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Unless the context requires otherwise, reference in this Form 10-K to Allied, we, us and our, refer to Allied Waste Industries, Inc. and its consolidated subsidiaries.
Item 11. Executive Compensation
Compensation Discussion And Analysis
The Compensation Committee has responsibility for (a) discharging the Boards responsibilities relating to the compensation of our companys CEO and other executives, and (b) reviewing and reporting on the continuity of executive leadership for our company. The Compensation Committees duties include approving the compensation structure for our CEO, reviewing the compensation structure for each of our other NEOs as listed under Item 11, Executive Compensation Summary Compensation Table, and reviewing and coordinating annually with the Governance Committee of our Board of Directors with respect to the compensation structure for the directors. See Item 10, Directors and Executive Officers of the Registrant The Management Development/Compensation Committee for more information regarding the Compensation Committee and its processes.
The Compensation Committee establishes and maintains our executive compensation program through internal evaluations of performance, comparison to benchmarks and other objective data, consultation with various executive compensation consultants, and analysis of compensation practices in industries where our company competes for qualified executive talent. The Compensation Committee determines whether or not our compensation programs have met their goals primarily by analyzing total compensation paid relative to the overall performance of individual executives and the overall financial performance of our company, as well as by considering other factors, including executive retention rates and customer satisfaction. The Compensation Committee reviews our compensation programs and philosophy regularly, particularly in connection with its evaluation and approval of changes in the compensation structure for a given year. Periodic reviews throughout 2006 led to the elimination of any future Long Term Incentive Plan performance
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cycles, a shift in the allocation of equity awards toward stock options rather than restricted stock units, or RSUs, and the implementation of Stock Ownership and Retention Guidelines, all as discussed below.
Objectives of Our Compensation Program
The compensation program for our NEOs is designed to attract, retain, incentivize, and reward talented executives who can contribute to our companys growth and success and thereby build value for our stockholders over the long term. Our companys executive compensation program is organized around four fundamental principles, as follows:
The Compensation Program for Our NEOs Should Enable Us to Compete for First-Rate Executive Talent. Stockholders are best served when we can attract and retain talented executives with compensation packages that are competitive but fair. Historically, the Compensation Committee set overall target compensation, including base salaries, near the 75th percentile relative to a comparison group. In 2005, the committee evaluated our companys compensation philosophy and decided it would be more appropriate to target a compensation package for NEOs that, under ordinary circumstances, will deliver base salaries at or above the 50th percentile of the base salaries delivered by certain peer companies with which we compete for executive talent (the Peer Group), while structuring other elements of the compensation package for NEOs to deliver total compensation that may be at or above the 75th percentile of the total compensation delivered by the Peer Group if certain performance goals are achieved. This change in philosophy will be gradually put into effect. The objective is to ensure that our compensation structure is effective and that the compensation our company pays or awards is commensurate with the returns delivered to shareholders.
To assist it in making this comparison, the Compensation Committee engages Cook to provide information regarding compensation practices of the Peer Group. In 2006, the Peer Group consisted of the following companies:
| Industry Peer Group | Revenue Peer Group |
| Aleris International, Inc. | Automatic Data Processing, Inc. |
| Casella Waste Systems, Inc. | Aramark Corporation |
| Metal Management, Inc. | The Brinks Company |
| Republic Services, Inc. | C. H. Robinson Worldwide, Inc. |
| Waste Connections, Inc. | Cintas Corporation |
| Waste Industries USA, Inc. | CSX Corporation |
| Waste Management, Inc. | Norfolk Southern Corporation |
| Waste Services, Inc. | Pitney Bowes, Inc. |
| WCA Waste Corporation | Ryder System, Inc. |
| Telephone & Data Systems, Inc. | |
| United Auto Group, Inc. | |
| YRC Worldwide, Inc. |
The companies listed under Industry Peer Group reflect other publicly traded companies in the same industry as our company. The companies listed under Revenue Peer Group reflect other publicly traded business-to-business, capital intensive, service-based companies with fiscal 2005 revenues ranging from approximately $2.5 billion to $11 billion and median revenue of $7.1 billion. At the request of the Compensation Committee, in 2006 Cook expanded the list of companies included in the Peer Group to ensure that the group was sufficiently representative of the companies and industries with which our company competes for employees.
The Compensation Committee uses benchmark comparisons to the Peer Group to ensure that it is acting responsibly and to establish points of reference to determine whether and to what extent it is establishing competitive levels of compensation for our executives. The committee compares numerous elements of executive compensation (i.e., base salaries, annual incentive compensation, long-term cash and equity-based incentives, retirement benefits, and certain material perquisites) to establish whether our proposed compensation programs are competitive with those offered by members of the Peer Group.
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A Substantial Portion of NEO Compensation Should Be Performance-Based. The Compensation Committee designs our executive compensation program to reward superior performance in a number of ways. In 2006, the Compensation Committee recommended, and our Board and stockholders approved, the Executive Incentive Compensation Plan (the EICP). Whether and to what extent our company will pay incentives to our executives under the EICP depends entirely on the extent to which the company-wide, individual, or other goals set by the Compensation Committee pursuant to that plan are attained. See The Elements of our Executive Compensation Cash Incentive Compensation. In addition, a substantial portion of executive compensation is delivered in the form of equity awards, as discussed below. For 2007, the equity granted to executives was only in the form of stock options from which executives will derive benefit only if the market value of our common stock increases.
A Substantial Portion of NEO Compensation Should Be Delivered in the Form of Equity Awards. The Compensation Committee designs our executive compensation program to provide a substantial portion of total NEO compensation in the form of equity-based compensation. The committee believes equity-based compensation provides an incentive to build value for our company over the long-term, which helps to align the interests of our NEOs with the interests of our stockholders and creditors. For 2006, the Compensation Committee granted to our NEOs stock options and RSUs, that, in each case, vest solely based on the passage of time. As part of the 2007 executive compensation package, in December 2006 the Compensation Committee granted to our NEOs stock options that vest solely based on the passage of time. The committee believes that time-vested equity awards encourage long-term value creation and executive retention because executives can realize value from such awards only if they remain employed with our company at least until the awards vest.
Our Compensation Program for NEOs Should Be Fair and Should Be Perceived as Such, Both Internally and Externally. The Compensation Committee seeks to accomplish this goal by comparing the compensation that we provide to our NEOs (a) to the compensation provided to officers of the companies included in the Peer Group, as a means to measure external fairness; and (b) to other senior employees of our company, as a means to measure internal fairness.
Our Compensation Programs are Designed to Reward Overall Company Performance
Our company designs its executive compensation programs so that an individuals total compensation is directly correlated with company and, in some cases, individual performance. Our executive compensation program emphasizes performance-based annual incentives because they permit the Compensation Committee to incentivize our NEOs, in any particular year, to pursue particular objectives that the Compensation Committee believes are consistent with the overall goals and long-term strategic direction that the Board has set for our company.
For 2006, the committee expanded the focus beyond EBITDA and individual goals to include Return on Invested Capital and Free Cash Flow as performance measures. Inclusion of the additional measures was intended to ensure that our managements decisions are balanced to consider earnings generation, cash flow, and the use of capital. The committee believed these goals more closely align incentive compensation with our companys goals of improving its return on invested capital and reducing debt over the long term. The committee believed that inclusion of these additional performance measures would encourage executives and other employees to focus on the overall performance of, and creation of value to, our company as reflected by the various integrated measures, rather than on any single measure. For 2006, the Compensation Committee and company management also placed greater emphasis on developing goals that were specific to and appropriate for each level of management.
In structuring our companys executive incentive compensation program for 2007, the Compensation Committee continued the focus on EBITDA, Return on Invested Capital, and Free Cash Flow as the metrics used for our incentive compensation program for NEOs, but eliminated individual performance goals. The committee believes that at this time in our companys development, it is more appropriate to align the compensation structure to these three company performance metrics only. We disclose performance targets to each member of management that is eligible to receive incentive compensation to ensure that each member understands our goals and the related potential incentive compensation.
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The Elements of Our Executive Compensation Program
The elements of our executive compensation program are as follows:
Cash compensation in the form of base salary and incentive compensation (performance- based bonuses);
Equity-based awards;
Deferred compensation plans; and
Other components of compensation.
In addition, the employment agreements with each of our executive officers provide for certain retirement benefits and potential payments upon termination of employment for a variety of reasons, including a change in control of our company. Each of the elements of our executive compensation program is discussed in the following paragraphs.
Cash Compensation. We include base salary as part of each NEOs compensation package because the Compensation Committee believes it is appropriate that some portion of the NEOs compensation be provided in a fixed amount of cash. We include performance-based annual incentives because they permit the Compensation Committee to incentivize our NEOs, in any particular year, to pursue particular objectives that the Compensation Committee believes are consistent with the overall goals and long-term strategic direction that the Board has set for our company.
Base Salary. Each executive officers employment agreement specifies a minimum level of base salary for the executive. The Compensation Committee, however, is free to set each NEOs salary at any higher level that it deems appropriate. Accordingly, the Compensation Committee generally evaluates and sets the base salaries for our NEOs annually. Changes in each NEOs base salary on a year-over-year basis depend upon the Compensation Committees assessment of company and individual performance. In February 2006 and February 2007, the Compensation Committee set each NEOs base salary, as follows:
| Name | 20062007 Base Salary |
2007-2008 Base Salary |
| John Zillmer $ 875,500 | $ 925,000 | |
| Donald Slager | 772,500 | 800,000 |
| Peter Hathaway | 597,400 | 615,000 |
| Edward Evans | 432,600 | 446,000 |
| Steven Helm | 433,527 |
* Mr. Helm retired in August 2006.
Assuming target performance levels are met, the amount of cash compensation that we provide in the form of salary generally is used as a measure for the amount of annual cash incentive under our incentive plan, which is described below. For 2006, the targeted annual cash incentive for each of the NEOs was 100% of base salary, except for our CEO, who had a targeted incentive percentage of 115% of base salary. These weightings reflect the Compensation Committees objective of ensuring that a substantial amount of each NEOs total cash compensation is tied to the achievement of specific performance goals.
Cash Incentive Compensation. The EICP is a performance-based incentive plan that provides additional cash or equity-based compensation to NEOs only if, and to the extent that, performance conditions set by the Compensation Committee are met. The Compensation Committee sets the performance criteria and target incentive compensation for each NEO under a Senior Management Incentive Plan or other plan for each year, which is established under the EICP at the outset of each year. In determining the amount of target annual incentives under the EICP, the Compensation Committee considers several factors, including:
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(i) the target incentives set, and actual incentives paid, in recent years;
(ii) the desire to ensure that a substantial portion of total compensation is performance-based; and
(iii) the advice of Cook as to compensation practices at other companies in the Peer Group.
Our company uses an iterative process to develop the performance objectives that will be used to determine whether and to what extent NEOs will receive payments under the EICP. Based on a review of business plans, members of management, including the CEO and Chief Personnel Officer, develop preliminary recommendations for review by the Compensation Committee. The Compensation Committee reviews managements preliminary recommendations and establishes final goals. In establishing final goals, the Compensation Committee strives to ensure that the incentives provided by the EICP are consistent with the strategic goals set by the Board, that the goals set are sufficiently ambitious so as to provide a meaningful incentive, and that bonus payments, assuming target levels of performance are attained, will be consistent with the overall NEO compensation program established by the Compensation Committee.
As described under Item 11, Executive Compensation Narrative to Summary Compensation Table and Plan-Based Awards Table Annual Cash Incentive Compensation, the Compensation Committee established the 2006 Senior Management Incentive Plan (the 2006 Senior MIP) under the EICP. The 2006 Senior MIP utilized a combination of overall company financial performance goals, weighted at 80%, and individual performance goals, weighted at 20%. The three overall company financial measures under the 2006 Senior MIP were weighted as follows:
Year-over-year Company Consolidated EBITDA Growth: 70%
Return on Invested Capital: 15%
Free Cash Flow: 15%
See Item 11, Executive Compensation Narrative to Summary Compensation Table and Plan-Based Awards Table Annual Cash Incentive Compensation for a description of each of the company financial measures.
The Compensation Committee selected year-over-year Company Consolidated EBITDA Growth, Return on Invested Capital, and Free Cash Flow as the relevant company-wide performance criteria because the committee believes that these criteria are consistent with the overall goals and long-term strategic direction that the Board has set for our company. Further, these criteria are closely related to or reflective of our companys financial and operational improvements, growth, and return to stockholders. EBITDA is an important non-GAAP valuation tool that potential investors use to measure our companys profitability against other companies in our industry. Return on invested Capital focuses attention on how efficiently and effectively management deploys our capital. Sustained returns on invested capital in excess of our companys cost of capital creates value for our stockholders over the long term. Free Cash Flow is another non-GAAP measurement tool that our management uses to assess how well we are achieving our goal of reducing our outstanding debt over time, which also contributes to creation of value for our stockholders and creditors. While each of these metrics is important on a stand-alone basis, the committee believes the combined focus on all three of these metrics will help drive overall operational success for our company.
The Compensation Committee strives to set the threshold, target, and stretch (i.e. maximum), company performance goals at levels such that the relative likelihood that our company will achieve such goals remains consistent from year to year. The Compensation Committee set company performance goals under the 2006 Senior MIP as follows:
Threshold performance goals for each of the financial measures were set at levels that reflected a slight improvement over our companys actual results in fiscal 2005;
Target performance goals were set at levels that corresponded to the fiscal 2006 budget amounts for each of the financial measures; and
Stretch performance goals were set at levels that were higher than the budget amounts for each of the financial measures. The Compensation Committee believed that each of the stretch performance goals was aggressive but attainable by our company.
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The Compensation Committee structured incentive payments under the 2006 Senior MIP so that our company would provide significant rewards to executive officers for superior performance, make smaller payments if our company achieved financial performance levels that exceed the threshold level of required performance but did not satisfy the target levels, and not make incentive payments if our company did not achieve the threshold minimum corporate financial performance levels established at the beginning of the fiscal year. The maximum annual incentive payment for our CEO under the 2006 Senior MIP was the lesser of 230% of his base salary or $5,000,000, and the maximum annual incentive payment for each of the other NEOs under the 2006 Senior MIP was the lesser of 150% of base salary or $3,000,000.
As stated above, the Compensation Committee selected individual objectives pursuant to which each of the NEOs was eligible to receive up to 20% of his incentive compensation under the 2006 Senior MIP. These individual objectives included measures on topics such as driver and employee turnover, safety, succession planning, capital management and strategic planning.
As described under Item 11, Executive Compensation Narrative to Summary Compensation Table and Plan-Based Awards Table Annual Cash Incentive Compensation, in February 2007 the Compensation Committee certified that (a) our companys EBITDA for 2006 was between the target and stretch financial performance goals for year-over-year Company Consolidated EBITDA Growth and (b) our Return on Invested Capital and Free Cash Flow for 2006 exceeded the stretch goals for these performance criteria. The committee also determined that each of the NEOs achieved his individual performance goals under the 2006 Senior MIP. Accordingly, we paid cash incentive compensation to each of the NEOs for 2006 set forth under Item 11, Executive Compensation Summary Compensation Table.
The aggregate payout percentage with respect to company performance targets was 132% of target for each NEO, except the CEO. The aggregate payout percentage with respect to company performance targets for the CEO was 164% of target. By way of comparison, in 2005, our company achieved performance for EBITDA in excess of threshold level, but below target, which resulted in a payout percentage with respect to company performance of 36% of each participant target award opportunity. In 2004, our company failed to achieve the threshold level for EBITDA and no payout was made with respect to company performance.
In February 2007, the Compensation Committee adopted the 2007 Senior Management Incentive Plan (the 2007 Senior MIP) under the EICP. The Compensation Committee established company performance goals under the 2007 Senior MIP with respect to EBITDA, Return on Invested Capital, and Free Cash Flow but did not set any individual performance goals for 2007. As described above, the Compensation Committee set the threshold, target, and stretch company performance goals under the 2007 Senior MIP at levels such that the likelihood that our company will achieve those goals is consistent with goals set in previous years. As described under Item 11, Executive Compensation Narrative to Summary Compensation Table and Plan-Based Awards Table Annual Cash Incentive Compensation, each NEO may convert a portion of his incentive compensation under the 2007 Senior MIP into RSUs, with a 50% matching contribution of additional RSUs by our company. The Compensation Committee adopted this feature of the 2007 Senior MIP in order to encourage executives to take a portion of their incentive compensation in the form of equity-based compensation, which will more closely align their interests with the interests of our stockholders.
In 2002, our company established a Long-Term Incentive Plan (the LTIP) under which the NEOs and certain other key employees participate during performance periods established by the Compensation Committee. The last LTIP performance period was implemented for the 2005-2007 performance cycle. In 2006, the Compensation Committee determined not to implement any further LTIP performance cycles after 2005. Instead, the committee decided that our company would provide long-term compensation in the form of regular annual grants of stock options that vest based upon the executives continued service with our company. The Compensation Committee believes that these option grants will provide appropriate long-term incentive opportunities tied directly to stock price appreciation, which will align our executives interests with the interests of our stockholders. In February 2007, the Compensation Committee certified that our company had not
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achieved the goals set for the 2004-2006 LTIP performance cycle. Accordingly, our company did not pay any LTIP awards to the NEOs for the 2004-2006 performance cycle.
Equity Compensation. As described above, our company provides a substantial portion of NEO compensation in the form of equity awards because the Compensation Committee believes that such awards serve to encourage our executives to create value for our company over the long-term, which aligns the interests of our NEOs with the interests of our stockholders and creditors. We currently make equity awards to our NEOs pursuant to our 2006 Incentive Stock Plan (the 2006 Stock Plan), which provides for awards in the form of stock options, restricted stock, restricted stock units, and other equity-based awards. The mix of cash and equity-based awards, as well as the types of equity-based awards, granted to our NEOs varies from year to year.
Each year, the Compensation Committee generally approves an equity award or awards for each NEO. The amount of the award depends on the Compensation Committees assessment, for that year, of the appropriate balance between cash and equity compensation. In making that assessment, the Compensation Committee considers various factors, such as the relative merits of cash and equity as a device for retaining and incentivizing NEOs and the practices of other companies in the Peer Group, as reported to the Compensation Committee by Cook. In addition, the Compensation Committee considers individual performance, individual pay relative to peers, and the value of already outstanding grants in determining the size and type of equity-based awards to each NEO. The Compensation Committee believes that a mix of equity and cash compensation provides balance by incentivizing the NEOs to pursue specific short and long-term performance goals and value creation while aligning the NEOs interests with our stockholders and creditors interests. The Compensation Committee considered the value of existing equity grants and the components of total annual compensation in determining the appropriate grant value for each NEO for the 2006 annual grant, which was granted December 30, 2005. The selected grant value was allocated between options and RSUs based on the recommendations provided by Cook.
For the 2007 annual grant, Cook (1) recommended ranges for the size of equity awards to be made to our NEOs based on Peer Group criteria and (2) reviewed the proposed NEO grants in relation to salaries and other elements of NEO compensation. For example, Cook recommended that the value of the aggregate equity grants to our NEOs, non-NEOs and non-employee directors on an annual basis should be approximately 0.5% of our companys market capitalization. Ultimately, the Compensation Committee approved grants of equity awards to each of the NEOs that were within ranges recommended by Cook. Such grants reflect overall compensation performance considerations, including past performance, future potential performance, and executive retention.
Based upon the advice of a previous compensation consultant, in previous years our company shifted its equity-based awards for senior management from stock options to RSUs. Beginning with the 2006 annual grant, Cook advised the Compensation Committee that we should return to stock options as our primary form of equity-based compensation because options provide long-term incentive opportunities that are tied directly to share price appreciation, which more closely aligns the NEOs interests with our stockholders interests. In order to transition our equity grants back to options, for 2006, our NEOs generally received 70% of the total value of their 2006 equity awards in the form of stock options and 30% in the form of RSUs, with the exception of the CEO, who received approximately 50% of the total value in stock options and 50% in the form of RSUs. These allocations effectively increased the proportion of the equity award granted in options, which are of value to the executive only upon an increase in the market price of our common stock. In December 2006, the Compensation Committee approved equity-based grants to the NEOs for 2007 solely in the form of stock options that vest based upon the executives continued service with our company. See Item 11, Executive Compensation Grants of Plan-Based Awards.
During 2006, the Compensation Committee also developed a new compensation philosophy of granting equity compensation with intrinsic value to management personnel below the NEO level who make significant contributions to the financial performance of our company. Accordingly, in December 2006 our company granted RSUs to certain top performers identified by our senior management. Top performers were defined as the top 10% of performers in each relevant employee level. The NEOs were not eligible for this grant.
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Practices Regarding the Grant of Options and Other Equity-Based Awards. Our company generally makes grants to our NEOs and other senior management on a once-a-year basis. Accordingly, the Compensation Committee makes all such grants of options or other equity-based awards to our executive officers either at the last regularly scheduled meeting of each year or at the first regularly scheduled meeting of the following year. The Compensation Committee granted equity-based awards for 2006 on December 30, 2005. These awards were effective immediately for the NEOs other than our CEO, and were effective on January 3, 2006, in the case of our CEO. The effective date of the grant for our CEO was subsequent to the action date due to individual grant limits within our plan. The Compensation Committee granted equity-based awards to our NEOs and other executives for 2007 at its regularly scheduled meeting on December 5, 2006. The Compensation Committee retains the discretion to make additional awards to NEOs at other times in connection with the initial hiring of a new officer, for retention purposes, or otherwise. We do not have any program, plan or practice to time annual or ad hoc grants of stock options or other equity-based awards in coordination with the release of material non-public information or otherwise.
All option awards made to our NEOs, or any of our other employees or directors, are made pursuant to our 2006 Stock Plan with an exercise price equal to the fair market value of our common stock on the date of grant. Fair market value is defined under the 2006 Stock Plan to be the closing market price of a share of our common stock on the date of grant. We do not have any program, plan or practice of awarding options and setting the exercise price based on the stocks price on a date other than the grant date. We do not have a practice of determining the exercise price of option grants by using average prices or lowest prices of our common stock in a period preceding, surrounding or following the grant date. While the Compensation Committees Charter permits delegation of the Compensation Committees authority to grant options in certain circumstances, all grants to NEOs are made by the Compensation Committee itself and not pursuant to delegated authority. From time to time the Compensation Committee authorizes our CEO to make a limited number of grants to new employees and other non-NEOs in accordance with the committees guidelines and with the consent of the Chair of the Compensation Committee.
Deferred Compensation Plans. Our deferred compensation plans allow certain employees, including the NEOs, to defer the receipt of salary and/or bonus payments and to defer the settlement of RSUs. We provide this benefit because the Compensation Committee wishes to permit our employees to defer the obligation to pay taxes on certain elements of their compensation while also potentially receiving earnings on deferred amounts. The deferred compensation plans were implemented to motivate and ensure the retention of key employees by providing them with greater flexibility in structuring the timing of their compensation payments. We believe that our deferred compensation plans are important retention and recruitment tools for our company, as many of the companies with which we compete for executive talent provide a similar plan to their senior employees.
Other Components of Compensation. Our company provides certain other forms of compensation and benefits to the CEO and the other executive officers, including perquisites and 401(k) matching contributions, as discussed below. The Compensation Committee has reviewed these other components of compensation in relation to the total compensation of the CEO and the other NEOs, and determined that they are reasonable and appropriate.
Perquisites. Our NEOs receive various perquisites provided by or paid for by our company. These perquisites include automobile allowances, memberships in social and professional clubs, and personal tax and financial planning services. We provide these perquisites because many companies in the Peer Group provide similar perquisites to their named executive officers, and we believe that it is necessary that we do the same for retention and recruitment purposes.
The Compensation Committee regularly reviews the perquisites that we provide to our NEOs in an attempt to ensure that the perquisites continue to be appropriate in light of the Compensation Committees overall goal of designing a compensation program for NEOs that maximizes the interests of our stockholders. For example, during 2006 the Board reviewed our companys policy regarding personal use of the corporate aircraft and determined that this was not an appropriate use of company resources. As a result, after July 2006 our employees were no longer permitted to use our corporate aircraft for non-business purposes.
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401(k) Plan. We maintain a 401(k) Plan for our employees, including our NEOs, because we wish to encourage our employees to save some percentage of their cash compensation, through voluntary deferrals, for their eventual retirement. The 401(k) Plan permits employees to make such deferrals in a manner that is relatively tax efficient. Our company may, in its discretion, match employee deferrals. For the 2006 plan year, our company made matching contributions equal to up to 50% of the first 5% of compensation deferred by employees (subject to IRS limits and non-discrimination testing).
Supplemental Retirement Compensation. We have a Supplemental Executive Retirement Plan (the SERP) for our NEOs and certain other members of senior management. See Item 11, Executive Compensation Retirement Plans for a description of these retirement benefits. The Compensation Committee believes that this plan serves a critically important role in the retention of our senior executives, as these executives must complete a minimum number of years of service and, in some cases, attain a certain minimum age, to be eligible for benefits. The plan thereby encourages our most senior executives to remain employed by us and to continue their work on behalf of our stockholders.
Our Chief Financial Officer participates in a tax-qualified defined benefit pension plan sponsored by Browning-Ferris Industries, Inc., under which he has not earned any new benefits since the plan was frozen in 1999. Otherwise, we do not have any tax-qualified defined benefit pension plan for any of our NEOs.
Post-Termination Compensation. We have entered into employment agreements with certain members of our senior management team, including each of the NEOs. Each of these agreements provides for certain payments and other benefits if the executives employment terminates under certain circumstances, including in the event of a change in control. See Item 11, Executive Compensation Narrative to Summary Compensation Table and Plan-Based Awards Table Employment Agreements and Item 11, Executive Compensation Potential Payments upon Termination or Change in Control for a description of these severance and change in control benefits.
The Compensation Committee believes that these severance and change in control arrangements are an important part of overall compensation for our NEOs because they help to secure the continued employment and dedication of our NEOs, notwithstanding any concern that they might have regarding their own continued employment prior to or following a change in control. The Compensation Committee also believes that these arrangements are important as a recruitment and retention device, as most of the companies with which we compete for executive talent have similar agreements in place for their senior employees.
The executive employment agreements also contain provisions that prohibit the executive from disclosing our companys confidential information and that prohibit the executive from engaging in certain competitive activities or soliciting any of our employees, customers, potential customers, or acquisition prospects. An executive will forfeit his right to receive post-termination compensation if he breaches these or other restrictive covenants in the employment agreements. We believe that these provisions help ensure the long-term success of our company.
Stock Ownership and Retention Guidelines
In February 2006, the Board established stock ownership and retention guidelines for our directors and executive officers. See Item 11, Executive Compensation Narrative to Summary Compensation Table and Plan-Based Awards Table Stock Ownership and Retention Guidelines for Executive Officers and Item 11, Executive Compensation Compensation of Directors Stock Ownership and Retention Guidelines for Directors for a description of these guidelines. These guidelines are designed to encourage our directors and executive officers to increase and maintain their equity stake in our company and thereby to more closely link their interests with those of our stockholders.
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The Effect of Regulatory Requirements on Our Executive Compensation
Code Section 162(m). Section 162(m) of the Internal Revenue Code of 1986, as amended (Code Section 162(m)) provides that compensation in excess of $1,000,000 paid to the Chief Executive Officer or to any of the other four most highly compensated executive officers of a public company will not be deductible for federal income tax purposes unless such compensation is paid pursuant to one of the enumerated exceptions set forth in Code Section 162(m). Our company attempts to structure its compensation programs such that compensation paid will be tax deductible by our company whenever that is consistent with our companys compensation philosophy. The deductibility of some types of compensation payments, however, can depend upon the timing of an executives vesting or exercise of previously granted rights. Interpretations of and changes in applicable tax laws and regulations, as well as other factors beyond our companys control, also can affect deductibility of compensation.
Our companys primary objective in designing and administering its compensation policies is to support and encourage the achievement of our companys strategic goals and to enhance long-term stockholder value. For these and other reasons, the Compensation Committee has determined that it will not necessarily seek to limit executive compensation to the amount that will be fully deductible under Code Section 162(m). The Compensation Committee will continue to monitor developments and assess alternatives for preserving the deductibility of compensation payments and benefits to the extent reasonably practicable, as determined by the Compensation Committee to be consistent with our companys compensation policies and in the best interests of our company and its stockholders.
Of the compensation paid to each of the NEOs in 2006, the following amounts were not deductible by our company under Code Section 162(m):
| John J. Zillmer | $ 420,298 |
| Donald W. Slager | 593,515 |
| Peter S. Hathaway | 516,071 |
| Edward A. Evans | 70,716 |
| Steven M. Helm |
As a result of the nondeductibility of these amounts for tax purposes, the incremental tax cost to our company was $584,539.
Code Section 409A. Code Section 409A generally changes the tax rules that affect most forms of deferred compensation that were not earned and vested prior to 2005. Although complete guidance regarding Code Section 409A has not been issued, the Compensation Committee takes Code Section 409A into account in determining the form and timing of compensation paid to our executives. Our company operates and administers its compensation arrangements in accordance with a reasonable good faith interpretation of the new rules.
Code Sections 280G and 4999. Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended (Code Sections 280G and 4999) limit our companys ability to take a tax deduction for certain excess parachute payments (as defined in Code Sections 280G and 4999) and impose excise taxes on each executive that receives excess parachute payments in connection with his or her severance from our company in connection with a change in control. The Compensation Committee considers the adverse tax liabilities imposed by Code Sections 280G and 4999, as well as other competitive factors, when it structures certain post-termination compensation payable to our NEOs. The potential adverse tax consequences to our company and/or the executive, however, are not necessarily determinative factors in such decisions.
Accounting Rules. Various rules under generally accepted accounting practices determine the manner in which our company accounts for grants of equity-based compensation to our employees in our financial statements. The Compensation Committee takes into consideration the accounting treatment of alternative grant proposals under SFAS 123(R) when determining the form and timing of equity compensation grants to employees, including our NEOs. The accounting treatment of such grants, however, is not determinative of the type, timing, or amount of any particular grant of equity-based compensation to our employees.
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Conclusions
During 2006 and the first few weeks of 2007, the Compensation Committee took the actions described in this Compensation Discussion and Analysis in order to enhance and improve the effectiveness of our executive compensation policies by placing greater emphasis on performance-based compensation and through other refinements to our executive compensation structure, including the following:
utilizing stock options exclusively for NEO equity-based compensation for 2007 because they are inherently more performance-based than RSUs;
focusing on company-wide financial performance goals and measures and eliminating individual objectives for NEOs because of the difficulty in measuring achievement of an individuals objectives;
adding the feature in the 2007 Senior MIP that allows participants to convert up to 40% of their incentive compensation into RSUs, with an additional 50% matching contribution by our company; and
deciding not to implement any further LTIP performance cycles in favor of a greater emphasis on equity awards.
The Compensation Committee reviewed all components of the NEOs compensation for 2006 and proposed compensation for 2007, as described above, including the potential payouts under the severance and change-in-control provisions in each of the NEOs employment agreements. A detailed tally sheet setting forth each of the above components and affixing dollar amounts under various payout scenarios was prepared for and reviewed by the Compensation Committee. Updated tally sheets are included in meeting materials for each Compensation Committee meeting and the committee regularly reviews these updated tally sheets. The Compensation Committee also takes the following factors into consideration, although none of these factors are persuasive individually or in the aggregate:
Each NEOs total compensation, including the value of all outstanding equity awards granted to the NEO, and future compensation opportunities;
Internal pay equity;
Our stock ownership and retention policies;
The competitive environment for recruiting NEOs, including what the relevant competitors pay; and
The need to provide each element of compensation and the amounts targeted and delivered.
When the Compensation Committee considers any individual component of an executives total compensation, it takes into consideration the aggregate amounts and mix of all components of the officers compensation, including accumulated (realized and unrealized) option and restricted stock grants. Based on this review, the Compensation Committee concluded that the amounts payable to each NEO under each individual element, as well as the NEOs total compensation in the aggregate, were reasonable and not excessive, as well as consistent with the guidelines suggested by Cook. The Compensation Committee further concluded that our companys executive compensation programs meet our objectives of attracting, retaining, incentivizing, and rewarding talented executives who can contribute to our long-term success and thereby build value for our stockholders.
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Compensation Committee Interlocks And Insider Participation
During fiscal 2006, none of the members of the Compensation Committee was a current or former officer or employee of our company, except for Charles H. Cotros, who served as our interim Chief Executive Officer from September 2004 through May 2005. During fiscal 2006, none of the members of the Compensation Committee had any relationship requiring disclosure under Item 404 or Item 407(e)(4)(iii) of Regulation S-K.
Compensation Committee Report
The Management Development/Compensation Committee (the Compensation Committee) of the Board of Directors oversees our companys compensation program on behalf of the Board. In fulfilling its oversight responsibilities, the Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis set forth in this Form 10-K. Based upon the review and discussions referred to above, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Form 10-K.
Submitted by the Management/Development Compensation Committee:
Nolan Lehmann (Chair)
Charles H. Cotros
Stephanie Drescher
James A. Quella
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The following table provides summary information about compensation expensed or accrued by our company during the fiscal year ended December 31, 2006, for (a) our Chief Executive Officer, (b) our Chief Financial Officer, (c) the two other executive officers other than our CEO and CFO serving at the end of the fiscal year ended December 31, 2006; and (d) one additional individual for whom disclosure would have been provided but for the fact that he was not serving as an executive officer at the end of fiscal 2006 (collectively, the Named Executive Officers or NEOs):
Summary Compensation Table
| Name and Principal Positions(s) | Year | Salary | Stock Awards (1) | Option Awards (2) | Non-Equity Incentive Plan Compensation (3) | Change in Pension Value (4) | All Other Compensation (5) | Total |
| John J. Zillmer Chairman of the Board of Directors and Chief Executive Officer | 2006 | $ 869,125 | $ 524,279 | $ 1,275,512 | $ 1,650,500 | $ 385,826 | $ 184,313 | $ 4,889,555 |
| Donald W. Slager President and Chief Operating Officer | 2006 | 766,875 | 507,910 | 248,660 | 1,019,400 | 509,958 | 38,909 | 3,091,712 |
| Peter S. Hathaway Executive Vice President and Chief Financial Officer | 2006 | 593,050 | 416,740 | 139,186 | 788,400 | 583,880 | 36,604 | 2,557,860 |
| Edward A. Evans Executive Vice President and Chief Personnel Officer | 2006 | 429,450 | 70,716 | 269,494 | 570,900 | 140,759 | 113,775 | 1,595,094 |
| Steven M. Helm Executive Vice President, General Counsel and Corporate Secretary (6) |
(1) The amounts shown in this column represent the dollar amounts recognized for financial statement reporting purposes in fiscal 2006 with respect to shares of restricted stock and restricted stock units, as determined pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). See Note 11 to the Consolidated Financial Statements included in this Form 10-K for a discussion of the relevant assumptions used in calculating grant date fair value pursuant to SFAS 123(R). For further information on these awards, see the Grants of Plan-Based Awards table in this Summary Compensation Section of this Form 10-K. Under the terms of his employment, Mr. Helm forfeited 18,805 RSUs when he retired. There were no other forfeitures of RSUs by any of the NEOs in 2006.
(2) The amounts shown in this column represent the dollar amount recognized for financial statement reporting purposes in each fiscal year with respect to options granted, as determined pursuant to SFAS 123(R). See Note 11 to the Consolidated Financial Statements included in this Form 10-K for a discussion of the relevant assumptions used in calculating grant date fair value pursuant to SFAS 123(R). For further information on these awards, see the Grants of Plan-Based Awards table in this Summary Compensation Section of this Form 10-K. There were no forfeitures of options by any of the NEOs in 2006.
(3) The amounts shown in this column constitute payments made under the 2006 Senior MIP. Awards under the 2006 Senior MIP were calculated and paid in 2007 but are included in compensation for 2006, the year in which they were earned. See Item 11, Executive Compensation Narrative to Summary Compensation Table and Plan-Based Awards Table for more information regarding the 2006 Senior MIP.
(4) The amounts shown in this column represent the increase in actuarial values of each of the executive officers benefits under our SERP during fiscal 2006. In addition, Mr. Hathaway participates in a tax-qualified pension plan sponsored by Browning-Ferris Industries, Inc., under which no new benefits have been earned since the plan was frozen in 1999. The change in actuarial value of this benefit is included for Mr. Hathaway.
(5) A breakdown of the amounts shown in this column for 2006 for each of the NEOs is set forth in the following table. Amounts shown below for 401(k) matching contributions are subject to change when the results of nondiscrimination tests for the plan year ending December 31, 2006 are finalized.
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| Mr. Zillmer | Mr. Slager | Mr. Hathaway | Mr. Evans | Mr. Helm | |
| Perquisites and other personal benefits $ | 178,813 | $ 33,409 | $ 31,104 | $ 108,275 | $ 16,791 |
| Payments in connection with retirement | 115,306 | ||||
| 401(k) matching contribution | 5,500 | 5,500 | 5,500 | 5,500 | 5,055 |
| Tax gross-up | 3,577 | ||||
| Total | $ 184,313 | $ 38,909 | $ 36,604 | $ 113,775 | $ 140,729 |
Payments to Mr. Helm in connection with his retirement reflect an adjustment during the first six months following his retirement in accordance with Code Section 409A. The difference between the adjusted amounts paid to Mr. Helm and the amounts to which he is otherwise entitled will be paid upon the expiration of the six-month period. Perquisites and other personal benefits, other than corporate aircraft usage, are valued at actual amounts paid to each provider of such perquisites and other personal benefits. No personal use of our aircraft was permitted after July 2006. Personal usage prior to that date is calculated using an incremental cost methodology. This methodology calculates the incremental cost to our company for personal use of our aircraft based on the cost of fuel and oil per hour of flight; trip-related inspections, repairs, and maintenance; crew travel expenses; on-board catering; trip-related flight planning services; landing, parking, and hanger fees; supplies; passenger ground transportation; and other variable costs. Since our aircraft is used primarily for business travel, we do not include the fixed costs that do not change based on personal usage, such as pilots salaries, the purchase or leasing costs of company aircraft, and the cost of maintenance not related to trips. The following table sets forth the types of perquisites and other personal benefits that we paid for or provided to our NEOs and the amount that we paid for perquisites and other personal benefits during 2006:
| Mr. Zillmer | Mr. Slager | Mr. Hathaway | Mr. Evans | Mr. Helm | |
| Personal use of company aircraft | $ 168,517 | $ 12,292 | $ | $ 91,918 | $ |
| Automobile allowance | 7,200 | 7,200 | 7,200 | 7,200 | 4,985 |
| Club dues | 3,096 | 3,800 | 4,016 | 2,320 | 1,207 |
| Income tax and planning services | 10,117 | 19,888 | 6,837 | 2,599 | |
| Other personal benefits | 8,000 | ||||
| Total | $ 178,813 | $ 33,409 | $ 31,104 | $ 108,275 | $ 16,791 |
(6) Mr. Helm retired from his position with the company effective August 31, 2006. See Item 11, Executive Compensation Potential Payments upon Termination or Change-in-Control for further discussion regarding the terms of Mr. Helms retirement.
The following table sets forth certain information with respect to grants of awards to the NEOs under our non-equity and equity incentive plans during 2006.
Grants Of Plan-Based Awards 2006
| Name | Grant Date | Action Date | Extimated Possible Payouts Under Non-Equity Incentive Plan Awards (1) | All other Stock Awards: Number of Shares of Stock or Units (#) | All Other Optin Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) (2) | |||
| Threshold ($) | Target ($) | Maximum ($) | ||||||||
| John J. Zillmer | 01/03/06 | 12/30/05 | $ | $ | $ | 160,000 (3) | $ | $ 1,424,000 | ||
| 01/03/06 | 12/30/05 | 495,000 (4) | 8.90 | 2,128,500 | ||||||
| 02/09/06 | 02/09/06 | 50,341 | 1,006,825 | 2,013,650 | ||||||
| 12/05/06 | 12/05/06 | 425,000 (5) | 12.91 | 2,486,250 | ||||||
| Donald W. Slager |
02/09/06 | 02/09/06 | 38,625 | 772,500 | 1,158,750 | |||||
| 12/05/06 | 12/05/06 | 166,600 (5) | 12.91 | 974,610 | ||||||
| Peter S.
Hathaway |
02/09/06 | 02/09/06 | 29,870 | 597,400 | 896,100 | |||||
| 12/05/06 | 12/05/06 | 83,300 (5) | 12.91 | 487,305 | ||||||
| Edward A. Evans |
02/09/06 | 02/09/06 | 21,630 | 432,600 | 648,900 | |||||
| 12/05/06 | 12/05/06 | 83,300 (5) | 12.91 | 487,305 | ||||||
| Steven M. Helm (6) |
02/09/06 | 02/09/06 | 21,676 | 433,527 | 650,291 | |||||
(1) Amounts shown represent awards granted under the 2006 Senior MIP, which was established pursuant to the EICP. The amount actually earned by each NEO is reported as Non-Equity Incentive Plan Compensation in the Summary Compensation Table. Amounts are considered earned in 2006 although they were not paid until 2007.
(2) Represents the grant date fair value of each award as determined pursuant to SFAS 123(R).
(3) Consists of RSUs awarded as part of our annual grant for 2006. The RSUs granted to the other NEOs as part of the annual grant for 2006 were made effective December 30, 2005 and, therefore, do not appear on this table. All of such RSUs were granted under the 2006 Stock Plan and vest at the rate of 20% per year on each of the first through fifth anniversaries of the grant date.
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(4) Consists of options to purchase shares of our common stock awarded as part of our annual grant for 2006. The options granted to the other NEOs as part of the annual grant for 2006 were made effective December 30, 2005 and, therefore, do not appear on this table. All of such options were granted under the 2006 Stock Plan and vest at the rate of 20% per year on each of the first through fifth anniversaries of the grant date.
(5) Consists of options to purchase shares of our common stock awarded as part of our annual grant for 2007 compensation. The options were granted under the 2006 Stock Plan and vest at the rate of 25% per year on each of the first through fourth anniversaries of the grant date.
(6) Mr. Helm retired from his position with our company effective August 31, 2006. Under the terms of his employment, he forfeited any payment under the 2006 Senior MIP when he retired.
Narrative to Summary Compensation Table and Plan-Based Awards Table
Employment Agreements. During 2006, all of the NEOs were employed pursuant to agreements with our company. Each employment agreement sets forth, among other things, the NEOs base salary, bonus opportunities, entitlement to participate in our benefit plans and to receive equity awards, and post-termination benefits and obligations.
Mr. Zillmers employment agreement has an initial term that expires on May 27, 2007. Thereafter, the agreement will automatically renew for one-year periods, unless either party gives notice of its intent not to renew at least 90 days prior to the end of the then-current term. The employment agreements with Mr. Slager and Mr. Hathaway provide for terms consisting of continuous periods of two years, such that at any given time the remaining term of each agreement is two years. Mr. Evans employment agreement has an initial term that expires on September 19, 2007. Thereafter, the agreement will automatically renew for one-year periods, unless the agreement is terminated by either party pursuant to the terms of that agreement. Mr. Helms employment agreement terminated in connection with his retirement from our company on August 31, 2006. See Item 11, Executive Compensation Potential Payments upon Termination or Change-in-Control Retirement of Steven M. Helm.
Each employment agreement specifies a minimum level of base salary for the executive, but gives the Compensation Committee authority to increase the executives base salary from time to time. The Compensation Committee generally evaluates and sets the base salaries for our NEOs on an annual basis. The base salary for each of our NEOs for 2006-2007 and 2007-2008 is set forth under Item 11, Executive Compensation Compensation Discussion and Analysis The Elements of Our Executive Compensation Program Cash Compensation.
The employment agreements also provide that each executive is entitled to (a) annual cash incentive compensation in an amount to be determined by the Board, with a target goal equal to 100% of the executives base salary (115% in the case of Mr. Zillmer, and in the case of Mr. Evans, up to the maximum amount permitted under our annual incentive compensation plan(s), which is 100%); (b) four weeks paid vacation; (c) an automobile allowance of $600 per month; (d) club membership dues; (e) participation in incentive, savings, retirement, and stock plans maintained by our company for its executive officers; (f) participation in welfare benefit plans maintained by our company for the benefit of its employees generally; (g) reimbursement of business expenses; and (h) indemnification and directors and officers insurance coverage.
Mr. Zillmers employment agreement provides that while Mr. Zillmer remains employed by our company, he will retain at least 50% of the net shares received upon the exercise of options or vesting of restricted stock (after deducting shares to satisfy applicable tax obligations incurred as the result of any exercise or vesting event) until such time as he has accumulated stock with a value of at least three times his annual salary. In addition, in 2005 our company paid Mr. Zillmer $300,000 to cover expenses incurred in relocating to the Phoenix-Scottsdale metropolitan area.
Mr. Evans employment agreement provides that while Mr. Evans remains employed by our company, he will retain at least 50% of the net shares received upon the exercise of options or vesting of RSUs (after deducting shares to satisfy applicable tax obligations incurred as the result of any exercise or vesting event) until such time as he has accumulated stock with a value of at least two and one-half times his annual salary. In addition, in 2005 our company paid Mr. Evans (1) a one-time signing bonus of $150,000 and (2) $200,000 to be used to cover expenses associated with relocating to the Phoenix-Scottsdale metropolitan area.
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The employment agreements also provide for severance payments upon termination of employment as a result of death or disability, termination by our company without cause, termination by the executive for good reason, or termination in connection with a change in control. In addition, the employment agreements provide for payments upon retirement if age and/or length of service requirements have been met. See Item 11, Executive Compensation Potential Payments Upon Termination or Change in Control for a description of these provisions in the employment agreements.
Annual Cash Incentive Compensation. In February 2006, the Board approved the EICP. Our stockholders approved the EICP at the 2006 Annual Meeting. The EICP is designed to preserve the tax deductibility under Code Section 162(m) of payments made to our CEO and the other four most highly compensated executives in any given year. The performance period under the EICP is our companys fiscal year or such other period as may be designated by the Compensation Committee. In no event, however, will any performance period be less than six months or more than five years.
Under the EICP, our CEO is eligible for an award for each performance period in an amount equal to up to 0.50% of our Operating Income Before Depreciation and Amortization (as defined in the EICP) for that performance period. Each of the participants in the EICP other than our CEO is eligible for an award for each performance period in an amount equal to up to 0.25% of Operating Income Before Depreciation and Amortization for such performance period. Notwithstanding the foregoing, the maximum award that may be paid under the EICP to our CEO for any fiscal year of our company is the lesser of (a) an amount equal to 0.50% of Operating Income Before Depreciation and Amortization, or (b) $5.0 million, and the maximum award that may be paid to any participant other than our CEO for any fiscal year of our company is the lesser of (i) an amount equal to 0.25% of Operating Income Before Depreciation and Amortization, or (ii) $3.0 million.
Subject to the foregoing limitations, the Compensation Committee may condition payment of an award upon the satisfaction of such objective or subjective standards as the Compensation Committee determines to be appropriate, in its sole and absolute discretion, and the Compensation Committee will retain the discretion to reduce the amount of any award that would otherwise be payable to a participant, including reducing such amount to zero. In February 2006, the Compensation Committee approved the 2006 Senior MIP, which established the 2006 performance goals under the EICP. The Compensation Committee used the 2006 Senior MIP as part of its objective and subjective standards to determine whether or not to exercise its discretion to reduce the amount of any award that would otherwise be payable to a participant with respect to 2006 under the EICP. Under the 2006 Senior MIP, the incentive payment was calculated based upon achievement of one or both of (a) company performance goals (weighted at 80%), and (b) individual objectives (weighted at 20%). This allocation reflected the committees view that the allocation toward individual objectives should be reduced over time. The performance goals were as follows:
1. Overall Company Performance Goals: Achievement of overall company performance goals (Company Goals) was measured based on: (a) year-over-year Company Consolidated EBITDA Growth (b) Return on Invested Capital, and (c) Free Cash Flow. EBITDA and EBIT were adjusted to remove the impact of restructuring and severance charges in either 2005 or 2006 to the extent that these charges were included in the results of the corporate office. Company Consolidated EBITDA Growth means the aggregate EBITDA for the entire company (i.e., including all subsidiaries and divisions, and all organizational levels). Return on Invested Capital means EBIT for the year less taxes at an assumed rate of 40%, divided by the average (based on year-end results) Net Tangible Assets (NTA). NTA means (x) total assets less cash, goodwill, and investments in consolidated subsidiaries, minus (y) liabilities excluding all debt, and accrued balances for insurance reserves, interest, closure and post-closure, remediation, derivative liabilities and deferred tax obligations. Free Cash Flow means cash flow from operations, less capital expenditures, plus proceeds from fixed asset sales and plus or minus any change in disbursement account. EBIT, Free Cash Flow, and EBITDA include all accruals necessary to pay out Annual Incentives, and were adjusted for material items at the discretion of the committee.
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2. Individual Objectives: Achievement of individual objectives was measured with respect to each participant. Each participant had two individual objectives that were appropriate for the participants position.
In February 2007, the Compensation Committee certified that (a) our company achieved a result between the target and stretch 2006 financial performance goals for 2006 Company Consolidated EBITDA Growth, (b) our company exceeded the stretch 2006 financial goals for both Return on Invested Capital and Free Cash Flow, and (c) the CEO and each of the other participants in the 2006 Senior MIP achieved his individual performance goals for 2006. Accordingly, in February 2007 our company paid annual incentive compensation to the NEOs under the 2006 Senior MIP in the amounts reported as Non-Equity Incentive Plan Compensation in the Summary Compensation Table.
On February 16, 2007, the Compensation Committee approved the 2007 Senior MIP, which established the performance goals for 2007 under the EICP. Each of the participants in the 2007 Senior MIP will have an opportunity to earn an amount of annual incentive equal to a percentage of the participants annualized base salary as of December 31, 2007. Our CEO has an opportunity to earn a targeted annual incentive equal to 115% and a stretch annual incentive equal to 230% of his base salary for 2007. Each of our other executive officers has an opportunity to earn a targeted annual incentive equal to 100% and a stretch annual incentive equal to 150% of that officers base salary for 2007.
The 2007 Senior MIP does not utilize any individual objectives. Incentive payments under the 2007 Senior MIP will be calculated based upon achievement of the following company performance goals, which will be weighted relative to their targets as follows:
Earnings before interest, taxes, depreciation and amortization (EBITDA): 70%
- For the purposes of the 2007 Senior MIP, EBITDA means the aggregate EBITDA for the entire company (i.e., including all subsidiaries, divisions, and organizational levels). EBITDA will be adjusted to remove the impact of (a) restructuring charges and severance charges to the extent that these were included in the results of the Operations Support Center (only), and (b) gains and losses on divestitures, discontinued operations, and non-cash impairments. All adjustments remain at the discretion of the Compensation Committee.
Return on Invested Capital: 15%
- Return on Invested Capital means Earnings Before Interest and Taxes (EBIT) for the year less taxes at an assumed rate of 40%, divided by the average (based on year-end results) Net Tangible Assets (NTA). NTA means (x) total assets less cash, goodwill, contra receivables related to insurance reserves, any assets arising out of the pension plans, and investments in consolidated subsidiaries, minus (y) liabilities excluding all debt and accrued balances for insurance reserves, pension plans, interest, closure and post-closure remediation, derivative liabilities, and deferred income taxes. EBIT and NTA will be adjusted for the same items as EBITDA.
Free Cash Flow: 15%
- Free Cash Flow means cash flow from operations, less capital expenditures, plus proceeds from fixed asset sales plus or minus the change in disbursement account.
EBITDA, EBIT and Free Cash Flow will include all accruals necessary to pay out annual incentives. All measures will be prepared on a consistent basis (i.e., adjusting for material changes caused by new accounting rules). All payouts will be interpolated between payout tiers.
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The following table provides certain information with respect to potential future payouts to the NEOs under the 2007 Senior MIP:
| Estimated Possible Payouts Under the 2007 Senior MIP (1) | |||
| Name | Threshold | Target | Maximum |
| John J. Zillmer | $ 53,188 | $ 1,063,750 | $ 2,127,500 |
| Donald W. Slager | 40,000 | 800,000 | 1,200,000 |
| Peter S. Hathaway | 30,750 | 615,000 | 922,500 |
| Edward A. Evans | 22,300 | 446,000 | 669,000 |
(1) The maximum annual incentive that may be paid to any participant under the 2007 Senior MIP cannot exceed the lesser of (a) 150% (230% in the case of the CEO) of the participants annual base salary, or (b) $3,000,000 ($5,000,000 in the case of the CEO).
Executives who are selected to participate in the 2007 Senior MIP, including the NEOs, may elect to receive up to 40% of their incentive award payments (if any) under the 2007 Senior MIP in the form of RSUs (Conversion RSUs). Participants must make this election no later than June 2007. If and to the extent a participant who makes the election receives a payment under the 2007 Senior MIP, then the participant will receive the number of Conversion RSUs equal to (a) the product of (i) the total award times (ii) the percentage of the award that the participant elected to receive in the form of RSUs, divided by (b) the closing market price of our common stock on December 31, 2007. The Conversion RSUs will be fully vested on the award date and will automatically convert into shares of our common stock on the first anniversary of the award date.
In addition, if a participant elects to receive Conversion RSUs our company will grant a number of additional RSUs equal to 50% of the Conversion RSUs (the Conversion Match RSUs). The Conversion Match RSUs will automatically convert into shares of common stock on the second anniversary of the award date, except that the Conversion Match RSUs will automatically be forfeited if the participants service with our company terminates for any reason prior to vesting unless otherwise stated in an employment or other written agreement with our company.
Long-Term Cash Incentive Compensation. In 2002, our company established a Long-Term Incentive Plan (LTIP) that was designed to (a) provide certain management personnel with a long-term cash incentive component of compensation that relies on financial performance of our company; (b) reward certain management personnel with an opportunity to share in our companys success; (c) strengthen the link between pay and performance; (d) facilitate the retention of key employees; and (e) balance the focus between short-term and long-term corporate objectives. The Compensation Committee established performance goals for each cycle of the LTIP based upon the metrics reflecting one or more of the following business measurements: earnings, cash flow, revenues, financial return ratios, debt reduction, risk management, customer satisfaction, and total stockholder returns, any of which may be measured either in absolute terms or as compared with another company or companies or with prior periods. At the end of each performance cycle, the Compensation Committee determines the actual awards based upon achievement of the performance goals for that cycle.
The Compensation Committee previously established performance cycles under the LTIP for the three-year periods from 2004-2006 and 2005-2007. In February 2006, the Compensation Committee decided not to implement a new LTIP performance cycle beginning in 2006.
LTIP awards for the 2004-2006 performance cycle were payable only if our company achieved specified levels of (1) EBITDA compound annual growth (weighted at 60%), and (2) net average annual debt reduction (weighted at 40%). In February 2007, the Compensation Committee certified that our company had not achieved either (a) the goal with respect to EBITDA compound annual growth for the 2004-2006 performance cycle, or (b) the goal with respect to annual average debt reduction for the 2004-2006 performance cycle. Accordingly, our company did not pay any LTIP awards to the NEOs for the 2004-2006 performance cycle.
LTIP awards for the 2005-2007 performance cycle will be payable only if our company achieves, on an overall basis for the three-year performance cycle, specified goals for average annual cash flow from operations (weighted at 60%) and improvements in the return on invested capital (weighted at 40%). The Compensation Committee believes that these performance goals are aligned with the long-term stockholder value creation goals of increasing operating performance
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and reducing balance sheet leverage. The Compensation Committee will have discretion to adjust the performance goals for one or more affected cycles if a major acquisition, divestiture, or other extraordinary event results in a significant impact on our ability to achieve such goals.
Actual results between the threshold and target or the target and maximum performance goals for the 2005-2007 LTIP cycle will be interpolated to calculate the actual payout. No award will be earned with respect to a goal if performance does not meet the threshold performance level for such goal. The goals are independent, however, and a partial award can be attained even if one threshold is missed. Pro rata awards based on whole months of active participation and based on actual results will be paid at the end of the performance cycle if an executives employment terminates due to death, disability, termination without cause, retirement, or a reduction in force. All awards will be forfeited if the executive voluntarily terminates employment or is discharged for cause. Participants may be given the opportunity to elect to receive some or all of any payment in the form of shares of our common stock. Employees who are otherwise eligible to participate in any of our non-qualified deferred compensation plans are permitted to defer LTIP awards in accordance with the terms of those plans.
Equity-Based Awards. We maintain various equity-based compensation plans, as described under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plan Information as of Fiscal Year-End. In December 2005, the Compensation Committee awarded RSUs and stock options under the 2006 Stock Plan to each of our NEOs, as follows:
| Name | Number of Restricted Stock Units | Number of Stock Options | Exercise Price of Stock Options |
| Mr. Zillmer | 160,000 | 495,000 | $ 8.90 |
| Mr. Slager | 20,000 | 133,000 | $ 8.74 |
| Mr. Hathaway | 9,000 | 63,000 | $ 8.74 |
| Mr. Evans | 17,000 | 111,000 | $ 8.74 |
| Mr. Helm | 9,000 | 63,000 | $ 8.74 |
These RSUs and options were intended to be part of the NEOs compensation for 2006. All of the RSUs and options have a grant date of December 30, 2005, except for Mr. Zillmers RSUs and options, which have a grant date of January 3, 2006. These RSUs and options vest at the rate of one-fifth on each of the first through fifth anniversaries of the grant date.
In December 2006, the Compensation Committee awarded stock options under the 2006 Stock Plan to each of our NEOs, as described under Item 11, Executive Compensation Plan-Based Awards During 2006. These options are intended to be part of the NEOs compensation for 2007.
Stock Ownership and Retention Guidelines for Executive Officers. In February 2006, the Board, acting through a special subcommittee, approved stock ownership and retention guidelines in order to encourage our executive officers to acquire and retain ownership of a significant number of shares of common stock while they serve as directors or officers of our company. Under the guidelines, persons who are designated by the Board as executive officers of our company under the Exchange Act are expected to hold shares of common stock having a value as set forth in the table below. Each person designated as an executive officer will be expected to retain 50% of all shares (after deducting shares used to satisfy applicable tax obligations incurred as a result of any exercise or vesting event) received from our company in any manner until their ownership threshold is met.
| Position (1) | Multiple of Base Salary (2) |
| Chairman of the Board | 3x |
| Chief Executive Officer | 3x |
| President | 3x |
| Executive Vice President | 2.5x |
(1) An officers highest position will determine the ownership guideline that he must attain.
(2) Base salary is determined as of the date the guidelines were adopted and thereafter at the beginning of each year of the executives employment term. The stock price initially was a fixed price of $8.00 per share. The stock price was reviewed in December 2006 and adjusted to $11.50. The impact of changes in both base salary and stock price will be reviewed at least annually.
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Salary and Cash Incentive Awards in Proportion to Total Compensation. As noted under Item 11, Executive Compensation Compensation Discussion and Analysis, we believe that a substantial portion of each NEOs compensation should be in the form of equity awards. The following table sets forth the percentage of each NEOs total compensation that we paid in the form of base salary and cash incentive awards under the 2006 Senior MIP.
| Name | Percentage of Total Compensation |
| Mr. Zillmer | 52 % |
| Mr. Slager | 58 % |
| Mr. Hathaway | 54 % |
| Mr. Evans | 63 % |
| Mr. Helm | 12 % |
Fiscal Year-End Holdings of Equity-Based Awards
The following table sets forth certain information regarding equity-based awards held by each of the NEOs as of December 31, 2006.
Outstanding Equity Awards at Fiscal Year-End 2006
| Option Awards | Stock Awards | |||||||
| Number of Unexercised Options (#) | Units of Stock That Have Not Vested | Unearned Shares, Units or Other Rights That Have Not aVested | ||||||
| Name | Exercisable | Unexercisable | Option Exercise Price ($) | Option Expiration Date | Number of Shares (#) | Market Value of Shares ($) (1) | Equity Incentive Plan Awards: Number (#) | Equity Incentive Plan Awards: Market or Payout Value ($) (1) |
| John J. Zillmer | 316,669 | 683,331 (2) $ 7.68 | 05/27/2015 | $ | $ | |||
| 495,000 (3) | 8.90 | 01/03/2016 | ||||||
| 425,000 (4) | 12.91 | 12/05/2016 | ||||||
| 34,169 (5) | 419,937 | |||||||
| 160,000 (3) | 1,966,400 | |||||||
| 50,000 (6) | 614,500 | |||||||
| Donald W. Slager | 30,000 | $ 21.19 | 02/26/2008 | |||||
| 80,000 | 21.06 | 12/29/2008 | ||||||
| 175,000 | 13.31 | 04/06/2009 | ||||||
| 75,000 | 10.32 | 12/11/2012 | ||||||
| 150,000 | 9.03 | 05/22/2013 | ||||||
| 26,600 | 106,400 (7) | 8.74 | 12/30/2015 | |||||
| 166,600 (4) | 12.91 | 12/05/2016 | ||||||
| 194,287 (8) | 2,387,787 | |||||||
| 13,889 (9) | 170,696 | |||||||
| 36,000 (10) | 442,440 | |||||||
| 16,000 (7) | 196,640 | |||||||
| Peter S. Hathaway | 125,000 (11) | $ 21.06 | 12/29/2008 | |||||
| 150,000 | 13.31 | 04/06/2009 | ||||||
| 60,000 | 10.32 | 12/11/2012 | ||||||
| 100,000 | 9.03 | 05/22/2013 | ||||||
| 12,600 | 50,400 (7) | 8.74 | 12/30/2015 | |||||
| 83,300 (4) | 12.91 | 12/05/2016 | ||||||
| 145,713 (8) | 1,790,813 | |||||||
| 48,571 (12) | 596,938 | |||||||
| 8,334 (9) | 102,425 | |||||||
| 24,000 (10) | 294,960 | |||||||
| 7,200 (7) | 88,488 | |||||||
| Edward A. Evans | 37,500 | 112,500 (13) $ 8.20 | 09/19/2015 | |||||
| 22,200 | 88,800 (7) | 8.74 | 12/30/2015 | |||||
| 83,300 (4) | 12.91 | 12/05/2016 | ||||||
| 15,000 (13) | 184,350 | |||||||
| 13,600 (7) | 167,144 | |||||||
| Steven M. Helm | 40,000 | $ 21.06 | 12/29/2008 | |||||
| 150,000 | 13.31 | 04/06/2009 | ||||||
| 33,618 (8) | 413,165 | |||||||
| 4,445 (9) | 54,629 | |||||||
| 12,000 (10) | 147,480 | |||||||
| 3,600 (7) | 44,244 | |||||||
144
(1) Calculated based upon the closing market price of our common stock on December 29, 2006, which was $12.29 per share.
(2) Pursuant to his employment agreement, we granted to Mr. Zillmer options to acquire up to 1,000,000 shares of common stock on May 27, 2005. An aggregate of 200,000 options vested on May 27, 2006, and the remainder vest pro rata each month thereafter over a period of four years. Therefore, 16,667 of these options continue to vest each month.
(3) These awards were granted to Mr. Zillmer on January 3, 2006, and vest as follows:
| Award Type | 1/3/2007 | 1/3/2008 | 1/3/2009 | 1/3/2010 | 1/3/2011 |
| Stock Options | 99,000 | 99,000 | 99,000 | 99,000 | 99,000 |
| RSUs | 32,000 | 32,000 | 32,000 | 32,000 | 32,000 |
(4) These options were granted to the NEOs on December 5, 2006, and vest as follows:
| Name | 12/5/2007 | 12/5/2008 | 12/5/2009 | 12/5/2010 |
| John J. Zillmer | 106,250 | 106,250 | 106,250 | 106,250 |
| Donald W. Slager | 41,650 | 41,650 | 41,650 | 41,650 |
| Peter S. Hathaway | 20,825 | 20,825 | 20,825 | 20,825 |
| Edward A. Evans | 20,825 | 20,825 | 20,825 | 20,825 |
(6) Pursuant to his employment agreement, we granted to Mr. Zillmer 50,000 shares of restricted stock on May 27, 2005, which vest based upon the attainment of certain levels of EBITDA over a period of not longer than seven years beginning on January 1, 2006. The first one-third of these shares vested on February 14, 2007 as the result of the achievement of the target EBITDA specified in Mr. Zillmers restricted stock agreement.
(7) These awards were granted on December 30, 2005. The first tranche of these awards vested on December 30, 2006. The remaining awards vest as follows:| Name | Award Type | 12/30/07 | 12/30/08 | 12/30/09 | 12/30/10 |
| Donald W. Slager | Stock Options | 26,600 | 26,600 | 26,600 | 26,600 |
| Donald W. Slager | RSUs | 4,000 | 4,000 | 4,000 | 4,000 |
| Peter S. Hathaway | Stock Options |