Notice of

Annual Meeting of Shareholders

 

The Annual Meeting of Shareholders of CLARCOR Inc. (the “Company”) will be held at the executive offices of the Company, 840 Crescent Centre Drive, Suite 600, Franklin, Tennessee 37067, on Monday, March 31, 2008 at 9:00 A.M., Central Time, for the following purposes:

 

1. To elect two Directors for a term of three years each;

 

2. To ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm to audit the Company’s financial statements for the fiscal year ending November 29, 2008; and

 

3. To transact such other business as may properly come before the meeting or any adjournment thereof.

 

Only holders of CLARCOR Common Stock of record at the close of business on Friday, February 1, 2008 are entitled to receive notice of and to vote at the meeting or any adjournment thereof.

 

Whether or not you plan to attend the meeting, you are requested to sign and date the enclosed proxy and return it promptly in the envelope enclosed for that purpose.

 

Richard M. Wolfson
Secretary

 

PLEASE SIGN AND DATE THE ACCOMPANYING PROXY
AND MAIL IT PROMPTLY.

 

Franklin, Tennessee

February 8, 2008

 

 

TABLE OF CONTENTS

 

CLARCOR Inc.
840 Crescent Centre Drive, Suite 600
Franklin, Tennessee 37067

 

PROXY STATEMENT

 

This Proxy Statement and the accompanying proxy are being mailed to shareholders of CLARCOR Inc. (the “Company”) on February 8, 2008. They are being furnished in connection with the solicitation of proxies by the Company’s Board of Directors for use at the Annual Meeting of Shareholders to be held at the executive offices of the Company, 840 Crescent Centre Drive, Suite 600, Franklin, Tennessee 37067, on Monday, March 31, 2008 at 9:00 A.M., Central Time, for the purposes set forth in the Notice of Annual Meeting. Directions to the Annual Meeting and information on how to vote in person can be obtained on-line at www.clarcorproxy.com or by contacting the Company’s Secretary, Richard M. Wolfson, at 840 Crescent Centre Drive, Suite 600, Franklin, Tennessee 37067, telephone: (615)771-3100.

 

A shareholder who gives a proxy may revoke it at any time before it is voted by giving written notice of the termination thereof to the Secretary of the Company, by filing with him another proxy or by attending the Annual Meeting and voting his or her shares in person. All valid proxies delivered pursuant to this solicitation, if received in time and not revoked, will be voted. If no specifications are given by the shareholder executing the proxy card, valid proxies will be voted (a) to elect the two individuals nominated for election to the Board of Directors listed on the proxy card enclosed herewith, (b) to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm to audit the books and accounts of the Company for the fiscal year ending November 29, 2008, and (c) in the discretion of the appointed proxies, upon such other matters as may properly come before the meeting.

 

As of February 1, 2008, the Company had outstanding 50,975,076 shares of Common Stock, constituting the only class of voting securities of the Company outstanding, and each outstanding share is entitled to one vote on all matters to be voted upon. Only holders of CLARCOR Common Stock of record at the close of business on February 1, 2008 are entitled to notice of and to vote at the meeting. A majority of the shares of Common Stock issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, will constitute a quorum for purposes of the Annual Meeting.

 

Important Notice Regarding the Availability Of Proxy Materials for the Shareholder Meeting to be held on March 31, 2008:

 

The following Proxy materials are available for you to review online at: www.clarcorproxy.com:

 

 

In accordance with Securities and Exchange Commission (“SEC”) rules, the foregoing website does not use “cookies”, track user moves or gather any personal information.

 

The Company’s Certificate of Incorporation provides for a Board of Directors consisting of nine directors divided into three classes, each class consisting of three directors. One class of directors is elected at each Annual Meeting of Shareholders. As disclosed on the Company’s Current Report on Form 8-K that was filed with the SEC on January 24, 2008, Arthur B. Laffer resigned from the Board on January 23, 2008 for personal reasons. The Board is therefore currently comprised of eight directors, two of whom are up for re-election this year.

 

Accordingly, at the Annual Meeting two directors are to be elected. The nominees are Messrs. Robert H. Jenkins, and Philip R. Lochner, Jr. Both of the nominees are current directors previously elected by the shareholders of the Company whose terms in office expire this year. Both have been recommended by the Corporate Governance/Directors’ Affairs Committee and by the entire Board of Directors for re-election to our Board of Directors and both nominees have consented to serve if elected. In the event either of these nominees is unable to serve as a director, the shares represented by the proxy will be voted for the person, if any, who is designated by the Board of Directors to replace the nominee. The Board of Directors has no reason to believe that either of the nominees will be unable to serve or that any vacancy on the Board of Directors will occur.

 

Proxies will be voted for the election of each of Messrs. Jenkins and Lochner unless the shareholder signing such proxy withholds authority to vote for one or more of these nominees in the manner described on the proxy. If a quorum is present at the meeting, the two candidates for director receiving the greatest number of votes will be elected. In such event, abstentions, withheld votes and broker non-votes will not affect the outcome of the election of directors.

 

If elected, Messrs. Jenkins and Lochner will hold office for a three-year period ending in 2011 or until their respective successors are duly elected and qualified.

 

The following are the current directors of the Company (including the nominees), their ages, the year in which each first became a director and their principal occupations or employment during at least the past five years:

 

 

The Board of Directors recommends a vote FOR the election of Messrs. Jenkins and Lochner as directors of the Company.

 

The New York Stock Exchange (“NYSE”) corporate governance rules require that the Board of Directors of a listed company consist of a majority of independent directors. The Company’s Board of Directors currently has, and previously has had, a majority of independent directors. Seven of the eight current members of the Board of Directors are independent; only Mr. Johnson is not.

 

Pursuant to the NYSE corporate governance rules, the Board of Directors has adopted categorical independence standards to provide assistance in the determination of director independence. The categorical standards are set forth below and provide that a director will not qualify as an independent director if:

 

(i) The director is, or has been within the last three years, an employee of the Company, or an immediate family member of the director is, or has been within the last three years, an executive officer of the Company;

 

(ii) The director has received, or has an immediate family member who has received, during any twelve month period within the last three years, more than $100,000 in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);

 

(iii) The director is a current partner or employee of the Company’s external audit firm, or was within the past three years (but is no longer) a partner or employee of such firm and personally worked on the Company’s audit within that time;

 

(iv) The director has an immediate family member who (a) is a current partner of a firm that is the Company’s external auditor, (b) is a current employee of such firm and participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice or (c) was within the past three years (but is no longer) a partner or employee of such firm and personally worked on the Company’s audit within that time;

 

(v) The director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Company’s present executive officers at the same time serves or served on that company’s compensation committee;

 

(vi) The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeded the greater of $1 million or 2% of such other company’s consolidated gross revenues; or

 

(vii) The director or an immediate family member is a current officer, director or trustee of a charitable organization where the Company’s annual discretionary charitable contributions to the charitable organization are more than the greater of (i) two percent (2%) of that organization’s total annual charitable receipts, or (ii) $1,000,000.

 

For purposes of the categorical standards, immediate family member includes a director’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares the director’s home.

 

The Board of Directors has affirmatively determined, assisted by the categorical independence standards set forth above, that none of the outside Directors has a material relationship with the Company (either directly or as a partner, shareholder, officer, employee or trustee of an organization that has a relationship with the Company). In making its determination, the Board of Directors considered relevant facts and circumstances, including commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, and considered the issue not merely from the standpoint of a director, but also from that of persons or organizations with which a director has an affiliation.

 

Applying the categorical independence standards, the Board of Directors has determined that each of Messrs. Adam, Bradford, Burgstahler, Donovan, Jenkins, Lochner and Packard is independent as required by

the NYSE corporate governance rules. While he was a director, Dr. Laffer was also determined to be independent.

 

The Board of Directors held seven meetings during fiscal 2007. All of the Company’s directors attended at least 75% of the aggregate number of meetings of each of (i) the Board of Directors and (ii) Committees of the Board of which they are members.

 

In fiscal 2007, directors who were not employees of the Company received (a) an annual retainer of $35,000 per year, payable in cash or shares of the Company’s Common Stock, at the director’s option; (b) a fee of $1,500 payable for each Board meeting attended; (c) a fee of $1,500 payable for each meeting of a Committee of the Board attended in person and a fee of $1,000 for each Committee meeting attended by telephone; and (d) annual fees payable to Chairmen of Committees of the Board as follows: (i) Audit Committee Chairman, $7,500; (ii) Directors Affairs/Corporate Governance Committee Chairman, $5,000; and (iii) Compensation Committee Chairman, $5,000. These Chairmanship fees will be increased to $6,500 (Directors Affairs/Corporate Governance and Compensation Committees) and $10,000 (Audit Committee) effective on March 31, 2008. Board members also receive reimbursement for travel expenses and the stock options referred to below.

 

Pursuant to the Company’s Deferred Compensation Plan for Directors, a non-employee director may elect to defer receipt of the director’s fees to which he is entitled and to be paid the amounts so deferred, plus interest thereon at the prime rate announced quarterly by JP Morgan Chase Bank, or its successor, either when the participant ceases being a director of the Company or at the time the participant reaches a specified age. None of the directors deferred any portion of the fees payable during fiscal 2007.

 

Under the Company’s 2004 Incentive Plan, on the date a person first becomes a non-employee director, and annually thereafter on the date of each annual meeting of shareholders, such person has the option to receive a grant of shares of the Company’s Common Stock with an aggregate fair market value equal to and in lieu of the amount of the annual retainer for non-employee directors.

 

Under the Company’s 2004 Incentive Plan, each non-employee director is also automatically granted, on the date of each annual meeting of shareholders, options to purchase 7,500 shares of Common Stock at an option exercise price equal to the fair market value of a share of Common Stock on the date of grant. For persons who become a non-employee director on a date other than the date of an annual meeting of shareholders, the number of shares subject to such option are prorated based on the number of days between the date on which he or she becomes a director and the date of the next Annual Meeting of Shareholders.

All options granted to directors as described above vest immediately on the date of grant and have a ten year term. Shares acquired upon exercise of an option may not be sold or transferred during the six month period following the date of grant of such option. The following table sets forth the compensation paid to the Company’s non-employee directors during Fiscal Year 2007:

 

DIRECTOR COMPENSATION FOR FISCAL YEAR 2007

 

 

 

 

 

 

The Company has established stock ownership guidelines for non-employee directors. These guidelines require that non-employee directors, after a five-year period, own Company common stock with a value of five times the annual retainer (currently $35,000). Shares subject to in-the-money options granted to a non-employee director count toward the fulfillment of these guidelines.

 

During fiscal 2007, the standing committees of the Board of Directors were the Directors Affairs/Corporate Governance Committee, the Audit Committee and the Compensation Committee. Each of these Committees is discussed below.

 

Directors Affairs/Corporate Governance Committee.  The Directors Affairs/Corporate Governance Committee currently consists of four directors: James L. Packard, Chairman, J. Marc Adam, James W. Bradford, Jr., and Philip R. Lochner, Jr. Each of these directors is independent as such term is defined in the NYSE corporate governance rules.

 

The Board has adopted a Charter for the Committee. A current copy of that Charter is available on the Company’s website: www.clarcor.com. The Charter provides, among other things, that the Committee will make recommendations to the full Board regarding changes to the size and composition of the Board or any committee thereof; identify individuals that the Committee believes are qualified to become Board members and recommend that the Board select such nominee or nominees to stand for election; and identify individuals for appointment to the Board to fill vacancies on the Board.

 

The Charter of the Committee requires the Committee to review and evaluate any stockholder nominees for director. The Company’s By-laws (available on the Company’s website) were last amended on December 18, 2007 and provide that notice of any proposed nomination by a shareholder for election of a person to the Board shall be delivered to or mailed and received at the principal executive offices of the Company no less than 120 days nor more than 150 days prior to the anniversary of the prior year’s Annual Meeting of Shareholders. Section 2.12 of the By-Laws specifies the information to be included by a shareholder in such a notice.

 

The Committee has no specific policy with regard to the minimum qualifications of director candidates. In the recent past, candidates recommended for election to the Board have had significant experience and expertise in the manufacture and distribution of disposable and replaceable industrial or automotive products, in international sales and distribution and/or in the preparation and analysis of financial statements and in accounting and financial matters generally. The Company believes that persons with these qualifications are the most relevant to assist the Company in the development of its business and its compliance with financial reporting and governance responsibilities.

 

Messrs. Jenkins and Lochner are the current nominees recommended by the Committee for election to the Board. Both of these individuals are standing for reelection by the shareholders.

 

In the past the Committee has reviewed potential candidates for election to the Board recommended primarily by Board members or third party search firms. The process has included a review of the candidate’s qualifications and interviews with the candidate. No different process would be applied with respect to nominees recommended by holders of the Company’s Common Stock.

 

The Directors Affairs/Corporate Governance Committee met five times during fiscal 2007.

 

Audit Committee.  The Audit Committee was established by the Board in accordance with applicable provisions of the Securities Exchange Act of 1934, as amended, and applicable NYSE requirements. The Audit

Committee currently consists of four directors: Messrs. Robert J. Burgstahler, Chairman, J. Marc Adam, James W. Bradford, Jr., and Paul Donovan. Each of these directors is independent and financially literate as such terms are defined in the NYSE corporate governance rules. Further, Mr. Burgstahler and Mr. Donovan have previously served as the chief financial officers, and Mr. Bradford as the chief executive officer, of publicly-held corporations. Based on these and other factors, the Board has determined that Mr. Bradford, Mr. Burgstahler and Mr. Donovan are each an “audit committee financial expert” as such term is defined in applicable rules of the Securities and Exchange Commission.

 

The Board has adopted a Charter for the Audit Committee. A current copy of that Charter is available on the Company’s website: www.clarcor.com.

 

The purposes of the Committee include assisting Board oversight of the integrity of the Company’s financial statements, its compliance with legal and regulatory and filing requirements, the selection of an independent auditor, determination of the independent auditor’s qualifications and independence and the performance of the Company’s internal audit function and independent auditors. The Committee discusses with management and the Company’s independent auditors the Company’s annual audited financial statements, quarterly financial statements, earnings press releases, and management’s assessment of internal control over financial reporting .

 

The Audit Committee met 11 times during fiscal 2007.

 

Compensation Committee.  The Compensation Committee currently consists of three directors: Messrs. Robert H. Jenkins, Chairman, Paul Donovan, and Philip R. Lochner, Jr. Each of these directors is independent as such term is defined in the listing standards of the NYSE.

 

The Board has adopted a written Charter for the Committee. A current copy of that Charter is available on the Company’s website: www.clarcor.com.

 

The purposes of the Committee include discharging the Board’s responsibilities relating to compensation of the Company’s executive officers and reviewing and making recommendations to the Board with respect to compensation plans, policies and programs. The Committee annually reviews and approves corporate goals and objectives relevant to the compensation of the Company’s Chief Executive Officer and, together with the other independent directors, determines and approves the compensation level of the Chief Executive Officer. The Committee also makes recommendations to the full Board with respect to the compensation of the Company’s other executive officers and approves grants and awards of restricted stock and stock options under the Company’s Incentive Plans. From time to time the Committee consults with outside compensation experts in exercising its responsibilities. All of the foregoing are described in greater detail in the Compensation Discussion and Analysis below.

 

The Compensation Committee met four times during fiscal 2007.

 

 

The Company’s Corporate Governance Guidelines (available on the Company’s website) provide that at each meeting of the Board of Directors the independent directors shall meet separately from the management of the Company. Mr. Johnson, a director and the Chairman, President and Chief Executive Officer of the Company, does not attend these executive sessions. Under the Guidelines, these sessions are chaired on a rotating basis by the chairperson of one of the standing committees of the Board (currently the Audit Committee, the Compensation Committee and the Corporate Governance Committee).

 

The Board has adopted a process for holders of the Company’s common stock and other interested parties to send written communications to the Board. Such communications should be sent to the Corporate Secretary at CLARCOR Inc., 840 Crescent Centre Drive, Suite 600, Franklin, Tennessee 37067. The Corporate Secretary will forward all such communications to the Chairman of the Corporate Governance Committee of the Board. That Committee will determine whether any such communication will be distributed to the full Board or, if requested by the sender, only to the non-management directors.

The Board has adopted a policy which recommends that all directors personally attend each annual and special meeting of the shareholders of the Company. At the last Annual Meeting of Shareholders, held on March 26, 2007, all of the directors were in attendance.

 

The Company has adopted a Code of Ethics for Senior Financial Officers applicable to the Company’s Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Internal Audit Director, and any other person performing the duties of such officials. The Code of Ethics for Senior Financial Officers is available on the Company’s website at www.clarcor.com.

 

During fiscal 2007, the Compensation Committee of the Board of Directors was composed of Robert H. Jenkins, Paul Donovan and Philip R. Lochner, Jr. None of these persons has at any time been an officer or employee of the Company or any of its subsidiaries. In addition, there are no relationships among our executive officers, members of the Compensation Committee or entities whose executives serve on the Board of Directors or the Compensation Committee that require disclosure under applicable regulations of the Securities and Exchange Commission.

 

We are not aware of any related party transactions between the Company and any of our directors, executive officers, 5% stockholders or their family members since the beginning of the last fiscal year which require disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934 (“Item 404 Transactions”).

 

Each year, the Company requires its directors and executive officers to complete a comprehensive questionnaire, one of the purposes of which is to disclose any related-party transactions with the Company, including any potential Item 404 Transactions. No such transactions were disclosed during fiscal 2007. The Company does not have a history of engaging in related-party transactions with its directors or executive officers or their respective related persons or affiliates and does not have a formal or other written policy regarding the analysis or approval of such transactions. That said, any material proposed related-party transaction, including any Item 404 Transaction irrespective of materiality, would be brought before the Board or a specially designated Committee thereof (with any interested director recusing him or herself from the proceedings) to be specifically considered and approved before the Company would knowingly engage in any such transaction.

 

 

The following table provides information concerning each person who is known to the Company to be the beneficial owner of more than 5% of the Company’s Common Stock. In each case the information is based upon information contained in a Schedule 13F filed with the Securities and Exchange Commission for the calendar quarter ended September 30, 2007.

 

 

 

The following table provides information concerning the shares of Common Stock of the Company beneficially owned as of January 15, 2008 by all directors, the executive officers named in the Summary Compensation Table on page 20 and by all directors and executive officers of the Company as a group.

 

SECURITY OWNERSHIP — MANAGEMENT

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors and persons who beneficially own more than 10% of the outstanding shares of the Company’s common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. Based solely on our review of those forms and certain written representations from reporting persons, we believe that in 2007 all of our executive officers, directors and greater than 10% beneficial owners were in compliance with all applicable filing requirements.

 

Through its compensation policies, the Company seeks to attract and retain high quality leadership and to assure that the executive officers and senior management of the Company are compensated in a manner consistent with their performance, shareholder interests, internal equity considerations, competitive practice and the applicable requirements of regulatory bodies. The Compensation Committee of the Board of Directors (the “Committee”) reviews and approves the compensation policies and practices of the Company, particularly in respect of executive officers and other members of senior management. All of the members of the Committee are independent directors, and none of them has at any time been an officer or employee of the Company or any of its subsidiaries.

 

The key principles listed below are reflected in structuring the compensation packages for the Chief Executive Officer and the other executive officers of the Company. None of these principles is accorded any specific weight or, as a matter of policy, considered as being more important than the others.

 

Pay for Performance

 

A high percentage of an executive’s total compensation is linked to the performance of the Company and its stock as well as the executive’s individual performance in attaining the Company’s objectives. This structure is designed to reward both short-term and long-term performance and align the interests of management with the long-term interests of the shareholders.

Competitiveness

 

Though such comparisons are often not straight-forward, our executives’ total compensation packages are designed to be comparable with those of executives occupying comparable positions in comparable companies. Elements of the packages are also designed to allow an opportunity to earn more than these median levels when the Company outperforms comparable companies. The Company believes that the opportunity to earn at higher levels provides a significant challenge and incentive to the executive officers of the Company.

 

Executive Ownership

 

A major component of our executive compensation is equity-based in the form of stock options and restricted stock units. As a result, our executive officers’ interests are directly linked with our shareholders’ interests. The Company believes that equity-based compensation properly balances the rewards for long-term versus short-term results.

 

Management Development

 

The compensation packages are also designed to attract and retain quality executives with the skills and other competencies required to meet the Company’s objectives and to enhance shareholder value.

 

The Committee engages independent compensation consulting firms to review on a regular basis relevant market and other data regarding executive compensation and to review from time to time the total compensation programs for the Company’s executive officers. Notwithstanding this engagement, the Committee considers the input of outside consultants to be but one of several factors in discharging its responsibilities. These other factors include but are not limited to the recommendations of the Company’s Chief Executive Officer; the performance of the Company, its operating units and their respective executives; market factors such as the health of the economy and of the industries served by the Company; the availability of executive talent generally; executives’ length of service; internal assessments and recommendations regarding particular executives; and the succession planning initiatives of the Company.

 

In fiscal 2005, the Committee engaged the consulting firm of Towers Perrin to conduct a review, and assist the Committee in the redesign of the Company’s long-term incentive grant strategy for its executives. At that time, Towers Perrin also conducted a competitive assessment of the annual salary, target total cash compensation and target total direct compensation (which consists of the sum of annual salary, target annual cash incentives and the value of annual long-term incentive awards) for each of the Company’s executives as compared to companies comprising the S&P Industrial Machinery Index using available published and proprietary survey sources.¹ Towers Perrin then adjusted the information in the assessment based on position-specific responsibilities. The assessment analyzed the target total direct compensation of the Company’s executives as compared to the median of the industry group.

 

The overall results of this assessment, which Towers Perrin provided directly to the Committee, provided the starting point for the Committee’s analysis in establishing compensation for the Company’s executive officers for fiscal 2006. The results of Towers Perrin’s analysis indicated that, for 2005, the total target direct compensation for Messrs. Johnson and Lindsay was below the market median and the total target direct compensation for Messrs. Ferrise and Klein was slightly in excess of the market median. (Mr. Wolfson was not employed at the time the assessment was conducted.) The Committee reviewed the data and in setting compensation levels for 2006 made adjustments based upon the results of Towers Perrin’s analysis, the Company’s performance, the Committee’s assessment of the performance of the executives and the recommendations of the Company’s Chief Executive Officer.

 

 

 ¹ The companies comprising the S&P Industrial Machinery Index are: Albany International Corp., Barnes Group Inc., Briggs & Stratton Corp., CUNO Inc., EnPro Industries Inc., Gardner Denver Inc., IDEX Corporation, Kaydon Corp, Lydall Inc., Milacron Inc., Mueller Industries Inc., Robbins & Myers Inc., Stewart & Stevenson Services Inc., Timken Co (The), Valmont Industries Inc., Watts Water Technologies Inc., and Wolverine Tube Inc.

In conducting its analysis of appropriate compensation levels for the Company’s executive officers for 2007, the Committee requested Towers Perrin to provide a review of changes in compensation levels for Fortune 500 companies and to provide its analysis of market trends in compensation generally. In setting compensation levels for 2007, the Committee again based its determinations in part on the information provided by Towers Perrin as well as the Company’s performance, the Committee’s assessment of the performance of the executives and the recommendations of the Company’s Chief Executive Officer.

 

The following is a discussion of each of the individual components of the Company’s executive compensation program.

 

Annual Salary.  The Company believes it is appropriate to provide its executives with a level of assured cash compensation commensurate with their experience, responsibilities and accomplishments. The Committee generally approves annual salaries for the executive officers on an annual basis at a meeting of the Committee held early in the first quarter of the fiscal year. Based on the considerations previously discussed, the Committee approved increases in the fiscal 2007 annual salaries for the Company’s named executive officers as follows:

 

 

Performance-based cash incentive compensation.  The Company believes that a substantial portion of an executive officer’s compensation should be incentive-based. Therefore, the Company has implemented a cash incentive program that provides executive officers with the opportunity to earn cash incentive compensation for the achievement of annual goals. This cash incentive program is known as the CLARCOR Value Added Incentive Plan (the “CVA Plan”), and was approved by the shareholders of the Company last year.

 

For fiscal year 2007, the Company intended that any incentive cash compensation paid under the CVA Plan would satisfy any applicable requirements as performance-based compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended. Accordingly, the Company established and the Committee approved maximum target payouts under the CVA Plan for the named executive officers during the first fiscal quarter of 2007 that were based on the Company’s fiscal 2007 net earnings. The maximum target payout for Mr. Johnson was established at 3.39% of net earnings and for each of the other named executive officers at 1.13% of net earnings.

 

Recognizing that these targets would likely result in the named executive officers receiving cash incentive amounts in excess of historical levels, the Committee indicated to management that it expected to use its discretion, which is referred to as “negative,” to reduce the cash incentive compensation payable to the executives for fiscal 2007 to levels substantially below the foregoing maximum amounts. The Committee further communicated to the executives to expect that it would set final cash incentive compensation in accordance with historical practice under the CLARCOR Value Added Incentive model (“CVA Model”).

 

Pursuant to the CVA Model, annual cash incentive awards are based upon the achievement of specified corporate and operating unit goals. The formula is based on the Company’s consolidated and operating group after-tax operating earnings (using an assumed tax rate which is held constant year to year) less the cost of capital. In calculating the cost of capital, the Company multiplies the value of net managed assets (i.e., assets under management’s control) by a fixed percentage which is held constant year to year to allow for meaningful comparisons across years. The size of cash incentives paid under the CVA Model varies directly with the amount

by which such after-tax earnings exceed the Company’s cost of capital. As a result, the CVA Model is designed to reward the effective deployment of the Company’s capital. The budgeted performance numbers used to calculate payouts under the CVA Model are stratified into “Levels” of CVA performance, where achieving 92.5% of the targeted budget performance number is considered “Level 1”, achieving the targeted budget performance number is considered “Level 6”, and achieving 109% of the targeted budget performance number is considered “Level 10”. The differences between Levels are calculated on a straight-line basis.

 

For Messrs. Johnson, Klein, Wolfson and Lindsay in fiscal 2007, the cash incentive award was based 100% on consolidated corporate CVA performance and for Mr. Ferrise it was based 80% on the CVA performance of Baldwin Filters, Inc. and 20% based on consolidated corporate CVA performance. The range of possible CVA awards payable for each named executive officer is shown below:

 

 

The Committee retains the discretion to include or exclude particular items of revenue or expense or assets or liabilities in determining the final calculations of cash incentive payments, as well as subjective factors such as personal performance and strategic long-term decisions affecting the Company’s performance. The Committee does not exercise this discretion often (historically once every few years) and does not follow any formula or give a pre-determined weight to any individual factor in doing so.

 

In determining the CVA awards for the named executive officers for fiscal 2007, the Company excluded the value of a litigation settlement received from a customer which the Company had sued for breach of contract. This had the effect of lowering the awards that would have otherwise been payable to the named executive officers. The Committee did this because the Committee had excluded the negative economic impact of the contract dispute in calculating CVA in fiscal year 2006 for the named executive officers other than Mr. Johnson.

 

The budgeted performance numbers that are used in the CVA Model are drawn directly from the Company’s annual budget, which is first reviewed and approved by the Board of Directors and which the Company believes is a realistic expression of the Company’s expected performance for the upcoming fiscal year. The Board reviews the individual budgets of each of the Company’s operating companies and questions their respective leaders about their underlying business each year. As a general rule, the budgets of each significant operation and the Company as a whole contemplate that revenue and profit will grow over prior year levels.

The Company believes that the historical results of the CVA Model support its view that the budgeted performance numbers are realistic targets which are neither overly aggressive nor easy to achieve. The following table shows the Company’s achievement versus its CVA “budget” (where Level 6 equals achievement of budget, Level 1 equals the entry point — currently 92.5% of budget, and Level 10 equals 109% of budget) over the previous 10 fiscal years:

 

 

Long-term equity incentive compensation.  The Company’s equity-based awards program encourages executives to work towards making business decisions that, over the long term, should increase the price of the Company’s stock, thereby aligning the interests of executives and shareholders. All equity-based awards are made pursuant to the provisions of incentive plans approved by the Company’s shareholders. Equity-based awards include a combination of stock options and restricted stock units.

 

The Committee typically approves equity-based awards to eligible employees (including the named executive officers) only once per year. The annual award is generally made early during the first quarter of the fiscal year after the Committee has received input from outside advisors such as Towers Perrin and the recommendations of the Chief Executive Officer (with respect to awards made to executive officers other than himself). The Committee may make an exception to this general policy in the event that a new executive officer is hired or an executive officer receives a promotion. Once granted, options are not repriced or “reloaded”, and in 2006 the Company’s internal audit group confirmed that no unexpired options (i.e., granted by the Company over the past 10 years) were backdated, and provided their findings to the Company’s external auditors and the Company’s Audit Committee. Although “incentive stock options” may be granted under the Company’s 2004 Incentive Plan, in practice all options granted are “non-qualified options”.

 

Grants of both stock options and restricted stock units normally vest evenly over four years in order to encourage executive officers’ continued service to the Company. Until the restricted stock units vest, the recipient does not have any rights as a shareholder of the Company other than the right to receive a cash payment equal to the dividends payable on the underlying shares of common stock. The Company values stock option grants by calculating their BlackScholes values at the date of grant and the value of restricted stock units by calculating their aggregate market value as of the date of grant. The value of these awards is included in the Company’s analysis of the executive officer’s total direct compensation as compared to other companies.

In December 2006, non-qualified options for the purchase of the Company’s common stock and restricted stock units were granted to our named executive officers pursuant to the Company’s equity incentive plans as follows:

 

 

Grants of time vested restricted stock units are not deemed “performance based compensation” under Section 162(m) of the Internal Revenue Code and an executive officer will realize at least some value from the grant of such units even if the market value of the Company’s common stock declines over the vesting period. The Company considered the possibility of implementing a performance based vesting program for its restricted stock units which would satisfy the requirements of 162(m) and make vesting contingent on the Company’s (or the executive’s) achievement of objective targets, but rejected it for the following reasons:

 

 

Perquisites.  The Company’s officers receive limited perquisites which the Company believes are consistent with the interests of shareholders. Most notably, the named executive officers receive the following three perquisites:

 

 

No executive officer other than the Chief Executive Officer may use Company aircraft for non-business purposes, and although the Company does not have a written policy in this regard, the non-business use of Company aircraft by the Chief Executive Officer occurs infrequently. Over the past three years (including once in fiscal 2007), the Company’s Chief Executive Officer has used the Company plane only three times for non-business purposes, and two of these instances were in connection with family emergencies. The cost of these flights is borne by the Company, but the amount is included in the Chief Executive Officer’s gross income for the year and he bears all associated taxes.

 

The value of the perquisites and other benefits payable to the named executive officers is set forth in the Summary Compensation Table on page 20 under the heading “All Other Compensation.”

 

 

The Company pays the premiums for supplemental life insurance policies owned by each of Messrs. Johnson, Klein and Lindsay (and another member of management who is not an executive officer) which will pay their respective beneficiaries an amount equal to approximately two times their respective base salaries. The Company also pays the incremental tax cost to these executives (i.e., a gross-up) to offset any negative personal income tax consequences associated with the Company’s payment of the premiums. In addition, the Company itself owns life insurance policies on each of Messrs. Johnson, Klein and Lindsay (and another member of management who is not an executive officer) which will pay their respectively named beneficiaries an additional amount equal to approximately two times their respective base salaries, with any remainder going to the Company. The foregoing supplemental life insurance benefits are provided to the above-named individuals in order to compensate them for the loss of a benefit provided under a legacy supplemental life insurance program that is no longer in effect.

 

The Company also provides each of Messrs. Johnson, Ferrise, Klein and Lindsay (and certain other members of management who are not executive officers) with supplemental disability insurance coverage totaling between approximately 75 and 110% of their respective cash compensation in the event they are disabled. The precise level of coverage depends on the nature and severity of the disability. Under the disability program available to employees generally, this amount would otherwise be capped at 60%. There is no incremental tax cost to these executives and therefore the Company does not gross-up any amounts.

 

The value of the Company-paid insurance premiums and any associated gross-ups described above are included in the Summary Compensation Table on page 20 under the heading “All Other Compensation” and further broken down in the table entitled “All Other Compensation” on page 21.

 

The Company believes that the provision of extra insurance coverage to the Company’s named executive officers is an important element in attracting and retaining executive officers.

 

 

The Company’s various retirement plans serve an important role in retaining the Company’s executives. The Company balances the effectiveness of these plans as a compensation and retention tool with the cost of providing them. A full description of these plans and the named executive officers’ participation therein is set forth on page 25 of this Proxy statement under the heading “Retirement Plans”, and the estimated total annual retirement benefits payable to the named executive officers is described in the Pension Benefits Table on page 26.

 

 

When Mr. Johnson was named Chairman and Chief Executive Officer of the Company in 2000, the Company entered into an amended employment agreement with Mr. Johnson, which superseded Mr. Johnson’s previous employment agreement. The amended agreement provides that Mr. Johnson will be employed as the Company’s Chairman, President and Chief Executive Officer. Mr. Johnson is entitled to receive an annual salary (currently $725,000), and to have such salary increased annually at the discretion of the Committee. Mr. Johnson is eligible to participate in all executive incentive plans and in all employee benefit and retirement plans available within the Company, as well as all perquisites made available to executive officers of the Company. Mr. Johnson’s

agreement, as amended, expires on the date of the 2008 Annual Meeting. His agreement is extended automatically each year thereafter unless the agreement is terminated by the Board.

 

The termination provisions of Mr. Johnson’s agreement and the economic consequences of termination and change of control of the Company are discussed further below under the heading “Potential Payments Upon Termination or Change of Control”.

 

Mr. Johnson’s employment agreement contained a provision that would have required the Committee to determine an equitable one-time lump-sum bonus payment to Mr. Johnson in the event that the Company ever achieved revenue of at least $250,000,000 and net profits after tax of more than 7.5% of sales in any fiscal quarter. As previously disclosed on the Company’s Current Report on Form 8-K filed with the SEC on January 23, 2008, Mr. Johnson unilaterally and voluntarily agreed to amend his agreement and delete this provision therefrom because he felt that he was already sufficiently compensated and incentivized to increase revenues and net profits and that this contractual right was unnecessary. Had he not agreed to this amendment, Mr. Johnson likely would have been entitled to invoke the provision in respect of the first quarter of fiscal 2008.

 

The Company has also entered into employment agreements with Messrs. Ferrise, Klein, Wolfson and Lindsay. The change of control provisions of these agreements and the economic consequences of such a change of control are discussed further below under the heading “Potential Payments Upon Termination or Change of Control.”

 

The Company believes that the protections afforded through the termination and change of control provisions of the Company’s employment agreements with the Company’s named executive officers are an important element in attracting and retaining executive officers.

 

 

The Company has established stock ownership guidelines for executive officers. These guidelines require that executive officers, after a five-year period, own Company common stock with a value ranging from a minimum of two times annual salary for officers at the level of corporate vice president to a minimum of four times annual salary for the Company’s Chief Executive Officer. In each case, shares subject to in-the-money options granted to an officer as well as grants of restricted stock units (irrespective of any deferral election by the officer) count toward the fulfillment of these guidelines.

 

 

During fiscal 2007, the Committee once again engaged the consulting firm of Towers Perrin to conduct a comprehensive competitive assessment of the annual salary, target total cash compensation and target total direct compensation (which consists of the sum of annual salary, target annual cash incentives and the value of annual long-term incentive awards) for each of the Company’s executive officers. The Committee felt that the companies comprising the S&P Industrial Machinery Index (which had served as the comparator group in 2005) was inadequate, as several of the constituent companies had markets, products, revenues, market capitalizations and financial conditions that were dissimilar to the Company’s. The Committee therefore asked Towers Perrin to benchmark against a pool of 20 more comparable industrial companies with international operations. Towers Perrin selected 20 companies¹, with median revenues of $1.3 billion, from its database and analyzed the target total direct compensation of the Company’s executives as compared to the median of this group. As stated previously, the Committee considers the input of outside consultants such as Towers Perrin as a guideline in assessing the appropriateness of the compensation levels of the Company’s executives, but does not view it as dispositive.

 

The overall results of Towers Perrin’s assessment provided the starting point for the Committee’s analysis in establishing compensation for the Company’s executive officers for fiscal 2008. The Committee reviewed the

 

 

 ¹ The following companies were included in the analysis: Fleetwood Enterprises Inc.; Louisiana-Pacific Corp; Hayes Lemmerz International, Inc.; Thomas & Betts Corp; The Toro Company; Terra Industries Inc.; Donaldson Co. Inc.; Plum Creek Timber Co., Inc.; Dresser-Rand Group, Inc.; MSC Industrial Direct Co., Inc.; Monaco Coach Corp.; Valmont Industries, Inc.; IDEX Corporation; GATX Corp.; Brady Corp.; Chesapeake Corp.; Constar International, Inc.; Milacron, Inc.; Arctic Cat Inc.; OMNOVA Solutions Inc.

data and in setting compensation levels for 2008 made adjustments based upon the results of Towers Perrin’s analysis, the Company’s performance, the Committee’s assessment of the performance of the executives and the recommendations of the Company’s Chief Executive Officer.

 

The Committee found that the named executive officers’ compensation levels in 2007, other than Mr. Wolfson’s base salary and Mr. Johnson’s non-equity incentive target, were generally appropriate and competitive, and decided to increase them in 2008 only by a standard margin of 3-4% over their 2007 levels. The Committee determined that Mr. Wolfson’s base salary and Mr. Johnson’s target non-equity incentive were below market and increased Mr. Wolfson’s base salary in 2008 by approximately 12% to $250,000 and increased Mr. Johnson’s target incentive payments under the CVA Model in 2008 to 80% of base salary (from 75% in 2007). As indicated in the table below, 2008 grants of stock options and restricted stock units to the named executive officers were consistent in number with 2007 grants. All 2008 grants were made based on the grant date stock price of $36.48.

 

Fiscal Year 2008 Option and RSU Grants

 

 

Beginning in the first quarter of fiscal 2008, the Committee also engaged Frederic W. Cook & Co., Inc., another outside executive compensation consultant, to review and analyze the compensation practices of the Company and to address specific questions regarding executive compensation that the Committee may have from time to time throughout the course of the year. The first such question involved the appropriate period for exercising stock options following an executive’s retirement, which is a matter of Committee discretion under the 2004 Incentive Plan. After consulting with Frederic W. Cook and considering the matter, the Committee determined that executive officers (and certain other senior level executives of the Company and certain of its subsidiaries) must exercise any outstanding options granted in 2008 within five years of his or her retirement or on the expiration date of the options, whichever is earlier. Options granted in years prior to 2008 were not impacted by this decision, and expire on the earlier of three years after retirement or the expiration date of the options.

 

 

In establishing executive compensation, the Company considers its deductibility under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1,000,000 that is paid to certain individuals. The Company believes that compensation paid under its incentive plans is generally fully deductible for federal income tax purposes other than with respect to amounts realized in respect of time based vested restricted stock units. However, in certain situations, the Committee may approve compensation that will not meet these requirements in order to ensure competitive levels of total compensation for its executive officers.

 

 

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Robert H. Jenkins, Chairman

Paul Donovan

Philip R. Lochner, Jr.

 

The foregoing report of the Compensation Committee shall not be deemed incorporated by reference by any general statement incorporating by reference the Proxy Statement into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such acts.