ONLINE RESOURCES CORPORATION
4795 Meadow Wood Lane
Chantilly, VA 20151
April 22, 2008

 

Dear Stockholder:

 

On behalf of the Board of Directors and management, I cordially invite you to attend our 2008 Annual Meeting of Stockholders to be held at 2:00 P.M. (EDT) on Wednesday, May 21, 2008 at our corporate headquarters, located at 4795 Meadow Wood Lane, Chantilly, Virginia 20151. The attached notice of annual meeting and proxy statement describe the business we will conduct at the meeting and provide information about Online Resources Corporation that you should consider when you vote your shares.

 

When you have finished reading the proxy statement, please promptly vote your shares by marking, signing, dating and returning the proxy card in the enclosed envelope. We encourage you to vote by proxy so that your shares will be represented and voted at the meeting, whether or not you can attend.

 

Sincerely,

 

 

Matthew P. Lawlor

Chairman of the Board and

Chief Executive Officer

 

ONLINE RESOURCES CORPORATION
4795 Meadow Wood Lane
Chantilly, VA 20151

 

NOTICE OF 2008 ANNUAL MEETING OF STOCKHOLDERS

 

The Stockholders of Online Resources Corporation:

 

Notice is hereby given that the Annual Stockholders Meeting of Online Resources Corporation will be held on Wednesday, May 21, 2008, at 2:00 P.M. (EDT) at our corporate headquarters, located at 4795 Meadow Wood Lane, Chantilly, Virginia 20151, for the following purposes:

 

 

WHO MAY VOTE:

 

Stockholders of record at the close of business on April 1, 2008 are the only stockholders entitled to notice of and to vote at the Annual Stockholders Meeting. A list of stockholders of record will be available at the meeting and, during the 10 days prior to the meeting, at the office of our Secretary at 4795 Meadow Wood Lane, Chantilly, VA 20151.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

 

Michael C. Bisignano

Vice President, General Counsel and Secretary

Dated April 22, 2008

 

TABLE OF CONTENTS

 

ONLINE RESOURCES CORPORATION
4795 Meadow Wood Lane
Chantilly, VA 20151
703-653-3100

 

 

 

 

PROXY STATEMENT FOR ONLINE RESOURCES CORPORATION
2008 ANNUAL MEETING OF STOCKHOLDERS

 

 

 

 

 

Why Did You Send Me this Proxy Statement?

 

We sent you this proxy statement and the enclosed proxy card because Online Resources Corporation’s Board of Directors is soliciting your proxy to vote at the 2008 annual meeting of stockholders and any adjournments of the meeting. This proxy statement summarizes the information you need to know to vote at the annual meeting.

 

On April 22, 2008, we began sending this proxy statement, the attached notice of annual meeting and the enclosed proxy card to all stockholders entitled to vote at the meeting. Although not part of this proxy statement, we are also sending our 2007 annual report, which includes our consolidated financial statements for the fiscal year ended December 31, 2007. You can also find a copy of our 2007 Annual Report on Form 10-K on the Internet through the SEC’s electronic data system called EDGAR at www.sec.gov or through the Investor Relations section of our website at www.orcc.com.

 

Who Can Vote?

 

Only stockholders who owned Online Resources Corporation common stock at the close of business on April 1, 2008 are entitled to vote at the annual meeting. On this record date, there were 29,004,174 shares of Online Resources Corporation common stock outstanding and entitled to vote, and 75,000 shares of Series A-1 Redeemable Convertible Preferred Stock outstanding, convertible to 4,621,570 shares of Online Resources Corporation common stock, and entitled to vote on an as-converted basis.

 

You do not need to attend the annual meeting to vote your shares. Shares represented by valid proxies, received in time for the meeting and not revoked prior to the meeting, will be voted at the meeting. A stockholder may revoke a proxy before the proxy is voted by delivering to our Secretary a signed statement of revocation or a duly executed proxy card bearing a later date. Any stockholder who has executed a proxy card but attends the meeting in person may revoke the proxy and vote at the meeting.

 

How Many Votes Do I Have?

 

Each share of Online Resources Corporation common stock that you own entitles you to one vote.

 

How Do I Vote?

 

Whether you plan to attend the annual meeting or not, we urge you to vote by proxy. Voting by proxy will not affect your right to attend the annual meeting. If your shares are registered directly in your name through our stock transfer agent, American Stock Transfer and Trust Company, or you have stock certificates, you may vote:

 

 

If your shares are held in “street name” (held in the name of a bank, broker or other nominee), you must provide the bank, broker or other nominee with instructions on how to vote your shares and can do so as follows:

 

 

How Does the Board of Directors Recommend That I Vote on the Proposals?

 

The Board of Directors recommends that you vote as follows:

 

 

If any other matter is presented at the annual meeting, the proxy card provides that your shares will be voted by the proxy holder listed on the proxy card in accordance with his or her best judgment. At the time this proxy statement was printed, we knew of no matters that are to be acted on at the annual meeting, other than those discussed in this proxy statement.

 

May I Revoke My Proxy?

 

If you give us your proxy, you may revoke it at any time before the meeting. You may revoke your proxy in any one of the following ways:

 

 

What if I Receive More Than One Proxy Card?

 

You may receive more than one proxy card or voting instruction form if you hold shares of our common stock in more than one account, which may be in registered form or held in street name. Please vote in the manner described under “How Do I Vote?” for each account to ensure that all of your shares are voted.

 

Will My Shares be Voted if I Do Not Return My Proxy Card?

 

If your shares are registered in your name or if you have stock certificates, they will not be voted if you do not return your proxy card by mail or vote at the meeting as described above under “How Do I Vote?”

 

If your shares are held in street name and you do not provide voting instructions to the bank, broker or other nominee that holds your shares as described above under “How Do I Vote?,” the bank, broker or other nominee has the authority to vote your unvoted shares on both Proposals 1 and 2 even if it does not receive instructions from you. We encourage you to provide voting instructions. This ensures your shares will be voted at the meeting in the manner you desire. If your broker cannot vote your shares on a particular matter because it has not received instructions from you and does not have discretionary voting authority on that matter or because your broker

chooses not to vote on a matter for which it does have discretionary voting authority, this is referred to as a “broker non-vote.”

 

What Vote is Required to Approve Each Proposal and How are Votes Counted?

 

 

Is Voting Confidential?

 

We will keep all the proxy cards, ballots and voting tabulations private. We only let our Inspectors of Election, Broadridge Financial Solutions (“Broadridge”), our proxy distributor, and Morrow & Co., LLC (“Morrow & Co.”), our proxy solicitor, examine these documents. We will not disclose your vote to management unless it is necessary to meet legal requirements. We will, however, forward to management any written comments you make, on the proxy card or elsewhere. Our practice is not to attribute a stockholder’s identity to their comments.

 

What Are the Costs of Soliciting these Proxies?

 

We will pay all of the costs of soliciting these proxies, including expenses in connection with preparing and mailing this proxy statement. We have retained Broadridge to assist our Board of Directors in the distribution of proxy materials for a fee of $19,125, plus reimbursement of out-of-pocket expenses. Broadridge will reimburse brokerage firms and other persons representing beneficial owners of our common stock for their expenses in forwarding proxy materials to such beneficial owners, and we will reimburse Broadridge for the expenses. We have

also retained Morrow & Co. for a fee of $10,000, plus reimbursement of out-of-pocket expenses, to assist our Board of Directors in the solicitation of the proxies. Our Directors and employees also may solicit proxies using the Internet, telephone, fax, email or in person. We will not pay our employees and Directors any additional compensation for these services.

 

What Constitutes a Quorum for the Meeting?

 

The presence, in person or by proxy, of the holders of a majority of the outstanding shares of our common stock at the record date is necessary to constitute a quorum at the meeting. Votes of stockholders of record who are present at the meeting in person or by proxy, abstentions, and broker non-votes are counted for purposes of determining whether a quorum exists.

 

Attending the Annual Meeting

 

The annual meeting will be held at 2:00 P.M. (EDT) on Wednesday, May 21, 2008 at our corporate headquarters, located at 4795 Meadow Wood Lane, Chantilly, Virginia 20151. When you arrive at our corporate headquarters, signs will direct you to the appropriate meeting rooms. You need not attend the annual meeting in order to vote.

 

Voting

 

To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the annual meeting in person. If you attend the annual meeting, you may also submit your vote in person, and any previous votes that you submitted, will be superseded by the vote that you cast at the annual meeting.

 

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of April 14, 2008 for (a) the executive officers named in the Summary Compensation Table set forth elsewhere in this proxy statement, (b) each of our current Directors and Director nominees, (c) all of our current Directors, Director nominees and executive officers as a group and (d) each stockholder known by us to own beneficially more than 5% of our common stock. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. We deem shares of common stock that may be acquired by an individual or group within 60 days of April 14, 2008 pursuant to the exercise of options or warrants or the conversion of other securities to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Except as indicated in footnotes to this table, we believe that the owners of our common stock named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them based on information provided to us by these stockholders. Percentage of ownership is based on 29,007,422 shares of common stock outstanding on April 14, 2008.

 

 

 

 

 

Our Bylaws provide that our business is to be managed by or under the direction of our Board of Directors. The members of our Board of Directors are divided into three classes for purposes of election. Our practice has been to elect one class, representing about one-third of the members of the Board, at each annual meeting of stockholders to serve for a three-year term. Our Board of Directors currently consists of nine members, classified into three classes as follows: (1) Matthew P. Lawlor, Ervin R. Shames and Barry D. Wessler constitute a class with a term ending at the 2010 annual meeting; (2) Michael H. Heath and the directorship formerly held by Debra A. Janssen, who resigned on March 7, 2008, constitute a class with a term ending at the 2009 annual meeting and (3) William H. Washecka, Stephen S. Cole and Joseph J. Spalluto constitute a class with a term ending at the upcoming 2008 annual meeting. Michael E. Leitner represents Tennenbaum Capital Partners, LLC on the Board, and he is not a member of a class.

 

On February 27, 2008, the Board of Directors voted to nominate William H. Washecka, Stephen S. Cole and Joseph J. Spalluto for election at the annual meeting for a term of three years. If Mr. Washecka, Mr. Cole and Mr. Spalluto are elected by the stockholders at the annual meeting to serve on the Board, they will serve until the 2011 annual meeting of stockholders, and until their successors are elected and qualified.

 

On March 7, 2008, Debra A. Janssen resigned from the Board of Directors as a result of her accepting a position with one of our competitors. The Board of Directors will address her vacancy in accordance with our Bylaws.

 

Set forth below are the names of the Directors whose terms do not expire this year and the persons nominated for election to the Board of Directors at the annual meeting, their ages, their offices in our company, if any, their principal occupations or employment for the past five years, the length of their tenure as Directors and the names of other public companies in which such persons hold directorships.

 

 

 

 

 

Matthew P. Lawlor is a co-founder of Online Resources Corporation and has served as Chairman and Chief Executive Officer since March 1989. He formerly served with Chemical Bank (now JP Morgan Chase), where he headed a regional consumer branch division and the bank’s international equity investment company. He also founded a venture development firm and served in the White House Office of Management and Budget. Mr. Lawlor is active in industry affairs, having founded and chaired the eFinancial Enablers Council, a group of senior Internet

executives whose firms serve the financial services industry. Mr. Lawlor has a BS in mechanical engineering from the University of Pennsylvania and a MBA from Harvard University.

 

Stephen S. Cole has been a Director since May 2005 and since 2001 has served as the President and Chief Executive Officer of YMCA of Metropolitan Chicago. From 1986-2001, Mr. Cole was President and Chief Executive Officer of Cash Station, Inc., an electronic banking company. Previously, Mr. Cole served in a variety of management positions for 14 years at First National Bank of Chicago. He serves as a director emeritus of Electronic Funds Transfer Association. Mr. Cole received a BA from Lake Forest College.

 

Michael H. Heath has been a Director since March 1989 and since 1991 has been the President of Convention Guides, a publisher of city guidebooks. He served as President of Online Resources Corporation from January 1995 to October 1997. Mr. Heath also served as President of MediaNews, which owned the Denver Post and the Houston Post, and held several senior management positions with Chemical Bank. Mr. Heath received a BA from Williams College and a MBA from Harvard University.

 

Debra A. Janssen became a Director in May 2007, but resigned on March 7, 2008 as a result of her acceptance of a position with one of our competitors. The Board will address her vacancy in accordance with our Bylaws. She previously was a private investor and served as Chief Executive Officer of one of the private firms in which she invested. From 2004 to 2006, she served as President of First Data Debit Services and the STAR Network. She served as President and Chief Executive Officer of SurePayroll, Inc. from 2002 to 2003 and President of Hallmark Cards’ web business from 2000 to 2001. Ms. Janssen also served as President and Chief Executive Officer of eFunds Corporation from 1999 to 2000 and was Chief Information Officer of Metavante (formerly M&I Data), where she worked from 1984 to 1998. She is currently a Director of Plato Learning, Inc., a publicly traded company, and served on its Audit Committee.

 

Michael E. Leitner has been a Director since February 2007, representing Tennenbaum Capital Partners, LLC. Prior to serving as a partner with Tennenbaum, which he has done since 2005, Mr. Leitner held a senior corporate development position for WilTel Communications from 2004 to 2005 and served as Chief Executive Officer of GlobeNet Communications from 2002 to 2004. Previously, he held senior corporate development positions with Microsoft Corporation and 360networks and served as vice president in Merrill Lynch’s M&A group. Mr. Leitner currently serves on the boards of ITC DeltaCom, Inc. and Anacomp, Inc. Mr. Leitner holds a BA in Economics from the University of California, Los Angeles, and an MBA from the University of Michigan.

 

Ervin R. Shames has been a Director since January 2000 and is currently a visiting lecturer in consumer marketing at the University of Virginia’s Darden School of Business. From 1993 to 1995, Mr. Shames served as President and Chief Executive Officer of Borden, Inc., a consumer marketing company. Previously, he served as President of both General Foods USA and Kraft USA. He also served as Chairman, President and Chief Executive Officer of Stride Rite Corporation. Mr. Shames is currently serving on the board of directors of Choice Hotels and is the non-executive Chairman of the Board of Select Comfort Corporation. Mr. Shames holds a BS/ BA from the University of Florida and a MBA from Harvard University.

 

Joseph J. Spalluto has been a Director since May 1995 and since 1989 has been a Managing Director of corporate finance for Keefe Bruyette & Woods, Inc., an investment banking firm specializing in the financial services industry, which he joined in 1981. During the past year, Mr. Spalluto was promoted to Executive Vice President. Mr. Spalluto received a BA from Amherst College and a JD from the University of Connecticut School of Law.

 

William H. Washecka has been a Director since February 2004 and currently serves on the boards of directors of Avalon Pharmaceuticals, Inc. and Audible, Inc. From November 2004 to December 2006, he served as Chief Financial Officer of Prestwick Pharmaceuticals, which specializes in therapies for central nervous system disorders. From 2001 until 2002, Mr. Washecka served as Chief Financial Officer for USinternetworking, Inc., an enterprise and e-commerce software service provider. Previously, Mr. Washecka was a partner with Ernst & Young LLP, which he joined in 1972. He has a BS in accounting from Bernard Baruch College of New York and completed the Kellogg Executive Management Program. Mr. Washecka is a certified public accountant.

 

Barry D. Wessler has been a Director since May 2000 and since 1995 has been a computer and communications consultant. Previously, Dr. Wessler co-founded GTE Telenet, an early packet switch service company

(now Sprint Data). He also served as CEO of Plexsys International, a cellular telephone infrastructure manufacturer, and President of NetExpress, an international facsimile network company. In the 1960’s, while at the Advanced Research Projects Agency, Dr. Wessler directed research for ARPANet, the forerunner of the Internet. Dr. Wessler has a BSEE and MSEE from MIT and a Ph.D. in Computer Science from the University of Utah.

 

Our Board of Directors has determined that all of its members, with the exception of Matthew P. Lawlor, are independent under the current independence standards promulgated by the Securities and Exchange Commission and by the Nasdaq Global Select Market.

 

Meeting Attendance.  During the fiscal year ended December 31, 2007, there were seven meetings of our Board of Directors, and the various committees of the Board met a total of thirty-four times. No Director attended fewer than 75% of the total number of meetings of the Board and of committees of the Board on which he or she served during 2007.

 

Management Development and Compensation Committee.  Our Management Development and Compensation (“MD&C”) Committee met eight times during fiscal 2007. During fiscal 2007 the Committee had four members, Stephen S. Cole (Chairman), Ervin R. Shames, Joseph J. Spalluto and Michel H. Heath. The MD&C Committee oversees our compensation and organizational matters. Specifically, the Committee reviews and approves management compensation policies, including target compensation levels for management that are based on industry benchmarks, design of our annual bonus program and establishment of the program’s goals and design of our long-term, equity-based incentive program. The Committee focuses, in particular, on the Chief Executive Officer (“CEO”) and the CEO’s direct reports. The Committee reviews and recommends goals for the CEO to the Board of Directors and evaluates the CEO together with the Board of Directors. In consultation with outside compensation experts, the Committee also designs and recommends to the Board of Directors the compensation policies for Directors. In overseeing the our management development policies and practices, the Committee consults with the CEO on succession plans and more broadly assesses the development and contingency plans for senior management staff. Our Board of Directors has adopted a charter for the Committee, which is available at www.orcc.com. Please also see the report of the MD&C Committee set forth elsewhere in this proxy statement.

 

Corporate Governance Committee.  Our Corporate Governance Committee met five times during fiscal 2007. During fiscal 2007 the Committee had four members, Michael H. Heath (Chairman), Michael E. Leitner, Joseph J. Spalluto and Ervin R. Shames. The Committee evaluates the Board’s and its Committees’ current composition, organization and governance processes. It also identifies and recommends qualified candidates for Director consideration and election by stockholders. The Committee conducts an annual assessment of the Board. Together with outside updates on industry best practices, legal developments and new securities regulations, the Committee recommends changes and adoption of new processes. The Committee also oversees the development and implementation of a Code of Business Conduct and Ethics for all of our Directors, executive officers and employees and develops and recommends to the Board corporate governance guidelines that are applicable to us. The Chairman of the Corporate Governance Committee also serves as lead Director in confidential sessions held by the Board without any member of management present. These confidential sessions are typically held five times per year, as part of our regularly scheduled Board meeting. For a description of the process used by the Committee in evaluating and recommending Director nominees, see “Nomination Process” below. Our Board of Directors has adopted a charter for the Committee, which is available at www.orcc.com.

 

Audit Committee.  Our Audit Committee met eleven times during fiscal 2007. During fiscal 2007 the Committee had five members, Barry D. Wessler (Chairman), William H. Washecka, Stephen S. Cole, Michael E. Leitner and Debra A. Janssen. A more detailed description of the functions of the Audit Committee can be found under “Report of the Audit Committee” set forth elsewhere in this proxy statement. Generally, the Committee oversees our accounting policies and consolidated financial statements. The Committee also oversees systems integrity and security procedures and supervises our internal audit function. The Audit Committee is governed by a written charter approved by the Board of Directors, which is available at www.orcc.com. The Board has determined that all members of the Audit Committee satisfy the current independence standards promulgated by the Securities

and Exchange Commission and by the Nasdaq Global Select Market. The Board has determined that William H. Washecka is an “audit committee financial expert,” as the Securities and Exchange Commission has defined that term in Item 401 of Regulation S-K.

 

Corporate Finance Committee.  Our Corporate Finance Committee met ten times during fiscal 2007. During fiscal 2007 the committee had four members, Ervin R. Shames (Chairman), Michael H. Heath, Michael E. Leitner and Joseph J. Spalluto. Our Corporate Finance Committee consults with and advises management and the Board of Directors on merger and acquisition opportunities and related financing. The Committee oversees the post-transaction integration and eventual evaluation of any acquisitions, including the strategic rationale for the acquisition and a comparison of actual financial results to original forecasts for the acquisitions. The Committee further consults and advises us on capital formation policies and implementation. As part of this function, it oversees our treasury and investment management policies, including management of float associated with bill payment operations. The Committee also reviews long-term financial projections and stockholder valuation, and it reviews and recommends capital hurdle rates and our annual capital budget. Our Board has adopted a charter for the Committee, which is available at www.orcc.com.

 

Our Corporate Governance Committee recommends candidates for nomination by the Board for election as directors. The Nominating Committee may consider candidates recommended by stockholders as well as from other sources such as other directors or officers, third party search firms or other appropriate sources. In evaluating and determining whether to nominate a candidate for a position on our Board, the Committee will consider the criteria outlined in our corporate governance policy, which include high professional ethics and values, relevant management experience and a commitment to enhancing stockholder value. In evaluating candidates for nomination, the Committee utilizes a variety of methods. In general, persons recommended by stockholders will be considered on the same basis as candidates from other sources. If a stockholder wishes to nominate a candidate to be considered for election as a Director at the 2008 Annual Meeting of Stockholders using the procedures set forth in our by-laws, it must follow the procedures described in “Stockholder Proposals and Nominations For Director.” If a stockholder wishes simply to propose a candidate for consideration as a nominee by the Nominating Committee, it should submit a recommendation to our Secretary at the address set forth on the first page of this proxy statement, indicating the nominee’s qualifications and other relevant biographical information and providing confirmation of the nominee’s consent to serve as a Director.

 

Generally, stockholders who have questions or concerns should contact our Corporate Communications Department at (703) 653-2248; however, any stockholders who wish to address questions regarding our business directly with the Board of Directors, including the non-management directors, should direct his or her questions to the Online Resources Corporation Board of Directors, c/o Corporate Secretary, Online Resources Corporation, 4795 Meadow Wood Lane, Chantilly, Virginia 20151. The Corporate Secretary has the authority to disregard any inappropriate communications or to take other appropriate actions with respect to any such inappropriate communications. If deemed an appropriate communication, the Corporate Secretary will submit your correspondence to the Chairman of the Board or to any specific director to whom the correspondence is directed.

 

The following table sets forth certain information regarding our executive officers who are not also members of the Board of Directors. All of our executive officers are at-will employees.

 

 

Raymond T. Crosier joined Online Resources Corporation in January 1996 and initially served as our Senior Vice President of Client Services. In January 2001 he was elected as our President and Chief Operating Officer. He

is responsible for managing our day-to-day operations. He has 24 years of experience with the financial services industry. Before joining us, he served as Vice President of Sales and Customer Service for TeleCheck International, a check verification and guarantee firm, from 1990 to 1996. TeleCheck was a subsidiary of First Financial Management Corp., which later merged with First Data Corporation. He served in a variety of other management positions at TeleCheck, including its national account division from 1989 to 1990 and its regional marketing divisions from 1977 to 1989. Mr. Crosier received a BA in Psychology from the University of Virginia.

 

Catherine A. Graham joined Online Resources Corporation in March 2002 and currently serves as Executive Vice President, Chief Financial Officer and Treasurer. She is responsible for general financial management with particular attention paid to broadening the investor base and exploring strategic business opportunities. She has 20 years of professional experience in financial disciplines, including technology, restaurant and banking companies. Ms. Graham most recently served as Chief Financial Officer of VIA NET.WORKS, Inc., then a publicly-held Internet service provider serving the international ISP markets with subsidiaries in multiple countries. From 1996 to 1998, she served as Vice President of Finance and Investor Relations Officer for Yurie Systems. Prior to her position with Yurie Systems, she served as Chief Financial Officer for Davco Restaurants, Inc., which was then the largest franchiser of Wendy’s restaurants with over 14,000 employees. Ms. Graham received a BA in Economics from the University of Maryland and a MBA from Loyola College.

 

The following discussion and analysis contains statements regarding future individual and company performance targets and goals. These targets and goals are disclosed in the limited context of Online Resources Corporation’s compensation programs and should not be understood to be statements of management’s expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts.

 

Introduction

 

The following discussion and analysis is intended to provide an understanding of (1) the structure and responsibilities of the Management Development and Compensation Committee of our Board of Directors, (2) the philosophy and objectives behind our compensation programs for executive officers and senior management (considered to be vice presidents and above), (3) each of the major elements comprising these compensation programs, and (4) the process used to determine the amounts of each of these elements.

 

Management Development and Compensation Committee

 

The Management Development and Compensation Committee of the Board of Directors (the “Committee”) is comprised entirely of independent, non-employee directors. The primary mission of the Committee is to discharge the responsibilities of our Board with respect to the design and implementation of executive compensation programs and the development of current and future managers and leaders. The responsibilities of the Committee include:

 

 

 

The Committee has the authority under its charter to retain and consult with independent advisors to assist the Committee in fulfilling these responsibilities and duties. It periodically retains independent compensation consultants to advise on plan design, identify peer companies, research comparable compensation levels and perform other similar functions.

 

The Committee usually meets in person five times per year in conjunction with scheduled meetings of the full Board, and also convenes additional meetings by telephone conference as needed. At the start of each year, the Committee establishes a calendar of agenda items for that year’s meetings. The Committee also establishes goals for itself pertaining to issues it wants to resolve or items it wants to accomplish during the year. On an ongoing basis, the Chairman of the Committee works also with our Chief Executive Officer, other executive officers and members of our senior management team to add other new or timely issues to the agenda for each meeting. Following the development of the agenda for each meeting, executive officers, members of senior management, our human resources department and, when appropriate, independent compensation consultants, prepare materials for distribution to the Committee.

 

Our Chief Executive Officer regularly attends the meetings of the Committee. Other members of our management team and independent compensation consultants may be invited to attend all or a portion of a Committee meeting, depending on the nature of the agenda for the meeting. Neither our Chief Executive Officer nor any other member of management votes on any matters before the Committee. The Committee, however, does solicit the views of our Chief Executive Officer on compensation matters generally, and particularly with respect to the compensation of members of the executive management team reporting directly to the Chief Executive Officer. The Committee may also solicit the views of other executive officers, members of senior management and our human resources department with respect to key compensation elements and broad-based employee benefit plans.

 

Compensation Philosophy and Objectives

 

 

 

Compensation Program Elements

 

Our compensation program for executive officers and senior management currently consists of (1) base salary, (2) annual incentive compensation, and (3) long-term equity-based incentive compensation. Our executive officers and senior management participate in the broad-based benefits plans that are available to other employees and we avoid additional material perquisites. We also do not generally have employment agreements that provide for continued employment for any period of time or guarantee severance benefits upon termination without cause or for good reason except for a change in control severance plan for the benefit of the executive officers and certain members of senior management in the event of (i) a change in control of our Company and (ii) termination of such person under specified circumstances within one year after the change in control. We have, however, entered into a limited number of severance agreements as a part of our acquisitions of other companies.

 

The Committee has a policy of requesting benchmark compensation studies with regard to executive officer and senior management positions on a periodic basis, to ensure that its decisions are based on current market information. The Committee has previously engaged independent compensation consultants Watson Wyatt Worldwide to prepare these studies, with its most recent study being completed in July 2007. These studies have provided the Committee with relevant market data, trends and alternatives to consider when making compensation decisions, and the Committee has used the study information to ensure that management compensation plans remained both competitive and within established target ranges relative to market-median levels. Watson Wyatt and any other independent compensation consultants engaged by the Committee are not engaged by management in any other capacity so as to preserve their independence.

 

In making compensation decisions, the Committee compares total compensation and its components against a peer group of companies which were publicly traded at the time of our study. This peer group, which is reviewed and updated annually, consists of companies in the specific market sectors in which we compete and general industry companies with consolidated and/or segment revenues comparable to ours. Each of the peer group companies has revenues of less than $1.5 billion and market capitalizations and employment levels that are similar to ours. The Committee believes the peer group is a reasonable representation of the market for management’s services. The companies included in the peer group considered as part of our compensation decisions in 2007 and for 2008 are:

 

 

 

As a result of the limited number of companies in our of the Peer Group, the Committee also utilized commercially available survey data related to general industry executive compensation to identify market-median and other market elements related to our 2007 and 2008 compensation programs.

 

Base Salary.  Base salaries for our executive officers and senior managers are reviewed and reset annually. Given our total compensation approach and the value our executive and senior management places on participating in current and future growth, base salaries tend to be underweighted in our compensation structure. The Committee seeks to benchmark base salaries at approximately the 40th percentile of high growth companies within the established peer group.

 

In addition to the market data from the peer group and other sources, the Committee considers other factors in arriving at or adjusting each executive officer’s base salary, including: (1) each executive officer’s scope of responsibilities; (2) each executive officer’s qualifications, skills and experience; (3) internal pay equity among senior executives; and (4) individual job performance, including both impact on current financial results and contributions to building longer-term shareholder value. Within this framework, annual increases are primarily driven by individual performance.

 

Annual Incentive Compensation.  We provide annual incentive compensation for our executives officers, senior managers and other employees under our Annual Incentive and Cash Profit-Sharing Plans. The Annual Incentive and Cash Profit-Sharing Plans are designed to drive current period, division and company-wide performance consistent with our stated long-term growth, profitability and service quality objectives. The Committee seeks to establish performance objectives at a level that rewards competitively superior performance with competitively superior compensation. Our annual incentive compensation is designed to be paid in cash. However, the Committee may, at its discretion, choose to pay, or allow participants to elect to receive, some or all of their annual incentive compensation in equity.

 

Before the start of each year, the Committee determines the four principal elements of the Annual Incentive and Cash Profit-Sharing Plans for the coming year: (1) the corporate and division or group performance goals; (2) the percentage of bonus payout to be tied to each of the performance goals; (3) target bonus levels, expressed as either a percentage of salary or a fixed amount for each identified level or title grouping of management; and (4) target profit-sharing percentages for certain levels of earnings performance used in determining the size of the profit-sharing pool. Actual bonus payments are increased above the target bonus levels for results that exceed the performance goals and are decreased below the target bonus levels, and may be reduced to zero, for results that do not fully meet the goals, with the amount of the increase or decrease based on a sliding scale determined by the Committee.

 

Our executive officers, senior and mid-level managers participate in our Annual Incentive Plan. These individuals have the most direct influence over our Company’s and their respective divisions’ or groups’ financial and quality performance, and thus their annual incentive compensation is based on our Company’s and their respective divisions’ or groups’ performance against those performance goals. In 2008, the Committee chose to implement a Cash Profit-Sharing Plan designed to reward all plan eligible employees for their contribution to our profitability. The Plan calls for the creation of a cash profit-sharing pool that is calculated as a percentage of our annual profits. The profit sharing pool will be divided among the plan-eligible employees who do not participate in our Annual Incentive Plan or some other commission plan.

 

Performance Goals and Related Bonus Allocations.  The Committee determines both the types of, and the targets for, the annual performance goals. Typical performance goals include annual or other periodic revenue

growth or amount, operating profitability growth or amount, core net income growth or amount, free cash flow amount and service quality or other operating performance metrics. Financially-oriented performance goals are generally tied to our Board-approved budget and operating plan. Some or all of these performance goals may be established on an adjusted basis, either for ease of measurement or to exclude factors beyond management’s control.

 

For 2007, the Committee selected revenue, core earnings per share, and minimum and target service quality thresholds as the performance goals for the 2007 Annual Incentive Plan. Corporate and division targets were established for each of these goals and the percentage of bonus payout tied to each of the goals was set as follows:

 

 

The Committee determined that bonus payouts for corporate participants, including the executive officers, would be based entirely on achievement of the established corporate performance targets, while division participants would have 50% of their bonus payouts based on division performance targets and 50% based on corporate performance targets. This structure was established to support and reward the operating objective of achieving cross-divisional product sales and client support.

 

On July 26, 2007 we entered into a definitive agreement to acquire Internet Transaction Solutions (“ITS”). After considering the resources the acquisition integration would require during the remainder of 2007 and the fact that there had been several unforeseen client losses that were negatively impacting the performance against the 2007 performance goals, the Committee concluded that it would amend the 2007 Annual Incentive Plan on July 31, 2007.

 

The amended 2007 Annual Incentive Plan included all eligible participants from Online Resources, but not ITS. The legacy 2007 ITS bonus plan, which was a cash incentive plan based on a combination of individual performance goals and corporate performance goals, was not amended. The Committee amended the revenue and core earnings per share targets to reflect the new information that was now available regarding the unforeseen client losses. Additionally, the Committee removed the division performance targets and only set corporate performance targets for revenue and core earnings per share. The Committee created a third corporate performance target, client satisfaction. In recognition of the fact that the performance goals were for only a six month period, the target payout percentage was set to 50% of each participant’s full year target bonus amount, with 75% being the maximum payout percentage that could be achieved. Finally, the management team participants earned their bonus in restricted stock units that vested on March 1, 2008, while non-management team participants earned their bonus in cash. The percentage of bonus payout tied to each of the goals was set as follows:

 

 

In total, participants earned 43% of their 2007 targeted bonuses as established by the amended 2007 Annual Incentive Plan, paid in a combination of cash and equity. This payout range was significantly less than in prior years, due largely to a shortfall in actual revenue and earnings compared to plan. As discussed previously, the shortfall in actual revenue and earnings was due to several unforeseen client losses during 2007, which was the reason for the amendment to the Plan. The Committee believes that in the context of its total compensation approach, payouts under the 2007 amended Annual Incentive Plan were fair to both participants and shareholders, and that the plan structure continues to be appropriate.

 

Looking forward, the Committee has selected revenue, core earnings per share and division or group specific quality measures as performance goals for the 2008 Annual Incentive Plan. Corporate and division or group performance targets have been established for each goal based on our 2008 budget and operating plan. As in 2007, bonus payouts to corporate participants, including the executive officers, will be based entirely on achievement of the established corporate performance targets, and division or group participants will have 50% of their bonus payouts based on division performance targets and 50% based on corporate performance targets. As was the case in

2007, payouts pursuant to the 2008 Annual Incentive Plan will be made in restricted stock units that will vest on March 1, 2009.

 

The Committee believes that the 2008 Annual Incentive Plan design is appropriate and will deliver fair value to both participants and shareholders.

 

Target Bonus Levels.  In 2007, the Committee concluded that bonus targets for executive officers and certain members of senior management should be percentages of their actual base salaries, with fixed dollar amounts still being established for other position or title groups. This encompassed our Chief Executive Officer, at 100% of base salary, our President and Chief Operating Officer at 75% of base salary and our Executive Vice President and Chief Financial Officer at 60% of base salary. On a percentage basis, the bonus target range for senior management was between 7% and 40% of base salary. Actual 2007 bonuses for our executive officers equaled 43% of their targets. All of these bonus amounts were paid in restricted stock units that vested on March 1, 2008.

 

The 2007 bonus targets were established by the Committee within its total compensation approach. Factors considered included peer group comparable compensation, internal compensation equity between participants of the same level or title, cash and equity compensation mix at the various levels of management and affordability.

 

For 2008, the Committee considered similar factors in establishing bonus targets, which resulted in increases in target amounts for some, but not all, levels of plan participation. On a percentage basis, the bonus target range for senior management is now between 25% and 100% of base salary. The Committee also concluded that bonus targets for all members of senior management should now be percentages of their actual base salaries, with fixed dollar bonus targets still being established for other positions or title groups. This encompasses our Chief Executive Officer, at 100% of base salary, our President and Chief Operating Officer at 75% of base salary and our Executive Vice President and Chief Financial Officer at 60% of base salary.

 

No participant in our Annual Incentive Plan has exceeded $1 million in annual taxable compensation. As such, we have not had the material terms of the performance goals under our Annual Incentive Plan approved by shareholders as would be required to qualify for an exemption from limits on deductibility of compensation under Internal Revenue Code section 162(m) and related regulations. We will continue to monitor compensation levels and will consider submitting the material terms of our performance goals to shareholders if the compensation of any of our executive officers or senior managers approaches this threshold.

 

Long-Term Equity-Based Incentive Compensation.  We make long-term incentive compensation available to our executive officers and senior and mid-level managers in the form of time-vested stock options and restricted stock units and performance-vested restricted stock units. Through the grant of these equity incentives, we seek to align the long-term interests of our management team, including our executive officers, with the long-term interests of our shareholders, by creating a direct link between compensation and shareholder return. We also seek to enable members of our management team to achieve ownership in our Company at levels that are meaningful to them, thereby improving our ability to retain these employees. Further, as we offer no defined benefit retirement or pension plans, long-term equity-based incentive grants are an important element in enabling members of our management team to build savings for retirement.

 

Prior to 2006, stock options were the primary form of equity-based incentives awarded under our plans. All employees would receive stock option grants on their date of hire or promotion and, for members of management, including our executive officers, periodically thereafter. These periodic grants were made when the Committee determined that amounts being vested under prior grants were not providing competitive compensation or that prior grants were materially through their vesting cycle. Stock option grants under these plans were generally designed to provide equity compensation over a four year period.

 

At our annual meeting in May 2005, the shareholders approved the 2005 Restricted Stock and Option Plan, which enabled us to award forms of equity other than stock options for the first time. With this approval, the Committee engaged independent compensation consultants Towers Perrin to assist it in designing a compensation program to address long-term performance. Following the consultants’ recommendations, the Committee created the Long-Term Incentive Plan, a mix of equity based incentives tied to key performance measures over a three year period. The plan is limited to executive officers and senior managers. It also establishes an annual grant cycle for the equity portion of total compensation. We began to make awards under this plan in January 2006.

Each year’s Long-Term Incentive Plan is designed to link compensation to our performance over the three year period beginning with the grant year. The Committee selected a three year period because they believed it was the longest period over which management could be expected to provide a reasonably accurate forecast. They also determined that it was possible to obtain reasonable predictions of competitors’ future performance for this period, but not for longer.

 

Award targets for each three-year plan cycle are established by the Committee within its total compensation approach, including seeking alignment between performance and pay. Factors considered include estimated peer group performance, peer group comparable compensation, cash and equity compensation mix at the various levels of management and affordability. Award targets are expressed as either a percentage of actual base salary or a fixed dollar amounts and are converted to share-equivalent grants based on the fair market value of our stock on the date of grant, as measured by the closing price per share on that date. The number of stock option shares granted is determined using the Black-Scholes option pricing model to determine the theoretical fair market value of the stock option on the date of grant. The stock options are exercisable at the fair market value on the date of grant. The number of restricted shares granted is determined using the fair market value on the date of grant. The restricted shares carry no exercise price.

 

Time-vested stock option and restricted stock grants vest annually over the three year period, provided the participant continues to remain employed by us. Performance-vested restricted stock vests at the end of the three year period, with the number of shares that vest based on our performance against two performance targets established by the Committee for that three year period. As performance-based restricted stock is intended to focus participants on our long-term performance and not reward tenure, participants having this grant type who leave us during the three year period may be entitled to partial vesting of their shares at the end of the three year period. They will be vested for either 33.3% or 66.7% of the shares that would have vested at the end of the three year period, if they were employed by us for at least one or two years of the period, respectively. All share grants, regardless of type, have a seven year life.

 

All participants in the Long-Term Incentive Plan receive grants consisting of time-vested stock options and restricted stock. For the executive officers and senior managers, performance-vested restricted stock is also granted, with such grants being allocated as follows for 2007:

 

 

Before the start of each year, the Committee selects two performance goals for the three year period covered by the coming year’s performance-based restricted stock grants. These performance goals will tend to be growth and profitability oriented and are intended to reflect the measures on which the capital markets value us. We believe that measures such as these best align the long-term interests of management and the shareholders.

 

The Committee also establishes a target for each selected performance goal, and creates a vesting band of around this target. Vesting of performance-based restricted stock can be increased to as much as 150% of target levels for results that exceed the performance targets. Vesting can also be decreased below target levels, and may be reduced to zero, for results that do not fully meet the targets. As depicted in the following matrix for 2007, the intersection of our actual performance against the target for each performance goal will determine the number of performance-based restricted shares that vest at the end of the three year period.

 

 

For example, if we were to achieve the target value of one performance goal and the high value of the other, 125% of participants’ performance-based restricted shares would vest. Note that the above matrix has been simplified for presentation purposes and actual vesting is interpolated between 50% and 150%.

For 2007, the Committee selected average revenue growth and average earnings before interest and taxes per share as performance goals for the 2007 Long-Tem Incentive Plan, to be measured over the 2007 through 2009 period. It established targets for each of these goals based on our three year forecast, as adjusted for a degree of uncertainty in future forecasting agreed upon by management and the Committee. Beginning in 2007, the Committee decided to also consider growth and profitability expectations for comparable companies as a factor in setting performance goal targets. It also established a vesting band performance around these targets. For revenue growth, the Committee determined that the vesting band would be approximately 25% above and below the target. For average earnings before interest and taxes per share, it determined that the vesting band would be 26% of the target value, both above and below the target. At all points in the matrix defined by these vesting bands, the Committee concluded that shareholders would receive fair incremental value after expensing of the related equity compensation.

 

Our Long-Term Incentive Plan requires that when we complete an acquisition, disposition or other material transaction during one or more already established three year periods, we adjust our performance targets to reflect the impact that transaction is expected to have on existing performance targets. The expected impact on which we base our adjustments is the impact that is communicated to and approved by our Board of Directors at the time of the transaction. On August 10, 2007 we acquired ITS, a company with approximately $20 million in run rate revenue. To adjust our existing 2006 and 2007 performance targets for this acquisition, we applied the forecast scenario on which our Board of Directors approved the acquisition. We also analyzed the impact of the ITS transaction as though we had completed the acquisition on January 1, 2006 and 2007, in order to properly assess and adjust consolidated growth rates. This acquisition altered expected revenue and earnings levels over the period, and the Committee approved adjusted performance targets for the 2006 and 2007 Long-Term Incentive Plans for the acquisition reflecting these impacts.

 

For 2008, the Committee chose to alter the mix of time-vested stock options and restricted stock and performance-vested restricted stock granted to executive officers and senior managers. The Committee made this decision based on recommendations received from its independent compensation consultant, who indicated that our current acquisition strategy makes it difficult to forecast future performance, and thus set reasonable performance goals. As such, the allocation to performance-vested restricted stock was reduced to 20%, and the allocations to time-vested stock options and restricted stock were increased to 40%. The equity grants made to executive officers and senior managers were allocated as follows in 2008:

 

 

The Committee also chose to lower the minimum payout percentage that could be earned under the Long-Term Incentive Plan in 2008. This results in the widening of the range of values that could be achieved at the lower end of the goals, allowing the payout percentage to be as low as 25%. In the 2006 and 2007 Long-Term Incentive Plans, the lowest payout percentage that could be achieved was 50%, but for 2008, the Committee determined that this was too stringent. The Committee chose to lower the minimum payout percentage to 25% from 50% but not increase the maximum payout percentage from 150% to allow senior management the ability to earn a minimal payout for a minimum level of performance. The 2008 payout percentages are depicted in the following matrix:

 

For 2008, the Committee again selected average revenue growth and average earnings before interest and taxes per share as performance goals for the 2008 Long-Tem Incentive Plan, to be measured over the 2008 through 2010 period. It established targets for each of these goals based on our three year forecast, as adjusted for a degree of uncertainty in future forecasting agreed upon by management and the Committee. As was the case in 2007, the Committee also considered growth and profitability expectations for comparable companies as a factor in setting performance goal targets. It also established a vesting band performance around these targets. For revenue growth, the Committee determined that the vesting band would be 40% below and 27% above the target. For average earnings before interest and taxes per share, it determined that the vesting band would be 27% below and above the target. At all points in the matrix defined by these vesting bands, the Committee concluded that shareholders would receive fair incremental value after expensing of the related equity compensation.

 

The Committee establishes target equity grants under the Long-Term Incentive Plan within its total compensation approach. Factors considered included peer group comparable compensation, cash and equity compensation mix at the various levels of management and affordability.

 

Beginning in 2007, equity targets for executive officers and certain members of senior management were established as percentages of their actual base salaries, with fixed dollar amounts still being established for other positions or title groups. This encompassed our Chief Executive Office, at 130% of base salary, our President and Chief Operating Officer at 100% of base salary and our Executive Vice President and Chief Financial Officer at 90% of base salary. On a percentage basis, the bonus target range for our executive officers and senior management was between 16% and 130% of base salary.

 

For 2008, the Committee’s analysis resulted in increases in target amounts at a number of levels of plan participation. Additionally, the Committee concluded that equity targets for the executive officers and all members of senior management should now be percentages of their actual base salaries, with fixed dollar amounts still being established for other positions or title groups. This encompasses our Chief Executive Office, at 343% of base salary, our President and Chief Operating Officer at 118% of base salary and our Executive Vice President and Chief Financial Officer at 106% of base salary. On a percentage basis, the bonus target range for our executive officers and senior management was between 30% and 343% of base salary.

 

Benefits and Perquisites.  We generally avoid perquisites. Our executive officers and senior managers receive the same benefits as are available to our other full-time employees.

 

Severance Compensation.  We do not have agreements with our executive officers and most of our senior managers that would provide severance benefits upon termination without cause or for good reason except for the change in control severance plan described below. We have, however, entered into severance agreements with a limited number of senior managers as a part of our acquisitions of other companies.

 

Potential Payments Upon Termination or Change in Control.  We have a change in control severance plan for the benefit of the executive officers and certain members of senior management in the event of (i) a change in control of our Company and (ii) termination of any such person under specified circumstances within one year after the change in control.

 

The change in control severance plan has a “double trigger” feature, meaning that two events must occur in order for benefits to be paid to a participant. The first event must be a change in control of our Company, which is defined to be (i) any change in control required to be reported in response to Item 1(a) on Form 10-K, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Act”); (ii) a third person, including a “group” as such term is used in Section 13(d)(3) of the Act, becoming the owner of 50% or more of the combined voting power of our outstanding common stock, unless such acquisition is approved by a majority of our Board prior to such acquisition; or (iii) the directors on our Board cease for any reason to constitute at least a majority of the Board.

 

The second event, which must occur within one year after the change of control event, is either (i) the termination of the participant by us for reasons other than cause or disability or (ii) the resignation of the participant from employment for “good reason”. “Good reason” is defined to be any changes in the duties and responsibilities of the participant which are materially inconsistent with the duties and responsibilities of the participant within our Company immediately prior to the change in control, (ii) any reduction of the participant’s compensation or aggregate benefits, (iii) any required relocation of the participant’s office beyond a 50 mile radius from the location

of the participant’s office immediately prior to the change in control, (iv) any failure by us to obtain the assumption of the change in control severance plan by a successor of our Company, or (v) requiring the participant to travel materially in excess of the participant’s business travel obligations prior to the change in control.

 

In the event the “double trigger” occurs to a participant in the plan, the participant shall be entitled to two categories of benefits. First, a lump sum severance payment equal to the participant’s average annual salary and cash bonus during the three years preceding the change in control, multiplied by (i) 2.99 for each Group A participant (defined to be one of our executive officers), (ii) 2,0 in the case of each Group B participant (defined to be one of the general managers of our operating divisions), and (iii) 1.0 in the case of each Group C participant (defined to be our CTO or Senior Vice President for Strategic Development). Second, the health benefit plan coverage (medical, dental and vision insurance) in effect for such participant and the participant’s family as of the date of his or her termination shall be provided by us to the participant for one year from the date of the participant’s termination at the same premium rates as charged for employees of ours, as if the participant had continued in employment during such period. In addition, all outstanding options and other equity awards, if any, granted to a participant in the severance plan shall become fully vested and exercisable upon a change in control, and the restricted period with respect to any restricted stock or any other equity award granted to a participant thereunder shall lapse immediately upon such change in control.

 

The benefits payable under the plan are subject to increase pursuant to Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), which defines “excess parachute payments” which are subject to certain excise taxes assessed pursuant to Section 4999 of the Code. The purpose of the increase is to ensure that such excise taxes do not diminish the benefit received by a participant under the plan. In addition, the benefits under the plan may be modified as necessary to ensure compliance with Section 409A of the Code governing deferred compensation arrangements.

 

Assuming the termination of the participants had occurred on December 31, 2007, and that no modifications of the benefits were required pursuant Sections 280G, 4999 or 409A of the Code, the following represents the benefits that would have been paid under the plan to each participant:

 

 

 

 

Chief Executive Officer Compensation and Performance

 

The compensation for Matthew P. Lawlor, our Chairman and Chief Executive Officer, consists of an annual base salary, annual incentive compensation and long-term equity-based incentive compensation. The Committee determines and recommends to the Board for their approval the level for each of these compensation elements within its total compensation approach, using methods consistent with those used for our other senior executives, including the assessment of Mr. Lawlor’s performance and review of competitive benchmark data.

 

The independent members of the Board of Directors evaluate Mr. Lawlor’s performance against a set of annual performance goals recommended by the Committee and approved by the those same independent members. The goals fall into four categories: 1) financial goals, focused on revenue, earnings before interest, taxes, depreciation

and amortization, and core net income as set forth in our budget, 2) operating goals, including metrics such as consumer adoption rate and transaction growth, 3) strategic goals, including initiatives relating to organization development, capital structure, acquisitions and other strategic matters, and 4) intangibles, covering leadership, and other qualitative factors that the independent members of the Board may deem appropriate in evaluating chief executive performance. For 2007, each of these categories is weighted 30%, 30%, 30% and 10%, respectively, out of a possible 100% score. This score is used by the Committee and independent members of the Board in evaluating Mr. Lawlor’s total compensation and setting his base salary.

 

In making its most recent evaluation, the Committee considered that we outperformed our peer group financially with: 1) revenue growth of 47% versus 21% for its peer group, 2) earnings before interest, taxes, depreciation and amortization growth of 59% versus 45% for its peer group, and 3) core earnings per share growth of 69% versus 61% for its peer group. The Committee noted that, for all metrics, the peer group comparison excluded four companies that were acquired during 2007 and did not report 2007 financial information, and for earnings before interest, taxes, depreciation and amortization, one additional company for which no information was available. In addition to our competitively superior financial performance, we achieved a high portion of our operating and strategic goals for 2007, led by the re-financing of our long-term debt at a much more favorable interest rate in February 2007 and the acquisition and subsequent integration of ITS. The Committee also concluded that Mr. Lawlor displayed outstanding leadership in positioning us for the future, addressing organizational scale with our reorganization, expanding the new product pipeline and pushing forward key infrastructure development.

 

Based on their analysis of competitive benchmarks and evaluation of Mr. Lawlor’s performance in 2007 and in prior years, the Committee recommended increasing Mr. Lawlor’s base salary to $350,000, maintaining his target bonus level at 100% of base salary and increasing his target equity grant level to 343% of base salary. The independent members of the Board discussed and implemented the Committee’s recommendations. The Committee believes that within our current compensation structure, these elements are commensurate with Mr. Lawlor’s performance for 2007 year, and that Mr. Lawlor’s compensation is below, but moving towards, the Committee’s target versus competitive benchmarks.

 

Stock Ownership Guidelines

 

Under stock ownership guidelines established by the Board in February 2007, within four years of joining our Company, the Chief Executive Officer is expected to achieve and maintain stock ownership equal to five times the Chief Executive Officer’s base salary and each of the other executive officers is expected to achieve and maintain stock ownership equal to three times that executive officer’s base salary. For purposes of these guidelines, stock ownership includes the fair market value of (1) all shares of common stock owned, including vested restricted stock and (2) vested stock options. The fair market value of stock options shall mean the then-current market price less the exercise price.

 

The Board of Directors has also established stock ownership guidelines for its members. Within four years of joining the Board, each member is expected to achieve and maintain stock ownership equal to five times their annual cash compensation.

 

Tax and Accounting Implications

 

Deductibility of Executive Compensation.  Section 162(m) of the Internal Revenue Code requires that companies meet specific criteria, including stockholder approval of certain stock and incentive plans, in order to deduct, for federal income tax purposes, compensation over $1 million per individual paid to their Chief Executive Officer and each of their four other most highly compensated executives. None of our executives have exceeded this threshold to date.

 

Our equity-based incentive plans and our annual incentive plan are designed to permit the grant and payment of equity or cash incentive awards that are fully deductible as performance-based compensation under the Internal Revenue Code. In reviewing and adopting other executive compensation programs, the Committee plans to continue to consider the impact of Section 162(m) limitations in light of the materiality of the deductibility of potential benefits and the impact of such limitations on other compensation objectives. Because the Committee

seeks to maintain flexibility in accomplishing our compensation goals, however, it has not adopted a policy that all compensation must be fully deductible.

 

Accounting for Stock-Based Compensation.  We account for stock-based compensation payments in accordance with the requirements of Statements of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). SFAS No. 123(R) requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their fair value. We expect that share-based compensation expense under SFAS No. 123(R) will reduce our diluted earnings per share by approximately $0.22 in 2008.

 

The following table summarizes the compensation of our named executive officers for the fiscal year ended December 31, 2007.

 

 

 

 

The following table summarizes the plan-based awards granted to our named executive officers during the fiscal year ended December 31, 2007. The option awards and the unvested portion of the stock awards identified in the table below are also reported in the Outstanding Equity Awards at Fiscal Year-End table that follows.

 

 

The following table summarizes the outstanding option and stock awards held by our named executive officers at December 31, 2007.

 

 

 

 

 

 

 

 

 

The following table summarizes the exercises of stock options and vesting of restricted stock units for our named executive officers during the fiscal year ended December 31, 2007.

 

 

The table disclosing the actuarial present value of our named executive officers accumulated benefit under defined benefits plans, the number of years of credited service under each such plan and the amount of pension benefits paid to each named executive officer during the year is omitted because we do not have a defined benefit

plan for named executive officers. The only retirement plans available to named executive officers in 2007 were our qualified 401(k) savings and retirement plan, which is available to all employees.

 

The table disclosing contributions to non-qualified defined contributions and other deferred compensation plans, and each named executive officer’s withdrawals, earnings and fiscal year end balances in those plans is omitted because we had no non-qualified deferred compensation plans or benefits for named executive officers or other employees in 2007.

 

Under our 2005 Restricted Stock and Option Plan, the grants to all employees who were employed for at least two years prior to a change of control vest upon a change of control. For all other employees, their grants under this plan shall vest upon the one year anniversary of the change of control or as to any of such employees whose employment is terminated prior to such anniversary, upon the date of termination. Under our change in control severance plan, all outstanding options and other equity awards, if any, granted to a participant in the severance plan shall become fully vested and exercisable upon a change in control, and the restricted period with respect to any restricted stock or any other equity award granted to a participant thereunder shall lapse immediately upon such change in control.

 

Each non-employee Director receives a one-time option to purchase shares of common stock with a fair market value of $48,000 (with an exercise price at the fair market value of the common stock at the time of grant) at the beginning of his or her initial term. The stock option vests annually over three years. Additionally, each non-employee Director receives annually (i) a fee of $24,000, (ii) an additional fee of $2,500 for each Board Committee on which he or she serves as the Chairperson, (iii) an additional fee of $1,250 if he or she serves on the Audit Committee, (iv) an option to purchase shares of common stock with a fair market value of $24,000, (v) an additional option to purchase shares of common stock with a fair market value of $2,500 for each Board Committee on which he serves as the Chairperson, and (vi) an additional option to purchase shares of common stock with a fair market value of $1,250 if he or she serves on the Audit Committee. The cash fees are paid in quarterly installments. The stock options are granted at the beginning of each annual term with an exercise price at the fair market value of the common stock at the time of grant, and they vest over the course of one year. We reimburse Directors for expenses they incur in connection with attending Board and Committee meetings. The employee Director and the Director representing Tennenbaum do not receive any compensation for their participation in Board or Committee meetings.

The following table summarizes the cash, equity awards and other compensation earned, paid or awarded to each of our independent Directors during the fiscal year ended December 31, 2007.