UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

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

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Federated Department Stores, Inc.

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FEDERATED DEPARTMENT STORES, INC.

7 West Seventh Street Cincinnati, Ohio 45202

and

151 West 34th Street New York, New York 10001

 

April 4, 2007

 

To the Stockholders:

 

It is my privilege to invite you to attend Federated’s 2007 annual meeting of stockholders. We are holding the annual meeting on Friday, May 18, 2007, at 11:00 a.m., Eastern Daylight Savings Time, at Federated’s offices located at 7 West Seventh Street, Cincinnati, Ohio 45202. We are enclosing the official notice of meeting, proxy statement and form of proxy with this letter. The matters listed in the notice of meeting are described in the attached proxy statement.

 

Your vote is important. Accordingly, we encourage you to read the proxy statement and cast your vote promptly by following the instructions on the enclosed proxy card.

 

Thank you for your cooperation and support of Federated.

 

Sincerely,

 

Terry J. Lundgren
Chairman of the Board, President
and Chief Executive Officer

 

 

FEDERATED DEPARTMENT STORES, INC.

7 West Seventh Street, Cincinnati, Ohio 45202

and

151 West 34th Street, New York, New York 10001

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

To the Stockholders:

 

Federated hereby gives notice that the annual meeting of its stockholders will be held at 11:00 a.m., Eastern Daylight Savings Time, on Friday, May 18, 2007, at Federated’s offices located at 7 West Seventh Street, Cincinnati, Ohio 45202. The items on the agenda for the annual meeting are:

 

 

Each of these matters is more fully described in the attached proxy statement. Stockholders of record at the close of business on March 23, 2007 are entitled to vote at the annual meeting or any postponements or adjournments of the annual meeting.

 

 

Dennis J. Broderick
Secretary

 

April 4, 2007

 

 

 

FEDERATED DEPARTMENT STORES, INC.
7 West Seventh Street, Cincinnati, Ohio 45202
and
151 West 34th Street, New York, New York 10001

 

PROXY STATEMENT

 

Federated’s board of directors (the “Board”) is furnishing this proxy statement in connection with its solicitation of proxies for use at the annual meeting of Federated’s stockholders. The annual meeting will be held at 11:00 a.m., Eastern Daylight Savings Time, on Friday, May 18, 2007, at Federated’s offices located at 7 West Seventh Street, Cincinnati, Ohio 45202. The proxies received will be used at the annual meeting and at any postponement or adjournment of the annual meeting for the purposes set forth in the accompanying notice of meeting. We will begin mailing the proxy statement, the notice of meeting and accompanying proxy on April 12, 2007.

 

Except where the context requires otherwise, the term “Federated” includes Federated Department Stores, Inc. and its subsidiaries. All share and per share amounts in this proxy statement are adjusted to reflect a two-for-one stock split effected as a stock dividend on June 9, 2006.

 

TABLE OF CONTENTS

 

 

The record date for the annual meeting is March 23, 2007. If you are a holder of record of shares of Federated’s common stock at the close of business on the record date you are entitled to vote those shares at the annual meeting. You are entitled to one vote for each share of common stock you own on each of the matters listed in the notice of meeting. As of the record date, 459,620,329 shares of common stock were outstanding. This number excludes shares held in the treasury of Federated.

 

The Board has adopted a policy under which all voting materials that identify the votes of specific stockholders will be kept confidential and will not be disclosed to Federated’s officers, directors or employees or to third parties except as described below. Voting materials may be disclosed in any of the following circumstances:

 

 

The policy described above will apply to the annual meeting.

 

A quorum of stockholders is necessary to hold a valid annual meeting. The holders of a majority of the stock issued and outstanding and entitled to vote at the annual meeting, present in person or represented by proxy, will constitute a quorum at the annual meeting for the transaction of business at the meeting. Federated will treat all shares of Federated common stock represented at the meeting, including abstentions and “broker non-votes,” as shares that are present and entitled to vote for purposes of determining the presence of a quorum. Federated will treat abstentions and broker non-votes as shares not voted for purposes of determining whether the requisite vote on a matter has been obtained. In order to obtain approval of any matter, the affirmative vote of the holders of a majority (or, in the case of the election of any nominee as a director, a plurality) of the shares of common stock represented at the annual meeting and actually voted is required. Consequently, abstentions and broker non-votes will have no effect on the outcome of the vote on any such matter. If the persons present or represented by proxy at the annual meeting constitute the holders of less than a majority of the outstanding shares of common stock as of the record date, the annual meeting may be adjourned to a subsequent date for the purpose of obtaining a quorum. “Broker non-votes” are shares held by a broker, bank or other nominee that are represented at the meeting, but with respect to which the beneficial owner of such shares has not instructed the broker, bank or nominee on how to vote on a particular proposal, and with respect to which the broker, bank or nominee does not have discretionary voting power on such proposal.

 

All shares of common stock represented at the annual meeting by proxies properly submitted prior to or at the annual meeting will be voted at the annual meeting in accordance with the instructions on the proxies, unless such proxies previously have been revoked. If no instructions are indicated, such shares will be voted:

 

 

You may vote in person at the annual meeting or by proxy. Federated recommends that you vote by proxy even if you plan to attend the annual meeting. You have three options for voting by proxy:

 

 

A number of banks and brokerage firms participate in a program that also permits stockholders whose shares are held in street name to direct their vote over the Internet or by telephone. If your bank or brokerage firm gives you this opportunity, the voting instructions from the bank or brokerage firm that accompany this proxy statement will tell you how to use the Internet or telephone to direct the vote of shares held in your account. The Internet and telephone proxy procedures are designed to authenticate your identity, to allow you to give your proxy voting instructions and to confirm that those instructions have been properly recorded. Votes directed over the Internet or by telephone through such a program must be received by 5:00 p.m., Eastern Daylight Savings Time, on Thursday, May 17, 2007. Requesting a proxy prior to the deadline described above will automatically cancel any voting directions you have previously given over the Internet or by telephone with respect to your shares. Directing the voting of your shares will not affect your right to vote in person if you decide to attend the annual meeting; however, you must first obtain a signed and properly executed proxy from your bank, broker or other nominee to vote your shares held in street name at the annual meeting.

 

If you participate in Federated’s Profit Sharing 401(k) Investment Plan or The May Department Stores Company’s (“May”) Profit Sharing Plan, you will receive a voting instruction card for the Federated common stock allocated to your account in the applicable plan. You may instruct the plan trustee on how to vote your proportional interest in any Federated shares held by the plan by signing, dating and mailing the enclosed voting instruction card, or by submitting your voting instructions by telephone or over the Internet. The applicable plan trustee will vote your proportional interest in accordance with your instructions and the terms of the plan. If you fail to vote, the trustee for the applicable plan, subject to its fiduciary obligations under

ERISA, will vote your proportional interest in the same proportion as it votes the proportional interests for which it receives instructions from other plan participants. Under the terms of the two plans, the trustees must receive voting instructions from plan participants by 5:00 p.m., Eastern Daylight Savings Time, on Wednesday, May 16, 2007.

 

You may revoke your proxy at any time by:

 

 

Certain Beneficial Owners.  The following table sets forth information as to the beneficial ownership of each person known to Federated to own more than 5% of Federated’s outstanding common stock as of December 31, 2006.

 

 

According to the FMR Schedule 13G, (a) 24,266,645 of the 29,300,976 shares beneficially owned by FMR (approximately 4.6% of the total number of shares of common stock outstanding) were beneficially owned by Fidelity Management & Research Company, a wholly-owned subsidiary of FMR (“FMRC”), as a result of acting as investment advisor to various investment companies, (b) 14,500 of such shares (approximately 0.003% of the total number of shares of common stock outstanding) were beneficially owned by Fidelity Management Trust Company, a wholly-owned subsidiary of FMR (“FMTC”), as a result of its serving as investment manager of institutional account(s), (c) 3,439,788 of such shares (approximately 0.7% of the total number of shares outstanding) were beneficially owned by Fidelity International Limited (“FIL”), (d) 2,928 of such shares were beneficially owned by Strategic Advisers, Inc., a wholly-owned subsidiary of FMR, (e) 212,500 of such shares (approximately 0.04% of the total number of shares outstanding) were beneficially owned by Pyramis Global Advisor, LLC, an indirect wholly-owned subsidiary of FMR (“PGALLC”), and (f) 1,364,615 of such shares (approximately 0.3% of the total number of shares outstanding) were beneficially owned by Pyramis Global Advisors Trust Company, an indirect wholly-owned subsidiary of FMR (“PGATC”). According to the FMR Schedule 13G:

 

 

 

According to the FMR Schedule 13G, Edward C. Johnson 3d and various Johnson family members are the predominant owners of the Series B shares of common stock of FMR, representing approximately 49% of the voting power of FMR. According to the FMR Schedule 13G, through their ownership of FMR’s voting common stock and related agreements, members of the Johnson family may be deemed to form a controlling group with respect to FMR.

 

Stock Ownership of Directors and Executive Officers.  The following table sets forth the shares of common stock beneficially owned (or deemed to be beneficially owned pursuant to the rules of the Securities and Exchange Commission, referred to as the SEC), as of March 23, 2007 by each Federated director who is not an employee of Federated, referred to as a Non-Employee Director, by each executive named on the 2006 Summary Compensation Table, referred to as a Named Executive, and by Federated’s directors and executive officers as a group. The business address of each of the individuals named in the table is 7 West Seventh Street, Cincinnati, Ohio 45202.

 

 

 

Securities Authorized for Issuance Under Equity Compensation Plans.  The following table presents certain aggregate information, as of February 3, 2007, with respect to the 1995 Equity Plan and Federated’s 1994 Stock Incentive Plan, referred to as the 1994 Stock Plan (included on the line captioned “Equity compensation plans approved by security holders”).

 

 

The foregoing table does not reflect shares of restricted stock previously issued under the 1995 Equity Plan or the 1994 Stock Plan. As of February 3, 2007:

 

 

The shares remaining available for future issuance as restricted stock or restricted stock units are included in the totals reflected in column (c). Under the 1995 Equity Plan and the 1994 Stock Plan, if these shares are not issued as restricted stock they may be made subject to grants of stock options.

 

The foregoing table does not reflect stock credits issued under Federated’s Executive Deferred Compensation Plan, the Director Deferred Compensation Plan, and the Associated Dry Goods Corporation Executives Deferred Compensation Plan (assumed by Federated in connection with its acquisition of May), which plans have not been approved by Federated’s stockholders. Pursuant to the Executive Deferred Compensation Plan, eligible executives may elect to receive a portion of their cash compensation in the form of stock credits. For a discussion of stock credits issued to Non-Employee Directors under the Director Deferred Compensation Plan, see “Further Information Concerning the Board of Directors — Director Compensation” and “Item 5. Approval of the Issuance of Common Stock Under the Director Deferred Compensation Plan.” Pursuant to the Associated Dry Goods Corporation Executives Deferred Compensation Plan, participants elected to receive a portion of their cash compensation in the form of stock credits.

 

Under the plans described in the immediately preceding paragraph, entitlements due to participants are expressed as dollar amounts and then converted to stock credits in amounts equal to the number of shares of common stock that could be purchased by the applicable plan at current market prices with the cash that otherwise would have been payable to the participant. Under the Executive Deferred Compensation Plan and the Associated Dry Goods Corporation Executives Deferred Compensation Plan, each stock credit, other than a stock credit payable in cash, entitles the holder to received one share of common stock upon the termination of the holder’s employment or service with Federated. Payments include dividend equivalents on the stock credits equal to any dividends paid to stockholders on shares of common stock. No specific numbers of shares are authorized for issuance under these plans.

 

Federated’s current Certificate of Incorporation and By-Laws provide that:

 

 

In accordance with the recommendation of the NCG Committee, the Board has nominated Sara Levinson, Joseph Neubauer, Joseph Pichler, Joyce M. Roché, Karl von der Heyden and Craig E. Weatherup, each of whom is currently a member of the Board, for election as directors. If elected, such nominees will serve for a one-year term to expire at Federated’s annual meeting of stockholders in 2008 or until their successors are duly elected and qualified. Information regarding these nominees, as well as the other persons who are expected to serve on the Board following the annual meeting, is set forth below. Ages are as of March 23, 2007. William P. Stiritz has reached Federated’s mandatory retirement age for directors and is retiring effective as of the date of the annual meeting.

 

Each nominee has consented to being nominated and agreed to serve if elected. If any nominee becomes unavailable to serve as a director before the annual meeting, the Board may designate a substitute nominee and the persons named as proxies may, in their discretion, vote your shares for the substitute nominee designated by the Board. Alternatively, the Board may reduce the number of directors to be elected at the annual meeting.

 

The Board recommends that you vote FOR the election of the nominees named above, and your proxy will be so voted unless you specify otherwise.

 

Nominees for Election as Directors — Terms Expire at the 2008 Annual Meeting

 

Sara Levinson

 

Ms. Levinson, age 56, has been the Non-Executive Chairman of ClubMom, Inc. since October 2002 and was President of the Women’s Group of Rodale, Inc. from October 2002 until June 2005. Prior to October 2000, she was President of NFL Properties, Inc. since September 1994. Ms. Levinson is also a member of the board of directors of Harley Davidson, Inc. and KickApps Corporation. Ms. Levinson has been a director since May 1997.

 

Joseph Neubauer

 

Mr. Neubauer, age 65, has been Chairman and Chief Executive Officer of ARAMARK Holdings Corporation since January 2007. From September 2004 to January 2007, Mr. Neubauer served as Chairman and Chief Executive Officer of ARAMARK Corporation. From January 2004 to September 2004 he served as Executive Chairman of ARAMARK Corporation. Prior to that, he was Chief Executive Officer of ARAMARK Corporation from 1983 until December 2003 and Chairman from 1984 until December 2003. He is also a member of the boards of directors of ARAMARK Corporation, Verizon Communications, Inc. and Wachovia Corporation. Mr. Neubauer has been a director since September 1992.

 

Joseph A. Pichler

 

Mr. Pichler, age 67, was Chairman of The Kroger Co. from June 2003 until June 2004 and was Chairman and Chief Executive Officer of The Kroger Co. from September 1990 until June 2003. Mr. Pichler has been a director since December 1997.

 

Joyce M. Roché

 

Ms. Roché, age 60, is the President and Chief Executive Officer of Girls Incorporated, a national non-profit research, education and advocacy organization. Prior to assuming her position at Girls Incorporated in September 2000, Ms. Roché was an independent marketing consultant from 1998 to August 2000. She served as President and Chief Operating Officer of Carson, Inc. from 1996 to 1998 and also held senior marketing positions with Carson, Inc., Revlon, Inc. and Avon, Inc. Ms. Roché is also a member of the boards of directors of Anheuser-Busch Companies, Inc., AT&T, Inc. and Tupperware Corporation. Ms. Roché has been a director since February 2006.

 

Karl M. von der Heyden

 

Mr. von der Heyden, age 70, was Vice Chairman of the Board of Directors of PepsiCo, Inc. from September 1996 to January 2001. He is also a member of the board of directors of the New York Stock Exchange Group and Dreamworks Animation SKG, Inc. Mr. von der Heyden has been a director since February 1992.

 

Craig E. Weatherup

 

Mr. Weatherup, age 61, was Chairman and Chief Executive Officer of The Pepsi Bottling Group, Inc. from November 1998 until January 2003. Mr. Weatherup is also a member of the board of directors of Starbucks Corporation. Mr. Weatherup has been a director since August 1996.

 

Continuing Directors — Terms Expire at the 2008 Annual Meeting

 

Meyer Feldberg

 

Professor Feldberg, age 65, has been Dean Emeritus and Sanford Bernstein Professor of Leadership and Ethics at Columbia Business School at Columbia University since June 2004. Prior to that time, he served as the Dean of the Columbia Business School at Columbia University from 1989 to June 2004. He is currently on leave of absence from Columbia University and is serving as a Senior Advisor at Morgan Stanley. He is also a member of the boards of directors of Revlon, Inc., Primedia, Inc., UBS Global Asset Management and SAPPI Limited. Professor Feldberg has been a director since May 1992.

 

Terry J. Lundgren

 

Mr. Lundgren, age 55, has been Chairman of Federated since January 15, 2004 and President and Chief Executive Officer of Federated since February 26, 2003. Prior to that time, he served as the President/Chief Operating Officer and Chief Merchandising Officer of Federated since April 15, 2002. From May 1997 until April 15, 2002, he was President and Chief Merchandising Officer of Federated. Mr. Lundgren has been a director since May 1997.

 

Marna C. Whittington

 

Dr. Whittington, age 59, has been President of Nicholas Applegate Capital Management since 2001 and Chief Operating Officer of Allianz Global Investors, the parent of Nicholas Applegate Capital Management, since 2002. Dr. Whittington is also a member of the board of directors of Rohm & Haas Company. Dr. Whittington has been a director since June 1993.

 

FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS

 

Attendance at Meetings

 

The Board held eight meetings during the fiscal year ended February 3, 2007, referred to as fiscal 2006. During fiscal 2006, no director attended fewer than 75%, in the aggregate, of the total number of meetings of the Board and Board Committees on which such director served.

 

Director Attendance at Annual Meetings

 

As a matter of policy, Federated expects its directors to make reasonable efforts to attend Federated’s annual meetings of stockholders. Nine of Federated’s directors attended its most recent annual meeting of stockholders.

 

Communications with the Board

 

You may communicate with the full Board, the Audit Committee, the Non-Employee Directors, or any individual director by communicating through Federated’s Internet website at www.fds.com/ir/corpgov or by mailing such communications to 7 West Seventh Street, Cincinnati, Ohio 45202, Attn: General Counsel. Such communications should indicate to whom they are addressed. We will refer any communications we receive that relate to accounting, internal accounting controls or auditing matters to members of the Audit Committee unless the communication is otherwise addressed. You may communicate anonymously and/or confidentially if you desire. Federated’s Office of the General Counsel will collect all communications and forward them to the appropriate director(s).

 

Director Independence

 

Federated’s Corporate Governance Principles require that a majority of the Board consist of directors who the Board has determined do not have any material relationship with Federated and are independent. The Board has adopted standards for director independence to assist the Board in determining if a director is independent. These standards are disclosed on Federated’s website at www.fds.com/ir/corpgov.

 

The Board has determined that each Non-Employee Director qualifies as independent under New York Stock Exchange (“NYSE”) rules and satisfies Federated’s standards for director independence. To assist the

Board in making that determination, the NCG Committee reviewed, among other things, each director’s employment status and other board commitments and, where applicable, each director’s (and his or her immediate family members’) affiliation with consultants, service providers or suppliers of the company.

 

During fiscal 2006, the NCG Committee specifically reviewed whether Mr. Neubauer’s service on the board of directors of Verizon Communications, Inc. impacted his independence since Federated purchases telecommunications network management services from Verizon. The committee focused on two of the independence standards:

 

 

The NCG Committee determined that Mr. Neubauer’s service on the Verizon board did not result in a failure to meet either standard because serving as a director of Verizon does not make him affiliated with Verizon in a “professional capacity” and he is not an employee or executive officer of Verizon. The committee then recommended that the Board determine that Mr. Neubauer qualified as independent.

 

Non-Employee Directors’ Meetings

 

The Non-Employee Directors meet in executive session without management either before or after all regularly scheduled Board meetings. The chairpersons of the Board Committees preside at such sessions by rotation. Non-Employee Directors who are not independent under the NYSE listing standards may participate in these executive sessions, but the Board would then hold at least one executive session each year exclusively for Non-Employee Directors who are independent under the NYSE listing standards.

 

Committees of the Board

 

The following standing committees of the Board were in existence throughout fiscal 2006: the Audit Committee, the Compensation and Management Development Committee, referred to as the CMD Committee, the Finance Committee and the NCG Committee. The table below provides the current members of each Board committee and meeting information for fiscal 2006:

 

 

 

 

Audit Committee.  The Audit Committee was established in accordance with the applicable requirements of the Securities Exchange Act of 1934 and the NYSE. Its charter is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the Audit Committee charter, the Board has determined that all members of the Audit Committee are independent under Federated’s standards for director independence and that Dr. Whittington qualifies as a “financial expert” because of her business experience, understanding of generally accepted accounting principals and financial statements, and educational background. In addition, the Board has determined that other members of the Audit Committee also qualify as “financial experts.”

 

The responsibilities of the Audit Committee include:

 

 

 

See “Report of the Audit Committee” for further information regarding the Audit Committee’s review.

 

Compensation and Management Development Committee.  The charter for the CMD Committee is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the CMD Committee charter, all current members of the CMD Committee are independent under Federated’s standards for director independence.

 

The responsibilities of the CMD Committee include:

 

 

See “Report of the Compensation Committee” for further information regarding the CMD Committee’s responsibilities.

 

Finance Committee.  The charter for the Finance Committee is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the Finance Committee charter, a majority of the members of the Finance Committee are independent under Federated’s standards for director independence.

 

The responsibilities of the Finance Committee include:

 

 

Nominating and Corporate Governance Committee.  The charter for the NCG Committee is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the NCG Committee charter, all current members of the NCG Committee are independent under Federated’s standards for director independence.

 

The responsibilities of the NCG Committee include:

 

 

The NCG Committee reviews the director compensation program periodically. To help it perform its responsibilities, the NCG Committee makes use of company resources, including members of senior management in Federated’s human resources and legal departments. In addition, the NCG Committee engages the services of Mercer Human Resources Consulting as an independent outside compensation consultant to assist the NCG Committee in assessing the competitiveness and overall appropriateness of Federated’s director compensation program.

 

Identification and Selection of Nominees for the Board

 

Federated’s By-laws provide that director nominations may be made by or at the direction of the Board. The NCG Committee is charged with identifying individuals qualified to become Board members and recommending such individuals to the Board for its consideration. The NCG Committee is authorized, among other means of identifying potential candidates, to employ third-party search firms. In evaluating potential candidates, the NCG Committee considers, among other things, the following:

 

 

The NCG Committee also takes into consideration whether particular individuals satisfy the independence criteria set forth in the NYSE listing standards and Federated’s standards for director independence, together with any special criteria applicable to service on various standing committees of the Board. The full Board (a) considers candidates that the NCG Committee recommends, (b) considers the optimum size of the Board, (c) determines how to address any vacancies on the Board, and (d) determines the composition of all Board committees.

 

The NCG Committee will consider candidates for nomination recommended by stockholders of Federated and will evaluate such candidates using the same criteria discussed above that it uses to evaluate director candidates identified by the NCG Committee. Stockholders who wish to recommend a candidate for a director nomination should write to the Nominating and Corporate Governance Committee, c/o Dennis J. Broderick, Secretary, Federated Department Stores, Inc., 7 West Seventh Street, Cincinnati, Ohio 45202. The recommendation should include the full name and address of the proposed candidate, a description of the proposed candidate’s qualifications and other relevant biographical information.

 

Director Nominations by Stockholders

 

Federated’s By-Laws also provide that director nominations may be made by the company’s stockholders. The By-Laws require that stockholders intending to nominate candidates for election as directors deliver written notice thereof to the Secretary of Federated not less than 60 days prior to the meeting of stockholders. However, in the event that the date of the meeting is not publicly announced by Federated by inclusion in a report filed with the SEC or furnished to stockholders, or by mail, press release or otherwise more than 75 days prior to the meeting, notice by the stockholder to be timely must be delivered to the Secretary of Federated not later than the close of business on the tenth day following the day on which such announcement of the date of the meeting was so communicated. The By-Laws further require, among other things:

 

 

 

The chairman of the Board may refuse to acknowledge the nomination of any person not made in compliance with these requirements. Similar procedures prescribed by the By-Laws are applicable to stockholders desiring to bring any other business before an annual meeting of the stockholders. See “Submission of Future Stockholder Proposals.”

 

Corporate Governance Principles and Code of Business Conduct and Ethics

 

The Corporate Governance Principles and the Code of Business Conduct and Ethics approved by the Board for adoption by Federated are disclosed on Federated’s website at www.fds.com/ir/corpgov.

 

Director Compensation

 

Non-Employee Directors receive the following compensation:

 

 

Each Non-Employee Director, his or her spouse and eligible dependents also receive executive discounts on merchandise purchased at Federated stores. This benefit remains available to them following retirement from the Board. As described below, the retirement plan for Non-Employee Directors was terminated in 1997.

 

The following table reflects the compensation information for each Non-Employee Director for fiscal 2006. Mr. Lundgren does not receive separate compensation for his service as a Director; his compensation is

reflected in the 2006 Summary Compensation Table in the section titled “Compensation of the Named Executives for 2006.”

 

2006 NON-EMPLOYEE DIRECTOR SUMMARY COMPENSATION TABLE

 

 

 

 

 

The amounts in the “Stock Awards” column reflect the variable accounting treatment and dollar amounts recognized for financial statement reporting purposes in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123(R)”) for fiscal 2006 for Mandatory Stock Credits issued in fiscal 2006 and prior years. Non-Employee Directors received the following Mandatory Stock Credits with respect to the Mandatory Stock Compensation payable to them in fiscal 2006:

 

 

 

 

 

 

 

 

Director Retirement Plan

 

Federated’s retirement plan for Non-Employee Directors was terminated on a prospective basis effective May 16, 1997 (the “Plan Termination Date”). As a result of such termination, persons who first become Non-Employee Directors after the Plan Termination Date will not be entitled to receive any benefit from the plan. Persons who were Non-Employee Directors as of the Plan Termination Date will be entitled to receive

retirement benefits accrued as of the Plan Termination Date. Subject to an overall limit in an amount equal to the aggregate retirement benefit accrued as of the Plan Termination Date (i.e., the product of the amount of the annual Board retainer earned immediately prior to retirement and the years of Board service prior to the Plan Termination Date), and the vesting requirements described below, persons who retire from service as Non-Employee Directors after the Plan Termination Date will be entitled to receive an annual payment equal to the amount of the annual Board retainer earned immediately prior to retirement, payable in monthly installments, commencing at the later of retirement or age 60 and continuing for the lesser of such person’s remaining life or a number of years equal to such person’s years of Board service prior to the Plan Termination Date. Full vesting will occur for Non-Employee Directors who reach age 60 while serving on the Board, irrespective of such person’s years of Board service. Vesting will occur as follows for Non-Employee Directors whose Board service terminates before the director reaches age 60: 50% vesting after five years of Board service and an additional 10% vesting for each year of Board service after five years. Board service following the Plan Termination Date will be given effect for purposes of the foregoing vesting requirements. There are no survivor benefits under the terms of the retirement plan. Five of the current Non-Employee Directors participate in the plan. If they had retired on December 31, 2006, each would have been entitled to a $60,000 annual payment for the following maximum number of years:

 

 

Director Stock Ownership Guidelines

 

In fiscal year 2005, the NCG Committee recommended, and the Board adopted, stock ownership guidelines for Non-Employee Directors. Under these guidelines, Non-Employee Directors are required to accumulate over time shares of Federated common stock equal in value to at least five times the annual Board retainer. Currently, the annual Board retainer is $60,000, so the guideline currently is $300,000 worth of Federated common stock. Shares counted toward this requirement include:

 

 

Federated common stock subject to unvested or unexercised stock options granted to Non-Employee Directors does not count toward the ownership requirement. Non-Employee Directors must comply with these guidelines by December 9, 2010 or within five years from the date the director’s Board service commenced, whichever is later. As of the end of the last fiscal year, all Non-Employee Directors that have served as Directors for five or more years owned sufficient shares to satisfy the ownership guidelines.

 

Matching Gift Program

 

Non-Employee Directors may participate in the matching gift program of the Federated Department Stores Foundation on the same terms as all company employees. Under this program, the Federated

Department Stores Foundation will match up to a total of $22,500 in gifts made by the director to approved charities in any calendar year. For fiscal 2006, the Foundation matched the following gifts:

 

 

The Audit Committee has appointed KPMG LLP, an independent registered public accounting firm, to audit the books, records and accounts of Federated for the fiscal year ending February 2, 2008. The Audit Committee’s appointment is subject to ratification by Federated’s stockholders. KPMG LLP and its predecessors have served as the independent registered public accounting firm for Federated since 1988, and the Board considers them well qualified. Representatives of KPMG LLP are expected to be present at the annual meeting and will have the opportunity to make a statement if they desire to do so. It is also expected that they will be available to respond to appropriate questions.

 

Fees Paid to Independent Registered Public Accounting Firm

 

The table below summarizes the fees paid to KPMG LLP during fiscal 2006 and fiscal year 2005:

 

 

Audit fees represent fees for professional services rendered for the audit of Federated’s annual financial statements, the audit of Federated’s internal controls over financial reporting and the reviews of the interim financial statements included in Federated’s Forms 10-Q.

 

Audit-related fees represent professional services principally related to the audits of financial statements of employee benefit plans, audits of financial statements of certain subsidiaries and certain agreed upon procedures reports.

 

Tax fees represent professional services related to tax compliance and consulting services, provided, however, that such tax consulting services did not involve the provision of advice regarding tax strategy or planning.

 

All other fees represent professional services other than those covered above.

The Audit Committee has adopted policies and procedures for the pre-approval of all permitted non-audit services provided by Federated’s independent registered public accounting firm. A description of such policies and procedures is attached as Appendix A to this proxy statement and incorporated herein by reference.

 

The Board recommends that you vote FOR ratification of the appointment of KPMG LLP, and your proxy will be so voted unless you specify otherwise.

 

The Board of Directors has adopted resolutions approving, declaring advisable and recommending that the company’s stockholders approve an amendment to Federated’s Second Restated Certificate of Incorporation to change its corporate name from “Federated Department Stores, Inc.” to “Macy’s, Inc.” If approved, the change in corporate name will become effective on June 1, 2007 upon the filing of a certificate of amendment with the Secretary of State of the State of Delaware. The company currently plans to file the certificate of amendment as soon as reasonably practicable after receiving approval of the amendment from its stockholders.

 

If this proposal is approved, Article First of the certificate of incorporation will be amended to read in its entirety as follows:

 

“The name of the corporation is Macy’s, Inc. (the “Company”).”

 

Purpose and Rationale for the Proposed Amendment

 

The Board is recommending the approval of the company name change to reflect the transformation that the company has experienced in recent years. Effective February 1, 2006, Federated realigned its store operations into eight retail operating divisions — seven Macy’s and one Bloomingdale’s. At the same time, it began to market and advertise the Macy’s retail operations on a nationwide basis as a nationwide department store. The Board believes that changing the company’s name to reflect one of its primary trade names will further promote the national awareness of the company in the minds of consumers, vendors, stockholders and the investment community.

 

Effect of the Proposed Amendment

 

If approved by stockholders, the change in corporate name will not affect the validity or transferability of any existing stock certificates that bear the name “Federated Department Stores, Inc.” If the proposed name change is approved, stockholders with certificated shares should continue to hold their existing stock certificates. The rights of stockholders holding certificated shares under existing stock certificates and the number of shares represented by those certificates will remain unchanged. Direct registration accounts and any new stock certificates that are issued after the name change becomes effective will bear the name “Macy’s, Inc.”

 

Currently Federated’s stock is quoted on the New York Stock Exchange under the symbol “FD.” If the proposed name change is approved, the stock will trade under the symbol “M.” A new CUSIP number will also be assigned to the common stock following the name change.

 

If the proposal to change the corporate name is not approved, the proposed amendment to Federated’s certificate of incorporation will not be made and its corporate name and ticker symbol will remain unchanged.

 

Required Approvals

 

The affirmative vote of the holders of a majority of the total number of shares of common stock outstanding as of the record date will be required to approve this proposal. Abstentions and broker non-votes will have the same effect as a vote against this proposal.

 

The Board recommends that you vote FOR the amendment to the certificate of incorporation, and your proxy will be so voted unless you specify otherwise.

 

The 1992 Incentive Bonus Plan, referred to as the 1992 Bonus Plan, was approved by Federated’s stockholders at the 1997 and 2002 annual meetings. In order to preserve the deductibility of compensation awarded under the plan, Federated again is seeking approval of the 1992 Bonus Plan at this year’s annual meeting. The purpose of the 1992 Bonus Plan is to promote the attainment of Federated’s performance goals by providing incentive compensation for certain key executives of Federated and its subsidiaries.

 

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation over $1.0 million accrued with respect to the chief executive officer and the four most highly compensated executive officers in addition to the chief executive officer employed by Federated at the end of the applicable year. Performance-based compensation will not be subject to the deduction limit if certain requirements are met. In the case of the 1992 Bonus Plan, one such requirement is that Federated’s stockholders approve the plan at least once every five (5) years.

 

The Board has amended the 1992 Bonus Plan, subject to stockholder approval at the 2007 annual meeting, as follows:

 

 

The CMD Committee administers the 1992 Bonus Plan; however, the Board has retained the power to amend or terminate this plan. Each member of the CMD Committee is independent under Federated’s standards for director independence and NYSE rules. The CMD Committee may delegate its authority to executive employees of Federated from time to time, and may revoke any such delegation from time to time (references to the CMD Committee throughout this discussion also include any executive employee to whom the CMD Committee has delegated authority).

 

Executives of Federated or its subsidiaries (including store principals, general merchandise managers, store managers, vice presidents and other elected officers) may participate in the 1992 Bonus Plan if the CMD Committee designates them as a Participant for one or more performance periods. The 1992 Bonus Plan provides for both annual incentive awards and long-term incentive awards. Annual incentive awards are based upon the achievement of specified performance goals for the applicable fiscal year. Long-term incentive awards are based on the achievement of specified performance goals over a specified period, not to exceed five consecutive fiscal years. However, the CMD Committee stopped granting new long-term incentive awards under the 1992 Bonus Plan in 2002. The CMD Committee has no current plans to make long-term incentive

awards, but believes it is in the best interests of Federated to have the flexibility to make long-term incentive awards under the 1992 Bonus Plan in the future. As of the date of this proxy statement, approximately 1,900 executive and management participants in the 1992 Bonus Plan are eligible for annual incentive awards, and no participants in the 1992 Bonus Plan have outstanding long-term incentive awards.

 

Before or shortly after the beginning of each performance period, the CMD Committee approves the applicable performance goals for the performance period for Federated and each other covered business unit and, in certain cases, for individual participants. The performance goals are based upon Federated’s business plan for the performance period. In the case of a participant who is, or is determined to be likely to become, a “covered employee” within the meaning of Section 162(m) of the Internal Revenue Code, the performance goals will be based solely upon one or more of the following measures of performance:

 

 

The performance goals may be expressed with respect to Federated or with respect to one or more of its business units and may be expressed in terms of absolute levels or percentages or ratios expressing relationships between two or more of the foregoing measures of performance (e.g., EBIT as a percentage of total sales), period-to-period changes, performance relative to business plans or budgets, or performance relative to one or more other companies or one or more indices. For participants who are not “covered employees” the performance goals may also include individual performance ratings or other performance measures, as determined by the CMD Committee.

 

Each business unit’s actual performance during a particular performance period is measured against the applicable performance goals. If the business unit’s performance for the performance period:

 

(i) is below the threshold performance goal, no annual or long-term incentive awards are paid to participants;

 

(ii) is equal to the threshold performance goal, the threshold levels of annual and long-term incentive awards, as applicable, are paid to participants;

 

(iii) is equal to the target performance goal, the target levels of annual and long-term incentive awards, as applicable, are paid to participants;

 

(iv) is equal to or greater than the maximum performance goal, the maximum level of annual and long-term incentive awards, as applicable, are paid to participants; and

 

(v) is in between any two of the performance goal levels described in the immediately preceding clauses (ii), (iii) and (iv), the levels of the annual and long-term incentive awards, as applicable, paid to participants are determined through interpolation.

 

If a performance goal has no threshold level of performance, target performance must be achieved in order for any annual incentive award to be paid to participants. If a performance goal has no maximum level of performance and performance exceeds the target level of performance, the annual incentive will be calculated at a rate established by the CMD Committee for above target performance. No annual incentive award paid to any participant may exceed $7.0 million, and no long-term incentive award paid to any participant for any long-term performance period may exceed $3.0 million.

 

The 1992 Bonus Plan provides that all annual and long-term incentive awards will be paid to participants:

 

(i) in cash;

 

(ii) in a lump sum and/or in deferred payments; and

 

(iii) on the date(s) and other terms, including any premium in respect of any deferred payments,

 

in each case as determined by the CMD Committee at the time that performance goals are established for a particular performance period.

 

In connection with a change in control, the CMD Committee will take all actions that it deems necessary or appropriate to treat participants equitably, including the modification or waiver of applicable performance formulas, performance goals, performance measures, performance periods or awards, and including potentially establishing or funding a trust or other arrangement intended to secure the payment of awards. Under the 1992 Bonus Plan, a “change in control” occurs if:

 

 

 

A change in control will not occur under the third bullet point above if Federated, an entity controlled by Federated or an employee benefit plan of Federated or any entity controlled by Federated discloses that it beneficially owns securities, whether more than 30% or otherwise.

 

The foregoing discussion of the material provisions of the 1992 Bonus Plan does not purport to be complete and is qualified in its entirety by reference to the full text of the plan, which is attached as Appendix B to this proxy statement and incorporated herein by reference. The 1992 Bonus Plan is subject to amendment from time to time by the Board.

 

Awards under the 1992 Bonus Plan are determined based on future performance, so future actual awards, if any, cannot now be determined. The following table sets forth the annual bonus opportunities for fiscal 2007 depending on the extent to which the performance goals established by the CMD Committee are achieved. There is no assurance that performance goals will actually be achieved, and therefore there is no assurance that any awards actually will be paid for fiscal 2007 or any future performance period.

 

NEW PLAN BENEFITS
1992 Incentive Bonus Plan

 

 

 

 

Under present federal income tax law, a participant in the 1992 Bonus Plan will be taxed at ordinary income rates on the amount of any award received pursuant to the 1992 Bonus Plan. Generally and subject to the provisions of Section 162(m), Federated will receive a federal income tax deduction corresponding to the amount of income recognized by a 1992 Bonus Plan participant.

 

If the holders of a majority of the shares of common stock that are actually voted on the matter at the annual meeting vote for the approval of the 1992 Bonus Plan, the 1992 Bonus Plan will be deemed to have been approved by Federated’s stockholders. If such approval by Federated’s stockholders is not obtained at the annual meeting, Federated will not receive a federal income tax deduction for any annual incentive awards payable to the executives subject to Section 162(m) of the Internal Revenue Code for any performance period commencing after February 3, 2007.

 

The Board recommends that you vote FOR the approval of the 1992 Bonus Plan, as amended, and your proxy will be so voted unless you specify otherwise.

 

On February 23, 2007, upon the recommendation of the NCG Committee, the Board approved and adopted the Director Deferred Compensation Plan (the “Director Plan”), subject to stockholder approval. In order for some elements of compensation that must be deferred under the Director Plan to be paid out in the form of Federated common stock, the NYSE requires that the issuance of Federated common stock with respect to Mandatory Stock Compensation (as defined below) be approved by stockholders. If stockholders approve the issuance of Federated common stock with respect to Mandatory Stock Compensation under the Director Plan, the effective date of the Director Plan is May 18, 2007, and it will cover compensation amounts earned after the date of the annual meeting. The Director Plan aligns the interests of Non-Employee Directors with the interests of other Federated stockholders by offering long-term stock incentives in addition to current cash compensation.

 

The following is a summary of the principal provisions of the Director Plan, a copy of which is set forth as Appendix C to this proxy statement.

 

Summary of the Director Plan

 

Shares Subject to the Director Plan.  The maximum number of shares of Federated common stock that may be credited to accounts and issued as Mandatory Stock Compensation pursuant to the Director Plan will be 250,000 shares, subject to adjustment in accordance with the Director Plan.

 

Participants.  Each member of the Board who is not a full-time employee of Federated or any subsidiary of Federated (“Non-Employee Director”) is a participant in the Director Plan. As of January 1, 2007, Federated had nine Non-Employee Directors eligible to participate in the Director Plan.

 

Administration.  The Board shall administer the Director Plan. The Board may delegate the administration of the Director Plan to the NCG Committee.

 

Mandatory Stock Compensation.  The Director Plan requires that 50% of the annual base retainer fee (including the fee payable to a committee chair) and 50% of the fees payable to Non-Employee Directors for attending Board and committee meetings (“Mandatory Stock Compensation”) be paid in credits representing the right to receive shares of common stock (“Mandatory Stock Credits”). The Mandatory Stock Compensation is subject to a three-year deferral period. Each month, a Non-Employee Director is credited with Mandatory Stock Credits equal to the number of shares of Federated common stock that could be purchased with the amount of Mandatory Stock Compensation payable to the Non-Employee Director for the month in accordance with the Director Plan. Mandatory Stock Credits are credited monthly to a bookkeeping account in the name of the Non-Employee Director. The dollar amount of any Mandatory Stock Compensation that is not credited

as Mandatory Stock Credits (because the amount is less than the value of a share of common stock) is also credited to the account.

 

A Non-Employee Director’s account is credited on the last day of each calendar quarter with a number of additional stock credits equal to the amount of dividends paid by Federated during the calendar quarter in cash or property on the number of shares of common stock equivalent to the number of Mandatory Stock Credits in the Non-Employee Director’s account from time to time during such quarter (combined with other amounts of Mandatory Stock Compensation credited to the Non-Employee Director’s account other than as Mandatory Stock Credits) divided by the closing price of one share of common stock on the last trading day of such quarter. For purposes of the Director Plan, the stock credits described in the preceding sentence are treated as additional Mandatory Stock Credits. At the end of each calendar quarter, a number of shares of common stock equal to the amount of Mandatory Stock Credits credited to the Non-Employee Director’s account during the calendar quarter are credited to a rabbi trust.

 

Distributions will be made three years after the end of the calendar quarter in which Mandatory Stock Credits are credited to a Non-Employee Director’s account. Alternatively, the Non-Employee Director may elect to further defer distribution of the Mandatory Stock Compensation under the elective deferred compensation feature of the Director Plan until the Director’s service on the Board ends, at which time the Mandatory Stock Compensation will be distributed in shares of common stock in accordance with the distribution schedule elected by the Non-Employee Director. Distributions of shares of Federated common stock may be made directly from the trust.

 

Elective Compensation.  The 50% of fees payable to Non-Employee Directors that is not Mandatory Stock Compensation (“Elective Compensation”) is paid currently in cash or, at the election of the Non-Employee Director, may be deferred until the Non-Employee Director’s service on the Board ends.

 

If the Non-Employee Director elects to defer the Elective Compensation, the Elective Compensation may be deferred in the form of cash or in the form of common stock. Elective Compensation that is deferred in the form of cash is credited to the Non-Employee Director’s bookkeeping account at the end of each month. All amounts credited to the account as cash will accrue interest in accordance with the terms of the Director Plan. The amounts in the account will be distributed in cash in annual installments commencing on or about the first Tuesday following the end of the calendar quarter in which the Director’s service on the Board ends pursuant to the distribution schedule elected by the Non-Employee Director.

 

Elective Compensation that is deferred in the form of common stock is credited to the Non-Employee Director’s account as stock credits (“Elective Stock Credits”) at the end of each month. Each month, a Non-Employee Director is credited with Elective Stock Credits equal to the number of shares of Federated common stock that could be purchased with the amount of Elective Compensation payable for the month to the Non-Employee Director that is deferred in the form of common stock. Such dollar amounts that are not credited as Elective Stock Credits (because the amount is less than the value of a share of common stock) are also credited to the Non-Employee Director’s account. A Non-Employee Director’s account is credited on the last day of each calendar quarter with a number of additional stock credits equal to the amount of dividends paid by Federated in cash or property during the calendar quarter on the number of shares of common stock equivalent to the number of Elective Stock Credits in the Non-Employee Director’s account from time to time during such quarter (combined with other amounts of Elective Compensation that are deferred in the form of common stock and credited to the Non-Employee Director’s account other than as Elective Stock Credits) divided by the closing price of one share of common stock on the last trading day of such quarter. For purposes of the Director Plan, the stock credits described in the preceding sentence are treated as additional

Elective Stock Credits. At the end of each calendar quarter, a number of shares of common stock equal to the number of Elective Stock Credits credited to a Non-Employee Director’s account during the calendar quarter are credited to the trust. Elective Compensation that is deferred in the form of common stock will be distributed in shares of common stock in accordance with the distribution schedule elected by the Non-Employee Director. Distributions of shares of Federated common stock may be made directly from the trust.

 

Adjustments.  In the event there is any change in the outstanding shares of Federated common stock as a result of (a) any stock dividend, stock split, combination of shares, recapitalization, or other change in the capital structure of the Company, (b) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation, or other distribution of assets or issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing, Mandatory Stock Credits, Elective Stock Credits and the number of shares of common stock available for issuance under the Director Plan shall be adjusted accordingly.

 

Amendment and Termination.  The Board may at any time amend or terminate the Director Plan to the extent permitted by law. However, no such action may adversely affect a Director’s rights with respect to any fees already earned but not yet paid in cash, Mandatory Stock Credits, Elective Stock Credits or common stock without the Non-Employee Director’s written consent.

 

Compliance with Section 409A of the Internal Revenue Code.  To the extent applicable, it is intended that the Director Plan comply with the provisions of Section 409A of the Internal Revenue Code. The Director Plan shall be administered in a manner consistent with this intent. Any amendments made to comply with Section 409A of the Internal Revenue Code may be retroactive to the extent permitted by Section 409A and may be made by Federated without the consent of the Non-Employee Directors. Any reference in this Director Plan to Section 409A will also include any proposed, temporary or final regulations, or any other guidance, promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.

 

Federal Income Tax Consequences.  The following discussion summarizes the federal income tax consequences to participants in the Director Plan. This summary is not intended to be complete and does not describe state or local tax consequences.

 

Taxes Related to the Receipt of Stock Credits.  The recipient of the Mandatory Stock Credits and Elective Stock Credits will generally be subject to tax at ordinary income rates on the fair market value of the common stock received in satisfaction of the Mandatory Stock Credits or Elective Stock Credits at the time of distribution. Federated will be entitled to a tax deduction equal to the amount of ordinary income recognized by the Non-Employee Director at that time.

 

Taxes Related to the Deferral of Cash.  Cash received under the Director Plan will generally be subject to tax as ordinary income in the year received. Accordingly, if a Non-Employee Director elects to defer receipt of Elective Compensation to be paid in cash, he or she will not be taxed currently, but will be taxed in the future when the cash is actually received. The cash will be taxed as ordinary income and Federated will be entitled to a tax deduction equal to the amount of ordinary income recognized.

 

If the holders of a majority of the shares of common stock that are actually voted on the matter at the annual meeting vote for the approval of issuance of common stock under the Director Plan, the issuance of common stock under the Director Plan will be deemed to have been approved by Federated’s stockholders. See footnote 1 to the 2006 Non-Employee Director Summary Compensation Table for a table showing the

number of Mandatory Stock Credits credited to the Non-Employee Directors’ accounts in fiscal 2006 under the Director Plan.

 

The Board recommends that you vote FOR the approval of the issuance of common stock under the Director Plan, and your proxy will be so voted unless you specify otherwise.

 

Overview

 

Federated is one of the nation’s premier retailers, with fiscal 2006 sales of $27 billion. In August 2005, Federated completed the acquisition of The May Department Stores Company, nearly doubling the size of the company. The acquisition included over 400 store locations operated by May under 11 regional nameplates. During fiscal 2006, Federated converted the May regional nameplates to the Macy’s nameplate and the May stores to either Macy’s or Bloomingdale’s stores, strengthening the reach of both of the national retailing brands. At the end of fiscal 2006, Federated operated more than 850 department stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy’s and Bloomingdale’s. Federated also operates “macys.com,” “bloomingdales.com” and Bloomingdale’s By Mail. The company employs about 188,000 regular full-time and part-time employees.

 

The retailing industry is intensely competitive. Federated’s stores and direct-to-customer business operations compete with many retailing formats in the geographic areas in which they operate, including department stores, specialty stores, general merchandise stores, off-price and discount stores, new and established forms of home shopping (including the Internet, mail order catalogs and television) and manufacturers’ outlets, among others. In addition to competing for customers, Federated also must compete very aggressively for executive talent.

 

Successfully integrating two retailers of the size and scope of Federated and May is a significant undertaking, requiring a tremendous amount of time and effort from Federated’s executive team during fiscal 2006 in addition to their ongoing responsibilities for Federated’s core business. Through the integration process, Federated identified many talented people from the May organization that Federated wanted to retain for the integrated business. Federated’s compensation programs are designed to compete with the compensation programs of other retailers and, as appropriate, general industry in order to attract and retain the best executives and keep them motivated to drive stockholder value.

 

Compensation Philosophy

 

Federated’s overall compensation program is performance-driven and designed to support the needs of the business by:

 

 

Federated’s compensation levels and individual compensation programs are assessed against market norms periodically by the CMD Committee with input from independent outside compensation consultants as needed. Under ordinary circumstances, the CMD Committee undertakes a comprehensive review of the program approximately every three years. Pay data is validated against several benchmarks, including specific pay levels of other large retail and vendor organizations and information from published surveys of the retail industry and general industry. In addition,

compensation of individual executives or specific plans or practices are reviewed more frequently, depending on business needs.

 

 

Federated’s compensation programs are based on measures of business success. They reflect a combination of specific internal measurements of success (such as EBIT, sales and cash flow) and external measurements of success (such as customer satisfaction and stock price performance). A portion of the compensation program focuses on the strategic initiatives that will help continue to differentiate Federated from other retailers and that are important in making Macy’s and Bloomingdale’s stores the customer’s first choice in shopping.

 

 

A significant portion of an executive’s compensation program is linked to variable compensation components, such as short-term cash incentives, stock options, stock credits and restricted stock. As a result, an individual’s compensation level is dependent on individual and company performance, including stock price appreciation. The mix of components and the proportion of each as a percentage of total compensation may vary from year to year, but the total mix is designed to maximize performance.

 

 

Federated’s executives are recognized as some of the most talented people in the retail industry, and Federated’s training and development programs have earned national recognition. The compensation programs are designed to attract and retain high caliber executives who are key to the continued success of the business, who can provide consistent leadership and whose talents support strong succession planning.

 

 

The combination of the core principles above appropriately ties Federated’s performance with compensation and thereby aligns the interests of key executives with the interests of the stockholders.

 

Operation of the CMD Committee

 

The CMD Committee of the Board administers the compensation program for corporate officers and division principals, oversees the company’s benefit plans and policies, including its incentive and equity plans, and also ensures that appropriate succession plans are in place for the chief executive officer and other key executive positions. For a more complete description of the responsibilities of the CMD Committee, see “Further Information Concerning the Board of Directors — Committees of the Board” and the charter for the CMD Committee posted on Federated’s website at www.fds.com/ir/corpgov.

 

The Compensation Program

 

Key components of Federated’s current compensation program are:

 

 

 

With respect to Named Executives, the CMD Committee annually reviews base pay, annual bonus payments and equity awards at its March committee meeting, at which time all financial results for the prior fiscal year for the company are available and individual and company performance against financial targets can be measured. Generally, total compensation for this group is targeted between the 50th and 75th percentiles of market practice.

 

The CMD Committee periodically benchmarks the ongoing competitiveness of Federated’s compensation program to test how well actual compensation levels reflect the targeted market position and promote Federated’s compensation philosophy. As a general rule, the CMD Committee reviews a comprehensive benchmarking analysis by its independent compensation consultant for the chief executive officer every year and for the other Named Executives every three years. In addition, in evaluating the compensation of the Named Executives, the CMD Committee reviews the compensation of other senior Federated executives for internal pay equity.

 

For the chief executive officer and the vice chairs, the CMD Committee compares executive compensation levels with proxy data reported by a group of major retailers and vendors. In fiscal 2006, as a secondary test against the market, the chief executive officer’s compensation was also compared to the proxy data reported by a peer group of consumer products companies that manage national brands and have revenues ranging from $10 to $60 billion. The component companies of both peer groups are listed below.

 

 

For the chief financial officer, the CMD Committee compares compensation to retail and general industry surveys published by various survey providers, including Hay, Hewitt, Mercer and Towers Perrin. These surveys contain compensation data for dozens, and in some cases hundreds, of companies.

 

The results of the benchmarking conducted in fiscal 2006 indicated that the compensation levels of the Named Executives were within the targeted pay positions. Federated’s chief executive officer’s compensation was between the 50th and 75th percentiles of the peer group of retailers and vendors, but below the median of

the consumer products peer group. The compensation of the other Named Executives was between the 50th and 75th percentile of either the retail and vendor proxy data or the retail and general industry survey data, as applicable.

 

Compensation Mix

 

The components of compensation for the Named Executives are the same as for the rest of Federated’s executive group — base salary, annual performance-based bonus, long-term performance-based and other equity incentives and benefits. The CMD Committee has established guidelines for annual performance-based bonuses and for long-term incentive awards. The chart below shows the mix of compensation that would be payable to the Named Executives on average over time at these award guideline levels, factoring in current salary rates as well as the “Change in Pension Value and Non-qualified Deferred Compensation Earnings” and “All Other Compensation” amounts from the 2006 Summary Compensation Table. While the values in the chart may change from year to year, depending on how the CMD Committee administers the programs, as well as other factors, they broadly reflect how the CMD Committee structures Federated’s compensation program over time to support the performance elements of the company’s compensation philosophy.

 

Based on the combination of the annual performance-based bonus and long-term award guidelines, 75% of the chief executive officer’s total compensation is tied to financial performance and/or stock price performance. For the other Named Executives, more than 50% of total compensation is tied to financial performance and/or stock price performance. These ratios are consistent with Federated’s compensation philosophy of focusing on results and strategic initiatives and fostering a pay-for-performance culture.

 

As the chart below shows, the value of the long-term award guideline for the chief executive officer is almost three times the value of the annual performance-based bonus at “target.” For the Named Executives other than Mr. Tysoe, the value of the long-term award guidelines is almost two times the value of the annual performance-based bonus at “target.” These ratios encourage the Named Executives to focus on Federated’s long-term performance.

 

 

For fiscal 2006, the compensation guidelines shown above were supplemented by the grant of merger stock credits to the Named Executives and by the special 2006 retention grants made on July 11, 2006 to the Named Executives other than Mr. Lundgren, Mr. Cody and Mr. Tysoe. Both of these awards provide additional long-term incentives intended to support the merger integration process and retain key members of Federated’s executive team during the most critical post-merger period.

 

Base Pay

 

Base pay is a significant retention tool when managed properly. Base pay is designed to compensate an individual for his or her level of responsibility and performance. The CMD Committee decisions regarding an individual’s base pay take into account many factors, including:

 

 

 

Federated utilizes base pay ranges for the chief financial officer and executive levels below that position, based upon position and responsibilities and market and competitive data, as described above. The CMD Committee periodically reviews base pay ranges, most recently in fiscal 2006. The CMD Committee adopted new base pay ranges for fiscal 2007 to reflect the integration of the May acquisition. Base pay of the other Named Executives is managed individually without using a base pay range.

 

Following the close of the fiscal year, the CMD Committee, with input from the full Board, conducts an annual performance review for the chief executive officer. The chief executive officer conducts an annual performance review for the other Named Executives. The CMD Committee bases its decisions about whether to increase base pay and, if so, by how much, on a number of factors, including those listed above and, for the chief financial officer, the individual’s salary within the base pay range established for that position. The CMD Committee reviews preliminary recommendations for annual increases at its February meeting and final recommendations at its March meeting. Annual increases in base pay normally take effect on April 1st of each year.

 

Fiscal 2006 Action:  In fiscal 2006, the Named Executives received the following annual base pay rate increases:

 

 

Annual Performance-Based Bonus

 

The Named Executives participate in the 1992 Bonus Plan. The 1992 Bonus Plan is a “non-equity incentive plan” under current SEC rules. It is designed to align a significant portion of the pay of Federated’s senior executives with Federated’s annual performance. The actual amount of annual cash bonus earned each year is based on Federated’s performance results against performance measures set by the CMD Committee at the beginning of the fiscal year. No bonus will be paid if Federated does not achieve a net profit, excluding restructuring charges and extraordinary items for the fiscal year.

 

For fiscal 2006, the performance measures were EBIT, sales, and cash flow dollars. The performance measures may not be adjusted for the Named Executives during the performance period except to prevent dilution or enlargement of any award as a result of extraordinary events or to exclude the effects of

extraordinary, unusual or nonrecurring events, changes in accounting principles, discontinued operations, acquisitions or divestitures and material restructuring charges. Federated has not disclosed the specific performance targets for each of the performance measures because they constitute confidential business information that could damage Federated’s ability to compete effectively in the retail market place. However, the CMD Committee believes that the company’s business plan is such that achieving target levels of performance requires the executives to stretch. Over the last five years, the company has achieved performance below the “threshold” level of performance once, between “threshold” and “target” once, and in excess of “target” three times. The Named Executives would be entitled to the following percentages of base pay for achieving the following “threshold,” “target” and “maximum” levels of performance.

 

 

For the 2007 fiscal year, in order to encourage more aggressive sales plan strategies, the CMD Committee approved a change in the “threshold” level of performance for the “sales” performance measure, to 10% for the Chief Executive Officer and 5% for the other Named Executives.

 

Fiscal 2006 Action:  The CMD Committee reviewed performance data at the end of fiscal 2006 with management at its March 2007 meeting and determined that Federated achieved a net profit for fiscal 2006, excluding restructuring charges and extraordinary items, and determined the extent to which the targeted levels of performance measures were achieved. The annual bonuses for the Named Executives for fiscal 2006 were as follows:

 

 

The maximum permitted annual bonus payment for any year under the 1992 Bonus Plan is $7.0 million. For fiscal 2006, the chief executive officer’s annual bonus was 38.6% of the maximum bonus payment under the 1992 Bonus Plan. The amount of annual incentive bonus paid for fiscal 2006 to each Named Executive is reflected in the “Non-Equity Incentive Plan Compensation” column of the 2006 Summary Compensation Table.

 

Annual incentive bonuses are determined as a percentage of the executive’s base salary as of the last day of the fiscal year. Bonus percentages are interpolated for performance results falling between “threshold” and “target” and between “target” and “maximum” for the applicable performance component, as measured against the company’s business plan for those components. If a performance component does not have a threshold level of performance, bonus percentages are interpolated for performance results falling between target and maximum. If a performance component has no maximum level of performance and performance exceeds the target level of performance, the annual bonus will be calculated at a rate established by the CMD Committee for above-target performance. Annual bonuses are submitted to the CMD Committee for approval at its March meeting.

 

For a more complete description of the 1992 Bonus Plan, see the discussion under “Item 4. Approval of the 1992 Incentive Bonus Plan, as Amended.”

 

Special 2006 Bonuses.  To reflect the strong performance of the company during the year despite the many challenges associated with the merger integration activities throughout the year, the CMD Committee approved an additional $25,000 special bonus for fiscal 2006 for each of Mrs. Hoguet, Mr. Cody, Mr. Cole, Ms. Grove and Ms Kronick. In addition, the CMD Committee approved a $200,000 special bonus for Mr. Cody to recognize his handling of the unique legal and human resources aspects of the May integration process. (For additional information concerning special, merger related retention arrangements for Mrs. Hoguet, Mr. Cole, Ms. Grove and Ms. Kronick, see “Special 2006 Retention Grants” below.)

 

Long-Term Performance-Based and Other Equity Incentives

 

Each year the CMD Committee reviews the use of long-term incentives under three long-term plans:

 

 

Federated’s stockholders have approved the 1995 Equity Plan and the 1994 Stock Plan. Approximately 1,900 executives are eligible for equity grants, including stock options and restricted stock, under these plans.

 

Stock Options.  The 1995 Equity Plan and the 1994 Stock Plan reflect Federated’s commitment to effective management of equity-based compensation. Stock option grants are discretionary. The CMD Committee determines grant types and grant levels based on market data (as described above), emerging trends and other financial considerations, including the impact on stockholder dilution. Options granted under the plans incorporate the following terms:

 

 

Despite the accounting changes resulting in the expensing of stock options, Federated has continued to use stock options as a long-term incentive vehicle because:

 

 

The CMD Committee’s use of stock options has evolved in recent years:

 

 

 

The CMD Committee approves annual stock option grants at its March meeting. The March meeting occurs after financial results for the company are available — at least four weeks after Federated releases its year-end earnings and at least ten days after February sales are announced. In fiscal 2006, the date of the CMD Committee meeting was March 24th. Under the terms of the equity plans, the exercise price for these stock options was set at the closing price of Federated common stock on the NYSE on the trading day prior to the grant date. The options vest 25% per year over four years beginning with the first anniversary of the grant date. In addition to the annual option grants, the CMD Committee may approve options grants on a limited basis on other dates in special circumstances, such as to newly hired executives, or to executives promoted into option eligible positions or to retain executives important to the success of the company.

 

Fiscal 2006 Action:  The CMD Committee based the number of stock options granted in fiscal 2006 to each Named Executive other than Mr. Tysoe on a specific dollar value. Since he had announced his intention

to resign from his position as a Vice Chair of Federated in fiscal 2006, Mr. Tysoe did not receive a stock option grant in fiscal 2006. The CMD Committee determined the grant date dollar value of the options granted to each Named Executive in fiscal 2004 using the Black-Scholes option valuation method and the grant date value of stock credits granted to each Named Executive in fiscal 2004, and then calculated the number of option shares and stock credits needed to provide the Named Executive with the same dollar value in fiscal 2006. The CMD Committee then awarded 60% of that dollar amount as “core” stock credits under the 2006-2007 stock credit plan (described below) and 40% of that dollar amount as stock options under the 1995 Equity Plan. The options have a 10-year term, vest 25% on each of the four anniversaries following the March 24, 2006 grant date and are priced at the closing price of Federated common stock on the NYSE on March 23, 2006. The 2006 stock option grants to the Named Executives are reflected in the 2006 Grants of Plan-Based Awards table under “Compensation of the Named Executives for 2006.”

 

For information concerning special retention stock option grants made to certain Named Executives in fiscal 2006, see “Special 2006 Retention Grants” below.

 

Stock Credits.  In March 2004, Federated implemented a two-year stock credit plan covering, among other personnel, the Named Executives. The plan was designed to accomplish several important objectives established by the CMD Committee, including:

 

 

After Mr. Lundgren’s appointment as chief executive officer in 2003, he outlined four key strategic initiatives to reinvent the company and drive profitable top-line growth for 2004 and 2005, referred to as the Four Priorities:

 

 

To achieve those objectives, management executives would have to change the way they managed their businesses, often with steps that could have had a short-term negative impact on division and corporate performance and, consequently, on annual incentive compensation. The CMD Committee determined that the stock credit plan would be an effective tool to retain executives and keep them focused on the long-term significant changes needed to achieve the Four Priorities. The CMD Committee, with input from Mr. Lundgren, determines the extent to which the objectives relating to the Four Priorities have been achieved.

 

As described above, the 2004-2005 stock credit plan replaced 50% of the option grants to the Named Executives and, as a result, the number of options that normally would have been granted to participants in fiscal years 2004 and 2005 were reduced by 50%. The number of stock credits was determined by converting the replaced options with stock credits at a ratio of three stock options to one stock credit. One-third of the

stock credits granted in 2004 were subject to performance criteria over 2004 and 2005, based on Federated’s Four Priorities.

 

At the end of fiscal 2005, the CMD Committee evaluated the performance results for the 33% of the stock credits granted in 2004 that were subject to performance criteria. Based on that evaluation, the CMD Committee concluded that 95% of those stock credits were earned. The remaining 5% of those stock credits were forfeited. The stock credits are subject to a two-year and three-year holding period and their ultimate value to the participants will be based on Federated’s stock price performance at the end of the applicable holding period. The value of one-half of the stock credit balance will be paid in cash in Spring 2008 and the value of the other half will be paid in Spring 2009. In each case, the value will be determined on the basis of the average closing price of Federated common stock as reported on the NYSE for the 20 business days preceding the payment date. During the holding period, participants receive additional credits on their stock credits equivalent to the dividends paid to stockholders on Federated common stock.

 

Two-thirds of the stock credits granted in 2004 were time-based. The stock credits are subject to holding periods and their ultimate value to the participants will be based on Federated’s stock price performance at the end of the applicable holding period. The value of one-half of the stock credit balance will be paid in cash in Spring 2008 and the value of the other half will be paid in Spring 2009. In each case, the value will be determined on the basis of the average closing price of Federated common stock as reported on the NYSE for the 20 business days preceding the payment date.

 

During 2005, the CMD Committee reviewed the elements of the total compensation program for the Named Executives and determined that stock credits continue to provide the link it seeks to align management’s compensation to Federated’s performance and stockholder interests and to drive implementation of the Four Priorities, including the introduction and implementation of the Four Priorities at the 400 plus stores acquired in the May transaction.

 

On March 24, 2006, the CMD Committee authorized a new stock credit plan for the 2006-2007 performance period. Stock credits issued under the 2006-2007 stock credit plan for the Named Executives other than Mr. Tysoe consist of core stock credits, 50% of which are time based and 50% of which have performance objectives tied to the Four Priorities, and merger stock credits, 100% of which have performance objectives tied to the achievement of synergies relating to the May acquisition, as follows:

 

 

At the end of fiscal 2007, the CMD Committee will evaluate performance against the performance criteria applicable to the stock credits to determine the percent (from 0% to 100%) of performance-based stock credits earned by the Named Executives. The performance-based stock credits earned by the Named Executives and the time-based stock credits held by them will then be subject to the two-year and three-year holding periods. The value of one-half of the stock credits will be paid in cash in Spring 2010 and the value of the other half will be paid in Spring 2011. In each case, the value will be determined on the basis of the average closing price of Federated common stock as reported on the NYSE for the 20 business days preceding the payment date.

 

The performance portion of the stock credits granted to Mr. Tysoe in fiscal 2006 are based on goals specific to his responsibilities for merger-related asset and real estate transactions. His stock credits are 75% performance-based and 25% time-based. Mr. Tysoe’s performance period is 2006-2007. In accordance with his separation arrangements with Federated, Mr. Tysoe will be paid his time-based and any earned performance-based stock credits in 2008. Mr. Tysoe’s separation arrangements are discussed in further detail under the heading “Compensation of the Named Executives for 2006 — Potential Payments Upon Termination or Change In Control.”

 

Participants who leave the company during the performance period will forfeit their core and merger stock credits unless they retire at or after age 62 with at least 10 years of vesting service or if they are terminated by Federated other than for cause, in which case their payments will be prorated for the number of months of completed service during the performance period divided by 24. Their payments will be made at the same time and in the same manner as payments to actively employed participants. In the event that a participant dies or becomes totally and permanently disabled during the performance period, the participant (in the event of disability) or the participant’s estate (in the event of death) will receive a lump sum payment of 50% of the participant’s core stock credit balance, discounted to present value.

 

Participants who leave the company during a holding period will:

 

 

All stock credit balances in the 2006-2007 stock credit plan vest and become immediately payable upon a change in control of the company.

 

Fiscal 2006 Action:  The CMD Committee granted core stock credits and merger stock credits to the Named Executives on March 24, 2006. The grant value of the core stock credits was based on 60% of the grant date dollar value of the combined 2004 stock option and stock credit grants to these executives, as described above. Fifty percent of the core stock credits granted to the Named Executives other than Mr. Tysoe are time-based and 50% are performance-based, with performance measures tied to the Four Priorities. The value of the merger stock credits was approximately 33.3% of the value of the core stock credit grants. The merger stock credits are 100% performance-based, with performance measures tied to company-wide objectives related to achieving certain financial merger synergies during fiscal 2006 and 2007. The Named Executives other than Mr. Tysoe each received the following number of stock credits:

 

The CMD Committee will evaluate performance against the performance criteria applicable to the stock credits to determine the percent of performance-based stock credits earned by the Named Executives. The CMD Committee will award between 0 and 100% of the core performance-based stock credits depending upon execution of the strategic plan objectives relating to the Four Priorities. The CMD Committee will award between 0 and 100% of the merger stock credits depending upon meeting the objectives relating to merger synergies. Each Named Executive will receive the same percentage of their performance-based stock credits. All stock credits are subject to the holding periods described above. Mr. Tysoe received 18,274 time-based stock credits and 54,824 performance-based stock credits. The CMD Committee will award between 0 and 100% of his performance-based stock credits depending upon the level of achievement for his objectives relating to merger-related asset and real estate transactions.

 

Restricted Stock.  The CMD Committee also may grant restricted stock under the 1995 Equity Plan and the 1994 Stock Plan for retention and performance reasons. Restricted stock grants under the two plans can be either time-based or performance-based. Time-based restricted stock will generally be forfeited by the executive if the executive’s employment with Federated ends prior to the vesting date. Shares may vest 100% on the third anniversary of the grant date or in installments over a number of years following the first anniversary of the grant date. Time-based restricted stock may not fully vest in under three years. Performance-based restricted stock is subject to forfeiture if performance criteria applicable to the shares are not satisfied and/or if the executive’s employment ends prior to the vesting date. Performance-based restricted stock may not fully vest in less than one year. Depending upon satisfaction of the performance criteria, shares may vest up to 100% on the first anniversary of the grant date or in installments over a number of years following the first anniversary of the grant date. To the extent performance criteria are not satisfied, shares are forfeited. Restricted stock grants typically are approved by the CMD Committee at its March meeting and are granted as of that day. In addition, the CMD Committee may approve special restricted stock grants on other dates in special circumstances, such as to retain executives important to the success of the company.

 

Restricted stock can complement stock options. Stock options work well (that is, they provide incentives) when the fair market value of the stock is above or slightly below the exercise price of the options. However, stock options do not work as well (that is, they provide little or no incentive) if the fair market value of the stock underlying the options falls significantly below the exercise price of the options. On the other hand, restricted stock can continue to work well even if the fair market value of the stock falls significantly below the value on the grant date.

 

Fiscal 2006 Action:  Since the CMD Committee does not make “annual grants” of restricted stock, there were no “annual grants” in fiscal 2006. However, for information concerning a special retention restricted stock grant to certain of the Named Executives, see “Special 2006 Retention Grants” below.

 

Special 2006 Retention Grants.

 

In addition to the annual stock option grants, on July 11, 2006, the CMD Committee approved special grants under the 1995 Equity Plan of stock options and time-based restricted stock to Mrs. Hoguet, Mr. Cole, Ms. Grove and Ms. Kronick. Each of these executives is deemed by Mr. Lundgren and the CMD Committee as an essential member of the Federated-May integration team. The special grants were awarded as a tool to retain these executives and keep the integration team intact and the integration efforts on track. The CMD Committee determined July 11th to be an appropriate date to award the special grants because the date was sufficiently after the date on which Federated released its June, 2006 sales information (July 6, 2006) and sufficiently before the next financial release date. Pursuant to the terms of the 1995 Equity Plan, the exercise price for these stock options was set at the closing price of Federated common stock on the NYSE on

July 10th, the trading date prior to the grant date. These options vest 100% on the third anniversary of the grant date. The shares of restricted stock granted will vest 100% on the third anniversary of the grant date, if the Named Executives remain employed through that date. The CMD Committee determined the numbers of shares of restricted stock and options for the July 11, 2006 grant so that the shares and options would have an aggregate value of approximately 4.0 to 4.5 times the executive’s base salary.

 

 

Benefits

 

Benefits are established based upon an assessment of competitive market factors and a determination of what is needed to attract and retain high caliber executives. Federated’s primary benefits for executives include participation in the company’s broad-based plans: the cash account pension plan, the 401(k) profit sharing plan, the company’s health and dental plans and various insurance plans, including disability and life insurance and Federated’s matching gift program.

 

Federated also provides the following benefits to the Named Executives:

 

 

 

Deductibility

 

The CMD Committee considers the deductibility for federal income tax purposes under Section 162(m) of the Internal Revenue Code in the design of Federated’s compensation programs. Section 162(m) places a limit of $1 million on the amount of compensation that Federated may deduct in any one year with respect to the Named Executives. There is an exception to the $1 million limitation for performance-based compensation meeting certain requirements defined by the IRS. Annual non-equity incentive plan compensation, stock option awards and performance-based restricted stock awards generally are performance-based compensation meeting those requirements and, as such, are fully deductible. The CMD Committee has taken the necessary actions to maximize the deductibility of payments under Federated’s 1992 Bonus Plan and of awards under its two equity plans. However, to maintain flexibility in compensating the Named Executives in a manner designed to promote Federated’s business goals, the CMD Committee does not require all compensation to be deductible.

Consequently, portions of the total compensation program may not be deductible under Section 162(m), including the portion of base pay of some of the Named Executives in excess of $1 million, time based restricted stock and stock credit awards.

 

Change-in-Control Agreements

 

Federated entered into change-in-control arrangements with certain senior executives initially in 1992. The CMD Committee reviews and evaluates these arrangements periodically. In fiscal 2006, the CMD Committee reviewed the change in control arrangements, referred to as the Change-in-Control Agreements, with each of the Named Executives other than Mr. Tysoe, all of which were due to expire November 1, 2006. The CMD Committee determined that the arrangements help to attract, retain and motivate the caliber and quality of executive that Federated needs in its most senior positions, and that the arrangements help provide for continuity of management in the event of a change in control of Federated.

 

The CMD Committee determined that Federated should offer to extend the Change-in-Control Agreements for terms of one year, to November 1, 2007, and not change the other terms of the agreements. The CMD Committee wanted the benefit of another year’s experience to monitor trends in market practices for Change-in-Control Agreements and the guidance to be provided in final 409A Treasury Regulations before deciding whether to offer additional changes in the terms of the agreements.

 

The arrangements for the Named Executives provide that if, following a change in control, the executive is terminated for any reason, other than death, disability or for cause, or if the executive terminates his or her employment for “good reason,” then the executive is entitled to benefits described under the heading “Compensation of the Named Executives for 2006 — Potential Payments upon Termination or Change in Control.”

 

In addition, Federated’s equity programs and deferred compensation programs provide for accelerated benefits in the event of a change in control, which affect all participants in those programs as well as the Named Executives.

 

As part of its review in fiscal 2006, the CMD Committee determined that the Change-in-Control Agreements continued to fit into its overall compensation objectives because they address compensation issues that arise because of a very specific circumstance — that is, in the event of a change in control of Federated — and that are not otherwise addressed by other elements of the compensation program. The Change-in-Control Agreements:

 

 

The Change-in-Control Agreements define “change in control” and “good reason” as described under “Compensation of the Named Executives for 2006 — Potential Payments upon Termination or Change in Control” below.

 

Stock Ownership Guidelines For Executives

 

During fiscal 2006, the Board adopted stock ownership guidelines for certain executives of Federated, including the Named Executives. Under the guidelines, each corporate officer at the level of Senior Vice President and above and each division principal is required to own Federated stock, as follows:

 

 

Shares counted toward the ownership requirement include:

 

 

Federated common stock subject to unvested or unexercised stock options does not count toward the ownership requirement. An executive must comply with these guidelines by the later of August 1, 2011 or within five years from the date the executive is employed in one of the positions listed above. As of the end of fiscal 2006, each of the Named Executives owned sufficient shares to satisfy the stock ownership guidelines.