UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No.      )

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The Toro Company

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NOTICE OF 2011
ANNUAL MEETING AND

 

PROXY STATEMENT

 

FOR MARCH 15, 2011

 

TABLE OF CONTENTS

 

The Toro Company

8111 Lyndale Avenue South, Bloomington, Minnesota 55420-1196

Telephone 952-888-8801

 

Michael J. Hoffman

Chairman and CEO

 

February 1, 2011

 

Dear Fellow Shareholders:

 

I am pleased to invite you to join us for The Toro Company 2011 Annual Meeting of Shareholders to be held on Tuesday, March 15, 2011, at 1:30 p.m., Central Daylight Time, at our corporate offices. Details about the annual meeting, nominees for election to the Board of Directors and other matters to be acted on at the annual meeting are presented in the Notice of Annual Meeting and proxy statement that follow.

 

It is important that your shares be represented at the annual meeting, regardless of the number of shares you hold and whether or not you plan to attend the meeting in person. Accordingly, please exercise your right to vote by following the instructions for voting on the Notice Regarding the Availability of Proxy Materials you received for the meeting or, if you received an electronic or paper copy of our proxy materials, by completing, signing, dating and returning your proxy card or by Internet or telephone voting as described in the proxy statement.

 

On behalf of your Toro Board of Directors and Management, it is my pleasure to express our appreciation for your continued support.

 

Sincerely,

 

Michael J. Hoffman

 

Your vote is important. Please exercise your right to vote as soon as possible by following the instructions for voting on the Notice Regarding the Availability of Proxy Materials you received for the meeting or, if you received an electronic or paper copy of our proxy materials, by completing, signing, dating and returning your proxy card or by Internet or telephone voting as described in the proxy statement. By doing so, you may save us the expense of additional solicitation.

 

You also can help us make a difference by eliminating paper proxy mailings. With your consent, we will provide all future proxy materials electronically. Instructions for consenting to electronic delivery can be found on your proxy card or by Internet at www.proxyvote.com. Your consent to receive shareholder materials electronically will remain in effect until canceled.

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

The Toro Company 2011 Annual Meeting of Shareholders will be held on Tuesday, March 15, 2011, at 1:30 p.m., Central Daylight Time, at our corporate offices located at 8111 Lyndale Avenue South, Bloomington, Minnesota, 55420-1196, for the following purposes:

 

 

We currently are not aware of any other business to be brought before the annual meeting. Shareholders of record at the close of business on January 21, 2011, the record date, will be entitled to vote at the annual meeting or at any adjournment or postponement of the annual meeting.

 

A shareholder list will be available at our corporate offices beginning March 4, 2011, during normal business hours for examination by any shareholder registered on our stock ledger as of the record date for any purpose germane to the annual meeting.

 

Since a majority of the outstanding shares of our common stock must be represented either in person or by proxy to constitute a quorum for the conduct of business, please promptly vote your shares by following the instructions for voting on the Notice Regarding the Availability of Proxy Materials you received for the meeting or, if you received an electronic or paper copy of our proxy materials, by completing, signing, dating and returning your proxy card or by Internet or telephone voting as described in the proxy statement.

 

February 1, 2011

 

BY ORDER OF THE BOARD OF DIRECTORS

 

 

TIMOTHY P. DORDELL

Vice President, Secretary and
General Counsel

 

THE TORO COMPANY
8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196

 

PROXY STATEMENT
2011 ANNUAL MEETING OF SHAREHOLDERS
TUESDAY, MARCH 15, 2011
1:30 p.m. Central Daylight Time

 

 

The Toro Company Board of Directors is using this proxy statement to solicit your proxy for use at The Toro Company 2011 Annual Meeting of Shareholders to be held at 1:30 p.m., Central Daylight Time, on Tuesday, March 15, 2011. We intend to mail Notices Regarding the Availability of Proxy Materials for the annual meeting and make proxy materials available to shareholders (or for certain shareholders and for those who request, a paper copy of this proxy statement and the form of proxy) on or about February 1, 2011. Please note that references in this proxy statement to “Toro,” the “Company,” “we,” “us,” “our” and similar terms refer to The Toro Company.

 

 

This proxy statement and our 2010 Annual Report, which includes our Annual Report on Form 10-K for the fiscal year ended October 31, 2010, are available at www.thetorocompany.com/proxy.

 

Pursuant to rules adopted by the Securities and Exchange Commission, or SEC, we have elected to provide access to our proxy materials over the Internet. Accordingly, we are sending a Notice Regarding the Availability of Proxy Materials to our shareholders of record and beneficial owners (excluding those beneficial owners who hold shares of our common stock in The Toro Company Investment, Savings and Employee Stock Ownership Plan, or IS&ESOP, The Toro Company Profit Sharing Plan for Plymouth Union Employees, The Toro Company Deferred Compensation Plan for Officers, The Toro Company Deferred Compensation Plan for Non-Employee Directors and those record and beneficial owners who previously have requested that they receive electronic or paper copies of our proxy materials). All shareholders have the ability to access our proxy materials on the website referred to in the Notice Regarding the Availability of Proxy Materials or request to receive a printed set of our proxy materials. Instructions on how to access our proxy materials over the Internet or request a printed copy of our proxy materials may be found in the Notice Regarding the Availability of Proxy Materials. In addition, shareholders may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis.

 

The annual meeting will be held on Tuesday, March 15, 2011, at 1:30 p.m., Central Daylight Time, at our corporate offices located at 8111 Lyndale Avenue South, Bloomington, Minnesota, 55420-1196.

 

The purposes of the annual meeting are to vote on the following items:

 

 

Shareholders of record at the close of business on January 21, 2011, the record date, will be entitled to notice of and to vote at the annual meeting or any adjournment or postponement of the annual meeting. As of January 21, 2011, there were 31,772,820 outstanding shares of our common stock. Each share of our common stock is entitled to one vote on each matter to be voted on at the annual meeting. Shares of our common stock that are held by us in our treasury are not counted as outstanding shares and will not be voted.

 

Dividend Reinvestment Plan Shares.  If you are a participant in our Dividend Reinvestment Plan, the number of shares shown on your proxy card includes shares you hold in that plan.

 

Employee Benefit Plan Shares.  If you are a participant in a Toro employee benefit plan that allows participant-directed voting of our common stock held in that plan, the number of shares shown on your proxy card includes shares you hold in that plan, as well as shares you own of record, if any. The trustee for each plan will cause votes to be cast confidentially in accordance with your instructions. Plan shares not voted by participants will be voted by the trustee in the same proportion as the votes actually cast by participants, in accordance with the terms of the respective plans.

 

Your vote is important. If you are a shareholder whose shares are registered in your name, you may vote your shares in person at the meeting or by one of the three following methods:

 

 

If your shares are held in “street name” (through a broker, bank or other nominee), you may receive a separate voting instruction form with this proxy statement or you may need to contact your broker, bank or other nominee to determine whether you will be able to vote electronically using the Internet or by telephone.

If you return your signed proxy card or use Internet or telephone voting before the annual meeting, the named proxies will vote your shares as you direct. For Proposal One—Election of Directors, you may:

 

 

For Proposal Two—Ratification of Selection of Independent Registered Public Accounting Firm and Proposal Three—Executive Compensation Advisory Vote, you may:

 

 

For Proposal Four—Advisory Vote on the Frequency of Executive Compensation Advisory Vote, you may vote for a frequency of every three years, every two years or every year, or you may abstain from voting on the proposal.

 

If you send in your proxy card or use Internet or telephone voting but you do not specify how you want to vote your shares, the proxies will vote your shares FOR all four nominees for election to the Board of Directors in Proposal One—Election of Directors, FOR Proposal Two—Ratification of Selection of Independent Registered Public Accounting Firm, FOR Proposal Three—Executive Compensation Advisory Vote, and for a frequency of every THREE YEARS on Proposal Four—Advisory Vote on the Frequency of Executive Compensation Advisory Vote.

 

The Board of Directors unanimously recommends that you vote:

 

 

If you are a shareholder whose shares are registered in your name, you may revoke your proxy at any time before it is voted by one of the following methods:

 

 

If you hold your shares through a broker, bank or other nominee, you may revoke your proxy by following instructions your broker, bank or other nominee provides.

 

The presence at the annual meeting, in person or represented by proxy, of a majority of the outstanding shares of our common stock as of the record date will constitute a quorum for the transaction of business at the annual meeting. Your shares will be counted toward the quorum if you submit a proxy or vote at the annual meeting. Shares represented by proxies marked “Abstain” and “broker non-votes” are also counted in determining whether a quorum is present for the transaction of business at the annual meeting. A “broker non-vote” is a proxy submitted by a broker that does not indicate a vote for some or all of the proposals because the broker does not have discretionary voting authority on certain types of proposals and has not received instructions from its client as to how to vote on a particular proposal. If there is not a quorum, a majority of the shares present at the annual meeting may adjourn the annual meeting to a later date as discussed under “Discretionary Voting and Adjournments” on page 5.

 

Proposal One—Election of Directors will be decided by the affirmative vote of a plurality of shares of our common stock as of the record date present in person or represented by proxy at the annual meeting. A “plurality” for Proposal One means the individuals who receive the greatest number of votes cast “For” are elected as directors. However, under our Amended and Restated Bylaws, if a majority of the votes of the shares present in person or represented by proxy at the annual meeting are designated to be “Withheld” from or are voted “Against” a nominee for director in an uncontested election, that director must tender his or her resignation for consideration by the Nominating & Governance Committee. The Nominating & Governance Committee then must evaluate the best interests of the Company and its shareholders and recommend the action to be taken by the Board with respect to such tendered resignation.

 

Proposal Two—Ratification of Selection of Independent Registered Public Accounting Firm will be decided by the affirmative vote of a majority of the shares, present in person or represented by proxy, and entitled to vote at the annual meeting.

 

Proposal Three—Executive Compensation Advisory Vote will be decided by the affirmative vote of a majority of the shares, present in person or represented by proxy, and entitled to vote at the annual meeting. This is a non-binding advisory vote; however, our Compensation & Human Resources Committee and Board expect to take into account the outcome of the vote when considering future executive compensation decisions.

 

Proposal Four— Advisory Vote on the Frequency of Executive Compensation Advisory Vote will be decided by the affirmative vote of a plurality of shares of our common stock as of the record date present in person or represented by proxy at the annual meeting. A “plurality” for Proposal Four means the choice of frequency that receives the greatest number of votes cast will be considered the preference of our shareholders. This is a non-binding advisory vote; however, our Compensation & Human Resources Committee and Board expect to take into account the outcome of the vote when considering the frequency of future executive compensation advisory votes.

 

Under the New York Stock Exchange, or NYSE, rules, if your shares are held in “street name” and you do not indicate how you wish to vote, your broker is permitted to exercise its discretion to vote your shares only on certain “routine” matters. Proposal One—Election of Directors, Proposal Three—Executive Compensation Advisory Vote and Proposal Four—Advisory Vote on the Frequency of Executive Compensation Advisory Vote are not “routine” matters. Accordingly, if you do not direct your broker how to vote, your broker may not exercise discretionary voting authority and may not vote your shares. This is called a “broker non-vote” and although your shares will be considered to be represented by proxy at the annual meeting, as previously discussed above under “Quorum Requirements,” they are not considered to be shares “entitled to vote” at the annual meeting and will not be counted as having been voted on the applicable proposal. Proposal Two—Ratification of Selection of Independent Registered Public Accounting Firm is a“routine” matter and, as such, your

broker is permitted to exercise discretionary voting authority to vote your shares “For” or “Against” the proposal in the absence of your instruction. Proxies marked “Withheld” on Proposal One—Election of Directors or “Abstain” on Proposal Two—Ratification of Section of Independent Registered Public Accounting Firm or Proposal Three—Executive Compensation Advisory Vote proposal will be counted in determining the total number of shares “entitled to vote” on such proposal and will have the effect of a vote “Against” a director or a proposal. If you “Abstain” from voting on Proposal Four—Advisory Vote on the Frequency of Executive Compensation Advisory Vote, the abstention will not have an effect on the outcome of the vote.

 

Broadridge Financial Solutions, Inc. has been engaged to tabulate shareholder votes and act as our independent inspector of elections for the annual meeting.

 

We currently are not aware of any business to be acted upon at the annual meeting other than that described in this proxy statement. If, however, other matters properly are brought before the annual meeting, or any adjournment or postponement of the annual meeting, your proxy includes discretionary authority on the part of the individuals appointed to vote your shares or act on those matters according to their best judgment, including to adjourn the annual meeting.

 

Adjournment of the annual meeting may be made for the purpose of, among other things, soliciting additional proxies. Any adjournment may be made from time to time by approval of the holders of common stock representing a majority of the votes present in person or by proxy at the annual meeting, whether or not a quorum exists, without further notice other than by an announcement made at the annual meeting.

 

The presiding officer at the annual meeting will determine how business at the annual meeting will be conducted. Only nominations and other proposals brought before the annual meeting in accordance with the advance notice and information requirements of our Amended and Restated Bylaws will be considered, and no such nominations or other proposals were received. In order for a shareholder proposal to have been included in our proxy statement for the annual meeting, our Vice President, Secretary and General Counsel must have received such proposal not later than October 5, 2010. Under our Amended and Restated Bylaws, complete and timely written notice of a proposed nominee for election to our Board at the annual meeting or a proposal for any other business to be brought before the annual meeting must have been received by our Vice President, Secretary and General Counsel not later than December 16, 2010, nor earlier than November 16, 2010. Additionally, such notice for any nomination or proposal must have contained the specific information required by our Amended and Restated Bylaws, including, among other things, information about: any proposed nominee and his or her relationships with the shareholder submitting the nomination; any agreements, arrangements or understandings the shareholder may have with any proposed nominee or other parties relating to the nomination or other proposal; and the interests that the shareholder has related to the Company and our shares, including as a result of, among other things, derivative securities, voting arrangements or short positions. This summary information regarding our Amended and Restated Bylaws is qualified in its entirety by reference to the full text of the Amended and Restated Bylaws, which can be found on our website at www.thetorocompany.com (select the “Investor Information” link and then the “Corporate Governance” link).

 

The following table sets forth information known to us as of January 21, 2011, as to entities that have reported to the SEC or have otherwise advised us that they are a beneficial owner, as defined by the SEC’s rules and regulations, of more than five percent of our outstanding common stock.

 

 

 

The following table sets forth information known to us regarding the beneficial ownership of our common stock as of January 21, 2011, by (i) each of our directors and nominees for director, (ii) our “principal executive officer,” “principal financial officer” and the next three most highly compensated executive officers named in the “Summary Compensation Table” on page 51 (we collectively refer to these persons as our “named executive officers”), and (iii) all directors and executive officers as a group, including our named executive officers.

 

 

 

 

 

The rules of the SEC require us to disclose the identity of directors, executive officers and greater than 10% owners of our common stock who did not file on a timely basis reports required by Section 16 of the Exchange Act. Based on review of reports filed by these reporting persons on the SEC’s electronic filing, or EDGAR, system and written representations by our directors and executive officers, we believe that all of our directors, executive officers and greater than 10% owners complied with all filing requirements applicable to them during our fiscal year ended October 31, 2010, or fiscal 2010.

 

Our Restated Certificate of Incorporation provides that our Board of Directors may be comprised of between eight and twelve directors. Our Board currently is comprised of 10 directors. As provided in our Restated Certificate of Incorporation, our Board is divided into three staggered classes of directors of the same or nearly the same number, with each class elected in a different year for a term of three years. Our current directors and their respective current terms are as follows:

 

 

The Board has nominated each of Jeffrey M. Ettinger, Katherine J. Harless, Inge G. Thulin and Michael J. Hoffman for election to the Board to serve for a three-year term ending at the 2014 Annual Meeting of Shareholders. Each of these nominees is a current member of the Board and has consented to serve if elected. Proxies only can be voted for the number of persons named as nominees in this proxy statement, which is four.

 

The Board of Directors unanimously recommends a vote FOR the election to the Board of the four nominees for director.

 

If prior to the annual meeting the Board should learn that any nominee will be unable to serve for any reason, the proxies that otherwise would have been voted for that nominee will be voted for a substitute nominee as selected by the Board. Alternatively, the proxies, at the Board’s discretion, may be voted for that fewer number of nominees as results from the inability of any nominee to serve. The Board has no reason to believe that any of the nominees will be unable to serve.

 

The following paragraphs provide information about each nominee for election to the Board at the annual meeting and each other member of the Board, including all positions he or she currently holds, his or her principal occupation and business experience for the past five years, and the names of other publicly held companies of which he or she currently serves as a director or has served as a director during the past five years. We believe that all of our director nominees and other directors display personal and professional integrity; satisfactory levels of education and/or business experience; business acumen; an appropriate level of understanding of our business and its industry and other industries relevant to our business; the ability and willingness to devote adequate time to the work of our Board and its committees; a fit of skills and personality with those of our other directors that helps build a Board that is effective, collegial and responsive to the needs of the Company; strategic thinking and a willingness to share ideas; a diversity of experiences, expertise and background; and the ability to represent the interests of all of our shareholders. The information presented below regarding each nominee or director also sets forth specific experience, qualifications, attributes and skills that led our Board to conclude that he or she should serve as a director in light of our business and structure.

Nominees for Election to the Board—Current Term Ending at the 2011 Annual Meeting

 

Jeffrey M. Ettinger, age 52, is the Chairman, President and Chief Executive Officer of Hormel Foods Corporation, Austin, Minnesota (a multinational manufacturer and marketer of consumer-branded food and meat products). Mr. Ettinger has held these positions since November 2006. Previously, he was President and Chief Executive Officer of Hormel Foods from January 2006 to November 2006, and was President and Chief Operating Officer from 2004 to 2006. First elected to the Toro Board in July 2010, he is a member of the Audit Committee and the Compensation & Human Resources Committee. Mr. Ettinger has served as a director of Hormel Foods (NYSE: HRL) since 2004, and currently he serves on the boards of the Grocery Manufacturers of America, the American Meat Institute, the Minnesota Business Partnership, the Austin Medical Center Foundation and The Hormel Foundation.

 

Throughout his career, Mr. Ettinger has developed and brings to our Board strong business acumen, significant executive leadership attributes and relevant experience of driving growth through innovation and strategic acquisitions. As Chairman, President and Chief Executive Officer of Hormel Foods, a Fortune 500 public company with global operations, Mr. Ettinger provides our Board and Management relevant insight and guidance with respect to numerous issues important to our Company, including in particular to our strategy of driving growth in our businesses through the development of innovative, customer-valued products and expansion of our global presence through targeted acquisitions. Additionally, he contributes knowledge of public company requirements and issues, which are helpful to his service a member of our Audit Committee and Compensation & Human Resources Committee.

 

Katherine J. Harless, age 59, was President and Chief Executive Officer of Idearc Inc., Dallas/Fort Worth, Texas (publisher of Verizon Yellow Pages and SuperPages.com), from November 2006 until her retirement in February 2008. On March 31, 2009, Idearc and all of its domestic subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Bankruptcy Code. On December 31, 2009, Idearc emerged from the Chapter 11 bankruptcy proceedings and under its plan of reorganization has, among other things, changed its name to SuperMedia Inc. and now trades on the NASDAQ Global Market under the symbol “SPMD.” Ms. Harless also served as President and Chief Executive Officer of Verizon Information Services Inc. from 2000 to November 2006, when it was spun off by Verizon Communications, Inc. to become Idearc, and was a director of Idearc from November 2006 to May 2008. First elected to the Toro Board in 2000, she is a member of the Audit Committee, the Compensation & Human Resources Committee and the Nominating & Governance Committee. Ms. Harless also currently serves on the advisory board of the McCombs School of Business at the University of Texas, Austin.

 

Ms. Harless brings to our Board executive leadership and management skills that earned her positions as former President and Chief Executive Officer of Idearc and former President of several strategic business units of Verizon Communications, Inc. and GTE Corporation. Ms. Harless was the first woman to become President of an operating company of GTE Corporation. Ms. Harless provides our Board with a seasoned business perspective and provides valuable business, leadership and management insights with respect to our strategic direction. Through her position as former President and Chief Executive Officer of Idearc, a public company, Ms. Harless gained experience and knowledge of financial, executive compensation, corporate governance and other requirements and issues applicable to public companies, which are helpful to her service as a member of our Audit Committee, Compensation & Human Resources Committee and Nominating & Governance Committee.

Inge G. Thulin, age 57, is the Executive Vice President, International Operations of 3M Company, Saint Paul, Minnesota (diversified technology), a position he has held since 2003. Previously he was Area Vice President, Asia Pacific of 3M from 2003 to 2004 and Area Vice President, Europe, Central/East Europe & Middle East from 2002 to 2003. First elected to the Toro Board in September 2007, he is a member of the Audit Committee and the Finance Committee. Mr. Thulin also currently serves on the boards of the United States Counsel for International Business and the Carlson School of Management, University of Minnesota.

 

Through his tenure with 3M, a Fortune 500 public company with global diversified manufacturing operations and, in 2009, international operations representing approximately 63 percent, or $14.6 billion, of 3M’s $23.1 billion in sales, Mr. Thulin has developed and brings to our Board significant leadership skills, strong international expertise and a proven ability to develop successful growth strategies in global organizations. He also contributes international structuring, operational and acquisition experience gained through his various positions with 3M, including as the leader of several businesses and subsidiaries in Sweden, France, Belgium and Russia. Mr. Thulin is a native of Sweden. As a result of his background and experience, Mr. Thulin provides valuable insight as our Company continues to focus on increasing global presence to grow our revenues by investing in new products designed specifically for international markets and in infrastructure around the world that will connect us more closely to international customers.

 

Michael J. Hoffman, age 55, is our Chairman of the Board, President and Chief Executive Officer, and we generally refer to him in this proxy statement as our Chairman and CEO. Mr. Hoffman was appointed as Chairman in March 2006, was elected as Chief Executive Officer in March 2005, and was elected as President in October 2004. He was our Chief Operating Officer from October 2004 to March 2005. Mr. Hoffman was first elected to the Toro Board in March 2005, and since November 2005 has also served as a director of Donaldson Company, Inc. (NYSE: DCI).

 

In his more than 33 years with our Company, Mr. Hoffman has developed and brings to our Board leadership experience and extensive knowledge of all aspects of our Company, businesses, industry, markets and day-to-day operations. Mr. Hoffman contributes an unwavering commitment to quality and innovation in our products, customer service, manufacturing, and marketing, and is a strong steward of our culture. Mr. Hoffman’s role as Chairman of the Board and Chief Executive Officer of our Company creates a critical link between our Board and our Management. As a result of his dual role, Mr. Hoffman provides unique insight into our Company’s future strategies, opportunities and challenges, and serves as the unifying element between the leadership and strategic direction provided by our Board and the implementation of our business strategies by our Management. Additionally, Mr. Hoffman’s service on the board of directors of Donaldson enables him to bring an enhanced understanding of, and experience with, public company requirements and issues.

 

Continuing Members of the Board—Current Term Ending at the 2012 Annual Meeting

 

Janet K. Cooper, age 57, was the Senior Vice President and Treasurer of Qwest Communications International Inc., Denver, Colorado (telecommunications), from September 2002 to June 2008. From 2001 to 2002, she served as Chief Financial Officer and Senior Vice President of McDATA Corporation, a global leader in open storage networking solutions. From 2000 to 2001, she served as Senior Vice President, Finance of Qwest. From 1998 to 2000, she served in various senior level finance positions at US West Inc., a regional Bell operating company, including Vice President, Finance and Controller and Vice President and Treasurer. From 1978 to 1998, Ms. Cooper served in various capacities with the Quaker Oats Company, including Vice President, Treasurer and Tax from 1997 to 1998 and Vice President, Treasurer from 1992 to 1997. First elected to the Toro Board in 1994, she is the Chair of the Audit Committee and a member of the Finance Committee. Ms. Cooper has served as a director of Lennox International Inc. (NYSE: LII) since 1999, and also currently serves as a director of MWH Global, a private firm that provides environmental engineering, construction and strategic consulting services worldwide.

Through her experience in various senior level financial positions with Qwest, McDATA Corporation, US West and Quaker, Ms. Cooper has developed a substantial financial and accounting background and expertise, which she contributes to our Board and more specifically to our Audit Committee, in her role as Chair, and our Finance Committee. Ms. Cooper’s financial expertise and acumen in capital markets, audit, tax, accounting, and treasury matters assists our Board in providing oversight to Management on these matters. Ms. Cooper’s senior leadership experience also enables her to provide strategic input to our Board, in addition to her financial expertise, discipline and oversight.

 

Gary L. Ellis, age 54, is the Senior Vice President and Chief Financial Officer of Medtronic, Inc., Minneapolis, Minnesota (medical technology). Mr. Ellis has held these positions since May 2005. Previously, he was the Vice President, Corporate Controller and Treasurer of Medtronic from 1999 to May 2005. First elected to the Toro Board in 2006, he is the Chair of the Finance Committee and a member of the Audit Committee. Mr. Ellis previously served as the Chairman of the Board of the American Heart Association from 2007 to 2008 and currently serves on the boards of Salient Surgical Technologies, the Science Museum of Minnesota and the Greater Twin Cities United Way.

 

As Chief Financial Officer of Medtronic, a Fortune 500 public company with global operations, Mr. Ellis possesses and brings relevant financial leadership experience and expertise to our Board and more specifically to our Finance Committee, in his role as Chair, and our Audit Committee. Such experience assists our Board in providing oversight to Management regarding capital structure, financial condition and policies, long-range financial objectives, tax strategies, financing requirements and arrangements, capital budgets and expenditures, insurance coverage, and strategic planning matters. Additionally, Mr. Ellis contributes his international experience managing worldwide financial operations and analyzing financial implications of merger and acquisition transactions, as well as aligning business strategies and financial decisions. As a result, Mr. Ellis provides our Board valuable perspectives as our Company continues its efforts to improve revenue growth and profitability, including specifically growth in international markets, and maintain a strong balance sheet.

 

Gregg W. Steinhafel, age 56, is the Chairman, Chief Executive Officer and President of Target Corporation, Minneapolis, Minnesota (retailing). Mr. Steinhafel was appointed as Chairman of Target in February 2009, was elected as Chief Executive Officer in May 2008, and was elected as President in 1999. First elected to the Toro Board in 1999, he is a member of the Compensation & Human Resources Committee and the Nominating & Governance Committee. Mr. Steinhafel has served as a director of Target (NYSE: TGT) since 2007 and also currently serves on the board of the Retail Industry Leaders Association.

 

Mr. Steinhafel brings to our Board meaningful leadership experience and retail knowledge that he has developed in his more than 30 years with Target, a Fortune 500 public company. As Chairman, President and Chief Executive Officer of Target, Mr. Steinhafel is responsible for Target’s strong brand recognition, devotion to innovation, strong supply chain initiatives, and disciplined approach to managing its business and investing in future growth, all of which are important to our Company’s business strategies. In addition, he contributes executive decision making skills and valuable strategic planning expertise, as well as significant and relevant knowledge of public company requirements and issues. Mr. Steinhafel’s significant retail knowledge assists our Board in providing guidance with respect to our residential business, which is affected by consumer confidence and spending levels, changing buying patterns of customers and the amount of product placement at mass retailers, such as The Home Depot.

 

Continuing Members of the Board—Current Term Ending at the 2013 Annual Meeting

 

Robert C. Buhrmaster, age 63, was Chairman and Chief Executive Officer of Jostens, Inc., Minneapolis, Minnesota (consumer manufacturing), until his retirement in 2004. Mr. Buhrmaster was appointed Chairman of Jostens in 1998 and was elected as Chief Executive Officer in 1994. He also served as President of Jostens from 1994 to January 2003. First elected to the Toro Board in 1996,

he serves as our presiding non-management director, or lead director, is the Chair of the Nominating & Governance Committee and is a member of the Finance Committee. Mr. Buhrmaster has served as a director of SurModics Inc. (NASDAQ: SRDX) since January 2008 and as its Chairman since January 2009. Since August 2009, he has also served as a director of Caraustar Industries, Inc., a privately-held integrated manufacturer of recycled paperboard and converted paperboard products. From December 2004 through February 2008, Mr. Buhrmaster served as a director of Innovex, Inc. (OTC: INVX).

 

Mr. Buhrmaster has developed and brings to our Board strong business leadership, corporate strategy and operational expertise that he acquired throughout his long career at Jostens, including as its Chairman, Chief Executive Officer and President. Additionally, as an experienced public company director, Mr. Buhrmaster contributes an enhanced knowledge of public company requirements and issues, including corporate governance matters, which are specifically relevant to his role as our lead director and to his service on our Nominating & Governance Committee, in his role as Chair. As a result, Mr. Buhrmaster is able to draw on his management and boardroom experiences to foster active discussion and collaboration among the independent directors of the Board and with our Company’s Management.

 

Robert H. Nassau, age 69, was the Regional Director of Corporate Accounts of F2 Intelligence Group, Minneapolis, Minnesota (consulting), from November 2003 until his retirement in November 2006. Previously, he was the owner and Chief Executive Officer of Nasly Inc., Lahaina, Hawaii (food, beverage and entertainment), from February 2000 to November 2003. He also previously served as President and Chief Executive Officer of St. Raymond Wood Products Holding Limited (wood manufacturing) from January 1997 to August 1999. First elected to the Toro Board in 1988, he is a member of the Audit Committee, the Compensation & Human Resources Committee and the Nominating & Governance Committee.

 

Mr. Nassau has developed and brings to our Board many years of business, management and operations expertise, including specific experience with lawn and garden tractors and riding mowers acquired early in his career through previous positions with Ford Motor Company and J.I. Case Company. Additionally, as our longest serving director having over 20 years of Board service, Mr. Nassau has developed deep and meaningful knowledge of our Company, our businesses and industry over the long term. As a result, Mr. Nassau provides valuable historical perspective, as well as insight regarding future strategic opportunities and challenges.

 

Christopher A. Twomey, age 62, is Chairman of Arctic Cat Inc., Thief River Falls, Minnesota (recreational vehicle manufacturer), a position he has held since August 2003. Previously, Mr. Twomey served as Chief Executive Officer of Arctic Cat from 1986 until his retirement in December 2010. First elected to the Toro Board in 1998, he is the Chair of the Compensation & Human Resources Committee and a member of the Nominating & Governance Committee. Mr. Twomey has been a director of Arctic Cat (NASDAQ: ACAT) since 1987.

 

Mr. Twomey brings to our Board meaningful strategic, management and operational experience and knowledge developed in his more than 25 years with Arctic Cat. As a result of Mr. Twomey’s long career in a business and industry dependent on distributor relationships and financing sources and affected by weather conditions and seasonality considerations, he provides valuable knowledge and insight with respect to similar issues faced by our Company in our industry. Also, as Chairman and former Chief Executive Officer of a public company, Mr. Twomey contributes a solid understanding of public company requirements and issues, including executive compensation and corporate governance issues, which are relevant to his service on our Compensation & Human Resources Committee, in his role as Chair, and as a member of our Nominating & Governance Committee.

 

The Board has adopted Corporate Governance Guidelines, which describe our corporate governance practices and policies and provide a framework for our Board governance. The topics addressed in our Corporate Governance Guidelines include: director qualifications, responsibilities, compensation and independence; Board committees; director access to officers and employees; related party transactions; Chief Executive Officer, or CEO, evaluation and succession; and annual performance evaluations. Our Corporate Governance Guidelines provide, among other things, that:

 

 

Our Corporate Governance Guidelines can be found on our website at www.thetorocompany.com (select the “Investor Information” link and then the “Corporate Governance” link). From time to time the Board, upon recommendation of the Nominating & Governance Committee, reviews and updates our Corporate Governance Guidelines as it deems necessary and appropriate.

 

Our Corporate Governance Guidelines provide that (i) our Board has no policy with respect to the separation of the offices of the Chairman and the CEO; (ii) our Board believes that this issue is part of the succession planning process and will be reviewed as the Nominating & Governance Committee deems it appropriate; and (iii) at any time that (a) the offices of Chairman and CEO are held by the same person, or (b) the Chairman does not meet the criteria for “independence” as established by applicable law, the rules and regulations of the SEC or the NYSE listing standards, then the Board, upon recommendation of the Nominating & Governance Committee, shall appoint a lead director who shall have such duties as are described in the Corporate Governance Guidelines or otherwise determined by the Board. The Board believes it is appropriate not to have a policy requiring the separation of the offices of the Chairman and the CEO so that it may make this determination based on what it believes is best under the current circumstances. However, the Board endorses the concept of an independent director being in a position of leadership and, thus, our Corporate Governance Guidelines require a lead director when the Chairman is not independent.

 

Our Board is currently chaired by Michael J. Hoffman, our Chairman and CEO. Our lead director is Robert C. Buhrmaster. Our Nominating & Governance Committee and full Board believe that our current leadership structure is appropriate for several reasons, including: (i) Mr. Hoffman’s extensive knowledge of the Company, our businesses and our industry, obtained through his more than 33 years of service to the Company, which benefit Board leadership and the Board’s decision-making process through his active role as Chairman; (ii) it unifies Board leadership and strategic direction as implemented by our Management; and (iii) we are able to appropriately balance risks relating to concentration of authority through the oversight of our independent and engaged lead director and Board. Mr. Hoffman’s biography is set forth on page 11.

 

As our lead director, Mr. Buhrmaster (i) presides at regularly scheduled executive sessions of the non-employee directors; (ii) provides direction on Board meeting agendas and other materials; (iii) manages the Board’s annual self-assessment process; and (iv) together with the Chair of the Compensation & Human Resources Committee, communicates to Mr. Hoffman the results of his annual performance review and compensation. With more than 14 years of continuous service on our Board, Mr. Buhrmaster has considerable knowledge of the Company, our business and our industry. Mr. Buhrmaster also has significant public company board experience. In addition to serving as our lead director, Mr. Buhrmaster serves as the Chair of our Nominating & Governance Committee. Mr. Buhrmaster’s biography is set forth on pages 12 and 13.

 

Management is primarily responsible for the identification, assessment and management of the key risks faced by our Company. Our risk assessment processes are coordinated primarily through our Business Risk and Process Improvement function, which is our internal audit function, and involve (i) the identification by senior leaders of our business functions and divisions of the particular risks relevant to their respective areas; (ii) assessment of the materiality of those risks, based on expected probability of occurrence and severity of impact; and (iii) to the extent prudent and feasible, development of strategies and plans to mitigate, monitor and control such risks.

 

The Board’s oversight of these risks primarily occurs in connection with the exercise of its responsibility to oversee our business, including through the review of our long-term strategic plans, annual operating plans, financial results, merger and acquisition related activities, material legal

proceedings, and management succession plans. In addition, the Board uses its committees to assist with risk oversight within their respective areas of responsibility and expertise as follows:

 

 

The Chair of each Board committee provides a summary of the matters discussed in the committee to the full Board. Additional information regarding the responsibilities of each of these committees can be found under “Board Committees” beginning on page 17.

 

The Board believes that its oversight of risk is enhanced by its current leadership structure, as previously discussed, because our Chairman and CEO, who is ultimately responsible for our Management’s risk responsibility, also chairs regular Board meetings and, with his in-depth knowledge and understanding of the Company, is well positioned to bring key business issues and risks to the attention of the full Board.

 

The Board, following consideration of all relevant facts and circumstances and upon recommendation of the Nominating & Governance Committee, has affirmatively determined that each director who served as a member of our Board during fiscal 2010 (Robert C. Buhrmaster, Winslow H. Buxton, Gary L. Ellis, Jeffrey M. Ettinger, Janet K. Cooper, Katherine J. Harless, Robert H. Nassau, Gregg W. Steinhafel, Inge G. Thulin and Christopher A. Twomey), other than Michael J. Hoffman, our Chairman and CEO, is independent in that each such person has no material relationship with the Company, our Management or our external auditor, and otherwise meets the independence requirements as established by applicable law, the rules and regulations of the SEC and the NYSE listing standards. The Board determined that Michael J. Hoffman is not independent due to his status as an executive officer of the Company. The Board based its independence determinations, in part, upon a review by the Nominating & Governance Committee and the Board of certain transactions

between us and the employers of certain of our directors, each of which was deemed to be pre-approved under our Corporate Governance Guidelines in that each such transaction was made in the ordinary course of business, at arm’s length, at prices and on terms customarily available to unrelated third party vendors or customers generally, in amounts that are not material to our business or the business of such unaffiliated corporation, and in which the director had no direct or indirect personal interest, nor received any personal benefit. Specifically, the pre-approved transactions reviewed by the Nominating & Governance Committee and the Board included: (a) ordinary course of business purchases from us by Arctic Cat, Inc., where Mr. Twomey is Chairman, and during fiscal 2010 was an executive officer, in the aggregate amount of approximately $1,575; (b) ordinary course of business purchases from us by Medtronic, Inc., where Mr. Ellis is, and during fiscal 2010 was, an executive officer, in the aggregate amount of approximately $120,022; and (c) ordinary course of business purchases from us by Target Corporation, where Mr. Steinhafel is, and during fiscal 2010 was, an executive officer, in the aggregate amount of approximately $1,359,082, and ordinary course of business purchases by us from Target in the aggregate amount of approximately $63,228.

 

The Board held six meetings during fiscal 2010 and took action by unanimous written consent once in fiscal 2010. At each regular Board meeting, our non-employee directors met in executive session without Management present and presided by our lead director. Each incumbent director attended at least 75% of the aggregate total number of meetings held by the Board and all committees on which he or she served.

 

We encourage all of our directors to attend our annual meeting of shareholders and we customarily schedule a regular Board meeting on the same day as our annual meeting. Nine of our ten directors attended the annual meeting of shareholders held in March 2010.

 

The Board has four committees with their respective principal functions and membership described below. Each committee has a charter which is posted on our website at www.thetorocompany.com (select the “Investor Information” link and then the “Corporate Governance” link).

 

The following table summarizes the current membership of our four Board committees. Each of the members of the Audit Committee, Compensation & Human Resources Committee and Nominating & Governance Committee meets the independence and other requirements established by applicable law, the rules and regulations of the SEC, the NYSE listing standards and the Internal Revenue Code of 1986, as amended, or Code. Mr. Hoffman is not a member of any Board committee but does attend committee meetings as a member of Management.

 

Audit Committee.  The Audit Committee oversees our accounting and financial reporting processes and audits of our consolidated financial statements. The Committee assists the Board in oversight of the quality and integrity of our financial reports, our compliance with legal and regulatory requirements, the qualifications and independence of our external auditor, and the performance of our Business Risk and Process Improvement function, which is our internal audit function. More specifically, the Committee’s duties and responsibilities include, among others:

 

 

 

The Board has determined that all members of the Audit Committee, in addition to being independent under the rules and regulations of the SEC and the NYSE listing standards, are financially literate and that Audit Committee Chair Janet K. Cooper meets the definition of “audit committee financial expert” as a result of her experience in senior corporate executive positions with financial oversight responsibilities, including her previous experience as the Senior Vice President and Treasurer of Qwest Communications International Inc. and as the Chief Financial Officer and Senior Vice President of Finance and Administration of McDATA Corporation, as well as other finance positions with Qwest and The Quaker Oats Company. Shareholders should understand that this designation is an SEC disclosure requirement related to Ms. Cooper’s experience and understanding with respect to certain accounting and auditing matters. The designation does not impose upon her any duties, obligations or liability greater than are generally imposed on her as a member of the Audit Committee and the Board, and her designation as a financial expert pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board. Other members of the Audit Committee who currently are serving or have served as chief executive officers or chief financial officers of other public companies also may be considered financial experts, but the Board has not so designated them.

 

The Audit Committee reviews the adequacy of its charter and its own performance on an annual basis. The Committee held 11 meetings during fiscal 2010. At four of these meetings the Committee met in private session with our external auditor and independently without Management present. At four of these meetings the Committee met in separate private sessions with Senior Management and at three of these meetings the Committee met in separate private sessions with the director of our internal audit function. Additional information regarding the Committee and our external auditor is set forth in the “Audit Committee Report” on page 71 and Proposal Two—Ratification of Selection of Independent Registered Public Accounting Firm beginning on page 70.

 

Compensation & Human Resources Committee.  The Compensation & Human Resources Committee is responsible for discharging the Board’s responsibilities relating to compensation of our CEO and other executive officers and reviewing and monitoring our human resource and organizational matters. The Committee has overall responsibility for approving and evaluating all of our compensation plans, policies and programs, as well as our philosophy and strategy, as they affect the CEO, other executive officers and management employees. More specifically, the Committee’s duties and responsibilities include, among others:

 

 

 

The Compensation & Human Resources Committee reviews the adequacy of its charter and its own performance on an annual basis. The Committee held five meetings during fiscal 2010. At four of its meetings the Committee met in private session without Management present.

 

Determining Executive Compensation.  At the beginning of each fiscal year, the Compensation & Human Resources Committee reviews and approves compensation for our Chairman and CEO and each of our vice presidents, including each of the other named executive officers, which includes:

 

 

In connection with this review and approval, the Committee receives information regarding (i) market base salary, total cash compensation and total direct compensation data and analysis prepared by its independent executive compensation consultant, Towers Watson; (ii) total cash compensation to be paid for the current fiscal year if annual cash incentive awards are achieved and paid at target; (iii) prior fiscal year target equity values; and (iv) total direct compensation for the current fiscal year for equity awards at target. Additionally, the Committee obtains compensation recommendations from our Chairman and CEO, Vice President, Human Resources and Business Development, and Director, Total Rewards and HR Services that reflect individual performance; corporate and/or division performance, as applicable; tenure in the position; and outside market factors, including general economic conditions. Neither the Chairman and CEO nor the Vice President, Human Resources and

Business Development provides input or recommendations with respect to his own compensation. The Chair of the Committee is also responsible for coordinating a performance evaluation for the Chairman and CEO based on feedback from all non-employee directors in connection with the ratification of the Chairman and CEO’s compensation by the Board. For information on the compensation of our named executive officers, please refer to the “Executive Compensation” section beginning on page 31. Also, at the beginning of each fiscal year, the Committee confirms the achievement of performance goals previously established by the Committee at the beginning of the prior fiscal year for annual cash incentive awards and previously established by the Committee at the beginning of the performance period for performance share awards and approves resulting payouts, if any.

 

The Compensation & Human Resources Committee has the sole authority to retain and terminate any external compensation consultant to be used to assist it in the evaluation of the compensation paid to our Chairman and CEO and other executive officers, including the sole authority to approve the consultant’s fees and the other terms and conditions of the consultant’s retention. The Committee has retained Towers Watson to assist in the design and review of our executive compensation program. Additional information regarding the role of Towers Watson is set forth in the “Compensation Discussion and Analysis” beginning on page 31. Additionally, from time to time, the Committee has engaged Towers Watson to perform other executive compensation consulting services, which in fiscal 2010 included: (i) the design and review of The Toro Company 2010 Equity and Incentive Plan, or 2010 Plan, (ii) the review and assessment of our material compensation policies, practices and programs in connection with our risk assessment, (iii) the design and review of our new change in control severance compensation policy, and (iv) the review of supplemental benefit plan practices. Towers Watson does not provide any services to the Company other than those for which it has been retained by the Committee. Representatives from Towers Watson periodically attend meetings of the Committee as resources for the Committee in carrying out its responsibilities. The Committee, through its Chair, can request an independent meeting with representatives from Towers Watson at any time. The Committee also has the authority to obtain advice and assistance from external legal, accounting or other advisors.

 

Nominating & Governance Committee.  The Nominating & Governance Committee’s duties and responsibilities include, among others:

 

 

With respect to recommending director nominees for re-election at the annual meeting, the Nominating & Governance Committee, with the participation of the Chairman of the Board, annually polls the members of the Board about each director whose term is expiring. If the Committee determines that a director does not continue to have the affirmative support of a majority of the members of the Board, the Committee does not recommend the director to stand for re-election.

 

The Nominating & Governance Committee reviews the adequacy of its charter and its own performance on an annual basis. The Committee held two meetings during fiscal 2010 and took action by written consent once in fiscal 2010. At each of its meetings the Committee met in private session without Management present.

 

Identifying New Director Nominees.  In identifying new nominees for election to the Board when vacancies occur, the Nominating & Governance Committee first may solicit recommendations for nominees from persons whom the Committee believes are likely to be familiar with candidates having the skills and characteristics required for Board nominees from time to time. Such persons may include members of the Board and our Senior Management. In addition, the Committee may engage a search firm to assist it in identifying and evaluating qualified nominees. The Committee has sole authority to retain and terminate any search firm to be used to identify director candidates and has sole authority to approve the search firm’s fees and other retention terms.

 

When reviewing the requisite skill and characteristics of potential new director nominees, the Nominating & Governance Committee, pursuant to our Corporate Governance Guidelines, will consider a variety of criteria, including an individual’s independence, diversity, age, skills and experience, each in the context of the needs of the Board as a whole. Although the Committee does not have a formal policy regarding consideration of diversity in identifying director nominees, the Committee will evaluate a nominee based on his or her diversity of background, skills, experiences, viewpoints, and geographical representation, as well as more traditional diversity factors. As a result, the composition of the current Board reflects diversity in age, gender, skills, and business and professional experiences.

 

The Nominating & Governance Committee may solicit the views of Senior Management, Board members and any other individuals it believes may have insight into a candidate. The Committee may designate one or more of its members and/or other Board members to interview any proposed candidate. The Committee then will recommend a director nominee to the Board based on its evaluation of such criteria.

 

In July 2010, the Board of Directors determined to increase the size of the Board, which had been decreased with the retirement of Mr. Winslow H. Buxton at the annual meeting of shareholders held in March 2010. A third-party search firm was engaged to assist in the identification and evaluation of director nominee candidates. In particular, the search firm was asked to concentrate on individuals who were currently serving in the position of chief executive officer, have proven strategic leadership, have operational and manufacturing experience, are in cultural alignment with Toro, bring diverse characteristics to the Board and are locally based. A slate of candidates, including Mr. Jeffrey M. Ettinger, was identified and referred to the Nominating & Governance Committee. Mr. Ettinger was subsequently interviewed by the Chair of the Committee and certain other directors, including our Chairman and CEO. The Committee recommended to the full Board that the Board be increased from nine to ten directors and that Mr. Ettinger be elected to fill the vacancy created by such increase. Mr. Ettinger was elected effective July 1, 2010, and is included in the group of nominees for election by our shareholders at the 2011 Annual Meeting of Shareholders for a term expiring at the 2014 Annual Meeting. See Proposal One—Election of Directors beginning on page 9.

 

The Nominating & Governance Committee will consider director candidates recommended to it by our shareholders. Those candidates must be qualified and exhibit the experience and expertise required of the Board’s own pool of candidates, as well as have an interest in our business, and the demonstrated ability to attend and prepare for Board, committee and shareholder meetings. Any

candidate must state in advance his or her willingness and interest in serving on the Board. Candidates should represent the interests of all shareholders and not those of a special interest group. The Committee will evaluate candidates recommended by shareholders using the same criteria it uses to evaluate candidates recommended by others as described above. A shareholder that desires to nominate a person for election to the Board at a meeting of shareholders must follow the specified advanced notice requirements contained in, and provide the specific information required by, our Amended and Restated Bylaws, as described under “Shareholder Proposals and Director Nominations for the 2012 Annual Meeting” on page 74.

 

Finance Committee.  The Finance Committee’s duties and responsibilities include, among others:

 

 

The Finance Committee reviews the adequacy of its charter and its own performance on an annual basis. The Committee held two meetings during fiscal 2010. At each of these meetings the Committee met in private session without Management present.

 

Overview.  Compensation for our non-employee directors is generally designed to attract and retain experienced and knowledgeable directors and to provide equity-based compensation to align the interests of our directors with those of our shareholders. A substantial portion of our director compensation is linked to our common stock performance, and directors can elect to receive all of their cash compensation for Board and committee service, consisting of annual retainers and meeting fees, in the form of our common stock.

 

Our compensation for our non-employee directors for fiscal 2010 was comprised of both cash compensation, in the form of annual retainers and meeting fees, and equity compensation, in the form of automatic annual stock awards and automatic annual stock option grants. Each of these

components is described in more detail below. Employee directors do not receive any additional compensation for their director service. Mr. Hoffman is our only employee director.

 

Processes and Procedures for Consideration and Determination of Director Compensation.  The Board has delegated to the Compensation & Human Resources Committee the responsibility, among other things, to review biennially and recommend to the Nominating & Governance Committee any proposed changes in non-employee director compensation, taking into account director compensation at comparable companies. The Compensation & Human Resources Committee most recently reviewed non-employee director compensation in fiscal 2007. In fiscal 2009, the Compensation & Human Resources Committee deferred its review of non-employee director compensation given the then worldwide recessionary economic conditions and the resulting impact on the Company’s business, and again deferred its review in fiscal 2010 given the then uncertainty regarding the level and rate of recovery, if any, that the Company’s business would experience. It is anticipated that the Compensation & Human Resources Committee will review non-employee director compensation in fiscal 2011. Decisions regarding non-employee director compensation made by the Compensation & Human Resources Committee and the Nominating & Governance Committee are not considered final but are subject to review and approval by the Board.

 

Annual Retainers and Meeting Fees.  Currently, all non-employee directors are entitled to receive the following annual retainers and meeting fees:

 

 

Committee chairs and our lead director are entitled to receive the following additional annual retainers and meeting fees:

 

 

Robert C. Buhrmaster served as our lead director during fiscal 2010 and the table on page 17 shows the Chair of each Board committee and the Board committees on which each director currently serves.

 

Annual retainers and meeting fees are paid in cash on a calendar year basis unless a director elects to (i) convert all or a part of his or her annual retainers and/or meeting fees into shares of our common stock, or (ii) defer receipt of all or a part of his or her annual retainers and/or meeting fees. Annual retainers are paid in advance and meeting fees are paid in arrears in four quarterly installments on each of January 1, April 1, July 1 and October 1. For example, the annual retainers paid on January 1 are for the period from January 1 through March 31 and meeting fees paid on January 1 cover meetings attended from October 1 through December 31 of the previous calendar year.

Common Stock in Lieu of Annual Retainers and Meeting Fees.  Our non-employee directors may elect to convert all or a part of their calendar year annual retainers and/or meeting fees otherwise payable in cash into shares of our common stock, which for calendar year 2010 were issued under The Toro Company 2000 Directors Stock Plan, or 2000 Directors Stock Plan, and beginning in calendar year 2011 and thereafter will be issued under the 2010 Plan. Annual retainers and meeting fees that are earned after the date a director makes an election for a calendar year are issued in December of that year. The number of shares of our common stock to be issued is determined by dividing the dollar amount of the annual retainers and meeting fees earned in the calendar year and to be converted into shares of our common stock by the closing price of our common stock, as reported on the NYSE, on the date that the shares are issued. On December 15, 2010, based on that day’s closing stock price of $61.57, Gary L. Ellis received 1,059 shares of our common stock in lieu of $65,250 earned for his calendar year 2010 retainers and meeting fees, Jeffrey M. Ettinger received 430 shares of our common stock in lieu of $26,500 earned for his calendar year 2010 retainer and meeting fees, and Inge G. Thulin received 706 shares of our common stock in lieu of $43,500 earned for his calendar year 2010 retainer and meeting fees. For Messrs. Ellis and Ettinger these annual retainers and meeting fees represented 100%, and for Mr. Thulin 75%, of (i) annual retainers for January 1, 2010, through December 31, 2010, which were accrued in quarterly installments on each of January 1, 2010, April 1, 2010, July 1, 2010, and October 1, 2010, and (ii) meeting fees for October 1, 2009, through September 30, 2010, which were accrued in quarterly installments on each of January 1, 2010, April 1, 2010, July 1, 2010, and October 1, 2010.

 

Stock Awards.  Stock awards are designed to link non-employee director compensation with shareholder interests. On the first business day of our fiscal year (usually November 1), each non-employee director is automatically awarded shares of our common stock, which for fiscal 2010 were issued under the 2000 Directors Stock Plan and for fiscal 2011 were and thereafter will be issued under the 2010 Plan, in an amount equal to $20,000 divided by the average of the closing prices of our common stock, as reported on the NYSE, during the three months prior to the award. Accordingly, on November 2, 2009, the first business day of fiscal 2010, 523 shares were awarded to each non-employee director based on a three-month average closing price of our common stock, as reported on the NYSE, of $38.21. The shares awarded are fully vested at the time of grant.

 

Stock Option Grants.  Stock option grants also are designed to link non-employee director compensation with shareholder interests. On the first business day of our fiscal year, each non-employee director is automatically granted a stock option to purchase shares of our common stock, which for fiscal 2010 were issued under the 2000 Directors Stock Plan and for fiscal 2011 were and thereafter will be issued under the 2010 Plan, in an amount equal to $40,000 divided by the grant date fair value of a stock option to purchase one share of common stock. For fiscal 2010, the fair value used for purposes of calculating the number of options granted was based on a Black-Scholes model valuation of $10.59 per share. Accordingly, on November 2, 2009, each non-employee director received a stock option to purchase 3,777 shares of our common stock. The exercise price per share of these stock options is equal to 100% of the fair market value of one share of our common stock on the date of grant, as determined by the closing price of our common stock, as reported on the NYSE, which was $37.01 on November 2, 2009. Except as described below, these stock options vest in three equal installments on each of the first, second and third year anniversaries of the date of grant and remain exercisable for a term of ten years after the date of grant.

 

If a director becomes disabled or dies and the director’s outstanding unvested stock options granted under the 2000 Directors Stock Plan or the 2010 Plan, as applicable, have not expired previously, all outstanding unvested stock options will vest in full on the date the director’s service ceases by reason of such disability or death. In addition, the director’s guardian or legal representative may exercise the stock options not later than the earlier of the date the stock options expire or one year after the date the director’s service ceased by reason of such disability or death.

If a director has served as a member of the Board for ten full fiscal years or longer and terminates his or her service on the Board, his or her outstanding unvested stock options will continue to vest in accordance with their terms and the director may exercise the vested portions of the stock options for up to four years after the director’s date of termination, but not later than the date the stock options expire. If a director has served as a member of the Board for less than ten full fiscal years and terminates his or her service on the Board, his or her outstanding unvested stock options will expire and be canceled and the director may exercise any vested portions of the stock options for up to three months after the director’s date of termination, but not later than the date the stock options expire. The following directors have served as a member of the Board for ten full fiscal years or longer: Robert C. Buhrmaster, Janet K. Cooper, Katherine J. Harless, Robert H. Nassau, Gregg W. Steinhafel and Christopher A. Twomey.

 

Stock options granted under the 2000 Directors Stock Plan will vest if there is a change in control of the Company and will remain exercisable for three years following the change in control, but not later than the date the stock options expire, and stock options granted under the 2010 Plan will vest if there is a change in control of the Company and will remain exercisable for the entirety of the term. Generally, and subject to some exceptions, a change in control is deemed to have occurred under the 2000 Directors Stock Plan and the 2010 Plan, as applicable, if: (i) another person becomes the beneficial owner of a specified percentage of our then-outstanding common stock or the combined voting power of our then-outstanding voting stock, which is 15% under the 2000 Directors Stock Plan and 20% under the 2010 Plan; (ii) a majority of the Board becomes comprised of persons other than those for whom election proxies have been solicited by the Board; (iii) the completion of certain business combinations, including certain reorganizations, mergers, consolidations, the sale of all or substantially all of our assets or the acquisition by us of assets or stock of another entity, where the shareholders before the business combination fail to beneficially own and have voting power for more than 50% of the Company or the resulting company after the business combination; or (iv) our shareholders approve a complete liquidation or dissolution of the Company.

 

Stock Ownership Guidelines.  To further align the interests of our directors with those of our shareholders, within five years of joining the Board, each non-employee director is expected to own a dollar value of our common stock equal to at least three times the director’s annual cash retainer for Board service. In July 2010, the Board, on recommendation of the Compensation & Human Resources Committee and the Nominating & Governance Committee, amended our Corporate Governance Guidelines to increase our stock ownership guidelines for non-employee directors to the current multiple of three from a previous multiple of two. As of January 21, 2011, each of our non-employee directors who served for five or more years satisfied these stock ownership guidelines.

 

Deferred Compensation Plan.  Non-employee directors may elect to defer receipt of all or a part of his or her cash and/or common stock compensation on a calendar year basis under The Toro Company Deferred Compensation Plan for Non-Employee Directors, or the Director Deferred Compensation Plan. Cash amounts deferred by a director are credited to a bookkeeping cash account maintained for the director participant and common stock amounts deferred by a director are credited to a bookkeeping common stock unit account maintained for the director participant. Cash accounts accrue interest with the rate of return based on funds that are comparable to the funds available to our employees through the IS&ESOP.

 

Common stock amounts deferred under the Director Deferred Compensation Plan are deferred as common stock units that fluctuate in value with the market price of our common stock. Dividends paid on our common stock are credited to a director’s account as additional common stock units.

 

A director participant’s cash account and common stock units are at all times fully vested. Distributions under the Director Deferred Compensation Plan are payable in accordance with the director participant’s election upon the earliest of retirement, prior to retirement if a valid election has

been made or in an unforeseeable financial emergency. The Director Deferred Compensation Plan does not provide for matching contributions by us.

 

None of our directors deferred any cash compensation earned during fiscal 2010 and Ms. Cooper and Mr. Thulin each deferred their fiscal 2010 annual stock award granted in November 2009. For fiscal 2011, Mr. Ellis will defer 100% of his cash compensation to be earned during calendar year 2011 and each of Messrs. Ellis and Thulin deferred their fiscal 2011 annual stock award granted in November 2010.

 

Company Products.  Each of our non-employee directors is entitled to receive certain Company products for his or her personal use at no cost; provided, however, that directors are responsible for payment of applicable taxes attributable to the value of such products and there is an $8,000 lifetime limit on installation and parts for an irrigation system. The value of a product is deemed to be our distributor net price or its equivalent, which is also the price at which products are available to employees for purchase. This value is generally included on the director’s IRS Form 1099 for the year in which the product was ordered. However, for certain consumer rider products, professional products and commercial vehicles, a director may elect at the time he or she orders the product to return such product in the future and, in that case, the director’s IRS Form 1099 for each year in which the product is in his or her possession will include the depreciable amount for such year using the IRS prescribed MACRS depreciation rate.

 

Charitable Giving.  Support of our directors’ charitable organizations is made in accordance with the Company’s Matching Gift Program, which provides that a gift in the amount of $25 to $1,000 by a director and/or his or her spouse to educational and/or environmental institutions and public broadcasting organizations will be matched by us in an aggregate amount of up to $1,000 per director per year.

 

Indemnification and Directors and Officers Insurance.  Each director is a party to an indemnification agreement with us that assures the director of indemnification and advancement of expenses to the fullest extent permitted by Delaware law and our Restated Certificate of Incorporation, and of continued coverage under our D&O insurance, to the extent it is maintained.

 

Director Compensation for Fiscal 2010.  The following table provides summary information concerning the compensation of each individual who served as a director during fiscal 2010, other than Michael J. Hoffman, our Chairman and CEO, who is not compensated separately for his service as a director and whose compensation is discussed in the “Executive Compensation” section beginning on page 31.

 

 

 

Our Corporate Governance Guidelines set forth in writing our policies and procedures regarding the review, approval and ratification of related person transactions. All reportable related person transactions must be reviewed, approved or ratified by the Nominating & Governance Committee. In determining whether to approve or ratify such transactions, the Committee will take into account, among other factors and information it deems appropriate:

 

 

Transactions in the ordinary course of business, between us and an unaffiliated corporation of which one of our non-employee directors serves as an officer, that are at arm’s length, at prices and on terms customarily available to unrelated third party vendors or customers generally, in which the non-employee director had no direct or indirect personal interest, nor received any personal benefit, and in amounts that are not material to our business or the business of such unaffiliated corporation, are deemed conclusively pre-approved.

 

It is our policy to maintain the highest level of moral, ethical and legal standards in the conduct of our business. Pursuant to our Corporate Governance Guidelines, the Board has adopted, and each director annually signs, a Business Ethics Policy Statement. The policy can be found on our website at www.thetorocompany.com (select the “Investor Information” link and then the “Corporate Governance” link).

 

All of our employees are required to comply with our Code of Conduct to help ensure that our business is conducted in accordance with the highest level of moral, ethical and legal standards. We also have a Code of Ethics for our CEO and Senior Financial Officers applicable to our Chairman and CEO (our principal executive officer), our Vice President, Finance and Chief Financial Officer, or CFO (our principal financial officer), our Vice President, Corporate Controller (our principal accounting officer and controller), and to all business unit controllers and senior accounting personnel identified by our Vice President, Corporate Controller who are also bound by the provisions set forth in the Code of Conduct relating to ethical conduct, conflicts of interest and compliance with the law. Our Code of Conduct and Code of Ethics for our CEO and Senior Financial Officers can be found on our website at www.thetorocompany.com (select the “Investor Information” link and then the “Corporate Governance” link). If necessary, we intend to satisfy the disclosure requirements of Item 5.05 of the Current Report on Form 8-K regarding amendments to or waivers from any provision of our Code of Ethics for our CEO and Senior Financial Officers by posting such information on our website at www.thetorocompany.com (select the “Investor Information” link and then the “Corporate Governance” link).

 

The Board has appointed Robert C. Buhrmaster, as our lead director, with the responsibility to facilitate communications by shareholders, interested parties and employees directly with the independent, non-management members of the Board. Our lead director maintains a special telephone line for the purposes described below.

 

As required by the Sarbanes-Oxley Act of 2002, we maintain procedures to receive, retain and treat complaints received regarding accounting, internal accounting controls or auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Our 24-hour, toll-free confidential compliance line is available for the submission of concerns regarding these matters by any employee. Any employee who believes he or she is aware of a breach of our Code of Conduct or an incident involving financial fraud may leave a confidential or anonymous message at 800-850-7247 (in the United States) or +1-678-999-4558 (outside the United States) or for Robert C. Buhrmaster, as our lead director, at 952-887-7268.

 

The Board also has established a process for shareholders and interested parties to send communications to the non-employee directors. Shareholders and interested parties may communicate with the Board or the non-employee directors through the lead director by calling 952-887-7268 or by writing to our Vice President, Secretary and General Counsel, 8111 Lyndale Avenue South, Bloomington, Minnesota, 55420-1196. Communications sent to us addressed to the Board or to any non-employee director are reviewed by our Vice President, Secretary and General Counsel. Some types of communications may not be forwarded to our lead director. These include job inquiries, surveys and requests for information about us, offers of goods and services, requests for donations and sponsorships and product ideas, as well as communications unrelated to us or our business. If the communication does not fall in one of these categories, it will be forwarded to our lead director.

 

Concerns and questions relating to accounting, internal accounting controls, financial policy, risk management or auditing matters are brought to the attention of the Chair of the Audit Committee and are handled in accordance with procedures established by the Audit Committee. These concerns also may be reported through our anonymous confidential compliance line at 800-850-7247 (in the United States) or +1-678-999-4558 (outside the United States) or to Robert C. Buhrmaster, as our lead director, at 952-887-7268. If requested, we will endeavor to keep information that has been submitted confidential, subject to any need to conduct an effective investigation and take appropriate action.

 

The Compensation & Human Resources Committee has reviewed and discussed the Compensation Discussion and Analysis with Management and, based on such review and discussions, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and in our Annual Report on Form 10-K for the fiscal year ended October 31, 2010.

 

Compensation & Human Resources Committee:

Christopher A. Twomey (Chair)

Jeffrey M. Ettinger

Katherine J. Harless

Robert H. Nassau

Gregg W. Steinhafel

 

Executive Summary.  This Compensation Discussion and Analysis describes the key principles and approaches used to determine significant elements of compensation awarded to, earned by and paid to each of our named executive officers listed in the “Summary Compensation Table” on page 51. This discussion should be read in conjunction with the accompanying compensation tables and corresponding narrative discussion and footnotes set forth on pages 51 through 69, as it provides information and context to the compensation disclosures included in those compensation tables, narrative discussions and footnotes.

 

We believe that our compensation program objectives outlined below have resulted in decisions on executive compensation that have appropriately incented the achievement of financial goals that, despite recent challenging economic conditions, have benefited our shareholders and are expected to drive long-term shareholder value. Summarized below are some key highlights of our financial performance for fiscal 2010:

 

 

Compensation Program Objectives.  Our guiding compensation philosophy is to maintain an executive compensation program that will allow us to attract, retain, motivate and reward highly qualified and talented executives that will enable us to perform better than our competitors and drive long-term shareholder value. The following core principles provide a framework for our executive compensation program:

 

 

Our compensation policies, practices and programs are designed such that we believe that they do not create risks that are reasonably likely to have a material adverse effect on the Company. Additional detail regarding our risk assessment of our compensation policies, practices and programs is set forth under “Assessment of Risk Related to Compensation Programs” beginning on page 50.

 

Role of the Compensation & Human Resources Committee, Management and Outside Consultants.  Compensation for our named executive officers generally is determined by the Compensation & Human Resources Committee, which is comprised solely of independent directors who meet at least three times each fiscal year. In making compensation decisions, the Committee considers input from Towers Watson, its independent executive compensation consultant, and our Management, including our Chairman and CEO, Vice President, Human Resources and Business Development and Director, Total Rewards and HR Services.

 

The Compensation & Human Resources Committee has engaged Towers Watson as its independent executive compensation consultant. In fiscal 2010 Towers Watson attended each Committee meeting. Towers Watson reviews and discusses Management’s executive compensation recommendations and is also engaged by the Committee from time to time to perform other executive compensation consulting services, which in fiscal 2010 included: (i) the design and review of the 2010 Plan, (ii) the review and assessment of our material compensation policies, practices and programs in connection with our risk assessment, (iii) the design and review of our new change in control severance compensation policy, and (iv) the review of supplemental benefit plan practices.

 

Each year, Towers Watson is also engaged to provide market data for all our executives, including our named executive officers. This market data is derived from the executive database within the Towers Watson Compensation Data Bank, which is a published compensation survey. The data in the compensation survey (there were 809 participating companies in the 2010 survey) is size adjusted, using a regression analysis, for our revenue size. If regression data is not available, data is provided for a sub-set of companies with annual revenue between $1 billion and $3 billion (there were 123 participating companies in the 2010 survey in this revenue range). For executives with divisional responsibilities, the data is size adjusted for specific division revenue. We believe that the market for

our executive talent is not limited to the manufacturing industry and, therefore, we do not focus specifically on manufacturing companies within the database, nor do we identify a separate group of peer companies within the manufacturing industry. The market data provided by Towers Watson is in aggregate form for each position in which our executives serves. Individual data for participating companies in the survey is not provided and, therefore, not considered when determining executive compensation in total or for any individual element.

 

Management’s role is to provide current compensation information to Towers Watson and provide compensation analysis and recommendations to the Compensation & Human Resources Committee and Towers Watson based on the executive’s experience, tenure, corporate and division performance, individual performance and internal pay equity. The Committee considers these factors in making compensation decisions for the named executive officers. Additionally, the Committee considers results of the annual CEO evaluation process in making compensation decisions for our Chairman and CEO. Neither the Chairman and CEO nor the Vice President, Human Resources & Business Development provides input or recommendations with respect to his own compensation.

 

Elements of Our Executive Compensation Program.  During fiscal 2010, our executive compensation program consisted of the following elements: base salary, annual cash incentives, long-term incentives, retirement and health benefits, and perquisites. The following table provides detail on each element of our executive compensation program and target positioning:

 

 

We do not target a specific mix between fixed (non-performance-based) and variable/incentive (performance-based) compensation, annual and long-term compensation, or cash and equity compensation in determining our executive compensation levels. At the beginning of each fiscal year, the Compensation & Human Resources Committee, Towers Watson and Management evaluate base salaries, annual cash incentives, long-term incentives and total direct compensation (the sum of base salaries, annual cash incentives and long-term incentives) in comparison to the market 50^th percentile. To the extent that the mix between fixed and variable/incentive compensation and individual elements of compensation change in the market, the mix may change for any individual named executive officer.

 

We describe each element of our executive compensation program in more detail in the following pages.

 

Base Salary

 

General.  We provide market competitive annual base salaries to our named executive officers in order to recognize their significant responsibilities and achievements in performing their day-to-day duties, reflect their historical and current levels of individual performance, reflect the scope and complexity of the role in which they serve, and provide a stable source of fixed income. Similar to our process for U.S.-based office salaried employees, we review base salaries for our executives, including our named executive officers, on an annual basis. The base salaries for our executives are reviewed at the regular meeting of the Compensation & Human Resources Committee held in November or December of each year. Given the timing of this review by the Committee, we believe it is appropriate for salary increases, if any, for our executives, including our named executive officers, to be effective December 1^st.

 

Discussion and Analysis.  When determining base salaries, the Compensation & Human Resources Committee, Towers Watson and Management evaluate each individual executive’s base salary relative to: the market; historical and current levels of individual performance, as analyzed by reviewing day-to-day responsibilities and fiscal year achievements; scope and complexity of the role in which the executive serves; and internal pay comparisons.

To provide context for recent base salary determinations, including fiscal 2010 determinations, we have provided the below table summarizing the fiscal 2008, fiscal 2009 and fiscal 2010 base salary actions taken with respect to each of our named executive officers. Prior to fiscal 2008, base salary increases were effective as of November 1^st rather than December 1^st.

 

 

Due to the economic climate and uncertainty that was unfolding early in fiscal 2009, at its meeting held in December 2008, the Compensation & Human Resources Committee approved a base salary freeze for most executive officers. Only two named executive officers received an increase to base salary effective as of December 1, 2008, Messrs. Dordell and Ramstad. Mr. Dordell received a 16% increase to his base salary on December 1, 2008, to bring his base salary closer to the market 50^th percentile and to reward his individual contributions and performance. Following that increase, Mr. Dordell’s base salary was at 88.5% of the market 50^th percentile base salary. Mr. Ramstad received a 5% increase to his base salary on December 1, 2008, to recognize his contributions as a vice president with responsibilities for both the human resources and business development functions and to reward his individual contributions and performance.

 

Later in fiscal 2009, as one of a number of cost savings initiatives implemented by the Company in connection with the then worldwide recessionary economic conditions and the resulting impact on the Company’s business, the Compensation & Human Resources Committee approved a 10% base salary reduction for all officers, including each of our named executive offers. These salary reductions were effective as of February 16, 2009.

 

With respect to all executives, including our named executive officers, on December 1, 2009, the Compensation & Human Resources Committee approved the reinstatement of base salaries back to December 1, 2008, levels. Additionally, a 7% increase was approved for Mr. Dordell to reflect his individual contributions and performance and to position his base salary closer to the market 50^th percentile. A 2.1% increase was approved for Mr. Ramstad to reflect his individual contributions and performance, as well as his responsibility for both the human resources and business development functions.

 

The table below summarizes fiscal 2010 base salary earnings, as reported in the “Summary Compensation Table” on page 51 in the “Salary” column, and how those base salary earnings compare as a percent above or below the fiscal 2010 market 50^th percentile. Fiscal year base salary earnings are different than December 1, 2009, base salaries since the effective date of any base salary increase is one month into the fiscal year.

 

Generally our named executive officers are slightly above or slightly below the market, with the exception of Mr. Ramstad. As described previously, market data is provided for each of the positions in which our named executive officers serve. For Mr. Ramstad’s position, market data is provided for the top human resources executive. However, Mr. Ramstad has overall responsibility for both the human resources and business development functions and responsibilities for both functions are considered when determining his compensation levels, including his base salary. As a result, his base salary exceeds the market 50^th percentile of a top human resources executive by over 20%. We believe it is important to compare Mr. Ramstad’s compensation to the market and that the top human resources executive position is most closely aligned to his position. However, we also believe it is equally important to consider and recognize Mr. Ramstad’s responsibilities for two unique functions, as well as his individual contributions and performance, in determining his appropriate annual base salary.

 

Fiscal 2011.  In December 2010, the Compensation & Human Resources Committee evaluated the economic recovery experienced by the Company, as reflected in our fiscal 2010 financial performance, levels of individual performance, scope and complexity of the position held by the named executive officers, and market data on typical executive salary increases. As a result, the Committee approved increases to base salaries, which were effective as of December 1, 2010.

 

 

The 3% base salary increases for Messrs. Hoffman and Brown reflect typical executive budgeted salary increases and were intended to provide an increase to fixed levels of compensation in light of the fact that base salaries for these individuals had not been increased since November 1, 2007. The increases for Messrs. Wolfe and Dordell bring their base salaries closer to the market 50^th percentile. In reviewing base salary for Mr. Ramstad, the Compensation & Human Resources Committee considered all of the information previously described regarding his overall responsibility for both the human resources and business development functions.

 

Annual Cash Incentives

 

General.  We provide the opportunity for our executives to earn an annual cash incentive, which is designed to motivate attainment of annual financial business results. Payout of annual cash incentives is based on achievement of certain threshold, target and maximum financial goals established as part of the annual financial plan. At the beginning of each fiscal year, during its regular meeting held in November or December, the Compensation & Human Resources Committee approves a target award expressed as a percentage of base salary for each named executive officer. Additionally, the Committee approves specific performance measures, weightings and goals at both the corporate and division level.

 

During its regular meeting held in July, the Compensation & Human Resources Committee reviews progress against the corporate and division performance goals along with projected payouts based on progress against those goals. Following the end of the fiscal year, at the Committee meeting held in November or December, Management presents a summary of, and the Committee confirms, actual performance in comparison to the established threshold, target and maximum performance levels for the corporate and division financial performance goals along with a corresponding payout percent (expressed as a percent of target performance).

Target Awards.  Target awards are established and expressed as a percentage of base salary. When determining the target award for each named executive officer, the Compensation & Human Resources Committee reviews the market 50^th percentile for target total cash compensation (sum of base salary and target annual cash incentives) for the position in which such named executive officer serves. Our objective is that when our performance against annual performance measures is at target levels of performance, resulting total cash compensation is at the market 50^th percentile. In addition to considering the market data, the Committee also considers experience, scope and complexity of the position, as well as individual contributions and performance. In December 2009, the Committee approved fiscal 2010 target awards, expressed as a percent of base salary, for each of our named executive officers that were the same as the target awards previously approved by the Committee for fiscal 2009. Additionally, a maximum award is established for each named executive officer, which is defined as 200% of the target award, and a threshold is established, which is defined as 40% of the target award. Therefore, if maximum levels of performance are achieved for all performance measures, the actual annual cash incentive award cannot exceed 200%. If performance at the threshold levels are met, the actual annual cash incentive award is paid out at 40% of the target award. If the thresholds are not met, there is no payout for that performance measure. Additional detail is provided under “Fiscal 2010 Performance Measures, Weightings and Goals” beginning on page 40. The percentage of base salary paid out for performance at the threshold (40% of target) and maximum (200% of target) levels is also provided. The target, threshold and maximum awards, expressed as a percentage of base salary are provided in the table below.

 

 

We believe that these target awards reflect market competitive annual cash incentive opportunities and that the differentiation of target awards by named executive officers is appropriate given their responsibilities and achievements and, therefore, the target awards were consistent with the target awards for fiscal 2009. The target awards generally result in fiscal 2010 target total cash compensation (sum of fiscal year base salary and target annual cash incentive) being slightly above or below the market 50^th percentile as outlined in the table below, with the exception of Mr. Ramstad. As described previously, Mr. Ramstad’s compensation is compared to a top human resources executive and, therefore, the Compensation & Human Resources Committee believes that market data does not reflect his responsibilities for both the human resources and business development functions. When Mr. Ramstad’s compensation is discussed and established between the Committee, Towers Watson and Management, those additional responsibilities are considered. Details regarding actual total cash compensation for fiscal 2010 can be found under “Discussion and Analysis” beginning on page 41.

 

Fiscal 2010 Performance Measures, Weightings and Goals.  Each year, the Compensation & Human Resources Committee, together with Towers Watson and Management, discuss performance measures, weightings and goals for the annual cash incentive awards. We believe that in order to motivate our executives to achieve our annual financial plan, it is important to set performance goals that are reflected in that annual financial plan. Key drivers in our annual financial plan generally include, and included for fiscal 2010, improvement in revenue growth, profitability and asset efficiency. We believe that establishing goals in these areas will drive shareholder value and focus our executives on improving annual performance such that the annual financial plan is achieved.

 

In fiscal 2010, the specific corporate performance measures and weightings, as approved by the Compensation & Human Resources Committee, were consistent with those established in fiscal 2009 and included:

 

 

Leading up to fiscal 2010, our divisions made significant progress toward our goal of driving working capital as a percentage of net sales “to the teens.” However, continued focus on this working capital initiative remained important for fiscal 2010. Therefore, division working capital as a percent of sales and division controllable profit contribution, or CPC, remained as performance measures for fiscal 2010. While asset efficiency and profitability remained as important corporate objectives for fiscal 2010, we believed it was appropriate to further focus the attention of our executives at the division level on revenue growth. This was discussed with our Compensation & Human Resources Committee and Towers Watson. As a result, the Committee approved division revenue growth as an additional division performance measure for fiscal 2010. The division performance measures and weightings for fiscal 2010, as approved by the Committee, included:

 

 

For fiscal 2010, threshold, target and maximum goals were established for all performance measures at both the corporate and division level. Target levels of performance were established based on our annual financial plan, which takes into account our prior fiscal year financial business results, our competitive situation and the general outlook for our businesses. The EPS threshold, which is set at 80% of plan, must be met for there to be a payout for corporate participants and a corporate portion of a payout for division participants. For division participants to receive a division payout, CPC must be at 80% of plan, or the threshold level of performance. Division participants are still eligible to receive a corporate portion of a payout if CPC is at 60% of plan or greater.

Below are tables summarizing the fiscal 2010 corporate, residential and landscape contractor equipment performance measures, which were the performance measures applicable to our named executive officers and include threshold, target, maximum and actual levels of performance.

 

 

 

 

Discussion and Analysis.  As indicated in the table above, actual fiscal 2010 performance for each performance measure at the corporate level far exceeded the maximum levels. Despite this fact, since our awards are capped at 200% of the target award, the corporate payout was 200% of the target award. Division payouts ranged from 0% to 200%.

 

For fiscal 2010, Messrs. Hoffman, Wolfe, Dordell and Ramstad’s annual cash incentive payouts were based entirely on corporate performance and, therefore, each of these officers received a payout of 200% of the target award, or the maximum level. This translates to payouts of 170% and 130% of base salary for Messrs. Hoffman and Wolfe, respectively, and 100% of base salary for Messrs. Dordell and Ramstad. Payouts for Messrs. Hoffman, Wolfe, Dordell and Ramstad are entirely based on corporate performance because they have no specific divisional responsibilities. In September 2010, several of our vice presidents were given new division responsibilities and, as such, Mr. Brown became the vice president of our international division. Since fiscal 2010 was largely completed, Mr. Brown’s division portion of the annual cash incentive payout was based on his division responsibilities for the majority of the year, which included our residential and landscape contractor equipment divisions. Overall, his annual cash incentive payout was based equally on corporate performance and division performance. For the division portion, Mr. Brown’s annual cash incentive payout was based 80% on performance of the residential division and 20% on performance of the landscape contractor equipment division. This mix generally reflects the difference between the size and profitability of those divisions, as well as how Mr. Brown generally spent his time between those divisions. Those divisions paid out at 200% (maximum) and 93%, respectively. Therefore, Mr. Brown received an annual cash incentive payout that was slightly less than the maximum level of 100% of his base salary. Since the fiscal 2010 annual cash incentive payouts were at or close to maximum levels for each of our named executive officers, the resulting fiscal 2010 actual total cash compensation (sum of fiscal year base salary earnings and annual cash incentive payout) exceeded the market 50^th percentile. This is consistent with our philosophy of linking pay to performance in that when financial performance exceeds target, resulting compensation is above the market 50^th percentile. Fiscal 2010

actual total cash compensation and its position relative to the market 50^th percentile is reflected in the table below.

 

 

Fiscal 2011.  In discussing the annual financial plan for fiscal 2011, the Compensation & Human Resources Committee, Towers Watson and Management discussed improved revenue and profitability and significant progress toward asset efficiency. It was determined that a stronger focus on both revenue growth and profitability were important for fiscal 2011. Therefore, Management recommended, and the Committee approved, revised weightings for fiscal 2011 emphasizing revenue growth and profitability, as outlined below.

 

Corporate Participants

 

 

Division Participants

 

 

For fiscal 2011, the Compensation & Human Resources Committee also established specific adjustment events to corporate annual cash incentive payouts. The impact of acquisitions on the annual cash incentive payouts will be determined based on the size of the acquisition as determined by projected year one revenue. The impact of any acquisition greater than $10 million will be excluded from the payout calculation and the impact of any acquisition less than $10 million will be included in the payout calculation. Additionally, any externally driven changes in accounting principles and standards will be excluded if the cumulative net impact on the payout of all such accounting adjustments impacts the award payout by more than 2%. These adjustments were important to maintain our historical practice of fixed accounting treatment for our annual cash incentives.

 

Long-Term Incentives

 

General.  We believe that the use of long-term incentives tied to our common stock, along with our established stock ownership guidelines, help align the interests of our executives with our shareholders. Therefore, we provide the opportunity for our executives to earn market competitive long-term incentives in the form of both stock options and performance share awards that are granted annually. Stock options generally vest ratably over a three-year period and performance share awards are paid following a three-year award term. We generally target the market 50^th percentile for long-term incentive awards. Typically, half of the targeted long-term incentive value is delivered in stock options and half is delivered in performance share awards. Market data is the starting data point in determining long-term incentive grants each fiscal year. Actual long-term incentive grants are determined after considering the market data, individual performance, scope and complexity of the role, tenure, and relative internal positioning.

Stock Options.  Each year at its regular meeting held in November or December, the Compensation & Human Resources Committee approves the grant of stock options to our executives. In fiscal 2010, stock options were granted by the Committee under the 2000 Stock Option Plan and in fiscal 2011 stock options were, and thereafter will be, granted by the Committee under the 2010 Plan. If shareholder value is not delivered and our stock price does not increase, the options will not have any value. If we deliver strong shareholder returns, our stock price presumably will increase, thereby increasing the value of the stock options and resulting total compensation.

 

To determine the number of options to award to our executives, including our named executive officers, we typically start with a total expected value of stock options, which generally represents one-half of the market 50^th percentile total long-term incentive value, to be granted to each executive officer. That value is then divided by the expected value of an option to purchase a share of common stock, using a Black-Scholes option pricing method, to determine the number of options to grant. The calculation of the expected value is based on the average closing price of our common stock, as reported on the NYSE, over the last three months of the prior fiscal year. The three-month average allows for smoothing of any volatility that may be associated with a particular date’s stock price

 

Stock options granted to our executives, including our named executive officers, vest in three equal installments on each of the first, second and third year anniversaries of the date of grant and are exercisable for a period of ten years following the date of grant. We believe that the three-year vesting schedule is common within our industry and at similarly sized companies. Additionally, the three-year vesting schedule is consistent with the three-year award term for our performance share awards. The three-year period for both stock options and performance share awards provides retention value and focuses our executives on attainment of longer term performance. The Compensation & Human Resources Committee periodically reviews option vesting schedules and terms, among other items.

 

Performance Share Awards.  Each year at its regular meeting held in November or December, the Compensation & Human Resources Committee approves the grant of performance share awards to our executives, including our named executive officers. Performance share awards are paid out in shares of our common stock following completion of a three-year award term.

 

Our historical process to determine the number of performance share awards to be granted to our named executive officers is to start with a total expected value of performance share awards to be delivered (which typically is one-half of the total long-term incentive value to be awarded). That value is divided by an expected value per share to determine the number of performance share awards to grant at target. The calculation of the expected value is based on the average closing price of our common stock, as reported on the NYSE, over the last three months of the prior fiscal year.

 

At the beginning of the fiscal year, the Compensation & Human Resources Committee establishes performance measures, weightings and goals for the three-year award term, as well as thresholds and maximums. Similar to the process used for establishing performance goals for annual cash incentive awards, our prior fiscal year financial business results, our competitive situation, our evaluation of market data, as well as the general state of our business, including any anticipated business opportunities, are considered by the Committee when establishing performance goals for the three-year award term. During its regularly scheduled meeting held in July, the Committee reviews progress against the performance goals for performance share awards for all outstanding performance periods. At the end of the three-year award term, at the Committee’s regular meeting in November or December, Management summarizes, and the Committee confirms, performance against the performance goals, and a corresponding payout, which is expressed as a percent of target, is presented. Shares of our common stock are paid out to the named executive officers in December and are contingent on our final earnings release for the recently completed fiscal year. At threshold levels of performance, the payout is 40% of the target award and at maximum levels of performance, the payout is 200% of the target award.

Fiscal 2010 Grants.  Stock options granted in fiscal 2010 to our executives, including our named executive officers, vest in three equal installments on each of the first, second and third year anniversaries of the date of grant and are exercisable for a period of ten years following the date of grant. The number of options awarded to our named executive officers for fiscal 2010 can be found in the “Grants of Plan-Based Awards for Fiscal 2010” table on page 54. The exercise price of the options is the closing price of our common stock, as reported on the NYSE, on the date of grant, which for fiscal 2010 was December 1, 2009. The exercise price for the fiscal 2010 stock options was $40.73.

 

The number of performance shares at threshold, target and maximum levels of performance for our named executive officers for the fiscal 2010 through fiscal 2012 award term can be found in the “Grants of Plan-Based Awards for Fiscal 2010” table on page 54 in the “Estimated Future Payouts Under Equity Incentive Plan Awards” columns. The grant date fair value of those awards can be found in the “Summary Compensation Table” on page 51 in the “Stock Awards” column.

 

When determining the fiscal 2010 stock option grants and performance share awards for the fiscal 2010 to fiscal 2012 award term, the Compensation & Human Resources Committee, Towers Watson and Management also considered the fiscal 2009 grant levels in terms of the number of shares, the target value of those grants, and market data. Market data continued to be an important reference point for the fiscal 2010 grants. However, with the economic uncertainty and climate, we believed that it was equally important to consider prior year grant levels when determining the fiscal 2010 grants. The fiscal 2010 target long-term incentive value for Mr. Hoffman was significantly less than the fiscal 2009 target long-term incentive value and slightly above market. Fiscal 2010 target long-term incentive values for Messrs. Wolfe, Dordell and Brown were essentially at market levels. The target long-term incentive value for Mr. Ramstad recognizes his responsibilities and accountabilities for both the human resources and business development functions.

 

Performance Measures for the Award Term Beginning in Fiscal 2010.  For the fiscal 2010 to fiscal 2012 award term, the following performance measures and weightings were established:

 

 

These measures and weightings are consistent with those established for the fiscal 2008 to fiscal 2010 and fiscal 2009 to fiscal 2011 award terms.

 

Performance Measures for the Award Term Ending in Fiscal 2010.  The table below outlines the performance measures and weightings, as well as threshold, target, maximum and actual levels of performance, for the fiscal 2008 to fiscal 2010 award term.

 

 

The threshold level of performance must be met for there to be a payout for that performance measure. Since actual results for cumulative net income plus after-tax interest and cumulative corporate revenue were below the threshold level of performance, there was no payout for these two performance measures. Cumulative corporate average net assets turns performance was slightly below maximum. Actual results translated into a payout percent of 48.6% of target. As a result, all eligible participants, including our named executive officers, received 48.6% of the target shares granted for the fiscal 2008 to fiscal 2010 award term. A summary of the performance shares awarded

to the named executive officers for the fiscal 2008 to fiscal 2010 award term, and the value realized on vesting for those awards, can be found in the “Option Exercises and Stock Vested for Fiscal 2010” table on page 56 in the “Number of Shares Acquired on Vesting” and “Value Realized on Vesting” columns, respectively.

 

Discussion and Analysis.  Delivering long-term incentives equally in the form of stock options and performance share awards has been effective in focusing our executives on long-term financial business results and encouraging stock ownership. Annually, the Compensation & Human Resources Committee, Towers Watson and Management review the performance measures and weightings utilized for performance share awards to confirm that such measures and weightings are the most effective measures and weightings for driving longer term results.

 

We continue to believe that providing two different types of long-term incentives, in the form of both stock options and performance share awards, is important. The long-term performance orientation of both types of awards is consistent with our objectives our compensation objectives of linking pay to performance and aligning with shareholder interests.

 

Total Direct Compensation.  As described previously, when analyzing compensation, we look at base salary, total cash compensation and total direct compensation in comparison to the market 50^th percentile when establishing new base salary levels, target annual cash incentive awards and long-term incentive awards. Actual value realized from long-term incentives is dependent on stock price at the time of exercise for stock option grants and actual payout of performance share awards at the end of the three-year term, which is dependent on actual performance against established performance goals. Therefore, it is difficult to assess actual total direct compensation on an annual basis in comparison to the market since the market data may have changed significantly when actual long-term incentive results are fully realized. We believe it is important to continue to review target total direct compensation when establishing long-term incentive grants for the new fiscal year. The fiscal 2010 base salary, target long-term incentives and target long-term incentives at the time the grant levels were determined are compared to the market 50^th percentile in the table below.

 

 

Fiscal 2011.  In fiscal 2011, the Compensation & Human Resource Committee modified its grant practice regarding stock options. Previously, stock options for all executives, including the named executive officers, and director-level employees were approved and granted on the date of the Committee meeting held in November or December. As permitted under the 2010 Plan, at their respective December 2010 meetings, the Committee and the Board approved the delegation of authority for the grant of incentive awards to non-executive employees to an Employee Award Committee consisting of the Chairman and CEO. It was determined that annual grants under this delegation of authority would be made to non-officer employees on the second business day following the issuance of the earnings release announcing fiscal 2010 results, with the exercise price of such options being equal to the closing price of our common stock, as reported on the NYSE, on that date of grant. The Committee determined it was appropriate for stock options granted to our executives, including our named executive officers, to be granted on this same schedule. Accordingly, the Committee approved the grant of stock options on the second business day following the issuance of the earnings release announcing fiscal 2010 results and having an exercise price equal to the closing price of our common stock, as reported on the NYSE, on that date of grant.

For fiscal 2011, in addition to approving performance measures, weightings and goals, the Compensation & Human Resources Committee also established specific adjustment events to performance share award payouts. The impact of acquisitions on the performance share award payouts will be determined based on the size of the acquisition as determined by projected year one revenue. The entire impact of any acquisition greater than $50 million is excluded from the payout calculation for the entire award term. All impacts for acquisitions less than $10 million will be included in the payout calculation for the entire award term. For acquisitions between $10 million and $50 million, the impact is excluded from the payout calculation if the transaction closes during the third year of the three-year term. If the transaction closes in the first or second year of the award term, the impact is included from the payout calculation with the exception of any transaction costs incurred. Additionally, any externally driven changes in accounting principles and standards will be excluded from the payout calculation if the cumulative net impact on the payout of all such accounting adjustments impacts the award payout by more than 2%. These adjustments were important to maintain our historical practice of fixed accounting treatment for our performance share awards.

 

Retirement and Health Benefits

 

General.  Our executives participate in The Toro Company Investment, Savings & Employee Stock Ownership Plan, or IS&ESOP, the plan in which the majority of our U.S.-based employees participate. This plan includes a standard 401(k) plan with a company match and two other company contributions (an investment savings contribution and an ESOP contribution). The 401(k) portion allows all eligible U.S.-based employees with 90 consecutive days of service to set aside pre-tax dollars to save for retirement. We currently match $0.50 for each employee dollar contribution, up to an employee maximum of 4%. Employees are eligible to receive the company match on the first of the month following one year of service. The company match is made on a per pay period basis. In the 401(k) portion, employees whose compensation exceeded a certain level for the prior calendar year are capped at a certain contribution percent. For the investment savings contribution, we historically contributed 5.5% of an employee’s eligible compensation plus 5.5% above the social security taxable wage base into their account, and for the ESOP contribution we historically contributed 1.5% of eligible compensation into an employee’s account each calendar year. Employees become eligible to receive the investment savings and the ESOP contribution on the first of the month following two years of service. The investments savings and ESOP contribution are made annually, generally during the first calendar quarter following the end of the prior calendar year.

 

During calendar year 2010, we amended the IS&ESOP so that all company contributions, including the company match, the investment savings and the ESOP fund contribution, are discretionary, with the intent that such contributions be tied to Company performance rather than fixed. The calendar year 2010 company match was $.50 for each employee dollar contribution, up to a maximum of 4%. During calendar year 2010, we announced that the investment savings contribution would be 3.5% at a profit after tax, or PAT, level of 5%, as established in our annual financial plan, and that the actual investment savings contribution could be higher or lower than 3.5% based on actual fiscal 2010 PAT performance. Actual PAT performance was 5.5% and, as a result, we will make a 4.5% investment savings contribution for calendar 2010. The calendar year 2010 ESOP contribution will be 1.5%. We intend to make both the investment savings contribution and the ESOP contribution in March 2011.

 

Our primary retirement benefits are provided through the IS&ESOP. In addition to the IS&ESOP, we also historically maintained The Toro Company Retirement Plan for Office and Hourly Employees, which was a floor offset pension plan. This plan was intended to provide a minimum level of benefit calculated based on earnings and years of service. Separately, a defined contribution offset was calculated based on our investment savings and ESOP contributions and, if the defined contribution was greater than the minimum benefit, then there was no benefit due under this plan. Over the last five years, we have evaluated this plan as well as the competitiveness of the IS&ESOP. The plan was

frozen to new participants in September 2005. Messrs. Ramstad and Dordell are not participants in this plan as they commenced employment after September 2005. The plan was frozen to future accruals on December 31, 2009, and terminated effective as of August 31, 2010. At the time a participant’s employment terminates, we will determine whether or not any benefit is due under the plan. As of December 31, 2010, none of our executives, including our named executive officers, was due a benefit under this plan.

 

Our executives participate in the same health and welfare benefit plans in which our U.S.-based office salaried employees participate, and receive no special benefits or preferential amounts under such plans. These plans include medical, dental, life, accidental death and dismemberment, and long-term disability.

 

Nonqualified Deferred Compensation Plans

 

General.  Our named executive officers are eligible to participate in three nonqualified plans: The Toro Company Deferred Compensation Plan, The Toro Company Deferred Compensation Plan for Officers and The Toro Company Supplemental Benefit Plan.

 

The Toro Company Deferred Compensation Plan.  This plan allows employees that are at a director-level and above, including our named executive officers, to defer on a pre-tax basis his or her calendar year base salary and/or fiscal year annual cash incentive payout to a date in the future. Participants can defer up to 50% of calendar year base salary and up to 100% of the fiscal year annual cash incentive payout. Deferred amounts go into a participant’s account and the participant may invest such deferred amounts in an array of funds that are generally consistent with funds provided in the IS&ESOP. Deferral elections are made on an annual basis, before the beginning of the new fiscal year. Participants must elect a distribution date that is at least two years later than the date the compensation otherwise would have been received. Participants elect the frequency of payments and the number of payments to receive at the time of distribution. Any payouts distributed prior to retirement are paid out in the form of a lump sum. Participants are always 100% vested in their accounts.

 

The Toro Company Deferred Compensation Plan for Officers.  This plan allows key employees that receive performance share awards, including our named executive officers, an opportunity to defer receipt of shares of our common stock paid out under such awards to a date in the future. Participants can defer up to 100% of the common stock payout. Each year, before the third fiscal year of the three-year award term begins, executives are given the opportunity to defer the receipt of those shares to some point in the future. Participants must elect a distribution date that is at least two years later than the date the shares would have been received. Participants elect the frequency of payment and the number of payments to receive at the time of distribution. Any payouts distributed prior to retirement are paid out in the form of a lump sum. Participants are always 100% vested in their accounts.

 

The Toro Company Supplemental Benefit Plan.  This plan is maintained for the purpose of providing to a select group of management or highly compensated employees, including our named executive officers, benefits in excess of the limitations on benefits and contributions imposed by Code Sections 401(a)(17) and 415. Our contributions to this plan are made on a calendar year basis, usually in the first calendar quarter following the end of the prior calendar year. We contribute the investment savings calculation and the ESOP fund calculation above the compensation limit into this plan. Amounts contributed go into a participant’s account and the participant may invest such deferred amounts in an array of funds that are generally consistent with funds provided in the IS&ESOP. Participants elect the funds into which these contributions are allocated, as well as the frequency of payments and the number of payments to receive at the time of distribution. Participants are always 100% vested in their accounts.

Discussion and Analysis.  For fiscal 2010, Mr. Dordell elected to defer (i) 10% of his base salary earned in calendar year 2009 (November and December 2009) and 15% of his base salary earned in calendar year 2010 (January through October 2010); (ii) 40% of his annual cash incentive payout; and (iii) 100% of his fiscal 2008 to fiscal 2010 performance share award payout. We believe that nonqualified deferred compensation plans are typical in the marketplace and provide a valued retirement vehicle for eligible employees, including our named executive officers. We review our nonqualified plans on a periodic basis.

 

Perquisites

 

General.  We provide our named executive officers and other executives with perquisites that assist in promoting their health and financial security. Below is a brief description of the perquisites provided to our named executive officers in fiscal 2010.

 

 

The value of the perquisites provided to our named executive officers for fiscal 2010 can be found in the “Summary Compensation Table” on page 51, in the “All Other Compensation” column and related footnote.

Discussion and Analysis.  In recognition of the fact that similar perquisites are provided at other companies with which we compete for executive talent, we provide perquisites to help attract and retain highly qualified and talented executives and to assist in promoting their health and financial security. We believe that the perquisites we provide are an important part of our overall executive compensation program and, in comparison with other companies, are relatively modest.

 

Stock Ownership Guidelines

 

We adopted stock ownership guidelines more than 10 years ago to encourage our executives to accumulate and retain our common stock. Our guidelines require that our Chairman and CEO own a dollar value of our common stock equal to at least five times his base salary, and require our other executives, including our other named executive officers, to own a dollar value of our common stock equal to at least two or three times base salary. We recommend that executives reach their guideline in five years. As of October 31, 2010, each of our named executive officers with five or more years of service satisfied these stock ownership guidelines.

 

Tax Deductibility of Compensation

 

Our compensation plans, including the AMIP, the 2000 Plan, the PSP, and the 2010 Plan, have been structured with the intention that annual cash incentive award payouts, stock options grants and performance share award payouts made under these plans can be qualified as performance-based compensation, which is tax deductible to us under Code Section 162(m).

 

Change in Control and Post-Termination Severance Arrangements

 

Change in Control Arrangements.  To encourage continuity, stability and retention when considering the potential disruptive impact of a possible, threatened or actual corporate change in control transaction, we have established change in control arrangements to incent our executives to remain with our Company in the event of a change in control or potential change in control. The Compensation & Human Resources Committee recently analyzed and reassessed our change in control arrangements to determine whether they are necessary and appropriate under the Company’s current circumstances and given the circumstances of our individual named executive officers. In so doing, the Committee, with the assistance of Towers Watson and Management, performed a market analysis of our change in control arrangements to determine if the terms of our change in control arrangements were consistent with those of other companies with whom we believe we compete for executive talent. As a result of the analysis, the Committee approved, upon recommendation of Management, a new change in control severance compensation policy that applies to all of our executive officers, including our named executive officers. Adoption of the change in control severance compensation policy on January 18, 2011, effectively terminated our individual change in control employment agreements with our executives, who, in each case, voluntarily terminated such agreements and became subject to the new change in control severance compensation policy. Under the new policy, we made several changes to the triggers and benefits provided under our prior change in control arrangements in order to conform our change in control practices to evolving market best practices, as well as to ensure that the appropriate executives are covered by such policy. Key changes incorporated into our change in control severance compensation policy include:

 

 

 

More information regarding our new change in control severance compensation policy and our prior change in control employment agreements, including potential payouts under each of such arrangements, is provided under “Potential Payments Upon Termination or Change in Control” beginning on page 58.

 

We believe that our change in control arrangements are important because they provide our executives with retention incentives and additional monetary motivation to complete a transaction that the Board believes is in the best interests of our Company and our shareholders. We also believe that is in the best interests of our Company and our shareholders to assure that we will have the continued dedication of our executives, notwithstanding the possibility, threat or occurrence of a change in control, and that it is imperative to diminish the inevitable distraction of our executives by virtue of the personal uncertainties and risks, including personal financial risks, created by a pending or threatened change in control of the company.

 

In addition to our new change in control severance compensation policy, we also have change in control provisions in our equity and incentive plans and related award agreements that are provided to recipients of awards thereunder and apply to our executives, including our named executive officers, as well as other employees. These plans and agreements generally provide for immediate vesting acceleration upon a change in control. More information regarding these provisions is also provided under “Potential Payments Upon Termination or Change in Control” beginning on page 58. Because the immediate vesting of stock options and certain other awards is triggered by the change in control itself, and is not dependent upon a termination of employment within a certain protection period, these acceleration provisions are known as “single trigger” change in control arrangements. We believe our “single trigger” change in control arrangements with respect to equity compensation awards provide important retention incentives during what can often be an uncertain time for employees and provide executives with additional monetary motivation to focus on and complete a transaction that our Board believes is in the best interests of our Company and our shareholders rather than seeking new employment opportunities. If an executive were to leave prior to the completion of the change in control, non-vested options or other awards held by the executive would terminate.

 

The Compensation & Human Resources Committee intends to continue to review our change in control arrangements periodically to ensure that they remain necessary and appropriate.

 

Other Post-Termination Severance Arrangements.  The only post-termination severance arrangements that we have with our named executive officers are in connection with a change in control situation as previously described. None of our named executive officers are entitled to any severance or other payments upon their termination of employment without cause or otherwise if such termination is not within three years after a change in control or, in certain instances, before the change in control.

 

Assessment of Risk Related to Compensation Programs

 

In fiscal 2010, we performed an assessment of our current compensation policies, practices and programs for all of our employees, focusing in particular on incentive compensation, for the

Compensation & Human Resources Committee to determine whether the risks arising from these policies, practices and programs are reasonably likely to have a material adverse effect on the Company. We determined that these policies, practices and programs do not create risks that are reasonably likely to have a material adverse effect on our Company. To conduct this assessment, Towers Watson was engaged to assist Management in reviewing and analyzing each of our material compensation policies, practices and programs. In connection with this assessment, various risk control features were considered, including: key design features of our incentive compensation plans, including use of appropriate incentive maximums or caps (which are 200% of the target award); the mix of corporate and division performance measures and goals emphasizing revenue growth, profitability and asset efficiency; the mix between fixed and variable compensation and annual versus long-term performance; stock ownership guidelines for our executives and non-employee directors; our “clawback” provisions; and our compensation governance structure. As a result of the assessment, we noted that (i) base salaries for all employees are targeted at the market 50^th percentile, are not subject to performance risk and, for non-executive employees, constitute the largest part of total compensation; and (ii) incentive or variable compensation awarded to our executives, which constitutes the largest part of their total compensation, is appropriately balanced between annual and long-term performance and cash and equity compensation, and utilizes performance measures and goals that are drivers of long-term success for our Company and our shareholders. As a result, we determined that our compensation policies, practices and programs and related compensation governance structure work together to minimize exposure to excessive risk while appropriately pursuing growth strategies that emphasize shareholder value creation.

 

The following table summarizes compensation for each of the last three fiscal years awarded to, earned by or paid to our Chairman and CEO, Vice President, Finance and CFO and each of the other three most highly compensated executive officers. We collectively refer to the executives listed as our “named executive officers.” The “Compensation Discussion and Analysis” beginning on page 31 provides additional information about compensation paid to our named executive officers.

 

 

 

 

 

 

 

 

 

 

The following table summarizes all plan-based awards granted to the named executive officers during fiscal 2010 and includes the potential range of annual cash incentive award payouts for fiscal 2010, the potential range of payouts of performance share awards granted in fiscal 2010 for the fiscal 2010 to fiscal 2012 award term and stock options granted in fiscal 2010. No other plan-based awards were granted to the named executive officers during fiscal 2010. Details on how the awards were determined can be found under “Annual Cash Incentives” beginning on page 38 and “Long-Term Incentives” beginning on page 42.