $150,000 per year). For 2006, the Chairman received a total of $97,750 in fees consisting of the $70,000 retainer,

Committee membership fees of $8,000, $11,000 in meeting fees, and total per diem fees of $8,750. The Chairman also received an additional $10,000 of equity compensation, which amount was split equally between stock awards and stock options. The stock option portion of the equity award was made on April 25, 2006 and was comprised of a stock option grant for the number of shares of common stock having a value of approximately $25,000, based on a Black-Scholes calculated value, with an exercise price equal to the closing market price of the common stock on April 25, 2006. This amounted to a stock award of 1,312 shares of common stock, and a stock option grant of 3,671 shares of common stock with an exercise price of $19.05 per share.

 

We are committed to good corporate governance. We believe that the foundation of our corporate governance is the independence of our directors, responsible corporate citizenship, and a commitment to the interests of our stockholders. In accordance with the requirements of the New York Stock Exchange and the Sarbanes-Oxley Act of 2002, our Board of Directors has adopted Corporate Governance Guidelines as well as charters for the Nominating and Governance Committee, the Compensation and Benefits Committee and the Audit Committee. These guidelines and charters, as well as the Business Conduct Policy and the Code of Ethics, are available for review on our website. In addition, the guidelines and charters are available in print to any stockholder who requests them in writing from our Corporate Secretary at the address provided below. We timely submitted our annual certification by the Chief Executive Officer to the New York Stock Exchange within 30 days of our Annual Meeting of Stockholders in 2006. The certification stated our compliance with the New York Stock Exchange’s corporate governance listing standards without qualification.

 

The non-employee directors of the Board meet regularly in executive session without management. The Chairman of the Board of Directors acts as the presiding director of such executive sessions. Directors may be contacted as a group, by Committee or individually, and the presiding director or the non-employee directors as a group may be contacted on an anonymous and/or confidential basis by addressing a letter to Federal Signal Corporation, 1415 West 22nd Street, Suite 1100, Oak Brook, IL 60523, Attn: Corporate Secretary. All such letters will be forwarded to the directors. We encourage our directors to attend the Annual Meeting of Stockholders. All of our directors attended the 2006 Annual Meeting of Stockholders.

 

There were no compensation committee interlocks or insider participation on the part of the members of our Compensation and Benefits Committee. The members and functions of the Compensation and Benefits Committee are set forth above under “Committees of the Board of Directors.”

 

During the year ended December 31, 2006, it was determined that none of our directors, nominees for director, or executive officers engaged in a transaction with us in which such director, nominee for director or executive officer had a direct or indirect material interest which required disclosure under applicable Securities and Exchange Commission rules.

 

We maintain various policies and procedures relating to the review, approval or ratification of transactions in which our Company is a participant and in which any of our directors, executive officers, 10% stockholders (if any) or their family members have a direct or indirect material interest. Our Company Policy for Business Conduct, which is available on our website at http://www.federalsignal.com, prohibits our directors and employees, including our executive officers, and in some cases, their family members, from engaging in specified activities without prior written consent. These activities typically relate to situations where a director, executive officer or employee, and in some cases, an immediate family member, may have significant financial or business interests in another company competing with or doing business with our Company, or who stands to benefit in some way from such a relationship or activity.

 

Each year, we require our directors and executive officers to complete a questionnaire which identifies, among other things, any transactions or potential transactions with the Company in which a director or an executive officer or one of their family members or associated entities has an interest. We also require that directors and executive officers notify our Corporate Secretary of any changes during the course of the year to the information provided in the annual questionnaire as soon as possible. In addition, the Audit Committee of our Board of Directors, pursuant to its charter and our Company Policy for Business Conduct, has responsibility for reviewing and approving, ratifying or making recommendations to our Board of Directors regarding related person transactions.

 

We believe that the foregoing policies and procedures collectively ensure that all related person transactions requiring disclosure under applicable Securities and Exchange Commission rules are appropriately reviewed.

 

Compensation Philosophy and Objectives

 

Our executive compensation and benefits programs are designed to drive and reinforce our business goals and strategies for success in the marketplace and to enable growth. As a key component of our executive compensation system, we have adopted a value-based management philosophy designed to develop a culture that emphasizes entrepreneurship, innovation and creativity, and rewards managers and employees who think and act like owners. This program also encourages collaboration and the maximization of long-term shareholder value, which in turn supports the attraction, motivation, and retention of the best global talent. Our executive compensation philosophy can be summarized as follows:

 

 

Role of our Compensation and Benefits Committee

 

Our Compensation and Benefits Committee establishes and oversees our general compensation and benefits program, and approves compensation and benefits for our executive officers. Specifically, our Compensation and Benefits Committee is charged in its charter with the authority and responsibility to:

 

 

The Chief Executive Officer annually reviews the performance of each executive officer. Recommendations based on these reviews, including those with respect to base salary adjustments, annual incentives and long-term incentives, are presented to the Committee. The Committee can exercise its discretion in modifying any recommended adjustments or awards to these executive officers. The compensation of the Chief Executive Officer is determined by the Committee, meeting in executive session without the Chief Executive Officer present.

 

Benchmarks for Executive Compensation

 

Compensation levels for our executives are compared to the compensation paid to executives at the group of peer companies specified below. We use market data from these peer companies to benchmark targeted compensation levels by position for base salary, annual cash incentives, long-term equity incentives and total compensation.

 

The market for experienced talent is highly competitive. We aim to attract and retain the most highly qualified executives to manage our business functions. In doing so, we draw upon a pool of talent that is highly sought after by both large and established companies. We draw upon a market that is global in scope. We recognize that we must satisfy the financial requirements of our candidates through competitive compensation practices. We also compete for talent on the basis of our vision of future growth and success, our culture and our Company values. In order to succeed in attracting the best global talent, the Committee has engaged Hewitt Associates, an outside global Human Resources consulting firm, to conduct regular reviews of our total compensation programs for our Chief Executive Officer and other key executives. Hewitt Associates provides the Committee with relevant market data and alternatives to consider when making compensation decisions for our Chief Executive Officer as well as other executive officers. In making compensation decisions, the Committee compares each element of compensation against a peer group of publicly traded and privately held manufacturing companies. The comparator group, which is periodically updated by the Committee, consists of companies against which we believe we compete for talent in the marketplace. The companies currently comprising the comparator group are:

 

 

Because of the large variance in size among the companies comprising the comparator group, regression analysis is used to adjust the compensation data for differences in revenues. This adjusted data is used as the basis of comparison between our Company and the companies in the comparator group.

 

We may also use published survey data to supplement the determination of competitive levels of compensation in the marketplace.

 

Elements of Executive Compensation

 

Our value-based compensation program consists of five components: base salary, annual cash incentives, long-term equity incentives, retirement and health and welfare benefits, and perquisites. Our programs balance individual, business unit and Company-wide goals and achievements.

 

     Base Salaries

 

Base salary levels for our executive officers and our Chief Executive Officer are determined primarily on external market data and on the individual performance of each executive officer during the previous year. Base salaries are targeted to be at the 50th percentile of competitive market data and, effective January, 2007, actual base salaries for named executive officers range from 97% to 119% of individual targets. In addition to the executive’s individual performance, the Committee also considers the following factors in setting base salaries and in recommending annual base salary adjustments: the executive’s current base salary relative to the targeted level, the executive’s level of responsibility, the executive’s prior experience, the executive’s breadth of knowledge, and other internal equity issues.

 

     Annual Cash Incentives

 

Since the beginning of 2005, annual cash incentive payments have been based exclusively on objective measures of financial performance that relate to the year-over-year increase in Economic Value. We believe that Economic Value is the best single financial measure that is directly tied to the creation of shareholder value because it encompasses both earnings growth and efficient use of capital. Economic Value is the net amount of value earned or lost on an investment after deducting the cost of holding that investment. The underlying rationale for adopting an Economic Value system for annual cash incentive compensation is to align management and employee interests with the interests of stockholders.

 

Economic Value is calculated by using three key inputs:

 

 

Economic Value is calculated by subtracting a Capital Charge from Net Operating Profit after Tax. The Capital Charge is derived by multiplying the Cost of Capital by the Average Capital Employed.

 

Our annual incentive program focuses our executives on maximizing long-term shareholder value and encourages decision making that supports year-over-year growth in the Economic Value of the particular unit in which an executive works and the Company as a whole. In 2004, the Company retained Shareholder Value Advisors, a financial and compensation consulting firm, to assist in developing Economic Value improvement goals for the Company and for each of the key operating units of the Company. The goals were established for the three-year period beginning in 2005.

 

The targeted Economic Value improvement goals were established based on the estimated improvement needed to give investors a cost of capital return on the market value of the Company or business unit. The target setting analysis assumed that the Economic Value improvement from the restructuring initiatives announced in 2004 was already reflected in the stock price and would not provide any additional return. The Economic Value improvement “value multiples” (the estimated investor wealth gains per $1 of Economic Value improvement) used in deriving the improvement goals were based on statistical models of peer company data. Target incentive compensation awards for all executive officers are set at 100% of the Economic Value improvement goal for the business unit or the Company, with threshold set at 50% of the target goals and maximum set at 200% of the target goals.

 

The incentive compensation for Mr. Welding and Ms. Kushner is based on the achievement of Economic Value goals which have been set for our Company as a whole. Mr. McConnaughey, Mr. Gustafson and Mr. Weber, each of whom are Group presidents, have threshold, target and maximum Economic Value goals for their respective Groups and for our Company as a whole, with their aggregate annual incentive award weighted at 80% for achievement of their individual Group goals and 20% for our Company goals. This weighting encourages executives to collaborate across Groups and functions in order to achieve business objectives at the enterprise level as well as in their own Groups.

 

The achievement of the threshold, target and maximum Economic Value goals will result in a cash incentive award equal to a pre-set percentage of the executive’s base salary or the salary mid-point (50th percentile of market) of similar positions at our comparator group companies, whichever is greater. The target percentages of base salary or salary mid-point to be paid out upon the achievement of various levels of Economic Value are determined based on competitive market data for each executive position. Economic Value results that fall in between the threshold, target and maximum goals will be extrapolated from those points to determine the actual cash incentive award for the executive. In 2006, the target annual cash incentive percentage for Mr. Welding was 75%, and the target annual cash incentive for all other named officers was 50%. In 2007, based on market data collected from our comparator group, Mr. Welding’s target annual cash incentive percentage was increased to 85% and for all other named officers the target annual cash incentive percentage was increased to 55%.

 

In order to support the achievement of long-term goals, executives are given the opportunity to carry forward the unmet portion of their maximum annual incentive opportunity. One-half of the difference between the maximum opportunity and the actual incentive earned for a particular year can be re-earned over each of the next two years if the related operating unit achieves an Economic Value amount for the subsequent year that is at or above target for that year and the result is at or above the relative level of Economic Value attained by the operating unit during the initial year. Any carry forward opportunity that is not earned in either of the two immediately subsequent years will be forfeited by the executive officer.

 

     Long-Term Equity Incentives

 

Equity ownership plays a key role in aligning the interests of executives with our stockholders. A further purpose of our long-term incentive plan is to provide a means through which our Company may attract the best talent to become our employees, to encourage our employees to engage in the business strategy and success of our Company, and to provide a retention tool through vesting obligations for executives. In accordance with our continuing commitment to meet these objectives, the Committee generally grants stock options and restricted stock awards to executives on an annual basis under our long-term incentive plans. A combination of stock appreciation rights, performance shares or units, or other equity vehicles may also be used as deemed appropriate. In order to ensure continued ownership of the equity granted under the long-term incentive grants, we have instituted stock ownership guidelines for our executive officers as discussed below under the caption “Stock Ownership Guidelines for Executive Officers.”

 

The grant date value of the equity awards (based upon Black-Scholes or other widely accepted valuation models) under the long-term equity incentive program is targeted at the 50th percentile of the intrinsic value of long-term incentives paid to comparable executives at companies in the comparator group. In addition to competitive market practices, we consider the executive’s level of responsibility, prior experience, historical award data, and

individual performance. As with the other components of compensation paid by us, these actual values of long-term incentives may be more or less than the targeted levels for a particular executive in a particular year.

 

Equity grants made in 2006 and in 2007 to executive officers were granted so that 50% of the grant date value of the long-term incentive award was in the form of stock options to motivate long-term decision making and to reward future business performance, and 50% of the grant date value was in the form of restricted stock shares to facilitate the desired levels of stock ownership and to promote executive retention.

 

Retirement and Health and Welfare Benefits

 

We recognize that our employees are the driving force behind the profitable growth of our Company and that our ability to sustain our success is dependant on each individual’s well being. To that end we offer a competitive package of Company-sponsored health and welfare benefits to all employees that executive officers are eligible to participate in.

 

 

Perquisites and Other Personal Benefits

 

We provide executives with perquisites and other personal benefits that the Committee feels are reasonable and consistent with its overall compensation program to better enable us to attract and retain the best talent for key executive positions. The Committee periodically reviews the levels of perquisites provided. Perquisites currently provided include:

 

 

 

Setting Actual Compensation for the Named Executive Officers

 

The specific compensation decisions made for each of the named executives for 2006 and year-to-date in 2007 reflect our management’s and our Committee’s assessments of performance relative to Company and business Group financial and operational measurements and individual performance objectives and comparisons against market benchmarks. Our compensation actions for our Chief Executive Officer and other named executive officers are summarized as follows:

 

Base Salary

 

In January 2006, the Committee set Mr. Welding’s base salary at $686,700. This base salary represents a 9% increase from the prior year’s salary of $630,000. At the same time, the Committee set Ms. Kushner’s base salary at $317,750, which represents a 9% increase from her prior year’s base salary of $291,500, and Mr. Weber’s base salary at $262,260, a 15% increase from the prior year’s base salary of $228,000. These increases were awarded to recognize these executives’ accomplishments in 2005 and the low relative position of their individual 2005 base salaries versus competitive market benchmarks. Mr. Gustafson’s 2006 base salary was set at $312,000, a 4% increase from the prior year’s base salary of $300,000. The Committee believed that Mr. Gustafson’s 2005 base salary was at competitive benchmarks but awarded the salary increase in recognition of Mr. Gustafson’s accomplishments in 2005. Mr. McConnaughey was hired by our Company on March 6, 2006, and pursuant to the negotiated terms of his employment offer was paid at an annual base salary rate of $320,000 during 2006.

 

Mr. Welding did not receive an increase in his base salary in 2007 based on the Committee’s review of external market data and the performance of our Company in 2006. In January 2007, the Committee set Ms. Kushner’s base salary at $330,460, a 4% increase from her prior year’s salary, and Mr. Gustafson’s base salary at $321,360, a 3% increase from his 2006 base salary. The Committee believes that Ms. Kushner’s and Mr. Gustafson’s individual salaries are competitive in the marketplace and the increase was awarded to recognize their individual accomplishments in 2006. Mr. Weber’s base salary for 2007 was increased to $288,475, a 10% increase from his 2006 base salary. This increase was awarded to recognize Mr. Weber’s accomplishments in 2006 and the low relative position of his 2006 base salary versus market benchmarks. Mr. McConnaughey did not receive an increase in base salary in 2007 based on the Committee’s review of external market data and the determination that Mr. McConnaughey’s base salary is currently at 119% of his target market base salary.

Annual Cash Incentive Payments

 

In February 2006, based on improvement in the Economic Value of our Company of $45 million in 2005, the Committee awarded Mr. Welding an incentive cash payment of $707,940 for 2005. This payment represented a payout of 112.4% of Mr. Welding’s annual base salary for 2005, based upon the achievement of actual Economic Value at the Company level over the target Economic Value for the year. Mr. Welding’s threshold incentive award was 37.5% of his annual base salary, his target incentive award level was 75% of his annual base salary and his maximum incentive award as a percentage of his annual base salary was 150%. Likewise, Ms. Kushner was awarded an incentive cash award of $218,874 for 2005 based upon the improvement in our Company’s Economic Value, which represents 75.1% of her 2005 annual base salary. Ms. Kushner’s threshold incentive award was 25% of her annual base salary, her target incentive award was 50% of her annual base salary and her maximum incentive award as a percentage of her annual base salary was 100%. Both Mr. Welding’s and Ms. Kushner’s annual incentive awards for 2005 represented achievement of an above target Economic Value for our Company during 2005.

 

In February 2006, based on the improvement in the Economic Value of the Fire Rescue Group of $21 million in 2005 and on the improvement of the Economic Value of our Company of $45 million in 2005, the Committee awarded Mr. Gustafson an incentive cash payment of $122,326 for 2005. This represents an annual cash incentive award equal to 40.8% of Mr. Gustafson’s annual base salary for 2005. Mr. Gustafson’s threshold incentive award as a percentage of his annual base salary was 25%, his target annual incentive award was 50% of his annual base salary and his maximum annual incentive award was 100% of his annual base salary. Mr. Gustafson’s annual incentive opportunity was weighted 80% based upon the Economic Value of the Fire Rescue Group and 20% based upon the Economic Value of our Company as a whole. Mr. Gustafson’s annual incentive award for 2005 represented achievement between threshold and target Economic Value for the Fire Rescue Group and above target Economic Value for our Company as a whole.

 

In February 2006, based on the improvement of the Economic Value of the Environmental Solutions Group of $7 million in 2005, and on the growth of the Economic Value of our Company of $45 million in 2005, the Committee awarded Mr. Weber an incentive cash payment of $80,510 for 2005. This represents an annual cash incentive equal to 35.2% of Mr. Weber’s annual base salary for 2005. Mr. Weber’s threshold annual incentive award as a percentage of his annual base salary was 25%, his target incentive award was 50% of annual base salary and his maximum annual incentive award was 100% of annual base salary. Mr. Weber’s annual incentive opportunity was weighted 80% based upon the Economic Value of the Environmental Solutions Group and 20% based upon the Economic Value of our Company as a whole. Mr. Weber’s annual incentive award for 2005 represented achievement between threshold and target Economic Value for the Environmental Solutions Group and above target Economic Value for our Company as a whole.

 

Mr. McConnaughey was not employed by our Company during 2005 and was therefore not eligible to receive an annual cash incentive award for that year.

 

In February 2007, based on the improvement of Economic Value of our Company of $9 million in 2006, the Committee awarded Mr. Welding an incentive cash payment of $611,291 for 2006. This award represented 89.0% of Mr. Welding’s annual base salary for 2006, representing an above target achievement of Economic Value for our Company for 2006. Likewise, the Committee awarded Ms. Kushner an incentive cash payment of $188,996 for 2006 based upon the Economic Value of our Company, which represents an above target payout equal to 59.5% of her annual base salary for last year.

 

Based on the improvement of the Economic Value of the Safety and Security Systems Group of $3 million in 2006, and the improvement of Economic Value of our Company of $9 million in 2006, the Committee awarded Mr. McConnaughey an incentive cash payment of $242,301 in February 2007. This cash incentive award was equal to 75.7% of Mr. McConnaughey’s base salary for 2006 and was prorated for the period from his employment with our Company on March 6, 2006 through the end of the year. Mr. McConnaughey’s threshold annual incentive award as a percentage of his annual base salary was 25%, his target incentive award was 50% of his annual base salary and his maximum incentive award was 100% of his annual base salary. Mr. McConnaughey’s annual incentive opportunity was weighted 80% based upon the Economic Value of the Safety and Security Systems Group and 20% based upon the Economic Value for our Company as a whole. Mr. McConnaughey’s annual incentive award for

2006 represents achievement above maximum Economic Value for the Safety and Security Systems Group and above target Economic Value of our Company as a whole.

 

Based on the improvement of Economic Value of the Fire Rescue Group of $3 million in 2006, and the improvement in Economic Value of our Company of $9 million in 2006, the Committee awarded Mr. Gustafson an incentive cash payment of $141,771 for 2006. This represented 45.4% of Mr. Gustafson’s annual base salary for 2006, which means that the Fire Rescue Group achieved between threshold and target Economic Value for 2006 while our Company as a whole achieved Economic Value that was above target.

 

Based on the growth of Economic Value of the Environmental Solutions Group of $10 million in 2006, and the growth in Economic Value of our Company of $9 million in 2006, the Committee awarded Mr. Weber an incentive cash payment of $291,170 for 2006. This represented 111.0% of Mr. Weber’s annual base salary for 2006, representing an above target achievement of Economic Value for the Environmental Solutions Group and our Company as a whole. Mr. Weber was the only one of the named executive officers who also earned a 2005 carry forward amount for performance of his business Group during 2006.

 

Long-Term Equity Incentives

 

In February 2006, the Committee granted Mr. Welding, Ms. Kushner, Mr. Gustafson and Mr. Weber stock options for 117,300, 25,235, 25,235 and 19,550 shares of our common stock, respectively. Each of the options had an exercise price of $16.94, the low share price on the date of grant. The options vest in three equal annual installments on the first three anniversaries of the date of the grant. At the same meeting, the Committee also granted Mr. Welding, Ms. Kushner, Mr. Gustafson and Mr. Weber 48,600, 10,400, 10,400 and 8,100 shares of restricted stock, respectively. The restricted shares vest fully on the third anniversary of the date of the grant and are subject to forfeiture and cancellation if the executive officer terminates his or her employment with our Company and its subsidiaries prior to that time.

 

Mr. McConnaughey was not employed by our Company at the time of the February 2006 grants. Pursuant to his employment offer, on Mr. McConnaughey’s date of hire, March 6, 2006, the Committee granted him stock options for 15,000 shares of our common stock, with an exercise price of $17.55 per share, the low price on the date of grant. Also, on Mr. McConnaughey’s date of hire, the Committee granted Mr. McConnaughey 18,900 shares of restricted stock. The restricted shares vest fully on the third anniversary of the date of the grant and are subject to forfeiture and cancellation if Mr. McConnaughey terminates his employment with our Company and its subsidiaries prior to that time.

 

In February 2007, the Committee granted Mr. Welding, Ms. Kushner, Mr. McConnaughey, Mr. Gustafson and Mr. Weber stock options to purchase 79,900, 21,600, 18,600, 20,700 and 18,600 shares of our common stock, respectively. Each of these options has an exercise price of $16.10, the closing share price on the date of grant. We have changed our methodology for determining the exercise price for stock options after analysis of the guidance of the federal securities regulators during 2006. The Committee will now set the exercise price of all options that it grants at the closing price for our common stock, as reported by the New York Stock Exchange, on the date of the grant of the option. The options vest in three equal annual installments on the first three anniversaries of the date of the grant. At the same meeting, the Committee granted Mr. Welding, Ms. Kushner, Mr. McConnaughey, Mr. Gustafson and Mr. Weber 38,000, 10,200, 8,200, 9,800 and 8,800 shares of restricted stock, respectively. The restricted shares vest fully on the third anniversary of the date of the grant and are subject to forfeiture and cancellation if the executive officer terminates his or her employment with our Company and its subsidiaries prior to that time.

 

Perquisites and Other Benefits

 

Vehicles and Vehicle Allowances:  In 2006, our Company paid on Mr. Welding’s behalf leased vehicle payments totaling $11,876. Ms. Kushner received a vehicle allowance totaling $11,400, Mr. McConnaughey received a vehicle allowance totaling $9,500, Mr. Gustafson received a vehicle allowance totaling $11,400, and Mr. Weber received a vehicle allowance totaling $3,800.

Health Medical Exam Reimbursement:  In 2006, Ms. Kushner received an executive health exam valued at $2,375, which was paid for by our Company. The other named executives, while eligible, did not take advantage of the program.

 

Additional Survivor Benefits:  Mr. Welding’s estate or his beneficiaries will be eligible to receive a benefit in the amount of one year’s compensation at his annual rate effective at the date of his death if Mr. Welding is employed by our Company at the time of his death. This benefit is not funded by an insurance policy from a third party insurer so there was no cash outlay by our Company attributable to the benefit during 2006.

 

Country Club Initiation and Membership Fees Reimbursement:  During 2006, Mr. Welding joined a country club and received reimbursement from our Company for certain country club initiation fees and membership dues. Mr. Welding received reimbursements in the aggregate amount of $46,151 during 2006, of which $42,500 represented the first of two payments of the original required initiation fee. The second payment of $42,500 will be made upon attainment of full membership status.

 

Relocation Reimbursement:  Mr. McConnaughey was hired by our Company during 2006 and, pursuant to our Company’s Executive Relocation Reimbursement Program, was reimbursed for various moving expenses in the aggregate amount of $113,171. Mr. Gustafson was also paid $36,000 during 2006 for relocation expenses associated with his move in 2005.

 

Tax Gross-Up Payments:  In connection with the payment of Mr. McConnaughey’s signing bonus of $300,000 upon the commencement of his employment with our Company, we also agreed to pay any income tax attributable to this bonus. The amount of this payment, including the income taxes attributable to the amounts paid by our Company on Mr. McConnaughey’s behalf, amounted to $167,115. Mr. McConnaughey was also reimbursed for certain tax expenses associated with certain of his relocation expenses in the amount of $11,686.

 

Supplemental Savings and Investment Plan:  In years prior to 2005, executives were eligible to participate in the Supplemental Savings and Investment Plan, a non-qualified deferred compensation benefit that supplemented our defined benefit plans. During 2007, balances remaining in this plan will be transferred into the new Savings Restoration Plan.

 

In connection with Ms. Kushner’s employment offer letter in 2002, we committed to payment of certain supplemental defined benefits or retirement benefits to Ms. Kushner upon her retirement after the age of 57. In full satisfaction of Ms. Kushner’s rights to such payments, we entered into an agreement with Ms. Kushner by which we agree to credit, as of March 1, 2007, Ms. Kushner’s notional account in the new Savings Restoration Plan in the aggregate amount of $308,472 and agree to make five additional payments in the aggregate amount of $77,480 on March 1 over the next five years, provided that Ms. Kushner is employed by our Company on such payment dates. In addition, in consideration of the fact that Ms. Kushner was not given the opportunity to make voluntary deferrals of compensation into the Supplemental Savings and Investment Plan during 2005 and 2006, we credited Ms. Kushner’s notional account, also as of March 1, 2007, with the additional amount of $15,798. None of these amounts were paid currently due to the fact that the Savings Restoration Plan is an unfunded, non-qualified defined contribution plan.

 

Stock Ownership Guidelines for Executive Officers

 

Our executive officers are required to own substantial holdings of our common stock while employed by us. Individual stock ownership targets are based on a multiple of between two and five times the executive’s base salary and executives generally have between three and five years from the date they become subject to the stock ownership guidelines to comply with the guidelines. We recognize both direct and indirect forms of ownership in achieving the requirements. Effective with the 2007 stock option and restricted stock awards made to the named executive officers, Mr. Welding will comply with requirements for stock ownership. Mr. McConnaughey has not met his requirements for stock ownership and has four years to comply. Ms. Kushner, Mr. Gustafson, and Mr. Weber have not met their requirements for stock ownership and have three years to comply.

Impact of Accounting and Tax Treatment on Forms of Compensation Paid

 

Section 162(m) of the Internal Revenue Code provides that compensation in excess of $1 million paid to the chief executive officer and the other most highly compensated executive officers of a public company will generally be nondeductible for federal income tax purposes, subject to certain exceptions. The Committee intends to structure compensation arrangements in a manner that will avoid the deduction limitations imposed by Section 162(m) in appropriate circumstances. However, the Committee believes that it is important and necessary that the Committee retain the right and flexibility to provide and revise compensation arrangements, such as base salary and cash bonus incentive opportunities, that may not qualify under Section 162(m) if, in the Committee’s view, such arrangements are in the best interests of our Company and our shareholders.

 

The responsibilities of the Compensation and Benefits Committee are provided in its Charter, which has been approved by our Board of Directors.

 

In fulfilling its oversight responsibilities with respect to the Compensation Disclosure and Analysis included in this Report, the Compensation and Benefits Committee, among other things, has:

 

 

SUBMITTED BY THE COMPENSATION AND BENEFITS COMMITTEE

 

JOHN F. MCCARTNEY, CHAIRMAN

 

CHARLES R. CAMPBELL      PAUL W. JONES

 

Notwithstanding anything set forth in any of our previous filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings, including this proxy statement, in whole or in part, the preceding report shall not be deemed incorporated by reference in any such filings.

 

The following table sets forth information concerning compensation earned during the fiscal year ended December 31, 2006 for our Chief Executive Officer, the Chief Financial Officer, the three other most highly compensated executive officers of our Company, and one other individual who served as an executive officer during 2006 who would have been one of the three other most highly compensated executive officers of our Company but for the fact that he was not serving as an executive officer of our Company at December 31, 2006:

 

 

 

 

 

 

The following table sets forth information concerning grants of plan-based awards earned for the fiscal year ended December 31, 2006 for the named executive officers:

 

 

 

 

Mr. Robert D. Welding — Our Company has an employment agreement with Mr. Welding. The agreement continues until the December 31st following Mr. Welding’s 65th birthday (currently 59), subject to earlier termination by our Company or Mr. Welding. Mr. Welding’s annual salary is as approved by the Compensation and Benefits Committee, but may not be less than $600,000 or such higher minimum annual rate as determined by the Committee. At the discretion of our Board of Directors, Mr. Welding’s annual compensation may be increased during the term of the agreement. In the event of his death prior to termination of employment, Mr. Welding’s estate is entitled to receive in monthly installments an amount equal to one year’s minimum compensation. The agreement also provides that during Mr. Welding’s employment and for a period of 36 months after termination of employment, he will not compete with us.

 

Our Company has not entered into formal written employment agreements with any of the other named executive officers. However, pursuant to his employment offer letter issued upon his appointment as President of the Safety and Securities Systems Group, Mr. McConnaughey is entitled to an annual salary of at least $320,000, an annual cash bonus opportunity targeted at approximately 50% of his base salary, annual stock option and restricted stock grants as determined by the Compensation and Benefits Committee, car allowance and participation in our Company’s standard benefit package including relocation benefits, health benefits, 401(k) plan and other benefits. Similarly, Mr. Gustafson’s employment offer letter entitles him to a base salary of at least $300,000, an annual cash bonus opportunity targeted at approximately 50% of his base salary, annual stock option and restricted stock grants as determined by the Compensation and Benefits Committee, a car allowance and participation in our Company’s standard benefits package including relocation benefits, health benefits, 401(k) plan and other benefits.

 

Mr. Stephen C. Buck resigned from our Company, effective April 24, 2006. Pursuant to an agreement entered into on May 5, 2006 with our Company, Mr. Buck received a severance payment of $457,236 which approximated his annual salary plus annual bonus. In addition, 42,183 unvested stock options and 21,825 unvested stock awards that Mr. Buck held at the date of termination were allowed immediate vesting. Mr. Buck can exercise the vested options within three years of his termination date. Mr. Buck was also provided executive outplacement services for twelve months following the date of termination, as well as subsidized COBRA coverage until the earlier of a) November 5, 2007 or b) the date he becomes eligible to receive other insurance coverage. Following his resignation, Mr. Buck will continue to be covered by our Supplemental Retirement Survivor and Disability Plan. Pursuant to this plan, upon his death his designated beneficiaries will be entitled to receive annual benefit payments of $34,760 for ten years. This benefit is a general obligation of our Company and has been substantially funded by a life insurance policy we obtained from a third party.

 

The exercise price for each option grant was the lowest sale price of our common stock on the date of grant. As explained in more detail in the Compensation Discussion and Analysis, we have changed our methodology for determining the exercise price for stock options during 2006, and will now set the exercise price of the option at the closing price for our common stock, as reported by the New York Stock Exchange, on the date of the grant of the option. The options granted in 2006 were granted under our 2005 Executive Incentive Compensation Plan, and vest in three equal annual installments on the first three anniversaries of the date of the grant. The restricted shares were granted under our 2005 Executive Incentive Compensation Plan, and vest fully on the third anniversary of the date of the grant and are subject to forfeiture and cancellation if the named executive officer terminates his or her employment with our Company and its subsidiaries prior to that time.

 

Annual cash bonuses to the named executive officers are paid under our management incentive plan. For 2006, 100% of the target bonuses for Mr. Welding and Ms. Kushner were based on the performance of our Company as a whole. For each of Messrs. McConnaughey, Gustafson and Weber, 20% of the target bonus was based on the performance of our Company as a whole, and the remaining 80% was based on the performance of the division under their direct supervision. The threshold, target and maximum levels of bonus payable were determined based on the Economic Value of our Company. For additional information about how Economic Value is determined, see the discussion under “Annual Cash Incentives” in the Compensation Discussion and Analysis beginning on page 13.

Information as to Stock Options

Outstanding Equity Awards at Fiscal Year-End  The following table sets forth information concerning outstanding equity awards, as of the completed 2006 fiscal year, held by the named executive officers: