INFORMATION REQUIRED IN PROXY STATEMENT
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
| o Preliminary Proxy Statement | ||
| o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | ||
| þ Definitive Proxy Statement | ||
| o Definitive Additional Materials | ||
| o Soliciting Material Pursuant to Section 240.14a-11c or Section 240.14a-12 | ||
The Procter & Gamble Company
Payment of Filing Fee (Check the appropriate box):
| þ | No fee required. |
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THE PROCTER & GAMBLE COMPANY
Notice of Annual Meeting
and
Proxy Statement
Procter & Gamble Hall
at the Aronoff Center for the Arts
Annual Meeting of Shareholders
October 10, 2006
THE PROCTER & GAMBLE COMPANY
P.O. Box 599
August 29, 2006
Fellow Procter & Gamble Shareholders:
It is my pleasure to invite you to this
year’s annual meeting of shareholders, which will be held
on Tuesday, October 10, 2006.
The meeting will start at 9:00 a.m., Eastern
Daylight Time, at the Procter & Gamble Hall at the Aronoff
Center for the Arts, 650 Walnut Street, in Cincinnati.
I appreciate your continued confidence in the
Company and look forward to seeing you on October 10.
Sincerely,
A. G. LAFLEY
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE
THE PROCTER & GAMBLE COMPANY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
August 29, 2006
| Date: | Tuesday, October 10, 2006 | |||
| Time: | 9:00 a.m., Eastern Daylight Time | |||
| Place: |
Procter & Gamble Hall
at the Aronoff Center for the Arts 650 Walnut Street, Cincinnati, Ohio |
|||
Purposes of the meeting:
| • | To review the minutes of the 2005 annual meeting of shareholders; | |
| • | To receive reports of officers; | |
| • | To vote on a proposal to amend the Company’s Code of Regulations to decrease the authorized number of Directors on the Board; | |
| • | To elect five members of the Board of Directors; | |
| • | To vote on a proposal to ratify the appointment of the independent registered public accounting firm; | |
| • | To vote on a proposal to reapprove and amend the material terms of the performance criteria under The Procter & Gamble 2001 Stock and Incentive Compensation Plan; | |
| • | To vote on one shareholder proposal; and | |
| • | To consider any other matters properly brought before the meeting. |
Who may attend the meeting:
Only shareholders, persons holding proxies from shareholders, and representatives of the media and financial community may attend the meeting.
Shareholders attending the meeting who are hearing-impaired should identify themselves during registration so they can sit in a special section where an interpreter will be available.
What to bring:
If your shares are registered in your name, you should bring the enclosed Admission Ticket to the meeting.
If your shares are held in the name of a broker, trust, bank, or other nominee, you will need to bring a proxy or letter from that broker, trust, bank, or nominee that confirms that you are the beneficial owner of those shares.
Webcast of the annual meeting:
If you are not able to attend the meeting in person, you may join a live video and audiocast of the meeting on the Internet by visiting http://www.pg.com/investors at 9:00 a.m. Eastern Daylight Time on October 10, 2006. Greater Cincinnati residents can also watch on Time Warner Cable channel 2 or Insight Cable channel 6.
Record Date:
August 11, 2006 is the record date for the
meeting. This means that owners of Procter & Gamble stock at
the close of business on that date are entitled to:
Annual Report:
We have sent a copy of the annual report for the
fiscal year that ended June 30, 2006 to each shareholder of
record as of August 11, 2006 (except that only one annual
report was sent to certain shareholders who share an address
unless we have received contrary instructions from one or more
of the shareholders). The annual report is not part of the proxy
solicitation materials.
Householding Information:
We have adopted a procedure approved by the
Securities and Exchange Commission (“SEC”) called
“householding.” Under this procedure, shareholders of
record who have the same address and last name and do not
participate in electronic delivery of proxy materials will
receive only one copy of our annual report and proxy statement
unless one or more of these shareholders notifies us that they
wish to continue receiving multiple copies. This procedure will
reduce our printing costs and postage fees. If you are still
receiving multiple copies of our annual report or proxy
statement at a single address and wish to receive a single copy,
please contact us at 1-800-742-6253 in the U.S., or inform us in
writing at: The Procter & Gamble Company, Shareholder
Services, P.O. Box 5572, Cincinnati, OH 45201-5572.
Shareholders who participate in householding will
continue to receive separate proxy cards. Householding will not
in any way affect the mailing of dividend checks.
If you participate in householding and wish to
receive a separate copy of the 2006 annual report or proxy
statement, or if you do not wish to participate in householding
and prefer to receive separate copies of future materials,
please call us toll-free at 1-800-742-6253 in the U.S., or
inform us in writing at: The Procter & Gamble Company,
Shareholder Services, P.O. Box 5572, Cincinnati, OH 45201-5572.
We will respond promptly to such requests.
Beneficial shareholders can request information
about householding from their banks, brokers or other holders of
record.
Proxy Voting:
Your vote is important. Please vote your proxy
promptly so your shares can be represented, even if you plan to
attend the annual meeting. You can vote by Internet, by
telephone, or by using the enclosed proxy card. Please see your
proxy card for specific instructions on how to vote.
Our proxy tabulator, Automatic Data
Processing, must receive any proxy that will not be delivered in
person to the annual meeting by 11:59 p.m., Eastern
Daylight Time on Monday, October 9, 2006.
•
receive notice of the meeting; and
•
vote at the meeting and any adjournments or
postponements of the meeting.
By order of the Board of Directors,
JAMES J. JOHNSON
Secretary
Table of Contents
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Proxy Statement
This proxy statement and the accompanying proxy
card are being mailed to Procter & Gamble shareholders
beginning August 29, 2006. The Procter & Gamble Company
(the “Company”), on behalf of its Board of Directors,
is soliciting your proxy to vote your shares at the 2006 annual
meeting of shareholders. We solicit proxies to give all
shareholders of record an opportunity to vote on matters that
will be presented at the annual meeting. In this proxy
statement, you will find information on these matters, which is
provided to assist you in voting your shares.
Voting Information
Who can vote?
You can vote if, as of the close of business on
Friday, August 11, 2006, you were a shareholder of record
of the Company’s:
Each share of the Company stock gets one vote. On
August 11, 2006, there were issued and outstanding:
For The Procter & Gamble Shareholder
Investment Program participants:
If you are a participant in The Procter &
Gamble Shareholder Investment Program (“SIP”), you can
vote shares of common stock held for your account through the
SIP Custodian.
For participants in The Procter & Gamble
Profit Sharing Trust and Employee Stock Ownership
Plan:
If you are a participant in The Procter &
Gamble Profit Sharing Trust and Employee Stock Ownership Plan,
you can instruct the Trustees how to vote the shares of stock
that are allocated to your account. If you do not vote your
shares, the Trustees will vote them in proportion to those
shares for which they have received voting instructions.
Likewise, the Trustees will vote shares held by the trust that
have not been allocated to any account in the same manner.
How do I vote by proxy?
Most shareholders can vote by proxy in three ways:
Please see your proxy card or the information
your bank, broker, or other holder of record provided you for
more information on these options.
If you vote by proxy, your shares will be voted
at the annual meeting in the manner you indicate on your proxy
card. If you sign your proxy card but do not specify how you
want your shares to be voted, they will be voted as the Board of
Directors recommends.
2
•
Common stock;
•
Series A ESOP Convertible Class A
Preferred Stock; or
•
Series B ESOP Convertible Class A
Preferred Stock.
•
3,175,131,514 shares of common stock;
•
84,392,994 shares of Series A ESOP
Convertible Class A Preferred Stock; and
•
67,327,297 shares of Series B ESOP
Convertible Class A Preferred Stock.
•
By Internet — You can vote by Internet
by following the instructions on your proxy card;
•
By Telephone — In the United States and
Canada you can vote by telephone by following the instructions
on your proxy card; or
•
By Mail — You can vote by mail by
returning the enclosed proxy card.
Can I change or revoke my vote after I return
my proxy card?
Yes. You can change or revoke your proxy by
Internet, telephone, or mail at any time before the annual
meeting.
Can I vote in person at the annual meeting
instead of voting by proxy?
Yes. However, we encourage you to complete and
return the enclosed proxy card to ensure that your shares are
represented and voted.
Voting Procedures
Election of Directors — The five
candidates receiving the most votes will be elected as members
of the Board of Directors. In accordance with the By Laws of the
Board of Directors, as amended on June 13, 2006, if a
Director nominee receives, in any non-contested election of
Directors, a greater number of votes “withheld” from
his or her election than votes “for” such election, he
or she will immediately tender his or her resignation as a
Director to the Board of Directors. Within 90 days, the
Board will decide, after taking into account the recommendation
of the Governance & Public Responsibility Committee (in each
case excluding the nominee in question), whether to accept the
resignation. Absent a compelling reason for the Director to
remain on the Board, the Board of Directors shall accept the
resignation. The Board’s explanation of its decision shall
be promptly disclosed on a Form 8-K submitted to the
Securities and Exchange Commission.
Proposals — The affirmative vote of a
majority of shares participating in the voting on each proposal
(except for the Board’s proposal dealing with amending the
Company’s Code of Regulations) is required for adoption.
Abstentions and broker non-votes will not be counted as
participating in the voting, and will therefore have no effect.
Passage of the Board’s proposal to amend the
Company’s Code of Regulations requires the affirmative vote
of a majority of the Company’s issued and outstanding
shares. Accordingly, abstentions and broker non-votes have the
same effect as votes against these proposals.
Who pays for this proxy
solicitation?
The Company does. We have hired Georgeson
Shareholder Communications, Inc., a proxy solicitation firm, to
assist us in soliciting proxies for a fee of $22,000 plus
reasonable expenses. In addition, Georgeson and the
Company’s Directors, officers, and employees may also
solicit proxies by mail, telephone, personal contact, telegraph,
or through online methods. We will reimburse their expenses for
doing this.
We will also reimburse brokers, fiduciaries, and
custodians for their costs in forwarding proxy materials to
beneficial owners of Company stock. Other proxy solicitation
expenses that we will pay include those for preparing, mailing,
returning and tabulating the proxies.
3
Election of Directors
Prior to the 2005 annual meeting of shareholders,
the Board of Directors was divided into three classes. The
classes were as equal in number as was possible depending on the
total number of Directors at any time. Each Director served for
a term of three years. The classes were arranged so that the
terms of the Directors in each class expired at successive
annual meetings. This meant that the shareholders elected
approximately one-third of the members of the Board of Directors
annually. At the 2005 annual meeting of shareholders, the
Company’s shareholders approved a proposal to amend the
Company’s Code of Regulations to provide for the annual
election of Directors. As a transition mechanism, this amendment
provided that Directors serving on the date of the 2005 annual
meeting of shareholders, including those elected at the 2005
annual meeting to serve a three-year term, would serve the
remainder of their elected terms. Starting with the 2006 annual
meeting of shareholders, as the term of each remaining class
expires, the Directors in that class, along with those other
Directors whose terms have expired since the 2005 annual meeting
of shareholders, will be elected annually. For example, the
three-year term of the Directors elected at the 2003 annual
meeting expires at the 2006 annual meeting, and these directors
are nominated for new one-year terms that will expire at the
2007 annual meeting. At the 2007 annual meeting, the three-year
term of the directors elected at the 2004 annual meeting will
expire as well as the one-year terms of the Directors elected at
the 2006 annual meeting. All Directors will be elected annually
starting with the 2008 annual meeting of shareholders, when the
three-year term of those Directors elected at the 2005 annual
meeting of shareholders expires.
The terms of Norman R. Augustine, A. G. Lafley,
Johnathan A. Rodgers, John F. Smith, Jr. and Margaret C. Whitman
will expire at the 2006 annual meeting. The Board has nominated
each of these individuals for new terms that will expire at the
2007 annual meeting. James M. Kilts, whose term also expires at
the 2006 annual meeting, has advised the Board of his intention
to retire from the Company effective October 1, 2006 and is
therefore not standing for re-election.
Each of the nominees has accepted the nomination
and agreed to serve as a Director if elected by the
shareholders. If any nominee becomes unable or unwilling to
serve between the date of the proxy statement and the annual
meeting, the Board may designate a new nominee and the persons
named as proxies will vote for that substitute nominee. If the
Company’s proposal to amend its Code of Regulations to
decrease the authorized number of Directors (see page 37 of
this proxy statement) is not approved by shareholders at the
annual meeting, the Board will take such action as it determines
to be appropriate, including permitting one or more vacancies to
exist. Any vacancies, whether resulting from non-passage of the
Company’s proposal or any other reason, may be filled by
the Board under the Company’s Code of Regulations. The
Board expects to fill any such vacancies once it has identified
appropriate candidates.
The Board of Directors recommends a vote FOR
Norman R. Augustine, A. G. Lafley, Johnathan A. Rodgers, John F.
Smith, Jr. and Margaret C. Whitman as Directors to hold office
until the 2007 annual meeting of shareholders and until their
successors are elected.
Nominees
for Election as Directors with Terms Expiring in 2007
 |
Norman R.
Augustine Director
since 1989 Mr. Augustine is retired Chairman and Chief Executive Officer of Lockheed Martin Corporation (aerospace, electronics, telecommunications and information management). He is also a Director of The Black & Decker Corporation and ConocoPhillips. Age 71. Chairman of the Compensation & Leadership Development Committee and member of the Innovation & Technology Committee. |
4
 |
A. G.
Lafley Director
since 2000 Mr. Lafley is Chairman of the Board, President and Chief Executive of the Company. He is also a Director of General Electric Company and Dell Inc. Age 59. |
|
 |
Johnathan A.
Rodgers Director
since 2001 Mr. Rodgers is President and Chief Executive Officer of TV One, LLC (media and communications). Age 60. Member of the Innovation & Technology Committee. |
|
 |
John F. Smith,
Jr. Director
since 1995 Mr. Smith is Chairman of the Board of Delta Air Lines, Inc. and retired Chairman of the Board and Chief Executive Officer of General Motors Corporation (automobiles and related businesses). He is also a Director of Delta Air Lines, Inc. and Swiss Reinsurance Company. Age 68. Chairman of the Audit Committee and member of the Governance & Public Responsibility Committee. |
|
 |
Margaret C.
Whitman Director
since 2003 Ms. Whitman is President and Chief Executive Officer of eBay Inc. (a global internet company that includes online marketplaces, payments and communications). She is also a Director of eBay Inc. and Dreamworks Animation SKJ, Inc. Age 50. Member of the Compensation & Leadership Development and Governance & Public Responsibility Committees. |
|
All of the nominees for election as Directors with terms expiring in 2007 listed above, except Mr. Rodgers, have been executive officers of their respective employers, and/or retired from such positions, for more than the past five years. Prior to his appointment as President and Chief Executive Officer of TV One, Mr. Rodgers was President of Discovery Networks, U.S. from 1996 until 2002.
Each of the Directors with terms expiring in 2006
was elected by the shareholders at the annual meeting in 2003.
5
Incumbent Directors with Terms Expiring in 2007
 |
Joseph T.
Gorman Director
since 1993 Mr. Gorman is retired Chairman and Chief Executive Officer of TRW Inc. (automotive, aerospace and information systems) and Chairman and Chief Executive Officer of Moxahela Enterprises, LLC (venture capital). He is also a Director of Alcoa Inc., Imperial Chemical Industries plc., Tonsburg Magnesium Group International AB and Vector Intersect Security Acquisition Corporation. Age 68. Chairman of the Finance Committee and member of the Compensation & Leadership Development Committee. |
|
 |
Lynn M.
Martin Director
since 1994 Ms. Martin is a former Professor at the J. L. Kellogg Graduate School of Management, Northwestern University and former Chair of the Council for the Advancement of Women and Advisor to the firm of Deloitte & Touche LLP for Deloitte’s internal human resources and minority advancement matters. She is also a Director of AT&T Inc., Ryder System, Inc., Dreyfus Funds and Constellation Energy Group, Inc. Age 66. Member of the Finance and Governance & Public Responsibility Committees. |
|
 |
Ralph Snyderman,
M.D. Director
since 1995 Dr. Snyderman is Chancellor Emeritus, James B. Duke Professor of Medicine at Duke University. He is also a Director of Axonyx Inc. and Cardiome Pharma Corporation. Age 66. Chairman of the Innovation & Technology Committee and member of the Audit and Finance Committees. |
|
 |
Bruce L.
Byrnes Director
since 2002 Mr. Byrnes is Vice Chairman of the Board – P&G Household Care. He is also a Director of Cincinnati Bell Inc. Age 58. |
6
 |
Scott D.
Cook Director
since 2000 Mr. Cook is Chairman of the Executive Committee of the Board of Intuit Inc. (a software and web services firm). He is also a Director of Intuit Inc. and eBay Inc. Age 54. Member of the Compensation & Leadership Development and Innovation & Technology Committees. |
|
 |
Charles R.
Lee Director
since 1994 Mr. Lee is retired Chairman of the Board and Co-Chief Executive Officer of Verizon Communications Inc. (telecommunication services). He is also a Director of The DIRECTV Group, Inc., Marathon Oil Corporation, United Technologies Corporation and US Steel Corporation. Age 66. Chairman of the Governance & Public Responsibility Committee and member of the Audit and Compensation & Leadership Development Committees. |
|
 |
W. James McNerney,
Jr. Director
since 2003 Mr. McNerney is Chairman of the Board, President and Chief Executive Officer of The Boeing Company (aerospace, commercial jetliners and military defense systems). He is also a Director of The Boeing Company. Age 57. Member of the Audit and Finance Committees. |
|
 |
Ernesto
Zedillo Director
since 2001 Dr. Zedillo is the former President of Mexico and Director of the Center for the Study of Globalization and Professor in the field of International Economics and Politics at Yale University. He is also a Director of Alcoa Inc. Age 54. Member of the Finance and Governance & Public Responsibility Committees. |
|
7
The Board of Directors
The Board of Directors has general oversight
responsibility for the Company’s affairs pursuant to
Ohio’s General Corporation Law, the Company’s Code of
Regulations and the Board of Directors’ By Laws. In
exercising its fiduciary duties, the Board of Directors
represents and acts on behalf of the shareholders. Although the
Board of Directors does not have responsibility for the
day-to-day management of the Company, it stays informed about
the Company’s business and provides guidance to Company
management through periodic meetings, site visits and other
interactions. The Board is deeply involved in the Company’s
strategic planning process, leadership development and
succession planning. Additional details concerning the role and
structure of the Board of Directors are in the Board’s
Corporate Governance Guidelines, which can be found in the
corporate governance section of the Company’s website at
www.pg.com/investors.
Committees of the Board
To facilitate deeper penetration of certain key
areas of oversight, the Board of Directors has established five
Committees. Membership on these Committees is shown in the
following Chart.
| Compensation & | Governance & | |||
| Audit | Leadership Development | Public Responsibility | ||
|
Mr. Lee
|
Mr. Augustine* | Mr. Lee* | ||
|
Mr. McNerney
|
Mr. Cook | Ms. Martin | ||
|
Mr. Smith*
|
Mr. Gorman | Mr. Smith | ||
|
Dr. Snyderman
|
Mr. Lee | Ms. Whitman | ||
| Ms. Whitman | Dr. Zedillo |
| Finance | Innovation & Technology | |||
|
Mr. Gorman*
|
Mr. Augustine | |||
|
Ms. Martin
|
Mr. Cook | |||
|
Mr. McNerney
|
Mr. Rodgers | |||
|
Dr. Snyderman
|
Dr. Snyderman* | |||
|
Dr. Zedillo
|
| * | Committee Chair |
The Audit Committee met eight times during
the fiscal year ended June 30, 2006, with representatives
of Deloitte & Touche LLP, the Company’s independent
registered public accounting firm, and financial management to
review accounting, control, auditing and financial reporting
matters. All members of the Committee are independent under the
New York Stock Exchange listing standards and the Board of
Directors’ Guidelines for Determining the Independence of
its Members (the “Independence Guidelines”, which can
be found in the corporate governance section of the
Company’s website at www.pg.com/investors and are attached
to this proxy statement as Exhibit A). The Audit Committee has
the responsibilities set forth in its charter with respect to
the quality and integrity of the Company’s financial
statements; the Company’s compliance with legal and
regulatory requirements; the Company’s overall risk
management profile; the independent registered public accounting
firm’s qualifications and independence; the performance of
the Company’s internal audit function and the independent
registered public accounting firm; preparing the annual Audit
Committee Report to be included in the Company’s proxy
statement; and assisting the Board of Directors and the Company
in interpreting and applying the Company’s Worldwide
Business Conduct Manual. The Audit Committee’s charter
can be found in the corporate governance section of the
Company’s website at www.pg.com/investors, and is attached
to this proxy statement as Exhibit B.
8
The Compensation & Leadership Development
Committee met five times during the fiscal year ended
June 30, 2006. All members of the Committee are independent
under the New York Stock Exchange listing standards and the
Independence Guidelines. The Compensation & Leadership
Development Committee has the responsibilities set forth in its
charter with respect to overseeing overall Company compensation
policies and their specific application to principal officers
elected by the Board of Directors and to members of the Board of
Directors; preparing an annual report on executive compensation
for inclusion in the Company’s proxy statement; and
assisting the Board in the development and evaluation of
principal officers. The Compensation & Leadership
Development Committee’s charter can be found in the
corporate governance section of the Company’s website at
www.pg.com/investors.
The Governance & Public Responsibility
Committee met six times during the fiscal year ended
June 30, 2006. All members of the Governance & Public
Responsibility Committee are independent under the New York
Stock Exchange listing standards and the Independence
Guidelines. The Governance & Public Responsibility Committee
has the responsibilities set forth in its charter with respect
to identifying individuals qualified to become members of the
Board of Directors; recommending when new members should be
added to the Board; recommending individuals to fill vacant
Board positions; recommending the Director nominees for the next
annual meeting of shareholders; periodically developing and
recommending updates to the Board’s Corporate Governance
Guidelines; other issues related to Director governance and
ethics; evaluation of the Board of Directors and its members;
and overseeing matters of importance to the Company and its
stakeholders, including employees, consumers, customers,
suppliers, shareholders, governments, local communities and the
general public. Public responsibility topics considered by this
Committee include organization diversity, sustainable
development, community and government relations, product quality
and quality assurance systems and corporate reputation. The
Governance & Public Responsibility Committee’s charter
can be found in the corporate governance section of the
Company’s website at www.pg.com/investors.
The Finance Committee met three times
during the fiscal year ended June 30, 2006. The Finance
Committee has the responsibilities set forth in its charter with
respect to overseeing financial matters of importance to the
Company. Topics considered by this Committee include the
Company’s annual financing plans; global financing
principles and objectives; financial strategies and capital
structures; funding and oversight of the Company’s pension
and benefit plans; the Company’s insurance program; the
financial implications of major investments, restructurings,
joint ventures, acquisitions and divestitures; and the impact of
various finance activities on debt ratings. The Finance
Committee’s charter can be found in the corporate
governance section of the Company’s website at
www.pg.com/investors.
The Innovation & Technology Committee
met two times during the fiscal year ended June 30,
2006. The Innovation & Technology Committee has the
responsibilities set forth in its charter with respect to
overseeing and providing counsel on matters of innovation and
technology. Topics considered by this Committee include the
Company’s approach to technical and commercial innovation;
the innovation and technology acquisition process; and tracking
systems important to successful innovation. The Innovation &
Technology Committee’s charter can be found in the
corporate governance section of the Company’s website at
www.pg.com/investors.
The Company’s Committee Charter Appendix,
which applies to all committees, can be found in the
corporate governance section of the Company’s website at
www.pg.com/investors.
Board and Committee Meeting
Attendance
During the fiscal year ended June 30, 2006,
the Board of Directors held eight meetings and the Committees of
the Board of Directors held 24 meetings for a total of 32
meetings. Average attendance at these meetings by nominees and
incumbents serving as Directors during the past year was in
excess of 93%.
9
Corporate Governance Guidelines
The Board of Directors has adopted Corporate
Governance Guidelines to set forth its agreements concerning
overall governance practices. These Guidelines can be found in
the corporate governance section of the Company’s website
at www.pg.com/investors. Shareholders can request a copy of the
Corporate Governance Guidelines by writing to the Company
Secretary at One Procter & Gamble Plaza, Cincinnati, OH
45202-3315.
Director Independence
In addition to the Corporate Governance
Guidelines, the Board has adopted the Independence Guidelines,
which can be found in the corporate governance section of the
Company’s website at www.pg.com/investors, and are attached
to this proxy statement as Exhibit A. The Board of
Directors has determined that the following Directors are
independent under the New York Stock Exchange listing standards
and the Independence Guidelines: Norman R. Augustine, Scott D.
Cook, Joseph T. Gorman, Charles R. Lee, Lynn M. Martin, W. James
McNerney, Jr., John F. Smith, Jr., Ralph Snyderman, Margaret C.
Whitman and Ernesto Zedillo.
Code of Ethics
For a number of years, the Company has had, in
one form or another, a code of ethics for its employees. During
the fiscal year ended June 30, 2004, the Company adopted a
revised version of its code of ethics to comply with the
specific requirements of new SEC regulations and New York Stock
Exchange listing standards. This code of ethics is contained in
the Worldwide Business Conduct Manual, which applies to
all of the Company’s employees, officers and Directors, and
is available on the Company’s website at www.pg.com. The
Worldwide Business Conduct Manual is firmly rooted in the
Company’s long-standing Purpose, Values and Principles,
which can also be found on the Company’s website at
www.pg.com. During the fiscal year ended June 30, 2006, the
Company continued its broad deployment of the Worldwide
Business Conduct Manual in 29 different languages, including
online training.
Presiding Director and Executive
Sessions
After consultation with the Governance &
Public Responsibility Committee, the non-employee members of the
Board of Directors appointed Norman R. Augustine to serve as the
Presiding Director for fiscal year 2006-07. Mr. Augustine
also served as Presiding Director during fiscal years 2004-05
and 2005-06. The Presiding Director acts as the key liaison with
the Chief Executive, assists in setting the Board agenda, chairs
the executive sessions and communicates the Board of
Directors’ feedback to the Chief Executive. The
non-employee Directors met three times during the year in
executive session without the presence of management Directors
or employees of the Company to discuss various matters related
to oversight of the Company, the management of Board affairs and
the Chief Executive’s performance.
Communication with Directors and Executive
Officers
Shareholders and others who wish to communicate
with the Board of Directors or any particular Director,
including the Presiding Director, or with any executive officer
of the Company, may do so by writing to the following address:
10
[Name of Director(s)/Executive Officer or
“Board of Directors”]
The Procter & Gamble Company
c/o Secretary
One Procter & Gamble Plaza
Cincinnati, OH 45202-3315
All such correspondence is reviewed by the
Secretary’s office, which logs the material for tracking
purposes. The Board of Directors has asked the Secretary’s
office to forward to the appropriate Director(s) all
correspondence, except for items unrelated to the functions of
the Board of Directors, business solicitations, advertisements
and materials that are profane.
Shareholder Recommendations of Board
Nominees
The Governance & Public Responsibility
Committee will consider shareholder recommendations for
candidates for the Board, which should be submitted to:
Shareholder recommendations should include the
name of the candidate, as well as relevant biographical
information. The minimum qualifications and preferred specific
qualities and skills required for Directors are set forth in
Article II, Sections B through E of the Board’s
Corporate Governance Guidelines. The Committee considers all
candidates using these criteria, regardless of the source of the
recommendation. The Committee’s process for evaluating
candidates includes the considerations set forth in
Article II, Section B of the Committee’s Charter.
After initial screening for minimum qualifications, the
Committee determines appropriate next steps, including requests
for additional information, reference checks and interviews with
potential candidates. In addition to shareholder
recommendations, the Committee also relies on recommendations
from current Directors, Company personnel and others. From time
to time, the Committee may engage the services of outside search
firms to help identify candidates. During the fiscal year ended
June 30, 2006, no such engagement existed (and none
currently exists) and no funds were paid to outside parties in
connection with the identification of nominees. All nominees for
election as Directors currently serve on the Board and are known
to the Committee in that capacity.
Annual Meeting Attendance
The Board’s expectation is that all its
members attend the annual meeting of shareholders. All Directors
attended the 2005 annual meeting, except for Robert D. Storey.
Director Compensation
Directors who are Company employees do not
receive Directors’ fees.
The objective of the Compensation &
Leadership Development Committee of the Board of Directors (the
“Committee”) is to provide non-employee Directors a
compensation package at the median of the Compensation Survey
Group (as this group is further described on page 14
of this proxy statement). In fiscal year
2005-06 non-employee Directors received the following
compensation:
11
Chairman of the Governance & Public
Responsibility Committee
The Procter & Gamble Company
c/o Secretary
One Procter & Gamble Plaza
Cincinnati, OH 45202-3315
•
An annual grant of restricted stock units on
October 11, 2005, the value of which the Committee
increased from $100,000 to $125,000. This positions the Director
compensation package at the median of the Compensation Survey
Group and achieves a mix of stock and cash consistent with that
group. These units are forfeitable for one year, will not
convert to common stock until at least one year after leaving
the Board and cannot be sold or traded until converted to common
stock, thus encouraging alignment with the Company’s
long-term interests. Restricted stock units earn dividend
equivalents at the same rate as dividends paid to shareholders;
Stock and restricted stock unit awards made to
non-employee Directors are made under The Procter &
Gamble 2003 Non-Employee Directors’ Stock Plan, as approved
by shareholders on October 14, 2003.
The following table presents the compensation
provided by the Company to the non-employee Directors for fiscal
year 2005-06.
NON-EMPLOYEE DIRECTOR COMPENSATION
TABLE
•
An annual retainer fee of $75,000 paid in
quarterly increments, which the Directors can elect to receive
as cash, common stock or deferred compensation;
•
A Committee meeting fee of $2,000 for every
Committee meeting attended, which the Directors can elect to
receive as cash, common stock or deferred compensation; and
•
The Chairman of the Audit Committee also received
an additional $15,000 annual retainer. The Chairmen of the
Compensation & Leadership Development, Finance,
Governance & Public Responsibility and
Innovation & Technology Committees each received an
additional $10,000 annual retainer. These Chairmen can elect to
receive these additional retainers as cash, common stock or
deferred compensation.
| Annual | Committee | Committee | ||||||||||||||||||
| Cash | Restricted | Meeting | Chairman | |||||||||||||||||
| Name | Retainer | Stock Units | Fees | Fee | Total | |||||||||||||||
|
Norman R. Augustine
|
$ | 75,000 | $ | 125,000 | $ | 14,000 | $ | 10,000 | $ | 224,000 | ||||||||||
|
Scott D. Cook
|
75,000 | 125,000 | 14,000 | 0 | 214,000 | |||||||||||||||
|
Joseph T. Gorman
|
75,000 | 125,000 | 16,000 | 10,000 | 226,000 | |||||||||||||||
|
Charles R. Lee
|
75,000 | 125,000 | 38,000 | 2,500 | * | 240,500 | ||||||||||||||
|
Lynn M. Martin
|
75,000 | 125,000 | 14,000 | 0 | 214,000 | |||||||||||||||
|
W. James
McNerney, Jr.
|
75,000 | 125,000 | 18,000 | 0 | 218,000 | |||||||||||||||
|
Johnathan A. Rodgers
|
75,000 | 125,000 | 2,000 | 0 | 202,000 | |||||||||||||||
|
John F.
Smith, Jr.
|
75,000 | 125,000 | 28,000 | 15,000 | 243,000 | |||||||||||||||
|
Ralph Snyderman
|
75,000 | 125,000 | 20,000 | 10,000 | 230,000 | |||||||||||||||
|
Robert D. Storey**
|
75,000 | 125,000 | 12,000 | 10,000 | 222,000 | |||||||||||||||
|
Margaret C. Whitman
|
75,000 | 125,000 | 20,000 | 0 | 220,000 | |||||||||||||||
|
Ernesto Zedillo
|
75,000 | 125,000 | 18,000 | 0 | 218,000 | |||||||||||||||
| * | Partial year as committee chair |
| ** | Mr. Storey retired as a Director on May 1, 2006. |
Non-employee Directors also receive life insurance coverage in the amount of $750,000, payable in the event of accidental death or disability occurring while traveling on Company business.
If a non-employee Director elects to defer cash fees under The Procter & Gamble Deferred Compensation Plan for Directors, such fees are credited to the Director’s account but not funded. Interest is credited to the account at the end of each month at the prime rate then in effect at J. P. Morgan Chase. Amounts credited to these deferred compensation accounts are payable upon the retirement or death of the Director, or after a term of years after retirement as specified by the Director.
Stock Ownership Guidelines for Non-employee Directors
Non-employee Directors must own Company stock
and/or restricted stock units worth six times their annual cash
retainer. All Directors have already achieved this ownership
requirement.
12
Charitable Gifts Program
Effective July 1, 2003, the Charitable Gifts
Program was discontinued for any new Directors. Only those
current and retired Directors who were participants prior to
July 1, 2003 continue in this program, which is funded by
life insurance on the lives of the non-employee members of the
Board of Directors and the Chief Executive. Participants receive
no financial benefit from the program because the Company
receives all insurance proceeds and charitable deductions. Under
this program, the Company makes charitable contributions of up
to a total of $1 million following the death of a
participant. These contributions are divided among up to five
charitable organizations selected by the participant. The
following current and retired Directors are participants in this
program: David M. Abshire, Edwin L. Artzt, Norman R. Augustine,
Donald R. Beall, Theodore F. Brophy, Richard B. Cheney,
Scott D. Cook, Domenico DeSole, Richard J. Ferris, Joseph T.
Gorman, Robert A. Hanson, Durk I. Jager, A. G. Lafley, Joshua
Lederberg, Charles R. Lee, Lynn M. Martin, W. James
McNerney, Jr., John E. Pepper, David M. Roderick, Johnathan
A. Rodgers, John G. Smale, John F. Smith, Jr., Ralph
Snyderman, Robert D. Storey, Margaret C. Whitman, Marina v.N.
Whitman and Ernesto Zedillo.
Report of the Compensation &
Leadership Development Committee of the
Introduction
The Compensation & Leadership
Development Committee of the Board of Directors (the
“Committee”) is responsible for ensuring that the
Company’s executive compensation policies, practices and
systems are competitive and reflect the long-term interests of
shareholders. None of its members have been an officer or recent
employee of the Company, and each is considered independent for
purposes of applicable New York Stock Exchange listing standards
as well as the Independence Guidelines. You can learn more about
the Committee’s purpose, responsibilities, structure and
other details by reading the Committee’s charter and the
Company’s Committee Charter Appendix, which can both be
found in the corporate governance section of the Company’s
website at www.pg.com/investors.
The Committee is also responsible for reporting
on the Company’s executive compensation each year, as part
of the annual proxy statement. The Committee utilized
market-based data and a pay-for-performance approach to
determine executive compensation. This Report explains:
Summary
The Company’s executive compensation is
based on a few simple principles:
These principles have served the Company well and
have enabled the Company to deliver strong shareholder value
increases over time. Additionally, these principles have
assisted the
13
•
The Company’s total compensation philosophy;
•
Key components of executive compensation,
including the Chief Executive’s compensation;
•
The factors the Committee considered as
compensation levels were established; and
•
Details regarding stock ownership, share
retention requirements and deductibility of qualifying
compensation.
•
Pay competitively;
•
Pay for performance; and
•
Design compensation programs that support the
business with emphasis on the longer term.
At the executive level, the vast majority of
compensation is at-risk, vests over time, and is tied directly
to the Company’s long-term success. Company executives are
compensated at levels competitive with individuals performing
similar jobs in comparable companies and achieving similar
results. This conclusion is based on the Committee’s
evaluation of comprehensive surveys by Hewitt Associates, a
leading independent outside executive compensation consulting
firm, and on the opinion of Frederic W. Cook & Co., an
independent compensation advisory firm that is retained by and
reports exclusively to the Committee and does no other work with
the Company or its management.
The Committee compares the Company’s pay
structure and its business, financial and stock price
performance to a benchmark group (the “Compensation Survey
Group”) that consists of two kinds of companies —
those we compete with in the marketplace and those outside our
industry with whom we compete for talent. The group consists of
25 companies. The Committee periodically evaluates the
Compensation Survey Group’s composition to ensure it
remains relevant, and updates it accordingly. Considering that
the Gillette merger substantially increased the size of the
Company, the Committee reevaluated the appropriateness of each
company in the peer group. To better align the peer group to the
Company’s increased size, the Committee replaced five of
the relatively smaller companies (a group with median sales of
$17.4 billion), with five larger companies (a group with
median sales of $73.1 billion). For this past fiscal year
the Compensation Survey Group consisted of the following
companies:
|
3M Altria Group AT&T Boeing Chevron Coca-Cola Colgate-Palmolive Du Pont Exxon Mobil |
General Electric General Motors Hewlett-Packard Home Depot IBM Johnson & Johnson Kimberly Clark Kraft Foods |
Lockheed Martin Merck Motorola PepsiCo Pfizer Target Verizon Communications Wal-Mart Stores |
For fiscal year 2005-06, the Committee established compensation targets for the Company’s executive officers consistent with the opportunity for compensation at the median of the Compensation Survey Group, based on the latest available data. Depending on the Company’s actual results, compensation can be below or above targets. For the past fiscal year the actual total compensation was above these targets because of strong business and financial performance as further described in the Criteria and Company Results section of this Report.
The Committee also considered certain aspects of P&G’s incentive compensation programs in view of the importance of successfully integrating the Gillette business as a result of the merger that closed on October 1, 2005. The Board and Company management are confident that combining P&G and Gillette will create substantial and sustainable shareholder value over the long-term. Near-term, the Company must focus on the successful integration of the Gillette business and delivery of revenue and cost synergies, while maintaining momentum in the Company’s core business.
Specifically to reflect the importance of the
Gillette merger, an additional factor was added to the
Short-Term Achievement Reward (“STAR”) annual
incentive, beginning in fiscal year 2005-06. This so-called
“Gillette Factor” was determined by assessing
performance during the fiscal year on various metrics related to
integration goals including: sustaining the overall health of
both the P&G and Gillette businesses during this period
(based on sales, market share and earnings progress); achieving
revenue and cost synergy objectives; staying within integration
cost and restructuring estimates; delivering the Company’s
“Field the Best Team” staffing commitments;
14
All the elements of the Company’s executive
compensation program are designed to deliver year-to-year and
long-term shareholder value increases. In fact, the majority of
executives’ compensation is at-risk, vests over time, and
is tied directly to the Company’s long-term success.
There are three elements of executive
compensation:
•
Criteria and Company Results
The Committee sets compensation levels each year
based on five performance criteria:
Additionally, the Board expects executives to
uphold the fundamental principles embodied in the Company’s
Statement of Purpose, Values, and Principles, plus the
Worldwide Business Conduct Manual, the Sustainability
Report, and the Environmental Quality Policy. The Committee
considers the effectiveness of executives in upholding these
principles when the Committee makes compensation decisions.
These fundamental principles include a commitment to integrity,
maximizing the development of each individual, developing a
diverse organization, and continually improving the
environmental quality of the Company’s products and
operations. In upholding these fundamental principles,
executives not only contribute to their own success, but also
help ensure that the Company’s business, employees,
shareholders and the communities in which the Company operates
will prosper.
In terms of the Company’s performance
against these criteria, results during fiscal year 2005-06 were
once again strong. More specifically, the Committee’s
compensation decisions were influenced by the Company’s
results on the following key performance metrics:
15
•
Compensation Elements —
Overview
•
Base salaries;
•
Annual incentives through the STAR
program; and
•
Long-term incentives that include equity awards
that may be delivered in the form of stock options, restricted
stock and restricted stock units through the Company’s Key
Manager Long-Term Incentive Program and through the
Company’s Business Growth Program.
•
The Company’s absolute performance, measured
by unit volume growth, net sales growth, earnings per share
growth, free cash flow growth and total shareholder return;
•
The Company’s performance relative to its
established goals;
•
The Company’s performance relative to the
performance of the Compensation Survey Group;
•
Compensation targets for specific positions set
at the median of the Compensation Survey Group; and
•
Individual contributions to Company performance.
•
Volume +19% (organic volume increased 6%, which
excludes the impacts of acquisitions and divestitures, such as
Gillette, of 13%);
•
Net Sales +20% (organic sales increased 7%, which
excludes the impacts of acquisitions and divestitures, such as
Gillette, of 14% and negative foreign exchange impact of 1%);
•
Earnings per share +12%-13%, excluding Gillette
dilution impact (comprised of 4% reported earnings per share
growth less the 8%-9% impact of dilution from the Gillette
acquisition);
The Company’s performance on all but one of
these criteria (TSR) met or exceeded previously established
targets. The Committee also considered other indicators of the
health of the Company’s businesses. Market shares continue
to increase broadly across the businesses. In addition, despite
a challenging cost environment, particularly on certain
commodities including petroleum-related products, the Company
improved its cost structure. Progress was also broad-based in
fiscal year 2005-06 as each Global Business Unit, four of the
five reporting segments, each of the 16 largest countries
and 16 of the Company’s 17 billion dollar brands (prior to
the Gillette merger) grew volume. The Pet Health, Snacks and
Coffee reporting segment and the Folgers brand were below year
ago, due to the impact of Hurricane Katrina. Only TSR lagged
below objective, with the Company trailing about two-thirds of
the peer group. Since stock prices will vary in the short-term,
the Committee considers how P&G stock has performed in the
market over a longer timeframe. For perspective, P&G’s
TSR over the past five years ranked in the top quartile of the
TSR peer group. The results described in this paragraph (other
than TSR) exclude Gillette because Gillette was part of the
Company for only nine months of fiscal year 2005-06. After the
Gillette merger the Company has 22 billion dollar brands
and seven reporting segments. The success of the Gillette
integration impacts executive compensation through the Gillette
Factor of the STAR program as discussed in the
Summary section of this Report.
As Chief Executive, Mr. Lafley has a
personal stake in the success of the Company and his
compensation is tied to that success. He is compensated in
accordance with the principles and criteria summarized above.
More than 90% of Mr. Lafley’s total compensation is
at-risk based on the Company’s performance. His total
compensation in fiscal year 2005-06, which is above the median
of the Compensation Survey Group, reflects the Company’s
strong overall performance during the year as well as the
sustained results over the past six years during which
Mr. Lafley has been Chief Executive. Mr. Lafley’s
compensation also reflects steps he has taken to sustain the
Company’s strong results in the future, including
significant progress to successfully integrate the Gillette
merger. The Committee also considered his commitment to good
corporate citizenship and to giving back to the communities in
which the Company operates.
This year the Committee modified the form in
which Mr. Lafley receives his long-term incentives,
achieving his target long-term compensation through a
combination of stock options and restricted stock units.
Mr. Lafley’s long-term incentive program now consists
of three components: 1) the three-year performance
program — Business Growth Program
(“BGP”) — that will pay out in restricted
stock units; 2) a portion of the annual Key Manager grant
in stock options; and 3) a portion of the annual Key
Manager grant in restricted stock units that vest after three
years.
Details of Mr. Lafley’s compensation
are included in the following pages. The other named executive
officers are compensated according to the same principles,
practices and programs as the Chief Executive.
Compensation Elements —
Detail
The Committee established base salary ranges
based on the examination of survey data for our Compensation
Survey Group. This information was gathered by Hewitt
Associates, a leading independent outside executive compensation
consulting firm. Salary ranges, combined with
16
•
Free cash flow productivity was 100% (this is
operating cash flow of $11.4 billion less capital
expenditures of $2.7 billion divided by net earnings of
$8.7 billion); and
•
Market Total Shareholder Return (“TSR”)
ranked 15th in the 21 company peer group the Company uses for
TSR comparison purposes.
•
Chief Executive Compensation
Overview
•
Base Salaries
STAR is the Company’s annual incentive
program. All awards are made within the authority of the
Additional Remuneration Plan that dates back to 1949, and The
Procter & Gamble 2001 Stock and Incentive Compensation Plan
(the “2001 Stock Plan”). To allow opportunities for
increased ownership or deferral, executives can choose to
receive all or some portion of their STAR awards in the form of
cash, stock options, restricted stock units or deferred
compensation under the Executive Deferred Compensation Plan.
STAR awards are based on three factors:
Differences in performance result in
significantly different levels of annual incentive compensation
for various business units, both above and below target. For
example, specific business unit factors for fiscal year 2005-06
ranged from 65% to 160% of target.
As a result of strong overall Company
performance, Gillette integration that is on target, as well as
combined business unit results that were significantly above
targeted performance goals, the fiscal year 2005-06 STAR program
paid out awards that were, on average, above target.
The Committee awarded long-term incentives
through the Company’s 2001 Stock Plan approved by
shareholders on October 9, 2001, The Gillette Company 2004
Long-Term Incentive Plan (the “2004 Gillette Plan”)
approved by Gillette’s shareholders on May 20, 2004,
and/or the Company’s Additional Remuneration Plan. Awards
under these programs focus executives’ attention on the
longer-term performance of the Company. When long-term incentive
programs pay awards at target, the combined long-term component
of executives’ compensation will be consistent with the
median opportunity for long-term compensation of the
Compensation Survey Group for comparable positions.
17
•
Annual Incentives
•
Overall Company results, measured by total
shareholder return relative to similar consumer product
companies and by earnings per share growth relative to a
pre-established target;
•
Specific business unit results, determined
through a retrospective assessment of each business unit’s
performance, including volume, sales, market share, value
contribution, profits, operating cash flow, operating total
shareholder return, performance relative to competitors and
business unit collaboration; and
•
Gillette integration results, as described in the
Summary section of this Report.
•
Long-Term Incentives
l
Key Manager Long-Term
Incentives
The Company may make awards of stock options,
restricted stock, and/or restricted stock units under the
shareholder-approved 2001 Stock Plan and the 2004 Gillette Plan.
These awards are given to employees who have demonstrated a
capacity for contributing substantially to the success of the
Company. As part of an appropriate mix of compensation elements,
the Company grants stock options to encourage these managers to
act as owners of the business, helping to further align their
interests with those of shareholders. Stock appreciation rights
(“SARs”) are granted instead of stock options in
countries where the holding of foreign stock is restricted.
18
Pursuant to the terms of the 2001 Stock Plan and
the 2004 Gillette Plan, the Company makes stock option grants at
no less than 100% of the market price on the date of grant and
the options cannot be repriced without shareholder approval.
Grants are made on the last business day in February as
pre-established by the Committee. Stock options and SARs are
fully exercisable after three years and have a maximum term of
ten years. In addition to ownership requirements, the Company
also requires top executives to hold exercised shares for a
period of time. Please see the Miscellaneous Items
section of this Report for more information.
The target number of shares to be awarded to an
individual is based on the median competitive values of our
Compensation Survey Group. For those selected to receive an
award, the target amount can be adjusted by as much as plus or
minus 50% based on an individual’s performance, with the
aggregate value of all grants remaining at target. The number of
option shares currently held by each executive is not considered
in determining awards. Grants were determined for employees who
came to the Company through the Gillette merger using the same
methodology, with most of these former Gillette employees
receiving shares from the 2004 Gillette Plan.
l
Business Growth Program
The Business Growth Program (“BGP”) is
a three-year performance program covering July 1, 2005
through June 30, 2008. Approximately 50 senior executives
are included in BGP. Each was assigned a target amount
(“Target Award”) for the three-year performance
period. Taken together, each executive’s BGP at target
and stock options at target represent total long-term
incentive compensation equal to the median long-term incentive
target compensation of the Compensation Survey Group for
comparable positions. The Committee determines actual BGP awards
based on Company performance versus pre-established targets for
diluted earnings per share growth and operating total
shareholder return.
BGP will pay out at target compensation levels
for the full three-year period if the Company achieves its
operating total shareholder return goal and delivers three-year
10% compound earnings per share growth. Interim earnings per
share growth goals are initially adjusted for Gillette dilution,
with this adjustment phasing out over the three-year performance
period. The program places management compensation at-risk based
on achievement of the profitable growth objectives of the
Company. Depending on actual results, participants may earn more
or less than target.
Progress awards of 30% of the total anticipated
award are made based on actual performance for the one-year
period ending June 30, 2006 and for the two-year period
ending June 30, 2007. Progress awards are made only if
performance targets are met or exceeded and are made subject to
the achievement of performance targets over the three-year
period of the program. For the year ended June 30, 2006,
the performance targets were exceeded and progress payments of
193% of target were made. This reflects very strong earnings per
share growth (adjusted in the first year for Gillette dilution,
which adjustment is phased out over the term of the program) and
operating total shareholder return that was above target and
reflects strong cash flow. The progress awards are shown in the
Summary Compensation Table on page 23 of this proxy
statement.
One-half of any amounts earned will be paid in
the form of three-year restricted stock units. The remaining
half can be paid in cash, deferred compensation via the
Executive Deferred Compensation Plan, or restricted stock units
with the restricted period elected by the executive within
prescribed limits. Restricted stock units earn dividend
equivalents at the same rate as dividends paid to shareholders.
Chief Executive Compensation
The Committee established compensation levels for
Mr. Lafley using the same principles applied to all Company
executives. The process for assessing his performance is
rigorous and objective, with performance standards selected
according to the best practices in our industry and for the
Company. Mr. Lafley’s total compensation opportunity
is competitive with that of chief executives in the Compensation
Survey Group. His compensation is linked directly to both his
personal performance and the Company’s performance. It is
also aligned with business strategies and is focused on
rewarding sustained, long-term growth.
The Committee reviewed all elements of
Mr. Lafley’s total compensation opportunity including
salary, bonus, equity and long-term incentive compensation,
unrealized stock option, restricted stock and restricted stock
unit gains, and the cost to the Company of
Mr. Lafley’s participation in benefits, perquisites
and retirement programs. A tally sheet displaying all of the
above components was reviewed by the Committee.
Meeting in executive session without the presence
of any Company employee, the Committee determined the amount of
Mr. Lafley’s compensation elements. The
Committee’s action was reviewed and discussed by the
non-employee Directors of the Board of Directors.
The Committee primarily considered the following
factors in determining Mr. Lafley’s annual and
long-term incentive awards:
In addition, the Committee considered several
outcomes of Mr. Lafley’s efforts that are focused on
sustaining growth into the future:
Finally, the Committee considered its tremendous
confidence in Mr. Lafley’s leadership based in part on
his past demonstrated performance. Since 2001, under
Mr. Lafley’s leadership, P&G sales have grown from
$39 billion to nearly $70 billion, average annual
earnings per share growth
19
•
The Company’s overall results;
•
Mr. Lafley’s individual performance,
including his high ethical standards;
•
The compensation of other chief executives in our
Compensation Survey Group; and
•
Our stated compensation philosophy.
•
Continued delivery of very good business results,
with sales, volume, profit and cash in line with or ahead of the
Company’s sustainable growth targets;
•
Continuing to establish the appropriate ethical
atmosphere for governance systems in the Company;
•
Completion of the merger with Gillette, including
the achievement of all legal and regulatory requirements;
•
The successful first stage of the integration of
Gillette — the Company’s largest transaction
ever. Cost and revenue synergies are on track and dilution
targets have been met;
•
Clarity and effectiveness of business strategies
and leveraging of business structure for competitive advantage;
•
The Company’s enhanced ability to innovate
and to create and build leading brands;
•
The continued emphasis on organizational
development, including the development of top talent and
potential successors for key executive positions, up to and
including the Chief Executive role — the Company is
recognized externally as one of the premier developers of
leaders at all levels of the organization; and
•
External recognition of Mr. Lafley’s
skills and contribution, including recent selection as CEO of
the year by CEO Magazine.
20
•
Chief Executive Base Salary
l
Fiscal Year 2005-06
Mr. Lafley’s base salary for fiscal year 2005-06 was
unchanged at $1,700,000.
l
Fiscal Year 2006-07
Mr. Lafley’s salary for fiscal year 2006-07 will
remain unchanged at $1,700,000 and, in combination with his STAR
target, his short-term compensation opportunity is consistent
with the median of his peer group.
•
Chief Executive Annual Incentive Award
l
Fiscal Year 2005-06
Mr. Lafley’s STAR target was 140% of base salary. This
STAR target, when combined with his base salary, was consistent
with the median of short-term target compensation for chief
executives in the Compensation Survey Group. His actual annual
incentive award was $3,500,000, which reflects the
Company’s strong business and financial performance and his
outstanding leadership of the organization.
l
Fiscal Year 2006-07
Mr. Lafley’s STAR target will be 155% of base salary
so that his total short-term compensation target (base salary
plus annual bonus) for fiscal year 2006-07 is consistent with
the median of compensation targets for chief executives in the
Compensation Survey Group.
•
Chief Executive Long-Term Incentive Awards
l
Fiscal Year 2005-06
Mr. Lafley’s total long-term incentive award target
was consistent with the median of long-term incentive awards
paid to chief executives in the Compensation Survey Group, based
on the latest available data. In fiscal year 2005-06, the
Committee awarded Mr. Lafley long-term incentives in the
form of stock options and restricted stock units and the payout
of his BGP progress award as discussed earlier in the
Compensation Elements-Detail section of this
Report. The grant date of the stock options and restricted stock
units awarded to Mr. Lafley was set by the Committee well over a
year in advance and is the same grant date used for all other
recipients. As required of Company grants, these were made at no
less than 100% of the market price on the date of grant and
cannot be repriced to a price that is below the market price on
the date of grant without shareholder approval.
—
Key Manager Stock Options and Restricted Stock Units
In February 2006, the Committee granted a combination of stock
options and restricted stock units to Mr. Lafley, resulting
in a grant of 516,529 stock options and 82,645 restricted stock
units. The Committee set this amount, which is above the median
of the Compensation Survey Group, in recognition of
Mr. Lafley’s strong performance in fiscal year
2004-05. The value of stock options and restricted stock units
are tied directly to future growth in shareholder value.
21
—
Business Growth Program
Under BGP, Mr. Lafley has an incentive award opportunity of
$10,200,000 for a three-year performance period from
July 1, 2005 to June 30, 2008. This target was
established using two times base salary for each year in the
program, which equals six times his July 1, 2005 base
salary. In 2005-06, Mr. Lafley earned a progress award of
$5,905,800 based on very strong earnings per share (adjusted in
the first year for Gillette dilution, which adjustment is phased
out over the term of the program) and operating total
shareholder return performance during the first year of the
three-year performance period. This progress award is 30% of his
total anticipated award (based on Company performance to date).
Mr. Lafley’s award was made on the same basis as the
other BGP participants. His award will be delivered entirely in
the form of restricted stock units on September 15, 2006.
One-half of the shares associated with these restricted stock
units would have been delivered to Mr. Lafley in three
years (September 2009), however Mr. Lafley has elected to
defer delivery of these shares until September 2009 or starting
one year following his retirement, whichever is later. The other
one-half will be delivered starting one year following his
retirement.
l
Fiscal Year 2006-07
The Committee will consider Mr. Lafley’s 2005-06
performance, competitive long-term incentive targets and his BGP
target in determining his Key Manager award. This award may be
made in the form of stock options, restricted stock and/or
restricted stock units.
Mr. Lafley will continue participation in the three-year
BGP performance program covering the period July 1, 2005
through June 30, 2008. If performance goals are fully
achieved, Mr. Lafley’s target interim progress award
for the second year of the program will be $3,060,000 (30% of
the three-year target).
The Committee has determined that since Mr. Lafley’s
share ownership greatly exceeds the requirement of eight times
his base salary, the Committee no longer requires that his
entire BGP award be paid in restricted stock units. Beginning in
2007, any amounts earned will be delivered consistent with all
other program participants, one-half in the form of three-year
restricted stock units and the other one-half delivered in the
participant’s choice of cash, deferred compensation via the
Executive Deferred Compensation Plan or restricted stock units,
with the restricted period elected within specified limits.
•
Chief Executive Benefits and Perquisites
•
Stock Ownership Requirements and Required Holding Periods
l
Stock
Ownership Guidelines
The interests of the Company and its employees are closely
aligned. One of the ways this is reflected is through executive
share ownership. Approximately 50 of the most senior
executives are required to acquire and retain a multiple of
their base salary in shares of Company stock and/or restricted
stock units.
The Chief Executive’s required multiple is eight times base
salary. The multiple for the Vice Chairs and the Chief Financial
Officer is five times base salary. The multiple for the other
approximately 50 most senior executives is four times base
salary.
Mr. Lafley currently owns more than 24 times his base
salary in stock — well above his ownership
requirement. All other executives subject to these stock
ownership requirements are either above their ownership
requirements or are pursuing plans that would permit them to
achieve their ownership requirements within the time frame
prescribed in the stock ownership program.
The Chief Executive must hold for at least two years the net
shares received from stock option exercises, excluding shares
disposed of to pay taxes or the price for any stock option
exercises. This requirement became effective with stock options
exercised on or after June 8, 2004. Approximately 50 of the
most senior executives of the Company must hold for at least one
year the net shares received from stock option exercises,
excluding shares disposed of to pay taxes or the price for any
stock option exercises. This requirement commenced with stock
options exercised on or after July 1, 2006. For all
executives subject to this holding period, including the Chief
Executive, these restrictions are in effect while actively
employed, and any awards that were taken as stock options
instead of cash or unrestricted securities are not subject to
the holding period.
•
Policy with Regard to Qualifying Compensation to Preserve
Deductibility
| Norman R. Augustine, Chairman | Charles R. Lee | |||
| Scott D. Cook | Margaret C. Whitman | |||
| Joseph T. Gorman |
22
| Long-Term Compensation Awards | ||||||||||||||||||||||||||||||||
| Annual Compensation | Securities | Long-Term | ||||||||||||||||||||||||||||||
| Restricted | Underlying | Incentive | ||||||||||||||||||||||||||||||
| Name and | Other Annual | Stock | Options/ | Plan | All Other | |||||||||||||||||||||||||||
| Principal Position | Year | Salary | Bonus(1) | Compensation(2) | Awards(3) | SARs | Payments(4) | Compensation(5) | ||||||||||||||||||||||||
|
A. G. Lafley
|
2005-06 | $ | 1,700.0 | $ | 3,500.0 | (6) | $ | 126.2 | $ | 5,000.0 | (7) | 516,529 | $ | 5,905.8 | (8) | $ | 401.5 | |||||||||||||||
| Chairman of the | 2004-05 | 1,700.0 | 3,500.0 | (9) | 169.9 | 0 | 764,306 | 6,800.0 | (10) | 471.0 | ||||||||||||||||||||||
| Board, President | 2003-04 | 1,700.0 | 3,500.0 | (11) | 95.3 | 0 | 705,834 | 9,864.0 | (12) | 523.1 | ||||||||||||||||||||||
| & Chief Executive | ||||||||||||||||||||||||||||||||
|
James M.
Kilts(13)
|
2005-06 | 1,158.8 | 1,704.0 | (14) | 460.1 | 0 | 1,000,000 | 0 | (15) | 117.6 | ||||||||||||||||||||||
| Vice Chairman of | ||||||||||||||||||||||||||||||||
| the Board-Gillette | ||||||||||||||||||||||||||||||||
|
Susan E. Arnold
|
2005-06 | 910.0 | 1,003.3 | — | 0 | 136,364 | 1,580.7 | (16) | 216.9 | |||||||||||||||||||||||
| Vice Chairman- | 2004-05 | 910.0 | 1,212.1 | — | 0 | 135,274 | 1,820.0 | (17) | 223.3 | |||||||||||||||||||||||
| P&G Beauty & Health | 2003-04 | 583.3 | 666.7 | — | 0 | 136,150 | 1,566.0 | (18) | 158.5 | |||||||||||||||||||||||
|
Bruce L. Byrnes
|
2005-06 | 910.0 | 1,123.7 | — | 0 | 132,232 | 1,580.7 | (19) | 218.2 | |||||||||||||||||||||||
| Vice Chairman of | 2004-05 | 910.0 | 772.7 | — | 158,597 | 1,820.0 | (20) | 227.3 | ||||||||||||||||||||||||
| the Board-P&G | 2003-04 | 910.0 | 984.5 | — | 238,260 | 2,700.0 | (21) | 257.7 | ||||||||||||||||||||||||
| Household Care | ||||||||||||||||||||||||||||||||
|
Clayton C.
Daley, Jr.(22)
|
2005-06 | 850.0 | 970.2 | (23) | — | 0 | 132,232 | 1,459.1 | (24 | 202.9 | ||||||||||||||||||||||
| Chief Financial | 2004-05 | 787.5 | 861.5 | — | 0 | 149,268 | 1,540.0 | (25) | 204.9 | |||||||||||||||||||||||
| Officer | 2003-04 | 725.0 | 827.3 | — | 0 | 153,168 | 2,088.0 | (26) | 205.1 | |||||||||||||||||||||||
|
Robert A. McDonald
|
2005-06 | 910.0 | 1,051.4 | 237.4 | 0 | 140,496 | 1,580.7 | (27) | 214.7 | |||||||||||||||||||||||
| Vice Chairman- | 2004-05 | 910.0 | 1,045.5 | 1,048.4 | (28) | 158,597 | 1,820.0 | (29) | 217.4 | |||||||||||||||||||||||
| Global Operations | 2003-04 | 827.5 | 775.5 | — | 1,500.0 | 223,672 | 1,908.0 | (30) | 281.9 | |||||||||||||||||||||||
| (1) | STAR awards may be made in the form of cash, restricted stock units, stock options, or deferred compensation as approved by the Compensation & Leadership Development Committee. All STAR awards are reported in this column regardless of the form of the award. STAR awards are paid in cash unless otherwise noted. |
| (2) | Personal benefits received from the Company by any of the Company’s named executive officers are required to be disclosed as “Other Annual Compensation” unless the aggregate amount is less than $50,000. The Company provides a modest level of personal benefits to named executive officers. These may include financial counseling, physical examinations, home security, lunch club fees, use of a Company car and use of Company aircraft for personal travel. In addition to these personal benefits, Mr. Kilts also receives, as required by his employment agreement, Company-provided housing in Boston and commuting expenses. Except for Messrs. Lafley, Kilts and McDonald, the aggregate incremental cost to the Company of all personal benefits provided to any named executive officer was less than the reporting threshold. Accordingly, these amounts are not included in the “Other Annual Compensation” column. Mr. Lafley is required to use Company aircraft for personal as well as business travel pursuant to the Company’s executive security program established by the Board of Directors. Mr. Lafley’s personal use of Company aircraft is the only personal benefit that represents greater than 25% of his total personal benefits. The aggregate incremental aircraft usage costs associated with this benefit were $115,045 for fiscal year 2005-06, $99,360 for fiscal year 2004-05, and $78,540 for fiscal year 2003-04. Mr. Kilts is also required to use Company aircraft for personal use as well as business travel for security reasons. Mr. Kilts’ personal use of Company aircraft and his Company-provided housing in Boston each represented greater than 25% of his total personal benefits. The aggregate incremental aircraft usage costs associated with Mr. Kilts’ personal use of Company aircraft were $165,130 for the period from October 1, 2005 (the date on which the Gillette merger closed) through June 30, 2006. The cost of Mr. Kilts’ housing in Boston during the same period was $107,801. Mr. Kilts’ Other Annual Compensation total also includes $102,037 for tax gross-up on his financial planning and housing personal benefits. Mr. McDonald’s financial counseling ($21,000) and home security ($42,760) personal benefits each represented greater than 25% of his total personal benefits. Mr. McDonald’s home security benefit was higher than in past years because the Company temporarily provided security at two residences while Mr. McDonald was in the process of moving. Mr. McDonald’s Other Annual Compensation total for fiscal year 2005-06 also includes $169,981 in tax equalization payments made by the Company to Mr. McDonald to cover incremental taxes required to be paid to Japan and Belgium in accordance with Company policies generally applicable to employees assigned outside their home countries. |
23
(3)
The number and value of aggregate restricted
stock shares/restricted stock unit holdings earned by each of
the named executive officers over their careers with the Company
and still held as of June 30, 2006 were: Mr. Lafley,
636,280 shares/units ($36,121,616); Mr. Kilts,
0 shares/units ($0); Ms. Arnold,
67,295 shares/units ($3,820,337); Mr. Byrnes,
92,662 shares/units ($5,260,422); Mr. Daley,
74,023 shares/units ($4,202,286); and Mr. McDonald,
77,903 shares/units ($4,422,553). These totals represent
restricted stock shares/restricted stock units accumulated over
the executives’ entire careers with the Company over many
years and under several compensation and benefit programs,
including long-term incentive plans (including some of the
payments described in the Long-Term Incentive Plan Payment
column of the table above and the related notes), receipt of
restricted stock shares/restricted stock units elected in place
of cash compensation/bonus, receipt of restricted stock
shares/restricted stock units as retirement program
contributions, and all other grants of restricted stock
shares/restricted stock units. The value of the restricted stock
shares/restricted stock units detailed above in this note is
determined by multiplying the total number of shares/units held
by each named executive by the average of the high and low
prices of the Company’s common stock on the New York Stock
Exchange on June 30, 2006 ($56.77). Dividends are paid on
all restricted stock shares, and dividend equivalents are
accumulated on all restricted stock units at the same rate as
paid on the Company’s common stock. Upon a change in
control, all conditions and restrictions on restricted stock and
restricted stock units will immediately lapse.
(4)
Amounts in this column represent awards under
BGP. The amounts shown in this column for fiscal year 2005-06
represent interim BGP progress payments which are subject to
achievement of performance targets over the three-year period of
the program. For more information on BGP see pages 18 and
27 of this proxy statement.
(5)
All Other Compensation (in thousands of
dollars) — details for fiscal year 2005-06:
| Flexible | ||||||||||||||||||||
| Profit Sharing | Compensation | Executive | Match on | Total All | ||||||||||||||||
| and Related | Program | Life | Savings | Other | ||||||||||||||||
| Name | Contributions | Contributions | Insurance | Plans(i) | Compensation | |||||||||||||||
|
A. G. Lafley
|
$ | 374.9 | $ | 8.4 | $ | 18.2 | $ | — | $ | 401.5 | ||||||||||
|
James M. Kilts
|
— | 0.0 | 49.5 | 68.1 | 117.6 | |||||||||||||||
|
Susan E. Arnold
|
200.6 | 6.3 | 10.0 | — | 216.9 | |||||||||||||||
|
Bruce L. Byrnes
|
200.6 | 8.4 | 9.2 | — | 218.2 | |||||||||||||||
|
Clayton C.
Daley, Jr.
|
187.3 | 8.4 | 7.1 | — | 202.9 | |||||||||||||||
|
Robert A. McDonald
|
200.6 | 8.4 | 5.7 | — | 214.7 | |||||||||||||||
| (i) | Mr. Kilts does not participate in The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan, which is discussed on page 27 of this proxy statement. This amount represents Company contributions under The Gillette Company Employees’ Savings Plan ($11,100) and The Gillette Company Supplemental Savings Plan ($57,000) in which Mr. Kilts continued to participate. |
| (6) | Mr. Lafley’s fiscal year 2005-06 STAR award will be paid in the form of deferred compensation on September 15, 2006. | |
| (7) | Award of 82,645 restricted stock units valued by averaging the high and low prices of the Company’s common stock on the New York Stock Exchange on February 28, 2006 ($60.50). These restricted stock units are subject to forfeiture until August 28, 2006. | |
| (8) | Mr. Lafley’s fiscal year 2005-06 BGP award will be paid in the form of restricted stock units on September 15, 2006. | |
| (9) | Mr. Lafley’s fiscal year 2004-05 STAR award was paid in the form of deferred compensation on September 15, 2005. |
| (10) | Mr. Lafley’s fiscal year 2004-05 BGP award was paid in the form of restricted stock units on September 15, 2005. |
| (11) | Mr. Lafley’s fiscal year 2003-04 STAR award was paid in the form of stock options on September 15, 2004. |
| (12) | Mr. Lafley’s fiscal year 2003-04 BGP award was paid in the form of restricted stock units on September 15, 2004. |
| (13) | Mr. Kilts was elected Vice Chairman of the Board-Gillette in October 2005 upon consummation of the Company’s merger with The Gillette Company. Mr. Kilts’ compensation for fiscal year 2005-06 reflects only post-merger compensation paid by Procter & Gamble. |
| (14) | Mr. Kilts’ fiscal year 2005-06 STAR award will be paid in the form of deferred compensation ($1,124,669) via the Gillette Company Deferred Compensation Plan and stock options ($579,375) on September 15, 2006. |
24
25
(15)
Pursuant to the terms of his employment
agreement, Mr. Kilts will receive a pro-rata BGP award at
the end of the current BGP period if at least minimum targets
are met, but will not receive BGP progress payments. For more
information on Mr. Kilts’ BGP participation see
page 27 of this proxy statement.
(16)
Ms. Arnold’s fiscal year 2005-06 BGP
award will be paid in the form of cash ($790,335) and restricted
stock units ($790,335) on September 15, 2006.
(17)
Ms. Arnold’s fiscal year 2004-05 BGP
award was paid in the form of cash ($910,000) and restricted
stock units ($910,000) on September 15, 2005.
(18)
Ms. Arnold’s fiscal year 2003-04 BGP
award was paid in the form of cash ($783,000) and restricted
stock units ($783,000).
(19)
Mr. Byrnes’ fiscal year 2005-06 BGP
award will be paid in the form of cash ($790,335) and restricted
stock units ($790,335) on September 15, 2006.
(20)
Mr. Byrnes’ fiscal year 2004-05 BGP
award was paid in the form of cash ($910,000) and restricted
stock units ($910,000) on September 15, 2005.
(21)
Mr. Byrnes’ fiscal year 2003-04 BGP
award was paid in the form of cash ($1,350,000) and restricted
stock units ($1,350,000).
(22)
Though the Company does not consider
Mr. Daley a “Named Executive Officer” for
purposes of the applicable SEC rules, the Company has elected to
include Mr. Daley in this table for continuity purposes.
With Mr. Kilts’ retirement effective October 1,
2006, and upon the effectiveness of the SEC’s new executive
compensation rules, the Company anticipates that Mr. Daley
will be included in this table for fiscal year 2006-07.
(23)
Mr. Daley’s fiscal year 2005-06 STAR
award will be paid in the form of cash ($485,100) and deferred
compensation ($485,100) on September 15, 2006.
(24)
Mr. Daley’s fiscal year 2005-06 BGP
award will be paid in the form of cash ($364,770), deferred
compensation ($364,770) and restricted stock units ($729,540) on
September 15, 2006.
(25)
Mr. Daley’s fiscal year 2004-05 BGP
award was paid in the form of cash ($770,000) and restricted
stock units ($770,000) on September 15, 2005.
(26)
Mr. Daley’s fiscal year 2003-04 BGP
award was paid in the form of cash ($1,044,000) and restricted
stock units ($1,044,000) on September 15, 2004.
(27)
Mr. McDonald’s fiscal year 2005-06 BGP
award will be paid in the form of cash ($790,335) and restricted
stock units ($790,335) on September 15, 2006.
(28)
Tax equalization payment made by the Company to
Mr. McDonald to cover incremental taxes required to be paid
to Japan and Belgium in accordance with Company policies
applicable generally to employees assigned outside their home
countries.
(29)
Mr. McDonald’s fiscal year 2004-05 BGP
award was paid in the form of cash ($910,000) and restricted
stock units ($910,000) on September 15, 2005.
(30)
Mr. McDonald’s fiscal year 2003-04 BGP
award was paid in the form of cash ($954,000) and restricted
stock units ($954,000) on September 15, 2004.
OPTION GRANTS IN LAST FISCAL YEAR
| Number of | % of Total Options | |||||||||||||||||||
| Securities | Granted to | |||||||||||||||||||
| Underlying Options | Employees in | Exercise or | Expiration | Grant Date | ||||||||||||||||
| Name | Granted(1) | Fiscal Year | Base Price | Date | Present Value(2) | |||||||||||||||
|
A. G. Lafley
|
516,529 | 1.5 | % | $ | 60.5000 | 2/28/2016 | $ | 8,508,266.0 | ||||||||||||
|
James M. Kilts
|
1,000,000 | 2.9 | % | $ | 56.6250 | 10/6/2015 | $ | 15,657,000.0 | ||||||||||||
|
Susan E. Arnold
|
136,364 | 0.4 | % | $ | 60.5000 | 2/28/2016 | $ | 2,246,188.0 | ||||||||||||
|
Bruce L. Byrnes
|
132,232 | 0.4 | % | $ | 60.5000 | 2/28/2016 | $ | 2,178,126.0 | ||||||||||||
|
Clayton C.
Daley, Jr.
|
132,232 | 0.4 | % | $ | 60.5000 | 2/28/2016 | $ | 2,178,126.0 | ||||||||||||
|
Robert A. McDonald
|
140,496 | 0.4 | % | $ | 60.5000 | 2/28/2016 | $ | 2,314,250.0 | ||||||||||||
| (1) | All options, which were granted pursuant to The Procter & Gamble 2001 Stock and Incentive Compensation Plan, were non-qualified, were granted at market value on the date of grant, vest on the third anniversary of the date of grant (with the exception of the grant to Mr. Kilts of 1,000,000 options in October 2005 in connection with the Gillette merger; 500,000 of these options vest after October 6, 2006 and 500,000 of these options vest after October 6, 2007), and have a term of ten years. Upon a change in control, all stock options will immediately vest. | |
| (2) | The Company utilizes a binomial lattice-based model to provide a grant date present value of stock option grants. The following assumptions were used in this calculation (with the exception of the grant to Mr. Kilts which is discussed below): options life 9 years; dividend yield 1.9%; weighted average interest rate 4.6%; and weighted average volatility 19%. The following assumptions were used in the calculation for Mr Kilts: options life 9 years; dividend yield 1.9%; weighted average interest rate 4.4%; and weighted average volatility 20%. We have made no adjustments to reflect that the options shown in this table are non-transferable and subject to forfeiture. |
AGGREGATED OPTION/ STOCK APPRECIATION RIGHT (SAR)
| Number of Securities | Value of Unexercised | |||||||||||||||||||||||
| Underlying Unexercised | In-the-Money | |||||||||||||||||||||||
| Options/SARs at FY End | Options/SARs at FY End(3) | |||||||||||||||||||||||
| Shares Acquired | Value | |||||||||||||||||||||||
| Name | on Exercise | Realized(2) | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||||
|
A. G. Lafley
|
98,468 | $ | 3,015.4 | 2,292,132 | 2,368,242 | $ | 40,871.2 | $ | 8,368.2 | |||||||||||||||
|
James M. Kilts
|
0 | 0.0 | 6,440,902 | 1,520,000 | 128,698.9 | 1,953.4 | ||||||||||||||||||
|
Susan E. Arnold
|
50,822 | 1,628.9 | 432,942 | 407,788 | 8,070.3 | 1,158.6 | ||||||||||||||||||
|
Bruce L. Byrnes
|
82,238 | 2,769.2 | 1,113,920 | 529,089 | 20,776.1 | 1,779.4 | ||||||||||||||||||
|
Clayton C. Daley,
Jr.
|
39,642 | 1,214.0 | 712,656 | 434,668 | 13,527.5 | 1,294.1 | ||||||||||||||||||
|
Robert A. McDonald
|
53,262 | 1,493.5 | 585,038 | 551,049 | 10,876.6 | 2,006.8 | ||||||||||||||||||
| (1) | Optionees may satisfy the exercise price by submitting currently owned shares and/or cash. Income tax withholding obligations may be satisfied by electing to have the Company withhold shares otherwise issuable under the option/stock appreciation right (SAR) with a fair market value equal to such obligations. |
| (2) | Options/ SARs were granted for terms of up to ten years except for years 1999, 2000 and 2001 when they were 15 years. The value realized on options/ SARs exercised during the last fiscal year represents the total gain over the years the options/ SARs were held by the executive. If this total gain is divided by the average number of years the options/ SARs were held, a more relevant annualized gain is produced. The annualized gains (in thousands of dollars) on these option/ SAR exercises were as follows: Mr. Lafley, $335.0; Mr. Kilts, $0 (pursuant to the terms of his employment agreement Mr. Kilts agreed not to exercise any options until eighteen months after the consummation of the merger between the Company and Gillette, which occurred on October 1, 2005); Mr. Byrnes, $307.7; Mr. Daley, $134.9; Mr. McDonald, $175.0; and Ms. Arnold, $169.2. |
| (3) | Calculated based on the fair market value of the Company’s common stock on June 30, 2006 ($56.77 per share) as determined by the average of the high and low prices of the Company’s common stock on the New York Stock Exchange on that date, minus the exercise price. |
26
Long-Term Incentive Plans — Awards
For the Three-Year Period
This table provides information concerning award
opportunities made under the Business Growth Program
(“BGP”) during fiscal year 2005-06 for the three-year
performance period beginning July 1, 2005 and ending
June 30, 2008. Payouts under BGP are based on core earnings
per share growth and operating total shareholder return over the
three-year period. If threshold performance is not met, no award
will be earned. To the extent the Company’s performance
exceeds the threshold, a varying award up to the maximum will be
earned. Progress payments equal to 30% of the anticipated award
may be made to participants, with the exception of
Mr. Kilts, at the end of the first and second year if
interim goals are achieved. Pursuant to the terms of his
employment agreement, Mr. Kilts will not receive progress
payments and will receive a pro-rata payout for his one-year
employment period only at the end of the three-year cycle in
2008, with a target payout of two times his annual base salary
during his one-year employment period. Progress payments for the
first year are shown in the Summary Compensation Table on
page 23 of this proxy statement for those participants
receiving progress payments. These progress payments are made
subject to achievement of performance targets over the
three-year period of the program. A discussion of BGP is also
included on page 18 of this proxy statement.
| Performance or | ||||||||||||||||||||
| Number of Shares, | Other Period Until | Estimated Future Payouts | ||||||||||||||||||
| Units, or Other | Maturation or | |||||||||||||||||||
| Name | Rights | Payout | Threshold(1) | Target(2) | Maximum(3) | |||||||||||||||
|
A. G. Lafley
|
— | 7/1/05 - 6/30/08 | $ | 102,000 | $ | 10,200,000 | $ | 20,400,000 | ||||||||||||
|
James M. Kilts
|
— | 7/1/05 - 6/30/08 | 30,900 | 3,090,000 | 6,180,000 | |||||||||||||||
|
Susan E. Arnold
|
— | 7/1/05 - 6/30/08 | 27,300 | 2,730,000 | 5,460,000 | |||||||||||||||
|
Bruce L. Byrnes
|
— | 7/1/05 - 6/30/08 | 27,300 | 2,730,000 | 5,460,000 | |||||||||||||||
|
Clayton C.
Daley, Jr.
|
— | 7/1/05 - 6/30/08 | 25,200 | 2,520,000 | 5,040,000 | |||||||||||||||
|
Robert A. McDonald
|
— | 7/1/05 - 6/30/08 | 27,300 | 2,730,000 | 5,460,000 | |||||||||||||||
| (1) | The minimum amount payable under the program is 1% of the target award, payable if the minimum level of performance is achieved on each of the performance criteria. If performance is below the minimum level for either measure, no award is paid. |
| (2) | The target award is paid if the target goals are achieved on each of the performance measures. |
| (3) | The maximum amount payable under the program is 200% of target, payable if an exceptional level of performance is achieved on each of the performance measures. |
RETIREMENT BENEFITS
Retirement benefits for U.S.-based executive officers (with the exception of Mr. Kilts, whose retirement benefits are described below) are provided primarily by The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan. This is a qualified defined contribution plan providing retirement benefits for U.S.-based employees. In addition, executives participating in The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan receive retirement awards in the form of restricted stock units (non-transferable and subject to forfeiture) which are restricted until one year following retirement. These awards make up the difference between the Internal Revenue Code limit on contributions that can be made to that Plan and what would otherwise be contributed by the Company to the executive’s retirement account. Under the rules set by the SEC, these Company contributions are included in the Summary Compensation Table in the “All Other Compensation” column (see footnote (5) to this table).
In connection with the Company’s merger with
The Gillette Company, the Company assumed responsibility for The
Gillette Company Retirement Plan, The Gillette Company
Supplemental Retirement Plan and other contractual retirement
arrangements for Gillette employees. Mr. Kilts
27
| Final Average Compensation(1) | Years of Service(2) | Annual Pension Benefit(3) | ||||||||
| $ | 4,635,000 | 5.7 | $ | 1,320,975 | ||||||
| (1) | Under the terms of his employment agreement, Mr. Kilts is entitled to receive a retirement benefit immediately following the date his employment ends for reasons other than cause. The amount of his benefit is 5% of his final average compensation, which under the terms of his employment agreement is defined as an amount equal to the amount paid to Mr. Kilts as a 36-month lump-sum severance payment (paid by The Gillette Company prior to the closing of the merger between the Company and Gillette) divided by three, multiplied by the number of full and partial years of service taken into account under Mr. Kilts’ employment agreement for this purpose (see footnote (2) below). |
| (2) | The years of service figure shown in the Pension Table above represents the number of full and partial years of service taken into account under Mr. Kilts’ employment agreement for purposes of determining the retirement benefit payable to Mr. Kilts. These years of service represent his actual years of service (5.7 years) and exclude three years of credited service with respect to which he received payment of a supplemental benefit from Gillette in a lump sum prior to consummation of the merger. |
| (3) | The amount of annual pension benefit payable to Mr. Kilts will be off-set, beginning three years after his retirement, by amounts payable to him under The Gillette Company Retirement Plan, a qualified plan, and The Gillette Company Supplemental Retirement Plan. Mr. Kilts’ benefit under the qualified plans is equal to 2% per year of service multiplied by his average final annual compensation. |
28
Comparison of Five-Year Cumulative Total
Return
The following graph compares the five-year
cumulative total return of the Company’s common stock as
compared with the S&P 500 Stock Index, the Dow Jones
Industrial Average Index, and a composite of the S&P
Household Products Index, the S&P Paper Products Index, the
S&P Personal Products Index, the S&P Health Care Index
and the S&P Foods Index weighted based on the Company’s
current fiscal year revenues.
| Dollar Value of $100 Investment at June 30 | ||||||||||||||||||||||||
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||
|
P&G Common
|
$ | 100.00 | $ | 143.72 | $ | 146.26 | $ | 181.99 | $ | 179.70 | $ | 193.29 | ||||||||||||
|
Composite Group
|
$ | 100.00 | $ | 114.45 | $ | 112.76 | $ | 145.37 | $ | 142.86 | $ | 162.47 | ||||||||||||
|
S&P 500
|
$ | 100.00 | $ | 82.02 | $ | 82.23 | $ | 97.93 | $ | 104.12 | $ | 113.10 | ||||||||||||
|
DJIA
|
$ | 100.00 | $ | 80.97 | $ | 77.83 | $ | 101.47 | $ | 106.09 | $ | 124.99 | ||||||||||||
The graph assumes a $100 investment made on
July 1, 2001 and the reinvestment of all dividends.
29
| Amount and Nature of Beneficial Ownership | ||||||||||||||||||||||||
| Direct(1) and | Trusteeships | Percent | Restricted | |||||||||||||||||||||
| Profit Sharing | Right to | and Family | of | Stock | ||||||||||||||||||||
| Owner | Plan(2) | Acquire(3) | Holdings(4) | Total | Class | Units(5) | ||||||||||||||||||
|
Susan E. Arnold
|
47,222.2 | 432,942 | 20 | 480,184 | (6) | 47,954 | ||||||||||||||||||
|
Norman R. Augustine
|
44,780.1 | 24,772 | — | 69,552 | (6) | 6,303 | ||||||||||||||||||
|
Bruce L. Byrnes
|
396,889.3 | 1,064,122 | — | 1,461,011 | (6) | 92,771 | ||||||||||||||||||
|
Scott D. Cook
|
7,081.1 | 10,674 | 32,440 | 50,195 | (6) | 6,303 | ||||||||||||||||||
|
Clayton C. Daley, Jr.
|
116,016.1 | 712,656 | 5,913 | 834,585 | (6) | 76,547 | ||||||||||||||||||
|
Joseph T. Gorman
|
40,436.6 | 24,772 | 4,239 | 69,447 | (6) | 6,303 | ||||||||||||||||||
|
James M.
Kilts(7)
|
10,660.3 | 6,940,902 | (8) | 64,522 | 7,016,084 | (6) | 0 | |||||||||||||||||
|
A. G. Lafley
|
228,700.8 | 2,487,912 | 6,873 | 2,723,486 | (6) | 632,451 | ||||||||||||||||||
|
Charles R. Lee
|
52,232.1 | 24,772 | — | 77,004 | (6) | 6,303 | ||||||||||||||||||
|
Lynn M. Martin
|
11,451.1 | 24,772 | — | 36,223 | (6) | 6,303 | ||||||||||||||||||
|
Robert A. McDonald
|
72,788.0 | 613,322 | — | 686,110 | (6) | 54,122 | ||||||||||||||||||
|
W. James McNerney, Jr.
|
5,896.1 | 0 | — | 5,896 | (6) | 6,303 | ||||||||||||||||||
|
Johnathan A. Rodgers
|
7,448.1 | 6,664 | — | 14,112 | (6) | 6,303 | ||||||||||||||||||
|
John F. Smith, Jr.
|
49,972.5 | 8,922 | — | 58,894 | (6) | 6,303 | ||||||||||||||||||
|
Ralph Snyderman
|
22,823.1 | 24,772 | — | 47,595 | (6) | 6,303 | ||||||||||||||||||
|
Margaret C. Whitman
|
2,860.1 | 0 | 8,200 | 11,060 | (6) | 6,303 | ||||||||||||||||||
|
Ernesto Zedillo
|
2,470.2 | 6,664 | — | 9,134 | (6) | 6,303 | ||||||||||||||||||
|
27 Directors and executive
officers, as a group
|
1,703,721.5 | 15,881,667 | 291,582.6 | 17,876,971.1 | 1,406,386.0 | |||||||||||||||||||
| (1) | Includes unrestricted common stock over which each Director or executive officer has sole voting and investment power and restricted common stock over which they have voting power but no investment power (until restrictions lapse). |
| (2) | Common stock allocated to personal accounts of executive officers under the Retirement Trust pursuant to The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan. Plan participants have sole discretion as to voting and, within limitations provided by the Plan, investment of shares. Shares are voted by the Trustees in accordance with instructions from participants. If instructions are not received by the Trustees as to the voting of particular shares, shares are to be voted in proportion to instructions actually received from other participants in the Trust. |
| (3) | Amounts reflect vested stock options and stock options that will vest within 60 days of the record date (August 11, 2006). If shares are acquired, the Director or executive officer would have sole discretion as to voting and investment. |
| (4) | The individuals involved share voting and/or investment powers with other persons. |
| (5) | Restricted stock units represent the right to receive unrestricted shares of common stock upon the lapse of restrictions, at which point the holders will have sole investment and voting power. Restricted stock units are not considered “beneficially owned” because holders are not entitled to voting rights or investment control until the restrictions lapse. |
| (6) | Less than .221% for any one Director or named executive officer. |
| (7) | In addition to the holdings shown in the table, Mr. Kilts is credited with 9,310.9 units of P&G common stock under The Gillette Company Supplemental Savings Plan. Mr. Kilts has no voting power over such units; however, these units are included in this footnote because they represent an additional financial interest that is subject to the same market risk as the Company’s common stock. |
| (8) | In addition to the amounts shown in this column, Mr. Kilts also holds 520,000 additional options that vest upon his retirement from the Company. Mr. Kilts has announced his intention to retire from the Company effective October 1, 2006. |
30
| Amount and Nature of | ||||||||||||
| Beneficial Ownership | ||||||||||||
| Profit | Percent | |||||||||||
| Sharing | of | |||||||||||
| Owner | Plan(1) | Trusteeships | Series | |||||||||
|
Susan E. Arnold
|
10,688.1 | — | (2) | |||||||||
|
Norman R. Augustine
|
0.0 | — | — | |||||||||
|
Bruce L. Byrnes
|
20,080.4 | — | (2) | |||||||||
|
Scott D. Cook
|
0.0 | — | — | |||||||||
|
Clayton C. Daley, Jr.
|
15,518.9 | — | (2) | |||||||||
|
Joseph T. Gorman
|
0.0 | — | — | |||||||||
|
James M. Kilts
|
0.0 | — | — | |||||||||
|
A. G. Lafley
|
16,059.2 | — | (2) | |||||||||
|
Charles R. Lee
|
0.0 | — | — | |||||||||
|
Lynn M. Martin
|
0.0 | — | — | |||||||||
|
Robert A. McDonald
|
11,673.4 | — | (2) | |||||||||
|
W. James McNerney, Jr.
|
0.0 | — | — | |||||||||
|
Johnathan A. Rodgers
|
0.0 | — | — | |||||||||
|
John F. Smith, Jr.
|
0.0 | — | — | |||||||||
|
Ralph Snyderman
|
0.0 | — | — | |||||||||
|
Margaret C. Whitman
|
0.0 | — | — | |||||||||
|
Ernesto Zedillo
|
0.0 | — | — | |||||||||
|
27 Directors and executive
officers, as a group
|
171,880.9 | 0.211 | % | |||||||||
|
Employee Stock Ownership Trust of
The Procter & Gamble Profit Sharing Trust and Employee
Stock Ownership Plan, P.O. Box 599, Cincinnati, Ohio 45201-0599
(G. V. Dirvin, S. P. Donovan, Jr., and E.H. Eaton, Jr., Trustees)
|
— | 23,125,337.8 (3 | ) | 27.40 | % | |||||||
| (1) | Shares allocated to personal accounts of executive officers under the Employee Stock Ownership Trust pursuant to The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan. Plan participants have sole discretion as to voting and, within limitations provided by the Plan, investment of shares. Shares are voted by the Trustees in accordance with instructions from participants. If instructions are not received by the Trustees as to the voting of particular shares, shares are to be voted in proportion to instructions actually received from other participants in the Trust. |
| (2) | Less than .024% for any one Director or named executive officer; by the terms of the stock, only persons who are or have been employees can have beneficial ownership of these shares. |
| (3) | Unallocated shares. The voting of these shares is governed by the terms of the Plan, which provides that the Trustees shall vote unallocated shares held by them in proportion to instructions received from Trust participants as to voting of allocated shares. The disposition of these shares in connection with a tender offer would be governed by the terms of the Plan, which provides that the Trustees shall dispose of unallocated shares held by them in proportion to instructions received from Trust participants as to the disposition of allocated shares. |
31
| Amount and Nature of | ||||||||||||
| Beneficial Ownership | ||||||||||||
| Profit | Percent | |||||||||||
| Sharing | of | |||||||||||
| Owner | Plan(1) | Trusteeships | Series | |||||||||
|
Susan E. Arnold
|
0.0 | — | — | |||||||||
|
Norman R. Augustine
|
0.0 | — | — | |||||||||
|
Bruce L. Byrnes
|
395.1 | — | (2) | |||||||||
|
Scott D. Cook
|
0.0 | — | — | |||||||||
|
Clayton C. Daley, Jr.
|
0.0 | — | — | |||||||||
|
Joseph T. Gorman
|
0.0 | — | — | |||||||||
|
James M. Kilts
|
0.0 | — | — | |||||||||
|
A. G. Lafley
|
524.8 | — | (2) | |||||||||
|
Charles R. Lee
|
0.0 | — | — | |||||||||
|
Lynn M. Martin
|
0.0 | — | — | |||||||||
|
Robert A. McDonald
|
0.0 | — | — | |||||||||
|
W. James McNerney, Jr.
|
0.0 | — | — | |||||||||
|
Johnathan A. Rodgers
|
0.0 | — | — | |||||||||
|
John F. Smith, Jr.
|
0.0 | — | — | |||||||||
|
Ralph Snyderman
|
0.0 | — | — | |||||||||
|
Margaret C. Whitman
|
0.0 | — | — | |||||||||
|
Ernesto Zedillo
|
0.0 | — | — | |||||||||
|
27 Directors and executive
officers, as a group
|
3,137.2 | .0047 | % | |||||||||
|
Employee Stock Ownership Trust of
The Procter & Gamble Profit Sharing Trust and Employee
Stock Ownership Plan, P.O. Box 599, Cincinnati, Ohio 45201-0599
(G. V. Dirvin, S. P. Donovan, Jr., and E. H. Eaton, Jr.,
Trustees)
|
— | 45,731,277.8 (3 | ) | 67.92 | % | |||||||
| (1) | Shares allocated to personal accounts of executive officers under the Employee Stock Ownership Trust pursuant to The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan. Plan participants have sole discretion as to voting and, within limitations provided by the Plan, investment of shares. Shares are voted by the Trustees in accordance with instructions from participants. If instructions are not received by the Trustees as to the voting of particular shares, shares are to be voted in proportion to instructions actually received from other participants in the Trust. |
| (2) | Less than .0010% for any one Director or named executive officer. |
| (3) | Unallocated shares. The voting of these shares is governed by the terms of the Plan, which provides that the Trustees shall vote unallocated shares held by them in proportion to instructions received from Trust participants as to voting of allocated shares. The disposition of these shares in connection with a tender offer would be governed by the terms of the Plan, which provides that the Trustees shall dispose of unallocated shares held by them in proportion to instructions received from Trust participants as to the disposition of allocated shares. |
32
On the date indicated, each of the following
Directors and/or executive officers filed a corrective form due
to an inadvertent failure by the Company to timely file a
required report: R. Kerry Clark, September 19, 2005; Robert
A. McDonald, February 28, 2006; James J. Johnson,
March 15, 2006; Norman R. Augustine, March 16, 2006;
G. Gilbert Cloyd, July 7, 2006; John F. Smith, Jr.,
July 7, 2006; and James M. Kilts, July 7, 2006.
Employment Contracts and Termination of
Employment Arrangements
Employment Agreement with
Mr. Kilts
In connection with the merger between the Company
and The Gillette Company, on January 27, 2005, at the
request of the Company, Gillette and Mr. Kilts entered into
an amendment to his then-existing employment agreement with
Gillette. Pursuant to this amendment, Mr. Kilts agreed to
one year of employment with the combined company following
consummation of the merger (which occurred on October 1,
2005), in the position of Vice Chairman of the Board of Procter
& Gamble. Mr. Kilts also agreed that, from the date of
the merger agreement until eighteen months after consummation of
the merger, he would not sell any shares of Gillette or Procter
& Gamble common stock, exercise any Gillette stock options,
or exercise any Procter & Gamble stock options into which
his Gillette stock options were converted in connection with the
merger. In addition, Mr. Kilts agreed to a three-year
non-competition covenant following termination of employment and
agreed that the non-competition covenant would apply to a
specified list of competitors.
In consideration for Mr. Kilts agreeing to
the foregoing, pursuant to the terms of the amendment, on
October 6, 2005, the Company granted Mr. Kilts options
to purchase 1,000,000 shares of Procter & Gamble common
stock, half of which will vest after October 6, 2006 and
the other half of which will vest after October 6, 2007. On
the last day of Mr. Kilts’ one-year post-merger
employment period, Procter & Gamble will also grant
Mr. Kilts 150,000 restricted shares of Procter & Gamble
common stock which will vest at the end of his three-year
non-competition period if Mr. Kilts has complied with the
terms of his non-competition covenant. During his one year of
employment, Mr. Kilts is entitled to receive an annual base
salary of $1,545,000 with an annual target bonus opportunity of
$1,545,000. The actual amount of this bonus is determined based
on the same performance criteria that apply to the determination
of the annual bonus of Procter & Gamble’s Chief
Executive during the same period. Mr. Kilts is also
entitled to participate on a pro-rata basis for his one-year
employment period in Procter & Gamble’s three-year
long-term Business Growth Program incentive plan on the same
terms as Procter & Gamble’s Chief Executive, which
provides Mr. Kilts with a target payout of two times his
annual base salary (i.e., $3,090,000). The actual amount of
Mr. Kilts’ fiscal year 2005-06 awards are shown in the
Summary Compensation Table on page 23 of this proxy
statement. Other provisions of his employment agreement that
existed prior to the amendment continue to apply, including the
requirement that he use corporate aircraft for travel,
reimbursement for commuting expenses, financial counseling, home
security, and Company-provided housing in the Boston area. In
addition, following the termination of his one-year employment
agreement with Procter & Gamble as described above,
Mr. Kilts is entitled to continue to receive, for three
years, certain benefits in which he was participating
immediately prior to the merger (consisting of life insurance,
financial counseling and home security) and is also entitled to
receive outplacement services. Mr. Kilts is also entitled
to receive gross-up payments for any excise tax due under his
employment agreement, as well as use of an office until age 65.
In the event that prior to the end of the
one-year employment period, Mr. Kilts terminates his
employment with Procter & Gamble for good reason, or Procter
& Gamble terminates his employment without cause, in each
case as defined in the amended employment agreement,
Mr. Kilts will be entitled to receive payment of his unpaid
base salary for the balance of the one-year employment period
payable in a lump sum following such termination and his annual
bonus
33
Transactions with Executive Officers,
Directors and Others
In the normal course of business, the Company and
its subsidiaries had transactions with other corporations where
certain Directors or nominees for Director are or were executive
officers. None of the aforementioned matters was material in
amount as to the Company, its subsidiaries or the corporations,
and the Company and its subsidiaries had no transactions in
which any Director, nominee for Director or any member of the
immediate family of any Director or nominee for Director had a
material direct or indirect interest reportable under applicable
SEC rules. Mr. Rodgers is the President and CEO of TV One,
a cable television network. During the fiscal year ended
June 30, 2006, the Company paid to TV One approximately
$1,029,374 for commercial advertising time. The Company has not
decided the exact amount of future purchases.
Report of the Audit Committee
Each member of the Audit Committee is an
independent Director as determined by the Board of Directors,
based on the New York Stock Exchange listing rules and the
Company’s own Independence Guidelines. Each member of the
Committee also satisfies the Securities and Exchange
Commission’s additional independence requirement for
members of audit committees. The Board of Directors has
determined that John F. Smith, Jr. and Charles R. Lee meet the
criteria for “Audit Committee Financial Expert” as
defined by SEC rules. The Board of Directors has also determined
that all Audit Committee members are financially literate. The
Committee’s work is guided by a Board-approved Charter,
which can be found in the corporate governance section of the
Company’s website at www.pg.com/investors and is attached
to this proxy statement as Exhibit B.
The Committee reviews and oversees the
Company’s financial reporting process on behalf of the
Board. Management has the Company’s primary responsibility
for establishing and maintaining adequate internal financial
controllership, for preparing the financial statements and for
the public reporting process. Deloitte & Touche LLP, the
Audit Committee appointed independent registered public
accounting firm for fiscal year ended June 30, 2006, is
responsible for expressing opinions on the conformity of the
Company’s audited financial statements with generally
accepted accounting principles and on management’s
assessment of the effectiveness of the Company’s internal
control over financial reporting. In addition, Deloitte &
Touche LLP will express its own opinion on the effectiveness of
the Company’s internal control over financial reporting.
In this context, the Committee reviewed and
discussed with management and Deloitte & Touche LLP the
audited financial statements for the year ended June 30,
2006, management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and
Deloitte & Touche LLP’s evaluation of the
Company’s internal control over financial reporting. The
Committee met eight times (including telephone meetings to
discuss quarterly results) during the fiscal year ended
June 30, 2006. The Committee has discussed with Deloitte
& Touche LLP the matters that are required to be discussed
by Statement on Auditing Standards No. 61 (Communication
With Audit Committees), as modified or supplemented. In
addition, the Committee has discussed various matters with
Deloitte & Touche LLP related to the Company’s
consolidated financial statements, including critical accounting
policies and practices used, alternative treatments for material
items that have been discussed with management, and other
material written communications between Deloitte & Touche
LLP and management. The Committee has also received written
disclosures and the letter from Deloitte & Touche LLP
required by Independence Standards Board Standard No. 1,
“Independence Discussion with Audit Committees” and has
34
John F. Smith, Jr. (Chairman)
Charles R. Lee
W. James McNerney, Jr.
Ralph Snyderman
| FY 2004-05 | FY 2005-06 | ||||||||
|
Audit Fees
|
$ | 27,223 | (1) | $ | 33,770 | ||||
|
Audit-Related Fees
|
2,101 | 2,646 | |||||||
|
Tax Fees
|
3,581 | 2,540 | |||||||
|
Subtotal
|
32,905 | 38,956 | |||||||
|
All Other Fees
|
9,634 | 6,782 | |||||||
|
Deloitte Total Fees
|
$ | 42,539 | $ | 45,738 | |||||
| (1) | The actual amount paid in fiscal year 2004-05 is different than the amount included in last year’s proxy statement due to the impact of foreign exchange at the time the actual bills were paid and variations in the timing of billing cycles. |
| 1) | Audit Fees – These are fees for professional services performed by Deloitte for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s 10-Q filings, and services that are normally provided in connection with statutory and regulatory filings or engagements. |
35
These services are actively monitored (both
spending level and work content) by the Audit Committee to
maintain the appropriate objectivity and independence in
Deloitte’s core work, which is the audit of the
Company’s consolidated financial statements. The Committee
also concluded that Deloitte’s provision of audit and
non-audit service to P&G and its affiliates is compatible
with Deloitte’s independence.
PROPOSAL TO RATIFY APPOINTMENT OF
THE
The Audit Committee of the Board has selected
Deloitte & Touche LLP as the Company’s independent
registered public accounting firm to perform the audit of our
financial statements and our internal control over financial
reporting for fiscal year ending June 30, 2007. Deloitte
& Touche LLP was our independent registered public
accounting firm for the fiscal year ended June 30, 2006.
Deloitte & Touche LLP representatives are
expected to attend the 2006 annual meeting. They will have an
opportunity to make a statement if they desire to do so and will
be available to respond to appropriate shareholder questions.
We are asking our shareholders to ratify the
selection of Deloitte & Touche LLP as our independent
auditor. Although ratification is not required by the
Company’s Code of Regulations, the Board of Directors’
By Laws or otherwise, the Board is submitting the selection of
Deloitte & Touche LLP to our shareholders for ratification
as a matter of good corporate practice. Even if the selection is
ratified, the Audit Committee, in its discretion, may select a
different independent registered public accounting firm at any
time during the year if it determines that such a change would
be in the best interest of the Company and our shareholders.
The Board of Directors recommends a vote FOR
the following proposal:
RESOLVED, That action by the Audit Committee
appointing Deloitte & Touche LLP as the Company’s
independent registered public accounting firm to conduct the
annual audit of the financial statements of the Company and its
subsidiaries for the fiscal year ending June 30, 2007 is
hereby ratified, confirmed and approved.
36
2)
Audit-Related Fees – These are
fees for assurance and related services performed by Deloitte
that are reasonably related to the performance of the audit or
review of the Company’s financial statements. This
includes: employee benefit and compensation plan audits; due
diligence related to mergers and acquisitions; other
attestations by Deloitte, including those that are required by
statute, regulation or contract; and consulting on financial
accounting/reporting standards and controls.
3)
Tax Fees – These are fees for
professional services performed by Deloitte with respect to tax
compliance and tax returns. This includes review of original and
amended tax returns for the Company and its consolidated
subsidiaries; refund claims, payment planning/tax audit
assistance; and tax work stemming from “Audit Related”
items.
4)
All Other Fees – These are fees
for other permissible work performed by Deloitte that does not
meet the above category descriptions. The fees cover various
local engagements that are permissible under applicable laws and
regulations including tax filings for individual employees
included in the Company expatriate program.
PROPOSAL TO AMEND THE COMPANY’S CODE
OF REGULATIONS TO DECREASE THE
The following proposal will be presented for
action at the annual meeting by direction of the Board of
Directors:
The Board of Directors recommends a vote FOR
this resolution for the following reasons:
The Company’s current Code of Regulations
provide that the Board of Directors shall be fixed at 17 persons
(the “fixed number”) and authorizes the Directors to
increase the number of Directors to not more than 19 and
decrease the number of Directors to not fewer than 15 (the
“authorized range”). The action described above would
change the Company’s Code of Regulations to decrease the
fixed number of persons on the Board of Directors to 13 and
decrease the authorized range of Directors to not more than 15
and not less than 10.
This resolution requires the affirmative vote of
a majority of the Company’s issued and outstanding shares.
Accordingly, abstentions and broker non-votes will have the same
effect as votes against this proposal. If this action is not
approved, the current fixed number and authorized range will
remain unchanged. If this action is approved, the Company’s
Code of Regulations will be amended to provide for the decrease
in the fixed number and authorized range of Directors.
The Board supports this proposed change to the
Company’s Code of Regulations to decrease the fixed number
of Directors on the Board and to decrease the authorized range
for the number of Directors. The Board believes a smaller board
size is more manageable and contributes to better discussion and
deliberation among the Directors, which is in the best interest
of the Company and its shareholders. The Board believes that
this reduction will result in a more optimal range of size and
will also bring the Board size in line with our U.S. peer group
of companies. Accordingly, the Board supports this change and
recommends a vote FOR this resolution.
37
RESOLVED, That Article III, Section 1
of the Company’s Code of Regulations be amended to read as
set forth in Exhibit D to this proxy statement so that the
number of persons authorized to compose the Board of Directors
shall be fixed at 13 and that the Directors may increase the
number to not more than 15 and may decrease the number to
not less than 10.
Background
Board Position
PROPOSAL TO REAPPROVE AND AMEND THE
MATERIAL TERMS OF THE PERFORMANCE CRITERIA UNDER THE PROCTER
& GAMBLE 2001 STOCK AND INCENTIVE COMPENSATION
PLAN
The following proposal will be presented for
action at the annual meeting by direction of the Board of
Directors:
The Company established The Procter & Gamble
2001 Stock and Incentive Compensation Plan (the
“Plan”) effective as of October 9, 2001, after
approval by its shareholders at the 2001 annual meeting.
The Plan provides the Compensation &
Leadership Development Committee of the Company’s Board of
Directors with the discretion to establish performance goals
consistent with Section 162(m) of the Internal Revenue Code
of 1986, as amended (the “Code”), and authorizes the
granting of cash, stock options, stock appreciation rights,
unrestricted and restricted stock, restricted stock units, or
other awards that are related to the price of common stock,
other property, or any combination thereof to employees upon
achievement of such established performance goals.
The regulations promulgated under
Section 162(m) of the Code require the Company to
seek reapproval of the performance criteria used to establish
the aforementioned performance goals every five years, in order
to continue to fully deduct for federal income tax purposes
performance-based compensation paid under the Plan to its five
most highly compensated officers.
The Plan currently stipulates that performance
objectives may consist of one or more or any combination of the
following criteria: stock price, market share, sales revenue,
cash flow, earnings per share, return on equity, total
shareholder return, gross margin, and/or costs.
The Company now desires to amend the Plan to
incorporate the following additional performance criteria: stock
price growth measures, operating total shareholder return, net
earnings or net income (before or after taxes), return on assets
or capital, earnings (before or after interest, taxes,
depreciation and/or amortization), operating margin, acquisition
integration metrics, and economic value added.
SHAREHOLDERS ARE NOT BEING ASKED TO APPROVE
ANY ADDITIONAL SHARES FOR ISSUANCE UNDER THE PLAN OR TO
OTHERWISE MODIFY THE TERMS OF THE PLAN. PREVIOUSLY ISSUED SHARES
WILL NOT BE AFFECTED BY THE PROPOSED CHANGES.
Shareholder approval is required for both the
reapproval of the existing performance criteria as currently set
forth in the Plan and the concurrent amendment to incorporate
select additional performance criteria to the Plan as set forth
above in order to comply with the regulatory requirements of
Section 162(m) of the Code. The resolution which will be
introduced at the annual meeting seeking this reapproval and
amendment of the Plan is as follows:
RESOLVED, that Paragraph 2(a) of
Article J of the Plan shall be amended to read as shown in
Exhibit E to this proxy statement and that the performance
criteria in such paragraph, as amended, are approved in their
entirety.
The Board of Directors recommends a vote FOR
this resolution for the following reasons:
Section 162(m) of the Internal Revenue Code
(the “Code”) limits the deductibility of executive
compensation paid to the Company’s covered executive
officers to $1,000,000 per year, but contains an exception for
certain performance-based compensation. Regulations promulgated
under Section 162(m) of the Code provide that, in order for
the Company to continue to fully deduct for federal income tax
purposes performance-based compensation paid under the Plan to
its five most highly compensated officers, the Company must seek
reapproval of the Plan’s performance criteria every five
years.
38
Background
As part of the Committee’s general policy to
preserve the deductibility of most compensation paid to the
Company’s five most highly compensated executives
(“Covered Executives”), and in order to enable it to
continue this practice, the Board is asking shareholders to
reapprove the existing performance criteria as currently set
forth in the Plan and to concurrently approve an amendment to
the Plan that incorporates additional performance objectives
that are available to the Committee for use as performance
criteria in establishing applicable performance goals with
respect to the granting of performance-based awards under the
Plan. Shareholders are not being asked to approve any
additional shares for issuance under the Plan and other than as
set forth above, the reapproval of the existing performance
criteria and the amendment will have no other impact on the
existing terms and conditions of the Plan as it exists prior to
this amendment. Previously issued shares will not be affected by
the proposed changes.
The affirmative vote of a majority of shares
participating in the voting is required for adoption.
Abstentions and broker non-votes will not be counted as
participating in the voting and will therefore have no effect.
If this action is not approved, the current performance criteria
will remain as it exists in the Plan today and some of the
compensation paid to the Company’s Covered Executives may
not be deductible, resulting in additional costs to the Company.
If this action is approved, the performance criteria in the Plan
will be reapproved and amended as shown in Exhibit E and
will provide for continued deductibility of certain compensation
paid to the Company’s Covered Executives.
The Board supports this effort to enhance the
ability of the Compensation & Leadership Development
Committee of the Board (the “Committee”) to better
identify appropriate performance objectives for use in setting
performance goals with respect to performance-based
compensation. The amendment to the Plan will increase the number
and combination of performance criteria available for use by the
Committee, which provides the Committee with greater flexibility
in establishing, prior to any specified Performance Period, the
goals against which it will measure and evaluate the performance
of its key managers. The approval of the amended Plan allows the
Company to preserve the deductibility of certain compensation
paid to its Covered Executives, thereby avoiding costs, which is
in the best interest of the Company and its shareholders.
For all of these reasons, the Board of
Directors recommends a vote FOR this resolution.
The remainder of this proposal sets forth a
summary of the terms of the Plan as it exists today. These
terms will not change as a result of this proposal. This
summary is qualified in its entirety by reference to the text of
the Plan, which is attached as Exhibit F to this proxy
statement.
Purpose. The
purposes of the Plan are to strengthen the alignment of
interests between those employees of the Company who are largely
responsible for the success of the business and the
Company’s shareholders through ownership behavior and the
increased ownership of shares of the Company’s common
stock, and to encourage participants to remain in the employ of
the Company. This is accomplished through the granting of stock
options, stock appreciation rights, restricted and unrestricted
stock, restricted stock units, or other performance-related
awards.
Administration.
The Committee, or such other Board committee as the Board may
designate, administers the Plan.
Participation.
Any key employee of the Company and its subsidiaries considered
by the Committee to demonstrate a capacity for contributing in a
substantial way to the success of these companies is eligible to
receive a grant under the Plan. The Committee makes the
determination of the persons to receive grants, the terms, the
form and level of grants.
39
Board Position
Summary Description of the
Plan
Approximately 4,900 employees of the Company and
its subsidiaries currently participate. However, because the
Plan provides for Committee discretion in selecting participants
and in making awards, neither (i) the total number of
persons who will participate and the respective benefits to be
accorded to them, nor (ii) the total number of persons who
would have participated had the proposed performance criteria
been in effect for the last fiscal year and the benefits such
persons would have received, can be determined at this time.
Limitation on Number of Shares Available
Under the Plan. The number of
shares of Company common stock that may be issued under the Plan
shall be the sum of:
This number will be adjusted for any stock split,
spin-off, stock dividend, merger, and similar events. The shares
may consist of newly issued, Treasury, or common stock
reacquired by the Company or a subsidiary. No more than
15 percent of the authorized shares may be awarded as
restricted or unrestricted stock.
Description of Awards Under the
Plan. The Committee may award to
eligible employees incentive stock options (“ISOs”),
nonqualified stock options (“NQSOs”), stock
appreciation rights (“SARs”), restricted and
unrestricted stock, restricted stock units, and performance
awards.
Stock Options and
SARs. The Committee has discretion to
award ISOs, which are intended to comply with Section 422
of the Internal Revenue Code (the “Code”), NQSOs,
which are not intended to comply with Section 422 of the
Code, and SARs. No person may be granted, in any period of one
calendar year, stock options or SARs for more than 2,000,000
shares.
The exercise price of any stock option or SAR
shall be established by the Committee at their time of grant and
cannot be less than the fair market value of the corresponding
number of shares as of the date of grant.
Stock options granted to participants under the
Plan will expire at such times as the Committee determines at
the time of the grant; provided, however, that no stock option
will be exercisable later than ten years from the date of grant.
Each stock option award agreement will set forth the extent to
which the participant will have the right to exercise the stock
option following termination of the participant’s
employment with the Company. Subject to the specific terms of
the Plan, the termination provisions are determined within the
discretion of the Committee, may differ among participants, and
may reflect distinctions based on the reasons for termination of
employment. Additionally, the Committee has discretion to set
such additional terms and conditions on stock option grants as
it deems appropriate.
No stock option may be repriced by amendment,
substitution, or cancellation and re-grant, unless authorized by
the shareholders. Adjustments pursuant to stock splits and other
events that adjust the number of shares subject to the Plan, as
explained above, will not be considered repricing.
The form of payment of a SAR is determined by the
Committee at the time of grant, and may be in shares of common
stock, cash, or a combination of the two. Upon exercise of the
SAR, the participant will receive an amount equal to the excess
of the fair market value of one share of
40
•
190,000,000 shares, plus
•
The number of authorized shares remaining
available under the 1992 Stock Plan (the “1992 Plan”);
•
Any shares awarded under the Plan or the 1992
Plan that are subsequently forfeited;
•
Any shares tendered to the Company by a recipient
in payment of all or a part of the exercise price of a stock
option awarded under the Plan or the 1992 Plan; and
•
Any shares tendered or withheld from a recipient
in satisfaction of withholding tax obligations with respect to a
stock option awarded under the Plan or the 1992 Plan.
Restricted and Unrestricted Stock and
Restricted Stock Units. The Committee
is also authorized to award shares of restricted and
unrestricted common stock under the Plan upon such terms and
conditions as it shall establish. The award agreement will
specify the period(s) of restriction (if any), the number of
shares of restricted and unrestricted common stock, and such
other provisions as the Committee shall determine and/or
restrictions under applicable federal or state securities laws.
Although recipients may have the right to vote their restricted
shares from the date of grant, they do not have the right to
sell or otherwise transfer the shares during any applicable
period of restriction or until earlier satisfaction of other
conditions imposed by the Committee in its sole discretion.
Participants holding restricted stock may also receive dividends
on their shares of restricted stock and the Committee, in its
discretion, will determine how such dividends on restricted
shares are to be paid.
The Committee is also authorized to award
restricted stock units under the Plan upon such terms and
conditions as it shall establish. Restricted stock units are
similar to restricted stock and are subject to the same
provisions listed above with respect to restricted stock, except
that no shares are actually awarded to the participant on the
date of grant, and participants holding restricted stock units
have no voting rights with respect to such units.
Each award agreement for restricted stock or
restricted stock units sets forth the extent to which the
participant has the right to retain the restricted stock or
restricted stock units following termination of the
participant’s employment with the Company. These provisions
are determined in the sole discretion of the Committee, need not
be uniform among all shares of restricted stock issued or
restricted stock units granted pursuant to the Plan, and may
reflect distinctions based on reasons for termination of
employment.
Performance Awards.
The Committee also has discretion to award performance awards
under the Plan upon such terms and conditions as it shall
establish (“Performance Awards”). The Committee, in
its discretion, shall determine the participants eligible for
the Performance Awards, the performance goals to be achieved
during the specified time period for such goals, the amount of
any Performance Awards to be paid and the method of payment for
any such award. Performance Awards may be granted either alone
or in addition to other grants made under the Plan. For
Performance Awards made to the Chief Executive and the
Company’s other four highest paid executive officers as of
the last day of the taxable year, each grant shall specify the
specific performance objectives which, if achieved, will result
in payment or early payment of the Performance Award.
Performance objectives may consist of one or more or any
combination of performance criteria as listed in the Plan. In
addition, each grant shall specify the minimum level of
achievement required by the participant relative to the
performance objectives to qualify for a Performance Award. No
person may be granted, in any one-year performance period, a
performance award that exceeds $20,000,000 or 800,000 shares.
Other Stock-Price-Based
Awards. The Committee also has
discretion to award other stock-price-based awards under the
Plan upon such terms and conditions as it shall establish. Each
stock-price-based award shall have a value as may be determined
by the Committee.
Additional
Information. The Committee may,
from time to time, suspend, terminate, revise, or amend the Plan
or terms of any grant except that, without the approval of
shareholders, no such revision or amendment may change the
number of shares covered by or specified in the Plan, change the
restrictions described above, expand those eligible for grants
under the Plan, or increase the percentage of shares authorized
to be transferred as restricted or unrestricted stock.
In the event of a change in control of the
Company, stock options and SARs granted under the Plan shall
vest immediately and any conditions or restrictions on shares of
common stock granted under the Plan shall lapse.
41
Stock Options. With
respect to options which qualify as ISOs, a Plan participant
does not recognize income for federal income tax purposes at the
time options are granted or exercised. If the participant
disposes of shares acquired by exercise of an ISO either before
the expiration of two years from the date the options are
granted or within one year after the issuance of shares upon
exercise of the ISO (the “holding periods”), the
participant will recognize in the year of disposition:
(a) ordinary income, to the extent that the lesser of
either (i) the fair market value of the shares on the date
of option exercise, or (ii) the amount realized on
disposition, exceeds the option price; and (b) capital
gain, to the extent the amount realized on disposition exceeds
the fair market value of the shares on the date of option
exercise. If the shares are sold after expiration of the holding
periods, the participant generally will recognize capital gain
or loss equal to the difference between the amount realized on
disposition and the option price. The Company receives no tax
deduction for compensation expense with respect to ISOs unless
the holding period requirements are not fulfilled by the
participant.
With respect to NQSOs, the participant does not
recognize income upon grant of the option and, upon exercise,
recognizes ordinary income to the extent of the excess of the
fair market value of the shares on the date of option exercise
over the amount paid by the participant for the shares. Upon a
subsequent disposition of the shares received under the option,
the participant generally recognizes capital gain or loss to the
extent of the difference between the fair market value of the
shares at the time of exercise and the amount realized on the
disposition. The Company receives a tax deduction for
compensation expense with respect to NQSOs upon the exercise of
the option in an amount equal to the spread.
SARs. The recipient
of a grant of SARs does not realize taxable income and the
Company is not entitled to a deduction with respect to such
grant on the date of such grant. Upon the exercise of an SAR,
the recipient realizes ordinary income, and the Company is
entitled to a corresponding deduction, equal to the amount of
cash or stock received.
Restricted Stock and Restricted Stock
Units. A participant holding
restricted stock, at the time the shares vest, realizes ordinary
income in an amount equal to the fair market value of the shares
and any cash received at the time of vesting, and the Company is
entitled to a corresponding deduction for federal income tax
purposes. Dividends paid to the participant on the restricted
stock during the restriction period are generally ordinary
income to the participant and deductible as such by the Company.
Alternatively, an employee may make an election
under Section 83(b) of the Code to pay tax on the initial
value of the restricted grant if he so elects within
30 days of the date of grant. This election can be made in
order to take advantage of capital gain rates on any subsequent
appreciation in lieu of ordinary income tax rates.
In general, the Company receives an income tax
deduction at the same time and in the same amount which is
taxable to the employee as compensation, except as provided
below under “Section 162(m).” To the extent a
participant realizes capital gains, as described above, the
Company is not entitled to any deduction for federal income tax
purposes.
A participant holding restricted stock units is
not taxed until those units are actually paid out, at which time
the participant realizes ordinary income in an amount equal to
the fair market value of the units at the time of payout, and
the Company is entitled to a corresponding deduction for federal
income tax purposes. Dividend equivalents are accumulated as
additional restricted stock units during the restriction period
and so are treated as described above at the time of the payout.
In general, the Company receives an income tax
deduction at the same time and in the same amount which is
taxable to the employee as compensation, except as provided
below under “Section 162(m).”
42
Federal Income Tax
Consequences.
| Number of Securities | ||||||||||||
| Remaining Available for | ||||||||||||
| Number of Securities to | Future Issuance Under | |||||||||||
| be Issued Upon | Weighted-Average | Equity Compensation | ||||||||||
| Exercise of Outstanding | Exercise Price of | Plans (Excluding | ||||||||||
| Options, Warrants | Outstanding Options, | Securities Reflected in | ||||||||||
| Plan Category | and Rights | Warrants and Rights | Column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
|
Equity Compensation Plans Approved
by Security
Holders(1)
|
348,490,236 | $ | 43.85 | 117,913,936 | ||||||||
|
Equity Compensation Plans Not
Approved by Security
Holders(2)
|
17,055,054 | $ | 41.88 | 5,117,192 | ||||||||
|
Total
|
365,545,290 | $ | 43.76 | 123,031,128 | ||||||||
| (1) | Includes The 1968 Procter & Gamble Plan for the Use of Shares in Payment of Remuneration; The Procter & Gamble 1992 Stock Plan; The Procter & Gamble 1993 Non-Employee Directors’ Stock Plan; The Procter & Gamble 2001 Stock and Incentive Compensation Plan; The Procter & Gamble 2003 Non-Employee Directors’ Stock Plan; The Gillette Company 1971 Stock Option Plan; and The Gillette Company 2004 Long-Term Incentive Plan. |
| (2) | Includes The Procter & Gamble 1992 Stock Plan (Belgian Version) and The Procter & Gamble Future Shares Plan. Details of these plans are discussed below. |
43
The Procter & Gamble Future Shares
Plan. On October 14, 1997, the
Company’s Board of Directors approved The
Procter & Gamble Future Shares Plan (the “Future
Shares Plan”) pursuant to which options to purchase shares
of the Company’s common stock may be granted to employees
worldwide. The purpose of the Future Shares Plan is to advance
the interests of the Company by giving substantially all
employees a stake in the Company’s future growth and
success and to strengthen the alignment of interests between
employees and the Company’s shareholders through increased
ownership of shares of the Company’s stock.
Subject to adjustment for changes in the
Company’s capitalization, the number of shares to be
granted under the plan is not to exceed 17 million shares.
Under the Future Shares Plan’s regulations, recipients are
granted options to acquire 100 shares of the Company’s
common stock at an exercise price equal to the average price of
the Company’s common stock on the date of the grant. These
options vest five years after the date of grant and expire ten
years following the date of grant. If a recipient leaves the
employ of the Company prior to the vesting date for a reason
other than disability, retirement or special separation (as
defined in the Future Shares Plan), then the award is forfeited.
At the time of the first grant following Board approval of the
Future Shares Plan, each employee of the Company not eligible
for an award under the 1992 Stock Plan was granted options for
100 shares. From the date of this first grant through
June 30, 2003, each new employee of the Company has also
received options for 100 shares. Following the grant of
options on June 30, 2003, the Company suspended this part
of the plan and intends to make no further grants under this
part of the Future Shares Plan.
In addition to the grants above, annual grants of
options for 100 shares are granted to approximately 3,000
employees who are not eligible for participation in the 2001
Stock and Incentive Compensation Plan in recognition of
outstanding performance. The Company’s key managers are
not eligible for such grants.
Conclusion.
If the shareholders approve this
proposal, the existing performance criteria set forth in the
Plan will be reapproved and the new performance criteria
described above will be added. This will increase the number and
combination of performance criteria available for use by the
Committee in establishing the goals against which it will
measure and evaluate the performance of its key managers. The
approval of this proposal will allow the Company to preserve the
deductibility of certain compensation paid to its Covered
Executives. Shareholders are not being asked to approve any
additional shares for issuance under the Plan or to otherwise
modify the terms of the Plan. Previously issued shares will not
be affected by the proposed changes.
The Board of Directors recommends a vote FOR
this resolution.
44
Shareholder Proposal
Mrs. Evelyn Y. Davis, Watergate Office Building,
2600 Virginia Avenue N.W., Suite 215, Washington, D.C.
20037, owner of 800 shares of common stock of the Company, has
given notice that she intends to present for action at the
annual meeting the following resolution:
“If you AGREE, please vote YOUR proxy FOR
this resolution.”
The Board of Directors recommends a vote
AGAINST this proposal for the following reasons:
The award of stock options to key managers of the
Company is a critical component of the Company’s long-term
incentive compensation. The value of stock options is based on
the Company’s long-term success. Stock options only benefit
the recipient if the stock price increases over time —
a result that also benefits the Company’s shareholders. The
Company’s well-controlled, competitively benchmarked, and
appropriately sized stock option grants tightly align the
interests of management and shareholders.
The Company’s key managers are awarded stock
options under plans that were approved by shareholders and
provide strong protections against abuse. Specifically, these
plans:
Any changes to these practices would require
shareholder approval. Moreover, option grant dates are set by
the Compensation & Leadership Development Committee well in
advance and are not affected by changes in the stock price or
subsequent business developments.
In awarding stock options, the Company is focused
on competitive pay while recognizing individuals for their
contributions to the success of the Company. Annually, the
Company benchmarks various aspects of its executive
compensation, including stock option grants, against a set of
peer group companies to ensure that our grants are targeted to
the median competitive values of comparable positions at the
benchmarked companies.
It is in the best interest of our shareholders to
provide compensation in forms that motivate our key managers and
assure competitive compensation programs. Stock options
encourage our key managers to act as owners of the business and
focus them on the longer-term performance of the Company, which
helps to further align their interests with those of
shareholders. Stock options only benefit the grant recipient if
the stock price increases over time — a result that
also benefits shareholders. The elimination of these
competitively benchmarked and shareholder-approved stock option
plans would place the Company at a significant competitive
disadvantage,
45
RESOLVED: “That the Board of Directors
take the necessary steps so that NO future NEW stock options are
awarded to ANYONE, nor that any current stock options are
repriced or renewed (unless there was a contract to do so on
some).”
REASONS: “Stock option awards have gone
out of hand in recent years, and some analysts MIGHT inflate
earnings estimates, because earnings affect stock prices and
stock options.”
There are other ways to “reward”
executives and other employees, including giving them actual
STOCK instead of options.
Recent scandals involving CERTAIN financial
institutions have pointed out how analysts CAN manipulate
earnings estimates and stock prices.
•
prohibit the granting of stock options priced at
less than the fair market value of the stock on the date of
grant;
•
prohibit the reduction of the exercise price of
outstanding stock options;
•
prohibit the cancellation and replacement of any
stock option with awards having a lower exercise price; and
•
prohibit the re-pricing of stock options that
have little or no value.
The elimination of stock option awards is not in
the best interest of the Company or its shareholders. The Board
recommends a vote AGAINST this proposal.
2007 Annual Meeting Date
It is anticipated that the 2007 annual meeting of
shareholders will be held on Tuesday, October 9, 2007.
Pursuant to regulations issued by the SEC, to be considered for
inclusion in the Company’s proxy statement for presentation
at that meeting, all shareholder proposals must be received by
the Company on or before the close of business on Tuesday,
May 1, 2007. Any such proposals should be sent to The
Procter & Gamble Company, c/o Secretary, One
Procter & Gamble Plaza, Cincinnati, OH 45202-3315. If a
shareholder notifies the Company after July 17, 2007 of an
intent to present a proposal at the 2007 annual meeting of
shareholders, the Company will have the right to exercise its
discretionary voting authority with respect to such proposal
without including information regarding such proposal in its
proxy materials.
Other Matters
No action will be taken with regard to the
minutes of the annual meeting of shareholders held
October 11, 2005, unless they have been incorrectly
recorded.
The Board of Directors knows of no other matters
which will come before the meeting. However, if any matters
other than those set forth in the notice should be properly
presented for action, the persons named in the proxy intend to
take such action as will be in harmony with the policies of the
Company and in that connection will use their discretion.
46
Exhibit A
The Procter & Gamble Company Board of
Directors
It is expected that Board members (in that role)
will exercise diligently and in good faith their independent
judgment in the best interests of the Company and its
shareholders as a whole, notwithstanding their other activities
or affiliations.
The Board has determined a majority of its
members should be “independent,” meaning they are free
of any material relationship with the Company or Company
management. In furtherance of this goal, the Board has adopted
the following guidelines for determining whether a member is
“independent.”*
1. Subject to Section 2, a Board member
will NOT be independent if, within the past three (3) years:
2. The Board will examine the independence
of each of its members once per year, and more frequently when
there are changed circumstances that may affect a Board
member’s independence. The Board will weigh all relevant
facts and circumstances in determining independence. If a Board
member has a relationship that exceeds the thresholds described
in Section 1 or another significant relationship with the
Company or Company management, then the independent Board
members will determine whether that Board member’s
relationship affects his/her independence. Regardless of other
circumstances, a Board member will not be independent if s/he
does not meet
A-1
(a) the Board member is employed by the
Company or a member of his/her immediate family is an executive
officer of the Company;
(b) the Board member receives or a member of
his/her immediate family receives more than $100,000 per year in
direct compensation from the Company, other than director and
committee fees and pension or other forms of deferred
compensation for prior service which are not contingent in any
way on continued service;
(c) the Board member is affiliated with or
employed by, or a member of his/her immediate family is
affiliated with or employed in a professional capacity by, a
present or former internal or external auditor of the Company;
(d) the Board member is employed, or a
member of his/her immediate family is employed as an executive
officer of another company where any of the Company’s
present executives serve on that company’s compensation
committee;
(e) the Board member is an executive officer
or employee or any member of his/her immediate family is an
executive officer, of a company that makes payments to, or
receives payments from, the Company for property or services in
an amount which in any single fiscal year, exceeds the greater
of $1,000,000 or 2% of such company’s consolidated annual
gross revenues;
(f) the Board member is an executive officer
or employee, or any member of his/her immediate family is an
executive officer, of a company which is indebted to the Company
or to which the Company is indebted, and the total amount of the
indebtedness exceeds the greater of $1,000,000 or 2% of the
consolidated annual gross revenues of either company;
(g) the Board member or any member of
his/her immediate family serves as an officer of a charitable or
educational organization, and donations by the Company
(excluding Company matches of charitable contributions made by
employees or directors under the Company’s Matching Gifts
Program) exceed the greater of $1,000,000 or 2% of the
organization’s consolidated annual gross revenues.
3. Independence determinations will be
disclosed in the Company’s proxy statement.
For purposes of these guidelines, “members
of his/her immediate family” and similar phrases will mean
a person’s spouse, parents, children, siblings, mothers-
and fathers-in-law, sons- and daughters-in-law, brothers- and
sisters-in-law, and anyone (other than an employee) who shares
the person’s home. “The Company” means The
Procter & Gamble Company and all of its subsidiaries.
A-2
*
(Note that certain special independence
requirements apply to members of the Company’s Audit
Committee. These requirements are set forth in the
“Committee Member Qualifications” section of the
Board’s Committee Charters Appendix.)
Exhibit B
The Procter & Gamble Company Board of
Directors
B-1
I.
The Committee’s Purpose.
The Committee is appointed by the
Board of Directors for the primary purposes of:
A.
Assisting the Board in its oversight of:
1.
the quality and integrity of the Company’s
financial statements;
2.
the Company’s compliance with legal and
regulatory requirements;
3.
the Company’s overall risk management
profile;
4.
the independent auditor’s qualifications and
independence; and
5.
the performance of the Company’s internal
audit function and independent auditors.
B.
Preparing the annual Audit Committee Report to be
included in the Company’s proxy statement.
II.
The Committee’s Duties and
Responsibilities. Company management
is responsible for preparing financial statements; the
Committee’s primary responsibility is oversight. To carry
out this responsibility, the Committee will undertake the
following activities:
A.
General.
1.
To develop and maintain free and open means of
communication with the Board, the Company’s independent
auditors, the Company’s internal auditors, and the
financial and general management of the Company;
2.
To perform any other activities as the Committee
deems appropriate, or as are requested by the Board, consistent
with this Charter, the Company’s By Laws and applicable law;
3.
To maintain and update, as appropriate, this
Charter, which will be published on the Company’s website
and disclosed in the Company’s proxy at least once every
three years as required by the SEC’s proxy rules; and
4.
To review with the Board any significant issues
that arise with respect to the items listed in I.A.1 through
I.A.5 above.
B.
The Company’s Financial Statements and
Published Information.
1.
At least annually, to review:
a.
major issues regarding accounting principles and
financial statement presentations including any significant
changes in the Company’s selection or application of
accounting principles, as well as the clarity and completeness
of the Company’s financial statements and items that impact
the representational faithfulness, verifiability and neutrality
of accounting information;
b.
analyses prepared by management and/or the
independent auditor setting forth significant financial
reporting issues and judgments made in connection with the
preparation of the financial statements, including analyses of
the effects of alternative GAAP methods on the financial
statements; and
c.
the effect of regulatory and accounting
initiatives, as well as off-balance sheet structures, on the
financial statements of the Company.
B-2
2.
To discuss the annual audited financial
statements and quarterly financial statements (including matters
outlined in SAS No. 61, Communications with Audit
Committees) with Company management and the independent
auditors, including the Company’s disclosures under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in the Company’s
SEC filings.
3.
To discuss the Company’s earnings press
releases, as well as financial information and earnings guidance
provided to analysts and ratings agencies. These discussions
need not occur in advance of each release or each provision of
guidance.
C.
Performance and Independence of the
Company’s Independent Auditors.
1.
At least annually, to obtain and review a written
report by the independent auditors describing:
a.
the independent auditing firm’s internal
quality control procedures;
b.
any material issues raised by the most recent
internal quality control review, or peer review, of the
independent auditing firm;
c.
any material issues raised by any inquiry or
investigation by governmental or professional authorities within
the preceding five years respecting one or more independent
audits carried out by the independent auditing firm;
d.
any steps taken to deal with any issues raised in
such internal quality control reviews, peer reviews, or
governmental or professional authority inquiries or
investigations; and
e.
all relationships between the independent auditor
and the Company.
2.
To annually evaluate the independent
auditor’s qualifications, performance and independence,
including a review and evaluation of the lead partner, taking
into account the opinions of Company management and the
Company’s internal auditors, and to report its conclusions
to the Board.
3.
To assure regular rotation of the lead audit
partner, as required by law.
4.
To periodically meet separately with independent
auditors.
5.
To set clear hiring policies for employees or
former employees of the independent auditors.
D.
The Review of Services and Audit by
Independent Auditor.
1.
To appoint, retain (with subsequent submission to
the Company’s shareholders for ratification), compensate,
evaluate and terminate the Company’s independent auditors,
with sole authority to approve all audit engagement fees and
terms, as well as all non-audit engagements with the independent
auditors (these responsibilities may not be delegated to Company
management).
2.
At least annually, to pre-approve all audit and
non-audit services to be provided to the Company by its
independent auditors (this responsibility may not be delegated
to Company management and, to the extent that this
responsibility is delegated to one or more members of the
Committee, such member(s) must report such pre-approvals at the
next scheduled meeting of the Committee).
3.
To ensure that the Company’s independent
auditors do not perform any non-audit services that are
prohibited by law or regulation.
4.
To review the scope of the annual audit to be
performed by the Company’s independent auditors.
B-3
5.
To review with the independent auditor any audit
problems or difficulties encountered in the course of the audit
work, and Company management’s responses.
6.
To review the audit report and recommendations
submitted by the Company’s independent auditors.
7.
To review the report required by
Section 10A(k) of the Securities Exchange Act of 1934 from
the independent auditor concerning:
a.
Critical accounting policies and practices to be
used in the audit;
b.
Alternative treatments of financial information
within GAAP that have been discussed with Company management,
ramifications of the use of such alternative disclosure and
treatments, and the treatment preferred by the independent
auditor; and
c.
Other material written communications between the
independent auditor and Company management, such as any
management letter or schedule of unadjusted differences.
E.
The Performance of the Company’s Internal
Audit Function.
1.
To periodically meet separately with internal
auditors.
2.
To review and approve the annual internal audit
plan.
3.
To receive and review summaries and reports from
the internal auditor with respect to its review of the
operations of the Company and the systems of internal controls
and, where deemed appropriate, management’s responses
thereto.
4.
To review the activities, organizational
structure, staffing and qualifications of the internal audit
function.
F.
Controls Within the Company.
1.
To periodically meet separately with Company
management including senior finance and accounting management.
2.
To annually review major issues as to the
adequacy of the Company’s internal controls and any special
audit steps adopted in light of material control deficiencies.
3.
To review the results of the Company’s
annual assessment relating to compliance with the Company’s
Worldwide Business Conduct Manual.
4.
To receive quarterly a report from the
Company’s Chief Executive and Chief Financial Officer
describing:
a.
all significant deficiencies in the design or
operation of internal controls which could adversely affect the
issuer’s ability to record, process, summarize, and report
financial data; and
b.
any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Company’s internal controls.
5.
To establish procedures for:
a.
the receipt, retention, and treatment of
complaints received by the Company regarding accounting,
internal accounting controls, or auditing matters; and
b.
the confidential, anonymous submission by
employees of the issuer of concerns regarding questionable
accounting or auditing matters.
To discuss:
INFORMATION CONCERNING COMMITTEE MEMBER
QUALIFICATIONS, COMMITTEE MEMBER APPOINTMENT AND REMOVAL,
COMMITTEE STRUCTURE AND OPERATIONS (INCLUDING AUTHORITY TO
DELEGATE TO SUBCOMMITTEES), AND COMMITTEE REPORTING TO THE BOARD
ARE ADDRESSED IN THE PROCTER & GAMBLE COMPANY BOARD OF
DIRECTORS COMMITTEE CHARTERS APPENDIX.
B-4
G.
Review of Risk Management.
1.
guidelines and policies to govern risk assessment
and risk management;
2.
the Company’s major risk exposures and the
steps Company management has taken to monitor and control such
exposures;
3.
To review the status of Corporate Security, the
security for the Company’s electronic data processing
information systems, and the general security of the
Company’s people, assets and information systems;
4.
To review the status of the Company’s
financial instruments; and
5.
To receive annual and as required reports from
the Chief Legal Officer regarding legal, regulatory and
intellectual property issues.
III.
Authority to Retain Experts.
The Committee has the authority to
select, direct and, if appropriate, terminate such experts as it
deems necessary in the performance of its duties.
IV.
Annual Performance Evaluation of the
Committee. At least annually, the
Committee will evaluate how well it has fulfilled its purpose
during the previous year, and will report its findings to the
full Board.
V.
Audit Committee Financial Expert.
At least one member of the Committee
must have accounting or related financial management expertise
as determined by the Board in accordance with applicable listing
standards. At least one member of the Committee must be an
“audit committee financial expert” as defined by the
Securities and Exchange Commission. The person with accounting
or related financial management expertise and the “audit
committee financial expert” can be one and the same.
Exhibit C
Guidelines of
The Committee has adopted the following
guidelines regarding the engagement of the Company’s
independent auditor to perform services for the
Company:
For audit services (including statutory audit
engagements as required under local country laws), the
independent auditor will provide the Committee with an
engagement letter during the July-September quarter of each year
outlining the scope of the audit services proposed to be
performed during the fiscal year. If agreed to by the Committee,
this engagement letter will be formally accepted by Committee at
the September Audit Committee meeting.
The independent auditor will submit to the
Committee for approval an audit services fee proposal after
acceptance of the engagement letter.
For non-audit services, Company management will
submit to the Committee for approval (during June or September
of each fiscal year) the list of non-audit services that it
recommends the Committee engage the independent auditor to
provide for the fiscal year. Company management and the
independent auditor will each confirm to the Committee that each
non-audit service on the list is permissible under all
applicable legal requirements. In addition to the list of
planned non-audit services, a budget estimating non-audit
service spending for the fiscal year will be provided. The
Committee will approve both the list of permissible non-audit
services and the budget for such services. The Committee will be
informed routinely as to the non-audit services actually
provided by the independent auditor pursuant to this
pre-approval process.
To ensure prompt handling of unexpected matters,
the Committee delegates to the Chair the authority to amend or
modify the list of approved permissible non-audit services and
fees. The Chair will report action taken to the Committee at the
next Committee meeting.
The independent auditor must ensure that all
audit and non-audit services provided to the Company have been
approved by the Committee. The Vice President of Internal
Controls will be responsible for tracking all independent
auditor fees against the budget for such services and report at
least annually to the Audit Committee.
C-1
Exhibit D
Amendment to the Company’s Code of
Regulations
The Code of Regulations of the Company shall be
amended as described below:
ARTICLE III
Board of Directors
SECTION 1. Number. The Board of
Directors shall be composed of
Note: New language is indicated by underlining.
Language to be deleted is lined out.
D-1
seventeen
(17) thirteen (13) persons unless this
number is changed by: (1) the shareholders by the
affirmative vote of the holders of shares of the Company
entitling them to exercise at least eighty percent (80%) of the
voting power of the Company voting as a single class at a
meeting of shareholders called for the purpose of electing
Directors or (2) the affirmative vote of at least
two-thirds (2/3) of the whole authorized number of Directors.
The Directors may increase the number to not more than
nineteen (19) fifteen
(15) persons and may decrease the number to not less
than fifteen (15) ten
(10) persons. Any Director’s office created by the
Directors by reason of an increase in their number may be filled
by action of a majority of the Directors in office.
Exhibit E
Amendment to The Procter & Gamble Company
2001
ARTICLE J — Performance Related
Awards
2. Notwithstanding the foregoing, any
Performance Awards granted to the Chief Executive and the
Company’s other four highest paid executive officers (as
reported in the Company’s proxy statement pursuant to
Regulation S-K, Item 402(a)(3)) under Article J,
Paragraph 1 shall comply with all of the following
requirements:
(a) Each grant shall specify the specific
performance objectives (the “Performance Objectives”)
which, if achieved, will result in payment or early payment of
the Performance Award. The Performance Objectives may be
described in terms of Company-wide objectives that are related
to the individual Participant or objectives that are related to
a subsidiary, division, department, region, function, or
business unit of the Company in which the Participant is
employed, and may consist of one or more or any combination of
the following criteria: Stock price, market share, sales
revenue, cash flow, earnings per share, return on equity, total
shareholder return, gross margin, stock price growth
measures, operating total shareholder return, net earnings or
net income (before or after taxes), return on assets or capital,
earnings (before or after interest, taxes, depreciation and/or
amortization), operating margin, acquisition integration
metrics, economic value added, and/or costs. The Performance
Objectives may be made relative to the performance of other
corporations. The Committee, in its discretion, may change or
modify these criteria; however, at all times the criterion must
be valid performance criterion for purposes of
Section 162(m) of the Internal Revenue Code of 1986, as
amended (the “Code”). The Committee may not change the
criteria or Performance Objectives for any Performance Period
that has already been approved by the Committee. The Committee
may cancel a Performance Period or replace a Performance Period
with a new Performance Period, provided that any such
cancellation or replacement shall not cause the Performance
Award to fail to meet the requirements of Section 162(m) of
the Code.
Note: New language is indicated by underlining.
E-1
Exhibit F
The Procter & Gamble 2001
ARTICLE A — Purpose.
The purposes of The Procter & Gamble
2001 Stock and Incentive Compensation Plan (the
“Plan”) are to strengthen the alignment of interests
between those employees of The Procter & Gamble
Company (the “Company”) and its subsidiaries who are
largely responsible for the success of the business (the
“Participants”) and the Company’s shareholders
through ownership behavior and the increased ownership of shares
of the Company’s common stock (the “Common
Stock”), and to encourage the Participants to remain in the
employ of the Company and its subsidiaries. This will be
accomplished through the granting of options to purchase shares
of Common Stock, the granting of performance related awards, the
payment of a portion of the Participants’ remuneration in
shares of Common Stock, the granting of deferred awards related
to the increase in the price of Common Stock, and the granting
of restricted stock units (“RSUs”) or other awards
that are related to the price of Common Stock.
ARTICLE B —
Administration.
1. The Plan shall be administered by the
Compensation Committee (the “Committee”) of the Board
of Directors of the Company (the “Board”), or such
other committee as may be designated by the Board. The Committee
shall consist of not fewer than three (3) members of the
Board who are “Non-Employee Directors” as defined in
Rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the “1934 Act”), or any successor rule
or definition adopted by the Securities and Exchange Commission,
to be appointed by the Board from time to time and to serve at
the discretion of the Board. The Committee may establish such
regulations, provisions, and procedures within the terms of the
Plan as, in its opinion, may be advisable for the administration
and operation of the Plan, and may designate the Secretary of
the Company or other employees of the Company to assist the
Committee in the administration and operation of the Plan and
may grant authority to such persons to execute documents on
behalf of the Committee. The Committee shall report to the Board
on the administration of the Plan not less than once each year.
2. Subject to the express provisions of the
Plan, the Committee shall have authority: to grant nonstatutory
and incentive stock options; to grant stock appreciation rights
either freestanding or in tandem with simultaneously granted
stock options; to grant Performance Awards (as defined in
Article J); to award a portion of a Participant’s
remuneration in shares of Common Stock subject to such
conditions or restrictions, if any, as the Committee may
determine; to award RSUs or other awards that are related to the
price of Common Stock; to determine all the terms and provisions
of the respective stock option, stock appreciation right, stock
award, RSU, or other award agreements including setting the
dates when each stock option or stock appreciation right or part
thereof may be exercised and determining the conditions and
restrictions, if any, of any shares of Common Stock acquired
through the exercise of any stock option; to provide for special
terms for any stock options, stock appreciation rights, stock
awards, RSUs or other awards granted to Participants who are
foreign nationals or who are employed by the Company or any of
its subsidiaries outside of the United States of America in
order to fairly accommodate for differences in local law, tax
policy or custom and to approve such supplements to or
amendments, restatements or alternative versions of the Plan as
the Committee may consider necessary or appropriate for such
purposes (without affecting the terms of the Plan for any other
purpose); and to make all
F-1
ARTICLE C —
Participation.
The Committee shall select as Participants those
employees of the Company and its subsidiaries who, in the
opinion of the Committee, have demonstrated a capacity for
contributing in a substantial manner to the success of such
companies.
ARTICLE D — Limitation on
Number of Shares Available Under the Plan.
1. Unless otherwise authorized by the
shareholders and subject to Paragraph 2 of this
Article D, the maximum aggregate number of shares available
for award under the Plan shall be one hundred ninety million
(190,000,000) shares. Any of the authorized shares may be used
for any of the types of awards described in the Plan, except
that no more than fifteen percent (15%) of the authorized shares
may be awarded as restricted or unrestricted stock.
2. In addition to the shares authorized for
award by Paragraph 1 of this Article, the following shares
may be awarded under the Plan:
ARTICLE E — Shares Subject to
Use Under the Plan.
1. The shares to be delivered by the Company
upon exercise of stock options or stock appreciation rights
shall be determined by the Board and may consist, in whole or in
part, of authorized but unissued shares or treasury shares. In
the case of redemption of stock appreciation rights by one of
the Company’s subsidiaries, such shares shall be shares
acquired by that subsidiary.
2. For purposes of the Plan, restricted or
unrestricted stock awarded or issued following redemption of
RSUs under the terms of the Plan shall be authorized but
unissued shares, treasury shares, or shares acquired in the open
market by the Company or a subsidiary, as determined by the
Board.
F-2
(a)
waive the provisions of Article F,
Paragraph 1(a);
(b)
waive the provisions of Article F,
Paragraph 1(b);
(c)
waive the provisions of Article G,
Paragraph 4(a), 4(b) and 4(c); and
(d)
impose conditions in lieu of those set forth in
Article G, Paragraphs 4 through 7, for
nonstatutory stock options, stock appreciation rights, stock
awards, RSUs, or Performance Awards which do not increase or
extend the rights of the Participant.
(a)
shares that were authorized to be awarded under
The Procter & Gamble 1992 Stock Plan (the “1992
Plan”), but that were not awarded under the 1992 Plan;
(b)
shares awarded under the Plan or the 1992 Plan
that are subsequently forfeited in accordance with the Plan or
the 1992 Plan, respectively;
(c)
shares tendered by a Participant in payment of
all or part of the exercise price of a stock option awarded
under the Plan or the 1992 Plan;
(d)
shares tendered by or withheld from a Participant
in satisfaction of withholding tax obligations with respect to a
stock option awarded under the Plan or the 1992 Plan.
ARTICLE F — Stock Options and
Stock Appreciation Rights.
1. In addition to such other conditions as
may be established by the Committee, in consideration of the
granting of stock options or stock appreciation rights under the
terms of the Plan, each Participant agrees as follows:
For purposes of this paragraph, it shall be
conclusively presumed that Participants have knowledge of
information they were directly exposed to through actual receipt
or review of memos or documents containing such information, or
through actual attendance at meetings at which such information
was discussed or disclosed.
F-3
(a)
The right to exercise any stock option or stock
appreciation right shall be conditional upon certification by
the Participant at time of exercise that the Participant intends
to remain in the employ of the Company or one of its
subsidiaries for at least one (1) year following the date
of the exercise of the stock option or stock appreciation right
(provided that termination of employment due to Retirement or
Special Separation shall not constitute a breach of such
certification), and,
(b)
In order to better protect the goodwill of the
Company and its subsidiaries and to prevent the disclosure of
the Company’s or its subsidiaries’ trade secrets and
confidential information and thereby help insure the long-term
success of the business, the Participant, without prior written
consent of the Company, will not engage in any activity or
provide any services, whether as a director, manager,
supervisor, employee, adviser, consultant or otherwise, for a
period of three (3) years following the date of the
Participant’s termination of employment with the Company,
in connection with the manufacture, development, advertising,
promotion, or sale of any product which is the same as or
similar to or competitive with any products of the Company or
its subsidiaries (including both existing products as well as
products known to the Participant, as a consequence of the
Participant’s employment with the Company or one of its
subsidiaries, to be in development):
(1)
with respect to which the Participant’s work
has been directly concerned at any time during the two
(2) years preceding termination of employment with the
Company or one of its subsidiaries or
(2)
with respect to which during that period of time
the Participant, as a consequence of the Participant’s job
performance and duties, acquired knowledge of trade secrets or
other confidential information of the Company or its
subsidiaries.
(c)
The provisions of this Article are not in lieu
of, but are in addition to the continuing obligation of the
Participant (which Participant hereby acknowledges) to not use
or disclose the Company’s or its subsidiaries’ trade
secrets and confidential information known to the Participant
until any particular trade secret or confidential information
become generally known (through no fault of the Participant),
whereupon the restriction on use and disclosure shall cease as
to that item. Information regarding products in development, in
test marketing or being marketed or promoted in a discrete
geographic region, which information the Company or one of its
subsidiaries is considering for broader use, shall not be deemed
generally known until such broader use is actually commercially
implemented. As used in this Article, “generally
known” means known throughout the domestic
U.S. industry or, in the case of Participants who have job
responsibilities outside of the United States, the appropriate
foreign country or countries’ industry. As used in this
Article, “trade secrets and other confidential
information” also includes personnel knowledge about a
manager, or managers, of the Company or its subsidiaries gained
in the course of Participant’s employment with the Company
or its subsidiaries (including personnel ratings or rankings,
manager or peer evaluations, performance records, special skills
or abilities, compensation, work
2. The fact that a Participant has been
granted a stock option or a stock appreciation right under the
Plan shall not limit the right of the employer to terminate the
Participant’s employment at any time.
Because a main purpose of the Plan is to
strengthen the alignment of interests between employees of the
Company (including all subsidiaries) and its shareholders to
ensure the continued success of the Company, the Committee is
authorized to suspend or terminate any outstanding stock option
or stock appreciation right of a Participant if the Committee
determines the Participant has acted significantly contrary to
the best interests of the Company or its subsidiaries. For
purposes of this paragraph, an action taken “significantly
contrary to the best interests of the Company or its
subsidiaries” includes without limitation any action taken
or threatened by the Participant that the Committee determines
has, or is reasonably likely to have, a significant adverse
impact on the reputation, goodwill, stability, operation,
personnel retention and management, or business of the Company
or any subsidiary. This paragraph is in addition to any remedy
the Company or a subsidiary may have at law or in equity,
including without limitation injunctive and other appropriate
relief.
3. The maximum number of shares with respect
to which stock options or stock appreciation rights may be
granted to any Participant in any calendar year shall not exceed
2,000,000 shares.
4. The aggregate fair market value
(determined at the time when the incentive stock option is
exercisable for the first time by a Participant during any
calendar year) of the shares for which any Participant may be
granted incentive stock options under the Plan and all other
stock option plans of the Company and its subsidiaries in any
calendar year shall not exceed $100,000 (or such
F-4
and development plans, training, nature of
specific project and work assignments, or specialties developed
as a result of such assignments) which directly or indirectly
affords the Participant a confidential basis to solicit,
encourage, or participate in soliciting any manager, or
managers, of the Company or any subsidiary to terminate his or
her relationship with the Company or that subsidiary.
(d)
By acceptance of any offered stock option or
stock appreciation rights granted under the terms of the Plan,
the Participant acknowledges that if the Participant were,
without authority, to use or disclose the Company’s or any
of its subsidiaries’ trade secrets or confidential
information or threaten to do so, the Company or one of its
subsidiaries would be entitled to injunctive and other
appropriate relief to prevent the Participant from doing so. The
Participant acknowledges that the harm caused to the Company by
the breach or anticipated breach of this Article is by its
nature irreparable because, among other things, it is not
readily susceptible of proof as to the monetary harm that would
ensue. The Participant consents that any interim or final
equitable relief entered by a court of competent jurisdiction
shall, at the request of the Company or one of its subsidiaries,
be entered on consent and enforced by any court having
jurisdiction over the Participant, without prejudice to any
rights either party may have to appeal from the proceedings
which resulted in any grant of such relief.
(e)
If any of the provisions contained in this
Article F shall for any reason, whether by application of
existing law or law which may develop after the
Participant’s acceptance of an offer of the granting of
stock appreciation rights or stock options, be determined by a
court of competent jurisdiction to be overly broad as to scope
of activity, duration, or territory, the Participant agrees to
join the Company or any of its subsidiaries in requesting such
court to construe such provision by limiting or reducing it so
as to be enforceable to the extent compatible with then
applicable law. If any one or more of the terms, provisions,
covenants, or restrictions of this Article shall be determined
by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions,
covenants, and restrictions of this Article shall remain in full
force and effect and shall in no way be affected, impaired, or
invalidated.
5. If the Committee grants incentive stock
options, all such stock options shall contain such provisions as
permit them to qualify as “incentive stock options”
within the meaning of Section 422 of the Internal Revenue
Code of 1986, as may be amended from time to time.
6. With respect to stock options granted in
tandem with stock appreciation rights, the exercise of either
such stock options or such stock appreciation rights will result
in the simultaneous cancellation of the same number of tandem
stock appreciation rights or stock options, as the case may be.
7. The exercise price for all stock options
and stock appreciation rights shall be established by the
Committee at the time of their grant and shall be not less than
one hundred percent (100%) of the fair market value of the
Common Stock on the date of grant.
8. Unless otherwise authorized by the
shareholders of the Company, neither the Board nor the Committee
shall authorize the amendment of any outstanding stock option or
stock appreciation right to reduce the exercise price.
9. No stock option or stock appreciation
right shall be cancelled and replaced with awards having a lower
exercise price without the prior approval of the shareholders of
the Company. This Article F, Paragraph 9 is intended
to prohibit the repricing of “underwater” stock
options and stock appreciation rights and shall not be construed
to prohibit the adjustments permitted under Article K of
the Plan.
10. The Committee may require any
Participant to accept any stock options or stock appreciation
rights by means of electronic signature.
ARTICLE G — Exercise of Stock
Options and Stock Appreciation Rights.
1. All stock options and stock appreciation
rights granted hereunder shall have a maximum life of no more
than ten (10) years from the date of grant.
2. No stock options or stock appreciation
rights shall be exercisable within one (1) year from their
date of grant, except in the case of the death of the
Participant.
3. Unless a transfer has been duly
authorized by the Committee pursuant to Article G,
Paragraph 6 of the Plan, during the lifetime of the
Participant, stock options and stock appreciation rights may be
exercised only by the Participant personally, or, in the event
of the legal incompetence of the Participant, by the
Participant’s duly appointed legal guardian.
4. In the event that a Participant ceases to
be an employee of the Company or any of its subsidiaries while
holding an unexercised stock option or stock appreciation right:
F-5
(a)
Any unexercisable portions thereof are then void,
except in the case of: (1) death of the Participant;
(2) Retirement or Special Separation that occurs more than
six months from the date the options were granted; or
(3) any option as to which the Committee has waived, at the
time of grant, the provisions of this Article G,
Paragraph 4(a).
(b)
Any exercisable portions thereof are then void,
except in the case of: (1) death of the Participant;
(2) Retirement or Special Separation; or (3) any
option as to which the Committee has waived, at the time of
grant, the provisions of this Article G,
Paragraph 4(b).
(c)
In the case of Special Separation, any stock
option or stock appreciation right must be exercised within the
time specified in the original grant or five (5) years from
the date of Special Separation, whichever is shorter.
5. In the case of the death of a
Participant, the persons to whom the stock options or stock
appreciation rights have been transferred by will or the laws of
descent and distribution shall have the privilege of exercising
remaining stock options, stock appreciation rights or parts
thereof, whether or not exercisable on the date of death of such
Participant, at any time prior to the expiration date of the
stock options or stock appreciation rights.
6. Stock options and stock appreciation
rights are not transferable other than by will or by the laws of
descent and distribution. For the purpose of exercising stock
options or stock appreciation rights after the death of the
Participant, the duly appointed executors and administrators of
the estate of the deceased Participant shall have the same
rights with respect to the stock options and stock appreciation
rights as legatees or distributees would have after distribution
to them from the Participant’s estate. Notwithstanding the
foregoing, the Committee may authorize the transfer of stock
options and stock appreciation rights upon such terms and
conditions as the Committee may require. Such transfer shall
become effective only upon the Committee’s complete
satisfaction that the proposed transferee has strictly complied
with such terms and conditions, and both the original
Participant and the transferee shall be subject to the same
terms and conditions hereunder as the original Participant.
7. Upon the exercise of stock appreciation
rights, the Participant shall be entitled to receive a
redemption differential for each such stock appreciation right
which shall be the difference between the then fair market value
of one share of Common Stock and the exercise price of one stock
appreciation right then being exercised. In the case of the
redemption of stock appreciation rights by a subsidiary of the
Company not located in the United States, the redemption
differential shall be calculated in United States dollars and
converted to the appropriate local currency on the exercise
date. As determined by the Committee, the redemption
differential may be paid in cash, Common Stock to be valued at
its fair market value on the date of exercise, any other mode of
payment deemed appropriate by the Committee or any combination
thereof.
8. Time spent on leave of absence shall be
considered as employment for the purposes of the Plan. Leave of
absence means any period of time away from work granted to any
employee by his or her employer because of illness, injury, or
other reasons satisfactory to the employer.
9. The Company reserves the right from time
to time to suspend the exercise of any stock option or stock
appreciation right where such suspension is deemed by the
Company as necessary or appropriate for corporate purposes. No
such suspension shall extend the life of the stock option or
stock appreciation right beyond its expiration date, and in no
event will there be a suspension in the five (5) calendar
days immediately preceding the expiration date.
10. The Committee may require any
Participant to exercise any stock options or stock appreciation
rights by means of electronic signature.
ARTICLE H — Payment for Stock
Options and Tax Withholding.
Upon the exercise of a stock option, payment in
full of the exercise price shall be made by the Participant. As
determined by the Committee, the stock option exercise price may
be paid by the Participant either in cash, shares of Common
Stock valued at their fair market value on the date of exercise,
a combination thereof, or such other method as determined by the
Committee. In addition to payment of the exercise price, the
Committee may authorize the Company to charge a reasonable
administrative fee for the exercise of any stock option.
Furthermore, to the extent the Company is required to withhold
federal, state, local or foreign taxes in connection with any
Participant’s stock option exercise, the Committee may
require the Participant to make such arrangements as the Company
may deem necessary for the payment of such taxes required to be
withheld (including, without limitation, relinquishment of a
portion of such stock options or relinquishment of a portion of
the proceeds received by the Participant in a simultaneous
exercise and sale of stock during a “cashless”
exercise). In no event, however, shall the Committee be
F-6
ARTICLE I — Grant of
Unrestricted Stock, Restricted Stock or RSUs.
The Committee may grant Common Stock or RSUs to
Participants under the Plan subject to such conditions or
restrictions, if any, as the Committee may determine. To the
extent the Company is required to withhold federal, state, local
or foreign taxes in connection with the lapse of restrictions on
any Participant’s shares of Common Stock, the Committee may
require the Participant to make such arrangements as the Company
may deem necessary for the payment of such taxes required to be
withheld (including, without limitation, relinquishment of a
portion of such shares of Common Stock). In no event, however,
shall the Committee be permitted to require payment from a
Participant in excess of the maximum required tax withholding
rates.
ARTICLE J — Performance Related
Awards.
1. The Committee, in its discretion, may
establish performance goals for selected Participants and
authorize the granting of cash, stock options, stock
appreciation rights, Common Stock, RSUs or other awards that are
related to the price of Common Stock, other property, or any
combination thereof (“Performance Awards”) to such
Participants upon achievement of such established performance
goals during a specified time period (the “Performance
Period”). The Committee, in its discretion, shall determine
the Participants eligible for Performance Awards, the
performance goals to be achieved during each Performance Period,
the amount of any Performance Awards to be paid, and the method
of payment for any Performance Awards. Performance Awards may be
granted either alone or in addition to other grants made under
the Plan.
2. Notwithstanding the foregoing, any
Performance Awards granted to the Chief Executive and the
Company’s other four highest paid executive officers (as
reported in the Company’s proxy statement pursuant to
Regulation S-K, Item 402(a)(3)) under Article J,
Paragraph 1 shall comply with all of the following
requirements:
F-7
(a)
Each grant shall specify the specific performance
objectives (the “Performance Objectives”) which, if
achieved, will result in payment or early payment of the
Performance Award. The Performance Objectives may be described
in terms of Company-wide objectives that are related to the
individual Participant or objectives that are related to a
subsidiary, division, department, region, function or business
unit of the Company in which the Participant is employed, and
may consist of one or more or any combination of the following
criteria: stock price, market share, sales revenue, cash flow,
earnings per share, return on equity, total shareholder return,
gross margin, and/or costs. The Performance Objectives may be
made relative to the performance of other corporations. The
Committee, in its discretion, may change or modify these
criteria, however, at all times the criterion must be valid
performance criterion for purposes of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the
“Code”). The Committee may not change the criteria or
Performance Objectives for any Performance Period that has
already been approved by the Committee. The Committee may cancel
a Performance Period or replace a Performance Period with a new
Performance Period, provided that any such cancellation or
replacement shall not cause the Performance Award to fail to
meet the requirements of Section 162(m) of the Code.
(b)
Each grant shall specify the minimum level of
achievement required by the Participant relative to the
Performance Objectives to qualify for a Performance Award. In
doing so, the grant shall establish a formula for determining
the percentage of the Performance Award to be awarded if
performance is at or above the minimum level, but falls short of
full achievement of the specified Performance Objectives. Each
grant may also establish a formula for determining an additional
award above and beyond the
ARTICLE K —
Adjustments.
In the event of any future reorganization,
recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation, rights offering, share exchange,
reclassification, distribution, spin-off or other change
affecting the corporate structure, capitalization or Common
Stock of the Company occurring after the date of approval of the
Plan by the Company’s shareholders, (i) the amount of
shares authorized to be issued under the Plan and (ii) the
number of shares and/or the exercise prices covered by
outstanding stock options, stock appreciation rights or RSUs
shall be adjusted appropriately and equitably to prevent
dilution or enlargement of rights under the Plan. Following any
such change, the term “Common Stock” shall be deemed
to refer to such class of shares or other securities as may be
applicable.
ARTICLE L — Additional
Provisions and Definitions.
1. The Board may, at any time, repeal the
Plan or may amend it except that no such amendment may amend
this paragraph, increase the total aggregate number of shares
subject to the Plan, reduce the price at which stock options or
stock appreciation rights may be granted or exercised, alter the
class of employees eligible to receive stock options, or
increase the percentage of shares authorized to be transferred
as restricted or unrestricted stock. Participants and the
Company shall be bound by any such amendments as of their
effective dates, but if any outstanding stock options or stock
appreciation rights are materially affected adversely, notice
thereof shall be given to the Participants holding such stock
options and stock appreciation rights and such amendments shall
not be applicable without such Participant’s written
consent. If the Plan is repealed in its entirety, all
theretofore granted unexercised stock options or stock
appreciation rights shall continue to be exercisable in
accordance with their terms and shares subject to conditions or
restrictions granted pursuant to the Plan shall continue to be
subject to such conditions or restrictions.
2. In the case of a Participant who is an
employee of a subsidiary of the Company, performance under the
Plan, including the granting of shares of the Company, may be by
the subsidiary. Nothing in the Plan shall affect the right of
the Company or any subsidiary to terminate the employment of any
employee with or without cause. None of the Participants, either
individually or as a group, and no beneficiary, transferee or
other person claiming under or through any Participant, shall
have any right, title, or interest in any shares of the Company
purchased or reserved for the purpose of the Plan except as to
such shares, if any, as shall have been granted or transferred
to him or her. Nothing in the Plan shall preclude the awarding
or granting of shares of the Company to employees under any
other plan or arrangement now or hereafter in effect.
3. “Subsidiary” means any company
in which more than fifty percent (50%) of the total combined
voting power of all classes of stock is owned, directly or
indirectly, by the Company or, if the company does not issue
stock, more than fifty percent (50%) of the total combined
ownership interest is owned, directly or indirectly, by the
Company. In addition, the Board may designate for participation
in the Plan as a “subsidiary,” except for the granting
of incentive stock options,
F-8
Performance Award to be granted to the
Participant if performance is at or above the specified
Performance Objectives. Such additional award shall also be
established as a percentage of the Performance Award. The
Committee may decrease a Performance Award as determined by the
Performance Objectives, but in no case may the Committee
increase any Performance Award as determined by the Performance
Objectives.
(c)
The maximum Performance Award that may be granted
to any Participant for any one-year Performance Period shall not
exceed $20,000,000 or 800,000 shares of Common Stock (the
“Annual Maximum”). The maximum Performance Award that
may be granted to any Participant for a Performance Period
greater than one year shall not exceed the Annual Maximum
multiplied by the number of full years in the Performance Period.
4. Notwithstanding anything to the contrary
in the Plan, stock options and stock appreciation rights granted
hereunder shall vest immediately and any conditions or
restrictions on Common Stock shall lapse upon a “Change in
Control.” A “Change in Control” shall mean the
occurrence of any of the following:
F-9
(a)
An acquisition (other than directly from the
Company) of any voting securities of the Company (the
“Voting Securities”) by any “Person” (as the
term person is used for purposes of Section 13(d) or 14(d)
of the Exchange Act), immediately after which such Person has
“Beneficial Ownership” (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of twenty
percent (20%) or more of the then outstanding shares or the
combined voting power of the Company’s then outstanding
Voting Securities; provided, however, in determining
whether a Change in Control has occurred pursuant to this
Paragraph 4(a), shares or Voting Securities which are
acquired in a “Non-Control Acquisition” (as
hereinafter defined) shall not constitute an acquisition which
would cause a Change in Control. A “Non-Control
Acquisition” shall mean an acquisition by (i) an
employee benefit plan (or a trust forming a part thereof)
maintained by (A) the Company or (B) any corporation
or other Person of which a majority of its voting power or its
voting equity securities or equity interest is owned, directly
or indirectly, by the Company (for purposes of this definition,
a “Related Entity”), (ii) the Company or any
Related Entity, or (iii) any Person in connection with a
“Non-Control Transaction” (as hereinafter defined);
(b)
The individuals who, as of July 10, 2001 are
members of the Board (the “Incumbent Board”), cease
for any reason to constitute at least half of the members of the
Board; or, following a Merger (as hereinafter defined) which
results in a Parent Corporation (as hereinafter defined), the
board of directors of the ultimate Parent Corporation;
provided, however, that if the election, or nomination
for election by the Company’s common stockholders, of any
new director was approved by a vote of at least two-thirds of
the Incumbent Board, such new director shall, for purposes of
the Plan, be considered as a member of the Incumbent Board;
provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual
initially assumed office as a result of either an actual or
threatened “Election Contest” (as described in
Rule 14a-11 promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board (a “Proxy
Contest”) including by reason of any agreement intended to
avoid or settle any Election Contest or Proxy Contest; or
(c)
The consummation of:
(i)
A merger, consolidation or reorganization with or
into the Company or in which securities of the Company are
issued (a “Merger”), unless such Merger is a
“Non-Control Transaction.” A “Non-Control
Transaction” shall mean a Merger where:
(A)
the stockholders of the Company, immediately
before such Merger own directly or indirectly immediately
following such Merger at least fifty percent (50%) of the
combined voting power of the outstanding voting securities of
(x) the corporation resulting from such Merger (the
“Surviving Corporation”) if fifty percent (50%) or
more of the combined voting power of the then outstanding voting
securities of the Surviving Corporation is not Beneficially
Owned, directly or indirectly by another Person (a “Parent
Corporation”), or (y) if there is one or more Parent
Corporations, the ultimate Parent Corporation;
Notwithstanding the foregoing, a Change in
Control shall not be deemed to occur solely because any Person
(the “Subject Person”) acquired Beneficial Ownership
of more than the permitted amount of the then outstanding shares
or Voting Securities as a result of the acquisition of shares or
Voting Securities by the Company which, by reducing the number
of shares or Voting Securities then outstanding, increases the
proportional number of shares Beneficially Owned by the Subject
Persons, provided that if a Change in Control would occur (but
for the operation of this sentence) as a result of the
acquisition of shares or Voting Securities by the Company, and
after such share acquisition by the Company, the Subject Person
becomes the Beneficial Owner of any additional shares or Voting
Securities which increases the percentage of the then
outstanding shares or Voting Securities Beneficially Owned by
the Subject Person, then a Change in Control shall occur.
5. The term “Special Separation”
shall mean any termination of employment that occurs prior to
the time a Participant is eligible to retire, except a
termination for cause or a voluntary resignation that is not
initiated or encouraged by the Company.
6. The term “Retirement” shall
mean: (a) retirement in accordance with the provisions of
any appropriate retirement plan of the Company or any of its
subsidiaries; or (b) termination of employment under the
permanent disability provision of any retirement plan of the
Company or any of its subsidiaries.
ARTICLE M — Consent.
Every Participant who receives a stock option,
stock appreciation right, RSU, or grant of shares pursuant to
the Plan shall be bound by the terms and provisions of the Plan
and of the stock option, stock appreciation right, RSU, or grant
of shares agreement referable thereto, and the acceptance of any
stock option, stock appreciation right, RSU, or grant of shares
pursuant to the Plan shall constitute a binding agreement
between the Participant and the Company and its subsidiaries and
any successors in interest to any of them. Every Person who
receives a stock option, stock appreciation right, RSU, or grant
of shares from a Participant pursuant to the Plan shall, in
addition to such terms and conditions as the Committee may
require upon such grant, be bound by the terms and provisions of
the Plan and of the stock option, stock appreciation right, RSU,
or grant of shares agreement referable thereto, and the
acceptance of any stock option, stock appreciation right, RSU,
or grant of shares by such Person shall constitute a binding
F-10
(B)
the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such Merger constitute at least half of the
members of the board of directors of (x) the Surviving
Corporation, if there is no Parent Corporation, or (y) if
there is one or more Parent Corporations, the ultimate Parent
Corporation; and
(C)
no Person other than (1) the Company,
(2) any Related Entity, (3) any employee benefit plan
(or any trust forming a part thereof) that, immediately prior to
such Merger was maintained by the Company or any Related Entity,
or (4) any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of
twenty percent (20%) or more of the then outstanding Voting
Securities or shares, has Beneficial Ownership of twenty percent
(20%) or more of the combined voting power of the outstanding
voting securities or common stock of (x) the Surviving
Corporation if there is no Parent Corporation, or (y) if
there is one or more Parent Corporations, the ultimate Parent
Corporation;
(ii)
A complete liquidation or dissolution of the
Company; or
(iii)
The sale or other disposition of all or
substantially all of the assets of the Company to any Person
(other than a transfer to a Related Entity or under conditions
that would constitute a Non-Control Transaction with the
disposition of assets being regarded as a Merger for this
purpose or the distribution to the Company’s stockholders
of the stock of a Related Entity or any other assets).
ARTICLE N — Purchase of Shares
or Stock Options.
The Committee may authorize any Participant to
convert cash compensation otherwise payable to such Participant
into stock options or shares of Common Stock under the Plan upon
such terms and conditions as the Committee, in its discretion,
shall determine. Notwithstanding the foregoing, in any such
conversion the shares of Common Stock shall be valued at no less
than one hundred percent (100%) of their fair market value.
ARTICLE O — Duration of
Plan.
The Plan will terminate on July 10, 2011
unless a different termination date is fixed by the shareholders
or by action of the Board of Directors, but no such termination
shall affect the prior rights under the Plan of the Company (or
any subsidiary) or of anyone to whom stock options or stock
appreciation rights were granted prior thereto or to whom shares
or RSUs have been transferred prior to such termination.
ADDITIONAL INFORMATION
Any shares of Common Stock of the Company awarded
as a portion of a participant’s remuneration shall be
valued at not less than one hundred percent (100%) of the fair
market value of the Company’s Common Stock on the date of
the award. These shares may be subject to such conditions or
restrictions as the Committee may determine, including a
requirement that the participant remain in the employ of the
Company or one of its subsidiaries for a set period of time, or
until retirement. Failure to abide by any applicable restriction
will result in forfeiture of the shares.
With regard to tax effects which may accrue to
the optionee, counsel advises that if the optionee has
continuously been an employee from the time an option has been
granted until at least three months before it is exercised,
under existing law no taxable income results to the optionee
from the exercise of an incentive stock option at the time of
exercise. However, the spread at exercise is an
“adjustment” item for alternative minimum tax purposes.
Any gain realized on the sale or other
disposition of stock acquired on exercise of an incentive stock
option is considered as long-term capital gain for tax purposes
if the stock has been held more than two years after the date
the option was granted and more than one year after the date of
exercise of the option. If the stock is disposed of within one
year after exercise, the lesser of any gain on such disposition
or the spread at exercise (i.e., the excess of the fair market
value of the stock on the date of exercise over the option
price) is treated as ordinary income, and any appreciation after
the date of exercise is considered long-term or short-term
capital gain to the optionee depending on the holding period
prior to sale. However, the spread at exercise (even if greater
than the gain on the disposition) is treated as ordinary income
if the disposition is one on which a loss, if sustained, is not
recognized — e.g., a gift, a “wash” sale or
a sale to a related party. The amount of ordinary income
recognized by the optionee is treated as a tax deductible
expense to the Company. No other amount relative to an incentive
stock option is a tax deductible expense to the Company.
With regard to tax effects which may accrue to
the optionee, counsel advises that under existing tax law gain
taxable as ordinary income to the optionee is deemed to be
realized at the date of exercise of the option, the gain on each
share being the difference between the market
F-11
1.
Shares Awarded as a Portion of
Remuneration
2.
U.S. Tax Effects
Incentive Stock Options
Nonstatutory Stock Options
With regard to tax effects which may accrue to
the recipient, counsel advises that “United States
persons,” as defined in the Internal Revenue Code of 1986
(the “I.R.C.”), must recognize ordinary income as of
the date of exercise equal to the amount paid to the recipient,
i.e., the difference between the grant price and the value of
the shares on the date of exercise.
With regard to tax effects which may accrue to
the recipient, counsel advises that “United States
persons” as defined in the Internal Revenue Code of 1986
(the “I.R.C.”), must recognize ordinary income in the
first taxable year in which the recipient’s rights to the
stock are transferable or are not subject to a substantial risk
of forfeiture, whichever is applicable. Recipients who are
“United States persons” may also elect to include the
income in their tax returns for the taxable year in which they
receive the shares by filing an election to do so with the
appropriate office of the Internal Revenue Service within
30 days of the date the shares are transferred to them.
The amount includable in income is the fair
market value of the shares as of the day the shares are
transferable or not subject to a substantial risk of forfeiture,
whichever is applicable; if the recipient has elected to include
the income in the year in which the shares are received, the
amount of income includable is the fair market value of the
shares at the time of transfer.
For non-United States persons, the time when
income is realized, its measurement and its taxation, will
depend on the laws of the particular countries in which the
recipients are residents and/or citizens at the time of transfer
or when the shares are first transferable and not subject to a
substantial risk of forfeiture, as the case may be. “United
States persons” who receive shares awarded as a portion of
remuneration may also have tax consequences with respect to the
receipt of shares or the expiration of restrictions or
substantial risk of forfeiture on such shares under the laws of
the particular country other than the United States of which
such person is a resident or citizen.
Notwithstanding the above advice received by the
Company, it is each individual recipient’s responsibility
to check with his or her personal tax adviser as to the tax
effects and proper handling of stock options, stock appreciation
rights, restricted stock units and Common Stock acquired. The
above advice relates specifically to the U.S. consequences
of stock options, stock appreciation rights and Common Stock
acquired, including the U.S. consequences to
“United States persons” whether or not resident
in the U.S. In addition to U.S. tax consequences, for
all persons who are not U.S. residents, the time when
income, if any, is realized, the measurement of such income and
its taxation will also depend on the laws of the particular
country other than the U.S. of which such persons are
resident and/or citizens at the time of grant or the time of
exercise, as the case may be.
The Plan is not subject to the qualification
requirements of Section 401(a) of the I.R.C.
The Plan is not subject to the provisions of the
Employee Retirement Income Security Act of 1974
(“ERISA”), as amended.
F-12
Stock Appreciation Rights
Shares Awarded as a Portion of
Remuneration
3.
Employee Retirement Income Security Act of
1974
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#0038-7125
OF
SHAREHOLDERS
AND
ADMISSION TICKET
Annual Meeting of Shareholders-Tuesday, October 10, 2006
The Procter & Gamble Company P.O. Box 5572 Cincinnati, OH 45201-5572 |
VOTE BY INTERNET — www.proxyvote.com Use the Internet to transmit your voting instructions anytime before 11:59 p.m. on October 9, 2006. Have your proxy/voting instruction card in hand when you access the web site and follow the instructions on the website. |
|
| VOTE BY PHONE — 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions anytime before 11:59 p.m. on October 9, 2006. Have your proxy/voting instruction card in hand when you call and follow the instructions the vote voice provides you. |
||
| VOTE BY MAIL Mark, sign, and date your proxy/voting instruction card and return it in the postage-paid envelope we have provided or return it to The Procter & Gamble Company, c/o ADP, 51 Mercedes Way, Edgewood, NY 11717. |
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
|
KEEP THIS PORTION FOR YOUR RECORDS | |
| DETACH AND RETURN THIS PORTION ONLY | ||
| Vote on Directors | ||||||||||
| The Board of Directors recommends a vote FOR the following action: | ||||||||||
1.
|
ELECTION OF DIRECTORS (terms expiring in 2007) Nominees: 01) Norman R. Augustine, 02) A. G. Lafley, 03) Johnathan A. Rodgers, 04) John F. Smith, Jr. and 05) Margaret C. Whitman | For All o |
Withhold All o |
For All Except o |
To withhold authority to vote, mark “For All Except” and write the nominee’s number on the line below. | |||||
| Vote on Proposals | For | Against | Abstain | |||||
| The Board of Directors recommends a vote FOR the following proposals: | ||||||||
2.
|
Approve amendment to the Code of Regulations to decrease the Authorized Number of Directors on the Board | o | o | o | ||||
3.
|
Ratify Appointment of the Independent Registered Public Accounting Firm | o | o | o | ||||
4.
|
Reapprove and Amend the Material Terms of the Performance Criteria Under the Procter & Gamble 2001 Stock and Incentive Compensation Plan | o | o | o | ||||
| For | Against | Abstain | ||||||
| The Board of Directors recommends a vote AGAINST the following proposal: | ||||||||
5.
|
Shareholder Proposal – Award no Future Stock Options | o | o | o | ||||
For address changes and/or
comments, please check this
box and write them on the back
where indicated
|
o | |||||
| Yes | No | |||||
HOUSEHOLDING ELECTION – Please
indicate if you consent to
receive certain future
investor communications in a
single package per household.
|
o | o | NOTE: Please sign exactly as name(s) appear(s) hereon. When signing as attorney, executor, administrator, trustee, or guardian, please give full title as such. |
Signature [PLEASE SIGN WITHIN BOX]
|
Date | Signature (Joint Owners) | Date |
| THE PROCTER & GAMBLE COMPANY |
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