CON-WAY INC.

(Name of Registrant as Specified In Its Charter)

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

Notice of Annual Meeting

and

Proxy Statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual Meeting of Shareholders

APRIL 17, 2007

CON-WAY INC.

CON-WAY INC.

2855 CAMPUS DRIVE, SUITE 300

TELEPHONE: 650/378-5200

SAN MATEO, CALIFORNIA 94403

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Tuesday, April 17, 2007

9:00 A.M., local time

Greenville Suite, Hotel du Pont, 11th and Market Streets, Wilmington, Delaware

 

FELLOW SHAREHOLDER:

 

The Annual Meeting of Shareholders of Con-way Inc. will be held at 9:00 A.M., local time, on Tuesday, April 17, 2007, to:

 

 

Shareholders of record at the close of business on March 1, 2007, are entitled to notice of and to vote at the meeting.

 

Your vote is important. Whether or not you plan to attend, I urge you to SIGN, DATE AND RETURN THE ENCLOSED WHITE PROXY CARD IN THE ENVELOPE PROVIDED, in order that as many shares as possible will be represented at the meeting. If you attend the meeting and prefer to vote in person, you will be able to do so and your vote at the meeting will revoke any proxy you may submit.

 

Sincerely,

 

 

JENNIFER W. PILEGGI

Secretary

 

March 9, 2007

 

TABLE OF CONTENTS

 

CON-WAY INC.

2855 CAMPUS DRIVE, SUITE 300

SAN MATEO, CALIFORNIA 94403

TELEPHONE: 650/378-5200

 

 

 

March 9, 2007

 

The Annual Meeting of Shareholders of Con-way Inc. (the “Company”) will be held on Tuesday, April 17, 2007. Shareholders of record at the close of business on March 1, 2007 will be entitled to vote at the meeting. This proxy statement and accompanying proxy are first being sent to shareholders on or about March 9, 2007.

 

 

The Board of Directors of the Company is soliciting your proxy for use at the meeting and any adjournment or postponement of the meeting. The Board recommends a vote for the election of the nominees for directors described below and for ratification of the appointment of KPMG LLP as independent auditors.

 

 

To be effective, properly signed proxies must be returned to the Company prior to the meeting. The shares represented by your proxy will be voted in accordance with your instructions. However, if no instructions are given, your shares will be voted in accordance with the recommendations of the Board.

 

 

A majority of the votes attributable to all voting shares must be represented in person or by proxy at the meeting to establish a quorum for action at the meeting. Directors are elected by a plurality of the votes cast, and the five nominees who receive the greatest number of votes cast for election of directors at the meeting will be elected directors for a three-year term. The ratification of the appointment of auditors requires a favorable vote of the holders of a majority of the voting power represented at the meeting.

 

In the election of directors, broker non-votes, if any, will be disregarded and have no effect on the outcome of the vote. With respect to the ratification of the appointment of auditors, abstentions from voting will have the same effect as voting against such matter and broker non-votes, if any, will be disregarded and have no effect on the outcome of such vote.

 

 

At the close of business on March 1, 2007, the record date for the Annual Meeting, there were outstanding and entitled to vote 46,063,229 shares of Common Stock and 594,411 shares of Series B Cumulative Convertible Preferred Stock (“Series B Preferred Stock”). Each share of Common Stock has the right to one non-cumulative vote and each share of Series B Preferred Stock has the right to 6.1 non-cumulative votes. Therefore, an aggregate of 49,689,136 votes are eligible to be cast at the meeting.

 

You are encouraged to exercise your right to vote by returning to the Company a properly executed WHITE proxy in the enclosed envelope, whether or not you plan to attend the meeting. This will ensure that your votes are cast.

 

You may revoke or change your proxy at any time prior to its use at the meeting. There are three ways you may do so: (1) give the Company a written direction to revoke your proxy; (2) submit a later dated proxy; or (3) attend the meeting and vote in person.

 

 

All shareholders are invited to attend the meeting. Persons who are not shareholders may attend only if invited by the Board of Directors. If you are a shareholder but do not own shares in your name, you must bring proof of ownership (e.g., a current broker’s statement) in order to be admitted to the meeting.

 

 

 

The Board of Directors Recommends a Vote “For” All Nominees.

 

The Board of Directors of the Company, pursuant to the Bylaws, has determined that the number of directors of the Company shall be fourteen. Unless you withhold authority to vote, your proxy will be voted for election of the nominees named below.

 

The following persons are the nominees of the Board of Directors for election as Class I directors to serve for a three-year term until the 2010 Annual Meeting of Shareholders and until their successors are duly elected and qualified:

 

John J. Anton

W. Keith Kennedy, Jr.

John C. Pope

Douglas W. Stotlar

Peter W. Stott

 

If a nominee becomes unable or unwilling to serve, proxy holders are authorized to vote for election of such person or persons as shall be designated by the Board of Directors; however, the Board of Directors knows of no reason why any nominee should be unable or unwilling to serve.

 

The Company has three classes of directors, each of which is elected for a three-year term. Class II directors will be elected in 2008 and Class III directors will be elected in 2009. All directors have previously been elected by the shareholders, except John J. Anton, who was appointed as a Class I director in March 2005, and Douglas W. Stotlar, who was appointed as a Class I director in April 2005. Mr. Anton was recommended to the Company’s Director Affairs Committee by non-management directors of the Company, and Mr. Stotlar is the Company’s President and Chief Executive Officer.

 

CLASS I DIRECTORS

 

 

CLASS II DIRECTORS

 

 

CLASS III DIRECTORS

 

 

The following table sets forth information regarding beneficial ownership of the Company’s Common Stock and Series B Preferred Stock, as of February 1, 2007, by the directors, the executive officers identified in the Summary Compensation Table below and by the directors and executive officers as a group.

 

 

 

 

 

The Board of Directors has determined that each incumbent director, other than Douglas W. Stotlar, is an independent director under the New York Stock Exchange listing standards. In making this determination as to Robert P. Wayman, the Board considered all of the relevant facts and circumstances relating to services provided by the Company and its subsidiaries to Hewlett-Packard Company, of which Mr. Wayman served as Executive Vice President and Chief Financial Officer until his retirement in December 2006. The bulk of these services constitute supply chain management services provided by the Company’s Menlo Logistics subsidiary under various contracts with Hewlett Packard. Payments received by the Company from Hewlett Packard for services provided in each of the last three fiscal years constituted less than 0.25% of Hewlett Packard’s consolidated gross revenues for those fiscal years. The Board concluded that such services do not constitute a material relationship between Mr. Wayman and the Company.

 

During 2006, the Board of Directors held seven meetings. Each incumbent director attended at least 75% of all meetings of the Board and the committees of the Board on which he or she served.

 

Non-management members of the Board of Directors meet in executive session on a regularly scheduled basis. Neither the Chief Executive Officer nor any other member of management attends such meetings of non-management directors. The Chairman of the Board of Directors of the Company, W. Keith Kennedy, Jr., has been chosen as the “Lead Non-Management Director” to preside at such executive sessions. For information regarding how to communicate with the Lead Non-Management Director and other members of the Company’s Board of Directors, see “Communications with Directors” on page 18.

 

The Board of Directors currently has the following standing committees: Audit Committee, Compensation Committee, Director Affairs Committee and Finance Committee, the members of which are shown in the table below. Each of the Audit, Compensation and Directors Affairs Committees is governed by a charter, current copies of which are available on the Company’s corporate website at www.con-way.com under the headings “Investor Relations/Corporate Governance.” Copies of the charters are also available in print to shareholders upon request, addressed to the Corporate Secretary at 2855 Campus Drive, Suite 300, San Mateo, California 94403.

 

 

 

Descriptions of the Audit, Compensation and Director Affairs Committees follow:

 

Audit Committee: Under its charter, the Audit Committee assists the Board in its oversight of matters involving the accounting, auditing, financial reporting, and internal control functions of the Company. The Committee receives reports on the work of the Company’s outside auditors and internal auditors, and reviews with them the adequacy and effectiveness of the Company’s accounting and internal control policies and procedures. Pursuant to Board policy, the Company’s Chief Executive Officer, Chief Financial Officer, Controller and General Counsel are required to promptly notify the Chair of the Audit Committee upon receiving complaints regarding accounting, internal control and auditing matters involving the Company.

 

Each Committee member has been determined to be an independent director under the New York Stock Exchange listing standards. The Board has determined that each of Mr. Pope and Mr. Wayman qualifies as an “audit committee financial expert” as such term is defined in rules adopted by the Securities and Exchange Commission. The Board has also determined that Mr. Pope’s service on the audit committees of more than three public companies does not impair his ability to effectively serve on the Company’s Audit Committee. The Committee met twelve times during 2006.

 

Compensation Committee: The Compensation Committee’s authority is established in its charter. The Compensation Committee approves the annual base salaries paid to the Chief Executive Officer, the Company’s other policy-making officers and certain other corporate officers. The Company’s Chief Executive Officer approves the annual base salaries for the Company’s other executives. The Compensation Committee also approves, for all executives, the short-term and long-term incentive compensation award opportunities and performance goals applicable to these awards, and annual grants of stock options to all executives made under the Company’s equity and incentive plan. In determining the compensation paid to the Chief Executive Officer, it is the practice of the Compensation Committee to consult with and obtain the concurrence of the other independent members of the Board of Directors. Management has no role in recommending or setting compensation for the Chief Executive Officer. The Committee also reviews the retirement and benefit plans of the Company and its domestic subsidiaries for non-contractual employees.

 

Each Committee member has been determined to be an independent director under the New York Stock Exchange listing standards. The Committee met five times during 2006.

 

The Compensation Committee engages an independent compensation consultant to assist the Committee in its annual review and approval of executive compensation. In 2006, Mercer Human Resource Consulting was engaged directly by the Compensation Committee to serve as executive compensation consultant. However, because Mercer also provides other services to the Company, for 2007 the Compensation Committee retained Hewitt Associates as its executive compensation consultant. Hewitt does not provide services to the Company, other than executive compensation consulting services to the Compensation Committee and director compensation consulting services to the Director Affairs Committee.

 

Each year the Chief Executive Officer presents to the Compensation Committee for consideration his recommendations with respect to the compensation of Company executives (other than himself). These recommendations include:

 

 

In developing his recommendations, the Chief Executive Officer takes into account the report prepared for the Compensation Committee by the independent compensation consultant. The Chief Executive Officer develops compensation recommendations for officers reporting directly to him after consultation with others as he deems appropriate. Recommendations for compensation paid to more junior executives are typically developed by the executive to whom the junior executive reports and are subject to review and adjustment by the Chief Executive Officer.

 

The independent compensation consultant is available for consultation with the Committee (without executive officers present) prior to and at the Committee meeting at which executive compensation is approved. The Compensation Committee also meets with the Chief Executive Officer (without other executive officers present) to discuss his executive compensation recommendations. The Committee then meets in an executive session without management and exercises its independent judgment in deciding whether to accept or revise the Chief Executive Officer’s recommendations.

 

The Committee charter provides that the Compensation Committee may delegate its duties and responsibilities to one or more agents (which may include officers or employees of the Company or third party agents), to the extent permitted under applicable law and New York Stock Exchange rules. However, the Compensation Committee has exercised its authority to delegate only in limited circumstances, as described below.

 

The Compensation Committee has delegated to the Employee Recognition Committee, a committee made up of the Company’s Chief Executive Officer, Chief Financial Officer and General Counsel, the authority to grant stock options and other long-term incentive awards and to award discretionary cash bonuses, subject to certain conditions and limitations. The Employee Recognition Committee has no authority to grant stock options and other long-term incentive awards or to award discretionary cash bonuses to the Chief Executive Officer, to any officer who reports directly to the Chief Executive Officer, or to any other policy-making executive officer. However, other officers and employees of the Company are eligible to receive stock option grants and/or discretionary bonus awards from the Employee Recognition Committee. Only officers who are hired or promoted during the year are entitled to receive other long-term incentive awards. These awards are permitted only for the cycle that begins in the year that the officers are hired or promoted, must be made within three months after the beginning of the award cycle, and are intended to provide these officers with the same long-term incentive awards that they would have received had they been in their current positions at the beginning of the award cycle (subject to pro rata adjustment based on the portion of the cycle in which they are employed).

 

The aggregate amount of all discretionary cash bonuses awarded in any fiscal year by the Employee Recognition Committee to eligible officers of the Company and by management to non-executive employees cannot exceed $3 million. The aggregate amount of discretionary cash bonuses that the Employee Recognition Committee awards to any eligible officer in any fiscal year cannot exceed an amount equal to the sum of the officer’s base annual salary and target annual performance bonus. The aggregate number of stock options granted by the Employee Recognition Committee in any fiscal year

cannot exceed 100,000 and the number of stock options that can be granted to any eligible officer or other employee in any single grant in a fiscal year cannot exceed 20,000. The Employee Recognition Committee provides annual reports to the Compensation Committee, identifying awards made.

 

In addition, the Compensation Committee charter identifies the Compensation Committee as the Committee with the responsibility to administer the 2006 Equity and Incentive Plan and the short-term and long-term incentive compensation awards made under the Plan. The Committee has delegated to management the authority to administer the plans on a day-to-day basis. However, the Committee retains sole authority to make awards, establish award terms (including performance goals) and determine whether or not modifications to performance goals are to be made.

 

The Compensation Committee has also delegated to the Employee Benefits Review Committee, a committee made up of Company employees and chaired by the Company’s Vice President — Human Resources, the authority to approve amendments to the Company’s tax-qualified and other non-executive benefit plans which are required to comply with applicable law or which are ministerial or clarifying in nature.

 

Director Affairs Committee: The functions of the Director Affairs Committee, which are set forth in the Committee’s charter, include the following:

 

 

Each Committee member has been determined to be an independent director under the New York Stock Exchange listing standards. The Director Affairs Committee met three times during 2006.

 

Not less often than every three years, the Director Affairs Committee engages an independent compensation consultant to review the Company’s director compensation. Typically, the Committee engages the same consultant that the Compensation Committee engages to provide advice regarding executive compensation. The Committee instructs the consultant to include in its review prevalent director compensation practices, including compensation in cash, stock and options. In 2006, the Committee retained Hewitt Associates and based on Hewitt’s advice modified director compensation. The Committee does not delegate any of its duties regarding director compensation, and executive officers of the Company have no role in determining or recommending the amount or form of director compensation.

 

The Director Affairs Committee will consider director candidates recommended by shareholders. In considering candidates submitted by shareholders, the Director Affairs Committee will take into consideration the needs of the Board and the qualifications of the candidate. To have a candidate considered by the Director Affairs Committee, a shareholder must submit the recommendation in writing and must include the following information:

 

 

 

The shareholder recommendation and information described above must be sent to the Corporate Secretary at 2855 Campus Drive, Suite 300, San Mateo, California 94403. The Director Affairs Committee will accept recommendations of director candidates throughout the year; however, in order for a recommended director candidate to be considered for nomination to stand for election at an upcoming annual meeting of shareholders, the recommendation must be received by the Corporate Secretary not less than 120 days prior to the anniversary date of the Company’s most recent annual meeting of shareholders.

 

The Director Affairs Committee believes that the minimum qualifications for serving as a director of the Company are that a nominee demonstrate, by significant accomplishment in his or her field, an ability to make a meaningful contribution to the Board’s oversight of the business and affairs of the Company and have a reputation for honest and ethical conduct in both his or her professional and personal activities. In addition, the Director Affairs Committee examines a candidate’s specific experiences and skills, time availability in light of other commitments, potential conflicts of interest and independence from management and the Company. The Director Affairs Committee also seeks to have the Board represent a diversity of backgrounds and experience.

 

The Director Affairs Committee identifies potential nominees by asking current directors and executive officers to notify the Committee if they become aware of persons, meeting the criteria described above, who would be good candidates for service on the Board. The Director Affairs Committee also, from time to time, may engage firms that specialize in identifying director candidates. As described above, the Committee will also consider candidates recommended by shareholders.

 

Once a person has been identified by the Director Affairs Committee as a potential candidate, the Committee may collect and review publicly available information regarding the person to assess whether the person should be considered further. If the Director Affairs Committee determines that the candidate warrants further consideration, the Chairman or another member of the Committee contacts the person. Generally, if the person expresses a willingness to be considered and to serve on the Board, the Director Affairs Committee requests information from the candidate, reviews the person’s accomplishments and qualifications, including in light of any other candidates that the Committee might be considering, and conducts one or more interviews with the candidate. In certain instances, Committee members may contact one or more references provided by the candidate or may contact other members of the business community or other persons that may have greater first-hand knowledge of the candidate’s accomplishments. The Committee’s evaluation process does not vary based on whether or not a candidate is recommended by a shareholder.

 

The Company has written policies and procedures for the review, approval or ratification of related person transactions. A transaction is subject to the policies and procedures if the transaction involves in excess of $120,000, the Company is a participant in the transaction and any executive officer, director or 5% shareholder, or any of their immediate family members, has a direct or indirect interest in the transaction. The Director Affairs Committee of the Board of Directors is responsible for applying these policies and procedures. It is the Company’s policy to enter into or ratify related person transactions only when the Director Affairs Committee determines that the transaction in question is in, or is not inconsistent with, the best interests of the Company and its stockholders, including but not limited to situations where the Company may obtain products or services of a nature, quantity or quality, or on other terms, that are not readily available from alternative sources or when the Company provides products or

services to related persons on an arm’s length basis on terms comparable to those provided to unrelated third parties or on terms comparable to those provided to employees generally.

 

Since January 1, 2006, the Company was not a participant in any transaction involving more than $120,000 in which a related person had a direct or indirect material interest, nor is any such transaction currently proposed.

 

 

Any shareholder or other interested party desiring to communicate with any director (including the Lead Non-Management Director and the other non-management directors) regarding the Company may directly contact any director or group of directors by submitting such communications in writing to the director or directors in care of the Corporate Secretary, 2855 Campus Drive, Suite 300, San Mateo, California 94403.

 

All communications received as set forth in the preceding paragraph will be opened by the Corporate Secretary for the sole purpose of determining whether the contents represent a message to the Company’s directors. Any contents that are not in the nature of advertising, promotions of a product or service, or patently offensive material will be forwarded promptly to the addressee. In the case of communications to the Board or any group of directors, the Corporate Secretary will make sufficient copies of the contents to send to each director who is a member of the group to which the envelope is addressed.

 

 

The Company’s policy regarding director attendance at the Annual Meeting of Shareholders is for the Chairman of the Board of Directors and the Chief Executive Officer (if different from the Chairman) to attend in person, and for other directors to attend in person or electronically. The Chairman of the Board and the Company’s Chief Executive Officer attended the Company’s 2006 Annual Meeting of Shareholders in person and eleven of the twelve other Directors attended telephonically.

 

 

The Board of Directors and each Committee of the Board is authorized, as it determines necessary to carry out its duties, to engage independent counsel and other advisors. The Company compensates any independent counsel or other advisor retained by the Board or any Committee.

 

 

The Board of Directors has adopted a Code of Ethics for Chief Executive and Senior Financial Officers, including the Chief Financial Officer and Controller. The Board of Directors has also adopted a Directors’ Code of Business Conduct and Ethics applicable to all directors, a Code of Business Conduct applicable to all officers and employees, and Corporate Governance Guidelines. Current copies of each of these documents are available on the Company’s corporate website at www.con-way.com under the headings “Investor Relations/Corporate Governance.” Copies are also available in print to shareholders upon request, addressed to the Corporate Secretary at 2855 Campus Drive, Suite 300, San Mateo, California 94403. The Company intends to satisfy any disclosure requirements regarding an amendment to, or waiver from, the Code of Ethics by posting such information on the Company’s website at www.con-way.com.

 

 

 

 

 

 

Each non-employee member of the Board of Directors receives an annual cash retainer of $70,000. The Chairman of the Board of Directors receives an additional annual cash retainer in recognition of his increased responsibilities and time commitment as Chair. In January 2006, the Board of Directors established an additional annualized retainer of $200,000 as compensation for Dr. Kennedy’s service as Chairman of the Board in 2006. In addition to the annual cash retainers, the chair of the Company’s Audit Committee also receives an annual chair cash retainer of $15,000, and the chairs of the Compensation, Director Affairs and Finance Committees each receive an annual chair cash retainer of $8,000. Each member of the Audit Committee, other than the chair, also receives a committee retainer of $5,000. Each of the retainers described above are payable quarterly in advance. Directors do not receive any fees for attending Board or Committee meetings.

 

Directors may elect to defer payment of their fees under the Company’s deferred compensation plans for directors. Payment of any deferred compensation account balances will be paid in a lump sum or in installments beginning no later than the year following the director’s final year on the Board. In 2006 (as in previous years), interest was credited quarterly to amounts deferred at the Bank of America prime rate and, as a result, in 2006, Dr. Kennedy and Mr. Rogers earned $2,761 and $15,665, respectively, in interest on their deferred account balances above 120% of the applicable federal rate. Recently, the Company’s deferred compensation plans for directors were amended to provide that balances on amounts deferred in 2007 and subsequent years will not be credited with a fixed rate of interest but instead will fluctuate based on the value on one of more funds selected by the director from a list of available funds. In addition, directors may elect to have some or all of their pre-2007 account balances treated in the same manner as post-2006 deferrals. Directors may also elect to convert some or all of their deferred compensation account balances into phantom stock units that track the performance of the Company’s common stock.

 

In 2005, director compensation was revised to provide that each director also receives grants of restricted stock having a specified notional value for each year of the director’s three-year term. The notional value was set at $65,000 per year during 2005 and 2006. In December 2006, the Board of Directors approved an increase in the notional value to $85,000 per year, effective with grants to be made in April 2007.

 

Except during a transition period, each director receives a grant of restricted stock in the year that the director is elected or re-elected to the Board and does not receive a restricted stock grant under this program in the subsequent two years. The value at the time of grant is equal to three times the specified annual notional value, so that directors elected or re-elected to the Board in April 2007 will receive grants with a value at the time of grant of $255,000 (three times $85,000). Each such grant of restricted stock is made in April (following election or re-election to the Board) and vests one-third per year, commencing on the anniversary date of the grant, or earlier upon the occurrence of certain events such as death, disability, retirement or a change in control. In April 2006, Dr. Kennedy received a transition grant of restricted stock having a value at the time of grant of $65,000.

 

Directors are also provided with certain insurance coverages and, in addition, are reimbursed for travel expenses incurred for attending Board and Committee meetings. The Company also maintains an Education Matching Gifts Program, pursuant to which the Company will match donations made to an accredited college or university by executives, certain other employees or members of the Company’s Board of Directors. The matching contributions made by the Company in any year on behalf of any executive, employee or Board member are limited to $5,000.

 

Introduction

 

This Compensation Discussion and Analysis describes the Company’s executive compensation objectives, policies and practices as in effect for the 2006 fiscal year.

 

In 2005, the Company began moving from its historic holding company approach to an operating company approach. The Company is now in the early stages of a systematic review of its compensation objectives, policies and practices, in part to ensure that they are properly aligned with the objectives of the new operating company approach. Changes to the Company’s executive compensation programs that result from this review will not be reflected in executive compensation before 2008.

 

Objectives

 

The objectives of the Company’s executive compensation programs are to: (a) align the Company’s rewards strategy with its business objectives to provide increased shareholder value; (b) support a strong performance culture; and (c) attract, retain and motivate highly talented executives.

 

A. Aligning Reward Strategies with Business Objectives to Provide Increased Shareholder Value; Supporting a Culture of Strong Performance.  The Company’s executive compensation programs are designed to reward performance that carries out the Company’s strategies and meets its business goals. In doing so, the Company ties a significant portion of an executive’s compensation to achievement of the Company’s business objectives, putting compensation “at risk” and providing a strong incentive for its executives to produce superior results. By aligning reward strategies with its business objectives in this manner, the Company believes that it encourages executive behavior that will provide increased shareholder value.

 

In 2006, at target levels of performance, the “at risk” compensation (that is, the short-term and long-term incentive compensation) was approximately 5 times annual base salary for the Chief Executive Officer, approximately 3 times annual base salary for the Chief Financial Officer and the President of Con-way Freight, and approximately 1.85 times annual base salary for the other executives listed in the Summary Compensation Table on page 40 (the “Named Executives”). Of those amounts, short-term incentive compensation was targeted at 1 times annual base salary for the Chief Executive Officer, 0.75 times base salary for the Chief Financial Officer and the President of Con-way Freight and 0.6 times base salary for the other Named Executives, and long-term incentive compensation was targeted at 4 times annual base salary for the Chief Executive Officer, 2.25 times base salary for the Chief Financial Officer and the President of Con-way Freight and 1.25 times base salary for the other Named Executives. These ratios were selected so as to target pay at the levels described below under “Compensation Relative to Peers.”

 

As discussed in greater detail below, in 2006 “at risk” compensation consisted of:

 

 

As discussed under “Long-Term Incentive Compensation” on page 26, in 2007 the Company introduced a new form of long-term incentive award tied to revenue growth with a profitability modifier, to encourage profitable growth of the Company.

 

In designing its incentive compensation programs, the Company seeks to establish an appropriate balance between short-term and long-term incentives so that executives are properly motivated to consider both the Company’s short-term and long-term objectives when making business decisions. In 2006, at target performance levels, long-term incentive compensation was approximately 4 times short-term incentive compensation for the Chief Executive Officer, approximately 3 times short-term incentive compensation for the Chief Financial Officer and the President of Con-way Freight, and approximately 2 times short-term incentive compensation for the other Named Executives. Overall this balance of compensation, including a higher weighting of long-term compensation for the CEO, is consistent with compensation of peer group companies, as discussed below.

 

B. Attracting, Retaining and Motivating Highly Talented Executives.  The Company’s ability to attract, retain and motivate highly talented executives depends on providing compensation that is competitive with compensation paid to executives at companies that are likely to try to recruit the Company’s executives and with compensation paid to executives whom the Company may seek to hire. Historically, the Company has viewed its Chief Executive Officer, Chief Financial Officer and the President of its Con-way Freight subsidiary as being more likely to be recruited by other companies within the transportation industry than by companies in general industry. Similarly, the Company has been more likely to consider executives at transportation companies if the Company was trying to fill any of these senior executive positions. As a result, the Company has been comparing the annual base salary, short-term incentive compensation and long-term incentive compensation of these officers to the same elements of compensation paid to their counterparts by the companies that comprise the Dow Jones Transportation Average (“DJTA”).

 

The Company has been comparing the annual base salary, short-term incentive compensation and long-term incentive compensation paid to the Company’s other executives against surveys of the same elements of compensation paid to similar executives in general industry (taking into account the Company’s relative size). The Company has viewed this general industry peer group, rather than the DJTA companies, as better reflecting the Company’s most direct competitors for executive talent in these roles. An independent compensation consultant retained by the Company’s Compensation Committee provides the comparative compensation data for all Company executives. In 2006, Mercer Human Resource Consulting served as executive compensation consultant to the Compensation Committee. Mercer was engaged to provide a market and competitive analysis using the peer groups described above and the percentile rankings of 50% for base salaries, 60% for short-term incentive compensation and 50% for long-term incentive compensation. As part of its analysis, Mercer was asked to review 2005 annual base salaries, short-term incentive compensation target factors and long-term incentive compensation target payouts for each of the Named Executives and other officers of the parent Company, recommend any modifications for 2006, and provide a report of its analysis to the Compensation Committee and the Company.

 

Company Performance versus Individual Performance; Absolute versus Relative Company Performance.

 

The Company’s executive compensation program takes into account both individual performance and Company performance. Individual performance is taken into account when making adjustments to annual base salaries and when making annual stock option grants to executives. Short-term and long-term incentive compensation awards (other than stock options) take into account performance of the Company, and/or performance of the Con-way company that employs the executive, but typically do not take into account individual performance.

 

Short-term incentive compensation measures performance of the Company, and/or the Con-way company that employs the executive, against internally-set goals, and does not measure performance against that of peer companies. Long-term incentive compensation measures the Company’s common stock performance (through stock option grants), total shareholder return relative to peer companies (“relative TSR”) (through the relative TSR portion of Value Management Plan awards described below), and performance against internally-set goals (through the remaining portion of Value Management Plan awards).

 

Compensation Relative to Peers

 

The Company’s current policy is generally to target executives’ annual base salary, short-term incentive compensation and long-term incentive compensation so that:

 

 

The Compensation Committee has elected to target annual base salary at the 50% percentile to put more emphasis on the Company’s incentive compensation programs while at the same time offering competitive salaries. Short-term incentive compensation has been targeted at the 60% percentile in recognition of the fact that performance goals are typically set as “stretch” goals so that executives receive target payouts only if actual performance exceeds expected performance as reflected in the Company’s financial plan. Long-term incentive compensation has been targeted at the 50% percentile so that our executives receive compensation that is competitive with peer group companies if target performance is achieved and higher payouts if targets are exceeded.

 

In the aggregate, the targeted compensation for our executives is consistent with the current compensation policy. However, these guidelines may not always be strictly applied on an individual basis, but rather, for any particular executive, our Compensation Committee may determine to target some elements of compensation at levels that are more or less than the amounts determined under these guidelines. These variations reflect our Compensation Committee’s and the Company’s view of the executive’s individual performance, as well as the executive’s experience and time spent in his or her position in the Company.

 

Our Compensation Committee, in consultation with an independent compensation consultant retained by the Committee, reviews this policy periodically to determine whether adjustments should be made to the percentile levels. The Company also conducts periodic comparisons of its post-employment compensation and perquisites. A market comparison of post-employment compensation was conducted in 2005 and of perquisites in 2006. See the discussions below on page 31 (“Retirement”), page 33 (“Perquisites”) and page 31 (“Termination of Employment Following a Change in Control.”)

 

Elements of Compensation

 

Executive compensation consists of five components:

 

 

 

A. Annual Base Salary.  The Company pays annual base salary to ensure that an executive has a level of income each year on which he or she can rely without regard to Company performance during the year. Base salaries are reviewed each year for all executives and adjusted as deemed appropriate, taking into account the executive’s individual performance as well as salary levels of similar executives at peer group companies. As discussed under “Compensation Committee” commencing on page 14, the Compensation Committee reviews and approves the annual base salaries and other compensation for the Chief Executive Officer (in consultation with the other independent Board members), the Company’s other policy making officers and certain other corporate officers, and the Chief Executive Officer approves the annual base salaries for the Company’s other executives.

 

Adjustments are also made during the year, primarily to reflect promotions. These adjustments tend to be larger than the annual adjustments because the promotions are generally to new positions that carry increased responsibility. In some cases, the annual base salaries of Company executives who are promoted to new positions are increased gradually over time to “market level,” rather than through a single “step” increase upon promotion. For example, this was the case with the March 2005 promotion of Mr. Schick to Chief Financial Officer, who received salary increases of 11.4% and 10.7% in 2005 and 12.9% in 2006.

 

In 2006 and 2007, the Named Executives received the percentage increases in annual base salary shown in the table below.

 

 

B. Short-Term Incentive Compensation.  The Company pays short-term incentive compensation, in the form of annual performance bonuses, to provide an incentive for executives to focus on achieving the Company’s short-term objectives and to produce strong results each year. This short-term incentive compensation program is a part of a broader program in which most regular Company employees participate.

 

The particular performance goals applicable to an executive’s performance bonus are a function of the executive’s areas of responsibility within the Company. Historically, performance goals have emphasized income of the entity that employs the executive, before taking into account the short-term incentive compensation paid to all employees of that entity and certain other adjustments to income. For executives employed by the parent Company, performance goals have typically measured income of the Company before taking into account taxes, short-term incentive compensation paid to parent Company employees and certain other adjustments to income.

 

Each year, the Company develops a three-year financial plan, which is approved by the Company’s Board of Directors (with such adjustments (if any) as the Board determines are appropriate). The Compensation Committee sets threshold, target and maximum performance goals for the annual performance bonuses in relation to the projected financial performance for the first year of the three-year financial plan. As discussed further below, target payouts typically are earned only if the Company or Company subsidiary (as applicable) exceeds expected performance for the year. In the Company’s incentive compensation plans, threshold is also known as “entry,” target as “factor,” and maximum as “double factor.”

 

Upon attainment of “target” performance goals, each plan participant earns a cash performance bonus determined as a percentage of base salary, which varies depending on the level of the executive. No performance bonus is earned if performance is at or below the specified threshold level, and a performance bonus equal to 200% of target bonus is paid if the maximum performance goals are reached or exceeded. Payouts at performance levels between threshold and target and between target and maximum are determined by interpolation.

 

The Compensation Committee typically approves target performance goals as “stretch” goals, so that executives receive target payouts only if the Company or Company subsidiary (as applicable) exceeds its expected performance for that year, as reflected in the Company’s financial plan. The extent to which expected performance must be exceeded at target varies from year to year, as do the performance levels which must be met for payouts above threshold and maximum payouts to occur. Payouts for performance at financial plan levels typically have ranged from 60% to 75% of target payout. When setting maximum performance goals, the Compensation Committee tries to identify a “best case” scenario that is achievable only if the Company substantially exceeds expectations. In setting the threshold, target and maximum performance goals, the Compensation Committee considers a number of factors, including market conditions, the business cycle, and operating plan priorities. The Compensation Committee tries to balance the interests of executives and shareholders and to pay annual performance bonuses that reasonably reward executives for performance while avoiding paying excessive bonuses harmful to shareholders’ interests. The table below shows the actual payouts (as a percentage of target) for the parent Company over the last 10 years.

 

 

The 2006 target performance bonus as a percentage of salary was 100% for our Chief Executive Officer, 75% for our Chief Financial Officer and the President of Con-way Freight, and 60% for our other Named Executives. These percentages of salary were established by the Compensation Committee as part of the overall philosophy to pay short-term incentive compensation at the 60th percentile relative to the Company’s compensation peer groups.

 

The 2006 annual performance bonuses for Messrs. Stotlar and Schick, the Company’s Chief Executive Officer and Chief Financial Officer, and a portion of the annual performance bonus for each of the other Named Executives, were based on parent Company income before taxes, incentive compensation, and expense for workers compensation and lost and damaged freight. During 2006, the Company sold its membership interest in Vector SCM, LLC to General Motors, sold part of the operations of Con-way Expedite and Brokerage, and discontinued the operations of Con-way Forwarding. The gains or losses and other effects of those transactions were not included when measuring performance for purposes of determining annual performance bonus payouts.

 

After these adjustments, the Company’s income before taxes, incentive compensation, and expense for workers compensation and lost and damaged freight was $426,572,000. This was below the level expected by the Company at the beginning of 2006 due to a number of factors, including a softening of the market for the less-than-truckload transportation services offered by Con-way Freight, the Company’s largest subsidiary. The Company’s performance exceeded the specified threshold amount ($233,061,000) but fell short of the target amount ($522,522,000). Based on this performance, the Chief Executive Officer and the Chief Financial Officer received payments of $402,037 and $156,350, respectively, equal to approximately 60% of their target annual performance bonuses. Each of the other Named Executives also received payments equal to 60% of the targeted amount for the portion of the annual performance bonus based on parent Company income before taxes, incentive compensation, and expense for workers compensation and lost and damaged freight. For Messrs. Bianco, Labrie and McClimon, this portion was 10%, 50% and 10%, respectively, of the total award, resulting in payments of $12,880, $60,979 and $18,706, respectively.

 

The balance of the annual performance bonus for Mr. Bianco, the President of the Company’s Menlo Worldwide, LLC subsidiary, was based in part on the operating income before incentive compensation and expense for workers compensation and lost or damaged freight of that subsidiary and in part on improvement in the working capital of Menlo Logistics, Inc., the largest subsidiary of Menlo Worldwide, LLC. Menlo Worldwide, LLC’s solid performance in 2006 resulted in its operating income before incentive compensation far exceeding the threshold amount but falling just short of the target amount. In addition, Menlo Logistics performed exceptionally well in reducing its working capital in 2006. Based on the respective performances of Menlo Worldwide, LLC and Menlo Logistics, Inc, in 2006, Mr. Bianco received payments of $140,844 and $45,686, equal to approximately 90% and 117%, of the portion of the target bonus tied to the Menlo Worldwide, LLC and Menlo Logistics, Inc. performance goals, respectively. These payments, taken together with the payment of $12,880 based on parent Company performance, resulted in Mr. Bianco receiving a total annual performance bonus of $199,410 for 2006.

 

In 2006, Mr. Labrie, currently Senior Vice President of Strategy and Enterprise Operations, was responsible for managing the Company’s Con-way Truckload, Con-way Expedite and Brokerage, Con-way Forwarding, and Road Systems subsidiaries. Consequently, 50% of his annual performance bonus was tied to the performance of those subsidiaries. During 2006, the Company sold a portion of the Con-way Expedite and Brokerage subsidiary and decided to discontinue the operations of its Con-way Forwarding subsidiary. Mr. Labrie did not receive any performance bonus based on the operations of the sold and discontinued operations. Based on the performances of Con-way Brokerage (the portion of Con-way Expedite and Brokerage that was not sold) and Road Systems, which were measured through a combination of income, revenue, margins and productivity, Mr. Labrie received payments of $22,859 and $9,514, equal to 74% and 93% of the portion of the target bonus tied to Con-way Brokerage and Road Systems performance goals, respectively. These payments, taken together with the payment of $60,979 based on parent Company performance, resulted in Mr. Labrie receiving a total annual performance bonus of $93,353 for 2006.

 

The balance of the annual performance bonus of Mr. McClimon, the President of the Company’s Con-way Freight subsidiary, was based in part on the operating income before incentive compensation and expense for workers compensation and lost or damaged freight of Con-way Freight and in part on the revenue of that subsidiary. Con-way Freight’s operating income before incentive compensation and expense for workers compensation and lost or damaged freight of $428,527,000 exceeded the threshold amount of $283,180,000 but fell short of the target amount of $588,556,000. In addition, Con-way Freight’s revenue of $3,116,830,000 exceeded the threshold amount of $2,720,249,000 but fell short of the target amount of $3,400,311,000. As noted above, a number of factors contributed to Con-way Freight’s performance during 2006, including a softening of the market for the less-than-truckload transportation services. As a result, Mr. McClimon received payments of $97,857 and $32,619, equal to 46% and 46% of the portion of the target bonus tied to the operating income and revenue performance goals, respectively. These payments, taken together with the payment of $18,706 based on parent Company performance, resulted in Mr. McClimon receiving a total annual performance bonus of $149,182 for 2006.

 

C. Long-Term Incentive Compensation.  The Company pays long-term incentive compensation to provide an incentive for executives to focus on achieving the Company’s long-term goals and objectives and on increasing long-term shareholder value. In 2006, the Company granted two types of long-term executive compensation awards to executives: stock option awards and Value Management Plan awards. However, for 2007 executive compensation, the Company replaced the Value Management Plan awards with a new performance share plan unit (“PSPU”) award. The number of PSPUs that vest is based on the Company’s revenue growth over a three-year period, with a profitability modifier to encourage profitable growth of the Company. Upon vesting, the PSPUs are payable in shares of the Company’s common stock.

 

For each executive, the Company first determines the target payout for long-term incentive compensation based on the guidelines described above under “Compensation Relative to Peers.” In 2006, after determining the total target payout, the Company allocated 50% of the target payout to stock option awards and 50% to Value Management Plan awards. This allocation is intended to put equal emphasis on shareholder value and operating performance for all executives. In addition, as discussed further below, the portion of the Value Management Plan award based on “relative total shareholder return” permits executives to earn some level of long-term incentive compensation payout if the Company outperforms its peers, regardless of the state of the economy or the market for the Company’s services.

 

(1) Stock Options

 

As described under “Compensation Committee,” commencing on page 14, each year the Chief Executive Officer submits a list of recommended stock option grants to the Compensation Committee for its consideration, modification (as the Compensation Committee deems appropriate) and ultimate approval. Although the starting point when developing recommended stock option grants for executives is 50% of their target payout for long-term incentive compensation, the grants that are actually recommended may be adjusted upward or downward to take into account the individual performance of the executives.

 

Options vest annually over three years (with one-third vesting on January 1 of each of the three calendar years following the year of grant) and have a term of ten years. All Company stock options are granted with exercise prices equal to the fair market value of Company stock on the date of grant, which is the date that the Compensation Committee approves the stock option grants. In September 2006, the Company’s 2006 Equity and Incentive Plan was amended to define fair market value as the closing stock price on the date of grant, if the stock market is open on that date. If not, fair market value is defined as the closing stock price on the last trading day immediately before the grant date. Prior to the amendment, fair market value was defined in the Company’s 2006 Plan (and in predecessor plans) as the closing stock price on the last trading day immediately before the grant date. This amendment was made to align our definition of fair market value with the definition utilized under the new SEC rules governing executive compensation disclosure.

 

(2) Value Management Plan Awards

 

Value Management Plan awards measure performance over a three-year time period. Each award is expressed as a percentage of salary, determined by dividing the target payout allocated to Value Management Plan awards by the executive’s base salary at the beginning of the cycle. For the 2006 - 2008 Value Management Plan award cycle, the target percentages of salary for the Named Executives were 200% for the Chief Executive Officer, 112.5% for the Chief Financial Officer and the President of Con-way Freight, and 62.5% for the other Named Executives. Value Management Plan awards have been granted to executives each year since 2000, and in addition to the awards for the 2006 - 2008 cycle, there are currently Value Management Plan awards outstanding for the 2005 - 2007 cycle. Payouts for the 2004 - 2006 award cycle were made in February 2007.

 

For cycles commencing in 2004 and thereafter, Value Management Awards have been based upon two factors:

 

 

TSR combines share price appreciation and dividends paid to show the total return to the shareholder and is used to compare the performance of different companies’ shares over time. Relative TSR was selected as a performance goal metric to make a portion of the Value Management Plan award dependent on actual performance versus peer group companies, rather than actual performance based on Company-specific metrics such as EBITDA and ROCE. For all executives, the relative TSR portion of the award is based upon the TSR of the Company in comparison to the TSR of the companies that were in the DJTA for the entire three-year cycle.

 

Generally, for executives employed by the Company the EBITDA/ROCE matrix is based on EBITDA and ROCE of the Company. For an executive employed by a subsidiary of the Company, the Value Management Plan award may be based on an EBITDA/ROCE matrix for that subsidiary, or a portion of the award may be based on an EBITDA/ROCE matrix for that subsidiary and a portion based on an EBITDA/ROCE matrix for the Company.

 

The Company selected EBITDA and ROCE as performance goal metrics because these metrics:

 

 

As noted above, two-thirds of a Value Management Plan award is based on the applicable EBITDA/ROCE matrix or matrices and one-third on relative TSR. The Compensation Committee, in consultation with its independent compensation consultant, decided on this weighting to closely align the awards with the attributes desired by the Company, which are to place a greater emphasis on driving the Company’s actual performance as opposed to performance relative to its peers. In addition, using relative TSR as the performance goal for part of the Value Management Plan award increases the amount of an executive’s payout if the Company outperforms its peers and decreases the amount of the executive’s payout if the Company underperforms its peers, regardless of the state of the economy or the market for the Company’s services.

 

Using the same three-year financial plan approved by the Board of Directors and used in establishing short-term incentive compensation awards, the Compensation Committee sets threshold, target and maximum performance goals for the portion of the Value Management Plan awards based on EBITDA and ROCE. Upon attainment of the three-year target performance goals, executives earn a target payout on that portion of their Value Management Plan awards. No performance bonus is earned on that portion of the award if performance falls below the specified threshold level, and a performance bonus equal to 200% of the targeted award level is paid if the maximum performance goals are reached or exceeded. Payouts at threshold performance levels typically are set at 50% of target payouts, and payouts at performance levels between threshold and target and between target and maximum are determined by interpolation.

 

Typically, the Company’s performance must be fairly consistent over the entire three-year award cycle for executives to earn meaningful payouts on the portion of their Value Management Plan awards based on EBITDA and ROCE. Because consistent performance is difficult to achieve, for recent cycles the Compensation Committee has structured the Value Management Plan program so that target

payouts are earned if the Company meets the three-year financial plan, and payouts equal to 50% of target payouts are earned if the Company achieves threshold performance level over the three-year cycle. The required performance levels for threshold and maximum payouts vary from year-to-year, and in setting these goals, the Compensation Committee considers a number of factors, including market conditions, the business cycle, and operating plan priorities.

 

Performance goals for the portion of the Value Management Plan award based on relative TSR typically are set so that executives receive a target payout for that portion of the award if the Company’s TSR is in the 50th percentile relative to the DJTA companies. Threshold performance goals are set so that executives receive no payout if the Company substantially underperforms the DJTA companies, and the maximum performance goal is set so that executives receive a maximum payout if the Company substantially outperforms the DJTA companies. For recent award cycles, the threshold performance goal has been set at the 30% percentile and the maximum performance goal has been set at the 85% percentile.

 

Since the Value Management Plan was adopted, five award cycles have been completed (2000 - 2002, 2001 - 2003, 2002 - 2004, 2003 - 2005 and 2004 - 2006). For all cycles prior to the 2004 - 2006 cycle, no executives received Value Management Plan award payouts other than executives whose awards were based on the performance of Con-way Freight. Those executives earned payouts of 0%, 0%, 198% and 200% for the four cycles. The payouts earned by Con-way Freight executives for the 2002 - 2004 and 2003 - 2005 cycles reflect the superior performance of that business unit over those periods.

 

For the 2004 - 2006 cycle, the performance goals for each of the Named Executives (other than the President of Menlo Worldwide, LLC) were based on EBITDA and ROCE of Con-way Freight (formerly Con-Way Transportation Services, Inc.), since each was an executive of Con-way Freight at the beginning of the award cycle. Con-way Freight’s EBITDA of $1,228,125,000 exceeded the specified maximum level of $1,041,100,000, reflecting its excellent performance during the first two years of the cycle. In addition, Con-way Freight’s ROCE of 31.8% exceeded the specified maximum level of 28% for the cycle. As a result, Messrs. Stotlar, Schick, Labrie and McClimon received payments of $224,189, $120,770, $173,403 and $220,133, respectively, equal to 200% of target on the two-thirds portion of the 2004 - 2006 Value Management Plan award tied to EBITDA and ROCE.

 

The performance goals for Mr. Bianco, the President of Menlo Worldwide, LLC, were based on EBITDA and ROCE of that entity, since he was an executive of Menlo Worldwide, LLC at the beginning of the award cycle. Menlo Worldwide’s EBITDA exceeded the threshold amount but fell short of the target amount. In addition, Menlo Worldwide’s ROCE greatly exceeded the maximum level, reflecting significant process improvements made during the three-year cycle. As a result Mr. Bianco received a payment of $139,119, equal to 139.1% of target on the two-thirds portion of the 2004 - 2006 Value Management Plan award tied to EBITDA and ROCE.

 

For all executives, the performance goals applicable to the relative TSR portion of the 2004 - 2006 Value Management Plan award were the same, so that a threshold payment equal to 50% of target would be payable if the Company TSR ranked in the 30th percentile relative to other companies in the DJTA; a target payment would be payable if the Company TSR ranked in the 50th percentile; and a maximum payment equal to 200% of target would be payable if the Company TSR ranked in the 85% percentile. For the 2004 - 2006 cycle, the Company TSR ranked below the 30th percentile, so the Named Executives did not receive a payout on the one-third portion of the 2004 - 2006 Value Management Plan award tied to relative TSR. Although the price of a share of the Company’s common stock reached as high as $60 during the three-year cycle, the closing price on December 29, 2006 (the last trading day of the year) was $44.04, reflecting (among other things) the effect on the Company of the softening of the market for less-than-truckload transportation services in 2006.

 

For the portion of the Value Management Plan awards based on EBITDA and ROCE, the performance goals for the 2005 - 2007 and the 2006 - 2008 cycles are as follows:

 

 

Each Named Executive will receive a target payout on this portion of the award if performance is at the level specified in the applicable three-year financial plan. For the 2005 - 2007 cycle, a threshold payout will be earned if performance is between 23% and 31% below that specified in the applicable three-year financial plan, depending on the business unit and the EBITDA/ROCE goal and a maximum payout will be earned if performance is at a level between 19% and 24% above that specified in the applicable three-year financial plan. For the 2006 - 2008 cycle, a threshold payout will be earned if performance is 20% below that specified in the applicable three-year financial plan, and a maximum payout will be earned if performance is 20% above that specified in the applicable three-year financial plan.

 

The Company develops its financial plan using the best information available to it at the time that the plan is prepared. However, of necessity, the Company must make many assumptions when developing the financial plan, including assumptions regarding the economy and the market for transportation and logistics services over the three-year duration of the plan. As a result, while at the time that the financial plan is developed by the Company and approved by the Board (with such adjustments (if any) as the Board determines are appropriate), the Company anticipates that performance at financial plan level for three consecutive years is difficult but achievable and that performance above plan at the levels listed above would be difficult, subsequent developments (including changes in the economy and the market for the Company’s services) will inevitably affect actual performance over the three-year period. Given these factors, at this time it is difficult for the Company to predict what the final performance and payouts will be for the 2005 - 2007 and 2006 - 2008 cycles. However, based on parent Company performance through the end of 2006, a payout at approximately 70% of target is currently estimated for the 2005 - 2007 cycle.

 

D. Post-Employment Compensation.  The Company provides certain post-employment compensation to executives in the following circumstances:

 

 

 

In addition, participating executives are entitled to receive their accounts from the Company’s deferred compensation plans (described below) upon their termination of employment for any reason.

 

(1) Retirement

 

The Company maintains the following qualified and non-qualified plans that provide post-retirement compensation:

 

 

In 2006, the Company decided to make certain changes to its retirement benefit programs, effective January 1, 2007. The changes made to the retirement benefit programs were intended to preserve and protect the retirement benefits earned by existing employees under the Con-way Pension Plan and the Company’s supplemental retirement plans, while at the same time reducing the Company’s exposure to pension cost volatility and making plan expenses more predictable. The changes also put increased emphasis on the Con-way Retirement Savings Plan by increasing Company matching contributions and introducing Company basic and transition contributions.

 

A more detailed discussion of these plans and the changes referred to above can be found in the narrative following the Pension Benefits table on page 44.

 

(2) Death and Disability

 

The Company provides executives with Company-paid term life insurance equal to two times annual base salary. Executives may purchase additional coverage (in $50,000 increments) up to three times their annual base salary or $1,750,000, whichever is less.

 

In addition, executives have a Company Business Travel plan that provides up to five times annual base salary if the executive dies when traveling on Company business, and various lesser amounts for other injuries. The Company also offers voluntary accidental death and dismemberment insurance that provides coverage up to $250,000.

 

The Company maintains a long-term disability program that provides executives with 662/3% of base pay, subject to a monthly maximum of $10,000 taxable income. The disability plan benefit is available only if the executive is unable to perform any occupation.

 

All of the death and disability benefits described above are provided to all regular full-time Company employees, and not just to executives.

 

(3) Termination of Employment Following a Change in Control

 

The Company maintains a program to provide severance benefits to executives in connection with a “change in control,” which includes both a change in control of the entire Company as well as sales of major business units. However, the sale of a business unit is a change in control only for executives employed by that business unit unless the sale also constitutes a sale of substantially all of the assets of

the Company. The program employs a “double trigger” so that all severance benefits (other than early vesting of equity awards) are available only if there is both a change in control and an involuntary or constructive termination of the executive’s employment within a specified period of time after the change in control occurs. Unvested stock options and restricted stock awards vest upon a change in control, whether or not the executive’s employment is terminated. The program has been in place since 1998.

 

The Company recognizes that a possible sale or other disposition of the Company or a business unit can create an enormous distraction. The Company maintains the severance program as an incentive for executives:

 

 

The Company found that this program worked well when it sold its air freight forwarding business to United Parcel Service in 2004. No key executives of the air freight forwarding business left the Company during the pendency of that sale.

 

The amount of severance benefits provided under the program varies depending on the level of the executive. Each of the Named Executives is entitled to receive lump sum severance payments equal to three years salary and target annual bonus, plus health and other benefits, if his employment is terminated within two years after a change in control. Executives at lower levels are entitled to receive somewhat lower levels of benefits. Approximately 15 executives are entitled to receive a tax gross-up, if the level of severance benefits that they receive results in the imposition of an excise tax under the Internal Revenue Code. A more detailed discussion of the program, including the benefits available under the program, can be found in the narrative on pages 50 through 52.

 

The Company believes that these levels of severance benefits are necessary to achieve the objectives described above. An independent compensation consultant retained by the Compensation Committee is asked to periodically review this severance benefit program. Based on these reviews and the Compensation Committee’s assessment of the severance benefit program, the Company believes that its program is in line with programs offered by companies that compete with the Company for executive talent.

 

(4) Involuntary Not-for-Cause Termination

 

On occasion the Company, in its discretion, enters into a severance agreement with a departing executive who is being involuntarily terminated for reasons other than cause. The agreements include an undertaking by the executive to cooperate with the Company on matters in which the executive was involved during the period of employment and to maintain the confidentiality of non-public Company information. The Company has found that these agreements work well in assisting the Company in making a transition from the departing executive to his or her replacement and in assisting the executive in making the transition to a new employment opportunity. The terms of these agreements vary and are subject to approval by the Chief Executive Officer or, if the severance agreement is with the Chief Executive Officer or a Senior Vice President, by the Board of Directors.

 

(5) Deferred Compensation Plan

 

The Company maintains a deferred compensation plan for eligible highly compensated employees. Only employees at director level and above with annual base salaries of at least $125,000 are eligible to

participate. Each year the Compensation Committee approves the list of employees who meet the eligibility criteria.

 

The Company maintains the plan to provide an additional tax-deferred vehicle for eligible employees to save for retirement at no additional cost to the Company and to remain competitive with other companies competing for highly-compensated talent. Executives may elect to defer annual base salary, annual performance bonuses and/or Value Management Plan awards, subject to certain limitations. The Company does not make contributions to the deferred compensation plan on behalf of executives.

 

Once a year, executives may elect to convert some or all of their deferred compensation account balances into phantom stock units. Elections made to convert into phantom stock units are irrevocable, so executives maintain their investments in the phantom stock units until they leave the Company at retirement or upon termination of employment. Phantom stock units are credited with returns based on performance of the Company’s common stock (including dividends paid on the common stock).

 

Deferrals made prior to 2007 are credited with interest based on the Bank of America Prime Rate or other fixed rate selected by the Compensation Committee. For deferrals made for plan years after 2006, participants select one or more funds from a specified group of available funds. Each participant’s account balance for that plan year will not be credited with interest but instead will fluctuate based on the performance of the funds selected by the participant. Deferred compensation account balances for years prior to 2007 will continue to be credited with interest unless the participant elects to have some or all of the account balances fluctuate based on the performance of the funds selected by the participant or to convert some or all of the account balance into phantom stock units.

 

A detailed discussion of the deferred compensation program, including the returns earned by executives on amounts deferred under the program, can be found in the narrative following the Nonqualified Deferred Compensation table on page 48.

 

E. Perquisites.  The Company offers relatively modest perquisites to executives. Most of these perquisites are taxable to the executive. In 2006, the Company compared its perquisites to perquisites offered by other companies in our industry and concluded that its perquisites were either below or in line with those offered by those other companies. Unlike some other companies, we do not own, lease or charter aircraft for executive use.

 

The perquisites consist of the following:

 

     (1) Annual Physical Examination

 

The Company will pay for an executive to have an annual physical examination. The Company believes that healthy executives are vital to the Company’s success and that the benefits from providing this perquisite far outweigh the cost.

 

     (2) Tax Preparation; Financial and Estate Planning

 

The Company will pay for annual tax planning and preparation services in an amount up to $4,500 and for lifetime financial and estate planning services in an amount of up to $6,000. The Company provides these benefits to assist the executive in dealing with the complexity of the tax and estate planning laws and in arranging his or her personal financial affairs.

 

     (3) Company Car

 

Each year the Company provides executives with the use of an automobile through a leasing program the Company has in place with Ford Motor Company. The program with Ford provides

automobiles not only to executives but also to the Company’s sales force and to director-level employees. Under this program, the Company is able to provide cars to executives at favorable prices. The Company has found that receiving a Company car boosts morale as employees rise to director-level and more senior positions in the Company.

 

     (4) Long-Term Care Insurance Benefits

 

The Company provides long-term care insurance at no cost to eligible executives. Executives may also elect to cover their qualified family members at their own expense. The Company-paid benefits include $6,000 per month for facility care for up to six years, $3,000 per month for in-home care for up to twelve years, or a combination of facility care and in-home care up to an aggregate maximum benefit of $432,000. Executives are entitled to continue this benefit, at their own expense, if they leave the Company.

 

     (5) Relocation Assistance

 

The Company offers assistance to executives relocating at the request of the Company. Some elements of the assistance, including payment of closing costs for new and existing homes and the cost of moving household goods, are provided to most employees who relocate.

 

For executives who are relocating from lower to higher cost-of-living areas, the Company may provide additional assistance. This assistance may take the form of payment of mortgage subsidies, temporary housing expenses, assistance in selling the relocating executive’s existing home and tax gross-up payments.

 

As a part of its standard relocation package provided to executive officers, director-level employees, senior managers and certain mid-level managers, the Company offers assistance with the sale of a transferring employee’s existing home. This assistance is offered through a contract between the Company and a third party home re-seller, which agrees to purchase the home at appraised value and then re-sell the home. Upon the sale of the home by the employee to the third party, the Company assumes the economic risk should the home ultimately be re-sold for less than the appraised value. The Company also assumes responsibility for closing costs incurred when the home is re-sold. In 2006, the Chief Financial Officer sold his home in Michigan to the third party home re-seller. The home remains on the market.

 

     (6) Education Matching Gifts Program

 

The Company will match donations to an accredited college or university chosen by the executive. The Company matches contributions dollar-for-dollar up to $5,000 per year. This matching donation program is available to all employees at director level and above and also to members of the Company’s Board of Directors.

 

     (7) Airline Club Memberships

 

The Company will pay for executives to join airline clubs. Membership in these clubs makes it easier for executives to perform their duties when traveling on Company business.

 

Compensation Policies and Procedures

 

The following sections briefly summarize various Company policies, practices, guidelines and considerations regarding compensation and Company stock ownership.

 

 

None of the Company’s domestic executives, including the Named Executives, has an employment agreement. However, as noted elsewhere in this Compensation Discussion and Analysis, the Company does have agreements in place to provide severance benefits to Named Executives if their employment is terminated within a specified period of time following a “change in control.” In addition, executives residing in foreign countries may have employment agreements, if required in order to comply with local legal requirements.

 

Although in special circumstances (such as when recruiting an outside executive) the Company may enter into an employment agreement, it is not a customary practice for the Company to do so. The Company’s frequent practice of filling executive positions by promoting from within has lessened the need for employment agreements, and the Company prefers to have all executives subject to the Company’s customary terms of employment for executives rather than terms negotiated as part of an employment agreement.

 

 

As described in the next paragraph, the Company pays discretionary cash bonuses from time to time to selected executives to reward them for extraordinary individual performance. In addition, from time to time the Company grants special stock option, restricted stock or other long-term incentive awards to selected executives upon hiring or promotion, for retention purposes or in recognition of individual performance.

 

Our Compensation Committee has delegated to the Employee Recognition Committee, a committee made up of the Chief Executive Officer, the Chief Financial Officer and the General Counsel, the authority to award special cash bonuses and to grant special stock option awards and other long-term incentive compensation awards, subject to specified limitations. This delegation is discussed under “Compensation Committee” on page 14. The Employee Recognition Committee does not have authority to award bonuses or to grant option awards and other long-term incentive compensation awards to members of that committee, to direct reports to the Chief Executive Officer or to other policy-making officers. Any special cash bonuses and special stock option awards and other long-term incentive compensation awards that are made to members of the Employee Recognition Committee, to other direct reports to the Chief Executive Officer or to any other policy-making officer are made by our Compensation Committee.

 

All restricted stock grants are made by the Compensation Committee. These grants may vest with the passage of time, upon the achievement of specified performance goals or a combination of the two. In January 2007, the Compensation Committee awarded 7,500 shares of restricted stock to each of Messrs. Bianco, Labrie and McClimon which are scheduled to vest on January 29, 2010.

 

 

The Company does not consider amounts realized or realizable from prior compensation, such as from stock option awards or other long-term incentive awards, when setting other elements of compensation such as subsequent long-term incentives or retirement benefits. The Company believes that incentive awards are effective in motivating executives and that adjustments based on

prior compensation would undermine the effectiveness of these awards. In addition, as noted elsewhere in this Compensation Discussion and Analysis retirement benefits are provided to all Company employees to assist in preparing for retirement and are unrelated to incentive compensation awards. In addition, executives who earn substantial levels of retirement benefits typically do so by spending significant parts of their careers at the Company, which benefits the Company through the continuity and “bench strength” of its management team.

 

 

The Company’s short-term and long-term incentive compensation plans are adopted under “omnibus” equity and incentive plans approved by the Company’s shareholders. These plans give our Compensation Committee discretion to adjust awards granted to executives. For example, the Compensation Committee may:

 

 

However, our Compensation Committee may not make any discretionary increase to the amount of the annual performance bonus or Value Management Plan award paid to any “covered employee” whose compensation is subject to Internal Revenue Code limits on deductibility (see the discussion below under “Tax and Accounting Considerations”).

 

When making awards, our Compensation Committee does not expect to exercise its discretion to adjust these awards. Due to subsequent events, however, our Compensation Committee has exercised discretion on certain occasions. For example, the following adjustments have been made in recent years:

 

 

All of these adjustments were made to eliminate the effect, whether positive or negative, of the particular transaction on these incentive awards so that the awards would continue to provide the same opportunity to executives that was intended when the awards were made. These adjustments reflect the fact that these business units no longer contribute to the overall performance of the Company but do not eliminate the effect of the performance of the business units up to the date of sale.

 

 

Both the Company’s short-term incentive compensation plan and its Value Management Plan require the Company’s policy-making executive officers to repay overpayments of awards that result from

financial statement restatement. Repayment is required if a restatement occurs (i) within one year following payment of the performance award, if the restatement is due to errors or omissions, or (ii) at any time if the restatement is due to fraudulent activities. To date, the Company has not been required to seek recovery of performance award overpayments from its executives.

 

The officers subject to the repayment obligation are the policy-making officers who are required to report their transactions in Company securities under Section 16 of the Securities Exchange Act of 1934. Currently these officers consist of the Named Executives and four other executives.

 

 

Once a year, the Company grants short-term and long-term incentive compensation awards (including stock options) to executives. Beginning in 2005, this process has taken place at our Compensation Committee’s regularly scheduled meeting in January. From 1999 through 2003, the annual award grants were made at our Compensation Committee’s regularly scheduled meeting in December. No annual awards were made in 2004.

 

Each year our Compensation Committee approves a schedule of meetings for the upcoming year. As a part of this scheduling process, our Compensation Committee determines the meeting at which the annual award grants will take place. Our Compensation Committee does not select or revise the meeting date at which it grants stock option and other awards in coordination with the release of material non-public information.

 

In general, no Company employees other than executive officers receive annual stock option awards. However, as noted above, on occasion the Employee Recognition Committee makes special option grants to select executive and non-executive employees, and on occasion our Compensation Committee makes special restricted stock grants to selected executives (see discussion above under “Special Bonuses and Awards”).

 

Neither our Compensation Committee nor the Employee Recognition Committee selects the grant dates for special grants in coordination with the release of material non-public information. All of these awards are made when deemed necessary or appropriate to achieve specific business objectives. For example, restricted stock awards may be made when an executive is hired or promoted or when the Company perceives a need to provide an incentive to a particular executive to remain with the Company.

 

The Company’s equity and incentive plan prohibits lowering the exercise price of any outstanding stock option, other than in connection with equitable adjustments to reflect stock dividends, stock splits, spin-offs, mergers and other corporate transactions. To our knowledge, the Company has never lowered the exercise price of any outstanding option (other than as part of an equitable adjustment) or backdated any stock options.

 

 

The role of executive officers in the compensation process is discussed under “Compensation Committee,” commencing on page 14.

 

 

The Company believes that its top executives should have a meaningful stake in the risks and rewards of long-term ownership of the Company. To this end, the Company has established stock ownership guidelines for its top three levels of executive officers, which currently includes a total of

approximately 15 executive officers. The following guidelines identify levels of ownership, expressed as a multiple of each executive’s base salary:

 

 

To determine compliance with these guidelines, ownership interests are valued as follows:

 

 

Each Level 1 and Level 2 officer is expected to be in compliance with the stock ownership guidelines by the fifth anniversary of the date of promotion to his or her current position. All Level 3 officers are expected to be in compliance with the stock ownership guidelines by December 31, 2011.

 

 

Company policy prohibits short sales of Company stock and other similar transactions that could be used to hedge the economic risk of the ownership of Company stock. The Company does not impose restrictions on the pledging of Company stock by executives. However, as noted in the footnotes to the Stock Ownership Table on page 11, no Named Executive currently has pledged any shares of which he is the beneficial owner.

 

 

Federal tax law limits the deductibility by the Company of “non-performance based compensation” paid to the Chief Executive Officer and our four other most highly compensated executives (the “covered employees”). All amounts of non-performance based compensation in excess of the annual statutory maximum of $1 million per covered employee are not deductible. The Company’s general policy is, where feasible, to structure incentive compensation paid to the covered employees so as to qualify as “performance-based compensation,” which is exempt from the $1 million annual cap and thus is deductible for federal income tax purposes. However, there may be circumstances where portions of a covered employee’s compensation will not be deductible. In 2006, approximately $810,000 of Mr. Stotlar’s compensation was not deductible, primarily due to the 2006 time-based vesting of 17,896 shares of restricted stock that were granted to Mr. Stotlar in 2002 and 2005.

 

The Company’s 2006 Equity and Incentive Plan, which was approved at the Company’s 2006 Annual Meeting of Shareholders, allows our Compensation Committee to make certain short-term and long-term incentive compensation awards to covered employees that qualify as “performance-based compensation.” Our Compensation Committee uses these awards to carry out its general policy of providing a competitive compensation package, while at the same time maximizing the deductibility of an executive’s compensation for federal income tax purposes.

 

Despite changes in accounting rules pursuant to FAS 123R, the Company has not revised its executive compensation practices relating to equity awards. As before, the Company continues to make

annual stock option grants to all executive officers and restricted stock grants only to selected executives as an inducement for those executives to join, or remain employed by, the Company, or upon promotion.

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis which appears in the Company’s 2007 Notice of Annual Meeting and Proxy Statement.

 

Based on the review and discussions referred to above, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2007 Notice of Annual Meeting and Proxy Statement for filing with the Securities and Exchange Commission.

 

THE COMPENSATION COMMITTEE

 

 

 

The following table sets forth the compensation received by the Company’s Chief Executive Officer, Chief Financial Officer and the other executive officers for whom disclosure is required, for the fiscal year ended December 31, 2006. As used in this Proxy Statement, “Named Executives” means the officers identified in this Summary Compensation Table. Annual performance bonuses reported under the “Bonus” column in previous proxy statements are now reported under the “Non-Equity Incentive Plan Compensation” column of the table.

 

 

 

 

 

 

 

 

 

The following table includes plan-based awards made to Named Executive Officers in 2006. Other than stock option awards, there were no awards granted under Equity Incentive Plans in 2006, and as a result the table below does not contain columns reflecting stock awards or estimated future payouts under Equity Incentive Plans.

 

 

 

 

 

The amounts shown in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table reflect the annual performance bonuses earned in 2006 under the Company’s short-term incentive plan, and payouts earned during the 2004 - 2006 award cycle under the Value Management Plan, the Company’s long-term incentive compensation plan. The applicable performance goals and levels of achievement underlying these payouts are discussed in the Compensation Discussion and Analysis on pages 24 through 30.

 

The amounts shown in the “Estimated Future Payouts Under Non-Equity Incentive Plan Awards” column of the Grants of Plan-Based Awards Table reflect the amounts payable at threshold, target and maximum achievement levels for the 2006 annual performance bonuses and for the Value Management Plan awards for the 2006 - 2008 award cycle. The performance goals applicable to the Value Management Plan awards are discussed in the Compensation Discussion and Analysis on page 30.

 

The option awards listed in the Grants of Plan-Based Awards table have a term of ten years and vest in three equal installments, on January 1 of 2007, 2008 and 2009. Any unvested portion of the option awards vest on death or disability, retirement at age 65 or on achieving “rule of 85” (combined age and years of service equal to 85 or more) or upon a change in control of the Company.

 

The following table identifies the exercisable and unexercisable option awards and unvested stock awards for each of the Named Executives as of December 31, 2006. All stock options were granted ten years prior to the expiration date listed in the table.