SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

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ARBITRON INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Dear Stockholder:

 

On behalf of the Board of Directors of Arbitron Inc., I am pleased to invite you to attend the annual meeting of stockholders. The meeting will be held at the Mandarin Oriental Hotel, 80 Columbus Circle at 60th Street, Time Warner Center, New York, New York 10023, on Tuesday, May 15, 2007, at 9:00 AM local time.

 

The Notice of Annual Meeting of Stockholders and the proxy statement that follow include information about the proposals recommended by Arbitron’s Board of Directors to (i) elect seven (7) individuals to serve as directors of Arbitron and (ii) approve an amendment to the Company’s 1999 Stock Incentive Plan.

 

Our Board of Directors believes that a favorable vote for each of these proposals at the annual meeting is in the best interests of Arbitron and its stockholders, and unanimously recommends a vote FOR each of the proposals. Accordingly, we urge you to review the accompanying materials carefully and to promptly vote your shares.

 

It is important that your shares be represented at the meeting. Please promptly vote your shares by following the instructions on the enclosed proxy card to ensure that your vote is counted at the meeting.

 

We look forward to seeing you at the meeting.

 

Sincerely,

 

Stephen B. Morris

President and Chief Executive Officer

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

May 15, 2007

 

 

 

Stockholders are entitled to one vote for each share of common stock held of record on the record date listed above. The proxy statement and the accompanying proxy card will be first mailed to stockholders on or about April 18, 2007.

 

It is important that your shares be represented and voted at the meeting. You can vote your shares by completing and returning the enclosed proxy card. Most stockholders can also vote their shares over the Internet or by telephone. If Internet or telephone voting is available to you, voting instructions are printed on the enclosed proxy card. You can revoke a proxy at any time prior to its exercise at the meeting by following the instructions in the accompanying proxy statement. We appreciate your cooperation.

 

By Order of the Board of Directors

 

Timothy T. Smith

Executive Vice President and Chief Legal Officer,
  Legal and Business Affairs, and Secretary

 

April 18, 2007

 

TABLE OF CONTENTS

 

ARBITRON INC.
142 West 57th Street
New York, New York 10019
April 18, 2007

 

 

PROXY STATEMENT

 

 

We will begin mailing this proxy statement to our stockholders on or about April 18, 2007.

 

We are furnishing this proxy statement to our stockholders in connection with a solicitation of proxies by our Board of Directors for use at our 2007 annual meeting of stockholders to be held on Tuesday, May 15, 2007, at 9:00 AM local time at the Mandarin Oriental Hotel, 80 Columbus Circle at 60th Street, Time Warner Center, New York, New York 10023.

 

If you held any of our common stock at the close of business on April 2, 2007, the record date for the annual meeting, you are entitled to receive notice of and to vote at our 2007 annual meeting. On that date, there were 29,926,654 shares of common stock outstanding. Our common stock constitutes the only class of securities entitled to vote at the meeting. Stockholders who have not exchanged their Ceridian Corporation common stock certificates for Arbitron Inc. common stock certificates in connection with the spin-off of Ceridian Corporation by Arbitron Inc. on March 30, 2001, will not be eligible to vote at the meeting.

 

All holders of our common stock at the close of business on April 2, 2007, the record date for the annual meeting, or their duly appointed proxies, are authorized to attend the 2007 annual meeting. If you attend the meeting, you may be asked to present valid picture identification, such as a driver’s license or passport, before being admitted. Cameras, recording devices and other electronic devices will not be permitted at the meeting.

 

Please also note that if you hold your shares in “street name” (that is, through a bank, broker or other nominee), you will need to bring a copy of the brokerage statement reflecting your stock ownership as of April 2, 2007, the record date for the annual meeting.

 

The presence of a majority of the outstanding shares of our common stock entitled to vote, in person or by proxy, is necessary to constitute a quorum and conduct business at the 2007 annual meeting. Abstentions and “broker nonvotes” will be considered present at the meeting for purposes of determining a quorum. A broker nonvote occurs when a bank or broker holding common stock for a beneficial owner does not vote on a particular matter because the bank or broker does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner.

 

Each share of our common stock that you hold entitles you to one vote on all matters that come before the annual meeting. Inspectors of election will count votes cast at the annual meeting.

 

The affirmative vote of a plurality of all the votes cast at the annual meeting, assuming a quorum is present, is necessary for the election of a director. Therefore, the seven individuals with the highest number of affirmative votes will be elected to the seven directorships. Stockholders who do not wish their shares to be voted for a particular nominee may indicate that in the space provided on the proxy card or by following the telephone or Internet instructions. For purposes of the election of directors, abstentions and other shares not voted (whether by broker nonvote or otherwise) will not be counted as votes cast and will have no effect on the result of the vote.

 

The affirmative vote of a majority of the shares of common stock present in person or by proxy and entitled to vote on the proposal is necessary to approve the Plan Amendment. In addition, for the Plan Amendment to be approved, the New York Stock Exchange listing standards require that (i) the total votes cast must represent over 50% of all of the outstanding shares of common stock entitled to vote and (ii) votes in favor must constitute at least a majority of the votes cast. For purposes of this proposal to approve the Plan Amendment, abstentions will count as votes cast, but broker nonvotes will not count as votes cast. Therefore, abstentions have the effect of a vote against the proposal, and broker nonvotes could, depending on the number of votes cast, have the effect of a vote against the proposal.

 

If you own Arbitron common stock as a participant in one or more of our employee benefit plans, you will receive a single proxy card that covers both the shares credited to your name in your plan account(s) and shares you own that are registered in your name. If any of your plan accounts are not in the same name as your shares of record, you will receive separate proxy cards for your record and plan holdings. Proxies submitted by plan participants in our 401(k) plan will serve as voting instructions to the trustees for the plan whether provided by mail, telephone or the Internet. In the absence of voting instructions from participants in the 401(k) plan, the trustees of the plan will vote the undirected shares in the same proportion as the directed shares.

 

If you hold your shares in your own name as a holder of record, you can simplify your voting by voting via the Internet or calling the toll-free number listed on the enclosed proxy card. If you vote via the Internet or by telephone, please do not return a signed proxy card. If, instead, you choose to vote by mail, please mark the proxy card enclosed with the proxy statement, date and sign it, and mail it in the postage-paid envelope. The shares represented will be voted according to your directions. You can specify how you want your shares voted on the proposal by marking the appropriate boxes on the proxy card. Please review the voting instructions on the proxy card and read the entire text of the proposal and the position of the Board of Directors on such proposal in the proxy statement prior to making your vote. If you properly execute and return a proxy in the enclosed form, your stock will be voted as you specify. If your proxy card is signed and returned without specifying a vote on the election of directors, the proxy representing your common stock will be voted in favor of the proposed director nominees and the amendment of the 1999 Stock Incentive Plan.

 

If you hold your shares through a broker, bank or other nominee, you will receive separate instructions from the nominee describing the procedure for voting your shares.

 

No other matters are to be presented for action at the annual meeting other than the items described in this proxy statement. The enclosed proxy will, however, confer discretionary authority with respect to any other matter that may properly come before the meeting. The persons named in the enclosed proxy intend to vote as recommended by the Board of Directors or, if no recommendation is given, in accordance with their judgment on any matters that may properly come before the meeting.

 

It is our policy that the individual stockholder votes are kept confidential prior to the final tabulation of the vote at our stockholders meeting if the stockholder requests confidential treatment. The only exceptions to this policy involve applicable legal requirements and proxy solicitations in opposition to the Board. Access to proxies and individual stockholder voting records is limited to the independent election inspectors (The Bank of New York), who may inform us at any time whether or not a particular stockholder has voted.

 

If you submit a proxy, you can revoke it at any time before it is exercised by giving written notice to our Corporate Secretary prior to the annual meeting or by timely delivery of a properly exercised, later-dated proxy (including an Internet or telephone vote). You may also attend the annual meeting in person and vote by ballot, which would cancel any proxy that you previously submitted.

 

You should rely only on the information provided in this proxy statement. We have not authorized anyone to provide you with different or additional information. You should not assume that the information in this proxy statement is accurate as of any date other than the date of this proxy statement or, where information relates to another date set forth in this proxy statement, then as of that date.

 

Our business is managed under the direction of the Board of Directors, which is currently composed of eight directors. On July 18, 2006, Erica Farber, a director of Arbitron since March 31, 2001, resigned from the Board of Directors. The current terms of office of all of our directors expire at the 2007 annual meeting. Lawrence Perlman, the current Chairman of the Board and a director of Arbitron since March 31, 2001, informed the Board of Directors on September 20, 2006, that he did not intend to stand for reelection when his term expired in 2007. Alan W. Aldworth, a director of Arbitron since May 14, 2004, informed the Board of Directors on February 21, 2007, that he did not intend to stand for reelection when his term expired in 2007. Neither Ms. Farber’s resignation nor Mr. Perlman’s or Mr. Aldworth’s decision not to stand for reelection was the result of any disagreement with the Company related to its operations, policies or practices. Our Board of Directors has renominated each of the other six directors currently serving on the Board to serve as directors for a one-year term until the 2008 annual meeting of stockholders. The Board of Directors has also nominated William T. Kerr for election to the Board of Directors to serve for a one-year term until the 2008 annual meeting of stockholders. Each of the nominees has consented to serve if elected.

 

The Board of Directors recommends a vote FOR and solicits proxies in favor of each of the nominees named below. Proxies cannot be voted for more than seven people. Our Board has no reason to believe that any of the nominees for director will be unable or unavailable to serve. However, if any nominee should for any reason become unable or unavailable to serve, proxies will be voted for another nominee selected by the Board. Alternatively, proxies, at our Board’s discretion, may be voted for a fewer number of nominees as results from a director’s inability or unavailability to serve. Each person elected will hold office until the 2008 annual meeting of stockholders and until his or her successor is duly elected and qualified, or until earlier resignation or removal.

 

The following is biographical information concerning the seven nominees for election as directors of Arbitron:

 

Shellye L. Archambeau, age 44

 

 

Philip Guarascio, age 65

 

 

 

William T. Kerr, age 66

 

 

Larry E. Kittelberger, age 58

 

 

Stephen B. Morris, age 63

 

 

 

Luis G. Nogales, age 63

 

 

Richard A. Post, age 48

 

 

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES SET FORTH ABOVE.

 

Under the listing standards of the New York Stock Exchange, and pursuant to our corporate governance policies and guidelines, we are required to have a majority of “independent” directors and a nominating/corporate governance committee, compensation committee and audit committee, each composed solely of independent directors. In determining director independence, the Board broadly considers all relevant facts and circumstances, including the rules of the New York Stock Exchange. The Board considers the issue not merely from the standpoint of a director, but also from that of persons or organizations with which the director has an affiliation. An independent director is free of any relationship with Arbitron or its management that may impair the director’s ability to make independent judgments.

 

The Board of Directors has evaluated the status of each director and affirmatively determined that Ms. Archambeau and Messrs. Guarascio, Kittelberger, Nogales, Perlman, and Post are independent. Mr. Morris is not independent because he is an employee of the Company and Mr. Aldworth is not independent because his son is employed by the Company’s registered public accounting firm. Each current member of the Compensation and Human Resources Committee, the Nominating Committee and the Audit Committee is independent. The Board of Directors has also evaluated the status of Mr. Kerr, a nominee for election as a director, and affirmatively determined that Mr. Kerr is independent. Ms. Farber served on the Board of Directors and its Compensation and Human Resources Committee and Nominating Committee during 2006, prior to her resignation from the Board of Directors in July. Prior to her resignation, the Board had affirmatively determined that Ms. Farber was independent.

 

In evaluating the independence of Mr. Nogales, the Board of Directors considered the fact that Mr. Nogales is the managing partner of a general partnership that has a 2% ownership interest in an investment fund that has a 96% ownership interest in two radio stations that have entered into five-year radio ratings contracts with the Company substantially in the form and upon substantially the terms and conditions of the Company’s standard radio ratings contract with third parties. The average annual fees payable to the Company under this agreement are equal to approximately $156,000. The Board of Directors, with Mr. Nogales and Mr. Morris not participating, had previously reviewed and approved the terms of this transaction. Following its review of this relationship, the Board of Directors affirmatively determined that Mr. Nogales is independent.

 

Corporate Governance Policies and Guidelines.  We have adopted corporate governance policies and guidelines, which serve as principles for the conduct of the Board of Directors. The corporate governance policies and guidelines, which meet the requirements of the New York Stock Exchange listing standards, address a number of topics, including, among other things, director qualification standards, director responsibilities, the responsibilities and composition of the Board committees, director access to management and independent advisers, director compensation, management succession and evaluations of the performance of the Board.

 

Codes of Ethics.  We have adopted a Code of Ethics and Conduct, which applies to all of our employees, officers and directors, and meets the requirements for such code as set forth in the New York Stock Exchange listing standards. We have also adopted a Code of Ethics for the Chief Executive Officer and Financial Managers, which applies to our Chief Executive Officer, Chief Financial Officer and all managers in the financial organization of Arbitron, and meets the requirements of a “code of ethics” as defined by the rules and regulations of the Securities and Exchange Commission (the “SEC”).

 

Where You Can Find These Documents.  Our corporate governance policies and guidelines, Code of Ethics and Conduct and Code of Ethics for the Chief Executive Officer and Financial Managers are available

on our Web site at www.arbitron.com, and are also available in print to any stockholder who sends a written request to the Treasury Manager at Arbitron Inc., 9705 Patuxent Woods Drive, Columbia, Maryland 21046.

 

Consistent with the New York Stock Exchange listing standards, our corporate governance policies and guidelines provide that, in order to promote open discussion among nonmanagement directors, the Board of Directors will devote a portion of each regularly scheduled Board meeting to executive sessions without management participation. Lawrence Perlman, the Chairman of our Board of Directors, presided at such executive sessions during 2006. Following the 2007 annual meeting, the Board of Directors will elect a new chair from among its duly elected members. If the person elected to serve as chair is not independent, as defined in the New York Stock Exchange listing standards, the Board of Directors will also elect a lead independent director to preside at executive sessions of nonmanagement directors. Our corporate governance policies and guidelines provide that if the group of nonmanagement directors includes directors who are not independent, as defined in the New York Stock Exchange listing standards, it is the Company’s policy that at least one such executive session convened per year shall include only independent directors.

 

Interested third parties may communicate with the Board of Directors by communicating directly with the Chairman of the Board of Directors or, if the person then serving as the chair is not independent as defined in the New York Stock Exchange listing standards, the lead independent director, by e-mailing correspondence directly to the Chairman or the lead independent director, as applicable, at nonmanagementdirectors@arbitron.com. The Chairman or the lead independent director, as applicable, will decide what action should be taken with respect to the communication, including whether such communication will be reported to the Board of Directors.

 

The Board of Directors held seven meetings in 2006, including meetings by telephone conference. Each director attended at least 75% of the meetings of the Board of Directors and applicable committees on which they served during the period that they served on the Board of Directors or such committees. In addition, pursuant to our corporate governance policies and guidelines, directors are expected to attend the annual meetings of stockholders. Last year, all of our then current directors attended the annual meeting of stockholders.

 

The Board of Directors maintains the following six standing committees:

 

 

Membership on the Audit Committee, the Compensation and Human Resources Committee, the Nominating Committee and the Corporate Governance Committee is limited to directors who are “independent” of Arbitron, as that term is defined in the New York Stock Exchange listing standards and as affirmatively determined by the Board of Directors.

 

The following directors currently serve on the Executive Committee:

 

Lawrence Perlman, Chair

Alan W. Aldworth

Stephen B. Morris

 

The Executive Committee acts on matters that arise between Board meetings and require immediate action. All actions taken by this committee will be reported to, and ratified by, the Board of Directors. The Executive Committee did not meet in 2006.

 

The following directors currently serve on the Audit Committee:

 

Richard A. Post, Chair

Shellye L. Archambeau

Larry E. Kittelberger

 

As required by the charter of the Audit Committee, our corporate governance guidelines, and the New York Stock Exchange listing standards, all members of the Audit Committee qualify as “independent” directors within the meaning of the New York Stock Exchange listing standards and Rule 10A-3 under the Securities and Exchange Act of 1934, as amended, are financially literate within the meaning of the New York Stock Exchange listing standards and meet the experience and financial expertise requirements of the New York Stock Exchange listing standards. The Board of Directors has determined that Richard A. Post is an “audit committee financial expert” as defined by the rules and regulations of the Securities and Exchange Commission. The principal purposes of the Audit Committee are to:

 

 

 

 

The Board of Directors has adopted an amended and restated written charter for the Audit Committee effective as of February 27, 2007. Nothing contained herein modifies the Audit Committee charter. A copy of the Audit Committee’s charter is available on our Web site at www.arbitron.com and is available in print, free of charge, to any stockholder who requests it. You can obtain such a copy in print by contacting the Treasury Manager at Arbitron Inc., 9705 Patuxent Woods Drive, Columbia, Maryland 21046. The Audit Committee held 15 meetings in 2006, including meetings by telephone conference.

 

The following directors currently serve on the Compensation and Human Resources Committee:

 

Philip Guarascio, Chair

Luis G. Nogales

Lawrence Perlman

Each member of the Compensation and Human Resources Committee qualifies as an “independent” director under the New York Stock Exchange listing standards. The principal responsibilities of the Compensation and Human Resources Committee are to:

 

 

The Committee has retained the firm of Frederic W. Cook & Co., Inc. as its compensation consultant to assist in the continual development and evaluation of compensation policies and the Compensation and Human Resources Committee’s determinations of compensation awards. The role of Frederic W. Cook & Co., Inc. is to provide independent, third-party advice and expertise in executive compensation issues.

 

The Board of Directors has adopted an amended and restated charter for the Compensation and Human Resources Committee effective as of February 20, 2007. Nothing contained herein modifies the Compensation and Human Resources Committee charter. A copy of the Compensation and Human Resources Committee’s charter is available on our Web site at www.arbitron.com and is available in print, free of charge, to any stockholder who requests it. You can obtain such a copy in print by contacting the Treasury Manager at Arbitron Inc., 9705 Patuxent Woods Drive, Columbia, Maryland 21046. The Compensation and Human Resources Committee held four meetings in 2006 including one executive session without representatives of management.

 

The following directors currently serve on the Nominating Committee:

 

Philip Guarascio, Chair

Larry E. Kittelberger

Richard A. Post

 

Each member of the Nominating Committee qualifies as an “independent” director under the New York Stock Exchange listing standards. The principal purposes of the Nominating Committee are to:

 

 

The Nominating Committee has approved, and the Board of Directors has adopted, policies and procedures to be used for considering potential director candidates to continue to ensure that our Board of Directors consists of a diversified group of qualified individuals who function effectively as a group. These policies and procedures provide that qualifications and credentials for consideration as a director nominee may vary according to the particular areas of expertise being sought as a complement to the existing composition

of the Board of Directors. However, at a minimum, candidates for director must possess: (1) strength of character; (2) an ability to exercise independent thought, practical wisdom and mature judgment; (3) an ability to make independent analytical inquiries; (4) a willingness and ability to devote adequate time and resources to diligently perform Board of Director duties; and (5) a reputation, both personal and professional, consistent with the image and reputation of Arbitron. In addition to the aforementioned minimum qualifications, the Nominating Committee also believes that there are other factors that, while not prerequisites for nomination, should be taken into account when considering whether to recommend a particular person. These factors include: (1) whether the person possesses specific media and marketing expertise and familiarity with general issues affecting Arbitron’s business; (2) whether the person’s nomination and election would enable the Board of Directors to have a member that qualifies as an “audit committee financial expert” as such term is defined by the Securities and Exchange Commission; (3) whether the person would qualify as an “independent” director under the New York Stock Exchange listing standards and the Company’s corporate governance policies and guidelines; (4) the importance of continuity of the existing composition of the Board of Directors; and (5) the importance of a diversified Board membership, in terms of both the individuals involved and their various experiences and areas of expertise. The Nominating Committee retains a third-party executive search firm to identify and review candidates upon request of the Nominating Committee from time to time.

 

The Nominating Committee seeks to identify director candidates based on input provided by a number of sources, including (i) Nominating Committee members, (ii) other directors of the Company, and (iii) stockholders of the Company. The Nominating Committee also has the authority to consult with or retain advisers or search firms to assist in the identification of qualified director candidates.

 

As part of the identification process, the Nominating Committee takes into account the number of expected director vacancies and whether existing directors have indicated a willingness to continue to serve as directors if renominated. Once a director candidate has been identified, the Nominating Committee then evaluates this candidate in light of his or her qualifications and credentials, and any additional factors that it deems necessary or appropriate. Existing directors who are being considered for renomination will be reevaluated as part of the Nominating Committee’s process of recommending director candidates.

 

The Nominating Committee considers candidates recommended by stockholders in the same manner as all other director candidates. Stockholders who wish to suggest qualified candidates must comply with the advance notice provisions and other requirements of Article II, Section 13 of our bylaws. These notice provisions require that recommendations for directors must be received not less than 90 days nor more than 120 days prior to the date of the annual meeting of stockholders for the preceding year. The notice must follow the guidelines set forth in this proxy statement under the heading, “— Other Matters — Director Nominations.”

 

After completing the identification and evaluation process described above, the Nominating Committee recommends to the Board of Directors the nomination of a number of candidates equal to the number of director vacancies that will exist at the annual meeting of stockholders. The Board of Directors then selects director nominees for stockholders to consider and vote upon at the stockholders’ meeting.

 

The Board of Directors has adopted an amended and restated written charter for the Nominating Committee, a copy of which is available on our Web site at www.arbitron.com and is available in print, free of charge, to any stockholder who requests it. You can obtain a copy in print by contacting the Treasury Manager at Arbitron Inc., 9705 Patuxent Woods Drive, Columbia, Maryland 21046. The Nominating Committee met three times in 2006.

 

The following directors currently serve on the Corporate Governance Committee:

 

Lawrence Perlman, Chair

Shellye L. Archambeau

Philip Guarascio

Larry E. Kittelberger

Luis G. Nogales

Richard A. Post

Each member of the Corporate Governance Committee qualifies as an “independent” director under the New York Stock Exchange listing standards. The principal purposes of the Corporate Governance Committee are to:

 

 

The Board of Directors has adopted an amended and restated written charter for the Corporate Governance Committee, a copy of which is available on our Web site at www.arbitron.com and is available in print, free of charge, to any stockholder who requests it. You can obtain a copy in print by contacting the Treasury Manager at Arbitron Inc., 9705 Patuxent Woods Drive, Columbia, Maryland 21046. The Corporate Governance Committee did not meet in 2006.

 

The following directors serve on the Technology Strategy Committee:

 

Larry E. Kittelberger, Chair

Shellye L. Archambeau

Stephen B. Morris

Luis G. Nogales

Richard A. Post

 

The principal purposes of the Technology Strategy Committee are to:

 

 

The Technology Strategy Committee held four meetings in 2006.

 

The table below provides information concerning the compensation of the directors for our most recently completed fiscal year. Except as noted below, all of our directors are paid at the same rate. The differences among directors in the table below are a function of additional compensation for chairing a committee, varying numbers of meetings attended and corresponding payments of meeting fees, and the form in which each director elects to receive retainer fees. In accordance with SEC regulations, share-based compensation is valued at the grant date fair value computed in accordance with Statement of Financial Accounting Standards No. 123 (Revised), “Share-Based Payment” (“SFAS No. 123(R)”). We disclose such expense ratably over the vesting period. We include in the table below the ratable portion of grants made both in the current and in prior years to the extent the vesting period for those grants occurred in such year.

 

Each director who is not also an employee of Arbitron or its subsidiaries is entitled to receive an annual retainer fee of $30,000, which is paid in quarterly installments. The nonemployee chair of the Audit Committee is entitled to receive a supplemental annual cash payment of $10,000; nonemployee chairs of the Compensation and Human Resources Committee, the Nominating Committee and the Technology Strategy Committee are entitled to receive a supplemental annual cash payment of $7,500. For each Board meeting attended, in person or by telephone, participating nonemployee directors are entitled to receive $1,500. For each committee meeting attended in person, participating nonemployee directors are entitled to receive $1,500. For each committee meeting attended by telephone, participating nonemployee directors are entitled to receive

$750. The nonemployee Chairman of the Board of Directors receives an annual cash payment of $135,000 in addition to the annual retainer fee.

 

Each newly elected nonemployee director receives a one-time grant of an option to purchase 15,000 shares of Arbitron common stock. These options will vest and become exercisable in three equal installments of 5,000 shares over a three-year period and expire 10 years from the date of grant. Beginning the year after initial election to the Board of Directors, each nonemployee director also receives an annual grant of an option to purchase 7,000 shares of Arbitron common stock on the date of the annual meeting of stockholders. The exercise price per share of each option granted is equal to 100% of the fair market value of the underlying Arbitron common stock on the date the option is granted, which is equal to the closing price of the Company’s common stock on such date. The annual grant of options are fully vested on the date of grant, become exercisable in full six months after their date of grant and expire 10 years from the date of grant.

 

The Company previously adopted a Nonemployee Director Incentive Program, as a component of its 1999 Stock Incentive Plan, which permits nonemployee directors to receive, at their discretion, either stock options or deferred stock units (“DSUs”) in lieu of their annual cash retainers and meeting fees. A DSU provides for the delivery of a share of Arbtiron’s common stock at a future date elected by the participant. In the event that a director elects to receive DSUs, such director will receive dividend equivalent rights on such DSUs to the extent dividends are issued on common stock. A director who elects to receive options receives a number of options based on a calculation approved by the Board of Directors. The formula for determining the number of option shares is to divide the cash fees earned in the quarter by the closing price of Arbitron common stock on the date of the grant, which is the last trading day of the quarter. This amount is then multiplied by four to arrive at the number of option shares granted. A director who elects to receive DSUs receives a number of units based on a calculation approved by the Board of Directors. The formula for determining the number of DSUs is to multiply the cash fees earned in the quarter by 120% and divide the result by the closing price of Arbitron common stock on the date of the grant, which is the last trading day of the quarter. The amounts set forth in the table below for each director in the column “Fees Earned or Paid in Cash” represent the cash payment of annual retainers and fees or, if the director elected to receive equity-based compensation in lieu of all or a portion of such retainers and fees, the amount of cash the director would have received if the director had not elected to receive such equity-based compensation. If the director elected to receive equity-based compensation in lieu of annual cash retainers and fees, we report in the columns “Stock Awards” and “Option Awards,” as applicable, the dollar amount recognized for financial statement reporting purposes with respect to 2006 in accordance with SFAS No. 123(R) of the aggregate incremental value of (1) equity-based compensation received in lieu of annual cash retainers and fees in excess of (2) the cash such director would have received if the director had not elected to receive equity-based compensation.

 

It is also the philosophy of the Company that directors have a meaningful equity ownership in the Company. In 2004, the Board established ownership guidelines concerning director stock ownership. The guidelines are for each director to own shares with a value of four times the annual retainer paid to that director. These guidelines are expected to be achieved over five years and include all owned shares, as well as DSUs owned by the directors under the Company’s Director Deferred Compensation Plan, but outstanding and unexercised stock options are not counted.

 

Mr. Morris is also an employee of Arbitron and is not separately compensated for his service as a director.

2006 Director Compensation

 

 

 

 

Unless the context requires otherwise, in this Executive Compensation and Other Information section, including the Compensation Discussion and Analysis and the tables which follow it, references to “we,” “us,” “our,” “its” or similar terms are to Arbitron Inc. and its subsidiaries.

 

Information concerning the persons who currently serve as Arbitron’s executive officers is provided below. Each of the named persons has been elected to the office indicated opposite the person’s name. The executive officers serve at the discretion of the Board of Directors. Officers generally are elected at the annual meeting of directors held immediately following the annual meeting of stockholders. The Board of Directors may elect additional executive officers from time to time.

 

Stephen B. Morris, age 63, President and Chief Executive Officer since March 30, 2001

 

 

Pierre C. Bouvard, age 45, President of Sales and Marketing since December 21, 2005

 

 

 

Owen Charlebois, age 54, President of Operations, Technology, and Research & Development since December 21, 2005

 

 

Sean R. Creamer, age 42, Executive Vice President of Finance and Planning and Chief Financial Officer since November 4, 2005

 

 

Linda Dupree, age 48, Executive Vice President, Portable People Meter New Product Development since February, 2007

 

 

Vaughan Scott Henry, age 45, Executive Vice President and Chief Information Officer since February 9, 2005

 

 

 

Claire L. Kummer, age 60, Executive Vice President of Operations, Integration and Manufacturing since December 21, 2005

 

 

Kathleen T. Ross, age 54, Executive Vice President and Chief Administrative Officer since September 13, 2005

 

 

Timothy T. Smith, 43, Executive Vice President and Chief Legal Officer, Legal and Business Affairs since August 1, 2006

 

 

In this section, we discuss certain aspects of our compensation program as it pertains to our principal executive officer, our principal financial officer and our three other most highly compensated executive officers in 2006. We refer to these five persons throughout this proxy statement as the “named executive officers.” Our discussion focuses on compensation and practices relating to our most recently completed fiscal year.

 

We believe that the performance of each of the named executive officers has the potential to impact both our short-term and long-term profitability. Therefore, the Compensation and Human Resources Committee (referred to as the “Committee” in the remainder of this section) and management place considerable importance on the design and administration of the executive compensation program.

 

Our executive compensation program is designed to attract, motivate and retain high-quality executives by providing total compensation that is performance-based and competitive with the various labor markets and industries in which we compete for talent. We provide incentives to advance the interests of stockholders and deliver levels of compensation that are commensurate with performance. Overall, we design our compensation program to:

 

 

We are in the process of executing a multi-year strategic plan that management and the Board believe will result in the following:

 

 

This strategic transformation has required and will require new executive skill sets. Indeed, we have revamped our executive team over the past 24 months, reducing the size from 10 to nine, three of whom are new to the Company.

 

We seek to achieve the objectives of our compensation program through the following three key compensation elements:

 

 

In making compensation decisions with respect to each element of total compensation, the Committee considers the competitive market for executives and compensation levels provided by comparable companies, including businesses engaged in activities similar to us as well as large, diversified, publicly traded and privately held businesses with a scope and complexity similar to Arbitron (collectively, the “Compensation Peer Group”). The Compensation Peer Group, which is periodically reviewed and updated by the Committee, consists of companies operating in similar sectors and of similar market capitalization, including companies against which the Committee believes Arbitron competes for executive talent and stockholder investment. The companies constituting the Compensation Peer Group are:

 

The Committee generally does not attempt to set each compensation element for each executive within a particular range related to levels provided by the Compensation Peer Group. Instead, the Committee uses market comparisons as one factor in making compensation decisions. Other factors considered when making individual executive compensation decisions include individual contribution and performance, reporting structure, internal pay relationship, complexity and importance of role and responsibilities, leadership, and growth potential. Occasionally other considerations influence pay levels, such as recruiting a new executive. All executive compensation decisions are made by the Committee after review with the Committee’s independent compensation consultant.

 

The purpose of base salary is to reflect job responsibility, experience, value to the Company and individual performance with respect to market competitiveness. Minimum salary for Mr. Morris is determined by his employment agreement. The amount of any increase over this minimum salary and salaries for named executive officers whose salaries are not specified in an agreement are determined by the Committee based on a variety of factors, including:

 

 

We compete with many larger companies for top executive talent. As such, the base salary component is generally targeted to be between the 50th and 60th percentile of the Compensation Peer Group. However, recruiting and retaining specific executives may result in some variation from this target. Where not specified by contract, salaries are generally reviewed annually. These objectives recognize the Committee’s expectation that, over the long term, Arbitron will generate stockholder returns in excess of the average of the Compensation Peer Group.

 

Base salary is the foundation of our executive compensation program and is designed to compensate executives for services rendered during the year. In setting base salaries, the Committee considers the importance of linking a high proportion of executive officers’ compensation to performance in the form of the annual non-equity incentive plan payment, which is tied to both Company performance measures and individual performance as well as long-term stock-based compensation, which is tied to Company stock price performance and performance compared to the Compensation Peer Group.

 

Our compensation program provides for an annual cash payment that is performance linked. The objective of the program is to compensate executives based on the achievement of specific goals that are intended to correlate closely with growth of long-term stockholder value.

 

The annual non-equity incentive plan is designed to reward executives for achieving corporate goals, providing significant upside for exceeding such goals. Early in the fiscal year, the Committee, working with senior management and the Committee’s independent compensation consultant, sets performance goals for the Company and for individual executives. The annual non-equity incentive plan compensation for which executives other than the CEO are eligible is equal to between 40% and 55% of salary at target; and 80% and 110% of salary at superior. Pursuant to the terms of his employment agreement, the target annual non-equity incentive plan payment for Mr. Morris is equal to 75% of his base salary at target and 150% of his base salary at superior during the term of the agreement. The CEO’s and the CFO’s annual non-equity incentive payments are based entirely on the achievement of corporate goals. Mr. Henry’s annual non-equity incentive payments are based 70% on achievement of corporate goals and 30% on the achievement of individual goals. The other named executive officers’ annual non-equity incentive payments are based 50% on the achievement of

corporate goals and 50% on the achievement of individual goals, based on the evaluation and recommendation of the CEO. Targets for annual non-equity incentive payments for named executive officers other than the CEO and CFO are allocated between corporate goals and individual goals in order to focus executives on the areas for which they are responsible, while also recognizing their role as leaders of the Company as a whole.

 

In determining the extent to which the performance goals are met or exceeded for a given period, the Committee exercises its judgment whether to reflect or exclude the impact of changes in accounting principles and extraordinary, unusual or infrequently occurring events. As a result, the Committee considered the effect of the early retirement of certain long-term debt on EPS in evaluating 2006 performance goals.

 

As a part of the annual financial and strategic planning process, the Committee (typically in January) reviews and assesses the Company’s performance against each of the performance goals established at the outset of the prior year. The Committee also considers the recommendation of the CEO (for executive officers other than himself) in exercising its judgment.

 

At the beginning of 2006, the Committee established performance goals for fiscal 2006 annual non-equity incentive payments based on the following five corporate financial and performance measures: earnings per share, revenue, Portable People Meter (“PPM”), Project Apollo and IT. The two financial targets, earnings per share and revenue, are selected by the Committee in order to reward executives for improving the Company’s overall financial performance. The two financial targets are, in the aggregate, weighted at 60% of the total corporate goals to reflect the importance the Committee places on the Company’s financial performance. Between the two financial targets, earnings per share is emphasized in order to focus executives’ attention on a financial measure that the Committee believes aligns the interests of management with those of long-term stockholders and rewards management for creating value for such long-term stockholders.

 

 

The Board and management have identified the shift away from diary-based radio audience measurement methodology and toward electronic measurement as a crucial component of the Company’s future success. The three non-financial performance targets, PPM, Project Apollo and IT, are three key areas the Committee believes require significant company-wide effort in order to achieve the Company’s strategic goals. Accordingly, the Committee has selected the three non-financial targets in order to reward executives for significant progress toward achieving long-term strategic goals that the Board believes are necessary to position the Company for future growth.

 

Portable People Meter (20% of total non-equity incentive plan payment)

 

 

IT (10% of total non-equity incentive plan payment)

 

 

The Committee approved the following assessment of 2006 performance:

 

 

The payout for the corporate performance component of each executive’s non-equity incentive plan payment was equal to approximately 144.5% of the target corporate performance non-equity incentive plan payment for which such executive was eligible. The Committee determines whether, and the extent to which, personal goals have been met based, in part, upon the recommendation of the CEO. As a result of these determinations, the Committee awarded the non-equity incentive plan payment amounts set forth in the Summary Compensation Table.

 

The long-term incentive program provides a periodic award (typically annual) that is performance based. The objective of the program is to align compensation for named executive officers over a multiyear period directly with the interests of stockholders of the Company by motivating and rewarding creation and preservation of long-term stockholder value. The level of long-term incentive compensation is determined based on an evaluation of competitive factors in conjunction with total compensation provided to named executive officers and the goals of the compensation program described above.

 

The Company’s long-term incentive compensation plan generally takes the form of a mix of stock option awards and restricted stock grants. These two vehicles reward stockholder value creation in slightly different ways. Stock options (which have exercise prices equal to the market price on the date of grant) reward executives only if the stock price increases. Restricted stock is impacted by all stock price changes and, therefore, the value to named executive officers is affected by both increases and decreases in stock price. On February 22, 2006, the Committee approved grants of stock options and restricted stock to executives with an effective date of March 1, 2006, as set forth in “— 2006 Grants of Plan-Based Awards” below. During 2006, the Committee’s practice was to make all grants effective as of the first business day of the month following the date of Committee action on the grant. This policy was intended to ensure that all grants would vest at the beginning of a month for purposes of bookkeeping and administrative convenience. The Committee has discontinued this practice and during 2007 and going forward, all grants will be effective as of the date the Committee approves the grant, and all option grants will have an exercise price equal to the closing price of our common stock on the date the Committee approves the grant. During 2006, for named executive officers other than Mr. Morris, approximately 50% of the total value of long-term compensation awards took the form of stock options, with restricted stock providing for the remaining value. During 2006, the Committee granted restricted stock to executives because it believed that this was an efficient way to reward them for, and motivate them toward, superior performance.

 

The long-term incentive program calls for stock options to be granted with exercise prices of not less than the fair market value of the Company’s stock on the effective date of grant and to vest ratably over three years, based on continued employment. Fair market value is equal to the closing price of the Company’s common stock on the date the Committee approves the grant, or for the grants made in 2006, the first business day of the month following the date the Committee approved the grant. The Committee will not grant stock options with exercise prices below the fair market value of the Company’s stock on the effective date of grant (determined as described above), and will not reduce the exercise price of stock options (except in connection with adjustments to reflect recapitalizations, stock or extraordinary dividends, stock splits, mergers, spin-offs and similar events permitted by the relevant plan) without stockholder approval. New option grants to named executive officers vest ratably over three years and have a term of 10 years. Restricted stock granted to named executive officers, except for Mr. Morris’s 2007 grant of restricted stock units, vests ratably over four years, based on continued employment and any unvested shares are forfeitable to the Company upon termination.

 

In addition to the long-term incentive equity awards paid to named executive officers in 2006 and/or set forth in the tables below, in February 2007, the Committee awarded restricted stock units to named executive officers in the following amounts: Mr. Morris: 43,333 units, Mr. Creamer: 13,667 units, Mr. Charlebois: 16,400 units, Mr. Bouvard: 16,400 units, and Mr. Henry: 10,933 units. Mr. Morris’s restricted stock units vest in three equal annual installments beginning on December 31, 2007, subject to continued employment. Each of the other named executive officers’ restricted stock units vest ratably over four years beginning on the first anniversary of grant, subject to continued employment. All unvested restricted stock units are forfeitable upon termination of employment. The restricted stock units granted in 2007 do not provide voting or dividend rights until the units are vested and converted into common stock.

 

In determining the annual grants of stock options and restricted stock, the Committee considers any contractual requirements, individual performance, market data on total compensation packages, the value of long-term incentive grants at targeted external companies within the Compensation Peer Group, total stockholder return, share usage and stockholder dilution and, except in the case of the award to the CEO, the recommendations of the CEO.

 

With limited exceptions, the Committee supports providing benefits and perquisites to named executive officers that are substantially the same as those offered to other officers of the Company at or above the level of vice president. Exceptions include the relocation assistance offered to Mr. Henry.

 

Mr. Morris participates in a defined benefit pension plan and two supplemental retirement plans, the Arbitron Benefit Equalization Plan (“BEP”) and the Supplemental Executive Retirement Plan (“SERP”). The amount payable under such retirement plans to Mr. Morris is determined by the plan’s benefit formula, which we describe in the section “Pension Benefits Table” below. The amount of benefits varies based upon the plan, the executive’s years of service with us and the executive’s compensation. We generally target total compensation (including retirement benefits) at peer median.

 

We offer a qualified 401(k) Plan to provide our employees tax-advantaged savings vehicles. We make matching contributions to the 401(k) Plan to encourage employees to save money for their retirement. This plan and our contributions to it enhance the range of benefits we offer to executives and further our ability to attract and retain employees.

 

Under the terms of the 401(k) Plan, employees may defer from 1% to 17% of their eligible earnings, and we contribute a matching contribution of 50% of before tax employee contributions up to a maximum of 3% to 6% of eligible employee earnings. We may also make an additional discretionary matching contribution of 0% to 30% of before tax employee contributions up to a maximum of 3% to 6% of eligible employee earnings (depending on the Company’s profitability). The 3% maximums referred to in the previous sentences relate to

employees who are pension participants and the 6% maximums relate to employees who are not pension participants.

 

Our matching contributions to the 401(k) Plan for each named executive officer are set forth in the Summary Compensation Table below. See also “— 2006 Nonqualified Deferred Compensation — 401(k) Plan.”

 

Mr. Morris is party to an employment agreement with the Company that provides for continued employment until December 31, 2009. The agreement also provides for the Company to retain Mr. Morris to provide consulting services to the Company for three years commencing January 1, 2010. During the consulting term, the Company will pay Mr. Morris a quarterly consulting fee of $83,333, as well as reasonable costs and expenses incurred in providing the consulting services. Pursuant to the agreement, Mr. Morris waived any rights to accelerate the vesting of restricted stock awards or stock options upon his retirement.

 

The agreement also provides for the payment of a lump sum to Mr. Morris or his estate upon his death or disability or a change of control of the Company during the term of the agreement. The terms of the change of control provision during the term of the agreement are described in the section “— Potential Payments Upon Termination or Change in Control” below.

 

We have entered into Retention Agreements with members of senior management, including each of our named executive officers other than Mr. Morris. Except for these Retention Agreements, none of our named executive officers other than Mr. Morris has an employment agreement which requires us to pay their salary for any period of time. We entered into the Retention Agreements because we do not want our executives distracted by a rumored or actual change in control of the Company. Further, if a change in control should occur, we want our executives to be focused on the business of the organization and the interests of stockholders. In addition, we think it is important that our executives can react neutrally to a potential change in control and not be influenced by personal financial concerns. We believe our Retention Agreements are consistent with market practice and assist us in retaining our executive talent. The material terms of the retention agreements are described in the section “— Potential Payments Upon Termination or Change in Control” below.

 

During 2004, the Committee recommended and the Board established stock ownership requirements for our executive officers. These officers are expected, over time, to acquire and hold Company stock (including restricted stock units) equal in value to at least the following:

 

 

These guidelines are expected to be achieved within three years of becoming an executive officer, and include owned shares of common stock, restricted shares, and restricted or DSUs that only can be settled in common stock. However, outstanding unexercised stock options are not taken into account for purposes of satisfying these guidelines. The Committee believes that this ownership policy further enhances the alignment of named executive officer and stockholder interests and thereby promotes the objective of increasing stockholder value.

 

The role of Arbitron management is to provide reviews and recommendations for the Committee’s consideration, and to manage the Company’s executive compensation programs, policies and governance. Direct responsibilities include, but are not limited to the following:

 

 

Section 162(m) (the “Section”) of the Internal Revenue Code of 1986, as amended, disallows any tax deductions for compensation exceeding $1 million and paid in a taxable year to any named executive officer, all of whom are “covered employees” under the Section. However, certain performance-based compensation, determined under pre-established objective performance goals, can be deducted even in excess of the $1 million limit. The Committee considers the potential impact of the Section as one factor to be taken into account in setting total compensation and its component elements. However, the Committee believes that it must retain flexibility, in observing its overall compensation philosophy and objectives, to structure total compensation to include components, such as service-vesting restricted stock, that would not be treated as performance-based compensation under the Section, both in order to attract and retain top talent and to appropriately gauge the performance of executives. Achieving the desired flexibility in the design and delivery of total compensation, therefore, may result in some compensation not being deductible for federal income tax purposes.

 

In making decisions with respect to any element of a named executive officer’s compensation, the Committee considers the total compensation that may be awarded to the officer, including base salary, annual non-equity compensation plan payment, long-term incentive compensation, and post-termination compensation. The Committee’s goal is to award compensation that is reasonable when all elements of potential compensation are considered.

 

The Compensation and Human Resources Committee reviewed and discussed the Compensation Discussion and Analysis included in this Proxy Statement with management. Based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement for filing with the Securities and Exchange Commission.

 

Submitted by the Compensation and

Human Resources Committee of the

Board of Directors

 

Philip Guarascio, Chair

Luis G. Nogales

Lawrence Perlman

 

The following sections provide a summary of cash and certain other amounts we paid for the year ended December 31, 2006 to the named executive officers. Except where noted, the information in the Summary Compensation Table generally pertains to compensation to the named executive officers for the year ended December 31, 2006. The compensation we disclose below is presented in accordance with SEC regulations. According to those regulations we are required in some cases to include:

 

 

Therefore, we encourage you to read the following tables closely. The narratives preceding the tables and the footnotes accompanying each table are important parts of each table. Also, we encourage you to read this section in conjunction with the Compensation Discussion and Analysis above.

 

The following table provides information concerning the compensation of the named executive officers for our most recently completed fiscal year.

 

In the column “salary,” we disclose the amount of base salary paid to the named executive officer during the fiscal year.

 

In the columns “Stock Awards” and “Option Awards,” SEC regulations require us to disclose the award of stock or options measured in dollars and calculated in accordance with SFAS No. 123(R). For restricted stock, the SFAS No. 123(R) fair value per share is equal to the closing price of our stock on the date of grant. Restricted stock awards typically vest in four equal annual installments beginning on the first anniversary of the date of grant. Awards are conditioned on the participant’s continued employment with Arbitron, but may have additional restrictions. We recognize such expense ratably over the vesting period. For stock options, the SFAS No. 123(R) fair value per share is based on certain assumptions, which we explain in note 15 to our notes to financial statements that are included in our annual report on Form 10-K. We recognize such expense ratably over the vesting period. The amounts shown in the 2006 Summary Compensation Table also include a ratable portion of each grant we made in prior years to the extent the vesting period occurred in 2006. Please also refer to the second table in this Proxy Statement, “— Summary of Cash and Certain Other Compensation and Other Payments to the Named Executive Officers — Grants of Plan-Based Awards.”

 

In the column “Non-equity Incentive Plan Compensation,” we disclose the dollar value of all earnings for services performed during the fiscal year pursuant to awards under non-equity incentive plans.

 

In the column “Change in Pension Value and Nonqualified Deferred Compensation Earnings,” we disclose the sum of the dollar value of (1) the aggregate change in the actuarial present value of the named executive officer’s accumulated benefit under all defined benefit and actuarial pension plans (including supplemental plans) in 2006; and (2) any above-market or preferential earnings on nonqualified deferred compensation, including on nonqualified defined contribution plans.

 

Retirement benefits for one of our named executive officers, Mr. Morris, constitute a significant percentage of his total compensation.

 

In the column “All other compensation,” we disclose the sum of the dollar value of:

 

 

2006 Summary Compensation Table

 

 

 

 

 

 

 

In this table, we provide information concerning each grant of an award made to a named executive officer in the most recently completed fiscal year under any plan. This includes stock option and restricted stock awards under the Arbitron Inc. 1999 Stock Incentive Plan, each of which is discussed in greater detail in this proxy statement under the caption, “Compensation Discussion and Analysis.” In the fifth column, we report the number of shares of restricted stock granted in the fiscal year. In the sixth and seventh columns, we report the number of shares of common stock underlying options granted in the fiscal year and corresponding per-share exercise prices, respectively. In the eighth column, we report the aggregate SFAS No. 123(R) value of all awards made in 2006; in contrast to how we present amounts in the Summary Compensation Table, we report such figures here without apportioning such amount over the service or vesting period. In all cases, the exercise price was equal to the closing market price of our common stock on the grant date, which in 2006 was the first business day of the month following the date on which the Compensation and Human Resources Committee approved the grant, which we report in the ninth column.

 

2006 Grants of Plan-Based Awards

 

 

 

 

 

The following table provides information concerning unexercised options and stock that has not vested for each named executive officer outstanding as of the end of our most recently completed fiscal year. Each outstanding award is represented by a separate row which indicates the number of securities underlying the award, including awards that have been transferred other than for value (if any).

 

For option awards, the table discloses the number of shares underlying both exercisable and unexercisable options, as well as the exercise price and the expiration date. For stock awards, the table provides the total number of shares of stock that have not vested and the aggregate market value of shares of stock that have not vested.

 

We computed the market value of stock awards by multiplying the closing market price of our stock at the end of the most recently completed fiscal year by the number of shares or units of stock.

 

Outstanding Equity Awards at Fiscal Year-End 2006

 

 

 

The following table provides information concerning exercises of stock options and similar instruments, and vesting of restricted stock and similar instruments, during the most recently completed fiscal year for each of the named executive officers on an aggregated basis. The table reports the number of securities for which the options were exercised; the aggregate dollar value realized upon exercise of options; the number of shares of restricted stock that have vested; and the aggregate dollar value realized upon vesting of stock.

 

2006 Option Exercises and Stock Vested

 

 

Arbitron has established a voluntary, tax-qualified, defined benefit pension plan funded by employee and employer contributions. The plan covers Arbitron employees who, as of December 31, 2000, were eligible to participate in the Ceridian pension plan. The Ceridian plan was closed to new participants effective January 2, 1995. Benefits earned under the Ceridian plan prior to December 31, 2000, are payable from the Arbitron plan for participants employed by Arbitron on December 31, 2000. The amount of the annual benefit under Arbitron’s plan is based upon an employee’s average annual compensation during the employee’s highest consecutive five-year earnings period while participating in the Ceridian plan or the Arbitron plan. Because the Internal Revenue Code of 1986, as amended, limits the annual benefit that may be paid from tax-qualified plans such as Arbitron’s retirement plan, Arbitron also established a benefit equalization plan (“BEP”) to provide retirees with supplemental benefits so that they will receive, in the aggregate, the benefits they would

have been entitled to receive under the retirement plan had these limits not been in effect. Benefits earned under the Ceridian BEP plan prior to December 31, 2000, are payable from the Arbitron plan for participants employed by Arbitron on December 31, 2000. Arbitron also established and funded a benefit protection trust to pay BEP benefits. Normal retirement age under the pension plan and the BEP is 65.

 

Annual compensation for purposes of the pension plan and the Arbitron BEP consists of salary and any annual non-equity incentive plan payments paid during the year, less the amount contributed by the employee to the pension plan that year on a pretax basis. Mr. Morris is the only named executive officer eligible to participate in these plans. Compensation for 2006 for the pension plan was $220,000 and compensation for the Arbitron BEP was $1,119,097. For purposes of the pension plan and the Arbitron BEP, an annual non-equity incentive plan payment is considered part of annual compensation in the year in which it is paid, rather than the year in which it was earned (the latter formulation being the basis on which amounts are reported in the Summary Compensation Table).

 

The Arbitron Supplemental Executive Retirement Plan (“SERP”) is designed to provide a targeted level of postretirement income to Mr. Morris in consideration of his significant impact on the long-term growth and profitability of the Company. The SERP benefit supplements the retirement benefits provided under the pension plan and the Arbitron BEP. Covered compensation for 2006 for the SERP was $1,119,097. Normal retirement age under the SERP is 63.

 

Benefit amounts in the Pension Benefits Table below are computed assuming payments are made on the normal life annuity basis and not under any of the various survivor options. Benefits listed in the table are not subject to deduction for Social Security or other offset amounts.

 

2006 Pension Benefits Table

 

 

 

 

No named executive officer participated in any nonqualified deferred compensation plan during 2006.

 

Arbitron has established a 401(k) plan that permits participating employees to contribute a portion of their compensation to the plan on a pretax basis. Arbitron makes matching contributions in amounts determined by Arbitron.

 

The 401(k) plan accounts are invested among a number of available investment options, including shares of Arbitron common stock, according to the directions of the participating employees. Voting and tender rights with respect to shares of Arbitron common stock credited to participants’ accounts will be passed through to the participants.

 

While employed, participating employees may access their accounts through loans and, in some cases, in-service withdrawals. Following termination of employment, benefits are either distributed in a lump-sum payment or, if minimum requirements are met, can be kept in the plan. To the extent a participant’s account is invested in

full shares of Arbitron’s common stock, the shares may be distributed to the participant when the account is distributable.

 

Arbitron retains the right to amend or terminate the 401(k) plan at any time.

 

The following table summarizes the estimated payments to be made under each contract, agreement, plan or arrangement that provides for payments to a named executive officer at, following, or in connection with any termination of employment including by resignation, retirement, disability or a constructive termination of a named executive officer, or our change in control or a change in the named executive officer’s responsibilities. However, in accordance with SEC regulations, we do not report any amount to be provided to a named executive officer under any arrangement that does not discriminate in scope, terms, or operation in favor of our executive officers and which is available generally to all salaried employees. Also, the following table does not repeat information disclosed above under the pension benefits table, the deferred compensation table, or the outstanding equity awards at fiscal year-end table, except to the extent that the amount payable to the named executive officer would be enhanced by the termination event.

 

For the purpose of the quantitative disclosure in the following table, and in accordance with SEC regulations, we have assumed that the termination took place on the last business day of our most recently completed fiscal year, and that the price per share of our common stock is the closing market price as of that date — $43.44.

 

Mr. Morris currently has an employment agreement with the Company, the terms of which are described below. Mr. Morris’s employment agreement contains provisions regarding protection of confidential information, rights in any intellectual property created by him, restrictions on competition and change of control compensation. None of our other named executive officers has an employment agreement with the Company, but each of the other named executive officers has retention agreements as described below.

 

The agreement with Mr. Morris incents him to remain with the Company until December 31, 2009, as well as to manage a strategic business/succession plan, including assisting the Board with the selection of his successor. Components of this agreement are as follows:

 

 

 

 

The agreement also provides for the Company to retain Mr. Morris as a consultant for three years beginning on January 1, 2010. Mr. Morris has also agreed to serve as a member of the Board of Directors during the consulting term if he is nominated and elected. During the consulting term, the Company will pay Mr. Morris a quarterly consulting fee of $83,333, as well as reasonable costs and expenses incurred by Mr. Morris in providing the consulting services.

 

Mr. Morris has waived any right to accelerate the vesting of restricted stock awards or stock options upon his retirement. Additionally, Mr. Morris has agreed not to dispose of shares of common stock during any 12-month period that exceeds an amount equal to 25% of the aggregate number of shares of common stock he is entitled to receive under the agreement, provided that this restriction will terminate upon Mr. Morris’s death, or a change in control of the Company. In the event that the agreement is terminated as a result of the death or disability of Mr. Morris or a change in control of the Company, all restricted stock awards granted under the agreement prior to termination will vest in full, but no further grants will be made.

 

The current agreement also provides certain separation payments. If Arbitron terminates the agreement with Mr. Morris without cause and the termination is not a change of control termination, Mr. Morris will be entitled to receive payment equal to two years’ base salary and two times the non-equity incentive plan payment, if any, that Mr. Morris would have received for the year in which the termination occurs, at the higher of the target award applicable to the year in which the termination occurs or the average of the actual non-equity incentive plan payments paid for the last three fiscal years. In addition, in the event of the death or disability of Mr. Morris prior to January 1, 2010, or a change in control of the Company after December 31, 2008, but prior to January 1, 2010, the Company will pay Mr. Morris or his estate $1,000,000. In the event of the death or disability of Mr. Morris or a change in control of the Company during the consulting term, the consulting term will terminate and the Company will pay Mr. Morris or his estate a lump sum equal to the remaining quarterly consulting payments scheduled to be paid to Mr. Morris for the balance of the consulting term as if the consulting term had not ended.

 

If Mr. Morris experiences a change of control termination, he will be entitled to receive a lump-sum payment that is equal to the sum of three times each of the following:

 

 

Beginning February 1, 2007, the multiplier reduces ratably on a monthly basis (for example, on July 1, 2007, the multiplier will become 2.5 and on January 1, 2008, the multiplier will become 2.0) through January 1, 2010, at which time the change of control provisions of the agreement will terminate.

 

For two years following a termination without cause, or for three years or until reemployment with benefits following a change of control termination, Mr. Morris shall be provided with the same or equivalent health, dental, accidental death and dismemberment, short-term and long-term disability, life insurance coverages, and all other insurance policies and other health and welfare benefits programs he was entitled to immediately prior to his termination. For purposes of the table below, we have assumed that Arbitron will provide equivalent benefits at Arbitron’s current average cost per participant for each of the benefit plans in which Mr. Morris currently participates.

 

The agreement with Mr. Morris provides him with the opportunity to receive additional supplemental retirement benefits as described under “— Summary of Cash and Certain Other Compensation and Other Payments to the Named Executive Officers — Pension Benefits Table” above. If Mr. Morris experiences a change of control termination, Mr. Morris will receive credit adding three years to age and service for purposes of determining the supplemental pension payable under the SERP.

 

The term “change of control termination” means the termination of Mr. Morris’s employment with Arbitron, by Arbitron or the executive, within two years after a change of control, for any reason other than conduct that constitutes fraud, misrepresentation, theft or embezzlement of Arbitron assets, an intentional violation of law involving moral turpitude or failure to follow Arbitron’s conduct and ethics policies. A change of control termination includes termination of employment by reason of death or disability within two years after a change of control.

 

For the purposes described above, a “change of control” is generally defined as any of the following:

 

 

If payments to Mr. Morris under the employment agreement would result in imposition of an excise tax under section 4999 of the Internal Revenue Code of 1986, as amended, Mr. Morris would receive an additional payment to compensate for the imposition of the tax. The payment shall be in an amount such that after the payment of all taxes, income and excise, Mr. Morris will be in the same after-tax position as if no excise taxes under the Internal Revenue Code had been imposed.

 

Messrs. Creamer, Charlebois, Bouvard and Henry have entered into retention agreements with us that provide for severance payments under some circumstances and for payments with respect to stock options and restricted stock grants upon a change of control.

 

The agreements provide that if the named executive officer is terminated other than for cause, and the termination is not a change of control termination, the executive will receive a lump-sum cash payment in the amount of 12 months of base salary and non-equity incentive, if the executive has fewer than 15 years of service, or 15 months of base salary and non-equity incentive if the executive has 15 or more years of service. The agreements provide that following a change of control termination, the executive will be entitled to receive a lump-sum payment that is equal to 18 months of base salary and non-equity incentive if the executive has fewer than 15 years of service, or 21 months of base salary and non-equity incentive if the executive has 15 or more years of service. For purposes of the retention agreements, payouts for non-equity incentive plan payments are based on the higher of the target non-equity incentive award applicable to the executive for the year in which termination occurs or the average of the actual non-equity incentive plan payments paid to the executive for the last three fiscal years. For purposes of the retention agreements, change of control termination excludes the executive’s failure to perform the duties reasonably assigned by the Chief Executive Officer. Receipt of any severance payments under the retention agreements is subject to the executive executing a waiver and release agreement releasing any claims against the Company.

 

In addition, the executive shall be provided, for a period of between 12 and 21 months following termination without cause or a change of control termination or, if sooner, until reemployment with equivalent benefit, with the same or equivalent health, dental, accidental death and dismemberment, short-term and long-term disability, life insurance coverage, and all other insurance and other health and welfare benefits programs he or she was entitled to on the day before the termination. For purposes of the table below, we have assumed that Arbitron will provide equivalent benefits at Arbitron’s current average cost per participant for each of the benefit plans in which the executive currently participates.

 

Upon a change of control, the vesting and exercisability of stock options and the vesting of other awards under Arbitron’s stock-based compensation plans will accelerate, and any unvested awards would become fully and immediately vested.

 

For purposes of these retention agreements, a “change of control” is generally defined as any of the following:

 

 

 

If payments to an executive under such a retention agreement would result in imposition of an excise tax under section 4999 of the Internal Revenue Code of 1986, as amended, the executive will also be entitled to be paid an amount to compensate for the imposition of the tax. The payment shall be in an amount such that after payment of all taxes, income and excise, the executive will be in the same after-tax position as if no excise tax under the Internal Revenue Code of 1986, as amended, had been imposed.