SCHEDULE 14A INFORMATION

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

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WOODWARD GOVERNOR COMPANY

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WOODWARD GOVERNOR COMPANY

NOTICE OF 2008 ANNUAL MEETING OF STOCKHOLDERS

AND PROXY STATEMENT

 

December 12, 2008

 

Dear Stockholder:

 

You are cordially invited to attend the Company’s annual meeting at 1:00 p.m., Mountain Standard Time, on Thursday, January 22, 2009, at the Hilton Fort Collins located at 425 West Prospect Road, Fort Collins, Colorado. Registration for the meeting will be conducted in Salon 4 and 6. We invite you to join our directors and members of our management team for an informal social period from 12:00 noon to 1:00 p.m. The formal meeting will begin promptly at 1:00 p.m.

 

Parking is available on site. A map is located on the back of this proxy statement.

 

Please complete and return your proxy card by mail, or vote via telephone or the Internet, as soon as possible regardless of whether you plan to attend.

 

Sincerely yours,

 

WOODWARD GOVERNOR COMPANY

 

Thomas A. Gendron

Chairman, Board of Directors

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

Important Notice Regarding the Availability of Proxy Materials for our Annual Meeting to Be Held on January 22, 2009:

 

This proxy statement and our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, including consolidated financial statements, are available to you at http://www.woodward.com.

 

 

YOUR VOTE IS IMPORTANT

Even if you plan to attend the meeting in person, please date, sign, and return your
proxy card in the enclosed envelope, or vote via telephone or the Internet, as soon as
possible. Prompt response is helpful and your cooperation will be appreciated.

 

Table of Contents

 

 

 

 

You may obtain a free copy of our Annual Report on Form 10-K for the year ended September 30, 2008, filed with the Securities and Exchange Commission (“SEC”) and available at its website at www.sec.gov. Please contact the Corporate Secretary, Woodward Governor Company, P. O. Box 1519, 1000 E. Drake Road, Fort Collins, Colorado 80525 or email investorrelations@woodward.com. This report is also available at www.woodward.com.

 

 

Woodward Governor Company (“Woodward” or the “Company”), on behalf of its Board of Directors (the “Board”), is soliciting your proxy to vote at our annual meeting of stockholders (or at any postponement or adjournment of the meeting). This proxy statement summarizes the information you need to know to vote at the meeting.

 

We began mailing this proxy statement and the enclosed proxy card on or about December 12, 2008, to all stockholders entitled to vote. The Woodward Governor Company Annual Report, which includes our financial statements, is being sent with this proxy statement. The financial statements contained in the Woodward Governor Company Annual Report are not deemed material to the exercise of prudent judgment in regard to the matters to be acted upon at the annual meeting, and, therefore, are not incorporated by reference into this proxy statement.

 

Stockholders who owned Woodward common stock at the close of business on the record date, November 24, 2008, are entitled to vote at the meeting. As of the record date, there were 67,789,021 shares of Woodward common stock outstanding.

 

Each share of Woodward common stock that you own entitles you to one vote on each matter presented at the meeting, except for the election of directors, in which you may cumulate your votes. Since four directors are standing for election, you will be entitled to four director votes for each share of stock you own. Of this total, you may choose how many votes you wish to cast for each director.

 

Woodward offers stockholders the opportunity to vote by mail, by telephone, or via the Internet. Instructions to use these methods are set forth on the enclosed proxy card.

 

If you vote by telephone or via the Internet, please have your proxy or voting instruction card available. A telephone or Internet vote authorizes the named proxies in the same manner as if you marked, signed, and returned the card by mail. Voting by telephone and via the Internet are valid proxy voting methods under the laws of Delaware (our state of incorporation) and our Amended and Restated Bylaws (our “Bylaws”).

 

If you properly fill in your proxy card and send it to us in time to vote, one of the individuals named on your proxy card (your “proxy”) will vote your shares as you have directed. If you sign the proxy card but do not make specific choices, your proxy will follow the Board’s recommendations and vote your shares:

 

“FOR” the election of the Board’s nominees to the Board; and

 

“FOR” the proposal to ratify the appointment of Deloitte & Touche LLP as independent registered public accounting firm.

 

If any other matter is presented at the meeting, your proxy will vote in accordance with his best judgment. At the time this proxy statement went to press, we knew of no other matters to be acted on at the meeting.

 

You may revoke your proxy by:

 

 

If you want to give your written proxy to someone other than the individuals named on the proxy card:

 

 

 

Proposal 1: Election of Directors

 

Nominees:  At the annual meeting, you will be asked to elect four directors to the Board. Each director will be elected to a three-year term and will hold office until the 2011 annual meeting held in or about January 2012 and until a successor is elected and qualifies.

 

Vote Required:  Directors are elected by a plurality vote of shares present at the meeting in person or by proxy, meaning that the four director nominees receiving the most votes will be elected.

 

Proposal 2: Ratification of the Appointment of Independent Registered Public Accounting Firm

 

Independent Registered Public Accounting Firm:  At the annual meeting, you will be asked to ratify the Audit Committee’s appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for fiscal year ending September 30, 2009.

 

Vote Required:  An affirmative vote by the holders of the majority of shares present at the meeting in person or by proxy will be required to ratify the Audit Committee’s appointment of the independent registered public accounting firm.

 

Quorum:  A quorum of stockholders is necessary to hold a valid meeting. The presence, in person or by proxy, at the meeting of holders of shares representing a majority of the votes of the common stock entitled to vote constitutes a quorum. Abstentions and broker non-votes are counted as present for establishing a quorum. A broker non-vote occurs when a broker votes on some matters on the proxy card but not on others because he or she is not permitted to vote on that item absent instruction from the beneficial owner of the shares and no instruction is given. Abstentions with respect to matters other than the election of directors have the same effect as votes against a matter.

 

The Board unanimously recommends that the stockholders vote FOR each of the proposals listed above.

 

 

Board of Directors (continued)

 

 

 

 

Directors Standing for Election at This Meeting for Terms Expiring in 2012:

 

Board of Directors (continued)

 

 

Directors Remaining in Office Until 2010:

 

Board of Directors (continued)

 

 

Directors Remaining in Office Until 2011:

 

 

Your Board recommends a vote “FOR” the nominees presented in Proposal 1.

 

Board of Directors (continued)

 

 

 

Woodward’s policies and practices reflect corporate governance initiatives that are compliant with the listing requirements of The Nasdaq Stock Market, Inc. (“Nasdaq”), SEC rules and regulations, and the corporate governance requirements of the Sarbanes-Oxley Act of 2002. Woodward maintains a corporate governance page on its website at www.woodward.com that can be accessed by clicking on “Investor Information” and then on “Corporate Governance.” Included on this site are the following documents adopted by our Board: our Director Guidelines; Executive/Director Stock Ownership Guidelines; our charters for Audit, Compensation, Executive, and Nominating and Governance Committees; the Woodward Codes of Business Conduct and Ethics for directors, officers, and members, including the Woodward Code of Ethics for Senior Financial Officers and Other Finance Members; and our Related Person Transaction Policies and Procedures.

 

The Board has determined that each member of the Board, other than Mr. Gendron and Mr. Halbrook, is independent under the criteria established by SEC rules and regulations and Nasdaq listing requirements for independent board members. In addition, the Board has determined that the members of the Audit Committee meet the additional independence criteria required for audit committee membership.

 

The Board met seven times in fiscal 2008; all incumbent directors attended more than 75 percent of the aggregate of the total meetings of the Board and all committees of the Board on which they served. Directors are invited, but are not required, to attend annual meetings of stockholders. All directors, except Mr. Halbrook, attended the Company’s last annual meeting of stockholders.

 

The Board has the following standing committees: Audit Committee; Compensation Committee; Executive Committee; and Nominating and Governance Committee. All actions by committees are reported to the Board at the next scheduled meeting.

Board Meetings and Committees (continued)

 

 

 

Board Meetings and Committees (continued)

 

 

 

Board Meetings and Committees (continued)

 

 

Board Meetings and Committees (continued)

 

 

 

Board Meetings and Committees (continued)

 

 

Board Meetings and Committees (continued)

 

 

Board Meetings and Committees (continued)

 

 

 

Option awards outstanding as of September 30, 2008 are as follows:

 

 

 

Note: No stock awards or non-equity incentive plan compensation were awarded to directors in 2008. Non-employee Directors have no pension plan or nonqualified deferred compensation earnings, and receive no perquisites.

 

 

 

 

Board Meetings and Committees (continued)

 

 

 

 

The Plan directs the Trustee to vote the shares allocated to participant accounts under the Woodward Stock Plan portion of the Plan as directed by such participants and to vote all allocated shares for which no timely instructions are received in the same proportion as the allocated shares for which instructions are received. Note: All shares have been adjusted to reflect the two-for-one stock split approved by the stockholders at the 2007 Annual Meeting of Stockholders held on January 23, 2008.

 

Based upon a review of our records, all reports required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) were filed on a timely basis, with the exception of a late Form 3 filed by Woodward on behalf of Dr. Sega on May 16, 2008.

 

 

The following table shows how much Woodward common stock was owned by each person known to us to own more than five percent of our common stock as of November 19, 2008.

 

 

 

 

2008 Overview

Our Executive Compensation Program has been designed to (1) provide a competitive total compensation program which enables us to attract, retain, and motivate a high-performance executive management team, and (2) link the total compensation program payouts to Company and individual performance. We believe that proper administration of this program should result in the development of a management team that improves our fundamental financial performance and provides value to the long-term interests of the Company and its stockholders.

 

Our Executive Compensation Program is based on the overall financial performance of the Company and is structured as a total compensation package comprised of the following elements:

 

 

In addition, the compensation program for NEOs includes health and welfare benefits, a deferred compensation program, defined contribution plans, change of control arrangements, and other ancillary benefits.

 

The Compensation Committee, comprised entirely of independent directors, has oversight responsibilities for the compensation program administration, and all compensation decisions with respect to our NEOs are subject to Compensation Committee review and approval. In making these decisions, the Compensation Committee uses a market-based compensation model wherein the responsibility and accountability of our NEOs are compared to similar positions at companies in our peer comparator group. In addition, Hewitt, an executive compensation consulting firm engaged by the Compensation Committee, provides guidance throughout the entire process, including guidance regarding the selection of our peer comparator group and the level of base salary, annual short-term incentive compensation, and long-term incentive compensation.

 

Compensation Philosophy and Strategy

Our compensation philosophy is to establish total compensation packages such that, when our fundamental financial performance is at target levels, total compensation (base salary, annual short-term cash incentives, and long term incentives) for each NEO is competitive with the 50^th percentile market value total compensation for executives in comparable positions at companies in our peer comparator group.

 

We place a strong emphasis on variable compensation. Variable compensation plans (annual short-term incentives and long-term incentives) are designed so that the payout opportunity is directly linked to the achievement of pre-determined financial performance metrics, with upside opportunity for exceeding the pre-determined goals. We also use long-term incentives, including equity-based compensation, to align NEO and stockholder interests.

 

With each component of our Executive Compensation Program, we strive to align the interests of our NEOs with the interests of our stockholders in different ways, by focusing on both short-term and long-term performance goals, by promoting ownership of the Company, and by linking individual performance to our fundamental financial performance.

 

Competitive Comparisons

Our compensation programs are benchmarked to be competitive with our peer comparator group. Generally, companies in our peer comparator group are selected by the Compensation Committee, in consultation with Hewitt and management. These selections are made from the Hewitt Total Compensation Measurement database companies on the basis of competition for business or talent, global structure, level of operational complexity, similar revenue size, market capitalization, and manufacturing profile.

 

The Compensation Committee analyzes compensation decisions based on our peer comparator group as a whole and uses 50^th percentile compensation data as a benchmark in determining our target compensation levels. In making these decisions and determinations, the Compensation Committee, in consultation with Hewitt and management, matches our NEOs with similarly positioned executives at companies in the peer comparator peer group. These matches facilitate pay comparisons based on functional matches, job duties, responsibilities, level of impact, and organizational level. The Compensation Committee uses the statistical methodology of regression analysis to bring comparator peer group revenues, and our corresponding target compensation levels, in alignment with our revenue. We use revenue for this analysis because we believe that revenue can be a proxy for the scope and complexity of the NEO position that is being compared.

Compensation Discussion and Analysis (continued)

 

 

Our peer comparator group identified below was used in fiscal 2008 to benchmark target compensation opportunities across each component of compensation, including base salary, annual short-term incentive compensation, and long-term incentive compensation and, when considered in the aggregate, the total compensation for each NEO.

 

 

For purposes of developing the performance metrics for determining the payout under the cash component of the long-term incentive plan, the Compensation Committee has approved a relative measure methodology wherein we compare our performance to the S&P Small Cap 600, of which we are a member. We believe that, for the cash component of the long-term incentive plan, this measure is more appropriate as a benchmark of our performance against a larger and broader population of companies, which is representative of investment options available to the market. We believe that outperforming the benchmark should result in an increase in stockholder value.

 

Allocation Between Current and Long-Term Compensation

We use a mix of pay comparison analysis when reviewing our total compensation. This analysis reviews how pay is delivered at our Company relative to companies in our peer comparator group, in particular, the relationship between fixed and variable pay, and short-term and long-term compensation. The following table sets forth our pay mix in fiscal 2008.

 

 

We look to market practice in our peer comparator group as a guide for pay mix in order to minimize any recruiting disadvantages that may result from a pay structure that differs materially from outside opportunities. Accordingly, our pay mix in fiscal 2008 was relatively consistent with the companies in our peer comparator group. We believe it is important to provide a smaller portion of total compensation in a more stable form, such as base salary, and a more meaningful portion of total compensation tied to incentives which can fluctuate, up or down, based on our fundamental financial performance.

 

Allocation Between Cash and Non-Cash Compensation

Total compensation for NEOs in fiscal 2008 was allocated 65% to cash (base salary, annual short-term incentive and long-term incentive) elements and 35% to non-cash (stock options) elements. This allocation was the outcome of our analysis rather than a starting point, as we do not have a targeted allocation ratio between cash and non-cash elements for total compensation. Our fiscal 2008 allocation was influenced by two important factors:

 

 

Elements of Compensation

 

Base Salary

Base salary is a standard compensation component we must pay to remain competitive in our industry. The Compensation Committee generally sets base salary and annual adjustments at levels considered appropriate for comparable NEO positions at companies in our peer comparator group. Base salaries are reviewed by the Compensation Committee on an annual basis in the fourth quarter of the fiscal year preceding the effectiveness of the change. Specifically, base salaries are reviewed and approved in September for an October effective date.

 

Using the statistical methodology of regression analysis described under the caption “Compensation Philosophy and Strategy — Competitive Comparisons,” we target base salaries for our NEOs at the 50^th percentile of our peer comparator group base salaries.

Compensation Discussion and Analysis (continued)

 

 

Quantitative data in our peer comparator group is used to determine the 50^th percentile, but we may also use qualitative performance data and factors to adjust an NEO’s base salary as a result of an individual NEO’s performance, experience, responsibilities, management, leadership skills, and rate of increase from existing base. These qualitative factors are used to determine the appropriate placement in the salary range and the relationship between an NEO’s base pay and the 50^th percentile.

 

Base salary is found in the Summary Compensation Table in the Salary column.

 

Annual Short-Term Incentive Compensation

 

Annual short-term incentive compensation is provided through the Management Incentive Plan (“MIP”). The MIP measures our internal annual financial performance against pre-determined metrics. The MIP is designed to be competitive with compensation offerings in our peer comparator group and to align compensation with financial performance drivers that are intended to benefit stockholders. The MIP is approved each year during the Compensation Committee’s September meeting, with the pre-determined metrics generally approved at its November meeting.

 

For fiscal 2008, the performance metrics were determined by the Compensation Committee to be: (1) earnings per share (“EPS”) in accordance with generally accepted accounting principles in the United States (“GAAP”); and (2) total Company returns on invested assets (“ROIA,” meaning EPS divided by our invested assets). The payout opportunity was based upon the following pre-determined targets:

 

 

Threshold customarily has been established at the EPS results achieved by us in the preceding fiscal year and the Target and Stretch/Outstanding amounts are set based on profit planning goals. The ROIA metrics are set based on profit planning goals.

 

Target payouts under the MIP are expressed as a percentage of base salary. Performance below the threshold would result in no payout, and performance at threshold would result in a payout of 40% of target. Performance at stretch/outstanding would result in a payout of 200% of target. Award amounts are interpolated for performance results between these amounts.

 

The Compensation Committee’s determination of target annual short-term incentive compensation under the MIP is based on the statistical method of regression analysis described under the caption “Compensation Philosophy and Strategy — Competitive Comparisons,” and targets at or near the 50^th percentile of our peer comparator group for each NEO. These targets may be adjusted by the Compensation Committee as a result of an individual NEO’s performance, experience, responsibilities, management, and leadership skills, but are generally established to be competitive with the market. In fiscal 2008, the Compensation Committee increased target payouts for each NEO’s annual short-term incentive compensation. The adjustments reflect the increase in the size and complexity of our business and are consistent with annual bonus market data of our peer comparator group. The increased target payouts for each NEO ensure that we remain competitive on our short-term incentive compensation plan.

 

The target and actual payouts for each NEO under the MIP are detailed in the following table:

 

 

Actual fiscal 2008 MIP payouts were based upon the achievement of an EPS of $1.75, and ROIA of 16.1% in fiscal 2008, resulting in payouts at 138.1% of target for each NEO. These payouts are set forth above and in the Summary Compensation Table under the Non-Equity Incentive Plan Compensation column.

 

Long-Term Management Incentive Compensation

Long-term incentive compensation plan is a key component of the total compensation package. The Woodward Governor Company 2006 Omnibus Incentive Plan (the “2006 Plan”), approved by stockholders in January 2006, replaced the Woodward Governor Company 2002 Stock Option Plan and the Woodward Long-Term Management Incentive Compensation Plan. The 2006 Plan permits the grant of

Compensation Discussion and Analysis (continued)

 

 

Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Covered Employee Annual Incentive Awards, Cash-Based Awards, and Other Stock-Based Awards. To date, the Committee has authorized to NEOs only nonqualified stock option equity awards and a multi-year cash based performance award.

 

The 2006 Plan has two components: (1) stock options and (2) cash. These components are paid to offer competitive benefits to our executives and to align their interests with increasing stockholder value. The aggregate values of these components are aligned with the total value of the options (as determined using the Black-Scholes-Merton methodology) plus the target cash payout to provide the total long-term incentive compensation. The Compensation Committee’s determination of total long-term compensation under the 2006 Plan uses the statistical method of regression analysis described under the caption ‘‘Compensation Philosophy and Strategy — Competitive Comparisons,” and targets the 50^th percentile of our peer comparator group for each NEO. Total long-term compensation may be adjusted by the Compensation Committee as a result of an individual NEO’s performance, experience, responsibilities, management, and leadership skills. The 50^th percentile of our peer comparator group for each NEO, as adjusted in consideration of each individual NEO’s performance, experience, responsibilities, management and leadership skills. With respect to stock option awards, the option price of the shares is determined at the date of the grant, which has been set forth in accordance with our written policy to be on the next business day following the close of our trading blackout period relating to the release of our annual financial results, and will not be less than the closing price as quoted on The NASDAQ Global Select Market on that day. Beginning with fiscal 2009, the Compensation Committee has changed this process such that the options will be granted on October 1 to coincide with each fiscal year.

 

With respect to the cash opportunity, the Compensation Committee generally establishes three-year performance periods, and the 2009-2011 performance period cycle was established in September 2008. The Committee establishes the three-year performance cycle long-term cash based awards in the fourth quarter of the fiscal year preceding the first year of the performance cycle. When the program was initiated under the 2006 Plan, an initial two-year performance period was established for 2006-2007, as well as a three-year performance period for 2006-2008. The performance metrics for the multi-year plans were determined by the Compensation Committee to be:

 

 

The performance metrics were selected and weighted equally based on important business measures for emphasis for the performance period and are typical of the per comparator group.

 

For the purposes of measuring performance, “return on capital” is defined as net income, adjusted for accounting changes and after-tax interest expense, divided by the sum of total debt, stockholder’s equity, and minority interest. “EPS” for this purpose is measured as net income, adjusted for accounting changes, divided by fully diluted common shares outstanding. EPS during the performance cycle is compared to a baseline EPS to calculate the growth in EPS during such cycle. There are currently three active cycles: 2006-2008 (basis is EPS for 2005 of $0.80) 2007-2009 (basis is EPS for 2006 of $0.99) 2008-2010 (basis is EPS for year ended 2007 of $1.39).

 

Company performance is measured relative to the performance of the companies in the comparison group using the S&P Small Cap 600 index, of which we are a member. As discussed previously, the Committee believes the S&P Small Cap 600 Index provides the appropriate market context against which our financial performance attracts investment.

 

Payout in relation to our ranking within the S&P Small Cap 600 is as follows:

 

 

The above payout formula applies to each measure weighted equally. If performance is below the 50^th percentile, no award will be earned or paid as it relates to that measure. Award amounts are interpolated for performance results between the above percentiles.

Compensation Discussion and Analysis (continued)

 

 

The Compensation Committee established a reward target for each NEO, articulated as a percentage of base salary. These targets are based on market data for our peer comparator group for long-term incentive compensation. Targets and 2006-2008 actual payout for the cash component of the long-term incentive plan are detailed in the following table:

 

 

Payouts for the initial three-year cycle of fiscal years ended September 30, 2006, 2007 and 2008 were based on the following performance levels:

 

 

These performance levels resulted in awards at 200% of target for each NEO for the 2006-2008 cycle. The amounts paid under the cash portion of the long-term incentive plan ending in fiscal 2008 can be found above and in the Summary Compensation Table under Non-Equity Incentive Plan Compensation.

 

Other Compensation Programs

Our NEOs participate in the same health, welfare, and retirement benefits as does all of our employee membership. This includes a group health insurance program; life insurance, inclusive of employee life, additional buy-up employee life, optional spouse life, and optional child life; Accidental Death & Dismemberment insurance; Long-Term Disability; Woodward Retirement Savings Plan, inclusive of employee contributions and Company contributions (100% match on the first 3% of employee contributions, 50% on the next 3% of employee contributions, maxing at 4.5%); Woodward Stock Plan (Company contribution of 5% of base wages); Retirement Income Plan (Company contribution of 1.5% of eligible wages, and 0.1% for each year of additional service). The Retirement Income Plan was closed to new participants as of September 30, 2003, with prior participants grandfathered.

 

All plans are subject to applicable limitations set by the Internal Revenue Service (“IRS”). Supplemental matches and contributions to the Executive Benefit Plan described below are made for the Retirement Savings Plan, the Woodward Stock Plan, and the grandfathered Retirement Income Plan.

 

Our NEOs are also eligible to participate in a deferred compensation plan, the Executive Benefit Plan (“EBP”). This plan is also available to other key members of management. Participants are able to defer up to 50% of base salary, and up to 100% of any incentive payments.

 

Messrs. Gendron and Weber had previously been provided company cars but have paid for their personal use. Messrs. Weber, Benning, and Glass had previously been provided with country club memberships. See Footnote 4 to the Summary Compensation Table. These perquisites were eliminated at the end of fiscal 2008.

 

Mr. Benning has a relocation benefit whereby we have agreed to relocate Mr. Benning and his wife anywhere within the U.S. within one year of his retirement. In addition, Woodward provides Mr. Benning a car and reimburses for the cost of gas associated with business use of a car, and for living accommodations and pays for costs associated with household property management services for Mr. Benning while serving as Group Vice President, Airframe Systems. In addition, Woodward reimburses certain personal travel expenses of Mr. Benning and his wife.

 

These benefits are paid to remain competitive in the marketplace. Amounts relating to certain of these benefits may be found in the All Other Compensation column of the Summary Compensation Table.

Compensation Discussion and Analysis (continued)

 

 

Post-Employment Compensation and Employment Contracts

Change in control agreements exist for Messrs. Gendron and Weber. We believe these are necessary to ensure actions and behaviors that are aligned with, and in the best interests of, our stockholders in the event of a change of control transaction and to retain these executives through a change of control transaction to ensure a smooth transition.

 

Severance benefits are intended to ease the consequences of an unexpected termination of employment. These benefits are also designed to prevent our senior executives from seeking employment with our competitors after termination or soliciting our employees or customers during the restricted period. The change of control benefits are designed to preserve productivity, avoid disruption, and prevent attrition during a period when we are involved in a change of control transaction. The change of control severance program also motivates executives to pursue transactions that are in our stockholders’ best interests notwithstanding the potential negative impact of the transaction on their future employment. While cognizant of their terms, the Committee does not view the change of control and severance arrangements as an element of current compensation, and such arrangements do not necessarily affect the Committee’s annual compensation decisions.

 

For a further description of the change in control agreements, see the information under the caption “Executive Compensation — Potential Payments Upon Termination or Change in Control — Change of Control Agreements Post-Employment Provisions.”

 

Messrs. Gendron, Weber, Benning, and Glass are not employed under general employment contracts and are employees at will. Mr. Lauffer is employed under an employment contract, as required by German labor laws. It is a five-year contract expiring in 2007, which automatically extends without further action by either party for successive additional five-year periods. Liability is limited in accordance with the five-year contract laws.

 

Discretion

Our compensation plans allow for the application of discretion in determining performance metrics and awards thereunder in the event of extraordinary circumstances. For fiscal 2008, no such discretion or adjustments were applied.

 

Impact of Accounting and Tax Issues on Executive Compensation

In setting individual executive’s compensation levels, we do not explicitly consider accounting and tax issues. We do, however, analyze the overall expense arising from aggregate executive compensation levels and awards and the components of our pay programs.

 

As one of the factors in our consideration of compensation matters, we also consider the anticipated tax treatment to the Company and to the executive officers of various payments and benefits. Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year with respect to our CEO and each of the next four most highly compensated executive officers. Certain performance-based compensation approved by stockholders is not subject to the deduction limit. The 2006 Omnibus Plan has been approved by stockholder vote. As a result, stock option and cash-based performance awards under this plan may qualify for performance-based deductions and may not be subject to the deductibility limit imposed by Section 162(m) of the Code. However, to maintain flexibility in compensating our key executives, it is not a stated policy that all compensation must be deductible. The Company and the Compensation Committee will consider various alternatives to preserving the deductibility of compensation payments and benefits to the extent reasonably practicable and to the extent consistent with our other compensation goals.

 

Stock Ownership Guidelines

The Board has established stock ownership guidelines for executives and non-employee directors to align their interests and objectives with our stockholders. Non-employee directors are committed to minimum ownership of our common stock of a value equal to five times the annual retainer paid at the date of election to the Board. Woodward executives are committed to minimum ownership of our common stock of a value equal to between two and four times their annual base salary at the date of appointment. Accumulation of such number of stock is expected within 60 months of the date of such person’s appointment or election.

 

Pledges

Under our written policies, no employees of the Company are permitted to margin our stock or engage in short sales or buying or selling of puts and calls against our stock. In addition, no employees of the Company are permitted to pledge our stock, except in limited circumstances and with prior approval from the Chief Financial Officer or General Counsel.

 

 

Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act of 1933, or the Securities Exchange Act of 1934, that might incorporate this Proxy Statement, in whole or in part, the following Woodward Governor Company Compensation Committee Report on Compensation Discussion and Analysis shall not be deemed to be “soliciting material” or “filed” with the SEC or incorporated by reference into any such previous or future filings.

 

The Compensation Committee is charged with certain responsibilities relating to compensation of the Company’s executive officers. The Compensation Committee evaluates and approves all compensation of executive officers, including base salaries, annual and long-term incentive plan, and perquisite programs of the Company. Compensation Committee determinations are presented to the Board.

 

The Committee also fulfills its duties with respect to the Compensation Discussion and Analysis and Compensation Committee Report portions of the proxy statement, as described in the Compensation Committee’s charter.

 

The Compensation Discussion and Analysis has been prepared by management of the Company. The Company is responsible for the Compensation Discussion and Analysis and for the disclosure controls relating to executive compensation. The Compensation Discussion and Analysis is not a report or disclosure of the Compensation Committee.

 

The Compensation Committee met with management of the Company and the Compensation Committee’s outside consultant to review and discuss the Compensation Discussion and Analysis.

 

The Compensation Committee of the Board of Woodward Governor Company has reviewed and discussed the Compensation Discussion and Analysis included in this proxy statement and the 2008 Annual Report on Form 10-K with the management of the Company. Based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and the Company’s 2008 Annual Report on Form 10-K, and the Board approved that recommendation.

 

Compensation Committee:		James R. Rulseh, Chairman
		John D. Cohn
		Michael T. Yonker

Summary Compensation Table

 

The following tables set forth compensation information for the NEOs for services rendered in all capacities to the Company and its subsidiaries in fiscal 2008.

 

 

 

 

Executive Compensation (continued)

 

 

 

The amounts of All Other Compensation reflected in this column for each NEO are quantified as required below:

 

 

 

Grants of Plan-Based Awards for Fiscal 2008

The following table provides additional information with respect to stock-based awards granted in fiscal 2008, the value of which was provided in the Option Awards column of the Summary Compensation Table, and the potential range of payouts associated with the MIP.

 

 

 

 

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

Stock option awards under the 2006 Plan consist of non-qualified options issued for a 10-year term. Options granted to officers and directors during fiscal 2008 vest over four years at the rate of 25% per year and options granted prior to fiscal 2008 vest over four years at the rate of 25% per year. Options granted to directors prior to fiscal 2008 vested in one year. The exercise or base price represents the Woodward closing price as reported on The Nasdaq on the date of the award. If employment is terminated, the options granted will be cancelled unless exercised within three months following the date of termination or the term of the option whichever is earlier. If the termination is due to retirement, all outstanding options vest and must be exercised within three years from the date of retirement or the term of the option, whichever is earlier. For the foregoing purposes, our directors are eligible for retirement upon attaining age 55, and our NEOs are eligible for retirement upon attaining age 55 with at least ten years of service with us or age 65 with no minimum years of service. Dividends are not paid on unexercised stock option awards.

Executive Compensation (continued)

 

 

The MIP would commonly be characterized as a bonus plan but is presented in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table because it is performance based. The actual amounts of the awards under the MIP and the cash portion of the long-term incentive plan listed in the Non-Equity Incentive Plan Compensation column were paid in November 2008. The awards under both plans as set forth in the Grants of Plan-Based Awards Table are based on Threshold/Target/Maximum percentages applied to base wages as of the beginning of the fiscal year. If employment is terminated, the employee must have had full-time employee status at the end of the fiscal year, in the case of the MIP, or at the end of the last fiscal year of the multi-year period, in the case of the LTIP, to receive a payout under both plans. If the termination is due to retirement, the payout under both plans will be prorated. In either event, the payout under both plans will be based on actual goal performance. Please see “Compensation Discussion and Analysis” for additional information relating to these provisions, including performance criteria relating to these plans.

Executive Compensation (continued)

 

 

Outstanding Equity Awards at Fiscal Year End (September 30, 2008)

The following table provides information regarding the outstanding equity awards held by each of the NEOs as of September 30, 2008: