UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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JOHNSON CONTROLS, INC.

(Name of Registrant as Specified In Its Charter)

 

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Johnson Controls, Inc.

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, Wisconsin 53201-0591

 

 

Notice of 2010

Annual Meeting

and Proxy Statement

 

 

Date of Notice: December 4, 2009

NOTICE OF THE 2010
ANNUAL MEETING OF SHAREHOLDERS

 

Johnson Controls, Inc. will hold the Annual Meeting of Shareholders on Wednesday, January 27, 2010, at 1:00 P.M. CST at Johnson Controls, Inc.’s world headquarters, located at 5757 North Green Bay Avenue, Milwaukee, Wisconsin. The purposes of the Annual Meeting are as follows:

 

David P. Abney

Robert L. Barnett

Eugenio Clariond Reyes-Retana

Jeffrey A. Joerres

 

 

The Board of Directors recommends a vote FOR items 1 and 2 and AGAINST item 3. The persons named as proxies will use their discretion to vote on other matters that may properly arise at the Annual Meeting.

 

If you were a shareholder of record at the close of business on November 19, 2009, you are entitled to vote at the Annual Meeting.

 

If you have any questions about the Annual Meeting, please contact:

 

Johnson Controls, Inc.

Shareholder Services X-76

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, WI 53201-0591

(414) 524-2363

(800) 524-6220

 

By Order of the Board of Directors

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE SHAREHOLDER MEETING TO BE HELD ON JANUARY 27, 2010.

 

Our proxy statement and our 2009 annual report to shareholders on Form 10-K are available at http://www.johnsoncontrols.com/proxy.

Johnson Controls, Inc.

5757 North Green Bay Avenue

Post Office Box 591

Milwaukee, WI

53201-0591

 

 

December 4, 2009

 

 

Dear Shareholder:

 

The Johnson Controls Annual Shareholders’ Meeting will convene on Wednesday, January 27, 2010, at 1:00 P.M. CST at Johnson Controls, Inc.’s world headquarters, located at 5757 North Green Bay Avenue, Milwaukee, Wisconsin. We are mailing our proxy statement, which details the business we will conduct at the Annual Shareholders’ Meeting, to shareholders on or about December 4, 2009, together with the Company’s Annual Report on Form 10-K for fiscal year 2009. Shareholders are not to regard the Annual Report on Form 10-K, which contains our audited financial statements, or the enclosed Chairman’s letter, as proxy solicitation materials. If you have elected not to receive printed proxy materials, you may access them at http://www.johnsoncontrols.com/proxy.

 

We are pleased to once again offer multiple options for voting your shares. As detailed in the “Questions and Answers” section of this proxy statement, you can vote your shares via the Internet, by telephone, by mail or by written ballot at the Annual Meeting. We encourage you to use the Internet to vote your shares as it is the most cost-effective method.

 

Thank you for your continued support of Johnson Controls.

 

Sincerely,

 

JOHNSON CONTROLS, INC.

 

Stephen A. Roell

Chairman and Chief Executive Officer

Table of Contents

 

 

 

 

 

           David P. Abney

           Robert L. Barnett

           Eugenio Clariond Reyes-Retana

           Jeffrey A. Joerres

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If shares you own are registered in your name and you are entitled to vote at the Annual Meeting, then you may nominate any person for director by writing to Mr. Okarma. Your letter must include all of the information required by our By-Laws including, but not limited to, your intention to nominate a person as a director, the candidate’s name, biographical data, and qualifications, as well as the written consent of the person to be named in our proxy statement as a nominee and to serve as a director. Under our current By-laws, to nominate a person as a director for the 2011 Annual Meeting, a shareholder must send written notice not less than 90 days and not more than 120 days prior to the first anniversary of the 2010 Annual Meeting. Therefore, because the 2010 Annual Meeting will take place on January 27, 2010, we must receive notice of shareholder intent to nominate a person as a director no sooner than September 29, 2010 and no later than October 29, 2010. A copy of the Corporate Governance Guidelines is provided at our website at http://www.johnsoncontrols.com/governance, or you may request a copy of these materials by contacting Shareholder Services at the address or phone number provided in the Questions and Answers section of this proxy statement and these materials will be mailed to you at no cost.

 

 

 

 

 

If the notice is received after October 29, 2010, then the notice will be considered untimely and we are not required to present the shareholder information at the 2011 Annual Meeting. If the Board of Directors chooses to present any information submitted after October 29, 2010, other than pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, at the 2011 Annual Meeting, then the persons named in proxies solicited by the Board of Directors for the 2011 Annual Meeting may exercise discretionary voting power with respect to such information.

 

 

 

The Ethics Policy is applicable to the members of the Board of Directors and to all of our employees, including, but not limited to, the principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing similar functions. Any amendments to or waivers of the Ethics Policy that the Board of Directors approves will be disclosed on our website. We are not including the information contained on our website as part of or incorporating it by reference into this Proxy Statement.

 

 

Johnson Controls, Inc.

Attn: Shareholder Services X-76

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, WI 53201-0591

 

 

 

 

Johnson Controls, Inc.

Attn: Shareholder Services X-76

5757 North Green Bay Ave.

Post Office Box 591

Milwaukee, WI 53201-0591

 

 

 

 

 

PLEASE VOTE. YOUR VOTE IS VERY IMPORTANT.

 

Promptly returning your proxy card or voting via telephone or the Internet
will help to reduce the cost of this solicitation.

 

 

BOARD NOMINEES

 

At the Annual Meeting, four directors will be elected for terms expiring in 2013. The Corporate Governance Committee has recommended, and the Board of Directors has selected, the following nominees for election: David P. Abney, Robert L. Barnett, Eugenio Clariond Reyes-Retana, and Jeffrey A. Joerres, all of whom are current directors of our company. Each person whom shareholders elect as a director will serve until the Annual Meeting of Shareholders in 2013, or until his successor has been duly qualified and elected. Brief biographies of the director nominees and of continuing directors as of September 30, 2009 follow.

 

The Board recommends that you vote FOR the election of
David P. Abney, Robert L. Barnett, Eugenio Clariond Reyes-Retana, and Jeffrey A. Joerres.

 

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” EACH OF ITS NOMINEES.

CONTINUING DIRECTORS

 

Terms Expire at the 2011 Annual Meeting:

 

Terms Expire at the 2012 Annual Meeting:

 

 

We ask that you ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for fiscal year 2010.

 

PricewaterhouseCoopers LLP has audited our financial statements for many years. The Audit Committee appointed them as the Company’s independent registered public accounting firm for fiscal year 2010.

 

Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting with the opportunity to make a statement if they so desire and to be available to respond to appropriate questions.

 

If the appointment is not ratified, the adverse vote will be considered as an indication to the Audit Committee that it should consider selecting another independent registered public accounting firm for the following fiscal year. Even if the selection is ratified, the Audit Committee, in its discretion, may select a new independent registered public accounting firm at any time during the year if it believes that such a change would be in our best interest.

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE
COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR
FISCAL YEAR 2010.

 

 

Laborers National Pension Fund, 14140 Midway Road, Suite 105, Dallas, Texas 75244, has informed us that it intends to present the proposal set forth below at our Annual Meeting. Laborers National Pension Fund states that it is the beneficial owner of 16,943 shares of our Common Stock.

 

RESOLVED:  That the shareholders of Johnson Controls (“Company”) hereby request that the Board of Directors initiate the appropriate process to amend the Company’s governance documents (certificate of incorporation or bylaws) to provide that director nominees shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders, with a plurality vote standard retained or contested director elections, that is, when the number of director nominees exceeds the number of board seats.

 

SUPPORTING STATEMENT:  In order to provide the shareholders a meaningful role in director elections, our Company’s director election vote standard should be changed to a majority vote standard. A majority vote standard would require that a nominee receive a majority of the votes case in order to be elected. The standard is particularly well-suited for the vast majority of director elections in which only board nominated candidates are on the ballot. We believe that a majority vote standard in board elections would establish a challenging vote standard for board nominees and improve the performance of individual directors and entire boards. Our Company presently uses a plurality vote standard in all director elections. Under the plurality vote standard, a nominee for the board can be elected with as little as a single affirmative vote, even if a substantial majority of the votes cast are “withheld” from the nominee.

In response to strong shareholder support for a majority vote standard in director elections, an increasing number of the nation’s leading companies, including Intel, General Electric, Motorola, Hewlett-Packard, Morgan Stanley, Wal-Mart, Home Depot, Gannett, Marathon Oil, and recently Pfizer, have adopted a majority vote standard in company bylaws or articles of incorporation. Additionally, these companies have adopted director resignation policies in their bylaws or corporate governance policies to address post-election issues related to the status of director nominees that fail to win election. Other companies have responded only partially to the call for change by simply adopting post-election director resignation policies that set procedures for addressing the status of director nominees that receive more “withhold” votes than “for” votes. At the time of this proposal submission, our Company and its board had not taken either action.

 

We believe that a post-election director resignation policy without a majority vote standard in company bylaws or articles is an inadequate reform. The critical first step in establishing a meaningful majority vote policy is the adoption of a majority vote standard. With a majority vote standard in place, the board can then consider action on developing post-election procedures to address the status of directors that fail to win election. A majority vote standard combined with a post-election director resignation policy would establish a meaningful right for shareholders to elect directors, and reserve for the board an important post-election role in determining the continued status of an unelected director. We feel that this combination of the majority vote standard with a post-election policy represents a true majority vote standard.

 

RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD RECOMMENDS THAT YOU VOTE AGAINST THIS PROPOSAL

 

Our Board and Corporate Governance Committee are mindful of the ongoing corporate governance developments and debate concerning majority voting in the election of directors. After reviewing and considering carefully this proposal, our Board and Corporate Governance Committee determined that the proposal is not in the best interests of our shareholders and recommend a vote “AGAINST” the proposal for the following reasons:

 

The Shareholder Proposal is Not Timely

 

This is not the right time to take the action that the shareholder proposal requests in light of the on-going discussions and debate in this area. Currently, there is proposed legislation in both the U.S. House of Representatives and the U.S. Senate relating to majority voting standards, and that legislation is under debate and evaluation by the legal community, shareholder advocates, corporate governance experts and other groups. These groups are considering the advantages, disadvantages, consequences and potential terms of majority voting. We believe that it is in the best interest of our company to wait until there is greater clarity regarding the results of this ongoing debate before we adopt any change to our current plurality standard. We do not believe it is appropriate to devote resources to crafting majority voting provisions and going through the cumbersome and costly process of asking shareholders to consider the provisions when legislation could easily require us to revisit those provisions.

 

Our Current System Elects Highly Qualified Directors

 

Given our company’s strong corporate governance practices, we believe this proposal is unnecessary. Our Board and Corporate Governance Committee have in place a robust nomination and evaluation process, which identifies and proposes qualified independent director nominees to serve the best interests of the company and our

shareholders. Our Corporate Governance Committee, which is composed solely of independent directors, evaluates and recommends director nominees for election, based on factors such as skill sets, professional experience, independence, other time demands (including service on other boards), diversity, technical capabilities, international and industry experience and the results of the annual evaluations that our Board conducts. Our Corporate Governance Committee reviews the qualifications of any candidate with those of current directors to determine coverage and gaps in experience in related industries, such as automotive and electronics, and in functional areas, such as finance, manufacturing and technology. This process has resulted in a Board that is comprised of highly qualified directors from diverse backgrounds, a majority of whom are independent as defined under NYSE regulations. Moreover, each director nominee has received a significant majority of the shares voted in elections during the past 10 years.

 

For all of these reasons, no change in the director election standard is necessary to improve our company’s performance or corporate governance practices, and any such change is not likely to enhance the quality of the directors elected in the future.

 

Implementation of the Shareholder Proposal Is Unlikely to Give Our Shareholders a More Meaningful Role in the Composition of the Board and May Result in Uncertainty

 

Our company’s directors are currently elected by a plurality voting standard, which is the historical and commonly employed standard under Wisconsin corporate law. Implementation of a majority voting standard is unlikely to give our shareholders a more meaningful role or a greater voice in the composition of our Board. Implementation of a majority voting standard also raises complications under Wisconsin law and good corporate governance practices.

 

Under majority voting, a nominee for director may fail to receive a majority of the votes cast. Pursuant to Wisconsin law, a director whose term expires continues as a “holdover director” until his or her successor is elected and qualified. Therefore, if an unsuccessful candidate in a failed election was an incumbent director, then he or she could continue as a director until a successor is elected at the next annual meeting of shareholders. If an unsuccessful candidate is not an incumbent, then the director position would become vacant and could be filled by the remaining directors acting alone. Neither of these situations achieves the goal of providing shareholders with a greater voice in director elections.

 

A majority voting standard may result in uncertainty in the composition of the Board. If our Board is left with vacancies for an indefinite period of time, it may be difficult for our Board to staff key committees of the Board and to otherwise meet its obligation to oversee the business and affairs of the company. It may also adversely affect our company’s ability to comply with applicable NYSE or SEC requirements regarding the number of independent directors and financial experts. Additionally, a majority voting standard could result in the loss of directors who have substantial prior experience with and knowledge about the company, its operations, strategies, and management team. The depth and breadth of our directors’ knowledge of our company and its operations are key to our Board’s efficient operation and its ability to deliver value to our shareholders.

 

Our Board is mindful of its duties to act in the interest of the company and its shareholders generally. While our Board governs the company to assure that the long-term interests of the shareholders are being served, implementation of the shareholder proposal could provide “special interest” shareholder groups that are indifferent to the long-term interests of the company and our shareholders with the power to promote “vote no”’ campaigns against the election of one or more of our Board’s director

nominees to advance their own special interests. In addition, such campaigns would force the company to employ costly solicitation strategies to obtain the required votes. This is not a prudent or effective use of our company’s resources.

 

Summary

 

We believe that our company and our shareholders are best served by the current system of plurality voting in director elections. The current process by which our Corporate Governance Committee identifies and recommends director nominees to our Board protects the interests of our company and our shareholders over the long term. The shareholder proposal would not improve our Board’s corporate governance practices or the selection process for directors. The shareholder proposal could result in failed elections, holdover directors, uncertainty in the composition of our Board, a lack of director continuity, and a concentration of voting power in the hands of shareholders who do not have the long-term interests of our company in mind. Further, given the pending legislative developments pertaining to majority voting, this shareholder proposal is not timely. Accordingly, our Board believes the proposal is not in the best interest of our company or our shareholders.

 

THE BOARD RECOMMENDS THAT YOU VOTE AGAINST THIS PROPOSAL.
PROXIES SOLICITED BY THE BOARD WILL BE VOTED AGAINST THIS PROPOSAL UNLESS OTHERWISE INSTRUCTED.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this proxy statement with management. Based on this review, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in our proxy statement relating to the 2010 Annual Meeting of Shareholders.

 

Southwood J. Morcott, Chairman
Dennis W. Archer
Eugenio Clariond Reyes-Retana
Jeffrey A. Joerres
William H. Lacy
Members, Compensation Committee

 

As we discuss on page 22, the Compensation Committee (the “Committee”) of our Board of Directors (the “Board”) has the sole authority, delegated by our Board, to approve and monitor all compensation and benefit programs (other than broad-based welfare benefit programs) for our executive officers including the officers we name in the Summary Compensation Table (“named executive officers”). The Committee works with the executive management to ensure that our compensation policies and practices are consistent with our values and support the successful recruitment, development, and retention of executive talent so we can achieve our business objectives and optimize our long-term financial returns. The Committee reports its actions and decisions to our Board.

 

We are an international company with operations in more than 60 countries throughout the world, and we generate over 50% of our net sales outside of the United States. We have a long history of strong financial results, and we believe our practice of linking

compensation with business performance has contributed significantly to our track record. We design and administer our executive compensation philosophy and programs to support our commitment to sound corporate governance. Fiscal year 2009 proved to be a year of unprecedented market decline. However, our executive compensation philosophy and programs linking pay to performance remained consistent. For fiscal year 2009, this resulted in a significant decrease in total direct compensation for executive officers reflecting the effects of the extremely difficult global economic conditions experienced over the past year on our financial performance.

 

What are the objectives of our executive compensation programs?

 

Pay for performance is an essential element of our executive compensation philosophy. The main objectives of our executive compensation programs are to:

 

 

What are the elements of our executive compensation program?

 

Our executive compensation program consists of the following elements:

 

 

The following sections discuss each element individually and in more detail.

 

We define total direct compensation as the executive’s base salary, annual incentive performance award, long-term incentive performance award, stock options, and restricted stock. We heavily weight our pay mix (the proportion of one compensation

element of direct compensation compared to the total of all elements of direct compensation) toward a strong relationship between our corporate or business unit performance and the executive’s pay, with the majority of performance-based pay weighted toward long-term performance. The elements of compensation that are based on corporate or business unit performance include annual cash incentive, long-term cash incentive, and equity incentives. In general, as an executive’s level or responsibility within our organization increases, so does the percentage of total compensation that we link to corporate or business unit performance.

 

How do we address risks arising from our executive compensation program?

 

We have designed our executive compensation program to discourage excessive risk-taking by our named executive officers by emphasizing long-term compensation and financial performance metrics aligned with shareholder value. While annual cash-based incentive awards play an appropriate role in our executive compensation program, overweighting this form of compensation can encourage strategies and risk-taking that may not align with the long-term best interests of the Company and our shareholders. On average, 20% of target total direct compensation is fixed for our named executive officers, while 80% is linked to performance. Appropriately, long-term incentives comprise over 75% of performance-based compensation. Our long-term cash incentive program’s use of pre-tax earnings and pre-tax return on invested capital (ROIC) over each year in a three-year period aims to reward sustainable performance over the longer term. Further, the focus on equity-based compensation, in combination with executive stock ownership requirements, reflects the program’s goals of risk assumption and aligning interests between executives and shareholders.

 

In fiscal year 2009, the Committee adopted an Executive Compensation Incentive Recoupment Policy covering executive officers of the Company subject to Section 16 of the Securities Exchange Act of 1934 who are elected by our Board. Under this policy, the Committee may require reimbursement of cash incentives paid to elected officers where:

 

 

The amount the Committee may require to be reimbursed is equal to the excess of the gross incentive payment made over the gross payment that would have been made if the original payment had been determined based on the restated financial results. The Committee will have sole discretion in determining whether an elected officer’s conduct has or has not met any particular standard of conduct under the law or Company policy. Further, following a material restatement of our financial statements, we will seek to recover any compensation received by our Chief Executive Officer and Chief Financial Officer that is required to be reimbursed under Section 304 of the Sarbanes-Oxley Act of 2002.

 

What process does the committee use to review our executive compensation programs and determine compensation?

 

The Committee is responsible for approving and monitoring the compensation and benefits we offer to our executive officers. The Committee evaluates executive pay

each year, ensuring that our compensation policies and practices are consistent with our philosophy. In evaluating the compensation of our Chief Executive Officer’s direct reports, the Committee also considers the Chief Executive Officer’s recommendations to the Committee. This includes the compensation of the other named executive officers, based on his review of their performance, job responsibilities, importance to our overall business strategy, and our compensation philosophy (including market practice). Our Chief Executive Officer does not make a recommendation to the Committee regarding his own compensation.

 

The Committee will generally determine an executive officer’s compensation based upon a desire to link compensation to the objectives of our executive compensation programs that we describe above under “What are the objectives of our executive compensation programs?” The Committee considers these factors collectively and ultimately uses its subjective judgment in making final decisions concerning compensation.

 

To support its annual review of our executive compensation and benefit programs for fiscal year 2009, the Committee engaged Towers Perrin, an independent compensation consultant, to conduct a marketplace review of the compensation we pay to our executive officers. Towers Perrin provided the Committee with relevant market data and alternatives to consider when making compensation decisions for the executive officers.

 

Towers Perrin benchmarked our compensation against a group of publicly-traded companies, which we refer to as the “Compensation Peer Group” and, with respect to the compensation of our President and Chief Operating Officer, against companies that Towers Perrin classifies as general industry companies in its annual executive compensation survey. In benchmarking our compensation, Towers Perrin used regression analysis to adjust the data based on the revenue sizes of the companies in the Compensation Peer Group and general industry survey to match our revenue size. The Compensation Peer Group, which the Committee annually reviews and updates, consists of companies against which we believe we compete for talent, that are in our industry or a similar industry, have similar market capitalization, or that are similar in size based on revenue. For purposes of the Committee’s annual review of fiscal year 2009 compensation and benefit programs, the following companies comprised the Compensation Peer Group:

 

 

When the Compensation Peer Group gives us inadequate data for a particular executive officer due to insufficient sample size, as was the case for our President and Chief Operating Officer for fiscal year 2009, Towers Perrin uses the general industry company data from its annual executive compensation survey. Towers Perrin did not provide the Committee with, and the Committee was not aware of, the identities of the companies that participated in the survey of general industrial companies.

 

We generally set the total direct compensation opportunity based on the 50th percentile of the Compensation Peer Group or general industry survey. Our approach results in some pay differences among our named executive officers based on position, which is

consistent with the survey data. For fiscal year 2009, we adjusted individual percentiles based on our named executive officers’ respective scope of responsibilities, leadership abilities, experience, effectiveness, and succession plans. These factors resulted in variations from the 50th percentile, but did not materially change the basis on which we set the total direct compensation opportunity. Actual percentiles for total direct compensation for our named executive officers for fiscal year 2009 ranged from the 50th percentile to the 75th percentile of the benchmarking data.

 

To determine the amount of compensation under each component of total direct compensation, we start by setting a target for total annual cash compensation (base salary and a target annual incentive payout percentage) according to market, typically based on the 50th percentile of market comparables. We also consider other factors as we describe above.

 

After we determine base salary and an annual incentive award target amount for an executive officer, we subtract the total of those amounts from the target total direct compensation for the executive officer and arrive at a target value for long-term incentive awards. We then break this value (which we refer to as the “annualized expected value of long-term incentive award opportunities”) into three parts: a target long-term cash incentive award value, which we determine by evaluating market pay mix data and internal equity considerations; a stock option grant value; and a restricted stock grant value.

 

In allocating equity compensation between stock options and restricted stock grants, we first determine the amount of restricted stock grants, based on an assessment of the executive officer’s individual performance and contributions to our company. We then allocate the difference between the executive officer’s target total direct compensation and the target annual cash compensation, target long-term cash incentive award value and restricted stock grant value to stock options.

 

How do we determine base salaries for executive officers?

 

We pay our named executive officers and other employees a base salary as part of a competitive compensation package and to provide a stable source of income. We typically consider salary levels as part of our annual compensation review process or upon a promotion. When we establish base salaries for executives, we consider salaries that companies in the Compensation Peer Group or general executive compensation industry survey pay for similar positions. When inadequate data is available from the companies in the Compensation Peer Group, we consider salaries that companies in the general executive compensation industry survey pay for similar positions. We generally attempt to set base salary at approximately the 50th percentile of the Compensation Peer Group subject to other variables as we describe above under “What process does the Committee use to review our executive compensation programs and determine compensation?”

 

Salary changes are generally effective October 1 of each year to correspond with the beginning of the new fiscal year. Salary changes may occur at other times, particularly on the occurrence of a promotion or other type of job change. Based on unexpected fiscal year 2009 economic and business conditions, the Company’s cost reduction efforts and the resulting economic sacrifices being made by the Company’s workforce, our Chief Executive Officer initiated discussions with the Chairman of the Compensation Committee regarding executive officer base salary increases that became effective on October 1, 2008. These discussions resulted in the Committee adopting a resolution in January 2009 that reduced annual base salaries for the remainder of fiscal year 2009 for certain executive officers, including each of the named executive officers, to the base level that was in effect for fiscal year 2008, for the reasons cited by our Chief Executive Officer.

How do we determine annual incentive performance awards?

 

We offer annual incentive performance awards to give our executives incentives to achieve our fiscal year business and financial objectives, and we establish the award opportunities and related performance goals accordingly. We believe achieving these annual business and financial objectives is important to executing our business strategy and delivering long-term value to shareholders.

 

For each fiscal year, the Committee approves a target incentive opportunity (which we measure as a percentage of base salary) for each executive officer, as well as the potential incentive opportunity percentages for maximum and threshold performance. For fiscal year 2009, the target incentive opportunity percentages for the named executive officers ranged from 100% to 156% of base salaries. For each executive officer, the actual payout potentially could range from zero to two times the target payout percentage, depending on achievement of goals, with potential payments increasing as performance improved (though not above two times the target payout percentage). We set the target incentive opportunity percentages at approximately the 50th percentile of the market benchmarking data provided by Towers Perrin. In measuring whether the target incentive opportunity percentages were approximately equal to the 50th percentile of the Compensation Peer Group, we excluded the portion of the target incentive opportunity that is subject to discretionary adjustment based on individual performance as we describe below. We have the discretion to decrease the size of the bonus payout based in part on an assessment of the executive officer’s individual performance. The Committee makes this assessment for our Chief Executive Officer based on its subjective evaluation of performance relative to strategic, financial and leadership objectives that the Committee or our Board has approved and has discretion to decrease the amount of the incentive award that our Chief Executive Officer would otherwise receive. Our Chief Executive Officer makes this assessment for the other executive officers based on his subjective evaluation of performance relative to strategic, financial and leadership objectives that he has approved and has the authority to decrease the amount of the incentive award that the executive officer would otherwise receive. We grant annual performance incentive awards under this program at the beginning of the fiscal year to which the award relates. The “Grants of Plan-Based Awards” table sets out the threshold, target, and maximum award potential for each named executive officer for the annual incentive performance award that applied to fiscal year 2009.

 

We set the performance targets for fiscal year 2009 for three of our named executive officers; Mr. Stephen A. Roell, Chairman of our Board and our President and Chief Executive Officer; Mr. Keith E. Wandell, our President and Chief Operating Officer until April 30, 2009; Mr. R. Bruce McDonald, our Executive Vice President and Chief Financial Officer; and, with respect to 30% of their awards, the remaining named executive officers; Mr. C. David Myers, our Vice President and President, Building Efficiency, Dr. Beda Bolzenius, our Vice President and President, Automotive Experience; and Mr. Alex A. Molinaroli, our Vice President and President, Power Solutions, using objectives for the Company’s pre-tax earnings and pre-tax return on equity (“ROE”). We define pre-tax earnings as income from continuing operations, adjusted for incentive plan expense and certain significant non-recurring items that impact comparability, such as gain or loss on divestitures, restructuring expense (for example, we incurred a restructuring expense in fiscal year 2009), and the adoption of new accounting pronouncements, all as reflected in our audited financial statements that appear in our Annual Report on Form 10-K. We define ROE as pre-tax earnings divided by total shareholders’ equity at the beginning of the fiscal year (as reported in our Annual Report on Form 10-K). For fiscal year 2009, we set the pre-tax earnings target at $2.0 billion and the ROE target at 18.4%.

The Committee approved potential payouts ranging from zero to two times of the target payout percentages for Messrs. Roell, Wandell, and McDonald (which we discuss below) for various levels of performance against these performance targets. The Committee approved potential payouts ranging from zero to 200% with respect to 30% of the target payout percentages for Mr. Myers, Dr. Bolzenius, and Mr. Molinaroli (which we discuss below) for the same level of performance against these targets. An executive officer would not receive an annual incentive payout if our fiscal year 2009 pre-tax earnings were less than $1.61 billion. If our fiscal year pre-tax earnings were at least $1.61 billion, the minimum potential payout an officer would receive was 45% of the target incentive payout, and the payout amount could have increased if ROE exceeded 13.8%. An officer would have been eligible to receive the maximum potential payout if our performance met or exceeded 18.4% ROE and $2.32 billion of pre-tax earnings.

 

For fiscal year 2009, the Committee based 70% of Mr. Myers’ incentive award on the performance of the Building Efficiency Group, using objectives for earnings before interest and tax (which we refer to as “EBIT”) and net cash from operations as a percent of revenue. We define EBIT for this purpose as business unit operating earnings, adjusted for incentive plan expenses and certain non-recurring items that impact comparability, all as reflected in our audited financial statements that appear in our Annual Report on Form 10-K. We define net cash from operations as trade working capital (defined as the sum of net accounts receivable, inventory, and net customer tooling less accounts payable). We may adjust net cash from operations and revenue for certain non-recurring items that impact comparability, such as acquisitions and divestitures. The targets were $1.05 billion in EBIT and 10% improvement over fiscal year 2008 in net cash from operations as a percent of revenue.

 

The Committee approved potential payouts for Mr. Myers ranging from zero to two times the target payout percentages (which we discuss below) for various levels of Building Efficiency Group performance against these Building Efficiency Group performance targets. Mr. Myers would not receive any payout if fiscal year 2009 Building Efficiency Group EBIT was less than $839.60 million. If fiscal year 2009 Building Efficiency Group EBIT was at least $839.60 million, he would have received a minimum potential payout of 45% of the target incentive payout, and the payout amount could have increased as change in net cash from operations as a percent of revenue improved beyond -15%. Mr. Myers would have been eligible to receive the maximum potential payout if the Building Efficiency Group met or exceeded 35% improvement in net cash from operations and $1.12 billion EBIT.

 

For fiscal year 2009, the Committee based 70% of Dr. Bolzenius’ incentive award on the performance of the Automotive Experience Group, again using objectives for EBIT and net cash from operations as a percent of revenue (defined above). The targets were $758.70 million in EBIT and 10% improvement over fiscal year 2008 in net cash from operations as a percent of revenue.

 

The Committee approved potential payouts for Dr. Bolzenius ranging from zero to two times the target payout percentages (as we discuss below) for various levels of Automotive Experience Group performance against these Automotive Experience Group financial targets. Dr. Bolzenius would not receive any payout if fiscal year 2009 Automotive Experience Group EBIT was less than $604.01 million. If fiscal year 2009 Automotive Experience Group EBIT was at least $604.01 million, he would have received a minimum potential payout of 45% of the target incentive payout, and the payout amount could have increased as change in net cash from operations as a percent of revenue improved beyond -15%. Dr. Bolzenius would have been eligible to receive the maximum potential payout if the Automotive Experience Group met or exceeded 35% improvement in net cash from operations and $802.90 million EBIT.

For fiscal year 2009, the Committee based 70% of Mr. Molinaroli’s incentive award on the performance of the Power Solutions Group, again using objectives for EBIT and net cash from operations as a percent of revenue (defined above). The targets were $576.08 million in EBIT and 10% improvement over fiscal year 2008 in net cash from operations as a percent of revenue.

 

The Committee approved potential payouts for Mr. Molinaroli ranging from zero to two times the target payout percentages (as we discuss below) for various levels of Power Solutions Group performance against these Power Solutions Group financial targets. Mr. Molinaroli would not receive any payout if fiscal year 2009 Power Solutions Group EBIT was less than $458.63 million. If fiscal year 2009 Power Solutions Group EBIT was at least $458.63 million, he would have received a minimum potential payout of 45% of the target incentive payout, and the payout amount could have increased as change in net cash from operations as a percent of revenue improved beyond -15%. Mr. Molinaroli would have been eligible to receive the maximum potential payout if the Power Solutions Group met or exceeded 35% improvement in net cash from operations and $609.60 million EBIT.

 

For fiscal year 2009, our actual financial results for the performance goals were 4.6% ROE and $432.5 million in pre-tax earnings; 3.2% improvement in Building Efficiency Group net cash from operations and $712.8 million in Building Efficiency Group EBIT; 9.1% improvement in the Automotive Experience Group net cash from operations and -$336.9 million Automotive Experience Group EBIT; -15.0% improvement in the Power Solutions Group net cash from operations and $416.4 million Power Solutions Group EBIT.

 

Based on the performance that we discuss above, none of the named executive officers received an annual performance bonus for fiscal year 2009.

 

How do we determine long-term cash incentive performance awards?

 

We tie the value of awards under our long-term cash incentive program to our long-term performance over a three-year period, and the program therefore serves to ensure that an executive’s pay under this program depends upon the extent to which we achieve our long-term financial objectives. By using a mix of stock options, restricted stock, and the long-term cash incentive, we are able to compensate executives for both sustained increases in our stock performance, as well as the achievement of key long-term financial objectives. We base the long-term incentive on achieving business plans that our Board approves. Since 2008, we have granted long-term performance incentive awards under this program at the beginning of the three-year performance period to which the award relates. At the end of each performance period, the Committee applies the objective-based formula that it approved in advance to determine each executive’s award for the performance period.

 

The “Grants of Plan-Based Awards” table sets out the threshold, target, and maximum award potential for the long-term incentive performance awards we granted in fiscal year 2009 to each named executive officer for the fiscal years 2009-2011 performance period.

 

We based each executive officer’s long-term cash incentive performance award opportunity for this performance period on annual objectives for corporate pre-tax earnings and pre-tax return on invested capital (“ROIC”). We have established targets of $1.85 billion pre-tax earnings and 13.9% ROIC for fiscal year 2009. We define pre-tax earnings as income from continuing operations, adjusted for certain significant non-recurring items, such as gain or loss on divestitures, restructuring expense (for example, we incurred a restructuring expense in fiscal year 2009), and the adoption of new accounting pronouncements, all as reflected in our audited financial statements

that appear in our Annual Report on Form 10-K. We define ROIC as pre-tax earnings adjusted by total financing costs, divided by invested capital. Invested capital is defined as the monthly weighted-average sum of shareholders equity plus total debt, less cash. We base the ROIC target each year on meeting the amounts set forth in the financial plan for that year. Our Board reviews and approves the financial plan each year. An executive officer would not receive a long-term incentive payout with respect to fiscal year 2009 under the 2009-2011 award if our pre-tax earnings were less than $1.69 billion. An executive officer would receive the maximum potential payout with respect to fiscal year 2009 under the 2009-2011 award if our performance met or exceeded 14.9% ROIC and $2.01 billion pre-tax earnings.

 

To calculate the payment an executive officer will receive under a long-term incentive award, we determine the performance results for each year in the three-year cycle, and calculate a weighted average for the three-year cycle based on the following: weighted 1/6 for the first year in performance cycle, weighted 2/6 for the second year in performance cycle, and weighted 3/6 for the third year in the performance cycle.

 

Executive officers were eligible in fiscal year 2009 for a payout under the three-year performance cycle of 2007-2009. For this cycle, the payout target percentages ranged from 70% to 130% of base salary for the named executive officers. The two financial measures for this cycle were pre-tax earnings and pre-tax ROIC. Our pre-tax earnings results were $1.6 billion, $1.79 billion, and $402.7 million for 2007, 2008, and 2009, respectively, and our pre-tax ROIC results were 15.2%, 15.4%, and 4.5% for 2007, 2008, and 2009, respectively. This performance resulted in payout percentages of 194.7%, 150.9%, and 0% of target for 2007, 2008 and 2009, respectively.

 

Based on the performance that we discuss above, the Committee approved a payout percentage of 82.8%, payable to executives in the program, including the named executive officers. Mr. Wandell retired as President and Chief Operating Officer on April 30, 2009. As a result of his retirement, Mr. Wandell’s actual award was prorated 86.1% of the amount that he would have received for the three-year performance cycle, determined based on our actual performance for that performance period. We show the amount in the Summary Compensation Table under the column heading “Non-Equity Incentive Plan Compensation.”

 

How do we determine stock option awards?

 

We award stock options to executives to:

 

 

We made all of our stock option grants to executives in fiscal year 2009 pursuant to our 2007 Stock Option Plan, which shareholders approved in January 2007. The exercise price of fiscal year 2009 stock options is equal to the New York Stock Exchange closing price of our common stock on the date of the grant. We do not engage in or permit “backdating” or repricing of stock options, and our equity compensation plans prohibit these practices.

 

Our executives, including our named executive officers, must earn the options through continued service. The options will vest 50% two years after the date of grant and 50%

three years after the date of grant, subject to continued employment (with earlier vesting on retirement), and have a ten-year exercise term.

 

We provide the fiscal year 2009 stock option grant details for each named executive officer in the “Grant of Plan-Based Awards” table and related footnotes. We determine stock option awards based on the value of the executive officer’s total direct compensation that we intend to deliver less the value of all other elements of direct compensation. Towers Perrin values the options using a binomial valuation methodology.

 

Our policy on granting equity awards states that our annual stock option grant occurs and is effective on the first business day of our fiscal year and that any subsequent stock option grants occur and are effective on the date of a regularly scheduled Compensation Committee meeting. Executive officers do not have a role in the timing of option grants. We do not choose the time for making option grants based in any way on any pending release to the public of material information.

 

How do we determine restricted stock awards?

 

We intend our restricted stock awards to:

 

 

Historically, we have awarded restricted stock to our executive officers in alternating years. Because we awarded restricted stock to our named executive officers in fiscal years 2006 and 2008, we did not award any restricted stock during fiscal year 2009.

 

During fiscal year 2009, the Compensation Committee approved a change to grant restricted stock annually beginning in fiscal year 2010. We believe this change will better reinforce our commitment to ensuring a strong linkage between company performance and pay.

 

We reflect the amount of restricted stock expense attributable to fiscal year 2009 as part of the amounts in the “Summary Compensation Table” under the column heading “Stock Awards.”

 

How do we determine retirement and other benefits?

 

We evaluate retirement and other benefits based on market practice of the Compensation Peer Group and general executive compensation industry data. We have a long history of providing retirement benefits to our U.S. salaried employees. We provide our retirement benefits through the following plans:

 

 

 

We provide these retirement benefits to our executive officers to help them prepare for a financially secure retirement, to provide an incentive to stay with us by recognizing tenure, and to offer what we believe is a competitive compensation package.

 

We have summarized the various retirement plans in which our named executive officers may participate in greater detail in the narrative following the “Pension Benefits” table.

 

Our named executive officers also participate in the Executive Deferred Compensation Plan, under which we permit all senior leaders required to own equity in our company to elect to defer receipt of all or any part of the compensation they would receive under the Annual and Long-Term Incentive Performance Plans or, historically, the 2001 Restricted Stock Plan, until certain pre-determined payment dates. However, in January 2008, we amended the 2001 Restricted Stock Plan to remove the option for deferral. Therefore, any restricted stock grants made after January 2008 will not be subject to the Executive Deferred Compensation Plan. We provide the Executive Deferred Compensation Plan as a vehicle to assist participants in saving for a secure future by allowing participants to defer compensation and associated taxes until retirement or other termination of employment. We discuss the Executive Deferred

Compensation Plan in further detail in the narrative following the “Nonqualified Deferred Compensation” table.

 

For elected officers hired prior to September 15, 2009, we maintain an Executive Survivor Benefits Plan. Under this plan, if a participating executive officer dies while he or she is an employee, then we will make certain payments to his or her beneficiary. We offer this benefit to executive officers hired prior to September 15, 2009, and coverage is in lieu of our regular group life insurance coverage and any other executive life insurance policy. All benefits under our Executive Survivor Benefits Plan cease upon retirement or other termination of employment. We amended this plan during 2009 to limit participation in the plan to current elected officers. Therefore effective September 15, 2009, this benefit is no longer available for newly elected officers and those officers will participate in our regular group life insurance coverage.

 

Do we provide perquisites to our executive officers?

 

According to our compensation philosophy, we limit the amount of executive benefits that we provide to our executive officers. We maintain a policy regarding eligibility and use of executive perquisites, and we do not allow exceptions outside of the policy. In general, we intend the perquisites we provide to help executive officers be more productive and efficient, or to protect us and the individual executive officer from certain business risks and potential threats. In fiscal year 2009, our named executive officers received perquisites of the following types: assistance with financial planning, personal use of a company airplane (personal use of airplane is minimal, and the cumulative fiscal year 2009 value of the personal use for all named executive officers was less than $20,000), and club dues. The Committee periodically reviews competitive market data to ensure that the perquisites we provide to executive officers are reasonable and within market practice. During fiscal year 2009, the Committee eliminated the payment of tax gross-ups on perquisites to executive officers effective January 1, 2010. The Committee annually reviews use of perquisites to ensure compliance with our policy.

 

Separate from the perquisites policy, we have (1) a company vehicle policy that provides personal use of a vehicle to all senior leadership, including our executive officers (the type of vehicle varies by leadership level and is limited to vehicles that use our automotive seating and interiors products so that executives can experience the effectiveness of our products); and (2) an executive physical examination program that offers executive officers an annual comprehensive physical examination within a compressed time period.

 

Do we have stock ownership requirements?

 

We have stock ownership requirements because we believe material stock ownership by executives plays a role in effectively aligning the interests of these employees with those of our shareholders and strongly motivates executives to build long-term shareholder value. We therefore maintain an executive stock ownership policy that requires our executives to hold significant amounts of our stock. The following forms of stock ownership count toward the ownership requirement under the policy:

 

 

 

Each executive officer named below that has been an officer of our company for more than four years has exceeded his respective guideline as of September 30, 2009. Executives failing to meet their required ownership level within a five-year period after becoming an executive officer will not receive future equity grants until their ownership requirement is met.

 

The guidelines for executive officer stock ownership under our Executive Stock Ownership Policy are as follows:

 

 

 

 

We also maintain the 2001 Common Stock Purchase Plan for Executives, or the CSPPE, which facilitates our executives’ acquisition of our common stock. Participants in the CSPPE may deduct from their pay up to $2,500 per month to purchase shares of our common stock. Participants pay a nominal brokerage fee or commission, and the price of each share is 100% of the average price of shares purchased by Wells Fargo Bank, N.A., as agent for the participants.

 

Does the Company consider the impact of tax and accounting rules and regulations?

 

We review the impact of executive compensation on our financial statements. We also review the effect that our compensation programs will have on our standards for corporate governance.

 

Section 162(m) of the Internal Revenue Code limits us from deducting compensation that we pay in any year to our principal executive officer or to our other three most highly-compensated officers (other than our principal financial officer) in excess of $1 million, unless that compensation meets the requirements under Section 162(m) for “qualifying performance-based” compensation (i.e., compensation that we pay only if the individual’s performance meets objective goals that the Committee has established in advance based on performance criteria that shareholders have approved). The Committee continues to emphasize performance-based compensation for executives, thus minimizing the consequences to us of Section 162(m) limits. However, the

Committee believes that its primary responsibility is to provide a compensation program that attracts, retains, and rewards the executive talent necessary for our success. Consequently, in any year, the Committee may authorize compensation that is not fully deductible under Section 162(m) if it believes such compensation is necessary to achieve our compensation objectives and protect the interests of our shareholders.

 

Do we utilize employment and change of control contracts?

 

As we discuss more fully on page 45, we have entered into employment agreements and change of control agreements with all of our executive officers. The employment agreements protect us from certain business risks (threats from competitors, loss of confidentiality or trade secrets, disparagement, solicitation of customers and employees) and define our right to terminate the employment relationship. The employment agreements also protect our executive officers from certain risks, such as death or disability, by providing for payment and benefits in the event of certain terminations of employment. The employment agreements define the events that will trigger benefits, and the amount of such benefits, in the event of a termination of employment. We believe that the benefits the employment agreements provide upon a termination of employment are customary and appropriate.

 

The change of control agreements provide that our named executive officers may be eligible to receive payments and other benefits if there is a change of control of our company. In addition, our executive officers may receive benefits under our equity and bonus plans if there is a change of control of our company. We intend the change of control benefits to provide some economic stability to our executive officers to enable them to focus on the performance of their duties and the best interests of our company and our shareholders without undue concern over their personal circumstances if there is a potential change of control of our company. We provide for acceleration of equity and incentive awards, in particular, to protect our executive officers’ opportunities to earn the awards if a change of control occurs.

 

Annually, the Committee reviews employment and change of control arrangements and reports its findings and recommendations to our Board. Based on the Committee’s annual review, in fiscal year 2009 the Compensation Committee eliminated from the form of change of control agreement that we intend to use for agreements that we enter into in the future, the executive officer’s right to terminate employment for any reason during the 30-day period following the first anniversary of a change of control event and receive the change in control payment under the agreement. We did not seek to eliminate this right from the existing change of control agreements because the agreements are an important element of the overall compensation arrangements that we have previously negotiated with our current executive officers and that we believe were competitive and appropriate at the time of negotiation. We determined that the amounts payable under the remaining arrangements on certain triggering events, as we describe under “Potential Payments and Benefits upon Termination or Change of Control,” were consistent with market competitive practices.

SUMMARY COMPENSATION TABLE FOR FISCAL YEARS 2009, 2008 AND 2007

 

The following table summarizes the compensation earned in the fiscal years noted by our chief executive officer, our chief financial officer, our three other most highly compensated executive officers who were officers as of the end of the fiscal year ended September 30, 2009 and Mr. Wandell. We refer to these officers as our “named executive officers”.

 

 

 

 

GRANTS OF PLAN BASED AWARDS DURING FISCAL YEAR 2009

 

The following table contains information concerning the plan-based equity and non-equity awards that we granted to our named executive officers in fiscal year 2009.

 

 

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR 2009 YEAR-END

 

The following table contains information concerning equity awards held by our named executive officers that were outstanding as of September 30, 2009.

 

 

 

 

PENSION BENEFITS AS OF SEPTEMBER 30, 2009

 

The following table sets forth certain information with respect to the potential benefits to our named executive officers under our qualified pension and retirement restoration plans as of September 30, 2009.

 

 

 

 

 

Johnson Controls Pension Plan — The Johnson Controls Pension Plan is a defined benefit pension plan that provides benefits for most of our non-union U.S. employees, including our eligible named executive officers. Our Pension Plan has two components: (1) a component that covers Johnson Controls employees hired prior to January 1, 2006, other than York employees, and (2) a component that covers York employees who were participants in the York International Pension Plan Number One, which was merged into the Pension Plan effective December 31, 2006.

 

Employees we hired prior to January 1, 2006 (other than York employees) automatically became participants in our Pension Plan in the month in which they were hired. Employees hired on or after January 1, 2006, are not eligible to participate in the Pension Plan.

 

Subject to certain limitations that the Internal Revenue Code imposes, the monthly retirement benefit payable under our Pension Plan to participants other than the York employees, at normal retirement age in a single life annuity, is determined as follows:

 

 

For York employees, including Mr. Myers, participating in our Pension Plan, the monthly benefit payable at normal retirement age in a single life annuity is $25 times years of credited service, or if greater, an amount equal to 1/12th of the following:

 

 

Service after December 31, 2003, does not count as credited service in this formula. For purposes of this formula, compensation means the participant’s taxable compensation, plus contributions to a 401(k) plan and 50% of the amount that the participant deferred under a nonqualified deferred compensation plan, for the highest five consecutive years of the last ten consecutive years of employment occurring prior to January 1, 2014. Normal retirement age for York participants is age 65. Mr. Myers is the only named executive officer whose benefits are calculated using this formula.

 

Participants in our Pension Plan generally become vested in their pension benefits upon completion of 5 years of service. Our Pension Plan does not pay full pension benefits until after a participant terminates employment and reaches normal retirement age. However, a participant who terminates employment may elect to receive benefits at a reduced level at any time after age 55, as follows:

 

 

Mr. Roell is currently eligible for early retirement under the Pension Plan. Mr. Wandell retired as of April 30, 2009, based on the early retirement provisions under the Pension Plan.

 

German Pension Arrangement — We have entered into a supplemental agreement with Dr. Bolzenius that provides for retirement benefits. We refer to the supplemental agreement as the “German Pension Arrangement.” The German Pension Arrangement entitles Dr. Bolzenius to credit for one pension “unit” for each year since November 2, 2004 that he has been an employee of our subsidiary, Johnson Controls GmbH. The values of the pension units range between €28,282 (or $37,340 using a conversion of Euros into US Dollars using an exchange rate as of January 1, 2007, of 1.32027 US Dollars to 1.00 Euro) and €10,857 (or $14,334 using a conversion of Euros into US Dollars using an exchange rate as of January 1, 2007, of 1.32027 US Dollars to 1.00 Euro) depending on Dr. Bolzenius’ age. The annual pension benefit, paid monthly, under the German Pension Arrangement is given by the sum of all pension units credited until the time of the termination of Dr. Bolzenius’ employment.

 

Dr. Bolzenius’ German Pension Arrangement provides for full benefits only if his employment terminates after age 65, but permits him to receive reduced benefits upon an eligible early retirement (age 63). Upon an early retirement, Dr. Bolzenius’ benefits based on the acquired pension unit total would be reduced by 0.5% for each month the early retirement occurred prior to age 65. Dr. Bolzenius is not currently eligible for early retirement.

 

In calculating the amounts shown in the column titled “Present Value of Accumulated Benefit” in the table above, we used the following valuation method and material assumptions: We calculated the amounts reflected for Dr. Bolzenius in accordance with SFAS No. 87 — Employers’ Accounting for Pensions using the following assumptions: A calculation date of September 30, 2009, a 5.25% discount rate, retirement occurring at age 65, and applicability of the RT-2005 G by K. Heubeck Mortality Tables.

 

Retirement Restoration Plan — Our Retirement Restoration Plan is an unfunded, nonqualified plan that provides retirement benefits above the payments that an employee, other than a York employee, will receive from our Pension Plan in those cases in which the Code’s qualified plan limits restrict the employee’s benefits. The Retirement Restoration Plan provides a benefit equal to the difference between the actual pension benefit payable under our Pension Plan and what such pension benefit would have been without regard to any Code limitation on either the amount of benefits or the amount of compensation that the benefit formula can take into account. Because

Mr. Myers was a York employee, he is not eligible under the Retirement Restoration Plan for a benefit with respect to the Pension Plan. Dr. Bolzenius is also not eligible under the Retirement Restoration Plan for a benefit with respect to the Pension Plan because he is not a participant in the Johnson Controls Pension Plan.

 

A participant is vested in his or her Retirement Restoration Plan benefits only if vested in his or her benefits under our Pension Plan. Benefits under the Retirement Restoration Plan are payable as an annuity at the later of the participant’s termination of employment or attainment of age 55.

 

NONQUALIFIED DEFERRED COMPENSATION DURING FISCAL YEAR 2009

 

The following table sets forth certain information with respect to participation in our nonqualified Executive Deferred Compensation Plan by our named executive officers during the fiscal year ended September 30, 2009.

 

 

 

 

We maintain the following two nonqualified deferred compensation plans under which executives, including our named executive officers, may elect to defer their compensation. Dr. Bolzenius does not participate in the Retirement Restoration Plan because he is not a participant in the Johnson Controls Pension Plan.

 

 

Under both plans, a participant may elect to have his or her cash deferrals credited to a common stock unit account or one or more investment accounts that are the same as those available under our 401(k) plan, which serve to measure the earnings that we will credit on the participant’s deferrals. Restricted stock deferrals under the Executive Deferred Compensation Plan are automatically credited to the common stock unit account until vested, after which the participant may reallocate deferrals to another investment account. Amounts allocated to the common stock unit account are credited with dividend equivalents, which are treated as if reinvested in additional common stock units.

 

Under both plans, deferred amounts are paid upon a participant’s termination of employment in a lump sum or up to ten year annual installments, as the participant elects.

 

Dividends paid on restricted stock awards that a participant has elected not to defer are also accumulated within the Executive Deferred Compensation Plan, deemed

reinvested in common stock units, and paid to a participant in a lump sum when the related shares of restricted stock vest.

 

The following table provides information about the compensation that our directors earned during fiscal year 2009 and their holdings of equity awards as of September 30, 2009. The table does not include Mr. Roell, who is our Chairman of the Board, President and Chief Executive Officer and who received no additional compensation for his service as a director.

 

 

 

 

For fiscal year 2009, we paid each non-employee director $200,000 (pro-rated for partial year service) in the form of an annual retainer, paid half in cash and half in shares of common stock at the then current market price, which shares we issued under the 2003 Director Stock Plan. For fiscal year 2010, the annual retainer has been increased to $220,000. We pay the cash portion of the retainer quarterly in October, January, April and July. We issue the stock annually using the market closing price as of the date of the Annual Meeting. We also reimburse non-employee directors for any expenses relating to their service as directors. Additionally, we pay the Chairpersons of the Audit, Compensation, Corporate Governance and Finance Committees an annual retainer of $25,000, each in cash.

Historically, new non-employee directors received a one-time grant of 2,400 shares of common stock upon election or appointment. In fiscal year 2009, our Board approved changing initial one-time grants to new non-employee directors from a fixed amount of shares of common stock to a fixed value of $85,000 payable in common stock units that are settled in cash only upon termination of service with our Board. Our Board believes that providing equality in initial grant value to new non-employee directors upon election or appointment, as well as additionally deferring settlement of the restricted stock units and requiring them to be held until termination or retirement from our Board, further supports our director stock ownership policy and is in the best interest of shareholders.

 

We maintain a director stock ownership policy that requires our directors to hold significant amounts of our stock. Our current stock ownership policy requires our directors to hold five times the value of the common stock portion of their retainer within five years of their election or appointment to our Board. All of our directors comply with the stock ownership policy guidelines.

 

We permit non-employee directors to defer all or any part of their retainer under the Deferred Compensation Plan for Certain Directors. A director may elect to treat any amount deferred as if invested in any of the investment funds that are available under our tax-qualified Savings and Investment Plan or into share units. We pay the deferred amount as adjusted for earnings, losses, gains and dividends, as applicable, to the director after the director retires or otherwise ceases service on our Board, in a lump sum or up to ten year annual installments, as the director elects. Prior to October 1, 2006, under the Director Share Unit Plan, we credited stock units annually into each non-employee director’s account. Directors may now elect to treat the value of existing units as if invested in any of the accounts available under the Savings and Investment Plan.

 

The following is a discussion of the nature and estimated value of payments and benefits that each of our named executive officers would receive in the event of termination of the executive’s employment or upon a change of control. We based the estimated value of the payments and benefits that we would provide on an assumption that the termination of employment or the change of control, or both, as applicable, occurred on September 30, 2009, the last business day of our fiscal year 2009. We can only determine the actual amounts of payments and benefits that an executive officer would receive upon his termination or upon a change of control at the actual time of such event.

 

Employment Agreements

 

We have entered into an employment agreement with each of our executive officers, including each of our named executive officers, but Mr. Wandell relinquished his agreement upon his retirement. On April 30, 2009, after 21 years of service to the company, Mr. Wandell retired as an employee of our company. Accordingly, Mr. Wandell became entitled to receive payments and distributions relating to the retirement benefits that he had been accruing during his service as an officer of our company. These included distribution of any vested benefits under the Retirement Restoration Plan and normal payouts under the Pension Plan (see the Pension Benefits Table), as well as a distribution of any vested benefits under the nonqualified Executive Deferred Compensation Plan (see the Nonqualified Deferred Compensation Table). Mr. Wandell is also entitled to receive, at the end of the applicable performance period for each of his

annual and long-term bonus awards outstanding under our Annual and Long-Term Incentive Performance Plans, a pro-rata portion of the award amount he would have earned had he remained employed through the end of each such performance period. For the performance periods ending in fiscal year 2009, the pro-rata amounts are indicated in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

At the time of his retirement, Mr. Wandell retained his shares of restricted stock that had not vested prior to or at the time of retirement, and these shares will continue to vest on the normal vesting schedule as reflected in the footnotes to the “Outstanding Equity Awards at Fiscal Year 2009 Year End” table. The award agreement provides that Mr. Wandell will not earn the restricted stock if he engages in conduct harmful to the best interests of our company. In addition, vesting for all outstanding option awards that we granted to Mr. Wandell under the 2000 Stock Option Plan prior to March 23, 2005 accelerated at the time of his retirement so that all of these options became exercisable in full. All outstanding options that we granted to Mr. Wandell under the 2000 Stock Option Plan on and after March 23, 2005, and vesting for all stock options that we granted to Mr. Wandell under the 2007 Option Plan, that had been outstanding for at least a full calendar year after the date of grant, accelerated at the time of his retirement so that all of these options became exercisable in full. Those outstanding options are reflected in the “Outstanding Equity Awards at Fiscal Year 2009 Year End” table.

 

Each employment agreement contains substantially similar terms except for individual salary amounts and benefits. In addition to setting forth the terms and conditions of each named executive officer’s employment and the amounts payable upon the executive’s termination of employment, the employment agreements contain terms that protect the company from certain business risks, including:

 

 

Summary of the Payments and Benefits Upon Each Termination Scenario

 

The following summarizes the types of payments and benefits to which each of our named executive officers (other than Mr. Wandell) would have been entitled if he had terminated employment on September 30, 2009, under various scenarios. These payments and benefits are generally based on the terms of the employment agreements and our relevant compensation and benefit plans, such as our Annual and Long-Term Incentive Performance Plans, stock option plans, 2001 Restricted Stock Plan, Retirement Restoration Plan, nonqualified Executive Deferred Compensation Plan, Executive Survivor Benefits Plan, and the severance plan for our U.S. salaried employees.

For each termination scenario, we have not separately quantified any amounts that a named executive officer would receive under plans generally available to all management employees that do not discriminate in favor of the named executive officers. These include distributions under our pension plan and 401(k) savings plan, disability benefits, vesting of stock option and restricted stock awards under equity plans, any salary or bonus awards due to the employee through the date of termination, pro-rated bonus awards relating to outstanding bonus awards and accrued vacation.

 

Voluntary Termination:  A named executive officer may terminate his employment with us at any time. In general, upon the executive’s voluntary termination:

 

 

The executive will be entitled to a distribution of his vested benefits under the Retirement Restoration Plan (see the Pension Benefits Table on page 39) and the nonqualified Executive Deferred Compensation Plan (see the Nonqualified Deferred Compensation Table on page 42).

 

Retirement and Early Retirement:  None of our named executive officers whom we employed on September 30, 2009 was eligible for full retirement on that date, although Mr. Roell was eligible for early retirement (which our Pension Plan defines as reaching age 55 and having 10 or more years of service). For an estimate of the value of the pension benefit for a named executive officer upon retirement, please see the Pension Benefits Table on page 39. In addition to such pension benefit, upon the executive’s full or early retirement:

 

 

 

 

 

The executive also will be entitled to a distribution of any vested benefits under the Retirement Restoration Plan (see the Pension Benefits Table on page 39) and the nonqualified Executive Deferred Compensation Plan (see Nonqualified Deferred Compensation Table on page 42).

 

Termination for “Cause”:  We may terminate the employment of a named executive officer for “cause” under the terms of the employment agreements. A termination for “cause” generally means a termination for theft, dishonesty, fraudulent misconduct, violation of certain provisions of the employment agreement, gross dereliction of duty, grave misconduct injurious to our company, and serious violation of the law or our policies on employee conduct. A named executive officer will not receive any special payments or benefits if we terminate his employment for “cause.” On the executive’s termination date, all of his outstanding unvested stock options will immediately terminate, and we will cancel any pending option exercises. In addition, the executive will forfeit all unvested shares of restricted stock and restricted stock units. The executive will be entitled to a distribution of his vested benefits under the Retirement Restoration Plan (see the Pension Benefits Table on page 39) and the nonqualified Executive Deferred Compensation Plan (see Nonqualified Deferred Compensation Table on page 42).

 

Termination without “Cause”:  If we terminate the employment of a named executive officer and the termination is not for “cause,” then:

 

 

The executive also will be entitled to a distribution of any vested benefits under the Retirement Restoration Plan (see the Pension Benefits Table on page 39) and the nonqualified Executive Deferred Compensation Plan (see Nonqualified Deferred Compensation Table on page 42).

 

The following is an estimate of the severance that each named executive officer would receive assuming the termination without “cause” occurred on September 30, 2009:

 

Termination due to Disability:  If a total and permanent disability causes a named executive officer’s termination, then:

 

 

In the case of termination as a result of total and permanent disability, the executive also will be entitled to distribution of any vested benefits under the Retirement Restoration Plan (see the Pension Benefits table on page 39) and the nonqualified Executive Deferred Compensation Plan (see the Nonqualified Deferred Compensation Plan table on page 42).

 

The following is an estimate of the retirement restoration plan benefit that arises from vesting that accelerates due to disability that each named executive officer would receive assuming the disability termination occurred on September 30, 2009:

 

 

Termination due to Death:  If a named executive officer dies while he is our employee, then:

 

 

 

In the case of termination as a result of death, the executive or the executive’s beneficiaries also will be entitled to a distribution of the executive’s vested benefits under the Retirement Restoration Plan (see the Pension Benefits Table on page 39) and the nonqualified Executive Deferred Compensation Plan (see the Nonqualified Deferred Compensation Table on page 42).

 

The following is an estimate of the Executive Survivor Benefits Plan value that each named executive officer would receive assuming the death occurred on September 30, 2009:

 

 

 

 

Change of Control Agreements

 

We have entered into change of control agreements with each of our executive officers, including each of our named executive officers, but Mr. Wandell relinquished his agreement upon his retirement on April 30, 2009. Upon a change of control of our company, the change of control agreements supersede the employment agreements. The change of control agreements generally entitle each named executive officer to continued employment with our company or our successor for two years following the change of control, with a base salary, bonus and other benefits at least equal to the base salary, bonus and benefits we paid or provided prior to the change of control. The change of control agreements also provide for a severance payment and continued welfare and medical benefits upon termination of the executive’s employment under certain circumstances during the two year employment period that begins on the date of the change of control, as we explain in more detail under “Termination Upon or Following a Change of Control” below. The agreement defines a change of control as:

 

 

 

Summary of the Payments and Benefits Upon a Change of Control

 

The following summarizes the types of payments and benefits to which each of our named executive officers would have been entitled if a change of control had occurred or if both a change of control and a termination of employment had occurred, on September 30, 2009. These payments and benefits are generally based on the terms of our change of control agreements, and our relevant compensation and benefit plans, such as our Annual and Long-Term Incentive Performance Plans, stock option plans, 2001 Restricted Stock Plan, Retirement Restoration Plan, and nonqualified Executive Deferred Compensation Plan.

 

For each change of control scenario, we have not separately quantified any amounts that a named executive officer would receive under plans generally available to all management employees that do not discriminate in favor of the named executive officers (such as vesting of stock option and restricted stock awards under equity plans and payments of pro-rated bonus awards relating to outstanding bonus awards).

 

Change of Control:  In the event of a change of control of our company, which each relevant compensation and bonus plan generally defines in the same manner as under the change of control employment agreement we discuss above, the following will occur as of the time of the change of control whether or not the named executive officer’s employment terminates:

 

 

The payments and the value of benefits under the change of control agreements or under any of our other plans and programs in connection with a change of control may exceed limitations that Section 280G of the Internal Revenue Code establishes, which would cause the executive officer to pay additional federal taxes. The change of control agreement provides that we will pay the executive officer an additional amount, called a “gross-up payment,” necessary to offset any taxes of this type that the Internal Revenue Service imposes on the executive officer and any additional taxes on this payment.

The following is an estimate of the Retirement Restoration Plan benefit that arises from vesting that accelerates due to the change of control and the excise tax gross up that each named executive officer would receive assuming the change of control (no termination) occurred on September 30, 2009: