UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

SCHEDULE 14A

 

(RULE 14a-101)

 

SCHEDULE 14A INFORMATION

 

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

Exchange Act of 1934 (Amendment No.     )

Filed by the Registrant þ

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

Diebold, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5995 Mayfair Road

P. O. Box 3077 • North Canton, Ohio 44720-8077

 

March 19, 2007

 

Dear Shareholder:

 

The 2007 Annual Meeting of Shareholders of Diebold, Incorporated will be held at the Kent State University (Stark) Professional Education and Conference Center, 6000 Frank Avenue, N.W., Canton, Ohio 44720, on Thursday, April 26, 2007 at 10:00 a.m. EST. For your convenience, we are pleased to offer a live webcast of the annual meeting at http://www.diebold.com.

 

All holders of record of Diebold Common Shares as of March 12, 2007, are entitled to vote at the 2007 Annual Meeting.

 

As described in the accompanying Notice and Proxy Statement, you will be asked to (i) elect ten directors, (ii) ratify the appointment of KPMG LLP as independent auditors for 2007 and (iii) approve amendments to the Amended Code of Regulations of Diebold, Incorporated.

 

Diebold’s Annual Report for the year ended December 31, 2006 is included herein. Your proxy card is enclosed. Please indicate your voting instructions and sign, date and mail this proxy card promptly in the return envelope.

 

If you are planning to attend the meeting, directions to the meeting location are included on the back page. If you are unable to attend the meeting, you may listen to a live broadcast that will be available from Diebold’s web site at http://www.diebold.com. The replay can also be accessed on the site soon after the meeting for up to three months.

 

We look forward to seeing those of you who will be attending the meeting.

 

Sincerely,

 

 

 

5995 Mayfair Road
P.O. Box 3077 • North Canton, Ohio 44720-8077

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

April 26, 2007

10:00 a.m. EST

 

Dear Shareholder,

 

The Annual Meeting of Shareholders of Diebold, Incorporated will be held at the Kent State University (Stark) Professional Education and Conference Center, 6000 Frank Avenue, N.W., Canton, Ohio 44720, on April 26, 2007 at 10:00 a.m. EST, for the following purposes:

 

1. To elect ten directors;

 

2. To ratify the appointment of KPMG LLP as the Corporation’s independent auditors for the year 2007;

 

3. To approve amendments to the Amended Code of Regulations of Diebold, Incorporated relating to:

 

(a) modernization and clarification of existing Code;

 

(b) a new NYSE requirement regarding uncertificated shares;

 

(c) indemnification of officers and directors;

 

(d) notice of shareholder proposals; and 

 

(e) permitting the Board to amend the Code to the extent permitted by law; and

 

4. To consider such other matters as may properly come before the meeting or any adjournment or postponement thereof.

 

Your attention is directed to the attached proxy statement, which fully describes these items.

 

Any action on the items of business described above may be considered at the annual meeting at the time and on the date specified above or at any time and date to which the annual meeting may be properly adjourned or postponed.

 

Holders of record of Diebold Common Shares at the close of business on March 12, 2007 will be entitled to vote at the meeting.

 

The enclosed proxy card is solicited, and the persons named therein have been designated, by the Board of Directors of the Corporation.

 

By Order of the Board of Directors

 

Warren W. Dettinger

Vice President, General Counsel and Secretary

 

March 19, 2007

(approximate mailing date)

 

YOU ARE REQUESTED TO COOPERATE IN ASSURING A
QUORUM BY FILLING IN, SIGNING AND DATING THE ENCLOSED PROXY
AND PROMPTLY MAILING IT IN THE RETURN ENVELOPE.

DIEBOLD, INCORPORATED

5995 Mayfair Road

P.O. Box 3077 • North Canton, Ohio 44720-8077

 

PROXY STATEMENT

 

Annual Meeting of Shareholders, April 26, 2007

 

This proxy statement is furnished to shareholders of Diebold, Incorporated in connection with the solicitation by the Board of Directors of proxies that will be used at the 2007 Annual Meeting of Shareholders to be held on April 26, 2007, at 10:00 a.m. EST, or any adjournments thereof, for the purpose of considering and acting upon the matters referred to in the preceding Notice of Annual Meeting and more fully discussed below.

 

Record Date and Share Ownership

 

On March 12, 2007, the record date for the meeting, the outstanding voting securities of the Corporation consisted of 65,705,897 Common Shares, $1.25 par value per share, all of one class. Each shareholder of record as of the close of business on March 12, 2007 will be entitled to one vote for each Common Share held on that date.

 

Submitting and Revoking Your Proxy

 

This proxy statement and accompanying form of proxy were first mailed to shareholders on or about March 19, 2007. If you complete and submit your proxy, the persons named as proxies on your proxy card, which we refer to as the Proxy Committee, will vote the shares represented by your proxy in accordance with your instructions. If you submit a proxy card but do not fill out the voting instructions on the proxy card, the Proxy Committee will vote the shares represented by your proxy as follows:

 

 

In addition, if other matters are properly presented for voting at the Annual Meeting, the Proxy Committee will vote on such matters in accordance with their best judgment. We have not received notice of other matters that may properly be presented for voting at the Annual Meeting.

 

Shareholders may revoke the authority granted by their proxies at any time before the exercise of the powers conferred thereby by: notice in writing delivered to the Secretary of the Corporation; submitting a subsequently dated proxy; or attending the Annual Meeting, withdrawing the proxy and voting in person.

 

Cumulative Voting

 

If a shareholder gives written notice to the President, any Vice President or Secretary at least forty-eight hours prior to the time fixed for holding the Annual Meeting that the shareholder desires that the voting for the election of directors shall be cumulative, and if an announcement of the giving of such notice is made upon convening of the Annual Meeting by the Chairman or Secretary or by or on behalf of the shareholder giving such notice, each shareholder will have cumulative voting rights. In cumulative voting, each shareholder may cast a number of votes equal to the number of shares owned multiplied by the number of directors to be elected, and the votes may be cast for one nominee only or distributed among the nominees. In the event that voting at the Annual Meeting is to be cumulative, unless contrary instructions are received on the enclosed proxy, it is presently intended that all votes represented by properly executed proxies will be divided evenly among the candidates nominated by the Board. However, if voting in such manner would not be effective to elect all such nominees, such votes will be cumulated at the discretion of the Proxy Committee so as to maximize the number of such nominees elected.

 

Votes Required to Adopt Proposals

 

The results of shareholder voting at the Annual Meeting will be tabulated by the inspectors of elections appointed for the Annual Meeting. The Corporation intends to treat properly executed proxies that are marked “abstain” as present for purposes of determining whether a

quorum has been achieved at the Annual Meeting, but will not count any broker non-votes for such purpose. The director-nominees receiving the greatest number of votes will be elected. Votes withheld with respect to the election of directors will not be counted in determining the outcome of that vote. The proposals to amend the Amended Code of Regulation require, for approval, the affirmative vote of at least a majority of the Common Shares outstanding. Accordingly, any abstentions and broker non-votes will have the effect of a vote against the proposals to amend the Amended Code of Regulations. All other matters to be considered at the Annual Meeting require, for approval, the affirmative vote of a majority of Common Shares voted at the meeting in person or by proxy. Abstentions with respect to the proposal to ratify the appointment of the independent auditors will not be counted for determining the outcome of that proposal. The Corporation does not anticipate receiving any broker non-votes at the Annual Meeting in light of the nature of the matters to be acted upon thereat; however, any broker non-votes received in respect of the ratification of the appointment of the independent auditors will not affect the voting on such proposal.

 

DIRECTOR INDEPENDENCE

 

The Board has determined that each of Louis V. Bockius III, Phillip R. Cox, Richard L. Crandall, Gale S. Fitzgerald, Phillip B. Lassiter, John N. Lauer, William F. Massy, Eric J. Roorda, Henry D. G. Wallace and Alan J. Weber, which includes each of the current members of the Audit Committee, the Board Governance Committee and the Compensation Committee, has no material relationship with the Corporation (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Corporation) and is independent within the Corporation’s director independence standards, which reflect the New York Stock Exchange director independence standards as currently in effect and as they may be changed from time to time. Accordingly, under the Corporation’s director independence standards a director will be determined not to be independent under the following circumstances:

 

 

Thomas W. Swidarski does not meet the aforementioned independence standards because he is the President and Chief Executive Officer, and is an employee of, the Corporation. The Corporation’s director independence standards are available on the Corporation’s web site at http://www.diebold.com or by written request to the Corporate Secretary.

 

In addition, except for employment arrangements with the Chief Executive Officer and other management directors that may be on the Board from time-to-time, the

Corporation does not engage in transactions with directors or their affiliates if a transaction would cast into doubt the independence of a director, would present the appearance of a conflict of interest or is otherwise prohibited by law, rule or regulation. This includes, directly or indirectly, any extension, maintenance or renewal of an extension of credit to any director of the Corporation. This prohibition also includes significant business dealings with directors or their affiliates, charitable contributions which would require disclosure in the Corporation’s proxy statement under the rules of the NYSE, and consulting contracts with, or other indirect forms of compensation to, a director. Any waiver of this policy may be made only by the Board and must be promptly disclosed to the Company’s shareholders.

COMMUNICATIONS WITH DIRECTORS

 

In accordance with the NYSE’s corporate governance standards, the Corporation’s non-management directors meet at regularly scheduled executive sessions without management present. The Corporation’s Chairman of the Board, John N. Lauer, is an independent director and presides at these sessions. Shareholders and interested parties may communicate with our committee chairs or with our non-management directors as a group, by sending an email to:

 

 

 

 

Communication may also be directed in writing to such person or group at Diebold, Incorporated, Attention: Corporate Secretary, 5995 Mayfair Road, P.O. Box 3077, North Canton, Ohio 44720-8077. The Board has approved a process for handling communications received by the Corporation and addressed to non-management members of the Board. Under that process, the Corporate Secretary will review all such communications and determine whether such communications require immediate attention. The Corporate Secretary will forward such communications, or a summary of such communications, to the appropriate director or directors. A majority of the independent directors of the Board approved the above-described process for determining which communications are forwarded to various members of the Board.

 

BUSINESS ETHICS POLICY

 

All of the directors, executive officers and employees of the Corporation are required to comply with certain policies and protocols concerning business ethics and conduct, which we refer to as our “Business Ethics Policy.” The Business Ethics Policy applies not only to the Corporation, but also to all of those domestic and international companies in which the Corporation owns or controls a majority interest. The Business Ethics Policy describes certain responsibilities that the directors, executive officers and employees have to the Corporation, to each other and to the Corporation’s global partners and communities including, but not limited to, compliance with laws, conflicts of interest, intellectual property and the protection of confidential information. The Business Ethics Policy is available on the Corporation’s web site at http://www.diebold.com or by written request to the Corporate Secretary.

DIRECTOR COMMITTEES AND COMPOSITION

 

During 2006, the Board held six meetings. All of the current directors of the Corporation attended 75% or more of the aggregate of all meetings of the Board and the Board committees on which they served during the period. The Board has five standing committees: Audit Committee, Board Governance Committee, Compensation Committee, Investment Committee and Information Technology Oversight Committee. Below is a summary of our committee structure and membership information during 2006:

 

 

 

 

Audit Committee

 

The current members of the Audit Committee, which is a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, are Henry D. G. Wallace, Chair, Louis V. Bockius III, Richard L. Crandall, William F. Massy, Eric J. Roorda and Alan J. Weber. All members of the committee are independent. The committee met in person or telephonically eight times during 2006, and had informal communications between themselves and management, as well as with the Corporation’s independent auditors, at various other times during the year. The Board has determined that Messrs. Massy, Wallace and Weber are audit committee financial experts. The committee’s functions are described below under “Report of Audit Committee.” The committee’s current charter is available on the Corporation’s web site at http://www.diebold.com or by written request to the Corporate Secretary.

 

Board Governance Committee

 

The current members of the Board Governance Committee are Gale S. Fitzgerald, Chair, Louis V. Bockius III, Phillip B. Lassiter and John N. Lauer. All members of the committee are independent. The committee met in person or telephonically six times during 2006. The committee’s functions include reviewing the qualifications of potential director candidates and making recommendations to the

Board to fill vacancies or to expand the size of the Board, when appropriate. The committee also makes recommendations as to the composition of the various committees of the Board and as to the compensation paid to the directors for their services on the Board and on Board committees. The committee’s current charter is available on the Corporation’s web site at http://www.diebold.com or by written request to the Corporate Secretary.

 

Compensation Committee

 

The current members of the Compensation Committee are Phillip B. Lassiter, Chair, Phillip R. Cox, Gale S. Fitzgerald and John N. Lauer. The committee met five times during 2006. The committee administers the Corporation’s executive compensation program. The role of the committee is to oversee the Corporation’s compensation plans and policies, administer its stock plans (including reviewing and approving equity grants to executive officers) and annually review and approve all compensation decisions relating to executive officers. The committee also assesses achievement of corporate and individual goals by the executive officers under the Corporation’s annual and long-term incentive plans. The committee reviews the management succession plan and proposed changes to any benefit plans of the Corporation such as retirement plans, deferred compensation plans and 401(k) plans. The committee’s current charter is available on the Corporation’s web site at http://www.diebold.com or by written request to the Corporate Secretary.

 

Investment Committee

 

The current members of the Investment Committee are Alan J. Weber, Chair, Phillip R. Cox, William F. Massy, Eric J. Roorda and Henry D. G. Wallace. The committee met one time in 2006. The committee’s functions include establishing the investment policies, including asset allocation, for the Corporation’s cash, short-term securities and retirement plan assets, overseeing the management of those assets, ratifying fund managers recommended by management and reviewing at least annually the investment performance of the Corporation’s retirement plans and 401(k) plans to assure adequate and competitive returns. The committee’s current charter is available on the Corporation’s web site at http://www.diebold.com or by written request to the Corporate Secretary.

 

Information Technology Oversight Committee

 

The current members of the Information Technology Oversight Committee are Richard L. Crandall, Chair, Gale S. Fitzgerald, William F. Massy and Alan J. Weber. The committee met in person or telephonically five times during 2006. The committee’s functions include overseeing and providing guidance to management with respect to major information technology-related projects and decisions and advising the Board on information technology-related matters facing the Corporation. The committee’s current charter is available on the Corporation’s web site at http://www.diebold.com or by written request to the Corporate Secretary.

 

2006 COMPENSATION OF NON-EMPLOYEE DIRECTORS

 

The following table details the cash retainers and fees, as well as equity compensation in the form of stock options granted pursuant to the Amended and Restated 1991 Equity and Performance Incentive Plan of the Corporation, which we refer to as the 1991 Plan, received by our non-employee directors during 2006:

 

		Fees Earned
		or Paid
		in Cash6				Option				Total
Name		($)				Awards7($)				($)
Louis V. Bockius III		$	54,000			$	84,398			$	138,398
Christopher M. Conner1			15,667				13,604				29,271
Phillip R. Cox			50,000				17,899				67,899
Richard L. Crandall2			69,000				84,398				153,398
Gale S. Fitzgerald			60,250				53,738				113,988
Phillip B. Lassiter			57,000				84,398				141,398
John N. Lauer			202,750				84,398				287,148
William F. Massy3			64,066				96,760				160,826
Eric J. Roorda			52,000				52,570				104,570
Henry D. G. Wallace4			53,434				35,651				89,085
Alan J. Weber5			59,500				16,560				76,060

 

 

 

		Audit				Board Governance				Compensation				Investment				IT Oversight
Name		Committee				Committee				Committee				Committee				Committee
Louis V. Bockius III		$	9,000			$	5,000			$	—			$	—			$	—
Christopher M. Connor			—				—				2,333				—				—
Phillip R. Cox			—				—				7,000				3,000				—
Richard L. Crandall			9,000				—				—				5,000				15,000
Gale S. Fitzgerald			—				7,250				7,000				—				6,000
Phillip B. Lassiter			—				5,000				12,000				—				—
John N. Lauer			—				5,750				7,000				—				—
William F. Massy			13,566				—				—				3,000				7,500
Eric J. Roorda			9,000				—				—				3,000				—
Henry D. G. Wallace			10,434				—				—				3,000				—
Alan J. Weber			9,000				—				—				3,000				7,500

 

 

 

Non-employee directors are compensated for their service as directors at the rate of $40,000 per year. The non-employee directors who are members of the Audit Committee receive $9,000 per year, and the chair of this committee receives $15,000 per year. The non-employee directors who are members of the Compensation Committee receive $7,000 per year, and the chair of this committee receives $12,000 per year. The non-employee directors who are members of the Board Governance Committee receive $5,000 per year, and the chair of this committee receives $8,000 per year. The non-employee directors who are members of the Investment Committee receive $3,000 per year, and the chair of this committee receives $5,000 per year. The non-employee directors who are members of the Information Technology Oversight Committee receive $1,500 per meeting, and the chair of this Committee receives $15,000 per year.

 

The non-employee Chairman of the Board received additional compensation of $15,000 per month for the first six months of 2006, after which time the amount was reviewed by the Compensation Committee and reduced to $10,000 per month.

 

A director may elect to defer receipt of all or a portion of his or her compensation pursuant to the 2005 Deferred Compensation Plan for Directors. Each non-employee director may also receive an award of option rights or restricted shares under the 1991 Plan. In 2006, each non-employee director was awarded a stock option to purchase 4,500 Common Shares at an exercise price representing 100% of the average share price of the Common Shares as of the date of grant. The term of the options is ten years, and vesting occurs at the rate of 25% annually beginning one year from the date of grant or immediately in the event of a change in control. In addition, all directors’ options that have vested prior to December 31, 2004 are entitled to reload rights, under which an optionee can elect to pay the exercise price using previously owned shares and receive a new option at the then current market price for a number of shares equal to those surrendered. The reload feature is only available, however, if the optionee agrees to defer receipt of the balance of the option shares for at least two years.

 

CONSIDERATION OF DIRECTOR NOMINEES

 

Shareholder Nominees

 

The policy of the Board Governance Committee is to consider properly submitted shareholder nominations for candidates for membership on the Board as described below under “Identifying and Evaluating Nominees for Directors.” In evaluating such nominations, the Board Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board and to address the membership criteria set forth below under “Director Qualifications.” Any shareholder nominations proposed for consideration by the Board Governance Committee should include (1) complete information as to the identity and qualifications of the proposed nominee, including name, address, present and prior business and/or professional affiliations, education and experience, and particular fields of expertise, (2) an indication of the nominee’s consent to serve as a director of the Corporation if elected, and (3) the reasons why, in the opinion of the recommending shareholder, the proposed nominee is qualified and suited to be a director of the Corporation, and should be addressed to Diebold, Incorporated, 5995 Mayfair Road, P.O. Box 3077, North Canton, Ohio 44720-8077, Attention: Corporate Secretary. See also below under “Proposals of Shareholders.”

 

Director Qualifications

 

In evaluating director-nominees, the Board Governance Committee considers such factors as it deems appropriate, consistent with the Corporation’s Corporate Governance Guidelines and other criteria established by the Board. The Board Governance Committee’s goal in selecting directors for nomination to the Board is generally to seek to create a well-balanced team that combines diverse experience, skill and intellect of seasoned directors in order to enable the Corporation to pursue its strategic objectives. The Board Governance Committee has not

reduced the qualifications for service on the Corporation’s Board to a checklist of specific standards or specific, minimum qualifications, skills or qualities. Rather, the Corporation seeks, consistent with the vacancies existing on the Corporation’s Board at any particular time and the interplay of a particular candidate’s experience with the experience of other directors, to select individuals whose business experience, knowledge, skills, diversity, integrity, and global experience would be considered a desirable addition to the Board and any committees thereof. In addition, the Board Governance Committee annually conducts a review of incumbent directors using the same criteria as outlined above, in order to determine whether a director should be nominated for re-election to the Board.

 

The Board Governance Committee makes determinations as to director selection based upon the facts and circumstances at the time of the receipt of the director candidate recommendation. Applicable considerations include (1) whether the Board Governance Committee is currently looking to fill a new position created by an expansion of the number of directors, or a vacancy that may exist on the Board, (2) whether the current composition of the Board is consistent with the criteria described in the Corporation’s Corporate Governance Guidelines, (3) whether the candidate submitted possesses the qualifications that are generally the basis for selection for candidates to the Board, and (4) whether the candidate would be considered independent under the rules of the NYSE and the Corporation’s standards with respect to director independence. Final approval of any candidate will be determined by the full Board. A copy of the Corporation’s Corporate Governance Guidelines is available on the Corporation’s web site at http://www.diebold.com or by written request to the Corporate Secretary.

 

Identifying and Evaluating Nominees for Directors

 

The Board Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. The Board Governance Committee regularly reviews the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Board Governance Committee considers various potential candidates for director. Candidates may come to the attention of the Board Governance Committee through current Board members, professional search firms, shareholders or other persons. As described above, the Board Governance Committee considers properly submitted shareholder nominations for candidates for the Board. Following verification of the recommending shareholder’s status, recommendations are considered by the Board Governance Committee at a regularly scheduled meeting.

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee during the year ended December 31, 2006 were Phillip B. Lassiter, Chair, Phillip R. Cox, Gale S. Fitzgerald and John N. Lauer. In addition, prior to his decision not to stand for re-election at the Corporation’s 2006 Annual Meeting, Christopher M. Connor was also a member of the Compensation Committee. No officer or employee of the Corporation served on the Compensation Committee during such period.

 

PROPOSAL NO. 1:

ELECTION OF DIRECTORS

The Board recommends that its ten nominees for director be elected at the Annual Meeting, each to hold office for a term of one year from the date of the Annual Meeting and until the election and qualification of a successor. In the absence of contrary instruction, the Proxy Committee will vote the proxies for the election of the ten nominees. All director-nominees are presently members of the Board. A substantial majority of the director-nominees are independent as required by the corporate governance standards of the NYSE. In addition, it is expected that all director-nominees attend the Annual Meeting unless there are extenuating circumstances for nonattendance. All ten directors standing for re-election attended the 2006 Annual Meeting.

 

If for any reason any director-nominees are not available for election when the election occurs, the designated proxies, at their option, may vote for substitute nominees recommended by the Board. Alternatively, the Board may reduce the number of director-nominees. The Board has no reason to believe that any director-nominee will be unavailable for election when the election occurs.

 

THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF ITS
TEN NOMINEES AS DIRECTORS.

The Director-Nominees are:

 

BENEFICIAL OWNERSHIP OF SHARES

 

To the knowledge of the Corporation, no person beneficially owned more than five percent of the outstand-

ing Common Shares as of December 31, 2006.

 

SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT

 

The following table shows the beneficial ownership of Common Shares of the Corporation, including those shares which individuals have a right to acquire, e.g., through exercise of options under the 1991 Plan, within the meaning of Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, by each director-nominee, and includes the Chief Executive Officer and the Chief Financial Officer, along with the other three most highly compensated executive officers of the Corporation, whom we refer to collectively as the Named Executive Officers, and for such persons and the other executive officers of the Corporation as a group as of March 12, 2007. Ownership is also reported as of January 31, 2007 for shares in the 401(k) Savings Plan over which the individual has voting power, together with shares held in the Employee Stock Purchase Plan.

 

		Common Shares								Percent
		Beneficially				Deferred				of
Director-Nominees:		Owned1				Shares2				Class
Louis V. Bockius III			203,817				—				0.31
Phillip R. Cox			2,250				—				*
Richard L. Crandall			23,839				—				0.04
Gale S. Fitzgerald			20,839				—				0.03
Phillip B. Lassiter			23,521				—				0.04
John N. Lauer			31,471				1,277				0.05
Eric J. Roorda			332,318				—				0.51
Thomas W. Swidarski			136,293	3,4			—				0.21
Henry D. G. Wallace			11,750				—				0.02
Alan J. Weber			3,750				—				0.01
Named Executive Officers:
Kevin J. Krakora Executive Vice President and Chief Financial Officer			62,309	3			—				0.09
Michael J. Hillock President, International			122,667	3,4			19,560				0.19
David Bucci Senior Vice President, Customer Solutions Group			206,674	3,4			7,500				0.31
Dennis M. Moriarty Senior Vice President, Global Security Division			69,158				1,475				0.11
All Current Director-Nominees and Executive Officers as a Group (25)			1,668,221	3,4			46,322				2.54

 

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation’s directors and executive officers, and persons who own more than 10% of the Corporation’s Common Shares, to file with the SEC reports of ownership of the Corporation’s securities on Form 3 and changes in reported ownership on Form 4 or Form 5. Such directors, executive officers and 10% shareholders are also required by SEC rules to furnish the Corporation with copies of all Section 16(a) forms they file.

 

Based solely upon a review of the reports furnished to the Corporation, or written representations from reporting persons that all reportable transactions were reported, the Corporation believes that during the year ended December 31, 2006, the Corporation’s directors, executive officers and 10% shareholders timely filed all reports they were required to file under Section 16(a).

 

COMPENSATION DISCLOSURE & ANALYSIS

 

The Corporation’s executive compensation program is administered by the Compensation Committee, which we refer to throughout this Compensation Disclosure and Analysis as the “Committee”. The role of the Committee is to oversee the Corporation’s compensation plans and policies, administer its stock plans and annually review and approve all compensation decisions relating to executive officers, including the Named Executive Officers.

 

The Corporation’s compensation program for its executives, including the Named Executive Officers, is designed to:

 

 

The Corporation’s current executive compensation program is consistent with these objectives. An overview of this program is described in the following pages.

Executive Compensation Program Overview

 

The following table summarizes the key elements of the Corporation’s executive compensation program:

 

 

				Factors Increasing or Decreasing
Element		Primary Purpose		Rewards		Target Pay Position
Base Salary		Reward individuals’ skills, experience and performance		• Performance against objectives • Individual responsibilities • Performance of the Corporation		Below median in order to emphasize variable pay components
Annual Bonuses		Motivate and reward achievement of annual financial objectives and individual goals		• Corporate EPS • Achievement of individual financial and non-financial goals		Above median
Long-Term Incentives
Performance Shares		Incentivize sustained performance over a three-year period		• Total shareholder return, or TSR, relative to peers and S&P 400 Mid-Caps		Total potential value is above median to provide competitive total compensation and build ownership. Value is delivered in the form of: • 50% performance shares at target results
Stock Options		Incentivize increase in shareholder value		• Stock price growth		• 50% options, valued using the Black-Scholes method
Benefits and Perquisites		Provide for basic life and income security needs		• Years of service		Median levels
Change-in-Control Benefits		Bridge to future employment if employment is terminated		• None; only paid in the event the executive’s employment is terminated		Below median levels

 

This mix of base salary, annual bonuses and long-term incentives, which we refer to throughout this Compensation Disclosure and Analysis as “total compensation,” makes up the Corporation’s total compensation program to its executives, including the Named Executive Officers. In addition, the Corporation occasionally awards special grants of restricted stock or restricted stock units, or RSUs, in cases of executive hiring, promotion and retention. In confirming the continued appropriateness of each pay element in the Corporation’s total compensation program, the Committee annually reviews the pay practices of similar size companies in related industries.

 

Market Benchmarking of Executive Compensation

 

In setting pay for executives, including the Named Executive Officers, the Corporation targets total compensation at the middle of a peer group of comparable companies, which we refer to throughout this Compensation Disclosure and Analysis as the “Peer Group”. However, actual compensation can vary widely based on corporate and individual performance, and experience.

 

The Committee annually reviews Peer Group practices for total compensation and periodically for other compensation elements. In addition to Peer Group data, the Corporation reviews data obtained from nationally recognized compensation surveys for a broad range of companies of comparable size and similar revenue. This additional information helps confirm Peer Group results and represents the broader market in which the Corporation competes for senior executives. In 2006, the Corporation developed data from both sources to benchmark all elements of total compensation, as well as for retirement practices.

 

Peer Group

 

The Committee also annually reviews the Corporation’s Peer Group itself, as companies may get merged, acquired, liquidated or otherwise disposed of, or may no

longer be deemed to adequately represent the Corporation’s peers in the market.

 

Several factors are used to select Peer Group companies:

 

 

The Corporation’s Peer Group was reduced through attrition during 2006 from 43 to 37 companies, and was further reduced in December 2006 to 31 companies because the Committee determined that several of the largest and smallest companies were no longer representative of the Corporation’s peers in the market. The Corporation believes that this group fairly represents the companies with which it competes for executive talent. The Peer Group also serves as one of the groups used to assess the Corporation’s TSR as part of its performance share plan. The following companies comprised the Corporation’s Peer Group and, as such, served as the primary basis for benchmarking the Corporation’s pay levels and practices:

 

Peer Group:
Affiliated Computer		Genlyte		Thomas & Betts
American Power Conversion		Harris		Unisys
Ametek		Hubbell		Varian Medical
Avaya		International Game Technology
Benchmark Electronics		Lennox
Cooper Industries		Mettler-Toledo
Corning		NCR		Removed from Peer Group
Crane		Pall		in December 2006:
Deluxe		PerkinElmer		3Com
Donaldson		Pitney Bowes		Bisys Group
Dover		Rockwell Automation		Danaher
Fiserv		Rockwell Collins		ITT Industries
Fisher Scientific		Sauer Danfoss		Parker-Hannifin
FMC Technologies		Teleflex		Unova (Intermec Inc.)

 

Pay Setting Process

 

In evaluating the Corporation’s total compensation program for its executives, conducting benchmarking, assessing its results, designing appropriate plans and recommending other potential actions, the Committee and management periodically utilize the services of an independent compensation consultant in accordance with the Committee’s charter. In 2006, the Committee and management utilized the services of Towers Perrin, a global professional services consulting firm, in this capacity.

 

The consultant serves at the will of the Committee and reports directly to its Chair, consistent with the Committee’s charter. At the direction of the Chair, the consultant also provides information to the Corporation’s CEO and Chief Human Resources Officer to use to prepare total compensation recommendations for the executives, including the Named Executive Officers (but excluding the CEO). These recommendations and the supporting information are then presented to the Committee for review and approval. The consultant also provides information to the Committee to use to prepare total compensation recommendations for the CEO. The Committee determines recommendations for the CEO’s total compensation package, which is then approved by independent members of the Board during executive session.

 

There are several factors that the Committee evaluates in determining increases or decreases in total compensation for each executive, including the Named Executive Officers, overall and by element, including:

 

 

 

The amount of total compensation realized or potentially realizable from prior compensation awards does not directly influence the level of total compensation paid or future pay opportunities. Moreover, the Corporation does not have a specific formula for allocating total compensation between current and long-term compensation or between cash and non-cash compensation. However, the Corporation does vary the mix of these elements based on competitive practices and management level to recognize each individual’s operating responsibilities and ability to impact short and long-term results.

 

Determination of Executive Compensation

 

Base Salaries

 

The Corporation pays salaries to recognize the skills, competencies, experience and individual performance an executive brings to his or her position. As a result, changes in salary focus primarily on changes in the executive’s responsibilities and an assessment of annual performance.

 

At the start of each year, executives, including the Named Executive Officers, provide individual performance objectives that relate specifically to their positions or departments. As a result, these personal goals vary from area to area, as well as by individuals within an area, to recognize their responsibilities and areas of influence. Performance against these objectives is assessed annually by the CEO, the Chief Human Resources Officer and the Committee. The Corporation’s Board assesses the CEO’s performance.

 

The Committee, with input from management, relies upon several factors when determining salary increases:

 

 

Salary increases in 2006 for the executives as a whole were generally less than 4%. Increases maintained the Corporation’s desired position in the market, which is below the median of the Peer Group and other comparable-size companies. These increases considered the factors the Corporation normally uses to determine executive increases. The exceptions were the Corporation’s CEO and CFO, who received promotional salary increases of 85% and 63%, respectively, associated with their promotions to these positions at the end of 2005.

 

Annual Bonuses

 

Executives, including the Named Executive Officers, also have the ability to earn annual cash bonuses under the Corporation’s Annual Cash Bonus Plan, which was approved by shareholders in 2005, depending upon the performance of the Corporation against objective performance measures established by the Board at the beginning of each fiscal year. Bonuses under the plan provide incentives to meet or surpass specific short-term corporate financial goals. As a result, the Cash Bonus Plan balances the objectives of the Corporation’s other pay programs, which concentrate on long-term financial results (performance shares) and stock price growth (performance shares and stock options). Finally, annual cash bonuses allow the Corporation to maintain relatively low fixed compensation costs but still provide executives with competitive cash compensation, subject to performance.

 

The Corporation intends its target bonuses to be above median levels to compensate for its below-median salary position and to provide competitive overall cash compensation at target results. For 2006, the Corporation’s target bonuses were as follows:

 

 

Actual bonuses can range from 0% to 200% of target depending on actual company performance. In this manner, the Corporation can reward executives with high

levels of cash compensation for results that substantially exceed target performance expectations. Conversely, the Corporation pays relatively low levels of cash compensation for results that fail to meet minimally acceptable standards.

 

The Corporation has historically used EPS as the performance criteria for the annual cash bonuses. The Committee believes EPS represents an important bottom-line financial result that investors use to evaluate the value of the Corporation’s Common Shares. As a result, consistent increases in EPS over time should lead to improvements in shareholders’ investment. To pay these bonuses, the Corporation funds a bonus pool based on target opportunities and achieving a pre-established EPS target. The level of EPS achieved relative to target determines the actual size of the pool funded. For 2006, the following levels of EPS would fund the following results:

 

 

In establishing these goals and evaluating results, the Committee may consider certain non-recurring or extraordinary items outside of the normal course of business and not reflective of the Corporation’s core performance. Accordingly, the EPS targets may not include these items. For example, in 2006 the Committee excluded certain items related to restructuring and realignment of the Corporation’s global manufacturing operations, as well as impairment and other charges related to the termination of its IT outsourcing agreement.

 

The Corporation uses two factors to distribute the pool. One-half of an executive’s funded award is paid automatically based on the Corporation’s EPS results. Payment of the other half is based on the achievement of the executive’s individual performance objectives. These goals typically consider objective financial results in the executive’s operating unit, area or department (e.g., revenue, operating profit, free cash flow, inventory goals). The CEO establishes the individual goals for his direct reports and the Committee sets the CEO’s individual performance objectives. In this way, the Corporation can reward individual contributions not fully captured by its EPS results. Moreover, the Corporation retains a strong emphasis on consolidated results because no bonuses are funded unless the Corporation achieves its threshold level of EPS performance.

 

EPS for 2006 funded a pool approximately equal to 71% of target. Under the plan, the Committee is authorized to consider negative discretion with respect to the bonuses on an individual basis; however, for 2006 cash bonuses the Committee used no discretion to adjust the pool, so the funded amount represented the pool available for distribution. Executives received bonuses ranging from 13.9% to 35.7% of target awards (one-half the amount funded) based on the Corporation’s EPS results. The remaining portion of the bonuses reported under “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table represents the achievement of the Named Executive Officers’ individual performance objectives.

 

Long-Term Incentives

 

Overview.  The 1991 Plan provides the Corporation flexibility in the types of long-term incentives, or LTI, it can award to executives, including the Named Executive Officers, and includes stock options, performance shares, restricted stock and RSUs. The LTI granted in 2006 — collectively and individually — support the Corporation’s compensation philosophy:

 

 

LTI opportunities are based on competitive practices of the Corporation’s Peer Group. In addition, the Corporation takes into account the competitiveness of executives’ target cash compensation (salary plus target bonus) and competitive total compensation levels. This dollar difference represents the target value of LTI that Diebold delivers in the form of options and performance shares.

 

Timing of Equity Awards.  Historically, all eligible employees of the Corporation, including the executives and the Named Executive Officers, have received LTI awards at the first regularly scheduled Board meeting of the year, typically during the first two weeks of February.

This is usually five to 15 days after the Corporation reports its financial results for the fourth quarter and year-end for the preceding fiscal year. It is also more than two months before the Corporation reports first quarter earnings. The exceptions are awards to employees who are promoted or hired from outside the Corporation during the year. These employees may receive special awards as of the time of their promotion or hire date. As such, the Corporation does not time the grants of options or any other equity incentives to the release of material non-public information.

 

Stock Options.  Approximately 50% of the Corporation’s target LTI is delivered in the form of stock options. In this manner, the Corporation strikes a balance between awards tied only to stock price appreciation and those based on the full value of the Corporation’s Common Shares, as well as other performance factors. LTI delivered in the form of stock options are valued using the Black-Scholes option valuation method, the same one used by the Corporation to determine its accounting cost. Grant guidelines are developed according to an executive’s salary grade or level, organizational level, reporting relationships and job responsibilities, in order to maintain internal equity in the grants to participants. Actual grants also vary based on an assessment of several factors, including the market value of the Corporation’s Common Shares, the Corporation’s financial performance, shares available under the 1991 Plan, an individual’s target total compensation and his or her performance against individual objectives.

 

Executives, including the Named Executive Officers, receive option grants with the following characteristics:

 

 

The exception was the Corporation’s CEO, who did not receive stock options in 2006. Instead, he received a special, one-time stock option grant of 150,000 stock options at the time of his promotion in December 2005. This grant was larger than the CEO’s normal grant to recognize his promotion and focus his attention on creating long-term value for shareholders, enhancing the Corporation’s operational excellence and improving its financial results. This grant also included special vesting requirements to emphasize retention and to reward only for sustained long-term results. The award does not vest until the seventh anniversary of the grant, provided the CEO is still employed at the Corporation. However, one-half of the award may vest early if the Corporation’s stock price reaches $50 per share for 20 consecutive trading days (a 32% improvement over the Corporation’s closing price on the date of grant). The other half of the award may vest early if the Corporation’s stock hits $60 per share for 20 consecutive trading days (a 58% improvement over the Corporation’s closing price on the date of grant).

 

Performance Shares.  The Corporation delivers the remaining 50% of target LTI in the form of performance shares. Performance shares are earned over a three-year performance period, determined as of the date of the Corporation’s fourth quarter and year-end earnings release immediately following such performance period, with actual awards varying from target based on the achievement of financial objectives established by the Board at the start of the period. No dividends are paid on performance shares until earned. The award of performance shares in this way is consistent with the Corporation’s objective to take a balanced approach to LTI by rewarding sustained financial performance as well as stock price appreciation. The expected value of a performance share at the time of grant (based on the Corporation’s stock price) determines the number of target performance shares potentially awarded. Management then develops performance share grant guidelines on the same principles used to develop stock option grant guidelines.

 

Executives, including the Named Executive Officers, received target performance share awards for the 2006 to 2008 period with the following characteristics:

 

 

 

 

For the 2004 to 2006 performance period, executives received performance shares approximately equal to 59% of target. Goals for this period were similar to those established for the 2006 to 2008 period. The Corporation’s TSR performance relative to the Peer Group and the S&P Mid-Cap 400 Index determined actual awards, with results in each area equally weighted. Each measure had threshold and maximum results, with a matrix used to determine awards for performance between threshold and maximum. The executive’s individual performance is not a factor in determining actual shares awarded. The Corporation’s TSR for the period was 9th in the Peer Group and 278th in the S&P Mid-Cap 400 Index. This was between the threshold and maximum performance objectives set at the start of the period and produced an award equal to 59% of the target award. Executives received shares equal to this percent of target, as no discretion was used to increase or decrease the results based on the Corporation’s relative TSR. Accordingly, the performance shares earned by the Named Executive Officers for the 2004 to 2006 performance period where as follows: Thomas W. Swidarski, 5,900 shares; Kevin J. Krakora, 2,360 shares; Dave Bucci, 5,900 shares; Michael J. Hillock, 5,736 shares; and Dennis M. Moriarty, 1,475 shares.

 

Special Grants of RSUs.  The Corporation made several management changes during the later part of 2005 and early 2006. Several executives took on new or greatly expanded roles and responsibilities critical to enhancing the Corporation’s operational excellence, increasing its financial results and improving shareholder value. As a result, the Committee felt it was important to provide select executives an additional incentive. The purpose of these awards was to ensure retention of the executives’ services through this transition period and to further enhance their incentive for building shareholder value.

 

Individuals in key roles, as determined by the CEO and the Committee, including some of the Named Executive Officers, received RSUs ranging in value from 23 to 185 percent of their salary. These grants for the applicable Named Executive Officers are reported below in the “2006 Grants of Plan-Based Awards” table.

 

Dividend equivalents are paid on these RSU awards the same as Common Shares, consistent with the terms of the Corporation’s standard RSU agreement. However, unlike the Corporation’s standard RSU agreement, the special RSUs have vesting requirements similar to those of the CEO’s special one-time stock option grant. RSUs typically vest three years following the date of grant; however, these special RSUs vest on the grant’s seventh anniversary, provided the executive is still employed by the Corporation. Similarly, one-half of the RSUs may vest early if the Corporation’s stock price reaches $50 per share for 20 consecutive trading days. The other half of the RSUs may vest early if the stock price reaches $60 per share for 20 consecutive trading days. These common goals help foster teamwork and cooperation among the Corporation’s executive team. The Committee excluded the CEO from this program because it believed his special option grant at the time of his promotion offered sufficient incentive to accomplish the Committee’s objectives.

 

Perquisites and Other Personal Benefits

 

The Corporation’s executives, including the Named Executive Officers, are also eligible to participate in the following additional pay elements as part of their total compensation package.

 

Benefits

 

The Corporation provides executives medical, dental, long-term disability, life insurance and severance benefits under the same programs used to provide benefits to all U.S.-based associates. Executives may buy additional life insurance coverage at their own expense, but not long-term disability. The maximum life insurance that may be bought by an executive is $1.5 million. Executives’ benefits are not tied to individual or company performance, which is the same approach used for other associates. Moreover, changes to executives’ benefits reflect the changes to the benefits of other associates.

 

Perquisites

 

The Corporation provides its executives with perquisites that are also not tied to individual or company performance. The Corporation believes that these benefits are set at a reasonable level, are highly valued by recipients, have limited cost, are part of a competitive reward program and help in attracting and retaining high quality executives. The Corporation’s executives receive the following perquisites, the values of which differ based on an officer’s reporting level:

 

 

The Committee periodically reviews the Corporation’s practices in this area and makes any necessary adjustments based on competitive practices, consistency with the Corporation’s total compensation philosophy and objectives and cost to provide these personal benefits. The Committee did not change the Corporation’s practices relating to executive perquisites in 2006; however, the Committee has decided that beginning in 2007, the Corporation will no longer provide tax gross-ups in connection with any executive perquisites.

 

Deferred compensation

 

Executives, including the Named Executive Officers, have the ability to defer receipt of annual cash bonuses and performance shares pursuant to the Corporation’s 2005 Deferred Incentive Compensation Plan. Current investment choices under the plan for cash deferrals (cash bonuses and dividends on deferred performance shares) mirror those used in the Corporation’s 401(k) plan, except company stock. As a result, the plan offers executives another means to save for retirement. The Corporation’s deferred compensation plan does not provide participants with additional compensation, but merely provides a tax deferred investment vehicle. Deferrals represent earned incentives that would have been paid to the executive except for the voluntary election of the executive. Moreover, the Corporation does not guarantee any specific rate of return nor does it contribute to the return that may be earned. As a result, the current program does not increase the Corporation’s compensation costs.

 

The current investment options have been in place since January 2006. Prior to 2006, cash deferrals under the plan earned a return equal to Moody’s Seasoned Bond Rate plus 3%. During 2005, the Committee reviewed the investment choices of the Corporation’s deferred compensation program and concluded that the Corporation’s practice was not consistent with competitive practices in the market or the principles of the Corporation’s total compensation program. As a result, the Committee changed the program’s investment choices to mirror those of the Corporation’s 401(k) plan.

 

Retirement

 

The Corporation also maintains qualified and non-qualified retirement programs. The executives, including the Named Executive Officers, participate in the Corporation’s qualified defined contribution (401(k)) plan on the same terms as all other associates. Under the Corporation’s qualified plan, the Corporation will match 60% of the first 3% of pay that is contributed by the associate to the plan, and 40% of the next 3% of pay contributed.

 

The Corporation also has two existing non-qualified supplemental retirement plans, the Supplemental Executive Retirement Plans I and II, which are now closed to new participants. Mr. Bucci and Mr. Hillock participate in the SERP I, but are not eligible for early retirement. Mr. Swidarski is the only participant in the SERP II.

 

During 2006, the Committee asked its independent consultant to review the Corporation’s retirement program. The review concluded that the Corporation’s retirement benefits were below median levels for executives in similar positions in its Peer Group and at other comparable companies. As a result, the Committee changed the Corporation’s non-qualified retirement program to:

 

 

Based upon its review, the Committee has adopted the following non-qualified retirement programs for implementation in 2007:

 

 

Participation in the plans is limited to executive officers in positions that help develop, implement and modify the Corporation’s long-term strategic plan, as nominated by the CEO and approved by the Committee. Details regarding these benefits for the Named Executive Officers will be presented in the Corporation’s proxy statement for the 2008 Annual Meeting.

 

Change-in-control benefits

 

The Corporation has entered into change-in-control agreements with its executive officers, including the Named Executive Officers. These agreements provide executives with the potential for continued employment for two years following a change-in-control. As a result, these agreements help retain these executives and provide for management continuity in the event of an actual or threatened change-in-control. They also help ensure that the executives’ interests remain aligned with shareholders’ interests during a time when their continued employment may be in jeopardy. Finally, they provide some level of income continuity should an executive’s employment be terminated without cause. The agreements provide:

 

 

Change-in-control benefits are only paid upon the occurrence of two events, a so-called “double trigger.” First, there must be a “change in control” of the Corporation, as defined in the agreements. Second, the executives must be terminated without cause or they must terminate their own employment for good cause, as described in the agreements. In this manner, benefits are only paid to executives if they are adversely affected by a change-in-control, consistent with the agreements’ objectives.

 

Based upon reviews conducted by the Corporation’s independent consultant, the Corporation believes its change-in-control benefits are below median levels for executives in similar positions in its Peer Group and at other comparable companies.

 

Other Compensation Policies

 

Stock Ownership Guidelines

 

The Corporation established stock ownership guidelines for its executives in 1996. Ownership guidelines reinforce the primary goals of the Corporation’s LTI: build stock ownership among executives and ensure their long-term economic interests are aligned with those of other shareholders.

 

Prior to 2006, ownership guidelines were based on a multiple of an executive’s salary, the executive’s stock holdings and the Corporation’s stock price. As a result, changes in these criteria could change the number of shares required to meet the executive’s guideline. Executives were expected to meet the following ownership guidelines within five years:

 

 

In determining an executive’s stock holdings, the Corporation counts the shares directly owned by the executive, including unvested restricted shares and shares deferred pursuant to the Corporation’s deferred compensation program, as well as the following stock equivalents: deferred shares/RSUs and the potential after-tax shares owned through the executive’s 401(k) savings plan

account. Outstanding options and unearned performance shares do not count toward the executives’ stock ownership guidelines.

 

The Corporation reviewed its ownership guidelines in 2006. It found the Corporation’s ownership guidelines were well-above median levels for executives in similar positions in its Peer Group and at other comparable companies. The Corporation’s approach to LTI supported this practice, as LTI were usually set above median levels. However, in 2006, the Corporation modified its ownership requirements to:

 

 

As a result, the Corporation adopted fixed share ownership guidelines. The new levels of ownership set forth in these guidelines are approximately the same as the Corporation’s pre-existing ownership guidelines based on the executives’ current salaries and the Corporation’s stock price on October 5, 2006. The definition of shares that count toward meeting the guidelines has also been retained.

 

 

In addition, until guidelines are met, executives must hold at least 80% of the net shares of stock received from any equity-based awards, after deductions for taxes and exercise costs. Once the guidelines are met, the executives are required to hold at least 40% of the net shares of stock received from any equity-based awards, after such deductions.

 

The stock holdings of the Named Executive Officers are set forth under “Security Ownership of Directors and Management.”

 

The Committee reviews management’s stock holdings annually to monitor progress toward the stock ownership guidelines. However, the Corporation does not impose any penalties on executives who fail to meet the stock ownership guidelines. This is because the new guidelines mandate some level of stock ownership whenever an executive would realize any value from an equity-based award. Moreover, the Corporation does not allow executives to hedge the economic risk associated with stock ownership.

 

Limitations on Deductibility of Compensation

 

Section 162(m) of the Internal Revenue Code generally limits the tax deductibility of compensation paid by a public company to its CEO and certain other highly compensated executive officers to $1 million in the year the compensation becomes taxable to the executive. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements.

 

In order to qualify as performance-based compensation, the Corporation’s compensation plans must meet certain requirements, including shareholder approval. The Corporation has taken steps intended to ensure it is not adversely affected by Section 162(m). To that end, the Corporation’s annual bonuses, grants of performance shares and awards of stock options are designed to meet the section’s deductibility requirements. However, base salaries and grants of restricted stock may not qualify as performance-based compensation and would not be excluded from the limitation on deductibility. As result, the Corporation has a policy pursuant to which certain executives have entered into agreements to automatically defer amounts affected by the $1 million limitation until the time when that limitation no longer applies.

 

Accounting for Stock-Based Compensation

 

Beginning on January 1, 2006, the Corporation began accounting for stock-based payments, including stock options, performance shares, restricted shares and RSUs, in accordance with the requirements of Financial Accounting Standards 123R.

 

COMPENSATION COMMITTEE REPORT

 

As noted above, the Compensation Committee is comprised of Phillip B. Lassiter, Chair, Phillip R. Cox, Gale S. Fitzgerald and John N. Lauer. Each member meets the independence standards of the NYSE corporate governance requirements.

 

The Corporation, with the Committee’s guidance and approval, has developed compensation programs based on its compensation philosophy for executive officers. The Corporation relies on its annual cash bonus award and LTI, tied directly to individual, business unit and corporate performance, to provide total direct compensation that is aligned to achievement of pre-established goals for the year. The Committee determines specific compensation elements for the CEO and considers and acts upon recommendations made by the CEO regarding the other executives.

 

The agenda for meetings of the Committee is determined by its Chairman with the assistance of the Chief Human Resources Officer. The meetings are regularly attended by the Chairman of the Board (when not a member of the Committee), the Chief Executive Officer and the Chief Human Resources Officer. At each meeting, the Committee meets in executive session. The Chairman of the Committee reports the Committee’s actions or recommendations to the full Board of Directors. The Corporation’s Human Resources and Legal/Corporate Secretarial departments support the Committee in its duties and may be delegated certain administrative duties in connection with the Corporation’s compensation programs. The Committee has the sole authority to retain and

terminate compensation consultants to assist in the evaluation of executive compensation and the sole authority to approve the fees and other retention terms of any such consultants. The Committee regularly engages an independent consult to conduct annual reviews of its total compensation programs for executives. The consultant also provides information to the Committee on trends in executive compensation and other market and Peer Group data.

 

The Committee has reviewed and discussed the above “Compensation Discussion and Analysis” and, based on such review and discussions, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006 and this proxy statement.

 

The foregoing report was submitted by the Compensation Committee of the Board and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A promulgated by the SEC or Section 18 of the Securities Exchange Act of 1934.

 

The Compensation Committee:

 

Phillip B. Lassiter, Chair
Phillip R. Cox
Gale S. Fitzgerald
John N. Lauer

EXECUTIVE COMPENSATION

 

The table below summarizes the total compensation paid or earned by each of the Named Executive Officers of the Corporation for the fiscal year ended December 31, 2006. The amounts shown include compensation for services in all capacities that were provided to the Corporation including any amounts which may have been deferred.

 

Summary Compensation Table

 

																										Change in
																										Pension
																										Value and
																						Non-Equity				Non-qualified
														Stock				Option				Incentive Plan				Deferred				All Other
						Salary				Bonus				Awards1				Awards2				Compensation3				Compensation				Compensation5				Total
Name and Principal Position		Year				($)				($)				($)				($)				($)				Earnings4 ($)				($)				($)
Thomas W. Swidarski			2006				550,000				0				674,188				597,741				392,500				21,000				93,727				2,329,156
President and Chief Executive Officer
Kevin J. Krakora			2006				320,000				0				381,635				158,861				171,273				11,000				44,578				1,087,347
Executive Vice President and Chief Financial Officer
Michael J. Hillock			2006				309,000				0				569,035				614,022				165,385				0				61,056				1,718,498
President, International
David Bucci			2006				302,940				0				543,001				604,016				154,035				0				51,174				1,655,166
Senior Vice President, Customer Solutions Group
Dennis M. Moriarty			2006				250,000				0				279,983				115,495				130,462				16,000				37,581				829,521
Senior Vice President, Global Security Division

 

 

 

		All Other Compensation ($)
Names		(a)				(b)				(c)				(d)				(e)				(f)
Thomas W. Swidarski		$	23,403			$	15,411			$	1,119			$	5,670			$	31,761			$	15,105
Kevin J. Krakora			13,129				10,056				673				5,670				9,529				3,636
Michael J. Hillock			13,050				9,509				2,434				5,670				13,019				10,000
David Bucci			12,550				9,774				1,092				5,670				10,880				9,625
Dennis M. Moriarty			11,613				5,983				798				5,670				7,912				1,965

 

2006 Grants of Plan-Based Awards

 

																														All Other				All Other
																														Stock				Option								Closing
																														Awards:				Awards:								Market				Grant Date
																														Number of				Number of								Price of				Fair Value
																														Shares of				Securities				Exercise or				Award on				of Stock and
						Estimated Future Payouts Under Non-Equity Incentive Plan Awards1												Estimated Future Payouts Under Equity Incentive Plan Awards2												Stock or				Underlying				Base Price				Date of				Option
		Grant				Thresh.				Target				Max				Thresh.				Target				Max				Units3				Options4				of Option				Grant				Awards6
Name		Date				($)				($)				($)				(#)				(#)				(#)				(#)				(#)				Awards5 ($/Sh)				($/Sh)				($)
Thomas W. Swidarski			2/20/06				—				—				—				6,000				20,000				40,000				—				—				39.43				39.54				788,600
			2/15/06				220,000				550,000				1,100,000				—				—				—				—				—				—				—				—
Kevin J. Krakora			2/20/06				—				—				—				—				—				—				—				25,000				39.43				39.54				346,500
			2/20/06				—				—				—				—				—				—				15,000				—				39.43				39.54				591,450
			2/20/06				—				—				—				3,000				10,000				20,000				—				—				39.43				39.54				394,300
			2/15/06				96,000				240,000				480,000				—				—				—				—				—				—				—				—
Michael J. Hillock			6/8/06				—				—				—				—				—				—				—				6,000				41.25				41.68				85,140
			6/8/06				—				—				—				—				—				—				500				—				41.25				41.68				20,625
			6/8/06				—				—				—				999				3,333				6,666				—				—				41.25				41.68				137,486
David Bucci			2/20/06				—				—				—				—				—				—				—				25,000				39.43				39.54				346,500
			2/20/06				—				—				—				3,000				10,000				20,000				—				—				39.43				39.54				394,300
			2/15/06				90,882				227,205				454,410				—				—				—				—				—				—				—				—
Dennis M. Moriarty			2/20/06				—				—				—				—				—				—				—				10,000				39.43				39.54				138,600
			2/20/06				—				—				—				—				—				—				9,000				—				39.43				39.54				354,870
			2/20/06				—				—				—				1,500				5,000				10,000				—				—				39.43				39.54				197,150
			2/15/06				75,000				187,500				375,000				—				—				—				—				—				—				—				—

 

 

Narrative Disclosure to Summary Compensation Table
and 2006 Grants of Plan-Based Awards Table

 

The Corporation has not entered into any employment agreements with any of the Named Executive Officers, except for the CEO.

 

In April 2006, the Corporation entered into an employment agreement with Mr. Swidarski, with a term of two years and with automatic one-year renewals thereafter unless either party notifies the other at least six months before the scheduled expiration date that the term is not to renew. Pursuant to his agreement, Mr. Swidarski is to receive a base salary of $550,000 for the first year, as well as other compensation, including bonus opportunities up to 200% of base salary. Further, as part of his employment agreement, Mr. Swidarski is also entitled to the following perquisites: a monthly auto allowance up to $3,295, plus tax gross-up; financial planning and tax preparation services up to $20,000 annually; country club dues and fees; and an annual physical examination.

 

In the event that Mr. Swidarski is terminated without cause, he is entitled to receive severance payments, including: a lump sum amount equal to two years base salary; a lump sum amount equal to twice his target annual cash bonus for the year in which termination occurs; a pro rata annual cash bonus for the year in which termination occurs, but only to the extent an annual cash bonus is paid to others for the year of termination; and continued participation in the company’s employee benefits plans for a period of two years (not including any qualified or non-qualified pension plan or 401(k) plan). Mr. Swidarski is also subject to non-competition and non-solicitation obligations for a period of two years following his termination of employment, regardless of the circumstances surrounding such termination.

 

When setting total compensation for each of the Named Executive Officers, the Compensation Committee reviews tally sheets, which show the executive’s current compensation, including equity and non-equity based compensation.

 

In the “Change in Pension Value and Non-qualified Deferred Compensation Earnings” column of the Summary Compensation Table, the benefit values for Mr. Bucci and Mr. Hillock actually decreased from 2005 to 2006 by $19,000 and $34,000, respectively, primarily due to an increase in the discount rate used to determine the pension values

 

Based on the fair value of equity awards granted to Named Executive Officers in 2006 and the base salary of the Named Executive Officers, “Salary” accounted for approximately 26% of the total compensation of the Named Executive Officers, while incentive compensation accounted for approximately 67% of the total compensation of the Named Executive Officers. Because the value of certain equity awards is based on the grant date fair value determined in accordance with FAS 123R, these percentages may not be able to be derived using the amounts reflected in the tables above.

 

For a more detailed description of the material terms of the awards granted to the Named Executive Officers in 2006, see above under “Compensation Discussion and Analysis.”

 

Outstanding Equity Awards at 2006 Fiscal Year-End

 

The following table provides information relating to exercisable and unexercisable stock options as of December 31, 2006 for the Named Executive Officers. In addition, the following table provides information relating to grants of restricted shares, RSUs and performance shares to the Named Executive Officers that have not yet vested as of December 31, 2006. No stock appreciation rights were outstanding as of December 31, 2006.

		Option Awards1																				Stock Awards
										Equity Incentive
										Plan Awards:																				Equity Incentive Plan Awards:
										Number of																				Number of
										Securities												Number of				Market Value				Unearned Shares,				Market or Payout
		Number of Securities								Underlying												Shares or				of Shares or				Units or Other				Value of Unearned
		Underlying Unexercised								Unexercised				Option								Units of Stock				Units of Stock				Rights				Shares, Units or
		Options								Unearned				Exercise				Option				That Have Not				That Have				That Have Not				Other Rights That
		Exercisable				Unexercisable				Options				Price				Expiration				Vested2				Not Vested3				Vested4				Have Not Vested3
Name		(#)				(#)				(#)				($)				Date				(#)				($)				(#)				($)
Thomas W. Swidarski			900				—				—			$	38.08				1/29/07				—			$	—				—			$	—
			600				—				—				47.53				1/28/08				—				—				—				—
			1,300				—				—				34.81				1/27/09				—				—				—				—
			1,500				—				—				22.88				1/26/10				—				—				—				—
			8,000				—				—				28.69				2/6/11				—				—				—				—
			15,000				—				—				36.59				2/5/12				—				—				—				—
			15,000				5,000				—				36.31				2/4/13				—				—				—				—
			12,500				12,500				—				53.10				2/10/14				—				—				—				—
			5,725				17,175				—				55.23				2/9/15				—				—				—				—
			—				150,000				—				37.87				12/11/15				—				—				—				—
			—				—				—				—				—				—				—				39,900				1,859,340
Kevin J. Krakora			5,000				—				—				35.60				9/17/11				—				—				—				—
			8,000				2,000				—				36.59				2/5/12				—				—				—				—
			7,500				2,500				—				36.31				2/4/13				—				—				—				—
			3,500				3,500				—				53.10				2/10/14				—				—				—				—
			1,625				4,875				—				55.23				2/9/15				—				—				—				—
			—				25,000				—				39.43				2/19/16				—				—				—				—
			—				—				—				—				—				15,000				699,000				—				—
			—				—				—				—				—				—				—				18,000				838,800
Michael J. Hillock			9,000				—				—				47.53				1/28/08				—				—				—				—
			25,000				—				—				36.59				2/5/12				—				—				—				—
			25,000				—				—				36.31				2/4/13				—				—				—				—
			25,000				—				—				53.10				2/10/14				—				—				—				—
			23,400				—				—				55.23				2/9/15				—				—				—				—
			6,000				—				—				41.25				6/7/16				—				—				—				—
			—				—				—				—				—				—				—				31,200				1,453,920
David Bucci			2,250				—				—				38.08				1/29/07				—				—				—				—
			9,000				—				—				47.53				1/28/08				—				—				—				—
			35,000				—				—				22.88				1/26/10				—				—				—				—
			25,000				—				—				28.69				2/6/11				—				—				—				—
			25,000				—				—				36.59				2/5/12				—				—				—				—
			18,750				6,250				—				36.31				2/4/13				—				—				—				—
			12,500				12,500				—				53.10				2/10/14				—				—				—				—
			6,250				18,750				—				55.23				2/9/15				—				—				—				—
			—				25,000				—				39.43				2/19/16				—				—				—				—
			—				—				—				—				—				1,250				58,250				—				—
			—				—				—				—				—				—				—				31,100				1,449,260
Dennis M. Moriarty			3,000				—				—				38.08				1/29/07				—				—				—				—
			1,500				—				—				47.53				1/28/08				—				—				—				—
			4,000				—				—				34.81				1/27/09				—				—				—				—
			4,000				—				—				22.88				1/26/10				—				—				—				—
			8,000				—				—				28.69				2/6/11				—				—				—				—
			8,000				—				—				36.59				2/5/12				—				—				—				—
			7,500				2,500				—				36.31				2/4/13				—				—				—				—
			3,500				3,500				—				53.10				2/10/14				—				—				—				—
			1,875				5,625				—				55.23				2/9/15				—				—				—				—
			—				10,000				—				39.43				2/19/16				—				—				—				—
			—				—				—				—				—				9,750				454,350				—				—
			—				—				—				—				—				—				—				11,100				517,260