OM GROUP, INC.

 

127 Public Square

1500 Key Tower

Cleveland, Ohio 44114-1221

 

Notice of Annual Meeting of Stockholders

to be Held May 8, 2007

 

The Annual Meeting of Stockholders of OM Group, Inc. will be held in the 27^th Floor Conference Center Auditorium at Key Tower, 127 Public Square, Cleveland, Ohio 44114, on Tuesday, May 8, 2007, at 10:00 a.m., for the following purposes:

 

1. To elect two directors for terms expiring in 2010 and one director for a term expiring in 2009;

 

2. To act upon a proposal to adopt the 2007 Incentive Compensation Plan;

 

3. To confirm the appointment of Ernst & Young LLP as our independent registered public accountant; and

 

4. To consider any other business that is properly brought before the meeting or any adjournment.

 

Stockholders of record at the close of business on March 16, 2007 are entitled to notice of and to vote at the meeting. This proxy statement and the accompanying proxy will be sent to stockholders by mail on or about March 28, 2007.

 

We cordially invite you to attend the meeting. To ensure your representation at the meeting, please vote promptly by mail, telephone or the Internet by following the instructions on the enclosed proxy or voting instruction card, even if you plan to attend the meeting. Mailing your completed proxy or voting instruction card, or using our telephone or Internet voting systems, will not prevent you from voting in person at the meeting if you wish to do so.

 

By Order of the Board of Directors

 

Valerie Gentile Sachs, Secretary

 

Cleveland, Ohio

March 28, 2007

PROXY STATEMENT

for

ANNUAL MEETING OF STOCKHOLDERS

of

OM GROUP, INC.

 

TABLE OF CONTENTS

 

 

What is the purpose of the annual meeting?

 

At our annual meeting, you will be asked to:

 

 

In addition, we will transact any other business that properly comes before the meeting.

 

Who is entitled to vote?

 

Holders of record of our common stock as of the close of business on March 16, 2007 are entitled to vote at the annual meeting. At that time, we had 29,800,253 outstanding shares of common stock. We have no other outstanding classes of stock that are entitled to vote at the annual meeting. Voting stockholders are entitled to one vote per share.

 

How do I vote?

 

You may vote in person at the meeting or through a proxy or voting instruction card. To vote by proxy or voting instruction card, you should sign and date each proxy card or voting instruction card you receive and return it in the prepaid envelope. If you are a registered stockholder or a participant in our Profit-Sharing and Retirement Savings Plan, you may vote by telephone or electronically through the Internet, by following the instructions included on your proxy card or voting instruction card.

 

What if I hold shares indirectly?

 

If you hold shares in a stock brokerage account or through a bank or other nominee, you are considered to be the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by your broker or nominee. As the beneficial owner you have the right to direct your broker how to vote. Under the New York Stock Exchange rules, your broker is permitted to vote your shares on the election of directors and the appointment of the independent registered public accountant, even if you do not furnish voting instructions. However, your broker may not vote on the proposal relating to the 2007 Incentive Compensation Plan without instructions from you. If you do not provide instructions on this issue, a broker non-vote will occur.

 

If your shares are held in “street name,” your broker or other nominee may have procedures that will permit you to vote by telephone or electronically through the Internet.

 

Can I change my vote?

 

You have the right to change your vote at any time before votes are counted at the meeting by:

 

 

What are the requirements and procedures for a quorum, abstentions and broker non-votes?

 

Your shares are counted as present at the meeting if you attend the meeting or if you properly return a proxy by mail or vote by telephone or through the Internet. In order for us to vote on matters at the meeting, a majority of our outstanding shares of common stock as of March 16, 2007 must be present in person or by proxy at the meeting, which includes shares that have been voted by telephone or the Internet. This is referred to as a quorum. Abstentions will be counted for purposes of establishing a quorum at the meeting and will be counted as voting (but not for or against) on the affected proposal. Broker non-votes will be counted for purposes of establishing a quorum but will not be counted as voting. If a quorum is not present, the meeting will be adjourned until a quorum is present.

 

How many votes are needed to elect directors and approve the other proposals?

 

The nominees for director who receive the greatest number of “for” votes will be elected to the director positions being filled. Shares not voted will have no impact on the election of directors. If you sign and return a proxy card or use the telephone or Internet procedures but do not give voting instructions, your shares will be voted “for” the candidates nominated by the Nominating and Governance Committee and approved by the Board. Approval of the other proposals requires the affirmative vote of a majority of shares represented at the meeting.

 

How will voting on any other business be conducted?

 

We currently do not know of any business to be considered at the annual meeting other than the three proposals described in this proxy statement. If any other business is properly presented at the meeting, your signed proxy card or use of the telephone or Internet procedures gives authority to the named proxies to vote your shares on such matters in their discretion.

 

Who will count the vote?

 

Representatives of National City Bank will tabulate the votes and act as inspectors of election.

 

Our authorized number of directors is presently fixed at eight, divided into three classes, with two classes having three members and one class having two members. Our directors are elected to serve three-year terms, so that the term of office of one class of directors expires at each annual meeting.

 

The Nominating and Governance Committee has recommended, and the Board of Directors has approved, the nomination of the following individuals, each of whom is currently a director, for election as directors for terms expiring at our annual meeting in 2010:

 

 

and the following individual, who also is currently a director, for election as a director for a term expiring at our annual meeting in 2009:

 

 

If any of these nominees becomes unavailable for election, the accompanying proxy may be voted for a substitute, or in favor of holding a vacancy to be filled by the directors. We have no reason to believe that any nominee will be unavailable. The accompanying proxy may be voted for up to the number of nominees named and the nominees receiving the largest number of “FOR” votes will be elected to the director positions to be filled.

 

The following information is provided regarding each nominee for election as a director and the continuing directors.

 

Nominees for Election as Directors for Terms Expiring in 2010

 

Katharine L. Plourde, age 55, has been a director since 2002. Ms. Plourde was a Principal and analyst at the investment banking firm of Donaldson, Lufkin & Jenrette, Inc., New York, New York, until November 1997. Since that time she has engaged in private investing. Ms. Plourde is a director of Pall Corporation (NYSE:PLL), a global producer of filtration and separation products and systems and serves as a director of a private corporation.

 

David L. Pugh, age 58, was appointed as a director on January 9, 2007. Mr. Pugh has served as Chairman of Applied Industrial Technologies Inc. (“Applied”), an industrial product distributor, since October 2000, and as Applied’s Chief Executive Officer since January 2000. He was President of Applied from 1999 to October 2000. Prior to joining Applied, Mr. Pugh was Senior Vice President of Rockwell Automation and general manager of Rockwell’s Industrial Control Group. Mr. Pugh is a director of Hexcel Corporation (NYSE:HXL), a plastics materials manufacturer, and of R.W. Becket Corp., a private company. Mr. Pugh was recommended to the Nominating and Corporate Governance Committee by a third-party search firm retained by that Committee.

 

Nominee for Election as Director for Term Expiring in 2009

 

Gordon A. Ulsh, age 61, was appointed as a director on February 16, 2007. Mr. Ulsh has served as President, Chief Executive Officer and a director of Exide Technologies (“Exide”), a company specializing in stored electrical energy products and services for industrial and transportation applications around the world since April 2005. From 2001 until March 2005, Mr. Ulsh was Chairman, President and Chief Executive Officer of FleetPride Inc., the nation’s largest independent aftermarket distributor of heavy-duty truck parts. Prior to joining FleetPride in 2001, Mr. Ulsh worked with Ripplewood Equity Partners, providing analysis of automotive industry segments for investment opportunities. Earlier, he served as President and Chief Operating Officer of Federal-Mogul Corporation in 1999 and as head of its Worldwide Aftermarket Division in 1998. Prior to Federal-Mogul, he held a number of leadership positions with Cooper Industries, Inc., including Executive Vice President of its automotive products segment. Mr. Ulsh joined Wagner Brake and Lighting in 1983 as Vice President of Operations (which company was acquired by Cooper Industries, Inc. in 1985), following 16 years in manufacturing and engineering

management at Ford Motor Company. Mr. Ulsh was recommended to the Nominating and Corporate Governance Committee by a third-party search firm retained by that Committee.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ALL NOMINEES.

 

Continuing Directors Whose Term of Office Expires in 2009

 

Richard W. Blackburn,  age 64, has been a director since August 2005. Mr. Blackburn retired from Duke Energy Corporation in 2004 after seven years as Executive Vice President and General Counsel, the last year of which he was also Chief Administrative Officer. Mr. Blackburn is a director of Enesco Group, Inc., a producer of giftware and home and garden decor products, and is a Trustee of the Massachusetts Eye and Ear Infirmary and George Washington University.

 

Steven J. Demetriou, age 48, has been a director since November 2005. Mr. Demetriou has been the Chairman of the Board and Chief Executive Officer of Aleris International, Inc., an international aluminum company, since December 2004 following the merger of Commonwealth Industries, Inc. and IMCO Recycling, Inc. Mr. Demetriou served as President and Chief Executive Officer of Commonwealth from June 2004 and served as a director of Commonwealth from 2002 until the merger. Mr. Demetriou was President and Chief Executive Officer of privately held Noveon, Inc., a global producer of advanced specialty chemicals for consumer and industrial applications, from 2001 until June 2004, at which time he led the sale of Noveon to Lubrizol Corporation. From 1999 to 2001, he was Executive Vice President of IMC Global Inc., a producer and distributor of crop nutrients and animal feed ingredients. Mr. Demetriou also serves on the board of privately held Kraton Polymers. He serves on the boards of several community organizations including United Way of Greater Cleveland, Cuyahoga Community College Foundation and the Cleveland Zoological Society.

 

Continuing Directors Whose Term of Office Expires in 2008

 

William J. Reidy, age 66, has been a director since 2002. Mr. Reidy, a CPA, was the managing partner of the Northeast Ohio practice of PricewaterhouseCoopers LLP. He retired from PricewaterhouseCoopers in 1999 after a 35-year career with the firm. Mr. Reidy is a member of the Board of Trustees of The Cleveland Clinic Foundation, a provider of health care services, and he currently serves on the boards of several community organizations including Cleveland Clinic Western Region and the Gateway Economic Development Corporation.

 

Joseph M. Scaminace, age 53, has been a director and our Chief Executive Officer since June 2005 and Chairman of our Board since August 2005. From 1999 to June 2005, Mr. Scaminace was the President, Chief Operating Officer and a board member of The Sherwin-Williams Company, a manufacturer and distributor of coatings. Mr. Scaminace currently is a member of several boards of directors, including Parker-Hannifin Corporation (NYSE:PH), a global producer of fluid power systems, electromechanical controls, and related components, Boler Company, a privately held company that makes truck and trailer suspension systems and auxiliary axles systems for the commercial heavy-duty vehicle market, and The Cleveland Clinic Foundation, a provider of health care services.

 

On February 7, 2007, the Board approved the 2007 Incentive Compensation Plan, subject to approval by our stockholders at this annual meeting. If approved by the stockholders, the 2007 Plan will supersede and replace our 1998 Long-Term Incentive Compensation Plan and our 2002 Stock Incentive Plan. The 1998 Plan and 2002 Plan will terminate upon stockholder approval of the 2007 Plan, such that no further grants will be made under either the 1998 Plan or the 2002 Plan. The terminations will not affect awards then outstanding under the 1998 Plan or the 2002 Plan. A copy of the 2007 Plan is attached to this proxy statement as Exhibit A and a summary of the 2007 Plan is provided below.

 

Purpose and Awards.  The purpose of the 2007 Plan is to advance our long-term interest by attracting, motivating and retaining our key employees and non-employee directors by means of long-term incentive

compensation that will align the interests of participants and stockholders through the ownership and performance of our common stock. Under the 2007 Plan, the Compensation Committee of the Board may grant stock options, stock appreciation rights, restricted stock awards and phantom stock and restricted stock unit awards.

 

Administration.  The 2007 Plan is administered by the Compensation Committee, which has conclusive authority to construe and interpret the 2007 Plan and any related award agreement, and to establish, amend and rescind administrative policies for the administration of the 2007 Plan, including the creation of any subplans or policies necessary to enable employees who are foreign nationals or employed outside of the U.S. to participate in the Plan.

 

Eligibility.  Those persons eligible to participate in the 2007 Plan are (a) our employees and employees of our subsidiaries who hold positions of managerial, administrative or professional responsibility and whose performance, as determined by the Compensation Committee, merits awards under the 2007 Plan and (b) non-employee directors. The terms, conditions and restrictions of each award are set forth in an award agreement.

 

Shares Subject to the 2007 Plan.  The total number of shares of common stock available for awards under the 2007 Plan (including any annual stock issuances made to non-employee directors) is 3,000,000. The 2007 Plan provides that no more than 1,500,000 shares of common stock may be the subject of awards that are not stock options or stock appreciation rights. In addition, no more than 250,000 shares of common stock may be awarded to any one person in any calendar year, whether in the form of stock options, restricted stock or another form of award.

 

Stock Options.  Stock option awards may be granted in the form of non-statutory stock options or incentive stock options. Options are exercisable in whole or in such installments as may be determined by the Compensation Committee, except that no stock option may be exercisable more than ten years after the date of grant. The Compensation Committee establishes the exercise price of stock options, which may not be less than the per share fair market value of our common stock on the date of grant. The Board may establish other terms, conditions, restrictions or limitations on any stock option award, including vesting periods and continued employment requirements. The exercise price is payable in cash or shares of common stock, or a combination of cash and common stock, or other consideration as determined by the Compensation Committee.

 

Stock options granted in the form of incentive stock options are also subject to certain additional limitations, as provided in Section 422 of the Internal Revenue Code of 1986, as amended. The aggregate fair market value of common stock with respect to which incentive stock options may become exercisable by an employee in any calendar year may not exceed $100,000. In addition, any incentive stock option granted to an employee who owns shares of our common stock possessing more than 10% of the combined voting power of all classes of our shares must have an option price that is at least 110% of the fair market value of the shares and may not be exercisable more than five years after the date of grant.

 

Stock Appreciation Rights.  Stock appreciation rights (SARs) may be granted pursuant to the 2007 Plan either separately or in conjunction with stock options. Upon exercise of a SAR, the holder will receive payment from us equal to the appreciation in market value of the shares of common stock covered by the SAR over the option or grant price of the SAR. The Committee may determine all other terms, conditions, restrictions and limitations on any SAR award, including the manner in which payment of the appreciation in value shall be made.

 

Restricted Stock Awards.  The Compensation Committee may grant restricted stock awards with such terms, conditions, restrictions or limitations as the Compensation Committee may determine are appropriate, including restrictions on vesting and transferability, requirements for continued employment or service, individual performance or our performance at the corporate, segment or identified business level. However, all time-based restricted stock awards must have a minimum vesting schedule of three years and all performance-based restricted stock awards must have a minimum vesting schedule of one year. During the period in which any shares of our common stock are subject to any conditions, restrictions or limitations, the Compensation Committee may grant to the participant to whom the award was made rights of a stockholder with respect to such shares, including the right to vote such shares and to receive dividends paid on the shares of common stock.

If restricted stock awards are granted subject to our financial performance, those awards will be earned upon satisfaction of the performance targets related to the performance period established by the Compensation Committee. Performance targets may vary among awards and among participants. The Compensation Committee may establish performance targets in terms of all or any combination of the following: sales, sales growth, gross margins, operating profit, operating profit growth, net income, net income growth, earnings per share, growth in earnings per share, EBITDA, cash flow per share, total stockholder returns, return on equity, return on invested capital, return on net assets employed, common stock price or common stock price appreciation. In determining whether performance targets have been met, the Compensation Committee has discretion to take nonrecurring or extraordinary events or items into account.

 

Section 162(m) of the Internal Revenue Code of 1986 prohibits a publicly-held corporation from claiming a deduction on its federal income tax return for compensation in excess of $1 million paid for a given fiscal year to the chief executive officer and the four next most highly compensated officers of the corporation at the end of a fiscal year. The $1 million compensation deduction limitation does not apply to “performance-based” compensation under Section 162(m) of the Code. To the extent appropriate, restricted stock awards that are made to participants who are subject to Section 162(m) of the Code are intended to qualify under Section 162(m).

 

Phantom Stock and Restricted Stock Units.  The Compensation Committee may grant awards of phantom stock and restricted stock units, each of which will entitle the participant to receive the market value or the appreciation in value of an equivalent number of shares of common stock on the settlement date determined by the Compensation Committee. The Compensation Committee may determine other terms, conditions, restrictions or limitations on any award of phantom stock or restricted stock units, including restrictions on vesting and transferability, requirements for continued employment or service, individual performance or our performance at the corporate, segment or identified business level, but subject to the minimum vesting schedule described above under “Restricted Stock Awards.” Performance-based phantom stock or restricted stock unit awards shall be subject to satisfaction of one or more of the corporate, segment or identified business performance goals listed above under “Restricted Stock Awards,” as specified by the Compensation Committee. Phantom stock or restricted stock unit awards based on such performance criteria and made to employees subject to Section 162(m) of the Code are intended to qualify under Section 162(m) to the extent appropriate.

 

Annual Stock Issuance to Non-Employee Directors.  Each non-employee director may receive all or a portion of his or her annual compensation as a non-employee director in the form of common stock, as determined annually by the Board of Directors in its discretion. The amount of annual compensation paid in common stock may vary from year to year. For purposes of determining the number of shares of common stock to be issued, the shares will be valued at the average of the high and low sale price of the common stock on the NYSE on the applicable measurement date.

 

Annual Incentive Awards.  The Compensation Committee is responsible for administering our annual incentive program, which provides annual bonus opportunities to certain of our employees. The Compensation Committee annually selects the employees who participate in the program and determines the annual bonus opportunity available to each selected employee. Annual bonus opportunities are based on factors and subject to terms and conditions provided in the annual incentive program for the particular year, which may include satisfaction of corporate performance goals, segment or identified business performance goals and individual objectives. A performance bonus will be earned upon satisfaction of one or more of the performance targets listed above under “Restricted Stock Awards,” as specified by the Compensation Committee. Such performance bonus awards are intended to qualify under Section 162(m) of the Code, and the maximum dollar amount of any performance bonus payable to an employee in a calendar year is $10,000,000.

 

Dividends and Dividend Equivalents.  If an award is granted in the form of a restricted stock award or a phantom stock or restricted stock unit award, the Compensation Committee may choose to grant to the participant who received the award the right to receive dividends or dividend equivalents.

 

Transferability.  The rights and interest of a participant under the 2007 Plan may not be transferred, except by will or the applicable laws of descent and distribution in the event of the participant’s death.

 

Adjustments upon Changes in Capitalization.  The number of shares of our common stock as to which awards may be granted under the 2007 Plan (as well as the limitations upon the number of shares subject to awards other than stock options and SARs and subject to awards to an individual in a calendar year) and shares of common stock subject to outstanding awards (together with the exercise price of outstanding stock options or SARs) will be appropriately adjusted to reflect changes in our capitalization, including stock splits, stock dividends, mergers, reorganizations, consolidations and recapitalizations.

 

Noncompetition.  A key employee or non-employee director may be required to forfeit unexercised, unearned or unvested awards under the 2007 Plan if the Compensation Committee determines that he or she has engaged directly or indirectly in any business or activity that is competitive with our business or is, in the opinion of the Compensation Committee, detrimental to our best interests.

 

Amendment.  The Board may amend, suspend or terminate the 2007 Plan at any time, subject to applicable shareholder approval requirements. The Compensation Committee may amend any outstanding award agreement, except only with the consent of the participant if the participant’s rights would be impaired and not so as to increase the amount otherwise payable under an award intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code.

 

Change in Control.  In the event of a change in control (as defined in the 2007 Plan), stock options not otherwise exercisable will become fully exercisable, and all restrictions and conditions previously established (including performance targets, at the target level) with respect to restricted stock, phantom stock and restricted stock unit awards will be deemed to have been satisfied. SAR awards will become exercisable, and we will pay each participant the spread between the base price of the SAR and the price paid in connection with the change in control. With regard to annual incentive awards, all performance targets and individual objectives will be deemed to have been satisfied, and employees participating in the annual incentive program will be entitled to receive payments of bonuses on that basis.

 

Term.  Awards may be granted under the 2007 Plan for a period of ten years from the date of adoption of the 2007 Plan by the Board, at which date the 2007 Plan will expire without affecting any awards that are then outstanding.

 

Federal Income Tax Consequences.  For federal income tax purposes, a holder of stock options (“optionee”) does not realize taxable income at the time of the grant of an incentive stock option, a non-statutory stock option or a SAR. Upon the exercise of a non-statutory stock option, we are entitled to a federal income tax deduction and the optionee recognizes ordinary taxable income (subject to withholding) in the amount by which the fair market value of the shares the optionee receives exceeds the option price. Upon the exercise of a SAR, we are entitled to a federal income tax deduction and the participant realizes ordinary taxable income in the amount of the cash or fair market value of the common stock received. On the subsequent sale of shares received upon the exercise of a non-statutory stock option or in payment of SARs, the difference between the fair market value of the shares on the date of receipt and the amount realized on the sale will be treated as a capital gain or loss, which will be short or long term depending on the length of the period for which shares are held prior to sale.

 

In the case of incentive stock options, the optionee generally does not realize taxable income until the sale of shares received upon exercise of the option. However, the difference between the option price and the fair market value of the stock on the date of exercise is treated as a preference item for purposes of the alternative minimum tax. If the shares are not sold within two years after grant and one year after exercise of the option, any gain or loss realized will be treated as long-term capital gain or loss. We will not be entitled to a deduction for federal income tax purposes in connection with the grant or the exercise of an incentive stock option. If a sale occurs prior to two years after grant or one year after exercise, then the difference between the option price and the fair market value of the stock on the date of exercise (or, if less, the difference between the amount realized on sale and the market value on the date of exercise) is taxable as ordinary income to the optionee and is deductible by us for federal income tax purposes.

 

In the case of an award of restricted stock, a participant realizes ordinary taxable income (subject to withholding) equal to the fair market value of the shares received as of the first day that such shares become

transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. We are entitled to a federal income tax deduction at that time in the same amount. Under Section 83(c)(3) of the Internal Revenue Code, if the sale of shares could subject a participant to suit under Section 16(b) of the Securities Exchange Act of 1934, the shares are treated as subject to a substantial risk of forfeiture and not transferable for a period not to exceed six months from the date of the award of restricted stock.

 

In the case of phantom stock or restricted stock units, a participant realizes ordinary taxable income (subject to withholding) equal to the cash received on the settlement date. We are entitled to a federal income tax deduction at that time in the same amount.

 

Vote Required.  Approval of the 2007 Plan requires the affirmative vote of the holders of a majority of the shares of our common stock present in person or by proxy and entitled to vote at this annual meeting.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSED ADOPTION

OF THE 2007 INCENTIVE COMPENSATION PLAN.

 

 

The Audit Committee has appointed Ernst & Young LLP to serve as our independent registered public accountant for the year 2007 and requests that stockholders confirm such appointment. Ernst & Young audited our consolidated financial statements and management’s report on internal control over financial reporting for 2006. Representatives of Ernst & Young will be present at the annual meeting and will have an opportunity to make a statement if they so desire and to respond to appropriate questions by stockholders. If our stockholders do not confirm Ernst & Young as our independent registered public accountant, the Audit Committee will reconsider the appointment of our independent registered public accountant.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU CONFIRM THE
APPOINTMENT OF ERNST & YOUNG LLP AS OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTANT FOR 2007.

 

Our Board of Directors has four regularly scheduled meetings per year. These meetings are usually held in our headquarters in Cleveland, Ohio. The Board met nine times in 2006. Directors are expected to attend Board meetings, our annual stockholders’ meeting, and the meetings of the committees on which he or she serves. During 2006, each director attended at least 75% of the meetings of the Board and those committees on which he or she served, except that Mr. Demetriou attended 69% of such meetings. Each director in office in May 2006 attended our annual meeting of stockholders held in May 2006.

 

Our independent directors meet in executive session during each Board meeting. Lead independent director Katharine L. Plourde presides at those executive sessions.

 

In addition to the independence criteria under the NYSE listing standards, our Board of Directors has adopted additional standards to determine director independence. These standards are located in our Corporate Governance Principles, which can be found in the “Corporate Governance” portion of our website (www.omgi.com).

 

The Board has affirmatively determined that Richard W. Blackburn, Steven J. Demetriou, Katharine L. Plourde, David L. Pugh and William J. Reidy meet these standards of independence. Mr. Ulsh only recently joined the Board, and the Board has not yet considered whether he meets the independence standards. Mr. Leo Daley served as a director from May 17, 2005 to May 2, 2006 and was independent during his period of service. In assessing Ms. Plourde’s independence, the Board considered her position as a director of one of our suppliers, Pall Corporation. The Board determined that the supply relationship between Pall and us did not impact Ms. Plourde’s independence or affect her ability to exercise independent judgment as our director. In assessing Mr. Reidy’s

independence, the Board considered that Mr. Reidy’s daughter is employed by PricewaterhouseCoopers, which provides some of our internal audit, tax and transaction advisory services. Mr. Reidy’s daughter has had no involvement in our account and the Board determined that the relationship did not impact Mr. Reidy’s independence or affect his ability to exercise independent judgment as our director.

 

The Board has a standing Audit Committee, Compensation Committee, and Nominating and Governance Committee, each composed solely of independent directors as defined by the NYSE listing standards and our Corporate Governance Principles. Each Committee has a charter that can be found in the “Corporate Governance” portion of our website (www.omgi.com).

 

The Audit Committee, currently composed of Ms. Plourde and Messrs. Blackburn, Demetriou and Reidy, met eight times in 2006. Mr. Reidy is the committee chairman. The committee is responsible for:

 

 

In performing its functions, the Audit Committee acts in an oversight capacity for our management processes and systems, internal control structure, financial reporting and risk management. It is not responsible for preparing or assuring the accuracy of our financial statements or filings, or conducting audits of financial statements. The Board has determined that each member of the Audit Committee is “independent” as defined by Rule 10A-3 of the Securities Exchange Act of 1934. The Board also has determined that each Audit Committee member is financially literate and has designated Mr. Reidy as the Audit Committee financial expert. The Audit Committee’s report can be found under “Report of the Audit Committee” in this proxy statement.

 

The Nominating and Governance Committee, currently composed of Ms. Plourde and Messrs. Blackburn, Demetriou and Reidy, met four times in 2006. Ms. Plourde is the committee chair.

 

The Nominating and Governance Committee is responsible for:

 

 

The process followed by the Nominating and Governance Committee for selecting and nominating directors is explained below under “Process for Selecting and Nominating Directors.”

 

The Compensation Committee, currently composed of Ms. Plourde and Messrs. Blackburn, Demetriou and Reidy, met five times in 2006. Mr. Demetriou is the committee chairman. The Compensation Committee is responsible for:

 

 

Each member of the Compensation Committee qualifies as a “non-employee director” under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, an “outside director” under Section 162(m) of the Internal Revenue Code, and an “independent director” as such term is defined in the NYSE listing standards and under our Corporate Governance Principles. The Compensation Committee has issued a report regarding the “Compensation Discussion and Analysis” portion of this proxy statement, which report can be found immediately following “Executive Compensation” in this proxy statement.

 

None of our directors who served on the Compensation Committee during 2006 was a current or former officer or an employee of ours or had any relationship with us that would be required to be disclosed by us under applicable related party requirements. There are no interlocking relationships between our executive officers or directors and the board or compensation committee of another entity.

 

In its role as the nominating body for the Board, the Nominating and Governance Committee reviews the credentials of potential director candidates (including potential candidates recommended by stockholders, current directors or management) and conducts interviews and makes formal recommendations to the Board for the annual and any interim election of directors. In making its recommendations, the Nominating and Governance Committee considers a variety of factors, including skills, diversity, experience with business and other organizations of comparable size, the interplay of the candidate’s experience with the familiarity and background of other Board members, the extent to which the candidate would be a desirable addition to the Board and any committees of the Board, and such other factors as it deems appropriate and in the best interests of us and our stockholders. In addition, the Nominating and Governance Committee has established the following minimum criteria for board membership. Director candidates must have demonstrated integrity and ethics both personally and professionally and have a record of professional accomplishment. Each candidate must be objective, inquisitive, practical, and possess mature judgment, as well as be prepared to represent the long-term interests of all our stockholders. Directors are required to fully participate in Board and committee meetings. Each candidate should not serve on more than three public company boards (including ours) and should not be an executive of a company on which one of our executives is a board member. Further, each candidate (or immediate family member, or affiliate or associate) shall not have any material personal, financial or professional interest in any present or potential competitor of ours. The Nominating and Governance Committee has retained a third-party search firm to assist in the identification of director candidates.

 

As part of the settlement of the shareholder derivative lawsuits that were brought in connection with the decline in our stock price after the third-quarter 2002 earnings announcement, we have established a procedure for the appointment of two stockholder-nominated directors. Under that procedure, a designee appointed by the derivative plaintiffs may work in coordination with our chairman or lead independent director to identify potential director candidates. Prior to the date of this proxy statement, we contacted the derivative plaintiffs’ designee in accordance with the procedure. The designee did not choose to assist in identifying director nominees at this time.

 

The Nominating and Governance Committee will consider candidates for director who are recommended by stockholders. Stockholder recommendations should be submitted in writing to: Chair of the Nominating and Governance Committee, OM Group, Inc., 127 Public Square, 1500 Key Tower, Cleveland, Ohio 44114-1221 USA. The recommendation letter shall include the candidate’s name, age, business address, residence address, and principal occupation, as well as the number of shares of our common stock owned by the candidate. The recommendation letter should provide all of the information that would need to be disclosed in the solicitation of proxies for the election of directors under Federal securities laws. Finally, the stockholder should also submit the recommended candidate’s written consent to be elected and commitment to serve if elected. The Nominating and Governance Committee may also require a candidate to furnish additional information regarding his or her eligibility and qualifications. A complete copy of our Policies and Procedures for Stockholders to Propose Candidates for Directors is available by writing to our Nominating and Governance Committee Chair.

 

You may contact the Board, the lead independent director or the independent directors as a group by sending a letter marked “Confidential” and addressed to Lead Independent Director, OM Group, Inc., c/o Valerie Gentile Sachs, Secretary, 127 Public Square, 1500 Key Tower, Cleveland, Ohio 44114-1221 USA.

 

Our Code of Conduct and Ethics applies to all of our employees, including our chief executive officer, our chief financial officer and our controller. The Code of Conduct and Ethics, our Corporate Governance Principles and all committee charters are posted in the Corporate Governance portion of our website (www.omgi.com). A copy of any of these documents is available in print free of charge to any stockholder who requests a copy by writing to OM Group, Inc., 127 Public Square, 1500 Key Tower, Cleveland, Ohio 44114-1221 USA, Attention: Gregory J. Griffith, Vice President, Strategic Planning, Development and Investor Relations.

 

There were no transactions between us and our officers, directors or any person related to our officers or directors, or with any holder of more than 5% of our common stock, either during 2006 or up to the date of this proxy statement.

 

We review all transactions between us and any of our officers and directors. Our Code of Conduct and Ethics, which applies to all employees, emphasizes the importance of avoiding situations or transactions in which personal interests interfere with the best interests of us or our stockholders. In addition, our Corporate Governance Principles include procedures for discussing and assessing relationships, including business, financial, familial and nonprofit, among us and our officers and directors. The Board reviews any transaction with a director to determine, on a case-by-case basis, whether a conflict of interest exists. The Board ensures that all directors voting on such a matter have no interest in the matter and discusses the transaction with counsel as necessary. The Board has delegated the task of discussing, reviewing and approving transactions between us and any of our officers to the Audit Committee.

 

The following table sets forth information concerning the number of shares of our common stock beneficially owned by our current directors, the named executive officers included in the summary compensation table in this proxy statement, and all our directors and executive officers as a group as of January 31, 2007. As of January 31, 2007, Mr. Scaminace beneficially owned approximately 1.0% of our outstanding shares of common stock and all directors and executive officers as a group beneficially owned approximately 1.6% of our outstanding shares of common stock.

 

The totals shown below for each person and for the group include shares held personally, shares held under our Profit-Sharing Plan, and shares acquirable within 60 days of January 31, 2007 by the exercise of stock options granted under our equity compensation plans. Each person has sole voting and investment power with respect to all shares shown.

 

Amount and Nature of Beneficial Ownership
as of January 31, 2007

 

 

 

 

The following table sets forth information concerning each person known to us to be the beneficial owner of more than 5% of our outstanding common stock as of December 31, 2006, which is the latest date for which we know such information.

 

 

 

 

This compensation discussion and analysis describes the following aspects of our compensation system as it applies to our executives:

 

 

Compensation Philosophy and Objectives

 

Prior to 2006, we did not have a distinctly articulated compensation philosophy. In late 2005, the Compensation Committee of our Board engaged Towers Perrin, a global human resource consulting firm, to undertake interviews of our senior management and directors to determine their respective understandings of our compensation structure and programs. These interviews also solicited the views of senior management and directors with respect to the compensation structure and programs they believed would assist in accomplishing the compensation objectives and supporting the corporate strategy of the organization. Based upon the information developed from these interviews and following a review of best industry practices, we have established an articulated compensation philosophy with the following primary objectives:

 

 

Means of Achieving Our Compensation Objectives

 

Targeted Total Direct Compensation

 

Our primary focus in compensating executives is “targeted total direct compensation,” which is comprised of base salary, annual bonus and the estimated value of long-term stock-based incentives.

 

In order to establish targeted total direct compensation for our senior management, we collected competitive data for base salaries, annual bonuses and long-term stock-based incentive awards. Because our market for executive talent is national, competitive data reflected the compensation of executives at companies of comparable size and complexity on a nationwide basis. In addition, the information collected related to both metal companies and specialty chemical companies, since there were no companies operating at the beginning of 2006 in both of our business segments, nickel and cobalt-based specialty chemicals. Most of the companies reviewed were publicly traded in the United States and had annual sales that ranged from approximately one-half to twice our sales for 2006, a range that we find acceptable for officer compensation comparisons. While the group includes some companies outside this range, the majority of companies fall

within these guidelines. The median company in the group has sales comparable to ours. The companies comprising the group reviewed are:

 

 

In addition to data derived from the public documents of peer companies, we review data obtained from nationally recognized compensation surveys for a broad range of companies of comparable size and similar revenues. This additional information helps confirm peer results and represents the broader market in which we compete for senior executives.

 

We used this competitive data as a benchmark for analyzing each executive position. In addition, we took into consideration the facts that our chief executive officer and our general counsel were hired in 2005 and our chief financial officer was hired in early 2006, and that each of them had agreed upon individual competitive compensation packages at the times of hire. For our senior executives, we established targeted total direct compensation following a review of competitive data, commitments made to them upon hiring (with respect to those newly hired executives), and their actual responsibilities without regard to titles. The amounts established approximate the applicable market medians, except as explained below regarding our chief executive officer. We believe an approximate market median result is appropriate for our executives because we expected to achieve at least median performance and that result balances the cost of the compensation program with the expected performance.

 

While we target total direct compensation at the market median, an executive’s actual total direct compensation could vary significantly depending upon the relationship between our actual performance and target results. If our results are well above target performance, executives have the opportunity to earn compensation that is well above the relevant market median. Conversely, executives may earn compensation that is well below the relevant market median if our performance is well below target levels.

 

The exception to this market median result is our chief executive officer. His targeted total direct compensation level generally is in the competitive top quartile. This reflects his recruitment in 2005 and his resulting employment agreement with us. His base salary, annual bonus and target stock-based compensation levels were required to attract him to us. They were also intended to replace the opportunities he received as president and chief operating officer of The Sherwin-Williams Company, a company that was several times larger than us. Our chief executive officer’s recruitment package reflected our board’s desire to retain an appropriate individual to lead our business transformation.

 

Compensation Mix

 

We compensate our executives through a combination of base salary, annual bonus and long-term stock-based incentive awards. We balance that compensation among fixed and variable compensation, short- and long-term compensation, and cash as well as stock-based compensation. The satisfaction of performance criteria is part of the determination of an executive’s annual bonus and long-term incentive compensation. The most senior executives, those who are able to more directly influence our performance and strategic direction, have incentive compensation opportunities that are predominately tied to the achievement of specific, company-wide financial targets. For executives with responsibility for a business operation, incentive

compensation also is tied to the achievement of specific business segment or unit performance targets and/or operational goals that are more directly influenced by that individual.

 

The amount of targeted total direct compensation of executives is allocated among the various types of compensation in a manner designed to achieve our overall compensation objectives. Our resulting compensation mix for the various executive levels for 2006 was approximately as follows:

 

 

 

 

Elements of Direct Compensation

 

Base Salary

 

We use base salaries to provide a predictable level of current income. Our base salaries are designed to assist in attracting, retaining and encouraging the development of qualified executives. The amount of each executive’s annual base salary is based on that executive’s position, skills and experience, individual performance and the salaries of executives in comparable positions and responsibilities at peer companies. It may also reflect an executive’s compensation level prior to joining us. In addition, since there also is competition for executives on a local basis across varying industries, we also review local conditions to confirm the competitiveness of our base salaries. When establishing base salaries for our executives, we do not take into account any awards previously made, including the results of equity-based awards under our long-term incentive plans. In the case of the chief executive officer, the compensation committee assesses his performance and determines his base salary level. For other executives, our chief executive officer assesses their performance and makes recommendations of base salary levels for consideration by the compensation committee.

 

A number of our senior executives have joined us recently and have base salaries that are derived from amounts agreed upon at the time of commencement of their employment. For Mr. Scaminace, our chief executive officer, we agreed to a base salary of $850,000 at the time of his employment in mid-2005. The base salary reflected the amount agreed upon at the time of his employment taking into consideration his compensation at The Sherwin-Williams Company, where he had been the president and chief operating officer, and the requirements of the chief executive officer position with us. Since Mr. Scaminace joined us in mid-2005, his base salary did not increase for 2006. Under the terms of Mr. Scaminace’s employment agreement with us, which has a term ending on May 31, 2008, his annual base salary cannot be less than $850,000. In early 2007, Mr. Scaminace’s annual base salary was increased to $882,300, based upon his achievement of performance goals and objectives established at the beginning of 2006, including the achievement of certain financial targets, refinement and execution of the strategic plan, development of accountability in our compensation systems, improvement in communication with internal and external stakeholders, the development of future leadership, and a review of the base salary levels for chief executive officers of companies within our peer group.

 

Similarly, the 2006 base salaries of Mr. Haber, who became chief financial officer in March 2006, and Ms. Sachs, who joined us as general counsel in September 2005, were agreed upon at the respective times of hire. The base salary of $325,000 for each of Mr. Haber and Ms. Sachs took into consideration their respective compensation at previous employers and the requirements of their respective positions with us. In early 2007, the annual base salaries of Mr. Haber and Ms. Sachs were increased to $337,400, based upon an assessment of their individual skills and competencies, including their level of respective achievement of specific

performance goals and objectives that were established early in 2006, and upon increases in the base salary level for executives in those positions with companies within our peer group.

 

Mr. Dunmead and Mr. Bak, who were the general managers of our two business segments during 2006, each had base salaries of $348,140 for 2006. We set these base salaries at the beginning of 2006, at which time we concluded they were appropriate based on the requirements of the positions, the skills and experience they each brought to us and their performance in 2005. In early 2007, Mr. Dunmead’s base salary was increased to $360,740, based upon an assessment of his individual skills and competencies, including his level of achievement of specific performance goals and objectives that were established at the beginning of 2006, and upon increases in the base salary level for executives in similar positions with companies within our peer group. On March 1, 2007, we completed the sale of our nickel business to a third party. Mr. Bak is the vice president and general manager of our nickel business, and we expect that Mr. Bak’s employment with us will not continue past March 31, 2007. Accordingly, Mr. Bak’s base salary was not considered for adjustment in 2007. However, in connection with the sale of the nickel business, we agreed to pay Mr. Bak a retention bonus of $348,140 and agreed to certain severance payments, which are described under “Potential Payments upon Termination or Change in Control” in this proxy statement.

 

Annual Bonus

 

As part of the development of our new compensation philosophy described above, we requested Towers Perrin to undertake a review of our annual bonus practices and provide competitive data about annual bonuses. As a result of that process, we concluded our annual bonuses historically had not had a strong relationship to our business results, had been granted and paid generally on a subjective basis and were generally below the bonus opportunities of our peer companies. In addition, in connection with the recent hiring of executives, we had agreed upon annual bonus opportunities that rewarded strong performance at higher levels than our historical annual bonuses, as we determined that those higher bonus levels were consistent with then-current market practices.

 

As a result of these considerations, in 2006 we modified our annual bonus program to provide employees, including executives, with the opportunity to be rewarded based upon our financial performance above established goals. Our current annual bonus program is intended to provide incentives for executives to endeavor to achieve targeted annual goals and receive rewards when those goals are met or exceeded. When combined with base salaries, annual bonus opportunities for our executives generally are set to provide competitive total cash compensation when target performance goals are met.

 

Under our current annual bonus program, an overall bonus pool is funded based upon corporate results as measured by our operating profit. We calculate operating profit by deducting from our net sales the cost of products sold (including depreciation and amortization) and selling, general and administrative expenses of our total business, including the results of discontinued operations. The overall bonus pool may be funded at a threshold level, a target level or a maximum level, depending upon our actual performance. These levels are designed to reflect operating profit that ranges from an acceptable return to stockholders (threshold), to a more demanding but achievable result (target) and finally to a stretch objective that normally would be achieved only periodically (maximum). Under the annual bonus program, all bonuses are calculated on a linear basis between these threshold and maximum levels. No bonuses are paid if our operating profit is not at least at the established threshold level, and no additional bonuses are earned if our operating profit exceeds the established maximum level.

 

For our 2006 bonus plan, we established the following operating profit objectives: threshold of $55.0 million, target of $78.0 million and maximum of $105.3 million. The target objective was based upon our budgeted operating profit for 2006 and the threshold and maximum objectives were set to reflect potential variances from our budgeted operating profit based upon our historical business results. Bonuses are self-funded in the sense that the threshold, target and maximum operating profit objectives are net of the aggregate amount that would be payable as bonuses at each level. Our actual operating profit for 2006 (including discontinued operations) was $301.2 million and thus the overall bonus pool for 2006 was funded at the maximum level. In 2006, our business model was primarily based on commodity metal pricing, which experienced significant price volatility during

2006. This volatility resulted in exceptional and unpredictable earnings for the year. However, under the terms of the program, no additional executive bonuses were earned as a result of our 2006 operating profit being in excess of the $105.3 million maximum established by the Compensation Committee.

 

Annual bonuses are paid in cash based upon varying factors established for each executive level. As more fully described below, some executive bonuses are based upon corporate performance, some are based upon a combination of corporate performance and satisfaction of individual goals, and some are based upon a combination of corporate performance, satisfaction of business segment or unit goals, and satisfaction of individual goals. These factors are weighted and based upon specific bonus opportunities that are established for various executive levels as described below. We selected these weightings and bonus opportunities based upon competitive criteria and after obtaining the advice of our human resources consultant, and they also reflect our subjective determination of appropriate threshold, target and maximum goals. Our chief executive officer has the discretion to recognize extraordinary individual contributions separately from application of the applicable objective factors and pay an individual above the levels described. In addition, notwithstanding the performance criteria established for bonuses, the Compensation Committee reviews the proposed bonus compensation for our executives following the availability of operating profit information for a completed year and in light of the individual performance reviews for executives eligible to receive bonuses, and it has the authority to exercise discretion in approving the amount of any bonus.

 

For 2006, the sole performance criteria for Mr. Scaminace was operating profit. We selected this measure because of its direct correlation with the interests of our stockholders — to drive consistency in our profit performance. In keeping with our approach of balancing compensation among fixed and variable compensation, short- and long-term compensation and cash as well as stock-based compensation, we established the target bonus level for Mr. Scaminace at $850,000 for 2006, which reflected 100% of his base salary and 30% of his targeted total direct compensation for 2006. The terms of our annual bonus program as applied to Mr. Scaminace for 2006 provided for him to earn 20% of his base salary if actual operating profit was at threshold and 200% of his base salary if actual operating profit met or exceeded the maximum level. For 2006, Mr. Scaminace was paid his maximum annual bonus of $1,700,000 as our operating profit exceeded the established maximum level and the Compensation Committee did not exercise any discretion to reduce or increase his award. Our annual bonus program will apply to Mr. Scaminace in a comparable fashion for 2007.

 

For senior executives who do not have responsibility for a business operation, 80% of their annual bonus opportunity is based on operating profit and 20% is based on individual performance objectives determined at the start of each year. Their respective bonus opportunities are in keeping with the approach described above to balance the mix of compensation. Mr. Haber and Ms. Sachs are included in this group of senior executives. Mr. Haber’s target bonus opportunity for 2006 was $195,000, which was 60% of his base salary. Ms. Sachs’s target bonus opportunity for 2006 was $162,500, which was 50% of her base salary. For 2006, Mr. Haber could have earned a bonus between 12% and 120% of his base salary, and Ms. Sachs could have earned a bonus between 10% and 100% of her base salary, depending upon the level of actual operating profit as compared to established operating profit (as described above), and assuming satisfaction of their respective individual performance objectives. For 2006, Mr. Haber and Ms. Sachs each earned the maximum applicable annual bonus opportunity, which was $390,000 for Mr. Haber and $325,000 for Ms. Sachs, since our operating profit exceeded the established maximum level (as described above) and since they each met their individual performance objectives. Mr. Haber’s individual performance objectives for 2006 were to achieve a specific cash flow objective and reduce material weaknesses in our financial controls. Ms. Sachs’s individual performance objectives for 2006 were development of our legal department, resolution of certain legacy legal issues (including litigation with our former chief executive officer, which settled in February 2007), and monetizing our nickel business. No discretion was exercised by our chief executive officer or the Compensation Committee to modify the amounts of bonuses otherwise earned by Mr. Haber or Ms. Sachs. Our annual bonus program will apply to Mr. Haber and Ms. Sachs in a comparable fashion for 2007.

 

For senior executives with responsibility for a business segment or unit, their performance goals are weighted toward the operational performance of the business segment or unit that they influence. This increases the effectiveness of our bonus program because it rewards individuals for results that they have some immediate ability to control and influence. For these executives, 40-80% of their annual bonus opportunity is

based upon our operating profit, up to 40% is based upon their respective business segment or unit performance and 20% is based upon individual performance objectives determined at the start of each year. Their respective bonus opportunities are in keeping with the approach described above to balance the mix of compensation. Mr. Dunmead and Mr. Bak were included in this group of senior executives for 2006.

 

Mr. Dunmead and Mr. Bak each had target bonus opportunities for 2006 of $174,070, which was 50% of his base salary. For 2006, each of these executives could have earned between 10% and 100% of his base salary, depending on the level of actual operating profit as compared to established operating profit (on the basis described above), his business segment performance and his individual performance. For 2006, Mr. Dunmead earned his maximum applicable bonus opportunity of $348,140. This bonus amount resulted from achievement of the established maximum levels of operating profit and business segment performance for which Mr. Dunmead had responsibility, each of which represented 40% of his bonus opportunity, together with satisfaction by Mr. Dunmead of his individual performance objectives, which represented the remaining 20% of his bonus opportunity. Mr. Dunmead’s individual performance objectives for 2006 were to achieve certain production levels at our joint venture operation in the Democratic Republic of Congo, integration of a recent acquisition in Asia and successful launch of a new information system at one of the facilities in our Specialties business segment. Our annual bonus program will apply to Mr. Dunmead in a comparable fashion for 2007.

 

For 2006, Mr. Bak earned a bonus of $341,000, which was 98% of his maximum applicable bonus opportunity. This bonus amount resulted from achievement of the established maximum levels of operating profit and business segment performance for which Mr. Bak had responsibility, each of which represented 40% of his bonus opportunity, together with satisfaction by Mr. Bak of most, but not all, of his individual performance objectives, which represented the remaining 20% of his bonus opportunity. As indicated above, we do not expect Mr. Bak to be employed by us after March 31, 2007. Under the terms of his retention agreement, described below under “Potential Payments upon Termination or Change in Control,” Mr. Bak will be entitled to a prorated bonus for 2007.

 

Long-Term Stock-Based Compensation

 

Historically, the primary form of our long-term incentive compensation consisted of nonqualified stock options. We selected stock options because we believed they were a competitive form of compensation expected by our senior management and because we would receive a corporate tax deduction upon exercise of an in-the-money option. With the change in the accounting treatment of options, we, like many companies, re-examined the cost and competitive need for options, which process included a review of competitive data regarding stock-based awards. We determined that a combination of stock options, time-based restricted stock and performance-based restricted stock would provide a package of incentive compensation that would more effectively motivate executives, reinforce the need for strong long-term financial results, continue to align the interests of our executives with the interests of our stockholders, build executive stock ownership among a new management team, retain executives in a cyclical business embarking upon a significant transformation and balance the cost of the incentives with the targeted results. Because of the potential adverse tax consequences to us of paying compensation that is not performance-based, we sought and received stockholder approval in 2006 to modify the terms of our 2002 Stock Incentive Plan to include performance criteria for grants of restricted stock. In addition, as described in this proxy statement under “Proposal 2. 2007 Incentive Compensation Plan,” we are proposing for stockholder approval a new incentive compensation plan to replace our existing long-term incentive compensation plans.

 

In 2006, we established targeted long-term stock-based compensation opportunities by salary range for senior management based upon executive position and competitive market information. The target is expressed as a monetary value that is derived from a percentage of an executive’s base salary and is meant to equal median levels for executives in comparable positions at similar size companies and peer organizations. The targeted long-term stock-based compensation value is balanced among stock options (50%), time-based restricted stock (20%) and performance-based restricted stock (30%). The stock options are designed to maintain a strong tie between the interests of our executives and our stockholders because options produce rewards to executives only if our stock price increases. Time-based restricted stock is designed to retain and

build equity ownership among a new management team about to undertake significant change. Performance-based restricted stock is designed to provide incentives and rewards for achieving specified longer-term financial results as well as increasing our common stock price. The mix between reward elements emphasizes performance rewards (80% of the total delivered as options and performance-based restricted stock) more than service-based rewards (20% in the form of time-based restricted stock). Moreover, it strikes what we consider a reasonable balance between stock price appreciation awards (50% of the total as options) and those based on sustained long-term financial results (30% as performance-based restricted stock).

 

The Compensation Committee also grants awards under our long-term incentive compensation plans to employees who are not included in our senior executive group. Awards to these participants historically have been in the form of stock options. For tax reasons, awards made to executives and other participants who are not U.S. residents generally are made in the form of stock options.

 

In 2006, we established target grant guidelines for each element for each executive. They were based on several factors, including our historical stock price performance for 2005, the estimated present value associated with each award element, an executive’s relative level, the monetary value of an executive’s target long-term stock-based compensation and the targeted mix of long-term incentive opportunities. Target grants are generally awarded to all eligible participants, although the chief executive officer may make recommendations to the Compensation Committee to adjust an individual’s awards based on the individual’s performance, responsibilities or involvement in strategic initiatives.

 

To reinforce the commitment to long-term results and retain executives, our long-term awards fully vest in three years. Our stock options become exercisable in equal increments over a three-year period. Time-based restricted stock awards vest three years after their grant date. Performance-based restricted stock awards are earned only upon satisfaction of performance targets relating to a three-year period (for example, for awards granted in May 2006, the three-year period will end December 31, 2008).

 

We award performance-based restricted stock at the maximum value, which is double the target value, shortly after the start of each performance period. In order for performance-based restricted stock to be earned, we must achieve specified performance goals for the three-year performance period covered by the award. We established two performance criteria for the performance-based restricted stock awards made in 2006: total operating profit and average return on net assets, in each case for the applicable three-year period. Both of these measures are based on consolidated results, with no weights given to business unit or individual performance. This approach emphasizes the need for our senior executives to focus on the overall company performance that will ultimately create value for stockholders. We believe that these measures are important in terms of achieving desired profitability and effectively managing our assets, key financial measures of our long-term success. These performance criteria are weighted equally and each will determine vesting of up to 50% of the total performance-based restricted shares. Based on our actual operating profit over the three-year performance period, between 0% and 50% of the total performance-based restricted shares will vest. Based on our actual return on net assets over the three-year performance period, between 0% and 50% of the total performance-based restricted shares will vest. No shares will be earned if total operating profit for the three-year period is not above the established threshold level, regardless of the average return on net assets for the period. Shares will be earned on a linear basis between the established threshold and maximum levels. These performance criteria are among those approved by our stockholders, with the result that we expect the value of any earned performance-based restricted stock to be tax-deductible by us.

 

Our established performance levels were designed to reflect reasonable performance that would be minimally acceptable to stockholders and achieved fairly frequently (threshold), performance that is more demanding and should be achieved approximately one-half of the time (target), and outstanding performance that would be met relatively infrequently (maximum). However, our business historically has been and currently remains significantly exposed to metal price volatility, which has caused material variations in our results from year to year. This reality must be taken into account when considering the likelihood of achieving established performance measures during a future three-year performance period. In addition, the recent sale of our nickel business and our related strategic transformation plan make any prediction of such likelihood even more uncertain as regards the 2006-2008 performance period.

 

Our named executive officers received the following equity-based awards for 2006, which are generally consistent with the approach outlined above:

 

 

 

 

In establishing award levels, we may or may not consider the equity ownership levels of the recipients or compensation previously paid, including prior stock-based awards that are fully vested. Our primary focus is to retain executives in light of prevailing competitive conditions and to motivate executives in ways that support our strategic direction. Accordingly, we will consider taking such equity ownership and prior compensation and awards into account only if we believe it would be consistent with our corporate interests.

 

Our current and intended future practice is to make long-term stock-based awards at the first Compensation Committee meeting held following the availability of preliminary financial results for the previous fiscal year and availability of the current year operating plan. This meeting customarily is held in February in conjunction with our regularly scheduled Board meeting, and this practice permits us to consider the preliminary prior-year results and future expectations when making new grants. We made stock option and long-term time-based restricted stock awards on February 7, 2007. We deferred the grant of long-term performance-based restricted stock awards until March 9, 2007, in order to permit the Compensation Committee to appropriately consider the March 1 sale of our nickel business and the potential use of proceeds from that sale in establishing performance objectives for the 2007 awards. From time to time, we also may grant awards in connection with new hires and promotions, at the time of those events. We grant stock options only with an exercise price equal to or greater than the market price of our common stock on the grant date. We do not attempt to time the grant of stock-based awards to the release of material nonpublic information. Our practice is to publicly release financial results for completed annual and quarterly periods at approximately the same time we file the required annual or quarterly report with the SEC.

 

Other Compensation Elements

 

Special Recognition Bonus

 

On February 7, 2007, the Compensation Committee provided special recognition bonuses to several members of our senior management group. These bonuses were in amounts approximating their target 2006 bonus opportunities, with one-half of the bonus payable in cash and one-half of the bonus payable in performance-based restricted stock. The cash portion related to performance in 2006 and was paid in February 2007. The performance-based restricted stock is subject to achievement of an established earnings target for our Specialties business segment during any one of the years in the three-year period ending December 31, 2009. The Compensation Committee awarded these bonuses to acknowledge the substantial time and effort spent by each of these individuals in the sale of the nickel business and to motivate these key executives to continue our transformation by growing our Specialties business through organic growth and strategic acquisitions. The bonuses were as follows:

 

Perquisites

 

We reviewed our perquisite practices as part of the overall review of compensation undertaken in early 2006. Perquisites for our senior executives other than Mr. Scaminace were limited in 2006 to an $18,000 annual car allowance and dues for one club (two clubs for Mr. Dunmead). Mr. Scaminace received no perquisites. Annual dues for clubs ranged from $5,160 to $8,250. Executives are not permitted to use our corporate jet for personal travel. We have season tickets to Cleveland-based professional basketball, baseball and football games and from time to time have tickets to musical, theatrical, dance and other performing arts events. These tickets are primarily intended to be used to entertain customers and suppliers. On those occasions when tickets are not used for business-related entertainment, they may be used by a wide range of our employees, including our executives, through a lottery process or on an invited basis.

 

The incremental costs of the perquisites furnished to our named executive officers during 2006 are included in the “All Other Compensation” column of the Summary Compensation Table below.

 

In February 2007, our Board decided to eliminate the car allowance and club dues perquisites described above. Subsequent to March 31, 2007, in lieu of receiving any specific perquisites or personal benefits, each of our senior executive officers other than Mr. Scaminace will receive an annual payment of $25,000. Mr. Scaminace will not receive this annual payment as he does not receive any perquisites.

 

Retirement Plans

 

Our senior executives participate in our qualified profit-sharing plan that is available generally to all of our employees and also participate in our benefit restoration plan, which is a nonqualified “excess” plan available to employees with base salaries in excess of certain limits imposed by the Internal Revenue Code for qualified plans ($220,000 for 2006). These plans are designed to encourage savings for retirement, as we do not maintain a defined benefit plan that provides a specified level of income following retirement. Our contributions to these plans for our named executive officers are included in the “All Other Compensation” column of the Summary Compensation Table below. Our benefit restoration plan is discussed below under “Nonqualified Deferred Compensation.”

 

Change in Control Agreements and Severance Agreements

 

We have entered into change in control agreements with all of our senior executives. We believe that the change in control agreements serve to protect us against the loss of key executives in the context of the current uncertainty in our business model and our transformation to a more customer-focused, value-added business. We also have severance agreements with all of our senior executives, which are designed to protect our executives in the event of their termination as a result of the sale of nickel business and the related change in our overall business. These agreements are discussed below under “Potential Payments upon Termination or Change in Control.”

 

Tax Deductibility of Executive Compensation

 

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to publicly held companies for compensation in excess of $1 million in any taxable year paid to the chief executive officer or the four next most highly compensated executive officers. However, compensation in excess of $1 million is deductible if it meets the criteria for being “performance based” within the meaning of Section 162(m). Our stock option and performance-based restricted stock awards satisfy the conditions for being “performance based” under Section 162(m). Time-based restricted stock awards and bonuses paid under our annual bonus plan do not currently satisfy the Section 162(m) “performance-based” conditions.

 

We generally endeavor to award compensation in a manner that satisfies the conditions for tax deductibility. However, we will not necessarily limit executive compensation to amounts deductible under Section 162(m), but rather intend to maintain the flexibility to structure our compensation programs so as to best promote our interests and the interests of our stockholders. For instance, we have established Mr. Scaminace’s targeted total direct compensation at the level described above, even though it may not be

fully deductible, because we believe such compensation is appropriate under relevant market conditions and is consistent with the objectives of our executive compensation program as applied to Mr. Scaminace.

 

Described below is a summary of the provisions of the employment agreements that we have with certain named executive officers and the restricted stock and stock option programs that are part of our compensation strategy, together with a summary of the 2006 total compensation of each named executive officer.

 

Employment Agreements

 

On May 26, 2005, we entered into an employment agreement with Mr. Scaminace that provides for Mr. Scaminace’s employment as our chief executive officer for a term beginning on June 13, 2005 and continuing until May 31, 2008. Under the terms of the agreement, Mr. Scaminace received an annual base salary in 2006 of $850,000 and is eligible for an annual bonus. Under the terms of his employment agreement, Mr. Scaminace was granted an award of 166,194 shares of our restricted common stock. The restricted common stock will vest on May 31, 2008 if Mr. Scaminace remains employed by us on that date. In addition, Mr. Scaminace was granted options to purchase 254,996 shares of our common stock, of which options for 80,001 shares vested on May 31, 2006, options for 85,050 shares will vest on May 31, 2007 and options for 89,945 shares will vest on May 31, 2008, if Mr. Scaminace remains employed by us on those dates. The options that vested in 2006 have an exercise price equal to the market price for common stock on the date of the grant ($24.89), while the remaining options have exercise prices set above the grant date market price for common stock ($28.67 for the options vesting in 2007 and $33.67 for the options vesting in 2008).

 

On September 7, 2005, we entered into an employment agreement with Ms. Sachs that provided for Ms. Sachs’s employment as vice president, general counsel and corporate secretary beginning on September 26, 2005. Under the terms of the agreement, Ms. Sachs received an initial annual base salary of $325,000 and is eligible for an annual bonus. Under the terms of her employment agreement, Ms. Sachs was granted options to purchase 50,000 shares of common stock, which will vest in equal annual increments over a three-year period if Ms. Sachs remains employed by the Company on those anniversary dates. The options have an exercise price equal to the market price for common stock on the date of the grant ($20.86).

 

On March 6, 2006, we entered into an employment agreement with Mr. Haber that provided for his employment as our chief financial officer. Under the terms of his agreement, Mr. Haber received an initial base salary of $325,000 and is eligible for an annual bonus.

 

The benefits that Messrs. Scaminace and Haber, Ms. Sachs and the other named executive officers will receive upon a termination of their employment or a change in control are discussed below under “Potential Payments upon Termination and Change in Control.”

 

Restricted Stock and Stock Option Programs

 

We maintain a 1998 Long-Term Incentive Compensation Plan and a 2002 Stock Incentive Plan, which allow us to award stock options to our employees and our directors and other types of awards, including time-based and performance-based restricted stock, to our employees. Our Compensation Committee administers both plans.

 

Under these plans, the option exercise price of stock options may not be less than the per share fair market value of our common stock on the grant date. Our historical practice has been to grant stock options at an exercise price equal to the average of the high and low prices of our common stock on the NYSE on the date the option is granted. As a result, we may grant stock options at an exercise price that is greater or less than the closing price of our common stock on the NYSE on the grant date. As described above, we also have granted stock options to our chief executive officer at exercise prices above the market price on the date of grant. We do not price stock options on a date other than the grant date. The stock options we grant are exercisable in equal increments over a three-year period from the grant date and no option may be exercised prior to one year from the date of grant, except in event of a change in control, death, disability or retirement.

If an employee’s employment ceases due to a change in control, death, disability or retirement, all unvested stock options become immediately exercisable. If employment ceases for any reason other than a change in control, death, disability or retirement, unvested stock options are forfeited and any vested but unexercised options may be exercised within three months of cessation of employment. Our outstanding stock options expire ten years after their grant date.

 

Our time-based restricted stock vests three years after the grant date, and our performance-based restricted stock is earned upon satisfaction of performance targets relating to a three-year period. If an employee’s employment ceases for any reason other than a change in control, death or disability, unvested restricted stock awards are forfeited. If an employee’s employment ceases due to a change in control, all unvested time-based restricted stock vests, and all unvested performance-based restricted stock vests at the target performance level. In the event of an employee’s death or disability, a pro rata portion (determined by the number of days from the date of grant as compared to the full three-year period) of unvested time-based restricted stock will vest, and the employee will remain eligible to receive a pro rata portion (determined in the same manner) of unvested performance-based restricted stock, as determined at the end of the performance period. Employees receiving restricted stock awards have voting rights and the right to receive any dividends that are declared, even before that restricted stock is vested or earned.

 

The table below summarizes the total compensation paid to or earned by each named executive officer for the fiscal year ended December 31, 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our Benefit Restoration Plan is a nonqualified, unfunded retirement plan that we maintain and that provides retirement, death, and disability benefits, at our sole discretion, to key employees who are in a select group of highly compensated or management employees whose retirement savings and profit-sharing benefits are subject to certain limitations under the Internal Revenue Code of 1986, as amended. If an executive retires after attaining age 65 or after attaining 55 with at least ten years of service, or becomes disabled or dies, his or her benefits are generally distributed over a 15-year period.

 

We annually credit (on January 1 of each year) each participating executive’s Benefit Restoration Plan account with the amount that would have been allocated to his or her qualified retirement savings and profit-sharing plan account, assuming that no limits were imposed, reduced by the actual benefit allocated to his or her qualified plan account and further reduced by the percentage of the qualified plan contribution attributable to any cash election made by the executive. Earnings are calculated by multiplying the balance of each participant’s Benefit Restoration Plan account at the beginning of the year by the five-year rolling average annual composite yield on Moody’s Corporate Bond Yield Index for the immediate preceding five years. The amounts shown below as contributed by us were credited to the indicated executive accounts as of January 1, 2006.

 

 

 

 

We maintain employment agreements, severance agreements and change in control agreements with certain of our named executive officers, who also participate in our long-term incentive plans. The following summaries describe and quantify the payments that each named executive officer would receive if his or her employment with us were terminated or if we had a change in control and such executive officer’s employment were terminated following the change in control. The summaries assume that the termination and/or change in control occurred on December 29, 2006 (the last business day of 2006) and that the relevant stock price is the closing market price of our common stock on the NYSE on December 29, 2006, which was $45.28.

 

Payments Pursuant to Employment Agreement with Chief Executive Officer

 

We have entered into an employment agreement with Mr. Scaminace, our chief executive officer. If we terminate Mr. Scaminace’s employment for cause, we will not be obligated to make any payments to him other than salary earned but not yet paid as of the termination date. As defined in the employment agreement, “cause” means (a) commission of a felony, (b) fraud, embezzlement or misappropriation of our funds or acts of dishonesty that are materially inimical to our best interest, (c) violation of the noncompetition provision contained in the employment agreement or (d) abandonment of or consistent failure to perform duties, other than for reason of disability.

 

If we terminate Mr. Scaminace’s employment without cause, Mr. Scaminace will receive a lump-sum payment that consists of (a) his base salary earned but unpaid through the date of termination, (b) an amount reflecting his accrued but unused vacation days and (c) two times the total of his “average annual base salary” and “average bonus amount.” His average annual base salary is determined by adding (x) his annual base

salary rate in effect immediately before the termination and (y) if his base salary rate has been increased at least once during the term of the employment agreement, the base salary rate in effect before the most recent increase, and dividing that sum by two. His average bonus amount is equal to the greater of (A) the aggregate bonuses received during the term of the employment agreement prior to termination divided by the number of bonuses received or (B) $950,000. The lump-sum payment must be made within ten days of termination pursuant to normal payroll practices.

 

If Mr. Scaminace suffers from a disability, defined as a condition that renders him unable to perform his duties by reason of illness or injury for a period of more than six consecutive months, we have the right to terminate his employment. If terminated for reason of disability, Mr. Scaminace will receive (a) his base salary through the month in which his employment terminates, payable as soon as practicable, and (b) an amount equal to two times the sum of his average annual base salary and his average bonus amount, both as defined above, payable in 24 equal monthly installments. These payments will be offset by any payments or benefits received by him from any disability plan maintained by us at the time of the disability.

 

If Mr. Scaminace dies, we will pay his beneficiary or estate the same payments as described above for a termination without cause, as well as any payments or benefits provided by any insurance program maintained by us in which he participated at the time of death.

 

Mr. Scaminace’s employment agreement requires that he comply with certain covenants and requirements upon termination. Mr. Scaminace must maintain the confidentiality of all of our information, must not solicit present or prospective employees, customers or suppliers for a period of two years following termination, must not compete with us for a period of two years following termination, and must not disparage us, our employees, stockholders, officers or directors.

 

The payments that would have been made to Mr. Scaminace pursuant to his employment agreement, assuming a termination of his employment as of December 29, 2006, are as follows:

 

 

 

 

Payments Pursuant to Severance Agreements

 

We have entered into severance agreements with Messrs. Haber and Dunmead and with Ms. Sachs. Each of Messrs. Haber and Dunmead and Ms. Sachs is entitled to certain payments in the event of termination during the term of the severance agreement. “Termination” means (a) termination for any reason other than death, disability, or cause (which includes commission of a felony; fraud, embezzlement or misappropriation of our funds; acts of dishonesty in the course of employment that are materially inimical to our best interests; and the failure to perform duties other than due to disability) and (b) the assignment of duties that are materially inconsistent with the executive’s position, authority, duties and responsibilities or results in the material diminution of the executive’s position. Ms. Sachs’s severance agreement also defines “termination” to include a material change in her reporting structure. In the event of a termination under a severance agreement, each executive is entitled to a lump-sum payment equal to 1.5 times his or her annual base salary then in effect plus any base salary earned through the termination date and bonus for the prior fiscal year, to the extent not otherwise paid. The payment must be made within ten days of termination pursuant to normal payroll practices.

 

In order to receive the payments outlined above, each executive must provide us with an agreement that contains a general release from future liability or suit, a nonsolicitation and nondisparagement provision, a waiver of continued participation in our employee benefit and welfare plans, a requirement to maintain the confidentiality of our information, and a six-month noncompetition provision.

 

The payments that would have been made to each executive, assuming a termination as of December 29, 2006, are indicated below.

 

 

Payments in the Event of Death, Disability or Retirement

 

If any named executive officer retires, dies or becomes disabled while employed by us, any unvested options held by that executive officer will become exercisable immediately. If any named executive officer dies or becomes disabled, a pro rata portion (determined by the number of days from the date of grant as compared to the full three-year period) of unvested time-based restricted will vest, and the employee will remain eligible to receive a pro rata portion (determined in the same manner) of unvested performance-based restricted stock, as determined at the end of the performance period. In accordance with the terms of our Benefit Restoration Plan, discussed above under “Nonqualified Deferred Compensation,” each named executive officer’s benefits accumulated under the plan will be distributed over a 15-year period in the event of retirement, death or disability, unless we decide to make a lump-sum payment. In addition, if Mr. Scaminace’s employment ceases by reason of death or disability, he will receive those payments described above under “Payments Pursuant to Employment Agreement with Chief Executive Officer.”

 

The table below sets forth payments that would have been made in the event of death, disability or retirement, assuming that such event had occurred on December 29, 2006 and based upon the closing market price of our common stock on the NYSE on that date. The “death or disability” column includes payments under the Benefit Restoration Plan, the value of unvested options that would have become exercisable upon death or disability, and the value of time-based restricted stock that would vest upon such an event. The “retirement” column includes only payments under the Benefit Restoration Plan and the value of unvested options that would have become exercisable upon retirement, as unvested restricted stock awards do not vest upon retirement. No amount is included in the table for performance-based restricted stock awards since the value of such awards is determinable only at the end of the performance period.

 

 

Payments in Event of a Change in Control

 

We have entered into a change in control agreement with each of our named executive officers. In the event that payments are made pursuant to these agreements, the payments and covenants required under these agreements supersede any other agreement between us and the named executive officer. For example, if Mr. Scaminace is terminated following a change in control and receives the benefits outlined below, he will not receive any of the payments or benefits under his employment agreement or any other agreement with us.

 

Under each change in control agreement, two events must take place before an executive receives payment. First, a change in control must occur. A “change in control” is defined as any of the following: (a) the acquisition by an individual, group or entity of beneficial ownership of 33% or more of our outstanding voting shares (not including any acquisition from us, by us or by our employee benefit plan), (b) the members of the board of directors in place at the time of the agreement cease to constitute a majority of the board (for reasons other than death or disability), subject to certain circumstances, or (c) the consummation of a reorganization, merger or consolidation or sale of all or substantially all of our assets, subject to certain limitations and conditions set forth in the agreement.

 

Second, the executive’s employment must be terminated, either by us “without cause” or by the executive for “good reason,” during the term of the change in control agreement. Termination “without cause” means termination for any reason other than death, retirement, disability or cause, as each term is defined in the agreement. Termination for “good reason” includes: (a) the assignment of duties inconsistent with the executive’s position or any other action that results in the diminution in such position, authority, duties or responsibilities, (b) the failure to provide the executive with salary and benefits equal to or greater than those in effect prior to a change in control, (c) the requirement that the executive work from a location that is more than 50 miles from the location from which he or she worked prior to the change in control, or a requirement that the executive travel on business to a substantially greater extent than prior to the change in control, or (d) the failure to require any successor to our business to assume and agree to the change in control agreement. In addition to the above, Mr. Scaminace’s agreement includes the following additional “good reason” termination provisions: (i) a reduction in his salary from the highest level in effect for the year prior to the change in control, (ii) the aggregate compensatory opportunities provided to him after a change in control are reduced below the levels provided prior to a change in control, subject to certain limitations, (iii) after the change in control, he is not permitted to participate in the compensatory programs generally available to executives of the surviving entity, (iv) the surviving entity has headquarters outside of the Cleveland metropolitan area, (v) he determines in good faith that he is unable to fulfill his duties as chief executive officer after the change in control or that the company’s strategic plan varies materially from the plan that was in place prior to the change in control, or (vi) he ceases to be a member of the board of directors of the surviving entity for reasons other than death, disability or voluntary resignation.

 

In the event that both triggering events occur, each named executive officer will be entitled to the following payments:

 

 

 

If an executive receives payment under these agreements, then the executive agrees not to compete with our successor for a period of one year from the termination date. The executive also agrees to maintain the confidentiality of our and our successor’s information and to not disparage us or our successor or our respective directors, partners, officers or employees. The executive also must provide a general release of all claims and causes of action against us arising from or relating to the executive’s employment with us.

 

The payments that would have been made to the named executive officers, assuming a change in control and related termination had occurred on December 29, 2006 and based upon the closing market price of our common stock on the NYSE on that date, are as follows:

 

 

Payments to Mr. Bak in connection with the Sale of the Nickel Business

 

On February 9, 2007, we entered into a retention and severance agreement with Mr. Bak, who was the general manager of our nickel business that was sold on March 1, 2007. This agreement was designed to help retain Mr. Bak at a time when his services were vital to completing a transaction we believe is critical to our long-term strategy and to stockholders. In connection with the completion of that sale, and in recognition of Mr. Bak’s crucial role in that transaction, Mr. Bak received the payments indicated below, and became entitled to receive certain other severance payments, in accordance with the terms of this agreement. In the event that Mr. Bak receives severance benefits under this agreement, this agreement will supersede Mr. Bak’s change in control agreement described above. Mr. Bak will retain his rights under other plans and incentive compensation programs.

 

We agreed to pay Mr. Bak a retention bonus equal to one year of his base salary in effect at the time of the agreement, which was $348,140. Mr. Bak will receive fifty percent of the retention bonus within 30 days of the sale and the remaining fifty percent will be paid within 90 days of the sale. If Mr. Bak is involuntarily terminated without cause by us prior to receiving the full amount of the retention bonus, or if Mr. Bak terminates his employment with us for good reason after payment of the first 50% but prior to payment of the remainder of his retention bonus, he will still be entitled to receive the payments. However, if Mr. Bak retires, resigns or is terminated for cause prior to receipt of the payments, Mr. Bak forfeits any remaining payment for the retention bonus. As defined in the retention and severance agreement, termination for “cause” includes termination for (a) conviction of a felony that is materially and demonstrably injurious to us, (b) willful misconduct or gross negligence in the performance of duties or (c) a breach of the retention agreement, and termination for “good reason” means the assignment inconsistent with his position, authority, duties or

responsibilities or any other diminution in position, authority, duties or responsibilities, excluding any isolated, inadvertent and insubstantial action taken by us that is promptly remedied.

 

Mr. Bak will also receive certain severance benefits if he is involuntarily terminated by us without cause within 150 days of the sale or if he resigns for good reason any time during the period commencing on the 31st day and ending on the 150th day after the sale. If Mr. Bak’s employment is terminated in accordance with these provisions, he will receive the following payments:

 

 

Mr. Bak is subject to a one-year noncompetition and confidentiality provision in connection with the retention bonus.

 

The payment that Mr. Bak is entitled to receive in connection with the sale of the nickel business is indicated below under the “Retention Bonus” column. The additional amounts that he will receive if he is involuntarily terminated without cause or resigns for good reason after the sale are also indicated below. We expect that Mr. Bak’s employment with us will not continue past March 31, 2007. For purposes of making this calculation only, we assumed that such termination or resignation occurred on March 1, 2007.

 

 

 

 

The following table reflects the compensation that we paid to non-employee directors for the fiscal year ended December 31, 2006. Mr. Scaminace, a director who is also our chief executive officer, does not receive additional compensation for his service as a director and is not included in the following table.

 

In 2006, outside directors received an annual fee of $100,000. The chair of the Audit Committee received an additional annual payment of $20,000, and the chairs of the Compensation Committee and the Nominating and Governance Committee each received an additional annual payment of $10,000. Ms. Plourde, the lead independent director, received an additional annual payment of $20,000. The outside directors’ annual fee currently is paid in cash.

 

The Board has increased the annual director’s fee to $110,000 for 2007, and if the proposed 2007 Incentive Compensation Plan is adopted, we will have the ability to pay a portion of outside directors’ annual compensation in shares of our common stock.

 

 

 

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis included in this proxy statement. Based on this review and discussions, the Compensation Committee recommended to the Board of Directors that such Compensation Discussion and Analysis be included in this proxy statement and the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission.

 

Compensation Committee

 

Steven J. Demetriou, Chairman

Richard W. Blackburn

Katharine L. Plourde

William J. Reidy

 

 

The following table sets forth the fees paid for services provided by Ernst & Young for the fiscal years ended December 31, 2006 and 2005.

 

 

The following is a description of the nature of the services related to the fees disclosed in the table above. All of the nonaudit services provided by the independent auditor were pre-approved by the Audit Committee in accordance with its pre-approval procedures, except for de minimis services in 2006 (representing approximately 1.4% of the total fees paid by us to the independent auditor) that were approved by the Audit Committee subsequent to their performance. Services of a similar nature and amount were pre-approved by the Audit Committee in prior years. The Audit Committee has considered whether Ernst & Young’s provision of nonaudit services is compatible with maintaining its independence.

 

Audit Fees

 

These are fees for professional services rendered by Ernst & Young for the audits of our annual consolidated financial statements and of management’s assessment and the effectiveness of internal control over financial reporting, the review of unaudited condensed consolidated financial statements included in our quarterly reports on Form 10-Q, audits of foreign subsidiary financial statements required by local statutes and services that are typically rendered in connection with statutory and regulatory filings or engagements.

 

Audit-Related Fees

 

These are fees for assurance and related services rendered by Ernst & Young that are reasonably related to the performance of the audit or the review of our consolidated financial statements that are not included as audit fees. These services include employee benefit plan audits and consulting on financial accounting and reporting.

 

Tax Fees

 

These are fees for professional services rendered by Ernst & Young with respect to tax compliance, tax advice and tax planning. These services include the review of tax returns, tax assistance in foreign jurisdictions and consulting on tax planning matters.

 

All Other Fees

 

These are fees for professional services rendered by Ernst & Young that do not fit within the above category descriptions.

 

The Audit Committee has reviewed and discussed with our management and with our independent registered public accountant, Ernst & Young LLP, the consolidated financial statements of OM Group, Inc. and its subsidiaries as set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. The Audit Committee has (a) discussed with Ernst & Young those matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T, (b) received from Ernst & Young the written communications required by Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees), as adopted by the Public Company Accounting Oversight Board in Rule 3600T, and (c) discussed with Ernst & Young its independence from us and our management. Ernst & Young has confirmed to us that it is in compliance with all rules, standards and policies of the Independence Standards Board and the Securities and Exchange Commission governing auditor independence. Based on these reviews and discussions, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements for the fiscal year ended December 31, 2006 be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission.

 

Audit Committee

 

William J. Reidy, Chairman

Richard W. Blackburn

Steven J. Demetriou

Katharine L. Plourde

 

Section 16(a) of the Securities Exchange Act of 1934 requires officers, directors, and persons who own more than 10% of a registered class of equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.

 

Based solely upon a review of Forms 3 and 4 (including amendments to such forms) furnished to us during 2006 and Forms 5 furnished with respect to 2006, no director, officer or beneficial owner of more than 10% of our outstanding common stock failed to file on a timely basis during 2006 or prior fiscal years any reports required by Section 16(a).

 

Any stockholder who intends to present a proposal at the 2008 annual meeting and who wishes to have the proposal included in our proxy statement and form of proxy for that meeting must deliver the proposal to us at our executive offices no later than December 1, 2007.

 

Any stockholder who intends to present a proposal at the 2008 annual meeting other than for inclusion in our proxy statement and form of proxy must deliver the proposal to us at our executive offices not later than January 31, 2008, or such proposal will be untimely. If a stockholder fails to submit the proposal by January 31, 2008, we reserve the right to exercise discretionary voting authority on the proposal.

 

Our Board of Directors has sent you this proxy statement. We will pay all expenses in connection with the solicitation of the enclosed proxy. In addition to solicitation by mail, our officers and employees may solicit proxies by telephone, in writing or in person, without receiving any extra compensation for such activities. We have retained The Proxy Advisory Group, LLC, a proxy soliciting firm, to assist in the solicitation of proxies for an estimated fee of $8,500 plus reimbursement of reasonable out-of-pocket expenses. We also will reimburse brokers and nominees who hold shares in their names for their expenses incurred to furnish proxy materials to the beneficial owners of such shares.

 

OM GROUP, INC.

 

Valerie Gentile Sachs

Secretary

 

2007 Incentive Compensation Plan

 

 

The purpose of this 2007 Incentive Compensation Plan (the “Plan”) is to advance the long-term interests of OM Group, Inc. (the “Corporation”) by

 

(i) motivating key personnel by means of incentive compensation,

 

(ii) furthering the identity of interests of participants with those of the stockholders of the Corporation through the ownership and performance of the common stock of the Corporation, and

 

(iii) permitting the Corporation to attract and retain key personnel and directors whose judgment is important to the successful conduct of the business of the Corporation.

 

Toward this objective, the Committee may grant awards to key personnel of the Corporation and its subsidiaries and to non-employee directors of the Corporation, on the terms and subject to the conditions set forth in this Plan.

 

 

2.1  “Award” means any form of stock option, stock appreciation right, restricted stock award, phantom stock or restricted stock unit award, or performance bonus granted pursuant to the provisions of this Plan.

 

2.2  “Award Agreement” means a written document evidencing an Award granted pursuant to this Plan and establishing the terms, conditions, restrictions and limitations applicable to such Award. To the extent an Award Agreement is inconsistent with the terms of this Plan, this Plan shall govern the rights of the Participant.

 

2.3  “Board” means the Board of Directors of the Corporation.

 

2.4  “Change in Control” means any one or more of the following:

 

(i) The Corporation is merged, consolidated or reorganized into or with another corporation or other legal person, and immediately after such merger, consolidation or reorganization less than fifty percent (50%) of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held directly or indirectly in the aggregate by the holders of voting shares of the Corporation immediately prior to such transaction;

 

(ii) The Corporation sells all or substantially all of its assets to any other corporation or other legal person, and less than fifty percent (50%) of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale are held directly or indirectly in the aggregate by the holders of voting shares of the Corporation immediately prior to such sale;

 

(iii) Any person or group of persons (as the term “person” is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), becomes the beneficial owner (as the term “beneficial owner” is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities (a) representing 50% or more of the issued and outstanding shares of the Corporation or (b) possessing the power to elect a majority of the Board of the Corporation, except that any acquisition directly from the Corporation, any acquisition by the Corporation, or any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any Subsidiary shall not constitute a Change in Control;

 

(iv) The Corporation files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to an item of Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a Change in Control of the Corporation has occurred;

 

(v) The stockholders of the Corporation approve the liquidation or dissolution of the Corporation; or

 

(vi) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority of the Board, provided that each director who is first elected, or first nominated for election by the Corporation’s stockholders, by a vote of at least two-thirds of the directors of the Corporation (or a committee of the Board) then still in office who were directors of the Corporation at the beginning of any such period will be deemed to have been a director of the Corporation at the beginning of such period.

 

Notwithstanding anything else in this Plan, a “Change in Control” shall not include any change for reasons of bankruptcy, insolvency, or otherwise for the benefit of the creditors of the Corporation or, if applicable, a Subsidiary of the Corporation.

 

2.5  “Change in Control Price” means the higher of (i) the mean of the high and low trading prices for the Corporation’s Common Stock on the Stock Exchange on the date of the Change in Control or (ii) the highest price per share actually paid for the Common Stock in connection with the Change in Control of the Corporation.

 

2.6  “Code” means the Internal Revenue Code of 1986, as amended from time to time.

 

2.7  “Committee” means the Compensation Committee of the Board, or such other committee designated by the Board, authorized to administer the Plan, composed of not fewer than two directors, each of whom shall be “a Non-Employee Director” under Rule 16b-3 of the Exchange Act or any successor rule or statute and shall be an “outside director” for purposes of Section 162(m) of the Code or any successor rule or statute.

 

2.8  “Common Stock” means common stock, par value $.01, of the Corporation.

 

2.9  “Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

2.10  “Key Employee” means an employee of the Corporation or a Subsidiary who holds a position of responsibility in a managerial, administrative or professional capacity and whose performance, as determined by the Committee in the exercise of its sole and absolute discretion, makes appropriate the grant of an Award under this Plan.

 

2.11  “Non-Employee Director” means any director of the Corporation who is not an employee of the Corporation.

 

2.12  “Participant” means any individual to whom an Award has been granted by the Committee under this Plan.

 

2.13  “Stock Exchange” means the New York Stock Exchange or, if the Common Stock is no longer traded on the New York Stock Exchange, such other market price reporting system on which the Common Stock is traded or quoted and is designated by the Committee after it determines that such other exchange is both reliable and reasonably accessible.

 

2.14  “Subsidiary” means a corporation or other business entity in which the Corporation directly or indirectly has an ownership interest of fifty percent or more.

 

 

The Plan shall be administered by the Committee except as otherwise expressly provided in this Plan. Subject to the express provisions of this Plan, the Committee shall have the conclusive authority to construe and interpret this Plan and any Award Agreement under this Plan and to establish, amend and rescind policies and procedures for the administration of this Plan and shall have such additional authority as the Board may from time to time determine to be necessary or desirable.

 

In addition, in order to enable employees who are foreign nationals or employed outside the United States, or both, to receive Awards under this Plan, the Committee may adopt such policies and subplans as are necessary or advisable, in the opinion of the Committee, to effectuate the purposes of the Plan.