UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
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Exchange Act of 1934 (Amendment No. _ )

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SLM Corporation

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

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12061 Bluemont Way
Reston, Virginia 20190

 

March 30, 2010

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

OF SLM CORPORATION

To Be Held On May 13, 2010

 

 

To our Shareholders:

 

The 2010 Annual Meeting of Shareholders of SLM Corporation will be held at the Company’s offices, 12061 Bluemont Way, Reston, Virginia 20190 on Thursday, May 13, 2010 beginning at 11:00 a.m., local time. At the meeting, holders of the Company’s common stock will consider and vote on the following matters:

 

 

All record holders of shares of the Company’s common stock at the close of business on March 15, 2010 are entitled to vote at the meeting. If you wish to attend the meeting in person, you must bring evidence of your ownership as of March 15, 2010, or a valid proxy showing that you are representing a shareholder.

 

Your participation in the Annual Meeting is important. We urge you to take the time to read carefully the proposals described in the proxy statement and vote your proxy at your earliest convenience. You may vote by telephone, Internet or, if you request that proxy materials be mailed to you, by completing and signing the proxy card enclosed with those materials and returning it in the envelope provided. If you plan to attend the Annual Meeting, please advise the Corporate Secretary, Carol Rakatansky, directly at (703) 984-5405.

 

Thank you for your investment in Sallie Mae.

 

Sincerely,

 

Anthony P. Terracciano
Chairman of the Board of Directors

 

TABLE OF CONTENTS

 

PROXY STATEMENT

Important Notice Regarding the Availability of Proxy Materials For the
Annual Meeting of Shareholders to be Held on May 13, 2010

The proxy statement and annual report on Form 10-K
are available at http://www.salliemae.com/Investors/AnnualReports

 

The Board of Directors of SLM Corporation (the “Company”) solicits your proxy to conduct business at the Company’s Annual Meeting to be held at the Company’s offices, 12061 Bluemont Way, Reston, Virginia 20190 on Thursday, May 13, 2010 at 11:00 a.m., local time. This proxy is first being sent or made available, as applicable, to the shareholders of the Company on or about April 1, 2010.

 

This proxy statement includes information about the Company’s:

 

 

The Company’s Annual Report on Form 10-K (the “Form 10-K”) for the fiscal year ended December 31, 2009, is being made available along with this proxy statement. The Form 10-K does not constitute a part of the proxy soliciting material. The proxy statement and Form 10-K are available at www.salliemae.com under “Investors, Annual Reports” and http://www.edocumentview.com/slm. You may also obtain these materials at the SEC’s website at www.sec.gov or by contacting the Office of the Corporate Secretary, SLM Corporation, 12061 Bluemont Way, Reston, Virginia, 20190. We will provide a copy of the Form 10-K without charge to any shareholder upon his or her written request.

 

Who may vote? Only the Company’s shareholders who owned common stock at the close of business on March 15, 2010, the record date for the Annual Meeting, can vote.

 

Why did I receive a “Notice Regarding the Availability of Proxy Materials”? In accordance with SEC rules, instead of mailing a printed copy of our proxy materials, the Company may send a Notice Regarding the Availability of Proxy Materials (the “Notice of Availability”) to shareholders. Certain shareholders will have the ability to access the proxy materials on a website referred to in the Notice of Availability or to request a printed set of these materials at no charge. Certain shareholders will not receive a printed copy of the proxy materials unless they specifically request one. If you receive a Notice of Availability, the Notice will instruct you as to how you may access and review all of

the important information contained in the proxy materials via the Internet and submit your vote via the Internet or telephonically. The Notice of Availability contains a 15-digit control number that you will need to vote your shares. Please keep the Notice of Availability for your reference through the meeting date.

 

How do I request paper copies of the proxy materials? If you hold SLM stock in street name through a broker, bank, trust or other nominee, you will receive a Notice of Availability, and you may request paper copies of the 2010 proxy materials by following the instructions listed at www.proxyvote.com, by telephoning 1-800-579-1639, or by sending an e-mail to sendmaterial@proxyvote.com.

 

If you hold SLM shares directly in your name through the Company’s stock transfer agent, Computershare Trust Company, N.A. (“Computershare”) as a shareholder of record, you will receive a Notice of Availability, and you may request paper copies of the 2010 proxy materials by following the instructions listed at www.envisionreports.com/SLM, or by telephoning 1-866-641-4276.

 

What is the difference between holding shares as a beneficial owner in street name and as a shareholder of record? If your shares are held in street name through a broker, bank, trust or other nominee, you are considered the beneficial owner of shares held in street name. As the beneficial owner, you have the right to direct your broker, bank, trust or other nominee on how to vote your shares. Your broker, bank, trust or other nominee has the discretion to vote on routine corporate matters presented in the proxy materials without your specific voting instructions. Your broker, bank, trust or other nominee may only vote your shares on routine matters (routine matters do NOT include the election of directors and amendments to the Company’s equity compensation plans and do include ratification of the appointment of the Company’s independent registered public accounting firm). For non-routine matters, your shares will not be voted without your specific voting instructions. If you hold your shares in street name, you, the beneficial owner, are not the shareholder of record, and therefore you may not vote these shares in person at the Annual Meeting unless you obtain a legal proxy from the broker, bank, trust or other nominee that holds your shares. If your shares are registered directly in your name with the Company’s transfer agent, Computershare, you are considered to be a shareholder of record with respect to those shares. As a shareholder of record, you have the right to grant your voting proxy directly to the Company or to a third party, or to vote in person at the Annual Meeting.

 

How do I vote? You may vote in one of the following ways:

 

By Internet or Telephone.  If you hold SLM stock in street name through a broker, bank, trust or other nominee, you may vote electronically via the Internet at www.proxyvote.com. If you wish to vote by telephone you must request paper copies of the materials (call 1-800-579-1639) in order to obtain a Voting Instruction Form which contains a specific telephone number for your broker, bank, trust or other nominee. Votes submitted telephonically or via the Internet must be received by 11:59 p.m., Eastern Daylight Time, on May 12, 2010.

 

If you hold SLM shares directly in your name as a shareholder of record, you may vote electronically via the Internet at www.envisionreports.com/SLM, or telephonically by calling 1-866-652-8683. Votes submitted telephonically or via the Internet must be received by 11:59 p.m., Eastern Daylight Time, on May 12, 2010.

 

In Person.  If you hold shares directly in your name as a stockholder of record, you may either vote in person or be represented by another person at the Annual Meeting by executing a legal proxy designating that person.

 

If you hold your shares in street name, you must bring a copy of a statement reflecting your stock ownership as of the record date to attend the meeting. You must also obtain a legal proxy from your broker, bank, trust or other nominee and present it to the inspector of elections with your ballot to be able to vote at the Annual Meeting. To request a legal proxy, please follow the instructions at www.proxyvote.com.

In order to attend the meeting, you must present a valid picture identification and, if you hold shares in street name (through a broker, bank, trust or other nominee), proof of stock ownership as of the record date.

 

By Mail.  If you hold SLM shares in street name through a broker, bank, trust or other nominee, to vote by mail you must request paper copies of the proxy materials. Once you receive your paper copies, you will need to mark, sign and date the Voting Instruction Form and return it in the prepaid return envelope provided. Your Voting Instruction Form must be received no later than close of business on May 12, 2010.

 

If you hold SLM shares directly in your name as a shareholder of record, to vote by mail you must request copies of the proxy materials. Once you receive your paper copies, you will need to mark, sign and date the proxy card and return it in the prepaid return envelope provided. Your proxy card must be received no later than close of business on May 12, 2010.

 

How do I vote my 401(k) Plan shares? If you participate in the Company’s 401(k) Plans, you may vote the number of shares equivalent to your interest, if any, as credited to your account on the record date. The 401(k) Plan Trustee will issue to you a voting instruction card that you can use to instruct the Trustee by telephone or by mail how to vote your shares. Voting instructions submitted telephonically or via the Internet must be received by 1:00 a.m., Central Time, on May 13, 2010. If you send your voting instructions by mail, your voting instruction card must be received no later than close of business on May 10, 2010.

 

How do proxies work? SLM’s Board of Directors is requesting your proxy. Giving the Board your proxy means that you authorize representatives of the Board to vote your shares at the Annual Meeting in the manner you specify and as described above. If you sign and return the enclosed proxy card or voting instruction card but do not specify how to vote, the Board of Directors will vote your shares in favor of the director nominees named in this proxy statement in order to elect all of the nominees or the maximum number possible, and will vote your shares in favor of the remaining proposals. Giving the Board your proxy also means that you authorize their representatives to cumulate votes in the election of directors and to vote on any other matter presented at the Annual Meeting in such manner as they determine best. The Company does not know of any other matters to be presented at the Annual Meeting as of the date of this proxy statement. If you own shares through the 401(k) Plans and do not vote your plan shares, the Trustee will vote your plan shares in the same proportion as other plan shares have been voted.

 

Can I change my vote? Yes, but depending on how you hold your shares, the procedures for doing so are different, as described below:

 

Beneficial Owners.  If your shares are held in street name through a broker, bank, trust or other nominee, you may revoke any proxy that you previously granted or change your vote at any time prior to 11:59 p.m., Eastern Daylight Time, on May 12, 2010, by entering your new vote either (i) electronically via the Internet at www.proxyvote.com using the account, control and PIN numbers that you previously used or (ii) telephonically using the number indicated on your Voting Instruction Form.

 

If you desire to change your vote by mail, you must first request paper copies of the materials and then mail your new Voting Instruction Form using the prepaid return envelope provided. However, your new instructions must be received before the close of business on May 12, 2010.

 

Shareholders of Record.  If you hold SLM shares directly in your name as a shareholder of record, you may revoke any proxy that you have previously granted or change your vote at any time prior to 11:59 p.m., Eastern Daylight Time, on May 12, 2010, by entering your new vote via Computershare’s electronic voting system at www.envisionreports.com/SLM or telephonically by calling 1-800-652-VOTE (8683) using the control numbers on the Notice of Availability and/or proxy card, located within the shaded bar. If you desire to change your vote by mail, you must mail your new

proxy card using the prepaid return envelope provided, and it must be received before the close of business on May 12, 2010.

 

You also may revoke your proxy or change your vote at any time prior to the final tallying of votes by:

 

 

How are my votes counted?

 

Stockholders of record are entitled to one vote per share of common stock held for each matter submitted for vote at the meeting.

 

For the election of directors.  A nominee will be elected to the Board if the number of votes “FOR” the nominee exceeds the number of shares voted “AGAINST” the nominee’s election.

 

In the election of directors, shares are entitled to cumulative voting, which means that each share of common stock is entitled to the number of votes equal to the number of directors to be elected. Therefore, each share you own is entitled to 16 votes in the election of directors. You may cumulate your votes and give one nominee 100 percent of your votes or you may distribute your votes among the nominees in any manner. If cumulative voting is applied at the Annual Meeting, the persons named as proxies may cumulate votes and cast such votes in favor of the election of some or all of the Board’s nominees in their sole discretion, except that a shareholder’s votes will not be cast for a nominee as to whom such shareholder instructs that such votes be withheld or be cast “AGAINST” or “ABSTAIN.” Abstentions and shares that are not voted in the election of directors, including shares for which a broker does not have discretionary voting authority, have no effect in the election of directors.

 

Other matters.  Approval of other matters at the Annual Meeting requires an affirmative vote of at least a majority of the votes present or represented and entitled to be voted on the matter, with each share of stock entitled to one vote. Abstentions have the same effect as votes against the matter. Shares that are not voted on a matter, including shares for which a broker does not have discretionary voting authority, are not counted as voting on this matter.

 

What constitutes a quorum? A quorum of shareholders is necessary to transact business at the Annual Meeting. A quorum exists if the holders of a majority of the Company’s shares entitled to vote are present in person or represented by proxy, including proxies on which abstentions (withholding authority to vote) are indicated. Abstentions and broker non-votes, other than where stated, will be counted in determining the quorum, but neither will be counted as votes cast.

 

Who will count the vote? Votes will be tabulated by the Inspector of Elections. The Board of Directors has appointed a representative of Computershare to serve as the Inspector of Elections.

 

 

At March 15, 2010, the record date, 485,758,650 shares of the Company’s voting common stock, par value $.20 per share, were outstanding and eligible to be voted. The common stock is listed on the NYSE under the symbol “SLM.”

 

The role of the Board of Directors is to promote sustainable, long-term growth of the Company in the interest of its shareholders. The primary responsibilities of the Board are to:

 

 

The Board’s governance guidelines are published at www.salliemae.com under the tab “Investors, Corporate Governance” and a written copy may be obtained by contacting the Corporate Secretary. Among the Company’s governance practices are the following:

 

 

The Board currently believes that the Company’s governance is best served by separating the role of Chairman and CEO. The Chairman of the Board, Anthony Terracciano, is an independent

director. In addition, the Board Governance Guidelines provide for the Lead Independent Director, who is also independent. The position of Lead Independent Director is currently held by Mr. Schoellkopf. Mr. Albert Lord, Vice Chairman and CEO, is the only member of management who is also a member of the Board. The Board believes the current structure as described, is the best structure for the Company in the current circumstances.

 

For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with the Company. The Board’s governance guidelines include the standards for determining director independence. These guidelines conform with the independence requirements of the New York Stock Exchange (“NYSE”) listing standards. The Company’s director independence standards are included within the Board’s Governance Guidelines described above and published at www.salliemae.com under “Investors, Corporate Governance” and they are also listed below.

 

The Board has determined that the following individuals (that is, all of the individuals who served as a director during 2009, and all nominees standing for election at the 2010 Annual Meeting, other than Mr. Lord) are independent of the Company because the nominees have no direct or indirect material relationships with the Company: Mses. Bates and Gilleland and Messrs. Diefenderfer, Goode, Hunt, Martin, Munitz, Newman, Porter, Puleo, Schoellkopf, Shapiro, Strange, Terracciano and Williams. The Board made this determination based on factors including the following:

 

 

In making its determinations regarding independence, the Board took into account that Mr. Hunt was an executive officer of the predecessor of the Company until 1990. In addition, under the Company’s Charitable Gift Program, which is described below in the section titled “Elements of Compensation — Non-cash Benefits” and was terminated effective March 1, 2009, the Company has made contributions to non-profit organizations on whose board of trustees some directors serve. The Board took into account these relationships, although no director of spouse is employed by the

organizations and the gifts were well below the thresholds in the Board’s independence standards. Mr. Lord is not independent because of his employment relationship with the Company.

 

During 2009, the Board of Directors met ten times.  Each of the incumbent directors attended at least 75 percent of the total number of meetings of the Board and committees on which he or she served. Directors are expected to attend the Annual Meeting and all members of the Board attended the Annual Meeting in May 2009.

 

The Board has established the following committees (the “Core Standing Committees”) to assist in its oversight responsibilities:

 

 

Each committee has a Board-approved written charter, which sets forth the respective committee’s functions and responsibilities. Committee charters are published at www.salliemae.com under “Investors, Corporate Governance.” Shareholders may obtain a written copy of a committee charter by contacting the Corporate Secretary.

 

An annual work plan is created from the charters of each Core Standing Committee so that responsibilities of the committees are addressed at appropriate times throughout the year. Agendas for meetings are based on each committee’s annual work plan and all other current matters the Committee Chair or management believes should be addressed at the meeting. The work of each Core Standing Committee is regularly reported to the full Board by the Committee Chair.

 

The current membership of the Core Standing Committees and the number of meetings held in 2009 are as follows:

 

 

 

A description of the function of each committee follows.

 

Audit Committee.  The Audit Committee assists the Board in fulfilling its responsibilities by providing oversight relating to: (1) the integrity of the Company’s financial reporting; (2) the Company’s system of disclosure controls and system of internal controls regarding financial, accounting, legal compliance and ethics; (3) the independent accountant’s qualifications, independence and performance; (4) the performance of the Company’s internal audit function; (5) the Company’s compliance with legal and regulatory requirements; (6) the review of related persons transactions; (7) the Company’s overall corporate risk assessment policies and risk management practices; and (8) the preparation of the report of the Committee for the Company’s annual proxy statement, as required by the Securities and Exchange Commission (“SEC”).

The Board has determined that all the members of the Audit Committee are independent under the Company’s governance guidelines and that all members of the Audit Committee also satisfy the heightened independence standards for audit committee members under the NYSE listing standards. In addition, the Board has determined that the following individuals qualify as audit committee financial experts: Ms. Bates; Mr. Diefenderfer; Mr. Goode; Mr. Martin; Mr. Newman; Mr. Porter; Mr. Schoellkopf; Mr. Shapiro; Mr. Strange; Mr. Terracciano and Mr. Williams. Except as described in the next sentence, none of the Committee members serves on the audit committee of more than three public companies. In addition to his service on the Audit Committee of the Company, Mr. Strange also serves on the audit committees of three other public companies. The Board has determined, however, that such simultaneous service does not impair Mr. Strange’s ability to serve on the Company’s Audit Committee.

 

Compensation and Personnel Committee. The Compensation and Personnel Committee (the “Compensation Committee”): (1) assists the Board in fulfilling its responsibilities relating to human resources, compensation and benefit matters concerning the Company; (2) carries out the Board’s responsibilities relating to compensation of the Company’s executives; (3) considers and makes recommendations to the Board with respect to Board compensation; and (4) prepares the report of the Committee for the Company’s annual proxy statement, as required by the SEC.

 

The Board of Directors has determined that all Committee members are independent under the Company’s governance guidelines and NYSE listing standards.

 

The Compensation Committee considers executive and director compensation on an annual basis, culminating in decisions in January of each year. Throughout the year, the Committee considers executive compensation as warranted by personnel changes.

 

The Board sets compensation for directors. The Compensation Committee, after consulting with the other independent directors, sets compensation for the CEO and officers at the level of Executive Vice President and above. The Chief Executive Officer or his delegates set pay for all other employees. See the Compensation Discussion and Analysis section of this proxy statement for more information regarding the Compensation Committee’s processes.

 

The Compensation Committee retains a compensation consultant to advise it. During the annual compensation process, the Committee uses the compensation consultant to accomplish the following: (1) recommend a peer group of companies that may be used for benchmarking executive and director compensation (the “Peer Group”); (2) inform the Committee about the marketplace for the amount and form of director and executive compensation; (3) inform the Committee of trends in executive and director compensation; (4) update the Committee on legislative and regulatory changes that affect director and executive compensation; and (5) provide its views on the reasonableness of amounts and forms of director and executive compensation. During 2009, neither Hewitt nor Semler Brossy provided services to the Company other than providing advice or recommendations regarding the form and amount of director and executive compensation. The Compensation Committee’s consultant during 2008 and the first quarter of 2009 was Semler Brossy. The Compensation Committee engaged Hewitt Associates, beginning in March, 2009.

 

The processes to consider compensation for executive officers and directors are as follows:

 

Annual Executive Compensation:  The process for the annual review of executive compensation is discussed later in this proxy statement.

 

Annual Director Compensation:  The Compensation Committee annually reviews director compensation of the Peer Group. After discussion with the Committee’s consultant and management, the Committee recommends director compensation to the Board.

 

Promotions/New Hires:  Throughout the year, as the Company’s executive talent needs change, promotions and/or new hires at the level of Executive Vice President and above may occur. In these cases, the Compensation Committee meets to consider the appropriate amount and form of

compensation for each individual. Management recommends an arrangement to the Committee for its consideration. The Committee’s consultant may give its input on the proposed arrangement to management and the Committee Chair.

 

Nominations and Governance Committee.  The Nominations and Governance Committee assists the Board in establishing appropriate standards for the governance of the Company, the operations of the Board and the qualifications of directors. The Committee also identifies individuals qualified to become Board members and recommends to the Board the director nominees for each Annual Meeting of shareholders. The Nominations process is described below, in “Nominations Process”.

 

The Board has determined that all of the members of the Nominations and Governance Committee are independent under the Company’s governance guidelines and NYSE listing standards.

 

Finance and Operations Committee.  The Finance and Operations Committee assists the Board in fulfilling its responsibilities and providing oversight relating to capital management, financing strategy and the general operations of the business, including technology and servicing operations.

 

The Board believes that effective risk oversight is critical to the Company’s ability to effectively predict and implement its business strategies. Management is responsible for identifying and managing the risks facing the Company, including within each area of the business and through its risk assessment function. The Board, including through its committees, is responsible for overseeing management’s implementation of risk assessment and management, and for guiding the Company’s risk tolerance in areas of key risks.

 

Each year the Company’s key risks are identified and are reported to the Board and/or its Committees. For example, strategic and political risk are reported to the Board. Operational risk is reviewed by the Finance and Operations Committee and the Board. Risks related to funding and liquidity are reviewed by the Board and Finance and Operations Committee, and risks related to compliance and regulatory matters are reviewed by the Audit Committee. The Board reviews all matters where a material risk to the Company is involved.

 

During each year the Audit Committee reviews with management the Company’s key risks and the processes for reporting those risks to the Board and management’s processes for addressing those risks. As part of the process, the Company’s Vice President, Risk Assessment and Internal Audit, conducts a risk assessment among members of management each year, and reports the results to the Audit Committee. In addition to the processes throughout the year which provide the Board and its committees the opportunity to evaluate and oversee risk, the Board also considers the Company’s key risks when it reviews and approves the Company’s annual business plan each year, and during the Board’s offsite strategy meeting, which is devoted to considering the Company’s long-term business plan a key consideration of which is the risks facing the Company.

 

The Compensation Committee reviews with appropriate members of management the Company’s compensation policies, including incentive compensation policies, to understand that they do not encourage excessive risk-taking and are compatible with effective controls and risk management. Beginning in 2009, the Committee determined to carry out such a review at least once per year, and at its meeting in January 2009, the Committee undertook such a review with the Company’s Chief Compliance Officer and Chief Credit Officer. During the latter half of 2009, the Committee reviewed the Federal Reserve Board of Governors’ October 2009 “Proposed Guidance on Sound Incentive Compensation Policies” (the “Guidance”) and considered the Company’s compensation programs in light of the Guidance and as they relate to risks that could arise from such programs. During 2009, the Committee reviewed and approved the goals and purposes of Company’s 2009 incentive plan and

all other material compensation programs. The Committee also discussed these programs with the Company’s Senior Vice President, Administration (who has responsibility for Human Resources) and the Committee’s independent consultant, as appropriate.

 

The Nominations and Governance Committee considers director candidates recommended in good faith by shareholders. The Committee also receives suggestions for candidates from Board members. Candidates are evaluated based on the needs of the Board and the Company at that time, given the then-current mix of Board members. As provided in the Governance Guidelines, the Board seeks representation that reflects gender, ethnic and geographic diversity. This policy is implemented through the Nominations and Governance Committee’s charter, which states that one of the goals and responsibilities of the Committee is to review the composition and diversity of the Board and its Committees, and the policy’s effectiveness is assessed as part of the annual Board evaluation process. When evaluating a candidate, factors that the Nominations and Governance Committee looks for and considers, include, but are not limited to, a nominee’s:

 

 

To recommend a candidate, shareholders should send, in writing, the candidate’s name, credentials, contact information, and his or her consent to be considered as a candidate to the Chairman of the Nominations and Governance Committee, in care of the Corporate Secretary at SLM Corporation, 12061 Bluemont Way, Reston, VA 20190. The shareholder should also include his or her contact information and a statement of his or her share ownership. The Nominations and Governance Committee considers and evaluates candidates recommended by shareholders in the same manner that it considers and evaluates other director candidates. In order to have been timely for consideration at the 2010 Annual Meeting, a nomination must have been received by the Company on or after January 22, 2010 and on or before March 23, 2010. Any such notice must satisfy the other requirements in the Company’s Bylaws applicable to such proposals and nominations. The Committee did not receive any such recommendations for director candidates for the 2010 Annual Meeting.

 

Shareholders and other interested parties may submit communications to the Board of Directors, the non-management directors as a group, the Lead Independent Director, the Chairman of the Board, or any other individual member of the Board by contacting the Chairman of the Board or the Lead Independent Director in writing at the following address: Office of the Chairman of the Board or Office of the Lead Independent Director, SLM Corporation, 12061 Bluemont Way, Reston, VA 20190. The Corporate Secretary will review all communications from our shareholders. Communications relevant to our business and operations, as determined by the Corporate Secretary, will be forwarded to the Board or individual members, as appropriate.

 

The Company has a Code of Business Conduct that applies to Board members and all employees, including the chief executive officer, the principal financial officer and the principal accounting officer. The Code of Business Conduct is available on the Company’s website (www.salliemae.com under “Investors, Corporate Governance”) and a written copy is available from the Corporate Secretary. The Company intends to post amendments to or waivers of the Code of Business Conduct (to the extent applicable to the Company’s chief executive officer, principal financial officer or principal accounting officer or any director) at this location on its website.

 

To the Company’s knowledge, the following institutions beneficially owned more than 5 percent of the Company’s outstanding common stock on December 31, 2009. The holdings reported below are based solely on Schedules 13G and amendments thereto filed with the SEC on or before March 15, 2010. The Company is not aware of any other beneficial owner who became the beneficial owner of 5% or more of the Company’s common stock between December 31, 2009 and March 15, 2010.

 

 

 

 

 

At the 2010 Annual Meeting, 16 directors are to be elected to hold office until the 2011 Annual Meeting and until their successors have been elected or appointed. The 16 persons nominated by the Board for election at the 2010 Annual Meeting are listed below, with brief biographies. All 16 nominees were elected at the 2009 Annual Meeting and are currently serving as SLM directors.

 

We know of no reason why any nominee would be unable to serve. However, if any nominee should become unavailable to serve as a director, the Board may reduce the size of the Board or designate a substitute nominee. If the Board designates a substitute nominee, persons named as proxies will vote “FOR” that substitute nominee.

 

At the recommendation of the Nominations and Governance Committee, the Board has nominated the 16 persons named below for election as directors. Each of the nominees currently serves as a director. In addition to fulfilling the general criteria for director nominees described above under “Nominations Process,” each of the nominees possesses experience, skills, attributes and other qualifications that the Board has determined support its oversight and management of the Company’s business, operations and structure. These qualifications are discussed below following each director’s biographical information.

 

 

 

 

This election is an uncontested election because the number of nominees for election to the Board equals the number of directors to be elected. Accordingly, to be elected to the Board, each nominee must receive more “FOR” votes than “AGAINST” votes. As part of the nominations process, each nominee agreed to tender his or her resignation to the Board in the event the nominee fails to

receive a majority of votes cast “FOR” his or her election. If any of the 16 nominees fails to receive a majority of the votes cast “FOR” his or her election, the Nominations and Governance Committee of the Board of Directors will make a recommendation to the Board on whether to accept or reject the nominee’s resignation, which will be automatically tendered upon the certification of the election results. The Board will act on the Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results.

 

You may cumulate your vote and cast all your votes “FOR” one nominee or you may distribute your votes among the nominees in any manner. The persons named as proxies by the Company will not exercise discretion to cumulate votes unless another shareholder cumulates its shares when voting for directors.

 

Unless marked to the contrary, proxies received will be voted “FOR” the nominees named in this proxy statement in order to elect all of the nominees or the maximum number possible.

 

The Board of Directors recommends a vote “FOR” the election of the 16 nominees named above. Proxies will be so voted unless shareholders specify a contrary choice in giving their proxies.

 

On March 25, 2010, the Company’s Board of Directors authorized, subject to shareholder approval, amendments (the “Amendments”) the SLM Corporation Incentive Plan (the “Incentive Plan”), the SLM Corporation Management Incentive Plan (the “Management Incentive Plan”) and the SLM Corporation Employee Stock Option Plan (the “Employee Plan,” and together with the Incentive Plan and the Management Incentive Plan, the “Equity Plans”) to expressly permit the Company to implement a one-time, value-for-value stock option exchange program as described below (the “Exchange Program”). The Exchange Program will allow certain eligible employees to exchange certain outstanding stock options that were awarded by the Company in the past under the Equity Plans and have an exercise price well above our current stock price (referred to as “underwater options”) for a lesser number of new stock options (the “Replacement Options”). Eligible employees exclude the executive officers named in the Summary Compensation Table on page 39 (the “NEO”s) and members of our Board of Directors. The Exchange Program is designed so that the Company will incur little or no additional stock-based compensation expense for Replacement Options granted pursuant to the Exchange Program, while increasing incentive and retention value for participating employees.

 

Overview

 

Following is a summary of important terms of the proposed Exchange Program, which are explained in more detail below:

 

 

 

Pursuant to applicable NYSE listing rules and the terms of the Equity Plans, implementation of the Exchange Program requires shareholder approval. The Amendments, if approved by shareholders, will provide the Compensation and Personnel Committee (the “Committee”) with authority to effect the Exchange Program. Shareholders are being asked to approve the Amendments to the Equity Plans in the forms attached hereto as Appendix A. If shareholders approve the Amendments, the Committee intends to commence the Exchange Program not later than 180 days after the date of such shareholder approval. If the Exchange Program does not commence within 180 days of such shareholder approval, we will not conduct an exchange or similar program without again seeking and receiving shareholder approval. If shareholders do not approve the Amendments, the Exchange Program will not take place.

 

Reasons for the Exchange Program

 

We believe that the Exchange Program is important to incentivize our employees and re-align their interests with those of shareholders in light of factors that have affected our stock price over the last several years. Since the summer of 2007, conditions in the capital markets, legislative developments and regulatory actions taken by the federal government have had and are continuing to have a significant effect on the Company. Most recently, during the latter half of March, 2010, the U.S. Congress passed the Health Care and Education Affordability Reconciliation Act of 2010, which eliminates the FFELP. These factors, including the potential effects of the elimination of the Federal Family Education Loan Program (“FFELP”), are discussed in more detail in our Forms 10-K, 10-Q and other filings with the SEC during fiscal years 2008 and 2009. The elimination of the FFELP significantly impacts the profitability and prospects of our business originating, servicing and collecting student loans originated under the FFELP.

 

The on-going duration of unavailability of credit through traditional sources has continued to negatively impact the Company’s financial results. Specifically, in the summer of 2007, the global capital markets began to experience a severe dislocation that has persisted. This dislocation contributed to a substantial increase in the Company’s cost of funding. Because the interest rates charged on FFELP student loans are set by law and had been reduced in 2007, the increased cost of funds significantly impacted the Company’s financial results. In addition, the Company was not able,

at economical rates, to finance in the capital markets the FFELP assets, notwithstanding that underlying obligations are almost wholly guaranteed by the federal government. In addition, the Commercial Paper/LIBOR spread averaged more than 50 basis points during the first half of 2009 and the last quarter of 2008, compared to a historical average of approximately 8 basis points, which affects the Company’s net interest margin, because student loan yields are based on Commercial Paper rates, and the Company’s borrowing is generally based on LIBOR.

 

During 2007 and 2008, the Company also was affected by the termination of a merger agreement at the end of 2007, which contemplated that the Company would become privately owned by an investor group. As a result of the termination of the merger agreement and the steps the Company had taken to position itself for a contemplated new funding structure after the merger, the Company was funded by a $37 billion short-term facility that was required to be refinanced within less than a year. The Company completed this refinancing in February 2008 at historically high fees and interest rates.

 

In early 2009, the Obama Administration issued its 2010 fiscal year budget request to Congress, which included provisions that called for the elimination of the FFELP and the origination of new federal student loans to be made through the Direct Student Loan Program (the “DSLP”) operated by the federal government. Subsequently, the House of Representatives passed H.R. 3221, the Student Aid and Fiscal Responsibility Act (“SAFRA”), which was consistent with the Obama Administration’s 2010 budget request to Congress. SAFRA eliminates the FFELP and requires that all new federal loans be made through the DSLP after July 1, 2010. The Obama Administration’s budget for the 2011 fiscal year, submitted to Congress on February 1, 2010, continued its request to eliminate the FFELP, and the process culminated during the latter half of March 2010, with the U.S. Congress passing the Health Care and Education Affordability Reconciliation Act of 2010, which included SAFRA provisions eliminating the FFELP. The President is expected to sign the Act into law by the end of March, 2010.

 

Under the FFELP, private sector lenders provide student loans guaranteed by state agencies or non-profit companies, and the U.S. Department of Education provides reinsurance for the guarantors. We participate in the FFELP, and we are the largest lender in the program. If SAFRA becomes law, after July 1, 2010, we will no longer originate, fund or hold new FFELP loans. In addition, the legislation eliminates the need for some of the services we provide to guarantors under the FFELP. Consequently, the Company will need to undertake a significant restructuring to conform its infrastructure to the elimination of the FFELP and achieve additional expense reduction, as certain of our revenue streams will decline, as discussed in our 2009 Form 10-K.

 

The Company has been preparing for the elimination of the FFELP. During 2009, the Board and executive management continued to focus on examining the profitability and potential of each of the Company’s business segments and adopted a business plan for 2010, taking into account the legislative uncertainty surrounding the FFELP and the Company’s strategy for moving forward. We improved our funding and liquidity position by executing term financings to replace short-term funding, and repurchasing outstanding indebtedness. We were also able to access the unsecured debt markets for the first time since June 2008. The Company was successful in becoming one of four private sector servicers awarded a servicing contract with the Department of Education to service all federally-owned student loans, including loans under the DSLP. In 2008, we also conducted a thorough review of our business model and operations with a goal of achieving appropriate risk-adjusted returns across all of our business segments and providing cost-effective services. As a result, we reduced our operating expenses by over 20 percent in the fourth quarter of 2008 compared to the fourth quarter of 2007, after adjusting for restructuring costs, growth and other investments. This reduction was accomplished by lowering our headcount by a total of 2,900 or approximately 25 percent, and consolidating operations through closing several work locations. The Company curtailed less profitable types of lending activity and wound down non-core operations.

As a result of management’s actions in response to these developments, among others, the Company’s stock price has recovered from a low of $3.44, and on March 15, 2010, our stock price closed at $12.32.

 

Despite the significant actions taken by management, the financial sector crisis, the legislation regarding the FFELP described above and other macro-economic factors have contributed to the price of our common stock declining significantly and thereby severely impacted the effectiveness of the Company’s equity compensation arrangements. The Company has long used equity compensation in the form of stock options to motivate and compensate its general employee population as well as its executives and directors. Since 1997, the Company has granted stock options to nearly all full-time employees. As of February 8, 2010, approximately 4,100 of our active employees held stock options, which represent 48% of active employees and 64% of employees who have been with the Company at least one year. The average Eligible Employee (which excludes our NEOs and directors) holds stock options on 7,800 shares. We believe our broad-based equity incentive program helps us to align employee and shareholder interests, motivate our employees, and retain experienced, high-performing and productive employees.

 

As a result of the decline in our stock price, however, many of our employees now hold stock options with exercise prices that are significantly higher than the current market price of our common stock. Moreover, many of our employee stock options vest and become exercisable when our stock price reaches a certain target, expressed as a premium to the option’s exercise price, for a specified period of days, and thus many employee stock options have never become exercisable. Although our business has stabilized, in light of the proposed federal student loan legislation, there can be no assurance our stock price will increase significantly in the near term. We believe that significantly “underwater” stock options no longer provide effective performance or retention incentives. At the same time, we believe we must continue to maintain competitive incentive programs in order to retain remaining valuable employees in order to promote long-term shareholder value. Therefore, we are proposing the Exchange Program to enhance employee incentives going forward.

 

The proposed Exchange Program has been designed in a manner intended to ensure that the fair value of the Replacement Options granted in the Exchange Program will be approximately equal to or less than the fair value of the stock options surrendered in the Exchange Program. We believe the Exchange Program is an efficient and cost-effective way to provide incentives to Eligible Employees and align Eligible Employees’ interests with long-term shareholder interests as follows:

 

 

 

Description of the Exchange Program

 

Implementation of the Exchange Program

 

The Company will not consummate the Exchange Program unless our shareholders approve the Amendments pursuant to this proposal. The exchange offer to employees will commence at a time determined by the Committee not later than 180 days following shareholder approval of the Amendment. However, even if the Amendments are approved by our shareholders, the Committee will retain the authority, in its discretion, to terminate, amend or postpone the Exchange Program at any time prior to expiration of the election period under the Exchange Program, provided that any amendment will not be inconsistent with the material terms of the Exchange Program as described in this proposal.

 

On the date we commence the Exchange Program, Eligible Employees holding Eligible Options will receive an “offer to exchange” document that will set forth the precise terms and timing of the Exchange Program. Eligible Employees will be given at least 20 business days to elect to surrender any or all of their Eligible Options in exchange for Replacement Options. Replacement Options will be granted promptly following the completion of the Exchange Program (the “Replacement Grant Date”), likely on the first trading day immediately following the date on which the Exchange Program concludes, with an exercise price equal to the closing price of our common stock on the NYSE on the grant date. On or before the Effective Date, we will file the offer to exchange with the SEC as part of a tender offer statement on Schedule TO. Eligible Employees, as well as shareholders and members

of the public, will be able to review the offer to exchange and other documents filed by us with the SEC free of charge on the SEC’s website at www.sec.gov.

 

Eligible Options

 

Eligible Options consist of employee stock options granted under the Equity Plans that (i) have an exercise price that is equal to or greater than 150% of the fifty-two week high trading price of the Company’s common stock as of the commencement of the Exchange Program and (ii) were granted on or before January 31, 2008, provided, however, that Eligible Options do not include employee stock options granted pursuant to a stock exercise program and which are considered “replacement options”.

 

As of February 8, 2010, we had approximately 45.5 million stock options outstanding, of which 35 million were granted under the Equity Plans. These outstanding stock options had a weighted average exercise price of $27.75 and a weighted average remaining life of 6.26 years. Of these outstanding awards, as of February 8, 2010 approximately 18.6 million would be Eligible Options and were held by approximately 3,800 eligible employees and, therefore, would be eligible for exchange under the Exchange Program. These Eligible Options had a weighted average exercise price of $35.92 and a weighted average remaining life of 5.84 years. The remaining 16.4 million stock options outstanding would not be eligible for exchange under the Exchange Program and had a weighted average exercise price of $18.53 and a weighted average remaining life of 6.75 years.

 

Eligible Employees

 

The Exchange Program generally will be open to all of our current employees who hold Eligible Options on the date the Exchange Program is commenced (the “Effective Date”). However, members of our Board of Directors and our NEOs will not be eligible to participate.

 

In addition to being employed as of the Effective Date, an employee must continue to be employed by us on the Replacement Grant Date. Any employee holding Eligible Options who elects to participate in the Exchange Program but whose employment terminates for any reason prior to the Replacement Grant Date, including voluntary resignation, retirement, involuntary termination, layoff, death or disability, will not be permitted to exchange his or her Eligible Options and will continue to hold their Eligible Options subject to existing terms.

 

Exchange Ratios

 

The Exchange Program is not a one-for-one exchange. Eligible Employees surrendering outstanding Eligible Options will receive Replacement Options covering a lesser number of shares with an exercise price equal to the closing price of our common stock on the NYSE on the grant date.

 

The Company will establish the exchange ratios shortly before the commencement of the Exchange Program. An exchange ratio represents the number of Eligible Options that an employee would be required to surrender in exchange for one Replacement Option. We intend to establish exchange ratios that would result in the Replacement Options having a fair value that is approximately equal to or less than the fair value of the Eligible Options as determined at the time the exchange ratios are set.

 

In order to establish the exchange ratios, the fair value of the Eligible Options will be calculated shortly before the start of the Exchange Program (using the Black-Scholes option pricing model), and these values will be compared to the estimated fair values of Replacement Options calculated at that time. The valuation model will take into account various factors, including the exercise prices of the Eligible Options, the estimated remaining terms of the Eligible Options and of the Replacement Options, prevailing interest rates and volatility of our stock price. To the extent allowed by SEC regulations, we may adjust the exchange ratios during the course of the Exchange Program in order

to try to more closely align the aggregate grant date fair value of Replacement Options with the fair value of Eligible Options.

 

For illustration purposes only, the table below sets forth the exchange ratios for certain Eligible Options, based on Black-Scholes assumptions that would have applied as of February 8, 2010:

 

 

 

The total number of Replacement Options that a participating employee will receive with respect to a surrendered Eligible Option will be determined by dividing the number of shares underlying the surrendered stock option by the applicable exchange ratio and rounding down to the nearest whole share. For example, if an Eligible Employee holds stock options to purchase 1,000 shares of our common stock at an exercise price of $45.42 per share, he or she would be entitled to exchange those stock options for a Replacement Option consisting of stock options to purchase 460 shares (i.e., 1,000 divided by 2.17, rounded down to the nearest whole share), based on the assumptions above.

 

Election to Participate

 

Participation in the Exchange Program will be voluntary. Eligible Employees may surrender one or more grants of Eligible Options for exchange in order to participate in the Exchange Program. Eligible employees will have an election period of at least 20 business days from the Effective Date in which to make their election whether or not to participate.

 

Exercise Price of Replacement Options

 

All replacement options will have an exercise price equal to the closing price of our common stock on the NYSE on the Replacement Grant Date. The terms of the Exchange Program, including the date that the offer to exchange concludes, are subject to governmental requirements which could result in our extending the offer to exchange for more than twenty business days. Additionally, we may otherwise decide to amend, postpone or not proceed with the commencement of the offer to exchange, or under certain circumstances, cancel the offer to exchange once it has commenced.

 

Vesting of Replacement Options

 

Replacement Options will be completely unvested at the time they are granted and will become vested on the basis of the participant’s continued employment with us. As noted above, many of our employee stock options vest and become exercisable when our stock price reaches a certain target, expressed as a premium to the option’s exercise price, for a specified period of days. Replacement Options received in exchange for Eligible Options containing price-vesting requirements and which are not vested on the Replacement Grant Date will vest in two equal annual installments, one installment per year. Replacement Options received in exchange for Eligible Options containing time-vesting requirements and which are not vested on the Replacement Grant Date will vest 12 months from the Replacement Grant Date. Replacement Options received in exchange for Eligible Options that are vested upon the Replacement Grant Date will vest six months from the Replacement Grant Date. The Replacement Options will vest as described regardless of the extent to which the corresponding

Eligible Options were vested upon surrender. If a participant’s employment with us terminates, then the vesting and forfeiture of the Replacement Options will be governed by the provisions of the Current Plan.

 

Term of the Replacement Options

 

The term of each Replacement Option will be the remaining term of the option for which it is exchanged.

 

Other Terms and Conditions of Replacement Options

 

Replacement Options will be granted pursuant to the Current Plan. All other terms and conditions of the Replacement Options issued in the Exchange Program will be substantially the same as those that apply generally to new grants of stock options under the Current Plan. The common stock for which the Replacement Options may be exercised is currently registered on a registration statement filed with the SEC.

 

Cancellation of Eligible Options Surrendered

 

All stock options surrendered as part of the Exchange Program will be cancelled upon completion of the exchange offer, and the shares underlying those stock options will not be available for new grants, except to the extent that the surrendered options are used to grant Replacement Options under the Current Plan. The terms of the Current Plan provide that shares underlying cancelled options originally granted under the Incentive Plan and the Management Incentive Plan may be used to grant awards under the Current Plan. However, we intend to use the shares underlying cancelled options originally granted under the Incentive Plan and the Management Incentive Plan only to the extent necessary to grant Replacement Options. Any shares underlying surrendered options originally granted under the Incentive Plan and the Management Incentive Plan that exceed the number of shares necessary to grant Replacement Options will not be added to the pool of shares available for issuance under the Current Plan. Accordingly, the aggregate number of shares issuable under the Current Plan will not be increased following the completion of the Exchange Program, other than to the extent used to grant Replacement Options, and the aggregate number of shares subject to outstanding stock options or available for future equity awards under all of the Company’s equity compensation plans will decrease.

 

Potential Modifications to Exchange Program Terms

 

While the terms of the Exchange Program will conform to the material terms described above in this proposal, we may find it necessary or appropriate to preclude additional employees from participating, or to change the terms of the Exchange Program from those described herein to take into account our administrative needs, governmental requirements, accounting rules, tax considerations, or the Company’s policy decisions. For example, the terms of the Exchange Program will be described in an offer to exchange that will be filed with the SEC, and it is possible that we may need to alter the terms of the Exchange Program to respond to comments from the SEC. We will not, however, under any circumstances, permit our NEOs or members of our Board of Directors to participate in the Exchange Program. Approval of the Amendments pursuant to this proposal constitutes authorization and approval of any such modifications.

 

Interest of the Directors and Executive Officers of the Company in the Option Exchange Program

 

As described above, our NEOs and members of our Board of Directors are not eligible to participate in the Exchange Program.

Impact of Option Exchange Program

 

Effect on Shareholders

 

The Exchange Program is designed in the aggregate to be expense-neutral to the Company other than as a result of variations between the date that we establish the exchange ratios and the date that the Replacement Options are granted, while reducing our overhang. We are unable to predict the precise impact of the Exchange Program on our shareholders because we are unable to predict how many or which employees will exchange their Eligible Options. If the Exchange Program were conducted as of February 8, 2010 and assuming full participation in the Exchange Program applying the exchange ratios described in the table above, (i) there will be a net reduction in the equity award overhang by approximately 7.4 million shares, and (ii) the Company will have approximately 38.4 million options outstanding (including those held by our NEOs and directors), with a weighted average exercise price of $15.50 and a weighted average remaining term of 7.10 years. As of January 31, 2010, the total number of shares of voting common stock outstanding was 484,912,370, and, as of March 15, 2010, the total number of shares of voting common stock outstanding was 485,758,650.

 

U.S. Federal Income Tax Consequences

 

The U.S. federal income tax consequences of the Exchange Program under current federal law, which is subject to change, are summarized in the following discussion of the general tax principles applicable to the program. This summary is not intended to be exhaustive and, among other considerations, does not describe state, local or international tax consequences. A more detailed summary of tax considerations will be provided to all participants in the documents that we file with the SEC as part of the offer to exchange. All Eligible Employees will be advised to consult their own tax advisors regarding the tax treatment of participating in the Exchange Program under all applicable laws prior to participating in the Exchange Program.

 

The Company believes that the exchange of Eligible Options for Replacement Options pursuant to the Exchange Program should be treated as a non-taxable exchange and neither the Company nor any of the eligible employees should recognize any income for U.S. federal income tax purposes upon the surrender of Eligible Options and the grant of Replacement Options. Since all Replacement Options will be non-qualified stock options, the holder, upon exercise of the option, will recognize ordinary income in an amount equal to the excess of the then fair market value of the stock acquired over the exercise price of the Replacement Option. The Company may deduct the amount of such ordinary income recognized by the holder, subject to any limitations under the Code. Any gain that the holder realizes when he or she sells or disposes of the shares will be short-term or long-term capital gain, depending on how long the shares were held.

 

Accounting Treatment

 

We intend to structure the Exchange Program so that the Replacement Options will have approximately the same or less fair value as the stock options surrendered, which would result in little or no incremental compensation expense to the Company. Due to the volatility in the stock price, exchange ratios may be set slightly above a precise value-for-value ratio to allow some movement in the stock price without causing the Replacement Options to have a higher fair value than the stock options surrendered. We believe that this methodology significantly minimizes the possibility of any incremental compensation expense being incurred.

 

Under ASC 718, we will recognize the remaining unamortized expense of exchanged awards ratably over the vesting period of the Replacement Options. We would also have to recognize any incremental compensation expense of the Replacement Options over the vesting period of the Replacement Options. The incremental compensation expense will be measured as the excess, if any, of the fair value of each Replacement Option on the Replacement Grant Date, over the fair value of the Eligible Options exchanged, measured as of the Replacement Grant Date. Because of changes in

variables between the time that we establish the exchange ratios and the Replacement Grant Date, the actual incremental compensation expense arising from the Replacement Grants may be higher or lower than intended. In the event that any of the Replacement Options are forfeited prior to their vesting due to termination of employment, any incremental compensation expense for the forfeited Replacement Options would not have to be recognized.

 

The following is a summary of the principal terms of the Incentive Plan, the Management Incentive Plan and the Employee Plan. The summary is qualified in its entirety by reference to the Incentive Plan, the Management Incentive Plan and the Employee Plan. The full text of the Incentive Plan is filed as Exhibit 10.24 to the Company’s Current Report on Form 8-K filed on May 25, 2005. The full text of the Management Incentive Plan is filed as Exhibit B to the Company’s proxy statement for the 1998 Annual Meeting of Shareholders. It was subsequently amended as shown on Exhibit C to the Company’s proxy statement for the 2000 Annual Meeting of Shareholders, and as shown on Exhibit A to the Company’s proxy statement for the 2002 Annual Meeting of Shareholders. The full text of the Employee Plan is attached as Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Replacement Options will be granted under the SLM Corporation 2009-2012 Incentive Plan. The material terms of that plan, which is not amended by this proposal, were described in the Company’s proxy statement for the 2009 Annual Meeting of Shareholders and the full text of the plan was filed as Attachment B to that proxy statement.

 

Each of the Equity Plans has been suspended so that no further grants can be made under them. Each of the Equity Plans is administered by the Board of Directors or a committee of directors appointed by the Board and by one or more subcommittees to whom some or all administrative authority may be delegated. Any such administrator has broad authority in connection with the administration of the plan and awards under it, including to interpret and construe the plan, any rules and regulations under the plan and the terms and conditions of any award granted under the plan, as well as to make exceptions or other determinations with respect to such awards, which need not be uniform among participants. Each of the Equity Plans authorized the issuance of stock options and performance-conditioned share awards, with the Incentive Plan authorizing as well the grant of restricted stock. The Incentive Plan and the Management Incentive Plan also authorized awards to be issued in the form of stock units and permitted performance-based awards denominated as a dollar value and settled in either stock or cash. Each of the Equity Plans provides that the exercise price of stock options generally may not be less than 100% of the fair market value of a share on the date of grant, permits options to have a term of up to ten years, and grants the plan administrator broad authority to set the vesting and other terms of options, including in its sole discretion to reduce, eliminate or waive any restrictions on options. Each of the Equity Plans provides for adjustment of the number of shares subject to the plan and to outstanding awards, and in the exercise price of outstanding options, in the event of changes in the Company’s capital structure as a result of reorganizations, mergers, consolidation, recapitalization, restructuring, reclassification, dividends (other than regular, quarterly cash dividends), stock splits, spin-offs and the like. The Incentive Plan and the Management Incentive Plan expressly authorize the plan administrator to provide for the exercisability of outstanding options in connection with or upon termination of employment within twenty-four months following a change in control, as defined in those plans. These two plans also expressly provide that certain material amendments to the plan, as well as actions to reduce or adjust downward the exercise price of outstanding options (including through an exchange program), require stockholder approval.

 

New Plan Benefits

 

Because the decision to participate in the Exchange Program is completely voluntary and because the Exchange Program is subject to a number of factors outside of our control, such as fluctuations in our stock price, we are not able to predict which or how many employees will elect to

participate, how many Eligible Options will be surrendered for exchange or how many Replacement Options may be issued. As indicated above, members of our Board of Directors and our NEOs will not be eligible to participate. As of February 8, 2010, assuming full participation in the Exchange Program and exchange ratios calculated in the same method as set forth in the table above, employees other than executive officers held Eligible Options covering approximately 18.5 million shares with exercise prices above $19.34 that could be exchanged for Replacement Options on approximately 11 million shares, and our executive officer group, excluding the NEOs, held Eligible Options on 138,000 shares with exercise prices above $19.34 that could be exchanged for Replacement Options covering 110,660 shares.

 

Assuming full participation in the Exchange Program and assuming the exchange ratios set forth in the table above, these Eligible Options would be surrendered and cancelled, while approximately 11.1 million Replacement Options would be issued, resulting in a reduction in shares subject to outstanding awards of approximately 7.4 million. The actual reduction in shares subject to outstanding awards and the actual number of Replacement Options granted are both dependent on a number of factors, including the level of employee participation and the exchange ratios established upon commencement of the Exchange Program.

 

The affirmative vote of the holders of a majority of the shares of common stock present or represented and entitled to be voted at the Annual Meeting is required to approve the amendment to equity compensation plans to allow a one-time stock option exchange program. In addition, New York Stock Exchange rules require that the total votes cast on this proposal represent a majority of all shares entitled to vote on this proposal. Unless marked to the contrary, proxies received will be voted FOR the approval of such amendment

 

The Board of Directors recommends a vote FOR the amendment to the Incentive Plan, the Management Incentive Plan and the Employee Plan to permit a one-time stock option exchange program.

EQUITY COMPENSATION PLANS

 

The following table summarizes information as of December 31, 2009, relating to equity compensation plans or arrangements of the Company pursuant to which grants of options, restricted stock, RSUs or other rights to acquire shares may be granted from time to time.

 

 

 

 

The Audit Committee has reviewed and discussed with management and the Company’s independent accountant, PricewaterhouseCoopers LLP, the Company’s audited financial statements as of and for the year ended December 31, 2009. The Committee also discussed with PricewaterhouseCoopers LLP the matters required to be discussed by Statement on Auditing Standards No. 61, as amended and as adopted by the Public Company Accounting Oversight Board (“PCAOB”), and with and without management present, discussed and reviewed the results of the independent accountant’s examination of the financial statements.

 

The Committee received and reviewed the written disclosures and the letter from PricewaterhouseCoopers LLP required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the Committee concerning independence and has discussed with PricewaterhouseCoopers LLP the accountant’s independence, including relationships that may have an impact on the accountant’s objectivity and independence.

 

Following the reviews and discussions referred to above, the Committee recommended to the Board of Directors that the financial statements referred to above be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for filing with the SEC.

 

Audit Committee

Ann Torre Bates, Chairman

Barry A. Munitz

Frank C. Puleo

J. Terry Strange

Barry L. Williams

 

Overview of Company Performance

 

The Company reported positive “core earnings” net income of $597 million in 2009, an increase from $526 million in 2008. During 2009, the Company originated $21.7 billion in FFELP loans, a 21 percent increase over 2008, and $3.2 billion of private credit loans, a 50% decline from the prior year. Continued deterioration in the economy led to higher private credit default rates during the first half of the year, which required higher than expected provisions for loan losses. However, private credit loan delinquencies and charge offs declined during the fourth quarter of 2009. For 2009, operating expenses on a “core earnings” basis were $1.18 billion, a $50 million decrease from $1.23 billion in 2008.

 

During the year, the Company won its bid to become a contract servicer for the U.S. Department of Education’s student loan operations, and fully refinanced the Company’s term unsecured debt facility, thereby stabilizing the Company’s liquidity and funding outlook. Management also continued its focus on compliance, as operations under the Department of Education contract were implemented. Higher credit standards in the private credit lending business, initiated in 2008, continued. In addition, the Company completed the planned exit from the purchased paper-non-mortgage business in the first quarter of 2009, and the exit from the purchased paper-mortgage/properties business during the fourth quarter of 2009.

 

Also during 2009, senior management focused on positioning the Company to move forward amid legislative uncertainty regarding the FFELP. The Company added new senior management team members in the areas of technology operations, servicing, sales and marketing. The new team included Joe DePaulo, Executive Vice President, and six Senior Vice Presidents. With the addition of these senior managers, the Company restructured the management of its technology and servicing

operations, increasing the focus on investments to upgrade servicing capabilities and creating a greater emphasis on customer service and satisfaction. In addition, the business development group focused on enhancing the Company’s marketing channels and operations, and the sales team was restructured to respond to the Company’s shifting focus on private credit lending and related products.

 

2009 Compensation Decisions

 

The primary objective of the Company’s executive compensation program is to drive and sustain corporate performance, thereby aligning the interests of senior management with shareholders. In furtherance of this objective, the program’s goal is to offer competitive levels of total compensation in order to attract and retain talented executives. Thus, the program is designed to reward individual performance. Total incentive compensation is determined measuring the extent to which corporate performance goals of the annual performance bonus plan are achieved and share price performance is sustained.

 

During 2009, the Compensation and Personnel Committee (the “Committee”) continued to focus on performance-based compensation. To that end, the Committee looked to compensate executives based on critical accomplishments in implementing the Company’s business plan, granting performance-based equity awards designed to further align management’s interests with shareholders and re-balancing the elements of compensation to reflect the Company’s management structure.

 

In January 2009, the Committee granted performance-based options and performance stock awards to the executive officers named in the Summary Compensation Table on page 39 (the “NEO“s). For each NEO other than Mr. Remondi, whose equity award was provided for under his employment agreement, one-third of each stock and option award vests on the later of the first, second and third anniversaries of the grant date or upon the date of the Company’s earnings release, to the extent “core earnings” net income targets for each year’s business plan are achieved, with 100% vesting if “core earnings” net income is 75% or more of plan and ratable decreases in vesting to 50% vesting for “core earnings” equal to 25% of plan and 0% vesting for less than 25% of plan. Pursuant to his employment agreement, Mr. Remondi’s options vest upon the Company’s closing stock price being equal to or greater than $24.22 for five or more consecutive trading days, but no earlier than January 8, 2010.

 

At its meeting in February 2009, the Committee established the 2009 performance bonus plan (the “2009 Bonus Plan”), in conjunction with the Board of Directors’ approval of the 2009 business plan. The 2009 Bonus Plan was established under the shareholder-approved SLM Corporation Incentive Plan. Almost all members of management, approximately 900 employees, were eligible to participate in the 2009 Bonus Plan. The following key measures for corporate success, were adopted as performance measures for the 2009 Bonus Plan:

 

 

The purposes of establishing the 2009 Bonus Plan and communicating results against the Plan were to: (1) inform management employees about the performance of the Company as a whole; (2) unite the workforce around common goals and (3) set expectations about the level of bonus compensation that might be earned at year end. As with past years, the 2009 Bonus Plan was not

 

 

¹  A description of “core earnings” treatment and a full reconciliation to the GAAP income statement can be found in the Company’s Annual Report on Form 10-K, which can be obtained on the Company’s website and otherwise as described on the first page of this proxy statement.

used to determine individual bonuses, but instead to establish the context in which individual bonuses would be determined based primarily on individual performance.²

 

Consistent with the Committee’s recent practice, two Compensation Committee meetings were held in January 2010. At the first meeting in mid-January, the Committee heard a report from its consultant, Hewitt, on executive pay for the Peer Group (as described below under “Executive Compensation Process: Peer Group Comparison”). Final year end results against the 2009 Bonus Plan were reported and discussed. A discussion occurred between the Committee, the CEO and the Senior Vice President for Administration regarding individual performance. A second meeting was held two weeks later, at which time the Committee, among other things, determined bonuses for 2009, which are discussed below.

 

Decisions Made

 

Key considerations of each NEO’s individual performance and how that performance resulted in pay decisions are as follows.

 

Mr. Lord.  During 2009, Mr. Lord continued to enhance the Company’s executive management team by recruiting Mr. DePaulo and other executives whose skills were concentrated in technology, marketing and servicing, building on the addition of Mr. Remondi and Mr. Hewes the prior year. Throughout 2009, Mr. Lord guided the Company’s long-term strategy and planning during a time when legislative uncertainty regarding the timing and nature of a potential termination of the FFELP continued. He oversaw steps taken to stabilize the Company’s liquidity and funding and initiated the Company’s successful bid to become a contract servicer for the U.S. Department of Education’s student loan operations. Mr. Lord led the senior management team in intense long-term strategic planning, which culminated in the development of the Company’s 2010 business plan. This includes steps to position the Company for a future in servicing and education finance, including private student lending and the provision of services to the Department of Education, and addresses the nature of the Company’s diminishing federally guaranteed loan business.

 

At the time he returned to manage the Company, Mr. Lord’s annual base salary was set at $1.25 million pursuant to his employment agreement. Under the agreement Mr. Lord participates in the Company’s equity grant programs. During January 2009, as part of the Annual Equity Grants the Committee awarded Mr. Lord 400,000 stock options and 50,000 shares of performance stock subject to the terms and conditions applicable to senior management and described above. In January 2010 the Committee expressed its confidence in Mr. Lord’s performance for 2009, awarding him a bonus of $950,000, paid 40% in Company restricted stock³ and 60% in cash. (Mr. Lord did not receive a cash bonus for 2008.) Consistent with other reductions at the Company, including Mr. Terracciano’s request to reduce his annual retainer, Mr. Lord and the Committee agreed to amend Mr. Lord’s employment agreement to reduce his annual base salary in 2010 by 20% to $1 million.

 

Mr. Remondi.  Mr. Remondi is the Company’s Vice Chairman and Chief Financial Officer. Mr. Remondi played a key role in the Company’s financing and political strategy and its long-term strategic planning during 2009. Mr. Remondi is also one of the Company’s chief representatives, communicating with shareholders and investors. During 2009, Mr. Remondi was a key presenter in the Company’s earnings releases and debt investor presentations. Mr. Remondi also helped guide the Company through a complete refinance of the Company’s term secured debt facility. He oversaw the Company’s participation in federally-sponsored liquidity and funding programs that enabled the

 

 

²  In order to allow for tax deductibility of bonuses paid to NEOs, the maximum individual bonus is the lesser of $5 million and one percent of the Company’s “core earnings” net income for 2009. The Committee used its discretion and paid bonuses less than that amount.

³  Restricted for one year.

Company to meet the demand for originating federal student loans. Mr. Remondi and his team developed capital planning and management abilities to enable the Sallie Mae Bank to enhance and diversify its funding and liquidity plan. In addition, Mr. Remondi has spoken with many federal officials, including officials in Congress, to discuss student loan reform.

 

Mr. Remondi’s compensation is set forth in his employment agreement entered into in January 2008. During 2009, pursuant to his employment agreement, Mr. Remondi received an annual base salary of $1,000,000 and a grant of 1 million stock options in January of 2009. In January 2010, the Committee expressed its confidence in Mr. Remondi’s 2009 performance, granting him a bonus of $800,000⁴ paid 40% in Company restricted stock and 60% in cash. (Mr. Remondi did not receive a cash bonus for 2008.) Consistent with other reductions at the Company, including Mr. Terracciano’s request to reduce his annual retainer and the reduction of Mr. Lord’s annual base salary, Mr. Remondi and the Committee agreed to amend Mr. Remondi’s employment agreement to reduce his annual base salary in 2010 to $850,000.

 

Mr. Hewes.  Mr. Hewes is the Company’s Senior Executive Vice President and Chief Lending Officer, with responsibility for all of the Company’s technology, servicing and debt collection operations, including private credit loan originations. During 2009, with the addition of new members of senior management, Mr. Hewes refocused the Company’s technology and servicing operations to position the Company for its future business plans. He also oversaw the redesign of the Company’s private credit product in response to the Company’s funding constraints and the final aspects of divestiture of the Company’s purchased paper businesses. Consistent with these additional responsibilities, in January 2009, Mr. Hewes was promoted to Senior Executive Vice President and his base salary during 2009 was increased to $600,000. In recognition of this role, the Committee granted Mr. Hewes 300,000 stock options and 20,000 shares of performance stock in January 2009. In January 2010 the Committee expressed its confidence in Mr. Hewes’ 2009 performance, granting him a bonus of $450,000, paid 40% in Company restricted stock⁵ and 60% in cash. (Mr. Hewes did not receive a cash bonus for 2008.) Consistent with other reductions at the Company, including Mr. Terracciano’s request to reduce his annual retainer and the reduction of Mr. Lord’s annual base salary, Mr. Hewes and the Committee agreed to reduce his annual base salary in 2010 to $550,000.

 

Mr. DePaulo.  Mr. DePaulo joined the Company in March 2009, as Executive Vice President responsible for Business Development, including all aspects of sales and marketing strategy and operations, web-based initiatives, partnership marketing and new product development. Mr. DePaulo also oversees Sallie Mae Bank. In 2009, Mr. DePaulo reorganized Sallie Mae’s business development function, leveraging the skills and capabilities of experienced student loan executives throughout the Company and recruiting experienced financial services executives. Mr. DePaulo expanded Sallie Mae’s distribution channels for its private student loan product, built the retail deposits product line, and established the consumer marketing processes and infrastructure to position the company for growth. Mr. DePaulo’s annual base salary, as provided in his employment agreement, is $400,000. At the commencement of his employment, in March 2009, the Committee granted Mr. DePaulo 150,000 stock options and 20,000 shares of performance stock. In January 2010 the Committee awarded Mr. DePaulo a $300,000 bonus for performance in 2009, paid 40% in Company restricted stock⁶ and 60% in cash, in recognition of his contributions in reorganizing and leading the Company’s marketing and sales strategies and operations as well as strategic planning regarding new products.

 

Mr. Clark.  Mr. Clark joined the Company in March, 2008 as Senior Vice President, Corporate Finance. In September, 2008 he was promoted to Senior Vice President and Treasurer, and in January 29, 2009 he was promoted to Executive Vice President and Treasurer. In recognition of his increased responsibilities, in January 2009, the Committee granted Mr. Clark 45,000 stock options and 5,000 shares of performance stock. Mr. Clark is responsible for the Company’s Corporate Finance

 

 

⁴  Restricted for one year.

⁵  Restricted for one year

⁶  Restricted for one year.

group, which handles all of the Company’s secured and unsecured financing needs, treasury operations, as well as rating agency and debt investor relations. Mr. Clark led the team that permanently funded over $50 billion in student loans, while reducing short-term funding exposure from $34 billion to $10 billion. In addition, Mr. Clark’s team repurchased $3.5 billion of unsecured debt. Mr. Clark’s annual base salary for 2009 was $300. In recognition of his responsibilities in the critical area of financing, in January 2010 the Committee increased his annual base salary to $325,000 for 2010 and awarded him a bonus of $450,000, paid 40% in Company restricted stock⁷ and 60% in cash.

 

Elements of Compensation

 

The executive compensation program includes seven elements of pay. The objective of and reason for each element, the role of those elements in the Company’s overall compensation structure and the relationship between the elements and the overall structure are discussed below.

 

 

 

⁷   Restricted for one year.

⁸   The Company’s defined contribution savings program provides for Company and employee contributions to tax-deferred, savings-style accounts under both a tax-qualified plan and a non-qualified plan. The investment risk is borne solely by employees.

⁹   The Company’s defined benefit plan retirement program is funded solely by corporate contributions and includes a tax-qualified plan and a non-qualified plan, which ceased to accrue benefits on June 30, 2009. The Company bears the investment risk of this program.

 

 

Executive Compensation Process

 

Peer Group Comparison

 

In setting compensation, the Committee reviews compensation data from a variety of sources. This data is used as a context to inform the Committee about the marketplace for executive pay and to determine if pay at the Company is fair and reasonable. The data is not used to set pay at the Company at a particular percentile relative to executive pay reported by peer or survey companies.

With the assistance of its consultant, Semler Brossy, the Committee in January 2009 reviewed the Company’s executive pay with executive pay practices at other companies, using data from a custom selected group, the “Peer Group”. The Company’s Peer Group for these purposes consisted of the following companies: Affiliated Computer Services; BB&T; Capital One Financial; Charles Schwab; CIT Group; Comerica; Discover Financial Services; Fifth Third Bancorp; Keycorp; Nationwide Financial Services; PNC Financial Services; Regions Financial; State Street; and Suntrust Banks. Each of the companies in this Peer Group are in the financial services and data processing sectors with revenues, assets, net income, market value and workforce size that are within a range of the Company’s. In addition, the Senior Vice President, Administration, reviewed with the Committee an analysis of pay for the top four management positions excluding the CEO, using data from a 2008 Financial Services Survey conducted by Towers Perrin (the “Survey Group”) and data that management had obtained from various public records. Companies in the financial services industry with assets greater than $50 billion comprise the Survey Group. These companies include banks, insurance companies, payment processors, federally chartered financial institutions and money managers. The Company purchases this survey data from Towers Perrin, but Towers Perrin is not retained by the Company as a compensation consultant.

 

Role of the CEO and Management

 

In January 2009, the Committee met twice to discuss with management the Company’s performance for the prior year and the Company’s business goals for the current year. During the first meeting, a discussion regarding the performance of each member of the executive management team occurred between members of the Committee, the CEO and the Senior Vice President, Administration, as applicable. The CEO met separately with the Committee to provide his views regarding senior management performance. The Chairman of the Board also met with the Committee to provide his input with regard to the performance of the CEO and other members of executive management. Also at that time, the CEO discussed with the Committee base salaries, equity awards and performance bonuses for the NEOs. At the second meeting in January, as a result of this process, base salaries and equity awards for 2009, which are reported in the tables that follow, were set. Mr. Lord and Mr. Remondi’s salaries were fixed by the terms of their employment agreements. Likewise, Mr. Remondi’s equity grant was fixed by his employment agreement. Mr. DePaulo’s compensation was approved by the Committee at its meeting in March 2009, prior to the commencement of his employment with the Company.

 

Throughout the year, directors had contact with members of the executive management team at one-on-one meetings to prepare for Board and Committee meetings, at Board and Committee meetings themselves, at investor conferences and other corporate events, and on an ad hoc basis, at which time directors sought information from or gave guidance to members of management. This contact enabled directors to observe firsthand the communication, analytical and leadership skills of the management team. Also, each regularly scheduled Board meeting included a session with the CEO during which time the CEO discussed the challenges of the business and how members of the management team were addressing the challenges. These sessions were followed by executive sessions of the independent directors, during which independent Board members discussed among themselves the CEO’s performance. These interactions served to inform the Committee when it approached individual pay decisions in January and February of 2009 and 2010.

 

Change in Control Severance Benefits

 

The Change in Control Severance Plan, which was adopted in 2006, applies to officers at the level of Senior Vice President and above. The plan is designed to reduce the possibility that executives might preemptively seek jobs at other corporations in anticipation of a potential change in control and to retain executives through the finalization and integration of any change in ownership of the Company, providing for continuity of management. As noted above, the Company considers this plan, including the tax gross up provisions, to have been important in allowing the Company to maintain operations

throughout the pendency of a proposed merger during 2007 and to quickly reorient itself following termination of that merger in 2008.

 

If termination of employment for reasons defined in the plan occurs within 24 months following a change in control of the Company, the participant is entitled to receive a lump sum cash payment equal to two times the sum of his or her base salary and average annual performance bonus (based on prior two years). A participant will also be entitled to receive a pro-rated portion of his or her target annual performance bonus for the year in which the termination occurs, as well as continuation of medical insurance benefits for a two-year period. The plan provides for tax gross-up payments in the event that benefits exceed amounts determined under the Internal Revenue Code of 1986, as amended (the “Tax Code”).

 

The Committee amended the Change in Control Severance Plan effective January 1, 2009 to eliminate vesting solely upon a change in control as defined in the plan. As amended, for equity awards granted after January 1, 2009, unvested equity awards become vested and non-forfeitable in connection with a change in control only if the participant’s employment is terminated or if the acquiring or surviving entity does not assume the awards. Equity awards made before January 1, 2009 vest upon a change in control, regardless of whether the participant’s employment terminates.

 

Executive Severance Benefits

 

At its meeting on May 22, 2009, the Committee established a severance policy for officers of the Company at the level of senior vice president and above, which is set forth in the Executive Severance Plan. The Committee established the severance policy in order to create a uniform severance policy applicable to senior management. Prior to the adoption of the severance policy, the Company did not have uniform guidelines regarding payment of severance to members of senior management. The Committee determined that adoption of a standard severance policy was advisable and consistent with the Board and management’s plans to position the Company to move forward during a time of uncertainty regarding the Company’s FFELP business line (see the section titled “Compensation Discussion and Analysis: Overview of Company Performance” and the Company’s Report on Form 10-K for a greater discussion of regarding the legislative uncertainty affecting the Company’s FFELP business).

 

Under the policy, eligible officers who do not have an individually negotiated severance arrangement, will receive a lump sum cash payment equal to a multiple of their compensation (base salary plus an average of the last 24 months of bonus compensation) upon the following events: (i) resignation from employment for good reason; (ii) the Company’s decision to terminate an eligible officer’s employment for any reason other than for cause, death or disability or (iii) upon mutual agreement of the Company and the eligible officer. The multiplier for each eligible officer position is as follows: CEO-2; CFO or Senior Executive Vice President-1.5; Executive or Senior Vice President-1.0. If the Company’s decision to terminate an eligible officer’s employment is due to job abolishment, outstanding and unvested equity awards granted through May 22, 2009 vest upon termination according to their underlying terms. Otherwise, the two-year average of any amounts included in taxable income due to vesting of restricted stock during the two-year period prior to termination of employment will be included in yearly compensation. In no event will a severance payment exceed a multiple of three times an officer’s base and incentive bonus.

 

In addition to the cash severance payment, eligible officers will receive subsidized medical benefits and outplacement services for 18 to 24 months. If an eligible officer is otherwise subject to an individually-negotiated severance arrangement, the terms of that arrangement, and not the policy, apply until the expiration of the arrangement. The policy will apply after the expiration of the arrangement.

 

Share Ownership Guidelines

 

The Company has maintained share ownership guidelines applicable to NEOs, for more than ten years, except for a four-month period beginning in April, 2009, during which time the application of the

guidelines was suspended due to the decreased price of the Company’s common stock as a result of the global economic downturn. The ownership guidelines, which are expected to be achieved over a five-year period, are as follows:

 

Chief Executive Officer — Lesser of 1 million shares or $5 million in value

Vice Chairman & CFO/Sr. Executive Vice President — Lesser of 500,000 shares or
  $2.5 million in value

Executive Vice President — Lesser of 200,000 shares or $1 million in value

 

The guidelines encourage continued ownership of a significant amount of the Company’s common stock acquired through equity awards and help align the interests of executives with the interests of the Company’s shareholders. Except as otherwise approved by the Committee, an NEO must hold all Company common stock acquired through equity grants until the guidelines are met, and an NEO will not be eligible to receive further equity grants if he or she sells this stock (i) before the guidelines are met or (ii) after the guidelines are met if such sale would result in violation of the guidelines.

 

The following shares and share units count towards the ownership guidelines: shares held in brokerage accounts; vested shares credited to deferred compensation accounts; shares credited to qualified retirement plan accounts; vested performance stock and performance stock units; on an after-tax basis, restricted stock and restricted stock units that vest solely upon the passage of time count upon grant; and on an after-tax basis, the extent to which vested stock options are “in-the-money.”

 

Equity Grant Practices in 2009

 

The Company grants stock options and performance stock to senior management annually, on an incentive basis (“Annual Equity Grants”), as well as upon initial hire or promotion, and in the event of acquisitions (“Event Driven Equity Grants.”)

 

 

The Compensation and Personnel Committee of the Board of Directors has reviewed and discussed with management the Compensation Discussion and Analysis. Based on its review and discussions with management, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference in the Company’s Annual Report on Form 10-K for 2009.

 

Compensation and Personnel Committee

Wolfgang Schoellkopf, Chairman

Diane Suitt Gilleland

A. Alexander Porter, Jr.

Steven L. Shapiro

 

The table below summarizes certain compensation paid or awarded to or earned by each of the NEOs for the fiscal year ended December 31, 2009. NEOs for 2009 are:

 

Mr. Lord, who served as Principal Executive Officer for the entire year;

 

Mr. Remondi, who served as Principal Financial Officer for the entire year;

 

Messrs. Hewes, Clark and DePaulo who were serving as executive officers at year end and were the most highly paid executive officers other than Messrs. Lord and Remondi; and

 

Messrs. Autor and Feierstein, who would have been among the highest paid executive officers had they been serving as executive officers at year end.

 

For this purpose, “compensation” means the amount disclosed in the “Total” column of the Summary Compensation table in this proxy statement less the amounts disclosed in the Change in Pension Value column of that same table.

 

For those individuals who were also NEOs in 2008 and 2007, compensation information for the years ended December 31, 2008 and December 31, 2007 is included.

 

 

 

 

 

 

 

The combination of both plans provides NEOs with an employer contribution of up to two percent and a matching contribution of up to six percent of base salary and annual performance bonus up to $745,000 of total covered compensation.

 

 

 

 

GRANTS OF PLAN-BASED AWARDS IN 2009

 

 

 

 

NARRATIVE DISCUSSION OF COMPENSATION ARRANGEMENTS

 

Individually negotiated compensation arrangements were in force during 2009 for three NEOs: Messrs. Lord, Remondi and DePaulo. A summary of each of these arrangements follows:

 

Mr. Lord.  In May 2007, Mr. Lord and the Company entered into an employment agreement, which ends on December 31, 2010, for Mr. Lord’s services as Chief Executive Officer. Under the agreement, Mr. Lord was paid an annual base salary of $1.25 million. Effective January 2010, Mr. Lord agreed to decrease his annual base salary to $1,000,000.

 

The agreement establishes payment terms in the event Mr. Lord’s employment ends for certain reasons. If the Company terminates Mr. Lord’s employment “without cause” or Mr. Lord ends his employment for good reason, Mr. Lord is entitled to receive a cash payment equal to: (1) the number of months remaining in the term of the agreement divided by 12, but not less than one; times (2) his base salary plus his target annual bonus for the year.

 

Termination for cause generally means a determination by the Board of Directors that there has been a failure by Mr. Lord to perform his responsibilities and such failure remains uncured, or that Mr. Lord has committed an act of misconduct, which means (i) embezzlement, fraud, commission of a felony, breach of fiduciary duty or deliberate disregard of material Company policies; (ii) personal dishonesty materially injurious to the Company; (iii) unauthorized disclosure of any proprietary information; or (iv) competing with the Company while employed or within at least a two-year period (or in some instances longer) after termination of employment.

 

Termination for good reason generally means (i) a material reduction in Mr. Lord’s position; (ii) a reduction in his base salary or a material reduction in his compensation arrangements or benefits (except that variability in the value of stock-based compensation or in incentive compensation will not be considered a reduction); or (iii) a forced relocation of the Company’s executive offices.

 

In the event of termination of employment following a change in control of the Company, Mr. Lord’s benefits are determined under the terms of his employment agreement as set forth above and not the Change in Control Severance Plan.

Mr. Remondi.  In January 2008, Mr. Remondi and the Company entered into a three-year employment agreement, which ends on January 8, 2011, for Mr. Remondi’s services as Chief Financial Officer and Vice Chairman. Under the agreement, Mr. Remondi received 3 million options to purchase the Company’s common stock, is paid an annual base salary of $1 million and is eligible to receive a maximum annual performance bonus of three times his salary. Effective January 2010, Mr. Remondi agreed to decrease his annual base salary to $850,000.

 

Two million of the options were granted on January 8, 2008 at a grant price of $17.30, the closing price of the Company’s stock on that day. These options vested on January 8, 2010, after meeting price and time vesting requirements. One million of the options were granted on January 8, 2009 at a grant price of $10.17, the closing price of the Company’s stock on that day. These options vest and are exercisable when the share price trades at $24.22 for five consecutive days (a 40 percent increase over $17.30, the grant price for the first two million options), but no earlier than January 8, 2010. If these options do not vest under the price-vesting target, they vest on January 8, 2014. Once vested, options may be exercised during the remainder of their 10-year term, unless Mr. Remondi’s employment ends. Once his employment ends, Mr. Remondi must exercise vested options within 3 months of his last day of employment, except in the case of death or disability. If Mr. Remondi’s employment ends due to death or disability, unvested options vest immediately and are exercisable for one year following his death or disability and his family will receive company-sponsored medical benefits for one year.

 

The agreement establishes payment terms in the event Mr. Remondi’s employment ends for certain reasons. If the Company terminates Mr. Remondi’s employment “without cause” or Mr. Remondi ends his employment for good reason, Mr. Remondi is entitled to receive a target bonus plus a cash payment equal to six months of “pay” (the average of base salary and annual bonus since employment) for each year of service, up to a maximum of three years of “pay.” Termination of employment by the Company without cause and termination of employment by Mr. Remondi for good reason have the same meanings as in Mr. Lord’s agreement described above. Under his contract, Mr. Remondi is provided with housing in Reston, Virginia and an allowance of $300,000 for personal use of corporate aircraft. In the event of termination of employment following a change in control of the Company, Mr. Remondi’s benefits are determined under the Change in Control Severance Plan.

 

Mr. DePaulo.  In March, 2009, Mr. DePaulo and the Company entered into a two-year employment agreement, which ends March 27, 2011. Under the agreement, Mr. DePaulo will serve as an Executive Vice President and is paid an annual base salary of $400,000. Under the agreement, Mr. Depaulo was granted 150,000 stock options and 20,000 shares of restricted stock, both containing the same vesting terms as the other senior management grants in January 2009 and described in the section titled “2009 Compensation Decisions”.

 

The agreement establishes payment terms in the event Mr. DePaulo’s employment ends during the term for certain reasons. If the Company terminates Mr. DePaulo’s employment without cause or Mr. DePaulo ends his employment for good reason, Mr. DePaulo is entitled to receive a cash payment equal to one-half of his target bonus for the year plus one-half of his annual base salary, and in such event Mr. DePaulo shall continue to be enrolled in the Company’s medical and dental plans for six months. Termination of employment by the Company without cause and termination of employment by Mr. DePaulo for good reason generally have the same meanings as in Mr. Lord’s agreement described above. In the event of termination of employment following a change in control of the Company, Mr. DePaulo’s benefits are determined under the Change in Control Severance Plan.

OUTSTANDING EQUITY AWARDS AT 2009 FISCAL YEAR END

 

The table below sets forth information regarding options and stock awards that were outstanding as of December 31, 2009.