NOTICE OF ANNUAL MEETING

 

AND

 

PROXY STATEMENT

 

2007

 

 

October 31, 2007

 

Dear Fellow Stockholders:

 

On behalf of the Board of Directors, it is my pleasure to invite you to Dell’s 2007 Annual Meeting of Stockholders. The meeting will be held on Tuesday, December 4, 2007, at 8:00 a.m. Central Time, at our Round Rock Campus, Building One, at 401 Dell Way, Round Rock, Texas 78682. For your convenience, we are also offering a Webcast of the meeting. If you choose to view the Webcast, go to www.dell.com/investor shortly before the meeting time and follow the instructions provided. If you miss the meeting, you can view a replay of the Webcast on that site.

 

You will find information regarding the matters to be voted on in the attached Notice of Annual Meeting of Stockholders and Proxy Statement. A copy of our Annual Report on Form 10-K for Fiscal 2007 is enclosed with these materials. You may visit www.dell.com/investor to access an interactive Fiscal 2007 Year-in- Review, as well as various Web-based reports, executive messages, and timely information on Dell’s global business.

 

This meeting is for Dell stockholders. If you attend the meeting in person, you will need the admission ticket found on the back page of this proxy statement or an account statement showing your ownership of Dell stock and proper photo identification for entry into the meeting. If you have received your materials electronically, you may print the ticket on the last page.

 

Whether or not you plan to attend the meeting in person, please submit your vote using one of the voting methods described in the attached materials. Submitting your vote by any of these methods will not affect your right to attend the meeting and vote in person should you so choose, although if you are a beneficial stockholder, you must obtain a legal proxy from the record holder.

 

If you have any questions concerning the meeting, please contact our Investor Relations Department at 512-728-7800 or Investor_Relations@dell.com. For questions regarding your stock ownership, you may contact our transfer agent, American Stock Transfer & Trust Company, at 800-937-5449 or www.amstock.com.

 

Sincerely,

 

Michael S. Dell

Chairman of the Board and Chief Executive Officer

 

TABLE OF CONTENTS

 

DELL INC.
One Dell Way
Round Rock, Texas 78682

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

 

 

Stockholders will also transact any other business properly brought before the meeting. At this time, the Board of Directors knows of no other proposals or matters to be presented.

 

This Notice of Annual Meeting and Proxy Statement is accompanied by a copy of the Annual Report on Form 10-K for Fiscal 2007.

 

On behalf of the Board of Directors:

 

Lawrence P. Tu, Secretary

October 31, 2007

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Webcast of Annual Meeting

 

 

We are pleased to offer a Webcast of our 2007 annual meeting, and viewers, like attendees, will have the ability to ask questions online during the question and answer session. If you choose to view the Webcast, go to www.dell.com/investor shortly before the meeting time and follow the instructions provided. If you miss the meeting, you can view a replay of the Webcast on that site.

 

Please note that you will not be able to vote your shares via the Webcast. If you plan to view the Webcast, please submit your vote using one of the methods described in these materials by 11:59 pm, Eastern Time, on December 3, 2007.

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PROXY STATEMENT

 

This Proxy Statement is furnished in connection with the solicitation of proxies by Dell Inc., on behalf of the Board of Directors, for the 2007 Annual Meeting of Stockholders. This Proxy Statement and the related proxy form are being distributed on or about November 5, 2007.

 

You can vote your shares using one of the following methods:

 

 

Internet and telephone voting are available 24 hours a day, and if you use one of those methods, you do not need to return a proxy or voting instruction card. Unless you are planning to vote at the meeting, your vote must be received by 11:59 p.m., Eastern Time, on December 3, 2007.

 

Even if you submit your vote by one of the first three methods mentioned above, you may still vote at the meeting if you are the record holder of your shares or hold a legal proxy from the record holder. See “Additional Information — Voting by Street Name Holders.” Your vote at the meeting will constitute a revocation of your earlier voting instructions.

 

Stockholders are being asked to consider five proposals at the meeting. The following is a summary of the proposals and the voting recommendations of the Board of Directors:

 

SUMMARY OF PROPOSALS

 

 

The details of each proposal are set forth below.

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Proposal 1 — Election of Directors

 

 

The first proposal to be voted on at the meeting is the election of directors. The directors elected at this meeting will serve until next year’s annual meeting. The Board of Directors has nominated all of the current directors for re-election to the Board. Those nominees are:

 

• Donald J. Carty • William H. Gray, III • Alan (A.G.) Lafley • Thomas W. Luce, III • Alex J. Mandl • Sam Nunn		• Michael S. Dell • Sallie L. Krawcheck • Judy C. Lewent • Klaus S. Luft • Michael A. Miles

 

Biographical information about each of the nominees is included under “Director Information” below.

 

The Board of Directors recommends a vote “FOR” all nominees.

 

If a nominee becomes unable or unwilling to accept nomination or election, the Board will either select a substitute nominee or reduce the size of the Board. If you have submitted a proxy and a substitute nominee is selected, your shares will be voted for the election of the substitute nominee.

 

The Board has no reason to believe that any nominee would be unable or unwilling to serve if elected.

 

According to the Bylaws, each of the above-named nominees will be elected to the Board if he or she receives affirmative (“FOR”) votes from the holders of a majority of the shares of common stock represented at the meeting and entitled to vote. Under our Corporate Governance Principles, if a nominee fails to receive the requisite majority vote, he or she will be required to submit his or her resignation. Any tendered resignation will be evaluated by the remaining independent directors. In determining whether to accept or reject the resignation, or take other action, the Board may consider all factors it deems relevant. The Board will act on the tendered resignation, and will publicly disclose its decision and rationale, within 90 days following certification of the stockholder vote.

 

 

Director Information

 

Set forth below is biographical and other information about the persons who will make up the Board following the meeting, assuming election of the nominees named above.

 

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Corporate Governance

 

 

Corporate Governance Principles — The Board of Directors believes that adherence to sound corporate governance policies and practices is important in ensuring that our company is governed and managed with the highest standards of responsibility, ethics, and integrity and in the best interests of the stockholders. The Board maintains a set of Corporate Governance Principles intended to reflect a set of core values that

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provide the foundation for our governance and management systems and our interactions with others. A copy of those principles can be found on our website at www.dell.com/corporategovernance.

 

Director Independence — The Board of Directors believes that the interests of the stockholders are best served by having a substantial number of objective, independent representatives on the Board. For this purpose, a director will be considered to be “independent” only if the Board affirmatively determines that the director does not have any direct or indirect material relationship with Dell that may impair, or appear to impair, the director’s ability to make independent judgments.

 

The Board has recently evaluated all relationships between each director and Dell and has made the following determinations with respect to each director’s independence:

 

 

 

 

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The Board will continue to monitor the standards for director independence established under applicable law or NASDAQ listing requirements and will ensure that our Corporate Governance Principles continue to be consistent with those standards.

 

Board Committees — The Board maintains the following committees to assist it in discharging its oversight responsibilities. The current membership of each committee is indicated above with their biographical information.

 

 

The Audit Committee is comprised entirely of directors who satisfy the standards of independence established under our Corporate Governance Principles, as well as additional or supplemental independence standards applicable to audit committee members established under applicable law and NASDAQ listing requirements. The Board has determined that each Audit Committee member meets the NASDAQ “financial literacy” requirement and that Mr. Mandl is a “financial expert” within the meaning of the current rules of the Securities and Exchange Commission.

 

 

The Governance and Nominating Committee’s policies and processes for identifying, evaluating, and selecting director candidates, including candidates recommended by stockholders are set forth in “Additional Information — Director Nomination Process” below.

 

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Each committee is governed by a written charter approved by the full Board. These charters form an integral part of the Corporate Governance Principles, and a copy of each charter can be found on our website at www.dell.com/corporategovernance.

 

Meetings and Attendance — During Fiscal 2007, the full Board held 9 meetings, the Audit Committee met 28 times, the Leadership Development and Compensation Committee met 6 times, the Governance and Nominating Committee met 4 times, and the Finance Committee met 4 times. All directors attended at least 75% of the meetings of the full Board and the meetings of the committees on which they served.

 

It is our policy that each director is expected to attend the annual meeting of stockholders, and that policy has been incorporated into our Corporate Governance Principles. All directors attended last year’s annual meeting with the exception of Ms. Lewent.

 

Communicating with Directors — Stockholders may send communications to the Board of Directors as a whole, the independent directors as a group, any Board committee, the Presiding Director, or any other individual member of the Board. Any stockholder who wishes to send such a communication may obtain the appropriate contact information at www.dell.com/boardofdirectors. The Board has implemented procedures for processing stockholder communications, and a description of those procedures can also be found at www.dell.com/boardofdirectors.

 

Director Compensation

 

Mr. Dell and Mr. Carty are currently the only members of the board who are also Dell employees, and they do not receive any additional compensation for serving on the Board. Kevin B. Rollins, the company’s former President and Chief Executive Officer, served as a member of the Board during Fiscal 2007 but received no additional compensation for such service. This section describes the compensation earned by Mr. Carty during Fiscal 2007 in his capacity as a director and prior to his becoming an executive officer. Details regarding Mr. Carty’s compensation as an executive officer can be found under “Executive Compensation” below.

 

Annual Retainer Fee — Each non-employee director receives an annual retainer fee, which was $75,000 during Fiscal 2007. In addition, the chair of the Audit Committee receives an additional annual retainer of $20,000; the chair of each of the other Board committees receives an additional annual retainer of $15,000; and the Presiding Director receives an additional annual retainer of $15,000 if he or she is not the chair of a Board committee. Each director can receive the retainer in cash, defer all or a portion into a deferred compensation plan, or receive fair market value stock options or restricted stock in lieu of cash. Amounts deferred into the deferred compensation plan are payable in a lump sum or in installments beginning upon termination of service as a director. The number of options or shares of restricted stock received in lieu of the annual retainer fee (or the method of computing the number) and the terms and conditions of those awards are determined from time to time by the Leadership Development and Compensation Committee. The annual retainers are payable at the first Board meeting after the annual stockholders’ meeting for all members elected by the stockholders. For new members appointed by the Board, the retainer is payable at the first Board meeting attended by the new director.

 

Option and Stock Awards — The non-employee directors are also eligible for stock option and restricted stock awards. The number of options and shares awarded, as well as the other terms and conditions of the awards (such as vesting and exercisability schedules and termination provisions), are generally within the discretion of the Leadership Development and Compensation Committee, except that (a) no non-employee director may receive awards (not including awards in lieu of annual cash retainer) covering more than 50,000 shares of common stock in any year (other than the year the director joins the Board, when the limit is two times the normal annual limit), (b) no more than 20% of the awards granted to a non-employee director during a year (not including awards in lieu of annual cash retainer) may consist of restricted stock, (c) the exercise price of any option cannot be less than the fair market value of the common stock on the date of grant, and (d) no option can become exercisable, and no share of restricted

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stock can become transferable, earlier than six months from the date of grant. If Proposal 3 is approved by the stockholders, the restriction described in clause (b) above will be removed, giving the Leadership Development and Compensation Committee authority to approve any mix of restricted stock and stock options, subject to the other conditions.

 

Option and restricted stock awards are granted at the first Board meeting after the annual stockholders’ meeting for all members elected by the stockholders. For new members appointed by the Board, option and restricted stock awards are granted on the date of the first Board meeting attended by the new director.

 

Other Benefits — We reimburse directors for their reasonable expenses associated with attending Board meetings and provide them with liability insurance coverage for their activities as directors.

 

Under our Certificate of Incorporation and Bylaws, the directors are entitled to indemnification from Dell to the fullest extent permitted by Delaware corporate law. We have also entered into indemnification agreements with each of the non-employee directors. Those agreements do not increase the extent or scope of the indemnification provided, but were entered into to establish processes and procedures for indemnification claims.

 

Director Compensation During Fiscal 2007 — The following table sets forth the compensation paid to the non-employee directors for Fiscal 2007.

 

 

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The following table sets forth the number of shares covered by awards made in Fiscal 2007. All of these awards, other than those made to Mr. Luce, were made on July 21, 2006, the date of the first Board meeting following last year’s annual meeting of stockholders. The awards to Mr. Luce were made on December 7, 2006, the date of the first Board meeting Mr. Luce attended after his reappointment to the Board in September 2006.

 

 

The restricted stock included in the Annual Restricted Stock Award column and the New Director Restricted Stock Award column vests ratably over five years (20% per year), so long as the director remains a member of the Board. The portion that is unvested at the time the director ceases to be a member of the Board (other than by reason of death or permanent disability) is forfeited. All unvested restricted stock vests immediately upon death or permanent disability. The grant date fair value for these awards, computed in accordance with SFAS 123(R), was $77,105 for each of the Annual Restricted Stock Awards; $154,211 for each of the New Director Restricted Stock Awards granted to Ms. Krawcheck and Mr. Lafley; and $154,206 for the New Director Restricted Stock Award granted to Mr. Luce.

 

The stock options included in the Annual Stock Option Award column and the New Director Stock Option Award column vest ratably over five years (20% per year), so long as the director remains a member of the Board. The portion that is unvested at the time the director ceases to be a member of the Board (other than by reason of death or permanent disability) terminates. All unvested options vest immediately upon death or permanent disability. The options terminate ten years from the date of grant unless terminated earlier as follows: all options (vested and unvested) terminate immediately if the director resigns at the request or demand of the Board or is otherwise removed from the Board; if the director ceases to be a member of the Board by reason of death, permanent disability, or retirement after attaining the age of 72, vested options remain exercisable for one year; if the director resigns for any other reason, vested options remain exercisable for 90 days. The options are transferable to family members under specified conditions. The exercise price of the options is the fair market value of Dell common stock on the date of grant ($26.36 for the award to Mr. Luce on December 7, 2006, and $19.55 for the awards to the other non-employee directors on July 21, 2006). The grant date fair value for these awards, computed in accordance with SFAS 123(R), was $104,367 for each of the Annual Stock Option Awards; $208,735 for each of the New Director Stock Option Awards granted to Ms. Krawcheck and Mr. Lafley; and $174,884 for the New Director Stock Option Award granted to Mr. Luce.

 

The restricted stock included in the Restricted Stock in Lieu of Retainer column was granted pursuant to the director’s election to receive restricted stock in lieu of some or all of the $75,000 annual cash retainer. This stock was fully vested at grant, but may not be sold or transferred for six months following the grant. The number of shares was determined by dividing the foregone retainer amount by the fair market value of Dell common stock on the date of grant ($19.55). The grant date fair value for these awards, computed in accordance with SFAS 123(R), was equal to the amount of the foregone retainer ($37,500 in the case of Mr. Gray and $75,000 in the case of each other director who elected this option).

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The following table sets forth the number of shares of restricted stock and the number of shares underlying stock options held by each of the non-employee directors as of the end of Fiscal 2007:

 

 

The information for Mr. Carty reflects awards he received in his capacity as a director, prior to becoming an executive officer. For information regarding awards he received as an executive officer, see “Executive Compensation” below.

 

 

Proposal 2 — Ratification of Independent Auditor

 

The Audit Committee has selected PricewaterhouseCoopers LLP as our independent auditor for Fiscal 2008, and the Board is asking stockholders to ratify that selection. Although current law, rules, and regulations, as well as the Charter of the Audit Committee, require our independent auditor to be engaged, retained, and supervised by the Audit Committee, the Board considers the selection of an independent auditor to be an important matter of stockholder concern and considers a proposal for stockholders to ratify such selection to be an important opportunity for stockholders to provide direct feedback to the Board on an important issue of corporate governance.

 

The Board of Directors recommends a vote “FOR” the ratification of PricewaterhouseCoopers LLP as Dell’s independent auditor for Fiscal 2008.

 

In accordance with our Bylaws, approval of this proposal requires the affirmative vote of a majority of the shares of common stock represented at the meeting and entitled to vote.

 

PricewaterhouseCoopers LLP is a registered public accounting firm and has been our independent auditor since 1986. In addition to retaining PricewaterhouseCoopers LLP to audit our financial statements, we engage the firm from time to time to perform other services. The following table sets forth all fees we incurred in connection with professional services rendered by PricewaterhouseCoopers LLP during each of the last two fiscal years (in millions).

 

 

 

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The Audit Committee has determined that the provision of the non-audit services described in note (c) above was compatible with maintaining the independence of PricewaterhouseCoopers LLP.

 

All Fiscal 2007 and Fiscal 2006 services were pre-approved by the Audit Committee. The Audit Committee has adopted a policy requiring pre-approval by the committee of all services (audit and non-audit) to be provided by our independent auditor. In accordance with that policy, the Audit Committee has given its approval for the provision of audit services by PricewaterhouseCoopers LLP for Fiscal 2008 and has also given its approval for up to a year in advance for the provision by PricewaterhouseCoopers LLP of particular categories or types of audit-related, tax, and permitted non-audit services. In cases where the Audit Committee’s pre-approval is not covered by one of those approvals, a designated member of the Audit Committee has the delegated authority to pre-approve the provision of services, and such pre-approvals are then communicated to the full Audit Committee.

 

Representatives of PricewaterhouseCoopers LLP will be present at the meeting to respond to appropriate questions, and they will have an opportunity to make a statement if they desire to do so.

 

Proposal 3 — Approval of the Amended and Restated 2002 Long-Term Incentive Plan

 

Stockholders approved the 2002 Long-Term Incentive Plan in July 2002. Under that plan, the Leadership Development and Compensation Committee has authority to choose performance goals for use in connection with each annual award from among a selection of goals set forth in the plan. Section 162(m) of the Internal Revenue Code requires that the material terms of the performance goals be disclosed to and reapproved by stockholders every five years. Consequently, we need to again obtain stockholder approval of the performance measures in order for the plan to continue to qualify as “performance-based” for purposes of Section 162(m). Section 162(m) limits the federal income tax deduction a company may take for compensation paid to certain executive officers to $1 million per year unless the compensation is paid pursuant to a “performance-based” plan. Reapproval of the plan will enable us to claim a federal income tax deduction for the compensation paid to our executives.

 

The Leadership Development and Compensation Committee has also approved certain amendments to the plan and has directed that those amendments be submitted to the stockholders for approval. Those proposed amendments are outlined below and are reflected in the Amended and Restated 2002 Long-Term Incentive Plan included as Appendix A.

 

Consequently, in order to approve the performance measures reflected in the plan and to approve the proposed amendments, stockholders are being requested to approve the Amended and Restated 2002 Long-Term Incentive Plan (the “Amended and Restated Plan”). The Amended and Restated Plan will become effective when it is approved by stockholders. If it is not approved by stockholders, the original terms of the plan will continue to apply and we will continue to issue awards under the original plan.

 

The Board of Directors recommends a vote “FOR” the approval of the Amended and Restated 2002 Long-Term Incentive Plan.

 

Approval of the Amended and Restated Plan will (a) renew our ability to grant performance-based compensation awards that comply with the requirements of Section 162(m) of the Internal Revenue Code, thereby preserving our ability to receive tax deductions for these awards, and (b) effect the amendments to the plan described below.

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Approval of the Amended and Restated 2002 Plan requires the affirmative vote of a majority of the shares represented at the meeting and entitled to vote.

 

Proposed Amendments

 

The Leadership Development and Compensation Committee has recommended the following amendments to the original 2002 plan. Each of these proposed amendments has been incorporated into the Amended and Restated Plan.

 

Prohibition on Reload Provisions — No stock option awards granted under the Amended and Restated Plan shall contain any “reload” provision. See Section 4.8 of the Amended and Restated Plan. This amendment is intended to better align the interests of participants with those of other stockholders by encouraging participants to retain their stock options.

 

Non-employee Director Awards — The original 2002 plan contains a restriction that limits restricted awards to a non-employee director to no more than 20% of the total number of shares awarded to the non-employee director each year. This limitation is removed in the Amended and Restated Plan. See Section 4.11 of the Amended and Restated Plan. With the removal of this restriction, the Leadership Development and Compensation Committee is afforded the flexibility to design compensation packages (including the mix of restricted stock vs. stock options) for non-employee directors that are more comparable to other companies, thereby enhancing the committee’s ability to retain and attract qualified Board members.

 

Performance Measures — The Amended and Restated Plan adds “cash flow” to the list of performance measures for incentive-based awards. See Section 5.1 of the Amended and Restated Plan. This addition provides the Leadership Development and Compensation Committee with additional flexibility to tailor performance measures that encourage executives and other participants to achieve cash flow objectives in support of our strategic corporate priorities.

 

Discounted Options — The terms of the original 2002 plan permit the issuance in certain cases of “discounted” stock options (i.e., options with an exercise price that is less than the fair market value of the common stock on the date of grant). The Amended and Restated Plan removes the ability to grant discounted stock options unless the amount of the discount is no more than 15% and the recipient pays or otherwise forgoes value to the company in an amount at least equal to the discount. See Section 4.2 of the Amended and Restated Plan. The Leadership Development and Compensation Committee believes that this better aligns the interests of participants with those of other stockholders.

 

Calculation of the 5% “Unrestricted Pool” — Under the terms of the original 2002 plan, most stock awards have to be subject to a vesting period of at least three years or subject to performance-based vesting over a period of at least one year. However, the plan permitted a certain number of awards (called the “Unrestricted Pool”) to be issued without these minimum conditions. The terms of the original 2002 plan calculated the Unrestricted Pool each year as 5% of the total number of stock awards made during that year. Under the terms of Amended and Restated Plan, the Unrestricted Pool would be calculated as 5% of the total remaining shares to be issued under the 2002 Plan. See Section 3.7 of the Amended and Restated Plan. Changing from an annual calculation to an aggregate calculation will provide the Leadership Development and Compensation Committee flexibility in structuring awards, as well as the ability to compute the number of unrestricted shares with certainty.

 

It is important to note that the Amended and Restated Plan does not increase the number of shares authorized for issuance under the plan.

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Summary Description of the Amended and Restated Plan

 

The following is a brief summary of the material features of the 2002 Long-Term Incentive Plan, as amended by the Amended and Restated Plan. The full text of the plan document is included as Appendix A, and the cross-references below refer to the sections of the plan document.

 

Purpose

 

The purpose of the plan is to align the interests of executives and other participants with those of other Dell stockholders through equity-based compensation alternatives, thereby promoting our long-term financial interests and enhancing long-term stockholder value. The plan will also facilitate our efforts to effectively recruit, motivate, and retain the caliber of executives and other employees essential for our success and provide them with competitive incentive compensation opportunities. (Section 1.1)

 

Administration and Operation

 

The plan is administered by the Leadership Development and Compensation Committee, which has complete and absolute authority to make any and all decisions regarding the administration of the Plan, including the authority to construe and interpret the plan and awards under the plan; establish administrative rules and procedures; select award recipients; determine the type of awards; establish the terms, conditions, and other provisions of awards; and amend, modify, or suspend awards. (Section 2.1) The committee may delegate any of its authority and responsibility to management, except for determinations and decisions regarding awards made to executive officers. (Section 2.1(c))

 

Eligibility

 

The persons eligible to receive awards under the plan include all of our employees, the non-employee directors, and those consultants and advisors to the company whom the committee identifies as having a direct and significant effect on company performance. (Section 2.2(a)) As of the end of Fiscal 2007, we had approximately 82,200 regular employees and nine non-employee directors.

 

Shares Available for Issuance

 

At August 3, 2007, there were approximately 251 million shares of common stock available for issuance pursuant to awards made under the plan. (Section 3.1) If the shares of stock that are subject to an award are not issued or cease to be issuable because the award is terminated, forfeited, or cancelled, those shares will then become available for additional awards. (Section 3.3) The number of shares authorized and available for issuance under the plan will be automatically adjusted in the event of a stock split, stock dividend, recapitalization, spin-off, or similar action. (Section 3.4) On October 30, 2007, the closing sale price of our common stock, as quoted on The NASDAQ Stock Market, was $29.80 per share.

 

Types and Terms of Awards

 

Awards under the plan may take the form of stock options (either incentive stock options or non-qualified options), stock appreciation rights, stock bonuses, restricted stock, restricted stock units, performance units, or performance shares. (Section 4.1) Subject to certain restrictions that are set forth in the plan, the Leadership Development and Compensation Committee has complete and absolute authority to set the terms, conditions, and provisions of each award, including the size of the award, the exercise or base price, the vesting and exercisability schedule (including provisions regarding acceleration of vesting and exercisability), and termination, cancellation, and forfeiture provisions. (Section 4.2(a))

 

The Leadership Development and Compensation Committee is subject to the following specific restrictions regarding the types and terms of awards:

 

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Notwithstanding any other provision of the plan, no stock option can be “repriced” if the effect would be to reduce the exercise price per share. For this purpose, “repricing” includes a tandem cancellation and regrant or any other amendment or action that would have substantially the same effect as decreasing the exercise price. (Section 4.6) In addition, Dell may not make loans to participants for the purpose of paying exercise prices or related taxes. (Section 4.7) No stock option award shall contain any “reload” provision entitling the participant to the automatic grant of additional stock options in connection with any exercise of the original stock option. (Section 4.8)

 

The Leadership Development and Compensation Committee may designate any award as “performance-based compensation” for purposes of Section 162(m) of the Internal Revenue Code, in which case the award must be conditioned on the achievement of one or more of the following “Performance Measures”: total stockholder return (stock price appreciation plus dividends), net income, earnings per share, return on sales, return on equity, return on assets, return on invested capital, increase in the market price of the common stock or other securities, revenues, operating income, operating margin (operating income divided by revenues), cash flow, and Dell’s performance in any of the above measures in comparison to the average performance of the companies included in the Dow Jones Computer Index or successor index or the average performance of the companies used in a self-constructed peer group. (Section 4.4)

 

Awards to Non-Employee Directors

 

The non-employee directors are eligible for stock option and restricted stock awards under the plan. The number of options and shares to be awarded is within the discretion of the Leadership Development and Compensation Committee, except that no non-employee director may receive awards covering more than 50,000 shares of stock in any year (other than the year the director joins the Board, when the limit is two times the normal annual limit). (Section 4.11(a))

 

The Leadership Development and Compensation Committee also has the discretion to permit a non-employee director to elect to receive stock options in lieu of the annual cash retainer fee. The number of options received in lieu of the annual retainer fee (or the method of computing the number) shall be set by the committee. (Section 4.11(b))

 

The Leadership Development and Compensation Committee has the discretion to establish the terms and conditions of awards to the non-employee directors, including vesting and exercisability schedules and termination provisions, subject to the following limitations (Section 4.11(c)):

 

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Other Provisions

 

Change in Control — The committee has the express authority to include in any award terms that provide for the acceleration of vesting and lapse of restrictions, as applicable, upon or following a “Change in Control” of the company. (Section 4.2(a)) “Change in Control” may be defined by the committee from time to time. (Section 5.1(a))

 

Amendments and Termination — The Board or the Leadership Development and Compensation Committee, without the consent or approval of any plan participant, may amend, suspend, or terminate the plan or any award granted under the plan, so long as that action does not materially impair any award then outstanding. Without the approval of stockholders, however, the Board or the Leadership Development and Compensation Committee may not amend the plan to increase the number of shares available for issuance or to modify any of the limitations described in the plan in such a manner as to materially reduce the limitation. (Section 5.2)

 

The Board can terminate the plan at any time. No Awards will be granted under the plan after the tenth anniversary of its effective date. (Section 1.2)

 

Foreign Jurisdictions — If the Leadership Development and Compensation Committee determines that the terms of the plan preclude the achievement of the material purposes of the plan in foreign jurisdictions because of differences in local law, policy, or custom, the committee may modify the terms of the plan, or provide additional terms, to the extent necessary to accommodate those differences. These modifications or additional terms may be reflected in sub-plans, supplements, or alternative versions of the plan. (Section 5.8)

 

Federal Income Tax Consequences

 

The following is a brief description of the material U.S. federal income tax consequences associated with awards under the Amended and Restated Plan. It is based on existing U.S. laws and regulations, and there can be no assurance that those laws and regulations will not change in the future. Tax consequences in other countries may vary.

 

Stock Options — There are no federal income tax consequences to either the company or the participant upon the grant of a stock option. If the option is a non-qualified stock option, the participant will realize ordinary income at exercise equal to the excess of the fair market value of the stock acquired over the exercise price and the company will receive a corresponding federal income tax deduction. Any gain or loss realized upon a subsequent disposition of the stock will generally constitute capital gain.

 

Incentive stock options provide potentially more favorable tax consequences to the participant, but we have never issued incentive stock options under the plan.

 

Restricted Stock — Generally, restricted stock is not taxable to a participant at the time of grant, but instead is included in ordinary income (at its then fair market value) when the restrictions lapse. A participant may elect to recognize income at the time of grant, in which case the fair market value of the stock at the time of grant is included in ordinary income and there is no further income recognition when the restrictions lapse. The company is generally entitled to a tax deduction in an amount equal to the ordinary income recognized by the participant.

 

Other Awards — In the case of other awards, the participant will generally recognize ordinary income in an amount equal to any cash received and the fair market value of any shares received on the date of payment or the date of delivery of the underlying shares, and the company will generally be entitled to a corresponding tax deduction.

 

Section 162(m) Limitation — Under Section 162(m) of the Internal Revenue Code, we may not take a tax deduction for compensation to certain executive officers in excess of $1 million per year, unless the compensation is “performance-based compensation” or qualifies under certain other exceptions. The Amended and Restated Plan contains a number of “Performance Measures” that will be approved by the stockholders upon approval of the plan. See “Types and Terms of Awards” above. To the extent that awards under the plan incorporate one or more of these Performance Measures, the awards should qualify as “performance-based compensation” for purposes of Section 162(m).

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New Plan Benefits

 

The awards that will be granted in the future to eligible participants under the Amended and Restated Plan are subject to the discretion of the Leadership Development and Compensation Committee and, therefore, are not determinable at this time. As noted above, the Amended and Restated Plan, if approved by stockholders, will effect certain amendments to the terms of the original plan. The original plan was effective for Fiscal 2007, and the following table sets forth information regarding awards that were made during Fiscal 2007 under the original plan.

 

 

With the exception of the awards to the non-employee directors (as reflected in the table under “Non-Executive Director Group”), none of the awards made during Fiscal 2007 would have been different had the Amended and Restated Plan been in effect. As discussed under “Proposed Amendments — Non-employee Director Awards” above, the Amended and Restated Plan gives the Leadership Development and Compensation Committee more flexibility in selecting the mix of restricted stock vs. stock options for non-employee directors. Consequently, had the Amended and Restated Plan been in effect during Fiscal 2007, the awards granted to the non-employee directors may have been different than those shown in the table above.

 

Stockholder Proposal 1 — Executive Stock Ownership Guidelines

 

 

The American Federation of State, County and Municipal Employees Pension Plan (the “AFSCME Pension Plan”), which at November 1, 2006, beneficially owned 14,833 shares of Dell common stock, has requested that a proposal regarding adoption of a stock ownership requirement for executive officers be presented for stockholder vote at the annual meeting. The proposal, along with the AFSCME Pension Plan’s supporting statement, is included verbatim below. The AFSCME Pension Plan’s request was submitted by Gerald W. McEntee, Chairman of the AFSCME Pension Plan, 1625 L Street, N.W., Washington, DC 20036.

 

For the reasons set forth following the proposal and supporting statement, management disagrees with the AFSCME Pension Plan’s proposal and supporting statement.

 

The Board of Directors recommends a vote “AGAINST” the AFSCME Pension Plan’s proposal.

 

Approval of the AFSCME Pension Plan’s proposal requires the affirmative vote of a majority of the shares of common stock represented at the meeting and entitled to vote.

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The AFSCME Pension Plan Proposal and Supporting Statement

 

Resolved, that stockholders of Dell Inc. (“Dell”) urge the Executive Compensation Committee of the Board of Directors (the “Committee”) to adopt a policy requiring that senior executives retain a significant percentage of shares acquired through equity compensation programs during their employment, and to report to stockholders regarding the policy before Dell’s 2008 annual meeting of stockholders. The Committee should define “significant” (and provide for exception in extraordinary circumstances) by taking into account the needs and constraints of Dell and its senior executives; however, the stockholders recommend that the Committee not adopt a percentage lower than 75% of net after tax shares. The policy should address the permissibility of transactions such as hedging transactions which are not sales but reduce the risk of loss to the executive.

 

Supporting Statement

 

Equity-based compensation makes up a substantial portion of senior executive compensation at Dell. In fiscal years 2003 through 2005, President and CEO Kevin Rollins were granted 2,650,000 stock options with a grant-date estimated value of $28,982,000. During the same time, Senior Vice President Rosendo Parra was granted 800,000 stock options with a grant-date estimated value of $8,232,000.

 

Dell claims that its compensation program promotes alignment between executive and stockholder long-term interests. Unfortunately, Dell’s generous equity compensation programs have yet to translate into meaningful levels of stock ownership. Despite exercising 2,163,000 options in fiscal years 2003 through 2005 and realizing over $72 million in profits, Dell’s most recent proxy statement disclosed that Mr. Rollins owns 18,465 shares outright, less than one percent of the total he has exercised. Over the same time, Mr. Parra has exercised 1,424,892 options, realizing over $14.8 million in profits, and yet he owns 18,972 shares outright. We believe that the alignment benefits touted by Dell are not being fully realized.

 

Requiring senior executives to hold a significant portion of shares obtained through compensation plans would focus them on Dell’s long-term success and would help align their interests with those of Dell’s stockholders. The recent backdating scandal has, we think, reminded investors of the dangers of a short-term mentality in which executives extract value through equity-based compensation, and then cash out before the effects of their mismanagement becomes apparent to other shareholders.

 

Dell has adopted a stock ownership requirement for directors and executive officers that requires them to own an amount of stock equal to a multiple of their base salary or annual retainer (500% in the case of the CEO). We believe that a retention ratio such as the one suggested in this proposal is superior to an ownership requirement for two reasons. First, a retention requirement ensures that equity compensation translates into equity ownership regardless of how much stock an executive owns. Second, a retention ratio is more flexible and does not require catch-up purchases in the event the company’s stock price falls and causes the executive to be out of compliance with the ownership requirement.

 

We urge stockholders to vote for this proposal.

 

Our Statement in Opposition

 

The Board of Directors is committed to designing, implementing, and administering a compensation program for executive officers that aligns with and supports our business strategy while ensuring an appropriate link between pay, company performance, and results for stockholders.

 

More specifically, the Board seeks to attract and retain the best executive talent by rewarding performance with cost-effective compensation. The Board agrees with the AFSCME Pension Plan that equity ownership by executive officers serves to align the long-term interests of senior executives and stockholders, and also sends a positive message to the investment community about the directors’ and executive officers’ commitment to adding stockholder value. In addition, the Board realizes that equity awards are an

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effective tool for compensation and recruitment of top management talent. In setting stock ownership guidelines, however, the Board must strike an appropriate balance between ensuring that our directors and executive officers have a significant equity stake in the future of the company, while also allowing them to prudently manage their personal financial affairs. Because the executive officers are in a position to directly influence the overall performance of the company, and in alignment with the company’s highly-leveraged pay-for-performance philosophy, a significant portion of their compensation, whether cash or equity, is at risk through short-term and long-term incentive programs. The level of pay at-risk varies for each executive based on level of responsibility, market practices, and internal equity considerations, as well as total share ownership (in the case of Mr. Dell). Adopting the AFSCME Pension Plan’s proposal would limit our ability to offer a significant at-risk cash compensation component because, under the AFSCME Pension Plan’s proposal, most of the equity component would not be available to the executive officers while they remain employed by the company. As a result, we would face the choice of either reducing the equity component awarded to executive officers in favor of cash compensation, or reducing the at-risk portion of cash compensation in favor of increasing salary. Neither alternative would better focus executive officers on our long-term success, nor align their interests with those of the other stockholders. Instead, adopting the AFSCME Pension Plan’s proposal would hinder our flexibility in appropriately linking pay, company performance, and results for stockholders.

 

The Board implemented stock ownership guidelines for themselves and our executive officers that they feel are appropriate for Dell and its stockholders. Under those guidelines, each director and executive officer must maintain the following minimum investment position in Dell stock:

 

 

Persons assuming one of these roles have three years after assuming their position to attain the specified minimum investment position. Unexercised stock options may not be used to satisfy these minimum ownership requirements, but unvested restricted stock or stock units can. As of May 2007, each director and executive officer has met their required stock ownership amount.

 

We believe that our stock ownership guidelines provide a more balanced approach to aligning the long-term interests of directors and executive officers and the other stockholders by requiring directors and executive officers to own meaningful levels of stock based on their retainer or salary, while giving them the ability to manage their personal financial affairs. The AFSCME Pension Plan’s proposal prescribes ownership solely through the retention of stock acquired through our equity compensation plans, and prohibits them from selling a substantial portion until they leave the company. This approach limits the compensatory effect of equity compensation plans, and eventually could incent a person to leave the company in order to sell their shares. In addition, the AFSCME Pension Plan’s proposal provides no guarantee of stock ownership by directors or executive officers until their restricted stock vests or they exercise options. Our stock ownership guidelines, by contrast, require ownership of Dell common stock, which may be acquired through a variety of means, including open market purchases, and set clear and reasonable standards for the amount of stock to be owned by directors and executive officers. In addition, our stock ownership guidelines allow for a significant at risk cash compensation component as part of the total compensation mix.

 

The Board believes that our compensation policies for executive officers and directors have been responsibly implemented, and that the stock ownership guidelines align the interests of directors and executive officers with the long-term interests of stockholders, while still permitting the Board to use equity incentives as part of a balanced approach to compensation that supports the recruitment and retention of top talent.

 

For these reasons, the Board strongly urges Dell stockholders to vote “AGAINST” the AFSCME Pension Plan’s proposal regarding adoption of a stock ownership requirement for executive officers.

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Stockholder Proposal 2 — Declaration of Dividend

 

Mrs. Linda Bush, 7927 Escala Drive, Austin, Texas 78735, a Dell stockholder, has requested that a proposal regarding the declaration of a dividend be presented for stockholder vote at the annual meeting. The proposal, along with Mrs. Bush’s supporting statement, is included verbatim below. The number of shares of Dell stock held by Mrs. Bush will be supplied upon oral or written request to Dell.

 

For the reasons set forth following the proposal and supporting statement, management disagrees with Mrs. Bush’s proposal and supporting statement.

 

The Board of Directors recommends a vote “AGAINST” Mrs. Bush’s proposal.

 

Approval of Mrs. Bush’s proposal requires the affirmative vote of a majority of the shares of common stock represented at the meeting and entitled to vote.

 

Mrs. Bush’s Proposal and Supporting Statement

 

Shareholder Resolution

 

That the Board of Directors declare a quarterly dividend.

 

Supporting Statement

 

The well respected Wharton economist Jeremy Siegel explained that paying dividends is the old-fashioned, time-tested way companies show investors their earnings are real and their bottom line is strong. Dividends provide certainty about the company’s financial wellbeing and they are also an attractive tool for investors looking to secure current income. More recently companies without a dividend history are generally received favorably when they declare new dividends. In addition, the percentage of large companies establishing dividends for the first time is significantly higher now that it has been in the past. The majority of Dell’s competitors all pay dividends. Dividends in mature companies that are no longer growing as rapidly as in the past have been a major component of growth in an investor’s return once the rapid appreciation phase is over. At one point in time, Dell was better served by the current policies of reinvestment in growth and returning capital to stockholders and managing dilution through stock repurchase programs. Now as a more mature value company with significant cash reserves the time is right to declare a quarterly dividend.

 

I urge your support for this issue.

 

Our Statement in Opposition

 

Enhancing the return on investment for Dell stockholders is of the utmost importance to our Board and management. The Board believes that, at the current time, return on investment can best be enhanced by using the company’s cash flow to reinvest in growth and to return capital to stockholders and manage dilution through a stock repurchase program. The Board also believes that maintaining a strong liquidity position is in the stockholders’ best interests and continually strives to balance the company’s liquidity needs with the desire to return capital to stockholders.

 

Reinvestment in Growth — During Fiscal 2007, we spent $895 million on property, plant, and equipment to support global expansion efforts and to fund infrastructure investments to support future growth. During Fiscal 2007, we expanded our global operations with additional customer contact centers in the Philippines, Malaysia, India, and Canada. In addition, a new manufacturing facility in Hortolandia, Brazil

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that was under construction during much of Fiscal 2007 commenced operations in March 2007, and manufacturing facilities in Chennai, India and Lodz, Poland began or will start operating later in Fiscal 2008. During Fiscal 2008, business centers located in Quezon City, Philippines and Malaysia opened or will open, and a second building in Ottawa, Canada will begin operations. A new business center has recently begun operations in Kuala Lumpur. Additionally, expansion of the design centers in China, India, and Taiwan is currently in process. We have been able to fund these capital projects out of operating cash flows, and the Board wants to maintain flexibility in the way the company deploys its available cash.

 

Return of Capital and Management of Dilution — Since 1996, we have had an active stock repurchase program, the objectives of which have been to distribute cash to stockholders and to manage dilution resulting from shares issued under equity compensation plans. As of the end of Fiscal 2007, we had cumulatively repurchased 1.5 billion shares of common stock for an aggregate cost of $28.6 billion. The program as currently approved by the Board authorizes the expenditure of up to an additional $1.4 billion on share repurchases.

 

The Board believes that our stock repurchase program is a highly effective way of returning cash to stockholders and offers several distinct advantages over the payment of dividends, including the following:

 

 

For these reasons, our Board and management believe that the company should continue to return capital to the stockholders through share repurchases rather than dividends.

 

Dividend Consideration — Under Delaware law, the declaration and payment of dividends is within the discretion of the Board, whose members are elected by the stockholders to exercise sound business judgment in deciding such matters. As a part of its fiduciary duties, the Board regularly evaluates whether we should pay a dividend. In making that decision, the Board has considered, and will continue to consider, a variety of factors in an effort to balance the anticipated needs of the company for liquidity, the ability of the company to generate earnings and cash flow, and the most effective means to enhance stockholder value.

 

The Board has determined that, at present, it is in the best interests of the company and the stockholders to continue to use our cash flow to reinvest in growth and to return capital to stockholders and manage dilution through the stock repurchase program. The Board continues, however, to actively review how we deploy our available cash, including the possibility of paying cash dividends in the future.

 

Mrs. Bush submitted the same proposal for stockholder vote in July 2006. Less than 6% of the votes received were in favor of the proposal.

 

For these reasons, the Board strongly urges Dell stockholders to vote “AGAINST” Mrs. Bush’s proposal regarding the declaration of a dividend.

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Executive Officers

 

 

The following table sets forth the name, age, and position of each of the persons who were serving as our executive officers as of October 15, 2007.

 

 

Set forth above is biographical information about each of our executive officers, except for Mr. Dell and Mr. Carty, whose biographical information is included under “Proposal 1 — Director Information” above.

 

Bradley R. Anderson — Mr. Anderson joined us in July 2005 and serves as Senior Vice President, Business Product Group. In this role, he is responsible for worldwide engineering, design, development, and marketing of our enterprise products, including servers, networking, and storage systems. Prior to joining Dell, Mr. Anderson was Senior Vice President and General Manager of the Industry Standard Servers business at Hewlett-Packard Company (“HP”), where he was responsible for HP’s server solutions. Previously, he was Vice President of Server, Storage and Infrastructure for HP, where he led the team responsible for server, storage, peripheral, and infrastructure products. Before joining HP in 1996, Mr. Anderson held top management positions at Cray Research in executive staff, field marketing, sales, finance, and corporate marketing. Mr. Anderson earned a bachelor of science in Petroleum Engineering from Texas A&M University and a Master of Business Administration from Harvard University. He serves on the Texas A&M Look College of Engineering Advisory Council.

 

Paul D. Bell — Mr. Bell has been with us since 1996 and has served as Senior Vice President and President, Americas since March 2007. In this role, Mr. Bell is responsible for all sales, and customer support operations across the Americas region (other than our consumer business). From February 2000 until March 2007, Mr. Bell served as Senior Vice President and President, Europe, Middle East, and Africa. Prior to this, Mr. Bell served as Senior Vice President, Home and Small Business. Prior to joining Dell in July 1996, Mr. Bell was a management consultant with Bain & Company for six years, including two years as a consultant on our account. Mr. Bell received bachelor’s degrees in Fine Arts and Business Administration from Pennsylvania State University and a Master of Business Administration degree from the Yale School of Organization and Management.

 

Michael R. Cannon — Mr. Cannon joined us in February 2007 as President, Global Operations. In this role, he is responsible for our manufacturing, procurement, and supply chain activities worldwide. Prior to joining Dell, Mr. Cannon was President, Chief Executive Officer, and a director of Solectron Corporation from January 2003 to February 2007, and President, Chief Executive Officer, and a director of Maxtor Corporation (now a part of Seagate Technology) from July 1996 to January 2003. Mr. Cannon has also worked at IBM’s Storage Systems Division. He began his career in engineering at The Boeing Company, where he held a management position with the Manufacturing Research and Development organization.

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Mr. Cannon studied mechanical engineering at Michigan State University and completed Harvard Business School’s Advanced Management Program. He currently serves on the board of Adobe Systems.

 

Jeffrey W. Clarke — Mr. Clarke has served as Senior Vice President, Business Product Group since January 2003. In this role, he is responsible for worldwide engineering, design, development, and marketing of our business client products, including Dell OptiPlex^tm Desktops, Latitude^tm Notebooks, Precision^tm Workstations, and Vostro^tm desktops and notebooks. Mr. Clarke joined Dell in 1987 as a quality engineer and has served in a variety of engineering and management roles. In 1995 Mr. Clarke became the director of desktop development, and from November 2001 to January 2003 he served as Vice President and General Manager, Relationship Product Group. Mr. Clarke received a bachelor’s degree in Electrical Engineering from the University of Texas at San Antonio.

 

Andrew C. Esparza — Mr. Esparza joined us in 1997 as a director of Human Resources in the Product Group. He was named Senior Vice President, Human Resources in March 2007 and was named an executive officer in September 2007. In this role, he is responsible for driving the strategy and supporting initiatives to attract, motivate, develop, and retain world-class talent in support of our business goals and objectives. He also has responsibility for corporate security on a worldwide basis. He currently sits on the board of directors for aDellante, our internal networking group responsible for the development of Hispanic employees within the company. Prior to joining Dell, he held human resource positions with NCR Corporation from 1985 until 1997 and Bechtel Power Corporation from 1981 until 1985. Mr. Esparza earned a bachelor’s degree in business administration with a concentration in human resource management from San Diego State University.

 

Stephen J. Felice — Mr. Felice serves as Senior Vice President and President, Asia Pacific-Japan. He was named Senior Vice President in March 2007, after having served as Vice President, Asia Pacific-Japan since August 2005. Mr. Felice leads our operations throughout the APJ region, including sales and customer service centers in Penang, Malaysia, and Xiamen, China. Mr. Felice joined us in February 1999 and has held various executive roles in our sales and consulting services organizations. From February 2002 until July 2005, Mr. Felice was Vice President, Corporate Business Group, Dell Americas. Prior to joining Dell, Mr. Felice served as Chief Executive Officer and President of DecisionOne Corp. Mr. Felice also served as Vice President, Planning and Development, with Bell Atlantic Customer Services. He spent five years with Shell Oil in Houston. Mr. Felice holds a bachelor’s degree in business administration from the University of Iowa and a Master of Business Administration degree from the University of Houston.

 

Ronald G. Garriques — Mr. Garriques joined us in February 2007 as President, Global Consumer Group. In this role he is responsible for all aspects of our consumer business, including sales, marketing, and product design. Before joining Dell, Mr. Garriques served in various leadership roles at Motorola from February 2001 to February 2007, where he was most recently Executive Vice President and President, responsible for the Mobile Devices division. He also was Senior Vice President and General Manager of the Europe, Middle East, and Africa region for the Personal Communications Services division, as well as Senior Vice President and General Manager of Worldwide Products Line Management for the Personal Communications Services division. Prior to joining Motorola, Mr. Garriques held management positions at AT&T Network Systems, Lucent Technologies, and Philips Consumer Communications. Mr. Garriques holds a master’s degree in business administration from The Wharton School at the University of Pennsylvania, a master’s degree in mechanical engineering from Stanford University, and a bachelor’s degree in mechanical engineering from Boston University.

 

Mark Jarvis — Mr. Jarvis joined us in October 2007 as Senior Vice President, Chief Marketing Officer. In this role he is responsible for the company’s global marketing effort, spanning consumer and commercial businesses, including global brand, online, and communications. From April 2007 until October 2007, Mr. Jarvis served as a consultant to Dell in the Chief Marketing Officer role. From 2003 until 2007, Mr. Jarvis served as a marketing consultant to numerous Bay Area startups. From 1989 until 2003, Mr. Jarvis held various roles at Oracle, last serving as Chief Marketing Officer.

 

David A. Marmonti — Mr. Marmonti serves as Senior Vice President and President, Europe, Middle East, and Africa, having been appointed to that position in March 2007. In this role he is responsible for all business operations across the EMEA region, including sales and customer call centers in the region. Mr. Marmonti joined us in 1998 and has held a variety of roles, including Vice President and General Manager of our Public Business Group; Vice President and General Manger of our Mid-Markets and

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Preferred Corporate Accounts segments; Vice President and General Manager of our EMEA Home and Small Business division; Vice President of Marketing & e-business for the U.S. Consumer segment; and Director and General Manger of the U.S. Asset Recovery Business. Prior to joining Dell, Mr. Marmonti spent 16 years at AT&T in a variety of senior roles, including executive positions in sales and marketing, serving corporate customers. Mr. Marmonti holds a bachelor’s degree in business administration and marketing from the University of Missouri at St. Louis.

 

Stephen F. Schuckenbrock — Mr. Schuckenbrock joined us in January 2007 as Senior Vice President and President, Global Services. In September 2007, he assumed the additional role of Chief Information Officer. He is responsible for all aspects of our services business, with worldwide responsibility for Dell enterprise service offerings, and is also responsible for our global information systems and technology structure. Prior to joining us, Mr. Schuckenbrock served as Co-Chief Operating Officer and Executive Vice President of Global Sales and Services for Electronic Data Systems Corporation. Before joining EDS in 2003, he was Chief Operating Officer of The Feld Group, an information technology consulting organization. Mr. Schuckenbrock served as Global Chief Information Officer for PepsiCo from 1998 to 2000. Mr. Schuckenbrock earned a bachelor’s degree in business administration from Elon University.

 

Lawrence P. Tu — Mr. Tu joined us as Senior Vice President, General Counsel and Secretary in July 2004, and is responsible for overseeing Dell’s global legal department and governmental affairs. Before joining Dell, Mr. Tu served as Executive Vice President and General Counsel at NBC Universal for three years. Prior to his position at NBC, he was a partner with the law firm of O’Melveny & Myers LLP, where he focused on high technology, Internet, and media related transactions. He also served five years as managing partner of the firm’s Hong Kong office. Mr. Tu’s prior experience also includes serving as General Counsel Asia-Pacific for Goldman Sachs, attorney for the U.S. State Department, and law clerk for U.S. Supreme Court Justice Thurgood Marshall. Mr. Tu holds Juris Doctor and bachelor of arts degrees from Harvard University, as well as a master’s degree from Oxford University, where he was a Rhodes Scholar.

 

Executive Compensation

 

Compensation Discussion and Analysis

 

Introduction

 

This Compensation Discussion and Analysis is designed to provide stockholders with an understanding of our compensation philosophy, core principles, and decision making process. It discusses the Leadership Development and Compensation Committee’s determinations of how and why, in addition to what, compensation actions were taken for the executive officers who are identified in the Summary Compensation Table below (the “Named Executive Officers”).

 

Specifically, the Leadership Development and Compensation Committee has the responsibilities listed below. For more information about the committee’s role, see the committee’s charter, which can be found on our website at www.dell.com/corporategovernance.

 

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The Leadership Development and Compensation Committee has delegated its authority with respect to compensation decisions for non-executive officer employees to the Chairman and Chief Executive Officer, subject to periodic review by the committee. The sections presented will follow in the order of the duties listed above.

 

Executive Compensation Philosophy and Core Objectives

 

We seek profitable revenue growth in a highly competitive industry that includes several other large branded competitors as well as a number of smaller branded and generic competitors. Our business strategy is evolving as we combine our direct customer model with relevant technologies and solutions, highly efficient manufacturing and logistics, and new distribution channels to reach commercial customers and individual consumers around the world. Accordingly, the Board and the Chief Executive Officer have defined the following four multi-year strategic corporate priorities:

 

 

The Leadership Development and Compensation Committee is committed to and responsible for designing, implementing, and administering a compensation program for executive officers that ensures appropriate linkage between pay, company performance, and results for shareholders. The committee seeks to increase shareholder value by rewarding performance with cost-effective compensation and ensuring that we can attract and retain the best executive talent through adherence to the following core compensation objectives:

 

 

Our compensation programs are designed to reward achievement of corporate priorities, and these programs will change from time to time as necessary to support the corporate priorities and as those priorities change. The specific principles, components, and decisions used in Fiscal 2007 to manage the compensation of executive officers are discussed in more detail below.

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Evaluating Chairman and CEO Performance

 

Process

 

All decisions relating to the compensation of the Chairman and the Chief Executive Officer are made by the Leadership Development and Compensation Committee in executive session, without management present. In assessing the compensation of the Chairman and Chief Executive Officer, the committee considers the performance of the company, the executive’s contribution to that performance, and other factors (including tenure and experience, retention concerns, and historical compensation) in the same manner as for any other executive officer.

 

Results

 

Fiscal 2007 was a challenging year for us in many ways. Increased pressure from competitors combined with poor execution led to an erosion of market share and ultimately culminated in a change of leadership. A number of long-term strategic initiatives, aimed at driving long-term sustainable performance and improving areas such as customer satisfaction, began to show positive results during the year; however, these positive results were overshadowed by our relatively weak financial performance. The compensation actions taken for the Chairman and the Chief Executive Officer and the other Named Executive Officers based on these results are discussed in the next section.

 

Executive Officer Compensation

 

The Total Compensation Package

 

Process — When making individual compensation decisions for executive officers, the committee takes many factors into account, including the individual’s performance, tenure, and experience; the performance of the company overall; any retention concerns; the recommendations of management; the individual’s historical compensation; and comparisons to other executive officers (both those of the company and those of our peer group).

 

Elements of the Total Compensation Package — The key elements of the compensation program for our executive officers are base salary, annual incentive bonus, long-term incentives, and benefits and perquisites.

 

The chart below is representative of the overall pay mix for our Named Executive Officers. The committee takes a holistic approach to executive compensation and balances the individual compensation elements for each executive officer individually. For example, because he is the company’s largest stockholder, Mr. Dell does not receive any long-term incentive compensation.

 

Pay Mix for Named Executive Officers

 

 

Pay Mix — Because executive officers are in a position to directly influence the overall performance of the company, and in alignment with our highly-leveraged pay-for-performance philosophy, a significant portion of their compensation is delivered in the form of performance-dependent, short- and long-term incentive programs. The level of performance-dependent pay varies for each executive based on level of responsibility, market practices, and internal equity considerations, as well as total share ownership.

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Competitive Market Assessment — The Leadership Development and Compensation Committee annually reviews market compensation levels for executive officers at similar high-tech and other large global general industry companies to determine whether the compensation components for our executive officers remain in the targeted ranges described below under “Market Positioning.” With the assistance of the human resources department, management collects and presents to the Leadership Development and Compensation Committee compensation data for the top five most highly-paid executive officers from a list of targeted comparator companies as well as data for all executive officers from published compensation surveys. These compensation surveys include data on high-tech and general industry pay practices for each executive position at companies similar in size and complexity to Dell. The compensation assessment includes an evaluation of base salary, target annual incentive opportunities, long-term incentive grant values, and benefits for each of our executive officers relative to similar positions in the market.

 

Each year, management develops the peer group for evaluating pay for the executive officers (excluding, in Fiscal 2007, Mr. Dell, who served as executive Chairman of the Board) based on those companies with which we compete for talent. The committee reviews and approves the peer group annually using an assessment of sales volumes, market capitalization, employment levels, product mix, and business results. The peer group used to evaluate executive pay practices at the beginning of Fiscal 2007 consisted of the following 23 companies:

 

Because only four of the above comparable companies employ full-time, non-CEO, Chairman of the Board positions, the Leadership Development and Compensation Committee included additional data from other large global general industry companies to evaluate market pay practices for Mr. Dell, who held such a position at Dell for most of Fiscal 2007. Specifically, the comparator group for the Chairman position consisted of 12 companies with annual revenues of at least $10 billion, as follows:

 

Market Positioning — The Leadership Development and Compensation Committee targets base salary and benefits at the median of competitive market practices and variable compensation (annual incentives and the grant value of long-term incentives) at the 75th percentile of the market for each component. The committee believes that above-average overall pay positioning will allow us to attract and retain the appropriate level of executive talent while appropriately rewarding high performance through stretch performance objectives. The actual target compensation for each individual executive may be higher or lower than the targeted market position based on such factors as individual skills, experience, contribution and performance, internal equity, or other factors that the committee may take into account that are relevant to the individual executive. In addition, actual compensation results (e.g., amounts earned and paid each year) may be higher or lower than target based on corporate, regional/business unit, and individual performance.

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Individual Compensation Components

 

Base Salary

 

Design — Our philosophy is that base salaries should meet the objectives of attracting and retaining the executive officers needed to run the business. The base salaries are targeted at market median levels, although each executive officer may have a base salary above or below the median of the market. Actual individual salary amounts are not objectively determined, but instead reflect the committee’s judgment with respect to each executive officer’s responsibility, performance, experience, and other factors, including any retention concerns, the individual’s historical compensation, and internal equity considerations. During Fiscal 2007, the Leadership Development and Compensation Committee relied significantly on the input and recommendations of Mr. Dell as Chairman and Mr. Rollins as Chief Executive Officer when evaluating factors relative to the other executive officers in order to approve salary adjustments.

 

Results — As noted above, in recent years the Leadership Development and Compensation Committee made a decision to allocate more compensation to the performance-dependent elements of the total compensation package. As a result, in Fiscal 2006 and Fiscal 2007, annual salary increases among executive officers generally were somewhat modest as more focus was placed on the annual incentive bonus. The Named Executive Officer salaries are all below the median of the market, and other than Mr. Dell, each Named Executive Officer received a modest raise for Fiscal 2007 designed to keep the salary close to the market median. Mr. Dell did not receive a raise because the committee determined that the key component of his compensation was performance-based bonus.

 

Annual Incentive Bonus

 

Design — The annual incentive bonus plan is designed to align executive officer pay with overall company financial performance, as well as performance against strategic initiatives in the short-term. The plan provides a reward based on the achievement of corporate, regional/business unit, and individual performance objectives.

 

Annual incentives for executive officers are subject to the Executive Annual Incentive Bonus Plan. This plan was designed to qualify as tax-deductible under Section 162(m) of the Internal Revenue Code, and was approved by stockholders at the 2003 annual meeting.

 

The Leadership Development and Compensation Committee establishes a target incentive opportunity for each executive officer expressed as a percent of base salary. As explained in the chart under “Elements of the Total Compensation Package” above, the base salary and annual incentive bonus components of the pay mix are generally equal in amount, each comprising approximately 10% of the pay mix. Therefore, most Named Executive Officers were granted a target incentive opportunity equal to their base salary. Mr. Dell and Mr. Rollins, the individuals with the greatest overall responsibility for company performance, were granted larger incentive opportunities in comparison to their base salaries in order to weight their overall pay mix even more heavily towards performance-based compensation. For the Named Executive Officers, the target annual incentives for Fiscal 2007 were as follows:

 

 

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To arrive at a payout number, the target percentage of salary for each executive officer is multiplied by a formula based on corporate performance, regional or business unit performance, and the achievement of individual performance goals. The formula is illustrated below.

 

 

Corporate Performance Target — At the end of the year, the Leadership Development and Compensation Committee evaluates company performance against specific financial and strategic performance targets set at the beginning of the year and modifies the bonus payout to 0% to 300% of the target. For Fiscal 2007, the financial performance objectives were revenue growth and operating income margin objectives, as follows:

 

 

Results — For Fiscal 2007, we did not achieve either revenue growth or operating income margin at the threshold level. Consequently, the committee set the corporate performance modifier at 0%, the other modifiers were not applied, and the formulaic payout results were zero.

 

Regional/Business Unit and Individual Performance — After the corporate performance modifier is set, the following additional modifiers are applied to determine individual payout amounts:

 

 

Each of these factors can result in further modification of the executive’s payout as indicated. Upward adjustments must be offset by downward adjustments for other executives, as the aggregate payouts cannot exceed the total amount funded and approved by the Leadership Development and Compensation Committee based on corporate performance. As mentioned above, the regional/business unit and individual performance modifiers were not applied for Fiscal 2007 as we did not meet the corporate performance thresholds.

 

Strategic Priorities Targets — The Leadership Development and Compensation Committee has the discretion to adjust the formulaic payout results based on company performance against specific strategic priorities established for the year. For Fiscal 2007, these included objectives in the areas of Customer Experience, Winning Culture and Global Growth.

 

 

 

 

Based on the results described above, the Leadership Development and Compensation Committee did not adjust the formulaic payout results, and no annual incentive payments were made to the executive officers.

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Long-Term Incentives

 

Design — Long-term incentives are the most significant element of total executive officer compensation. Performance-dependent components of compensation comprise much of this element, consistent with our philosophy of driving performance and thereby aligning the interests of executives with other stockholders. These incentives are designed to motivate executive officers to improve financial performance and stockholder value, as well as encouraging the long-term employment of the executive officers. These incentives include a variety of stock and cash vehicles, such as:

 

 

Historically, we relied primarily on stock option awards in granting long-term incentives. However, in Fiscal 2007 the Leadership Development and Compensation Committee redesigned the long-term incentives for the executive officers. In addition to using stock options, the committee introduced PBUs that reward the achievement of specific business objectives as well as stock appreciation, and approved new long-term cash engagement awards to introduce an additional incentive for executive officers to remain with the company over the next four years.

 

The specific mix of options and PBUs as a percent of total long-term incentives varied for each executive officer based on the Chairman’s and the Chief Executive Officer’s assessments of the perceived value of each vehicle for each executive officer.

 

In awarding new long-term incentives, the Leadership Development and Compensation Committee also considers level of responsibility, prior experience, and individual performance criteria, as well as the compensation practices of the peer group of companies used to evaluate total compensation. The objective is to provide executive officers with above-average long-term incentive award opportunities targeted at the 75th percentile of peer practices for on-going, annual awards, while also offering additional cash retention incentives to executive officers other than the Chairman and the Chief Executive Officer. The long-term incentive program is designed to be highly leveraged, ensuring that if our stockholder returns exceed industry norms, actual gains will exceed industry norms, while also meeting our need to retain executive talent in a highly competitive market.

 

We do not backdate options or grant options or other equity awards retroactively. In addition, we do not purposely schedule option awards or other equity grants prior to the disclosure of favorable information or after the announcement of unfavorable information. Options are generally granted at fair market value on a fixed or predetermined date. All equity grants to executive officers require the approval of the Leadership Development and Compensation Committee. In general, awards under our annual long-term incentive grant process are made on predetermined Board meeting dates.

 

Fiscal 2007 Equity Opportunities — In Fiscal 2007 the Leadership Development and Compensation Committee established the following target long-term equity incentive opportunities (estimated value at grant and granted in the indicated combination of stock options and PBUs) for each Named Executive Officer:

 

 

 

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The size of stock option grants for executive officers is based primarily on the target dollar value of the award translated into a number of option shares based on the estimated economic value on the date of grant, as determined using the Black-Scholes option pricing formula. As a result, the number of shares underlying stock option awards will typically vary from year to year, as it is dependent on the price of Dell common stock on the date of grant. In addition, the size of the award will vary based on the target mix of options and PBUs, which varies for each executive officer.

 

In March 2006, the Leadership Development and Compensation Committee approved grants of stock options to each of the executive officers (other than Mr. Dell) as part of our annual stock option grants. These options had an exercise price equal to the fair market value of Dell common stock on the date of grant (determined as the average of the high and low stock price on The NASDAQ Stock Market on the date of grant) and vest ratably over five years (20% per year) beginning on the first anniversary of the date of grant. Because the exercise price of these options is equal to the fair market value of Dell’s common stock on the date of grant, these stock options will deliver a reward only if the stock price appreciates from the price on the date the stock options were granted. This design is intended to focus the executive officers on the long-term enhancement of stockholder value.

 

After we delayed filing our Annual Report on Form 10-K for Fiscal 2007, we suspended the exercise of employee stock options. As a result, some stock options expired while the holders had no ability to exercise them or otherwise prevent their expiration. The Leadership Development and Compensation Committee determined that we should nevertheless provide certain of the affected individuals with the value that they would have received had they been permitted to exercise the options. Therefore, we agreed to pay those individuals cash payments generally equal to the in-the-money value of the options at expiration. We will make those payments within 45 days after we file our Annual Report on Form 10-K for Fiscal 2007. The group of affected individuals included current and former executive officers. Because these payments are intended to compensate the affected individuals for the value they would have received had their options been exercisable, the payments were not considered in making other compensation decisions.

 

 

The size of PBU grants is based on a target dollar value of the award divided by the stock price on the date of grant. The actual number of shares earned is determined based on company performance measured over a one-year period against predetermined performance goals. Shares granted in Fiscal 2007 vest ratably over a five-year period beginning on the date of grant.

 

For Fiscal 2007, the following revenue growth and minimum operating margin goals were used as performance measures. Even if the revenue growth goal is achieved, the minimum operating margin goal must also be achieved at or above threshold for any shares to be earned. The table below provides the threshold, target, and maximum performance levels and the percentage of shares

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earned at these levels. The percentage of shares earned is prorated within the ranges below based on the performance level.

 

 

Since none of the performance goals were achieved during Fiscal 2007, no PBU shares were earned by any of the executive officers.

 

 

These cash awards vest and will be paid out in increments over a four-year period and represent compensation in addition to targeted market pay positioning for each executive officer. These awards are contingent only upon continued employment through the annual vesting period which ends in March of each fiscal year. If the executive officer’s employment terminates, other than due to death or permanent disability, the executive forfeits all subsequent payouts. The value of the award for each executive officer was determined at the recommendation of the Chairman and the Chief Executive Officer based on an assessment of the holding power of current long-term incentives for each executive officer, retention risk, and each individual’s impact on the organization.

 

The following table sets forth the awards and vesting periods for each of the Named Executive Officers under this program. Neither Mr. Dell nor Mr. Rollins was eligible for these cash awards. Mr. Carty joined the company as an executive in January 2007 and thus did not receive an award under this program.

 

 

 

     Benefits and Perquisites

 

Our policy is to provide limited benefits and perquisites for executive officers. While perquisites do not constitute a significant part of executive officer compensation, the Leadership Development and Compensation Committee believes that limited benefits and perquisites are generally a typical component of total remuneration for executives in industries similar to ours and that providing such benefits is important to delivering a competitive package to retain executive officers. Specific perquisites and benefits include:

 

Deferred Compensation Plan — We maintain a nonqualified deferred compensation plan that is available to all Dell executives. For a description of the terms of this plan, as well as information about the account

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balances held by each of the Named Executive Officers, see “Other Benefit Plans — Deferred Compensation Plan” below.

 

Financial counseling and tax preparation services — Each executive officer is entitled to reimbursement, up to $12,500 annually, for financial counseling services (including tax preparation). Actual costs are reimbursed, and the income is imputed to the executive officer for federal income tax purposes.

 

Annual physical — We pay for a comprehensive annual physical for each executive officer and his or her spouse and reimburse for associated travel and lodging, all subject an annual maximum of $5,000 per person.

 

Technical Support — We provide our executive officers with technical support (personal and business) and, in come cases, certain home network equipment. The incremental cost of providing these services is limited to the cost of hardware provided and is insignificant.

 

Other — The executive officers participate in our other benefit plans on the same terms as other employees. These plans include medical, dental and life insurance benefits; our 401(k) retirement savings plan; and our employee stock purchase plan. See “Other Benefit Plans” below.

 

Stock Ownership Guidelines

 

The Board has established stock ownership guidelines for themselves and our executive officers to more closely link their interests with those of other Dell stockholders. Under those guidelines, non-employee directors must maintain ownership of Dell common stock having an aggregate value equal to at least 300% of their annual retainer, the Chairman and Chief Executive Officer must maintain ownership of stock having an aggregate value equal to at least 500% of base salary, and all other executive officers must maintain ownership of stock having an aggregate value equal to at least 400% of base salary. A person has three years after becoming subject to the guidelines to attain the specified minimum ownership position. Unvested restricted stock or stock units may be used to satisfy these minimum ownership requirements, but unexercised stock options may not. We believe these ownership guidelines to be in line with the prevalent ownership guidelines among our recognized peer companies.

 

Compliance with these guidelines is evaluated once each year using the average closing price of Dell common stock during the previous fiscal year. As of the last evaluation in May 2007, all directors and executive officers met their ownership requirements.

 

Administration of Compensation Plans

 

The Leadership Development and Compensation Committee approves every compensation action for executive officers, including equity awards, which are effective on the day of approval. In addition, the committee annually conducts a comprehensive review of all compensation and benefit plans for the company, with a view to ensuring compliance, fairness, cost competitiveness, and adherence to our pay-for-performance philosophy. While the committee was expecting better company performance in the past year, it is confident that the executive officers reaped rewards commensurate with their individual and Dell’s overall performance.

 

Employment Agreements, Severance, and Change-in-Control Arrangements

 

Substantially all of Dell’s employees enter into a standard employment agreement upon commencement of their employment. The standard employment agreement primarily addresses intellectual property and confidential and proprietary information matters and does not contain provisions regarding compensation or continued employment.

 

We did not have any special employment agreement with any of our executive officers, nor did we provide them with any kind of contractual severance or change-in-control benefits, during Fiscal 2007. We have recently begun to implement special employment agreements with our executive officers that contain non-solicitation and non-competition agreements and also provide for the payment of specified severance upon termination of employment. On September 6, 2007, the Leadership Development and Compensation Committee approved new severance arrangements for the executive officers other than Mr. Dell. Under the new agreements, if an executive officer’s employment is terminated without cause, the executive will receive a severance payment equal to 12 months’ base salary and target bonus. The agreements also

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obligate each executive officer to comply with certain noncompetition and nonsolicitation obligations for a period of 12 months following termination of employment. We previously entered into separate severance arrangements with Michael R. Cannon and Ronald G. Garriques upon commencement of their employment in February 2007. The new severance arrangements will not be applicable to either Mr. Cannon or Mr. Garriques until the expiration of their current arrangements. No executive officer severance payments would have been required as of the last business day of Fiscal 2007.

 

All of our equity awards contain provisions that accelerate the vesting of the awards upon the death or permanent disability of the holder. These provisions are generally applicable to all Dell employees, including the executive officers. In addition, the Leadership Development and Compensation Committee has authority under our stock plans to issue awards with provisions that accelerate vesting and exercisability in the event of a change-in-control and to amend existing awards to provide for such acceleration. To date, the committee has not elected to include change-in-control acceleration provisions in any awards.

 

Other Factors Affecting Compensation

 

In establishing total compensation for the executive officers, the Leadership Development and Compensation Committee considered the effect of Section 162(m) of the Internal Revenue Code, which limits the deductibility of compensation paid to each “covered employee” (generally, the chief executive officer and the three other highest paid officers other than the chief financial officer) to $1 million, unless it is performance based. To the extent practical, the committee intends to preserve deductibility, but may choose to provide compensation that is not deductible if necessary to attract, retain and reward high-performing executives.

 

Compensation Committee Report

 

The Leadership Development and Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on that review and those discussions, the committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Dell’s Annual Report on Form 10-K for the Fiscal year ended February 2, 2007, and Dell’s 2007 proxy statement. This report is provided by the following independent directors, who comprise the committee.

 

THE LEADERSHIP DEVELOPMENT AND
COMPENSATION COMMITTEE

 

Michael A. Miles, Chair
Alan (A.G.) Lafley
Judy C. Lewent
Klaus S. Luft

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Summary Compensation Table

 

The following table summarizes the total compensation for Fiscal 2007 for the following persons: Michael S. Dell (who served as Chairman of the Board and, beginning January 31, 2007, principal executive officer), Kevin B. Rollins (who served as principal executive officer until January 31, 2007), Donald J. Carty and James M. Schneider (each of whom served as principal financial officer during a portion of the year), and Paul D. Bell, Stephen J. Felice, and Rosendo G. Parra (the three other most highly compensated individuals who were serving as executive officers at the end of Fiscal 2007). These persons are referred to as the “Named Executive Officers.”

 

 

 

 

Also includes the cost of providing various perquisites and personal benefits, as well the value of our contributions to the company-sponsored 401(k) plan and deferred compensation plan, and the amount we paid for term life insurance coverage under health and welfare plans. See “Compensation Discussion and Analysis — Benefits and Perquisites.” In addition, during Fiscal 2007, Mr. Bell and Mr. Felice received payments in connection with their expatriate assignments to cover housing, automobile and other expenses, as well as tax equalization.

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The following table provides detail for the aggregate “All other Compensation” for each of the Named Executive Officers.

 

 

The amount shown for Mr. Dell’s security costs represents the amount of company-paid expenses relating to personal and residential security. This security is provided to Mr. Dell pursuant to a Board-authorized security program. The Board believes that Mr. Dell’s personal safety and security are of vital importance to the company’s business and prospects and, therefore, that these costs are appropriate corporate business expenses. Nevertheless, because these costs can be viewed as conveying personal benefits to Mr. Dell, they are reported as perquisites in this column. In conjunction with our security operations, we also provide certain security services to members of Mr. Dell’s immediate family and at locations other than Mr. Dell’s principal residence. Mr. Dell fully reimburses the company for the incremental costs attributable to such services.

 

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Incentive Plan Based Awards

 

The following table sets forth certain information about plan based awards that were made to the Named Executive Officers during Fiscal 2007. For more information about the plan under which these awards were granted, see the “Compensation Discussion and Analysis” above.

 

Grants of Plan-Based Awards in Fiscal 2007