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The following is an excerpt from a DEF 14A SEC Filing, filed by SUN MICROSYSTEMS, INC. on 9/20/2005.
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SUN MICROSYSTEMS, INC. - DEF 14A - 20050920 - EXECUTIVE_COMPENSATION

EXECUTIVE COMPENSATION

 

The following table sets forth information concerning the total compensation earned during fiscal years 2003, 2004 and 2005 for services rendered to Sun by:

 

    its Chief Executive Officer; and

 

    the four other most highly compensated individuals (based on salary and bonus during fiscal year 2005) who were serving as executive officers of Sun at the end of fiscal year 2005.

 

Summary Compensation Table

 

          Annual Compensation

    Long-term
Compensation


    
            Awards

  

Name and Principal Position


   Fiscal
Year


   Salary ($)

  

Bonus

($) (1)


    Other Annual
Compensation
($)


    Securities
Underlying
Options (#)


   All Other
Compensation
($) (2)


Scott G. McNealy

    Chairman of the Board

    of Directors and

    Chief Executive Officer

   2005
2004
2003
   $
 
 
121,789
100,000
100,000
   $
 
 
1,111,250

(3)
 
 
  $
 
 
5,849

(4)
 
 
  1,250,000
1,500,000
1,000,000
   $
 
 
4,793
4,000
6,800

Crawford W. Beveridge

    Executive Vice

    President, People and

    Places and Chief Human

    Resources Officer

   2005
2004
2003
    
 
 
532,915
481,765
421,000
    
 
 
160,650
98,810
(3)
 
 
   
 
 


 
 
 
  400,000
500,000
300,000
    
 
 
7,482
6,603
8,384

Stephen T. McGowan

    Chief Financial Officer

    and Executive Vice

    President, Corporate

    Resources

   2005
2004
2003
    
 
 
598,050
571,454
430,000
    
 
 
177,013
177,260
(3)
(5)
 
   
 
 


 
 
 
  400,000
500,000
300,000
    
 
 
7,282
7,026
7,204

Gregory M. Papadopoulos

    Executive Vice President

    and Chief Technology

    Officer

   2005
2004
2003
    
 
 
526,546
457,777
400,000
    
 
 
160,650
73,280
220,000
(3)
 
(6)
   
 
 
6,226

763
(7)
 
(7)
  400,000
500,000
300,000
    
 
 
7,240
7,037
7,169

Jonathan I. Schwartz

    President and Chief

    Operating Officer

   2005
2004
2003
    
 
 
812,308
559,435
425,000
    
 
 
280,000
107,819
(3)
 
 
   
 
 
9,961
3,529
(7)
(7)
 
  800,000
1,500,000
300,000
    
 
 
6,754
5,660
8,882

(1)   Except as otherwise indicated, represents cash bonuses earned for the indicated fiscal years under our Section 162(m) Executive Officer Performance-Based Bonus Plan. Under this plan, Mr. McNealy will receive a bonus of $625,000 for fiscal 2004 if Sun achieves three consecutive quarters of operating profitability and year over year revenue growth on or by the end of fiscal 2007.

 

(2)   Represents matching contributions made by Sun on behalf of each named executive officer to Sun’s 401(k) plan.

 

(3)   Represents a discretionary bonus paid under the SMI Bonus Plan.

 

(4)   Reflects income attributed to personal use of a corporate jet.

 

(5)   Includes a special one-time recognition bonus in the amount of $60,000.

 

(6)   Represents a special cash bonus payment.

 

(7)   Represents a special payment in recognition of patent applications attributed to the executive officer.

 

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Option grants in last fiscal year

 

The following table shows the stock option grants made during fiscal 2005 to the executive officers named in the Summary Compensation Table:

 

Option Grants in Last Fiscal Year

 

Name


   Number of
Securities
Underlying
Options
Granted (#) (1)


  

% of Total
Options
Granted to
Employees in

Fiscal Year


   

Exercise
or Base
Price

($/Sh) (2)(3)


  

Expiration

Date


   Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Options Term (4)


              5%($)

   10%($)

Scott G. McNealy

   1,250,000    1.46 %   $ 3.79    07/29/14    $ 2,979,388    $ 7,550,355

Crawford W. Beveridge

   400,000    0.47       3.79    07/29/14      953,404      2,416,114

Stephen T. McGowan

   400,000    0.47       3.79    07/29/14      953,404      2,416,114

Gregory M. Papadopoulos

   400,000    0.47       3.79    07/29/14      953,404      2,416,114

Jonathan I. Schwartz

   800,000    0.94       3.79    07/29/14      1,906,809      4,832,227

(1)   Stock options have a ten-year term and vest at a rate of twenty percent per year beginning on the first anniversary of the date of grant. See also “Executive Compensation — Executive officer severance and change-in-control arrangements” contained elsewhere in this proxy statement.

 

(2)   The exercise price and tax withholding obligations may be paid in cash and, subject to certain conditions or restrictions, by delivery of already owned shares, pursuant to a subscription agreement or pursuant to a cashless exercise procedure under which the optionee provides irrevocable instructions to a brokerage firm to sell the purchased shares and to remit to Sun, out of the sale proceeds, an amount equal to the exercise price plus all applicable withholding taxes. However, our executive officers and members of the Board are currently prohibited from exercising their vested options pursuant to a Sun-sponsored cashless exercise procedure.

 

(3)   Options were granted at an exercise price equal to the last reported sale price of Sun’s common stock, as reported on NASDAQ, on the date of grant.

 

(4)   In accordance with SEC rules, these columns show gains that could accrue for the respective options, assuming that the market price of Sun common stock appreciates from the date of grant over a period of ten years at an annualized rate of 5% and 10%, respectively. For example, the options that we granted to Mr. McNealy would produce a pre-tax gain of $7,550,355 only if Sun’s stock price appreciates by 10% per year over the next 10 years and rises from $3.79 to $9.83 per share before Mr. McNealy exercises his options. Such an increase in Sun’s stock price (159%) would result in a significant increase in Sun’s aggregate market capitalization. If Sun’s stock price does not increase above the exercise price at the time of exercise, the actual realized value to the named executive officers would be zero. These calculations do not take into account any taxes or other expenses that might be owed.

 

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Option exercises in last fiscal year

 

The following table provides information concerning stock option exercises during fiscal year 2005 and exercisable and unexercisable stock options held by the executive officers named in the Summary Compensation Table:

 

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

 

Name


   Shares
Acquired on
Exercise (#)


   Value
Realized ($)


  

Number of Securities
Underlying Unexercised
Options at

Fiscal Year-End(#) (1)
Exercisable/Unexercisable


  

Value of Unexercised

In-the-Money Options at
Fiscal Year-End($) (1)(2)
Exercisable/Unexercisable


Scott G. McNealy

   4,800,000    $ 11,841,600    15,100,200 / 3,050,000    $ 1,464,000 / $18,000

Crawford W. Beveridge

   0      0    2,170,200 / 980,000      3,600 / 5,400

Stephen T. McGowan

   80,000      68,848    1,185,200 / 980,000      3,600 / 5,400

Gregory M. Papadopoulos

   108,000      75,648    1,362,200 / 980,000      3,600 / 5,400

Jonathan I. Schwartz

   0      0    1,450,200 / 2,180,000      3,600 / 5,400

(1)   Effective May 30, 2005, Sun accelerated the vesting schedules for all stock options outstanding as of that date with exercise prices of $6.00 or more.

 

(2)   Based on a fair market value of $3.73 per share on June 30, 2005, the last reported sale price of Sun’s common stock, as reported on NASDAQ, on that date.

 

Executive officer severance and change-in-control arrangements

 

In June 2005, the Leadership Development and Compensation Committee approved Sun’s U.S. Vice President Severance Plan (the “Severance Plan”), which went into effect in July 2005. The Severance Plan is available to Sun’s U.S. employees at the level of vice president or above, including the executive officers named in the Summary Compensation Table. Under the Severance Plan, in the event an executive officer’s employment is terminated as a result of a workforce reduction, retirement, mutual agreement or involuntary termination without cause, the executive will be entitled to receive the following benefits: (i) regular pay and benefit continuation for sixteen weeks following notification of termination of employment; (ii) a lump-sum cash payment composed of four weeks of “pay” and four weeks of COBRA premiums for each year of service, subject to a maximum number of weeks based on the executive’s position and an overall cap, each as described in the Severance Plan; and (iii) ten months of career service assistance. In addition, in the event an executive is terminated as a result of his or her retirement, the executive’s stock options will continue to vest for fifteen months following the date of retirement. Pay is defined under the Severance Plan as the executive’s base pay as of the date of the applicable termination letter. Amounts payable to an executive under the Severance Plan will be reduced to the extent the executive receives severance payments under the Worker Adjustment and Retraining Notice Act, or any other law, plan or agreement, including the Change of Control Agreements described below.

 

In October 1990, we approved a form of Senior Management Change of Control Agreement (“Change of Control Agreement”). In May 2003, the Leadership Development and Compensation Committee approved certain administrative amendments to the Change of Control Agreement. Each of our executive officers, including the executive officers named in the Summary Compensation Table, has signed a Change of Control Agreement. Subject to certain provisions in the Change of Control Agreement, each officer is eligible to receive the following if such officer’s employment is terminated within twelve months following a change of control of Sun: (i) an amount equal to two and one-half times such officer’s annual compensation (or, in the case of Mr. McNealy, three times his annual compensation); (ii) continuation of health benefits and group term life insurance for twenty-four months; and (iii) the acceleration of vesting for all stock options held. The term “annual compensation” includes one year of base salary at the highest base salary rate an officer received during

 

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the twelve-month period preceding termination (the “Look-Back Period”), 100% of the greatest on-target bonus for which an officer was eligible during the Look-Back Period and 100% of the greatest on-target commission for which an officer was eligible during the Look-Back Period. The term “change of control” includes the following circumstances: (i) the stockholders approve a merger or consolidation of Sun with another corporation resulting in a greater than fifty percent change in the total voting power of Sun or the surviving company immediately following such transaction, (ii) the stockholders approve a plan of liquidation of the Company, (iii) the stockholders approve an agreement for the sale by the Company of all or substantially all of the Company’s assets, (iv) the acquisition by any person of securities of the Company representing fifty percent or more of the total voting power of Sun, except under certain circumstances; and (v) certain changes in the majority composition of the Board during a thirty-six month period, not initiated by the Board.

 

Deferred compensation arrangements

 

In June 1995, the Leadership Development and Compensation Committee approved another component of our executive compensation program, the Non-Qualified Deferred Compensation Plan (the “Deferred Plan”). The Leadership Development and Compensation Committee last amended the Deferred Plan on June 30, 2003. The Deferred Plan is a voluntary, non-tax qualified, deferred compensation plan available to members of Sun’s Board of Directors, executive officers and other members of Sun’s management, to enable them to save for retirement by deferring a portion of their current compensation. Under the Deferred Plan, compensation may be deferred until termination of employment or other specified dates participants may choose. Deferred amounts are adjusted for gain or loss (net of expenses) based on the performance of one or more investment options selected by the participant from among investment funds chosen by the Administrative Committee of the Sun Microsystems, Inc. Tax-Deferred Retirement Savings Plan. Under the Deferred Plan, in the event of a participant’s death while an employee of Sun, the participant’s beneficiaries are entitled to receive the employee’s account balance plus a supplemental survivor benefit equal to two times the amount of compensation the participant deferred under the Deferred Plan, not to exceed $3,000,000. The account of any participant, and the right of such participant to receive distributions from his or her account, are considered an unsecured claim against the general assets of the Company.

 

Certain transactions with officers and members of the Board

 

Prior to the enactment of the Sarbanes-Oxley Act of 2002, which prohibits loans to executive officers, Sun made a series of loans to Jonathan I. Schwartz, its President and Chief Operating Officer. In October 2001, Mr. Schwartz received a full recourse, unsecured loan from Sun in the amount of $1,000,000, payable in full on or before October 29, 2005, at an interest rate of 4.82% per annum, compounded annually. This loan was made to assist Mr. Schwartz in meeting certain obligations in connection with a margin loan. In May 2002, the Board approved the grant of additional loans to Mr. Schwartz for an aggregate principal amount of up to $3,000,000 at market rate terms and for the same purpose as the loan granted in October 2001. Sun issued the first of these loans in June 2002, with a principal amount of $1,000,000 and an interest rate of 6.75% per annum, compounded semi-annually, payable in full on or before June 30, 2006. This loan was a full-recourse loan secured by Sun common stock owned by Mr. Schwartz with a fair market value equal initially to the principal amount of the loan. This loan also obligated Mr. Schwartz to adjust the number of shares of Sun common stock to secure the loan every six months as necessary so that the fair market value of the Sun common stock securing the loan equaled the total amount of principal, accrued interest and any other obligations then owed by Mr. Schwartz to Sun under the terms of the loan. On July 19, 2002, Sun loaned Mr. Schwartz the remaining $2,000,000 previously authorized. Under the terms of the July 2002 loan agreement, all previous loans to Mr. Schwartz (including the prior unsecured $1,000,000 loan issued in October 2001) were consolidated into one full recourse loan containing the same terms, with an interest rate of 6.75% per annum, compounded semi-annually, payable in full on or before June 30, 2006 and secured by Sun common stock owned by Mr. Schwartz with a fair market value equal initially to the total $4,000,000 principal amount and subject to adjustment every six months as provided in the June 2002 loan described above. As of June 30, 2005, a balance of $3,871,370, including accrued interest, remained outstanding. In accordance with the Sarbanes-Oxley Act of 2002, Sun will not materially modify or renew this loan and, in the future, will not provide any new loans to its executive officers.

 

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Section 16(a) beneficial ownership reporting compliance

 

Our members of the Board and executive officers file reports with the SEC indicating the number of shares of any class of our equity securities they owned when they became a member of the Board or an executive officer and, after that, any changes in their ownership of our equity securities. These reports are required by Section 16(a) of the Exchange Act. Based on our review of the reports, we believe that during fiscal 2005 all of the members of the Board, our executive officers and ten percent stockholders complied with the foregoing filing requirements.

 

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