UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

SCHEDULE 14A

(RULE 14a-101)

SCHEDULE 14A INFORMATION

 

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

Exchange Act of 1934 (Amendment No.     )

Filed by the Registrant þ

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

COOPER TIRE & RUBBER COMPANY

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COOPER TIRE & RUBBER COMPANY

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

TO THE STOCKHOLDERS:

 

The 2007 Annual Meeting of Stockholders of Cooper Tire & Rubber Company (the “Company”) will be held in the Alumni Memorial Union, North Multi-Purpose Room at the University of Findlay, 1000 North Main Street, Findlay, Ohio 45840, on Tuesday, May 1, 2007, at 10:00 a.m., Eastern Daylight Time, for the following purposes:

 

 

Only holders of Common Stock of record at the close of business on March 6, 2007 are entitled to notice of and to vote at the Annual Meeting.

 

BY ORDER OF THE BOARD OF DIRECTORS

James E. Kline,

Vice President, General

Counsel and Secretary

 

Findlay, Ohio

March 22, 2007

 

Please mark, date and sign the enclosed proxy and return it promptly in the enclosed addressed envelope, which requires no postage. In the alternative, you may vote by Internet or telephone. See page 2 of the proxy statement for additional information on voting by Internet or telephone. If you are present and vote in person at the Annual Meeting, the enclosed proxy card will not be used.

 

TABLE OF CONTENTS

 

COOPER TIRE & RUBBER COMPANY

 

701 Lima Avenue, Findlay, Ohio 45840
March 22, 2007

 

 

PROXY STATEMENT

 

 

GENERAL INFORMATION AND VOTING

 

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Cooper Tire & Rubber Company (the “Company,” “Cooper Tire,” “we” or “us”) to be used at the Annual Meeting of Stockholders of the Company to be held on May 1, 2007, at 10:00 a.m., Eastern Daylight Time, in the Alumni Memorial Union, North Multi-Purpose Room at the University of Findlay, 1000 North Main Street, Findlay, Ohio 45840. This proxy statement and the related form of proxy were first mailed to stockholders on or about March 22, 2007.

 

Purpose of Annual Meeting

 

The purpose of the Annual Meeting is for stockholders to act on the matters outlined in the notice of Annual Meeting on the cover page of this proxy statement. These matters consist of (1) the election of three Directors, (2) the ratification of the selection of the Company’s independent auditors for the year ending December 31, 2007, and (3) the transaction of such other business as may properly come before the Annual Meeting or any postponement(s) or adjournment(s) thereof.

 

Voting

 

Only stockholders who owned shares of Common Stock at the close of business on March 6, 2007 (the “record date”) will be eligible to vote at the Annual Meeting. As of the record date, there were 61,598,224 shares of Common Stock outstanding. Each stockholder will be entitled to one vote for each share owned.

 

The holders of a majority of the shares of Common Stock issued and outstanding, and present in person or represented by proxy, constitute a quorum. Abstentions and “broker non-votes” with respect to a proposal will be counted to determine whether a quorum is present at the Annual Meeting. “Broker non-votes” occur when certain nominees holding shares for beneficial owners do not vote those shares on a particular proposal because the nominees do not have discretionary authority to do so, and have not received voting instructions with respect to the proposal from the beneficial owners.

 

Agenda Item 1.  Except in the case of a contested election, each nominee for election as a Director who receives a majority of the votes cast with respect to such Director’s election by stockholders will be elected as a Director. In the case of a contested election, the nominees for election as Directors who receive the greatest number of votes will be elected as Directors. Abstentions and “broker non-votes” are not counted for purposes of the election of Directors.

 

Agenda Item 2.  Although the Company’s independent auditors may be selected by the Audit Committee of the Board of Directors without stockholder approval, the Audit Committee will consider the affirmative vote of a majority of the shares of Common Stock having voting power present in person or represented by proxy at the Annual Meeting to be a ratification by the stockholders of the selection of Ernst & Young LLP as the Company’s independent auditors for the year ending December 31, 2007. As a result, abstentions will

have the same effect as a vote cast against the proposal, but “broker non-votes” will have no effect on the outcome of this proposal.

 

Proxy Matters

 

Stockholders may vote either by completing, properly signing, and returning the accompanying proxy card, or by attending and voting at the Annual Meeting. If you properly complete and return your proxy card in time to vote, your proxy (one of the individuals named in the proxy card) will vote your shares as you have directed. If you sign and return the proxy card but do not indicate specific choices as to your vote, your proxy will vote your shares to elect the nominees listed under “Nominees for Director” and to ratify the selection of the Company’s independent auditors.

 

Stockholders of record and participants in certain defined contribution plans sponsored by the Company or a subsidiary of the Company (see below) may also vote by using a touch-tone telephone to call 1-800-652-VOTE (8683), or by the Internet by accessing the following website: http://www.investorvote.com.

 

Voting instructions, including your stockholder account number and personal proxy access number, are contained on the accompanying proxy card or, in the case of participants in the following defined contribution plans sponsored by the Company or a subsidiary of the Company, the accompanying voting instruction card:

 

 

Those stockholders of record who choose to vote by telephone or Internet must do so by not later than 2:00 a.m., Eastern Daylight Time, on May 1, 2007. All voting instructions from participants in the defined contribution plans sponsored by the Company and listed above must be received by not later than 2:00 a.m., Eastern Daylight Time, on April 27, 2007.

 

A stockholder may revoke a proxy by filing a notice of revocation with the Secretary of the Company, or by submitting a properly executed proxy bearing a later date. A stockholder may also revoke a previously executed proxy (including one submitted by Internet or telephone) by attending and voting at the Annual Meeting, after requesting that the earlier proxy be revoked. Attendance at the Annual Meeting, without further action on the part of the stockholder, will not operate to revoke a previously granted proxy. If the shares are held in the name of a bank, broker or other holder of record, the stockholder must obtain a proxy executed in his or her favor from the holder of record to be able to vote at the Annual Meeting.

 

The Bylaws of the Company provide for the Board of Directors to be divided into three classes. Three Directors are to be elected to the class having a term expiring in 2010. If elected, each Director will serve for a three-year term expiring in 2010 and until his successor is elected and qualified; however, the Company expects that, due to a Board of Directors-approved waiver to the mandatory retirement provision of the Company’s Guidelines as to the Role, Organization and Governance of the Board of Directors (the “Governance Guidelines”), if elected, Mr. Aronson and Mr. Pond will retire from the Board of Directors in 2008. The Company currently anticipates adding two Directors to the Board of Directors during 2007 and that the two new Directors will continue to serve after the retirement of Messrs. Aronson and Pond.

 

Each of the nominees is a Director standing for re-election and has consented to stand for election to a term as described above. In the event that any of the nominees becomes unavailable to serve as a Director before the Annual Meeting, the Board of Directors will designate a new nominee, and the persons named as proxies will vote for that substitute nominee.

 

The Board of Directors recommends that stockholders vote FOR the three nominees for Director.

 

 

 

NOMINEES FOR DIRECTOR (CONT.)

 

 

 

 

 

 

 

 

 

 

 

DIRECTORS WHO ARE NOT NOMINEES (CONT.)

 

 

 

 

 

 

 

 

Note:  The beneficial ownership of the Directors and nominees in the Common Stock of the Company is shown in the table at page 53 of this proxy statement.

 

 

Ernst & Young LLP served as independent auditors of the Company in 2006 and has been retained by the Audit Committee to do so in 2007. In connection with the audit of the 2006 financial statements, the Company entered into an engagement letter with Ernst & Young LLP that sets forth the terms by which Ernst & Young LLP will perform audit services for the Company. That agreement is subject to alternative dispute resolution procedures. The Board of Directors has directed that management submit the selection of the independent auditors for ratification by the stockholders at the Annual Meeting.

 

Stockholder ratification of the selection of Ernst & Young LLP as the Company’s independent auditors is not required by the Company’s Bylaws or otherwise. However, the Board of Directors is submitting the selection of Ernst & Young LLP to the stockholders for ratification. If the stockholders do not ratify the selection, the Audit Committee will reconsider whether or not to retain the firm. In such event, the Audit Committee may retain Ernst & Young LLP, notwithstanding the fact that the stockholders did not ratify the selection, or select another nationally recognized accounting firm without resubmitting the matter to the stockholders. Even if the selection is ratified, the Audit Committee reserves the right in its discretion to select a different nationally recognized accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and its stockholders.

 

The Board of Directors recommends that stockholders vote FOR the ratification of the selection of the Company’s independent auditors.

 

The rules regarding disclosure of executive compensation in our proxy statement were greatly altered by the Securities and Exchange Commission in 2006 for our proxy statements commencing with this one. In addition to new and different tables, greater emphasis is placed on providing discussion and analysis of our compensation practices. Further, the content of our Compensation Committee Report has been changed. Accordingly, the information in this proxy statement is not directly comparable to that in our 2006 proxy statement.

 

This section discusses the principles underlying our executive compensation policies and decisions and the most important factors relevant to an analysis of these policies and decisions. It provides qualitative information regarding the manner and context in which compensation is awarded to and earned by our executive officers and places in perspective the data presented in the compensation tables and narratives that follow.

 

In order to maximize stockholder value, we have designed our executive compensation program to achieve the following objectives:

 

 

 

In order to achieve these objectives, we have also designed our executive compensation program to:

 

 

Our Compensation Committee is responsible for performing the duties of the Board of Directors relating to the compensation of our executive officers and other senior management, including the executive officers for whom we disclose compensation in the tables below under the heading “Executive Compensation.” The Compensation Committee reviews and approves all elements of our executive compensation program (including performance goals and objectives) that are provided to our executive officers. Management is responsible for making recommendations to the Compensation Committee regarding executive officer compensation (except with respect to Chief Executive Officer compensation) and effectively implementing the executive compensation program, as approved by the Compensation Committee. To assist the Compensation Committee with its responsibilities, the Compensation Committee has retained Towers Perrin, an independent compensation consultant.

 

In setting appropriate compensation levels for our named executive officers, our overall aim is to target the compensation opportunities that we offer, both for each element of compensation and in the aggregate, at the middle of the range offered by companies in our competitive market. The Compensation Committee, with the help of Towers Perrin, has identified comparably-sized U.S. industrial companies to which we look to help determine the range of compensation offered in our competitive market. The Compensation Committee engages the independent compensation consultant to provide market competitive pay levels among comparably sized industrial companies for similar positions. We do not use a specific peer group for compensation benchmarking. The Compensation Committee annually analyzes market practices regarding base salary and annual and long-term incentive opportunities, and evaluates periodically market practices regarding other compensation elements.

 

We take a holistic view when establishing salary, annual and long-term incentive award opportunities. As a result, in addition to reviewing market pay levels for comparable positions, we consider performance, the executive’s resulting total compensation, business needs and internal equity considerations (i.e., we aim for positions with comparable

responsibilities to have the same target incentive award opportunities) when allocating among base salary and annual and long-term incentive compensation opportunities for our executive officers. Actual total compensation can vary widely from target compensation based on company-wide, business unit and individual executive performance.

 

Additional information about the role and processes of the Compensation Committee are presented under the heading “Meetings of the Board of Directors and its Committees — Compensation Committee” below.

 

We believe the executive compensation program, by compensation element and in total, best achieves our objectives. The primary elements of the executive compensation program, which are integral to the attraction, retention and motivation of our named executive officers, are described below:

 

 

When we establish total compensation, we generally utilize a consistent approach regarding our Chief Executive Officer, Chief Financial Officer and three other most-highly compensated executive officers during each year, who we refer to as our named executive officers. For 2006, our named executive officers also included our former Chief Executive Officer and our former President of our North American Tire Division, as described in the “2006 Summary Compensation Table” below.

 

We present below a description of each element of the executive compensation program as established for our 2006 named executive officers. Unless otherwise noted, the same framework applies to all other officers and key executives. Additionally, on January 1, 2007, Mr. Roy V. Armes joined us as our new President and Chief Executive Officer. For more information on our employment and compensation arrangements with Mr. Armes, see “— Employment Agreements and Arrangements — Mr. Roy V. Armes” below.

 

We pay base salaries to reward an individual executive’s competencies, skills, experience and individual executive performance. Generally, we target our base salaries at the middle of the range offered by companies in our competitive market for comparable positions in order to initially attract and retain outstanding executive talent, and later to provide a basic degree of financial security and reward for executive performance. In addition to market level considerations, we also take into account individual factors consisting of job responsibilities, experience and individual executive performance when establishing base salaries.

 

Our Compensation Committee reviews and approves the base salary for our Chief Executive Officer, and for each officer below the Chief Executive Officer based on input from the Chief Executive Officer. We review base salaries annually, and make increases, if any, based on our salary increase budget for the year, the individual factors described above and internal equity and market level considerations.

 

For 2006, the base salaries for our named executive officers approximated, on average, median market levels. The amount of each named executive officer’s 2006 base salary increase, expressed as a percentage of such officer’s 2005 base salary, was as follows: Mr. Weaver, 0.0%; Mr. Miller, 3.9%; Mr. Kline, 1.9%; Mr. Geers, 2.0%, Mr. Stephens, 0.0% and Mr. Dattilo, 0.0%. Mr. Pond did not serve as one of our officers in 2005 or for most of 2006. For 2007, our base salary increases for our named executive officers will be 0.0%.

 

We provide our named executive officers with an annual incentive award opportunity to motivate and reward them for achieving established company-wide and business unit financial goals and individual goals. We believe that our named executive officers should have a material percentage of their annual compensation contingent on both our financial performance and their individual performance.

 

Under this program, each named executive officer can earn an annual cash incentive payment, expressed as a percentage of base salary, based on the achievement of certain financial goals and individual goals. The annual cash incentive payment, if earned, is generally paid each year in the executive’s first paycheck following our February Board of Directors meeting. When setting target annual incentive award opportunities for our named executive officers, the Compensation Committee considers individual factors consisting of job responsibilities, experience and individual executive performance, as

well as market practices. The following are the target and actual incentive awards for each named executive officer for 2006 expressed as a percentage of base salary:

 

 

 

The Compensation Committee sets annual performance targets at the beginning of each year based upon its determination of what would constitute an appropriate level of performance for us or our individual business units. Our Chief Executive Officer and other members of management develop specific recommendations for our Compensation Committee regarding the annual performance targets. After analysis and discussion of the recommendations, and modification of the recommendations if necessary, our Compensation Committee approves the annual performance targets. In making its determination, the Compensation Committee takes into account the following principal factors:

 

 

2006 Incentive Compensation

 

For 2006, the Compensation Committee established financial goals as performance metrics for the annual incentive program in the following categories:

 

 

Annual incentive awards are also based on the named executive officers’ achievement of individual goals established by them and approved by the Chief Executive Officer and the Compensation Committee. Individual goals for 2006 included those related to: net income; customer order fill rate; pension trust returns; sales rate; new product introduction; conversion cost; through-put efficiencies; cost reductions (LEAN); reduction in legal fees; diversity targets; employee development; market share improvement; raw materials spending reductions; and days outstanding/accounts receivable. The Compensation Committee chose operating profit and operating cash flow as the 2006 financial performance metrics due to our need for a short-term focus on improvements in operations and the conservation of cash. To arrive at our operating profit, as used for incentive compensation purposes, we start with our operating profit from our consolidated statement of operations in our financial statements, deduct the minority owners’ portion of operating profit, add the

amortization of certain intellectual property and adjust for any special items. In 2006, a restructuring expense was added to derive operating profit for incentive compensation purposes.

 

For 2006, the Compensation Committee assigned the following weighting to each performance metric:

 

 

The Compensation Committee chose to give operating profit significantly more weight for 2006 than either operating cash flow or individual goals because it is the key metric in monitoring our profit improvement initiatives and assuring that value is delivered to our stockholders in the short-term. Additionally, for Messrs. Miller and Stephens, who are the business unit executives among our named executive officers, the Compensation Committee chose to spread the weighting for each of operating profit and operating cash flow evenly between company goals and business unit goals.

 

Actual annual incentive award payments for financial goals and individual goals are based on actual results relative to the established performance targets, as determined by our Compensation Committee. While actual annual incentive award payments for individual goals can range from 0% to 100% of the target incentive award opportunity, actual incentive award payments for financial goals can range from 0% to 200% of the target incentive award opportunity. As noted above, the 2006 target incentive awards, as a percent of base salary, assigned to our named executive officers ranged from 45% to 85% of base salary. For 2006, we calculated earned incentive awards for financial goals based on the following performance schedule:

 

 

We calculated earned awards for individual goals in 2006 based on the executive’s performance, as determined by the Compensation Committee, relative to each goal as approved by the Compensation Committee. As a result, we made payouts in the range of 0% to 100% for our executive officers based on their 2006 individual goals.

 

As noted above, in 2006, our performance and the performance of our business units resulted in annual incentive award payouts to our named executive officers ranging from 0.0% to 11.5% of their base salaries. The actual award payout amounts for our named executive officers are presented in the “2006 Summary Compensation Table” below as part of the column, “Non-Equity Incentive Plan Compensation.” The potential range of the 2006 annual incentive awards, by named executive officer, is also presented in the “2006 Grants of Plan-Based Awards Table” below.

 

2007 Incentive Compensation

 

For 2007, the Compensation Committee has established, based on input from our Chief Executive Officer, Chief Financial Officer and Vice President of Global Human Resources, the following financial goals as performance metrics for the annual incentive program:

 

 

In establishing these performance metrics, the Compensation Committee took into account the same factors considered in 2006, as described above. However, the Compensation Committee chose different performance targets for 2007. The “Other” performance target will consist of the metrics established to meet Project Sunrise objectives and Global Profit Management System objectives. Although we view our performance targets as ambitious goals, we believe that they are achievable during the 2007 performance period if our executive officers and employees continue to provide superior performance.

 

Project Sunrise is a cost/profit improvement project in which we are focusing on developing a more contemporary product management system, mix improvement, better pricing and a change to our manufacturing and distribution strategy. Global Profit Management System is a company-wide cost improvement project in which we are focusing on making quick payback cost improvements that improve efficiency, output and quality.

 

The Compensation Committee has also assigned the following weighting to each 2007 performance metric:

 

 

Business unit executives will have the weightings for each of operating profit, working capital, inventory management, and Project Sunrise and Global Profit Management System targets spread between company goals and business unit goals.

 

The 2007 target annual incentive awards for our named executive officers, as a percentage of base salary, and the annual incentive percentage awards to be earned, are unchanged from 2006 (except for Messrs. Stephens and Dattilo, who are no longer employed by us). Additionally, earned incentive awards for 2007 will be calculated based on the following performance schedule (except for inventory management and “Other”):

 

 

 

For inventory management and “Other” performance metrics, our named executive officers must meet or exceed targets to earn any annual incentive. If those targets are met, 100% of the 2007 target annual incentive award associated with the “Other” category will be paid, but there is no additional award opportunity that can be earned above 100% of the target annual incentive award.

 

We grant long-term incentive awards to help align the interests of our named executive officers and other executives with the investment interests of our stockholders. Specifically, named executive officers are able to share in our growth and financial success, as reflected in the achievement of targeted return on invested capital levels, as a result of receiving a significant percentage of their compensation in the form of equity-based awards. Long-term incentive awards are granted under our 2006 Incentive Compensation Plan.

 

Under this program, each named executive officer is entitled to receive long-term incentive awards based on the achievement of certain financial goals, as discussed below, during three-year performance periods. Our Chief Executive Officer, Chief Financial Officer and Vice President of Global Human Resources provide input to the Compensation Committee regarding the long-term incentive awards. For 2006, when approving long-term incentive award opportunities for our named executive officers, both in the aggregate and by award type, the Compensation Committee considered market median levels, individual executive performance, internal equity considerations and other factors.

 

In 2006, we provided 50% of the long-term incentive award opportunity to named executive officers through performance cash awards, with the remaining 50% provided to our named executive officers through equity-based awards. More specifically, we targeted the following mix of long-term incentive award grants for each named executive officer in 2006:

 

 

Award Grant Timing and Pricing

 

Regarding grants of equity-based awards, our policy is to price awards to current employees at the average of the high and low trading price of our common stock, as quoted on the New York Stock Exchange, on the date of grant, which is the date of our February Board of Directors meeting. Since February 8, 2000, our Board of Directors has granted

authority to our Management Executive Committee to make discretionary grants of up to an aggregate of 500,000 shares of our common stock to our executives and employees based on their performance and contributions to Cooper Tire. A total of 102,458 shares of our common stock have been granted to employees under this authority since February 8, 2000. Other than for this discretion, only our Compensation Committee and Board of Directors are involved in grants of equity-based awards. For new executives, we price awards at the average of the high and low trading price of our common stock, as quoted on the New York Stock Exchange, on the hiring date for each new eligible executive.

 

Long-Term Incentive Award Overview

 

The awards that we issue under our long-term incentive award program are described below:

 

 

Each element of the 2006 long-term incentive award opportunity is further discussed below.

Performance Cash and Performance Units

 

Awards for the 2006-2008 Performance Period.  Our named executive officers can earn performance cash and performance units for the achievement of specific return on invested capital targets for a three-year period beginning January 1, 2006 and ending December 31, 2008. Performance cash and performance units, if earned, are generally paid after the performance period in the executive’s first paycheck following our February Board of Directors meeting. The following are the target performance cash and performance units awards for each named executive officer for the 2006-2008 performance period:

 

Target Performance Cash ($)

 

 

 

Target Performance Units (#)

 

 

 

Actual payouts for the 2006 performance cash and unit awards can range from 0% to 200% of target.

 

The Compensation Committee established return on invested capital as the performance target for grants of performance cash and performance units under the long-term incentive program for the 2006-2008 performance period. The Compensation Committee chose return on invested capital as the performance metric because it believes this is the best long-term measure of management effectiveness. To arrive at return on invested capital, as used for incentive compensation purposes, we start with operating profit for incentive purposes after tax, add income taxes, and divide by a five-point average of: equity; plus notes payable; plus the current portion of long-term debt; plus long-term debt. Although we view our performance targets as ambitious goals, we believe that they are achievable during the 2006-2008 performance period if our executive officers and employees continue to provide superior performance.

 

Actual performance cash and performance units payments will be based on actual results relative to the return on invested capital performance targets, as determined by our Compensation Committee, and can range from 0% to 200% of the target award opportunity. We will calculate earned performance cash and performance units awards based on the following performance schedule:

 

 

The targets and potential range for the 2006-2008 performance cash and performance unit awards, by named executive officer, is presented in the “2006 Grants of Plan-Based Awards Table” below.

 

Payouts for the 2004-2006 Performance Period.  We made payouts in March 2007 based on 2004 performance cash grants for the three-year performance cycle ending December 31, 2006. These payouts were based on our achievement relative to performance metrics as follows:

 

 

The payouts we made in 2007 for the 2004-2006 cycle equaled 24.7% of the target long-term incentive amount. These payout results were based solely on the achievement of our 2004 operating cash flow targets. No payout was earned based on 2005 and 2006 return on invested capital results. The actual performance cash award payouts for our named executive officers are presented in the “2006 Summary Compensation Table” below as part of the column “Non-Equity Incentive Plan Compensation.”

 

Accounting and Tax Implications.  Under the accounting rules, performance cash awards result in variable accounting, with our ultimate expense equal to the value earned by/paid to the named executive officers. As such, the ultimate expense is not determinable until the end of the three-year performance period. When the named executive officers earn and receive a payout (taxable at ordinary income tax rates, subject to withholding), we receive a corresponding tax deduction. In the “2006 Summary Compensation Table” below, the accounting cost attributed during 2006 to performance unit awards is presented under the column “Stock Awards.”

Stock Options

 

Stock options align our named executive officers’ interests with those of our stockholders because the stock options have realizable value only if the price of our common stock increases relative to the grant/exercise price of the stock option. For 2006, we made stock option awards to our named executive officers that had the following characteristics:

 

 

In 2006, based on the approval of the Compensation Committee, we granted stock options to our named executive officers and other key employees as described in the “2006 Grants of Plan-Based Awards Table” below.

 

Accounting and Tax Implications.  Under FAS 123(R), the grant date fair value of stock options, which is a fixed charge at date of grant, is generally expensed over the vesting period for the stock options. In the “2006 Summary Compensation Table” below, the accounting cost attributed during 2006 to outstanding stock option grants is presented under the column “Option Awards,” including the amount recorded for stock option grants in 2006. The full grant date fair value of the 2006 stock option grants is presented in the “2006 Grants of Plan-Based Awards Table” below. The ultimate value, if any, which may be realized by our named executive officers based on such stock option awards is not determinable at the date of grant. Additionally, when executives exercise stock options, they are taxed in accordance with the income tax law and regulations applicable at the time of exercise or disposition, depending upon the type of options, at ordinary income rates (subject to withholding), and we receive a corresponding tax deduction where appropriate.

 

Restricted Stock Units

 

We grant restricted stock units to our executives to facilitate executive retention and, for newly hired executives, recruitment. The restricted stock unit awards granted to our named executive officers in 2006, which are described in the “2006 Grants of Plan-Based Awards Table” below, fully vest three years after the date of grant.

 

Accounting and Tax Implications.  In the “2006 Summary Compensation Table” below, the accounting cost attributed during 2006 to outstanding restricted stock grants is presented under the column “Stock Awards.” The full grant date accounting (FAS 123R) fair value of the 2006 restricted stock awards is presented in the “2006 Grants of Plan-Based Awards Table” below. The ultimate value, if any, which may be realized by our named executive officers based on such restricted stock unit awards is not determinable at the date of grant. When the executive receives a distribution of the restricted stock units, they are taxed in accordance with the income tax law and regulations applicable at the time at ordinary income rates (subject to withholding), and we receive a corresponding tax deduction when appropriate.

 

Changes for 2007

 

For the 2007-2009 performance period, we will provide long-term incentive awards solely in the form of performance shares. The Compensation Committee has established total company net income and operating cash flow performance targets to determine the

achievement of performance shares (the cash flow targets exclude capital expenditures and dividends). The Compensation Committee has decided to utilize these performance metrics because improvement in our net income and prudent management of cash is imperative over the three-year time horizon of the performance period. The net income and operating cash flow targets for each year in the performance period will be based on the respective year’s operating plan. We anticipate that 70% of the performance shares that we award will be earned based on the net income target, while 30% of the performance shares awarded will be earned by meeting established cash flow targets. Although we view these performance targets as ambitious goals, we believe that they are achievable during the 2007-2009 performance period if our executive officers and employees continue to provide superior performance.

 

The performance shares will be notionally earned annually (one-third of total per year) based on the net income results and operating cash flow results for 2007, 2008 and 2009, respectively. The notionally earned performance shares will earn dividend equivalents. Notionally earned awards will vest and be payable in early 2010 in our common stock.

 

Payouts can range from 0% to 200% of the long-term incentive plan targets that we establish for each named executive officer according to the schedule below:

 

 

We believe that our named executive officers whose business decisions impact our operations and results should obtain and maintain a reasonable equity stake in Cooper Tire. Our Compensation Committee has therefore established stock ownership guidelines for Messrs. Armes, Geers, Miller and Weaver. Under the guidelines, we consider that our executives own our common stock if the shares are:

 

 

but not if the shares are represented by unexercised stock options or unearned performance shares.

 

Under the guidelines, Mr. Armes is required to own by March 1, 2010 our common stock in an amount equal to three times his base salary (resulting in an ownership goal of 116,605 shares). This goal has already been accomplished. Mr. Weaver was required to own, by March 1, 2006, our common stock in an amount equal to two times his base salary (resulting in an ownership goal of 41,000 shares). This goal was not accomplished. Mr. Miller is required to own by March 1, 2008, and Mr. Geers by March 1, 2009, our

common stock in an amount equal to two times his base salary, respectively (resulting in respective ownership goals of 31,456 and 28,862). As of December 31, 2006, Mr. Weaver, Mr. Miller and Mr. Geers owned 99.6%, 62.1% and 92.6% of their required ownership targets, respectively, regarding our common stock.

 

If any of our named executive officers does not timely satisfy the stock ownership guidelines, then our Compensation Committee may penalize the executive officer by: (1) imposing a mandatory payment of 50% of his or her annual bonuses in stock; (2) requiring that the executive retain 50% of the executive’s stock options (50% of net after-tax shares); (3) requiring that 50% of the executive’s long-term incentive awards be paid in stock; or (4) reducing the executive’s stock option grants.

 

Other Compensation Elements

 

Our named executive officers are eligible to participate in the following other compensation programs:

 

 

Pension Plans

 

In order to facilitate and reward lengthy service by highly-qualified executives, we provide retirement benefits based on market competitive levels. We have a cash balance plan, which is a type of noncontributory defined benefit pension plan in which a participant’s benefit is determined as if an individual account had been established for him or her, for our non-union employees in the United States, other than those participants in our existing defined benefit plans who had reached age 40 and had at least 15 years of service with us as of January 1, 2002.

 

The cash balance plan provides for a participant to have credited to a hypothetical account established for him or her under the cash balance plan a percentage of his or her compensation (as defined in the cash balance plan) each year, and to have earnings credited each year to the participant’s hypothetical account balance at an interest rate equal to the 30-year Treasury bond rate. The percentage of the participant’s compensation that is credited to his or her hypothetical account each year is based upon the participant’s age and years of service, and increases in increments as the participant’s total age and years of service increase. A participant in the cash balance plan who was a participant in one of our prior defined benefit pension plans had credited to his or her hypothetical account in the cash balance plan on January 1, 2002 the actuarial equivalent lump sum of the participant’s frozen retirement benefit in the former plan, calculated as of January 1, 2002.

 

Upon retirement, a participant’s benefit under the cash balance plan will be paid in the form of an annuity, or in a lump sum, upon the election of the participant. A participant may receive the amount of his or her benefit in a lump sum payment upon termination of employment at any time. Payment of the benefit in an annuity form may not generally commence until the participant has reached age 55. The amount payable is not reduced by any Social Security benefits payable to the participant.

 

Non-union employees who were participants in a defined benefit pension plan sponsored by us or one of our subsidiaries prior to January 1, 2002, and who had reached age 40 and had 15 or more years of service as of that date, continue to be covered by the terms of such prior plan. Of our named executive officers, only Messrs. Geers and Stephens remain covered by a prior plan, and Mr. Stephens is no longer employed by us. The plan in which Messrs. Geers and Stephens participate provides a pension based primarily upon their levels of compensation during the last ten years of their employment and their number of years of service. Benefits under the prior plan are not subject to deduction for Social Security or other offset amounts.

 

401(k) Plan

 

In addition to the retirement plan, we maintain a tax-qualified 401(k) plan, the Spectrum Investment Savings Plan, which we refer to as our 401(k) plan, which provides for broad-based employee participation. Under the 401(k) plan, all of our employees are eligible to receive matching contributions from us that are subject to vesting over time. There are two parts to our matching contribution.

 

First, we will contribute up to $0.50 to each participant’s account under the 401(k) plan for every $1.00 contributed by the participant, up to 6% of the participant’s salary, if we meet certain return on stockholders’ equity goals for a given year. We will not make a contribution for a particular year unless our return on stockholders’ equity for the year is in excess of 10% of the stockholders’ equity at the beginning of that year. Second, we will contribute an additional amount if our return on invested capital reaches certain specified levels. There was no matching contribution for our 401(k) plan for 2006.

 

We offer the 401(k) plan because it provides our employees with a way to save for retirement without significantly affecting the amount of their take-home pay. We intend to evaluate the 401(k) plan for competitiveness in the marketplace from time to time, but we do not anticipate taking the level of benefits provided into account in determining our executives’ overall compensation packages in the coming years.

 

If benefits in the 401(k) plan, the cash balance plan or the other qualified plan(s) in which an executive may participate exceed the level of benefits permitted from a tax-qualified retirement plan, the excess benefit amount is payable from an unfunded, non-qualified supplemental benefit or pension plan, as applicable. All of our named executive officers are eligible to participate in the non-qualified, supplemental plans. The actuarial change from 2005 in our named executive officers’ pension benefits and the value of our annual contributions to our 401(k) plan are presented in the “2006 Summary Compensation Table” below. Detailed information about these plans is presented in the “2006 Pension Benefits Table” and related disclosures below.

 

For 2007, we have chosen to maintain a non-qualified deferred compensation plan, the Cooper Tire & Rubber Company Executive Deferred Compensation Plan, which we refer to as the executive deferred compensation plan. The executive deferred compensation plan allows a select group of our senior level management employees (including, among the named executive officers, Messrs. Armes, Miller, Kline, Geers and Weaver) to elect to defer receipt of up to 80% of their base salary and up to 100% of their annual incentive cash and long-term incentive cash compensation each year (subject to an aggregate $10,000 minimum per year), until a date or dates chosen by the participant. Each year, participants must make an irrevocable election to participate in the executive deferred compensation plan and choose (1) the amounts that they will defer for the

subsequent year, (2) the form of distribution for the deferred amounts and (3) their investment preferences for the deferred amounts.

 

The executive deferred compensation plan allows participants to defer income taxation (but not Social Security or Medicare taxation) on the deferred amounts. Deferred amounts will be taxed at ordinary income tax rates when distributed to participants. We offer the executive deferred compensation plan to a select group of senior level management (about 25 executives) in order to allow them to defer more compensation than they would otherwise be permitted to defer under tax-qualified retirement plans, such as our 401(k) plan and pension plans, in order to help them build sufficient retirement savings. We also offer the executive deferred compensation plan as part of our competitive compensation package that enables us to attract and retain top executive talent.

 

We credit deferred amounts in bookkeeping accounts established for each participant, and hold the deferred amounts in a trust that we have established for the executive deferred compensation plan. This trust, unlike the trust for our 401(k) plan, is not protected against the claims of third parties. Based on the participants’ elections, deferred amounts are credited with earnings as if the deferred amounts were invested in accordance with those funds available under our 401(k) plan that were chosen by the participants. We do not make matching or other employer contributions to the executive deferred compensation plan. Distributions of deferred amounts will be made in accordance with the participants’ elections, and generally after the participants’ employment terminates, in a lump sum, in up to 10 annual installments, or in a combination of these two forms. Participants may in some cases delay distribution of deferred amounts. Participants may also change their distribution elections subject to distribution delays.

 

We intend to evaluate the executive deferred compensation plan for competitiveness in the marketplace from time to time, but we do not anticipate taking the level of benefits provided into account in determining our executives’ overall compensation packages in the coming years. Detailed information about this plan is presented in the “2006 Non-Qualified Deferred Compensation Table” and related disclosures below.

 

In order to provide a market competitive total compensation package to our named executive officers, we provide a limited amount of perquisites to our named executive officers. In 2006, we provided the following perquisites and supplemental benefits:

 

 

The value of these perquisites and supplemental benefits provided in 2006 is presented in the “2006 Summary Compensation Table” below as part of the column “All Other Compensation.”

 

We have entered into employment agreements with Messrs. Armes and Weaver that specify payments in the event the executive’s employment is terminated without “Cause,”

by the executive for “Good Reason” or after a change in control. During 2006, we were also a party to such employment agreements with Messrs. Dattilo and Stephens. We also maintain a change in control severance plan for other senior executives (including our named executive officers not covered by employment agreements), which provides specified benefits in the event of a change in control and termination of the executive’s employment. See the further disclosure under “Potential Payments Upon Termination or Change of Control” for more information.

 

Mr. Roy V. Armes

 

On January 1, 2007, Mr. Armes joined us as our new President and Chief Executive Officer. For 2007 and beyond, we have entered into an employment agreement with Mr. Armes. Under the employment agreement, Mr. Armes will be employed by us as President and Chief Executive Officer at an initial annual base salary of $700,000, and generally with all benefits available to our executives. The initial term of the employment agreement is for three years, which is automatically extended for successive one year terms after the initial term until the year in which Mr. Armes’ 64th birthday occurs, unless either Mr. Armes or we give prior notice by September 30 that the term will not be extended. The employment agreement contains non-competition and non-solicitation provisions that extend for two years after any termination of employment.

 

Mr. Armes will participate in our annual incentive compensation program described above, under which he will be eligible to receive a target award equal to 85% of his base salary and a maximum award equal to 170% of his base salary. For the 2007 fiscal year, Mr. Armes is assured an annual incentive award that is no less than 85% of his base salary. Mr. Armes will also participate in our long-term incentive compensation program. Mr. Armes received an initial award of restricted stock units upon commencement of employment under our 2006 Incentive Compensation Plan, in an aggregate amount equal to $4,000,000, subject to a three-year cliff vesting requirement and terms and conditions as determined by our Board of Directors.

 

Mr. Armes is entitled to certain separation benefits and payments upon an involuntary termination without cause or a voluntary termination due to good reason other than within two years following a change of control. These payments and benefits include a lump sum payment of $75,000 plus two times the sum of his base salary and average annual incentive compensation, as defined in his employment agreement (three times, if terminated before December 31, 2009), 24 months’ continuation of life, accident and health benefits, full vesting of his initial restricted stock unit award and certain other benefits. If such termination occurs during the two-year period on or following a change of control, Mr. Armes would receive in addition full vesting of all then-unvested restricted stock unit and stock option awards.

 

In the event of Mr. Armes’ death or termination of employment due to disability, he or his beneficiaries or estate will be entitled to payment of 30 days’ base salary, a full target-level bonus, a prorated long-term incentive compensation payout and 24 months’ continuation of life and accident benefits (if terminated due to Mr. Armes disability) and health benefits followed by COBRA, as well as full vesting of Mr. Armes’ initial restricted stock unit award. If Mr. Armes retires under our pension plan, he will be entitled to a prorated annual bonus and long-term incentive compensation payout.

 

The employment agreement also provides for a tax gross-up for any excise tax, exceeding 110% of the “safe harbor limit,” due under the Internal Revenue Code for certain

payments made by us to Mr. Armes. In addition, all post-termination payments are conditioned upon the execution by Mr. Armes of a release of all claims against us.

 

Mr. Byron O. Pond

 

Effective August 2, 2006, our Board of Directors appointed Mr. Pond to serve as an independent contractor in the position of interim Chief Executive Officer following the resignation of Mr. Dattilo until such time as a permanent Chief Executive Officer was appointed by us. As part of a compensation arrangement with Mr. Pond for such independent contractor service, we agreed to (1) pay Mr. Pond base compensation at the rate of $850,000 per year and (2) grant Mr. Pond shares of our common stock with a value of $185,000 priced at the closing market price for our common stock on the first day of trading during each three-month period in which he occupied the position of interim Chief Executive Officer. We did not compensate Mr. Pond as a Director under the compensation arrangements applicable to our Directors while he served as interim Chief Executive Officer. Mr. Pond served as our interim Chief Executive Officer through December 31, 2006.

 

Mr. Philip G. Weaver

 

Prior to 2006, we entered into an employment agreement with Mr. Weaver under which Mr. Weaver agreed to remain employed in his present capacity for a specified time, at a base salary not lower than his base salary at the time of execution of the agreement, and generally with all benefits available to our executives as of the date on which the agreement became effective. The initial term of the agreement was three years. The term of the agreement automatically extended for one additional year each January 1, unless either we or Mr. Weaver gives prior notice of a desire not to extend the term. On January 1, 2006, the employment agreement was automatically extended until December 31, 2008. In no event was the term to extend beyond Mr. Weaver’s 65th birthday. The agreement contained a non-compete provision that extended for two years after any termination of employment, and certain severance and other post-termination benefits and payment provisions.

 

On October 13, 2006, we entered into an amended employment agreement with Mr. Weaver that supersedes in its entirety his prior employment agreement with us as of January 1, 2009. Prior to January 1, 2009, however, the terms of Mr. Weaver’s prior employment agreement with us remain in full force and effect. Under the amended employment agreement, Mr. Weaver will serve as our Vice President and Chief Financial Officer for a term of one year. The term of the amended agreement will be automatically extended on January 1 of each year following January 1, 2009 for additional one-year terms until the year in which Mr. Weaver’s 64th birthday occurs, unless either party provides notice no later than September 30th of the preceding year that such party does not wish to extend the amended agreement.

 

The amended agreement further provides that:

 

 

 

Under the amended agreement, Mr. Weaver is also entitled to certain severance and other post-termination benefits and payments. See also “Potential Payments Upon Termination or Change of Control” for more information about benefits and payments under Mr. Weaver’s current agreement.

 

Mr. D. Richard Stephens and Mr. Thomas A. Dattilo

 

We also entered into employment agreements with Messrs. Dattilo and Stephens, neither of whom remains employed with us. Under the agreements, each executive remained employed in his present capacity for a specified time, at a base salary not lower than his base salary at the time of execution of the agreement, and generally with all benefits available to our executives as of the date on which the agreements became effective. The initial term of each agreement was four years for Mr. Dattilo and three years for Mr. Stephens. The term of each agreement automatically extended for one additional year each January 1, unless either we or the executive gave prior notice of a desire not to extend the term. In no event was the term to extend beyond the executive’s 65th birthday. The agreements contain a non-compete provision that extends for two years after any termination of employment.

 

Under the employment agreements, Messrs. Dattilo and Stephens were also entitled to certain severance and other post-termination benefits and payments as further described below in the disclosure under “Potential Payments Upon Termination or Change of Control.”

 

 

We do not have a formal policy regarding adjusting or recovering annual incentive or long-term incentive awards or payments if the relevant performance metrics upon which such awards or payments are based are later restated or otherwise adjusted in a manner that reduces the actual size of the award or payment. We will consider making such adjustments on a case-by-case basis if such situations arise.

 

 

Regulations issued under Section 162(m) of the Internal Revenue Code provide that compensation in excess of $1 million paid to the Chief Executive Officer and other named executive officers will not be deductible unless it meets specified criteria for being “performance based.” Our Compensation Committee generally manages our incentive programs to qualify for the performance based exemption. It also reserves the right to provide compensation that does not meet the exemption criteria if, in its sole discretion, it determines that doing so advances our business objectives. Examples of such compensation arrangements that may from time to time be provided that will not meet the specific criteria of Section 162(m) include a guaranteed incentive compensation bonus and a grant of restricted stock units that are not based upon performance.

 

The following report has been submitted by the Compensation Committee of the Board of Directors:

 

The Compensation Committee of the Board of Directors has reviewed and discussed the Company’s Compensation Discussion and Analysis with management. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s definitive proxy statement on Schedule 14A for its 2007 Annual Meeting, which is incorporated by reference in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, each as filed with the Securities and Exchange Commission.

 

The foregoing report was submitted by the Compensation Committee of the Board and shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A promulgated by the Securities Exchange Commission or Section 18 of the Securities Exchange Act of 1934.

 

Respectfully submitted,

 

Byron O. Pond, Chairman

John J. Holland

John F. Meier

Richard L. Wambold

 

The following tables and narratives provide, for the fiscal year ended December 31, 2006, descriptions of the cash compensation paid by us, as well as certain other compensation paid or accrued, for that year to Mr. Pond, Interim Chief Executive Officer and President; Philip G. Weaver, Vice President and Chief Financial Officer; the three most highly compensated executive officers other than Messrs. Pond and Weaver who were serving as executive officers as of December 31, 2006; D. Richard Stephens, who would have been one of the three other most highly compensated executive officers but for the fact that he was no longer an executive officer as of December 31, 2006; and Thomas A. Dattilo, former President and Chief Executive Officer. We refer to these individuals as our named executive officers. Our Chief Executive Officer, Mr. Armes, joined us on January 1, 2007 and therefore is not reflected in the following tables.

 

The following table shows compensation information for 2006 for our named executive officers.

 

 

 

The following table shows all plan-based awards granted to our named executive officers during 2006. The stock option awards and the unvested portion of the stock awards identified in this table are also reported in the “Outstanding Equity Awards at 2006 Fiscal Year-End Table” below. All awards are granted under our 2001 Incentive Compensation Plan, except the grants to Mr. Pond, which were made under our 2006 Incentive Compensation Plan.

 

 

 

Non-preferential dividend equivalents accrue on these restricted stock units at the same quarterly rate as that paid to our stockholders, which for 2006 was $0.105 per share. For all named executive officers other than Mr. Pond, the non-equity incentive awards reflected in columns (c) through (e) and (l), and the equity plan incentive awards reflected in columns (f) through (h) and (l), of the above table were granted by our Compensation Committee on February 14, 2006 as part of our long-term incentive compensation program. For more information about these awards, see “Compensation Discussion and Analysis” above.

 

Additionally, for all named executive officers other than Mr. Pond, the stock option awards reflected in columns (j) through (l) of the above table were also granted by our Compensation Committee on February 14, 2006. These options vest in 25% increments beginning on the first anniversary of the grant date, and expire on February 14, 2016. The options are subject to earlier expiration if the named executive officer ceases to be our employee, with specified periods for exercise after termination provided in the event of termination without cause, retirement, or death.

 

Except with respect to Mr. Pond, the awards reflected in columns (i) and (l) of the “2006 Grants of Plan-Based Awards Table” above represent restricted stock units granted by our Compensation Committee on February 14, 2006. These restricted stock units are subject to a three-year vesting period. Non-preferential dividends also accrue on these stock awards.

 

Certain of our named executive officers are or were parties to employment agreements with us. For more information about these agreements, see “Compensation Discussion and Analysis — Employment Agreements and Arrangements” above. For more information about the compensation arrangements in which our named executive officers participate and the proportion of our named executive officers’ total compensation represented by base salary and bonus, see “Compensation Discussion and Analysis” above.

 

The following table shows all outstanding equity awards held by our named executive officers at the end of 2006. The following awards identified in the table below are also reported in the “2006 Grants of Plan-Based Awards Table” above: (1) stock option awards with an expiration date of February 14, 2016; and (2) the awards in column (i).