UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

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March 18, 2011

 

Dear fellow stockholder:

 

You are cordially invited to attend our annual meeting of stockholders on Thursday, April 28, 2011. We will hold the meeting at 10:00 a.m., Central Time, in the lower level auditorium at our headquarters located at CityPlace One, One CityPlace Drive, St. Louis, Missouri 63141. You can find maps with directions to our headquarters near the back of the proxy statement that accompanies this letter.

 

In connection with the annual meeting, we have enclosed a notice of the meeting, a proxy statement and a proxy card. We have also enclosed a copy of our annual report for 2010 which contains detailed information about us and our operating and financial performance.

 

I hope that you will be able to attend the meeting, but I know that not every stockholder will be able to do so. Whether or not you plan to attend, I encourage you to vote your shares. You may vote by telephone or on the Internet, or complete, sign and return the enclosed proxy card in the postage-prepaid envelope, also enclosed. The prompt execution of your proxy will be greatly appreciated.

 

Sincerely,

 

Steven F. Leer

Chairman of the Board and Chief Executive Officer

 

 1 CityPlace Drive, Suite 300     St. Louis, Missouri 63141     t: (314) 994-2700

 

One CityPlace Drive, Suite 300
St. Louis, Missouri 63141

 

March 18, 2011

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

The annual meeting of stockholders (the “Annual Meeting”) of Arch Coal, Inc. will be held in the lower level auditorium at our headquarters located at CityPlace One, One CityPlace Drive, St. Louis, Missouri 63141 on Thursday, April 28, 2011 at 10:00 a.m., Central Time, for the following purposes:

 

 

The close of business on February 28, 2011 has been fixed as the record date for the determination of stockholders entitled to receive notice of and to vote at the Annual Meeting or any adjournment(s) or postponement(s) thereof. This Notice, the proxy statement and the form of proxy/voting instruction card are first being sent or made available to stockholders on or about March 18, 2011.

 

By order of the Board of Directors

 

Robert G. Jones

Senior Vice President-Law, General Counsel and

Secretary

 

PROXY STATEMENT

 

TABLE OF CONTENTS

 

 

 

The 2011 annual meeting of stockholders (the “Annual Meeting”) of Arch Coal, Inc., a Delaware corporation (“Arch” or the “Company”), will be held on Thursday, April 28, 2011. The Annual Meeting will be held at 10:00 a.m., Central Time, in the lower level auditorium at our headquarters located at CityPlace One, One CityPlace Drive, St. Louis, Missouri 63141. You can find maps with directions to our headquarters under “Directions to the Annual Meeting” in this proxy statement.

 

 

Stockholders of the Company at the close of business on February 28, 2011, the record date for the Annual Meeting, are entitled to receive notice of and to vote at the Annual Meeting or any adjournments or postponements of the Annual Meeting. On the record date, Arch had 162,689,099 shares of common stock outstanding.

 

 

All Arch stockholders on the record date are invited to attend the Annual Meeting. Each stockholder planning to attend the meeting will be asked to present valid photo identification, such as a driver’s license or passport. In addition, each stockholder must present his or her admission ticket, which is a portion of the enclosed proxy card.  Please tear off the ticket at the perforation. If your shares are not registered in your name and you would like to attend the Annual Meeting, please ask the broker, trust, bank or other nominee in whose name the shares are held to provide you with evidence of your beneficial ownership, such as a current broker’s statement.

 

No cameras, camcorders, videotaping equipment, other recording devices or large packages will be permitted in the Annual Meeting. Photographs may be taken by Arch employees or independent contractors at the Annual Meeting, and those photographs may be used by Arch. By attending the Annual Meeting, you will be agreeing to Arch’s use of those photographs and waive any claim or rights with respect to those photographs and their use.

 

 

Stockholders will vote on four items at the Annual Meeting:

 

 

 

The Board recommends you vote your shares:

 

 

 

If your shares are registered in the name of a nominee, including your broker or bank, follow the instructions provided by your nominee to vote your shares. In most instances you will be able to vote over the telephone, over the Internet, or by mail. If your shares are registered in your name:

 

You may vote in person at the Annual Meeting.  You can find maps with directions to our headquarters under “Directions to the Annual Meeting” in this proxy statement.

 

You may vote by telephone.  You can vote by calling the toll-free telephone number on your proxy card. Telephone voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on the day before the meeting. If you vote by telephone, you do not need to return your proxy card.

 

You may vote over the Internet.  The web site for Internet voting is on your proxy card. Internet voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on the day before the meeting. If you vote via the Internet, you do not need to return your proxy card.

 

You may vote by mail.  If you choose to vote by mail, simply mark your proxy card, date and sign it, and return it in the postage-paid envelope provided.

 

 

Yes. You have the right to change or revoke your proxy (1) at any time before the Annual Meeting by (a) notifying Robert G. Jones, Arch’s Secretary, in writing, or (b) returning a later-dated proxy card; or (2) by voting in person at the Annual Meeting.

 

 

You have one vote for each share of our common stock that you owned at the close of business on the record date. These shares include:

 

 

 

 

If you participate in our dividend reinvestment plan or our direct stock purchase plan, your proxy will also serve as an instruction to vote the whole shares you hold under those plans in the manner indicated on the proxy. If your proxy is not received, the shares you hold in those plans will not be voted.

 

 

If you are both a registered stockholder and a participant in our employee thrift plan, you will receive a single proxy card that covers shares of our common stock credited to your plan account as well as shares of record registered in exactly the same name. Accordingly, your proxy card also serves as a voting instruction for the trustee of the plan. If your plan account is not carried in exactly the same name as your shares of record, you will receive separate proxy cards for individual and plan holdings. If you own shares through this plan and you do not return your proxy by April 18, 2011, the trustee will vote your shares in the same proportion as the shares that are voted by the other participants in the plan. The trustee will also vote unallocated shares of our common stock held in the plan in direct proportion to the voting of allocated shares in the plan for which voting instructions have been received unless doing so would be inconsistent with the trustee’s duties.

 

 

Yes. Voting tabulations are confidential except in extremely limited circumstances. Such limited circumstances include contested solicitation of proxies, when disclosure is required by law, to defend a claim against us or to assert a claim by us and when a stockholder’s written comments appear on a proxy or other voting material.

 

 

Shareholders of Record.  If you are a shareholder of record and you either indicate when voting that you wish to vote as recommended by the Board or you sign and return a proxy card without giving specific voting instructions, the proxy holders will vote your shares in the manner recommended by the Board on all matters presented in this proxy statement and as the proxy holders may determine in their discretion with respect to any other matters properly presented for a vote at the Annual Meeting. See the Section entitled “Other Matters” below.

 

Beneficial Owners of Shares Held in Street Name.  If you are a beneficial owner of shares held in street name and you do not provide the organization that holds your shares with specific voting instructions, under the rules of applicable national securities exchanges the organization that holds your shares may generally vote on routine matters but cannot vote on non-routine matters. If the organization that holds your shares does not receive specific instructions from you on how to vote your shares on a non-routine

matter, such organization will inform the inspector of election that it does not have the authority to vote on this matter with respect to your shares. This is generally referred to as a “broker non-vote.”

 

 

The ratification of the appointment of Ernst & Young LLP, independent registered public accounting firm, as our independent auditors for the year ending December 31, 2011 (Proposal No. 2) is a matter considered routine under applicable rules. A broker or other nominee may generally vote on routine matters, and therefore no broker non-votes are expected to exist in connection with Proposal No. 2.

 

The election of directors (Proposal No. 1), the advisory vote on executive compensation (Proposal No. 3) and the advisory vote on the frequency of the advisory vote on executive compensation (Proposal No. 4) are matters considered non-routine under applicable rules. A broker or other nominee cannot vote without instructions on non-routine matters, and therefore there may be broker non-votes on Proposals No. 1, No. 3 and No. 4.

 

 

For Proposal No. 1, the seven nominees receiving the highest number of affirmative votes of the shares entitled to be voted for them will be elected as directors to serve until their terms expire and until their successors are duly elected and qualified.

 

Approval of Proposals No. 2, No. 3 and No. 4 requires the affirmative vote of a majority of the shares present or represented by proxy and voting at the Annual Meeting.

 

 

In order to have a valid stockholder vote, a quorum must exist at the Annual Meeting. For the Company, a quorum exists when stockholders holding a majority of the outstanding shares of common stock are present or represented at a meeting. For these purposes, shares that are present or represented by proxy at the Annual Meeting will be counted toward a quorum, regardless of whether the holder of the shares or proxy fails to vote on a particular matter or whether a broker with discretionary voting authority fails to exercise such authority with respect to any particular matter.

 

 

We intend to announce preliminary voting results at the Annual Meeting. We will publish the final results in a Current Report on Form 8-K, which we expect to file within four business days after the Annual Meeting is held. You can obtain a copy of the Form 8-K by logging on to our website at archcoal.com, by calling the Securities and Exchange Commission (SEC) at 800-SEC-0330 for the location of the nearest public reference room, or through the EDGAR system at sec.gov. Information on our website does not constitute part of this proxy statement.

 

 

Arch is dedicated to being a market-driven global leader in the coal industry and to creating superior long-term stockholder value. It is our policy to conduct our business with integrity and an unrelenting passion for providing the best value to our customers. All of our corporate governance materials, including the corporate governance guidelines, our code of conduct and board committee charters, are published under “Corporate Governance” in the Investors section of our website at archcoal.com. Information on our website does not constitute part of this proxy statement. The Board regularly reviews these materials, Delaware law, the rules and listing standards of the New York Stock Exchange and SEC regulations, as well as best practices suggested by recognized governance authorities, and modifies the materials as warranted.

 

 

It is the Board’s objective to have a substantial number of directors who are independent. We have adopted in our corporate governance guidelines the criteria established by the New York Stock Exchange for determining whether a director is independent. The Board has determined, in its judgment, that all but two members, Steven F. Leer and John W. Eaves, each of whom are executive officers, meet the New York Stock Exchange standards for independence. The independent members of the Board meet regularly without any members of management present. These sessions are normally held following or in conjunction with regular Board meetings. Mr. James R. Boyd, chairman of the Nominating and Corporate Governance Committee and lead director, serves as the presiding director during executive sessions.

 

All members of our Audit, Nominating and Corporate Governance and Personnel and Compensation committees must be independent directors as defined by our corporate governance guidelines. Members of the Audit Committee must also satisfy a separate Securities and Exchange Commission independence requirement, which provides that they may not accept, directly or indirectly, any consulting, advisory or other compensatory fee from us or any of our subsidiaries other than their directors’ compensation.

 

 

Our certificate of incorporation and bylaws provide for a Board that is divided into three classes as equal in size as possible. The classes have three-year terms, and the term of one class expires each year in rotation at that year’s annual meeting. The size of the Board can be changed by a two-thirds vote of its members and is currently set at 14 members. Our Board has a policy requiring members to resign from their position on the Board effective after the Company’s annual meeting immediately following a member’s 75th birthday. As a result of this policy, Mr. Thomas A. Lockhart is retiring from the Board, effective immediately after the Annual Meeting. Effective upon Mr. Lockhart’s retirement, the size of the Board shall be decreased to 13 members. Vacancies on the Board may be filled by a majority of the remaining directors. A director elected to fill a vacancy, or a new directorship created by an increase in the

size of the Board, serves for the remainder of the full term of the class of directors in which the vacancy or newly created directorship occurred.

 

Mr. Leer has served as both the chairman of our Board and our chief executive officer since being appointed as chairman in April 2006. Mr. Boyd served as the chairman of our Board from 1998 until April 2006 and has served as our lead director since stepping down as the chairman. The responsibilities of the lead director include consulting with the chairman of the Board regarding agendas for Board meetings and presiding over meetings of the Board during executive sessions of the independent directors.

 

Our Board has no fixed policy with respect to the separation of the offices of chairman and chief executive officer. Our Board retains the discretion to make this determination on a case-by-case basis from time to time as it deems to be in the best interest of the Company and our stockholders at any given time. We believe our current Board leadership structure is appropriate because it recognizes that in most cases one person should speak for and lead the Company and the Board in order to promote unified leadership and direction. In addition, the Board believes that Mr. Leer has served effectively as a liaison between the Board and management by serving the Company in both capacities. Our governance structure provides effective oversight of the Board through a strong and independent lead director, as well as the following:

 

 

 

Our corporate governance guidelines provide that our Nominating and Corporate Governance Committee and Board will nominate candidates for our board of directors who possess the following principal qualities: strength of character, an inquiring and independent mind, practical wisdom, and mature judgment. In addition to these qualities, the selection criteria for nomination include recognized achievement, an ability to contribute to some aspect of our business, and the willingness to make the commitment of time and effort required of a director.

 

As described in more detail below, our Board believes that each of our directors meet such criteria and has attributes and experience that make him or her well qualified to serve. While we do not have a formal diversity policy, in order to find the most valuable talent available to meet these criteria, our Board generally considers candidates diverse in geographic origin, gender, ethnic background, and professional experience (private, public, and non-profit), pursuant to our corporate governance guidelines. Our goal is to include members with the skills and characteristics that taken together will assure a strong Board.

 

Our directors have diverse backgrounds and provide experience and expertise in a number of critical areas. The Nominating and Corporate Governance Committee considers the particular experience,

attributes, reputation and qualifications of directors standing for re-election and potential nominees for election, as well as the needs of our Board as a whole and its individual committees. In nominating candidates for election by our stockholders, both the Nominating and Corporate Governance Committee and the Board act pursuant to these guidelines. Both the Nominating and Corporate Governance Committee and the Board assess the effectiveness of corporate governance policies, including with respect to diversity, through completion of an annual evaluation process.

 

The Nominating and Corporate Governance Committee has identified nine areas of expertise that are particularly relevant to service on the Board and has identified the directors whose key areas of expertise qualify them for each of the listed categories. The categories identified by the Nominating and Corporate Governance Committee are:

 

CEO/Senior Management — Experience working as a chief executive officer or senior officer of a major public or private company or non-profit entity.

 

Energy — Extensive knowledge and experience in the energy industry, either as a senior executive of an energy company, as a senior executive of a customer of an energy company or through legal or regulatory experience on energy matters.

 

Environmental and Safety — A thorough understanding of safety and environmental issues and energy industry regulations.

 

Finance and Accounting — Senior executive level experience in financial accounting and reporting, auditing, corporate finance and/or internal controls.

 

Governance/Board — Prior or current experience as a board member of a major organization (private, public or non-profit).

 

Government Relations — Experience in or a strong understanding of the workings of government and public policy on a local, state and national level.

 

Human Resources and Compensation — Senior executive level experience or membership on a board compensation committee with an extensive understanding of compensation programs, particularly compensation programs for executive level employees and incentive based compensation programs.

 

Marketing — Senior executive level experience in marketing combined with a strong working knowledge of our markets, customers and strategy.

 

Strategic Planning — Senior executive level experience in strategic planning for a major public, private or non-profit entity.

The following is a list of our directors, their ages as of February 28, 2011, their occupation during the last five years and certain other biographical information, including the areas of expertise where each director or nominee is most skilled:

 

 

CLASS III DIRECTORS WHO ARE UP FOR ELECTION AT THE ANNUAL MEETING AND WHOSE TERM EXIPIRES AT THE 2012 ANNUAL MEETING

 

THE FOLLOWING CLASSES OF DIRECTORS ARE NOT UP FOR ELECTION AT THE ANNUAL MEETING

 

CLASS III DIRECTORS WHOSE TERM EXPIRES AT THE 2012 ANNUAL MEETING

 

 

 

CLASS I DIRECTORS WHOSE TERM EXPIRES AT THE 2013 ANNUAL MEETING

 

 

 

The Board has the following five committees: Nominating and Corporate Governance, Finance, Personnel and Compensation, Audit and Energy and Environmental Policy. The table below contains information concerning the membership of each of the committees as of December 31, 2010, and the number of times the Board and each committee met during 2010. Each director attended at least 75% of the total number of meetings of the Board and of the committees on which he or she serves. In addition, all directors are expected to attend the annual meeting of stockholders, and all of the then-current directors attended last year’s annual meeting (Messrs. Freudenthal, Jones and Wold were appointed as directors subsequent to last year’s annual meeting).

 

 

 

 

The Nominating and Corporate Governance Committee is responsible for the following items:

 

 

The Board has determined, in its judgment, that the Nominating and Corporate Governance Committee is composed entirely of independent directors as defined in the New York Stock Exchange listing standards and operates under a written charter adopted by the board of directors, a copy of which is published under “Corporate Governance” in the Investors section of our website at archcoal.com.

 

The Finance Committee reviews and approves fiscal policies relating to our financial structure, including our debt, cash and risk management policies. The Finance Committee also reviews and recommends to the Board appropriate action with respect to significant financial matters, including dividends on our capital stock, major capital expenditures and acquisitions, and funding policies of our employee benefit plans.

 

 

The Personnel and Compensation Committee is responsible for the following items:

 

 

The Board has determined, in its judgment, that the Personnel and Compensation Committee is composed entirely of independent directors as defined in the New York Stock Exchange listing standards and operates under a written charter adopted by the entire board of directors, a copy of which is published under “Corporate Governance” in the Investors section of our website at archcoal.com. The report of the Personnel and Compensation Committee can be found under “Personnel and Compensation Committee Report” in this proxy statement.

 

 

The Audit Committee is responsible for the following items:

 

 

The Audit Committee is directly responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm. The Board has determined, in its judgment, that the Audit Committee is composed entirely of independent directors as defined in the New York Stock Exchange listing standards and Rule 10A-3 of the Securities Exchange Act of 1934 and operates under a written charter adopted by the Board, a copy of which is published under “Corporate Governance” in the Investors section of our website at archcoal.com.

The Board has also determined, in its judgment, that Mr. Jennings is an “audit committee financial expert” and that each member of the Audit Committee is “financially literate.” Our corporate governance guidelines do not currently restrict the number of audit committees of public companies on which members of our Audit Committee may serve. The Board has determined that none of the members of the Audit Committee currently serves on the audit committees of more than three public companies. The report of the Audit Committee can be found under “Audit Committee Report” in this proxy statement.

 

 

The Energy and Environmental Policy Committee reviews, assesses and provides advice to the Board on current and emerging energy and environmental policy trends and developments that affect or could affect us. In addition, the Energy and Environmental Policy Committee makes recommendations concerning whether and to what extent we should become involved in current and emerging energy and environmental policy issues.

 

 

All of our employees, including our chief executive officer, our chief financial officer and each of the other executives named in this proxy statement, and directors must act ethically at all times and in accordance with the policies comprising our code of conduct, which is published under “Corporate Governance” in the Investors section of our website at archcoal.com. We intend to post amendments to or waivers from (to the extent applicable to one of our directors or executive officers) the code of conduct on our website.

 

The Company’s code of conduct also prohibits directors and all employees from trading in puts and calls of the Company’s stock, or engaging in short sales, margining or any other action designed to hedge or offset any change in the value of the Company’s stock.

 

 

Our code of conduct reflects our policy that all of our employees, including the named executive officers, and directors must avoid any activity that creates, or may create, a conflict of interest, that might interfere with the proper performance of their duties or that might be hostile, adverse or competitive with our business. In addition, each of our directors and executive officers is encouraged to notify our Board when confronted with any situation that may be perceived as a conflict of interest, even if the person does not believe that the situation would violate our code of conduct or corporate governance guidelines. The Board will then determine, after consultation with counsel, whether a conflict of interest exists. Directors who have a material personal interest in a particular issue may not vote on any matters with respect to that issue.

 

 

The entire Board is responsible for oversight of the company’s risk management processes. Our Vice President of Enterprise Risk Management oversees risk management efforts, provides periodic reports to

our audit committee and provides reports to our board of directors at least once per year. In addition, our board of directors and its standing committees periodically request supplemental information or reports as they deem appropriate.

 

 

The identities of the directors who served on the Personnel and Compensation Committee during 2010 are set forth under the report of the Personnel and Compensation Committee under “Personnel and Compensation Committee Report” in this proxy statement. None of the directors who served on the Personnel and Compensation Committee during 2010 has been an officer or employee of ours. None of our executives has served on the Board or compensation committee of any other entity that has or has had one or more executives serving as a member of our Board or compensation committee.

 

 

The Nominating and Corporate Governance Committee has responsibility for assessing the need for new directors to address specific requirements or to fill a vacancy. The committee initiates a search for a new candidate seeking input from our chairman and from other directors. The committee may retain an executive search firm to identify potential candidates. All candidates must meet the requirements specified in our corporate governance guidelines. Candidates who meet those requirements and otherwise qualify for membership on our Board are identified, and the committee initiates contact with preferred candidates. The committee regularly reports to the Board on the progress of the committee’s efforts. The committee meets to consider and approve final candidates who are then presented to the Board for consideration and approval. Our chairman or the chairman of the Nominating and Corporate Governance Committee may extend an invitation to join the Board.

 

Stockholder recommendations should be submitted in writing to Robert G. Jones, our secretary, and should include information regarding nominees required under our bylaws. Individuals recommended by stockholders will receive the same consideration received by individuals identified to the Nominating and Corporate Governance Committee through other means.

 

 

Our Board has established procedures intended to facilitate stockholder communication directly with the Board, the non-employee directors or the Audit Committee. Such communications may be confidential or anonymous, and may be reported by phone to our confidential hotline at 866-519-1881 or by writing to the individual directors or group in care of Arch Coal, Inc., One CityPlace Drive, Suite 300, St. Louis, Missouri 63141, Attention: Senior Vice President-Law, General Counsel and Secretary. All such communications are promptly communicated to the chairman of the Audit Committee or our Director of Internal Audit, as appropriate.

 

A total of seven directors are up for election at the Annual Meeting. The terms of five directors (Messrs. Boyd, Eaves, Hunt, Perry and Jones) will expire at the Annual Meeting. Our Board has nominated each of those individuals for re-election for a three-year term that will expire in 2014. In addition, as part of the Board’s succession planning process and upon the recommendation of the Nominating and Corporate Governance Committee, each of Messrs. Freudenthal and Wold were appointed to the Board within the past year. It is our Board’s policy to have each member of the Board that is appointed outside the normal annual stockholder meeting process to come up for election at the annual meeting immediately after such member(s) is appointed to the Board. As a result, Messrs. Freudenthal and Wold have been nominated for election as Class III Directors, and if elected will serve a term that will expire at the 2012 annual meeting.

 

The Board is not aware that any nominee will be unwilling or unable to serve as a director. All nominees have consented to be named in the proxy statement and to serve if elected. If, however, a nominee is unavailable for election, your proxy authorizes us to vote for a replacement nominee if the Board names one. As an alternative, the Board may reduce the number of directors to be elected at the meeting.

 

 

The Board recommends a vote “FOR” each nominee.

 

Ernst & Young LLP was our independent registered public accounting firm for 2010. The Audit Committee has appointed Ernst & Young LLP as our independent registered public accounting firm for 2011. The Audit Committee and the Board are requesting that stockholders ratify this appointment. In the event the stockholders do not ratify the selection of Ernst & Young LLP, the Audit Committee will reconsider its selection. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the fiscal year if the Audit Committee believes such a change would be in our best interests and the best interests of our stockholders.

 

Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting and to respond to questions.

 

 

The following table sets forth the fees accrued or paid to Ernst & Young LLP, the Company’s independent registered public accounting firm for the years ended December 31, 2010 and December 31, 2009:

 

 

 

The Audit Committee has adopted an audit and non-audit services pre-approval policy that requires the committee, or the chairman of the committee, to pre-approve services to be provided by our independent registered public accounting firm. The Audit Committee will consider whether the services to be provided by the independent registered public accounting firm are prohibited by the SEC’s rules on auditor independence and whether the independent registered public accounting firm is best positioned to provide the most effective and efficient service. The Audit Committee is mindful of the relationship

between fees for audit and non-audit services in deciding whether to pre-approve such services. The Audit Committee has delegated to the chairman of the committee pre-approval authority between committee meetings, and the chairman must report any pre-approval decisions to the committee at the next regularly scheduled committee meeting. All non-audit services performed by Ernst & Young LLP in 2010 and 2009 were pre-approved in accordance with the procedures established by the Audit Committee.

 

 

The Board recommends a vote “FOR” Proposal No. 2.

 

Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires that the Company seek a non-binding advisory vote from its stockholder to approve the compensation as disclosed in the Compensation Discussion & Analysis (“CD&A”) and tabular disclosures of this proxy statement.

 

As described in detail in the CD&A, we seek to closely align the interests of our named executive officers with the interests of our shareholders. Our compensation programs are designed to reward our named executive officers for the achievement of short-term and long-term strategic and operational goals, and are centered around the following principles:

 

 

The vote on this resolution is not intended to address any specific element of compensation; rather, the vote relates to the compensation of our named executive officers, as described in this proxy statement in accordance with the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis and the related tables and narrative disclosures. We believe that the Company’s named executive officer compensation programs have been effective at appropriately aligning pay and performance and in enabling the Company to attract and retain very talented executives within our industry.

 

 

We are asking our stockholders to indicate their support for our named executive officer (NEO) compensation as described in this proxy statement. This proposal, commonly known as a “say-on-pay” proposal, gives you as a stockholder the opportunity to express your views on our fiscal year 2010 executive compensation of our NEOs and the policies and procedures described in this proxy statement. Accordingly, we ask our stockholders to vote “FOR” the following resolution at the Annual Meeting:

 

“RESOLVED, that the stockholders approve the compensation awarded by the Company to the NEOs, as described in the CD&A, tabular disclosures, and other narrative executive compensation disclosures in this proxy statement as required by the rules of the Securities and Exchange Commission.”

 

The say-on-pay proposal is non-binding. The approval or disapproval of this proposal by stockholders will not require the Board to take any action regarding the Company’s named executive officer compensation practices. Although this advisory vote will be non-binding, the Board will consider stockholders’ concerns and take them into account when designing future executive compensation programs. The final decision on the compensation and benefits of our NEOs and on whether, and if so, how, to address stockholder disapproval remains with the Board.

 

In addition to the non-binding advisory vote on executive compensation, the Dodd-Frank Act also enables our stockholders to express their preference for having a say-on-pay vote every one, two or three years or abstain. This non-binding “frequency” vote is required at least once every six years beginning with our Annual Meeting.

 

After careful consideration of this proposal, our Board has determined that an advisory vote on executive compensation that occurs annually is the most appropriate alternative for the Company, and therefore our Board recommends that you vote for a one-year interval for the advisory vote on executive compensation. An annual advisory vote on executive compensation will allow our stockholders to provide timely, direct input on the Company’s executive compensation philosophy, policies and practices as disclosed in the proxy statement each year. The Board believes that an annual vote is therefore consistent with the Company’s efforts to engage in an ongoing dialogue with our stockholders on executive compensation and corporate governance matters.

 

The Company recognizes that the stockholders may have different views as to the best approach for the Company, and therefore we look forward to hearing from our stockholders as to their preferences on the frequency of an advisory vote on executive compensation. In the event that none of the frequency choices receives the affirmative vote of a majority of the shares present or represented by proxy and voting at the Annual Meeting, the Board will consider the frequency receiving the most votes to be indication of the stockholders’ preference.

 

 

The Board recommends that you vote “ONE YEAR” for Proposal No. 4.  Please note that the proxy card provides stockholders with four choices (every one, two or three years, or abstain). Stockholders are not voting to approve or disapprove the Board’s recommendation.

 

 

The frequency vote is non-binding. Stockholder approval of a one, two or three-year frequency vote will not require the Company to implement an advisory vote on executive compensation every one, two or

three years. The final decision on the frequency of the advisory vote on executive compensation remains with the Board.

 

The Board values the opinions of the Company’s stockholders as expressed through their votes and other communications. Although the resolution is non-binding, the Board will carefully consider the outcome of the frequency vote and other communications from stockholders when making future decisions regarding the frequency of say-on-pay votes.

 

The Company knows of no other matters to be submitted to the stockholders at the Annual Meeting. If any other matters properly come before the stockholders at the Annual Meeting, it is the intention of the persons named on the proxy to vote the shares represented thereby on such matters in accordance with their best judgment.

 

 

This Compensation Discussion and Analysis describes the material elements of compensation to each of the following named executive officers of Arch Coal, Inc. (the “named executive officers” or “NEOs”), for fiscal year 2010:

 

 

We discuss compensation actions taken during fiscal years 2009 and 2011 to the extent they enhance the understanding of our NEO compensation program for fiscal year 2010.

 

 

We believe that our success in creating long-term value for our stockholders depends on our ability to closely align the interests of our named executive officers with the interests of our stockholders. Our compensation programs are designed to attract, motivate and retain highly talented executives. We encourage sustained long-term profitability and increased stockholder value by linking named executive officer compensation to our achievement of financial and operating performance. We use equity-based awards and other mechanisms to align the long-term interests of our named executive officers with those of our stockholders. We have designed elements of our compensation program to increase the likelihood that we will retain key employees.

We have determined the type and amount of compensation for each NEO after considering a variety of factors, including the executive’s position and level of responsibility within our organization, comparative market data and other external market-based factors. Our Personnel and Compensation Committee (the “Committee”) uses this information when establishing compensation in order to achieve a comprehensive package that emphasizes pay-for-performance and is competitive in the marketplace. For the 2010 fiscal year, the Committee designed a compensation package for each NEO weighted as follows:

 

 

Despite a difficult economic environment globally, 2010 was a better year for the coal industry as a whole, and for the Company in particular. This improvement was driven by a rebound in power demand spurred by a better domestic economy and favorable weather trends. As described in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our Annual Report on Form 10-K, our fiscal 2010 financial results were strong relative to our fiscal 2009 results. The following table highlights the year-over year comparison of some of the key financial metrics that we use in evaluating the Company’s performance for the purpose of making compensation decisions.

 

 

 

The Committee believes that an effective executive compensation program should encompass the following fundamental objectives:

 

 

We have designed our executive compensation program around these beliefs.

 

The Committee uses current compensation levels, performance, long-term career goals, future leadership potential and succession planning, among other factors, in determining appropriate compensation levels for our NEOs. The Committee does not use a formula to weight these factors. However, the Committee believes these factors provide context within which to assess the significance of comparative market data and to differentiate the level of compensation among our NEOs.

 

Annually, the Committee reviews the design of our named executive officer compensation program, including whether the risks arising from our compensation policies and practices are reasonably likely to have a material adverse effect on us. In doing so, the Committee assesses whether compensation programs used in prior years have successfully achieved our compensation objectives. The Committee also considers the extent to which our compensation program is designed to achieve our long-term financial and operating goals. The Committee has retained the consultants listed below under “Role of Compensation Consultants” to help analyze certain comparative market data. Certain members of management participate in this process by assembling and summarizing data used by the Committee. The Committee reviewed our compensation policies and practices, and has determined that the risks arising from our compensation policies and practices are not reasonably likely to have a material adverse effect on us.

 

After the end of the performance period to which a particular incentive award relates, the Committee reviews our performance relative to the applicable performance targets and recommends payouts based on that performance. The Committee retains discretion to recommend payouts that are above or below actual performance levels for the applicable performance period. For purposes of determining the amount of a payout to recommend, the Committee may also consider infrequent or non-recurring items that are not reflective of ongoing operations or the effects of major corporate transactions or other items that the Committee determines, in its judgment, significantly distort the comparability of our actual performance against the performance targets.

 

 

Our chief executive officer and vice president of human resources provide the Committee with compensation recommendations for our NEOs, other than the chief executive officer, including base salary, annual cash incentive opportunity and long-term incentive opportunities. Management provides a current market value for each proposed element and for the total targeted value, as well as the median market value for the named executive officer’s peers. Management obtains the comparative market information primarily from materials provided by our compensation consultant. Our chief executive officer does not recommend his own base salary or targeted payouts under our annual or long-term incentive awards.

 

Annually, the Committee reviews the performance of our chief executive officer and makes recommendations to the board of directors regarding his compensation. In doing so, the Committee uses information provided by our compensation consultant and certain historical financial and operating performance data provided by management. Historically, the Committee has not considered accrued pension benefits, deferred compensation, 401(k) savings plan amounts or existing stock ownership in

making its recommendations. The Committee believes that the compensation opportunities granted to our chief executive officer, while higher in the aggregate than compensation granted to our other executives, is appropriate taking into consideration our chief executive officer’s overall leadership responsibilities.

 

 

During 2010, the Committee retained Meridian Compensation Partners, LLC (“Meridian”) to provide the Committee advice on executive compensation matters. Meridian assisted the Committee in the development of a compensation peer group which is described in more detail below. Meridian also advised the Committee on competitive compensation practices, mix of compensation elements and comparative market data, which the Committee considered in addressing and determining the appropriate levels of compensation for each NEO relative to the marketplace.

 

 

The Committee approved a compensation peer group that is composed of public companies with which we most directly compete on the basis of customers, investors and executive talent. For 2010, the component companies of the peer group are listed below:

 

 

The Committee assesses the appropriateness of the peer group used to benchmark our compensation programs on an annual basis and adds or subtracts members of the peer group as appropriate.

 

 

We use the following compensation elements to achieve the compensation objectives established by the Committee:

 

 

The Committee believes that a higher percentage of total compensation for those executives with a greater ability to influence the achievement of our financial and operating objectives should be variable

and, therefore, subject to greater risk. In general, as the position and amount of responsibility for an executive increase, a greater percentage of that executive’s total compensation will be variable. As a result, executives with the highest level and amount of responsibility generally have the lowest percentage of their total compensation fixed as base salary and the highest percentage of their total compensation dependent upon short- or long-term incentive awards.

 

The following table shows the allocation of total targeted compensation for each NEO for each of the last three years:

 

 

 

Base Salary — We provide each named executive officer with an annual base salary. Base salaries for our named executives depend on the executives’ experience and scope of responsibilities as well as the median market data for comparable job positions. We increase base salary primarily in response to notable achievements or for changes in scope of responsibilities. In addition, we may increase base salary to remain competitive in the marketplace.

 

Upon the recommendation of the Committee, the board of directors did not approve any increases in annual base salaries for our executives in 2010. At the beginning of 2011, upon the recommendation of the Committee, the board of directors approved increases in the annual base salaries for our named executives officers. It was determined that this increase was appropriate in order to align our named executive officer base salaries with comparable job positions at companies in our peer group. In making its recommendations, the Committee considered market data provided to the Committee by our compensation consultant.

 

Annual Cash Incentive Program — We provide approximately 275 key employees, including the executives named in this proxy statement, the opportunity to earn additional cash compensation through annual cash incentive awards. The Committee intends for our annual cash incentive program to focus our organization on meeting certain financial and operating objectives by rewarding those key employees with the greatest ability to influence our results.

Early each year the Committee considers whether annual cash incentives should be awarded. If so, the Committee recommends to the board of directors the group of employees eligible to receive an award for that year. Annual cash incentive awards contain various incentive levels based on the participant’s accountability and impact on our performance, with target opportunities established as a percentage of base salary.

 

The following table shows the target opportunities available to the NEOs as a percentage of their base salaries and the actual payouts as a percentage of their base salaries each of the last three years:

 

 

 

Payouts under our annual cash incentive program depend upon our earnings before interest, taxes, depreciation and amortization (EBITDA), earnings per share, safety and environmental performance and, for some employees, our production costs per ton. Some or all of these performance measures may be used for our other key employees, and the performance measures may differ for various groups or classifications of employees. By identifying meaningful performance measures and by assigning certain measures greater weight, we are able to more closely align compensation to the achievement of those business objectives over which particular employees have the greatest impact.

 

We generally establish the financial performance levels based on budgeted earnings for the upcoming year, and the target levels are generally consistent with the range of earnings that we provide to investors. We generally establish safety and environmental performance targets based on our prior performance history with the objective of promoting improvements in those areas. In order to inspire performance above the targets we set and to acknowledge certain levels of performance below those targets, annual cash incentive awards contain threshold, target and maximum levels for each performance measure. Payouts under the awards depend upon the achievement of our objectives.

The following table shows the relative weighting of the performance measures and the threshold, target and maximum levels of performance established for annual incentive awards to the NEOs for the 2010 fiscal year:

 

 

 

The performance goals are defined and evaluated based on the following:

 

 

If the target level of performance is achieved with respect to a particular performance measure, the applicable payout percentage for that performance measure will equal 100%. Achievement at the threshold performance level results in an applicable payout percentage of 25%, while performance below threshold level results in a payout percentage of 0% for that performance measure. By contrast, achievement at or above the maximum performance level results in an applicable payout percentage of 200%. We may prorate payouts under the annual cash incentive awards for performance levels that fall between the threshold, target and maximum performance levels.

In early 2011, the Committee evaluated the level of achievement of the various performance measures and made the following determinations:

 

 

 

Based on the actual performance as set forth above, the Committee determined the amount of each executive officer’s annual cash incentive award and recommended that the board of directors approve the following payouts under the 2010 annual cash incentive awards:

 

 

In addition, the board of directors, upon the recommendation of the Committee, established an annual cash incentive program for 2011 identifying those individuals eligible to participate, the target opportunity for each participant and the performance measures that will be used. The overall design of the 2011 annual cash incentive program is generally consistent with the program approved by the board of directors for 2010.

 

Long-Term Incentive Program — Our long-term incentive program is designed to achieve the compensation objectives established by the Committee. The Committee intends for our long-term incentive program to promote decision-making that creates long-term value for our stockholders. The Committee believes that an effective long-term incentive program should also create strong retention incentives for those key employees who are most likely to influence our long-term performance. In addition, we attempt to align the long-term interests of our executives with those of our stockholders by tying a portion of total compensation to appreciation in the value of our common stock.

 

The Committee has retained flexibility in the types of awards that it may use to implement our long-term incentive program. We have used performance units and performance-contingent phantom stock in order to promote the achievement of our long-term financial and operating performance objectives. In

addition, we have used restricted stock, restricted stock units, stock options and other awards tied to the value of our common stock in order to align the long-term interests of our executives and our stockholders and for retention purposes. In determining the aggregate value of long-term awards and the mix of those awards for our executives, the Committee considers the executives’ scope of responsibility, peer group market data, market competition for the particular position, relative internal equity and leadership continuity.

 

The following table shows the types of awards that we have generally included as a component of our long-term incentive program for each of the last three years and for 2011, and the percentage of targeted long-term compensation associated with each award:

 

 

The following is a description of each of these types of awards:

 

Performance Units — We use performance units as a component of our long-term incentive program in order to motivate our NEOs and other key employees to focus on our financial and operating performance over a multi-year period. Performance units generally provide an opportunity for key employees to earn compensation upon the successful achievement of our objectives over a three-year period. The Committee has also retained discretion to further align the long-term interests of our stockholders and executives by providing that payouts under performance units may be in the form of cash, stock or a combination of the two.

 

Payouts under the performance units granted will depend upon our achievement of certain financial and operating performance objectives over a three-year period. For 2010, the Board, upon the recommendation of the Committee, determined to use performance units for 50% of the value of the long-term incentive program. The units are tied to relative total shareholder return, as well as our safety and environmental results.

 

Restricted Stock Units and Restricted Stock — We use restricted stock units as a component of our long-term incentive program designed to align the long-term interests of our stockholders and our executives and for retention purposes. In addition, from time to time we grant restricted stock and restricted stock units to certain key employees as an additional retention incentive. Restricted stock units and restricted stock can provide a significant retention incentive since they have real, current value that an executive may forfeit if his or her employment terminates before the awards vest. In addition, restricted stock units and restricted stock satisfy our compensation objectives by promoting long-term decision-making that results in appreciation in the value of our common stock.

 

When awarded, we generally conditioned receipt of the common stock underlying these awards on the executive’s continued employment. Restricted stock units and restricted stock usually vests ratably over a period of time, generally three or four years. Certain restricted stock awards that we have granted in the

past cliff vest at the end of a specified period in order to provide an additional retention incentive. In determining the conditions associated with these types of awards, the Committee considers the market competition for the executive’s position, the ability of the executive to influence our long-term financial and operating performance and succession planning. The Committee has retained discretion whether or not to consider the number of shares of our common stock held by an executive in recommending subsequent awards of restricted stock units or restricted stock. The Board, upon the recommendation of the Committee, has awarded restricted stock as a component of the long-term incentive plan for 2011.

 

Stock Options — In 2010, the board of directors, upon the recommendation of the Committee, determined to use stock options as 50% of the value of the long-term incentive program. In making its recommendation, the Committee determined that long-term stock price appreciation was reflective of our achievement of the long-term performance objectives established by our board of directors.

 

Stock options represent the opportunity to buy shares of our common stock at a fixed price at a future date. Under the terms of our stock incentive plan, the exercise price of stock options cannot be less than the fair market value of a share of our common stock on the date of grant. As such, stock options have value for our executives only if the price of our common stock increases after the date of grant.

 

In the past, our board of directors has approved stock options grants in connection with our annual performance assessment and evaluation process. Our policy is to issue stock options on the dates on which the awards are approved and to set the exercise prices of those awards equal to the closing market price of our common stock on that date. In order to provide some retention incentive, our stock options vest over a stated period measured from the date of grant. Depending upon the strength of the retention incentive intended by the Committee, stock options may vest over three or four years. As is typical, the stock options we grant expire after ten years, except in limited circumstances.

 

Perquisites and Other Benefits — We provide various perquisites and other benefits to our NEOs for a variety of different reasons, including our intent to attract and retain executives with a comprehensive compensation package. Many of these perquisites and other benefits are not tied to any formal performance objectives. We provide the following perquisites to our executives:

 

Financial, Estate and Tax Planning Services — We provide our NEOs with financial, estate and tax planning services in order to assist them with the complexities of the various compensation arrangements that we maintain, retirement planning and compliance with our stock ownership guidelines.

 

Club Membership Dues — We provide a limited number of NEOs with memberships for country clubs. We intend for these club memberships to provide access to facilities that our NEOs may use for more private business and business entertainment meetings.

 

Other Perquisites — We provide certain NEOs with a limited personal use of our corporate aircraft. For more information about this perquisite, including the incremental cost to us for providing those perquisites, refer to the table included as a footnote to the Summary Compensation Table below.

 

In December 2009, the board of directors, upon the recommendation of the Committee, determined that beginning January 1, 2010, executives will not receive any tax gross up payments on perquisites.

Participation in Benefit Plans and Other Compensation Arrangements — Each of our NEOs is eligible to participate in the same health and welfare plans as our other eligible employees. These plans include medical and dental insurance, life, travel and accidental death and dismemberment insurance, short- and long-term disability coverage and participation in our qualified defined benefit pension plan and qualified defined contribution plan. In addition, each of our NEOs is eligible to participate in our supplemental retirement plan and non-qualified deferred compensation plan, and each of our NEOs is subject to an employment agreement.

 

The following is a summary of certain benefit plans and other compensation arrangements available to our NEOs but for which our other employees may not be eligible:

 

Supplemental Retirement Plan Benefits — We sponsor a tax-qualified defined benefit plan covering all of our eligible employees, including our executives. The Internal Revenue Code limits the amount of qualified retirement benefits we may provide for certain employees. As a result, we sponsor a supplemental retirement plan that provides eligible employees, including the executives named in this proxy statement, with additional retirement benefits that would otherwise be available under our defined benefit pension plan but for the limitations contained in the Internal Revenue Code. For more information about our defined benefit pension plan and our supplemental retirement plan, including the accumulated benefits attributable to the executives named in this proxy statement, you should see “Pension Benefits” below.

 

Non-Qualified Deferred Compensation Plan — We sponsor a tax-qualified defined contribution plan covering all of our eligible employees, including the NEOs. Under this plan, eligible employees may contribute up to 50% of their base salaries to the plan, subject to certain limitations contained in the Internal Revenue Code. We contribute one dollar for each dollar contributed by our employees, up to a maximum of 6% of employees’ base salaries. The Internal Revenue Code limits the amount certain of our employees may contribute to our defined contribution plan in any tax year. As a result, we sponsor a non-qualified deferred compensation plan that allows eligible employees, including the executives named in this proxy statement, to defer receipt of a portion of their base salaries and certain annual and long-term cash incentive awards not subject to these limits. The deferred compensation plan provides higher-paid employees with the full company matching contribution to which they would otherwise be entitled under our defined contribution plan but for the limitations contained in the Internal Revenue Code. For more information about our deferred compensation plan, including information about amounts attributable to the executives named in this proxy statement, you should see “Non-Qualified Deferred Compensation” below.

 

Employment Agreements — In order to provide certain key employees, including the executives NEOs, with some financial security in the event their employment with our organization is terminated without cause or under certain circumstances following a change of control, we provide those employees with employment agreements. Those agreements provide for cash payments to the key employees in the event their employment with us is terminated under certain circumstances. We believe that the employment agreements we maintain with our key employees provide a meaningful mechanism by which to retain those individuals who are most capable of affecting our future performance. In December 2009, the board of directors, upon the recommendation of the Committee, determined that no tax gross up provision is to be

included in any employment agreement entered into after January 1, 2010. For more information about the employment agreements with the executives named in this proxy statement, you should see “Potential Payments Upon Termination of Employment or Change-in-Control” below.

 

Stock Ownership Guidelines — Our Board has adopted stock ownership guidelines that are intended to promote meaningful stock ownership by our executives. These guidelines specify a number of shares of our common stock, including unvested restricted stock, unvested restricted stock units, shares held through our qualified defined contribution plan and hypothetical shares of our common stock held through our non-qualified deferred compensation plan, that our executives must have accumulated by January 1, 2009 or, if elected after January 1, 2004, within five years of becoming an executive. The specific share holding requirements are determined based on a multiple of base salary ranging from one to three times, with the higher multiples applicable to the executives having the highest levels of responsibility. As of December 31, 2010, each of the individuals who has been an executive for at least five years satisfied the stock ownership goal adopted by the Board.

 

 

The Internal Revenue Code limits the amount of the tax deduction we are entitled to take for compensation paid to the executives named in this proxy statement for a particular year unless the compensation meets specific standards. We may deduct compensation in excess of $1 million if compensation is “performance-based” and is paid pursuant to a plan that meets certain requirements. In developing, implementing and administering our executive compensation program, the Committee considers the impact of these limits and balances the desire to maximize the deductibility of compensation with the goal of attracting, motivating and retaining highly-talented executives.

 

We generally seek to maximize the tax deductibility of all elements of compensation. However, in light of the need to maintain flexibility in administering our executive compensation program, the Committee retains discretion to recommend to the board of directors compensation in excess of the limits, even if a portion of it may not be deductible.

 

The following table is a summary of compensation information for our chief executive officer, our chief financial officer and each of the other three most highly compensated executives for each of the last three years:

 

 

 

 

 

 

 

 

 

The following table shows information relating to the grants of certain equity and non-equity awards made to the NEOs during 2010: